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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

BS
Merrill Lynch
GEMs Paper #26 | 30 June 2016 79

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