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Al Rajhi Capital: Saudi Industrial Services Co (SISCO) Key Beneficiary of Saudi Vision 2030; Initiating coverage with a TP of SAR27/sh

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By IM Insights
4 years ago
Al Rajhi Capital: Saudi Industrial Services Co (SISCO) Key Beneficiary of Saudi Vision 2030; Initiating coverage with a TP of SAR27/sh

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  1. Sisco /Saudi Arabia All Industries –All Sectors SISCO AB: Saudi Arabia 19 January 2020 US$0.426bn Market cap Target price Current price Underweight 85% US$1.825mn Free float Avg. daily volume 27.00 29% over current 21.00 as at 16/1/2020 Neutral Overweight Overweight Key themes Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 15.0 132 10.0 90 RSI10 173 Vol mn 20.0 4 2 01/19 04/19 Source: Bloomberg Saudi Industrial Services Co (SISCO) Key Beneficiary of Saudi Vision 2030; Initiating coverage with a TP of SAR27/sh The recent contract to operate and develop Jeddah Islamic port will almost double the capacity of the company from 2.5mn TEU to 5.2mn TEU. This will contribute to double digit revenue growth going forward as per our analysis. Also the capacity expansion in bonded warehouse and reinstatement of inspection fees will boost the net profit margins significantly. 70 30 -10 6 Research Department Pratik khandelwal Tel +966 11 828 4642, pratikK@alrajhi-capital.com 07/19 We initiate coverage on SISCO with a target price of SAR27/sh based on equal weights given to DCF valuation (SAR26/sh) and P/E based relative valuation (SAR27/sh). SISCO is one of the largest players in the shipping, loading and unloading services in Saudi Arabia. The main reason why we like the company is that it aligns well with the government’s initiative to make Saudi Arabia a leading regional logistic hub and increase the traffic through Red Sea as a part of Saudi vision 2030. The company recently earned a concession contract from Mawani (Saudi Port Authority) to develop and operate Jeddah Islamic Port from 2020 for a period of 30 years. As per this contract, the company will invest SAR1bn over the next three years and it will double the company’s handling capacity from currently 2.5mn TEU to 5.2mn TEU by 2024e thus making it the largest port service provider on the red sea. The other key business segments of the company are logistics & parks services and water solution services which are also poised to do well in coming years. Moreover some recent developments such as reinstatement of inspection fees in 2019 and removal of expat levy fees for industrial companies from 2020 further provide a significant push to the company’s net profit margin in the near term. The dividend pay-out ratio in the range of 40-50% makes it further appealing for the long term investors. 10/19 An overview of deal with Mawani: Jeddah Islamic port is on the Red sea and is the largest port of Saudi Arabia with annual volumes of over 6mn TEU (twenty-foot equivalent units). It currently handles over 60% of the total imports of the country and is strategically located connecting east and west cargo. In December 2019 RSGT (Red Sea Development Gateway Terminal) a subsidiary of SISCO signed a 30 year concession contract with Saudi Port Authority (Mawani) to develop and operate Jeddah Islamic Port (JIP). Under this deal RSGT will redevelop the northern port of JIP which will significantly increase the company’s handling capacity from 2.5mn TEU currently to 4.5mn TEU by c2021e and to 5.2mn TEU by c2024e. This will make RSGT the largest container terminal in Saudi Arabia on the red sea. As a part of the deal the company will invest SAR1bn over the next three years to develop the port and will record this investment as an intangible asset in its balance sheet and amortize it over the next thirty years. As per our analysis and discussion with the company the operation of existing facilities of JIP should have a positive impact from Q2 2020 and improve the top-line as it gets the right to operate the existing facilities of the port. There will not be much increment in the fixed cost for operating the port and therefore the majority of the revenue arising from JIP will flow directly to the bottom line. Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
