Al Jazira Capital remains "Overweight" on Saudi Kayan

22/10/2017 14:03 AST

Net income of SAR 381.0mn, beats Al Jazira Capital estimate and market consensus. Net income was supported by higher than expected operating rate and higher margins. Gross margin increased on YoY basis to 30.1% Vs. 25.1% recording the highest margin since inception. Despite lower Ethane based products margin in 3Q2017, 4.7%QoQ higher margin of Butane downstream products and higher production efficiency led to overall margin expansion. Recommendation remains "Overweight" with PT of 10.40/share.
3Q2017 net profit came significantly above Al Jazira Capital estimate of SAR 28.5mn, due to their expectation of plant closure for maintenance during the quarter. The company previously announced the maintenance date during the 2H2017 without specifying a certain quarter. Saudi Kayan announced the highest net profit of, SAR 381.0mn (EPS: SAR 0.25), since inception; indicating an increase of 140.9%YoY and 57.4%QoQ. The YoY strong performance is mainly attributed to i) higher volumetric sales due to improved operating rate ii) higher average sales prices iii) higher overall margins due to higher operating efficiency, despite higher feedstock cost iv) lower OPEX, despite higher zakat provision. In 3Q2017, the Company is expected to register an increase in zakat provision by 34.5%QoQ to stand at SAR 38.5mn from SAR 28.4mn in 2Q2017, whereas finance expenses are expected to stand at SAR 233mn in 3Q2017.
Kayan's sales in 3Q2017 stood at SAR 2,703mn, above Al Jazira Capital estimates of SAR 1,972mn, which is ascribed to our inclusion of the impacts of plants maintenance in 3Q2017. The plant was running at an operating rate of 106.8%, higher than 98.2% in 2Q2017 and 101.3% in 1Q2017. We believe that the plant maintenance in March/April-2016 has positively impacted the overall performance in FY2017, and we expect further improvement in performance in FY2018 and onward. During the quarter, Asian average prices of Kayan key products such as, HDPE, PP and MEG increased by 0.9%QoQ, 6.7%QoQ and 18.6%QoQ in 3Q2017 respectively; however, the company's 60-70% feedstock cost (Butane) increased by 11.0%QoQ, and 26.3%YoY. On the other hand, the Company was granted a grace period for ethane, butane and methane feedstock until 2Q2017, as revised feedstock prices will be applied by 3Q2017. Butane benchmark price was switched from Naphtha to Saudi Aramco's contract price, whereas ethane prices hiked to USD 1.75 per mmbtu from USD 0.75 per mmbtu.
The company's plants shutdown in 4Q2017 is expected to weigh on kayan's top line, but Al Jazira Capital estimate improved future performance. Kayan will shut down its olefins plant for 41 days for debottlenecking to boost its annual production capacity of ethylene to at least 93,000 tons. The company's EG/ EO plant will be also closed for 46 days, to raise the annual production capacity of pure ethylene oxide to at least 61,000 tons. The polycarbonates units will be closed (56 days), the phenolics unit (31 days), amines unit (53 days) and ethoxylates unit (49 days).
AJC view: We believe that in addition to the higher than expected operating rate, the impact of higher production cost in some particular feedstock prices (Ethane-base) has been partly offset by Butane margin expansion in 3Q2017. We expect that the company's sales volume in 4Q2017 to be under pressure due to plants shutdown. However, Our outlook will remain optimistic in the year FY2017/2018 as compared to FY2016; gross margin is expected to slightly improve in the FY2018 coming quarters due to higher efficiency after 4Q2017 plants maintenance and better products spreads. Thus, we remain "Overweight" on KAYAN with a PT of SAR 10.40/share indicating a potential upside of 13.9%. Saudi Kayan Co. is expected to post SAR 770.4mn in net income (0.51 EPS) for FY2017, as compared to SAR 152.0mn in FY2016. The company is trading at a forward PE and P/B of 17.8x and 1.0x respectively based on our FY2017 earnings forecast.

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