• A play on KSA’s rich geology, but market valuation is even richer; Sell Maaden is a government-owned mining and commodities business, with priority access to the Kingdom’s mineral resources. It operates a fully-integrated business through three main divisions: phosphate (DAP), aluminium and gold, of which we expect phosphate to be the largest cash generator. The stock offers a strong growth outlook, but with that said, we view the company’s valuation as excessive at a 2017 P/E of 39x (c2x peers) and initiate with a Sell rating (FV: SAR27.5).
• LT prospects positive on strong growth profile, top end management While we think the stock is overvalued, there’s plenty we do like about it: i) EPS CAGR of 38% through 2019 on a 50% increase in DAP capacity and the commercial start of the company’s remaining aluminium assets; ii) top management team that has consistently expanded resources, is transparent and has enhanced returns to shareholders in tough years; and iii) Saudi Arabia’s mineral wealth remains largely untapped, offering significant long-term opportunity. For LT investors, this could be enough to get exposure today, but for investors with a shorter time horizon (one-two years), we think current levels are ripe for correction, especially since the recent stock rally (+20% last two weeks) has been driven by positive sentiment after the release of the Saudi Vision 2030, which we view as somewhat overambitious.
• Prices have bottomed; Chinese supply to prevent strong recovery DAP and aluminium prices plummeted last year on excessive Chinese supply (DAP: 8MT of exports in 2015, +64% Y-o-Y & aluminium: supply +200% since 2009). We think prices have bottomed as they are now close to Chinese production costs, but fundamentals are still shaky (oversupply, volatile demand) and any large price rise is likely to be met with a surge in Chinese exports. Expect another difficult year ahead. Energy subsidy reform a risk in the long term Maaden has a significant cost advantage to its global peers, owing to cheap feedstock prices in Saudi Arabia. The company is protected against higher gas prices in the coming years as it enjoys a grace period for its operations, but is susceptible to feedstock price hikes in the long term. Phosphate operations would remain very competitive even at higher gas prices, but the aluminium business could suffer on a significant increase in the cost of the company’s self-generated electricity.

Yousef Husseini