  2. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Company’s ownership structure and business model: SISCO is a Saudi conglomerate having several subsidiaries; the company has three business segments as follows: Figure 1: Ownership Summary Effective Ownership Subsidiaries Ownership % (as per AR 2018) Direct Ownership Revenue Net Income Assets Ports and Terminals Red Sea Ports Development Company (RSPD) 61% 53% No Impact No Impact No Impact Red Sea Gateway Terminal Company (RSGT) 61% 21% 69% 41% 69% Saudi Trade & Export Development Company (LOGIPOINT) 76% 76% 8% 21% 12% Support Services Operations Co. (ISNAD) 99% 97% 7% 18% 1% 65% 65% 16% 11% 8% 100% 91% 90% Logistics Segment Water Segment Kindasa Water Services Company (Kindasa) TOTAL Associates (SAR mn) Revenue Net Income Assets 50% 257.10 15.60 266.10 33.33% 249.70 35.40 154.80 45% Stake Sold Stake Sold Stake Sold International Water Distribution Co. (TAWZEA) Saudi Al-Jabr Talke Company (SA TALKE) Saudi Stork Technical Services Company Source: Company data, Al Rajhi Capital A) The shipping loading and unloading services- In this segment company has two key subsidiaries, the Red Sea Port Development Company and Red Sea Gateway Terminal. The main business of the company is to build operate and transfer port development agreement in Saudi Arabia. It provides trans-shipment and getaway services and facilitates export and import of goods in the country. Gateway is a higher margin segment compared to the other and the current trans-shipment to getaway ratio stands at 45:55. The tariff rates for different shipment are determined based on the size of the container by the Saudi port authority (Mawani) and it varies with CPI (consumer price index). The company inspects the consignment once it arrives at the port and receives an inspection fee for the services. The inspection fee was removed in 2018 however it was reinstated in March 2019 which along with higher capacity utilization (80%) led to a strong double digit revenue growth in 9m2019. The company currently has a total handling capacity of 2.5mn TEU (twenty-foot equivalent unit) and after the recent concession contract with Mawani to operate JIP it will reach to 5.2mn by c2023e. The company has a dominant presence in Red sea and accounts for ~38% of the total handling capacity in the western region and with the new JIP deal it will reach to ~ 50% by 2021e. Figure 2: Shipping and Loading Segment’s Volume and Price Estimate FY19E FY20E FY21E FY22E FY23E FY24E 2500 3500 4500 4700 5000 5200 900 1126 1438 1544 1710 1872 Gateway Volume 1100 1376 1757 1887 2090 2288 Total Containers Volume 2000 2503 3195 3431 3800 4160 Utilization (%) 80% 72% 71% 73% 76% 80% Trans-shipment 160 160 163 163 166 166 Gateway 320 320 326 326 333 333 Inspection 30 30 30 30 30 30 Volumes (TEU '000) Handling Capacity Trans-shipment Volume Price (SAR) Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 2
  3. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 B) The logistics parks and Services- In the logistic segment company has two subsidiaries, Saudi Trade & Export development Co (also known as “Logipoint”) and Support Services operations Co (also known as ISNAD). Under this segment company provides storage services for the goods which arrive at the port. It is the only company licensed to operate a bonded warehouse in the kingdom. It has an open yard space of 750,000 sqm and bonded warehouse space of 350,000 sqm. The company plans to expand its bonded warehouse area by another 50,000sqm in the next 12-18 months. In a bonded warehouse any third party can hold their goods without paying the custom duty and that’s the reason the demand for this warehouse is higher (2018 utilization: 100%; 2019e utilization: 100%) thus providing room for premium pricing. For open yard facilities the key user has been the automobile industry in the past, however as the import of automobiles fell in 2018 especially due to expat exodus the capacity utilization was just 62% in 2018 and the revenue