National Petrochemical Co. - Petrochempbv 2.2 1.6 1.4 1.3 1.2 0.8 Dividend yield NA NA NA 1% 1% 3%...

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National Petrochemical Co. - PetrochemInitiation | KSA | Petrochemicals Sector

January 2015

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• Operational structure - National Petrochemical Company (Petrochem) operational income stream is solely based on the production facility of Saudi Polymers Company (SPCo). The complex has a designed capacity to produce 2.9mn tons of basic chemicals, polymers and other high-end products; where 76.4% of the capacity is associated with ethylene and related polymers. On the other hand, the complex is also designed to produce polypropylene and different grades of polystyrene (PS). While, we believe most of 1-Hexene (designed capacity to produce 100k tons/annum) is used to produce HDPE and LLDPE . It is worthy to mention that the complex started its commercial operation in Q4-2012. Besides production of petrochemical products, the company carried out its marketing & selling through its 65.0% owned subsidiary Gulf Polymers Distribution Company FZCO (GPDCo); located in UAE free zone.

• Diversified product portfolio; a key growth driver - We believe the company’s production mix (discussed earlier) is in line with the existing industry dynamics; where, the presence of polypropylene will further smoothen its growth journey. It is worthy to mention that polypropylene market witnessed significant development since 2012 and is expected to show reasonable growth in near to medium term; which will lead the average prices to remain on higher levels. On the other hand, we are expecting stable PP and PS market outlook (where, prices are expected to remain on higher levels) in near to medium term.

• Key markets and raising finance - According to the given information in 2013, the company made 67.0% of overall sales in Asian market followed by European (29.0%) and local (4.0%) markets. On the other hand, the company recently issued Sukuk amount SAR1.2bn @ SAIBOR + 1.7% for 5 years.

• Volumetric growth in 2014 but lower prices threatening potential growth- SPCo complex witnessed several unscheduled shutdowns during 2013; which is normal for any new plant in the kingdom. But in 2014 we assume the company’s operation will be normalized; and, hence, only routine shutdowns are expected in 2015 and onwards. Consequently, we expected the company to witness volumetric growth in 2014 which will lead the company to post net income of SAR688.0mn (EPS; SAR1.43) in 2014 as compared to a loss of SAR66.1 (LPS; SAR0.14) last year. However, we believe, the recent decline in prices of related products to lower levels will hammer the company and limit the increase in earnings going forward.

Recommendation ‘Overweight’

12-month price target; SAR27.9

Current Price: SAR21.3

Upside / (downside): 31.0%

Amounts in SARmn; unless specified 2013 2014e 2015e 2016e 2017e 2023e

Sales revenue 4,436.7 7,381.0 6,990.2 7,449.6 7,749.1 9,187.4 Sales revenue YoY growth NM 66.4% -5.3% 6.6% 4.0% 2.1%Operating income 165.4 1,326.3 1,118.0 1,288.9 1,402.7 1,859.4 Operating income YoY growth NM NM -15.7% 15.3% 8.8% 1.6%Net income (66.1) 686.8 537.3 638.9 704.7 964.6 Net income YoY growth NM NM -21.8% 18.9% 10.3% 1.5%EPS (0.14) 1.43 1.12 1.33 1.47 2.01 PE NM 15.31 19.05 16.02 14.52 10.61 PBV 2.2 1.6 1.4 1.3 1.2 0.8 Dividend yield NA NA NA 1% 1% 3%

Source: AlJazira Capital* We have taken respective December closing prices for 2013 & 2014, while for years 2015 and onwards we used closing price of 6th January 2015

Key information

Key financial indicators

Price Chart

TASI Petrochem

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10,250.0 10,750.0 11,250.0

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• Investment consideration - Using DCF valuation methodology, we arrived at a 12-month price target of SAR27.9/share for Petrochem. This indicates the stock, at a current market price of SAR21.3/share (as of 06th Jan 2015), is offering a potential upside of 31٫0% and trading at prospective 2015 PE and PBV of 19٫0x and 1.4x, respectively. We, therefore, initiate our coverage on Petrochem with ‘Overweight’ recommendation.

