Saudi Basic Industries Co. (SABIC) - Aljazira Capital
Saudi Basic Industries Co. (SABIC) July 2016
SABIC: Q2-2016 earnings above estimates; Although the impact of Ibn Rushd impairment losses, the strong earnings were supported by lower than expected production cost and better performance of metals segment. “Overweight” recommendation with a higher PT. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 2Q-16 33,827 3,842 1.28
Actual 2Q-16 34,479 4,739 1.58
Deviation (%) 1.9% 23.3%
Margin expansion, better performance of metals segment and high operating rate led to strong performance in 2Q2016: Saudi Basic Industries Corporation (SABIC) announced its 2Q2016 result showing a deviation of 23.3% from AJC estimates and 26.2% from the market consensus of SAR 3,756mn. SABIC posted net income of SAR 4.74bn; indicating a fall of 23.2%YoY, and an increase of 39.0%QoQ. We believe that the better than expected result is mainly attributed to i) Lower than expected production cost with higher product spreads. ii) better performance from the metals segment after a prominent increase in steel prices. ii) improved products prices. We believe that despite the impact of Ibn Rushd impairment losses of SAR 366mn, higher OPEX and zakat provision, the improved operating rate and margin expansion has strongly supported the financial earnings in 2Q2016. SABIC’s revenue in 2Q2016 stood at SAR 34.5bn, well above AJC estimates of SAR 33.9bn. We believe that the higher than expected revenue is attributed to i) plants were running at higher than expected operating rate. ii) better performance of the metals segment. During the quarter, the average selling prices of petrochemical unit increased by around 6%QoQ, where MEG, Polypropylene and PE products prices rose by 9.6%, 12.1% and 3.3% in 2Q2016 respectively. On the other hand, the fertilizer segment were substantially impacted by YTD declining in fertilizers prices, as Urea prices fell 28.5%YoY and 1.0%QoQ. Ammonia price declined 16.7%YoY, but hiked 9.6% QoQ. Gross profit stood at SAR 11.02bn depicting a decline of 13.4%YoY and an increase of 31.4% QoQ, significantly above our forecast of SAR 9.4bn. Gross margin stood at 31.2% in 1Q2016, well above our estimate of 27.7%, and higher than 26.9% in 1Q2016. We believe the company’s overall 2Q2016 gross margin performance still benefitted from the higher spreads across products despite the increase in fuel cost. We believe SABIC’s higher feedstock costs, and the recent implementation of cost efficiency measures led to a strong sequential upsurge in the gross margin for the quarter; however, margin expansion is subject to change in the coming quarters based on the movement in products spreads. Operating profit for 2Q-2015 stood at SAR 6.95bn depicting a decline of 25.9%YoY and an increase of 39.0%QoQ; higher than our estimates of SAR 5.96bn. The company continue to show more control in its expenses, as it reduced OPEX (SG & A) by SAR 82mn to stand at SAR 3.31bn, as compared to SAR 3.39bn in 1Q-2016. Petrochemical products witnessed margin expansion in 2Q2016 due to higher spreads in some feedstock cost: The company benefitted from the high spreads across products based propane and butane (almost 35% of SABIC feedstock). In 2Q2016, Saudi propane prices rose only by 7.4% QoQ to an average price of USD 325 per MT. However, polypropylene prices increased by more than 13.5%QoQ. Consequently, lower increase in propane price than Polypropylene prices led to expansion in PP-Propane spreads in 2Q2016. PP-Propane spread expanded by 13.9%QoQ. We believe all Petchem players using liquid gas benefited from strong product prices and reported margin expansion in 2Q2016, which outperformed players using only ethane or methane as feedstock. However, in the medium-term the current spreads is likely to slightly narrow further. We update our recommendation to “Overweight” on SABIC with a higher PT of SAR 91.30/share indicating a potential upside of 11.3%: SABIC Co. is expected to post SAR 19.6bn in net income (6.53 EPS) for 2016, recording an increase of 4.4% YoY for the year supported by better margins. The company is trading at a forward PE and P/B of 12.6x and 1.46x respectively based on our 2016 earnings forecast. We expect the company to reduce its dividend payment to SAR 4.5 DPS (5.5% D/Y) in 2016 due to current oil fundamentals and the company’s expected additional capital expenditure in the medium term with Exxon mobil, and oil to chemicals projects. The company ended 1Q2016 with cash and cash equivalents totalling SAR 73.8bn, along with the decline of the long-term debt by almost 9.6%YoY that could provide the company with much more flexibility to start its expansion projects.
