Tasnee’s Q3 profit below estimates, says Al Rajhi Cap

National Industrialization Co.’s (TASNEE) net income of SAR 259 million in Q3 2018 came in below Al Rajhi Capital’s expectations of SAR 365 million and consensus estimates of SAR 345 million.

The miss came on lower operating rates and TiO2 prices, the financial advisory firm said in an earnings review.

The Q3 revenue stood at SAR 2.90 billion, falling short of Al Rajhi’s estimate of SAR 3.03 billion and consensus view of SAR 2.95 billion, due to lower-than-expected sales volume and TiO2 prices.

Gross margins came in at 26.7 percent, below the brokerage firm’s forecast of 29.1 percent, amid operating leverage and the largely fixed nature of costs.

The stock price unjustifiably shed 24 percent since June 2018 owing to concerns that Tronox deal may not go through, possible weakness in TiO2 and the impact of operating leverage as product prices decline.

“We believe Tronox sale is not material as the deal was announced when TiO2 prices were low at USD2,460/tonne and thereby the company was in a relatively weaker position. But now with the recovery in TiO2 prices (Q3 avg: USD3,129/tonne) , the company has started generating healthy free cash flows ( SAR1.5bn in 1H18 alone),” Al Rajhi Capital said.

The full-year net profit is expected to hit SAR 1.3 billion, compared to SAR 716 million in 2017.

“The key downside risks include decline in TiO2 prices, write off of its goodwill, further impairment in associates, increase in SAIBOR, shutdowns at petrochemical plants, while upside risk factors may be related to sustained rally in TiO2 prices and better operating performance of its associates,” the report added.

Al Rajhi Capital affirmed its ‘overweight” recommendation on the stock, but cut its target price to SAR 23 from SAR 26.