Equity Analysis /
Saudi Arabia

Yansab: Lower prices to mitigate operating efficiency, downgrade to Neutral

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    13 May 2019
    Published by

    We downgrade Yansab from Overweight to Neutral, with a revised PT of SAR74.0 (from SAR82.6 earlier). The main reason behind the rating change is the weakness in product prices which is expected to mitigate the expected improvement in efficiency. However, the key advantages of the stock are 1) attractive dividend yield of 5.9%, and 2) being part of EM indices. The stock is trading at 2019f PE of 15.5x, higher than the peer group average of 12.9x.

    Net income to grow 2.6% yoy to SAR2.48bn in 2019f: We expect Yansab’s net income in 2019f to increase 2.6% yoy to reach SAR2.48bn due to higher operating rates and better margins, despite the decline in prices. Operating rates are expected to increase to 98% in 2019 from 95% in 2018 following to the debottleneck project completed in Q4 18, which increased MEG capacity by 10% to 850,000mt. This will also support margins which are expected to increase to 40.1% in 2019f from 37.6% in 2018. These factors are expected to mitigate the decline in product prices. The outlook for MEG prices is muted due to increasing supply from China and weak global demand, although higher oil prices may provide some price support. We expect prices to decline 25.8% yoy to US$684 in 2019f vs US$921 in 2018. For PE, the increase in US production is putting pressure on prices. We expected PE price to decline 14% yoy to US$1,109. 

    Gradual change in feedstock discounts: According to the Fiscal Balance Program (FBP), the feedstock discount offered to petrochemical producers is planned to be removed during 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 and ethane. We expect the current discount of 20% on propane prices to be reduced gradually by 5% annually until 2023. We expect the current price of ethane of US$1.75/mmbtu to be adjusted to US$2.5 by 2022f.  The assumption is based on 1) giving Saudi producers’ sufficient time to improve efficiency, and 2) maintaining the competitiveness of Saudi producers, especially given that the shale boom has reduced propane prices in the US to levels similar to the discounted price of propane used by Saudi producers. This is expected to increase the production cost for Yansab, reducing its margins from 40.1% in 2019f to 37.1% in 2023.

    Inclusion to FTSE and MSCI is a key stock driver: Yansab is part of MSCI and FTSE indices with an estimated weight of 2.4% and 2.6%, respectively. Passive inflows from FTSE are expected to be SAR566mn, whilst those from MSCI are estimated at SAR1.2bn. This represents c52 days of value traded (based on 3 months average daily value traded). We expect the inclusions to continue to support the stock price through to Q3 19.