Financial Analysis

SABIC

Introduction

SABIC is one of the Saudi most diversified production company which has several

product lines in shape of petrochemicals, polymers, metals, fertilizers and other chemicals.

SABIC is listed in Tadawul and as per their rating it is a second largest public entity in Saudi

Arabia and Middle East. SABIC has a diversified structure of share ownership but the major part

of its share pertains to Saudi Aramco which is almost 70% while the remaining 30% pertains to

private shareholders.

SABIC was ranked fourth all over the world in chemical production in 2013. It is the

second largest producer of ethylene glycol and authorities expect SABIC to top the list as it has

offered other new products in markets as well. SABIC on 3 rd in producing polyethylene, 4th in

manufacturing polyolefin and polypropylene and also the world largest manufacturer of methyl

tart-butyl ether, polycarbonate and polyether imide.

SABIC was ranked 4th in chemical companies by Fortune Global 500 and by the end of

2018 SABIC was already among the top 300 companies of World. In 2010, SABIC grew to be

the second-largest diversified chemical company, or first when measured only by asset value.

Measured over all its branches, it became (as of 2014) the world's 98th-largest corporation on

the Forbes Global 2000 ranking (which lists only publicly traded companies), with sales

revenues of $50.4 billion, profits of $6.7 billion and assets standing at $90.4 billion.
Objectives of this Study

One of the main objective of this study is to have the complete in-depth analyses of the

SABIC and examine our financial knowledge which we have covered in this subject. Second

objective is to forecast the future values based on the past trends and thoroughly study the

company financial policies which will drive the strategically financial path for SABIC. Last but

not the least objective of this study is to recommend the best practices which a company should

adopt based on their historical performances and past trends.

Significance of the Study

This study took a great analysis and calculation skills. As for this study, you need to think

like a financial analyst or a potential investor who tries all the options before investing or

recommending other individual to invest in a particular company. This study will help other

students to understand the basic financial and capital structure tools such as WACC and its

components and why do we need these tools. Other faculty members can also use it as base in

developing an analytical view for the students.

Cost of Capital and Its Valuation Method

Cost of Capital is the required rate of return which a particular investor wants on his

investment. Individuals do investment for a better return and if they don’t get it they are not

going to invest. So it is very important for a firm or company to have a detailed plan of their

project and mention the return on its project which they will offer to an investor. A company is

not likely to get the funds from the investors if its project is not going to earn the cost of capital.
Importance of Cost of capital

Each organization has different projects to invest. Some of them are project worthy and

some of them are not. Each project has a different cost of capital which company has to pay.

Companies compare all the projects with each other and identify their cost of capital and risk in

achieving that cost of capital. After that, they invest in a project which gives them a better return.

Capital Structure and its sources

Companies have two sources to get funds for their projects. One is the investors which is

also known as equity holders and other one is loan from financial institutions or other sources

which also known as debt financing. Each of these sources have different cost associated with

them and company needs to find it a source which has a lesser cost of capital or more beneficial

for a company.

Methods to Calculate Cost of Capital

In order to find a cost of capital, a company has to calculate a cost for having a fund from

each source separately and then compare the cost and decide the structure of capital.

Cost of Debt

One of the sources of funds which is available to companies is to get loan from financial

institutions or from public. It is known as debt financing and you can calculate it in different

ways as per your need.

Cost of debt before Tax adjustment can be calculated as

Kd = Interest divided by principal amount of loan and then multiply it by 100.

And after tax adjustment it can be calculated as

Kd = Interest (1-tax) divided by Net Adjusted Value (debentures).

Sometimes company issues debentures with a premium or discount and in that case their

principal value varies with a change in time. So need to adjust its principle amount before

calculation and after adjustment it should be calculated as

Kd = Interest divided by Net Adjusted Value (Debentures) and then multiply it by 100.

Cost of Equity

Other source of funds is to get money from investors and it is also called equity. Cost of

equity can be calculated with two different methods,

1. Dividend Growth Model

2. Capital Asset Pricing Model

Dividend Growth Model

In this method, cost of equity can be calculated as,

Ke = Dividend per share divided by Net Proceed per share plus Growth rate

Capital Asset Pricing Model

Under this method, cost of equity is calculated as,

Ke = Risk Free rate + beta multiply by (Market Premium Risk less Risk Free rate)
Weighted Average Cost of Capital

If we multiply all cost of capital with proportion of capital structure and divides with the

total of proportion of capital structure %. After this what we receive is called weighted average

of cost of capital.

WACC = Kd multiply by its capital share + ke multiply by its capital share.

