• Operational earnings slightly down Q-o-Q, but better than expected SABIC reported its 1Q16 results yesterday, with net income of SAR3.4 billion, up 11% Q-o-Q, which was 19% above our forecast and 14% above Bloomberg consensus. However, the earnings improvement was largely due to base effect as 4Q15 numbers included a one-off of SAR375 million related to a write down of assets at one of its subsidiaries. Adjusting for this, bottom-line earnings would have been flat as lower gross profit Q-o-Q was offset by a significant decline in S,G&A and higher other income, according to the release. We view the results positively in light of the current challenging operating environment (low oil prices, higher feedstock costs) and we maintain our Buy rating on SABIC.
• Earnings beat on better ethane supply and lower steel losses Gross profit of SAR8.4 billion was down 7.5% Q-o-Q and 6% above our forecasts, as weaker prices (especially methanol) along with higher natural gas costs likely pressured margins. Full financials are not yet available, but we believe the beat likely stemmed from: i) lower-than-expected costs at its Saudi ethylene crackers, which we believe could have come from improved ethane supply; ii) a stronger than expected performance in steel, which recorded a loss of SAR725 million versus our expectation of around SAR900 million; and iii) higher-than-expected other income, which we had forecast would decline Q-o-Q.
• Strong 2Q16 outlook, we see dividend upside in 1H2016 Price momentum for global petrochemicals has slowed somewhat in recent weeks after rallying significantly in March, but current levels are still much higher than 1Q levels and spreads have improved significantly, which should translate to a stellar set of 2Q results. We had expected SABIC to cut dividends this year on lower earnings but so far, prices have been better than expected and if a strong 2Q materialises as expected, the company could comfortably maintain its 1H dividend from last year (SAR2.5/share, dividend yield of 6.7%).

Yousef Husseini