Egypt cement-sector-072009

Global Research

July 2009

Sector

Egypt Cement SectorEgyp

t

Against All Odds...

Global Investment House KSCCGlobal Tower,P.O. Box 28807 Safat13149 KuwaitTel: (965) 22951000Fax: (965) 22951299Email: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

Faisal Hasan, CFAHead of [email protected] No:(965) 22951270

Mahmoud SoheimManager-Egypt [email protected] No: (202) 37609526

Ahmed Abu Hussein, CFAFinancial [email protected] No: (202) 37609526

Radwa WeshahyFinancial [email protected] No: (202) 37609526

Table of Contents

Investment Summary 1

Global Cement Industry 5

MENA Cement Industry 14

Egypt Cement Industry 28

Valuation and Recommendation 60

Players Profile 63

Sinai Cement Company 64

Misr Cement Qena 81

Misr Beni Suef Cement 98

Global Research - Egypt Global Investment House

�Egypt Cement SectorJuly 2009

Investment Summary

The structure of the world cement industry has become more globalized with a small number of multinational companies dominating the world cement manufacturing capacities. Moreover, the interaction between the cement market’s supply and demand forces on the national , regional and international arena, created a new world order.

The world cement industry experienced a period of rapid growth during the past decade, where the world aggregate cement consumption increased at a CAGR of 7.3% over the period from 2003-2008. The robust growth in the cement industry came on the back of strong global economic performance, which was mainly attributable to the vigorous economic activity and developments in emerging markets, growing at a CAGR of 7.5% over the same period.

The cement industry situation has changed considerably after the global financial crisis, where the added cement capacities during the past couple of years and the announcement of multiple new capacities coming on-stream in the next 4 years, mainly in emerging markets, coupled with the expected slow-down in the construction sector will create an inevitable oversupply situation in the global cement markets.

The world map of cement has changed dramatically over the past 60 years, where the center of gravity has been moving steadily away from the west toward the East or developing economies. North America and Europe (developed market) share in world cement consumption has been declining from around 80% in the 50’s to around 20% recently. This trend is attributable to developing countries’ large population growth, as well as the continuous construction development plans, including large scale infrastructure and real estate projects and cheap labor and raw materials.

On the regional level, the MENA region’s cement industry has been expanding remarkably over the past five years, on the back of the high activity witnessed in the construction sector to undertake large scale real estate and infrastructure developments, including housing, tourism, industrial and public projects. MENA region cement consumption has been expanding at a CAGR of 9.6%, reaching 258.7mn ton in 2008, whereas cement production reached 255.6mn ton in 2008, achieving a CAGR of 7.6% over the same period.

The MENA region cement production capacity in 2008 is estimated at around 376mn ton, which is forecasted to increase by 40.5%, reaching around 529mn ton in 2012, according to the announced expansion plans. Arab Countries cement annual production capacity stood at 222mn ton, representing 59% of the MENA region’s cement annual production capacity. Arab Countries cement annual production capacity is expected to increase by 99mn ton over the next 4 years, reaching 321mn ton.

These huge cement capacities addition in the MENA region coming on stream over the next years, unluckily coincided with the global economic slowdown and a declining activity in the construction sector. This situation is expected to create an over-supply in the regional cement market and trigger price wars, in addition to possible delays in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates.


2 Egypt Cement Sector July 2009

Therefore, we believe that countries with low cash cost of production per ton will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices.

With respect to the local market, the Egyptian cement industry has been growing vigorously over the past 5 years, on the back of the high activity experienced in the construction and real estate sectors. Egypt’s cement consumption has been growing at a CAGR of approximately 6% over the past 40 years. Despite the declining global demand, resulting from the global financial crisis, cement demand in Egypt continued its robust growth fueled by lower steel prices, which triggered higher construction activity.

The Egyptian grey cement sector consists of 13 cement manufacturing companies, of which 9 companies are controlled by 6 multinational companies. At the end of 2008, Egypt’s cement production capacity reached 43.3mn tons, compared to 41.8mn ton in 2007, recording a growth rate of 3.9%. Egypt cement production capacity is expected to add around 18.5mn tons between 2009 and 2011, growing at a CAGR of 12.6% over the next 3 years. Accordingly, Egypt cement production capacity will come very close to 62mn ton.

The government intervention in the cement industry through increasing energy prices for energy intensive industries, including cement, harmed the competitive edge of the Egyptian cement sector, for its relatively low cost of production. In addition, banning cement exports could jeopardize the position of the Egyptian cement in export markets, yet we believe the negative effect will be marginal, as Europe, which represents Egypt’s main export market, is witnessing a severe decline in demand.

Finally, we believe that Egypt’s cement sector outlook is positive, on the back of the continuing activity in the construction sector. The growth in the construction sector is expected to be driven by the government plan to boost investments in infrastructure projects, as well as low income housing and industrial development projects, in addition to the improvement of under developed areas in Egypt. Furthermore, the private sector investments in the residential, commercial and hospitality real estate segments are expected to support the construction sector, as well.

Table 01: “Global” Valuation Matrix

Company Name

Price

(LE)

Target

Price

(LE) Reco.

Upside

potential

BVPS*

(LE)

EPS*

(LE)

PBV^

(x)

PE^

(x)

Sinai Cement 71.98 107.3 Buy 49.0% 23.77 9.20 1.51 7.83

Misr Cement Qena 78.00 91.3 Buy 17.1% 22.62 11.38 3.46 6.86

Misr Beni Suef Cement 88.49 162.8 Buy 83.9% 42.60 19.29 2.08 4.59 * 2009 projected EPS & BV ^ Multiples are based on projected EPS, BVPS & last market prices as of June 30th, 2009.Source: Global Research


July 2009 Egypt Cement Sector �

Introduction

The world cement industry experienced a period of rapid growth during the past decade, where the world aggregate cement consumption increased at a CAGR of 7.3% over the period from 2003-2008. The robust growth in the cement industry came on the back of strong global economic performance, which was mainly attributable to the vigorous economic activity and developments in emerging markets, growing at a CAGR of 7.5% over the same period.

The global front has changed dramatically since mid 2008, as the US economy went into recession. A liquidity squeeze appeared in the horizon, on the back of defaulting sub-prime mortgage borrowers, due to easy credit granted to home buyers with a low credit-worthiness.

In mid-September, the situation deteriorated rapidly all over the world, where a series of defaults in many financial institutions occurred simultaneously, leading to the world’s worst financial crisis. Huge stocks sell-off wave hit the world’s markets triggered by investors’ panic, leading to tremendous losses on the global stock exchanges. Although the world governments’ efforts to curb the downward trend to avoid recession, through adopting expansionary policies, including lowering interest rates and injecting money in the world economy, the global financial crisis still persists to date.

The global concurrent economic slow-down will negatively affect consumer demand, which in turn will drag the growth of the entire sectors of the world economy. The construction sector, which drives demand on building materials, will not be different and will be adversely affected by the slowing world economy. In addition, tight credit conditions will act as an obstacle to real estate developers in the implementation of their planned projects on all fronts, leading to delay or cancellation of these projects. Consequently, the double effect of a slower world economy and dry credit markets will negatively affect demand on building materials, including cement.

The cement industry situation has changed considerably after the global financial crisis, where the added cement capacities during the past couple of years and the announcement of multiple new capacities coming on-stream in the next 4 years, mainly in emerging markets, coupled with the expected slow-down in the construction sector will create an inevitable oversupply situation in the global cement markets.

Consequently, this will lead to delay in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates. However, there is some good news represented in lower oil and natural gas prices, resulting from reduced oil demand, which will have the effect of lowering the cement production cost.

Cement demand growth in developed markets, Western Europe and North America, is expected to decelerate. Whereas, emerging markets cement demand growth is forecasted to remain positive, although at a slower pace than previously projected before the global financial crisis.


� Egypt Cement Sector July 2009

Therefore, the majority of the new capacities additions are directed to emerging economies, which are still under-developed and needs a lot of spending on infrastructure projects, in addition to emerging markets comparative advantage in terms of cost differential, where labor and energy cost are cheaper and CO2 emission restrictions are lower than in the developed economies. This will somehow alleviate the pressure on the construction sector, resulting from the slow-down in the housing sector and mitigate the negative effect on the growth of the global cement consumption created by developed countries.

Given the new set of circumstances, a new competitive environment will emerge, where countries with lower cash cost of production will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices.

The purpose of this report is to assess the position of Egyptian cement industry within the context of the global and regional cement industry. We will apply a top-down approach by exploring the cement market dynamics in each respective market.



Global Cement Industry

The structure of the world cement industry has become more globalized with a small number of multinational companies dominating the world cement manufacturing capacities. Moreover, the interaction between the cement market’s supply and demand forces on the national, regional and international arena, created a new world order.

The cement consumption is cyclical and closely related to the construction industry business cycle, which in turn is largely determined by the overall macro economic growth. However, cement is to some extent protected from extreme cycles in the construction industry, because it is almost used in every type of construction. That is why the cement demand as a building material is the last to be influenced during economic recessions and the first to benefit from an economic recovery.

The cement consumption is seasonal throughout the year, where consumption decline in the winter season due to bad weather conditions. Furthermore, the demand on cement is inelastic in nature, as a decrease in cement prices will not significantly boost consumption during a down cycle in the construction sector, as well as an increase in cement prices will not materially reduce demand throughout a high construction activity period.

The cement industry has some distinctive characteristics. It is a capital intensive industry, where the typical investment cost of a green field plant with an annual capacity of 1mn ton is estimated to be in the range of USD150-200mn. In addition, the cement industry is an energy intensive industry, where the production of one ton of cement requires around 60-130kg of fuel oil or its equivalent, depending on the cement type and the production process, and about 105kwh of electricity.

The cement industry is closely related to the population, this relationship is intuitive because the ultimate purpose of any building and construction development activity is to serve people, whether in the form of housing, commercial, industrial, service or infrastructure developments. The supply curve of cement kept shifting upward in close relation to population, exhibiting a 95.8% correlation between cement production and population.

Chart 01: World Cement production against world population

Source: USGS, U.S Census Bureau & Global research

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Supply and Demand Analysis

The world cement industry witnessed a stage of rapid growth over the period from 2002-2007, resulting generally from good economic performance in world economies. The world GDP growth achieved a CAGR of 4.6% over the same period and a growth rate of 5.2% in 2007. This growth in the world economy came mainly on the back of strong economic performance in emerging economies, which were able to achieve high economic growth rate during the period from 2002 to 2007, growing at a CAGR of 7.4%, compared to 2.7% in developed economies.

Chart 02: Real GDP growth rates

Source: IMF & Global research

Much of the growth in developing countries is attributable to intensive spending in the field of social development and construction activities, especially in the Middle East and Asian economies. Consequently, global cement consumption has been growing vigorously over the past 5 years at a CAGR of 8.7%, reaching 2.76bn tons in 2007 up from 2.57bn tons consumed in 2006. On the other hand, world cement production responded to this increasing consumption by growing robustly at a CAGR of 8.5% over the same period, where cement production reached 2.76bn ton in 2007, compared to 2.57bn tons in 2006.

Chart 03: World cement production and consumption

Source: Cembureau, ICR, USGS & Global research

By far China is the world’s largest cement producer and consumer, accounting for about 50% of the world’s aggregate supply and demand. China’s large population of 1.3bn people, besides the massive numbers of infrastructure projects and continuing urbanization are the driving forces behind its tremendous cement consumption and production quantities. The

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second largest producer and consumer of cement is India with a population of 1.1bn people and substantial housing and infrastructure development projects.

Chart 04: World cement 2008 by regionProduction Consumption

Source: Cembureau, ICR & Global research

The world map of cement has changed dramatically over the past 60 years, where the center of gravity has been moving steadily away from the west toward the East or developing economies. North America and Europe (developed market) share in world cement consumption has been declining from around 80% in the 50’s to around 20% recently. This trend is attributable to developing countries’ large population growth, as well as the continuous construction development plans, including large scale infrastructure and real estate projects and cheap labor and raw materials.

Chart 05: Growth in World cement consumption in developed vs. developing countries

Source: Cembureau, ICR, USGS & Global research

The world has changed dramatically after the emergence of the financial crisis in the United States and its rapid spillover effect all over the world. Deteriorating credit markets and tight credit conditions prevailing around the globe, as well as slower economic growth will act as major drags on the construction and building materials sectors, in terms of lower demand and hard project financing.

The strong performance of the world cement industry over the past half decade is believed to come to an end, as the world cement consumption increased by 3.4% in 2008, compared to 7.6% in 2007, whereas the world cement production achieved a growth rate of 2.1% in 2008 against 7.4% in 2007. Therefore, we believe that the world cement industry already started its down cycle, which is expected to prevail at least during the coming year, if not longer.

China,49.1%

Others, 5.2%

Asia Pacific, 18.3%

Europe, 9.5%

Americas, 9.0%

MENA, 8.9%

Others, 5.8%

Asia Pacific, 18.4%

Europe, 9.0%

Americas, 9.1%

MENA, 9.1%

China,48.7%

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World Developed Countries Developing Countries



The decline in world cement consumption was mainly attributable to developed economies’ weak demand, which is estimated to be decreased by around 9.6% in 2008, compared to a decline of 1.7% in 2007. Although, cement demand in developing economies is estimated to decrease too, it is still on the positive side, growing by a moderate 5.9% in 2008, against a 9.6% in 2007. The continuing construction spending in emerging economies will offset the negative cement demand growth witnessed in developed countries.

Chart 06: World expected cement demand by region

Source: Global research

Moreover, an examination of how the growth in cement production evolved historically over the past 60 years can provide us with some insight on where the global cement industry is heading. As indicated in chart 07, we plotted the growth in cement production for different time periods for years 2007 and 2008. We found that the trend line for 2008 different periods CAGR shows a flatter slope than the trend line for 2007, which supports our previous argument that the cement industry entered a period of slowdown.

The cement industry production achieved a growth rate of 7.4% over 2007, compared to 2.1% in 2008, which is even lower than cement production long term growth. Therefore, we believe that the cement industry will grow at its long term average growth rate in the range of 4.5 to 5% over the short term, before rebounding again when the world economy starts to recover.

Chart 07: World cement production CAGR for different periods

Source: USGS & Global research

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July 2009 Egypt Cement Sector 9

Cement Pricing

The world average cement prices have been growing at a CAGR of 5% over the past 4 years, reaching an average of US$105-110/ton in 2008, compared to US$85-90/ton in 2004. This robust growth in cement prices came mainly on the back of the rapid growth in cement demand, especially from emerging markets as we explained earlier, in addition to the rising international energy prices, particularly the prices of steam coal and petcoke, which represent the main energy source in the cement industry.

Chart 08: Australia -New Castle Steam Coal FOB price

Source: World Bank & Global Research

The production cost of cement varies significantly from one country to another, depending on the availability and cost of energy, raw materials and labor. As long as energy cost is the largest contributor to the cement’s production cost, cement producers in countries with lower cost of energy will have a competitive advantage over their counterparts. In addition, environmental regulations and carbon dioxide (CO2) restrictions in some countries will add an incremental cost to the overall production cost. As an example for these restrictions, Europe’s current CO2 price is EUR25 per ton of clinker produced.

On average, energy cost represents around 30% of the cement total production cost. Keeping all other things constant, a rise in energy cost will be translated into higher production cost, causing cement manufacturers to increase their selling prices in order to maintain their target profit margins. The extent to which the cement prices will respond to an increase in energy cost will depend primarily on the prevailing conditions in the construction market, which directly affects demand for cement.

Capacities Additions

The world new cement capacity additions experienced a period of significant growth to cope with the increasing cement consumption. This trend is evidenced by the large increase in the contracted cement kiln capacities, achieving a CAGR of 33.5% for the period 2003-2008. Given the annual contracted new cement kiln capacities globally excluding China, as indicated in chart 09, and the fact that a time period of 2-3 years is needed between the contract award and the commissioning of production, we can forecast that around an additional 400mn ton of cement capacities will come on stream outside China during the next 3 years.

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�0 Egypt Cement Sector July 2009

Chart 09: New Global contracted cement kiln capacities (excluding China)

Source: FLSmidth & Global Research

However, new cement capacities annual order book declined in 2007 and 2008 by 10.7% and 1.6%, respectively, reflecting cement producers concern regarding the coming 2-3 years outlook of the world cement consumption. This implies that the growth in cement consumption during near future is expected to grow at a slower pace compared to the previous robust 5 years.

An analysis of the distribution of the annual contracted order book among different regions shows that around 90% of the contracted new capacity additions were originated from developing countries, especially from MENA region and India, against only 10% in developed markets.

The shift in cement manufacturing toward the Eastern hemisphere was mainly driven by tight supply conditions and escalating demand environment, on the back of increasing population and continuous development of immature housing and infrastructure projects, which remain a fundamental driver for growth. The supply/demand imbalance in emerging markets enabled cement producers to command higher prices and enjoy higher profitability, which created surplus funds available for investment and further capacity expansions.

Furthermore, emerging markets have a competitive advantage with respect to production cost and price differential, which is considered another reason encouraging cement producers to shift east. Access to cheap labor and energy cost, as well as relaxed environmental regulations were two main factors contributing to the lower production cost in emerging markets. In addition, high cement prices in developed markets compared to emerging markets, with the exception of Africa due to limited supply and dependence on imports, created the basis for exports to developed markets at competitive prices.

Moreover, Chinese equipment manufactures provide cement plant projects at lower cost. The Chinese Sinoma Company is able to provide turnkey projects at approximately 30% less than European suppliers. Therefore, the return on invested capital for cement producers employing the Chinese technology for a typical 1.5mn ton cement plant reaches 16%, compared to 10% for an identical plant build by any European supplier. It is worth mentioning that Sinoma had a market share of 34% in 2008, taking the lead for the first time from FLSmidth.

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July 2009 Egypt Cement Sector ��

Chart 10: Cement plants equipment suppliers market share 2008

Source: FLSmidth & Global Research

The emergence of the financial crisis and its negative consequences on the construction sector, especially in the developed markets, resulted in capacity reduction and projects delay, as well as exacerbating the move of the new cement capacities to the emerging markets. In Developed markets, companies will focus on vertical integration into ready-mix concrete and aggregates, as a strategy to protect their market share and profitability.

Lafarge, the world largest cement producer, modified its 2006-2010 initial global capacity expansion plan down from 60mn ton to 48mn ton and extended the plan time horizon by 1 year to end in 2011. In addition, Lafarge re-allocated the planned 10% capacity expansion in developed countries in its initial plan, to become 100% directed toward emerging markets.

In addition, major multinational players are expected to abandon merger and acquisition activity during 2009, as they will focus mainly on cash flow generation and achieving a sound liquidity position through cost optimization, applying a conservative investment approach and keeping low leverage. However, cement manufacturers emerging from developing countries are serious competitors to the traditional industry leaders. These emerging market players are gaining momentum and increasing control over the cement industry, on the back of high profitability making them cash rich companies eager for growth and willing to diversify abroad.

A new competitive environment will emerge in the global cement industry, where countries with lower cash cost of production will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices.

Trade

Generally, cement is not an export oriented product because it is a heavy and low value product. Therefore, cement transportation cost is considered an important factor in determining its import/export destinations world-wide. Consequently, the world total cement trade represented only 6-8% of the world total consumption over the period from 1999 to 2008.

Polysius (Germany), 14%

KHD (Germany), 7%

Others, 13%FLSmidth (Denmark), 32%

Sinoma (China), 34%



Chart 11: Cement world trade

Source: Ocean Shipping Consultants, Clarkson, ICR & Global Research

The United States of America is the largest importer of cement in the world. However, the volume of cement imports to the United States has been significantly slashed by 33.2% and 42.8% in 2007 and 2008, respectively. This decline resulted from the construction sector slow down, which mainly came on the back of weakness in the housing segment. On the other hand, China is the world’s largest cement exporting country, thanks to its huge capacities, which produce around 50% of the world cement production, and its competitive cement selling prices of approximately US$55/ton.

Cement Seaborne Shipping is much more economically than inland shipping, allowing cement to travel very long distance at lower cost. Therefore, seaborne shipping has the lion’s share in global cement trading, where around 80% of total cement trading is shipped by sea. However, seaborne cement trading accounted for a small percentage of the world dry bulk shipments amounting to 4.5% of in 2007 and it is estimated to be 4.2% in 2008.

Chart 12: World dry bulk shipments

Source: Clarkson & Global Research

The bulk carrier freight rates, which are determined by factors outside the cement sector, including fleet supply, seasonal factors and bunker price (carrier fuel), can change the cost competitiveness of one country compared to others in global markets.

The international seaborne dry bulk freight rates, as measured by Baltic Dry Index (BDI), which provide an assessment of the price of moving the major raw materials by sea, has witnessed a dramatic drop by around 93% since late May 2008 till the end of December 2008, back to its 2005 levels. However, the index started to recover some of its losses since early 2009.

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Iron ore, 25.9%

Coal, 26.1%

2007

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Others, 14.9%

Phosphate rock, 1.1%

Grains, 10.0%

Bauxite/ Alumina, 2.8%

Cement, 4.5%

Forest Products, 5.8%

Steel products, 8.9%

Grains, 9.9%

Bauxite/ Alumina, 2.7%

Cement, 4.2%

Forest Products, 5.6%

Iron ore, 27.2%

Coal, 25.7%

Others, 14.8%

Phosphate rock, 1.0%

2008E



Chart 13: Baltic Dry Index

Source: Bloomberg & Global Research

The current financial turmoil along with the global economic slow-down, especially in developed economies, will result in reduction in the global cement consumption growth. Therefore, the volume of global cement trading is expected to be negatively affected, as most of the cement volumes are forecasted to be produced and consumed locally, whereas cement trading will be mainly concentrated in the Eastern hemisphere, where demand still exists.

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�� Egypt Cement Sector July 2009

MENA Cement Industry

For the purpose of the report, the Middle East and North Africa (MENA) region is represented by 20 countries, including 18 Arab countries and 2 non-Arab countries, as follows:

- Gulf Co-operation Council (GCC) Countries; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE).

- The Arab Peninsula; Iraq, Yemen and the GCC region.

- The Levant; Jordan, Lebanon, Syria and Palestine.

- North Africa; Algeria, Egypt, Libya, Morocco, Sudan and Tunis.

- Non-Arab Countries; Iran and Turkey. They are added to the MENA region because they are considered major cement producers.

