NBKCapital-MENAinFocus-14September2010

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Issue no. 75 - September 14, 2010

nbkcapi ta l .com

MENAinFocus

Insie Tis Issue

In Focus 1: UAE Cement Market: Grueling Times Ahead

With little to impress, UAE cement manufacturers face

challenging times ahead, driven by signicant excess supply

and near historical low prices. We would still refrain from calling

this the bottom as the key demand drivers for the industry lack

direction. Accordingly, in the short- to medium-term we view the

UAE cement sector as unexciting from the investors perspective

as developments in the UAE real estate and construction sector

fail to inspire. The downside risks of oversupply in the industry

along with weak economic fundamentals, sliding cement prices,

margin pressures, and negligible free cash ows leading to

potential discontinuation in dividends seem imminent.

By: Mala Pancholia

In Focus 2: Omani Banks: 1H2010 Update

In this section, we examine the performance of a sample of Omani

banks during 1H2010. The period was characterized by slow

growth as evidenced by the marginal loan growth of 2% in the

overall banking sector between December 2009 and May 2010.

Most of the sampled banks were able to increase their operating

income supported by strong growth in net interest income, while

net prot growth was supported by a general decline in loan loss

provisioning charges in 1H2010. Non-performing loans (NPLs)grew for half of the sampled banks in 1H2010, although at a

slower pace than seen in FY2009, but NPL coverage stayed

above 100% for all banks. All the banks witnessed a decline in

their capital adequacy ratios (CARs) between December 2009

and June 2010.

By: Munira Mukadam and Tariq van der Loo

Rebase Performance of Regiona Inices

85

95

105

115

Aug-09 Oct-09 Dec-09 Mar-10 May-10 Jul-10 Aug-10

MSCI Arabian Markets MSCI GCC Countries MSCI Jordan+Egypt+Morocco

MENA Maret Caps

0%

1%

1%

2%

2%

3%

7%

8%

12%

12%

14%

37%

0 50 100 150 200 250 300 350

Palestine

Tunisia

Lebanon

Oman

Bahrain

Jordan

Morocco

Egypt

Kuwait

Qatar

UAE

Saudi Arabia

(%) Share of MENA Market Cap Market Cap. (USD billion)

Summar of Performance of MENA Inices

Index Level

as of

31-Aug-10

% below

52-Week High

% over

52-Week Low 1-Mth Period YTD PE PB

REGIONAL

MSCI Arabian Mkts 473 530 443 -10.8% 6.8% -0.4% 2.3% 895 13.3 1.7

MSCI GCC Mkts 414 463 386 -10.6% 7.2% -0.4% 2.3% 691 13.1 1.6

MSCI Jordan, Egypt & Morocco 1,104 1,264 1,003 -12.7% 10.0% 0.1% 4.6% 159 15.1 2.3

GCC

MSCI Bahrain 270 400 250 -32.7% 7.6% 6.7% -18.9% 17 11.5 1.1

MSCI Kuwait 633 715 516 -11.5% 22.8% 6.1% 15.6% 106 16.8 1.6

MSCI Oman 854 930 782 -8.1% 9.2% -0.5% 1.8% 17 12.0 1.8

MSCI Qatar 641 680 575 -5.8% 11.3% 2.3% 5.3% 106 11.3 2.2

MSCI Saudi Domestic 388 451 356 -13.9% 9.2% -2.9% -0.3% 321 14.5 2.0

MSCI UAE 197 297 178 -33.5% 10.7% -1.8% -13.8% 124 10.5 1.0

OTHER MENA

MSCI Egypt 1,334 1,577 1,179 -15.4% 13.2% 1.7% 5.4% 73 12.1 1.8

MSCI Jordan 261 327 250 -20.2% 4.3% -4.0% -17.1% 28 19.3 1.7MSCI Morocco 402 441 344 -8.8% 16.9% -3.4% 9.2% 59 18.9 4.3

MSCI Lebanon 956 1,200 954 -20.3% 0.2% -5.4% -14.3% 11 7.9 1.0

MSCI Tunisia 1,587 1,587 1,172 0.0% 35.4% 4.6% 24.0% 10 16.5 2.1

Palestine SE 492 533 481 -7.7% 2.2% -1.9% -0.2% 2 10.5 1.3

Market

Cap

(USD

billions)

Trailing

INDEX52-Week

High

52-Week

Low

% Change
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MENAinFocusSeptember 14, 2010

nbkcapi ta l .com | 2

IN FOCUS 1 UAE CEMENT MARkET: GRUElING TIMES AhEAd

Clouded by oversupply, the United Arab Emirates (UAE) cement industry is undergoing a

transition phase. Weak economic fundamentals, tanking demand, sliding cement prices, and

margin pressures pose major challenges for the UAE cement players going forward. Essentially,

cement is the building block of an economy, a key component for construction. However, the UAEcement story, a commodity business and cyclical by nature, has little to impress.

The trillion-dollar Gulf Cooperation Council (GCC) economy boasts a colossal project pipeline

of USD 1.8 trillion. Given that the bulk of these projects are UAE (Dubai) real estate focused,

planned or announced but un-awarded, considerable uncertainty exists over the active project

portfolio. Moreover, the gradual shift of project focus from real estate and construction to oil and

gas, water, power, etc. holds little promise for the UAE cement industry.

At the end of 2009, the 11 integrated cement manufacturers added up to a combined cement

capacity of 24 million tons per annum (Mtpa) compared to a demand of 18.2 Mtpa. Local demand

is expected to slide by another 25% to 30% this year to about 1314 million tons. Adding to the

woes of the cement manufacturers, bulk cement prices in the domestic market have nearly halved

to about AED 190 per ton (the lowest in the GCC) since their peak in 2008, and going forward,

we believe cement prices in the UAE will inuence cement prices in neighboring GCC countries.

As domestic demand-supply fundamentals deteriorate, UAE manufacturers are entering survival

mode, tapping the export markets with a focus on breaking even. As evident from the 1H2010

results, most UAE cement companies are in the red and are barely EBITDA positive. The relatively

high cash costs of production plus the sizeable freight cost (20% to 30% of the landed UAE

cement price) make the UAE cement price uncompetitive versus its regional peers, given the

current pricing in the other GCC markets. Ideally, except for the export ban, Saudi Arabian

cement players are better positioned to challenge UAE exports within the region due to the Saudi

companies low-cost structure and proximity to supply-decient markets such as Iraq.

Backed by a oundering UAE construction outlook, UAE cement manufacturers face a challengingroad ahead. With very few positives to boast, we feel UAE cement companies in general, from an

investment perspective, are unexciting in the near- to mid-term. EBITDA margins deteriorating

to historic lows, net losses after years of protability, and the potential discontinuation of cash

dividends owing to negligible free cash ows have resulted in negative year-to-date stock returns.

Hopes of a recovery on the back of the Abu Dhabi nuclear deal seem based on extremely optimistic

assumptions. While consolidation seems to be the way forward in the saturated UAE cement

sector, the risk-reward tradeoff seems heavily weighed down by the overall negativity in the sector,

lack of clarity on the UAE real estate sector, low investor appetite for cement stocks, tight credit

markets, regional economic ambiguity, and margin contraction leading to weakening cash ows.

Amid all the negativity, the low gearing and near-replacement cost valuations for the UAE cement

companies stand out somewhat.

With little to offer for investors in the near- to mid-term, we retain a cautious view of the UAE

cement sector. Going forward, in an excess supply scenario, volume push through exports and

survival in a low-price scenario are likely to be the key sustainability drivers for the industry.

