Al Babtain Power & Telecom Equities Saudi Arabia Industrial Sunday, 7 January 2018

Transcription

1 Apr-1 7 Ma y-17 Jun-17 Jul-1 7 Aug -17 Sep -17 Oct-1 7 Nov-17 Dec-17 Jan-18 Al Babtain Power & Telecom Equities Saudi Arabia Industrial AbdelRahman Wahba Equity Analyst Mubasher International Abdulrahman.Sobhy@MubasherFS.com A value of ever-evolving multifaceted solutions Buy (Opening Position) Price Target: SAR35.59 Expected Total Return: +33% Following on with our Hidden Gems Uncovered series, we are glad to present today a new stock pick from the Saudi market, Tadawul. Our pick is one of the leading producers of capital goods in Saudi Arabia, with special focus on power and telecom infrastructure. It has generated a 4-year CAGR of 19% in earnings to reach SAR158.6mn in 2016, induced by the improvement in operating margins. In addition, it has managed to reward its shareholders with generous dividend payouts, thanks to its healthy cash flows. Al Babtain looks attractive on both the fundamental and trading fronts, with average ROAE of 18.5% in the past three years and a current P/E of 7.4x vs. a regional peers median of 17.6x. Interestingly, only 6% of this company s shares allotted for foreign ownership is taken up, leaving an ample room for new foreign investors. Background: Al Babtain Power & Telecom (2320.TDWL) was incorporated in December 1955 and listed on Tadawul in December Currently, Al Babtain sells its products to five different countries, namely Saudi Arabia, the UAE, France, Egypt, and Qatar. Al Babtain generates its revenues through three core segments: (1) Outdoor lightening, (2) Structures and metal towers, and (3) Integrated solutions. Well positioned to benefit from developments in the MENA power sector: Recently, the company s board of directors approved the establishment of a subsidiary specialized in renewable energy to supply, install, and maintain renewable energy projects for residential, commercial, and industrial complexes. Besides diversifying its revenue streams, this would allow Al Babtain to cope with the new trend in power generation. Meanwhile, the company signed an SAR121.6mn contract with Elsewedy Electric (SWDY.EGX) during 2017 to supply galvanized transmission towers for the Upper Egypt electricity transmission line. This will allow the company to benefit from infrastructure development in Egypt, as the country strives to develop its transmission and distribution network to accommodate the new power capacity coming online through Page 1 Recovery of oil prices and GCC development trends to support growth: Oil prices are expected to hover around USD60/barrel over our forecast horizon. This should help the GCC governments to further spend on essential projects (residential, industrial, and commercial) that will require electricity transmission, thus spurring demand in the region. Key risks: Although the company increased its geographical foot print and enjoys a widespread base in various markets, key risks include: (1) volatility of commodity prices, (2) oil prices volatility which has a significant effect on GCC governments spending, and (3) regional geopolitical instability. We are opening position in the stock with a PT of SAR35.59 (ETR: +33%): Using a discounted cash flow (DCF) model and a dividend discount model (DDM), we set our price target (PT) at SAR35.59/share with an expected total return (ETR) of +33%. Hence, we are opening position in the stock, supported by a dividend yield of c.7.5% and its cheap valuation multiples with a current P/E of 7.4x, a 58% discount to a regional peers median of 17.6x. Stock Performance & Details ALBABTAI (SAR) vs. SASEIDX Rebased Vol. (mn, RHS) ALBABTAI SAR, a 2015a 2016a 2017e 2018e 2019e Revenue 1,486,283 1,551,837 1,248,778 1,213,467 1,294,835 1,362,559 EBITDA 248, , , , , ,858 Net Income 88, , , , , ,275 Revenue Growth (%) 7.0% 4.4% (19.5%) (2.8%) 6.7% 5.2% EBITDA Growth (%) 43.4% 5.7% (7.0%) (9.4%) (2.4%) 5.2% Net Income Growth (%) (20.0%) 50.2% 19.7% (12.7%) (1.2%) 11.2% EBITDA Margin (%) 16.7% 16.9% 19.5% 18.2% 16.6% 16.6% Net Margin (%) 6.0% 8.6% 12.7% 11.4% 10.6% 11.2% Net Debt (Cash) 874, , , , , ,437 EPS (SAR) BVPS (SAR) DPS (SAR) PER (x) 12.3x 8.7x 6.2x 8.2x 8.3x 7.5x PBV (x) 1.7x 1.7x 1.3x 1.4x 1.3x 1.3x Dividend Yield (%) 3.9% 7.3% 8.6% 7.5% 7.5% 8.4% Sto ck D etails Last price (SAR) W High (SAR) W Low (SAR) M -ADVT (SARmn) 4.74 % Chg: M om 3.24 % Chg: YoY 1.94 % Chg: YTD M ubasher Ticker 2320.TDWL Bloomberg Ticker ALBABTAI AB C apital D etails No. of Shares (mn) 42.6 M kt Cap (SARmn) 1,140.4 M kt. Cap (USDmn) Free Float (%) 93.0%

