we have revised our estimates on sabic. we sabic n ... · ethoxylates, detergent alcohols 2018...

Saudi Basic Industries Corp Petrochemicals – Industrial SABIC AB: Saudi Arabia

15 June 2016

Rating NEUTRAL

Target price SAR78.0 (-4.4% upside)

Current price SAR81.60

Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

Key themes & implications

We have revised our estimates on SABIC. We believe petrochemical prices are likely to remain subdued going forward as significant new capacity additions boosts supply. Recovery in metal segment will be protracted. The fertilizer segment’s bottom line will remain under pressure on lower product prices and hike in feedstock costs. We arrive at a target price of SAR78 on the company and rate the stock Neutral.

Share information

Market cap (SAR/US$) 244.8bn / 65.28bn

52-week range 60.88 - 103.9

Daily avg volume (US$) 168mn

Shares outstanding 3,000mn

Free float (est) 21%

Performance 1M 3M 12M

Absolute -3.1% 6.2% -20.9%

Relative to index -1.2% 3% 10.1%

Major Shareholder:

Public Investments Funds (PIF) 70.0%

GOSI 5.7%

Valuation

12/14A 12/15A 12/16E 12/17E

P/E (x) 10.5 12.5 15.6 14.1

P/B (x) 1.5 1.5 1.5 1.5

EV/EBITDA (x) 5.8 6.6 7.9 7.3

Dividend Yield 6.7% 6.7% 6.7% 6.7% Source: Company data, Al Rajhi Capital

SABIC N: Revising estimates We have revised our estimates on SABIC to take into account the latest

developments in the sector. Significant new petrochemical production capacity

expected to become operational globally over the next few years along with

slow global manufacturing activity is expected to ease the current tight supply-

demand situation. Thus, even if crude oil prices rally from the current levels,

we do not expect a similar rise in petrochemical product prices, but will likely

result in lower spreads on naphtha and pressure on margins. With no

significant new capacity additions in the near future, SABIC’s revenue and

profit growth will primarily be driven by product prices and change in

spreads. Based on revised estimates, our target price is SAR78 per share and

we rate the stock Neutral.

Growth to be restricted by subdued pricing environment: Ethylene prices

hit an 8-month high recently on the back of a tight demand-supply scenario.

However, we expect the situation to change as significant new capacity is likely

to become operational over the next few years. IHS Chemical estimates 24mn

tons of new PE capacity to become operational between 2015-2020 (~17% of

2015 global consumption), led by US and China. The new capacities will compete

with Middle Eastern exports and keep product prices in check. In addition, there

is limited capacity expansion in the foreseeable future, which will limit volume

driven growth. As a result, we expect SABIC’s revenue to be mostly flat,

CAGR:+1.6% during 2015-18.

Relative advantage to improve on oil recovery: SABIC has a diversified

feedstock base compared to Saudi-based peers and has Ethane (fixed priced) as

a major part of its feedstock. With the sharp fall in naphtha prices, the

company’s competitive advantage has reduced compared to its global peers. As

crude oil prices recover, consequently pushing naphtha prices higher, SABIC will

see slight increase in costs but will improve its relative advantage over global

majors which could give it a higher valuation multiple relative to peers.

Valuation: SABIC is currently trading at a 12-month forward PE of ~15.7x

according to Bloomberg consensus estimates, higher than its historical average.

The current valuation is at a similar level seen in 2009, when the global

economy was recovering from the financial crisis. We believe there is limited

upside in the stock from the current levels. Based on our revised estimates, we

arrive at a target price of SAR78 on SABIC. As the stock is already trading at

SAR81, we rate the stock Neutral. Nevertheless, the stock will continue to trade

range bound with volatile oil prices in the short-term offering investment

opportunities as investors use the stock as a proxy to position portfolios based

on oil price movements.