was impacted negatively. However the capacity utilization for open yard space has improved in the first 9M 2019 as company has started renting the open space to different industries, currently e-commerce players and other logistic companies are also occupying the open yards facilities. In future the company has plans to tie up with more e-commerce players and other industrial companies to improve the occupancy rate of open yard. The latest development in the logistics business is the construction of new warehouse in the Jeddah city with a size of 50,000 sqm. This warehouse is expected to operate in 2020 and aims to cater to small retailers in the city who don’t have their own warehouse. In future SISCO has plans to open more such warehouses in main cities of the kingdom thus diversifying their presence from port to various parts of the cities. Figure 3: Logistics Segment Capacity Utilization Estimate Land Area (sqm mn) FY19E FY20E FY21E FY22E FY23E FY24E 1.78 1.78 1.78 1.78 1.78 1.78 Open Yard (sqm mn) 0.75 0.75 0.75 0.75 0.75 0.75 Open Yard Occupancy (%) 80% 80% 82% 82% 82% 82% Open Yard Occupied (sqm mn) 0.60 0.60 0.62 0.62 0.62 0.62 Total Wearhouse Area (sqm mn) 0.35 0.40 0.40 0.40 0.40 0.40 Bonded Wearhouse 0.07 0.12 0.12 0.12 0.12 0.12 Non-Bonded Wearhouse 0.28 0.28 0.28 0.28 0.28 0.28 100% 100% 100% 100% 100% 100% 0.35 0.40 0.40 0.40 0.40 0.40 Wearhouse Occupancy (%) Wearhouse Occupied Source: Company data, Al Rajhi Capital c) Water Solutions- It has a desalination plant, water distribution network and waste water treatment facilities. The revenue from this segment is highly correlated with the population growth and therefore the recent expat exodus has impacted the segment in 2017 and 2018. The leisure tourist visa scheme launched in September 2019 will increase the headcounts in the country and should improve the demand for potable water. The waste water treatment business has witnessed a marginal slowdown especially in Jeddah off late however the newly signed Taif wastewater treatment plant with Saudi water partnership Co provides room for future growth. Figure 4: City-wise distribution capacity Pumping Capacity (mn m3) Riyadh 80 Jeddah 150 Waste/Recycled Water 10 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3
  4. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Figure 5: Desalination Business Performance As on 9M 2019 Capacity (mn cubic mtrs) 22 PW pumping capacity (m3/d '000) 220 Left in concession (m3/d '000) 72 Inhabitants served ('000) 300 Years left in concession 25 No. of concessions 5 Factories served 2700 O&M projects 9 Industrial cities managed 14 Source: Company data, Al Rajhi Capital Key Financials Figure 6 Income Statement (SAR mn) FY18 FY19E FY20E FY21E 564,705 725,716 876,091 1,076,455 29% 21% 23% -342,639 -442,687 -534,416 -656,637 222,066 283,029 341,676 419,817 27% 21% 23% 39% 39% 39% 39% -16,395 -18,143 -18,398 -22,606 -117,592 -145,143 -153,477 -170,143 88,078 119,743 169,801 227,069 36% 42% 34% 16% 17% 19% 21% Depreciation & Amortization 149,866 158,165 171,276 185,852 EBITDA 237,944 277,908 341,077 412,921 17% 23% 21% 42% 38% 39% 38% -50,780 -42,622 -48,872 -61,372 1,413 Revenue Revenue growth% Cost of Revenue Gross Profit Gross Profit growth% GP Margin % Selling and Distribution Expense General and Administrative Expense Operating Income Operating Income growth% OP Margin % EBITDA growth % EBITDA Margin % Finance Cost Finance Income 501 496 906 8,782 8,782 8,782 8,782 Share in results from equity accounted associates 23,745 23,745 23,745 23,745 Income before Zakat and Income tax 70,327 110,144 154,363 199,636 Zakat and Income tax -4,806 -11,014 -15,436 -19,964 Net Profit for the year 65,520 99,130 138,926 179,673 Other Income Net Profit Growth % 51% 40% 29% Net Profit Margin % 12% 14% 16% 17% EPS (SAR) 0.80 1.21 1.70 2.20 FY18 FY19E FY20E Source: Company data, Al Rajhi Capital Figure 7 Cash Flow (SAR mn) FY21E OPERATING ACTIVITIES Net cash from operating activities 183,951 225,729 289,546 346,560 Net cash from /(used in) investing activities 20,742 -12,094 -267,582 -274,896 Net cash (used in)/from financing activities -174,817 -49,565 180,537 160,164 29,876 164,071 202,501 231,828 180,584 344,655 547,155 778,983 Net increase/(decrease) in cash and cash equivalent Cash and C.E at the end of the year Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4
