1,650 1,550 1,450 EGYPTIAN CEMENT SECTOR Cement Sector... · Cons. & Materials Index vs. EGX 30...

Initiation of Coverage Egypt 3 May 2012

EGYPTIAN CEMENT SECTOR

1 Essam Abd-Elaleem

+202 3300 5324 [email protected]

Pakinam El-Etriby +202 3300 5329 [email protected]

Get set!

► Sector faced a barrage of problems in 2011. Post the 25 January

2011 revolution, domestic cement demand in Egypt slumped,

labour strikes and attacks on gas supply pipelines interrupted

production, and cement prices weakened. On average, 2011 sector

earnings were down 25%.

► 2012 remains challenging, but is priced in. Domestic and export

demand should remain subdued in 2012 (+3% YoY each), with

Egypt’s FY12 GDP growth estimated at 1.8%. Gas and electricity

prices were increased by 33% each from 1 January, and a hike in

mazut price is possible. Wage inflation will pressure margins, as

will lower utilisation.

► Government infrastructure spending and revival in real estate

to resuscitate sector from 2013. Post revolution, we expect

Egypt’s new government to spend on infrastructure to kick-start

the economy and create jobs, in addition to resurgence in real

estate activity as buyers regain confidence after the elections. We

believe both factors will stimulate cement demand from 2013,

thereby boosting utilisation and firming up prices.

► Valuations cheap relative to peers, with significantly higher

margins, ROEs, and yields. Egypt’s cement producers generate

much higher margins and ROEs than do most global peers, but

they also trade at large P/E and EV/EBITDA discounts to peers’

averages of 40% and 26%, respectively. Dividend yields, too, are

attractive. While 2012 remains a tough environment for producers,

we believe valuations already discount this and that investors

should be positioning themselves in the sector now, ahead of a

robust recovery in 2013.

► We prefer gas-based producers to mazut users. We prefer

producers who are wholly or predominately gas-based and those

who continually operate at higher utilisation rates and report the

highest revenue/employee ratios. Mazut users have been less

profitable and less efficient and face the risk of mazut prices being

raised. Our top picks are Misr Beni-Suef Cement (MBSC) and SVCE,

as both offer substantial upside over a 12-month horizon.

Recommendation summary table

Figure 1: Valuation

Company Recom.

Current

price (EGP)

WACC

(%)

Target

price

(TP,

EGP)

Potential

(%)

South Valley BUY 3.1 21.8 5.8 +87.5

Misr Beni-Suef BUY 52.8 19.5 69.5 +33.1

Suez Group HOLD 21.0 19.2 25.8 +22.8

Misr – Qena SELL 85.3 18.5 61.4 -28.0

Source: Bloomberg, NAEEM estimates

Closing price as of 2 May 2012

Cons. & Materials Index vs. EGX 30 Index (rebased)

Source: EGX, NAEEM Research

Egypt cement sector statistics

2010a 2011e 2012f 2013f

Capacity (m tons) 54.5 57.1 62.5 65.2

YoY growth (%) 0.0 4.8 9.4 4.4

Production (m tons) 48.3 47.5 49.6 53.5

YoY growth (%) 3.3 (1.7) 4.5 7.7

Consumption (m tons) 49.5 47.7 49.2 52.3

YoY growth (%) 5.4 (3.6) 3.3 6.3

Exports (m tons) 0.6 1.0 5.5 6.8

YoY growth (%) (69.9) 69.5 449.2 23.1

Imports (m tons) 1.6 0.8 2.1 2.6

YoY growth (%) 27.5 (48.3) 150.0 25.0

Utilisation (%) 89% 83% 79% 82%

PCCC (kg) 609.8 577.8 588.2 615.9

Source: CBE, company data , NAEEM estimates

Key ratios and valuation indicators

EV/ton

(USD)

EBITDA

margin (%) ROE (%)

Alex. Portland Cement 398 38.9 41.6

Misr – Qena 248 42.3 36.2

South Valley Cement 189 10.7 1.6

Misr Beni-Suef 128 43.7 16.6

Sinai Cement 81 31.0 15.2

National Cement 76 15.8 35.0

Torah Cement 59 15.6 19.5

Suez Cement 36 21.1 7.9

Egypt 152 30.6 22.6

MENA 422 28.0 11.9

Europe na 18.8 2.0

950

1,050

1,150

1,250

1,350

1,450

1,550

1,650

Cons. Index EGX30

2


Contents

Sector faced a barrage of problems in 2011….……………………………………………..……….. 3

2012 remains challenging, but is priced in……………………………………………………….….. 6

Government infrastructure spending and revival in real estate to resuscitate sector from

2013….…………………………………………………………………………………………………. 12

Valuations cheap relative to peers, with significantly higher margins, ROEs, and

yields……………………………………………………………………………………………………15

We prefer gas-based producers to mazut users…………………….…………………………….. 17

South Valley Cement……..……………………………………………………………………………19

Misr Beni-Suef……….…………………………………………………………………………………23

Suez Cement Group….………………………………………………………………………………..27

Misr Cement – Qena… ……………………………………………………………………………… 31

Disclosure Appendix…….……………………………………………………………………………35

3


Sector faced a barrage of problems in 2011 ► A sharp dive in Egypt’s GDP growth

► Real estate sector in turmoil

► Bombing of a natural gas pipeline

► Slack cement demand, low utilisation, and weaker prices

A catalogue of issues

2011 saw almost a perfect storm for Egypt’s cement sector, as it was buffeted by a

slew of problems, including the halting of production during the 25 January

revolution, distribution problems in the days that followed, labour strikes, attacks

on a gas supply pipeline in Sinai, a new producer entering the market, weak export

demand, and lastly, the government’s announcing a large increase in energy prices

for energy-intensive industries including cement, aluminium, steel, and ceramics.

Natural gas prices were raised 33% to USD4/mmbtu from USD3/mmbtu from 1

January 2012.

The revolution and its aftermath have severely affected Egypt’s economy – both

GDP growth and industrial production dived sharply. The lack of clear political

direction since the revolution is prolonging the downturn, and the impact on

tourism, free cash flow (FCF), and foreign direct investment (FDI) has also been

severe.

Figure 2: Quarterly real GDP growth Figure 3: Industrial output

Source: CBE, *Fiscal year to June Source: CBE, *Fiscal year to June

Figure 4: Monthly tourist arrivals Figure 5: Quarterly FDI

Source: CBE, *Fiscal year to June Source: CBE, *Fiscal year to June

The construction and real estate sectors were among those hardest hit in the wake

of the revolution. Larger-scale construction contracts were halted, either because

-4%

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27,000

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39,000

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EGPm

Industrial output YoY % chg (RHS)

0

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1,400

1,600

Mar-

07

Jun-0

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c-1

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c-1

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12

Number of tourist arrivals ('000)

DahabBombing

Jan 25 Revolution

-500

0

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USDm

GDP growth fell sharply post

revolution and remains

anaemic

Construction activity severely

curtailed

4


of the uncertain political environment or the fact that necessary approvals could

not be obtained owing to a paralysis of the decision-making process in

government departments and agencies post revolution.

Figure 6: Construction activity

Source: CBE, BMI, NAEEM Research

The real estate sector saw new sales dry up, developers faced cancellations on

earlier bookings, and, as a result, many developers faced severe cash flow

difficulties. While developers aimed to finish construction on projects already sold

(although constrained by cash flow in many cases), there were few new project

launches. In addition, ongoing lawsuits over land titles also had a dampening

effect.

Figure 7: Palm Hills Development reservations and cancellations – recent

trend

Source: PHDC, NAEEM Research

In 2011, new entrants El-Sewedy Cement, Nile Valley Cement, the Army's Arish

plant in Sinai, Al Nahda Industries, and MBCS's second production line all began

production, with total additional capacity of 7.5m tons. This new capacity, however,

arrived to the market at a bad time and raised oversupply when prices were

already soft.

In December 2011, a natural gas pipeline in North Sinai, which delivers gas to

Jordan and Israel and to cement producers in Sinai, was bombed, stopping flow.

Since then, the pipeline has been bombed a further 13 times, and these multiple

breaches have meant that in order to protect output, cement plants that usually

use gas have, on occasion, been forced to convert to the more expensive mazut.

In mid-December 2011, the Egyptian government announced a 33% increase in

the cost of energy supplied to energy-intensive industries, including cement, from

1 January 2012. As a result, natural gas prices were raised to USD4/mmbtu from

USD3/mmbtu. So far, there has been no announcement regarding an increase in

the price of mazut. Mazut has always been more expensive (cost/ton of cement)

than natural gas, and is still so even after the gas price hike. Nevertheless, a future

hike in mazut price cannot be ruled out.

11%

9%

18%

27%22%

20% 19%

14%

-6%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

10

20

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2004 2005 2006 2007 2008 2009 2010 2011 2012E

EGPbn

Construction activity YoY, % chg (RHS)

1,781

1,122

229 264 235 272 250 226

653

887

215

545

0

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800

1,000

1,200

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3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Reservations Cancellations

EGPm

Significant slowdown in real

estate sector

7.5mtpa capacity added in

2011

Fuel supply line damaged

33% hike in gas prices

5


Figure 8: Gas and mazut price trend Figure 9: Gas and mazut cost/ton

Source: Companies data, NAEEM estimates Source: Companies data, NAEEM estimates

Before 2008, Egypt cement producers enjoyed a large cost advantage cf. MENA

producers owing to subsidised energy prices, an abundance of raw materials, and

lower labour costs. However, in mid-2008, the Egyptian government decided to

increase fuel costs and raised the gas price from USD1.25/mmbtu to

USD2.1/mmbtu and that of mazut from EGP500/ton to EGP1,000/ton. In 2009, it

increased the gas price for a second time to USD3/mmbtu, which raised the cost

per ton of cement to c. EGP200. After the revolution came the 33% increase in the

price of gas as part of the government’s attempts to reduce the budget deficit.

We believe the government is likely to increase the price of mazut by the

beginning of 2013 by c. 33% to EGP1,330/ton, which would give natural gas a

significant price advantage over mazut. We forecast fuel prices to remain at

USD4/mmbtu and EGP1,330/ton for gas and mazut, respectively, and to increase

by 33% in 2015.

Slack demand, low utilisation, and weaker prices

Amid the poor political and economic backdrop and due to the factors mentioned

above, Egypt’s cement consumption fell by an estimated 4% in 2011, to 48m tons.

Cement capacity grew by 5% in 2011, as shown in Figure 10, but given weakening

demand, production fell by 1.7% to 47.5m tons in 2011 vs. 48.3m tons in 2010. As

a result, utilisation fell to 83% cf. 88% in 2010.

The overcapacity in the local market, coupled with the slowdown in demand, saw

selling prices fall to as low as EGP340/ton in November 2011, -25% YoY. We

estimate cement prices to have averaged EGP400/ton (USD67/ton) in 2011;

internationally, they ranged between USD45/ton and USD50/ton. There have,

however, been some signs of improvement in export prices this year to c.

USD55/ton.

Figure 10: Cement capacity additions through 2016 (tpa)

Source: CBE, NAEEM estimates

200

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Gas Mazut (RHS)

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EGP

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2%

4%

6%

8%

10%

Capacity Capacity additions YoY, % chg

Prices rose several times

since 2008

We believe a mazut price

hike is likely

Cement consumption down

4% YoY in 2011 …

… while capacity grew 5%

YoY and drove down

utilisation

6


2012 remains challenging, but is priced in ► More excess capacity, further margin squeeze

► A mazut price hike possible in 2013, but …

► 2012 sees a glimmer of hope for exports

► 2013 should see signs of economic recovery in Egypt

We believe 2012 will continue to be very challenging for Egypt’s cement sector.

