Saudi Arabia Fertilizers Company - SAFCO

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1 Recommendation Fair Value (SR) Price as of 19 th of November 2013 (SR) Expected return Company data Tadawul symbol 52- week high (SR) 52-week low(sr) YTD change Average trading volume (thousand shares) Market Cap (million SR) Market Cap (million USD) Number of shares issued (million) Free float Financial indicators Revenues (million SR) Net Income (million SR) EPS (SAR) PE ratio (x) P/BV (x) Dividend yield Net Income growth *Ending Q ,789 3, % %.517 Source: Albilad Capital estimates, Tadawul ,051 4, % %1.1. For more information you may contact: Turki Fadaak Research & Advisory Manager LTM* 4,637 3, % % ,980 3, % %915- Revise % 2020.SE % ,667 13, % SAFCO Tadawul Petrochemicals Index Tadawul Index Quarterly Update SAFCO`s third quarter was in-line with the consensus estimates making SAR 734 million in the third quarter of the current year higher than the previous quarter, although the company showed Y-on-Y earning s decline. Income Statement In the first three quarters of 2013, revenues declined by 9.59%, compared to 2012 first three quarters, to SAR 3,233 million due to the decline in selling prices. Cost of goods sold increased by 1.75% to SAR 1,032 million, which led to a decline in the gross profit margin by 356 basis points to 68.06% versus 71.62% in the first three quarters of Selling, general, and administrative expenses increased by 1.22% to SAR 61 million. Other income also increased by 6.23% compared to the same period last year. Thus, during the first three quarters of 2013, the company realized a decline in net income by 13.29% recording SAR 2,358 million compared to the same period last year. In addition, the company s net income margin also declined to 72.96% versus 76.07% during the same period last year. Balance Sheet In 2012, total assets grew by 7.36%, in comparison to the previous year, reaching SAR 10,032 million and declined by 14.91% in the first three quarters of 2013 to SAR 8,536 million, compared to the ending balance in December Key highlights: 1. Increase in fixed assets due to capital expenditures amounting to SAR 573 million and SAR 687 million during 2012 and 2013 first three quarters, respectively. 2. Increase in 2012 inventory by 13.72% compared to 2011 and the decline in 2013 third quarter ending balance by 3.11% compared to the same period last year to reach SAR 395 million. 3. Decrease in 2012 accounts receivable ending balance by 5.56% compared to 2011 and by 11.73% during 2013 first three quarters versus the same period last year to reach SAR 662 million in September Increase in 2012 accounts payable ending balance by 54.37% compared to last year and by 37.12% during 2013 first three quarters compared to the same period last year to reach SAR 573 million in September Or Albilad Capital Head Office: Tel : Fax : P.O. Box 041 Riyadh

2 USD / Ton USD / Ton Saudi Arabia Fertilizers Company - SAFCO Firtilizers Sector Urea prices dropped 3.3% from July to September, but the commodity recorded plunge of 11% in early September before reversing upwards. In addition, Ammonia prices plunged by 18% during the same quarter. Ammonia Urea In the third quarter, Urea demand from China increased but was offset by additional supply. China exported 2.8 million ton in July and August, compared to 1 million ton in the same period last year. In addition, china`s production increased by 8% year to August. In Western Europe, Nitrogen fertilizers` shipments declined by 9% but imports increased by 7% during the third quarter. In India, fertilizers sales increased by 13% from April to September while imports increased to 3.1 million ton from 1.7 million ton in the corresponding period of last year. In Brazil, consumption increased by 8% while imports surged to 2.2 million ton from1.7 million ton year to date. 2

3 Valuation and Recommendation SAFCO showed an expected decline in earnings during the third quarter. We maintain our fair value of SAFCO at SAR per share. SAFCO`s share price exceeds our fair value by 1.61%, thus, we assign revise recommendation Net Income (million SAR) 4,110 3,866 3,750 4,494 4,494 5,079 4,110 Dividends Paid (million SAR) 3,000 3,250 3,667 3,923 4,394 4,965 3,000 Net Income Growth 27% -6% -3% 7% 12% 13% 27% Payout Ratio 73% 84% 98% 98% 98% 98% 73% Fair Value Stick Price as of 25 th of November Expected Return -1.61% Recommendation Revise 3

