Saudi Arabian Fertilizers Company (SAFCO) - Aljazira Capital
Saudi Arabian Fertilizers Company (SAFCO) Investment Update
June 2015
Delayed commercial operation of SAFCO 5, plunged products prices and the weak Q1-2015 to lower our earnings estimates for 2015/16. A weak Q1 results influenced our earnings estimates: Q1-15 earnings came below the market consensus of SAR 701mn (a deviation of -15.8%). Saudi Arabia Fertilizers Company (SAFCO) posted net income of SAR 590.0mn; indicating a fall of 30.0%YoY and 24.3%QoQ. The lower gross profit was mainly attributed to lower than expected volumetric sales and weak products price (Ammonia and Urea) that declined over 28%YoY and 23%YoY respectively in Q1-2015 and resulting in lower gross margin of 62.7% as compared to 69.6% in 1Q-2014. Operating profits declined by -26.9%YoY and -18.5%QoQ, largely affected by lower contribution from its affiliates Ibn al-Bitar (-64.4%YoY and -42.5%QoQ). We expect the company to show signs of recovery throughout Q3-2015 along with the commercial operation of SAFCO 5 and expected improvement of price realization per tonne for related fertilizers products. Fertilizer demand neutral; capacity addition in Urea and Ammonia is a concern. As per International Fertilizer Industry Association (IFA), demand for Nitrogen (N) fertilizers is expected to grow 1.3%YoY and 1.0%YoY to 111.8Mt and 112.9Mt in 2014–15 and 2015–16, respectively. Regional demand dynamics of 2014–15 indicate offsetting trends, with robust growth in fertilizer volumes from Oceania and Africa on one hand, whereas a decline in growth in North America and Western & Central Europe on the other. However, in 2015–16, the demand is largely expected to rebound in major markets including North America, South Asia, and East Asia. Consequently, we expect the demand dynamics of nitrogen fertilizers to remain largely neutral. However, global nitrogen supply is projected at 174 Mt and demand at 157 Mt for 2019, indicating a potential surplus of 18Mt. We believe this corresponds to a strong capacity addition by producers of key Nitrogen constituents (Ammonia and Urea). Among regions, East Asia, North America, and Africa are expected to contribute significantly to both Ammonia and Urea capacity additions in the next five years. While global Ammonia capacity is projected to grow 16% over 2014–19, the IFA expects global Urea capacity to expand at a CAGR of 4.0% during 2014–19. SAFCO-5 project to expand fertilizer products’ base – SAFCO has already completed the commissioning of the project, and recently made an announcement to run the trial production until the end of June 2015 and start the commercial production in Q3-2015. According to the given information, SAFCO-5 is expected to add 1.1mn tons of urea capacity, which will lead the overall capacity to increase from 2.37 mn to 3.47 mn tons, recording an increase of 46% of the total urea capacity. The new production line will use 850,000 tons of carbon monoxide as feedstock and use the excess ammonia capacity (from other production line); which might lead to a reduction in Ammonia quantity sold in the coming quarters.
Please read Disclaimer on the back
‘Neutral ’
Recommendation Previous Target Price (SAR)
142.0
Current Price* (SAR)
122.0
New Target Price (SAR)
125.5
Upside / (Downside)
2.8% *prices as of 11th of June 2015
Key Financials SARmn (unless specified)
FY14
FY15E
FY16E
Revenues Growth % Net Income Growth % EPS
4,456 5.1% 3,174 0.4% 7.62
4221 -5.3% 2,878 -9.3% 6.91
4848 14.9% 3,444 19.7% 8.27
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA ROE ROA Dividend Yield
68.5% 74.6% 71.2% 14.8x 5.97x 13.63
67.7% 73.1% 68.2% 17.7x 6.17x 15.92
70.5% 76.1% 71.0% 14.8x 5.53x 13.16
39.4%
35.7%
39.5%
34.6%
31.6%
35.1%
5.5%*
4.9%
6.6%
Source: Company reports, Aljazira Capital
Shareholders Pattern Saudi Basic Industries Corp.
