Equity Analysis /
Saudi Arabia

SABIC Agri-Nutrients: Q2 19: Lower margins offset better associate income

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    22 July 2019
    Published by

    SAFCO reported a lower than expected set of Q2 19 results with a net income of SAR380mn, declining 7.3% yoy (+13.4% qoq). This compares with NCBC and consensus estimates of SAR417mn and SAR413mn, respectively. We believe the variance is mainly due to lower margins which offset the improved income from associate, Ibn Al-Baytar. Gross margins came-in at 51.6% vs our estimate of 56.7%.

    Revenues stood at SAR814mn, declining 14.4% yoy (+13.2% qoq). This is broadly in-line with our expectations. We believe the operating rates of the facilities stood at 73% vs our estimates of 75% and Q2 18 of 109%. Based on the annual report, SAFCO 3 started a 117 days shutdown to perform a debottleneck project to increase its capacity by 20% to 1.32mn tons. The shutdown started on 11 January 2019. Moreover, SAFCO 2 began a 43 days shutdown on 15 March 2019. This facility has a capacity of 1.1mn tons.

    Gross margins came-in at 51.6%, lower than our estimate of 56.7% and Q2 18 levels of 52.5%. We believe the variance in margins is attributed to the impact of SAFCO 3 shutdown.  Better margins after resuming of operations would be a key catalyst. 

    EBIT came in at SAR325mn, 13.4% lower than our estimates of SAR375mn. This is a decline of 17.8% yoy (+9.9% qoq). SG&A of SAR95mn was largely in-line with our estimates and compares to SAR104mn in Q2 18. The yoy decline in opex is due to the efficiency programs implemented last year. 

    The variance reduced at the net income level to -8.8% driven by higher income from the associate Ibn Al-Baytar. We believe associate income came-in at SAR57mn, higher than our estimate of SAR43mn and SAR20mn in Q2 18.

    In Q2 19, urea prices increased +7.5% yoy and +3.1% qoq US$269. Ammonia prices declined -20.2% yoy and -20.6% to US$222.

    We are Neutral on SAFCO with a PT of SAR77.6. Although supply is expected to be limited in the future, higher exports from China are a key risk on urea prices. The stock is trading at 2019f PE of 23.4x, higher than the regional peer group average of 14.4x. Further development on the deal with SABIC will be the key catalyst for the stock.