Table 02: MENA economic indicators 2008e

CountryGDP

growthPopulation

(mn.)GDP per

capita (US$)

Inflation rate (End ofperiod)

Ara

b C

ount

ries

Ara

b P

enin

sula

GC

C r

egio

n

Bahrain 6.3 0.78 25,245 10.5

Kuwait 5.9 3.44 46,397 9.0

Oman 7.4 2.60 21,704 10.0

Qatar 16.8 1.10 106,460 15.0

Saudi Arabia 5.9 24.90 21,221 11.5

United Arab Emirates 7.0 4.76 56,667 12.9

Iraq 9.8 28.22 3,324 6.8

Yemen 3.5 22.98 1,199 15.9

The

Lev

ant Jordan 6.0 5.85 3,267 16.1

Lebanon 6.0 3.80 7,376 8.7

Syria 4.2 19.88 2,238 8.0

Palestine 0.8 2.41 2,758 11.5

Nor

th A

fric

a

Algeria 4.9 34.80 4,922 4.2

Egypt 7.2 75.05 2,109 20.2

Libya 7.1 6.21 17,468 12.0

Morocco 6.5 31.18 2,902 3.9

Sudan 8.5 38.13 1,631 12.0

Tunis 5.5 10.36 4,032 4.7

Non-Arab Countries

Iran 5.5 72.87 5,247 24.0

Turkey 3.5 69.69 11,463 10.9Source: IMF, CIA and Global Research

Sector Drivers

Economic Activity

The MENA region is endowed with a substantial energy reserve, where more than 66% of the world’s crude oil reserve exists and around 47% of the global natural gas reserve is located. Accordingly, the hydrocarbon sector is a main contributor to MENA’s economy,



especially for oil-exporting countries, such as Saudi Arabia, UAE, Kuwait, Algeria, Libya and Iran. Other countries including Egypt, Morocco, Tunis, Oman and Jordan are not mainly dependent on the hydrocarbon sector and have more diversified economies.

Chart 14: Global Oil and Natural Gas proven reserves (end of 2008)OIL Natural GAS

Source: BP & Global Research

The overall MENA region witnessed a period of strong economic performance, growing at a CAGR of around 5.3% over the past 5 years. Economies were expanding vigorously on all fronts, following the global growth trend, achieving a growth rate of 5.8% in 2008, the same as 2007. MENA oil-exporters economic growth rate declined from 6.4% in 2007 to 5.8% in 2008, resulting from slower domestic demand growth in Iran. However, GCC economic growth reached 6% in 2008 from 4.1% in 2007. On the other hand, MENA diversified economies achieved an economic growth rate of 5.7% in 2008, compared to 3.8% in 2007.

Chart 15: MENA GDP growth rate


The significant surge in the international food and oil prices starting in 2007 to mid 2008 caused inflation rate to exceed the 10%-mark in the majority of MENA countries. Crude oil prices reached almost US$145/barrel in mid 2008 from around US$55/barrel at the beginning of 2007. This remarkable increase in oil prices created surplus liquidity mainly in oil exporting countries, especially the GCC economies.

On the other hand, more diversified economies, which are dependent on food and oil imports, experienced a decline in their current account balances as a percentage of GDP, due to higher cost of imports.

Saudi Arabia, 21.0%Iran, 10.9%

Iraq, 9.1%

Kuwait, 8.1%

UAE, 7.8%

Other MENA, 8.4%

Rest of theWorld, 34.7%

Iran, 16.0%

Qatar, 13.8%

Saudi Arabia, 4.1%

UAE, 3.5%Algeria, 2.4%

Other MENA, 5.7%

Rest of theWorld, 54.5%

3.8%

5.7%

4.0%

5.7%6.

4%

5.8%

3.9% 5.

0%

4.1%

6.0%

4.3%

6.0%

5.8%

5.8%

3.9% 5.

2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2007 2008e 2009f 2010fMENA Diversified MENA Oil Exporters GCC MENA



Chart 16: MENA current account position as percentage of GDP


The governments of the GCC countries utilized these excess funds to diversify their economies to become less dependent on the oil and gas sector, as they invested a substantial amount of these excess petrodollars in society development, such as real estate and infrastructure projects, in order to attract private investments, which were primarily directed to develop high-end housing, commercial and tourism schemes, as well as industrial project. These large scale multi-facet development projects on all fronts, as well as infrastructure developments created a great demand for building materials, including cement.

The world economic slowdown, resulting from the manifestation of the global credit crunch, which started in mid September 2008, negatively affected MENA economies. The direct effect of the crisis was relatively mild, compared to developed economies, as financial institutions in MENA region were not large holders of subprime mortgage securities. However, the vulnerability of MENA economies to the ripple effect of the financial crisis was more severe than its direct effect, with respect to shrinking global demand, squeezing liquidity and falling stock markets.

Therefore, MENA countries economic growth are expected to slowdown, on the back of lower revenues, resulting from weak demand for the region’s exports and tourism, falling oil prices and tight credit conditions. This will lead to decline in investment spending, which will result in scaling down and postponement of ambitious investment projects.

Oil exporting countries current account position will be negatively affected, as receipts from hydrocarbons were slashed, on the back of falling crude oil prices, reaching around US$45/barrel from a peak of US$145/barrel in mid-2008. On the other hand, diversified economies will benefit from lower commodity and oil prices, as their current account position will improve.

It is worth mentioning that oil price is an essential key factor affecting the region’s economy, as well as the world economy. Therefore, any decision by the region’s main oil exporting countries, which are also members in the Organization of the Petroleum Exporting Countries (OPEC), to cut oil production to set a floor under oil prices will play a major role in shaping the region’s growth profile.

Population

Population is one of the main determinants of cement consumption. As any construction activity undertaken to develop any type of real estate or infrastructure project, is implemented to serve the people whether in form of housing, tourism or public services projects. MENA

14.9

%

19.2

%

-1.2

%

12.8

%

17.2

%

-3.6

%

13.5

%

18.7

%

-7.3

%

6.0%

8.0%

-0.7

%

4.1%

5.4%

0.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

MENA MENA Oil Exporters MENA Diversified2006 2007 2008 2009 2010



region has a large population base, with a total population of around 461mn people, growing at a CAGR of 2% over the past 10-year period.

Population in the MENA region is expected to grow by its historical annual average rate until it reaches approximately 507mn people in 2013. Furthermore, MENA region has favorable population segmentation with around 39% of its population are young and less than 18 years old, which ensures strong demand on housing and utilities development projects.

Chart 17: MENA historical and forecasted population

Source: IMF, US Census Bureau & Global Research

Arab Countries contribute to around 69% of total MENA population, with a total population of 318mn people in 2008, compared to 142mn people in non-Arab countries. North Africa was the greatest contributor with a share of 43% of total MENA population.

Chart 18: MENA Population distribution 2008

Source: IMF, US Census Bureau & Global Research

Construction activity

The MENA region’s construction activity has been expanding vigorously over the past years to develop large scale real estate and infrastructure projects. Generally, this high level of activity in the construction sector came on the back of the good economic performance all over the MENA region, as well as different governments’ hefty investments, through the public sector to develop immature housing and infrastructure projects to upgrade the living standards and social services offered to the increasing population. Moreover, the contribution of the private sector to this construction boom was mainly focused on the development of luxurious residential, commercial and leisure schemes.

-

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Popu

latio

n m

n.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

MENA population MENA population Growth

The Levant, 7% North Africa, 43%

Non-Arab Countries, 31%

GCC, 8%

Yemen, 5%

Iraq, 6%

ArabPeninsula,19%



The GCC region witnessed the highest level of construction activity in the MENA region, driven by two main factors; the high oil prices, which created a surplus liquidity, and willingness to diversify their economies to become less dependent on the hydrocarbon sector.

The world economic recession resulting from the outbreak of the global financial crisis and the subsequent free fall in the world oil prices, as a consequence of slower global demand, negatively affected the liquidity levels of oil dependant economies. Moreover, dry credit market conditions worsened the situation even more, with project financing became very hard to obtain, as banks willingness to finance real estate projects disappeared. This situation has adversely affected the construction activity, leading to a slowing-down in the sector and downsizing and rescheduling of ambitious development plans. Accordingly, demand on building materials decreased, leading to a decline in their prices.

According to data published by MEED, the Gulf region, which includes GCC, Iraq and Iran, projects’ value in March 2009 reached US$3.1bn, growing at a CAGR of around 10% over the past 10 quarters. Although the total projects’ value increased by 16.5% during the last quarter in 2008, it advanced only by 5% in the first quarter of 2009. The large increase in the projects’ value in the last quarter of 2008 came on the back of the stimulus packages announced by the governments to invest in infrastructure projects, in order to counter attack the slowdown resulting from the financial turmoil.

Chart 19: Gulf region projects value against their growth rate

Source: MEED & Global Research

The value of the projects in itself is promising and assures a good activity in the broad construction sector over the next years. However, the two crucial questions are how many projects will find their way to the light with the current liquidity constraints and falling demand and how such projects are distributed among different economic sectors.

We believe that the coming period will determine the destiny of many projects, where infrastructure and economically feasible projects with adequate financing will be the surviving projects, although they may witness some delays relative to their original completion dates. On the other hand, projects that are speculative in nature, mainly luxurious real estate projects, will be the ones that are more likely to witness cancellations.

The UAE has the largest construction market worth US$1.23bn, representing around 42% of the Gulf region projects’ value, where some 80% of the UAE planned activity is in the real

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec.2006

Mar.2007

Jun.2007

Sept.2007

Dec.2007

Mar.2008

Jun.2008

Sept.2008

Dec.2008

Mar.2009

US$

mn.

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%

Projects value Growth


July 2009 Egypt Cement Sector �9

estate construction segment. Therefore, the UAE vulnerability to the negative consequences of the credit crunch is much harsher than other countries in the region. There are around US$335mn worth of projects on hold, representing 25% of UAE projects’ value and even on-going projects were rescheduled with extended time frames and minimal work force because of lack of funding and lower population projections, due to downsizing of the expatriate work force.

Chart 20: Gulf region projects breakdown by country on March 2009

Source: MEED & Global Research

The decline in building material prices, which is considered a positive factor in stimulating the construction sector, was not enough to fuel more real estate investments due to declining demand and the severe lack of funds to finance projects, in addition to that the fiscal budget of oil exporting countries, mainly GCC, came under pressure due to lower oil prices.

Although the construction sector is under pressure, the governments still have the ability to ease strain on a slowing down construction sector by injecting funds to stimulate the economic activity. Therefore, many governments in the region adopted stimulus package plans to enhance their economies, mainly through increasing public spending on society development projects, such as schools, universities, hospitals and infrastructure projects, as well as injecting fresh money in the troubled financial system .

Data shows that merely the top 12 infrastructure projects in the MENA region will cost around US$55bn, to be implemented during the coming years. This level of expected expenditure on infrastructure projects should provide a good level of assurance that the construction activity in the overall MENA region is not expected to fall sharply. However, the construction activity will vary from one country to another. Accordingly, MENA demand on building materials is not expected also to decline severely.

Oman, 3.5%Qatar, 7.1%Saudi Arabia, 20.7%

UAE, 41.9% Iran, 9.7%

Bahrain, 2.2%

Kuwait, 9.9%

Iraq, 5.0%



Table 03: Top 12 railway and road mega projects

Project CountryValue

(US$ bn) Scope StatusCompletion

Date

GCC rail network GCC region 14 3,000km rail network connecting

the 6 GCC countries

Planning 2016

Kuwait national rail network Kuwait 6.6 505km railway linking Saudi borders

in the south with Iraqi borders in the

north though Kuwait cities

Planning 2014

Land bridge Saudi Arabia 6.6 1,155km railway linking port cities

of Jeddah, Dammam and Jubail

through Riyadh

Developer

selection

2011

Makkah-Madina railway Saudi Arabia 6 440km railway linking the 2 holy

cities of Makkah and Madina with

Jeddah

Contract

awarded

2012

Mina-Arafa railway Saudi Arabia 5.3 The railway will link the Holy city

of Makkah with Mina, Muzdalefa

and Arafat

Contract

awarded

2013

UAE railway UAE 3 9000km high speed railway linking

all the 7 emirates together

Planning 2015

Total railway projects 41.5

Friendship causeway Bahrain/Qatar

4.2 45km road and railway linking

Bahrain and Qatar

Contract

awarded

2013

Subiya Causeway Kuwait 3.7 36km bridge linking between

Kuwait city and Subia peninsula

Planning 2016

Red Sea bridge Yemen/Djibouti

2 27km road and railway linking the

Arabian Peninsula and Africa

Planning 2020

Jamarat bridge Saudi Arabia 1.5 Expansion of the Hajj bridge in Mina Construction 2009

Persian Gulf bridge Iran 1 Bridge linking Qeshm island with

Iranian mainlan

Planning 2014

Island bridges UAE 1 20 bridges linking islands of

Suwwa, Reem and Umlafaine

Contract

awarded

N/A

Total road projects 13.4

Total rail & road projects 54.9Source: MEED, Zawya & Global Research

Regulations

The cement industry is highly regulated, as it is subject to high level of intervention by most the region’s governments. The reason behind this is that cement is considered a strategic commodity, as it is an essential building material for all and every kind of society construction and infrastructure development activity.

Therefore, different governments across the region issued various regulations on their respective local cement markets to regulate trading of cement, with the objective of prioritizing meeting local demand and controlling local selling price of cement.

In Saudi Arabia, cement prices soared from an average of US$67/ton in 2007 to over than US$100/ton, on June 2008. In turn, the Ministry of Commerce and Industry (MOCI) imposed a ceiling on the factory price of cement at SR250/ton (US$68/ton). In addition, the


July 2009 Egypt Cement Sector 2�

government banned all cement exports effective June 2008, following growing complaints from contractors and individuals that traders are directing cement for exports, attracted by higher profit. On May 25th, 2009, cement export ban was removed on condition that cement companies abide by the government decision to sell each bag of cement on the local market for SAR10 (US$2.67).

It is worth mentioning that, Eastern Province Cement Company decided to shut a production line, which produces 3,500 ton per day, for four months (for a lengthy maintenance), as the government decision to ban exports has inflated the Company’s stockpiles. However, Saudi Arabia decision to remove export ban, was driven by two reasons, the current high level of inventory and the expected new capacities additions.

Table 04: Main government regulationsCountry Regulations Effective date

Egypt Price cap of US$58.5/ton August 2006

Export duty of US$12/ton February 2007

Export duty of US$15/ton August 2007

Export ban March 2008 to September 2008

Removal of export duty of US$15/ton October 2008

Allowing imports April 2009

Export ban April 2009 to August 2009

Saudi Arabia Price cap of US$68/ton June 2008

Export ban June 2008

Removal of export ban May 2009

UAE Price cap of US$81/ton 2007

Price cap of US$99/ton 2008

Reintroduction of 5% imports duty February 2009

Oman Export duty US$78/ton June 2008 until now

Syria Price cap of US$130/ton February 2009 until now

Iran Export ban May 2008 to December 2008

Price cap of US$50-60/ton July 2008

Export Duty US$100/ton July 2008 to December 2008

Price cap of US$65/ton January 2009Source: ICR, Reuters & Global Research

On the other hand, UAE government decided to set cement price at US$81/ton in 2007. Price cap was further raised to US$94/ton and again to around US$99/ton in 2008. The surge witnessed in cost of raw materials and fuel coupled with supply shortage pushed cement prices to a record high. Accordingly, the Ministry of Economy signed an agreement with producers to increase production and remove import duties, as well as reducing port handling fees on May 2008. Later in February 2009, import duties of 5% were reintroduced to protect local manufacturers, as well as avoiding oversupply in the market.

During March 2008, Oman two cement companies along with the Oman Chamber of Commerce and Industry (OCCI) agreed to increase the retail price of cement by OMR0.20 to OMR1.50 per bag equivalent to OMR30.0 per ton (US$78.0/ton) for cement manufacturers, effective June 1st, 2008.



In 2008, the Syrian Prime Minister decided to extend, until June 2009, the permission to import cement to satisfy the rapidly growing demand. This decision is revised on June of every year. On February 2009, the Syrian government decided to fix the cement price at US$130/ton, in order to protect the local producers, from the notably cheaper imported cement from countries with lower production cost.

Moreover, the Iranian government banned producers from exporting cement because of concerns to witness a local shortage, effective May 2008. However, recently established plants were allowed to export a proportion of their production to cover bank repayments and other debt, but have to pay an export tax duty of US$100/ton, which was imposed by the government on July 2008. Additionally, Iran government has enforced a US$50-60/ton cement price, as the black market price was more than double the ex-work price, effective July 2008.

On January 2009, the government has decided to eliminate the US$100/ton export duty, as the local supply and demand were almost balanced, after new plants started production. Additionally, exports will only be allowed as long as the price of cement in Iran does not exceed a maximum of US$65/ton.

Concerning Egypt the latest set of regulations were issued by the Minister of Trade and Industry in April 2009, to control local cement prices including, banning cement exports for 4 months, reduction of cement imports clearing period from 30day period to 3-day period, as well as obliging cement producers to print their selling prices on cement bags for all distribution channels, including end-user price. Further details regarding regulations in the cement market will be discussed later under Egypt’s cement sector.

Supply and Demand Analysis

The MENA region’s cement industry has been expanding remarkably over the past five years, on the back of the high activity witnessed in the construction sector to undertake large scale real estate and infrastructure developments, including housing, tourism, industrial and public projects. MENA region cement consumption has been expanding at a CAGR of 9.6%, reaching 258.7mn ton in 2008, whereas cement production reached 255.6mn ton in 2008, achieving a CAGR of 7.6% over the same period.

Chart 21: MENA cement production and consumption

Source: Arab union for Cement and Building Material (AUCBM), ICR & Global Research

164

177 20

1 225 242 259

177

188 202 22

2 240 25

6

-

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008

Ton

mn

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Consumption Production Consumption growth Production growth



Turkey is considered the largest cement producer in the region, producing 20.1% of the region’s total cement production in 2008. Iran produces around 17.4% of the region’s cement production and comes in the second place, followed by Egypt, which produced almost 15.5% of MENA cement production in 2008. Saudi Arabia and UAE ranked the fourth and fifth biggest cement producers in the region in 2008, manufacturing around 12.9% and 6.3%, respectively.

Chart 22: MENA countries cement production and consumption 2008

Source: Arab union for Cement and Building Material (AUCBM), ICR & Global Research

On the consumption front, Iran is the largest cement consumer in the region, consuming around 17% of the region’s cement consumption, followed by Turkey, which consumed 15.7% of the region’s cement consumption in 2008. Egypt took the third place with approximately 14.8% of MENA cement consumption in 2008. In addition, Saudi Arabia and UAE came as the fourth and fifth biggest cement consumers in the region in 2008, consuming around 11.5% and 7.7%, respectively.

Chart 23: MENA countries Cement per Capita Consumption (CPCC) Vs. 5 year CPCC CAGR

Source: AUCBM, ICR & Global Research

Further analysis of the cement consumption data with respect to Cement Per Capita Consumption (CPCC) and its respective CAGR over the past five years reveals that all Arab countries average CPCC stands at 490kg, with a CAGR of 8% over the previous 5-year period, compared to a CPCC of 593kg and a CAGR of 6.3% over the same period in non-Arab countries. Collectively, the MENA region average CPCC recorded 519kg, achieving a CAGR of 7.4% over the past half decade, relative to a world average CPCC of 426kg and a CAGR of 6.1% over the past 5 years.

1.6

2.2 4.

2

3.0

32.9

16.0

2.8

3.1 4.1

4.7

5.4

-

16.5

39.7

5.2

11.2

0.2

6.9

44.4

51.4

1.5 5.

0

3.5

2.5

29.9

20.0

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5.3

4.5

3.5 6.

7

2.0

14.0

38.4

8.0 12

.5

2.6 6.

3

44.0

40.6

0

10

20

30

40

50

60

Bahrai

n

Kuwait

OmanQata

r

Saud

i Arab

iaUAE

Iraq

Yemen

Jorda

n

Leban

onSy

ria

Pales

tine

Algeria

Egypt

Libya

Moro

cco

Suda

nTu

nis Iran

Turke

y

Ton

mn

Production Consumption

BahrainKuwait

OmanQata

r

Saudi Arab

iaUAE Ira

qYem

enJordan

LebanonSyria

Palestin

e

Algeria

EgyptLibya

MoroccoSudan

Tunis Iran

Turkey

4%

9%

1%

16%

-1% 3%

16%

40%

9%

13%

1%

-3%

10%

7%

15%

6% 6%

3%

6% 6%

(500)-

5001,0001,5002,0002,5003,0003,5004,0004,500

CPCC

(kg.)

-5%0%5%10%15%20%25%30%35%40%45%

CPCC (kg.) GCC avg. CPCC MENA avg. CPCC 5 year CAGR


2� Egypt Cement Sector July 2009

GCC countries have the highest CPCC figures in the MENA region, recording an average of 1,660kg in 2008, with a CAGR of 7.4% over the period from 2003-2008, resulting from the high level of construction activity experienced in the GCC region. UAE has the highest CPCC in the MENA region, reaching 4,200kg in 2008. It is worth mentioning that Libya CPCC is in the same level as some GCC countries. Other countries in the MENA region CPCC figures hover around the region’s average CPCC, with the exception of Iraq, Syria, Yemen and Sudan, which are far below the MENA region’s average.

We believe that countries with a large population base and relatively lower CPCC will have a good potential for cement consumption growth on the long-term. Countries under this category are Sudan, Yemen, Iraq and Syria. On the other hand, GCC countries CPCC is not sustainable on the long term, given their low population base, except for Saudi Arabia, which has a much larger population compared to other GCC countries.

Capacities

As aforementioned, the strong economic performance witnessed in the MENA countries has encouraged more investments in real estate and infrastructure development projects, which in turn created high demand for building materials. Therefore, cement producers around the MENA region planned to raise their production capacities to meet the growing demand.

The MENA region cement production capacity in 2008 is estimated at around 376mn ton, which is forecasted to increase by 40.5%, reaching around 529mn ton in 2012, according to the announced expansion plans. Arab Countries cement annual production capacity stood at 222mn ton, representing 59% of the MENA region’s cement annual production capacity. Arab Countries cement annual production capacity is expected to increase by 99mn ton over the next 4 years, reaching 321mn ton.

Chart 24: MENA countries current and forecasted annual cement production capacity

Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Arab Union for Cement and

Building Materials (AUCBM), Cement Companies and Global Research

Egypt, Saudi Arabia and UAE are implementing considerable capacity expansion plan, contributing around 32% of the new capacity expansion in the MENA region, in order to meet the growing local demand. Egypt is projected to add around 18.5mn ton, increasing its annual production capacity from 43mn ton in 2008 to 62mn ton in 2012. In addition, Saudi Arabia is expected to increase its cement annual production capacity by 27%, reaching 61mn ton in 2012, compared to 48mn ton in 2008. Similarly, UAE is forecasted to lift its annual production capacity by 17mn ton by 2012, representing 56% increase from 2008 production capacity level of 30mn.

60.0

43.3

48.0

30.0

16.2

19.0

8.0

6.0

4.5

7.7

4.8

0.7

4.7

3.0

2.6

0.5

113.

