        Revenues: SAR1,053mn, -18% Y-o-Y, -21% Q-o-Q, -9% vs. EFGe
        Gross profit: SAR205mn, -55% Y-o-Y, -57% Q-o-Q, -44% vs. EFGe
        EBIT: SAR74mn, -76% Y-o-Y, -77% Q-o-Q, -69% vs. EFGe
        Net income: SAR40mn, -76% Y-o-Y, -78% Q-o-Q, -65% vs. EFGe
 
Sipchem reported its 4Q18 results this morning, with a very weak set of numbers as the shutdown at the methanol plant was a major drag. Net income fell 78% Q-o-Q to SAR40mn, well below our SAR112mn forecast, as the impact on volumes and margins from the shutdown was larger than expected. Lower prices across the board also contributed to the weaker performance (methanol -13%, VAM -10%, LDPE -7%), but the shutdown appears to have been the major factor by far. Revenues were SAR1.053bn, down 21% sequentially and 9% below our forecasts as volumes saw a large contraction on the shutdown, with lower prices adding further pressure. Gross margins fell to 19.4% (from 35.2% in 3Q18 and EFGe of 31.8%) as the shutdown appears to have inflated fixed costs per tonne substantially.
 
A bad set of numbers, with the shutdown weighing more heavily than we expected; but, as always, shutdowns can be quite tough to forecast, given numerous moving parts, so we are not concerned by the poor performance and are, instead, more focused on the medium-term outlook. We expect to see some rebound in earnings in 1Q19 as volumes bounce back, although the quarter will still be challenging and not a real gauge of the company’s earnings potential since methanol prices have fallen another 20% from 4Q18 average levels and as the new methanol expansion will still be ramping up. We are Buyers of Sipchem as we believe the expansion at the methanol plant is not fully priced in and that the stock offers value at normalised methanol price levels of USD350/t (the stock trades at 10-11x forward P/E at that price level). However, we acknowledge that prices are well below that level at the current time (cUSD290/t; c17% lower) and will need to rise by at least another 10% for the name to show its real potential. We will be keeping a close eye on methanol prices in the next few weeks as we are expecting a decent rebound in prices in March after the Lunar holidays in China, which could be a solid trigger for the stock, given their elevated operating leverage, especially with the stock having slightly lagged the rest of the sector YTD.

Yousef Husseini
 
SIPCHEM: SAR18.70 as of 12 Feb. 2019, Rating: Buy, TP: SAR26.00/share, MCap: USD1,828mn, SIPCHEM AB/2310.SE