• Earnings flat Q-o-Q, in line with forecasts; maintain Buy Advanced reported its 1Q2016 results highlights this morning, with net income coming in at SAR146 million, flat Q-o-Q (+63% Y-o-Y) and largely in line with our (SAR141 million) and consensus forecasts (SAR144 million). Bottom-line earnings however, included two one-offs: i) a SAR17.2 million provision related to losses from available-for-sale investments; and ii) SAR16 million capital gain from the sale of the company’s 5% stake in its South Korean JV. Adjusting for these one-offs, earnings would have been SAR147 million, 18% ahead of our clean earnings forecast of SAR125 million. We maintain our Buy on Advanced and continue to view it as an attractive, defensive play in the current volatile environment.
• Lower feedstock costs offset weaker PP prices Gross profit was SAR157 million, down 2% Q-o-Q and 14% ahead of our forecast, while operating income fell a marginal 3% Q-o-Q to SAR144 million, 12% ahead of our expectations. Full financials are not yet available, so it is not clear what drove the beat. Earnings were flattish Q-o-Q despite i) lower PP prices (-6%); and ii) reduction in the discount the company receives on its propane feedstock from 28% to 20%, as propane prices CFR Japan, the benchmark that the Saudi government uses to price propane, plunged 26% Q-o-Q, offsetting the lower prices and discount.
• Spreads have recovered strongly; 2Q outlook is solid PP-propane spreads, the main driver of profitability for Advanced, have rallied from around USD430/tonne in December to over USD600/tonne on the back of strong demand due to the peak demand season in Asia (March to May) and inventory restocking. Surprisingly, a lot of the strong demand has been coming from outside of China, with both Vietnam and India showing a significant uptick in PP demand. With several plants in the Middle East and China shutting down for turnaround in April, we expect further spread momentum in the short term. We estimate that at a spread around USD600/tonne, Advanced could generate cSAR180-200 million in bottom-line earnings (annualised P/E of 8.2-9x).

Yousef Husseini