Weak Q4 earnings on shutdowns and higher ... AWS
SAFCO
Petrochemicals – Industrial SAFCO AB: Saudi Arabia 29 January 2018
US$7.60bn Market cap
Target price Current price
40%
US$3.352mn
Free float
Avg. daily volume
62.00 66.71
-7.1% over current as at 25/1/2018
Existing rating Underweight
Neutral
Overweight
Underweight
Performance Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
65.0
88.0
55.0
76.0
RSI10
100.0
70 30 -10 1000
Vol th
75.0
500
01/17
04/17
07/17
10/17
Source: Bloomberg
Forecasts
Research Department Pritish K. Devassy, CFA Tel +966 11 2119370, [email protected]
SAFCO Weak Q4 earnings on shutdowns and higher production costs SAFCO reported 2017 full year earnings at SAR879mn, down by ~15% y-o-y, dragged by decline in sales volume amid planned shutdown of some of its plants, higher op. costs and non-cash expenses. Revenue for 2017 declined 3.4%, around 5% below our estimate while Urea price was up 13% y-o-y (weekly avg.). SAFCO’s stock price was up ~15% in the last 3 months, mimicking Urea’s price rally (13%). We believe further rally in Urea, which was driven by a confluence of factors, is unlikely to continue. We pencil US$250/t for Urea price in FY2018e as we believe Urea oversupply concerns still persists. We do expect DPS to improve to SAR1/sh for 2H17 and 1H18, implying 12M dividend yield of ~3%. The company plans to increase SAFCO III and IV production capacity further by 11% and 20%, respectively in 2018. We increase our TP upwards to SAR62/share mainly as we revise Urea price upwards. The stock is currently trading at a PE of 19.1x based on 2018E EPS, higher than its global fertilizers peers, at 16.1x and historical average of 17.3x. Our TP implies an upside of -7.1% (-4.1% with dividend), 2018 target P/E of 17.7x and we revise our rating to Neutral on the stock.
(SARmn)
2017
2018e
2019e
Revenue
2,759
3,519
3,404
y-o-y
-3.4%
27.5%
-3.3%
Gross Profit
1,199
1,906
1,793
Gross margin
43.5%
54.2%
52.7%
(SAR mn)
Q4 2016
Q3 2017
Q4 Y-o-Y Q-o-Q 2017
ARC Comments est
Revenue
765
617
616
-19.5% -0.2%
770
372
266
151
-59.5% -43.3% 401
Net income
879
1,457
1,360
y-o-y
-15.1%
65.8%
-6.7%
Net margin
31.8%
41.4%
39.9%
Figure 1 SAFCO Q4 results
Gross profit Gross margin
48.6% 43.1% 24.5%
Operating profit
265
175
51
EPS (SAR)
2.1
3.5
3.3
Operating margin
35%
28%
8%
DPS (SAR)*
1.8
2.5
3.1
Net profit
268
188
63
Payout ratio
83%
72%
95%
Net margin
35%
31%
10%
P/E (Curr)
19.1x
20.5x
P/E (Target)
17.7x
19.0x
Top-line miss due to lower-than-expected sales volume amid planned shutdown. Higher production costs and non-cash expenses led to gross profit miss in Q4.
52.1% -80.8% -71.0% 290
Higher SG&A expenses, due to year end, kept the operating profit under pressure.
38% -76.7% -66.8% 320
Missed consensus estimate of SAR276mn.
42%
Source: Company data, Al Rajhi Capital
Source: Company data, Al Rajhi Capital. * Estimated
Urea price drivers: The recent rally in Urea have been driven by factors such as: Expectation of new Urea tenders from India Limited gas availability amid closure of some Chinese gas based production facilities Increase in Ammonia prices which set up a higher cost base for Urea Seasonal demand (gas) during winter Speculation of reintroduction of Chinese export tax Recently, India imported Urea from Iran at USD260/tonne. Despite these near term reasons, we believe that fundamentally markets remain oversupplied as seen from average utilization rate of Urea producers at around 77% (source: Greenmarkets, Bloomberg). The interim winter seasonal demand is likely to subside as well. Valuation: As the stock price has increased ~15% in the last 3 months, the stock is currently trading at a P/E of 19.1x based on our 2018E EPS, above global fertilizer peers’ multiple of 16.1x. Given the improved near-term outlook for Urea prices, we revise our TP to SAR62/sh. and rating to Neutral for the stock.
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.
