RSI10 Sipchem SIPCHEM AB: Saudi Arabia Rating Target price Current price NEUTRAL SAR40.98 (7.6% upside) SAR38.10 Sector rating Company risk rating Key themes & implications Outperform Low Sipchem recently announced that it has commenced trial operations at its EVA/LDPE plant and plans to begin commercial operations in Q1 2015. In addition to this, the company s cable insulation and PBT units are expected to come online next year and these will boost earnings. However, the stock price has risen strongly over the last few days resulting in limited upside over our revised target price. Also, the valuations indicate that the stock is trading at a premium over its industry peers. Share information Market cap (SAR/US$) 13.90bn / 3.71bn 52-week range 23.00-38.40 Daily avg. volume (US$) Shares outstanding 6.83mn 366.7mn Free float (est.) 72% Performance 1M 3M 12M Absolute 15.5% 22.4% 51.9% Relative to index 8.1% 15.6% 23% Major Shareholders: Al-Zamil Group Holding Co. 9.6% Ikarus Petroleum Holding 8.2% Valuation 12/12A 12/13A 12/14E 12/15E P/E (x) 23.6 21.6 22.9 15.8 P/B (x) 2.5 2.4 2.4 2.2 EV/EBITDA (x) 12.9 13.3 13.7 10.9 Dividend Yield 3.3% 3.3% 3.3% 4.0% Performance 37.00 32.00 27.00 22.00 Price Close Relative to TADAWUL FF (RHS) 70 30-10 08/13 11/13 02/14 05/14 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Established in 1999, Sipchem is a leading producer of methanol, other petrochemical intermediaries and derivatives, which have diverse industrial uses. Also, Sipchem has a marketing arm, which assists in marketing the products across Europe. Last year, it opened a marketing branch in Singapore to expand its footprint in Asia. 123 113 104 94 Research Department ARC Research Team Tel 966 11 211 9332, gopij@alrajhi-capital.com Sipchem Growth catalysts priced in Sipchem, the Kingdom s major downstream petrochemical player, is expected to continue its growth path as new plants including EVA/LDPE are expected to come on stream over the next couple of quarters. These projects will add specialty products to Sipchem s portfolio and will further strengthen the downstream value chain. With increased visibility on the Phase-III projects, we have revised our earnings estimates for 2015E and 2016E upward by 7% and 6% respectively. Considering the impact of earnings accretion as well as lower cost of capital due to the potential opening of markets to foreign investors, we have raised the target price to SAR41 per share (earlier SAR31.9). However, the stock has surged over 15% since the Q2 earnings release, limiting the upside potential; hence we have continued with our Neutral rating. Sipchem remains one of the consistent performers in the petrochemical space and we believe that any price corrections over the near term may offer better entry points. Downstream plants to bolster earnings: In addition to the EA/BA plant that begun commercial production in Q3 last year, Sipchem recently announced commencement of trial operations at the EVA/LDPE plant (capacity: 200ktpa). Additionally, the company has initiated trial operations at its cable insulation polymer unit in Q1 2014. We expect Sipchem to start commercial operations at these units in Q1 2015. Further, the company is building a PBT plant (capacity: 63ktpa), the trial operations of which are expected to begin in Q4 2014. These projects will supply raw material to a variety of manufacturing units across industries. Once fully operational, we expect these plants to boost Sipchem s annual revenues by ~SAR1.0-1.2bn and net profit by SAR350-450mn. Strong margin improvement to be seen in FY2016: The commencement of the Phase-III units and other projects will boost the company s margins, which have been hampered since the acquisition of the marketing business in late 2011. Although the new production facilities are expected to come online over H1 2015, we believe the plants will take a quarter or two to ramp-up production and operate at the optimal levels. Consequently, we expect a gradual recovery in net margin in 2015E (17.2% vs. 16% in 2013) and a stronger margin in 2016E (19%). Second outage this year to hit Q3 2014 results: On July 24, Sipchem announced an unplanned shutdown at its methanol unit due to a technical glitch. The company expects the maintenance