Ma aden Equity infusion will strengthen balance sheet

RSI10 Ma aden MAADEN AB: Saudi Arabia Rating Target price Current price OVERWEIGHT SAR42.0 (19.4% upside) SAR35.17 Research Department ARC Research Team Tel 966 11 211 9332, gopij@alrajhi-capital.com Key themes & implications Recently, Ma aden decided to raise capital via a rights issue. We believe, this will be a positive move for the company considering the elevated debt levels. Moreover, the equity infusion will help company meet the funding requirements of the new phosphate project and Ma aden may not have to rely of additional debt as of now. Also, commencement of the aluminum plant will remain the key to its earnings performance. Share information Market cap (SAR/US$) 33.16bn / 8.84bn 52-week range 27.20-39.20 YTD daily avg. vol. (US$) Shares outstanding 159.6mn 925.0mn Free float (est.) 33% Performance 1M 3M 12M Absolute -4.1% -5.7% 18.0% Relative to TASI -3.8% -4.2% -9.8% Major Shareholder: Public Investment Fund 50.0% GOSI 9.6% Valuation 12/12A 12/13A 12/14E 12/15E P/E (x) 30.4 19.7 36.2 18.2 P/B (x) 1.8 1.7 1.6 1.5 EV/EBITDA (x) 21.5 38.6 32.1 20.1 Dividend Yield 0.0% 0.0% 0.0% 1.6% Performance 40.00 38.00 36.00 34.00 32.00 30.00 28.00 26.00 Price Close Relative to TADAWUL FF (RHS) 70 30-10 06/13 09/13 12/13 03/14 Source: Bloomberg, Company data, Al Rajhi Capital Company summary 107 103 100 96 93 89 86 82 Ma aden was formed in 1997 by the Saudi government to use the Kingdom s non-petroleum reserves to diversify the Saudi economy away from the oil-based sectors. In July 2008, Ma aden was listed on the Saudi Stock Exchange. Over the past few years, Ma aden has diversified away from gold mining business to phosphate (MPC started in Q4 2011) and aluminum businesses (expected to start commercial production by 2014-end). Ma aden Equity infusion will strengthen balance sheet Ma aden, which is in an expansionary mode, announced its plans to raise SAR5.6bn capital via a rights issue, which will boost its paid-up capital by about 60%. Ma aden stated that it will use the proceeds for expansion in its gold and phosphate segments along with the funding for the aluminum plant. However, with the aluminum plant beginning initial production recently, we believe the majority of the proceeds may be used for the ambitious fertilizer project Wa ad Al Shamal. The company had signed EPC contracts for this project a few months ago. We see the rights issue as a positive development for Ma aden as it will help limit its spiraling leverage ratios. Over the near term, timely beginning of commercial production at the aluminum project will be a key value driver for Ma aden. We anticipate production to begin as announced earlier. With this, we raise our target price to SAR42 (earlier SAR38) a share and reiterate our Overweight rating. Diversification has led to high levels of debt: Ma aden has diversified its businesses over the past few years as it shifted its focus from gold to fertilizer (Ma aden Phosphate Co.) and aluminum (a JV with Alcoa). The company has relied on debt to fund the diversification and consequently net debt has risen 8.6x over a period of three years (SAR3.6bn in Q1 2011 to SAR31bn Q1 2014) with the leverage ratio (D/E ratio) increasing from 71% to 136%. However, despite a highly levered balance sheet, interest coverage ratio remains at 5.0x (for Q1 2014), which we believe is healthy considering current debt levels. Rights issue to curtail ballooning leverage levels: Ma aden announced that it will build another fully-integrated phosphate fertilizer plant at Wa ad Al Shamal with estimated investments of SAR27bn (Ma aden will hold 60% stake in the JV). Recently, Ma aden executed EPC contracts to develop five units whose estimated building costs stand at about SAR14bn. The company has secured approvals for debt worth SAR23.25bn (SAR15.75bn from various banks and SAR7.5bn from PIF), which are to be used for the project. These loans will drive up gross debt by 67% from current levels. However, with an equity