SAFCO
Petrochemicals –Industrial 29 January 2018
Figure 2 SAFCO 1Y Forward P/E trend 30 25 20 15 10 5
Average
Max
Jan-18
Dec-17
Oct-17
Nov-17
Sep-17
Jul-17
Aug-17
Jun-17
Apr-17
May-17
Jan-17
Feb-17 Mar-17
Dec-16
Oct-16
Nov-16
Sep-16
Jul-16
SAFCO 1Y Forward P/E trend
Aug-16
Jun-16
Apr-16
May-16
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Jan-15
Feb-15 Mar-15
0
Min
Source: Bloomberg, Al Rajhi Capital
Risks: Key upside risks to our price may be related to major shutdowns of Urea plants globally, delay or suspension of construction of newer Urea plants worldwide, sharp pick-up in demand which may be because of change in regulations across Asian countries (import tax in China, fertilizer import quota in India etc.) all of which could tilt the supply-demand balance in favour of suppliers. Other upside risks relate to increase in dividends above our expectations, increase in stake of associates/subsidiaries which could help bring in some efficiencies. Downside risks may arise from further decline in Urea price and acquisition of associates/subsidiaries at expensive valuations. Figure 3 Margins and Valuation Metrics - SAFCO vs. global peers Market Cap (US$ 'mn) TTM OPM (%) TTM NPM (%)
2017E PE
2018E PE
2017E EV/EBITDA
2018E EV/EBITDA
31.8
20.3x
13.0x
15.5x
15.3x
7.8x
Saudi Arabia SAFCO
7,422
36.0
Middle East & Africa (ex-Saudi Arabia) Israel Chemicals
5,674
9.5
4.5
15.9x
13.2x
8.6x
291
-9.2
-13.4
NA
NA
NA
NA
Abou Kir Fertilizers & Chemical Industries
1,796
NA
NA
3.1x
14.8x
15.9x
10.4x
Arab Potash/The
1,985
9.7
19.7
NA
NA
NA
NA
Jordan Phosphate Mines
Europe K+S
5,442
7.0
4.3
28.1x
17.2x
12.1x
8.7x
13,381
4.2
3.0
24.7x
15.9x
10.4x
7.7x
CF Industries
9,713
4.3
-11.0
NA
NA
16.7x
12.9x
Mosaic
9,549
5.7
4.7
26.7x
22.8x
11.2x
8.8x
Potash Corp
17,351
14.6
10.2
36.9x
29.4x
15.1x
13.3x
Agrium
15,889
8.0
2.6
24.4x
19.2x
12.9x
10.8x
15,113
27.9
18.5
34.1x
31.0x
17.3x
15.4x
49
2.2
-1.1
NA
NA
4.7x
4.5x
447
7.0
1.9
8.1x
5.2x
7.8x
6.5x
2,556
8.8
4.8
23.1x
20.0x
14.0x
12.7x 5.6x
Yara International North America
Latin America Sociedad Quimica y Minera de Chile SA Fertilizantes Heringer SA Asia China XLX Fertilizer Coromandel International Engro Fertilizers
833
NA
NA
9.4x
8.6x
7.3x
National Fertilizers
548
6.2
2.7
NA
NA
NA
NA
Phosagro
6,395
21.7
18.5
15.4x
11.9x
8.1x
7.2x
Taiwan Fertilizer Co Ltd
1,352
9.3
6.0
NA
NA
NA
NA
334
-14.0
1.7
14.3x
12.1x
27.5x
31.1x
Fauji Fertilizer Bin Qasim Ltd Hubei Yihua Chemical Industry Co Ltd
629
-14.6
-21.9
NA
NA
NA
NA
Acron PJSC
2,912
21.1
22.3
10.0x
9.0x
7.8x
7.3x
Luxi Chemical Group Co Ltd
4,887
14.0
8.1
23.0x
16.1x
11.5x
10.4x
PhosAgro PJSC
5,833
21.7
18.5
14.0x
10.8x
7.6x
6.7x
737
16.8
29.4
NA
NA
NA
NA
Median
8.4
4.6
19.4x
15.3x
11.4x
8.7x
Average
8.3
6.1
19.4x
16.1x
12.0x
10.4x
Dorogobuzh PJSC
Source: Bloomberg, Al Rajhi Capital. Notes: All valuation ratios as of January 25, 2018
Disclosures Please refer to the important disclosures at the back of this report.
2
SAFCO
Petrochemicals –Industrial 29 January 2018
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Disclosures Please refer to the important disclosures at the back of this report.
3
SAFCO
Petrochemicals –Industrial 29 January 2018
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. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
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Disclosures Please refer to the important disclosures at the back of this report.
