UAE Cement Sector - GulfBase.com · UAE Cement Sector • Focusing on cost control • Majority of...

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SectorJanuary 2010

UAE Cement Sector

• Focusing on cost control • Majority of the big ticket projects being put on hold • Capacity upgrades to decline utilization rates and prices • BUY: FCI, RAKCC & GCEM SELL: ARKAN

• Manufacturers focusing on cost control measures

With external factors such as cement demand outlook being very bleak majority of the cement players in the region are looking at internal measures to prop up their business and survive. Cement manufacturers in UAE are firing multiple kilns to control their energy costs.

• UAE cement capacity to increase by 19% by 2011 UAE current cement capacity at 34mtpa (20mtpa of listed cement manufacturers and remaining of the unlisted cement companies) is expected to increase to 40.6mtpa (24.5mtpa of the listed and 16.1mtpa of the unlisted companies) by 2011. Such a growth in capacity would give rise to multiple problem provided economic revival comes up with the continuation of the big ticket projects.

• Realization prices to decline Average realization prices as of 9M-2009 have declined on an average of 6% in GCC when compared to 2008. Countries with relatively stable prices are Saudi Arabia and Oman while the rest have witnessed a major fall. In UAE, cement manufacturers witnessed a fall of 7.4% during 9M-2009, which we expect to go down further by 4% in the last quarter, ending the year with a drop of 11.4% during 2009.

• 48.7% of total projects in UAE as of December 2009 are on hold With continued economic uncertainty and unfolding of major events in UAE, development projects in majority of the fields are being put on hold. Out of the total US$924.8bn projects in UAE at the end of December 2009, 48.7% have either been postponed or being put on hold. The figure has risen from around 38.8% in June 2009 to 45.6% in September 2009. Going forward, with unfolding of Dubai World issue many more projects might face obstacle which might act as a dampener on an already slow projects market.

• Recommendation

Based on our universe, the sector profitability is expected to show a decline in 2009, mainly because of (i) drop in realization prices (ii) expected decline in utilization rates & (iii) majority of project being put on hold. However we believe that certain cement players would continue to perform well due to favorable cost structure & advantageous location. We recommend BUY on FCI, RAKCC & GCEM & SELL for ARKAN.

Faisal Hasan, CFA Head of Research [email protected] Phone: +965-2295-1270 Hettish Karmani Senior Financial Analyst [email protected] Phone: +965-2295-1281

Global Research - UAE Cement Sector

CMP Mkt. Cap P/E EV/EBITDA EV/Ton

(AED) (AED mn) 2010 2010 (AED)

Arkan B-dg Mat. Co ARKAN UH 2.53 4,427.50 18.22 16.75 836.44 1.68 -33.5% SELL

Fujairah Cement FCEM KK 2.17 774.40 4.08 5.72 238.50 2.86 31.4% BUY

Gulf Cement GCEM UH 1.60 1,313.70 7.18 4.74 435.07 2.19 36.9% BUY

RAK Cement RAKCC UH 1.04 503.40 5.66 3.20 329.70 1.55 48.7% BUYSource: ADX, Bloomberg & Global Research

Company Bloomberg Ticker

Target Price

(AED)

Upside / (Downside)

Recommendation

2

Global – UAE Cement Sector

Assumptions & Valuations We have done valuations of four out of nine listed cement companies of UAE, which are: Arkan Building Materials (Arkan), Fujairah Cement Industries (FCI), Gulf Cement Company (GCEM) and Ras Al Khaimah Cement Company (RAKCC). We have made the following assumptions in our earnings projections for the companies till 2012: • Average price realizations on domestic sales have been projected to drop in 2009 and 2010 and thereafter

grow at a slighter pace.

• The revenues and cost of sales have been projected based on the expected revenues from the additional capacities of the company, which will come online in the projected years.

• Among the operating expenses, expenses under all account heads have been projected for 2009, as also for

the subsequent years, keeping in mind the projected growth in Country’s project market.

• Although the companies have fairly skewed capital structure, but keeping in view the expansion and management discussion appropriate debt have been taken and accordingly the financial charges have been projected.

• Risk free rate used in the valuation is the yield on 10 year government bond of UAE.

• Beta for the company has been arrived through monthly return over 5 years. Majority of the scrips have

less than 1 Beta hence to be more conservative we have taken Beta as 1. Valuation on DCF Method The free cash flows of the four companies in 2006, 2007 & 2008, as well as in the following four years have been shown in the table below. Free Cash Flows(AED mn) 2006 2007 2008 2009F 2010F 2011F 2012FARKAN 1.6 43.7 (706.0) (333.4) 175.7 234.8 325.2 FCF Yield 0.0% 0.7% -6.7% -8.1% 4.0% 5.3% 7.3%GCEM (23.4) 136.2 198.5 287.8 199.8 74.3 232.1 FCF Yield -1.2% 3.6% 10.7% 21.9% 15.2% 5.7% 17.7%FCI 42.1 179.7 (444.3) (79.0) 143.5 185.7 109.1 FCF Yield 3.7% 15.8% -31.0% -10.2% 18.5% 24.0% 14.1%RAKCC 117.9 38.0 (11.3) 145.6 75.3 100.1 31.7 FCF Yield 11.9% 3.7% -2.9% 29.5% 15.0% 19.9% 6.3%Source: Company Reports & Global Research

Free cash flows of Arkan Building Material was negative in 2008 and are expected to remain so at the end of 2009 also on account of Company’s expansion during the period. Same has been the reason for Fujairah Cement Industries also for 2008 and 2009. Earnings Projections & P/Es

