COVER SHEET - files. · PDF fileBusiness Strategy Analysis ... 4-7 Business Strategies to...

COVER SHEET

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TABLE OF CONTENTS

Description Page #

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Business Strategy Analysis . . . . . . . . . . . . . . . . 4-7

Business Strategies to counter the five forces. 8

SAFCO (Introduction) . . . . . . . . . . . . . . . . . . . . . 9

SIPCHEM (Introduction) . . . . . . . . . . . . . . . . . . . 10

SAFCO

Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . 11

Solvency Ratios and Analysis . . . . . . . . . . . . 12

Profitability Ratios and Analysis . . . . . . . . . . 13-16

Horizontal Analysis Cons. Balance Sheet . . . . 17-18

Horizontal Analysis Cons. Income Statement. . 19

Cash Flow Statement . . . . . . . . . . . . . . . . . . . 20

Vertical Analysis (Financial Statement) . . . . . . 21-22

Vertical Analysis (Income Statement) . . . . . . . 23

SIPCHEM

Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . 24

Solvency Ratios and Analysis . . . . . . . . . . . . 25-28

Horizontal Analysis Cons. Balance Sheet . . . . 29-30

Vertical Analysis Cons. Balance Sheet . . . . . . 31-32

Horizontal Analysis Cons. Income Sheet . . . . 33

Vertical Analysis Cons. Income Sheet . . . . . . 34

Stockholder' Equity Statement . . . . . . . . . . . 35

Cash Flow Statement . . . . . . . . . . . . . . . . . . . 36-37

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

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Introduction

SAFCO (Saudi Arabian Fertilizer Company) one of SABIC affiliate located in Jubail industrial city. The first SABIC affiliate registered in

Saudi stock. SIPCHEM (Saudi International Petrochemical Company) is newly established and came on stream on 2004 producing Methanol

and other petrochemical products. This company located in Jubail

industrial city and registered in the Saudi stock market.

Purpose

The purpose of this report is to analyze both companies financial

statement and performance ratio analyses. The two different perspectives are:

a) Investors: The investor can take appropriate investment decision in the company after analyzing its profitability and liquidity.

b) Creditor: Liquidity and solvency of the company allow financial institutions to measure the company’s ability to repay its loan and

other financial obligations.

Targets

Both companies have similar targets and summarized as

follow:

o To contribute in the national income resources diversification.

o To assist in the settlement of immigrating capitals, to be invested in

national projects for the interest of the state and its citizens.

o To achieve a enumerative capital proceed for investors.

o Adopting and settlement of the latest technologies in the field of

cement production into the Kingdom to obtain an identical product

to the Saudi & International standards.

o Creating wide opportunities for absorbing Saudi manpower.

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Business Strategy Analysis

Any investors before forming an organization are looking to profit that will be generated for each dollar they invest. Normally business strategy comes first step to provide qualitative assessment of profit potential.

Industry analysis & competitive advantages are main tow items in business strategy. One simple method is Michel Porter module.

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. Michael Porter provided

a framework that models an industry as being influenced by five forces. The Management seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm

operates. As an overall the Diagram of Porter’s 5 Forces could be represented as

follows

SUPPLIER POWER

Supplier concentration/number of suppliers

Importance of volume to supplier

Impact of inputs on cost

Presence of substitute inputs

Threat of forward integration

Cost relative to total purchases in industry

THREAT OF SUBSTITUTES

Switching costs

Buyer inclination to substitute

Price-performance trade-off of

Substitutes

Relative price & performance

DEGREE OF RIVALRY

Exit barriers

Industry concentration

Fixed costs / Value Added

Industry growth

Intermittent over capacity

Product differences

Switching costs

Brand identity

Diversity of rivals

Excess capacity

BARRIERS TO ENTRY

Absolute cost advantages

Proprietary learning curve

Access to inputs

Government policy

Economies of scale

Capital Requirements

Brand identity

Switching costs

Access to distribution

Proprietary products

RIVALRY

Industry profitability

BUYER POWER

Bargaining leverage

Buyer volume

Buyer information

Brand identity

Price sensitivity

Threat of backward integration

Product differentiation

Buyer concentration Vs industry

Substitutes available

Buyer’s incentives

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1. Rivalry:

Whenever there is rivalry among organizations, it is very essential for the management to device strategies to minimize

(or) eliminate such threats.

Normally, intensity of rivalry is influenced by the following

industry characteristics:

a. A larger number of firms increase rivalry because more firms must compete for the same customers and resources.

b. Slow market growth causes organizations to fight for market share.

c. High fixed costs can result in an economy of scale effect that increases rivalry.

d. High storage costs e. Low switching costs of changing over from one product to

another. f. High strategic stakes.

g. High exit barriers cause a firm to remain in an industry even if not profitable. When the plant / equipment are highly

specialized, it is difficult to sell to other buyers.

h. A diversity of rivals with different cultures, histories and philosophies make an industry unstable.

i. A growing market and the potential for high profits induce new firms to enter the market.

In pursuing an advantage over its rivals, a firm can choose from

several competitive moves:

Raising or lowering prices to gain a temporary advantage. Improving features, implementing innovations in the

manufacturing process and in the product itself. Creatively using channels of distribution – using vertical

integration or using a distribution channel that is novel to the industry.

Exploiting relationships with suppliers.

In general, SAFCO doing well in this part and it is low concert hr rivalry matter due to no privet sector is welling to enter the fertilizing

business due to huge investment and low growth rate. SAFCO has partnership with there customers especially internal ones. In the other

hand, SIPCEM enter the Methanol business as strategic product has several sub products and uses.

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2. Threat of Substitutes

Substitute products refer to products in other industries. The

substitute products will find similar end uses as the product in question. It may not be from a rival firm.

SAFCO have low concern on a substitute to fertilizers. SIPCHEM major product is Methanol and main use of it world wide is in

producing MTBE (gasoline additive to enhance octane) and as solvent in different paint industry. MTBE product is banned now

in USA due to political reasons to promote the use of Ethanol that produced from corps to support local farmers in USA. Also,

Europe adopting new policy to use Bio fuels and this start already in Germany. The only hope future is in China & Idea that

with in 5 to 7 years consumption of gasoline will increase and

best cheap additive is MTBE.

