Calculation of Equity Value and Fair Value Per ShareNPV of Free Cash Flows (during Explicit Forecast Period) 3,201.87Terminal Value:Residual Cash Flow (FCFF of 2013E) 4,427.44WACC 7.21%Long-Term Growth Rate (g) 2.00%Divided by Capitalisation Rate (WACC - g) 0.05Equals Nominal Terminal Value 86,738.86Implied Multiple of 2013E EBITDA 12.79Times PV/ Discount Factor 0.73Present Value of Terminal/Residual Value 63,419.10Enterprise Value 66,620.97Implied Multiple of 2013E EBITDA 9.82Less: Long-term Debts 33,715.50Less: Market Value of Preferred Shares 0.00Add: Surplus Cash and Investments 0.00Equity Value 32,905.47No. of Outstanding Shares (Million) 876.00Fair Value Per Share (SAR) 37.56* figures in SAR Million unless specifiedSensitivity AnalysisWe have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value andenterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probableoutcomes.DiscountFactorSensitivity Analysis of Nominal Terminal Value (SAR Million)Long-Term Growth Rate1.00% 1.50% 2.00% 2.50% 3.00%5.21% 106,307 121,245 140,842 167,680 206,6816.21% 85,888 95,483 107,359 122,440 142,2237.21% 72,050 78,751 86,739 96,424 108,4128.21% 62,052 67,008 72,763 79,527 87,5899.21% 54,490 58,313 58,313 67,668 73,477DiscountFactorSensitivity Analysis of Discounted Terminal Value (SAR Million)Long-Term Growth Rate1.00% 1.50% 2.00% 2.50% 3.00%5.21% 84,600 96,488 112,084 133,442 164,4796.21% 65,502 72,820 81,877 93,378 108,4657.21% 52,679 57,579 63,419 70,501 79,2658.21% 43,513 46,988 51,024 55,767 61,4209.21% 36,661 39,233 42,162 45,527 49,435DiscountFactorSensitivity Analysis of Enterprise Value (SAR Million)Long-Term Growth Rate1.00% 1.50% 2.00% 2.50% 3.00%5.21% 88,247 100,135 115,731 137,089 168,1276.21% 68,921 76,239 85,296 96,797 111,8847.21% 55,881 60,781 66,621 73,702 82,4678.21% 46,508 49,983 54,019 58,762 64,4159.21% 39,459 42,031 44,960 48,325 52,233
Investment OpinionThe performance of the refining and petrochemicals segments is directly dependent on the demandfor products, which is in turn strongly correlated to the overall macroeconomic health. According to BPStatistical Review of World Energy 2009, global oil production increased from 76.99 million bpd in2003 to 81.82 million bpd in 2008. The refining segment also witnessed healthy growth over 2003-08led by the rising demand for refined products and sound economic growth across the world. Globalrefining capacity expanded from 83.64 million bpd in 2003 to 88.63 million bpd in 2008. However,global crude throughput fell by approximately 252,000 bpd to 75.18 million bpd in 2008 mainly onaccount of a decline in consumption. Accordingly, global refinery utilisation rates fell for the third timein succession to 84.8% in 2008 - the lowest since 2003. The prices of key refined products collapsedfollowing weak demand due to the economic crisis. Naphtha, a major feedstock for the petrochemcalssector reached levels even lower than the spot price of crude oil following weak demand forpetrochemicals. However, on a positive note, the prices of refined products are beginning to movepositively with consolidating demand and improving macroeconomic environment. In addition, despitethe recent economic challenges, the region is on track with its investments in oil & gas, particularly inexploration and development projects to replenish declining reserves, replace and upgradedeteriorating assets and ensure long-term supply. According to Proleads, the region witnessed a10.9% increase in upstream oil & gas investments with 265 projects as of January 2009 from just 239in June 2008. As of 1Q09, there were 35 million bpd of refinery projects under construction at variousstages. Going forward, a favourable investent scenario along with consolidating demand and pricespresent a healthy outlook for the sector.Fair Value: SAR 37.56Investment Opinion:OVERWEIGHTThe petrochemicals sector witnessed healthy growth during 2008, as sound economic growthregistered by economies worldwide kept the demand for petrochemical products high. At the sametime, price realisations followed an upward trajectory leading to record top- and bottom-line growth forcompanies operating in the sector. However, towards the later part of 2008, the sector witnessedslower growth as demand for petrochemicals plunged due to the economic slump. The slowdownacross the world driven by multiple factors including the subprime mortgage crisis and declining oilprices was instrumental in pulling down demand for petrochemical products. The prices of basicpetrochemicals such as ethylene, butadiene, propylene, styrene and benzene slumped to at leastthree-year lows. Even China, which continues to be one of the largest consumers of petrochemicals,was no exception and witnessed negative demand growth for the first time in 10 years. As the impactof the economic crisis deepened, the petrochemicals sector witnessed shut-downs of productionfacilities and delays in capacity addition plans. In addition, the sector has been abuzz with talks ofvarious mergers and acquisitions. However, recently there has been a revival of sorts in the prices ofcrude oil and natural gas. The OPEC crude increased from USD 35.58 per bbl at the start of the yearto USD 66.47 per bbl as of September 14, 2009. The prices for polypropylene, polyethylene andbenzene witnessed sequential improvements in 2Q09. While polypropylene prices reported a 24.4%sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter. Theprice of benzene gained the maximum rising 80.6% on a sequential basis. Based on these factors, weexpect a gradual improvement in the earnings of companies operating in the sector.Petro <strong>Rabigh</strong> is well-placed in the downstream business given its ownership of one of the world’slargest refining & petrochemical complex with an annual production capacity of 17.2 million tonnes ofrefined petroleum products and 2.4 million tonnes of ethylene and propylene-based petrochemicals.Besides this, the company has strong backing from its founding shareholders - Saudi Aramco andSumitomo Chemical. The company not only has a feedstock cost advantage with uninterruptedaccess to raw materials from Saudi Aramco, but also has the location advantage of being in closeproximity with the end markets. Furthermore, access to established marketing channels of its foundingshareholders gives it a definite edge. Going forward, with demand improving and prices consolidatingfor refined products and petrochemicals, the company will benefit as its projects become fullyoperational. Future expansion plans including the <strong>Rabigh</strong> II project will further strengthen thecompany’s foothold in the industry. Based on these solid fundamentals, we hold an optimistic view onthis stock.Currently, Petro <strong>Rabigh</strong>’s stock is trading at a P/E multiple of 26.67x and 11.71x on 2009E and 2010Eearnings, and at a P/B multiple of 2.82x and 2.30x on 2009E and 2010E BVPS, respectively.Meanwhile, the stock has outperformed the index by more than doubling (up 112.2%) since Januaryas against a gain of 21.2% by the Tadawul All Share Index. <strong>Co</strong>nsidering the above factors, we arriveat a price target of SAR 37.56, which exhibits a potential upside of 13.8% from its closing price of SAR33.00 (as on Sep 14, 2009). Accordingly, we initiate our coverage on <strong>Rabigh</strong> <strong>Refining</strong> &<strong>Petrochemical</strong> <strong>Co</strong>. with an OVERWEIGHT recommendation.
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