Rating: Neutral
Target Price: SAR18.0
Closing Price: SAR15.2

Earnings fall Q-o-Q despite higher TiO2 prices, well below forecasts
Earnings fell 9% Q-o-Q to SAR94mn with operational numbers coming in flattish (gross profit -0.5% Q-o-Q) despite the substantial TiO2 price hikes during the quarter (prices on average increased cUSD150-200/tonne). Earnings were well below both our (-37%) and consensus forecasts (-34%). COGS appeared to have risen substantially Q-o-Q, offsetting revenue gains (+8% Q-o-Q) and driving the miss versus our estimate. The significant cost inflation was likely driven by higher chloride slag prices – Tasnee’s main feedstock – which appears to have increased more aggressively than we thought. We will review our numbers once the full financials are out to account for the higher-than-expected costs in the TiO2 division, but we maintain our Neutral rating for now.
 
Petrochemical operations weaken, as expected
Full financials are not yet available, so it is not clear how the company’s joint venture investments (SEPC- ethylene cracker, SAAC – acrylates complex and SPC – PDH based PP) performed, but based on the 2Q17 release we believe they declined Q-o-Q, which is in line with what we were expecting as weaker prices for PE and acrylates should have more than offset the improvement in PP to propane spreads (which would have boosted SPC’s earnings). 
 
We were wrong on 2Q, but we still believe margins will strengthen in 2H17
We had expected the strong TiO2 price hikes to translate into a stellar 2Q17, but higher-than-expected cost inflation prevented this from materialising. Despite the underwhelming numbers, we still think the TiO2 division could see a significant improvement as the year progresses. The global TiO2 market has gone from strength to strength YTD and the market tightness is likely to persist in the medium term as i) the peak demand season remains in full force during the summer; and ii) Huntsman’s Pori plant in Europe – which partially drove the shortage in European supplies – remains shuttered until 2018. While feedstock prices have also risen in 3Q17 so far, increases have been marginal and not as steep as the TiO2 price increases and as such, margins should expand going forward.