Saudi Kayan Petrochemical

Ready for a take-off

Saudi Kayan reported a net loss of SAR35mn in Q3, well above our as well as consensus estimates due to higher zakat expenses. The company announced that it has started commercial production at majority of its plants on October 1st. We expect Saudi Kayan’s utilization rate to reach 65% for Q4 with the ramp-up in production over the next 2-3 months. Considering the commencement of production of basic as well as speciality chemicals, we expect the company to record net profit for the full year 2011. We raise our target price to SAR20.8 from SAR15.7 and upgrade our rating on the company to Overweight (previous rating - Underweight).

Launch of commercial operation to be reflected in Q4 results: Saudi Kayan announced that it has started operations at most of its plants including olefins (capacity 1.48mtpa), ethylene glycol (0.57mtpa), propylene (0.63mtpa), HDPE (0.4mtpa), polycarbonate (0.26mtpa) and acetone (0.14mtpa) from October 2011 out of total capacity of 6mtpa. Accordingly, we have revised the cracker utilization rate for Saudi Kayan for Q4 to 65%.

Valuation and conclusion: Since 2009, Saudi Kayan was struggling to commence its production, resulting in depressed valuations. With the launch of production in Q4, the biggest concern of a delay in production commencement has been lifted and hence we upgrade our rating for the stock to Overweight. Based on our revised assumptions for operating rates, price, cost and WACC estimates, we have increased our target price to SAR20.8 per share (previous target SAR15.7), which implies 17.2% upside from the current share price.