Saudi Arabian Fertilisers Co (Safco) said on Saturday that lower global prices were behind an almost 75 percent drop in its third-quarter net profit, sending its stock price down as much as 5.2 percent. Safco said it made 464 million riyals ($123.7 million) in the three months to September 30, down from a 1.83 billion riyal record net profit it made a year earlier.
"The decline during the third quarter compared to both the same period of 2008 and the second quarter of 2009 is due to a decrease in global prices," Safco said in a statement posted on the bourse website. Safco's Chairman Mohamed al-Mady said new capacity in the region and a decline in demand from the US market further added to the firm's troubles. "There were some changes in the global fertilisers market, like the start of a new plant in Egypt, that is new competition that caused new imbalance in supply, demand," Mady told Reuters.
He later told Dubai-based al-Arabiya television channel that new production capacity had also entered the market from Iran. The company also incurred the financial cost linked to the review of the value of inventories, Mady said, without being more specific.
Saudi Basic Industries Corp (SABIC) holds a 42.9 percent stake in Safco. "For four quarters now Safco's net income has been down sequentially," Laurent-Patrick Gally of Dubai-based Shuaa Capital said, adding that the stock was losing its appeal because of earnings decline. "These are not good numbers for investors".
Shuaa's third-quarter earnings forecast were in line with Safco's earnings. "Our forecasts assumed a 3 percent decline in fertiliser sales volume, a 64 percent in urea prices and 70 percent for ammonia," Gally said. Safco said operating profit fell 77 percent during the third quarter to 432 million riyals. The annual decline in Safco's net profit stood at 60 percent in the second quarter and 27.4 percent in the first quarter.
"We need to see next year prices of urea above $300 per tonne and ammonia above $250 per tonne to give a 10 to 15 percent rise in Safco's top line. Every dollar in Safco's topline goes almost fully to its bottom line," Gally said. Mady declined to give any forecasts for Safco.
Safco's earnings were close to the average forecast of analysts polled by Reuters in a survey this month, who predicted an average net profit of 467.8 million riyals in the third quarter. "Ammonia and urea prices during the third quarter were relatively flat compared to the second quarter," Gally added. After it announced its earnings, Safco's stock closed at 119.75 riyals - the lowest since September 7 - from a previous close of 125.25 riyals.
Before Saturday's session, Safco shares gained 39.6 percent since the start of 2009, which is above the year-to-date performance of the all share index, but below the 63.2 percent rise in the petrochemical industry's index. "Valuation appears to us quite full ... We advise investors holding Safco shares to take some money out of the table at this stage. For those who don't already own the name, we recommend to wait for better entry points," Gally said.