Revising estimates - Al Rajhi Capital
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
Research Department Pritish Devassy, CFA Tel +966 11 2119370, [email protected]
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
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.
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 supplydemand 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) Revenue (mn)
12/13A 188,986
12/14A 188,989
12/15A 148,086
12/16E 136,023
12/17E 148,271
Revenue Growth Gross profit margin EBITDA margin
0.0% 29.3% 30.1%
0.0% 27.2% 27.8%
-21.6% 29.1% 30.4%
-8.1% 26.9% 28.3%
9.0% 27.6% 28.4%
Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
13.4% 8.43 2.0% 16.8% 15.0% 6.1%
12.4% 7.78 -7.6% 14.7% 13.3% 8.0%
13.2% 6.52 -16.3% 12.1% 10.7% 12.3%
11.5% 5.24 -19.7% 9.7% 8.3% 12.0%
11.7% 5.81 10.9% 10.8% 9.7% 11.0%
Source: Company data, Al Rajhi Capital
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.
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 naphthaethylene spread in Europe increased from ~US$375 per ton in 2014 to ~US$560 per ton in 2015. This increase in spread would have directly benefitted the bottom line. We believe this is the prime reason that SABIC’s petrochemical segment’s net profit margin was stable in 2015 (at 12.2%), even while its subsidiaries Saudi Kayan and Yansab posted sharply lower margins. Going forward however, this trend is likely to reverse as crude oil prices recover, pushing naphtha prices higher. In a situation of rising crude prices, the company’s Saudi plants, with mostly fixed feedstock prices, will see an increase in their competitive advantage, and balance the fall in margins of the European business. Figure 1 European ethylene-naphtha spread remains elevated 1800 1600 1400 1200 1000 800 600 400 200 0 Jan-13
Apr-13
Jul-13
Ethytlene
Oct-13
Jan-14
Apr-14
Naphtha Europe
Jul-14
Oct-14
Jan-15
avg. spread 2014
Apr-15
Jul-15
avg. spread 2015
Oct-15
Jan-16
Apr-16
YTD 2016
Source: Bloomberg, Al Rajhi Capital
Petrochemical prices to be subdued Petrochemical product prices did not drop as sharply as the fall in feedstock prices (following the fall in crude oil prices), as the petrochemical market was more balanced in terms of demand and supply, taking outages into account. Ethylene prices cooled down recently after hitting an eight-month high in March 2016 on tight supply scenario. As a result, the correlation between oil and petrochemicals has dropped since the fall in oil prices (mid 2014). Figure 2 Correlation between ethylene and brent crude
Figure 3 Ethylene prices have been trending higher US$/ton 1,600
0.86
Title: Source:
1,400
0.84 1,200
0.82
Please fill in the values above to have them entered in your report
1,000
800
0.8
600
0.78
400 200
0.76
0 Jan-15
0.74
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Ethylene f ob Japan spot price
0.72 Since 2008
Since 2012
Since 2014
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Ethylene spot North West Europe delivered (CIF)
Source: Bloomberg, Al Rajhi Capital
2
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 900 800 700 600 500 400 300 200 100
0 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 20112013, 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 Cedar Bayou, Chevron Phillips Chemical Texas Dow Chemical
Freeport, Texas
ExxonMobil Chemical
Baytown, Texas
Formosa Plastics Occidental Chemical/Mexichem
Sasol
C2 capacity ('000 tons/year) C2 downstream ('000 tons/year) 500 Bimodal HDPE, 500 mLLDPE at Sweeny 1500 400 ELITE PE, 350 LDPE, 320 elastomers, 200 EPDM 1500 650x2 mLLDPE plus LLDPE at Mont Belvieu 1500
Point Comfort, Texas
1590
Ingleside, Texas
544
Lake Charles, Louisiana
1500
Start- up schedule Mid-2017 H1 2017 H2 2017
525 PE unspec, 625.5 LDPE, 1,000 MEG 2017/2018 Feed into existing 1,050 VCM 450 LDPE, 450 LLDPE, 300 EO/EG, 300 ethoxylates, detergent alcohols
Q1 2017
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) Disclosures Please refer to the important disclosures at the back of this report.