Domestic demand is unlikely to strengthen drastically, and export appetite remains

low amid the weak global economy. Meanwhile, capacities are scheduled to rise at

a number of plants and will depress utilisation rates to historically low levels.

Domestic cement prices rose 7% to an average of EGP427/ton as producers

passed some of the energy cost increase to customers.

The Egyptian economy, too, is in bad shape: GDP growth in the fiscal year to June

2011 (FY11) slumped to 1.8% from 5.1% in FY10; we forecast GDP growth of 1.8%

for FY12. Fixed capital formation and FDI have remained low in 1H12 (calendar)

and are estimated to experience a solid recovery only after the results of the

presidential elections are out in June. Egypt’s foreign currency reserves had fallen

to a mere USD15.1bn at end-March 2012, representing just three months’ import

cover and thus heightening the risk of a more rapid EGP devaluation. We forecast

an exchange rate of EGP6.3 to USD1 by end-2012.

The tourism sector, although witnessing a recovery in arrivals after the revolution

hiatus, is still generating revenue well lower than in prior years. Unemployment is

rising and is estimated to hit a peak of c. 13% in 2012.

Against this backdrop, we do not see a significant recovery in capital expenditure

on construction projects or a strong resurgence in real estate activity that would

translate into much stronger demand for cement in 2012. Government spending

on infrastructure and social amenities will be key going forward, but we do not

estimate this kicking in until well into mid-calendar 2013.

Figure 11: Growth in Egypt’s GDP, construction, and cement consumption


Demand to grow slightly in 2012

Given the weak economic environment, we forecast Egypt’s cement consumption

to grow by 3% YoY in 2012 to 49m tons [vs. 9% YoY growth in capacity to 62m

tons per annum (tpa)].

Consumption would have been flat, save for the government’s plans to build 1m

low-cost housing units over five years, starting 2012, in five phases: the first phase

of 340,000 units has already been completed, and the second phase (227,000

units) is to be completed by end-2012. This project is estimated to consume c. 3-

4m tons of cement a year over the period.

-10%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011 2012E 2013 2014 2015 2016

Real GDP growth, YoY % chg Construction growth, YoY % chg

Cement growth, YoY % chg

Plant utilisation to fall further

in 2012

Egyptian economy in bad

shape

Recovery in capex and real

estate will be slow in 2012

Cement consumption to

grow 3% YoY in 2012 …

… boosted by low-cost

housing projects

7


We believe demand will strengthen in 2013 after the presidential elections and the

consequent political stability. We see cement consumption exceeding 50m tons in

2013, +6% YoY, as real estate and infrastructure building activity re-gather

momentum. Further out, we forecast cement consumption to grow at a CAGR of

6% over 2012-2016.

We forecast export demand to improve to 5m tons in 2012, although this is 20%

below the six-year average of 6.3m tons before the export ban was enforced. The

weak global economic environment and significant overcapacity regionally may

also result in dumping, which would make it difficult for Egyptian producers to

regain a foothold in export markets.

More excess capacity and much lower utilisation

The Egyptian market has historically shown a cement surplus, averaging c. 3.5mtpa

over 2003-2008. However, in 2009, the market turned to a deficit and net imports

averaged 500k tons through to 2011.

Subsequent to the rapid increase in cement capacity and production, which

unfortunately coincided with a slowdown in local demand, we forecast a market

surplus of c. 271k tons in 2012. Going forward, we expect continued excess

capacity in the market because of significant additions coming onstream – c.

14mtpa to be added through to 2016.

Historically, the Egyptian government’s policy has played a significant role in

reshaping Egypt’s cement industry. For example, in 2007, the government issued

six licences to greenfield cement factories and two others to expand production. In

2010, the government imposed a 5% sales tax on local producers and approved a

new energy pricing framework that increased the cost of fuel by 33% and

electricity by 50% during peak hours; it also imposed an export ban on cement.

Lastly, the government increased the cost of gas fuel by 33% and electricity by

50% starting 2012. These policies, coupled with a sharp slowdown in construction

and real estate activity, are likely to lead to overcapacity in the local market in

2012.

Figure 12: Cement production, consumption, and surplus/deficit


We expect 5mtpa of new capacity (+9.4%) to come onstream in 2012, both from

existing players adding new production lines and from new entrants. The timing,

however, is inopportune given the weak demand profile. For 2013-2015, a further

4% p.a. increase in capacity is scheduled.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1,000

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31,000

41,000

51,000

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81,000

2004a

2005a

2006a

2007a

2008a

2009a

2010a

2011e

2012f

2013f

2014f

2015f

2016f

'000 tons'000 tons

Capacity Cunsumption Production Surplus/(deficit) (RHS)

We see 6% YoY consumption

growth in 2013

Market surplus of c. 271k

tons in 2013

5mtpa new capacity in 2012

8


Figure 13: Egypt’s cement producers and capacity additions until 2015 (in kilotons)

Company 2011 2012 2013 2014 2015

Suez SCGC Group 13,625 13,625 13,625 13,625 13,625

Lafarge Cement Egypt (Egyptian Cement Company) 9,600 9,600 9,600 9,600 9,600

Assiut Cement Company 4,752 4,752 4,752 4,752 4,752

Titan Group - Egypt 4,500 4,500 4,500 4,500 4,500

El-Amreyah Cement 4,450 4,450 4,450 4,450 4,450

ASEC Cement Group 3,615 3,615 3,615 3,615 3,615

Sinai Cement 3,300 3,300 3,300 3,300 3,300

National Cement 3,100 3,100 3,100 3,100 3,100

Arabian Cement 1,800 1,800 1,800 1,800 1,800

Misr Beni Suef Cement 1,767 3,000 3,000 3,000 3,000

Misr Cement (Qena) 1,500 1,500 1,500 1,500 1,500

South Valley Cement 1,500 1,500 1,500 1,500 1,500

Medcom Aswan for Cement 750 750 750 750 750

ElSewedy Cement 750 1,500 1,500 1,500 1,500

Nile Valley Cement 750 1,500 1,500 1,500 1,500

Spanish Egyptian Cement (SPEGYCO - Shoura) 600 600 600 600 600

Al Nahda Industries - Cement 375 1,500 1,500 1,500 1,500

Ministry of Defense Arish Plant 375 1,500 3,000 3,000 3,000

Arab National Cement - 375 1,600 1,600 1,600

Building Materials Industries (BMIC) - EKHO - - - 1,500

North Sinai Cement - - - 1,500

Total capacity 57,109 62,467 65,192 65,192 68,192

Source: CBE, NAEEM Research

Despite the new capacity additions of 5mtpa in 2012, we forecast production to

see only a 4% increase to 50m tons because of slack demand from the real estate

sector and a lack of activity in the construction sector. As a result, we expect

utilisation to decline even further in 2012 to c. 79% (-4pps, following a 5pps

decline in 2011).

Figure 14: Utilisation rates - companies vs. the country

Source: Companies data, NAEEM estimates

Cement price seeing recovery

Local cement prices rose at a 19% CAGR in the eight years up to 2010 and reached

EGP470/ton. However, after the revolution, cement prices fell sharply, reaching a

low of EGP340/ton by November 2011 and averaging EGP400/ton for full-year

2011, -12% YoY.

We expect local cement prices to increase slightly in 2012 by c. 4% to average

EGP446/ton as cement companies try to pass on some of the energy cost increases

70%

75%

80%

85%

90%

95%

20%

40%

60%

80%

100%

120%

140%

160%

2010a 2011e 2012f 2013f 2014f 2015f 2016f

MBSC MCQE SVCE SUCE Egypt Ut. (RHS)

Sector-wide utilisation at

79% in 2012

Cement prices dipped

sharply post revolution

9


they have been hit with since 1 January 2012. Local prices have thus far risen 17%

since the low of November 2011 to c. EGP427/ton.

Furthermore, the international cement price is likely to rise on the back of higher

energy costs. We expect international prices to increase by c. 10% to USD55/ton

(equivalent to EGP330/ton) over the next two years.

Figure 15: Cement price/ton (monthly average

exfactory)

Figure 16: Local and international cement prices

forecasts

Source: CBE, NAEEM estimates Source: CBE, NAEEM estimates

Energy price increases not being completely passed through

translates into a margin squeeze

In mid-December 2011, the Egyptian government announced a 33% increase in

energy costs to energy-intensive industries, including cement, from 1 January

2012. As a result, natural gas prices rose to USD4/mmbtu from USD3/mmbtu. The

price of electricity was also raised 33%.

So far, there has been no announcement of an increase in the price of mazut. Even

after the gas price hike, mazut remains a higher-cost option for producers and an

inefficient fuel source relative to gas. Nevertheless, a future hike in mazut prices

cannot be ruled out, particularly bearing in mind that oil products account for the

lion’s share of government subsidies. For the purpose of our forecasts, we have

assumed that the government will increase mazut prices by 33% from the

beginning of 2013.

Despite the weak demand environment, overcapacity, and intense competition,

cement producers were able to pass on part of the energy price hike to customers,

but profit margins remain under pressure, as much of the energy price increase

has to be absorbed for now.

Based on our individual company operating assumptions, we see the increase in

electricity prices decreasing gross margin by c. 1pps, while the hike in natural gas

prices will depress gross margin c. 4pps, on average, for those using gas as their

main fuel (assuming a selling price of EGP446/ton). Additionally, the government

announced increasing clay fees by EGP20/ton, which will shrink gross margin by a

further 4pps.

427

300

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550

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Monthly average ex-factory price

EGP/ton

100

200

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600

2010a 2011e 2012f 2013f 2014f 2015f 2016f

Local prices Export Prices

EGP/ton

Export prices

Gas and electricity prices

increased 33% from January

2012

Mazut prices may follow

Gross margins to shrink 4pps

following the hike in gas

prices

10


Figure 17: Impact of energy cost and clay fees increases on companies’ gross margins

Company

Fuel type

Before energy cost

increase

After energy cost

increase Change

Gas Mazut

Cost/ton

(EGP) GPM (%)

Cost/ton

(EGP) GPM (%)

Cost (chg.

%) GPM (pps)

Misr Beni-Suef Cement 100% 0% 223 50% 266 40% 19% -9pp

Misr Cement – Qena 0% 100% 247 45% 270 39% 9% -5pp

Suez Group Cement 60% 40% 234 47% 279 37% 19% -10pp

South Valley Cement 100% 0% 226 49% 273 39% 21% -11pp


The current energy cost per ton of cement for a mazut user is EGP231/ton based

on a mazut price of EGP1,000/ton. Before the recent gas price hike, mazut was at a

35% premium in terms of cost per ton of output versus the gas cost. After the gas

price hike, the premium has fallen to 1%. While no mazut price hike has been

proposed so far, a government desperate to lower its budget deficit might still

revisit this. The most likely scenario, in our view, is that the mazut price will be

raised 33% in line with the gas price increase.

Wage inflation and labour issues

Figure 18: Breakdown of average variable costs

Source: Companies data, NAEEM estimates

During 2011, there were labour strikes at cement plants around the country, some

lasting several days, and in the post-Mubarak era, labour unions or groups are

exercising their newfound freedom to protest pay and working conditions, and to

strike work. Many industries (including spinning mills, ceramics, and transportation

and logistics) have thus been impacted by labour unrest. Going forward, organised

labour and labour disputes are likely to become common across the board.

