Equity Analysis /
Saudi Arabia

Sipchem: First post-merger earnings; mixed results

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

    SNB Capital
    25 July 2019
    Published bySNB Capital

    Sipchem reported a mixed set of Q2 19 results, with a net income of SAR211mn, vs NCBC and consensus estimates of SAR225mn and SAR238mn, respectively. We believe the variance is due to including only one month of Sahara’s (pre-merger) profitability in the consolidated financials. Sahara contributed a revenue of SAR158mn and earnings of SAR58mn for June. If Sahara’s Q2 19 profits was included, Sipchem’s net income would be SAR263.1mn. On a standalone basis, Sipchem (pre-merger) Q2 19 net income stood at SAR153mn (+33.3% qoq) vs our estimates of SAR140mn. For Sahara, Q2 19 net income would be SAR110mn (-50.2% yoy) vs our estimate of SAR125mn.

    Sahara financials were combined with effect from 1 June, as the merger was only completed in May. For the months of April and May, Sahara’s earnings were accounted for and reflected only in the retained earnings.

    Revenues were SAR1.41bn, down 4.4% yoy. This is 7.6% lower than our estimates. For Sipchem (pre-merger), revenues were SAR1.25bn, higher than our estimates of SAR1.14bn, but down 15.1% yoy. We believe the higher-than-expected revenue is due to higher prices and/or operating rates, which we expect at 123% in Q2 19, vs our estimate of 117%.

    For Sahara (pre-merger), revenues came in at SAR441mn (+20.7% qoq) and higher than our estimate of SAR387mn. The variance is believed to be driven by higher operating rate, which stood at 126% vs our estimate of 110%. Sipchem (post-merger) consolidated only June revenues of SAR158mn.

    Sipchem announced a shutdown at the IAC facility for six weeks starting 23 June 2019. Sipchem also announced a three-week shutdown at IVAC facility starting 25 June 2019. This follows a 41-day shutdown at IDC facility in January 2019.

    Gross margin came in at 34.7% vs our estimates of 31.2%. We believe the variance is due to lower cost of production, offsetting the impact of major shutdowns.

    In Q2 19, methanol prices declined 2.4% qoq and 29.7% yoy to US$278, while LDPE prices declined 1.6% qoq and 15.4% yoy to US$1,015. Acetic acid prices declined 6.4% qoq (-41.4% yoy) to US$443.

    We are Overweight on Sipchem with a PT of SAR23.1. We believe the Sipchem-Sahara merger and the resulting synergies is a key catalyst for the stock. Also, efficiency improvement following shutdowns in 2019 is a key driver going forward. We await full financials to update our estimates.