Performance Highlights

Profit & Loss Statements (2010 – 2019)

In last 10 years, SABIC sales has declined from 151,970,027 SAR to 139,740,293 SAR

and this is mainly because due to change in environmental factors. Few other companies from

different countries also chipped in and provided the new option to other required countries. India

is one of them and we have recently seen Saudi investments in Indian Petrochemicals product.

SABIC did really well from 2011 to 2014 in maintaining their revenue up to 189M SAR with

slight changes but in 2015 the faced a major declined in their revenue line.

SABIC has an average performance with respect to COGS and Gross Profit. In 2010,

COGS was 68% of total sales and in 2019 it forms around 75% of total sales. In a 10 period

mark, it is satisfactory but it is also alarming that SABIC cost of manufacturing increased more

than its Sales.

SABIC did really well in order to maintain its operating and Net Income by managing its

operating expense and other incomes until 2019. Throughout the 10 year period, SABIC has an
operational income of 20 to 21% of its sales and net income of 13 to 14% but it has significantly

down to 11% and 4% respectively which potentially due to decrease in sales and an increase in

COGS.

Years Sales COGS Gross Profit Income from Net Income

Operations
2010 151,970,027.00 103,423,348.00 48,546,679.00 37,892,595.00 21,528,665.00
2011 189,898,253.00 127,767,893.00 62,130,360.00 48,838,371.00 29,241,750.00
2012 189,025,547.00 134,700,874.00 54,324,673.00 40,935,097.00 24,780,262.00
2013 189,031,500.00 133,687,137.00 55,344,363.00 42,584,691.00 25,278,382.00
2014 188,988,645.00 137,511,488.00 51,477,157.00 37,731,269.00 23,347,114.00
2015 148,085,741.00 105,057,981.00 43,027,760.00 28,519,321.00 18,768,690.00
2016 142,998,827.00 95,759,137.00 47,239,690.00 25,870,097.00 17,613,609.00
2017 149,765,968.00 99,785,144.00 49,980,824.00 28,998,387.00 18,430,236.00
2018 169,128,339.00 111,287,016.00 57,841,323.00 36,280,368.00 21,520,678.00
2019 139,740,293.00 104,204,712.00 35,535,581.00 15,000,428.00 5,633,181.00

P&L Overview
200,000,000.00
180,000,000.00
160,000,000.00
140,000,000.00
120,000,000.00
100,000,000.00
80,000,000.00
60,000,000.00
40,000,000.00
20,000,000.00
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sales COGS
Gross Profit Income from Operations
Net Income

Balance Sheet (2010 – 2019)

SABIC has a very stable balance sheet in last 10 years. There is no dramatically change

in their balance sheet components but there is few up & downs. SABIC current assets has
declined over the 10 year period and major portion in this declined amount pertains to Accounts

Receivable and it is very obvious to identify why it has declined surely because of decline sales.

Another highlighted item is the capital structure of SABIC. In 2010, Equity is 52% and Debt is

48% of SABIC capital but in 2019 Equity is 68% and debt is 32% which indicates that SABIC

has a more focused towards equity financing compare to debt financing. It can also be identified

through a decrease in long term liability.

Year Total Current Total Non- Total Current Total Non- Total Equity

Assets Current liabilities Current

Assets liabilities
2010 117,099,370.0 200,480,533.00 44,304,714.00 107,128,610.0 166,146,579.00

0 0
2011 132,401,475.0 200,382,173.00 43,069,794.00 100,508,220.0 189,205,634.00

0 0
2012 136,295,367.0 202,138,586.00 48,343,039.00 91,853,331.00 198,237,583.00

0
2013 134,852,328.0 204,218,241.00 44,466,113.00 87,948,373.00 206,656,083.00

0
2014 134,417,200.0 205,623,879.00 44,655,366.00 85,159,986.00 210,225,727.00

0
2015 117,062,009.0 211,157,145.00 42,604,725.00 75,757,243.00 209,857,186.00

0
2016 107,625,883.0 206,228,793.00 41,380,295.00 70,395,342.00 202,079,039.00

0
2017 117,763,471.0 204,691,951.00 48,299,406.00 64,017,524.00 210,138,492.00

0
2018 107,587,828.0 212,123,046.00 37,880,513.00 60,393,886.00 221,436,475.00

0
2019 94,860,679.00 215,706,824.00 37,590,097.00 61,799,797.00 211,177,609.00
 Balance Sheet Overview
250,000,000.00

200,000,000.00

150,000,000.00

100,000,000.00

50,000,000.00

-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total Current Assets Total Non Current Assets

Total Current liabilities Total Non Current liabilities
Total Equity

FCFF & FCFE (2010 -2019)

FCFF for SABIC is very stable throughout the 10 year period with little variations. In

2010, it was around 34,853,933 SAR and in 2019 it is 37,375,985 SAR. In 2016, FCFF was

48,772,806 SAR which was its highest in last 10 years and it was due to positive change in

working capital management.