2 Corporate Profile Al Babtain Power & Telecom (2320.TDWL) is a shareholding company established in It was later transformed to a limited liability company in 1986 then to a joint stock company since Al Babtain is based in Riyadh, Saudi Arabia and is active in the power and telecommunication infrastructure, providing a full range of electrical products and services through its facilities around the GCC, Egypt, and Europe. Al Babtain s authorized and paid-in capital amounts to SAR426.3mn distributed over 42.63mn ordinary shares with a par value of SAR Major clients Board of directors Abdul Aziz Al Babtain Abdul Karim Al Babtain Ibrahim Hamad Al Babtain Chairman Mansour Mohamed Al Babtain Mohamed Al Konaybet Mansour Ibrahem Al Babtain Khaled Al Babtain Yassin Al Jaffery Sultan Al Babtain Source: Tadawul Shareholder structure Ownership limits Source: Decypha, Tadawul Page 2

3 Investment Thesis A diversified infrastructure supplier with a geographical widespread: Al Babtain currently generates its revenue from operations in five different countries. In 2016, Saudi Arabia was the main contributor with c.64% of total revenues, followed by the UAE with a contribution of c.12%. Each of Egypt and France represented c.10% of total revenues. Operations from Qatar contributed by c.4% of total revenues. Al Babtain operates through three core segments : (1) Outdoor lightening, (2) Integrated solutions, and (3) Structures and metal towers. 1. Outdoor lightening represented c.50% of total revenues and 58% of total reported EBT in This segment focuses on the production and galvanization of lightening poles, lanterns, and electricity distribution panels. 2. Integrated solutions represented c.31% of total revenues and 15% of total reported EBT in This segment focuses on the supply, installation, and maintenance works for telecommunications systems. 3. Structures and metal towers represented c.19% of total revenues and 26% of total reported EBT in This segment includes the production, testing, and construction of telecommunication and transmission towers. This segment faced a challenge in 2016 as oil prices plunged which had a negative impact on GCC infrastructure spending. Well positioned to benefit from developments in the MENA power sector: Recently, the company s board of directors approved the establishment of a limited liability company to be specialized in renewable energy. This new company will be supplying, installing, and maintaining renewable energy projects for residential, commercial, and industrial complexes. Besides diversifying the revenue stream, this would allow Al Babtain to cope with the new trends in power generation. Meanwhile, the company signed an SAR121.6mn contract with Elsewedy Electric (SWDY.EGX) during 2017 to supply galvanized transmission towers for the Upper Egypt electricity transmission line. This should help the company in benefiting from infrastructure development in Egypt, as the country strives to develop its transmission and distribution network to accommodate the new power capacity coming online through We note that Egypt is adding 14.4 gigawatts of power capacity over the period from 2016 through 2019, which will require intensive spending in the transmission and distribution projects. Ease in the Kingdom s austerity measured to spur demand for Al Babtain: In H1 2017, the KSA government has abandoned several austerity measures that were adopted in 2016 to control spending. Meanwhile, the government has approved a public spending of SAR978bn in 2018 budget, with an increase of 16% compared to the SAR840bn budgeted spending for the year 2016 that witnessed strong