Leading Saudi petrochemical and chemical manufacturing company, Sipchem reported an excellent set of Q2 results with top-line and bottom-line coming above consensus estimates.
This was likely due to higher-than-expected sales volume amid improving demand, and better cost efficiencies, according to Al Rajhi Capital Research.
The company continued to positively surprise analysts with the sharp improvement in production efficiencies (~18% q-o-q decline production costs despite 16% higher revenues in Q2), with gross and operating margins reaching their highest levels.
Going forward, Sipchem is expected to continue benefiting from high operating leverage (key feedstock is methane, which is fixed at $1.25/mmbtu, and hence any improvement in product prices would translate directly into profits).
Average Methanol prices continued to rise since Q2 2020 and now stabilised at around $400/t in Q3 (higher than the YTD price of $384/t and our forecast of ~$360/t for 2021), mainly aided by tight supply-demand balance and rising oil prices.
The demand also looks favourable, driven by rebounding industrial and energy consumption post opening up the economies across the globe. Further, the shutdown of loss-making/low–margin plants (PBT and GACI) plants may continue to support the margins.
Accordingly, Al Rajhi expects the company to distribute a DPS of SR1.5 (yield: 4.5%) for 2021 with a possibility of further upside next year if Methanol prices sustain at the current level. Based on its revised estimates and DCF valuation, Al Rajhi raises its trading price to SR40/sh ($10.67) (SR35/sh. earlier) and remains overweight on the stock.-- TradeArabia News Service
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