Mala PancholiaT. +971 4365 2811

E. [email protected]
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Iusive GCC Projects Outoo

Activity in the construction sector is a precursor to the demand for cement in the UAE; housing

and infrastructure projects qualify as the top consumers. Typically, 2-10% of a building projects

cost could be attributed to cement. According to a research paper produced by the University

of the Witwatersrand for Pretoria Portland Cement Company, the cost of cement can range from8.5% for low-cost housing to just about 2% for a high-end residential unit or a shopping center.

This range can vary in response to cement prices as well as the overall project cost ination.

Cement, due to its bulky nature, tends to be a zone-bound commodity, and therefore, the UAEs

cement demand depends signicantly on the construction activity in the local market. However,

any pickup in construction activity within the GCC can also act as a demand driver in the short- to

medium-term. According to the MEED presentation dated May 24, 2010, a total of USD 467

billion worth of projects are currently under construction in the GCC. Another USD 1.3 trillion

worth of projects have been announced but not yet awarded. At the same time, almost USD 600

billion worth of projects have been either put on hold or canceled across the GCC. (See Figure

1-1.)

Figure 1-1 GCC Projects A Promising Pipeline Weighed Down with Delays and

Slowdowns

16 23 24

52

132

220

1525

15

3953

447

55

252

66

131

438

401

50

100

150

200

250

300

350

400

450

500

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

USDB

illions

Value of Projects Under Construction Value of Projects on Hold / Canceled

Value of Projects Active but Un-awarded

Sources: MEED Presentation at Arabian World Construction Summit, May 2010 and NBK Capital

According to International Monetary Fund (IMF) data, the 30-year average investment/gross

domestic product (GDP) ratio for the Middle East and North Africa (MENA) region has been

24%; the lowest was 21% in 2000. In addition, the World Bank indicated that the gross capital

formation/GDP ratio for the GCC averaged 22% from 1990 to 2007. In line with the long-term

average, the above-mentioned colossal project outlook seems unsustainable. With cautious

optimism and backed by planned budgetary government spending, it could be concluded that

around USD 200 billion in projects are likely to be awarded in the GCC in the next few years, with

the bulk materializing in Saudi Arabia, Qatar, and Abu Dhabi.

Although the active project stream contains USD 1.8 trillion worth of projects (excluding the

canceled/on-hold projects), only projects under construction

19% of the total project stream

account for tangible activity in the region. In the UAE alone, approximately 55% of the total

The GCCs colossal project

pipeline could be deceptive.

Although the UAEs project

pipeline, largely driven by real

estate, accounts for the largestunder construction project

base, it also accounts for the

highest project cancellations

and/or suspensions
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Figure 1-3 Project Focus Shifts from Real Estate and Construction to Other Sectors

45%49%

27%

41%

55%51%

73%

59%

20

40

60

80

100

120

140

160

180

2007 2008 2009 Jan'10-Jul'10

USDB

illions

Construction Other Sectors

Sources: MEED Presentation at Arabian World Construction Summit, May 2010 and NBK Capital

The shift in the project focus theme ties in well with the UAEs construction and real estate

services contribution to the GDP story. (See Figure 1-4.) The total contribution of this sector

to non-oil GDP slumped from a high of 26% in 2008 to 19% in 2009, the lowest since 2000

(it averaged 22% from 2000 to 2009). The regions weak credit scenario along with sluggish

foreign direct investment (FDI) ow into the UAE (down 70% year on year [YoY] in 2009 versus

a compound annual growth rate [CAGR] of 42% in the preceding eight years) only exaggerate the

sectors woes.

The International Institute of Finance (IIF) report GCC Regional Overview released in May

2010 stated that historically 25% of the UAEs loan book was exposed to the speculative realestate sector. The Central Bank data indicates that, while the UAEs total bank credit growth

declined from 43% YoY in 2008 to 4% in 2009, the loan growth in particular for the building and

construction sector dipped from 74% YoY to 6% YoY. Unfavorable industry dynamics particularly

in the UAE have led to a depressed demand for cement and other building materials.

Figure 1-4 Contribution of Real Estate and Related Sectors UAE GDP

170 182199

228260

327

399

466

566

649

12%

2% 3%

12%

10%

9% 8%

6%5%

-2%

21%20%

22% 22% 22% 22%23%

24%

26%

19%

-5%

0%

5%

10%

15%

20%

25%

30%

-200

-100

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth/Contribution,

Percen

tage

UAENon-oilGDP,

AEDB

illion

UAE Non Oil GDP, AED Billions

UAE Real GDP Growth

Building & Construction & Real Estate Business Services Contribution to Non-Oil GDP

Sources: UAE Central Bank, IIF, and NBK Capital

As real estate goes out of

flavor, other sectors such as

infrastructure, oil and gas, etc.

benefit from the government

stimulus packages

Declining contribution of the

real estate, construction, and

related sectors tends to have

a profound impact on the

cyclical building materials

sector


6/22



UAE Cement deman an Supp dnamics A Bea Picture

Currently, there are 21 players in the UAE cement industry, 11 of which are integrated cement

manufacturers. Four are based in Ras Al Khaimah close to the port as well as to the limestone

quarries. In 2006, the real estate and construction boom attracted many new entrants, resulting

in a three-and-half-fold increase in clinker manufacturing capacity, from 6.6 Mtpa to 23.3 Mtpaby the end of 2009. During the same period, the cement grinding capacity almost tripled from

11.8 Mtpa to 33 Mtpa in 2009 and is likely to further rise to 40.7 Mtpa by the end of 2010.

The clinker production capacity reects the true supply scenario in the industry as opposed to the

overall grinding capacity. While grinders ourish in a period of growth, they are most prone to be

driven out of business in an economic downturn.

Between 2004 and 2008, demand for cement almost doubled, from 10.5 million tons to a

historical high of 20.8 million tons. However, the economic meltdown led to a virtual freeze in the

UAEs real estate and construction sector. Project slowdown and the shift from the construction

sector predictably weakened the demand for cement, which decreased to 18.2 million tons in

2009. The UAE Cement Manufacturers Association expects the cement demand to slide another

25% to 30% YoY in 2010.

Signicant surplus capacity is a new experience for the sector, which has compelled manufacturers

to look for other viable options to ofoad production. Most players have opted to export to Oman,

Iraq, Sudan, etc. However, high transportation costs (almost 30% of the landed cement price)

signicantly limit the competitiveness of UAE products.

Figure 1-5 UAE Cement Industry Dynamics From Attractive to Lackluster

6 67

811

1314

17

2118

13

6 6 6 6 68

10

19 19

23

27

6 6 78

1113

17

26

33 33

41

16%

3%

17%

20%

25%

21%

13%

20% 21%

-13%

-30%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-30

-20

-10

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

ChangeinDemand,

Percentage

D

emandandSupplyinMillionTonsperAnnum(

Mtpa)

Cement Consumption Clinker Production Capacity

Cement Production Capacity Change in Demand

Sources: Union Cement Company and NBK Capital

litte Opportunit in te doom

With real estate and construction out of avor, cement manufacturers are faced with surplus

capacity, historically low cement prices, stretched receivables, and limited export opportunities

(which will be discussed in detail later). Volume growth in the UAE, essentially the key determinantin this commodity business, remains insignicant in the near-term.

With a virtual freeze of activity

in the UAEs prominent real

estate and construction sector,

demand for cement is expected

to decline by almost 25%-30%

YoY in 2010


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Although we foresee consolidation as the only way forward for the troubled UAE cement industry,

we must highlight that the region lacks concrete historical evidence of such activity within the

sector. While cement companies are trading at attractive valuations (close to replacement cost

and even lower than replacement cost in some cases), long-term investors remain skeptical of

the risk-reward tradeoff. In addition to the cyclical nature of the business, the general lack of

business condence surrounding the UAE real estate and construction industry continues to deterpotential investors.

