immature profile of the real estate market in Saudi Arabia. Sovereign actions in
neighbouring countries, like the UAE, have boosted the sector (land granted to
developers, capital flows from international investors). We see big developers becoming
more active in the Kingdom but the effects on supply will not be immediate, in our view.
So far, they represent only 15% of the total market.
Key strategic objectives and KPIs to watch
• The Ministry of Housing is looking to: 1) improve performance of the real estate
sector and increase its contribution to the GDP; and, 2) enable citizens to obtain a
suitable residence. The ministry targets by 2020 to: 1) double the real estate sector
64 GEMs Paper #26 | 30 June 2016
contribution to GDP from 5% to 10%; 2) reduce the average time required to
approve and license new residential real estate; 3) reduce the housing unit cost
from 10x to 5x of the gross individual annual income; and, 4) increase the real
estate financing to non-oil GDP ratio from 8% to 15%.
• The Saudi Commission for Tourism and National Heritage is looking to increase and
develop hospitality facilities and tourism services. The ministry targets by 2020 to
increase the number of hotel rooms/apartments by 39% to 621.6k.
Positive government ambitions but…
The rise of real estate finance to non-oil GDP from 8% to 15% implies an incremental
funding of US$32bn which could finance c212k additional units by 2020 or c53k
additional units p.a. This compares to an estimated annual demand of 181k units which
come on the top of the existing c1.2mn shortage of housing.
…needs to be combined with land tax and sukuk issuance initiatives
Based on the target Key Performance Indicators (KPIs) set for the Ministry of Housing,
we estimate the initiative to be supportive but not sufficient to cater to the natural
annual demand which is 3.5 times more elevated than the implied additional supply
funded by the programme. We understand this initiative has to be combined with the
land tax initiative and the potential sukuk issuance from the Ministry of Housing which
could add further liquidity to the REDF to finance more units.
Land tax - gradual revenue source
Land tax among flagship measures adopted by the Saudi government
We expand more below on our understanding of the land tax initiative which was
recently approved by the Cabinet to tackle the housing shortage and raise government
revenues. Saudi Arabia’s Cabinet announced in November 2015 that it will gradually levy
a 2.5% tax on undeveloped land plots owned by persons or private entities in urban
areas, after the country’s Shura council approved a proposal to impose taxes on the socalled
white lands. The draft law was amended to include gradual taxes in accordance
with a specific timetable to force landlords to sell land, thus increasing land supply.
The regulations adopted in mid-June define undeveloped land as all vacant land
dedicated to residential use or commercial residential use within the urban boundary
limits. Fees will be applied to in a gradual series of stages; first, to owners of
undeveloped land with areas exceeding 10,000 square metres; second, to single owners
of developed land of more than 10,000 square metres in one master development plan;
third, to single owners of developed land of more than 5,000 square metres in one
master development plan; and, last, to single owners of land of more than 10,000 square
metres in one city. The Ministry of Housing will determine the land locations where the
tax will apply. The extension of the tax in later phases to developed land, from
undeveloped ones at first, will broaden the tax base and minimize tax evasion.
Tax proceeds will be deposited in SAMA
The taxes and fines collected by the Ministry of Housing shall be deposited in the
central bank, the Saudi Arabian Monetary Agency, and will be used to develop the
country’s infrastructure for new housing projects, according to the state-owned news
agency.
Law could be effective this month, but gradual implementation likely
Under the new system, the housing ministry has been in charge of issuing executive
procedures and rules for the new legislation within 180 days. The law will be effective
180 days after publication in the official gazette. The housing ministry is finalizing
necessary amendments to the decree by end-June 2016 and aim for implementation by
17 January 2017 (including a 1-3 year grace period).
GEMs Paper #26 | 30 June 2016 65
Tax on land: a lever to lower real estate prices in urban areas
Given that the government is giving landlords a grace period in order to either develop
or sell land to developers, we perceive the newly approved land tax as a lever to lower
real estate prices. Ultimately, this would improve household affordability, reduce social
tensions and indirectly tackling energy subsidies as it frees up potential household
income to spend on electricity and gasoline.
Land tax could generate up to US$11bn/yr from the major urban cities
We estimate that the government could potentially collect up to US$11bn per annum of
tax related to undeveloped land in the top 5 urban Saudi cities which accommodate
more than 50% of the Saudi population. While the law will not be effective until end-
2016, we do not expect the tax proceeds to be significant early on.
Table 20: Land tax proceeds estimates for the 5 major urban cities
Land tax could generate up to US$11bn per annum in first phase
City Selected urban land area (sqm) White land value (SARbn)
Annual Land tax proceeds
@ 2.5% (SARbn)
Riyadh 1,300,000,000 494 12.4
Jeddah 1,686,000,000 481 12
Mecca 850,000,000 485 12.1
Medina 293,000,000 88 2.2
Dammam 200,000,000 48 1.2
Total 4,329,000,000 1,595 39.9
Source: SAMA, BofA Merrill Lynch estimates for white land and proceeds
Table 21: NTP objectives and KPIs affecting the real estate sector
Strategic objective
KPI
Unit Baseline 2020 target Regional
b'mark
Int'l
b'mark
Ministry of Housing
Enable citizens to obtain a house Real estate sector contribution to GDP % 5 10 13 20
Improve performance of real estate Average time required to license new
sector
residential new projects
Day/ Permit 730 60 44 26
Enable citizens to obtain a house Housing unit cost multiples of gross
individual annual income
x 10 5 6.7 3
Enabling citizens to obtain suitable Real estate financing to non-oil GDP
housing financing
% 8 15 16 75
Source: Saudi National Transformation Plan
Table 22: NTP government costs related to the consumer and real estate sectors
Consumer SAR (000)
Ministry of Economy and Planning 3,293,255
Ministry of Commerce and Industry 4,313,050
Ministry of Environment, Water and Agriculture 13,942,405
Ministry of Haj and Umrah 333,600
Ministry of Labor and Social Development 7,931,710
Total 29,814,020
Real Estate SAR (000)
Ministry of Housing 59,166,666
Source: Saudi National Transformation Plan
66 GEMs Paper #26 | 30 June 2016
Metals & Mining: ambitious growth target
Faisal AlAzmeh, CFA >>
Merrill Lynch KSA Company
faisal.alazmeh@baml.com
The NTP has focused on several areas relating to domestic drivers, i.e., housing, retail,
trade and finance. However, a core part of the Saudi government’s transformation
strategy is to focus on expanding the Kingdom’s mining potential. Saudi Maaden has
historically been Saudi’s mining champion, but the mining sector currently contributes
only around 2% to the Kingdom’s GDP. The NTP has set a high target for the sector: its
contribution to GDP growing by 50% to SAR97bn by 2020 and sector employment
increasing by 40% to 90k. While the first target could be achieved given the amount of
capital that is currently being deployed in the sector, the latter part is questionable in
our view as capital intensive projects are not the best means for employment
generation.