to be completed in 2-3 weeks, which effectively means the production can resume in mid-august. The company has not offered any clarity on the financial impact as well as its trickledown effect on downstream production. The outage can be a repeat of Q1, when the company s downstream operations were also impacted due to the closure of methanol and CO units. This outage can be a near-term headwind for the stock. Period End (SAR) 12/11A 12/12A 12/13A 12/14E 12/15E Revenue (mn) 3,324 3,922 4,006 4,156 5,116 Revenue Growth 66.8% 18.0% 2.1% 3.8% 23.1% Gross profit margin 42.9% 32.3% 32.4% 31.5% 32.7% EBITDA margin 53.2% 42.1% 42.9% 41.0% 40.5% Net profit margin 21.3% 15.0% 16.0% 14.6% 17.2% EPS 1.93 1.60 1.75 1.66 2.41 EPS Growth 87.0% -16.9% 9.4% -5.6% 45.3% ROE 13.4% 10.4% 11.3% 10.5% 14.6% ROCE 9.8% 8.3% 7.6% 7.4% 9.1% Capex/Sales 27.1% 36.9% 42.3% 27.6% 10.0% Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform 1
Change in our assumption: The CMA has recently announced that it plans to open the Saudi equity markets, which will allow foreign investors to invest directly in local market. The move is expected to boost foreign capital inflow and provide Saudi Arabian companies with better access to capital. We have earlier assumed an additional risk premium of 100bps in our cost of capital calculations to account for the limited access to Saudi market and related factors. On account of this new development, we are reducing our additional risk premium by 50bps as the process is already underway. We will review this further as we get more clarity on the move and will adjust our premium accordingly. Valuation and conclusion: While the EA/BA plant has come on stream in Q3 last year, we expect the remaining three units to begin commercial operations over H1 2015. These units will bolster Sipchem s earnings y-o-y in FY2015, although we believe the full effect may be felt only in 2016. Based on these assumptions, we have revised upward our EPS estimates for 2015E and 2016E to SAR2.41 (+7%) and SAR2.73 (+6%) respectively. We have raised our target price to SAR41 a share to account for earnings accretion as well as reduction in cost of equity. However, the stock has surged 15% since the announcement of the Q2 results, which has resulted in limited upside potential at the current price levels. Hence, we continue with our Neutral rating on the stock. The stock is currently trading at a P/E (2015E) of 15.8x, a premium over the peer average multiple of 14x. Considering the unplanned shutdown, the company is likely to post weak Q3 results, which may negatively impact the stock prices offering better entry points for investors. Appendix Figure 1 Details of Sipchem s expansion plans Plant Products Capacity Stage EA/BA Ethyl Acetate, Butyl Acetate 100 ktpa Commercially operational since Q3 2013 EVA/LDPE Ethylene Vinyl Acetate, Low Density Polyethylene 200 ktpa Trial operations commenced in August 2014 Cable Insulation Polymer Cable Insulation Polymers - Trial operations begun in March 2014 PBT Polybutylene Terephthalate 63 ktpa Initial start-up expected to begin in Q4 2014 Source: Tadawul, Company data, Al Rajhi Capital Risks to our rating 1. Delay in commissioning of the new plants can severely impact the earnings growth. 2. A sudden growth slowdown in the developed markets will dampen demand, which will hurt product prices and affect Sipchem s performance. 3. Any negative news flow regarding the unplanned shutdown or delay in execution of new projects may further trigger the share price decline. 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 3,324 3,922 4,006 4,156 5,116 Cost of Goods Sold (1,898) (2,654) (2,707) (2,849) (3,445) Gross Profit 1,427 1,268 1,299 1,307 1,670 Government Charges S.G. & A. Costs (125) (131) (137) (172) (205) Operating EBIT 1,302 1,137 1,162 1,135 1,466 Cash Operating Costs (1,556) (2,271) (2,286) (2,452) (3,042) EBITDA 1,768 1,651 1,720 1,704 2,073 Depreciation and Amortisation (466) (514) (558) (569) (608) Operating Profit 1,302 1,137 1,162 1,135 1,466 Net financing income/(costs) (169) (163) (154) (151) (191) Forex and Related Gains Provisions - - - - - Other Income - - - - - Other Expenses Net Profit Before Taxes 1,133 974 1,008 984 1,274 Taxes (26) (72) (55) (72) (68) Minority