ENTITY OF AUDI SARADAR GROUP CURRENT PRICE SAR 24.8 FAIR VALUE SAR 33.2 RATING BUY HIGHLIGHTS Stock Data Ticker NIC AB Bloomberg Median TP (SAR) 41.3 Market Cap (SAR mn) 16,589 Market Cap (USD mn) 4,424 Number of Shares (mn) 668.9 Avg Mon Liquidity (SAR mn ) 790.8 52 week High (SAR) 42.3 52 week Low (SAR) 24.8 Ownership Structure Private Enterprises 38.0% GOSI 8.6% Public 53.4% Tasnee Stock Performance Bloomberg Consensus NATIONAL INDUSTRIALIZATION CO. (TASNEE) WEAKER-THAN-EXPECTED TiO2 OUTLOOK CUTS FAIR VALUE FAIR VALUE: REVISED DOWNWARD FROM SAR 46.9/SHARE TO SAR 33.2/SHARE Tasnee reported net earnings of SAR 417 million for its 3rd quarter of 2012, in line with our estimates yet representing a major fall on both a Q-o-Q and Y-o-Y basis. The weak performance mainly stemmed from waning fundamentals in the Titanium Dioxide (TiO2) industry, the largest contributor to the company s top line. The continuous destocking in the TiO2 industry and the wait-and-see approach by consumers resulted in reduced pigment sales volumes for Tasnee and at lower industry prices. The company s bottom line was also affected by softer prices in the PolyOlefins (PO) industry, mainly represented by HDPE, LDPE and PP. In the near-term, weakness in demand fundamentals is expected to continue in both the TiO2 and PO industry, constituting a threat to Tasnee s figures. Long-term, some solidness in industry demand fundamentals should be regained however we do not expect operating rates and prices to return to peak levels of previous years. Accordingly, with this bleaker-than-expected economic and industry outlook, we revise downward our target price from SAR 46.9/share to SAR 33.2/share. A SOFTER TIO2 INDUSTRY OUTLOOK FOR NEAR-TERM, HOWEVER SHOULD REGAIN SOME FUNDAMENTAL STRENGTH IN THE LONG-TERM As TiO2 demand is tightly correlated to economic growth and as signs of sluggish growth in the economic recovery are resurfacing, the demand outlook for TiO2 remains soft for the near term. TiO2 prices have dropped by c5% in the 3rd quarter of 2012, primarily on the back of inventory de-stocking, with prices expected to remain subdued until year-end (especially in light of the fourth quarter s seasonality effect). However, looking beyond, TiO2 fundamentals are expected to regain their solidness gradually, particularly as inventory levels normalize and the global economy gets back on track. With global GDP forecasts exceeding 4% for the years 2014 through 2017, any rebound in the US construction market or Chinese infrastructure spending should result in stronger demand for the white pigment. As such, with an increasing shortage in the titanium feedstock market and therefore limited supply of TiO2 given limited capacity expansions, a recovery in the global economy should improve demand and industry prices. However, again we note that any macro-economic risk to resurface or to linger will threaten global TiO2 demand, thus making it highly unlikely that operating rates and prices will return to peak levels of previous years. MAINTAINING OUR BUY RATING IN LIGHT OF A 27% YTD PLUNGE IN STOCK PRICE We update our investment case on Tasnee, reducing its fair value to SAR 33.2/share. Given the oversold condition of the stock, witnessing a price plunge of 27% YTD (vs TASI +3.0% YTD) and trading at its 52- week low, the revised target price implies upside potential of 33.9%. Accordingly, we maintain our BUY rating for investors with a medium to long-term investment horizon. Despite this negative revision, Tasnee still trades at attractive multiples vis-à-vis global peers while offering yields materially higher than the industry average. The company trades at 8.6x and 7.8x 2012 and 2013 estimated net earnings, respectively, vs a peer average of 10.9x and 9.7x, for the same years, respectively. Moreover, Tasnee trades at an EV of 6.5x and 5.7x 2012 and 2013 estimated EBITDA, respectively, vs a peer average of 7.8x and 6.5x, for the same period respectively. Furthermore, the stock offers a dividend yield of 4.2%, vs a peer average of 3.3%, and a FCF yield of 11.6% vs a peer average of 6.3%. Thus, Tasnee is still regarded as a value and dividend play, despite this negative revision to our investment case. Moreover, given the long-term growth outlook for the TiO2 industry and given that Tasnee is the only investment in the MENA region offering TiO2 exposure, holding this stock should allow investors to capitalize on a rebound in the TiO2 market. FINANCIAL DATA 2011 2012 E 2013 E 2014 E Sales Revenues (SAR 000) 19,648,743 17,688,114 19,400,399 21,093,501 COMPANY COVERAGE Reine Dagher Associate Reine.Dagher@asib.com Youssef Nizam, CFA Head of Equity Research Youssef.Nizam@asib.com Net Income (SAR 000) 2,441,423 1,922,880 2,127,952 2,452,397 EPS (SAR) 4.38 2.87 3.18 3.67 DPS (SAR) 2.0 1.0 1.0 2.0 BVPS (SAR) 19.77 17.22 19.08 20.94 PE 7.1 8.6 7.8 6.8 Dividend Yield 4.8% 4.2% 5.1% 7.4% PB 1.57 1.44 1.30 1.18 1