3. Buyer Power

The power of buyers is the impact that customers have on a

producing industry. A buyer power is strong when there are many suppliers and one or few buyers (or) when buyers

purchase a significant amount of the output. This is low concern

to SAFCO since they are controlling customers and only government regulation can create a threat by allowing importing

fertilizers from abroad. For SIPCHEM this mater is high and all there product is exported. They are overcoming this matter by

producing high quality product and having partnership with MHI a Japanese company who is the technology licensor of their

plant.

4. Supplier Power

A producing industry requires raw materials, labor, components

and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms. Suppliers, if

powerful, can exert an influence on the producing industry, such as selling raw materials at a higher price etc. Both companies

having similar threats since the sole supplier for Hydrocarbon feed is Saudi Aramco. But the advantages are the feed soled

with 30% discount from international prices by Aramco to all

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Petrochemical plants in Jubail Industrial city. This gives

advantages especially to SIPCHEM to compete with other international companies

5. Barriers of Entry / Threat of Entry

The possibility that new firms may enter the industry also affects

competition. Normally firms tend to enter if the profit levels are

high. If more firms enter, the prices start dropping over a period of time. Then, some firms tend to leave the market. Hence, a

market equilibrium is normally established.

Still, there can be some barriers of entry like artificially reduced prices in order not to attract other firms etc.

Barriers to entry can arise from several sources, some of which

are briefed below:

a. Government creates barriers. The government can restrict competition through the granting of monopolies and through

regulation. b. Patents and proprietary knowledge serve to restrict entry into

an industry.

c. Requirement of very specialized assets to produce a particular product (asset specificity) can also restrict entry into the

market. d. Organizational economies of scale. The most cost efficient

level of production is termed Minimum Efficient Scale (MES). This is the point at which the unit costs of production are at

minimum. SAFCO got the chance and they are the first entrant to this business

and the only one in Kingdome. They control the market and they made it different to other to enter the same business.

For SIPCHEM, they are not the only ones in the Methanol business SABIC is major producer as well and the competition is high. I don’t

see any other new firms can enter the methanol business except SABIC they can build new methanol complexes to meet the slow

growth of methanol.

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Generic Strategies to counter the five forces: Strategy can be formulated on three levels:

Corporate level.

Business Unit level Functional or departmental level.

The business unit level is the primary context of industry rivalry. Michael Porter identified three generic strategies that can be

implemented at a business unit level to create a competitive advantage. They are as follows:

Cost Leadership.

Differentiation Focus

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Saudi Arabian Fertilizer Company (SAFCO)

Saudi Arabian Fertilizer Company (SAFCO) was founded in 1965 and 41% owned by Saudi Basic Industries Corporation (SABIC). SAFCO

employees own 10 per cent of the company and the remaining 49 per cent is in the hands of private Saudi investors. It now operates a plant in Dammam and a newer unit in Jubail Industrial City. It manufactures

ammonia, urea, sulphuric acid and melamine. In 1996, SAFCO took over National Chemical Fertilizer Company (Ibn Al-Baytar), an ammonia, urea

and compound and phosphate fertilizer manufacturer that was previously a 50:50 joint venture between SAFCO and SABIC.

The company doubled its paid-in capital in 1996 to SR 1,000 million

($267 million) through a two-for-one stock dividend. Capital was further increased in April 1998 to SR 1,500 million ($400 million) in a one-for-two bonus issue and this was followed with a stock split which reduced

SAFCO's nominal share value to SR 50 ($13.33) from SR 100 ($26.67). There are currently 30 million SAFCO shares. SAFCO completed in 1999

the new ammonia and urea plants. These doubled the capacity of SAFCO's Jubail operations. Total SAFCO capacity, including output from its original Jubail complex, will rise to 1.2 million tones a year of

ammonia and more than 1.5 million t/y of urea.

SAFCO Mission

To produce, process, manufacture and market all kinds of fertilizers for the local and international market.

Production and manufacturing of Ammonia, Urea, Melamine and Sulfuric Acid and market all products for the local and

international market.

Establishing, acquiring and operating chemical & non-chemical

factories (not related to the gas) for the purpose of expansion in the company activities.

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SIPCHEM

SIPCHEM (Saudi International Petrochemical Company) is a Saudi Joint

Venture Company located in Al-Jubail Industrial City, established on December 22, 1999 with an initial capital of 500 Million Saudi Riyals. The company is owned by the private sector in Saudi Arabia and other

GCC.

The objective of SIPCHEM is to invest in the basic and intermediate petrochemical industry. SIPCHEM started producing both methanol and

butanediol (first plant in the Middle East) in 2005. The company has many projects at different phase like, Acetyl Complex consisting of plants

for Acetic Acid, Vinyl Acetate Monomers, Carbon Monoxide. The Acetyl Complex is expected to be commissioned by early 2009. SIPCHEM is also planning to build an olefins project and its downstream product.

SIPCHEM Mission

"To provide competitive and quality petrochemical products through

development of safe, environmentally sound and reliable facilities to satisfy our costumers, motivate our employees and meet shareholders expectations".

SIPCHEM Vision

"To be a responsible, innovative and globally recognized petrochemical company, maximizing the benefits of investments, synergies and

strategic alliances".

