This report does not constitute a rating action.
The rise in fuel prices in Saudi Arabia from Jan. 1, 2025, will lead to a marginal increase in production costs for rated Saudi corporates. However, it could significantly affect wider Saudi corporations' profit margins and competitiveness. The additional cost will be reflected in companies' financials from the first quarter of 2025.
S&P Global Ratings believes Saudi Basic Industries Corp. (SABIC), Almarai, and Saudi Electric Co. (SEC) can manage the higher costs, with no meaningful impact on credit quality. For SABIC and Almarai, the increase in feedstock prices will not affect profitability significantly. In the case of utility company, SEC, additional support will likely come from the government if needed.
What's Happening
On Jan. 1, 2025, Saudi Aramco (not rated), Saudi Arabia's national oil and gas company, announced that it is raising feedstock and fuel prices as of that date. The last such increase was made on Jan. 1, 2024.
Why It Matters
Saudi Arabia is continuing its significant and rapid transformation under the country's Vision 2030 program. We expect an acceleration of investments to diversify the Saudi economy away from its reliance on the upstream hydrocarbon sector. The sheer scale of projects--estimated at more than $1 trillion in total--suggests large funding requirements. Higher feedstock and fuel prices would help reduce subsidy costs for the government, with those savings potentially redeployed to Vision 2030 projects.
What Comes Next
We expect rated companies can mitigate marginally higher production costs by enhancing operational efficiencies and potentially via pass-through mechanisms.
SABIC (A/Positive/--) – Commodity chemicals
A healthy balance sheet and advantageous cost position will continue to underpin our rating. SABIC sources more than half of the feedstock used in the country at favorable costs from its 70% shareholder Saudi Aramco. We expect SABIC to continue to outperform global peers on profitability. We don’t expect the rise in feedstock and fuel prices to materially affect profitability, since the company estimates it will increase its cost of sales by only 0.2%. We expect S&P Global Ratings-adjusted EBITDA margins to average 15%-18% in 2024-2025, following 14.9% in 2023. Negative free operating cash flow (FOCF) will increase the group’s gross reported debt from Saudi Arabian riyal (SAR) 29.4 billion as of third-quarter 2024, but leverage should stay comfortably below our 2.0x threshold for the rating. We anticipate funds from operations (FFO) to debt higher than 60% and debt to EBITDA lower than 2.0x after 73% and 1.0x, respectively, for the 12 months ended Sept. 30, 2024.
We view SABIC as a government-related entity (GRE) with a high likelihood of receiving extraordinary support in the event of stress. SABIC plays an important role in Saudi Arabia's Vision 2030 strategy and is a significant employer, with Saudi nationals making up about 90% of its local workforce. Our sovereign rating on Saudi Arabia currently caps the rating on SABIC, since we do not rate companies with a very strong link to the government higher than the government itself. The government, via Aramco, controls SABIC's operating strategy and financial policy.
Almarai (BBB-/Positive/--) – Consumer goods
Almarai estimates additional costs of SAR200 million for 2025 due to the higher fuel price, in addition to indirect impacts from other parts of its supply chain. We believe Almarai will continue focusing on business efficiency, cost optimization, and other initiatives to mitigate these impacts.
The company's revenue and profitability growth will continue as inflation eases. Revenue was up 9% for the 12 months to Sept. 30, 2024. For that period, EBITDA totaled SAR4.2 billion and the EBITDA margin was 22.9%, due to the stabilization of key dairy and feed prices and strong overhead cost control. Robust tourism numbers and consumer preferences are increasingly supporting convenience foods and the growth of on-the-go consumption. We anticipate 6%-12% revenue growth in 2025 as healthy consumer spending and population growth boost sales volumes, alongside capacity additions and new products. With these factors offsetting cost inflation, we expect Almarai's EBITDA margin to stabilize at 21%-22% over the next 12-24 months.
The company's latest results, for the 12 months ended Sept. 30, 2024, were better than expected for the positive rating outlook, with FFO to debt at 37.4% and adjusted debt to EBITDA at 2.3x, versus our forecast of 33%-35% and 2.5x–2.7x, respectively.
Saudi Electric Co. (A/Positive/--) – Integrated Power
Given our opinion of an almost certain likelihood that the Saudi Arabian government would provide timely and sufficient extraordinary support to SEC in the event of financial distress, we equalize our rating on the company with that on the sovereign. An unrestricted and uncapped balancing account provides a mechanism for government support, including related to the higher fuel costs. We believe any increased fuel cost will be covered by this balancing account. For example, we expect it will compensate for increased gas prices in 2024, thereby covering SAR6 billion-SAR7 billion of additional costs for SEC’s generation assets.
We forecast SEC's FFO to debt at 17%-24% in 2025-2026 and adjusted debt to EBITDA at 3.5x-4.5x, depending on capital expenditure. These ratios were 19.1% and 4.1x, respectively, for the 12 months ended Sept. 30, 2024. We expect SEC will spend close to SAR125 billion on new assets over 2024-2026, including about SAR 36 billion spent as of Sept. 30, 2024.
Related Research
- Outlooks On Three Saudi Corporates Revised To Positive After Similar Rating Action On Sovereign; Ratings Affirmed, Sept. 17, 2024
- Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed, Sept. 13, 2024,
- Outlook On Saudi Arabia-Based Almarai Revised To Positive On Expected Higher Profits; 'BBB-/A-3' Ratings Affirmed, July 25, 2024
- Full Analysis: Saudi Electric Co., July 17, 2024
| Primary Contact: | Sapna Jagtiani, Dubai 97143727122; sapna.jagtiani@spglobal.com |
| Secondary Contacts: | Fares Shweiky, Dubai 33140752587; fares.shweiky@spglobal.com |
| Mikhail Davydov, Madrid 971-54-581-6323; mikhail.davydov@spglobal.com | |
| Sovereign Analyst: | Zahabia S Gupta, Dubai 971-4-372-7154; zahabia.gupta@spglobal.com |
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