Saudi Arabia Fertilizers Co. (SAFCO) - Aljazira Capital
Saudi Arabia Fertilizers Co. (SAFCO) Result Flash Note 1Q-2016
April 2016
SAFCO: Q1-2016 earnings came in-line with our expectation, higher operating rate of SAFCO-5 minimized the impact of low selling prices; “Overweight” recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)*
Forecasts 1Q-16 648.6 281.3 0.68
Actual 1Q-16 NA* 286 0.69
Deviation (%) 1.7% *Not Available
Weak product prices and lower operating rate to offset the positive effect of SAFCO-5: Q12016 net profit came in-line with our estimates and showed a deviation of 1.7% from AJC estimates and 12.6% from the market consensus of SAR 327.2mn. SAFCO posted net income of SAR 286mn; indicating a fall of 51.5%YoY and 24.5%QoQ. We believe that the YoY weak profitability is attributed to i) A drop in product prices ii) fuel costs increase. iii) Higher depreciation of fixed assets due to the commercial production of SAFCO-5. We believe that despite the improvement of the new plant’s operating rate (SACO5), the weak average product price is strongly affecting the financial earnings in the latest two quarters. However, we expect the company’s sales in 2016 to continue its growth trajectory, due to higher operating rate of SAFCO 5; that would definitely offset any further decline in future fertilizers prices. Based on our estimates, SAFCO operated at 83.6% that is higher than 79% in 4Q2015. On the other hand, YTD declining in crop prices where substantially impacted by the global fertilizer demand, where Urea prices fell by 33.2%YoY and 17.4%QoQ. Ammonia price declined by 34.7%YoY and 27.8%QoQ. We expect short-term fundamentals to remain weak due to urea overcapacity and inventories in the industry.
Please read Disclaimer on the back
Recommendation
‘Overweight’
Current Price* (SAR)
65.25 72.30
Target Price (SAR)
10.8%
Upside / (Downside)
*prices as of 14th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
4,456 5.1% 3,174 0.4% 7.62
3,547 -20.4% 2,130 -32.9% 5.11
3,124 -11.9% 1,630 -23.5% 3.91
Source: Company reports, Aljazira Capital
Our estimates and valuation: SAFCO is expected to post SAR 1,630 mn in net income (3.91 EPS) for 2016, recording a decline of 23.5%YoY for the year influenced by higher feedstock cost and low level in product price, we reiterated our recommendation with ‘Overweight’ for the stock with lower target price at SAR 72.30/ share; indicating a potential upside of 10.80% over current market price of SAR 65.25 share (as of 14th April 2016). The company is trading at forward PE and P/B of 16.7x and 4.3x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 5 DPS (7.6% D/Y) in 2016 owing to a strong balance sheet and no additional capital expenditure in the medium term after the completion of SAFCO-5.
Gross profit stood at SAR 271mn depicting a decline of 55.1%YoY and 24.7%QoQ. We expect gross margin in Q1-2016 to be negatively impacted by higher feedstock cost, where the company expected higher production cost of 8% in 2016. We expect SAFCO gross margin stood at 41.7%, as compared to 44.3% in 4Q2015 and 62.7% in 1Q2016. Operating Profit for Q1-2016 stood at SAR 256.0mn depicting a decline of 56.1%YoY, and 25.2%QoQ; however Key Ratios the company is expected to record lower OPEX (SG & A) at SAR 15.0mn, as SARmn (unless specified) compared to SAR 18.0mn in Q4-2015 and SAR 20.3mn in Q1-2015. Gross Margin EBITDA Margin Net Margin P/E P/B Higher feedstock cost, electricity, and fuel gas cost to hurt SAFCO’s net EV/EBITDA (x) profitability by around 8.0% in 2016: The government of Saudi Arabia raised ROE natural gas, fuel, Petchem feedstock, and electricity prices to curb deficit. It ROA Dividend Yield
Low economic output led to weak crop prices, which led to a fall in demand for fertilizers. Urea prices were down 33.2%YoY owing to a large surplus worldwide, resembling the decline in feedstock and ammonia prices. We expect the urea overcapacity and inventories would keep urea prices under pressure for some time.