Many companies responded to the labour disputes by agreeing to grant higher

pay increases and special bonuses in 2011, which impacted margins. We believe

businesses will again play safe in 2012 and grant higher pay increments than they

did in prior years.

While cement companies may be impacted by such issues, we note that labour

costs are relatively small cf. other cost categories (energy costs being, by far, the

largest) at only 6% of total variable costs and c. 3% of revenue.

Yet, we see the gross margins of Egyptian cement companies as being attractive,

as they are relatively higher than those of global peers, given that fuel costs are

still lower, despite recent increases, and the competitive labour costs. Moreover,

Egypt enjoys an abundance of cement raw materials, in addition to its factories

being located close to limestone quarries.

Raw materials35.0%

Energy cost39.4%

Labor cost6.0%

Other cost1.5%

Operating & maintenance

18.0%

Egyptian cement companies’

margins remain higher than

global peers’

Labour strikes were common

post revolution

11


Egypt’s cement gross profit averages EGP179/ton at a selling price of EGP446/ton,

which translates into a GPM of c. 40% (c. 5pps higher than the global average).

EBITDA margin for the country averaged 31%, 2pps above the MENA EBITDA

average and 11pps higher than the global peer average.

Figure 19: EBITDA margin averages – Egypt, MENA, and Europe

Source: Reuters, NAEEM Research

UAE

Jordan

Kuwait

Oman

Lebanon

Egypt

Qatar

Morocco

Saudi Arabia

0 10 20 30 40 50 60%

Europe MENA

12


Government infrastructure spending and

revival in real estate to resuscitate sector from

2013 ► Infrastructure spending to be main demand catalyst

► Longer-term dynamics of the real estate sector remain strong

Our current forecasts call for the Egyptian economy to recover from 2013 onwards.

We expect GDP growth of 4.8% in FY13 and 6% in FY14, up from just 1.8% in FY12.

The initial spur will be a normalisation of economic activity after the disruption

caused by the revolution and the subsequent period of political uncertainty.

Figure 20: Total capital investment vs. real GDP growth

Source: CBE, BMI, NAEEM estimates

By late-2012, Egypt should have a completely new government in place, with a

clear agenda, which we believe will continue to be pro-business. The consequent

elimination of uncertainty will, we believe, immediately stimulate economic activity

across the spectrum. For example, while demand for basic goods and services has

held up during 2011 (preventing Egypt’s GDP growth slipping into negative

territory), Egyptian consumers have been deferring purchases of durables and

discretionary items. We therefore expect a surge in sales as pent-up demand for

these items is released after the presidential elections. On the other hand, we

acknowledge the risk that if the government is forced to reduce subsidies on food

and fuel over the coming months, this could act as a drag on private consumption.

At corporate level, most companies shelved or severely cut back capital

expenditure plans in 2011. We expect that in 2012, capex will return to pre-

revolution budgeted levels, as we see certain companies upping 2012 capex as

they play catch-up after having postponed expansions in 2011.

Infrastructure spending would be the catalyst

Although the resurgence of the Egyptian consumer will have a trickle-down effect

on other parts of the economy, a more direct impact of construction spending will

come from increased government spending on infrastructure projects and from

attracting FDIs.

We believe that in an effort to kick-start Egypt’s economy and create jobs, the new

Egyptian government will direct substantial funds towards infrastructure projects.

Given that the new government would have come to power after a people’s revolt,

its policy emphasis is likely to be populist and directed towards improving Egypt’s

overburdened infrastructure and social causes, including better education,

hospitals, and affordable housing. This will all translate into stronger demand for

cement.

0%

2%

4%

6%

8%

0

75

150

225

300

375

450

2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f

EGPbn

Total capital investment Real GDP growth, YoY % chg (RHS)

Egypt’s GDP growth to

recover to 6% by 2014

Elimination of uncertainty,

post elections, should spur

economic activity

Capex plans resumed

Infrastructure spending is the

catalyst

13


In its FY12 fiscal budget, the government increased total capital spend to

EGP233bn, +8% YoY. Housing and real estate construction activities accounted for

13% of total investments (EGP31bn), while spending on infrastructure was

EGP32.4bn. We foresee a 10% increase in FY13 capital investment.

Given that new government policies will probably not be disclosed until 3Q12, it is

unlikely that new construction projects can break ground far before 1Q13.

Currently, the list of active infrastructure projects includes 27 projects, with

investment cost totalling USD9.6bn, and the majority of these are scheduled for

completion before end-2017. In addition, there are another five projects in the

pipeline with an estimated cost of USD2.8bn.

Figure 21: Egypt’s top 20 projects in terms of investment cost

Project name Sector

Approval

date

Closing

date

Cost

(USDm)

Project

status

Ain Sokhna Power Project Power 29-Jan-09 31-Dec-15 2,189.8 Active

Helwan South Power Project General energy na na 1,985.0 Pipeline

Giza North Power Project Power 08-Jun-10 31-Dec-16 1,412.1 Active

Wind Power Development Project Renewable energy 15-Jun-10 31-Dec-15 796.0 Active

Giza North Additional Financing General energy 14-Feb-12 na 764.0 Active

Alexandria Coastal Zone Management Project General water, sanitation, and

flood protection

29-Apr-10 30-Jun-15 654.2 Active

Kom Ombo Solar Power Other renewable energy na na 525.0 Pipeline

Cairo Airport Development Project – TB2 Aviation 23-Feb-10 30-Nov-15 436.0 Active

Railways Restructuring Additional Financing Railways 14-Dec-10 na 340.0 Active

Railways Restructuring Railways 17-Mar-09 31-Mar-17 305.0 Active

Integrated Irrigation Improvement and

Management Project

Irrigation and drainage 03-May-05 31-Mar-14 303.0 Active

Integrated Sanitation and Sew. Infra. 2 Sewerage 30-Jun-11 31-Dec-16 300.0 Active

Egypt Enhancing Access to Finance for Micro and

Small Enterprises

Micro- and SME finance 09-Mar-10 31-Dec-15 300.0 Active

Affordable Mortgage Finance DPL Housing finance 24-Sep-09 31-Dec-13 300.0 Active

The Second National Drainage Project Irrigation and drainage 15-Jun-00 31-Mar-13 278.4 Active

Urban Transport Infrastructure Development General transportation na na 250.0 Pipeline

Secondary Education Enhancement Project Secondary education 15-Apr-99 30-Jun-12 250.0 Active

Integrated Sanitation and Sewerage Infrastructure

Project

Sanitation 20-Mar-08 30-Jun-14 201.5 Active

Egypt – Farm-level Irrigation Modernisation Irrigation and drainage 14-Dec-10 30-Jun-16 180.0 Active

Second Pollution Abatement Project Other industry 23-Mar-06 31-Aug-13 166.0 Active

Total cost 11,936

Source: The World Bank, NAEEM Research

FDI revival

Since the revolution, FDI has fallen sharply; it actually turned negative in 3QFY11

(the March quarter). Data showed a slight recovery in 4QFY11 and 1QFY12 (Figure

5). We expect the tepid recovery to continue until mid-2012, but after the

presidential elections, we estimate FDI to surge and very quickly reach levels last

seen in mid-FY10, particularly as we expect the new government to introduce new

measures to attract FDI (for example, a package of tax breaks, reducing

bureaucracy in establishing businesses, and providing assistance with establishing

premises, staffing. etc.)

Such FDI will bring with it investment in physical assets including new factories and

plants, which will be a further driver for cement demand.

FDI has bottomed, recovery

to be seen post elections

14


Long-term dynamics of the real estate sector remain strong

The real estate sector in Egypt was the hardest hit in 2011 because of a

combination of lower demand after the revolution and uncertainties related to

land ownership. The sector saw customer instalment delays and cancellations

rising to 40-50% during 1Q-2Q11. This was particularly evident in secondary-home

projects and land banks that faced court cases or ownership uncertainties.

A recent favorable court ruling on Talaat Mustafa Group Holding Co.’s (TMGH)

Madinaty project and the New Urban Communities Authority’s (NUCA) ruling on

Six of October Development and Investment’s (OCDI) Westown project have

infused hope into a sector that was mired in legal wrangling over land ownership.

Although a comprehensive legal solution is not in place, we think the government

is showing a willingness to come to a settlement with investors, albeit on an

individual basis, thus giving a much needed fillip in terms of confidence to both

investors and buyers. Continued political progress, despite temporary flare-ups, is

pointing towards a more stable environment going forward.

Despite the aforementioned issues, the long-term dynamics of the real estate

sector remain strong. Demand is fuelled mainly by 2% p.a. population growth

(urban growth at 2.7% p.a.), favourable demographics, high population density (c.

31,000/sq km), and c. 600k marriages each year. An indication of the strength of

Egypt’s organic real estate demand is that despite the economic shocks in 2011,

three large listed developers were able to record net sales (net of cancellations) in

3Q-4Q11, and the trend is likely to strengthen in 2012. Meanwhile, customer

instalment delinquency is estimated to drop below 12% as the economy stabilises

and a recovery in the real estate sector sets in by mid-2013; the home mortgage

market is still in its infancy and represents <0.5% of GDP. We expect this to be a

key catalyst in the next phase of Egypt's real estate growth.

Figure 22: Housing statistics in Egypt

Avg. annual

income (EGP) Population (m) (%)

Population in

urban areas (m)

Affordability (avg. d

house value in EGP)

Annual housing

demand

203,000 4.7 6% 4 570,000 28,200

61,020 9.5 12% 8 171,500 57,000

27,000 16.6 21% 10 76,000 99,600

10,260 18.2 23% 14 28,750 109,200

3,240 30.0 38% 19 9,000 180,000

Source: Sakan Finance, NAEEM estimates

Utilisation on the mend

While we expect demand to rebound, we believe new capacity additions would

slow down. As a result, we expect industry-wide utilisation to begin increasing

again from 2014 to reach c. 86% in 2017 from a low of 79% in 2012.

Real estate suffered from

instalment delays and

cancellations

Legal cases to be resolved

gradually

Real estate demand

dynamics remain robust

15


Valuations cheap relative to peers, with

significantly higher margins, ROEs, and

yields ► ROEs averaged 22% in 2011 despite the unrest; should rise to 26% by 2015

► Egypt’s cement stocks trade at a FY12 P/E average of 8.4x, at a 40% discount

to regional peers

► EV/EBITDA at 5.2x is cheap relative to the global average of 7x

Egypt’s cement companies all trade at P/E and EV/EBITDA multiples that are at

significant discounts to regional peers (Figure 23). This is despite their being more

profitable and reporting higher ROEs (Egypt averaged 22% ROE vs. regional at

19% in 2011), even after factoring in recent energy price hikes. We expect the

ROEs of the four selected companies to average 26% in 2015.

On a multiple-valuation basis, Egyptian cement stocks are cheap relative to

regional and global peers: at a P/E of 8.4x, they indicate a 40% discount to regional

peers and come in 60% lower than the global average. Egypt’s cement sector’s

EV/EBITDA averages 5.9x in 2012, 26% below the regional peer average of 7.0x.

In terms of EV/ton, Egyptian cement companies average USD152/ton cf. regional

peers’ USD427/ton, 64% lower.

