NATIONAL INDUSTRIALIZATION CO. (TASNEE) - Bank Audi

ENTITY OF AUDI SARADAR GROUP
CURRENT PRICE SAR 24.8
FAIR VALUE SAR 33.2
RATING BUY
Stock Data
November 23, 2012
HIGHLIGHTS
Ticker NIC AB
Bloomberg Median TP (SAR) 41.3
Market Cap (SAR mn) 16,589
Market Cap (USD mn) 4,424
Number of Shares (mn) 668.9
Avg Mon Liquidity (SAR mn ) 790.8
52 week High (SAR) 42.3
52 week Low (SAR) 24.8
Ownership Structure
Private Enterprises 38.0%
GOSI 8.6%
Public 53.4%
Tasnee Stock Performance
Bloomberg Consensus
COMPANY COVERAGE
Reine Dagher
Associate
Reine.Dagher@asib.com
Youssef Nizam, CFA
Head of Equity Research
Youssef.Nizam@asib.com
EQUITY RESEARCH
WEAKER-THAN-EXPECTED TiO2 OUTLOOK CUTS FAIR VALUE
FAIR VALUE: REVISED DOWNWARD FROM SAR 46.9/SHARE TO SAR 33.2/SHARE
Tasnee reported net earnings of SAR 417 million for its 3rd quarter of 2012, in line with our estimates
yet representing a major fall on both a Q-o-Q and Y-o-Y basis. The weak performance mainly
stemmed from waning fundamentals in the Titanium Dioxide (TiO2) industry, the largest contributor
to the company’s top line. The continuous destocking in the TiO2 industry and the wait-and-see
approach by consumers resulted in reduced pigment sales volumes for Tasnee and at lower industry
prices. The company’s bottom line was also affected by softer prices in the PolyOlefins (PO) industry,
mainly represented by HDPE, LDPE and PP. In the near-term, weakness in demand fundamentals
is expected to continue in both the TiO2 and PO industry, constituting a threat to Tasnee’s figures.
Long-term, some solidness in industry demand fundamentals should be regained however we do
not expect operating rates and prices to return to peak levels of previous years. Accordingly, with
this bleaker-than-expected economic and industry outlook, we revise downward our target price
from SAR 46.9/share to SAR 33.2/share.
A SOFTER TIO2 INDUSTRY OUTLOOK FOR NEAR-TERM, HOWEVER SHOULD REGAIN
SOME FUNDAMENTAL STRENGTH IN THE LONG-TERM
As TiO2 demand is tightly correlated to economic growth and as signs of sluggish growth in the
economic recovery are resurfacing, the demand outlook for TiO2 remains soft for the near term.
TiO2 prices have dropped by c5% in the 3rd quarter of 2012, primarily on the back of inventory
de-stocking, with prices expected to remain subdued until year-end (especially in light of the
fourth quarter’s seasonality effect). However, looking beyond, TiO2 fundamentals are expected to
regain their solidness gradually, particularly as inventory levels normalize and the global economy
gets back on track. With global GDP forecasts exceeding 4% for the years 2014 through 2017, any
rebound in the US construction market or Chinese infrastructure spending should result in stronger
demand for the white pigment. As such, with an increasing shortage in the titanium feedstock
market and therefore limited supply of TiO2 given limited capacity expansions, a recovery in the
global economy should improve demand and industry prices. However, again we note that any
macro-economic risk to resurface or to linger will threaten global TiO2 demand, thus making it highly
unlikely that operating rates and prices will return to peak levels of previous years.
MAINTAINING OUR BUY RATING IN LIGHT OF A 27% YTD PLUNGE IN STOCK PRICE
We update our investment case on Tasnee, reducing its fair value to SAR 33.2/share. Given the oversold
condition of the stock, witnessing a price plunge of 27% YTD (vs TASI +3.0% YTD) and trading at its 52week
low, the revised target price implies upside potential of 33.9%. Accordingly, we maintain our BUY
rating for investors with a medium to long-term investment horizon.
Despite this negative revision, Tasnee still trades at attractive multiples vis-à-vis global peers
while offering yields materially higher than the industry average. The company trades at 8.6x and
7.8x 2012 and 2013 estimated net earnings, respectively, vs a peer average of 10.9x and 9.7x, for
the same years, respectively. Moreover, Tasnee trades at an EV of 6.5x and 5.7x 2012 and 2013
estimated EBITDA, respectively, vs a peer average of 7.8x and 6.5x, for the same period respectively.
