September 27, 2016 Santhosh Balakrishnan Yasser Bin Ahmed Riyad Capital is licensed by the Saudi Arabia [email protected][email protected]Capital Market Authority (No. 07070-37) +966-11-203-6809 +966-11-203-6805 Concerns Overweigh Our revised outlook on Saudi Kayan Company (Kayan) is modest after our model update, leading to an estimate and target price revision. In our view, Kayan’s operational concerns are yet to be resolved despite strong earnings trends since start of 2016. We continue to maintain Neutral for the following reasons i) strong earnings growth is unlikely to sustain in the coming quarters ii) volatile operating rates and unplanned shutdowns affecting efficiency and iii) subsidy impact from 2Q2017 could elevate feedstock costs and result in margin contraction. Despite topline growth concerns, we expect some improvement in earnings as margins expand in contrary to our earlier view. We change our valuation approach to EV/EBITDA method versus DCF earlier. The revised approach takes our 12-month target price to SAR 6.25 from earlier SAR 6.00. Despite such upward revision, stock offers negative real returns while valuation has moved beyond acceptable levels, suggesting Kayan is unappealing. Kayan is trading at expensive levels with EV/EBITDA of 12.5x for 2016E versus sector’s 10.1x. Strong 2Q16 earnings trends unlikely to sustain Kayan reported strong 2Q2016 earnings of SAR 91 million after five quarters of consecutive losses. Remarkably, kayan recorded its best ever margins and bumper earnings growth in this quarter surprising street expectations, the bright spot in its entire operational history. On the flipside, we believe this trend is unlikely to sustain as feedstock spreads have contracted and product prices have fallen slightly since 3Q. Operating rates continue to impact We believe concerns do arise and look forward for a consistent performance in operating metrics. Kayan operated at 77% utilization during 2015, due to a 53-day shutdown in 1Q2015, while it had a 40-day shutdown during 1Q2016 suggesting operating rates could be below 80% for 2016E. We believe such history of unplanned shutdown has led to an inconsistent outlook; we continue to view this as a major risk. Margins to contract due to subsidy cuts from 2Q2017 Kayan is likely to see the impact of feedstock costs starting 2Q2017 with ethane to be priced at $1.75/mmbtu and Butane priced at discount to international FOB prices. We believe such impact could lead to higher feedstock costs as Kayan operates a costlier feedstock structure due to presence of butane, which has low crack yields. Revise target price to SAR 6.25, maintain Neutral With expectations of losses over next 3-years, we ignore P/E and DCF approach and amicably rely on a target EV/EBITDA multiple of 12.0x to derive SAR 6.25 fair value. With barely any dividends over the next five years and marginal upside, a large fall from these levels would only make Kayan attractive. Until then, maintain Neutral. SAUDI KAYAN COMPANY (KAYAN) Update Report Rating Neutral 12-Month Target Price SAR 6.25 Expected Total Return Price as on Sep-26, 2016 SAR 6.07 9 Upside to Target Price 3.0% Expected Dividend Yield N.A Expected Total Return 3.0% Market Data 52 Week H/L SAR 10.2/4.5 Market Capitalization SAR 9,105 mln Enterprise Value SAR 31,209 mln Shares Outstanding 1,500 mln Free Float 35% 12-Month ADTV(mln) 14.6 Bloomberg Code KAYAN AB 1-Year Price Performance Source: Bloomberg Shareholding SABIC 35.0% Foreign Ownership (Inc. QFI) 0.5% Public Float 64.5% 30 40 50 60 70 80 90 100 110 120 130 S O N D J F M A M J J A KAYAN TASI TPCHEM -70% -60% -50% -40% -30% -20% -10% 0% 6M 1Y 2Y KAYAN TASI TPCHEM Key Financial Figures FY Dec31 (SAR mln) 2014A 2015A 2016E 2017E 2018E Revenue 11,636 7,976 7,581 8,320 9,299 EBITDA 2,950 1,884 2,569 2,421 2,271 Net Income (45) (1,243) (233) (177) (140) EPS (SAR) (0.03) (0.83) (0.16) (0.12) (0.09) DPS (SAR) NA NA NA NA NA P/E (x) NM NM NM NM NM P/B (x) 0.7x 0.8x 0.8x 0.8x 0.8x EV/Sales (x) 2.8x 4.0x 4.2x 3.8x 3.4x EV/EBITDA (x) 10.8x NM 12.5x 13.2x 14.1x
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2016 SAUDI KAYAN COMPANY (KAYAN SAR 6 · 2016 Santhosh Balakrishnan Riyad Capital is licensed by the Saudi ArabiaYasser Bin Ahmed [email protected] Capital Market
