Saudi Kayan Petrochemical Co. is expected to post SAR 956 million in net income for FY 2020, as compared to expected losses of SAR 100 million in FY 2019, Aljazira Capital said in a note.
Saudi Kayan posted a disappointing set of results for Q2, with net loss of SAR 273.1 million; broadly in-line with Aljazira Capital’s estimates of SAR 291.1 million but above market consensus estimates of SAR 220 million.
The profit miss was mainly attributed to high feedstock cost and an increase in finance cost by SAR 91 million due to debt restructuring.
“We expect that the substantial decline in feedstock price could shift the bottom line to profitability in Q3 2019,” Aljazira Cap said, recommending an “Overweight” on the stock with a revised target price at SAR 14.50.
Kayan has a relatively high leveraged balance sheet, with long-term obligation of SAR 22.7 billion and financing expenses of SAR 1.04 billion in FY 2018. Kayan announced that the refinancing of its debt would cut financing cost by SAR 71 million in H2-19 and SAR 230 million in FY 2020.
“This we believe will mitigate the impact on the bottom line, improving the company’s capability to maintain a strong cash flow and reducing debt level to SAR 19.5 billion by end of FY 2019.” the brokerage added.
Finance costs are expected to decline to SAR 245 million in Q3 2019 vs. SAR 378.4 million in Q2 and SAR 287.3 million in Q1.
However, net debt/EBITDA would stay high at 5.4x in FY19 against only 4.1x in FY18, limiting the company’s ability to pay dividend in the next three years, Aljazira Cap added.
Lower feedstock prices could turn Kayan to profitability during Q3-19 with a net income of SAR 170 to SAR 200 million, it noted.
“Furthermore, our mid-term outlook remains optimistic on the company due to improved operating rate; and expected noticeable recovery in product spreads after Q2-19,” Aljazira Capital stated.
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