National Industrialization Co. Diversified Operations Industrial NIC AB: Saudi Arabia 25 May 2014

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1 RSI10 National Industrialization Co. NIC AB: Saudi Arabia 25 May 2014 Rating Target price Current price OVERWEIGHT SAR37.30 (18.7% upside) SAR31.40 Key themes & implications Sluggish petrochemical prices coupled with declining TiO2 prices have been weighing on NIC s earnings over the last few quarters. However, with economic conditions in the developed markets improving, we believe that the downside risks are limited for product prices. Moreover, commencement of new plants should offer tailwinds to NIC. With this, we upgrade the stock to Overweight. Share information Market cap (SAR/US$) 21.08bn / 5.62bn 52-week range Daily avg. volume (US$) Shares outstanding 16.3 mn 668.9mn Free float (est.) 72% Performance 1M 3M 12M Absolute 0.7% 0.1% 14.7% Relative to index -0.8% -8.5% -11.7% Major Shareholder: Al-Shair Co. for Trading, Industry & 7.8% Contracting GOSI 8.6% Valuation 12/12A 12/13A 12/14E 12/15E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 6.3% 4.8% 6.3% 6.3% Source: data, Al Rajhi Capital Performance Price Close Relative to TADAWUL FF (RHS) /13 08/13 11/13 02/14 Source: Bloomberg, data, Al Rajhi Capital summary NIC, the Kingdom s first private joint stock company, is among the leading petrochemical company in the Kingdom. Also, NIC is the world s second-largest and the Middle East s only TiO2 producer. The company s TiO2 is mainly used by the paints industry. NIC also produces basic petrochemicals (total production capacity of about 3.3mtpa). Moreover, the company has entered in various joint ventures to enter into downstream petrochemical space Research Department ARC Research Team Tel , gopij@alrajhi-capital.com NIC Limited downside, upgrade to Overweight Economic sluggishness over the past few quarters affected NIC s earnings; however, we think product prices are bottoming out and will rebound in the next few months considering positive indicators coming from the developed markets. More importantly, NIC is involved in a few projects ilmeniteprocessing unit and super-absorbent polymer plant which are expected to come on-stream in H While the titanium unit should boost revenues by ~20% due to added capacity, SAPCO should bring in ~SAR500mn annually. This earnings accretion is not entirely factored in the stock price due to lack of news flow, and we believe any positive updates on the expansion plans will favourably impact the stock price. NIC has been underperforming the sector index for a while now (+14.7% vs % in last 52 weeks). Hence we believe, the current price levels offer an entry opportunity for the long-term investors, although the stock may remain volatile in the near term. Further, NIC s high dividend yields is another positive for stock. With this, we retain our target price of SAR37.3 a share, and upgrade the stock to Overweight rating. New projects to bolster earnings in 2015: Although NIC has not been active on updating status of its new projects, it recently announced that operations at SAPCO (a JV super-absorbent polymer plant) are in the trial operations phase, and will be completed by 2014-end. We expect SAPCO to begin commercial production in H Another project, the US$500mn titanium slagger unit, was expected to come on-stream in H The unit is fully scalable with a design capacity of 500ktpa of high-purity (85-92%) TiO2 and can be expanded to 1mtpa going forward. The company is yet to release any updates on the progress; hence, we expect the plant to become fully operational only in early At 90% operating levels, the titanium plant should boost NIC s annual revenues by ~20% while SAPCO should bring in ~SAR500mn next year. Product prices hurt bottom-line although the worst seems to be over: NIC, which has a stable operating history, has been affected by declining product prices over the last couple of years. This has hurt the company s top-line, which declined 8.8% y-o-y in 2012 and grew by a meagre 1.6% last year. However, the product prices seem to be bottoming out and we expect prices to pick up over the next few months. Prices of TiO2, which contributes to a significant portion of NIC s revenues, have been stable in the last four months. We anticipate the prices to move up in the latter half of the year as developed economies (major consumers of the product) gather momentum. With this, we believe that the downside risks to the company s earnings are limited and expect the bottom-line performance to improve going forward. Conclusion & Valuation: With product prices bottoming out, we expect limited downside to NIC s revenues as well as earnings in the next couple of quarters. Moreover, the upcoming plants will offer tailwinds with increased capacity and foray into downstream products. Further, as NIC shares have declined 6.2% YTD (+14.7% in the last 52 weeks) compared to the 2.7% gains (+26.4%) registered by the Saudi Petrochemical Index, we believe that the downside risk is limited at current levels. The stock is trading at 2014E PE of 15.6x at a premium over its peer average of 14.8x which we believe is justified considering its earnings potential, especially 2015 onwards. Also, NIC is a generous dividend payer. We expect 2014E dividend of SAR2 a share, which translates to a yield of 6.3%. We retain our target price of SAR37.3 a share and upgrade our rating to Overweight. Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform 1

