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SIDPEC - 2Q17: A taste of what’s to come; strong volume recovery drives earnings jump

Rating: Buy
Price: EGP25.0
Fair Value: EGP16.8

Earnings jump 83% Q-o-Q as volumes and margins recover, beat forecasts

Bottom-line earnings surged 83% Q-o-Q (+104% Y-o-Y) to EGP393mn and were substantially ahead of our EGP219mn forecast.  A significant jump in volumes was the main factor behind the sequential improvement, in our view, as revenues gained 31% Q-o-Q (+28% vs. EFGe). Margins, however, were also boosted (gross margin of 29.6% vs. 24.9% in 1Q17 and EFGe of 25%), likely due to significant improvement in operating rates and productivity, which would have reduced costs, in addition to stronger European PE prices (+5% Q-o-Q). We view this quarter as an indication of the potential earnings that Sidpec could generate next year once the plant is fully operational (this year has been marred by low rates and shutdowns, including one in 3Q17). The stock is trading at c6x 2018 P/E, well below its peers; hence, we reiterate our Buy rating.
Higher-than-expected volumes drive beat; numbers imply ETHYDCO contributed to 2Q

The massive beat was due to much higher-than-expected volumes, as we had assumed volumes would be in line with 1Q17 levels, as management had previously indicated operating rates were likely to remain low until after the shutdown in 3Q17, but it appears the plant was going at full tilt during the quarter. We estimate operating rates were close to 105%, based on our model, vs. our expectation of 80% (in line with the budgeted volumes). Full numbers are not yet available, but we suspect ETHYDCO was included in the earnings this quarter for the first time, based on the fact that net income before taxes was 16% higher than gross profit, while -as typically- gross profits are in line or slightly higher than earnings before taxes.
Looking ahead: 3Q17 earnings to pull back on shutdown, but smooth sailing thereafter

We expect earnings to see a substantial correction in 3Q17, on the back of the month-long maintenance shutdown during July. However, with the plant expected to restart imminently, we believe earnings will normalise in 4Q17, at which point, operating rates should return back to their historic levels (100%+) and possibly even higher, given some of the enhancements expected to take place during the shutdown.

Yousef Husseini