  5. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Figure 8 Balance Sheet (SAR mn) FY18 FY19E FY20E FY21E 180,584 344,655 547,155 778,983 21,303 30,321 36,604 44,975 108,033 139,178 168,018 206,443 Assets Cash and Cash Equivalent Inventories Trade receivables, prepayments and other receivables Due from related parties Total Current Assets Property, plant and equipment 9,920 9,920 9,920 9,920 319,840 524,074 761,697 1,040,322 896,944 843,910 791,598 740,408 1,162,103 1,092,037 1,263,453 1,426,249 Investment Properties 143,016 134,439 126,036 117,869 Investment in associates 121,115 130,465 139,816 149,166 17,900 17,900 17,900 17,900 Goodwill 8,777 8,777 8,777 8,777 Trade receivables, long term 8,041 8,041 8,041 8,041 Total Non-Current Assets 2,357,895 2,235,569 2,355,621 2,468,410 TOTAL ASSETS 2,677,735 2,759,644 3,117,318 3,508,732 Current portion of long term debt 153,414 153,414 153,414 153,414 Trade payables, accrued and other current liabilities 159,712 194,054 234,264 287,841 892 892 892 892 314,018 348,361 388,571 442,148 Intangible Assets Financial assets at FVOCI Current Liabilities Due to related parties Total Current Liabilities Non Current Liabilities Long term loan and bank facilities 699,027 699,027 949,027 1,199,027 Employees' end of services benefits 27,216 25,217 23,218 21,219 Long term provisions 61,504 61,504 61,504 61,504 4,538 4,538 4,538 4,538 792,284 790,285 1,038,286 1,286,287 Derivative financial instrument Total Non Current Liabilities Share holders Equity Share Capital 816,000 816,000 816,000 816,000 Share Premium 36,409 36,409 36,409 36,409 Statutory Reserves 71,290 71,290 71,290 71,290 5,907 5,907 5,907 5,907 158,627 179,786 209,439 247,788 1,088,234 1,109,393 1,139,046 1,177,395 483,198 511,605 551,415 602,902 Total Share holder Equity 1,571,433 1,620,998 1,690,461 1,780,297 TOTAL LIABILITIES AND EQUITY 2,677,735 2,759,644 3,117,318 3,508,732 Other componets of Equity Retained Earnings Equity attributable to parent Non Controlling Interest Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 5
  6. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Valuations table and Scenario Analysis Figure 9 Summary of DCF valuation FY20E 169,801 Operating profit Before Interest and Tax Tax rate Post-tax operating profit (NOPAT) Add: Depreciation & amortization FY22E 225,534 FY23E 235,985 FY24E 239,119 10.0% 10.0% 10.0% 10.0% 10.0% 152,821 204,362 202,981 212,386 215,207 171,276 185,852 194,560 204,385 5,088 6,779 2,152 4,015 Less: Change in working capital Less: Capex FY21E 227,069 (295,995) 205,402 3,344 (306,514) (250,000) (250,000) (170,000) Free Cash Flow to Firm 33,191 90,480 149,692 170,786 253,953 FCF growth -85.1% 172.6% 65.4% 14.1% 48.7% Discount factor PV of Free Cash Flows Sum of present values of FCFs 0.92 0.85 0.79 0.72 0.67 30,694 77,120 117,597 123,660 169,439 518,509 Perpetual Growth Rate (g) 2.20% Free cash flow (t+1) 259,540 Terminal value 4,121,313 Present value of terminal value 2,749,764 EV 3,268,273 Less: Net debt (780,289) Less: Minority (501,181) Add: Investment in associates 133,498 Equity value 2,088,765 Shares O/s 81,600 Fair value per share (SAR) 26 Upside/Downside 21.5% Current Price 21 Source: Company data, Al Rajhi Capital Figure 10 Summary of Relative Valuation EPS 2020e 1.70 PE Multiple (estimated) Fair value per share (SAR) 16x 27 Source: Company data, Al Rajhi Capital Figure 11 Weighted Average Target Price Valuation Methodology Fair Value (SAR) Weightage Weighted value per share (RO) Upside/Downside DCF 26.00 50% 12.81 24% Relative Valuation 27.00 50% 13.62 29% Fair Value (SAR) 27.00 Current Market Price 21.00 Upside/(Downside) 29% Source: Company data, Al Rajhi Capital Figure 12 Bull, Bear and Base case scenario target price Disclosures Please refer to the important disclosures at the back of this report. 6
