Sipchem AWS
Sipchem
Petrochemicals – Industrial SIPCHEM AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR 31.90 (-1.2% upside)
Current price
31.90 (-1.2% upside) SAR32.30
Sector rating Company risk rating
Research Department ARC Research Team Tel 966 11 211 9332, [email protected]
Outperform Low
Key themes & implications Sipchem and SPC have recently announced that they have postponed their merger due to regulatory constraints. Although the merger would have benefited Sipchem, we believe it will not create operational headwinds over the near-term as it has a healthy feedstock pipeline. Moreover, the PhaseIII units, which we expect to come online over the next few quarters, will offer tailwinds. Share information Market cap (SAR/US$)
11.84bn / 3.158bn
52-week range
21.75 - 33.08
Daily avg. volume (US$)
8.63mn
Shares outstanding
366.7mn
Free float (est.)
72%
Performance
1M
3M
12M
Absolute
5.7%
2.5%
42%
Relative to index
4.2%
-3.4%
11.7%
Major Shareholder: Al-Zamil Group Holding Co.
9.6%
Ikarus Petroleum Holding
8.2%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
20.2
18.4
16.7
14.4
P/B (x)
2.1
2.0
1.9
1.9
EV/EBITDA (x)
9.4
9.8
9.9
8.8
Dividend Yield
3.9%
3.9%
3.9%
4.5%
Source: Company data, Al Rajhi Capital
Performance Price Close
Relative to TADAWUL FF (RHS)
34
136
RSI10
32
130
30
125
28
119
26
113
24
107
22
102
20
96
70 30 -10 06/13
09/13
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Sipchem Deferment of merger plans Sipchem recently announced that it has deferred its merger plans with SPC with mutual consent on account of regulatory hurdles, after making positive progress in the earlier stages. Although the merger would have benefited both the companies, we believe that the deferment will not create any operational headwinds for Sipchem over the near term. Sipchem’s CEO also stated that its operations were running smoothly and the merger postponement will not affect its growth plans in any way. On the operational front, we would like to see better utilization rates in Q2, after the unplanned stoppage at its methanol plant in Q1, which impacted its quarterly results. We continue to maintain our Neutral rating on the stock with a target price of SAR31.9 a share. Postponement of merger not to affect operations: We believe the deferment of the merger plans will not impede Sipchem’s growth plans as it has diversified feedstock supply arrangements in place. Further, the company’s CEO confirmed our view yesterday, indicating that it will continue its ongoing operations without any impediments and its growth plans will remain intact. Ethylene supply from TSOC to continue: We had earlier assumed that the deferment of the merger may negatively impact the ethylene procurement contracts, which Sipchem has with Tasnee & Sahara Olefin Co. (TSOC, an SPC affiliate). However, Sipchem, in a management call with us yesterday, clarified that its existing ethylene contracts with TSOC will continue despite the negative outcome of the proposed merger as these contracts were signed with the parent company and were outside of the merger talks. Q2 performance to pick up after a weak Q1: Sipchem has a credible operating history which was reflected in its healthy 2013 performance. However, its methanol plant experienced an unexpected technical glitch, which had led to the closure of its downstream units resulting in a poor Q1. In the Q1 earnings call, the management stated that the company has resolved all the issues and that the methanol plant is running smoothly. Moreover, Sipchem’s butanediol plant has resumed operations after a 35-day maintenance-cum-expansion shutdown. We expect Sipchem to post healthy Q2 results based on improved utilization rates. Conclusion: Despite the deferment of the merger with SPC, Sipchem continues to be a value play with a credible operating history. Further, the commencement of its Phase-III units over the next few quarters will provide earning accretion. Having said that, the stock has gained 42% over the last 52 weeks and is trading at 16.7x 2014E PE vs. TASI’s 15.3x. At the current valuations, we reiterate our Neutral rating with a target price of SAR31.9 per share.