SIPCHEM improved its financial performance in 2005 with a net profit of

325 Million Saudi Riyals versus 6 Million Saudi Riyals in 2004.

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RATIO ANALYSIS

SAFCO

Liquidity Ratios and Analysis:

SR (000) 2005 2004

Working capital = current Assets – current

liabilities 2005 : 1,113,587 – 415,619

2004 : 964,616 - 433,950

SR 697,968

SR 530,666

Current ratio = current assets ÷ current liabilities

2005 : 113,587 ÷ 41,561 2004 : 964,616 ÷ 433,950

2.73 : 1 2.22 : 1

Current cash debt coverage ratio = cash provided

by operations ÷ average current liabilities 2005 : 922,659 ÷ 424,784.5

2004 : 781,425 ÷ 398,385.5

2.17 times 1.96 times

Days in inventory =365 days ÷ inventory turnover

ratio 2005 : 365÷ 3.07 2004 : 365 ÷ 3.05

119.9 days 119 days

Receivable turnover ratio = net credit sales ÷ average net receivable

2005 : 1,823,985 ÷ 441,199.5 2004 : 1,356,516 ÷ 348,482


Average collection period = 365 days ÷ receivable

turnover ration 2005 : 365 ÷ 4.134 2004 : 365 ÷ 3.893

88.3 days 93.80 days

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Solvency Ratios and Analysis:

SR (000) 2005 (000)

2004 (000)

Debt to total assets ratio = Total liabilities ÷ Total assets

2005 : 1,419,257 ÷ 6,207,325 2004 : 1,031,871 ÷ 5,279,788

22.9 % 19.6 %

Cash debt coverage ratio = Cash provided by operations ÷ Average total liabilities 2005 : 922,659 ÷ 1,225,564

2004 : 781,425 ÷ 871,241.5


Times interest earned ratio = (Net income +

Interest expense + Zakat expense) ÷ Interests expense 2005 : (1,100,150 + 31,452 + 42,203) ÷ 31,452

2004 : (660,096 + 31,452 + 35,000) ÷ 31,452


Free cash flow = Cash provided by operations –

Capital expenditures – Cash dividends 2005 : 922,659 – 889,619 – 526,259

2004 : 781,425 – 886,585 – 306,906

- SR 493,219 - SR 412,066

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Profitability Ratios and Analysis:

SR (000) 2005 (000)

2004 (000)

Earning / Share ratio (EPS) = Not income - preferred stock dividend ÷ average common

share. 2005 : 1,100,150 ÷ 200,000

2004 : 660,096 ÷ 200,000

5.500 3.3

Price earning ratio (PE) = stock price / share ÷ Earnings / share

2005 : 114 ÷ 5.5 2004 : 114 ÷ 3.3

20.73 times

34.5 times

Gross Profit Ratio = Gross Profit ÷ Net Sales 2005 : 1,074,666 ÷ 1,823,985

2004 : 670,044 ÷ 1,356,516

59% 49%

Profit Margin Ratio = Net Income ÷ Net

Sales 2005 : 1,100,150 ÷ 1,823,985

2004 : 695,096 ÷ 1,356,516

60% 51.2%

Return on Asset Ratio (ROA) = Net Income ÷ Average total assets

2005 : 1,100,150 ÷ 5,743,556.5 2004 : 695,096 ÷ 4,949,111

19.2% 13.3%

Asset Turnover Ratio = Net sales ÷ Average total assets

2005 : 1,823,985 ÷ 5,743,556.5 2004 : 356,516 ÷ 4,949,111


Payment ratio = Cash dividend declared on com stock ÷ Net Income 2005 : 840000 ÷ 1,100,150

2004 : 560000 ÷ 666,096

76.4% 84.1%

Return on commercial stock hloder's

equity ratio (RCE) = Net income / Preferred stock ÷ Average com stock equity 2005 : 1,100,150 ÷ 4,517,992.5

2004 : 660,096 ÷ 4,077,869.5

24.4% 16.2%

Working capital is a liquidity measure, there is increase in 2005 compare to 2004, but SAFCO still has positive working capital, which indicates the company is in a strong position that enables it to pay its liabilities.

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The current ratio expresses the relationship between current assets and current liabilities. SAFCO current ratio for 2005 indicates that for every SR 1 of current liabilities, SAFCO has SR 2.73 of current assets. There is a slight different between 2005 compare to 2004, but still shows strong liquidity position. Acid-test or quick ratio measures the company’s immediate short-term ability to pay its obligations, SAFCO quick ratio of 2005 shows significant improvement compare to 2004. The current cash debt coverage ratio measures the company’s ability to generate sufficient cash to meet its short-term needs, which overcomes the disadvantage of the current ratio that uses year-end balances of current asset and current liability accounts. The ratio of 2005 has increased in comparison to 2004; 2.20 times vs 1.96 times, which indicates the ability of SAFCO to generate sufficient cash to meet its short-term needs has improved, although it was strong. Receivable turnover ratio which measures the number of times (average) receivable are collected during the period. SAFCO ratio indicates a higher ratio in 2005 (4.13 time vs 3.89 times) in 2004, which shows how quickly certain assets can be converted to cash (liquidity improvement). Average collection period, which show the effectiveness of a company’s credit and collection policies. The average collection period for 2005 was slightly improved. Overall, SAFCO liquidity ration are considered adequate and reflect strong liquidity position.

The Debt to Total Assets Ration measures the % of the total assets provided by creditors. This ratio indicates the degree of financial leveraging. It also provides some indication of the company's ability to

withstand losses without impairing the interests of its creditors. The higher % of debt to total assets, the greater risk that the company may

be unable to meet its maturing obligations. The debt to total asset ratio for SAFCO increased in 2005 from 2004 (22.9% Vs 19.5%), which indicates higher use of debt financing. But the ratio is considered low in

the light of the SAFCO earnings.

The Cash Debt Coverage Ratio is a cash-basis measure of solvency.

This ratio indicates a company's ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets used in its operations. The ratio decreased in 2004 from 2005 due to the

increase in liability.

Times Interest Earned Ratio is a measurement of solvency which provides and indication of company's ability to meet interest payments as

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they come due the interest coverage of SAFCO in 2005 is 38.7 times with a great increase from 2003 ratio 23.1 times) which indicates the strong

positioning of SAFCO to meet its ability for its payments.

Free Cash Flow indication of a company solvency as well of it ability to

pay dividends or expand operations, is the amount of excess cash it generates after investing to maintain its current productive capacity and pay dividends. The cash flow of SAFCO declined considerably from 2005

to 2004. It is likely SAFCO used to acquire more equipment and plants for future investments, upgrade but still SAFCO distributed dividends due to SAFCO high profits.