2 TiO2 prices have been relatively stable since the beginning of the year TiO2 prices have been relatively stable in the last six months: Uncertainty engulfing the global macroeconomic environment has weighed on TiO2 prices in the last couple of years. The sharp decline in the prices reflected on NIC s financials as revenues and net income declined y-o-y in 2012 and However, many developed markets, especially the US, have been charting the recovery path since Q4 last year. Industrial scenario has improved in these economies (developed markets account for two-thirds of TiO2 consumption) and this has augured well for TiO2. Since then, TiO2 prices have been relatively stable (see chart below). Although China and India are facing headwind, we expect manufacturing to pick up in the latter half of the year. With this, we believe TiO2 prices will move up gradually. Figure 1 TiO2 prices SAR per ton 25,000 20,000 15,000 10,000 5,000 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Source: Bloomberg, Al Rajhi Capital For petrochemicals, we expect product demand to pick up, especially in the emerging markets, in H as China gradually emerges from the growth slowdown. Although, the industrial growth might not be as sharp as witnessed earlier, uptick in other emerging markets should largely compensate for a partial decline in China. Also, Brent prices remain at elevated levels and this will support petrochemical prices over the near term. Valuation appendix 1. We have used a blended valuation methodology a combination of DCF and Relative Valuation with weights of 70% and 30% respectively. 2. For relative valuation, we have used a peer group comprising Saudi petrochemical and leading global TiO2 producers. Key Upsides/Risks to our rating 1. A sudden growth slowdown in the developed markets will dampen demand, which will hurt product prices and affect NIC performance. 2. Further delays in expansion plans can limit the upside, while, a faster completion can offer further upside. 3. The stock price is likely to remain volatile in the short-term if the earnings performance remain subdued, and in the absence of clarity on expansion plans, as mentioned earlier. Disclosures Please refer to the important disclosures at the back of this report. 2

3 Income Statement (SARmn) 12/11A 12/12A 12/13A 12/14E 12/15E Revenue 19,649 17,921 18,201 19,034 26,700 Cost of Goods Sold (12,657) (12,352) (13,388) (13,641) (19,224) Gross Profit 6,992 5,569 4,813 5,394 7,476 Government Charges S.G. & A. Costs (1,597) (1,475) (1,744) (1,791) (2,403) Operating EBIT 5,394 4,094 3,069 3,602 5,073 Cash Operating Costs (12,929) (12,435) (13,732) (14,137) (20,319) EBITDA 6,720 5,486 4,469 4,898 6,381 Depreciation and Amortisation (1,326) (1,392) (1,399) (1,295) (1,308) Operating Profit 5,394 4,094 3,069 3,602 5,073 Net financing income/(costs) (691) (745) (606) (733) (836) Forex and Related Gains Provisions (88) 15 (188) - - Other Income Other Expenses Net Profit Before Taxes 4,714 3,566 2,399 3,006 4,484 Taxes (546) (490) (122) (355) (493) Minority Interests (1,726) (1,313) (1,092) (1,300) (2,288) Net profit available to shareholders 2,441 1,764 1,185 1,351 1,703 Dividends (836) (1,338) (1,003) (1,338) (1,338) Transfer to Capital Reserve /11A 12/12A 12/13A 12/14E 12/15E Adjusted Shares Out (mn) CFPS (SAR) EPS (SAR) DPS (SAR) Growth 12/11A 12/12A 12/13A 12/14E 12/15E Revenue Growth 22.9% -8.8% 1.6% 4.6% 40.3% Gross Profit Growth 56.2% -20.4% -13.6% 12.1% 38.6% EBITDA Growth 54.5% -18.4% -18.5% 9.6% 30.3% Operating Profit Growth 77.1% -24.1% -25.0% 17.4% 40.8% Net Profit Growth 65.8% -27.8% -32.8% 14.0% 26.1% EPS Growth 65.8% -27.8% -32.8% 14.0% 26.1% Margins 12/11A 12/12A 12/13A 12/14E 12/15E Gross profit margin 35.6% 31.1% 26.4% 28.3% 28.0% EBITDA margin 34.2% 30.6% 24.6% 25.7% 23.9% Operating Margin 27.5% 22.8% 16.9% 18.9% 19.0% Pretax profit margin 24.0% 19.9% 13.2% 15.8% 16.8% Net profit margin 12.4% 9.8% 6.5% 7.1% 6.4% Other Ratios 12/11A 12/12A 12/13A 12/14E 12/15E ROCE 17.5% 10.9% 8.1% 8.5% 11.9% ROIC 18.4% 11.9% 8.8% 9.0% 12.2% ROE 24.1% 15.3% 9.8% 10.6% 12.5% Effective Tax Rate 11.6% 13.7% 5.1% 11.8% 11.0% Capex/Sales 20.5% 16.4% 16.7% 12.6% 10.0% Dividend Payout Ratio 34.2% 75.8% 84.7% 99.1% 78.5% Valuation Measures 12/11A 12/12A 12/13A 12/14E 12/15E P/E (x) P/CF (x) P/B (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) EV/IC (x) Dividend Yield 4.0% 6.3% 4.8% 6.3% 6.3% Source: data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3

