KMEFIC Research The petrochemical sector in Saudi Arabia by xcu79604

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 KMEFIC Research                  
                                  
 The petrochemical sector in Saudi Arabia:
                                  
 An understanding of the industry  and review of its
    Expected rate of return on  equity in GCC
 prospects, including investment opinions on 2 key
 sector players: SABIC and SAFCO.                    July 2009
                                  
                                                              




                                 KMEFIC Research Department
                   ‫ﺷﺮآﺔ اﻟﻜﻮﻳﺖ واﻟﺸﺮق اﻷوﺳﻂ ﻟﻺﺳﺘﺜﻤﺎراﻟﻤﺎﻟﻲ ش.م.ك.م‬
Kuwait and Middle East Financial Investment Company K.S.C.C
INTRODUCTION........................................................................................................................................................ 3 
HIGHLIGHTS ............................................................................................................................................................. 4 
PETROCHEMICAL INDEX VS. TADAWUL ......................................................................................................... 5 
PORTER’S 5 FORCES ON THE PETROCHEMICAL INDUSTRY .................................................................... 6 
THREAT OF NEW ENTRANTS ................................................................................................................................... 7 
SUPPLIERS POWER .................................................................................................................................................... 7 
THREAT OF SUBSTITUTES ....................................................................................................................................... 7 
BUYERS POWER ......................................................................................................................................................... 7 
BUSINESS RIVALRY .................................................................................................................................................. 7 
BASIC PRODUCTION FLOW .................................................................................................................................. 9 
PETROCHEMICAL ...................................................................................................................................................... 9 
FERTILIZER ................................................................................................................................................................. 9 
MACROECONOMIC OVERVIEW ........................................................................................................................ 11 
GROSS DOMESTIC PRODUCT & KEY GROWTH INDICATORS ........................................................................ 11 
OIL VULNERABILITY .............................................................................................................................................. 13 
THE GLOBAL FINANCIAL CRISIS.......................................................................................................................... 13 
OIL & GAS OUTLOOK ........................................................................................................................................... 15 
MARKET DYNAMICS ............................................................................................................................................... 15 
OIL OUTLOOK ........................................................................................................................................................... 16 
GAS OUTLOOK.......................................................................................................................................................... 17 
FEEDSTOCK COST ADVANTAGE ...................................................................................................................... 18 
CAPACITY AND INFRASTRUCTURES............................................................................................................... 19 
SAUDI BASIC INDUSTRIES CORPORATION (SABIC).................................................................................... 21 
COMPANY & BUSINESS OVERVIEW .................................................................................................................... 22 
FINANCIAL PERFORMANCE & VALUATION ...................................................................................................... 22 
PROJECTS, STRATEGY ............................................................................................................................................ 23 
SAUDI ARABIAN FERTILIZER COMPANY (SAFCO) ..................................................................................... 24 
COMPANY & BUSINESS OVERVIEW .................................................................................................................... 25 
FINANCIAL PERFORMANCE & VALUATION ...................................................................................................... 25 
PROJECTS, STRATEGY ............................................................................................................................................ 26 
APPENDIXES ............................................................................................................................................................ 27 
SABIC BALANCE SHEETS ....................................................................................................................................... 27 
SABIC INCOME STATEMENTS ............................................................................................................................... 27 
SABIC CASH FLOW STATEMENTS ........................................................................................................................ 28 
SAFCO BALANCE SHEETS ...................................................................................................................................... 28 
SAFCO INCOME STATEMENTS .............................................................................................................................. 29 
SAFCO CASH FLOW STATEMENTS ....................................................................................................................... 29 
    July 2009                                                                   KMEFIC Research
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INTRODUCTION 
As the world tries to anticipate and looks out for potential signs of recovery, attention is
unavoidably drawn to basic commodities such as oil and gas whose availability and prices partly
shape the world growth. This has become even more relevant to petrochemical companies in the
Middle East whose competitive advantage lies in the feedstock of their activities and whose
profitability is therefore highly conditioned to oil and gas prices. Among GCC countries, one in
particular, thanks to its abundant natural resources, has gained prominence on the global
petrochemical scene. In less than a few decades, Saudi Arabia has become the largest producer of
petrochemical products in the Middle East, accounting for about 6% of the global ethylene
capacity in 2007 or 7 million tonnes, up 600% from 20041. Indeed, the gulf country which
possesses around 20% of the world’s proven oil reserves (or 266.7 billion barrels2) and enjoys the
fourth largest natural gas reserves in the world (258.4 trillion cubic feet2) in 2008 (year end) has
long provided its successful home companies with an undisputable and sustainable strategic
competitive advantage. Basic chemical products prices being highly correlated with oil and gas
prices, the petrochemical industry in Saudi Arabia has displayed strong growth and high
profitability since 2000. But this golden growth unexpectedly stopped in H2 2008 as oil prices
fell dramatically from a record USD147 per barrel in July 2009 to about USD40 per barrel at
2008 year end, with most petrochemical prices going down subsequently amid worldwide
equities meltdown. Though oil prices recovered higher levels in H1 2009, the global crisis has
posed challenging questions regarding the expected growth and profitability of the petrochemical
sector. This report provides an overall understanding of the petrochemical industry in Saudi
Arabia, addresses some key factors to its prospects and presents valuation of two leading Saudi
companies in their industry: Saudi Basic Industries Corporation, SABIC (petrochemicals) and
Saudi Arabian Fertilizer Company, SAFCO (fertilizers).




1
    Energy International Administration, 2008
2
    Oil & Gas Journal, 2009


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HIGHLIGHTS 
          Saudi Arabia’s economy to be impacted by the crisis, but GDP’s growth expected to
          remain positive in FY09 thanks to government stimulus package including a USD400
          billion investments and development program announced by Saudi’s officials during the
          G20 meetings last April.
          Absolute feedstock competitive advantage on the back of rising oil & gas prices trend
          (gas prices had already risen 20% in April MoM while oil prices gained almost 50% from
          late December FY08 to end of June FY09) to considerably help major petrochemical
          companies weather the financial crisis successfully.
          Global ethylene capacity is expected to reach 173 millions of tonnes in 2015, up 47%
          from 2005 with Middle East growing almost 6 times as fast as the world average.
          Saudi Arabia ethylene capacity to reach 18.2 m tpa in 2013, more than double from that of
          2008 levels, taking the KSA’s global ethylene capacity production market share to circa
          12%, with Jubail and Yanbu the focus of petrochemicals developments over the medium-
          term.
          Middle East to become the only net ethylene derivatives exporter in 2015, growing its
          trade flow by circa 226% from 2005, with the Asia Pacific region growing its net trade
          flow (imports) to about 21 millions of tones in 2015 up 130% from 2005 driven by
          China’s strong anticipated growth.
          Petrochemical market in Saudi Arabia expected to recover in H2 FY09, but magnitude
          and timing to depend on global recovery.



