Higher than expected rebound of the products prices to support our positive outlook for H2-2015. Yanbu petrochemical log lower-than-expected Q1 profits: Yanbu National Petrochemical Company posted net income of SAR 285.1mn (EPS SAR0.51); indicating a fall of 48.7%YoY and 53.9%QoQ. The lower gross profit was mainly attributed to decline in average selling price of the products, Ethylene and Mono- ethylene Glycol MEG that declined by almost 33% YoY and 19% YoY respectively. Along with higher cost of sales that increase to 75.9% of revenue against 69.4% in Q1-2015. Although the operating profit was impacted primarily by lower volumetric sales and lower products price. The operating expenses showed an improvement as it declined by 22.7%YoY. We expect the company to show signs of recovery throughout Q3-2015, as maintenance during Q2-2015 will have a positive impact on the production efficiency and overall performance. Integrated business model to lower the impact of product price fluctuations: YANSAB pursues an integrated business model with selfsufficiency in ethylene and propylene derivative feedstock. In addition, the company receives ethane at a fixed price of USD0.75/mmbtu from Saudi Aramco, while it supplies propane at a 28% discount to the Saudi export price of naphtha. These factors still gives YANSAB a significant cost advantage over Asian and European producers and a complementary feature to lower the effects of any sharp fluctuations in its products prices. Shutdown is estimated to impact Q2-2015 result: YANSAB has announced a scheduled maintenance and stopped its entire facility for 35 days in April 2015; but the operations at its ethylene glycol plant- MEG resumed after 60 days of maintenance. The expected financial impact is estimated to be around SAR350 mn (SAR0.62/share) and will be reflected in Q2-2015 results. Based on the initial perception of the maintenance effect and current product prices, the company is expected to post net income of around SAR 65 mn in Q2-2015. Sufficient cash cushion to support attractive dividends: YANSAB has paid dividends of SAR 3/Share at a yield of 6.3% in 2014 with payout ratio of 68%. However, the impact of maintenance shutdown and the weak result in Q1-2015 would be a logical reason to reduce the distributions into an acceptable level. We anticipate the company to pay a dividend of SAR 2.5/Share (4.5% D/Y) in 2015 owing to a strong operating cash flow and no additional capital expenditure in the near to medium term. The company ended 2014 with cash and cash equivalents totaling SAR2.7bn, along with the decrease of the long-term debt by almost 46% that could provide the company with much flexibility to support higher dividend payment in 2016/17. Recommendation Neutral Previous Target Price (SAR) 57.2 Current Price* (SAR) 55.25 New Target Price (SAR) 60.1 Upside / (Downside) 8.8% Key Financials SARmn (unless specified) FY14 FY15E FY16E Revenues 9,511 7,651 9273 Growth % 1.7% -19.6% 21.2% Net Income 2,478 1,665 2,452 Growth % -6.3% -32.8% 47.2% EPS 4.40 2.96 4.36 Key Ratios *prices as of 11 th of June 2015 SARmn (unless specified) FY14 FY15E FY16E Gross Margin 32.5% 28.6% 31.6% EBITDA Margin 43.5% 41.9% 42.6% Net Margin 26.1% 21.8% 26.4% P/E 11.3x 18.3x 12.4x P/B 1.80x 1.96x 1.90x EV/EBITDA 6.83 9.60 7.53 ROE 16.2% 10.7% 15.5% ROA 10.9% 7.6% 11.4% Dividend Yield 6.0% 4.5% 5.6% Shareholders Pattern Shareholders Pattern Type Holding Saudi Basic Industries Corp. Institution 51.0% General Organization for Social Govermental Insurance - GOSI 11.92% Public 37.08% Company Overview: YANSAB, established in 2006, is a 51% owned subsidiary of SABIC. The company has a total production capacity of around 4 mn tones of petrochemical products such as; Ethylene, Propylene, Polyethylene, Polypropylene and Ethylene Glycol. YANSAB started commercial operations in March 2010. Access to SABIC s distribution network as well as technical expertise, and cheap feedstock advantage are the other key positives. Geographic Revenue Breakdown - 2014 10% 11% 9% 45% Asia Middle East US Europe Africa 1 Jassim Al-Jubran +966 11 2256248 j.aljabran@aljaziracapital.com.sa 25%
