Saudi Basic Industries Corporation (SABIC)

Transcription

1 Saudi Basic Industries Corporation (SABIC) 28 March, 2007 Country: Kingdom of Saudi Arabia Exchange: Saudi Stock Market (Tadawul) Sector: Petrochemical Local Ticker: 2010.SE Reuters Code: 2010.SE Investment Opinion: OVERWEIGHT Last traded Price: SAR Fair Value: SAR Current Price (SAR) YTD Stock Performance % Shares (Million) 2,500 Market Cap (SAR Million) 297,500 EPS 8.13 P/E BVPS, 31-Dec P/B 4.08 Dividend, 2006 (SAR) 4 Dividend Yield (%) week High (SAR) week Low (SAR) Source: Company website and Gulfbase.com Products & Services: Manufacturer of chemicals, plastics, fertilizers, and metals. Share Price Movement The Saudi Basic Industries Corporation (SABIC) enjoys a strong brand image as the largest petrochemicals company in the Gulf region. The company has seen a dream run of profits in the last two years. Backed by the Saudi Government, SABIC carries tremendous credibility and reach. The company s size and integration of operations enable it to reap rich economies of scale. However, countries like Iran and China are ramping up petrochemicals production, which may depress pricing in future. We forecast a 12-month price target of SAR taking into account SABIC s strong fundamentals and give the stock an OVERWEIGHT recommendation. Call us on or us at research@taib.com

2 Background SABIC Saudi s petrochemical behemoth. Giant conglomerate with diverse interests. Footprints across the globe. The Saudi Basic Industries Corporation (SABIC) was established by a royal decree in 1976 to produce chemicals, polymers, and fertilizers. Headquartered in Riyadh, SABIC is the largest and most profitable non-oil company in the Middle East (in terms of market capitalization), and one of the world s 10 largest petrochemical manufacturers. It is ranked 307 th on Fortune Global 500 in SABIC is also the world s single largest producer and exporter of granular urea fertilizer. A heavyweight conglomerate, SABIC has multifarious interests in a variety of sectors and geographies. The company operates 18 large-scale industrial complexes through 19 subsidiaries and joint ventures, including two giant Saudi Arabian production facilities at Al-Jubail, on the Arabian Gulf Coast and Yanbu on the Red Sea coast. It manages six Strategic Business Units (SBUs) including Polyolefins, PVC and Polyester, Fertilizers, Basic Chemicals, Intermediates, and Metals. To remain a frontrunner in providing innovative products, it has established primary research centers in Riyadh and supporting operations in Al-Jubail, Houston (USA), Geleen (the Netherlands) and Vadodara (India). Recently, the company allocated an outlay of USD 8 billion to fund its global ambitions of becoming the foremost petrochemicals company in the world. SABIC s presence is spread across the globe. Its European operations division, SABIC Europe, was initiated by acquiring the Dutch group DSM s petrochemicals business. With headquarters in Sittard, the Netherlands, this division operates two petrochemical production facilities at Gelsenkirchen in Germany, and Geleen in the Netherlands. Polypropylene, polyethylene and other hydrocarbons produced here, at a total yearly capacity of 2.5 million tonnes, are marketed by a network of logistical hubs and sales offices positioned across Europe. Sales and marketing in Asia is coordinated by SABIC s Asia-Pacific business based in Singapore. The company streamlined this operation in 2002, to improve communications and eliminate overlapping of resources amongst its subsidiaries in Hong Kong, Japan, Korea, China, and the Philippines. SABIC Americas Inc. (SAI) is a wholly owned US-based subsidiary. Operating out of Houston, Texas, it is instrumental in marketing, business development, and research and technology, in the region. It is also a leading importer and provider of basic and intermediate chemicals and fertilizer products to industries throughout the USA, Canada, Mexico, Central America, South America, and the Caribbean. Board of Directors Chaired by His Highness Prince Saud bin Thunayan Al-Saud. SABIC s Board of Directors comprises seven members, of which five are government nominees. The Chairman of the company is Prince Saud bin Thunayan Al-Saud. The rest of the board members are as follows: Name Designation Mohamed H Al-Mady Ahmad I Al-Hakami Saleh E Al-Husseini Abdulmuhsin Ibn Abdulaziz Al-Faris Mohammed S Abanumay Abdullah M Al-Issa Vice Chairman & CEO Director Director Director Director Director