Type
Holding
Institution
42.99%
General Organization for Social Governmental Insurance - GOSI
12.2%
Public
44.81% Source: Company reports, Aljazira Capital
Company Overview: The Company was established in Sep 1965 and started its commercial production in 1970. SAFCO holds 50% stakes in National Chemical Fertilizer CO. (Ibn Baytar), 3.87% stakes in Arabian Industrial Fibers (Ibn Rushd) and 1.69% stakes in Yanbu National Petrochemical Co. (YANSAB). The company’s principle activities are to manufacture and convert urea and ammonia. The company, at present, is the main producer of ammonia, urea, melamine and sulfuric acid in KSA.
Geographic Revenue Breakdown - 2014 3%
Asia Australia US
2%
18%
Africa Local
Analyst
22%
55%
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
Source: Company reports, Aljazira Capital
Saudi Arabian Fertilizers Company (SAFCO) Investment Update
June 2015
Please read Disclaimer on the back
We expect the production line to reach a utilization rate of around 60% by Q4-2015 and 85% at the end of H2-2016. According to the given information, Safco-5 will enable the company to reduce the consumption of energy by 8.0% and water by 11.0%. China may change the game; superior quality products from the Middle East: Chinese Urea exports increased significantly in the international market after the implementation of a new export tax regime on Chinese companies. Urea exports now account for a constant tax at CNY 80/ton in all seasons compared to the previous seasonal tax regime. We believe this is a key near-term price swing, decreasing Urea prices in the international market. In the Gulf region, Urea prices slid 5.0% YTD by the end of May 2015. However, we believe the long-term impact of the price decline on the Gulf region will be relatively less than that in other regions of the world. Black Sea Urea Spot Price fell 19.0% during the same period. We believe this is mainly due to a better variety of Urea products from the Middle East compared to those by Chinese producers. Price points to remain volatile on demand front; impact of gas prices on realization is margin neutral. In 2015, declining crop prices substantially impacted the global fertilizer demand. Ammonia and Urea prices fell 27.0% and 5.0% YTD, respectively, as of May 2015. Although global supply drivers suggest weakness in the fertilizer market in the near to medium term, we expect long-term industry fundamentals to remain strong. Additionally, a weak outlook for gas global benchmark prices can put pressure on Ammonia and Urea prices. However, as gas is a key feedstock for fertilizer production, any change in input prices and consequent product prices would largely be margin neutral for fertilizer companies. Gulf urea and ammonia prices 1,000
(USD/ Mt)
800 600 400 200
Urea-Gulf
Ammonia-Gulf
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
0
Source: Aljazira Capital, Bloomberg
Modest financial growth – We expect the company’s revenues to increase at a CAGR of 3.1%, during 2014-17. The expected growth is mainly based on the increase in volumetric sales (SAFCO 5) and the average prices of related fertilizer products. On the other hand, the expected stability in gross margin coupled with growth in revenues will lead the company’s net profitability to increase at a CAGR of 2.9%, during 2014-17. Strong Balance Sheet to support dividends. SAFCO has consistently paid dividends at an average yield of 7.4% in the last three years (average payout of over 100%). However, the company in 2014 proposed a DPS of SAR 7 with payout ratio of 73.5% and a yield of 4.9%, which was the lowest in the last three years. We believe that the low dividend payment was due to the project expansion cost of SAFCO-V and impacted price of product in Q4-2015. On the other hand, we anticipate the company to pay a dividend of SAR 6 DPS (4.9% D/Y) in 2015 and then an average DPS of SAR 8 over the next three years owing to a strong operating cash flow and no additional capital expenditure in the medium term. The company ended 2014 with retained earnings of SAR2.0bn, along with zero debt in the balance sheet makes the company flexible to support higher dividend payment in 2016/17. Our estimates and valuation: Saudi Arabia Fertilizers Co. (SAFCO) is expected to post SAR 2,877.9mn in net income (6.91 EPS) for 2015, recording a decline of 9.3%YoY for the year Influenced by expected lower volumetric sales in 1H-2015, lower contribution from associates, decline in product prices (Urea and Ammonia) . Moreover, we are adjusting our year end forecast from SAR 3,445mn due to announced delays in the commercial operation of the Safco 5 project. We adjust our valuation and reduce our 12-month price to SAR125.5/share; indicating a potential upside of 2.8% over current market price of SAR122.0/share (as of 11th June 2015). We, therefore, update our recommendation to ‘Neutral’ for SAFCO. The company is trading at a PE of 17.5x against our 2015 forward PE of 17.7x based on our 2015 earnings forecast.
