Marmore Corporate Reports. Saudi Basic Industries Corporation. subsidiary

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1 Marmore Corporate Reports Saudi Basic Industries Corporation Country Sector Saudi rabia Materials

2 MRMORE CORPORTE RESERCH SBIC pril 2015 Research Team M.R. Raghu CF, FRM Head of Research N.C. Karthik Ramesh Manager Research Irfan hmed Naheem nalyst Support Team Jenevivu Lasrado Secretary, Research Nataraj Balakrishnan Manager dmin & Support Disclaimer This report has been prepared and issued by Marmore MEN Intelligence Ltd (Marmore), a fully owned research of Kuwait Financial Centre Markaz K.P.S.C. Marmore is a private limited company registered with the Registrar of Companies in India. This Report is owned by Marmore and is privileged and proprietary and is subject to copyrights. Sale of any copies of this Report is strictly prohibited. This Report cannot be quoted without the prior written consent of Marmore. ny user after obtaining Marmore's permission to use this Report must clearly mention the source as Marmore." The Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable, but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, interpretations, estimates, and projections in this report constitute the current judgment of the author as of the date of this Report. They do not necessarily reflect the opinion of Markaz or Marmore or other identified parties and are subject to change without prior notice. Neither Marmore nor Markaz have an obligation to update, modify, or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast, or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This Report may not consider the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. ccordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance. Markaz may seek to do business, including investment banking deals, with companies covered in its research reports. Markaz may have interests in the areas covered in this research report. Markaz, Markaz managed entities, its clients, or its employees may have from time to time long or short positions in any security, derivative or other types of assets referred to in this research report. s a result, investors should be aware that Markaz may have a conflict of interest that could affect the objectivity of this report. This report may provide the addresses of or contain hyperlinks to websites. Except to the extent to which the report refers to website material of Markaz and Marmore, Markaz has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz s or Marmore s own website material) is provided solely for your convenience and information, and the content of the linked site does not in any way form part of this document. ccessing such website or following such link through this report or Markaz s or Marmore s website shall be at your own risk. For further information, please contact Markaz at P.O. Box 23444, Safat 13095, Kuwait; info@e-marmore.com; Tel: ; Fax:

3 Table of contents MRMORE CORPORTE RESERCH SBIC pril Executive Summary Business Overview... 8 Overview... 8 Porter five force analysis...21 STEEPLED analysis Financial Overview...31 Revenue...31 Key Financial Ratios...33 Capital Expenditure...34 Debt/Equity Ratio (D/E)...35 Return on Equity (ROE) and Return on sset (RO)...35 CFO-to-Sales...36 Earnings Quality (EQ) Projections Peer nalysis...42 Regional Peers...42 Global Peers Share Market Overview...46 Dividend...48 Risk Metrics...48 Liquidity...49 nalyst Calls ppendix...51 Sector Overview

4 Tables and Charts MRMORE CORPORTE RESERCH SBIC pril 2015 Tables Charts 1.1 Summary 2.1 SBIC: Business lines 1.2 Business View 2.2 SBIC Revenue: Business line-wise 1.3 Financial View (Long term view) 2.3 Production by Business Unit, Performance Indicators 2.4 Production Volumes 2.2 SBIC Business Segment and reas 2.5 Segment-wise revenue contribution ( ) 2.3 SBIC: Direct Investment and Related Entities 2.6 Fertilizers Segment Revenue ( ) 2.4 Summary of Porter s Five Forces analysis 2.7 Metals Segment Revenue ( ) 2.5 Summary of STEEPLED analysis 2.8 Corporate Segment Revenue ( ) 2.6 SWOT analysis 3.1 Total Sales (USD Mn) 3.1 Financial Ratios 3.2 Major segment sales (USD million) 3.2 Earnings Quality across time periods 3.3 SBIC CPEX, USD Millions and Capex/Sales ratio ( ) 3.3 Earnings Quality Components 3.4 SBIC D/E Ratio, ( ) 4.1 Projections for Income Statement, Balance 3.5 ROE & RO Sheet 4.2 Business Segment wise revenue projections 3.6 Cash Flow from Operations (in USD mn) and CFO-to- Sales ratio, Regional Peer Overview 3.7 Nine months Income Statement, (USD mn) 5.2 Peer comparison based on size, P/E and dividends (2013) 3.8 Balance Sheet as on September 2014 & 2013, (USD mn) 5.3 Peer comparison based on returns and margins (2013) 6.1 SBIC vs. Tadawul ll Share Index, Rebased 2009 to 31st Dec, Peer comparison based on Balance Sheet 6.2 SBIC Volume traded (in mn) vs. Price strength (2013) 5.5 Rankings of Closest Regional Peers based on 6.3 Risk vs. Return: SBIC, Peers and Tadawul Index, Market Cap 6.1 Returns of SBIC vs. Tadawul index 6.2 SBIC Dividends, Risk Metrics 6.4 Liquidity Metrics 6.5 nalyst Calls 7.1 Projections for Income Statement, Balance Sheet 7.2 Board of Directors and Executive Management 7.3 Board Compensation 4