3 Major Shareholders and Affiliates 70% with the Govt. and 30% with private investors. SABIC is a public company based in Riyadh. The Saudi Arabian government owns 70% of its shares, and the remaining 30% are held by private investors from both Saudi Arabia and the other countries of the Gulf Cooperation Council. SABIC in turn, holds shares ranging from 24.81% to 100% in subsidiaries and affiliate companies, most of which operate in the kingdom. The company holds 20% share each in Aluminum Bahrain and National Chemical Carriers of Saudi Arabia, and a 17.74% share in United Gulf Industries Corporation, as investments. This apart, it also has stakes in companies operating in the Netherlands, Australia, Germany, and Bahrain. Share Holding Pattern 30% 70% Saudi Arabian Government Private Investors SUBSIDIARIES COUNTRY % SHARE Arabian Petrochemical Company and subsidiary Saudi Arabia % Saudi Iron and Steel Company Saudi Arabia % SABIC Industrial Investments and subsidiaries Saudi Arabia % SABIC Luxembourg S.à.r.l.and subsidiaries Luxembourg % SABIC Asia Pacific Pte.Ltd.and subsidiaries Singapore % SABIC Antilles Netherland % Jubail United Petrochemical Company Saudi Arabia 75.00% National Chemical Fertilizer Company Saudi Arabia 71.50% National Industrial Gases Company Saudi Arabia 70.00% Saudi European Petrochemical Company Saudi Arabia 70.00% Arabian Industrial Fiber Company Saudi Arabia 53.90% Saudi Methanol Company Saudi Arabia 50.00% Arabian Industrial Fiber Company Saudi Arabia 50.00% Saudi Methanol Company Saudi Arabia 50.00% Al-Jubail Fertilizer Company Saudi Arabia 50.00% Saudi Yanbu Petrochemical Saudi Arabia 50.00% National Methanol Company Saudi Arabia 50.00% Saudi Petrochemical Company Saudi Arabia 50.00% Eastern Petrochemical Company Saudi Arabia 50.00% Al-Jubail Petrochemical Company Saudi Arabia 50.00% Saudi Arabian Fertilizer Company Saudi Arabia 42.99% Source: Company Annual Report

4 Asset Structure Fixed assets had the lion s share, Strong financial backbone with deep pockets, In 2006, SABIC s asset base grew by 21.64% to SAR billion from SAR billion as compared to Property, plant & equipment, which constituted 58.40% of total assets, climbed 20.99% to SAR billion. Total long term assets grew 14.80% to SAR billion from SAR billion, of which employee union loan grew 21.50% to SAR 1.4 billion as against SAR 1.1 billion in the previous year. Of the total non-current assets, total long term investment decreased by 40.11% to SAR 3.53 billion as against SAR 5.98 billion. Of this, while investment in associates decreased marginally to SAR 2.7 billion from SAR 2.8 billion, other long term investment jumped to SAR 0.76 billion. On the back of the company s strong brand equity, goodwill rose 8.88% to SAR 3.20 billion from SAR 2.94 billion in Meanwhile, SABIC s current assets increased by 31.43% in 2006, to SAR billion from SAR billion in the previous year. In 2006, SABIC s cash balance decreased from SAR 3.8 billion to SAR 4.9 billion translating into a 21.23% decline, while time deposits jumped to 60.57% at SAR billion from SAR billion as compared to the year ago. This resulted in an overall increase of cash & cash equivalents by 46.32% to SAR billion from SAR billion. Accounts receivable shot up by 13.41% to SAR billion from SAR billion in Concurrently, provision for doubtful receivables inched up 8.5% to SAR 0.19 billion from SAR 0.17 billion. Doubtful receivables came down from 1.20% of accounts receivable from 1.15% in 2005, indicating an efficient receivable policy in place. For the year 2006, SABIC s capacity expansion plan fueled inventory growth by 28.33% to SAR billion from SAR billion in the earlier year. Asset Structure 3% 2% 26% Cash & Cash Equivalents Accounts Receivables & Others Total Inventory Property Plant & Equipment 50% 8% 11% Intangible & other assets Investment Source: Zawya.com