2
Key risk factor: According to Jacob consultancy, more than 65.0%-70.0% of Chinese ammonia/urea capacities are based on coal. The country, at present, is making serious effort to make the usage of coal more feasible (environmentally). Any success in this context will lead to reduce the dependence on imports while, on other hand, we cannot ignore the possible rise in South Asian fertilizer capacities; where, there are ample reservoirs of coals. © All rights reserved
Saudi Arabian Fertilizers Company (SAFCO) Investment Update
June 2015
Please read Disclaimer on the back
Key Financials Amount in SARmn, unless otherwise specified Income statement Sales revenue Sales revenue growth Cost of sales Gross profit General & administrative expenses Operating profit Operating profit growth Interest income & financial charges Other income (expenses) - net Profit before zakat & minority interest Income from Ibn-Baytar Zakat Net profit Net profit growth Assets Cash & equivalent Property plant & equipment Intangible assets Other non-current assets Total Assets Liabilities & owners' equity Other current liabilities Other non-current liabilities Paid -up capital Statutory reserves Retained earnings Total owners' equity Total equity & liabilities
2012
2013
2014
2015E
2016E
2017E
4,980 -1.4% (1,372) 3,608 (87) 3,522 -4.2% (4) 110 3,628 312 (107) 3,833 -6.4%
4,240 -14.9% (1,362) 2,879 (81) 2,797 -20.6% (3) 86 2,881 364 (112) 3,132 -18.3%
4,456 5.1% (1,402) 3,054 (97) 2,956 5.7% 84 3,041 213 (80) 3,174 1.3%
4,221 -5.3% (1,364) 2,857 (112) 2,745 -7.2% 81 2,826 129 (77) 2,877.9 -9.3%
4,848 14.9% (1,430) 3,417 (110) 3,307 20.5% 82 3,389 133 (78) 3,444 19.7%
5,041 4.0% (1,478) 3,563 (112) 3,450 4.3% 83 3,533 131 (79) 3,586 4.1%
3,594 3,500 146 1,293 10,032
2,085 4,320 217 1,554 9,405
1,640 4,792 127 1,224 8,925
1,716 5,170 128 1,167 9,317
1,459 5,497 130 1,114 9,453
1,372 5,850 131 1,064 9,729
693 482 3,333 1,667 1,458 8,857 10,032
633 503 3,333 1,667 619 8,269 9,405
510 553 4,167 1,667 1,626 7,862 8,925
516 558 4,167 1,667 2,004 8,243 9,317
531 564 4,167 1,667 2,115 8,358 9,453
546 570 4,167 1,667 2,367 8,614 9,729
7.3 5.2
5.2 3.3
5.5 3.2
5.5 3.3
5.1 2.7
4.9 2.5
72.5% 70.7% 77.7% 77.0% 39.9% 45.3%
67.9% 66.0% 74.8% 73.9% 32.5% 36.9%
68.5% 66.3% 74.6% 71.2% 34.6% 39.4%
67.7% 65.0% 73.1% 68.2% 31.6% 35.7%
70.5% 68.2% 76.1% 71.0% 36.7% 41.5%
70.7% 68.4% 76.7% 71.1% 37.4% 42.3%
6.92 8.91 11.60 21.26 152.25 63,437.5 7.9% 13.13 7.16
14.89 19.90 9.48 19.85 156.50 65,208.3 7.7% 16.51 7.89
10.17 13.63 7.62 18.87 112.67 46,945.8 6.2% 14.79 5.97
11.64 15.92 6.91 19.78 122.00 50,833.3 4.9% 17.66 6.17
10.19 13.38 8.27 20.06 122.00 50,833.3 6.6% 14.76 6.08
9.81 12.80 8.61 20.67 122.00 50,833.3 6.6% 14.18 5.90
Key fundamental ratios Liquidity ratios Current ratio (x) Cash ratio (x) Profitability ratios Gross profit margin Operating margin EBITDA margin Net profit margin Return on assets Return on equity Market & valuation ratios EV/sales (x) EV/EBITDA (x) EPS (SAR) BVPS (SAR) Market price (SAR) * Market-Cap (SAR mn) Dividend yield P/E ratio (x) P/BV ratio (x)
Source: Company Financials, Aljazira Research
3
© All rights reserved
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [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
Senior 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.
