• Operating earnings rebound Q-o-Q on higher prices, miss estimates Sidpec reported its 2Q16 numbers this morning with net income of EGP193mn, down 11% Q-o-Q (-24% Y-o-Y) and 15% below our forecast. The weaker bottom line Q-o-Q was mainly due to base effect as 1Q16 numbers included an FX gain of EGP88mn, adjusting for this, we estimate net income would have risen 29% Q-o-Q. On an operational level, revenues surged 16% Q-o-Q but fell 5% short of our forecast, while gross profit improved 23% to EGP255 mn (-14% vs EFGe). The better operational numbers Q-o-Q were mainly due to better prices (ethylene+10%, PE +4%) which improved locally and in the international market. Overall, a disappointing set of numbers and we plan to revise our forecasts once full financials are available.
• Lower-than-expected revenues and margins drive miss Gross margins improved to 34.9% from 32.9% due to better pricing, but was somewhat disappointing as it was well below our 38.5% forecast. The lower-than-expected margins were likely a consequence of higher-than-expected costs, though it is not clear if this was due to higher feedstock prices or other factors. Full financials are not yet available, so it is not clear if the revenue miss was driven by lower-than-expected volumes or netbacks. We would be somewhat concerned if the revenue miss was due to lower-than-expected production as this would be the second consecutive quarter with the plant not operating at full rates.
• Expect 2H16 to be challenging too, feedstock revision a risk With oil prices retracing recently and new PE supply coming on line in the coming months, we expect PE prices will likely weaken in 2H16 so we expect earnings to remain challenged in the medium term. Furthermore, the company is still susceptible to further feedstock price hikes and could see more cost inflation as we get closer to the end of the year, as was the case in 2014 and 2015.

Yousef Husseini