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September 27, 2016
2016
Santhosh Balakrishnan Yasser Bin Ahmed Riyad Capital is licensed by the Saudi Arabia
Concerns Overweigh Our revised outlook on Saudi Kayan Company (Kayan) is modest after our model update, leading to an estimate and target price revision. In our view, Kayan’s operational concerns are yet to be resolved despite strong earnings trends since start of 2016. We continue to maintain Neutral for the following reasons i) strong earnings growth is unlikely to sustain in the coming quarters ii) volatile operating rates and unplanned shutdowns affecting efficiency and iii) subsidy impact from 2Q2017 could elevate feedstock costs and result in margin contraction. Despite topline growth concerns, we expect some improvement in earnings as margins expand in contrary to our earlier view. We change our valuation approach to EV/EBITDA method versus DCF earlier. The revised approach takes our 12-month target price to SAR 6.25 from earlier SAR 6.00. Despite such upward revision, stock offers negative real returns while valuation has moved beyond acceptable levels, suggesting Kayan is unappealing. Kayan is trading at expensive levels with EV/EBITDA of 12.5x for 2016E versus sector’s 10.1x.
Strong 2Q16 earnings trends unlikely to sustain Kayan reported strong 2Q2016 earnings of SAR 91 million after five quarters of consecutive losses. Remarkably, kayan recorded its best ever margins and bumper earnings growth in this quarter surprising street expectations, the bright spot in its entire operational history. On the flipside, we believe this trend is unlikely to sustain as feedstock spreads have contracted and product prices have fallen slightly since 3Q.
Operating rates continue to impact We believe concerns do arise and look forward for a consistent performance in operating metrics. Kayan operated at 77% utilization during 2015, due to a 53-day shutdown in 1Q2015, while it had a 40-day shutdown during 1Q2016 suggesting operating rates could be below 80% for 2016E. We believe such history of unplanned shutdown has led to an inconsistent outlook; we continue to view this as a major risk.
Margins to contract due to subsidy cuts from 2Q2017 Kayan is likely to see the impact of feedstock costs starting 2Q2017 with ethane to be priced at $1.75/mmbtu and Butane priced at discount to international FOB prices. We believe such impact could lead to higher feedstock costs as Kayan operates a costlier feedstock structure due to presence of butane, which has low crack yields.
Revise target price to SAR 6.25, maintain Neutral With expectations of losses over next 3-years, we ignore P/E and DCF approach and amicably rely on a target EV/EBITDA multiple of 12.0x to derive SAR 6.25 fair value. With barely any dividends over the next five years and marginal upside, a large fall from these levels would only make Kayan attractive. Until then, maintain Neutral.
Petrochemical sector, the best performer in TASI KSA petrochemicals sector has seen a positive stride after most companies reported strong earnings in 2Q2016, beating analyst expectations, while outperforming TASI and other sectors. The key reason for such positive increase is the improvement in product prices and resultant margin expansion. The sector recorded SAR 6.8 billion in earnings versus SAR 5.1 billion consensus, with an earnings beat of nearly +31%. Additionally margins have expanded significantly due to widened spreads in feedstock, positioned as the key advantage over global producers.
The increased margins, growth in product prices and increase in utilization rates has led to a superior earnings growth of +63% Q/Q though it declined by -20% Y/Y on subdued oil prices. Though 1Q2016 downturn was due to bottomed oil prices, product prices stood firm and managed to grow, however recovered lower than oil prices. Oil prices averaged US$42/bbl on a YTD basis, registering a sharp jump of +33% in 2Q2016 alone. The same is reflected in the KSA petrochemical index reporting a growth of +9% versus TASI’s +4%, reporting its best outperformance versus sectors.
