• 2Q16 earnings marginally improve, beating EFGe; reiterate Sell SAFCO reported its 2Q16 financial highlights with earnings of SAR299mn (+5% Q-o-Q, -50% Y-o-Y), which beat our estimate of SAR259mn (+16%). Despite the better-than-expected results, we believe that 2Q16’s earnings level continues to be depressed amid the weak urea price environment, which stands at decade-long lows of cUSD200/tonne (-29% Y-o-Y, -2% Q-o-Q). With SAFCO trading at a 2016e P/E ratio of 19x, we believe it is trading at unjustified and elevated multiples. In addition, with the 1H16 DPS cut to SAR1.5, we believe there are more attractive dividend plays in the chemicals space and we maintain our Sell rating on the stock.
• Volumes & better-than-expected investment income likely drove beat Operationally, gross profit and operating income came in at SAR265mn and SAR248mn, respectively, beating our estimates by 11% each. We believe that higher-than-expected sales volumes may have been a likely driver behind the beat vs EFGe on the operational level as we had anticipated volumes to remain flat Q-o-Q, especially as SAFCO underwent a scheduled maintenance shutdown at one of its ammonia lines (according to fertecon). Below the operational level, SAFCO noted in its earnings release that income from its investment in Ibn Baytar improved Q-o-Q, which widened the beat vs EFGe as we had anticipated a flat contribution Q-o-Q.
• Nitrogen fertilisers market remains weak With the nitrogen fertilisers market facing i) significant oversupply; and ii) weaker production costs for marginal coal-based producers in China, we believe that companies with a fixed cost base, such as SAFCO, will continue to experience significant margin weakness. Accordingly, we remain bearish on nitrogen-based fertiliser exposure in the medium term.

Ahmed Hazem Maher
Youssef Husseini