Mixed pricing outlook for major products: Yanbu National Petrochemical Co derives majority of its revenue from the Chemicals and Polymers division, which includes key final products, such as mono-ethylene glycol (MEG), LLDPE, HDPE, and polypropylene (PP). As MEG contributed the most to the revenue, we believe the company enjoyed strong benefits with relatively less correction in MEG prices in 2014 and 2015. We believe Asia MEG price to remain strong in 2015; supported by 1) robust downstream demand from the polyester sector and (2) current low inventories in China, with no visibility of capacity addition in the near term. In the Propylene (PP) segment, prices have increased 14% YTD. We believe this is mainly driven by expectation of increase in demand after China s Lunar New Year holiday. While robust capacity addition in China and the Middle East is a concern, industry sources estimate global demand for PP to outstrip supply by 2.28mt in 2015. We expect prices to remain broadly stable in the near to medium term. However, in the polyethylene (PE) segment, Asian PE demand is witnessing structural weakness from upcoming capacity additions in an already oversupplied market. Although PE prices have recovered in YTD 2015 (HDPE and LLDPE up 16% and 2%, respectively), supported by rising crude prices, we remain cautious in the near term. Mono ethylene glycol (MEG): Although decline in crude prices contributed to a significant correction in 2014, the correction in MEG was less than that in other products. However, prices have recovered since January 2015. 800 600 Polypropylene (PP): Prices remained largely stable in 2012, 2013, and 2014. However, in 2014, the correction in PP was stronger than that in MEG and PE. Recovery in 2015 is mainly driven by expectation of robust demand outpacing supply. 1,600 800 2
Polyethylene (PE) Prices of HDPE and LLDPE have increased considerably since 2012. After correction in 2014, we believe the recovery in 2015 is purely driven by higher crude prices. 1,800 1,600 LLDPE - Asia HDPE - Asia Our estimates and valuation: Yanbu National Petrochemical Co. is expected to post net income of SAR 1,665.3mn (2.96 EPS) for 2015, recording a decline of 32.8%YoY for the year 2015; primarily impacted by lower product price in the early 2015 and the impact of announced maintenance shutdown in Q2-2015 with a financial impact of SAR 350mn (0.62/share). Moreover, we are increasing our year end forecast from SAR 1,495mn due to higher than expected rebounding of the products prices led by the recent uptrend in oil prices. Therefore, we adjust our valuation and increase our 12-month price to SAR60.1/share; indicating a potential upside of 8.8% over current market price of SAR55.25/share (as of 14th June 2015). We, also update our recommendation to Neutral for YANSAB due to increase in the price. The company is currently trading at a PE of 13.9x, against our 2015 forward PE of 18.2x and 2016 forward PE of 12.4x. 3
