Global Investment House – Kuwait – Advanced Propylene Company – Initial Research Report-Advanced Polypropylene Company (APPC) was established as a joint stock company in the Kingdom of Saudi Arabia on 1st October 2005. The principle activity of the Company is the manufacturing of Polypropylene. The Company has marked 2006 as its first financial year. The petrochemical plant of the Company is vertically integrated, which utilizes all production of propylene to make polypropylene (PP).
We initiate our coverage of APPC with a ‘BUY’ recommendation. By employing, Discounted Cash Flow Methodology (DCF), we have arrived at an intrinsic value of SR63.9 per share, with a potential upside of 15.1% over the current market price of SR55.5 per share.
The Capital Market Authority (CMA) gave approval to list the shares of the Company on Saudi Stock Exchange (Tadawul), on Oct 2006. This has led the Company to go public in 4Q2006 following an IPO on the Saudi Stock Exchange. The Company, through its IPO, offered 66.4mn shares @ SR10 each, which increased the total issued shares of the Company to 141.4mn shares @ SR10 each.
Majority of the Company’s shares are held by general public. However, the share of general public, in total issued shares, has increased from 46.9%, through IPO, to 53.1% by the end of 2007, while the rest of the shares are held by several local, regional and international players. Out of which, Dar Chemicals is the largest shareholder with the share of 15.9% in total issued capital of 141.4mn shares.
The Company has a combined capacity to produce 455,000 tons of PDH, by using Naphtha as a feedstock and 450,000 tons of PP by using the home made propylene as a feed stock. Moreover, the manufacturing facility of the Company comprises of two plants one is use to produce propane dehydrogenation (PDH) from the cracking of Naphtha and other is to produce PP through the utilization of PDH in an effective manner. It is worth mentioning that all propylene production of the Company is used to produce PP. Furthermore, the manufacturing facility of Propylene is equipped with CATOFIN PDH technology, which is widely adopted alternative technology to produce propylene. While, the Company has installed NOVOLEN PP process technology to produce polypropylene.
The basic feedstock for the Company propane is obtained from the cracking of Naphtha. In pursuant to the allocation letter of Saudi Aramco, the Company has now allocated to get 23mn barrels per day of propane feedstock at the price which is 30% lower than the international market price. This gives it a competitive edge over international players. The Company is also using gas as a feedstock and has got approval to get 15 million cubic feet per day (mmcfd) of gas. The Company is enjoying the benefit of getting feedstock gas at subsidize rate of US$0.75 per million British thermal units (mmbtu). Moreover, gas prices have now become a major challenge on international level to manage their margins. Since average gas prices has been surged to US$6.3 per mmbtu in 2007 from US$ 4.6 per mmbtu in 2003 after making all time high of US$7.3 per mmbtu in 2005.
Based on our expectations, the revenue from the manufacturing facilities of the Company will start from 2Q2008, and will lead to the annual sales revenues of SR2.3bn in 2008. While, the net profit of the Company is expected to surge to SR463.3mn (translating in to EPS of SR3.3) as compared to SR2.2mn (EPS of SR0.015) in 2007 and depicts net profit margin for the Company at 19.9% in 2008. Moreover, the company is expected to post ROA of 17.5% and ROE of 28.1% in 2008.
Profitability & ROA Profitability & ROE
Source: Company Reports, Global Research
The bottom-line of the Company, in 2009, is expected to increase to SR592.5mn (translating into EPS of SR4.2), which is mainly due to the full year impact of the production from complex. However, an expected decline in the average prices of polypropylene, in 2010 & 2011, will lead to a slight decline in profitability of the Company, which will lead to a decline in prospective ROA & ROE in corresponding years.
APPC - Investment Indicators
Price as on 14th July 2008 Shares in issue Market Cap (SR mn) 52-Week High/Low
55.5 SR 141.4 mn 7,846 60.25 / 21.25
Year Revenues (SR Mn) Net Profit
(SR Mn) EPS
(SR) BVPS
(SR) ROE
(%) P/E
(x) P/BV
(x)
2010E 3,023 579.2 4.10 15.8 25.9% 13.5 5.6
2009E 3,085 592.5 4.19 13.8 30.5% 13.2 5.6
2008 E 2,332 463.3 3.28 11.7 28.1% 16.9 5.6
2007 A - 2.2 0.02 10.0 0.2% n/a 4.8
Source: 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 14th July 2008
