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Saudi Arabia: Yanbu National Petrochemicals - April 2018

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5 years ago
Saudi Arabia: Yanbu National Petrochemicals - April 2018

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  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”). 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  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. 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