3
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
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
H2 2016
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 51
Figure 8 China increases methanol imports from Iran 700,000 600,000
50 500,000
Title: Source: Please fill in the values above to have them entered in your report
400,000
49
300,000 48
200,000 100,000
47 -
46
45
Q1 2015
Source: Bloomberg
Q1 2016
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.
Disclosures Please refer to the important disclosures at the back of this report.
4
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 20102014 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 US$/ton 2,500
2,000
1,500
1,000
500
0 Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Polypropylene (US$/MT)
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Ethytlene (US$/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.
Disclosures Please refer to the important disclosures at the back of this report.
5
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
....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 mn tons
Figure 12 Steel segment revenues and margins SAR/ton
5.8
3,000 5.7
1,600
5.7
5.7
1,400
14.3%
5.6 5.6
20.0% 15.0%
12.4%
2,500
5.7
Title: Source:
10.0% Please fill in the values above to have them entered in your report 1,200
10.0%
1,000
5.0%
800
0.0%
600
-5.0%
2,000
5.6 5.5
1,500
5.5 5.4
1,000
5.4
400 5.4
-13.7%
-10.0%
500 200
5.3 5.3
2012
2013 Sales volumes
2014
2015
Realization (RHS)
Source: Company data, Al Rajhi Capital
-15.0%
-
-20.0% 2012
2013 Revenues
2014
2015
Net prof it margin (RHS)
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.
Disclosures Please refer to the important disclosures at the back of this report.
6
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Figure 13 China monthly steel exports
Figure 14 Mainland China HRC steel prices and inventories
'000 tons
USD/tonne Title: 6,000
12,000
000'tons 700
Source: 600
5,000
10,000
Please fill in the values above to have them entered in your report 500 4,000
8,000
400 3,000 300
6,000
2,000 200
4,000
1,000
100
0 Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Feb-16
May-16
Nov-15
Aug-15
Feb-15
May-15
Nov-14
Aug-14
Feb-14
Inventories (RHS)
Source: Bloomberg, Al Rajhi Capital
May-14
Nov-13
Aug-13
Feb-13
May-13
Nov-12
Aug-12
Feb-12
May-12
Nov-11
May-11
0 Aug-11
-
2,000
Price
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
SARmn 200,000
30.0%
180,000 20.0%
160,000
Title: Source:
35 30
Please fill in the values above to have them entered in your report 25
140,000
10.0%
120,000
20
100,000
0.0%
15
80,000 60,000 40,000
-10.0%
10
-20.0%
5
20,000 0 -
-30.0% 2011
2012
2013 Revenue
2014
2015
2016E
Chemicals
Polymers
Innovative plastics
2017E
y-o-y growth (RHS)
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
2012
2013
2014
f ertilizers
metals
2015
Source: Argaam, Company data, Al Rajhi Capital
7
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
60.0%
35,000
50.0%
30,000
Title: Source:
18.0% 16.0%
Please fill in the values above to have them entered14.0% in your report 25,000
40.0%
12.0%
30.0%
20.0%
20,000
10.0%
15,000
8.0% 6.0%
10,000
10.0%
4.0% 5,000
2.0%
0.0% 2012
2013
2014
2015
0
0.0% 2011
-10.0% Petrochemicals
Fertilizer
Metals
SABIC
Source: Company data, Al Rajhi Capital
2012
2013 Net prof it
2014
2015
2016E
2017E
NPM (RHS)
Source: Company data, Al Rajhi Capital
ROE vs COE SABIC’s return on equity has slipped from 17.5% in 2012 to 12.1% in 2015 (adjusted for oneoff 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. Disclosures Please refer to the important disclosures at the back of this report.
