All Sectors - All Industries TASI Closing 9,467.0 YTD performance (%) 13.6 YTD avg. daily Turnover (SAR bn) 9.1 Key themes We are positive about TASI s dividend yield over the near-term. We expect sectors such as Cement, Retail and Food to pay higher dividends this year on the back of increasing profits. Large sectors such as Petrochemicals are also expected to maintain a healthy dividend payout. TASI s top dividend picks Stock DPS* (2015E) Div. Yield SAFCO 10.0 6.5% SABIC 5.0 5.1% APC 3.0 6.1% Saudi Cement 7.0 7.3% Eastern province 4.0 6.5% Arabian Cement 5.5 6.9% Qassim Cement 6.0 6.2% STC 4.0 6.0% Jarir 7.0 3.4% SACC 7.5 3.8% *in SAR. Prices as on 15 th Feb 2015 Expected Dividend yield for 2015 *Source: Bloomberg Research Department ARC Research Team Tel 966 11 2119248, devassyp@alrajhi-capital.com Dividend strategy Cement & Petrochemicals still lead We are updating our dividend portfolio after the announcement of 2014 earnings and annual dividends. The Cement and Petrochemical sectors remain the top dividend payers. The sharp fall in crude oil prices is bound to lead to a decline in the Petrochemical sector s earnings, which is likely to result in a cut in dividends. Nevertheless, we believe Petrochemicals sector offers healthy dividend yields. Based on our estimates, SAFCO has the highest dividend yield in the Petrochemical space, at 6.5% for 2015e. The Cement sector is reviving from the slowdown witnessed in late 2013 and early 2014 due to the labor shortage, and is likely to increase dividend payments in 2015. As for 2014, except for Saudi Cement, dividends were inline or above our estimates for Cement companies. Based on our estimates, Saudi Cement has the highest dividend yield in the Cement space, at 7.3% for 2015e. Among other high dividend payers, we expect 6% dividend yield for STC in the Telecom sector. Our latest dividend portfolio is dominated by Cement (four companies) and Petrochemical sectors (three companies), while the Retail, Food and Telecom sectors are represented by one company each. Petrochemical and Cement sectors pay the best dividends: Cement and Petrochemicals remain among the top dividend payers, offering the best dividend yields to investors. The Petrochemical sector s dividend payout stood at 47.5% in 2014 (58.7% in 2013). Although the sector s earnings are expected to be under pressure in 2015 due to low product prices and sluggish global economic growth, its high cash balance will allow petrochemical companies to refrain from drastic cuts in their dividend payments. The Cement sector offered a dividend payout of 86% in 2014, down from 94.6% in 2013, which we believe is a more sustainable level. With the sector witnessing a recovery in sales volumes, we believe there is a potential to increase dividend payments in 2015. Excluding Mobily, our portfolio outperformed the market: Overall, our recommended portfolio underperformed the overall market since May 2014, as Petrochemicals suffered due to the sharp fall in crude oil prices and Mobily plunged about 50% on accounting issues. Excluding the impact of Mobily, our dividend portfolio (-2.3%) marginally outperformed the TASI (-3.1%), without including dividends. On a total return basis, our portfolio gave a marginally positive return (+0.3%), as the higher dividend yield offset the fall in stock prices. Few changes to our dividend portfolio: We have made a few changes to our dividend-paying stocks, taking into account the latest dividend payments and current yields. We have also implemented changes to our short-listing criteria, which are explained later in the report. We have dropped Mobily from our portfolio, given the uncertainty attached with the company s earnings currently and replaced it with STC, which currently offers an attractive dividend yield of 6% (2015e). Our portfolio is dominated by Cement (four companies), since we believe the reviving cement sales augurs well for dividend distribution. We have three Petrochemical companies, and one company each from the Telecom, Retail, Food and Energy sectors. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform
TASI s dividend yield has slipped despite negative returns in 2014 Saudi Stock Market Dividend yield slips slightly The TASI s dividend yield slipped slightly in 2014, despite the index s negative return. The index ended 2014 with a dividend yield of 3.24%, down from 3.6% in 2013. Based on the current Bloomberg estimates for 2015, the TASI is currently trading at a dividend yield of 3%. Both the fall in crude prices and the accounting issues with Mobily have impacted the dividend expectations for 2015. Figure 2 shows that the TASI offers a decent dividend yield as compared to global peers. While the TASI offers better dividend yields than some of the developed markets, its yields are lower than most emerging markets. Figure 1 TASI returns and dividend yield over the years 50% 4.5 30% 27% 26% 4 3.5 10% 8% 6% 3-10% -3% -2.37% 2.5 2-30% 1.5-50% -70% -55% 2008 2009 2010 2011 2012 2013 2014 1 0.5 0 Returns (LHS) Dividend Yield (RHS) Figure 2 Country-wise 2015e dividend yields (%) 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Abu Dhabi Qatar Brazil UK Dubai TASI Germany Dow Jones S&P Index Japan India Disclosures Please refer to the important disclosures at the back of this report. 2
Sector analysis: High dividend-paying sectors Cement and Petrochemicals remain the highest dividend-paying sectors. The Cement sector has been consistently offering high dividend payouts due to the low capex requirements of major companies and strong cement demand in the Kingdom, allowing companies to operate at high capacity utilization rates. Petrochemical companies are cash rich, thanks to the cheap feedstock, which enables them to maintain a high dividend payout despite their expansion plans. Telecom was another sector offering a good dividend yield. However, the sector s dynamics have changed after Mobily s issues. Nevertheless, Saudi Telecom Company continues to offer an attractive dividend yield and is one of our top picks for the dividend strategy portfolio. The Cement sector is offering a dividend yield of 5.9% at the current level (based on 2014 dividends), similar to 2012 and 2013. With construction activity reviving and cement sales beginning to improve, we believe Cement is likely to continue paying healthy dividends in 2015 as well. The Petrochemical sector is a close second with a dividend yield of 5.5% (we have ignored the Telecom sector as Mobily has skewed the sector s figures). The sector s yield has improved from 3.9% in 2013 on the back of the recent correction and the increase in dividend payments. While Cement is witnessing a revival, Petrochemical is going through a rough phase due to the sharp fall in oil prices and rising risk of a global economic slowdown. As a result, profitability of most companies in the sector is expected to take a hit in 2015. However, cash rich companies like SABIC and SAFCO are not expected to make drastic cuts to their dividend payouts. The Retail, Food and Industrial sectors continue to trade at low dividend yields, since these high-growth sectors are at higher PE valuations as compared to matured sectors like Cement and Petrochemicals. Figure 3 Sectors dividend yield trend (%) 7 6 5 4 3 2 1 0 Cement Telecom Petrochem Building & Cons Retail Industrial Banking Food Real Estate 2012 2013 2014 Only a few sectors like Banking, Cement, Food and Retail are expected to witness an increase in dividend payments, as indicated by their higher dividend yield for 2015, as compared to 2014 (calculated at current prices [Figure 4]). On the other hand, the Petrochemical, Telecom and Real Estate sectors are expected to cut dividends in 2015 (as per Bloomberg estimates). Disclosures Please refer to the important disclosures at the back of this report. 3
2015E dividend expectations The prevailing concerns about the global economic growth and excess oil supply are weighing on the Saudi market. The heavyweight Petrochemical sector, which has maintained a healthy dividend payout over the last few years, will be hit by the sharp drop in oil prices as well as a sluggish global demand. Nevertheless, Petrochemical companies have the ability to maintain their dividend payouts backed by their strong cash reserves. On the other hand, the Cement sector is witnessing an increasing demand as construction activity revives in the Kingdom, which will lead to higher earnings in 2015. As a result, we have four Cement companies in our preferred dividend portfolio. The consensus expects Petrochemicals (4.4%) and Cement (5.7%) to offer higher-than-tasi dividend yields (source: Bloomberg). The Energy sector also offers an attractive dividend yield of 4.3% (2015e), but with only two companies, the sector is dominated by Saudi Electricity Company. The dividend from the Telecom sector is set to decline with only one company (Saudi Telecom Company) reporting consistent profits. Consumer sectors like Retail and Food will strongly benefit from the two-month salary bonus announced by the government, but are likely to offer below-average dividends. Figure 4 Sectors dividend yields at current prices (%) 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Cement