5

61.8

61.2

46.8

26.0

23.1

15.0

12.4

9.8

8.7

7.8

7.8

6.2

6.0

4.4

0.9

0

20

40

60

80

100

120

Iran Egypt SaudiArabia

UAE Morocco Algeria Libya Syria Jordan Tunisia Qatar Sudan Oman Yemen Kuwait Bahrain

Ton

mn

2008 E 2012 F



Moreover, other countries are also implementing capacity expansions and establishing Greenfield plants, including Algeria, Morocco, Libya, Jordan, Syria, Yemen, Kuwait, Sudan and Qatar. Syria was expected to be one of the major cement producers in the region, as since 2005 the Syrian government planned to add around 25mn ton, of which only 6mn ton were confirmed. Up to date, no further details were disclosed concerning the start-up dates of the remaining announced capacities. Therefore, we excluded Syria’s unconfirmed additional capacities from our calculations.

Chart 25: Distribution of capacities additions in MENA countries between 2009-2012

Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies & Global

Research

Iran is expected to have the lion’s share with respect to the new capacities additions, where around 35% of the new cement capacities in the MENA region are expected to come from Iran, which is projected to boost its production capacity by 89%, reaching 113.5mn ton in 2012, relative to 60mn ton in 2008. It is worth mentioning that the Iran cement annual production capacity reached 64mn ton on March 2009.

The new capacities additions in the region are expected to come over the course of the next 4 years, where 25% will be added in 2009, whereas the majority of the new capacities expansions of 36% are forecasted to start operations in 2010. Afterwards, 23% and 16% of the new capacities are due to be completed in 2011 and 2012, respectively. Moreover, Arab Countries are expected to add 34, 36, 28 and 1mn ton over 2009, 2010, 2011 and 2012, respectively.

Chart 26: MENA countries current and forecasted annual cement production capacity

Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies and

Global Research

Iran, 35.1%

Sudan, 4.7%

Algeria, 2.7%Bahrain, 0.2%

Egypt, 12.1%

Jordan, 3.5%Kuwait, 1.2%Libya, 4.6%

Morocco, 6.4%

Oman, 1.0%Qatar, 2.0%

Saudi Arabia, 8.6%

Syria, 4.2%Tunisia, 0.7%

UAE, 11.0%

Yemen, 2.0%

37638

5535 24 529

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2008 2009 2010 2011 2012 2012

Ton m

n



Saudi Arabia is expected to add 3mn ton in 2009, 7mn ton in 2010 and 3mn ton in 2011, which will bring Saudi Arabia total cement annual production capacity to 61mn ton by the end of 2012. UAE is expected to add 10, 2 and 4mn ton of new cement capacities in 2009, 2010 and 2011, respectively.

Chart 27: Capacities additions by country throughout 2009 to 2012

Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies and

Global Research

However, the negative effect of the world financial crisis on the construction sector forced some cement producers to revise their expansion plans, either by postponing their projects or by cancelling the entire project. Therefore, some of the announced projects were deferred, especially in UAE and Saudi Arabia.

In UAE, Jebel Ali Cement factory, which will have an annual production capacity of 2.5mn ton, completion date were postponed to 2010. In addition, JK cement, which is expected to have an annual capacity of 2.2mn ton, was postponed to commence operation in 2011. In Saudi Arabia, Arabian Cement Company postponed its 3mn ton cement plant to start operations in 2011, whereas Southern Provence Cement Company freezed its expansion plans, until market conditions improve.

These huge cement capacities addition in the MENA region coming on stream over the next years, unluckily coincided with the global economic slowdown and a declining activity in the construction sector. This situation is expected to create an over-supply in the regional cement market and trigger price wars, in addition to possible delays in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates Therefore, we believe that countries with low cash cost of production per ton will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices.

Pricing and Cost

Pricing

Based on the fact that most of the region’s governments intervened in the cement industries, either by imposing price caps or setting an export duty fee, the cement prices in 2008 were stable to the extent to which the governments were able to enforce the stated regulations. The average retail cement price in the MENA region in 2008 was approximately US$103/ton.

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10

20

30

40

50

60

Iran

Egypt

UAE

Saudi A

rabia

Morocco

Sudan

Libya

Syria

Jordan

Algeria

Qatar

Yemen

Kuwait

Oman

Tunisia

Bahrain

Ton

mn

2009 2010 2011 2012



Chart 28: Cement retail prices in the region

Source: International Cement Review (ICR), Global Cement Magazine, WorldCement, CemWeek and Global Research

Cost

Cement production cost varied among different MENA countries and some other selected countries, depending on the cost of energy, raw materials and labor. The MENA region average cash cost of production in 2008 reached US$40/ton. It is worth mentioning that Algeria has the lowest cash cost of production of US$15/ton.

Chart 29: Selected countries cash cost of production

Source: International Cement Review (ICR) and Global Research

200

151130 128

118101 100 99

90 90 90 85 79 78 77 70 65

-

50

100

150

200

250

Sudan

Yemen

Syria

Mor

occo

Jord

an

Turke

y

Algeria

UAEEgy

pt

Bahrai

n

Kuwait

Leban

onTun

is

OmanQata

r

Saudi

Arabia

Iran

US$

/ton

55 5450

45

40

33 33 32

26 25 24 23

15

0

10

20

30

40

50

60

Jorda

nOman

Syria

Europe

Moro

cco

UAEInd

iaEgy

pt

China

Qatar

Saudi

Arbia

Iran

Algeria

US$

/ton



Egypt Cement Industry

Background

Egypt is one of the oldest countries in cement manufacturing in the region, as it started cement production in the early years of the 20th century, specifically in 1927 with the construction of Torah Cement Company. Later in 1929, Helwan Cement Company was established followed by Alexandria Cement Company in 1948 and National Cement Company in 1956. In the 70s, the production capacities of the 4 cement companies reached around 4mn tons.

The construction boom witnessed in the late 70s and 80s created high demand for cement that was met through imports because of the limited local production capacities, despite the opening of 3 new cement companies, Suez, Assuit and Amiryah, which started production throughout that period. In the mid 80s, Egypt became one of the largest cement importing countries in the world.

During the 90s, 6 new cement companies were established to cope with the increasing construction activity and the resulting increasing cement demand, especially with the appearance of new sub-urban cities such as, Al-Sherouq, Al-Obour, 6th of October, 10th of Ramadan and Al-Sadat. However, Egypt’s cement net importing position prevailed during the 90s and the early years of the 21st century.

Consequently, cement producers in Egypt increased their production capacities and enhanced their production lines to meet the surging local cement demand. In 2002, Egypt turned out to be a net exporter of cement and later in 2004 Egypt stopped importing cement and became one of the largest cement exporting countries in the world.

Similarly, cement distribution and pricing evolved over time and went through 3 phases of development. The first phase started in 1932 with the establishment of the cement store by the sole cement producers then, Torah and Helwan, to organize selling their production. Later in 1957, the government replaced the cement store with the cement selling office, which was responsible for marketing cement in the local and export markets. However, the government’s centralized management of that office led to price distortions and production bottlenecking in the cement sector. Therefore, the cement selling office was terminated in 1991 and cement producers became free to set their prices based on the market forces.

Currently, grey cement manufacturers in Egypt reached 13 players with a total production capacity of 43.3mn ton. Out of the 13 market players, there are 9 cement companies controlled by 6 leading multinational companies, who entered the Egyptian market mainly through the privatization of the state-owned cement companies, which started in 1996. The entrance of these multinational companies significantly contributed to enhancing the productivity and efficiency of the local cement industry.

Ordinary Portland Cement (OPC) is the most common type of cement produced in Egypt. This type of cement is the most widely used in every aspect of the construction works. In addition, the production mix is not limited to OPC, it also includes, seawater cement, rapid hardening cement, slag cement and white cement. These other types of cement are more specific purpose cement and differ from OPC in their composition.



Sector Drivers

Economic Activity

The Egyptian economy continued its robust growth for the third consecutive year, achieving an average GDP growth rate of 7.1% over the past 3 years. The economic growth was broad-based including various sectors. The main sectors that have witnessed the highest growth rate in real term over the past 3 years were construction 14.9%, Suez Canal 14.0%, tourism 13.7% and communication 12.9%. This healthy economic performance came on the back of economic reform policies adopted by the government since 2004, as the government continuously presses on with legislative and administrative efforts to create better business environment.

Chart 30: Real GDP growth

Source: Ministry of Economic development, CBE & Global research

The government efforts placed Egypt for the third time in 4 years, among the top 10 global reformers and the top regional reformer this year in the «Doing Business 2009» report, which is compiled annually by the World Bank comparing the business environments in 181 economies worldwide. There have been improvements particularly in the areas of starting a business, dealing with construction permits, registering property, getting credit, protecting investors and trading across borders.

Chart 31: Total implemented investments

Source: CBE & Global research

This economic growth came on the back of growth in final consumption at a CAGR of 18.3%, which was mainly attributable to the growth in private consumption, over the period from 2004/05 to 2007/08. In addition to the huge investments undertaken by local and foreign investors in almost all the economic sectors, where total investment reached L199.5bn, representing 22.3% of GDP and achieving a CAGR of 27.4% over the same period.

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Moreover, Foreign Direct Investment (FDI) reached US$13.2bn in 2007/08, recording a remarkable CAGR of 50.5% over the past 3 years. It is worth mentioning that FDI represented 8.1% of GDP in 2007/08, compared to 8.5% in 2006/07.

Chart 32: Net FDI

Source: Ministry of Investment & Global research

USA and European Union (EU) represent a major source of FDI, where they collectively account for around 65% of total FDI inflows to the Egyptian economy. When we look at the distribution of the total FDI inflows by country, we find that USA is the greatest contributor with a share of 36.1% in 2007/08, followed by the Euro Union with a share of 28.7%.

Chart 33: FDI total inflows


Furthermore, higher international food and energy prices prevailed in the international markets, as well as the higher local consumption level resulted in soaring inflation rate, reaching a peak of 23.6% in August 2008, and higher cost of imports, which increased by 37.8% in 2007/08 over the previous year, in addition to higher exports proceeds, which increased by 33.3% in 2007/08. The increase in the cost of imports outweighed the growth in exports, leading to 43.7% increase in the trade deficit in absolute value and as percent of GDP in 2007/08, reaching 14.5% compared to 12.7% in 2006/07.

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Chart 34: Development in inflation and the corridor range


On the other hand, the increase in net services by 30.2%, mainly on the back of the growth in receipts from Suez Canal and tourism, as well as the incline in transfers by 32.3%, compensated to some extent for the increase in trade deficit and resulted in a surplus of US$888mn in the current account balance in 2007/08. Nevertheless, the current account balance declined by 60.9%, compared to the previous year, and represented 0.6% of GDP.

Starting from the second half of 2008, the global financial crisis extended its shadows on the Egyptian economy, where GDP growth reached 5% during H1 2008/09, compared to 7.1% in H1 2007/08. Although final consumption kept is momentum during H1 2008/09, growing at 23.7%, total investments were severely hit, achieving a growth rate of 13.8% in H1 2008/09, relative to a growth of 33.2% in H1 2007/08. Moreover, FDI witnessed a sharp decline by 48.2% from in US$7.8bn in H1 2007/08 to US$4.0bn in H1 2008/09, as the majority of FDI inflows were from USA and EU that have been severely hit by the world credit crunch.

The current account balance deficit widened to US$2,513mn, representing 2.7% of GDP in H1 2008/09, compared to US$294mn, representing 0.4% of GDP in H1 2007/08. This decline came on the back of deteriorating trade balance position, decreasing by 29.8%, in addition to slower growth in Suez Canal receipts, which recorded a growth rate of 8.1% in H1 2008/09 compared to 24.6% in H1 2007/08, as well as 2.8% growth in tourism receipts in H1 2008/09, as opposed to 30.1% in H1 2007/08.

Therefore, the Egyptian government has taken measures to limit the spillover negative effects of the world financial crisis and spur economic growth including:

1. Increasing the infrastructure investment budget,

2. Cancelling taxes on exports and increasing financial support to all exporting sectors benefiting from export support fund to 50%,

3. Postponing plans to cancel subsidies on electricity and natural gas for energy-intensive industries, like cement, fertilizers and petrochemicals,

4. Refraining imports of finished goods and commodities that have a local counterpart.

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We believe that trade deficit is not expected to worsen dramatically in 2009 as imports decline, as a result of a weaker domestic demand and plunging commodity prices will to some extent offset the expected drop in the country’s exports. In addition, the current account deficit is expected to widen as a result of the declining tourism and Suez Canal revenues, as well as the remittances of the expatriate workers.

Moreover, The subsidy bill, which surged by almost 50% in 2007/08, is expected to witness a considerable decline as the oil prices dropped severely since June 2008 and the changes made by the Egyptian government to reduce energy subsidy during 2008 are not expected to reverse. This in turn will leave more room for the government to direct this saving in other areas that could bolster the economic growth.

Despite the challenges that currently face the Egyptian government to sustain the economic growth, the financial intermediation will not be hampered by the international credit crunch, supported by a strong banking sector with healthy balance sheets and low level of financial integration, thanks to the government reforms. The Egyptian banking sector reforms were mainly attributed to strong supervision and regulation, elimination of nonperforming loans and unadventurous financing and investment practices.

In general, Egypt’s medium term outlook remains sound with an expected GDP growth of around 4%. We believe that the Egyptian economy is capable of surpassing the current storm that hit the world economy, thanks to the reforms implemented since 2004. Most likely, the government will work on targeting inflation rate, maintaining economic growth and balance of payments stability, throughout 2009.



Construction Activity

The construction sector is considered one of the important sectors in the Egyptian economy, as it has been expanding remarkably at a CAGR of approximately 15% over the past 3 years and employs approximately 10% of the Egyptian work force. Another sector that is highly interrelated with construction sector is the real estate sector, which achieved a CAGR of around 4% over the same period. Collectively, the two sectors contribution to GDP reached 7.4% in 2007/2008, achieving a CAGR of 10% for the period from 2004/05 to 2007/08.

Chart 35: Construction vs. real estate sector macro indicators


The high construction activity witnessed in all the economic sectors whether, residential, recreational, industrial or infrastructure, over the recent past created high demand on all building materials in the local market. This growth was mainly attributable to robust economic performance, as well as the large investments implemented by both the government sector in the field of social services and public utilities, and the private sector in all segments of the real estate sector including, housing, commercial, hospitality and industrial development projects.

According to building permits quarterly bulletin published by the Egyptian Cabinet Information and Decision Support Center (IDSC), the composite building and construction index in Egypt maintained its momentum in December2008, increasing by 5.6% on Q-o-Q basis and 18.8% on Y-o-Y basis. The composite building and construction index recorded a healthy CAGR of 9.2% over the last 5 years.

Chart 36: Composite building and construction index

Source: IDSC & Global research

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Moreover, the total number of building permits kept its upside trend in December 2008, reaching 21,905 building permits. The overall building permits index achieved a growth rate of 9.4% in December 2008, compared to the previous quarter, and an impressive 77.6% over December 2007. This increase in issued building permits promises a positive outlook in the construction sector.

Chart 37: Overall building permits index


It is worth mentioning that the construction activity does not include only the construction of different types of buildings, but also it includes all infrastructure developments, such as roads, electricity and water works. According to the latest data published by CAPMAS, the total value of executed construction work by the private sector in 2007 reached LE8.9bn, against a total value of LE10.6bn executed by the public sector in 2006/07.

Although the reporting periods for the private sector and the public sector do not match, we will add the two values up just to find out how the value of executed construction work is distributed among different economic sector during the last available fiscal year.

Chart 38: Total value of executed construction work according to economic activity


Residential buildings share of total value of executed construction works was only 17% and the remaining other types of buildings captured 31% of the total construction works, whereas the remaining 52% was spent on different infrastructure projects. This fact highlights that the demand on building materials depends on the broad construction activity including building construction and infrastructure works.

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Although the construction sector has been negatively affected during the H1 2008/09, achieving a growth rate of 9.4%, compared to 14.9% in H1 2007/08, the real estate sector was able to slightly improve its growth rate from 3.4% in H1 2007/08 to 3.5% in H1 2008/09. This large decline in the construction sector growth came on the back of lower investments, as a result of the global financial crisis.

Therefore, the Egyptian government took some measures to stimulate the Egyptian economy, including the construction sector by increasing the public infrastructure investment budget by LE15bn, in addition to the originally planned infrastructure investments of approximately LE418bn in electricity, water, sanitation, transportation and communication sectors throughout the sixth 5-year plan (2007/08-2011/12).

The sixth five year plan (2007/08-2011/12) placed an overall investment target of LE1,295bn, of which around LE670bn are planned to be spent on construction activity in general, which includes targeted investments of LE418bn in the infrastructure, LE132bn in construction and real estate, LE76bn in health and education and LE44bn in tourism.

Chart 39: Sixth 5-year plan targeted total investmentsDistribution among economic sectors Distribution by implementing body

Source: Ministry of Economic Development & Global Research

The government 5-year plan set a target to encourage investment and prioritize development in Upper Egypt, within the context of the government’s local development of developing under-developed areas of Egypt. The plan included establishing a holding company for Upper Egypt to identify investment opportunities, providing investment incentives to encourage private sector investment, completing delivery of potable water, electricity and natural gas. The local development plan also included rural development, which include the establishment of 400 villages and reclamation of 1mn acre, as well as slum development project.

Moreover, the government announced that it will allocate another LE15bn to be invested in participation with the private sector in infrastructure and industrial development projects within the context of Public-Private Partnership (PPP) strategy, which proved to be a successful alternative to government, as it relief some burden from the state’s spending budget, besides benefiting from the private sector technical know-how, as well as better offered services. During the period from 1998 to 2007, the private sector participation in PPP projects reached US$15.3bn in the Energy, Telecom and transportation sectors.

Agriculture &Irrigation, 5%

ExtractiveIndustries, 11%

Manufacturing, 23%

Construction &real estate, 10%

Trade, 3%

Tourism, 3%

Education & Health, 6%

Other social services, 6%

Electricity, 6%Transportation, 13%

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Private sector,84%



Chart 40: Private sector participation in infrastructure projectsBy year By sector

Source: PPI World Bank database & Global Research

Given the current global economic recession resulted from the credit crunch, the government’s total targeted investments throughout the sixth 5-year development plan seem to be optimistic, as we believe that total planned investments should be adjusted downward because total implemented investments, including FDIs will be negatively affected at least during the next one to two years.

However, lower international commodities prices, including building materials, which came on the back of declining global demand, presented an opportunity for more infrastructure and building investments at lower cost, mainly in less developed countries with immense society development needs.

In addition, the government’s plan to boost investments in infrastructure, such as transportation and public utilities, as well as economic housing and industrial development projects, besides prioritizing the development of under-developed areas in Egypt will act as a cushion for the activity in the construction sector.

We, therefore, believe that the construction sector is expected to experience slower growth rate during the next one to two years, relative to the booming phase over the last 3 years, yet the decline in growth rate is not expected to be that severe, providing reasonable support for the building materials sector, including cement. In other words, the outlook of the local construction sector is to some extent promising, taking into consideration the concurrent global financial turmoil and liquidity squeeze.

Population

Population is considered one of the main drivers of the economic activity, including the building materials sector, through their demand on housing and different construction activities. Egypt is a population rich country and has the largest population in the MENA region, representing around 15% and 21% of total MENA and Arab countries population, respectively.

Egypt’s population reached approximately 75mn at the end of June 2008, achieving a CAGR of 2% over the past 10 years. Furthermore, population in Egypt is expected to reach 84.5mn in 2014, growing at its historical annual average growth rate.

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Chart 41: Egypt population

Source: IMF & Global research

Egypt has favorable demographics segmentation with around 33% of its current population is less than 15 years old and 50% falls in 15-45 age-group. This segmentation guarantees a strong current and future demand on housing and society development projects. It is worth mentioning that it is estimated that around 350,000 housing units are needed annually to meet new housing demand, in addition to 2.5mn housing units to meet accumulated unmet housing demand.

Chart 42: Egypt population age-group segmentation

Source: CAPMAS & Global research

Regulations

Generally, the cement industry in Egypt received a great deal of the government supervisory authorities’ attention, because of the increasing local cement selling price, resulting from fake supply shortage existed in the local market, as local production exceeds consumption. This situation emerged because cement producers and traders preferred to direct cement production to the export market, where prices are higher than the local selling prices, in order to achieve higher profits.

To ensure local supply of cement at reasonable prices, the Egyptian government imposed an export duty of LE65 (US$12)/ton on exported cement in February 2007. Apparently, the export duty was not severe enough to offset cement export price differential. Therefore, the government increased the export duty to LE85 (US$15.5)/ton in August 2007. However, local cement prices remained high, as cement producers passed their increased cost to consumers. In an attempt by the government to bring discipline to the local cement market, the Egyptian government imposed a ban on cement exports for 6 months starting from April till the end

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of September 2008, to calm an overheated local cement market. Unfortunately, local cement prices remained high, on the back of high local demand driven by the construction boom, as well as the traders’ malpractices of maintaining high prices through faking shortage of supply.

In addition, the government decision to impose LE27(US$5)/ton of clay extracted from quarries, as resources development fees in May 2008, as well as the liberalization of energy prices for energy intensive industries, will harm the competitive edge of Egyptian cement sector, for its relatively low cost of production. As the government felt that the subsidy that should go to local consumers, is passed to exports and that the producers are making high profit margins.

Furthermore, the Minister of Trade and Industry filed a sue case of anti-competitive practice against local cement producers for the period from May 2005 till the end of 2006. The local cement producers were accused of forming a cartel to set local cement prices and dividing market shares among them. In August 2008, the court found local cement producers guilty of exercising monopolistic behavior and fined cement manufacturers with a total of LE200mn.

However, the emergence of the global financial crisis since mid September 2008 triggered the Egyptian government to take some defensive measures in order to minimize the negative effect of the slowdown in the world economy on Egypt’s cement exports. These measures included the removal of the LE85/ton export duty in October 2008, as well as bringing the export ban to an end.

Later in February 2009, cement producers voluntary decided to stop cement exports for 3 months in order to satisfy local demand and calm the surging local cement prices, around LE490/ton, which reached more than LE700/ton. The skyrocketing cement price came on the back of two major factors; the first was the significant surge in transportation cost, as truck drivers organized a strike across the governorates to protest the new law that bans the use of trailers. The second was the malpractice of traders, who took advantage of this strike, as well as the surging cement local demand to further raise prices.

Consequently, the Minister of Trade and Industry intervened in April 2009, through issuing some regulations to control local cement prices including, assigning the government’s anticompetitive supervisory body to investigate local cement market for any dysfunctional during the past 6 months, banning cement exports for 4 months, reduction of cement imports clearing period from 30day period to 3-day period, as well as obliging cement producers to print their selling prices on cement bags for all distribution channels, including end-user price, in order to end the manipulation of cement prices by traders.

This new set of regulations is expected to ease some of the upward pressure on local cement price, due to the competition from imported cement. However, the current strong local cement demand will act as a buffer for sharp decline in local cement price and the profitability of cement producers. On the other hand, banning cement exports for 4 months for the second time in less than a year, although it could jeopardize the position of the Egyptian cement in export markets, we believe this negative effect will be marginal, as Egyptian main cement export markets, such as Spain and Italy are facing a severe decline in demand.