Period End (SAR) 12/13A 12/14A 12/15A 12/16E 12/17E

Revenue (mn) 188,986 188,989 148,086 136,023 148,271

Revenue Growth 0.0% 0.0% -21.6% -8.1% 9.0%

Gross profit margin 29.3% 27.2% 29.1% 26.9% 27.6%

EBITDA margin 30.1% 27.8% 30.4% 28.3% 28.4%

Net profit margin 13.4% 12.4% 13.2% 11.5% 11.7%

EPS 8.43 7.78 6.52 5.24 5.81

EPS Growth 2.0% -7.6% -16.3% -19.7% 10.9%

ROE 16.8% 14.7% 12.1% 9.7% 10.8%

ROCE 15.0% 13.3% 10.7% 8.3% 9.7%

Capex/Sales 6.1% 8.0% 12.3% 12.0% 11.0% Source: Company data, Al Rajhi Capital

Research Department Pritish Devassy, CFA

Tel +966 11 2119370, [email protected]

Key highlights

1) Petrochemical spreads to reduce on expected

increase in supply, mainly from US and China

2) However SABIC will see comparative advantage due

to majority of its feedstock being fixed priced ethane

feedstock.

3) European business providing cushion due to high

ethylene-naphtha spreads, despite domestic plants

facing margin pressure.

4) Top-line growth will be restricted with limited volume

growth, as well as subdued product prices.

5) Steel segment will continue to put pressure on the

bottom line.

Risks

1) Oversupplied market leading to sharper than

expected fall in margins.

2) Continued losses in the steel business impacting the

bottom line.

Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016

Disclosures Please refer to the important disclosures at the back of this report. 2

Increasing profitability of European businesses With the sharp fall in crude prices resulting in similar decline in naphtha prices, we estimate

the profitability of the company’s European business (one fourth of total sales) would have

increased, offsetting the lower profitability of the Saudi manufacturing facilities (on the back

of mostly fixed feedstock costs). The lower naphtha prices, in addition to falling energy and

other commodity prices has boosted the profitability of the European manufacturing

facilities, which generally lie near the last quartile of the cost curve. The average naphtha-

ethylene spread in Europe increased from ~US$375 per ton in 2014 to ~US$560 per ton in

2015. This increase in spread would have directly benefitted the bottom line. We believe this

is the prime reason that SABIC’s petrochemical segment’s net profit margin was stable in

2015 (at 12.2%), even while its subsidiaries Saudi Kayan and Yansab posted sharply lower

margins. Going forward however, this trend is likely to reverse as crude oil prices recover,

pushing naphtha prices higher. In a situation of rising crude prices, the company’s Saudi

plants, with mostly fixed feedstock prices, will see an increase in their competitive advantage,

and balance the fall in margins of the European business.

Figure 1 European ethylene-naphtha spread remains elevated

Title:

Source:

Please fill in the values above to have them entered in your report

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

Ethytlene Naphtha Europe avg. spread 2014 avg. spread 2015 YTD 2016 Source: Bloomberg, Al Rajhi Capital

Petrochemical prices to be subdued

Petrochemical product prices did not drop as sharply as the fall in feedstock prices (following

the fall in crude oil prices), as the petrochemical market was more balanced in terms of

demand and supply, taking outages into account. Ethylene prices cooled down recently after

hitting an eight-month high in March 2016 on tight supply scenario. As a result, the

correlation between oil and petrochemicals has dropped since the fall in oil prices (mid

2014).

Figure 2 Correlation between ethylene and brent crude Figure 3 Ethylene prices have been trending higher

Title:

Source:


0.72

0.74

0.76

0.78

0.8

0.82

0.84

0.86

Since 2008 Since 2012 Since 2014

Title:

Source:


0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16

US$/ton

Ethylene fob Japan spot price

Ethylene spot North West Europe delivered (CIF)

Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital



However, we believe this is about to change with significant new capacity expected to become

operational in US and China between 2016-2018. Further, we have no reason to think that

there will be any dramatic change in supply outages seen in the past couple of years. If at all,

they will only improve, further easing the situation. Any supply readjustment in the market

will take longer than before as the erstwhile high cost producers in Asia and Europe still are

enjoying higher margins as indicated by their ethylene – naphtha spreads (see figure 4). As a

result, we don’t expect petrochemical product prices to recover sharply even if crude oil

prices rally from here. Any rally in oil and consequently naphtha prices will lead to lower

spreads, putting pressure on margins.

Figure 4 Ethylene-Naphtha spread

Title:

Source:


0

100

200

300

400

500

600

700

800

900

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Source: Bloomberg, Al Rajhi Capital

New capacity to become operational in US In the US, a wave of new capacity announced on the back of the shale gas boom, is likely to

become operational in 2017-2018. Most of these announcements were made between 2011-

2013, when a boom in natural gas production from shale lowered ethane prices in the region,

providing increased cracking spreads and boosting investment in the industry.

