Saudi Industrial Investment Group - Gulfbase
Saudi Industrial Investment Group Update Report
Buy
12-month Target Price SAR 16.00
Trough Valuations
February 11, 2016 Expected Total Return Price as on Feb-09, 2016
SAR 10.32
Upside to Target Price
55.1%
Expected Dividend Yield
9.7%
Expected Total Return
64.8%
Market Data 52 Week H/L
SAR 21.70/9.95
Market Capitalization
SAR 4,644 mln
Enterprise Value
SAR 19,855 mln
Shares Outstanding
450.0 mln
Free Float
82.1%
12-Month ADTV (000’s)
1,552.8
TASI Weight
0.76%
Reuters Code
2250.SE
Bloomberg Symbol
SIIG AB
We update our models and revise outlook on Saudi Industrial Investment Group (SIIG) for 2016-19, transferring coverage with this report. In this update, we revise revenue growth lower as SIIG faces the brunt of oil price decline. Though this is a sector-wide concern, pricing competency is the worst affected. SIIG is relatively better placed due to its lesser complexity in products comprising of PE and PP through its 50% owned subsidiary, Petrochem (TASI: 2002). However, associate’s performance continues to be a concern. We trim earnings growth for 2016-19 as government’s decision to hike feedstock prices would increase fuel costs, squeezing margins. On the valuations front, 2016E P/E of 7.0x is at par with Petrochem’s 7.1x but lower than sector’s 10.8x and TASI’s 13.8x. SIIG offers higher yield of 9.7% for 2016E versus Petrochem’s 3.9%. Maintain Buy on an upside of +55% but revise target price to SAR 16.00 from earlier SAR 28.00. New normal for margins from 2016
SIIG’s value continues to be driven by Petrochem’s contribution, which we believe is positioned well. However, associates such as JCP and SCP need to improve. On a group level, the strong network of products with exports focused to growth markets like Asia is attractive. The free fall in product prices, has led us to revise growth rates downwards. Hence, adjust revenue growth to +7% CAGR for 2016-19E from +9%. Opex is set to rise on feedstock price hike and expect contraction of 560 bps in operating margins for 2016. We adjust earnings to +6% CAGR through 2019 to reach SAR 781 million. Global supply-demand to grow at +5% CAGR
1-Year Price Performance
According to research firm Nexant, global supply for PE and PP are unlikely to outpace demand until 2017, demand growth of +5% CAGR through 2020. SIIG’s product portfolio catering to automotive and packaging is a strong end-user segment but slight demand weakening is expected after China’s PMI started contracting. Additionally, producers believe the product prices decline to be a bottom and expect once oil price volatility reduces, feedstock spreads are likely to enhance margins. For SIIG, 2016 will pose a challenge as low prices and margins remain a concern but this is set to normalize going forward.
120 110 100 90 80 70 60 50 40 30 F M A M J
J
SIIG
A S O N D TASI
J
Valuation at historical lows; negatives oversold
TPCHEM
Source: Bloomberg
Feb-09, 2016
SIIG
TASI
10.32
5,873
TPCHEM 3,527
We believe, SIIG offers an attractive entry point for investors as stock touched its all-time low of SAR 9.95 (Jan 18, 2016) and currently at 8-year lows. It retreated significantly by 58% over the last six months. Amid its attractive P/E, SIIG offers DPS of SAR 1.00 over the next two years, yielding 9.7%. We maintain Buy due to total expected return of +65%.
Total Change 6-months 1-Year 2-Year
(58.1%)
(32.5%)
(39.3%)
(54.7%)
(29.1%)
(38.0%)
(67.7%)
(32.3%)
(54.8%)
Shareholding Structure
Key Financials FY December 31 (SAR mln)
2015A
2016E
2017E
2018E
Revenue
7,304
7,691
8,348
8,857
EBITDA
2,891
2,340
2,486
2,576
Net Profit
727
663
673
718
EPS (SAR)
1.62
1.47
1.49
1.60
DPS (SAR)
1.00
1.00
1.00
1.25
PPA
10.7%
GOSI
5.8%
BVPS (SAR)
7.09
7.30
7.52
7.68
Foreign Ownership (Inc. QFI)
1.4%
ROAA
5.6%
6.6%
5.7%
6.4%
82.1%
ROAE
Public Float
Santhosh Balakrishnan
[email protected] +966-11-203-6809
13.7%
10.3%
9.1%
8.9%
P/E
6.4x
7.0x
6.9x
6.5x
P/B
1.5x
1.4x
1.4x
1.3x
P/S
0.6x
0.6x
0.6x
0.5x
EV/ EBITDA
6.9x
8.5x
8.0x
7.7x
EV/ Sales
2.7x
2.6x
2.4x
2.2x
Yasser Bin Ahmed
[email protected] +966-11-203-6805
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Saudi Industrial Investment Group Update Report
Sector Outlook Polyethylene (PE) and Polypropylene (PP) are the widely used plastic resins in the world driven by demand from automotives and packaging industry. Global demand for both (PE and PP) is highly influenced by the Asian economies as nearly 50-55% of demand is driven by the end-users in these markets. Asian majors like China, South Korea and India are the major consumers with China alone at 20% followed by US at 11%. Hence, producers closely follow consumption trends in these markets and any demand weakness affects overall industry. For SIIG, PE and PP are the major products. These products are witnessing slight pull-back in demand and prices hit multi-year lows. However, Nexant, expects global PP consumption is at par with demand, with demand expected to grow at +5% CAGR and reach 74 million MT by 2020. Exhibit 1: Global PP Demand & Supply from 2014-20 (Mln Tons) Supply
80
Exhibit 2: Global Polypropylene Demand Proportion 2016
Demand
United States 11%
70
China 20%
North America 12%
60
South America 6%
50
Europe 11%
40 Asia Pacific 32%
30 2014
2015
2016
2017
2018
2019
MEA 8%
2020
Source: Nexant, Bloomberg
Source: Nexant, Bloomberg
On the other hand, PE products (LDPE, HDPE and LLDPE) are expected to grow at a CAGR of +6% through 2020 to 109 million MT. With consumption remaining robust, prices remain the only concern. Exhibit 3: Global PE Demand & Supply from 2014-20 (Mln Tons) Supply
Exhibit 4: Global Polyethylene Demand Proportion 2016
Demand
110 China 18%
100
United States 11% North America 14%
90 80
South America 5%
70 60
Europe 13%
Asia Pacific 31%
50 40 2014
2015
2016
Source: Nexant, Bloomberg
2017
2018
2019
MEA 8%
2020
Source: Nexant, Bloomberg
Recently, weak PMI numbers from China has sent the oil and petrochemical prices crashing on anticipation of lower demand. Though these concerns cast shadow over the short term but they are unlikely to sustain. We believe the industry has decent supply-demand gap and capacity gluts are less likely. In a pessimistic scenario, a ramp-up in capacity by few Asian producers from 2017 is expected. This would increase supply up by another 5-10%, however such move offers no large over-supply threats.
February 11, 2016
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Saudi Industrial Investment Group Update Report
Financial Analysis We revise our outlook for 2016-19E and adjust estimates mainly for 2016. The fall in product prices being the key highlight of revisions, hence adjusting revenue estimates lower (revenues similar to Petrochem) by -8% for 2016 and -3% for 2017-18. We adjust our margin assumption accordingly, as Petrochem is likely to witness slight contraction after the hike in feedstock cost. Earnings are revised downwards for 2016-17E after the relevant adjustments in minority interest for Petrochem, while we expect slow growth from associates. Table 1: Changes in Estimates (SAR Mln)-RC versus Consensus RC Estim ates (Old)
Revenue Y/Y Gross Profit Y/Y EBITDA Y/Y Net Income Y/Y EPS
Consensus (6M Old)
Consensus (New )
2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
2016E 2017E 2018E
2016E 2017E 2018E 2016E 2017E 2018E
8,370 15% 2,637 6% 2,654 -8% 1,136 56% 2.52
7,965 9% 2,600 5% 3,174 10% 1,280 76% 2.84
7,512 3% 2,546 3% 2,483 -14% 820 13% 1.82
8,704 4% 2,785 6% 2,802 6% 1,216 7% 2.70
8,958 3% 2863 3% 2802 0% 1245 2% 2.77
RC Estim ates (new )
7,691 5% 2,307 -7% 2,340 -19% 663 -9% 1.47
8,348 9% 2,546 10% 2,486 6% 673 1% 1.49
Est.Revision (RC)
8,857 6% 2,724 7% 2,576 4% 718 7% 1.60
-8%
-4%
-1%
-12%
-9%
-5%
-12% -11%
-8%
-42% -45%
-42%
-42% -45%
-42%
8,282 4% 2,659 2% 2,935 -8% 1,365 7% 3.03
8,528 3% 2,729 3% 3,422 17% 1,322 -3% 2.94
7,518 0% 2,410 -5% 2,397 -3% 903 10% 2.01
Est.Revision (Cons.)
