Saudi Outlook January 2013

Transcription

1 Saudi Outlook January 213 Al Rajhi Capital Head Office, King Fahd Road, 5561, Riyadh 11432, Kingdom of Saudi Arabia Toll Free: customerservice@alrajhi-capital.com URL:

2 Saudi Outlook All Sectors Saudi Arabia 8 January 213 January 18, 21 US$ 175.bn 37.6% US$246.4mn Market cap Free float Avg. daily volume Target mkt cap SAR755.bn 15.1%over current Consensus mkt cap SAR76.7bn 15.9% over current Current mkt cap SAR656.2bn as at 6/1/213 Research Department ARC Research Team Tel , research@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes We expect TASI to continue its march in 213 despite global economic concerns. The export oriented petrochemicals sector could be under pressure, however banking sector will show modest credit growth. We expect the domestic oriented sectors to do well on favorable demand scenario. Further, select stocks from petrochemical sector are expected to perform well in 213. Implications We like SABIC and NIC for their diversified offerings, while we pick Savola for its exposure to the lucrative retail business. In telecoms, we prefer Mobily on strong revenue visibility. From the smaller companies, we pick Extra, Shaker, Astra and Saudi Catering. We are also positive on materials companies like Ma aden and Arabian Cement for their strong growth outlook. Al Rajhi s Top picks Stock Rating Price Target SABIC Overweight SAR11. NIC Overweight SAR4.5 Mobily Overweight SAR88.7 Extra Overweight SAR123.5 Savola Overweight SAR49.1 Shaker Overweight SAR83.5 Saudi Catering Overweight SAR91. Ma aden Overweight SAR37. Arabian Cement Overweight SAR65. Astra Overweight SAR46.2 Why do we think it? Stock 3 year EBITDA CAGR* 213 EV/EBITDA SABIC 5.8% 6.8x NIC 21.1% 6.5x Mobily 1.1% 6.1x Extra 12.4% 11.6x Savola 1.5% 13.1x Saudi Catering 15.7% 8.4x Ma aden 33.1% 15.8x Arabian Cement 9.5% 5.9x Astra 34.3% 9.x * Saudi Outlook - 213: Look out for the bright spots Given the fragile economic fundamentals across the globe - slow US recovery and possibility of re-emergence of Eurozone debt crisis - we are cautiously positive on performance of TASI in 213. With potential weakness in major sectors like petrochemicals and banking, overall volumes could be lower in 213 as compared to 212. Hence, picking the right stocks will be crucial for return maximization. We continue to remain bullish on domestic demand driven sectors like food, retail and cement, while we also like a few selected stocks from petrochemical sector. Though, we expect TASI might be lackluster in 213, investment opportunities still exist aplenty especially in the domestic demand driven sectors. Weak global environment to pull down exports: The global economic environment deteriorated in 212 with Eurozone debt crisis spreading to larger European countries like Spain and Italy and weaker growth projections for China and India. Further, the potential US fiscal cliff (partially resolved) also weighed on the global recovery. With little demand recovery in sight, we believe Saudi exports (especially petrochemicals) to be under pressure in 213. Demographics favor domestic sectors: As compared to export oriented sectors, sectors focusing on the domestic market like food, retail, cement and telecoms are expected to do much better on favorable demographics and rising income levels. From the sector performance over the last two years, we can see that domestic demand driven sectors have done considerably well. We expect this story to repeat in 213 as well. Stock picking remains the key: With the broader index expected to remain sluggish next year due to pressure on larger sectors such as petrochemicals and banking, stock picking will be crucial for return maximization. We believe there are enough opportunities, especially in small to mid-size companies if chosen wisely. We feel that the investors will be cautious on petrochemical and banking sectors in the near term and will opt for domestic demand driven stocks. Interesting stories for 213: We are targeting a number of companies, which seem attractive both in terms of supply demand dynamics and business model. These are relatively smaller companies mainly focused on domestic demand like Al Mouwasat (leader in health care), Al Drees (largest fuel retailer), Halwani (an established brand in the food sector), Al Tayyar (the largest travel company in the Kingdom) and Yanbu Cement (one of the largest domestic cement companies). We will closely monitor these stocks in 213. Al Rajhi Capital s top picks for 213: We continue to remain Overweight on SABIC and NIC, from the petrochemical sector for their diversified portfolio and depressed valuations. In the telecom sector, we like Mobily for its aggressive growth strategy and sound dividend policy. In the food sector, we are bullish on Savola, especially its domestic retail business whose efficiency is improving. We also like Saudi Airline Catering for its exposure to the niche airline catering market. Among small and mid-size sectors, we are positive on Extra for its aggressive expansion plans. We also remain positive on Ma aden as it will benefit from its entry into the phosphate and aluminum businesses, while Arabian Cement excels from its proximity to the thriving western region. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

3 Saudi Outlook All Sectors 8 January 213 Table of Contents ARC Coverage Universe...3 Global economy: Recovery painfully slow...4 Saudi Economic outlook: Remains on solid base...6 Saudi Stock Market: Stock picking remains the key ARC recommendations and top picks Sector profiles... 2 Petrochemicals... 2 Telecom Food & Agriculture Retail Cement Company profiles Ma aden Saudi Ceramic Astra Shaker Interesting ideas Al Drees Petroleum and Transport Services Al Mouwasat Medical Services Al Tayyar Travel Group Eastern Province Cement Company... 5 Halwani Bros National Shipping Company Saudi Dairy & Foodstuff Co Takween Advanced Industries Yanbu Cement... 6 Disclosures Please refer to the important disclosures at the back of this report. 2

4 Saudi Outlook All Sectors 8 January 213 Al Rajhi Capital s Coverage Universe We currently cover 29 companies in the Saudi market, which encompasses about 52% of the total market capitalization of TASI. We cover all the market leaders in their respective sectors. We do not cover banking and insurance stocks as most of them do not match with Al Rajhi Capital s (ARC s) Shariah compatibility. We also do not cover real-estate and energy & utilities sectors yet. Please find below the list of our recommendations and key theme on each company. Figure 1 ARC Coverage Universe Company Petrochemicals Rating Target price (SAR) Current price (SAR) Upside Potential (%) Key Theme SABIC Overweight % Largest listed company, well diversified portfolio Sipchem Overweight Exposure to methanol, excellent operating rates SAFCO Overweight % Exposure to fertilizers, support from parent, SABIC NIC Overweight % Diversified portfolio with exposure to TiO2, healthy operating history Yansab Neutral Focus on basic olefins, weakness in product prices APC Neutral % Portfolio concentrated to polypropylene, weak operating history Sahara Neutral % Focus on polypropylene, operations to commence in many plants Saudi Kayan N/A N/A 12.8 N/A Loss making for the last few quarters, utilization rates are low PetroRabigh N/A N/A 18.2 N/A Refining margins are negative, very low profitability Telecom STC Overweight % Mobily Overweight % Zain Neutral STC remains a strong long term story and with domestic market reaching a saturation point, the company s international businesses provide new growth avenues. Mobily is the most consistent telecoms player in the Saudi market, achieving double digit growth in bottom-line for the last four consecutive quarters. Dividend too remain a big trigger for the company. Despite the recent capital restructuring, Zain continues reel under the pressure of its huge outstanding debt. Agri & Food Almarai Neutral % Dominant dairy supplier, diversifying into poultry and infant food Leading sugar and edible oil supplier in the MENA region. Retail segment Savola Overweight % (super and hypermarkets) are improving substantially Herfy Neutral % Growing fast food chain in Saudi, diversifying into bakery & meat processing Saudi Catering Overweight % Leading in flight caterer in Saudi Arabia Retail Jarir Neutral Reputed retailer for stationeries, office supplies and electronics Extra Overweight % Fast growing retailer of electronics and home appliance in Saudi Arabia Alothaim Overweight % Retail store operator providing value for money in the Kingdom Alhokair Overweight % Apparel retailer selling a large number of reputed international brands Industrial Maaden Overweight % We remain bullish on Ma'aden which is diversifying into phosphate and aluminium. Shaker Overweight % Market leader in the growing AC market in the Kingdom, growing exports Astra Overweight % Company with pharma & chemicals business, now investing into steel Saudi Ceramic Overweight % Leading ceramic manufacturers in the region, healthy project pipeline Cement Yamama Cement Overweight % Arabian Cement Overweight % Saudi Cement Neutral % Jouf Cement Overweight % Qassim Cement Neutral % Source: ARC Research Yamama Cement is one of the most profitable companies in the Saudi cement industry, backed by cheap fuel and low transportation costs owing to its proximity to Riyadh and being close to infrastructure projects. Arabian Cement has maintained high utilization rates, on the back of the massive construction and cement demand in the western region. One of the aggressive players in the market, which supplies to Bahrain, Central region and also sell clinker to other players in the market. One of newly listed companies in the market, Al Jouf is on the verge of expanding its capacity with a new production line. Qassim Cement have already achieved full capacity and thus limiting its future growth. The dividend yield stands at an attractive 7%. Disclosures Please refer to the important disclosures at the back of this report. 3

5 Saudi Outlook All Sectors 8 January 213 Global economy: Recovery painfully slow Global growth is expected to improve marginally amid uneven growth geographically Uncertainty remains amid positive signals Although there has been positive sentiments created by a temporary resolution of fiscal cliff and improvement in economic data specifically from the US and China, global economic recovery is expected to be sluggish in the current year. International Monetary Fund expects the global growth to improve slightly from an estimated 3.3% in 212 to 3.6% in 213. Moreover, the global growth is likely to be uneven geographically. On the one hand, US indicators have been positive and Chinese data show turn around. On the other hand, indicators in Euro Area remain depressed and data in the UK and Japan barely reflect any improvement. Moreover, recovery in large emerging economies also expected to remain slow. Having said this, the global economic outlook still faces risk from partially resolved fiscal cliff and debt ceiling issue in the US and the possibility of re-emergence of Euro debt problem as recession hit countries find it difficult to achieve fiscal consolidation targets. Figure 2 Slow improvement in economic growth is expected this year 1. % Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212E Q1 213E Q2 213E Q3 213E Q4 213E US Euro Area China India Global Source: Bloomberg, Al Rajhi Capital Labor market and housing sector data reflect improvement in the US economy US and Chinese economies look better As stated above, the global economic sentiments got boost from a temporary resolution of fiscal cliff in the US amid improving economic data points. The tax increase has been averted for people earning upto US$45, a year and spending cut has been deferred for another two months in the US. Moreover, economic data in the last couple of months reflect decent improvement in the job market and recovery in the housing sector. Improvement in job market has been supporting consumer spending sustain. Investment sentiment is also likely to revive slowly with partial resolution of fiscal cliff. However, the economy still faces risk from final outcome of spending cut negotiation and debt ceiling issue in the near term. Figure 3 Slow improvement in Job market in the US Figure 4 Gentle turn around in Chinese indicators Thousand % Index PMI above 5 reflects expansion whereas below 5 contraction Signs of recovery YoY % Change in nonfarm payroll Unemployment rate-rhs PMI manufacturing Industrial production-rhs Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4

6 Saudi Outlook All Sectors 8 January 213 Economic indicators have turned around in China in recent months Euro Area remain under recession amid clouded outlook whereas growth in the UK and Japan is expected to be sluggish Monetary policy has been a critical support in the post crisis era which is likely to continue its support with ultra easy policy Economic data point gentle turn around in China as well- the second largest economy. With the completion of the once-a-decade leadership transition, focus is back on reviving the economy, which recorded its slowest growth in the third quarter since early 29. Economic data emerging from the country has been positive with accelerating factory output and retail sales. The country s factory output rose 1.1% YoY in November (highest level since March 212), while retail sales jumped 14.9% YoY. We expect that Chinese economy is bottoming out, as its manufacturing and non-manufacturing PMI moved above 5 mark in November and December. However, the recovery is likely to be slow as the developed economies, which are its major export markets, are struggling to revive growth. Other developed countries struggling On the other hand, many other large developed economies Euro Area, the UK and Japan are struggling to get back to the growth path. Euro Area economy remains in recession and sentiments, though improved, remain subdued. PMI manufacturing and services indices have improved in recent months but remain below 5 mark reflecting contraction. The UK economy was in the recession in H The growth turned positive at.9% QoQ in the third quarter supported by Olympic related spending. However, revival is expected to be muted. Japanese economic outlook sharply deteriorated in the second half of 212 as third quarter growth turned negative at -.9% QoQ. Tankan survey indices for the fourth quarter have further deteriorated. Monetary policy support An important factor which has played a critical role in the post economic crisis period is monetary policy support from central banks. Each time when growth has slowed or risk in the financial system has risen, central banks in major economies have pitched in with monetary stimulus to support the growth and contain the risk. Federal Reserve s balance sheet has expanded to US$2.9 trillion (around 2 of GDP) by Mid December 212 from around US$9 billion (around 6% of GDP) in Sep 28. Similarly, balance sheets of Bank of England (BoE) and Bank of Japan (BoJ) have grown during the period. European Central bank has also provided large amount of liquidity through various programs including LTRO through which it injected more than EUR1 trillion into banking system. It also has plans to purchase sovereign bonds from troubled countries in the Euro Area. Federal Reserve and BoJ continue to provide additional monetary stimulus. Fed will purchase US$85 billion worth of mortgage and Treasury securities per month until there is satisfactorily improvement in job market and overall economy. Thus, in a year time, Fed will infuse more than a trillion dollar into the financial system. Bank of Japan is also committed to providing as much support possible through monetary stimulus especially after Liberal Democratic Party victory recently. Immediately after the election results, BoJ added JPY1 trillion to its asset purchase program on 2th December. Partially resolved fiscal cliff and debt ceiling issue and possibility of re-emergence of Euro debt crisis are main risks global economy faces in 213 Broader risks remain The partially resolved US fiscal cliff and the debt ceiling issues remain major concerns for the global economic outlook in the near term. Only tax part of the issue has been resolved and spending cut part has been deferred for two months. Moreover, the country is expected to touch the debt ceiling in another couple of months which needs a permanent resolution rather than deferring the issue. Another risk Euro Area sovereign debt problem which seems to be moving into right direction- has potential to come back. The troubled countries especially Spain is yet to make formal request to ECB for using the central bank s Outright Monetary Transaction option so that the central bank could purchase Spanish government bond directly. Moreover, weaker economic outlook for the area for next year is another negative which would make it difficult for troubled countries to achieve their fiscal consolidation targets. Having said that, we would underline that the severity of the problem has been blunted by actions from the ECB. Disclosures Please refer to the important disclosures at the back of this report. 5

