Figure 1 SAFCO Q1 results Q Q Q (SAR mn) Operating profit % 375.6% 347. Operating margin 47% 8% 30% 40%

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Vol mn RSI10 SAFCO Petrochemicals Industrial SAFCO AB: Saudi Arabia US$7.22bn 40% US$5.60mn Market cap Free float Avg. daily volume Target price 62.00-2.6% over current Current price 63.70 as at 8/5/2018 Underweight Neutral Overweight Underweight Performance 75.0 70.0 65.0 60.0 55.0 70 30-10 8 6 4 2 Earnings Price Close MAV50 Source: Bloomberg Existing rating MAV10 05/17 08/17 11/17 02/18 Relative to TADAWUL FF (RHS) (SARmn) 2017 2018e 2019e Revenue 2,759 3,333 3,695 y-o-y -3.4% 20.8% 10.9% Gross Profit 1,199 1,558 1,895 Gross margin 43.5% 46.8% 51.3% Net income 879 1,160 1,459 y-o-y -15.2% 32.1% 25.7% Net margin 31.8% 34.8% 39.5% EPS (SAR) 2.1 2.8 3.5 DPS (SAR)* 1.8 2.5 3.3 Payout ratio 83% 90% 95% P/E (Curr) 23.3x 18.6x P/E (Target) 22.3x 17.7x 106.0 98.5 91.0 83.5 76.0 Research Department Pritish K. Devassy, CFA Tel +966 11 2119370, devassyp@alrajhi-capital.com SAFCO (SAFCO AB Equity) Q1: Weak results on higher costs. Maintain Neutral SAFCO reported Q1 earnings at SAR237mn, down by ~44% y-o-y due to higher cost of sales (which included restructuring costs) and top-line miss. Q1 top-line declined 4.2% y-o-y (6% below our estimate and ~13% lower than consensus) despite flattish Urea prices implying slower than expected pick up in operating rates after the Q4 17 shutdown. The stock is down 12% from mid- April levels due to concerns around higher costs and decline in Urea price. SAFCO is likely to carry out maintenance in SAFCO II and III, hence we expect operating rates to be slightly lower in the coming quarters. Avg. Q2 Urea price has declined to US$245/t. We use average cycle price of US$250/t (unchanged) for Urea in 2018E as we believe Urea oversupply concerns still persist. We expect DPS to improve to SAR2.5/sh for 2018E, implying a dividend yield of ~4%. Given stable outlook for Urea prices, we make no material changes to our forward looking estimates. Consequently, we maintain our TP of SAR62/sh and remain Neutral. Additional details: We attribute the miss in Q1 18 to have majorly come from higher cost of sales (cost ex-depreciation and ex-feedstock was 28.9% of sales) which likely included restructuring costs. We believe this could be non-recurring in nature. A higher figure of 35.4% was reported in Q4 2017 as well, but that could have been related to the shutdown. Given the expected shutdown, we expect it to stay relatively high in Q2 as well. Thereafter we expect it to decline back to earlier levels (Figure 2). Q1 also saw a lower share of profit from Ibn Al- Baytar, down ~28% y-o-y to SAR19.6mn (below our estimate of ~SAR29.4mn), further dragging down the net profit to SAR237mn (-44% y-o-y), below our estimate of SAR363mn (consensus: SAR392mn). Figure 1 SAFCO Q1 results (SAR mn) Q1 2017 Q4 2017 Q1 2018 Y-o-Y Q-o-Q ARC est Comments Slightly below our estimate, largely due to weaker than Revenue 847 616 811-4.2% 31.6% 860 expected sales volume. Higher than expected production costs led to gross profit miss in Gross profit 480 149 358-25.3% 140.9% 450 Q1. Gross margin 56.6% 24.1% 44.2% 52.3% Operating profit 395 51 242-38.8% 375.6% 347 Operating margin 47% 8% 30% 40% Net profit 423 63 237-44.0% 279.5% 363 Net margin 50% 10% 29% 42% Non-recurring restructuring costs further contributed to miss at the operating level. Lower than expected equity income (SAR19.6mn vs SAR29.4mn expected) from Ibn AlBaytar dragged net profit below our estimate. Figure 2 Costs (ex-depreciation and ex- feedstock costs) % sales 40% 35% 30% Shutdown 35.4% Restructuring costs Shutdown expected 28.9% 28% 25% 21.8% 23.6% 23.3% 23.5% 23.5% 20% 18.8% 15% 10% 5% 0% Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018e Q3 2018e Q4 2018e Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