Kayan’s operates with a diversified product mix With Kayan operating in the Olefins and Aromatics space with a variety of specialty chemicals. Its key product composition spanned across Mono Ethylene Glycol (MEG), Polyethylene (PE), Polypropylene (PP) and Polycarbonate (PC), this collectively accounts for 86% of its capacity, while rest are specialized chemicals.
Exhibit 1: Sector Indices Performance Exhibit 2: Sector Earnings Performance
Source: Argaam, Company Reports Source: Argaam, Company Reports
MEG27%
LDPE13%
HDPE18%
PP16%
PC12%
Butanol5%
ETA5% Ethoxy
2%NDA2%
ETO15%
Ethylene40%
Propylene17%
Benzene3%
Acetone4%
BPA7%
Phenol6%
Cumene8%
Page 3 of 15
SAUDI KAYAN COMPANY Update Report
With product demand improving globally, few supply-demand imbalance do exist over short term but still robust over long term. We look at demand – supply scenario over the next 3-4 years.
MEG a good volume driver Globally, Mono Ethylene Glycol (MEG) is a 26 million MT market as of 2015 with 51% of its supply controlled by China. MEG by usage carries lot of significance in the PET bottle industry. In our view, Kayan is a small player globally, but large on a regional level. With its 609 KT of capacity (27% of its product capacity), we believe MEG is key to Kayan’s volume growth. With the help of SABIC and its affiliate Yansab (MEG capacity of 809 KT), we believe synergies do rise gradually. According to TM research, the MEG market is expected to grow at +6.1% CAGR during 2015-23. We believe Chinese consumers are increasingly relying on imports from MENA producers, though new capacities are expected to be in place by end of 2018. In our view, this risk is due, to create an imbalance in supply-demand for medium term.
PP demand is more Asia focused
Kayan operates a 350 KT polypropylene plant, which accounts for 16% of its end-product capacity. We believe with such high proportion, Kayan is likely to explore more in the Asian markets as demand from Asia is expected to remain high for 2016-18E, according to Nexant research. Additionally, Nexant predicts global PP demand is expected to grow at +5% CAGR and reach 74 million MT by 2020, equating supply.
Exhibit 5: Global MEG Demand & Supply (mln Tons) Exhibit 6: Global MEG Demand Proportion 2016
The long-term demand stems from end user industries in auto and electronics sectors. China alone has a 20% share of the PP market due to its significance in China’s plastics industry. We believe capacities are expected to increase in this market at a steady pace in US, China and Korea from 2017.
PE to see some supply-demand imbalance from 2018 Kayan’s PE (LDPE, HDPE and LLDPE) products account for 34% of its production capacity with a combined capacity of 700 KTA. Globally, PE products (LDPE, HDPE and LLDPE) are expected to grow at a CAGR of +6% through 2020 to 109 million MT. We do not expect an immediate ramp-up in capacity though expected to show some level of increased supply from 2018 as China and US are in the process of expanding its capacity across products. With consumption, remaining robust, supply growth is gathering pace to equal demand. Additionally global operating rates have not significantly expanded, barely affecting price-demand equation. We believe the PE industry has shown a narrowing supply-demand gap, however concerns on over capacity do exists.
Polycarbonate a promising business, SABIC driving initiatives Global Polycarbonate (PC) market is a highly concentrated market with five large producers forming 75% of total capacity. Kayan has a 260 KTA of capacity in this segment (12% of its product capacity) mainly driven by SABIC’s initiatives in JV with GE plastics, regarded as innovative plastic segment. This being a high value segment is mainly used in optical media and production of bottles. Asia is the largest consumer of this market with a share of 64%. PC demand is driven by electronic and automotive industries, with Nexant forecasting +6% CAGR through 2020 and reach U$19.6 billion.
Exhibit 9: Global PE Demand & Supply (mln Tons) Exhibit 10: Global PE Demand Proportion 2016
Asia and Middle East are Kayan’s key market Kayan exports 47% of its volumes to Asian markets predominantly to China followed by MENA, while exposure to Europe and North America is lower. With Kayan’s largest market being Asia and Middle East, synergies do arise from affiliates (Yansab) but primarily driven by parent company SABIC and its JV partners. With Asia being predominant in its geographical mix, Kayan is less prone to volatile cycles in developed markets, which is a positive at times of low growth in Europe and North America.