7 Saudi Outlook All Sectors 8 January 213 Saudi economic outlook: Remains on solid base Deliberate efforts for diversification away from oil industry have helped growth in non-oil sectors Oil sector remains crucial as it constitutes more than half of the nominal GDP Over a decade of strong performance and government s conscious efforts towards diversification, Saudi economy has acquired a solid base. The resource generated in the oil sector has been wisely utilized to create a base for non-oil sector. The average growth in the non-oil sector has been almost double in the last one decade compared to the growth in the previous decade. Government efforts to create infrastructure has boosted construction sector while diversification effort has supported manufacturing sector. Rising income and consumption in the country have resulted into solid growth in sectors such as trade, transport, storage and communication. The same factors remain supportive to our outlook as we expect continuous growth in the government spending, rising income and favorable demography. Moreover, stable inflationary situation, easy monetary policy and accelerating credit growth are likely to keep the growth on solid ground. In the near to medium term, unfavorable movement in oil prices is unlikely to have any significant impact on the outlook. However, in the longer term oil sector is still critical as it remains main source of government revenue and export items besides constituting half of the nominal GDP. Oil sector still crucial The Saudi economy remains highly dependent on oil revenue as oil sector constitutes half of the nominal GDP and overwhelming proportion of export and government revenue comes from the sector. The importance of the sector has grown even more over the last decade as share of oil sector has moved up from 37% to above 5 in nominal GDP. It continues to be above 5 since 25 except 29 when crude prices and domestic production in Saudi Arabia had crashed in wake of global economic crisis. However, since then crude production has recovered and average prices have remained at high levels especially since 21. Growth in the sector has been robust over the last three years. However, we see moderation in 213 mainly due to high base. Figure 5 Oil sector remains the backbone of the economy 6 55% 5 45% 4 35% E 213F Share of oil sector in nominal GDP Growth in oil sector-rhs Source: CDSI, Al Rajhi Capital Oil revenue constitutes 9 of the government s total revenue Government spending remains important support to the economy Government spending supportive to growth but depends on oil Government revenue is highly dependent on the oil sector as oil revenue constitutes almost 9 of the total revenue. As we see in the chart below, the proportion has grown over the last decade from 78% in 22 to around 9 in 211. Non-oil revenue was just 15% of the government s total expenditure in 211. The non-oil revenue has averaged around 18% of the government s total expenditure over the last decade. On the other side, government expenditure has been strong support to the steady economic growth over the last one decade. Total expenditure has grown almost 3 times between 22 and 211. Moreover, the capital expenditure has grown almost 1 times during the same period. The sharp rise in capital expenditure reflects government commitment towards Disclosures Please refer to the important disclosures at the back of this report. 6

8 Saudi Outlook All Sectors 8 January 213 creating infrastructure and adding to the productive capacity of the economy. The total expenditure has been estimated at record high level of SAR853bn in 212. The government has budgeted SAR81bn spending in 213. Robust fiscal situation in the country with the lowest public debt to GDP ratio (3.6%) in the G2 countries provides strong counter cyclical support to the economy. Even in low oil prices scenario government has potential to spend. We expect total expenditure to continue to rise in 213 with higher growth in capital expenditure. Figure 6 Share of oil revenue remains high Figure 7 Capital expenditure has grown faster 1,4, 1,2, SAR million 92% 9 88% 7, 6, SAR million 35% 3 1,, 8, 86% 84% 82% 5, 4, 25% 2 6, 4, 2, 8 78% 76% 74% 72% 3, 2, 1, 15% 1 5% 7 Total revenue Total expenditure Share of oil revenue in total revenue-rhs Current expenditure Capital expenditure Share of capital expenditure-rhs Source: CDSI, Al Rajhi Capital Source: CDSI, Al Rajhi Capital Export revenue has provided a solid strength to external sector Export remains dominated by oil The dominance of oil in export can be gauged by the fact that it constituted 85%-9 of total export of the country in the last decade. It is likely to continue to be the main export item in the foreseeable future. Having said that, export revenue has provided a solid strength to the external sector with large trade and current account surpluses. Trade surplus has averaged 32% of GDP per year since 21. The large surplus has resulted into high current account surplus even as the country has deficit in service account and net outflow of remittance in excess of SAR1bn. The consistent external account surplus has resulted into accumulation of foreign reserves which has reached SAR2,385bn at the end of October 212. However, non-oil export has also witnessed robust growth over the last decade on the back of government effort to diversify the economy away from oil. The average growth in non-oil export has been around 2 per year since 21 which is slightly higher than the average growth in the oil export. This is the reason we see marginal dip in oil share in the total export. Figure 8 Crude oil remains main export item 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, SAR million E 213F 91% 9 89% 88% 87% 86% 85% 84% 83% 82% Export Share of oil in total export Source: CDSI, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7

9 Saudi Outlook All Sectors 8 January 213 Over the last decade non-oil sector has grown in importance which provides a solid base to the economy Non-oil sector provides solid base Notwithstanding the critical importance of oil sector in the Saudi economy, non-oil sector has grown in importance with steady growth over the last decade. The government s effort to diversify the economy away from oil has further helped the sector to grow at solid rate during the period. The average annual growth has been around 4.6% since 21 which is significantly higher compared to average annual growth of 2.8% in the previous decade. The drop in non-oil private sector growth during economic crisis was well supported by the pickup in non-oil government sector growth. Figure 9 Non-oil private and government sectors have been complementing each other over the last decade F 213F Non-oil private sector Non-oil government sector Source: CDSI, Al Rajhi Capital Many sub-sectors have outperformed over the last decade Diversification effort by the government supported manufacturing Although the growth in non-oil sector has been broad based over the last one decade, construction, trade and hotels and transport, storage and communication sub-sectors have outperformed. The average annual growth in construction sub-sector has been 5.3% with pick in the recent years as the growth was 7.8% in 21 and 11.6% in 211. In the backdrop of large pipeline investment from the government in creating physical infrastructure, we believe that the sector is likely to continue out perform in coming years as well. Another non-oil subsector which has grown above the average growth of the non-oil sector over the last one decade is Wholesale and Retail trade, Restaurant and Hotels. The average annual growth has been 5.3% in the sub-sector. The outperformance in likely to continue in medium term for demography being supportive and income has been rising. Another related sub-sector, Transport, Storage and Communication, has grown at robust 8.6% annually since the beginning of the last decade. The strong growth has increased its share in real GDP from 4.9% in 21 to 7.6% in 211, equal to construction sub-sector s share. Moreover, government targeted efforts towards diversification of the economy and promoting industrialization have resulted into strong growth in manufacturing as well. The average growth in the sub-sector has been 5.9% annually in the last one decade. The outlook for the sector remains positive as rising non-oil export indicates strong demand for products. However, the sector performance also hinges upon global economic outlook. Figure 1 Sub-sectors of non-oil sector Figure 11 Sub-sectors of non-oil sector 14% 12% 1 14% 12% 1 8% 8% 6% 6% 4% 4% 2% 2% Construction Trade and hotels Transport, storage & communication Manufacturing Finance, Insurance etc Source: CDSI, Al Rajhi Capital Source: CDSI, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 8

10 Saudi Outlook All Sectors 8 January 213 Fundamental factors such as rising income, government spending and demography remain supportive to the medium term outlook Growing population and income levels support to growth momentum Fundamental factors such as demography, rising income levels and government commitment to build infrastructure and diversify the economy away from oil sector are main drivers of growth in the next many years to come. The per capita income has more than doubled from US$8,724 in 21 to US$2,332 in 211. The per capita growth has been robust even as population growth was high. Demography is supportive to growth as 68% population is in the age between 15 years and 64 years. The age group is considered the productive age group which contributes in production side as well as consumption side. Moreover, almost 29% population lies in the age between years and 14 years who will continue to enter the productive age group over the next many years. Figure 12 Population growth and rising income Figure 13 Saudi Arabia has a young population profile 25, 2, US$ 3.6% 3.4% 3.2% , % , 5, 2.6% 2.4% 2.2% Per capita income Population growth-rhs Population in mn Source: CDSI, Al Rajhi Capital Source: UNSD, Al Rajhi Capital; Note: Data is as of 21 Acceleration in credit growth will have positive impact on economic activity Credit growth has picked up The average credit growth in the last one decade has been strong, though, with high volatility as well. The credit growth peaked around 4 in However, global economic crisis resulted into almost no growth in credit in 29 and a tepid growth in 21. As economic activity picked up in 211, credit growth also started accelerating which continues to be in accelerating mode. It grew 11% in 211 and 15.3% y-o-y in October 212. Trade and commerce received 21.3% of the total credit disbursed by commercial banks in the country whereas manufacturing and processing industries received 13% in 211. Consumer loans comprised 28% of the total credit to the private sector in the year. The accelerating credit growth is likely to support not only growth in financial sector but also it will have a positive impact on the non-oil sector growth. Figure 14 Robust but volatile credit growth Figure 15 Steady rise in credit growth after economic crisis 45% 4 35% 3 25% 2 15% 1 5% 18% 16% 14% 12% 1 8% 6% 4% 2% Year-on-year -5% Credit growth Loans, advances and overdrafts Banks' total claims on private sector Source: SAMA, Al Rajhi Capital Source: SAMA, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 9

11 Saudi Outlook All Sectors 8 January 213 Inflation has been stable since early 29 which is expected to remain stable Inflation has been stable After moderating from its peak at 11.1% in July 28, inflation has largely been stable in the range of 4%-6% since early 29. Currently it has eased towards lower end of the range. It was remarkable that the price rise was largely stable in 211 even as government spending jumped by almost 3 and consumer demand was boosted due to extra money household received from the government. The main source of inflation in the country in recent years has been supply side constraint in housing. Amid robust economic growth over the last decade and high population growth (more than 2% growth in local population per year and inflow of expatriate workers), demand for housing grew much faster than supply. This put upward pressure on rental. Now, government focus to build houses and provide incentives to real estate sector has resulted into good pipeline of housing supply in coming years. This in turn is likely to keep rental growth under control. Another important component of inflation is food inflation which is largely influenced by global trend in food prices. There is consensus expectation that the rise in food prices will be moderate in 213. Other industrial and agricultural raw materials prices are also expected to rise modestly. Based on these expectations, we believe that inflation is likely to be stable at around 4% in 213. Figure 16 Stable inflationary situation after economic crisis Forecast period Inflation Source: CDSI, Al Rajhi Capital Easy monetary policy has been supportive to growth Supportive monetary policy Amid stable inflationary situation and domestic monetary policy linked to US monetary policy, we believe that the current accommodative monetary policy will continue through 213. The Repo rate is currently at 2% and reverse Repo rate matches with the US Fed funds rate at.25%. The low level of policy interest rate has been the reason of low interbank rate and overall low interest rate environment in the country. The low rate has been supportive to the overall economic growth as it catapults higher credit growth and thus creates aggregate demand. Disclosures Please refer to the important disclosures at the back of this report. 1

12 Saudi Outlook All Sectors 8 January 213 Saudi Stock Market: Stock picking remains the key TASI remained largely flat over the last two years TASI performing better than many of its GCC peers Over the last two years, the Tadawul All Share Index (TASI) has witnessed many troughs and peaks as various regional and global issues weighed down on its performance. However, the index performance was largely flat. In 211, TASI remained volatile due to political unrest in the MENA region, which was feared to significantly impact the regional growth rate and political equations as well as the sluggish global economic recovery. Due to regional factors, TASI declined to its lowest level of 5,5, despite a strong uptick in the Brent crude prices. For the first time in the last few years, correlation between TASI and Brent was negative in 211. In 212, TASI showed a strong ~23% surge in the first three month to reach 7,8. After peaking in April 212, TASI declined by more than 14%, weighed by global concerns. Factors such as strong domestic indicators, speculative investments and the rumors of market opening to foreign investors during the first two quarters of 212, died down as global economic concerns took the center stage. TASI remained an average performer in 212 as its returns were comparatively better than some of its GCC peers and some of the matured market indices such as FTSE (UK). However, it was left behind by other indices such MSCI World Index and MSCI Emerging Market Index. TASI lost most of its Q1 gains during the later part of the year due to weakening crude prices and an impact of fragile global economic recovery. Figure 17 TASI Index price and volume data 8,5 Stronger than the expected results from SABIC Shares plunged amid concerns over the EU banking sector mn 1,2 8, 7,5 7, 6,5 Regional turmoil pushed TASI at nine-months low level Saudi Arabia forecasted surplus budget Saudi Arabia approves first mortage law TASI jumped 2.4% on higher crude prices 1, 8 6 6, Crude falls 3.2% 4 5,5 2 5, Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Trading Volume Index Value Source: Bloomberg, Al Rajhi Capital Figure 18 Performance of key global markets in % % 27.7% 25% 2 15% 22.9% 22.9% 19.9% 15.1% 13.4% 13.2% 1 9.5% 7.4% 7.3% 6.5% 5.8% 5% 2.1% % -6.8% -5% -1 Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 11

