Earnings Report /
Saudi Arabia

SABIC: Weak results due to impairments

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

    SNB Capital
    29 October 2019
    Published bySNB Capital

    SABIC reported a disappointing Q3 19 results with a net income of SAR0.83bn. This is significantly lower than the NCBC and consensus estimates of SAR2.0bn and SAR2.16bn, respectively. This reflects a decline of 86.4% yoy and 60.9% qoq. The variance is due to Clariant impairment of SAR1.5bn. Adjusting for that, net income would be SAR2.33bn.

    Revenues stood at SAR33.7bn, in line with our estimates and reflects a decline of 23% yoy (-6% qoq). We believe the decline is mainly due to lower prices (-2% qoq) and volumes (-4% qoq).

    The petrochemicals segment revenue stood at SAR29.7bn, down 23.9% yoy (-6% qoq). This is in line with our estimates of SAR29.6bn. The yoy decline is due to weak prices and volumes. The Agri-nutrient sector revenues stood at SAR1.7bn vs our estimates of SAR1.5bn, down 21.4% yoy (-7% qoq). We believe the better-than-expected result is due to a better performance after shutdowns in H1 19. For the metal sector, revenues stood at SAR2.3bn, down 8.5% yoy. This is 9.8% lower than our estimates, which we believe is due to lower sales volumes and prices.

    Gross profit stood at SAR9.6bn, down 36.4% yoy (-4.0% qoq). This is broadly in line with our estimates. Gross margin stood at 28.6% in Q3 19, contracting 600bps from 34.6% in Q3 18 and compares to our estimates of 27.4%. We believe the yoy contraction in margins is due to lower spreads.

    EBITDA stood at SAR9.1bn, down 36% yoy (flat qoq) and reflects an EBITDA margin of 26.9%. EBIT stood at SAR4.7bn, down 53.2% yoy (-3.5% qoq). This compares to our estimates of SAR4.2bn. Opex came in at SAR5.0bn, broadly in line with our estimates.

    An impairment of SAR1.5bn was recorded in Q3 19, related to SABIC’s 24.99% stake in Clariant. This impairment represents c14.2% of SABIC’s investment of SAR10.6bn in FY 18. However, adjusting for that, net income is SAR2.3bn, down 61.8% yoy (+10.1% yoy).

    In Q3 19, HDPE prices decreased 26.4% yoy (-8.0% qoq) to US$958, while PP prices decreased 16.4% yoy (-6.3% qoq) to US$1,036. PP-propane spread declined -4.5% yoy (+8.2% qoq) to US$645.

    We are Neutral on SABIC with a PT of SAR96.2. The outlook of the petrochemical sector remains muted due to weak growth of the global economy, US-China trade war and excess supply. The stock is trading at 2019f PE of 22.7x, higher than the peer group average of 13.9x.