Sahara Petrochemical Co. - Aljazira Capital
Sahara Petrochemical Co. Investment Update
January 2016
Sahara Petrochemical: Q4-2015 earnings missed market expectation with a negative surprise; affiliates restructure program and losses from associates to hurt profits by SAR 122mn. “Overweight” recommendation reiterated. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 434.7 81.1 0.18
Actual 4Q-15 432.6 (47.92) (0.11)
Deviation (%) - 0.5% -
Al Waha higher utilization rates was offset by higher than expected operating expenses and higher losses of new projects: Sahara Petrochemical Company (SAHARA) Q4-2015 earnings came below estimate and showed a deviation from AJC estimates of SAR 81.1mn and from the market consensus of SAR 85.1mn. SAHARA posted a net loss of SAR 47.92mn; (EPS; SAR -0.11); as compared with SAR 83.4mn in 4Q2014, and SAR 121mn in 3Q2015. We believe the weak results is mainly ascribed to i) losses of new projects of SAR 92.2mn ii) affiliates restructure program with almost SAR 30mn iii) higher than expected OPEX. vi) FX losses and inventory revaluation, and despite the high volumetric sales from AlWaha plant due to high operating rate. AlWaha’s sales in 4Q2015 stood at SAR 432.5mn, as compared to AJC estimates of SAR 434.7mn. Based on our calculation, the plant was running with operating rate of 114%, which was in line with our estimates. However, we believe 2015 had more-than-anticipated one-offs, which impacted the overall performance negatively. However, we expect a more normalized and stable performance in 2016 and despite the current oil price fluctuations risks. Gross profit stood at SAR 117.1mn, well below AJC estimates of SAR 131.3mn due to unrealized losses for inventories revaluation with the recent prices and higher decline in Polypropylene prices compare to Naphtha that contracted profit margins. Operating profits stood at SAR 63.4mn; where the company recorded higher than expected OPEX (SG & A) at SAR 53.7mn, as compared to our estimate of SAR 27.4mn due to one-off charge of its affiliates restructure program. During the quarter, average selling prices of PP declined of 32.9%YoY and 14.7%QoQ. HDPE prices fell 22.8%YoY and 8.1%QoQ. LDPE decreased 20.0%YoY and 8.5%QoQ. Ethylene price increased 1.7%QoQ and decreased 14.1%YoY. Higher feedstock cost, electricity, and fuel gas cost to hurt SAHARA’s net profitability by around SAR 40mn in 2016: The government of Saudi Arabia recently raised natural gas, fuel, Petchem feedstock, and electricity prices to curb deficit. It’s cutting the propane price discount to 20% from 28% while changing the basis to propane instead of naphtha. It increased the Ethan prices from earlier fixed subsidized rate of USD 0.75 per mmbtu to USD 1.75 per mmbtu and Methane/natural gas from 0.75 per mmbtu to USD 1.25 per mmbtu. According to the company, this change is expected to increase production costs by 3% as a result of ethane increase, fuel and electricity prices, while the impact of higher propane gas price would be dependent on feedstock prices. We have reworked our financial model assumptions to incorporate the impact of these changes. Currently, our assumption for OPEC crude oil basket for 2016 stands at USD 53.5 per barrel. Based on our revised assumptions, SAHARA’s net income of our estimates would decline by about 9.7% in 2016. Consequently, the net income of SAHARA for 2016 stands revised to SAR 376.3mn from earlier estimate of SAR 416.6mn Strong balance sheet position to maintain a healthy dividend of at least SAR 0.5 DPS in 2016: By the end of 3Q2015, Sahara’s debt-to-equity ratio stood at 0.44x, with a total debt of around SAR 2,034mn and cash and equivalents of SAR 1,382mn. During 2015, the management reduced its dividend payment to SAR 0.50 per share from 0.85 per share in 2014, resulting in dividend yield of 4.9%. We believe a strong balance sheet and sustainable cash flows would be adequate to maintain a healthy dividend of at least SAR 0.5 DPS in 2016. Sahara is trading at a P/E of 9.15x for 2016E, which is lower than the current multiple of the petrochemical sector 12.0x.
