Yanbu National Petrochemical Co (Yansab) Hold 12-Month Target Price SAR 41.00 110 100 Expected Total Return Price as on, 2016 SAR 39.76 Upside to Target Price 3.1% Expected Dividend Yield 3.8% Expected Total Return 6.9% Market Data 52 Week H/L SAR 54.93/23.77 Market Capitalization Enterprise Value Shares Outstanding SAR 22,365 mln SAR 22,175 mln 562.5 mln Free Float 35.8% 12-Month ADTV (000 s) 543.8 90 80 70 60 50 40 TASI Weight 1.2% Reuters Code Bloomberg Symbol 1-Year Price Performance Source: Bloomberg 2290.SE YANSAB AB Yansab TASI TPCHEM, 2016 39.76 6,693 4,519 6-months 1-Year 2-Year May 16, 2016 M J J A S O N D J F M A Yansab TASI TPCHEM Total Change (7.6%) (5.5%) (6.5%) (23.1%) (30.8%) (33.7%) (37.3%) (31.8%) (42.3%) Shareholding Structure SABIC 51.0% GOSI 11.9% Foreign Ownership (Inc. QFI) 2.9% Public Float 33.8% Valuations Peaked; Rally Overdone We update our models and revise our outlook on Yanbu National Petrochemical Co (Yansab) for 2016-19, transferring coverage with this update report. Yansab recently reported excellent 1Q2016 results beating RC and street estimates on stellar margin growth. A record margin expansion after a gap of nearly 8-9 quarters is noteworthy. We revise estimates slightly as product prices continue to be depressed since 2015, while Aramco s decision to raise feedstock costs from 2H2016 could affect margins. Yansab could lose the advantage of higher subsidies (28% discount versus 20% currently) like peers, but a scenario of higher spreads in bottomed feedstock prices is a positive. Yansab s stock price has rallied by +26% on a YTD basis versus sectors +6% and TASI s -3%. However, this surge in stock prices has overshot valuations, in our view. A combination of these factors has led a target price revision from SAR 44.00 to SAR 41.00. We revise to Hold from Buy, due to minimal upside. Earnings growth of +11% CAGR due to base effect We revise revenue growth expectations to +10% CAGR from earlier +11% and expect growth to follow from 2017 once product prices and macro situation in oil market improves. With rise in feedstock costs in 2016, margin could dip initially and improve from 2018, hence adjust EBITDA margins to 36% for 2016-19. Earnings growth of +11% CAGR is expected through 2019, touching SAR 2.0 billion. Earnings tumbled by -50% in 2015 to SAR 1.2 billion, hence a higher growth rate on lower base is a sector-wide trend. SABIC to add further synergies Globally, prices of Yansab s key products, PE, PP and MEG have witnessed large volatility but still lower than correction witnessed in crude oil prices. The outlook on supply is steady as global utilization rates of 87% are healthy while Yansab maintains 85%. Demand across products is expected to grow at +5% for 2016-20 for all products despite slight weakening in China. SABIC s strong network in global petchem space should further help Yansab in adding synergies and position well in its export markets, mainly Asia. Valuations expensive, revise to Hold Stock has rallied by +55% since our last note in January and has outperformed TASI by a large margin. This had led to a valuation premium over sector; with Yansab s 2016E P/E of 15.0x expensive to sector s 13.2x and TASI s 13.8x. Additionally, 2016-19 earnings growth of +11% is higher to sector s +9% (consensus earnings), hence a premium versus sector is unwarranted. We believe rally is overdone, with limited upside and thin yield of 3.8%, suggesting that Yansab is no longer attractive. Revise to Hold on valuation concerns. Key Financials FY December 31 (SAR 2015A 2016E 2017E 2018E Revenue 6,911 6,332 6,775 7,693 EBITDA 2,660 2,372 2,365 2,721 Net Profit 1,207 1,489 1,453 1,744 EPS (SAR) 2.15 2.65 2.58 3.10 DPS (SAR) 2.00 1.50 1.75 2.00 BVPS (SAR) 27.29 28.94 29.77 30.87 ROAA 5.8% 7.2% 6.9% 8.2% ROAE 7.9% 9.1% 8.7% 10.0% P / E 18.5x 15.0x 15.4x 12.8x P / B 1.5x 1.4x 1.3x 1.3x P / S 3.2x 3.5x 3.3x 2.9x EV/ EBITDA 8.3x 9.3x 9.4x 8.2x EV/ Sales 3.2x 3.5x 3.3x 2.9x Santhosh Balakrishnan