We believe that the new capacities addition will fix the current distortion taking place in local cement price, as new supply will come on stream to meet the soaring local cement consumption. However, regulating cement imports will be a critical issue, especially that Saudi Arabia, where huge new capacities are under their way, removed the export ban. In addition, Saudi Arabia has lower cost of production and could export to Egypt at low prices. This situation will create unfavorable market conditions for all cement producers, in the form of price war, which will lead to lower profitability and extended payback period for new investments.



Supply/demand analysis

The Egyptian cement industry has been growing vigorously over the past 5 years, on the back of the high activity experienced in the construction and real estate sectors. Egypt’s cement consumption has been growing at a CAGR of approximately 6% over the past 40 years. In 2008, local cement consumption reached 38.4mn tons, achieving a growth rate of 11.4% over 2007 and recording a CAGR of around 9% since 2003. On the other hand, cement production reached 39.8mn tons, compared to 38.4mn tons in 2007, achieving a CAGR of 6.6% over the past 5 years.

Chart 43: Egyptian cement industry supply and demand


Over the past 5 years, the overall cement sector capacity utilization rate kept increasing, with some companies operating over 100% of their installed capacities, driven by the strong growth in cement consumption, which outpaced production growth.

Despite the declining global demand, resulting from the global financial crisis, cement demand in Egypt continued its robust growth fueled by lower steel prices, which triggered higher construction activity, as developers used this opportunity to complete their pending and delayed construction works, when steel price was high, in addition to accelerating their projects schedule to benefit from lower development cost.

Chart 44: Monthly cement demand


Moreover, individuals who acquired land plots within the context of the national housing program under “build your own home” scheme, created high demand on building materials

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because they are obliged to get the necessary building permits and finalize the construction of their own homes within a pre-specified time span. In addition, homes construction in villages experienced high activity, as the government is discussing a law that will regulate building in villages and agricultural lands.

Accordingly, local cement prices reacted positively to this high demand, surging from around LE420/ton in the beginning of 2008 to more than LE700/ton in February 2009. Furthermore, the strike organized by truck drivers in February 2008 to protest the new law that bans the use of trailers also contributed to the rising local cement price.

Chart 45: Monthly cement demand vs. cement average retail price in Greater Cairo

Source: IDSC, CBE, Ministry of Investment & Global research

It is worth mentioning that cement demand in Egypt is seasonal, as it witnesses some decline during the winter months from October to February and the Holy month of Ramadan, while it accelerates throughout the summer months.

Chart 46: Monthly cement demand vs. 3-month moving average

Source: IDSC, CBE, Ministry of Investment & Global research

On the export front, Egypt’s cement exports as percentage of total cement production experienced a declining trend over the past 5 years, as cement producers kept directing a greater proportion of their production to the local market in order to meet the increasing local cement consumption. The remarkable decline in 2008 exports came on the back of the Minister of Trade and Industry decision to ban cement exports for a six month period from March to October 2008.

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Chart 47: Cement and clinker exports

Source: CBE, Ministry of Investment & Global research

Going down to the companies’ level, we found that the market share of each company is highly in line with their respective capacity. With respect to total domestic and export cement sales, Italicementi group, including Suez, Helwan and Torah cement companies, has the largest market share of around 28%, followed by Egyptian Cement Company, which is owned by Lafarge, captured approximately 21% market share in 2008.

Chart 48: Egyptian cement market players market shares in 2008

Source: Companies financials & Global research

It is worth mentioning that Arabian Cement Company only produces clinker and directs almost all of its production to the export market. Therefore, we excluded Arabian Cement Company from our calculations, in order not to distort our cement capacity, production and consumption figures, besides the scarcity of information about this company specifically.

Capacities

The Egyptian grey cement sector consists of 13 cement manufacturing companies, of which 9 companies are controlled by 6 multinational companies. Only one company is owned by the Egyptian government that is National Cement Company, while 3 firms are owned by the Egyptian private sector, namely Misr Beni Suef Cement, Misr Cement Qena and South Valley Cement. Multinational companies control 85.5% of Egypt’s grey cement manufacturing capacity.

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Italcementi (Suez+Helwan+Torah), 27.7%

Egyptian Cement Company(lafarge), 20.5%Assuit Cement (Cemex), 12.7%

Alexandria & Beni Suef Cement (Titan), 8.4%

Ameryah Cement (Cimpor), 7.8%

Sinai Cement (Vicat), 6.0%

Misr Beni Suef Cement, 4.3%

Misr Cement Qena, 5.0%South Valley Cement, 0.2%

National Cement, 7.4%



Chart 49: Egypt current capacity distribution by company


At the end of 2008, Egypt’s cement production capacity reached 43.3mn tons, compared to 41.8mn ton in 2007, recording a growth rate of 3.9%. The increase in the production capacity was attributable to the opening of South Valley Cement new production lines. The distribution of the current cement capacities in Egypt is found to be more concentrated in Suez and Sinai.

Chart 50: Egypt current cement capacities distribution by region


In order to meet the growing local cement consumption, Industrial Development Authority (IDA) held an auction in October 2007 to bid for new cement capacities licenses, either by new entrants or existing players wishing to expand their capacities. The bid resulted in the sale of 8 out of the 10 offered new licenses against a total sum of LE1.14bn, to add 12MTA of cement capacity.

Later in January 2008, IDA offered the remaining two licenses in El-Wadi El-Gedid and Sohag governorates for bidding. The bid resulted in the sale of El-Wadi El-Gedid license, whereas Sohag license was postponed, after all the companies applied for the license have been disqualified. Accordingly, total new cement capacities additions resulting from IDA auction summed up to 13.5mn ton tons of cement capacity, which are planned to start production between 2010 and 2011.

Italcementi (Suez, Helwan,Torah), 27.3%

Egyptian Cement Company(lafarge), 23.1%Assuit Cement (Cemex), 11.5%

Alexandria & Beni Suef Cement (Titan), 7.6%

Ameryah Cement (Cimpor), 8.5%

Sinai Cement (Vicat), 3.5%

Misr Beni Suef Cement, 3.5% Misr Cement Qena, 3.5%South Valley Cement, 3.5%

National Cement, 8.1%

Lower Egypt, 12%

Upper Egypt, 26%Central Egypt, 26%

Suez & Sinai, 36%



Table 05: Cement new capacities licenses winners

Company

License cost

(LE mn) Governorate

Capacity

(MTA)

Expected

commencement date

Wadi Al-Nil Cement 251 Beni Suef 1.5 2010

El-Sewedy Cement 201 Suez 1.5 2010

Arab National Cement 200 El-Menya 1.5 2011

Al-Nahda for Industries 83 Qena 1.5 2011

North Sinai Cement 44 North Sinai 1.5 2011

Construction Material 22 Assuit 1.5 2010

El-Wadi Cement - El-Wadi El-Gadid 1.5 2011

Total Greenfield capacities 801 10.5

Assuit Cement 202 Assuit 1.5 2010

Beni Suef Cement 135 Beni Suef 1.5 2010

Total expansion capacities 337 3.0

Total new capacities 1,138 13.5Source: Industrial Development Authority (IDA) & Global Research

It is worth mentioning that 7 out of the 9 new licenses were oriented toward Upper Egypt, where the country is far less developed and needs a lot of infrastructure and public utilities development projects. The concentration of the new licenses in Upper Egypt came in synchronization with the government plan to prioritize and encourage investment in Upper Egypt.

Chart 51: Egypt forecasted cement capacity distribution by region in 2011


In addition, there are approximately another 5mn ton of additional capacities that were licensed in prior periods to the latest auction. These new capacities are due to come on stream between 2009 and 2010. During 2009, Sinai Cement and Misr Beni Suef Cement new production lines will start production with a capacity of 1.5mn ton each, while a new Company called “Medcom” will start production in Aswan with a capacity of 1mn ton. In addition, Alexandria and Beni Suef Cement plan to increase their annual capacity by 200,000 tons through debottlenecking. Moreover, National Cement will expand its existing lines annual production capacity by 750,000tons on 2 phases, the first phase to be implemented in 2010 and the second phase in 2011.

Therefore, Egypt cement production capacity is expected to add around 18.5mn tons between 2009 and 2011, growing at a CAGR of 12.6% over the next 3 years. Accordingly, Egypt cement production capacity will come very close to 62mn ton.

Lower Egypt, 10%

Upper Egypt, 36%Central Egypt, 20%

Suez & Sinai, 32% Al-Wadi Al-Gedid, 2%



Chart 52: Egypt expected annual capacities additions


The capacities addition in Egypt coming on stream, along with the new capacities installation in the MENA region over the next 3 years, especially Saudi Arabia and United Arab Emirates, will create an oversupply in the region, where Saudi Arabia is expected to add 13.2mn ton and UAE is forecasted to add 16.8mn ton.

Unfortunately, the slowdown in the construction sector, resulting from the world financial crisis will exacerbate the severity of the excess supply situation in the region. However, on the bright side, Egypt is still witnessing a boom in the construction sector, despite the declining demand on building materials in the global markets. Therefore, we believe that the on-going high construction activity will act as a buffer, protecting Egypt’s cement industry from the negative consequences of the global financial crisis.

Pricing and cost

Pricing

Cement price in Egypt has been growing robustly since the start of 2008, driven by high demand resulting from higher construction activity, as explained earlier under supply and demand section. The average retail price of cement in Greater Cairo reached near LE600/ton in February 2009 from around LE400/ton at the beginning of 2008, recording a growth rate of 50%. Therefore, the government intervened with some measures, as indicated earlier under the regulations section, to bring discipline back to the cement market.

However, the imposed government regulations were successful to the extent that cement prices kept growing at a reasonable pace throughout 2008. Since the beginning of 2009, high local cement demand caused cement prices to hike again till it reached near the LE600/ton in February 2009.

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Chart 53: Average cement retail prices in Greater Cairo

Source: CBE, Ministry of Investment & Global research

It is worthy to mention that cement in other governorates is most likely traded at a premium to the average retail price prevailing in Greater Cairo. The highest retail price is found in Upper Egypt, due to transportation cost, where cement is traded on average at a 10%-15% premium compared to those prices in Greater Cairo. Accordingly, when prices in Greater Cairo reached near LE600/ton, prices in Upper Egypt climbed to more than LE700/ton.

Cost of production

The cost structure of the cement industry has evolved significantly over the past 2 years, on the back of the government decisions to liberalize energy prices for energy intensive industries. Therefore, cement cost of production witnessed a large increase over the course of 2008, where the median cash cost of production reached US$31.5/ton in 2008 from US$23.3/ton in 2007, recording a growth of 35.2% between 2007 and 2008. It is worth mentioning that cash cost of production increased further in Q1 2009 to reach US$35.2/ton.

Chart 54: Cash cost of production per ton in US$

Source: Companies financials & Global research

Initially, the liberalization of energy prices for energy intensive industries, including cement was introduced in mid-2007 to be implemented over 3-year period. The scheme encompassed increasing electricity prices from LE0.134/KWH to LE0.216/KWH for high voltage usages, through increasing electricity price by LE0.0273/KWH annually over 3 years. In addition, natural gas prices were set to increase from USD1.25/MBTU toUSD2.65/MBTU, via increasing its price by USD0.47/MBTU annually. The new scheme first phase of the liberalization of energy prices started in the first of September 2007, where electricity and natural gas prices became LE0.1613/KWH and USD1.72/MBTU, respectively.

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Later in May 2008, the government decided to shorten the liberalization of energy prices phase-out period. Consequently, starting from the first of July 2008, electricity prices were raised by approximately 52% from LE0.1613/KWH to LE0.245/KWH. Similarly, natural gas prices increased by 74.4% from USD1.72/MBTU to USD3.0/MBTU and fuel oil price increased by 100% from LE500/ton to LE100/ton. Moreover, the government imposed LE27/ton of clay extracted as a resources development fees, starting from first of July 2008.

However, the liberalization of energy prices will jeopardize the competitive edge of the Egyptian cement industry for its relative low cost of production, in favor of other regional competitors, who have lower cost of production and excess capacities, such as Saudi Arabia. Consequently, this will lead to squeezed profit margins for local cement producers, as they will not be able to raise their prices beyond imported cement, which has a lower cost, to compensate for the increasing cost of production.

Market Structure Analysis (porter’s five competitive forces)

Chart 55: Cement market competition analysis

Source: Global Research

Rivalry among Existing Players – High

Competition among existing players is high, as all cement manufacturers produce similar product mix with almost no differences with respect to the product quality. Therefore, cement producers compete along other dimensions, such as cost optimization, distribution channels and pricing. In addition, customer loyalty is low and creating a brand identity is difficult, as customers will always prefer to buy at lower prices, as long as the product is similar, irrespective of the brand name.

Competition among existing cement manufacturers was not fierce over the recent past, as the cement market witnessed a period of high demand, growing at a CAGR of 9% over the past 5-year period, that led some cement manufacturers to operate beyond their nominal capacities. However, the granted new cement capacities licenses besides allowing imports will intensify the competition among the existing players and the new entrants on capturing market share, leading to price wars.

Threat of New Entrants

Low

Threat of Substitute

Low

Rivalry among Existing Players

High

Bargaining Power of Suppliers

Low

Bargaining Power of Buyers

Low



Threat of New Entrants – High

The entry barriers to the cement industry are high, as the cement industry is a capital intensive industry and requires a large initial investment cost. In addition, a license is required to be issued by the government to operate a cement plant. Furthermore, economies of scale is important in operating a cement plant, as cement production fixed costs are high.

Bargaining Power of Suppliers – Low

Cement manufacturing raw materials, such as limestone and clay are located abundantly in Egypt. In addition, all cement manufacturers in Egypt have concessions to raw material quarries. Therefore, the bargaining power of suppliers is weak.

Bargaining Power of Buyers – Low

There are two different buyers in the cement market, traders and agents and on the other hand end-users. The majority of cement distribution is controlled by traders, who purchase cement from cement manufacturers and resell it to the end users. The high demand witnessed in the local market gave more power to cement manufacturers and traders, who benefited from the situation by raising cement prices. In other words, cement producers and traders became price makers and end-customers price takers.

Therefore, the government intervened with a set of regulations, as mentioned earlier, to regulate the local cement market. However, power is expected to shift to end-users when the new cement capacities come on stream, leading to a balance between the supply and demand forces.

Threat of Substitutes – Low

There is no effective substitute for cement.



Cement market forecast

Supply and Demand

As long as cement consumption is heavily dependent on the construction activity, which in turn is highly correlated with the economic performance. We regressed the change in local cement consumption against the change in GDP over the past 12 years, in order to be able to project how local cement consumption will evolve over the coming 5 years, given the change GDP. The resulting regression equation is:

%Δ Local cement demand= -0.15+4.19 %Δ GDP

This regression equation is found to be statistically significant with a coefficient of determination (R²) of 71.8% and standard error of 4.1%.

Table 06: Historical and projected GDP growth vs. local cement consumption growthGDP Growth Local consumption growth

1996/97 5.3% 8.5%1997/98 4.1% 7.2%1998/99 5.4% 11.1%1999/00 5.9% 7.0%2000/01 3.4% -0.9%2001/02 3.2% 0.8%2002/ 03 3.1% -7.1%2003/ 04 4.2% -2.3%2004/ 05 4.6% 2.3%2005/ 06 6.9% 18.8%2006/ 07 7.1% 8.1%2007/ 08 7.2% 14.7%2008/09F 4.0% 1.4%2009/10F 4.5% 3.5%2010/11F 6.0% 9.7%2011/12F 6.5% 11.8%2012/13F 6.8% 12.9%2013/14F 7.0% 13.9%

Source: Ministry of Economic Development & Global Research

The local cement consumption volume resulting from the regression equation represents estimated local consumption for the period from July to June of each year. Therefore, we calculated the average local consumption for each respective year and the year that follows to obtain an annual local consumption forecast for the period from January to December of each year for the coming 5 years.

Table 07: Projected local cement consumptionMid-year Tons (mn) Full year Ton (mn)2008/09F 37.322009/10F 38.61 2009 37.962010/11F 42.37 2010 40.492011/12F 47.39 2011 44.882012/13F 53.49 2012 50.432013/14F 60.95 2013 57.22




The regression equation estimated that local cement consumption is forecasted to be 37.96mn ton, which is lower than local consumption in 2008. Therefore, we adjusted the regression results to cope with the fact that local cement consumption in the first 3 months of 2009 was running at 23% higher than Q1 2008. According to our analysis, we forecast that local cement consumption will grow at a CAGR of 8.3% over the next 5 year. However, we estimated that local cement consumption will grow at a slower pace in 2010 and 2011 after growing vigorously over the past 3 years. Afterwards, local cement demand will rebound gradually starting from 2012.

Table 08: Adjusted forecasted local cement consumption

Year

Forecasted consumption

(Ton mn) Premium

Adjusted forecasted

consumption (Ton mn)

Annual

growth

2008A 38.40 - 38.40

2009F 37.96 12% 42.52 10.7%

2010F 40.49 10% 44.54 4.7%

2011F 44.88 5% 47.12 5.8%

2012F 50.43 2% 51.45 9.2%

2013F 57.22 0% 57.22 11.2%Source: Global Research

In order to forecast local and export sales for each player in the market, we started with assuming a utilization rate for each market player in the cement industry for the next 5 years, taking into consideration each respective player historical utilization rate and the new capacities additions.

Afterward, we multiplied the utilization rate of each cement manufacturer by its annual cement production capacity to obtain each player cement production. By summing up individual cement production, we reached to the total cement production, which is then subtracted from total local consumption to get the total exports sales.

Subsequently, we allocated total export sales to each market player based on every player respective historical share in cement exports, taking into consideration the entrance of new competitors in the market. Finally, we subtracted each manufacturer cement production from forecasted exports to get estimated local sales for each market participant.

Chart 56: Forecasted cement production capacity, utilization rate, local & exports sales


We believe that exports sales are expected to witness a slight growth in 2009, before it will start to rebound in 2010 and 2011, as the construction sector in Europe, which represents Egypt’s major

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export destination, is expected to recover. Afterwards, exports will decline in 2012 till it reaches 2008 levels in 2013, as local demand is expected to rebound, according to our estimates.

We believe that Africa represents a real potential for the Egyptian cement exports, as many African countries are still under developed, besides they do not have the sufficient cement capacity to meet their local demand. The main obstacle to achieve this target is the unavailability of transportation networks. However, Europe is expected to remain a major export destination, due to its proximity to Egyptian ports. On the other hand, the exports to the Arabian Peninsula countries are forecasted to decline considerably, on the back of the new cement production capacity that will come on stream in that region during the next 2 to 3 years, which are expected to cover this region’s deficit.

Chart 57: Egypt’s forecasted major export markets


Prices

Cement local selling prices is expected to witness some stabilization throughout the remaining months of 2009, resulting from the latest government decisions of banning exports, allowing imports and printing retail price on cement bags.

Moreover, cement selling price is not expected to drop notably, as it did not witness the significant surge in its retail price like other building materials prices, such as steel rebars, which increased by around 88%, reaching LE6,630/ton in mid 2008, compared to LE3,530/ton at the end of 2007. Therefore, steel prices witnessed a hard landing, reaching LE3,150/ton in March 2009. The following graph emphasis our argument, as it shows the indexed retail local selling prices of cement and steel rebars since the start of 2006.



Chart 58: Cement and steel rebars indexed retail local selling prices


However, we believe that cement prices will calm down in 2010 and 2011, when new cement capacities are expected to come on stream, before it continue to grow moderately in 2012 and 2013. The capacities additions in the local market will coincide with the new capacities additions in the region, especially in Saudi Arabia and UAE. This will create an oversupply situation in the local and regional markets, leading to price wars.

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SWOT Analysis

Strengths

• Abundant and cheap raw materials and labor. • Relatively low production cost, compared to other countries in the region.• Competitive cement selling price.• Local demand remained high, despite the global financial crisis.

Weaknesses

• Liberalization of energy prices.• The imposition of US$5/ton on clay used in production.• Minimal environmental regulations. • Distortions in the local cement market, due to manipulation of cement prices by

traders.

Opportunities

• Large government planned infrastructure investments.• Large population base, guaranteeing continuous housing and social development

demand.• High housing demand, especially in the low and lower middle segments.• Egypt geographical location gives it flexibility to direct cement exports.• Lower steel prices encouraged more construction activity.

Threats

• Slowing down GDP and investments.• Large new cement capacities additions in the region, including Egypt.• Loss of export markets due to exports banning.• More government intervention to raise raw materials and fuel prices.



Outlook

Egypt cement sector outlook is positive, on the back of the continuing activity in the construction sector. The growth in the construction sector is expected to be driven by the government plan to boost investments in infrastructure projects, as well as low income housing and industrial development projects, in addition to the improvement of under developed areas in Egypt. Furthermore, the private sector investments in the residential, commercial and hospitality real estate segments are expected to support the construction sector, as well.

However, the government intervention in the cement industry through increasing energy prices for energy intensive industries, including cement, harmed the competitive edge of the Egyptian cement sector, for its relatively low cost of production. In addition, banning cement exports could jeopardize the position of the Egyptian cement in export markets, yet we believe the negative effect will be marginal, as Europe, which represents Egypt’s main export market, is witnessing a severe decline in demand.

Although the government decision to shorten cement imports clearing period could work to stabilize local prices, regulating imports will be a critical issue, especially that Saudi Arabia, where several new capacities are under their way, removed the export ban. Saudi Arabia has lower cost of production and could export to Egypt at low prices. This situation will create unfavorable market conditions for all cement producers, in the form of price war, which will lead to lower profitability and extended payback period for new investments.

Moreover, the capacities additions in Egypt are expected to come on stream along with the new capacities installation in the MENA region over the next 3 years, especially in Saudi Arabia and UAE, creating an oversupply situation. Unfortunately, these new capacities coincided with a slowing construction sector on the regional level. This situation is expected to result in price wars, as well as delays in the planned commissioning dates of the new announced capacities and lower utilization rates.

With respect to cement local price, we believe that prices will go down in 2010 and 2011, on the back of the competition from imported cement, as well as the commissioning of the new local cement capacities over the next 2 years, before it continue to grow moderately in 2012 and 2013. On the other hand, local cost of production is not expected to grow significantly, like what happened over the past year, assuming that the government will not intervene to materially raise the cement industry raw materials or fuel cost.

Finally, we believe that the cement local demand will be the white knight, which will be able to provide a safety cushion to the cement industry against turbulences witnessed in the export markets. Despite the negative consequences of the financial crisis on the world economy, Egypt cement sector outlook is still believed to be promising.



Cement Sector Financial Performance

The aggregate financial performance of all the cement companies listed on the Egyptian Exchange is depicted in the following table.

