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Introduction
The present report analyzes the financial performance of Sahara International Petrochemical Co. (Sipchem), a joint-stock chemical company with headquarters in Saudi Arabia. The purpose of the present report is to assess the company’s financial health by comparing its current performance with historical performance and competitors. First, the report provides an overview of the company with a focus on the industry, key products, and shares against assets analysis. Second, the report provides a qualitative assessment of the company with an emphasis on risks and competitive advantages. Third, the paper includes a quantitative analysis of the company’s performance in terms of growth, profitability, asset management, coverage, leverage, and common-size analysis. Third, the report provides an in-depth analysis of the company’s long-lived assets. Finally, the report is concluded with an overview of the findings.
Defining the Company
Company Background
SIPCHEM, formerly known as Saudi International Petrochemical Co., was formed in 1999 to produce chemical and petrochemical products (Sipchem, 2021a). It is a joint-stock company operating all over the world, with headquarters in Al Khobar, Suadi Arabia (Sipchem, 2021a). Only 10% of the company’s sales are attributed to Saudi Arabia and GCC. More than 37% of sales are made in Asia, 27% – in Europe, and 22% – in India (Sipchem, 2018).
The company produces a wide variety of petrochemical products. Sipchem’s specializes in three groups of products: primary products, intermediate products, and polymer products, which are the three categories of products served by the company (Anis, 2020). Direct products are produced as the company’s main products and include methanol, tetrahydrofuran, and butanediol. It is the world’s most significant producer of the three products named above. The intermediate products are those which the company produces as secondary goods to boost its wide range of products and comprise acetic acid, acetic anhydride, vinyl acetate, and more. Polymers are made by Sipchem as the third alternative product and include LDPE, EVA, polypropylene, and semi-conductive. Sipchem’s ability to produce a variety of goods has contributed to its growth in the market (Sipchem, 2021a). This has helped it control the majority of the petrochemical production by serving millions of people.
In line with its vision statement, Sipchem has achieved recognition as the world’s leading company in growth, excellence, and partnership in the petrochemical industry. Over the years, the company has taken over the production of chemicals and petrochemical products, helping it tap a broad market base. The company distributed its products globally to serve millions of consumers by creating sustainable, innovative, and quality products relying on its growth and employees’ motivation as directed by its mission statement (Sipchem, 2021a). Sipchem ‘s ability to configure and understand its mission and vision in the industry has contributed immensely to its growth in the market. It has also aided the company in relating with its employees in delivering quality products in time, creating a positive image. The company has emulated positive standards in its activities and boosted its market capture and reputational income (Anis, 2020). Sipchem deals with different commodities and has separated the production of each product from others to facilitate efficiency and has also incorporated integrated systems in operations to minimize the operational cost as it maximizes the profit.
The is if governed by a board of directors consisting of 11 members. Currently, Eng. Khalid A. Al-Zamil serves as the chairman of the board, and Mr. Fahad S. Al-Rajhi serves as a vice-chairman (Sipchem, 2021b). Sipchem is a head company for numerous subsidiaries, including International Acetyl Company, International Vinyl Acetate Company, International Polymers Company, Sipchem Chemical Company, Gulf Advanced Cable Insulation Company, and Sipchem Marketing Company (Sipchem, 2018). The company also has several subsidiaries for different regions, such as Asia and UAE (Sipchem, 2018). The company has a strong corporate governance system with no noticed issues.
Company’s Assets and Shares
In 2020, the company’s total assets were estimated at SR 23,765,081 thousand, which signified a minor decrease in comparison with SR 23,991,272 thousand in 2019 (Sipchem, 2021a). The assets are distributed among five sectors, including basic chemicals, intermediate chemicals, polymers, marketing, and corporate, with the highest amount attributed to corporate assets (Sipchem, 2021). Total liabilities of the company in 2021 were SE 9,929,205 thousand, which implies that the debt-to-asset ratio was 0.41, signifying low external risks (Sipchem, 2021). In other words, the company’s equity to asset ratio is 0.59.
The company’s total assets increased significantly in 2019, as the company acquired 100% of shares of Sahara Petrochemicals Company (Sipchem, 2021a). As a result, total assets increased from SR 15,980 million to SR 23,991 million (Sipchem 2019). The purchase was financed by both debt and equity.
Currently, the total number of shares outstanding in 2020 was 728,162 thousand, which demonstrates a significant increase in comparison with 580,556 thousand in 2019. As a result, earnings per share (EPS) decreased from SR 520 to SR 240, which was more than a 55% drop. In 2018, the number of total shares outstanding was 366,667 thousand, which implies that Sipchem has been issuing additional equity for three consecutive years to finance its operation (Sipchem 2019).
