Saudi Arabia: Yanbu National Petrochemicals - April 2018

Transcription

1. Yanbu National Petrochemicals Petrochemicals – Industrial YANSAB AB: Saudi Arabia 23 April 2018 US$11.07bn Market cap Target price Current price 37% US$6.41mn Free float Avg. daily volume 68.00 73.82 -7.9% over current as at 19/4/2018 Existing rating Underweight Neutral Overweight Neutral Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) Vol mn RSI10 80.0 118.0 70.0 106.3 60.0 94.7 50.0 83.0 70 30 -10 4 3 2 1 04/17 07/17 10/17 01/18 Source: Bloomberg Earnings (SARmn) 2017 2018e 2019e 7,931 Revenue 7,221 8,013 Y-o-Y 15.9% 11.0% -1.0% Gross profit 2,870 3,193 3,485 Gross margin 39.7% 39.8% 43.9% Net profit 2,376 2,665 2,961 1.4% 12.2% 11.1% 32.9% 33.3% 37.3% Y-o-Y Net margin EPS (SAR) DPS (SAR) Payout ratio 4.2 4.7 3.3 4.0 5.3 5.0 76.9% 84.4% 95.0% P/E (Curr) 17.2x 15.3x 13.8x P/E (Target) 16.1x 14.4x 12.9x Source: Company data, Al Rajhi Capital Research Department Pritish Devassy, CFA Tel +966 11 2119370, devassyp@alrajhi-capital.com Yanbu National Petrochemicals Q1: Earnings in-line Yansab reported lower than expected Q1 revenue, probably due to higher than expected impact of shutdowns (not reported by company, source: polymer update) of HDPE and LLDPE plants. We estimated Q1 utilization rate at ~82%, however, results indicated that operating rates could have come even lower at ~75%. Despite lower top-line (-17.5% q-o-q) amid shutdowns, we observed an improvement in production efficiencies, and probably higher by-product sale from excess ethylene resulting in overall net profit (SAR631mn) coming in broadly in-line with our estimate (SAR652mn). This comes in after last two quarters of earnings beat reemphasising the law of averages at work for cyclical petchem companies. Consequently, our forward looking annual estimates which are dependent on average cycle prices and utilization rates remain broadly unchanged as we expect Yansab’s performance to improve post shutdown. Hence, we reiterate our TP of SAR68/share with a Neutral rating. We do expect an increase in dividend to SAR4.0/share for 2018E, given its healthy financial position and robust FCF generation. Additional details: Q1 revenue of SAR1,787mn was below our estimate of SAR1,966mn (consensus: SAR2,113mn), primarily due to weak sales volume amid likely plant shutdowns in February/March (HDPE/LLDPE plants: 6-7 weeks; source: PolymerUpdate), completely offsetting higher prices across its products portfolio. The ~SAR179mn miss in top-line was largely offset by better than expected production efficiencies (most likely at MEG plant) and lower SG&A expenses, leading to SAR46mn and just SAR29mn miss at the gross and operating profit levels. Consequently, net profit came in at SAR631mn, mostly in line with our estimate of SAR652mn (consensus: SAR726mn). What to expect in the near term? Post shutdown of HDPE/LLDPE plants in Q1, we expect production rates to improve in the coming quarters and hence we reaffirm our positive outlook on the company and maintain our earlier estimates. While product prices are likely to improve gradually in the coming quarters, the company might see a pressure in feedstock prices in the near term, due to rising oil prices, which could keep the margins under-check. Additionally, we believe that dividends are likely to increase from SAR3.25/share in 2017 to SAR4.00/share in 2018E, given its healthy financial position and robust free cash flow generation. Further, the Ethylene Glycol DBN project will increase the company’s MEG capacity to 850kta at the end of 2018, which would be the medium term trigger for the stock. Figure 1 YANSAB Q1 results (SAR mn) Q1 2017 Revenue 1,759 2,167 1,787 Gross profit Gross margin Operating profit 728 Q4 2017 897 Q1 Y-o-Y Q-o-Q 2018 740 ARC Comments est Missed our and consensus estimates, largely due to lower 1.6% -17.5% 1,966 than expected utilization rate amid likely multi-weeks shutdown at its HDPE and LLDPE plants. Top-line miss was partially offset by improvement in production 1.6% -17.5% 786 efficiencies (most likely at MEG plant), capping the miss at the gross profit level.. 41.4% 41.4% 41.4% 623 780 635 39.9% 1.9% -18.6% 664 Operating margin 35.4% 36.0% 35.5% Net profit Net margin 608 778 631 SG&A expenses could have declined more than our expectation. 33.7% 3.7% -18.9% 652 34.6% 35.9% 35.3% Largely in line with our estimate of SAR652mn (consensus: SAR726mn), aided by improved production and operating efficiencies. 33.2% Source: Company data, Al Rajhi Capital Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
2. Yanbu National Petrochemicals Co Petrochemicals –Industrial 23 April 2018 Valuation: Despite top-line miss in Q1, which was due to shutdowns, we continue to remain positive on Yansab, given its strong operational capabilities coupled with healthy balance sheet (net cash position) and robust FCF generation amid limited capex requirements (even after incorporating SAR373mn Ethylene Glycol DBN project). Post Q1 results, we do not revise our future estimates materially. At 2018 forward EPS of SAR4.7/share, the 2018 PE multiple comes at 15.3x, higher than its historical average of 14.2x. We maintain our TP of SAR68/share based on an equal mix of DCF and relative valuation (target multiple 13.5x, to adjust for higher payout as per our estimates). FY18E DPS of SAR4.0/share implies a dividend yield of ~5.5%, which is superior to most of its peers. Disclosures Please refer to the important disclosures at the back of this report. 2
3. Yanbu National Petrochemicals Co Petrochemicals –Industrial 23 April 2018 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Al Rajhi. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication. Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither Al Rajhi nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report. Al Rajhi may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of Al Rajhi. Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by Al Rajhi with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of Al Rajhi and Al Rajhi accepts no liability whatsoever for the actions of third parties in this respect. 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. Disclosures Please refer to the important disclosures at the back of this report. 3
4. Yanbu National Petrochemicals Co Petrochemicals –Industrial 23 April 2018 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. 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 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target 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. 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 Mazen AlSudairi Head of Research Tel : +966 1 211 9449 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com 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. 4