Table 09: Cement sector financial performance 2007 2008 Y-o-Y %

(Values in LE mn) Revenue EBITDA Net

Profit Revenue EBITDA Net

Profit Revenue EBITDA Net

ProfitSuez Cement Group 4,196 1,698 981 5,542 2,077 1,041 32.1% 22.3% 6.1%Egyptian Cement 3,208 1,797 1,548 3,449 1,849 1,494 7.5% 2.9% -3.5%Assuit Cement 1,731 902 477 2,316 881 576 33.7% -2.4% 20.8%Alexandria Cement 533 276 175 733 287 208 37.6% 3.8% 18.8%Amiryah Cement 946 462 286 1,310 587 408 38.4% 27.1% 42.7%National Cement* 975 346 231 1,155 317 240 18.4% -8.4% 3.9%Sinai Cement 656 381 342 906 475 414 38.1% 24.8% 21.3%Misr Beni Suef Cement 588 397 193 660 421 202 12.2% 6.1% 4.8%Misr Cement Qena 597 344 276 773 408 303 29.5% 18.3% 9.6%

*As National Cement FY ends on June 30, we adjusted the Company’s figures to show it on a comparables basis to other cement companies.Source: Companies’ Financials & Global Research

The aggregate sales revenue of the cement sector grew by 25.4% in 2008, where it increased from LE13.4bn in 2007 to LE16.8bn in 2008. Although sales volume slightly decreased by 0.3% in 2008, the increase in the average selling price per ton from LE331/ton in 2007 to 417/ton in 2008, outweighed the decline in the sales volume, leading to high growth in sales revenue. It is worth mentioning that we excluded South Valley Cement from our calculations because its financial results are distorted, as it started cement production in May 2008, yet the Company was established in 1997, operating as a portfolio management company managing its own portfolio of actively traded securities. Accordingly, its profitability ratios and valuation multiples will not be comparable to any other cement company.

Chart 59: Average selling price for all cement companies

*Assuit Cement Q1 2009 results was not available, as the Company was delisted on April 2009.Source: Companies’ Financials & Global Research

Suez Cement Group achieved the highest sales value, capturing 33% of the total market sales value, followed by Egyptian Cement and Assuit Cement, representing 20% and 14% of aggregate sales value, respectively. Collectively, the three companies accounted for 67% of the total market sales revenue. These results are in line with the three companies’ sales volumes and production capacities.

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Qena2007 2008 Q1 2009



Moreover, Amiryah Cement achieved the highest growth rate in revenue in 2008, on the back of the 13% increase in sales volume and the 22% growth in average selling price. Sinai Cement ranked second in terms of growth in revenue driven by the commencement of production of its second production line during the Q4 2008, boosting sales volumes in 2008 by 20%.

On the other hand, the cash cost of production reached US$31.5/ton in 2008 from US$23.3/ton in 2007, increasing by 35.2%. Additionally, the cash cost of production increased further by 12% in Q1 2009 to reach US$35.2/ton. This growth in cash cost of production, came mainly on the back of the liberalization of energy prices, as we explained earlier.

It is worth mentioning that Suez Cement Group reported the highest cash cost of production of US$57.6/ton in Q1 2009, whereas Alexandria Cement had the lowest cash cost of US$24.7/ton in the same period.

Chart 60: Cash cost of production for all cement companies


Furthermore, the cement sector aggregate EBITDA reached LE7.3bn in 2008, compared to LE6.6bn in 2007, recording a growth rate of 10.6%. All cement companies average EBITDA margin reached 43.7% in Q1 2009, compared to 49.2% and 43.4% in 2007 and 2008, respectively. Misr Beni Suef Cement achieved the highest EBITDA margin of 59.4% in Q1 2009 among all cement market players, while National Cement Company recorded the lowest EBITDA margin of 25.8% in Q1 2009.

Chart 61: Cement sector EBITDA margin


With respect to net profit, the cement sector overall net profit reached LE4.5bn in 2008, compared to LE4.9bn in 2007, achieving a growth rate of 8.4%. All cement companies’ average Return on Sales (ROS) reached 31.7% in Q1 2009, compared to 33.6% and 29% in 2007 and 2008, respectively. Misr

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Qena2007 2008 Q1 2009



Beni Suef Cement also achieved the highest ROS of 46.4% in Q1 2009 relative to all other cement companies, whereas National Cement Company recorded the lowest ROS of 18% in the same period.

Chart 62: Cement sector ROS


Finally, the average ROE for all cement companies declined to 29.2% in 2008, compared to 30.3% in 2007. During 2008, the highest ROE was achieved by ECC, reaching 103.1%, while Assuit Cement reported the lowest ROE of 17.1%.

Chart 63: Cement sector ROE

Source: Companies’ Financials & Global Research

Valuation ratios

Table 10: Cement companies valuation ratios*PE PBV EV/EBITDA EV/Ton (US$)

Suez Cement 5.9 0.9 2.8 101.0 ECC 0.2 0.2 0.7 38.3 Assuit Cement^ 2.0 - 1.3 41.2 Alexandria Cement 4.0 1.3 2.9 44.9 Amiryah Cement 6.1 1.9 4.1 140.1 National Cement 6.9 2.2 4.4 79.9 Sinai Cement 6.1 1.5 4.8 185.7 Misr Beni Suef Cement 8.7 1.9 3.8 173.0 Misr Cement Qena 7.7 3.1 4.2 172.0 Average 3.5 1.4 2.5 88.5 Median 6.1 1.5 3.8 101.0

Multiples are based on last market prices as of June 30th, 2009.* Ratios are calculated using balance sheet figures as of March 31st, 2009 & income statement figures on December 31st, 2008^ Assuit Cement Q1 2009 results was not available, as the Company was delisted on April 2009Source: Companies’ Financials & Global Research

SuezCement

ECC AssuitCement*

AlexandriaCement

AmiryahCement

NationalCement

SinaiCement

Misr BeniSuef

Cement

MisrCement

Qena2007 2008 Q1 2009

23.4

% 48.3

%

27.5

%

32.9

%

30.2

%

23.7

%

52.0

%

32.8

% 46.3

%

18.8

% 43.3

%

24.9

%

28.4

%

31.2

%

20.8

% 45.7

%

30.7

%

39.2

%

21.7

% 41.6

%

0.0% 29

.5%

32.1

%

18.0

% 42.3

%

46.4

%

42.3

%

0%

10%

20%

30%

40%

50%

60%

SuezCement

ECC AssuitCement*

AlexandriaCement

AmiryahCement

NationalCement

SinaiCement

Misr BeniSuef

Cement

MisrCement

Qena2007 2008

17.7

%

93.7

%

17.1

%

25.2

%

29.9

%

42.6

%

28.6

%

27.4

%

33.7

%

16.9

%

103.

1%

17.1

%

28.9

%

34.6

%

43.0

%

26.8

%

24.1

%

31.9

%

0%

20%

40%

60%

80%

100%

120%



Regional Cement Sector Performance

Chart 64: Regional peer EBITDA margin in 2008


Chart 65: Regional peers ROS in 2008


Chart 66: Regional peers ROE in 2008


44.0

%

62.1

%

71.0

%

20.8

% 66.6

%

67.2

%

72.2

%

60.4

%

31.7

%

34.6

%

31.6

%

33.3

%

15.8

%

23.2

%

14.3

%

20.8

%

39.9

%

23.5

%

28.5

%

23.3

%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%

Arabian

Easter

n Pro

vince

Qassim

Saudi

Southe

rn P

rovin

ce

Tabuk

Yamam

a Sau

di

Yanbu

Arkan

Buil

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ateria

lsGulf

Fujaira

h

Sharja

h

Nation

alRAK

Umm Al Q

aiwain

Union

Raysu

t

Oman

Kuwait

Qatar N

ation

al

Arabian

Easter

n Pro

vince

Qassim

Saudi

Southe

rn P

rovin

ce

Tabuk

Yamam

a Sau

di

Yanbu

Arkan

Buil

ding M

ateria

lsGulf

Fujaira

h

Sharja

h

Nation

alRAK

Umm Al Q

aiwain

Union

Raysu

t

Oman

Kuwait

Qatar N

ation

al

35.3

%

54.4

%

63.0

%

49.3

%

60.9

%

52.0

%

54.4

%

51.2

%

-42.

0%

0.2%

26.3

%

21.0

%

34.8

%

18.8

%

6.4%

14.0

%

30.4

%

19.7

%

5.0%

29.3

%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

Arabi

an

Easter

n Pro

vinc

e

Qassim

Saud

i

Sout

hern

Pro

vinc

e

Tabu

k

Yamam

a Sau

di

Yanbu

Arkan

Bui

ldin

g Mate

rials

Gulf

Fujai

rah

Shar

jah

Nation

alRAK

Umm

Al Q

aiwain

Union

Raysu

t

Oman

Kuwait

Qatar N

ation

al

14.6

%

23.2

%

30.0

%

21.8

%

33.5

%

14.5

%

21.5

%

23.8

%

-18.1

%

0.1

%

20.7

%

17.5

%

7.5

%

10.0

%

1.2

%

11.1

%

27.6

%

10.6

%

3.2

%

25.2

%

-30.0%-20.0%-10.0%

0.0%10.0%20.0%30.0%40.0%



Table 11: Regional peers valuation ratios*PE PBV EV/EBITDA EV/Ton (US$)

Arabian Cement 11.1 1.6 11.3 410.9 Eastern Province Cement 8.8 2.2 7.2 321.5 Qassim Cement 10.2 2.8 8.2 432.1 Saudi Cement 9.4 2.2 26.8 356.3 Southern Province Cement 10.9 3.8 9.5 439.1 Tabuk Cement 12.8 1.8 7.9 364.5 Yamama Saudi Cement 8.8 2.0 6.8 326.5 Yanbu Cement 9.0 2.4 7.5 294.7 Saudi Arabia Average 9.8 2.4 9.4 367.0 Saudi Arabia Median 9.8 2.2 8.0 360.4

Arkan Building Materials N/A 4.9 37.0 N/A Gulf Cement 933.9 1.3 4.3 N/A Fujairah Cement 5.7 1.3 7.2 N/A Sharjah Cement 3.9 0.7 2.7 N/A National Cement 6.7 0.6 14.2 N/A RAK Cement 7.5 0.8 6.0 N/A Umm Al Qaiwain Cement 36.1 0.5 13.3 N/A Union Cement 8.4 1.0 5.7 N/A UAE Average 25.2 1.5 9.6 N/A UAE Median 7.5 0.9 6.6 N/A

Raysut Cement 11.0 3.5 7.9 278.2 Oman Cement 14.5 1.6 10.8 211.2 Oman Average 12.1 2.4 8.8 249.0 Oman Median 12.8 2.5 9.4 244.7

Kuwait Cement 70.6 3.0 12.4 N/A

Qatar National Cement 6.9 2.3 13.6 N/A

Regional Average 12.1 2.1 9.7 350.9 Regional Median 9.4 1.9 8.1 341.4

Multiples are based on last market prices as of June 30th, 2009. * Ratios are calculated using balance sheet figures as of March 31st, 2009 & income statement figures on December 31st, 2008




Valuation and Recommendation

In order to arrive at fair value for cement companies under review, we have used two valuation methods:

1. Discounted Cash Flow (DFC) method, using Free Cash Flow to Firm (FCFF) approach.

2. Relative valuation method, using Enterprise Value to Earnings before Interest, Taxes, Depreciation and Amortization (EV/EBITDA).

Discounted Cash Flow (DCF) method

The Discounted cash Flow (DCF) method used in the valuation of cement companies under review was the Free Cash Flow to Firm (FCFF) approach, which is defined as after tax operating cash flow after covering all the company’s capital expenditures and working capital needs. Our forecast horizon extends for 5 years, from 2009 to 2013, which represent the terminal year. The terminal value is estimated using constant growth Gordon Growth Model. The forecasted FCFF and the terminal value are then discounted at the company’s Weighted Average Cost of Capital (WACC), in order to arrive at total enterprise value. Afterwards, cash is added to enterprise value and debt deducted from it to arrive at the company’s equity value, which is then divided by the total number of shares to reach the company’s per share fair value.

In our DCF valuation, we have used the following assumptions:

1. Risk Free Rate (RFR) of 10.5%, representing the weighted average Yield to Maturity (YTM) on April 2014 treasury bonds.

2. Market risk premium of 9.5% was assumed.

3. Beta of 1.

4. The cost of equity was calculated using the Capital Asset Pricing Model (CAPM).

5. Perpetual growth of 3%.

Under these assumptions, the cost of equity reached 20% and a WACC of 20% were used for Sinai Cement and Misr Cement Qena, as these two companies are free of debt. On the other hand, the WACC used for Misr Beni Suef Cement was 19.7%, as the Company has a debt burden, which has a cost of 11.6%. As we mentioned earlier the company has a tax holiday, therefore it does not benefit from the interest tax shield.

Table 12: Per share value using DCF method

Company NameFair value per

share (LE)

Sinai Cement Company 108.3

Misr Cement Qena Company 85.8

Misr Beni Suef Cement Company 165.2Source: Global Research



Relative Valuation Method

We compared cement companies under review with other cement producers in the region, in terms of Enterprise Value to Earnings before Interest, Taxes, Depreciation and Amortization (EV/EBITDA). We preferred to use EV/EBITDA rather than Price to Earnings ratio (PE), as it puts different companies on a comparable basis irrespective of their capital structure. We reached a weighted average EV/EBITDA of 2.51x for the cement sector in Egypt, 9.40x for the cement sector in Saudi Arabia, 9.59x for the cement sector in UAE, 8.77x for the cement sector in Oman, 12.36x for the cement in Kuwait and 13.56x for the cement sector in Qatar. This resulted in an overall weighted average EV/EBITDA of 6.82x for the cement sector in the region.

Table13: Peer group EV/EBITDACompany Name EV/EBITDA Suez Cement Company 2.75 Egyptian Cement Company 0.70 Assuit Cement Company 1.29 Alexandria Cement Company 2.90 Amiryah Cement Company 4.11 National Cement Company 4.36 Sinai Cement Company 4.76 Misr Beni Suef Cement Company 3.76 Misr Cement Qena Company 4.19 Egypt Cement Sector weighted average 2.51

Arabian Cement Company 11.29 Eastern Province Cement Company 7.23 Qassim Cement Company 8.22 Saudi Cement Company 26.78 Southern Province Cement Company 9.52 Tabuk Cement Company 7.88 Yamama Saudi Cement Company 6.75 Yanbu Cement Company 7.53 Saudi Cement Sector weighted average 9.40

Arkan Building Materials 37.03 Gulf Cement Company 4.29 Fujairah Cement Company 7.19 Sharjah Cement Company 2.75 National Cement Company 14.21 RAK Cement Company 5.98 Umm Al Qaiwain Cement Company 13.30 Union Cement Company 5.72 UAE Cement Sector weighted average 9.59

Raysut Cement 7.90 Oman Cement 10.84 Oman Cement Sector weighted average 8.77

Kuwait Cement Company 12.36 Kuwait Cement Sector weighted average 12.36

Qatar National Cement Company 13.56 Qatar Cement Sector weighted average 13.56

Overall Weighted Average 6.82EV is calculated using June 30th, 2009 last market price * Assuit Cement Q1 2009 results was not available, as the Company was delisted on April 2009, we used cash and debt balances as of 31/12/2008, Source: Stock Exchanges & Global Research



Consequently, companies under review fair value per share based on multiple valuation are shown in the table below:

Table 14: Per share value using multiple valuation

Company NameFair value per

share (LE)




In order to arrive at the weighted average fair value per share for each cement company, we have assigned an 80% weight to DCF valuation and 20% weight to relative valuation. The weighted average per share value for each company is illustrated in the table below:

Table 15: Per share weighted average fair value

Company NameWeighted average

value (LE)




Risks to valuation

• Lower than forecasted local and export cement demand, would adversely affect the projected sales volumes.

• Lower than forecasted sales volumes and/or selling price, would negatively affect the projected sales values, which in turn will lead to lower valuation.

• Higher than projected cost of production would affect valuation adversely.

• Higher than projected capital expenditure would negatively affect valuation.



Players Profile



Tickers:SCEM.CA (Reuters)SCEM:EY (Bloomberg)

Listing:The Egyptian Exchange (EGX)

Fair Value:LE107.3

CMP:LE71.98 (As of June 30th, 2009)

July, 2009

BUY

Sinai Cement Company

The Company’s cement plant, located in North Sinai, started cement production in January 2001, with a production capacity of 1.5mn ton.

On August 2006, the Company contracted with FLSmidth to establish a second production line with a production capacity of 1.5mn ton. The new production line started operation in late 2008, raising the Company’s production capacity to 3mn ton.

Sinai Cement Company holds a 25.4% stake in Sinai White Cement Company and a 99.96% in Sinai Cement Services Company. It is worth mentioning that the Company’s Board of Directors (BOD) approved on December 2007, the establishment of Sinai Cement Services Company, with an authorized capital of LE250mn and issued capital of LE25mn. Sinai Cement Company paid 50% of Sinai Cement Services’ capital, as of the end of first quarter of 2009.

The Company will raise its issued and paid-in capital from LE350mn to LE700mn, in order to finance the second production line. It is important to note that trading on Sinai Cement stocks is limited to the local investors and is prohibited on foreigners.

On August 2008, Sinai Cement Company was fined LE20mn for conduction anti-competitive practice during the period from May 2005 to the end of 2006. The Company and other local cement producers were accused of forming a cartel to manipulate local cement prices and dividing market shares among them.

Key Data

Market Cap. (LEmn) # 2,519EPS (LE)* 9.2BVPS (LE)* 23.8P/E* 7.8P/BV* 1.512M Avg. vol. 34,00152 week Low/High (LE) 29.0/75.0

Source: Global Research# As of June 30th, 2009* 2009 projected EPS & BV

Company Background

Sinai Cement Company was incorporated in 1998, as an Egyptian Joint Stock Company, subject to Law No. 8 of year 1997, and its executive regulations. Sinai Cement is specialized in the production of grey cement and its related products. Sinai Cement Company is listed on the Egyptian Exchange (EGX) since July 2000.



Management

Sinai Cement Company is chaired by Eng. Hassan Rateb. The Company’s Board of Directors (BoD) was elected in 2007 for a 3-year period. The table below shows the current board members.

Table 16:Sinai Cement Board MembersHassan Rateb Chairman

Eric Hollar Managing Director

Gilbert Nathan Board Member

Mohamed Sanhory Board Member

Salah Yassin Board Member

Ezzat Ghazy Board Member

Anis El Hindy Board Member

Adel Nasr El Din Board Member

Rehab Rateb Board Member

Louis Vicat Board MemberSource: EGX

Shareholding and Liquidity

Sinai Cement Company’s authorized capital is LE1bn, while the issued and paid-in capital is LE350mn, distributed over 35mn shares, with a par value of LE10/share. On November 2008, the Company’s extraordinary general assembly approved increasing the Company’s issued and paid-in capital by LE350mn, through a 1:1 stock dividend distribution, in order to finance the Company’s second production line.

Accordingly, the Company’s issued and paid-in capital will reach LE700mn, distributed over 70mn shares, at a par value of 10/share. It is worth mentioning that the capital increase was not listed until now.

Chart 67: Sinai Cement Shareholders Structure as of March 31st, 2009

Source: EGID

Vicat Misr Cement Industries Company holds a 39.6% stake in Sinai Cement Company, whereas the Company’s free float reached 26.3% as of March 31st, 2009. It is important to note that foreigners are banned from trading on Sinai Cement stock.

Social Insurance Fund forPublic Sector Labor, 9.4%

Sama Cement, 9.4%Vicat Misr CementIndustries, 39.6%

Al Arabia Co. for IndustrialInvestment, 6.2%

Others, 9.0%Free Float, 26.3%



Table 17: Stock Liquidity2007 2008 2009*

Average Daily Volume 50,612 51,727 36,813

Average Daily Turnover (LE000) 3,054 3,216 1,808

Market Capitalization (LE000) ** 2,390,500 1,159,200 2,519,300* Average daily volume and turnover for the period from January to June 2009.** Market Capitalization is calculated on respective year-end prices and for 2009 as of June 30th, 2009. Source: Mubasher and Global Research

The Company’s stock was underperforming the EGX 30 Index, as well as the Building Materials index till November 2008. Afterwards, Sinai Cement stock outperformed the EGX30 and it was moving in line with the Building Materials Index.

Chart 68: Sinai Cement share price performance chart

Source: Mubasher, EGX and Global Research

Table 18: Sinai at a glanceCMP (LE) Shares in Issue (mn) M-Cap (LE mn) 52-Week Hi/Lo (LE)

71.98 35 2,519 75 29.02

Year

Gross Profit

(LE mn)

Net Profit

(LE mn)

EPS

(LE)

BVPS

(LE)

ROAE

(%) P/E (x) P/BV (x)2010 F 691,512 514,440 7.35 24.51 30.45% 9.79 1.47 2009 F 785,918 643,841 9.20 23.77 40.09% 7.83 1.51 2008 A 544,355 434,131 12.40 44.23 31.65% 2.79 1.63 2007 A 465,310 341,539 9.76 34.14 32.40% 7.15 2.11


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SCEM EGX30 Building Materials Index



Financial Performance

Income Statement Analysis

During the period from 2004 to 2008, Sinai Cement Company’s total sales volume has reported a robust growth, rising at a CAGR of 18.7%. This strong growth came on the back of the increase in local cement sales volume, where it increased form 0.9mn ton in 2004 to 2.3mn ton in 2008, growing at a CAGR of 26.3%. This can be attributed to the surge witnessed in the local cement consumption, driven by the higher construction activities witnessed in the country. In 2008, the Company’s local cement sales volume grew by 44.8%, compared to 2007. Meanwhile, the exported cement volume dropped by 74.7% in 2008, on the back of the Minister of Trade and Industry decision to ban cement exportation for a 6-month period from March to October 2008, as well as the surging local demand.

Chart 69: Sinai Cement Sales Volume Breakdown

Source: Sinai Cement Company and Global Research

Moreover, the increase witnessed in the local cement demand in 2008 has fuelled the growth in the selling prices, where Sinai Cement Company’s average selling price rose by 15.2% in 2008. Consequently, the Company’s total sales value climbed to LE906.3mn in 2008 from LE656.4mn in 2007, achieving a growth rate of 38.1%. Sinai Cement Company maintained a healthy growth in its sales value over the past 4 years, growing at a CAGR of 28.9% from 2004 to 2008.

Chart 70: Sinai Cement Sales Value and Average Price


0.60.6

0.4

0.1

1.0 1.2 1.6 2.3

1.9%

7.3%

11.1%

19.9%

0.0

0.5

1.0

1.5

2.0

2.5

2005 2006 2007 2008

Tons

mn

0%

5%

10%

15%

20%

25%

Local Sales Export Sales Growth in sales

421.0 540.2 656.4 906.3

306326 332

382

0100200300400500600700800900

1,000

2005 2006 2007 2008

LE m

n

0

50

100

150

200

250

300

350

400

450

LE

Total Sales Value Average price per ton (right scale)



The government’s plan to reduce the subsidy bill through cutting the energy subsidies for the energy intensive industries, including the cement, implemented since mid 2007, has raised the Company’s cash cost of production by 58.0% in 2008, reaching LE153/ton from LE97/ton in 2007. It is worth mentioning that cash cost of production is calculated by excluding depreciation expense from cost of sales.