1
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Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
7.85
Target Price (SAR)
10.75
36.3%
Upside / (Downside)
*prices as of 25nd of January 2016
Key Financials SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
1,898 -20.2% 385.4 -32.5% 0.88
1,420 -25.2% 34.9 -90.9% 0.08
1,844 29.8% 376.3 976.7% 0.86
Source: Company reports, Aljazira Capital
Our estimates and valuation: SAHARA Co. is expected to post SAR 376.3mn in net income (0.86 EPS) for 2016, recording a yearly strong growth due to higher operating rate of AlWaha, expected Improvement in associates’ operations, and the exclusion of any oneoffs impacts or any scheduled maintenance. However, impact of higher feedstock cost and low level in product price is already included in the model. Thus, we remain our ‘Overweight’ for the stock with lower target price at SAR 10.75/share; indicating a potential upside of 36.3% over current market price of SAR 7.85/ share (as of 25th January 2016). The company is trading at a forward PE and PB of 9.15x and 0.56x respectively based on our 2016 earnings forecast. We anticipate the company to maintain its dividend payment at SAR 0.50 DPS (10.8% D/Y) in 2016.
Key Ratios FY14
FY15E
FY16E
20.6% 23.7% 20.3% 17.34x 1.05x 16.4
23.5% 27.8% 2.5% 128.57x 0.73x 12.6x
28.0% 33.2% 20.4% 9.15x 0.56x 6.6x
6.1% 4.5% 5.6%
0.6% 0.4% 4.9%
6.1% 4.7% 10.8%
SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern Zamil Group Holding Company Public Pension Agency Public
Holding 7.91% 5.95% 86.14%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
3.44 -21.4% 18.25 7.80 438.8 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
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]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+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
Senior 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
January 2016
Sahara Petrochemical: Q4-2015 earnings missed market expectation with a negative surprise; affiliates restructure program and losses from associates to hurt profits by SAR 122mn. “Overweight” recommendation reiterated. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 434.7 81.1 0.18
Actual 4Q-15 432.6 (47.92) (0.11)
Deviation (%) - 0.5% -
Al Waha higher utilization rates was offset by higher than expected operating expenses and higher losses of new projects: Sahara Petrochemical Company (SAHARA) Q4-2015 earnings came below estimate and showed a deviation from AJC estimates of SAR 81.1mn and from the market consensus of SAR 85.1mn. SAHARA posted a net loss of SAR 47.92mn; (EPS; SAR -0.11); as compared with SAR 83.4mn in 4Q2014, and SAR 121mn in 3Q2015. We believe the weak results is mainly ascribed to i) losses of new projects of SAR 92.2mn ii) affiliates restructure program with almost SAR 30mn iii) higher than expected OPEX. vi) FX losses and inventory revaluation, and despite the high volumetric sales from AlWaha plant due to high operating rate. AlWaha’s sales in 4Q2015 stood at SAR 432.5mn, as compared to AJC estimates of SAR 434.7mn. Based on our calculation, the plant was running with operating rate of 114%, which was in line with our estimates. However, we believe 2015 had more-than-anticipated one-offs, which impacted the overall performance negatively. However, we expect a more normalized and stable performance in 2016 and despite the current oil price fluctuations risks. Gross profit stood at SAR 117.1mn, well below AJC estimates of SAR 131.3mn due to unrealized losses for inventories revaluation with the recent prices and higher decline in Polypropylene prices compare to Naphtha that contracted profit margins. Operating profits stood at SAR 63.4mn; where the company recorded higher than expected OPEX (SG & A) at SAR 53.7mn, as compared to our estimate of SAR 27.4mn due to one-off charge of its affiliates restructure program. During the