OVERWEIGHT. Saudi Electricity Co. (5110.SE)

Transcription

1 Saudi Electricity Co. (5110.SE) OVERWEIGHT CMP SAR Target SAR Potential Upside 12.8% MSCI GCC Index Saudi Tadawul 6, Key Stock Data Sector Electricity Reuters Code 5110.SE Bloomberg Code SECO AB Equity Net Out. Shares (bn) Market Cap (SAR bn) Market Cap (USD bn) Avg. 12m Vol. (mn) Volatility (30 day) Volatility (180 day) Stock Performance (%) 52 week high / low (SAR) / M 3M 12M Absolute (%) Relative (%) Shareholding Pattern (%) Government of Saudi Arabia Saudi Arabian Oil Company 6.90 Public SEC and Tadawul Movement Executive Summary The Saudi Electricity Company (SEC) was established in December 1999, following the consolidation of all 10 regional electricity companies and other electricity projects of the Saudi General Electricity Authority. The company has a monopoly in the country to undertake electricity generation, transmission, distribution, as well as export/import, investments in power projects, and conducting related research & development (R&D). The government plans to split the company into four different entities to facilitate a more competitive, market-driven environment. Net loss due to higher direct costs During 1H09, the company reported revenues of SAR billion, up 4.7% from SAR 9.96 billion, on higher sales. Electricity sales contributed 91.5% to total revenues, and stood at SAR 9.59 billion. Meter reading, maintenance and bills preparation tariff contributed 3.8% and electricity connection tariff added 4.7% to total revenues, respectively. SEC s operating expenses rose 5.9% during 1H09, and, as a percentage of revenues, stood at 102.6% compared to 101.9% in 1H08. Consequently, operating loss increased to SAR 0.28 billion compared to SAR 0.19 billion in 1H08. Other income totalled SAR 0.22 billion, up from SAR 0.20 billion in 1H08. Net loss stood at SAR billion as opposed to a net income of SAR billion in 1H08. Annualised adjusted LPS stood at SAR 0.03 compared to an EPS of SAR in 1H08. Outlook and valuation Saudi s energy consumption has been increasing and is expected to grow at 64.1% between 2007 to 2018 on the back of rising population and growth in infrastructure development activities. In order to meet this demand, investments to the tune of USD 28 billion are planned for capacity expansion by 13,000MW over the next three years. Saudi Arabia is the fastest growing consumer of energy in the GCC and the Middle East region, with demand for electric utilities expected to increase at an average of 5-7% annually. Further, in tandem with the diversification strategy, the government s planned development outlay of about USD 400 billion across different projects over the next five years, as well as private investments will add to the total demand. SEC is backed by the government of Saudi Arabia and is the largest electricity generation and desalination company in the country. Further, its medium-to-long-term expansion plans make it a key player in the region. The company s long term drivers are intact given its expansion plans. To determine the value of the company, we have used the DCF valuation method. Currently, SEC is trading at a P/E multiple of 23.17x and 18.68x on 2009E and 2010E earnings respectively, and at a P/B multiple of 0.89x and 0.85x for the same period. While the Tadawul Index posted an YTD gain of 32.2%, SEC witnessed an YTD gain of 15.7%. Considering the above factors, we arrive at a fair Value per share of SAR exhibiting a 12.8% upside from its closing price of SAR (as of October 13, 2009). Therefore, we initiate the coverage on Saudi Electricity Company with an OVERWEIGHT opinion. SAR Billion 2007A 2008A 2009E 2010E 2011E Total Revenue EBITDA EBITDA Margin (%) Net Profit Net Profit Margin (%) Adjusted EPS (SAR) Total Assets RoAE (%) Call us on or us at research@taib.com

2 Background SEC accounts for majority of total electricity generation in the country Established in December, 1999, Saudi Electricity Company (SEC) was formed as a result of consolidation of all the 10 regional electricity companies and other electricity projects of the Saudi General Electricity Authority. The company has a monopoly in the country to undertake electricity generation, transmission, distribution, as well as export/import, investments in power projects, and conducting related research & development (R&D). In 2008, SEC supplied power to over 5.42 million customers with an installed capacity of more than 39 gigawatts (GW), the biggest in the GCC region. By the end of 2008, there were approximately 70 plants under the company s control. In order to meet the growing electricity demand, SEC plans to invest USD 28 billion (SAR 105 billion) over the next three years, and an additional USD 42 billion by 2018 to add 25,000 megawatts (MW) to meet the expected demand. The demand is also spurred by a USD 400 billion development plan, to support the government s sponsored development spending programme and a continuous rising population in the country. Apart from this, SEC opened doors to the private sector for construction of new power plants on build, own & operate (BOO) and build, operate & transfer (BOT) basis. The company, which is currently 80% state-owned with a float of 20% on the Saudi stock market, is likely to be split by 2010 for strategic reasons. The government plans to split the company into four different entities to facilitate a more competitive, market-driven environment. Each of the four entities will have a production capability of about 9,000MW. This move will also involve the creation of two new distribution and transmission companies. On July 03, 2009, Fitch assigned an AA- rating to the company s SAR 7 billion Sukuk issue. The structure for the Sukuk was similar to SEC s AA- rated 2007 SAR 5 billion Sukuk. Business Model SEC is primarily engaged in production, transmission and distribution of electricity Strategic alliances with international players helping it achieve high standards of operational efficiency SEC Signed agreement with IPP s for a long-term purchase contract on a fixed tariff The company has sovereign backing

