Revenue: SAR1.6bn, -25% Y-o-Y, -23% Q-o-Q, +2% vs. EFGe
Gross Profit: SAR349mn, -61% Y-o-Y, -58% Q-o-Q, -33% vs. EFGe
EBIT: SAR200mn, -74% Y-o-Y, -72% Q-o-Q, -53% vs. EFGe
Net income: SAR234mn, -63% Y-o-Y, -60% Q-o-Q, -46% vs. EFGe
 
Yansab reported its 4Q18 results highlights last Thursday with earnings plummeting 60% Q-o-Q to SAR234mn, well below our SAR433mn forecast and Bloomberg consensus forecasts of SAR511mn. The large pullback in profits was primarily due to: i) a major shutdown at the MEG plant during the quarter, which impacted both volumes and costs negatively; ii) a large decline in prices (PE –8%, PP –5%, MEG –17%) and iii) stable feedstock costs despite the correction in oil prices as higher cost inventory from 3Q18 likely spilled over into 4Q. 
 
Revenues of SAR1.6bn were down 23% Q-o-Q, due to lower volumes on the shutdown and the lower prices, but were broadly in line with our forecast (+2%). Gross margins of 21.5% (vs 39.8% in 3Q18) however, were substantially below our 33% forecast. 
 
We speculate that the lower-than-expected margins could have been a result of several factors, including: i) higher-than-expected impact from the shutdown, which could have inflated fixed costs per tonne beyond our expectations; ii) higher-than-expected cost of feedstock, as higher cost inventory from the previous quarter appears to have had a larger impact than we expected and iii) lower-than-expected prices as the demand environment was quite weak during 4Q18 due to the plunge in oil prices and concerns on a global slowdown, so the company could have offered discounts to maximise their volumes during the quarter. 
 
Our view: A bad set of numbers that could spill into 1Q19, 2Q19 the real benchmark. Overall, a really bad set of numbers, but we would take them with a pinch of salt given the shutdown and as 4Q18 margins were squeezed from both sides given that feedstock prices were lagging the correction in product prices. We believe earnings will see a strong rebound in 1Q19 as feedstock prices have corrected substantially since then (current propane prices are c30% lower than October levels) but we still expect it to be a very challenging quarter in light of the weak pricing environment and as the impact of the shutdown in 4Q could spill into 1Q19, as per the company’s original release discussing the shutdown. As such, we believe 2Q19 will be the real benchmark for the company’s true earnings potential going forward as we expect the plant to be operating at full rates and as prices should see some improvement following the huge global destocking wave witnessed in the sector during 4Q18, especially as demand tends to pick up after the Chinese New Year’s Holiday in February. 
 
What does this mean for SABIC and the rest of the sector? We expect that SABIC will likely report on Sunday morning (EFGe net income of SAR5.1bn) and based on the numbers reported by petchem players so far (Kayan, SIIG, Yansab), it appears likely that earnings will disappoint ours and the markets expectations (Bloomberg consensus of SAR5.3bn) as margins have so far been much lower-than-expected, which as mentioned we believe could be due to a lack of correction in feedstock costs due to lag as well as potentially lower-than-expected pricing given a very weak demand environment in 4Q18. We expect this same trend is likely to play out in the rest of the sector as well, given that the majority of producers are exposed to liquid feedstocks as well and are thus likely to see a similar squeeze in margins. As such, we reiterate to investors that tactically, petchems are not an ideal play in the short term. (Yousef Husseini, company)
 
YANSAB: SAR65.30 as of 23 Jan. 2019, Rating: Buy, TP: SAR77.00/share, MCap: USD9,795mn, YANSAB AB/2290.SE