Options
The company issued a record amount of stock options in 2020, which demonstrates that the company required much cash to finance its operations. In particular, Sipchem issues more than 2 million instruments in May of 2020 and almost half a million options in October (Sipchem, 2021a). Table 1 below provides an overview of all issued options.
Non-Controlling Interest and Controlling Interest
The company has a significant amount of non-controlling interest in its subsidiaries. The total amount of subsidiaries’ equity the company is eligible for was SR 849 million in 2020 (Sipchem, 2021a). Controlling interest is provided in Table 2 below. The percentage of non-controlling interest of the company in the subsidiaries is provided in Table 3.
Table 3. Non-controlling interest (Sipchem, 2021a)
Company Analysis
Qualitative Analysis
The present report uses SWOT analysis as the primary method for assessing internal and external environments that can be used for future growth. The tool helps to systematize the knowledge about different aspects of the company’s environment to conduct strategic planning. The present report sees strengths as a source of competitive advantage and weaknesses as competitive disadvantages.
Strengths
- High employee loyalty. The company values its employees and ensures that all of them are satisfied and cared for. In 2020, during the time of economic recession and shutdowns, the company managed to avoid significant employee losses. Additionally, Sipchem launched a program for employees to purchase shares, which is expected to have a positive impact on employee loyalty.
- Large resources. The company has significant assets and relatively high revenues even during the economic recession associated with the COVID-19 pandemic. The company’s in 2020 was SR 5,323,023 thousand, which is only a little lower than SR 5,439,730 received in 2019 (Sipchem, 2021). The company can use these funds to grow rapidly.
- Global presence. The company is one of the global leaders in the chemical industry and has a large presence in Europe, Asia, and GCC (Sipchem, 2021). The company can use such a presence to diversify the customer base.
- One of the strongest sustainability programs in the industry. The company has developed a comprehensive sustainability framework highly valued by all stakeholders. The sustainability policy allowed the company to continuously decrease its environmental impact (Sipchem, 2020).
- Strong partnership network. Sipchem is the largest chemical company in Saudi Arabia with a diversified product line and a large number of subsidiaries. The company has numerous partners and subsidiaries that allow efficient collaboration to reach common goals (Sipchem, 2018).
Weaknesses
- Weak presence in North America. The US and Canada are perspective markets that have a large buying potential. However, Sipchem has only 2% of its operations in the US and no distribution channels in Canada (Sipchem, 2018).
- Growing cost of environmental impact. The company experiences a significant rise in costs due to the cost of possible environmental hazards (Sipchem, 2021b).
- Unique workplace culture. The company may have trouble penetrating into other markets due to a unique, non-flexible workplace culture (Sipchem, 2021b).
Opportunities
- Growing environmental concern. This aspect can be seen as both an opportunity and a threat. On the one hand, the company may experience significant risks associated with changes in environmental policies and unwanted environmental impact (Sipchem, 2021b). On the other hand, since the company has a strong sustainability program, the growing environmental concern may be seen as a competitive advantage. Customers will tend to use products from companies that support environmental sustainability, which will increase Sipchem’s sales.
- Rapid growth of emerging markets. Emerging markets, such as BRIC countries, have a very high rate of economic development and urbanization (Bakirtas & Akpolat, 2018). The increased urbanization leads to increased use of fuel and other chemicals (Bakirtas & Akpolat, 2018). Sipchem has a strong presence in India and Asia, which can be used to gain a strategic advantage in the future.
- Economic Recovery after the Pandemic. The world experienced a large economic crisis due to the pandemic. It is expected to rebound in the nearest future, which can be used for faster development of the company (Sharma et al., 2021).
Threats
- Growing competition. The competition in the industry is very high, which implies that the companies need to fight for small margins (Sipchem, 2021b).
- Manpower risks. Due to increased competition and a growing number of projects in the industry, Sipchem faces the risk of not being able to retain or hire key personnel (Sipchem, 2021b).
- Product price volatility. The company needs to tolerate increased volatility in product price due to the Pandemic, which may negatively affect the profitability of the company (Sipchem, 2021b).
- Supply chain risks. Recent global changes had varying impacts on supply chains around the world. The company may experience significant threats due to disruptions in the supply chain (Sipchem, 2021b).
Quantitative Analysis
Growth
In 2020, the company experienced negative growth in almost all key financial figures compared to the previous year. The key to the decreased performance is a decline in revenue due to the decreased prices of the company’s key products (Sipchem, 2021a). An overview of the company’s growth is provided in Table 4 below.
