Saudi Arabian Mining Co. (Ma'aden) - Aljazira Capital
Saudi Arabian Mining Co. (Ma’aden) Investment Update
January 2016
Ma’aden: Q4-2015 results were below estimates with a disappointing result; higher QoQ OPEX expenses and jointly controlled entity loss contributed by SAR 130.5 mn loss in the quarter result. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 2,697.5 131.9 0.113
Actual 4Q-15 2,658.6 (5.7) (0.005)
Deviation (%) -1.44% *Not Available,
Lower cost of sales was offset by declines in product prices and jointly controlled entity loss in 4Q2015: Q4-15 earnings showed a net loss of SAR 5.7mn vs. AJC estimate of SAR 131.9 mn profit and market consensus of SAR 87.7mn profit. Saudi Arabian Mining Company’s (Ma’aden) reported net loss of SAR 5.7mn; (EPS; SAR-0.005); as compared to a net profit of SAR 375.9mn in Q4-2014 and SAR 79.9mn in the previous quarter. The company attributed the weak QoQ result to i) decrease in the average product prices except Ammonia ii) the increase in OPEX expenses iii) increase in net loss of jointly controlled entity and finally higher provision for zakat. Gross profit declined 47.8%YoY to SAR 533.6mn. It was 8.8% lower than our estimate of SAR 585.6mn. The YoY fall in gross profit was primarily owing to decline in product prices which led to decline in revenues. Operating profit fell 70.2%YoY to SAR 181.5mn, 38.3% lower than our expectation of SAR 294.1mn. Decline in operating profit was due to higher OPEX expenses of 35.1%QoQ (a deviation of SAR 91.5mn). Despite lower interest cost and zakat provision, the company reported loss of SAR 5.7mn against a profit of SAR 375.9mn in 4Q2014. Poor performance on low commodity prices Aluminum: Aluminum prices declined to about USD 1,507.0/tonne in the end of December 2015 from around USD 1,858.0/tonne in end of December 2014 due to weak global demand and higher inventory levels. Growth in aluminum production outpaced demand by the widest in the last 6 years. We note that aluminum accounts for almost 43.5% of the company’s sales in 2015. Phosphate: In 4Q2015, sales of diammonium phosphate (DAP) and ammonia increased 11.2%QoQ and 20.0%QoQ respectively in 4Q2015 due to unplanned shutdown in 3Q2015. Ammonia sales price fell 29.1%YoY and an increase of 5.6%QoQ. DAP-Fertilizer sales price plunged by 9.2%YoY and 8.1%QoQ. Gold: Gold prices averaged at about USD 1,150 per ounce in 2015. However, it moved in a broad range of about USD 1,050 per ounce to USD 1,300 per ounce. Currently, gold prices are hovering at about USD 1,100 per ounce and they are likely to remain muted in 2016 as demand from key consumers China and India is expected to remain lackluster. Also, strong dollar would keep the gold prices in pressure. Rise in energy prices and electricity tariffs to affect net income by about SAR 120mn: Saudi government’s decision to increase energy prices and electricity tariffs is expected to lower Maaden’s net income by about SAR 120mn annually. The financial impact would be reflected in FY2016 financials. We have reworked our financial model assumptions to incorporate the impact of these changes. Based on the new assumptions, the increase in cost would be about SAR 118.1mn. Consequently, net income of the company would stand revised from SAR 745.7mn to SAR 627.63mn in 2016 . However, the margins are expected to positively expand after the commencement of commercial production of Wa’ad Al Shamal, which may lower the impact of energy repricing. The company is trading at a forward PE and PB of 18.6x and 0.90x respectively based on our 2017 earnings forecast
1
Highly leveraged balance sheet, financing cost and depreciation to hurt the company’s net income: Ma’aden is considered to be one of the highly leveraged companies in the Saudi market, with long-term obligation of SAR43.3bn. Almost 25% shares of the loan are expected to be settled in 2023E. Hence, the high financing cost and depreciation of SAR 450.4mn and SAR 2,209.6mn respectively (2015), the higher the effect on the company’s net income. We expect the company to remain highly leveraged in the near to medium-term, and won’t have capacity to pay dividend in 2016/17 year. However, the margins are expected to positively expand after the commencement of commercial production of Wa’ad Al Shamal, which will lower the impact of finance cost and depreciation on the company’s net income. © All rights reserved