Company summary Established in 1999, Sipchem is engaged in manufacturing of methanol and other petrochemical intermediaries, which have diverse industrial uses. The company’s subsidiary markets the produce along with other products. Sipchem acquired Aectra SA in 2011, which offers marketing and logistic support in the European markets. The company has been listed on the Saudi stock market since 2006.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
3,324
3,922
4,006
4,201
4,211
Revenue Growth Gross profit margin EBITDA margin
66.8% 42.9% 53.2%
18.0% 32.3% 42.1%
2.1% 32.4% 42.9%
4.9% 33.9% 39.9%
0.2% 36.4% 43.8%
Net profit margin EPS EPS Growth
21.3% 1.93 87.0%
15.0% 1.60 -16.9%
16.0% 1.75 9.4%
16.9% 1.93 10.3%
19.6% 2.25 16.3%
ROE ROCE
13.4% 9.8%
10.4% 8.3%
11.3% 7.6%
11.8% 7.9%
13.1% 8.7%
Capex/Sales
27.1%
36.9%
42.3%
21.9%
12.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
1
Sipchem
Petrochemicals – Industrial 12 June 2014
Methanol prices Sipchem derives significant amount of revenues from methanol. Methanol prices surged to a five-and-a-half year high of SAR550 per ton in Q4 2013 on the back of optimism over improving macroeconomic scenario, although prices have been steadily declining since the beginning of 2014. However, average methanol prices dipped only 3% on a y-o-y basis in Q2. We expect prices to stabilize in the range of US$350-370 per ton. Figure 1 Methanol prices have been relatively steady in Q2 2014 US$/ton 600
500
400
300
200
100
0 April-13
July-13
October-13
January-14
April-14
Source: Bloomberg, Al Rajhi Capital
Update on expansion plans Sipchem is working on the commencement of its Phase-III units, which comprise diversified downstream petrochemical plants. Sipchem announced on March 31, 2013 that it has completed all construction and mechanical works at its EVA/LDPE plant (200,000 tpa). As per the company’s disclosure, the trial operations were expected to begin in Q2 2014. We are yet to receive any update on this front. At the current price levels, we estimate that the EVA/LDPE plant will contribute about SAR1bn to Sipchem’s annual revenues at 80% utilization rates (~25% of the 2013 revenues). Further, Sipchem declared in early March that the initial operations at Gulf Advanced Cables Insulation Co. (GACI) have begun. We expect commercial production at GACI to begin in H2 2014. The company also announced that the construction work at its polybutylene terephthalate plant (63,000 tpa) is going on, and it expects experimental operations to begin in Q4. We believe these plants will offer significant tailwinds to Sipchem and boost its earnings performance over the medium-term.
Disclosures Please refer to the important disclosures at the back of this report.
2
Sipchem
Petrochemicals – Industrial 12 June 2014
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Jithesh Gopi, CFA Head of Research Tel: +966 11 2119332 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
3
Petrochemicals – Industrial SIPCHEM AB: Saudi Arabia 12 June 2014
Rating
NEUTRAL
Target price
SAR 31.90 (-1.2% upside)
Current price
31.90 (-1.2% upside) SAR32.30
Sector rating Company risk rating
Research Department ARC Research Team Tel 966 11 211 9332, [email protected]
Outperform Low
Key themes & implications Sipchem and SPC have recently announced that they have postponed their merger due to regulatory constraints. Although the merger would have benefited Sipchem, we believe it will not create operational headwinds over the near-term as it has a healthy feedstock pipeline. Moreover, the PhaseIII units, which we expect to come online over the next few quarters, will offer tailwinds. Share information Market cap (SAR/US$)
11.84bn / 3.158bn
52-week range
21.75 - 33.08
Daily avg. volume (US$)
8.63mn
Shares outstanding
366.7mn
Free float (est.)
72%
Performance
1M
3M
12M
Absolute
5.7%
2.5%
42%
Relative to index
4.2%
-3.4%
11.7%
Major Shareholder: Al-Zamil Group Holding Co.
