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HOLD Saudi Basic Industries Corporation – SABIC Saudi Basic Industries Corporation 1 Global Research - Saudi Arabia Saudi Arabia Faisal Hasan, CFA Head of Research [email protected] Phone No:(965) 22951270 Syed Taimure Akhtar Financial Analyst [email protected] Phone No:(966) 1 2199966 Ext.: 950 Umar Faruqui Financial Analyst [email protected] Phone No:(965) 22951270 Investment Update Tickers: 2010.SE (Reuters) SABIC AB (Bloomberg) Listing: Saudi Stock Exchange (Tadawul) Fair Value: SR83.1 CMP: SR80.5 (as on Nov. 22 nd , 2009) Investment Summary We believe that product prices and overall capacity utilization were the key factors for Saudi Basic Industries Corporation (SABIC) profitability growth during 2Q2009 and 3Q2009. However, on a 9M2009 basis the prices and capacity utilization are still low compared to the previous year as the financial crisis which started in 4Q2008 stretched into 1H2009 eroding oil prices and end-product demand. The company reported after tax profit of SR3.6bn in 3Q2009, a growth of 102.1% over the previous quarter but a decline of 49.6% over the corresponding period last year. During 9M2009 tax after profit declined by 79.3% from SR21.7bn recorded in 9M2008. In view of the rise in oil prices in 3Q2009, we have changed our forecast for crude oil prices from US$60.0-65.0 per barrel to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also raised our forecast for petrochemical prices. Going forward, we believe that the company capacity utilization will grow modestly to reach 77.0%-82.0% in 2012 compared to 60.0%-65.0% in 2009 due to an expected slow pace of economic recovery. Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012. JV with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%.
Transcript
Page 1: Saudi Basic Industries Corporation – SABIC Saudi Arabia

HOLD

Saudi Basic Industries Corporation – SABIC

Saudi Basic Industries Corporation 1

Global Research - Saudi Arabia

Saud

i Ara

bia

Faisal Hasan, CFAHead of [email protected] No:(965) 22951270

Syed Taimure AkhtarFinancial [email protected] No:(966) 1 2199966 Ext.: 950

Umar FaruquiFinancial [email protected] No:(965) 22951270

Investment Update

Tickers:2010.SE (Reuters)SABIC AB (Bloomberg)

Listing:Saudi Stock Exchange (Tadawul)

Fair Value:SR83.1

CMP:SR80.5 (as on Nov. 22nd, 2009)

Investment Summary

• We believe that product prices and overall capacity utilization were the key factors for Saudi Basic Industries Corporation (SABIC) profitability growth during 2Q2009 and 3Q2009. However, on a 9M2009 basis the prices and capacity utilization are still low compared to the previous year as the financial crisis which started in 4Q2008 stretched into 1H2009 eroding oil prices and end-product demand.

• The company reported after tax profit of SR3.6bn in 3Q2009, a growth of 102.1% over the

previous quarter but a decline of 49.6% over the corresponding period last year. During 9M2009 tax after profit declined by 79.3% from SR21.7bn recorded in 9M2008.

• In view of the rise in oil prices in 3Q2009, we have changed our forecast for crude oil prices from US$60.0-65.0 per barrel to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also raised our forecast for petrochemical prices.

• Going forward, we believe that the company capacity utilization will grow modestly to reach 77.0%-82.0% in 2012 compared to 60.0%-65.0% in 2009 due to an expected slow pace of economic recovery.

• Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012.

• JV with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%.

Page 2: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

2 Saudi Basic Industries Corporation

• Long-term sustainable volumetric growth is largely associated with the revival in the world’s major economies, which are the major consumers of SABIC products. The stimulus measures in various countries have managed to jump-start the economies. However, so far the recovery has been “jobless” with unemployment still at historically high levels in many countries. Eventually private sector spending and consumer spending will have to overtake government spending to make economic growth sustainable. Thus, we are assuming a slow economic recovery.

• After incorporating all the recent updates in our financial model we have revised our fair value upwards to SR83.1. The stock at its current market price of SR80.5 (as on 22nd Nov 09) is trading at a discount of 3.2% to the fair value. We, therefore, recommend ‘HOLD’ for the stock.

Table 01: Investment IndicatorsMarket Price

(SR)

Shares in issue

(mn)

Market Cap

(SR mn)

52-week price range

(SR) High / Low

80.50* 3,000 241,500 84.7 / 34.1

Year

Revenues

(SR mn)

Net Profit

(SR mn)

EPS

(SR)

BVPS*

(SR)

ROE

(%)

P/E*

(x)

P/BV*

(x)

2010E 129,738 18,183 6.1 41.3 15.7 13.3 1.9

2009E 99,561 7,619 2.5 35.8 7.2 31.7 2.2

2008A 150,810 22,030 7.3 34.3 22.7 7.1 1.5

2007A 126,204 27,022 9.0 36.5 32.9 14.7 3.6Source: Annual Reports and Global Research *Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the Tadawul as of November 22nd 2009.

