Rating: Neutral
Target Price: SAR18.5
Closing Price: SAR14.7

Shutdowns drive earnings sequentially lower, but ahead of forecasts 
Earnings fell 35% Q-o-Q to SAR60mn due to the extensive shutdown schedule during the quarter (CO, AA and VAM plants were all down for maintenance) as well as falling prices for most of its products (methanol -21% Q-o-Q, EVA -6%, LDPE -7% - VAM and BDO were the only exceptions). Earnings, however, were significantly ahead of our SAR22mn forecast as margins were surprisingly resilient. Overall, a much better-than-expected set of numbers but we still see challenges ahead in light of a lacklustre price environment and it remains unclear whether the margin level is sustainable. We maintain our Neutral rating.
 
Sales tumble and miss forecasts, but margins surprise positively
Revenues fell 23% Q-o-Q to SAR918mn, missing our forecast by 4% as sales volume likely plummeted due to the shutdowns. Gross profit and EBIT fell 20% and 24% Q-o-Q, respectively but were substantially ahead of our forecasts. The main surprise in the results was very strong margins, with gross margins at 30.6% (vs EFGe of 20.8%), improving from 29.4% in 1Q17, despite the significant pullback in product prices as well as an extensive shutdown schedule during the quarter. While we are impressed with the reported margin level (the highest reported margin since 4Q14) it remains unclear what drove the margin enhancement and whether it is sustainable. If the margin improvement was a consequence of cost cutting or a substantial improvement in VAM/BDO margins following the recent increases, then this bodes well for 2H17 when all plants should be operating at full utilisation.
 
2H17 price outlook: Prices bottomed, but no near-term catalysts other than oil
We believe that chemical prices have largely bottomed in 2Q17 and could see some improvement following the recent uptick in oil prices which could stimulate some pre-buying. However, outside of the higher oil price we see limited catalysts in the ST. In methanol and derivatives, supply is likely to increase as Iran starts up its mega complex in 3Q, which will likely put some downward pressure on Chinese prices, especially as demand doesn’t tend to pick up until 4Q. For LDPE, inventory levels remain relatively high, more supply is expected in 3Q and demand doesn’t tend to pick up until around September/October. VAM is the only product with some momentum as some supply issues in Asia have provided support, but even here demand has been underwhelming.   

Yousef Husseini