Government focus on mining to boost jobs and growth
The focus on mining is driven by the ample and growing resources available. The
Kingdom’s largest mined products are phosphates, bauxite and gold. It supplies around
8% of global DAP production and has the largest integrated aluminium company in the
world. Ma’aden continues to discover new gold and copper sites as well. We believe the
outlook for mining is encouraging and the contribution to GDP targeted by the
government could be achieved. We believe investments in this sector faces two hurdles:
1. Diversification – the base metal cycle lags that of oil but is eventually driven by the
same global drivers (global growth). Furthermore, the NTP has currently set a low
number for its capital commitments to the industry (US$82mn), achieving the
targeted diversification and job creation at the moment seems to be highly
dependent on attracting private sector capital. This would require attractive
incentives schemes such as energy subsidies, tax exemptions or ease of issuing
work permits for expats. However, at the moment, these have not been addressed
by the Saudi authorities.
2. High capital intensity – for example, the government has spent close to US$21bn
on Saudi Maaden but the company employs only around 6,000 permanent workers,
of which Saudis account for nearly a third. While the build-up of this capacity does
create a multiplier effect of almost 10x during the construction phase, most of the
added jobs are usually low income blue-collar jobs that tend not to attract Saudis.
Domestic services sectors create more jobs than mining for dollars spent
We argue that capital spent on domestic services sectors is likely to yield more
employment for dollars spent. A key example is Saptco, the Saudi Public transport
Company, which has spent around US$450mn on assets and currently employs around
the same number of permanent employees as Maaden, of which 1,200 are Saudis. We
acknowledge that the technology and technical transfer will be different in an
investment like Maaden versus Saptco, yet we believe the economic efficiency of using
the mining sector as a means of generating employment is questionable.
NTP is already happening: Saudi Aramco has project to create 2,000 jobs
The plan to develop the mining industry is moving forward. Saudi Aramco has already
announced its plans to build a downstream industrial complex along with GE and
Cividale SpA. The complex will include the first-of-its-kind high-end forging & casting
manufacturing facility and will serve the region’s maritime and energy industries. The
project will cost around US$400mn and likely generate around 2,000 jobs.
GEMs Paper #26 | 30 June 2016 67
Exports will largely depend on market conditions
Part of the NTP relies on growing Saudi exports, including that of the mining industry.
While it is easy build a plant, the timing of when there projects come online and how it
coincides with the cycle matters. The ability to dump will largely depend on the position
on the cost curve, which seems to be fading with the recent reduction of subsidies.
The conglomerate model to continue
Saudi Arabia has historically adapted the conglomerate model to build up its industrial
sectors, such as petrochemicals (SABIC), metals & mining (Maaden) and steel (Hadeed).
We believe the government continues to focus on this model in its NTP plan and will use
a number of vehicles to expand the sectors in question: Maaden in metals & mining and
the new military company in defence.
Maaden has transformed from a pure gold producer to one of the largest conglomerates
in Saudi Arabia at the moment. Through three key Joint-Ventures (JVs), the company is a
top producer of DAP (Diammonium Phosphate) and gold and aluminium. The NTP clearly
sets the stage for Maaden to grow even further but is unclear on how this is to be
achieved and what it would mean for shareholders. Also, in our view, the all-in-one
model has delivered subpar returns globally and the trend is towards the streamlining of
operations and specialised vehicles. As an example, the largest petrochemical and
agrichem companies, Dow and Dupont, plan to merge and then split into three different
businesses, providing more specialisation. We can see the advantages of the specialised
entity model as it provides cost synergies, efficiency and a clear strategy for the
company. Also, in the conglomerate model, certain parts of the company are often
dwarfed as other revenues streams represent a larger contribution to returns. Board and
management could be more or solely focused on the sub-segment had if it is a standalone
entity they have to monitor and manage, in our view.
Table 23: National Transformation Plan objectives in the mining sector
Baseline Target 2020 Regional benchmark Global benchmark
Overall kingdom:
Number of jobs created 65k 90k 75k 210k
Contribution to GDP SAR64bn SAR97bn SAR13bn SAR262bn
Number of localized technologies Under study 125 NA NA
Less developed regions in Saudi:
Number of jobs created 0 12k NA NA
Expected contribution from private sector 0 SAR28bn NA NA
memo:
Initiative cost to the government: SAR310mn (US$83mn)
Source: Saudi National Transformation Plan
68 GEMs Paper #26 | 30 June 2016
Oil & gas/petchems: focus on downstream
Faisal AlAzmeh, CFA >>
Merrill Lynch KSA Company
faisal.alazmeh@baml.com
Focus on downstream expansion is a priority
An increased focus on downstream expansion is a strategic development priority in
Saudi Arabia, with the aim of exploiting competitive advantages on feedstock costs and
the strategic location. Furthermore, the government sees it as a mechanism to create
job opportunities for nationals. We see the NTP natural gas target as optimistic as it
faces many hurdles, while imports could be a better alternative which authorities now
suggest they could be open to eventually.
Downstream chemicals represents the second largest focus of the NTP
The NTP is firmly focused on the integration of chemicals/refining/mining capacity into
value-add downstream operations that would limit imports of certain products and
provide technology transfer into the Kingdom. This accompanies the government’s plans
to expand its natural gas and refining capacity by 48% and 13%, respectively.
The NTP includes a sizeable allocation to the Royal Commission for Jubail and Yanbu,
the government body that overlooks, promotes and develops the
petrochemicals/energy-intensive/mining sectors in the Kingdom. The government plans
to spend around US$10.9bn on developing various areas including: 1) the oil-to-olefins
(OTC) complex in Yanbu; 2) colleges and institutes in Jubal Industrial area; 3) the
necessary infrastructure in the community area of Yanbu Industrial City; and 4) valueadd
transformation industries in Raas AlKhair Industrial City.
Table 24: NTP focus for the Royal Commission of Jubail and Yanbu
Key focus areas
US$mn
Development of the OTC project 772
Development of colleges and institutes in Jubail Industrial City 731
Development of infrastructure in Yanbu 1,003
Development of residential areas in Jubail Industrial City 642
Development of Multi-Modal Logistics Hub in Yanbu Industrial City 543
Development, protection and rehabilitation of public facilities in Jubail Industrial City 954
Development of value-added transformation industries in Raas Alkhair Industrial City 805
Construction of Housing in Jubail Industrial City 538
Development of Mineral industries port in Yanbu Industrial City 556
Other infrastructure and projects (38 projects, size between 100mn to 500mn) 4,557
Total 11,101
Source: Saudi National Transformation Plan
Subsidies are likely to be needed
A key obstacle to building more refining capacity and a large OTC complex is the high
capital intensity of such projects and the subsidies required to ensure an acceptable rate
of return. We see the natural gas target as optimistic with many hurdles; importation
could be a better alternative. We believe the government plans to reduce subsidies in
water and electricity, but maintain them for feedstock prices as intensive natural gas
production requires cheap gas to thrive. However, a move towards benchmarking to US
gas prices is a likely and logical step, in our view. An alternative scenario would to mark
natural gas prices in the Kingdom to the LNG netback out of Qatar. This would facilitate
an additional US$2.5bn from the sector but would also put several companies at risk of
becoming loss making (especially companies with a high content of heavy feed in their
input mix). Should such a scenario take place, we believe implementation would be
carried out over phases in order to allow companies to cope with the new pricing order.
