Al Rajhi Capital - Saudi Outlook 2013.pdf

Al Rajhi Capital Head Office, King Fahd Road,5561, Riyadh 11432, Kingdom of Saudi Arabia.+966 146 00 423 • Toll Free: 800 124 5858

Email: [email protected] • URL: www.alrajhi-capital.com

Saudi Outlook - 2013January 2013

Saudi Outlook - 2013 All Sectors Saudi Arabia

8 January 2013

January 18, 2010

US$ 175.0bn 37.6% US$246.4mn Market cap Free float Avg. daily volume

Disclosures Please refer to the important disclosures at the back of this report.

Powered by Enhanced Datasystems’ EFA Platform

Target mkt cap SAR755.0bn 15.1%over current Consensus mkt cap SAR760.7bn 15.9% over current Current mkt cap SAR656.2bn as at 06/01/2013

Underweight Neutral Overweight Overweight

Key themes

We expect TASI to continue its march in 2013 despite global economic concerns. The export oriented petrochemicals sector could be under pressure, however banking sector will show modest credit growth. We expect the domestic oriented sectors to do well on favorable demand scenario. Further, select stocks from petrochemical sector are expected to perform well in 2013.

Implications

We like SABIC and NIC for their diversified offerings, while we pick Savola for its exposure to the lucrative retail business. In telecoms, we prefer Mobily on strong revenue visibility. From the smaller companies, we pick Extra, Shaker, Astra and Saudi Catering. We are also positive on materials companies like Ma’aden and Arabian Cement for their strong growth outlook.

Al Rajhi’s Top picks

Stock Rating Price Target

SABIC Overweight SAR110.0

NIC Overweight SAR40.5

Mobily Overweight SAR88.7

Extra Overweight SAR123.5

Savola Overweight SAR49.1

Shaker Overweight SAR83.5

Saudi Catering Overweight SAR91.0

Ma’aden Overweight SAR37.0

Arabian Cement Overweight SAR65.0

Astra Overweight SAR46.2

Why do we think it?

Stock 3 year EBITDA CAGR* 2013 EV/EBITDA

SABIC 5.8% 6.8x

NIC 21.1% 6.5x

Mobily 10.1% 6.1x

Extra 12.4% 11.6x

Savola 10.5% 13.1x

Saudi Catering 15.7% 8.4x

Ma’aden 33.1% 15.8x

Arabian Cement 9.5% 5.9x

Astra 34.3% 9.0x

*2012-2015

Research Department ARC Research Team

Tel 966 1 2119248, [email protected]

Saudi Outlook - 2013:

Look out for the bright spots Given the fragile economic fundamentals across the globe - slow US recovery

and possibility of re-emergence of Eurozone debt crisis - we are cautiously

positive on performance of TASI in 2013. With potential weakness in major

sectors like petrochemicals and banking, overall volumes could be lower in

2013 as compared to 2012. Hence, picking the right stocks will be crucial for

return maximization. We continue to remain bullish on domestic demand

driven sectors like food, retail and cement, while we also like a few selected

stocks from petrochemical sector. Though, we expect TASI might be lackluster

in 2013, investment opportunities still exist aplenty especially in the domestic

demand driven sectors.

Weak global environment to pull down exports: The global economic

environment deteriorated in 2012 with Eurozone debt crisis spreading to larger

European countries like Spain and Italy and weaker growth projections for

China and India. Further, the potential US fiscal cliff (partially resolved) also

weighed on the global recovery. With little demand recovery in sight, we believe

Saudi exports (especially petrochemicals) to be under pressure in 2013.

Demographics favor domestic sectors: As compared to export oriented

sectors, sectors focusing on the domestic market like food, retail, cement and

telecoms are expected to do much better on favorable demographics and rising

income levels. From the sector performance over the last two years, we can see

that domestic demand driven sectors have done considerably well. We expect

this story to repeat in 2013 as well.

Stock picking remains the key: With the broader index expected to remain

sluggish next year due to pressure on larger sectors such as petrochemicals and

banking, stock picking will be crucial for return maximization. We believe there

are enough opportunities, especially in small to mid-size companies if chosen

wisely. We feel that the investors will be cautious on petrochemical and banking

sectors in the near term and will opt for domestic demand driven stocks.

Interesting stories for 2013: We are targeting a number of companies, which

seem attractive both in terms of supply demand dynamics and business model.

These are relatively smaller companies mainly focused on domestic demand like

Al Mouwasat (leader in health care), Al Drees (largest fuel retailer), Halwani (an

established brand in the food sector), Al Tayyar (the largest travel company in

the Kingdom) and Yanbu Cement (one of the largest domestic cement

companies). We will closely monitor these stocks in 2013.

Al Rajhi Capital’s top picks for 2013: We continue to remain Overweight on

SABIC and NIC, from the petrochemical sector for their diversified portfolio and

depressed valuations. In the telecom sector, we like Mobily for its aggressive

growth strategy and sound dividend policy. In the food sector, we are bullish on

Savola, especially its domestic retail business whose efficiency is improving. We

also like Saudi Airline Catering for its exposure to the niche airline catering

market. Among small and mid-size sectors, we are positive on Extra for its

aggressive expansion plans. We also remain positive on Ma’aden as it will

benefit from its entry into the phosphate and aluminum businesses, while

Arabian Cement excels from its proximity to the thriving western region.

Saudi Outlook - 2013 All Sectors

8 January 2013

Disclosures Please refer to the important disclosures at the back of this report. 2

Table of Contents

ARC Coverage Universe ...................................................................3

Global economy: Recovery painfully slow .....................................4

Saudi Economic outlook: Remains on solid base .........................6

Saudi Stock Market: Stock picking remains the key .................... 11

ARC recommendations and top picks .......................................... 17

Sector profiles ................................................................................. 20

Petrochemicals ............................................................................................................................. 20

Telecom ......................................................................................................................................... 23

Food & Agriculture ....................................................................................................................... 25

Retail .............................................................................................................................................. 29

Cement ........................................................................................................................................... 32

Company profiles ............................................................................ 35

Ma’aden .......................................................................................................................................... 35

Saudi Ceramic ............................................................................................................................... 37

Astra ............................................................................................................................................... 39

Shaker ............................................................................................................................................ 41

Interesting ideas .............................................................................. 43

Al Drees Petroleum and Transport Services .............................................................................. 44

Al Mouwasat Medical Services .................................................................................................... 46

Al Tayyar Travel Group ................................................................................................................ 48

Eastern Province Cement Company ........................................................................................... 50

Halwani Bros ................................................................................................................................. 52

National Shipping Company ........................................................................................................ 54

Saudi Dairy & Foodstuff Co ......................................................................................................... 56

Takween Advanced Industries .................................................................................................... 58

Yanbu Cement ............................................................................................................................... 60


8 January 2013


Al Rajhi Capital’s Coverage Universe

We currently cover 29 companies in the Saudi market, which encompasses about 52% of the total market capitalization of TASI. We cover all the market leaders in their respective sectors. We do not cover banking and insurance stocks as most of them do not match with Al Rajhi Capital’s (ARC’s) Shariah compatibility. We also do not cover real-estate and energy & utilities sectors yet. Please find below the list of our recommendations and key theme on each company.

Figure 1 ARC Coverage Universe

Company Rating

Target

price (SAR)

Current

price (SAR)

Upside

Potential (%) Key Theme

Petrochemicals

SABIC Overweight 110.0 92.0 19.6% Largest listed company, well diversified portfolio

Sipchem Overweight 23.3 19.8 18.0% Exposure to methanol, excellent operating rates

SAFCO Overweight 185.0 154.0 20.1% Exposure to fertilizers, support from parent, SABIC

NIC Overweight 40.5 29.8 35.9% Diversified portfolio with exposure to TiO2, healthy operating history

Yansab Neutral 50.3 49.8 1.0% Focus on basic olefins, weakness in product prices

APC Neutral 28.7 27.3 5.1% Portfolio concentrated to polypropylene, weak operating history

Sahara Neutral 15.4 14.3 8.1% Focus on polypropylene, operations to commence in many plants

Saudi Kayan N/A N/A 12.8 N/A Loss making for the last few quarters, utilization rates are low

PetroRabigh N/A N/A 18.2 N/A Refining margins are negative, very low profitability

Telecom

STC Overweight 47.2 45.6 3.5%

STC remains a strong long term story and with domestic market reaching a

saturation point, the company’s international businesses provide new

growth avenues.

Mobily Overweight 88.7 79.0 12.3%

Mobily is the most consistent telecoms player in the Saudi market,

achieving double digit growth in bottom-line for the last four consecutive

quarters. Dividend too remain a big trigger for the company.

Zain Neutral 10.0 8.2 22.0%

Despite the recent capital restructuring, Zain continues reel under the

pressure of its huge outstanding debt.

Agri & Food

Almarai Neutral 63.5 65.0 -2.3% Dominant dairy supplier, diversifying into poultry and infant food

Savola Overweight 49.1 39.9 23.1%

Leading sugar and edible oil supplier in the MENA region. Retail segment

(super and hypermarkets) are improving substantially

Herfy Neutral 110.0 100.8 9.2% Growing fast food chain in Saudi, diversifying into bakery & meat processing

Saudi Catering Overweight 91.0 81.0 12.3% Leading in flight caterer in Saudi Arabia

Retail

Jarir Neutral 168.6 160.5 5.0% Reputed retailer for stationeries, office supplies and electronics

Extra Overweight 123.5 105.0 17.6% Fast growing retailer of electronics and home appliance in Saudi Arabia

Alothaim Overweight 96.7 82.0 17.9% Retail store operator providing value for money in the Kingdom

Alhokair Overweight 124.1 106.0 17.1% Apparel retailer selling a large number of reputed international brands

Industrial

Maaden Overweight 37.0 33.5 10.4%

We remain bullish on Ma'aden which is diversifying into phosphate and

aluminium.

Shaker Overweight 83.5 66.0 26.5% Market leader in the growing AC market in the Kingdom, growing exports

Astra Overweight 46.2 38.8 19.1% Company with pharma & chemicals business, now investing into steel

Saudi Ceramic Overweight 86.7 75.3 15.2% Leading ceramic manufacturers in the region, healthy project pipeline

Cement

Yamama Cement Overweight 61.0 49.4 23.5%

Yamama Cement is one of the most profitable companies in the Saudi

cement industry, backed by cheap fuel and low transportation costs owing

to its proximity to Riyadh and being close to infrastructure projects.

Arabian Cement Overweight 65.0 51.8 25.6%

Arabian Cement has maintained high utilization rates, on the back of the

massive construction and cement demand in the western region.

Saudi Cement Neutral 98.0 99.3 -1.3%

One of the aggressive players in the market, which supplies to Bahrain,

Central region and also sell clinker to other players in the market.

Jouf Cement Overweight 19.0 16.6 14.8%

One of newly listed companies in the market, Al Jouf is on the verge of

expanding its capacity with a new production line.

Qassim Cement Neutral 84.0 81.3 3.4%

Qassim Cement have already achieved full capacity and thus limiting its

future growth. The dividend yield stands at an attractive 7%. Source: ARC Research


8 January 2013


Global economy: Recovery painfully slow

Uncertainty remains amid positive signals Although there has been positive sentiments created by a temporary resolution of “fiscal cliff” and improvement in economic data specifically from the US and China, global economic recovery is expected to be sluggish in the current year. International Monetary Fund expects the global growth to improve slightly from an estimated 3.3% in 2012 to 3.6% in 2013. Moreover, the global growth is likely to be uneven geographically. On the one hand, US indicators have been positive and Chinese data show turn around. On the other hand, indicators in Euro Area remain depressed and data in the UK and Japan barely reflect any improvement. Moreover, recovery in large emerging economies also expected to remain slow. Having said this, the global economic outlook still faces risk from partially resolved “fiscal cliff” and debt ceiling issue in the US and the possibility of re-emergence of Euro debt problem as recession hit countries find it difficult to achieve fiscal consolidation targets.

Figure 2 Slow improvement in economic growth is expected this year

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%

Source: Bloomberg, Al Rajhi Capital

US and Chinese economies look better As stated above, the global economic sentiments got boost from a temporary resolution of “fiscal cliff” in the US amid improving economic data points. The tax increase has been averted for people earning upto US$450,000 a year and spending cut has been deferred for another two months in the US. Moreover, economic data in the last couple of months reflect decent improvement in the job market and recovery in the housing sector. Improvement in job market has been supporting consumer spending sustain. Investment sentiment is also likely to revive slowly with partial resolution of “fiscal cliff”. However, the economy still faces risk from final outcome of spending cut negotiation and debt ceiling issue in the near term.

Figure 3 Slow improvement in Job market in the US Figure 4 Gentle turn around in Chinese indicators

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Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital

Global growth is expected to improve marginally amid uneven growth geographically

Labor market and housing sector data reflect improvement in the US economy


8 January 2013


Economic data point gentle turn around in China as well- the second largest economy. With the completion of the once-a-decade leadership transition, focus is back on reviving the economy, which recorded its slowest growth in the third quarter since early 2009. Economic data emerging from the country has been positive with accelerating factory output and retail sales. The country’s factory output rose 10.1% YoY in November (highest level since March 2012), while retail sales jumped 14.9% YoY. We expect that Chinese economy is bottoming out, as its manufacturing and non-manufacturing PMI moved above 50 mark in November and December. However, the recovery is likely to be slow as the developed economies, which are its major export markets, are struggling to revive growth.

Other developed countries struggling On the other hand, many other large developed economies – Euro Area, the UK and Japan – are struggling to get back to the growth path. Euro Area economy remains in recession and sentiments, though improved, remain subdued. PMI manufacturing and services indices have improved in recent months but remain below 50 mark reflecting contraction. The UK economy was in the recession in H1-2012. The growth turned positive at 0.9% QoQ in the third quarter supported by Olympic related spending. However, revival is expected to be muted. Japanese economic outlook sharply deteriorated in the second half of 2012 as third quarter growth turned negative at -0.9% QoQ. Tankan survey indices for the fourth quarter have further deteriorated.

Monetary policy support An important factor which has played a critical role in the post economic crisis period is monetary policy support from central banks. Each time when growth has slowed or risk in the financial system has risen, central banks in major economies have pitched in with monetary stimulus to support the growth and contain the risk. Federal Reserve’s balance sheet has expanded to US$2.9 trillion (around 20% of GDP) by Mid December 2012 from around US$900 billion (around 6% of GDP) in Sep 2008. Similarly, balance sheets of Bank of England (BoE) and Bank of Japan (BoJ) have grown during the period. European Central bank has also provided large amount of liquidity through various programs including LTRO through which it injected more than EUR1 trillion into banking system. It also has plans to purchase sovereign bonds from troubled countries in the Euro Area.

Federal Reserve and BoJ continue to provide additional monetary stimulus. Fed will purchase US$85 billion worth of mortgage and Treasury securities per month until there is satisfactorily improvement in job market and overall economy. Thus, in a year time, Fed will infuse more than a trillion dollar into the financial system. Bank of Japan is also committed to providing as much support possible through monetary stimulus especially after Liberal Democratic Party victory recently. Immediately after the election results, BoJ added JPY10 trillion to its asset purchase program on 20th December.

Broader risks remain The partially resolved US “fiscal cliff” and the debt ceiling issues remain major concerns for the global economic outlook in the near term. Only tax part of the issue has been resolved and spending cut part has been deferred for two months. Moreover, the country is expected to touch the debt ceiling in another couple of months which needs a permanent resolution rather than deferring the issue.

Another risk – Euro Area sovereign debt problem which seems to be moving into right direction- has potential to come back. The troubled countries especially Spain is yet to make formal request to ECB for using the central bank’s Outright Monetary Transaction option so that the central bank could purchase Spanish government bond directly. Moreover, weaker economic outlook for the area for next year is another negative which would make it difficult for troubled countries to achieve their fiscal consolidation targets. Having said that, we would underline that the severity of the problem has been blunted by actions from the ECB.

Economic indicators have turned around in China in recent months

Euro Area remain under recession amid clouded outlook whereas growth in the UK and Japan is expected to be sluggish

Monetary policy has been a critical support in the post crisis era which is likely to continue its support with ultra easy policy

Partially resolved fiscal cliff and debt ceiling issue and possibility of re-emergence of Euro debt crisis are main risks global economy faces in 2013


8 January 2013


Saudi economic outlook: Remains on solid base

Over a decade of strong performance and government’s conscious efforts towards diversification, Saudi economy has acquired a solid base. The resource generated in the oil sector has been wisely utilized to create a base for non-oil sector. The average growth in the non-oil sector has been almost double in the last one decade compared to the growth in the previous decade. Government efforts to create infrastructure has boosted construction sector while diversification effort has supported manufacturing sector. Rising income and consumption in the country have resulted into solid growth in sectors such as trade, transport, storage and communication. The same factors remain supportive to our outlook as we expect continuous growth in the government spending, rising income and favorable demography. Moreover, stable inflationary situation, easy monetary policy and accelerating credit growth are likely to keep the growth on solid ground. In the near to medium term, unfavorable movement in oil prices is unlikely to have any significant impact on the outlook. However, in the longer term oil sector is still critical as it remains main source of government revenue and export items besides constituting half of the nominal GDP.

Oil sector still crucial The Saudi economy remains highly dependent on oil revenue as oil sector constitutes half of the nominal GDP and overwhelming proportion of export and government revenue comes from the sector. The importance of the sector has grown even more over the last decade as share of oil sector has moved up from 37% to above 50% in nominal GDP. It continues to be above 50% since 2005 except 2009 when crude prices and domestic production in Saudi Arabia had crashed in wake of global economic crisis. However, since then crude production has recovered and average prices have remained at high levels especially since 2010. Growth in the sector has been robust over the last three years. However, we see moderation in 2013 mainly due to high base.

Figure 5 Oil sector remains the backbone of the economy

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Share of oil sector in nominal GDP Growth in oil sector-rhs

Source: CDSI, Al Rajhi Capital

Government spending supportive to growth but depends on oil Government revenue is highly dependent on the oil sector as oil revenue constitutes almost 90% of the total revenue. As we see in the chart below, the proportion has grown over the last decade from 78% in 2002 to around 90% in 2011. Non-oil revenue was just 15% of the government’s total expenditure in 2011. The non-oil revenue has averaged around 18% of the government’s total expenditure over the last decade. On the other side, government expenditure has been strong support to the steady economic growth over the last one decade. Total expenditure has grown almost 3 times between 2002 and 2011. Moreover, the capital expenditure has grown almost 10 times during the same period. The sharp rise in capital expenditure reflects government commitment towards

Deliberate efforts for diversification away from oil industry have helped growth in non-oil sectors

Oil sector remains crucial as it constitutes more than half of the nominal GDP

Oil revenue constitutes 90% of the government’s total revenue

Government spending remains important support to the economy


8 January 2013


creating infrastructure and adding to the productive capacity of the economy. The total expenditure has been estimated at record high level of SAR853bn in 2012. The government has budgeted SAR810bn spending in 2013. Robust fiscal situation in the country with the lowest public debt to GDP ratio (3.6%) in the G20 countries provides strong counter cyclical support to the economy. Even in low oil prices scenario government has potential to spend. We expect total expenditure to continue to rise in 2013 with higher growth in capital expenditure.