UAE Nucear dea: Cement Proucers hopes lie to hit te Wa

In addition to tapping export opportunities in the near-term, the Cement Manufacturers Association

views Abu Dhabis upcoming nuclear deal as a potential driver for the cement industry. In 2010,

the demand for cement in UAE is likely to slide by another 25% to 30% to reach 13 to 14 million

tons, and the situation is unlikely to improve in the near-term.

At the end of 2009, Abu Dhabi awarded a USD 20 billion contract to a Korean consortium to build

four nuclear power plants. (The USD 20 billion price includes construction, commissioning, and

fuel loads for the four plants.) The Nuclear Energy Institute stated that a new nuclear power plantcould require an investment of USD 68 billion, including interest during construction, and is

likely to consume approximately 400,000 cubic yards of concrete, 66,000 tons of steel, 44 miles

of piping, 300 miles of electrical wiring, and 130,000 electrical components.

In line with the above guidance, it can be estimated that building the four nuclear reactors (total

capacity of 5,600 MW) is likely to consume between 1 and 2 million tons of cement over the

rst 24 months of Phase I, which is expected to commence in 2012. In a larger, developed, and

relatively stable economy, construction of a nuclear power plant could have an overall positive

impact for the state in terms of additional job creation, rising housing and socio-economic

demands, higher direct and indirect spending, and other community benets. However, it remains

to be seen if a sustainable story will emerge for the UAE, thus providing the much-needed push

for the UAE cement industry.

UAE Cement Prices Steep decine from historica higs

In the period between early 2003 and May 2004, limited UAE production capacity coupled

with robust demand and trader monopolies led to a steep price increase of about 55% (from

USD 63 to USD 98 per ton). In mid-2004, the Ministry of Economy intervened and agreed with

the Cement Manufacturers Association to ease cement prices. Despite these government efforts,

cement prices continued to escalate on the back of soaring construction demand.

The bulk price was ofcially capped at USD 80.3 (AED 295) per ton in July 2007. Although

the cement manufacturers agreed to adhere to the price cap, they had ample opportunities to

sell cement at more than USD 100 (AED 365) per ton. As demand for materials surged andcommodity prices hit the roof (oil hit a high of USD 148 per barrel [bbl] in June 2008), the

alleged black market cement prices rose to almost USD 136 (AED 500) per ton. The UAE Ministry

of Economy revised the price cap upward in early 2008 to AED 360 per ton (USD 98) in an

attempt to dampen the high inationary environment.

Unaffected by the price cap, the cement price in Abu Dhabi was vulnerable to wide uctuations.

In the rst half of 2008, the Abu Dhabi Department of Planning and Economy reported that

cement prices were up 30% YoY in 2007 and rose a further 46% until June 2008 to hit AED 645

per ton (USD 175).

In mid-2008, the global nancial meltdown led to a virtual collapse of the booming regional

construction industry. The UAE in particular suffered the most as almost 80% of the ongoing

construction projects were halted, indenitely suspended, or canceled. Accordingly, demand for

building materials more or less evaporated.


8/22



We estimate that bulk cement prices in the UAE have halved from their peak, ranging between

AED 180 and 200 per ton (pre-2002 levels). See Figure 1-6.

Figure 1-6 UAE Cement Price Trend Been through the Highs and Lows

162

232

370

190

8%

11%

43%

17%

2%4% 4% 5%

19%

-18%

-38%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

50

100

150

200

250

300

350

400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

Changein

Price,

YOY

BulkOPCP

rice,

AEDp

erton

Bulk OPC Price, AED per ton Change in Price, YOY

Sources: Union Cement Company and NBK Capital

The UAEs per-capita cement consumption of > 4,200 kg (ve times the world average) during the

peak of 2008 was unsustainable. The UAE cement industry was deeply impacted by the global

downturn. Domestic players have since entered survival mode as the local selling prices are fastapproaching the actual cash cost of production. Local cement industry players perceive exports

to be instrumental to counter the excess capacity albeit limited by their cost structure, a key

determinant of the companies resilience from here on.

Given the bulky nature of the commodity, cement is costly to ship due to a sizeable freight

element. Nevertheless, for the UAE players, the existing price differentials of 10-20% in the

neighboring Middle East and Africa markets versus UAE domestic prices (plus freight) enhance

the export landscape in the near-term. In addition, the most-cost-effective market of Saudi Arabia

poses no or little threat to UAEs export markets due to an active export ban.

Gradual erosion of these tempting price differentials is almost undeniable, and before long, UAE

cement companies could soon reassess their export strategy to avoid 1) margin contraction leading

to potential cash-ow stress and 2) a lower capacity utilization rate.

Portland cement price in the

UAE has declined 50% since

the peak in mid-2008 and

is likely to hover around this

range in the near-term


9/22



Figure 1-7 Opportunities Surface Around the Current Flow of Cement across the GCC*

IRAQ *

Active Capacity: 3 MtpaDomestic Price:

USD 120-150/ton

OMAN

Capacity: 5.3-5.5 MtpaDomestic Price: USD 70-72/ton

Transport from the UAE: USD 5-10/ton

QATAR

Capacity: 6.0-6.5 MtpaDomestic Price: USD 68/ton

Transport from UAE: USD 15/tonUAE

Capacity: 33.8 MtpaDomestic Price: USD 52-58/ ton

Transport from RAK to AUH/DXB:

USD 5-10/ton

SUDAN / OTHER AFRICAN REGIONS*

Sudan Capacity: 1Mtpa (6 Mtpa by 2011)Sudan Cement Import 09: 2.35 million tons

Sudan Cement Consumption 09: 3.3 million tons

Domestic Market Price: USD 250-270/tonFreight UAE to Khartoum+ Clearance: USD 100-200/ton

SAUDI ARABIA

Capacity: 48 MtpaDomestic Price:

USD 60/tonProminentCementExporter

Selling Price FOB:USD 40-50/ton

Freight toMENA: USD10-30/ton

Indicates potential supply opportunities from Saudi Arabia

Indicates the export markets pursued by the UAE cement manufacturers

*Data for Sudan is per the CEMEX report on the Sudan cement industry; the government of Sudan has currently xed a

minimum price of USD 60 per ton, and data for Iraq was reported by the United States Agency for International Develop-

ment (USAID) as of November 25, 2007 Sources: MEED and NBK Capital

Cost Structure Vita to Surviva

In the current excess supply scenario, it essentially comes down to survival of the ttest, which

can be achieved only through cost efciencies. Energy remains a crucial component of the total

cost of production for cement companies. The UAE cement companies are at a disadvantage

compared to some of their GCC peers with regard to the energy issue since the gas prices for the

UAE cement players are not subsidized by the local government, unlike signicantly subsidized

rates for gas in other GCC countries.