Figure 5 US new petrochemical capacity

Company Location

C2 capacity

('000 tons/year) C2 downstream ('000 tons/year)

Start- up

schedule

Chevron Phillips Chemical

Cedar Bayou,

Texas 1500

500 Bimodal HDPE, 500 mLLDPE

at Sweeny Mid-2017

Dow Chemical Freeport, Texas 1500

400 ELITE PE, 350 LDPE, 320

elastomers, 200 EPDM H1 2017

ExxonMobil Chemical Baytown, Texas 1500

650x2 mLLDPE plus LLDPE at

Mont Belvieu H2 2017

Formosa Plastics

Point Comfort,

Texas 1590

525 PE unspec, 625.5 LDPE, 1,000

MEG 2017/2018

Occidental

Chemical/Mexichem Ingleside, Texas 544 Feed into existing 1,050 VCM Q1 2017

Sasol

Lake Charles,

Louisiana 1500

450 LDPE, 450 LLDPE, 300

EO/EG, 300

ethoxylates, detergent alcohols 2018 Source: ICIS, Al Rajhi Capital

China: From consumer to competitor Significant capacity is also expected to become operational in China in 2016-2017, as the

country targets to achieve self sufficiency in the petrochemical industry. However, with crude

prices trading below the US$50 per barrel, the economics of the CTO and MTO

manufacturing units is not compelling. As a result, there is a possibility of some delay in new

capacities. Nevertheless, with contracting manufacturing activity (as indicated by PMI data)



and growing petrochemicals production, import demand will remain subdued. Import of

major products like polypropylene and polyethylene has been steadily falling, on the back of

rising domestic production. Polyethylene imports have declined 3% y-o-y in Q1 2016 to

2.4mn tons, while polypropylene imports fell by a sharp 23% to 1mn tons.

Figure 6 China polypropylene plant starts, 2016

Plant Name Type Capacity (mt/year)

H1 2016

Fujian Meide Petrochemical PDH 300,000

China Coal Mengda New Energy PP, Ordos CTO 300,000

Shenhua Xinjiang Coal Liquefaction CTO 300,000

Total 900,000

H2 2016

Ningbo Fortune PP, Ningbo PDH 400,000

Fund Energy PP, Changzhou MTO 300,000

Qinghai Damei Coal PP, Xining City CTO 400,000

Huating Meiyue MTO 200,000

Jiutai Energy PP, Ordos MTO 350,000

SINOPEC Zhong Tian He Chuang Energy PP 1, Ordos CTO 350,000

SINOPEC Zhong Tian He Chuang Energy PP 2, Ordos CTO 350,000

Total 2,350,000 Source: Platts, Al Rajhi Capital

Given the capacity likely to build up, the direction of prices is likely to depend on the

robustness of demand in our view, and how country transforms to a consumption led

economy. Overall China continues to be a key market for the region. Declining PMI and

competition from Iran are likely to be an important factor in 2016. Already in 1Q16 china

there was a shift in import patterns from Saudi to Iran and Oman in Methanol (y-o-y). The

other regions in the US, Europe still continue to be seeing stable demand.

Figure 7 China PMI remains in contraction mode Figure 8 China increases methanol imports from Iran

Title:

Source:


45

46

47

48

49

50

51

Title:

Source:


-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Q1 2015 Q1 2016

Source: Bloomberg Source: Platts, Al Rajhi Capital

Cost curve shifts down Despite many producers in the US and EU switching to ethane/ LPG, ethylene costs will

continue to be predominantly set by naphtha, which makes up two thirds of feedstock

globally. But, naphtha cost curve has declined dramatically along with the fall in oil prices,

which means lesser upward pressure on prices.



Figure 9 Ethylene cost curve

Source: Lyondellbasell and Bloomberg

While the above was primarily with regard to ethylene, this phenomenon will be more

pronounced in the case of propylene and its related products. As capacities are gradually

being built, propylene prices have seen lower increase in prices as compared to ethylene

because of the increase in PDH capacities. The phenomenon seen with ethylene from 2010-

2014 will repeat in 2016-20 for polypropylene [see chart below]. Increasing exports of

propane from US, will put downward pressure on costs, which is expected to lead to

weakness in prices of propylene. Already we see that the propane exports from US to China

have increased significantly.