Figure 6 Share of oil revenue remains high Figure 7 Capital expenditure has grown faster

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70%

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Source: CDSI, Al Rajhi Capital Source: CDSI, Al Rajhi Capital

Export remains dominated by oil The dominance of oil in export can be gauged by the fact that it constituted 85%-90% of total export of the country in the last decade. It is likely to continue to be the main export item in the foreseeable future. Having said that, export revenue has provided a solid strength to the external sector with large trade and current account surpluses. Trade surplus has averaged 32% of GDP per year since 2001. The large surplus has resulted into high current account surplus even as the country has deficit in service account and net outflow of remittance in excess of SAR100bn. The consistent external account surplus has resulted into accumulation of foreign reserves which has reached SAR2,385bn at the end of October 2012.

However, non-oil export has also witnessed robust growth over the last decade on the back of government effort to diversify the economy away from oil. The average growth in non-oil export has been around 20% per year since 2001 which is slightly higher than the average growth in the oil export. This is the reason we see marginal dip in oil share in the total export.

Figure 8 Crude oil remains main export item

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Export revenue has provided a solid strength to external sector


8 January 2013


Non-oil sector provides solid base Notwithstanding the critical importance of oil sector in the Saudi economy, non-oil sector has grown in importance with steady growth over the last decade. The government’s effort to diversify the economy away from oil has further helped the sector to grow at solid rate during the period. The average annual growth has been around 4.6% since 2001 which is significantly higher compared to average annual growth of 2.8% in the previous decade. The drop in non-oil private sector growth during economic crisis was well supported by the pickup in non-oil government sector growth.

Figure 9 Non-oil private and government sectors have been complementing each other over the last decade

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Non-oil private sector Non-oil government sector


Although the growth in non-oil sector has been broad based over the last one decade, construction, trade and hotels and transport, storage and communication sub-sectors have outperformed. The average annual growth in construction sub-sector has been 5.3% with pick in the recent years as the growth was 7.8% in 2010 and 11.6% in 2011. In the backdrop of large pipeline investment from the government in creating physical infrastructure, we believe that the sector is likely to continue out perform in coming years as well. Another non-oil sub-sector which has grown above the average growth of the non-oil sector over the last one decade is “Wholesale and Retail trade, Restaurant and Hotels”. The average annual growth has been 5.3% in the sub-sector. The outperformance in likely to continue in medium term for demography being supportive and income has been rising. Another related sub-sector, Transport, Storage and Communication, has grown at robust 8.6% annually since the beginning of the last decade. The strong growth has increased its share in real GDP from 4.9% in 2001 to 7.6% in 2011, equal to construction sub-sector’s share.

Moreover, government targeted efforts towards diversification of the economy and promoting industrialization have resulted into strong growth in manufacturing as well. The average growth in the sub-sector has been 5.9% annually in the last one decade. The outlook for the sector remains positive as rising non-oil export indicates strong demand for products. However, the sector performance also hinges upon global economic outlook.

Figure 10 Sub-sectors of non-oil sector Figure 11 Sub-sectors of non-oil sector

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Manufacturing Finance, Insurance etc

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Construction Trade and hotels Transport, storage & communication

Source: CDSI, Al Rajhi Capital Source: CDSI, Al Rajhi Capital

Over the last decade non-oil sector has grown in importance which provides a solid base to the economy

Many sub-sectors have outperformed over the last decade

Diversification effort by the government supported manufacturing


8 January 2013


Growing population and income levels support to growth momentum Fundamental factors such as demography, rising income levels and government commitment to build infrastructure and diversify the economy away from oil sector are main drivers of growth in the next many years to come. The per capita income has more than doubled from US$8,724 in 2001 to US$20,332 in 2011. The per capita growth has been robust even as population growth was high. Demography is supportive to growth as 68% population is in the age between 15 years and 64 years. The age group is considered the productive age group which contributes in production side as well as consumption side. Moreover, almost 29% population lies in the age between 0 years and 14 years who will continue to enter the productive age group over the next many years.

Figure 12 Population growth and rising income Figure 13 Saudi Arabia has a young population profile

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Credit growth has picked up The average credit growth in the last one decade has been strong , though, with high volatility as well. The credit growth peaked around 40% in 2004-05. However, global economic crisis resulted into almost no growth in credit in 2009 and a tepid growth in 2010. As economic activity picked up in 2011, credit growth also started accelerating which continues to be in accelerating mode. It grew 11% in 2011 and 15.3% y-o-y in October 2012.

Trade and commerce received 21.3% of the total credit disbursed by commercial banks in the country whereas manufacturing and processing industries received 13% in 2011. Consumer loans comprised 28% of the total credit to the private sector in the year. The accelerating credit growth is likely to support not only growth in financial sector but also it will have a positive impact on the non-oil sector growth.

Figure 14 Robust but volatile credit growth Figure 15 Steady rise in credit growth after economic crisis

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Source: SAMA, Al Rajhi Capital Source: SAMA, Al Rajhi Capital

Fundamental factors such as rising income, government spending and demography remain supportive to the medium term outlook

Acceleration in credit growth will have positive impact on economic activity


8 January 2013


Inflation has been stable After moderating from its peak at 11.1% in July 2008, inflation has largely been stable in the range of 4%-6% since early 2009. Currently it has eased towards lower end of the range. It was remarkable that the price rise was largely stable in 2011 even as government spending jumped by almost 30% and consumer demand was boosted due to extra money household received from the government.

The main source of inflation in the country in recent years has been supply side constraint in housing. Amid robust economic growth over the last decade and high population growth (more than 2% growth in local population per year and inflow of expatriate workers), demand for housing grew much faster than supply. This put upward pressure on rental. Now, government focus to build houses and provide incentives to real estate sector has resulted into good pipeline of housing supply in coming years. This in turn is likely to keep rental growth under control.

Another important component of inflation is food inflation which is largely influenced by global trend in food prices. There is consensus expectation that the rise in food prices will be moderate in 2013. Other industrial and agricultural raw materials prices are also expected to rise modestly. Based on these expectations, we believe that inflation is likely to be stable at around 4% in 2013.

Figure 16 Stable inflationary situation after economic crisis

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Inf lation

Forecast period


Supportive monetary policy Amid stable inflationary situation and domestic monetary policy linked to US monetary policy, we believe that the current accommodative monetary policy will continue through 2013. The Repo rate is currently at 2% and reverse Repo rate matches with the US Fed funds rate at 0.25%. The low level of policy interest rate has been the reason of low interbank rate and overall low interest rate environment in the country. The low rate has been supportive to the overall economic growth as it catapults higher credit growth and thus creates aggregate demand.

Inflation has been stable since early 2009 which is expected to remain stable

Easy monetary policy has been supportive to growth


8 January 2013


Saudi Stock Market:

Stock picking remains the key

Over the last two years, the Tadawul All Share Index (TASI) has witnessed many troughs and peaks as various regional and global issues weighed down on its performance. However, the index performance was largely flat. In 2011, TASI remained volatile due to political unrest in the MENA region, which was feared to significantly impact the regional growth rate and political equations as well as the sluggish global economic recovery. Due to regional factors, TASI declined to its lowest level of 5,500, despite a strong uptick in the Brent crude prices. For the first time in the last few years, correlation between TASI and Brent was negative in 2011.

In 2012, TASI showed a strong ~23% surge in the first three month to reach 7,800. After peaking in April 2012, TASI declined by more than 14%, weighed by global concerns. Factors such as strong domestic indicators, speculative investments and the rumors of market opening to foreign investors during the first two quarters of 2012, died down as global economic concerns took the center stage. TASI remained an average performer in 2012 as its returns were comparatively better than some of its GCC peers and some of the matured market indices such as FTSE (UK). However, it was left behind by other indices such MSCI World Index and MSCI Emerging Market Index. TASI lost most of its Q1 gains during the later part of the year due to weakening crude prices and an impact of fragile global economic recovery.

Figure 17 TASI Index price and volume data

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Trading Volume Index Value

Regional turmoil pushed TASI at nine-months low level

Saudi Arabia forecasted surplus budget

Stronger than the expected results f rom SABIC

Shares plunged amid concerns over the EU banking sector

Crude falls 3.2%

Saudi Arabia approves f irst mortage law TASI jumped 2.4%

on higher crude prices

mn


Figure 18 Performance of key global markets in 2012

Title:

Source:


29.1%27.7%

22.9% 22.9%

19.9%

15.1%13.4% 13.2%

9.5%

7.4% 7.3% 6.5%5.8%

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-10%

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TASI remained largely flat over the last two years

TASI performing better than many of its GCC peers


8 January 2013


Mid-size sectors have performed better

Mid-size sectors by market capitalization such as cement, food & agriculture and insurance have out-performed TASI over the past three years, while performance of large sectors such as banking remained in the negative territory during the same period. Further, the petrochemicals sector (largest in terms of market capitalization) has been traded at par with the market even though crude prices have surged by 45.6% in the last three years. Except for building & construction and real estate sectors, every mid size sector has outperformed the TASI. Moreover, market capitalization of food & agriculture and cement sectors increased more than 55% over the past three years, helped by the rising domestic consumption.

Saudi Arabia needs around 1.5mn affordable housing units to be built over the next few years to fulfill demand from a growing population (about 45% of the population are in the 15-40 age-group). Thus, we believe real estate and cement sectors will be attractive over the medium-term. Further, we believe that the new mortgage law will boost lending for new housing facilities across Saudi Arabia. We believe that this law will be beneficiary for the banking sector in the medium to long term, while the near term impact is likely to be muted due to lack of clarity. Hence, we do not expect banking sector to perform well in 2013 but 2014 onwards the positive impact of the mortgage law can kick in.

Retail and agriculture will continue to be benefitted by strong consumer demand. On the other hand, we remain cautious on the petrochemical sector over the near-term considering weakness in product prices. Having said that, we expect the sector to benefit from production cost advantage as well as active government support over the medium term.

Figure 19 Performance of key sectors in TASI


Valuations imply upside potential over the near-term TASI’s 2013 forward P/E multiple is 10.7x, which is 15% below the average multiple for the large mature and emerging markets across the globe. We believe that this undervaluation indicates towards a healthy upside potential for TASI going forward. On regional comparison, TASI is trading at higher multiples than many of the GCC markets, which we believe is well justified considering the Kingdom’s robust economic growth potential and high trading volumes.

The Saudi Arabian market looks fairly attractive, when we compared its P/E multiple with some of the international indices (refer to Figure 19 below). TASI is trading at a discount over some of the matured markets like the US and Japan, and emerging markets like India and Hong Kong. We expect TASI to move upward in the medium-term.

Mid-size sectors performed better than large size sectors

We expect the new mortgage law to benefit the banking sector in the medium term

TASI, at its current valuation, trades 15% below matured and emerging


8 January 2013


Figure 20 2013 PE comparison of TASI vs. major global markets

Title:

Source:


16.1

13.512.5 12.3

11.7 11.310.9 10.8 10.7 10.7 10.6

9.89.0 9.0

7.8

0.0

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Banking, Telecoms and Petrochemicals look relatively undervalued The 2013 P/E for petrochemicals sector remains low compared to its global peers; indicating good buying opportunity in the sector. Likewise, telecom sector’s valuation suggests a further upside. However, banking sector, which is the second largest sector in TASI by capitalization, is witnessing a higher forward P/E multiple compared to other regions, even though the sector posted improved profitability in 2012. The banking sector’s premium multiple is justified by strong results and we believe that the sector is well protected from the ongoing global turmoil.

Figure 21 2013 PE comparison of large-cap Saudi sectors

MSCI EM

S&P 500

Saudi

14.4

8.6

12.4

14.1

9.8

17.1

13.6

10.0

12.2

10.1 9.9 10.2

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Petrochemicals Banking Telecom

MSCI EM S&P 500 MSCI World Saudi


PE comparison with different industry indexes suggests big upside potential for major Saudi industries


8 January 2013


Figure 22 Saudi market – sector valuation

Sectors

Market Cap

(SAR bn) PE Ratio PB Ratio Dividend Yield 3M Returns 1Y Returns

Petrochemical 439.9 10.1 1.8 4.1 -2.2% -5.4%

Banking 307.5 9.9 1.6 3.3 -3.6% 0.7%

Cement 75.2 12.0 2.8 5.9 3.6% 13.7%

Retail 30.6 12.8 4.3 3.4 0.3% 16.0%

Real Estate 54.5 NA 0.7 1.5 -3.1% 25.0%

Insurance 38.7 NA 3.3 1.2 -8.1% 35.0%

Agriculture 66.3 14.2 2.7 2.9 -2.6% 14.1%

Telecom 152.8 10.2 1.9 4.7 5.5% 30.4%

Building & Const. 19.3 10.3 1.6 4.4 -7.0% -12.5%

Industrial Investment 50.7 14.9 1.7 2.4 -0.4% 15.5%

Multi-Investment 83.0 NA 1.7 1.8 9.8% 33.4%

Transport 10.9 9.1 1.5 2.3 7.3% 69.4%

Hotel & Tourism 8.1 NA 2.2 3.9 -1.8% 22.1%

Media & Publishing 5.5 NA 2.5 1.9 2.4% 40.8%

Energy 57.2 18.9 1.0 5.5 0.6% -3.1%

TASI 1,400.3 10.7 1.8 3.6 -1.4% 6.5% Source: Bloomberg, Al Rajhi Capital

Volumes likely to be on the lower side After a relatively strong growth in volumes in 2012, we expect the trading volumes to remain on the lower side in 2013, as there are limited compelling reasons for retail and institutional investors to invest heavily in this current market environment. The overall picture is somewhat gloomy as investors are looking for catalysts, which can propel the market to another level. Although the smaller sectors are performing better than the larger ones, they are not in a position to attract large investments due to their smaller size. We have observed a quarterly trend in volumes where Q1 and Q2 volumes are strong, while volumes in Q3 and Q4 lag behind. This can be attributed to Ramadan and Hajj holiday season, which falls in Q3 and Q4 where the trading activities are muted. Further, better performance from petrochemical companies in Q1 and Q2 is also a factor for better volumes in those companies. We believe that this pattern will continue in 2013, although the volumes could decline y-o-y in Q1 and Q2 2013.

Figure 23 TASI volumes can come down in 2013

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Q1 2013 E

Q2 2013 E

Q3 2013 E

Q4 2013 E


Domestic sectors command higher valuation multiples compared to larger sectors like petrochemical and banking

Volumes can remain on the lower side after a spectacular rise in 2012


8 January 2013


IPO activity suggests good appetite among investors

After a sharp decline in IPO activities after the 2008-2009 financial crisis, 2012 was a relatively better year for IPOs in the Kingdom with seven IPOs worth US$1.4bn. As can be seen in the chart below, 2012 was the best year for IPOs after 2008 despite the lower number of listed companies.

Figure 24 2012 was a good year for IPO despite having a low number of companies

Title:

Source:


$ 2.8 $ 4.8 $ 9.7 $ 0.8 $ 1.0 $ 0.5 $ 1.4

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IPO value (US$bn) Number of companies

Source: CMA, Zawya, Al Rajhi Capital

Compared to other GCC markets, IPO activities on TASI were better than Oman (two IPOs worth US$265mn). The UAE, Qatar, Kuwait, and Bahrain have not witnessed any IPO activity in 2012. On y-o-y basis, the IPO proceeds more than doubled in 2012 (YTD), which reflects that Saudi Arabia is the preferred market to list in the GCC.

All the companies which got listed in 2012 were from domestic market focused sector such as cement, food, retail and hotel & tourism. Major IPO listings in 2012 include Al Tayyar Travel (SAR1.4bn), Saudi Airline Catering (proceeds of SAR1.3bn), Dallah Healthcare (proceeds of SAR540mn), Takween Advanced industries (proceeds of SAR234mn), City Cement (SAR946mn) and Najran Cement (SAR850mn). A small insurance company, Alinma Tokio Marine (SAR60mn) also got listed in 2012. All the IPOs got strong response from the markets and were oversubscribed to the tune of 2x to 16x.

Figure 25 IPO issues in 2012

Company name Date of listing

IPO proceeds

(SAR mn) Industry Oversubscription

Return since

listing

Takween Advanced Industries 07-Jan-12 234.0 Industrial Investment 5.7x -25%

Alinma Tokio Marine Co 26-Feb-12 60.0 Insurance 16.1x 13%

Najran Cement Co 02-Apr-12 850.0 Cement 3.1x -15%

Al Tayyar Travel Group 15-Apr-12 1,368.0 Hotel & Tourism 2.4x 7%

Saudi Airlines Catering Co 16-Jun-12 1,328.0 Food & Agriculture 2.2x 24%

City Cement Co 07-Aug-12 946.0 Cement 3.0x -1%

Dallah Healthcare Holding Co 17-Dec-12 539.6 Retail 3.1x 17% Source: Bloomberg, Zawya, Al Rajhi Capital

Stock picking remains the key Smaller and domestic-oriented sectors have performed well over the last two years, riding on strong demand and changing demographics of the Kingdom. Our analysis suggests that companies from cement, real estate, retail and food & agriculture sectors have handsomely outperformed the broader index during the last two years. Most of these companies are relatively small and have gained investor attention over the last couple of years.

IPO activity picked up in 2012 suggesting better investor confidence in the markets

Saudi remained the best market in the GCC for new listings in 2012 with 7 IPOs

In a positively cautious environment in 2013, stock picking remains the key for return maximization


8 January 2013


Figure 26 Top performing stocks in TASI over the last two years

Company

Market cap

(SAR mn) Sector

1Y return

%

2Y return

%

Alhokair 7,420 Retail 60.6% 140.2%

Saudi Cement 15,185 Cement 30.1% 90.8%

Yanbu Cement 8,820 Cement 16.3% 80.5%

Southern Province Cement 14,350 Cement 16.6% 61.9%

Taiba Holding 3,743 Real Estate 31.1% 60.8%

Al-Jazira Bank 8,280 Banking 54.4% 57.7%

Knowledge Economic City 4,750 Real Estate 17.8% 55.6%

Jarir Bookstore 9,630 Retail 10.7% 54.7%

Arriyadh Development 2,270 Real Estate 0.4% 52.8%

Al Mouwasat 2,663 Retail 17.2% 50.3%

Ma'aden 30,988 Industrial Inv. 29.6% 47.3%

Arabian Cement 4,140 Cement 12.4% 46.2%

Bank Albilad 8,790 Banking 41.5% 45.5%

Yamamah Cement 10,004 Cement 1.1% 37.0%

Mobily 55,300 Telecoms 45.5% 36.3%

Makkah Construction 6,840 Real Estate 16.0% 34.4%

TASI 6.5% 2.2% Source: Company data, Al Rajhi Capital

On the other hand, many of the large companies on TASI have underperformed the broader index, which remains a major cause of concern.

