Equity Analysis /
Saudi Arabia

Kayan: Weakest results since 2015

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    22 July 2019
    Published by

    Kayan reported a larger than expected loss of SAR273mn in Q2 19, vs NCBC and consensus estimates of a net loss of SAR213mn and SAR221mn, respectively. This compares to a loss of SAR197mn in Q1 19 and a net profit of SAR879mn in Q2 18, and is the biggest loss since Q4 15. Although revenues were in line with our estimates, we believe the main reason behind the variance is lower margins and higher than expected financial expense. Gross margins came in at 7.9% vs our estimate of 8.9%.

    Revenues came in at SAR2.43bn, in-line with our estimates. This is a decline of -31.1% yoy and -4.5% qoq. Based on our estimates, we believe Kayan facilities operated at 115%, in-line with our estimate and Q2 18 levels.

    Gross margin stood at 7.9%, lower than Q2 18 of 36.9%, Q1 19 of 10.3%. Moreover, there are also lower than our estimates of 8.9% and are the lowest since Q4 17. Besides lower prices, we believe the weaker than expected margin is due to lower spreads and higher production costs. 

    Operating income stood at SAR40mn, declining -96.5% yoy and -59.8% qoq. This is lower than our estimate of SAR72mn. SG&A came in at SAR153mn, marginally higher than our estimate of SAR147mn. 

    Other expenses stood at SAR313mn, higher than SAR238mn in Q2 18 and our estimates of SAR285mn. We believe this increase is due to higher financial expense. We believe interest expense stood at SAR316mn compared to our estimates of SAR288mn and SAR240mn in Q2 18.

    In Q2 19, HDPE prices decreased -23.1% yoy (-1.6% qoq) to US$1,041, while PP prices declined -10.5% yoy (up +2.0% qoq). Polycarbonates prices declined -40.2% yoy and -5.5% qoq to US$2,115. PP-butane spreads declined -23.6% yoy and -11.0% qoq to US$577. 

    In June 2019, Saudi Kayan announced a strategy to reduce financing costs by repaying and restructuring its debts. This is expected to result in a positive financial impact of SAR71mn to be reflected during H2 19 and SAR230mn during 2020f. 

    In our previous report, in May 2019, we revised Kayan’s rating to Neutral with a revised PT of SAR14.3. Losses recorded in the last three quarters and weak margins are the main concerns. The stock is trading at a 2019f PE of 19.3x, higher than the peer group average (excluding SAFCO) of 13.3x. We await the full financials to revisit our estimates.