Furthermore, the stock offers a dividend yield of 4.2%, vs a peer average of 3.3%, and a FCF yield of
11.6% vs a peer average of 6.3%. Thus, Tasnee is still regarded as a value and dividend play, despite
this negative revision to our investment case. Moreover, given the long-term growth outlook for
the TiO2 industry and given that Tasnee is the only investment in the MENA region offering TiO2
exposure, holding this stock should allow investors to capitalize on a rebound in the TiO2 market.
FINANCIAL DATA
COMPANY UPDATE
NATIONAL INDUSTRIALIZATION CO. (TASNEE)
2011 2012 E 2013 E 2014 E
Sales Revenues (SAR 000) 19,648,743 17,688,114 19,400,399 21,093,501
Net Income (SAR 000) 2,441,423 1,922,880 2,127,952 2,452,397
EPS (SAR) 4.38 2.87 3.18 3.67
DPS (SAR) 2.0 1.0 1.0 2.0
BVPS (SAR) 19.77 17.22 19.08 20.94
PE 7.1 8.6 7.8 6.8
Dividend Yield 4.8% 4.2% 5.1% 7.4%
PB 1.57 1.44 1.30 1.18
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SAFCO COMPANY UPDATE
EQUITY RESEARCH
November 23, 2012
VALUATION
FCFF VALUATION
We revisited our FCFF model incorporating the weaker-than-expected global economic and
industry growth. We reviewed mainly our price projections for TiO2, noting that the latest Cristal
announcement of a TiO2 price increase dated all way back in December 2011. In addition, we
reviewed downward our price projections for HDPE, LDPE and PP. We adjusted our discount rate to
9.0%, from a previous 10.4%, and the growth rate to 2.1%, from a previous 2.4%, to reflect the latest
macro-developments and the latest changes in the company’s financial position. Accordingly, a fair
value of SAR 32.9/share was obtained.
(SAR 000) 2012 E 2013 E 2014 E
Net Income 1,922,880 2,127,952 2,452,397
Change in Working Capital 413,915 (513,935) 834,347
Non-Cash Charges 1,305,363 1,431,728 1,556,677
Capex 1,173,880 1,157,358 1,258,362
Interest Expense 661,848 648,009 577,627
Free Cash Flow to the Firm (FCFF) 2,302,296 3,564,267 2,493,992
Present Value of FCFF 2,302,296 2,997,948 1,923,871
Present Value of Terminal Value 28,517,658
Intrinsic Value of the Firm 35,741,774
Net Debt 13,731,348
Intrinsic Value of Equity 22,010,426
WACC 9.0%
Terminal Growth Rate 2.1%
Shares Outstanding (000) 668,914
NAV per share (SAR) 32.9
SENSITIVITY ANALYSIS
Below is a data table presenting a sensitivity analysis to our price target valuation, assuming various
growth and discount rates.
Terminal Growth Rate
WACC
8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0%
1.0% 32.8 29.3 26.3 23.6 21.2 19.0 17.1 15.4 13.8
1.25% 34.5 30.8 27.5 24.7 22.2 19.9 17.9 16.0 14.4
1.5% 36.3 32.3 28.9 25.9 23.2 20.8 18.7 16.8 15.0
1.75% 38.3 34.0 30.3 27.1 24.3 21.8 19.6 17.5 15.7
2.0% 40.4 35.8 31.9 28.4 25.4 22.8 20.5 18.4 16.5
2.25% 42.7 37.8 33.5 29.9 26.7 23.9 21.4 19.2 17.2
2.5% 45.2 39.9 35.3 31.4 28.0 25.0 22.4 20.1 18.0
2.75% 48.0 42.1 37.2 33.0 29.4 26.3 23.5 21.1 18.9
3.0% 51.0 44.6 39.3 34.8 30.9 27.6 24.7 22.1 19.8
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TASNEE
November 23, 2012
RELATIVE VALUATION
COMPANY UPDATE EQUITY RESEARCH
Using two different earnings multiples, we valued Tasnee on an equal basis with comparable peers
region-wide and world-wide. Tasnee should be trading at a premium to regional counterparts given
mainly its exclusive and significant exposure to TiO2, in addition to its largely diversified income
stream, an advantage shared by very few counterparts in the region. Furthermore, Tasnee should
be trading at a premium to global peers given that the company benefits from a notable feedstock
advantage in the production of polyolefins.
P/E MULTIPLE
Tasnee’s counterparts trade at an average of 10.9x estimated 2012 earnings, opposed to Tasnee trading
at 8.6x its estimated 2012 earnings, implying an unjustified discount to its peers. Based on our 2012
earnings per share (EPS) estimate of SAR 2.87, a fair value of SAR 31.4/share was derived, thus offering
an upside potential of 26.4% for the company’s stock.