3 Board of Directors Chaired by Mr. Mahmoud Bin Abdullah Al Taybe Mr. Saleh Bin Hussein Al Awaji Mr. Issam Bin Aalwan Al Bayyat Mr Khaled Bin Abdallah Al Sabti Mr. Suleiman Bin Abdallah Al Qadhi Mr. Abdullah Bin Mohammed Basudan Mr Saud Bin Mohameed Al Nimr Mr. Saleh Bin Saad Al Mhanna Mr. Abdulaziz Bin Saleh Al Farayh Mr. Abdulsalam Abdulaziz Al Yemni Source: Zawya Global economy expected to witness negative growth of 1.1% in 2009 Subsidiaries/Associates/Affiliates of SEC SEC has a number of subsidiaries, associates and investments. SUBSIDIARIES/ASSOCIATES/INVESTMENTS COUNTRY % SHARE Electricity Company for Sukuk Saudi Arabia Rabigh Electricity Company Saudi Arabia Water and Electricity Company Saudi Arabia Gulf Cooperation Council Interconnection Authority Saudi Arabia Al Shakeek Water and Electricity Company Saudi Arabia Ras Al Zuwar Water and Electricity Company Saudi Arabia INVESTMENTS Al Shuaiba Holding Company Saudi Arabia 8.00 Al Shuqaiq water and Electricity Company Saudi Arabia 8.00 Shuaibah Water and Electricity Company Saudi Arabia 8.00 Al Jubail Water and Electricity Company Saudi Arabia 5.00 Source: Zawya Industry Scenario According to estimates by the International Monetary Fund (IMF), the world economy will recede 1.1% during 2009 as a result of the continued economic slowdown. This is contrary to the growth rates of 5.2% and 3.0% registered for 2007 and 2008, respectively. However, the trend is likely to reverse with growth rebounding to 3.1% in The Middle East region s GDP, which registered a healthy real growth of 5.7% and 6.2% during 2006 and 2007 respectively, is anticipated to come down from 5.4% in 2008 to 2.0% for 2009 before expanding back to 4.2% in Within the region, the GCC countries witnessed GDP growth of 6.4% in 2008, but are likely to grow at a mere 1.3% during 2009 owing to multiple factors that include weak oil prices, contraction of global demand and trade-related activity, squeezed liquidity, lower tourism and reduced remittances. However, the GCC s growth is expected to normalize to 4.2% in 2010 on improving market dynamics. Saudi Arabia s real GDP grew at an average 4.4% over the period , on the back of high oil prices and subsequent economic development. However, unlike the overall GCC region, Saudi Arabia s real GDP is expected to contract 0.9% during 2009 before bouncing back to a positive 4.0% in Slowdown to impede economic growth As per preliminary estimates, Saudi Arabia s nominal GDP increased 22.0% YoY to reach SAR 1, billion in 2008 from SAR 1, billion in 2007, driven by record oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel (bbl) in 2008 from USD 67.6 per bbl in The mining & quarrying sector (up 37.2% to SAR 1, billion) was the largest contributor to the GDP at 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues worth SAR billion during 2008 accounting for 4.1%. The finance, insurance, real estate and business services sectors together contributed 6.6%. In light of the financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 19.2% decline in nominal GDP for However, a reversal is expected, as economic growth is likely to rebound to 16.7% in The country is estimated to run a budget deficit of SAR 65 billion (USD 16 billion) in 2009 the first in six years. However, massive fiscal surpluses registered during have allowed Saudi Arabia to boost its foreign assets, which supported higher spending and offset the pressure due to the global crisis. 2,000 1,600 1, Saudi Arabia's Nominal GDP E 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 70.0% 56.0% 42.0% 28.0% 14.0% 0.0% Contribution to GDP (%) E Nominal GDP (SAR Billions) Nominal GDP Growth (%) Source: SAMA, Central Department of Statistics & Information Oil to GDP Non-oil to GDP

