05-Jan-2017
Advanced Petrochemical - 4Q16 results: Stellar performance at SK Gas subsidiary drives earnings surprise; operational earnings only slightly ahead
Rating: Neutral
Price: SAR47.3
Target Price: SAR42.5
SK Gas drives better earnings Q-o-Q, beats estimates
Advanced Petrochemicals reported its 4Q16 results yesterday, showing an 11% Q-o-Q improvement in bottom-line earnings to SAR210mn (+44% Y-o-Y), 17% above our SAR180mn forecast. The better earnings, as well as the beat, were mainly due to a stellar performance from the company’s 28.5%-owned SK Gas investment (PDH plant in South Korea), which saw its earnings surge by c75% Q-o-Q to SAR25mn, well above our SAR12mn forecast. It is not yet clear what drove such a substantial improvement at SK Gas, especially as margins should have declined on higher propane prices this quarter. On the operational level, there were no major surprises, as earnings were only slightly ahead of our forecasts. We will review our forecasts to reflect the better-than-expected performance at SK Gas, but we maintain our Neutral rating, as we believe the company’s earnings potential is largely reflected in the current share price, and as we see downside risks to spreads in 2017 (see last bullet).
Operational earnings stable as higher volumes offset weaker margins
On the operational level, revenues jumped 9% Q-o-Q, on the back of higher prices (+3%) and volumes, beating our forecast by 5%, as volumes appear to have been higher than we expected. Gross profit, however, was flattish Q-o-Q (-2%, +6% vs. EFGe), as lower margins (34.4% vs. 38.1% in 3Q16) - on a weaker PP-propane spread - offset the higher revenues. Operating income fell 4% Q-o-Q to SAR185mn, 7% above our forecast. The slight beat at the operational level was mainly a function of the higher-than-expected revenues, with gross margins only slightly ahead of our expectation (34.4% vs. EFGe of 33.8%).
Price outlook positive on higher oil prices, but spreads are likely to be lower
We expect PP prices to be higher in 2017, on the back of the increase in oil prices, which should drive higher costs for the marginal producers globally. On the other hand, we believe PP to propane spreads are likely to decline in the coming period, as supply additions are expected to outpace demand growth, which should drive lower margins this year. We note, however, that we do not expect a substantial drop in spreads, as fundamentals should remain healthy even after these capacity additions, and it is possible that the substantial improvement witnessed at SK Gas (if sustainable) could largely offset any weakness in spreads.
Yousef Husseini
Price: SAR47.3
Target Price: SAR42.5
SK Gas drives better earnings Q-o-Q, beats estimates
Advanced Petrochemicals reported its 4Q16 results yesterday, showing an 11% Q-o-Q improvement in bottom-line earnings to SAR210mn (+44% Y-o-Y), 17% above our SAR180mn forecast. The better earnings, as well as the beat, were mainly due to a stellar performance from the company’s 28.5%-owned SK Gas investment (PDH plant in South Korea), which saw its earnings surge by c75% Q-o-Q to SAR25mn, well above our SAR12mn forecast. It is not yet clear what drove such a substantial improvement at SK Gas, especially as margins should have declined on higher propane prices this quarter. On the operational level, there were no major surprises, as earnings were only slightly ahead of our forecasts. We will review our forecasts to reflect the better-than-expected performance at SK Gas, but we maintain our Neutral rating, as we believe the company’s earnings potential is largely reflected in the current share price, and as we see downside risks to spreads in 2017 (see last bullet).
Operational earnings stable as higher volumes offset weaker margins
On the operational level, revenues jumped 9% Q-o-Q, on the back of higher prices (+3%) and volumes, beating our forecast by 5%, as volumes appear to have been higher than we expected. Gross profit, however, was flattish Q-o-Q (-2%, +6% vs. EFGe), as lower margins (34.4% vs. 38.1% in 3Q16) - on a weaker PP-propane spread - offset the higher revenues. Operating income fell 4% Q-o-Q to SAR185mn, 7% above our forecast. The slight beat at the operational level was mainly a function of the higher-than-expected revenues, with gross margins only slightly ahead of our expectation (34.4% vs. EFGe of 33.8%).
Price outlook positive on higher oil prices, but spreads are likely to be lower
We expect PP prices to be higher in 2017, on the back of the increase in oil prices, which should drive higher costs for the marginal producers globally. On the other hand, we believe PP to propane spreads are likely to decline in the coming period, as supply additions are expected to outpace demand growth, which should drive lower margins this year. We note, however, that we do not expect a substantial drop in spreads, as fundamentals should remain healthy even after these capacity additions, and it is possible that the substantial improvement witnessed at SK Gas (if sustainable) could largely offset any weakness in spreads.
Yousef Husseini