NCB Capital Research Department
April 2010
Saudi PetrochemicalsEntering the expansion phase
Please refer to last page for important disclaimer
Analyst
Tariq Al-Alaiwat
+966 2 690 7627
An industry update with analysis of six of the leading companies in the sector
Co
nte
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EXECUTIVE SUMMARY ........................................................................................4 OVERVIEW OF COVERAGE ..................................................................................5 INDUSTRY OUTLOOK..........................................................................................6
Ethylene: Backbone of the petrochemial value chain ...................................................7 Polyethlene.......................................................................................................... 10 Propylene & Polypropylene..................................................................................... 14
OIL: CORRELATION & PRICING ........................................................................17 INDUSTRY FINANCIALS ...................................................................................21
Revenue outlook................................................................................................... 21 Margins & profitability forecasts.............................................................................. 22 1Q 2010 financial performance............................................................................... 23
KEY ASSUMPTIONS ..........................................................................................25 VALUATION......................................................................................................26
Dividend yield ...................................................................................................... 27
COMPANY PROFILES ........................................................................................28 Sahara Petrochemicals .......................................................................................... 29
Yansab................................................................................................................. 39
Saudi Kayan ......................................................................................................... 49
Petrochem ........................................................................................................... 58
National Industrialization Co. .................................................................................. 67
Sipchem............................................................................................................... 72
KSA Petrochemical Sector
27 April 2010 SAUDI PETROCHEMICAL SECTOR
Executive summary Demand outlook positive, but aggressive capex worrisome Improving economic conditions mainly in Asian economies strengthens the demand
outlook for petrochemical products in the forthcoming years. However, the sector is
expected to witness a capacity surplus post 2012E, when the large build-out by
Middle Eastern and Asian players will start operations. This will likely exert pressure
on utilization rates, therefore, limiting petrochemical price growth in the medium to
long-term. We expect Saudi firms with existing facilities to continue operating at
100% utilization rates until 2013E, dropping to 95% in 2014E and 90% in 2015E
owing to increased petrochemical supply globally.
Feedstock and location benefits intact Access to low cost feedstock and proximity to growing Asian market are key
positives for the Saudi Petrochemical sector. These factors enabled a faster
recovery in earnings in the 2H 2009 for the Saudi companies and we expect these
benefits to continue driving earnings growth in the forthcoming years. We project
the average net profit margin for the 6 companies in this report to increase to
20.8% in 2011E from 12.5% in 2009.
Initiation of coverage on Saudi Kayan, Yansab, Sahara Petrochemicals and PetroChem We initiate coverage on Saudi Kayan (2350.SE) with a neutral rating and a price
target of SR20.3, Yansab (2290.SE) with a neutral rating and a price target of
SR50.7, Sahara Petrochemicals (2260.SE) with a neutral rating and a price target
of SR27.2 and PetroChem (2002.SE) with an underweight rating and a price target
of SR15.8 We have selected them due to their similar production mixes. All four
new companies being introduced to our coverage produce ethylene, propylene and
their derivatives (polyethylene, polypropylene, HDPE, LDPE and ethylene glycols).
Updating Sipchem and NIC (Tasnee) We update our forecasts for Sipchem and NIC (Tasnee). We maintain our
Outperform ratings on both with a price target of SR29.4 for Sipchem and SR40.0
for Tasnee. We believe 2010 will be a strong year for Tasnee as it realizes the full
benefits of its aggressive expansion in its petrochemical segment. The SEPC
expansion produces the same products as the four new companies under our
coverage but with production running at a high capacity, Tasnee is set to benefit
the most on the back of its strong track record and position.
Sipchem is expected to benefit from the commercial start of its Acetyl complex
scheduled in May 2010. An improved outlook on oil prices and higher operating
efficiency strengthen our outlook towards the stock. Sipchem undertook a
scheduled maintenance shutdown of 25 days in 3Q 2009. This continues to pay-off
in efficiency of production and better margins.
Collectively all six stocks represent 9.3% of the Saudi markets free float and 34%
of the petrochemical sector free float market share. In terms of production, this mix
collectively contributes approximately 50% of total ethylene and derivates produced
from the KSA capacities.
4
27 April 2010 SAUDI PETROCHEMICAL SECTOR 5
Overview of coverage Exhibit 1: KSA petrochemical coverage - key positives & negatives
Company Recom. Target
priceUpside/
Downside Positive Negative
Sipchem Overweight SR29.4 ↑ 19.1%
• Commercial start of phase II expansion in 2Q 2010
• Improved operating efficiency to fuel 2010 earnings growth
• Revised oil forecasts boost petrochemical price assumptions
• Will be effected the most by the possible doubling in natural gas in 2012 as gross margins contract the most
• The only company paying anti-dumping charges (on Butanediol sales to China) amongst these companies
NIC (Tasnee) Overweight SR40.0 ↑ 14.2%
• Yanbu capacity expansion to positively impact titanium business earnings
• Improved oil forecast boosts petrochemical price assumptions
• Full year contribution from SEPC business to boost 2010 earnings
• Lowest net margins amongst the six companies in this report
• Highest debt to equity ratio • Engaged in non-core activities
which are not yet divested.
Sahara Neutral SR27.2 ↑ 11.4%
• Benefits of a diversified product mix is a long run positive
• Investor friendly management
• SEPC is the only income generator for now
• SAMC, ACVC and SAP plants to start in three years
Yansab Neutral SR50.7 ↑ 3.9%
• 1Q10 start to operations looks ideal
• Benefitting from SABIC’s strong marketing platform
• Investor friendly management
• Below 100% operating rates worrisome due to propane feed stock deficiency
• We believe that despite our confidence in the company, the stock is fully valued
Saudi Kayan Neutral SR20.3 ↓ 9.2%
• Strong partnership with SABIC to offer strong marketing platform
• Ramping operations just as the current cycle nears its peak
• Uncertainty on start of operations
• A lack of revenues in 2010e
Petrochem Underweight SR15.8 ↓ 15.1% • Strong partnership with Chevron Phillips to offer strong marketing platform
• Investor friendly management
• No sales to be reported until 2012
• Net losses in 2010e & 2011e • Planned product lines offers
limited growth opportunities
Source: NCBC Research
27 April 2010 SAUDI PETROCHEMICAL SECTOR
Industry outlook The Global Petrochemical Industry: Improving demand and higher prices Demand for petrochemicals and their derivatives generally track global economic
trends, given their extensive use in everyday applications (plastics, chemicals and
coating industry). Not surprisingly, the global economic crisis led to a significant
slowdown in petrochemical demand. There are signs of demand recovery in the key
consuming markets — automobiles, construction and consumer durables —
increased petrochemical trade, primarily in Asia (mainly China) in recent quarters.
This coupled with higher petrochemical prices is a positive for the sector. In our
view, demand fundamentals for petrochemical products remain largely intact in the
long-term, mainly due to rising consumption in developing Asian countries
(particularly China and India) and an anticipated rise in demand from developed
economies when economic conditions revive.
Exhibit 2: Economic growth to fuel petrochemical consumption GDP Growth (%)
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2008A 2009A 2010E
US Euro area UK Japan China India
Source: IMF
Petrochemical prices, over the last year, have rallied in tandem with the rise in oil
prices on the assumption that demand has bottomed and will return as economic
activity rebounds. Detailed information on the price performance of petrochemical
products and oil grades is available in our monthly NCBC Petrochemical Tracker.
Post-2012, we believe the sector is set to face significant oversupply due to
aggressive expansion plans by Middle Eastern and Asian companies. This in turn
may lead to overcapacity, depressing utilization rates and putting a cap on pricing,
a trend which looks to remain for the medium to longer-term.
The Saudi Petrochemical Industry: Emerged from troubled waters faster than others Saudi petrochemical producers were not immune to the global slowdown and took a
hit on earnings in 4Q08 and 2009. However, their feedstock advantage and
proximity to Asian markets provided a floor to their earnings and Saudi firms
together reported net income of SR8bn in 2H 2009 compared to net income of
SR0.7bn in 1H 2009. The sector is one of the prime focus areas of the Saudi
Arabian government in its attempt to reduce the economy’s dependence on
petrodollars and to diversify the economy towards value added industries. The
KSA producers procure
natural gas at
USD0.75/mmbtu
6
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
government offers natural gas to domestic petrochemical producers at a subsidized
rate of USD0.75/mmbtu through state-owned oil giant, Saudi Aramco. However,
globally producers procure this commodity at spot prices that currently stand at
USD5/mmbtu.
Based on our discussions with industry players, we believe that the natural gas
price of USD0.75/mmbtu will double to USD1.5/mmbtu in the Kingdom by 2012E.
However, even at these revised levels, the price is well below that what is paid by
the global peers. In our view, access to low cost feedstock, higher economies of
scale and logistical advantages arising from proximity to Asian markets give Saudi
Arabian companies a significant advantage over global peers. To further strengthen
their position in the global petrochemical market, Saudi Arabian petrochemical
players are undertaking aggressive capex to expand their capacities and diversify
their product portfolios.
Ethylene: Backbone of the petrochemical value chain Ethylene is the most popular olefin used largely in the production of industrial
chemicals and plastics products. It is an important feedstock for various
petrochemical derivatives — mainly polyethylene and ethylene oxide. Ethylene
derivatives find applications in a wide range of products such as films and sheets,
injection and blow molding, pipes and paints. Ethylene demand closely tracks
economic cycles, given the nature of its end markets.
Exhibit 3: Ethylene finds applications in different products
Ethylene consumption in 2008
HDPE 28%
LDPE 16%
LLDPE 16%
Others 6%
Ethylene Oxide 15%
Ethylene Dichloride 12%
Ethyl Benzene 7%
Source: NIC Prospectus - Jacobs Consultancy HDPE = High density polyethylene: LDPE = Low density polyethylene; LLDPE = Loner low density polyethylene
AGGRESSIVE CAPEX BY ASIAN AND MIDDLE EASTERN PLAYERS TO SHIFT TRADE FLOW
Ethylene production facilities are distributed across the globe. Key producing
regions are North America (accounting for about 27% of production), Asia-Pacific
(31%), Middle East and Africa (16%), and Western Europe (15%). However, Asia
and the Middle East are set to emerge as the global hub of ethylene and its
derivatives, given the capacity additions that are expected to become operational
... global spot price is at
USD4/mmbtu
Middle East and Africa will
represent 24% of global
ethylene capacity by 2012
7
27 April 2010 SAUDI PETROCHEMICAL SECTOR 8
INDUSTRY OUTLOOK
during through 2012. According to BMI, Middle East and Africa will represent 24%
of the 182mn mt of global ethylene capacity by 2012, from close to 12% of the
132mn mt global capacity in 2007.
Exhibit 4: Key ethylene projects announced globally Ethylene capacity in ‘000 mtpa
Announced ethylene cracker projects ('000 tpa) Start date
Qatar
ExxonMobil Chemical/ Qatar Petroleum 1,300 2013-14
Qatar Petroleum/ Honam Petrochemical 1,000 1H-12
UAE
Borouge I & II 3,000 2010-13
Abu Dhabi National Chemicals 1,450 2014
China
Dushanzi Petrochemical 1,000 1Q-10
Kuwait Petroleum/Sinopec 1,000 2012
SABIC/Sinopec 1,000 2H-10
Sinopec Hainan Refining & Chemical 1,000 2011-12
Zhenhai Refining and Chemical Co. 1,000 2Q-10
Fushun Petrochemical 800 2011
Sinopec/SK Corp 800 2012-13
PetroChina Sichuan Petrochemical 800 2011-12
Daqing Petrochemical 600 End 2011
Dow Chemical/Shenhua 600 -
India
Reliance Industries 1,500 Delayed
Essar Gujarat Petrochemicals 1,300 Delayed
ONGC Petro-additions Ltd 1,100 End 2012
GAIL/Oil India/Total 1,000 Post 2012
Indian Oil Corp. 860 Jul-05
Total 21,110
Source: BMI, ICIS, Zawya
Owing to aggressive capex by Saudi firms in recent years, Business Monitor
International (BMI) expects total ethylene capacity in Saudi Arabia to grow around
2.3 times to 18.3mn mtpa by 2012 from about 8mn mtpa capacity in 2008.
Exhibit 5: Announced ethylene projects in Saudi Arabia
Ethylene capacity in ‘000 mtpa
Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date
Eastern Petrochemical (Sharq) 1,300 Dec-09
National Chevron Phillips 1,200 2011
PetroRabigh 1,250 4Q-09
Ras Tanura Integrated Petrochemical Co 1,200 2014-15
SEPC 1,010 Jun-09
Saudi Kayan 1,350 2H-10
Yansab 1,300 Jul-09
Total 8,560
As a % of existing ethylene capacity in KSA 106 Source: BMI, ICIS, Zawya
Total ethylene capacity in
KSA expected to grow 2.3x
by 2012
27 April 2010 SAUDI PETROCHEMICAL SECTOR 9
INDUSTRY OUTLOOK
ACCESS TO LOW COST FEEDSTOCK IS A KEY POSITIVE FOR SAUDI PRODUCERS
Raw materials and utilities form a major proportion of the ethylene cash cost
(please see exhibit 6). Naphtha and ethane, the feeds for ethylene crackers, are the
key components of raw material costs. The availability of ethane at the low price of
USD0.75/mmbtu in Saudi Arabia significantly lowers the proportion of raw material
cost in ethylene production, as is evident in the chart below. As a result, the
ethylene production cost of Saudi plants based on ethane feed is close to
USD160/mt, versus USD380/mt for producers using naphtha-feed crackers.
Exhibit 6: Ethane-feed Saudi plants have low feedstock cost versus the West Cost structure breakdown (%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SouthKorea(N/E)
China(N/E)
NWEurope
inland (N)
NWEuropecoastal(Na)
US GulfCoast(E/P)
US GulfCoast (NG)
W.Canada(N)
KSA (E)
Raw materials Utilities Fixed costs
Source: MEED N=Naphtha; E=Ethane; P=Propane
MUTE DEMAND GROWTH AND CAPACITY ADDITIONS TO RESTRICT PRICE RECOVERY
North America and North-East Asia are two of the largest consumers of ethylene
globally, accounting for 26% and 25% of total global ethylene demand of 111mn
mtpa in 2008. On the consumption growth front, the Middle East emerged as the
leader with a CAGR of 7.7% in ethylene consumption during 2003-2008, followed
by North-East Asia at 4.5%. Following the modest demand rebound witnessed in 2H
2009, growth in global ethylene consumption is expected to remain muted in 2010e
owing to weak demand from developed countries mitigating the rapid demand
growth in many Middle Eastern and Asian economies.
Sluggish demand and new capacity additions are expected to restrict any significant
increase in global utilization rates in the near-term. However, Middle Eastern and
Asian players are expected to continue to operate at higher rates than their
Western counterparts, given their proximity to the growing end markets. Middle
Eastern firms also enjoy a feedstock cost advantage over their Asian peers.
On the pricing front, ethylene prices averaged USD832/mt in 2009, down 28.8%
YoY, following a 38% YoY dip in oil prices. We expect this to rise to USD1,284/mt in
2010e. Since the majority of total global ethylene capacity is based on naphtha or
ethane procured at market prices, movements in oil prices largely govern the price
movements of ethylene. Nevertheless, given the continued strength in oil prices, we
expect ethylene prices to continue rising in the near-term. However, from a longer-
Movement in oil prices
govern price movements of
ethylene
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
term perspective, oversupply concerns weigh heavily on the magnitude of further
recovery. We expect ethylene prices to grow at a CAGR of 5.9% during 2009-
2015E. Our ethylene price forecast is based on anticipated movement in oil prices,
given the strong correlation between ethylene prices and oil prices historically.
Exhibit 7: Ethylene prices (historic and forecasts) USD/mt
0
200
400
600
800
1,000
1,200
1,400
1,600
2005 2006 2008 2009 2011E 2012E 2014E 2015E 2017E 2018E
Source: Bloomberg, NCBC Research estimates
Polyethylene Polyethylene is the most commonly used ethylene derivative and finds multiple
applications as it is durable, flexible and chemically resistant. It has two forms –
high density polyethylene (HDPE) and low density polyethylene (LDPE).
Polyethylene mainly finds application in films and sheets followed by injection
molding and blow molding.
High Density Polyethylene (HDPE) This is a high density version of polyethylene and therefore harder, stronger but
less flexible than the low density polyethylene (LDPE). HDPE, given its
specifications, finds uses in products and packaging such as milk containers,
detergent bottles and water pipes to list a few.
Exhibit 8: Applications of HDPE
(%)
Film Grade27%
Pressure Pipe Grade13%
Blow Moulding Medium
14%
Blow Moulding Small26%
Blow Moulding Large20%
Source: Jacob Consultancy, NIC
10
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
HDPE SUPPLY DYNAMICS
By geography, North America is the largest producer of HDPE with a market share
of about 25% of total global capacity of about 30mn mtpa in 2008, followed by
North East Asia (22%) and Western Europe (16%). The Middle Eastern region
accounted for 13% of global market share. Following the aggressive capex
undertaken by Middle Eastern players, the region’s total HDPE capacity is expected
to grow 2.6 times to 10mn mtpa by 2012e from 3.9mn mtpa in 2008.
During 2003-2008, global operating rates were higher than 85%, similar to the
strong levels witnessed during 1995-1997. Following the spread of economic
recessionary pressures across the globe, operating rates bottomed out in 2009.
Global operating rates are expected to improve gradually in the coming years
capitalizing on improving demand scenarios; though the pace of recovery is
expected to be slow. Given that operating costs are much lower in KSA and the
region, due to the lower cost of raw materials, we expect KSA producers to operate
at higher average rates than their global peers. Exhibit 9 details the global
production and operating rates historically and our estimates going forward.
Exhibit 9: Global HDPE production and operating rates
Metric tons per annum (millions), unless otherwise stated
0
10
20
30
40
50
60
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
60%
70%
80%
90%
100%
Capacity Production Operating Rate (%)
Source: NIC Presentation - Jacob Consultancy, NCBC Research estimates
HDPE DEMAND DYNAMICS
North-East Asia, North America and Western Europe are the largest consumers, by
geography of HDPE, together accounting for 64% of global consumption of 30mn
mtpa in 2008. During 2003-2008, global HDPE demand had increased at a CAGR of
3.5%, outpacing the growth in capacity of 3.1% during the same period. The
fastest growing geography was the Middle East, which reported a CAGR of 13.8% in
HDPE consumption, followed by North-East Asia at 3.5%. Going forward, we expect
consumption growth in Middle Eastern and Asian countries (mainly China and India)
to remain strong. However, overall HDPE demand is expected to grow at a slower
pace than witnessed historically, given the anticipated weakness in demand from
developed economies.
HDPE PRICING OUTLOOK
The prices of HDPE and LDPE have grown close to 47-77% since the beginning of
2009, driven by the increase in oil and ethylene prices. Going forward, we expect
HDPE and LDPE prices to continue tracking ethylene prices. We project HDPE prices
HDPE capacity in Middle
East expected to grow 2.6x
by 2012e
11
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
to grow at a CAGR of 2.6% during 2009-2015E, while LDPE prices are expected to
witness a CAGR of 3.3% during the same period.
Exhibit 10: Polyethylene prices (historic and forecasts) USD/mt
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2005 2006 2008 2009 2011E 2012E 2014E 2015E 2017E 2018E
HDPE LDPE Ethylene
Source: Bloomberg, NCBC estimates
Low Density Polyethylene (LDPE) This is the low density version of polyethylene and therefore less hard, weaker but
more flexible then HDPE. LDPE, given its specifications, finds uses in products and
packaging such as foils, trays, plastic bags, and protective coating on paper and
even in textiles.
Exhibit 11: Applications of LDPE
%
High Clarity Film26%
Cable Insulation Grade6%
Heavy Duty Film13%
Hygienic Film28%
GP27%
Source: NIC Prospectus - Jacob Consultancy
LDPE SUPPLY DYNAMICS
Total global capacity of LDPE was over 22mn mtpa in 2008. By geography, Asia and
Europe were the largest producer of LDPE with a global market share of over 20%
each, followed by North America with a market share of over 10%. Since most of
the new capacities are being developed in the Middle East and Asia, this region’s
contribution to global capacity is expected to increase in the coming years.
Between 2003-2008 global
capacity of LDPE grew at a
CAGR of 2.4%
12
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
During 2003-2008, global supply of LDPE grew at a CAGR of 2.4%, outpacing the
growth of close to 1% in global demand during the same period. Going forward, an
expanding capacity base along with slower demand growth is expected to limit the
medium term rise in the producers’ utilization rates.
Exhibit 12: Global LDPE production and utilization rates Metric tons per annum (millions), unless otherwise stated
0
5
10
15
20
25
30
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
60%
70%
80%
90%
100%
Capacity Production Operating Rate (%)
Source: NIC Presentation - Jacob Consultancy, NCBC Research estimates
LDPE DEMAND DYNAMICS
Western Europe, North America and China are the largest LDPE consumers by
geography, together accounting for close to 60% of global LDPE consumption of
19mn mtpa in 2008. In the coming years, LDPE demand is expected to grow at a
slower pace than witnessed historically, given the anticipated weakness in demand
from developed economies which is expected to offset the consumption growth in
Middle Eastern and Asian countries (mainly China and India).
