• Strong turnaround across almost all operations… Sahara reported its 1Q16 results this morning with earnings recovering substantially Q-o-Q to SAR55 million (versus a loss of SAR48 million in 4Q15). Earnings were much better than our breakeven expectation as well as Bloomberg consensus (+47%). Part of the improvement was due to base effect as 4Q15 numbers included some one-offs, but the main reasons for the turnaround include: i) improved productivity and volumes at Al-Waha, which largely offset lower prices; ii) a decline in losses generated at its new projects as the restructuring and cost-cutting efforts have begun to bear fruit; and iii) an improvement in earnings at SEPC due to better volumes and prices, according to the announcement.
• …But we remain Neutral as risks are still elevated However, we would remain Neutral on the name given its historically poor operational track record and as the new projects are likely to continue to generate losses this year, especially as acrylic acid fundamentals are very poor. In addition, we are concerned about the significant volatility we have seen in the company’s earnings for the past few quarters as earnings reached SAR120 million in 3Q15, before plummeting to a loss of SAR48 million in 4Q2015 and then rising again to SAR55 million this quarter.
• SEPC and new projects drive beat Operating income of SAR59 million was in line with our forecast as higher-than-expected revenue (+7% vs EFGe) was offset by higher-than-expected S,G&A costs. The beat on earnings was largely due to better-than-expected earnings at the JV projects (SEPC, SAAC and SAMAPCO). This likely stemmed from a better-than-expected performance at SEPC on the back of higher-than-expected volumes and lower-than-expected costs. In addition, losses from the new projects were also likely not as bad as our expectations, although we had already assumed a solid improvement for the new projects Q-o-Q.

Youssef Husseini