4 60,000MW to be added by 2015 The Middle East with an installed capacity of 152 GW represents 3.5% of the global electricity generation. About 97% of the electricity generated is based on thermal power production. Rapid population growth and billions of dollars of government and private investments in the region s infrastructure led to spiralling growth in the construction sector. Strong growth in investments across different sectors of the GCC economies has significantly increased the demand for power. In the power sector, more than 60,000MW are expected to get streamlined between 2008 and It is estimated that an additional USD 50 billion is required for production and upgrade of transmission and distribution networks. Work is currently underway on the GCC-wide power grid project to link Saudi Arabia, Qatar, Bahrain, Kuwait, Oman and the UAE with an integrated electricity network by 2010, with an overall estimated budget of over USD 8.5 billion. GCC power needs by 2010: Country Power Needs (MW) Investments (USD million) Bahrain 1, Kuwait 3,400 2,500 Oman 1, Qatar Saudi Arabia 20,000 15,000 UAE 6,600 5,100 Total 33,100 24,900 Source: Oapec Electricity generation expected to increase 64.1% by 2018 According to BMI, Saudi Arabia will account for 16.3% of Middle East & Africa (MEA) region s power generation by The country s electricity generation is expected to increase by 64.1% by The rapidly rising population is one of the significant factors for the sharp increase in power demand. Saudi Arabia s present generation capacity is estimated to be around 39,242MW with another 13,000MW likely to be added by The total number of high voltage and extra-high voltage transmission substations in the country reached 586 including 1,690 transformers with a total capacity of 153,414 mega volt amperes (MVA). The total length of power transmission networks increased 4.8% to 39,793 circuit kilometres (ckm). During 2008, 452 villages were electrified, taking the total number of electrified towns, villages, and settlements to 11,405. Electricity supply was enabled for 260,543 new customers an increase of 4.6% - taking the total number up to 5.42 million customers. Increased infrastructure spending to boost power demand Saudi Arabia s real estate/construction sector experienced an unprecedented boom until 1H08, owing to the country s robust economic growth, rising per capita GDP, abundant liquidity, increasing government & private sector spending, and a growing population fuelled by the inflow of expatriates. Booming construction and infrastructure development activities have significantly increased power demand in the country. Further, in tandem with its diversification strategy, the government s planned development outlay of about USD 400 billion across different projects over the next five years, as well as private investments will add to the total demand. In '000 MW Electricity sector - Saudi Arabia 89% 89% 88% 88% 87% 87% 86% Actual Generation Total Production capacity PLF In Kwh Per capita Electricity Consumption - Saudi Arabia 9,000 7,200 5,400 3,600 1, E 2009E 2010E 2011E 2012E Per capita Consumption % grow th in population 9% 7% 5% 4% 2% 0% -2% % grow th in consumption Source: SEC, SAMA, IMF, EIU

5 Supporting IWPPs, IPPs to meet growing demand Several new Independent Water & Power Production (IWPP) plants are planned in the first phase of power and water projects involving foreign partnerships. The Water & Electricity Company, a joint holding of the SEC and the SWCC, is overseeing three of these, work on two of which has already begun - one in Shuaiba by a consortium led by Malakoff International (Malaysia) and the local ACWA Power, and the other at Shuqaiq, led by ACWA with Mitsubishi Corporation (Japan) and the Gulf Investment Corporation, an investment bank owned jointly by the six Gulf Cooperation Council governments. Tihamah has also been licensed to build four IWPPs. The sites are at Uthmaniya, Juaymah, Shadgum (each with a planned capacity of 308MW) and Ras Tanura (150MW). Marafiq is also overseeing an IWPP at Jubail, which is being developed as a joint venture between three Saudi government bodies (Marafiq, the SEC and the Public Investment Fund) and the Suez Consortium (comprising Belgium s Suez Energy International, the Gulf Investment Corporation and ACWA). Biggest Power Projects in Saudi Arabia: Name Value USD billion Electricity (MW) Completion Yanbu IWPP* 4 1, Madina* 3.7 1,700 - Jubail IWPP 3.4 2, Shuaiba Power Plant 3 1, Jizan Economic City (JEC) - Power Plant 2.5 2, Rabigh independent power project 2.5 1, Source: Construction Week * includes water capacity Need to increase generation capacity to meet growing demand Overall, the current capacity in the GCC is expected to be around 75 GW, which is set to triple over the next 25 years. GCC countries are actively reforming their power sectors in order to boost competition in generation by allowing independent power providers. In Saudi Arabia, there are several ongoing and planned projects in different sectors worth billions of dollars, thereby consumes large units of electricity and water, directly affecting the demand to rise sharply over the coming years. Saudi Arabia, in particular, has emerged as the fastest growing consumer of energy in the GCC and the Middle East, with demand expected to increase at an average of 5-7% annually. Recently, the Saudi Arabian government permitted the private sector to invest in power generation. It has also developed a reform plan for a three-stage electricity market evolution planned over Besides growing domestic demand for power, another important driver for the sector is the development of the GCC power grid. The first phase of the grid s development to connect Qatar with Saudi Arabia, Kuwait and Bahrain is already functional. The main objective behind the regional grid is to utilise surplus power generated in each Gulf state and to create a sufficient and dependable power supply system for the fast developing region. All the six countries are committed to establishing the required regulatory amendments to create a reliable power pool. Ongoing power projects in the GCC have been estimated to be worth up to SAR billion, with Saudi Arabia accounting for around 50% of the total investments according to recent industry reports. Financial Performance 2008 Revenue Sales rose 7% YoY in 2008 Saudi Electricity s total revenues increased at a three-year CAGR of 5.9% over , while yearon-year revenues increased 7.0% to SAR billion from SAR billion a year ago, mainly due to increased sale of electricity units. Looking at the revenue breakup of 2008, contribution from electricity sales of SAR billion stood at 92.7% of total revenues. Meter reading, maintenance and bills preparation tariff contributed SAR 0.75 billion, while electricity connection tariff added SAR 0.89 billion to total revenues.