Our recommendations in this report include:

► South Valley (SVCE): TP EGP5.8 – BUY

► Misr Beni-Suef (MBSC): TP EGP69.5 – BUY

► Suez Cement (SUCE): TP EGP25.8 – HOLD

► Misr Cement – Qena (MCQE): TP EGP61.4 – SELL

Figure 23: Comparable valuation

Company name Country

Market cap

(USDm)

EV/ton

(USD)

PE EV/EBITDA DY

(%)

ROE

(%) 2012 2013 2012 2013

Egypt

Suez Cement Goup Egypt 630 36 6.2 7.1 2.4 2.7 3.1 7.9

Alex. Portland Cement Egypt 578 398 na na na na 12.7 41.6

Misr Beni-Suef Co. Egypt 431 128 9.5 7.1 5.4 4.4 7.7 16.6

Misr Cement – Qena Egypt 423 248 9.5 11.3 8.0 7.5 8.2 36.2

Torah Cement Egypt 346 59 na na na na 9.6 19.5

SINAI CEMENT Egypt 303 81 7.2 7.8 0.7 0.7 11.5 15.2

South Valley Cement Egypt 253 189 9.7 7.3 9.4 7.3 3.2 1.6

National Cement Egypt 245 76 na na na na 10.4 35.0

Average 152 8.4 8.1 5.2 4.5 8.3 21.7

MENA region

Southern Province Cement Saudi Arabia 3,957 790 15.1 14.5 3.3 3.2 3.3 34.9

Saudi Cement Saudi Arabia 3,917 1,000 16.7 15.6 3.6 3.4 4.7 25.0

Yamamah Saudi Cement Saudi Arabia 2,727 400 12.9 13.0 2.5 2.5 2.6 22.6

Yanbu Cement Saudi Arabia 2,100 486 13.1 11.4 3.1 2.7 3.3 19.7

Qassim Cement /THE Saudi Arabia 1,980 540 12.9 13.0 2.7 2.7 4.2 29.0

Arabian Cement Saudi Arabia 1,024 441 11.1 10.6 2.4 2.3 3.4 15.7

Tabuk Cement Saudi Arabia 614 378 13.3 10.9 2.2 1.8 2.0 12.7

Qatar National Cement Qatar 1,411 334 10.8 10.8 2.2 2.1 5.7 19.9

Raysut Cement Co. Oman 637 257 13.2 12.6 24.9 23.0 4.1 14.2

Oman Cement Co. Oman 585 205 14.5 13.6 24.6 21.9 4.4 8.6

Egyptian cement companies

trade at a significant

discount to regional peer

multiples

16


Company name Country

Market cap

(USDm)

EV/ton

(USD)

PE EV/EBITDA DY

(%)

ROE

(%) 2012 2013 2012 2013

Akcansa Cimento Turkey 848 142 27.0 23.2 9.6 8.6 5.9 11.8

Cimsa Cimento Sanaya Turkey 601 144 8.0 7.1 3.2 3.0 10.1 14.2

Average 427 14.0 13.0 7.0 6.4 4.5 19.0

Europe

HOLCIM LTD-REG Switzerland 20,269 na 16.7 13.5 8.5 7.7 1.8 1.6

Lafarge SA - LG France 11,291 na 10.9 8.5 8.9 8.2 1.7 3.7

TITAN Cement Co. S.A. Greece 1,541 na 32.5 19.0 11.2 10.0 na 0.7

Italcementi SPA Italy 1,412 na 24.6 12.8 8.0 7.1 2.6 nm

Average 21.2 13.5 9.1 8.2 2.0 2.0

Total average 317 14.1 12.0 7.0 6.3 5.5 17.7

Attractive dividend yields

Egyptian cement companies generally report relatively high dividend payout ratios

(with the exception of SVCE). On average, over the past five years, the sector (ex-

SVCE) has reported a dividend payout ratio (DPOR) of 50%, and its dividend yield

(DY) averaged 10%. We estimate DY and DPOR in 2012 to average 9% and 79%,

respectively.

Figure 24: Five-year average DY vs. DPOR Figure 25: 2012 estimated DY vs. DPOR

Source: Company data, NAEEM estimates Source: Company data, NAEEM estimates

Slightly exposed to currency fluctuations

Egypt’s cement companies source all their raw materials locally in EGP; their

energy costs are in EGP, except for natural gas users, whose energy costs are fixed

in USD. We forecast a managed depreciation of the EGP to around USD1 = EGP6.3

by end-2012, which will have a small negative effect on cement cost/ton for those

companies using natural gas. However, in a worst-case scenario of USD1 = EGP6.6,

the increase in cement cost/ton would be 2.4%, which translates into a 1pps

decline in GPM.

On the other hand, a further weakening of the EGP against the USD would be

beneficial for cement producers, as it would make imported cement more

expensive and Egyptian cement more competitive in the international market.

8.1 12.6 15.0

2.5

41

83

55

23

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

MBSC MCQE SUCE SVCE

5-year avrg. DY 5-year avrg. DPOR

8.5 10.7 9.9 7.1

77

100

7075

0%

20%

40%

60%

80%

100%

120%

MBSC MCQE SUCE SVCE

DY% DPOR%

Egypt’s average dividend

yield at 9% in 2012

17


We prefer gas-based producers to mazut users ► SVCE – considerable room to grow: BUY

► MBSC – still the most profitable: BUY

► SUCE – not yet: HOLD

► MCQE – the most exposed to higher fuel costs: SELL

We use the DCF method to arrive at target prices based on the following

assumptions: a conservative terminal growth rate of 2%, a risk-free rate of 13%,

and a risk premium of 9.5%.

Our valuations and recommendations are summarised as follows:

Figure 26: Valuation

Company Rec.

Current

price

(EGP)

WACC

(%)

Target

price

(EGP)

Potential

(%)

P/E

2013

EV/EBITDA

2013

DY (%)

2012

South Valley Cement BUY 3.1 21.8 5.8 +87.5 7.3 7.3 7.6

Misr Beni-Suef Cement BUY 52.2 19.5 69.5 +33.1 7.1 4.4 8.4

Suez Cement Group HOLD 21.0 19.2 25.8 +22.8 7.1 2.7 10.1

Misr Cement – Qena SELL 85.3 18.5 61.4 -28.0 11.3 7.5 10.3

Source: Bloomberg, NAEEM estimates


South Valley Cement – BUY, TP EGP5.8; +88%

► Market share predicted to grow to 2.4% in 2012 (from 1.7% in 2010)

► Shifting solely to using gas instead of mazut, leading GPM to improve to 39%

in 2012 (from 13% in 2011)

► Having just started its own clinker production line and recently completed

installation of its own water, gas, and electricity feeder lines, and reduced the

effect of the increase in energy prices, we see a significant improvement in

SVCE’s margins from 2013

► Owns and manages an investment portfolio of EGX-listed shares valued at

EGP1.7bn (EGP3.5/share) – 12% higher than SVCE’s market price

► SVCE trades at an 2013 PE of 7.3x, 9.9% below the local average of 8.1x. We

estimate 2014 P/E at 5.6x

► Our SOTP valuation is EGP5.8/share: this comprises the DCF value for the core

cement business of EGP2.4/share plus EGP3.5/share from investment in listed

securities. The valuation indicates 87.5% potential upside to the current price

Misr Beni-Suef – BUY, TP EGP69.5; +33%

► Doubling its capacity in mid-2011 to 3mtpa will lead revenue to grow at a

CAGR of 17% over 2011-16

► Located in Upper Egypt and close to limestone quarries gives MBSC a

competitive advantage; it reports lower labour costs and uses natural gas as

its source of fuel

► MBSC trades at an 2013 PE of 7.1x, at a 12% discount to local peers’ 8.1x. The

company’s EV/EBITDA multiple of 4.4x also looks cheap relative to the

regional average of 6.4x. In terms of EV/ton, it trades at USD128/ton, 16%

below Egypt’s EV/ton average of USD152/ton

Shifting completely to gas

fuel

Just started its own clinker

production

Investments valued at

EGP3.5/share

Doubled capacity in 2011

Attractive valuation

18


► On a DCF basis, we value MBSC at EGP69.5/share, which implies 33% potential

upside. We initiate coverage on MBSC with BUY

Suez Cement Group – HOLD, TP EGP25.8; +23%

► Challenges include poor cost efficiencies as a result of old wet kilns that

constitute c. 11% of capacity and its use of mazut as fuel in c. 40% of

production. The company’s plants, too, are relatively old and in need of

renovation, making it more prone to competition from new and efficient

players

► SUCE is a backward and horizontally integrated company as it owns three

cement plants, a cement bag manufacturer, and ready-mix concrete stations

► The share trades at 2.7x 2013e EV/EBITDA, at a 41% discount to local peers:

SUCE’s 2013e PE is 7.1x, 12% below the average in Egypt of 8.1x.

► We estimate 2012 dividend yield at 10% at current prices

► We recommend a HOLD on SUCE. Our DCF valuation yields a TP of

EGP26/share, which implies 16% upside potential to the current market price

of EGP22.5

Misr Cement – Qena – SELL, TP EGP61.4; -30%

► The company uses mazut as its main source of fuel, and this makes it the most

exposed to increases in fuel costs and the least flexible where pricing is

concerned

► MCQE operates at maximum capacity, and its market share is shrinking

following the capacity additions of new entrants

► Gross margin is estimated to shrink to 39% in 2012 (from 45% in 2011) on the

back of a likely hike in mazut prices; we estimate it to come in at 34% by 2015

► MCQE trades at relatively higher multiples cf. local peers – its 2013e P/E and

EV/EBITDA are 11.3x and 7.5x, respectively, while Egypt’s P/E averages 8.0x

and EV/EBITDA 4.5x

► SELL MCQE; TP of EGP61.4/share; -28% potential

Works with some old

technology

The most integrated in Egypt

Mazut is main fuel source

Operates at maximum

capacity


SOUTH VALLEY CEMENT

19

Considerable room for growth – BUY

South Valley Cement (SVCE) is Egypt’s youngest cement producer:

it acquired its licence in 2007 and commenced clinker production

in mid-2011, when its market share was estimated at 1.0%. We

expect this to rise to 2.2% in 2012 following a full year of in-

house clinker production, and forecast 2012 revenue at EGP514m,

3x the EGP170m it reported in 2011. Gross margin should reach a

healthy 42% in 2012 and consequently drive EBITDA Margin to

35%, helped also by cost savings from the establishment of its

own water, gas, and electricity lines. We forecast 2012 net profit

of EGP157m (cf. EGP13m in 2011). SVCE has a lower dividend

yield than do its local peers, but we estimate strong EPS growth

over the next five years (at a CAGR of 20% over 2012-16), which

would enable higher payouts. We initiate coverage on SVCE with

a BUY recommendation and a TP of EGP5.8.

► Strong recovery in 2012 sales. We estimate SVCE’s 2011 sales to

have fallen 61% to EGP167m. However, with the launch of its own

clinker production in mid-2011, combined with an expected

recovery in local and global cement demand, we forecast revenue

at EGP514m in 2012 (cf. EGP167m in 2011) and a further 23% YoY

growth in 2013 to EGP634m on higher volumes and prices. We

believe SVCE's revenue will also be boosted by a marked rise in

ready-mix concrete sales in 2012 to EGP57m or c. 11% of total

sales.

► Exports should compensate for slowing local demand. SVCE

has announced targeting African export markets, particularly

Sudan, Cameron, and Libya. A rise in exports should compensate

for the slower recovery in local demand, and we forecast SVCE's

export volumes to grow rapidly – to reach 0.12m tons in 2012 and

0.24m tons in 2013 vs. an estimated 0.02m tons in 2011. Export

revenue is estimated to reach EGP38m in 2012 and EGP80m in

2013, and global prices are forecast to rise at an estimated 6%

CAGR over 2012-16.

