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$) 21.08bn / 5.62bn 52-week range 25.20-34.50 Daily avg. volume (US$) 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) 12.0 17.8 15.6 12.4 P/B (x) 1.7 1.8 1.6 1.5 EV/EBITDA (x) 8.6 10.9 9.8 8.0 Dividend Yield 6.3% 4.8% 6.3% 6.3% Source: data, Al Rajhi Capital Performance 36 34 32 30 28 26 24 Price Close Relative to TADAWUL FF (RHS) 70 30-10 05/13 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. 114 108 102 97 91 85 79 Research Department ARC Research Team Tel 966 11 211 9332, 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 H1 2015. 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. +26.4% 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 H1 2015. Another project, the US$500mn titanium slagger unit, was expected to come on-stream in H2 2014. 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 2015. 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
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 2013. 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 H2 2014 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
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 5 64 - - - Provisions (88) 15 (188) - - Other Income 81 121 101 124 234 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 - - - - - 12/11A 12/12A 12/13A 12/14E 12/15E Adjusted Shares Out (mn) 668.9 668.9 668.9 668.9 668.9 CFPS (SAR) 8.21 6.68 5.50 5.90 7.92 EPS (SAR) 3.650 2.637 1.772 2.019 2.546 DPS (SAR) 1.250 2.000 1.500 2.000 2.000 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) 8.6 12.0 17.8 15.6 12.4 P/CF (x) 3.8 4.7 5.7 5.3 4.0 P/B (x) 1.9 1.7 1.8 1.6 1.5 EV/Sales (x) 2.3 2.6 2.7 2.5 1.9 EV/EBITDA (x) 6.7 8.6 10.9 9.8 8.0 EV/EBIT (x) 8.4 11.5 15.9 13.4 10.0 EV/IC (x) 1.5 1.4 1.4 1.3 1.3 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
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 1,043 - - - Total Other Assets 753 854 777 908 908 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 1,456 823 2,263 1,579 2,156 Zakat Payable - - - - - Dividends Payable 59 64 - - - Other Current Liabilities - 639 - - - 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 758 390 886 1,111 1,111 Provisions 1,491 1,689 394 295 295 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) 1.89 2.66 3.86 3.58 3.19 Net Debt to Equity 71.6% 74.3% 88.2% 82.4% 94.1% EBITDA Interest Cover (x) 9.7 7.4 7.4 6.7 7.6 BVPS (SAR) 16.48 18.04 17.93 20.15 20.69 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
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Additional disclosures 1. Explanation of Al Rajhi Capital s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. 2. Definitions "Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. 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: +966 11 2119332 gopij@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37. Disclosures Please refer to the important disclosures at the back of this report. 5