Figure 27 Large cap stocks underperformed in the last two years

-6.3% -6.1%

28.5%

-2.9%

45.5%

16.7%

-3.9%-1.5% -2.1%

6.5%

-14.3%

-22.6%

0.9%

-4.6%

36.3%

23.8%

-27.3%

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SABIC Al Rajhi STC Saudi Electricity

Mobily SAFCO Samba Riyad Bank Saudi British Bank

TASI


Small and mid size domestic oriented companies significantly outperformed TASI in the last two years

Large cap stocks like SABIC and Al Rajhi have clearly underperformed the broader index


8 January 2013


ARC recommendations and top picks In 2013, we remain positively cautious on TASI as well as larger sectors such as petrochemicals and banking. However, we believe that demand slowdown and product price decline could weigh on the petrochemical sector in the next couple of quarters, while the banking sector lacks substantial catalysts like credit growth. Despite the recently passed mortgage law, we opine that the intricacies of this law are yet to be formulated and could benefit the banking sector only post 2013. For TASI to move higher, the index definitely require a major fillip from these two sectors.

Modest upside in the broader index essentially means that investors have to choose wisely from the available stocks to maximize their returns. We remain positive on domestic oriented sectors such as food & agriculture, retail and cement. In the petrochemical sector, we expect the companies with diversified portfolio and healthy operating rates will continue to excel, despite pressure on product prices.

For domestic driven sectors, we believe that the companies will benefit from favorable demographics and rising per capita income. Though these companies are relatively smaller, they have significant upside potential in 2013. We particularly like companies in the food & agriculture, retail, telecom and cement sectors as fundamentals continue to remain strong. We like Savola and Saudi Catering in the food & agriculture sector, while we prefer Mobily in the telecom space. We like Arabian Cement as it is in proximity to demand centers, Jeddah and Makkah which are ongoing major expansion plans.

We believe that investors would analyze the profit outlook of larger sectors like petrochemicals and banking in the first half of 2013. If the bottom-line performance remains muted, investors could get out of these sectors and put money into smaller and domestic oriented companies. We have therefore, included most of the domestic and mid cap companies in our top pick list, anticipating this change in investors’ psychology.

Figure 28 Upside potential for our top picks

35.9%

26.5%25.6%

23.1%

19.6% 19.1%17.6%

12.3% 12.3%10.4%

0.0%

5.0%

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15.0%

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NIC Shaker Arabian Cement

Savola SABIC Astra Extra Saudi Catering

Mobily Maaden

SABIC remains the largest and the most diversified petrochemical company in our coverage universe. We believe the company’s strong operating history, substantial presence in the fertilizer segment and global presence will enable it to achieve better results in a challenging market environment. The company’s petrochemical production capacity has risen over the last few years to about 60mtpa, with the latest addition of Saudi Kayan in Q4 2011. SABIC also enjoys a strong global presence thanks to a few international acquisitions and joint-ventures. Although the company’s near-term expansion plans are not significant, further increase in production from Kayan and commencement of SAFCO V plant can provide future revenue generating opportunities. China and other Asian markets will continue to remain the major export markets for SABIC.

We remain fairly positive on the company and expect it to outperform its peers going forward, despite the near-term pricing headwinds faced by its products. We reiterate our Overweight rating with a target price of SAR110.

We remain cautious on petrochemical and banking sectors…

… On the other hand, we remain positive on domestic oriented sectors

Most of our top picks are mid-size domestic demand oriented companies


8 January 2013


NIC boasts of a diversified business model (presence in industrial and petrochemical segments), which partially cushions the company from the risks of an economic slowdown. Further, its strong operating history and private ownership adds to the stock’s attractiveness. NIC has a strong operational history with plants operating at 90% plus levels over the last few years. TiO2 and petrochemical segments contributed almost equally to the 2011 revenue at 53% and 46% respectively. While the TiO2 segment mainly exports to Europe and the US, the petrochemical segment is focused more on Asia. With commencement of advanced petrochemical plants in second half of 2013, NIC will enter the niche segment of advanced petrochemicals.

We like NIC’s healthy financials, which enables regular dividend payouts along with acquisition- oriented growth strategy. Considering its underperformance over the last few months, we retain our Overweight rating on NIC with a target price of SAR40.5.

Mobily has been the pick of the telecoms sector, outperforming its peers in terms of revenue and profit growth as well as stock performance. The company has achieved double digit growth in bottom-line for the last four consecutive quarters, taking advantage of the opportunity provided by the surge in data consumption. Mobily has been focusing on the corporate segment, with an intention to diversify its revenue stream. The company has made two important tie-ups in order to become a one stop telecom solution provider for corporate. It has signed a five-year contract with IBM for SAR1bn to provide comprehensive IT solutions. It has also tied up with Etihad Atheeb to provide fixed line services. Mobily has been consistently increasing its dividend payout over the past few years. The management has guided for further increasing its dividend in 2012 and 2013 to SAR4.0 per share and SAR5.0 per share respectively. This implies dividend yield of 5.3% and 6.6% for 2012 and 2013 respectively.

Extra leads the home and electronic appliance market in the Kingdom, and has been rapidly expanding its stores. The company currently operates 29 stores across the Kingdom which it targets to reach 42 by 2015. The company is one of the few players in the Kingdom, who facilitate online purchase, backed by home delivery. Extra has been rapidly setting up stores over the past couple of years, and has been conducting promotional events like the “Mega Sale” and “Women Festival” to attract the Saudi consumers. Extra has been aggressive in its approach, and this is reflected in the high selling & distribution costs it has been incurring. The company has also lined up plans to expand into the neighboring countries in the GCC region — Oman, Qatar and Bahrain — over the next couple of years. We believe this is the right approach to capture a large chunk of a growing market.

We like Extra’s business for its growth potential and its approach at selling electronic products (targeted sales campaigns and online sales) in the Kingdom and have recently begun coverage on the stock with and Overweight rating and a target price of SAR123.5 per share.

Savola remains one of the largest food suppliers (oil, sugar, and pasta) in the MENA region as well as a leading grocery retail operator in the Kingdom through its subsidiary Azizia Panda. The company, which also has an indirect exposure to the growing dairy sector through Almarai, recently increased its stake from 29.9% to 36.5% in October 2012 through a SAR2bn deal. Savola has been able to post impressive results this year, despite the challenges of rising commodity prices, difficulties in sourcing raw material supplies and the Arab spring. We like the growing demand from its key markets in the GCC and larger MENA region and believe it will drive the company’s future growth. As a result, we believe the company will be able to achieve its target of 140 supermarkets and 60 hypermarkets by 2015 in the Kingdom from its current network of 90 and 41 respectively. Following the retail division’s strong performance and the increase in Almarai’s stake, we raise our target price to SAR49.1.

Shaker is one of the major players in the Saudi AC market; we estimate that it enjoys the highest market share in split AC and a decent share in windows ACs. Thanks to its JV with LG, the company is faring well and has outperformed many local competitors. We strongly believe the company is well positioned to benefit from the government huge expenditure in education and health sectors. Also, the housing projects that are undertaken by the Ministry of Housing will also be a huge catalyst for the company. We maintain our overweight rating on Shaker with a target price of SAR83.5, implying a 26.5% upside potential.

NIC will benefit from diversified revenue model and healthy operating rates

We expect Mobily to outperform its peers in the medium term

Rapid growth in the electronic appliances market make Extra one of our top picks

Savola is the largest food company in the Kingdom

Shaker will benefit from its dominant position in the AC market and rising demand for housing


8 January 2013


Saudi Airline Catering Company is the latest addition in the food & agriculture sector (listed in July 2012). The company is the leader in the Saudi airline catering market with a share of about 95%. Further, the company is active in expanding its sources of income by engaging in sky sales, lounges and non-airline catering services. For the past five years, revenues and EBITDA grew with a CAGR of 14% and 17% respectively. We strongly believe the new expansions in Saudi airports, accompanied by the introduction of two new airlines in Saudi domestic airlines will boost the company’s revenues.

Ma’aden successfully commenced its phosphate operations in 2012 while the aluminum business is slated to start by 2014. We remain bullish on the performance of the phosphate segment and expect it to stabilize this year, contributing substantially to the company’s bottom-line. We estimate phosphate revenue to reach SAR5bn in 2013 (82%, respectively of the total revenue). Phosphate will remain the key value generator for Ma’aden, with a contribution of over 60% to the company’s appraised enterprise value. The company is now contemplating to expand its phosphate project and has identified the prospects in the Umm Wual project at Al Khabra for this purpose. This project is expected to add 16mn tons per annum of phosphate-based products. These products include phosphoric acid and sulfuric acid and various animal fodder related products. The total project cost has been estimated at SAR26bn and the tentative date for launch has been announced as Q4 2016.

While on peer valuation, Ma’aden is trading at higher multiples (2013 PE of 27.1 and EV/EBITDA of 19.3), which we believe will substantially come down once the new businesses gets stabilized.

Arabian Cement remains our top pick in the cement sector, owing to its robust revenue and earnings growth, proximity to the western region (which is undergoing massive expansion) as well as an open investor relations. Arabian Cement has maintained high utilization rates, on the back of the massive construction and cement demand in the western region. However, the company seems to be struggling with its Jordan subsidiary. We have therefore cut our estimates on its Jordan subsidiary but still remain positive on its investment in Jordan as it is one of the higher margin markets. Arabian Cement appears undervalued with a modest 2013 PE of 7.8x and a dividend yield of 6% makes us believe that the company has a healthy upside potential.

Astra has diverse interests in different sectors such as pharmaceuticals, chemicals and steel. The company is a market leader in the pharma and specialty chemicals businesses in Saudi Arabia, which ensure healthy cash flows and stable growth. Astra’s investment in Al Anmaa (the Iraqi steel business) will boost its top-line as well as result in healthy margins on the back of cheap feedstock availability in Iraq. We reiterate our Overweight rating on the stock with a target price of SAR46.2.

The list of our top picks is below:

Figure 29 ARC Top Picks

Company Rating Target Price (SAR)

Sabic Overweight 110.0

NIC Overweight 40.5

Mobily Overweight 88.7

Extra Overweight 123.5

Savola Overweight 49.1

Shaker Overweight 83.5

Saudi Catering Overweight 91.0

Ma'aden Overweight 37.0

Arabian Cement Overweight 65.0

Astra Overweight 46.2 Source: Al Rajhi Capital valuation

Saudi Airline Catering is the market leader in flight catering in the Kingdom

Aggressive entry into phosphate and aluminum business makes Ma’aden an attractive stock

Arabian Cement benefits from its proximity to thriving western region

Astra is well diversified company with presence in pharma, chemical and steel business

Saudi Petrochemicals Sector Petrochemicals –Industrial Saudi Arabia

8 January 2013

January 18, 2010

US$ 95.2 bn 30.6% US$158.9mn Market cap Free float Avg. daily volume





Key themes

We expect Saudi petrochemical producers to outperform global rivals on the back of competitive advantages such as cheap feedstock costs, active government support and proximity to demand centers in Asia. We believe the composition of product portfolio will determine the results for these producers over the near-term as product prices largely remain under pressure.

Implications

We like SABIC and NIC for their diversified product portfolio and global presence. Sipchem and SAFCO will benefit from their exposure to methanol and fertilizers respectively. Since APC and SPC are single-product companies, they will be vulnerable, while Yansab is likely to post weak results due to its basic olefin products.

What do we think?


SABIC Overweight SAR110.0

Sipchem Overweight SAR23.3

SAFCO Overweight SAR185.0

NIC Overweight SAR40.5

Yansab Neutral SAR50.3

APC Neutral SAR28.7

SPC Neutral SAR15.4

Where are we versus consensus?

0

40

80

120

160

200

SABIC Sipchem SAFCO NIC Yansab APC Sahara

SAR

Current Consensus ARC

Source Bloomberg, Al Rajhi Capital

Research Department ARC Research Team

Tel +9661 211 9248, [email protected]

Petrochemical sector:

Near term headwinds persist The Saudi petrochemical sector benefits from distinct advantages such as

cheap feedstock costs, active government support and proximity to large

demand centers. However, an uncertain global economic outlook is expected to

weigh on the sector performance in 2013. Having said that, we expect the

sector to perform better than its global peers aided by higher utilization rates

and ability to make profits at lower price levels. We believe pure-play

producers will be more affected than the diversified product companies over

the near-term and portfolio composition remains the key. Petrochemicals

sector was affected by weak fundamentals in 2012 and we expect the trend to

continue in 2013. Thus, we continue to remain our cautiously positive stance on

the sector.

Weak global environment puts pressure on crude prices. The global

economic environment deteriorated over the last few months on the back of the

prevailing Eurozone crisis and a slowdown among major emerging economies

such as China and India. The Eurozone again slipped into a recession in Q3 with

another quarter of negative GDP growth, prompting economists to expect this

recession to continue for the next couple of quarters. Despite the positive news

flow about the aversion of fiscal cliff from the US, we expect global demand to be

weaker for the first half of 2013 as demand catalysts are still not in sight.

Petrochemical prices could remain under pressure. Ethylene and propylene

prices are currently 24% and 19% lower compared to their 2012 highs

respectively, and this weakness has also affected their derivatives, polyethylene

and polypropylene. With low feedstock prices and weak demand, we expect

petrochemical prices to remain under pressure over the near-term.

Petrochemical producers cut down operating rates. Major petrochemical

producers in Europe and Asia have cut down on their operating rates or are

planning to do so over the near-term due to a steep decline in product prices.

However, Saudi producers can continue operating at full capacity aided by their

feedstock cost advantage and hence, will be less impacted than their global

peers.

Hike in feedstock costs can be a dampener. Saudi Aramco is mulling an

increase in feedstock costs for petrochemical companies, which had been put on

hold in 2012, citing weaker global economic conditions. Interactions with the

management of a few companies have revealed that this increase can take place

in 2013. We believe such a hike could be a dampener for the industry as it is yet

to recover fully from the weakness in demand and product prices.

Stock conclusions. We believe companies with a diversified portfolio such as

SABIC and NIC are better placed for growth over the near term as compared to

single product companies like APC and SPC (pure-play polypropylene

companies). We believe Sipchem and SAFCO will continue to perform well

owing to their exposure to methanol and fertilizers respectively, while we expect

Yansab’s performance to remain under pressure on the back of its exposure to

basic olefins. We remain Overweight on SABIC, NIC, Sipchem and SAFCO, while

we reiterate our Hold rating on APC, SPC and Yansab.

Saudi Petrochemicals Sector Petrochemicals –Industrial

8 January 2013


Petrochemical sector: Pressure remains on product prices

Crude prices rose mainly on Iran sanctions Crude oil prices have been consolidating around the $110 per barrel level as disappointing economic news flow has been put aside by the continuing geopolitical tensions in the Middle East. The IEA has boosted its global crude demand outlook for Q4 2012 and 2013, amid signs of economic recovery from China. The agency increased its global oil demand estimates for the fourth quarter by around 435,000 bpd, reversing its previous estimates of 290,000 bpd cut in the November report. Global demand is now forecast to grow by 865,000 bpd in 2013 to touch 90.5 million bpd - 110,000 bpd more than its earlier forecast. In contrast to a sluggish demand outlook, supply of crude oil improved as the global output rose by 730,000 bpd to 91.6 million bpd in November, primarily due to increase in non-OPEC output. Oil exports from Iran remained stable at 1.3mn bpd in November, as Malaysia, Taiwan and the UAE bought more oil from the sanction hit nation to offset reduced imports from China and India.

On the other hand, supply side concerns remain as geopolitical tensions between Israel and Iran continue to rise, resulting in fears of a possible closure of the Strait of Hormuz. Further, the recent conflict between Israel and Palestine as well as political turmoil in Egypt have supported oil prices, despite weakness in demand. Despite these tensions, we believe that Brent prices will come down over the next few quarters owing to demand slowdown and weaker economic growth.

Figure 30 Trend in Brent prices

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Downward pressure on product prices continues

The petrochemical industry has undergone a roller-coaster ride of sharp peaks and troughs throughout the year. After healthy product prices in Q1 2012, both demand and prices declined in Q2 on the back of economic weakness, lower naphtha prices and higher inventory build-up across the globe. Despite a continued weakness in the global economy and limited increase in demand from major markets, petrochemical product prices witnessed a sharp rally in Q3 mainly driven by the upstream factors such as rise in Brent and naphtha prices, the need for inventory replenishment and turnarounds across the globe. As these factors faded in Q4, the product prices declined again marking another weak quarter.

Crude prices remained above US$110 levels on the back of improving demand scenario and geopolitical events in the MENA region

We expect crude prices to decline marginally over the next few quarters

Saudi Petrochemicals Sector Petrochemicals –Industrial

8 January 2013


Figure 31 Volatility in the petrochemical prices

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Despite this see-saw activity in the product prices, the real demand catalysts were lacking as buyers were hesitant to place large orders fearing weakness in demand from developed markets. We expect demand to pick up again in the first quarter of 2013 as many Asian plants go for their scheduled maintenance in Q1, resulting in a supply crunch.

SABIC and NIC remain our top picks

SABIC and NIC remain our top picks for the next few quarters on the back of diversified revenue streams and healthy operating rates. SABIC is the largest company in our coverage universe and benefits from its scale, international operations and a few new projects commencing in the near term. On the other hand, NIC benefits from its presence in the TiO2 segment, which contributes roughly half of the revenue. TiO2 business provides the company diversification in revenue streams. We reiterate our Overweight rating on SABIC and NIC with target price of SAR110 and SAR40.5 respectively.

Apart from top picks, we are positive on SAFCO and SIpchem for their exposure to fertilizers and methanol respectively. We believe that the product prices for urea, ammonia as well as methanol will remain healthy over the next few quarters, helping both SAFCO and Sipchem to post solid results. We remain Overweight on these stocks with target price of SAR185 and SAR23.3 respectively. For SAFCO, we have reduced the target price from SAR216.7 to SAR185 to take into account the dilution effect of 33.3% bonus shares.

We are Neutral on Yansab, APC and SPC mainly due to their dependence on basic olefins, for which product prices have remained under pressure for the last few quarters. We don’t expect price material recovery in these product prices in the near term.

Figure 32 Petrochemical Sector

Company Rating Target Price

Market Cap.

(SARmn) PE Ratio EV/EBITDA EPS growth Dividend yield

(SAR) (SARmn) 2013E 2013E 2013E 2013E

SABIC Overweight 110.0 276,000 11.7 6.8 -3.7% 6.5%

Sipchem Overweight 23.3 7,022 12.7 8.2 -7.8% 7.6%

SAFCO Overweight 185.0 51,333 14.5 8.8 21.2% 6.3%

NIC Overweight 40.5 19,933 9.9 7.1 6.0% 4.2%

Yansab Neutral 50.3 28,023 9.4 7.7 29.6% 4.3%

APC Neutral 28.7 4,477 13.5 9.1 5.2% 0.0%

SPC Neutral 15.4 6,011 9.2 9.0 228.3% 0.0% Source: Company data, Al Rajhi Capital

Petrochemical prices declined in Q4 after a steep rise in Q3

We expect SABIC and NIC to benefit from their diversified business model in the near term

Saudi Telecom Sector Telecom –Industrial Saudi Arabia

8 January 2013

January 18, 2010






Key themes

We remain bullish on the Saudi telecoms sector on the back of rising smartphone penetration and consequent growth in data consumption. Mobily continues to strengthen its position in the Saudi market, while STC focuses on its international businesses.

