• 2Q16 earnings up 28% Q-o-Q on higher spreads Advanced reported its 2Q16 results this morning, showing a 28% increase in net income to SAR186mn (-24% Y-o-Y), 8% below our forecast of SAR201mn. The better earnings Q-o-Q were mainly a function of higher revenues and margins, on the back of a 12% increase in PP prices and an 18% improvement in PP-propane spreads during the quarter. Although this was a strong set of results, we expect it to be the highest of 2016 and believe that spreads are likely to come under pressure in 2H16 on increased PP supply. We think current valuation levels are fair and maintain our Neutral rating.
• Operational earnings slightly below forecasts; AFS losses widen miss Gross profit and EBIT also rose substantially Q-o-Q (+28% and +33%, respectively), but were much lower Y-o-Y, as spreads were significantly higher a year ago. EBIT was slightly below our forecasts (-5%), though it is not yet clear what drove this, as full financials are not yet available. The miss widened on the bottom-line due to SAR9mn in losses from available-for-sale investments, which we did not account for in our forecasts (adjusting for this, earnings were only 3% below EFGe). Investment income from the South Korean JV project – which became commercially operational during 2Q16 – was SAR8mn, much better than our SAR4mn expectation.
• Spreads have already contracted; expect more pressure in the ST PP-propane spreads have already fallen substantially from their peak levels in 2Q16 as i) demand has slowed down, following end of peak demand season in Asia; and ii) the expectation of increased supply in 2H16 has incentivised buyers to maintain lean inventories. We expect even more pressure on spreads in the coming months as new Chinese supply hits the market, reducing global utilisation rates even further.

Yousef Husseini