Rating: Sell
Target Price: SAR4.00
Closing Price: SAR6.42

Raise EPS forecasts on lower depreciation post IFRS; TP unchanged and maintain Sell
We increase our EPS forecasts as a result of lower depreciation expenses post the implementation of IFRS (SAR61mn in 1H17 vs. SAR89mn in 1H16). Our EBITDA forecasts only saw marginal adjustments; thus, our TP remains unchanged at SAR4.0/share. We maintain our Sell rating on Chemanol, as we still expect challenges in the medium term, in light of a weak construction market in Saudi Arabia, which should be a drag on prices (Chemanol’s products are geared towards construction) and is likely to keep earnings in the red for the foreseeable future. 
 
2Q17 results: Cash settlement drives Q-o-Q improvement, but recurring earnings fall
Chemanol reported its 2Q17 financial highlights, showing net profit of SAR2.62mn, mainly on a one-off USD5.5mn (SAR20.6mn) cash settlement that the company had obtained from a previous dispute with one of its marketers. Net profit beat our estimated loss of SAR12mn, as we did not account for the cash settlement. Gross profit was reported at SAR31.4mn, which is broadly in line with our estimate (-4%), while operating profit was stated at SAR15mn (includes cash settlement), well above our breakeven expectation. On a recurring basis, the company’s earnings actually weakened sequentially. We estimate a recurring operating loss of SAR5.7mn, which misses our breakeven forecast, on the back of higher-than-expected SG&A. Recurring net loss is also estimated at SAR18mn compared to our estimated net loss of SAR12mn. We think that the slump in methanol prices (-21% Q-o-Q) was one of the main factors that led to the weaker set of results, given that Chemanol produces methanol derivatives. In addition, volumes were also affected, due to weak demand in the local market, based on the release.   
 
Methanol prices have bottomed, but remain cautious on local market demand
Methanol prices softened in 2Q17, following: i) weak oil price environment; and ii) turnaround season that was conducted by MTO (methanol to olefins) players in China. We believe methanol prices have now bottomed and could see some pick-up with the recent rally in oil, but, fundamentally, 3Q demand is typically soft, and with new supply coming from Iran, prices are not likely to see a meaningful rally until 4Q17, in our view. Furthermore, Chemanol has historically sold 30-40% of its products in the local market (mainly to the construction sector), where the outlook is muted, given the slowdown in construction in the past few years.

Yousef Husseini
 
Omar El Gharabawi