Chart 01: Share Price Performance Chart

Source: Zawya & Saudi Stock Exchange (Tadawul)

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09 35

55

75

95

115

135

155

175

TASI - LHS SABIC(SR) - RHS

Page 3: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

3Saudi Basic Industries Corporation

GCC Petrochemical & Fertilizer Sector

Based on given data and our understanding, regional capacities reached 63.1mn tons by the end of 2008 and are further forecasted to reach at 73.5mn tons by the end of 2009. In CAGR terms, the regional capacity is expected to grow at 9.1% during 2009-12 to 89.4mn tons. It is worth mentioning that the forecasted growth in the regional capacity is based on timely completion of expansion plans.

Chart 02: Regional Petrochemical Capacity Growth (mn ton)

Source: Zawya & Global Research

The regional fertilizer capacity is expected to increase at a 2008-12 CAGR of 24.0% to 31.6mn. The capacity includes all types of fertilizers. The major growth in regional fertilizer capacity is expected to take place in Saudi Arabia where it is expected to increase at a CAGR of 31.2% to 20.1mn tons. In turn, the major portion of growth in domestic fertilizer capacity is attributable to the upcoming capacity in Maaden Complex, which has a capacity to produce 10.0mn tons of different fertilizer products and SABIC has a 30.0% stake.

Chart 03: Growth in Regional Fertilizer Capacity (mn ton)

Source: Zawya & Global Research

0.1%9.6%

16.5%11.4%

4.5% 4.5%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2007 2008 2009E 2010E 2011E 2012E0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Total Petrochemical Capacities Growth

28.2%

38.5%

27.4%4.7%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2007 2008 2009E 2010E 2011E 2012E-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Total Fertilizer Capacities Growth

Page 4: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

4 Saudi Basic Industries Corporation

Table 02: GCC Petrochemical Capacity Expansion Plan (tons)

Project Names Country

Cost US$

(mn)

Basic-

Olefins

Basic-

Aromatic

Basic-

Oxygenate

Expected

Completion

OSOS Petrochemical Project Saudi Arabia 1,000 - - - 2010

Sino-Saudi Petrochemical Project Saudi Arabia 5,000 1,700,000 - - 2010

Saudi Kayan Saudi Arabia 10,000 3,800,000 - - 3Q2010

SIPCHEM-Olefins Saudi Arabia 7,000 2,100,000 - - 3Q2012

Safra Yanbu Phase II Aromatics Expansion Saudi Arabia 400 - - - 2009

SIPCO-Yanbu Linear Alkyl Benzene (LAB) Plant Saudi Arabia - - - - 2010

Petrokemya-PVC and Offsite Saudi Arabia - - - - 2010

Sadaf-Styrene Plant-Saudi Petrochemical Saudi Arabia 600 - 600,000 - 2010

Dammam 7 - Butanol Plant Saudi Arabia 400 - - - 2010

Delta Oil Saudi Arabia 2,000 1,200,000 - - 2009

Arabian Chlor Vinyl Company Saudi Arabia 400 - - - 1Q2010

Saudi Polyolefin Company - SPC Saudi Arabia 560 - - - 2009

Sahara - Jubail Acrylic Complex Saudi Arabia - - - - 4Q2010

Al Rajhi - Jubail Complex Saudi Arabia 4,000 - - - 2011

Gulf Petrochemical Industries Company Bahrain 200 - - 1,728,000 2010

KFH - Petrochemical, Water, and Power Bahrain 1,500 - - - 2010

IBK - PTA/PET Complex Kuwait 300 - - - 2010

Salalah Methanol Plant Oman 900 - - 1,080,000 2Q2010

QAPCO Qatar 410 - - - 2Q2012

QP/Shell Qatar 2,500 1,500,000 - - 2011

QH/Honam - Qatar Petrochemical Complex Qatar 2,600 880,000 600,000 - 2012

QP/Exxon Mobil - Ras Laffin Petrochemical Qatar 3,000 1,300,000 - - 2012

QAFAC II - Ammonia & Methanol Complex Qatar - - - - 1Q2010

Borogue 2 UAE 5,500 39,000 - - 2Q2010

Borogue 3 UAE - - - - 2014

Takreer - Ruwais Gasoline and Aromatics UAE 1,000 - 600,000 - 2010

KGL – Petroleum UAE 2,000 - - - 2013

Total 52,122 12,519,000 1,800,000 2,808,000 Source: Zawya & Global Research

Table 03: GCC Fertilizer Capacity Expansion Plan (tons)

