SABIC's Q3 profit significantly higher than estimates, says NCB Capital

Saudi Basic Industries Corp.’s (SABIC) third-quarter 2017 earnings of SAR 5.8 billion were “significantly higher” than the NCB Capital (NCBC) and consensus estimates of SAR 4 billion and SAR 4.3 billion, respectively, the brokerage said in an earnings review.

SABIC’s Q3 net profit grew 10.7 percent year-on-year (YoY) and 56.1 percent quarter-on-quarter, while also marking the highest net income for the company since Q2 2015.

“We believe the stronger than expected results are driven by higher operating rates in petrochemicals and metals segments, lower cost of production, and lower operating expenses (OPEX),” the report said.

Revenues increased 10.8 percent YoY, recording the highest sales since second quarter of 2015. This was 6.3 percent higher than the NCBC estimates of SAR 37.3 billion, mainly due to an improvement in operating rates in the petrochemical and metals segments, the report said.

“We believe SABIC managed to increase its operating rates to benefit from the supply shortage following hurricane Harvey in the US,” it added.

Gross margin came in at 35.6 percent, compared to NCBC estimates of 31.7 percent. “We believe the margin expansion is driven by higher product prices and the impact of the cost control initiative,” the brokerage said.

Earnings before interest and taxes (EBIT) were SAR 8.6 billion in Q3, up 8.9 percent, and also significantly higher than NCB Capital’s estimate of SAR 6.1 billion due to higher-than-expected sales, gross margin expansion and lower-than-expected OPEX, the report said.

NCB Capital is “neutral” on SABIC, with a target price of SAR 98.4.

“Strong balance sheet and higher oil prices are the key positives. The stock is trading at a 2018E P/E of 15.2x, higher than the peer average of 13.9x, offering a limited upside,” the brokerage said.