Chart 71: Sinai Cement average selling price and cash cost of production


Consequently, COGS soared by almost 90% in 2008, from LE191.1mn in 2007 to LE362.0mn in 2008. This increase in COGS out-weighted the growth in sales, leading to an escalation in the COGS/Sales ratio from 29.1% in 2007 to 39.9% in 2008. Chart 72: Sinai Cement Cost of Goods Sold (COGS)


Although the S,G&A declined as a percent of sales from 12.8% in 2007 to 7.6% in 2008, the EBITDA margin decreased from 58.1% in 2007 to 52.5% in 2008, as the hike witnessed in the COGS outpaced the growth in the sales and the decline in the S,G&A.

306326 332

382

85 89 97

153

72.1% 72.5% 70.9%

60.1%

-

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008

LE

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Average price per ton Cash cost per ton Spread

142159

191

362

2.6% 12.4%20.1%

89.5%

33.6% 29.5%

29.1%

39.9%

-

50

100

150

200

250

300

350

400

2005 2006 2007 2008

LE m

n

0%

20%

40%

60%

80%

100%

COGS Growth in COGS COGS/Sales



Chart 73: Sinai Cement EBITDA


Sinai Cement Company enjoys a10 year tax exemption according to Law no. 8 of year 1997. The tax holiday started in 2002 and will end in 2011. It is worth mentioning that the Company paid LE0.32mn in 2008, representing the 20% taxes on the interest income, which is not included in the tax holiday.

The Company has incurred LE20mn, reported as extraordinary item in 2008, as a result of the court’s decision for committing anti-competitive practice during the period from May 2005 to the end of 2006. In turn, the Company’s Return on Sales (ROS) declined from 52.0% in 2007 to 45.7% in 2008.

Chart 74: Sinai Cement Net Profit


Balance Sheet Analysis

In 2008, the Company’s total assets grew by 29.9%, reaching LE1.8bn, compared to LE1.4bn in 2007. The Company’s asset structure is dominated by the long term assets, which include fixed assets and projects under construction. The long term assets increased from LE672.0mn in 2006 to LE1.2bn and LE1.4bn in 2007 and 2008, respectively, as the Company established a second production line, which was contracted in August 2006, to double its cement annual production capacity from 1.5mn ton to 3mn ton. The remaining cost to complete the second line is estimated to be LE150-160mn, based on the Company’s management guidance.

Sinai Cement Company’s investments, which constituted 5.9% of total assets, grew from LE80.2mn in 2007 to LE103.1mn in 2008, up by 28.5%. It is worth mentioning that the

230 326 381 475

54.6%

60.3%

58.1%

52.5%

-50

100150200250300350400450500

2005 2006 2007 2008

LE m

n

40%

45%

50%

55%

60%

65%

EBITDA EBITDA Margin

182

287342

414

43.2%

53.1% 52.0%

45.7%

-

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008

LE

mn

0%

10%

20%

30%

40%

50%

60%

Net profit Return on Sales



Company holds a stake of 25.4% in Sinai White Cement Company. In addition, the Company’s Board of Directors (BOD) approved on December 2007, the establishment of Sinai Cement Services Company, with an authorized capital of LE250mn and issued capital of LE25mn. Sinai Cement will hold a 99.96% stake in the new company. It is worth mentioning that Sinai Cement paid 50% of Sinai Cement Services’ capital, as of the end of first quarter of 2009.

Chart 75: Sinai Cement Assets Composition


On the other hand, the Company’s funding structure was dominated by the equity, as the Company is free of debt. The shareholders equity accounted for 88.0% of the Company’s total assets in 2008, reaching LE1.5bn in 2008, compared to LE1.2bn in 2007, up by 29.5%.

In addition, the Company’s other liabilities rose from LE159.4mn in 2007 to LE211.6mn in 2008, up by 32.8%. The accrued expenses have contributed significantly to this increase, as the Company accrued LE20mn fine for conducting anticompetitive practice.

Chart 76: Sinai Cement Liabilities and Shareholders’ Equity


Q1 2009

Sinai Cement local sales volume reached 893,102 ton in the first quarter of 2009, compared to 458,644 ton in the first quarter of 2008, growing by 94.7% Y-o-Y. This came on the back of the commencement of the Company’s second production line, which raised the annual production capacity from 1.5mn ton to 3mn ton. Additionally, the ongoing growth in the local cement demand during the first quarter of 2009 has supported the local sales volume of Sinai

8.8% 18.1% 6.7%8.7%

7.5%

9.5%

77.6% 68.8%85.0% 77.9%

4.8% 5.6% 5.9% 5.9%

1.4%7.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008Cash & Equivalent Other assets Long-term Assets Investments

93.7% 93.5% 88.2% 88.0%

6.3% 6.5%11.8% 12.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008

Equity Other liabilities



Cement Company. It is worth mentioning that the Company didn’t export cement during the first quarter of 2009, compared to 31,233 ton exported in the first quarter of 2008.

Chart 77: Sinai Cement Q1 Sales Value


Furthermore, the Company’s average selling prices increased by 9.1% during the first quarter of 2009, reaching LE418/ton, compared to the average selling price in 2008. Accordingly, the total sales value mounted by 108.5% during the first quarter of 2009, reaching LE372.7mn up from LE178.8mn reported in the same period the previous year.

Chart 78: Sinai Cement Selected Income Statement Items in Q1


Moreover, Sinai Cement Company’s cash cost per ton soared in the first quarter of 2009 by 9.6%, reaching LE199/ton from LE182/ton in 2008. The COGS/Sales ratio rose from 30.2% in the first quarter of 2008 to 47.7% in the first quarter of 2009. On the other hand, the S,G&A/Sales ratio declined from 8.0% to 5.0% during the comparable periods.

The rise in the production cost has negatively impacted the Company’s EBITDA margin, which decreased from 61.8% in the first quarter of 2008 to 47.2% in the first quarter of 2009. Similarly, the net profit margin declined from 54.4% to 42.3% between the comparable periods.

115 150 179 373

43.4%

30.3%19.5%

108.5%

-

50

100

150

200

250

300

350

400

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

20%

40%

60%

80%

100%

120%

Total Sales Value Growth

34 45 54 17867 90 110 176

29.5% 30.4% 30.2%

47.7%

58.7% 60.0% 61.8%

47.2%

-

20

40

60

80

100

120

140

160

180

200

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

10%

20%

30%

40%

50%

60%

70%

COGS EBITDA COGS/Sales EBITDA Margin



Table 19: Sinai Cement Q1 Income StatementLE000 Q1 2008 Q1 2009 Change%Sales 178,784 372,717 108.5%COGS (53,964) (177,907) 229.7%S,G&A (14,339) (18,799) 31.1%EBITDA 110,481 176,011 59.3%Depreciation (8,882) (17,522) 97.3%EBIT 101,599 158,489 56.0%Interest Income 0 2,652 - Investment Income 0 0 - Interest Expense 0 0 - Other Provisions (3,454) (4,695) 35.9%Other Non-Operating Income\(Expense) (1,177) 1,220 203.7%NPBT 96,968 157,666 62.6%Income Tax 0 0 - NPAT 96,968 157,666 62.6%Capital Gain/Loss 290 0 -100.0%Other Extraordinary Items 0 0 - NPAUI 97,258 157,666 62.1%Minority Interest 0 0 - Net Profit/(Loss) 97,258 157,666 62.1%


Financial Forecast

Based on our cement market forecast, Sinai Cement Company is expected to operate at a utilization rate of 120% in 2009, on the back of high local demand. Then, the utilization rate will decline to 118%, as we assumed that local cement demand will grow at a slower rate in 2010 and 2011.

Chart 79: Sinai Cement forecasted capacity, utilization rate, local & export sales volume


However, we assumed that Sinai will increase its utilization rate to 121% in 2011, as the company will allocate a larger proportion of its production to the export markets. Afterwards, utilization rate is expected to rebound gradually, to reach 125% in 2013, as local demand growth is forecasted to increase.

Moreover, we assumed that average price per ton during 2009 will follow cement consumption pattern, declining by around 5% in 2010, then increasing gradually to reach almost LE450/ton by 2013.

3.0 3.0 3.0 3.0 3.03.6

0.1 0.20.5 0.4

0.1

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120%118%

121%123%

125%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013

Ton m

n

100%

105%

110%

115%

120%

125%

130%

Capacity Local sales Export Sales Utilization rate



Chart 80: Sinai Cement forecasted sales value and average price


With respect to cash cost of production, we assumed a growth rate of 30.5% in 2009, in order to reflect the government decision to increase energy prices. Afterwards, cash cost of production is forecasted to increase on average by 2% annually, assuming no further government intervention, such as increasing energy prices and/or imposing any additional duties on cement manufacturers.

Chart 81: Sinai Cement forecasted average selling price and cash cost of production


Consequently, COGS/Sales ratio is forecasted to increase in 2010, as the selling price is expected to decline, whereas cash cost of production is not foreseen to decrease, based on our estimates. Nevertheless, COGS/Sales ratio is estimated to decline gradually starting from 2011 till it reaches 2009 levels in 2013, as the selling price will rebound at a higher rate than the growth in cash cost of production.

Chart 82: Sinai Cement forecasted cost of sales and COGS/Sales ratio


1,504

1,4111,500

1,582

1,677

418

399

413

429

447

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

1,650

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2009 2010 2011 2012 2013

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n

370

380

390

400

410

420

430

440

450

460

LE

Sales value Average price/ton (Right scale)

382

418399

413429

447

153

199 203 207 210 215

60.1%

52.3%49.0% 50.0%

51.0% 52.0%

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012 2013

LE

30%

35%

40%

45%

50%

55%

60%

65%

Average price/ton Cash cost/ton Spread

718 720

750 775

805

47.7%

51.0% 50.0%

49.0%

48.0%

660

680

700

720

740

760

780

800

820

2009 2010 2011 2012 2013

LE m

n

40%

42%

44%

46%

48%

50%

52%

COGS COGS/Sales



Furthermore, we assumed that the S,G&A will increase annually by 10% from 2008 levels. Therefore, S,G&A/Sales is expected to increase marginally throughout our forecast horizon, as the percentage increase in S,G&A will outpace the increase in sales. Accordingly, EBITDA Margin is forecasted to decline in 2010, as a result of the increase in COGS/Sales and S,G&A/Sales, then improving gradually over the next years.

Chart 83: Sinai Cement forecasted EBITDA and EBITDA margin


Net profit as a percent of sales is expected to follow a similar pattern like EBITDA margin from 2009 to 2011, for the same reasons mentioned above. However, net profit margin will be lower than EBITDA margin, mainly due to the expected increase in depreciation expense, resulting from depreciating the new production line.

Starting from 2012, Sinai Cement will start to pay 20% taxes, as its tax exemption period will end in 2011. Therefore, ROS will drop in 2012. It is worth mentioning that we assumed a tax rate of 20% on interest income during the tax exemption period, according to the Egyptian tax law, which exempts only operating income from taxes throughout the tax holiday period.

Chart 84: Sinai Cement forecasted net profit and ROS


710

608 658706

761

47.2%

43.1% 43.9%44.6%

45.4%

-

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013

LE m

n

40%

41%

42%

43%

44%

45%

46%

47%

48%

EBITDA EBITDA margin

644

514565

493

538

42.8%

36.5%37.7%

31.1%32.1%

-

100

200

300

400

500

600

700

2009 2010 2011 2012 2013

LE m

n

30%

32%

34%

36%

38%

40%

42%

44%




Valuation

Discounted Cash Flow (DCF)

Based on our valuation assumption stated earlier under valuation and recommendation section and out projected Free Cash Flow to Firm (FCFF), shown below, we reached a fair value of LE108.3/share using DCF method, implying 50.4% upside potential from the current market price of LE71.98/share, as of June 30th, 2009.

Table 20: Sinai Cement DCF valuation(Values in 000) 2009F 2010F 2011F 2012F 2013F

Free Cash Flow 509,412 570,416 619,473 548,946 591,968

Terminal Value 3,586,627

Discounted Cash Flow 465,143 434,038 392,806 290,071 260,670

PV of Terminal Value 1,579,352

Enterprise Value 3,422,080

Cash 368,015

Debt -

Equity value 3,790,095

No. of Shares 35,000

Fair Value (LE) 108.3Source: Global Research

Sensitivity Analysis

We provide below a sensitivity analysis table, which shows the probable values given different growth rate assumption and WACC. The shaded area represents the most probable outcome.

Table 21: Sensitivity AnalysisTerminal Growth

1.0% 2.0% 3.0% 4.0% 5.0%

WACC

18.0% 112.9 116.4 120.3 124.8 130.0

19.0% 107.5 110.5 113.9 117.8 122.1

20.0% 102.8 105.4 108.3 111.6 115.3

21.0% 98.4 100.7 103.3 106.1 109.3

22.0% 94.6 96.6 98.8 101.2 104.0Source: Global Research

Relative Valuation

Using the Weighted average EV/EBITDA of 6.82x for the cement sector in the region, calculated earlier under the valuation and recommendation section, we reached a fair value of LE103.1/share using relative valuation method, implying 43.2% upside potential from the current market price of LE71.98/share, as of June 30th, 2009.

Based on the fact that relative valuation is being highly influenced by the market prices of the comparable companies, a 20% weight was assigned for EV/EBITDA and 80% to the DCF.



Table 22: Sinai Cement weighted average fair value

Valuation approach

Fair Value/

share (LE) Weight

Weighted

Value (LE)

DCF Valuation 108.3 80% 86.6

Relative valuation 103.1 20% 20.6

Weighted average fair value 107.3

Current market price (LE)* 71.98

Upside/(Downside) potential 49.0%*Price as of June 22nd, 2009Source: Global Research

Combining both methods resulted in a fair value of LE107.3/share, compared to the current market price of LE71.98/share, implying an upside potential of 49.0% over the market price. Therefore, we initiated our coverage for Sinai Cement Company with a “BUY” recommendation.



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Tickers:MCQE.CA (Reuters)MCQE:EY (Bloomberg)


Fair Value:LE91.3


July, 2009

BUY

Misr Cement Qena

The Company’s cement plant is located in Qena governorate and it started production in April 2002, with a production capacity of 1.5mn ton. Misr Cement Qena holds a 20% stake in South Upper Egypt Company, which is specialized in the production of cement bags.

On August 2008, Misr Cement Qena Company was fined LE20mn for conducting anti-competitive practice during the period from May 2005 to the end of 2006. The Company and other local cement producers were accused of forming a cartel to manipulate local cement prices and dividing market shares among them.

Management

On March 2009, Misr Cement Qena Company’s Board of Directors (BoD) was elected, where Mr. Mahmoud Hassan was reelected to chair the Company’s Board.

Key Data

Market Cap. (LEmn) # 2,340EPS (LE)* 11.4BVPS (LE)* 22.6P/E* 6.9P/BV* 3.512M Avg. vol. 11,30852 week Low/High (LE) 60.5/91.3


Company Background

Misr Cement Qena was established in 1997, as an Egyptian Joint Stock Company. The Company operates under Law No. 159 of year 1981 and its executive regulations. The Company also enjoys the tax exemption benefits of Law No. 8 of year 1997. Misr Cement Qena Company mainly produces grey cement and its related products. Misr Cement Qena Company is listed on the Egyptian Exchange (EGX) since May 2000.



Table 23: Misr Cement Qena Board Members Mahmoud Hassan Chairman and Managing DirectorAdel Fatouh Board Member & representing Misr Insurance & Al Shark Insurance companiesAmr El Gawhary Board Member & representing the Egyptian Investment Projects CompanyMohamed Sultan Board Member & representing Egyptian Kuwaiti Investment CompanyGiorgio Bodo Board Member & representing Asec Cement CompanyRoshdi Eskander Board Member & representing Al Ahli Capital HoldingSouheir Mahmoud Board Member & representing Misr BankOsama Abd ElWahab Board Member & representing National Investment BankMamdouh Mahmoud Board Member & representing Misr Construction and Trading CompanyMohamed Naseem Board MemberMahmoud Suboh Board MemberMohamed Riziq Board MemberMahmoud Abd Allah Board Member

Source: EGX

Misr Cement Qena Company current senior management is shown in the table below.

Table 24: Misr Cement Qena senior managementMohamed Ismail General Manager - FinanceAlaa Hassan General Manager – Cement PlantSabry Hassan Manager – AdministrationAhmed Imam Manager – Finance (Cairo Branch)Mahmoud Abd El Aziz Manager – Finance (Main Branch) Mahmoud Safwat Manager – Production

Source: EGX


Misr Cement Qena Company’s authorized capital is LE600mn, while the issued and paid-in capital is LE300mn, distributed over 30mn shares, with a par value of LE10/share. The Company holds 122,000 shares, as treasury stock, representing 0.4% of the Company’s issued shares, with total value of LE10.1mn, as of March 31st, 2009. It is worth mentioning that the Company acquired the treasury shares at an average purchase price of LE83.05/share.

According to the Capital Market Authority law, companies hold treasury stock for more than one-year period are obliged to resell these treasury shares in the market or write them off. Therefore, Misr Cement Qena Company extraordinary general assembly meeting, held on March 22nd, 2009, approved decreasing its issued and paid-in capital by LE1.22mn, through writing off 122,000 treasury stock. The Company is currently performing the required procedures to write off its treasury stock.

Chart 85: Misr Cement Qena Shareholders Structure as of March 31st, 2009

Source: EGID

Banks, 7.5%

Misr Insurance, 20.1%

Al Ahli Capital Holding, 7.5%

Egyptian Kuwaiti Investment, 9.8%

Egyptian Investment Projects, 10.0%

Asec Cement, 27.4%

Others, 2.1%

Free Float, 15.5%



The Company’s shareholders structure is diversified between different companies, banks, insurance and other companies, with a 15.5% of its shares is free floated in the market, as of March 31st, 2009. Table 25: Stock Liquidity

2007 2008 2009*

Average Daily Volume 74,386 22,430 860

Average Daily Turnover (LE000) 5,840 1,714 67

Market Capitalization (LE000) ** 2,208 2,091 2,340* Average daily volume and turnover for the period from January to June 2009.** Market Capitalization is calculated on respective year-end prices and for 2009 as of June 30th, 2009. Source: Mubasher and Global Research

Misr Cement Qena Company’s stock performance is considered relatively stable, when compared to the EGX 30 index and the Building Materials index. The Company’s stock price movement showed a steady pattern during the market peaks and dips.

Chart 86: Misr Cement Qena share price performance chart


Table 26: Misr Cement Qena at a glanceCMP (LE) Shares in Issue (mn) M-Cap (LE mn) 52-Week Hi/Lo (LE)

78.00 30 2,340 91.25 60.50

Year

Gross Profit

(LE mn)

Net Profit

(LE mn)

EPS

(LE)

BVPS

(LE)

ROAE

(%)

P/E

(x)

P/BV

(x)

2010 F 353,830 270,746 9.06 23.08 39.66% 8.61 3.39

2009 F 432,589 339,952 11.38 22.62 41.80% 6.86 3.46

2008 A 431,956 302,950 10.10 31.69 34.22% 7.72 2.46

2007 A 359,348 276,448 9.21 27.32 37.07% 7.99 2.86Source: Global Research

-

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150

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MCQE EGX30 Index Building Materials Index





Misr Cement Qena sales volume reached 2.0mn ton in 2008, compared to 1.8mn ton in 2007, a Y-o-Y growth of 10.5%. This growth is mainly attributed to the local sales, where the local sales volume grew from 1.2mn ton in 2007 to 1.6mn ton in 2008, up by 30.2%, reflecting the surge witnessed in the local cement consumption.

Meanwhile the export sales volume declined by 30.0% between 2007 and 2008, on the back of the Minister of Trade and Industry decision to ban cement exportation for a 6-month period from March to October 2008. During the period from 2004 to 2008, the Company’s total sales volume reported strong growth, rising at a CAGR of 10.6%, as it reached 2.0mn tons in 2008 against 1.3mn tons in 2004. The local sales volume grew at a CAGR of 9.8%, whereas the export sales volume increased at a CAGR of 13.6% between 2004 and 2008.

Chart 87: Misr Cement Qena Sales Volume Breakdown

Source: Misr Cement Qena Company and Global Research

In 2008, Misr Cement Qena Company’s average selling price was up by 17.2%, triggered by the robust growth in the local cement demand. The increase in average selling prices along with the rise in the sales volume, have resulted in the growth in the Company’s total sales value, reaching LE773.3mn in 2008 up from LE597.3mn in 2007, achieving a growth rate of 29.5%. Between 2004 and 2008, the growth in Company’s total sales value has increased at a CAGR of 18.0%, where local and export sales values grew at a CAGR of 76.9% and 23.1%, respectively.

Chart 88: Misr Cement Qena Sales Value and Average Price


0.5 0.6 0.6

0.4

1.2 1.11.2 1.6

10.5%

8.1%

1.8%

4.4%

0.0

0.5

1.0

1.5

2.0

2.5

2005 2006 2007 2008

Tons

mn

0%

2%

4%

6%

8%

10%

12%

Local Sales Export Sales Growth in Total Sales Volume

420.1521.8

597.3773.3

250

305335

392

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008

LE m

n

0

50

100

150

200

250

300

350

400

450

LE




The government’s energy subsidy cut decision has adversely influenced the production cost of Misr Cement Qena Company. The Company’s cash cost per ton jumped by 29.9% in 2008, reaching LE173/ton from LE133/ton in 2007. This came on the back of the surge witnessed in the fuel oil and the electricity prices, where they contributed together to 52.6% of the total COGS in 2008. It is worth mentioning that Misr Cement Qenq use fuel oil as a source of energy not natural gas.

Chart 89: Misr Cement Qena average selling price and cash cost of production


Accordingly, the Company’s COGS mounted to LE341.4mn in 2008, compared to LE238.0mn in 2007, rising by 43.5%. In addition, COGS/Sales ratio increased from 39.8% in 2007 to 44.1% in 2008, as the growth in COGS outpaced the growth in sales.

Chart 90: Misr Cement Qena Cost of Goods Sold (COGS)


Moreover, the S,G&A/Sales ratio rose from 2.5% in 2007 to 3.2% in 2008. Therefore, the EBITDA margin decreased from 57.7% to 52.7% between 2007 and 2008, reflecting the increase in COGS/Sales and S,G&A/Sales ratios.

