• Losses widen in 3Q16 as price pressure continues; reiterate sell Chemanol reported its 3Q16 financial results this morning, showing losses of SAR39.91mn, much larger than the SAR3.58mn losses reported in 2Q16 and below EFGe loss estimate of SAR31mn. The large swing in losses is mainly due to base effect, as 2Q16 results included one-off insurance compensation of SAR29mn. On the operational level, gross loss came in at SAR3.7mn (vs. gross profit of SAR7.4mn in 2Q16), while operating loss was SAR27.3mn (vs. losses of SAR23mn in 2Q16), both below our expectations. The weaker operational performance was mainly the consequence of lower product prices, according to the earnings release. We reiterate our Sell rating on Chemanol, with the results set reinforcing our bearish view on the name.
• Revenues plummet, main driver behind miss Revenues plummeted 22% Q-o-Q to SAR123.6mn, missing our estimates by 25%. We believe the much lower-than-expected revenues was the main driver behind the earnings miss. According to the release, lower product prices were behind the sales contraction, but we suspect lower volumes also contributed, given how large the drop was. We believe this is a reflection of the weak construction market in Saudi Arabia (c37% of Chemanol’s sales were local in 2015), which has been under distress.
• Outlook not encouraging as market weak, debt levels elevated Our outlook for the company remains bearish, in light of the weakness in the Saudi construction sector, as the pullback in oil prices has forced the government to cut spending substantially and has resulted in a lot of late payments to contractors. Data from MEED Projects show that new awards in Saudi Arabia have declined 66% Y-o-Y through September of this year. Beyond this, losses could escalate if the government decides to hike feedstock prices next year, and we are concerned that the company will not be able to service its debt (net debt/ EBITDA of 9.6x as of 30 June 2016) if fundamentals do not improve substantially.

Yousef Husseini