5 MRMORE CORPORTE RESERCH SBIC pril Executive Summary SBIC is presently ranked amongst the world s largest petrochemicals manufacturer. Table 1.1: Summary Market Cap (Feb 15) USD bn Sales (2014) 50.3 bn Listings Saudi Stock Exchange Net Profit (USD bn) 5.9 bn % share in the index 7.2% of Tadawul FF Index Net Debt (USD bn) Number of employees 40,000 P/E 10.9 Number of countries 45 P/B 1.73 Peer group ranking 1 out of 7 regional Div. Yield 6.03% Source: Reuters, Data as on Jan 2014 Established in 1976 by Royal decree, Saudi Basic Industries Corporation (SBIC) is presently ranked amongst the world s largest petrochemicals manufacturer. Based in Riyadh, Saudi rabia, SBIC is public company with 70% stake owned by the Saudi rabian government, 5.6% is held by General organisation for Social Insurance (GOSI) and the remaining 24.3% by private investors based in Saudi rabia and other Gulf Cooperation Council countries. The petrochemical segment contributed over 86% to SBIC s revenue in SBIC is composed of six business units: chemicals, polymers, performance chemicals, fertilizers, innovative plastics and metals and generated revenues of USD 50.34bn in The petrochemical segment contributed over 86% to SBIC s revenue in The next big segment in terms of revenue is the minerals/metals segment, generating over 5% of the revenue. From , the revenue from all the four business segments has grown at CGR of 6%. We estimate the combined revenue from all the segments in 2015 to decline by almost 10%, in comparison to

6 MRMORE CORPORTE RESERCH SBIC pril 2015 Table 1.2: Business View SBIC s diversity in terms of geography and product line are its business model strengths. Sector ttractiveness Business Model ttractiveness Industry Competitiveness STEEPLED nalysis Source: Marmore nalysis Ratings Low High High Good The materials produced by the petrochemical companies are used to create everyday indispensable products. However, high initial capital expenditure, economies of scale, patented technology, complex supply chain along with environmental and government regulations reduce the attractiveness of the sector. SBIC is one of the leading players in petrochemical sector in the world and also has dominant presence in the domestic markets. SBIC s diversity in terms of geography and product line are its business model strengths. The petrochemical industry is extremely competitive and is also prone to economic downturns. However, the complimenting factors discussed in the STEEPLED analysis indicate potential for growth for SBIC. Table 1.3: Financial View (Long term view) The petrochemical industry is extremely competitive and is also prone to economic downturns. Topline Growth Bottomline Growth Margins ROE Balance sheet Strength CFO CPEX Earnings Quality Source: Marmore nalysis Ratings Moderate Low Low Moderate Good Good Good Good 6

7 MRMORE CORPORTE RESERCH SBIC pril 2015 SBIC has lower debt and stronger balance sheet compared to most of its regional peers. SBIC has grown at a CGR of 6% over the periods. However, the sales declined in 2012 post the growth in 2011, and remained stagnant in 2013 only to decline marginally in 2014 again. The decline and stagnation of revenue is primarily attributable to the weaker European economy and slowdown in China coupled with lower end-product prices as a result of drop in oil prices. The net profits have grown at a CGR of 2% during periods. The profitability margins of SBIC are low, despite the access to cheap feedstock. The reduced return due to lower product prices affects the profitability margins. SBIC has lower debt and stronger balance sheet compared to most of its regional peers. SBIC fares significantly well compared to industry peers in the area of earnings quality. Lower CPEX and higher CFO compared to industry average, has helped SBIC achieve better earnings quality score of 85 compared to industry average score of 54. 7

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