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June 2015
Delayed commercial operation of SAFCO 5, plunged products prices and the weak Q1-2015 to lower our earnings estimates for 2015/16. A weak Q1 results influenced our earnings estimates: Q1-15 earnings came below the market consensus of SAR 701mn (a deviation of -15.8%). Saudi Arabia Fertilizers Company (SAFCO) posted net income of SAR 590.0mn; indicating a fall of 30.0%YoY and 24.3%QoQ. The lower gross profit was mainly attributed to lower than expected volumetric sales and weak products price (Ammonia and Urea) that declined over 28%YoY and 23%YoY respectively in Q1-2015 and resulting in lower gross margin of 62.7% as compared to 69.6% in 1Q-2014. Operating profits declined by -26.9%YoY and -18.5%QoQ, largely affected by lower contribution from its affiliates Ibn al-Bitar (-64.4%YoY and -42.5%QoQ). We expect the company to show signs of recovery throughout Q3-2015 along with the commercial operation of SAFCO 5 and expected improvement of price realization per tonne for related fertilizers products. Fertilizer demand neutral; capacity addition in Urea and Ammonia is a concern. As per International Fertilizer Industry Association (IFA), demand for Nitrogen (N) fertilizers is expected to grow 1.3%YoY and 1.0%YoY to 111.8Mt and 112.9Mt in 2014–15 and 2015–16, respectively. Regional demand dynamics of 2014–15 indicate offsetting trends, with robust growth in fertilizer volumes from Oceania and Africa on one hand, whereas a decline in growth in North America and Western & Central Europe on the other. However, in 2015–16, the demand is largely expected to rebound in major markets including North America, South Asia, and East Asia. Consequently, we expect the demand dynamics of nitrogen fertilizers to remain largely neutral. However, global nitrogen supply is projected at 174 Mt and demand at 157 Mt for 2019, indicating a potential surplus of 18Mt. We believe this corresponds to a strong capacity addition by producers of key Nitrogen constituents (Ammonia and Urea). Among regions, East Asia, North America, and Africa are expected to contribute significantly to both Ammonia and Urea capacity additions in the next five years. While global Ammonia capacity is projected to grow 16% over 2014–19, the IFA expects global Urea capacity to expand at a CAGR of 4.0% during 2014–19. SAFCO-5 project to expand fertilizer products’ base – SAFCO has already completed the commissioning of the project, and recently made an announcement to run the trial production until the end of June 2015 and start the commercial production in Q3-2015. According to the given information, SAFCO-5 is expected to add 1.1mn tons of urea capacity, which will lead the overall capacity to increase from 2.37 mn to 3.47 mn tons, recording an increase of 46% of the total urea capacity. The new production line will use 850,000 tons of carbon monoxide as feedstock and use the excess ammonia capacity (from other production line); which might lead to a reduction in Ammonia quantity sold in the coming quarters.
Please read Disclaimer on the back
‘Neutral ’
Recommendation Previous Target Price (SAR)
142.0
Current Price* (SAR)
122.0
New Target Price (SAR)
125.5
Upside / (Downside)
2.8% *prices as of 11th of June 2015
Key Financials SARmn (unless specified)
FY14
FY15E
FY16E
Revenues Growth % Net Income Growth % EPS
4,456 5.1% 3,174 0.4% 7.62
4221 -5.3% 2,878 -9.3% 6.91
4848 14.9% 3,444 19.7% 8.27
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA ROE ROA Dividend Yield
68.5% 74.6% 71.2% 14.8x 5.97x 13.63
67.7% 73.1% 68.2% 17.7x 6.17x 15.92
70.5% 76.1% 71.0% 14.8x 5.53x 13.16
39.4%
35.7%
39.5%
34.6%
31.6%
35.1%
5.5%*
4.9%
6.6%
Source: Company reports, Aljazira Capital
Shareholders Pattern Saudi Basic Industries Corp.
Type
Holding
Institution
42.99%
General Organization for Social Governmental Insurance - GOSI
12.2%
Public
44.81% Source: Company reports, Aljazira Capital
Company Overview: The Company was established in Sep 1965 and started its commercial production in 1970. SAFCO holds 50% stakes in National Chemical Fertilizer CO. (Ibn Baytar), 3.87% stakes in Arabian Industrial Fibers (Ibn Rushd) and 1.69% stakes in Yanbu National Petrochemical Co. (YANSAB). The company’s principle activities are to manufacture and convert urea and ammonia. The company, at present, is the main producer of ammonia, urea, melamine and sulfuric acid in KSA.