EPS is a measurement of the net income earned on each share of common stock. SAFCO EPS increased in 2005 2.2 times due to the high

profit.

Price Earning Ratio (PE) is a statistic that measures the ratio of the market price of each share of common stock to the earnings per share.

The (P-E) ratio is a reflection of investor's assessment of a company's future earnings. SAFCO (P-E) reduced considerably in 2005 from 2004,

which reflects the investor's confidence in SAFCO.

The Payment Ratio measures the % of earnings distributed in the form of cash dividends from the net income. SAFCO management distribution

of was reduced by 12% put still in good range.

Return on Comm. Stockholder's Equity Ratio shows how many SR of net income was earned for each SR invested by the owners. SAFCO

during 2005 had a ROE of 24.4 %, which is almost 8% more than 2004, which is considerably very good.

Return on Asset Ratio (ROA) measures the over all profitability of assets in terms of the income earned on each SR invested in assets. SAFCO had a (13.33%) return on assets in 2004, which is lower than

2005 (19.2 %), which shows over 5.5% improvement in ROA.

Profit Margin Ratio: There is a strong visible increase around 9% during 2005 from 2004. The profit margin ratio measures the percent of each SR

of sales that results in net income.

Asset Turnover Ratio indicates how efficiently assets are used to

generate sales and it seams that SAFCO are keeping the same ratio almost, which shows that SAFCO generated sales of SR 0.32 for each SR 1 it had invested in assets, it is little more than 2004.

Gross Profit Ratio measures the cost incurred to support each SR of sales and it has a direct impact on the profit / margin ratio. However,

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there is an improvement over 10% during 2005, ever than more improvement is required always in this area to increase profitability.

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Horizontal Analysis of SAFCO Consolidated Balance Sheet:

The comparative consolidated balance sheet show that a number of

positive changes happened in SAFCO position from 2004 to 2005 as following:

Financial Statements

SAUDI ARABIAN FERTILIZER COMPANY

(Saudi Joint Stock Company)

BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2004 (In Thousands of Saudi Riyals)

Horizontal Analysis of Consolidated Balance Sheet

Note 2005 2004

Increase (Decrease)

During 2004

Amount (%)

ASSETS

Current assets

Cash and cash equivalents 3 304,139 375,530 -71,391 -19.01%

Accounts receivable 4 557,657 324,742 232,915 71.72%

Inventories 5 235,215 253,166 -17,951 -7.09%

Prepayments and other assets 16,576 206,984 -190,408 -91.99%

Total current assets 1,113,587 964,616 148,971 15.44%

Non-current assets

Deferred charges 51,653 49,313 2,340 4.75%

Investments and financial assets 6 975,823 913,692 62,131 6.80%

Property, plant and equipment 7 3,922,873 3,180,279 742,594 23.35%

Home ownership program receivable

8 143,389 171,888 -28,499 -16.58%

Total non-current assets 5,093,738 4,315,172 778,566 18.04%

TOTAL ASSETS 6,207,325 5,279,788 927,537 17.57%

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable and other liabilities

415,619 349,745 65,874 18.83%

Current installments of long term debt

10 0 6,000 -6,000 -

100.00%

Total current liabilities 11 415,619 409,745 5,874 1.43%

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Note 2005 2004

Increase (Decrease)

During 2004

Amount (%)

Non-current liabilities

Long term debt 11 695,000 320,000 375,000 117%

Amount due to related party 13 0 24,205 -24,205 -100.0%

End-of-service indemnities 12 308,638 277,920 30,718 11.1%

Total non-current liabilities 1,003,638 622,125 381,513 61.3%

Stockholders’ equity

Share capital 1 2,000,000 2,000,000 0 0.0%

Statutory reserve 14 1,000,000 984,399 15,601 1.6%

General reserve 14 545,105 545,105 0 0.0%

Retained earnings 1,242,963 718,414 524,549 73.0%

Total stockholders’ equity 4,788,068 4,247,918 540,150 12.7%

TOTAL LIABILITIES AND STOCKHOLDERS’

EQUITY 6,207,325 5,279,788 927,537 17.6%

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Horizontal Analysis of SAFCO Consolidated Statements of Income:

This analysis shows the following changes:

Income Statement

SAUDI ARABIAN FERTILIZER COMPANY (SAFCO)

(Saudi Joint Stock Company) STATEMENT OF INCOME

ENDED DECEMBER 31, 2005 AND 2004

Horizontal Analysis of Consolidated Income Statement

Note 2005 2004

Increase (Decrease)

During 2004

Amount (%)

Sales 4,13 1,823,985 1,356,516 467,469 34.46%

Cost of sales 749,319 686,472 62,847 9.16%

Gross profit 1,074,666 670,044 404,622 60.39%

Selling and distribution expenses

13,14 51,053 43,144 7,909 18.33%

General and administrative expenses

13,18 42,070 29,189 12,881 44.13%

Operating income 16 981,553 597,711 383,842 64.22%

Income from time deposits, net

8,303 9,211 -908 -9.86%

Write down of investments 7 -31,452 -31,452 0 0.00%

Other expense, net 8,158 5,242 2,916 55.63%

Income before share of net (loss) income of associated companies

950,246 580,712 369,534 63.63%

Share of net (loss) income OF associated companies

Ibn Al-Baytar 6 192,107 114,384 77,723 67.95%

Net income before zakat 1,142,353 695,096 447,257 64.34%

Zakat 16 42,203 35,000 7,203 20.58%

NET INCOME 1,100,150 660,096 440,054 66.67%

Earnings per share (SR) 27.5 16.5 11.00 66.67%

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Cash Flow Statement

SAUDI ARABIAN FERTILIZER COMPANY (Saudi Joint Stock Company)

STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of Saudi Riyals)

2005 2004

CASH FLOWS FROM OPERATING ACTIVITIES

Net income 1,100,150 660,096

Adjustments for:

Depreciation, amortization and write downs 196,282 203,251

Share of net loss (income) of associated

companies -192,107 -114,384

Income from time deposits -8,303 -9,211

Changes in operating assets and liabilities:

Receivables 232,915 47,480

Inventories -17,951 -57,056

Prepayments and deferred charges -25,542 -12,274

Payables 23,169 26,580

Other operating cash flows:

Home ownership program receivable 28,499 19,612

End-of-service indemnities 30,718 27,333

Zakat paid -15,243 -10,002

Net cash from operating activities 922,659 781,425

CASH FLOWS FROM INVESTING ACTIVITIES

Net change in property, plant and equipment -889,619 -886,858

(Purchase) sale of investment in Saudi

Government Development Bonds 100,000 100,000

Income received from time deposits 8,303 9,211

Amounts received from associated companies -1,475 75,000

Net cash (used in) from investing activities -782,791 -702,647

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long term debt 375,000 320,000

Repayment of term debt 60,000 -50,000

Dividends paid 526,259 -306,906

Unclaimed bearer shares disposal - -

Net cash used in financing activities -211,259 -36,906

Net change in cash and cash equivalents -71,391 41,872

Cash and cash equivalents, January 1 375,530 333,658

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Vertical Analysis of SAFCO Consolidated Balance Sheets:

The base for the asset items is the total assets, and the base for the liability and stockholders equity items is the total of liabilities and stockholder equity.


SAUDI ARABIAN FERTILIZER COMPANY (Saudi Joint Stock Company)

BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2005

(In Thousands of Saudi Riyals)

Vertical Analysis of Consolidated Balance Sheet

Note 2005 % 2004 %

ASSETS

Current assets

Cash and cash equivalents 3 304,139 4.90% 375,530 7.1

Accounts receivable 4 557,657 8.98% 324,742 6.2

Inventories 5 235,215 3.79% 253,166 4.8

Prepayments and other assets 16,576 0.27% 206,984 3.9

Total current assets 1,113,587 17.94% 964,616 18.3

Non-current assets

Deferred charges 51,653 0.83% 49,313 0.9

Investments and financial assets

6 975,823 15.72% 913,692 17.3

Property, plant and equipment 7 3,922,873 63.20% 3,180,279 60.2

Home ownership program receivable

8 143,389 2.31% 171,888 3.3

Total non-current assets 5,093,738 82.06% 4,315,172 81.7

TOTAL ASSETS 6,207,325 100.00% 5,279,788 100.0

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable and other liabilities

415,619 6.7% 349,745 6.6

Current installments of long term debt

10 0 0.0% 6,000 0.1

Total current liabilities 11 415,619 409,745 7.8

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Note 2005 % 2004 %


Long term debt 11 695,000 11.2% 320,000 6.1

Amount due to related party 13 0 0.0% 24,205 0.5

End-of-service indemnities 12 308,638 5.0% 277,920 5.3

Total non-current liabilities 1,003,638 16.2% 622,125 11.8

Stockholders’ equity

Share capital 1 2,000,000 32.2% 2,000,000 37.9

Statutory reserve 14 1,000,000 16.1% 984,399 18.6

General reserve 14 545,105 8.8% 545,105 10.3

Retained earnings 1,242,963 20.0% 718,414 13.6

Total stockholders’ equity 4,788,068 77.1% 4,247,918 80.5

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

6,207,325 100.0% 5,279,788 100.0

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Vertical Analysis of SAFCO Consolidated Income Statement:

The base for the calculation is the net sales.

Income Statement

SAUDI ARABIAN FERTILIZER COMPANY (SAFCO) (Saudi Joint Stock Company)

STATEMENT OF INCOME


Vertical Analysis of Consolidated Income Statement

Note 2005 % 2004 %

Sales 4,13 1,823,985 100.0% 1,356,516 100.0%

Cost of sales 749,319 41.1% 686,472 50.6%

Gross profit 1,074,666 58.9% 670,044 49.4%

Selling and distribution expenses

13,14 51,053 2.8% 43,144 3.2%

General and administrative expenses

13,18 42,070 2.3% 29,189 2.2%

Operating income 16 981,553 53.8% 597,711 44.1%

Income from time deposits, net

8,303 0.5% 9,211 0.7%

Write down of investments 7 -31,452 -1.7% -31,452 -2.3%

Other expense, net 8,158 0.4% 5,242 0.4%

Income before share of net (loss) income of associated companies

950,246 52.1% 580,712 42.8%

Share of net (loss) income OF associated companies

Ibn Al-Baytar 6 192,107 10.5% 114,384 8.4%

Net income before zakat 1,142,353 62.6% 695,096 51.2%

Zakat 16 42,203 2.3% 35,000 2.6%

NET INCOME 1,100,150 60.3% 660,096 48.7%

Earnings per share (SR) 27.5 16.5

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RATIO ANALYSIS

SIPCHEM Liquidity Ratios and Analysis:

SR (000) 2005 2004

Working capital = current Assets – current

liabilities 2005 : 1,302,454 – 211,472

2004 : 106,559 – 320,555

SR 1,090,982

SR 213,996

Current ratio = current assets ÷ current liabilities

2005 : 1,302,454 ÷ 211,472 2004 : 106,559 ÷ 320,555

6.16 : 1 0.332 : 1

Current cash debt coverage ratio = cash provided by operations ÷ average current liabilities

2005 : 501,772 ÷ 266,013.5 2004 : 138,922 ÷ 453,861


Inventory turnover ratio = cost of goods sold ÷ average inventory 2005 : 726,087 ÷ 42,144

2004 : 7,808 ÷ 14.693


Days in inventory =365 days ÷ inventory turnover ratio 2005 : 365÷ 17.23

2004 : 365 ÷ 0.53

21.2 days 688.7 days

Receivable turnover ratio = net credit

sales ÷ average net receivable 2005 : 726,087 ÷ 65,062.5

2004 : 7,808 ÷ 23,078


Average collection period = 365 days ÷

receivable turnover ration 2005 : 365 ÷ 11.16 2004 : 365 ÷ 0.34

32.71 days 1,078.8

days

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Solvency Ratios and Analysis:

SR (000) 2005 (000)

2004 (000)

Debt to total assets ratio = Total liabilities ÷ Total assets

2005 : 2,516,043 ÷ 4,427,855 2004 : 1,900,696 ÷ 2,637,547

57 % 72.1 %

Cash debt coverage ratio = Cash provided by operations ÷ Average total liabilities 2005 : 501,772 ÷ 2,208,369.5

2004 : 138,922 ÷ 1,353,552.5

0.23 time 0.103 times

Free cash flow = Cash provided by

operations – Capital expenditures – Cash dividends 2005 : 501,772 - 405,025 - 0

2004 : 138,922 – 835,665 – 0

SR 96,747 - SR 696,743

Profitability Ratios and Analysis:

SR (000) 2005 (000)

2004 (000)

Earning / Share ratio (EPS) = Not income - preferred stock dividend ÷ average common share.

