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RESARCH REPORT SABIC. Supervised by: Dr. saleh alharbi. Investment Analysis & Portfolio Management. Prepared by: Abdullah Al-Muaiqel - Bassam I. Ibn Salamah -Mohammed Salem. 4 th June 2008. Outline. Key Data Recommendation Financial Highlights Company Overview

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RESARCH REPORT SABIC

Supervised by:

Dr. saleh alharbi

Investment Analysis & Portfolio Management

Prepared by:

Abdullah Al-Muaiqel - Bassam I. Ibn Salamah -Mohammed Salem

4th June 2008


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Outline

  • Key Data

  • Recommendation

  • Financial Highlights

  • Company Overview

  • Historical Profit & Production Data

  • Recent Development

  • SABIC Acquisitions & JV's Analysais

  • SABIC Share Price Performance

  • Valuation

  • Risks

  • Four Years Financial Forecast

  • Disclosure Appendix


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Key Data

  • Reuters Code: 2010.SE

  • Listing: Saudi Stock Exchange

  • Sector: Petrochemical Industries


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Recommendation

  • CMP: SR139 (As on May 21st 2008)

  • Target Price: SR221

  • Potential Total Return: 59%


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Financial Highlights

2007 Financial Highlights

  • SABIC reported a net income of SR27bn in FY07, an increase of 33.2% over FY06.

  • SABIC total sales increased to SR126.2bn, an increase of 46% over FY06 and cost of goods sold was SR78.3bn, an increase of 52.2% over FY06.

  • SABIC total assets expanded to SR256.3bn in FY07, an increase of 53.8% over FY06.

  • SABIC total liabilities increased by 76.2% to reach SR165.1bn in FY07.

  • Current asset in FY07 reached SR77.2bn which represent (2.4:1) from the current liability SR31.7bn in FY07, which stresses a strong position of meeting its financial commitment.

  • SABIC Shareholder's Equity increased by 25.1% to reach SR91.2bn in FY07.

  • SABIC reported an EPS of SR10.81 in FY07 as compared to SR8.12 reported in previous year.

  • SABIC increased its capital from SR25bn to SR30bn on 29th March 2008.


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Financial Highlights

Cont.

Q1'08 Financial Highlights

  • SABIC reported a net income of SR6.9bn in Q1'08, an increase of 10% over Q1'07.

  • SABIC total sales increased to SR40bn, an increase of 52.2% over Q1'07 and cost of goods sold was SR26.2bn, an increase of 69.3% over Q1'07.

  • SABIC total assets expanded to SR268.9bn in Q1'08, an increase of 48.8% over Q1'07.

  • SABIC total liabilities increased by 63.1% to reach SR175.8bn in Q1'08. The current asset now reached SR82.8bn which represent (1.9:1) from the current liability SR43.6bn in Q1'08, which is less than the ratio in 2007 of (2.4:1) due to the increase in loans to finance the new projects.

  • SABIC Shareholder's Equity increased by 17.2% to reach SR93.1bn in Q1'08 compared to Q1'07.

  • SABIC reported an EPS of SR10.81 in FY07 as compared to SR8.12 reported in previous year.



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Company Overview

  • SABIC was first conceived in 1976, and began production in 1981.

  • SABIC is a major petrochemical player in the Saudi Arabia.

  • The government holds 70%

  • It consists of 17 world-scale manufacturing affiliates in Saudi Arabia. 12 factories for Chemicals, 4 for fertilizers and one for metals.

  • Eight of these are joint ventures with foreign partners, three are wholly owned by SABIC and six are joint venture partnerships with local and regional private sector investors.

  • SABIC’s output accounts for 95% of the domestic petrochemical output.

  • Today, SABIC is among the leading petrochemical companies in terms of sales and product diversity.

  • Headquartered in Riyadh, SABIC is the Middle East’s largest non-oil industrial company. It is also a major player in the world petrochemical industry accounting for 7% of the total petrochemical production.

  • It is the world’s 7th largest petrochemical manufacturer, fourth-largest producer of Polyolefin's.

  • It is the world’s third-largest producer of polyethylene and the sixth-largest producer of polypropylene.

  • SABIC is also the world’s single largest producer and exporter of granular urea and one of the world’s top producers of olefins.



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Recent Development

  • SABIC & Exxon-Mobil studying a potential project to target domestic supply of carbon black and rubber and thermoplastic specialty polymers to serve emerging local and international markets. Expected project start-up by 2011.

  • SABIC has indicated that it will invest SR19bn in a new JV project in China. Investment might include setting up production units for ethylene, PE & EG at a cost ranging between SR11bn & SR19bn.