Project Name Country

Cost US$

(mn) DAP Ammonia Urea

Expected

Completion

Maaden Saudi Arabia 7,010 2,900,000 1,100,000 - 1Q2010

SIPCHEM Saudi Arabia - - 648,000 - 3Q2012

SAFCO-V Saudi Arabia 500 - 1,200,000 1,500,000 2Q2011

Ruwai UAE 1,500 - 720,000 1,260,000 3Q2011

Oman India Oman 1,000 - - 1,700,000 3Q2011

QAFAC II Qatar 400 - 360,000 - 1Q2010

QAFCO V Qatar 3,200 - 1,656,000 1,386,000 1Q2011

Total 13,727 2,900,000 5,684,000 6,087,200 Source: Global Research & Zawya

Page 5: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

5Saudi Basic Industries Corporation

Regional Capacity Utilization

Based on our regional coverage, we expect regional average capacity utilization to improve slightly to 50.0%-60.0% during 4Q2009 as compared to the calculated utilization rate of 50.0%-55.0% during 3Q2009. On a yearly basis the 2009 regional petrochemical capacity (excluding fertilizer) is expected to average 57.0%-62.0%. Going forward, we expect a slow improvement in regional capacity utilization to reach 75.0%-85.0% by the end of 2012.

Chart 04: Regional Petrochemical Capacity Utilization

Source: Global Research & Company Reports

On the other hand, the average regional fertilizer capacity is expected to remain in the range of 80.0%-90.5% during 4Q-2009 as compared to our calculated utilization rate of 80.0%-85.0% during 3Q2009. For the whole 2009 the utilization rate is expected to end up in the range of 85.0%-90.0%. Despite the decrease in fertilizer prices, capacity utilization levels remained high in 2009 due to a shortage of fertilizer globally. In addition, agriculture sector was more resilient to the economic crisis as the world is already facing a food shortage. Going forward, we assume regional fertilizer capacity utilization rate to increase to 90.0%-95.0% by 2012.

Feedstock Prices

Natural gas is the main feedstock for fertilizer sector and crude oil prices are used as a benchmark to set gas prices in international markets. However, gas prices are highly subsidized in certain regions of the world such as Middle-East, Northern Africa, and South Asia where pre-determined discounts exist which fix the price to US$0.75 per mmbtu (in Saudi Arabia) to US$2.5 per mmbtu (North Africa and South Asia). Average gas prices in international markets shot up by 79.5% from US$4.4 per mmbtu in 2001 to US$7.9 per mmbtu in 2008, due to higher average crude oil prices YoY. Crude oil price have recovered in 2Q-2009 and 3Q-2009 after falling by more than 50.0% in 3Q-2008. In view of the rise in oil prices in 2Q-2009 and 3Q-2009, we have changed our forecast for crude oil prices from US$60.0-65.0 to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also revised international gas prices to US$4.0-5.0 per mmbtu during 2009-12.

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

2008 2009E 2010E 2011E 2012E85.0%

87.5%

90.0%

92.5%

95.0%

97.5%

100.0%

Capacity Utilization - Petrochemical Capacity Utilization - Fertilizer

Page 6: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

6 Saudi Basic Industries Corporation

Chart 05: Gas & Crude Oil Prices

Source: OPEC, EIA & Global Research

Products’ Prices

The upward revision in forecasted crude oil prices has led to an upward revision of 5.0%-10.0% of prices of petrochemical and fertilizer during 2009-12.

Chart 06: Basic Petrochemical & Fertilizer Products Prices (US$ per ton)

Source: OPEC, EIA & Global Research

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

2006 2007 2008 2009E 2010E 2011E 2012E3.0

4.0

5.0

6.0

7.0

8.0

9.0

Crude Oil Prices (US$ per barrel) Gas Prices (US$ per mmbtu)

500

700

900

1,100

1,300

1,500

1,700

3Q08

A

4Q08

A

1Q09

A

2Q09

A

3Q09

A

4Q09

E

1Q10

E

2Q10

E

3Q10

E

4Q10

E

1Q11

E

2Q11

E

3Q11

E

4Q11

E

1Q12

E

2Q12

E

3Q12

E

4Q12

E150

350

550

750

950

1,150

1,350

1,550

Ethylene Propylene Ammonia Urea

Page 7: Saudi Basic Industries Corporation – SABIC Saudi Arabia

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7Saudi Basic Industries Corporation

Saudi Basic Industries Corporation – Updated Financial Outlook

New Complexes & Expansion Plans

Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012.

JV with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%.

