Equity Analysis /
Saudi Arabia

Advanced Petrochemicals: Margin expansion despite lower spreads

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    8 July 2019
    Published by

    Advanced reported a better-than-expected set of Q2 19 results with a net income of SAR192mn, higher than the NCBC and consensus estimates of SAR181mn and SAR176mn, respectively. This reflects a growth of 18.6% qoq and a decline of 24.2% yoy. With revenues coming in line with our estimates, we believe the better-than-expected results are due to a qoq expansion in margins from lower production costs. 

    Revenues stood at SAR681mn in Q2 19, in line with our estimates. This is an increase of 5.1% qoq, but a decline of 9.2% yoy. Based on our calculations, Advanced facilities operated at 119% in Q2 19, in line with our estimates and compared with 116% in Q1 19. In Q1 19, Advanced’s PDH facility was closed for 10 days to improve operational efficiency. 

    Gross profit stood at SAR246mn (-11.2% yoy, +29.9% qoq), coming in higher than our estimates of SAR210mn. This growth was driven by a strong gross margin expansions at 36.1% vs our estimates of 30.9% and 37.0% in Q2 18. We believe the qoq margin expansion is due to lower production costs following to the 10 days shutdown in Q1 19.

    The higher-than-expected gross profit was offset by a weak performance at SK Advanced. Advanced’s share in the profits of SK Advanced came in at SAR3.0mn vs our estimates of SAR18.3mn and SAR23.6mn in Q2 18. We believe the weak performance at the facility is attributed to weak spreads and operational efficiency. 

    In Q2 19, average PP prices increased 2.5% qoq, but declined 10.1% yoy to US$1,111. Propylene prices declined 4.5% qoq and 17.9% yoy to US$859. PP-propane spread declined 6.9% qoq (-19.9% yoy) to US$601.

    Advanced signed three MoUs with SK Gas, which include building PDH and PP facilities in Saudi with a capacity of 750,000mt and a cost of SAR6.8bn.  Advanced secured an approval from the Ministry of Energy to supply propane. The facility is expected to start operations in H2 2024.

    We are Neutral on Advanced, with a PT of SAR58.8. The progress on the MoU’s will be a key catalyst for the company in the future. The stock trades at 2019f PE of 15.1x, higher than the peer average of 14.8x.