Riyad Cap revises rating on SAFCO, raises target price

Riyad Capital has upgraded its recommendation on Saudi Arabian Fertilizer Company (SAFCO) from Neutral to Buy and raised its target price to SAR 74 from SAR 65 on better earnings expectations after a tough year in 2017.

This is driven by a modest recovery in urea prices in 2018, in addition to higher production levels due to fewer scheduled shutdowns in 2018 compared to last year, it said in a report on Wednesday.

The research firm expects SAFCO to achieve net income of SAR 1.38 billion for 2018, SAR 1.55 billion in 2019 and SAR 1.66 billion in 2020.

Revenue growth is expected to increase to SAR 3.2 billion in 2018, compared with SAR 2.8 billion in 2017.

“We believe demand from Asia Pacific markets will drive up volume sales as China’s exports are expected to decline in 2018 benefiting SAFCO, as most of its sales are concentrated in Asia-Pacific markets,” Riyad Capital said.

Stable performance after the ammonia reliability enhancement project at SAFCO 3 will also lead SAFCO to better revenues levels this year, the brokerage added.

Meanwhile, SAFCO is expected to fund Ibn-Baytar acquisition internally, with an expected cash flow for 2018 and 2019 of SAR 818 million and SAR 984 million, respectively.

“However, this may give less room for SAFCO to increase its dividend in the short-term,” Riyad Cap added.