• Retroactive energy price hike stifles margins; earnings miss forecasts Sidpec reported its 4Q2015 results today, with net income falling 27% Q-o-Q to EGP177 million, mainly on the back of a large compression in margins (gross margins of 31.4% versus 41.9% in 3Q2015, see fig. 1). Earnings missed our forecasts by 25% (-13% on the operating level), although this included some one-off provisions taken during the quarter; if we were to adjust for these provisions, bottom-line earnings would have been only c10% below our forecast. According to management, the large compression in margins was driven by a retroactive adjustment to energy costs (feedstock, fuel, etc.) as the government decided to increase these costs for 2015. Margins were also affected by lower prices Q-o-Q (Asian and European PE down 10%).
• We maintain our DPS forecast of EGP1.3/share, implying 12.4% yield Despite the earnings miss, we maintain our DPS forecast for 2015 at EGP1.3/share, implying a 90% payout on FY2015 earnings, in line with the payout of previous years. The main risk to dividends is the company’s planned Port Said project (200,000tpy ethylene, cost of USD600mn) as management has not yet decided how they will finance the project. Based on our discussions with management, we expect the dividend will be maintained at the high payout this year as the project remains in the very early stages, and no full capex plan has yet been laid out for it, i.e., shareholders are likely to push for a high payout at the AGM.
• What to do with the stock: Value is still there, but be cautious We have a Buy rating on Sidpec and still see value in the stock, even after the feedstock price hike, but recommend that investors take a cautious approach with the company, given the retroactive cost increases. At this point, it is too early to know if another hike in costs will be forthcoming next year, and given that the company has had its feedstock costs retroactively adjusted twice in the last two years (2014 and 2015), the downside risks are substantial, and as such, it could be justified that the company trades at lower multiples than it has historically, given the lack of visibility.

Yousef Husseini