Yanbu National Petrochemical Co. (YANSAB) - Aljazira Capital
Yanbu National Petrochemical Co. (YANSAB) Result Flash Note 3Q-2016
October 2016
YANSAB: 3Q-2016 earnings came below our expectation; however, gross margin at highest level since inception. The company partly compensated lower sales volume with higher product spreads. Recommendation updated to “Neutral” with higher PT. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 3Q-16 2,012.0 703.9 1.25
Actual 3Q-16 1,725.7 607.6 1.08
Deviation (%) -14.2% -13.7% (0.17)
Lower than expected operating rate; along with higher production efficiencies contributes to mix performance in 3Q2016: 3Q2016 net profit came below our estimates of SAR 703.9mn, and the market consensus of SAR 638.8mn. YANSAB posted net income of SAR 607.6mn; indicating an increase of 101.4%YoY and a fall of 11.9%QoQ. The company attributed the YoY stronger profitability to i) higher volumetric production and sales revenue due to the completion of scheduled maintenance in 2Q-2015. ii) the reduction in some of feedstock prices, and despite lower average sales prices for majority of the products iii) increase in Murabaha investment return and decrease in financial charges. However, we believe that the QoQ weak performance, is mainly attributed to decrease in sales volumes and decrease in average sales prices for some products despite a significant decrease in production cost. We believe, despite the margin expansion due to lower feedstock cost, demand probably has softened significantly during third quarter on the seasonal downturn in some Polymers, where Olefins momentum is slowing and pushing down some polymers prices.
Please read Disclaimer on the back
Recommendation
Neutral
Current Price* (SAR)
48.89
Target Price (SAR)
53.10
Upside / (Downside)
8.6% *prices as of 12st of October 2016
Key Financials SARmn (unless specified)
FY14
FY15
Revenues Growth % Net Income Growth % EPS
9,511 1.7% 2,478 -6.3% 4.40
6,911 -27.3% 1,207 -51.3% 2.15
7,245 4.8% 2,354 94.9% 4.18
8,352 15.3% 2,643 12.3% 4.70
Source: Company reports, Aljazira Capital,
Key Ratios SARmn (unless specified) FY14
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) Decline in sales volume to weigh on earnings: The company reported a 9.2%QoQ ROE decline in revenue for 3Q2016 to SAR 1.73bn, which is below our estimate of ROA 2.01bn. Based on our estimates, Yansab witnessed low operating rate of 97.3% that Dividend Yield
is lower than AJC expectation of 112% and 115.9% actual utilization in 2Q2016. The company’s lower production level was in-line with seasonal demand trends, which resulted in lower sales volume. We expect the company’s operating rate in 4Q-2016 to continue its growth trajectory, due to expected higher production sufficiency and seasonal demand recovery. However, the revised fuel costs are expected to have more impact in the coming quarters due to 17%QoQ increase in Propane prices while the product prices seem to be stable.
FY16E FY17E
32.5% 43.5% 26.1% 11.3x 1.80x 6.83x 16.2% 10.9% 6.3%
FY15 25.4% 38.9% 17.5% 15.10x 1.19x 7.26x 7.8% 5.6% 6.2%
FY16E FY17E 38.7% 52.1% 32.5% 11.64x 1.71x 7.38x 15.0% 11.3% 6.1%
37.0% 48.3% 31.6% 10.37x 1.61x 6.59x 16.0% 12.6% 6.1%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
28.26 50.88% 50.25 23.80 562.50 Source: Company reports, Aljazira Capital
During the quarter, average prices of Yansab key products such as, MEG declined by 8.5%QoQ from USD 824 to USD 754 per MT. Whereas, Polypropylene and PE Shareholders Pattern derivatives products increased 2.6% and 0.9% in 3Q216 respectively, as compared Shareholders Pattern to 1Q2016 prices.
Holding 51.0% Saudi Basic Industries Corp. YANSAB recorded a strong gross margin of 40.8% and lower OPEX: Gross profit General Organization for Social Insurance - GOSI 11.92% stood at SAR 704.3mn depicting an increase of 61.1%YoY and a fall of 11.3%QoQ. Public 37.08%
Gross margin expanded in 3Q2016 to 40.8% vs. 24.1% in 3Q2015 and 41.9% in 2Q2016, which we believe was due to i) higher production efficiency ii) lower feedstock cost after the new pricing of Propane (pricing benchmark switched from Japanese Naphtha to propane with 20% discount in 3Q2016). Operating Profit stood at SAR 656.4mn depicting an increase of 72.1%YoY, and a fall of 11.1%QoQ; where the company recorded lower OPEX (SG & A) at SAR 47.9mn, as compared to SAR 57.2mn in Q2-2016 and SAR 53.2 in 3Q2015.