5 Capital Structure Equity based capital structure. SABIC s long term funds comprise mostly of equity. It debt-equity ratio, which stood at a low 0.53 in 2004, decreased to 0.36 by the end of 2005, and rose slightly to 0.46 in This marginal increase was due to a rise in long term debt and in equity. The company s total non-current liabilities, which stood at SAR billion at the end of 2004, fell to SAR billion as of 2005, and again shot up to SAR billion in Simultaneously, total shareholder s equity climbed from SAR billion in 2004 to SAR billion in 2005 and again rose to SAR billion in The equity augmentation was due to retained earnings in the last couple of years. In April 2006, the company declared a stock split of 1:5 thereby enhancing the number of outstanding shares from 400 million to 2000 million. Again in April 2006, SABIC declared a bonus share of 25%, which eventually augmented the capital from SAR 20 billion to SAR 25 billion. The SABIC Sukuk Deal of the Year. SABIC raised SAR 3 billion through Sukuk offerings, in July 2006, which bagged two awards, Sukuk Deal of the Year and Saudi Arabian Deal of the Year conferred by Islamic Finance News. However, this issue of bonds has not altered the debt-equity ratio of the company significantly. Debt-Equity Ratio of Sabic Credit Rating Credit score rating raised to A+ by S&P s. SABIC raised SAR 9.0 billion in debt in the first nine months of 2006, of which SAR 3.0 billion were in sukuk (Islamic bonds). Cash increased by SAR 12 billion, maintaining the company s large net cash position. Going forward, SABIC is expected to raise even more debt in order to diversify its funding sources and capitalize on its strong credit ratings, which will allow it to borrow at attractive rates. Standard & Poor s raised SABIC s credit rating to A+ with a Stable outlook in September The rating agency cited SABIC s leading global position, rising profitability during the past five years, and its sound financing position as the reasons for the up gradation. In their opinion, though the margins of the company are subject to cyclical changes, they are sufficiently high to withstand them. The rating indicates that while SABIC is susceptible to adverse changes in economic conditions as compared to higher rated companies, its capacity to meet all financial obligations remains strong.