 Table 1 - Valuation highlights


              LT FV       CMP (30-June-09)   Upside/(Downside)                                  Comments

                                                                 * Strong feedstock advantage

  SABIC        70.58                 62.75               12%     * Petrochemical demand expected to recover from H1 FY09 but the
                                                                   magnitude of recovery will depend on global recovery
                                                                 * Financials heavily impacted by bad performing US subsidiary (former GE
                                                                    plastics) in H1 FY09 (SAR1.2 billion impairment charge booked)

                                                                 * Successful business model: high margin thanks to absolute cost
 SAFCO       140.21                  113.5               24%      advantage - very good cash conversion cycle - low CAPEX requirements –
                                                                  low leverage
                                                                 * Fertilizer demand strong in the long run - less sensitive to economic
                                                                   cycle (high correlation with agricultural needs)
Source: KMEFIC Research




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PETROCHEMICAL INDEX vs. TADAWUL 

 Petrochemical Index Vs. Tadawul Index (& Sector shares trading volume)
 12,000                                                                                                      120
                                                      Volume (Million Shares)
 10,000                                               Tadawul Index (TASI)                                   100

                                                      Petrochemical Index (Rebased)
  8,000                                                                                                      80




                                                                                                                   Million shares
  6,000                                                                                                      60


  4,000                                                                                                      40


  2,000                                                                                                      20


      0                                                                                                      0
          J-08   J-08     A-08   S-08   O-08   N-08   D-08     J-09     F-09     M-09   A-09   M-09   J-09

 Source: KMEFIC Research, TASI




The petrochemical sector is of key importance in the Saudi Stock Exchange. It is, indeed,
composed of 13 companies, which altogether made around USD50 billion in revenue and USD7
billion in net earnings in FY08. As of 30 June 2009 the petrochemical sector accounted for more
than 30% of the total market capitalization on the Saudi Stock Exchange, tied with the banking
and financial services sector.
The Tadawul was not spared by the global financial crisis. From end July 2008 to end November
2008 the Tadawul Index, TASI, dropped by circa 50% to low record 4,424 driven down by the
petrochemical index on concerns about plummeting oil prices, which over the same period
decreased by almost 70%. As a matter of fact, Q4 FY08 was one of the worst quarters to date
with companies fourth quarter’s earnings literally plunging. Petrochemical heavyweight SABIC
Q4 FY08 net earnings decreased by 96% QoQ to SAR0.3 billion, when fertilizer giant SAFCO
Q4 FY08 net earnings dropped to SAR0.5 billion, down 71% QoQ and 28% YoY. However,
from end November 2008 on until end March 2009, the TASI remained relatively stable overall,
with the petrochemical index moving similarly to the TASI. End of March marked an apparent
recovery for the TASI with the index going overall upward by 19% from 31 March 2009 to 30
June 2009, boosted by the petrochemical index, which over the same period recovered twice as
fast (+ 41%) on the back of a USD400 billion stimulus plan (investment and development
program for the government and the monetary sectors for the next five years) adopted and
disclosed by the Kingdom during the G20 summits in early April. Likewise, sector volumes
traded in April and May respectively increased by 18% and 44%.




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        09
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                                                                                       y          Report
                                                                                  Equity Analysis R

   TER’S 5 FOR
PORT                   E PETR
             RCES ON THE        EMICAL
                            ROCHE    L 
   USTRY
INDU   Y 
         to                      ess                   nsity) of the P
In order t assess the attractivene (or competitive inten                       cal
                                                                     Petrochemic Industry, we
relied on Michael Por             es       rk.
                     rter’s 5 force framewor




           Porter's 5 forces on the Petroch
Figure 2 - P               s                            ry
                                          hemical Industr




                                                        Suppliers
                                                         power:
                                                         HIGH




                         Th
                          hreat of                                             Threat of
                           new
                           n                                                             :
                                                                              substitutes:
                           trants:
                         ent                                                    LOW
                          L
                          LOW
                                                       trochemical
                                                     Pet
                                                       Industry




                                        iness
                                     Busi                                 s
                                                                     Buyers
                                        alry:
                                     riva                            power:
                                      LOOW                           LOW




Source: M. Port KMEFIC Research
              ter,




         ochemical sec in Saudi Arabia
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THREAT OF NEW ENTRANTS  
We considered the threat of new entrants to be low because barriers to entry include high capital
cost, economies of scale, distribution channels, proprietary technology, environmental regulation
and geopolitical factors. Furthermore, high levels of industry expertise are needed to be
competitive at all levels in the petrochemical field. In addition, fixed cost levels are high for
upstream, downstream, and chemical products. It is therefore very hard for new players to enter
this market.


SUPPLIERS POWER 
Suppliers bargaining power can be considered as high since the Organization of Petroleum
Exporting Countries (OPEC) controls around 50% of the world’s supply of oil and owns about
two thirds of the world oil reserves (EIA, 2007). This consequently gives this organization a
strong influence over oil prices. OPEC’s influence on oil prices can thus be considered as a threat
for companies which use oil & gas as feedstock as it can exert a considerable degree of
uncertainty over the company’s chemical production costs. In fact, as it will be elaborated further
in the section entitled “The feedstock cost advantage”, abundant natural resources in the Middle
East countries in general (and Saudi Arabia in particular) has given the region a strategic position
for key players in the petrochemical industry.


THREAT OF SUBSTITUTES 
The threat of substitutes and new processes in the short term (next 20 years) can be regarded as
low. The petrochemical industry produces materials such as plastics, synthetic rubbers, fibers and
solvents which are indispensable to our everyday life products (in the form of packaging,
clothes, computers, furniture, etc). Often these products generate energy savings during their use
which by far outweigh the energy used to produce them.
In fact, the petrochemical industry accounts for 30% of total global industrial final energy use and
about 8% of world oil consumption (EIA, 2007). Besides, more than half of the energy used by
the chemical industry is stored as feedstock in its product. Because of the high share of feedstock
energy, the process energy efficiency using substitutes is quite limited, at least in the short term.
Biomass feedstock could help to reduce CO2 emission and fossil fuel independence, but most
experts argue this would be an option in the longer term, as its efficiency levels have yet to be
proven competitive to oil and gas resources.
 
 
BUYERS POWER 
Buyers can either be industrials or consumers. In both cases their power is quite limited due to the
nature (necessity) of the petrochemical products. However, the continuous search for price
reductions and higher margins has led more and more companies to settle their operations in
Middle East countries to benefit from low cost feedstock.


BUSINESS RIVALRY 
Due to tight regulations and high capital requirements, rivalry has been relatively low even while

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the industry has been growing quite fast (in average 2 or 3% more than countries Gross Domestic
Products). Indeed, the biggest share of the market is still split between a few major companies
which have extended their operations from upstream to downstream and petrochemical activities.
The petrochemical sector in Saudi Stock Exchange is composed of 13 listed companies, SABIC
and SAFCO respectively amounting for 89% and 2.5% of market shares in 2008 (revenues for all
public petrochemical companies).




 

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BASIC PRODUCTION FLOW 
The below sections lay out the different materials and processes involved in the production of
petrochemical products and fertilizers and bring out the importance and location of oil and gas
feedstock’s within the production chain.

PETROCHEMICAL 
Figure 3 (page 10) shows the global framework of the petrochemical industry from inputs
(feedstock) to derivatives and end markets.

 
FERTILIZER 
Figure 4 displays in more details the production process of ammonia, one of the most important
basic chemical serving as a core component in the production of nitrogen fertilizer and urea. Urea
is the most popular and commonly used nitrogen fertilizer worldwide.




