The National Shipping Company of Saudi Arabia 25 August 2013 Recommendation

Revise

Fair Value (SR)

22.22

th

Price as of 91 of August 2013 (SR) Expected return

23.32 -4.5%

Company data Tadawul symbol 52- week high (SR) 52-week low(SR) YTD change Average trading volume (thousand shares) Market Cap (million SR) Market Cap (million USD) Number of shares issued (million) Free float Financial indicators Revenues Net Income EPS PE ratio P/BV Dividend yield Net Income growth *Ending Q2 2013

Bahri

4030.SE 23.35 16.95 19.5% 1,082 7,340 1,957 315.0 65.9%

2010 2,050 415 1.32 15.15 1.17 5.01%

2011 1,991 288 0.91 21.84 1.17 2.51%

2012 2,465 504 1.60 12.47 1.10 5.01%

Last 12 months* 2,403 414 1.31 17.74 1.29 4.3%

%9.71

%6.73-

%..79

%9.71-

TASI Transport

130 125 120 115 110 105 100 95 90 85

Tadawul

Initiation of Coverage The National Shipping Company of Saudi Arabia (Bahri) was founded in 1979, Riyadh. The company owns and operates oil tankers, chemical tankers and bulk cargo vessels. The company owns 17 very large crude carriers (VLCC), 23 chemical tankers and 5 Cargo carriers, bringing the total number of vessels owned to 45 and it is expected to reach 65 after the merge with Vela. The company also plans to increase its fleet to 76 by the end of 2015. The company operates through four functional divisions. The major contributor to top line is crude oil carriers, followed by liquefied natural gas and chemical shipping division. During 2012, the crude oil division shipped 208 million barrels of crude oil on board. Moreover, the chemical clean tankers completed 127 trips in 2012, compared to 100 trips in the previous year. Country USA India China Other Total

No. of Trips 30 24 6 40 100

Percentage 30% 24% 6% 40% 100%

Crude Shipped (million barrel) 62 48 11 78 199

Percentage 30% 23% 5% 42% 100

The company operates 15 crude carriers in the spot market while the other two on charter bases. Management preferred to selectively operate more vessels in the spot market to remote destinations with routes between Asia, West Africa and Latin America due to the prevailing low charter rates.

We think, rates will rebound in the next 24 months as the oversupply of vessels will be absorbed and more aged vessels will exit the market or scraped. Therefore, we see the sector cautiously optimistic, due to the recent improvement in the US economic growth supported by recent drop in unemployment. In addition, we see India and China to continue to be the main profitable destinations and source of Oil demand. Operating Basis 2012 Spot Operating Carriers Chartered Carriers Total

Trips 86 14 100

Crriers 15 2 17

Average No. of Trips 5.73 7.00

For more information you may contact: Turki Fadaak Research & Advisory Manager [email protected] Or Head Quarter: Tel : +966 11 203 9892 Fax : +966 1479 8453 P.O. Box 942 Riyadh 99499

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The National Shipping Company of Saudi Arabia 25 August 2013

The chemical division owns 23 carriers, but operates only 22, either directly or indirectly. The National Chemical Carriers (NCC), which is 80% owned by Bahri and 20% owned by SABIC, operates 8 chemical vessels. Moreover, in the past few years the company signed an agreement with Odjfel SE to operate 9 chemical carriers, liquified natural gas and refined crude oil tankers. In 2005, Bahari also acquired 30.3% of Petredec Limited in 2005, which is a leading LPG carrier company. The general cargo carriers division, which is the earliest division in Bahri, operates fleet of 5 Roll On/Roll Off (RORO) vessels. The fleet`s main route is between the US east coast and Jeddah, Dubai, and Mumbai. The company plans to replace the existing old vessels with modern vessels during 2013 and 2014. The new RORO vessels will be equipped with specially-designed ramp that can hold 240 metric tons; one of the largest ramp capacities currently in use. This allows the carrier to accommodate a wide variety of cargoes under deck with different shapes and sizes, whether self-propelled, towable, high and wide or heavy static parcels which require relatively little handling. In 2010, Bahri established the bulk cargo division through a joint venture with Arabian Agricultural Services Company (ARASCO). The new JV has paid up capital of SAR 200 million, 60% owned by Bahri and 40% by ARASCO, and started operations in 2012 through three leased vessels and intends to add two additional units, to meet the growing demand for agriculture products. Moreover, the new entity signed an agreement to build three Kamsermax carriers to be delivered late 2013 and early 2014. Subsidiary NSCSA Company (USA) Mideast Ship Management Ltd. National Chemical Carriers Ltd. Bahri Dry Bulk