Chart 07: Overall Company’s Production & Growth

Source: Company Annual Accounts, Press Release, Zawya & Global Research

Going forward, we believe that the company capacity utilization will grow modestly to reach 77.0%-82.0% in 2012 compared to 60.0%-65.0% in 2009 due to an expected slow pace of economic recovery.

Sales Revenue

Based on the improvement in product prices and capacity utilization during 3Q2009, the company is expected to post sales revenue of SR99.5bn in 2009, which is 1.6% higher than our previous forecast. We have updated crude oil prices, capacity utilization and commencement dates of new capacities in 2010. We have also incorporated the delay in YASNAB plant which is not expected to come online in 2009. We now expect sales revenue to increase at a CAGR of 3.3% during 2009-12 against our previous estimate of negative CAGR of 1.5% during the same period.

5.0%

11.5%

0.4% 9.6%

4.9%

3.0% 0.9%

8,500

18,500

28,500

38,500

48,500

58,500

68,500

78,500

2006A 2007A 2008A 2009E 2010E 2011E 2012E0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Production (000 tons) Growth

Page 8: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

8 Saudi Basic Industries Corporation

Chart 08: Sales Revenue (SR mn)

Source: Company Annual Accounts, & Global Research

CGS & Gross Margins

The company is expected to record cost of sales of SR62.3bn as compared to our previous estimate of SR71.3bn. The expected 2009 gross margin now is 27.0% as compared to our previous estimate of 27.2%. We have also lowered our 2009 EBITDA margin estimate to 30.3% from 32.0% due to upward revision in administration costs to SR8.9bn from our previous estimate of 8.7bn and decline in other income estimate by 31.1% to SR1.8bn from our previous estimate. Going forward, gross margins are expected to show improvement and remain in the range of 30.0%-33.0% during 2009-12 due to higher end-product prices and utilization levels.

Chart 09: Gross & EBITDA Margins

Source: Company Annual Accounts, & Global Research

Profitability Growth

Despite the upward revision in sales revenue for 2009, we expect the company to post profitability of SR7.6bn in 2009, a downward revision by SR3.3bn from our previous estimate. The major reasons for such a downward revision are (i) downward revision in other income by SR0.8bn from our previous estimate (ii) expected higher depreciation, which has pushed up our cost of sales estimate by SR1.3bn, (iii) higher minority interest to SR7.1bn from previous estimate of SR6.6bn, (iv) increase in administration and general expenses estimate by SR0.2bn to SR8.9bn from our previous estimate (v) increase in financial cost to SR3.1bn from our previous estimate of SR3.0bn.

10.3%

46.2%

19.5%

-34.0%

30.3%

14.2%

16.2%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2006A 2007A 2008A 2009E 2010E 2011E 2012E-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Sales Revenue (SR mn) Growth

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

41.0%

43.0%

2006A 2007A 2008A 2009E 2010E 2011E 2012E

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

Gross Margin - LHS EBITDA Margin - RHS

Page 9: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

9Saudi Basic Industries Corporation

Chart 10: Profitability (SR mn) & ROAA

Source: Annual Reports & Global Research

Chart 11: Profitability (SR mn) & ROAE

Source: Annual Reports & Global Research

We now expect profitability to increase at a 2008-12 CAGR of 5.6% as compared to previous estimate of 1.8% for the same period. The major reasons of upward revision in the company’s future profitability are (i) improved capacity utilization (ii) higher long term price range from our previous estimate and (ii) commencement of Chinese JV, which is expected to operate at 100.0% utilization levels. The company’s ROAA and ROAE are expected remain in the average range of 5.0-6.0% and 14.0%-15.0% during 2009-12.

13.4%12.9%

8.4%

2.7%

5.9%

6.4%

7.5%

-

5,000

10,000

15,000

20,000

25,000

30,000

2006A 2007A 2008A 2009E 2010E 2011E 2012E0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

PAT ROAA

30.0%32.9%

22.7%

7.2%

15.7%

16.2%

17.8%

-

5,000

10,000

15,000

20,000

25,000

30,000

2006A 2007A 2008A 2009E 2010E 2011E 2012E0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

PAT ROAE

Page 10: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

10 Saudi Basic Industries Corporation

Valuation and Recommendation

We have used Discounted Cash Flow methodology to value the Company. Under this method, we have used 4-year (FY2009-FY2012) explicit forecast period for the Free Cash Flows (FCF) of SABIC. The terminal value is estimated by using a constant terminal growth rate for the Company. The forecasted cash flow and the terminal value is then discounted at the company Weighted Average Cost of Capital (WACC). In order to value the FCF of SABIC, we have used the following assumptions:

1. Risk Free Rate (RFR) of 5.5%. 2. Equity risk premium of 6.0%.3. Beta of 1.2 4. A terminal growth rate of 3.0%.5. A target cost of debt of 7%.

