Tasnee’s Q3 beats estimates on higher associate income: Al Rajhi Cap

The National Industrialization Co.’s (Tasnee) net profit of SAR 192 million for the third quarter of 2017 widely exceeded Al Rajhi Capital and consensus’ estimates of SAR 122 million and SAR 132 million respectively.

“Sharp improvement in income from associates (particularly SEPC) to around SAR 400 million in Q3 versus our expectation of SAR 287 million is likely the primary reason,” the brokerage said in an earnings review.

“If we were to adjust for this, our numbers would have been broadly in-line with actual reported numbers, implying that core operations of Tasnee, which is its titanium business, was in-line with our expectation,” the report added.

Revenue in Q3 rose 33 percent year-on-year (YoY) and 3.5 percent quarter-on-quarter (QoQ) to SAR 2.76 billion, slightly missing the expectations of SAR 2.85 billion on lower than expected sales volume.

Gross profit doubled YoY in Q3 to SAR 537 million, beating the brokerage’s estimate of SAR 519 million.

Meanwhile gross margin stood at 19.4 percent, compared to Al Rajhi Capital’s estimate of 18.2 percent.

Looking forward, key upside risks to the brokerage’s estimates are the sale of Tasnee’s Cristal segment, recovery in titanium dioxide (TiO2) prices, sale of the Jizan plant, and higher-than-expected cash flows from asset sales of unprofitable businesses.

Downside risks include weaker spreads, increase in SAIBOR, higher-than expected costs of operating Jizan plant, and a decline in TiO2 prices.

“We revise long term sustainable operating margin to an average 15.9 percent, around 240 basis points above our earlier estimates,” the brokerage said.

Al Rajhi Capital maintained a “Neutral” rating on the stock with a revised target price of SAR 15 per share.

It is unlikely that Tasnee will distribute dividends until at least 2018, given its debt and cash flow position, unless TiO2 price significantly rises, it added.