6 Operational Performance 2006A 2007A 2008A 8% 7% 6% 5% 4% 3% 2% 1% 0% Electricity sales Meter tariff Electricity connection tariff % grow th in total revenues Source: SEC Sales Revenue Composition Source: SEC Expenses SEC s cost of sales (CoS), excluding depreciation, increased 11.4% to SAR billion from SAR billion in The increase in cost was due to a 10.9% increase in fuel costs and 12.5% rise in operation & maintenance costs. Further, as a percentage of revenues, CoS increased 262 bps to 65.3% in 2008 from 62.7% in Sales, general & administrative (G&A) expenses declined 23.6% to SAR 0.22 billion from SAR 0.28 billion. As a percentage of revenues, SG&A expenses were down 39 bps to 1.0% in Depreciation expenses increased 5.9% to SAR 6.74 billion in 2008, due to an 11.9% increase in fixed assets. Decline in profits due to higher costs Profitability The company s gross profit decreased marginally by 0.6% to SAR 7.73 billion, due to higher CoS. Gross margin contracted to 34.7% from 37.3% in Total operating expenses increased 9.1%, and as a percentage of revenue, it increased to 96.6% from 94.7%. This dented profit from operations, which fell 31.4% in Other income for the year stood at SAR 0.34 billion. Net profit attributable to equity shareholders declined 21.8% to SAR 1.10 billion from SAR 1.41 billion, due to higher costs. Accordingly, net profit margin also contracted to 5.0% in 2008 from 6.8% a year ago and adjusted EPS fell to SAR 0.27 from SAR The lower earnings base for the year led to a decline in RoAA from 1.1% to 0.8%, and RoAE from 3.0% to 2.3%.

7 Chart Gallery Revenues (SAR Million) Net Profit (SAR Million) 25,000 20,000 15,000 10,000 1,400 1, , H08 1H H08 1H09 EBIT and EBIDTA Margin Net Profit Margin 40% 31% 22% 13% 4% -5% H08 1H09 EBIT Margin EBITDA Margin 10% 8% 6% 4% 2% 0% -2% H08 1H09 Return on Average Equity (RoAE) Return on Average Assets (RoAA) 5% 4% 3% 2% 1% 0% -1% -2% H08 1H09 4% 3% 2% 1% 0% -1% -2% H08 1H09 Total Assets (SAR billion) Shareholders' Equity (SAR billion) H08 1H H08 1H09

8 The salient features of the balance sheet are: Total Assets rose 9% in 1H09 Total assets increased 8.5% to SAR billion in 1H09 from SAR billion in 1H08, led by an increase in fixed assets and work in progress. The share of current assets in the total decreased to 14.0% in 1H09 from 18.4% in the previous year, led by a decline in accounts receivables. Account receivables fell 19.9% YoY to SAR billion for 1H09. Inventories, which accounted for 3.8% of the total assets (4.5% in 1H08), decreased to SAR 5.62 billion compared to the earlier SAR 6.16 billion. Cash and cash equivalents declined 73.7% to SAR 0.67 billion taking its share in total assets to 0.4% (1.8% in 1H08). On the other hand, prepayments and other receivables increased to SAR 2.56 billion compared to SAR 1.44 billion. The share of non-current assets in total assets increased to 86.0% in 1H09 from 81.6% in 1H08. Fixed assets increased 14.7% to SAR billion from SAR billion. Construction work in progress rose 21.3% to SAR billion, while its share in total assets stood at 16.2% for 1H09 (14.5% in 1H08). Equity investment in the companies and others stood at SAR 2.35 billion, up 22.3% from SAR 1.92 billion in 1H08. Current liabilities were up 18.6% to SAR billion with its share in the total balance sheet rising from 26.2% in 1H08 to 28.6% in 1H09. This was led by a 20.0% increase in account payables to SAR billion and a 15.3% rise in the current portion of long-term loan to SAR 1.13 billion. However, accruals and other payables declined to SAR 1.60 billion from SAR 1.72 billion. During 1H09, non-current liabilities increased 8.6% to SAR million with their share in total balance sheet remaining at the same level of 39.3%, due to an increase in long-term loans and deferred revenues. Shareholders equity increased marginally by 0.7% to SAR billion due to a 10.8% increase in statutory reserve and a 5.6% increase in retained earnings. Retained earnings were up to SAR 4.76 billion from SAR 4.50 billion. Adjusted book value per share (BVPS) rose to SAR compared to SAR in 1H08. Further, the ratio of shareholders equity to total assets fell to 0.32 in 1H09 compared to 0.35 in 1H08. Saudi Electricity reports 5% rise in revenues on improved sales Financial Performance Analysis 1H 2009 For the six months ended June 2009, Saudi Electricity Company reported a 4.7% increase in revenues to SAR billion as against SAR 9.96 billion in the same period last year. This was mainly due to higher units sold in the market on rising demand. Looking at the revenue breakup of 1H09, contribution from electricity sales of SAR 9.59 billion stood at 91.5% of the total revenues. Meter reading, maintenance and bills preparation tariff contributed 3.8% and electricity connection tariff added 4.7% to total revenues, respectively. The company also witnessed a 5.9% rise in operating expenses during the first half of 2009, and, as a percentage of revenues, it stood at 102.6% compared to 101.9% in 1H08. Consequently, operating loss increased to 42.5% to SAR 0.28 billion compared to SAR 0.19 billion in the same period last year. Total other income amounted to SAR 0.22 billion, up from SAR 0.20 billion. Net loss stood at SAR billion compared to a net income of SAR billion in 1H08. Annualised adjusted LPS stood at SAR 0.03 compared to an EPS of SAR in 1H08.

