• Earnings flattish Q-o-Q on lower feedstock; maintain Buy Yansab reported impressive 1Q16 results yesterday, despite generally weaker prices in 1Q (PE -1%, PP -8%). Net income of SAR401.9 million was stable Q-o-Q (+41% Y-o-Y) but well above our forecast (+25%) and Bloomberg consensus (+43%). It was able to generate solid earnings despite lower volume Q-o-Q (according to the announcement) as feedstock costs dropped (naphtha -21%) and MEG prices were slightly higher (+4%). Overall, a stellar set of numbers given the current price environment and we reiterate our Buy rating. We will review our forecasts once full financials are available.
• Lower-than-expected costs likely drove beat Full financials are not yet available, but we believe lower-than-expected costs was the most likely factor behind the beat. This could have stemmed from: i) lower-than-expected levels of high-cost inventory from 4Q (we assumed about 45 days of inventory); ii) better-than-expected cost efficiency and/or iii) more lower cost ethane in the feedstock mix. The huge jump in earnings Y-o-Y came despite much lower prices (MEG -19%, PE -6%, PP -20%) as spreads were higher on the significant drop in naphtha prices (-29% Y-o-Y) and as operations, feedstock mix and cost efficiency have likely improved considerably following the maintenance shutdown in 2Q2015 and the improvement in ethane supply since December 2015.
• 2Q should be even better, but we see some risks to 2H2016 earnings With the significant improvement in prices from 1Q16 levels (MEG +7%, PE +8%, PP +18%) we expect 2Q2016 results will be even better. Looking further ahead into 2H2016, we expect prices and spreads to come under pressure on significant supply coming to the market. We also believe the start-up of Sadara and additional ethane being allocated to Petro Rabigh II could strain current ethane supplies and as such we see risks of further ethane supply curtailments as was the case last year. On the upside, any strong upward movement in oil is likely to be very supportive.

Yousef Husseini