RIYADH: Corporate earnings are likely to remain under pressure in Q3 2016. While the petrochemical sector may continue to post a decline in profits on an annual basis, the sequential performance is likely to be comparatively stronger on stable spread between product prices and feedstock cost, a report from Al Rajhi Capital research revealed. The cut in government spending might impact construction related sectors – real estate, cement and building & construction.
Consumer spending related sectors – retail and food & agriculture are also likely to witness a decline in profitability on lower disposable incomes and slowdown in other sectors of the economy, but will be positively impacted by increase in religious tourists during Haj season this year.
Crude prices rose in Q2 from the lows of Q1 2016. Brent crude prices steadily recovered to $48.05 (-21% y-o-y) per barrel at the end of Q2 2016, compared to $36.75 per barrel at the end of Q1 2016. This led to a rise in petrochemical product prices as well. All companies under our coverage reported higher price realization during the quarter on a sequential basis, though on an annual basis, petrochemical prices were still down in the range of 10-140%. Petrochemical product spreads rose during the quarter, which supported margin improvement. The petrochemical sector revenues fell 16.4% y-o-y, while net profit slipped 19.7% y-o-y.
“For the companies under our coverage, revenues fell over ~16% y-o-y, coming largely in line with our expectations,” it isaid. The sector’s net profit also slipped about 16.5% y-o-y, but most companies earnings beat our as well as market expectations. Margins were mostly stable despite the sharp fall in product prices, supported by increased spread between product prices and feedstock costs and the efficiency measures undertaken by most firms.
SABIC posted a surprisingly strong set of results for Q2 2016, with net profit coming in at SR4.7 billion, beating our as well as consensus estimates by a wide margin. Adjusting for a one-off impairment for one of its subsidiary, the company’s profit stood at SR5.1 billion. “We believe the company’s profitability was supported by increased spread in the petrochemical division and the recovery in steel margins.” In addition, the company’s listed subsidiaries also posted impressive performances – Saudi Kayan posted a profit of SR91 million after five quarters of losses. Yansab trebled its profit over the same period last year to SR689 million (+203% y-o-y), while we had expected only a +70% growth in profit. The high growth was partly due to the low base of Q2 2015 when the company undertook a maintenance shutdown, but the surprise was mostly due to higher than expected sales volumes and lower cost of goods sold (excluding raw material costs). NIC also beat market expectations, posting a profit of SR103.9 million, compared to a net loss of SR107.7 million in Q2 2015.
The company had undergone a restructuring exercise, which is likely to have led to cost savings in this quarter. In addition, the company benefited from higher operating rates and the recovery in petrochemical and titanium dioxide prices. On the other hand, SAFCO’s results were mostly in line, with net profit falling ~50% y-o-y to SR299 million due to the double impact of consistently falling product prices, together with the 66.7% hike in methane prices, its primary feedstock.
The company’s earnings will remain under pressure this year for the same reasons. APC’s profit (-23.5% y-o-y, +27.8% q-o-q) also stood mostly in line with our estimate, as profitability was boosted on a sequential basis by increased sales volume and higher product prices. Sipchem was the only company under our coverage to disappoint, posting a net profit of SR26 million, down 76.4% y-o-y.
The fall in profit was partly due to the maintenance shutdown at its International Polymers Company and Gulf Advanced Cable Insulation Company. However, the surprise is likely due to higher cost of goods sold and certain non-recurring expenses. The company also mentioned about non-renewal of certain contracts, but there is no clarity regarding the same.