  7. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 45 40 38.85 SAR 35 30 26.43 25 20 15.00 15 Jan-21 Dec-20 Oct-20 Nov-20 Sep-20 Jul-20 Aug-20 Jun-20 Apr-20 May-20 Mar-20 Jan-20 Feb-20 Dec-19 Oct-19 Nov-19 Sep-19 Jul-19 Aug-19 Jun-19 Apr-19 May-19 Mar-19 Feb-19 Jan-19 10 Source: Company data, Al Rajhi Capital Key Assumption  For calculating the port segment revenue we have assumed the total handling capacity to be 3.5mn TEU for 2020e because the additional 2mn TEU capacity will be available only for six months thereby taking an average for whole year.  The transhipment to getaway ratio for our base case is 45:55 as was the case during the first 9m2019.  We have converted forty-feet equivalent unit (FEU) into twenty-feet equivalent unit (TEU) in-line with the industry standards and have considered a blended price of SAR160 per container for trans-shipment and SAR320 for getaway.  The tariffs for different containers are decided by Saudi Port authority (Mawani) and we have taken the tariff from Mawani’s website after consulting with the company. The tariffs are increased based on CPI and accordingly we have increased the tariffs in c2021e and c2023e by 2%. For inspection revenue we have assumed the tariff to be SAR30 per container.  For logistics segment we have considered the occupancy rate for open yard to be 80% as it was for the first 9m2019, since the demand for these yards have been adversely impacted by slowdown in the auto sector in the past. The pricing for open yard is SAR90 per sqm as per our calculations.  For bonded and non-bonded warehouse the occupancy is considered to be 100% since it is in high demand mainly because bonded warehouse could be used for storing the goods without paying the custom duties for a considerable amount of time, allowing its customers to re-export the goods. The company indicated a 50,000sqm increase in capacity for these warehouses over the next 12-18 months. The pricing for bonded warehouse is considered to be SAR300 per sqm.  For water desalination we have assumed the growth to be 3% in 2020e which is due to increase in volume. From c2021e to c2024e the growth is assumed to be nil as the growth depends on population and expats. The price is assumed to be SAR5.6/m3.  The investment of SAR1bn for JIP deal over the next four years is treated as intangible assets, since it gives the company a concessional right to operate the port and collect the revenue for the next 30 years. Accordingly this SAR1bn investment gets amortized over the next 30 years rather than being depreciated as normal PP&E. As per our calculations the gross margins for different segments are as follows: Disclosures Please refer to the important disclosures at the back of this report. 7
  8. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Figure 13 Gross Margins segment wise Segment Wise Margin Analysis 2018 Shipping and unloading services 388,351 Direct Cost -238,243 Gross Profit 150,108 GM % of the segment 39% Sale of potable water 92,920 Direct Cost -65,309 Gross Profit 27,611 GM % of the segment 30% Rentals and support services 83,434 Direct Cost -39,087 Gross Profit 44,347 GM % of the segment 53% Source: Company data, Al Rajhi Capital Figure 14 Key Assumptions and Facts FY18 FY19E FY20E FY21E FY22E FY23E FY24E 2,500 2,500 3,500 4,500 4,700 5,000 5,200 Open Yard (sqm mn) 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Weahhouse (sqm mn) 0.35 0.35 0.4 0.4 0.4 0.4 0.4 22 22 22 22 22 22 22 Capcity Port Container Handling (TEU mn) Logistics Water Solutions Desalination (m3 mn) Sales Voulme Port Total Container Handling (TEU mn) 1,565 2,000 2,503 3,195 3,431 3,800 4,160 Trans-shipment 762 900 1,126 1,438 1,544 1,710 1,872 Gateway 803 1,100 1,376 1,757 1,887 2,090 2,288 Open Yard (sqm mn) 0.47 0.60 0.60 0.62 0.62 0.62 0.62 Weahhouse (sqm mn) 0.35 0.35 0.40 0.40 0.40 0.40 0.40 17.2 17.2 17.6 17.6 17.6 17.6 17.6 Trans-shipment 160 160 160 163 163 166 166 Gateway 320 320 320 326 326 333 333 Logistics Water Desalination (m3 mn) Average Selling Price Port Container Handling (SAR) Logistics Open Yard (sqm mn) 90 90 90 90 90 90 90 Wearhouse (sqm mn) 300 300 300 300 300 300 300 5.3 5.6 5.6 5.6 5.6 5.6 5.6 Water Desalination (m3 mn) Source: Company data, Al Rajhi Capital Key Investment Themes RSGT and Mawani deal provides significant upside in port revenue: Recently RSGT (Red Sea Development Gateway Terminal) signed a 30 year concession contract with Saudi Port Authority (Mawani) to develop and operate northern region of Jeddah Islamic Port (JIP). Under this deal RSGT will redevelop the northern port of JIP which will significantly increase the company’s handling capacity from 2.5mn TEU currently to 4.5mn TEU by c2021e. This will make RSGT the largest container terminal in Saudi Arabia on the Disclosures Please refer to the important disclosures at the back of this report. 8