Geographic Revenue Breakdown - 2014 3%
Asia Australia US
2%
18%
Africa Local
Analyst
22%
55%
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
Source: Company reports, Aljazira Capital
Saudi Arabian Fertilizers Company (SAFCO) Investment Update
June 2015
Please read Disclaimer on the back
We expect the production line to reach a utilization rate of around 60% by Q4-2015 and 85% at the end of H2-2016. According to the given information, Safco-5 will enable the company to reduce the consumption of energy by 8.0% and water by 11.0%. China may change the game; superior quality products from the Middle East: Chinese Urea exports increased significantly in the international market after the implementation of a new export tax regime on Chinese companies. Urea exports now account for a constant tax at CNY 80/ton in all seasons compared to the previous seasonal tax regime. We believe this is a key near-term price swing, decreasing Urea prices in the international market. In the Gulf region, Urea prices slid 5.0% YTD by the end of May 2015. However, we believe the long-term impact of the price decline on the Gulf region will be relatively less than that in other regions of the world. Black Sea Urea Spot Price fell 19.0% during the same period. We believe this is mainly due to a better variety of Urea products from the Middle East compared to those by Chinese producers. Price points to remain volatile on demand front; impact of gas prices on realization is margin neutral. In 2015, declining crop prices substantially impacted the global fertilizer demand. Ammonia and Urea prices fell 27.0% and 5.0% YTD, respectively, as of May 2015. Although global supply drivers suggest weakness in the fertilizer market in the near to medium term, we expect long-term industry fundamentals to remain strong. Additionally, a weak outlook for gas global benchmark prices can put pressure on Ammonia and Urea prices. However, as gas is a key feedstock for fertilizer production, any change in input prices and consequent product prices would largely be margin neutral for fertilizer companies. Gulf urea and ammonia prices 1,000
(USD/ Mt)
800 600 400 200
Urea-Gulf
Ammonia-Gulf
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
0
Source: Aljazira Capital, Bloomberg
Modest financial growth – We expect the company’s revenues to increase at a CAGR of 3.1%, during 2014-17. The expected growth is mainly based on the increase in volumetric sales (SAFCO 5) and the average prices of related fertilizer products. On the other hand, the expected stability in gross margin coupled with growth in revenues will lead the company’s net profitability to increase at a CAGR of 2.9%, during 2014-17. Strong Balance Sheet to support dividends. SAFCO has consistently paid dividends at an average yield of 7.4% in the last three years (average payout of over 100%). However, the company in 2014 proposed a DPS of SAR 7 with payout ratio of 73.5% and a yield of 4.9%, which was the lowest in the last three years. We believe that the low dividend payment was due to the project expansion cost of SAFCO-V and impacted price of product in Q4-2015. On the other hand, we anticipate the company to pay a dividend of SAR 6 DPS (4.9% D/Y) in 2015 and then an average DPS of SAR 8 over the next three years owing to a strong operating cash flow and no additional capital expenditure in the medium term. The company ended 2014 with retained earnings of SAR2.0bn, along with zero debt in the balance sheet makes the company flexible to support higher dividend payment in 2016/17. Our estimates and valuation: Saudi Arabia Fertilizers Co. (SAFCO) is expected to post SAR 2,877.9mn in net income (6.91 EPS) for 2015, recording a decline of 9.3%YoY for the year Influenced by expected lower volumetric sales in 1H-2015, lower contribution from associates, decline in product prices (Urea and Ammonia) . Moreover, we are adjusting our year end forecast from SAR 3,445mn due to announced delays in the commercial operation of the Safco 5 project. We adjust our valuation and reduce our 12-month price to SAR125.5/share; indicating a potential upside of 2.8% over current market price of SAR122.0/share (as of 11th June 2015). We, therefore, update our recommendation to ‘Neutral’ for SAFCO. The company is trading at a PE of 17.5x against our 2015 forward PE of 17.7x based on our 2015 earnings forecast.