8
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Figure 19 Du Pont analysis of ROE 2011
2012
2013
2014
2015
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
Particulars NPM
Source: Company data, Al Rajhi Capital
Figure 20 ROE vs COE
Figure 21 ROCE vs WACC
20.0%
Title: Source:
16.00%
18.0%
14.00%
Please fill in the values above to have them entered in your report
16.0% 12.00% 14.0% 10.00%
12.0% 10.0%
8.00%
8.0%
6.00%
6.0% 4.00% 4.0% 2.00%
2.0% 0.0%
0.00% 2012
2013
2014 ROE
2015
2016E
2017E
2012
2013
COE
2014 ROCE
Source: Company data, Al Rajhi Capital
2015
2016E
2017E
WACC
Source: Company data, Al Rajhi Capital
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 140
18 16
120
14 100
12 80
10
60
8 6
40
4 20 0 Jan-08
2 0 Jan-09
Jan-10
Jan-11 Price
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
12m f orward PE (RHS)
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
9
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Income Statement (SARmn) Revenue
12/13A
12/14A
12/15A
12/16E
12/17E
188,986
188,989
148,086
136,023
148,271
(133,687)
(137,511)
(105,058)
(99,474)
(107,348)
55,299
51,477
43,028
36,550
40,923
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
(132,156)
(136,496)
(103,073)
(97,589)
(106,180)
56,830
52,493
45,013
38,434
42,091
(14,291)
(14,762)
(15,713)
(15,936)
(15,624)
42,539
Cost of Goods Sold Gross Profit Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
37,731
29,300
22,498
26,466
(73)
915
994
1,418
1,525
-
-
-
-
-
Forex and Related Gains Provisions Other Income Other Expenses Net Profit Before Taxes Taxes Minority Interests Net profit available to shareholders Dividends
-
-
-
-
-
42,466
38,646
30,294
23,917
27,991 (2,100)
(2,300)
(2,100)
(2,100)
(2,100)
(14,888)
(13,199)
(8,645)
(6,110)
(8,469)
25,278
23,347
19,549
15,707
17,422
(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 12/17E
Growth
12/13A
12/14A
12/15A
12/16E
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%
12/17E
Other Ratios
12/13A
12/14A
12/15A
12/16E
ROCE
15.0%
13.3%
10.7%
8.3%
9.7%
ROIC
18.7%
17.3%
13.3%
10.4%
12.1%
ROE
10.8%
16.8%
14.7%
12.1%
9.7%
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) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
1.5
1.5
1.5
1.5
1.5
6.1%
6.7%
6.7%
6.7%
6.7%
10
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
-
-
-
-
-
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
6,089
13,907
13,349
13,349
13,349
-
-
-
-
-
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
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
Other Intangible Assets Total Other Assets
Short Term Debt Trade Payables Dividends Payable Other Current Liabilities
Other LT Payables
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)
-
-
(18,213)
(25,551)
(12,859)
(16,323)
(16,310)
Cashflow from investing activities Net Operating Cashflow Dividends paid to ordinary shareholders Proceeds from issue of shares
41,980
26,642
35,444
16,520
21,392
(12,734)
(18,502)
(16,504)
(16,500)
(16,500)
-
-
-
-
-
(14,888)
3,410
(9,794)
-
-
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)
Increase in Loans Effects of Exchange Rates on Cash
Total cash generated
(1,092)
(3,442)
(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
6.1%
8.0%
12.3%
12.0%
11.0%
Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
(452)
11
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Al Rajhi. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication.
Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months.
Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither Al Rajhi nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report. Al Rajhi may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of Al Rajhi. Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by Al Rajhi with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of Al Rajhi and Al Rajhi accepts no liability whatsoever for the actions of third parties in this respect. 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.
Disclosures Please refer to the important disclosures at the back of this report.
12
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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.
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.
Contact us Pritish Devassy, CFA Head of Equity Research Tel : +966 1 211 9370 Email: [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 37/07068.
Disclosures Please refer to the important disclosures at the back of this report.