GEMs Paper #26 | 30 June 2016 69
Table 25: Additional costs on petrochemical producers of higher feedstock prices
Current scheme
(US$50/bbl)
US Spot/(US$50/bbl)
Government revenues raised
(US$bn)
Ethane 950 1,411 461
Methane 201 457 256
Propane 3,918 4,898 980
Butane 789 986 197
Naphtha 2,348 2,934 587
Ammonia 64 132 69
Feedstock cost 8,269 10,819 2,550
Electricity & water 1,039 2,053 1,014
Total 9,309 12,872 3,564
Source: IHS Chemical, BofA Merrill Lynch Global Research. US spot refers to natural gas prices of US$2.6/mn BTU. The US$2.5bn feedstock
price rise could directly accrue to the central government through Saudi Aramco, while higher electricity and water charges would not.
Moving further down the value chain
Downstream operations in Saudi have historically been international Joint-Ventures (JVs)
and government-owned entities like SABIC. In July 1993, the government issued a Royal
Decree that merged all the state-owned refineries, distribution activities and marketing
operations under Saudi Aramco.
This resulted in a transfer of the government’s stake in three key refineries and
international refining and petrochemical operations to one state-owned company.
Today, Saudi Aramco is one of the largest crude oil refiners in the world and aims to
become a top-three petrochemical producer through standalone petrochemicals
facilities like Sadara, downstream integration at its many refineries, and potential
acquisitions. The recent announcement of the US split with Shell was followed by
comments that the breakup was due to different strategies by both companies with
Aramco increasing its focus on petrochemicals.
Petrochemicals - a route to diversification
Saudi Arabia is emerging as one of the largest petrochemicals producers globally. The
country initially started with integrated refining leading to petrochemical production
through its multiple JVs in Saudi and other regions, and is now building the largest
petrochemical complex globally. One of the goals is to maximise the value of the Saudi
hydrocarbon chain. Ultimately, this expansion into petrochemicals should further support
the diversification drive and thus support the stated goals for the Saudi economy.
Saudi Arabia (potentially through Saudi Aramco) aims to become a leader not only in
commodity chemicals, but also downstream petrochemical conversion. In the cities of
the Jubail and Rabigh, the Ministry of Energy, Industry and Mineral Resources (along
with Saudi Aramco) is constructing value-parks next to upstream chemical facilities. The
aim is to provide integration and the infrastructure for SMEs to operate and produce
value-added products in the Kingdom. This diversification into specialty chemicals could
increase returns from the current US$500/ton level to around US$2000/ton by 2040,
according to local press citing senior Aramco officials. Saudi Arabia could also look to
grow its international refining footprint to provide further integration opportunities, as
was suggested by the recent split of the Motiva JV (Saudi is more keen to expand its
downstream operations, whilst Shell is looking to reduce them).
Two petrochemical projects are also being built. The first is the Sadara project in Jubail,
which is expected to become the world’s largest integrated chemicals complex with
3MMt of output. It will use naphtha as feedstock. The second is Petro Rabigh II, which is
the expansion project of the existing Petro Rabigh plant that will process 4MMt (93kb/d)
of naphtha feedstock, and is planned to be launched in 2016.
NTP includes the long discussed Oil-to-Olefins (OTC)
Saudi’s national transformation plan includes the development of a US$770mn
industrial cluster whereby expansion to the Aramco refinery is likely to take place,
providing the platform for the long discussed OTC, Oil-to-Olefins, project. Saudi
70 GEMs Paper #26 | 30 June 2016
authorities have highlighted in several press releases that Aramco and SABIC are looking
at potential oil-to-olefins projects. The Kingdom has a proprietary technology that
enables it to maximise the yield of olefins per ton of oil used. According to SABIC's
management, this project has been carried out on a small scale at test sites and it is
conducting feasibility studies at a larger-scale facility. Aramco has also highlighted plans
in this area. While both companies declined to comment, Bloomberg highlighted that
sources indicate they are assessing the possibility of embarking on a project together.
Such a step would be the first of its kind in Saudi Arabia, with Aramco and SABIC
working alongside each other on such a large scale.
Refining capacity target: almost there
The NTP aims to increase the refining capacity to 3.3mn bpd per day by 2020 from
2.9mn bpd today. Saudi has recently completed and launched two large refining projects
with 400kbpd installed refining capacity each: (1) SATORP in Jubail launched in June
2014; and (2) YASREF in Yanbu – first shipment made in January 2015 and inaugurated
in January 2016. In addition, it is building a new refinery, Jazan, which should process
400kb/d of Arabian heavy and medium crude oil; launch is expected in 2019.
Table 26: Saudi Arabia government refining assets
Name Location Completion Refining Saudi Aramco's Saudi Aramco's Partner
capacity, kb/d share in capacity, kb/d ownership (%)
Wholly-owned domestic refineries
Jeddah Jeddah 1967 90 90 100% n/a
Yanbu Yanbu 1979 240 240 100% n/a
Riyadh Riyadh 1981 126 126 100% n/a
Ras Tanura Ras Tanura 1986 550 550 100% n/a
Total 1,006 1,006
Domestic refining JVs:
SAMREF Yanbu 1983 400 150 50.0% ExxonMobil
SASREF Jubail 1986 305 114 50.0% Shell
Petro Rabigh I Rabigh 1990 400 150 37.5% Sumitomo (37.5%, free float 25%)
SATORP Jubail 2014 400 250 62.5% Total (37.5%)
YASREF Yanbu 2015 400 250 62.5% Sinopec (37.5%)
Total 1905 914
Total in Saudi Arabia 2,911 1,920
International refining JVs:
S-Oil South Korea 1991 669 424 63.4% S-Oil
Motiva USA 2002 1070 535 50.0% Shell
Showa Shell Japan 2004 445 67 15.0% Shell
Fujian China 2007 280 70 25.0% Sinopec, ExxonMobil
Total 2464 1096
Total capacity globally 5,375 3,016
Source: Saudi Aramco, Energy Policy, BofA Merrill Lynch Global Research
Table 27: Saudi Arabia petroleum product output in 2014 (mn bpd)
Saudi Aramco LPG Naphtha Gasoline Jet Fuel Diesel Fuel oil Asphalt Total
ownership (%)
Wholly-owned domestic refineries
Jeddah 100% 0.9 2.9 4.0 0.0 2.4 9.2 6.4 25.8
Yanbu 100% 2.4 3.2 11.5 -0.4 29.3 30.9 0.0 77.0
Riyadh 100% 1.8 0.0 10.9 2.7 19.2 0.0 6.5 41.2
Ras Tanura 100% 5.0 15.0 43.9 7.8 76.1 32.5 7.2 187.4
Subtotal 10.1 21.1 70.3 10.0 127.1 72.6 20.1 331.3
Saudi Aramco share in domestic JVs
SAMREF 50% -1.1 0.0 25.0 11.1 18.8 14.4 0.0 68.2
SASREF 50% 1.3 11.7 2.2 9.4 14.2 13.3 0.0 52.2
Petro Rabigh 38% 1.3 7.3 6.9 4.9 11.7 13.4 0.0 45.5
SATORP 63% 1.3 3.9 11.1 8.2 31.6 7.5 0.0 63.7
Subtotal 2.9 22.9 45.2 33.7 76.3 48.6 0.0 229.5
Total 13.0 44.0 115.6 43.7 203.4 121.2 20.1 560.9
Source: Saudi Aramco, BofA Merrill Lynch Global Research
GEMs Paper #26 | 30 June 2016 71
Chart 59: Saudi government refining assets (effective stake in k bpd)
1,006
Chart 60: Saudi refining breakdown per region (effective stake)
23%
2,464
914
56%
21%
Domestic fully owned
Share in domestic JVs
Domestic fully owned
Share in domestic JVs
Share in JVs overseas
Share in JVs overseas
Source: Saudi Aramco, BofA Merrill Lynch Global Research
Source: Saudi Aramco, BofA Merrill Lynch Global Research
Exports are geared towards Asia and Far East
Saudi Arabia exported c.1mbpd of oil products in 2014, mainly to Asia and the Far East
(56%), other Middle Eastern countries (19%) and Western Europe (12%).
