Equity Analysis /
Saudi Arabia

SABIC: Lowest net income since 2009

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

    SNB Capital
    28 July 2019
    Published bySNB Capital

    SABIC reported a weak set of Q2 19 results, with net income declining -68.3% yoy (-37.8% qoq) to SAR2.1bn. This is the lowest earnings level since Q2 09 and is significantly lower than the NCBC and consensus estimates of SAR3.5bn and SAR3.4bn, respectively. We believe the variance is attributed to lower prices and margins. We await for the financials before revisiting our estimates.

    Revenues stood at SAR35.9bn, declining -17.1% yoy (-4.0% qoq). This is 5.1% lower than our estimates of SAR37.8bn. We believe the yoy decline is mainly due to lower prices. The better than expected result from the Agri-nutrient sector was offset by lower income from the Petrochemicals segment.

    The Petrochemicals segment revenue stood at SAR31.5bn, down -25.7% yoy (-2% qoq). This is 7.2% lower than our estimates. The decline is due to lower than expected prices as quantities increased marginally qoq. The Agri-nutrient sector revenues stood at SAR1.8bn vs our estimates of SAR1.4bn, down -15% yoy (flat qoq). We believe the better than expected result is due to a better performance from SAFCO after shutdowns in H1 19. For the Metal sector, revenues were SAR2.6bn, down -10.5% yoy. This is 6.2% higher than our estimates which we believe is due to better sales volumes. 

    Gross profit stood at SAR10.0n, down -37.7% yoy (-11.0% qoq). This is lower than our estimates of SAR11.3bn. Gross margin stood at 28.0% in Q2 19, contracting 923bps from 37.2% in Q2 18. This compares to our estimates of 29.9%. We believe the yoy contraction in margins is mainly due to lower spreads following the increase in propane and butane prices.

    EBIT stood at SAR4.8bn in Q2 19, down -55.4% yoy (-21.5% qoq). This compares to our estimates of SAR6.2bn. Opex came-in at SAR5.2bn, coming flat qoq but lower than SAR5.3bn in Q2 18. Opex-to-sales ratio stood at 14.5% vs our estimate of 13.5% and 12.2% in Q2 18.

    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. MEG prices declined -42.2% yoy (-11.4% qoq) to US$566. This is the lowest level in over 10 years. PP-propane spread declined -20.7% yoy (-7.7% qoq) to US$596. Average urea prices increased +7.5% yoy (+3.1% qoq) to US$269.

    We are Neutral on SABIC with a PT of SAR121.2. We believe muted global growth, capacity expansions and trade tensions are the key risks going forward. SABIC does not expect an improvement in the industry in H2 19. The stock is trading at a TTM PE of 22.1x, higher than the peer average of 17.0x.