Advanced Petrochemicals Co: Summary of Q1 2018 Results

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1. Advanced Petrochemicals Co Petrochemicals – Industrial APPC AB: Saudi Arabia 16 April 2018 US$2.549bn Market cap Target price Current price 9% US$4.483mn Free float Avg. daily volume 47.00 48.57 -3.2% over current as at 12/4/2018 Existing rating Underweight Neutral Overweight Neutral Vol mn RSI10 Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 51.0 98.7 46.0 90.3 41.0 82.0 70 30 -10 4 3 2 1 04/17 07/17 10/17 01/18 2017 2018e 2019e 2,442 2,429 Source: Bloomberg Earnings (SARmn) Revenue 2,385 Y-o-Y 11.5% Gross profit Gross margin Net profit Y-o-Y Net margin 2.4% -0.6% 738 686 825 31.0% 28.1% 34.0% 631 590 716 -13.8% -6.5% 21.4% 26.5% 24.2% 29.5% EPS (SAR) 3.2 3.0 3.6 DPS (SAR) 2.8 2.8 3.0 Payout ratio 87.3% 93.4% 82.4% P/E (Curr) 15.6x 16.7x 13.7x P/E (Target) 14.7x 15.7x 12.9x Research Department Pritish K. Devassy, CFA Tel +966 11 2119370, devassyp@alrajhi-capital.com Advanced Petrochemicals Co Q1: Shutdown, higher feedstock costs drive earnings lower Q1 revenue came below our forecast as we expected a lower impact from the pre-announced shutdown to replace the catalyst and this top-line miss was reflected in profitability. We estimated a utilization rate of 102% for the PP plant, almost the same rate, around the last time the company had a shutdown to replace the catalyst– however the results indicate that the operating rates may have come lower. Weaker than expected income from its Korean associate and higher overhead costs due to shutdown also seem to have contributed to the miss at the bottom-line which came in at SAR98mn (vs our estimate of SAR152mn). We make no material changes to forward looking estimates as we expect production to ramp up to past levels (~128%). Our TP therefore remains at SAR47/share and we have a Neutral rating. We expect quarterly DPS to be maintained at SAR0.7/share for 2018, given its healthy cash flow (estimated Q1 EBITDA at ~SAR0.75/sh ) and debt position (net debt/EBITDA ~1x). Additional details: APCC reported lower than expected Q1 revenue at SAR504mn, ~8% below our estimate of SAR547mn (consensus: SAR543mn), primarily due to decline in sales volume (-15.8% y-o-y) amid plants shutdowns in March (Saudi PP plant: 22 days, PDH: 24 days), completely offsetting increased PP prices (+13.8%). Additionally, the company witnessed a significant rise in its feedstock prices (Propane: 16.3% y-o-y; Propylene: 21.9% - both slightly higher than our expectations) during the quarter, which, along with weak sales volume, resulted into lower operating profit (-18.8% y-o-y). Furthermore, share of profit from SK Advanced declined ~34% y-o-y to SAR10mn (below our estimate of ~SAR18mn), further dragging down the net profit (-21% y-o-y). What to expect in the near term? Post shutdown in Q1, we expect production rates to improve in the coming quarters and hence we do not change our outlook materially on the company. However, there is a risk of increasing feedstock prices in the near term as oil prices continue to move northward. Product prices, being more defensive, could follow suit only eventually. Source: Company data, Al Rajhi Capital Figure 1 APCC Q1 results (SAR mn) Q1 2017 Q4 2017 Q1 Y-o-Y Q-o-Q 2018 Revenue 526 637 504 Gross profit 143 153 119 Gross margin ARC Comments est Missed our and consensus estimates, largely due to weaker -4.2% -20.9% 547 than expected sales volume amid plants shutdowns. -16.9% -22.1% 173 27.2% 24.0% 23.6% Operating profit 117 115 95 Operating margin 22% 18% 19% Net profit 124 104 98 Net margin 24% 16% 19% Higher production costs led to gross profit miss in Q1. 31.7% -18.8% -17.6% 146 Declined, owing to lower top-line and higher feedstock costs. 27% -21.2% -5.6% 152 Lower than expected equity investment income (SAR10mn vs SAR17.7mn expected) dragged net profit below our estimate 28% Source: Company data, Al Rajhi Capital Long term view and Valuation: Despite weak Q1 earnings, which was largely impacted from planned shutdown, we believe that APCC is a fundamentally healthy stock without any notable operational issues. Polypropylene-Propane 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. Advanced Petrochemicals Co Petrochemicals –Industrial 16 April 2018 spreads are likely to drive earnings while volumes may improve slightly post the company’s revised agreement (effective from Jan 1, 2018) with SATORP to extend propylene supply (100,000 mt instead of 80,000) till 2023 and once the Py-gas project begins commercial activity (likely by 1H 2021). The stock is currently trading at a P/E of 16.7x on our 2018E EPS, above its 3-year historical average of 12.9x. We maintain our TP of SAR47/share based on equal mix of relative (SAR40.5/sh. based on 12.0x 12 month forward PE) and DCF valuation (SAR53.7/sh. based on FCF, cost of equity 10.6%). At our 2018E DPS of SAR2.8/share, the stock offers a healthy dividend yield of 5.6%. As APCC’s share price has gained ~15% in the last three months, we revise our rating to Neutral (from OW previously) on the stock. Disclosures Please refer to the important disclosures at the back of this report. 2
3. Advanced Petrochemicals Co Petrochemicals –Industrial 16 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”). 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