quarter, average selling prices of PP declined of 32.9%YoY and 14.7%QoQ. HDPE prices fell 22.8%YoY and 8.1%QoQ. LDPE decreased 20.0%YoY and 8.5%QoQ. Ethylene price increased 1.7%QoQ and decreased 14.1%YoY. Higher feedstock cost, electricity, and fuel gas cost to hurt SAHARA’s net profitability by around SAR 40mn in 2016: The government of Saudi Arabia recently raised natural gas, fuel, Petchem feedstock, and electricity prices to curb deficit. It’s cutting the propane price discount to 20% from 28% while changing the basis to propane instead of naphtha. It increased the Ethan prices from earlier fixed subsidized rate of USD 0.75 per mmbtu to USD 1.75 per mmbtu and Methane/natural gas from 0.75 per mmbtu to USD 1.25 per mmbtu. According to the company, this change is expected to increase production costs by 3% as a result of ethane increase, fuel and electricity prices, while the impact of higher propane gas price would be dependent on feedstock prices. We have reworked our financial model assumptions to incorporate the impact of these changes. Currently, our assumption for OPEC crude oil basket for 2016 stands at USD 53.5 per barrel. Based on our revised assumptions, SAHARA’s net income of our estimates would decline by about 9.7% in 2016. Consequently, the net income of SAHARA for 2016 stands revised to SAR 376.3mn from earlier estimate of SAR 416.6mn Strong balance sheet position to maintain a healthy dividend of at least SAR 0.5 DPS in 2016: By the end of 3Q2015, Sahara’s debt-to-equity ratio stood at 0.44x, with a total debt of around SAR 2,034mn and cash and equivalents of SAR 1,382mn. During 2015, the management reduced its dividend payment to SAR 0.50 per share from 0.85 per share in 2014, resulting in dividend yield of 4.9%. We believe a strong balance sheet and sustainable cash flows would be adequate to maintain a healthy dividend of at least SAR 0.5 DPS in 2016. Sahara is trading at a P/E of 9.15x for 2016E, which is lower than the current multiple of the petrochemical sector 12.0x.
1
© All rights reserved
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
7.85
Target Price (SAR)
10.75
36.3%
Upside / (Downside)
*prices as of 25nd of January 2016
Key Financials SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
1,898 -20.2% 385.4 -32.5% 0.88
1,420 -25.2% 34.9 -90.9% 0.08
1,844 29.8% 376.3 976.7% 0.86
Source: Company reports, Aljazira Capital
Our estimates and valuation: SAHARA Co. is expected to post SAR 376.3mn in net income (0.86 EPS) for 2016, recording a yearly strong growth due to higher operating rate of AlWaha, expected Improvement in associates’ operations, and the exclusion of any oneoffs impacts or any scheduled maintenance. However, impact of higher feedstock cost and low level in product price is already included in the model. Thus, we remain our ‘Overweight’ for the stock with lower target price at SAR 10.75/share; indicating a potential upside of 36.3% over current market price of SAR 7.85/ share (as of 25th January 2016). The company is trading at a forward PE and PB of 9.15x and 0.56x respectively based on our 2016 earnings forecast. We anticipate the company to maintain its dividend payment at SAR 0.50 DPS (10.8% D/Y) in 2016.
Key Ratios FY14
FY15E
FY16E
20.6% 23.7% 20.3% 17.34x 1.05x 16.4
23.5% 27.8% 2.5% 128.57x 0.73x 12.6x
28.0% 33.2% 20.4% 9.15x 0.56x 6.6x
6.1% 4.5% 5.6%
0.6% 0.4% 4.9%
6.1% 4.7% 10.8%
SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern Zamil Group Holding Company Public Pension Agency Public
Holding 7.91% 5.95% 86.14%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
3.44 -21.4% 18.25 7.80 438.8 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
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]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+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
Senior 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
