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National Industrialization Co. -Equity Report -31-07-2016

Source: Aljazira Capital

TASNEE: 2Q2016 earnings were better than our estimates, higher than expected gross margin and income of associated companies supported the company’s performance. “Overweight” recommendation on the stock with higher PT.

Product spreads in petrochemical and SAR 94.9mn other income to lower the impact of higher finance expenses and OPEX in 2Q2016: National Industrialization Company (TASNEE) continued to surprise us after five consecutive quarters of losses, missing AJC loss estimates of SAR 61.7mn and the market consensus of SAR 6.0mn profit. TASNEE posted net profit of SAR 103.9mn; (EPS; SAR 0.16); compared with losses of SAR 107.7mn in 2Q2015, and a net loss of SAR 94.8mn in the previous quarter. We believe that the company’s performance during 2Q2016 was largely improved by i) higher than expected margin expansion for some products in petrochemical segments. ii) higher income from associated company, which improved to SAR 94.9mn compared to SAR 10mn in 1Q2016 as a result of the restructuring of the company’s business in 2015. iii) improved product prices and despite the increase in finance expenses to SAR 191mn vs. SAR 154.6mn in 2Q2015 and SAR 175.8mn in 1Q2016.

We update our recommendation to “Overweight” on Tasnee with a higher PT of SAR 15.20/share indicating a potential upside of 12.2%: TASNEE Co. is expected to post SAR 368.3mn in net income (0.55 EPS) for 2016, recording shift to profitability due to number of one-offs and higher restructuring cost in 2015. Therefore, we update our recommendation to “Overweight” for the stock with higher target price at SAR 15.20/ share; indicating a potential upside of 12.2% over current market price of SAR 13.55/ share (as of 27th July 2016). The company is trading at a forward PE and PB of 12.4x and 0.56x respectively based on our 2017 earnings forecast. We expect the company to stop its dividend payment in 2016/2017 due to low level of satisfactory performance in the industrial segment. At the end of 1Q2016, TASNEE’s debt-to-equity ratio stood at 1.55x, with debt of around SAR 21.3bn, and cash and equivalents of SAR 2.5bn.

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