FCFE for SABIC has significantly decreased in last 10 years. In 2010, it was stated as

78,053,558.40 SAR and in 2019 it is 38,859,288 SAR. We have seen in the balance sheet

analysis that SABIC has a great change in capital structure and they are having more focused

towards equity finance rather than debt finance which resulted in a decrease of debt as well as in

FCFE.
 Years FCFF FCFE
2010 34,853,933.40 78,053,558.40
2011 27,012,531.80 64,530,558.80
2012 40,054,847.60 68,249,023.60
2013 36,453,169.60 72,853,286.60
2014 37,331,970.20 72,881,813.20
2015 44,069,833.20 64,699,887.20
2016 48,772,806.20 58,422,853.20
2017 35,565,701.20 18,151,777.20
2018 31,524,275.00 31,278,851.00
2019 37,375,985.00 38,859,288.00

FCFF & FCFE

90,000,000.00
80,000,000.00
70,000,000.00
60,000,000.00
50,000,000.00
40,000,000.00
30,000,000.00
20,000,000.00
10,000,000.00
-
2008 2010 2012 2014 2016 2018 2020

FCFF FCFE

Share Valuation

For its share valuation, we have identified the future cash flows for SABIC by taking

2019 FCFF as a base and a WACC of 3.55% as per our calculation. As per the calculation,
SABIC has a share value of 163.49 SAR but in 2019 it was performing at 93.90 which means

that SABIC share is undervalued and it is a great potential share to invest.

FCFF WACC NPV Computation

37,375,985.0

0 Total NPV 451,724,357.75

38,886,038.0 3.55% 37,554,519.0

8 0 Cash & Cash equivalents 38,743,346.00

40,457,099.8 3.55% 39,071,785.1
in 2019
7 6
Total Value in SAR 000 490,467,703.75
42,091,635.2 3.55% 40,650,351.4

1 4
No of Shares 000 3,000,000
43,792,208.5 3.55% 42,292,694.4

4 7
45,561,487.9 3.55% 44,001,390.9 Value per Share 163.49

2 4
47,402,249.1 3.55% 45,779,121.6 Market Value of Share in 93.90

8 4 2019
49,317,380.3 3.55% 47,628,675.6

1 7
51,309,885.9 3.55% 49,552,954.8 Capital Structure

9 2
53,382,892.2 3.55% 51,554,978.1 SABIC capital structure has changed from

6 0 2010. In 2019, equity covers around 68% of total

55,539,651.5 3.55% 53,637,886.5
assets and 32% pertains to liability.
0 1
2019 %
Total Equity 211,177,609.0 68%

0
Total Liability 99,389,894.00 32%
Total Equity & 310,567,503.0 100%
 Liability 0

Capital Structure

Total Liability
32% Total Equity
Total Liability

Total Equity
68%

12000 140

10000 120

100
8000
80
6000
60 SABIC
TASI
4000
40
2000 20

0 0
14 14 14 14 15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 18 19 19 19 19
n- r- l- t- n- r- l- t- n- r- l- t- n- r- l- t- n- r- l- t- n- r- l- t-
Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc

Stock Comparison with Tadwwul All Share Index

Beta for SABIC

 20.00%
f(x) = 0.56 x + 0
R² = 0.58
15.00%

10.00%

5.00%
SABIC

0.00%
-30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00%
-5.00% Linear ()

-10.00%

-15.00%

-20.00%
TASI

The R2 value is the relationship of variance of the stock returns to the variance of the

overall market returns. A large number, .869 for example, indicates a highly related variance

between the two. A low number, .253 for example, indicates a less- related variance between the

two. In our case the R2 i.e. the Beta is 0.58 which indicates a pretty much stable variability.

Cost of Debt (kd)

Cost of debt is an effective rate of interest which company pay on its debts. It should be

noted that, we used historical information to calculate the SABIC debt.