EV/EBITDA MULTIPLE
On a forward basis (2012E), Tasnee’s peer group trades at an average EV/EBITDA of 7.8x opposed to
Tasnee’s EV/EBITDA of 6.5x. Accordingly, a fair value of SAR 36.0/share was obtained, resulting in an
upside potential of 45.0%.
(SAR 000)
EBITDA 2012E 5,742,171
Enterprise Value 44,788,933
Net Debt as of YE12 E 13,980,539
Minority Interest as of YE12 E 6,758,963
Market Capitalization 24,049,431
Shares Outstanding (000) 668,914
NAV per Share (SAR) 36.0
FINAL VALUATION
Attributing a 60% weight to the FCFF valuation and the remaining weight to the comparative
valuation, a final fair value of SAR 33.2/share was derived for Tasnee, offering an upside potential of
33.9% (based on the closing price of SAR 24.8/share).
Fair Value (SAR) Weight
FCFF Valuation 32.9 60%
Relative Valuation
P/E 31.4 20%
EV/EBITDA 36.0 20%
Final Fair Value per Share (SAR) 33.2
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TASNEE
November 23, 2012
COMPANY UPDATE EQUITY RESEARCH
APPENDIX A: PRO-FORMA INCOME STATEMENT
(SAR 000) 2011 2012E 2013E 2014E
Sales 19,648,743 17,688,114 19,400,399 21,093,501
Cost of Sales (12,657,082) (11,915,594) (12,784,863) (13,816,243)
Gross Profit 6,991,661 5,772,520 6,615,536 7,277,258
S,G&A expenses (1,597,396) (1,512,215) (1,642,126) (1,785,436)
Share in net income of associates 12,703 16,780 18,952 17,866
Income from operations 5,406,968 4,277,085 4,992,362 5,509,687
Investment income and other 80 159,722 164,481 180,880
Financing charges (692,656) (661,848) (648,009) (577,627)
Income before zakat, income tax and MI 4,713,634 3,774,959 4,508,834 5,112,940
Zakat and income tax on subsidiaries (539,393) (418,342) (527,459) (598,130)
Minority interest (1,725,751) (1,414,213) (1,669,764) (1,893,484)
Income before zakat 2,448,490 1,942,404 2,311,610 2,621,326
Zakat (7,067) (19,524) (183,658) (168,929)
Net Income 2,441,423 1,922,880 2,127,952 2,452,397
APPENDIX B: PRO-FORMA BALANCE SHEET (SUMMARIZED)
(SAR 000) 2011 2012E 2013E 2014E
Cash and cash equivalents 4,636,675 5,140,859 6,349,548 5,285,079
Accounts receivables 4,140,326 3,572,098 3,917,892 4,259,812
Inventories 3,692,544 4,345,280 3,729,822 4,030,715
Prepaid expenses and other assets 391,013 728,451 559,732 540,699
Total current assets 12,860,558 13,786,688 14,556,994 14,116,305
Investments in associated companies and other 471,622 458,969 474,029 489,089
PPE, net 17,830,489 18,388,339 21,415,348 22,193,886
Intangible assets, net 3,569,127 3,390,671 3,212,214 3,033,758
Projects under progress 4,105,038 5,423,000 1,963,000 1,613,000
Other non-current assets 753,256 720,220 746,521 733,370
Total non-current assets 27,067,021 28,929,497 28,405,655 28,634,524
Total Assets 39,927,579 42,716,184 42,962,649 42,750,828
Short-term facilities and Murabaha 3,387,118 1,831,181 2,049,658 2,268,136
Current portion of long-term loans 1,586,773 2,091,846 2,091,846 2,091,846
Accounts payable 1,027,614 1,035,644 1,111,196 900,629
Accrued expenses and other liabilities 1,953,075 1,839,538 1,957,984 2,098,519
Total current liabilities 7,954,580 6,798,210 7,210,685 7,359,130
Long-term loans 11,363,330 15,198,371 13,106,524 11,014,678
Other non-current liabilities 2,833,232 2,441,979 2,391,568 2,152,580
Total non-current liabilities 14,196,562 17,640,350 15,498,092 13,167,258
Total shareholders’ equity 11,022,826 11,518,662 12,764,104 14,005,967
Minority interests 6,753,611 6,758,963 7,489,768 8,218,473
Total Equity 17,776,437 18,277,625 20,253,872 22,224,440
Total Liabilities and Equity 39,927,579 42,716,184 42,962,649 42,750,828
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TASNEE
FAIR VALUE DEFINITION
November 23, 2012
RATING GUIDE
ISSUER
COMPANY UPDATE EQUITY RESEARCH
It is an unbiased estimate of the 12-month potential market price of the stock
SELL REDUCE HOLD ACCUMULATE BUY
Downside -30% -10% +10% +30% Upside
BUY: Upside potential in share price is more than 30%
ACCUMULATE: Upside potential in share price is between 10 and 30%
HOLD: Upside or downside potential in share price less than 10%
REDUCE: Downside potential in share price is between 10 and 30%
SELL: Downside potential in share price is more than 30%
Audi Saradar Investment Bank
Audi Saradar Investment Bank SAL • Lebanese joint stock company with a registered capital of
10,000,000,000 Lebanese Pounds • Commercial Registrar in Beirut: 30812 • Holding number 33 on
the Central Bank’s Banks List.