250

305335

392

118 125 13317352.7%

59.1%60.2%

55.9%

-

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008

LE

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%


198.8 213.6 238.0

341.4

47.3%

40.9% 39.8%44.1%

26.8%

7.5%11.4%

43.5%

-

50

100

150

200

250

300

350

400

2005 2006 2007 2008

LE m

n

0%

20%

40%

60%




Chart 91: Misr Cement Qena EBITDA


Additionally, the Company’s interest income surged by 95.8% in 2008, reaching LE17.8mn, as opposed to LE9.1mn in 2007. This came on the back of the hike witnessed in the time deposits from LE281.1mn in 2007 to LE477.0mn in 2008, growing by 69.7%. Furthermore, the Company formed LE45mn as provision expense in 2008, resulting from the government’s decision to raise the resources development fees on clay.

Misr Cement Qena Company enjoys 10 years tax exemption according to Law no. 8 of year 1997. The tax holiday started in 2003 and will end in 2012. It is worth mentioning that the Company paid LE3.2mn in 2008, representing the taxes on the interest income, which is not included in the tax holiday.

The ROS declined from 46.3% in 2007 to 39.2% in 2008, mainly due to the cost increase and the provision expense incurred in 2008. The Company reported a net profit of LE302.9mn in 2008, compared to LE276.4mn in 2007, recording a Y-o-Y growth of 9.6%.

Chart 92: Misr Cement Qena Net Profit



The Company’s total assets reached LE1.1bn in 2008, as opposed to LE1.0mn in 2007, up by 17.4%. This growth is basically attributed to the surge witnessed in the cash and cash equivalents, which soared by 67.2%, reaching LE489.6mn, compared to LE292.9mn in 2007. In turn, the cash and cash equivalents’ contribution to the Company’s total assets grew from 30.1% to 42.9% between 2007 and 2008.

209.7294.1

344.4407.5

49.9%

56.4%57.7%

52.7%

-50

100150200250300350400450

2005 2006 2007 2008

LE m

n

40%

45%

50%

55%

60%


148

236276 303

35.3%

45.2% 46.3%

39.2%

-

50

100

150

200

250

300

350

2005 2006 2007 2008

LE m

n

0%

10%

20%

30%

40%

50%




On the other hand, the long term assets, which were the major component in the Company’s asset structure, represented 51.3% of the Company’s total assets in 2008, down from 63.6% in 2007. Furthermore, the inventory grew from LE36.5mn in 2007 to LE51.1mn in 2008, increasing by 40.1%. This came on the back of the hike witnessed in the fuel oil price, which was doubled during the year.

Chart 93: Misr Cement Qena Assets Composition


On the other hand, the Company’s financing was dominated by the equity, which represented 83.4% of the total assets in 2008. The shareholders equity reached LE950.8mn in 2008, compared to LE819.6mn in 2007, increasing by 16.0%.

Additionally, the Company’s other liabilities rose from LE152.0mn in 2007 to LE189.8mn in 2008, up by 24.9%. This increase is mainly attributed to the growth in the provisions for the resource development fees.

Chart 94: Misr Cement Qena Liabilities and Shareholders’ Equity


Q1 2009

During the first quarter of 2009, Misr Cement Qena sales value grew by 12.7%, on the back of the strong local cement demand, driven by the higher construction activities witnessed in the country. The Company’s sales value increased from LE213.3mn in the first quarter of 2008 to LE240.4mn in the first quarter of 2009.

9.8% 11.9%

42.9%8.4% 7.8%

5.8%

81.8% 80.2%63.6%

51.3%

30.1%

6.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008

Cash & Equivalent Other assets Long-term Assets

62.7%

83.2% 84.4% 83.4%

37.3%

16.8% 15.6% 16.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008

Equity Other liabilities



Chart 95: Misr Cement Qena Q1 Sales Value


In addition, the Company’s COGS reached LE111.1mn in the first quarter of 2009, compared to LE86.0mn in the first quarter of 2008, rising by 29.1%. As a result, the COGS/Sales ratio increased from 40.3% to 46.2% between the comparable periods. In addition, the S,G&A/Sales ratio rose slightly from 3.3% in the first quarter of 2008 to 3.4% in the first quarter of 2009. Accordingly, the Company’s EBITDA margin fell from 56.3% to 50.4% between the comparable periods.

Chart 96: Misr Cement Qena Selected Income Statement Items in Q1


Moreover, the interest income increased from LE4.2mn in the first quarter of 2008 to LE7.2mn in the first quarter of 2009, a Y-o-Y growth of 71.8%. This came on the back of the 62.9% growth in the time deposits from LE387.4mn to LE631.0mn between the comparable periods.

The Company’s bottom line reached LE101.7mn in the first quarter of 2009, as opposed to LE89.8mn reported in the first quarter of 2008, achieving a growth of 13.2%. The ROS rose merely from 42.1% to 42.3% between the comparable periods.

129.5 143.1 213.3 240.4

59.6%

10.5%

49.1%

12.7%

-

50

100

150

200

250

300

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

10%

20%

30%

40%

50%

60%

70%


54 6186

111

72 78

120 121

41.6% 42.9%40.3%

46.2%

55.9% 54.7% 56.3%50.4%

-

20

40

60

80

100

120

140

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

10%

20%

30%

40%

50%

60%




Table 27: Misr Cement Qena Q1 Income StatementLE000 Q1 2008 Q1 2009 Change%Sales 213,315 240,424 12.7%COGS (86,042) (111,121) 29.1%SG&A (7,080) (8,217) 16.1%EBITDA 120,192 121,085 0.7%Depreciation (10,176) (10,252) 0.8%EBIT 110,016 110,833 0.7%Interest Income 4,212 7,237 71.8%Investment Income 160 0 -100.0%Interest Expense (22) (13) -42.9%Other Provisions (20,000) (20,000) 0.0%Other Non-Operating Income\(Expense) (2,426) 5,531 328.0%NPBT 91,940 103,588 12.7%Income Tax (2,146) (1,938) -9.7%NPAT 89,794 101,650 13.2%Capital Gain/Loss 0 0 - Other Extraordinary Items 0 0 - NPAUI 89,794 101,650 13.2%Minority Interest 0 0 - Net Profit/(Loss) 89,794 101,650 13.2%


Financial Forecast

According to our cement market forecast, Misr Cement Qena is expected to operate at a utilization rate of 130% in 2009, fueled by high local consumption. After that the utilization rate will decrease to 115%, as we forecasted that local demand will advance by a slower pace in 2010 and 2011.

In addition, the Company’s utilization rate was assumed to rebound gradually from 115% in 2010 to reach 118% in 2013. We also assumed that the Company is expected to allocate a greater proportion of its production to the export market in 2010 and 2011. Afterwards, an increasing percentage of production will be allocated to the local market, as local demand will rebound.

Chart 97: Misr Cement Qena forecasted capacity, utilization rate, local & export sales volume


Furthermore, we assumed that average price per ton during 2009 will maintain its current levels, on the back of higher local demand, then decline by 5% in 2010, before rebounding gradually until reaching approximately LE450/ton in 2013.

1.5 1.5 1.5 1.5 1.51.5

1.3 1.21.3

1.7

0.5 0.50.5

0.1

0.4

130%

115%116%

117%118%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2009 2010 2011 2012 2013

Ton m

n

110%

115%

120%

125%

130%

135%




Chart 98: Misr Cement Qena forecasted sales value and average price


Moreover, we assumed that cash cost of production to grow at around 12% in 2009, in order to reflect the government decision to liberalize energy prices. Afterwards, cash cost of production is forecasted to increase on average by 1.5% annually, assuming no further government intervention, such as increasing energy prices and/or imposing any additional duties on cement manufacturers.

Chart 99: Misr Cement Qena forecasted average selling price & cash cost of production


Accordingly, COGS/Sales ratio is expected to increase in 2010, as the selling price is expected to decrease, while cash cost of production will keep increasing marginally over our forecast horizon. However, COGS/Sales ratio is estimated to decline gradually starting from 2011 till it reaches 45.8% in 2013, as the selling price growth will outpace the rise in the cash cost of production

Chart 100: Misr Cement Qena forecasted cost of sales and COGS/Sales ratio


693720

754

794

810

402

414

415

430

449

620

640

660

680

700720

740

760

780

800

820

2009 2010 2011 2012 2013

LE m

n

370

380

390

400

410

420

430

440

450

460

LE


392 415 402 414 430 449

173193 196 198 200 205

55.9%53.4%

51.1%52.2%

53.5% 54.2%

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012 2013

LE

30%

35%

40%

45%

50%

55%

60%


377

339344

351364

46.6%

48.9%

47.8%

46.5% 45.8%

310

320

330

340

350

360

370

380

390

2009 2010 2011 2012 2013

LE m

n

40%

41%

42%

43%

44%

45%46%

47%

48%

49%

50%

COGS COGS/Sales



Additionally, we assumed that S,G&A will increase annually by 10% from 2008 level. Consequently, S,G&A/Sales is expected to increase marginally throughout our forecast horizon, as the percentage increase in S,G&A will outpace the increase in sales. Accordingly, EBITDA Margin is forecasted to decline in 2010, as a result of the increase in COGS/Sales and S,G&A/Sales, then improving gradually over the next years.

Chart 101: Misr Cement Qena forecasted EBITDA and EBITDA margin


ROS is expected to follow a similar trend like EBITDA margin from 2009 to 2012, for the same reasons mentioned above. However, net profit margin will be lower than EBITDA margin, mainly because we assumed that the Company will continue to form provisions but at lower rate than the historical rate, as percentage of sales.

Starting from 2013, Misr Cement Qena will start to pay 20% taxes, as its tax exemption period will end in 2012. Therefore, ROS will drop in 2013. It is worth mentioning that we assumed a tax rate of 20% on interest income during the tax exemption period, according to the Egyptian tax law, which exempts only operating income from taxes throughout the tax holiday period.

Chart 102: Misr Cement Qena forecasted net profit and ROS


406326 346 371 396

50.2%

47.0%48.0%

49.2%49.8%

-

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013

LE m

n

40%

42%

44%

46%

48%

50%

52%


340271 293 319

280

42.0%

39.1%

40.6%

42.3%

35.2%

-

50

100

150

200

250

300

350

400

2009 2010 2011 2012 2013

LE m

n

30%

32%

34%

36%

38%

40%

42%

44%




Valuation


Based on our valuation assumption stated earlier under valuation and recommendation section and out projected Free Cash Flow to Firm (FCFF), shown below, we reached a fair value of LE85.8/share using DCF method, implying 9.9% upside potential from the current market price of LE78/share, as of June 30th, 2009.

Table 28: Misr Cement Qena DCF valuation(Values in 000) 2009F 2010F 2011F 2012F 2013F

Free Cash Flow 383,571 306,337 325,311 349,174 311,032


Discounted Cash Flow 350,239 233,096 206,279 184,508 136,961

PV of Terminal Value 829,824


Cash 631,843

Debt -







WACC

1.0% 2.0% 3.0% 4.0% 5.0%

18.0% 88.7 90.8 93.2 96.0 99.2

19.0% 85.3 87.2 89.3 91.6 94.3

20.0% 82.4 84.0 85.8 87.8 90.1

21.0% 79.7 81.1 82.6 84.4 86.3


Relative Valuation

Using the Weighted average EV/EBITDA of 6.82x for the cement sector in the region, calculated earlier under the valuation and recommendation section, we reached a fair value of LE113.7/share using relative valuation method, implying 45.7% upside potential from the current market price of LE78/share, as of June 30th, 2009.




Table 30: Misr Cement Qena weighted average fair value

Valuation approach

Fair Value/

share (LE) Weight

Weighted

Value (LE)




Current market price (LE)* 78

Upside/(Downside) potential 17.1%*Price as of June 30th, 2009Source: Global Research

Combining both methods resulted in a fair value of LE91.3/share, compared to the current market price of LE78/share, implying an upside potential of 17.1% over the market price. Therefore, we initiated our coverage for Misr Cement Qena Company with a “BUY” recommendation.



Bal

ance

She

etM

isr

Cem

ent

Qen

aA

ctua

lP

roje

cted

(in

LE 0

00s)

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

Ass

ets

Ope

ratin

g C

ash

5,85

94,

975

11,7

2512

,620

13,2

1611

,302

11,7

5512

,305

Exc

ess

Cas

h76

,901

91,4

5928

1,13

347

6,99

626

9,73

333

2,67

539

7,08

746

3,65

3N

et A

ccou

nts

Rec

eiva

bles

10,4

816,

137

3,54

33,

000

3,48

53,

603

3,97

74,

433

Inve

ntor

y25

,462

30,4

4136

,486

51,1

1953

,728

50,7

3052

,363

53,7

89D

ues

From

HC

’s &

Aff

iliat

es-

--

--

--

-O

ther

Cur

rent

Ass

ets

34,7

5926

,651

20,4

3212

,214

13,4

9712

,121

12,3

0812

,544

Tot

al C

urre

nt A

sset

s15

3,46

315

9,66

335

3,31

955

5,94

935

3,66

041

0,43

147

7,49

054

6,72

4D

efer

red

tax

asse

t-

--

--

--

-Su

bsid

iari

es &

Oth

er L

ong

Ter

m I

nves

tmen

ts80

880

880

880

880

880

880

880

8O

ther

long

term

ass

ets

--

--

--

--

Inta

ngib

les

--

--

--

--

Proj

ects

Und

er I

mpl

emen

tatio

n4,

305

8,25

97,

401

950

297

249

156

137

Gro

ss F

ixed

Ass

ets

:78

4,10

277

6,96

678

7,51

880

1,57

981

9,05

383

4,49

585

0,51

086

7,09

7L

ess

: Acc

. Dep

reci

atio

n99

,698

138,

052

177,

394

218,

680

262,

215

306,

634

351,

898

398,

038

Net

Fix

ed A

sset

s68

4,40

463

8,91

461

0,12

458

2,89

855

6,83

752

7,86

149

8,61

246

9,05

9T

otal

Ass

ets

842,

981

807,

645

971,

652

1,14

0,60

591

1,60

293

9,34

997

7,06

61,

016,

728

Lia

bilit

ies

& S

hare

hold

er’s

Equ

ity

Shor

t Ter

m D

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195

--

--

--

-C

PLT

D-

--

--

--

-A

ccou

nts

Paya

ble

29,9

3222

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25,2

6326

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27,3

5224

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24,9

4025

,419

Acc

rued

exp

ense

s11

,274

8,29

67,

716

3,46

43,

773

3,38

83,

440

3,50

6D

own

paym

ents

24,7

226,

848

14,5

437,

272

7,54

56,

776

6,88

07,

012

Div

iden

ds p

ayab

le-

--

--

--

-D

ues

To

HC

”s &

Aff

iliat

es-

-1,

593

3,19

33,

193

3,19

33,

193

3,19

3O

ther

Cur

rent

Lia

bilit

ies

15,4

2921

,228

26,8

7020

,558

22,6

3620

,327

20,6

4021

,036

Tot

al C

urre

nt L

iabi

litie

s81

,552

58,5

5275

,984

60,5

1864

,498

58,2

4459

,094

60,1

66T

otal

Lon

g T

erm

Deb

t20

2,57

214

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--

--

--

Prov

isio

ns F

or D

efer

red

Tax

es-

38,6

2347

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52,9

8855

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57,4

0759

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61,7

27O

ther

Pro

visi

ons

16,4

3816

,438

24,0

0074

,200

114,

200

134,

200

154,

200

174,

200

Oth

er N

on-C

urre

nt L

iabi

litie

s13

,717

6,99

74,

522

2,14

11,

381

--

-M

inor

ity in

tere

st-

--

--

--

-T

otal

Lia

bilit

ies

314,

279

135,

585

152,

040.

432

189,

846

235,

890

249,

852

272,

670

296,

093

Net

Pai

d-In

Cap

ital

300,

000

300,

000

282,

329

289,

868

298,

780

298,

780

298,

780

298,

780

Add

ition

al p

aid-

in c

apita

l-

--

--

--

-L

egal

& S

tatu

tory

Res

erve

s8,

372

15,7

7727

,561

41,3

8358

,381

71,9

1886

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102,

495

Gen

eral

& O

ther

Res

erve

s2,

413

2,41

32,

413

2,41

32,

413

2,41

32,

413

2,41

3R

etai

ned

Ear

ning

s21

7,91

735

3,87

050

7,30

961

7,09

431

6,13

931

6,38

731

6,65

531

6,94

7Sh

areh

olde

rs”

Equ

ity

528,

702

672,

060

819,

611

950,

758

675,

712

689,

498

704,

396

720,

635

Tot

al L

iabi

litie

s &

Sha

reho

lder

’s E

quit

y84

2,98

180

7,64

597

1,65

21,

140,

605

911,

602

939,

349

977,

066

1,01

6,72

8So

urce

: M

isr

Cem

ent Q

ena

Fin

anci

als

& G

loba

l Res

earc

h



Inco

me

Stat

emen

tM

isr

Cem

ent

Qen

aA

ctua

lP

roje

cted

(in

LE 0

00s)

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

Rev

enue

s fr

om O

pera

tion

420,

108

521,

823

597,

321

773,

339

809,

855

692,

609

720,

332

754,

070

CO

GS

(198

,784

)(2

13,6

41)

(237

,973

)(3

41,3

82)

(377

,265

)(3

38,7

79)

(344

,006

)(3

50,6

07)

S. ,

G. &

Adm

. Exp

ense

s(1

1,63

7)(1

4,09

5)(1

4,96

3)(2

4,41

6)(2

6,24

7)(2

8,21

6)(3

0,33

2)(3

2,60

7)E

BIT

DA

209,

686

294,

087

344,

385

407,

540

406,

342

325,

614

345,

994

370,

856

Dep

reci

atio

n &

Am

ortiz

atio

n(2

6,45

6)(4

0,33

4)(4

0,55

2)(4

2,68

8)(4

3,53

5)(4

4,41

9)(4

5,26

4)(4

6,14

0)O

pera

ting

Pro

fit

-EB

IT18

3,23

025

3,75

330

3,83

336

4,85

336

2,80

728

1,19

530

0,73

032

4,71

6In

tere

st I

ncom

e2,

867

3,90

79,

082

17,7

8622

,381

12,6

5615

,609

18,6

31In

vest

men

t Inc

ome

320

320

320

520

520

520

520

520

Inte

rest

Exp

ense

(32,

701)

(9,0

67)

(548

)(1

41)

--

--

Oth

er P

rovi

sion

s(5

,558

)-

(21,

788)

(70,

200)

(40,

000)

(20,

000)

(20,

000)

(20,

000)

Oth

er N

on-O

pera

ting

Inco

me/

(exp

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)(5

5)1,

050

(3,9

47)

(1,2

22)

(1,2

79)

(1,0

94)

(1,1

38)

(1,1

91)

NP

BT

148,

104

249,

963

286,

953

311,

596

344,

429

273,

277

295,

722

322,

676

Inco

me

Tax

-(1

4,29

1)(1

0,50

5)(8

,646

)(4

,476

)(2

,531

)(3

,122

)(3

,726

)N

PA

T14

8,10

423

5,67

227

6,44

830

2,95

033

9,95

227

0,74

629

2,60

031

8,95

0C

apita

l Gai

n/L

oss

--

--

--

--

Ext

raor

dina

ry it

ems

--

--

--

--

NP

AU

I14

8,10

423

5,67

227

6,44

830

2,95

033

9,95

227

0,74

629

2,60

031

8,95

0M

inor

ity I

nter

est

--

--

--

--

Net

Pro

fit/

(lo

ss)

148,

104

235,

672

276,

448

302,

950

339,

952

270,

746

292,

600

318,

950

Sour

ce:

Mis

r C

emen

t Qen

a F

inan

cial

s &

Glo

bal R

esea

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Cas

h F

low

Sta

tem

ent

Mis

r C

emen

t Q

ena

Act

ual

Pro

ject

ed(i

n LE

000

s)20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)N

et I

ncom

e14

8,10

423

5,67

227

6,44

830

2,95

033

9,95

227

0,74

629

2,60

031

8,95

0D

epre

ciat

ion

& A

mor

tizat

ion

26,4

5640

,334

40,5

5242

,688

43,5

3544

,419

45,2

6446

,140

Non

-ope

ratin

g ite

ms

55(1

,050

)3,

947

1,22

21,

279

1,09

41,

138

1,19

1Pr

ovis

ion

5,55

8-

21,7

8870

,200

40,0

0020

,000

20,0

0020

,000

Inve

stm

ent I

ncom

e(3

20)

(320

)(3

20)

(520

)(5

20)

(520

)(5

20)

(520

)In

tere

st I

ncom

e(2

,867

)(3

,907

)(9

,082

)(1

7,78

6)(2

2,38

1)(1

2,65

6)(1

5,60

9)(1

8,63

1)In

tere

st e

xpen

se32

,701

9,06

754

814

1-

--

-C

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l los

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gain

)-

--

--

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-E

xtra

ord

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y ite

ms

--

--

--

--

Ope

rati

ng p

rofi

t bef

ore

wor

king

cap

ital

cha

nges

209,

686

279,

795

333,

881

398,

895

401,

866

323,

083

342,

872

367,

130

(Inc

reas

e)/d

ecre

ase

in r

ecei

vabl

es7,

067

4,34

52,

594

543

(485

)(1

18)

(374

)(4

55)

(Inc

reas

e)/d

ecre

ase

in in

vent

ory

4,02

8(4

,978

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h



Tickers:MBSC.CA (Reuters)MBSC:EY (Bloomberg)


Fair Value:LE162.8


July, 2009

BUY

Misr Beni Suef Cement

Misr Beni Suef Cement Company’s plant, which is located in Beni Suef governorate in Upper Egypt, started production in 2003, with a production capacity of 1.5mn ton. In 2005, the Company decided to double its production capacity to meet the growing demand on cement in both the local and exportation markets.

On December 2006, Misr Beni Suef Cement signed the second production line contract with Polysius. The new line commenced production in the first quarter of 2009, raising the Company’s production capacity to 3mn ton.

On August 2008, Misr Beni Suef Cement Company was charged by LE20mn for exercising monopolistic activities during the period from May 2005 to the end of 2006. The Company, along with other local cement producers, was accused of forming a cartel to manipulate local cement prices and dividing market shares among them.

Management

Misr Beni Suef Cement Company is currently chaired by Dr. Mohamed Ali Ahmed. The Company’s Board of Directors (BoD) consists of 6 members in addition to the chairman, as shown in the table below.

Key Data

Market Cap. (LEmn) # 1,770EPS (LE)* 19.3BVPS (LE)* 42.6P/E* 4.6P/BV* 2.112M Avg. vol. 14,49652 week Low/High (LE) 41.0/104


Company Background

Misr Beni Suef Cement Company was founded in 1997, as a Joint Stock Company, operating under Law No. 8 of year 1997 and its executive regulations. The Company is involved in the production of grey cement and its related products. The Company is listed on the Egyptian Exchange (EGX) since August 1999.