Key Financials Amount in SARmn, unless otherwise specified 2012 2013 2014 2015E 2016E 2017E Income statement Revenues 9,299 9,354 9,511 7,644 9,263 9,997 Revenue Growth -3.7% 0.6% 1.7% -19.6% 21.2% 7.9% Cost of sales (6,190) (6,129) (6,424) (5,456) (6,335) (6,712) Gross profit 3,109 3,225 3,087 2,188 2,928 3,285 General & administrative expense (234) (232) (244) (203) (205) (207) Operating profit 2,875 2,993 2,843 1,985 2,723 3,078 Operating profit growth -20.5% 4.1% -5.0% -30.2% 37.2% 13.0% Other income 31 29 11 15 15 15 Financial / bank charges (361) (260) (224) (183) (136) (101) Profit before zakat & minority interest 2,546 2,762 2,630 1,816 2,602 2,992 Zakat (100) (118) (152) (154) (156) (157) Net profit 2,446 2,645 2,478 1,662 2,447 2,836 Net profit growth -22.9% 8.1% -6.3% -32.9% 47.2% 15.9% Balance sheet Assets Cash and bank balance 530 2,106 2,691 2,722 3,959 4,958 Other current assets 4,823 4,676 4,805 4,915 5,075 5,382 Property plant & equipment 16,498 15,623 14,590 13,718 12,842 11,977 Other non-current assets 538 495 381 385 389 393 Total assets 22,388 22,901 22,467 21,740 22,265 22,710 Liabilities & owners' equity Total current liabilities 2,471 2,174 2,655 2,214 2,417 2,309 Long-term loans 6,821 5,523 2,979 2,834 2,789 2,645 Total non-current liabilities 135 161 200 235 276 324 Share capital 5,625 5,625 5,625 5,625 5,625 5,625 Statutory reserves 743 1,008 1,256 1,422 1,666 1,950 Change in Fair Value Of Interest Rate Swap Retained earnings 6,593 8,410 8,672 8,761 9,275 9,858 Total owners' equity 12,961 15,043 15,552 15,808 16,567 17,433 Total equity & liabilities 22,388 22,901 22,467 21,740 22,265 22,710 Key fundamental ratios Liquidty ratios Current ratio (x) 2.2 3.1 2.8 3.4 3.7 4.5 Cash ratio (x) 0.2 1.0 1.0 1.2 1.6 2.1 Profitability ratios Gross profit margin 33.4% 34.5% 32.5% 28.6% 31.6% 32.9% Operating margin 30.9% 32.0% 29.9% 26.0% 29.4% 30.8% EBITDA margin 42.2% 43.9% 43.5% 41.9% 42.6% 42.9% Net profit margin 26.3% 28.3% 26.1% 21.7% 26.4% 28.4% Return on assets 10.8% 11.7% 10.9% 7.5% 11.1% 12.6% Return on equity 20.8% 18.9% 16.2% 10.6% 15.1% 16.7% Leverage ratio Interest coverage (x) 7.97 11.52 12.71 10.82 20.02 30.51 Debt / equity (x) 0.53 0.37 0.19 0.18 0.17 0.15 Market/valuation ratios EV/sales (x) 3.54 4.80 2.85 3.99 3.15 2.81 EV/EBITDA (x) 8.38 10.95 6.54 9.53 7.41 6.54 EPS (SAR) 4.35 4.70 4.40 2.95 4.35 5.04 BVPS (SAR) 23.04 26.74 27.65 28.10 29.45 30.99 Market price (SAR)* 47.30 73.75 47.64 54.00 54.00 54.00 Market-Cap (SAR mn) 26,606 41,484 26,798 30,375 30,375 30,375 Dividend yield - 4.1% 6.3% 4.6% 5.6% 6.5% P/E ratio (x) 10.88 15.69 10.82 18.27 12.42 10.72 P/BV ratio (x) 2.05 2.76 1.72 1.92 1.83 1.74 Source: Company Financials, Aljazira Research 4
RESEARCH DIVISION AGM - Head of Research Abdullah Alawi +966 11 2256250 a.alawi@aljaziracapital.com.sa Jassim Al-Jubran +966 11 2256248 j.aljabran@aljaziracapital.com.sa Senior Talha Nazar +966 11 2256115 t.nazar@aljaziracapital.com.sa Sultan Al Kadi +966 11 2256374 s.alkadi@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef +966 11 2256000 a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa +966 11 2256364 s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa +966 11 2256277 lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit +966 16 3617547 aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. Al-Misbani +966 12 6618400 a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni +966 1 225 6352 s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION 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. RATING TERMINOLOGY 1. 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. 2. 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. 3. 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. 4. 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. 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