santhosh.balakrishnan@riyadcapital.com +966-11-203-6809 Yasser Bin Ahmed yasser.bin.ahmed@riyadcapital.com +966-11-203-6805 Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Yanbu National Petrochemical Co (Yansab) Sector Outlook Global petrochemical product prices witnessed large volatility over the last few quarters, particularly since the start of 2016. In addition to the volatile prices, the short-term shift in China s consumption further escalated worries when its PMI hit below 48.0 during 1Q2016. With Yansab s largest market being Asia, we believe Asia s supply-demand dynamics is likely to influence its growth outlook. Yansab exports 43% to Asian markets predominantly to China, while product portfolio mainly comprises of PP, PE and MEG and accounts for 90% of revenue. Globally most product prices touched its 5-7 year lows unlike oil s 15-year lows. MEG touched a low of US$ 585/ton, PP at US$ 1,060/ton and PE at US$ 1,065/ton nearing its 7-year lows. We analyze and examine the persistence of demand-supply on these markets. Global Mono Ethylene Glycol (MEG), Yansab s key product, accounts for 43% of revenue as of 2015. Yansab with a MEG capacity of 0.8 million MT has a 3% share globally, though MEG s share in exports is relatively unknown. MEG market is 26 million MT as of 2015 and key consumer being China with its 51% share due to its MEG s usage and significance in the PET bottle industry. According to TM research, the MEG market is expected to grow at 6.1% CAGR during 2015-23. KSA producers are increasingly focusing on Chinese markets as China s MEG demand of 12 million MT is met through imports of 8 million MT. It has local supply of 4 million MT, however capacities are getting build up by 2018. Exhibit 1: Global MEG Demand & Supply from 2014-20 (Mln Tons) Exhibit 2: Global MEG Demand Proportion 2016 30 29 Supply Demand Americas 13% Europe 7% MEA 3% 28 27 26 25 Asia Ex- China 26% China 51% 24 2014 2015 2016 2017 2018 2019 2020 Source: Nexant, Bloomberg Source: Nexant, Bloomberg Global polypropylene (PP) demand is at par with supply and according to Nexant research, demand is expected to grow at +5% CAGR and reach 74 million MT by 2020. Yansab has a market share of 0.5% in a largely Asia dominated market. PP s long-term demand is driven by end user industries in Auto and electronics, which are on a gradual rise, mainly in Asia. Exhibit 3: Global PP Demand & Supply from 2014-20 (Mln Tons) Exhibit 4: Global Polypropylene Demand Proportion 2016 80 75 70 Supply Demand China 20% United States 11% North America 12% 65 South America 6% 60 55 50 2014 2015 2016 2017 2018 2019 2020 Asia Pacific 32% MEA 8% Europe 11% Source: Nexant, Bloomberg Source: Nexant, Bloomberg May 16, 2016 2
Yanbu National Petrochemical Co (Yansab) China alone has a 20% share of the PP market, as products for use in injection moulding, carries lot of significance in China s plastics industry. We believe capacities are expected to increase in this market at a steady pace in US, China and Korea from 2017. Global PE products (LDPE, HDPE and LLDPE) are expected to grow at a CAGR of +6% through 2020 to 109 million MT. With consumption remaining robust, demand is equating supply. We believe the PE industry has shown a narrowing supply-demand gap, however concerns of over capacity are less likely. Additionally global operating rates have not significantly expanded, barely affecting price-demand equation. We do not expect an immediate ramp-up in capacity and expected to show some level of increased supply from 2018 as China and US are in the process of expanding its capacity across products. Exhibit 5: Global PE Demand & Supply from 2014-20 (Mln Tons) Exhibit 6: Global Polyethylene Demand Proportion 2016 110 100 Supply Demand China 18% United States 11% North America 14% 90 South America 5% 80 70 2014 2015 2016 2017 2018 2019 2020 Asia Pacific 31% MEA 8% Europe 13% Source: Nexant, Bloomberg Source: Nexant, Bloomberg May 16, 2016 3