6 Industry Scenario Petrochemicals - the biggest boost to regional economic growth. Saudi Arabia - the largest petrochemicals producer. Petrochemicals in a state of flux. Derivative chemicals drive industry growth. Saudi Arabia a better bet. The petrochemicals industry is the third largest source of economic growth and employment in the GCC region. With the production of plastics being downsized in the developed countries leaving a void, this sector is poised on the threshold of a major expansion. Even as global demand for petrochemicals grew at a healthy rate of 7.5% during the 1990 s, the pace is projected to accelerate. Liquid petrochemical exports are expected to increase significantly from 17 million tonnes in 2004 to 50 million tonnes in Favorable demand from China, India, Brazil, and other industrializing countries are a further source of optimism for the sector. To capitalize on these heady times, all the GCC countries including Saudi Arabia, Qatar, Kuwait and Bahrain are in various stages of implementing major projects to increase capacity. Today, Saudi Arabia accounts for over three-fourths of the GCC region s petrochemicals production, which translates into 7% of the global production. According to Saudi Arabia s General Investment Authority, 600 conversion units operate in the country, which use petrochemical feedstock as inputs to produce downstream products, such as storage products, insulation materials, and home goods. Over the next five years, Saudi producers are expected to double their total capacity. Globally, the polyethylene and polypropylene segment is primed to explode. Production, which stood at 227 million tonnes, is expected to grow by 27% and reach 288 million tonnes by In the GCC region, the industry is bracing up to meet this challenge and outpace world expansion, for which strategies are already in place. The industry has pegged its expansion expenses at approximately USD 35 billion, of which 75% may be raised through debt. Leveraging on this exciting climate, SABIC is scheduled to expand its total polypropylene production capacity to 60 million tonnes, while Arabian Industrial Fibers Company, one of its affiliates, is expanding its polyethylene terephthalate (PET) capacity by 230,000 tonnes, annually. Demand for ethylene is also estimated to gallop, as global demand is projected to reach 20% by With eyes firmly fixed on the future, firms are entering into purchase agreements for feedstock, to mitigate a possible raw material crunch, as production is ramped up across the region. Similar expansion is also expected in the production of methanol and other basic chemicals. Within the GCC region, derivative chemicals like polypropylene are expected to beat the growth rate of other chemicals, with projected growth standing as high as 337%. In preparation, most producers have ensured the integration of production facilities with those of basic chemicals, a vital maneuver for the success of derivative chemical firms. Simultaneously, private investment in this segment has also seen more encouragement. Other derivative chemicals for which firms a re-making aggressive expansion plans include ethylene glycol and methyl tertiary butyl ether. While all the GCC countries are racing for the honors, Saudi Arabia and Iran are leading the pack. These two are expected to contribute the most to the capacity expansion. However, Saudi Arabia appears to be the better bet, since Iran may run into difficulties on the political front. Thus, most of the action is concentrated in Saudi Arabia, and SABIC, under the government s benevolent eye, is likely to walk away with the trophy. Recent Performance highest profit achieved since inception. Saudi Basic Industries Corporation (SABIC) reported a record 2006 net profit of SAR 20.3 billion compared to SAR 19.2 billion in 2005, an increase of 6%. These are the highest profits achieved by the company since its inception and has resulted in earnings per share increasing to SAR 8.13 compared to SAR 7.66 in SABIC also reported record results on several other counts - operating profits, production, sales, and revenues. For the year 2006, total operating profits amounted to SAR 35.3 billion compared to SAR 33.1 billion in 2005, an increase of 7%. The total production of SABIC s manufacturing complexes stood at 49.1 million tonnes in 2006 compared to 46.7 million tonnes in 2005, an increase of 5%. Simultaneously, a total of 38.5 million tonnes was marketed as compared to 36.6 million tonnes, an increase of 5% over Sales revenues surged to SAR 86.5 billion compared to SAR 78.3 billion in 2005, an increase of 11%. These were the highest revenues achieved by the company since its inception.

7 Sales vs Net Operating Profit Margin On a sustained growth path. Sales Margin (In Bn) 25,000,000 20,000,000 15,000,000 10,000,000 5,000, Net Operating Margin (%) 0 Q1FY06 Q2FY06 Q3FY06 Q4FY06 Quarters 0 Sales vs Net Profit Margin 25,000, Sales Margin (In Bn) 20,000,000 15,000,000 10,000,000 5,000,000 0 Q1FY06 Q2FY06 Q3FY06 Q4FY Net Profit Margin (%) Quarters Source: Zawya.com SABIC s Capacity Expansion Program SABIC s production capacity increased by 5% to 49.3 million tonnes per annum (mtpa) in 2006 from 46.8 mtpa in Thereafter, new capacity additions in 2006 came in from the following plants: 1. Jubail Petrochemical United Company (United), started its 630,000 tonnes per annum (tpa) of MEG Jubail United Hadeed, SABIC s fully owned steel producer, increased its long products by 500,000 metric tonnes in Projected rise in production capacity to 100 mtpa by SABIC has indicated that production capacity will rise to 100 mtpa by Capacity expansions in the coming four years will derive from existing subsidiaries (Sharq, Al Razi, Ibn Zahr, United, and Hadeed), newly established ones (Yansab and Saudi Kayan) and Huntsman, SABIC s most recent acquisition.