infusion of SAR5.6bn, the leverage ratio would reach 183%. Rights issue proceeds will meet the funding requirements: In December 2013, Ma aden had stated that it was in negotiations with PIF, SIDF and export credit agencies to secure loans in addition to the commitments it received from banks. However, with an additional equity capital of SAR5.6bn along with debt of SAR23.25bn from banks and PIF, we believe that the company might not need any additional debt funding from SIDF and export credit agencies. Conclusion: Ma aden s decision to boost its equity capital will reflect positively on the company s financials in our view, as the capital infusion will not only help Ma aden restrain its leverage ratio, but will also eliminate the need for additional debt. We believe that the rights issue is unlikely to be issued at a significant discount to the current market price and hence, will lead to a lesser dilution. Considering the equity infusion and earnings growth potential from expansion projects, we view the company as a long term value play. However, stock can witness volatility in the near term on news flow related to developments in the expansion projects and volatile earnings. We revise our target price upward to SAR42 a share and reiterate our Overweight rating. Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform 1

Ma aden a long term play Even considering the rights issue, Ma aden s balance sheet will be laden with considerable debt as the company has sought funding for expansion projects. However, commencement of the commercial production at its aluminium plant in Q4 2014 and an expected pick up in gold volumes over the medium term, should boost earnings performance from 2015 onwards. We expect earnings to double y-o-y in 2015, and hence 2015E PE of 18.2x seems justifiable. Further, phosphate plant coming online in 2017 will offer substantial earnings growth. Hence, we expect Ma aden to add value to its shareholders over a 2-4 year period. Having said that, the stock may witness volatility over the near term driven by news flow associated with the on-going projects and volatile earnings. In our view, Ma aden continues to remain a value stock for long-term investors. Wa ad Al Shamal phosphate project details In early February this year, Ma aden awarded EPC contracts for five units of its new phosphate project, details of which are tabulated below. Ma aden, The Mosaic Co. and SABIC will hold stakes of 60%, 25% and 15% respectively in the joint venture. Figure 1 EPC contracts for phosphate project Plant Capacity (mn tons) Estimated costs (SAR mn) Expected completion Sulfuric acid 4.9 2,865 Q4 2016 Phosphoric acid 1.5 3,506 Q4 2016 Ore beneficiation 5.3 2,089 Q3 2016 Fertilizer 3.0 2,250 Q4 2016 Ammonia 1.1 3,093 Late 2016 Total 15.8 13,803 Source: Tadawul, Al Rajhi Capital 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 1,533 5,577 6,047 8,115 8,809 Cost of Goods Sold (532) (2,982) (4,472) (5,354) (5,085) Gross Profit 1,001 2,594 1,575 2,760 3,724 Government Charges S.G. & A. Costs (419) (833) (902) (1,425) (1,233) Operating EBIT 582 1,761 674 1,335 2,491 Cash Operating Costs (777) (2,832) (4,275) (5,764) (5,030) EBITDA 756 2,745 1,772 2,351 3,779 Depreciation and Amortisation (174) (984) (1,098) (1,016) (1,288) Operating Profit 582 1,761 674 1,335 2,491 Net financing income/(costs) 64 (221) (156) (152) (149) Forex and Related Gains Provisions - - - (44) (44) Other Income Other Expenses 14 (5) 1,357 1 1 Net Profit Before Taxes 658 1,532 1,872 1,140 2,298 Taxes (120) (52) (55) (25) (80) Minority Interests (125) (389) (134) (198) (394) Net profit available to shareholders 413 1,091 1,682 917 1,823 Dividends - - - - (547) Transfer to Capital Reserve 12/11A 12/12A 12/13A 12/14E 12/15E Adjusted Shares Out (mn) 925.0 925.0 925.0 925.0 925.0 CFPS (SAR) 0.770 2.663 3.151 2.303 3.790 EPS (SAR) 0.447 1.179 1.819 0.991 1.971 DPS (SAR) 0.000 0.000 0.000 0.000 0.591 Growth 12/11A 12/12A 12/13A 12/14E 12/15E Revenue Growth 117.0% 263.8% 8.4% 34.2% 8.6% Gross Profit