Figure 10 Ethylene and Polypropylene prices in Asia

Title:

Source:


0

500

1,000

1,500

2,000

2,500

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

US$/ton

Polypropylene (US$/MT) Ethytlene (US$/MT)

Source: Company data, Al Rajhi Capital

Cost advantage on fixed feedstock While newer capacity being built in Saudi is likely to be naphtha based, ethane will continue

to be by far the dominant feedstock in Saudi and for SABIC (see figure 11). Globally,

increasing naphtha prices (linked to oil) will reduce spreads but relative cost advantage is

likely to be maintained for SABIC (with fixed low ethane/methane feedstock prices). Broadly,

while global petrochemical firms are likely to see downward pressure on spreads, SABIC’s

petrochemical segment will relatively do better taking only spreads into consideration.



....but equally important factors other than just spreads Generally ethylene-naphtha and ethylene-ethane spreads are tracked closely because the

profits of the companies follow this trend. However it is important to see that “Other COGS”

are an important element, constituting a higher percentage of costs (75% of total COGS).

Recovery in steel segment The steel segment posted a loss of ~SAR1.5bn in 2015, compared to a profit of ~SAR1.4bn in

2014. This is primarily due to the sharp ~20% y-o-y fall in average realization price for the

company in 2015. As production costs are mostly fixed, the fall in product prices directly

flows down to the bottom line. Further, sales volumes were also lower in 2015.

Figure 11 Steel sales volume and average realization Figure 12 Steel segment revenues and margins

Title:

Source:


5.4

5.7 5.7

5.6

-

500

1,000

1,500

2,000

2,500

3,000

5.3

5.3

5.4

5.4

5.5

5.5

5.6

5.6

5.7

5.7

5.8

2012 2013 2014 2015

SAR/tonmn tons

Sales volumes Realization (RHS)

Title:

Source:


14.3%12.4%

10.0%

-13.7%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-

200

400

600

800

1,000

1,200

1,400

1,600

2012 2013 2014 2015

Revenues Net prof it margin (RHS)

Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Steel prices have been under pressure over the past few year on the back of the sluggish

demand and consequently increased exports from China, which alone accounts for ~50% of

the global production. China recently pledged to reduce its steel capacity by 100-150mn tons

(~10% of its capacity) over a period of 5 years, but that is unlikely to materially change the

demand-supply mismatch. Nevertheless, Chinese steel prices recovered sharply in Q1 2016

on the back of falling production as well as record low inventory levels, which created a tight

supply situation, allowing global steel prices to recover as well. In addition, demand is also

now expected to be stronger than earlier on the back of strong credit growth in China, strong

economic growth in US and India. Though steel prices have again cooled down, they are not

expected to go back to their 2015-end lows. We are of the view that 2016 steel prices are likely

to average higher than Q4 2015 and move higher in 2017 as the global economy recovers and

high cost producers shut shop.



Figure 13 China monthly steel exports Figure 14 Mainland China HRC steel prices and inventories

Title:

Source:


0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

'000 tons

Title:

Source:


0

100

200

300

400

500

600

700

-

1,000

2,000

3,000

4,000

5,000

6,000

Ma

y-11

Aug

-11

Nov-1

1

Fe

b-1

2

Ma

y-12

Aug

-12

Nov-1

2

Fe

b-1

3

Ma

y-13

Aug

-13

Nov-1

3

Fe

b-1

4

Ma

y-14

Aug

-14

Nov-1

4

Fe

b-1

5

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

000'tonsUSD/tonne

Inventories (RHS) Price

Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital

Financials

Revenue to slip further in 2016 and recover from 2017 SABIC’s revenue growth has been mostly flat between 2012-2014 (see chart below), before

falling 21% y-o-y to SAR149bn in 2015 on the back of a sharp decline in product prices.

Petrochemical segment sales, which account for more than 85% of the company’s total

revenues, were flat during the 2012-2014 period. In 2015, petrochemical segment revenues

fell 21% y-o-y on the back of the sharp fall in product prices. Fertilizer and Metal segment

revenues also fell sharply in 2015, due to the sell-off in commodity prices. Nevertheless, the

fall in revenues has been restricted partly due to higher sales volumes in the Petrochemical

and Fertilizer segments. We expect revenues to fall ~8% y-o-y in 2016 on the back of

continued weakness in product prices across all product segments. However, we expect the

company’s topline to improve from 2017 onwards, supported by recovery in crude and

product prices as well as higher utilization. Nevertheless, as product prices are not expected

to recover sharply, even if crude oil price surge, SABIC’s revenue growth will be mostly flat in

the mid to low single digits in the foreseeable future.