13
Rating
NEUTRAL
Target price
SAR78.0 (-4.4% upside)
Current price
SAR81.60
Research Department Pritish Devassy, CFA Tel +966 11 2119370, [email protected]
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
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.
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 supplydemand 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) Revenue (mn)
12/13A 188,986
12/14A 188,989
12/15A 148,086
12/16E 136,023
12/17E 148,271
Revenue Growth Gross profit margin EBITDA margin
0.0% 29.3% 30.1%
0.0% 27.2% 27.8%
-21.6% 29.1% 30.4%
-8.1% 26.9% 28.3%
9.0% 27.6% 28.4%
Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
13.4% 8.43 2.0% 16.8% 15.0% 6.1%
12.4% 7.78 -7.6% 14.7% 13.3% 8.0%
13.2% 6.52 -16.3% 12.1% 10.7% 12.3%
11.5% 5.24 -19.7% 9.7% 8.3% 12.0%
11.7% 5.81 10.9% 10.8% 9.7% 11.0%
Source: Company data, Al Rajhi Capital
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.
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 naphthaethylene spread in Europe increased from ~US$375 per ton in 2014 to ~US$560 per ton in 2015. This increase in spread would have directly benefitted the bottom line. We believe this is the prime reason that SABIC’s petrochemical segment’s net profit margin was stable in 2015 (at 12.2%), even while its subsidiaries Saudi Kayan and Yansab posted sharply lower margins. Going forward however, this trend is likely to reverse as crude oil prices recover, pushing naphtha prices higher. In a situation of rising crude prices, the company’s Saudi plants, with mostly fixed feedstock prices, will see an increase in their competitive advantage, and balance the fall in margins of the European business. Figure 1 European ethylene-naphtha spread remains elevated 1800 1600 1400 1200 1000 800 600 400 200 0 Jan-13
Apr-13
Jul-13
Ethytlene
Oct-13
Jan-14
Apr-14
Naphtha Europe
Jul-14
Oct-14
Jan-15
avg. spread 2014
Apr-15
Jul-15
avg. spread 2015
Oct-15
Jan-16
Apr-16
YTD 2016
Source: Bloomberg, Al Rajhi Capital
Petrochemical prices to be subdued Petrochemical product prices did not drop as sharply as the fall in feedstock prices (following the fall in crude oil prices), as the petrochemical market was more balanced in terms of demand and supply, taking outages into account. Ethylene prices cooled down recently after hitting an eight-month high in March 2016 on tight supply scenario. As a result, the correlation between oil and petrochemicals has dropped since the fall in oil prices (mid 2014). Figure 2 Correlation between ethylene and brent crude
Figure 3 Ethylene prices have been trending higher US$/ton 1,600
0.86
Title: Source:
1,400
0.84 1,200
0.82
Please fill in the values above to have them entered in your report
1,000
800
0.8
600
0.78
400 200
0.76
0 Jan-15
0.74
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Ethylene f ob Japan spot price
0.72 Since 2008
Since 2012
Since 2014
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Ethylene spot North West Europe delivered (CIF)
Source: Bloomberg, Al Rajhi Capital
2
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 900 800 700 600 500 400 300 200 100
0 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 20112013, 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 Cedar Bayou, Chevron Phillips Chemical Texas Dow Chemical
Freeport, Texas
ExxonMobil Chemical
Baytown, Texas
Formosa Plastics Occidental Chemical/Mexichem
Sasol
C2 capacity ('000 tons/year) C2 downstream ('000 tons/year) 500 Bimodal HDPE, 500 mLLDPE at Sweeny 1500 400 ELITE PE, 350 LDPE, 320 elastomers, 200 EPDM 1500 650x2 mLLDPE plus LLDPE at Mont Belvieu 1500
Point Comfort, Texas
1590
Ingleside, Texas
544
Lake Charles, Louisiana
1500
Start- up schedule Mid-2017 H1 2017 H2 2017
525 PE unspec, 625.5 LDPE, 1,000 MEG 2017/2018 Feed into existing 1,050 VCM 450 LDPE, 450 LLDPE, 300 EO/EG, 300 ethoxylates, detergent alcohols
Q1 2017
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) Disclosures Please refer to the important disclosures at the back of this report.