1
Feedstock cost to rise after FY2016: The company benefitted from the high spreads across products, where the increase in profit was primarily ascribed to some high product margins. In 3Q2016, Saudi propane prices declined by 10.8%QoQ to an average price of USD 290 per MT. However, polypropylene prices increased by 2.6%QoQ. Consequently, decline in propane price, but an increase in PP prices led to expansion in PP-Propane spreads in 3Q2016. PP-Propane spread expanded 23.1%QoQ to USD 708/ton. YANSAB is projected to continue to benefit from higher spreads across products in the short-term. However, in the medium to long term, the current spreads seem unsustainable and is likely to narrow further after FY2016 with the new pricing of Ethane. The company’s grace period ended after 2Q-2016 for propane (60% of feedstock) and would be end at the end of 2016 for Ethane (40% of feedstock). © All rights reserved
Source: Company reports, Aljazira Capital
We update our recommendation to “Neutral” on YANSAB with a higher PT of SAR 53.10/share indicating a potential upside of 8.6% over current market price of SAR 48.89/ share (as of 12th Oct 2016).: YANSAB Co. is expected to post SAR 2,354mn in net income (4.18 EPS) for 2016, recording an increase of 94.9%YoY for the year that mainly attributed to higher efficiencies after scheduled maintenance during 2015, and despite impacted by higher electricity cost and low level in product price. The company is trading at a forward PE and P/B of 10.4x and 1.61x respectively based on our 2017 earnings forecast. We expect the company to raise dividend payment to SAR 3.0/share (6.1% D/Y) in 2016 and over the next two years owing to a strong operating cash flow and no additional capital expenditure in the near to medium term.
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
Talha Nazar +966 11 2256250 [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
Mansour Hamad Al-shuaibi
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618443 [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
October 2016
YANSAB: 3Q-2016 earnings came below our expectation; however, gross margin at highest level since inception. The company partly compensated lower sales volume with higher product spreads. Recommendation updated to “Neutral” with higher PT. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 3Q-16 2,012.0 703.9 1.25
Actual 3Q-16 1,725.7 607.6 1.08
Deviation (%) -14.2% -13.7% (0.17)
Lower than expected operating rate; along with higher production efficiencies contributes to mix performance in 3Q2016: 3Q2016 net profit came below our estimates of SAR 703.9mn, and the market consensus of SAR 638.8mn. YANSAB posted net income of SAR 607.6mn; indicating an increase of 101.4%YoY and a fall of 11.9%QoQ. The company attributed the YoY stronger profitability to i) higher volumetric production and sales revenue due to the completion of scheduled maintenance in 2Q-2015. ii) the reduction in some of feedstock prices, and despite lower average sales prices for majority of the products iii) increase in Murabaha investment return and decrease in financial charges. However, we believe that the QoQ weak performance, is mainly attributed to decrease in sales volumes and decrease in average sales prices for some products despite a significant decrease in production cost. We believe, despite the margin expansion due to lower feedstock cost, demand probably has softened significantly during third quarter on the seasonal downturn in some Polymers, where Olefins momentum is slowing and pushing down some polymers prices.
Please read Disclaimer on the back
Recommendation
Neutral
Current Price* (SAR)
48.89
Target Price (SAR)
53.10
Upside / (Downside)
8.6% *prices as of 12st of October 2016
Key Financials SARmn (unless specified)
FY14
FY15
Revenues Growth % Net Income Growth % EPS
9,511 1.7% 2,478 -6.3% 4.40
6,911 -27.3% 1,207 -51.3% 2.15
7,245 4.8% 2,354 94.9% 4.18
8,352 15.3% 2,643 12.3% 4.70
Source: Company reports, Aljazira Capital,
Key Ratios SARmn (unless specified) FY14
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) Decline in sales volume to weigh on earnings: The company reported a 9.2%QoQ ROE decline in revenue for 3Q2016 to SAR 1.73bn, which is below our estimate of ROA 2.01bn. Based on our estimates, Yansab witnessed low operating rate of 97.3% that Dividend Yield
is lower than AJC expectation of 112% and 115.9% actual utilization in 2Q2016. The company’s lower production level was in-line with seasonal demand trends, which resulted in lower sales volume. We expect the company’s operating rate in 4Q-2016 to continue its growth trajectory, due to expected higher production sufficiency and seasonal demand recovery. However, the revised fuel costs are expected to have more impact in the coming quarters due to 17%QoQ increase in Propane prices while the product prices seem to be stable.