Figure 15 Revenue and growth data Figure 16 Segmental sales volumes

Title:

Source:


-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2011 2012 2013 2014 2015 2016E 2017E

SARmn

Revenue y-o-y growth (RHS)

Title:

Source:


0

5

10

15

20

25

30

35

Chemicals Polymers Innovative plastics

fertilizers metals

2012 2013 2014 2015

Source: Company data, Al Rajhi Capital Source: Argaam, Company data, Al Rajhi Capital



Margins expected to be slightly down in 2016 SABIC’s gross profit margins have been mostly flat over the last four years, as the sharp fall in

product prices have been offset by lower feedstock prices. The falling price of naphtha

benefited the company’s European operations, which offset the impact of contracting

margins in the domestic petrochemicals business as well as metals and fertilizer segments. As

a result, the petrochemical segment’s gross profit margin has improved from 18.5% in 2012 to

19.5% in 2015. We believe the segment’s gross margin is likely to remain lower over the next

few years. A recovery in crude prices is likely to lower petrochemical product spreads, but this

will partly be offset by improved margins from the domestic fixed feedstock pricing

(ethane/methane) production facility.

The fertilizer segment’s gross profit margin has slipped from 62.8% in 2012 to 45.5% in 2015,

on the back of the sharp drop in product prices. The segment’s margins will come under

further pressure in 2016 due to the upward revision in feedstock prices (primarily methane)

along with continued weakness in product prices, due to oversupply. Nevertheless, post 2016,

the segment’s margin is expected to remain stable. The metals business division has moved

into the red as gross margin fell from 20.2% in 2012 to -7.2% in 2015 on the back of the sharp

fall in steel prices, due to continued oversupply from China. The segment’s profitability is

expected to improve in 2016 with steel prices recovering from their lows. However, the

segment is unlikely to contribute much to SABIC’s bottom line due to continued oversupply

situation.

Dominated by the petrochemical segment, SABIC’s net profit margin has also been

comparatively flat, moving from 13.1% in 2012 to 12.6% in 2015. Adjusted for a one-off

charge impairment charge, the net profit margin stood at 12.8%.

Figure 17 Segment gross profit margin Figure 18 SABIC net profit and net profit margin

Title:

Source:


-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2012 2013 2014 2015

Petrochemicals Fertilizer Metals SABIC

Title:

Source:


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013 2014 2015 2016E 2017E

Net prof it NPM (RHS)


ROE vs COE SABIC’s return on equity has slipped from 17.5% in 2012 to 12.1% in 2015 (adjusted for one-

off impairment). We expect the company’s ROE to slip further in 2016 to less than our

estimated cost of equity for the company of 11.3%. The company’s ROE is expected to recover

slightly in 2017 on the back of measures taken to improve efficiency and recovery in

commodity prices. Nevertheless, we believe the difference between its ROE and COE will

remain low in the foreseeable future. DuPont analysis indicates that lower leverage has been

consistently contributing to the fall in ROE. Return on capital employed has followed a

similar trend at 10.5% in 2015, compared to 14.4% in 2012. The ROCE is expected to fall

further in 2016E and recover from 2017.



Figure 19 Du Pont analysis of ROE

Particulars 2011 2012 2013 2014 2015

NPM 15.4% 13.1% 13.4% 12.4% 12.7%

Asset turnover 0.57 0.56 0.56 0.56 0.45

Eq. multiplier/leverage 2.41 2.32 2.16 2.11 2.02 Source: Company data, Al Rajhi Capital

Figure 20 ROE vs COE Figure 21 ROCE vs WACC

Title:

Source:


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2012 2013 2014 2015 2016E 2017E

ROE COE

Title:

Source:


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2012 2013 2014 2015 2016E 2017E

ROCE WACC


Valuation

SABIC is currently trading at a 12-m forward PE of ~15.7x (Bloomberg consensus), which is

around the same level witnessed in 2009, when the global economy was beginning to recover

from the financial crisis. Based on our estimates, the stock trades at 17x its 2016 earnings and

13.8x its 2017 earnings. SABIC is trading at a premium to its regional and international peers,

which trade at an average PE of ~15x 2016 earnings, as well as a premium to its historical

average. We have used a weighted average of DCF (80% weight) and PE (20% weight) to

arrive at a target price of SAR78 on SABIC. As our target price provides a negligible potential

upside from current levels, we lower our rating on the company to Neutral.