2009F 2010F 2011F 2012F 2009F 2010F 2011F 2012FRAKCC 0.18 0.18 0.19 0.21 5.77 5.66 5.34 5.06 GCEM 0.18 0.22 0.25 0.28 9.07 7.18 6.34 5.75 FCI 0.35 0.53 0.58 0.65 6.26 4.08 3.76 3.36 ARKAN 0.01 0.14 0.17 0.20 223.88 18.22 15.11 12.93 Source: Company Reports & Global Research

Company EPS (AED) P/E (x)

3


Based on the two valuation methods employed – DCF and peer comparison, and by assigning fixed weightages to the valuations – 80% to the DCF valuation and 20% to the peer comparison valuation, the weighted average valuation of each of the four companies has been arrived at. These are as under: Global Research UAE Cement Sector

DCF Value P/E Value

(AED) (AED)ARKAN 1.77 1.32 1.68 -33.5% SELLFCI 2.31 5.05 2.86 31.4% BUYGCEM 2.21 2.11 2.19 36.9% BUYRAKCC 1.50 1.74 1.55 48.7% BUYSource: ADX, Bloomberg & Global Research

Company Target Price (AED)

Upside / (Downside)

Recommendation

We recommend BUY on FCI, RAKCC & GCEM & SELL for ARKAN.

4


UAE Cement Sector Increasing Cement Capacity UAE realty & construction markets were the major charming reason for investment in the country which to some extent have been marred because of couple of reason majorly being credit crunch worldwide and issues related with Dubai World and its related entities. Despite such issues majority of the cement players in the county have gone ahead with their expansion plans and have turned the tables upside down from a demand supply gap ranging between 3-5mtpa earlier to a surplus of over 3mn in 2009. Increasing petrodollar liquidity generated through high oil prices fuelled unprecedented growth in construction activity and boosted real estate activities in the country. Such a situation has given birth to increased demand for cement earlier and raised the cement production capacity from 29mtpa (17.7mtpa of listed companies and 11.6mtpa of unlisted companies) in 2008 to 34mtpa (20.0mtpa of listed companies and 14.1mtpa of unlisted companies) in 2009 & to as high as 40.6mtpa (24.5mtpa of listed companies and 16.1mtpa of unlisted companies) by the end of 2010.

2006 2007 2008 2009F 2010FUnion Cement 1.2 4.5 4.5 4.5 4.5 Gulf Cement 2.0 2.7 2.7 2.7 2.7 Fujairah Cement 2.2 2.2 2.2 4.6 4.6 Sharjah Cement 3.3 3.3 3.3 3.3 3.3 National Cement 1.5 1.5 1.5 1.5 1.5 RAK Cement 1.1 1.1 1.1 1.1 1.1 Um Al Quain Cement 0.7 0.7 0.7 0.7 0.7 Arkan Building Materials 1.2 1.2 1.2 1.2 5.7 RAK White Cement 0.5 0.5 0.5 0.5 0.5 Pioneer Cement Company 1.0 1.0 1.0 1.0 1.0 Emirates Cement Company - 3.0 3.0 3.0 3.0 Star Cement - - 2.3 2.3 2.3 Binani Cement Company 1.0 1.0 1.0 1.0 1.0 Sharaf Group Cement Factory - - - - 2.0 Jabel Ali cement company 0.9 0.9 0.9 0.9 0.9 Bin Harmel & Nael - - 1.9 1.9 1.9 Cemex - - 1.6 1.6 1.6 National Cement Factory - - - 2.5 2.5 Listed Companies 13.7 17.7 17.7 20.0 24.5 Unlisted Companies 2.9 5.9 11.6 14.1 16.1 Grand Total UAE 16.5 23.5 29.3 34.1 40.6 Source: Global Research & Company / Industry Sources

(mtpa)UAE Cement Capacity

Out of the nine listed cement companies in UAE, two of them have recently completed their expansion. Arkan has raised its cement production capacity from 1.2mtpa in 2008 to 5.7mtpa by 2009 while Fujairah Cement Industries has raised its capacity to 4.6mtpa in 2009 from 2.2mtpa earlier. Share of the listed cement companies which currently stands at 60% is estimated to remain same by 2010. Major cement players like Arkan Building Materials, Union Cement Company & Fujairah Cement Industries would account for 36% of the market by 2010. In the unlisted segment majority of the cement players will come with a full throttle production in 2010 which will further exaggerate the already glutted cement market. Unlisted companies whose current share of the total market is estimated at 40% is estimated to remain same by 2010. Major new comers with capacity of over 2mpta are Sharaf Group Cement Factory & National Cement Factory.

5


Realization Prices Under Pressure In UAE, cement prices increased at a tremendous pace in the past on account of booming real estate and construction market. Such rising demand fuelled prices as well which increased the prices of other construction materials as well. Many a times government intervened and capped the cement prices and on the other hand continued to import cement to ease the shortage and rising prices. But as of now the situation has changed as the prices of cement has gone down significantly and are reaching the levels of 2007. On an average realization prices in UAE have gone down by over 7.5% in 9M/2009 to US$85/ton as compared to US$92/ton in 2008. Prices on an average in GCC also went down by 7% during 9M-2009 as compared to those in 2008. Average cement prices in GCC reached US$77.4/ton by 3Q-09, as compared to US$83.2/ton in 2008. Prices in Kuwait and Qatar witnessed the highest decline at 16% and 11.6% respectively. On the other hand, Saudi Arabia and Oman enjoyed a 3.1% and 1.4% respective increase in cement prices during 9M-2009. UAE cement companies witnessed a scenario of excess demand that lifted cement prices high in 2008. Excess supply after the credit crisis halted major construction projects which has now put pressure on cement prices. UAE cement companies enjoy local supply of raw materials especially in Ras Al Khaimah which is full of limestone, but also a majority of UAE cement companies import raw materials from neighboring countries such as Saudi Arabia, India and Pakistan causing cement prices to increase.