FY14
FY15
FY16E
68.5% 74.6% 71.2% 14.8x 5.97x 13.63x 39.4% 34.6% 5.5%*
58.8% 68.1% 60.1% 16.07x 4.51x 13.57x 27.6% 23.8% 7.3%
49.0% 62.2% 52.2% 16.68x 4.31x 13.96x 23.4% 19.4% 7.6%
increased the Methane prices from earlier fixed subsidized rate of USD 0.75 per Source: Company reports, Aljazira Capital , * Adjusted price mmbtu to USD 1.25 per mmbtu. This change is expected to increase feedstock prices for SAFCO. The increase in prices of electricity and fuel gas is expected to Key Market Data increase the production costs by about 8% according to the company. Market Cap (bn) 27.18 -19.4% SAFCO-5 project to gradually expand fertilizer products’ base in 2016: YTD % 127.50 SAFCO has already completed the commissioning of the project, and already 52 Week (High ) 52 Week (Low) 62.0 started the commercial production in Q3-2015. According to the given Shares Outstanding (mn) 416.67 information, SAFCO-5 is expected to add 1.1mn tons of urea capacity, which Source: Company reports, Aljazira Capital will lead the overall capacity to increase from 2.37 MT to 3.47 MT, recording an increase of 46% of the total urea capacity. The new production line will use Shareholders Pattern 850,000 tons of carbon monoxide as feedstock and use the excess ammonia Shareholders Pattern Holding capacity (from other production line); which will lead to more reduction in 42.99% Saudi Basic Industries Corp. Ammonia quantity sold in the coming quarters. 12.20% General Organization for Social Insurance - GOSI
1
Strong Balance Sheet to support dividends: The company in 2015 proposed Public a DPS of SAR 6 with payout ratio of 117.4% and a yield of 7.3%. We anticipate the company to pay a dividend of SAR 5 DPS (7.6% D/Y) in 2016 and over the next two years owing to a strong operating cash flow and no additional capital expenditure in the medium term. The company ended 2015 with retained earnings of SAR 1.25bn, along with zero debt in the balance sheet makes the company flexible to support higher dividend payment in 2016/17. © All rights reserved
44.81% Source: Company reports, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
April 2016
SAFCO: Q1-2016 earnings came in-line with our expectation, higher operating rate of SAFCO-5 minimized the impact of low selling prices; “Overweight” recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)*
Forecasts 1Q-16 648.6 281.3 0.68
Actual 1Q-16 NA* 286 0.69
Deviation (%) 1.7% *Not Available
Weak product prices and lower operating rate to offset the positive effect of SAFCO-5: Q12016 net profit came in-line with our estimates and showed a deviation of 1.7% from AJC estimates and 12.6% from the market consensus of SAR 327.2mn. SAFCO posted net income of SAR 286mn; indicating a fall of 51.5%YoY and 24.5%QoQ. We believe that the YoY weak profitability is attributed to i) A drop in product prices ii) fuel costs increase. iii) Higher depreciation of fixed assets due to the commercial production of SAFCO-5. We believe that despite the improvement of the new plant’s operating rate (SACO5), the weak average product price is strongly affecting the financial earnings in the latest two quarters. However, we expect the company’s sales in 2016 to continue its growth trajectory, due to higher operating rate of SAFCO 5; that would definitely offset any further decline in future fertilizers prices. Based on our estimates, SAFCO operated at 83.6% that is higher than 79% in 4Q2015. On the other hand, YTD declining in crop prices where substantially impacted by the global fertilizer demand, where Urea prices fell by 33.2%YoY and 17.4%QoQ. Ammonia price declined by 34.7%YoY and 27.8%QoQ. We expect short-term fundamentals to remain weak due to urea overcapacity and inventories in the industry.