6,868 -9% 1696 -30% 2408 0% 728 -19% 1.62
-6%
-9%
-19%
-2%
-9%
-38%
-22% -18%
-30%
-36% -34%
-45%
-36% -34%
-45%
Source: Bloomberg Estimates and Riyad Capital * Comparison show n till 2018E as consensus for 2019 not available
Our estimates differ from the consensus because of large positive skew in consensus earnings estimates. This has led to an imprecise mean estimate, which could adjust gradually. The consensus currently and prior to six months had a large deviation and widened after analysts adjusted the impact of subsidy cuts recently. We followed suit to adjust the same though our expectations are more positive from 2017.
Revenue growth feeble in 2016 but expected to grow from 2017 SIIG sales composition as of 2015 comprises of 35% of sales from PE, while PP accounts for 25% followed by aromatic value chain with 40%. With PE and PP being the majority, we see product prices across both declining during 2015 with prices on an average fell by -20% for PE while PP declined by -26%. As prices across PE and PP value chain contracts, the resultant effect of the same would be a modest growth in revenue expectations for 2016-19. The impending oil volatility could keep product prices low, hence we expect a +7% CAGR from earlier +9% for 2016-19E to SAR 9.3 billion. We raise our growth rates beyond 2017 as we expect volatility in oil prices to subside. The operating rates for Petrochem are expected to be reasonably well but slightly lower for aromatics chain. Exhibit 5: Revenue (SAR Mln) and Growth Forecasts Revenue
Exhibit 6: Polypropylene vs Ethylene Prices (rebased)
YoY
180%
10% 160%
5%
140%
100% 80%
February 11, 2016
Poly Propylene
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
2019E
2018E
2017E
2016E
2015
2014
Source: Company reports and Riyad Capital
Jul-11
40%
-10%
Jan-11
60% Jul-10
-5%
Jan-10
9,326
8,857
8,348
7,691
7,304
7,859
120%
0%
Ethylene
Source: Bloomberg
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Saudi Industrial Investment Group Update Report
New margin trends to start; expect 400 bps dip in gross margins We expect SIIG to have a diminishing margin scenario until we see improvement in product prices as costs become difficult to rationalize further. Reasons for such expectations are i) subsidy cuts -Saudi Aramco has started pricing the feedstock from 2016 with 20% discount against its international benchmark versus 28% earlier adjusting freight cost ii) the impending oil price volatility and instability reduces the spread advantage on feedstock and iii) lower utilization in JCP and SCP as outages are increasing. In light of all these factors, we estimate average Opex for 2016-19 to be 69% considering increase in overall cost. Margin impact on Petrochem starting from 2016 is likely to result in contraction for SIIG’s gross margin and set to average 31% for 2016-19. In this scenario, a growth of +9% CAGR in gross profit is expected through 2019 reaching SAR 2.9 billion. Exhibit 7: Gross Profit (SAR Mln) and Growth Forecasts
Gross Prof it
YoY
Exhibit 8: Gross Margin Forecasts 12% 8%
32%
31%
31%
30%
0%
34%
2,956
2,724
2,546
2,307
2,482
4%
Source: Company reports and Riyad Capital
2019E
2018E
2017E
2015
2019E
2018E
2015
2016E
2017E
-8%
2016E
-4%
Source: Company reports and Riyad Capital
We expect earnings growth of +6% CAGR through 2019 from earlier +11% estimated. The ongoing weakening amid losses in 4Q2015 from SCP and JCP projects are a concern. Despite such concerns, Petrochem would be in a position to absorb such negatives and take SIIG’s earnings to SAR 781 million by 2019. Net margins are expected to average 8.3% through 2019 starting with a decline in 2016 and gradually improving to 8.5% by 2019. We forecast EPS of SAR 1.47 for 2016 and reach SAR 1.74 by 2019. DPS of SAR 1.00 over the next three years is expected and increase to SAR 1.25 for 2018 supported by maiden DPS of SAR 0.50 from Petrochem in 2015. Exhibit 9: Net Profit (SAR Mln) and Margin Forecasts
Net profit
Net Margins
Exhibit 10: EPS and DPS Forecasts (SAR) 12% 11%
Source: Company reports and Riyad Capital
1.50
1.74
2019E
1.25
2018E
1.60
1.49
1.00
2017E
1.47
2.07
1.62
1.00
1.00
2016E
2019E
2018E
2017E
2016E
2015
2014
7%
2015
8%
1.00
9%
2014
781
718
673
663
727
933
10%
Source: Company reports and Riyad Capital
D/E ratios of 1.9x is at higher levels due to Petrochem’s debt of nearly SAR 14 billion but relatively in-line with some of the new producers in KSA. ROE of 10% during 2016 is slightly higher versus industry’s 9%. Since plant’s investment cycle is relatively new, we expect feeble ROE expansion through 2019. Nevertheless, average ROA of 7% for 2016-19 is lower versus its WACC of 10%.
February 11, 2016
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Saudi Industrial Investment Group Update Report
4Q2015 review Revenue of SAR 1.6 billion in 4Q2015 missed our estimate of SAR 1.7 billion, declined by -13% Q/Q and -26% Y/Y mainly on lower product prices. Gross profit of SAR 546 million during 4Q2015 declined by -11% Y/Y and -28% Q/Q beating our expectations of SAR 463 million. Gross margins declined to 33% from 40% in 3Q2015 but improved from 28% in 4Q2014. Net income of SAR 55 million for 4Q2015 witnessed a decline of -35% Y/Y and -73% Q/Q. Table 2: Quarterly Income Statement Summary (SAR Mln) 1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
Revenue Q/Q Gross Profit Q/Q EBITDA Q/Q Net Income Q/Q EPS (SAR)
689 -68% 172 NM 257 NM 60 NM 0.13
1144 66% 223 29% 304 18% 230 284% 0.51
1117 1486 -2% 33% -39 370 NM NM 31 349 -90% 1026% 221 203 NM -8% 0.49 0.45
1710 15% 456 23% 486 39% 261 28% 0.58
1966 15% 561 23% 568 17% 210 -19% 0.47
1952 -1% 669 19% 643 13% 376 79% 0.84
2230 14% 613 -8% 621 -3% 85 -77% 0.19
1771 -21% 440 -28% 434 -30% 126 48% 0.28
1967 11% 738 68% 770 77% 339 170% 0.75
1912 1655 -3% -13% 758 546 3% -28% 796 573 3% -28% 207 55 -39% -73% 0.46 0.12
Gross Margins EBITDA Margins Net Margins
25.0% 19.5% -3.5% 24.9% 26.7% 28.5% 34.2% 27.5% 24.8% 37.5% 39.6% 33.0% 37.3% 26.6% 2.8% 23.5% 28.4% 28.9% 32.9% 27.9% 24.5% 39.1% 41.6% 34.6% 8.7% 20.1% 19.8% 13.7% 15.2% 10.7% 19.3% 3.8% 7.1% 17.2% 10.8% 3.3%
Source: Company Reports and Riyad Capital
The management has indicated that decrease in net income in 4Q2015 is due to the decline in contribution from SCP and JCP, as both reported lower profits/losses. The planned 37 days shutdown during 4Q2015 has led to such an impact. Net margins plunged to 3.3%, declined by 50 bps on a Y/Y basis from 3.8% in 4Q2014. It declined by 750 bps on a Q/Q basis from 10.8% in 3Q2015.
