KMEFIC Research The petrochemical sector in Saudi Arabia: An understanding of the industry and review of its prospects, including investment opinions on 2 key sector players: SABIC and SAFCO. July 2009 KMEFIC Research Department لمالي شراستثماوسط ليت والشرق اة الكو شرك. م. ك. مKuwait and Middle East Financial Investment Company K.S.C.C
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Source: Reuters
Expected rate of return on equity in GCC
KMEFIC Research
The petrochemical sector in Saudi Arabia:
An understanding of the industry and review of its
prospects, including investment opinions on 2 key
sector players: SABIC and SAFCO.
July 2009
KMEFIC Research Department
م .ك.م.شركة الكويت والشرق الأوسط للإستثمارالمالي ش
Kuwait and Middle East Financial Investment Company K.S.C.C
PETROCHEMICAL INDEX VS. TADAWUL ......................................................................................................... 5
PORTER’S 5 FORCES ON THE PETROCHEMICAL INDUSTRY .................................................................... 6
THREAT OF NEW ENTRANTS ................................................................................................................................... 7 SUPPLIERS POWER .................................................................................................................................................... 7 THREAT OF SUBSTITUTES ....................................................................................................................................... 7 BUYERS POWER ......................................................................................................................................................... 7 BUSINESS RIVALRY .................................................................................................................................................. 7
BASIC PRODUCTION FLOW .................................................................................................................................. 9
GROSS DOMESTIC PRODUCT & KEY GROWTH INDICATORS......................................................................... 11 OIL VULNERABILITY .............................................................................................................................................. 13 THE GLOBAL FINANCIAL CRISIS .......................................................................................................................... 13
OIL & GAS OUTLOOK ........................................................................................................................................... 15
MARKET DYNAMICS ............................................................................................................................................... 15 OIL OUTLOOK ........................................................................................................................................................... 16 GAS OUTLOOK .......................................................................................................................................................... 17
Figure 17 - SAFCO rebased to Petrochemical Index (& company shares
trading volume)
Millio
n sh
ares
SA
R
July 2009 KMEFIC Research
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COMPANY & BUSINESS OVERVIEW The Saudi Arabian Fertilizer Company (SAFCO), the first petrochemical company in Saudi
Arabia, was established in 1965 by a royal decree. SAFCO’s products include urea (since 1970),
ammonia (since 1970), sulfuric acid (since 1972) and melamine (since 1984). They are mostly
used in the agricultural industry but may as well supply other industries (Figure 4 in section
“Basic production flow”). The company’s products are sold domestically but also widely
exported to Asia, North America, South America, Australia and Europe. SAFCO, which has
grown organically to become the leading manufacturer and exporter of fertilizers in the Gulf
region, generated revenues of SAR5.2 billion in FY08, up 49% YoY, with 4.8 million metric
tonnes produced. SAFCO is currently 43% owned by SABIC, which may give it the opportunity
to benefit from potential synergies in certain business areas (such as sales, marketing, R&D). As
on 30 June 2009, the company’s market capitalization was SAR28.4 billion.
FINANCIAL PERFORMANCE & VALUATION Despite the financial crisis SAFCO’s revenues in FY08 reached a five year high SAR5.2 billion
with net earnings at SAR4.3 billion, up 94% YoY. This is explained by strong fertilizers demand
for the first three quarters of FY08 along with outstanding gross profit margins (84% in FY08)
due to an exceptional feedstock cost advantage. As a matter of fact, SAFCO is supplied in natural
gas through Saudi Aramco at a fixed price of USD0.75 MBTU (as a comparison, in April 2009
natural gas prices stood at about USD3.5 MBTU). However, SAFCO revenues for Q1 FY09
dropped to SAR739.4 million on lower fertilizer prices worldwide, down 10% QoQ while net
earnings fell to SAR524.5 million, down 27.5% YoY. In spite of the current economic situation,
we believe the fertilizer industry, which shows less sensitivity to cyclical effects, along with the
company’s efficient business model (low leverage, high free cash flow generation due to absolute
feedstock advantage, low conversation cycle and low CAPEX requirements) provide the
company with bullish prospects. Our weighted Discounted Cash flows (Free Cash Flow to the
Firm) and Relative Valuation models resulted in a Long Term Fair Value of SAR140.21, a
potential upside of 24% from the stock price as on 30 June 2009 (Table 7).
