• A weak set of results as shutdown takes its toll; maintain Neutral Sipchem reported very weak 4Q2015 results yesterday, mainly due to: i) lower prices (methanol -12% Q-o-Q, VAM –5%, AA –19%); ii) inflated costs due to the 45-day shutdown at the methanol plant; and iii) a 37% Q-o-Q surge in S,G&A expenses, likely due to end of year bonuses, in our view. Net income fell 64% Q-o-Q (-80% Y-o-Y) to SAR26 million, above our forecast of SAR23 million but lower than Bloomberg consensus of SAR38 million. While earnings were generally below consensus forecasts, we view this as a one-off quarter and believe operations at the methanol plant should improve considerably in 2016 post the major part replacements that took place during the shutdown. We maintain our Neutral rating on Sipchem for now, but plan to review our forecasts following the results.
• Shutdown has larger-than-expected impact on margins, drives miss On the operational level, earnings saw a substantial decline (gross profit -51% Q-o-Q, EBIT -81% Q-o-Q) and missed our forecasts as margins were much weaker than expected (gross margins of 11.7% vs 25.9% in 3Q2015 and EFGe of 17.1%) as the shutdown appears to have had a larger than expected impact on costs. On the other hand, revenues rose 8% Q-o-Q (18% above) despite the weaker price environment and the shutdown, implying a large amount was sold from inventory.
• 2016 will be challenging on weak prices and higher feedstock prices While we expect smoother operations next year following a spate of shutdowns in 2015, the pricing environment is really challenging for Sipchem and with feedstock costs rising this year, things will only get harder, in our view. Methanol (-60% Y-o-Y) and derivative prices have been among the most heavily impacted by weaker oil prices due to their strong correlation with oil, especially as global market supply for these products is long, further exacerbating the pressure on prices. With oil prices likely to remain muted in 1H2016, Sipchem’s earnings are unlikely to see a meaningful recovery in the short term.

Yousef Husseini