austerity measures. In the same context, the expected relative recovery in oil prices should help mitigate the financial pressure the kingdom has been witnessing. In the 2018 budget, a total of SAR54bn of spending was allocated to infrastructure (6% of total planned spending for the year); this is 38% higher than the SAR39bn that was allocated in the previous year. We view this as a demand booster for all of Al Babtain s business segments. High dividend payer: Al Babtain is a generous dividend payer, with an average payout ratio of 55% over the last three years. For 2016, the company paid a DPS of SAR2.00, implying a dividend yield of 8.6% (based on end-of-year stock price). With healthy cash flows, we expect cash dividends to grow in the future. Revenue (outer pie) and EBT (inner pie) contribution by segment High dividend payer 31% 15% 1% 19% 26% Structures and metal towers Outdoor lighting Integrated solutions 58% Head office 50% Source: Company reports Page 3

4 Forecast Assumptions Demand to recover across all business segments: Over , Al Babtain s revenues declined at a CAGR of 3.5% to SAR1.25bn, pulled mainly by lower Saudi Arabia sales which retreated at a CAGR of 2.8% over the same period. We forecast revenues to rebound at a CAGR of 3.7% over e to reach SAR1.55bn by Oil prices recovery and infrastructure spending key catalysts for demand in Saudi Arabia: Demand for Al Babtain s products is mainly driven by new mega projects and infrastructure spending. In the GCC, where oil is the driver of most economies, the drop of oil prices over the last period resulted in a slowdown in economic activity in the region, especially in Saudi Arabia. This slowdown had a negative effect on infrastructure spending by the KSA government and delayed the delivery of mega projects. The Council of Economic & Development Affairs (CEDA) had cancelled projects valued at up to SAR1tn (USD266.7bn). According to the IMF, the Saudi Gross Fixed Capital Formation (GFCF) is expected to grow at a 5-year CAGR ( ) of c.3.9% vs. 1% during the period, driven by a recovery in oil prices. Hence, we forecast revenues from Saudi Arabia to follow the same trend, growing at a 5-year CAGR ( ) of 3.9% and followed by 2% in Economic development and fixed capital investments to drive demand higher: Revenues from outside Saudi Arabia represented c.36% of total revenue in 2016, coming mainly from France, the UAE, Egypt, and Qatar. Over , the GFCF for France and the UAE are expected to grow at CAGRs of 3.1% and 5.2%, respectively, according to IMF estimates. Hence, we used the GFCF growth rates to forecast revenues from both countries across the same period (adjusting values to SAR using PPP), before growth rates slow to 2% by We also expect operations in Qatar to decline by 40% YoY in 2017 and to stabilize at this new low level due to the geopolitical instability across , and to grow by 2% in In Egypt, the floatation of the Egyptian pound late 2016 resulted in the local currency losing more than 50% of its value. The IMF forecasts that Egypt s GFCF will grow at a CAGR of 17% in EGP terms over We forecast that revenues will grow Revenue to grow at a CAGR of 3.7% at a CAGR of 6% over the same period (after adjusting values to SAR using PPP). Operating margins to ease to pre-2016 levels as commodity markets recover: Gross profit margin (GPM) expanded from 21% in 2013 to 29% in 2016, which we could attribute to the decline in commodity prices across In our forecasts, we assumed GPM to reach 27% in 2017, in line with the 9M 2017 results and averaging 26% over to account for higher commodity prices. We note that higher commodity prices result in a higher material cost and hence tighter margins. For example, lightning poles and transmission towers are produced from steel, so higher iron costs lead to lower margins. Lower debt burden, improved CCC, and higher profitability support healthy cash flows and a high payout: Al Babtain s cash dividends grew over a 3-year CAGR ( ) of 10%, to SAR2.00/share in 2016 compared to SAR1.5/share in This implied a payout ratio of 54% for 2016, which we could attribute to: 1. Higher profitability driven by the successful restructuring of the French subsidiary and improved operating margins due to the cost optimization strategy. 