Main Business Company’s vessels Agent Technical Ship Management Petrochemical Transportation Dry Bulk Transportation

Partner Petredec Limited NCC Odjfel United Float Glass

Ownership 100% 100% 80% 60%

Profit Contribution 2012 0.16% 0.41% 19.46% 0.94%

Main Business LPG shipping Chemicals Shipping Glass Manufacturing

Revenue Breakdown H1 2013

Bulk Cargo General 4% Cargo 21% Chemical shipping 20%

Crude Shipping 55%

Ownership 30% 40% 10%

Gross Profit Breakdown H1 2013

General Cargo 17% Bulk Cargo 5% Crude Shipping 47% Chemical shipping 31%

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The National Shipping Company of Saudi Arabia 25 August 2013 Sector Overview The shipping industry continued to show fierce competition among market players due to the increase in tankers supply and threats facing global economic growth in general, and the austerity in Europe in particular. However, we think that the oversupply will be absorbed in the next two years, on the back of anticipated U.S. economic recovery along with strong current growth in Asia. The following graphs illustrate the shipping rates of the Baltic Dry Index*, Baltic Dirty Tanker Index and Baltic Clean Tanker index for cargo, crude oil and chemicals.

The graph depicts the long term downtrend for all of the Baltic shipping indices. We attribute the decline in rates to the increase in supply of vessels and weak global economic growth which led to decrease in demand for oil and other commodities. However, the Baltic Dry Index rose 29.65% during the past three months to USD 1,102. Moreover, the Index also advanced 41.10% in the last 180 days. On the other hand, The Clean Tanker Index which mimics the movement of shipping rates for Chemicals, liquefied natural gas and refined oil decreased by 5.8% to USD 552 during the past three months. Moreover, the index plunged by 20.69% and 6.12% in the last six months and last twelve months, respectively. In addition, The Dirty Tanker index, which shows the change in crude oil shipping rates, reached USD 644, implying increase of 5.40%, over the past three months. The index also advanced by 2.06% and 6.27% compared to last six months and last year, respectively.

Baltic Dry Index 2300 2100 1900 1700 1500 1300 1100 900 700 500

Baltic Clean Tanker 950 900 850 800 750 700 650 600 550 500

Baltic Dirty Tanker 1100 1000 900 800 700 600 500

*The Baltic Index is a shipping and trade index that mimics international shipping rates for several commodities like crude oil, petrochemicals, grains, and other. The index is traded on London-based Baltic Exchange and it is not restricted to Baltic Sea countries or the United Kingdom.