3
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
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
H2 2016
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 51
Figure 8 China increases methanol imports from Iran 700,000 600,000
50 500,000
Title: Source: Please fill in the values above to have them entered in your report
400,000
49
300,000 48
200,000 100,000
47 -
46
45
Q1 2015
Source: Bloomberg
Q1 2016
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.
Disclosures Please refer to the important disclosures at the back of this report.
4
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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 20102014 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 US$/ton 2,500
2,000
1,500
1,000
500
0 Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Polypropylene (US$/MT)
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Ethytlene (US$/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.
Disclosures Please refer to the important disclosures at the back of this report.
5
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
....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 mn tons
Figure 12 Steel segment revenues and margins SAR/ton
5.8
3,000 5.7
1,600
5.7
5.7
1,400
14.3%
5.6 5.6
20.0% 15.0%
12.4%
2,500
5.7
Title: Source:
10.0% Please fill in the values above to have them entered in your report 1,200
10.0%
1,000
5.0%
800
0.0%
600
-5.0%
2,000
5.6 5.5
1,500
5.5 5.4
1,000
5.4
400 5.4
-13.7%
-10.0%
500 200
5.3 5.3
2012
2013 Sales volumes
2014
2015
Realization (RHS)
Source: Company data, Al Rajhi Capital
-15.0%
-
-20.0% 2012
2013 Revenues
2014
2015
Net prof it margin (RHS)
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.
Disclosures Please refer to the important disclosures at the back of this report.
6
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Figure 13 China monthly steel exports
Figure 14 Mainland China HRC steel prices and inventories
'000 tons
USD/tonne Title: 6,000
12,000
000'tons 700
Source: 600
5,000
10,000
Please fill in the values above to have them entered in your report 500 4,000
8,000
400 3,000 300
6,000
2,000 200
4,000
1,000
100
0 Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Feb-16
May-16
Nov-15
Aug-15
Feb-15
May-15
Nov-14
Aug-14
Feb-14
Inventories (RHS)
Source: Bloomberg, Al Rajhi Capital
May-14
Nov-13
Aug-13
Feb-13
May-13
Nov-12
Aug-12
Feb-12
May-12
Nov-11
May-11
0 Aug-11
-
2,000
Price
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
SARmn 200,000
30.0%
180,000 20.0%
160,000
Title: Source:
35 30
Please fill in the values above to have them entered in your report 25
140,000
10.0%
120,000
20
100,000
0.0%
15
80,000 60,000 40,000
-10.0%
10
-20.0%
5
20,000 0 -
-30.0% 2011
2012
2013 Revenue
2014
2015
2016E
Chemicals
Polymers
Innovative plastics
2017E
y-o-y growth (RHS)
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
2012
2013
2014
f ertilizers
metals
2015
Source: Argaam, Company data, Al Rajhi Capital
7
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
60.0%
35,000
50.0%
30,000
Title: Source:
18.0% 16.0%
Please fill in the values above to have them entered14.0% in your report 25,000
40.0%
12.0%
30.0%
20.0%
20,000
10.0%
15,000
8.0% 6.0%
10,000
10.0%
4.0% 5,000
2.0%
0.0% 2012
2013
2014
2015
0
0.0% 2011
-10.0% Petrochemicals
Fertilizer
Metals
SABIC
Source: Company data, Al Rajhi Capital
2012
2013 Net prof it
2014
2015
2016E
2017E
NPM (RHS)
Source: Company data, Al Rajhi Capital
ROE vs COE SABIC’s return on equity has slipped from 17.5% in 2012 to 12.1% in 2015 (adjusted for oneoff 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. Disclosures Please refer to the important disclosures at the back of this report.