  • SABIC singed a LOI on 31st Jan08 with Synobic from China to establish a polymer complex in Tianjin to produce 0.6 mtpa PE & 0.4 mtpa EG, with a total investment of SR6.4bn and to be owned on 50:50 basis. The target date for production start up will be in Q4’Y9.

  • SABIC signed on 15th Sep07 a strategic partnership agreement with MAADEN to mine, process & export phosphates as fertilizer & related products, with an investment of SR21bn & SABIC share will be 30%. This complex will produce 1.5 mtpa of phosphoric Acid, 4.5 mtpa of sulfuric Acid, 1.1 mtpa of ammonia, & 3mtpa of phosphate. Startup will be on 2010.

  • SABIC acquired GE Plastic on 1st Sep07 for more SR43.6bn which complement SABIC existing business without any overlaps, by adding high-performance plastics to the product range SABIC currently offers to customers.


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Recent Development

Cont.

  • In Jan07 SABIC has acquired 100% stake in Huntsman Petrochemicals (UK) for SR2.6bn in cash. It will complement SABIC by adding 0.865 mtpa ethylene, 0.4 mtpa propylene, 1.3 mtpa Aromatics, & 0.4 mtpa PE.

  • SABIC Europe has signed a contract to build a HDPE plant at its production site in Gelsenkirchen, Germany. The plant will produce 0.25 mtpa in , replacing an existing 0.100,000 tpa plant. It will begin production in Q4’08.

  • IBN ZAHR at Jubail, has awarded a contract for the construction of 0.5 mtpa PP Plant. The plant is planned to be completed by Q3’08.

  • SADAF at Jubail, plans to build a third world-scale plant, boosting styrene production by over 60%, making it the world’s largest single-complex styrene producer by 2010.

  • AR-RAZI at Jubail, is part-way through its 5th expansion, due to go on stream in 20008 offering an annual capacity of 1.7 mtpa of methanol.

  • SABIC is on a major expansion drive. Its total capacity is stated to increase from 43mtpa in 2004 to 64mtpa by 2008 and 100mtpa by 2010.

  • By 2010, SABIC’s share of the domestic petrochemical production is likely to decline to 75%. The sector is expected to witness investments of about SR154bn between 2004-2009 taking Saudi Arabia’s market share in the global petrochemical market to 13%.


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SABIC Acquisitions & JV's Analysais

GE Plastic Acquisition

  • The acquisition marks another notch in SABIC's ambitions "to become one of the world’s leading manufacturing companies. The deal brings to SABIC a new market and 30,000 important customers worldwide.

  • Now the company called SABIC Innovative Plastics (SIP).

  • GE Plastics is a well established major player in the engineering thermoplastics (ETP) market, with a focus on automotive, electrical & electronic, glazing & lighting/furniture markets. It is currently targeting the healthcare market as a major area for growth. Sales in 2006 were $6.7bn, and operating profit $738m.

  • GE plastic complement SABIC as it offers a channel for further downstream & access to a major market.

  • The profit margin generated from SIP will be much less than what SABIC currently making from its production facility in Saudi Arabia.

  • This will drag SABIC overall profit margin to a lower side.

  • There are also concerns that SABIC may face heavy losses from SIP when the overall world growth start slowing as it anticipated now in US, Japan & Europe

  • But we should be fare in our evaluation & not to compare SABIC new investment outside Saudi with the current return from investments in Saudi Arabia as it's holding a unique advantage for low cost feedstock.


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SABIC Acquisitions & JV's Analysais

Strategic Fit

  • SABIC DSM acquisition in 2002 is the 1st acquisition for SABIC outside the country and followed by the acquisition of Huntsman in 2007 which gave SABIC an easy access to the European Market and SABIC sales in Europe has grown substantially.

  • SIP gave SABIC a ready market for its material & a well established network which has being built by GE in US & Europe.

  • Now the production of SIP will be now cost efficient as SABIC will be in a better position to supply SIB with raw material at competitive prices compared to GE previously.

  • Kayan which SABIC own 35% & planned to be on stream on 2010 with a huge integrated complex & some its products will be used as raw material for SIP.

  • As a conclusion, we conclude that SABIC acquisitions & JV's are supporting SABIC ambitious to be the leader in the global market and these projects are complementing each other which will lead SABIC for continues growth and accessing new markets & technologies.


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SABIC Share Price Performance

  • Fluctuating in the range of SR140-150 in the past few months.

  • Drop after SABIC announced the Q4'07 results on 20th Jan08

  • Investors were expecting a higher net income than the reported SR6.8bn for Q4'07.