► 2012 margins rising to healthy levels. SVCE’s gross margin was

low at 14% in 2010 and 13% in 2011e owing to the high

production costs associated with it having to buy clinker from

other producers before mid-2011. It now produces its own clinker,

which, in addition to affording cost savings, should drive up plant

utilisation to c. 80% in 2012. SVCE was also using lines leased from

third parties for transporting electricity and water until it

completed the construction of its own lines recently, and has

shifted from using mazut to using the cheaper natural gas as fuel.

Considering these factors, we expect gross margin to expand to

39% in 2012 and 2013.

► Valuation. We use the SOTP method, which yields a TP of EGP5.8:

the DCF used for the core cement business yields EGP2.3/share,

and the fair value of SVCE’s portfolio of listed securities worth

EGP1.7bn translates into EGP3.5/share. This implies an 87.7%

upside potential from its current market price.

Recommendation BUY

Market Price (EGP) 3.1

Fair Value (EGP) 5.8

Upside Potential (%) 87.7

EGX 30 Index 4,906.9

Stock Data

Reuters Code SVCE.CA

Bloomberg Code SVCE EY

Shares Outstanding (m) 493

Market Cap (EGPm) 1,527

Market Cap (USDm) 252

Free Float (%) 42.7

SVCE vs. EGX30 (rebased)

Source: Bloomberg, NAEEM Research

Financial indicators and valuation multiples

Year to 31 Dec. 2009a 2010a 2011e 2012f 2013f

Revenue (EGP) 478 423 167 514 634

Revenue (% Δ) nm (11.5) (60.5) 207.8 23.3

EBITDA (EGP) 150 143 53 182 234

EBITDA (% Δ) 31.4 33.9 31.6 35.4 36.9

EPS (EGP) 0.3 0.1 0.0 0.3 0.4

EPS (% Δ) nm (66.4) (74.6) nm 33.7

P/E 22.4 49.4 114.0 9.7 7.3

P/CFPS nm 16.7 nm 9.6 7.6

Yield (%) 3.1 2.0 0.7 7.7 10.3

ROE (%) 5.5 1.6 0.4 4.8 6.1

Net Debt/Equity (x) 0.0 0.0 0.1 0.0 -

Int. Cov. (x) 48.3 nm 18.6 367.5 nm

Source: Company data, NAEEM estimates


2

3

4

5

6

May-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

May-1

2

Price (EGP)

SVCE EGX30 Rebased

20

SOUTH VALLEY CEMENT

Investment positives and risks

Key positives

► Entering a growth phase as new capacity is taken up

► Strong export potential

► Margins boosted by in-house clinker line

► Cost savings from new electricity and water lines

Downside risks

► Longer-than-expected political and economic unrest

► A further slowdown in real estate and construction

activities

► New to the market, market share lower than peers’

► New licence, more competition, pressure on selling prices

Valuation

SVCE trades at a 2013e P/E of 7.3x, at a 9% and 43%

discount to the local and regional peers’ averages of 8.0x

and 12.9x, respectively. It’s EV/ton of USD200 2013e is 51%

below the regional peers’ average of USD407/ton. We value

SVCE at EGP5.8/share: a DCF value (WACC of 21.8%) of

EGP2.3/share plus EGP3.5/share from investment securities

implies 87.7% potential upside.

Figure 27: Assumptions for calculation of WACC (%)

Risk-free rate of return 13.0%

Pre-tax cost of debt 15.0%

Equity risk premium 9.5%

Beta 1.1

Tax rate 25.0%

Target debt to equity 20:80

Cost of equity 23.5%

WACC 21.8%

Figure 28: Fair value sensitivity analysis

WA

CC

Terminal growth rate

6 1.0% 1.5% 2.0% 2.5% 3.0%

19.8% 6.0 6.1 6.1 6.2 6.2

20.8% 5.9 5.9 5.9 6.0 6.0

21.8% 5.7 5.7 5.8 5.8 5.9

22.8% 5.6 5.6 5.6 5.7 5.7

23.8% 5.5 5.5 5.5 5.5 5.6

Key performance indicators 2009a 2010a 2011e 2012f 2013f

Figures in EGPm unless otherwise indicated

Market Share (%) 2.3 1.7 1.0 2.4 2.3

Capacity (mtpa) 1.5 1.5 1.5 1.5 1.5

Sales (mtpa) 1.1 0.8 0.4 1.2 1.4

Revenue 478 423 167 514 634

Gross Profit 107 60 23 218 266

GPM (%) 22.3 14.2 13.9 42.4 41.9

EBITDA 150 143 53 182 234

EBITDA Margin (%) 31 34 32 35 37

Net Profit 151.5 50.9 12.9 157.0 209.8

EPS (EGP) 0.31 0.10 0.03 0.32 0.43

DPS (EGP) 0.21 0.10 0.02 0.24 0.32


Quarterly results snapshot

Company brief

South Valley Cement Company was established in 1997 and is

engaged in the manufacture of cement and associated

products. The company's wide range of products includes

clinker, ordinary Portland cement, and ready-mix concrete. It

operates through two main production facilities – in the Beni-

Suef Industrial Zone, Beni Suef; and in Borg El Arab, Alexandria.

SVCE also owns and manages a portfolio of diverse, multi-

sector direct and indirect investments.

1Q11 2Q11 1H11 3Q11 9M11


Revenue 42. 36.6 79.4 41.1 120.5

Gross profit 8.1 0.8 9.0 6.2 15.2

GPM (%) 19.0 2.3 11.3 15.2 12.6

EBITDA 11.1 (1.0) 10.2 11.3 21.5

EBITDA margin (%) 26.0 (2.6) 12.8 27.6 17.9

Net profit 9.7 (4.7) 5.0 36.0 41.1

EPS (EGP) 0.02 (0.01) 0.01 0.07 0.08

Source: Company data, NAEEM Research

Figure 29: 1-year forward PE multiple valuation bands Figure 30: Shareholder structure

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EGP Historical PE band chart

Adj closing price

Blue Nile Limited Co

36.9%

Gazelle Ltd Inc9.1%

Al Nuhla Trdg & Cont

8.0%

Sharbatly Abdulrahma

0.9%Others2.4%

Free Float42.7%

21

SOUTH VALLEY CEMENT

Charts gallery

Figure 31: Capacity vs. Production Figure 32: Local sales, market share, and exports

Figure 33: Revenue, EBITDA, and net profit (YoY) Figure 34: Margins

Figure 35: Breakdown of COGS Figure 36: EPS, DPS, and dividend yield (%)


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Net profit margin Gross profit margin

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Packing14%

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22

SOUTH VALLEY CEMENT

Summary Financials

Income Statement (EGPm) 2010A 2011E 2012F 2013F 2014F 2015F

Revenue 423 220 514 634 730 783

Gross Profit 60 34 218 266 319 345

EBITDA 143 61 182 234 286 314

Depreciation and Amortisation (20) (20) (25) (25) (26) (28)

EBIT 124 40 157 209 260 286

Net Interest Income/(Expenses) 0 (2) (0) 1 14 9

Other Operating Income/Expenses (90) (18) - - - -

Net Profit before Tax 51 21 157 210 274 295

Income Taxes - - - - - -

Net Profit after Tax 51 21 157 210 274 295

Minority Interest - - - - - -

Net Profit 51 21 157 210 274 295

EPS (EGP) 0.1 0.0 0.3 0.4 0.6 0.6

DPS (EGP) 0.10 0.03 0.24 0.32 0.42 0.45

Balance Sheet (EGPm) 2010A 2011E 2012F 2013F 2014F 2015F

Cash and Cash Equivalents 453 433 464 418 425 389

Receivables (net) 7 6 21 26 30 32

Inventory 115 52 97 121 113 120

Total Current Assets 953 699 1,194 1,297 1,395 1,422

Fixed Assets (net) 261 242 223 215 209 203

Projects under Construction 1,313 1,482 1,482 1,482 1,482 1,482

Long-term Investments 0 0 0 0 0 0

Intangible Assets 0 0 0 0 0 0

Total Assets 4,235 4,131 4,607 4,702 4,794 4,814 Short-term Debt and CPLTD 126 126 126 126 126 126

Accounts Payable 18 23 36 45 50 53

Total Current Liabilities 372 272 733 861 963 1,019

Long-term Debt 598 622 496 370 244 119

Total Non-current Liabilities 601 625 499 373 247 121

Shareholders' Equity 3,263 3,234 3,376 3,468 3,584 3,674

Minority Interest 0 0 0 0 0 0

Total Liabs. and Shareholders' Equity 4,235 4,131 4,607 4,702 4,794 4,814

Cash Flow Statement (EGPm) 2010A 2011E 2012F 2013F 2014F 2015F

NOPLAT 124 (8) 157 209 260 286

Non-cash Items 20 20 25 25 26 28

Gross Cash Flow 143 13 182 234 286 314

Change in Operating Working Capital (146) 134 (3) (20) 10 (6)

Operating Cash Flow (2) 147 179 214 296 308

Capital Expenditure (1) (2) (5) (17) (20) (21)

Change in Projects under Construction (130) (169) - - - -

Gross Investment (131) (170) (5) (17) (20) (21)

Free Cash Flow

(133) (23) 173 197 276 287

Key Ratios and Indicators 2010A 2011E 2012F 2013F 2014F 2015F

Profitability Ratios

Revenue Growth (%) (11.5) (48.0) 133.4 23.3 15.2 7.2

EBITDA Growth (%) (4.5) (57.8) 200.3 28.7 22.2 9.8

EPSG (%) (66.4) (59.6) 662.6 33.8 30.5 7.8

Gross Margin (%) 14.2 15.3 42.4 41.9 43.7 44.1

EBITDA Margin (%) 33.9 27.5 35.4 36.9 39.2 40.1

Net Margin (%) 12.0 9.3 30.5 33.1 37.5 37.7

ROAE (%) 1.6 0.6 4.7 6.1 7.8 8.1

ROACE (%) 3.2 1.0 4.1 5.4 6.8 7.5

Valuation Ratios

PE (x) 49.4 71.6 9.7 7.3 5.6 5.2

EV/EBITDA (x) 18.6 27.5 9.4 7.3 6.0 5.5

PB (x) 0.5 0.5 0.5 0.4 0.4 0.4

P/FCF (x) 16.7 nm 8.6 7.6 5.5 5.3

Dividend Payout Ratio (%) 72.0 nm 75.0 75.0 75.0 75.0

Dividend Yield (%) 2.0 1.0 7.7 10.3 13.4 14.5

Liquidity Ratios

Current Ratio (x) 2.6 2.6 1.6 1.5 1.4 1.4

Quick Ratio (x) 2.3 2.4 1.5 1.4 1.3 1.3

Net Debt/Equity (x) 0.0 0.1 0.0 nm nm nm

Net Debt/EBITDA (x) 1.0 3.1 0.2 nm nm nm

Interest Coverage Ratio (x) nm 22.3 327.9 nm nm nm

Cash Conversion Cycle (days) 104.3 68.2 90.7 90.7 70.7 70.7


MISR BENI-SUEF CEMENT

23

Still the most profitable, even after fuel price hike – BUY

We believe 2012 will see a full-year effect of Misr Beni-Suef

Cement Co.’s (MBSC) second production line coming onstream,

which boosted capacity by 100% to 3mtpa. We estimate the

company’s market share will grow to 4.2% (from 4.0% in 2011) and

forecast revenue growth of 9% YoY in 2012, accelerating to 22% in

2013 and driving net profit by 33%. As a natural gas user, MBSC

enjoys a relatively low cost/ton, which translates into it reporting

the highest margins among local peers. Furthermore, we forecast

that following its capacity expansion, MBSC will apply a higher

payout ratio from 2012. We value it on a DCF basis at

EGP69.5/share and initiate with a BUY.