  Figure 4 - Ammonia & Urea Production Process




     Natural Gas          Desulphurizer




                             Primary                     Carbon                                          Urea      Separation &
       Steam
                            Reformer                     Dioxide                                       Synthesis    Purification



                           Secondary        CO Shift      CO2       CO & CO2       Synthesis and                   Urea Solution
         Air                                                                                                                         Prilling
                            Reformer        Converter    Absorber   Methanator   Refrigerant Section               Concentration

                                                                                      Ammonia
                                                                                                                    Granulation    Urea Storage
                                                                                    Storage Tank


                                                                                                                                     Shipping



    Source: KMEFIC Research, SAFCO




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                                           Figure 3 -Summary of major petrochemicals production chain


                                           Inputs                                           Basic Building Blocks               Intermediates                    Derivatives            End Markets
                                                                                                                                                                                                                                               July 2009




                                                                                                                                                                     Titanium Dioxide   Paints, Plastic, Paper
                                                Ore
                                                                                                                                 Phosphoric Acid
                                                                                                                                  Sulfuric Acid
                                                Ore                                                                 Ammonia                                             Fertilizers     Agriculture


                                            Salt (Brine)                                                        Caustic Soda                                                            PVC, Aluminium, Paper, Other Chemicals
                                                                                                                    Chlorine
                                                                                                                                                                                        Steel, Electronics, Food, Medical
                                                                              Electricity                     Oxygen Nitrogen                                            MTBE           Gasoline Blending
                                              Natural
                                               Gas                                                                  Methanol
                                                                                                                                  Vinyl Chloride                          PVC           Construction, Medical Equipment




The petrochemical sector in Saudi Arabia
                                                                                NGLS
                                                                               Natural                                                                                                  Packaging, Durables
                                                                                                                                                                       Polythylene
                                                                             Gas Liquids                                          Alpha Olefins
                                                                                                                    Ethylene                                                            Polyethylene
                                                                                                                                  Ethyline Oxide                     Ethylene Glycol    Polyester fibers and plastic, Antifreeze

                                                                               Ethane                                                                                   Polystrene      Packaging, Insulation
                                                                                                                                     Styrene
                                                                               Propane                                                                                                  Synthetic Rubber
                                                                               Butane                                                                                     ABS           Appliances, Automotives

                                                                                                                                   Acrylonitrile
                                                                                                                    Propylene                                         Acrylic Fibers    Clothing


                                                                                                                                   Acrylic Acid                         Acrylates       Paints, Adhesives
                                                                                                                                                                                        Superabsorbants (Diapers)
                                                                                                                                 Propylene Oxide                      Polyurethanes     Furniture, Automotive, Insulation


                                                                                                                                                                      Polypropylene     Automotive, Consumer Products

                                             Crude Oil                        Refining                              Benzene          Cumene                          Phenol/Acetone     Polycarbonate, Epoxies, Adhesives
                                                                           (Nahtha/Gas Oil)
                                                                                                                                   Cyclohexane
                                                                                                                                                                          Nylon
                                                                                                                                                                                        Automotive, Carpets, Hosiery, Cords
                                                                                                                    Butadiene
                                                                                 Fuel                                              DMT/PTA                              Polyester       Clothing, Contaners, Bottles (PET)
                                                                                                                     Xylene
                                                                                                                                                   Ethylene Glycol
                                                                                                                                                                                                                                   Equity Analysis Report




                                           Source: HSBC, KMEFIC Research




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  MACROECONOMIC OVERVIEW 
  We will regard all GDP related issues with particular attention, as the demand for petrochemicals
  has been growing at around 3% above the world GDP.
   
   
  GROSS DOMESTIC PRODUCT & KEY GROWTH INDICATORS 
   
Table 2: Key Macroeconomic Medium-Term Indicators
Saudi Arabia                                   2004 A    2005 A    2006 A    2007 A    2008 A    2009 E    2010 E
Average Import Crude Price & WTI* (USD/B)        38.6      52.7      62.5      69.7      96.1      59.1      70.9
Real GDP Growth Rate, %                            5.3       5.6       3.0       3.5       4.6       1.8       1.7
Population (mn)                                  22.5      23.1      23.7      24.3      24.9      25.5      26.2
GDP/Capita (USD)                               19,487    21,236    22,033    22,852    23,834    23,255    23,448
CPI Inflation (Y-o-Y % Change)                     0.4       0.6       2.3       4.1       9.9       5.5       4.5
Net Foreign Assets (USD Bn)                        99       158       240       313       450       355       370
Source: SAMA, IMF, BMI and KMEFIC Research
*- West Texas Intermediate



  Since 2003, Saudi Arabia has been able to achieve strong growth thanks to high oil revenues and
  a relatively fast expansion of the non oil sector. As a matter of fact, since 2003 growth has
  averaged 4.3% with a significant and increasing contribution from the non oil sector (Table 2,
  Figure 5). Furthermore, net foreign assets constantly increased over the past 8 years to reach an
  estimated USD450 billion in 2008 (Figure 6). Besides, the issue of population growth in the
  Middle East has come into prominence. Indeed, the Arab population has been growing at a
  relatively fast pace, at an average rate of 3% per year for the past decade. This strong population
  increase has raised some challenging economic issues for governments in the region. The main
  question being that in order to grow GDP per capita in an environment where population grows at
  3% per year and inflation grows at 1.5% (at least) per year; governments have to find ways to
  grow their GDPs by at least 5% per year to generate real GDP growth of 0.5%. As displayed in
  Table 2, Saudi Arabia was able to grow its GDP per capita at CAGR 5.4% from 2004 to 2007.
  The country’s remarkable growth was accompanied by ambitious developments plans
  implemented by the government, which among many initiatives helped the country diversify its
  sources of revenues.




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Figure 5: Saudi Arabia real oil & non-oil GDP growth                   Figure 6: Net Foreign Assets Position

10%                                                                        500                                                               100%
                Real oil GDP                                               450
    8%                                                                     400                                                               80%
                Real non-oil GDP
                                                                           350
    6%                                                                     300                                                               60%
                                                                           250
    4%                                                                     200                                                               40%
                                                                           150
    2%                                                                     100                                                               20%
                                                                            50
    0%                                                                       0                                                               0%
         2000    2001   2002       2003   2004   2005   2006   2007               2000 2001 2002 2003 2004 2005 2006 2007 2008
-2%
                                                                                                Net Foreign Assets (USD Bn)
-4%                                                                                             Net Foreign Assets as % of GDP


Source: KMEFIC Research, IMF                                           Source: KMEFIC Research, SAMA




Saudi Arabia is currently undergoing its 8th five                      Figure 7: Investments breackdown from 2000-2007
year development plan (spreading from 2005 to
2009). It marks a new phase in the development                             Power & water
                                                                                                       Industry 5%
                                                                               10%
process of the kingdom of achieving long term
sustainable development. Emphasis has been
placed on key priorities among which are the
diversification of the economic base and the                            Real estate                                                Infrastructure
                                                                          12%                                                           35%
improvement of the productivity and
competitiveness of the national economy.
Considerable attention has been given to
promising areas such as strategic and
manufacturing industries, the natural gas                             Petrochemicals
industry and information technology. Thus, oil                             15%
wealth is being invested over the medium term
to expand the non oil sector and boost oil                                                                             Oil & Gas
production capacity to support global oil market                                                                         23%
stability (Figure 7).
                                                                       Source: KMEFIC Research, IMF
 
 
 
 
 
 
 
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OIL VULNERABILITY 
 
While oil importing countries might have welcome the fall in oil prices since mid-2008, this is
certainly not the case for oil exporting countries, many of which are subsequently expecting
dramatic declines in their fiscal balances along with much less growth in their net foreign assets
and in their GDPs. Indeed, a heavy concentration of economic activity in the hydrocarbon sector
naturally tends to raise a country vulnerability to sharp drop in oil prices. Standard & Poor’s
recently released their oil price vulnerability index ranking3, placing Saudi Arabia second among
the countries whose overall economy can be most impacted by oil prices fluctuations. Note that
fiscal outturns are logically expected to weaken in 2009, in line with falling oil prices and
revenues and the government deliberate countercyclical expansionary fiscal policy (elaborated
further in the “global financial crisis” section of our report), with total expenditure expected to
rise by 16% relative to 2008 budget. The government balance should, consequently, reach a
deficit of circa 7% of GDP, reversing from a 20% surplus in average over the past four years.
Nevertheless, Saudi Arabia holds enough cumulated fiscal surplus to digest this deficit in the
medium term.
 