2. Leverage eased post 2013 due to a shorter cash conversion cycle (CCC), which dropped from 290 days in 2013 to 218 days in The debt/equity ratio followed suit, declining from 168% in 2013 to 60% in This led to an improved free cash flow to equity (FCFE), which increased from SAR49.7mn in 2014 to SAR81.2mn in With minimal cash flows required for investing activities, as we assume maintenance Capex of 2.7% of revenues, and an improved cash conversion cycle compared to average historical levels, we forecast payout ratio to average 63% between This would imply an expected annual dividend yield of 7.5% for Operating margins to hover around historical average Page 4

5 Forecast Assumptions (Cont. d) Free cash flow vs. net finance payments ROAE to remain attractive Leverage to ease on lower cash conversion cycle Capex to be limited to maintenance Page 5

6 Forecast Assumptions (Cont. d) 2015a 2016a 2017e 2018e 2019e 2020e 2021e 2022e CAGR Revenues SAR,000 1,551,837 1,248,778 1,213,467 1,294,835 1,362,559 1,438,608 1,518,125 1,548, % Growth rate -20% -3% 7% 5% 6% 6% 2% KSA SAR,000 1,092, , , , , , , , % Growth rate -27% 0% 5% 5% 5% 5% 2% % of total revenue 70% 64% 66% 65% 65% 64% 64% 64% Other countries SAR, , , , , , , , , % Growth rate -2% -8% 10% 6% 7% 7% 2% % of total revenue 30% 36% 34% 35% 35% 36% 36% 36% COGS SAR,000 1,138, , , ,902 1,013,265 1,069,819 1,128,952 1,151, % Growth rate -22% -1% 9% 5% 6% 6% 2% GP SAR, , , , , , , , , % GPM% 27% 29% 27% 26% 26% 26% 26% 26% SG&A % 11% 11% 11% 11% 11% 11% 11% 11% EBITDA SAR, , , , , , , , , % EBITDA % 17% 20% 18% 17% 17% 17% 17% 17% Growth rate -7% -9% -2% 5% 6% 6% 2% Depreciation expense SAR,000 70,981 47,123 56,157 55,695 51,955 49,234 47,387 46,272 Effective tax rate 8% 8% 9% 9% 9% 9% 9% 9% NOPLAT SAR, , , , , , , , , % Growth rate 5% -16% -3% 9% 9% 8% 3% Net Profit SAR, , , , , , , , , % NPM% 9% 13% 11% 11% 11% 12% 12% 12% Growth rate 19% -13% -1% 11% 10% 9% 4% Investment in working capital SAR,000 55, ,840 35,053 (54,974) (45,429) (50,473) (52,310) (20,244) Capex SAR,000 (44,617) (31,371) (32,994) (35,206) (37,047) (39,115) (41,277) (42,103) Source: Company reports, MubasherTradeResearch estimates Page 6

7 Cost of Equity (COE) Valuation We used both DCF and DDM valuation models to value Al Babtain Power & Telecom: DCF FV SAR37.40/share: We have built a two-stage forecasting model (a high-growth period through 2022, followed by a stablegrowth terminal period). We discounted free cash flows to the firm (FCFF) at a weighted average cost of capital (WACC) of 10.2%, resulting from an average cost of equity (COE) of 11.2% and an average aftertax cost of debt of 5.02%. We derived COE as follows: We generally use a variable COE, taking into account the salient risks attached with each annual cash flow. Since the cash flows generated by Al Babtain comes from five countries, we used a blended cost of equity (COE), taking into account the revenue breakdown by country. For each country of operations, we used the build-up method to reach COE, starting off with the risk-free rate of the US dollar then adjusting it for Saudi inflation differential and each country s risk premium. Beta: based on 5-year weekly data. Terminal growth rate (TGR): 2%. We arrived at a fair value of SAR37.40/share. DDM FV SAR33.79/share: We have built a two-stage forecasting model (a high-growth period through 2022, followed by a stablegrowth terminal period). We discounted the future dividends at an average cost of equity (COE) of 11.2%. We assumed an average payout ratio of 63% over and 89% for the terminal year. We achieved the terminal year payout ratio as follows: TGR: 2%. Return on equity (ROE): 17.8%. We derived the required reinvestment rate of 11%, achieving a payout ratio of 89% for the terminal year. We arrived at a fair value of SAR33.79/share. PT SAR35.59/share (+33%); position opened: Applying equal weights to both the DCF and the DDM valuation models, we reached a PT of