February 11, 2016
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Saudi Industrial Investment Group Update Report
Valuation We update our models and resort to two valuation metrics (DCF and Target P/E) for valuing SIIG, keeping in mind the recent earnings downgrade on Petrochem. The target P/E approach derived SAR 14.73 fair value after taking in to account its historical P/E movements and the range of valuations versus its peers in KSA. However, we prefer DCF method to derive our 12-month target price of SAR 16.00 (SAR 16.05 fair value) from earlier SAR 28.00. We maintain our Buy rating due to large upside of +55% as stock prices have corrected significantly.
#1: DCF suggest fair value of SAR 16.05 We run our DCF assumptions for forecasts assumed for 2017-19E with a risk-free rate of 3.8% and long-term terminal growth rate of 1.0%. A cost of equity of 12.7% and cost of debt at 5.1% is considered to derive a WACC of 10%. We assume a capital structure (Equity: Debt) of 65:35. Table 3: Discounted Cashflow Valuation 2017E 1,848 564 (131) (316) 116 1,965 1,277
NOPLAT Add: Depreciation &Amortization Change in w orking capital Less: Capex Net Adjustments in WC, CAPEX and D&A Free Cash Flow to Firm (FCFF) PV of FCFF-Share of Petrochem DCF Valuation Terminal Value PV of Terminal Value Value of the firm Add (Less): Net Debt Value of equity Value Per Share (SAR)
2018E 1,962 535 (103) (300) 132 2,094 1,361
2019E 2,121 507 (87) (284) 136 2,257 1,467 16,636 12,500 16,605 (9,383) 7,222 16.05
Assum ptions Cost of equity After tax cost of debt WACC Zakat (tax) rate Terminal Grow th rate Risk free rate Market Return Market Risk Premium LT Debt/Equity LT Equity Capital/Debt Potential Upside 3 Yr Weekly Adj.Beta Shares O/S (Mln) Stock price (SAR)
12.7% 5.1% 10.0% 2.5% 1.0% 3.9% 10.2% 6.3% 35.0% 65.0% 55.1% 1.4 450 10.32
Source: Riyad Capital
WACC
Table 4: Sensitivity Analysis of WACC and Terminal Growth Rate 16.050 9.2% 9.4% 9.6% 9.8% 10.0% 10.2% 10.4% 10.6%
0.3% 16.16 15.54 14.96 14.50 13.87 13.34 12.84 12.37
0.4% 16.50 15.88 15.28 14.81 14.16 13.62 13.12 12.63
0.5% 16.86 16.21 15.60 15.12 14.46 13.91 13.39 12.89
0.6% 17.22 16.56 15.93 15.44 14.76 14.20 13.67 13.16
0.7% 17.59 16.91 16.27 15.77 15.07 14.50 13.96 13.44
0.8% 17.96 17.27 16.62 16.11 15.39 14.81 14.25 13.72
Term inal Grow th Rate 0.9% 1.0% 1.1% 1.2% 18.35 18.75 19.16 19.57 17.64 18.02 18.41 18.81 16.97 17.33 17.70 18.08 16.45 16.80 17.16 17.52 15.72 16.05 16.39 16.74 15.12 15.44 15.76 16.10 14.55 14.86 15.17 15.49 14.01 14.30 14.60 14.91
1.3% 20.00 19.22 18.47 17.90 17.09 16.44 15.82 15.22
1.4% 20.44 19.63 18.87 18.28 17.46 16.78 16.15 15.54
1.5% 20.89 20.06 19.28 18.67 17.83 17.14 16.49 15.87
1.6% 21.35 20.50 19.70 19.08 18.21 17.50 16.84 16.21
1.7% 21.82 20.95 20.13 19.49 18.60 17.88 17.20 16.55
1.8% 22.31 21.42 20.57 19.91 19.00 18.26 17.56 16.90
Source: Riyad Capital
Risks to valuation Any further fall in product prices would lead to volatile margins. The probable slowdown in demand from Asian markets could affect growth as SIIG (which includes Petrochem) exports its product to Asia. The impact of technical outage can result in plant shutdown affecting operating rates. Any further increase on feedstock prices from 2017 could have a large downside impact on our estimates.
February 11, 2016
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Saudi Industrial Investment Group Update Report
#2: Target P/E valuation at SAR 14.73 We used a target P/E multiple of 10.0x to value SIIG as its key subsidiary, Petrochem, is valued at 11.0x while associates such as JCP and SCP does not command large valuation multiples. We believe a discount of 10% to Petrochem is the ideal measure to value SIIG as business models are not different. Table 5: Price Sensitivity and Target P/E Valuation using Bear-Base-Bull Case EPS Estimates
P/E Range(x)
2015A
EPS (SAR)
1.62
10.0x 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x
16.16 17.77 19.39 21.00 22.62 24.23 25.85 27.47 29.08
2016E
# # # # # # # # #
2017E
2018E
2019E
Bear
Base
Bull
Bear
Base
Bull
Bear
Base
Bull
Bear
Base
Bull
1.31
1.47
1.55
1.38
1.49
1.62
1.45
1.60
1.75
1.52
1.74
1.95
13.11 14.42 15.73 17.05 18.36 19.67 20.98 22.29 23.60
14.73 16.21 17.68 19.15 20.63 22.10 23.57 25.05 26.52
15.47 17.02 18.56 20.11 21.66 23.20 24.75 26.30 27.84
13.77 15.14 16.52 17.90 19.27 20.65 22.03 23.41 24.78
14.95 16.44 17.94 19.43 20.93 22.42 23.92 25.41 26.90
16.24 17.87 19.49 21.12 22.74 24.36 25.99 27.61 29.24
14.46 15.90 17.35 18.79 20.24 21.68 23.13 24.58 26.02
15.95 17.55 19.15 20.74 22.34 23.93 25.53 27.12 28.72
17.54 19.30 21.05 22.80 24.56 26.31 28.07 29.82 31.58
15.18 16.70 18.21 19.73 21.25 22.77 24.29 25.80 27.32
17.37 19.10 20.84 22.58 24.31 26.05 27.78 29.52 31.26
19.47 21.42 23.37 25.31 27.26 29.21 31.16 33.10 35.05
2016E 663 1.47
2017E 2018E 2019E 673 718 781 1.49 1.60 1.74
19.89 15.76 14.73
20.18 15.99 14.95
Valuation based on P/E Net profit estimates (SAR Mln) EPS (SAR) P/E based valuation (SAR) Valuation at 2 year historical average of 13.5x Based on a sector average 2016E consensus P/E of 10.7x Estim ated valuation at PER of 10.0x Source: Riyad Capital
21.54 17.07 15.95
23.44 18.58 17.37
Negatives oversold; large discount to sector SIIG’s P/E of 6.4x on 2015 earnings is the lowest in the petrochemical sector despite reported disappointing earnings in 4Q2015. At current prices, yields of 9.7% are above the sector. With 2016 earnings performance expected to decline, valuations are expected to re-rate but P/E of 6.4x in 2015 and 7.0x 2016E is attractive, hence expect investors to consider SIIG as a valuation pick. Table 6: KSA Petrochemicals Sector Valuation (TTM basis)
Com pany Nam e
Price Mcap EV SAR (SAR) SAR Mln Mln
February 11, 2016
YTD
52 Wk- 52 WkHi Lo (SAR) (SAR)
P/B
P/S
199,500 251,604 10.6x 1.2x 27,917 26,149 13.1x 3.7x 5,519 33,146 NA 0.7x 6,192 18,743 6.8x 1.1x 4,658 19,869 6.4x 0.7x 3,423 4,429 89.7x 0.6x 15,750 16,397 13.0x 1.0x 3,795 12,009 13.1x 0.7x 5,658 5,860 7.9x 2.3x 7,350 32,614 NA 0.6x 7,665 43,559 NA 0.9x 730 2,306 6.8x 0.7x 694 1,464 NA 0.6x 645 1,508 NA 0.5x
1.3x 7.9x 0.4x 0.8x 0.6x 2.4x 2.3x 1.1x 2.4x 0.9x 0.3x 0.5x 1.5x 0.9x
1.9x 9.2x 2.3x 2.8x 2.9x 3.9x 2.7x 3.8x 2.7x 4.4x 1.8x 1.8x 3.7x 2.4x
6.3x 9.0% (13%) 110.50 13.6x 9.0% (18%) 127.50 14.5x 12.1% (22%) 29.20 8.0x NA (23%) 30.40 8.3x 9.7% (25%) 29.90 13.9x 6.4% (24%) 18.10 7.1x 7.1% (14%) 57.50 10.4x NA (26%) 36.10 6.7x 8.7% (9%) 61.00 18.8x NA (28%) 14.00 33.0x 5.7% (29%) 26.70 5.3x NM (27%) 24.75 129.3x NM (24%) 13.95 17.2x NM (25%) 15.10
Sector Median* 289,494 469,659 10.6x 0.7x Source: Bloomberg, Market Cap and EV are total