UAE Cement Prices

Source: Company Reports, MEED & Global Research

55.0

65.0

75.0

85.0

95.0

2004 2005 2006 2007 2008 1H/09 9M/09 2009E 2010E 2011E

(US$

/Ton

)

The cementers which witnessed a major fall in the realization prices during 9M-2009 were Gulf Cement and Fujairah Cement. Realization prices for Gulf & Arkan went down by over 17% and 11% respectively during 9M-2009. Prices of other cement players on an average went down by 3% during 9M-2009. Going forward with the issues relating to Dubai World and many other government related entities we expect the realization prices to remain under pressure in 2010 and expect them to prop up during 2011 as Abu Dhabi would be progressing and enhancing their real estate and construction markets and would also be helping out Dubai in its time of financial difficulties resulting in fueling the cement market. Apart from that cement and ready-mix companies in the UAE are gearing up for a massive opportunity for supplying cement and concrete for nuclear power plants in the UAE on which an early step is expected to be taken.

6


Projects Market – waning in medium term The once-booming real estate market in Dubai, one of the UAE’s seven emirates, has been hit particularly hard by the global financial crisis, with prices tumbling, developers canceling projects amounting to US$450bn and jobs getting slashed. With a total value of around US$925bn, 1,372 building projects are under construction or in bidding across the commercial, hospitality, residential and retail sectors in the UAE, and 566 projects have either been shelved or are on hold. The list of projects now on hold in Dubai includes the US$95bn Nakheel Harbour & Tower project. On a site next to Ibn Battuta Mall, the scheme planned to feature a 1-kilometre-tall tower, which would be the world’s tallest. Construction has also slowed on Dubai World subsidiary Limitless’ US$10bn Arabian Canal. The tender for the second package of the excavation work is on hold and Limitless has instructed the contractor to slow down on the first earthworks package. Some of the major big projects which were continuing despite the down turn like Burj Khalifa (Burj Dubai) & Dubai Metro have also completed or are in their ending stage. The scale of Dubai’s economic crisis was highlighted on 25th November 2009, when the government announced its largest holding company, Dubai World, was asking for more time to pay back the US$25bn it owes its creditors. In its statement, the Dubai government said it will restructure the debts held by Dubai World, which owns real estate developer Nakheel and the ports operator DP World, among others.

UAE Projects Market

Source: MEED

35.0%

38.0%

41.0%

44.0%

47.0%

50.0%

0.0

0.3

0.6

0.9

1.2

1.5

Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

(US$

tn)

Projects on Hold Projects Projects on Hold as % of Total

However in Abu Dhabi, end-user demand in the property market looks set to pick-up, due to greater availability of mortgage financing, a short-to-medium term supply-demand mismatch and a structured pace of development. Short term demand driver in UAE would be the construction & real estate market in Abu Dhabi and nuclear projects worth US$41bn in UAE which require an early completion. Nevertheless, GCC construction market still offers huge scope for contractors, particularly for those willing to seek work beyond the UAE. Saudi Arabia & Qatar construction market has US$845bn worth of project market out of which only 7% are on hold.

7


Financial Performance For the consolidation of the sector financials we have taken nine listed companies which are: Arkan Building Materials (Arkan), Fujairah Cement Industries (FCI), Gulf Cement Company (GCEM), Ras Al Khaimah Cement Company (RAKCC), Union Cement Company (UCC), Sharjah Cement (SCIDC), National Cement Company (NCC), Ras Al Khaimah White Cement (RAKWCT) and Um Al Quain Cement Industries (QCEM).

UAE Cement Sector(US$ 000) 9M-2008 9M-2009 % ChgeSales Revenue 1,063,129 976,638 -8.1%Cost of Sales 800,409 722,630 -9.7%Gross Profit 262,720 254,008 -3.3%Operating Expense 49,899 49,664 -0.5%Other Income 76,523 23,010 -69.9%Operating Profit 212,821 204,344 -4.0%Financial Charges 27,053 32,934 21.7%Net Profit 282,141 172,872 -38.7%Assets 4,407,501 3,752,459 -14.9%Equity 3,555,356 3,014,278 -15.2%Debt 433,489 505,268 16.6%Liabilities 852,145 738,181 -13.4%Source: Combined Financials of 9 Listed Companies

Revenue Consolidated revenues of the sector were down by 8.1% to US$976.6mn during 9M-2009 as compared to US$1,063.0mn at the end of 9M-2008. Reason for the decline in revenue was because of decline in cement sales volume as well as a sharp decline in cement realization prices. However the same during the 3Q-2009 was US$257.1mn down by over 23% as compared to US$336.7mn in 3Q-2008. Much sharper decline was witnessed as majority of the projects in UAE were being called off or were put on hold. Cost of Sales On the cost side, the sector witnessed a decline of 9.7% in the cost of sales to US$722.6mn in 9M-2009 as compared to US$800.4mn in 9M-2008. The same during the 3Q-2009 was down by 16.4% to US$214.8mn. Major reason as being quoted by various cement players is the installation & commissioning of coal mill successfully by majority of the players giving them the ability to burn multiple fuels and safeguarding them against hike in prices of a particular fuel. Other Income Other income which in the past continued to cushion the bottom lines of the UAE cement sector put a circuit breaker this time around due to their heavy losses on their investments in real estate, property & equity markets. In the past other income as percentage of total income used to go as high as 51.2% in 2005 and 45.7% in 2007. The same during 9M-2009 have gone down to 13.3% as compared to 27.1% during 9M-2008. The same during 3Q-2009 was at 64.75% as after heavy provisions during the earlier quarters put the lower base in to effect. Other reason for higher percentage during 3Q-2009 was also because lower operating income from the core business. Net Profit Net profit of the sector witnessed a decline of 38.7% to US$172.8mn in 9M-2009 as compared to US$282.1mn in 9M-2008. The same during 3Q-2009 was at US$27.4mn as compared to US$73.3mn in 3Q-2008. Major reasons for the decline in profitability is because of the lower operating income and lower contribution from the non-core income sources of the Companies.