Growth 202.7% 159.1% -39.3% 75.2% 34.9% EBITDA Growth 639.2% 263.0% -35.4% 32.7% 60.7% Operating Profit Growth 2281.6% 202.6% -61.8% 98.2% 86.5% Net Profit Growth 163.9% 54.2% -45.5% 98.9% EPS Growth 163.9% 54.2% -45.5% 98.9% Margins 12/11A 12/12A 12/13A 12/14E 12/15E Gross profit margin 65.3% 46.5% 26.1% 34.0% 42.3% EBITDA margin 49.3% 49.2% 29.3% 29.0% 42.9% Operating Margin 38.0% 31.6% 11.1% 16.5% 28.3% Pretax profit margin 42.9% 27.5% 30.9% 14.1% 26.1% Net profit margin 27.0% 19.6% 27.8% 11.3% 20.7% Other Ratios 12/11A 12/12A 12/13A 12/14E 12/15E ROCE 1.5% 3.6% 1.2% 2.1% 3.8% ROIC 2.3% 5.9% 1.6% 2.5% 4.0% ROE 2.5% 6.2% 8.9% 4.5% 8.5% Effective Tax Rate 18.2% 3.4% 3.0% 2.2% 3.5% Capex/Sales 551.9% 248.4% 212.4% 129.5% 35.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 30.0% Valuation Measures 12/11A 12/12A 12/13A 12/14E 12/15E P/E (x) 80.2 30.4 19.7 36.2 18.2 P/CF (x) 46.6 13.5 11.4 15.6 9.5 P/B (x) 2.0 1.8 1.7 1.6 1.5 EV/Sales (x) 31.2 10.6 11.3 9.3 8.6 EV/EBITDA (x) 63.4 21.5 38.6 32.1 20.1 EV/EBIT (x) 82.3 33.5 101.6 56.4 30.5 EV/IC (x) 1.7 1.5 1.3 1.3 1.2 Dividend Yield 0.0% 0.0% 0.0% 0.0% 1.6% 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 11,226 9,247 4,389 4,769 3,804 Current Receivables 482 563 760 1,615 1,409 Inventories 562 1,090 1,883 1,705 1,938 Other current assets 42 94 147 250 250 Total Current Assets 12,311 10,994 7,180 8,340 7,401 Fixed Assets 29,678 41,490 55,270 64,630 66,425 Investments 448 445 1,161 1,161 1,161 Goodwill - - - - - Other Intangible Assets 512 1,492 274 451 451 Total Other Assets 624 722 66 45 45 Total Non-current Assets 31,263 44,148 56,771 66,287 68,082 Total Assets 43,574 55,142 63,951 74,627 75,483 Short Term Debt 762 861 1,198 2,028 2,028 Accounts Payable 1,332 2,011 2,051 4,308 4,052 Accrued Expenses 1,503 2,906 3,261 3,769 3,523 Dividends Payable - - - - - Other Current Liabilities 83 92 46 10 10 Total Current Liabilities 3,823 5,934 6,611 10,133 9,632 Long-Term Debt 18,815 25,809 31,595 37,280 36,830 Other LT Payables - 52 440 216 216 Provisions 230 262 298 379 379 Total Non-current Liabilities 19,046 26,123 32,333 37,875 37,425 Minority interests 3,719 5,007 5,248 5,942 6,337 Paid-up share capital 9,250 9,250 9,250 9,250 9,250 Total Reserves 7,736 8,827 10,510 11,426 12,839 Total Shareholders' Equity 16,986 18,077 19,760 20,676 22,089 Total Equity 20,705 23,085 25,007 26,619 28,426 Total Liabilities & Shareholders' Equity 43,574 55,142 63,951 74,627 75,483 Ratios 12/11A 12/12A 12/13A 12/14E 12/15E Net Debt (SARmn) 8,352 17,424 28,404 34,539 35,054 Net Debt/EBITDA (x) 11.05 6.35 16.03 14.69 9.28 Net Debt to Equity 40.3% 75.5% 113.6% 129.8% 123.3% EBITDA Interest Cover (x) (11.9) 12.4 11.4 15.5 25.4 BVPS (SAR) 18.36 19.54 21.36 22.35 23.88 Cashflow Statement (SARmn) 12/11A 12/12A 12/13A 12/14E 12/15E Net Income before Tax & Minority Interest 658 1,532 1,872 1,140 2,298 Depreciation & Amortisation 174 984 1,098 1,016 1,288 Decrease in Working Capital (708) (335) (1,308) 2,184 (528) Other Operating Cashflow (2,713) (3,182) (2,867) 180 (80) Cashflow from Operations (2,590) (1,003) (1,205) 4,520 2,978 Capital Expenditure (8,461) (13,853) (12,842) (10,504) (3,083) New Investments 2,496 3,175 3,046 (139) - Others 986 1,657 (481) (285) - Cashflow from investing activities (4,979) (9,022) (10,278) (10,928) (3,083) Net Operating Cashflow (7,569) (10,024) (11,483) (6,409) (105) Dividends paid to ordinary shareholders - - - - (410) Proceeds from issue of shares - - - - - Effects of Exchange Rates on Cash - - - - - Other Financing Cashflow 1,027 952 494 226 - Cashflow from financing activities 7,088 8,045 6,626 6,789 (860) Total cash generated (481) (1,979) (4,857) 380 (966) Cash at beginning of period 11,706 11,226 9,247 4,389 4,769 Implied cash at end of year 11,226 9,247 4,389 4,769 3,804 Ratios 12/11A 12/12A 12/13A 12/14E 12/15E Capex/Sales 551.9% 248.4% 212.4% 129.5% 35.0% Disclosures Please refer to the important disclosures at the back of this report. 4

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