13
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
Propylene & Polypropylene
DIVERSIFIED NATURE OF APPLIATIONS
Propylene is the other commonly used olefin which finds application in films and
sheets, blow and injection molding, and fiber manufacturing. Much of the propylene
is converted into derivatives such as polypropylene and propylene oxide.
Exhibit 13: Propylene applications
Propylene consumption in 2008
Polypropylene , 67%
Propylene oxide , 8%
Acry nitrile , 7%
Acrylic Acid , 4%
Others, 14%
Source: Sahara prospectus
Polypropylene is consumed mainly for molding (injection and blow), films, sheets,
and fiber. These applications have a wide use in producing home appliances,
automotive parts, textile fibers and food packaging.
Exhibit 14: Polypropylene applications
Polypropylene consumption
Films & sheets , 22%
Injection Molding, 37%
Blow molding , 9%
Fiber , 24%
Other , 9%
Source: Sahara prospectus
MIDDLE EAST’S NEW FOCUS
About 34% of the total global capacity of 68mn mtpa of propylene was located in
North-East Asia in 2008, followed by Western Europe, home for about 21% of
global propylene capacity. North America accounted for around 20%, while the
Middle Eastern region contributed about 5%. The geographical distribution of
Middle East represents 5%
of global propylene
capacity
14
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
polypropylene capacity is similar to that of propylene. Middle Eastern players
account for about 6% of the total global polypropylene capacity of 44mn mtpa.
In the coming years, the Middle Eastern region’s contribution is expected to rise,
given the growing number of propylene and polypropylene projects in the region,
with Saudi Arabia being the front-runner. Key projects include those being
developed by Advanced Petrochemical Company, Alujain, Sahara Petrochemical,
and Petrorabigh. Total capacity of about 3.6mn mtpa each of propylene and
polypropylene is being added in KSA during 2009-2011. Currently, Saudi Arabia has
capacity of 1.8mn mtpa of polypropylene.
Saudi Arabian players procure propane (the main feed for propylene) at a
discounted rate to naphtha prices (which is linked to oil prices). Though this
advantage is less attractive than that of ethylene, the offered discount on procuring
propane keeps production costs lower than global peers. This seems to be driving
the significant investments by Saudi players in increasing propylene and its
derivatives capacity in the Kingdom.
DEMAND DYNAMICS
North-East Asia, North America and Western Europe are the largest consumers by
geography, together accounting for 68% of global polypropylene consumption of
44mn mtpa in 2008. Consumption growth in the Middle East during 2003-2008
stood at 11.5% (CAGR), the fastest amongst all geographies, followed by North-
East Asia, which recorded a CAGR of 5.5%. Going forward, these markets are
expected to continue driving consumption growth. However, on the flip side, weak
demand in developed countries continues to remain a concern.
PRICING OUTLOOK
Propylene prices increased significantly in 2008 and touched a peak of
USD1,748/mt in June 2008. However, intensifying recessionary pressure forced the
prices down to levels of USD400/mt during November 2008. Currently, pricing has
recovered to the USD1,000-1,100/mt range. Polypropylene prices are hovering in
the range of USD1,200/mt.
KSA has a polypropylene
capacity of 1.8mn mtpa,
which should grow to 5.4
mtpa by 2011
Exhibit 15: Propylene supply surplus
Surplus/shortage (mn mt)
-1.0
-0.5
0.0
0.5
1.0
1.5
2003 2004 2005 2006 2007 2008
Source: National Petrochem prospectus
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27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY OUTLOOK
Evident in exhibit 15, the propylene surplus has gradually increased in recent years
as supply grew at a CAGR of 3.0% during 2003-2008, outpacing the consumption
growth of 2.9% during the same period. The increased focus of Middle Eastern
petrochemical players on propylene is set to further disturb the equilibrium between
demand and supply amidst anticipated demand weaknesses in the near to medium-
term. We project propylene prices to increase at a CAGR of 4.9% during 2009-
2015E, slower than the price recovery in ethylene. Polypropylene prices are
expected to track the trend followed by propylene and expand at a CAGR of 4.1%
during the same period.
Exhibit 16: Propylene and polypropylene prices (historic and forecasts) USD/mt
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
Propylene Polypropylene
Source: Bloomberg, NCBC Research estimates
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27 April 2010 SAUDI PETROCHEMICAL SECTOR
Oil: Correlation & pricing Petrochemicals are dependant on oil Crude oil and natural gas are primary feedstock for hydrocarbons like ethane and
propane, and hence, they have a strong bearing on the prices of petrochemicals.
Price hikes in crude oil and natural gas during the last decade resulted in high
petrochemical prices. This in turn boosted the prices of downstream products,
including polymers and plastics. The US Henry Hub natural gas prices rose to an
average of USD6.95/mmbtu in 2007 from USD4.23/mmbtu in 2000 and WTI crude
oil prices jumped to an average of USD72.30/brl from USD30.37/brl over the same
period. Consequently, during 2001-2007, ethylene prices increased approximately
156% and propylene prices grew by about 176% and boosted prices of
petrochemical derivatives during 2001-2007, reflecting in the prices of plastics and
polymer.
The uptrend in crude oil and natural gas prices was interrupted in 2H08, as
consumption declined amid the global economic crisis. Consequently, petrochemical
prices also dropped as feedstock prices declined. Prices for the key building blocks
of petrochemical products – ethylene and propylene – collapsed significantly during
the same period. Ethylene and propylene prices declined in the range of 65–75%
between July 2008 and December 2008. Petrochemical prices have since recovered,
attributable to the improving demand scenario but more strongly attributable to the
increase in the price of oil.
Exhibit 17: Petrochemicals prices and oil price correlation
Ethylene (USD/mt) and oil price (USD/barrel)
0
200
400
600
800
1000
1200
1400
1600
1800
0 20 40 60 80 100 120 140 160
Correlation : 0.87
Source: Bloomberg
NCBC oil forecast Oil plays a large part in the outlook of both petrochemical prices and petrochemical
stocks. The correlation between oil prices and the Petrochemicals sector has been
very strong over the past 1.5 years and at times ranging between 80-90%. Oil
demand and supply scenarios are the key factor instrumental in shaping oil price
trends. Unusually cold weather in Western regions supported oil demand in January
and in turn the crude oil price touched USD87 per barrel. Though this level shows a
strong rebound of 177% from its lows of December 2008, it is around 60% the
level of its highs of July 2008.
Correlation between oil
prices and the
petrochemical sector
ranges between 80-90%
17
27 April 2010 SAUDI PETROCHEMICAL SECTOR 18
OIL: CORRELATION AND PRICING
In 2010, global oil demand is expected to average 86.6mn barrels per day, up
1.88% YoY, primarily driven by growth in Asian economies as oil demand from
OECD countries is expected to remain weak, according to IEA. On the supply front,
non-OPEC oil supply is expected to marginally grow by 0.3% YoY to 51.8mn barrels
per day in 2010, while OPEC kept its output quotas unchanged in its latest meeting.
However, output from OPEC members increased to 29.2mn barrels per day for the
first time, on YoY basis, in the month of February 2010 since October 2008.
We use our NCBC Economics team’s oil price assumptions for our estimates. With
stabilizing supply and anticipated demand recovery, oil prices are projected to
average USD81 per barrel in 2010e, up 20.5% YoY. However, further substantial
increases in oil prices seem difficult to achieve in the near-term, given the
uncertainty in the global economic recovery and the availability of capacity, which
indicate the presence of some downside risks. Nevertheless, in the long run, oil
prices are expected to range between USD85-90 per barrel during 2011-2012e and
gradually rise to USD80 per barrel by 2015e, as the economic scenario improves.
Exhibit 18: Oil price – historic and forecast USD/brl
0
25
50
75
100
125
150
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
Source: NCBC Economic Research estimates
Saudi petrochemical sector closely tracks oil price movement The performance of the TASI Petrochemical sector is very strongly correlated with
oil. We can observe from exhibit 19 that the correlation increased during the recent
economic crisis as it reached above 80% and despite a recent decline, is still in the
70% range. Recent increases in oil prices to above the $85 per barrel range has
driven a spike in the Petrochemical sector, which is now up over 30.6% YTD. While
economic fundamentals look to be improving, we caution that the current rally in oil
prices may not be sustainable as our outlook for 2010e calls for an average price of
$81 per barrel, implying a drop in oil prices in the coming quarters is possible.
Assuming correlations remain high, any drop in oil prices could negatively impact
the Petrochemical sector.
In addition, we note that further strength in oil prices could continue to drive the
Petrochemical sector higher. Stronger oil prices would imply stronger petrochemical
prices which would lead to stronger revenues and earnings for companies in the
27 April 2010 SAUDI PETROCHEMICAL SECTOR
OIL: CORRELATION AND PRICING
sector. However, we also note that unless long-term fundamentals change, we
would not expect current volatility in oil prices to materially impact our long-term
oil price and petrochemical price assumptions. These assumptions drive our long-
term fundamental outlook for our companies and thus our underlying valuations.
Therefore, while any further current strength in oil prices may drive petrochemical
stocks higher, on a fundamental basis, valuations may begin to be stretched.
Exhibit 19: Petrochemicals sector and oil price correlation
Oil and Petrochemical sector weekly changes rebased to 100
0
50
100
150
200
250
Jul-07 Oct-07 Feb-08 May-08 Sep-08 Dec-08 Apr-09 Jul-09 Nov-09 Mar-10
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oil (LHS) Petrochem Sector (LHS) 1 Year Rolling Correlation
Source: Bloomberg, NCBC research
Scenario analysis based on change in oil prices Given that prices of petrochemicals are largely impacted by changes in the price of
oil, we study the relationship between the movement in oil prices and the historical
movement in petrochemical prices. Based on this understanding, we derive
petrochemical prices for the coming years and evaluate changes in the target stock
price (derived from our DCF valuation) in tandem with the movement in oil prices
(refer to Exhibit 20). In our analysis, we have assumed a per barrel oil price for the
terminal year as USD75. This highlighted column is our base case forecasts where
we assume that oil will remain at our estimated levels. We have then assumed
different scenario’s wherein oil decreases by 10-20% and increases by 10-20% for
the entire forecasting horizon.
19
27 April 2010 SAUDI PETROCHEMICAL SECTOR
OIL: CORRELATION AND PRICING
Exhibit 20: Scenario analysis for oil movement in the range of $60-90/brl
SRmn, unless otherwise stated
Oil’s impact on our terminal year base case forecasts
↓20% ↓10% $75/brl ↑10% ↑20%
Tasnee
Revenue 14,643 15,683 16,462 17,242 18,281
Net Income 1,319 1,399 1,459 1,519 1,599
Valuation (SR) 35.7 38.2 40.0 41.8 44.1
Current price (SR) 35.0 35.0 35.0 35.0 35.0
Upside/(downside) from current (%)
2.1 9.0 14.2 19.3 26.1
Sipchem
Revenue 2,774 3,142 3,418 3,694 4,062
Net Income 430 627 774 921 1,117
Valuation (SR) 15.2 23.4 29.4 35.5 43.6
Current price (SR) 24.7 24.7 24.7 24.7 24.7
Upside/(downside) from current (%)
(38.3) (5.4) 19.1 43.6 76.3
Yansab
Revenue 7,219 8,468 9,404 10,341 11,589
Net Income 2,027 2,382 2,647 2,913 3,268
Valuation (SR) 36.3 44.5 50.7 56.9 65.1
Current price (SR) 48.8 48.8 48.8 48.8 48.8
Upside/(downside) from current (%)
(25.7) (8.8) 3.9 16.5 33.4
Sahara
Revenue 2,391 2,886 3,257 3,628 4,123
Net Income 706 832 927 1,021 1,147
Valuation (SR) 20.0 24.1 27.2 30.3 34.5
Current price (SR) 24.45 24.45 24.45 24.45 24.45
Upside/(downside) from current (%)
(18.4) (1.4) 11.4 24.1 41.1
PetroChem
Revenue 5,901 6,874 7,606 8,339 9,319
Net Income 709 881 1,011 1,141 1,316
Valuation (SR) 8.0 12.4 15.8 19.3 23.9
Current price (SR) 18.7 18.7 18.7 18.7 18.7
Upside/(downside) from current (%)
(57.2) (33.3) (15.1) 3.2 28.0
Saudi kayan
Revenue 10,987 12,995 14,501 16,007 18,015
Net Income 2,834 3,203 3,480 3,757 4,126
Valuation (SR) 16.9 18.9 20.3 21.8 23.8
Current price (SR) 22.4 22.4 22.4 22.4 22.4
Upside/(downside) from current (%)
(24.7) (15.8) (9.2) (2.5) 6.4
Source: NCBC Research estimates
20
27 April 2010 SAUDI PETROCHEMICAL SECTOR
Industry financials
Revenue outlook We expect revenue in 2010E to increase to SR29bn from SR11.7bn in 2009 for the
six stocks we look at in this note. The drivers for this revenue growth include the
start of production at two of the companies, an increase in volumes produced, as
well as improving prices of petrochemicals. Out of the six stocks detailed in this
report, Sipchem and Tasnee reported operating revenues in 2009. For 2010e
Yansab and Sahara are expected to see revenues however Saudi Kayan is not
expected to report revenues until 2011e and Petrochem until 2012e.
Exhibit 21: Sector and petrochemical players revenue
SRmn
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
Tasnee 10,863 17,123 17,506 18,288 18,107 18,949 18,354
Sipchem 830 2,817 3,741 3,911 3,565 3,665 3,405
Yansab 0 7,652 9,966 10,314 10,274 10,157 9,925
Sahara 0 1,467 2,922 3,063 4,772 4,473 4,109
Petrochem 0 0 0 5,932 8,721 8,191 7,579
Saudi Kayan 0 0 12,134 16,773 16,677 15,653 14,456
Total 11,693 29,059 46,269 58,281 62,116 61,088 57,828
Source: Companies, NCBC Research estimates
From the six companies we look at in this note, we expect Saudi Kayan to report
the highest absolute growth in revenue during 2010E-14E, increasing by SR15.6bn.
Sipchem is expected to witness the lowest absolute growth with SR0.96bn for the
same period.
Exhibit 22: Sector and petrochemical players revenue growth
%
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
Tasnee 8.2 57.6 2.2 4.5 (1.0) 4.6 (3.1)
Sipchem (51.0) 239.0 33.0 5.0 (9.0) (3.0) (7.0)
Yansab n/a n/a 30.2 3.5 (0.4) (1.1) (2.3)
Sahara n/a n/a 99.2 4.8 55.8 (6.3) (8.1)
Petrochem n/a n/a n/a n/a 47.0 (6.1) (7.5)
Saudi Kayan n/a n/a n/a 38.0 (1.0) (6.0) (7.6)
Average (%) (21.4) 148.3 41.2 11.2 15.2 (3.0) (5.9)
Source: Companies, NCBC Research estimates
21
27 April 2010 SAUDI PETROCHEMICAL SECTOR 22
INDUSTRY FINANCIALS
Margins and profitability forecasts
Gross Margins benefit from low cost feedstock We expect Saudi petrochemical producers to continue to benefit from the access to
low cost feedstock from Saudi Aramco. Sourcing natural gas at a subsidized
USD0.75/mmBtu, Saudi Arabian ethane-feed crackers can produce ethylene at an
estimated USD160/mt compared with over USD380/mt from producers in the West
which use naphtha-feed crackers. This provides Saudi petrochemical players a
substantial cushion to absorb price declines and weakness in demand and generally
offers a floor on ethylene pricing beyond which global peers would quickly become
loss making.
Our gross margin forecasts for these companies ranges from 34% to 44% through
2015e, with the average peaking at 44% in 2010E. The difference in gross margins
for the companies depends mainly on the product area they are focusing on, as well
as the feedstock used (and subsequent cost advantages). The gross margins for
these companies compares to a range of 10% to 20% which is generally expected
for global competition in Asia and the West.
EBITDA and Net margins We expect EBITDA margins to range between 30%-33% during 2011E-14E for the
six companies under coverage. Amongst them, Sipchem has the highest EBITDA
margins for 2010E while Tasnee has the lowest. Despite the improving demand
outlook, the supply build-out is expected to outpace demand and limit the pace of
price recovery and therefore limiting the pace of margin expansion. We therefore
expect margins to witness limited growth post 2014E.
Exhibit 23: Covered petrochemical players margins
%
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
Tasnee EBITDA 22.9 29.0 27.2 25.3 24.7 23.3 23.3
Net 4.8 8.9 8.1 7.4 7.2 7.2 7.2
Sipchem EBITDA 39.5 61.1 60.6 54.6 52.9 51.2 49.0
Net 17.0 30.9 31.3 27.3 25.4 24.6 22.5
Yansab EBITDA n/a 52.6 44.4 44.2 44.6 44.7 45.0
Net n/a 39.1 30.3 31.5 31.5 31.6 31.8
Sahara EBITDA n/a 34.0 33.9 33.9 33.7 33.7 34.2
Net n/a 44.2 29.6 28.5 26.3 25.7 25.4
Petrochem EBITDA n/a n/a n/a 35.6 35.4 35.2 35.1
Net n/a n/a n/a 15.3 12.4 11.5 10.7
Saudi Kayan EBITDA n/a n/a 33.3 33.0 33.7 33.8 34.0
Net n/a n/a 18.8 19.4 19.7 18.8 17.8
Average of covered stocks EBITDA 31.2 35.8 33.2 31.5 31.2 30.7 30.3
Net 10.9 19.8 17.8 17.2 16.8 16.5 15.9
Source: Companies, NCBC Research estimates
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY FINANCIALS
1Q 2010 financial performance The recently reported 1Q 2010 earnings came in very strong across the six
companies in this report when compared on a QoQ and a YoY basis. In 1Q 2009
total net income for the six companies in this report came out as a loss of
SR33.3mn and improved substantially to SR742.2mn in 1Q 2010. Total operating
income for 1Q 2009 stood at SR4mn while 1Q 2010 stood at SR1,293.8mn.
Overall improvement was driven by significant increases in petrochemical prices.
On a YoY basis, ethylene prices have increased 97%, while polyethylene prices
witnessed growth of 56.7%. Similarly, propylene and polypropylene prices
increased by 135.8% and 46.4% respectively.
TASNEE
Higher petrochemical prices positively impacted Tasnee’s 1Q 2010 results along
with the SEPC production. The net loss of SR26mn in 1Q 2009 was due to a
maintenance shutdown in the SPC plant and additional expense related to the SEPC
expansion.
SIPCHEM
Higher petrochemical prices positively impacted Sipchem’s 1Q 2010 results. Net
income improved 178% YoY and 43.7% QoQ. The average prices of Methanol
(accounting for 94% of Sipchems production) during 1Q10 stood at USD313/mt,
62% higher than that of USD193/mt in 1Q09
YANSAB
The start of commercial operations at the petrochemical complex positively
impacted its 1Q 2010 results as it was the first quarter for Yansab to have
revenues. Yansab reported net income of SR259mn for 1Q 2010 versus a net loss
of SR8.2mn for 1Q 2009.
SAHARA
The operating loss in 1Q 2010 is due to the pre-operational status of the Al Waha
plant as it is still in trial runs. The reason behind the rise in its net income was
primarily due to the income from the SPEC plant (which falls under ‘investment
from associates’ in the income statement).
PETROCHEM
The plants are in currently in pre-operational stage and under construction which
are the primary reasons behind reporting losses in 1Q 2010 of SR43mn.
SAUDI KAYAN
The plants are in currently in pre-operational stage which is the primary reason
behind reporting losses in 1Q 2010 of SR3.8mn. The company is still reporting zero
operating income.
23
27 April 2010 SAUDI PETROCHEMICAL SECTOR
INDUSTRY FINANCIALS
Exhibit 24: Covered petrochemical players earnings summary
SRmn unless otherwise stated
Company 1Q 2009 4Q 2009 1Q 2010 QoQ (%) YoY (%)
Tasnee Operating income 12.5 606.7 856.1 41.1 6,748.4
Net income (26) 215.6 332.8 54.4 na
Sipchem Operating income 5.6 122.8 134.6 9.6 2,303.0
Net income 29.2 56.5 81.2 43.7 178.1
Yansab Operating income 0 0 310.0 n/a n/a
Net income (8.2) (7.3) 259 n/a n/a
Sahara Operating income (13.1) (8.8) (3.6) n/a n/a
Net income (14.1) 52.9 116 119.4 n/a
Petrochem Operating income (1.0) (4.8) (3.3) n/a n/a
Net income (7.9) (20.9) (43.0) n/a n/a
Saudi Kayan Operating income 0 0 0 n/a n/a
Net income (6.3) (0.4) (3.8) n/a n/a
Total Operating income 4.0 715.9 1,293.8 80.7 32,245
Net income (33.3) 296.4 742.2 150.4 n/a
Source: Companies, NCBC Research estimates
24
27 April 2010 SAUDI PETROCHEMICAL SECTOR
Key assumptions Utilization rate estimates We expect utilization rates of all the plants, which are already in operation, to run
at 100% during 2010. Utilization rates are then expected to decrease from 2014 in
line with over supply concerns and cyclical factors. Plants which are to commence
operations will gradually ramp up their utilization rates. Details of Yansab’s lower
utilization rate assumptions are discussed in detail in the company section on page
31 of this report.