Chart 61: Oil product export volumes split per region in 2014
1% 1%
11%
Chart 62: Saudi Arabia oil product slate in 2014
20.1
13.0 44.0
56%
19%
12%
203.4
121.2
115.6
43.7
North America South America Western Europe
Middle East Middle Africa Asia and Far East
Source: Ministry of Energy, Industry and Mineral Resources.
LPG Naphtha Gasoline Jet Fuel
Diesel Fuel oil Asphalt
Source: Company data, BofA Merrill Lynch Global Research
Ambitious natural gas expansion
The NTP also focuses on expanding natural gas production. The government aims to
grow the existing production by 48%, largely through non-traditional routes. According
to the minister of Energy, Industry and Mineral Resources, natural gas accounts for 50%
of energy production and the target is to increase this to 70% by 2020 through
expanding local production or importing if necessary. The government’s priority will be
to explore the option of local production, although imports were, for the first time, not
excluded. We consider this as an interesting development as importing LNG into Saudi
costs the same as producing it internally through non-traditional routes, in our view. The
Saudi statement acknowledges that Saudi Arabia is willing to be open to the possibility
should imports provide a more economic means for this purpose.
Table 28: National Transformation Plan objectives in the petrochemicals, oil, and refining sectors
Base line Target 2020 Regional benchmark Global benchmark
Oil production capacity (mn bbls/day) 12.5 12.5 3.8 11
Dry gas production capacity (bn scf per day) 12 17.8 5.7 16
Refining capacity 2.9 3.3 1.1 1.9
memo:
Initiative cost to the government (total SAR491mn or US$131mn):
Energy
SAR216mn
Oil & Gas
SAR200mn
Gas network
SAR75mn
Source: Saudi National Transformation Plan
72 GEMs Paper #26 | 30 June 2016
Utility sector: sharing the capex burden and
achieving cost reflective tariffs
Ali Dhaloomal
MLI (UK)
ali.dhaloomal@baml.com
Eight strategic objectives aimed at being self-funding
The electricity sector is mentioned in eight strategic objectives of the NTP 2020. The
two most important measures in our view are the one related to subsidies cuts and the
one on the liberalisation of the sector which should free out financial resources to fund
the future capex burden as well as the other targets under the NTP. This is even more
relevant as the NTP doesn’t provide any additional funding for the sector.
Unanswered questions as to impact on electricity sector
While we think these initiatives should be welcomed as they would reduce the financial
burden on Saudi Electricity Company (SEC) from its ambitious capacity expansion plan
(SAR240bn / US$64bn to be spent over the 2016-21, mostly in generation), some
questions remain unanswered, especially in regards to SEC’s capital structure and
financial sustainability on a standalone basis. It remains unclear if the proceeds from the
disposals of the minority stakes in the GenCos will be used to fund future capex plans or
to alleviate SEC’s commercial debt (US$16.3bn as of FYE15) and government and
government-related debt and payables (c.US$46bn as of FYE16). Also, it remains unclear
if on the back of the NTP, SEC would start paying its current payables (fuel sourced
from Aramco, electricity sourced from SWCC and fees owed to municipalities) instead of
accruing these amounts as it does now.
1. Saving SAR200bn annually by cutting the water and electricity subsidies: The
current print of the NTP doesn’t give any detail about how this target will be split
between water and electricity subsidies, but we note that the plan aims to reach full
cost reflective water tariffs by 2020 (from 30% cost coverage at the moment).
Recall that starting from January 1st, electricity prices have been increased by a
weighted average of close to 20%, with residential prices (half of the consumption)
now ranging SAR 0.05-0.30 / KWh vs SAR 0.05-0.26 previously. The highest
increases are for the commercial sector, the governmental entities and the
agricultural sector. SEC’s management recently indicated to us that they expect a
neutral impact over the long term from this decision as it mirrors an increase in
feedstock price charged by Aramco. However, over the short to medium term, SEC
cash flows are expected to benefit from the tariff decision given that the company
books all its fuel costs in payables without disbursing any amount to Aramco.
2. Increasing the percentage of power generation through strategic partners to
100% from 27% now: We believe that the aim here is to bring industrial or
financial partners in all SEC’s and Saline Water Conversion Corporation (SWCC)
generation units, in line with the electricity sector reform which expected to be
implemented by late 2016 / early 2017. According to SEC’s management, the most
likely scenario involves SEC’s generation assets to be split into four separate
regional GenCos where minority stakes would be sold to major global utilities or
sold in the public market.
3. Increasing the efficient use of “fuel” in power generation to 40% from 33%
now: We think that this objective entails increasing the share of efficient combined
cycle gas turbines (CCGT) plants. Given that SEC currently represents 73% of the
country’s installed capacity and that 19% of its electricity is generated via efficient
combined cycle gas turbines (CCGT), this means that 71% of the remaining tier
party capacity is “efficient”. We note that another 39% of SEC’s installed
generation capacity is made of less efficient open cycle gas turbines (OCGT).
GEMs Paper #26 | 30 June 2016 73
4. Increasing the reserve to peak demand to 12% from 10% now: This reserve
margin was just at 2.3% back in 2012 and SEC was assigned a target of 10% which
management expects to fulfil. In light of the recent improvements and SEC’s
ambitious capacity expansion plan (SAR240bn / (US$64bn in capex over the 2016-
21), the target looks realistic to us.
5. Reducing the outages of more than 5min to 3.0 per year from 6.4 per year now
and the average outage time to 120 minutes from 262 minutes now. This goal
will likely be achieved through the ongoing investments in expanding and improving
SEC’s transmission and distribution network (half of the overall capex incurred in
2015 went to these two segments).
6. Increasing the access to electricity to 99.5% of the population from 99% now:
It is hard to quantify the cost of this objective, but we believe that it entails
increasing the reach to the remote Eastern and Southern regions of the country
where the economics of expanding the transmission network are not relevant.
