Equity Analysis /
Saudi Arabia

Petrochem: In-line results; higher operating rates sustained; Neutral

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    9 May 2019
    Published by

    Petrochem reported an in-line set of results in Q1 19 with a net income of SAR186mn (down 44.0% yoy and 20.8% qoq). However, this is lower than consensus estimates of SAR220mn. We believe the better than expected revenues were offset by slightly lower margins.

    Petrochem reported an in-line set of results with a net income of SAR186mn (down 44.0% yoy and 20.8% qoq). We believe the better than expected revenues were offset by slightly lower margins.

    Revenues stood at SAR2.02bn, declining 8.6% yoy and 7.5% qoq. This is 5.7% higher than NCBC estimates of SAR1.91bn which can be attributed to higher than expected operating rates. According to our estimates, Petrochem facilities’ operating rates reached 127%, vs our estimates of 120% and Q4 18 rates of 128%. The sustainability of the operating rates is a key advantage.

    Gross margins stood at 26.0% compared to our estimates of 28.2% and Q4 18 margins of 20.5%. We believe the qoq contraction in margins is mainly attributed to lower spreads. PP-naphtha spreads declined -7.4% qoq and -11.6% yoy to US$564.

    Operating profit stood at SAR376mn, down 38.0% yoy (+44.1% qoq). This is in-line with our estimates. SG&A came-in at SAR150mn vs our estimates of SAR162mn. Opex-to-sales reached 7.4% in Q1 19 vs our estimates and Q4 18 of 8.5%.

    In Q1 19, HDPE prices decreased -9.6% qoq (-20.7% yoy) to US$1,058, while PP prices were down -7.9% qoq (-11.2% yoy) to US$1,084. Average PS prices were US$1,275, down -5.6% qoq and -15.8% yoy.  PP-naphtha spreads declined -7.4% qoq and -11.6% yoy to US$564.

    Petrochem announced a DPS of SAR0.5 for 2018, in-line with 2017 but lower than our estimates of SAR0.75. This reflects a dividend yield of 1.8% and a dividend payout ratio of 20.6%.

    We are Neutral on Petrochem, with a PT of SAR30.8. We believe the sustainable improvement in operating rates and higher dividends (SAR0.75 in 2019f vs SAR0.5 in 2018) are the key catalysts for the stock. Petrochem trades at a 2019f PE of 13.5x, higher than the peer group average of 12.9x.