Calculation using SABIC historical Information:

Cost of Debt (kd) = Total Interest paid*(1-tax rate)/Total Debt
Interest Cost for 2019 = 1,153,492.00
Tax Rate (SA) = 20%
Total Debt = 49,729,239.00
Long Term Debt and Lease = 40,226,649.00

Liabilities 2019 Balance Sheet

Short term portion of LT = 9,502,590.00

liabilities
Cost of Debt = 2.32%
 Q1 Q2 Q3 Q4
2014 Risk Free Rate 3.65% 3.38% 3.41% 2.98%
Risk Premium 4.96% 4.91% 4.20% 5.46%
2015 Risk Free Rate 2.61% 3.23% 3.19% 3.35%
Risk Premium 5.91% 5.11% 5.93% 5.71%
2016 Risk Free Rate 3.48% 3.70% 4.64% 4.16%
Risk Premium 5.19% 4.80% 4.62% 3.51%
2017 Risk Free Rate 4.07% 3.81% 3.69% 3.75%
Risk Premium 4.07% 4.58% 4.03% 4.42%
2018 Risk Free Rate 3.71% 3.81% 4.01% 4.09%
Risk Premium 4.67% 3.90% 4.21% 3.20%
2019 Risk Free Rate 3.51% 3.17% 2.65% 3.03%
Risk Premium 4.09% 3.58% 4.42% 3.50%

Cost of Equity (ke)

For ke, we need to have risk free and premium rate and for that we have taken data from

Saudi Equity Market. The data was only available for last 6 years from 2014 to 2019 but what

we have done we have taken its average to make it less volatile. As per the average.

Risk free rate is 3.55%

Risk Premium rate is 4.54%

WACC

WACC is a calculation of firm's cost of capital in which each category of capital is

proportionately weighted.

Calculation
WACC = Cost of Debt * % of Debt in Capital + cost of equity * % of

Calculation equity in capital.

Cost of Cost
Debtof =Equity (ke) 2.32%
= Rf + Beta (Rm - Rf)
Risk Free Rate (Rf) = 3.55%
(kd) Risk Premium Rate = 4.54%
Cost of = 4.12%
(Rm)
Equity (ke)
Beta = 0.58
Equity %Cost of =Equity (ke) 68%
= 4.12%
Debt % = 32%
WACC = 3.55%

Dividend Information (2014 – 2019)

 Dividend Per Share
6.00

5.00

4.00

3.00

2.00

1.00

0.00
2014 2015 2016 2017 2018 2019

Other Financial Information

Compound Annual Growth FCFF (CAGR) 4.04%

Retention Rate*(ROC + D/E (ROC - Interest (1-t)))

Compound Annual Growth FCFE (CAGR) 4.43%

Retention Rate*(ROC)

Average Dividend Payout (2010 - 2019) 4.67%

Average Retention Rate 95.33%
Average Interest Rate before Tax 1.50%

Years D/E Ratio Return on Interest Rate

Assets (ROC) on Debts
2010 0.665690252 11% 2%
2011 0.541764327 13% 2%
2012 0.481889289 11% 2%
2013 0.396137427 11% 2%
2014 0.395207229 9% 0%
2015 0.345880141 8% 0%
2016 0.312302302 9% 0%
2017 0.276309149 10% 1%
2018 0.213439276 11% 2%
 2019 0.235485378 5% 2%

Recommendation

To make it easier, I have developed some key positive and negative points for SABIC

and by going through one by one from each these points. It would be better for us to decide.

Positive Points

1. SABIC share is currently trading at below its fair value. For the investors, it is great boost

as it suggests that SABIC share will go up in near future. SABIC share was trading at

93.90 SAR and its fair value was 163.49 at that time.

2. Earnings are forecast to grow by 29.37%.

3. Health Balance Sheets.

4. Debt to equity ratio is decreasing over the last 5 years.

5. Interest Payments and Debt repayment is well covered.

6. Dividend per share is growing over the last 10 years.

7. Relative Experienced Leadership.

Negative Points
 1. Dividend is not sustainable. As dividend has a growing trend over the last 10 years and

current share of earnings are not sufficient to cover the dividend payments in future as

per the past trend.

2. Share price in last few months are not stable due to Saudi Russia dispute.

3. Large one of loss impacted their 2019 earnings.

4. Profit margins significantly decreased from 2018 12.7% to 2019 4%.

After going through from all the positive and negative points for SABIC. I would recommend

investors to invest in SABIC. Despite of decreasing profit margins for 2019, SABIC has a great

potential to earn great profit margins in next 3 years as their earnings are forecasted to grow by

29% per year. As far as dividend growth is concerned, SABIC has a past trend of increase in

dividend payout over the last 10 years but current year one off loss has significantly dented their

trend but as per the analyst report they will be able to covered that one in future. In short, SABIC

share is currently trading at 40% less compare to its market which is surely a noticeable point for

investors.

References

1. https://simplywall.st/stocks/sa/materials/sase-2010/saudi-basic-industries-shares#future

2. https://www.argaam.com/en/company/financial-pdf/3

3. https://www.investing.com/indices/tasi-historical-data

4. SA - Market Risk Premia

5. https://tradingeconomics.com/saudi-arabia/interest-rate