Table 4. Key financials and their growth (in thousand SR)
The analysis demonstrates that Sipchem experienced significant growth in total assets (55%) in 2019 due to the acquisition of Sahara Petrochemicals Company. The total amount of liabilities, however, increased only by 16.9% that year, demonstrating that the acquisition was made using equity, which was confirmed by the increased number of shares in 2019. In 2020, assets did not change significantly. In 2020, the only positive change was the increase in current assets by 20.47%. However, this increase was offset by a drastic increase in the current liabilities. The analysis also shows that even though the revenues (sales) remained relatively stable, the company experienced significant variation in costs, which is reflected in the Net profit negative growth for two consecutive years. The company’s growth is visualized in Figure 1 below.
Profitability
The company experienced negative growth in profitability in 2019 and 2020. The analysis of total revenues provided in Table 3 demonstrated that total sales experienced only a minor change. However, the calculations of profitability ratios demonstrated that Sipchem’s profitability was declining (see Table 5 below). The central problem was the increased cost of revenue and operating expenses. In 2020, the company’s gross profit margin decreased by 8%, signifying the increase in the cost of goods sold (COGS). While the company’s Gross profit margin and operating profit margins were above industry averages, the company’s net profit margin was only 1.07%, which is more than twice as low as the industry average.
Table 5. Profitability ratios
Note: Industry averages are taken from Ready Ratios (2021).
Asset Management
The company had a mixed performance in terms of asset management. On the one hand, the efficiency of asset use decreased in 2019 in comparison with 2018 and remained the same in 2020. The problem was that even though Sipchem acquired Sahara Petrochemicals Company, it did not lead to an increase in revenues. Thus, it may be concluded that the assets were managed ineffectively. On the other hand, the company’s inventory improved in 2020 in comparison with 2019. However, it should be noticed that both asset turnover and inventory turnover were significantly below the industry averages. Asset management ratios are provided in Table 6 below.
Table 6. Asset management ratios
Note: Industry averages are taken from Ready Ratios (2021).
Coverage (Liquidity)
Even though the company’s board acknowledged liquidity as one of the company’s major risks, Sipchem’s performance in terms of profitability was sufficient. Sipchem experienced a significant decline in both current and quick ratios in 2020 in comparison with 2019. However, the ratios were still above 1, signifying that the company had enough cash to cover its current expenses. Sipchem’s quick ratio was above the industry average due to an adequate inventory policy. Liquidity ratios are provided in Table 7 below.
Table 7. Coverage ratios
Note: Industry averages are taken from Ready Ratios (2021).
Financial Leverage
The company’s financial leverage was above the industry average in 2020. Sipchem’s debt-to-assets ratio in 2020 (0.42) was slightly below the industry average of 0.46 (Ready Ratios, 2021). Moreover, it remained relatively stable in comparison with that in 2019 (0.4) and in 2018 (0.54). Thus, the company’s performance in terms of financial leverage was adequate for the past three years.
Common Size Analysis
Tables 8 and 9 below provide common size (vertical) analyses for the balance sheet and income statement of Sipchem correspondingly.
Table 8. Vertical analysis of balance sheet in million SR
Table 9. Balance sheet vertical analysis in million SR
Vertical analysis of the balance sheet demonstrated that the company was gradually decreasing the percentage of inventories and increasing the percentage of cash and equivalents to control liquidity, as it was identified as one of the company’s primary risks. The vertical analysis of the balance sheet demonstrates that the increase in COGS was the primary concern for the company.
Long-Lived Assets
Different Types of Assets
The present report focuses on four types of long-lived assets, including property, plant, and equipment (PPE), intangible assets, goodwill (instead of natural resources), and other long-lived assets. The percentages of each asset are provided in Table 10 below.
Table 10. Long-lived assets in million SR (Sipchem, 2021a)
Results of the Analysis
An analysis of a chief financial officer (CFO) would reveal that Sipchem decided to increase its property plant and equipment in 2019 in anticipation of an increase in sales. In particular, Sipchem acquired Sahara Petrochemicals Company. In 2020, however, the company started to dispose of PPE, anticipating an economic downturn due to the pandemic. It appears that the company was selling PPE in 2020 to cover its current expenses and decrease the cost of maintenance.