9.6%
Ikarus Petroleum Holding
8.2%
Valuation 12/12A
12/13A
12/14E
12/15E
P/E (x)
20.2
18.4
16.7
14.4
P/B (x)
2.1
2.0
1.9
1.9
EV/EBITDA (x)
9.4
9.8
9.9
8.8
Dividend Yield
3.9%
3.9%
3.9%
4.5%
Source: Company data, Al Rajhi Capital
Performance Price Close
Relative to TADAWUL FF (RHS)
34
136
RSI10
32
130
30
125
28
119
26
113
24
107
22
102
20
96
70 30 -10 06/13
09/13
12/13
03/14
Source: Bloomberg, Company data, Al Rajhi Capital
Sipchem Deferment of merger plans Sipchem recently announced that it has deferred its merger plans with SPC with mutual consent on account of regulatory hurdles, after making positive progress in the earlier stages. Although the merger would have benefited both the companies, we believe that the deferment will not create any operational headwinds for Sipchem over the near term. Sipchem’s CEO also stated that its operations were running smoothly and the merger postponement will not affect its growth plans in any way. On the operational front, we would like to see better utilization rates in Q2, after the unplanned stoppage at its methanol plant in Q1, which impacted its quarterly results. We continue to maintain our Neutral rating on the stock with a target price of SAR31.9 a share. Postponement of merger not to affect operations: We believe the deferment of the merger plans will not impede Sipchem’s growth plans as it has diversified feedstock supply arrangements in place. Further, the company’s CEO confirmed our view yesterday, indicating that it will continue its ongoing operations without any impediments and its growth plans will remain intact. Ethylene supply from TSOC to continue: We had earlier assumed that the deferment of the merger may negatively impact the ethylene procurement contracts, which Sipchem has with Tasnee & Sahara Olefin Co. (TSOC, an SPC affiliate). However, Sipchem, in a management call with us yesterday, clarified that its existing ethylene contracts with TSOC will continue despite the negative outcome of the proposed merger as these contracts were signed with the parent company and were outside of the merger talks. Q2 performance to pick up after a weak Q1: Sipchem has a credible operating history which was reflected in its healthy 2013 performance. However, its methanol plant experienced an unexpected technical glitch, which had led to the closure of its downstream units resulting in a poor Q1. In the Q1 earnings call, the management stated that the company has resolved all the issues and that the methanol plant is running smoothly. Moreover, Sipchem’s butanediol plant has resumed operations after a 35-day maintenance-cum-expansion shutdown. We expect Sipchem to post healthy Q2 results based on improved utilization rates. Conclusion: Despite the deferment of the merger with SPC, Sipchem continues to be a value play with a credible operating history. Further, the commencement of its Phase-III units over the next few quarters will provide earning accretion. Having said that, the stock has gained 42% over the last 52 weeks and is trading at 16.7x 2014E PE vs. TASI’s 15.3x. At the current valuations, we reiterate our Neutral rating with a target price of SAR31.9 per share.
Company summary Established in 1999, Sipchem is engaged in manufacturing of methanol and other petrochemical intermediaries, which have diverse industrial uses. The company’s subsidiary markets the produce along with other products. Sipchem acquired Aectra SA in 2011, which offers marketing and logistic support in the European markets. The company has been listed on the Saudi stock market since 2006.
Period End (SAR)
12/11A
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
3,324
3,922
4,006
4,201
4,211
Revenue Growth Gross profit margin EBITDA margin
66.8% 42.9% 53.2%
18.0% 32.3% 42.1%
2.1% 32.4% 42.9%
4.9% 33.9% 39.9%
0.2% 36.4% 43.8%
Net profit margin EPS EPS Growth
21.3% 1.93 87.0%
15.0% 1.60 -16.9%
16.0% 1.75 9.4%
16.9% 1.93 10.3%
19.6% 2.25 16.3%
ROE ROCE
13.4% 9.8%
10.4% 8.3%
11.3% 7.6%
11.8% 7.9%
13.1% 8.7%
Capex/Sales
27.1%
36.9%
42.3%
21.9%
12.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
1
Sipchem
Petrochemicals – Industrial 12 June 2014
Methanol prices Sipchem derives significant amount of revenues from methanol. Methanol prices surged to a five-and-a-half year high of SAR550 per ton in Q4 2013 on the back of optimism over improving macroeconomic scenario, although prices have been steadily declining since the beginning of 2014. However, average methanol prices dipped only 3% on a y-o-y basis in Q2. We expect prices to stabilize in the range of US$350-370 per ton. Figure 1 Methanol prices have been relatively steady in Q2 2014 US$/ton 600
500
400
300
200
100
0 April-13
July-13
October-13
January-14
April-14
Source: Bloomberg, Al Rajhi Capital
Update on expansion plans Sipchem is working on the commencement of its Phase-III units, which comprise diversified downstream petrochemical plants. Sipchem announced on March 31, 2013 that it has completed all construction and mechanical works at its EVA/LDPE plant (200,000 tpa). As per the company’s disclosure, the trial operations were expected to begin in Q2 2014. We are yet to receive any update on this front. At the current price levels, we estimate that the EVA/LDPE plant will contribute about SAR1bn to Sipchem’s annual revenues at 80% utilization rates (~25% of the 2013 revenues). Further, Sipchem declared in early March that the initial operations at Gulf Advanced Cables Insulation Co. (GACI) have begun. We expect commercial production at GACI to begin in H2 2014. The company also announced that the construction work at its polybutylene terephthalate plant (63,000 tpa) is going on, and it expects experimental operations to begin in Q4. We believe these plants will offer significant tailwinds to Sipchem and boost its earnings performance over the medium-term.
Disclosures Please refer to the important disclosures at the back of this report.
2
Sipchem
Petrochemicals – Industrial 12 June 2014
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Jithesh Gopi, CFA Head of Research Tel: +966 11 2119332 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
3