Using the above assumptions, we have derived a cost of equity for the company at 12.5% through Capital Assets Pricing Model, and a WACC of 10.7%, resulting in a fair value of SR83.1 per share.

Table 04: DCF Calculations(SR Mn) 2009 (E) 2010 (E) 2011 (E) 2012 (E)

FCF (2,243) 9,864 14,836 26,310

Discounted Cash Flow (2,187) 8,688 11,804 18,910

Terminal Value 352,118

Primary Value 37,214

Terminal Value (discounted) 253,081

Total Enterprise Value 290,295

Debt (101,623)

Add: Investments & Cash Equivalents 52,836

Total Equity Value 241,509

Shares Outstanding (mn) 3,000

Fair Value Per Share 83.1 Source: Global Research

Sensitivity Analysis

We provide below a sensitivity analysis table, which shows the probable value given different growth rate assumption and WACC. The shaded area represents the most probable outcomes.

Table 05: Sensitivity Analysis Terminal Growth Rates

1.5% 2.5% 3.0% 4.5% 5.5%

WA

CC

8.7% 93.7 110.0 120.3 165.9 220.1

9.7% 79.4 91.5 98.9 129.6 162.3

10.7% 68.3 77.6 83.1 105.1 126.7

11.7% 59.4 66.7 71.0 87.4 102.7

12.7% 52.1 58.0 61.4 74.0 85.4Source: Global Research

Page 11: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

11Saudi Basic Industries Corporation

Key Risk

The major risks to our valuation are (i) long-term crude oil prices and (ii) long-term capacity utilization rate. In order to facilitate investors, we have run sensitivity on the company’s valuation at different levels of crude oil and capacity utilization with respect to our base assumptions. The following table shows the impact of these two factors on the company’s valuation.

Table 06: Key Risk Analysis Long - Term Crude Oil Price

Long-Term

Capacity

Utilization

-25.0% -12.5%

Base

Assumption* +12.5% +25.0%

-10.0% 34.3 46.5 57.1 70.9 83.1

-5.0% 44.8 57.9 70.9 84.0 97.0

Base Assumption** 55.2 69.2 83.1 97.1 111.0

+5.0% 65.6 80.5 95.3 110.1 124.9

+10.0% 76.0 91.8 109.1 123.2 138.9Source: Global Research*In the range of US$70.0-80.0 per barrel**In the range of 77.0%-80.0%

We have incorporated all the recent developments in our financial model. Consequently we have revised our fair value by 10.1% to SR83.1 from SR75.6. The stock at its current market price of SR80.5 (as on 22nd Nov 09) is trading at a discount of 3.2% to its fair value. We, therefore, recommend ‘HOLD’ for the stock.

Page 12: Saudi Basic Industries Corporation – SABIC Saudi Arabia

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12 Saudi Basic Industries Corporation

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22

10,1

67,7

94

1

0,26

9,47

2

10

,372

,166

T

otal

Cur

rent

Ass

ets

73,9

74,4

41

98,3

05,2

65

95,4

54,9

74

98,9

27,4

91

103,

589,

683

1

09,0

98,8

18

115

,988

,869

Non

-Cur

rent

Ass

ets

In

vest

men

ts3,

531,

839

6,02

0,87

7 8,

695,

833

7,82

6,25

0 8,

217,

562

8,6

28,4

40

9,05

9,86

2 O

ther

Non

-Cur

rent

Ass

ets

4,01

7,91

5 3,

327,

361

3,18

9,91

5 3,

349,

411

3,51

6,88

1

3

,692

,725

3,

877,

362

Tot

al N

on-C

urre

nt A

sset

s7,

549,

754

9,34

8,23

8 11

,885

,748

11

,175

,660

11

,734

,443

12,

321,

166

12,9

37,2

24

Fix

ed A

sset

s

Plan

t & P

rope

rty

79,9

70,6

22

123,

113,

574

141,

440,

177

158,

852,

881

184,

402,

038

1

97,2

52,9

81

210

,840

,414

In

tang

ible

Ass

ets

5,09

4,00

3 22

,964

,004

22

,979

,090

23

,950

,854

28

,372

,380

33,

678,

212

40,0

45,2

10

Tot

al F

ixed

Ass

ets

85,0

64,6

25

146,

077,

578

164,

419,

267

182,

803,

735

212,

774,

418

2

30,9

31,1

93

250

,885

,624

T

otal

Ass

ets

166,

588,

820

253,

731,

081

271,

759,

989

292,

906,

887

328,

098,

545

3

52,3

51,1

77

379

,811

,717

Lia

bilit

ies

& O

wne

rs’