8


UAE Cement Sector

Source: Company Reports & Global Research* Combined Financials of Nine Listed UAE Companies

24.7%

26.0%

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

9M-2008 9M-2009

Gross Margins (%)

27.1%

13.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

9M-2008 9M-2009

Other Income as % of PAT

20.0%

20.9%

20.0%

20.2%

20.4%

20.6%

20.8%

21.0%

9M-2008 9M-2009

Operating Margins (%)

26.5%

17.7%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

9M-2008 9M-2009

Net Margins (%)

6.2%6.5%

5.0%

5.4%

5.8%

6.2%

6.6%

7.0%

9M-2008 9M-2009

Financial Charges as % of Debt

9.8%

13.5%

1.0%

4.0%

7.0%

10.0%

13.0%

16.0%

9M-2008 9M-2009

Debt as % of Assets

19.3%

19.7%

19.1%

19.2%

19.3%

19.4%

19.5%

19.6%

19.7%

9M-2008 9M-2009

Liabilities as % of Assets

80.7%

80.3%

80.1%

80.2%

80.3%

80.4%

80.5%

80.6%

80.7%

9M-2008 9M-2009

Equity as % of Assets

7.9%

5.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

9M-2008 9M-2009

Return on Equity (%)

6.4%

4.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

9M-2008 9M-2009

Return on Assets (%)

9


Peer Group Comparison Gross Margins Gross margins of the industry have been on the declining trend as the cost of energy is depreciating their margins. Nevertheless the players are taking cautious step and are installing coal mill giving them the ability to burn multiple fuels and safeguarding them against hike in prices of a particular fuel. On the whole the margins of the industry has gone down to 26.0% in 9M-2009 as compared to 24.7% in 9M-2008. Ras Al Khaimah based cement companies such as Gulf Cement & RAK Cement enjoy the highest gross margins at 31.1% and 30.6% respectively as of 9M-2009. Reason for higher gross margins is because of being relatively close to the raw material quarries in Ras Al Khaimah emirate. Operating Margins Operating margins amongst the peers has been wide ranging. The least been 13.9% of Arkan Building Materials and the most at 29.5% by Gulf Cement and 25.8% by RAK Cement. In the year 2005, the companies enjoyed best margins when margins touched as high as 43%. Since 2005, the margins since then have trickled down to 27% in 2007 and 22.9% in 2008. Going forward we believe that the operating margins would remain stable as lower cement prices would be offset by the multi fuel burners installed by majority of the cement players in the country. Nevertheless the downside risk would always be there as fuel costs for distribution and administrative costs because of inflation would continue take the charm away. Net Margins The spread between the maximum and minimum net margins has been quite varying during the current financial year. The maximum was achieved by Ras Al Khaimah Cement Company at 28.2% and the lowest worked out for Arkan Building Materials Company at -3% during 9M-2009. Overall net margins of the sector were at 17.7% which have doubled from that achieved in 2008 at 8.3%. Financial Charges as % of Debt Liabilities of the sector mostly include the payables and most of the financing for expansions purposes is done through equity or through huge cash balance, which shields the companies from acquiring loan and ultimately results in lesser financial charges. Financial charges as percentage of debt for the sector has declined tremendously as the last two listed cement companies i.e. Arkan Building Materials and Fujairah Cement Industries have completed their expansion. Overall sector financial charges as percentage of debt has declined to 6.5% in 9M-2009 as compared to 9.7% at the end of 2008. Liability as % of Assets The capital structure of the cement sector is strongly equity-based. The majority of the cement companies have strong liquidity and have a very conservative capital structure. For the sector as a whole, equity accounts for 80.3% of total assets in 9M-2009. The company which has a highly conservative capital structure amongst all is Union Cement & RAK Cement at 95% each. While the company which has high liability as percentage of assets is Fujairah Cement Industries followed by Arkan. Other Income as % of Net Income Cement companies in the UAE have strong exposure to the regional equity and real estate investments, making some of them extremely risky. In 2008, other income/(loss) was a major eroder of the profits as its percentage to the net income was -149.2%. Gulf Cement Company registered heavy losses in 2008 and the same trend has continued in 9M-2009 as its contribution to the total income has been -40% at the end of 9M-2009. ROE & ROA Return on equity of the cement companies have been fairly low which can be attributed to the highly skewed capital structure of the companies in the region. Equity has more than 80% contribution to the total assets of the sector, which in turn reduces its return. As of 9M-2009, Fujairah Cement Industries & RAK Cement enjoy highest ROE at 8.8% and 7.8% respectively. However in ROA terms, RAK Cement and Union Cement take the lead at 7.5% and 6.9% respectively.

