SIIG reported weaker-than-expected set of Q4 19 results with a net income of SAR62mn, declining 48.5% yoy (-61.3% qoq). This is lower than the NCBC estimate of SAR120mn. We believe the lower-than-expected results are attributed to weaker performance from Petrochem and loss on jointly managed projects.
Revenues stood at SAR1.81bn, coming in line with our estimates. This is a decline of 17.3% yoy (-7.8% qoq). According to our estimates and based on the average quarterly prices, Petrochem facilities’ operating rates remained flat qoq at 135% in line with our estimates and compared to 128% in Q4 18.
Gross margins stood at 22.3% vs our estimates of 24.9% and Q3 19 levels of 25.3%. We believe the lower-than-expected margins is due to higher production costs and the impact of the end of the feedstock grace period. This is the first full quarter for Petrochem using the adjusted feedstock prices after the end of grace period. Ethane is provided at US$1.75 (vs US$0.75 earlier) starting from 12 August 2019. Moreover, Propane is now linked to Saudi Aramco prices with a discount of 20% vs a link to naphtha with a discount of 28% (starting from 1 September 2019).
Loss of SAR11mn from its JVs. This is lower than our estimates of net profit of SAR35mn and Q3 19 of SAR83mn and compared to a loss of SAR69.7mn in Q4 18. We believe the net loss is due to a larger-than-expected impact of the 26 days shutdown at SCP facility.
In Q4 19, HDPE prices decreased 27.1% yoy (-10.9% qoq) to US$853, while PP prices decreased -17.1% yoy (-5.8% qoq) to US$976. Average PS prices declined 20.7% yoy (-8.1% qoq) to US$1,071. Benzene and styrene declined 5.4% yoy (+1.2% qoq) and 20.5% yoy (-12.7% qoq), respectively while propylene declined -5.2% yoy (-7.5% qoq). PP-propane spread remained flat yoy but declined 10.6% qoq to US$576. Although prices started to improve in January 2020 following to the agreement between the US and China, it remains close to Q4 19 levels. Moreover, PP-Propane spread declined 25% yoy in Q1 2020 to US$432.
We are Neutral on SIIG with a PT of SAR26.1. Although the trade agreement between China and the US is positive, none of the petrochemical products were exempted from the tariff. Moreover, concerns over global GDP growth and additional new capacities in the US and China are expected to add more pressure on prices. The stock is trading at 2020f PE of 15.7x, lower than with the peer group average of 17.8x.