SAR35.59/share, implying an upside potential of +33%. At our PT, Al Babtain s stock would be valued at 2018e P/E of 11.1x. We expect the stock to yield 7.5% based on an expected dividend payout of 62%. DCF valuation Economic profit analysis 2018e 2019e 2020e 2021e 2022e Terminal ROIC 12.9% 13.7% 14.5% 15.1% 15.1% 15.1% WACC 11.7% 9.4% 9.9% 10.1% 10.0% 10.0% Terminal growth rate 2.0% SAR,000 except per-share figures 2018e 2019e 2020e 2021e 2022e Terminal NOPLAT 145, , , , , ,007 Depreciation 55,695 51,955 49,234 47,387 46,272 Gross Cash Flow 201, , , , ,416 Change in Operating Working Capital (54,974) (45,429) (50,473) (52,310) (20,244) Capital Expenditures (35,206) (37,047) (39,115) (41,277) (42,103) Change in other operating assets Gross Investment (90,180) (82,476) (89,588) (93,587) (62,347) FCFF/TV 111, , , , ,069 2,144,426 Present value FCFF 99, ,760 99,350 95, ,958 1,319,561 DCF Enterprise Value 1,829,129 Less: (Net Debt)/Cash (371,624) Less: Potential claims (591) Less: Minority Interest (1,386) Add: Other Investments 138,674 DCF Equity Value 1,594,202 Number of Shares Outstanding 42,631 FV/share (SAR) Source: MubasherTrade Research estimates DDM valuation Discounted Dividends Valuation Model 2018e 2019e 2020e 2021e 2022e Terminal ROAE 16.5% 17.3% 17.9% 18.3% 17.8% Sustainable GR 2.0% Reinvestment rate 11% Payout ratio 62% 63% 63% 58% 67% 89% FCFE/share DPS paid during the year (SAR/share) DPS/FCFE % 109% 104% 106% 96% 71% Present Value Of Future Dividends Continuing Value Present Value of Continuing Value Value Per Share Source: MubasherTrade Research estimates Sensitivity of PT to TGR and COE Source: MubasherTrade Research estimates Page 7 Terminal Growth Rate (TGR) % 1.5% 2.0% 2.5% 3.0% +1% % Base Case % % How we reached our PT Method Price Target (SAR/sh.) Weight DCF % DDM % Weighted average Source: MubasherTrade Research estimates

8 Peers Analysis Mkt cap EBITDA Margin P/E EV/EBITDA PBV (USD mn) Country Company name Current Current Saudi Arabia Electrical Industries Co % 10.7% n/a n/a 21.7x 21.6x n/a n/a 17.6x 16.3x 12.9x n/a n/a 9.8x 2.5x 1.7x n/a n/a Egypt Elsewedy Electric Co 1, % 17.1% 16.6% 14.6% 6.6x 4.3x 6.3x 7.7x 5.4x 5.1x 4.7x 4.7x 5.4x 5.1x 1.3x 1.5x 2.2x 1.9x Oman Voltamp Energy SAOG % 12.4% n/a n/a 7.8x 8.2x n/a n/a 9.9x 6.9x 7.1x n/a n/a 8.1x 1.3x 1.4x n/a n/a Tunisia Accumulateur Tunisienne Assad % 16.3% 18.5% 18.7% n/a 48.7x 23.7x 22.5x 72.5x 11.9x 7.5x 7.8x 7.3x 9.7x 1.6x 1.7x n/a n/a Egypt El Nasr Transformers and Elect % 10.4% n/a n/a 12.4x 8.7x n/a n/a 20.5x 15.2x 8.7x n/a n/a 11.9x 0.6x 0.8x n/a n/a Saudi Arabia Al Babtain Power & MTR PT % 20% 18% 17% 8.7x 6.2x 11.0x 11.1x 9.8x 7.1x 6.0x 8.6x 8.7x n/a 1.7x 1.3x 1.9x 1.8x Saudi Arabia Al Babtain Power & Market price % 20% 18% 17% 8.7x 6.2x 8.2x 8.3x 7.4x 7.1x 6.0x 6.9x 7.0x n/a 1.7x 1.3x 1.4x 1.3x Regional Peers' Average 11% 13% 18% 17% 12.1x 18.3x 15.0x 15.1x 25.2x 11.1x 8.2x 6.3x 6.4x 8.9x 1.5x 1.4x 2.2x 1.9x Regional Peers' Median 12% 12% 18% 17% 10.1x 8.7x 15.0x 15.1x 17.6x 11.9x 7.5x 6.3x 6.4x 9.7x 1.3x 1.5x 2.2x 1.9x Note: Prices as of 3 January Source: MubasherTrade Research estimates, Bloomberg Comparable analysis: Given the diverse nature of businesses that the lightening poles and structures metal and towers suppliers have, we opted not to conduct a relative valuation for Al Babtain with its peers. As most of those peers business models are not the same with Al Babtain, hence we used capital goods suppliers in the MENA region to measure the performance of Al Babtain compared to its competitors in the region. We can notice that the historical margins and current multiples are attractive relative to peers, which reflect the company s efficiency and strong performance. Page 8

