• Maintain FV, downgrade to Neutral as upside is limited We raise our 2016-2018 EPS forecasts by 4% on average for Sidpec as we up our EGP forecasts, although this was partially offset by higher cost forecasts. Our FV remains unchanged at EGP13.5/share as the marginal increase in our forecasts was offset by an increase in our cost of equity by c200bps. We no longer believe that Sidpec is an ideal FX hedge in light of the heightened operational risks and we downgrade our rating to Neutral.
• Operational risks outweigh value as an EGP hedge We believe that potential operational downside risks could outweigh any value the stock offers as an FX hedge. First off, the company’s feedstock costs have been climbing the last few years and we see risks of further price increases (we assume a base price of USD5/mmBtu starting in 2017). Secondly, labour costs have been inflating at more than 20% annually. Thirdly, production has been on a downtrend (PE production –5% CAGR since 2013) raising the question of declining productivity at the plant. Finally, sales in the local market are already sold at premium that reflects the black market EGP rate, implying that current PE prices in the Egyptian market are already reflecting a post devaluation price.
• Is gas supply at risk after the start-up of ETHYDCO? We think so… Historically, Sidpec has not suffered from any gas supply issues, but we are concerned that the recent start-up of 20%-owned ETHYDCO – which will require c50% more ethane feedstock than Sidpec currently consumes – could constrain supply at the plant. In 2Q16, ethylene production declined 41% Q-o-Q and 47% Y-o-Y as the company diverted some feedstock to ETHYDCO for its trial run (Sidpec was compensated with ethylene). Management believe that this is only temporary and that ETHYDCO has its own dedicated ethane supply, but we are concerned by this especially as a recent article by MEES claims that it is unlikely that the required 45mn cfd of ethane required will be available in the foreseeable future. As such we highlight this as another potential risk investors should keep their eye on.

Yousef Husseini