Implications

Mobily remains our top pick in the sector. We also remain Overweight on STC on the back of improved profitability of its international businesses. We have slashed our estimates for Zain KSA, as the company is struggling with its financial problems and ceding revenue market share to two other players. We remain Neutral on Zain KSA, considering a sharp correction in the stock.

What do we think?


STC Overweight SAR47.2

Mobily Overweight SAR88.7

Zain Neutral SAR10.0

Why do we think it?

Stock 3 year EBITDA CAGR 2013 EV/EBITDA

STC 10.1% 6.1x

Mobily 4.4% 4.2x

Zain 14.9% 19.2x


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Research Department Mazhar Khan


Saudi Telecoms Sector:

Mobily remain top pick We remain bullish on Saudi telecoms sector despite saturating mobile

penetration levels, as we believe information and communications technology

services will only grow in importance over time. Broadband remains the key

growth driver for telecom operators in Saudi Arabia, as increasing smart-

phone penetration levels and changing usage patterns of consumers are

expected to result in a sharp rise in data consumption. Mobily remains our top

pick in the sector, as it continues to outpace its peers, while STC will benefit

from improving profitability from its international businesses. Zain, on the

other hand, is struggling to improve its performance, both on the financial as

well as the operational fronts.

Favorable demographics to support data usage. Saudi Arabia is one of the

youngest countries in the world, with 30% population below 15, while about 50%

are below the age of 26 years. We believe the young Saudi population is likely to

drive data usage, as today’s youths are more technology-savvy. According to a

study conducted by Nielsen in 2011, Saudi youths were second only to the US in

checking e-mails on their mobile. They have led their peers in the BRIC

countries and the US in downloads of screen savers and ring tones, indicating

that the current Saudi generation is increasingly IT-literate.

Rising smart-phone penetration. Smartphone penetration in Saudi Arabia is

expected to increase to 48.5% by 2016 from 25% at the end of 2011, supported by

the availability of entry-level and mid-level options. An average smart-phone

generates about 35 times more data traffic than a basic feature phone. Thus,

rising smart-phone penetration in Saudi Arabia will spur a huge growth in data

usage.

MVNO – Opportunity or Threat? With the Saudi telecom regulator CITC

planning to issue three MVNO (Mobile Virtual Network Operator) licenses in the

near future, the Saudi telecoms market is set to undergo an important

transformation. The introduction of MVNOs can provide a new growth

opportunity as well as pose a threat for the existing telecom operators. The

existing telecom operators can benefit by tying up with MVNOs to gain market

share or generate revenues by leasing their excess capacity. On the other hand, it

will definitely trigger a price war.

Stock Conclusions. We remain Overweight on the two largest and more

established players in the Saudi telecoms market. Both STC and Mobily are

witnessing strong growth in the Saudi market, and stand to benefit immensely

from the rising demand for data services. Mobily has tied up with IBM in order

to target corporate customers with cloud computing and data security services.

STC is the only company in the Kingdom, which provides investors with

exposure to international markets. On the other hand, the third operator – Zain

KSA – continues to suffer from high debt levels and is finding it exceedingly

difficult to refinance its outstanding debt, even after improving its balance sheet

position following a capital restructuring exercise. We remain Neutral on Zain

after the sharp correction witnessed in the stock over the past few months.

Saudi Telecom Sector Telecom –Industrial

8 January 2013


Saudi Telecoms Sector:

Favourable demographics and increasing smart-phone penetration key driver

Saudi Arabia is one of the youngest countries in the world, with 30% population is below 15, while about 50% below the age of 26 years (source: CIA World Fact book). A study conducted by Neilson in 2011 showed that the Saudi youth led their peers in the BRIC countries and even the US in downloads of screen savers and ring tones, and were second only to US in checking e-mails. This data indicates that the current Saudi generation is increasingly IT-literate. Thus, the young population of Saudi Arabia is likely to drive data usage, as the youth are more technology savvy. The availability of relatively cheap entry-level and mid-level smart-phones is giving a boost to smart-phone sales in the Kingdom. According to estimates by Informa telecoms & media, smart-phone penetration in Saudi Arabia stood at 25% at the end of 2011, and is expected to jump to 48.5% by 2016. According to estimates by CISCO, a smart-phone generated 35 times more mobile data traffic than a basic feature phone in 2011, as users were able to download digital content (applications/games/ringtones/wallpapers) easily and stay connected (e-mails/instant messaging applications). Thus, rising smart-phone penetration will lead to huge growth in data consumption. CISCO estimates that the mobile data traffic in the MENA region will grow at a CAGR of more than 100% from 2011 to 2016. Since Saudi Arabia is one of the biggest mobile markets, we believe the Kingdom will lead the rise in data consumption in the region. (Please refer to Telecom sector note released 9th December 2012 for further details).

Positive on STC and Mobily, while Neutral on Zain

Mobily has been the pick of the telecoms sector, outperforming its peers in terms of revenue and profit growth as well as stock performance. Off late, Mobily has shifted its focus on the enterprise segment to drive growth in a maturing telecom market. We think this strategy will ensure a positive performance in the coming years. The company has made two important tie-ups and signed a five-year contract with IBM for SAR1bn to provide comprehensive IT solutions, which will enable it to offer services such as data security and cloud computing. It has also tied up with Etihad Atheeb to provide fixed line services. The company has also been consistently increasing its dividends pay out and thus we expect SAR5/share as pay out for 2013, implying an impressive dividend yield of 6.6%. We have increased Mobily’s target price to SAR88.7, implying an upside potential of about 12.3% and maintain our Overweight rating. Mobily still trades on a cheap 2013 PE of 8.4x and EV/EBITDA of 6.1x. (Please refer to our Telecoms sector note dated 9th December 2012)

STC remains a strong long term story with increasing international business and improving performance of its subsidiaries. STC has a huge cash balance which it plans to utilize towards increasing its international presence. We believe that there is also a possibility of the company increasing its dividend payout (current SAR2/year), which could be a major trigger for the stock. We remain Overweight on STC with a target price of SAR47.2.

Zain continues to struggle with a huge debt outstanding (SAR13.5bn at the end of Q3 2012) and reducing its debt is becoming difficult due to negative free cash flow. The company’s market share has fallen from about 15.6% at the end of 2010 to below 12% currently. Tight financial conditions and negative cash flows have limited the company’s ability to introduce innovative plans and increase its advertising spend. Based on our estimates, we have arrived at a fair value of SAR10 per share which is also our target price. We remain Neutral.

Figure 33 Telecoms Sector


Market Cap.


(SAR) (SARmn) 2013E 2013E 2013E 2013E

Mobily Overweight 88.7 53,725 8.4x 6.1x 7.1% 6.5%

STC Overweight 47.2 87,400 8.1x 4.2x 7.0% 4.9%

Zain KSA Overweight 10.0 2,318 nm nm -12.7% 0.0% Source: Company data, Al Rajhi Capital

According to industry sources, Smartphone penetration is expected to increase from 25% in 2011 to 48.5% in 2016

About half the Saudi population is below the age of 26; and being tech savvy augurs well for the telecoms sector

We expect Mobily to pay a dividend of about SAR5 next year. This does not include the bonus shares announced

Zain’s market share has fallen to less than 12% currently

Saudi Food Sector Food –Industrial Saudi Arabia

8 January 2013

January 18, 2010

US$11.9bn 51.2% US$19.3m Market cap Free float Avg. daily volume



Target mkt cap SAR49.9bn 11.6%over current Consensus mkt cap.SAR49.4bn 10.5% over current Current mkt cap. SAR44.7bn as at 6/01/2013


Key themes

Rising disposable income levels, changing lifestyles and ever-increasing population will drive the growth for companies like Herfy and Savola in the food sector. We believe increasing global crop prices coupled with the Saudi government’s cap on prices will pose challenges for basic food suppliers like Almarai over the near-term. New sub-sectors such as juice, bakery and poultry are emerging in the Kingdom, apart from niche markets like airline catering.

Implications

We are Overweight on SACC and Savola, the former for its unique business model and the latter for its continuing expansion plans. On the other hand, we lower our target price for Almarai and increase it for Herfy. However, we maintain our Neutral rating on both stocks.

What do we think?


Almarai Neutral SAR63.5

Savola Overweight SAR49.1

Herfy Neutral SAR110

Saudi Catering Overweight SAR91

Why do we think it?


Almarai 11.0% 12.9x

Savola 10.5% 6.2x

Herfy 13.0% 11.6x

Saudi Catering 15.7% 8.8x


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Research Department Moath Al Shaikh


Food & Agriculture sector:

Demand hurt by challenges The Saudi food sector has been witnessing healthy growth, similar to the retail sector, owing to the Kingdom’s favorable demographic profile. Demand for protein-rich and processed food products continues to rise. However, dependence on imports for basic food and feed commodities, and government intervention on prices will hinder the profitability of food suppliers over the near-term. Meanwhile, new sub-sectors such as juice, bakery and poultry are emerging.

Food will be an important part of Saudi retail sales growth: According to

EIU, the Saudi food sales market is expected to reach $69.9bn by 2016,

representing around 53% of the retail sales market, which is expected to reach

$131.2bn by then. This large revenue contribution will stem from rising

disposable income levels, changing lifestyles, and ever-increasing population.

International crop prices are crucial on higher imports: An ever-increasing

population is resulting in higher grain imports. Hence, Saudi food suppliers will

be affected by the movement in the international crop prices. Crop prices rose

significantly in the first half of 2012 on account of tough weather conditions in

the US and Europe, coupled with declining inventory levels. Although prices

have corrected slightly since then, we believe it is an only short-term effect and

crop prices will remain high over the long-term.

Government interventions heighten concerns: The Saudi government

recently ordered Almarai to roll back a price hike for some of its dairy products

despite rising input cost. This is the second government interventions, which we

feel stems from its aim to curb inflation. However, we believe continued

interventions will hinder the growth of food companies.

New food sectors are emerging: Apart from the traditional markets such as

dairy, edible oil, and sugar, new markets such as juices, bakery and poultry have

emerged with healthy growth prospects. Companies like Almarai and Savola

have entered these markets. However, it remains to be seen whether they are

able to build successful business models, as in the past, given the intense

competition in these segments.

Stock conclusions: While the demand for food is certain, securing supplies at

an affordable cost will be crucial for food companies in Saudi Arabia to remain

profitable. We believe companies supplying basic food staples like Almarai will

face pressure over the near-term due to their inability to pass on any increase in

costs. Companies with diversified revenue streams like Savola, with presence in

supermarket and hypermarket businesses, will perform better. We believe

Savola’s move to raise stake in Almarai, from 29.95% to 36.52% in October, will

provide synergistic benefits and help consolidate the leadership position of both

the companies in the Saudi food market over the long-term. While we like

Herfy’s focus on expanding stores and expect it to benefit from the rising

disposable income, the company is likely to face intense competition from its

peers, some of which are large global leaders. We also like SACC’s business

model, which is the domestic leader in a niche market of in-flight catering. We

believe SACC is most likely to benefit from the rapid growth in the Saudi

aviation industry over the next few years.


8 January 2013


Dairy and food market: Healthy prospects despite challenges

Dairy sector to witness growth in volumes but at a cost Milk consumption is one of the main factors driving the GCC dairy market, of which Saudi Arabia currently accounts for more than 60%. According to BMI, demand for milk has grown by around 6% annually over the past few years. Almarai has a dominating presence in all the milk products, including laban and zabadi in the GCC region. We believe demand for milk products will be healthy, as the Saudi population shifts to a healthier lifestyle.

Figure 34 Dairy market for GCC countries Figure 35 Expected CAGR for milk based products (2012-2016)

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Laban & Zabadi

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Source: Nielsen Company 2011, Al Rajhi Capital Source: Euromonitor, Al Rajhi Capital

Competition and pricing pressures pose near-term concerns Almarai has not been able to pass on any increase in input costs (in terms of feed and packaging costs) to its consumers. In mid-2011, the Saudi government did not allow the company to hike the prices of its dairy products in a bid to curb food inflation in the country. Later in November 2012, the company increased the prices of non-core products such as chocolate milk and this was again not allowed by the government. Although the government t almost doubled the feed subsidies for the company, we believe they have only partially offset the recent surge in crop prices. Since the company is being used as a tool to serve the strategic interest of the nation, its operating margins have been gradually eroding. Given the fact that milk price is among the lowest in the world, we believe prices could increase in future, although not in the near-term.

Saturated local Sugar market The Saudi sugar market has become saturated considering that the Saudi per capita consumption is at par with regional consumption rates. The only growth that we can envisage apart from meeting the needs of a growing population is bridging the demand-supply gap of refined sugar (currently around 10% of the supply is imported). With Savola controlling almost 90% of the Saudi market by our estimates, we do not expect the company to further expand its capacity in Saudi Arabia over the near-term. Juice, bakery, and poultry are star sectors.

Juice, Bakery and Poultry Market

Ample room for growth and innovation in the juice market According to Al Rabie, a leading juice producer in Saudi Arabia, the juice, nectar (25-99% juice), and carbonated soft drink (CSD) market in Saudi Arabia is estimated to be worth US$1.3bn and is growing at a healthy rate (posted a CAGR of 8% during 2009-2011). The market is dominated by CSD, which corners more than 50% market share. We believe this market domination is mainly on account of the western eating lifestyle adopted by the young population in the Kingdom, driven by the increasing number of super and hyper-markets along with fast food outlets.

Almarai dominates the Saudi dairy sector

Almarai is finding it tough to pass on increase in input costs to its consumers

Savola is dominating the local sugar market

The fresh juice and nectar segments are likely to see better growth than CSD


8 January 2013


Looking ahead, we believe the market will shift more toward nectars and fresh fruit juice, due to increasing health awareness. Our view is supported by the forecasts made by Al Rabie. According to data provided by the company, the juice, nectar and CSD segments grew at a CAGR of 4.3%, 8.0%, and 9.7%, respectively over 2009-2011. However, this growing trend is expected to change in the future with the juice, nectar and CSD segments growing at a CAGR of 6.6%, 10.1%, and 3.5%, respectively during 2011-2015.

Competition heating up in the bakery segment The Euromonitor has estimated Saudi Arabia’s bakery market to have reached US$3.7bn in 2011 and expects it to grow to US$4.7bn over the next five years. Almarai through its two brands – Lusine and 7 Days – dominates the bakery segment and we believe the company has plans to ramp up capacity as a small part of its recently announced SAR15.7bn capex plan for 2012-2017 in May 2012. Pain D'Or – a new bakery brand of the Lebanese Malco Group – has recently set up one of the largest industrial baking facilities in the Kingdom, and has gained the lion’s share of the market. Savola has been operating its baking business through Herfy. The bakery segment is the second-largest division for Herfy in terms of revenue contribution, after its popular restaurant business. Herfy has also commenced its first production line at a new plant. The cost of the plant is SAR119mn and will have three times the current capacity. Although the intense competition is bound to impact the near-term margins of companies in the sector, it also indicates the attractiveness of the industry.

Domestic poultry production trying to catch up with rising demand Chicken is preferred over red meat (bovine and sheep) in Saudi Arabia. According to the USDA, Saudi consumption of chicken is currently around 1.4mn tons with nearly 60% being supplied by imports. According to data from the FAO, most of the imports are from Brazil (81%) followed by France (17%). In 2011, Saudi Arabia was the second largest importer in the world at 895,000 tons after Japan, while in terms of per capita consumption, the Kingdom ranked fourth at 52.4 kg. GCC countries are among the top consumers of chicken in the world, where Bahrain, Oman and Saudi are the fastest growing (CAGR of 17%, 12% and 8%, respectively over 2007-2011), which reflects a shift to a more protein-based diet in the region.

Growth outside big cities for fast food market The Saudi fast food market is the biggest in the GCC region, and is one of the largest in the MENA region. We believe McDonald’s and Herfy are the market leaders in this space. Other active players are Burger King, Kudu and Al Baik. The rest of the market comprises minor local players, who are rapidly gaining market share. We estimate Herfy’s market share in the fast food hamburger restaurants (FFHR) to be around 27-29%, slightly below McDonald’s market share of around 33-35%.

Figure 36 No. of stores of large players in the FFHR market Figure 37 Central region's sales share is dropping – Herfy

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McDonlads Burger King Hardee's Kudu Herfy

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Source: Company data, Al Rajhi Capital Source: Companies data, Al Rajhi Capital

Top players in the market are gearing up for a price war

While demand outlook is robust, most of it will be met by imports


8 January 2013


Local airline catering market: dominated by Saudi Airlines Catering The Saudi airline catering market is well positioned to grow by capitalizing on the growing population, ever-increasing religious visitors and high economic growth in the Kingdom. According to our estimates, airline passenger traffic in Saudi Arabia is set to grow at a CAGR of 7% over 2011-2015, higher than the global average of about 5.2%.

In 2011, national carriers accounted for almost 39% of international passengers passing through Saudi airports. Among them, Saudi Airlines (Saudia) represented 33%, while the remainder 6% was represented by National Air Services (NAS) – the sole domestic competitor for Saudia – after Sama Airlines suspended its operations in late 2010. On the other hand, Saudia dominates the domestic market with a 94% market share. Saudia is the second-largest airline in the Middle East region, after UAE-based Emirates. The company is planning to expand its fleet from around 99 planes to 128 planes by 2016.

Figure 38 International passengers market share in Saudi Figure 39 Total passengers passing through Kingdom’s airports

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International Carriers Saudia NAS

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Overweight on Savola & Catering, but Neutral on Almarai & Herfy We are Overweight on Savola as we believe the company will benefit from strong demand emanating from international markets coupled with efficiency improvements in the domestic retail markets. We are also Overweight on Saudi Catering as we believe the company is well positioned to benefit from the strong growth in passenger traffic in the Kingdom. On the other hand, we are Neutral on Almarai as it is struggling to pass on higher crop prices to its customers. Finally, we like Herfy’s expansion mode, especially outside big cities. However, we believe all the good news is already factored in the share price for the company. Below is the table showing our coverage in the food sector.

Figure 40 Food sector


Market Cap.


(SAR) (SARmn) 2013E 2013E 2013E 2013E

Almarai Neutral 63.5 26,000 17.9x 12.9x 7.6% 2.0%

Savola Overweight 49.1 19,950 11.8x 6.2x 10.5% 3.0%

Herfy Neutral 110.0 3,022 14.9x 11.6x 12.8% 3.5%

Saudi Catering Overweight 91.0 6,642 11.8 8.8 17.4% 6.0% Source: Company data, Al Rajhi Capital

Passenger traffic in the Kingdom will grow at a GAGR of 7% over the next five years

Saudia is the second-largest airline in the Middle East region

Saudi Retail Sector Retail –Industrial Saudi Arabia

8 January 2013

January 18, 2010




Target mkt cap SAR23.9bn 11.8%over current Consensus mkt cap SAR23.6bn10.4% over current Current mkt cap SAR21.4bn as at 06/01/2013


Key themes

Rising disposable income levels, changing lifestyles and ever-increasing population will drive the growth for companies in the retail sector. We believe large store formats will dominate the retail scenario across the Kingdom going forward. Players in the high-end luxury and electronic segments are also likely to benefit over the near-term, even as growth prospects have been attracting regional players into the country.