9 Financial Summary Balance Sheet (SAR,000) Per-Share Data FY End: December 2014a 2015a 2016a 2017e 2018e 2019e 2014a 2015a 2016a 2017e 2018e 2019e Current Assets Price Cash & Cash Equivalent 80,539 72, , , , ,185 # Shares (WA, in mn) 42,631 42,631 42,631 42,631 42,631 42,631 Accounts & Notes Receivable 408, , , , , ,683 EPS Other Current Assets 825, , , , , ,991 DPS Total Current Assets 1,313,816 1,189,380 1,095,499 1,088,395 1,158,245 1,211,859 BVPS Fixed Assets (net) 370, , , , , ,725 Other Non-Current Assets 142, , , , , ,674 Valuation Indicators Net Intangibles 29,814 26,406 23,540 23,540 23,540 23, a 2015a 2016a 2017e 2018e 2019e Total Assets 1,856,728 1,698,496 1,585,997 1,555,730 1,605,092 1,643,798 PER (x) 12.3x 8.7x 6.2x 8.2x 8.3x 7.5x Liabilities & Equity PBV (x) 1.7x 1.7x 1.3x 1.4x 1.3x 1.3x Short-Term Debt 417, , , , , ,336 EV/Sales (x) 1.3x 1.2x 1.2x 1.2x 1.2x 1.1x Current Portion of LT Debt 138, , ,460 42,406 42,406 42,406 EV/EBITDA 7.9x 7.1x 6.0x 6.9x 7.0x 6.5x Accounts Payable 87,929 66,470 89,656 88,732 96, ,747 Dividend Payout Ratio 47.9% 64.2% 53.7% 61.6% 62.3% 63.0% Other Current Liabilities 169, , , , , ,625 Dividend Yield 3.9% 7.3% 8.6% 7.5% 7.5% 8.4% Total Current Liabilities 813, , , , , ,113 Long-Term Debt 318, ,028 60, ,217 84,811 42,406 Profitability & Growth Ratios Other Non-Current Liabilities 73,468 78,563 80,918 81,212 80,534 79, a 2015a 2016a 2017e 2018e 2019e Total Liabilities 1,204, , , , , ,488 Minority Interest 1,312 1,225 1,326 1,386 1,446 1,512 Revenue Growth 7.0% 4.4% (19.5%) (2.8%) 6.7% 5.2% Total Equity 651, , , , , ,310 EBITDA Growth 43.4% 5.7% (7.0%) (9.4%) (2.4%) 5.2% Total Liabilities & Equity 1,856,728 1,698,496 1,585,997 1,555,730 1,605,092 1,643,798 Net Income Growth (20.0%) 50.2% 19.7% (12.7%) (1.2%) 11.2% EBITDA Margin 16.7% 16.9% 19.5% 18.2% 16.6% 16.6% Income Statement (SAR,000) Net Margin 6.0% 8.6% 12.7% 11.4% 10.6% 11.2% 2014a 2015a 2016a 2017e 2018e 2019e ROAE 14.1% 19.7% 21.5% 17.6% 16.5% 17.3% Total Revenue 1,486,283 1,551,837 1,248,778 1,213,467 1,294,835 1,362,559 ROAA 4.6% 7.5% 9.7% 8.8% 8.7% 9.4% COGS (1,094,121) (1,138,249) (892,853) (883,652) (962,902) (1,013,265) Gross Profit 392, , , , , ,294 Liquidity & Solvency Multiples Other operating (exp.)/ Inc. (144,129) (151,465) (112,137) (109,038) (116,350) (122,435) 2014a 2015a 2016a 2017e 2018e 2019e EBITDA 248, , , , , ,858 D&A, Others (55,696) (39,831) (31,727) (43,679) (43,370) (39,141) Net Debt/(Cash) 874, , , , , ,437 Net finance exp., taxes (49,723) (49,503) (39,878) (38,535) (35,256) (35,377) Net Debt/Equity 134.1% 101.0% 59.5% 46.2% 41.8% 36.7% NP Before XO & MI 142, , , , , ,341 Net debt to EBITDA 3.5x 2.7x 1.9x 1.7x 1.7x 1.5x XO & Minority Interest (53,634) (39,969) (13,545) (60) (60) (66) Debt to Assets 47.1% 41.7% 29.0% 26.0% 23.6% 21.3% Net Income 88, , , , , ,275 Current ratio 1.6x 1.7x 1.6x 2.0x 2.0x 2.0x Cash Flow Statement (SAR,000) Consensus Estimates 2015a 2016a 2017e 2018e 2019e 2017e 2018e 2019e Revenues NA NA NA Cash from Operating 323, , , , ,173 MubasherTrade Research vs. Consensus NA NA NA Cash from Investing (40,852) (25,469) (20,515) (22,882) (24,233) Net Income NA NA NA Cash from Financing (282,697) (357,743) (190,304) (133,486) (147,730) MubasherTrade Research vs. Consensus NA NA NA Net Change in Cash ,201 (9,701) (5,790) Fwd PER (x), Last Price Fwd PER (x), Price Target Capex (44,617) (31,371) (32,994) (35,206) (37,047) Fwd DY (%), Last price 7.5% 7.5% 8.4% Source: Company data, MubasherTrade Research estimates a = Actual; e = Estimate Share price at 4-Jan-18 Page 9

10 Investment Rating Disclosure Appendix Important Disclosures METHODOLOGY: We strive to search for the best businesses that trade at the lowest valuation levels as measured by an issuer s intrinsic value on a per-share basis. In doing so, we follow both topdown and bottom-up approaches. Under the top-down approach, we attempt to study the most important quantitative and qualitative factors that we believe can affect a security's value, including macroeconomic, sector-specific, and company-specific factors. Under the bottom-up approach, we focus on the analysis of individual stocks by running our proprietary scoring model, including valuation, financial performance, sentiment, trading, risk, and value creation. COUNTRY MACRO RATINGS: We analyze the four main sectors of a country s macroeconomics, then we assign,, and star for low risk, moderate risk, and high risk, respectively. We use different weights for each economic sector: (a) Real Sector (30% weight), (b) Monetary Sector (10% weight), (c) Fiscal Sector (25% weight), (d) External Sector (15% weight), and (e) Credit Rating and Outlook (20%). STOCK MARKET RATINGS: We compare our year-end price targets for the subject market index on a total-return basis versus our calculated required rate of return (RRR). Taking into account our Country Macro Rating, we set the Neutral borderline (below which is Underweight ) as 20% of RRR for Country Macro Rating, 40% of RRR for Country Macro Rating, and 60% of RRR for Country Macro Rating. That said, our index price targets are based on the average of two models. Model (1): Estimated index levels based on consensus price targets of all index constituents. Stocks with no price targets are valued at market price. Model (2): Estimated index levels based on our expected re-pricing (whether re-rating, de-rating, or unchanged rating) of the forward price-earnings ratio (PER) of each index in addition to consensus earnings growth for the forward year. SECTOR RATINGS: On the sectors level, we focus on six major sectors, namely (1) Consumer and Health Care, (2) Financials, (3) Industrials, Energy, & Utilities, (4) Materials, (5) Real Estate, and (6) Telecom Services & IT. To assess each sector, we use the SWOT analysis to list the strengths, weaknesses, opportunities, and threats in each country. We then translate our qualitative SWOT analysis into a quantitative model to evaluate all six sectors across countries. Each of the measures we used, although mostly subjective, is assigned a score as either +1 (high impact), 0 (medium impact), or -1 (low impact). At a later stage, when assigning the final rating Overweight, Neutral, or Underweight for each sector in each country, we realize that sometimes it is unfair to assign equal weights for the sub-sectors in each major sector assessed. Hence, some of the sub-sectors are given different weights for their significant profile in each country. Additionally, the final rating for each sector in each specific country is assigned based on a relative calculation comparing this sector to all other sectors in this country. SECURITY INVESTMENT RATINGS: We combine intrinsic value, relative valuation, and market sentiment into a single rating. Our three-pronged methodology involves (1) discounted cash flows DCF valuation model(s), (2) relative valuation metrics, and (3) overall sentiment. Whenever possible we attempt to apply all three aspects on the issuers or securities under review. In certain cases where we do not have our own financial and valuation models, we attempt to scan the market for other analysts value estimates and ratings (i.e. consensus view) on average. We compliment this with relative valuation and sentiment drivers, such as positive/neutral/negative news flows. For all issuers/securities covered, we have three investment ratings (Buy, Hold, or Sell), comparing the security s expected total return (including both price performance and expected cash dividend) over a 12-month period versus its Required Rate of Return RRR as calculated using the Capital Asset Pricing Model CAPM and adjusted for the Risk Rating we attach to each security. Our price targets are subjective and are estimates of the analysts where the securities covered will trade within the next 12 months. Price targets can be derived from earnings-based valuation models (e.g. Discounted Cash Flow DCF ), asset-based valuation models (e.g. Net Asset Value NAV ), relative valuation multiples (e.g. PER, PBV, EV/EBITDA, etc.), or a combination of them. In case we do not have our own valuation model, we use a weighted average of market consensus price targets andratings. We review the investment ratings periodically orasthe situation necessitates. SECURITY RISK RATINGS: We assess the risk profile of each issuer/security covered and assign one of three risk ratings (High, Moderate, or Low). The risk rating is weighted to reflect different aspects specific to (1) the sector, (2) the issuer, (3) the security under review, and (4) volatility versus the market (as measure by beta) and versus the security s