Figure 1-8 Average Cash Cost Analysis UAE Manufacturers Lack Competitive Edge

2008 2009 1H 2010 2008 2009 1H 2010Yamama Cement Saudi Arabia 70% 65% 65% 19.7 18.7 19.7

Saudi Cement Saudi Arabia 57% 60% 57% 28.3 25.0 22.2

Eastern Province Cement Saudi Arabia 64% 58% 54% 25.9 25.9 30.0

Yanbu Cement Saudi Arabia 60% 62% 59% 25.4 23.0 24.2

Southern Cement Saudi Arabia 66% 65% 63% 22.6 21.5 23.7

Tabuk Cement Saudi Arabia 66% 63% 63% 19.2 16.9 17.5

Fujairiah Cement United Arab Emirates 31% 28% 16% 62.3 53.4 47.0

Gulf Cement United Arab Emirates 35% 29% 15% 56.7 51.5 40.9

Ras Al Khaimah Cement United Arab Emirates 23% 30% 7% 68.6 53.4 45.4

Union Cement United Arab Emirates 17% 24% 6% 60.8 45.0 52.7

Raysut Oman 40% 36% 46% 25.1 35.2 27.4

Oman Cement Oman 23% 39% 47% 31.7 32.9 45.6

Cash Cost (USD) / TonCompany Name

EBITDA MarginsCountry

Sources: Reuters Knowledge, company nancial statements, and NBK Capital

Optimizing for cost efficiency

will be key to survival for the

cement players in the UAE in

the near- to mid-term


10/22



In Saudi Arabia, the average cash cost of production was USD 20-30 per ton in 1HQ2010 while

for the UAE players, the average cash cost of production was USD 4050 per ton. (Refer to Table

1-8.) Of late, the declining volumes, sliding prices, and relatively higher total cost of production

in the UAE led to unattractive EBITDA margins of around 8% to 10% versus the healthy average

EBITDA margin of around 60% for the Saudi Arabian players.

Worth highlighting is that the UAE producers cash cost of production is nudging closer to the

prevailing market price of cement, leaving the manufacturers very little room. Lowering costs by

using the most efcient mix of energy, cost cutting in other areas, avoiding inventory piles through

volume push, and thus surviving through the lean period will dene the modus operandi for the

cement players in the UAE in the near- to mid-term.

Among the UAE players, our cost analysis shows that, in the last two years, Gulf Cement Company

followed by Ras Al Khaimah Cement Company have the lowest xed cost per ton while Union

Cements xed costs are about 35-40% higher. The lower xed costs are favorable for the former

companies in difcult economic conditions as these companies benet from additional operating

leverage versus Union Cement.

Figure 1-9 Fixed Cost (FC) and Variable Costs (VC) Comparison of Select UAE Players

FC/Ton VC/Ton FC/Ton VC/Ton FC/Ton VC/Ton

2008 25.4 194.9 25.4 207.5 17.8 244.5

2009 21.7 171.4 34.0 144.2 24.7 185.5

1H 2010* 14.5 138.1 33.3 174.8 16.8 159.9

Values in AEDGulf Cement Union Cement Ras Al Khaimah Cement

*NBK Capital estimates Sources: Company nancial statements and NBK Capital estimates

As a result of the higher cost of production and unfavorable market prices, the EBITDA margins

of UAE companies deteriorated signicantly between 2009 and 1H2010. Saudi Arabia, on the

other hand, benets from relatively attractive EBITDA margins.

divien Pa Teme Cou Vanis

For the last two years, cement companies in the UAE have paid handsome dividends. Long-term

investors viewed the cement sector favorably for the rich payout ratios despite declining prots.

However, in the current conditions, UAE cement results are not only perturbed by low volume

and declining prices, but a selected few are also burdened with losses in investment portfolios.

With deteriorating EBITDA margins for the UAE cement players, and possibly strained free cash

ows (FCF) in the near- to mid-term despite low capital expenditures (capex) (see Figure 1-10),

cement companies may opt to shrink dividends in the near future. Most UAE cement companies

are net debt negative, implying signicant cash balances, which is ideally suited for the current

scenario. However, on the back of weak fundamentals, contracting margins, and diminishing

returns on equity, it should not be surprising if manufacturers chose to retain the cash balances

to manage working capital requirements rather than distribute dividends. Up until FY2009, a few

UAE cement companies paid dividends by dipping into previous earnings, but the trend seems

unlikely to continue as companies seek to break even in the near- to mid-term.

Lower fixed costs are desirable

in tough economic conditions


11/22



Figure 1-10 UAE Dividend Story Could Dissipate with Tightening FCF/share

2009 2008 2009 2008 1H 2010 2009 2008 2009 2008

Arkan Building Materia ls Company PJSC - - - 0% 0% (0.00) (0.32) (0.50) - -

Fujairah Cement Industries PSC 0.06 0.22 2.00 26% 40% (0.08) (0.56) (1.42) -.11x -.16x

Gulf Cement Company PSC 0.10 0.15 6.90 227% 5810% (0.02) 0.21 0.08 .48x 1.87x

National Cement Company PSC 0.45 0.45 12.93 121% 83% (0.47) (0.19) 0.11 -2.34x 4.08x

Ras Al Khaimah Cement Company PSC 0.10 0.11 14.49 67% 67% (0.08) 0.14 (0.03) .7x -4.23x

Sharjah Cement & Industrial Deve lopment 0.09 0.23 10.20 49% 51% (0.09) 0.23 (0.01) .39x -15.55x

Umm AlQaiwain Cement Industries Co. PSC - 0.09 - 0% 358% 0.03 0.09 (0.06) - -1.57x

Union Cement Company PSC 0.10 0.10 7.35 118% 43% (0.02) 0.12 (0.04) .86x -2.66x

Company Name

Div

Yield

Current

(%)

DIV /FCF

Payout

FCF/ShareDividend per

Share

Dividend

Payout

Sources: Reuters Knowledge and NBK Capital

Peer Comparison Furter dampens UAE Cement Sector Attractiveness

The UAE cement industry averages an enterprise value (EV) per ton of USD 99, bordering on thereplacement cost in India and/or China. According to industry sources, setting up a greeneld

cement project in the UAE could cost USD 120180 per ton; the higher end reects European

machinery, and the lower end reects high-grade machinery imported from China. The graph

below mirrors the current position of GCC cement players based on their EV per ton versus the

trailing-twelve-month (TTM) EBITDA margin. Presently, no GCC cement company appears in the

preferred zone (top-left quadrant; high EBITDA and low EV per ton). Meanwhile, some Saudi

manufacturers, although expensive, have the potential to outperform other GCC peers and, hence,

they appear in the top-right quadrant, edging closer to the average EV per ton.

Figure 1-11 UAE Cement Players Low EBITDA Margins Justify Cheap Valuations

SCIDC

GCEM

FCI

UCC

RAKCC

SCC

YSCC

YCC

EPCC

TCC

QNCD

RCCI

OCOI

0

10

20

30

40

50

60

70

0 50 100 150 200 250 300 350

EBITDAMargin

LTM

EV/Ton (USD)

EV/Ton Versus EBITDA Margin LTM

Sources: Reuters Knowledge, Bloomberg, and NBK Capital

While the average EV per ton for the GCC players is USD 255, the same for the UAE players

averages 60% lower due to the various issues of high costs of production, surplus capacity,

weak industry outlook, and limited export opportunities, as discussed earlier. Long-term strategic

investors could be eyeing the UAE as a doorway to tap African markets.

Weak fundamentals could

prompt UAE cement

manufacturers to prioritize

cash retention versus dividend

distribution considering the

potential of stretched working

capital requirements in the

near future

Unsurprisingly, UAEs

integrated cement players with

their deteriorating EBITDA

margins remain lackluster

versus GCC peers with higher

margins driven by the low cash

cost of production


12/22



For instance, the recent acquisition by UltraTech of ETA Star Cement Co. assets in the UAE,

Bahrain, and Bangladesh was concluded at an EV per ton of USD 120. ETA Star Cements

facilities include a 2.3 Mtpa clinker plant and 2.1 Mtpa of cement grinding capacity in the UAE

as well as 0.4 Mtpa and 0.5 Mtpa of grinding capacity in Bahrain and Bangladesh. It is not

surprising that well-established players such as UltraTech weigh the risks of the weak industry

dynamics primarily in the GCC and the potential for negative return on investment in the near-termagainst the rewards of the attractive valuations in the UAE and the long-term expansion of the

geographical footprint to close in on an EV/ton of USD 120 (enterprise value of USD 380 million).

