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Saudi International Petrochemical -Equity Report -31-07-2016

Source: Aljazira Capital

SIPCHEM: Q2-2016 earnings were below estimates; Despite the inline revenue with our estimate, SAR 42.0mn one-off impact and higher than expected production cost led to weak performance. “Overweight” recommendation reiterated.



Maintenance cost, compensation for early retirement program and selling prices pressure to weaken performance in 2Q2016: Saudi International Petrochemical Company (Sipchem) 2Q-2016 earnings came below expectation and showed a deviation of 52.3% from AJC estimates and 54.3% from the market consensus of SAR 56.9mn. SIPCHEM posted net income of SAR 26.0mn (EPS of SAR 0.07), indicating a decline of 76.4%YoY and 48.7%QoQ. The company ascribed the weak performance primarily to i) a decrease in average selling prices ii) higher financial expenses as a result of increased SAIBOR. iii) SAR 22mn non-recurring compensation for early retirement program and the non-renewal of some contracts. vi) maintenance cost of SAR 20mn during the scheduled shutdown of carbon monoxide plant, acetic acid plant and Ethyl Acetate plant in 2Q2016. On the other hand, we believe the in-line top line with our estimate represents the high operating rate of other facilities and operational efficiency after the scheduled maintenance of International Methanol Company (IMC) plant in 4Q2015.

We remain “Overweight” on SIPCHEM with PT of SAR 16.20/share indicating a potential upside of 22.2%: SIPCHEM Co. is expected to post SAR 286mn in net income (0.78 EPS) for 2016, recording a decline of 0.7%YoY due to the impact of higher feedstock cost, scheduled maintenance and low level in product price. However, we remain our ‘Overweight’ on the stock with a target price at SAR 16.20/share; indicating a potential upside of 22.2% over current market price of SAR 13.25/share (as of 27th July 2016). The company is trading at a forward PE and PB of 9.98x and 0.58x respectively based on our 2017 earnings forecast. We expect the company to pay dividend at SAR 0.60 DPS (4.2% D/Y) in 2016. At the end of 1Q2016, Sipchem’s debt-to-equity ratio stood at 1.56 times, with gross debt at around SAR 9.0bn. However, SAR 1.8bn sukuk was repaid in 2Q2016, and the company issued a new sukuk of SAR 1.0bn. Going forward, we believe a strong balance sheet and sustainable cash flows would be sufficient for the company to repay existing debt.

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