1 High Density Polyethylene 2Low Linear Density Polyethylene

Senior Analyst Syed Taimure Akhtar +966 11 2256146 [email protected]

Ethylene 39.3%

HDPE 18.5%

LLDPE 18.5%

1-Hexene 3.4% Polypropylene

13.5% Polystyrene

3.4% PolystyreneHigh impact (HIPS) 3.4% (GPPS)

Reuters code: 2002.SEBloomberg code: PETROCH AB Country: KSASector: PetrochemicalPrimary Listing: KSA exchangeM-Cap: SAR10,233.6mn52 Weeks H/L (SAR): 36.4 / 17.65



January 2015


Valuation summaryOur DCF based valuation methodology is based on 10-years explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions;

• Terminal growth rate is taken at 3.0%.

• 5-year monthly raw beta of 0.56 from Bloomberg; in order to reduce the impact volatility.

• Risk free rate is taken at 2.8%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.1356%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran’s Equity Risk Premium; determinants, estimations & implications.

• KSA total market risk premium is taken at 12.609% from Bloomberg. Hence, the equity risk premium is calculated at 9.8%.

• Capital Assets Pricing Model (CAPM) is used to calculate cost of equity at 8.3%.

• Cost of debt is taken at 3.6%.

• Weighted average cost of capital (WACC) is taken at 5.2%.

All figures in SAR Mn, unless specified 2013 2014e 2015e 2016e 2017e 2023e

Revenues 4,437 7,381 6,990 7,450 7,749 9,187 EBITDA 985 2,145 1,995 2,190 2,326 2,922

Margin (%) 22.2% 29.1% 28.5% 29.4% 30.0% 31.8%EBIT 165 1,326 1,118 1,289 1,403 1,859

Margin (%) 3.7% 18.0% 16.0% 17.3% 18.1% 20.2%Net Income (66) 687 537 639 705 965

Margin (%) -1.5% 9.3% 7.7% 8.6% 9.1% 10.5%Cash from operations 103 960 1,480 1,487 1,573 1,894 Total assets 21,006 22,403 22,016 21,683 21,388 23,327 Shareholders' equity 5,555 6,564 7,119 7,648 8,230 12,119 Total liabilities & equity 21,006 22,403 22,016 21,683 21,388 23,327 Free Cash Flow Analysis (FCF) NOPLAT 137 858 722 831 905 1,201 Depreciation & amortization 819 818 877 901 923 1,062 Change in net working capital (686) (717) (118) (245) (255) (369)CAPEX (0.5) (645) (601) (567) (530) (1,147)FCF 270 315 880 920 1,044 747

Discount Factor - 1.00 0.94 0.90 0.85 0.62 PV of FCF - 314 830 824 886 461 Sum of PV of FCF (2014-23) 6,361 Terminal value 31,318 PV of Terminal value 19,331 Enterprise value 25,691 Add: Net debts (12,287)Net Worth 13,404 Shares (mn) 480.0 DCF based value (SAR/share) 27.9 Terminal growth 3.0%WACC 5.5%

