The Sidi Kerir Petrochemicals Company (SKPC) has reported a surprise profit on the back of a reduction in natural gas (ethane-propane mix) feedstock prices during the second quarter (Q2) of 2020.
The company noted that the price reduction is also likely to have positive knock-on effects for its associate company, ETHYDCO, which is 20% owned by SIDPEC. ETHYDCO’s profits are expected to have been booked during the quarter.
In spite of a significant drop in export prices and volumes, both quarter-on-quarter (q-o-q) and year-on-year (y-o-y), SIDPEC reported a bottom-line profit of EGP 5.2m. This compares to the EGP32m loss it reported in Q1 of 2020, and the profit of EGP 260m in Q2 of 2019.
Naeem Research sees that the profit was led by a higher gross margin, which registered 4.27%, up 1.58pps q-o-q but down 20.38pps y-o-y, beating the estimates by 5.3pps. SIDPEC’s results were also led by the associate profit from ETHYDCO.
The company’s consolidated top-line recorded EGP720m, down 24% q-o-q and 45% y-o-y. Global HDPE prices averaged USD763/tonne, down 10% q-o-q and 28% y-o-y. At the same time, Naeem Research expects the company’s sales volumes to have dropped by 10% q-o-q and 17% y-o-y, which is likely to have been negatively impacted by the pandemic (which had led to a temporary disruption in global trade).
With regards to natural gas prices, while SIDPEC was previously charged USD7.0/mmbtu, starting in April 2020, however, the company, as per Naeem Research’s assessment, had received a price reduction. This came as part of the government’s overall strategy to reduce gas prices for heavy industrial users in the country.
Naeem Research is expecting the company to benefit from both higher prices (quarter to date, with the HDPE increasing by 20% q-o-q in Q3) and export volumes.
Naeem Research recommends a Buy on SIDPEC, with a TP of EGP8.65/share. Naeem Research’s valuation on the stock, however, could be subject to an upside revision given the new dynamics of the cost of natural gas