RIYADH: National Industrialization Co.'s (NIC's) diversified business model (presence in industrial and petrochemical segments) partially cushions the company from the current turbulent environment, Al-Rajhi Capital said in its report on Saturday.
Despite near-term headwinds, Al-Rajhi Capital believes NIC will continue to deliver a solid performance on the back of robust TiO2 (titanium dioxide) demand outlook leading to higher margins from the industrial segment and additional production of advanced petrochemicals from late 2013. Further, NIC's healthy balance sheet enables the company to pursue acquisition-oriented growth strategy as well as support healthy dividend payouts. Therefore, Al-Rajhi Capital initiates coverage on NIC with an Overweight rating and a target price of SR49.6. NIC shares closed Saturday at SR36.50.
The Tadawul All-Share Index (RASI) fell 0.47 percent to 6,057.59 on Saturday.
The report said NIC has a unique business model compared to other Saudi petrochemical peers, as it is a combination of volatile petrochemical business and relatively stable industrial business. Different characteristics of these two segments and a robust TiO2 price outlook provide stability to the company and make it partially immune to the volatility in petrochemicals prices, especially in the current times.
NIC is the world's second largest and Middle East's only producer of titanium dioxide. The company has followed an acquisition-oriented growth path for this segment and acquired multiple assets in 2008-2009. According to Al-Rajhi Capital, demand for TiO2 is to grow both from emerging and developed markets amid supply constraints, which augurs well with rising prices in the medium term. Banking on the healthy TiO2 prices, NIC is expected to report a strong revenue growth in the industrial segment with an improvement in operating margin over the next few years.
NIC's petrochemical business is engaged in production of basic petrochemicals such as ethylene, propylene and its derivatives. However, the company is building facilities with a focus on advanced petrochemicals such as acrylic acid, which will commence operations in late 2013. Al-Rajhi Capital expects the segment performance to be negatively affected by lower product prices and volatile demand environment in the near term. However, the company will benefit from the move-up in the value chain and higher margins on advanced products in the medium term.
NIC has a well-managed balance sheet with net debt to equity ratio of 0.8x and cash balance of SR4.2 billion as of Q3, 2011. NIC is likely to post healthy revenue growth with operating margin of more than 28 percent in 2012. With strong operating cash flows, net debt to EBITDA ratio is to decline moderately over the medium term, which will enable NIC to maintain dividend payout of ~30 percent as well as seek attractive acquisition opportunities.
Eye catching at current level, NIC is using a blend of long-run DEP forecasting (70 percent weight) and comparative multiple analysis (30 percent). The bank assigns Overweight rating to NIC and a target price of SR49.6 per share, given its unique business model and its ability to grow even during times of crisis. The stock is currently trading at 2012 P/E multiple of 7.6x compared to peer average of 8.0x. Further, the company is to increase its dividends to SR1.5 per share in 2011 (from SR1 in 2010), implying a dividend yield of 4.1 percent.
© Arab News 2011
