Production problem leads to slip in net revenue outlook
Saudi bank reduces its SAFCO price target
Saudi farmers will feel some relief with urea prices expected to drop, but the weakness in prices may not bode well for Saudi Arabian Fertilizer Company (SAFCO). The Saudi bank NCB Capital reduced its price target for SAFCO by 3 per cent to 122 riyals a share. Analysts at the bank said they expected a slight decline in production in the third quarter because of a shutdown for 10 days in one of the fertiliser company's plants, and a 2 per cent reduction in urea prices. SAFCO's ammonia plant number three, which has an annual capacity of about 500,000 tonnes of ammonia, stopped production for 10 days last month because of a technical problem. That should lead to a 2 per cent drop in SAFCO's net revenue this quarter, NCB Capital forecast. The company should be able to make use of available ammonia stocks to continue its production of urea.
SAFCO shares have declined about 2 per cent in the past three months but have been moving marginally higher recently on low volumes. "We don't think SAFCO has any important catalyst to move the stock over the next 12 months," said Ahmed al Qahtani, an analyst at NCB. "The company does not have any growth plans that we think are feasible at the current stage." The dividend payout of about 100 per cent a year since 2008 enforces the view that the company is not pursuing aggressive expansion.
SAFCO reported an 89 per cent increase in second-quarter profit to 907 million riyals from the same period a year earlier. Mr al Qahtani estimates the company will make 546.4m riyals of net income in the third quarter. NCB Capital is maintaining a neutral rating on the stock. SAFCO's second-quarter results were in line with estimates and there was no reason to change the outlook for the sector and the company, Mr al Qahtani said. It is hardly doom and gloom for SAFCO, as the company is expected to continue to benefit from the stringent cost controls that helped deliver solid first and second quarters.