31-Jul-2017
SAFCO - Cut TP on weaker pricing, maintain Neutral given intact LT outlook
Rating: Neutral
Target Price: SAR60.5
Closing Price: SAR62.0
Cut TP to SAR60.5 on weaker urea prices, but maintain Neutral
We lower our 2017-19 EPS forecasts for SAFCO by c10% on average to account for the weaker-than-expected pricing environment, thus we cut our TP to SAR60.5 (from SAR66.5), implying 2% downside, and maintain our Neutral rating. We still expect a challenging year for fertiliser prices globally, in light of an oversupplied market, with prices recently testing the bottoms seen in 2016 (USD180/tonne). With that said, most of the supply increases this year have been in the US, while the Chinese market has been relatively strong (urea exports down 50% Y-o-Y and Chinese prices were among the highest in the market in 2Q). As such we remain positive on the longer-term prospects for the market, which we still expect to begin rebalancing in 2018 as supply additions slow down and China continues to cut capacity.
2Q17 earnings weighed down by shutdown and weak prices
SAFCO reported its 2Q17 financial highlights on Monday, with net income slumping 52% Q-o-Q (-32% Y-o-Y) to SAR204mn, missing our estimate by 28% (-30% vs. Bloomberg consensus). According to the release, sales volumes fell on the back of a shutdown at one of its plants which impacted revenues and costs. This along with the 18% Q-o-Q dip in urea prices contributed to the weak results. The earnings miss appears to have primarily been driven by lower-than-expected volumes and higher-than-expected costs.
Dwindling cash balances could drive temporary dividend freeze
SAFCO has yet to announce dividends for 1H17, which is unusual as it typically announces its 1H dividend by mid-July at the latest. This leads us to believe that it likely won’t pay any dividends for 1H17, especially as cash balances are under pressure (2Q17 cash balance of SAR334mn). Furthermore, maintenance capex spend has increased substantially in the past two years as the company looks to enhance its operations and it is still looking at potentially purchasing the remaining share owned by SABIC in IBN AL-BAYTAR (still under study), which means that even less cash could be available for distribution. As such we have cut our 2017 dividend forecast to SAR2/share (from SAR3.5/share previously) to reflect the tight balance sheet and we have reduced our long-term dividend forecasts (2018+) by c10%.
Yousef Husseini
Omar El Gharabawi
Target Price: SAR60.5
Closing Price: SAR62.0
Cut TP to SAR60.5 on weaker urea prices, but maintain Neutral
We lower our 2017-19 EPS forecasts for SAFCO by c10% on average to account for the weaker-than-expected pricing environment, thus we cut our TP to SAR60.5 (from SAR66.5), implying 2% downside, and maintain our Neutral rating. We still expect a challenging year for fertiliser prices globally, in light of an oversupplied market, with prices recently testing the bottoms seen in 2016 (USD180/tonne). With that said, most of the supply increases this year have been in the US, while the Chinese market has been relatively strong (urea exports down 50% Y-o-Y and Chinese prices were among the highest in the market in 2Q). As such we remain positive on the longer-term prospects for the market, which we still expect to begin rebalancing in 2018 as supply additions slow down and China continues to cut capacity.
2Q17 earnings weighed down by shutdown and weak prices
SAFCO reported its 2Q17 financial highlights on Monday, with net income slumping 52% Q-o-Q (-32% Y-o-Y) to SAR204mn, missing our estimate by 28% (-30% vs. Bloomberg consensus). According to the release, sales volumes fell on the back of a shutdown at one of its plants which impacted revenues and costs. This along with the 18% Q-o-Q dip in urea prices contributed to the weak results. The earnings miss appears to have primarily been driven by lower-than-expected volumes and higher-than-expected costs.
Dwindling cash balances could drive temporary dividend freeze
SAFCO has yet to announce dividends for 1H17, which is unusual as it typically announces its 1H dividend by mid-July at the latest. This leads us to believe that it likely won’t pay any dividends for 1H17, especially as cash balances are under pressure (2Q17 cash balance of SAR334mn). Furthermore, maintenance capex spend has increased substantially in the past two years as the company looks to enhance its operations and it is still looking at potentially purchasing the remaining share owned by SABIC in IBN AL-BAYTAR (still under study), which means that even less cash could be available for distribution. As such we have cut our 2017 dividend forecast to SAR2/share (from SAR3.5/share previously) to reflect the tight balance sheet and we have reduced our long-term dividend forecasts (2018+) by c10%.
Yousef Husseini
Omar El Gharabawi