Quarterly results preview Saudi Arabia Market 01 October 2013

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform

Key themes

We present our Q3 revenue and profit estimates for companies under our coverage in petrochemical, telecom, cement, food & agriculture and retail sectors.

ARC Research coverage

Sector Rating Price Target SABIC Overweight SAR114.0

Sipchem Overweight SAR28.8

SAFCO Overweight SAR175.1

NIC Overweight SAR29.8

Yansab Neutral SAR64.2

APC Neutral SAR33.4

SPC Neutral SAR17.6

STC Overweight SAR47.2

Mobily Overweight SAR80.7

Zain Neutral SAR10.0

Arabian Cement Neutral SAR78.0

Yamama Cement Overweight SAR58.5

Al Jouf Cement Neutral SAR20.0

Saudi Cement Overweight SAR118.0

Qassim Cement Neutral SAR90.0

Savola Neutral SAR55.3

Almarai Neutral SAR50.7

Catering Neutral* SAR114.3

Herfy Neutral* SAR115.1

Jarir Neutral* SAR183.4

Extra Neutral* SAR98.9

Alhokair Neutral* SAR102.9

Alothaim Neutral* SAR115.7

Ma’aden Overweight SAR37.0

Ceramics Neutral* SAR121.0

Shaker Overweight SAR92.7

Astra Overweight SAR46.2

* Rating and TP under review

Research Department Jithesh Gopi, CFA

Tel 966 11 211 9332,gopij@alrajhi-capital.com

Saudi companies’ results preview Q3: Domestic drivers remain strong We expect domestic sectors to once again drive the performance of TASI in Q3 especially due to a surge in domestic spending witnessed during the festive Ramadan season. Fragile global economic recovery and weakening demand growth is hampering the petrochemical sector, although we believe stock replenishment in Q3 and higher product prices to boost earnings q-o-q. Meanwhile, we expect consumer driven sectors like retail and food companies to post better results in Q3, as they would benefit from the festive Ramadan season. Government spending in infrastructure and increasing housing demand will continue to be a major demand driver for the cement sector. Continued credit demand from retail and corporate customers will benefit the banking sector despite a continuing contraction in NIM.

Market Outlook: We had taken a cautiously optimistic view on Saudi Market in our report published on 08th July, despite Ramadan and summer months, contrary to the popular expectation of a traditionally weaker period. Since then, the broader market has gained about 6%, and has retained most of the gains despite regional political issues and absence of any positive triggers. During the past few days, investors seem to be booking some profits ahead of Q3 earnings season to benefit from the market’s strong performance during the quarter. A revival of interest in the banking sector helped the broader index to achieve strong YTD gains, and we expect the other major sector, Petrochemicals to likely benefit from better 3Q results, as discussed below. Overall, we maintain our optimistic view on the market, although major gains are unlikely in the absence of interest in key sectors.

Petrochemicals: At the start of the year, we had forecasted a modest revenue growth for the petrochemical sector for FY2013; however, considering the slowing industrial growth in China coupled with continued economic crisis in Europe, we have revised our estimates downwards in subsequent quarters. Being a stock replenishment season traditionally, we expect companies to report healthy revenue and bottom line growth q-o-q in Q3, boosted by higher operating rates and product prices. In Q3, we expect Sipchem to report better results on the back of timely commencement of EA/BA plant (a part of Phase III), while a 10-day shutdown at Al Waha will negatively impact SPC’s revenue and profit margins. SABIC (+7.2% YTD) continues to remain our top pick, while we reiterate our Overweight rating on Sipchem (+29.8%) and SAFCO (-2.8%). On the rest of the stocks, we remain Neutral.

Telecoms: The telecom sector has seen some important developments during the year. The introduction of MVNO’s in the saturated Saudi telecom market is likely to result in a lot of customer churn and contraction in margins. Zain received a relief from the government, allowing it to defer its annual license fee payments for seven years, helping to improve the company’s cash flow position. On the other hand, STC has recently agreed to sell its loss making Indonesian subsidiary. Meanwhile, Mobily is in talks to acquire a stake in Etihad Atheeb Telecom. Mobily (+22.7%) remains our top-pick in the sector due to its strong fundamentals and attractive dividend payouts. We maintain our Neutral rating on Zain (+20.3%) due to the weak operational fundamentals of the company.

