• Losses continue in 2Q16 as fundamentals remain weak; maintain Sell Chemanol reported yesterday its 2Q16 financial highlights, showing losses of SAR3.6mn, contracting from 1Q16’s loss figure of SAR31mn as a SAR29mn insurance settlement (related to the 2014 fire at the paraformaldehyde plant) offered some relief from another poor operational performance. Although losses came in ahead of our SAR26mn loss estimate, excluding the impact of the settlement, losses would have come in at cSAR32.6mn, which is even weaker than our expectation. We reiterate our negative stance on Chemanol, as the company will still likely suffer in the current weak price environment, and as balance sheet liquidity concerns continue to mount. Accordingly, we maintain our Sell rating on the stock.
• Operations weighed down by weak pricing and demand During 2Q16, Chemanol reported gross profit of only SAR7mn (-42% vs. EFGe), while booking operating losses of SAR23mn. Chemanol’s poor operational results seem to be driven by i) methanol continuing to trade at depressed levels of cUSD230/tonne, which has led to a drop in product prices (based on the earnings release); and ii) poor market demand, as the construction sector in Saudi Arabia, where Chemanol’s products are highly exposed, has seen a slowdown in activities. Full financial statements have not yet been released, but we think that it is likely that volumes have remained nearly flat Q-o-Q.
• Losses likely to persist in 2016; worse is yet to come Despite methanol prices in China having inched up 7% in 2Q16, we think that current levels are insufficient for Chemanol to turn profitable any time soon. Also, with the construction sector in Saudi Arabia being in a weak state, it is unlikely that prices of Chemanol’s products such as formaldehyde and other derivatives will see a meaningful recovery any time soon. As Chemanol’s natural gas grace period has come to an end during June (gas price will rise by USD0.5/mmBtu), the company is set to face even more margin pressure throughout 2016, we believe.

Ahmed Hazem Maher
Yousef Husseini