Telecom Petrochem Energy TASI Building & Const. Banking Retail Food & Agri. Real Estate TTM 2015 Performance of dividend-paying sectors vis-a-vis TASI We have looked at the performance of various dividend-paying sectors in comparison to the Saudi market index from May 2014, since the price performance is a major component of total returns. Among the high dividend paying sectors, Energy has outperformed the market over the last nine months, delivering a return of about 9%, while Cement has largely remained a market performer, slipping about 6% since May 2014, similar to the TASI. Petrochemicals has severely underperformed the market primarily due to the fall in oil prices, which directly impact the sector. Petrochemicals has fallen 15% since May 2014, despite the recent partial recovery. The high growth Food and Retail sectors continue to be one of the best performing ones on the TASI, returning 13% and 9.6% respectively (since our last report in May 2014). However, due to their low dividend yields and price volatility, passive investors may find them unattractive. Disclosures Please refer to the important disclosures at the back of this report. 4
Retail and Food continue to outperform the market, while the Energy sector has surged recently Figure 5 Performance of high dividend-paying sectors vis a vis TASI 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 TASI Petrochemical Retail Cement Food Energy Performance of our dividend portfolio since May 2014 The Saudi stock market has been under severe pressure since the second half of 2014, as crude oil prices fell about 60% from their high of more than US$115 in June. The accounting issues with Mobily further worsened the impact, as it pulled down the entire Telecom sector along with it. The TASI has fallen 3.1% since our last dividend strategy note in May 2014. The stocks in our dividend portfolio during this period have declined 8% on an average. Mobily, which plunged about 60%, was the major reason for the underperformance of our portfolio. Excluding the impact of Mobily, our dividend portfolio outperformed the TASI, slipping by 2.3%. Our portfolio delivered a negative return of about 5.6% (including Mobily) on a total return basis (including dividend payments). Till the last week of 2014, the TASI s total return stood at a negative 9.2%. However, the TASI has risen more than 8% since then. Overall, our portfolio has marginally outperformed the index. The healthy dividend payout of the companies in our portfolio provided a cushion to investors from the decline in the overall portfolio. We believe staying invested in high dividend yield stocks will help investors earn a healthy income, limiting any downside risks related to the current market volatility. Figure 6 Portfolio performance Stock performance Total Return SAFCO -4% -1% Saudi Cement -11% -8% Southern Province -9% -6% Saudi Chemical -2% 4% Mobily -60% -59% SABIC -16% -15% NIC -10% -10% Sipchem -2% 0% Catering 19% 21% National Shipping 14% 17% Average -8.0% -5.6% TASI -3.1% NA Disclosures Please refer to the important disclosures at the back of this report. 5
Key dividend stocks for 2015 Below is a list of 20 stocks expected to pay healthy dividends in 2015. These companies currently offer the best dividend yields in the Saudi market. Predictably, the list is dominated by Cement and Petrochemical companies. Figure 7 Major dividend paying companies on TASI Companies Net Income (SAR mn) DPS (SAR) Payout (%) Dividend Yield 2013 2014 y-o-y change 2014 2015E 2014 2014 2015E YTD Returns SAUDI ARABIAN AMIANTIT CO 113 83-26.6% 1.0 0.7 139.8 7.2% 5.2% 7.0% AL ABDULLATIF INDUSTRIAL INV 267 200-24.9% 2.5 2.5 101.4 6.5% 6.5% 14.5% SAUDI BASIC INDUSTRIES CORP 25,278 23,433-7.3% 5.5 5.0 70.4 5.7% 5.1% 16.3% NATIONAL INDUSTRIALIZATION C 1,177 1,133-3.7% 1.5 1.3 88.8 5.2% 4.4% 7.8% SAUDI CHEMICAL COMPANY 301 284-5.7% 3.8 3.8 83.6 5.4% 5.4% 22.3% ARABIAN CEMENT 192 646 236.5% 5.0 5.5 77.4 6.3% 6.9% 2.7% YANBU NATIONAL PETROCHEMICAL 2,645 2,478-6.3% 3.0 3.0 68.1 6.0% 6.0% 5.4% YAMAMA CEMENT CO 870 671-22.9% 3.0 3.3 90.6 6.1% 6.6% 2.7% QASSIM CEMENT/THE 585 563-3.7% 6.0 6.0 95.8 6.2% 6.2% 8.8% SAUDI CEMENT 1,124 1,075-4.3% 6.0 7.0 49.8 6.2% 7.3% 0.7% SASCO 42 81 93.8% 1.5 1.5 82.9 5.2% 5.2% 17.5% UNITED ELECTRONICS CO 167 121-27.6% 3.0 3.5 74.3 3.0% 3.5% 22.9% EASTERN PROVINCE CEMENT CO 309 373 20.7% 3.5 4.0 80.6 5.6% 6.5% 12.0% SAHARA PETROCHEMICAL CO 579 394-31.9% 0.9 0.9 94.6 4.8% 4.8% 15.9% SAUDI VITRIFIED CLAY PIPE CO 84 101 19.1% 5.0 5.0 74.6 4.9% 4.9% 14.4% NATIONAL GAS & INDUSTRIALIZA 114 152 33.6% 1.8 1.8 88.7 5.4% 5.4% 