 
THE GLOBAL FINANCIAL CRISIS 

Figure 8: Saudi Arabia real GDP growth forecasts            Figure 9: World & Middle East real GDP growth forecasts

5%
                                                             7%

4%                                                           6%
                     GDP                                                         Middle East    World
                                                             5%
3%
                                                             4%

2%                                                           3%
                                                             2%
1%
                                                             1%

0%                                                           0%
        FY08    FY09 E FY10 E FY11 E FY12 E FY13 E          -1%      FY08     FY09 E       FY10 E   FY11 E   FY12 E   FY13 E

                                                            -2%
Source: KMEFIC Research, BMI                                Source: KMEFIC Research, IMF




We do not expect Saudi Arabia to miraculously avoid the hit already taken by most countries
amid the downturn. Falling oil pricing, declines in consumer spending, exports and imports
should certainly undermine the Kingdom’s growth. However, as pointed out by Business Monitor
International, there are still grounds for positive growth in 2009 thanks to government spendings
and the momentum from ongoing infrastructure projects. Furthermore, the financial framework
can reasonably be considered as stable, which will encourage investments. Indeed, the Saudi
government, whose net asset position has been forecasted at 170% of GDP in FY093, holds
3
    Gulf Cooperation Council Credit Survey, Standard & Poor’s, June 2009


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enough cash reserve to step in and rescue companies for political reasons. Furthermore, the
government stimulus plans adopted to cope with the crisis will certainly bear fruits in the near
term (Table 3). During the G20 summit meetings, held in London last April, Saudi Arabia
adopted a USD400 billion investment and development program for the government and the
monetary sectors for the next five years, comforting the country’s ambition to become one of the
world’s ten most competitive economies by 2010 (the 10x10 plan). This was one of the largest
economic initiatives prepared during the discussions of the economic recovery program for global
economies.
Finally, Saudi Arabia’s GDP growth is expected to reach above 3% by 2013 while the world
should experience a continued growth from 2010 to 2013 (Figure 9), strongly driven by emerging
economies (particularly the BRIC: Brazil, Russia, India and China).

Table 3: Fiscal and Monetary Policy Stimulus Measures
                                                Intervention Measures

          Sep-08               Central Bank pledges liquidity to banking sector if needed
          Oct-08               Central Bank says that banks have option to borrow up to
                               75% of the value of their government paper holdings but
                               none have taken up this offer

          Oct-08               Repurchase rate cut by 100bps to 4.00%

          Oct-08               Reserve requirement cut from 13% to 10%

          Oct-08               Central Bank guarantees all deposits in banking sector

          Oct-08               Central Bank injects USD 3 bn into banking system

          Oct-08               USD 2.7 bn credit facility extended to low-income Saudis

          Nov-08               Repurchase rate cut by 100bps to 3.00%

          Nov-08               Reserve requirement cut from 10% to 7%

          Dec-08               Record-breaking USD 126.7 bn budget announced
          Dec-08               Repurchase Rate but by 50bps to 2.5%, reverse
                               repurchase rate cut by 50bps to 1.5%
          Jan-09               Public Investment fund announces it will extend project
                               loan durations to 20 years, including a five-year grace
                               period, from 15 years and will raise a cap on project
                               lending to 40% of the value of the project from 30%

          Jan-09               Reverse repurchase rate cut by 75bps to 0.75%

          Apr-09               Reverse repurchase rate cut by 25bps to 0.5%

          Apr-09               USD400 Bn investments and development program
Source: BMI, KMEFIC Research


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OIL & GAS OUTLOOK 
MARKET DYNAMICS 
 
With around 266.7 billion barrels of proven oil reserves4 (around one-fifth of the proven,
conventional world oil reserves) and 258.4 trillion cubic feet of natural gas4 (the fourth largest
natural gas reserves in the world), Saudi Arabia enjoys an enviable, unparalleled advantaged
energy and feedstock position; the revenue from oil & gas in turn supporting further investments
and developments. Oil & Gas prices impact petrochemical development when they are high or
low. Although there can be negative impact, the energy advantage prevails under both scenarios.

Scenario I: High or relatively high oil prices imply that gulf countries in general maintain a
share of the market at or near current levels. However, higher oil prices may also likely
negatively impact the world economy, which translates into lower petrochemical demand growth
and the requirement for fewer capital expenditures. As the incremental low cost producing region,
petrochemical investments in the Middle East are likely to be maintained (thanks to higher cash
margins) at the expense of other regions.

Scenario II: Although it might have been hard to seriously consider for many until recently, low
oil prices have the negative effect of reducing the inherent advantage of gulf petrochemical
producers. Nevertheless, very low oil prices would have to be sustained for an extended period of
time before investment economics were adversely affected. Prices would actually have to drop
considerably lower before Middle East ethane based producers had difficulty competing on a
delivered polyethylene cash cost basis (cf “feedstock cost advantage” section). Should oil prices
be sustained for a long time, the demand in petrochemical products would grow as consumers
would certainly fancy lower priced products. The resulting growth in the sector would push the
need for more facilities (potentially outside of the Middle East). However, one should understand
that very low oil prices for a very long period of time might be unlikely to occur as OPEC
countries which control around 50% of the world’s supply of oil and own about two thirds of the
world oil reserves would step in to influence market prices (up or down), trying to find consensus
for their own benefits and the world economy.




 
 
 
 
 
 
4
    Oil & Gas Journal, 2009

    The petrochemical sector in Saudi Arabia                                           P a g e | 15
    July 2009                                                                                           KMEFIC Research
                                                                                                    Equity Analysis Report
OIL OUTLOOK 
 
     Figure 10 - World Oil Prices in three price cases 1980-2030



                              250


                              200
    2007 Dollars per Barrel




                                                           Reference

                                                           High Price
                              150
                                                           Low Price

                              100


                              50


                               0
                                    1980   1985   1990      1995        2000   2005   2010   2015       2020    2025     2030




          Source: KMEFIC Research, Annual Energy Outlook 2009
                                                                                                                                 


In its latest issue of the Annual Energy Outlook (May 2009), the Energy International
Administration laid out its updated assumptions on oil prices up to 2030 based on three price
scenarios depending on economic growth. As expectations for future GDP growth rates may be
subject to many uncertainties, the EIA included a high economic growth case (0.5 percentage
point added to the growth rate assumed for each country in the reference case) and a low
economic growth case (0.5 percentage point subtracted to the growth rate assumed for each
country in the reference case) in addition to the reference case. The effects of different
assumptions about future oil prices are illustrated in Figure 10. In the high price case, world oil
prices (in real 2007 dollars) climb from USD68 per barrel in 2006 to USD200 per barrel in 2030;
in the low price case, they drop to USD50 per barrel in 2015 and remain at about this level
through 2030, while oil prices rise to USD130 per barrel in 2030 in the reference case.
 
