Earnings Report /
Saudi Arabia

Advanced Petrochemicals: Q3 22 Results Analysis | Gross margin at a decade low

  • Revenues came in at SAR657mn, down 18.4% yoy (-19.3% qoq) and was in line with our estimates

  • Gross profit stood at SAR89mn, down 67.0% yoy, (-47.1% qoq) and was lower than our estimates of SAR106mn

  • Operating profit stood at SAR55mn down 76.2% yoy (-58.2% qoq), lower than our estimates of SAR73mn

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
31 October 2022
Published bySNB Capital

Advanced reported a Q3 22 net income of SAR27mn, down 87.6% yoy (-75.4% qoq). This is lower than the SNB Capital and consensus estimates of SAR47mn and SAR69mn respectively.  The yoy decline in profits were mainly due 1) lower revenues due to a decline in selling prices, 2) lower gross margins and 3) increase in share of losses from SK Advanced. Although revenue came in-line with our estimates, the variance was mainly due to lower-than-expected gross margins.

  • Revenues came in at SAR657mn, down 18.4% yoy (-19.3% qoq) and was in line with our estimates. The decline in sales was driven by a 22.0% yoy decrease ( -23% qoq) in selling prices, which was partly offset by 4.0% yoy (5.0% qoq) increase in sales volume. Based on our calculations, Advanced’s facilities operated at 126%, broadly in-line with our estimates of 125% and compared to Q2 22 rate of 124%. 

  • Gross profit stood at SAR89mn, down 67.0% yoy, (-47.1% qoq) and was lower than our estimates of SAR106mn. Gross margin came-in at 13.5% vs our estimates of 16.4% and contracted from 33.5% and 20.7% in Q3 21 and Q2 22 respectively. We highlight that this is the lowest gross margin since Q1 2012. We believe the decline was driven by 1) lower revenue 2) higher than expected feedstock prices of which propane increased 6% yoy (-18% qoq), while outsourced propylene prices were down 5% yoy (-20.0% qoq) and 3) high logistic costs (+105% ytd)

  • Operating profit stood at SAR55mn down 76.2% yoy (-58.2% qoq), lower than our estimates of SAR73mn. Operating expenses came in at SAR34mn vs SAR37mn in Q2 22 and our estimates of SAR33mn.  Opex to sales stood at 5.2% vs 4.5% in Q2 22 and our estimates of 5.1%

  • SK Advanced reported a loss of SAR30mn in Q3 22, vs our estimates of a loss of SAR25mn and compared to losses of SAR19mn and SAR5mn in Q2 22 and Q3 21 respectively.

  • In Q3 22, PP prices decreased 10.8% yoy (-14.7.0% qoq) to US$1,016 while propylene prices decreased 7.2% yoy (-17.4% qoq) to US$900. PP-propane spread decreased 43.7% yoy (+1.6% qoq) to US$301

 

Outlook

     Based on our June 22 update, we are Neutral on Advanced with PT of SAR60.0. We await full Q3 2022 financials to update our PT. In the long run we believe Advanced’s outlook is positive driven by major expansion in its Jubail project expected to start in 2025f. The near-term concerns include 1) the global economic slowdown and its impact on product prices 2) the loss-making SK Advanced associate. Advanced is trading at 2023f PE of 17.6x vs local peers average of 15.3x.