1.6% SAUDI TELECOM CO 9,897 11,008 11.2% 3.5 4.0 63.6 5.3% 6.0% 1.1% NATIONAL CO FOR GLASS IN/THE 45 62 36.9% 1.7 1.7 82.9 4.2% 4.2% 23.6% ARRIYADH DEVELOPMENT COMPAN 250 189-24.2% 1.0 1.0 70.4 4.3% 4.3% 13.3% HAIL CEMENT 50 147 191.4% 1.1 1.1 73.2 4.3% 4.3% 11.0% Our dividend portfolio for FY2015 We present our top ten stocks in terms of dividend yield We have chosen 10 dividend-paying stocks after measuring the listed companies on the following parameters: Shariah-compliant companies with a market cap of more than SAR5bn to ensure that the chosen companies are leading companies. Companies should be consistently profitable over the last four years at least. Interest coverage of more than 3x in 2014 to ensure that the company makes enough profits to distribute to shareholders as well as have a cushion against a drop in sales in any given year. Positive cash flow over the last three years. This will ensure that the company generates enough cash to distribute and does not depend on raising debt. A net debt-to-ebitda ratio of less than one for picking companies with strong balance sheets and healthy cash balances. In addition, we have selected the top dividend payers by considering a sector-wide representation. While Cement (4 companies) and Petrochemical stocks (3 companies) form the majority of the portfolio, we also have one company each from the Telecom, Retail, Food and Energy sectors. Disclosures Please refer to the important disclosures at the back of this report. 6
Within the chosen set of 10 companies, Saudi Cement offers the best dividend yield in our portfolio (2015E). Saudi Cement along with SABIC, SAFCO and Saudi Airlines Catering (SACC) are regulars in our portfolio. We have replaced Mobily with STC this year. With a dividend payment of SAR3.5 per share in 2014, STC traded at an attractive dividend yield of 5.3% and has the potential to increase its dividend payment in 2015 to SAR4 per share. Jarir and SACC, in addition to healthy dividends, also provide diversification benefits to our portfolio. Figure 8 Dividend picks for 2015 Last price 1 yr return Net income Dividend Dividend Yield Company 2014 2015E Growth 2014 2015E 2014 2015E STC 66.2 8.7% 11,008 12,397 12.6% 3.5 4.0 5.3% 6.0% SAFCO 153.5-6.7% 3,174 3,335 5.1% 7.0 10.0 4.5% 6.5% SABIC 96.9-15.3% 23,430 18,479-21.1% 5.5 5.0 5.7% 5.1% APC 51.1 12.7% 751 553-26.3% 3.0 3.0 6.1% 6.1% Jarir 205.0 13.9% 740 866 17.0% 6.7 7.0 3.2% 3.4% Catering 196.0 25.1% 654 695 6.3% 6.5 7.5 3.3% 3.8% Qassim Cement 96.0 3.3% 563 580 2.9% 6.0 6.0 6.2% 6.2% Eastern Province 61.3 2.2% 373 334-10.4% 3.5 4.0 5.6% 6.5% Arabian Cement 79.6 30.1% 646 676 4.5% 5.0 5.5 6.3% 6.9% Saudi Cement 97.5-14.9% 1,075 1,167 8.6% 6.0 7.0 6.2% 7.3% A brief summary of our top dividend picks is as follows: SAFCO, a pure-play fertilizer company, has been benefiting from strong ammonia and urea prices. Although SAFCO paid lower dividends in 2014 (SAR7 per share), we believe the launch of commercial production (expected in Q2 2015) at its SAFCO-V plant will act as a growth catalyst. We expect a dividend of SAR10 per share for 2015, implying a yield of 6.5% at the current market prices. Saudi Cement is one of the biggest cement companies in Saudi Arabia. The company supplies cement to the Central region as well as to Bahrain, apart from selling clinker to other players in the market. The company paid a dividend of SAR6 per share in 2014, amounting to a yield of 6.2%. With the cement sector witnessing a revival in demand and with no capex planned for the company, we believe Saudi Cement may increase its dividend to SAR7 per share in 2015. Qassim Cement, established in 1978, operates in the central region of the Kingdom. Qassim Cement has maintained a dividend payout of over 90% since 2009. For 2015, we estimate a DPS of SAR6, which translates into an attractive yield of 6.2%. STC is the only major company in the Telecom sector to post healthy profit and generate a strong cash flow to distribute dividends. STC is expected to increase its dividend payout in 2015 on the back of strong cash flow. The company s dividend yield at the current market prices is 6%, based on our 2015 DPS estimate. SABIC, which is among the top global petrochemical companies, boasts of healthy operations, diverse product base and global presence. A sharp decline in the product prices has impacted SABIC s earnings in 2014; however, its strong cash position (~SAR73bn) will help offer a healthy dividend payout. We expect a dividend of SAR5 a share for 2015, which translates into a dividend yield of 5.1%. Eastern Province Cement, formed in 1982, is a dominant player in the eastern region of the Kingdom. The company is witnessing a recovery in cement demand due to the revival in construction activities. The company has been paying annual dividends on a consistent basis for the last 18 years. At the current levels, the Disclosures Please refer to the important disclosures at the back of this report. 7