10


Comparative AnalysisArkan GCEM FCI RAKCC Sector

Gross Margins 2007 51.5% 29.2% 32.7% 18.6% 31.8%9M-2008 36.9% 28.7% 25.4% 15.8% 24.7%2008 40.3% 30.6% 28.2% 21.0% 27.5%9M-2009 23.7% 31.1% 27.6% 30.6% 26.0%

Other Income as % of PAT (%)2007 41.0% 46.5% 4.7% 10.1% 45.7%9M-2008 -2.8% -20.6% 6.0% 7.0% 27.1%2008 167.6% N/M 4.8% 4.6% -149.2%9M-2009 -44.5% -40.4% 3.0% 4.9% 13.3%

Operating Margins (%)2007 36.9% 28.1% 30.3% 14.9% 27.1%9M-2008 27.2% 27.6% 22.8% 12.7% 20.0%2008 28.4% 29.4% 25.2% 18.0% 22.9%9M-2009 13.9% 29.5% 24.6% 25.8% 20.9%

Net Margins (%)2007 58.5% 50.3% 30.8% 16.4% 41.2%9M-2008 26.9% 32.2% 23.6% 13.6% 26.5%2008 -42.0% 0.2% 26.3% 18.8% 8.3%9M-2009 -3.0% 19.7% 24.4% 28.2% 17.7%

Fin. Charges as % of Debt (%)2007 - 4.9% 4.3% 6.9% 23.9%9M-2008 - 4.8% 0.3% 0.4% 6.2%2008 - 6.9% 0.3% 0.6% 9.7%9M-2009 2.7% 5.6% 0.1% 15.3% 6.5%

Debt as % of Assets (%)2007 0.0% 8.7% 5.9% 0.6% 3.9%9M-2008 9.8% 6.6% 32.0% 3.3% 9.8%2008 4.3% 6.9% 30.3% 2.9% 8.0%9M-2009 32.9% 5.5% 34.3% 0.2% 13.5%

Liabilities as % of Assets (%)2007 3.5% 14.5% 21.9% 6.7% 10.8%9M-2008 25.7% 15.6% 39.5% 8.3% 19.3%2008 36.9% 13.6% 41.0% 11.2% 20.9%9M-2009 35.9% 10.0% 40.5% 4.9% 19.7%

Equity as % of Assets (%)2007 96.5% 85.5% 78.1% 93.3% 89.2%9M-2008 74.3% 84.4% 60.5% 91.7% 80.7%2008 63.1% 86.4% 59.0% 88.8% 79.1%9M-2009 64.1% 90.0% 59.5% 95.1% 80.3%

Return on Equity (%)2007 9.7% 24.0% 21.4% 7.6% 14.7%9M-2008 7.7% 11.6% 14.7% 5.3% 7.9%2008 -18.1% 0.1% 20.7% 10.0% 4.4%9M-2009 -1.0% 6.9% 8.8% 7.8% 5.7%

Return on Assets (%)2007 9.4% 20.6% 16.7% 7.1% 13.1%9M-2008 5.7% 9.8% 8.9% 4.9% 6.4%2008 -11.4% 0.1% 12.2% 8.9% 3.5%9M-2009 -0.6% 6.2% 5.2% 7.5% 4.6%

Source: Company Reports

11


Company Profiles

12


• Revenue & Income to grow post 2009 Despite the downturn in 2008 whereby at year end majority of the companies either ended in losses or posted a hefty decline, Fujairah Cement Industries (FCI) continued its upbeat performance posting a y-o-y growth of 36.6% in sales revenue and 12.9% in net income. Nevertheless post 2009 we expect FCI sales volume and revenue to prop up and post a CAGR growth of 18.2% and 19.4% respectively during 2009-2012. Increase in sales volume is also expected to be accompanied by 1% CAGR growth in the realization price. • Margins not to take beating FCI posted gross margins of 28.2% in 2008 as compared to 32.2% and 38.8% during 2007 and 2006 respectively. During 9M-2009 the gross margins of the Company rose to 27.6% as compared to 25.4% in 9M-2008. Going forward we expect the Company to post gross margins at an average of 30% during 2009-2012. • Expansion is online Looking at the demand scenario before the credit crunch and Dubai World related issues Company was bullish on the demand for cement and to capitalize on this opportunity it ramped up its production capacity for clinker and cement to 3.75mtpa and 4.56mtpa respectively by the end of 2009. • 9M-2009 earnings declined 32% Fujairah Cement Industries Company (FCI) announced 9M-2009 net profit of AED88.3mn (EPS: AED0.25), 32% decline as compared to AED129.8mn (EPS: AED0.36) in 9M-2008. 3Q-2009 net profit at AED6.49mn (EPS: AED0.018) was down 88% on y-o-y basis and 79.6% on a q-o-q basis. • Valuations Based on our future earnings projections, the DCF value of Fujairah Cement comes out to be AED2.31.36 per share. While on the basis of the weighted average P/E for the industry and FCI’s projected 2010 earnings, the company’s stock valuation comes to AED5.05 per share. Hence the value of FCI shares derived from the weighted average of the DCF and relative valuation methods is AED2.86 per share. • Upside Potential of 31.4% The stock closed at KD0.170 (AED2.17) on the KSE (ADX) at the end of trading on Jan 11, 2010. Hence it has, a potential upside of 31.4% from its current price level.

Fujairah Cement Industries (FCI)

Recommendation: BUYUpside Potential: 31.4%Target Price: AED 2.86Current Price: AED 2.17

Bloomberg Code: FCEM KKReuters Code: FCEM.KW

Market Data 1m 3m 12m

Absolute -5% -24% -40%

Relative -9% -23% -69%

52-wk High (AED) 4.67

52-wk Low (AED) 2.09

Market Cap (AED mn) 774.4

Market Cap (US$ mn) 206.2

Outstanding shares (mn) 355.8

Average volume 564,306

52-wk val. traded Co/Index 3.21%

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

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Hettish Karmani Senior Financial Analyst [email protected] +965 2295 1281

Key Figures & Ratios (AED mn) 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)