8
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Figure 19 Du Pont analysis of ROE 2011
2012
2013
2014
2015
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
Particulars NPM
Source: Company data, Al Rajhi Capital
Figure 20 ROE vs COE
Figure 21 ROCE vs WACC
20.0%
Title: Source:
16.00%
18.0%
14.00%
Please fill in the values above to have them entered in your report
16.0% 12.00% 14.0% 10.00%
12.0% 10.0%
8.00%
8.0%
6.00%
6.0% 4.00% 4.0% 2.00%
2.0% 0.0%
0.00% 2012
2013
2014 ROE
2015
2016E
2017E
2012
2013
COE
2014 ROCE
Source: Company data, Al Rajhi Capital
2015
2016E
2017E
WACC
Source: Company data, Al Rajhi Capital
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 140
18 16
120
14 100
12 80
10
60
8 6
40
4 20 0 Jan-08
2 0 Jan-09
Jan-10
Jan-11 Price
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
12m f orward PE (RHS)
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
9
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
Income Statement (SARmn) Revenue
12/13A
12/14A
12/15A
12/16E
12/17E
188,986
188,989
148,086
136,023
148,271
(133,687)
(137,511)
(105,058)
(99,474)
(107,348)
55,299
51,477
43,028
36,550
40,923
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
(132,156)
(136,496)
(103,073)
(97,589)
(106,180)
56,830
52,493
45,013
38,434
42,091
(14,291)
(14,762)
(15,713)
(15,936)
(15,624)
42,539
Cost of Goods Sold Gross Profit Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs)
37,731
29,300
22,498
26,466
(73)
915
994
1,418
1,525
-
-
-
-
-
Forex and Related Gains Provisions Other Income Other Expenses Net Profit Before Taxes Taxes Minority Interests Net profit available to shareholders Dividends
-
-
-
-
-
42,466
38,646
30,294
23,917
27,991 (2,100)
(2,300)
(2,100)
(2,100)
(2,100)
(14,888)
(13,199)
(8,645)
(6,110)
(8,469)
25,278
23,347
19,549
15,707
17,422
(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 12/17E
Growth
12/13A
12/14A
12/15A
12/16E
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%
12/17E
Other Ratios
12/13A
12/14A
12/15A
12/16E
ROCE
15.0%
13.3%
10.7%
8.3%
9.7%
ROIC
18.7%
17.3%
13.3%
10.4%
12.1%
ROE
10.8%
16.8%
14.7%
12.1%
9.7%
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) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
1.5
1.5
1.5
1.5
1.5
6.1%
6.7%
6.7%
6.7%
6.7%
10
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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
-
-
-
-
-
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
6,089
13,907
13,349
13,349
13,349
-
-
-
-
-
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
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
Other Intangible Assets Total Other Assets
Short Term Debt Trade Payables Dividends Payable Other Current Liabilities
Other LT Payables
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)
-
-
(18,213)
(25,551)
(12,859)
(16,323)
(16,310)
Cashflow from investing activities Net Operating Cashflow Dividends paid to ordinary shareholders Proceeds from issue of shares
41,980
26,642
35,444
16,520
21,392
(12,734)
(18,502)
(16,504)
(16,500)
(16,500)
-
-
-
-
-
(14,888)
3,410
(9,794)
-
-
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)
Increase in Loans Effects of Exchange Rates on Cash
Total cash generated
(1,092)
(3,442)
(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
6.1%
8.0%
12.3%
12.0%
11.0%
Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
(452)
11
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Al Rajhi. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication.
Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months.
Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither Al Rajhi nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report. Al Rajhi may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of Al Rajhi. Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by Al Rajhi with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of Al Rajhi and Al Rajhi accepts no liability whatsoever for the actions of third parties in this respect. 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.
Disclosures Please refer to the important disclosures at the back of this report.
12
Saudi Basic Industries Corp Petrochemicals – Industrial 15 June 2016
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.
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.
Contact us Pritish Devassy, CFA Head of Equity Research Tel : +966 1 211 9370 Email: [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 37/07068.
Disclosures Please refer to the important disclosures at the back of this report.
13