average annualized standard deviation. We review the risk ratings at least annually or as the situation necessitates. Other Disclosures MFS does not have any proprietary holding in any securities. Only as a nominee, MFS holds shares on behalf of its clients through Omnibus accounts. MFS is not currently a market maker for any listed securities. If Total Return is Buy (B) Hold (H) Sell (S) Not Rated (NR) Not Covered (NC) Low (1) Moderate (2) High (3) Higher than RRR Higher than RRR Higher than RRR Between RRR and 20% of RRR Lower than 20% of RRR Risk Rating Between RRR and 40% of RRR Lower than 40% of RRR Between RRR and 60% of RRR Lower than 60% of RRR We have decided not to publish a rating on the stock due to certain circumstances related to the company (i.e. special situations). We do not currently cover this stock or we are restricted from coverage for regulatory reasons.

11 Analyst Certification I (we), AbdelRahman Sobhy Wahba, Equity Analyst, employed with Mubasher International, a company under the National Technology Group of Saudi Arabia being a shareholder of Mubasher Financial Services BSC (c) and author(s) to this report, hereby certify that all the views expressed in this research report accurately reflect my (our) views about the subject issuer(s) or security(ies). I (we) also certify that no part of my (our) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed in this report. Also, I (we) certify that neither myself (ourselves) nor anyof my (our) close relatives hold or trade into the subject securities. Head of Research Certification I, Amr Hussein Elalfy, Global Head of Research of Mubasher Financial Services BSC (c) confirm that I have vetted the information, and all the views expressed by the Analyst in this research report about the subject issuer(s) or security(ies). I also certify that the author(s) of this report, has (have) not received any compensation directly related to the contents of the Report. Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Mubasher Financial Services BSC (c) ( MFS ) has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; MFS makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the document are based upon publicly available information at the time of publication and are subject to change without notice. This document is not intended for all recipients and may not be suitable for all investors. Securities described in this document are not available for sale in all jurisdictions or to certain category of investors. The document is not substitution for independent judgment by any recipient who should evaluate investment risks. Additionally, investors must regard this document as providing stand-alone analysis and should not expect continuing analysis or additional documents relating to the issuers and/or securities mentioned herein. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. References to ratings/recommendations are for informational purposes only and do not imply that MFS adopts, supports or confirms in any way the ratings/recommendations, opinions or conclusions of the analysts. This document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MFS or its affiliates to any registration or licensing requirements within such jurisdiction. MFS accepts no liability for any direct, indirect, or consequential damages or losses incurred by third parties including its clients from any use of this document or its contents. Copyright Copyright 2018, Mubasher Financial Services BSC (MFS), ALL RIGHTS RESERVED. No part or excerpt of this document may be redistributed, reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of MFS. MubasherTrade is a trademark of Mubasher Financial Services BSC. Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain. Issuer of Report Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated bythe Central Bank of Bahrain. Website: Research@MubasherTrade.com

12 Sales & Research Contact Details INSTITUTIONAL SALES RETAIL SALES RESEARCH MENA Bahrain UAE Research Team Call Center: Call Center: Egypt Egypt Institutions-Egy@Mubasher.net Egypt@MubasherTrade.com Call Center: /