13 Saudi Outlook All Sectors 8 January 213 Mid-size sectors performed better than large size sectors We expect the new mortgage law to benefit the banking sector in the medium term Mid-size sectors have performed better Mid-size sectors by market capitalization such as cement, food & agriculture and insurance have out-performed TASI over the past three years, while performance of large sectors such as banking remained in the negative territory during the same period. Further, the petrochemicals sector (largest in terms of market capitalization) has been traded at par with the market even though crude prices have surged by 45.6% in the last three years. Except for building & construction and real estate sectors, every mid size sector has outperformed the TASI. Moreover, market capitalization of food & agriculture and cement sectors increased more than 55% over the past three years, helped by the rising domestic consumption. Saudi Arabia needs around 1.5mn affordable housing units to be built over the next few years to fulfill demand from a growing population (about 45% of the population are in the 15-4 age-group). Thus, we believe real estate and cement sectors will be attractive over the medium-term. Further, we believe that the new mortgage law will boost lending for new housing facilities across Saudi Arabia. We believe that this law will be beneficiary for the banking sector in the medium to long term, while the near term impact is likely to be muted due to lack of clarity. Hence, we do not expect banking sector to perform well in 213 but 214 onwards the positive impact of the mortgage law can kick in. Retail and agriculture will continue to be benefitted by strong consumer demand. On the other hand, we remain cautious on the petrochemical sector over the near-term considering weakness in product prices. Having said that, we expect the sector to benefit from production cost advantage as well as active government support over the medium term. Figure 19 Performance of key sectors in TASI Source: Bloomberg, Al Rajhi Capital TASI, at its current valuation, trades 15% below matured and emerging Valuations imply upside potential over the near-term TASI s 213 forward P/E multiple is 1.7x, which is 15% below the average multiple for the large mature and emerging markets across the globe. We believe that this undervaluation indicates towards a healthy upside potential for TASI going forward. On regional comparison, TASI is trading at higher multiples than many of the GCC markets, which we believe is well justified considering the Kingdom s robust economic growth potential and high trading volumes. The Saudi Arabian market looks fairly attractive, when we compared its P/E multiple with some of the international indices (refer to Figure 19 below). TASI is trading at a discount over some of the matured markets like the US and Japan, and emerging markets like India and Hong Kong. We expect TASI to move upward in the medium-term. Disclosures Please refer to the important disclosures at the back of this report. 12

14 Saudi Outlook All Sectors 8 January 213 Figure PE comparison of TASI vs. major global markets Source: Bloomberg, Al Rajhi Capital Banking, Telecoms and Petrochemicals look relatively undervalued The 213 P/E for petrochemicals sector remains low compared to its global peers; indicating good buying opportunity in the sector. Likewise, telecom sector s valuation suggests a further upside. However, banking sector, which is the second largest sector in TASI by capitalization, is witnessing a higher forward P/E multiple compared to other regions, even though the sector posted improved profitability in 212. The banking sector s premium multiple is justified by strong results and we believe that the sector is well protected from the ongoing global turmoil. PE comparison with different industry indexes suggests big upside potential for major Saudi industries Figure PE comparison of large-cap Saudi sectors Petrochemicals Banking Telecom MSCI EM S&P 5 MSCI World Saudi Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 13

15 Saudi Outlook All Sectors 8 January 213 Domestic sectors command higher valuation multiples compared to larger sectors like petrochemical and banking Volumes can remain on the lower side after a spectacular rise in 212 Figure 22 Saudi market sector valuation Sectors Market Cap (SAR bn) PE Ratio PB Ratio Dividend Yield 3M Returns 1Y Returns Petrochemical % -5.4% Banking %.7% Cement % 13.7% Retail % 16. Real Estate 54.5 NA % 25. Insurance 38.7 NA % 35. Agriculture % 14.1% Telecom % 3.4% Building & Const % Industrial Investment % 15.5% Multi-Investment 83. NA % 33.4% Transport % 69.4% Hotel & Tourism 8.1 NA % 22.1% Media & Publishing 5.5 NA % 4.8% Energy % -3.1% TASI 1, % 6.5% Source: Bloomberg, Al Rajhi Capital Volumes likely to be on the lower side After a relatively strong growth in volumes in 212, we expect the trading volumes to remain on the lower side in 213, as there are limited compelling reasons for retail and institutional investors to invest heavily in this current market environment. The overall picture is somewhat gloomy as investors are looking for catalysts, which can propel the market to another level. Although the smaller sectors are performing better than the larger ones, they are not in a position to attract large investments due to their smaller size. We have observed a quarterly trend in volumes where Q1 and Q2 volumes are strong, while volumes in Q3 and Q4 lag behind. This can be attributed to Ramadan and Hajj holiday season, which falls in Q3 and Q4 where the trading activities are muted. Further, better performance from petrochemical companies in Q1 and Q2 is also a factor for better volumes in those companies. We believe that this pattern will continue in 213, although the volumes could decline y-o-y in Q1 and Q Figure 23 TASI volumes can come down in Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 Q2 Q3 Q4 213 E 213 E 213 E 213 E Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 14

16 Saudi Outlook All Sectors 8 January 213 IPO activity suggests good appetite among investors After a sharp decline in IPO activities after the financial crisis, 212 was a relatively better year for IPOs in the Kingdom with seven IPOs worth US$1.4bn. As can be seen in the chart below, 212 was the best year for IPOs after 28 despite the lower number of listed companies. IPO activity picked up in 212 suggesting better investor confidence in the markets Figure was a good year for IPO despite having a low number of companies $ 2.8 $ 4.8 $ 9.7 $.8 $ 1. $.5 $ IPO value (US$bn) Number of companies Source: CMA, Zawya, Al Rajhi Capital Saudi remained the best market in the GCC for new listings in 212 with 7 IPOs Compared to other GCC markets, IPO activities on TASI were better than Oman (two IPOs worth US$265mn). The UAE, Qatar, Kuwait, and Bahrain have not witnessed any IPO activity in 212. On y-o-y basis, the IPO proceeds more than doubled in 212 (YTD), which reflects that Saudi Arabia is the preferred market to list in the GCC. All the companies which got listed in 212 were from domestic market focused sector such as cement, food, retail and hotel & tourism. Major IPO listings in 212 include Al Tayyar Travel (SAR1.4bn), Saudi Airline Catering (proceeds of SAR1.3bn), Dallah Healthcare (proceeds of SAR54mn), Takween Advanced industries (proceeds of SAR234mn), City Cement (SAR946mn) and Najran Cement (SAR85mn). A small insurance company, Alinma Tokio Marine (SAR6mn) also got listed in 212. All the IPOs got strong response from the markets and were oversubscribed to the tune of 2x to 16x. Figure 25 IPO issues in 212 Company name Date of listing IPO proceeds (SAR mn) Industry Oversubscription Return sinc listing Takween Advanced Industries 7-Jan Industrial Investment 5.7x -25% Alinma Tokio Marine Co 26-Feb Insurance 16.1x 13% Najran Cement Co 2-Apr Cement 3.1x -15% Al Tayyar Travel Group 15-Apr-12 1,368. Hotel & Tourism 2.4x 7% Saudi Airlines Catering Co 16-Jun-12 1,328. Food & Agriculture 2.2x 24% City Cement Co 7-Aug Cement 3.x -1% Dallah Healthcare Holding Co 17-Dec Retail 3.1x 17% Source: Bloomberg, Zawya, Al Rajhi Capital In a positively cautious environment in 213, stock picking remains the key for return maximization Stock picking remains the key Smaller and domestic-oriented sectors have performed well over the last two years, riding on strong demand and changing demographics of the Kingdom. Our analysis suggests that companies from cement, real estate, retail and food & agriculture sectors have handsomely outperformed the broader index during the last two years. Most of these companies are relatively small and have gained investor attention over the last couple of years. Disclosures Please refer to the important disclosures at the back of this report. 15

17 Saudi Outlook All Sectors 8 January 213 Small and mid size domestic oriented companies significantly outperformed TASI in the last two years Figure 26 Top performing stocks in TASI over the last two years Market cap Company (SAR mn) Sector 1Y return % 2Y return % Alhokair 7,42 Retail 6.6% 14.2% Saudi Cement 15,185 Cement 3.1% 9.8% Yanbu Cement 8,82 Cement 16.3% 8.5% Southern Province Cement 14,35 Cement 16.6% 61.9% Taiba Holding 3,743 Real Estate 31.1% 6.8% Al-Jazira Bank 8,28 Banking 54.4% 57.7% Knowledge Economic City 4,75 Real Estate 17.8% 55.6% Jarir Bookstore 9,63 Retail 1.7% 54.7% Arriyadh Development 2,27 Real Estate.4% 52.8% Al Mouwasat 2,663 Retail 17.2% 5.3% Ma'aden 3,988 Industrial Inv. 29.6% 47.3% Arabian Cement 4,14 Cement 12.4% 46.2% Bank Albilad 8,79 Banking 41.5% 45.5% Yamamah Cement 1,4 Cement 1.1% 37. Mobily 55,3 Telecoms 45.5% 36.3% Makkah Construction 6,84 Real Estate % TASI 6.5% 2.2% On the other hand, many of the large companies on TASI have underperformed the broader index, which remains a major cause of concern. Large cap stocks like SABIC and Al Rajhi have clearly underperformed the broader index Figure 27 Large cap stocks underperformed in the last two years % % % 16.7% 23.8% % -6.1%.9% -2.9% -4.6% -3.9% 6.5% 2.2% -1.5% -2.1% -1.1% % -13.9% % -27.3% -4. SABIC Al Rajhi STC Saudi Electricity Mobily SAFCO Samba Riyad Bank Saudi British Bank TASI Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 16

18 Saudi Outlook All Sectors 8 January 213 ARC recommendations and top picks We remain cautious on petrochemical and banking sectors On the other hand, we remain positive on domestic oriented sectors In 213, we remain positively cautious on TASI as well as larger sectors such as petrochemicals and banking. However, we believe that demand slowdown and product price decline could weigh on the petrochemical sector in the next couple of quarters, while the banking sector lacks substantial catalysts like credit growth. Despite the recently passed mortgage law, we opine that the intricacies of this law are yet to be formulated and could benefit the banking sector only post 213. For TASI to move higher, the index definitely require a major fillip from these two sectors. Modest upside in the broader index essentially means that investors have to choose wisely from the available stocks to maximize their returns. We remain positive on domestic oriented sectors such as food & agriculture, retail and cement. In the petrochemical sector, we expect the companies with diversified portfolio and healthy operating rates will continue to excel, despite pressure on product prices. For domestic driven sectors, we believe that the companies will benefit from favorable demographics and rising per capita income. Though these companies are relatively smaller, they have significant upside potential in 213. We particularly like companies in the food & agriculture, retail, telecom and cement sectors as fundamentals continue to remain strong. We like Savola and Saudi Catering in the food & agriculture sector, while we prefer Mobily in the telecom space. We like Arabian Cement as it is in proximity to demand centers, Jeddah and Makkah which are ongoing major expansion plans. We believe that investors would analyze the profit outlook of larger sectors like petrochemicals and banking in the first half of 213. If the bottom-line performance remains muted, investors could get out of these sectors and put money into smaller and domestic oriented companies. We have therefore, included most of the domestic and mid cap companies in our top pick list, anticipating this change in investors psychology. Figure 28 Upside potential for our top picks Most of our top picks are midsize domestic demand oriented companies % 26.5% 25.6% 23.1% % 19.1% 17.6% % 12.3% 1.4% 5.. NIC Shaker Arabian Cement Savola SABIC Astra Extra Saudi Catering Mobily Maaden SABIC remains the largest and the most diversified petrochemical company in our coverage universe. We believe the company s strong operating history, substantial presence in the fertilizer segment and global presence will enable it to achieve better results in a challenging market environment. The company s petrochemical production capacity has risen over the last few years to about 6mtpa, with the latest addition of Saudi Kayan in Q SABIC also enjoys a strong global presence thanks to a few international acquisitions and jointventures. Although the company s near-term expansion plans are not significant, further increase in production from Kayan and commencement of SAFCO V plant can provide future revenue generating opportunities. China and other Asian markets will continue to remain the major export markets for SABIC. We remain fairly positive on the company and expect it to outperform its peers going forward, despite the near-term pricing headwinds faced by its products. We reiterate our Overweight rating with a target price of SAR11. Disclosures Please refer to the important disclosures at the back of this report. 17

19 Saudi Outlook All Sectors 8 January 213 NIC will benefit from diversified revenue model and healthy operating rates NIC boasts of a diversified business model (presence in industrial and petrochemical segments), which partially cushions the company from the risks of an economic slowdown. Further, its strong operating history and private ownership adds to the stock s attractiveness. NIC has a strong operational history with plants operating at 9 plus levels over the last few years. TiO2 and petrochemical segments contributed almost equally to the 211 revenue at 53% and 46% respectively. While the TiO2 segment mainly exports to Europe and the US, the petrochemical segment is focused more on Asia. With commencement of advanced petrochemical plants in second half of 213, NIC will enter the niche segment of advanced petrochemicals. We like NIC s healthy financials, which enables regular dividend payouts along with acquisition- oriented growth strategy. Considering its underperformance over the last few months, we retain our Overweight rating on NIC with a target price of SAR4.5. We expect Mobily to outperform its peers in the medium term Rapid growth in the electronic appliances market make Extra one of our top picks Mobily has been the pick of the telecoms sector, outperforming its peers in terms of revenue and profit growth as well as stock performance. The company has achieved double digit growth in bottom-line for the last four consecutive quarters, taking advantage of the opportunity provided by the surge in data consumption. Mobily has been focusing on the corporate segment, with an intention to diversify its revenue stream. The company has made two important tie-ups in order to become a one stop telecom solution provider for corporate. It has signed a five-year contract with IBM for SAR1bn to provide comprehensive IT solutions. It has also tied up with Etihad Atheeb to provide fixed line services. Mobily has been consistently increasing its dividend payout over the past few years. The management has guided for further increasing its dividend in 212 and 213 to SAR4. per share and SAR5. per share respectively. This implies dividend yield of 5.3% and 6.6% for 212 and 213 respectively. Extra leads the home and electronic appliance market in the Kingdom, and has been rapidly expanding its stores. The company currently operates 29 stores across the Kingdom which it targets to reach 42 by 215. The company is one of the few players in the Kingdom, who facilitate online purchase, backed by home delivery. Extra has been rapidly setting up stores over the past couple of years, and has been conducting promotional events like the Mega Sale and Women Festival to attract the Saudi consumers. Extra has been aggressive in its approach, and this is reflected in the high selling & distribution costs it has been incurring. The company has also lined up plans to expand into the neighboring countries in the GCC region Oman, Qatar and Bahrain over the next couple of years. We believe this is the right approach to capture a large chunk of a growing market. We like Extra s business for its growth potential and its approach at selling electronic products (targeted sales campaigns and online sales) in the Kingdom and have recently begun coverage on the stock with and Overweight rating and a target price of SAR123.5 per share. Savola is the largest food company in the Kingdom Shaker will benefit from its dominant position in the AC market and rising demand for housing Savola remains one of the largest food suppliers (oil, sugar, and pasta) in the MENA region as well as a leading grocery retail operator in the Kingdom through its subsidiary Azizia Panda. The company, which also has an indirect exposure to the growing dairy sector through Almarai, recently increased its stake from 29.9% to 36.5% in October 212 through a SAR2bn deal. Savola has been able to post impressive results this year, despite the challenges of rising commodity prices, difficulties in sourcing raw material supplies and the Arab spring. We like the growing demand from its key markets in the GCC and larger MENA region and believe it will drive the company s future growth. As a result, we believe the company will be able to achieve its target of 14 supermarkets and 6 hypermarkets by 215 in the Kingdom from its current network of 9 and 41 respectively. Following the retail division s strong performance and the increase in Almarai s stake, we raise our target price to SAR49.1. Shaker is one of the major players in the Saudi AC market; we estimate that it enjoys the highest market share in split AC and a decent share in windows ACs. Thanks to its JV with LG, the company is faring well and has outperformed many local competitors. We strongly believe the company is well positioned to benefit from the government huge expenditure in education and health sectors. Also, the housing projects that are undertaken by the Ministry of Housing will also be a huge catalyst for the company. We maintain our overweight rating on Shaker with a target price of SAR83.5, implying a 26.5% upside potential. Disclosures Please refer to the important disclosures at the back of this report. 18