FY16E FY17E
32.5% 43.5% 26.1% 11.3x 1.80x 6.83x 16.2% 10.9% 6.3%
FY15 25.4% 38.9% 17.5% 15.10x 1.19x 7.26x 7.8% 5.6% 6.2%
FY16E FY17E 38.7% 52.1% 32.5% 11.64x 1.71x 7.38x 15.0% 11.3% 6.1%
37.0% 48.3% 31.6% 10.37x 1.61x 6.59x 16.0% 12.6% 6.1%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
28.26 50.88% 50.25 23.80 562.50 Source: Company reports, Aljazira Capital
During the quarter, average prices of Yansab key products such as, MEG declined by 8.5%QoQ from USD 824 to USD 754 per MT. Whereas, Polypropylene and PE Shareholders Pattern derivatives products increased 2.6% and 0.9% in 3Q216 respectively, as compared Shareholders Pattern to 1Q2016 prices.
Holding 51.0% Saudi Basic Industries Corp. YANSAB recorded a strong gross margin of 40.8% and lower OPEX: Gross profit General Organization for Social Insurance - GOSI 11.92% stood at SAR 704.3mn depicting an increase of 61.1%YoY and a fall of 11.3%QoQ. Public 37.08%
Gross margin expanded in 3Q2016 to 40.8% vs. 24.1% in 3Q2015 and 41.9% in 2Q2016, which we believe was due to i) higher production efficiency ii) lower feedstock cost after the new pricing of Propane (pricing benchmark switched from Japanese Naphtha to propane with 20% discount in 3Q2016). Operating Profit stood at SAR 656.4mn depicting an increase of 72.1%YoY, and a fall of 11.1%QoQ; where the company recorded lower OPEX (SG & A) at SAR 47.9mn, as compared to SAR 57.2mn in Q2-2016 and SAR 53.2 in 3Q2015.
1
Feedstock cost to rise after FY2016: The company benefitted from the high spreads across products, where the increase in profit was primarily ascribed to some high product margins. In 3Q2016, Saudi propane prices declined by 10.8%QoQ to an average price of USD 290 per MT. However, polypropylene prices increased by 2.6%QoQ. Consequently, decline in propane price, but an increase in PP prices led to expansion in PP-Propane spreads in 3Q2016. PP-Propane spread expanded 23.1%QoQ to USD 708/ton. YANSAB is projected to continue to benefit from higher spreads across products in the short-term. However, in the medium to long term, the current spreads seem unsustainable and is likely to narrow further after FY2016 with the new pricing of Ethane. The company’s grace period ended after 2Q-2016 for propane (60% of feedstock) and would be end at the end of 2016 for Ethane (40% of feedstock). © All rights reserved
Source: Company reports, Aljazira Capital
We update our recommendation to “Neutral” on YANSAB with a higher PT of SAR 53.10/share indicating a potential upside of 8.6% over current market price of SAR 48.89/ share (as of 12th Oct 2016).: YANSAB Co. is expected to post SAR 2,354mn in net income (4.18 EPS) for 2016, recording an increase of 94.9%YoY for the year that mainly attributed to higher efficiencies after scheduled maintenance during 2015, and despite impacted by higher electricity cost and low level in product price. The company is trading at a forward PE and P/B of 10.4x and 1.61x respectively based on our 2017 earnings forecast. We expect the company to raise dividend payment to SAR 3.0/share (6.1% D/Y) in 2016 and over the next two years owing to a strong operating cash flow and no additional capital expenditure in the near to medium term.
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
Talha Nazar +966 11 2256250 [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
Mansour Hamad Al-shuaibi
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618443 [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