2014 2015 2016E 2017E 2018E 2019E Jan-10 Jul-10 Jan-11 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 6,911 6,332 6,775 7,693 9,511 8,382 Yanbu National Petrochemical Co (Yansab) Financial Analysis Revisions driven by margins and changes in product price outlook for 2016-19 We adjust our forecasts and publish our revised outlook for 2016-19E. The key factors driving our revisions are the volatility in product prices. As a result, revise revenue by -2% for 2016-19 from earlier estimates. Consensus revenue had a huge deviation of +10% for 2017 versus RC, as analysts expect product prices to spike up significantly. We believe utilization rates are likely to stay firm at 85% on a gross level. The effect of subsidy cuts from 2H2016 leads to a dip in margins initially and improve from 2018. We followed suit to adjust earnings though our expectations are more positive from 2017. Table 1: Changes in Estimates (SAR Mln)-RC versus Consensus RC Estimates (Old) RC Estimates (new ) Consensus (New ) 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Revenue 6,436 6,911 7,523 6,332 6,775 7,693 6,796 7,329 7,458 Y/Y -7% 7% 9% -8% 7% 14% -2% 8% 2% Gross Profit 1,373 1,566 1957 1,916 1,868 2,162 1,665 1,847 2058 Y/Y -22% 14% 25% 9% -3% 16% -5% 11% 11% EBITDA 2,142 2,328 2709 2,372 2,365 2,721 2,578 2,746 2737 Y/Y -19% 9% 16% -11% 0% 15% -3% 7% 0% Net Income 958 1,158 1531 1,489 1,453 1,744 1,348 1,533 1669 Y/Y -21% 21% 32% 23% -2% 20% 12% 14% 9% EPS 1.70 2.06 2.72 2.65 2.58 3.10 2.40 2.73 2.97 Source: Bloomberg Estimates and Riyad Capital Revenue growth expected from 2017 EIA expects oil prices to stabilize in a range of US$60/bbl for 2017 and expected to reach US$ 80/bbl by 2019 barring any unforeseen geo-political risks. We incorporate such assumptions and estimate similar growth in Yansab s product prices. Oil prices touched a low of US$ 27/bbl in January and recovered to US$ 47/bbl, recovering by +78% in less than 3 months denoting its volatility. However, product prices did not touch as low as oil neither recovered sharply. Based on our revised projections, we expect Yansab to report a revenue growth of +10% CAGR for 2016-19 to SAR 8.4 billion by 2019. The same is driven by expectations of an improvement in prices of MEG, PP and PE growing at an average of 6% CAGR through 2019. Exhibit 7: Revenue (SAR Mln) and Growth Forecasts Exhibit 8: Polypropylene vs Ethylene Prices (rebased) Revenue YoY 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 180% 160% 140% 120% 100% 80% 60% 40% Poly Propylene Ethylene Source: Company reports and Riyad Capital Source: Bloomberg May 16, 2016 4
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 1.6 1.6 1.6 1.5 1.7 1.8 1.9 1.8 2.1 2.0 2.2 2.1 2.2 2.3 2.3 2.3 2.5 2.4 2.4 2.4 2.5 2.5 2.7 2.9 Yanbu National Petrochemical Co (Yansab) Product prices have high correlation in an upcycle Yansab s sales of SAR 1.5 billion in 1Q2016 were similar to 1Q2015, in a period where oil markets witnessed its worst downside. A historical correlation of quarterly sales versus product prices suggests correlations are decreasing in a down cycle; while in an upcycle, it does move in tandem. This signifies the fundamental dynamics of demand and supply, which means product prices movements are indicative of supply-demand factors and not short-term market factors. Exhibit 9: Yansab Quarter Sales (SAR Bln) versus Growth in Global Product Prices (Avg) Trends Revenue MEG PP PE 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 35% 25% 15% 5% -5% -15% -25% Source: Company Reports, Bloomberg New margin trends to start, initially dip in 2016-17 and improve from 2018 Opex on an average for 2016-19 stood at 71% considering an increase in overall cost from 2016. Yansab is shock proof until 2Q2016 when the new pricing structure becomes applicable. Aramco had given a grace period for subsidized feedstock, following Yansab s inception in 2009 and the same expires in 2016. For 1Q2016, COGS declined sharply due to a sharp drop in Propane (Asia) prices, where