20 Saudi Outlook All Sectors 8 January 213 Saudi Airline Catering is the market leader in flight catering in the Kingdom Aggressive entry into phosphate and aluminum business makes Ma aden an attractive stock Saudi Airline Catering Company is the latest addition in the food & agriculture sector (listed in July 212). The company is the leader in the Saudi airline catering market with a share of about 95%. Further, the company is active in expanding its sources of income by engaging in sky sales, lounges and non-airline catering services. For the past five years, revenues and EBITDA grew with a CAGR of 14% and 17% respectively. We strongly believe the new expansions in Saudi airports, accompanied by the introduction of two new airlines in Saudi domestic airlines will boost the company s revenues. Ma aden successfully commenced its phosphate operations in 212 while the aluminum business is slated to start by 214. We remain bullish on the performance of the phosphate segment and expect it to stabilize this year, contributing substantially to the company s bottom-line. We estimate phosphate revenue to reach SAR5bn in 213 (82%, respectively of the total revenue). Phosphate will remain the key value generator for Ma aden, with a contribution of over 6 to the company s appraised enterprise value. The company is now contemplating to expand its phosphate project and has identified the prospects in the Umm Wual project at Al Khabra for this purpose. This project is expected to add 16mn tons per annum of phosphate-based products. These products include phosphoric acid and sulfuric acid and various animal fodder related products. The total project cost has been estimated at SAR26bn and the tentative date for launch has been announced as Q While on peer valuation, Ma aden is trading at higher multiples (213 PE of 27.1 and EV/EBITDA of 19.3), which we believe will substantially come down once the new businesses gets stabilized. Arabian Cement benefits from its proximity to thriving western region Astra is well diversified company with presence in pharma, chemical and steel business Arabian Cement remains our top pick in the cement sector, owing to its robust revenue and earnings growth, proximity to the western region (which is undergoing massive expansion) as well as an open investor relations. Arabian Cement has maintained high utilization rates, on the back of the massive construction and cement demand in the western region. However, the company seems to be struggling with its Jordan subsidiary. We have therefore cut our estimates on its Jordan subsidiary but still remain positive on its investment in Jordan as it is one of the higher margin markets. Arabian Cement appears undervalued with a modest 213 PE of 7.8x and a dividend yield of 6% makes us believe that the company has a healthy upside potential. Astra has diverse interests in different sectors such as pharmaceuticals, chemicals and steel. The company is a market leader in the pharma and specialty chemicals businesses in Saudi Arabia, which ensure healthy cash flows and stable growth. Astra s investment in Al Anmaa (the Iraqi steel business) will boost its top-line as well as result in healthy margins on the back of cheap feedstock availability in Iraq. We reiterate our Overweight rating on the stock with a target price of SAR46.2. The list of our top picks is below: Figure 29 ARC Top Picks Company Rating Target Price (SAR) Sabic Overweight 11. NIC Overweight 4.5 Mobily Overweight 88.7 Extra Overweight Savola Overweight 49.1 Shaker Overweight 83.5 Saudi Catering Overweight 91. Ma'aden Overweight 37. Arabian Cement Overweight 65. Astra Overweight 46.2 Source: Al Rajhi Capital valuation Disclosures Please refer to the important disclosures at the back of this report. 19

21 Saudi Petrochemicals Sector Petrochemicals Industrial Saudi Arabia 8 January 213 January 18, 21 US$ 95.2 bn 3.6% US$158.9mn Market cap Free float Avg. daily volume Target mkt cap SAR426.2bn 19.4%over current Consensus mkt cap SAR434.5bn 21.7% over current Current mkt cap SAR356.9bn as at 6/1/213 Research Department ARC Research Team Tel , research@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes We expect Saudi petrochemical producers to outperform global rivals on the back of competitive advantages such as cheap feedstock costs, active government support and proximity to demand centers in Asia. We believe the composition of product portfolio will determine the results for these producers over the near-term as product prices largely remain under pressure. Implications We like SABIC and NIC for their diversified product portfolio and global presence. Sipchem and SAFCO will benefit from their exposure to methanol and fertilizers respectively. Since APC and SPC are single-product companies, they will be vulnerable, while Yansab is likely to post weak results due to its basic olefin products. What do we think? Stock Rating Price Target SABIC Overweight SAR11. Sipchem Overweight SAR23.3 SAFCO Overweight SAR185. NIC Overweight SAR4.5 Yansab Neutral SAR5.3 APC Neutral SAR28.7 SPC Neutral SAR15.4 Where are we versus consensus? SAR SABIC Sipchem SAFCO NIC Yansab APC Sahara Current Consensus ARC Source Bloomberg, Al Rajhi Capital Petrochemical sector: Near term headwinds persist The Saudi petrochemical sector benefits from distinct advantages such as cheap feedstock costs, active government support and proximity to large demand centers. However, an uncertain global economic outlook is expected to weigh on the sector performance in 213. Having said that, we expect the sector to perform better than its global peers aided by higher utilization rates and ability to make profits at lower price levels. We believe pure-play producers will be more affected than the diversified product companies over the near-term and portfolio composition remains the key. Petrochemicals sector was affected by weak fundamentals in 212 and we expect the trend to continue in 213. Thus, we continue to remain our cautiously positive stance on the sector. Weak global environment puts pressure on crude prices. The global economic environment deteriorated over the last few months on the back of the prevailing Eurozone crisis and a slowdown among major emerging economies such as China and India. The Eurozone again slipped into a recession in Q3 with another quarter of negative GDP growth, prompting economists to expect this recession to continue for the next couple of quarters. Despite the positive news flow about the aversion of fiscal cliff from the US, we expect global demand to be weaker for the first half of 213 as demand catalysts are still not in sight. Petrochemical prices could remain under pressure. Ethylene and propylene prices are currently 24% and 19% lower compared to their 212 highs respectively, and this weakness has also affected their derivatives, polyethylene and polypropylene. With low feedstock prices and weak demand, we expect petrochemical prices to remain under pressure over the near-term. Petrochemical producers cut down operating rates. Major petrochemical producers in Europe and Asia have cut down on their operating rates or are planning to do so over the near-term due to a steep decline in product prices. However, Saudi producers can continue operating at full capacity aided by their feedstock cost advantage and hence, will be less impacted than their global peers. Hike in feedstock costs can be a dampener. Saudi Aramco is mulling an increase in feedstock costs for petrochemical companies, which had been put on hold in 212, citing weaker global economic conditions. Interactions with the management of a few companies have revealed that this increase can take place in 213. We believe such a hike could be a dampener for the industry as it is yet to recover fully from the weakness in demand and product prices. Stock conclusions. We believe companies with a diversified portfolio such as SABIC and NIC are better placed for growth over the near term as compared to single product companies like APC and SPC (pure-play polypropylene companies). We believe Sipchem and SAFCO will continue to perform well owing to their exposure to methanol and fertilizers respectively, while we expect Yansab s performance to remain under pressure on the back of its exposure to basic olefins. We remain Overweight on SABIC, NIC, Sipchem and SAFCO, while we reiterate our Hold rating on APC, SPC and Yansab. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

22 Saudi Petrochemicals Sector Petrochemicals Industrial 8 January 213 Petrochemical sector: Pressure remains on product prices Crude prices remained above US$11 levels on the back of improving demand scenario and geopolitical events in the MENA region Crude prices rose mainly on Iran sanctions Crude oil prices have been consolidating around the $11 per barrel level as disappointing economic news flow has been put aside by the continuing geopolitical tensions in the Middle East. The IEA has boosted its global crude demand outlook for Q4 212 and 213, amid signs of economic recovery from China. The agency increased its global oil demand estimates for the fourth quarter by around 435, bpd, reversing its previous estimates of 29, bpd cut in the November report. Global demand is now forecast to grow by 865, bpd in 213 to touch 9.5 million bpd - 11, bpd more than its earlier forecast. In contrast to a sluggish demand outlook, supply of crude oil improved as the global output rose by 73, bpd to 91.6 million bpd in November, primarily due to increase in non-opec output. Oil exports from Iran remained stable at 1.3mn bpd in November, as Malaysia, Taiwan and the UAE bought more oil from the sanction hit nation to offset reduced imports from China and India. On the other hand, supply side concerns remain as geopolitical tensions between Israel and Iran continue to rise, resulting in fears of a possible closure of the Strait of Hormuz. Further, the recent conflict between Israel and Palestine as well as political turmoil in Egypt have supported oil prices, despite weakness in demand. Despite these tensions, we believe that Brent prices will come down over the next few quarters owing to demand slowdown and weaker economic growth. We expect crude prices to decline marginally over the next few quarters Figure 3 Trend in Brent prices Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Source: Bloomberg, Al Rajhi Capital Downward pressure on product prices continues The petrochemical industry has undergone a roller-coaster ride of sharp peaks and troughs throughout the year. After healthy product prices in Q1 212, both demand and prices declined in Q2 on the back of economic weakness, lower naphtha prices and higher inventory build-up across the globe. Despite a continued weakness in the global economy and limited increase in demand from major markets, petrochemical product prices witnessed a sharp rally in Q3 mainly driven by the upstream factors such as rise in Brent and naphtha prices, the need for inventory replenishment and turnarounds across the globe. As these factors faded in Q4, the product prices declined again marking another weak quarter. Disclosures Please refer to the important disclosures at the back of this report. 21

23 Saudi Petrochemicals Sector Petrochemicals Industrial 8 January 213 Petrochemical prices declined in Q4 after a steep rise in Q3 Figure 31 Volatility in the petrochemical prices USD/ton Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Ethylene Propylene Source: Bloomberg, Al Rajhi Capital Despite this see-saw activity in the product prices, the real demand catalysts were lacking as buyers were hesitant to place large orders fearing weakness in demand from developed markets. We expect demand to pick up again in the first quarter of 213 as many Asian plants go for their scheduled maintenance in Q1, resulting in a supply crunch. We expect SABIC and NIC to benefit from their diversified business model in the near term SABIC and NIC remain our top picks SABIC and NIC remain our top picks for the next few quarters on the back of diversified revenue streams and healthy operating rates. SABIC is the largest company in our coverage universe and benefits from its scale, international operations and a few new projects commencing in the near term. On the other hand, NIC benefits from its presence in the TiO2 segment, which contributes roughly half of the revenue. TiO2 business provides the company diversification in revenue streams. We reiterate our Overweight rating on SABIC and NIC with target price of SAR11 and SAR4.5 respectively. Apart from top picks, we are positive on SAFCO and SIpchem for their exposure to fertilizers and methanol respectively. We believe that the product prices for urea, ammonia as well as methanol will remain healthy over the next few quarters, helping both SAFCO and Sipchem to post solid results. We remain Overweight on these stocks with target price of SAR185 and SAR23.3 respectively. For SAFCO, we have reduced the target price from SAR216.7 to SAR185 to take into account the dilution effect of 33.3% bonus shares. We are Neutral on Yansab, APC and SPC mainly due to their dependence on basic olefins, for which product prices have remained under pressure for the last few quarters. We don t expect price material recovery in these product prices in the near term. Figure 32 Petrochemical Sector Company Rating Target Price Market Cap. (SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield (SAR) (SARmn) 213E 213E 213E 213E SABIC Overweight , % 6.5% Sipchem Overweight , % 7.6% SAFCO Overweight , % 6.3% NIC Overweight , % Yansab Neutral , % 4.3% APC Neutral , %. SPC Neutral , %. Disclosures Please refer to the important disclosures at the back of this report. 22