2005 : 324,960-0 ÷ 107,500 2004 : 6,108-0 ÷ 65,000

3.02 0.094

Price earning ratio (PE) = stock price / share ÷ Earnings / share High 2005 : 45 ÷ 3.02

Low 2004 : 45 ÷ 0.094

14.89 times

478.9 times

Gross Profit Ratio = Gross Profit ÷ Net Sales

2005 : 476,051 ÷ 726,087 2004 : 5,579 ÷ 7,808

70% 72%

Profit Margin Ratio = Net Income ÷ Net Sales 2005 : 324,960 ÷ 726,087

2004 : 6,108 ÷ 7,808

45% 78%

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SR (000) 2005 (000)

2004 (000)

Return on Asset Ratio (ROA) = Net

Income ÷ Average total assets 2005 : 324,960 ÷ 3,532,701 2004 : 6,108 ÷ 2,087,350

9.2% 3%

Asset Turnover Ratio = Net sales ÷

Average total assets 2005 : 726,087 ÷ 3,532,701

2004 : 7,808 ÷ 2,087,350


Pay Out Ratio = No Dividends

Return on commercial stock hloder's equity ratio (RCE) = Net income /

Preferred stock ÷ Average com stock equity 2005 : 324,960 - 0 ÷ 1,324,332

2004 : 6,108 - 0 ÷ 733,798

25% 8%

Working capital is a liquidity measure, there is major (5-times) increase in 2005 compare to 2004, SIPCMEM has positive working capital, which indicates the company is in a strong position that enables it to pay its liabilities. The current ratio expresses the relationship between current assets and current liabilities. SIPCHEM current ratio for 2005 indicates that for every SR 1 of current liabilities, SIPCHEM has SR 6.16 of current assets. There is a major improvement between 2005 compare to 2004 and this shows strong liquidity position for 2005. Acid-test or quick ratio measures the company’s immediate short-term ability to pay its obligations, SAFCO quick ratio of 2005 shows significant improvement compare to 2004. The current cash debt coverage ratio measures the company’s ability to generate sufficient cash to meet its short-term needs, which overcomes the disadvantage of the current ratio that uses year-end balances of current asset and current liability accounts. The ratio of 2005 has increased in comparison to 2004; 1.89 times vs. 0.31 times, which indicates the ability of SIPCHEM to generate sufficient cash to meet its short-term needs has improved. Receivable turnover ratio which measures the number of times (average) receivable are collected during the period. SIPCHEM ratio indicates a higher ratio in 2005 (17.23 time vs. 0.53 times) in 2004, which shows how quickly certain assets can be converted to cash (liquidity improvement).

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Average collection period, which show the effectiveness of a company’s credit and collection policies. The average collection period for 2005 was drastically improved. Overall, SIPCHEM liquidity ration are considered adequate and reflect strong liquidity position. The Debt to Total Assets Ration measures the % of the total assets

provided by creditors. This ratio indicates the degree of financial leveraging. It also provides some indication of the company's ability to withstand losses without impairing the interests of its creditors. The

higher % of debt to total assets, the greater risk that the company may be unable to meet its maturing obligations. The debt to total asset ratio

for SIPCHEM increased in 2005 from 2004 (57% Vs 72.1%), which indicates higher use of debt financing and this can be explain since SIPCHEM is a new company and it use most of its capital financing

thought dept .

The Cash Debt Coverage Ratio is a cash-basis measure of solvency. This ratio indicates a company's ability to repay its liabilities from cash

generated from operating activities without having to liquidate the assets used in its operations. Since SIPCHEM is a new company in operation

this has lead to a very low cash debt coverage ratio for both 2004 and 2005, however, there was an increase in 2004 from 2005 due to the increase in cash generated from operation activities (3.6 times increase

in 2005 compare to 2004) and increase in liability (1.5 times increase in 2005 compare to 2004).

Free Cash Flow indication of a company solvency as well of it ability to pay dividends or expand operations, is the amount of excess cash it generates after investing to maintain its current productive capacity and

pay dividends. The cash flow of SIPCHEM increase considerably from 2005 to 2004. In 2004 cash provided by operation activities was negative and this related to the start operation, however in 2005 the major

improvement in cash provided by operation activities. Since SIPCHEM has a major plan to expand its plant and this is clear from the capital

expenditure investment that SIPCHEM spent in both 2004 and 2005.

EPS is a measurement of the net income earned on each share of common stock. SIPCHEM EPS increased in 2005 3.02 times from 0.09 in

2004 and this related to the high profit in 2005 compare to 2004.

Price Earning Ratio (PE) is a statistic that measures the ratio of the market price of each share of common stock to the earnings per share.

The (P-E) ratio is a reflection of investor's assessment of a company's future earnings. SIPCHEM (P-E) reduced considerably in 2005 from

2004.

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Return on Comm. Stockholder's Equity Ratio shows how many SR of net income was earned for each SR invested by the owners. SIPCHEM

during 2005 had a ROE of 25 %, compare to 8% in 2004, which is considerably very good.

Return on Asset Ratio (ROA) measures the over all profitability of assets in terms of the income earned on each SR invested in assets. SIPCHEM had a (3.0%) return on assets in 2004, which is lower than

2005 (9.2 %), that shows improvement in 2005 compare to 2204, however ,because SIPCHEM is a new company in operation this ration is expected to improve in the future.