Yansab gets a 28% discount until 2Q2016. We expect the propane spreads will be reduced to 20% discount to global benchmark. Similarly, ethane will be priced at US$ 1.75/mmbtu from 4Q2016. The Q/Q trends suggest that COGS to sales versus international feedstock price trends are moving in inverse directions. Exhibit 10: Yansab CoGS (% of Sales) versus Global Feedstock Price (Avg) Movements 80% 75% 70% 65% 60% 55% COGS Ethane QoQ Propane QoQ 40% 30% 20% 10% 0% -10% -20% -30% 50% -40% Source: Company Reports, Bloomberg We expect Yansab to have an improved margin scenario from 2017 as feedstock spreads are expanding globally amid KSA producer s advantage of lower feedstock costs. In this scenario, a growth of +9% CAGR in gross profit (refer to exhibit 11) is expected through 2019 reaching SAR 2.5 billion. May 16, 2016 5
2014 2015 2016E 2017E 2018E 2019E 2014 2015 2016E 2017E 2018E 2019E 1,207 2.15 2.00 1.50 1,489 1,453 1.75 2.65 2.58 2.00 1,744 3.00 3.10 2.50 2,043 2,478 3.63 4.40 2014 2015 2016E 2017E 2018E 2019E 2014 2015 2016E 2017E 2018E 2019E 1,758 1,916 1,868 2,162 2,660 2,372 2,365 2,721 2,466 3,016 3,087 4,132 Yanbu National Petrochemical Co (Yansab) EBITDA margins to improve from 2018 We expect EBITDA margins of 36% on an average for 2016-19 and expect a CAGR of +8% through 2019 to reach SAR 3.0 billion. Yansab would be able to improve margins as operating rates of 85% are stable denoting decent operating leverage helping to cover fixed costs while scope for improvement is seen, unless unplanned shutdown occurs. Exhibit 11: Gross Profit (SAR Mln) and Margin Forecasts Exhibit 12: EBITDA (SAR Mln) and Margin Forecasts Gross Profit Gross Margins 32% EBITDA EBITDA Margins 44% 30% 42% 28% 40% 38% 26% 36% 24% 34% Source: Company reports and Riyad Capital Source: Company reports and Riyad Capital Earnings growth of +11% CAGR expected through 2019 We expect earnings of SAR 2.0 billion by 2019, a CAGR of +11% through 2019. With such a growth, net margins are expected to average 23% through 2019 after a decline in 2017 and improving to 24% by 2019. We forecast EPS of SAR 2.65 for 2016 and expected to grow to SAR 3.63 by 2019. DPS of SAR 1.50 for 2016E is expected and likely to reach SAR 2.50 delivering a payout ratio of 65%. It has paid an average of 75% for 2013-15, we expect this to be lower for 2016-19. Exhibit 13: Net Profit (SAR Mln) and Margin Forecasts Net profit YoY 32% 30% 28% Exhibit 14: EPS and DPS Forecasts (SAR) EPS Dividends 26% 24% 22% Source: Company reports and Riyad Capital Source: Company reports and Riyad Capital Relatively debt free balance sheet; ROE s are lower versus sector Yansab has nearly SAR 4.1 billion of debt as of 1Q2016 with the majority of repayment planned over the next 3-4 years. D/E ratios of 16% are relatively lower to sector leaving high interest coverage ratios despite depressed profitability scenario from 2015. It continues its maintenance capex at a run rate of 2-3% over the last 3-4 years except in case of shutdown in some quarters, which is a one-off. Its steady stream of cash flows leaves enough room for a decent dividend payout, leaving any unplanned shutdowns. ROE of 11% is low in the sector, we believe lower leverage (debt) and limited expansion are the reasons. May 16, 2016 6
Yanbu National Petrochemical Co (Yansab) 1Q2016 review A comeback quarter in terms of margins Revenue of SAR 1.5 billion in 1Q2016 missed our estimate of SAR 1.7 billion, declined by -18% Q/Q and -13% Y/Y mainly on lower product prices. However, product prices decline remained in mid-single digits. Gross profit of SAR 521 million during 1Q2016 declined by -3% Q/Q and improved by +26 Q/Q beating our expectations of SAR 463 million. Gross margins improved to 35% from 24% in 1Q2015 and improved from 29% in 4Q2015 as feedstock prices declined significantly. Table 2: Quarterly Income Statement Summary (SAR Mln) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Revenue 2,169 2,213 2,889 2,084 2,318 2,409 