9 Working Capital Snapshot SAR Million 2007A 2008A 1H08A 1H09A Total Current Assets 27,180 25,011 25,326 20,998 Cash and cash equivalents 5,589 1,232 2, Receivables from electricity consumers and accrued revenue, net 13,284 15,074 15,185 12,158 Accounts Receivable days Prepayments and other receivables, net 1,719 2,898 1,439 2,555 Inventories, net 6,587 5,807 6,158 5,615 Inventory Conversion Period (Days) Total Current Liabilities 34,676 40,149 36,113 42,829 Accounts payable 32,202 38,279 33,414 40,096 Average Payment Period (Days) ,027 Accruals and other payables 1,494 1,314 1,720 1,604 Current portion of long-term loans ,129 Net Core Working Capital -12,330-17,398-12,071-22,323 Average Core Working Capital Cycle (Days) Net Current Assets -7,496-15,138-10,787-21,831 Average Working Capital Cycle (Days) Source: SEC s Financial Statements

10 Peer Comparison In order to do a peer comparison, we have taken comparable companies as Abu Dhabi National Energy Company (ADNEC), Qatar Electricity & Water Company (QEWC) and Saudi Electricity Company (SEC). ADNEC QEWC SEC H H H09 Ratios: Total Assets Turnover Ratio (x) Operating Profit Margin 37.4% 22.4% 34.4% 33.5% 3.4% -2.6% EBITDA Margin 58.4% 45.4% 50.7% 50.6% 33.7% 31.9% Net Profit Margin 10.9% 2.1% 33.3% 34.3% 5.0% -0.5% RoAE 2.4% 0.4% 6.6% 5.8% 0.8% -0.1% RoAA 28.8% 5.4% 30.2% 39.8% 2.3% -0.2% Market Indicators: Adj. EPS (USD) P/E (x) NA Adj. BVPS (USD) P/BV (x) Current Market Capitalisation (USD Million) 2,864 2,864 2,786 2,786 11,875 11,875 (USD Millions) Sales 4,575 2, ,940 2,794 % YoY change Operating Profit 1, % YoY change NA EBITDA 2,674 1, , % YoY change Net Profit % YoY change NA Total Assets 23,520 24,548 3,731 4,197 38,748 39,881 % YoY change Shareholders' Equity 1,625 1, ,940 12,786 % YoY change

11 New Projects and Strategies Expected to add 13,000MW over the next three years SEC is looking to expand its base by increasing its generation capacity to fulfil the rising demand from an increasing population. The company plans to spend USD 28 billion over the next three years to meet the rising demand. This is expected to add about 13,000MW of power and the related transmission & distribution system. SEC also plans to invest USD 70 billion by 2018 to add 25,000MW to meet the demand spurred by the USD 400 billion, five-year government-spending programme and the rising population. According to the King Fahd University of Petroleum & Minerals, the country s annual electricity consumption may quadruple to 140GW by SEC is restructuring the company, aimed at converting the utility into a holding company that owns multiple power generation, transmission and distribution firms. SEC will transfer its power generation activity to four companies, each with a production capability of about 9,000MW. The restructuring is expected to be complete by mid-2010 and all subsidiaries are expected to start operations in The move is expected to boost competition in the market, thereby helping efficiencies. This will bring new technology to the sector, increasing efficiency and improving the overall market scenario. On September 09, 2009, the company approved projects worth SAR 7.64 billion for new power generation and transmission projects. The state-run power producer, according to a cabinet statement, will not be required to pay annual dividend to the government until the end of The government decision to give up its 74% dividend will bolster the stock for 10 years, till the outstanding plants are upgraded and new facilities are built. Electric power generation projects currently executed by the company: Project Type Capacity (MW) Completion Expansion of Qurayyah Power Plant Combined Cycle (CC) 1, Expansion of Power Plant 9 Gas Expansion of Faras Power Plant Gas Expansion of Rabigh Power Plant Gas 1, Power Plant 10 CC 2, Expansion of Jizan Power Plant Gas Expansion of Tabuk Power Plant Gas Expansion of Al-Shoaiba Power Plant Steam 1, Source: SEC Electric power generation projects currently executed by the company: Project Type Capacity (MW) Completion Private sector station at Jubail (Marafeq) CC 2, Private sector station at Al-Shoaiba Steam Private sector station at Al-Shuqaiq Steam Source: SEC Planned projects that will be executed by the company/private sector Project Type Capacity (MW) Completion Expansion of Qurayyah Power Plant (the steam part) CC 1, Expansion of Rabigh Steam Power Plant Steam 2, Expansion of Power Plant 10 (the steam part) CC Shuqaiq Power Plant Steam 3, Dhabaa Steam Power Plant Steam 1, Ras Al-Zor Power Plant Steam 3, South Jeddah Power Plant Steam 3, Al-Uqair Power Plant Steam 3, Source: SEC

12 SWOT Analysis STRENGTHS Saudi government being the major stakeholder helps the company raise funds easily from the market, with sovereign backing Controlling the biggest share in the market gives it the advantage for any new installations or proposals WEAKNESS Rising leverage level may impact the company s performance. THREATS Intensified competition on account of entry of IPP s and IWPP s The country follows a fixed tariff structure OPPORTUNITIES Expected rise in the population in the region. Expected growth in the economy over the long run Diversification of the economy Risks and Concerns: Decline in oil revenues may drive investments away from the economy, thereby increasing the gestation period for ongoing projects. High volatility in natural gas prices may affect top-line and bottom-line growth. Valuation Methodology: We have used DCF valuation method to arrive at the fair value of STC, as discussed below: Assumptions: Cost of Equity: 6.26% WACC: 5.18% (i) Risk free Rate (Rf) of 3.19%, equivalent to 12-months average yield on 10 year US T- bill. (ii) Unlevered Beta of 0.43 (iii) A terminal growth rate of 2.0% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 6.26% and a WACC of 5.18%.

