NCB Capital remains ‘neutral’ on SAFCO after Q3 profit hits new low

NCB Capital remained “neutral” on SAFCO, Saudi Arabia Fertilizers Co., with share price target of SAR 63.4, noting that the company’s Q3-2016 net income of SAR 181 million was the lowest on record.

The results came lower than NCB Capital’s and consensus estimate of SAR 253 million and SAR 249 million, respectively.

“We believe this disappointment is due to weak gross margin and lower income from Ibn Al-Baytar. Gross margins stood at 29.3 percent in 3Q16, the lowest on record,’’ analysts at NCBC wrote in a recent research note.

NCBC calculated that SAFCO’s share in Ibn Al-Baytar was SAR 20 million, lower than NCBC’s estimate of SAR 34 million. It’s also lower than SAR 36 million in Q2-2016 and SAR 29 million in Q3-2015

“We believe weak fertilizer prices and the preparation for the shutdown in 4Q16 negatively impacted Ibn Al-Baytar performance,” according to the note.

In the third quarter, urea prices declined 10 percent QoQ to $192, due to new capacity additions globally. Ammonia prices also fell 10.2 percent QoQ to $254.

The stock is trading at a 2017E P/E of 19.5x, higher than its historical average of 17.8x. NCBC believes that this is unjustified, given a weak urea price outlook.