Equ

ity

C

urre

nt L

iabi

litie

s

Acc

ount

P/A

11,0

65,4

22

14,9

65,3

92

8,26

1,24

6 9,

357,

378

9,13

7,03

2

10

,309

,824

10,

797,

513

Shor

t-T

erm

Ban

k Fa

cilit

ies

607,

622

1,39

9,18

8 1,

235,

542

1,85

3,31

3 2,

223,

976

2,6

68,7

71

3,20

2,52

5 C

urre

nt P

ortio

n O

f L

ong-

Ter

m L

oans

5,52

1,17

4 3,

272,

036

3,0

53,2

74

4,41

8,37

3 5,

302,

048

6,3

62,4

57

7,63

4,94

9 A

ccru

ed L

iabi

litie

s &

Pro

visi

ons

8,52

9,86

8 11

,660

,325

11,

244,

500

9,3

57,3

78

22,8

42,5

79

2

1,47

8,80

0

22

,576

,619

D

ivid

end

P/A

2,74

8,98

5

618

,677

619,

882

7

43,8

58

89

2,63

0

1

,071

,156

1,

285,

387

Zak

at P

/A

1,

767,

020

2,1

65,5

63

2,38

2,11

9 2,

620,

331

2,8

82,3

64

3,17

0,60

1 T

otal

Cur

rent

Lia

bilit

ies

25,7

24,0

86

33,6

82,6

38

2

6,58

0,00

7

28

,112

,420

43

,018

,596

44,

773,

372

48,6

67,5

94

Non

-Cur

rent

Lia

bilit

ies

L

ong-

Ter

m L

oans

33,6

11,6

28

75,4

37,5

95

88,3

67,4

62

101,

622,

581

103,

655,

033

1

04,6

91,5

83

105

,215

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O

ther

Non

-Cur

rent

Lia

bilit

ies

6,76

2,86

9 10

,114

,576

10,

170,

907

11,0

86,2

89

12,0

84,0

55

1

3,17

1,62

0

13

,303

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T

otal

Non

-Cur

rent

Lia

bilit

ies

40,3

74,4

97

85,5

52,1

71

9

8,53

8,36

9

112

,708

,870

11

5,73

9,08

8

117

,863

,203

1

18,5

18,3

77

Tot

al L

iabi

litie

s66

,098

,583

11

9,23

4,80

9

125

,118

,376

1

40,8

21,2

90

158,

757,

683

1

62,6

36,5

75

167

,185

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Shar

ehol

ders

’ E

quit

y

Shar

e C

apita

l25

,000

,000

25

,000

,000

30,

000,

000

30,0

00,0

00

30,0

00,0

00

3

0,00

0,00

0

30

,000

,000

St

atut

ory

Res

erve

s11

,445

,362

12

,500

,000

14,

702,

984

14,7

02,9

84

14,7

02,9

84

1

4,70

2,98

4

14

,702

,984

R

esea

rch

& T

echn

olog

y R

eser

ves

1,29

1,69

1 1,

291,

691

1,2

91,6

91

1,29

1,69

1 1,

291,

691

1,2

91,6

91

1,29

1,69

1 G

ener

al R

eser

ves

20,6

31,5

58

28,8

94,7

05

4

2,36

0,94

0

44

,646

,541

50

,101

,541

56,

590,

088

64,8

34,4

09

Ret

aine

d E

arni

ngs

14,5

14,5

48

23,4

67,6

35

1

4,57

6,85

9

16

,861

,059

27

,769

,658

40,

745,

351

54,4

84,4

86

Tot

al S

hare

hold

ers’

Equ

ity

72,8

83,1

59

91,1

54,0

31

102

,932

,474

1

07,5

02,2

75

123,

865,

874

1

43,3

30,1

14

165

,313

,569

M

inor

ity I

nter

ests

27,6

07,0

78

43,3

42,2

41

4

3,70

9,13

9

44

,583

,322

45,

474,

988

46,3

84,4

88

4

7,31

2,17

8 T

otal

Lia

bilit

ies

& S

hare

hold

ers’

Equ

ity

166,

588,

820

253,

731,

081

2

71,7

59,9

89

292

,906

,887

32

8,09

8,54

5

352

,351

,177

3

79,8

11,7

17

Sour

ce:

Com

pany

Ann

ual A

ccou

nts

& G

loba

l Res

earc

h

Page 13: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

13Saudi Basic Industries Corporation

INC

OM

E S

TA

TE

ME

NT

Saud

i Bas

ic I

ndus

trie

s C

orpo

rati

on (

SAB

IC)

SR ‘

000’