Interests (400) (314) (310) (305) (324) Net profit available to shareholders 707 588 643 607 882 Dividends (458) (458) (458) (458) (550) Transfer to Capital Reserve 12/11A 12/12A 12/13A 12/14E 12/15E Adjusted Shares Out (mn) 366.7 366.7 366.7 366.7 366.7 CFPS (SAR) 4.289 3.863 4.120 4.037 4.947 EPS (SAR) 1.928 1.603 1.753 1.655 2.406 DPS (SAR) 1.250 1.250 1.250 1.250 1.500 Growth 12/11A 12/12A 12/13A 12/14E 12/15E Revenue Growth 66.8% 18.0% 2.1% 3.8% 23.1% Gross Profit Growth 65.6% -11.2% 2.4% 0.7% 27.8% EBITDA Growth 65.3% -6.6% 4.2% -1.0% 21.7% Operating Profit Growth 70.4% -12.7% 2.2% -2.3% 29.1% Net Profit Growth 87.0% -16.9% 9.4% -5.6% 45.3% EPS Growth 87.0% -16.9% 9.4% -5.6% 45.3% Margins 12/11A 12/12A 12/13A 12/14E 12/15E Gross profit margin 42.9% 32.3% 32.4% 31.5% 32.7% EBITDA margin 53.2% 42.1% 42.9% 41.0% 40.5% Operating Margin 39.2% 29.0% 29.0% 27.3% 28.7% Pretax profit margin 34.1% 24.8% 25.2% 23.7% 24.9% Net profit margin 21.3% 15.0% 16.0% 14.6% 17.2% Other Ratios 12/11A 12/12A 12/13A 12/14E 12/15E ROCE 9.8% 8.3% 7.6% 7.4% 9.1% ROIC 13.6% 11.0% 10.2% 8.4% 10.7% ROE 13.4% 10.4% 11.3% 10.5% 14.6% Effective Tax Rate 2.3% 7.3% 5.5% 7.3% 5.4% Capex/Sales 27.1% 36.9% 42.3% 27.6% 10.0% Dividend Payout Ratio 64.8% 78.0% 71.3% 75.5% 62.4% Valuation Measures 12/11A 12/12A 12/13A 12/14E 12/15E P/E (x) 19.7 23.6 21.6 22.9 15.8 P/CF (x) 8.8 9.8 9.2 9.4 7.7 P/B (x) 2.5 2.5 2.4 2.4 2.2 EV/Sales (x) 6.0 5.4 5.7 5.6 4.4 EV/EBITDA (x) 11.3 12.9 13.3 13.7 10.9 EV/EBIT (x) 15.3 18.7 19.7 20.5 15.4 EV/IC (x) 2.1 2.0 1.8 1.8 1.8 Dividend Yield 3.3% 3.3% 3.3% 3.3% 4.0% 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 3,630 3,053 2,858 2,750 3,644 Current Receivables 688 857 1,314 1,208 1,366 Inventories 281 278 303 483 547 Other current assets - - - - - Total Current Assets 4,599 4,189 4,475 4,441 5,557 Fixed Assets 9,808 10,649 11,547 12,621 12,526 Investments - - - - - Goodwill 34 30 30 30 30 Other Intangible Assets 224 322 637 143 143 Total Other Assets - - - - - Total Non-current Assets 10,066 11,000 12,214 12,794 12,698 Total Assets 14,665 15,189 16,689 17,235 18,255 Short Term Debt 542 642 541 715 715 Accounts Payable 721 675 748 966 1,366 Accrued Expenses - - - - - Zakat Payable 54 71 - - - Dividends Payable - - - - - Other Current Liabilities Total Current Liabilities 1,317 1,389 1,288 1,682 2,082 Long-Term Debt 5,674 6,028 7,410 7,524 7,524 Other LT Payables 586 554 470 458 458 Provisions 66 83 100 118 118 Total Non-current Liabilities 6,326 6,665 7,979 8,099 8,099 Minority interests 1,391 1,509 1,628 1,643 1,805 Paid-up share capital 3,667 3,667 3,667 3,667 3,667 Total Reserves 1,964 1,959 2,127 2,143 2,602 Total Shareholders' Equity 5,630 5,626 5,793 5,810 6,268 Total Equity 7,022 7,135 7,421 7,453 8,074 Total Liabilities & Shareholders' Equity 14,665 15,189 16,689 17,235 18,255 Ratios 12/11A 12/12A 12/13A 12/14E 12/15E Net Debt (SARmn) 2,586 3,617 5,093 5,490 4,595 Net Debt/EBITDA (x) 1.46 2.19 2.96 3.22 2.22 Net Debt to Equity 36.8% 50.7% 68.6% 73.7% 56.9% EBITDA Interest Cover (x) 10.4 10.1 11.2 11.3 10.8 BVPS (SAR) 15.36 15.34 15.80 15.85 17.10 Cashflow Statement (SARmn) 12/11A 12/12A 12/13A 12/14E 12/15E Net Income before Tax & Minority Interest 1,133 974 1,008 984 1,274 Depreciation & Amortisation 466 514 558 569 608 Decrease in Working Capital 184 (149) (497) (89) 178 Other Operating Cashflow (17) (23) (125) 23 22 Cashflow from Operations 1,765 1,316 944 1,486 2,082 Capital Expenditure (900) (1,448) (1,696) (1,148) (512) New Investments (19) - - - - Others - 0-6 - Cashflow from investing activities (919) (1,447) (1,696) (1,143) (512) Net Operating Cashflow 846 (131) (753) 343 1,570 Dividends paid to ordinary shareholders - (642) (495) (458) (513) Proceeds from issue of shares - - - - - Effects of Exchange Rates on Cash Other Financing Cashflow (107) (293) (157) (180) (162) Cashflow from financing activities 1,163 (445) 557 (451) (675) Total cash generated 2,009 (576) (196) (108) 895 Cash at beginning of period 1,621 3,630 3,053 2,858 2,750 Implied cash at end of year 3,630 3,053 2,858 2,750 3,644 Disclosures Please refer to the important disclosures at the back of this report. 4
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"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