Results preview Saudi Arabia Market 1 October 2013

Disclosures Please refer to the important disclosures at the back of this report. 2

Cement: We have a positive view on the cement sector due to strong domestic demand and high dividend yields. With multi billion dollars worth of government financed infrastructure projects underway in the Kingdom, the demand will remain strong. However, the cap on pricing and a ban on exports is restricting profitability growth for cement manufacturers. The restriction on exports, placed early this year, resulted in a sharp drop in realizations for export dependent cement manufacturers, due to which we downgraded Al-Jouf Cement to Neutral from Overweight. We also downgraded Arabian Cement during the year, to Neutral as operational problems at the company’s Jordan-subsidiary, Qatrana Cement, dented its financials. However, we upgraded Saudi Cement to Overweight due to its attractive dividend yield and rising utilization levels.

Retail: The strong fundamentals of the retail sector remain intact as a growing Saudi population and rising disposable income leads to increased demand for latest electronic products, consumer durables and fashion accessories. We have raised the estimates for retail sector companies under our coverage over the last nine months, as they posted better than expected results, overall, during the first half of the year. However, we have downgraded our rating on most of the companies after more than 40% YTD rally in the retail sector index. We have downgraded our rating on Extra, Alhokair and Alothaim, to Neutral, after the stocks met their respective target prices, while maintaining our Neutral rating on Jarir. We will publish a detailed sector and valuation update post Q3 results.

Food & Agriculture: The Food sector performed mostly in line with our estimates in Q2 2013. We remain positive on the sector’s growth outlook as companies increase capacities and expand into new product lines to meet the strong demand of the young Saudi population. We expect falling global food prices to support profitability margins for the food sector companies going forward. Moreover, earnings during the third quarter are likely to be boosted by an increase in demand typically witnessed during the holy month of Ramadan. For the companies under our coverage, we have increased our 2013 profit estimates by about 3% overall. We have downgraded our rating on Saudi Airlines Catering and Savola to Neutral, after both the stocks achieved our target prices. We have maintained our Neutral rating on Almarai and Herfy since the beginning of the year.

Results preview Saudi Arabia Market 1 October 2013

Disclosures Please refer to the important disclosures at the back of this report. 3

Saudi Arabia: Q3 estimates for the companies under our coverage

Company 2012Q3A 2013Q2A 2013Q3E YOY % chg. QOQ % chg. 2012Q3A 2013Q2A 2013Q3E YOY % chg. QOQ % chg.PetrochemicalSABIC 44,806 44,993 48,576 8.4% 8.0% 6,312 6,042 6,982 10.6% 15.6% 13-Oct-2013

Sipchem 914 912 1,055 15.4% 15.7% 156 174 218 39.6% 25.1% 13-Oct-2013

SAFCO 1,398 983 998 -28.6% 1.6% 1,149 693 722 -37.2% 4.2% 13-Oct-2013

NIC 4,167 4,517 4,611 10.7% 2.1% 417 303 330 -21.0% 8.7% 13-Oct-2013

Yansab 2,018 2,213 2,775 37.5% 25.4% 436 671 887 103.6% 32.3% 16-Oct-2013

APC 649 686 696 7.2% 1.5% 100 137 143 42.9% 4.8% 9-Oct-2013

SPC 313 603 549 75.1% -9.0% 44 127 146 234.3% 15.3% 13-Oct-2013

CementArabian Cement 338 362 348 3.0% -3.8% 87 125 96 10.6% -22.8% 13-Oct-2013

Yamama Cement 306 456 329 7.5% -27.7% 157 268 174 11.1% -35.0% 13-Oct-2013

Saudi Cement 433 626 488 12.6% -22.2% 209 307 250 19.3% -18.7% 13-Oct-2013

Al Jouf Cement 71.3 83.2 83.7 17.3% 0.6% 21.9 13.8 25.6 16.9% 85.7% 20-Oct-2013

Qassim Cement 213 301 222 4.3% -26.2% 111 166 121 9.3% -27.3% 9-Oct-2013

TelecomSTC 15,146 11,433 11,129 -26.5% -2.7% 1,954 1,429 1,653 -15.4% 15.6% 20-Oct-2013

Mobily 6,183 5,972 6,577 6.4% 10.1% 1,511 1,611 1,702 12.6% 5.7% 19-Oct-2013

Zain 1,530 1,706 1,754 14.7% 2.8% -493 -370 -344 -30.2% -7.1% 13-Oct-2013

Food & AgricultureAlmarai 2,673 2,874 3,091 15.6% 7.6% 450 398 497 10.5% 24.8% 8-Oct-2013

