• Net income improves Q-o-Q on non-operational factors SABIC reported its 3Q16 results this morning, showing a flattish operational performance Q-o-Q, likely as better PE and PP spreads during the quarter offset weakness in the fertiliser (urea -7%, ammonia -22%) and steel segments (feedstock iron ore prices +5%). Net income came in at SAR5.2bn, up 10% Q-o-Q (-7% Y-o-Y), 8% ahead of our forecasts, but in line with Bloomberg consensus forecasts of SAR5.15bn. The better bottom-line was a function of higher other income, as well as base effect, since 2Q16 numbers included a one-off SAR366mn impairment related to Ibn Rushd. We see no major surprises in the results and maintain our Neutral rating on the stock.
• Higher-than-expected margins drive slight operational beat Revenues fell 3% Q-o-Q to SAR33.3bn (-11% Y-o-Y, -3% vs. EFGe) though it is not clear if this was driven by lower prices or a drop in volumes. Gross profit was stable Q-o-Q at SAR11bn (+2% vs. EFGe), while operating profit rose 10% Q-o-Q to SAR7.6bn (+4% vs. EFGe), although this was mainly due to base effect (one-off in 2Q16). Adjusting for this, EBIT would have been flat. Margins improved to 32.9% from 32.0% in 2Q16, likely on lower costs and were the main driver behind the slight beat at the operational level (EFGe of 31.4%). Lower-than-expected S,G&A and higher-than-expected other income also contributed to the beat on the bottom-line.
• 4Q price outlook: Expect pullback; urea and methanol only exception We expect product prices for SABIC to generally decline as we approach year-end, with the exception of urea and methanol prices. Essentially, while urea markets remain weak, they have bottomed, and the recent increase in Chinese coal prices is likely to provide support in the short term. In petchems, lacklustre demand near year-end and new capacity in China are likely to weigh on prices, though methanol prices should hold up in a rising oil price environment. Finally, for steel, recent reports indicate a large drop in prices in the local market due to weak construction demand and high inventory levels.

Yousef Husseini