8 New Projects and Strategy Converting the vision into reality. Accelerating global ethylene demand. On an acquisition spree. Many feathers in the cap. SABIC is leaving no stone unturned to capitalize on the existing and anticipated lag between demand and supply in the petrochemicals industry. It has already allocated an outlay of USD 8 billion in expansion projects in the next three years, with USD 70 billion apportioned to take care of the next 15 years. Saudi Arabia s accession to the World Trade Organization as a full member in Dec 2005, has not only added fillip to its business in general, but also to its ambitions of expanding into Europe and China in particular. Apart from exporting, SABIC is busy establishing manufacturing facilities in China to cater to local demand. SABIC enjoys the double benefit of being the largest company in the Middle East and having a strong backing from the Saudi government. Thus, it has virtually no competition to speak of. In December 2005, SABIC entered into an engineering and construction services contract with Technip of Italy and Toyo of Japan to design, supply and construct ethylene and propylene production plants for its major affiliate, the Yanbu National Petrochemicals Company (also known as Yansab). World demand for ethylene led by China grew at a rate higher than the growth of supply from the newly-created plants. In tandem, the GCC countries, primarily Iran and Saudi Arabia are pumping investments into this industry keeping in view the demand from the Asian economies. SABIC s current and planned investment in capacity expansions are expected to reach approximately USD 25 billion in the next five years. This expansion will foster a growth in the annual production capacity, from 47 million tonnes in 2005 to 130 million tonnes by This will not only increase SABIC s manpower employment to more than 25,000, but also facilitate the development of the Arabian economy through finer governance and corporate social responsibility. SABIC and Exxon Mobil are working together on a feasibility study to define a potential project that would assist the growth of two joint petrochemical ventures at Yanbu and Jubail. The project would target a domestic supply of carbon black, and rubber and thermoplastic specialty polymers (EPDM, TPO, Butyl, SBR/PBR) to serve emerging local and international markets. The project is expected to start by In January 2007 SABIC has acquired 100% stake in Huntsman Petrochemicals (UK) Ltd. for a purchase price of USD 685 million in cash. The new entity has been renamed SABIC UK Petrochemicals. The acquisition marks a significant step in SABIC s global growth plans. The former Huntsman business adds substantial capacity to SABIC Europe and complements the group s strong home base in the Kingdom of Saudi Arabia. All 850 Huntsman Petrochemicals (UK) Ltd. employees will transfer to SABIC. The acquired manufacturing business operates an 865 ktpa ethylene/ 400 ktpa propylene cracker and a 1.3 million tpa Aromatics facility with logistical facilities at Wilton and North Tees. SABIC will complete the construction of a new 400 ktpa capacity polyethylene (LDPE) plant in Wilton, Teesside. It is scheduled to come on stream by the end of On January 24, 2007, SABIC signed Letters of Award with two companies to construct new Polypropylene (PP) and Low Density Polyethylene (LDPE) plants at its complex in Al-Jubail Industrial City. The first contract was signed with Samsung Engineering for the construction of a 350 kta PP plant and the second with Simon Carves Ltd. for a 300 kta LDPE plant. SABIC affiliate, SAUDI KAYAN, in which it holds a 35% stake, has signed two letters of award with the first contract being awarded to TECNICAS REUNIDAS GROUP to construct a Phenolics Plant, to produce 240 kta of Bis-Phenol A. The second contract was awarded to DAELIM Industrial Co. Ltd. to construct a Polycarbonate (PC) plant to produce 260 kta of PC. In a later development, in March 2007, the Chairman of SABIC and the CEO of Ma aden signed an agreement in for a strategic joint venture in a phosphate minerals project. Total capital investment in the project stood at SAR 13 billion. SABIC will have a 30% equity share and the remaining 70% balance of ownership will be retained by Ma aden. The project aims to utilize phosphate reserves in the north of Saudi Arabia to produce phosphate fertilizers in the Minerals Industrial City at Ras Az Zawr.

9 Positives A petrochemicals heavyweight, the company enjoys economies of scale, while expansion into related areas and integration of operations provide it economies of scope. Backed by the Saudi Arabian Government, which owns 70%, the company has tremendous financial strength and marketing reach. In 2005, SABIC reported exceptional growth and record profits, which also continued for Negatives SABIC s growth has slowed and falling petrochemical prices may further affect profitability in Prime markets in Asia, such as China, are increasing production capacities; therefore, SABIC may have to contend with a potential oversupply in the market.