 
 
 
 
 
 
 

    The petrochemical sector in Saudi Arabia                                                                   P a g e | 16
    July 2009                                                                                                KMEFIC Research
                                                                                                         Equity Analysis Report
GAS OUTLOOK 
 
 
    Figure 11 - World Gas Prices in five prices cases 1990-2030


                                             10
      2007 dollars per thousand cubic feet




                                              8



                                              6

                                                                                            Reference
                                              4
                                                                                            High Price
                                                                                            Low Price
                                              2                                             Rapid technology
                                                                                            Slow technology

                                              0
                                                  1990   1995   2000   2005   2010   2015       2020           2025     2030

     Source: KMEFIC Research, Annual Energy Outlook 2009




Likewise, in its Annual Energy Outlook 2009 (March 2009) natural gas prices may vary with
economic growth but also with technology progress assumptions. In fact, technology
improvements reduce drilling and operating costs and expand the economic recoverable resource
base. Quite logically, in the rapid technology case where exploration and development costs per
well decline at a faster rate, natural gas prices reach lower levels. Conversely, in the slow
technology case natural gas prices reach higher levels. In the high economic growth case, natural
gas consumption grows more rapidly; thus natural gas prices rise more sharply than in the
reference case reaching USD8.7 (per thousand cubic feet) in 2030. In the low economic growth
scenario, natural gas consumption grows more slowly; thus natural gas prices are lower than in
the reference case reaching USD7.8 (per thousand cubic feet) in 2030.
 
 
 
 
 
 
 
 
 
 
    The petrochemical sector in Saudi Arabia                                                                          P a g e | 17
           09
    July 200                                                                                               KMEFIC Research
                                                                                                           K
                                                                                                            y          Report
                                                                                                       Equity Analysis R

   DSTOC
FEED        ST ADV
       CK COS        AGE 
                 VANTA
        nt
Abundan natural re              n
                     esources in Saudi Ara abia have p             he
                                                       provided th petrochem mical comp  panies
        g           ntry         ery       tive
operating in the coun with a ve competit cost stru                  ing      ainable high gross
                                                       ucture allowi for susta
and opera            ns.
         ating margin For insta           CO,                     nt
                                 ance, SAFC Saudi Arabia’s gian fertilizer c             ets
                                                                             company, ge its
natural g supply from Saudi A
        gas         fr           Aramco at a fixed price of USD0.75 MBTU5 while the g
                                                       e                                 global
         as          A           at        SD3.5 MBTU.
natural ga prices in April stood a around US

Besides, feedstock ca account f up to 60% of total po
                      an         for          %            olyolefin ma           g            s,
                                                                       anufacturing costs. Thus any
                     ck
decrease in feedstoc prices sh    hould considerably imp  prove hydro ocarbon pro oducers’ mar rgins.
          k          y                        ugh                     he
Feedstock prices may vary by country, althou most countries in th gulf have adopted the same
                      p          dstock at a p
strategy, which is to provide feed                        ves
                                             price that giv a petroch hemical prod            entive
                                                                                  ducer an ince
                      ing                     he          bon
to invest while offeri a better value for th hydrocarb producer. This adva        antaged feeddstock
          ws         sed          rs
cost allow gulf bas producer to manuf         facture and deliver poly yolefins at very compe etitive
        As
prices. A shown in Figure 12, a Saudi pro     oducer utiliz           /propane (alkanes crack of
                                                           zing ethane/                       ked
        m)
petroleum would lik               material to a Chinese cu
                     kely deliver m                                    uge
                                                          ustomer at hu cost sav              below
                                                                                  vings, even b
        mpetition.
local com



                        d             na             with       USD30 per barr
Figure 12 - LDP Delivered Costs To Chin (Integrated, w Crude at U            rel)


              er Ton
     Dollars pe
                                                                                    Canada Ethane
                                                                                    C                         d
                                                                                                       US Mixed Feed
     1,000



       800                                                        Europe Naphtha
                                                             West E

                                             a
                                         China Naphtha
       600


                             ne
                   Saudi Ethan
       400



       200



         -
                             st
                 Feedstock Cos               riable Cost
                                           Var                         Fixed Cost                 ht
                                                                                             Freigh           uty
                                                                                                             Du


           FIC              e
Source: KMEF Research, Middle East Economic Survey (2007).




5
          tands for one million BTUs an one cubic fo of natural g produces a
    MBTU st             m             nd          foot          gas        approximately 1,000 BTUs

            ochemical sec in Saudi Arabia
    The petro           ctor                                                                                           P a g e | 18
 July 2009                                                                    KMEFIC Research
                                                                          Equity Analysis Report

CAPACITY AND INFRASTRUCTURES 
Feedstock availability coupled with high oil & gas prices for the past years (until end 2008) have
enabled Saudi petrochemical prices to achieve very high cash margins. Petrochemical companies’
ability to be profitable has therefore been largely dependent on the country’s feedstock capacity.

Growing feedstock capacities in the Middle East

In 2008, the total petrochemical production of MENA countries reached about 85 million tonnes,
that is about two third of the global production. Ethylene is a critical feedstock to the
petrochemical industry both in terms of volume produced (circa 120 millions of tonnes globally
in 2005) and number of end market products it may generate from automotives, packaging and
synthetic rubbers to medical equipments (for a more exhaustive list please refer to Figure 3).
Global ethylene capacity is expected to reach 173 millions of tonnes in 2015, up 47% from 2005
when the Middle East capacity should grow by 300% over the same decade, taking its global
market share of ethylene to around 19% in 2015 (Figure 13). Furthermore, comforting its
position as the most dynamic petrochemical region in the world, the Middle East is anticipated to
become the only net exporter of ethylene in the world in 2015, significantly growing its trade
flow by 226% from 2005 (Figure 14). Besides, we note that Asia Pacific should considerably
increase its demand of ethylene driven by China’s strong growth to reach a net trade flow
(import) of about 21 millions of tonnes in 2015, up 130% from 2005 (Figure 14).



 Figure 13 - Global Ethylene Capacity Trend

                                       180
                                       160
       Capacity (millions of tonnes)




                                       140                                        Middle East
                                       120                                        China
                                       100                                        Rest of Asia
                                        80                                        Japan
                                        60                                        Europe
                                        40                                        North America
                                        20                                        Others
                                        0
                                             1995   2005          2015
 Source: KMEFIC Research, Parpinelli Tecnon




 The petrochemical sector in Saudi Arabia                                              P a g e | 19
 July 2009                                                                                                                                       KMEFIC Research
                                                                                                                                             Equity Analysis Report


 Figure 14 - Changing Trade Flow Pattern of Ethylene Derivatives

                                                            Exporter                                                   Middle East is the
                                                      30                                                               only net exporter
       Net Trade (Mn of tonnes Ethylene Equivalent)




                                                                Middle East is the primary exporter
                                                      20

                                                                                                                                                        Asia-Pacific
                                                      10

                                                                                                                                                        Western Europe
                                                       0

                                                                1995              2000                2005             2010                 2015
                                                      -10                                                                                               Middle East


                                                      -20                                                                                               North America
                                                                                                  North America transactions
                                                                                                  from net export to net importer
                                                      -30    Importer


 Source: KMEFIC Research, CMAI




Saudi Arabia, the heavyweight in the MENA petrochemical industry

As for Saudi Arabia, whose total production capacity accounts for more than half of MENA’s,
domestic ethylene capacity in 2013 is forecasted to be almost double that of 2008 levels, at 18.2m
tpa, with Jubail and Yanbu the focus of petrochemicals developments over the medium-term
(Table 4).

