• 4Q2015 losses surge as operations weaken further; reiterate Sell Chemanol reported its 4Q2015 financial results yesterday with losses of SAR60 million (vs losses of SAR42.7 million in 3Q2015), which was significantly worse than our estimate of a SAR27.3 million loss. Earnings were mainly impacted by: i) a significant drop in methanol prices (-12% Q-o-Q), which had a substantial impact on margins; ii) shutdowns at the methanol plant that led to further costs of SAR11.4 million; and iii) some one-off provisions. We were already negative on the company's operations and financial position before this and we have become more so now given its inability to control costs amid a depressing price environment. We will review our forecasts and FV following the weaker than expected results and maintain our Sell rating for now.
• Cost inflation a big concern in the current price environment COGS increased by 14% Q-o-Q, mostly driven by the shutdowns during the quarter but also included inventory write-downs worth SAR4.45 million. Also, S,G&A expenses rose cSAR9.2 million on higher freight and preloading charges as well as end of year adjustments. We are concerned at the large cost escalation in Q4, especially as the increase in feedstock costs (methane prices will increase starting in 1Q2016 to USD1.25/mmbtu from USD0.75/mmbtu previously) in Saudi has yet to take its toll. These energy price hikes alone should account for an additional cost increase of SAR30 million in 2016, according to a release by Chemanol.
• Debt servicing could become an issue if conditions do not improve… With methanol prices reaching USD210/tonne in China (-60% Y-o-Y), prices appear to be approaching a bottom as marginal producers in China are under considerable margin pressure. But, in the current oil price environment, we believe it is unlikely that we will see any meaningful recovery in methanol prices. This will continue to put pressure on Chemanol’s earnings and cash flow in 2016 and makes it very difficult for it to service its debt (annualised net debt/ EBITDA of c8.5x), in our view. As such, if prices remain at current levels and it does not reduce its cost base substantially, we believe 2016 will be a challenging year for Chemanol.

Ahmed Hazem Maher
Yousef Husseini