• Global values SAHARA stock at SR17.4 and recommends a BUY on the stock
Global Investment House – Kuwait – Initial Research Report - Sahara Petrochemicals Company (SAHARA), a Saudi Joint Stock Company, was founded by the Zamil Group. Al-Zamil Group is one of Saudi Arabia’s leading industrial groups with diversified interests ranging from banking and industrial investments to petrochemicals and food manufacturing.
We have used the Discounted Cash Flows methodology to value the Company. Under this valuation we have used the forecasted 5-year (FY2009-FY2013) Free Cash Flows (FCF) of Sahara Petrochemicals and its subsidiary. We have made our forecasts on a consolidated basis due to non-availability of individual financial statements. The value of the company comes to SR17.4, offering a potential upside of 43.2% over the current market price of SR12.15 as on 10 March 2009. Thus, we initiate our coverage on SAHARA with a ‘BUY’ recommendation.
Sahara made its Initial Public Offering in May 2004 when 6.0mn shares were offered at a price of SR 50/share which represented 20.0% of the company’s share capital at that time. Currently, Zamil Group Holding Company is a major shareholder in Sahara Petrochemicals with a 7.5% stake. 92.5% share is held by the general public.
Sahara Petrochemicals has a 75.0% stake in Al Waha Petrochemical Company (Al Waha). Al- Waha Petrochemicals plant will have a capacity to produce 450,000 tons per annum of polypropylene when it comes online in late 1Q2009. Sahara also has a 32.5% stake in Tasnee and Sahara Olefins Company (TSOC) which is a Joint venture with National Industrialization Company. Tasnee and Sahara Olefins Company acts as a holding company with a 75.0% stake in Saudi Ethylene and Polyethylene Company (SEPC).
The two main revenue sources for Sahara Petrochemicals will be Al-Waha Polypropylene plant and Saudi Ethylene and Polythene Company in which Sahara has an effective stake of 24.4%. Al-Waha Polypropylene plant is expected to come online at the end of 1Q2009. Al-Waha Petrochemicals is aiming to produce high specification polypropylene products using the most advanced propane dehydrogenation technology. The Polypropylene sales will be insulated from the current downturn to a certain extent as the company will produce those polypropylene grades which currently are being imported in Saudi Arabia.
Al-Waha Petrochemicals will sell its produce both in the domestic market and the international market. The company will enter into off-take agreements with third parties whereby the risk of selling will be transferred to these undertaking firms. The polypropylene will be marketed globally by Basell, which has a presence in more than 120 countries.
According to our projections the consolidated revenue for Sahara Petrochemicals will grow at a 2009-13 CAGR of 17.2% to SR1.8bn. The increase in revenue will be driven by increase in volumes sold of polypropylene at a 2009-13 CAGR of 13.1% to 414,000 tons. We have assumed 60.0% utilization rate in the first year of its Al-Waha plant operations in view of the falling demand for petrochemical products brought about by the prevailing global financial crisis. We estimate the utilization rate to increase steadily going forward to 92.0% in 2013 as the world economy enters the recovery phase.