► Full-year impact of 2011 capacity increase. MBSC doubled its

capacity to 3mpta in mid-2011, and we therefore forecast sales

volume to increase by 10% in 2012 (cf. 10% in 2011), which should

also drive MBSC’s market share to 4.2%. To achieve this sales

volume, we expect MBSC to reduce prices by c. 3% to 5% below

market price in 2012. We estimate utilisation of only 67%, as it is

likely that the new capacity will be fully absorbed only by 2015. We

forecast revenue growth of 9% YoY in 2012 to EGP942m and a

CAGR of 19% over 2012-16.

► Exports to remain subdued. Given the fallout from the political

unrest in the MENA region and the economic problems in Europe,

we expect MBSC’s exports to remain weak in 2012. We forecast

exports to account for just 5% of production and export prices to

remain stable at USD50/ton. We see a more convincing recovery in

exports only in 2014.

► Fuel price hike squeezes margins, but GPM high versus peers’.

We estimate that the 33% increase in gas prices from 1 January

2012 will drive MBSC’s production cost/ton 15% higher to

EGP219/ton. As a result, we forecast a 3pps YoY decline in gross

margin to 49% in 2012. With competition intensifying, we also

expect SG&A expenses to rise as a percentage of revenue, which

would lower EBITDA margin to 45%. These margins, however, will

be the highest among both Egyptian and regional peers.

► Surge in earnings growth in 2013. With an expected recovery in

prices and increased sales volumes, we forecast revenue growth to

accelerate to 22% in 2013 and that this, together with much-

improved utilisation, should see MBSC's earnings surge +33% in

2013 (vs. just +7% in 2012).

► Attractive valuation. MBSC trades at a 2013e P/E of 7.1x, i.e. at a

13% discount to the local peers’ average of 8.2x and at a 45%

discount to the regional peers’ average of 12.8x. Its 2013e P/E is

25% below its 10-year historical average. Its dividend yield comes in

at 8%, which, while lower than that of Egyptian peers, is attractive

regionally. On a DCF basis (WACC of 18.7%), we value MBSC at

EGP69.4/share, which implies 33% potential upside from current

levels.

Recommendation BUY





Stock Data

Reuters Code MBSC.CA

Bloomberg Code MBSC EY




Free Float (%) 38

MBSC vs. EGX30 (rebased)



Year to 31 Dec. 2010a 2011a 2012f 2013f 2014f

Revenue (EGP) 749 862 942 1,153 1,456

Revenue (% Δ) (10.4) 15.1 9.3 22.4 26.3

EBITDA (EGP) 477 398 427 533 691

EBITDA (% Δ) 63.7 46.2 45.3 46.2 47.5

EPS (EGP) 7.6 6.4 5.5 7.3 7.9

EPS (% Δ) (22.2) (15.5) (14.3) 33.5 7.2

P/E 7.6 7.5 9.5 7.1 6.6

P/CFPS 13.4 10.9 6.2 4.3 3.7

Yield (%) 6.9 8.2 8.1 10.8 11.6

ROE (%) 20.0 15.6 16.1 20.1 20.1

Net Debt/Equity (x) - - - - -

Int. Cov. (x) nm nm nm nm nm



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MBSC EGX30 Rebased

24



Key positives

► The most profitable among local peers; GPM of 50%

► Doubling capacity should drive market share up to 4.2%

► Increasing free cash flow should lead to higher DPS

► Trades at a 50% discount to regional peers’ average

Downside risks

► Continued political uncertainty or more unrest

► Prolonged slowdown in real estate/construction activities

► More intense competition pressuring selling prices

► An increase in gas prices

Valuation

MBSC trades at a 2013e P/E of 7.6x, i.e. at a 25% and 50%

discount to local and regional peer averages of 9.5x and

12.5x, respectively. Its 2013e P/E comes in 23% below its

10year historical average. Dividend yield, at 8%, while lower

than that of Egyptian peers, is attractive regionally. On a DCF

basis (WACC of 18.7%), we value MBSC at EGP69/share,

which implies 33% potential upside from current levels.





Beta 0.7

Tax rate 25.0%



WACC 18.7%


WA

CC


69 1.0% 1.5% 2.0% 2.5% 3.0%

16.7% 76 77 79 81 82

17.7% 71 73 74 75 77

18.7% 67 68 69 71 72

19.7% 64 65 66 67 68

20.7% 60 61 62 63 64

Key performance indicators 2010a 2011a 2012f 2013f 2014f


Market Share (%) 3.8 4.1 4.2 4.5 5.0

Capacity (mtpa) 1.5 2.3 3.0 3.0 3.0

Sales (mtpa) 1.2 2.0 2.2 2.6 3.1

Revenue 749 862 942 1,153 1,456

Gross Profit 496 450 468 579 750

GPM (%) 66.3 52.2 49.6 50.2 51.5

EBITDA 477 398 427 533 691

EBITDA Margin (%) 63.7 46.2 45.3 46.2 47.5

Net Profit 304 257 275 367 393

EPS (EGP) 7.6 6.4 5.5 7.3 7.9

DPS (EGP) 4.0 4.0 4.2 5.7 6.1


Quarterly results snapshot 1Q11 2Q11 1H11 3Q11 9M11


Revenue 171.1 244.6 415.7 240.3 655.9

Gross Profit 110.8 129.2 240.0 98.0 338.0

GPM (%) 64.8 52.8 57.7 40.8 51.5

EBITDA 100.3 118.2 218.5 78.1 296.6

EBITDA Margin (%) 58.6 48.3 52.6 32.5 45.2

Net Profit 66.5 86.6 153.1 42.6 195.7

EPS (EGP) 1.7 2.2 3.8 1.1 4.9


Company brief

Misr Beni-Suef Company was incorporated in November

1997 to produce cement and associated products. It was

listed on the EGX in August 1999 and began production in

1997 with capacity of 1.5mtpa, which was increased 100% in

2011 to 3mtpa. We estimate that with the new capacity

onstream, MBSC will command a market share of c. 4% of

Egyptian cement sales. The company principally uses natural

gas to fuel its kilns and just a small percentage of mazut, and

is able to alter the mix of gas and mazut depending on

market conditions. All its output is sold to wholesalers.


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National

Investment20.1%

Mohamed

Farouq Moust6.7%

Abbas Baker

Wajdi Ab5.6%

Abbas Magdi

5.5%

Elqasrawi Faeq

Ibrah5.1%

Others

18.9%

Fee Float

38.1%

25


Charts gallery

Figure 41: Capacity vs. production Figure 42: Local sales, market share, and exports

Figure 43: Revenue, EBITDA and, net profit (YoY) Figure 44: Margins



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Gross profit margin EBITDA margin

Net profit margin

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Electricity13%

Others27%

Paking14%

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26


Summary Financials

Income Statement (EGPm) 2010A 2011A 2012E 2013F 2014F 2015F

Revenue 749 862 942 1,153 1,456 1,718

Gross Profit 496 450 467 579 750 883

EBITDA 477 398 427 533 691 814


EBIT 339 246 251 350 497 615

Net Interest Income/(Expenses) 28 11 24 17 21 19

Other Operating Income/Expenses 3 0 0 0 0 0


Income Taxes (67) 0 (1) (1) (124) (154)



Net Profit 304 257 275 367 393 479

EPS (EGP) 7.6 6.4 5.5 7.3 7.9 9.6

DPS (EGP) 4.0 4.0 4.2 5.7 6.1 7.4

Balance Sheet (EGPm) 2010A 2011A 2012E 2013F 2014F 2015F

Cash and Cash Equivalents 332 335 462 728 994 1,272


Inventory 121 169 228 276 290 343

Total Current Assets 511 571 763 1,093 1,397 1,748

Fixed Assets (net) 1,171 1,517 1,388 1,410 1,284 1,166

Projects under Construction 451 150 150 0 0 0





Total Current Liabilities 450 493 494 550 630 701

Long-term Debt 21 36 31 26 21 16





Cash Flow Statement (EGPm) 2010A 2011A 2012E 2013F 2014F 2015F

NOPLAT 339 246 251 350 373 461

Non-cash Items 132 153 175 182 194 199

Gross Cash Flow 472 398 426 532 567 660

Change in Operating Working Capital (152) (19) (64) (8) 42 (2)

Operating cash flow 319 379 362 524 608 658


Change in Projects under Construction (195) (190) 0 0 0 0


Free Cash Flow

124 182 315 470 540 577

Key Ratios and Indicators 2010A 2011A 2012E 2013F 2014F 2015F


Revenue Growth (%) (10.4) 15.1 9.3 22.4 26.3 18.0

EBITDA Growth (%) (4.0) (16.6) 7.1 24.8 29.7 17.8

EPSG (%) (22.2) (15.5) (14.3) 33.5 7.2 21.9

Gross Margin (%) 66.3 52.2 49.6 50.2 51.5 51.4

EBITDA Margin (%) 63.7 46.2 45.3 46.2 47.5 47.4

Net Margin (%) 40.6 29.8 29.2 31.8 27.0 27.9

ROAE (%) 20.0 15.6 16.1 20.1 20.1 22.8

ROACE (%) 21.0 13.9 13.7 18.0 23.9 27.7

Valuation Ratios

PE (x) 7.6 7.5 9.5 7.1 6.6 5.4

EV/EBITDA (x) 4.2 5.4 5.4 4.4 3.4 2.9

PB (x) 1.3 1.2 1.2 1.1 1.0 1.0

P/FCF (x) 13.4 10.9 6.2 4.3 3.7 3.5

Dividend Payout Ratio (%) 33.4 65.8 77.0 77.0 77.0 77.0

Dividend Yield (%) 6.9 8.2 8.1 10.8 11.6 14.2

Liquidity Ratios

Current Ratio (x) 1.1 1.2 1.5 2.0 2.2 2.5

Quick Ratio (x) 0.9 0.8 1.1 1.5 1.8 2.0

Net Debt/Equity (x) nm nm nm nm nm nm

Net Debt/EBITDA (x) nm nm nm nm nm nm

Interest Coverage Ratio (x) nm nm nm nm nm nm



SUEZ CEMENT CO.

27

The big brother – HOLD

Suez Cement Co. (SUCE) is Egypt’s largest, most integrated cement

producer. It reports 12mtpa capacity and a 20% share of the local

market. SUCE is vertically integrated: it owns and operates five

cement plants, a ready-mix company, a hydrated lime plant, and a

cement bag manufacturer, but is still a relatively high-cost

producer. We believe the relocation of its Helwan plant will allow

a full switch to the more efficient dry technology. We expect flat

revenue in 2012, but estimate +13% YoY in 2013. GPM should

improve to c. 35% in 2012 (from 30% in 2011) despite the gas

price hike. We expect a dividend payout ratio of 60% in 2012,

which would yield 9%. Our DCF valuation indicates 23% upside,

and the share look cheap relative to peers, but owing to the lack

of catalysts, the risk of a hike in the price of mazut, and the timing

of the switch to the dry technology being uncertain, we are not

buyers. HOLD.

► Large size affords economies of scale, but it still operates at

high cost. SUCE is Egypt’s largest and most-integrated cement

producer, and owns and operates five cement production facilities,

a ready-mix plant, and a cement bag manufacturer, and has

entered into a JV to produce hydrated lime. The benefits of SUCE’s

large scale and integration are, however, somewhat offset by its

use of older technology (15% of production using wet kilns) and its

heavy reliance on mazut as fuel.

