• Earnings soar 72% Q-o-Q, well above consensus forecasts Yansab reported its 2Q16 results yesterday with a stellar set of numbers that beat our (+46%) and consensus forecasts (+62%). Net income surged 72% Q-o-Q to SAR689mn (+203% Y-o-Y) and operational numbers were just as impressive (gross profit +53% Q-o-Q, EBIT +56%), which the company attributed to higher selling prices (ethylene +10%, PE +4%, PP +12%, MEG flat) and increased production and sales volume. We also believe that a strong improvement in costs could have been another factor behind the substantial improvement Q-o-Q. The strong numbers reinforce our view that Yansab is among the few attractive opportunities left in the chemical space today, and we maintain our Buy rating.
• Several factors likely drove the massive beat The full financials are not yet available, but we believe lower-than-expected costs likely played a major role in the beat vs our numbers, which could have been driven by i) inventory lag (feedstock prices were much lower last quarter); ii) better cost efficiency; and iii) a higher-than-expected ethane contribution to the feedstock mix (ethane is lower cost than other feedstock alternatives). We also believe that higher-than-expected sales volume as well as higher-than-expected netbacks - which could have been driven by a larger-than-expected amount of sales to Europe where netbacks are higher – could have also contributed to the beat.
• 2Q results likely the high point of 2016, but 3Q should also be solid We expect that Yansab’s 2Q16 results are likely to be the strongest of the year, but we still expect a solid set of results in 3Q as prices and spreads have so far held up better than we expected, mainly as demand has picked up on restocking activity in Asia. We believe this could sustain in the short term as inventories remain relatively low and that this along with higher netbacks in Europe would support 3Q numbers. However, we caution investors that the recent rally in prices is likely to be temporary and that once inventory levels improve and new Asian supply hits the market in 2H16, prices and spreads are likely to fall back, in our view.

Yousef Husseini