1.0x
2.8x
12.0x
Saudi Basic Industries Corp 66.71 Saudi Arabian Fertilizer Co 66.88 National Industrialization Co 8.12 National Petrochemical Co 12.97 Saudi Industrial Investment Group 10.32 Sahara Petrochemical Co 7.80 Yanbu National Petrochemical Co 28.30 Saudi International Petrochemical Co10.44 Advanced Petrochemical Co 34.83 Saudi Kayan Petrochemical Co 4.93 Rabigh Refining & Petrochemical Co 8.90 Alujain Corp 10.55 Nama Chemicals Co 5.40 Methanol Chemicals Co 5.35
P/E
EV/ EV/ Div.Yl Sales EBITDA d
59.50 62.00 7.50 12.70 9.80 7.60 23.80 9.75 31.90 4.40 7.00 9.50 4.95 4.95
8.8%
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Saudi Industrial Investment Group Update Report
Appendix Exhibit 8: 5 Year Price Multiples Trading History P/B Ratio
P/S Ratio
4.0
3.5
2.4
3.0 1.9
2.5 2.0
1.4
1.5 1.0
0.9
P/S P/B
3 Yr Avg
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Oct-13
Feb-14
3 Yr Avg
12M Avg
12M Avg
P/E Ratio
24.0
Jun-13
Oct-12
Feb-13
Jun-12
Feb-12
Jun-11
Feb-11
Oct-15
Jun-15
Oct-14
Feb-15
Jun-14
Oct-13
Feb-14
Jun-13
Oct-12
Feb-13
Jun-12
Feb-12
Oct-11
Feb-11
Jun-11
0.0
0.4
Oct-11
0.5
EV/EBITDA Ratio
60.0 50.0
19.0
40.0 14.0
30.0
9.0
20.0
P/E
3 Yr Avg
12M Avg
EV/EBITDA
3 Yr Avg
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Jun-11
0.0
Feb-11
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Feb-11
Jun-11
10.0 4.0
12-M Avg
Source: Bloomberg
Exhibit 9: KSA Petrochemicals Sector Valuation-Consensus EPS growth 2016-18E Vs 2017E P/E
14.0% Sipchem
12.0% 2016-18 E EPS grow th
Sahara
10.0%
SIIG
Petrochem
8.0% Saudi Kay an
6.0% SABICY ANSAB
4.0% Adv anced
2.0% 5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
2017E P/E Source: Bloomberg
February 11, 2016
|8
Saudi Industrial Investment Group Update Report Table 7: Summary Financials and Ratio's Income Statement (SAR mln) Total Sales Cost of Sales Gross Profit S,G&A Expenses
2012 5,556
2013 4,437
2014 7,859
2015 7,304
2016 E 7,691
2017 E 8,348
2018 E 8,857
2019 E 9,326
(5,036) 520
(3,710) 727
(5,559) 2,299
(4,822) 2,482
(5,384) 2,307
(5,802) 2,546
(6,134) 2,724
(6,370) 2,956
(366)
(572)
(807)
(731)
(846)
(918)
(974)
(1,026)
Associate Income Financial Charges
64 (40)
885 (265)
612 (172)
318 (146)
285 (145)
295 (143)
292 (142)
277 (141)
Income before MI and Zakat Minority intrest
178 453
774 43
1,932 (872)
1,922 (1,032)
1,601 (865)
1,779 (1,032)
1,899 (1,102)
2,067 (1,199)
Income before zakat
631
817
1,060
737
747
798
(74)
(75)
(80)
(87)
727
663
673
718
781
2,923
2,891
2,340
2,486
2,576
2,715
2.07
1.62
1.47
1.49
1.60
1.74
1.00
1.00
1.00
1.00
1.00
1.25
1.50
1,775 3,740
1,510 3,397
1,799 4,933
2,506 5,374
1,471 5,591
2,464 6,850
2,822 7,441
3,588 8,420
Property Plant & Equipment Investment in subsidiaries Total non-Current Assets
20,772 1,560 22,497
18,370 3,234 21,977
17,632 3,154 21,525
16,755 3,210 21,194
15,960 3,274 20,194
14,145 3,339 18,489
12,937 3,406 17,395
10,662 3,474 15,238
Total Assets
26,236
25,374
26,458
26,568
25,784
25,339
24,836
23,658
1,314 738
625 926
593 1,146
496 1,296
592 953
638 857
675 1,543
701 1,235
Total Current Liabilities Long Term Debt
2,051 13,709
2,426 11,968
2,219 10,822
2,368 9,526
2,149 8,573
2,130 7,716
2,885 6,173
2,635 4,938
LT Accounts Payable Total non-Current Liab
53 14,578
13,122
13,059
11,712
11,660
10,868
9,357
8,253
Total Liabilities Retained Earnings Total Equity
16,629 1,207 6,070
15,548 1,398 6,332
15,278 1,786 6,813
14,080 1,989 7,089
13,809 2,136 7,302
12,998 2,292 7,525
12,241 2,375 7,680
10,888 2,403 7,786
Total Liab & Equity
26,236
25,374
26,458
26,568
25,784
25,339
24,836
23,658
1,779 516
1,899 468
2,067 421
Zakat
890
(103)
(127)
(163)
539
714
933
EBITDA
564
1,780
EPS
1.21
1.59
DPS
1.00
Net Income
(92)
868
Balance Sheet (SAR mln) Assets Cash & equivalents Total Current Assets
Liabilities & Equity Accounts Payable Short Term Debt
Cash Flows (SAR mln) Income before Zakat Adjustments
631 (639)
817 (796)
1,932 (428)
1,922 683
CFO Prop, plant & equip
(8) (129)
22 (1)
1,504 (169)
2,605 (135)
343 (333)
2,295 (316)
2,368 (300)
2,488 (284)
182 46
755 422
716 400
677 377
752 468
Projects and deferred expenses CFI Loans Dividends CFF Cash at year end
(1,827) (1,956) (76) (449) 225 1,775
557 556 (565) (450) (244) 1,510
126 (43)
1,601 (1,258)
(926) (450) (1,172)
(546) (450) (1,944)
(953) (450) (1,799)
(857) (450) (1,703)
(1,543) (450) (2,387)
(1,235) (563) (2,189)
1,799
2,506
1,471
2,464
2,822
3,588
Valuations and Ratio's Margins Gross
9%
16%
29%
32%
30%
31%
31%
32%
EBITDA
10%
40%
37%
40%
30%
30%
29%
29%
Net
10%
16%
12%
10%
9%
8%
8%
8%
Cash Ratio
0.87
0.62
0.81
1.06
0.68
1.16
0.98
1.36
Current Ratio
1.82
1.40
2.22
2.27
2.60
3.22
2.58
3.20
Inventory Turnover Interest Cover
5.80 3.80
3.99 3.62
4.47 12.18
4.73 14.13
4.55 12.05
4.55 13.40
4.55 14.37
4.55 15.70
27.06 58%
7.88 55%
4.48 50%
4.11 45%
4.91 45%
4.26 42%
3.79 39%
3.08 35%
2.51
2.21
1.92
1.68
1.57
1.41
1.27
1.07
Leverage/Liquidity (x)
Debt to EBITDA Debt to Assets Debt to Equity Others Price to Earnings Price to Book Dividend Payout Dividend Yield Earnings Yield
8.5x 0.8x
6.5x 0.7x
5.0x 0.7x
6.4x 0.7x
7.0x 0.6x
6.9x 0.6x
6.5x 0.6x
5.9x 0.6x
83% 9.7% 11.7%
63% 9.7% 15.4%
48% 9.7% 20.1%
62% 9.7% 15.7%
68% 9.7% 14.3%
67% 9.7% 14.5%
78% 12.1% 15.5%
86% 14.5% 16.8%
Source: Company reports, Riyad Capital
February 11, 2016
|9
Saudi Industrial Investment Group Update Report
Page Intentionally Left Blank
February 11, 2016
| 10
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Buy
12-month Target Price SAR 16.00
Trough Valuations
February 11, 2016 Expected Total Return Price as on Feb-09, 2016
SAR 10.32
Upside to Target Price
55.1%
Expected Dividend Yield
9.7%
Expected Total Return
64.8%
Market Data 52 Week H/L
SAR 21.70/9.95
Market Capitalization
SAR 4,644 mln
Enterprise Value
SAR 19,855 mln
Shares Outstanding
450.0 mln
Free Float
82.1%
12-Month ADTV (000’s)
1,552.8
TASI Weight
0.76%
Reuters Code
2250.SE
Bloomberg Symbol
SIIG AB
We update our models and revise outlook on Saudi Industrial Investment Group (SIIG) for 2016-19, transferring coverage with this report. In this update, we revise revenue growth lower as SIIG faces the brunt of oil price decline. Though this is a sector-wide concern, pricing competency is the worst affected. SIIG is relatively better placed due to its lesser complexity in products comprising of PE and PP through its 50% owned subsidiary, Petrochem (TASI: 2002). However, associate’s performance continues to be a concern. We trim earnings growth for 2016-19 as government’s decision to hike feedstock prices would increase fuel costs, squeezing margins. On the valuations front, 2016E P/E of 7.0x is at par with Petrochem’s 7.1x but lower than sector’s 10.8x and TASI’s 13.8x. SIIG offers higher yield of 9.7% for 2016E versus Petrochem’s 3.9%. Maintain Buy on an upside of +55% but revise target price to SAR 16.00 from earlier SAR 28.00. New normal for margins from 2016