Exhibit 25: Sector and petrochemical players average utilization rates
%
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
Tasnee 99 99 100 100 93 90 87
Sipchem 107 94 100 100 100 95 90
Yansab - 93 93 93 93 93 93
Sahara - 91 100 100 100 95 90
Petrochem - - - 90 100 95 90
Saudi Kayan - - - 100 100 95 90
Average 103 94 99 97 98 94 90
Source: Companies, NCBC Research estimates
Oil and petrochemical price estimates We expect average petrochemical prices to improve in 2010e on a YoY basis
benefiting from rising oil prices and improved demand. We expect the uptrend in
petrochemical prices to continue until 2013e, however declining gradually
thereafter as capacity build-outs begin reaching the market, outpacing demand
growth. We expect ethylene prices to fall by 1.2% in 2014e (on YoY basis) after
peaking at SR4,662/mt in 2012e.
The exhibit below provides the trend for average selling prices of key products for
the six companies we look at in this note. We expect prices to stay in a range as it
becomes increasingly difficult to achieve a strong recovery in prices given
increasing capacity and soft demand growth.
Exhibit 26: Oil and petrochemical price outlook
SR/mt, unless otherwise stated
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
WTI Prices ($/bbl) 61.7 80.6 85.0 90.0 85.0 85.0 80.0
Naptha 1,787 2,674 2,799 2,929 2,852 2,811 2,693
Ethylene 2,656 4,434 4,550 4,662 4,563 4,506 4,348
HDPE 4,066 4,912 5,165 5,294 5,258 5,196 5,071
LDPE 4,146 5,547 5,627 5,691 5,639 5,570 5,437
LLDPE 4,041 5,147 5,256 5,333 5,288 5,224 5,098
PE 3,591 4,571 4,923 5,034 5,014 4,959 4,856
Propylene 2,822 4,337 4,477 4,618 4,507 4,448 4,287
PP 3,866 4,882 5,241 5,422 5,357 5,288 5,139
Methanol 843 1,170 1,258 1,298 1,287 1,275 1,246
Acetic Acid 3,400 4,715 5,070 5,233 5,189 5,138 5,023
Vinyl Acetate 4,039 5,602 6,023 6,217 6,165 6,104 5,968
TiO2 8,719 9,591 10,182 10,810 11,477 12,185 12,185
Source: Companies, NCBC Research estimates
25
27 April 2010 SAUDI PETROCHEMICAL SECTOR
Valuation We used the following methodologies to arrive at our valuations for each of the
companies in this report.
Weighted Average Cost of Capital (WACC) Our valuation is based on the following assumptions:
Cost of Equity (CoE): We have taken the US 10-year Treasury yield of 3.81% (as
of April 2010) as the risk-free rate, as the Saudi Riyal is pegged to the US dollar.
The company’s adjusted beta (weekly returns since 1 January 2007 compared with
the Saudi’s TASI) is then used. We assume an equity risk premium of 8.04% for
Saudi Arabia which includes a 1.35% premium for the country risk associated with
Saudi Arabia.
Tax-adjusted cost of debt: We take the cost of debt for each stock and then
adjust for Zakat.
Using the above assumptions, we arrive at the appropriate WACC for each stock.
Discounted cash flow model We first prepare Free Cash Flow (FCF) estimates out to 2017. Given the cyclicality
of the sector, the eight-year explicit forecast period covers one business cycle. We
then use a terminal growth assumption of 2.5% and discount the cash flows using
the WACC. We then arrive at the estimated enterprise value of the company,
further adjust for debt, cash, and other payments to derive the equity value and
target price for each company.
Sum of the parts (SOTP) based DCF For evaluating Sahara’s business, we have constructed separate DCF valuations for
its projects – Al Waha, ACVC, SAMC (including SAP) and SEPC. We then follow the
same methodology used in the above DCF explanation.
A range of valuations offers opportunities The end result of our valuation exercises results in a range with significant upside
for Tasnee (upside of 14.2%) and Sipchem (upside of 19.1%), which we rate as
Outperform, and significant downside for Petrochem (downside of 15.1%), which
we rate as Underperform. The current levels for Yansab, Saudi Kayan and Sahara
look reasonable on this basis and we thus rate them as Neutral.
In general, we favor companies with a track record of production and
revenue/profitability generation. Constructing and starting operations at the
massive facilities which are going on stream in the country is an extremely complex
operation with inevitable delays. While we have been conservative in our
assumptions for start of operations at the companies which are not yet in
production, further delays are possible, which would impact the valuations. In
addition, we note that valuation levels for companies which have not yet started
operations seem to us to be high in general given uncertainties on timing and
ultimate production/profitability levels.
26
27 April 2010 SAUDI PETROCHEMICAL SECTOR 27
VALUATION
Exhibit 27: Valuation overview 2010
SRmn, unless otherwise stated
Company Market cap (SRmn)
% of Market free float
P/E 2010E
Dividend yield (%)
P/BV 2010E
Tasnee 16,124 0.37 9.5 3.0 1.7
Sipchem 8,233 0.28 10.1 4.2 1.5
Yansab 27,450 1.10 10.9 0.0 3.2
Sahara 7,152 0.53 29.0 0.0 2.0
Petrochem 8,952 1.72 n/a 0.0 1.2
Saudi Kayan 33,600 1.49 n/a 0.0 1.9
Source: Companies, NCBC Research estimates
Dividend yield Amongst the six stocks, we expect Saudi Kayan to report the highest dividend yield
of 4.5% from 2012e onwards. On the other hand, we do not expect Sahara and
Petrochem to pay a dividend during our forecast period. Amongst the four stocks
producing in the years prior to 2012, we expect Sipchem to offer the highest
dividend yield of 4.0%. With regards to Yansab we expect it to benefit from good
timing of commencement which builds comfortable cash reserves benefiting from
improving demand and sustained growth in petrochemical prices.
These dividend yields compare to the average for companies in the Saudi market of
around 3.4%. We note that the higher dividend yielding stocks in the Petrochemical
space, such as Sipchem, look interesting as they can be seen both as dividend
plays, as well as growth stocks given the production expansion they are seeing.
Exhibit 28: Petrochemical company dividend yields
Units %
Company 2009 2010E 2011E 2012E 2013E 2014E 2015E
Tasnee 2.1 2.9 2.9 2.9 2.9 2.9 2.9
Sipchem 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Yansab 0.0 0.0 2.0 2.0 2.0 2.0 2.0
Sahara 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Petrochem 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Saudi Kayan 0.0 0.0 0.0 4.5 4.5 4.5 4.5
Source: Companies, NCBC Research estimates
Risks We believe one issue to keep in mind when investing in shares in the sector is the
sometimes complicated shareholding structures. We note that some of the
companies are essentially production facilities which serve larger entities such as
SABIC. Here, Yansab and Saudi Kayan fall into this category as most or all of their
output is marketed and sold through SABIC and many senior members of the
company managements are either currently or formerly affiliated with SABIC. While
we would like to believe that all management decisions are taken in the best
interests of each of the companies, there inevitably may be conflicts between
industrial shareholders and minority (public) shareholders which we believe could
impact the value for minority (public) shareholders. In our valuation analysis, we
have not incorporated the risks of such actions.
Company Profiles Initiation and review of stocks
PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE
Sahara Petrochemicals
Neutral Looking forward to Al Waha production
Target Price (SR) 27.2
Current price (SR) 24.5
Potential upside (%) ↑ 11.4
Stock details
52-week range H/L (SR) 26/13
Market cap ($mn) 1,910
Shares outstanding (mn) 293
Listed on exchanges TADAWUL
Price perf (%) 1M 3M 12M
Absolute 9.9 23.2 91.8
Rel. to market 8.5 13.0 65.1
Avg daily T/o (mn) SR US$
3M 41.2 11.0
12M 32.0 8.5
Reuters code 2260.SE
Bloomberg code SPCO AB
Website www.saharapcc.com
Valuation multiples
09 10E 11E
P/E (x) 70.1 11.9 9.9
P/B (x) 1.8 2.0 1.7
EV/EBITDA (x) n/a 15.1 8.1
Div yield (%) 0.0 0.0 0.0
Source: NCBC Research estimates
Share price performance
0
5
10
15
20
25
30
Mar-09 Sep-09 Mar-10
4000
5000
6000
7000
8000
Sahara TASI (RHS)
Source: Bloomberg
Sahara Petrochemicals Co. (Sahara) has one operational plant, one
coming on-stream in 2Q 2010 and a further three set to commercialize
operations in 2013. Despite the diversified product mix, dependence on
limited production restricts its prospects in the near term. We initiate
coverage on Sahara with a Neutral rating and target price of SR27.2.
SEPC is the only income generator for now…: SEPC (Sahara’s 24.41%
owned associate) went commercially active in July 2009 and added
SR148.2mn to Sahara’s 2009 bottom line by way of income from associates.
We expect Sahara’s 2010 results to benefit from SEPC’s full year contribution
as well as an improving demand outlook and stronger petrochemical prices.
…Until the Al Waha plant begins commercial operations in 2Q 2010:
This plant will not only add 450,000 mt of polypropylene annually to Sahara’s
production, but will also bring in revenue to the company for the first time. Al
Waha will remain the only source of revenue for Sahara until the other plants
commercialize operations in 2013. Management has assured us of the start
date and we are confident in their ability to meet it.
• SAMC, ACVC and SAP plants to start in three years: These plants, which
are in the pipeline, will source feedstock from Sahara’s existing facilities – Al
Waha and SEPC. However, we do not expect these three plants to be
commercially operational before 1Q13, when they will add 755,000 mtpa in
capacity and SR269.4mn in estimated net income. Hence, on-time
commencement of Al Waha is crucial for Sahara’s valuation.
• Diverse product mix a long-term play: Once all of Sahara’s facilities are up
and running, the company will have amongst the most diverse product
portfolios in the sector with a range of ethylene derivatives, superabsorbent
polymers, and acrylates. However, Sahara will be benefiting from this diverse
mix only from 2013 onwards when the all the plants are operational.
• Valuation: Sahara trades at a 2009 P/BV multiple of 1.8x (sector average:
2.9x and TASI: 2.2x). Our DCF analysis results in a valuation of SR27.2/share.
However, with only two operational product lines, we believe Sahara may be
limited in its ability to benefit from the improving demand and pricing outlook
in the near term. We initiate coverage on Sahara with a Neutral rating and a
target price of SR27.2, representing 11.4% upside.
Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 0 1,242 2,358 2,440 3,757
EBITDA SR mn (39) 474 887 907 1,343
EBITDA margin % n/a 38.2 37.6 37.2 35.7
Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627
Net income SR mn 76 601 723 706 975
Net margin % n/a 48.4 30.7 28.9 26.0
EPS SR 0.35 2.05 2.47 2.41 3.33
Assets SR mn 5,956 7,396 8,451 9,297 10,707
Equity SR mn 2,938 3,539 4,263 4,969 5,944 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 SAHARA – INITIATING COVERAGE
Investment scenarios Valuation can increase significantly with higher prices, lower cost and better operating rates
Historical and expected price performance
2.383.46
3.272.38
3.453.72
27.2
36.8
18.1
0
7
14
21
28
35
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WAC
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by
3%
Cost
ris
es
by
3%
DCF
Base
case
Utiliz
ation g
row
by
5%
Cost
reduce
s by
3%
Pric
es
gro
w b
y 3%
SO
TP B
ull
case
(SR)
36.8
18.1
27.2
0
8
16
24
32
40
Apr-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11
Historical Price Performance Price Target
Scenario analysis
Source: NCBC Research estimates Source: NCBC Research estimates
Investment view DCF scenarios
• Price
target:
SR 27.2
• Weighting of DCF is 100%
• DCF bull
case:
SR 36.8
• Assuming higher prices and higher
utilization rates due to a faster demand
recovery. Also, assuming lower costs
resulting in better margins. This would
result in net income of SR683.3mn in 2010e
and SR1,065.6mn in 2014e.
• DCF base
case:
SR 27.2
• We expect operating rates and prices to
improve gradually in the coming years.
However, aggressive capacity additions are
expected to outpace the demand recovery
thus denting operating rates and prices
from 2014e onwards. We assume net
income of SR600.9mn in 2010e and
SR892.4mn in 2014e.
• Al Waha, the only revenue until 2013: In 2Q10, the Al
Waha plant, with capacity to produce 450,000 mt of
polypropylene, will start commercial operations. It will be
the only source of revenues until 2013, when the other
plant, ACVC, commence operations.
• SAMC, ACVC and SAP projects to remain under-
construction until 2013: The SAMC, ACVC and SAP plants
are not expected to start commercial operations before
2013. Once operational, these plants will add 755,000mtpa
capacity of varied petrochemical products, resulting in a
38.2% YoY jump in Sahara’s net income in 2013e.
• Benefits of a diversified product mix is a long run
positive: Sahara’s product mix will be diversified with the
inclusion of acrylates and superabsorbent polymers along
with ethylene and propylene derivatives. These products
offer different end uses thus enabling Sahara to benefit
from demand diversity in the long run, though limited
revenue streams cloud its near term outlook.
• Valuation: Despite integrated product flow and diversified
product mix strengthening Sahara’s long term outlook, we
believe limited capacity restricts its near term ability to
leverage the improving market scenario in terms of
petrochemical demand and prices. We, therefore, initiate
coverage on Sahara with a Neutral rating and a target price
of SR27.2, representing an upside of 11.4%.
• DCF bear
case:
SR 18.1
• Lower prices and higher costs due to higher
than expected revision in feedstock prices.
Also, a one percentage point increase in
WACC. Net income of SR557.2mn in 2010e
and SR787mn in 2014e.
Potential catalysts Investment risks
• Earlier then expected start in production: If Sahara
commences operations at its SAMC and ACVC plants earlier
then our estimated 2013, this would act as a positive trigger
to the stock as well as earlier reporting of profits and
revenues for these plants.
• A quick recovery in global economic growth would drive
demand and prices, and result in higher operating rates.
• Any delays in commencement of the Al Waha plant from its
expected May start of commercial operations.
• Any delays in commencement of the SAMC, ACVC and SAP
plants from the expected 1Q 2013 start.
• Higher then expected rise in feedstock prices could dent
profitability
• Once operational, anti dumping claims by Asian traders
could burden Sahara’s cost structure
30
27 April 2010 SAHARA – INITIATING COVERAGE
Investment view AL WAHA PLANT STARTING IN 2Q10, WITH SAMC, ACVC AND SAP PLANTS FOLLOWING IN 2013
The Al Waha plant started its trial runs in May 2009 however Sahara will not be
reporting revenue until 2Q10 when the plant commercializes its operations. The
only income that Sahara has been earning to date is from the SEPC plant (24.41%
owned by Sahara) which falls under the “Investment from associates” line in the
income statement. Management has assured us the operations at Al Waha will
commercialize by 2Q 2010 however we have incorporated it as June in our
forecasting. The Al Waha plant will be adding 450,000 mt of polypropylene annually
to Sahara’s production and will be the only source of revenue until the ACVC plant
commercialize their operations in 1Q 2013.
Sahara’s next milestones after the Al Waha plant, is the Saudi Acrylic Monomers
Company (SAMC), the Superabsorbent Polymers Project (SAP) and the Arabian
Chlor Vinyl Company (ACVC). All three projects will internally source feedstock from
Sahara’s existing facilities. We expect these plants to be commercially operational
by 2013 at which point they will be adding 755,000mtpa in annual capacity.
Management has indicated that these plants will begin commercial operations by
4Q 2012 however we have incorporated it as 1Q 2013 in our forecasting.
…OFFERING A DIVERSE PRODUCT MIX
The SAMC, ACVC and SAP plants will provide Sahara with a diverse product portfolio of
not only ethylene and its derivatives, but also commodity acrylates, superabsorbent
polymers and caustic soda. The uses of ethylene and its derivatives are discussed in
detail on page 7 in the ‘Industry outlook’ section of this report. Acrylates are primarily
used in printing inks, textiles, plastic additives and sealants. Superabsorbents are
primarily used in disposable hygiene products, which include baby diapers and feminine
hygiene, as well as liquid absorbent pads in packaged meat and in water-blocking
tapes. Caustic soda is more of an industrial product as it is used as a chemical base in
manufacturing paper, soap detergents and drain cleaners.
Risks to our view
AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES
Sahara Petrochemicals procures natural gas from Saudi Aramco at an attractive
price of USD0.75/mmbtu under long term contracts. However, we believe an
increase in the medium-term is possible and assume that for others in the sector,
gas prices will rise to USD1.5/mmBtu in 2012e. We have incorporated the rise in
price from 2012e for ethane and 2011e for propane in projecting Sahara’s future
cash flows. An earlier change in contractual prices and volumes of feedstock would
erode Petrochem’s cost advantage and impact earnings.
DELAYS IN COMMENCEMENT OF PLANTS
Prior to commencement of the Al Waha plant, Sahara will not be reporting
revenue’s and when the plant does commence commercial operations, it will be the
only source of revenue until ACVC joins in 1Q 2013. Any delay in the start of these
four plants beyond our expected dates would act as a negative trigger to the stock
both in terms of news and earnings impact.
31
27 April 2010 SAHARA – INITIATING COVERAGE
Valuation: SR27.2/share
Valuation methodology We have used Sum-of-the parts (SOTP) based DCF methodology to arrive at our
target price for Sahara.
Cost of Equity (COE) of 12.7%: We have taken the US 10-year Treasury yield of
3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to
the US dollar. The company’s adjusted beta (weekly returns since 1 January 2007
compared with Saudi’s TASI) is 1.10. We assume an equity risk premium of 8.04%
for Saudi Arabia which includes a 1.35% premium for the country risk associated
with Saudi Arabia.
Tax-adjusted cost of debt of 4.4%: The cost of debt for Sahara is assumed to
be 4.5%. After adjusting it for tax rate, cost of debt equals 4.4%.
Using the above assumptions, we arrive at a WACC of 10.2%.
SUM-OF-THE PARTS (SOTP) BASED DCF
For evaluating Sahara’s business, we have constructed separate DCF valuations for
its projects – Al Waha, ACVC, SAMC (including SAP) and SEPC. We first prepare a
detailed free cash flow (FCF) estimate for eight years from 2010 to 2017. Given the
cyclicality of the sector, the eight-year explicit forecast period covers one business
cycle. We then use a terminal growth rate of 2.5% and discount the cashflows
using the WACC of 10.20%. This is further adjusted for debt, cash and other
payments to derive Sahara’s equity value and target price.
Exhibit 36: Sahara - Details of SOTP Valuation
In SR mn, unless otherwise specified
Sahara’s stake(%)
Al Waha project 75.0 3,843
ACVC project 50.0 405
SAMC (incl. SAP) project 32.4 421
SEPC project 24.4 2,718
Total 7,003
Add: cash & cash equivalent 975
Less: end of services indemnities (14)
Equity value 7,965
No. of shares 293
Target price 27.2
Source: Company, NCBC Research estimates
The table below indicates the impact of changes in WACC as well as terminal
growth rate on the SOTP target price.
Exhibit 37: Sensitivity of valuation to WACC and terminal growth
Terminal growth rate (%)
1.5 2.0 2.5 3.0 3.5
8.2 34.1 36.5 39.2 42.4 46.4
9.2 28.8 30.4 32.3 34.5 37.1
10.2 24.6 25.8 27.2 28.8 30.6
11.2 21.3 22.2 23.3 24.4 25.8
WA
CC
(%
)
12.2 18.5 19.3 20.1 21.0 22.0
Source: NCBC Research estimates
32
27 April 2010 SAHARA – INITIATING COVERAGE
Company description
Overview Sahara Petrochemical Co (Sahara), established in 2004, is a holding company
engaged in producing chemical and petrochemical products through its following
subsidiaries:
• Tasnee and Sahara Olefins Company (TSOC): Sahara owns a 32.55%
stake in this subsidiary and the remaining is owned by Tasnee and its affiliates
(60.45%), and Saudi General Organization of Social Insurance (GOSI) (7.0%).
The firm has investments in SEPC (75.0% stake) and SAAC (65.0% stake).
• Saudi Acrylic Acid Company (SAAC): This is a JV between Sahara (22.0%),
TSOC (65.0%) and Tasnee (13.0%). SAAC currently holds a 75.0% stake each
in SAMC and SAP Project of which both of these projects are in the planning
stage.
• Al Waha Petrochemical Company (Al Waha): This subsidiary is 75.0%
owned by Sahara and is engaged in producing propylene and polypropylene.