4
Petrochemicals – Industrial SAFCO AB: Saudi Arabia 29 January 2018
US$7.60bn Market cap
Target price Current price
40%
US$3.352mn
Free float
Avg. daily volume
62.00 66.71
-7.1% over current as at 25/1/2018
Existing rating Underweight
Neutral
Overweight
Underweight
Performance Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
65.0
88.0
55.0
76.0
RSI10
100.0
70 30 -10 1000
Vol th
75.0
500
01/17
04/17
07/17
10/17
Source: Bloomberg
Forecasts
Research Department Pritish K. Devassy, CFA Tel +966 11 2119370, [email protected]
SAFCO Weak Q4 earnings on shutdowns and higher production costs SAFCO reported 2017 full year earnings at SAR879mn, down by ~15% y-o-y, dragged by decline in sales volume amid planned shutdown of some of its plants, higher op. costs and non-cash expenses. Revenue for 2017 declined 3.4%, around 5% below our estimate while Urea price was up 13% y-o-y (weekly avg.). SAFCO’s stock price was up ~15% in the last 3 months, mimicking Urea’s price rally (13%). We believe further rally in Urea, which was driven by a confluence of factors, is unlikely to continue. We pencil US$250/t for Urea price in FY2018e as we believe Urea oversupply concerns still persists. We do expect DPS to improve to SAR1/sh for 2H17 and 1H18, implying 12M dividend yield of ~3%. The company plans to increase SAFCO III and IV production capacity further by 11% and 20%, respectively in 2018. We increase our TP upwards to SAR62/share mainly as we revise Urea price upwards. The stock is currently trading at a PE of 19.1x based on 2018E EPS, higher than its global fertilizers peers, at 16.1x and historical average of 17.3x. Our TP implies an upside of -7.1% (-4.1% with dividend), 2018 target P/E of 17.7x and we revise our rating to Neutral on the stock.
(SARmn)
2017
2018e
2019e
Revenue
2,759
3,519
3,404
y-o-y
-3.4%
27.5%
-3.3%
Gross Profit
1,199
1,906
1,793
Gross margin
43.5%
54.2%
52.7%
(SAR mn)
Q4 2016
Q3 2017
Q4 Y-o-Y Q-o-Q 2017
ARC Comments est
Revenue
765
617
616
-19.5% -0.2%
770
372
266
151
-59.5% -43.3% 401
Net income
879
1,457
1,360
y-o-y
-15.1%
65.8%
-6.7%
Net margin
31.8%
41.4%
39.9%
Figure 1 SAFCO Q4 results
Gross profit Gross margin
48.6% 43.1% 24.5%
Operating profit
265
175
51
EPS (SAR)
2.1
3.5
3.3
Operating margin
35%
28%
8%
DPS (SAR)*
1.8
2.5
3.1
Net profit
268
188
63
Payout ratio
83%
72%
95%
Net margin
35%
31%
10%
P/E (Curr)
19.1x
20.5x
P/E (Target)
17.7x
19.0x
Top-line miss due to lower-than-expected sales volume amid planned shutdown. Higher production costs and non-cash expenses led to gross profit miss in Q4.
52.1% -80.8% -71.0% 290
Higher SG&A expenses, due to year end, kept the operating profit under pressure.
38% -76.7% -66.8% 320
Missed consensus estimate of SAR276mn.
42%
Source: Company data, Al Rajhi Capital
Source: Company data, Al Rajhi Capital. * Estimated
Urea price drivers: The recent rally in Urea have been driven by factors such as: Expectation of new Urea tenders from India Limited gas availability amid closure of some Chinese gas based production facilities Increase in Ammonia prices which set up a higher cost base for Urea Seasonal demand (gas) during winter Speculation of reintroduction of Chinese export tax Recently, India imported Urea from Iran at USD260/tonne. Despite these near term reasons, we believe that fundamentally markets remain oversupplied as seen from average utilization rate of Urea producers at around 77% (source: Greenmarkets, Bloomberg). The interim winter seasonal demand is likely to subside as well. Valuation: As the stock price has increased ~15% in the last 3 months, the stock is currently trading at a P/E of 19.1x based on our 2018E EPS, above global fertilizer peers’ multiple of 16.1x. Given the improved near-term outlook for Urea prices, we revise our TP to SAR62/sh. and rating to Neutral for the stock.
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.