SIIG’s value continues to be driven by Petrochem’s contribution, which we believe is positioned well. However, associates such as JCP and SCP need to improve. On a group level, the strong network of products with exports focused to growth markets like Asia is attractive. The free fall in product prices, has led us to revise growth rates downwards. Hence, adjust revenue growth to +7% CAGR for 2016-19E from +9%. Opex is set to rise on feedstock price hike and expect contraction of 560 bps in operating margins for 2016. We adjust earnings to +6% CAGR through 2019 to reach SAR 781 million. Global supply-demand to grow at +5% CAGR
1-Year Price Performance
According to research firm Nexant, global supply for PE and PP are unlikely to outpace demand until 2017, demand growth of +5% CAGR through 2020. SIIG’s product portfolio catering to automotive and packaging is a strong end-user segment but slight demand weakening is expected after China’s PMI started contracting. Additionally, producers believe the product prices decline to be a bottom and expect once oil price volatility reduces, feedstock spreads are likely to enhance margins. For SIIG, 2016 will pose a challenge as low prices and margins remain a concern but this is set to normalize going forward.
120 110 100 90 80 70 60 50 40 30 F M A M J
J
SIIG
A S O N D TASI
J
Valuation at historical lows; negatives oversold
TPCHEM
Source: Bloomberg
Feb-09, 2016
SIIG
TASI
10.32
5,873
TPCHEM 3,527
We believe, SIIG offers an attractive entry point for investors as stock touched its all-time low of SAR 9.95 (Jan 18, 2016) and currently at 8-year lows. It retreated significantly by 58% over the last six months. Amid its attractive P/E, SIIG offers DPS of SAR 1.00 over the next two years, yielding 9.7%. We maintain Buy due to total expected return of +65%.
Total Change 6-months 1-Year 2-Year
(58.1%)
(32.5%)
(39.3%)
(54.7%)
(29.1%)
(38.0%)
(67.7%)
(32.3%)
(54.8%)
Shareholding Structure
Key Financials FY December 31 (SAR mln)
2015A
2016E
2017E
2018E
Revenue
7,304
7,691
8,348
8,857
EBITDA
2,891
2,340
2,486
2,576
Net Profit
727
663
673
718
EPS (SAR)
1.62
1.47
1.49
1.60
DPS (SAR)
1.00
1.00
1.00
1.25
PPA
10.7%
GOSI
5.8%
BVPS (SAR)
7.09
7.30
7.52
7.68
Foreign Ownership (Inc. QFI)
1.4%
ROAA
5.6%
6.6%
5.7%
6.4%
82.1%
ROAE
Public Float
Santhosh Balakrishnan
[email protected] +966-11-203-6809
13.7%
10.3%
9.1%
8.9%
P/E
6.4x
7.0x
6.9x
6.5x
P/B
1.5x
1.4x
1.4x
1.3x
P/S
0.6x
0.6x
0.6x
0.5x
EV/ EBITDA
6.9x
8.5x
8.0x
7.7x
EV/ Sales
2.7x
2.6x
2.4x
2.2x
Yasser Bin Ahmed
[email protected] +966-11-203-6805
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Saudi Industrial Investment Group Update Report
Sector Outlook Polyethylene (PE) and Polypropylene (PP) are the widely used plastic resins in the world driven by demand from automotives and packaging industry. Global demand for both (PE and PP) is highly influenced by the Asian economies as nearly 50-55% of demand is driven by the end-users in these markets. Asian majors like China, South Korea and India are the major consumers with China alone at 20% followed by US at 11%. Hence, producers closely follow consumption trends in these markets and any demand weakness affects overall industry. For SIIG, PE and PP are the major products. These products are witnessing slight pull-back in demand and prices hit multi-year lows. However, Nexant, expects global PP consumption is at par with demand, with demand expected to grow at +5% CAGR and reach 74 million MT by 2020. Exhibit 1: Global PP Demand & Supply from 2014-20 (Mln Tons) Supply
80
Exhibit 2: Global Polypropylene Demand Proportion 2016
Demand
United States 11%
70
China 20%
North America 12%
60
South America 6%
50
Europe 11%
40 Asia Pacific 32%
30 2014
2015
2016
2017
2018
2019
MEA 8%
2020
Source: Nexant, Bloomberg
Source: Nexant, Bloomberg
On the other hand, PE products (LDPE, HDPE and LLDPE) are expected to grow at a CAGR of +6% through 2020 to 109 million MT. With consumption remaining robust, prices remain the only concern. Exhibit 3: Global PE Demand & Supply from 2014-20 (Mln Tons) Supply
Exhibit 4: Global Polyethylene Demand Proportion 2016
Demand
110 China 18%
100
United States 11% North America 14%
90 80
South America 5%
70 60
Europe 13%
Asia Pacific 31%
50 40 2014
2015
2016
Source: Nexant, Bloomberg
2017
2018
2019
MEA 8%
2020
Source: Nexant, Bloomberg
Recently, weak PMI numbers from China has sent the oil and petrochemical prices crashing on anticipation of lower demand. Though these concerns cast shadow over the short term but they are unlikely to sustain. We believe the industry has decent supply-demand gap and capacity gluts are less likely. In a pessimistic scenario, a ramp-up in capacity by few Asian producers from 2017 is expected. This would increase supply up by another 5-10%, however such move offers no large over-supply threats.
February 11, 2016
|2
Saudi Industrial Investment Group Update Report
Financial Analysis We revise our outlook for 2016-19E and adjust estimates mainly for 2016. The fall in product prices being the key highlight of revisions, hence adjusting revenue estimates lower (revenues similar to Petrochem) by -8% for 2016 and -3% for 2017-18. We adjust our margin assumption accordingly, as Petrochem is likely to witness slight contraction after the hike in feedstock cost. Earnings are revised downwards for 2016-17E after the relevant adjustments in minority interest for Petrochem, while we expect slow growth from associates. Table 1: Changes in Estimates (SAR Mln)-RC versus Consensus RC Estim ates (Old)
Revenue Y/Y Gross Profit Y/Y EBITDA Y/Y Net Income Y/Y EPS
Consensus (6M Old)
Consensus (New )
2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
2016E 2017E 2018E
2016E 2017E 2018E 2016E 2017E 2018E
8,370 15% 2,637 6% 2,654 -8% 1,136 56% 2.52
7,965 9% 2,600 5% 3,174 10% 1,280 76% 2.84
7,512 3% 2,546 3% 2,483 -14% 820 13% 1.82
8,704 4% 2,785 6% 2,802 6% 1,216 7% 2.70
8,958 3% 2863 3% 2802 0% 1245 2% 2.77
RC Estim ates (new )
7,691 5% 2,307 -7% 2,340 -19% 663 -9% 1.47
8,348 9% 2,546 10% 2,486 6% 673 1% 1.49
Est.Revision (RC)
8,857 6% 2,724 7% 2,576 4% 718 7% 1.60
-8%
-4%
-1%
-12%
-9%
-5%
-12% -11%
-8%
-42% -45%
-42%
-42% -45%
-42%
8,282 4% 2,659 2% 2,935 -8% 1,365 7% 3.03
8,528 3% 2,729 3% 3,422 17% 1,322 -3% 2.94
7,518 0% 2,410 -5% 2,397 -3% 903 10% 2.01
Est.Revision (Cons.)
