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Advanced Petrochemicals: Q4 19: Higher margins and SK Advanced support results

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

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    SNB Capital
    12 January 2020
    Published bySNB Capital

    Advanced reported a better than expected set of Q4 19 results, with a net income of SAR192mn. This is higher than the NCBC and consensus estimates of SAR169mn and SAR162mn, respectively. Earnings increased 17.0% yoy and a decline of 10.1% qoq. We believe the better than expected results are due to higher income from SK Advanced, better margins and lower finance expenses.

    Revenues stood at SAR619mn in Q4 19, coming in-line with our estimates of SAR606mn. This is a decline of 17.5% yoy and 4.4% qoq. Based on our calculations, Advanced facilities operated at 123% in Q4 19, slightly higher than our estimates of 120% and compared to 121% in Q3 19. 

    Gross profit stood at SAR213mn (flat yoy, -13.0% qoq). This is 5.7% higher than our estimates of SAR202mn. The growth was driven by a gross margin expansion at 34.5% vs our estimates of 33.3% and 28.4% in Q4 18. We believe the higher margins are supported by growth in revenues and operational efficiency. 

    The deviation increased at the net income level driven by strong performance at SK Advanced. Advanced's share in the profits of SK Advanced came-in at SAR27.0mn vs our estimates of SAR20.2mn and SAR7.7mn in Q4 18. We believe the strong performance is attributed to operational efficiency.  Advanced fully redeemed its SAR1bn sukuk on 17 November 2019. The company has recently secured a SAR250mn loan to partially repay the sukuk and to meet working capital requirements. We believe the sukuk redemption reduced the financing expenses to cSAR5.0mn, compared to our estimates of SAR10.0mn. 

    In Q4 19, average PP prices declined 17.1% yoy and 5.8% qoq to US$976. Prices have stabilized at cUS$930 in the past few weeks but the outlook remains bearish due to increasing supplies. Propylene prices declined 15.2% yoy and 7.5% qoq to US$838. PP-propane spread remained flat yoy but declined 10.6% qoq to US$576. 

    We are Neutral on Advanced, with a PT of SAR53.5. Operational efficiency and a sustainable dividend yield of 5.8% are the key strengths of the stock. The development of US-China trade conflict is the sector key catalyst going forward.