Source: Aljazira capital

DCF based valuation methodology



January 2015


Amount in SARmn, unless otherwise specified 2013 2014e 2015e 2016e 2017e 2023e

Income statement Sales revenue 4,437 7,381 6,990 7,450 7,749 9,187 Sales revenue growth NM 66.4% -5.3% 6.6% 4.0% 2.1% Cost of sales (3,710) (5,251) (5,060) (5,341) (5,522) (6,487) Gross profit 727 2,130 1,930 2,109 2,227 2,700 General & administrative expenses (251) (313) (316) (319) (321) (327) Marketing & selling expenses (311) (491) (496) (501) (503) (514) Operating profit 165 1,326 1,118 1,289 1,403 1,859 Operating profit growth NM NM -15.7% 15.3% 8.8% 1.6% Interest expenses (203) (172) (185) (192) (200) (237) Profit before zakat and minority interest (38) 1,155 933 1,097 1,202 1,623 Minority interest 10 (422) (350) (411) (451) (609) Profits before zakat (28) 732 583 685 752 1,014 Zakat (38) (45) (46) (46) (47) (50) Net profit (66) 687 537 639 705 965 Net profit growth NM NM -21.8% 18.9% 10.3% 1.5% Balance sheet Assets Cash & equivalent 673 1,430 1,234 943 755 700 Other current assets 1,876 2,689 2,773 3,064 3,349 5,295 Property plant & equipment 18,369 18,195 17,919 17,586 17,193 17,235 Deferred expenses 75 76 76 77 78 83 Other non-current assets 13 14 14 14 14 15 Total Assets 21,006 22,403 22,016 21,683 21,388 23,327 Liabilities & owners' equity Current liabilities 2,330 2,432 2,404 2,456 2,493 2,710 L-term debt + Sukuk 11,968 11,042 10,117 9,191 8,266 7,463 Other non-current liabilities 1,153 2,365 2,377 2,388 2,400 1,036 Share capital 4,800 4,800 4,800 4,800 4,800 4,800 Statutory reserves 2 70 124 188 259 798 Retained earnings (681) (63) 421 868 1,361 4,600 Minority interest 1,434 1,757 1,774 1,792 1,810 1,921 Total owners' equity 5,555 6,564 7,119 7,648 8,230 12,119 Total equity & liabilities 21,006 22,403 22,016 21,683 21,388 23,327 Cash flow statement Operating activities 103 960 1,480 1,487 1,573 1,894 Investing activities (0.50) (645) (602) (568) (531) (1,148) Financing activities 402 443 (1,075) (1,210) (1,231) (717) Change in cash 505 757 (196) (291) (188) 29 Ending cash balance 673 1,430 1,234 943 755 700 Key fundamental ratios Liquidity ratios Current ratio (x) 1.1 1.7 1.7 1.6 1.6 2.2 Cash ratio (x) 0.3 0.6 0.5 0.4 0.3 0.3 Profitability ratios Gross profit margin 16.4% 28.9% 27.6% 28.3% 28.7% 29.4% Operating margin 3.7% 18.0% 16.0% 17.3% 18.1% 20.2% EBITDA margin 22.2% 29.1% 28.5% 29.4% 30.0% 31.8% Net profit margin -1.5% 9.3% 7.7% 8.6% 9.1% 10.5% Return on assets -0.3% 3.2% 2.4% 2.9% 3.3% 4.2% Return on equity -1.2% 11.3% 7.9% 8.7% 8.9% 8.2%

Market & valuation ratios EV/sales (x) 5.66 2.93 2.95 2.69 2.49 2.03 EV/EBITDA (x) 25.50 10.10 10.35 9.15 8.30 6.37 EPS (SAR) (0.14) 1.43 1.12 1.33 1.47 2.01 BVPS (SAR) 11.57 13.68 14.83 15.93 17.14 25.25 Market price (SAR) * 25.60 21.90 21.32 21.32 21.32 21.32 Market-Cap (SAR mn) 12,288.0 10,512.0 10,233.6 10,233.6 10,233.6 10,233.6 Dividend yield NA NA NA 1.2% 1.4% 2.8% P/E ratio (x) NM 15.31 19.05 16.02 14.52 10.61 P/BV ratio (x) 2.21 1.60 1.44 1.34 1.24 0.84

Source: Company financial reports & Aljazira Capital * Source: AlJazira Capital* We have taken respective December closing prices for 2013 & 2014, while for years 2015 and onwards we used closing price of 6th January 2015

Key financial data

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

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Disclaimer

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. 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.

2. 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.

3. 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.

4. 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.

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.

AGM - Head of ResearchAbdullah Alawi+966 11 [email protected]

Senior Analyst Syed Taimure Akhtar +966 11 2256146 [email protected]

Senior Analyst

Talha Nazar +966 11 [email protected]

Analyst

Jassim Al-Jubran +966 11 [email protected]

AnalystSultan Al Kadi+966 11 [email protected]

General manager - brokerage services and sales

Ala’a Al-Yousef+966 11 [email protected]

AGM-Head of international and institutional

brokerage

Luay Jawad Al-Motawa +966 11 [email protected]

AGM- Head of Western and Southern Region Investment Centers & ADC

Brokerage

Abdullah Q. Al-Misbani +966 12 6618400 [email protected]

AGM-Head of Sales And Investment Centers

Central Region

Sultan Ibrahim AL-Mutawa +966 11 [email protected]

AGM-Head of Qassim & Eastern Province

Abdullah Al-Rahit +966 16 3617547 [email protected]

AGM - Head of Institutional Brokerage

Samer Al- Joauni +966 1 225 6352 [email protected]

National Petrochemical Co. - Petrochempbv 2.2 1.6 1.4 1.3 1.2 0.8 Dividend yield NA NA NA 1% 1% 3%...

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