6,868 -9% 1696 -30% 2408 0% 728 -19% 1.62
-6%
-9%
-19%
-2%
-9%
-38%
-22% -18%
-30%
-36% -34%
-45%
-36% -34%
-45%
Source: Bloomberg Estimates and Riyad Capital * Comparison show n till 2018E as consensus for 2019 not available
Our estimates differ from the consensus because of large positive skew in consensus earnings estimates. This has led to an imprecise mean estimate, which could adjust gradually. The consensus currently and prior to six months had a large deviation and widened after analysts adjusted the impact of subsidy cuts recently. We followed suit to adjust the same though our expectations are more positive from 2017.
Revenue growth feeble in 2016 but expected to grow from 2017 SIIG sales composition as of 2015 comprises of 35% of sales from PE, while PP accounts for 25% followed by aromatic value chain with 40%. With PE and PP being the majority, we see product prices across both declining during 2015 with prices on an average fell by -20% for PE while PP declined by -26%. As prices across PE and PP value chain contracts, the resultant effect of the same would be a modest growth in revenue expectations for 2016-19. The impending oil volatility could keep product prices low, hence we expect a +7% CAGR from earlier +9% for 2016-19E to SAR 9.3 billion. We raise our growth rates beyond 2017 as we expect volatility in oil prices to subside. The operating rates for Petrochem are expected to be reasonably well but slightly lower for aromatics chain. Exhibit 5: Revenue (SAR Mln) and Growth Forecasts Revenue
Exhibit 6: Polypropylene vs Ethylene Prices (rebased)
YoY
180%
10% 160%
5%
140%
100% 80%
February 11, 2016
Poly Propylene
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
2019E
2018E
2017E
2016E
2015
2014
Source: Company reports and Riyad Capital
Jul-11
40%
-10%
Jan-11
60% Jul-10
-5%
Jan-10
9,326
8,857
8,348
7,691
7,304
7,859
120%
0%
Ethylene
Source: Bloomberg
|3
Saudi Industrial Investment Group Update Report
New margin trends to start; expect 400 bps dip in gross margins We expect SIIG to have a diminishing margin scenario until we see improvement in product prices as costs become difficult to rationalize further. Reasons for such expectations are i) subsidy cuts -Saudi Aramco has started pricing the feedstock from 2016 with 20% discount against its international benchmark versus 28% earlier adjusting freight cost ii) the impending oil price volatility and instability reduces the spread advantage on feedstock and iii) lower utilization in JCP and SCP as outages are increasing. In light of all these factors, we estimate average Opex for 2016-19 to be 69% considering increase in overall cost. Margin impact on Petrochem starting from 2016 is likely to result in contraction for SIIG’s gross margin and set to average 31% for 2016-19. In this scenario, a growth of +9% CAGR in gross profit is expected through 2019 reaching SAR 2.9 billion. Exhibit 7: Gross Profit (SAR Mln) and Growth Forecasts
Gross Prof it
YoY
Exhibit 8: Gross Margin Forecasts 12% 8%
32%
31%
31%
30%
0%
34%
2,956
2,724
2,546
2,307
2,482
4%
Source: Company reports and Riyad Capital
2019E
2018E
2017E
2015
2019E
2018E
2015
2016E
2017E
-8%
2016E
-4%
Source: Company reports and Riyad Capital
We expect earnings growth of +6% CAGR through 2019 from earlier +11% estimated. The ongoing weakening amid losses in 4Q2015 from SCP and JCP projects are a concern. Despite such concerns, Petrochem would be in a position to absorb such negatives and take SIIG’s earnings to SAR 781 million by 2019. Net margins are expected to average 8.3% through 2019 starting with a decline in 2016 and gradually improving to 8.5% by 2019. We forecast EPS of SAR 1.47 for 2016 and reach SAR 1.74 by 2019. DPS of SAR 1.00 over the next three years is expected and increase to SAR 1.25 for 2018 supported by maiden DPS of SAR 0.50 from Petrochem in 2015. Exhibit 9: Net Profit (SAR Mln) and Margin Forecasts
Net profit
Net Margins
Exhibit 10: EPS and DPS Forecasts (SAR) 12% 11%
Source: Company reports and Riyad Capital
1.50
1.74
2019E
1.25
2018E
1.60
1.49
1.00
2017E
1.47
2.07
1.62
1.00
1.00
2016E
2019E
2018E
2017E
2016E
2015
2014
7%
2015
8%
1.00
9%
2014
781
718
673
663
727
933
10%
Source: Company reports and Riyad Capital
D/E ratios of 1.9x is at higher levels due to Petrochem’s debt of nearly SAR 14 billion but relatively in-line with some of the new producers in KSA. ROE of 10% during 2016 is slightly higher versus industry’s 9%. Since plant’s investment cycle is relatively new, we expect feeble ROE expansion through 2019. Nevertheless, average ROA of 7% for 2016-19 is lower versus its WACC of 10%.
February 11, 2016
|4
Saudi Industrial Investment Group Update Report
4Q2015 review Revenue of SAR 1.6 billion in 4Q2015 missed our estimate of SAR 1.7 billion, declined by -13% Q/Q and -26% Y/Y mainly on lower product prices. Gross profit of SAR 546 million during 4Q2015 declined by -11% Y/Y and -28% Q/Q beating our expectations of SAR 463 million. Gross margins declined to 33% from 40% in 3Q2015 but improved from 28% in 4Q2014. Net income of SAR 55 million for 4Q2015 witnessed a decline of -35% Y/Y and -73% Q/Q. Table 2: Quarterly Income Statement Summary (SAR Mln) 1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
Revenue Q/Q Gross Profit Q/Q EBITDA Q/Q Net Income Q/Q EPS (SAR)
689 -68% 172 NM 257 NM 60 NM 0.13
1144 66% 223 29% 304 18% 230 284% 0.51
1117 1486 -2% 33% -39 370 NM NM 31 349 -90% 1026% 221 203 NM -8% 0.49 0.45
1710 15% 456 23% 486 39% 261 28% 0.58
1966 15% 561 23% 568 17% 210 -19% 0.47
1952 -1% 669 19% 643 13% 376 79% 0.84
2230 14% 613 -8% 621 -3% 85 -77% 0.19
1771 -21% 440 -28% 434 -30% 126 48% 0.28
1967 11% 738 68% 770 77% 339 170% 0.75
1912 1655 -3% -13% 758 546 3% -28% 796 573 3% -28% 207 55 -39% -73% 0.46 0.12
Gross Margins EBITDA Margins Net Margins
25.0% 19.5% -3.5% 24.9% 26.7% 28.5% 34.2% 27.5% 24.8% 37.5% 39.6% 33.0% 37.3% 26.6% 2.8% 23.5% 28.4% 28.9% 32.9% 27.9% 24.5% 39.1% 41.6% 34.6% 8.7% 20.1% 19.8% 13.7% 15.2% 10.7% 19.3% 3.8% 7.1% 17.2% 10.8% 3.3%
Source: Company Reports and Riyad Capital
The management has indicated that decrease in net income in 4Q2015 is due to the decline in contribution from SCP and JCP, as both reported lower profits/losses. The planned 37 days shutdown during 4Q2015 has led to such an impact. Net margins plunged to 3.3%, declined by 50 bps on a Y/Y basis from 3.8% in 4Q2014. It declined by 750 bps on a Q/Q basis from 10.8% in 3Q2015.
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Saudi Industrial Investment Group Update Report
Valuation We update our models and resort to two valuation metrics (DCF and Target P/E) for valuing SIIG, keeping in mind the recent earnings downgrade on Petrochem. The target P/E approach derived SAR 14.73 fair value after taking in to account its historical P/E movements and the range of valuations versus its peers in KSA. However, we prefer DCF method to derive our 12-month target price of SAR 16.00 (SAR 16.05 fair value) from earlier SAR 28.00. We maintain our Buy rating due to large upside of +55% as stock prices have corrected significantly.