Table 7 - SAFCO Valuation
in SAR LTF value Weight Weighted Value
DCF - FCFF 134.94 80% 107.95
Relative valuation 161.30 20% 32.26
Hybrid valuation 140.21
July 2009 KMEFIC Research
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Table 8 - Sensitivity analysis of fair value (SAR) to WACC and Growth
WACC
140.21 10.93% 11.93% 12.93% 13.93% 14.93%
GR
OW
TH
1.0% 154.45 143.47 134.31 126.64 120.05
1.5% 158.87 146.97 137.13 128.95 121.97
2.0% 163.77 150.82 140.21 131.45 124.04
2.5% 169.26 155.07 143.58 134.18 126.27
3.0% 175.45 159.81 147.30 137.15 128.69
PROJECTS, STRATEGY In July 2008 SAFCO announced the signature of an agreement with Hadeed to construct a 50/50
owned facility in Jubail Industrial City for the production of flat steel products with an annual
capacity of 1.7 million metric tonnes. In addition to this project, the facility should rely on the
quantity of gas allocated to SAFCO plant in Dammam, which was closed by the end of Q3 FY08.
During the construction phase of the flat products facility, SAFCO reached agreement with
SABIC affiliate, the Saudi Methanol Company (AR-RAZI) to make use of the above referenced
gas quantity to produce methanol for SAFCO for an interim period until the completion of the flat
steel products project, scheduled for a period estimate.
July 2009 KMEFIC Research
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APPENDIXES
SABIC BALANCE SHEETS
SABIC INCOME STATEMENTS
in "000" SAR FY05 A FY06 A FY07 A FY08A FY09 E FY10 E FY11 E
Sales
78,253,536
86,327,862
126,204,404
150,809,596
90,485,758
124,924,637
143,663,332
Gross profit
33,084,330
35,228,022
47,950,176
45,763,281
26,693,298
36,302,886
44,972,869
Operating Profit
29,169,978
30,886,120
41,046,523
36,591,289
17,473,188
27,761,030
34,978,898
EBITDA
35,700,701
37,005,356
48,652,533
46,643,288
28,221,927
39,107,700
43,446,250
Net Profit
19,159,685
20,293,942
27,022,272
22,029,843
9,038,302
15,220,975
20,200,535
in "000" SAR FY05 A FY06 A FY07 A FY08 A FY09 E FY10 E FY11 E
Cash & Cash Equivalents
28,172,569
39,556,764
45,876,795
51,027,586
63,960,610
72,961,812
72,151,044
Net Receivables
17,465,830
20,759,432
30,122,511
20,067,638
16,036,087
18,625,991
21,445,396
Other Current Assets
10,642,446
13,658,245
22,305,959
24,359,750
12,768,466
15,066,790
17,628,144
Total Current Assets
56,280,845
73,974,441
98,305,265
95,454,974
92,765,163
106,654,592
111,224,584
PP&E
66,096,734
79,970,622
123,113,574
141,440,177
150,598,304
156,335,346
162,858,951
Intangibles and Others
14,572,901
12,643,757
32,312,242
34,864,838
34,552,186
36,088,592
39,026,662
Total non Current Assets
80,669,635
92,614,379
155,425,816
176,305,015
185,150,490
192,423,938
201,885,613
Total Assets
136,950,480
166,588,820
253,731,081
271,759,989
277,915,653
299,078,530
313,110,197
ST Debt
6,703,959
6,128,796
4,671,224
4,288,816
4,384,740
4,445,100
4,176,090
Payables
7,781,718
11,065,422
16,732,412
10,426,809
9,412,327
10,588,295
12,193,804
Other Current Liabilities
7,461,439
7,747,658
12,279,002
11,864,382
7,336,133
8,456,437
9,594,212
Total Current Liabilities
21,947,116
24,941,876
33,682,638
26,580,007
21,133,200
23,489,832
25,964,106
LT Debt
23,017,180
33,611,628
75,437,595
88,367,462
90,491,980
94,334,900
88,625,910
Other LT Liabilities
6,764,647
7,545,079
10,114,576
10,170,907
10,272,616
11,136,278
11,299,878
Total non Current Liabilities
29,781,827
41,156,707
85,552,171
98,538,369
100,764,596
105,471,178
99,925,788
Total Liabilities
51,728,943
66,098,583
119,234,809
125,118,376
121,897,796
128,961,010
125,889,893
Minority Interest
22,880,920
27,607,078
43,342,241
43,709,139
47,331,206
51,568,726
56,753,193
Total Equity
85,221,537
100,490,237
134,496,272
146,641,613
156,138,577
170,117,520
187,220,303
July 2009 KMEFIC Research
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SABIC CASH FLOW STATEMENTS
in "000" SAR FY05 A FY06 A FY07 A FY08A FY09 E FY10 E FY11 E
Cash Flow from operations
33,135,996
34,734,906