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The National Shipping Company of Saudi Arabia 25 August 2013 Latest Developments On 4th November 2012, Bahri and Saudi Aramco have executed definitive and legally binding agreements to merge the fleet and operations of Bahri and Vela International Marine Limited, a wholly owned subsidiary of Saudi Aramco, whereby both companies have received all regulatory approvals to complete the transaction. Under the terms of this agreement, Vela will transfer to Bahri its entire fleet and all the relevant personnel. Vela’s fleet consists of 94 very large crude carriers, one floating oil storage and 2 clean tankers. The transaction allows Bahri to become Aramco’s exclusive carrier through 10-year renewable shipping contract. Moreover, the deal provides relatively stable rates for both parties, whereby floor price is set to protect Bahri against declining rates and reimbursement mechanism is offered to Saudi Aramco if shipping rates exceed certain threshold. Thus, we believe these pricing terms will reduce Bahri’s exposure to fluctuations in global shipping rates but will limit the company’s profits if prices rose significantly. As part of the company’s vessel modernization initiative, Bahri sold “Saudi Hofuf”, a general cargo vessel, for SAR 28.3 million in July 2013. Bahri is expected to generate gain on the vessel’s salvage value of SAR 97.6 million, which shall be reflected in 2293 third quarter results. The company also received “Bahri Tabuk”, with DWT of 26 thousand, from Hyundai Mipo Dockyard . In the first half of 2293, Bahri also received two cargo vessels “Bahri Hofuf” and “Bahri Abha”. The company also sold “Saudi Diriyah”, realizing gain on sale of SAR 19.5 million. In fact, Bahri adopted cargo vessel replacement and modernization plan and expects to receive another 3 vessels from Hyundai Mipo Dockyard during 2013 and 2014. In the second half of 2012, National Chemical Carriers received four chemical tankers built in South Korea, with capacity of 45 thousand ton each. The tankers are currently operating via NCC Odfjell. On the other hand, NCC cancelled the shipbuilding contract of "NCC Bader" due to delay in delivery. The contract guarantees National Chemical Carriers’ rights to get refunded for all the paid installments amounting to USD 41.6 million. Moreover, NCC signed 5-year renewable charter agreement for three chemical tankers with International Shipping and Transportation Company, subsidiary of SABIC. In July 2012, Bahri disclosed signing Murabaha financing agreement with The Public Investment Fund to finance the construction of two general cargo vessels. The financing facility amounts to SAR 450 million and will be paid on quarterly equal installments over 10 years. In 2012, Bahri also signed 3- year contract with Saudi Arabia Airlines to transport goods and equipments. This strategic cooperation aims to leveraging the leading positions of both companies in the field of integrated logistics services.

*The Baltic Index is a number issued daily by the London-based Baltic Exchange and it is not restricted to Baltic Sea countries; the index provides "an assessment of the price of moving the major raw materials by sea.

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The National Shipping Company of Saudi Arabia 25 August 2013 Financial Analysis Income Statement In 2292, Bahri’s revenues grew by 23.78%, in comparison to the previous year, reaching SAR 2,465 million. Crude oil transportation revenue, which represents approximately 60% of total revenues, grew by 20.13%. Cost of services increased by 14.42% to SAR 1,890 million, which led to an increase in the gross profit margin by 628 basis points to 23.31% versus 17.03% in 2011. Selling, general, and administrative expenses also increased by 92.28% to SAR 929 million. Other income, which includes Bahri’s share in affiliated companies’ profit, increased by 4.61% compared to 2011 to reach SAR 168 million. Thus, the fiscal year ending December 2012 showed a growth in net income by 75.14% to SAR 504 million, compared to SAR 288 million in 2011, and the company realized an increase in the net income margin by 600 basis points to reach 20.45%. During 2013 second quarter, net income declined by 36.02% to SAR 133 million, compared to SAR 207 million during the same quarter last year, and by 8.3% versus 2013 first quarter. Thus, net income plunged by 24.58% during 2013 first half to reach SAR 277 million compared to SAR 367 million during the same period last year. In general, Bahri’s management attributed the decline in profits to lower shipping spot rates, especially crude shipping and the decline in Petredec’s net income, a 32.3% owned subsidiary. In the first half of 2013, revenues declined by 4.65%, compared to 2012 first half, to SAR 1,264 million. This was mainly due to the decline in crude oil transportation revenues by 19.80%, driven by the decline in shipping rates compared to last year, whereas chemical transportation revenues and cargo transportation revenues increased by 14.39% and 15.31%, respectively. The gross profit margin also declined to reach 21.33% versus 28.24% during 2012 first half. This was mainly triggered by the decline in crude oil gross profit, by 51.61% to SAR 126 million. Selling, general, and administrative expenses decreased by 20.93% to SAR 62 million. Thus, during 2013 first half, the company realized a decline in net income by 24.58% recording SAR 277 million versus SAR 367 million in 2012 first half. In addition, the company showed a decline in the net income margin to reach 21.91% versus 27.70% during the same period last year.