1
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Please read Disclaimer on the back
Recommendation
Overweight
Current Price* (SAR)
82.0 91.30
Target Price (SAR)
11.3%
Upside / (Downside)
*prices as of 28th of July 2016
Key Financials SARmn (unless specified)
Revenues Growth % Net Income Growth % EPS
FY14
FY15
188,123 -0.5% 23,347 -7.6% 7.78
FY16E FY17E
148,086 144,315 164,543 -21.3% -2.5% 14.0% 18,769 19,603 22,568 -19.6% 4.4% 15.1% 6.26 6.53 7.52
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
FY14
FY15
27.5% 28.0% 12.4% 11.37x 1.63x 5.61x 14.6% 7.6% 6.2%
29.1% 29.9% 12.7% 12.23x 1.42x 5.65x 11.6% 6.3% 7.2%
FY16E FY17E 30.7% 31.0% 13.6% 12.55x 1.46x 6.09x 11.9% 6.5% 5.5%
30.4% 30.9% 13.7% 10.90x 1.40x 5.29x 13.4% 7.4% 6.1%
Source: Company reports, Aljazira Capital
Shareholders Pattern Holding
Shareholders Pattern General Organization for Social Insurance Public Investment Fund Public
5.70% 7.74% 24.3%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
247.5 11.4% 97.25 59.50 3000.0
Source: Company reports, Aljazira Capital
Price Performance 110
11000 10000
100
9000
90
8000
80
7000
70
6000
60
5000
50
12/31/14 1/31/15 2/28/15 3/31/15 4/30/15 5/31/15 6/30/15 7/31/15 8/31/15 9/30/15 10/31/15 11/30/15 12/31/15 1/31/16 2/29/16 3/31/16 4/30/16 5/31/16 6/30/16 7/31/16
Result Flash Note 2Q-2016
Tadawul
SABIC
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
Talha Nazar +966 11 2256115 [email protected]
+966 11 2256374 [email protected]
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
Waleed Al-jubayr +966 11 2256146 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Sultan Al Kadi
Analyst
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. 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. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. 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.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
SABIC: Q2-2016 earnings above estimates; Although the impact of Ibn Rushd impairment losses, the strong earnings were supported by lower than expected production cost and better performance of metals segment. “Overweight” recommendation with a higher PT. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 2Q-16 33,827 3,842 1.28
Actual 2Q-16 34,479 4,739 1.58
Deviation (%) 1.9% 23.3%
Margin expansion, better performance of metals segment and high operating rate led to strong performance in 2Q2016: Saudi Basic Industries Corporation (SABIC) announced its 2Q2016 result showing a deviation of 23.3% from AJC estimates and 26.2% from the market consensus of SAR 3,756mn. SABIC posted net income of SAR 4.74bn; indicating a fall of 23.2%YoY, and an increase of 39.0%QoQ. We believe that the better than expected result is mainly attributed to i) Lower than expected production cost with higher product spreads. ii) better performance from the metals segment after a prominent increase in steel prices. ii) improved products prices. We believe that despite the impact of Ibn Rushd impairment losses of SAR 366mn, higher OPEX and zakat provision, the improved operating rate and margin expansion has strongly supported the financial earnings in 2Q2016. SABIC’s revenue in 2Q2016 stood at SAR 34.5bn, well above AJC estimates of SAR 33.9bn. We believe that the higher than expected revenue is attributed to i) plants were running at higher than expected operating rate. ii) better performance of the metals segment. During the quarter, the average selling prices of petrochemical unit increased by around 6%QoQ, where MEG, Polypropylene and PE products prices rose by 9.6%, 12.1% and 3.3% in 2Q2016 respectively. On the other hand, the fertilizer segment were substantially impacted by YTD declining in fertilizers prices, as Urea prices fell 28.5%YoY and 1.0%QoQ. Ammonia price declined 16.7%YoY, but hiked 9.6% QoQ. Gross profit stood at SAR 11.02bn depicting a decline of 13.4%YoY and an increase of 31.4% QoQ, significantly above our forecast of SAR 9.4bn. Gross margin stood at 31.2% in 1Q2016, well above our estimate of 27.7%, and higher than 26.9% in 1Q2016. We believe the company’s overall 2Q2016 gross margin performance still benefitted from the higher spreads across products despite