• Losses continue in light of poor market conditions; reiterate Sell Chemanol reported its 1Q16 financial results showing a net loss of SAR31.3 million. The weak results reaffirm our view that it will continue to suffer in the current operating environment as i) prices have been under pressure (methanol –7% Q-o-Q, -18% Y-o-Y); ii) methane feedstock prices are set to rise in the near term (Chemanol enjoys a grace period till June); and iii) the slowdown in Saudi construction activities has negatively impacted demand. We also highlight that liquidity remains one of Chemanol's main challenges with operating losses adding risks to interest coverage. Hence, we reiterate our Sell rating on the stock.
• Operational results are in the red, even prior to the hike in feedstock While losses are seemingly better when compared to the loss of SAR60.2 million booked in 4Q15, the preceding quarter did face a shutdown as well as several one-off charges, which augmented the poor results. Chemanol's loss in 1Q16 is 6% below our SAR29.4 million estimate and showed significant weakness even at the operating level, which booked losses of SAR21.9 million (3% below EFGe). Even on the gross level, the company only managed to achieve a 3.4% margin, a very weak margin especially given that the hike in feedstock is yet to show its impact.
• Expect continued distress throughout 2016 While methanol prices seem to hit bottom at USD200/tonne in early January, and have risen 13% since then, we believe that it is unlikely that prices will recover enough to translate into profits for Chemanol. We also believe that the weak price environment will also be accompanied by i) soft demand for the company's products as construction activities weaken in Saudi Arabia; and ii) higher feedstock costs starting from June. These factors combined will, in our view, continue to drive losses at the company throughout 2016.

Ahmed Hazem Maher
Yousef Husseini\