Figure 1-12 UAE Cement Players EV/ton is 60% Lower than the GCC Peer Average

Sharjah Cement & Industrial Development United Arab Emirates 148 213 (17.7) 13.1 9.0 106

Gulf Cement Company PSC United Arab Emirates 324 193 (9.4) 5.9 17.7 70

Fujairah Cement Industries PSC United Arab Emirates 291 450 0.0 28.2 14.6 178

Union Cement Company PSC United Arab Emirates 248 238 (19.1) 24.9 5.8 70

Ras Al Khaimah Cement Company PSC United Arab Emirates 91 78 (31.7) 8.6 13.5 72

Saudi Cement Company Saudi Arabia 1,832 2,159 17.1 9.3 59.5 239

Yamama Saudi Cement Company. Ltd. Saudi Arabia 1,836 1,733 7.6 8.0 63.9 275

Yanbu Cement Company Saudi Arabia 1,179 1,336 (13.2) 9.7 58.6 318

Eastern Province Cement Company Saudi Arabia 1,025 987 (10.2) 8.3 54.3 276

Tabuk Cement Company Saudi Arabia 432 316 (7.0) 6.7 64.5 233

Qatar National Cement Company (QSC) Qatar 996 1,096 3.2 9.5 34.4 248

Raysut Cement Company SAOG Oman 649 633 (16.1) 8.1 39.9 228

Oman Cement Company SAOG Oman 584 578 (8.1) 8.1 45.0 222

Average UAE (15.6) 16.1 12.1 99

Peer Average (3.3) 8.5 52.5 255

EV/Ton

(USD)

EV (USD

MM)EV/EBITDA

EBITDA

Margin

(% LTM)

Company Name CountryPerformance

(% YTD)

MCap.

(USD MM)

Sources: Reuters Knowledge, Bloomberg, and NBK Capital

Overall, the UAE cement sector remains lackluster. Contracting EBITDA margins, demand

vaporization, and limited growth prospects justify the cheap valuations and make this industryunattractive in the near- to mid-term. Moreover, the notably low trading liquidity in the sector

discourages investors. While the long-term view for merger and acquisition (M&A) activity seems

reasonable, the overall cement sector remains less than favorable in the near- to mid-term.

At less than half the EV/ton

versus peers, UAE cementplayers could attract long-term

investors for M&A activity, but

equity investors are likely to

shun the industry in the near-

midterm


13/22



IN FOCUS 2 OMANI BANkS: 1h2010 UPdATE

We examine the performance of a sample of Omani banks in 1H2010 in terms of balance sheet

growth, liquidity, protability, asset quality, and capitalization. The sample includes the six local

commercial banks listed on the Muscat Securities Market (MSM). The Omani banking sector

performance in 1H2010 was largely similar to the regional performance, which was characterizedby lackluster economic activity and decreased demand for credit, in general. Most of the sampled

banks were able to increase their operating income, supported by strong growth in net interest

income, while net prot growth was supported by a general decline in loan loss provisioning

charges in 1H2010. NPLs grew for half of the sampled banks in 1H2010, although at a slower

pace than seen in FY2009, but NPL coverage stayed above 100% for all banks. All the sampled

banks witnessed a decline in their CARs between December 2009 and June 2010; however, the

CARs were still above the 12% minimum required by the Central Bank of Oman (CBO).

Between December 2009 and May 2010, total banking sector loans in Oman grew by a marginal

2%, after growing by 6% in FY2009, and an average of 40% in the two years before. The sampled

banks posted mixed results, with the smaller banks posting stronger loan growth than their larger

peers. Ahli Bank, the smallest bank in our sample in terms of total assets, recorded the highestloan growth in 1H2010 at 20%, driven by a surge (+36%) in corporate loans. Bank Sohar was

the outperformer in FY2009, posting a 24% growth rate in loans, driven primarily by an increase

in credit extended to nancial institutions. Bank Muscat, on the other hand, the largest bank in

Oman, witnessed a considerable slowdown in lending, as the bank posted a slight decline (-0.3%)

in net loans in 1H2010, following modest 3% growth in FY2009. Oman International Bank (OIB)

was the only bank to post a decline in loans in FY2009 (-1.9%) and 1H2010 (-2.4%). In Figure

2-1, we plot the growth in loans and deposits for our sampled banks in FY2009 and 1H2010.

Figure 2-1 Growth in Loans and Deposits in 1H2010 and FY2009

3%

-3%

17%

24%

-2%

18%

-3%

-6%

13%

52%

0.1%

46%

-0.3%

4%

-0.03%

8%

-2%

20%

10%

4% 3%5%

1%

12%

-10%

0%

10%

20%

30%

40%

50%

60%

BankMuscat

NBO BankDhofar

BankSohar

OIB AhliBank

BankMuscat

NBO BankDhofar

BankSohar

OIB AhliBank

Growth in Loans Growth in Deposits

2009 1H2010

Sources: Banks nancial statements and NBK Capital

Deposit growth, however, was healthier than loan growth in 1H2010, with all banks experiencing

positive growth. At the sector level, deposits grew by 7% between December 2009 and May 2010,

Munira Mukadam

T. +971 4365 [email protected]

Tariq van der LooT. +971 4365 2812


Ahli Bank recorded the highest

loan growth in 1H2010, driven

by a surge in corporate loans
http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/http://../Local%20Settings/Application%20Data/Adobe/InDesign/Version%206.0-ME/en_GB/Caches/InDesign%20ClipboardScrap.pdfhttp://../Local%20Settings/Application%20Data/Adobe/InDesign/Version%206.0-ME/en_GB/Caches/InDesign%20ClipboardScrap.pdfhttp://../Local%20Settings/Application%20Data/Adobe/InDesign/Version%206.0-ME/en_GB/Caches/InDesign%20ClipboardScrap.pdfhttp://../Local%20Settings/Application%20Data/Adobe/InDesign/Version%206.0-ME/en_GB/Caches/InDesign%20ClipboardScrap.pdfhttp://www.nbkcapital.com/


14/22



after growing by just 6% in FY2009. Ahli Bank and Bank Muscat outperformed the sector and their

Omani peers with deposits increasing by 12% and 10%, respectively, in 1H2010. In FY2009 and

1H2010, the focus on raising low-cost deposits increased in anticipation of downward pressure

on net interest margins due to slow loan growth. At Bank Muscat, for example, the cheaper current

and call deposits grew by 21% in 1H2010. Comparatively, the more expensive time deposits grew

by just 8% in the same period. Similarly, National Bank of Oman (NBO) witnessed a 17% increasein current and savings deposits, whereas time deposits declined by 4% in 1H2010.

The upside of the slowdown in lending in 1H2010 was improved liquidity. Several banks witnessed

a decline in the simple loans-to-deposits ratio (LDR) in 1H2010, as deposit growth exceeded loan

growth in that period, enhancing the liquidity position of these banks (Figure 2-2).

Figure 2-2 Loans-to-Deposits Ratios: June 2010 versus December 2009

125%

108% 108%

95%

84%

95%

113%

108%105%

96%

82%

102%

0%

20%

40%

60%

80%

100%

120%

140%

Bank Muscat NBO Bank Dhofar Bank Sohar OIB Ahli Bank

2009 Jun-2010


At the sector level, the LDR dropped from 107% in December 2009 to 102% in May 2010. OIB

has historically maintained the lowest LDR among the sampled banks. The bank continued to do

so at the end of June 2010, with an LDR of 82%, versus an LDR of 108% for the banks peers,

giving OIB an advantage to expand its loan book more easily compared to its peers when lending

appetite returns. Bank Muscat, on the other hand, had an LDR of 113% at the end of June 2010,

the highest among the banks peers. We would like to note that the lending ratio implemented

by the CBO is 87.5%; however, the deposit base in this case includes borrowings and equity.