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
28.80
Target Price (SAR)
32.80
13.8%
Upside / (Downside)
*prices as of 21th of January 2016
Key Financials SARmn (unless specified) FY14 Revenues Growth % Net Income Growth % EPS
FY15E FY16E FY17E
10,792 10,956 11,585 16,170 78.5% 1.5% 5.7% 39.6% 1,357 605.2 627.6 1,812.6 -19.3% -55.4% 3.7% 188.8% 1.16 0.52 0.54 1.55 Source: Company reports, Aljazira Capital
Our estimates and valuation: Ma’aden Co. is expected to post SAR 627.6mn in net income (0.54 EPS) for 2016, influenced by rise in energy prices and electricity tariffs and low product prices, we remain our ‘Overweight’ for the stock with lower target price at SAR 32.80/share; indicating a potential upside of 13.8% over current market price of SAR28.80 share (as of 21st January 2016). The company is trading at a forward PE and PB of 18.6x and 0.90x respectively based on our 2017 earnings forecast. On December 20, 2015, the board of directors recommended not to distribute any dividends for FY2015. The step was taken to conserve capital as the company is still developing and financing its major projects.
Key Ratios SARmn (unless specified) FY14
FY15E FY16E FY17E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA
22.3% 32.1% 5.5% 64.0 1.13 19.3 2.38% 0.96%
28.9% 32.7% 12.6% 26.9 1.09 19.1 5.93% 2.34%
19.0% 30.2% 5.4% 53.6 0.95 17.6 2.30% 0.96%
23.0% 32.1% 11.2% 18.6 0.90 11.4 6.37% 2.76%
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Public Investment Fund Public
Holding 7.45% 7.98% 49.99% 34.58%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
33.65 -13.2% 48.40 25.70 1,168.48 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
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 &
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]
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.
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
January 2016
Ma’aden: Q4-2015 results were below estimates with a disappointing result; higher QoQ OPEX expenses and jointly controlled entity loss contributed by SAR 130.5 mn loss in the quarter result. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 2,697.5 131.9 0.113
Actual 4Q-15 2,658.6 (5.7) (0.005)
Deviation (%) -1.44% *Not Available,
Lower cost of sales was offset by declines in product prices and jointly controlled entity loss in 4Q2015: Q4-15 earnings showed a net loss of SAR 5.7mn vs. AJC estimate of SAR 131.9 mn profit and market consensus of SAR 87.7mn profit. Saudi Arabian Mining Company’s (Ma’aden) reported net loss of SAR 5.7mn; (EPS; SAR-0.005); as compared to a net profit of SAR 375.9mn in Q4-2014 and SAR 79.9mn in the previous quarter. The company attributed the weak QoQ result to i) decrease in the average product prices except Ammonia ii) the increase in OPEX expenses iii) increase in net loss of jointly controlled entity and finally higher provision for zakat. Gross profit declined 47.8%YoY to SAR 533.6mn. It was 8.8% lower than our estimate of SAR 585.6mn. The YoY fall in gross profit was primarily owing to decline in product prices which led to decline in revenues. Operating profit fell 70.2%YoY to SAR 181.5mn, 38.3% lower than our expectation of SAR 294.1mn. Decline in operating profit was due to higher OPEX expenses of 35.1%QoQ (a deviation of SAR 91.5mn). Despite lower interest cost and zakat provision, the company reported loss of SAR 5.7mn against a profit of SAR 375.9mn in 4Q2014. Poor performance on low commodity prices Aluminum: Aluminum prices declined to about USD 1,507.0/tonne in the end of December 2015 from around USD 1,858.0/tonne in end of December 2014 due to weak global demand and higher inventory levels. Growth in aluminum production outpaced demand by the widest in the last 6 years. We note that aluminum accounts for almost 43.5% of the company’s sales in 2015. Phosphate: In 4Q2015, sales of diammonium phosphate (DAP) and ammonia increased 11.2%QoQ and 20.0%QoQ respectively in 4Q2015 due to unplanned shutdown in 3Q2015. Ammonia sales price fell 29.1%YoY and an increase of 5.6%QoQ. DAP-Fertilizer sales price plunged by 9.2%YoY and 8.1%QoQ. Gold: Gold prices averaged at about USD 1,150 per ounce in 2015. However, it moved in a broad range of about USD 1,050 per ounce to USD 1,300 per ounce. Currently, gold prices are hovering at about USD 1,100 per ounce and they are likely to remain muted in 2016 as demand from key consumers China and India is expected to remain lackluster. Also, strong dollar would keep the gold prices in pressure. Rise in energy prices and electricity tariffs to affect net income by about SAR 120mn: Saudi government’s decision to increase energy prices and electricity tariffs is expected to lower Maaden’s net income by about SAR 120mn annually. The financial impact would be reflected in FY2016 financials. We have reworked our financial model assumptions to incorporate the impact of these changes. Based on the new assumptions, the increase in cost would be about SAR 118.1mn. Consequently, net income of the company would stand revised from SAR 745.7mn to SAR 627.63mn in 2016 . However, the margins are expected to positively expand after the commencement of commercial production of Wa’ad Al Shamal, which may lower the impact of energy repricing. The company is trading at a forward PE and PB of 18.6x and 0.90x respectively based on our 2017 earnings forecast
1
Highly leveraged balance sheet, financing cost and depreciation to hurt the company’s net income: Ma’aden is considered to be one of the highly leveraged companies in the Saudi market, with long-term obligation of SAR43.3bn. Almost 25% shares of the loan are expected to be settled in 2023E. Hence, the high financing cost and depreciation of SAR 450.4mn and SAR 2,209.6mn respectively (2015), the higher the effect on the company’s net income. We expect the company to remain highly leveraged in the near to medium-term, and won’t have capacity to pay dividend in 2016/17 year. However, the margins are expected to positively expand after the commencement of commercial production of Wa’ad Al Shamal, which will lower the impact of finance cost and depreciation on the company’s net income. © All rights reserved
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
28.80
Target Price (SAR)
32.80
13.8%
Upside / (Downside)
*prices as of 21th of January 2016
Key Financials SARmn (unless specified) FY14 Revenues Growth % Net Income Growth % EPS
FY15E FY16E FY17E
10,792 10,956 11,585 16,170 78.5% 1.5% 5.7% 39.6% 1,357 605.2 627.6 1,812.6 -19.3% -55.4% 3.7% 188.8% 1.16 0.52 0.54 1.55 Source: Company reports, Aljazira Capital
Our estimates and valuation: Ma’aden Co. is expected to post SAR 627.6mn in net income (0.54 EPS) for 2016, influenced by rise in energy prices and electricity tariffs and low product prices, we remain our ‘Overweight’ for the stock with lower target price at SAR 32.80/share; indicating a potential upside of 13.8% over current market price of SAR28.80 share (as of 21st January 2016). The company is trading at a forward PE and PB of 18.6x and 0.90x respectively based on our 2017 earnings forecast. On December 20, 2015, the board of directors recommended not to distribute any dividends for FY2015. The step was taken to conserve capital as the company is still developing and financing its major projects.
Key Ratios SARmn (unless specified) FY14
FY15E FY16E FY17E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA
22.3% 32.1% 5.5% 64.0 1.13 19.3 2.38% 0.96%
28.9% 32.7% 12.6% 26.9 1.09 19.1 5.93% 2.34%
19.0% 30.2% 5.4% 53.6 0.95 17.6 2.30% 0.96%
23.0% 32.1% 11.2% 18.6 0.90 11.4 6.37% 2.76%
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Public Investment Fund Public
Holding 7.45% 7.98% 49.99% 34.58%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
33.65 -13.2% 48.40 25.70 1,168.48 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
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 &
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]
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.
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
