Equity Analysis /
Saudi Arabia

Advanced Petrochemicals: Downgrade to Neutral; positives priced-in

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    1 May 2019
    Published by

    We downgrade Advanced to Neutral from Overweight with a revised PT of SAR58.8. Operational efficiency, a sustainable dividend yield of 4.6% and being part of FTSE and MSCI indices are the key strengths of the stock. However, we believe the current price reflects all the positives. Advanced is trading at 2019f PE of 15.7x, higher than peer group average of 12.8x.

    Net income to grow 7.3% yoy to SAR769mn: We expect Advanced’s net income in 2019f to increase 7.3% yoy to SAR769mn, driven by higher operating rates and efficiency, which will offset the expected decline in PP prices. Operating rates are expected to increase to 118% from an effective rate of 104% in 2018 which was impacted by a major 21-days shutdown in Q1 18. Despite this, PP prices and spreads are expected to decline 7.2% and 4.2% to US$1,130 and US$648,respectively.

    Gradual change in feedstock discounts: According to the Fiscal Balance Program (FBP), the feedstock discount for petrochemical producers was planned to be removed between 2020 and 2021. However, the updated FBP extended the period to 2023 for fuel used in several industries without specifically changing the dates for propane. We expect the current discount of 20% on propane prices to be gradually reduced by 5% annually until 2023. The assumption is based on 1) giving producers’ sufficient time to improve efficiency, and 2) maintaining their competitiveness. The shale boom has reduced propane prices in the US similar to the discounted price used by Saudi producers. For Advanced, we expect margins to decline from 30% in 2018 to 23% in 2023.

    Inclusion to FTSE and MSCI is a key stock driver: Advanced is part of FTSE and MSCI indices with an estimated weight of 0.9% and 1.0%, respectively. Passive inflows from FTSE are expected to be SAR205mn while those from MSCI are estimated at SAR443mn. This represents around 47 days based on 3 months daily trading average. We believe the inclusion will support the stock price in 2019.

    Downgrade to Neutral: We downgrade Advanced to Neutral with a PT of SAR58.8 (down from SAR61.6). Although Advanced is one of the most efficient petrochemical producers in Saudi, with high sustainable operating rates and dividends, we believe the current valuation reflects all the positives. Advanced is trading at 2019f PE of 15.7x, higher than the sector PE of 12.8x.