24 Saudi Telecom Sector Telecom Industrial Saudi Arabia 8 January 213 January 18, 21 US$ 41.4 bn 33.2% US$41.3mn Market cap Free float Avg. daily volume Target mkt cap SAR167.3bn 7.7%over current Consensus mkt cap SAR173.3bn 11.6% over current Current mkt cap SAR155.4bn as at 6/1/213 Research Department Mazhar Khan Tel , khanm@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes We remain bullish on the Saudi telecoms sector on the back of rising smartphone penetration and consequent growth in data consumption. Mobily continues to strengthen its position in the Saudi market, while STC focuses on its international businesses. Implications Mobily remains our top pick in the sector. We also remain Overweight on STC on the back of improved profitability of its international businesses. We have slashed our estimates for Zain KSA, as the company is struggling with its financial problems and ceding revenue market share to two other players. We remain Neutral on Zain KSA, considering a sharp correction in the stock. What do we think? Stock Rating Price Target STC Overweight SAR47.2 Mobily Overweight SAR88.7 Zain Neutral SAR1. Why do we think it? Stock 3 year EBITDA CAGR 213 EV/EBITDA STC 1.1% 6.1x Mobily 4.4% 4.2x Zain 14.9% 19.2x Where are we versus consensus? SAR STC Mobily Zain Current Consensus ARC Source Bloomberg, Al Rajhi Capital Saudi Telecoms Sector: Mobily remain top pick We remain bullish on Saudi telecoms sector despite saturating mobile penetration levels, as we believe information and communications technology services will only grow in importance over time. Broadband remains the key growth driver for telecom operators in Saudi Arabia, as increasing smartphone penetration levels and changing usage patterns of consumers are expected to result in a sharp rise in data consumption. Mobily remains our top pick in the sector, as it continues to outpace its peers, while STC will benefit from improving profitability from its international businesses. Zain, on the other hand, is struggling to improve its performance, both on the financial as well as the operational fronts. Favorable demographics to support data usage. Saudi Arabia is one of the youngest countries in the world, with 3 population below 15, while about 5 are below the age of 26 years. We believe the young Saudi population is likely to drive data usage, as today s youths are more technology-savvy. According to a study conducted by Nielsen in 211, Saudi youths were second only to the US in checking s on their mobile. They have led their peers in the BRIC countries and the US in downloads of screen savers and ring tones, indicating that the current Saudi generation is increasingly IT-literate. Rising smart-phone penetration. Smartphone penetration in Saudi Arabia is expected to increase to 48.5% by 216 from 25% at the end of 211, supported by the availability of entry-level and mid-level options. An average smart-phone generates about 35 times more data traffic than a basic feature phone. Thus, rising smart-phone penetration in Saudi Arabia will spur a huge growth in data usage. MVNO Opportunity or Threat? With the Saudi telecom regulator CITC planning to issue three MVNO (Mobile Virtual Network Operator) licenses in the near future, the Saudi telecoms market is set to undergo an important transformation. The introduction of MVNOs can provide a new growth opportunity as well as pose a threat for the existing telecom operators. The existing telecom operators can benefit by tying up with MVNOs to gain market share or generate revenues by leasing their excess capacity. On the other hand, it will definitely trigger a price war. Stock Conclusions. We remain Overweight on the two largest and more established players in the Saudi telecoms market. Both STC and Mobily are witnessing strong growth in the Saudi market, and stand to benefit immensely from the rising demand for data services. Mobily has tied up with IBM in order to target corporate customers with cloud computing and data security services. STC is the only company in the Kingdom, which provides investors with exposure to international markets. On the other hand, the third operator Zain KSA continues to suffer from high debt levels and is finding it exceedingly difficult to refinance its outstanding debt, even after improving its balance sheet position following a capital restructuring exercise. We remain Neutral on Zain after the sharp correction witnessed in the stock over the past few months. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

25 Saudi Telecom Sector Telecom Industrial 8 January 213 Saudi Telecoms Sector: Favourable demographics and increasing smart-phone penetration key driver About half the Saudi population is below the age of 26; and being tech savvy augurs well for the telecoms sector According to industry sources, Smartphone penetration is expected to increase from 25% in 211 to 48.5% in 216 Saudi Arabia is one of the youngest countries in the world, with 3 population is below 15, while about 5 below the age of 26 years (source: CIA World Fact book). A study conducted by Neilson in 211 showed that the Saudi youth led their peers in the BRIC countries and even the US in downloads of screen savers and ring tones, and were second only to US in checking s. This data indicates that the current Saudi generation is increasingly ITliterate. Thus, the young population of Saudi Arabia is likely to drive data usage, as the youth are more technology savvy. The availability of relatively cheap entry-level and mid-level smart-phones is giving a boost to smart-phone sales in the Kingdom. According to estimates by Informa telecoms & media, smart-phone penetration in Saudi Arabia stood at 25% at the end of 211, and is expected to jump to 48.5% by 216. According to estimates by CISCO, a smart-phone generated 35 times more mobile data traffic than a basic feature phone in 211, as users were able to download digital content (applications/games/ringtones/wallpapers) easily and stay connected ( s/instant messaging applications). Thus, rising smart-phone penetration will lead to huge growth in data consumption. CISCO estimates that the mobile data traffic in the MENA region will grow at a CAGR of more than 1 from 211 to 216. Since Saudi Arabia is one of the biggest mobile markets, we believe the Kingdom will lead the rise in data consumption in the region. (Please refer to Telecom sector note released 9 th December 212 for further details). Positive on STC and Mobily, while Neutral on Zain We expect Mobily to pay a dividend of about SAR5 next year. This does not include the bonus shares announced Mobily has been the pick of the telecoms sector, outperforming its peers in terms of revenue and profit growth as well as stock performance. Off late, Mobily has shifted its focus on the enterprise segment to drive growth in a maturing telecom market. We think this strategy will ensure a positive performance in the coming years. The company has made two important tie-ups and signed a five-year contract with IBM for SAR1bn to provide comprehensive IT solutions, which will enable it to offer services such as data security and cloud computing. It has also tied up with Etihad Atheeb to provide fixed line services. The company has also been consistently increasing its dividends pay out and thus we expect SAR5/share as pay out for 213, implying an impressive dividend yield of 6.6%. We have increased Mobily s target price to SAR88.7, implying an upside potential of about 12.3% and maintain our Overweight rating. Mobily still trades on a cheap 213 PE of 8.4x and EV/EBITDA of 6.1x. (Please refer to our Telecoms sector note dated 9 th December 212) STC remains a strong long term story with increasing international business and improving performance of its subsidiaries. STC has a huge cash balance which it plans to utilize towards increasing its international presence. We believe that there is also a possibility of the company increasing its dividend payout (current SAR2/year), which could be a major trigger for the stock. We remain Overweight on STC with a target price of SAR47.2. Zain s market share has fallen to less than 12% currently Zain continues to struggle with a huge debt outstanding (SAR13.5bn at the end of Q3 212) and reducing its debt is becoming difficult due to negative free cash flow. The company s market share has fallen from about 15.6% at the end of 21 to below 12% currently. Tight financial conditions and negative cash flows have limited the company s ability to introduce innovative plans and increase its advertising spend. Based on our estimates, we have arrived at a fair value of SAR1 per share which is also our target price. We remain Neutral. Figure 33 Telecoms Sector Company Rating Target Price Market Cap. (SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield (SAR) (SARmn) 213E 213E 213E 213E Mobily Overweight , x 6.1x 7.1% 6.5% STC Overweight ,4 8.1x 4.2x % Zain KSA Overweight 1. 2,318 nm nm -12.7%. Disclosures Please refer to the important disclosures at the back of this report. 24

26 Saudi Food Sector Food Industrial Saudi Arabia 8 January 213 January 18, 21 US$11.9bn 51.2% US$19.3m Market cap Free float Avg. daily volume Target mkt cap SAR49.9bn 11.6%over current Consensus mkt cap.sar49.4bn 1.5% over current Current mkt cap. SAR44.7bn as at 6/1/213 Research Department Moath Al Shaikh Tel , alshaikhma@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes Rising disposable income levels, changing lifestyles and ever-increasing population will drive the growth for companies like Herfy and Savola in the food sector. We believe increasing global crop prices coupled with the Saudi government s cap on prices will pose challenges for basic food suppliers like Almarai over the near-term. New sub-sectors such as juice, bakery and poultry are emerging in the Kingdom, apart from niche markets like airline catering. Implications We are Overweight on SACC and Savola, the former for its unique business model and the latter for its continuing expansion plans. On the other hand, we lower our target price for Almarai and increase it for Herfy. However, we maintain our Neutral rating on both stocks. What do we think? Stock Rating Price Target Almarai Neutral SAR63.5 Savola Overweight SAR49.1 Herfy Neutral SAR11 Saudi Catering Overweight SAR91 Why do we think it? Stock 3 year EBITDA CAGR 213 EV/EBITDA Almarai x Savola 1.5% 6.2x Herfy x Saudi Catering 15.7% 8.8x Where are we versus consensus? Catering Almarai Savola Herfy ARC Consensus Current Source Bloomberg, Al Rajhi Capital Food & Agriculture sector: Demand hurt by challenges The Saudi food sector has been witnessing healthy growth, similar to the retail sector, owing to the Kingdom s favorable demographic profile. Demand for protein-rich and processed food products continues to rise. However, dependence on imports for basic food and feed commodities, and government intervention on prices will hinder the profitability of food suppliers over the near-term. Meanwhile, new sub-sectors such as juice, bakery and poultry are emerging. Food will be an important part of Saudi retail sales growth: According to EIU, the Saudi food sales market is expected to reach $69.9bn by 216, representing around 53% of the retail sales market, which is expected to reach $131.2bn by then. This large revenue contribution will stem from rising disposable income levels, changing lifestyles, and ever-increasing population. International crop prices are crucial on higher imports: An ever-increasing population is resulting in higher grain imports. Hence, Saudi food suppliers will be affected by the movement in the international crop prices. Crop prices rose significantly in the first half of 212 on account of tough weather conditions in the US and Europe, coupled with declining inventory levels. Although prices have corrected slightly since then, we believe it is an only short-term effect and crop prices will remain high over the long-term. Government interventions heighten concerns: The Saudi government recently ordered Almarai to roll back a price hike for some of its dairy products despite rising input cost. This is the second government interventions, which we feel stems from its aim to curb inflation. However, we believe continued interventions will hinder the growth of food companies. New food sectors are emerging: Apart from the traditional markets such as dairy, edible oil, and sugar, new markets such as juices, bakery and poultry have emerged with healthy growth prospects. Companies like Almarai and Savola have entered these markets. However, it remains to be seen whether they are able to build successful business models, as in the past, given the intense competition in these segments. Stock conclusions: While the demand for food is certain, securing supplies at an affordable cost will be crucial for food companies in Saudi Arabia to remain profitable. We believe companies supplying basic food staples like Almarai will face pressure over the near-term due to their inability to pass on any increase in costs. Companies with diversified revenue streams like Savola, with presence in supermarket and hypermarket businesses, will perform better. We believe Savola s move to raise stake in Almarai, from 29.95% to 36.52% in October, will provide synergistic benefits and help consolidate the leadership position of both the companies in the Saudi food market over the long-term. While we like Herfy s focus on expanding stores and expect it to benefit from the rising disposable income, the company is likely to face intense competition from its peers, some of which are large global leaders. We also like SACC s business model, which is the domestic leader in a niche market of in-flight catering. We believe SACC is most likely to benefit from the rapid growth in the Saudi aviation industry over the next few years. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

27 Saudi Telecom Sector Telecom Industrial 8 January 213 Almarai dominates the Saudi dairy sector Dairy and food market: Healthy prospects despite challenges Dairy sector to witness growth in volumes but at a cost Milk consumption is one of the main factors driving the GCC dairy market, of which Saudi Arabia currently accounts for more than 6. According to BMI, demand for milk has grown by around 6% annually over the past few years. Almarai has a dominating presence in all the milk products, including laban and zabadi in the GCC region. We believe demand for milk products will be healthy, as the Saudi population shifts to a healthier lifestyle. Figure 34 Dairy market for GCC countries Figure 35 Expected CAGR for milk based products ( ) 6% 3% 3% Cheese 1.8% 7% 17% Laban & Zabadi 9.4% 63% Milk 7.3% KSA UAE Kuwait Oman Bahrain Qatar Source: Nielsen Company 211, Al Rajhi Capital Source: Euromonitor, Al Rajhi Capital 2% 4% 6% 8% 1 12% Almarai is finding it tough to pass on increase in input costs to its consumers Savola is dominating the local sugar market The fresh juice and nectar segments are likely to see better growth than CSD Competition and pricing pressures pose near-term concerns Almarai has not been able to pass on any increase in input costs (in terms of feed and packaging costs) to its consumers. In mid-211, the Saudi government did not allow the company to hike the prices of its dairy products in a bid to curb food inflation in the country. Later in November 212, the company increased the prices of non-core products such as chocolate milk and this was again not allowed by the government. Although the government t almost doubled the feed subsidies for the company, we believe they have only partially offset the recent surge in crop prices. Since the company is being used as a tool to serve the strategic interest of the nation, its operating margins have been gradually eroding. Given the fact that milk price is among the lowest in the world, we believe prices could increase in future, although not in the near-term. Saturated local Sugar market The Saudi sugar market has become saturated considering that the Saudi per capita consumption is at par with regional consumption rates. The only growth that we can envisage apart from meeting the needs of a growing population is bridging the demand-supply gap of refined sugar (currently around 1 of the supply is imported). With Savola controlling almost 9 of the Saudi market by our estimates, we do not expect the company to further expand its capacity in Saudi Arabia over the near-term. Juice, bakery, and poultry are star sectors. Juice, Bakery and Poultry Market Ample room for growth and innovation in the juice market According to Al Rabie, a leading juice producer in Saudi Arabia, the juice, nectar (25-99% juice), and carbonated soft drink (CSD) market in Saudi Arabia is estimated to be worth US$1.3bn and is growing at a healthy rate (posted a CAGR of 8% during ). The market is dominated by CSD, which corners more than 5 market share. We believe this market domination is mainly on account of the western eating lifestyle adopted by the young population in the Kingdom, driven by the increasing number of super and hyper-markets along with fast food outlets. Disclosures Please refer to the important disclosures at the back of this report. 26