7. Reach 86 GW of installed capacity vs. 69 GW at the end of 2015 (incl. 50 GW
at SEC alone): The target is in line with SEC own current ambitious expansion plan
(22.8GW to be added over five years to reach 68.3 GW by the end of 2018) and
factors in additional capacity from SWCC and IPPs as well.
8. Generate 4% of the electricity from renewables (equiv. to 3.45 GW): we would
expect the projects to be primarily based on onshore wind and solar. It is likely that
these projects will be fully developed by IPPs under long term power purchase
agreements where SEC would be the offtaker and assume the higher cost of the
electricity from these ReIPP. While SEC has currently no renewable generation
capacity at all, it has recently invited expressions of interest for potential lead
developers for two 50MW solar photovoltaic projects, which we see as a (modest)
step towards the NTP target. Based on the KACARE study on grid impact, Saudi
Arabia’s electricity network should be able to integrate up to 14GW of renewables
capacity by 2020. Finally, we note that ACWA Power, the largest privately-owned
utility company in Saudi Arabia and one of the main IPP players in the country
(along with Engie), has developed a proven expertise in wind and solar projects
internationally. ACWA is likely to be one of the main players in the upcoming
liberalisation plans.
Chart 63: SEC’s debt and payables to the gov.
& GREs grew at 17.4% CAGR since 2009
(US$bn)
50
40
30
20
10
Chart 64: Saudi Arabia power generation
installed capacity split in 2015 (total: 69 GW)
10%
18%
72%
Chart 65: Saudi Electricity Company (SEC) fuel
mix for electricity generation
19%
39%
1%
41%
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Saudi Electricity Company (SEC)
Saline Water Conversion Corp. (SWCC)
IPPs and others
Heavy & light fuel
Natural Gas - CCGT
Natural Gas - OCGT
Other
Municipality fee payables
SWCC purchased power payables
Saudi Aramco net payables for fuel cost
Government soft loans
Long-term government payables
Source: SEC, BofA Merrill Lynch Global Research
Source: SEC, BofA Merrill Lynch Global Research
Source: SEC
74 GEMs Paper #26 | 30 June 2016

Defence: Vision 2030 supports defence
spending
Celine Fornaro >>
MLI (UK)
celine.fornaro@baml.com
Benjamin Heelan >>
MLI (UK)
benjamin.heelan@baml.com
Saudi Arabia is increasing its regional role as a Security and Defence nation in the
Middle East region. The 2030 Vision includes a higher local content in defence
procurement which can be achieved through new contract awards and increased
cooperation with large Original Equipment Manufacturers (OEMs). BAE is best
positioned, in our view: it has been the in the country since 1966 with 5,000 local
employees and Saudi Arabia represents 21% of BAE’s group sales.
Saudi Arabia to build out military industrial base
Defence is one of the key industries that Saudi is pinpointing for investment as part of
its future strategy plans, and one where it is well placed to become a global leader, in
our view. Saudi Arabia has one of the largest defence budgets globally, and we expect
its focus on defence investment to remain broadly intact regardless of the price of oil.
Due to regional tensions, defence spending will likely remain high for the foreseeable
future, in our view. Saudi Vision 2030 and the associated National Transformation Plan
(NTP) will likely increase focus on use of defence to achieve their economic
diversification goals. This is likely to take place through capability deployment and
employment in partnership with long term defence partners. Saudi authorities aim to
raise the locally-sourced defence procurement from 2% today to 50% in 2030.
Much of the countries’ defence spending is for foreign imports. According to
consultancy IHS, 1 out of every 7 dollars spent on defence imports in 2015 was spent by
Saudi Arabia, which was predicted by IHS to increase its defence imports by 52%yoy to
US$9.8bn in 2015.
In our view, Saudi strategy to increase locally manufactured defence content is justified,
given their level of purchasing power with international contractors. However, this could
trigger a round of new contracts’ awards to set up new terms. The State owned Taqnia
company has been signing some contracts with international companies but this
remains very limited at this stage.
Saudi commitment to defence spending positive for European Defence
Saudi Arabia’s Ministry of Finance 2016 defence budget spending remains high at
SAR213bn (cUS$57bn) which is 25% of the total budget. In 2015, the budgeted defence
spending reached SAR307bn (US$82bn). Despite the large decrease in headline defence
and security expenditure, budgetary figures suggest the allocation for the Ministry of
Interior, Ministry of National Guard, Ministry of Defence, General Intelligence
Directorate, and Saudi Royal Guard Regiment could be heavily supported from elsewhere
in the budget, if required. Figures released by the Ministry of Finance suggest that
SAR183.0bn of the state budget for 2016 - c21% of total budgeted spending - will be
allocated through a new 'Budget Support Provision' that is to be used "to give more
flexibility to the budget and redirect capital and operational expenditure in line with
national priorities and to fulfil spending requirements". In our view, the commitment to
defence spending is positive for companies who have presence in the area, BAE (Buy,
600p) & Thales (Buy, €87).
BAE Systems ties to Saudi Arabia go as far back as 1966, when the company was
contracted to Lightning and Strikemaster aircraft and equipment in a programme called
the ‘Magic Carpet’. In 1985, a new government-to-government (UK/Saudi Arabia)
agreement was signed covering supply and support of Tornado, Hawk and PC-9 aircraft.
A new government-to-government agreement, known as the Saudi British Defence Cooperation
Programme, was inaugurated at the start of 2007. Salam Project, which
GEMs Paper #26 | 30 June 2016 75
provides for the acquisition of 72 Typhoon aircraft in a programme aimed at the
modernisation of the Saudi Armed Forces, was launched in September 2007. This
carries substantial packages of work and expertise transfers, aimed at developing the
Saudi industrial defence sector. BAE Systems has made a major commitment to the
training of local nationals to bring them into management, technical and other qualified
positions. Saudis constitute 21% of BAE’s group sales, 57% of the total BAE Systems'
workforce in Saudi Arabia making the Company one of the largest private sector
employers of Saudis with 5,000 employees based locally. The UK and Saudi have
discussed in the past moving the final assembly of some of the 72 Typhoons in Saudi
Arabia but it failed. Now, the two countries may be trying to have locally produced
Hawks on the back of the 22 trainer order at the end of 2015, according to local press.
Thales (10% of group sales in the Middle East, mainly in defence) has an established
presence in the Kingdom of Saudi Arabia, with 750 employees and a diversified portfolio
of activities. The company has built a mature relationship with Saudi Arabia based on
solid, country-wide partnerships. Thales’s major commercial successes include the
Shahine and Crotale air defence contracts with logistic support. In naval defence, Thales
is the prime contractor for the Sawari II contract (three frigates), that follows on from
the successful Sawari I programme (four frigates) for which Thales now provides logistic
support. In 2007, Thales was selected by the Saudi Arabian Ministry of Defence to
supply a major electronic protection system to the Royal Saudi Air Force.
US contractors such as Lockheed Martin (supplier of F16 jets, C130J transport planes),
General Dynamics (military vehicles) and Raytheon (missiles) have some local presence
in Saudi Arabia, but BAE is by in large the largest and historical local presence.