4 Q3 Q3 Balance sheet (million SR) Change Balance sheet (million SR) Change Current Assets 4,108 2, % Current Assets 3,637 4,727 5, % Investment in Affiliated Companies % Investments % Fixed Assets 3,767 4, % Fixed Assets 3,726 3,613 3, % Other Long Term Assets % Other Long Term Assets % Total Assets 8,744 8, % Total Assets 8,379 9,345 10, % Current Liabilities % Current Liabilities % Long Term Debt - - Long Term Debt Other Long Term Liabilities % Other Long Term Liabilities % Shareholders' Equity 7,686 7, % Shareholders' Equity 7,134 8,210 8, % Liabilities and Shareholders' Equity 8,744 8, % Liabilities and Shareholders' Equity 8,379 9,345 10, % 9M 9M Income statement (million SR) Change Income statement (million SR) Change Revenues 3,576 3, % Revenues 3,789 5,051 4, % Cost of Revenues 1,015 1, % Cost of Revenues 1,100 1,286 1, % Gross Profit 2,561 2, % Gross Profit 2,690 3,765 3, % Selling, General, and Admin. Expenses % Selling, General, and Admin. Expenses % Net Interest Expense % Net Interest Expense (8) (12) (29) 146.8% Other Expenses/(Income) (291) (309) 6.2% Other Expenses/(Income) (665) (502) (422) -15.9% Total Other Expenses/(Income) (231) (248) 7.5% Total Other Expenses/(Income) (606) (423) (364) -13.7% Net Income Before Zakat 2,792 2, % Net Income Before Zakat 3,296 4,188 3, % Zakat % Zakat % Net Income 2,720 2, % Net Income 3,235 4,110 3, % 9M 9M Cash flow statement (million SR) Change Cash flow statement (million SR) Change Net Income Before Zakat 2,792 2, % Net Income Before Zakat 3,296 4,188 3, % Depreciation and Amortization % Depreciation and Amortization % Inventory (35) % Inventory (33) (27) (51) 91.3% Accounts Receivable % Accounts Receivable (238) (41) 1 Accounts Payable % Accounts Payable (297) % Other Changes in Cash Flow From Operations (329) (367) 11.4% Other Changes in Cash Flow From Operations (591) (332) (453) 36.4% Change in Fixed Assets (385) (687) 78.5% Change in Fixed Assets (123) (201) (573) 184.6% Other Changes in Cash Flow From % Other Changes in Cash Flow From % Investing Change in Activities Debt (80) (40) -50.0% Investing Change in Activities Debt (237) (193) (120) -37.8% Dividends Paid (3,250) (4,000) 23.1% Dividends Paid (3,250) (3,000) (3,250) 8.3% Beginning Cash Balance 3,280 3, % Beginning Cash Balance 2,964 2,256 3, % Ending Cash Balance 2,841 1, % Ending Cash Balance 2,256 3,280 3, % Source: SAFCO Filings 4

5 Definitions Earnings Per Share It is an indicator of the company's profit in Saudi Riyals per each outstanding share. It is calculated by dividing the company s net income of by the number of outstanding shares. Revenue Is the amount of income that is brought into a company by its business activities. Gross profit A company s profit after deducting the cost associated directly with its sales or production. Does not include indirect cost like depreciation, interest, tax and non-operating expense. Price-to-earnings (P/E) Ratio It is the price paid by the company shareholders for the earnings of one of its shares. It is used to compare the prices of the company s shares with that of another company within the same sector. If the P/E is higher than the sector s average, it indicates either the share is overpriced or that there is a greater expectation for the company to generate more profits in the future, and vice versa. It is calculated by dividing the price of a share by the share s earnings in Saudi Riyals Book value per share The company's book value represents the value of the company in the event of liquidation or exit. Dividing the book value by the company s number of issued shares represents the book value of a share. Price-to-book (P/B) ratio It represents the market price per share vis-à-vis its book value. It is used to compare between companies within the same sector and comparing them to the sector s average. If the number is higher than the average, it means that the company s price is traded higher than its book value. This means that either the share is overpriced or that the company is in a growth state; and vice versa. The number is calculated by dividing the share s market price by its book value. Return on equity It is a percentage representing the extent of the company's efficiency in achieving earnings from the shareholders investment. It is calculated by dividing the company s net income by Shareholders' equity. The higher the percentage, the higher the efficiency, and vice versa. Net Debt Total long-term debt after deducting cash on hand and in banks. Enterprise Value It is the market capitalization plus net debt. Time horizon We recommend using a Time horizon of 9 to 12 months, during which the current price might reach the Target price Albilad Capital Rating Methodology Al-Bilad Capital uses its own evaluation structure, and its recommendations are based on quantitative and qualitative data collected by the analysts. Moreover, the evaluation system places covered shares under one of the next recommendation areas based on the closing price of the market, the fair value that we set and the possibility of ascent/descent. Overweight: Hold: Revise: Underweight: The Target share price exceeds the current share price by 02%. We expected the share price to reach the Target price over the next 9-12 months The Target share price exceeds the current share price by less than 15%. We expected the share price to reach the Target price over the next 9-12 months The Target share price is less than the current share price by less than 10%. We expected the share price to reach the Target price over the next 9-12 months The Target share price is less than the current share price by 01%. We expected the share price to reach the Target price over the next 9-12 months 5

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