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Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
4Q14 review: Earnings miss estimates; Maintain Buy
Rating Summary
4Q14 net profit misses SFC/consensus estimate: Sahara reported 4Q14 preliminary net
Recommendation
Buy
Target price (SAR)
19.5
Upside/ (downside)
21%
profit of SAR92m (-46% yoy, SAR17m in 3Q14) which has missed SFC/consensus by c.26%/38%. Revenues were also softer than expected at SAR504m (+9% qoq, -24% yoy)
Stock Details
and missed SFC/consensus by c.15%/c.13%. While no further details are divulged at this
Closing price*
stage, in our view, the miss vs. SFC could have come from lower than expected realized product prices for its key products (polyethylene/polypropylene -10%/-9% qoq tracking decline in crude prices) and also from lower than expected profitability from its new projects
SAR
16.1
SAR mn
7,065
Mn
439
52-Week High
SAR
27.3
52-Week Low
SAR
12.8
%
-23.7
Market capitalization Shares outstanding
such as SAAC/SAPCO/SAMAPCO that started commercial operations in 3Q14.
Price chg. (3 months)
New projects hold key to volume growth while existing projects act as an anchor:
EPS 2015E
Sahara has 6 key assets: Al Waha (c.75% stake), SEPC (c.24.4% stake), SAMCO/SAPCO
Ticker (Reuters/ Bloomberg)
(c.32.4% stake), SAMAPCO (c.50.0% stake), and Saudi Butanol (c.14.2% stake). Of these,
*Price as of January 18, 2015
SAR
0.91
2260.SE
SPC AB
while Al Waha and SEPC are old and mature (produce ethylene, polyethylene, propylene, and polypropylene) and would act as an earnings anchor, bulk of the volume growth is likely to originate from new projects such as SAMCO, SAPCO, SAMAPCO and Saudi Butanol which are already operational (except Saudi Butanol) since July 2014 and would reach a somewhat steady state in 2015. Overall, investors should closely monitor the prospects of
Key Shareholding (%) Public/Others
86.1
Zamil Group Holding
7.9
PPA
6.0
Source: Tadawul
new projects as that would account for bulk of the incremental earnings between 2014-16E. Reward vs. risk seems to be skewed to the upside; Maintain Buy: In the previous 3
Key Ratios
2015E
2016E
months, Sahara (c.-24%) performed in line with Tadawul Petchem Index (c.-24%). While we
P/E (x)
17.7
12.1
expect substantial yoy earnings decline in 2015 from lower product prices, we believe
EV/EBITDA (x)*
18.1
17.2
potential negatives are largely priced in and reward vs. risk seems to be skewed to the
Dividend yield (%)
6.2
7.8
upside. On our 2015 numbers, Sahara is trading at 17.7x P/E (Tadawul Petchem 16.7x, EM
Source: Company, Saudi Fransi Capital analysis, * not meaningful due to presence of associate income below the EBITDA line
13.3x, global 13.6x) due to potentially depressed earnings. However, we consider 2016E earnings to be reflective of a normalized environment and as such consider 2016E multiple to be a more relevant metric for comparison. On our 2016E estimates, Sahara trades at 12.1x
Stock price movement vs. TASI
P/E (Tadawul Petchem 12.0x, EM c.11.4x, Global 11.6x). We maintain Buy rating on Sahara. 210
Current low level of oil price seems unsustainable for high cost producers: Brent crude price has fallen c.60% from peak and tracking crude price, KSA petchem index has corrected by c.40%. While oil price could continue to remain volatile in the near term leading to volatility
190 170 150
130
