• Global : values SABIC stock at SR168.5 and recommends a BUY on the stock
Global Investment House – Kuwait – SABIC – Initial Research Report. Saudi Basic Industries Corporation (SABIC) is a public listed joint stock company incorporated under the law of Saudi Arabia. The Company was established pursuant to Royal Decree on 6th September 1976, and registered in Riyadh on 4th January 1977. The establishment of SABIC was in furtherance of a government policy to diversify the Saudi industrial base outside the oil sector and to make proper use of associated gases at well-heads, which had, until that point, been flared off. The Company has numbers of subsidiary and affiliates, which is referred as the ‘SABIC Group’. Along with its subsidiaries and affiliates, the Company is the largest non-oil industrial group in MENA region. The principle activity of the Company is to market and sell the petrochemical products of its affiliates / subsidiaries, under long-term marketing and sales agreements.
We initiate our coverage of SABIC with a ‘BUY’ recommendation. Based consolidated fair value of SR168.5, which offers a potential upside of 25.1% over the current market price of SR134.75 per share as of July 27th 2008. To arrive at our consolidated fair value of the Company, we have assigned 80% weighted average to the discounted cash flows (DCF) based value and 20% to value derive from the relative valuation technique.
SABIC group comprises of 21 manufacturing petrochemical affiliates / subsidiaries, which are involved in the manufacturing of wide range of petrochemical products, including basic chemicals, intermediates (including industrial gases), polymers, fertilizers and metals. These affiliates / subsidiaries has further categorized under six strategic business units (SBUs), which are (i) basic chemical, (ii) intermediates, (iii) polymers, (iv) specialized products, (v) fertilizer and (vi) metal. In 2007, the Company, through its affiliates / subsidiaries, owned 37.1mn tons capacity to produce different petrochemical products and metals. In addition, 64.9% of the total capacity is composed to produce petrochemical products (basic chemicals), 20.2% of capacity is of fertilizer products and 14.8% is claimed by metal production unit. Moreover, the Company, through its affiliates / subsidiaries, is the largest petrochemical company not only in Saudi Arabia but also in the MENA region. The Company, in 2007, has claimed 70.7% of the total country and 37.3% in the total MENA region production capacity.
The production capacity expansions and new production capacities in the Company’s affiliates / subsidiaries: (i) Eastern Petrochemical Company – SHARQ, (ii) Saudi Kayan Petrochemical Company – Saudi Kayan (iii) Yanbu National Petrochemical Company - YANSAB, (iv) Saudi Methanol Company, (v) Maaden fertilizer project, (vi) Saudi Arabian Fertilizer Company’s SAFCO-V expansion plan, and (vii) acquisition in European region, will lead the Company’s production capacity to increase, during 2007-11, at a CAGR of 5.7%.
The basic feedstock for the Company propane is obtained from the cracking of Naphtha. In pursuant to the allocation letter of Saudi Aramco, the Company has now allocated to get 23mn barrels per day of propane feedstock at the price which is 30% lower than the international market price. This gives it a competitive edge over international players. The Company is also using gas as a feedstock and has got approval to get 15 million cubic feet per day (mmcfd) of gas. The Company is enjoying the benefit of getting feedstock gas at subsidize rate of US$0.75 per million British thermal units (mmbtu). Moreover, gas prices have now become a major challenge on international level to manage their margins. Since average gas prices has been surged to US$6.3 per mmbtu in 2007 from US$ 4.6 per mmbtu in 2003 after making all time high of US$7.3 per mmbtu in 2005.
Chart 01: Increase in Profitability (SR Mn) & ROA Chart 02: Increase in Profitability (SR Mn) & ROE
Source: Company Reports, Global Research
The Company is expected to report a profit after tax of SR30.6bn in 2008, a growth of 10.9% as compared to SR27.1bn in 2007. Furthermore, the profitability is expected to increase at a CAGR of 7.5%, during 2007-2011. The return on average assets, on other hand, is expected to decline to 9.7% in 2011, which is mainly due to a time lag in the investment and commencement of production. The return on average equity is also expected to dilute due to higher growth in equity as compared to profitability growth.
SABIC - Investment Indicators
Price as on July 27th 2008 Shares in issue Market Cap (SR mn) 52-week price range (SR) High / Low
(SR) (mn)
134.75 3,000 404,250 181.6 / 90.8
Year Revenues Net Profit EPS BVPS ROE P/E P/BV
(SR Mn) (SR Mn) (SR) (SR) (%) (x) (x)
2009E 185,266 31,784 10.6 42.9 17.3% 12.7 3.1
2008E 170,822 30,686 10.2 36.5 19.8% 13.2 3.7
2007A 126,747 27,027 9.0 32.1 21.2% 14.7 4.1
2006A 86,328 20,294 6.8 26.0 19.5% 10.4 2.7
Source: Annual Reports & Global Research * Historical P/E & P/B multiples pertain to respective year-end prices, while those for future years are based on closing price as at July 27th 2008.
