• Global values SAFCO stock at SR252.5 and recommends a Hold on the stock
SAFCO – Initial Research Report - Saudi Arabian Fertilizer Company (SAFCO) is an affiliate of Saudi Basic Industries Corporation (SABIC) and a Saudi Joint Stock Company Limited, which was incorporated under Royal Decree, which also included its by-laws, and registered in Dammam on 1965. The company was formed due to a joint venture between the government and citizens of Saudi Arabia. The principle activity of the Company includes manufacturing and marketing of fertilizers, which include urea, ammonia, melamine, and sulphuric acid. The design capacity of the Company has increased to 5.1mn tons per annum.
We have used Sum of the Parts Discounted Cash Flows methodology to value the Company. Under this valuation we have used 4-year (FY2008-FY2011) explicit forecast period for the Free Cash Flows (FCF) of SAFCO and the YANSAB, in which Company has 1.7% stakes. Our sum of the parts (SOTP) fair value of the company is SR252.5 per share, which is 3% lower than the market price of SR260.2 per share (as on 24th June 2008). Thus, we initiate our coverage on SAFCO with a ‘HOLD’ recommendation.
SABIC owns 42.9% of the shareholding of SAFCO, which makes it a major shareholder of the company. Moreover, General Organization for Social Insurance and Public Pension Agency holds 14.5% shares of the Company. While, the remainder 42.5% is held by general public, this is also considered as a free-float.
National Chemical Fertilizer Company (‘Ibn Al-Baytar’) is a subsidiary of the Company, whose principle activity is the production of fertilizer products. SAFCO has 50% stakes in Ibn Al-Baytar. Besides this, the Company has (i) 8.8% stakes in Arabian Industrial Fibers Company, (ii) 5% stakes in Gulf Ferro Alloys Company and (iii) 1.7% stake in Yanbu National Petrochemicals Company (YANSAB).
The Company has completed its SAFCO-IV expansion in April 2007, which has increased the total production capacity of the plant from 2.8mn tons in 2006 to 5.1mn ton. However, average production capacity during 2007 remained at 4.5mn tons. The expansion in capacity is mainly composed of additional production capacity of 1.1mn tons of urea and 1.1mn tons of ammonia while the capacity to produce Sulphuric acid and Melamine remained same. Moreover, based on the given production capacity of the fertilizer plant 51.7% of the total capacity is assigned for the production of Urea, while the production of Ammonia accounts for only 45% of the total. However, the production capacity of sulphuric acid shares only 2.9% and minimal capacity is allocated for the production of Melamine.
The Company has a plan to execute another capacity expansion plan called ‘SAFCO-V’, after the successful completion of SAFCO-IV in 2Q2007. Under the new plan, the Company would be able to expand its ammonia and urea annual production capacity by 1.2mn tons and 1.5mn tons, respectively. The plan is expected to complete 2Q2011. However, at present, SAFCO-V plan is on hold since the Company has not yet able to get gas supply contract with Saudi Aramco.
Profitability of the Company is expected to increase by 34.2% in 2008 over the net profit of SR2.21bn in 2007. The expected stabilize gross profit margins, EBITDA margins and improvement in net financial income due to forecasted higher cash reserves will lead the Company’s profitability to increase with a CAGR of 17.1%, during 2007-11.
The positive bottom-line of the Company will lead an improvement in return on assets and return on equity from 56.8% and 36.7% in 2007 to 71.8% and 42.9% in 2008, respectively.
SAFCO - Investment Indicators
Price as on 24th June 2008 (SR)
Shares in issue (mn) Market Cap (SR mn) 52-Week High / Low (SR)
260.2 250 65,063 264.7 / 97.4
Year Revenue (SR mn) Net Profit
(SR Mn) EPS (SR) BVPS (SR) ROE (%) P/E
(x) P/BV
(x)
2009 E 4,948.5 3,076.1 12.3 31.3 39.3% 21.2 8.3
2008 E 4,552.6 2,964.2 11.9 27.6 42.9% 21.9 9.4
2007 A 3,516.0 2,209.2 8.8 24.1 36.7% 29.5 4.9
2006 A 1,831.3 1,151.3 4.6 19.0 24.3% 14.9 3.6
Source: Annual Reports and Global Research