Page 6 of 15
SAUDI KAYAN COMPANY Update Report
Financial Analysis
Revisions driven by margins and changes in product outlook for 2016-19 We revisit our models and revise our outlook for 2016-19E considering the upbeat 2Q2016 results which was largely driven by a surge in petrochemical prices. Our revision braces towards a slightly mixed outlook for 2016-19, hence adjust topline downwards and earnings upwards. We cut revenue growth and believe utilization to be lower in the coming quarters due to unplanned shutdowns. However, product prices are expected to grow at decent rates, mimicking oil prices. An upgrade in earnings is driven by Kayan’s consecutive positive surprises, over the last two quarters (refer Ext-21) sighting growth in margins. Additionally, trim our loss expectations for 2016-19E versus earlier estimates. We believe Kayan continues to benefit from a superior product composition and believe the downside risk is the volatile utilization rates, which we believe to improve in the coming years.
Revenue growth trimmed to +11% CAGR Revenue is expected to grow at +11% CAGR and slightly lower to our expectations earlier. We base our macro oil forecasts on EIA’s expectations of a +6% CAGR with oil prices reaching US$ 73/ bbl by 2019.
We believe Kayan is positioned well and efficiently leverages SABIC’s distribution network. We remain positive on Kayan’s product portfolio comprising of volume and value, with MEG driving volumes and PC driving value growth. On a combined basis these core products (MEG, PP, PE and PC) accounts for 76% of production volumes and 80% of sales as of 2015. Our revised outlook suggests revenues are expected to reach SAR 10.3 billion by 2019. On the product prices front, MEG on a standalone basis is expected to grow at +5% CAGR through 2019 according to Nexant, while a +4% CAGR is expected from PE and PP.
Table 1: Changes in Estimates (SAR mln)-RC versus Consensus
Source: Riyad Capital, Company Reports Source: Riyad Capital, Company Reports
11
,63
6
7,9
76
7,5
81
8,3
20
9,2
99
10
,23
7
-35%
-25%
-15%
-5%
5%
15%
201
4
201
5
201
6E
201
7E
201
8E
201
9E
Revenue YoY
Asia47%
Middle East & Africa
39%
Europe9% Other
Countries
5%
Page 7 of 15
SAUDI KAYAN COMPANY Update Report
A historical correlation of quarterly sales versus product prices suggests correlations have declined since start of 1Q2016. A recap of the performance in product prices suggests a lag in oil’s correlation versus product prices. Oil prices are exempted from volatile demand cycles while product prices are prone to such cycles. Hence, do form part of a less volatile cycle over the short term causing pricing imbalance.
Feedstock spreads have aided growth in margins A close look at recent trends in petrochemical prices, suggest slight improvement in topline mainly driven by PC and PE. Though products are not affected largely, the feedstock prices has seen exceptional volatility (ethane, propane and butane) once oil prices plummeted to decade lows. The steep fall in feedstock prices has led to an advantage for producers due to higher feedstock spreads. With added feedstock spreads and impending discount from Aramco, this has led to superior growth in margins for Kayan.
Margins are prone to contract from 1H2017
Kayan is protected from energy price hike till 1H2017 due to the grace period allowed to many KSA producers by Aramco at the time of inception. We believe Kayan’s costs are higher due to its feedstock mix comprising of ethane and butane, with butane forming 30%. With ethylene yields being lower from butane compared to ethane, Kayan has a higher cost structure versus other 100% ethane based crackers. With ethane priced at $0.75/mmbtu till 2Q2017 for Kayan and will be hiked to $1.75/mmbtu.