Figure 22 SABIC 12-month forward PE chart

Title:

Source:


0

2

4

6

8

10

12

14

16

18

0

20

40

60

80

100

120

140

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Price 12m forward PE (RHS)

Source: Bloomberg, Al Rajhi Capital



Income Statement (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E

Revenue 188,986 188,989 148,086 136,023 148,271

Cost of Goods Sold (133,687) (137,511) (105,058) (99,474) (107,348)

Gross Profit 55,299 51,477 43,028 36,550 40,923

Government Charges

S.G. & A. Costs (12,760) (13,746) (13,728) (14,051) (14,456)

Operating EBIT 42,539 37,731 29,300 22,498 26,466

Cash Operating Costs (132,156) (136,496) (103,073) (97,589) (106,180)

EBITDA 56,830 52,493 45,013 38,434 42,091

Depreciation and Amortisation (14,291) (14,762) (15,713) (15,936) (15,624)

Operating Profit 42,539 37,731 29,300 22,498 26,466

Net financing income/(costs) (73) 915 994 1,418 1,525

Forex and Related Gains

Provisions - - - - -

Other Income

Other Expenses - - - - -

Net Profit Before Taxes 42,466 38,646 30,294 23,917 27,991

Taxes (2,300) (2,100) (2,100) (2,100) (2,100)

Minority Interests (14,888) (13,199) (8,645) (6,110) (8,469)

Net profit available to shareholders 25,278 23,347 19,549 15,707 17,422

Dividends (15,000) (16,500) (16,500) (16,500) (16,500)

