Bahrain-based investment bank Securities & Investment Co. ( SICO) has initiated coverage of Saudi Arabian Mining Co. (Maaden) with a “reduce” rating, setting the stock’s price target at SAR 25.
The recommendation was based on the expectation of an 11 percent drop in earnings per share (EPS) this year, driven by weaker commodity prices, higher gas prices and the full impact of depreciation and interest from the company’s integrated aluminum project.
“The upstream aluminum business would barely break even at current commodity prices, leaving the onus of profitability of the aluminum project on the downstream rolled products division,” the investment bank said in a report. “We see pain in aluminum over the next two years, and a continued softness in DAP and ammonia prices at least through H1-2016.”
Maaden will likely see its revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) increase at a compound annual growth rate (CAGR) of 12 percent and 14 percent, respectively over the next five years, the report added.
Despite a 15 percent decline last month due to sell-offs, SICO suggests that the stock is “not cheap” currently, as it trades at an EV/EBITDA of 11x in 2017.
In addition, the diversified mining company may see tightened liquidity over the next five years as debt repayments weigh on free cash flows. Accordingly, the company may have to refinance debt in an interest rate upcycle.
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