In-line results, higher gross margin offset by high opex



SABIC reported an in-line set of 1Q17 results with a net income of SR5.24bn. Net income increased 80.1% YoY and 51.4% QoQ. We believe higher than expected gross margin was mitigated by higher opex. Gross margin stood at 37.2% in 1Q17, higher than our estimate of 31.3% but in-line with 37.1% in 4Q16. Opex stood at SR5.4bn in 1Q17, higher than our estimate of SR3.5bn due to reclassification of expenses to SG&A.

SABIC reported an in-line set of 1Q17 results with a net income of SR5.24bn, increasing 80.1% YoY and 51.4% QoQ. The results were also in-line with the consensus estimate of SR5.4bn. We believe higher than expected gross margins were mitigated by higher opex.

Gross margin came in at 37.2% in 1Q17, higher than our estimate of 31.3%. This is also higher than 30.2% in 1Q16 but in-line with 37.1% in 4Q16. We believe the YoY increase in gross margin is attributed to 1) higher petrochemical segment margins on an increase in PP-propane spreads (+20.3% YoY) and 2) higher fertilizer margins on an improvement in urea prices (+24.8% YoY). We believe the variance in gross margin against our estimate is mainly due to reclassification of expenses from COGS to SG&A.

Operating profit stood at SR8.4bn in 1Q17, in-line with our estimate. We believe higher than expected gross margin was mitigated by higher opex, as certain expenses have been reclassified to SG&A. Opex stood at SR5.4bn, higher than our estimate of SR3.5bn, but lower than SR6.3bn in 4Q16.

Higher operational efficiency, strong balance sheet and an attractive dividend yield of 5.0% are the key strengths of the stock. The stock is trading at a 2017E P/E of 15.6x, lower than the sector average of 16.6x.


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