Kayan reported a disappointing set of Q3 22 results, with a net loss of SAR812mn vs profits of SAR667mn and SAR150mn in Q3 21 and Q2 22, respectively. The results were significantly lower than the SNB Capital and consensus estimates of profits of SAR41mn each. Although revenues came in-line with our estimates, we believe the losses were due to a combination of higher-than-expected cost of production, SG&A and other expenses. The company reported a gross loss margin of 18.8% in Q3 22, which we believe is due to 1) higher feedstock cost, 2) higher depreciation expenses and/or 3) inventory write-off. We believe the result is a negative read across for the Saudi petrochemical sector.
Revenues stood at SAR2.60bn, down 24.4% yoy (-23.8% qoq) and was in-line with our estimates of SAR2.63bn. We believe the decline in revenues was due to a lower selling prices (-26.0% qoq) and partially offset by a volumetric growth (+3% qoq). Based on our calculations, we believe Kayan’s operating rates stood at c90%, broadly in-line with our estimates and Q2 22 levels.
Gross loss came in at SAR489mn compared to our estimate of a gross profit of SAR308mn and vs SAR983mn and SAR435mn in Q3 21 and Q2 22, respectively. This is the first gross loss since Q1 20. Gross loss margin stood at 18.8%, compared to gross profit margins of 28.6% and 12.8% in Q3 21 and Q2 22, respectively and our estimates of 11.7%. We believe the decline in gross loss is due to the 1) higher than expected feedstock prices, 2) higher depreciation expense and/or 3) inventory losses.
Operating loss stood at SAR676mn vs our estimates of a profit of SAR150mn and profits of SAR789mn and SAR246mn in Q3 21 and Q2 22, respectively. We believe the losses were due to 1) cascading effect of gross loss and 2) higher than expected SGA.
Based on our calculations, SG&A stood at SAR187mn (7.2% of sales) higher than our estimates of SAR158mn (6.0% of sales) and compared to SAR189mn (5.6% of sales) in Q2 22. At the EBITDA level, losses stood at SAR70.8mn (vs profit of SAR843mn in Q2 22), while free cash flow came in at SAR469mn (-42% qoq).
Based on our last update, we are Neutral on Kayan with a PT of SAR17.8. We believe key near term risks include 1) a further decline in product prices due to prevailing macroeconomic conditions 2) high feedstock prices (dominated by butane), and 3) higher financing costs given the hawkish interest rates environment and high debt level of cSAR13.0bn. The stock is trading at 2023f P/E of 35.1x, higher than the peers group average of 15.7x.