• Headline numbers broadly in line; recurring earnings beat SABIC reported SAR4.7bn in bottom-line earnings for 2Q16 (+39% Q-o-Q,   -23% Y-o-Y), surprising the market (+24% vs. Bloomberg consensus), but broadly in line with our forecast of SAR4.6bn. The numbers would have been even better (SAR5.1bn, +50% Q-o-Q, +12% vs. EFGe), had it not been for another impairment of Ibn Rushd’s assets, which affected the bottom-line by SAR366mn and operating income by SAR761mn (the asset was previously impaired in 4Q15). A solid set of numbers, but with spreads having peaked and oil prices pulling back recently, we think the stock price offers minimal upside at these levels and maintain our Neutral rating.
• Higher prices and spreads, better steel performance drive Q-o-Q rise On the operational level, gross profit rose 31% Q-o-Q (-13% Y-o-Y) to SAR11bn (-+8% vs. EFGe), while EBIT improved 39% Q-o-Q (-26% Y-o-Y) to SA6.95bn (+2% vs. EFGe). The better numbers Q-o-Q were due to: i) higher prices (ethylene +10%, PE +4%, PP +12%, methanol +7%), especially for steel (we estimate at least +20%Q-o-Q); and ii) higher spreads should have supported SABIC’s mixed feed operations in Saudi Arabia, as well as its international operations in Europe and Asia. Full financials are not yet available, so it is not clear whether the beat on recurring earnings was driven by higher-than-expected volumes or margins.
• BoD proposes cutting dividend to SAR2/share, below expectations SABIC also announced that its board of directors (BoD) had proposed a cash dividend of SAR2/share for 1H16, a 20% cut to last year’s DPS and below our expectation of SAR2.5/share. This implies a pay-out of 74% based on our forecasts and a dividend yield of 4.7%. The dividend cut is likely a reflection of the company’s more recent aggressive approach to pursuing growth. In the last two to three months alone, SABIC has announced that it is studying: i) a potential JV petrochemical project in China; ii) a potential JV cracker in the US; as well as iii) an oil-to-chemicals project, which it is jointly studying with Aramco, so the dividend cut would make sense in this context.

Yousef Husseini