2,494 2,290 1,717 1,563 1,800 1,831 1,496 Q/Q 0% 2% 31% -28% 11% 4% 4% -8% -25% -9% 15% 2% -18% Gross Profit 800 807 1028 590 708 761 845 773 413 373 435 537 521 Q/Q NM 1% NM NM 20% 7% 11% -8% -47% -10% 17% 24% -3% EBITDA 1015 1027 1226 805 969 1020 1107 1036 664 593 614 790 777 Q/Q NM 1% 19% -34% 20% 5% 8% -6% -36% -11% 4% 29% -2% Net Income 667 671 865 442 556 613 691 618 285 227 302 393 402 Q/Q NM 1% NM -49% 26% 10% 13% -11% -54% -20% 33% 30% 2% EPS (SAR) 1.48 1.49 1.92 0.98 1.23 1.36 1.54 1.37 0.63 0.51 0.67 0.87 0.89 Gross Margins 36.9% 36.5% 35.6% 28.3% 30.6% 31.6% 33.9% 33.8% 24.0% 23.9% 24.1% 29.3% 34.8% EBITDA Margins 46.8% 46.4% 42.4% 38.6% 41.8% 42.4% 44.4% 45.2% 38.7% 37.9% 34.1% 43.1% 51.9% Net Margins 30.8% 30.3% 29.9% 21.2% 24.0% 25.4% 27.7% 27.0% 16.6% 14.5% 16.8% 21.5% 26.9% Source: Company Reports and Riyad Capital Gross margins are the highest after a span of nine quarters, suggesting the feedstock spread advantage, despite Aramco hiking its fuel prices, which was not applicable for Yansab. Net income of SAR 402 million beat our estimates of SAR 281 million for 1Q2016, an increase of +41% Y/Y and +2% Q/Q. Net margins stood at its best after a gap of 4 quarters with 27% net margins versus 17% in 1Q2015 and 22% in 4Q2015. Consensus consistently see surprises Yansab earnings have mostly been a mixed bag since 2015 with consensus rarely meeting expectations. We noted that most analyst expectations were on the bearish side as oil prices started collapsing as evident from 3Q2014 with mostly positive surprises except in case of 1Q and 3Q of 2015. May 16, 2016 7
WACC Yanbu National Petrochemical Co (Yansab) Valuation We roll forward and update our models to value Yansab using both absolute and relative valuations. With current operating rates and limited capex, we believe DCF method would be apt in valuing Yansab. Margins are likely to improve following the pickup in product prices and drive sustainable free cash flows, as operations continue to be intact. Alternatively, we value Yansab using a target P/E multiple method which derived SAR 37.05 fair value using 14.0x P/E. Amongst the valuation approaches we prefer DCF valuation and revise our 12-month target price to SAR 41.00 from our SAR 44.00 earlier. Revise to Hold. #1: DCF suggests fair value of SAR 40.67 Our DCF valuation with forecast assumed for 2017-19E used a long-term terminal growth rate of 0.5% and risk-free rate assumption of 3.8%, which includes a premium of 1.5% for country risk over benchmark 10-year T-bill yields of 2.3% (being the average of the last 6 months). This results in cost of equity of 11.7%, while we assume after tax cost of debt at 5.1%, deriving a WACC of 10.4% assuming a capital structure (Equity/Debt) of 20%. Table 3: Discounted Cashflow Valuation 2017E 2018E 2019E Assumptions NOPLAT 1,588 1,859 2,135 Cost of equity 11.7% Add: Depreciation &Amortization 740 794 799 After tax cost of debt 5.1% Change in w orking capital (126) (128) (131) WACC 10.4% Less: Capex (292) (439) (353) Zakat (tax) rate 2.5% Net Adjustments in WC, CAPEX and D&A 322 227 315 Terminal Grow th rate 0.5% Free Cash Flow to Firm (FCFF) 1,910 2,086 2,451 Risk free rate 3.9% PV of Terminal Value 1,730 1,712 1,822 Market Return 10.2% DCF Valuation Market Risk Premium 6.25% Terminal Value 25,018 LT Debt/Equity 20.0% PV of Terminal Value 18,596 LT Equity Capital/Debt 80.0% Value of the firm 23,859 Potential Upside 3.1% Add (Less): Net Debt (984) 3 Yr Weekly Adj.Beta 1.3 Value of equity 22,876 Shares O/S (Mln) 563 Value Per Share (SAR) 40.67 Stock price (SAR) 39.76 Source: Riyad Capital Table 4: Sensitivity Analysis of WACC and Terminal Growth Rate Terminal Growth Rate 40.668 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.5% 1.6% 9.6% 41.90 42.30 42.71 43.13 43.55 43.99 44.43 44.89 45.35 45.83 46.32 46.82 47.33 47.85 48.39 48.94 9.8% 41.19 41.58 41.97 42.37 42.78 43.20 43.62 44.06 44.51 44.96 45.43 45.91 46.40 46.90 47.41 47.93 10.0% 40.52 40.88 41.26 41.65 