As mentioned earlier, most of the sampled banks managed to increase their operating income in

1H2010 as illustrated in Figure 2-3. The increase in operating income was primarily supported by

growth in net interest income (+10% for the combined banks in 1H2010), despite sluggish loan

growth during the period. Fee and commission income, on the other hand, was weak in 1H2010,

posting a combined growth of merely 2% in 1H2010. Bank Sohar, the youngest bank (established

in 2007) in the sample, outperformed peers in FY2009, as the banks operating income grew by

64% driven by net interest income that more than doubled in that year. In 1H2010, Ahli Bank

posted the largest increase in operating income at 55%, driven by a 43% expansion in net interestincome.

Loans-to-deposits ratios

decreased for several banks

in 1H2010, resulting in an

enhanced liquidity position for

these banks


15/22



Figure 2-3 Growth in Operating Income and Net Profit in 1H2010 and FY2009

-3%-7%

16%

64%

-4%

26%

-21%

-42%

7%

-27%

44%

7%

-3%

11%

43%

-8%

55%

-22%

9%

18%

-22%

98%

-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

BankMuscat

NBO BankDhofar

BankSohar

OIB AhliBank

BankMuscat

NBO BankDhofar

BankSohar *

OIB AhliBank

Growth in Op. Income Growth in Net Profit

2009 1H2010

261%

* Bank Sohar reported a net prot in 2009 versus a net loss in 2008 Sources: Banks nancial statements and NBK Capital

With regard to bottom-line growth, half the banks experienced a decline in net prot in FY2009,

on the back of high provisioning charges (Figure 2-3). NBO witnessed the largest decline in

net prot of 42% in FY2009 as net loan loss provisions surged to RO 12.95 million (33% of

income before loan loss provisions [IBP]). Bank Sohar, on the other hand, recorded a decline in

net provisioning from RO 5.4 million in 2008 to RO 2.7 million in 2009, driven by a decline

in general provisioning charges. There was some improvement in 1H2010, as net loan lossprovisioning charges declined for most banks, compared with 1H2009. Total provisioning charges

for the sampled banks declined by 61% in 1H2010. Bank Muscat was the main reason for this

drop as the bank witnessed the largest decline in provisioning, from RO 46.6 million in 1H2009

to RO 14 million in 1H2010. To put things into perspective, loan loss provisions accounted

for 23% of Bank Muscats IBP in 1H2010, versus 44% of IBP in 1H2009. However, the bank

recorded a year-on-year (Y-o-Y) decline in net prot in 1H2010 due to a large one-off gain (sale

of the stake in HDFC Bank in India) of RO 53.2 million recorded in 1H2009, which inated net

prot during that period. After being adjusted for that one-off gain, Bank Muscats net prot in

1H2010 compares favorably to the adjusted net prot of RO 7.2 million in 1H2009. Bank Sohar

and Ahli Bank outperformed their Omani peers, with growth in the bottom line mainly supported

by robust net interest income growth in 1H2010. OIBs net interest income, on the other hand,

declined in 1H2010 (down 9%), resulting in an 8% drop in operating income in 1H2010 and a

22% decline in net prot.

In Figure 2-4, we compare the net loan loss provisioning charges to average gross loans in FY2009

and 1H2010. This measure (risk cost) decreased for all banks in 1H2010, with the exception of

Ahli Bank. Bank Muscat and Bank Dhofar had the largest drops in their risk costs, which declined

to 0.7% and 0.15%, respectively, in 1H2010 (annualized), compared to 2.23% and 0.89%,

respectively, in FY2009.

Most banks achieved positive

growth in net profit and

operating income in 1H2010;

however, OIB underperformed

the group


16/22



Figure 2-4 Net Loan Loss Provisioning Charges-to-Average Gross Loans: 1H2010

versus FY2009

2.23%

0.90% 0.89%

0.38%

-0.12%

0.06%

0.70%

0.83%

0.15%

0.29%

-0.11%

0.08%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


2009 1H2010 (annualized)


The decline in provisioning was accompanied by a slowdown in NPL formation for the Omani

banks, in general. Bank Muscat, for example, saw its NPLs increase by 7% in 1H2010, while

NPLs had increased more than two-fold in 2009, driven by the banks exposure to some troubled

Saudi conglomerates. Three of the sampled banks saw an increase in the NPLs-to-gross loans

ratio between December 2009 and June 2010 as seen in Figure 2-5. NBO and Bank Dhofar, on

the other hand, witnessed a notable drop in NPLs, of 10% and 12%, respectively, in 1H2010,

resulting in a drop in the banks NPLs-to-gross loans ratio at the end of June 2010.

Figure 2-5 NPLs-to-Gross Loans Ratios: June 2010 versus December 2009

4.3% 4.3%

3.1%

0.2%

5.0%

0.3%

4.6%

3.7%

2.7%

0.3%

5.0%

0.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%


2009 Jun-2010


Risk cost declined in 1H2010

compared with FY2009 for the

majority of the sampled banks

Three of the sampled banks

witnessed an increase in the

NPLs-to-gross loans ratio

between December 2009 and

June 2010


17/22



The NPL coverage ratios of the Omani banks, however, were comfortable at the end of June 2010,

despite a decline in net provisioning charges in 1H2010. In fact, between December 2009 and

June 2010, NPL coverage increased for most of the banks. Bank Sohar exhibited the highest NPL

coverage ratio, nearly 500% (Figure 2-6), as of June 2010. All the other banks also maintained

coverage ratios of more than 100% as of June 2010. Although the Omani banks asset quality

indicators have shown some positive signs in 1H2010, we believe the banking sector is stillvulnerable due to the lackluster economic growth. Furthermore, a few of the banks have exposure

to Dubai World: Bank Muscat, RO 19.25 million; National Bank of Oman, RO 8.7 million; and

Bank Sohar, RO 1.6 million. The nal resolution regarding the Dubai World restructuring plan will

determine the impact of these exposures on the respective banks, especially in terms provisioning

requirements. Thus, we would not rule out weakening of asset quality in the latter half of 2010.

Bank Dhofar, OIB, and Ahli Bank announced that they do not have any exposure to Dubai World.

Figure 2-6 NPL Coverage Ratios: June 2010 versus December 2009

107%

94%

109%

97%

221%

108% 109%

127%

103%

200%

0%

50%

100%

150%

200%

250%


2009 Jun-2010

498%

706%


All the sampled banks witnessed a decline in their CARs between December 2009 and June 2010.

Nevertheless, at the end of June 2010, the banks were sufciently capitalized as illustrated in

Figure 2-7, with CARs ranging between 12.4% (Bank Sohar) and 15.2% (OIB). In March 2010,

the required ratio imposed by the CBO was raised from 10% to 12%, effective December 2010.

The hike in the required CAR by the CBO will put additional pressure on some of the banks that

have ratios close to the 12% mark.

The NPL coverage ratios

of the Omani banks were

comfortable at the end of June

2010, despite a decline in

net provisioning charges in

1H2010


18/22



Figure 2-7 Capital Adequacy Ratios: June 2010 versus December 2009

15.2%

17.6%

14.8%

12.9%

15.3%

17.6%

14.5%15.1%

14.4%

12.4%

15.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Bank Muscat NBO Bank Dhofar Bank Sohar OIB Ahli Bank*

2009 Jun-2010


*CAR unavailable as of June 2010

To conclude, the performance of the sampled banks has been satisfactory in 1H2010, with modest

growth in net interest income and operating income for most banks. Similar to most regional

banks, the bottom line of Omani banks suffered in FY2009 due to high provisioning. However, a

decline in provisioning charges in 1H2010 supported growth in net prot in that period. Lending

was sluggish and was outpaced by deposit growth in 1H2010, resulting in improved liquidity for

several banks. The NPLs-to-gross loans ratio of some of the Omani banks has increased; however,

NPL formation has slowed so far in 2010, and NPL coverage ratios remain above 100% for all the

sampled banks. Furthermore, a notable drop in loan loss provisioning charges resulted in a general

decline in the banks risk costs in 1H2010. Finally, the capitalization of the banks was sufcient

at the end of June 2010, despite declining since December 2009. While these factors provide

a positive indication for the sectors ability to face any further economic uncertainty, we remain

cautious about weak balance sheet growth and a further weakening in asset quality in 2010.

