Sipchem reported a net income of SAR774mn in Q3 22, higher than the SNBC estimates of SAR656mn. However, it declined by 24.8% yoy, 38.7% qoq and was significantly lower than the consensus estimates of SAR852mn. The variance in earnings is mainly due to higher-than-expected revenues, which was offset by lower margins on higher feedstock costs, and lower income from JVs and associates. We note this is the lowest earnings since Q1 21. -
Revenues came in at SAR2.94bn, up 17.3% yoy (-8.0% qoq). This was significantly higher than our estimates of SAR2.23bn. Although product prices declined 13-29% qoq, Sipchem’s top-line was strong which we believe might be attributed to 1) strong realized prices particularly in the beginning of the quarter when prices were still high and 2) higher operating rates.
Gross profit stood at SAR1.21bn, down 11.7% yoy (-28.0% qoq) and was higher than our estimates of SAR1.01bn. Gross margin came in at 41.1%, lower than our estimates of 45.2% and 52.6% in Q2 22. The better-than-expected top line was mitigated by higher cost of production despite the qoq decline in feedstock prices. We believe this might be attributed to 1) higher production levels and/or 2) inventory losses.
EBIT came-in at SAR909mn down 20.3% yoy (-33.6% qoq) and was higher than our estimates of SAR775mn. SG&A came-in at SAR300mn, higher than our estimate of SAR231mn. SG&A/sales stood at 10.2%, broadly in-line with our estimates of 10.4% and higher than 9.7% in Q2 22.
Net non-opex came in at SAR135mn, vs our estimates of SAR119mn and SAR106mn in Q2 22. We believe the net non-opex increased qoq due to a decrease in the share of profits from associates and higher other expenses. At the end of Q3 22, the gearing ratio improved to 24% vs 34% in Q4 21. Sipchem’s debt declined by SAR1.1bn since 2021 to cSAR4.3bn.
In Q3 22, average methanol prices decreased by 2.5% yoy (-12.6% qoq) to US$312, PP prices decreased 10.8%yoy (-14.7% qoq) to US$1,016. Acetic acid decreased 50.6% yoy (-29.1% qoq) to US$488. PP-propane spread decreased 43.7% yoy (+1.6% qoq) to US$301.
Based on our June 22 update, we are Overweight on Sipchem with a PT of SAR63.1. We believe Sipchem’s short to midterm outlook is positive driven by its unique product portfolio and advantageous feedstock mix. However, the global economic slowdown and its impact on product prices is a key risk. The stock is trading at 2023f P/E of 9.4x lower than its peer group average of 15.2x.