► Recovery forecast for 2013. The fallout from the political unrest

in Egypt and the economic slowdown in Europe caused a drop in

revenue in 2011. Local consumption has since been recovering

slowly, and we forecast flat revenue in 2012 but a return to 13%

growth in 2013, on firmer prices and higher sales volume of 11m

tons in 2013 (vs. 10m tons in 2012). Utilisation should rise to 88%

in 2013, and we estimate full utilisation by 2016. We also forecast

exports to account for just 10% of total sales in 2012 but to

increase to 20% by 2014, when international markets return to

health.

► Steady earnings growth through 2016. 2011 net earnings fell

54% YoY owing to the political unrest in Egypt, declining prices,

and labour strikes. We expect earnings to recover to EGP621m in

2012, +9% YoY, on higher volume and selling prices, before they

decline in 2013 by 11% on the back of a likely hike in mazut prices.

Subsequently, we estimate a 17% CAGR in net profit through 2016

sustained by higher selling prices and the cost reductions SUCE is

planning, primarily in terms of changing operations at its Helwan

plant from the wet to the more efficient dry technology.

► Attractive valuation. SUCE’s 2012e EV/EBITDA of 2.7x is very

cheap relative to that of its peers, at a 54% and 60% discount to

local and regional peers’ averages of 5.9x and 6.7x, respectively.

The company reports the lowest EV/ton at USD46/ton (cf. the local

and regional averages of USD159/ton and USD422/ton,

respectively). The stock also offers a dividend yield of 9%. Our DCF

valuation gives a fair value of EGP25.8/share, which implies 28.2%

upside potential from current price levels.

Recommendation HOLD





Stock Data

Reuters Code SUCE.CA

Bloomberg Code SUCE EY




Free Float (%) 12.7

SUCE vs. EGX30 (rebased)



Year to 31 Dec. 2010a 2011a 2012f 2013f 2014f

Revenue (EGP) 6,152 4,820 4,825 5,443 5,982

Revenue (% Δ) (3.6) (21.6) 0.1 12.8 9.9

EBITDA (EGP) 2,222 1,091 1,254 1,124 1,392

EBITDA (% Δ) 36.1 22.6 26.0 20.6 23.3

EPS (EGP) 6.8 3.1 3.4 3.0 3.8

EPS (% Δ) (4.9) (54.0) 8.5 (12.9) 28.7

P/E 5.6 7.2 6.2 7.1 5.5

P/CFPS 3.0 7.4 6.0 7.8 4.6

Yield (%) 12.9 7.3 9.7 9.2 11.8

ROE (%) 17.3 7.9 8.5 7.1 8.9


Int. Cov. (x) nm nm nm nm nm



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SUCE EGX30 Rebased

28

SUEZ CEMENT GROUP


Key positives

► Egypt’s largest cement producer; market share at 20%

► Converting to 100% dry technology should reduce costs

► Vertical integration enhances value-add

► Trades at a 54% discount to regional peer average

Downside risks

► Exposure to a possible hike in mazut prices

► Delay in full conversion to dry technology

► Prolonged slowdown in real estate/construction activities

► More intense competition pressuring selling prices

Valuation

SUCE’s 2012e EV/EBITDA of 2.6x is very cheap relative to

that of its peers, and the stock trades at a 56% and 61%

discount to the local and regional peer averages of 5.9x and

6.7x, respectively. On a DCF basis (WACC of 19.2%), we

value SUCE at EGP25.8/share, which implies 22.9% upside

potential from current levels.





Beta 0.7

Tax rate 25.0%



WACC 19.2%


WA

CC


69 1.0% 1.5% 2.0% 2.5% 3.0%

17.2% 28 28 29 29 30

18.2% 26 27 27 28 28

19.2% 25 25 26 26 27

20.2% 24 24 24 25 25

21.2% 23 23 23 24 24



Market Share (%) 23.5 20.4 19.0 18.5 19.0

Capacity (mtpa) 12.0 12.0 12.0 12.0 12.0

Sales (mtpa) 11.4 10.4 10.3 11.3 12.4

Revenue 6,152 4,820 4,825 5,443 5,982

Gross Profit 2,537 1,448 1,736 1,614 1,841

GPM (%) 41.2 30.0 36.0 29.6 30.8

EBITDA 2,222 1,091 1,254 1,124 1,392

EBITDA Margin (%) 36.1 22.6 26.0 20.6 23.3

Net Profit 1,236 569 617 538 692

EPS (EGP) 6.8 3.1 3.4 3.0 3.8

DPS (EGP) 4.9 1.7 2.0 1.9 2.5



Figures are in EGPm unless otherwise indicated

Revenue 1,421 1,335 2,756 1,003 3,759

Gross Profit 490 434 923 283 1,206

GPM (%) 34.5 32.5 33.5 28.2 32.1

EBITDA 406 334 739 204 944

EBITDA Margin (%) 28.6 25.0 26.8 20.4 25.1

Net Profit 277 135 412 104 517

EPS (EGP) 1.5 0.7 2.3 0.6 2.8


Company brief Suez Cement Co. is an Egypt-based company engaged, along

with its subsidiaries, in the manufacture and supply of cement

and related building materials. It operates through five

production facilities, and its products include ordinary Portland

cement, Portland limestone cement, Portland slag cement, OPC

superfine, blast furnace cement, sulphate-resistant cement,

white cement, masonry cement, and oil well cement. In

addition, it produces and sells hydrated lime. Its subsidiaries are

Torah Cement (66.12%), Suez Bags Co. (53.03%), Helwan

Cement Co. (99.46%), Ready-Mix Concrete Production Co.

(52%), Ready-Mix Concrete Production Co. (52%), Techno

Gravel for Quarries-Egypt (45%), Hilal Cement Co. Kuwait (51%),

Industrial Development Co. (90%), and Iksim Industrial (90%).


0

20

40

60

80

100

120

140

160



Adj closing price

Menaf sas26.1%

Alliance of Arab Inv

12.6%

Ciments francais12.4%

Ciments Du Marco Cim

11.7%

Others24.6%

Free float 12.7%

29

SUEZ CEMENT GROUP

Charts gallery





0%

20%

40%

60%

80%

100%

120%

0.5

2.5

4.5

6.5

8.5

10.5

12.5

14.5

2009 2010 2011 2012f 2013f 2014f 2015f

mtons

Capacity Clinker production


0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010 2011 2012f 2013f 2014f 2015f

EGPm


-30%

-20%

-10%

0%

10%

20%

30%

2009a 2010a 2011a 2012f 2013f 2014f 2015f


20%

30%

40%

50%

60%

2009a 2010a 2011a 2012f 2013f 2014f 2015f

Gross profit margin (%) EBITDA margin (%)

Net profit margin

Raw materials15%

Fuel35%

Electricity12%

Others25%

Paking13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015

EGP

EPS DPS Dividend Yield (RHS)

30

SUEZ CEMENT GROUP

Summary Financials


Revenue 6,152 4,820 4,825 5,443 5,982 6,362

Gross Profit 2,537 1,448 1,736 1,613 1,841 1,904

EBITDA 2,222 1,091 1,254 1,124 1,392 1,426


EBIT 1,683 661 866 715 970 962


Other Operating Expenses 19 171 - - - -

Net Profit before Tax 1,832 954 950 816 1,063 1,069

Income Taxes (373) (282) (216) (179) (242) (241)

Net Profit after Tax 1,458 672 733 637 821 828

Minority Interest (221) (107) (116) (100) (129) (130)

Net Profit 1,236 569 617 538 692 698

EPS (EGP) 6.8 3.1 3.4 3.0 3.8 3.8

DPS (EGP) 4.9 1.7 2.0 1.9 2.5 2.5


Cash and Cash Equivalents 1,758 1,448 1,692 1,732 2,141 2,368

Receivables (net) 243 247 160 181 198 211

Inventory 952 998 922 1,144 1,135 1,222

Total Current Assets 3,299 2,957 3,046 3,362 3,811 4,158

Fixed Assets (net) 3,521 3,569 3,577 3,602 4,018 4,060



Intangible Assets 2,685 2,685 2,685 2,685 2,685 2,685



Total Current Liabilities 1,805 1,609 1,422 1,573 1,673 1,753

Long-term Debt 34 81 57 32 32 32






NOPLAT 1,273 431 649 536 727 722

Non-cash Items 449 329 388 409 422 464

Gross Cash Flow 1,722 760 1,037 945 1,150 1,186

Change in Operating Working Capital (19) 65 (32) (125) 61 (41)

Operating Cash Flow 1,702 825 1,005 820 1,210 1,145


Change in Projects under Construction (398) (292) 0 0 0 0


Free Cash Flow

1,287 497 607 385 732 636



Revenue Growth (%) (3.6) (21.6) 0.1 12.8 9.9 6.4

EBITDA Growth (%) 2.1 (50.9) 14.9 (10.4) 23.9 2.5

EPSG (%) (4.9) (54.0) 8.5 (12.9) 28.7 0.9

Gross Margin (%) 41.2 30.0 36.0 29.6 30.8 29.9

EBITDA Margin (%) 36.1 22.6 26.0 20.6 23.3 22.4

Net Margin (%) 20.1 11.8 12.8 9.9 11.6 11.0

ROAE (%) 17.3 7.9 8.5 7.1 8.9 8.6

ROACE (%) 21.0 8.1 10.5 8.4 11.0 10.5

Valuation Ratios

PE (x) 5.6 7.2 6.2 7.1 5.5 5.5

EV/EBITDA (x) 2.6 3.0 2.4 2.7 2.2 2.1

PB (x) 0.5 0.5 0.5 0.5 0.5 0.5

P/FCF (x) 3.0 7.4 6.0 7.8 4.6 5.1


Dividend Yield (%) 12.9 7.3 9.7 9.2 11.8 11.9

Liquidity Ratios

Current Ratio (x) 1.8 1.8 2.1 2.1 2.3 2.4

Quick Ratio (x) 1.3 1.2 1.5 1.4 1.6 1.7






MISR CEMENT – QENA

31

The most exposed to higher fuel costs – SELL Misr Cement Co. – Qena (MCQE) has an annual clinker capacity of

1.5m tons. We do not forecast any expansions in the mid-term as

the local market is already oversupplied, but with new players

entering the cement market, we expect MCQE's market share to

decline to 3.7% in 2012 cf. 4.0% in 2011. In 2011, revenue declined

11% YoY to EGP791m, and we expect 2012 revenue at EGP796m.

Margins are also likely to be squeezed in 2013 on an expected rise

in the price of mazut, which in turn could harm EBITDA, and we

estimate net profit to drop 17% YoY following the end of the tax

holiday in 2012. We initiate coverage on MCQE with a SELL and a

TP of EGP61.4.

► Sales to slow in 2012. We forecast a 4% YoY decline in 2012 sales

volume following weak demand and a squeeze in market share

given the increased number of players in the local market. We also

estimate relaxed revenue and lower utilisation rates, we expect a

recovery in global demand starting 2013 and therefore forecast

export sales to account for 13% and 16% of total sales in 2013 and

2014 respectively and raise revenue by 11% and 5% in 2013 and

2014, respectively. (MCQE's overseas sales, before the export ban,

accounted for 33% of total sales in 2007 and 21% in 2008.)

