Source: Aljazira Capital
SABIC: Q12017 earnings came in-line with our estimates; margin expansion, hikes in sales’ prices and better performance of metals segment led the strong performance. Weak margins of Propane/Butane derivatives were partly offset by higher margin of ethane downstream products. Better production efficiency and an increase in all product prices led to gross margin of 37.2% in 1Q2017 from 30.2% in 1Q2016. Dividend payment is expected to raise towards SAR 4.5 per-share in 2017. We remain “Neutral” on the stock with a PT of SAR 98.0/share.
Saudi Basic Industries Corporation (SABIC) announced its 1Q2017 result showing a deviation of 3.8% from AJC estimates and 0.4% from the market consensus of SAR 5,219mn. SABIC posted net income of SAR 5.24bn; indicating an increase of 80.1%YoY and 51.4%QoQ. We believe that the YoY strong result is mainly attributed to i) higher product spreads due to margin expansion in Ethane-based products. ii) higher average sales prices iii) better performance from the metals segment after a prominent increase in steel prices. In addition, the strong performance on QoQ basis in the bottom line is primarily ascribed to Ibn Rushd impairment losses of SAR 330mn, in 4Q2016, along with higher selling prices and slight margin expansion in 1Q2017. On the other hand, the deviation of 1Q2017 earnings from our estimates is attributed mainly to the higher than expected gross margin due to higher spreads between ethane derivatives (45% of feedstock).
SABIC’s revenue in 1Q2017 stood at SAR 36.95bn, which is in-line with AJC estimates of SAR 37.4bn with a 1.3% deviation. We believe that the stability in revenue and continued high operating rate in 1Q2017 are due to solid global demand and better performance of the metals segment with the steel price hike of 9%YoY. During the quarter, the average selling prices of petrochemical unit increased by around 8.9%QoQ, where MEG, Polypropylene and PE products prices rose by 29.5%, 2.4% and 1.2% in 1Q2017 respectively. On the other hand, the fertilizer segment was substantially supported by shutdown in some global plants, where Urea prices hiked by 22.1%YoY and 13.5%QoQ. Ammonia price declined 4.5%YoY, but increased by 65.4%QoQ.
Ajc View: The company benefitted from the high spreads across some products based on Ethane and despite margin contraction in products based on liquid gas such as propane and butane (almost 35% of SABIC feedstock). In 1Q2017, Saudi Propane average price significantly rose by 27.4%QoQ to an average price of USD 471 per MT; however, polypropylene prices increased by only 2.4%QoQ. Consequently, higher increase in propane price than Polypropylene prices led to lower PP-Propane spreads in 1Q2017. PPPropane spread expanded by 12.2%QoQ. On the other hand, improved metals segments, global demand stability, investment diversification and better production efficiency are the key factors for SABIC. SABIC Co. is expected to post SAR 21.2bn in net income (7.05 EPS) for FY2017, indicating an increase of 18.6%YoY for the year supported by better margins and current better oil fundamentals. The company is trading at a forward PE and P/B of 14.0x and 1.75x respectively based on our 2017 earnings forecast. We expect the company to hike its dividend payment to SAR 4.5 DPS (4.6% D/Y) in 2017 from SAR 4 DPS in 2016.