Net Profit 173.2 195.6 123.7 189.6 206.2 230.7

EV/Ton (AED) 448.9 811.2 527.2 238.5 217.4 213.1

EPS (AED) 0.62 0.63 0.35 0.53 0.58 0.65

BVPS (AED) 2.88 3.06 2.94 3.22 3.55 3.90

EV/EBITDA (x) 4.66 7.51 9.31 5.72 4.80 4.21

P/E (x) 6.58 7.32 6.26 4.08 3.76 3.36

P/BV (x) 1.41 1.51 0.74 0.68 0.61 0.56

Source: Company Reports & Global Research

# FCI Trading on Kuwait SE has been taken and accordingly the exchange rate is being taken

* Market price for 2010 and subsequent years as per closing prices on KSE on Jan 11, 2010

13


Well Positioned Manufacturer… Fujairah Cement Industries (FCI) the only cement player in UAE focusing on its core business unlike others who are heavily invested in the equities, real estate and properties. Over the years the Company has scored very well and has been a progressive cement manufacturer. Despite the downturn in 2008 whereby at year end majority of the companies either ended in losses or posted a hefty decline, FCI continued its upbeat performance posting a y-o-y growth of 36.6% in sales revenue and 12.9% in net income. Going forward, we expect the company to perform well due to its strategic way of managing cement business and already positioned brand name. We anticipate the Company to report a drop of 33.2% in sales revenue & 36.8% in net income in 2009 and thereafter to register a CAGR growth of 19% & 23% in sales and net income during 2009-2012. Capacity Utilization to Drop… FCI registered capacity utilization of 93% for clinker by importing 655,000tons of clinker and almost cent percent for cement during 2008. Company is projected to witness a drop in the capacity utilization rates as the overall demand scenario in the country is expected to remain subdued to ripple effects of slow projects market & company’s expanded clinker and cement capacity.

Clinker & Cement Capacity Utilization


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2006 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)

Clinker Cap Utilization (%) Cement Cap Utilization (%)

Effect of Lower Cement Demand & Higher FCI Capacity

We expect Company’s utilization rate for clinker and cement to drop the most in 2010 and then after expect it to gradually pick up in 2011 and 2012. Expansions to bring Economies of Scale… FCI has been continuously pursuing the path of quality by upgrading its technology. The company is taking steps to integrate the latest quality control and cost saving measures. The company’s attainment of ISO certification is evidence of its emphasis on quality standards. In addition, the limestone quarry leased by FCI within close proximity of the factory, continues to insulate it from variable raw material prices, while minimizing its transportation costs. Looking at the demand scenario before the credit crunch and Dubai World related issues Company was bullish on the demand for cement and to capitalize on this opportunity it ramped up its production capacity for clinker and cement to 3.75mtpa and 4.56mtpa respectively by the end of 2009.

14


Operating Performance… FCI production and sales of cement registered CAGR growth of 14.9% and 13.4% respectively during 2003-08. In 2008, clinker and cement production went up by 5% to 1.4mn tons and 2.2mn tons respectively. Increase in cement production was also due to import of 655,000tons of clinker during the year.

Clinker & Cement Production


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Clinker Production (mn tons) Cement Production (mn tons)

During 9M-2009, clinker production dropped by 1.8% to 0.99mn as compared to 1.01mn during 9M-2008. While cement production dropped by 27.8% to 1.22mn during 9M-2009 as compared to 1.69mn during the same period last year. For the full year we expect FCI to produce 1.27mn tons of clinker and 1.54mn tons of cement which are less by 8.9% and 30.1% when compared to that of 2008. While sales volume, are expect to drop by 29.7% during the year to 1.55mn ton in 2009 as compared to 2.2mn tons in 2008.

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Nevertheless post 2009 we expect FCI sales volume and revenue to prop up and post a CAGR growth of 18.2% and 19.4% respectively during 2009-2012. Increase in sales volume is also expected to be accompanied by 1% CAGR growth in the realization price.

15


Valuation & Recommendations DCF Method In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we have used the Capital Asset Pricing Model (CAPM) for which following assumptions have been taken: • Beta of the Company arrived through its monthly return over 5 years comes out to be 0.46. Although the

stock is defensive but to be more conservative we have taken Beta as 1. • The cost of equity derived from the above assumptions using the Capital Asset Pricing Model (CAPM) is

12.6%. • The cost of debt taken is 7.0%. • Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to be 11.5%. • Based on our future earnings projections and the above assumptions for DCF computations, the DCF value

of Fujairah Cement comes out to be AED2.31 per share.

(AED mn) 2009 (F) 2010 (F) 2011 (F) 2012 (F) Free Cash Flow (79.0) 143.5 185.7 109.1 Discounted Cash Flow (79.0) 129.3 150.1 79.1 Primary Value 279.5 Discounted Terminal Value 960.4 Cash 52.4 Value of Investments - Debt 576.7 (As of 9M-2009)Equity Value 715.6 Shares Outstanding (mn) 309.4 Per Share Value (AED) 2.31 Source: Global Research.

(As of 9M-2009)

Fujairah Cement - DCF Valuation

(As of 9M-2009)

Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital is shown in table below. The table provides estimated fair values for Fujairah Cement’s shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives.

Fujairah Cement - Sensitivity Analysis

WACC 1.0% 2.0% 3.0% 4.0% 5.0%9.5% 2.46 2.92 3.53 4.36 5.57 10.5% 2.02 2.38 2.84 3.44 4.26 11.5% 1.67 1.96 2.31 2.76 3.35 12.5% 1.38 1.61 1.89 2.24 2.68 13.5% 1.13 1.33 1.55 1.83 2.17

Source: Global Research.