2006

A20

07A

2008

A20

09E

2010

E20

11E

2012

ESa

les

8

6,32

7,86

2

126

,204

,404

1

50,8

09,5

96

99,5

61,4

63

129

,738

,466

1

48,1

57,0

58

172

,100

,105

C

ost o

f Sa

les

(

51,4

15,4

77)

(7

8,25

4,22

8)(1

05,0

46,3

15)

(72,

673,

373)

(

89,8

32,0

97)

(100

,928

,937

)(1

13,4

13,9

55)

Gro

ss P

rofi

t

34,

912,

385

4

7,95

0,17

6

45

,763

,281

26

,888

,090

39

,906

,369

47

,228

,121

58

,686

,150

Im

pair

men

t of

Goo

dwill

-

-

-

(1,1

81,2

50)

-

-

-

Se

lling

, Gen

eral

& A

dmin

istr

ativ

e E

xpen

ses

(4,0

26,2

65)

(6,9

03,6

53)

(9,1

71,9

92)

(8,9

25,8

18)

(1

1,67

6,46

2)(1

3,33

4,13

5)(1

5,48

9,00

9)In

com

e F

rom

Ope

rati

ons

3

0,88

6,12

0

41,

046,

523

36,5

91,2

89

16,7

81,0

22

2

8,22

9,90

7

33

,893

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43,

197,

140

Oth

er I

ncom

e

2,

552,

369

4,2

30,2

35

4,54

4,64

9 1,

760,

104

4,1

75,2

38

4,20

9,92

1

4

,470

,416

Fi

nanc

ial C

harg

es(1

,567

,042

)(2

,869

,168

)(3

,800

,927

)(3

,111

,992

)

(2,

645,

192)

(2,7

05,3

97)

(2,6

90,3

58)

Pro

fit

Bef

ore

Zak

at &

Min

orit

y In

tere

st

31,

871,

447

4

2,40

7,59

0

37

,335

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15

,429

,135

29

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35

,398

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44,

977,

198

Min

ority

Int

eres

t(1

0,52

7,50

5)(1

3,58

5,31

8)(1

3,90

5,16

8)(7

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)(1

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5,98

4)(1

2,38

9,47

8)(1

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2,01

9)P

rofi

t B

efor

e Z

akat

21,3

43,9

42

28,8

22,2

72

2

3,42

9,84

3 8,

297,

016

19,3

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69

23,0

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31

29,2

35,1

79

Zak

at

(1,

050,

000)

(1,8

00,0

00)

(1,4

00,0

00)

(678

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)(1

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)(1

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)(1

,754

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)P

rofi

t A

fter

Zak

at/N

et I

ncom

e

20,

293,

942

2

7,02

2,27

2

22

,029

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7,

618,

668

18,1

83,3

31

21,6

28,4

89

27,4

81,0

68

P&

L A

ppro

pria

tion

A/C

Ope

ning

Bal

ance

14,0

43,7

17

14,5

14,5

48

23,

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14,5

76,8

59

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61,0

59

27,

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iden

d(9

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8,75

0,00

0)(1

0,25

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0)(3

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)(1

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)(2

,162

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)(5

,496

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)B

oD R

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ion

(1,

400)

(1,

400)

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(1,

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1,40

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rans

fer

to g

ener

al r

eser

ves

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17)

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263,

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(13

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20)

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nsfe

r to

Sta

tuto

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ves

(2,0

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94)

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054,

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) -

-

-

-

In

crea

sed

in C

apita

l(5

,000

,000

)

-

(5,0

00,0

00)

-

-

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-

End

ing

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ance

14,5

14,5

48

23,4

67,6

35

14,

576,

859

16

,861

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27

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4

0,74

5,35

1 5

4,48

4,48

6 So

urce

: C

ompa

ny A

nnua

l Acc

ount

s &

Glo

bal R

esea

rch

Page 14: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

14 Saudi Basic Industries Corporation

CA

SH F

LO

WS

STA

TE

ME

NT

Saud

i Bas

ic I

ndus

trie

s C

orpo

rati

on (

SAB

IC)

SR ‘

000’

2006

A20

07A

2008

A20

09E

2010

E20

11E

2012

E O

PE

RA

TIN

G A

CT

IVIT

IES

P

rofi

t Bef

ore

Zak

at

21,

343,

942

28,8

22,2

72

2

3,42

9,84

3 8

,297

,016

19,

343,

969

2

3,00

9,03

1

29,

235,

179

Dep

reci

atio

n &

Am

ortiz

atio

n

6,1

19,2

36

7,6

06,0

10

1

0,05

1,99

9 10

,290

,853

13,

690,

166

1

5,01

3,73

8

15,

254,

743

Oth

er O

pera

ting

Act

iviti

es

10,

330,

531

12,6

74,9

62

1

2,78

0,57

9 8

,482

,607

8,8

84,5

38

1

0,88

3,55

5

13,

960,

562

Zak

at P

aid

(81

3,02

8) (

2,00

1,95

1) (

1,12

2,92

8)