Table 31: Misr Beni Suef Cement Board Members Mohamed Ali Ahmed Chairman Farouk Mohamed Vice Chairman and Managing DirectorFayek Al Qasrawy Vice Chairman and Managing DirectorAl Sayed Ali Ahmed Vice Chairman and Managing DirectorMostafa Hafez Board Member and representing the National Investment BankMahmoud Awara Board MemberMagdi Abbas Board Member

Source: EGX


Misr Beni Suef Cement Company’s authorized capital is LE500mn, while the issued and paid-in capital is LE200mn, distributed over 20mn shares, with a par value of LE10/share.

Chart 103: Misr Beni Suef Cement Shareholders Structure as of March 31st, 2009

Source: EGID

The Company’s stock is considered relatively liquid, where 46.9% of its capital is free floated in the stock market. The top management holds a 31.6% stake in the Company and 20.1% stake is owned by the National Investment Bank, as of March 31st, 2009. Table 32: Stock Liquidity

2007 2008 2009*

Average Daily Volume 16,032 34,661 13,266

Average Daily Turnover (LE000) 1,818 3,647 756

Market Capitalization (LE000) ** 2,322 994 1,770* Average daily volume and turnover for the period from January to June 2009.** Market Capitalization is calculated on respective year-end prices and for 2009 as of June 30th, 2009. Source: Mubasher and Global Research

Apparently, Misr Beni Suef Cement Company’s stock is underperforming the EGX index, as well as the Building Materials index. Although, Misr Beni Suef share rose at a slower pace when compared to both indices, its performance was more stable relative to the two indices.

Top Management, 31.6%

National Investment Bank, 20.1%

Free Float, 46.9%

Others, 1.4%



Chart 104: Misr Beni Suef shares price performance chart


Table 33: Misr Beni Suef at a glanceCMP (LE) Shares in Issue (mn) M-Cap (LE mn) 52-Week Hi/Lo (LE)

88.49 20 1,770 104.00 41.01

Year

Gross Profit

(LE mn)

Net Profit

(LE mn)

EPS

(LE)

BVPS

(LE)

ROAE

(%) P/E (x) P/BV (x)

2010 F 651,021 401,362 20.07 53.72 41.67% 4.41 1.65

2009 F 633,285 385,737 19.29 42.60 45.57% 4.59 2.08

2008 A 441,504 202,412 10.12 42.04 26.17% 4.91 2.10

2007 A 407,795 193,150 9.66 35.31 30.15% 12.02 2.51Source: Global Research

-

50

100

150

200

250

300

3-Ja

n-07

3-Fe

b-07

3-M

ar-0

7

3-A

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3-M

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3-Ju

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3-Ju

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3-A

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3-Se

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3-O

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3-N

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3-D

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3-Ja

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3-Se

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3-N

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3-Fe

b-09

3-M

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9

3-A

pr-0

9

3-M

ay-0

9

3-Ju

n-09

MBSC EGX30 Index Building Materials Index


July 2009 Egypt Cement Sector �0�



Misr Beni Suef Cement Company’s total sales volume witnessed a moderate growth during the period from 2004 to 2008, rising at a CAGR of 2.8%. In 2008, the Company’s total sales volume reported a slight decline of 2.4%, where it went down from 1.73mn ton in 2007 to 1.69mn ton in 2008.This can be attributed to the plunge witnessed in the export sales volume in 2008, dropping by 67.0%, from 0.9mn ton to 0.3mn ton between 2007 and 2008. Conversely, the strong domestic demand has supported the local sales volume, which surged by 63.4% during the year, growing from 0.9mn ton in 2007 to 1.4mn ton in 2008.

Chart 105: Misr Beni Suef Cement Sales Volume Breakdown

Source: Misr Beni Suef Cement Company and Global Research

Misr Beni Suef Cement Company’s average selling price rose by 13.0% in 2008, rising from LE346/ton in 2007 to LE391/ton in 2008. Accordingly, the Company’s total sales value reached LE660.0mn in 2008, compared to LE588.3mn in 2007, up by 12.2%. Between 2004 and 2008, the Company’s total sales value witnessed a robust growth at a CAGR of 22.5%, where it climbed from LE293.0mn in 2004 to LE660.0mn in 2008.

Chart 106: Misr Beni Suef Cement Sales Value and Average Price


The rise in the energy prices, after the government’s decision to cut energy subsidies for the energy intensive industries, has contributed significantly to the hike witnessed in the Company’s cash cost per ton, excluding depreciation, by 23.9% in 2008, reaching LE129/ton from LE104/ton in 2007.

0.50.9

1.4

0.7 1.20.9

0.3

0.83.5%

13.0%

-2.1% -2.4%-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2005 2006 2007 2008

Tons

mn

-4%

0%

4%

8%

12%

16%

20%

Local Sales Export Sales Growth in Total Sales Volume

406.0 557.5 588.3 660.0

362355

346

391

0

100

200

300

400

500

600

700

2005 2006 2007 2008

LE m

n

320

330

340

350

360

370

380

390

400

LE




Chart 107: Misr Beni Suef Cement average selling price and cash cost of production


Consequently, the COGS increased from LE180.5mn in 2007 to LE218.4mn in 2008, rising by 21.0%, which outpaced the growth in sales. Therefore, the COGS/Sales ratio grew from 30.7% in 2007 to 33.1% in 2008.

Chart 108: Misr Beni Suef Cement Cost of Goods Sold (COGS)


Additionally, the S,G&A/Sales ratio rose from 1.9% to 3.1% between 2007 and 2008. The increase witnessed in both, the COGS and S,G&A as percentage of sales, caused EBITDA margin to decline from 67.4% in 2007 to 63.8% in 2008.

Chart 109: Misr Beni Suef Cement EBITDA


346

391362 355

85 96 104129

76.6%

73.1%

69.8%

66.9%

-

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008

LE

62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%


132.5168.6 180.5

218.4

20.4%

27.3%

7.0%

21.0%

32.6%30.3% 30.7%

33.1%

-

50

100

150

200

250

2005 2006 2007 2008

LE m

n

0%

20%

40%


268.3

383.1 396.8 421.0

66.1%68.7% 67.4%

63.8%

-

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008

LE m

n

40%

45%

50%

55%

60%

65%

70%

75%




Furthermore, the Company’s interest income dropped by 36.5% in 2008, reaching LE14.6mn, compared to LE23.0mn in 2007. This decline is due to the slump of the time deposits from LE535.4mn in 2007 to LE216.4mn in 2008, down by 59.6%.

The Company formed LE120mn provision expense in 2008 to meet the cost of extending the infrastructure for the additional electricity and natural gas required for Company’s second production line, which will double the current annual production capacity from 1.5mn ton to 3mn ton.

Misr Beni Suef Cement Company enjoys 10 years tax exemption according to Law no. 8 of year 1997. The tax holiday started in 2004 and will end in 2013. It is worth mentioning that the Company paid LE2.9mn in 2008, representing the 20% taxes on the interest income, which is not included in the tax holiday.

The Company’s ROS declined to 30.7% in 2008 from 32.8% in 2007 for the same reasons explained above. The Company net profit grew from LE193.1mn in 2007 to LE202.4mn in 2008, up by 4.8%.

Chart 110: Misr Beni Suef Cement Net Profit



Misr Beni Suef Cement Company’s total assets increased from LE1.4bn in 2007 to LE1.6bn in 2008, a Y-o-Y growth of 12.6%. This came as a result of the Company’s expansion plan, which will double the annual production capacity from 1.5mn ton to 3mn ton. Therefore, the Company’s projects under construction reported more than twofold growth during the year rising from LE243.3mn in 2007 to LE781.1mn in 2008.

Consequently, the long term assets has accounted for 80.6% of total assets in 2008, up from 56.3% in 2007. This came on the expense of the cash and cash equivalent balance, which plummeted by 59.2% in 2008, dropping from LE558.1mn to LE227.9mn between 2007 and 2008.

132.8

227.7193.1 202.4

32.7% 32.8% 30.7%

40.8%

-

50

100

150

200

250

2005 2006 2007 2008

LE m

n

0%

10%

20%

30%

40%

50%

Net Profit Return on Sales


�0� Egypt Cement Sector July 2009

Chart 111: Misr Beni Suef Cement Assets Composition


On the other hand, Misr Beni Suef Cement Company’s equity, which represents 54.1% of the Company’s financing structure, grew by 19.1% in 2008, to reach LE840.8mn up from LE706.1mn in 2007. On the debt front, the Company’s interest bearing debt balance stood at LE51.7mn in 2008, compared to LE183.4mn in 2007, a drop of 71.8%. This decline was due to the early repayment of the Company’s debt in 2008. Moreover, the Company’s other liabilities rose from LE490.1mn in 2007 to LE660.5mn in 2008, up by 34.8%. This increase is mainly attributed to the growth in the provisions, related to the additional required infrastructure for electricity and natural gas to operate the Company’s second production line. Chart 112: Misr Beni Suef Cement Liabilities and Shareholders’ Equity


Q1 2009

The local cement demand has maintained its growth during the first quarter of 2009, driven by the accelerated activities witnessed in the construction sector. Misr Beni Suef Cement Company’s total sales value soared by 57.5% in the first quarter of 2009, reaching LE231.3mn, as opposed to LE146.8mn in the first quarter of 2008, due to the commencement of the production from the first phase of the second production line.

11.8%

35.2%

14.7%

3.7%

3.3%

4.8%

84.5%

61.6% 56.3%

80.6%

40.5%

3.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008Cash & Equivalent Other assets Long-term Assets

28.6%9.3% 13.3% 3.3%

48.2%

59.5% 51.2%54.1%

23.1%31.3% 35.5% 42.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008

Interest Bearing Debt Equity Other liabilities



Chart 113: Misr Beni Suef Cement Q1 Sales Value


In the first quarter of 2009, the Company’s COGS hiked by 85.8%, which outpaced growth in sales, reaching LE89.9mn, compared to LE48.4mn in the first quarter of 2008. Accordingly, the COGS/Sales ratio increased from 33.0% to 38.9%, between the comparable periods.

Moreover, the S,G&A/Sales ratio rose from 0.7% in the first quarter of 2008 to 1.7% in the first quarter of 2009. In turn, the EBITDA margin went down from 66.3% to 59.4% between the comparable periods.

Chart 114: Misr Beni Suef Cement Selected Income Statement Items in Q1


Misr Beni Suef Cement Company’s bottom line reached LE107.4mn in the first quarter of 2009, as opposed to LE57.7mn reported in the first quarter of 2008, achieving a growth of 86.0%. Consequently, the net profit margin rose from 39.3% to 46.4% between the comparable periods.

116.8 117.3146.8

231.3

57.6%

0.4%

25.2%

57.5%

-

50

100

150

200

250

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

10%

20%

30%

40%

50%

60%

70%


33 38 48

9083 7997 137

28.6% 32.0% 33.0%

70.7% 67.3% 66.3%59.4%

38.9%

-

20

40

60

80

100

120

140

160

Q1 2006 Q1 2007 Q1 2008 Q1 2009

LE m

n

0%

10%

20%

30%

40%

50%

60%

70%

80%




Table 34: Misr Beni Suef Cement Q1 Income StatementLE000 Q1 2008 Q1 2009 Change%

Sales 146,809 231,268 57.5%

COGS (48,394) (89,897) 85.8%

SG&A (1,058) (3,970) 275.3%

EBITDA 97,357 137,401 41.1%

Depreciation (15,837) (15,829) -0.1%

EBIT 81,520 121,573 49.1%

Interest Income 4,428 3,351 -24.3%

Investment Income 0 0 -

Interest Expense 0 0 -

Other Provisions (28,000) (17,223) -38.5%

Other Non-Operating Income\(Expense) 674 349 -48.1%

NPBT 58,621 108,050 84.3%

Income Tax (888) (675) -24.0%

NPAT 57,733 107,375 86.0%

Capital Gain/Loss 0 0 -

Other Extraordinary Items 0 0 -

NPAUI 57,733 107,375 86.0%

Minority Interest 0 0 -

Net Profit/(Loss) 57,733 107,375 86.0%Source: Misr Beni Suef Cement Company and Global Research

Financial Forecast

According to our cement market forecast, Misr Beni Suef Cement is expected to operate at a utilization rate of 85% in 2009, as the new production line will not be fully completed during 2009. After that the utilization rate will increase gradually, as the new production line will be completed in 2010. The utilization rate is forecasted to reach103% in 2013. We also assumed that the Company is expected to allocate a greater proportion of its production to the export market in 2010 and 2011. Afterwards, an increasing percentage of production will be allocated to the local market, as local demand will rebound.

Chart 115: Misr Beni Suef Cement forecasted capacity, utilization rate, local & export sales volume


Furthermore, we assumed that average price per ton during 2009 will maintain its current levels, on the back of strong local consumption, then decline by 5% in 2010, before rebounding gradually until reaching LE450/ton in 2013.

3.0 3.0 3.0 3.0

2.2 2.42.9

0.30.4

0.8

0.2

3.0

2.2 2.4

0.6

94%

99%

85%

101%

103%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009 2010 2011 2012 2013

Ton

mn

80%

85%

90%

95%

100%

105%




Chart 116: Misr Beni Suef Cement forecasted sales value and average price


Moreover, we assumed that cash cost of production to grow at around 28% in 2009, reflecting the government decision to liberalize energy prices. Afterwards, cash cost of production is forecasted to increase on average by 2% annually, assuming no further government intervention, such as increasing energy prices and/or imposing any additional duties on cement manufacturers.

Chart 117: Misr Beni Suef Cement forecasted average selling price and cash cost of production


Consequently, COGS/Sales ratio is expected to increase in 2010, as the selling price is expected to decrease, while cash cost of production will keep increasing marginally over our forecast horizon. However, COGS/Sales ratio is estimated to decline gradually starting from 2011 till it reaches 45.8% in 2013, as the selling price is expected to increase at a higher rate than the growth in the cash cost of production.

Chart 118: Misr Beni Suef Cement forecasted cost of sales and COGS/Sales ratio


1,055 1,122 1,219 1,298 1,382

400

413

414

428

447

-

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010 2011 2012 2013

LE m

n

370

380

390

400

410

420

430

440

450

460

LE


391 414 400 413 428 447

129166 168 171 176 179

66.9%

60.0%58.0% 58.5% 59.0% 60.0%

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012 2013

LE

40%

45%

50%

55%

60%

65%

70%


422471 506 532

553

40.0%

42.0%41.5%

41.0%

40.0%

-

100

200

300

400

500

600

2009 2010 2011 2012 2013

LE m

n

38%

39%

40%

41%

42%

43%

44%

COGS COGS/Sales



Additionally, we assumed that S,G&A will increase annually by 10% from 2008 level. Consequently, S,G&A/Sales is forecasted to increase marginally over our forecast horizon, as the growth in S,G&A will outpace the increase in sales. Accordingly, EBITDA Margin is forecasted to decline in 2010, as a result of the increase in COGS/Sales and S,G&A/Sales, then advancing gradually over the next years.

Chart 119: Misr Beni Suef Cement forecasted EBITDA and EBITDA margin


Net profit as a percent of sales is expected to follow a similar trend like EBITDA margin from 2009 to 2013, for the same reasons mentioned above. However, net profit margin will be lower than EBITDA margin, mainly because we assumed that the Company will continue to form provisions required to meet the cost of supply energy to its new production line, but at lower rate than the historical rate, as percentage of sales.

Starting from 2014, Misr Beni Suef Cement will start to pay 20% taxes, as its tax exemption period will end in 2013. It is worth mentioning that we assumed a tax rate of 20% on interest income during the tax exemption period, according to the Egyptian tax law, which exempts only operating income from taxes throughout the tax holiday period.

Chart 120: Misr Beni Suef Cement forecasted net profit and net profit margin


611 626 686 736 796

57.9%

55.8% 56.3% 56.7%57.6%

-

100

200

300

400

500

600

700

800

900

2009 2010 2011 2012 2013

LE

mn

40%42%

44%46%

48%50%

52%54%

56%58%

60%


386 401475

546

624

36.5%35.8%

39.0%

42.1%

45.2%

-

100

200

300

400

500

600

700

2009 2010 2011 2012 2013

LE m

n

30%

32%

34%

36%

38%

40%

42%

44%

46%




Valuation


Based on our valuation assumption stated earlier under valuation and recommendation section and out projected Free Cash Flow to Firm (FCFF), shown below, we reached a fair value of LE165.2/share using DCF method, implying 86.7% upside potential from the current market price of LE88.49/share, as of June 30th, 2009.

Table 35: Misr Beni Suef Cement DCF valuation(Values in 000) 2009F 2010F 2011F 2012F 2013F

Free Cash Flow (42,193) 477,877 653,014 699,846 756,028


Discounted Cash Flow (38,576) 365,052 416,788 373,206 336,852

PV of Terminal Value 1,663,397


Cash 257,190

Debt (69,039)







WACC

1.0% 2.0% 3.0% 4.0% 5.0%

17.7% 173.9 180.4 187.8 196.3 206.2

18.7% 163.8 169.5 175.8 183.0 191.3

19.7% 154.9 159.8 165.2 171.4 178.4

20.7% 146.9 151.1 155.9 161.2 167.1


Relative Valuation

Using the Weighted average EV/EBITDA of 6.82x for the cement sector in the region, calculated earlier under the valuation and recommendation section, we reached a fair value of LE152.9/share using relative valuation method, implying 72.8% upside potential from the current market price of LE88.49/share, as of June 30th, 2009.



��0 Egypt Cement Sector July 2009

Table 37: Misr Beni Suef Cement weighted average fair value

Valuation approach

Fair Value/

share (LE) Weight

Weighted

Value (LE)




Current market price (LE)* 88.49

Upside/(Downside) potential 83.9%*Price as of June 22nd, 2009Source: Global Research

Combining both methods resulted in a fair value of LE162.8/share, compared to the current market price of LE88.49/share, implying an upside potential of 83.9% over the market price. Therefore, we initiated our coverage for Misr Beni Suef Cement Company with a “BUY” recommendation.



Bal

ance

She

etM

isr

Ben

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f C

emen

tA

ctua

lP

roje

cted

(in

LE 0

00s)

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

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12 (

F)

Ass

ets

Ope

ratin

g C

ash

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5,49

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11,4

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6233

4,52

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639

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��2 Egypt Cement Sector July 2009

Inco

me

Stat

emen

tM

isr

Ben

i Sue

f C

emen

tA

ctua

lP

roje

cted

(in

LE 0

00s)

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

Rev

enue

s fr

om O

pera

tion

406,

008

557,

502

588,

293

659,

952

1,05

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41,

122,

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1,21

9,20

41,

297,

515

CO

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(132

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)(1

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(180

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)(2

18,4

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(505

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7,25

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9,97

6)E

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334

383,

079

396,

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421,

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610,

763

626,

248

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983

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(129

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)(1

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ng P

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205,

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319,

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357,

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604,

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rest

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8,39

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205,

314

387,

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227,

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193,

150

202,

412

385,

737

401,

362

474,

930

546,

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ting

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(1,8

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(1,9

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(2,2

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)(1

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)in

crea

se/(

decr

ease

) in

pay

able

s5,

036

2,40

839

,515

(47,

788)

4,20

51,

231

864

1,18

2in

crea

se/(

decr

ease

) in

acc

rued

exp

ense

s(7

,012

)(1

1,10

0)90

324

,498

22,3

474,

730

1,52

91,

064

incr

ease

/(de

crea

se)

in d

own

paym

ents

849

24,9

03(2

6,12

1)(1

3,59

4)15

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1,00

51,

451

1,17

5in

crea

se/(

decr

ease

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oth

er c

urre

nt li

abili

ties

1,79

215

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23,1

3643

,674

2,73

37,

666

1,04

679

3C

ash

flow

fro

m o

pera

ting

act

ivit

ies

273,

211

411,

664

416,

043

396,

135

603,

457

627,

770

682,

496

730,

348

Rec

eipt

s fr

om e

xtra

ordi

nary

item

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11,5

6488

61,

141

1,82

51,

941

2,10

82,

243

Net

cas

h pr

ovid

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acti

viti

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3,39

342

3,22

841

6,92

939

7,27

660

5,28

262

9,71

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4,60

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2,59

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Fixe

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7,27

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63,0

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(31,

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(29,

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Proj

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und

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plem

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636

(528

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0,03

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3,61

650

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Inve

stm

ents

(88,

558)

(243

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)(2

10,9

16)

328,

998

216,

440

(167

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59,7

17)

(397

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)O

ther

long

-ter

m A

sset

s-

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--

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com

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14,5

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394

-6,

494

20,4

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ovis

ion

(55,

000)

(95,

000)

(156

,500

)(1

68,1

15)

(126

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8,57

2)(7

5,59

1)(7

2,66

1)C

ash

flow

fro

m I

nves

ting

act

ivit

ies

(135

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39,4

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(588

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)(3

62,5

11)

(535

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)(3

94,4

63)

(456

,197

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78,8

73)

Incr

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/(de

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in s

hare

hold

ers’

equ

ity10

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)(2

0,42

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4,16

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7,78

5)In

crea

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decr

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long

& s

hort

term

bor

row

ing

(148

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)(1

33,2

62)

93,7

51(1

31,7

56)

210,

686

(109

,098

)(7

6,63

9)(7

6,63

9)In

crea

se/(

decr

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) in

oth

er lo

ng-t

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liab

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s41

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91,0

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0,51

216

1,16

712

5,96

078

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75,5

9172

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rest

exp

ense

(27,

567)

(8,8

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(3,1

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4,22

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3,39

8)(4

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ivid

ends

pai

d(2

8,16

4)(5

5,00

0)(6

0,00

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7,61

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54,8

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(158

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)(1

87,7

08)

(215

,802

)C

ash

flow

fro

m F

inan

cing

act

ivit

ies

(152

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)(7

9,24

1)17

9,12

8(3

5,95

1)(5

8,54

1)(2

33,8

04)

(226

,322

)(2

52,0

31)

Net

cas

h fl

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561

7,18

3(1

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)11

,254

1,44

32,

085

1,68

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ash

at th

e be

ginn

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of th

e ye

ar5,

524

933

5,49

512

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11,4

9222

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24,1

8926

,274

Cas

h at

the

end

of th

e ye

ar93

35,

495

12,6

7811

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22,7

4624

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26,2

7427

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Sour

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Sour

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Mis

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& G

loba

l Res

earc

h

This Page is Intentionally Left Blank

Company

Sinai Cement Company

Misr Cement Qana

Misr Beni Suef Cement

Recommendation

Buy

Buy

Buy

Reuters Ticker

SCEM.CA SCEM:EY MCQE.CA MCQE:EY MBSC.CA MBSC:EY

Price (LE.)

71.98

78.00

88.49

Disclosure

1,10 1,10 1,10 1,10 1,10 1,10

Disclosure Checklist

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Global Research: Equity Ratings DefinitionsGlobal Rating DefinitionBuy Fair value of the stock is >10% from the current market priceHold Fair value of the stock is between +10% and -10% from the current market priceReduce Fair value of the stock is between -10% and -20% from the current market priceSell Fair value of the stock is < -20% from the current market price

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Egypt cement-sector-072009

Business

Transcript of Egypt cement-sector-072009