4 Balance Sheet (SARmn) 12/11A 12/12A 12/13A 12/14E 12/15E Cash and Cash Equivalents 4,637 6,456 5,179 7,065 3,853 Current Receivables 2,684 2,505 3,948 3,948 5,389 Inventories 3,693 5,514 5,846 5,527 7,006 Other current assets 1,847 2,013 1,017 1,110 1,110 Total Current Assets 12,861 16,488 15,989 17,651 17,358 Fixed Assets 21,936 23,596 25,086 26,444 27,806 Investments 809 1,029 1,615 1,680 1,680 Goodwill 2,544 2,566 3,666 3,564 3,564 Other Intangible Assets 1,025 1, Total Other Assets Total Non-current Assets 27,067 29,087 31,143 32,596 33,958 Total Assets 39,928 45,575 47,133 50,246 51,316 Short Term Debt 5,161 3,431 5,067 4,449 4,449 Accounts Payable 1,017 1,337 1,567 1,382 1,886 Accrued Expenses 1, ,263 1,579 2,156 Zakat Payable Dividends Payable Other Current Liabilities Total Current Liabilities 7,695 6,296 8,896 7,410 8,491 Long-Term Debt 12,207 17,591 17,383 20,151 19,774 Other LT Payables ,111 1,111 Provisions 1,491 1, Total Non-current Liabilities 14,456 19,670 18,663 21,557 21,180 Minority interests 6,754 7,542 7,580 7,803 7,803 Paid-up share capital 5,574 6,689 6,689 6,689 6,689 Total Reserves 5,449 5,378 5,304 6,788 7,153 Total Shareholders' Equity 11,023 12,067 11,993 13,477 13,842 Total Equity 17,776 19,610 19,573 21,280 21,645 Total Liabilities & Shareholders' Equity 39,928 45,575 47,133 50,246 51,316 Ratios 12/11A 12/12A 12/13A 12/14E 12/15E Net Debt (SARmn) 12,732 14,567 17,271 17,535 20,370 Net Debt/EBITDA (x) Net Debt to Equity 71.6% 74.3% 88.2% 82.4% 94.1% EBITDA Interest Cover (x) BVPS (SAR) Cashflow Statement (SARmn) 12/11A 12/12A 12/13A 12/14E 12/15E Net Income before Tax & Minority Interest 4,714 3,566 2,399 3,006 4,484 Depreciation & Amortisation 1,326 1,392 1,399 1,295 1,308 Decrease in Working Capital 836 (194) 685 (575) (1,839) Other Operating Cashflow (2,242) (1,763) (1,214) (1,629) (2,781) Cashflow from Operations 4,633 3,002 3,269 2,098 1,172 Capital Expenditure (4,021) (2,935) (3,045) (2,399) (2,670) New Investments (364) (149) (64) (33) - Others (100) (170) (166) (11) - Cashflow from investing activities (4,485) (3,254) (3,276) (2,443) (2,670) Net Operating Cashflow 148 (253) (7) (345) (1,498) Dividends paid to ordinary shareholders (499) (836) (1,340) - (1,338) Proceeds from issue of shares Effects of Exchange Rates on Cash Other Financing Cashflow 1,101 (23) (1,054) (53) - Cashflow from financing activities 602 2,072 (1,270) 2,231 (1,715) Total cash generated 751 1,819 (1,277) 1,886 (3,213) Cash at beginning of period 3,886 4,637 6,456 5,179 7,065 Implied cash at end of year 4,637 6,456 5,179 7,065 3,853 Ratios 12/11A 12/12A 12/13A 12/14E 12/15E Capex/Sales 20.5% 16.4% 16.7% 12.6% 10.0% Source: data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4

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In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company s profits or operating performance exceed or fall short of our expectations. Contact us Jithesh Gopi, CFA Head of Research Tel: gopij@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh Kingdom of Saudi Arabia research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No /37. Disclosures Please refer to the important disclosures at the back of this report. 5