• Arabian Chlor Vinyl Company (ACVC): This is a 50:50 JV between Sahara
and Maaden, and is currently in the planning stage.
Exhibit 38: Shareholding pattern %
Individuals and corporations, 70% Government
agencies, 10%
Public, 20%
Source: Tadawul
About 70% of Sahara’s capital is held by individuals and corporations (including Al-
Zamil Holding Group Company, which is the largest single shareholder having a
7.5% stake). Three public entities of Saudi Arabia together own a 10% stake in
Sahara; General Organization of Social Insurance (GOSI) with 4%, the General
Organization Retirement Organization with 4%, and Majlis Al-Awqaf Al-Aala with
2%. The remaining 20% is held by the public. In August 2009, Sahara increased its
share capital to SR2,925.3mn from SR1,875mn through rights a issue by offering
105.03mn shares.
33
27 April 2010 SAHARA – INITIATING COVERAGE
COMPANY DESCRIPTION
Al Waha
PROJECT DETAILS
A joint venture between Sahara (75.0%) and LyondellBasell (25.0%) with a project
cost of SR3.92bn. It has capacity to produce 467,000 mt of propylene which would
act as a feedstock to produce 450,000 mt of polypropylene annually. Trial runs
started in May 2009 and commercial operations are expected to start in 2Q10.
Sahara followed its Shariah-compliant project financing structure for funding the Al
Waha project. The equity contribution of the project was close to 41%. Debt worth
SR2.3bn was raised through Shariah-compliant external financing commitments,
SIDF and PIF.
FEEDSTOCK AGREEMENTS
Saudi Aramco has agreed to supply propane to the Al Waha plant effective from 1
July 2008 for a period of 20 years, while SEPC agreed to supply 29,750 mt of
ethylene annually for a period of 15 years. Propane is priced on the basis of
naphtha prices multiplied by a conversion factor, which currently stand at 0.685
and is expected to increase to 0.700 in 2011e.
MARKETING AGREEMENTS
About 86% of the output from the facility is directed to the markets of the Middle
East, South East Asia and India. As per an off-take agreement with Al Waha, Basell
Sales and Marketing Company BV (LyondellBasell’s subsidiary) is responsible for
sales outside KSA.
SEPC
PROJECT DETAILS
SEPC, with a project cost of SR9.4bn, is jointly owned by TSOC (75.0% stake) and
LyondellBasell (25.0% stake). Sahara owns around 24.41% in the venture. SEPC
has annual capacity to produce 1mn mt of ethylene, which is used as a feedstock to
produce 400,000 mt each of HDPE and LDPE. It also produces 285,000 mt of
propylene annually. The facility started commercial operations in June 2009.
FEEDSTOCK AGREEMENTS
Saudi Aramco agreed to supply around 1.058 mn mtpa of propane to SEPC for a
period of 20 years, at a discounted rate which is approximately 30% lower than
international prices. Saudi Aramco also supplies around 650,000 mt of ethane
annually to SEPC at a discounted rate of USD0.75/mmbtu.
MARKETING AGREEMENTS
SEPC plans to sell about 88% of its production to Middle East, South East Asia and
Europe. Tasnee Petrochemicals and Basell Sales and Marketing Company are
responsible for sales and marketing of the output, while some proportion of
ethylene which is not utilized in polyethylene production would be sold under long
term agreement to Saudi firms (including Sahara and its subsidiaries).
34
27 April 2010 SAHARA – INITIATING COVERAGE
COMPANY DESCRIPTION
Planned projects Sahara has 3 projects in the pipeline:
• Saudi Acrylic Monomers Company (SAMC)
• Superabsorbent Polymers Project (SAP Project)
• Arabian Chlor Vinyl Company (ACVC)
All three projects will internally source feedstock from Sahara’s existing facilities, Al
Waha and SEPC. Once operational, Sahara will have an integrated production flow
where most of the feedstock requirement is sourced internally. Total cost of these 3
projects equals about SR7bn, out of which around SR4.9bn would be sourced
through raising debt. Sahara’s total equity contribution to these projects equals
SR874mn.
Currently, pre-EPC activities of the three projects are underway which are expected
to be completed by December 2011. The 2nd phase, Procurement and Construction
Phase, is expected to finish by June 2012, while the projects are expected to start
trial operations in 4Q 2012. We have assumed the plants to start commercial
operations in 1Q 2013 in our forecasts
SAMC
SAMC is a joint venture between SAAC (75%) and Dow Chemicals (25%) and will
produce 150,000 mt of acrylic acid annually which in turn would be used to produce
two types of commodity acrylates – butyl acrylates and 2-ethylhexyl acrylates –
together having annual production capacity of 125,000 mtpa.
About 80% of acrylates production will be sold to Rohm and Hass Co. to the market
globally, while the remaining 20% would cater to the needs of the GCC region.
The estimated project cost is more than SR3bn, with an equity contribution of 30%
comprised of SR900mn from the two partners. Debt worth SRSR2.1bn is expected
to be raised from SIDF and commercial banks.
SAP PROJECT
This facility will produce 80,000 mt of superabsorbent polymers annually by using
acrylic acid produced at the SAMC plant. The project is 75% owned by SAAC and
25% by Evonik Industries AG. Sahara holds a 32.36% stake in the project. About
80% of its production will be sold in Asia.
The estimated project cost is SR1.5bn, with an equity contribution of 30%
comprised of SR450mn. Debt worth SR1.05bn is expected to be raised from SIDF
and commercial banks.
ACVC
This facility is a joint venture equally owned by Sahara and Saudi Arabian Mining
Company (Ma’aden) and will be engaged in producing 250,000 mt of caustic soda
and 300,000 mt of ethylene dichloride annually. The ethylene requirement of this
facility will be sourced from SEPC under an agreement to supply 85,000 mt
annually for a period of 20 years. Under a long term agreement, Ma’aden will
purchase caustic soda for usage in its aluminum complex which will be constructed
at Ras-Al-Zaur. Key markets – Saudi Arabia, Southeast Asia and North East Asia.
35
27 April 2010 SAHARA – INITIATING COVERAGE
COMPANY DESCRIPTION
The estimated project cost is SR2.5bn, with an equity contribution of 35%
comprised of SR875mn from the two partners. Debt worth SR1.6bn is expected to
be raised from SIDF and from commercial banks.
Exhibit 39: Product flow chart for planned projects
‘000 mt per annum
Caustic Chlorine Plant
Sodium Chloride370 KTA Chlorine
Caustic Soda to Ma’aden250,000 mtpa
Ethylene from SEPC 85,000 mtpa
EDC Plant
Caustic - NaOH
EDC to export markets 245,000 mtpa Ethylene Amine project 55,000 mtpa
Air
Acrylic Acid unit
Acrylic Acid 150,000
Esterification unit
Meoh,N- Butanol, MEG,DEG,PEG,2EH
Mixed Acrylate125,000 mtpa
Acrylic Acid 75,000 mtpa
Acrylic Acid 75,000 mtpa
PurificationSAP
80,000 mtpaPolymerizatio
n
Source: Company data, NCBC Research
36
27 April 2010 SAHARA – INITIATING COVERAGE
Financials
Exhibit 40: Income statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Sales - 1,242 2,358 2,440 3,757 3,523
% change n/a n/a 89.9 3.5 54.0 -6.2
COGS - (781) (1,543) (1,603) (2,547) (2,410)
Gross Profit - 462 815 837 1,209 1,112
Gross margin (%) n/a 37.2 34.6 34.3 32.2 31.6
G&A (39) (67) (128) (132) (205) (193)
D&A expenses - (80) (200) (202) (338) (341)
Operating Profit (39) 394 687 705 1,005 919
% change n/a n/a 74.2 2.6 42.6 -8.5
EBITDA (39) 474 887 907 1,343 1,261
% change n/a 87.2 2.2 48.1 -6.1
Margins (%) n/a 38.2 37.6 37.2 35.7 35.8
Interest expense - (32) (55) (55) (51) (47)
Profit before Zakat and MI 78 960 1,219 1,180 1,650 1,552
Minority interest - (316) (457) (442) (619) (582)
Net Income before Zakat 78 644 762 737 1,031 970
Zakat (1) (43) (38) (31) (56) (77)
Net income/(loss) 76 601 723 706 975 892
Net margin (%) n/a 48.4 30.7 28.9 26.0 25.3
as a % of NI before NI and Zakat n/a 37.5 37.5 37.5 37.5 37.5
EPS 0.35 2.05 2.47 2.41 3.33 3.05
Source: Company, NCBC Research estimates
Exhibit 41: Balance sheet In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 556 965 1,005 1,160 2,420 3,899
Other rec. & prepayments 154 154 154 154 154 154
Accounts receivables - 221 420 435 669 627
Inventories 104 160 317 329 523 495
Total current assets 815 1,501 1,896 2,078 3,767 5,176
Investment in associates 1,007 1,007 1,007 1,007 1,007 1,007
Projects under construction 4,083 997 1,830 2,663 - -
Property and equipment, net 16 3,891 3,718 3,549 5,933 5,661
Total non-current assets 5,141 5,894 6,555 7,219 6,940 6,668
Total assets 5,956 7,396 8,451 9,297 10,707 11,844
A/c payables & other liabilities 184 107 211 220 349 330
Other current liabilities 80 80 80 80 80 80
Total current liabilities 265 188 292 300 430 411
Long term debts 1,338 1,938 1,796 1,575 1,352 1,126
Advances against Islamic facilities
922 922 835 746 655 562
Other non-current liabilities 99 99 99 99 99 99
Total non-current liabilities 2,360 2,960 2,730 2,419 2,105 1,787
Share capital 2,925 2,925 2,925 2,925 2,925 2,925
Statutory reserves 8 68 140 211 308 398
Retained earnings 131 672 1,323 1,958 2,836 3,639
Total stockholders' equity 2,938 3,539 4,263 4,969 5,944 6,836
Minority interest 393 709 1,166 1,609 2,227 2,809
Total liabilities & stockholders' equity
5,956
7,396
8,451
9,297
10,707
11,844
Source: Company, NCBC Research estimates
37
27 April 2010 SAHARA – INITIATING COVERAGE
F INANCIALS
Exhibit 42: Cash flow statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from op. (a) 9 643 1,130 1,332 1,633 1,867
Cash flow from inv.(b) (732) (833) (861) (865) (59) (70)
CAPEX (732) (833) (861) (865) (59) (70)
Cash flow from fin.(c) 825 600 (230) (311) (314) (318)
Debt 380 600 (142) (221) (223) (225)
Net chg. in cash (a+b+c) 103 409 39 156 1,260 1,479
Cash at start of the year 453 556 965 1,005 1,160 2,420
Cash at end of the year 556 965 1,005 1,160 2,420 3,899
Source: Company, NCBC Research estimates
Exhibit 43: Key ratios
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR)
EPS 0.35 2.05 2.47 2.41 3.33 3.05
FCF per share (3.9) (1.1) 1.0 2.7 2.2 4.4
Div per share - - - - - -
Book value per share 15.1 15.1 14.5 15.9 17.9 19.8
Valuation ratios (x)
P/E 70.1 11.9 9.9 10.1 7.3 8.0
P/FCF (6.2) (22.8) 24.7 8.9 10.9 5.6
P/BV 1.8 2.0 1.7 1.4 1.2 1.0
EV/sales n/a 6.4 3.4 3.3 2.1 2.3
EV/EBITDA n/a 16.7 8.9 8.8 5.9 6.3
Div yield (%) - - - - - -
Profitability ratios (%)
Gross margins n/a 37.2 34.6 34.3 32.2 31.6
Operating margin n/a 31.8 29.1 28.9 26.7 26.1
EBITDA margins n/a 38.2 37.6 37.2 35.7 35.8
Net profit margins n/a 48.4 30.7 28.9 26.0 25.3
ROE 2.6 17.0 17.0 14.2 16.4 13.1
ROA 1.3 8.1 8.6 7.6 9.1 7.5
Liquidity ratios
Current ratio 1.0 2.9 3.1 3.1 3.1 3.1
Quick Ratio 0.6 2.0 2.0 2.0 1.9 1.9
Operating ratios (days)
Inventory n/a 75 75 75 75 75
Receivables outstanding n/a 65 65 65 65 65
Payables outstanding n/a 50 50 50 50 50
Operating cycle n/a 140 140 140 140 140
Cash cycle n/a 90 90 90 90 90
Production & sales
Production capacity (mn mt) 0.0 0.9 0.9 0.9 1.5 1.5
Production volumes (mn mt) 0.0 0.5 0.9 0.9 1.5 1.4
Utilization rate (%) 0.0 93 100 100 100 95
External sales volumes (mt) 0.0 0.2 0.5 0.5 1.0 1.0
Source: Company, NCBC Research estimates
38
PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE
Yansab
Netural Looking fully valued
Target Price (SR) 50.7
Current price (SR) 48.8
Potential upside (%) ↑ 3.9
Stock details
52-week range H/L (SR) 50/26
Market cap ($mn) 7,330
Shares outstanding (mn) 563
Listed on exchanges TADAWUL
Price perf (%) 1M 3M 12M
Absolute 22.9 43.1 131.3
Rel. to market 21.6 32.9 104.6
Avg daily T/o (mn) SR US$
3M 123.3 32.9
12M 75.3 20.1
Reuters code 2290.SE
Bloomberg code YANSAB AB
Website www.yansab.com.sa
Valuation multiples
09 10E 11E
P/E (x) n/a 9.6 9.5
P/B (x) 4.8 3.2 2.5
EV/EBITDA (x) n/a 10.6 9.7
Div yield (%) - - 2.0
Source: NCBC Research estimates
Share price performance
0
11
22
33
44
55
Mar-09 Jul-09 Dec-09 Apr-10
0
2000
4000
6000
8000
Yansab TASI (RHS)
Source: Bloomberg
Yanbu National Petrochemical Company (Yansab) has recently started
commercial operations (in March 2010). The timing looks ideal as both
demand and pricing are gaining traction. The company’s strong links
with SABIC and strategic location in the West are positives. However
with the strong performance of the stock over the past year, we
believe much of this is priced in. We initiate coverage with a Neutral
rating and target price of SR50.7.
1Q10 start to operations looks ideal: Yansab seems to have gotten its
timing right in commencing operations in March 2010, given the pick up in
both petrochemical prices and demand. However, with many other projects in
the country starting up over the next 3 years (Petrochem, Saudi Kayan and
Sahara Petrochemicals) excess supply which could impact operating rates and
pricing is a material risk.
Benefitting from SABIC’s strong marketing platform: We expects Yansab
to benefit from SABIC’s global marketing network and distribution channels.
Yansab’s location in the West of the country, which is significantly closer to
European markets relative to its East based peers, will be an added advantage.
A quick ramp up in revenues and earnings: 2010e will be the first year of
commercial operations and we expect revenues and earnings to quickly ramp
up over the next few years. By 2014e, we expect revenues of SR10.2bn from
zero in 2009. Net income should expand to SR3.2bn by 2014e from losses in
2009.
Below 100% operating rates worrisome: Yansab receives 35,000 barrels
per day of propane from Aramco, which is actually 10,000 barrels per day
below its full requirement. As a result, the ethylene cracker will likely run at a
sub-optimal utilization rate. Though SABIC is seeking approval for additional
propane from Aramco, we believe it may be difficult to secure this due to rising
domestic demand amid limited supply.
Looking fully valued: Yansab trades at a 2009 P/BV multiple of 4.8x (sector
average: 2.9x and TASI: 2.2x). In 2009 and YTD, Yansab’s stock price has
increased 126% and 46% respectively versus the TASI rising 67% and 13%.
Despite our confidence in the company, our valuation of SR50.7/share implies
the stock is fully valued. We initiate coverage on Yansab with a Neutral rating
and a target price of SR50.7, implying upside of 3.9%.
Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 0 7,485 9,771 10,123 10,087
EBITDA SR mn (29) 3,902 4,294 4,436 4,464
E Margin % n/a 52.1 43.9 43.8 44.3
Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627
Net income SR mn (29) 2,874 2,902 3,132 3,124
Net margin % - 38.4 29.7 30.9 31.0
EPS SR (0.05) 5.11 5.16 5.57 5.55
Assets SR mn 21,124 23,719 25,487 24,763 26,034
Equity SR mn 5,668 8,542 10,882 13,451 16,013 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 YANSAB – INITIATING COVERAGE
Investment scenarios Valuation can increase significantly with higher prices and better operating rates
Historical and expected price performance
32.0
7.06.5
5.1
50.7
6.56.0
5.6
68.7
0
10
20
30
40
50
60
70
DCF
Bear
case
WAC
C incr
ease
s by
2%
Pric
e dec
lines
by
5%
Cost
ris
es
by
10%
DC
F Base
case
Pri
ces
incr
ease
s by
5%
WAC
C r
educe
s by
100
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Opera
ting r
ate g
row
sas
allo
cation incr
ease
s
DC
F Bull
case
(SR)
67.5
32.1
50.7
0
10
20
30
40
50
60
70
Apr-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11
Historical Price Performance Price Target
Scenario analysis
Source: NCBC Research estimates Source: NCBC Research estimates
Investment view DCF scenarios
Price target:
SR 50.7
• Weighting of DCF is 100%
DCF bull case:
SR 68.7
• Assuming Yansab would be able to procure
additional feedstock from Saudi Aramco
would enable it to run its plant at a higher
operating rate. Also assuming higher prices
and a lower WACC. This would result in net
income increasing to SR3.8bn from
SR3.4bn between 2010e-14e.
DCF base
case:
SR 50.7
• We expect operating rates and prices to
improve gradually in the coming years.
However, aggressive capacity additions are
expected to outpace the demand recovery
thus denting operating rates and prices
from 2014e onwards. We assume net
income to increase to SR3.2bn from
SR3.0bn between 2010e-14e
• Commercial start up in March 2010: Yansab started
commercial operations at a time when prices have regained
strength and demand has picked up
• Strong tie-up with SABIC: Being a 55% stakeholder in
Yansab, SABIC is responsible for marketing and selling the
entire output from the Yansab complex.
• Presence in West offers proximity to Europe: Yansab
benefits from its plant location in the West of the country
which gives it the ability to easily cater to demand in Europe
• Insufficient feedstock limits operating rate: Yansab is
not able to secure the required propane feedstock from
Saudi Aramco for running its ethylene cracker at 100%
capacity. Though SABIC is in talks with Saudi Aramco to
procure an additional 10,000 barrels per day of propane, we
believe this may be difficult given rising demand in the
Kingdom and scarce supply
• Fully valued: Yansab’s stock price has increased by 131%
in the last 12 months, outpacing the recovery in the TASI
index by 105%. We believe that despite our confidence in
the company and its operations, the stock is fully valued DCF bear
case:
SR 32.1
• Lower prices and higher cost of production
owing to a higher than expected rise in
feedstock cost. Also a two percentage point
higher WACC. Net income is projected to
increase to SR2.7bn from SR2.6bn between
2010e-14e
Potential catalysts Risks to our view
• Allocation of an additional 10,000 barrels per day of
propane feedstock would enable Yansab to run its plant at a
100% operating rate
• A quick recovery in global economic growth would drive
demand and prices, and result in higher operating rates
• Higher then expected rise in feedstock prices could dent
profitability
• Earlier then expected 2015 revision of feedstock prices
would impact the cost structure
• Anti dumping claims by Asian traders could burden Yansab’s
cost structure with additional charges.
• Any extended slowdown in key industries could lead to a
protracted period of demand deceleration, depressing
operating rates and prices.
40
27 April 2010 YANSAB – INITIATING COVERAGE
Investment view LOOKING FULLY VALUED
At current levels, Yansab is trading at a 2010e P/E of 9.17x and a 2011e P/E of
9.1x. The stock had tumbled to a historic low of SR12.80 (down 75.3%) during
2008 after which it has climbed 281% to a current price of SR48.8. Yansab gained
125.7% during 2009 versus 27.5% for the Tadawul and 66.7% for the sector. Year
to date, the stock has risen 46.0%, versus 13.0% for the Tadawul. Despite our
confidence in the company, we believe the stock is looking fully valued at these
levels.
WELL TIMED COMMENCEMENT OF OPERATIONS
Given the cyclical nature of the petrochemical industry, we believe Yansab is
starting operations at an ideal time as prices have regained strength and demand is
picking up. This compares to some of its peers such as Petrochem, Sahara
Petrochemicals and Saudi Kayan which will all be beginning commercial operations
over 2011 to 2013. For the overall sector, the large capacity increases during this
time may impact utilization rates and pricing and we forecast utilization rates
dropping from 2014 onwards as the current cycle peaks.
GEOGRAPHIC ADVANTAGE RELATIVE TO KSA PEERS
Yansab is one of the two petrochemical producers located in the West of Saudi
Arabia. The other producers discussed in this report are all located in the East of
Saudi Arabia. Being located in the West gives Yansab the ability to cater to demand
in Europe. The distance between Yanbu and Jubail (the main production area in the
East) is in excess of 1,200km over land and around 4,700km (2,500 nautical miles)
by sea.
BENEFITTING FROM SABIC’S MARKETING PLATFORM AND FINANCING
SABIC (which owns 51% in Yansab) is responsible for marketing and selling the
entire output from Yansab’s complex to local and export markets. SABIC also acts
as a strong source of financing which is helpful during times when project financing
is difficult to secure. In 2009, SABIC offered SR2.2bn to Yansab in order to help the
company complete the project and to cover cost overruns.
FEEDSTOCK SHORTAGE CAPS UTLIZATION RATES
Yansab currently receives 35,000 barrels per day of propane, which is 10,000
barrels per day short in terms of running its plant at 100% utilization. According to
the prospectus, the company is seeking approval for these additional allocations;
however we believe it may be difficult to secure additional feedstock due to growing
domestic demand and limited supply.
Risks to our view
AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES
Yansab procures natural gas from Saudi Aramco at an attractive price of
USD0.75/mmbtu under long term contracts. However, we believe an increase in the
medium term is possible and have incorporated the possible upward reviews in gas
prices to USD1.5/mmBtu in 2012e for the Saudi petrochemical players. However,
41
27 April 2010 YANSAB – INITIATING COVERAGE
INVESTMENT VIEW
for Yansab, we believe prices will remain at the 0.75/mmbtu until 2015e when the
contract between Yansab and Aramco will be reviewed. An earlier increase in
feedstock cost than our forecast would erode Yansab’s cost advantage and
negatively affect our earnings estimates.
ANY UNEXPECTED CHANGE IN FEEDSTOCK PROCUREMENT QUANTITIES
If there is any progress in Yansab receiving more ethane and propane feedstock
allocations from Aramco, this would increase the utilization rates and positively
impact earnings.
42
27 April 2010 YANSAB – INITIATING COVERAGE
Valuation: SR50.7/share
Valuation methodology We have used DCF methodology to arrive at our target price for Yansab. Our
valuation is based on the following assumptions:
Cost of Equity (COE) of 13.1%: We have taken the US 10-year Treasury yield of
3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to
the US dollar. The company’s adjusted beta (weekly returns since 1 January 2007
compared with Saudi’s TASI) is 1.16. We assume an equity risk premium of 8.04%
for Saudi Arabia which includes a 1.35% premium for the country risk associated
with Saudi Arabia.
Tax-adjusted cost of debt of 4.4%: The cost of debt for Yansab is assumed to
be 4.5%. After adjusting it for tax/zakat, the cost of debt equals 4.4%.
Using the above assumptions, we arrive at a WACC of 10.2%.
For our DCF valuation, we explicitly model the detailed cash flows through 2017e,
which allows us to cover a complete business cycle. We use a terminal growth rate
of 2.5% and our WACC of 10.21%. Based on these assumptions, we arrive at the
estimated enterprise value of the company. This is further adjusted for debt, cash,
and other payments to derive Yansab’s equity value and target price of
SR50.7/share.
Exhibit 29: Yansab - Details of DCF Valuation
(SR mn unless specified)
Sum of present value 19,285.1
Terminal value 36,524.5
Present value of terminal 20,008.0
Enterprise value 39,293.2
Less: debt (13,459.0)
Add: cash 2,763.6
Less: end-of-services indemnities (81.1)
Equity value 28,516.6
Number of shares (mn) 562.5
Value per Share (SR) 50.70
Source: Company, NCBC Research estimates
The table below indicates the impact of changes in WACC as well as terminal
growth rate on the DCF target price.
Exhibit 30: Sensitivity table
Terminal growth rate (%)
1.5 2.0 2.5 3.0 3.5
8.2 55.6 59.1 63.2 68.0 73.9
9.2 50.3 53.0 56.0 59.5 63.6
10.2 46.3 48.4 50.7 53.3 56.4
11.2 43.1 44.8 46.6 48.7 51.0
WA
CC
(%
)
12.2 40.5 41.9 43.4 45.0 46.9 Source: NCBC Research estimates
43
27 April 2010 YANSAB – INITIATING COVERAGE
Company description
Overview Established in 2005, Yanbu National Petrochemical Company (Yansab) is 55%
owned by SABIC which holds 51%. GOSI holds 9.2%, while a 35% stake is with the
public. The company’s IPO in January 2006 was about 2.8 times over subscribed
and the proceeds totaled SR5.63bn (USD1.5bn).
Yansab has a total annual production capacity of more than 4mn mt of
petrochemical products. Basic chemicals (olefins, aromatics and oxygenate)
accounts for about 50% of the total product mix, while intermediates and polymers
contribute about 19% and 31%, respectively. On 12 July 2009, Yansab started
experimental runs at its petrochemical complex in Yanbu Industrial City. Production
at its ethylene and mono ethylene glycol plants started during the month of July
2009.
While the current capacity is around 4mn mt per annum (mtpa), capacity expansion
of 10-30% with minimal investments has been pre-designed into the complex. For
example, the olefins cracker’s current capacity is about 1.3mn mtpa of ethylene,
while the designed capacity is of 1.7mn mtpa. Similarly, the LLDPE and Mono
Ethylene Glycol plants have designed annual capacity of 500,000 mt and 800,000
mt, however the current annual capacity is of 400,000 mt and 700,000 mt,
respectively. The complex started commercial operations in March 2010 and
contributed to Yansab’s 1Q 2010 quarterly results.
Project cost overruns bring total to over SR21bn We believe the total project cost has increased to SR21.15bn (USD5.64bn) from the
SR18.75bn (USD5bn) announced in 2005. The project has been funded with debt
and equity split in a 70:30 ratio. Debt financing includes SR4.0bn from the Public
Investment Fund (PIF), a loan worth SR5.95bn from Commercial and Export Credit
Agencies and an Islamic finance tranche of SR3.18bn.
Moreover, during 2009, Yansab received a term loan worth SR2.2bn from its
partner, SABIC. We believe this was to cover the increase in project cost and debt
repayments due during the year.
44
27 April 2010 YANSAB – INITIATING COVERAGE 45
COMPANY DESCRIPTION
Exhibit 31: Product flow chart
Metric tons per annum (mtpa), unless otherwise stated
770,000 mtpa
400,000 mtpa
Olefin production unit
Oxygen (525,000 mtpa)
Ethane (80 mn cu ft per day)
Propane (45,000 bbl per day)
Ethylene oxide / ethylene glycol
HDPE
LLDPE
Polypropylene
Butene separation unit (26,000 mtpa)
Benzene extraction unit, Toluene, Xylene
Exchange of refined propane (50,000 mtpa)
Thermal gasoline (120,000 mtpa)
Ethylene(1.3 mn mtpa)
50,000mtpa
100,000mtpa Butene 1
500,000 mtpa
400,000 mtpa
26,000 mtpa
100,000 mtpa
38,000 mtpa
Benthin –32,000 mtpa
Butene 2
Benzene
Toluene, Xylene
MTBE
Propylene(0.4 mn mtpa)
Source: Yansab, NCBC Research estimates
Feedstock agreement
ETHANE AND PROPANE
Yansab has secured low cost ethane and propane allocations from Saudi Aramco to
feed its mixed-feed facility.
Saudi Aramco has allocated 80mn cubic feet per day of ethane, 35,000 barrels of
propane per day and 35mn m2 per day of natural gas to Yansab. This allocation is
sufficient to produce 1.25mn mt of ethylene and 0.325mn mt of propylene annually
implying the plant would operate at an average utilization rate of 93%. We believe
it may be difficult for the company to secure this additional allocation due to
growing domestic demand and limited supply.
Saudi Aramco supplies ethane to Yansab at a fixed price of USD0.75/mmBtu. We
believe there will be a general increase in this pricing for the industry in 2012 to
USD1.5/mmbtu. However, for Yansab, given contractual agreements, we believe
the upward revision in ethane prices will likely take affect after 2015. Based on this,
we have incorporated this revision in our model from 2016. The propane price is
linked to Japanese naphtha prices and is likely to be revised upward in 2011,
though the hike is expected to be limited. Despite the prices for these key inputs
rising, we note that Yansab will still be receiving ethane and propane at attractive
levels compared to global peers.
27 April 2010 YANSAB – INITIATING COVERAGE
COMPANY DESCRIPTION
OTHER RAW MATERIALS
SABIC’s subsidiary, National Industrial Gases Co, is fulfilling the oxygen
requirement of Yansab’s complex. All the supply points are located close to the
project site to minimize the possibility of any delays (or disruptions) in supply.
Marketing agreement SABIC is responsible for marketing and selling the entire output from Yansab’s
complex to the local and export markets. Yansab, therefore, is set to benefit from
SABIC’s strong marketing network and distribution channels.
Dividend We have projected dividend payment of SR1 per share dividend starting from 2011,
given Yansab’s only begins commercial operations in 2010. This results in a
dividend yield of 2.0% for 2011e onwards.
46
27 April 2010 YANSAB – INITIATING COVERAGE
Financials Exhibit 32: Income statement In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Revenues 0 7,485 9,771 10,123 10,087 9,972
% change n/a n/a 30.5 3.6 -0.4 (1.1)
COGS 0 (4,163) (5,875) (6,072) (6,017) (5,962)
Gross Profit 0 3,322 3,896 4,050 4,070 4,010
Margins (%) n/a 44.4 39.9 40.0 40.3 40.2
G&A expenses (29) (198) (535) (553) (552) (546)
D&A expenses 0 (778) (933) (939) (945) (953)
Operating Profit (29) 3,124 3,361 3,497 3,518 3,464
% change n/a n/a 7.6 4.1 0.6 (1.5)
EBITDA (29) 3,902 4,294 4,436 4,464 4,417
% change n/a n/a 10.1 3.3 0.6 (1.0)
Margins (%) n/a 52.1 43.9 43.8 44.3 44.3
Interest expenses, net of income 0 (139) (276) (182) (157) (83)
Zakat 0 (112) (183) (184) (237) (289)
Net income (29) 2,874 2,902 3,132 3,124 3,093
Net margin (%) n/a 38.4 29.7 30.9 31.0 31.0
% change n/a n/a 1.0 7.9 (0.2) 31.0
EPS (SR) (0.05) 5.11 5.16 5.57 5.55 5.50
Source: Company, NCBC Research estimates
Exhibit 33: Balance sheet In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 606 2,339 4,037 4,006 6,097 8,119
Advances to suppliers and other receivables 865 865 865 865 865 865
Accounts receivables 0 1,230 1,606 1,664 1,658 1,639
Inventory 738 1,255 1,771 1,830 1,813 1,797
Total current assets 2,208 5,689 8,279 8,365 10,433 12,420
Capital work in progress 18,576 0 0 0 0 0
Fixed assets 0 17,891 17,068 16,259 15,462 14,694
Pre-operating expenses 200 0 0 0 0 0
Deferred charges 110 110 110 110 110 110
Other non-current assets 30 30 30 30 30 30
Total non-current assets 18,916 18,030 17,208 16,399 15,601 14,834
Total assets 21,124 23,719 25,487 24,763 26,034 27,254
Accounts payable 276 912 1,288 1,331 1,319 1,307
Accruals and provisions 488 488 488 488 488 488
Current portion of LT loan 916 947 3,336 1,279 1,298 1,367
Total current liabilities 1,679 2,347 5,112 3,098 3,105 3,162
LT loans, including term loan from a major shareholder 13,696 12,749 9,412 8,134 6,835 5,468
Employees's end of service benefits 81 81 81 81 81 81
Total non-current liabilities 13,777 12,830 9,494 8,215 6,916 5,549
Share capital 5,625 5,625 5,625 5,625 5,625 5,625
Statutory reserve 14 301 592 905 1,217 1,527
Retained earnings 29 2,616 4,665 6,921 9,171 11,392
Total stockholders' equity 5,668 8,542 10,882 13,451 16,013 18,543
Total liabilities & stockholders' equity 21,124 23,719 25,487 24,763 26,034 27,254
Source: Company, NCBC Research estimates
47
27 April 2010 YANSAB – INITIATING COVERAGE
F INANCIALS
Exhibit 34: Cash flow statement In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from op. (a) (1,787) 2,542 3,319 3,997 4,080 4,069
Cash flow from inv.(b) (1,455) 107 (111) (130) (148) (185)
CAPEX (1,471) (93) (111) (130) (148) (185)
Cash flow from fin.(c) 4,970 (3,071) (1,509) (3,899) (1,841) (1,861)
Debt 2,814 (916) (947) (3,336) (1,279) (1,298)
Net chg. in cash (a+b+c) 1,728 (422) 1,699 (32) 2,091 2,023
Cash at start of the year 1,033 2,761 2,339 4,037 4,006 6,097
Cash at end of the year 2,761 2,339 4,037 4,006 6,097 8,119
Source: Company, NCBC Research estimates
Exhibit 35: Key rations
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR)
EPS (0.05) 5.11 5.16 5.57 5.55 5.50
FCF per share (3.2) 4.6 6.2 7.2 7.2 7.0
Div per share - - 1.0 1.0 1.0 1.0
Book value per share 10.1 15.2 19.3 23.9 28.5 33.0
Valuation ratios (x)
P/E n/a 9.6 9.5 8.8 8.8 8.9
P/FCF n/a 10.6 7.9 6.8 6.7 6.9
P/BV 4.8 3.2 2.5 2.0 1.7 1.5
EV/sales - 5.5 4.2 4.1 4.1 4.2
EV/EBITDA n/a 10.6 9.7 9.3 9.3 9.4
Div yield (%) - - 2.0 2.0 2.0 2.0
Profitability ratios (%)
Gross margins - 44.4 39.9 40.0 40.3 40.2
Operating margin - 41.7 34.4 34.5 34.9 34.7
EBITDA margins - 52.1 43.9 43.8 44.3 44.3
Net profit margins - 38.4 29.7 30.9 31.0 31.0
ROE - 33.6 26.7 23.3 19.5 16.7
ROA - 12.1 11.4 12.6 12.0 11.3
Liquidity ratios
Current ratio 1.0 1.4 0.8 1.4 1.4 1.4
Quick Ratio 0.5 0.9 0.5 0.8 0.8 0.8
Operating ratios (days)
Inventory - 110 110 110 110 110
Receivables outstanding - 60 60 60 60 60
Payables outstanding - 80 80 80 80 80
Operating cycle - 170 170 170 170 170
Cash cycle - 90 90 90 90 90
Production & sales
Production capacity (mn mt) 3.9 3.9 3.9 3.9 3.9 3.9
Production volumes (mn mt) 0.8 3.1 3.7 3.7 3.7 3.7
Utilization rate (%) 59 96 96 96 96 96
External sales volumes (mt) 0.4 1.7 2.1 2.1 2.1 2.1
Source: Company, NCBC Research estimates
48
PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE
Saudi Kayan
Neutral Still Awaiting Start of Operations
Target Price (SR) 20.3
Current price (SR) 22.4
Potential downside (%) ↓ 9.2
Stock details
52-week range H/L (SR) 23/11
Market cap ($mn) 8,972
Shares outstanding (mn) 1,500
Listed on exchanges TADAWUL
Price perf (%) 1M 3M 12M
Absolute 17.9 20.4 100.9
Rel. to market 16.6 10.3 74.2
Avg daily T/o (mn) SR US$
3M 313.3 83.7
12M 214.4 57.2
Reuters code 2350.SE
Bloomberg code KAYAN AB
Website www.saudikayan.com
Valuation multiples
09 10E 11E
P/E (x) - - 14.7
P/B (x) 2.2 2.2 1.9
EV/EBITDA (x) - - 12.4
Div yield (%) - - -
Source: NCBC Research estimates
Share price performance
0
5
10
15
20
25
Apr-09 Sep-09 Mar-10
4000
5000
6000
7000
8000
Kayan TASI (RHS)
Saudi Kayan Petrochemical Company’s (Saudi Kayan) diversified
product mix and strong links with SABIC are key positives. However,
doubts over on-time start of operations and a lack of revenues until
2011e dim the near term outlook. We, therefore, initiate coverage on
Saudi Kayan with a Neutral rating and target price of SR20.3/share.
Uncertainty on start of operations: Saudi Kayan’s initial target was that all
plants would begin trial operations by the end of 2009. Despite this target
being reiterated in June 2009, shortly thereafter, in Dec. 2009, the company
announced a delay until 2H 2010 for all plants (except LDPE and Amines which
were expected to start in 2H 2012). In our forecasts we assume that
commercial operations of the majority of plants will be delayed until 2Q 2011
and the LDPE and Amines plants will delayed until 2013.
Strong earnings growth during 2011e-2013e: Given that we expect
operations in 16 of its 18 plants to start in 2Q 2011, we project net income to
turn positive in 2011e. While year 2012e will benefits from full year
contribution from these 16 plants (all plants except LDPE and Amines), 2013e
will be the first year of full production at Saudi Kayan’s petrochemical complex.
Net income is projected to peak in 2013e at SR3,288mn from SR2,279mn in
2011e.
Post 2013 earnings to contract as the current cycle nears its peak: Post
2013e, net income is likely to contract as the current cycle nears its peak;
regional and global capacity additions are likely to outpace demand growth,
pressuring prices and utilization rates to decline.
SABIC – a strong partner: Saudi Kayan is set to benefit from its close
association with SABIC’s (its single largest stakeholder with 35%) global sales
and marketing network and distribution channels. Saudi Kayan’s entire output
will be marketed and sold through SABIC.
Valuation: Saudi Kayan’s shares have jumped 100.9% in the last 12 months,
outpacing the TASI’s growth of 26.7%. Despite trading at a reasonable P/BV
multiple of 2.2x (sector average: 2.9x and TASI: 2.2), we believe the shares
may have risen too far too fast given the start-up nature of the business. With
our target price of SR20.3 indicating 9.2% downside to the current stock
levels, we initiate with a Neutral rating.
Source: Bloomberg Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 0 0 12,134 16,773 16,677
EBITDA SR mn 0 5 4,039 5,529 5,621
EBITDA margin % n/a n/a 33.3 33.0 33.7 Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627 Net income SR mn (17) (96) 2,279 3,247 3,288
Net margin % n/a n/a 18.8 19.4 19.7
EPS SR (0.01) (0.06) 1.52 2.16 2.19
Assets SR mn 35,808 36,099 38,648 39,928 40,374
Equity SR mn 15,477 15,381 17,660 19,407 21,195 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
Investment scenarios Valuation can increase significantly with higher prices and better operating rate
Historical and expected price performance
11.1
2.9
3.92.4
20.3
2.41.9
2.5
27.1
0
6
12
18
24
30
DCF
Bea
r ca
se
WACC
incr
ease
s b
y 2 %
Price
dec
lines
b
y 5 %
Pro
duct
ion c
ost
ris
es b
y 3 %
DC
F Bas
ecas
e
Pri
ces
incr
ease
s by
5 %
Opera
ting r
ate
gro
ws
by
5%
WACC
red
uce
s by
1%
DCF
Bull
case
(SR)
27.1
11.1
20.3
0
5
10
15
20
25
30
Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11
Historical Price Performance Price Target
Scenario analysis
Source: NCBC Research estimates Source: NCBC Research estimates
Investment view DCF scenarios
• Price
target:
SR 20.3
• Weighting of DCF is 100%
• DCF bull
case:
SR 27.1
• We assume Saudi Kayan to run its plant at
a higher operating rate. We also assume
higher prices and lower WACC. This would
result in net income rising to SR3.53n from
SR2.74n between 2011E-2014E
• DCF base
case:
SR 20.3
• We assume utilization rates peak in 2013
and prices peak in 2012. Aggressive
capacity additions globally are expected to
outpace the demand recovery, thus,
denting operating rates and prices in
subsequent years. We assume net income
to increase to SR2.94bn from SR2.28bn
between 2011E-2014E, while peaking in
2013e at SR3.3bn
• Commencement delay worrisome: Saudi Kayan has
already missed its initial commencement date for its plants
of Dec. 2009 and has retendered and re-awarded the EPC
contracts for 2 plants. Given its previous delays and
uncertainty of the start of its LDPE and Amines plants we
believe further delays are possible.
• Commercial operations to boost earnings: We estimate
that its first year of full commercial operations in all its
plants will only be in 2013. Following this, we expect net
income to peak in 2013e to SR3,288mn from SR2,279mn in
2011e.
• Restricted earnings growth post 2013e: As a result of
regional and global capacity additions outpacing demand
growth, we expect Saudi Kayan to experience pressuring
prices and utilization rates. This is projected to decline
Saudi Kayan’s 2014e net income by 9.2% to SR2,941mn.
• Strong tie-up with SABIC: SABIC will market Saudi
Kayan’s entire output, enabling Saudi Kayan to capitalize on
SABIC’s strong marketing network and distribution channel.
• Valuation: In the last 12 months, the stock price has
jumped by 100.9%, outpacing the TASI’s growth of 26.7%.
and sector growth of 51.6%. Despite Saudi Kayan’s
fundamental positives, we believe the risk reward is to the
downside. We initiate coverage on Saudi Kayan with a
target price of SR20.3, representing a downside of 9.2%.
