Petrochem reported lower than expected set of Q4 19 results with a net income of SAR131mn, declining -44.5% yoy (-23.4% qoq). This is the lowest net income since Q4 16 and is also lower than the NCBC and consensus estimates of SAR157mn and SAR150mn, respectively. We believe the lower than expected earnings are attributed to higher production costs.
Revenues stood at SAR1.81bn, in-line with our estimates. This is a decline of -17.3% yoy (-7.8% qoq). According to our estimates and based on the average quarterly prices, Petrochem facilities’ operating rates remained flat qoq at 135% in-line with our estimates and compared to 128% in Q4 18.
Gross margins stood at 22.3% vs our estimates of 24.9% and Q3 19 levels of 25.3%. We believe the lower than expected margins is due to higher production costs and the impact of the end of the feedstock grace period. This is the first full quarter for Petrochem using the adjusted feedstock prices after the end of grace period. Ethane is provided at US$1.75 (vs US$0.75 earlier) starting from 12 August 2019. Moreover, Propane is now linked to Saudi Aramco prices with a discount of 20% vs a link to naphtha with a discount of 28% (starting from 1 September 2019).
Operating profit stood at SAR249mn, down -4.5% yoy (-25.6% qoq). This is significantly lower than our estimates of SAR306mn. Opex stood at SAR154mn vs our estimates of SAR144mn and compared to SAR186mn in Q4 18. Opex-to-sales remained unchanged yoy at 8.5% in Q4 19 vs our estimates of 8.0%.
In Q4 19, HDPE prices decreased -27.1% yoy (-10.9% qoq) to US$853, while PP prices decreased -17.1% yoy (-5.8% qoq) to US$976. Average PS prices declined -20.7% yoy (-8.1% qoq) to US$1,071. PP-propane spread remained flat yoy but declined 10.6% qoq to US$576. Although prices started to improve in January 2020 following to the trade agreement between the US and China, it remains close to Q4 19 levels. Moreover, PP-Propane spread declined 25% yoy in Q1 2020 to US$432.
We are Neutral on Petrochem with a PT of SAR26.3. Although the trade agreement between China and the US is positive, none of the petrochemical products were exempted from tariff. Moreover, concerns over global GDP growth and additional new capacities in the US and China are expected to add more pressure on prices. The stock trades at a 2020f P/E of 17.8x, in-line with the peer group average.