Table 4: Saudi Arabia ethylene capacity & global market share (actual/ forecast)
                                                                                                                                               2008A             2013 E
Saudi Arabia ethylene capacity (m tpa)                                                                                                            7.4              18.2
Saudi Arabia global market share of ethylene capacity                                                                                             6%               12%
Source: KMEFIC Research, BMI, March 2009




 The petrochemical sector in Saudi Arabia                                                                                                                 P a g e | 20
      July 2009                                                                                                                KMEFIC Research
                                                                                                                           Equity Analysis Report

      Saudi Basic Industries Corporation (SABIC)  

      Listing                              : Tadawul                          Sector                                      : Petrochemical Industries

      CMP (30 Jun - 09)                    : SAR62.75                         Upside/ (Downside)                          : 12%
      LTFV                                 : SAR70.58
      Opinion                              : Undervalued

      Key Performance Indicators                                                                                                                        
      in'million'SAR unless otherwise indicated (Dec year end)                     FY08 A                              FY09 E           FY10 E             FY11 E
      Revenues                                                                    150,810                              90,486           106,773            124,925 
      EBITDA                                                                       46,643                              28,222            39,108             43,446 
      Net Profit                                                                   22,030                               9,038            15,221             20,201

      Gross Profit Margin                                                              30.3%                            29.5%            34.0%              36.0% 
      Operating Margin                                                                 24.3%                            19.3%            26.0%              28.0% 
      Net Profit Margin                                                                14.6%                            10.0%            14.3%              16.2% 
      ROE                                                                              15.7%                             6.0%             9.7%              11.8% 

      EPS (SAR)                                                                      7.34                                3.01             5.07               6.73 
      EPS growth                                                                   ‐18.5%                              ‐59.0%            68.4%              32.7%
      P/E                                                                              8.5                               20.8             12.4                 9.3 

      BVPS (SAR)                                                                           48.9                           52.0            56.7               62.4 
      P/BV                                                                                   1.3                            1.2             1.1                1.0 
      Dividend Yield                                                                       1.7%                           2.9%            4.4%               5.3%

      EV/EBITDA                                                                             4.0                             6.7             4.8                4.3 

      Debt/Equity                                                                   63.2%                               60.7%             58.1%              49.6% 
      Net Debt                                                                     74,091                              57,816            55,999             53,739 
  Source: KMEFIC Research, SABIC financial statements




Figure 15 - SABIC rebased to Petrochemical Index (& company shares trading                                          Figure 16 - SABIC shareholding structure
volume)
                                         Volume (Million Shares)                                                                                                      Free Float
       160                                                                             40                                                                               30.0%
                                         SABIC (SAR)
       140                               Petrochemical Index (Rebased)                 35
       120                                                                             30
                                                                                              Million shares




       100                                                                             25
SAR




        80                                                                             20                              Public
        60                                                                             15                            Investment
                                                                                                                        Fund
        40                                                                             10                              70.0%
        20                                                                             5
          0                                                                            0
              J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09
   
Source: KMEFIC Research, TADAWUL                                                                                     Source: KMEFIC Research, Zawya


      The petrochemical sector in Saudi Arabia                                                                                                P a g e | 21
    July 2009                                                                KMEFIC Research
                                                                         Equity Analysis Report
COMPANY & BUSINESS OVERVIEW 
 
The Saudi Basic Industries Corporation (SABIC) was established by a royal decree in 1976 to
produce chemicals, polymers and fertilizers, benefiting from oil and gas competitive feedstock
thanks to the country’s abundant natural resources. Constantly growing organically and through
acquisitions, SABIC has become a heavyweight in the petrochemical sector. In 2008, SABIC’s
revenues topped about SAR151 billion, net profit SAR22 billion with a production of more than
56 million metric tonnes, up 60% YoY. Best known for being one of the world largest
petrochemical companies, the Saudi Arabia based company has also grown and diversified its
activities to become the largest steel producer in the Middle East. As a truly global company,
SABIC currently employs more than 33,000 people in more than 100 countries over six
continents. As on 30 June 2009, the company’s market capitalization was SAR188.2 billion,
which is more than 60% of the petrochemical sector’s combined capitalizations in the Tadawul.


FINANCIAL PERFORMANCE & VALUATION 
 
SABIC revenues continuously grew at CAGR 24.4% over the past three years, reaching about
SAR151 billion in FY08 with a net profit of SAR22 billion, down 18.5% YoY though. SABIC’s
growth was strongly supported by increasing demand for petrochemicals along with soaring oil
and gas prices and successful acquisitions. Nevertheless, non exempt from the global turmoil, the
company’s financial performance started weakening in the last fiscal year fourth quarter. Indeed,
Q4 FY08 revenues plunged 39% YoY and net earnings came at SAR0.3 billion, down 96% QoQ
due to lower petrochemical fundamentals (for both volumes and prices per unit). Besides, SABIC
surprisingly disclosed a net loss of SAR0.9 billion in Q1 FY09 due to SAR1.2 billion impairment
on its goodwill related to its US subsidiary Sabic Innovative Plastic (formerly GE Plastics). We
note that Q1 FY09 normalized net earnings (from this exceptional write off) are still positive at
SAR0.2 billion but lower than most analysts expectations. Despite the fact that we expect
SABIC growth to be considerably haltered in FY09 (down 40% YoY) we still believe SABIC
prospects are strong due to (i) an anticipated recovery of the petrochemical demands from H2
FY09, FY10 on and (ii) strong cash margin thanks to sustained low feedstock costs (gas prices
already went up 16% in April) which should help the company weather the crisis. Our weighted
Discounted Cash flows (Free Cash Flow to the Firm) and Relative Valuation models resulted in a
Long Term Fair Value of SAR70.58, up 12% from the stock price as on 30 June 2009 (Table
5).
 
    Table 5 - SABIC Valuation
    in SAR                                              LTFV           Weight      Weighted Value

    DCF - FCFF                                          75.32            80%                60.26
    Relative valuation                                  51.64            20%                10.33
    Hybrid valuation                                                                        70.58
 
 
    The petrochemical sector in Saudi Arabia                                          P a g e | 22
 July 2009                                                                            KMEFIC Research
                                                                                  Equity Analysis Report

 Table 6 - Sensitivity analysis of fair value (SAR) to WACC and Growth
                                                           WACC

                  70.58         9.21%        10.21%        11.21%        12.21%        13.21%

                  1.0%          84.33         73.32         64.48        57.26          51.23
    GROWTH




                  1.5%          89.21         77.03         67.38        59.57          53.10

                  2.0%          94.76         81.19         70.58        62.10          55.14

                  2.5%         101.14         85.90         74.16        64.89          57.36

                  3.0%         108.55         91.25         78.17        67.99          59.81
 
 
 
PROJECTS, STRATEGY  
 
As a move to cope with the current financial crisis SABIC decided to keep costs minimal. Along
with other cost cutting measures, SABIC innovative Plastics announced last February it would be
cutting around 100 jobs. This company, which was purchased from GE about 2 years ago forced
SABIC to book a SAR1.2 billion in their Q1 FY09 financials. SABIC could, however, still be
involved in some inorganic growth transactions, as Prince Saud Bin Abdullah Bin Thenayan Al
Saud, the company’s chairman told Alarabiya TV in May 2009: “The economic crisis had some
negative as well as some positive effects…, and it could be a chance for some new acquisitions”.
Furthermore, SABIC and Spichem announced in May 2009 their cooperation on projects in order
to create synergies after the downturn somehow hit their profitability. Under a memorandum of
understanding, SABIC agreed it will crack ethane feedstock to provide Sipchem; in return,
Sipchem will provide SABIC with carbon monoxide. Furthermore, within the framework of its
strategy to become “the preferred world leader in chemicals”, SABIC has engaged in multiple
expansion and development projects, among which are key projects in the Asia Pacific region
whose demand for petrochemicals is bound to increase (Figure 14 in section Capacity,
Infrastructures).Thus, in January 2008 SABIC signed a contract with China Petroleum &
Chemical Corporation to set up a plant in Tianjin, China. Likewise, in April 2008 SABIC
announced its plans for a petrochemical project in India. Besides SABIC also signed a joint
venture agreement with Ma’aden (Saudi Arabian Mining company) in 2007 for a phosphate
project.