Profit Margin Ratio: There is a decrease in 2005 profit ratio compare to 2004.However 2004 profit was not representative because the company

at that time was just started. There was increase in both net income and sales in 2005 compare to 2004.

Asset Turnover Ratio indicates how efficiently assets are used to

generate sales and it seams that SIPCHEM are keeping the same ratio almost, which shows that SIPCHEM generated sales of SR 2.06 for each

SR 1 it had invested in assets, the is a major improvement in turnover ratio compare to 2004.

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Horizontal Analysis of SIPCHEM Consolidated Balance Sheet:

The comparative consolidated balance sheet show that a number of

positive changes happened in SAFCO position from 2005to 2004


SAUDI INTERNATIONAL PETROCHEMICAL CO. (Joint Stock Company)

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 AND

2004

Horizontal Analysis of Consolidated Balance Sheet

Note

2005 2004 Amount %

SR SR

ASSETS

Current assets

Cash and cash equivalents 3 1,163,583,499 31,014,952 1,132,568,547 3651.7%

Inventories 5 54,900,695 29,387,354 25,513,341 86.8% Accounts receivable, prepayments and other receivables 6 83,969,359 46,156,193 37,813,166 81.9%

Total current assets 1,302,453,553 106,558,499 1,195,895,054 1122.3%

Non-current assets

Investment securities 4 259,583,759 140,070,647 119,513,112 85.3%

Property and equipment 7,8 2,486,835,025 2,218,123,391 268,711,634 12.1%

Deferred projects implementation costs 9 251,153,731 43,395,596 207,758,135 478.8%

Intangible assets 10 113,694,291 129,398,850 -15,704,559 -12.1%

Other assets 11 14,134,340 0 14,134,340

Total non-current assets 3,125,401,146 2,530,988,484 594,412,662 23.5%

TOTAL ASSETS 4,427,854,699 2,637,546,983 1,790,307,716 67.9%

LIABILITIES, STOCKHOLDERS’ EQUITY

AND

MINORITY INTEREST

Current liabilities

Accounts payable and other liabilities 12 146,607,085 188,649,345 -42,042,260 -22.3%

Short term loan 13 0 101,500,000 -101,500,000 -100.0%

Current portion of long term debt 14 64,864,865 30,405,405 34,459,460 113.3%

Total current liabilities 211,471,950 320,554,750 -109,082,800 -34.0%


Long term debt 14 1,853,575,132 1,252,094,595 601,480,537 48.0%

End-of-service indemnities 15 7,990,487 3,928,095 4,062,392 103.4%

Total non-current liabilities 1,861,565,619 1,256,022,690 605,542,929 48.2%

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Note

2005 2004 Amount %

SR SR

Stockholders’ equity and minority interest

Share capital 1 1,500,000,000 650,000,000 850,000,000 130.8%

Statutory reserve 1,17 68,181,209 35,685,152 32,496,057 91.1%

Retained earnings 343,630,860 51,166,352 292,464,508 571.6%

Total stockholders’ equity 1,911,812,069 736,851,504 1,174,960,565 159.5%

Minority interest 16 443,005,061 324,118,039 118,887,022 36.7%

Total stockholders’ equity and minority interest 2,354,817,130 1,060,969,543 1,293,847,587 121.9% TOTAL LIABILITIES, STOCKHOLDERS’ EQUITY AND MINORITY INTEREST 4,427,854,699 2,637,546,983 1,790,307,716 67.9%

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Horizontal Analysis of SIPCHEM Consolidated Statements of Income:

This analysis shows the following changes:



CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 AND

2004

Vertical Analysis of Consolidated Balance Sheet

Note

2005 %

2004 %

SR SR

ASSETS

Current assets

Cash and cash equivalents 3 1,163,583,499 26.3% 31,014,952 1.2%

Inventories 5 54,900,695 1.2% 29,387,354 1.1%

Accounts receivable, prepayments and other receivables 6 83,969,359 1.9% 46,156,193 1.7%

Total current assets 1,302,453,553 29.4% 106,558,499 4.0%

Non-current assets

Investment securities 4 259,583,759 5.9% 140,070,647 5.3%

Property and equipment 7,8 2,486,835,025 56.2% 2,218,123,391 84.1%

Deferred projects implementation costs 9 251,153,731 5.7% 43,395,596 1.6%

Intangible assets 10 113,694,291 2.6% 129,398,850 4.9%

Other assets 11 14,134,340 0.3% 0 0.0%

Total non-current assets 3,125,401,146 70.6% 2,530,988,484 96.0%

TOTAL ASSETS 4,427,854,699 100.0% 2,637,546,983 100.0%

LIABILITIES, STOCKHOLDERS’ EQUITY

AND

MINORITY INTEREST

Current liabilities

Accounts payable and other liabilities 12 146,607,085 3.3% 188,649,345 7.2%

Short term loan 13 0 0.0% 101,500,000 3.8%

Current portion of long term debt 14 64,864,865 1.5% 30,405,405 1.2%

Total current liabilities 211,471,950 4.8% 320,554,750 12.2%


Long term debt 14 1,853,575,132 41.9% 1,252,094,595 47.5%

End-of-service indemnities 15 7,990,487 0.2% 3,928,095 0.1%

Total non-current liabilities 1,861,565,619 42.0% 1,256,022,690 47.6%

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Note

2005 %

2004 %

SR SR

ASSETS

Stockholders’ equity and minority

interest

Share capital 1 1,500,000,000 33.9% 650,000,000 24.6%

Statutory reserve 1,17 68,181,209 1.5% 35,685,152 1.4%

Retained earnings 343,630,860 7.8% 51,166,352 1.9%

Total stockholders’ equity 1,911,812,069 43.2% 736,851,504 27.9%

Minority interest 16 443,005,061 10.0% 324,118,039 12.3%

Total stockholders’ equity and minority

interest 2,354,817,130 53.2% 1,060,969,543 40.2%

TOTAL LIABILITIES, STOCKHOLDERS’

EQUITY AND 4,427,854,699 100.0% 2,637,546,983 100.0%

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Income Statement

SAUDI INTERNATIONAL PETROCHEMICAL CO.