10 Valuation: Discounted Cash Flows For our valuation, we have used the Moody s Country Risk Premium of 1.20% for Saudi Arabia and 4.84% for the US markets. The Beta considered for SABIC is valued at Cost of Equity is 11.44% We have used the interest rate on 10-year US treasury notes as the proxy for risk-free rate of interest, since interest rates of Saudi Arabia correlate closely with US rates. At the time of this report, the 10-year US treasury had a yield of 4.61%. Our estimate for the cost of equity, based on CAPM, stands at 11.44%. SABIC s free cash flows have grown substantially during the last few years. We expect the growth to carry on in the next couple of years as well, though at lower rates. The company is relying on the surge in demand for petrochemicals and other chemicals from the Chinese and other emerging economies. However, we expect growth rates to be only moderate, given the efforts of other companies to add capacities, both locally, in the GCC and in emerging economies. Target Price Fair Value: SAR Investment Opinion: OVERWEIGHT Our target price of SAR is at a premium of 39.09% on SABIC s current stock price (SAR on March 27, 2007). Considering that the company s stock is currently trading at a substantial discount to its fair value, we place an OVERWEIGHT recommendation on SABIC s stock. Condensed Projections Revenues 99,277, ,168, ,293,887 Net profits 21,714,497 23,451,656 25,327,789 Total assets 208,236, ,883, ,859,876 Total equity 87,459, ,951, ,942,099 EPS BVPS

11 FINANCIAL STATEMENTS BALANCE SHEET As at SAR Dec Dec 05 %Chg Assets Cash & Cash Equivalents 41,227,735 28,172, % Receivables 18,314,256 15,760, % Provision for Doubtful Receivables (192,051) (177,004) 8.5% Inventory - Net 13,658,245 10,642, % Other Current Assets 966,256 1,882, % Fixed Assets 79,970,622 66,096, % Total Long Term Investments 3,531,839 5,898, % Other Non Current Assets 4,017,915 3,339, % Goodwill Intangibles (Others) TOTAL ASSETS 3,207,772 2,946, % 1,886,231 2,388, % 166,588, ,950, % LIABILITES Total current Liabilities 22,945,954 18,655,316 23% Total long Term Liabilities 35,915,739 25,910, % Total Provisions 7,236,890 7,163, % Minority Interest 27,607,078 22,880, % Total Shareholders Equity 72,883,159 62,340, % Total Liabilities & Shareholders Equity 166,588, ,950, %

12 FINANCIAL STATEMENTS INCOME STATEMENT For the period ending (SAR 000) 31 Dec Dec 05 %Chg Gross Revenue 86,327,862 78,253, % Cost of Goods Sold (51,415,477) (45,169,206) 13.8% Gross Margin 34,912,385 33,084, % S. G & A (3,855,529) (3,520,225) 9.5% Depreciation Expense (170,736) (394,127) -56.7% Net Operating Profit 30,886,120 29,169, % Interest Expense (1,567,042) (1,397,257) 12.1% Interest Income 2,073,026 1,141, % Total Investment Income 196, , % Foreign Exchange Gain/Loss 281,419 (487,220) 157.7% Other Income , % Minority Interest (10,527,505) (9,100,464) 15.7% Net Profit Before Taxes/ Zakat 21,343,942 19,909, % Tax/ Zakat Provision (1,050,000) (750,000) 40% Net Profit After Taxes/Zakat 20,293,942 19,159, % Earnings Per Share (SAR) % KEY RATIOS 31 Dec Dec 05 Total asset turnover ratio (x) Operating profit margin (%) Net profit margin (%) Earnings per share (SAR) Return on equity (%) Return on assets (%)

13 OPINION RATINGS: OVERWEIGHT NEUTRAL UNDERWEIGHT The stock is expected to perform better than the market index; investors may give the stock more weight in their portfolio, than its weight in the overall market The stock is expected to perform in tandem with the market index; investors may give the stock the same weight in their portfolio as in the overall market. The Stock is not expected to perform in line with the market index; investors may give the stock less weight in their portfolio than its weight in the overall market. Call us on or us at DISCLAIMER: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication, but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to increase or diminish. Consequently, investors may not get back the full value of their original investment