 The petrochemical sector in Saudi Arabia                                                       P a g e | 23
      July 2009                                                                                                             KMEFIC Research
                                                                                                                        Equity Analysis Report

      Saudi Arabian Fertilizer Company (SAFCO) 

      Listing                               : Tadawul                       Sector                                     : Petrochemical Industries

      CMP (30 Jun - 09)                     : SAR113.50                     Upside/ (Downside)                         : 24%
      LTFV                                  : SAR140.21
      Opinion                               : Undervalued

      Key Performance Indicators                                                                                                                              
      in'million'SAR unless otherwise indicated (Dec year end)                     FY08 A                         FY09 E             FY10 E          FY11 E
      Revenues                                                                         5,243                        3,408                4,430        5,095 
      EBITDA                                                                           4,594                        2,481                3,600        4,044 
      Net Profit                                                                       4,280                        2,353                3,389        3,839 

      Gross Profit Margin                                                          83.7%                           69.0%                 79.0%        78.0% 
      Operating Margin                                                             80.8%                           64.0%                 74.5%        73.5% 
      Net Profit Margin                                                            81.6%                           69.0%                 76.5%        75.3% 
      ROE                                                                          60.9%                           30.5%                 38.6%        37.5% 

      EPS (SAR)                                                                    17.12                            9.41                 13.56        15.35 
      EPS growth                                                                   55.0%                          ‐45.0%                 44.1%        13.3% 
      P/E                                                                             6.6                           12.1                    8.4          7.4 
      BVPS (SAR)                                                                    32.1                            29.6                  40.7         41.1 
      P/BV                                                                            3.5                             3.8                   2.8          2.8 
      Dividend Yield                                                               10.6%                            4.6%                  6.6%         7.4% 

      EV/EBITDA                                                                                      6.2             11.4                   7.9            7.0 

      Debt/Equity                                                                    7.3%                            8.1%                  7.3%         8.3% 
      Net Debt                                                                     ‐2,102                          ‐1,735                ‐4,229       ‐3,758 
  Source: KMEFIC Research, Financial Statements




Figure 17 - SAFCO rebased to Petrochemical Index (& company shares                                      Figure 18 - Share ownership of SAFCO
trading volume)
                                                  Volume (Million Shares)                                                                              SABIC
      300                                                                      9                                                                        43%
                                                  SAFCO (SAR)                  8                                  Free Float
      250
                                                                               7                                     43%
                                                  Petrochemical Index
      200                                                                      6
                                                                                    Million shares




                                                  (Rebased)
SAR




                                                                               5
      150
                                                                               4
      100                                                                      3
                                                                               2
       50
                                                                               1
                                                                                                                                                     General
        0                                                                      0
                                                                                                                                                   Organization
            J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09                                                                        for Social
                                                                                                                                                    Insurance
Source: KMEFIC Research, TADAWUL                                                                        Source: KMEFIC Research, Zawya                 14%


      The petrochemical sector in Saudi Arabia                                                                                              P a g e | 24
    July 2009                                                                   KMEFIC Research
                                                                            Equity Analysis Report
COMPANY & BUSINESS OVERVIEW 
 
The Saudi Arabian Fertilizer Company (SAFCO), the first petrochemical company in Saudi
Arabia, was established in 1965 by a royal decree. SAFCO’s products include urea (since 1970),
ammonia (since 1970), sulfuric acid (since 1972) and melamine (since 1984). They are mostly
used in the agricultural industry but may as well supply other industries (Figure 4 in section
“Basic production flow”). The company’s products are sold domestically but also widely
exported to Asia, North America, South America, Australia and Europe. SAFCO, which has
grown organically to become the leading manufacturer and exporter of fertilizers in the Gulf
region, generated revenues of SAR5.2 billion in FY08, up 49% YoY, with 4.8 million metric
tonnes produced. SAFCO is currently 43% owned by SABIC, which may give it the opportunity
to benefit from potential synergies in certain business areas (such as sales, marketing, R&D). As
on 30 June 2009, the company’s market capitalization was SAR28.4 billion.

FINANCIAL PERFORMANCE & VALUATION 
 
Despite the financial crisis SAFCO’s revenues in FY08 reached a five year high SAR5.2 billion
with net earnings at SAR4.3 billion, up 94% YoY. This is explained by strong fertilizers demand
for the first three quarters of FY08 along with outstanding gross profit margins (84% in FY08)
due to an exceptional feedstock cost advantage. As a matter of fact, SAFCO is supplied in natural
gas through Saudi Aramco at a fixed price of USD0.75 MBTU (as a comparison, in April 2009
natural gas prices stood at about USD3.5 MBTU). However, SAFCO revenues for Q1 FY09
dropped to SAR739.4 million on lower fertilizer prices worldwide, down 10% QoQ while net
earnings fell to SAR524.5 million, down 27.5% YoY. In spite of the current economic situation,
we believe the fertilizer industry, which shows less sensitivity to cyclical effects, along with the
company’s efficient business model (low leverage, high free cash flow generation due to absolute
feedstock advantage, low conversation cycle and low CAPEX requirements) provide the
company with bullish prospects. Our weighted Discounted Cash flows (Free Cash Flow to the
Firm) and Relative Valuation models resulted in a Long Term Fair Value of SAR140.21, a
potential upside of 24% from the stock price as on 30 June 2009 (Table 7).



    Table 7 - SAFCO Valuation

    in SAR                                            LTF value          Weight      Weighted Value

    DCF - FCFF                                           134.94            80%                107.95

    Relative valuation                                   161.30            20%                 32.26

    Hybrid valuation                                                                          140.21




 
    The petrochemical sector in Saudi Arabia                                             P a g e | 25
    July 2009                                                                       KMEFIC Research
                                                                                Equity Analysis Report
    Table 8 - Sensitivity analysis of fair value (SAR) to WACC and Growth
                                                             WACC

                    140.21        10.93%         11.93%         12.93%      13.93%    14.93%
                    1.0%          154.45          143.47        134.31      126.64    120.05
        GROWTH




                    1.5%          158.87          146.97        137.13      128.95    121.97

                    2.0%          163.77          150.82        140.21      131.45    124.04

                    2.5%          169.26          155.07        143.58      134.18    126.27

                    3.0%          175.45          159.81        147.30      137.15    128.69
 
 
 
PROJECTS, STRATEGY  
 
In July 2008 SAFCO announced the signature of an agreement with Hadeed to construct a 50/50
owned facility in Jubail Industrial City for the production of flat steel products with an annual
capacity of 1.7 million metric tonnes. In addition to this project, the facility should rely on the
quantity of gas allocated to SAFCO plant in Dammam, which was closed by the end of Q3 FY08.
During the construction phase of the flat products facility, SAFCO reached agreement with
SABIC affiliate, the Saudi Methanol Company (AR-RAZI) to make use of the above referenced
gas quantity to produce methanol for SAFCO for an interim period until the completion of the flat
steel products project, scheduled for a period estimate.




