• Earnings recover significantly, better than expected Sipchem reported its 1Q2016 results this morning, with a better-than-expected set of numbers (net income +28% versus EFGe, +36% versus consensus) as earnings were boosted by improved productivity after the maintenance shutdown in 4Q2015. Clean earnings came in at SAR72 million (reported earnings were SAR51 million and included a SAR21.5 million provision on asset write-downs), down 10% Y-o-Y, but much better than the SAR26 million reported last quarter and our forecasts. Gross profit of SAR229 million was almost flat Y-o-Y (-2%), an impressive achievement, in light of prices being down 18% Y-o-Y and feedstock costs having escalated following the increase in methane prices in Saudi Arabia.
• Costs improve substantially post shutdown Revenues of SAR892 million (+8% Y-o-Y, +2% Q-o-Q) were in line with our forecasts (-1%), with the beat coming from much lower-than-expected costs, which appear to have improved substantially following the maintenance shutdown conducted in 4Q2015 on the methanol plant. To put this in perspective, COGS/sales at 52% were in line with 3Q2015 levels, when prices were more than 20% higher and feedstock costs were lower, implying that cost efficiency and productivity at the plant have seen substantial improvement. EBITDA margins of 40% were much better than our 33% forecast on the back of this cost improvement.
• Is this sustainable? Partially, but we remain Neutral for now The most important question is whether the cost improvement is sustainable. Our view is that part of the improvement is sustainable, but that productivity is likely to decline from here. Historically, Sipchem’s costs have improved dramatically in quarters following shutdowns and then normalised in the subsequent quarters. As such, while we think costs are likely to be better than last year when operational issues plagued the methanol plant, we doubt the sustainability of costs at the 1Q2016 levels. We remain Neutral as we still expect this to be a challenging year, in light of weak prices, and as we see risks of further feedstock cost increases.

Yousef Husseini