Terminal Growth Rate

Weighted Average Share Value – BUY with an upside of 31.4% To arrive at the peer-set P/E multiple, we have computed the average industry P/E of the four listed cement companies in UAE, based on their current market prices and projected earnings for 2010. The weighted average P/E for the UAE cement industry, thus arrived at, is 9.48x. On the basis of the weighted average P/E for the industry and FCI’s projected 2010 earnings, the company’s stock valuation comes to AED5.05 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, we have provided a lower weightage of 20% to the peer valuation method, and 80% weightage to DCF. Hence The value of FCI shares derived from the weighted average of the DCF and relative valuation method is AED2.86 per share. Hence we recommend BUY on the stock at its prevailing price levels.

16


Financial Statement(AED mn) 2006 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)

Profit & Loss Statement Sales Revenue 387.8 561.9 744.9 497.5 674.8 758.2 846.0 Cost of Sales (237.3) (380.9) (535.0) (358.2) (465.6) (530.7) (592.2) Gross Profit 150.5 181.0 209.9 139.3 209.2 227.5 253.8 Gen & Admn Expenses (5.7) (8.3) (15.4) (12.4) (16.9) (19.0) (21.2) Distribution Expenses (1.9) (2.5) (3.2) (2.5) (3.4) (3.8) (4.2) Amo. of Extraction Rights (2.5) (2.5) (3.6) (3.6) (3.6) (3.6) (3.6) Operating Profit 142.9 170.1 187.8 120.8 185.3 201.1 224.8 Other Income 11.1 8.1 9.3 3.7 5.1 5.7 6.3 Finance costs (1.5) (2.6) (1.5) (0.8) (0.8) (0.6) (0.5) Net Profit 150.2 173.2 195.6 123.7 189.6 206.2 230.7

Balance SheetBank & Cash Equivalents 107.8 212.6 134.1 164.5 194.4 181.3 115.9 Trade Receivables 137.8 177.2 205.6 129.5 184.9 207.7 278.1 Other Receivables 2.2 2.8 4.1 2.7 7.4 12.5 13.9 Inventories 95.9 93.7 178.7 166.8 178.6 189.0 227.2 Total Current Assets 343.7 486.3 522.4 463.6 565.3 590.6 635.1 Extraction Rights 46.9 44.4 40.9 37.3 33.7 30.1 26.5 Gross Fixed Assets 869.8 953.9 1,523.2 1,773.2 1,803.2 1,838.2 1,873.2 Accumulated Depreciation 412.0 447.8 483.3 483.3 483.3 483.3 483.3 Net Fixed Assets 457.8 506.1 1,039.9 1,289.9 1,319.9 1,354.9 1,389.9 Total Assets 848.4 1,036.8 1,603.1 1,790.7 1,918.8 1,975.5 2,051.4

Short-term Loan 10.8 14.1 90.3 94.8 75.9 53.1 37.2 Trade Payable 66.0 152.7 152.5 98.1 140.3 174.5 194.7 Proposed Dividend 69.0 - - 71.2 89.0 89.0 106.8 Other Current Liabilities 5.7 4.6 5.8 11.8 19.1 32.0 29.2 Total Current Liabilities 151.5 171.4 248.6 275.9 324.3 348.6 367.8 Long-term Loan 49.6 46.9 395.7 455.0 432.3 345.8 276.7 Employee Indemnity Provision 7.4 9.3 13.0 14.9 16.7 18.4 20.3

Paid-up Equity Capital 281.3 281.3 309.4 355.9 355.9 355.9 355.9 Statutory Reserve 77.0 110.8 130.4 142.7 161.7 182.3 205.4 Voluntary Reserve 134.3 165.5 200.7 223.0 257.1 294.2 335.8 Retained Earnings 147.2 251.7 305.4 323.2 370.8 430.3 489.7 Total Owners' Equity 639.8 809.3 945.9 1,044.8 1,145.5 1,262.7 1,386.7 Liabilities & Owners' Equity 848.4 1,036.8 1,603.1 1,790.7 1,918.8 1,975.5 2,051.4

Cash Flow StatementCash Flow from Operating Activities 157.1 261.3 128.7 170.2 172.8 220.1 143.6 Cash Flow from Investing Activities (116.5) (84.3) (574.5) (250.0) (30.0) (35.0) (35.0) Cash Flow from Financing Activities (39.7) (72.2) 367.2 110.3 (112.9) (198.2) (174.1) Net Cash at End 107.8 212.6 134.1 164.5 194.4 181.3 115.9

Ratio AnalysisCurrent Ratio (x) 2.3 2.8 2.1 1.7 1.7 1.7 1.7 Quick Ratio (x) 1.6 2.3 1.4 1.1 1.2 1.2 1.1 Gross Profit Margin 38.8% 32.2% 28.2% 28.0% 31.0% 30.0% 30.0%Operating Margin 36.9% 30.3% 25.2% 24.3% 27.5% 26.5% 26.6%Net Profit Margin 38.7% 30.8% 26.3% 24.9% 28.1% 27.2% 27.3%Return on Average Assets 19.1% 18.4% 14.8% 7.3% 10.2% 10.6% 11.5%Return on Average Equity 25.5% 23.9% 22.3% 12.4% 17.3% 17.1% 17.4%Current Liability / Equity 0.24 0.21 0.26 0.26 0.28 0.28 0.27 Total liabilities / Assets 0.19 0.17 0.16 0.16 0.18 0.19 0.19 Debt / Equity 0.09 0.08 0.51 0.53 0.44 0.32 0.23 EPS (AED) 0.53 0.62 0.63 0.35 0.53 0.58 0.65 Book Value Per Share (AED) 2.27 2.88 3.06 2.94 3.22 3.55 3.90 Asset Per Share (AED) 3.02 3.69 5.18 5.03 5.39 5.55 5.76 Cash Flow per Share (AED) 0.56 0.93 0.42 0.48 0.49 0.62 0.40 Market Price (AED) * 4.09 4.05 4.63 2.18 2.18 2.18 2.18 Market Capitalization (AED mn) 1,150.6 1,139.3 1,432.7 774.4 774.4 774.4 774.4 EV/Ton (AED) 501.5 448.9 811.2 527.2 238.5 217.4 213.1 Free Cash Flow Yield (%) 3.7% 15.8% -31.0% -10.2% 18.5% 24.0% 14.1%Dividend Yield (%) 6.1% 4.9% 4.3% 9.2% 11.5% 11.5% 13.8%EV/Revenues (x) 2.84 1.76 2.40 2.33 1.61 1.31 1.15 EV/EBITDA (x) 5.94 4.66 7.51 9.31 5.72 4.80 4.21 P/E Ratio (x) 7.66 6.58 7.32 6.26 4.08 3.76 3.36 P/BV Ratio (x) 1.80 1.41 1.51 0.74 0.68 0.61 0.56 Source: Company Reports & Global Research# FCI Trading on ADX is very low hence trading on Kuwait SE has been taken and accordingly the exchange rate is being taken* Market price for 2010 and subsequent years as per closing prices on KSE on Jan 11, 2010