Exhibit 15: Quarterly Revenues (SAR bln) versus Growth in Global Product Prices (Avg) Trends
Source: Riyad Capital, Company Reports, Bloomberg
2.4
2.0
2.3
2.2
2.9
2.1
2.3
3.1
2.9
2.9 3.0
3.2
2.5
1.8
2.1 2.2
1.9
1.7
2.2
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1.0
1.5
2.0
2.5
3.0
3.5
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
Revenue MEG PP PE
Exhibit 16: Quarterly COGS (% of Sales) versus Global Feedstock Price (Avg) Movements
Source: Riyad Capital, Company Reports, Bloomberg
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
COGS Ethane Q/Q Butane Q/Q
Page 8 of 15
SAUDI KAYAN COMPANY Update Report
Butane supply on the other hand will be priced at 20% discount to international prices until 1H2017 versus 27% earlier, we believe costs are likely to elevate. As a result, we forecast Opex to be at 93% on an average for 2016-19 and higher starting 2017.
Cost efficiency is beyond operational limits Kayan continues to operate at lower utilization rates and believe its unable to cover fixed costs fully at current operating rates. This cost inefficiency is attributed to the falling topline and believe a threshold range of 90% utilization is deemed necessary. Unless product prices move significantly or utilization breaches 90%, kayan would fail to deliver the required efficiency in costs. Keeping such assumptions, gross profit CAGR of +13% through 2019 is expected reaching SAR 819 million. On the other hand average EBITDA margins of 24% for 2016-19 is expected. We expect EBITDA CAGR of +8% through 2019 and reach SAR 2.2 billion. Depreciation rate of 21% to sales during 2015 is relatively high versus other producers. Keeping such rates, thin operating margins of 5% is expected and result in operating profit of SAR 614 million by 2019.
Trimming loss expectations, starting 2019 should be green Loss of SAR (6) million by 2019 is expected, showing signs of improvement. With such a loss scenario, accumulated losses could reach SAR (556) million over the next three years. We forecast LPS of SAR (0.16) for 2016 and do not expect any dividends over the next 5 years.
Highly leveraged balance sheet Kayan has nearly SAR 27.1 billion of debt as of 2Q2016 with major part of repayment scheduled between 2018-2022, however over the next 2 years, its relatively lower. D/E ratios of 2.2x is relatively high. This leaves earnings stressed at times of a muted topline growth (2014-15 is a good example), leading to low interest coverage ratios at times. Kayan continues a decent capex run rate of 7% except in 2015 and 1Q2016 due to shutdown.
Exhibit 17: Gross Profit (SAR mln) and Margin Forecasts Exhibit 18: EBITDA (SAR mln) and Margin Forecasts
Source: Riyad Capital, Company Reports Source: Riyad Capital, Company Reports
97
6
-20
9
56
9
58
2
65
1 81
9
-4%
-2%
0%
2%
4%
6%
8%
10%
201
4
201
5
201
6E
201
7E
201
8E
201
9E
Gross Profit Gross Margins
2,9
50
1,8
84 2,5
69
2,4
21
2,2
71
2,2
40
15%
20%
25%
30%
35%
201
4
201
5
201
6E
201
7E
201
8E
201
9E
EBITDA EBITDA Margins
Exhibit 19: Net Profit (Loss) Forecasts (SAR mln) Exhibit 20: Total Debt (SAR mln) and Net Debt to EBITDA
Source: Riyad Capital, Company Reports Source: Riyad Capital, Company Reports
(45
)
(1,2
43
)
(23
3)
(17
7)
(14
0)
(6)
201
4
201
5
201
6E
201
7E
201
8E
201
9E
29
,10
5
26
,98
4
24
,83
0
22
,58
0
20
,08
0
17
,58
0
6
7
8
9
10
11
12
13
14
201
4
201
5
201
6E
201
7E
201
8E
201
9E
Total Debt Net Debt to EBITDA
Page 9 of 15
SAUDI KAYAN COMPANY Update Report
2Q2016 Review
Record-breaking performance Revenue of SAR 2.2 billion in 2Q2016 has beaten our expectations of SAR 1.65 billion, increased by +27% Q/Q and flat Y/Y mainly on higher product prices. Operational costs declined as growth in feedstock costs were lower causing costs to shrink and margins to expand. The major feedstock prices increased barely in the global markets. Gross profit of SAR 398 million during 2Q2016 increased by +413% Q/Q and +54% Y/Y. Gross margins recorded the highest ever in its operational history with 19% in 2Q2016 from 5% in 1Q2016 and improved from 12% in 2Q2015. Operating margins recorded the highest with 14%, the last best was 8% in 3Q2015. Operating income of SAR 291 million almost doubled from SAR 150 million, a year ago before reverting to green, but reported a loss in 1Q2016 to SAR (24) million. Net income of SAR 91 million came after continuous quarterly losses over the last six quarters and beat our estimates of SAR (281) million loss for 2Q2016. Net margins stood at 4%, the highest.