The capital adequacy ratios

declined for all banks in

1H2010


19/22



COMPANIES IN FOCUS (PRICES AS OF AUGUST 31, 2010)

T12M 2010 2011 Latest 2010 2011

Banking

Abu Dhabi Commercial Bank UAE AED 1.70 01-Aug-10 1.80 Accumulate na na 3.6 0.4 0.4 0.4

Arab National Bank Saudi Arabia SAR 37.90 13-Jul-10 51.20 Buy 11.2 10.5 9.7 1.6 1.5 1.4

BankMuscat Oman OMR 0.843 01-Sep-10 0.86 Hold 18.8 12.9 10.5 1.5 na na

Banque Saudi Fransi Saudi Arabia SAR 43.90 12-Jul-10 49.30 Accumulate 12.7 11.6 10.3 1.9 1.8 1.6

The Commercial Bank of Qatar Qatar QAR 75.40 28-Jul-10 92.80 Buy 12.2 11.7 9.6 1.5 1.4 1.3

First Gulf Bank UAE AED 13.85 28-Jul-10 20.90 Buy 5.5 5.4 4.1 0.8 0.8 0.7

National Bank of Abu Dhabi UAE AED 11.35 28-Jul-10 14.10 Buy 8.0 8.3 6.6 1.2 1.2 1.0

Qatar National Bank Qatar QAR 140.70 07-Jul-10 157.50 Accumulate 11.4 10.5 9.4 2.6 2.3 2.0

Riyad Bank Saudi Arabia SAR 27.40 12-Jul-10 34.10 Accumulate 13.2 12.6 10.6 1.4 1.4 1.3

Samba Financial Grp. Saudi Arabia SAR 61.75 13-Jul-10 60.60 Hold 12.4 11.8 10.9 2.3 2.1 1.9

The Saudi British Bank Saudi Arabia SAR 43.50 13-Jul-10 51.10 Accumulate 19.6 12.8 10.1 2.3 2.1 1.8

Union National Bank UAE AED 3.02 29-Jul-10 3.80 Buy 5.3 5.8 4.3 0.6 0.6 0.5

PBDate of

Last Report

PERecommendation

12-Month

Fair ValueS ec to r C oun tr y C ur renc y

Closing

Price

T12M 2010 2011 T12M 2010 2011

Cement

Oman Cement Co. Oman OMR 0.677 26-Jul-10 0.88 Buy 7.1 10.8 9.1 8.4 8.9 7.4

Ras Al Khaimah Cement Co. UAE AED 0.68 21-Feb-10 1.06 Hold 16.9 14.6 13.0 8.9 7.5 7.1

Raysut Cement Co. Oman OMR 1.239 18-Jul-10 1.44 Accumulate 9.9 10.6 9.7 8.0 8.2 7.6

Qatar National Cement Co. Qatar QAR 80.00 26-Apr-10 84.50 Hold 8.5 10.7 10.7 7.2 9.9 9.9

Real Estate

Salhia Real Estate Co. Kuwait KWD 0.255 10.6 na na 9.8 na na

Telecommunications

Bahrain Telecommunications Co. Bahrain BHD 0.555 22-Jul-10 0.700 Buy 8.2 7.2 7.1 5.0 5.0 4.9

du UAE AED 2.09 11-Aug-10 2.55 Buy 22.9 22.6 16.2 7.3 6.8 5.2

Etihad Etisalat Co. Saudi Arabia SAR 52.75 27-Jul-10 66 Buy 10.6 10.3 8.9 7.9 7.7 6.7

Egyptian Company for Mobile Svcs Egypt EGP 172.81 01-Aug-10 194 Buy 9.5 10.7 11.8 4.8 4.8 4.7

Jordan Telecom Grp. Jordan JOD 5.19 28-Jul-10 4.57 Reduce 13.2 12.5 12.3 6.3 6.0 5.9

Oman Telecommunications Co. Oman OMR 1.144 17-Aug-10 1.800 Buy 7.6 8.4 8.7 4.0 3.9 3.9

Qatar Telecom Qatar QAR 171.00 18-Aug-10 205 Buy 8.6 6.5 7.4 4.0 3.9 3.7

Saudi Telecom Saudi Arabia SAR 38.10 8.3 na na 5.3 na na

Telecom Egypt Egypt EGP 16.92 16-Aug-10 20.10 Accumulate 9.5 11.4 12.1 5.9 6.0 6.3

Vodafone Qatar Qatar QAR 7.85 26-Jul-10 9.60 Buy na na na na 66.4 22.5

Wataniya Kuwait KWD 1.800 18-Aug-10 2.240 Buy 13.8 11.3 11.8 4.5 4.1 3.9

Transportation & Logistics

Agility Kuwait KWD 0.435 3.9 na na 2.6 na na

Air Arabia UAE AED 0.79 10.4 na na 8.2 na na

Aramex UAE AED 1.72 26-Jul-10 1.91 Accumulate 13.0 13.0 11.1 7.7 7.7 6.8

DP World UAE USD 0.48 19-Aug-10 0.57 Hold 26.7 23.0 16.6 12.1 10.5 9.4

Jazeera Airways Kuwait KWD 0.102 nmf na na nmf na na

Others

Almarai Saudi Arabia SAR 198.00 12-Jul-10 219.00 Accumulate 18.9 16.6 15.1 15.7 14.4 12.9

Dana Gas UAE AED 0.77 11-Aug-10 1.01 Buy nmf 39.4 9.4 13.0 8.6 4.8

Lecico Egypt EGP 13.75 13-Jun-10 16.95 Buy 7.4 7.3 6.4 4.9 4.7 4.3

Qatar Electricity and Water Co. Qatar QAR 105.90 25-Jul-10 131.00 Buy 10.8 9.3 7.9 13.4 12.6 10.9

Savola Saudi Arabia SAR 32.20 25-Aug-10 41.00 Buy 15.2 13.7 13.7 13.9 11.8 10.8

The Sultan Center* Kuwait KWD 0.19 18-Aug-10 0.27 Buy 23.4 16.0 23.8 12.6 9.6 10.4

Orascom Construction Egypt EGP 251.80 01-Sep-10 270.00 Accumulate 19.3 18.1 13.4 11.8 11.4 9.1

EV/EBITDAPE

Under Review

Under Review

Date of

Last Report

Under Review

Recommendation

Under Review

12-Month

Fair Value

Under Review

S ec to r C oun tr y C ur renc yClosing

Price

*Adjusted


20/22



RISk ANd RECOMMENdATION GUIdE

RECOMMENdATION UPSIdE (dOWNSIdE) POTENTIAl

BUY MORE THAN 20%

ACCUMULATE BETWEEN 5% AND 20%

HOLD BETWEEN -10% AND 5%

REDUCE BETWEEN -25% AND -10%

SELL LESS THAN -25%

RISk lEVEl

lOW RISk hIGh RISk

1 2 3 4 5

dISClAIMER

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any individual or legal entity who is a citizen or resident of or domiciled in any jurisdiction where such distribution, publication, availability, or use would constitute a

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to subscribe for any investment (including but not limited to securities or other nancial instruments). No representation or warranty, express or implied, is given by NBK

Capital or any of its respective directors, partners, ofcers, afliates, employees, advisors, or representatives that the investment referred to in this report is suitable for

you or for any particular investor. Receiving this report shall not mean or be interpreted that NBK Capital will treat you as its customer. If you are in doubt about such

investment, we recommend that you consult an independent investment advisor since the investment contained or referred to in this report may not be suitable for you

and NBK Capital makes no representation or warranty in this respect.