#1: DCF suggest fair value of SAR 16.05 We run our DCF assumptions for forecasts assumed for 2017-19E with a risk-free rate of 3.8% and long-term terminal growth rate of 1.0%. A cost of equity of 12.7% and cost of debt at 5.1% is considered to derive a WACC of 10%. We assume a capital structure (Equity: Debt) of 65:35. Table 3: Discounted Cashflow Valuation 2017E 1,848 564 (131) (316) 116 1,965 1,277
NOPLAT Add: Depreciation &Amortization Change in w orking capital Less: Capex Net Adjustments in WC, CAPEX and D&A Free Cash Flow to Firm (FCFF) PV of FCFF-Share of Petrochem DCF Valuation Terminal Value PV of Terminal Value Value of the firm Add (Less): Net Debt Value of equity Value Per Share (SAR)
2018E 1,962 535 (103) (300) 132 2,094 1,361
2019E 2,121 507 (87) (284) 136 2,257 1,467 16,636 12,500 16,605 (9,383) 7,222 16.05
Assum ptions Cost of equity After tax cost of debt WACC Zakat (tax) rate Terminal Grow th rate Risk free rate Market Return Market Risk Premium LT Debt/Equity LT Equity Capital/Debt Potential Upside 3 Yr Weekly Adj.Beta Shares O/S (Mln) Stock price (SAR)
12.7% 5.1% 10.0% 2.5% 1.0% 3.9% 10.2% 6.3% 35.0% 65.0% 55.1% 1.4 450 10.32
Source: Riyad Capital
WACC
Table 4: Sensitivity Analysis of WACC and Terminal Growth Rate 16.050 9.2% 9.4% 9.6% 9.8% 10.0% 10.2% 10.4% 10.6%
0.3% 16.16 15.54 14.96 14.50 13.87 13.34 12.84 12.37
0.4% 16.50 15.88 15.28 14.81 14.16 13.62 13.12 12.63
0.5% 16.86 16.21 15.60 15.12 14.46 13.91 13.39 12.89
0.6% 17.22 16.56 15.93 15.44 14.76 14.20 13.67 13.16
0.7% 17.59 16.91 16.27 15.77 15.07 14.50 13.96 13.44
0.8% 17.96 17.27 16.62 16.11 15.39 14.81 14.25 13.72
Term inal Grow th Rate 0.9% 1.0% 1.1% 1.2% 18.35 18.75 19.16 19.57 17.64 18.02 18.41 18.81 16.97 17.33 17.70 18.08 16.45 16.80 17.16 17.52 15.72 16.05 16.39 16.74 15.12 15.44 15.76 16.10 14.55 14.86 15.17 15.49 14.01 14.30 14.60 14.91
1.3% 20.00 19.22 18.47 17.90 17.09 16.44 15.82 15.22
1.4% 20.44 19.63 18.87 18.28 17.46 16.78 16.15 15.54
1.5% 20.89 20.06 19.28 18.67 17.83 17.14 16.49 15.87
1.6% 21.35 20.50 19.70 19.08 18.21 17.50 16.84 16.21
1.7% 21.82 20.95 20.13 19.49 18.60 17.88 17.20 16.55
1.8% 22.31 21.42 20.57 19.91 19.00 18.26 17.56 16.90
Source: Riyad Capital
Risks to valuation Any further fall in product prices would lead to volatile margins. The probable slowdown in demand from Asian markets could affect growth as SIIG (which includes Petrochem) exports its product to Asia. The impact of technical outage can result in plant shutdown affecting operating rates. Any further increase on feedstock prices from 2017 could have a large downside impact on our estimates.
February 11, 2016
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Saudi Industrial Investment Group Update Report
#2: Target P/E valuation at SAR 14.73 We used a target P/E multiple of 10.0x to value SIIG as its key subsidiary, Petrochem, is valued at 11.0x while associates such as JCP and SCP does not command large valuation multiples. We believe a discount of 10% to Petrochem is the ideal measure to value SIIG as business models are not different. Table 5: Price Sensitivity and Target P/E Valuation using Bear-Base-Bull Case EPS Estimates
P/E Range(x)
2015A
EPS (SAR)
1.62
10.0x 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x
16.16 17.77 19.39 21.00 22.62 24.23 25.85 27.47 29.08
2016E
# # # # # # # # #
2017E
2018E
2019E
Bear
Base
Bull
Bear
Base
Bull
Bear
Base
Bull
Bear
Base
Bull
1.31
1.47
1.55
1.38
1.49
1.62
1.45
1.60
1.75
1.52
1.74
1.95
13.11 14.42 15.73 17.05 18.36 19.67 20.98 22.29 23.60
14.73 16.21 17.68 19.15 20.63 22.10 23.57 25.05 26.52
15.47 17.02 18.56 20.11 21.66 23.20 24.75 26.30 27.84
13.77 15.14 16.52 17.90 19.27 20.65 22.03 23.41 24.78
14.95 16.44 17.94 19.43 20.93 22.42 23.92 25.41 26.90
16.24 17.87 19.49 21.12 22.74 24.36 25.99 27.61 29.24
14.46 15.90 17.35 18.79 20.24 21.68 23.13 24.58 26.02
15.95 17.55 19.15 20.74 22.34 23.93 25.53 27.12 28.72
17.54 19.30 21.05 22.80 24.56 26.31 28.07 29.82 31.58
15.18 16.70 18.21 19.73 21.25 22.77 24.29 25.80 27.32
17.37 19.10 20.84 22.58 24.31 26.05 27.78 29.52 31.26
19.47 21.42 23.37 25.31 27.26 29.21 31.16 33.10 35.05
2016E 663 1.47
2017E 2018E 2019E 673 718 781 1.49 1.60 1.74
19.89 15.76 14.73
20.18 15.99 14.95
Valuation based on P/E Net profit estimates (SAR Mln) EPS (SAR) P/E based valuation (SAR) Valuation at 2 year historical average of 13.5x Based on a sector average 2016E consensus P/E of 10.7x Estim ated valuation at PER of 10.0x Source: Riyad Capital
21.54 17.07 15.95
23.44 18.58 17.37
Negatives oversold; large discount to sector SIIG’s P/E of 6.4x on 2015 earnings is the lowest in the petrochemical sector despite reported disappointing earnings in 4Q2015. At current prices, yields of 9.7% are above the sector. With 2016 earnings performance expected to decline, valuations are expected to re-rate but P/E of 6.4x in 2015 and 7.0x 2016E is attractive, hence expect investors to consider SIIG as a valuation pick. Table 6: KSA Petrochemicals Sector Valuation (TTM basis)
Com pany Nam e
Price Mcap EV SAR (SAR) SAR Mln Mln
February 11, 2016
YTD
52 Wk- 52 WkHi Lo (SAR) (SAR)
P/B
P/S
199,500 251,604 10.6x 1.2x 27,917 26,149 13.1x 3.7x 5,519 33,146 NA 0.7x 6,192 18,743 6.8x 1.1x 4,658 19,869 6.4x 0.7x 3,423 4,429 89.7x 0.6x 15,750 16,397 13.0x 1.0x 3,795 12,009 13.1x 0.7x 5,658 5,860 7.9x 2.3x 7,350 32,614 NA 0.6x 7,665 43,559 NA 0.9x 730 2,306 6.8x 0.7x 694 1,464 NA 0.6x 645 1,508 NA 0.5x
1.3x 7.9x 0.4x 0.8x 0.6x 2.4x 2.3x 1.1x 2.4x 0.9x 0.3x 0.5x 1.5x 0.9x
1.9x 9.2x 2.3x 2.8x 2.9x 3.9x 2.7x 3.8x 2.7x 4.4x 1.8x 1.8x 3.7x 2.4x
6.3x 9.0% (13%) 110.50 13.6x 9.0% (18%) 127.50 14.5x 12.1% (22%) 29.20 8.0x NA (23%) 30.40 8.3x 9.7% (25%) 29.90 13.9x 6.4% (24%) 18.10 7.1x 7.1% (14%) 57.50 10.4x NA (26%) 36.10 6.7x 8.7% (9%) 61.00 18.8x NA (28%) 14.00 33.0x 5.7% (29%) 26.70 5.3x NM (27%) 24.75 129.3x NM (24%) 13.95 17.2x NM (25%) 15.10