76 GEMs Paper #26 | 30 June 2016
Table 29: Stocks mentioned
Name Symbol Opinion Q-R-Q Price PO
Al Hammadi XBQYF Buy C-1-7 SAR 40.19 SAR 64.0
Al Othaim XWPJF Buy C-1-7 SAR 99.99 SAR 121.0
BAE SYSTEMS BAESF Buy A-1-7 GBP 483.4 GBP 600
BAE SYSTEMS BAESY Buy A-1-7 USD 26.17 GBP 34.26
SABIC XAUBF Buy C-1-8 SAR 80.87 SAR 99.5
Saudi Telecom XUTUF Buy C-1-7 SAR 63.95 SAR 81.0
Savola XSAVF Buy C-1-7 SAR 35.95 SAR 46.0
THALES THLEF Buy C-1-7 EUR 73.5 EUR 87.0
YANSAB XUYNF Buy C-1-7 SAR 40.28 SAR 48.0
Zain KSA XOCTF Buy C-1-9 SAR 7.83 SAR 12.2
Almarai XALRF Neutral B-2-7 SAR 53.7 SAR 61.0
Jarir XJRIF Neutral C-2-7 SAR 118.64 SAR 134.0
SAFCO XDUAF Neutral C-2-8 SAR 59.73 SAR 72.0
Dallah Healthcare XJEFF Underperform C-3-7 SAR 86.12 SAR 79,0
Dar Al Arkan XARKF Underperform C-3-9 SAR 6.49 SAR 7.0
Extra XYDUF Underperform C-3-7 SAR 26.72 SAR 24.0
Source: BofA Merrill Lynch Global Research
Price objective basis & risk
Al Hammadi (XBQYF)
Our SAR64 PO for Al Hammadi is based on our DCF-derived valuation. This is equivalent
to 32x FY17E EPS. Strong earnings growth means out-year valuations appear much
more reasonable than near-term valuations (e.g. implied 13x FY20E EPS). Company
specific risks are: lower-than-expected growth resulting from delays in executing on
expansion plans, inability to raise prices to offset cost inflation, failure to manage
growth without impacting margins, pricing pressure from insurers, new competition,
sustained delays to government payments, and any potentially dilutive acquisitions.
General/macro risks are: sustained low oil prices and any resultant slow-down in the
economy, civil unrest, ongoing failure of the government to pay bills.
Al Othaim (XWPJF)
We use a combination of DCF, DDM and peer group analysis to value Al Othaim. We
have taken a weighted average of values implied by our DCF, DDM and peer group
analyses. We attribute a 50% weight to the DCF and 25% weights for both the DDM and
the P/E multiple, which points to a PO of SAR121. We attribute a greater weight to the
DCF valuation as we believe food retailers offer good visibility on cash flow generation.
In the case of Al Othaim, we think DCF better reflects the stock's growth opportunity.
We assume a perpetuity growth rate of 2% and WACC of 9.1% in our DCF.
The downside risks to our investment case are:
- Weaker-than-expected margin performance
- Cannibalisation effect in Saudi Arabia
- Competition: We expect competition to intensify among the large organized players,
such as Savola-owned Panda which have aggressive retail expansion plans growth plan
- Saudization: Most of Al Othaim's labors are low level staff working in the warehouses
and branches which depends heavily on expatriate labors. This suggests the Saudization
of the staff could put further pressure on margins.
Almarai (XALRF)
We arrive at our SAR61/share price objective using a combination of P/E multiples and
DCF valuation, taking the average yielded by the two methods. More specifically:
GEMs Paper #26 | 30 June 2016 77
On a multiples basis, we value Almarai on 21x 2017E EPS, a 15% premium to Global
(blue chip) food producer averages. We believe that at this level it is fairly valued given
it is trading at a premium to its historical trading average and the weaker consumer
outlook.
Our DCF analysis yields a valuation of SAR59/share, based on a WACC of 8% and
terminal growth rate of 3.5%.
Risks to our PO are company specific factors such as plant outages, disease outbreaks
in its biological assets, delays in the investment program and factors affecting suppliers.
Macro level risks are commodity prices, government regulation, subsidy removals and
price pressures from growing competition.
BAE SYSTEMS (BAESF / BAESY)
Our PO of 600p (US$34.26/ADR) is an average based on DCF, 2016-17E P/E and
EV/EBITA and Sum-of-Parts. We regard as BAE's peers Lockheed Martin, LLL, General
Dynamics, Northrop Grumman, Raytheon, QinetiQ, Cobham, Ultra Electronics.
Our DCF valuation (8.7% WACC and 1.8% long-term growth rate in line with defence
peers and 10.7% long term margin) implies a 550p share price. Our SOP suggests at
valuation range of 592-595p, using peer group EV/EBITA multiples of 12.7-13.7x and
EV/sales of 1.2x. Applying EU and US peers multiples on EV/EBITA and P/E yields a
valuation range of 671-679p.
At 600p BAE would be trading on 14.6x 2016E P/E and at 13.9x 2016E EV/EBITA. This
P/E is in the middle of the historical range of c.20x to c.6x, and the EV/EBITA is near the
high end of the historical range of c.12x to c.4x.
Upside risks are: 1) An export contract for Typhoons, in particular an order for 60+
airplanes from Saudi, 2) USD strength against the UK, 3) development of a large scale
and long term conflict.
Downside risks are: 1) significant decrease to the US or UK defence budgets, below our
current assumptions, 2) significant weakness of the US$ vs Sterling.
Dallah Healthcare (XJEFF)
We set a SAR79 price objective for Dallah, which is equivalent to 23x FY17E EPS. We
expect earnings to double between FY15A and FY20E as beds triple. The multiple
therefore falls quickly and on FY20E earnings, when some of this growth is likely to
have come through, the stock trades in-line with other hospital stocks, both EM and
Saudi.
Upside risks are: greater price increases than assumed in forecasts, faster uptake of
new capacity, accretive M&A activity.
Down side risks are: Slowdown in the economy, lower-than-expected growth resulting
from delays in executing on expansion plans, inability to raise prices to offset cost
inflation, failure to manage growth without impacting margins
Dar Al Arkan (XARKF)
Our PO of SAR7.0/share is based on sum-of-the-parts methodology. We
employ a WACC of 10.7%, derived from a COE and COD of 11.1% and 9.0%,
respectively. Our SOTP includes (1) the NPV of the current development portfolio
to 2016E, (2) the NPV of recurring cash flows from investment portfolio + the NPV
of its terminal value minus incremental capex to complete the investment
programme, (3) the NPV of land sales from the developed land bank, and (4) the
book value (valued at cost) of DAAR s remaining land bank.
Downside risks: (1) Deterioration of demand for land would increase
the perceived liquidity risk (2) Deterioration of credit environment (3) Emergence
78 GEMs Paper #26 | 30 June 2016
of sub-developers which would inflate the acq. cost of land and consequently
depreciate the residual value of land due to lower margins (4) Mismanagement of
cash flows: a mismanagement of the resources (overspending in CAPEX for land
for example) could arise liquidity concerns because of over-exposure to land
sales mkt. Upside risks: A lower-than-expected borrowing cost: We
forecast an incremental cost of debt of 9%, A improvement in the credit
environment sensitive to exogenous factors such as liquidity and the risk appetite
of the international mkt. would lower DAAR s cost of funding, We see upside
valuation risk in the value of the land bank should the company manages to
develop housing units with the support of the Ministry of Housing. debt-financed
acquisition to boost its recurring income.