SAFCO VALUATION FCFF VALUATION We revisited our FCFF model incorporating the weaker-than-expected global economic and industry growth. We reviewed mainly our price projections for TiO2, noting that the latest Cristal announcement of a TiO2 price increase dated all way back in December 2011. In addition, we reviewed downward our price projections for HDPE, LDPE and PP. We adjusted our discount rate to 9.0%, from a previous 10.4%, and the growth rate to 2.1%, from a previous 2.4%, to reflect the latest macro-developments and the latest changes in the company s financial position. Accordingly, a fair value of SAR 32.9/share was obtained. (SAR 000) 2012 E 2013 E 2014 E Net Income 1,922,880 2,127,952 2,452,397 Change in Working Capital 413,915 (513,935) 834,347 Non-Cash Charges 1,305,363 1,431,728 1,556,677 Capex 1,173,880 1,157,358 1,258,362 Interest Expense 661,848 648,009 577,627 Free Cash Flow to the Firm (FCFF) 2,302,296 3,564,267 2,493,992 Present Value of FCFF 2,302,296 2,997,948 1,923,871 Present Value of Terminal Value 28,517,658 Intrinsic Value of the Firm 35,741,774 Net Debt 13,731,348 Intrinsic Value of Equity 22,010,426 WACC 9.0% Terminal Growth Rate 2.1% Shares Outstanding (000) 668,914 NAV per share (SAR) 32.9 SENSITIVITY ANALYSIS Below is a data table presenting a sensitivity analysis to our price target valuation, assuming various growth and discount rates. Terminal Growth Rate WACC 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 1.0% 32.8 29.3 26.3 23.6 21.2 19.0 17.1 15.4 13.8 1.25% 34.5 30.8 27.5 24.7 22.2 19.9 17.9 16.0 14.4 1.5% 36.3 32.3 28.9 25.9 23.2 20.8 18.7 16.8 15.0 1.75% 38.3 34.0 30.3 27.1 24.3 21.8 19.6 17.5 15.7 2.0% 40.4 35.8 31.9 28.4 25.4 22.8 20.5 18.4 16.5 2.25% 42.7 37.8 33.5 29.9 26.7 23.9 21.4 19.2 17.2 2.5% 45.2 39.9 35.3 31.4 28.0 25.0 22.4 20.1 18.0 2.75% 48.0 42.1 37.2 33.0 29.4 26.3 23.5 21.1 18.9 3.0% 51.0 44.6 39.3 34.8 30.9 27.6 24.7 22.1 19.8 2
RELATIVE VALUATION Using two different earnings multiples, we valued Tasnee on an equal basis with comparable peers region-wide and world-wide. Tasnee should be trading at a premium to regional counterparts given mainly its exclusive and significant exposure to TiO2, in addition to its largely diversified income stream, an advantage shared by very few counterparts in the region. Furthermore, Tasnee should be trading at a premium to global peers given that the company benefits from a notable feedstock advantage in the production of polyolefins. P/E MULTIPLE Tasnee s counterparts trade at an average of 10.9x estimated 2012 earnings, opposed to Tasnee trading at 8.6x its estimated 2012 earnings, implying an unjustified discount to its peers. Based on our 2012 earnings per share (EPS) estimate of SAR 2.87, a fair value of SAR 31.4/share was derived, thus offering an upside potential of 26.4% for the company s stock. EV/EBITDA MULTIPLE On a forward basis (2012E), Tasnee s peer group trades at an average EV/EBITDA of 7.8x opposed to Tasnee s EV/EBITDA of 6.5x. Accordingly, a fair value of SAR 36.0/share was obtained, resulting in an upside potential of 45.0%. (SAR 000) EBITDA 2012E 5,742,171 Enterprise Value 44,788,933 Net Debt as of YE12 E 13,980,539 Minority Interest as of YE12 E 6,758,963 Market Capitalization 24,049,431 Shares Outstanding (000) 668,914 NAV per Share (SAR) 36.0 FINAL VALUATION Attributing a 60% weight to the FCFF valuation and the remaining weight to the comparative valuation, a final fair value of SAR 33.2/share was derived for Tasnee, offering an upside potential of 33.9% (based on the closing price of SAR 24.8/share). Fair Value (SAR) Weight FCFF Valuation 32.9 60% Relative Valuation P/E 31.4 20% EV/EBITDA 36.0 20% Final Fair Value per Share (SAR) 33.2 3