28 Saudi Telecom Sector Telecom Industrial 8 January 213 Top players in the market are gearing up for a price war While demand outlook is robust, most of it will be met by imports Looking ahead, we believe the market will shift more toward nectars and fresh fruit juice, due to increasing health awareness. Our view is supported by the forecasts made by Al Rabie. According to data provided by the company, the juice, nectar and CSD segments grew at a CAGR of 4.3%, 8., and 9.7%, respectively over However, this growing trend is expected to change in the future with the juice, nectar and CSD segments growing at a CAGR of 6.6%, 1.1%, and 3.5%, respectively during Competition heating up in the bakery segment The Euromonitor has estimated Saudi Arabia s bakery market to have reached US$3.7bn in 211 and expects it to grow to US$4.7bn over the next five years. Almarai through its two brands Lusine and 7 Days dominates the bakery segment and we believe the company has plans to ramp up capacity as a small part of its recently announced SAR15.7bn capex plan for in May 212. Pain D'Or a new bakery brand of the Lebanese Malco Group has recently set up one of the largest industrial baking facilities in the Kingdom, and has gained the lion s share of the market. Savola has been operating its baking business through Herfy. The bakery segment is the second-largest division for Herfy in terms of revenue contribution, after its popular restaurant business. Herfy has also commenced its first production line at a new plant. The cost of the plant is SAR119mn and will have three times the current capacity. Although the intense competition is bound to impact the near-term margins of companies in the sector, it also indicates the attractiveness of the industry. Domestic poultry production trying to catch up with rising demand Chicken is preferred over red meat (bovine and sheep) in Saudi Arabia. According to the USDA, Saudi consumption of chicken is currently around 1.4mn tons with nearly 6 being supplied by imports. According to data from the FAO, most of the imports are from Brazil (81%) followed by France (17%). In 211, Saudi Arabia was the second largest importer in the world at 895, tons after Japan, while in terms of per capita consumption, the Kingdom ranked fourth at 52.4 kg. GCC countries are among the top consumers of chicken in the world, where Bahrain, Oman and Saudi are the fastest growing (CAGR of 17%, 12% and 8%, respectively over ), which reflects a shift to a more protein-based diet in the region. Growth outside big cities for fast food market The Saudi fast food market is the biggest in the GCC region, and is one of the largest in the MENA region. We believe McDonald s and Herfy are the market leaders in this space. Other active players are Burger King, Kudu and Al Baik. The rest of the market comprises minor local players, who are rapidly gaining market share. We estimate Herfy s market share in the fast food hamburger restaurants (FFHR) to be around 27-29%, slightly below McDonald s market share of around 33-35%. Figure 36 No. of stores of large players in the FFHR market Figure 37 Central region's sales share is dropping Herfy % 4% 4% 12% 12% 12% % 72% % 8% McDonlads Burger King Hardee's Kudu Herfy Southern Region Central Region Eastern Region Northern Region Western Region Source: Companies data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 27

29 Saudi Telecom Sector Telecom Industrial 8 January 213 Local airline catering market: dominated by Saudi Airlines Catering Passenger traffic in the Kingdom will grow at a GAGR of 7% over the next five years Saudia is the second-largest airline in the Middle East region The Saudi airline catering market is well positioned to grow by capitalizing on the growing population, ever-increasing religious visitors and high economic growth in the Kingdom. According to our estimates, airline passenger traffic in Saudi Arabia is set to grow at a CAGR of 7% over , higher than the global average of about 5.2%. In 211, national carriers accounted for almost 39% of international passengers passing through Saudi airports. Among them, Saudi Airlines (Saudia) represented 33%, while the remainder 6% was represented by National Air Services (NAS) the sole domestic competitor for Saudia after Sama Airlines suspended its operations in late 21. On the other hand, Saudia dominates the domestic market with a 94% market share. Saudia is the second-largest airline in the Middle East region, after UAE-based Emirates. The company is planning to expand its fleet from around 99 planes to 128 planes by 216. Figure 38 International passengers market share in Saudi Figure 39 Total passengers passing through Kingdom s airports % % 6.2% % 3 25% 2 15% 1 1 5% - Source: GACA, Al Rajhi Capital International Carriers Saudia NAS Source: GACA, Al Rajhi Capital Total passengers Saudia passengers % - RHS Overweight on Savola & Catering, but Neutral on Almarai & Herfy We are Overweight on Savola as we believe the company will benefit from strong demand emanating from international markets coupled with efficiency improvements in the domestic retail markets. We are also Overweight on Saudi Catering as we believe the company is well positioned to benefit from the strong growth in passenger traffic in the Kingdom. On the other hand, we are Neutral on Almarai as it is struggling to pass on higher crop prices to its customers. Finally, we like Herfy s expansion mode, especially outside big cities. However, we believe all the good news is already factored in the share price for the company. Below is the table showing our coverage in the food sector. Figure 4 Food sector Company Rating Target Price Market Cap. (SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield (SAR) (SARmn) 213E 213E 213E 213E Almarai Neutral , 17.9x 12.9x 7.6% 2. Savola Overweight , x 6.2x 1.5% 3. Herfy Neutral 11. 3, x 11.6x 12.8% 3.5% Saudi Catering Overweight 91. 6, % 6. Disclosures Please refer to the important disclosures at the back of this report. 28

30 Saudi Retail Sector Retail Industrial Saudi Arabia 8 January 213 January 18, 21 US$ 5.7 bn 73.5% US$4.3mn Market cap Free float Avg. daily volume Target mkt cap SAR23.9bn 11.8%over current Consensus mkt cap SAR23.6bn1.4% over current Current mkt cap SAR21.4bn as at 6/1/213 Research Department Majed Alsolaim Tel , alsolaimm@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes Rising disposable income levels, changing lifestyles and ever-increasing population will drive the growth for companies in the retail sector. We believe large store formats will dominate the retail scenario across the Kingdom going forward. Players in the high-end luxury and electronic segments are also likely to benefit over the near-term, even as growth prospects have been attracting regional players into the country. Implications We are Overweight on Alothaim and Extra, due to their expansion plans. We are also overweight on Alhokair backed by its strong performance. On the other hand, we maintain our Neutral rating on Jarir as we believe that all the positives for the company have been priced in. What do we think? Stock Rating Price Target Jarir Neutral SAR168.6 Extra Overweight SAR123.5 Alothaim Overweight SAR96.7 Alhokair Overweight SAR124.1 Why do we think it? Stock 3 year EBITDA CAGR 213 EV/EBITDA Jarir 12.4% 14.8x Extra 9.8% 11.7x Alothaim 14.8% 5.7x Alhokair 8.7% 8.9x Where are we versus consensus? SAR Jarir Extra Alothaim Alhokair Current Consensus ARC Source Bloomberg, Al Rajhi Capital Retail sector: Fundamentals are good An emphasis on diversifying the economy away from oil coupled with massive government spending has supported the development of small sectors such as retail. A young and fast growing population and rising disposable income levels have also facilitated the retail sector to flourish. Cultural peculiarities, improving education levels and an attraction to modern lifestyle are changing the face of the retail industry, leading to a boom in the development of hypermarkets and supermarkets. However, mere store expansion will not be adequate enough going forward. As competition intensifies, retailers will have to innovate to stay ahead in the race. We believe retailers of high-end luxury clothing, footwear and electronic products will benefit the most over the nearterm. A strong Saudi economy is spending generously. The Saudi government has been allocating a sizeable chunk of its oil export surpluses for social spending (SAR 1.4tn over ). We believe this massive social spending will lead to higher disposable incomes in turn leading to higher spending, which will gradually trickle down to various domestic sectors such as retail. The Saudi government s emphasis on diversifying the economy has also led to the development of sectors like agriculture, retail, and real estate, which are growing faster as compared to bellwether sectors such as petrochemicals and banking. Demographic dividend is fueling retail growth. Saudi Arabia is one of the largest in the GCC region, with a population of 28 million, of which more than 8 is below the age of 4. Coupled with rising disposable income levels, demand for better quality and diversified products is growing, which bodes well for retail companies. Further, a similar demographic profile across the GCC region provides additional growth opportunities for established players. Big-box formats to spur the next leg of growth. Big-box retail formats (hypermarkets and supermarkets) are relatively under-penetrated in Saudi Arabia. We believe these big-box stores will gain popularity in the Kingdom going forward, on account of their cost effectiveness, convenience, and entertainment value (other forms of public entertainment are not allowed in a conservative society). We also expect the retail sector to spread beyond Riyadh and Jeddah to other cities like Dammam, Khobar and the holy cities of Mecca and Medina. An attractive market will intensify competition. While the sector s growth prospects are rosy, there is intense competition not only from within but also from established players in the neighboring GCC countries. As a result, Saudi retailers need to innovate constantly by targeting select consumer groups, offering differentiating services, and building a loyal brand base. Stock conclusions. We expect more consolidation activities in future as the market remains highly fragmented. Alhokair s acquisition of NESK in August is an indication of this trend. In grocery retail, we believe large players like Savola (through Azizia Panda), Alothaim and Tamimi will continue to maintain their market leading positions. In non-grocery retail, we believe companies like Alhokair, Jarir and Extra will perform well over the near-term, first, on account of their exposure to high-end brands and second, on account of their exposure to fast moving electronic gadgets like smartphones, tablets, and gaming devices. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

31 Saudi Retail Sector Retail Industrial 8 January 213 Retail is promising: Growing despite challenges Small convenience stores will be gradually phased out The retail sector in Saudi Arabia, although bigger in size, is still evolving as compared to a country like the UAE, where it is much more developed due to the latter s history of being a trading hub. Although big-box retail formats (supermarkets and hypermarkets) have sprungup in Saudi Arabia, they remain relatively under-penetrated as compared to other global markets. Small convenience stores called bakalas currently dominate the retail sector with around 59% market share. Large stores are the only culturally accepted source of entertainment in the Kingdom We expect retail market to spreads beyond Riyadh and Jeddah even as competition intensifies However, in Saudi Arabia, we believe the economic and cultural environment is conducive for large stores to thrive. Apart from the strong growth scenario as discussed earlier, large malls serve as the only source of entertainment in the form of shopping and dining, which is culturally acceptable in the Kingdom. Supermarkets and hypermarkets with in-house facilities such as restaurants and theme parks are ideal locations for the Saudi population to relax. We believe this cultural connection coupled with the healthy income of a young population, will trigger more footfalls for the big-box formats over the medium to long-term. We believe the entertainment value that these stores will provides will remain a major factor for online retail sales to develop slowly in the Kingdom. Online sales will pick up gradually for the convenience it provides to consumers, especially women, to receive goods from the comfort of their homes. Growth to be more balanced, expect more competition Apart from the growth in Riyadh and Jeddah, the retail sector is also expected to expand to other cities in the country spreading growth more evenly across the country. The twin holy cities of Mecca and Medina, in particular, will witness considerable growth in retail space. Although both the holy cities witness an influx of nearly 1mn pilgrims every year, they have traditionally seen limited retail facilities as compared to Riyadh and Jeddah. This trend is set to change with large facilities under construction in both the holy cities. Further, Saudi retail market s attractiveness has attracted large regional retailers such as Majid Al Futtaim, Al Tayer, Landmark Group, Chalhoub Group and Alshaya. In June 212, the EMKE Group rolled out its popular Lulu brand hypermarket in Riyadh, and plans to open more stores over the next couple of years. We believe western retailers who are facing dwindling sales in their domestic market due to weak economic conditions to also enter the Kingdom gradually. Although this will lead to intense competition, we believe international players will prefer to enter into partnerships with established Saudi companies such as Savola, Alhokair, and Alothaim, who can provide ease of scalability at low cost. Selling products will become a part of the entire customer relationship experience Saudi retailers will have to build relationships Saudi Arabian consumers are becoming more discerning because of the availability of information on comparable products on the internet. Besides this, the competition has intensified due to the presence of regional and international players. Hence, Saudi retailers will have to leverage their local presence and proximity, and will have to provide competitive (best prices, discounts, financing arrangements, extended warrantees, etc.) and value-added services (door delivery, free installation, after-sales support, etc.) to ensure customer satisfaction and brand loyalty. Customizing products and developing marketing campaigns to target specific groups would also facilitate long-term growth. For instance, Extra launched a month-long Women Festival in early 212, where women were offered products specific to their needs at discounted prices. Disclosures Please refer to the important disclosures at the back of this report. 3

32 Saudi Retail Sector Retail Industrial 8 January 213 Almost priced in for Jarir and upside potential for the rest We like Extra s business for its growth potential and its approach at selling electronic products (targeted sales campaigns and online sales) in the Kingdom. We feel the company will ride on the retail wave in the Kingdom as well as the GCC region at large and expect it to witness high revenue and profit growth in future. We have conservatively kept selling expenses at the same level in the forecast period, but we understand that this could reduce substantially in future, boosting margins. We have given an Overweight rating for Extra with a target price of SAR Given the impressive results, following the successful acquisition of NESK, as well as the ongoing store openings locally and internationally, we have revised our forecasts for Alhokair and increased our revenue and profit forecasts. We have set a new target price of SAR124.1(old target: SAR91.4). Thus, we have upgraded our rating from Neutral to Overweight. Alhokair trades at a EV/EBITDA multiple of 8.9x and a PE ratio of 1.9x. We believe Alothaim will continue to report decent results based on its same-store sales growth, expansion plans, and rising population. Given the 212 dip in Alothaim s share price (around 2), we believe the company is attractive (price in 6/1/212 is SAR82). Thus, we reiterate our Overweight rating on the stock but have revised our target price downward from SAR19.4 to SAR96.7, implying an upside potential of 18%. Alothaim trades at a 213 EV/EBITDA multiple of 5.7x and a PE ratio of 1.8x. We have raised our target price on Jarir to SAR168.6, given that we have marginally increased our earnings forecasts. Our new target price implies an upside potential of 5%. Therefore, we maintain our Neutral rating. Jarir currently trades at a 213 EV/EBITDA multiple of 14.8x and a PE ratio of 15.5x. Figure 41 Retail Sector Company Rating Target Price Market Cap. (SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield (SAR) (SARmn) 213E 213E 213E 213E Alhokair Overweight , % 4.2% Jarir Neutral , % 5.5% Alothaim Overweight , % 4.3% Extra Overweight , % 2.4% Disclosures Please refer to the important disclosures at the back of this report. 31

