Equity Analysis /
Egypt

Sidi Kerir Petrochemicals: Q2 19 – Downgrade TP, upgrade to Overweight on share price slump

    Myss Semeida
    Al Ahly Pharos Securities Brokerage
    8 August 2019

    Volume ramp-up offsets ongoing polyethylene price losses

    SKPC released its full financials for Q2 19. As we initially anticipated, the company’s uptick in sales to reach EGP1,301mn (+6% qoq, -13% yoy) was volume-driven as polyethylene utilization rates for Q2 19 stood at 88% (+7% qoq, -10% yoy). Local polyethylene selling prices continued to decline in tandem with the global market, averaging just cUS$1,162/ton (-4% qoq, -11% yoy) for Q2 19.

    Margins remain pressured; recovery not expected within 2019

    SKPC reported a gross margin of 25% (-0.4ppts qoq, -4ppts yoy) for Q2 19, similar to the first quarter as declining global polyethylene prices offered zero support for margin recovery. We do not expect margins to increase beyond this level for 2019 as we assume a gross margin of 24% for the year. However, we do incorporate a gradual recovery of SKPC’s gross margin in our FV, starting next year to reach 27% by 2021, where it remains fixed into perpetuity.

    ETHYDCO consolidation boosts bottom line

    SKPC recorded a bottom line of EGP260mn in Q2 19, a net margin of  20% (+4ppts qoq, -7ppts yoy). The boost in the company’s profitability was driven by associate income of EGP72mn from ETHYDCO. It is also worthy to note that the company recorded EGP19mn in FX losses this quarter, as the EGP continues to appreciate against the US$.

    Update FV to EGP17.03; Upgrade to OW on share price slump

    We update our exchange rate assumptions to incorporate an FX rate of EGP17.0/US$ for 2019, that depreciates by an average of c5% each year. This sole change yields a FV for SKPC of EGP17.03/share. Given the recent share price slump, our FV currently implies a valuation gap of 91.2%, which compelled us to change our recommendation on the stock from Equalweight to Overweight. We remind you that SKPC’s current stock price of EGP8.91/share irrationally reflects sustainable EGP appreciation and polyethylene price lows.

    Despite our change of recommendation, we remain wary of the implications of SKPC undergoing a c23% secondary stake sale in the coming period to fund the equity portion of its massive US$1.2bn polypropylene project. SKPC is currently trading at 2019e 5.0x PE, and 2.5x EV/EBITDA; a significant discount to its historical average of 8.5x PE, and 6.3x EV/EBITDA.