• Earnings improve Q-o-Q, but miss forecasts Sahara reported its 3Q16 results this morning with earnings rising 9% Q-o-Q to SAR105mn, 12% below our forecast and slightly below consensus (-4.5%). We believe the earnings improvement was driven by a better performance at its jointly-controlled entities, SEPC and SAAC, which should have benefited from better prices and spreads. The earnings release also mentioned higher volumes at these subsidiaries, which was another factor behind the better earnings Q-o-Q. Overall, a decent set of numbers though they disappointed our expectations mainly on weaker-than-expected performance from Al Waha. We remain Neutral on Sahara, but still like the stock as a potential dividend play (c7-7.5% yield).
• Al Waha disappoints and main reason behind miss The main factor behind the miss was a disappointing performance from Al Waha, which saw its revenues fall 6% Q-o-Q (-5% vs EFGe) on lower volumes. Gross profit fell 7% Q-o-Q to SAR137mn (-16% vs EFGe) on lower revenues but margins remained flat Q-o-Q at 32.5%. This was much lower than our 36.5% forecast, though it is not yet clear whether this was driven by higher-than-expected costs or lower-than-expected netbacks. We do not believe the slight drop in volumes is a concern as the revenue number would still imply operating rates of c100%, based on our estimates.
• We still expect higher dividends this year Despite the lower-than-expected earnings, we still believe Sahara could boost its dividends this year to SAR0.75/share (c7-7.5% yield) from SAR0.5/share last year given the substantial improvement in earnings YTD (9M2016 net income +209%), its extended debt repayment schedule (final repayment in 2026, only SAR123mn due in 2016) and its cash rich balance sheet (SAR1.6bn as of 30 June 16). The main downside risk here would be any debt covenants that the company has that are linked to dividends.

Youssef Husseini