• DCF bear
case:
SR 11.1
• We assume lower prices and higher cost of
production owing to higher than expected
rise in feedstock cost. We also assume
WACC to be two percentage point higher.
Net income is projected to increase to just
SR2.15bn from a net income of SR1.65bn
between 2011E-2014E
Potential catalysts Investment risks
• A quick rebound in global economic growth would drive
demand and prices and result in higher operating rates
• Earlier than expected commencement of the facilities would
act as a positive trigger for the stock price
• Higher than expected increase in feedstock prices could
dent profitability
• Revision of feedstock prices before expected in 2015 would
impact the cost structure
• Anti dumping claims by Asian traders could burden Saudi
Kayan’s cost structure with additional charges
• Any extended slowdown in key industries could lead to a
protracted period of demand weakness, depressing
operating rates and selling prices
50
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
Investment view BOTTOM LINE TO REMAIN NEGATIVE IN 2010
Saudi Kayan aims to kick start trial runs at its units (except the LDPE and amines
plants) during 2H 2010 and early 2011. Given this, we assume commercial
operations at these units will start only in 2Q 2011. As a result, net income is
expected to turn positive only in 2011e, while we forecast Saudi Kayan will be
reporting net losses in 2010e. We believe 2012e will be the first year when Saudi
Kayan will witness a full year of production at these plants (apart from LDPE and
amines). We also expect net income to peak in 2013e, as subsequent years are
impacted by lower operating rates and prices.
ON TIME COMMENCEMENT OF OPERATIONS DOUBTFUL
Saudi Kayan re-tendered the engineering, procurement and construction (EPC)
contracts for its LDPE and amines facilities in 2009. The EPC contract for the amines
unit was awarded to CTCI Corp in January 2010, while Daelim Industries won the
EPC contract for the LDPE plant in late March 2010. The letter of intention for the
LDPE EPC contract was initially signed with Simon Carves Limited. Construction of
the LDPE plant is expected to be completed by 2H 2012, while an update on the
timeline for the amines facility is still not available. These uncertainties raise
concerns regarding Saudi Kayan’s ability to start operations as planned. Any delay
in Saudi Kayan reaching full capacity will also dent its ability to leverage the
benefits of scale and its integrated product mix.
STOCK PRICE RISE OFFERS LIMITED ROOM FOR UPSIDE
In the last 12 months, Saudi Kayan’s stock price has climbed 100.9% to the current
SR22.4 versus the 26.7% gain for the Tadawul index and 51.6% of the sector
index. We believe the stock looks expensive at current levels, given the company’s
start-up nature, and the continued uncertainties surrounding its start operations.
SAUDI KAYAN TO LEVERAGE ON SABIC’S MARKETING EXPERTISE
On the positive side, Saudi Kayan will benefit from SABIC’s extensive sales and
marketing network, distribution channel and its deep experience in the
petrochemical business. SABIC owns 35% in Saudi Kayan and is responsible for
marketing the entire output from the complex.
Risks to our view
AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES
Saudi Kayan procures natural gas from Saudi Aramco at an attractive price of
USD0.75/mmBtu under long term contracts. However, we believe a price increase
in the medium term is possible. Discussions with industry players indicate the
possibility of an upward revision in gas prices to USD1.5/mmBtu in 2012. However,
according to the company’s filings, prices will remain at the 0.75/mmBtu until
2014, when the contract between Saudi Kayan and Aramco will be reviewed. We
have incorporated a change in pricing for Saudi Kayan to USD1.5/mmBtu from
USD0.75/mmBtu, based on this information. Any change in contractual prices and
volumes of feedstock, contrary to our assumption, would erode Saudi Kayan’s cost
advantage and affect earnings.
51
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
F INANCIAL PERFORMANCE
EARLIER THAN EXPECTED START OF OPERATIONS
Saudi Kayan commencing operations at most of its plants ahead of our 2Q 2011
estimate would act as a positive trigger for the stock. This, in turn, is likely to result
in the company reporting profits and revenues earlier than expected, thereby
boosting the stock’s valuation.
52
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
Valuation: SR20.3/share
Valuation methodology We have used DCF methodology to arrive at our target price for Saudi Kayan.
Cost of Equity (COE) of 14.9%: We have taken the US 10-year Treasury yield of
3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to
the US dollar. Special attention is needed in estimating Saudi Kayan’s Beta because
of the expected change in the company’s capital structure. We calculated historical
(observed) beta using two years weekly data and then adjusted it for leverage, to
reflect our expectation of a medium-term debt-to-capital ratio of 50%. The levered
beta is 1.38. We assume an equity risk premium of 8.04% for Saudi Arabia which
includes a 1.35% premium for the country risk associated with Saudi Arabia.
Tax-adjusted cost of debt of 4.4%: The cost of debt for Saudi Kayan is assumed
to be 4.50%. After adjusting it for tax rate, cost of debt equals 4.40%.
Using the above assumptions, we arrive at a WACC of 9.65%.
DCF VALUE OF SR20.3/SHARE
For evaluating Saudi Kayan’s business, we use the DCF analysis with a detailed free
cash flow (FCF) estimate out to 2017E. Given the cyclicality of the sector, the eight-
year explicit forecast period covers one business cycle. We then use a terminal
growth assumption of 2.5% and discount the cash flows using the WACC. We then
arrive at the estimated enterprise value of the company, further adjust for debt,
cash, and other payments to derive Saudi Kayan’s equity value and target price.
Exhibit 52: Saudi Kayan - Details of DCF Valuation
In SR mn, unless otherwise specified
Sum of present value 18,302.5
Terminal value 50,653.5
Present value of terminal 28,634.0
Enterprise value 46,936.6
Less: debt (18,804.6)
Add: cash 2,453.9
Less: end-of-services indemnities (65.1)
Equity value 30,520.8
Number of shares (mn) 1,500.0
Value per share (SR) 20.3
Source: NCBC Research estimates
The table below indicates the impact of changes in WACC as well as terminal
growth rate on the DCF target price.
Exhibit 53: Sensitivity table
Terminal growth rate (%)
1.5 2.0 2.5 3.0 3.5
7.7 26.6 28.9 31.7 35.1 39.2
8.7 21.6 23.2 25.1 27.3 29.9
9.7 17.8 19.0 20.3 21.9 23.7
10.7 14.9 15.8 16.7 17.9 19.1
WA
CC
(%
)
11.7 12.5 13.2 13.9 14.8 15.7
Source: NCBC Research estimates
53
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
Company description
Overview Saudi Kayan is a joint venture between SABIC and privately-held Al Kayan
Petrochemical Company (Al Kayan), and was registered on 12 June 2007. During
2007, 45% was offered to the public through an initial public offering. Currently,
SABIC and Al Kayan own a 35% and 20% stake in the firm, respectively, with the
remainder held by the public.
Exhibit 54: Shareholding pattern
Units
Public, 45%
Al Kayan Petrochemical Co,
20%
SABIC, 35%
Source: Tadawul
Saudi Kayan is currently in pre-operational stage and commissioning is expected to
start in phases, with important units starting operations in 2H 2010 and others in
early 2011. Two plants – LDPE and Amines – are expected to start trial operations
2H 2012 with commercial operations in 2013. Saudi Kayan’s petrochemical
complex, located in the Jubail Industrial City, will create a fully integrated
production model as the basic chemicals produced would be used internally to
manufacture polymers for external sales. The complex will have annual production
capacity of about 6mn mt.
Project cost at USD10bn The total project cost is targeted at approximately SR37.5bn (USD10bn) which was
financed through debt (~60%) and equity (~40%). SABIC, Al Kayan Petrochemical
Co and the proceeds from the IPO together accounted for SR15bn – the equity
proportion of the project cost.
In May 2008, a consortium of banks and financial institutions agreed to lend
SR22.5bn (USD6bn) to Saudi Kayan for a period of 15 years. The consortium
includes a group of regional and international banks and financial institutions along
with export credit agencies (such as ECGD, KEIC, K-EXIM and SACE). Al Rajhi
Banking & Investment Corporation is providing Islamic working capital, while the
Public Investment Fund (PIF) of the Kingdom of Saudi Arabia is financing the
project cost. Saudi Investment Development Fund (SIDF) provided USD533mn of
debt to Saudi Kayan.
54
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE 55
F INANCIAL PERFORMANCE
Feedstock agreement
ETHANE AND BUTANE AT A DISCOUNT TO GLOBAL PRICES
Saudi Aramco has agreed to supply ethane to Saudi Kayan at a fixed price of
USD.75/mmBtu for seven years commencing from the first quarter of 2008. From
mid-December 2009, Saudi Kayan started receiving natural gas from Saudi Aramco
to facilitate commissioning of the complex. Industry wide expectations are that
ethane prices will be revised to SR1.5/mmBtu in 2012, however we believe Saudi
Kayan will face this revision in 2015, benefitting from its seven year agreement
with Saudi Aramco.
Saudi Aramco has also agreed to supply butane at a price linked to Japanese
Naphtha. The butane prices calculated using this mechanism are lower than butane
export prices. The price at which butane is supplied to Saudi Kayan is expected to
be revised upward in 2011 from a discount of 31.5% to a discount of 30%. The
company should continue to enjoy material cost benefits versus its global peers
who procure butane at market prices.
OTHER RAW MATERIALS SUPPLIED THROUGH THE SABIC GROUP
SABIC is scheduled to supply methanol to the complex, while the oxygen and
nitrogen requirement will be fulfilled by the National Company for Industrial Gases
(Gas) – SABIC’s subsidiary. Amine, benzene, butane-1 and soda will also be
supplied by SABIC’s subsidiaries.
Dividend policies We have projected dividend payment of SR1 per share dividend starting from
2012e. This results in a dividend yield of 4.5%.
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
Financials
Exhibit 55: Income statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Sales 0 0 12,134 16,773 16,677 15,653
% change n/a n/a n/a 38.0 (1.0) (6.0)
Cost of Sales 0 0 (8,674) (11,998) (11,841) (11,231)
% of sales 0 0 71.5 71.5 71.0 71.8
Gross Profit 0 0 3,459 4,775 4,835 4,422
Gross margins (%) n/a n/a 28.5 28.5 29.0 28.2
SG&A expenses 0 0 (669) (922) (919) (870)
D&A expenses 0 (5) (1,248) (1,676) (1,705) (1,738)
Operating Profit 0 0 2,790 3,852 3,916 3,552
Operating Margin (%) 23.0 23.0 23.5 22.7
Interest Income 38 29 43 79
Interest Expense (464) (470) (470) (462)
Profit before taxes (17) (94) 2,364 3,411 3,490 3,170
Zakat (0) (2) (85) (164) (202) (229)
Net income (17) (96) 2,279 3,247 3,288 2,941
Net margin (%) n/a n/a 18.8 19.4 19.7 18.8%
EPS (SR) (0.01) (0.06) 1.52 2.16 2.19 1.96
Source: Company, NCBC Research estimates
Exhibit 56: Balance sheet
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 2,472 2,685 1,761 2,365 3,912 5,185
Accounts receivables 0 0 1,995 2,757 2,741 2,573
Inventories 0 0 2,614 3,616 3,569 3,385
Other receivables & prepayments 168 251 0 0 0 0
Total current assets 2,639 2,936 6,370 8,738 10,222 11,143
Cost of project under construction 33,147 33,147 32,268 31,180 30,142 29,186
Other non-current assets 21 16 10 10 10 10
Total non-current assets 33,168 33,163 32,279 31,190 30,152 29,196
Total assets 35,808 36,099 38,648 39,928 40,374 40,339
Accounts payable 272 408 1,901 2,630 2,595 2,462
Accrued and other current liabilities 883 1,133 1,142 1,222 1,262 1,276
Total current liabilities 1,155 1,540 3,043 3,852 3,857 3,738
Long term debts 19,113 19,113 17,878 16,600 15,250 13,893
Other non-current liabilities 62 64 67 69 71 72
Total non-current liabilities 19,175 19,178 17,945 16,669 15,321 13,965
Share capital 15,000 15,000 15,000 15,000 15,000 15,000
Statutory reserves 49 49 277 602 931 1,225
Retained earnings 428 332 2,383 3,805 5,264 6,411
Total stockholders' equity 15,477 15,381 17,660 19,407 21,195 22,636
Total equity & liabilities 35,808 36,099 38,648 39,928 40,374 40,339
Source: Company, NCBC Research estimates
56
27 April 2010 SAUDI KAYAN – INITIATING COVERAGE
F INANCIALS
Exhibit 57: Cash flow statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from op. (a) (946) 213 675 3,970 5,064 4,913
Cash flow from inv.(b) (13,404) 0 (364) (587) (667) (783)
Cash flow from fin.(c) 13,299 0 (1,235) (2,778) (2,849) (2,857)
Debt 13,299 0 (1,235) (1,278) (1,349) (1,357)
Net change in cash (1,051) 213 (924) 604 (1,547) 1,273
Cash at start of the year 3,522 2,472 2,685 1,761 2,365 3,912
Cash at the end of period 2,472 2,685 1,761 2,365 3,912 5,185
Source: Company, NCBC Research estimates
Exhibit 58: Key ratios
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR)
EPS (0.01) (0.06) 1.52 2.16 2.19 1.96
Div per share 0.0 0.0 0.0 1.0 1.0 1.0
FCF per share (9.6) 0.2 0.5 2.5 3.2 3.0
Book value per share 10.3 10.3 11.8 12.9 14.1 15.1
Valuation ratios (x)
P/E n/a n/a 14.7 10.3 10.2 11.4
P/BV 2.2 2.2 1.9 1.7 1.6 1.5
P/FCF (2.3) 109.5 46.7 8.8 7.0 7.5
EV/sales n/a n/a 4.1 3.0 3.0 3.2
EV/EBITDA n/a 9,183.8 12.4 9.1 8.9 9.5
Div yield (%) - - - 4.5 4.5 4.5
Profitability ratios (%)
Gross margins n/a n/a 28.5 28.5 29.0 28.2
Operating margin n/a n/a 23.0 23.0 23.5 22.7
EBITDA margins n/a n/a 33.3 33.0 33.7 33.8
Net profit margins n/a n/a 18.8 19.4 19.7 18.8
ROE (0.1) (0.6) 12.9 16.7 15.5 13.0
ROA (0.1) (0.3) 5.9 8.1 8.1 7.3
Liquidity ratios
Current ratio 0.1 0.2 1.5 1.7 1.6 1.6
Quick Ratio 0.1 0.2 0.7 0.7 0.7 0.7
Operating ratios (days)
Inventory - - 110 110 110 110
Receivables outstanding - - 60 60 60 60
Payables outstanding - - 80 80 80 80
Operating cycle - - 170 170 170 170
Cash cycle - - 90 90 90 90
Production & sales (‘000 mt)
Production capacity 0.0 5.7 5.7 5.7 6.1 6.1
Production volumes 0.0 0.0 4.3 5.7 6.1 5.8
Utilization rate (%) n/a n/a 100 100 100 95
External sales volumes 0.0 0.0 2.2 2.9 2.8 2.7
Source: Company, NCBC Research estimates
57
PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE
Petrochem
Underweight Waiting until 2012
Target Price (SR) 15.8
Current price (SR) 18.7
Potential downside (%) ↓ 15.1
Stock details
52-week range H/L (SR) 20/13
Market cap ($mn) 2,390
Shares outstanding (mn) 480
Listed on exchanges TADAWUL
Price perf (%) 1M 3M SL
Absolute 21.9 24.3 42.9
Rel. to market 16.5 13.9 23.6
Avg daily T/o (mn) SR US$
3M 46.2 12.3
Since listing 93.0 24.8
Reuters code 2002.SE
Bloomberg code PETROCH AB
Website www.petrochem.com.sa
Valuation multiples
09 10E 11E
P/E (x) n/a n/a n/a
P/B (x) 1.3 1.9 2.0
EV/EBITDA (x) n/a n/a n/a
Div yield (%) 0.0 0.0 0.0
Source: NCBC Research estimates SL: Since listing
Share price performance
10
15
20
25
Aug-09 Nov-09 Feb-10
4000
5000
6000
7000
8000
Petrochem TASI (RHS)
National Petrochemical Co. (Petrochem), expected to commence
operations in 2012, will be entering into the Ethylene and Propylene
derivatives arena through a JV with Chevron Phillips. However, given
that there will likely be no revenue until 2012e and that 2010e-2011e
will remain in net losses, we initiate coverage on Petrochem with an
Underweight rating and target price of SR15.8/share.
No sales to be reported until 2012: We expect Petrochem to only report
revenue figures starting in 2012e once its plants become operational. Given
our assumption that its plants will be commercially operational from 2Q12,
2012e will comprise 9 months of production. We expect 2013e will be the first
year for a full year of production to impact the revenue figures.
Net losses in 2010e & 2011e: We expect Petrochem will be incurring net
losses during 2010e and 2011e. The majority of the net losses during this time
are from interest expenses. Once revenues start in 2012e, we expect the net
income to turn positive, however quickly peaking in 2013e at SR1,080.3mn,
with contraction likely thereafter due to a lower utilization rate.
Planned product lines offers limited growth opportunities: Polyethylene
and polypropylene will account for close to 88% of Petrochem’s external sale
volumes. However, there is potential for oversupply here in the medium-term
given the aggressive capex by most of the Saudi players in extending their
ethylene and propylene derivatives capacities.
Strong partnership to offer motivated marketing: Chevron Phillips
Petrochemical Company, Petrochem’s JV partner, is an experienced marketer
with fully developed platforms and channels. Chevron Phillips has an off-take
agreement with Petrochem which limits its inventory risk.
Valuation: Petrochem trades at a 2009 P/BV multiple of 1.9x (sector average:
2.9x and TASI: 2.2x). Our DCF analysis results in a valuation of SR15.8/share.
Given the limited positive catalysts since operations will not start for another
two years, we initiate coverage on Petrochem with an Underweight rating and
a target price of SR15.8 representing 15.1% downside.
Source: Bloomberg Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 0 0 0 5,932 8,721
EBITDA SR mn (9) (15) (17) 2,115 3,087
EBITDA margin % n/a n/a n/a 35.6 35.4
Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627
Net income SR mn (61) (127) (236) 905 1,080
Net margin % n/a n/a n/a 15.3 12.4
EPS SR (0.19) (0.26) (0.49) 2.90 3.46
Assets SR mn 14,581 19,228 21,284 22,666 23,189
Equity SR mn 4,757 4,630 4,394 5,299 6,380 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 PETROCHEM - INITIATING COVERAGE
Investment scenarios Valuation can increase significantly with lower cost and higher prices
Historical and expected price performance
8.2
3.8
2.51.3
15.8
1.90.9
2.6
21.3
0
5
10
15
20
25
DC
F Bear
case
WACC
incr
ease
s by
2%
Realiz
ation d
ecl
ines
by
3%
Cost
ris
es
by
3%
DC
F Base
case
Utiliz
atio
n g
row
by
5%
Cos
t re
duce
s by
2%
Real
ization
gro
ws
by
3%
DCF
Bull
case
(SR)
21.3
8.2
15.8
0
5
10
15
20
25
30
Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11
Historical Price Performance Price Target
Scenario analysis
Source: NCBC Research estimates Source: NCBC Research estimates
Investment view DCF scenarios
• Price
target:
SR 15.8
• Weighting of DCF is 100%
• DCF bull
case:
SR 21.3
• Assuming higher prices and higher
utilization rates due to a faster demand
recovery. Also assuming lower costs and
expanding margins. Net income of
SR1.34bn expected in 2013e.
• DCF base
case:
SR 15.8
• We expect operating rates and prices to
improve gradually in coming years.
However, aggressive capacity additions are
expected to outpace the demand recovery
thus denting operating rates and prices
from 2014e onwards. We assume net
income of SR1.1bn in 2013e.
• No top line to be reported untill 2012: Plants will be
commercially operational in 2Q 2012e with 2012 featuring
only 9 months of production. Full year revenues will start in
2013e.
• Net losses till 2011e: Given no sales until 2012e,
Petrochem will be incurring net losses during 2010e and
2011e, mostly from interest expenses, we believe.
• Capacity oversupply in the region a risk: Polyethylene
and polypropylene will account for close to 88% of
Petrochem’s external sale volumes. Capacity oversupply in
these markets is a possibility given the aggressive capex
taken by KSA players in extending their ethylene and
propylene derivatives capacities.
• Low cost structure: The availability of low cost feedstock
to Petrochem helps in competing with global peers, but not
versus other KSA players which enjoy the same feedstock
advantage.
• Association with Chevron a positive: Petrochem’s JV
partner, Chevron Phillips Petrochemical Company, brings
strong marketing benefits as it has entered into an off-take
agreement with Petrochem to off take and sell all unsold
production
• DCF bear
case:
SR 8.2
• Lower prices and weaker utilization due to
intensified competition. Also two
percentage points higher WACC. Net
income of SR0.91bn expected in 2013e.
Potential catalysts Risks to our view
• Earlier then expected start in production: If Petrochem
commences operations earlier then our estimated 2Q 2012,
this would act as a positive trigger to the stock as well as
earlier reporting of profits and revenues.
