SICO initiates coverage Sipchem with an 'Overweight' rating

SICO's research indicates a fair value target of SR43.10 for Sipchem's shares, offering 68% of upside compared to the current share price.

Sipchem is one of the region's biggest manufacturers of methanol and accounts for around 2% of the world's methanol capacity. Methanol is a key product for the global chemicals industry as it is widely used in the production of other forms of chemicals. The Middle East is expected to increase its share of the methanol market from its 20% share in 2007 to 24% by 2010.

Sipchem lies in the top quartile of margins in the methanol industry according to SICO, but, earnings remain susceptible to bouts of cyclicality in methanol prices. However, it is Sipchem's strategy to vertically integrate the business by moving into downstream products that will enable investors to buy into a stock. This strategy will offer relatively stable margins further supported by its ready access to plentiful and cheap supplies of its key raw material - natural gas - through a discounted supply agreement with Saudi Aramco.

In addition, Sipchem's plans to double its acetyl production capacity by the third quarter of 2009 will boost the company's earnings, with SICO expecting these to peak in 2010. SICO feels that Sipchem's business strategy to venture into downstream products provides vertical integration to the company. This integration aids in realizing economies of scale and lowers total structural costs, and accordingly provides better earnings visibility and ability to offer better margins.

According to SICO, Sipchem is currently trading at 7.2x its estimated 2008 EBITDA, which appears expensive when compared to its peers' average of 6.1x. However looking ahead to 2009 and 2010, the company will be experiencing significant earnings growth, especially in 2010, which SICO strongly feel that is not fully captured by the current share price making the stock undervalued.

Sipchem is also putting in place measures that will change the investment profile of the business. Its plans to move into downstream products moves it from a pure commodity player to a value-add manufacturer, offering more stable margins and growing earnings derived from its expansion plans. It also offers a competitive cost advantage due to its discounted supply of natural gas to feed the manufacturing process. The recent weakness in the share price, in SICO's view, has been over-done, and expects that Sipchem's share price will reach its fair value as the broader market realizes the potential upside from the company's expansion plans.

Securities & Investment Company is an investment bank offering a selective range of services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds a banking license from the Central Bank of Bahrain.

As of December 31, 2007, SICO reported total assets of BD104.832m, with shareholders' equity of BD42.106m. SICO's shares have been listed on the Bahrain Stock Exchange since May 2003. Securities & Investment Company was the first 'closed' company to list on the exchange.