SAFCO
Petrochemicals –Industrial 29 January 2018
Figure 2 SAFCO 1Y Forward P/E trend 30 25 20 15 10 5
Average
Max
Jan-18
Dec-17
Oct-17
Nov-17
Sep-17
Jul-17
Aug-17
Jun-17
Apr-17
May-17
Jan-17
Feb-17 Mar-17
Dec-16
Oct-16
Nov-16
Sep-16
Jul-16
SAFCO 1Y Forward P/E trend
Aug-16
Jun-16
Apr-16
May-16
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Jan-15
Feb-15 Mar-15
0
Min
Source: Bloomberg, Al Rajhi Capital
Risks: Key upside risks to our price may be related to major shutdowns of Urea plants globally, delay or suspension of construction of newer Urea plants worldwide, sharp pick-up in demand which may be because of change in regulations across Asian countries (import tax in China, fertilizer import quota in India etc.) all of which could tilt the supply-demand balance in favour of suppliers. Other upside risks relate to increase in dividends above our expectations, increase in stake of associates/subsidiaries which could help bring in some efficiencies. Downside risks may arise from further decline in Urea price and acquisition of associates/subsidiaries at expensive valuations. Figure 3 Margins and Valuation Metrics - SAFCO vs. global peers Market Cap (US$ 'mn) TTM OPM (%) TTM NPM (%)
2017E PE
2018E PE
2017E EV/EBITDA
2018E EV/EBITDA
31.8
20.3x
13.0x
15.5x
15.3x
7.8x
Saudi Arabia SAFCO
7,422
36.0
Middle East & Africa (ex-Saudi Arabia) Israel Chemicals
5,674
9.5
4.5
15.9x
13.2x
8.6x
291
-9.2
-13.4
NA
NA
NA
NA
Abou Kir Fertilizers & Chemical Industries
1,796
NA
NA
3.1x
14.8x
15.9x
10.4x
Arab Potash/The
1,985
9.7
19.7
NA
NA
NA
NA
Jordan Phosphate Mines
Europe K+S
5,442
7.0
4.3
28.1x
17.2x
12.1x
8.7x
13,381
4.2
3.0
24.7x
15.9x
10.4x
7.7x
CF Industries
9,713
4.3
-11.0
NA
NA
16.7x
12.9x
Mosaic
9,549
5.7
4.7
26.7x
22.8x
11.2x
8.8x
Potash Corp
17,351
14.6
10.2
36.9x
29.4x
15.1x
13.3x
Agrium
15,889
8.0
2.6
24.4x
19.2x
12.9x
10.8x
15,113
27.9
18.5
34.1x
31.0x
17.3x
15.4x
49
2.2
-1.1
NA
NA
4.7x
4.5x
447
7.0
1.9
8.1x
5.2x
7.8x
6.5x
2,556
8.8
4.8
23.1x
20.0x
14.0x
12.7x 5.6x
Yara International North America
Latin America Sociedad Quimica y Minera de Chile SA Fertilizantes Heringer SA Asia China XLX Fertilizer Coromandel International Engro Fertilizers
833
NA
NA
9.4x
8.6x
7.3x
National Fertilizers
548
6.2
2.7
NA
NA
NA
NA
Phosagro
6,395
21.7
18.5
15.4x
11.9x
8.1x
7.2x
Taiwan Fertilizer Co Ltd
1,352
9.3
6.0
NA
NA
NA
NA
334
-14.0
1.7
14.3x
12.1x
27.5x
31.1x
Fauji Fertilizer Bin Qasim Ltd Hubei Yihua Chemical Industry Co Ltd
629
-14.6
-21.9
NA
NA
NA
NA
Acron PJSC
2,912
21.1
22.3
10.0x
9.0x
7.8x
7.3x
Luxi Chemical Group Co Ltd
4,887
14.0
8.1
23.0x
16.1x
11.5x
10.4x
PhosAgro PJSC
5,833
21.7
18.5
14.0x
10.8x
7.6x
6.7x
737
16.8
29.4
NA
NA
NA
NA
Median
8.4
4.6
19.4x
15.3x
11.4x
8.7x
Average
8.3
6.1
19.4x
16.1x
12.0x
10.4x
Dorogobuzh PJSC
Source: Bloomberg, Al Rajhi Capital. Notes: All valuation ratios as of January 25, 2018
Disclosures Please refer to the important disclosures at the back of this report.
2
SAFCO
Petrochemicals –Industrial 29 January 2018
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Disclosures Please refer to the important disclosures at the back of this report.
3
SAFCO
Petrochemicals –Industrial 29 January 2018
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. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
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Disclosures Please refer to the important disclosures at the back of this report.
4