► Margins being squeezed. Although MCQE uses only mazut (which

remains subsidised) in its production process, its GPM dropped to

47% in 2011 vs. 56% in 2010, mainly on the back of a decline in

sales volume and prices. A further squeeze is likely in 2012, to 38%,

following the 20% hike in electricity prices and the increase in clay

fees by c. EGP20/ton. We expect a rise of c. 30% in mazut prices in

2013, which should drag GPM down 1pps to c. 37% and EBITDA

margin to 34% (vs. 43% in 2011). We also forecast a further 13%

increase in mazut prices in 2015 in tandem with an increase in gas

prices.

► Net profit growth trending down. An increase in energy prices,

higher SG&A, and the tax holiday ending in 2012 should result in

declining in net profit over the next four years. We estimate 2012

net profit at EGP268m, -15% YoY, and a further decline of 16% YoY

in 2013 after the tax holiday ends in December 2012.

► MCQE offers the highest dividend yield (DY). MCQE has been

paying a regular annual cash dividend since 2003. Its historical DY

averaged 12% over the past five years (2007-2011), and 2011

reported the highest yield at 16% – both coming in much higher

than the 7% average reported by its MENA region peers.

Meanwhile, the company has not disclosed any expansion plans,

and we therefore assume a dividend payout ratio of 100% for 2012,

which yields 11% on the current market price.

Recommendation SELL



Downside Potential (%) -28.0


Stock Data

Reuters Code MCQE.CA

Bloomberg Code MCQE EY




Free Float (%) 12.7

MCQE vs. EGX30 (rebased)



Year to 31 Dec. 2010a 2011a 2012f 2013f 2014f

Revenue (EGP) 888 791 796 886 929

Revenue (% Δ) 5.2 (11.0) 0.7 11.3 4.8

EBITDA (EGP) 468 344 281 301 327

EBITDA (% Δ) 52.6 43.5 35.3 34.0 35.2

EPS (EGP) 14.3 10.6 9.0 7.5 8.4

EPS (% Δ) 21.6 (26.2) (15.3) (15.9) 12.1

P/E 7.0 8.5 9.5 11.3 10.1

P/CFPS 7.8 8.1 8.0 9.6 9.0

Yield (%) 15.9 15.7 10.5 8.8 9.9

ROE (%) 40.5 36.2 38.7 31.7 35.9


Int. Cov. (x) nm nm nm nm n



70

80

90

100

110

120

May-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

May-1

2

Price (EGP)

MCQE EGX30 Rebased

32

MISR CEMENT QENA


Key positives

► MCQE enjoys the highest dividend yield among local

and regional peers

► Reports a higher utilisation rate (113% on average) than

peers (2008-2011)

► Trades at a 17% discount to regional peers' EV/EBITDA

average

Downside risks

► Continued political uncertainty or more unrest

► A prolonged slowdown in real estate/construction

activities

► A higher-than-expected increase in mazut prices

Valuation

MCQE's FY13 EV/EBITDA multiple is at a 36% premium to

that of its local peers of 5.5x. However, it is 16% below the

regional peers’ average of 8.9x. On a DCF basis (WACC of

18.5%), we value MCQE at EGP61.4/share, which implies 28%

downside potential from current levels.





Beta 0.6

Tax rate 25.0%



WACC 18.5%


WA

CC


69 1.0% 1.5% 2.0% 2.5% 3.0%

16.5% 66 67 68 69 70

17.5% 63 64 64 65 66

18.5% 60 61 61 62 63

19.5% 57 58 59 59 60

20.5% 55 56 56 57 58



Market Share (%) 4.1 4.0 3.3 3.2 3.1

Capacity (mtpa) 1.5 1.5 1.5 1.5 1.5

Sales (mtpa) 2.0 1.9 1.8 2.0 2.0

Revenue 888.4 790.9 796.1 886.4 928.7

Gross Profit 496.8 369.7 306.2 329.5 356.8

GPM (%) 55.9 46.8 38.5 37.2 38.4

EBITDA 467.5 344.0 280.7 301.1 327.1

EBITDA Margin (%) 52.6 43.5 35.3 34.0 35.2

Net Profit 428.3 316.0 267.5 225.1 252.4

EPS (EGP) 14.3 10.6 9.0 7.5 8.4

DPS (EGP) 16.0 14.0 9.0 7.5 8.4



Figures are in EGPm unless otherwise indicated

Revenue 196.1 214.8 410.9 186.8 597.7

Gross Profit 100.9 108.7 209.6 88.0 297.6

GPM (%) 51.4 50.6 51.0 47.1 49.8

EBITDA 96.4 99.4 195.8 82.1 277.9

EBITDA Margin (%) 49.2 46.3 47.7 44.0 46.5

Net Profit 102.5 92.1 194.6 69.1 263.7

EPS (EGP) 3.4 3.1 6.5 2.3 8.8


Company brief Misr Cement Company – Qena (MCQE) is an Egypt-based

company that was established in 1997. Its activities include

the production and distribution of different types of cement

and cement-related products and construction materials,

and it deals in all types of construction supplies and

equipment. On 17 June 1999, MCQE concluded a contract

with FLSmidth & Co. A/S, one of the largest companies in

the field of industrialisation and cement line supply. MCQE

has also entered into a technical cooperation agreement

with Arab Swiss Engineering Co. (ASEC) for Technical and

Operational Management.


0

50

100

150

200

250

300



Adj closing price

Menaf sas26.1%

Alliance of Arab Inv

12.6%

Ciments francais

12.4%

Ciments Du Marco Cim

11.7%

Others24.6%

Free float 12.7%

33

MISR CEMENT QENA

Charts gallery





105%

110%

115%

120%

125%

0.5

1.0

1.5

2.0

2.5

2009 2010 2011 2012f 2013f 2014f 2015f

mtons

Capacity Clinker production


0%

1%

2%

3%

4%

5%

0

200

400

600

800

1,000

2009 2010 2011 2012f 2013f 2014f 2015f

EGPm


-60%

-40%

-20%

0%

20%

40%

2009 2010 2011 2012f 2013f 2014f 2015f


0%

10%

20%

30%

40%

50%

2009 2010 2011 2012f 2013f 2014f 2015f

Gross profit margin EBITDA margin

Net profit margin

Raw materials22%

Fuel32%

Electricity11.7%

Others23%

Paking11.4%

0%

2%

4%

6%

8%

10%

12%

14%

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013

EGPm

EPS DPS Dividend yield (RHS)

34

MISR CEMENT QENA

Summary Financials


Revenue 888 791 796 886 929 967

Gross Profit 497 370 306 329 357 323

EBITDA 468 344 281 301 327 292


EBIT 389 294 238 260 288 253


Other Operating Income/Expenses 14 6 10 4 5 5


Income Taxes (7) (2) (2) (65) (72) (63)



Net Profit 428 316 268 225 252 228

EPS (EGP) 14.3 10.6 9.0 7.5 8.4 7.6

DPS (EGP) 16.0 14.0 9.0 7.5 8.4 7.6


Cash and Cash Equivalents 674 292 433 436 497 503


Inventory 47 50 70 76 78 88

Total Current Assets 745 422 524 536 601 618

Fixed Assets (net) 507 469 430 394 360 326




Total Assets 1,404 986 1,050 1,026 1,057 1,040 Short-term Debt and CPLTD 0 0 0 0 0 0


Total Current Liabilities 251 281 265 283 286 293

Long-term Debt 0 0 0 0 0 0


Shareholders' Equity 1,097 651 731 689 716 692


Total Liabs. and Shareholders' Equity 1,404 986 1,050 1,026 1,057 1,040


NOPLAT 382 290 236 195 216 190

Non-cash Items 74 50 43 41 39 39

Gross Cash Flow 456 340 279 236 255 229

Change in Operating Working Capital 56 (15) 22 9 0 (4)

Operating Cash Flow 512 326 301 246 255 225


Change in Projects under Construction 0 0 0 0 0 0


Operating Free Cash Flow

509 322 296 241 250 220



Revenue Growth (%) 5.2 (11.0) 0.7 11.3 4.8 4.1

EBITDA Growth (%) 4.3 (26.4) (18.4) 7.3 8.6 (10.6)

EPSG (%) 21.6 (26.2) (15.3) (15.9) 12.1 (9.5)

Gross Margin (%) 55.9 46.8 38.5 37.2 38.4 33.4

EBITDA Margin (%) 52.6 43.5 35.3 34.0 35.2 30.2

Net Margin (%) 48.2 40.0 33.6 25.4 27.2 23.6

ROAE (%) 40.5 36.2 38.7 31.7 35.9 32.4

ROACE (%) 35.0 31.6 31.9 34.0 38.1 33.4

Valuation Ratios

PE (x) 7.0 8.5 9.5 11.3 10.1 11.2

EV/EBITDA (x) 5.0 6.9 8.0 7.5 6.9 7.7

PB (x) 2.3 3.9 3.5 3.7 3.6 3.7

P/FCF (x) 7.8 8.1 8.0 9.6 9.0 10.0


Dividend Yield (%) 15.9 15.7 10.5 8.8 9.9 9.0

Liquidity Ratios

Current Ratio (x) 3.0 1.5 2.0 1.9 2.1 2.1

Quick Ratio (x) 2.8 1.3 1.7 1.6 1.8 1.8





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This report is based on publicly available information. It is not intended as an offer to buy or sell, nor is it a solicitation of an offer to buy or sell

the securities mentioned. The information and opinions in this report were prepared by the NAEEM Research Department (“NAEEM”) from

sources it believed to be reliable at the time of publication. NAEEM accepts no liability or legal responsibility for losses or damages incurred from

the use of this publication or its contents. NAEEM has the right to change opinions expressed in this report without prior notice.

This research report (including all appendices) contains information that is intended to be conveyed only to the intended recipients, which insofar

as the United Sates is concerned, are “major U.S. institutional investors” (i.e., U.S. institutional investors having total assets under management in

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NAEEM immediately, and promptly destroy this research report without retaining any portion in any manner. The unauthorized use,

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Analyst Certification

The primary research analyst/analysts covering the company (or companies) mentioned in this report certify that their views about the company

(or companies) and their securities are accurately expressed. Further, no part of their compensation, whether pecuniary or in-kind, was, is, or will

be, directly or indirectly related to the recommendations or views expressed in this research report. Unless otherwise stated, individuals listed on

the front cover/page of the report are the research analysts.

Stock Ratings

NAAEM believes that an investor’s decision to buy or sell a stock should depend on individual circumstances (including, but not limited to the

investor’s existing holdings and financial standing) and other considerations. Different securities firms use a range of rating terms and rating

systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each report. In addition, since

NAEEM’s research reports contain complete information about the analyst’s views, investors should read NAEEM reports in their entirety, and not

infer the contents from the ratings alone. Ratings (and/or research) should not be relied upon as an investment advice.

NAEEM assigns ratings to stocks on the following basis:

Rating Upside/Downside potential 3 May 2012ting distribution as of Ra

BUY >20% 55%

ACCUMULATE >10% to 20% 13%

HOLD +10% to -10% 29%

REDUCE <-10% to -20% 0%

SELL < -20% 3%

Research Contacts

Mike Millar, CA Regional Head of Research +202 3300 5321 [email protected]

May El Haggar Deputy Head of Research +202 3300 5322 [email protected]

Hisham Halaldeen Sales Research +202 3300 5323 [email protected]

Sales and Trading Contacts

Sherine Ezzat Regional Director,

MENA Trading, Foreign Markets & GDRs +202 3300 5401 [email protected]

Teymour El Derini Director of MENA Sales & Trading +202 3300 5402 [email protected]

Tarek Abaza Head of Trading Desk - Egypt +202 3300 5416 [email protected]

mailto:[email protected]






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