Sidi Kerir Petrochemicals (Sidpec): Great Margins for the Future?
SKPC: More than one way to unlock potential; initiate with OW/M
Overweight / Medium Risk
12MPT: EGP38.9 (+51%)
Key Insights
Closing 2022 with an exceptional performance: Sidi Kerir Petrochemicals Co. (Sidpec) [SKPC] resumed its strong upward trajectory, following weak revenues seen in 2019 (-14% y/y) and 2020 (-30% y/y). The company benefited in 2022 from higher demand for its products and higher selling prices. SKPC also benefited greatly from the two EGP devaluation rounds in 2022, which drove its selling prices to soar at a higher rate than its costs. Over the years, the cost per tonne of SKPC’s ethane/propane (E/P) mix, its main feedstock, has been increasing, which dampened its margins. However, the new pricing formula introduced in October 2022 improved SKPC’s H1 2023 margins to a great extent, alleviating its cost burden going forward.
Joining the “competition”: SKPC currently holds a 20% stake in the Egyptian Ethylene & Derivatives Co. (ETHYDCO), its main Egypt-based competitor. Both fall under the Egyptian Petrochemicals Holding Co.’s (ECHEM) umbrella. In 2022, ETHYDCO produced about 324,000 tonnes of ethylene and 331,000 tonnes of polyethylene (PE), generating USD520mn in revenues (equivalent to EGP9.98bn) with a utilization rate of 83% for PE compared to SKPC’s 2022 101% utilization rate. SKPC said it will acquire the 80% it does not already own in ETHYDCO through a share swap. With SKPC currently controlling 25-35% of the domestic PE market, the combined market share of both companies could reach 50% if the tie-up goes through.
Valuation, Investment Thesis, & Risks
Valuation: We used the DCF model to value SKPC as well as ETHYDCO, for which we used a top-down approach using its historical margins and utilization rates. Thus, we valued ETHYDCO at EGP35.5bn, while SKPC’s equity was valued at EGP20.5bn (including 20% of ETHYDCO). Given that SKPC’s BoD already approved its acquisition of an 80% stake in ETHYDCO through a share swap, we combined both valuations, which came out to EGP48.9bn or EGP29.9/share. This implies a 12MPT of EGP38.9/share (+51%). Thus, we assign SKPC an Overweight / Medium Risk rating.
Investment Thesis: SKPC is one of the companies that we believe can ride out the local economic downturn. This is because (1) the EGP devaluation helps SKPC because of its consistent export revenues, (2) the high-interest rate environment will not affect the company negatively given its historically low-leveraged balance sheet and its high cash balance, and (3) SKPC’s new E/P feedstock cost formula will allow the company to resume its great historical margins.
Risks: Any volatility in E/P feedstock supplies, concerning both cost and quantity. SKPC is sensitive to the decline of global crude oil prices, given its high correlation with ethylene and PE prices. Global economic turmoil could suffocate global demand for PE products which could eventually hurt SKPC’s export revenues. A weaker USD.
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