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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 ona 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 (KAUBF) We apply a justified P/E multiple to derive SABIC's PO of SAR99.5. The P/E is based ona 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 OS Merrill Lynch GEMs Paper #26 | 30 June 2016 79 HOUSE_OVERSIGHT_016189