The Content shall not be considered investment, legal, accounting, or tax advice or a representation that any investment or strategy is suitable or appropriate for your

individual circumstances or otherwise constitutes a personal recommendation to you. NBK Capital does not offer advice on the tax consequences of investments, and

you are advised to contact an independent tax adviser.

The information and opinions contained in this report have been obtained or derived from sources that NBK Capital believes are reliable without being independently

veried as to their accuracy or completeness. NBK Capital believes the information and opinions expressed in this report are accurate and complete; however, NBK

Capital gives no representations or warranty, express or implied, as to the accuracy or completeness of the Content. Additional information may be available upon request.

NBK Capital accepts no liability for any direct, indirect, or consequential loss arising from the use of the Content. This report is not to be relied upon as a substitution for

the exercise of independent judgment. In addition, NBK Capital may have issued, and may in the future issue, other reports that are inconsistent with and reach different

conclusions from the information presented in this report. Those reports reect the different assumptions, views, and analytical methods of the analysts who prepared

the reports, and NBK Capital is under no obligation to ensure that such other reports are brought to your attention. NBK Capital may be involved in many businesses that

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no representation or warranty, express or implied, is made regarding future performance. Information, opinions, and estimates contained in this report reect a judgment

at the reports original date of publication by NBK Capital and are subject to change without notice.

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other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price, or income of that

investment. In the case of investments for which there is no recognized market, it may be difcult for investors to sell their investments or to obtain reliable information

about their value or the extent of the risk to which they are exposed.

NBK Capital has not reviewed the addresses of, the hyperlinks to, or the websites referred to in the report and takes no responsibility for the content contained therein.

Such address or hyperlink (including addresses or hyperlinks to NBK Capitals own website material) is provided solely for your convenience and information, and the

content of the linked site does not in any way form part of this document. Accessing such websites or following such links through this report or NBK Capitals website

shall be at your own risk.

COPyRIGhT NOTICE

This is a publication of NBK Capital. No part of this publication may be reproduced or duplicated without the prior consent of NBK Capital.


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Kuwait

National Bank of Kuwait SAK

Abdullah Al-Ahmed Street

P.O. Box 95, Safat 13001

Kuwait City, Kuwait

T. +965 2242 2011F. +965 2243 1888

Telex: 22043-22451 NATBANK

INTERNATIONAl NETWORk

Bahrain


Bahrain Branch

Seef Tower, Al-Seef District

P.O. Box 5290, Manama, Bahrain

T. +973 17 583 333

F. +973 17 587 111

Saudi Arabia

National Bank of Kuwait SAKJeddah Branch

Al-Andalus Street, Red Sea Plaza

P.O. Box 15385

Jeddah 21444, Saudi Arabia

T. +966 2 653 8600

F. +966 2 653 8653

United Arab Emirates


Dubai Branch

Sheikh Rashed Road, Port Saeed

Area, ACICO Business Park

P.O. Box 88867, Dubai


T. +971 4 2929 222

F. +971 4 2943 337

Jordan


Head Ofce

Al Hajj Mohd Abdul Rahim Street

Hijazi Plaza, Building # 70

P.O.Box 941297,Amman -11194, Jordan

T. +962 6 580 0400

F. +962 6 580 0441

Lebanon

National Bank of Kuwait

(Lebanon) SAL

Sanayeh Head Ofce

BAC Building, Justinian Street

P.O. Box 11-5727, Riyad El Solh

1107 2200 Beirut, Lebanon

T. +961 1 759 700

F. +961 1 747 866

IraqCredit Bank of Iraq

Street 9, Building 187

Sadoon Street, District 102

P.O.Box 3420, Baghdad, Iraq

T. +964 1 7182198/7191944

+964 1 7188406/7171673

F. +964 1 7170156

Egypt

Al Watany Bank of Egypt

13 Al Themar Street

Gameat Al Dowal AlArabia

Fouad Mohie El Din Square

Mohandessin, Giza, Egypt

T. +202 333 888 16/17F. +202 333 79302

United States of America


New York Branch

299 Park Avenue, 17th Floor

New York, NY 10171, USA

T. +1 212 303 9800F. +1 212 319 8269

United Kingdom

National Bank of Kuwait (Intl.) Plc

Head Ofce

13 George Street,

London W1U 3QJ, UK

T. +44 20 7224 2277

F. +44 20 7224 2101

NBK Investment

Management Limited

13 George Street

London W1U 3QJ, UK

T. +44 20 7224 2288F. +44 20 7224 2102

France

National Bank of Kuwait (Intl.) Plc

Paris Branch

90 Avenue des Champs-Elysees

75008 Paris, France

T. +33 1 5659 8600

F. +33 1 5659 8623

Singapore


Singapore Branch

9 Rafes Place #51-01/02

Republic Plaza, Singapore 048619T. +65 6222 5348

F. +65 6224 5438

Vietnam


Vietnam Representative Ofce

Room 2006, Sun Wah Tower

115 Nguyen Hue Blvd, District 1

Ho Chi Minh City, Vietnam

T. +84 8 3827 8008

F. +84 8 3827 8009

China


Shanghai Representative Ofce

Suite 1003, 10th Floor,

Azia Center, 1233 Lujiazui Ring Rd.

Shanghai 200120, China

T. +86 21 6888 1092

F. +86 21 5047 1011

ASSOCIATES

Qatar

International Bank of Qatar (QSC)

Suhaim bin Hamad Street

P.O.Box 2001

Doha, Qatar

T. +974 447 3700

F. +974 447 3710

Turkey

Turkish Bank

Head Ofce

Valikonagl Avenue No. 1

P.O.Box 34371 Nisantasi,

Istanbul, Turkey

T. +90 212 373 6373

F. +90 212 225 0353

NATIONAl BANk OF kUWAIT

Kuwait

Head Ofce

38th Floor, Arraya II

Al Shuhada Street, Block 6, Sharq

P.O.Box 4950, Safat 13050

Kuwait

T. +965 2224 6900

F. +965 2224 6905

MENA Research


Al Shuhada Street, Block 6,Sharq

P.O.Box 4950, Safat 13050, Kuwait

T. +965 2224 6663

F. +965 2224 6905


Brokerage


Al Shuhada Street, Block 6, Sharq

P.O.Box 4950, Safat 13050, Kuwait

T. +965 2224 6964

F. +965 2224 6978



NBK Capital Limited

Precinct Building 3, Ofce 404

Dubai International Financial Center

P.O.Box 506506

Dubai, UAE

T. +971 4 365 2800

F. +971 4 365 2805

Turkey

NBK Capital

Arastima ve Musavirlik AS,

Sun Plaza, 30th Floor,

Dereboyu Sk. No.24

Maslak 34398, Istanbul, Turkey

T. +90 212 276 5400

F. +90 212 276 5401

NBk CAPITAl
http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/http://www.nbkcapital.com/mailto:menaresearch%40nbkcapital.com.kw%20?subject=mailto:menaresearch%40nbkcapital.com.kw%20?subject=mailto:menaresearch%40nbkcapital.com.kw%20?subject=mailto:menaresearch%40nbkcapital.com.kw%20?subject=http://www.nbkcapital.com/


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