Allocation Methods
PPE are initially recorded at cost net of accumulated depreciation and accumulated impairment losses. The depreciation is calculated on a straight-line basis. An asset is written-off when it is destroyed, or no economic benefits are expected from it (Sipchem, 2021a). Intangible assets are measured on initial recognition at cost (Sipchem, 2021a). They are carried at cost less accumulated amortization and accumulated impairment losses (Sipchem, 2021). Goodwill is allocated at the cost of acquisition and impairment to goodwill is assessed every year. As an independent auditor, I would assess the CFO’s method of allocation as reasonable, as it is done in accordance with the Financial Accounting Standards Board (Sipchem, 2021a).
Percentage of Used PPE
Sipchem recorded a depreciation of PPE of SR 869 million in 2020, while the total PPE was SR 13,015 million. Thus, 6.68% of the PPE was used in 2020.
Impairment Losses
Sipchem reported impairment to plant in machinery in all three years under analysis. In 2020, the company reported an impairment of SR 280 million, and it was SR 454 million in 2019. In 2018, the company did not report any impairment losses.
Ratio Analysis
The fixed asset turnover ratio measures how well a company uses its non-current assets to generate revenue (Libby et al., 2020). The high the ratio, the more efficient the management of the long-term assets (Libby et al., 2020). The long-lived asset turnover ratio is calculated in Table 11 below.
Table 11. Lon-lived asset turnover (in million SR except for the ratio)
The analysis of a CEO would reveal that the company’s efficiency of long-term asset use decreased in 2019 and was stagnant in 2020. The central problem was that Sipchem acquired Sahara Petrochemicals Company and failed to use it effectively for generating revenues due to an overall decrease in product prices (Sipchem, 2021a). Even though the average industry ratio is unsavable for the matter, a CEO would assume that Sichem’s performance is below average, as its recent acquisition was unsuccessful and undermined the company’s efficiency of long-lived assets use.
Effect of Depreciation of Cashflow
The effect of the depreciation of cash flow from operating activities is summarized in Table 12 below. An analysis of a CFO would reveal that the effect of depreciation on net cash flow was increasing during the past two years, which is a sign of concern.
Table 12. Effect of depreciation
Effect of Depreciation of Cashflow
The company had high capital expenditures during the past three years. In 2020, the company’s capital expenditures were SR 515 million; in 2019, they were SR 673 million; and in 2018, they were SR 879 million (Sipchem, 2019; 2021a). The analysis demonstrated that the company was gradually decreasing its capital expenditures during the past two years. In 2020, the company sold some of its long-term assets to maintain adequate cash flow.
Manipulating Balance Sheet
There are several ways to manipulate a balance sheet that can be used. In the case of Sipchem, one of the most efficient ways would be to record revenue for future periods or record non-existent product sales to demonstrate positive profitability (Adkins, 2021). As a CEO, it is crucial to demonstrate that the company managed to stay profitable even during the difficult times of the pandemic. However, when recording such sales, a CFO should be aware of possible disclosure of the information and loss of trust from all the stakeholders. It may appear more appropriate to sell some of the long-term assets and declare it as revenue.
Conclusion
The financial analysis of Sipchem revealed that the company is experiencing a significant decline in terms of financial performance. The central problem is the decrease in product prices and a decrease in production due to lockdown during the pandemic. Almost all financial ratios demonstrate a significant decline in performance. However, SWOT analysis demonstrated that Sipchem has several strengths and opportunities to address its weaknesses and threat and improve its current financial position.
References
Anis, A. (2020). Financial performance, disparity, and trend of petrochemicals sector of Saudi Arabia. Entrepreneurship and Sustainability Issues, 8(1), 809-821.
Adkins, T. (2021). Financial statement manipulation. Investopedia.
Bakirtas, T., & Akpolat, A. G. (2018). The relationship between energy consumption, urbanization, and economic growth in new emerging-market countries. Energy, 147, 110-121.
Libby, R., Libby, P., & Hodge, F. (2020). Financial accounting (10th ed.). McGraw Hill Education.
Ready Ratios. (2021). Industrial Organic Chemicals: average industry financial ratios.
Saudi Exchange. (2021). Saudi Stock Exchange. Web.
Sharma, D., Bouchaud, J. P., Gualdi, S., Tarzia, M., & Zamponi, F. (2021). V–, U–, L–or W–shaped economic recovery after Covid-19: Insights from an Agent-Based Model. PloS One, 16(3), e0247823.
Sipchem. (2018). Annual report 2017.Web.
Sipchem. (2019). Financial statements 2018. Web.
Sipchem. (2020). Sustainability report 2019.Web.
Sipchem. (2021a). Consolidated Financial Statements with Independent Auditor’s Report. KPMG.
Sipchem. (2021b). Board Annual Report of Sahara International Petrochemical Company (Sipchem). Web.
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