• A play on TiO2 & petchems, but upside is limited; initiate with Neutral We initiate coverage on Tasnee with a FV of SAR14.5 and a Neutral rating. Tasnee is among the largest TiO2 producers in the world (through 79%-owned Cristal) and one of the largest petrochemical producers in Saudi Arabia. Today, the majority of its value lies in the petrochemical operations (c60% of our FV) as the TiO2 operations (23%) are going through trough cycle conditions. While we acknowledge that earnings have started to turnaround and should continue to recover on improved TiO2 pricing, management’s restructuring efforts, as well as new expansions (e.g. titanium slag unit), we believe this is priced in (2017e P/E of 16.5x) and that current levels fairly reflect the stock’s risk/return profile.
• We still see some challenges, and expect a bumpy recovery We do not expect the turnaround will be smooth for Tasnee and see some challenges ahead. First off, while TiO2 fundamentals are improving, we believe petrochemical markets have peaked and spreads are likely to correct from here as a significant amount of supply is expected to hit the market in the coming years mainly from China, US and the Middle East. Secondly, the company’s restructuring is ongoing so this could lead to some unexpected expenses this year. Finally, with SAIBOR continuing to rise, this could trigger a significant rise in interest expenses given that it is highly leveraged.
• Risks: Beyond product prices and feedstock, debt is a major concern We assume a gradual recovery in global TiO2 prices and weaker spreads in petrochemicals, any large divergence from this could have a significant impact on our numbers. Our forecasts are also very sensitive to feedstock prices: we assume ethane prices in Saudi will continue to rise until they reach USD3/mmBtu (from USD1.75/mmBtu). We also highlight its elevated debt levels as a key negative risk. Not only will this pressure FCFE in the coming years, but interest expenses could rise substantially as: i) SAIBOR rates continue to rise; and ii) the company will have to refinance some debt this year, likely at a higher price (e.g. higher spread to SAIBOR or LIBOR). On the upside, higher-than-expected TiO2 prices would be the largest risk as the TiO2 division has relatively elevated operating leverage.

Yousef Husseini