(Joint Stock Company)

STATEMENT OF INCOME ENDED DECEMBER 31, 2005 AND 2004

Horizontal Analysis of Consolidated Income Statement

Note 2005 2004

Amount % SR SR

Sales 726,087,384 7,807,956 718,279,428 9199.3%

Cost of sales (250,036,027) (2,228,848)

-

247,807,179 11118.2%

Gross profit 476,051,357 5,579,108 470,472,249 8432.8%

Investment income 36,924,642 7,485,189 29,439,453 393.3%

Financial charges (40,484,565) (3,352,855) -37,131,710 1107.5%

General and administrative expenses 20 (25,090,560) (5,648,810) -19,441,750 344.2%

Operating income 447,400,874 4,062,632 443,338,242 10912.6%

Net expenses of pre-operating

activities 21 (2,328,217) (617,138) -1,711,079 277.3%

Other income 17,787,476 3,621,933 14,165,543 391.1%

Income before minority interest and

zakat 462,860,133 7,067,427 455,792,706 6449.2%

Minority interest (130,066,002) (307,880)

-

129,758,122 42145.7%

Net income before zakat 332,794,131 6,759,547 326,034,584 4823.3%

Zakat 19 (7,833,566) (652,029) -7,181,537 1101.4%

NET INCOME 324,960,565 6,107,518 318,853,047 5220.7%

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Income Statement


STATEMENT OF INCOME


Vertical Analysis of Consolidated Income Statement

Note 2005

% 2004

% SR SR

Sales 726,087,384 100.0% 7,807,956 100.0%

Cost of sales 250,036,027 34.4% 2,228,848 28.5%

Gross profit 476,051,357 65.6% 5,579,108 71.5%

Investment income 36,924,642 5.1% 7,485,189 95.9%

Financial charges 40,484,565 5.6% 3,352,855 42.9%

General and administrative expenses 20 25,090,560 3.5% 5,648,810 72.3%

Operating income 447,400,874 61.6% 4,062,632 52.0%

Net expenses of pre-operating activities 21 2,328,217 0.3% 617,138 7.9%

Other income 17,787,476 2.4% 3,621,933 46.4%

Income before minority interest and zakat 462,860,133 63.7% 7,067,427 90.5%

Minority interest 130,066,002 17.9% 307,880 3.9%

Net income before zakat 332,794,131 45.8% 6,759,547 86.6%

Zakat 19 7,833,566 1.1% 652,029 8.4%

NET INCOME 324,960,565 44.8% 6,107,518 78.2%

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Stockholders' Equity Statement



CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

YEAR ENDED DECEMBER 31, 2005

Share Statutory Retained

capital reserve earnings Total

SR SR SR SR

January 1, 2004 650,000,000 35,074,400 45,669,586 730,743,986

Net income for the year - - 6,107,518 6,107,518

Transfer to statutory reserve - 610,752 (610,752) -

December 31, 2004 650,000,000 35,685,152 51,166,352 736,851,504

Proceeds from issuance

of share capital 850,000,000 - - 850,000,000

Net income for the year - - 324,960,565 324,960,565

Transfer to statutory reserve - 32,496,057 (32,496,057) -

December 31, 2005 1,500,000,000 68,181,209 343,630,860 1,911,812,069

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Cash Flow Statement



CONSOLIDATED STATEMENT OF CASH FLOW YEAR ENDED DECEMBER 31, 2005 AND 2004

2005 2004

SR SR

OPERATING ACTIVITIES

Net income before zakat 332,794,131 6,759,547

Adjustments for:

Depreciation 87,257,403 6,036,573

Amortization of intangible assets 17,998,923 1,134,025

End-of-service indemnities 3,601,160 1,234,725

Financial charges 40,484,565 3,352,855

Minority interest 130,066,002 307,880

Net expenses of pre-operating activities 2,328,217 617,138

Changes in operating assets and liabilities:

Accounts receivable, prepayments and other receivables (37,813,166) (42,237,631)

Inventories (25,513,341) (29,387,354)

Accounts payable and other liabilities (12,025,826) (83,255,144)

Cash from (used in) operations 539,178,068 (135,437,386)

Financial charges paid (36,588,476) (2,698,533)

Zakat income tax paid (686,745) (785,764)

End-of-service indemnities paid (130,946) -

Net cash from (used in) operating activities 501,771,901 (138,921,683)

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2005 2004

SR SR

INVESTING ACTIVITIES

Cash flow for pre-operating activities (2,328,217) (617,138)

(Purchase) sale of government development bonds, net (119,513,112) 46,522,896

Purchase of property and equipment (405,024,530) (835,664,754)

Increase in intangible assets (4,885,017) (64,665,505)

Deferred project implementation costs incurred (207,758,135) (39,404,536)

Other assets (14,134,340) -

Net cash used in investing activities (753,643,351) (893,829,037)

FINANCING ACTIVITIES

Short term loan (101,500,000) 101,500,000

Proceeds from issuance of share capital 850,000,000 -

Long term debt 635,939,997 786,500,000

Capital introduced by minority shareholders - 123,621,470

Net cash from financing activities 1,384,439,997 1,011,621,470

Net change in cash and cash equivalents 1,132,568,547 (21,129,250)

Cash and cash equivalents, January 1 331,014,952 52,144,202

CASH AND CASH EQUIVALENTS, DECEMBER 31 1,163,583,499 31,014,952

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Conclusion

While SAFCO an old plant that incorporate new expansions with highly

experience human resources, SIPCHEM is relatively new complex that invest in a commodity products and expected to be a strong competitor

in the hydrocarbons industry in Saudi Arabia and globally. Comparing both Business Strategy and Final Analysis Ratios shows very well established companies. Both SIPCHEM & SAFCO are growing and

making profit also have future plan that is expected to improve the total assets and increase both overall company's profit.

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