2
Key risk factor: According to Jacob consultancy, more than 65.0%-70.0% of Chinese ammonia/urea capacities are based on coal. The country, at present, is making serious effort to make the usage of coal more feasible (environmentally). Any success in this context will lead to reduce the dependence on imports while, on other hand, we cannot ignore the possible rise in South Asian fertilizer capacities; where, there are ample reservoirs of coals. © All rights reserved
Saudi Arabian Fertilizers Company (SAFCO) Investment Update
June 2015
Please read Disclaimer on the back
Key Financials Amount in SARmn, unless otherwise specified Income statement Sales revenue Sales revenue growth Cost of sales Gross profit General & administrative expenses Operating profit Operating profit growth Interest income & financial charges Other income (expenses) - net Profit before zakat & minority interest Income from Ibn-Baytar Zakat Net profit Net profit growth Assets Cash & equivalent Property plant & equipment Intangible assets Other non-current assets Total Assets Liabilities & owners' equity Other current liabilities Other non-current liabilities Paid -up capital Statutory reserves Retained earnings Total owners' equity Total equity & liabilities
2012
2013
2014
2015E
2016E
2017E
4,980 -1.4% (1,372) 3,608 (87) 3,522 -4.2% (4) 110 3,628 312 (107) 3,833 -6.4%
4,240 -14.9% (1,362) 2,879 (81) 2,797 -20.6% (3) 86 2,881 364 (112) 3,132 -18.3%
4,456 5.1% (1,402) 3,054 (97) 2,956 5.7% 84 3,041 213 (80) 3,174 1.3%
4,221 -5.3% (1,364) 2,857 (112) 2,745 -7.2% 81 2,826 129 (77) 2,877.9 -9.3%
4,848 14.9% (1,430) 3,417 (110) 3,307 20.5% 82 3,389 133 (78) 3,444 19.7%
5,041 4.0% (1,478) 3,563 (112) 3,450 4.3% 83 3,533 131 (79) 3,586 4.1%
3,594 3,500 146 1,293 10,032
2,085 4,320 217 1,554 9,405
1,640 4,792 127 1,224 8,925
1,716 5,170 128 1,167 9,317
1,459 5,497 130 1,114 9,453
1,372 5,850 131 1,064 9,729
693 482 3,333 1,667 1,458 8,857 10,032
633 503 3,333 1,667 619 8,269 9,405
510 553 4,167 1,667 1,626 7,862 8,925
516 558 4,167 1,667 2,004 8,243 9,317
531 564 4,167 1,667 2,115 8,358 9,453
546 570 4,167 1,667 2,367 8,614 9,729
7.3 5.2
5.2 3.3
5.5 3.2
5.5 3.3
5.1 2.7
4.9 2.5
72.5% 70.7% 77.7% 77.0% 39.9% 45.3%
67.9% 66.0% 74.8% 73.9% 32.5% 36.9%
68.5% 66.3% 74.6% 71.2% 34.6% 39.4%
67.7% 65.0% 73.1% 68.2% 31.6% 35.7%
70.5% 68.2% 76.1% 71.0% 36.7% 41.5%
70.7% 68.4% 76.7% 71.1% 37.4% 42.3%
6.92 8.91 11.60 21.26 152.25 63,437.5 7.9% 13.13 7.16
14.89 19.90 9.48 19.85 156.50 65,208.3 7.7% 16.51 7.89
10.17 13.63 7.62 18.87 112.67 46,945.8 6.2% 14.79 5.97
11.64 15.92 6.91 19.78 122.00 50,833.3 4.9% 17.66 6.17
10.19 13.38 8.27 20.06 122.00 50,833.3 6.6% 14.76 6.08
9.81 12.80 8.61 20.67 122.00 50,833.3 6.6% 14.18 5.90
Key fundamental ratios Liquidity ratios Current ratio (x) Cash ratio (x) Profitability ratios Gross profit margin Operating margin EBITDA margin Net profit margin Return on assets Return on equity Market & valuation ratios EV/sales (x) EV/EBITDA (x) EPS (SAR) BVPS (SAR) Market price (SAR) * Market-Cap (SAR mn) Dividend yield P/E ratio (x) P/BV ratio (x)
Source: Company Financials, Aljazira Research
3
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RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [email protected]
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RATING TERMINOLOGY
Senior 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.
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