Saudi Kayan Q4 loss beat estimates despite shutdown: NCB Cap

Saudi Kayan Petrochemical Co. (Saudi Kayan) reported a net loss of SAR 220 million in Q4 2017, exceeding NCB Capital and consensus estimates of a loss of SAR 417 million and SAR 136 million, respectively, the brokerage said in an earnings review.

This was the first time since Q1 2016 that the petrochemical producer recorded a loss.

“We believe the main reason behind the variance is lower than expected impact of the shutdown, which resulted in higher operating rates and better margins,” NCB Capital said.

Gross margins stood at 8.2 percent – lowest since Q4 2015 – in the fourth quarter of this year, lower than 21.7 percent in in the same period last year and 30.1 percent in the previous quarter. NCB Capital had estimated a gross loss margin of 2.1 percent.

“We believe the variance is due to higher than expected operating rates which offset the negative impact of higher average feedstock prices,” the brokerage said.

Operating income of SAR 12 million was also higher than NCB Capital’s estimate of a loss of SAR 195 million.

Sales at SAR 2.3 billion were lower 5.8 percent year-on-year and 14.7 percent quarter-on-quarter, but were higher than NCB Capital’s estimates of SAR 1.5 billion.

“The stock is trading at a 2018E P/E of 34.0x, significantly higher than the sector average of 15.3x,” the report said.

NCB Capital held a target price of SAR 8.3 on the stock, with “neutral” rating.

“Operational efficiency following the major shutdowns is expected to be a key driver in 2018, while a highly leveraged balance sheet is a key risk,” it added.