Earnings Report /
Saudi Arabia

Kayan: Q3 19 results – back to profitability, supported by higher spreads

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    21 October 2019
    Published by

    Kayan returned to profitability in Q3 19 after three consecutive quarters of losses. The net income of SAR1.25mn was better than expected vs NCBC and consensus estimates losses of SAR184mn and SAR134mn respectively. We believe better than expected results are due to high operating rates and margins.

    • Revenues came in at SAR2.30bn, 4.8% higher than our estimates of SAR2.20bn. This is a decline of -31.8% yoy and -5.2% qoq. Based on our estimates, we believe Kayan facilities operated at 115%, higher than our estimate of 110% and in-line with Q3 18 of 114%. We were conservative on our operating rates assumptions given the curtailment of feedstock supply.However, the company’s strong performance proves the resilience of the Saudi producers and provides a strong positive read-across signal.
    • Gross margin stood at 16.3%, lower than Q3 18 of 27.5% but higher than Q2 19 of 7.9% and our estimates of 12.7%. We believe better than expected margin is due to higher revenues and spreads. EBIT stood at SAR201mn, down -73.6% yoy and compares to an income of SAR40mn in Q2 19. This is significantly higher than our estimate of SAR125mn. 
    • Kayan reported a net income of SAR1.25mn vs our estimate of a loss of SAR184mn. We believe this variance also driven by lower than expected financial expense. We believe, interest expense stood at SAR226mn, lower than our estimate of SAR329.5mn and Q2 19 of SAR378mn. Kayan said that the decline in financing expenses is in-line with its strategy to reduce the debt burden on the balance sheet.
    • In Q3 19, HDPE prices decreased -26.4% yoy (-8.0% qoq) to US$958, while PP prices declined -16.4% yoy and -6.3% qoq and to US$1,036. PP-butane spreads increased +14.2% qoq and remained flat yoy at US$660. 
    • Saudi Petrochemical companies announced curtailment of supplies of feedstock ranging from 30%-50% due to attack on Saudi Aramco facilities in September 2019. However, supplies have been resumed 10-14 days after the incident and Saudi producers announced that no material financial impact has been reported.
    • We are Neutral on Kayan with a PT of SAR14.3. The reduction of financial expenses is a key positive, while the ongoing weakness in the petrochemical market are the key concerns. The stock is trading at a 2019f PE of 16.9x, higher than the peer group average (excluding SAFCO) of 14.1x.