13 DCF Calculations DCF Valuation (FCFF Model) (in SAR Million) 2009E 2010E 2011E 2012E 2013E NOPAT 1,822 1,964 1,943 2,379 2,749 Add: Depreciation and Amortisation 3,532 7,704 8,187 8,335 8,420 Less: Capex 8,248 18,087 15,653 13,836 12,634 Less: Change in Net Working Capital -6,633-4,801-3,433-4,020-4,321 Operating Free Cash Flows to Firm (OFCFF) 3,740-3,618-2, ,857 Non-Operating Income Tax on Non-Operating Income Add: Non-Operating Cash Flows (After Tax Non-Operating Income) Free Cash Flow to Firm (FCFF) 3,898-3,195-1,641 1,379 3,410 WACC (Ko) 5.18% 5.18% 5.18% 5.18% 5.18% Present Value / Discount Long-Term Growth Rate (g) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 109,527 Present Value of Free Cash Flows 3,801-2,962-1,447 1,155 2,717 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 3,265 Terminal Value: Residual Cash Flow (FCFF of 2013E) 3,410 WACC 5.18% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 3.18% Equals Nominal Terminal Value 109,527 Implied Multiple of 2013E EBITDA 9.81 Times PV/Discount Factor 0.80 Present Value of Terminal/Residual Value 87,276 Enterprise Value 90,541 Implied Multiple of 2013E EBITDA 8.11 Less: Market Value of Long-term Debts 40,242 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 50,299 Net shares outstanding ( Million) 4,167 Fair Value Per Share (SAR) * figures in SAR Million unless specified Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes. Discount Factor Sensitivity Analysis of Nominal Terminal Value (SAR Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 3.18% 158, , , ,193 1,997, % 108, , , , , % 82,481 94, , , , % 66,546 74,026 83,298 95, , % 55,770 60,984 60,984 74,755 84,115

14 Discount Factor Sensitivity Analysis of Discounted Terminal Value (SAR 000) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 3.18% 137, , , ,316 1,735, % 90, , , , , % 65,725 75,035 87, , , % 50,816 56,529 63,609 72,616 84, % 40,829 44,646 49,200 54,728 61,579 Discount Factor Sensitivity Analysis of Enterprise Value (SAR 000) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 3.18% 140, , , ,785 1,738, % 93, , , , , % 68,990 78,300 90, , , % 53,988 59,700 66,781 75,787 87, % 43,913 47,729 52,283 57,811 64,663 Fair Value: SAR Investment Opinion: OVERWEIGHT Investment Opinion Energy consumption in the GCC has grown on the back of rising population and a general all-round spike in construction activities and industrial projects. Strong growth in investments across various sectors of the GCC economies has significantly increased the demand for power. Saudi has benefited from this robust economic growth as well, leading to increased infrastructure investments and development activities across multiple sectors. This, along with the rising population and increased government and private sector spending, has been behind the sharp increase in energy demand, necessitating additional investments into the sector. According to BMI, Saudi s primary energy demand is expected to grow by 64.1% by In order to meet this demand, investments to the tune of USD 28 billion are being planned for capacity expansion of 13,000MW over the next three years. Further, in an effort to efficiently utilise the electricity generated, work is currently underway on the GCC-wide power grid project to link Saudi Arabia, Qatar, Bahrain, Kuwait, Oman and the UAE with an integrated electricity network by 2010, with an overall budget of over USD 8.5 billion. SEC holds the inherent advantage of being the largest power player in Saudi, controlling most of the electricity generation, transmission and distribution. Moreover, the company is strongly backed by the Saudi government and has the option to leverage its balance sheet if required. It is also likely to be the largest beneficiary of the investments planned in the sector, given the strong government support. Besides, the company has a large number of projects underway and the future split will help the company benefit in the long term. Going forward, the company is expected to benefit from its planned capacity expansions, which are likely to substantially improve bottom-line performance in the long run. Currently, SEC is trading at a P/E multiple of 23.17x and 18.68x on 2009E and 2010E earnings respectively, and at a P/B multiple of 0.89x and 0.85x for the same period. While the Tadawul Index posted a YTD gain of 32.2%, SEC witnessed a YTD gain of 15.7%. Considering the above factors, we arrive at a fair Value per share of SAR exhibiting a 12.8% upside from its closing price of SAR (as of October 13, 2009). Therefore, we initiate the coverage on Saudi Electricity Company with an OVERWEIGHT opinion.

