Earnings Report /
Saudi Arabia

Advanced Petrochemicals: Earnings call summary – Q2 22

  • Sales was driven by a 13% yoy increase in sales volume which was partly offset by a decline in realized prices.

  • Advanced does not need to inject capital to SK Advance currently.

  • Propylene consumption was reduced due to lockdowns in China.

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
6 September 2022
Published bySNB Capital

Operating overview

  • Sales was driven by a 13% yoy increase in sales volume which was partly offset by a decline in realized prices.

  • PP prices begun declining since May 22; Average PP prices were in the range of US$1050-1100 in Indian subcontinent. In Q2 22, average PP prices were down 2.8% yoy (-2% qoq).

  • In Q2 22, demand was low from Europe, Turkey and LatAM.

  • Advanced recorded higher netbacks in India and Asia as compared to Europe and Turkey due to the lower logistic costs and freight rates.

  •  In Q2 22, the average prices in Turkey were US$1,100 while the freight rates were US$150, making Turkey an unattractive market.

  • Shipping rates declined in Q2 22 but were still on the higher side. The management believes curtailment or shutdown in plants in China, SEA and Europe led to container availability and hence a decline in rates.

  • Of the total sales mix, Turkey’s share reduced from 44% in Q1 22 to 30% in Q2 22. Advanced increased its sales mix locally, in the Indian subcontinent and in APAC.

Q2 22 Financial overview

  • Revenues came-in at SAR814mn, up 5.9% yoy (-6.0% qoq).

  • Gross profit stood at SAR169mn, down 48.8% yoy (-19.8% qoq). Gross margin contracted to 20.8%, from 42.9% in Q2 21 and 24.3% in Q1 22.

  • The gross profit was negatively impacted by higher feedstock and logistic costs.

  • Propane and outsourced propylene prices increased by 60% yoy and 15% yoy respectively, while offshore logistic costs increased by 165% yoy.

  • Operating income stood at SAR132mn, down 53.2% yoy (-26.9% qoq).

  • Net income stood at SAR110mn, down 58.5% yoy (-33.1% qoq).

 

South Korea

  • SK Advanced reported a loss of SAR19mn in Q2 22, compared to a profit of SAR26mn in Q2 21 and a loss of SAR15mn in Q1 22.

  • The management clarified that the losses were due to a squeeze in spreads of propylene and propane.

  • Propylene consumption was reduced due to lockdowns in China.

  • The plant was shut down from 25 July to the end of August 22, consequently impacting the margins negatively. Apart from the shut down the plant ran smoothly.

 

New Projects

  • The PDH project is 37% completed.

  • Advanced has concluded deals with banks for Islamic financing.

  • For the SAR3.0bn SIDF loan, front end fee is 8%  (cSAR240mn), there is also a follow up fee of 1-1.5% every 6  months.

  • The management guided that splitter, reactors, and other key equipment will arrive on site within the next 3 months as Advanced has already pre booked the required machinery.

  • Installation of big equipment on site will begin in December 2022.

  • The management clarified that the paid-up value of the project is SAR2.2 bn, thus confirming that the total costs has increased. Debt to equity proportion still remains at 75%/25%.

  • The management is in close coordination with the Ministry on the mixed feed cracker and has been progressing well. Any material development will be disclosed subsequently.

  • For the mixed feed cracker, Advanced is looking for a partnership that will add value in terms of technology, R&D and/or access to market.

 

Cash flows

  • The management will assess Advanced’s existing cash and net income and accordingly recommend quarterly dividends to the board.

  • Advanced does not need to inject capital to SK Advance currently.

  • Financing costs are capitalized as per IFRS. Commercial financing is based on SAIBOR/ LIBOR+ margin.

  • Advanced owns 6% stake in Tasnee.  This is a strategic investment for Advanced, however the board will decide if it needs to be liquidated.

 

2022 outlook and guidance

  • Demand for PP in H2 22 is uncertain, however the management anticipates an improvement in the coming months.

  • The management highlighted that the only way to deal with uncertain market conditions is to be agile and work closely with offtakers.

  • PP prices reached the bottom in August 22 and is now stable. Avg price were cUS$1400 in Q2 22 and then declined to cUS$990 in August 22.

  • Advanced will continue to shift its sales to regions with higher netbacks.

  • Advanced does not plan to have any shutdowns in 2022f and 2023f. As per the schedule of turnaround every 3 years the next shutdown will be scheduled in Q1 2024.

  • The management anticipates a reduction in shipping rates in Q3 22.

  • The management believes that China’s production capacities are currently on hold. However, if there are better spreads, the plant operating rates will increase leading to higher production.

  • LYB announced a surcharge in PP contract prices due to higher costs of production, passing additional electricity costs to customers. As per the management, this will positively impact Advanced.

  • Advanced has submitted all details of its projects on Shareek program to the Ministry and awaits feedback.