company offers a dividend yield of 5.6% based on its 2014 announced dividends and 6.5% based on the 2015 expectations. APC is a pure-play polypropylene producer. The company has benefited from a sharper decline in its feedstock prices (as compared to the end product), boosting margins in the last few quarters. Further, the commencement of additional propylene supply will boost APC s production volumes over the medium-term. Given the prospects, we expect a dividend of SAR3 a share for 2015. At the current prices, this implies a dividend yield of 6.1%. SACC is the sole catering service provider to Saudi Arabian Airlines. Apart from the major fleet expansion plans by Saudia, contract wins with other foreign airlines and expansion into non-airlines catering provides strong growth potential for the company. Despite the robust returns over the past year, the company continues to offer a healthy dividend yield (3.8% in 2015e). Jarir Marketing Company is a leading retailer of portable electronics like smartphones, tablets, laptops as well as books and stationery. The company has aggressive expansion plans, with a target of opening 7 stores annually over the next three years. The company will benefit from favorable demographics and rising disposable income, supported by high government spending. The company pays regular dividends on a quarterly basis(3.4% in 2015e). Potential surprises We have tried to look for companies that have the potential to surprise the market with a bonus issue or higher cash dividend. As seen in the past, such announcements are positively received by investors, resulting in a major impact on stock prices. We have looked at the following parameters: 1) Current retained earnings/paid-up capital, and 2) Dividend payout ratio as compared to net profit expectation for 2015 to identify the companies. We believe companies like Almarai and Al Tayyar, with a dividend payout ratio of less than 40% in 2014 and expectations of double digit growth in net profit in 2015 are projected to increase their cash dividend payments this year. Similarly, Zamil Industrial and Dallah Healthcare have a dividend payout ratio of less than 50%, and are expected to witness higher profits in 2015, which may allow them to increase their dividend payments. Figure 9 Potential Surprises Company Dividend Payout Ratio Retained Reserves to Paid-up Capital Potential Surprise Saudi Telecom Company 63.6 1.7 Bonus shares Yanbu National Company 68.1 1.5 Bonus shares Zamil Industrial 46.1 1.5 Bonus shares Almarai 35.8 0.4 Dividend increase Al Tayyar 26.7 0.6 Dividend increase Al Khaleej 38.1 0.2 Dividend increase Dallah Healthcare 48.1 0.8 Dividend increase In our previous strategy report, we had highlighted six companies, which we thought had the potential to issue bonus shares (including Zamil Industrial). Of those, only Saudi Ceramic announced a bonus share issue in 2014, while the remaining three companies (SABIC, STC, SADAFCO, Saudi Pharmaceutical and Zamil) did not. Disclosures Please refer to the important disclosures at the back of this report. 8
Additional Disclaimer: Our dividend stock portfolio has been compiled solely based on financial parameters mentioned in this report and dividend yields of individual companies. While we have used the fundamental analysis presented in our equity research, we have not considered our ratings on each of these stocks while picking these companies. The selection and recommendation is made purely based on parameters mentioned in the report, and investors are strongly recommended to evaluate other relevant factors based on their specific requirements and portfolios. Disclosures Please refer to the important disclosures at the back of this report. 9
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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 10% 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 10% below the current share price and 10% above the current share price on a 6-9 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 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 Pritish K. Devassy, CFA Tel : +966 11 2119370 devassyp@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Tel +966 11 2119332 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. 10