Extra (XYDUF)
We derive a PO of SAR 24 using a DCF valuation model which we believe best captures
differing capital costs and growth profiles across the MENA region. Key assumptions are
an 11% WACC and a 2% perpetuity growth rate. Upside/downside risks to our PO are
better/worse returns from better/worse like-for-like sales and shorter/longer break even
times from new international markets.
Jarir (XJRIF)
We derive a PO of SAR134 using a DCF valuation model which we believe best captures
the company's plan to add c.60% new stores by 2017. Key assumptions are: - a 5-year
CAGR in sales of 11% followed by an five-year CAGR of 6% and a perpetuity growth rate
of 2%, - an average EBIT margin of 13%, - a WACC of 9.5% with a beta of 0.9x. Our
WACC is calculated using a RFR of 5.0% and an ERP of 6.0%. We used a 2% terminal
growth rate.
The risks to our PO are company-specific issues such as a failure to deliver the expected
11% top-line growth or a faster-than-expected deterioration in electronics margins. In
addition, there are risks associated with a slowdown in the economy or consumer
spending.
Saudi Arabian Fertilizer Company (XDUAF)
We apply a justified P/E multiple to derive SAFCO's PO of SAR72. The P/E is based on a
normalized RoE of 30.2%, Cost of Equity of 10.4% and payout of 93.5%.
Upside risks to our price objective are: (1) delays in global nitrogen fertilizers capacity
expansions, which would result in a tighter supply of urea and effectively higher prices,
(2) Stronger demand for fertilizers and effectively prices, (3) An increase in the marginal
producer cost that effectively leads to a higher urea price floor.
Downside risks are: (1) lower prices of urea due to weaker than expected demand, (2)
Delay in SAFCO 5 expansion project, (3) an increase in natural gas cost.
Saudi Basic Industries Corporation (XAUBF)
We apply a justified P/E multiple to derive SABIC's PO of SAR99.5. The P/E is based on a
normalised RoE of 15.8%, Cost of Equity of 11.5% and payout of 65.0%
Downside risks to our price objective are a decline in the supply of low-cost feedstock, a
lower-than-expected recovery in petrochemicals prices, delays in the ramp-up of newly
established subsidiaries, or weakness in steel demand in Saudi Arabia.
Saudi Telecom Company (STC) (XUTUF)
We derive our SAR81/share PO for STC on a sum of the parts basis, using a combination
of DCF and market valuations for its core subsidiaries and associates, adjusting for
ownership stakes. Specifically, we use DCF to value its core operations in Saudi Arabia
(9.5% WACC), Viva Kuwait (10.5% WACC), and other subsidiaries (10.1% WACC). We
GEMs Paper #26 | 30 June 2016 79
assume a terminal growth rate of 2% across all of the markets, starting from 2023. For
STC's associates, we value its holdings in Oger Telecom and Binariang using a
combination of our Research team's valuation (for Oger's stake in Turk Telecom) and
book value. We then add STC's net cash position at YE 2015 in deriving our PO.
Risks to our PO come from potential market share loss as both Mobily and Zain KSA,
plus several MVNO's are aiming to take market share from STC domestically, following
recent cut in MTR's. Additionally, we see ongoing risk from FX exposure at their
subsidiary investments, especially their indirect stake in Turk Telekom.
Savola (XSAVF)
Given the diversified nature of the Savola group, we use a sum of the parts valuation in
deriving our SAR46/share price objective for Savola. Specifically, we:
Value the food business on 12x 2016 earnings, a 30% discount to global peers on
account have having slightly slower growth and risks presented by having a significant
position in Iran (which accounts for 13% of revenues).
Value retail(Panda) at 15x 2016 earnings, a c.10% discount to global peers on account of
having slower near term growth. we believe near term growth will be impacted by
continued aggressive expansion and slowing demand trends in the Saudi market
(following the introduction of the 2016 budget).
The investments business is valued using a variety of methods. For its stake in Almarai,
we value it in line with our price objective for the shares. Savola's interests in other
listed entities (Herfy, KEC and EEC) are valued at current market valuation given we do
not have research coverage on the names. The stakes in none listed entities including
the real estate book and private equity holdings are valued at 2x book value (YE2015).
Downside risks to our PO include higher cost escalation than we forecast, further
adverse moves in commodity prices , adverse FX movements in countries outside of
Saudi Arabia where Savola does business and any disruptions to its material Iranian
business.
THALES (THLEF)
To derive our Thales price objective of €87, we use a 2017E sum of the parts valuation,
using Rockwell Collins, Raytheon, Northrop Grumman, Ultra, and the EU Civil Aerospace
peer group as peers for the Aerospace/defence segments, and Ansaldo STAS as a peer
for the transport business.
At €87 Thales would trade on 18.1x 2017E P/E and 12.3x EV/EBITA which we think is
appropriate given balance sheet/ portfolio optionality and building order momentum.
Upside/Downside risks to our price objective are: 1) changes in the company's free float,
2) assets swap and portfolio changes could add more value than we currently estimate
3) lower/more French defence cuts than we currently estimate.
YANSAB (XUYNF)
We apply a justified P/E multiple to derive YANSAB's PO of SAR48. The P/E is based on
a normalized RoE of 14.5%, Cost of Equity of 11% and payout of 70%
Downside risks to our price objective are: 1. Lower-than-expected demand for polyester
would adversely impact MEG prices and effectively earnings 2. Unexpected change in
feedstock prices could negatively impact earnings 3. Unexpected shutdowns that would
result in lower production.
80 GEMs Paper #26 | 30 June 2016
Zain KSA (XOCTF)
We use a DCF valuation model to derive our price objective of SAR 12.2. Key
assumptions are a discount rate of 11.0%, underpinned by a risk free rate of 5.5%, a
cost of equity of 29% and a 6.5% cost of debt. We explicitly forecast free cash flows
until 2022 and then assume perpetuity growth of 3%, as we do when valuing other Gulf
operators. Our forecasts take in to account the repayment of the deferred royalty loan
afforded to Zain in 2013 (repayments starting from 2021).
Downside risks are greater pricing pressure from MVNOs, the loss of its appeal against
a SAR620mn tax claim, an unfavourable ruling against Zain KSA in its arbitration process
with Mobily and an inability to grow market share and margins, which in turn would
threaten capital requirements.
Analyst Certification
We, Abdelrali El Jattari, Ali Dhaloomal, Anton Fedotov, Benjamin Heelan, Celine Fornaro,
Faisal AlAzmeh, CFA, Francisco Blanch, Hootan Yazhari, CFA, Jamie Clark, CFA and Jean-
Michel Saliba, hereby certify that the views each of us has expressed in this research
report accurately reflect each of our respective personal views about the subject
securities and issuers. We also certify that no part of our respective compensation was,
is, or will be, directly or indirectly, related to the specific recommendations or view
expressed in this research report.