• Higher then expected rise in feedstock prices could dent
profitability
• Once operational, anti dumping claims by Asian traders
could burden Petrochem’s cost structure with additional
charges.
59
27 April 2010 PETROCHEM - INITIATING COVERAGE
Investment view NET LOSSES UNTIL 2011E, WITH NO REVENUE UNTIL 2012E
We expect Petrochem’s plants to become commercially operational from 2Q12,
meaning the company will be in losses until then and 2012e figures will have
revenues for only 9 months of production. A full year of production, revenues and
subsequent earnings will only begin from 2013e, we expect.
We believe revenues will contract slightly after 2013e driven by a leveling out in
prices and contracting utilization rates. This outlook is in-line with our concerns on
global over capacity during this time frame as large capacity additions continue in
the overall market. We anticipate that utilization rates will contract to 95% in
2014e and 90% in 2015e.
With production commencing in 2012, we expect Petrochem will be incurring net
losses during 2010e and 2011e due to its interest expenses. After strong net
income growth in 2012e and 2013e, we expect net income to contract in 2014e and
2015e as a result of the decreasing utilization rate.
FORAY IN ETHYLENE AND PROPYLENE PRODUCT LINE OFFERS
LIMITED GROWTH OPPORTUNITIES
Polyethylene and polypropylene will account for close to 88% of Petrochem’s
external sale volumes, we believe. Given the aggressive capacity additions planned
by most of the Saudi players in extending their ethylene and propylene derivatives
capacities, we believe Petrochem will be entering into a market facing overcapacity.
This could restrict any price recovery in the polyethylene and polypropylene
markets in forthcoming years. In addition, Petrochem’s dependency on these
product lines is concerning when most of its peers are diversifying into different
value-added derivatives with a larger capacity base. We therefore remain slightly
apprehensive over Petrochem’s ability to outperform its Saudi peers in terms of
earnings generation capabilities in the coming years.
LIMITED HEAD ROOM WITH VALUE ALREADY PRICED IN
In the near term, we do not see any strong price catalysts given that the company
is currently in pre-operational stage. Moreover, as the stock price is already up
42.9%, outpacing the 19.3% rise in TASI index, from its listing on 08 August 2009,
and the pre-operational status, we believe the stock is looking expensive. Our
valuation and price target of SR15.8/share indicates 15.1% downside and drives
our Underweight rating.
60
27 April 2010 PETROCHEM – INITIATING COVERAGE
INVESTMENT VIEW
Risks to our view
EARLIER THEN EXPECTED START IN PRODUCTION
If Petrochem commences operations earlier then our estimated 2Q 2012, the news
announcement would act as a positive trigger to the stock price and more
importantly would positively impact the financials with earlier reporting of profits
and revenues.
AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES
Petrochem procures natural gas from Saudi Aramco at an attractive price of
USD0.75/mmbtu under long term contracts. However, we believe an increase in the
medium-term is possible and assume that for others in the sector, gas prices will
rise to USD1.5/mmBtu in 2012e. For Petrochem, we believe that prices will remain
at 0.75/mmbtu until 2015e when the contract between Petrochem and Aramco will
be reviewed. We have incorporated the rise in price from 2016e in projecting
Petrochem’s future cash flows. An earlier change in contractual prices and volumes
of feedstock would erode Petrochem’s cost advantage and impact earnings.
61
27 April 2010 PETROCHEM - INITIATING COVERAGE
Valuation: SR15.8/share
Valuation methodology We have used DCF methodology to arrive at our target price for Petrochem.
Our valuation is based on the following assumptions:
Cost of Equity (COE) of 14.4%: We have taken the US 10-year Treasury yield of
3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to
the US dollar. Special attention is needed in estimating Petrochem’s Beta because
of the expected change in the company’s capital structure. We calculated historical
(observed) beta using two years weekly data and then adjusted it for leverage, to
reflect our expectation of a medium-term debt-to-capital ratio of 45%. The levered
beta is 1.32. We assume an equity risk premium of 8.04% for Saudi Arabia which
includes a 1.35% premium for the country risk associated with Saudi Arabia.
Tax-adjusted cost of debt of 4.4%: The cost of debt for Saudi Kayan is assumed
to be 4.50%. After adjusting it for tax rate, cost of debt equals 4.40%.
Using the above assumptions, we arrive at a WACC of 9.97%.
DCF VALUE OF SR15.8/SHARE
For evaluating Petrochem’s business, we use DCF analysis with a detailed free cash
flow (FCF) estimate out to 2017e. Given the cyclicality of the sector, the eight-year
explicit forecast period covers one business cycle. We then use a terminal growth
rate assumption of 2.5% and discount the cash flows using the WACC of 9.97%.
Based on these assumptions, we arrive at the estimated enterprise value of the
company. This is further adjusted for debt, cash, and other payments to derive
Petrochem’s equity value and target price.
Exhibit 44: Petrochem - Details of DCF Valuation
In SRmn, unless otherwise specified
(SR mn unless specified)
Sum of present value 6,180.7
Terminal value 29,694.4
Present value of terminal 16,488.5
Enterprise value 22,669.2
Less: debt (11,576.7)
Add: cash 601.3
Less: end-of-services indemnities (1.8)
Equity value pre-minorities 11,692.0
Less: minorities interest (4,092.2)
Equity value post minorities 7,599.8
Number of shares (mn) 480.0
Value per Share (SR) 15.8
Source: Company, NCBC Research estimates
The table below indicates the impact of changes in WACC as well as terminal
growth rate on the DCF target price.
Exhibit 45: Sensitivity table
Terminal growth (%)
1.5 2.0 2.5 3.0 3.5
8.0 19.0 21.3 24.0 27.2 31.1
9.0 15.6 17.3 19.2 21.5 24.2
10.0 13.0 14.3 15.8 17.5 19.5
11.0 10.9 12.0 13.2 14.5 16.0
WA
CC
(%
)
12.0 9.2 10.1 11.1 12.2 13.4 Source: NCBC Research estimates
62
27 April 2010 PETROCHEM - INITIATING COVERAGE
Company description
Overview Established in March 2008, National Petrochemical Company (PetroChem), 47.7%
owned by Saudi Industrial Investment Group (SIIG – 2250.SE), is engaged in the
petrochemical market through its subsidiary - Saudi Polymers Company. Petrochem
owns a 65% stake in Saudi Polymers Company located in Al-Jubail Industrial City.
The remaining 35% stake is owned by Arabian Chevron Philips Petrochemical Ltd.
Saudi Polymers Company’s petrochemical complex is under-construction and will
have a total annual production capacity of 3.4 mn mtpa. Its petrochemical product
portfolio includes 1.2mn mtpa of ethylene, 0.4mn mtpa of propylene, 1.1mn mtpa
of HDPE and LDPE (0.55mn mtpa each), 0.4mn mtpa of polypropylene, 0.2mn mtpa
of polystyrene and 0.1mn mtpa of hexene. Saudi Polymers Company is in pre-
operational stage and is expected to commence operations in 2011. We have taken
a conservative assumption that the complex would start commercial operations in
2Q 2012.
In July 2009, Petrochem raised SR2.6bn in its IPO by offering 240mn shares to the
public and 20 mn shares to SIIG. Out of the 240mn shares, 80mn shares each were
allocated to General Organization for Social Insurance (GOSI) and Public Pension
Agency (PPA). Following this, SIIG’s stake reduced to 47.7% from 95% held earlier,
GOSI and PPA each owns 16.2%, while the remaining 17.6% is held by the public.
Exhibit 46: Shareholding pattern
%
SIIG, 48%
GOSI, 16%
PPA, 16%
Public, 20%
Source: Tadawul
63
27 April 2010 PETROCHEM - INITIATING COVERAGE
COMPANY DESCRIPTION
Exhibit 47: Product flow chart
mt per annum, unless otherwise stated
Ethane60 mn cu ft
Propane(40,000 bpd)
Olefins unit
EthyleneHDPE and LDPE units
HDPE and LDPE550,000 mtpa (each)
Polystyrene unit Polystyrene200,000 mtpa
Styrene
Polypropylene400,000 mtpaPP unit
Propylene
Hexene unit
Source: Petrochem Prospectus, NCBC Research estimates
Project cost The estimated cost of the project is over SR20.8bn financed through equity and
debt funding. Total debt of SR13.5bn was raised from commercial banks (SR9.3bn),
PIF (SR3.0bn) and SIDF (SR1.2bn). The equity contribution worth SR7.4bn was
arranged through the IPO and partner’s contribution.
Feedstock agreement The complex includes a mix feed cracker which utilize 40% ethane and 60%
propane as feedstocks.
ETHANE AND PROPANE
Saudi Aramco has agreed to supply around 40,000 bpd of propane to Saudi
Polymer Company for a period of 20 years, at a discounted rate to international
prices. Saudi Aramco will also supply around 60mn cubic feet of ethane annually to
Petrochem at fixed rate of USD0.75/mmbtu until 2015.
STYRENE
The styrene requirement for the Saudi Polymer Co will be fulfilled by Al-Jubail
Chevron Phillips Co which will provide 200,000 mtpa to the facility. We believe
styrene will be supplied at discount to market prices given that Arabian Chevron
Phillips Petrochemical Company is Petrochem’s JV partner.
Marketing agreement Petrochem’s JV partner, Chevron Phillips Petrochemical Company has an off-take
agreement in which it is obligated to off take and sell all unsold production leaving
no risk to Petrochem in terms of unsold production.
End markets Saudi Polymer Co will cater to the Middle Eastern, South Eastern Asia and European
petrochemical markets through Chevron Phillips Chemical International Sales
(CPCIS). Moreover, Saudi Polymer Company will be responsible for any inter-
segmental sales, products sold to Saudi Chevron Phillips and Jubail Chevron Phillips
and products sold to Saudi clients.
64
27 April 2010 PETROCHEM - INITIATING COVERAGE
Financials Exhibit 48: Income statement In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Revenues 0 0 0 5,932 8,721 8,191
% change n/a n/a n/a n/a 47.0 (6.1)
COGS 0 0 0 (3,892) (6,189) (5,893)
Gross Profit 0 0 0 2,040 2,532 2,298
Margins (%) n/a n/a n/a 34.4 29.0 28.1
G&A expenses (9) (15) (18) (316) (488) (462)
D&A expenses 0 (0) (0) (390) (1,044) (1,051)
Operating Profit (9) (15) (18) 1,724 2,043 1,836
EBITDA (9) (15) (17) 2,115 3,087 2,887
% change n/a n/a n/a n/a 46.0 (6.5)
Other expenses (15) 0 0 0 0 0
Interest expenses, net of income 15 14 (211) (280) (299) (286)
Minority interest payment 2 4 0 (487) (582) (508)
Zakat (53) (129) (7) (52) (83) (100)
Net income (61) (127) (236) 905 1,080 943
% change n/a n/a n/a n/a 19.3 12.5
Net margin (%) n/a n/a n/a 15.3 12.4 11.5
EPS (SR) (0.19) (0.26) (0.49) 2.90 3.46 3.02
Source: Company, NCBC Research estimates
Exhibit 49: Balance sheet In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 3,272 689 337 252 714 1,566
Accounts receivables 0 0 0 1,056 1,553 1,459
Inventories 0 0 0 800 1,272 1,211
Total current assets 3,276 694 341 2,112 3,543 4,240
Cost of project under construction 11,170 18,399 20,808 0 0 0
Property and equipment, net 1 1 1 20,419 19,512 18,623
Deferred expenses 134 134 134 134 134 134
Total non-current assets 11,305 18,534 20,944 20,553 19,646 18,756
Total assets 14,581 19,228 21,284 22,666 23,189 22,996
Accured expenses & other liabilities 1 1 1 1 1 1
Zakat provision 53 53 53 53 53 53
Accounts payables 0 0 0 533 848 807
Total current liabilities 54 54 54 587 902 861
Long term debts 7,675 9,967 12,259 12,002 11,130 10,036
Support loans 1,037 1,037 1,037 1,237 1,237 1,237
Other non-current liabilities 966 967 968 968 968 968
Total non-current liabilities 9,678 11,971 14,264 14,207 13,335 12,240
Share capital 4,800 4,800 4,800 4,800 4,800 4,800
Statutory reserves 2 2 2 92 200 295
Retained earnings (45) (172) (408) 407 1,379 2,228
Total stockholders' equity 4,757 4,630 4,394 5,299 6,380 7,322
Minority Equity 92 2,573 2,573 2,573 2,573 2,573
Total liabilities & equity 14,581 19,228 21,284 22,666 23,189 22,996
Source: Company, NCBC Research estimates
65
27 April 2010 PETROCHEM - INITIATING COVERAGE
F INANCIALS
Exhibit 50: Cash flow statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from op. (a) 667 (126) (235) (27) 1,470 2,109
Cash flow from inv.(b) (9,092) (7,229) (2,410) 0 (136) (162)
Addition(and transfers) to PP&E (9,012) (7,229) (2,410) 0 (136) (162)
Cash flow from fin.(c) 10,184 4,773 2,292 (57) (872) (1,094)
Debt 7,492 2,292 2,292 (257) (872) (1,094)
Net change in cash 1,759 (2,583) (353) (85) 462 852
Cash at start of the year 1,513 3,272 689 337 252 714
Cash at end of the year 3,272 689 337 252 714 1,566
Source: Company, NCBC Research estimates
Exhibit 51: Key ratios In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR)
EPS (0.19) (0.26) (0.49) 2.90 3.46 3.02
FCF per share (28.02) (15.09) (5.06) 1.52 4.58 5.67
Div per share - - - - - -
Book value per share 14.92 9.65 9.15 11.04 13.29 15.25
Valuation ratios (x)
P/E n/m n/m n/m 6.43 5.39 6.17
P/FCF n/m n/m n/m 12.26 4.07 3.29
P/BV 1.25 1.93 2.04 1.69 1.40 1.22
EV/sales n/m n/m 2.43 1.65 1.76 1.90
EV/EBITDA n/m n/m n/m 6.81 4.66 4.98
Div yield (%) - - - - - -
Profitability ratios (%)
Gross margins n/m n/m n/m 34.40 29.03 28.06
Operating margin n/m n/m n/m 29.07 23.43 22.41
EBITDA margins n/m n/m n/m 35.65 35.40 35.25
Net profit margins n/m n/m n/m 15.26 12.39 11.51
ROE (1.27) (2.75) (5.37) 17.08 16.93 12.87
ROA (0.42) (0.66) (1.11) 3.99 4.66 4.10
Liquidity ratios
Current ratio 0.07 0.07 0.07 3.17 3.14 3.10
Quick Ratio 0.07 0.07 0.07 1.81 1.73 1.70
Operating ratios (days)
Inventory (excl. spare parts) - - - 75 75 75
Receivables outstanding - - - 65 65 65
Payables outstanding - - - 50 50 50
Operating cycle - - - 140 140 140
Cash cycle - - - 90 90 90
Production & sales
Production capacity (mn mt) 0.0 0.0 3.4 3.4 3.4 3.4
Production volumes (mn mt) 0.0 0.0 0.0 2.3 3.4 3.2
Utilization Rate (%) n/a n/a n/a 90.0 100.0 95.0
External Sales Volumes (mt) 0.0 0.0 0.0 1.1 1.7 1.6
Source: Company, NCBC Research estimates
66
PETROCHEMICAL | 27 Apr i l 2010 COMPANY UPDATE
National Industrialization Co
Overweight Riding on expansion
Target Price (SR) 40.0
Current price (SR) 35.0
Stock details
52-week range H/L (SR) 33/14
Market cap ($mn) 4,305
Shares outstanding (mn) 461
Listed on exchanges TADAWUL
Price perf (%) 1M 3M 12M
Absolute 17.1 28.7 133.3
Rel. to market 15.7 18.5 106.6
Avg daily T/o (mn) SR US$
3M 42.3 11.3
12M 32.1 8.6
Reuters code 2060.SE
Bloomberg code NIC AB
Website www.tasnee.com
Valuation multiples
09 10E 11E
P/E (x) 31.0 10.5 11.4
P/B (x) 2.1 1.8 1.6
EV/EBITDA (x) 11.5 5.8 6.0
Div yield (%) 2.1 2.9 2.9
Source: NCBC Research estimates
Share price performance
0
8
16
24
32
40
Apr-09 Sep-09 Mar-10
4000
5000
6000
7000
8000
Tasnee TASI (RHS)
National Industrialization Co (Tasnee) has added 60,000mt capacity of
TiO2 and started construction of its Acrylic acid plant. Moreover, an
improved outlook on oil prices and a full year contribution from SEPC
are set to boost earnings going forward. Our price target increases to
SR40.0 and we reiterate our Overweight rating on the stock
Yanbu capacity expansion to positively impact titanium business
earnings: Cristal Global added 60,000 mt capacity of titanium dioxide at its
Yanbu plant at the end of 2009, increasing Tasnee’s total titanium dioxide
capacity by about 8%. This increase will offset the loss in production for the
months of March and April 2010 at Stallingborough (UK) due to a temporary
shutdown, and should positively impact earnings through the remainder of the
year.
Improved oil forecast boosts petrochemical price forecast: Recent
strength in oil prices is a positive for Tasnee’s valuation as movements in oil
prices have a strong bearing on petrochemical prices. This, along with an
expanded capacity base and rising demand supports our outlook on the stock.
Full year contribution from SEPC business to boost 2010 earnings:
Tasnee’s 2010 results will benefit from a full year contribution from the SEPC
plant which started operations in June 2009. The timing on this expansion
looks ideal as it allows Tasnee to capitalize on rising petrochemical demand
and prices.
Valuation increased to SR40.0/share: The increased capacity and higher
pricing assumptions has positively impacted Tasnee’s future cash flows. Our
price target also increases by 20% to SR40.0. We continue to remain
Overweight on Tasnee and see it as one of our top picks in the Petrochemical
sector.
Source: Bloomberg Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 10,863 17,123 17,506 18,288 18,107
EBITDA SR mn 2,493 4,963 4,764 4,624 4,480
EBITDA margin % 22.9 29.0 27.2 25.3 24.7 Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627 Net income SR mn 519 1,530 1,418 1,352 1,307
Net margin % 4.8 8.9 8.1 7.4 7.2
EPS SR 1.13 3.32 3.08 2.93 2.84
Assets SR mn 33,168 36,739 38,089 38,493 35,919
Equity SR mn 7,790 8,859 9,816 10,707 11,554 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 TASNEE – COMPANY UPDATE 68
Forecast changes NET POSITIVE CHANGE IN TITANIUM CAPACITY POSITIVELY IMPACTS VALUATION
Cristal Global has completed a capacity expansion of its Yanbu based TiO2 facility to
180,000 mt from 120,000 mt, an expansion which we had not previously
incorporated into our model. However, offsetting this, in March 2010, Cristal Global
(Tasnee’s titanium arm) closed its 150,000mt/year TiO2 producing plant located in
Stallingborough (UK) when a pressurized container of titanium tetrachloride
ruptured. Cristal Global has indicated that the plant resumed normal operations last
weekrelease. The increased TiO2 production from the Yanbu plant in the first
quarter will help in mitigating the impact of near two month’s capacity closure at its
UK facility. We calculate the net impact of the additional capacity and the closure of
its UK facility as a 2,500mt increase in Cristal Global’s TiO2 capacity per quarter for
1Q 2010 and 2Q 2010 versus 4Q 2009.
UPWARD REVISION IN OIL PRICE FORECAST
Our oil price forecasts (NCBC Economics team) call for oil to average USD80.60 per
barrel in 2010e, up 30.6% YoY. Oil prices are expected to increase to USD85 per
barrel in 2011e and gradually rise to USD90 per barrel by 2013e. In the long run,
oil prices are expected to average around USD75 per barrel. These assumptions are
higher than our previous estimates. This upward revision in oil prices in turn has
pushed our petrochemical price estimates up thus positively impacting Tasnee’s
financial outlook and valuation.
Exhibit 59: NCBC oil price forecast
In USD per barrel
2010E 2011E 2012E 2013E 2014E 2015E
New forecast 81 85 90 85 85 80
Previous forecast 74 70 75 80 80 85
Change (%) 9 21 20 6 6 (6)
Source: NCBC Economics team estimates
WORK AT ACRYLIC ACID PLANT STARTED
The Acrylic Acid project includes a plant producing 125,000 mtpa of commodity
acrylates and a facility producing 80,000 mtpa of superabsorbent polymers. The
estimated project cost is SR3.1bn with an equity to debt contribution of 30%:70%.
The project is expected to start commercial operations in 3Q12. Once operational,
this should offer an additional revenue stream to Tasnee, although we have not yet
incorporated this into our forecasts, thus providing some additional upside. Tasnee,
through its various holdings, will receive 52.3% of the economics of this plant.
However it is not clear yet as to whether Tasnee will fully consolidate the earnings
from the Acrylic acid plant or reflect it under the investment in associates.