33 Saudi Cement Sector Cement Industrial Saudi Arabia 8 January 213 January 18, 21 US$ 1.3 bn 81.2% US$8.2mn Market cap Free float Avg. daily volume Target mkt cap SAR43.9bn 13.1%over current Consensus mkt cap SAR39.6bn2.1% over current Current mkt cap SAR38.8bn as at 6/1/213 Research Department Mazhar Khan Tel , khanm@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes Robust cement demand on the back of large-scale government investments will ensure cement companies remain profitable in the coming years. Projects, worth US$7bn, are in the pipeline, which are expected to boost cement consumption across the Kingdom. We expect cement consumption to grow at a CAGR of 6% through 215, with the lion s share of the demand emanating from the central region followed by the western region. Implications We rate Yamama Cement Company and Arabian Cement Company as Overweight. We expect both these companies to deliver a solid operating and financial performance over the next couple of years on the back of rising demand. Al Jouf is a newly incorporated company and is passing through a high growth phase. We rate Al Jouf Overweight. We rate Saudi Cement Company as Neutral as it lacks expansion plans for future growth. We rate Qassim Cement Company as Neutral as the company lacks long-term growth. What do we think? Stock Rating Price Target Yamama Cement Overweight SAR61. Arabian Cement Overweight SAR65. Al Jouf Cement Overweight SAR19. Saudi Cement Neutral SAR98. Qassim Cement Neutral SAR84. Why do we think it? Stock 3 year EBITDA CAGR 213 EV/EBITDA Yamama Cement 9.1% 8.6x Arabian Cement 9.5% 6.x Saudi Cement.29% 11.3x Al Jouf Cement 18.8% 12.2x Qassim Cement.18% 9.5x Where are we versus consensus? SAR 12 Saudi Cement sector: Outlook positive but concerns persist With massive investments ongoing in the infrastructure space, the outlook for the Saudi cement sector looks positive in the coming years. Cement companies have benefited largely from cheap raw materials and fuel availability, making them outstandingly profitable. However, there are some concerns on fuel supply which acts as a major hurdle for the sector. We prefer Arabian Cement for its proximity to high demand areas and Yamama Cement for its well entrenched brand image. Further, Al Jouf Cement s expansion plans and improving operating rates look exciting, despite the export ban. On the other hand, we are Neutral on Saudi Cement and Qassim Cement as capacity constraints limit their future growth. Government spending remains the key driver. The demand for Saudi cement sector is benefiting from massive investments currently underway as Saudi Arabia is strengthening its non-oil sector. The government has initiated plans to execute projects, worth US$7bn, over the next 2 years. Nearly half of the government investments are set aside for real estate and housing sectors. Government spending remains the major catalyst for the cement sector over the near-term. Investment in real estate will provide opportunities. Over the past eight years, Saudi Arabia s population has grown at a CAGR of 3%, driven mainly by a young population. This increase in population and expats coupled with declining household size has enhanced the housing demand. High residential demand and the government s recent announcement of constructing 5k residential units (allocation of SAR25obn) have brightened the outlook for cement companies. Concerns on fuel supply still remain. Despite buoyant demand, the cement sector is facing difficulty in ensuring smooth supply of fuel from the Government. A majority of cement companies are undergoing expansion plans in order to fulfill huge demand in the Kingdom, but uncertainty on fuel remains a major hurdle for the sector and could impact future growth. Attractive dividend yield. Cement companies in the kingdom have shown sable expansion in their business and rewarded investors with robust dividend policies. Based on our dividend forecasts for 213, Saudi Cement s dividend yield stand at a highest at 7.6%, followed closely by Qassim Cement (7.5%) and Yamama Cement (7.3%). Arabian Cement, on the other hand, provides a decent dividend yield of 6.. These high dividend yields are again a motivation to invest in cement companies. 8 4 Yamama Cement Arabian Cement Saudi Cement Current Consensus ARC Source Bloomberg, Al Rajhi Capital Jouf Cement Qassim Cement Targets revised due to lower than expected profits. We have cut the target of Arabian Cement from SAR78 to SAR65 after its subdued performance in H We also remain Overweight on Yamama Cement (SAR61), and Al Jouf Cement (SAR19), while we are Neutral on Qassim (SAR84) and Saudi Cement (SAR98). With domestic sectors in focus, we see huge interest among local investors for cement and thus see upside potential among selected companies. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

34 Saudi Cement Sector Cement Industrial 8 January 213 Solid demand for the next two years should keep the cement manufacturers interested in the domestic market Saudi Cement sector: Demand outlook positive To grow at a CAGR of 6% until 215 The mammoth infrastructure development across the Kingdom ensures continuous flow of cement demand. Overall, we expect demand to rise gradually over the next three years from around 51mn tons in 212 to 6mn tons by 215, at a CAGR of 6%. The announcement of 5, units should take concrete shape over the next couple of years a move which will keep cement producers interested. Several other companies like Qassim Cement, Arabian Cement and Al Jouf Cement have firmed up plans to increase their capacity but they have not been able to secure approvals from Aramco as yet. Due to these prevailing uncertainties we believe supply will remain neck-to-neck with demand over the next three years at least, and though the growth in profitability might be muted, stable costs will ensure high margins and profitability will remain intact for the companies. Figure 42 Major projects planned in KSA Source: Govt. announcements, Al Rajhi Capital Higher volumes sold post ramadan and Hajj Cement demand has picked up post Ramadan, as denoted by the monthly sales data of the companies. After a 39% M-o-M decline in volumes in August (to 2.5mn tones) owing to Ramadan, cement dispatches jumped 57%, in September and stabilizing thereafter. Traditionally Q4 has always been better compared to Q3, which coincides with summer and holiday season. We expect the trend to continue for H1 213 as well. However there are some concerns as well which might affect the performance of the sector in 213. With the government s decision to fix the selling price to SAR24 a ton, the only way cement companies will show growth in their earnings is by increasing volumes sold or cutting their overall costs. The companies are already experiencing full capacity and cost cutting does not seem to work as the players are already in a matured stage of business. Therefore, we do not expect a major profitability growth for the companies to come in 213. Fuel supply has been a major hindrance for capacity expansions One of the major concerns governing the cement sector for past one year has been the matter of fuel supply. Fuel supply has remained an uncertainty and has hindered the progress of existing companies with several capacity expansions getting delayed or awaiting approval. Another major hindrance is ceiling on cement prices at SAR24 a ton which, in our view will arrest profit growth for the companies. As a result, we have cut down our revenue estimates for all companies under our coverage and thus this cut has trickled down to the companies bottom-lines. Disclosures Please refer to the important disclosures at the back of this report. 33

35 Saudi Cement Sector Cement Industrial 8 January 213 Figure 43 Cement dispatches M-o-M Figure 44 Inventory levels each month (212 v/s 211) 6 in ' Jan Feb March April May June July August Sept. Oct. Nov. Monthly dispatches M-o-M change Estimates revised down but still reiterate our ratings With a cap on cement prices and declining clinker inventory, we expect growth in dispatches to slow down. We have cut our estimates for companies located in central and eastern region as these companies might experience high competition and eating market share. While we have cut our estimates and target price for Arabian Cement and Yamama Cement, we remain Overweight on them. We still remain Overweight on Al Jouf and positive about its second production line due to start in 215. We remain Neutral on Saudi Cement, as the stock has already risen 31% this year and we see limited upside potential. We also remain Neutral on Qassim Cement due to limited capacity expansion plans and falling inventory levels. Figure 45 Cement Sector Company Rating Target Price Market Cap. (SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield (SAR) (SARmn) 213E 213E 213E 213E Yamama Cement Overweight 61. 9, x 8.6x % Arabian Cement Overweight 65. 4,6 7.8x 6.x 34.1% 5.9% Al Jouf Cement Overweight 19. 2, x 12.2x 25.2% 3. Saudi Cement Neutral , x 11.3x 5.1% 8.1% Qassim Cement Neutral 84. 7, x 9.5x 8.7% 7.4% Disclosures Please refer to the important disclosures at the back of this report. 34

36 RSI1 Ma aden Mining Industrial MAADEN AB: Saudi Arabia 8 January 213 Rating Target price Current price OVERWEIGHT SAR37. (1.4% upside) SAR33.5 Key themes & implications Capitalizing on Saudi Arabia s vast mineral wealth, Ma aden has forayed into two new businesses phosphate (started in 211-end), and aluminum (to begin by 214-end). We believe the company will benefit from the cheap feedstock as well as government support to emerge as a success story over the long-term. We believe the company s topline will surge over SAR1bn by 215, with the commencement of its new businesses. Share information Market cap (SAR/US$) 29.5bn / 7.74bn 52-week range Daily avg volume (US$) Shares outstanding 7.2mn 925.mn Free float (est) 33% Performance 1M 3M 12M Absolute -1.6% -6.3% 25.6% Relative to index -.1% 16% Major Shareholder: Public Investment Fund 5. GOSI 7.7% Valuation 12/12E 12/13E 12/14E 12/15E P/E (x) na P/B (x) EV/EBITDA (x) na Dividend Yield.. 1.1% 1.8% Performance Price Close Relative to TADAWUL FF (RHS) /11 3/12 6/12 9/12 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Ma aden was established in 1997 by the Saudi Government to facilitate the development of Saudi Arabia s non-petroleum minerals. PIF owns 5 stake in Ma aden. In July 28, Ma aden was listed on the Tadawul. The company s business was mainly gold exploration, which has now been diversified into phosphate (which started in Q4 211) and aluminum businesses (expected to start by 214-end) as well. Ma aden Aggressive growth strategy Ma aden is the largest mining company in Saudi Arabia. The company, traditionally a gold miner, has successfully commenced its phosphate operations in 212, while the aluminum business is slated to begin by 214. The demand outlook for phosphates appears positive, despite a slowdown in the global economy. We believe Ma aden offers long-term earnings accretion and hence, we maintain Overweight rating with a target price of SAR37. Business segments Gold: Ma aden is the largest gold miner in Saudi Arabia producing close to 15, ounces of gold in 211. However, production has declined since it peaked in 25 (23,665 ounces), as drilling activities has been curtailed to increase the life span of existing mines. Two mines Ad Duwayhi and As Suq which are under construction, can add about 3 to Ma aden s current production levels by 214. Phosphate: Ma aden operates its phosphate business with a production capacity of 3mn tons of diammonium phosphate (DAP), 1.1mn tons of ammonia, 4.5mn tons of sulfuric acid and 1.4mn tons of phosphoric acid. The company is building a 16mtpa phosphate project at Umm Wual to commence in Q4 216, at an estimated project cost of SAR26bn. Aluminum: The aluminum project is set to launch by 213 with a capacity of 74, tpa of aluminum and later add 1.8 mtpa of alumina by 214. Further, the company is also building a refinery and a new production line with a capacity of 1, tpa of aluminum sheets. Operational highlights Ma aden commenced commercial production of DAP in 212 diversifying away from gold. This resulted in revenue to surge by around 7.2 times to SAR1.6bn in Q3 212 as compared to Q3 211, while net income grew by 11.5 times to SAR311mn over the same period. The company has recently awarded the FEED and PMC contracts for development of the SAR26bn Umm Wual project. Financial highlights Research Department Mazhar Khan, Tel , khanm@alrajhi-capital.com Ma aden posted 34.1% revenue CAGR for to reach SAR1.5bn, on the back of higher gold prices and steady production. Net income grew at a CAGR of 5.4% over the same period to reach SAR413mn. That said, the two important triggers for Ma aden going ahead is reaching 1 capacity in DAP production and aluminum ramp up. Period End FY 28 FY 29 FY 21 FY 211 FY 212E Revenue (SAR mn) ,514 4,64 Revenue Growth (%) 88.5% 37.9% 11.4% 114.3% 26.4% Gross profit margin (%) 49.3% 51.7% 54.5% 68.2% 37.5% EBITDA margin (%) 13.9% 28.8% 22.2% 55.5% 5. Net profit margin (%) 43.2% 62.2% (1.3%) 27.3% 16.9% EPS (SAR).2.4 (.1).4.9 EPS growth (%) NA 98.7% NA NA 9.3% ROE (%) 1.2% 2.4% (.1%) 2.4% 4.4% ROCE (%) (.4%).3%.2% 1.7% 2.9% Capex/Sales (%) % % 736.3% 54.3% 211.2% Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform 35

37 Ma aden Mining Industrial 8 January 213 Figure 46 Revenue and net margin Figure 47 FCF and net debt/equity SAR mn 5, 7 SAR mn 9, 8 4,5 4, 3,5 3, 2,5 2, 1,5 1, , 5, 3, 1, (1,) (3,) (5,) (7,) FY 28 FY 29 FY 21 FY 211 FY 212E -1 (9,) FY 28 FY 29 FY 21 FY 211 FY 212E -8 Revenue Net Margin (RHS) FCF Net Debt/Equity (RHS) Figure 48 ROE and ROA Figure 49 Capex/sales and asset turnover 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% % FY 28 FY 29 FY 21 FY 211 FY 212E FY 28 FY 29 FY 21 FY 211 FY 212E -.6 ROE ROA (RHS) Capex/Sales Asset Turnover ratio (RHS) Figure 5 P/E and EV/EBITDA Figure 51 Dividend payout and dividend yield x 16 x FY 28 FY 29 FY 21 FY 211 FY 212E FY 28 FY 29 FY 21 FY 211 FY 212E P/E EV/EBITDA (RHS) Dividend payout Dividend yield (RHS) Disclosures Please refer to the important disclosures at the back of this report. 36