Kayan started seeing positive surprises after an era of misses Kayan’s earnings have mostly been a mixed bag since 2015 with consensus rarely meeting actuals, posting negative surprises. However, it consistently delivered positive surprises from the start of 2016 and the trend is clearly visible in exhibit 22. We believe most analysts have been pessimistic due to one-sided negative directions in earnings.
Table 2: Quarterly Income Statement Summary (SAR mln)
Exhibit 21: Revenue Surprises (SAR mln -Est vs Act) Exhibit 22: Earnings Surprises (SAR mln -Est vs Act)
Source: Company Reports, Bloomberg Source: Company Reports, Bloomberg
-247
-660
0
-221
620
-403
-353
667
-646
66
63 1
70
-127
-6
-449
205
-174 -4
7
505
-800
-600
-400
-200
0
200
400
600
800
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
-730
-236
-429
-148
-155
-5
-133
18
-162
-111
-174
35
-40
-311
-36
-59
-643
133
275
-800
-600
-400
-200
0
200
400
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
Page 10 of 15
SAUDI KAYAN COMPANY Update Report
Valuation
Revised Target price to SAR 6.25 using EV/EBITDA We update our models and value Kayan using relative valuation methods. We believe its apt, as Kayan continues to deliver negative operating cashflows due to shutdowns amid inconsistent utilization rates. With expectations of losses over next 3-years, we ignore DCF approach and rely on a target EV/EBITDA multiple. In this scenario, we believe 12.0x EV/EBITDA multiple metric is the most appropriate in valuing Kayan, which is an average for last 2 years. The target EV/EBITDA multiple method derived a fair value of SAR 6.25 which is higher from SAR 6.00 earlier. A marginal increase in target prices is justified due to upgraded estimates and as we move from DCF approach to EV/EBITDA method.
Risks to valuation Any fall in product prices could lead to a tricky situation in maintaining margins though cost advantage over feedstock is till 1H2017. The potential slowdown in demand from Asian markets could prove to a dampener for growth as Kayan exports nearly half of its product to Asia. We also caution against any impact of technical outage, which can result in plant shutdown affecting operating rates and affect topline. Additionally any increase in fuel prices could have a downside on estimates.
Table 3: Price Sensit ivity and Target EV /EBITDA V aluation using Bear-Base-Bull Case EBITDA Estimates
Valuation at last 3 year average of 12.8x 7.35 6.09 4.81 4.55
Based on KSA sector 2016E median EV/EBITDA of 10.3x 2.56 1.57 0.57 0.36
Estimated valuation at EV/EBITDA of 12.0x 6.25 5.06 3.84 3.59
Source: Company Reports, Riyad Capital
E
V/E
BIT
DA
(x)
Ran
ge
Valuation based on EV/EBITDA
Bull
2016E 2017E 2018E 2019E
Bear Bull Bear Bull Bear Bull Bear
Page 11 of 15
SAUDI KAYAN COMPANY Update Report
Valuations expensive, stock rally overdone On a TTM basis, Kayan trades at a premium to sector, hence unconvincing on the valuations front. Valuation appears to be full and does not command large consideration with its EV/EBITDA of 13.6x higher to sectors 10.5x. Stock prices have rallied by +35% (TASI: +1% and Sector: +15%) over last 6 months following strong 2Q2016 earnings. Additionally, the recent rally of +28% since 1Q2016 versus TASI’s +4% and sectors +9% leaves little scope for conviction. We believe rally is overdone.
Band chart suggests Kayan is trading at a bear cycle A 12-month forward rolling band chart suggest Kayan EV/EBITDA average is nearly 14.0x, while historically (2012-14) it always traded above 18.0x which we believe is when markets at a bull cycle and when oil prices averaged $100/bbl.