Total Assets

Revenues

Total liabilities

12000

3000

10000

2500

8000

2000

6000

1500

4000

1000

2000

500

0

Net Income

0 2008

2009

2010

2011

2012

2008

2009

2010

2011

2012

Balance Sheet In 2012, total assets grew by 4.15%, in comparison to the previous year, reaching SAR 11,064 million and increased in 2013 first half by 2.12% to SAR 11,298 million, compared to the ending balance in December 2012. Key highlights: 1.

Increase in fixed assets due to capital expenditures amounting to SAR 620 million and SAR 326 million during 2012 and 2013 first half, respectively.

2.

Decline in 2012 inventory by 8.95% compared to 2011 and the increase in inventory ending balance by 2.37% during 2013 first half compared to the same period last year to reach SAR 185 million.

3.

Increase in 2012 accounts receivable ending balance by 21.60% compared to 2011 and by 38.82% during 2013 first half versus the same period last year to reach SAR 516 million in June 2013.

4.

Decline in 2012 accounts payable ending balance by 19.92% compared to last year and the increase in accounts payable during 2013 first half by 1.51% compared to the same period last year to reach SAR 276 million in June 2013.

5

The National Shipping Company of Saudi Arabia 25 August 2013 Merger with Vela By the end of 2292, Bahri’s signed definitive merger agreement with Vela. The financial impact of the transaction will be gradually reflected throughout the next three years. However, Bahri's net income is expected to drop by 11.6% in 2013 due to lower shipping rates compared to last year. In fact, the acquisition of Vela's fleet will reduce the sharp decline in earnings that could have occurred without the merger. Bahri's 2013 EPS is expected to plunge by 29.20% due to the increase in paid-in capital from SAR 3,150 million to SAR 3,940 million post the merger.

2012 Expected increase in no. of vessels Total no. of vessels post-merger Expected revenue post-merger (SR million) Expected net income post-merger (SR million) Change in net income Issued shares (SR million) Expected EPS Increase in EPS

41 2464 504 315 1.60

2013F

2014F

2015F

2016F

10 55 2475 446 -11.6% 394 1.13 -29.2%

10 65 2925 527 18.2% 394 1.34 18.2%

6 71 3195 575 9.2% 394 1.46 9.2%

5 76 3420 616 7.0% 394 1.56 7.0%

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The National Shipping Company of Saudi Arabia 25 August 2013 Valuation and Recommendation We valued Bahri`s share price using three valuation methods: Price to Earnings Ratio, EV to EBITDA, and EV to Revenue, relative to four comparable companies: Nakilat, Milaha, Nippon Yusen KK, and MISC Berhard. These few companies, with similar operating business model as Bahri, have only been included in our comparable universe as most of the global peers trade at losses due to the current challenges facing the sector with declining shipping rates worldwide. Therefore, we assign Revise recommendation for Bahri`s share with fair value of SAR 22.22 per share, which is 4.5% below current share price. Company Country Currency Income Net Revenues EBITDA Market Cap Net Debt Enterprise Value P/E Multiple EV/EBITDA EV/Revenue Fair Multiple PE EV/EBITDA EV/Revenue Fair Value According To PE EV/EBITDA EV/Revenue

Nakilat Qatar Million QR 744 3,224 2,687 99,342 29,226 32,816 2.51 2151 2.51

Milaha Qatar Million QR 168 2,423 124 8,831 729 1,262 152 2.5. 05.

