Saudi Kayan’s record Q3 profit supported by strong gross margin: NCB Cap

Saudi Kayan Petrochemical Co.’s (Saudi Kayan) third quarter net income of SAR 156 million beat NCB Capital’s forecasts and the consensus estimate of SAR 95 million and SAR 100 million respectively, on higher than expected gross margins and lower operating expenses, the brokerage said in an earnings review.

In Q3 2016, Kayan reported the highest quarterly net income since inception, rising by 71.7 percent QoQ and compared with a net loss of SAR 14 million in Q3 2015. The profit improvement is driven mainly by higher operating rates and gross margins, benefiting from improved operational performance following shutdowns.

The strong gross margin was driven by higher operating rates, higher polypropylene-naphtha spread (+9.3 percent QoQ) and lower production cost after shutdown.

“We believe faster than expected ramp-up in operations following the major 48-56 days shutdown in H1-2016, led to the improvement in operating rates in Q3,” the review said.

Operating expenses stood at SAR 98 million in Q3-16, missing estimates of SAR 108 million.

The brokerage revised net income estimates for Saudi Basic Industries Corporation (SABIC)— which owns a 35 percent equity in Kayan—higher by SAR 18 million to SAR 5.09 billion.

NCB Capital reiterated a “Neutral” rating on the stock with a target price of SAR 6.7. The company’s high debt levels of SAR 27 billion and rising interest rates represent key downside risks, it added.