in petchem stocks, in the mid-term, such low level of oil price seems unsustainable for high
110
cost producers (e.g. 30 out of 39 key US shale basins are potentially unprofitable at crude
90
70 Jan-13 Jan-13 Mar-13 Apr-13 May-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
price less than USD65/bbl and 38 out of 39 are unprofitable at crude price less than USD50/ bbl, Source: Bloomberg New Energy Finance) and a rebound in oil price to a higher level
Sahara
Tadawul
seems likely although timing is difficult to predict. In this backdrop, correction in petchem stocks seems overdone and they seem to offer good value coupled with attractive dividend
Source: Tadawul
yields (2015E c.5.1%) meaning the sector could rerate once oil price volatility subsides. 4Q14A
4Q14E
%diff
Cons*
%dev
3Q14
%qoq
4Q13
%yoy
2015E
2016E
Revenues
504
589
-15%
579
-13%
460
9%
666
-24%
1,920
2,014
Gross Profit**
177
106
67%
Na
Na
26
588%
116
53%
308
332
EBIT**
137
80
71%
Na
Na
2
Nm
88
56%
212
231
92
125
-26%
149
-38%
17
Nm
170
-46%
399
582
SAR mn
Net Profit
Sector Coverage Dipanjan Ray [email protected] +966-11-2826861 AbdulAziz Jawdat [email protected] +966-11-2826856
Source: Company, Saudi Fransi Capital analysis, * Bloomberg consensus. **not comparable due to possibly difference in accounting
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Recommendation Framework BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price. HOLD: The analyst recommends a HOLD when our fair value estimate ranges within ±10% of the current share price. SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current share price.
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Contacts RESEARCH & ADVISORY DEPARTMENT [email protected]
SAUDI FRANSI CAPITAL Call Centre 800-125-9999 Website www.sfc.sa
SAUDI FRANSI CAPITAL LLC C.R. 1010231217, PO Box 23454, Riyadh 11426, Saudi Arabia, Head Office Riyadh
Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the c ompany that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or compl ete, and it should not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and stat ements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this report should make themselves aware of, and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Saudi Fransi Capital LLC; C.R. 1010231217, P.O Box 23454, Riyadh 11426, Saudi Arabia, Head Office – Riyadh. Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
4Q14 review: Earnings miss estimates; Maintain Buy
Rating Summary
4Q14 net profit misses SFC/consensus estimate: Sahara reported 4Q14 preliminary net
Recommendation
Buy
Target price (SAR)
19.5
Upside/ (downside)
21%
profit of SAR92m (-46% yoy, SAR17m in 3Q14) which has missed SFC/consensus by c.26%/38%. Revenues were also softer than expected at SAR504m (+9% qoq, -24% yoy)
Stock Details
and missed SFC/consensus by c.15%/c.13%. While no further details are divulged at this
Closing price*
stage, in our view, the miss vs. SFC could have come from lower than expected realized product prices for its key products (polyethylene/polypropylene -10%/-9% qoq tracking decline in crude prices) and also from lower than expected profitability from its new projects
SAR
16.1
SAR mn
7,065
Mn
439
52-Week High
SAR
27.3
52-Week Low
SAR
12.8
%
-23.7
Market capitalization Shares outstanding
such as SAAC/SAPCO/SAMAPCO that started commercial operations in 3Q14.