  9. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 red sea. Jeddah Islamic port is one of the largest port of Saudi Arabia on the red sea and it is witnessing a strong growth in import and export as it has total volume of over 6mn TEU. The contract is effective from FY2020 and will reflect from Q3 2020 in the company’s financial. As per our analysis the total port revenue will increase 25% y-o-y in c2020e to SAR661mn and 30% y-o-y in c2021e to SAR861mn. As per our discussion with the company the fixed cost will be very marginal in operating the JIP initially and therefore the significant portion of top-line arising from JIP should flow directly to the net profit thus enhancing near term net margins. Reinstatement of Inspection fees provides a big push to the net profit: The inspection fee was reinstated in 2019 which improved the top-line as well as bottom line for the company in 9M2019. The inspection fees relates to the charges for checking and verifying the goods as per the custom regulations. Since there is no additional variable cost involved the fees received directly adds to the bottom line of the company. As per our calculation the inspection fees earned in 9m2019 was SAR33mn and this will continue in future. Expat Fee waiver provides a significant cost saving in near term: The government announced the waiver of expat levy fees for industrial company and as per our analysis it should be implemented in 2020. SISCO is one of the key beneficiaries of this regulation. The company exceeds the Saudization requirement and has in total 724 Saudis and 2542 expats employees as per our calculation. Considering the expat levy fee of SAR600 per month per employee, it will lead to a cost saving of ~SAR18mn which is ~12% of the total current SG&A and this amount will directly add to the net profits of the company once implemented. Figure 15 Potential benefit of expat fee waiver No of Employeess Saudi Non Saudi Salaries & Wages and benefits Expat fee waived Benefit as a % of Total Salaries FY20E FY21E FY22E FY23E FY24E 3,266 3,266 3,266 3,266 3,266 724 724 724 724 724 2,542 2,542 2,542 2,542 2,542 76,241 77,766 79,321 80,908 82,526 7200 7200 7200 7200 7200 18,302 18,302 18,302 18,302 18,302 24% 24% 23% 23% 22% Source: Company data, Al Rajhi Capital The company’s business is less correlated to oil and petrochemical companies: The company’s business is not much correlated to oil and petrochemical exports as its key clientele is retail, manufacturing and industrial sectors and therefore it could be the key beneficiary of the Saudi vision 2030 where the government intends to make Saudi Arabia as one of the largest and most prominent logistics hub in the GCC region. After the new capacity addition the company will become the leader on the red sea and most of the export-import taking place through the western part of Saudi Arabia will involve SISCO. We believe the company is well positioned to benefit from the increasing non-oil based exports and imports the kingdom is targeting in future. We forecast the company revenue to reach ~SAR1.3bn by c2024e driven mainly by government’s continuous effort to diversify the economy from oil based to non-oil based sector. Water business to stabilize amidst rising tourism: The sale of potable water is directly related to the population growth and the additional headcount from tourism in the country. As a part of Saudi Vision 2030 the government intends to almost double the religious tourist by 2030e and the recent launch of tourist visa for leisure tourism is expected to increase the number of tourist in the kingdom which will support the demand for drinking water. Another reason why we like SISCO is that it has state of the art desalinization water treatment plant with distribution capabilities and it will take time for the competitors to gain this expertise. For waste water treatment we believe that the current slowdown is cyclical in nature as its growth is highly correlated to the growth of manufacturing activities. Due to Disclosures Please refer to the important disclosures at the back of this report. 9