Address: Bank Audi Plaza • Bab Idriss • Beirut 2021 8102 Lebanon • P.O. Box 11-2560 • Beirut 1107
2808 • Lebanon. Phone: +961 1 964072 • Fax: +961 1 970403 • Email: contactus@asib.com
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TASNEE
November 23, 2012
DISCLAIMER
COMPANY UPDATE EQUITY RESEARCH
“All rights reserved. This research document (the “Document”) is prepared by Audi Saradar Investment Bank SAL (“ASIB”),
being an entity of Audi Saradar Group, for the use of the clients of ASIB and/or the clients of any entity within the Audi
Saradar Group.
This Document is disclosed to you on a confidential basis. Receipt and/or review of this Document constitute your agreement
not to copy, modify, redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information
contained in this Document prior to public disclosure of the same by ASIB or the Audi Saradar Group or without the express
prior written consent of ASIB.
This Document is not intended for dissemination, distribution to, or use by, any person or entity in any country or jurisdiction
which would subject ASIB or any entity within the Audi Saradar Group, to any registration or licensing requirements within
these jurisdictions or where it might be considered as unlawful. Accordingly, this Document is for distribution solely in
jurisdictions where permitted and to persons who may receive it without breaching any applicable legal or regulatory
requirements. In any case, this Document shall not be distributed in the Republic of Egypt.
Your attention is drawn to the fact that you should not access this Document if the regulations of your country of citizenship
and/or residency or any applicable regulations prohibit it. In any case, persons who are subject to any restrictions in any
country, such as US persons are not permitted to access information contained herein.
Neither the information, nor any opinion expressed herein constitutes an offer or an invitation or a recommendation to
make an offer, to buy or sell any security or other investment product related to such security or investment. This Document
provides general information only, is not intended to provide personal investment advice or recommendation and does not
take into account the specific investment objectives, financial situation and the particular needs of any specific person who
may receive it. You should seek financial, legal or tax advice regarding the appropriateness and suitability in investing in any
security, other investment or investment strategy discussed or forecasted in this Document.
You should carefully read the definitions of the Rating Guide provided in this Document. In addition you should read this
Document in its entirety and not conclude its contents from the ratings solely.
The information herein was obtained from various public sources believed in good faith to be reliable. Neither ASIB nor any
entity within the Audi Saradar Group represents that the information contained in this Document is complete, accurate
or free from any error and makes no representations or warranties whatsoever as to the data, information and opinions
provided herein.
This Document and any information, opinion and prospect contained herein reflect a judgment at its original date
of publication by ASIB and are subject to change without notice. ASIB and/or any entity within the Audi Saradar Group
may have issued, and may in the future issue, other research documents that are inconsistent with, and reach different
conclusions from, the information, opinions and prospects presented in this Document.
This Document reflects the different assumptions, views and analytical methods of the analysts who prepared them; ASIB,
and the Audi Saradar Group are under no obligation to ensure that such other research documents are brought to the
attention of any recipient of this Document.
ASIB, any entity within the Audi Saradar Group, one or more of their affiliates and/or their officers (including but not limited
to their strategists, analysts and sales staff) may have a financial interest in securities of the issuer(s) or related investments,
may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in
this Document and may take a view that is inconsistent with that taken herein.
The price, value of and income from any of the securities or financial instruments mentioned in this Document can fall as well
as rise. The value of securities and financial instruments is subject to market conditions, volatility, exchange rate fluctuation
and credit quality of any issuer that may have a positive or adverse effect on the price or income of such securities or
financial instruments. Any forecasts on the economy, stock market, bond market or the economic trends of the markets are
not necessarily a guide to future returns. You should understand that statements regarding future prospects may not be
realized. Past performance should not be taken as an indication or guarantee of future performance, and no representation
or warranty, express or implied, is made regarding future returns. As a result of the preceding, you may lose, as the case may
be, the amount originally invested.
None of ASIB, any entity within the Audi Saradar Group, any of their affiliates and/or their officers (including but not limited
to their strategists, analysts and sales staff) shall be held liable for any loss or damage that may arise, directly or indirectly,
from any use of the information contained in this Document nor for any decision or investment made on the basis of
information contained herein.”
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