Implications

We are Overweight on Alothaim and Extra, due to their expansion plans. We are also overweight on Alhokair backed by its strong performance. On the other hand, we maintain our Neutral rating on Jarir as we believe that all the positives for the company have been priced in.

What do we think?


Jarir Neutral SAR168.6

Extra Overweight SAR123.5

Alothaim Overweight SAR96.7

Alhokair Overweight SAR124.1

Why do we think it?


Jarir 12.4% 14.8x

Extra 9.8% 11.7x

Alothaim 14.8% 5.7x

Alhokair 8.7% 8.9x


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Research Department Majed Alsolaim

Tel +966 2119471, [email protected]

Retail sector:

Fundamentals are good An emphasis on diversifying the economy away from oil coupled with massive government spending has supported the development of small sectors such as retail. A young and fast growing population and rising disposable income levels have also facilitated the retail sector to flourish. Cultural peculiarities, improving education levels and an attraction to modern lifestyle are changing the face of the retail industry, leading to a boom in the development of hypermarkets and supermarkets. However, mere store expansion will not be adequate enough going forward. As competition intensifies, retailers will have to innovate to stay ahead in the race. We believe retailers of high-end luxury clothing, footwear and electronic products will benefit the most over the near-term.

A strong Saudi economy is spending generously. The Saudi government has

been allocating a sizeable chunk of its oil export surpluses for social spending

(SAR 1.4tn over 2010-2014). We believe this massive social spending will lead to

higher disposable incomes in turn leading to higher spending, which will

gradually trickle down to various domestic sectors such as retail. The Saudi

government’s emphasis on diversifying the economy has also led to the

development of sectors like agriculture, retail, and real estate, which are growing

faster as compared to bellwether sectors such as petrochemicals and banking.

Demographic dividend is fueling retail growth. Saudi Arabia is one of the

largest in the GCC region, with a population of 28 million, of which more than

80% is below the age of 40. Coupled with rising disposable income levels,

demand for better quality and diversified products is growing, which bodes well

for retail companies. Further, a similar demographic profile across the GCC

region provides additional growth opportunities for established players.

Big-box formats to spur the next leg of growth. Big-box retail formats

(hypermarkets and supermarkets) are relatively under-penetrated in Saudi

Arabia. We believe these big-box stores will gain popularity in the Kingdom

going forward, on account of their cost effectiveness, convenience, and

entertainment value (other forms of public entertainment are not allowed in a

conservative society). We also expect the retail sector to spread beyond Riyadh

and Jeddah to other cities like Dammam, Khobar and the holy cities of Mecca

and Medina.

An attractive market will intensify competition. While the sector’s growth

prospects are rosy, there is intense competition not only from within but also

from established players in the neighboring GCC countries. As a result, Saudi

retailers need to innovate constantly by targeting select consumer groups,

offering differentiating services, and building a loyal brand base.

Stock conclusions. We expect more consolidation activities in future as the

market remains highly fragmented. Alhokair’s acquisition of NESK in August is

an indication of this trend. In grocery retail, we believe large players like Savola

(through Azizia Panda), Alothaim and Tamimi will continue to maintain their

market leading positions. In non-grocery retail, we believe companies like

Alhokair, Jarir and Extra will perform well over the near-term, first, on account

of their exposure to high-end brands and second, on account of their exposure to

fast moving electronic gadgets like smartphones, tablets, and gaming devices.

Saudi Retail Sector Retail –Industrial

8 January 2013


Retail is promising: Growing despite challenges

Small convenience stores will be gradually phased out The retail sector in Saudi Arabia, although bigger in size, is still evolving as compared to a country like the UAE, where it is much more developed due to the latter’s history of being a trading hub. Although big-box retail formats (supermarkets and hypermarkets) have sprung-up in Saudi Arabia, they remain relatively under-penetrated as compared to other global markets. Small convenience stores called “bakalas” currently dominate the retail sector with around 59% market share.

However, in Saudi Arabia, we believe the economic and cultural environment is conducive for large stores to thrive. Apart from the strong growth scenario as discussed earlier, large malls serve as the only source of entertainment in the form of shopping and dining, which is culturally acceptable in the Kingdom. Supermarkets and hypermarkets with in-house facilities such as restaurants and theme parks are ideal locations for the Saudi population to relax. We believe this cultural connection coupled with the healthy income of a young population, will trigger more footfalls for the big-box formats over the medium to long-term. We believe the entertainment value that these stores will provides will remain a major factor for online retail sales to develop slowly in the Kingdom. Online sales will pick up gradually for the convenience it provides to consumers, especially women, to receive goods from the comfort of their homes.

Growth to be more balanced, expect more competition Apart from the growth in Riyadh and Jeddah, the retail sector is also expected to expand to other cities in the country spreading growth more evenly across the country. The twin holy cities of Mecca and Medina, in particular, will witness considerable growth in retail space. Although both the holy cities witness an influx of nearly 10mn pilgrims every year, they have traditionally seen limited retail facilities as compared to Riyadh and Jeddah. This trend is set to change with large facilities under construction in both the holy cities.

Further, Saudi retail market’s attractiveness has attracted large regional retailers such as Majid Al Futtaim, Al Tayer, Landmark Group, Chalhoub Group and Alshaya. In June 2012, the EMKE Group rolled out its popular Lulu brand hypermarket in Riyadh, and plans to open more stores over the next couple of years. We believe western retailers who are facing dwindling sales in their domestic market due to weak economic conditions to also enter the Kingdom gradually. Although this will lead to intense competition, we believe international players will prefer to enter into partnerships with established Saudi companies such as Savola, Alhokair, and Alothaim, who can provide ease of scalability at low cost.

Saudi retailers will have to build relationships Saudi Arabian consumers are becoming more discerning because of the availability of information on comparable products on the internet. Besides this, the competition has intensified due to the presence of regional and international players. Hence, Saudi retailers will have to leverage their local presence and proximity, and will have to provide competitive (best prices, discounts, financing arrangements, extended warrantees, etc.) and value-added services (door delivery, free installation, after-sales support, etc.) to ensure customer satisfaction and brand loyalty. Customizing products and developing marketing campaigns to target specific groups would also facilitate long-term growth. For instance, Extra launched a month-long “Women Festival” in early 2012, where women were offered products specific to their needs at discounted prices.

Large stores are the only culturally accepted source of entertainment in the Kingdom

We expect retail market to spreads beyond Riyadh and Jeddah even as competition intensifies

Selling products will become a part of the entire customer relationship experience

Saudi Retail Sector Retail –Industrial

8 January 2013


Almost priced in for Jarir and upside potential for the rest

We like Extra’s business for its growth potential and its approach at selling electronic products (targeted sales campaigns and online sales) in the Kingdom. We feel the company will ride on the retail wave in the Kingdom as well as the GCC region at large and expect it to witness high revenue and profit growth in future. We have conservatively kept selling expenses at the same level in the forecast period, but we understand that this could reduce substantially in future, boosting margins. We have given an Overweight rating for Extra with a target price of SAR123.5.

Given the impressive results, following the successful acquisition of NESK, as well as the ongoing store openings locally and internationally, we have revised our forecasts for Alhokair and increased our revenue and profit forecasts. We have set a new target price of SAR124.1(old target: SAR91.4). Thus, we have upgraded our rating from Neutral to Overweight. Alhokair trades at a 2013 -2014 EV/EBITDA multiple of 8.9x and a PE ratio of 10.9x.

We believe Alothaim will continue to report decent results based on its same-store sales growth, expansion plans, and rising population. Given the 2012 dip in Alothaim’s share price (around 20%), we believe the company is attractive (price in 06/01/2012 is SAR82). Thus, we reiterate our Overweight rating on the stock but have revised our target price downward from SAR109.4 to SAR96.7, implying an upside potential of 18%. Alothaim trades at a 2013 EV/EBITDA multiple of 5.7x and a PE ratio of 10.8x.

We have raised our target price on Jarir to SAR168.6, given that we have marginally increased our earnings forecasts. Our new target price implies an upside potential of 5%. Therefore, we maintain our Neutral rating. Jarir currently trades at a 2013 EV/EBITDA multiple of 14.8x and a PE ratio of 15.5x.

Figure 41 Retail Sector

Company Rating

Target

Price

Market Cap.

(SARmn) PE Ratio EV/EBITDA

EPS

growth

Dividend

yield

(SAR) (SARmn) 2013E 2013E 2013E 2013E

Alhokair Overweight 124.1 7,350 10.9 8.9 34.6% 4.2%

Jarir Neutral 168.6 9,645 15.5 14.8 4.5% 5.5%

Alothaim Overweight 96.7 1,845 10.8 5.7 12.4% 4.3%

Extra Overweight 123.5 2,520 15.4 11.7 10.3% 2.4% Source: Company data, Al Rajhi Capital

Saudi Cement Sector Cement –Industrial Saudi Arabia

8 January 2013

January 18, 2010




Target mkt cap SAR43.9bn 13.1%over current Consensus mkt cap SAR39.6bn2.1% over current Current mkt cap SAR38.8bn as at 6/01/2013


Key themes

Robust cement demand on the back of large-scale government investments will ensure cement companies remain profitable in the coming years. Projects, worth US$700bn, are in the pipeline, which are expected to boost cement consumption across the Kingdom. We expect cement consumption to grow at a CAGR of 6% through 2015, with the lion’s share of the demand emanating from the central region followed by the western region.

Implications

We rate Yamama Cement Company and Arabian Cement Company as Overweight. We expect both these companies to deliver a solid operating and financial performance over the next couple of years on the back of rising demand. Al Jouf is a newly incorporated company and is passing through a high growth phase. We rate Al Jouf Overweight. We rate Saudi Cement Company as Neutral as it lacks expansion plans for future growth. We rate Qassim Cement Company as Neutral as the company lacks long-term growth.

What do we think?


Yamama Cement Overweight SAR61.0

Arabian Cement Overweight SAR65.0

Al Jouf Cement Overweight SAR19.0

Saudi Cement Neutral SAR98.0

Qassim Cement Neutral SAR84.0

Why do we think it?


Yamama Cement 9.1% 8.6x

Arabian Cement 9.5% 6.0x

Saudi Cement 0.29% 11.3x

Al Jouf Cement 18.8% 12.2x

Qassim Cement 0.18% 9.5x


0

40

80

120

Yamama Cement

Arabian Cement

Saudi Cement

Jouf Cement Qassim Cement

SAR



Research Department Mazhar Khan


Saudi Cement sector:

Outlook positive but concerns

persist With massive investments ongoing in the infrastructure space, the outlook for

the Saudi cement sector looks positive in the coming years. Cement companies

have benefited largely from cheap raw materials and fuel availability, making

them outstandingly profitable. However, there are some concerns on fuel

supply which acts as a major hurdle for the sector. We prefer Arabian Cement

for its proximity to high demand areas and Yamama Cement for its well

entrenched brand image. Further, Al Jouf Cement’s expansion plans and

improving operating rates look exciting, despite the export ban. On the other

hand, we are Neutral on Saudi Cement and Qassim Cement as capacity

constraints limit their future growth.

Government spending remains the key driver. The demand for Saudi cement

sector is benefiting from massive investments currently underway as Saudi

Arabia is strengthening its non-oil sector. The government has initiated plans to

execute projects, worth US$700bn, over the next 20 years. Nearly half of the

government investments are set aside for real estate and housing sectors.

Government spending remains the major catalyst for the cement sector over the

near-term.

Investment in real estate will provide opportunities. Over the past eight

years, Saudi Arabia’s population has grown at a CAGR of 3%, driven mainly by a

young population. This increase in population and expats coupled with declining

household size has enhanced the housing demand. High residential demand and

the government’s recent announcement of constructing 500k residential units

(allocation of SAR25obn) have brightened the outlook for cement companies.

Concerns on fuel supply still remain. Despite buoyant demand, the cement

sector is facing difficulty in ensuring smooth supply of fuel from the

Government. A majority of cement companies are undergoing expansion plans

in order to fulfill huge demand in the Kingdom, but uncertainty on fuel remains

a major hurdle for the sector and could impact future growth.

Attractive dividend yield. Cement companies in the kingdom have shown sable

expansion in their business and rewarded investors with robust dividend

policies. Based on our dividend forecasts for 2013, Saudi Cement’s dividend

yield stand at a highest at 7.6%, followed closely by Qassim Cement (7.5%) and

Yamama Cement (7.3%). Arabian Cement, on the other hand, provides a decent

dividend yield of 6.0%. These high dividend yields are again a motivation to

invest in cement companies.

Targets revised due to lower than expected profits. We have cut the target of

Arabian Cement from SAR78 to SAR65 after its subdued performance in H2

2012. We also remain Overweight on Yamama Cement (SAR61), and Al Jouf

Cement (SAR19), while we are Neutral on Qassim (SAR84) and Saudi Cement

(SAR98). With domestic sectors in focus, we see huge interest among local

investors for cement and thus see upside potential among selected companies.

Saudi Cement Sector Cement –Industrial

8 January 2013


Saudi Cement sector: Demand outlook positive

To grow at a CAGR of 6% until 2015 The mammoth infrastructure development across the Kingdom ensures continuous flow of cement demand. Overall, we expect demand to rise gradually over the next three years from around 51mn tons in 2012 to 60mn tons by 2015, at a CAGR of 6%. The announcement of 500,000 units should take concrete shape over the next couple of years – a move which will keep cement producers interested. Several other companies like Qassim Cement, Arabian Cement and Al Jouf Cement have firmed up plans to increase their capacity but they have not been able to secure approvals from Aramco as yet. Due to these prevailing uncertainties we believe supply will remain neck-to-neck with demand over the next three years at least, and though the growth in profitability might be muted, stable costs will ensure high margins and profitability will remain intact for the companies.

Figure 42 Major projects planned in KSA

Source: Govt. announcements, Al Rajhi Capital

Higher volumes sold post ramadan and Hajj Cement demand has picked up post Ramadan, as denoted by the monthly sales data of the companies. After a 39% M-o-M decline in volumes in August (to 2.5mn tones) owing to Ramadan, cement dispatches jumped 57%, in September and stabilizing thereafter. Traditionally Q4 has always been better compared to Q3, which coincides with summer and holiday season. We expect the trend to continue for H1 2013 as well. However there are some concerns as well which might affect the performance of the sector in 2013. With the government’s decision to fix the selling price to SAR240 a ton, the only way cement companies will show growth in their earnings is by increasing volumes sold or cutting their overall costs. The companies are already experiencing full capacity and cost cutting does not seem to work as the players are already in a matured stage of business. Therefore, we do not expect a major profitability growth for the companies to come in 2013.

One of the major concerns governing the cement sector for past one year has been the matter of fuel supply. Fuel supply has remained an uncertainty and has hindered the progress of existing companies with several capacity expansions getting delayed or awaiting approval. Another major hindrance is ceiling on cement prices at SAR240 a ton which, in our view will arrest profit growth for the companies. As a result, we have cut down our revenue estimates for all companies under our coverage and thus this cut has trickled down to the companies bottom-lines.

Solid demand for the next two years should keep the cement manufacturers interested in the domestic market

Fuel supply has been a major hindrance for capacity expansions

Saudi Cement Sector Cement –Industrial

8 January 2013


Figure 43 Cement dispatches M-o-M Figure 44 Inventory levels each month (2012 v/s 2011)

Title:

Source:


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in '000

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Jan Feb March April May June July August Sept. Oct. Nov.

2011 2012 Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Estimates revised down but still reiterate our ratings With a cap on cement prices and declining clinker inventory, we expect growth in dispatches to slow down. We have cut our estimates for companies located in central and eastern region as these companies might experience high competition and eating market share.

While we have cut our estimates and target price for Arabian Cement and Yamama Cement, we remain Overweight on them. We still remain Overweight on Al Jouf and positive about its second production line due to start in 2015. We remain Neutral on Saudi Cement, as the stock has already risen 31% this year and we see limited upside potential. We also remain Neutral on Qassim Cement due to limited capacity expansion plans and falling inventory levels.

Figure 45 Cement Sector


Market Cap.


(SAR) (SARmn) 2013E 2013E 2013E 2013E

Yamama Cement Overweight 61.0 9,882 10.3x 8.6x 13.0% 7.2%

Arabian Cement Overweight 65.0 4,060 7.8x 6.0x 34.1% 5.9%

Al Jouf Cement Overweight 19.0 2,145 15.4x 12.2x 25.2% 3.0%

Saudi Cement Neutral 98.0 15,032 13.6x 11.3x 5.1% 8.1%

Qassim Cement Neutral 84.0 7,290 11.6x 9.5x 8.7% 7.4% Source: Company data, Al Rajhi Capital

Ma’aden Mining – Industrial MAADEN AB: Saudi Arabia

8 January 2013

Rating OVERWEIGHT

Target price SAR37.00 (10.4% upside)

Current price SAR33.50

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 35

Key themes & implications

Capitalizing on Saudi Arabia’s vast mineral wealth, Ma’aden has forayed into two new businesses – phosphate (started in 2011-end), and aluminum (to begin by 2014-end). We believe the company will benefit from the cheap feedstock as well as government support to emerge as a success story over the long-term. We believe the company’s top-line will surge over SAR10bn by 2015, with the commencement of its new businesses.

Share information

Market cap (SAR/US$) 29.05bn / 7.74bn

52-week range 24.80 - 37.50

Daily avg volume (US$) 7.2mn

Shares outstanding 925.0mn

Free float (est) 33%

Performance 1M 3M 12M

Absolute -1.6% -6.3% 25.6%

Relative to index -0.1% 0% 16%

Major Shareholder:

Public Investment Fund 50.0%

GOSI 7.7%

Valuation

12/12E 12/13E 12/14E 12/15E

P/E (x) na 27.1 23.6 16.6

P/B (x) 1.6 1.5 1.5 1.4

EV/EBITDA (x) na 19.3 15.0 9.6

Dividend Yield 0.0% 0.0% 1.1% 1.8% Source: Company data, Al Rajhi Capital

Performance

90

94

99

103

108

112

116

121

125

23

25

27

29

31

33

35

37

39

Price Close Relative to TADAWUL FF (RHS)

-10

30

70

12/11 03/12 06/12 09/12

RS

I10

Source: Bloomberg, Company data, Al Rajhi Capital

Company summary

Ma’aden was established in 1997 by the Saudi Government to facilitate the development of Saudi Arabia’s non-petroleum minerals. PIF owns 50% stake in Ma’aden. In July 2008, Ma’aden was listed on the Tadawul. The company’s business was mainly gold exploration, which has now been diversified into phosphate (which started in Q4 2011) and aluminum businesses (expected to start by 2014-end) as well.

Ma’aden Aggressive growth strategy Ma’aden is the largest mining company in Saudi Arabia. The company,

traditionally a gold miner, has successfully commenced its phosphate

operations in 2012, while the aluminum business is slated to begin by 2014. The

demand outlook for phosphates appears positive, despite a slowdown in the

global economy. We believe Ma’aden offers long-term earnings accretion and

hence, we maintain Overweight rating with a target price of SAR37.