Savola 6,870 6,723 7,419 8.0% 10.4% 405 388 458 13.1% 18.2% 23-Oct-2013

Herfy 203 223 214 5.3% -4.0% 42.4 51.2 48.4 14.2% -5.6% 13-Oct-2013

Catering 442 475 504 14.0% 6.2% 134 168 162 20.8% -3.5% 13-Oct-2013

RetailJarir 1,190 1,258 1,386 16.5% 10.2% 161 126 171 6.4% 35.5% 13-Oct-2013

Alhokair 1,383 1,258 1,617 16.9% 28.5% 252 165 305 20.8% 84.6% 21-Oct-2013

Alothaim 1,165 1,161 1,263 8.4% 8.8% 40.7 39.7 41.4 1.9% 4.3% 13-Oct-2013

Extra 699 971 909 30.1% -6.4% 28.4 53.3 36.4 28.1% -31.8% 13-Oct-2013

OtherMa'aden 1,609 1,237 1,335 -17.0% 7.9% 311 41.0 183 -41.1% 347.5% 9-Oct-2013

Saudi Ceramic 346.0 429.0 416.0 20.2% -3.0% 56.0 82.0 92.0 64.3% 12.2% 13-Oct-2013

Shaker 456.0 569.0 484.0 6.1% -14.9% 72.0 102.0 74.0 2.8% -27.5% 13-Oct-2013

Astra 318.0 447.5 383.0 20.4% -14.4% 47.0 62.0 93.0 97.9% 50.0% 20-Oct-2013

Qassim cement announced a fuel leak and subsequent stoppage of one of its production line for 5 days. Though the impact could be minimal, we have taken a conservative view on Q3 performance.

STC has been reporting impairment losses related to its international assets during the past few quarters. We believe the losses will smoothen out in the next couple of quarters thereby improving the bottomline.

We estimate a 13% y-o-y growth in Mobily's bottomline backed by an increase in revenues and cost controls.

Zain's net losses should reduce further on account of a rise in its revenues.

Q3 is a weak quarter for Herfy due to Ramadan, though y-o-y growth will be supported by new stores

Rise in methanol prices and commencement of ethyl acetate unit (a part of Phase III) will significantly boost Sipchem's revenue and margins.

SAFCO will post weak result in Q3 y-o-y due to a sharp drop in fertilizer prices, despite an increased demand on a q-o-q basis.

We believe NIC will post marginal revenue growth q-o-q on the back of recovery in petrochemical and TiO2 prices.

Yansab is likely to report good results on the back of higher product prices and steady utilization rates.

Jouf received 20,000 tons of imported cement in Q3 which should translate into impressive profits.

A 10-day shutdown at Al Waha will weigh on SPC's top line growth; however, higher income from associates can boost the company's net profit margin.

Arabian cement should report moderate y-o-y results, backed by a reasonable utilization rate. Results will be cyclical due to Ramadan effect during the quarter.

Yamama Cement should post moderate results despite the slowdown in activity reported during Ramadan period.

We expect 90% capacity utilization for Saudi Cement, translating into robust Q3 results.

Estd Result Date*

Capacity expansion coupled with growth in the construction sector will support the company's revenues.

Q3 is a lower demand season. However, we expect growth in Non-LG Segment.

The pharma and chemical segments will support the revenue, despite the delay in Al Anmaa's operations.

Growth in non-airline business, and uptick in passenger traffic to drive growth during the quarter

Sales will be driven by new store openings and rising disposable income among the young Saudi population

This is the best quarter for Alhokair due to the high demand for new apparels witnessed in the Ramadan season.

High demand during the Ramadan season will support growth. Expected to post best quarterly top line figure.

Q3 is a weak quarter for Extra. However, new stores and growth in same store sales should boost y-o-y growth.

Ma'aden is likely to post better Q-o-Q results on the back of restart of its DAP and ammonia facility. Nevertheless, we expect lower utilization rates due to subdued gold, DAP and ammonia prices.

Net Profit (SAR mn)Revenues (SAR mn)

APC will benefit from higher polypropylene prices, which will be reflected in the top line growth and better margins q-o-q.

Almarai will benefit from uptick in its poultry business, and continued growth in its dairy and juice segments.

Q3 is helped by higher demand due to Ramadan. Further falling global food prices will drive margin expansion.

We expect SABIC to post a moderate top line growth, and an increase in profit margins on the back of higher product prices.

Note: *Estimated reporting dates are taken from Bloomberg for reference. These may change due to the Eid holidays.

Results preview Saudi Arabia Market 1 October 2013

Disclosures Please refer to the important disclosures at the back of this report. 4

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Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law:

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Contact us

Jithesh Gopi, CFA Head of Research Tel : +966 11 2119332 gopij@alrajhi-capital.com

Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.