Nippon Yusen KK Japan Million JPY 98,812 9,817,922 994,162 416,272 188,222 9,482,922 1.52 2151 .51

MISC Berhad Malaysia Million USD 342 2,268 826 6,112 9,871 8,874 1.5. 2.5. 25.

Average Weighted

2.51 225. 05.

97.8 99.2 4.7

23.38 94.69 29.28

Assigned Weights PE EV/EBITDA EV/Revenue

%82 %92 %92

Fair Value (SR) Share Price Expected Return Recommendation

1151. 23.32 -4.5% Revise

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The National Shipping Company of Saudi Arabia 25 August 2013

Balance sheet (million SR) Current assets Investments Fixed assets Other assets Total assets Current liabilities Long term loans Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Income statement (million SR) Revenues Cost of revenues Gross profit S,G&A Financing Expense Other Expense Total Other Expense Net income before zakat Zakat Minority Interest Net income

Cash flow statement (million SR) Net income Depreciation Inventory Accounts receivable Accounts payable Other changes in operating activities Fixed assets purchases

H1 2012

H1 2013

77011 1,6

77,,1 186

%7131 %7036

8751,

8780,

%,38

516

586

%038

70786,

777,68

%63,

77058

77155

%,830

67715

67716

%037-

Change

%71131

17

11

57518

57107

%,3,

70786,

777,68

%63,

H1 2012

H1 2013

Change

771,1 657

77,16 666

%631%635

116

,10

%,830-

18

1,

%,036-

,6

,6

%736

)716(

)711(

%731-

)11(

)61(

%6736

601

171

%,,36-

,8

78

%1638-

7,

,7

%1136

111

,11

%,631-

H1 2012 111 ,70

H1 2013 ,11 ,10

Change %,631%631

)15(

)51(

%6831

)61(

)767(

%,1731

)71(

66

Balance sheet (million SR) Current assets Investments Fixed assets Other assets Total assets Current liabilities Long term loans Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Income statement (million SR) Revenues Cost of revenues Gross profit S,G&A Financing Expense Other Expense Total Other Expense Net income before zakat Zakat Minority Interest Net income

Cash flow statement (million SR) Net income Depreciation Inventory Accounts receivable Accounts payable Other changes in operating activities Fixed assets purchases

)705(

)10(

%6,38-

),8,(

)1,1(

%7536

Other changes in investing activities Increase in debt financing

)10(

16

)71(

,0,

Cash Dividends Other changes in financing activities Beginning cash balance

)751(

)17,(

0

)70(

185

176

%7831-

Cash Dividends Other changes in financing activities Beginning cash balance

111

,11

%,631-

Ending cash balance

Ending cash balance

Other changes in investing activities Increase in debt financing %6636

1.2.

1.22

1.21

Change

1,578 456

1,042 561

1,117 683

%13, %,,

7,419

8,490

8,703

%1

513

530

561

%1

9,966

10,623

11,064

%6

736

944

1,007

%1

3,819

4,295

4,254

%7%716

33

28

77

5,378

5,356

5,726

%1

9,966

10,623

11,064

%6

1.2.

1.22

1.21

Change

2,050 1,492

1,991 1,652

2,465 1,890

%,6 %76

557

339

575

%16

104

110

121

%70

50

52

60

%75

-66

-160

-168

88

1

13

%888

470

338

562

%11

36

25

36

%6,

19

25

22

%71-

415

288

504

%15

1.2. 415 361

1.22

1.21

288 381

504 430

-17

-12

13

29

-113

-62

41

35

-58

%5

Change %15 %71 %65%76-

-47

-180

-155

-271

-1,417

-620

%51-

670

-23

-67

%766

-620

672

65

%60-

-317

-311

-157

%66-

80

-20

37

762

1,085

385

%15-

1,085

385

314

%78-

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The National Shipping Company of Saudi Arabia 25 August 2013 Definitions 

Earnings Per Share It is an indicator of the company's profit in Saudi Riyals per each outstanding share. It is calculated by dividing the company’s net income of by the number of outstanding shares.



