Strong top-line despite the shutdown



Petrochem reported a better than expected 2Q17 result with a net income of SR132mn, significantly higher than the NCBC estimate of SR92mn. Net income declined 36.4% YoY and 21.2% QoQ. We believe higher than expected operating rates and lower non-opex led to the variance.

Petrochem reported a better than expected set of 2Q17 results with a net income of SR132mn, declining 36.4% YoY and 21.2% QoQ. This is higher than the NCBC and consensus estimate of SR92mn and SR109mn, respectively. We believe higher than expected operating rates and lower nonoperating expenses were the key reasons behind the variance.

Revenues stood at SR1.75bn in 2Q17, increasing 6.8% YoY and 4.1% QoQ. This is significantly higher than our estimate of SR1.44bn. Based on our calculations, Petrochem’s facilities operated at 100% in 2Q17, higher than our estimate of 82% and 91% in 1Q17. We believe the company used inventories to mitigate the impact of a 15 days unplanned shutdown. The company said that the shutdown was due to nitrogen supply disturbance which impacted Jubail industrial area which indicates that this shutdown does not signal an operational concern. Petrochem had a major 2-month shutdown in 4Q16.

Operating profit came in at SR264mn in 2Q17, 16.6% above our estimate. Opex stood at SR157.1mn in 2Q17, higher than our estimate of SR143.7mn and SR150mn in 2Q16. This represents 9.0% of sales in 2Q17, broadly inline with 8.8% in 1Q17. The deviation increased at the net income level mainly due to lower than expected non-operating expenses.

In 2Q17, PP and PE prices declined 4.5% QoQ and 4.0% QoQ, respectively, but remained flat YoY. PP-naphtha spread remained flat YoY and QoQ at US$556.

We remain Neutral on Petrochem with a PT of SR18.4. The stock is trading at a 2018E P/E of 12.3x, lower than the sector average of 13.4x. Improvement in operational efficiency following shutdowns in 2Q17 and the potential increase in dividends are the stock’s key catalysts. However, high debt of SR11.8bn with a net debt/EBITDA of 4.7x is the key risk, especially during a time of increasing interest rates.


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