Business segments

Gold: Ma’aden is the largest gold miner in Saudi Arabia producing close to

150,000 ounces of gold in 2011. However, production has declined since it

peaked in 2005 (203,665 ounces), as drilling activities has been curtailed to

increase the life span of existing mines. Two mines – Ad Duwayhi and As

Suq – which are under construction, can add about 30% to Ma’aden’s

current production levels by 2014.

Phosphate: Ma’aden operates its phosphate business with a production

capacity of 3mn tons of diammonium phosphate (DAP), 1.1mn tons of

ammonia, 4.5mn tons of sulfuric acid and 1.4mn tons of phosphoric acid.

The company is building a 16mtpa phosphate project at Umm Wual to

commence in Q4 2016, at an estimated project cost of SAR26bn.

Aluminum: The aluminum project is set to launch by 2013 with a capacity of

740,000 tpa of aluminum and later add 1.8 mtpa of alumina by 2014.

Further, the company is also building a refinery and a new production line

with a capacity of 100,000 tpa of aluminum sheets.

Operational highlights Ma’aden commenced commercial production of DAP in 2012 diversifying away

from gold. This resulted in revenue to surge by around 7.2 times to SAR1.6bn in

Q3 2012 as compared to Q3 2011, while net income grew by 11.5 times to

SAR311mn over the same period. The company has recently awarded the FEED

and PMC contracts for development of the SAR26bn Umm Wual project.

Financial highlights Ma’aden posted 34.1% revenue CAGR for 2006-11 to reach SAR1.5bn, on the

back of higher gold prices and steady production. Net income grew at a CAGR of

5.4% over the same period to reach SAR413mn. That said, the two important

triggers for Ma’aden going ahead is reaching 100% capacity in DAP production

and aluminum ramp up.

Period End FY 2008 FY 2009 FY 2010 FY 2011 FY 2012E

Revenue (SAR mn) 460 634 707 1,514 4,640

Revenue Growth (%) 88.5% 37.9% 11.4% 114.3% 206.4%

Gross profit margin (%) 49.3% 51.7% 54.5% 68.2% 37.5%

EBITDA margin (%) 13.9% 28.8% 22.2% 55.5% 50.0%

Net profit margin (%) 43.2% 62.2% (1.3%) 27.3% 16.9%

EPS (SAR) 0.2 0.4 (0.01) 0.4 0.9

EPS growth (%) NA 98.7% NA NA 90.3%

ROE (%) 1.2% 2.4% (0.1%) 2.4% 4.4%

ROCE (%) (0.4%) 0.3% 0.2% 1.7% 2.9%

Capex/Sales (%) 1191.1% 1129.4% 736.3% 540.3% 211.2% Source: Company data, Al Rajhi Capital

Research Department Mazhar Khan,

Tel 966 1 2119248, [email protected]

Ma’aden Mining – Industrial 8 January 2013


Figure 46 Revenue and net margin

Figure 47 FCF and net debt/equity

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FCF Net Debt/Equity (RHS)

Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Figure 48 ROE and ROA Figure 49 Capex/sales and asset turnover

-1%

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Figure 50 P/E and EV/EBITDA Figure 51 Dividend payout and dividend yield

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Saudi Ceramic Construction & Materials – Industrial SCERCO AB: Saudi Arabia

8 January 2013

Rating NEUTRAL

Target price SAR86 (14.3% upside)




We expect pressure on margins to continue next year as we believe the high transportation cost coupled with increase in labour cost due to new regulations will affect the company’s margins. Furthermore, the company’s share price fell sharply as many major shareholders lowered their positions. We lowered our long-term assumptions, and accordingly lowered our target price. Our new target price offers limited upside potential, we therefore downgrade our rating to Neutral.

Share information


52-week range 72.75 - 107.7





Absolute 0% -10.4% -23.2%

Relative to index -4.1% -12.1% -32.5%

Major Shareholder:

General Social Insurance 15.9%

Saleh Abdulaziz Al Rajhi 6.8%

Valuation

12/11A 12/12A 12/13E 12/14E

P/E (x) 12.2 12.0 11.3 9.8

P/B (x) 2.5 2.2 2.0 1.8

EV/EBITDA (x) 9.4 9.7 8.8 8.0


Performance

64

69

74

79

84

89

94

99

104

109

69

79

89

99

109


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Saudi Ceramic Company is one of the oldest and

leading ceramics producers in the Middle East. The

company manufactures and markets ceramic

products such as ceramic tiles, sanitary ware

(bathroom products) and road markers; in addition,

the company manufactures water heaters.

Saudi Ceramic: outlook not so bright Last year was one of the toughest years for Saudi Ceramic Company. Margins for its largest segment (tiles) dropped by almost of 5%. Lack of electricity for its new tile plant in addition to disturbance of raw and finished goods due to transportation difficulties were the main reasons for that. Furthermore, red-bricks new plant (planned to commence in 2012) was overdue due to continued delays to obtain necessary license to build the plant. The disappointing results accompanied by selling pressure from major shareholders led the stock price decline of 30% since early April 2012. Looking ahead for 2013, we expect revenues to grow by 13% as capacity and utilization rates for tiles and sanitary ware (bathroom products) improve. That said, we expect pressure from transportation cost to continue. We also expect higher labour cost on the back of the Ministry of Labour’s new regulations. As a result, we have lowered our target price for Saudi Ceramic to SAR86. Our new target price offers limited upside potential of 14%. We therefore downgrade our rating to Neutral.

Business segments: Tiles: The tile segment is the biggest segment for Saudi Ceramics. It

represents 66% from revenues. Saudi Ceramics is the leader in this segment with a market share of around 23%.

Sanitary ware: Sanitary ware segment’s contribution is about 12% and we expect it to grow as major capacity additions should take place in the middle of this year. This market is dominated by imports (90%). SCC’s market share is around 7% by our estimates.

Heaters: Water heaters segment is the second largest contributor for Saudi Ceramic’s top line, but the least in profits. Further, the company has been facing difficulty maintaining its operating margins due to large variations in products mix and fluctuating raw material cost.

Expansion plans The current capacities for tile, sanitary ware and heater plants are 52mn sqm per annum, 3.1mn pieces per annum and 1.5mn pieces per annum respectively. The utilisation rates are almost 100% for all the plants. In 2013, the tile capacity should increase to reach 63mn sqm per annum. Also the capacity for sanitary ware should increase to reach 3.6mn pieces per annum.

Financial highlights Thanks to the strong growth in tile and sanitary ware segments, Saudi Ceramic posted revenue CAGR of 13% over the last four years. Net income, however, lagged this revenues growth as it only grew by 7%. Looking ahead, we expect the company to report decent top line. However, we believe pressure on margins will continue to affect the company’s bottom line.

Period End (SAR) 12/10A 12/11A 12/12A 12/13E 12/14E

Revenue (mn) 1,080 1,221 1,445 1,673 1,867

Revenue Growth 12.7% 13.1% 18.3% 15.7% 11.6%

Gross profit margin 36.3% 36.5% 32.1% 32.0% 32.4%

EBITDA margin 29.4% 29.8% 25.6% 23.7% 24.0%

Net profit margin 20.3% 19.0% 16.3% 15.0% 15.4%

EPS 5.85 6.19 6.29 6.69 7.68

EPS Growth 11.2% 5.8% 1.6% 6.4% 14.9%

ROE 23.6% 21.6% 19.3% 18.5% 19.4%

ROCE 15.4% 15.2% 13.0% 13.6% 14.5%

Capex/Sales 16.6% 22.6% 20.6% 16.0% 15.0% Source: Company data, Al Rajhi Capital


Tel 966 1 211 9426, [email protected]

Saudi Ceramic Construction & Materials – Industrial 8 January 2013


Figure 52 Saudi Ceramics is dominating the tiles market Figure 53 Sanitary ware market is dominated by imports


Figure 54 Gross margin dropped sharply in 2012 Figure 55 Heaters gross margin also dropped in 2012

Title:

Source:


33.0%

34.0%

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Figure 56 We expect EBITDA margin to further decline in 2013 Figure 57 Saudi & UAE are the biggest consumers per capita

Title:

Source:


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10.0%

15.0%

20.0%

25.0%

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EBITDA EBITDA%

Title:

Source:


-

5.0

10.0

15.0

20.0

25.0

Chin

a

Bra

zil

Ind

ia

Iran

Eg

yp

t

US

A

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i Ara

bia

Mexic

o

Sp

ain

Italy

Russia

Turk

ey

Fra

nce

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land

UA

E

Mala

ysia

Mo

rocco

Arg

entina

Iraq

UK

Po

rtug

al

Alg

eria

Syria

Consumption per capita (mn sqm)

Source: Company data, Al Rajhi Capital Source: Infotile, Al Rajhi Capital

Astra Industrial Group Diversified Operations – Industrial ASTRA AB: Saudi Arabia

8 January 2013

Rating OVERWEIGHT





Industrial companies such as Astra are concentrating on the domestic market as well as the MENA region. Consequently, we believe Astra’s performance will be closely linked with the macroeconomic developments and growth in the MENA region.

Share information


52-week range 33.60 - 44.60





Absolute 3.9% -6.2% 19.2%

Relative to index 3.8% -1.4% 9.8%

Major Shareholder:

Arab Supply & Trading Co. 43.8%

Mohammad N. S. Al Otaibi 8.0%

Valuation

12/11A 12/12E 12/13E 12/14E

P/E (x) 11.9 11.4 8.6 7.2

P/B (x) 1.6 1.5 1.4 1.2

EV/EBITDA (x) 13.8 13.3 8.6 6.3


Performance

97

101

104

108

111

115

118

122

32

34

36

38

40

42

44

46


-10

30

70

12/11 03/12 06/12 09/12

RS

I10


Company summary

Astra is a holding company – backed by its parent Astra Group – the second largest private conglomerate in Saudi Arabia. Astra draws strength from its diverse business interests encompassing pharma, polymers, agrochemicals and steel. Established in 1988 as a limited liability company, Astra was later converted into a closed joint stock company in 2008. This was followed by an increase in share capital, after which Astra was listed on the TASI.

Astra Industrial Group Awaiting Al Anmaa’s launch Astra Industrial Group (Astra) has diverse interests in different sectors such as pharmaceuticals, chemicals and steel. The company is one of the leaders in the pharma and specialty chemicals businesses in Saudi Arabia, which should ensure healthy cash flows and stable growth. Astra’s investment in Al Anmaa (the Iraqi steel business) was delayed due to technical difficulties. However, we believe once it kicks off, it will boost the company’s top-line as well as result in healthy margins on the back of cheap feedstock availability in Iraq. We reiterate our Overweight rating on the stock with a revised target price of SAR46.2.

Business segments Pharma business: Astra’s pharma business – Tabuk Pharmaceuticals – is

one of the largest vendors of branded generic drugs in Saudi Arabia. Being

the largest segment, it contributed 39% and 54% of the group’s revenue and

net profit, respectively, in 2011.

Specialty chemicals business: Astra’s polymer business comprising Astra

Polymers Compounding Company and Astra Industrial Complex Company,

corners more than 70% market share in Saudi Arabia and the UAE. This

segment was the second largest contributor in 2011, representing 38% and

34% of the group’s revenue and net profit, respectively.

Steel business: This business consists of the International Building

Systems Factory producing prefabricated steel structures and Al Tanmiya

Steel, which owns the soon-to-be-launched Al Anmaa steel plant in Iraq.

The steel segment represented only 23% and 12% of the group’s revenue

and net profit, respectively, in 2011. However, we believe the launch of Al

Anmaa will make it the company’s largest segment in future.

Operational highlights Astra had announced testing some of the components of the Al Anmaa plant, following its connection to the Iraqi National Grid in July 2012. However, there have been no major updates since then. We believe any announcement of Al Anmaa’s launch will provide a boost to Astra.

Financial highlights Astra posted revenue CAGR of 12.9% over the last four years to reach SAR1.4bn in 2011, thanks to the robust growth in its pharma and chemicals businesses. Net income grew at a CAGR of 4.3% over the same period to reach SAR248mn.

Period End FY 2008 FY 2009 FY 2010 FY 2011 FY 2012E

Revenue (SAR mn) 991 1,042 1,120 1,382 1,621

Revenue Growth (%) 16.6% 5.1% 7.6% 23.3% 17.3%


EBITDA margin (%) 20.3% 19.6% 18.4% 15.6% 15.2%

Net profit margin (%) 18.7% 19.6% 23.1% 18.0% 16.2%

EPS (SAR) 2.5 2.8 3.5 3.3 3.5

EPS growth (%) (5.6%) 9.8% 26.9% (4.2%) 5.5%

ROE (%) 12.9% 13.1% 15.4% 13.9% 13.6%

ROCE (%) 12.4% 10.5% 8.7% 9.1% 9.1%

Capex/Sales (%) 2.9% 7.6% 26.2% 16.4% 13.1% Source: Company data, Al Rajhi Capital

Research Department ARC Research Team,


Astra Industrial Group Mining – Industrial 8 January 2013




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Al-Hassan G.I. Shaker Co Wholesale – Industrial SHAKER AB: Saudi Arabia

8 January 2013

Rating OVERWEIGHT





We believe the AC market will continue to tread the growth path. Shaker occupies a formidable position in the Saudi AC market - we estimate that it enjoys the highest market share in split AC space and a decent market share in window ACs. We believe Shaker’s strategy of manufacturing LG air-conditioners in Saudi will open a major channel for government projects and will drive the company’s growth. We believe growth in profitability coupled with decent dividends will support the share price.

Share information


52-week range 58.50 - 76.00





Absolute -4.7% -5.4% 9.5%

Relative to index -8.8% -7.1% 0.2%

Major Shareholder:

Ibrahim Abu Nayan and Brothers Co. 12.2%

Abdulgader Almuhaideb and Children Co. 12.2%

Valuation

12/11A 12/12E 12/13E 12/14E

P/E (x) 12.8 11.5 9.8 8.5

P/B (x) 4.8 4.3 3.7 3.1

EV/EBITDA (x) 12.8 10.9 9.7 8.4


Performance

90

97

104

111

118

125

56

61

66

71

76

81


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Shaker is one of the biggest manufacturers/ distributers of ACs in the Kingdom. It has a JV with LG through which it manufactures air-conditioners under the famous brand name of LG. Further, Shaker exclusively distributes the respected Chinese Midea AC as well as McQuay Air Conditioning. Moreover, the company has bagged many exclusive distribution rights of many home appliance products such as refrigerators, washing machines and kitchen appliances.

Al Hasan Shaker share price lagging Following our initial coverage on Shaker on May 2012, the company reported solid set of results. Revenues and profits grew for the first 9 month of 2012 by 10% and 12% respectively. Shaker benefitted strongly from the huge government expenditure especially in the Educational sector. For 2013, the Saudi Arabian government announce spending budget of SAR810bn. Further, educational sector has its biggest share of it with around 25% (up from 21% last year). We strongly believe Shaker is well positioned to benefit from these huge expenditures as it has been the case before. Shaker is trading on a forward PE of 9.8 and a 2013 EV/EBITDA of 9.7. We further note that the share price did not react with the company’s good results as the share price only rose by 6.5% in 2012. We maintain our target price for the company and maintain our overweight rating. Our target price offers 26.5% from current prices.

Market is still booming: We believe the boom in the Saudi construction market will play a crucial role in stimulating the air-conditioning demand. By our estimates, the size of the Saudi air-conditioning market is currently above SAR4.4bn and is expected to grow further capitalizing on the growth in the building and construction industry from both private and government projects. In addition, while Split and Windows AC are still dominating the market, Chillers and Packaged AC are currently outperforming in terms of growth.

Biggest government budget should ensure growth: The government of Saudi Arabia announced its budget with spending reaching SAR810bn. Education and health care are among the biggest beneficiary sectors. We strongly believe Shaker will benefit from these huge expansions as the company’s products were largely used in previous projects. Additionally, the government huge housing projects should also act as a catalyst for the company to boost its sales although the horizon for these projects might take a while.

Strong growth in LG sales: For the first nine months of 2012, LG segment sales grew strongly by 9%, although slightly lower than our estimates. We expect the growth to continue next year as we expect the company to report revenue of SAR1.5bn from LG segment, up by 10% from 2012. We further note, LG is the largest segment for Shaker with a contribution of around 82% of revenues.

Financial highlights Thanks to the strong growth in LG products, Shaker posted revenue CAGR of 20% over the last four years. Similarly, EBITDA and net income also grew strongly by a CAGR of 20% and 15% respectively. Looking ahead, we expect the company to report decent top and bottom line growth in 2013. We also believe dividend will increase in 2013 to reach SAR4.5, implying a 6.8% dividend yield.

Period End (SAR) 12/10A 12/11A 12/12E 12/13E 12/14E

Revenue (mn) 1,156 1,566 1,737 1,981 2,122

Revenue Growth 15.8% 35.5% 10.9% 14.0% 7.1%

Gross profit margin 33.5% 29.8% 30.1% 30.3% 31.3%

EBITDA margin 17.0% 15.3% 16.3% 15.8% 16.9%

Net profit margin 12.6% 11.5% 11.6% 11.9% 12.8%

EPS 4.15 5.15 5.75 6.72 7.75

EPS Growth 9.6% 24.1% 11.7% 16.9% 15.3%

ROE 36.0% 39.9% 39.4% 40.5% 40.1%

ROCE 35.3% 34.8% 36.3% 35.5% 34.7%

Capex/Sales 8.3% 4.6% 2.8% 3.0% 4.0% Source: Company data, Al Rajhi Capital


Tel 966 1 211 9426, [email protected]

Al-Hassan G.I. Shaker Co Wholesale – Industrial 8 January 2013


Figure 64 Saudi AC market (SAR mn) Figure 65 Saudi AC market break down (by value)

Title:

Source:


9.0%

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0

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Window Split Packaged Chillers CAGR % - rhs

Source: Company prospectus, Al Rajhi Capital estimates Source: Company prospectus, Al Rajhi Capital estimates

Figure 66 Shaker revenue and profit growth Figure 67 Shaker gross profit forecast (SAR mn)

Title:

Source:


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79

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Figure 68 Split AC market size & Shaker’s market share Figure 69 Windows AC market size & Shaker’s market share

Title:

Source:


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Source: Company prospectus, Al Rajhi Capital estimates Source: Company prospectus, Al Rajhi Capital estimates

Al-Hassan G.I. Shaker Co Wholesale – Industrial 8 January 2013


Interesting Companies section:

We are targeting a number of companies, which seem attractive both in terms of supply demand dynamics and business model. These are relatively smaller companies mainly focused on domestic demand like Al Mouwasat (leader in health care), Al Drees (largest fuel retailer), Halwani (an established brand in the food sector), Al Tayyar (the largest travel company in the Kingdom) and Yanbu Cement (one of the largest domestic cement companies). We will closely monitor these stocks in 2013 for coverage.