Revenue Is the amount of income that is brought into a company by its business activities.



Gross profit A company’s profit after deducting the cost associated directly with its sales or production. Does not include indirect cost like depreciation, interest, tax and non-operating expense.



Price-to-earnings (P/E) Ratio It is the price paid by the company’ shareholders for the earnings of one of its shares. It is used to compare the prices of the company’s shares with that of another company within the same sector. If the P/E is higher than the sector’s average, it indicates either the share is overpriced or that there is a greater expectation for the company to generate more profits in the future, and vice versa. It is calculated by dividing the price of a share by the share’s earnings in Saudi Riyals



Book value per share The company's book value represents the value of the company in the event of liquidation or exit. Dividing the book value by the company’s number of issued shares represents the book value of a share.



Price-to-book (P/B) ratio It represents the market price per share vis-à-vis its book value. It is used to compare between companies within the same sector and comparing them to the sector’s average. If the number is higher than the average, it means that the company’s price is traded higher than its book value. This means that either the share is overpriced or that the company is in a growth state; and vice versa. The number is calculated by dividing the share’s market price by its book value.



Return on equity It is a percentage representing the extent of the company's efficiency in achieving earnings from the shareholders’ investment. It is calculated by dividing the company’s net income by Shareholders' equity. The higher the percentage, the higher the efficiency, and vice versa.



Net Debt Total long-term debt after deducting cash on hand and in banks.



Enterprise Value It is the market capitalization plus net debt.



Time horizon We recommend using a Time horizon of 9 to 12 months, during which the current price might reach the Target price



Target price It is the price we expect the current share price to reach during the Time horizon.

Rating Methodology Al-Bilad Investment Co. uses its own evaluation structure, and its recommendations are based on quantitative and qualitative data collected by the analysts. Moreover, the evaluation system places covered shares under one of the next recommendation areas based on the closing price of the market, the fair value that we set and the possibility of ascent/descent. Overweight:

The Target share price exceeds the current share price by ≥ 92%. We expected the share price to reach the Target price over the next 9-12 months

Neutral:

The Target share price exceeds the current share price by less than 15%. We expected the share price to reach the Target price over the next 9-12 months

Revise:

The Target share price is less than the current share price by less than 10%. We expected the share price to reach the Target price over the next 9-12 months

Underweight:

The Target share price is less than the current share price by ≥ 92%. We expected the share price to reach the Target price over the next 9-12 months

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The National Shipping Company of Saudi Arabia 25 August 2013

Albilad Investment Company Client Services E-mail: [email protected] Tel: +966-11-203-9888 Toll-free: 800-116-0001

Research & Advisory E-mail: [email protected] Tel: +966-11-203-9892

Brokerage E-mail: [email protected] Tel: +966-11-203-9840 Asset Management E-mail: [email protected] Tel: +966-11-203-9870

Investment Banking E-mail: [email protected] Tel: +966-11-203-9859

Disclaimer AlBilad Investment Co. exerted utmost efforts to ensure that the information included in this report is accurate and correct. However, AlBilad Investment Co., its managers, and staff bear no liability whether explicitly or implicitly for the content of the report and no legal responsibility, whether directly or indirectly, for any results based on it. This report should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from AlBilad Investment Co. We would also like to note that this information in no way constitutes a recommendation to buy or sell banknotes or make any investment decisions. Any investment act taken by an investor based fully or partially on this report is the complete responsibility of the investor. This report is not meant to be used or seen as advice or an option or any other measure to be taken in the future. We recommend consulting a qualified investment advisor before investing in these investment tools. AlBilad Investment Co. preserves all rights associated with this report.

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