42.04 42.44 42.85 43.27 43.69 44.13 44.58 45.04 45.50 45.98 46.47 46.97 10.2% 39.86 40.22 40.58 40.95 41.33 41.71 42.11 42.51 42.92 43.34 43.77 44.20 44.65 45.11 45.58 46.06 10.4% 39.26 39.60 39.95 40.30 40.67 41.04 41.42 41.80 42.20 42.60 43.01 43.43 43.86 44.30 44.75 45.21 10.6% 38.64 38.96 39.30 39.64 39.99 40.35 40.71 41.08 41.46 41.85 42.24 42.65 43.06 43.48 43.91 44.35 10.8% 38.06 38.37 38.70 39.03 39.36 39.71 40.06 40.41 40.78 41.15 41.53 41.92 42.31 42.72 43.13 43.55 11.0% 37.50 37.80 38.12 38.43 38.76 39.09 39.43 39.77 40.12 40.48 40.84 41.22 41.60 41.98 42.38 42.79 Source: Riyad Capital Risks to valuation The continued volatility in oil prices poses a challenge to sustainable product prices as product prices have hit multi-year lows. Additionally, the feedstock spread advantage could become limited versus international peers if Aramco continues to increase the price of feedstock. Yansab exports mostly to Asian countries (nearly 43% of revenue coming from Asia) and any slowdown in Asia affects Yansab. May 16, 2016 8
P/E Range(x) Yanbu National Petrochemical Co (Yansab) #2: Target P/E valuation at SAR 37.05 As sanity check on valuation approaches, we valued Yansab using target P/E based method and derived a fair value of SAR 37.05. We derived a target in the P/E range of 14.0x considering average range of the P/E multiples between 3 to 5 years. Additionally, our view augments that valuation ranges are closer currently; its large cap peers are at a P/E median of 15.2x, while overall sector valuations are at 13.2x due to outliers. Table 5: Price Sensitivity and Target P/E Valuation using Bear-Base-Bull Case EPS Estimates 2015A 2016E 2017E 2018E 2019E Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull EPS (SAR) 2.15 2.36 2.65 2.78 2.47 2.58 3.25 2.60 3.10 3.84 2.73 3.63 4.49 12.0x 25.76 # 28.26 31.76 33.34 29.68 31.00 39.01 31.16 37.20 46.03 32.72 43.58 53.86 13.0x 27.90 # 30.62 34.40 36.12 32.15 33.59 42.26 33.76 40.30 49.87 35.44 47.21 58.35 14.0x 30.05 # 32.97 37.05 38.90 34.62 36.17 45.51 36.35 43.40 53.71 38.17 50.84 62.84 15.0x 32.20 # 35.33 39.69 41.68 37.09 38.75 48.76 38.95 46.50 57.54 40.90 54.47 67.32 16.0x 34.34 # 37.68 42.34 44.46 39.57 41.34 52.02 41.55 49.60 61.38 43.62 58.10 71.81 17.0x 36.49 # 40.04 44.99 47.24 42.04 43.92 55.27 44.14 52.70 65.21 46.35 61.73 76.30 18.0x 38.63 # 42.39 47.63 50.01 44.51 46.50 58.52 46.74 55.80 69.05 49.08 65.37 80.79 19.0x 40.78 # 44.75 50.28 52.79 46.99 49.09 61.77 49.34 58.90 72.89 51.80 69.00 85.28 20.0x 42.93 # 47.10 52.93 55.57 49.46 51.67 65.02 51.93 62.00 76.72 54.53 72.63 89.77 Valuation based on P/E 2016E 2017E 2018E 2018E Net profit estimates (SAR Mln) 1489 1453 1744 2043 EPS (SAR) 2.65 2.58 3.10 3.63 P/E based valuation (SAR) Valuation at 2 year historical average of 15.7x 41.55 40.56 48.67 57.01 Based on a sector average 2016E consensus P/E of 13.4x 35.46 34.62 41.54 48.66 Estimated valuation at PER of 14.0x 37.05 36.17 43.40 50.84 Source: Riyad Capital Valuations expensive, thin yields Yansab trades above par and remains expensive to sector P/E amid lower yield. It trades at P/E of 17.0x, the highest among large caps in the sector and a thin TTM yield of 5.0%. Currently, the stock offers 24% premium to sector on a TTM basis. We believe with multi-product exposure and valuation range, Yansab offers lower risk reward among peers, while priced attractively are peers such as SAFCO and SABIC, which trades at 14.5x and 13.8x respectively. Table 6: KSA Petrochemicals Sector Valuation (TTM basis) Company Name Price (SAR) Mcap SAR Mln EV SAR Mln P/E P/B P/S EV/ Sales EV/ EBITDA Div. Yld YTD 52 Wk-Hi (SAR) 52 Wk- Lo (SAR) Saudi Basic Industries Corp 84.00 252,000 298,270 13.8x 1.5x 1.8x 1.9x 6.2x 7.1% 10% 109.75 59.50 Saudi Arabian Fertilizer Co 63.75 26,562 24,481 14.5x 4.0x 8.1x 7.8x 12.2x 9.4% (22%) 127.50 61.00 National Industrialization Co 12.30 8,228 36,150 NA 1.0x 0.6x 2.3x 15.7x NA 16% 25.30 7.50 National Petrochemical Co 17.35 8,328 19,348 9.0x 1.4x 