Figure 70 Interesting companies for 2013

Company Market Cap. (SARmn) PE Ratio (x) EV/EBITDA (x) EPS growth (%) Dividend yield (%)

(SARmn) 2012 2012 2012 2012

Al Drees 1,089.0 11.1 7.3 7.1 5.4

Al Mouwasat 2,662.5 15.3 11.7 24.9 3.8

Al Tayyar 5,240.0 N/A N/A 23.3 N/A

Esatern Province Cement 4,988.0 12.7 9.5 6.1 6.1

Halwani Bros 1,251.4 15.6 8.4 0.2 4.6

National Shipping Co. 6,300.0 12.6 13.9 -30.6 4.2

SADAFCO 2,096.3 12.5 8.6 15.2 5.0

Takween 1,374.0 N/A N/A N/A N/A

Yanbu Cement 8,820.0 12.6 10.3 23.0 4.4 Source: Bloomberg, Al Rajhi Capital

Al Drees Petroleum Retail Sector ALDREES AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR36.30



The fuel retailing sector in the Kingdom is highly fragmented as there are a lot of small and single fuel stations. Thus, service quality and customer loyalty become the keys to succeed in this market. Al Drees is the market leader with about 10% market share. We believe the company can grow at a healthy pace going forward, considering its healthy balance sheet and track record of aggressive expansion.

Share information


52-week range 32.60 - 43.75





Absolute 2.3% -6.5% 1.8%

Relative to index -1.8% -8.2% -7.5%

Major Shareholder:

Hamad Mohammed Saad Al Drees 6.7%

Valuation

Period End FY 2008 FY 2009 FY 2010 FY 2011

P/E (x) 20.6 15.8 12.7 11.8

P/B (x) 3.4 3.1 2.8 2.5

EV/EBITDA (x) 12.7 9.9 8.6 12.0

Dividend Yield 4.2% 4.2% 5.6% 5.6%

| Source: Zawya, Al Rajhi Capital

Performance

79

84

89

94

99

104

109

114

31

33

35

37

39

41

43

45


-10

30

70

12/11 03/12 06/12 09/12

RS

I10

| Source: Bloomberg, Company data, Al Rajhi Capital

Company summary

Al Drees is the largest fuel retailing company in Saudi Arabia. The company claims to be the first of its kind in fuel retailing providing various value-added services at its stations. Apart from fuel retailing, the company has aggressively expanded into transportation services in the last few years.

Al Drees Petroleum Market leader in fuel retailing Al Drees is one of the largest fuel retailing companies in Saudi Arabia

operating 456 fuel stations across the country. The company, though being a

market leader holds only 10% share in a highly fragmented market. Al Drees

claims to be first of its kind in fuel retailing in the Kingdom, providing various

value-added services at its stations. Apart from fuel retailing, the company has

aggressively expanded into transportation services in the last few years.

Thanks to its strong balance sheet, Al Drees is well placed to capture future

growth as well as to continue paying healthy dividends.

Segment highlights

Fuel retailing: The fuel retailing is the largest segment for Al Drees, which

accounted for 91% of the total revenue in 2011. Along with fuel, the

company’s fuel stations provide various services such as car-wash, tire

servicing & alignment, accessories, food, ATMs, and rent-a-car. The

company has maintained a healthy growth rate of 10% in the number of

stations over the last few years. Further, the company has come up with

innovative ideas like prepaid fuel cards and electronic fueling system to

increase customer loyalty. The company sold 3,252mn liters of fuel in 2011,

up 14.4% y-o-y and added 35 new fuel stations. This segment reported

revenue of SAR1.55bn, up 19% y-o-y in 2011.

Transportation services: Al Drees provides transportation services for

industrial companies in Saudi Arabia and neighbouring countries through

its fleet of 2,669 trucks and trailer cruises. The company transports goods to

other GCC countries and to countries like Yemen, Jordan, Lebanon, Syria,

Yemen, Turkey and Egypt. This division reported revenue of SAR188mn, up

7.5% y-o-y in 2011.

Financial highlights

Al Drees posted 16.6% revenue CAGR over 2006-2011 to reach SAR1.7bn. This

was mainly due to the expansion in the number of fuel stations and

transportation fleet across the Kingdom. The company’s net income grew at a

CAGR of 17.3% over the same period to SAR92mn. The company’s net profit

margin was 5.4% in 2011, and has been largely flat over the last five years.

Al Drees posted revenue of SAR1.4bn for 9M 2012, up 11.1% y-o-y, while the

company’s net profit improved to SAR72mn, up 4.7% y-o-y.

Period End FY 2008 FY 2009 FY 2010 FY 2011 9M 2012

Revenue (SAR mn) 1,134 1,310 1,480 1,694 1,389

Revenue Growth (%) 30.9% 15.4% 13.0% 14.4% 11.1%*


EBITDA margin (%) 8.2% 9.0% 9.5% 6.1% 8.8%


EPS (SAR) 1.8 2.3 2.9 3.1 2.4

EPS growth (%) 4.9% 30.3% 24.9% 7.1% -12.4%*

ROE (%) 16.7% 19.9% 21.9% 21.2% 21.1%**

ROCE (%) 16.9% 18.5% 20.1% 21.4% 19.6%**

Capex/Sales (%) 12.7% 5.0% 5.0% 3.2% 6.0%**Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

Source: Zawya, Al Rajhi Capital

AlDrees Petroleum Oil and Gas – Industrial 8 January 2013




0%

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Source: Zawya, Al Rajhi Capital, * annualized Source: Zawya, Al Rajhi Capital, * annualized


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Al Mouwasat Medical Services Co Retail – Industrial MOUWASAT AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price

SAR53.25



Saudi Arabia’s health sector is expected to witness steady growth over the medium-term due to an ever growing population, rising life expectancy, growing per capita income and changing lifestyles leading to obesity and other health issues. With rising healthcare spending and awareness, the future holds great promise for the companies like Mouwasat.

Share information


52-week range 44.00 - 54.75





Absolute 4.9% -1.4% 17%

Relative to index 0.8% -3.1% 7.7%

Major Shareholder:

Mohammed Sultan Hammad Subaie 17.5%

Nasser Sultan Fahad Subaie 17.5%

Valuation


P/E (x) 27.4 24.9 22.5 18.0

P/B (x) 6.5 5.6 4.7 4.0

EV/EBITDA (x) 20.1 18.1 13.7 10.7


Performance

86

90

95

99

103

107

112

116

42

44

46

48

50

52

54

56


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Established in 1974-75, Mouwasat is one of the largest healthcare and hospital chain in Saudi Arabia. The company has hospitals in Dammam, Medinah, Jubail and Qatif, which are equipped with modern facilities, and have tie-ups with major hospitals in the US and Europe. The company also runs dispensaries, specialty clinics and pharmacies across the Kingdom. Mouwasat is currently building a hospital in Riyadh, which will be operational in mid-2013.

Al Mouwasat Medical Services Leader in healthcare space Mouwasat is one of the largest healthcare and hospital chains in the Kingdom.

Besides the four large hospitals in Dammam, Madinah, Jubail and Qatif, the

company also runs a number of dispensaries, specialized centers and

pharmacies across the country. The company’s client list includes large

companies such as Saudi Aramco and SABIC. Mouwasat has aggressive

expansion plans, to enlarge its existing facilities in Dammam and Jubail, as

well as build new hospitals in Riyadh and Dhahran.

Operational highlights

Established in 1974 and followed next year with the launch of Mouwasat

Dispensary in Dammam, the company established its first hospital in 1984. The

Dammam hospital currently operates 250 beds along with 100 outpatient

clinics. The hospital manages a unit for cardiac surgeries as well. The hospitals

in Medinah and Jubail were started in 2000 and 2004, which have 120 beds (30

clinics) and 104 beds (36 clinics), respectively. The Qatif hospital was

commenced in 2006 with 120 beds and 32 outpatient clinics. All these hospitals

are equipped with modern facilities and have built relationships with major

hospitals in the US and Europe. Apart from these hospitals, Mouwasat runs

dispensaries in Dammam and Al-Ahsa along with specialized centers for skin

care, cosmetic surgeries and weight loss surgeries. The company also owns 10

pharmacies in various cities like Dammam, Jubail and Medinah.

Expansion program

Mouwasat has embarked on an aggressive expansion plan to increase its market

share by 5% over the next five years. The company plans to shift its Dammam

hospital to a new larger facility nearby. Further, the company will also expand its

inpatient facility in Jubail. Additionally, Mouwasat is building a new hospital in

Riyadh with 175 beds and 60 clinics, to be launched by mid-2013. The company

has also begun the design work on constructing a new 150 bed hospital and 50

clinics in Dhahran and is conducting feasibility studies for hospitals in Jeddah

and Bahrain.


Mouwasat posted 14.3% revenue CAGR over the last three years to reach

SAR678mn in 2011, while its net income rose by 15.1% CAGR to SAR148mn.


Revenue (SAR mn) 455 518 587 678 583

Revenue Growth (%) 13.4% 13.9% 13.5% 15.5% 19.4%*


EBITDA margin (%) 30.8% 30.1% 35.0% 37.7% 29.4%


EPS (SAR) 1.9 2.1 2.4 3.0 2.6

EPS growth (%) 9.4% 10.3% 10.8% 24.9% -43.0%*

ROE (%) 23.7% 22.3% 20.7% 22.1% 23.8%**

ROCE (%) 21.6% 20.6% 23.0% 26.6% 22.7%**

Capex/Sales (%) 14.8% 14.7% 14.0% 12.7% 21.5%** Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

Al Mouwasat Medical Services Co Retail – Industrial 8 January 2013




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Al Tayyar Travel Group Travel Services – Industrial ALTAYYAR AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR65.50



The travel & tourism sector in Saudi Arabia is expanding rapidly thanks to rising per capita income as well as a young population. Apart from favorable demographics, the Kingdom’s religious importance is also a major factor. Going forward, we expect this sector to continue growing at a healthy pace. Al Tayyar, being the market leader, is expected to benefit from the sector’s growth as well as from its aggressive expansion programs.

Share information


52-week range 57.00 - 69.50





Absolute 3.6% 1.9% NA

Relative to index -0.5% 0.2% NA

Major Shareholder:

Pilot company for investment and real estate development

23.3%

Nasser Akil Abdullah 18.5%

Valuation


P/E (x) 18.8 13.2 10.6 8.6

P/B (x) 6.6 4.9 4.5 4.5

EV/EBITDA (x) 10.4 8.1 6.3 5.5

Dividend Yield 0.0% 0.0% 0.0% 0.0% Source: Zawya, Al Rajhi Capital

Performance

98

101

104

107

111

114

117

120

123

55

57

59

61

63

65

67

69

71


-10

30

70

06/12 07/12 09/12 11/12

RS

I10


Company summary

Al Tayyar is the largest travel & tourism services provider in the Kingdom. The company provides a wide array of services including reservation, ticketing, and customized tours for all major regional and international destinations. Al Tayyar also provides special tourism services such as incentive trips, Hajj & Umrah programs, medical & educational programs, conferences and events, and chartered flights.

Al Tayyar Travelling the right path Al Tayyar is the largest travel & tourism services provider in the Kingdom. The

company issues an average of 3 mn tickets per annum, and has more than

3,200 government and corporate clients. Besides air ticketing, the company

also provides cargo services, which currently accounts for a small portion of its

revenue stream. Over the last 30 years, Al Tayyar has created a strong brand

name for itself in the fragmented regional travel & tourism market. We believe

such a brand presence will help the company to tap the rapidly growing travel

& tourism industry in the region.

Segment highlights

Air ticketing, travel & tours (ATT): Al Tayyar provides a wide array of

services such as reservation, ticketing as well as customized tours for all

major domestic, regional and international destinations. The company also

provides special services such as organizing incentive trips, Hajj & Umrah

programs, medical & educational programs, conferences and events, and

chartered flights. Al Tayyar provides its services mainly in Saudi Arabia,

Sudan, Egypt, Lebanon, Malaysia and the UAE.

Cargo and others: Al Tayyar has two small divisions, which provide cargo

and transportation services to its customers. These services are provided in

alliance with various airlines in the region including BMI, Etihad Airways,

Egypt Air and Oman Air. These divisions reported revenue of SAR126mn for

9M 2012, which remained largely flat y-o-y.


Al Tayyar posted 19.5% revenue CAGR over the last five years to reach SAR4.6bn

in 2011. This was mainly due to its aggressive expansion across the Kingdom

coupled with a healthy market growth. Over the same period, the company’s net

income grew at a CAGR of 34.3% to SAR612mn. The company’s net profit

margin improved from 7.4% in 2006 to 14.7% in 9M 2012.

Al Tayyar reported revenue of SAR4.1bn in 9M 2012, up 21.1% y-o-y. The

company’s net margin stood at 14.7% for this period.


Revenue (SAR mn) 2,771 3,069 3,824 4,607 4,061

Revenue Growth (%) 27.1% 10.7% 24.6% 20.5% 21.1%*


EBITDA margin (%) 11.0% 14.3% 16.2% 16.2% 16.0%


EPS (SAR) 3.5 4.9 6.2 7.6 7.5

EPS growth (%) 60.1% 41.7% 25.4% 23.3% 19.9%*

ROE (%) 35.2% 37.2% 42.8% 52.3% 50.9%**

ROCE (%) 25.7% 32.4% 48.6% 59.3% 52.8%**

Capex/Sales (%) (0.1%) 1.5% (5.3%) 1.6% 2.9%** Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

Al Tayyar Travel Group Travel Services – Industrial 8 January 2013




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0

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FY 2008 FY 2009 FY 2010 FY 2011 9M 2012

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FY 2008 FY 2009 FY 2010 FY 2011 9M 2012



Eastern Province Cement Cement – Industrial EACCO AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR58.00



Rising cement demand in the Saudi market, led by large-scale government investments, will ensure the profitability of the Saudi cement companies in the medium-term. Projects, worth US$700bn, are currently underway in the country, which will boost cement consumption in a big way. Since EPCC is located in the eastern region, it is expected to benefit not only from the domestic cement demand but also from the export market.

Share information


52-week range 51.00 - 70.50





Absolute 8.4% 12.6% 3.6%

Relative to index 4.3% 10.9% -5.7%

Major Shareholder:

PPA 10.6%

Fund Investments 10.0%

Valuation


P/E (x) 11.5 14.2 14.5 13.7

P/B (x) 2.7 2.5 2.4 2.3

EV/EBITDA (x) 7.3 8.7 10.9 8.3

Dividend Yield 10.3% 5.2% 5.2% 6.0%

| Source: Company data, Al Rajhi Capital

Performance

78

85

92

99

106

113

49

54

59

64

69

74


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Eastern Province Cement Company (EPCC) is one of the leading cement companies in KSA. Established in 1985, the company has a cement and clinker production capacity of 3.5 mn tons each at Al Khursaniya. EPCC enjoys a strategic location advantage, which provides access to export markets. EPCC is one of the few cement companies in the Kingdom, which has continued to export despite the recent government ban.

Eastern Province Cement Limited expansion program Established in 1985, Eastern Province Cement Company (EPCC) is one of the

largest cement companies located in the eastern region of Saudi Arabia. The

company’s total capacity is 3.5 mtpa of cement and 3.5mtpa of clinker. EPCC

offers various types of cement products such as ordinary portland cement,

sulphate resistant cement and precast concrete. Since the company is

strategically located in the eastern province, it benefits from its proximity to

Bahrain, and thus exports a small portion of its production.


EPCC commenced commercial production in 1985 with a production capacity of

1.4 mn tons of clinker and 862,605 tons of cement. The company’s production

capacity reached 3.5 mn tons of cement and clinker respectively on the back of

capacity ramp-ups in 1994 and 2001. EPCC has consistently managed to achieve

a high utilization rate. The company’s plant also holds an ISO 9001:2000

certificate, and has won many government awards like the “Ideal Plant” Award.

Expansion plans

EPCC has begun construction of a cement plant at Al Khursaniyah, with a

production capacity of 600 tons per day. The company has allocated a

capex of US$45mn. The phase I of the construction work is expected to

be completed in December 2012 (source: Zawya).

In another development, EPCC acquired a 50% stake in Briansa Saudi Concrete

Precast from its Spanish business partner in December 2012. The company paid

SAR55mn for this acquisition.


EPCC reported a meagre 1% revenue CAGR over 2006-2011 to reach SAR813mn.

The weak revenue growth was on account of limited capacity expansion and a

cap on cement prices. EPCC’s net income declined at a CAGR of 4% over the

same period to SAR364mn. The company’s net margin declined from 57.7% in

2006 to 44.8% in 2011. For 9M 2012, EPCC reported a revenue growth of 5% y-

o-y to SAR626mn and a net profit of SAR291mn (+12.7% y-o-y).


Revenue (SAR mn) 799 779 819 813 626

Revenue Growth (%) (13.5%) (2.5%) 5.3% (0.8%) 5.0%*


EBITDA margin (%) 64.2% 57.6% 43.0% 56.9% 58.7%


EPS (SAR) 5.0 4.1 4.0 4.2 3.4

EPS growth (%) (19.8%) (19.2%) (2.2%) 6.1% 12.7%*

ROE (%) 23.2% 17.3% 16.2% 16.9% 17.9%**

ROCE (%) 21.3% 17.5% 16.4% 17.5% 17.9%**

Capex/Sales (%) 9.8% 26.8% 9.6% 10.0% 9.4%**

Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

Eastern Province Cement Cement – Industrial 8 January 2013




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ROE* ROA*

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Halwani Bros Co Food-Diversified – Industrial HB AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR43.80



Started in 1952, Halwani produces a wide range of food products. Halwani is an ISO 9001 certified company and has also received the HACCP certification in 2008. The company is in the process of setting up a new manufacturing unit in the Jeddah Industrial Complex, which is expected to be completed in 2013.

Share information


52-week range 34.60 - 64.00





Absolute 1.6% 3.8% -21.8%

Relative to index -2.5% 2.1% -31.1%

Major Shareholder:

Dalla Industrial Investment Co 55.5%

Mohd Abdul Hameed Halwani 6.9%

Valuation


P/E (x) 21.4 29.3 15.6 15.5

P/B (x) 2.6 2.7 2.5 2.3

EV/EBITDA (x) 15.8 12.4 10.1 8.9


Performance

47

56

64

73

81

90

98

107

31

36

41

46

51

56

61

66


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Halwani Bros Co. is a leading food manufacturer in Saudi Arabia. The company was established in 1952, and went public in June 2008. The company has manufacturing facilities in Saudi Arabia and Egypt. Egypt accounts for about 41% of the company’s revenues, whereas Saudi Arabia accounts for about 47% of its revenues. Halwani is a leader in the processed meat market in Egypt, as well as the sugar confectionary market in Saudi Arabia.

Halwani Bros Co. Key player in the food industry Incorporated in 1952 as a halawa manufacturer, Halwani Bros today is a key

player in the food industry with a wide range of products under its belt. The

company is a leader in the processed meat market in Egypt as well as in the

sugar confectionary market in Saudi Arabia. Halwani is an ISO 9001 certified

company since 2002. The company received the HACCP certification in 2008,

gaining recognition for its food safety managing system. Halwani is currently

in the process of setting up a new manufacturing unit in the Jeddah Industrial

Complex, which is expected to be completed in 2013.

Operational performance Halwani owns and operates a number of manufacturing facilities in Saudi Arabia

and Egypt. The company produces an assortment of food products including

halawa, tahina, jams, sweets, juices, cheese, ice cream, and dairy products. It

also produces condiments such as mustard, ketchup, vinegar, dressing,

sugarcane syrup, ground red pepper in oil, and olives.