Outlook on Urea prices: Average Urea prices largely remained stable at US$255/t (1Q17: US$253/t) in Q1 2018. Currently average Q2 trading price is at USD$ 245/t. We said in our last report that the price surge in Urea was unsustainable as the factors responsible were temporary. The primary reason was increase in coal prices in China which is the key input for producing Urea for the marginal cost producer. China continues to curtail production due to environment concerns. While Chinese supply is declining, demand-supply balance is being aided by comparably weak demand and higher production volume outside China (Source: Yara international). While it is hard to estimate prices, we note that Urea prices in the past many years have trended in-line with gas prices which we believe are likely to remain stable (Figure 3). Figure 3 Natural gas prices and Urea prices have fairly moved together 3.50 300 3.00 250 2.50 200 2.00 150 1.50 1.00 0.50 105 96 67 73 85 66 72 91 84 100 50 - Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 - Natural gas (USD/mmbtu) Urea(USD/ton) Urea/Natural gas ratio Source:Bloomberg, Al Rajhi Capital Lower Chinese exports (Figure 5) implies that Chinese supply shocks will now matter lesser than in the past, especially when there is permanent capacity addition outside China (3.8mn tonnes in 2018E as per Yara International, Figure 4). For the medium term, we have estimated Urea prices to rise gradually by 3% from 2019 onwards. We have considered a few scenarios for Urea price in 2019 and arrived at various target prices based on equal mix of relative and DCF valuations (Figure 6). For our base case we expect 3% increase. Figure 4 Increase in supply outside of China Figure 5 Falling export ( 000 tonnes) Source: Yara, Al Rajhi Capital Source: Yara, Al Rajhi Capital Valuation: The stock is currently trading at ~22x 12-month forward EPS, above its 3-year historical average of 18x and above global fertilizer peers multiple of 16x. The company s planned capacity expansion of SAFCO III plant (~20% increase in capacity) is most likely to begin production in Q2 2019 and its impact is limited in our view. We make no material changes to our estimates, given the stable near-term outlook for Urea prices. Our TP stands at SAR62/share based on equal mix of relative (SAR59.2/sh. based on 19.0x 12 month forward PE) and DCF valuation (SAR64.4/sh. based on FCF, cost of equity 9.3%). Consequently, we maintain Neutral rating on the stock. Disclosures Please refer to the important disclosures at the back of this report. 2

May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 SAFCO Figure 6 Various scenarios of Target P/E and 2019 Urea price changes 17.0x 18.0x 19.0x 20.0x 21.0x 10% 63 64 66 68 69 3% 59 60 62 63 65 0% 57 58 60 62 63-5% 54 56 57 59 60-10% 51 53 54 56 57 Figure 7 SAFCO 1Y Forward P/E trend 30 25 20 15 10 5 0 Source: Bloomberg, Al Rajhi Capital SAFCO 1Y Forward P/E trend Average Max Min Figure 8 Margins and Valuation Metrics - SAFCO vs. global peers Saudi Arabia Market Cap (US$ 'mn) TTM OPM (%) TTM NPM (%) 2018E PE 2019E PE 2018E EV/EBITDA 2019E EV/EBITDA SAFCO 7,055 24.0 25.4 22.5x 20.4x 3.9x 14.8x Middle East & Africa (ex-saudi Arabia) Israel Chemicals 5,790 11.6 6.7 13.7x 12.2x 2.0x 7.8x Jordan Phosphate Mines 342-5.2-6.6 NA NA 0.4x NA Abou Kir Fertilizers & Chemical Industries 2,189 NA NA 3.8x 18.1x 10.2x 20.3x Arab Potash/The 1,991 13.8 21.2 NA NA 1.7x NA Europe K+S 5,640 9.2 5.1 18.0x 13.9x 1.1x 9.3x Yara International 11,763 3.5 3.4 17.5x 12.0x 1.2x 8.8x North America CF Industries 9,117 5.3 11.0 43.5x 22.9x 2.5x 11.9x Mosaic 10,460 6.3-1.4 18.5x 15.1x 1.0x 8.2x Nutrien Ltd 29,274 6.5 3.6 20.0x 15.5x NA 8.2x Latin America Sociedad Quimica y Minera de Chile SA 14,342 28.5 19.7 31.0x 26.3x 6.6x 15.0x Fertilizantes Heringer SA 70 0.8-2.6 6.6x 9.2x 1.5x 3.4x Asia China XLX Fertilizer 397 10.0 5.3 4.7x 4.0x 0.7x 6.9x Coromandel International 2,011 10.3 6.1 17.1x 14.4x 4.3x 11.4x Engro Fertilizers 843 NA NA 8.8x 8.2x 2.3x 5.9x National Fertilizers 401 6.2 2.4 NA NA 1.5x NA Phosagro 5,556 19.8 14.0 9.7x 9.6x NA 6.9x Taiwan Fertilizer Co Ltd 1,321 10.5 13.9 23.4x NA 0.8x NA Fauji Fertilizer Bin Qasim Ltd 342-6.9 5.2 21.1x 11.4x 1.1x NA Hubei Yihua Chemical Industry Co Ltd 354 NA -51.0 NA NA NA NA Acron PJSC 2,796 22.4 14.2 13.1x 9.6x 2.5x 8.2x Luxi Chemical Group Co Ltd 4,127 21.6 15.0 8.5x 6.8x 3.1x NA PhosAgro PJSC 5,095 19.8 14.0 8.9x 8.8x 3.3x 6.5x Median 10.0 5.7 15.4x 12.0x 1.7x 8.2x Average 10.2 5.0 16.0x 12.8x 2.5x 9.2x Source: Bloomberg, Al Rajhi Capital. Notes: All valuation ratios as on latest trading prices. Disclosures Please refer to the important disclosures at the back of this report. 3

IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. 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"Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target 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. 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 Mazen AlSudairi Head of Research Tel : +966 1 211 9449 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. 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