  • Speculation was projecting SABIC net income in more than SR7bn.

  • The other factor was the US threat for going into recession which will impact the global economy.

  • No impact of SABIC announcement on 19th Apr08 for the Q1'08 net income of SR6.9bn.

  • Due to these factors & our evaluation of SABIC share price, we think current price is very attractive

  • & one of the best opportunities to investors to buy the stock.


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Valuation

  • we are estimating the dividend growth rate by calculating the average dividend growth rate 6.8%.

  • Estimating beta for SABIC by regression of its return with the market return for the past five years on the monthly basis using Merrill Lynch (ML) methodology.

  • Estimating SABIC target price to be SR221 based on the DDM with a required return of 8.3%.

  • In 2007 the petrochemical prices increased compare to 2006 & the same thing applied for the steel prices. We also observe that even in 2008 the prices petrochemicals & steel further increased & most importunately the Urea increased by %60 & the Steel prices increased by more than 100% & for the Polymers (PE, PP, & EG) the average increase was in the range of 15-20% .

  • Based on the current market price SR139, The stock is trading at 12.9 of its 07 earning & 3.8 of its BV. On a year forward basis, the stock is trading at 10.3 of 2008F earning & 4.1 of 08 BV.


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Risks

  • Petrochemical prices are tide up internationally & SABIC is effected directly & immediately on any changes in these prices upward or downward, which indicate a good risk which considered in our forecast.

  • The recession in US, Europe & Japan & this is being offset currently by the GDP growth by China. But this may not be always the case & then the downward cycle of petrochemical may start & then prices will be affected & the same will be reflected on the profit margins.

  • There are also many projects currently under construction in Saudi, UAE, Qatar, Kuwait, Oman, Egypt, Iran, China, India, other countries & most of them are expected to be on stream by within 2009 till 2011 & by having these huge production capacities will eventually bring the prices to a lower levels.

  • Major of the petrochemical industries are located in M.E. & specifically in GCC, which reflect a risk for investors due unstable political enjoinment in Iraq & Lebanon & a threat of war or terrorist attack an issue.




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Disclosure Appendix

MBA Student Certification

  • This report is prepared by three students studying the curse of Investment Analysis & Portfolio Management & supervised by its instructor Dr. Saleh Al-Harbi. All the forecast, assumptions, views, & opinion expressed in this report reflect their personnel opinion & no part of their compensation was to directly or indirectly related to a specific recommendation or views contained in this research report.


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Disclosure Appendix

Cont.

Assumption and Rating References

  • Dividend Growth Rate

    The dividend growth is being estimated by using the average growth rate, which result an average dividend growth rate of 6.8%.

  • Average dividend Growth Rate = (Dn / Do)^(1 / n-1)

    2. Beta

  • We have estimated Beta by regression line of SABIC share return & TASI return. We have used the data of past five years from 2003 till 2007, we took the closing number for each month. (beta=0.75)


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Disclosure Appendix

Cont.

Assumption and Rating References

3. Risk Free Rate & Market Risk Premium

We have assumed the Free Risk free rate to be 4.5% and the market risk premium to be 5%.

4. The Required Rate Of Return

We used CAPM and its presented in the below formula.

k = Risk Free Rate + beta * Market Risk Premium

= 0.045 + 0.75 * 0.05 = 8.25%

5. Dividend Discount Model (DDM)

We used the commonly used method for obtaining the stock value, where it assumes the value of a share of common stock equal to the present value of all future dividends.

Pi = D1 / (k-g) = 3.204 / (.0825 - .068) = SR221

By having all the above items obtained, we have calculated the price of SABIC share to be SR221.


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Disclosure Appendix

Cont.

Assumption and Rating References

6. SABIC Stock Performance (1Y)

We have obtained all SABIC stock prices and trading volume from 20th May07 till 21st May08 & we took the H&L prices & avg trading volume.

7. SABIC Financial Statement Forecast

By % of sales method, which begins with the sales forecast expressed as an annual growth rate in SR sales revenue. In our case for SABIC, we forecasted the growth in sales for sales in 2008 till 2011.

We did not follow the % of sales in most of the items in the balance sheet as it will not reflect the correct direction, as most of the sales projected in 2008 are due to the substantial increase in selling prices for most of the products like Urea, Polyolefin's, steel, etc.

We have considered also the Q1'08 financial report in our forecast which we based it on Y07 financial report.

As a conclusion, all the increases in sales

value especially in Y08, was not presented

with the same rate of increase in Assets,

Liabilities, investment, etc.



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