Halwani has the capacity to produce 50 tons of tahina and 65 tons of halawa

daily. In January 2012, the company commissioned a new plant in Egypt, which

raised its meat processing capacity by 50% in the country. The company

continues to be the market leader in processed meat in Egypt (60% market

share), as well as in sugar confectionary (23% market share) in Saudi Arabia.

Future expansion programs Halwani is in the process of setting up a new manufacturing unit in the Jeddah

Industrial Complex, which is expected to complete in 2013. Halwani is also

capitalizing on the rising trend of ready to-eat packaged food in Egypt and Saudi

Arabia, with capacity expansions set for 2013.

Financial highlights Halwani derives 47% of its revenues from the Saudi market and about 41% from

Egypt and about 10% from the international markets. Halwani’s revenue has

grown at a CAGR of about 10.2% over 2007-2011 to SAR814mn. The company’s

EBITDA margin has improved from 11% to 15.7% over this period. Also, net

profit grew at a CAGR 24.7% over the same period to reach SAR81mn in 2011,

implying an EPS of SAR2.82. The company reported a gross profit margin of

about 32.5% from its sales in Saudi Arabia, while it delivered a gross profit

margin of only 10.5% from its sales in Egypt during 2011.


Revenue (SAR mn) 664 617 732 814 667

Revenue Growth (%) 20.3% (7.0%) 18.6% 11.2% 8.3%*


EBITDA margin (%) 10.8% 14.5% 15.4% 15.7% 16.1%


EPS (SAR) 2.0 1.5 2.8 2.8 2.2

EPS growth (%) 75.2% (27.0%) 88.6% 0.2% -4.9%*

ROE (%) 12.1% 9.2% 15.8% 15.0% 15.2%**

ROCE (%) 10.7% 15.2% 21.2% 19.7% 21.5%**


Halwani Bros Co Food-Diversified – Industrial 8 January 2013




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FY 2008 FY 2009 FY 2010 FY 2011 9M 2012

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ROE* ROA*

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National Shipping Company Transport – Industrial NSCSA AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR20.00



Being the largest shipping company in the Kingdom, National Shipping Company (Bahri) derives majority of its demand from the oil and petrochemical exports. We believe this demand will steadily increase in future as Saudi Arabia’s oil and petrochemical production is set to grow. However, the oversupplied tanker market and weak global economic situation pose near-term concerns.

Share information


52-week range 12.30 - 20.25





Absolute 12.7% 13.6% 63.9%

Relative to index 8.6% 11.9% 54.6%

Major Shareholder:


Valuation


P/E (x) 8.4 17.1 15.2 21.9

P/B (x) 1.2 1.3 1.2 1.2

EV/EBITDA (x) 7.6 16.1 12.9 16.9


Performance

9299106113120127134141148155162

11

13

15

17

19

21


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

The National Shipping Company (Bahri) is the largest shipping company in the Kingdom, established in Riyadh by a royal decree in 1979. The company owns, charters and operates vessels to transport crude oil, LPG, petrochemicals and general cargo. Bahri, along with its affiliates, covers more than 150 ports in the GCC countries, Africa, Europe, North and Latin America, Asia, and Australia.

National Shipping Company Largest shipper in the Kingdom National Shipping Company (Bahri) is the biggest shipping company in the

Kingdom and one of the world’s largest with a capacity of 846,000 dead-

weight tons (DWT). Bahri links the Kingdom’s trade with the rest of the world

by transporting oil & gas, chemicals, dry bulk and general cargo. The company

has a large transportation network stretching across the globe. With oil and

petrochemical production in Saudi Arabia set to grow over the near-term, we

expect the company to benefit from rising exports from the Kingdom.

Segment highlights Oil & gas: Oil & gas transportation is Bahri’s largest segment. The

company’s fleet of 17 tankers makes it the sixth-largest operator of very

large crude carriers (VLCCs) in the world. Through its affiliate, Petredec, the

company operates 77 vessels for gas transportation with a combined

capacity of 250,000 cubic meters. This segment contributed 62% of Bahri’s

total revenue, with an operating margin of 11.7% in 2011.

Chemicals: Bahri’s chemical transportation is carried out through National

Chemical Carrier (NCC), which is 80% owned by Bahri and 20% by SABIC.

NCC currently owns and operates 22 tankers. The company currently has

three new tankers under construction to join the fleet over 2012-2013. The

chemicals segment earned the highest margin for Bahri in 2011 (operating

margin of 41.9%) and contributed 18% of its total revenue.

General cargo: Bahri has four multi-utility ships, which operate in the

Arabian Gulf-Indian sub-continent, Red Sea, Mediterranean, US-Canada,

and US-Gulf trade routes. Currently, six more ships under this category are

under construction with Hyundai, which are expected to be delivered over

2012-2014. Further, Bahri is foraying into the dry bulk segment and has

ordered for five bulk carriers. The general cargo segment accounted for 20%

of total revenue in 2011 with an operating margin of 11%.

Financial highlights Bahri posted 3.8% revenue CAGR over 2006-2011 to reach SAR2bn. The

company’s revenue growth was weak mainly due to low freight rates, despite

substantial expansion in fleet. Net income declined 8.2% CAGR during this

period to SAR288mn.

Bahri reported revenues of SAR1.9bn in 9M 2012, up 32% y-o-y, while the

company’s net profit jumped to SAR427mn, up 145%.


Revenue (SAR mn) 2,595 1,672 2,050 1,991 1,880

Revenue Growth (%) 52.3% (35.6%) 22.6% (2.9%) 32.0%*


EBITDA margin (%) 45.5% 37.3% 34.2% 30.6% 36.8%


EPS (SAR) 2.4 1.2 1.3 0.9 1.4

EPS growth (%) 77.5% (50.8%) 12.3% (30.6%) 147.3%*

ROE (%) 14.7% 7.4% 8.2% 5.7% 10.7%**

ROCE (%) 9.5% 2.9% 3.7% 2.4% 5.3%**

Capex/Sales (%) 81.2% 67.1% (21.1%) 71.1% 13.3%** Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

National Shipping Company Transport – Industrial 8 January 2013




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SAR mn


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ROE* ROA*

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Saudi Dairy & Foodstuff Co Food-Diversified – Industrial SADAFCO AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR64.50



We expect the dairy sector to post healthy growth over the medium-term on the back of ever-increasing population, increasing per capita income and growing health awareness. The per capita Saudi milk consumption is currently only a fraction of that in the developed markets, which indicates a large market opportunity. Since SADAFCO is the market leader in dairy products across the Kingdom, it is expected to be a major beneficiary of this growth.

Share information


52-week range 48.30 - 66.50





Absolute 5.3% 5.3% 38.4%


Major Shareholder:

United Industries Company 39.0%

Tolerant trading Co. Ltd, 11.6%

Valuation


P/E (x) 35.9 74.0 10.3 16.2

P/B (x) 4.1 4.2 3.1 2.9

EV/EBITDA (x) 17.4 16.4 9.8 10.7

Dividend Yield 2.3% 2.3% 2.3% 4.7%

| Source: Zawya, Al Rajhi Capital

Performance

89

98

107

116

125

134

46

51

56

61

66

71


-10

30

70

01/12 04/12 07/12 10/12

RS

I10


Company summary

Established in 1976, SADAFCO has been a leader in the UHT (Long Life) milk market in Saudi Arabia, accounting for more than half of the long-life milk market, and one-third of the total drinking milk market. The company also manufactures tomato paste, ice cream, snacks and drinks. SADAFCO has recently expanded its product range with new launches in the breakfast cream, cheese, butter, powdered milk, and frozen french-fries categories.

SADAFCO Rapidly growing dairy company Saudia Dairy and Foodstuff Company (SADAFCO) is the largest dairy company,

and the market leader in long-life white milk (UHT) and tomato paste in Saudi

Arabia. The company produces more than 50% of UHT milk and accounts for

more than one-third of the total drinking milk market. Besides milk, SADAFCO

boasts of a wide range of products such as tomato paste, beverages, cheeses,

snacks and ice creams. Given the favourable demographics and rising per capita

income, we believe the company is well placed for steady future growth over the

medium-term.

Operational highlights SADAFCO markets its products – long-life milk, cheese, desserts, butter, ice

cream, tomato paste, snacks and bottled water – under its flagship brand

Saudia. The company benefits immensely from Saudia’s brand presence and

premium pricing. SADAFCO’s other established brands include Movenpick,

Crispy, Chillz and Majestique. Milk accounted for 65% of the company’s revenue

and 79% of its total earnings in 2011, while tomato paste constituted 8% of its

revenue and profits. SADAFCO’s manufacturing facilities are located in Jeddah

and Dammam in Saudi Arabia. The milk and ice cream factories in Jeddah are

running at their optimum utilization levels. The company moved its Jeddah

factory, which is used to produce tomato paste and snacks, to Dammam in 2012,

where it can expand its capacity due to larger space. Saudi Arabia is the key

market for the company, with the country contributing 87% of its revenue in

2011. Besides Saudi Arabia, SADAFCO has established distribution outlets in the

UAE, Qatar, Bahrain and Jordan through its subsidiaries.

Expansion plans SADAFCO will develop a regional distribution center in Riyadh on a company-

owned land to meet the rising consumer demand. The company has approved a

capex of SAR65mn for the centre, which is expected to commence operations by

2014.

Financial highlights SADAFCO posted 10.2% revenue CAGR over the last four years to reach

SAR1.1bn in 2011, on the back of increased market share of its milk segment as

well as entry into various other food categories. The company’s net income rose

by 40.7% CAGR over the same period to SAR130mn.


Revenue (SAR mn) 878 922 1,023 1,134 797

Revenue Growth (%) 14.3% 5.0% 10.9% 10.9% 16.8%*


EBITDA margin (%) 11.7% 11.1% 15.9% 14.6% 13.4%


EPS (SAR) 1.8 0.9 6.3 4.0 2.4

EPS growth (%) 76.8% (51.6%) 617.8% (36.3%) 15.5%*

ROE (%) 11.4% 5.6% 30.5% 17.7% 13.6%**

ROCE (%) 11.6% 12.5% 19.0% 17.2% 22.1%**

Capex/Sales (%) (1.9%) 2.6% 3.9% 6.0% 3.5%** Source: Zawya, Al Rajhi Capital, * on 6M 2011, ** on annualized basis; Note: SADAFCO’s year end is March

Saudi Dairy & Foodstuff Co Food-Diversified – Industrial 8 January 2013




0%

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0

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SAR mn


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ROE* ROA*

0.0

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0.6

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Takween Advanced Industries Chemicals – Industrial TAKWEEN AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR45.80



The plastic packaging market is one of the fastest growing markets in Saudi Arabia due to rising demand for packaged food. Transparent bottles and light-weight packaging materials with long shelf-life are the preferred market choices. Takween, by virtue of being one of the largest companies in the plastic packaging sector with premium offerings, is expected to benefit from the rising demand.

Share information


52-week range 38.50 - 65.00



Free float (est) 4%


Absolute -14% -16% NA

Relative to index -18.1% -17.7% NA

Major Shareholder:

Othman Holding Company 50.8%

Abdulrahman Saleh Al Rajhi & Partners 13.9%

Valuation


P/E (x) NA 61.5 19.5 18.0

P/B (x) NA 10.8 4.0 3.5

EV/EBITDA (x) NA 11.8 12.7 12.3

Dividend Yield NA 0.0% 0.0% 0.0%

| Source: Company data, Al Rajhi Capital

Performance

63

69

74

80

86

92

97

103

35

40

45

50

55

60

65

70


-10

30

70

02/12 05/12 07/12 10/12

RS

I10


Company summary

Established in 1993 for production of plastic packaging for dairy products and beverages, Takween has expanded its offerings by acquiring Ultrapak in 2006 and SAAF in 2010 to foray into the PET preform and nonwoven fabrics market. The company’s products are used in various sectors such as dairy, food and beverage industries, while the nonwoven fabrics are sold to manufacturers of medical and hygiene products such as surgical gowns, drapes and baby diapers.

Takween A major player in packaging industry Takween is a manufacturer of plastic packaging products such as plastic sheets,

cups, PET bottles and medical apparels in Saudi Arabia, which are used in

diverse industries like food (dairy products, beverages, juices, etc) retail and

healthcare. Although Saudi Arabia remains the company’s major market, it also

serves clients in the Middle East. Takween, which was listed on the Tadawul

Stock Exchange in January 2012, has witnessed more than 100% rise in its stock

price since its listing.

Segment highlights

Plastic packaging: The plastic packaging segment offers various products

such as polystyrene sheets, disposable cups, food packaging containers, and

HDPE bottles to be used for packaging milk, juices and beverages. The

company recently added PET bottles to its portfolio for juice and dairy

products. Plastic packaging was the fastest growing segment for Takween in

2011 (+24% revenue growth y-o-y) and accounted for 33.5% revenue, with

an operating margin of 12.1%.

PET preforms: PET preforms are polymers in a vial shape that are sold to

bottlers to produce bottles of different shapes and characteristics. Takween

acquired Ultrapak in 2006, which offers a wide range of preforms. It is the

only company in the Middle East, which produces hot fill preforms required

for the juice industry for longer shelf-life. This segment accounted for 25.1%

of the company’s revenue in 2011, with an operating margin of 10.9%.

Non-woven fabrics: Takween, through its acquisition of Advanced Fabrics

(SAAF) in 2010, offers a wide range of spunbond, meltblown and composite

(SMS) fabrics. The main applications of these fabrics include sanitary wears

such as baby diapers, protective clothing for medical & industrial purposes,

and masks & filters. The Nonwoven fabric segment is the largest and the

most profitable segment for the company. This segment contributed 41.4%

of Takween’s revenue in 2011, with an operating margin of 14.8%.

Financial highlights Takween posted a strong 129.4% revenue CAGR over the last two years to reach

SAR694mn in 2011. This was mainly due to acquisition of SAAF and rising

demand for plastic packaging in the Kingdom. The company’s net income rose

by 84.6% CAGR to SAR76mn. It posted revenues of SAR509mn for 9M 2012,

down 3.4% y-o-y, while the company’s net profit remained flat at SAR53mn.


Revenue (SAR mn) NA 132 609 694 509

Revenue Growth (%) NA NA 361.7% 14.0% -3.4%*

Gross profit margin (%) NA 50.1% 27.6% 24.7% 18.4%

EBITDA margin (%) NA 40.8% 21.1% 19.1% 18.8%

Net profit margin (%) NA 17.0% 11.6% 11.0% 10.5%

EPS (SAR) NA 0.7 2.3 2.5 1.8

EPS growth (%) NA NA 215.0% 8.2% 0.0%*

ROE (%) NA 17.6% 20.5% 19.6% 17.7%**

ROCE (%) NA 12.1% 19.1% 19.9% 17.8%**

Capex/Sales (%) NA 19.0% 4.9% 10.6% 5.8%** Source: Zawya, Al Rajhi Capital, * on 9M 2011, ** on annualized basis

Takween Advanced Industries Chemicals – Industrial 8 January 2013




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Yanbu Cement Cement – Industrial YNCCO AB: Saudi Arabia

8 January 2013

Rating NA

Target price NA

Current

price SAR84.00



Rising cement demand in the Saudi market, led by large-scale government investments, will ensure profitability of the cement companies over the medium-term. Projects, worth US$700bn, are currently underway in the country, which will boost cement consumption. By virtue of being located in the western region, YCC is well placed to benefit from the growing cement demand over the medium-term.

Share information


52-week range 61.00 - 84.00





Absolute 7.3% 12.4% 24.4%


Major Shareholder:

GOSI 11.8%


Valuation


P/E (x) 15.8 18.3 20.5 16.7

P/B (x) 3.7 3.7 3.5 3.1

EV/EBITDA (x) 14.8 17.8 21.8 14.9


Performance

89

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30

70

12/11 03/12 06/12 09/12

RS

I10


Company summary

Yanbu Cement Company is one of the leading cement companies in KSA. YCC was established in 1976, primarily to manufacture and sell cement in the western region. The company enjoys the location advantage of being close to major demand centers as well as to the export markets. Thus, the company has been able to achieve higher gross and net profit margins.

Yanbu Cement Recovery story since 2010 Yanbu Cement Company (YCC) is one of the largest cement manufacturers in

the Kingdom. YCC’s total capacity currently stands at 7mtpa of clinker. The

company offers various types of cement such as ordinary portland cement,

sulphate resistant cement, portland pozzolan cement and masonary cement.

YCC is located in the North Western region and is geographically well placed

between the major demand centers in the country such as Jeddah, Makkah and

Madinah. The company also benefits from its proximity to raw material

sources. Additionally, YCC’s proximity to the Red Sea offers an option to export

cement to countries like Egypt, if the government lifts the export ban.


YCC was established in 1977 with an initial production capacity of 3,000 tons of

clinker per day and was subsequently raised to 4,000 tons per day. In 1998, the

company further expanded its capacity by another 7,000 tons per day by setting

up a new cement plant adjacent to the old factory at Yanbu, thus having a total

installed capacity of 11,000 tons of clinker per day. YCC commenced production

from its Line 5 expansion project, with a capacity of 10,000 tons per day clinker

in mid-2011. This brought YCC’s total capacity to 7 mn tons clinker per annum,

enabling it to become one of the largest cement producers in the Kingdom.


YCC’s revenues deteriorated during 2008-2010 owing to a ban on exports as

well as intense competition in the region. Since early 2011, the government’s

push towards new infrastructure and housing projects led to an increase in

cement demand benefiting companies like YCC. Cement sales volume jumped by

16.1% y-o-y in 2011. In line with its volume growth, YCC’s revenues increased by

26.4% y-o-y. Despite the top line weakness during 2008-2010, the company has

maintained its net margin at a healthy level of 47-51%.

YCC posted 6.1% revenue CAGR over the last five years to reach SAR1.1bn in

2011. The company’s net income rose by only 0.7% CAGR during the same

period to SAR529mn. For 9M 2012, YCC reported a revenue growth of 32.9% y-

o-y to SAR1.1bn, with a net profit of SAR517mn (+37.6% y-o-y).


Revenue (SAR mn) 1,094 943 895 1,132 1,080

Revenue Growth (%) (6.6%) (13.7%) (5.1%) 26.4% 32.9%*


EBITDA margin (%) 51.6% 51.9% 49.5% 57.0% 62.9%


EPS (SAR) 5.3 4.6 4.1 5.0 4.9

EPS growth (%) (15.3%) (13.9%) (10.7%) 23.0% 37.4%*

ROE (%) 23.8% 20.0% 17.0% 18.6% 22.2%**

ROCE (%) 23.7% 19.1% 12.9% 13.5% 18.3%**


Yanbu Cement Cement – Industrial 8 January 2013




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Disclaimer and additional disclosures for Equity Research

Disclaimer

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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 15% 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 5% below the current share price and 15% above the current share price on a 6-9 month time horizon.

"Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.

2. Definitions

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Research Team

Mazhar Khan Analyst – Telecoms/ Cement Tel : +9661 211 9248 [email protected]

Md. Rahmatullah Khan Economic Analyst Tel : +9661 211 9319 [email protected]

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