  10. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 recent structural changes the kingdom has attracted a lot of foreign investors and we believe that this should increase the manufacturing activities in the kingdom in intermediate to long term which should drive the waste water treatment segment. Logistics demand to improve with improving retail and e-commerce business in the kingdom: The demand for company’s bonded and other warehouse is totally dependent on the growth of overall manufacturing and retail business in the kingdom. After a cyclical slowdown in 2017 and 2018 we have observed consumer spending picking up in 2019, this is one of the reason we have observed the improving capacity utilization for SISCO’s business segments in 2019. Going forward we see this trend to continue as the outlook for retail and ecommerce remains positive amidst reducing unemployment, favourable demographics, rising income and increasing avenues to spend. SISCO is one of the few listed companies which will benefit a lot from e-commerce growth, the online sales in Saudi Arabia is still underpenetrated and as the online retailing grow in the kingdom it will lead to the demand of logistics and warehousing facilities. To cater to the rising demand for warehouse the company is planning to expand its bonded warehouse capacity by 50,000sqm in another 1218 months and add a new non bonded warehouse inside the Jeddah to capture the demand of retailers and e-commerce players present in the city. The company is already having a business tie up with e-commerce giant Amazon and in future we believe this segment to significantly contribute to the company’s revenue. Valuation: We use equal mix of DCF and P/E based relative valuation to value SISCO. We are very bullish on SISCO as the company’s business is one of the key areas where government focus is expected to increase as a part of Saudi vision 2030 plan. The recent contracts such as Jeddah Islamic port and Taif waste water treatment agreement provides strong revenue visibility in near term as well as long term. Our DCF based target is SAR26 and relative valuation target price based on 16x FY20E EPS stands at SAR27 and thus the equal weighted target price stands at SAR26 implying 26% upside from current market price of SAR21. Key downside Risk a) Any slowdown in manufacturing sector will impact the import and export and might impact the companies’ port revenue negatively. b) The port tariffs are dependent on the government; if the tariffs are reduced it will impact the top-line and consequentially the bottom-line of the company. c) If the transhipment volume increases compared to getaway volume then the revenue growth as well net margins will have a negative impact since the pricing for transhipment is almost half the gateway. d) If the government gives licensing to new bonded warehouses then the company will lose its monopoly status and the pricing in this segment might come down due to the competition. Disclosures Please refer to the important disclosures at the back of this report. 10
  11. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Al Rajhi. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. 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  12. Sisco /Saudi Arabia All Industries –All Sectors 19 January 2020 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Explanation of Al Rajhi Capital’s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations. Contact us Mazen AlSudairi Head of Research Tel : +966 11 836 5468 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37. Disclosures Please refer to the important disclosures at the back of this report. 12