Special Disclosures
Some of the securities discussed herein should only be considered for inclusion in
accounts qualified for high risk investment.
GEMs Paper #26 | 30 June 2016 81
Disclosures
Important Disclosures
Credit opinion history
Bahrain / BHRAIN
Sovereign Date^ Action Recommendation
Bahrain / BHRAIN 12-Nov-2015 Initial Marketweight
Table reflects credit opinion history as of previous business day’s close. ^First date of recommendation within last 36 months. The investment opinion system is contained at the end of the
report under the heading "BofA Merrill Lynch Credit Opinion Key."
Dubai / DUGB
Sovereign Date^ Action Recommendation
Dubai / DUGB 12-Nov-2015 Initial Marketweight
08-Jan-2016 Downgrade Underweight
28-Apr-2016 Upgrade Marketweight
Table reflects credit opinion history as of previous business day’s close. ^First date of recommendation within last 36 months. The investment opinion system is contained at the end of the
report under the heading "BofA Merrill Lynch Credit Opinion Key."
Qatar / QATAR
Sovereign Date^ Action Recommendation
Qatar / QATAR 12-Nov-2015 Initial Marketweight
08-Jan-2016 Downgrade Underweight
26-Feb-2016 Upgrade Marketweight
25-May-2016 Restricted NA
Table reflects credit opinion history as of previous business day’s close. ^First date of recommendation within last 36 months. The investment opinion system is contained at the end of the
report under the heading "BofA Merrill Lynch Credit Opinion Key."
BofA Merrill Lynch Credit Opinion Key
BofA Merrill Lynch Global Research provides recommendations on an issuer’s bonds (including corporate and sovereign external debt securities), capital securities, equity preferreds and CDS as
described below. Convertible securities are not rated. An issuer level recommendation may also be provided for an issuer as explained below. BofA Merrill Lynch Global Research credit
recommendations are assigned using a three-month time horizon.
Issuer Recommendations: If an issuer credit recommendation is provided, it is applicable to bonds and capital securities of the issuer except bonds and capital securities specifically
referenced in the report with a different credit recommendation. Where there is no issuer credit recommendation, only individual bonds and capital securities with specific recommendations
are covered. CDS and equity preferreds are rated separately and issuer recommendations do not apply to them.
BofA Merrill Lynch Global Research credit recommendations are assigned using a three-month time horizon:
Overweight: Spreads and /or excess returns are likely to outperform the relevant and comparable market over the next three months.
Marketweight: Spreads and/or excess returns are likely to perform in-line with the relevant and comparable market over the next three months.
Underweight: Spreads and/or excess returns are likely to underperform the relevant and comparable market over the next three months.
BofA Merrill Lynch Global Research uses the following rating system with respect to Credit Default Swaps (CDS):
Buy Protection: Buy CDS, therefore going short credit risk.
Neutral: No purchase or sale of CDS is recommended.
Sell Protection: Sell CDS, therefore going long credit risk.
Sovereign Investment Rating Distribution: Global Group (as of 31 Mar 2016)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 5 12.82% Buy 2 40.00%
Hold 28 71.79% Hold 12 42.86%
Sell 6 15.38% Sell 6 100.00%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only Sovereign
issuer recommendations. A Sovereign issuer rated Overweight is included as a Buy, a Sovereign issuer rated Marketweight is included as a Hold, and a Sovereign issuer rated Underweight is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12
month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be
referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
82 GEMs Paper #26 | 30 June 2016
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays
no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s
coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
Credit Opinion History Tables for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
One or more analysts responsible for covering the securities in this report owns stock of the covered issuer: Genel Energy.
MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: Qatar.
The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: BAE SYSTEMS, Dubai, Qatar, Qatar (Central Bank), SABIC, Saudi
Telecom, THALES, Yansab.
MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: BAE SYSTEMS, Bahrain, Bahrain (Treasury),
Dubai, Qatar, Qatar (Central Bank), SABIC, Yansab.
The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: BAE SYSTEMS, Bahrain, Bahrain (Treasury), Dubai, Qatar, Qatar
(Central Bank), SABIC, Yansab.
In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale: Al Hammadi, Al Othaim,
Almarai, BAE SYSTEMS, Dallah Healthcare, Dar Al Arkan, Extra, Jarir, SABIC, SAFCO, Saudi Telecom, Savola, THALES, Yansab, Zain KSA.
MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: BAE SYSTEMS, Dubai, Qatar, Qatar (Central Bank), SABIC, THALES,
Yansab.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: BAE
SYSTEMS, Dubai, Qatar, Qatar (Central Bank), SABIC, Saudi Telecom, THALES, Yansab.
MLPF&S or one of its affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 15th day of the month, it reflects a
significant financial interest on the last day of the previous month. Reports issued before the 15th day of the month reflect a significant financial interest at the end of the second month
preceding the report: BAE SYSTEMS, Qatar.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: BAE SYSTEMS.
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GEMs Paper #26 | 30 June 2016 83
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84 GEMs Paper #26 | 30 June 2016
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GEMs Paper #26 | 30 June 2016 85
Research Analysts
Economics
Jean-Michel Saliba
MENA Economist
MLI (UK)
+44 20 7995 8568
jean-michel.saliba@baml.com
MENA & FM equity
Hootan Yazhari, CFA >>
Research Analyst
Merrill Lynch (DIFC)
+971 4 4258218
hootan.yazhari@baml.com
Healthcare
Jamie Clark, CFA >>
Research Analyst
MLI (UK)
+44 20 7995 1300
jamie.clark@baml.com
Chemicals & Mining
Faisal AlAzmeh, CFA >>
Research Analyst
Merrill Lynch KSA Company
+966 11 299 3741
faisal.alazmeh@baml.com
Real Estate & Consumer
Abdelrali El Jattari >>
Research Analyst
Merrill Lynch (DIFC)
+971 4 4258231
abdelrali.eljattari@baml.com
Credit Research
Ali Dhaloomal
Research Analyst
MLI (UK)
+44 20 7996 9107
ali.dhaloomal@baml.com
Commodities
Francisco Blanch
Commodity & Deriv Strategist
MLPF&S
+1 646 855 6212
francisco.blanch@baml.com
Peter Helles
Commodity Strategist
MLI (UK)
+44 20 7996 8154
peter.helles@baml.com
Aerospace, Defence & Satellite Services
Celine Fornaro >>
Research Analyst
MLI (UK)
+44 20 7996 5515
celine.fornaro@baml.com
Benjamin Heelan >>
Research Analyst
MLI (UK)
+44 20 7996 5723
benjamin.heelan@baml.com
Energy
Anton Fedotov >>
Research Analyst
Merrill Lynch (Russia)
+7 495 662 6079
anton.a.fedotov@baml.com
Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all
investors. Investors should have experience in FX markets and the financial resources to absorb any losses arising from
applying these ideas or strategies.
>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules.
Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for
this report in particular jurisdictions.
86 GEMs Paper #26 | 30 June 2016