27 April 2010 TASNEE – COMPANY UPDATE
F INANCIAL PERFORMANCE
HIGHER MINORITY INTEREST AND ZAKAT RELATED EXPENSES
Tasnee reported an increase in zakat expense for its subsidiaries and minority
interest related expenses in 2009. In 2009, zakat related expenses stood at
SR91.9mn (compared to an income of SR55.6mn in 2008) and minority related
expenses were SR452.7mn (compared to SR157.8mn in 2008). These higher than
expected expenses were the primary reason behind the net income weakness for
the full year 2009. For the full year 2009, net income stood at SR526mn (SR601mn
in 2008) lower than our original expectation of SR653mn. We have incorporated
these increases while projecting Tasnee’s earnings in coming years.
The table below displays revised estimates for Tasnee’s 2010 and 2011
performance.
Exhibit 60: Earnings revisions
In SR mn, unless otherwise stated
Old
2010ENew
2010E % chg Old
2011ENew
2011E % chg
Revenue 14,251 17,123 20 15,224 17,506 15
EBITDA 3,291 4,963 51 3,705 4,764 29
Net profit 1,215 1,530 26 1,377 1,418 3
Target price (SR) N/A N/A N/A 33.2 40.0 20
Source: NCBC Research estimates
69
27 April 2010 TASNEE – COMPANY UPDATE
Financials Exhibit 61: Income statement In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Revenues 10,863 17,123 17,506 18,288 18,107 18,949
% change 8.2 57.6 2.2 4.5 (1.0) 4.6
COGS (8,404) (11,938) (12,451) (13,345) (13,313) (14,169)
Gross Profit 2,459 5,185 5,054 4,943 4,794 4,779
Margins (%) 22.6 30.3 28.9 27.0 26.5 25.2
Other Expenses (965) (1,404) (1,496) (1,575) (1,614) (1,701)
Share in associates 23 20 20 20 20 20
Operating Profit 1,517 3,801 3,578 3,388 3,200 3,098
Margins (%) 14.0 22.2 20.4 18.5 17.7 16.3
Minority interest expenses (453) (1,225) (1,136) (1,083) (1,047) (1,092)
Zakat (92) (264) (245) (233) (226) (235)
Net income 519 1,530 1,418 1,352 1,307 1,364
Net margin (%) 4.8 8.9 8.1 7.4 7.2 7.2
EPS 1.13 3.32 3.08 2.93 2.84 2.96
Source: Company, NCBC Research estimates
Exhibit 62: Balance sheet
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 3,585 4,484 6,233 6,703 4,419 5,129
Accounts receivables 3,033 4,546 4,408 4,505 4,460 4,667
Inventories 2,716 4,046 3,897 3,820 3,782 3,958
Other receivables & prepayments 533 757 790 846 844 844
Total current assets 9,867 13,833 15,328 15,875 13,506 14,599
Fixed assets 18,057 17,871 17,717 17,560 17,345 17,176
Intangible assets 3,697 3,689 3,680 3,673 3,662 3,652
Construction work-in-progress 448 227 227 227 227 227
Other non-current assets 1,098 1,118 1,138 1,158 1,179 1,199
Total non-current assets 23,301 22,906 22,762 22,618 22,413 22,253
Total assets 33,168 36,739 38,089 38,493 35,919 36,852
Short-term facilities 2,235 1,962 2,006 2,095 2,075 2,171
Current portion of long-term debt 892 1,238 1,774 4,263 1,337 1,973
Accounts payable 1,011 1,469 1,498 1,569 1,565 1,666
Other current liabilities 1,643 2,303 2,358 2,475 2,470 2,521
Total current liabilities 5,781 6,971 7,636 10,403 7,447 8,331
Long term debts 12,888 12,472 11,182 6,918 5,581 3,608
Obligation under capital lease 1,219 1,031 844 656 469 375
Other non-current liabilities 3,641 5,021 5,163 5,389 5,416 5,656
Total non-current liabilities 15,927 16,014 14,607 10,269 8,758 6,812
Share capital 4,607 4,607 4,607 4,607 4,607 4,607
Statutory reserves 349 502 644 779 910 1,046
Retained earnings 1,220 2,136 2,952 3,708 4,424 5,190
Others 1,613 1,613 1,613 1,613 1,613 1,613
Total stockholders' equity 7,790 8,859 9,816 10,707 11,554 12,457
Minority interest 3,670 4,895 6,031 7,114 8,161 9,253
Total equity & liab 33,168 36,739 38,089 38,493 35,919 36,852
Source: Company, NCBC Research estimates
70
27 April 2010 TASNEE – COMPANY UPDATE
F INANCIALS
Exhibit 63: Cash flow statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from op. (a) 38 1,392 2,994 2,791 2,656 2,646
Cash flow from inv.(b) (1,790) (747) (1,022) (1,071) (1,055) (1,139)
Addition(and transfers) to PP&E (2,195) (629) (896) (936) (912) (986)
Free cash flow (a+b) (1,752) 645 1,972 1,720 1,601 1,507
Cash flow from fin.(c) 1,724 253 (223) (1,250) (3,885) (797)
Debt 1,271 (343) (711) (1,684) (4,284) (1,241)
Net chg. in cash (a+b+c) (28) 899 1,749 470 (2,284) 710
Cash at start of the year 3,613 3,585 4,484 6,233 6,703 4,419
Cash at end of the year 3,585 4,484 6,233 6,703 4,419 5,129
Source: Company, NCBC Research estimates
Exhibit 64: Key ratios
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR) EPS 1.13 3.32 3.08 2.93 2.84 2.96 FCF per share (5.6) 1.4 4.3 3.7 3.5 3.3 Div per share 0.8 1.0 1.0 1.0 1.0 1.0 Book value per share 16.9 19.2 21.3 23.2 25.1 27.0 Valuation ratios (x) P/E 31.0 10.5 11.4 11.9 12.3 11.8 P/BV (6.3) 25.0 8.2 9.4 10.1 10.7 P/FCF 2.1 1.8 1.6 1.5 1.4 1.3 EV/sales 2.6 1.7 1.6 1.6 1.6 1.5 EV/EBITDA 11.5 5.8 6.0 6.2 6.4 6.5 Div yield (%) 2.1 2.9 2.9 2.9 2.9 2.9 Profitability ratios (%) Gross margins 22.6 30.3 28.9 27.0 26.5 25.2 Operating margin 14.0 22.2 20.4 18.5 17.7 16.3 EBITDA margins 22.9 29.0 27.2 25.3 24.7 23.3 Net profit margins 4.8 8.9 8.1 7.4 7.2 7.2 ROE 1.6 4.2 3.7 3.5 3.6 3.7 ROA 6.7 17.3 14.4 12.6 11.3 10.9 Liquidity ratios Current ratio 1.7 2.0 2.0 1.5 1.8 1.8 Quick Ratio 1.2 1.4 1.5 1.2 1.3 1.3 Operating ratios (days) Inventory 91 86 81 76 76 76 Receivables outstanding 102 97 92 90 90 90 Payables outstanding 44 45 44 43 43 43 Operating cycle 193 183 173 166 166 166 Cash cycle 149 138 129 123 123 123 Production & sales (mn mt) Production (mn mt) Titanium business 0.7 0.8 0.8 0.8 0.8 0.8 Petrochemical business 2.2 3.3 3.0 3.1 3.0 3.0 Utilization rate (%) Titanium business 83 96 100 100 100 100 Petrochemical business 87 100 100 100 84 88 External sales volumes (mt) Titanium business 0.7 0.8 0.8 0.8 0.8 0.8 Petrochemical business 1.1 1.7 1.7 1.7 1.6 1.7
Source: Company, NCBC Research estimates
71
PETROCHEMICAL | 27 Apr i l 2010 COMPANY UPDATE
Sipchem
Overweight 2Q 2010 to benefit from Phase II
Target Price (SR) 29.4
Current price (SR) 24.7
Stock details
52-week range H/L (SR) 26/17
Market cap ($mn) 2,198
Shares outstanding (mn) 333
Listed on exchanges TADAWUL
Price perf (%) 1M 3M 12M
Absolute 1.6 8.6 39.5
Rel. to market 0.3 (1.6) 12.8
Avg daily T/o (mn) SR US$
3M 26.4 7.1
12M 28.2 7.5
Reuters code 2310.SE
Bloomberg code SIPCHEM AB
Website www.sipchem.com
Valuation multiples
09 10E 11E
P/E (x) 58.4 9.5 7.0
P/B (x) 1.7 1.5 1.3
EV/EBITDA (x) 34.0 6.5 4.9
Div yield (%) 4.0 4.0 4.0
Source: NCBC Research estimates
Share price performance
0
5
10
15
20
25
30
Apr-09 Oct-09 Apr-10
4000
5000
6000
7000
8000
Sipchem TASI (RHS)
Source: Bloomberg
Saudi International Petrochemical Co (Sipchem) 2010 results are to
benefit from the commercial start of its Acetyl complex scheduled for
April 2010. An improved outlook on oil prices and higher operating
efficiency further strengthens our outlook towards the stock. Our
price target increases 6% to SR29.4 and we reiterate our Overweight
rating on the stock.
Commercial start of phase II expansion in 2Q 2010: Management has
indicated an April start to commercial operations at its Phase II complex,
however we are conservatively assuming a May 2010 start. Earnings from this
Acetyl complex will likely boost Sipchem’s 2010e net income by over 6x YoY to
SR870mn.
Revised oil forecasts boost petrochemical price forecasts: We have
revised our petrochemical price forecasts upward in line with our revisions in
oil prices given rising demand and stabilizing supplies. The higher pricing along
with an expanded capacity base positively impacts Sipchem’s valuation.
Improved operating efficiency to fuel 2010 earnings growth: In 4Q
2009, Sipchem benefited from improved operating performance post its
maintenance shutdown during 3Q 2009, a strong recovery in petrochemical
prices and reduced anti-dumping charges. As a result, Sipchem’s net income
grew to SR56.5mn in 4Q 2009 from SR34.7mn in 4Q 2008. We expect these
factors to fuel earnings growth in 2010 as well.
Improved visibility on Phase III expansion plan: Sipchem aims to award
the engineering, procurement and construction (EPC) contract for Phase III by
end 2010. This expansion would add 125,000 mtpa of polyvinyl acetate and
200,000 mtpa of ethylene vinyl acetate to Sipchem’s existing petrochemical
product mix. This joint venture, 75% owned by Sipchem and 25% by Korea’s
Hanwha Chemical Co, is expected by management to be completed by end
2013. We do not yet incorporate Phase III into our valuation, offering further
upside.
Estimates and Valuation: Stronger pricing and improved efficiencies drive
our changes to estimates. Better 2009 full year results and the contribution
from the Acetyl complex increase our confidence in the stock. Hence, our price
target increases by 5.6% to SR29.4 representing an upside of 19.1%. We
continue to remain Overweight on Sipchem.
Financials
2009 2010E 2011E 2012E 2013E
Revenues SR mn 830 2,817 3,741 3,911 3,565
EBITDA SR mn 328 1,722 2,269 2,136 1,887
EBITDA margin % 39.5 61.1 60.6 54.6 52.9
Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627
Net income SR mn 141 870 1,171 1,069 905
Net margin % 17.0 30.9 31.3 27.3 25.4
EPS SR 0.42 2.61 3.51 3.21 2.72
Assets SR mn 11,818 12,377 12,852 13,241 13,318
Equity SR mn 4,922 5,457 6,292 7,026 7,595 Please refer to the last page for important disclaimer
Source: Company, NCBC Research estimates
27 April 2010 SIPCHEM – COMPANY UPDATE
Forecast changes PHASE II TO START COMMERCIALLY IN APRIL 2010
We believe Sipchem management is targeting an April 2010 start for its Phase II
complex, however we have factored in our forecasts that the complex will be
commercially starting from the beginning of May, out of conservatism. The complex
started trial runs at its different units during 3Q 2009 and 4Q 2009. The Acetyl
complex is set to double Sipchem’s annual capacity to 2.2mn mt. The contribution
of the Phase II complex will positively impact 2010e revenues by an estimated
SR1.5bn. Overall 2010e net income expected to grow by approximately 6.2 times
to SR870mn when compared with 2009 net income of SR141mn.
UPWARD REVISION IN OIL PRICE FORECAST
We have increased our oil forecasts to an average of USD80.60 per barrel in 2010e,
up 30.6% YoY. Oil prices are expected to increase to USD85 per barrel in 2011e
and gradually rise to USD90 per barrel by 2012e, as the global economy recovers.
In the long run, oil prices are expected to average around USD75 per barrel. These
assumptions are higher than our previous estimates, which has pushed our
petrochemical price estimates up thus positively impacting Sipchem’s valuation.
Exhibit 65: NCBC oil price forecast
In USD per barrel
2010E 2011E 2012E 2013E 2014E 2015E
New forecast 81 85 90 85 85 80
Previous forecast 74 70 75 80 80 85
Change (%) 9 21 20 6 6 (6)
Source: NCBC Economics team estimates
STRONG 1Q 2010 RESULTS BOOST OUTLOOK
Sipchem’s 1Q 2010 results benefited from higher than expected petrochemical
prices, improved operating performance post its maintenance shutdown during 3Q
2009 and lower anti-dumping charges. The Chinese government reduced the anti-
dumping charges on Sipchem’s Butanediol output to 4.5% from the 20.9% levied
earlier. Net income in 1Q 2010 jumped to SR81.2mn from SR29.2mn in 1Q 2009
and SR56.5mn in 4Q 2009. We expect these factors to fuel earnings growth in 2010
as well.
UPDATE ON PHASE III DEVELOPMENT
The engineering, procurement and construction (EPC) contract for Phase III is
expected to be awarded by the end of 2010. Phase III will produce 125,000 mtpa of
polyvinyl acetate and 200,000 mtpa of ethylene vinyl acetate. Sipchem will be
delivering 80,000mtpa of carbon monoxide production from the IGC plant to SABIC
under a 20-year agreement. The project is expected to complete by end 2013.
Sipchem is in talks with SABIC to take the ethane feedstock. Currently, we have
not included the impact of this expansion while valuing Sipchem due to uncertainty
on timing. Nevertheless, any positive news flow on this front will act as a strong
catalyst for the stock price, we believe.
73
27 April 2010 SIPCHEM – COMPANY UPDATE
F INANCIAL PERFORMANCE
Exhibit 66: Earnings revisions
In SR Mn, unless otherwise stated
Old
2010ENew
2010E % chg Old
2011ENew
2011E % chg
Revenue 2,934 2,817 (4.0) 3,302 3,741 13.3
EBITDA 1,654 1,722 4.1 1,905 2,269 19.1
Net profit 670 870 29.8 818 1,171 43.2
Target price (SR) N/A N/A N/A 27.9 29.4 5.6
Source: NCBC Research estimates
.
74
27 April 2010 SIPCHEM – COMPANY UPDATE
Financials
Exhibit 67: Income statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Sales 830 2,817 3,741 3,911 3,565 3,665
Change (%) (51.4) 239.2 32.8 4.6 (8.9) 2.8
Cost of Sales (435) (979) (1,286) (1,581) (1,500) (1,604)
Gross Profit 395 1,838 2,455 2,330 2,065 2,061
Gross margin (%) 47.6 65.2 65.6 59.6 57.9 56.2
SG&A (67) (116) (186) (195) (177) (182)
Depreciation (167) (308) (364) (385) (407) (429)
Operating Profit 168 1,413 1,905 1,751 1,480 1,450
Operating Margin (%) 20.3 50.2 50.9 44.8 41.5 39.6
Minority interest (29) (454) (611) (558) (472) (470)
Profit before taxes 141 917 1,233 1,126 953 949
Zakat (40) (46) (62) (57) (48) (48)
Net Income 141 870 1,171 1,069 905 901
Net Income Margin (%) 17.0 30.9 31.3 27.3 25.4 24.6
EPS 0.42 2.61 3.51 3.21 2.72 2.70
Source: Company, NCBC Research estimates
Exhibit 68: Balance sheet In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash & Cash equivalents 1,831 1,724 1,743 1,885 1,976 1,905
Accounts receivables 308 772 1,025 1,072 977 1,004
Inventories 79 201 264 325 308 330
Total current assets 2,218 2,697 3,032 3,282 3,261 3,239
Fixed assets 9,517 9,596 9,737 9,877 9,974 10,088
Other non-current assets 83 83 83 83 83 83
Total non-current assets 9,601 9,679 9,820 9,960 10,057 10,171
Total assets 11,818 12,377 12,852 13,241 13,318 13,410
Accounts payable 620 754 826 895 876 900
Accrued and other current liabilities 283 773 773 773 773 486
Total current liabilities 903 1,528 1,599 1,668 1,649 1,386
Long term debts 4,241 3,541 2,840 2,140 1,440 1,020
Other non-current liabilities 842 799 756 713 669 633
Total non-current liabilities 5,083 4,340 3,596 2,853 2,109 1,652
Share capital 3,333 3,333 3,333 3,333 3,333 3,333
Reserves 1,208 1,295 1,412 1,519 1,609 1,700
Retained earnings 484 932 1,650 2,276 2,755 3,231
Others (103) (103) (103) (103) (103) (103)
Total stockholders' equity 4,922 5,457 6,292 7,026 7,595 8,161
Minority interest 910 1,052 1,365 1,695 1,964 2,210
Total equity & liabilities 11,818 12,377 12,852 13,241 13,318 13,410
Source: Company, NCBC Research estimates
75
27 April 2010 SIPCHEM – COMPANY UPDATE
F INANCIALS
Exhibit 69: Cash flow statement
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Cash flow from operating activities (175) 1,114 1,806 1,888 1,807 1,705
Cash flow from investing activities (1,327) (389) (504) (525) (505) (543)
Addition(and transfers) to PP&E (1,532) (387) (504) (525) (505) (543)
Cash flow from financing activities 752 (833) (1,283) (1,221) (1,211) (1,233)
Debt 1,179 (263) (754) (754) (754) (754)
Net change in cash (750) (107) 18 142 91 (70)
Cash at start of the year 2,581 1,831 1,724 1,743 1,885 1,976
Cash at the end of period 1,831 1,724 1,743 1,885 1,976 1,905
Source: Company, NCBC Research estimates
Exhibit 70: Key ratios
In SR mn, unless otherwise stated
2009 2010E 2011E 2012E 2013E 2014E
Per share ratios (SR)
EPS 0.42 2.61 3.51 3.21 2.72 2.70
FCF per share (5.22) 2.18 3.90 4.09 3.91 3.49
Div per share 1.00 1.00 1.00 1.00 1.00 1.00
Book value per share 14.77 16.37 18.88 21.08 22.79 24.48
Valuation ratios (x)
P/E 58.44 9.46 7.03 7.70 9.10 9.13
P/BV 1.67 1.51 1.31 1.17 1.08 1.01
P/FCF (4.73) 11.32 6.33 6.04 6.32 7.08
EV/sales 13.37 3.74 2.55 2.39 2.61 2.52
EV/EBITDA 33.96 6.47 4.91 5.22 5.90 5.93
Div yield (%) 4.0 4.0 4.0 4.0 4.0 4.0
Profitability ratios (%)
Gross margins 47.6 65.2 65.6 59.6 57.9 56.2
Operating margin 20.3 50.2 50.9 44.8 41.5 39.6
EBITDA margins 39.5 61.1 60.6 54.6 52.9 51.3
Net profit margins 17.0 30.9 31.3 27.3 25.4 24.6
ROE 2.9 15.9 18.6 15.2 11.9 11.0
ROA 1.2 7.0 9.1 8.1 6.8 6.7
Liquidity ratios
Current ratio 3.6 3.6 3.7 3.7 3.7 3.6
Quick Ratio 3.4 3.3 3.4 3.3 3.4 3.2
Operating ratios (days)
Inventory 66 75 75 75 75 75
Receivables outstanding 135 100 100 100 100 100
Payables outstanding 149 85 85 85 85 85
Operating cycle 201 175 175 175 175 175
Cash cycle 52 90 90 90 90 90
Production & sales (mn mt)
Production capacity 1.0 2.2 2.2 2.2 2.2 2.2
Production volumes 1.1 1.7 2.2 2.2 2.0 2.1
Utilization rate (%) 107* 95 100 100 100 95
External sales volumes 1.1 1.3 1.4 1.4 1.3 1.3
Company, NCBC Research estimates *Company reported figure
76
27 April 2010 SAUDI PETROCHEMICAL SECTOR
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Head of Research Eiji Aono [email protected] +966 2 690 7786 Brokerage website www.alahlitadawul.com / www.alahlibrokerage.com Corporate website www.ncbc.com NCBC INVESTMENT RATINGS Overweight: Target price represents expected returns in excess of 15% in the next 12 months Neutral: Target price represents expected returns between -10% and +15% in the next 12 months Underweight: Target price represents a fall in share price exceeding 10% in the next 12 months Price Target: Analysts set share price targets for individual companies based on a 12 month horizon. These share price
targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon
OTHER DEFINITIONS NR: Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with
applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations
CS: Coverage Suspended. NCBC has suspended coverage of this company NC: Not Covered. NCBC does not cover this company
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