(678

,348

)

(1,

160,

638)

(

1,38

0,54

2)

(1,

754,

111)

Cha

nge

in W

orki

ng C

apita

l (

2,24

5,77

5) 1

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1,

090,

352

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14)

8

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(

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5,88

2) G

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ill I

mpa

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ent L

oss

-

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h F

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m O

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Act

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34,

734,

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4

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8

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5,45

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STIN

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(39,

239,

323)

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4,68

2)

(28,

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176)

Inv

estm

ents

2,5

63,2

33

(

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(

1,55

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869

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(

391,

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(41

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422)

Oth

er N

on-C

urre

nt A

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s

(1,0

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45)

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557)

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4,42

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(4,

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997)

(

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6)

(6,

551,

634)

Oth

er I

nves

ting

Act

iviti

es

(644

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)(4

3,68

3,16

8)

(1,

136,

307)

1,7

60,1

04

4

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4,2

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21

4

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C

ash

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ws

Fro

m I

nves

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Act

ivit

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(17

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(75,

810,

167)

(29

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(27,

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378)

(40

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) (

29,5

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15)

(31

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F

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AC

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Lon

g-T

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Fin

anci

ng

9

,763

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711,

105

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18

2

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hort

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m F

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2

55,9

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7

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6)

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3

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63

444

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5

33,7

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nter

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0 (

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76

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I

ncre

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e In

Cas

h 1

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ng B

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h E

ndin

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5,87

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2 So

urce

: C

ompa

ny A

nnua

l Acc

ount

s &

Glo

bal R

esea

rch

Page 15: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

15Saudi Basic Industries Corporation

FA

CT

SH

EE

TSa

udi B

asic

Ind

ustr

ies

Cor

pora

tion

(SA

BIC

)

2006

A20

07A

2008

A20

09E

2010

E20

11E

2012

EL

iqui

dity

Rat

ios

C

urre

nt R

atio

(x)

2

.9

2

.9

3

.6

3

.5

2

.4

2

.4

2

.4

Cas

h R

atio

(x)

1

.5

1

.4

1

.9

1

.9

1

.2

1

.2

1

.1

Pro

fita

bilit

y R

atio

s

Gro

ss M

argi

n 40

.4%

38.0

%30

.3%

27.0

%30

.8%

31.9

%34

.1%

EB

ITD

A M

argi

n 43

.4%

40.8

%32

.8%

30.3

%34

.4%

34.8

%35

.5%

EB

IT M

argi

n 38

.7%

35.9

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.3%

18.6

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25.7

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Net

Pro

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n 23

.5%

21.4

%14

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OA

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32.9

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%16

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12.9

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7%5.

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L

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Rat

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D

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o E

quity

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6

0

.83

0.8

6

0

.95

0.8

4

0

.73

0.6

4 D

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o A

sset

39

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ies/

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al A

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)

0

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0

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ome

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R

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se f

or V

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tion

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umbe

r of

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res

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0

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per

sha

re (

SR)

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1 E

PS (

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rice

(SR

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80.

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80.

5

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ket C

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965

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EV

/EB

ITD

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8.3

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9.6

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atio

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4

1

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7

.1

31.

7

1

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BV

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io

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*H

isto

rica

l P/E

& P

/BV

mul

tiple

s pe

rtai

n to

res

pect

ive

year

-en

d pr

ices

, whi

le th

ose

for

futu

re y

ears

are

bas

ed o

n cl

osin

g pr

ices

on

the

Tada

wul

as

of N

ovem

ber

22nd

200

9.So

urce

: C

ompa

ny A

nnua

l Acc

ount

s &

Glo

bal R

esea

rch

Page 16: Saudi Basic Industries Corporation – SABIC Saudi Arabia

Global Research - Saudi Arabia Global Investment House

16 Saudi Basic Industries Corporation

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Disclosure Checklist

Saudi Basic Indusrties Corporation

Company Recommendation

Hold

Ticker

2010.SE (Reuters)SABIC AB (Bloomberg)

Price Disclosure

1, 10SR80.5

Global Research: Equity Ratings Definitions

Buy

Hold

Reduce

Sell

Global Rating Definition

Fair value of the stock is >10% from the current market price

Fair value of the stock is between +10% and -10% from the current market price

Fair value of the stock is between -10% and -20% from the current market price

Fair value of the stock is < -20% from the current market price


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