Please read Disclaimer on the back
Recommendation
‘Overweight’
Current Price* (SAR)
65.25 72.30
Target Price (SAR)
10.8%
Upside / (Downside)
*prices as of 14th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
4,456 5.1% 3,174 0.4% 7.62
3,547 -20.4% 2,130 -32.9% 5.11
3,124 -11.9% 1,630 -23.5% 3.91
Source: Company reports, Aljazira Capital
Our estimates and valuation: SAFCO is expected to post SAR 1,630 mn in net income (3.91 EPS) for 2016, recording a decline of 23.5%YoY for the year influenced by higher feedstock cost and low level in product price, we reiterated our recommendation with ‘Overweight’ for the stock with lower target price at SAR 72.30/ share; indicating a potential upside of 10.80% over current market price of SAR 65.25 share (as of 14th April 2016). The company is trading at forward PE and P/B of 16.7x and 4.3x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 5 DPS (7.6% D/Y) in 2016 owing to a strong balance sheet and no additional capital expenditure in the medium term after the completion of SAFCO-5.
Gross profit stood at SAR 271mn depicting a decline of 55.1%YoY and 24.7%QoQ. We expect gross margin in Q1-2016 to be negatively impacted by higher feedstock cost, where the company expected higher production cost of 8% in 2016. We expect SAFCO gross margin stood at 41.7%, as compared to 44.3% in 4Q2015 and 62.7% in 1Q2016. Operating Profit for Q1-2016 stood at SAR 256.0mn depicting a decline of 56.1%YoY, and 25.2%QoQ; however Key Ratios the company is expected to record lower OPEX (SG & A) at SAR 15.0mn, as SARmn (unless specified) compared to SAR 18.0mn in Q4-2015 and SAR 20.3mn in Q1-2015. Gross Margin EBITDA Margin Net Margin P/E P/B Higher feedstock cost, electricity, and fuel gas cost to hurt SAFCO’s net EV/EBITDA (x) profitability by around 8.0% in 2016: The government of Saudi Arabia raised ROE natural gas, fuel, Petchem feedstock, and electricity prices to curb deficit. It ROA Dividend Yield
Low economic output led to weak crop prices, which led to a fall in demand for fertilizers. Urea prices were down 33.2%YoY owing to a large surplus worldwide, resembling the decline in feedstock and ammonia prices. We expect the urea overcapacity and inventories would keep urea prices under pressure for some time.
FY14
FY15
FY16E
68.5% 74.6% 71.2% 14.8x 5.97x 13.63x 39.4% 34.6% 5.5%*
58.8% 68.1% 60.1% 16.07x 4.51x 13.57x 27.6% 23.8% 7.3%
49.0% 62.2% 52.2% 16.68x 4.31x 13.96x 23.4% 19.4% 7.6%
increased the Methane prices from earlier fixed subsidized rate of USD 0.75 per Source: Company reports, Aljazira Capital , * Adjusted price mmbtu to USD 1.25 per mmbtu. This change is expected to increase feedstock prices for SAFCO. The increase in prices of electricity and fuel gas is expected to Key Market Data increase the production costs by about 8% according to the company. Market Cap (bn) 27.18 -19.4% SAFCO-5 project to gradually expand fertilizer products’ base in 2016: YTD % 127.50 SAFCO has already completed the commissioning of the project, and already 52 Week (High ) 52 Week (Low) 62.0 started the commercial production in Q3-2015. According to the given Shares Outstanding (mn) 416.67 information, SAFCO-5 is expected to add 1.1mn tons of urea capacity, which Source: Company reports, Aljazira Capital will lead the overall capacity to increase from 2.37 MT to 3.47 MT, recording an increase of 46% of the total urea capacity. The new production line will use Shareholders Pattern 850,000 tons of carbon monoxide as feedstock and use the excess ammonia Shareholders Pattern Holding capacity (from other production line); which will lead to more reduction in 42.99% Saudi Basic Industries Corp. Ammonia quantity sold in the coming quarters. 12.20% General Organization for Social Insurance - GOSI
1
Strong Balance Sheet to support dividends: The company in 2015 proposed Public a DPS of SAR 6 with payout ratio of 117.4% and a yield of 7.3%. We anticipate the company to pay a dividend of SAR 5 DPS (7.6% D/Y) in 2016 and over the next two years owing to a strong operating cash flow and no additional capital expenditure in the medium term. The company ended 2015 with retained earnings of SAR 1.25bn, along with zero debt in the balance sheet makes the company flexible to support higher dividend payment in 2016/17. © All rights reserved
44.81% Source: Company reports, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
