Equity Analysis /
Saudi Arabia

SIIG: Strong results supported by JVs

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    29 July 2019
    Published by

    SIIG reported strong Q2 19 results with a net income of SAR205mn, declining 36.2% yoy. This is significantly higher than the NCBC estimates of SAR170mn. We believe the better than expected results are due to a strong income from the JVs, which more than offset weak operating income of Petrochem.

    SIIG reported a strong set of Q2 19 results with a net income of SAR205mn, significantly higher than the NCBC estimates of SAR170mn. This is a decline of 36.2% yoy (+15.2% qoq). We believe the better than expected results are due to strong income from the JVs which more than offset weak operating income of Petrochem.

    Revenues stood at SAR1.65bn, declining 26.3% yoy (-18.3% qoq). This is 17.8% lower than NCBC estimates of SAR2.0bn, which can be attributed to lower than expected operating rates and prices. According to our estimates and based on the average quarterly prices, Petrochem facilities’ operating rates were 105% vs our estimates of 127% and Q4 18 rates of 128%.

    Gross margins stood at 27.4% vs our estimates at 25.5% and Q1 19 levels at 26.0%. We believe the better than expected margins is due to operational efficiency as spreads were relatively flat qoq. PP-naphtha spreads increased marginally by 0.4% qoq but declined -4.6% yoy to US$566.

    SIIG income from JVs stood at SAR112mn. This is higher than our estimates of SAR83mn and Q1 19 of SAR91mn. We believe the higher income than expected income is due to higher operating rates as prices remained broadly flat qoq. 

    In Q2 19, HDPE prices decreased -23.1% yoy (-1.6% qoq) to US$1,041, while PP prices decreased -10.5% yoy (+2.0% qoq) to US$1,106. Average PS prices declined 18.2% yoy (-1.3% qoq) to US$1,258. For the SCP and JCP products, benzene and styrene declined 27.8% yoy (+1.2% qoq) and 24% yoy (+1.4% qoq) while propylene declined 17.9% yoy and 4.5% qoq.

    In our latest update published in May 2019, we downgraded SIIG to Neutral from Overweight, with a revised PT of SAR26.1, due to the ongoing decline product prices and lower margins. The outlook of the petrochemicals sector is muted due 1) US-China trade war, 2) new capacities, 3) weak demand from the auto industry and 4) uncertainty on feedstock prices. The stock is trading at 2019f PE of 13.1x, higher than with the peer group average of 11.7x.