15 Financial Statements Consolidated Balance Sheet (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash and cash equivalents 5,589 1,232 2, ,365 3,832 3,331 Receivables from electricity consumers and accrued revenue, net 13,284 15,074 15,185 12,158 13,772 13,884 13,474 Prepayments and other receivables, net 1,719 2,898 1,439 2,555 3,670 4,040 4,200 Inventories, net 6,587 5,807 6,158 5,615 6,064 6,419 6,459 Total Current Assets 27,180 25,011 25,326 20,998 25,871 28,175 27,465 Non-Current Assets Receivables from electricity consumers 4, , Equity investments in companies and others 1,660 2,160 1,922 2,351 2,607 2,852 3,006 Construction work in progress 15,051 20,104 20,010 24,263 25,130 27,643 30,407 Fixed assets, net 87,655 98,108 88, , , , ,665 Total Non-Current Assets 109, , , , , , ,077 Total Assets 136, , , , , , ,542 LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts payable 32,202 38,279 33,414 40,096 44,087 49,436 52,460 Accruals and other payables 1,494 1,314 1,720 1,604 1,866 2,156 2,355 Current portion of long-term loans ,129 1, Total Current Liabilities 34,676 40,149 36,113 42,829 47,082 52,420 55,644 Non-Current Liabilities Long-term loans 3,846 4,648 3,367 5,880 7,120 14,631 18,470 Sukuk 5,000 5,000 5,000 5,000 12,000 12,000 12,000 End-of-service indemnities 4,009 4,351 4,253 4,266 4,635 4,845 5,065 Deferred revenue, net 11,575 13,353 12,218 14,270 14,270 14,270 14,270 Customers refundable deposits 1,037 1,096 1,064 1,129 1,129 1,129 1,129 Long-term Government payables 13,296 13,296 13,296 13,296 13,296 13,296 13,296 Government loan 14,938 14,938 14,938 14,938 14,938 14,938 14,938 Total Non-Current Liabilities 53,700 56,681 54,136 58,777 67,388 75,109 79,167 Total Liabilities 88,376 96,830 90, , , , ,811 Equity Share capital 41,666 41,666 41,666 41,666 41,666 41,666 41,666 Statutory reserve ,183 1,422 1,661 General reserve Retained earnings 4,915 5,361 4,503 4,757 6,566 8,709 10,856 Equity attributable to equity holders 47,994 48,553 47,596 47,948 49,953 52,340 54,731 Total Liabilities and Equity 136, , , , , , ,542

16 Consolidated Income Statement (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Revenue Electricity sales 19,323 20,652 9,156 9,586 23,767 26,738 28,305 Meter reading, maintenance and bills Preparation tariff Electricity connection tariff ,101 1,231 Total Operating revenues 20,839 22,289 9,959 10,478 25,537 28,655 30,386 Operating expenses Fuel expenses -4,938-5,477-2,479-2,607-6,224-7,013-7,467 Purchased energy -1,371-1, ,680-1,900-2,030 Operations and maintenance -6,760-7,608-3,656-3,698-8,691-9,781-10,433 Depreciation -6,372-6,744-3,261-3,613-7,145-7,704-8,187 General and administrative expenses Total Operating expenses -19,725-21,525-10,152-10,754-23,990-26,691-28,443 Operating Income 1, ,547 1,964 1,943 Other income and expenses, net Net income before zakat 1,453 1, ,924 2,387 2,392 Deferred zakat expenses Net income 1,412 1, ,924 2,387 2,392

17 Consolidated Cash Flow Statement (in SAR Million ) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Operating activities Net profit before zakat 1,453 1, ,924 2,387 2,392 Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful receivables Provision for slow-moving inventory Company s share in net income of investee companies Depreciation 6,372 6,744 3,261 3,613 7,145 7,704 8,187 Gain on sale of fixed assets, net Gain on sale of the investments End-of-service indemnities, net Deferred revenues, net 1,041 1, (Increase) decrease in operating assets and liabilities: Receivables from electricity consumers and accrued revenue 3,483 2,921 1,301 2,831 1, Prepayments and other receivables , Inventories -1, Accounts payable 6,853 6,077 1,212 1,817 5,710 5,347 3,024 Accruals and other payables Net proceeds and refunds from customers refundable deposits Net cash from operating activities 17,446 18,461 7,649 9,894 16,913 15,101 14,231 Investing activities Equity investments in companies and others Fixed assets and construction work in progress -14,778-22,281-9,506-11,605-24,878-20,600-18,417 Proceeds from sale of fixed assets Dividend received from investments Net cash used in investing activities -15,531-22,668-9,667-11,739-25,303-20,845-18,571 Financing activities Sukuk 5, , Net proceeds (repayment) of longterm loans -4, ,804 3,045 7,211 3,839 Dividends paid to shareholders and Board of Directors remuneration Net cash used in financing activities ,027 1,282 9,523 7,211 3,839 Net change in cash and cash equivalents 1,389-4,357-3, ,133 1, Cash and cash equivalents, beginning of the year 4,201 5,589 5,589 1,232 1,232 2,365 3,832 Cash and cash equivalents, end of the year 5,589 1,232 2, ,365 3,832 3,331