46,655,309
46,229,845
41,782,740
34,567,933
37,769,890
Cash Flow from investing activities
(10,626,649)
(17,867,006)
(73,703,935)
(29,806,609)
(24,163,965)
(19,873,661)
(19,135,971)
Cash Flow from financing activities
(17,581,909)
(5,483,705)
33,520,656
(11,272,445)
(4,685,751)
(5,693,070)
(19,444,687)
(Decrease) increase in cash & cash equivalents
4,927,438
11,384,195
6,472,030
5,150,791
12,933,024
9,001,202
(810,768)
Cash Flow at year - end
28,172,569
39,556,764
45,876,794
51,027,586
63,960,610
72,961,812
72,151,044
SAFCO BALANCE SHEETS
in "000" SAR FY05 A FY06 A FY07 A FY08 A FY09 E FY10 E FY11 E
Cash & Cash Equivalents
304,139
594,238
1,572,063
3,917,745
3,310,877
5,987,075
5,771,091
Net Receivables
441,731
529,396
838,053
850,724
567,952
726,032
820,785
Other Current Assets
367,717
431,650
422,434
370,226
305,691
371,145
426,127
Total Current Assets
1,113,587
1,555,284
2,832,550
5,138,695
4,184,520
7,084,252
7,018,002
PP&E
3,922,873
4,025,640
3,811,597
3,457,565
3,407,565
3,359,826
3,357,565
Intangibles and Others
1,170,865
1,093,095
1,509,279
1,253,777
1,374,360
1,499,233
1,911,313
Total non Current Assets
5,093,738
5,118,735
5,320,876
4,711,342
4,781,925
4,859,059
5,268,878
Total Assets
6,207,325
6,674,019
8,153,426
9,850,037
8,966,445
11,943,310
12,286,881
ST Debt
-
176,786
148,393
236,786
200,000
247,500
284,625
Payables
250,902
190,270
394,225
556,060
294,442
233,576
281,199
Other Current Liabilities
101,717
96,922
262,090
- -
- -
Total Current Liabilities
352,619
463,978
804,708
792,846
494,442
481,076
565,824
LT Debt
695,000
1,063,214
826,428
589,643
600,000
742,500
853,875
Other LT Liabilities
371,638
407,450
507,953
433,588
481,283
534,224
592,988
Total non Current Liabilities
1,066,638
1,470,664
1,334,381
1,023,231
1,081,283
1,276,724
1,446,863
Total Liabilities
1,419,257
1,934,642
2,139,089
1,816,077
1,575,724
1,757,800
2,012,687
Equity
4,788,068
4,739,377
6,014,337
8,033,960
7,390,721
10,185,510
10,274,193
July 2009 KMEFIC Research
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SAFCO INCOME STATEMENTS
in "000" SAR FY05 A FY06 A FY07 A FY08A FY09 E FY10 E FY11 E
Sales
1,823,985
1,831,252
3,516,028
5,242,632
3,407,711
4,430,024
5,094,528
Gross profit
1,074,666
1,090,249
2,294,474
4,388,701
2,351,320
3,973,732
4,202,985
Operating Profit
981,553
988,450
2,127,414
4,234,781
2,180,935
3,300,368
3,744,478
EBITDA
1,177,835
1,182,652
2,470,576
4,593,652
2,480,935
3,600,368
4,044,478
Net Profit
1,108,308
1,151,324
2,209,226
4,279,788
2,352,612
3,388,965
3,838,513
SAFCO CASH FLOW STATEMENTS
FY05 A FY06 A FY07 A FY08A FY09 E FY10 E FY11 E
Cash Flow from operations
922,659
1,004,992
2,397,134
4,269,285
2,420,413
3,634,576
1,123,023
Cash Flow from investing activities
(782,791)
138,232
45,870
124,789
(5,000)
40,000
115,000
Cash Flow from financing activities
(211,259)
(853,125)
(1,465,179)
(2,048,392)
(3,022,281)
(998,378)
(1,454,007)
(Decrease) increase in cash & cash equivalents
(71,391)
290,099
977,825
2,345,682
(606,868)
2,676,198
(215,984)
Cash Flow at year - end
304,139
594,238
1,572,063
3,917,745
3,310,877
5,987,075
5,771,091
July 2009 KMEFIC Research
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This report is being provided for informational purposes only and on the condition that it will not form a primary basis for any investment
decision. This report is not an offer to buy or sell any of the securities that may be referred to herein. In no event will KMEFIC be liable for any
loss occurring from investment decisions made based on the recommendation here-enclosed. Past performance is not necessarily a guide to future
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July 2009 KMEFIC Research
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Source: Reuters
م .ك.م.المالي ش شركة الكويت والشرق الأوسط للإستثمار
+(965 )63222525: فاكس –+( 965 )22255000: هاتف –13009 صفاة الكويت 819.ب.صKuwait and Middle East Financial Investment Company K.S.C.C