the increase in fuel cost. We believe SABIC’s higher feedstock costs, and the recent implementation of cost efficiency measures led to a strong sequential upsurge in the gross margin for the quarter; however, margin expansion is subject to change in the coming quarters based on the movement in products spreads. Operating profit for 2Q-2015 stood at SAR 6.95bn depicting a decline of 25.9%YoY and an increase of 39.0%QoQ; higher than our estimates of SAR 5.96bn. The company continue to show more control in its expenses, as it reduced OPEX (SG & A) by SAR 82mn to stand at SAR 3.31bn, as compared to SAR 3.39bn in 1Q-2016. Petrochemical products witnessed margin expansion in 2Q2016 due to higher spreads in some feedstock cost: The company benefitted from the high spreads across products based propane and butane (almost 35% of SABIC feedstock). In 2Q2016, Saudi propane prices rose only by 7.4% QoQ to an average price of USD 325 per MT. However, polypropylene prices increased by more than 13.5%QoQ. Consequently, lower increase in propane price than Polypropylene prices led to expansion in PP-Propane spreads in 2Q2016. PP-Propane spread expanded by 13.9%QoQ. We believe all Petchem players using liquid gas benefited from strong product prices and reported margin expansion in 2Q2016, which outperformed players using only ethane or methane as feedstock. However, in the medium-term the current spreads is likely to slightly narrow further. We update our recommendation to “Overweight” on SABIC with a higher PT of SAR 91.30/share indicating a potential upside of 11.3%: SABIC Co. is expected to post SAR 19.6bn in net income (6.53 EPS) for 2016, recording an increase of 4.4% YoY for the year supported by better margins. The company is trading at a forward PE and P/B of 12.6x and 1.46x respectively based on our 2016 earnings forecast. We expect the company to reduce its dividend payment to SAR 4.5 DPS (5.5% D/Y) in 2016 due to current oil fundamentals and the company’s expected additional capital expenditure in the medium term with Exxon mobil, and oil to chemicals projects. The company ended 1Q2016 with cash and cash equivalents totalling SAR 73.8bn, along with the decline of the long-term debt by almost 9.6%YoY that could provide the company with much more flexibility to start its expansion projects.
1
© All rights reserved
Please read Disclaimer on the back
Recommendation
Overweight
Current Price* (SAR)
82.0 91.30
Target Price (SAR)
11.3%
Upside / (Downside)
*prices as of 28th of July 2016
Key Financials SARmn (unless specified)
Revenues Growth % Net Income Growth % EPS
FY14
FY15
188,123 -0.5% 23,347 -7.6% 7.78
FY16E FY17E
148,086 144,315 164,543 -21.3% -2.5% 14.0% 18,769 19,603 22,568 -19.6% 4.4% 15.1% 6.26 6.53 7.52
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
FY14
FY15
27.5% 28.0% 12.4% 11.37x 1.63x 5.61x 14.6% 7.6% 6.2%
29.1% 29.9% 12.7% 12.23x 1.42x 5.65x 11.6% 6.3% 7.2%
FY16E FY17E 30.7% 31.0% 13.6% 12.55x 1.46x 6.09x 11.9% 6.5% 5.5%
30.4% 30.9% 13.7% 10.90x 1.40x 5.29x 13.4% 7.4% 6.1%
Source: Company reports, Aljazira Capital
Shareholders Pattern Holding
Shareholders Pattern General Organization for Social Insurance Public Investment Fund Public
5.70% 7.74% 24.3%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
247.5 11.4% 97.25 59.50 3000.0
Source: Company reports, Aljazira Capital
Price Performance 110
11000 10000
100
9000
90
8000
80
7000
70
6000
60
5000
50
12/31/14 1/31/15 2/28/15 3/31/15 4/30/15 5/31/15 6/30/15 7/31/15 8/31/15 9/30/15 10/31/15 11/30/15 12/31/15 1/31/16 2/29/16 3/31/16 4/30/16 5/31/16 6/30/16 7/31/16
Result Flash Note 2Q-2016
Tadawul
SABIC
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
Talha Nazar +966 11 2256115 [email protected]
+966 11 2256374 [email protected]
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
Waleed Al-jubayr +966 11 2256146 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Sultan Al Kadi
Analyst
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. 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. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. 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.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
