SABIC’s Q4 profit hit by lower margins, says NCB Cap

Saudi Basic Industries Corp (SABIC)’s net income of SAR 4.6 billion in Q416 (up 47.7 percent YoY, but declining 12.8 percent QoQ) is lower than the NCB Capital’s and the consensus estimates by 14.7 percent and 6.9 percent.

SABIC attributed the YoY increase in earnings to lower cost of sales and SG&A expenses, while the QoQ decline is attributed to lower other income and SAR 339 million impairment at Ibn Rushd, in which it holds 48.1 percent stake.

“Although revenues were in-line with our estimates, we believe lower than expected gross margin and income from associates were the key reasons behind the deviation,” the brokerage said in an earnings review Thursday.

SABIC’s gross margin was 31.1 percent, below NCB Capital’s estimates of 33.5 percent and 32.9 percent it achieved in Q316.

The lower-than-expected margins at the petrochemical segment and weak performance at the steel division mitigated the improvement at the fertilizer segment, NCB Capital noted.

“We believe lower PP-propane spread and higher cost of operations impacted petrochemical margins.”

Operating expense stood at SAR 3.3 billion, lower than the estimated SAR 3.7 billion, but in-line with SAR 3.3 billion in the previous quarter. This includes the impairment charge related to Ibn Rushd assets in Q4-16.

The deviation increased at the net income level due to lower than expected investment and other income. “We believe other income stood at SAR 475 million in Q416, lower than our estimate of SAR 823 million and SAR 641 million in Q4-15.”

NCB capital remained ‘Neutral’ on the stock with a price target of SAR 90.  The stock is trading at a 2017E P/E of 14.6x, lower than the sector average of 16.2x.