Equity Analysis /
Saudi Arabia

Petrochem: Weak revenues mitigated by lower non-opex

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    29 July 2019
    Published by

    Petrochem reported an in-line set of Q2 19 results with a net income of SAR183mn (down 36.5% yoy and 2.1% qoq). This is higher than the consensus estimates of SAR168mn. We believe the lower than expected non-opex mitigated the impact of a weaker than expected operating rate.

    Petrochem reported an in-line set of Q2 19 results with net income declining 36.5% yoy (-2.3% qoq) to SAR183mn. However, this is higher than the consensus estimates of SAR168mn. We believe higher other income, lower interest and Zakat expenses offset lower than expected operating rates and prices. 

    Revenues stood at SAR1.65bn, declining 26.3% yoy (-18.3% qoq). This is 17.8% lower than NCBC estimates of SAR2.0bn, which can be attributed to lower than expected operating rates and prices. According to our estimates and based on the average quarterly prices, Petrochem facilities’ operating rates were 105% vs our estimates of 127% and Q4 18 rates of 128%.

    Gross margins stood at 27.4% vs our estimates at 25.5% and Q1 19 levels at 26.0%. We believe the better than expected margins is due to operational efficiency as spreads were relatively flat qoq. PP-naphtha spreads increased marginally by 0.4% qoq but declined -4.6% yoy to US$566.

    Operating profit stood at SAR321mn, down 44.0% yoy (-14.6% qoq). This is lower than with our estimates by 11.8%. Opex came-in at SAR131mn vs our estimates of SAR149mn and compared to SAR166mn in Q2 18. Opex-to-sales reached 7.9% in Q2 19 vs our estimates and Q2 18 of 7.4%.

    In Q2 19, HDPE prices decreased -23.1% yoy (-1.6% qoq) to US$1,041, while PP prices decreased -10.5% yoy (+2.0% qoq) to US$1,106. Average PS prices declined 18.2% yoy (-1.3% qoq) to US$1,258.

    The weaker than expected operating income was offset by lower Zakat and finance expense in addition to higher other income. Based on our estimates, non opex came in at SAR138mn vs our estimates of SAR190mn.

    We are Neutral on Petrochem with a PT of SAR26.3. The muted outlook of the petrochemicals sector due 1) The US-China trade war, 2) additional new capacities, 3) weak demand from the auto industry and 4) the uncertainty on feedstock prices are the key risks. The stock trades at a 2019f P/E of 12.9x, higher than the peer group average of 11.7x.