Sector Median* 289,494 469,659 10.6x 0.7x Source: Bloomberg, Market Cap and EV are total
1.0x
2.8x
12.0x
Saudi Basic Industries Corp 66.71 Saudi Arabian Fertilizer Co 66.88 National Industrialization Co 8.12 National Petrochemical Co 12.97 Saudi Industrial Investment Group 10.32 Sahara Petrochemical Co 7.80 Yanbu National Petrochemical Co 28.30 Saudi International Petrochemical Co10.44 Advanced Petrochemical Co 34.83 Saudi Kayan Petrochemical Co 4.93 Rabigh Refining & Petrochemical Co 8.90 Alujain Corp 10.55 Nama Chemicals Co 5.40 Methanol Chemicals Co 5.35
P/E
EV/ EV/ Div.Yl Sales EBITDA d
59.50 62.00 7.50 12.70 9.80 7.60 23.80 9.75 31.90 4.40 7.00 9.50 4.95 4.95
8.8%
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Saudi Industrial Investment Group Update Report
Appendix Exhibit 8: 5 Year Price Multiples Trading History P/B Ratio
P/S Ratio
4.0
3.5
2.4
3.0 1.9
2.5 2.0
1.4
1.5 1.0
0.9
P/S P/B
3 Yr Avg
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Oct-13
Feb-14
3 Yr Avg
12M Avg
12M Avg
P/E Ratio
24.0
Jun-13
Oct-12
Feb-13
Jun-12
Feb-12
Jun-11
Feb-11
Oct-15
Jun-15
Oct-14
Feb-15
Jun-14
Oct-13
Feb-14
Jun-13
Oct-12
Feb-13
Jun-12
Feb-12
Oct-11
Feb-11
Jun-11
0.0
0.4
Oct-11
0.5
EV/EBITDA Ratio
60.0 50.0
19.0
40.0 14.0
30.0
9.0
20.0
P/E
3 Yr Avg
12M Avg
EV/EBITDA
3 Yr Avg
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Jun-11
0.0
Feb-11
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Feb-11
Jun-11
10.0 4.0
12-M Avg
Source: Bloomberg
Exhibit 9: KSA Petrochemicals Sector Valuation-Consensus EPS growth 2016-18E Vs 2017E P/E
14.0% Sipchem
12.0% 2016-18 E EPS grow th
Sahara
10.0%
SIIG
Petrochem
8.0% Saudi Kay an
6.0% SABICY ANSAB
4.0% Adv anced
2.0% 5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
2017E P/E Source: Bloomberg
February 11, 2016
|8
Saudi Industrial Investment Group Update Report Table 7: Summary Financials and Ratio's Income Statement (SAR mln) Total Sales Cost of Sales Gross Profit S,G&A Expenses
2012 5,556
2013 4,437
2014 7,859
2015 7,304
2016 E 7,691
2017 E 8,348
2018 E 8,857
2019 E 9,326
(5,036) 520
(3,710) 727
(5,559) 2,299
(4,822) 2,482
(5,384) 2,307
(5,802) 2,546
(6,134) 2,724
(6,370) 2,956
(366)
(572)
(807)
(731)
(846)
(918)
(974)
(1,026)
Associate Income Financial Charges
64 (40)
885 (265)
612 (172)
318 (146)
285 (145)
295 (143)
292 (142)
277 (141)
Income before MI and Zakat Minority intrest
178 453
774 43
1,932 (872)
1,922 (1,032)
1,601 (865)
1,779 (1,032)
1,899 (1,102)
2,067 (1,199)
Income before zakat
631
817
1,060
737
747
798
(74)
(75)
(80)
(87)
727
663
673
718
781
2,923
2,891
2,340
2,486
2,576
2,715
2.07
1.62
1.47
1.49
1.60
1.74
1.00
1.00
1.00
1.00
1.00
1.25
1.50
1,775 3,740
1,510 3,397
1,799 4,933
2,506 5,374
1,471 5,591
2,464 6,850
2,822 7,441
3,588 8,420
Property Plant & Equipment Investment in subsidiaries Total non-Current Assets
20,772 1,560 22,497
18,370 3,234 21,977
17,632 3,154 21,525
16,755 3,210 21,194
15,960 3,274 20,194
14,145 3,339 18,489
12,937 3,406 17,395
10,662 3,474 15,238
Total Assets
26,236
25,374
26,458
26,568
25,784
25,339
24,836
23,658
1,314 738
625 926
593 1,146
496 1,296
592 953
638 857
675 1,543
701 1,235
Total Current Liabilities Long Term Debt
2,051 13,709
2,426 11,968
2,219 10,822
2,368 9,526
2,149 8,573
2,130 7,716
2,885 6,173
2,635 4,938
LT Accounts Payable Total non-Current Liab
53 14,578
13,122
13,059
11,712
11,660
10,868
9,357
8,253
Total Liabilities Retained Earnings Total Equity
16,629 1,207 6,070
15,548 1,398 6,332
15,278 1,786 6,813
14,080 1,989 7,089
13,809 2,136 7,302
12,998 2,292 7,525
12,241 2,375 7,680
10,888 2,403 7,786
Total Liab & Equity
26,236
25,374
26,458
26,568
25,784
25,339
24,836
23,658
1,779 516
1,899 468
2,067 421
Zakat
890
(103)
(127)
(163)
539
714
933
EBITDA
564
1,780
EPS
1.21
1.59
DPS
1.00
Net Income
(92)
868
Balance Sheet (SAR mln) Assets Cash & equivalents Total Current Assets
Liabilities & Equity Accounts Payable Short Term Debt
Cash Flows (SAR mln) Income before Zakat Adjustments
631 (639)
817 (796)
1,932 (428)
1,922 683
CFO Prop, plant & equip
(8) (129)
22 (1)
1,504 (169)
2,605 (135)
343 (333)
2,295 (316)
2,368 (300)
2,488 (284)
182 46
755 422
716 400
677 377
752 468
Projects and deferred expenses CFI Loans Dividends CFF Cash at year end
(1,827) (1,956) (76) (449) 225 1,775
557 556 (565) (450) (244) 1,510
126 (43)
1,601 (1,258)
(926) (450) (1,172)
(546) (450) (1,944)
(953) (450) (1,799)
(857) (450) (1,703)
(1,543) (450) (2,387)
(1,235) (563) (2,189)
1,799
2,506
1,471
2,464
2,822
3,588
Valuations and Ratio's Margins Gross
9%
16%
29%
32%
30%
31%
31%
32%
EBITDA
10%
40%
37%
40%
30%
30%
29%
29%
Net
10%
16%
12%
10%
9%
8%
8%
8%
Cash Ratio
0.87
0.62
0.81
1.06
0.68
1.16
0.98
1.36
Current Ratio
1.82
1.40
2.22
2.27
2.60
3.22
2.58
3.20
Inventory Turnover Interest Cover
5.80 3.80
3.99 3.62
4.47 12.18
4.73 14.13
4.55 12.05
4.55 13.40
4.55 14.37
4.55 15.70
27.06 58%
7.88 55%
4.48 50%
4.11 45%
4.91 45%
4.26 42%
3.79 39%
3.08 35%
2.51
2.21
1.92
1.68
1.57
1.41
1.27
1.07
Leverage/Liquidity (x)
Debt to EBITDA Debt to Assets Debt to Equity Others Price to Earnings Price to Book Dividend Payout Dividend Yield Earnings Yield
8.5x 0.8x
6.5x 0.7x
5.0x 0.7x
6.4x 0.7x
7.0x 0.6x
6.9x 0.6x
6.5x 0.6x
5.9x 0.6x
83% 9.7% 11.7%
63% 9.7% 15.4%
48% 9.7% 20.1%
62% 9.7% 15.7%
68% 9.7% 14.3%
67% 9.7% 14.5%
78% 12.1% 15.5%
86% 14.5% 16.8%
Source: Company reports, Riyad Capital
February 11, 2016
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Saudi Industrial Investment Group Update Report
Page Intentionally Left Blank
February 11, 2016
| 10
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
