Lower gross margin led to SABIC’s profit miss, says NCB Cap

Saudi Basic Industries Corporation’s (SABIC) net profit of SAR 3.7 billion for the second quarter this year significantly missed NCB Capital and consensus estimates of SAR 4.5 billion and SAR 4.7 billion, respectively, the brokerage said in an earnings review.

“We believe the variance is due to lower than expected gross margin mainly on losses from the steel segment and a one-off charge of SAR 278 million related to Ibn Rushd,” the firm said.

SABIC, which owns a 48.1 percent stake in Arabian Industrial Fibers Co. (Ibn Rushd), reported SAR 375.5 million and SAR 705.9 million impairment on Ibn Rushd assets in 2015 and 2016, respectively.

Sales stood at SAR 35.1 billion in Q2, down by 3.3 percent year-on-year (YoY) and 5.2 percent quarter-on-quarter (QoQ), which comes in-line with the estimates.

Gross margin declined to 30.8 percent in Q2 from 35.6 percent a year earlier and 37.2 percent in the previous quarter, missing the estimated 35 percent, due to higher losses at the metals segment, lower polypropylene-propane spread, and lower fertilizer segment margin on weak urea prices.

In Q2, PP prices declined 4.5 percent QoQ (up 2.9 percent YoY) to $1,002, while HDPE prices fell 4 percent QoQ (flat YoY) to $1,110. Urea prices fell 21.3 percent QoQ to $210. PP-propane spread was down 6.2 percent QoQ and 13.9 percent YoY to $570.

Meanwhile, SABIC’s metals segment reported a net loss of SAR 483 million in Q2 2017 compared to a net profit of SAR 86 million in Q2 2016 and a loss of SAR 34.7 million last quarter.

NCB Capital maintained its “Neutral” rating on the stock, and revised the target price to SAR 98.4 per share from SAR 100.1 per share.

“Strong balance sheet and exposure to global markets are the key positives. However, ongoing volatility in oil prices is a key risk,” it said.