1.2x 2.6x 7.2x NA 4% 28.20 10.60 Saudi Industrial Investment Grou 13.80 6,210 21,072 9.1x 0.9x 0.9x 2.8x 7.7x NA (0%) 29.10 9.80 Sahara Petrochemical Co 11.55 5,068 5,816 33.6x 0.9x 3.2x 2.8x 10.4x 4.3% 13% 16.35 7.40 Yanbu National Petrochemical Co39.76 22,500 22,310 17.0x 1.5x 3.4x 3.2x 7.8x 5.0% 23% 57.50 23.80 Saudi International Petrochemica 14.55 5,335 13,493 20.5x 0.9x 1.5x 3.6x 9.9x 8.2% 4% 33.50 9.75 Advanced Petrochemical Co 49.20 8,069 8,350 10.5x 3.4x 3.4x 2.9x 7.0x 6.1% 30% 61.00 31.90 Saudi Kayan Petrochemical Co 6.85 10,275 35,388 NA 0.8x 1.3x 4.1x 14.6x NA 1% 12.35 4.40 Rabigh Refining & Petrochemical 12.60 11,038 48,083 NA 1.3x 0.5x 2.0x 37.8x 4.0% 3% 24.90 7.00 Alujain Corp 14.45 1,000 2,576 7.9x 1.0x 0.7x 1.8x 5.5x NA 0% 24.35 9.50 Nama Chemicals Co 6.85 880 1,640 NA 0.8x 2.0x 3.4x 165.3x NA (4%) 12.55 4.95 Methanol Chemicals Co 7.30 880 1,736 NA 0.6x 1.2x 2.4x 17.2x NA - 2% 14.60 4.95 Sector Median* 366,373 538,714 13.8x 1.0x 1.4x 2.8x 10.1x 6.1% Source: Bloomberg, Market Cap and EV are total May 16, 2016 9
May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 Appendix Yanbu National Petrochemical Co (Yansab) Exhibit 15: 5 Year Price Multiples Trading History 3.4 P/B Ratio 4.3 P/S Ratio 2.9 3.8 2.4 1.9 1.4 0.9 0.4 3.3 2.8 2.3 1.8 P/B 3 Yr Avg 12M Avg P/S 3 Yr Avg 12M Avg 24.0 P/E Ratio 16.0 14.0 EV/EBITDA Ratio 19.0 12.0 14.0 10.0 8.0 9.0 6.0 4.0 4.0 P/E 3 Yr Avg 12M Avg EV/EBITDA 3 Yr Avg 12-M Avg 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Dividend Yield 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 EV/Sales Ratio Dvd Yld 12M Avg EV/Sales 3 Yr Avg 12M Avg 7 Volume Traded ( Mln Shares) 350 Value Traded (SAR Mln) 6 300 5 250 4 200 3 2 1 0 150 100 50 0 Volume (Mln Shares) Turnover (SAR Mln) Source: Bloomberg May 16, 2016 10
2016-18 E EPS grow th Yanbu National Petrochemical Co (Yansab) Exhibit 16: KSA Petrochemicals Sector Valuation-Consensus EPS growth 2016-18E Vs 2017E P/E 30.0% 25.0% Sahara 20.0% SABIC Saudi Kayan 15.0% Petrochem 10.0% SAFCO YANSAB 5.0% SIIG Sipchem 0.0% 5.0 7.0 9.0 11.0 Adv anced 13.0 15.0 17.0 19.0 21.0 23.0 25.0 2017E P/E Source: Bloomberg May 16, 2016 11
Yanbu National Petrochemical Co (Yansab) Table 7: Summary Financials FY ended Dec 31 2011 2012 2013 2014 2015 2016 E 2017 E 2018 E 2019 E Income Statement (SAR mln) Total Sales 9,659 9,299 9,354 9,511 6,911 6,332 6,775 7,693 8,382 Cost of Sales (5,866) (6,190) (6,129) (6,424) (5,154) (4,416) (4,907) (5,532) (5,916) Gross Profit 3,793 3,109 3,225 3,087 1,758 1,916 1,868 2,162 2,466 S,G&A Expenses (175) (234) (232) (244) (218) (230) (243) (235) (250) Operating Income 3,618 2,875 2,993 2,843 1,540 1,686 1,625 1,926 2,216 Other Income /expenses 62 31 29 11 26 28 31 34 38 Financial Charges (413) (361) (260) (224) (182) (164) (134) (116) (93) Pre-Zakat Income 3,267 2,546 2,762 2,630 1,384 1,551 1,522 1,845 2,162 Zakat (92) (100) (118) (152) (176) (62) (68) (101) (119) Net Income 3,174 2,446 2,645 2,478 1,207 1,489 1,453 1,744 2,043 EBITDA 4,635 3,894 4,073 4,132 2,660 2,372 2,365 2,721 3,016 Shares Outstanding 563 563 563 563 563 563 563 563 563 EPS 5.64 4.35 4.70 4.40 2.15 2.65 2.58 3.10 3.63 DPS - - 3.00 3.00 2.00 1.50 1.75 2.00 2.50 Balance Sheet (SAR mln) Assets Cash & equivalents 599 530 2,106 2,691 679 1,171 1,677 2,276 2,873 Accounts Receivable 2,459 2,562 2,380 2,298 1,844 1,690 1,808 2,053 2,236 Inventories 1,170 1,112 1,119 1,316 826 707 786 886 948 Investments 769 891 915 964 2,734 2,843 2,957 3,075 3,198 Others 123 259 262 228 245 257 270 284 298 Total Current Assets 5,121 5,353 6,782 7,496 6,328 6,668 7,498 8,573 9,553 Property Plant & Equipment 17,588 16,498 15,623 14,638 14,357 13,742 13,126 12,454 11,637 intangable assets 234 330 305 144 80 85 89 93 98 Other Non Current Assets 32 208 191 189 203 213 224 235 247 Total non-current Assets 17,855 17,036 16,119 14,971 14,641 14,040 13,439 12,783 11,982 Total Assets 22,975 22,388 22,901 22,467 20,968 20,708 20,937 21,356 21,535 Liabilities & Equity Short