38 RSI1 Saudi Ceramic Construction & Materials Industrial SCERCO AB: Saudi Arabia 8 January 213 Rating Target price Current price NEUTRAL SAR86 (14.3% upside) SAR75.3 Key themes & implications We expect pressure on margins to continue next year as we believe the high transportation cost coupled with increase in labour cost due to new regulations will affect the company s margins. Furthermore, the company s share price fell sharply as many major shareholders lowered their positions. We lowered our long-term assumptions, and accordingly lowered our target price. Our new target price offers limited upside potential, we therefore downgrade our rating to Neutral. Share information Market cap (SAR/US$) 2.822bn /.752bn 52-week range Daily avg volume (US$) Shares outstanding 1.7mn 25.mn Free float (est) 64% Performance 1M 3M 12M Absolute -1.4% -23.2% Relative to index -4.1% -12.1% -32.5% Major Shareholder: General Social Insurance 15.9% Saleh Abdulaziz Al Rajhi 6.8% Valuation 12/11A 12/12A 12/13E 12/14E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 3.1% 4.7% 5.3% 4.4% Performance Price Close Relative to TADAWUL FF (RHS) /12 4/12 7/12 1/12 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Saudi Ceramic Company is one of the oldest and leading ceramics producers in the Middle East. The company manufactures and markets ceramic products such as ceramic tiles, sanitary ware (bathroom products) and road markers; in addition, the company manufactures water heaters. Saudi Ceramic: outlook not so bright Research Department Moath Al Shaikh Tel , alshaikhma@alrajhi-capital.com Last year was one of the toughest years for Saudi Ceramic Company. Margins for its largest segment (tiles) dropped by almost of 5%. Lack of electricity for its new tile plant in addition to disturbance of raw and finished goods due to transportation difficulties were the main reasons for that. Furthermore, redbricks new plant (planned to commence in 212) was overdue due to continued delays to obtain necessary license to build the plant. The disappointing results accompanied by selling pressure from major shareholders led the stock price decline of 3 since early April 212. Looking ahead for 213, we expect revenues to grow by 13% as capacity and utilization rates for tiles and sanitary ware (bathroom products) improve. That said, we expect pressure from transportation cost to continue. We also expect higher labour cost on the back of the Ministry of Labour s new regulations. As a result, we have lowered our target price for Saudi Ceramic to SAR86. Our new target price offers limited upside potential of 14%. We therefore downgrade our rating to Neutral. Business segments: Tiles: The tile segment is the biggest segment for Saudi Ceramics. It represents 66% from revenues. Saudi Ceramics is the leader in this segment with a market share of around 23%. Sanitary ware: Sanitary ware segment s contribution is about 12% and we expect it to grow as major capacity additions should take place in the middle of this year. This market is dominated by imports (9). SCC s market share is around 7% by our estimates. Heaters: Water heaters segment is the second largest contributor for Saudi Ceramic s top line, but the least in profits. Further, the company has been facing difficulty maintaining its operating margins due to large variations in products mix and fluctuating raw material cost. Expansion plans The current capacities for tile, sanitary ware and heater plants are 52mn sqm per annum, 3.1mn pieces per annum and 1.5mn pieces per annum respectively. The utilisation rates are almost 1 for all the plants. In 213, the tile capacity should increase to reach 63mn sqm per annum. Also the capacity for sanitary ware should increase to reach 3.6mn pieces per annum. Financial highlights Thanks to the strong growth in tile and sanitary ware segments, Saudi Ceramic posted revenue CAGR of 13% over the last four years. Net income, however, lagged this revenues growth as it only grew by 7%. Looking ahead, we expect the company to report decent top line. However, we believe pressure on margins will continue to affect the company s bottom line. Period End (SAR) 12/1A 12/11A 12/12A 12/13E 12/14E Revenue (mn) 1,8 1,221 1,445 1,673 1,867 Revenue Growth 12.7% 13.1% 18.3% 15.7% 11.6% Gross profit margin 36.3% 36.5% 32.1% % EBITDA margin 29.4% 29.8% 25.6% 23.7% 24. Net profit margin 2.3% % % EPS EPS Growth 11.2% 5.8% 1.6% 6.4% 14.9% ROE 23.6% 21.6% 19.3% 18.5% 19.4% ROCE 15.4% 15.2% % 14.5% Capex/Sales 16.6% 22.6% 2.6% Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform 37

39 China Brazil India Iran Egypt USA Saudi Arabia Mexico Spain Italy Russia Turkey France Poland UAE Malaysia Morocco Argentina Iraq UK Portugal Algeria Syria Saudi Ceramic Construction & Materials Industrial 8 January 213 Figure 52 Saudi Ceramics is dominating the tiles market Figure 53 Sanitary ware market is dominated by imports Figure 54 Gross margin dropped sharply in 212 Figure 55 Heaters gross margin also dropped in 212 1, % 1, % 22% % 16% % 12% Sales Gross margin% Sales Gross margin% Figure 56 We expect EBITDA margin to further decline in 213 Figure 57 Saudi & UAE are the biggest consumers per capita FY11 FY12E FY13E FY14E FY15E FY16E. EBITDA EBITDA% Consumption per capita (mn sqm) Source: Infotile, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 38

40 RSI1 Astra Industrial Group Diversified Operations Industrial ASTRA AB: Saudi Arabia 8 January 213 Rating Target price Current price OVERWEIGHT SAR46.2 (19. upside) SAR38.8 Key themes & implications Industrial companies such as Astra are concentrating on the domestic market as well as the MENA region. Consequently, we believe Astra s performance will be closely linked with the macroeconomic developments and growth in the MENA region. Share information Market cap (SAR/US$) 2.942bn /.785bn 52-week range Daily avg volume (US$) Shares outstanding.6mn 74.12mn Free float (est) 56% Performance 1M 3M 12M Absolute 3.9% -6.2% 19.2% Relative to index 3.8% -1.4% 9.8% Major Shareholder: Arab Supply & Trading Co. 43.8% Mohammad N. S. Al Otaibi 8. Valuation 12/11A 12/12E 12/13E 12/14E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 4.4% 4.4% 4.4% 5.6% Performance Price Close Relative to TADAWUL FF (RHS) /11 3/12 6/12 9/12 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Astra is a holding company backed by its parent Astra Group the second largest private conglomerate in Saudi Arabia. Astra draws strength from its diverse business interests encompassing pharma, polymers, agrochemicals and steel. Established in 1988 as a limited liability company, Astra was later converted into a closed joint stock company in 28. This was followed by an increase in share capital, after which Astra was listed on the TASI Astra Industrial Group Awaiting Al Anmaa s launch Astra Industrial Group (Astra) has diverse interests in different sectors such as pharmaceuticals, chemicals and steel. The company is one of the leaders in the pharma and specialty chemicals businesses in Saudi Arabia, which should ensure healthy cash flows and stable growth. Astra s investment in Al Anmaa (the Iraqi steel business) was delayed due to technical difficulties. However, we believe once it kicks off, it will boost the company s top-line as well as result in healthy margins on the back of cheap feedstock availability in Iraq. We reiterate our Overweight rating on the stock with a revised target price of SAR46.2. Business segments Research Department ARC Research Team, Tel , research@alrajhi-capital.com Pharma business: Astra s pharma business Tabuk Pharmaceuticals is one of the largest vendors of branded generic drugs in Saudi Arabia. Being the largest segment, it contributed 39% and 54% of the group s revenue and net profit, respectively, in 211. Specialty chemicals business: Astra s polymer business comprising Astra Polymers Compounding Company and Astra Industrial Complex Company, corners more than 7 market share in Saudi Arabia and the UAE. This segment was the second largest contributor in 211, representing 38% and 34% of the group s revenue and net profit, respectively. Steel business: This business consists of the International Building Systems Factory producing prefabricated steel structures and Al Tanmiya Steel, which owns the soon-to-be-launched Al Anmaa steel plant in Iraq. The steel segment represented only 23% and 12% of the group s revenue and net profit, respectively, in 211. However, we believe the launch of Al Anmaa will make it the company s largest segment in future. Operational highlights Astra had announced testing some of the components of the Al Anmaa plant, following its connection to the Iraqi National Grid in July 212. However, there have been no major updates since then. We believe any announcement of Al Anmaa s launch will provide a boost to Astra. Financial highlights Astra posted revenue CAGR of 12.9% over the last four years to reach SAR1.4bn in 211, thanks to the robust growth in its pharma and chemicals businesses. Net income grew at a CAGR of 4.3% over the same period to reach SAR248mn. Period End FY 28 FY 29 FY 21 FY 211 FY 212E Revenue (SAR mn) 991 1,42 1,12 1,382 1,621 Revenue Growth (%) 16.6% 5.1% 7.6% 23.3% 17.3% Gross profit margin (%) 42.3% 44.3% 45.3% 4.1% 39.7% EBITDA margin (%) 2.3% 19.6% 18.4% 15.6% 15.2% Net profit margin (%) 18.7% 19.6% 23.1% % EPS (SAR) EPS growth (%) (5.6%) 9.8% 26.9% (4.2%) 5.5% ROE (%) 12.9% 13.1% 15.4% 13.9% 13.6% ROCE (%) 12.4% 1.5% 8.7% 9.1% 9.1% Capex/Sales (%) 2.9% 7.6% 26.2% 16.4% 13.1% Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform 39

41 Astra Industrial Group Mining Industrial 8 January 213 Figure 58 Revenue and net margin Figure 59 FCF and net debt/equity SAR mn 2, 25% SAR mn , ,2 15% (1) % (2) -1 FY 28 FY 29 FY 21 FY 211 FY 212E (3) FY 28 FY 29 FY 21 FY 211 FY 212E -15 Revenue Net Margin (RHS) FCF Net Debt/Equity (RHS) Figure 6 ROE and ROA Figure 61 Capex/sales and asset turnover % 12% 8% 4% 25% 2 15% 1 5% FY 28 FY 29 FY 21 FY 211 FY 212E FY 28 FY 29 FY 21 FY 211 FY 212E. ROE ROA Capex/Sales Asset Turnover ratio (RHS) Figure 62 P/E and EV/EBITDA Figure 63 Dividend payout and dividend yield x 2 x 3 6 8% % 6% % % % % 1% FY 28 FY 29 FY 21 FY 211 FY 212E FY 28 FY 29 FY 21 FY 211 FY 212E P/E EV/EBITDA (RHS) Dividend payout Dividend yield (RHS) Disclosures Please refer to the important disclosures at the back of this report. 4

42 RSI1 Al-Hassan G.I. Shaker Co Wholesale Industrial SHAKER AB: Saudi Arabia 8 January 213 Rating Target price Current price OVERWEIGHT SAR83.5 (26.5% upside) SAR66. Research Department Moath Al Shaikh Tel , alshaikhma@alrajhi-capital.com Key themes & implications We believe the AC market will continue to tread the growth path. Shaker occupies a formidable position in the Saudi AC market - we estimate that it enjoys the highest market share in split AC space and a decent market share in window ACs. We believe Shaker s strategy of manufacturing LG airconditioners in Saudi will open a major channel for government projects and will drive the company s growth. We believe growth in profitability coupled with decent dividends will support the share price. Share information Market cap (SAR/US$) 2.432bn /.649bn 52-week range Daily avg volume (US$) Shares outstanding 1.5mn 35.mn Free float (est) 66% Performance 1M 3M 12M Absolute -4.7% -5.4% 9.5% Relative to index -8.8% -7.1%.2% Major Shareholder: Ibrahim Abu Nayan and Brothers Co. 12.2% Abdulgader Almuhaideb and Children Co. 12.2% Valuation 12/11A 12/12E 12/13E 12/14E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 5.3% 6.1% 6.8% 6.8% Performance Price Close Relative to TADAWUL FF (RHS) /12 4/12 7/12 1/12 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Shaker is one of the biggest manufacturers/ distributers of ACs in the Kingdom. It has a JV with LG through which it manufactures air-conditioners under the famous brand name of LG. Further, Shaker exclusively distributes the respected Chinese Midea AC as well as McQuay Air Conditioning. Moreover, the company has bagged many exclusive distribution rights of many home appliance products such as refrigerators, washing machines and kitchen appliances Al Hasan Shaker share price lagging Following our initial coverage on Shaker on May 212, the company reported solid set of results. Revenues and profits grew for the first 9 month of 212 by 1 and 12% respectively. Shaker benefitted strongly from the huge government expenditure especially in the Educational sector. For 213, the Saudi Arabian government announce spending budget of SAR81bn. Further, educational sector has its biggest share of it with around 25% (up from 21% last year). We strongly believe Shaker is well positioned to benefit from these huge expenditures as it has been the case before. Shaker is trading on a forward PE of 9.8 and a 213 EV/EBITDA of 9.7. We further note that the share price did not react with the company s good results as the share price only rose by 6.5% in 212. We maintain our target price for the company and maintain our overweight rating. Our target price offers 26.5% from current prices. Market is still booming: We believe the boom in the Saudi construction market will play a crucial role in stimulating the air-conditioning demand. By our estimates, the size of the Saudi air-conditioning market is currently above SAR4.4bn and is expected to grow further capitalizing on the growth in the building and construction industry from both private and government projects. In addition, while Split and Windows AC are still dominating the market, Chillers and Packaged AC are currently outperforming in terms of growth. Biggest government budget should ensure growth: The government of Saudi Arabia announced its budget with spending reaching SAR81bn. Education and health care are among the biggest beneficiary sectors. We strongly believe Shaker will benefit from these huge expansions as the company s products were largely used in previous projects. Additionally, the government huge housing projects should also act as a catalyst for the company to boost its sales although the horizon for these projects might take a while. Strong growth in LG sales: For the first nine months of 212, LG segment sales grew strongly by 9%, although slightly lower than our estimates. We expect the growth to continue next year as we expect the company to report revenue of SAR1.5bn from LG segment, up by 1 from 212. We further note, LG is the largest segment for Shaker with a contribution of around 82% of revenues. Financial highlights Thanks to the strong growth in LG products, Shaker posted revenue CAGR of 2 over the last four years. Similarly, EBITDA and net income also grew strongly by a CAGR of 2 and 15% respectively. Looking ahead, we expect the company to report decent top and bottom line growth in 213. We also believe dividend will increase in 213 to reach SAR4.5, implying a 6.8% dividend yield. Period End (SAR) 12/1A 12/11A 12/12E 12/13E 12/14E Revenue (mn) 1,156 1,566 1,737 1,981 2,122 Revenue Growth 15.8% 35.5% 1.9% % Gross profit margin 33.5% 29.8% 3.1% 3.3% 31.3% EBITDA margin % 16.3% 15.8% 16.9% Net profit margin 12.6% 11.5% 11.6% 11.9% 12.8% EPS EPS Growth 9.6% 24.1% 11.7% 16.9% 15.3% ROE % 39.4% 4.5% 4.1% ROCE 35.3% 34.8% 36.3% 35.5% 34.7% Capex/Sales 8.3% 4.6% 2.8% Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform 41

43 Al-Hassan G.I. Shaker Co Wholesale Industrial 8 January 213 Figure 64 Saudi AC market (SAR mn) Figure 65 Saudi AC market break down (by value) 3, 15. 2, , 13. 1, , E 213E 214E 9. Window Split Packaged Chillers CAGR % - rhs Source: Company prospectus, Al Rajhi Capital estimates Source: Company prospectus, Al Rajhi Capital estimates Figure 66 Shaker revenue and profit growth Figure 67 Shaker gross profit forecast (SAR mn) 1,6 1,4 1,2 1, E 211A 212E 213E 214E 215E 216E 25. Revenues Gross profit EBITDA Net profit LG gross profit Other gross profit Shaker gross margin % - rhs Figure 68 Split AC market size & Shaker s market share Figure 69 Windows AC market size & Shaker s market share 3,5 6 1,2 3 3, 55% 1, 25% 2, , 1,5 45% % 1, 35% % 25% Market value (mn SAR) Shaker Market Share% Market value (mn SAR) Shaker Market Share% Source: Company prospectus, Al Rajhi Capital estimates Source: Company prospectus, Al Rajhi Capital estimates Disclosures Please refer to the important disclosures at the back of this report. 42