APPENDIX A: PRO-FORMA INCOME STATEMENT (SAR 000) 2011 2012E 2013E 2014E Sales 19,648,743 17,688,114 19,400,399 21,093,501 Cost of Sales (12,657,082) (11,915,594) (12,784,863) (13,816,243) Gross Profit 6,991,661 5,772,520 6,615,536 7,277,258 S,G&A expenses (1,597,396) (1,512,215) (1,642,126) (1,785,436) Share in net income of associates 12,703 16,780 18,952 17,866 Income from operations 5,406,968 4,277,085 4,992,362 5,509,687 Investment income and other 80 159,722 164,481 180,880 Financing charges (692,656) (661,848) (648,009) (577,627) Income before zakat, income tax and MI 4,713,634 3,774,959 4,508,834 5,112,940 Zakat and income tax on subsidiaries (539,393) (418,342) (527,459) (598,130) Minority interest (1,725,751) (1,414,213) (1,669,764) (1,893,484) Income before zakat 2,448,490 1,942,404 2,311,610 2,621,326 Zakat (7,067) (19,524) (183,658) (168,929) Net Income 2,441,423 1,922,880 2,127,952 2,452,397 APPENDIX B: PRO-FORMA BALANCE SHEET (SUMMARIZED) (SAR 000) 2011 2012E 2013E 2014E Cash and cash equivalents 4,636,675 5,140,859 6,349,548 5,285,079 Accounts receivables 4,140,326 3,572,098 3,917,892 4,259,812 Inventories 3,692,544 4,345,280 3,729,822 4,030,715 Prepaid expenses and other assets 391,013 728,451 559,732 540,699 Total current assets 12,860,558 13,786,688 14,556,994 14,116,305 Investments in associated companies and other 471,622 458,969 474,029 489,089 PPE, net 17,830,489 18,388,339 21,415,348 22,193,886 Intangible assets, net 3,569,127 3,390,671 3,212,214 3,033,758 Projects under progress 4,105,038 5,423,000 1,963,000 1,613,000 Other non-current assets 753,256 720,220 746,521 733,370 Total non-current assets 27,067,021 28,929,497 28,405,655 28,634,524 Total Assets 39,927,579 42,716,184 42,962,649 42,750,828 Short-term facilities and Murabaha 3,387,118 1,831,181 2,049,658 2,268,136 Current portion of long-term loans 1,586,773 2,091,846 2,091,846 2,091,846 Accounts payable 1,027,614 1,035,644 1,111,196 900,629 Accrued expenses and other liabilities 1,953,075 1,839,538 1,957,984 2,098,519 Total current liabilities 7,954,580 6,798,210 7,210,685 7,359,130 Long-term loans 11,363,330 15,198,371 13,106,524 11,014,678 Other non-current liabilities 2,833,232 2,441,979 2,391,568 2,152,580 Total non-current liabilities 14,196,562 17,640,350 15,498,092 13,167,258 Total shareholders equity 11,022,826 11,518,662 12,764,104 14,005,967 Minority interests 6,753,611 6,758,963 7,489,768 8,218,473 Total Equity 17,776,437 18,277,625 20,253,872 22,224,440 Total Liabilities and Equity 39,927,579 42,716,184 42,962,649 42,750,828 4
FAIR VALUE DEFINITION It is an unbiased estimate of the 12-month potential market price of the stock RATING GUIDE SELL REDUCE HOLD ACCUMULATE BUY Downside -30% -10% +10% +30% Upside BUY: Upside potential in share price is more than 30% ACCUMULATE: Upside potential in share price is between 10 and 30% HOLD: Upside or downside potential in share price less than 10% REDUCE: Downside potential in share price is between 10 and 30% SELL: Downside potential in share price is more than 30% ISSUER Audi Saradar Investment Bank Audi Saradar Investment Bank SAL Lebanese joint stock company with a registered capital of 10,000,000,000 Lebanese Pounds Commercial Registrar in Beirut: 30812 Holding number 33 on the Central Bank s Banks List. Address: Bank Audi Plaza Bab Idriss Beirut 2021 8102 Lebanon P.O. Box 11-2560 Beirut 1107 2808 Lebanon. Phone: +961 1 964072 Fax: +961 1 970403 Email: contactus@asib.com 5
DISCLAIMER All rights reserved. This research document (the Document ) is prepared by Audi Saradar Investment Bank SAL ( ASIB ), being an entity of Audi Saradar Group, for the use of the clients of ASIB and/or the clients of any entity within the Audi Saradar Group. This Document is disclosed to you on a confidential basis. Receipt and/or review of this Document constitute your agreement not to copy, modify, redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this Document prior to public disclosure of the same by ASIB or the Audi Saradar Group or without the express prior written consent of ASIB. This Document is not intended for dissemination, distribution to, or use by, any person or entity in any country or jurisdiction which would subject ASIB or any entity within the Audi Saradar Group, to any registration or licensing requirements within these jurisdictions or where it might be considered as unlawful. 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