National Petrochemical Co. (Petrochem) reported net income of SAR 187 million in Q1 2019, which came below Aljazira Capital and the market consensus estimates of SAR 223.5 million and SAR 220 million, Aljazira Cap said in a report.
Q1-19 profit miss was driven by higher than expected cost of goods sold (COGS); which could be due to an increase in depreciation rate for Polystyrene unit.
"The company’s ability to increase its production efficiency and rates is the key to potential growth for FY19 and onwards. We reiterate our “Neutral” recommendation on the stock with TP at SAR 30.0/share," the brokerage added.
Q1 sales revenue stood at SAR 2.02 billion, in line with estimates of SAR 2.02 million.
"Despite the weaker than expected gross margin, we believe that the production efficiency and operating rates will continue to positively reflect on the top line," Aljazira said, adding, "We expect the sudden upsurge in production capacity could be due to either outsourcing basic materials from the local market or obtaining additional feedstock from Aramco (additional clarification is required)."
FY19 is expected to witness higher COGS due to an increase in depreciation rates for Polystyrene unit, which would be offset by a strong increment in operating rate, the brokerage noted.
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