Term Debt 1,181 1,279 1,298 1,462 1,464 1,133 1,133 916 700 Accounts Payable 423 361 252 463 201 172 192 216 231 Accrual and provisions 737 831 623 729 1,107 1,085 1,063 1,042 1,021 Others 1,213 - - - - - - - - Total Current Liabilities 3,555 2,471 2,174 2,655 2,772 2,390 2,387 2,174 1,952 Long Term Debt 8,778 6,821 5,523 4,060 2,596 1,778 1,528 1,528 1,278 Other Non Current Liab. 127 135 161 200 248 260 273 287 301 Total non-current Liab 8,905 6,956 5,683 4,260 2,844 2,038 1,801 1,815 1,579 Total Liabilities 12,460 9,427 7,857 6,915 5,616 4,428 4,189 3,989 3,531 Share Capital 5,625 5,625 5,625 5,625 5,625 5,625 5,625 5,625 5,625 Reserves 499 743 1,008 1,256 1,376 1,525 1,671 1,845 2,049 Retained Earnings 4,391 6,593 8,410 8,672 8,351 9,129 9,453 9,897 10,329 Total Equity 10,515 12,961 15,043 15,552 15,352 16,279 16,748 17,367 18,003 Total Liab & Equity 22,975 22,388 22,901 22,467 20,968 20,708 20,937 21,356 21,535 Cash Flows (SAR mln) CFO 3,300 3,345 3,621 4,058 3,417 2,401 1,995 1,986 2,242 CFI (253) (342) (205) (207) 989 (247) (255) (262) (270) CFF (3,238) (3,073) (1,840) (3,260) (59) (1,662) (1,234) (1,125) (1,375) Source: Company reports, Riyad Capital May 16, 2016 12
Yanbu National Petrochemical Co (Yansab) Table 8: Ratios 2011 2012 2013 2014 2015 2016 E 2017 E 2018 E 2019 E Valuations P/E 7.1x 9.2x 8.5x 9.1x 18.6x 15.0x 15.4x 12.8x 11.0x P/B 2.1x 1.7x 1.5x 1.4x 1.5x 1.4x 1.3x 1.3x 1.2x P/S 2.3x 2.4x 2.4x 2.4x 3.2x 3.5x 3.3x 2.9x 2.7x P/CF 37.6x 42.5x 10.7x 8.4x 33.1x 19.2x 13.4x 9.9x 7.8x EV/Sales 2.4x 2.5x 2.4x 2.4x 3.3x 3.6x 3.4x 3.0x 2.7x EV/EBITDA 4.9x 5.9x 5.6x 5.5x 8.6x 9.6x 9.7x 8.4x 7.6x EV/EBIT 6.3x 8.0x 7.6x 8.0x 14.8x 13.6x 14.1x 11.9x 10.3x Dividend Yield 0.0% 0.0% 7.5% 7.5% 5.0% 3.8% 4.4% 5.0% 6.3% Earnings Yield 14.1% 10.9% 11.8% 11.0% 5.4% 6.6% 6.5% 7.8% 9.1% Growth (YoY) Total Sales 66% -4% 1% 2% -27% -8% 7% 14% 9% Gross Profit 75% -18% 4% -4% -43% 9% -3% 16% 14% EBITDA 61% -16% 5% 1% -36% -11% 0% 15% 11% Net Income 90% -23% 8% -6% -51% 23% -2% 20% 17% Margins Gross Margins 39% 33% 34% 32% 25% 35% 32% 32% 33% EBIT Margins 37% 31% 32% 30% 22% 27% 24% 25% 26% EBITDA Margins 48% 42% 44% 43% 38% 37% 35% 35% 36% Net Margins 33% 26% 28% 26% 17% 24% 21% 23% 24% Key Ratio's Cash Ratio 0.2 0.2 1.0 1.0 0.2 0.5 0.7 1.0 1.5 Current Ratio 1.4 2.2 3.1 2.8 2.3 2.8 3.1 3.9 4.9 Inventory Turnover 5.0 5.6 5.5 4.9 6.2 6.2 6.2 6.2 6.2 Payables Turnover 13.9 17.1 24.3 13.9 25.6 25.6 25.6 25.6 25.6 Receivables Turnover 3.9 3.6 3.9 4.1 3.7 3.7 3.7 3.7 3.7 Interest Cover 8.9 8.1 11.6 12.8 8.6 10.4 12.3 16.9 24.3 Debt to EBITDA 2.4 2.1 1.7 1.3 1.5 1.2 1.1 0.9 0.7 Debt to Assets 49% 36% 30% 25% 19% 14% 13% 11% 9% ROA 14% 11% 12% 11% 6% 7% 7% 8% 9% ROE 30% 19% 18% 16% 8% 9% 9% 10% 11% ROIC 17% 14% 14% 13% 8% 9% 8% 10% 11% Cashflow/EBITDA 71% 86% 89% 98% 128% 101% 84% 73% 74% Capex/Sales 1% 1% 1% 2% 11% 2% 2% 2% 2% Capex/Depreciation 14% 13% 11% 13% 77% 18% 17% 16% 16% Dividend Payout 0% 0% 64% 68% 93% 57% 68% 65% 69% Debt to Equity 106% 62% 45% 36% 26% 18% 16% 14% 11% Per Share Ratio's EPS 5.64 4.35 4.70 4.40 2.15 2.65 2.58 3.10 3.63 DPS - - 3.00 3.00 2.00 1.50 1.75 2.00 2.50 BVPS 18.69 23.04 26.74 27.65 27.29 28.94 29.77 30.87 32.01 Sales/Share 17.17 16.53 16.63 16.91 12.29 11.26 12.04 13.68 14.90 FCF I/Share 5.87 5.95 6.44 7.21 6.07 4.27 3.55 3.53 3.99 FCF II/Share (0.25) (0.22) (0.19) (0.28) (1.41) (0.22) (0.22) (0.23) (0.23) FCF III/Share (0.20) (0.39) (0.18) (0.09) 3.17 (0.22) (0.23) (0.24) (0.25) Source: Company reports, Riyad Capital May 16, 2016 13
Yanbu National Petrochemical Co (Yansab) Page Intentionally Left Blank May 16, 2016 14
Stock Rating Strong Buy Buy Hold Sell Not Rated Expected Total Return 25% Expected Total Return 15% Expected Total Return < 15% Overvalued Under Review/ Restricted For any feedback on our reports, please contact research@riyadcapital.com Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations. Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia ( KSA ). Website: www.riyadcapital.com