18 Common Size Statements Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash and cash equivalents 4.1% 0.8% 1.8% 0.4% 1.4% 2.1% 1.8% Receivables from electricity consumers and accrued revenue, net 9.7% 10.4% 11.0% 8.1% 8.4% 7.7% 7.1% Prepayments and other receivables, net 1.3% 2.0% 1.0% 1.7% 2.2% 2.2% 2.2% Inventories, net 4.8% 4.0% 4.5% 3.8% 3.7% 3.6% 3.4% Total Current Assets 19.9% 17.2% 18.4% 14.0% 15.7% 15.7% 14.5% Non-Current Assets Receivables from electricity consumers 3.5% 0.0% 1.2% 0.0% 0.0% 0.0% 0.0% Equity investments in companies and others 1.2% 1.5% 1.4% 1.6% 1.6% 1.6% 1.6% Construction work in progress 11.0% 13.8% 14.5% 16.2% 15.3% 15.4% 16.0% Fixed assets, net 64.3% 67.5% 64.5% 68.2% 67.4% 67.4% 67.9% Total Non-Current Assets 80.1% 82.8% 81.6% 86.0% 84.3% 84.3% 85.5% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts payable 23.6% 26.3% 24.2% 26.8% 26.8% 27.5% 27.7% Accruals and other payables 1.1% 0.9% 1.2% 1.1% 1.1% 1.2% 1.2% Current portion of long-term loans 0.7% 0.4% 0.7% 0.8% 0.7% 0.5% 0.4% Total Current Liabilities 25.4% 27.6% 26.2% 28.6% 28.6% 29.1% 29.4% Non-Current Liabilities Long-term loans 2.8% 3.2% 2.4% 3.9% 4.3% 8.1% 9.7% Sukuk 3.7% 3.4% 3.6% 3.3% 7.3% 6.7% 6.3% End-of-service indemnities 2.9% 3.0% 3.1% 2.9% 2.8% 2.7% 2.7% Deferred revenue, net 8.5% 9.2% 8.9% 9.5% 8.7% 7.9% 7.5% Customers refundable deposits 0.8% 0.8% 0.8% 0.8% 0.7% 0.6% 0.6% Long-term Government payables 9.7% 9.1% 9.6% 8.9% 8.1% 7.4% 7.0% Government loan 11.0% 10.3% 10.8% 10.0% 9.1% 8.3% 7.9% Total Non-Current Liabilities 39.4% 39.0% 39.3% 39.3% 41.0% 41.8% 41.8% Total Liabilities 64.8% 66.6% 65.5% 67.9% 69.6% 70.9% 71.1% Equity Share capital 30.6% 28.7% 30.2% 27.9% 25.3% 23.2% 22.0% Statutory reserve 0.6% 0.7% 0.6% 0.7% 0.7% 0.8% 0.9% General reserve 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% Retained earnings 3.6% 3.7% 3.3% 3.2% 4.0% 4.8% 5.7% Equity attributable to equity holders 35.2% 33.4% 34.5% 32.1% 30.4% 29.1% 28.9% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

19 Common-Size Consolidated Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Revenue Electricity sales 92.7% 92.7% 91.9% 91.5% 93.1% 93.3% 93.2% Meter reading, maintenance and bills Preparation tariff 3.5% 3.4% 3.7% 3.8% 3.1% 2.8% 2.8% Electricity connection tariff 3.8% 4.0% 4.3% 4.7% 3.9% 3.8% 4.0% Total Operating revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses Fuel expenses -23.7% -24.6% -24.9% -24.9% -24.4% -24.5% -24.6% Purchased energy -6.6% -6.6% -6.3% -6.3% -6.6% -6.6% -6.7% Operations and maintenance -32.4% -34.1% -36.7% -35.3% -34.0% -34.1% -34.3% Depreciation -30.6% -30.3% -32.7% -34.5% -28.0% -26.9% -26.9% General and administrative expenses -1.4% -1.0% -1.3% -1.7% -1.0% -1.0% -1.1% Total Operating expenses -94.7% -96.6% % % -93.9% -93.1% -93.6% Operating Income 5.3% 3.4% -1.9% -2.6% 6.1% 6.9% 6.4% Other income and expenses, net 1.6% 1.5% 2.0% 2.1% 1.5% 1.5% 1.5% Net income before zakat 7.0% 5.0% 0.1% -0.5% 7.5% 8.3% 7.9% Deferred zakat expenses -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net income 6.8% 5.0% 0.1% -0.5% 7.5% 8.3% 7.9%

20 Financial Ratios 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Liquidity Ratios: Current Ratio (x) Quick Ratio (x) Inventory Conversion Period (Days) Average Collection Period (Days) Length of Operating Cycle (Days) Average Payment Period (Days) Length of Cash Cycle (Days) Activity Ratios: Debtors Turnover Ratio (x) Creditors' Turnover Ratio (x) Total Assets Turnover Ratio (x) Equity Turnover Ratio (x) Profitability Ratios: Gross Profit Margin (GPM) (%) EBITDA Margin (%) Operating Profit Margin (OPM) (%) Net Profit Margin (NPM) (%) Return on Average Equity (ROAE) (%) Return on Average Assets (ROAA) (%) Leverage Ratios: Debt to Equity (D/E) Ratio (x) Shareholders' Equity to Total Assets Ratio (x) Total Liabilities to Total Assets Ratio (x) Current Liabilities to Equity Ratio (x) Growth Rates: % YoY Growth in Revenue NA % YoY Growth in Operating Profit NA % YoY Growth in EBITDA NA % YoY Growth in Net Profit NA % YoY Growth in Total Assets NA % YoY Growth in Shareholders' Equity NA Ratios used for Valuation: Adj. EPS (SAR) Adj. BVPS (SAR) P/E Ratio (x) NA P/BV Ratio (x) Current Market Price (SAR) * Annualised

21 Call us on or us at DISCLAIMER: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication, but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to increase or diminish. Consequently, investors may not get back the full value of their original investment