Price chg. (3 months)
New projects hold key to volume growth while existing projects act as an anchor:
EPS 2015E
Sahara has 6 key assets: Al Waha (c.75% stake), SEPC (c.24.4% stake), SAMCO/SAPCO
Ticker (Reuters/ Bloomberg)
(c.32.4% stake), SAMAPCO (c.50.0% stake), and Saudi Butanol (c.14.2% stake). Of these,
*Price as of January 18, 2015
SAR
0.91
2260.SE
SPC AB
while Al Waha and SEPC are old and mature (produce ethylene, polyethylene, propylene, and polypropylene) and would act as an earnings anchor, bulk of the volume growth is likely to originate from new projects such as SAMCO, SAPCO, SAMAPCO and Saudi Butanol which are already operational (except Saudi Butanol) since July 2014 and would reach a somewhat steady state in 2015. Overall, investors should closely monitor the prospects of
Key Shareholding (%) Public/Others
86.1
Zamil Group Holding
7.9
PPA
6.0
Source: Tadawul
new projects as that would account for bulk of the incremental earnings between 2014-16E. Reward vs. risk seems to be skewed to the upside; Maintain Buy: In the previous 3
Key Ratios
2015E
2016E
months, Sahara (c.-24%) performed in line with Tadawul Petchem Index (c.-24%). While we
P/E (x)
17.7
12.1
expect substantial yoy earnings decline in 2015 from lower product prices, we believe
EV/EBITDA (x)*
18.1
17.2
potential negatives are largely priced in and reward vs. risk seems to be skewed to the
Dividend yield (%)
6.2
7.8
upside. On our 2015 numbers, Sahara is trading at 17.7x P/E (Tadawul Petchem 16.7x, EM
Source: Company, Saudi Fransi Capital analysis, * not meaningful due to presence of associate income below the EBITDA line
13.3x, global 13.6x) due to potentially depressed earnings. However, we consider 2016E earnings to be reflective of a normalized environment and as such consider 2016E multiple to be a more relevant metric for comparison. On our 2016E estimates, Sahara trades at 12.1x
Stock price movement vs. TASI
P/E (Tadawul Petchem 12.0x, EM c.11.4x, Global 11.6x). We maintain Buy rating on Sahara. 210
Current low level of oil price seems unsustainable for high cost producers: Brent crude price has fallen c.60% from peak and tracking crude price, KSA petchem index has corrected by c.40%. While oil price could continue to remain volatile in the near term leading to volatility
190 170 150
130
in petchem stocks, in the mid-term, such low level of oil price seems unsustainable for high
110
cost producers (e.g. 30 out of 39 key US shale basins are potentially unprofitable at crude
90
70 Jan-13 Jan-13 Mar-13 Apr-13 May-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
price less than USD65/bbl and 38 out of 39 are unprofitable at crude price less than USD50/ bbl, Source: Bloomberg New Energy Finance) and a rebound in oil price to a higher level
Sahara
Tadawul
seems likely although timing is difficult to predict. In this backdrop, correction in petchem stocks seems overdone and they seem to offer good value coupled with attractive dividend
Source: Tadawul
yields (2015E c.5.1%) meaning the sector could rerate once oil price volatility subsides. 4Q14A
4Q14E
%diff
Cons*
%dev
3Q14
%qoq
4Q13
%yoy
2015E
2016E
Revenues
504
589
-15%
579
-13%
460
9%
666
-24%
1,920
2,014
Gross Profit**
177
106
67%
Na
Na
26
588%
116
53%
308
332
EBIT**
137
80
71%
Na
Na
2
Nm
88
56%
212
231
92
125
-26%
149
-38%
17
Nm
170
-46%
399
582
SAR mn
Net Profit
Sector Coverage Dipanjan Ray [email protected] +966-11-2826861 AbdulAziz Jawdat [email protected] +966-11-2826856
Source: Company, Saudi Fransi Capital analysis, * Bloomberg consensus. **not comparable due to possibly difference in accounting
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Recommendation Framework BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price. HOLD: The analyst recommends a HOLD when our fair value estimate ranges within ±10% of the current share price. SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current share price.
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Contacts RESEARCH & ADVISORY DEPARTMENT [email protected]
SAUDI FRANSI CAPITAL Call Centre 800-125-9999 Website www.sfc.sa
SAUDI FRANSI CAPITAL LLC C.R. 1010231217, PO Box 23454, Riyadh 11426, Saudi Arabia, Head Office Riyadh
Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Sahara Petrochemical Co. (Sahara) KSA Petrochemical Sector | 4Q 2014 Preliminary Results | January 19, 2015
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the c ompany that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or compl ete, and it should not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and stat ements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this report should make themselves aware of, and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Saudi Fransi Capital LLC; C.R. 1010231217, P.O Box 23454, Riyadh 11426, Saudi Arabia, Head Office – Riyadh. Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