Transfer to Capital Reserve

12/13A 12/14A 12/15A 12/16E 12/17E

Adjusted Shares Out (mn) 3,000 3,000 3,000 3,000 3,000

CFPS (SAR) 18.15 17.10 14.64 12.58 13.84

EPS (SAR) 8.43 7.78 6.52 5.24 5.81

DPS (SAR) 5.00 5.50 5.50 5.50 5.50

Growth 12/13A 12/14A 12/15A 12/16E 12/17E

Revenue Growth 0.0% 0.0% -21.6% -8.1% 9.0%

Gross Profit Growth 3.6% -6.9% -16.4% -15.1% 12.0%

EBITDA Growth 4.4% -7.6% -14.2% -14.6% 9.5%

Operating Profit Growth 3.7% -11.3% -22.3% -23.2% 17.6%

Net Profit Growth 2.0% -7.6% -16.3% -19.7% 10.9%

EPS Growth 2.0% -7.6% -16.3% -19.7% 10.9%

Margins 12/13A 12/14A 12/15A 12/16E 12/17E

Gross profit margin 29.3% 27.2% 29.1% 26.9% 27.6%

EBITDA margin 30.1% 27.8% 30.4% 28.3% 28.4%

Operating Margin 22.5% 20.0% 19.8% 16.5% 17.9%

Pretax profit margin 22.5% 20.4% 20.5% 17.6% 18.9%

Net profit margin 13.4% 12.4% 13.2% 11.5% 11.7%

Other Ratios 12/13A 12/14A 12/15A 12/16E 12/17E

ROCE 15.0% 13.3% 10.7% 8.3% 9.7%

ROIC 18.7% 17.3% 13.3% 10.4% 12.1%

ROE 16.8% 14.7% 12.1% 9.7% 10.8%

Effective Tax Rate 5.4% 5.4% 6.9% 8.8% 7.5%

Capex/Sales 6.1% 8.0% 12.3% 12.0% 11.0%

Dividend Payout Ratio 59.3% 70.7% 84.4% 105.0% 94.7%

Valuation Measures 12/13A 12/14A 12/15A 12/16E 12/17E

P/E (x) 9.7 10.5 12.5 15.6 14.1

P/CF (x) 4.5 4.8 5.6 6.5 5.9

P/B (x) 1.6 1.5 1.5 1.5 1.5

EV/Sales (x) 1.7 1.6 2.0 2.2 2.1

EV/EBITDA (x) 5.6 5.8 6.6 7.9 7.3

EV/EBIT (x) 7.4 8.1 10.1 13.4 11.5

EV/IC (x) 1.5 1.5 1.5 1.5 1.5

Dividend Yield 6.1% 6.7% 6.7% 6.7% 6.7% Source: Company data, Al Rajhi Capital



Balance Sheet (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E

Cash and Cash Equivalents 35,719 33,626 38,484 32,058 28,015

Current Receivables 60,798 64,987 49,288 51,674 54,745

Inventories 32,442 31,675 24,635 23,124 24,465

Other current assets 34,747 43,116 34,389 34,389 34,389

Total Current Assets 133,025 134,417 116,886 111,335 111,704

Fixed Assets 165,435 168,871 173,215 173,602 174,288

Investments 13,491 15,478 16,726 16,726 16,726

Goodwill 22,197 17,757 16,325 16,325 16,325

Other Intangible Assets - - - - -

Total Other Assets 3,095 3,518 4,775 4,775 4,775

Total Non-current Assets 204,218 205,624 211,041 211,428 212,114

Total Assets 337,243 340,041 327,928 322,763 323,818

Short Term Debt 6,089 13,907 13,349 13,349 13,349

Trade Payables

Dividends Payable - - - - -

Other Current Liabilities

Total Current Liabilities 42,638 44,655 42,259 38,223 38,823

Long-Term Debt 73,947 69,176 59,293 59,293 59,293

Other LT Payables 3,507 4,119 3,754 3,754 3,754

Provisions 10,495 11,865 12,742 12,742 12,742

Total Non-current Liabilities 87,948 85,160 75,789 75,789 75,789

Minority interests 50,385 48,886 47,856 47,520 47,054

Paid-up share capital 30,000 30,000 30,000 30,000 30,000

Total Reserves 126,271 131,340 132,023 131,230 132,152

Total Shareholders' Equity 156,271 161,340 162,023 161,230 162,152

Total Equity 206,656 210,226 209,880 208,750 209,205

Total Liabilities & Shareholders' Equity 337,243 340,041 327,928 322,763 323,818

Ratios 12/13A 12/14A 12/15A 12/16E 12/17E

Net Debt (SARmn) 13,636 10,469 4,248 10,674 14,717

Net Debt/EBITDA (x) 0.24 0.20 0.09 0.28 0.35

Net Debt to Equity 6.6% 5.0% 2.0% 5.1% 7.0%

EBITDA Interest Cover (x) 780.8 (57.4) (45.3) (27.1) (27.6)

BVPS (SAR) 52.09 53.78 54.01 53.74 54.05

Cashflow Statement (SARmn) 12/13A 12/14A 12/15A 12/16E 12/17E

Net Income before Tax & Minority Interest 42,466 38,646 30,294 23,917 27,991

Depreciation & Amortisation 14,291 14,762 15,713 15,936 15,624

Decrease in Working Capital 6,197 4,355 11,611 (4,910) (3,813)

Other Operating Cashflow (2,762) (5,570) (9,316) (2,100) (2,100)

Cashflow from Operations 60,192 52,193 48,302 32,843 37,702

Capital Expenditure (11,468) (15,161) (18,278) (16,323) (16,310)

New Investments (4,477) (9,019) 9,069 - -

Others (2,268) (1,370) (3,649) - -

Cashflow from investing activities (18,213) (25,551) (12,859) (16,323) (16,310)

Net Operating Cashflow 41,980 26,642 35,444 16,520 21,392

Dividends paid to ordinary shareholders (12,734) (18,502) (16,504) (16,500) (16,500)

Proceeds from issue of shares - - - - -

Increase in Loans (14,888) 3,410 (9,794) - -

Effects of Exchange Rates on Cash

Other Financing Cashflow (15,450) (14,991) (9,598) (6,446) (8,936)

Cashflow from financing activities (43,072) (30,084) (35,896) (22,946) (25,436)

Total cash generated (1,092) (3,442) (452) (6,426) (4,043)

Cash at beginning of period 36,836 35,719 33,626 38,484 32,058

Implied cash at end of year 35,744 32,278 33,174 32,058 28,015

Ratios 12/13A 12/14A 12/15A 12/16E 12/17E

Capex/Sales 6.1% 8.0% 12.3% 12.0% 11.0% Source: Company data, Al Rajhi Capital



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Disclaimer and additional disclosures for Equity Research

Disclaimer

This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.

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Explanation of Al Rajhi Capital’s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.

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