 
 


    The petrochemical sector in Saudi Arabia                                                   P a g e | 26
            July 2009                                                                                    KMEFIC Research
                                                                                                     Equity Analysis Report

        APPENDIXES 
         
        SABIC BALANCE SHEETS 

in "000" SAR                                 FY05 A        FY06 A        FY07 A        FY08 A        FY09 E        FY10 E        FY11 E

Cash & Cash Equivalents                    28,172,569     39,556,764    45,876,795    51,027,586    63,960,610    72,961,812    72,151,044

Net Receivables                            17,465,830     20,759,432    30,122,511    20,067,638    16,036,087    18,625,991    21,445,396

Other Current Assets                       10,642,446     13,658,245    22,305,959    24,359,750    12,768,466    15,066,790    17,628,144

Total Current Assets                       56,280,845     73,974,441    98,305,265    95,454,974    92,765,163   106,654,592   111,224,584

PP&E                                       66,096,734     79,970,622   123,113,574   141,440,177   150,598,304   156,335,346   162,858,951

Intangibles and Others                     14,572,901     12,643,757    32,312,242    34,864,838    34,552,186    36,088,592    39,026,662

Total non Current Assets                   80,669,635     92,614,379   155,425,816   176,305,015   185,150,490   192,423,938   201,885,613

Total Assets                              136,950,480    166,588,820   253,731,081   271,759,989   277,915,653   299,078,530   313,110,197

ST Debt                                     6,703,959      6,128,796     4,671,224     4,288,816     4,384,740     4,445,100     4,176,090

Payables                                    7,781,718     11,065,422    16,732,412    10,426,809     9,412,327    10,588,295    12,193,804

Other Current Liabilities                   7,461,439      7,747,658    12,279,002    11,864,382     7,336,133     8,456,437     9,594,212

Total Current Liabilities                  21,947,116     24,941,876    33,682,638    26,580,007    21,133,200    23,489,832    25,964,106

LT Debt                                    23,017,180     33,611,628    75,437,595    88,367,462    90,491,980    94,334,900    88,625,910

Other LT Liabilities                        6,764,647      7,545,079    10,114,576    10,170,907    10,272,616    11,136,278    11,299,878

Total non Current Liabilities              29,781,827     41,156,707    85,552,171    98,538,369   100,764,596   105,471,178    99,925,788

Total Liabilities                          51,728,943     66,098,583   119,234,809   125,118,376   121,897,796   128,961,010   125,889,893

Minority Interest                          22,880,920     27,607,078    43,342,241    43,709,139    47,331,206    51,568,726    56,753,193

Total Equity                              85,221,537     100,490,237   134,496,272   146,641,613   156,138,577   170,117,520   187,220,303
         
         
        SABIC INCOME STATEMENTS 
         
in "000" SAR                                 FY05 A        FY06 A         FY07 A         FY08A        FY09 E        FY10 E         FY11 E

Sales                                       78,253,536    86,327,862   126,204,404   150,809,596    90,485,758   124,924,637    143,663,332

Gross profit                                33,084,330    35,228,022    47,950,176    45,763,281    26,693,298    36,302,886     44,972,869

Operating Profit                            29,169,978    30,886,120    41,046,523    36,591,289    17,473,188    27,761,030     34,978,898

EBITDA                                      35,700,701    37,005,356    48,652,533    46,643,288    28,221,927    39,107,700     43,446,250

Net Profit                                  19,159,685    20,293,942    27,022,272    22,029,843     9,038,302    15,220,975     20,200,535
         

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     SABIC CASH FLOW STATEMENTS 
      
in "000" SAR                                        FY05 A             FY06 A         FY07 A          FY08A         FY09 E         FY10 E         FY11 E

Cash Flow from operations                         33,135,996         34,734,906     46,655,309     46,229,845     41,782,740     34,567,933     37,769,890

Cash Flow from investing activities              (10,626,649)       (17,867,006)   (73,703,935)   (29,806,609)   (24,163,965)   (19,873,661)   (19,135,971)

Cash Flow from financing activities              (17,581,909)        (5,483,705)    33,520,656    (11,272,445)    (4,685,751)    (5,693,070)   (19,444,687)

(Decrease) increase in cash & cash equivalents     4,927,438         11,384,195      6,472,030      5,150,791     12,933,024      9,001,202      (810,768)

Cash Flow at year - end                           28,172,569         39,556,764     45,876,794     51,027,586     63,960,610     72,961,812     72,151,044
      
      
      
     SAFCO BALANCE SHEETS 
      
in "000" SAR                                          FY05 A            FY06 A        FY07 A        FY08 A          FY09 E        FY10 E          FY11 E

Cash & Cash Equivalents                                304,139           594,238      1,572,063     3,917,745      3,310,877      5,987,075      5,771,091

Net Receivables                                        441,731           529,396       838,053       850,724         567,952       726,032         820,785

Other Current Assets                                   367,717           431,650       422,434       370,226         305,691       371,145         426,127

Total Current Assets                                 1,113,587         1,555,284      2,832,550     5,138,695      4,184,520      7,084,252      7,018,002

PP&E                                                 3,922,873         4,025,640      3,811,597     3,457,565      3,407,565      3,359,826      3,357,565

Intangibles and Others                               1,170,865         1,093,095      1,509,279     1,253,777      1,374,360      1,499,233      1,911,313

Total non Current Assets                             5,093,738         5,118,735      5,320,876     4,711,342      4,781,925      4,859,059      5,268,878

Total Assets                                         6,207,325         6,674,019      8,153,426     9,850,037      8,966,445    11,943,310      12,286,881

ST Debt                                                         -        176,786       148,393       236,786         200,000       247,500         284,625

Payables                                               250,902           190,270       394,225       556,060         294,442       233,576         281,199

Other Current Liabilities                              101,717            96,922       262,090              -               -             -               -

Total Current Liabilities                              352,619           463,978       804,708       792,846         494,442       481,076         565,824

LT Debt                                                695,000         1,063,214       826,428       589,643         600,000       742,500         853,875

Other LT Liabilities                                   371,638           407,450       507,953       433,588         481,283       534,224         592,988

Total non Current Liabilities                        1,066,638         1,470,664      1,334,381     1,023,231      1,081,283      1,276,724      1,446,863

Total Liabilities                                    1,419,257         1,934,642      2,139,089     1,816,077      1,575,724      1,757,800      2,012,687

Equity                                               4,788,068         4,739,377      6,014,337     8,033,960      7,390,721    10,185,510      10,274,193
      
      
      
      
      
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     SAFCO INCOME STATEMENTS 
      
in "000" SAR                                          FY05 A      FY06 A        FY07 A         FY08A        FY09 E         FY10 E        FY11 E

Sales                                                 1,823,985   1,831,252    3,516,028     5,242,632     3,407,711      4,430,024     5,094,528

Gross profit                                          1,074,666   1,090,249    2,294,474     4,388,701     2,351,320      3,973,732     4,202,985

Operating Profit                                       981,553     988,450     2,127,414     4,234,781     2,180,935      3,300,368     3,744,478

EBITDA                                                1,177,835   1,182,652    2,470,576     4,593,652     2,480,935      3,600,368     4,044,478

Net Profit                                            1,108,308   1,151,324    2,209,226     4,279,788     2,352,612      3,388,965     3,838,513
      
      
      
      
     SAFCO CASH FLOW STATEMENTS 
      
                                                      FY05 A      FY06 A        FY07 A        FY08A         FY09 E         FY10 E        FY11 E

Cash Flow from operations                              922,659    1,004,992    2,397,134     4,269,285     2,420,413      3,634,576     1,123,023

Cash Flow from investing activities                   (782,791)    138,232        45,870       124,789        (5,000)       40,000        115,000

Cash Flow from financing activities                   (211,259)   (853,125)   (1,465,179)   (2,048,392)   (3,022,281)     (998,378)    (1,454,007)

(Decrease) increase in cash & cash equivalents         (71,391)    290,099       977,825     2,345,682     (606,868)      2,676,198     (215,984)

Cash Flow at year - end                                304,139     594,238     1,572,063     3,917,745     3,310,877      5,987,075     5,771,091
      
      




      
      


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