17


• Revenue to increase at a CAGR of 8.8% during 2008-12 Net sales of the company increased at a CAGR of 34% during 2005-08. Going forward we expect the Company’s revenue to increase at a CAGR of 8.8% during 2008-12 on account of continuation of cement projects in Abu Dhabi where Arkan has stationed its big clinker and cement factory. The blocks business would also continue to bode well for the Company as it has not many competitors in the region. • Margins not to take beating Arkan is expected to post a significant drop in the gross margins for 2009 at 24.1% due to its losses in the steel segment. Nevertheless the margins are expected to revie going forward as the Company has fully wrote down the inventory of its steel segment. • Increased capacity to start commercial operation Arkan ramped up its cement capacity by way of constructing a new cement factory on the site of Arkan Industrial Park. The factory has a clinker and cement capacity of 3.2mtpa & 4.5mtpa and has come online by the end of 2009. This has taken Arkan’s total annual capacity of clinker and cement to 4.0mtpa and 5.7mtpa respectively. While on the other hand construction of the new block factory in Al Mafraq and Al Ain has also been completed which has increased the blocks production capacity from 23.5mn to 75mn by the end of 2009. • Presense in Abu Dhabi boost the future outlook All out efforts are being made by the Company to sustain their business segments but the time is not favoring them as majority of the capacities are coming online in the region along with a depressed demand scenario in UAE itself. Only favoring aspect for the Company is the presence of its significantly huge clinker capacity in Abu Dhabi, the only emirate in UAE which is progressing ahead with its planned projects. • Valuations Based on our future earnings projections, the DCF value of Arkan comes out to be AED1.77 per share. While on the basis of the weighted average P/E for the industry and Arkan’s projected 2010 earnings, the company’s stock valuation comes to AED1.32 per share. Hence the value of Arkan derived from the weighted average of the DCF and relative valuation methods is AED1.68 per share. • Downside of 33.5% The stock closed at AED2.53 on the ADX at the end of trading on Jan 11, 2010. Hence it has, a potential downside of 33.5% from its current price level.

Arkan Building Materials (Arkan)

+965 2295 1281

Recommendation: SELLDownside: -33.5%Target Price: AED 1.68Current Price: AED 2.53

Bloomberg Code: ARKAN UH

Reuters Code: ARKAN.AD


Absolute 4% -28% -61%

Relative -1% -27% -89%



Market Cap (AED mn) 4,427.5

Market Cap (US$ mn) 1,291.5

Outstanding shares (mn) 1,750.0



Hettish Karmani Senior Financial Analyst [email protected]

0.01.02.03.04.05.06.07.08.09.010.0

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Key Figures & Ratios (AED mn) 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)Net Profit / (Loss) 202.7 (291.6) 18.3 243.0 293.0 342.5 EV/Ton (AED) 5,124.8 9,789.4 4,247.8 836.4 822.9 808.1

EPS / LPS (AED) 0.12 (0.17) 0.01 0.14 0.17 0.20

BVPS (AED) 1.19 0.92 0.91 1.08 1.15 1.19

EV/EBITDA (x) 25.50 N/M 83.11 16.75 13.93 11.88

P/E (x) 32.81 N/M 223.88 18.22 15.11 12.93 P/BV (x) 3.20 6.52 2.57 2.35 2.21 2.12 Source: Company Reports & Global Research

18


Managing to Position Itself… Arkan Building Materials (Arkan) remains focused on the regional construction industry and intends to expand its portfolio of businesses by a number of means. Steps already taken include: (1) Arkan introduced new 100% owned company i.e. New Block Factories in Al Ain & Al Mafraq which has enhanced the production capacity of blocks to 250,000 blocks per day (2) Arkan signed a contract with M-Tec of Germany for a new dry mortar factory, its production commenced in 2009 (3) Partial or complete acquisition in already well established business which can give a mileage to the Company such as 40% stake in Vision Group. Other than these efforts Arkan ventured into the steel segment in 2008 & 2009 for which it received a severe burnt because of depreciation in commodity prices during the year and wrote down inventories worth of AED430mn. All out efforts are being made by the Company to sustain their business segments but the time is not favoring them as majority of the capacities are coming online in the region along with a depressed demand scenario in UAE itself. Only favoring aspect for the Company is the presence of its significantly huge clinker capacity in Abu Dhabi, the only emirate in UAE which is progressing ahead with its planned projects. Expansion not to Translate into Higher Utilization… Arkan over the past years materialized the expansion plans for its cement and block factories keeping in mind the growing demand scenario for cement in UAE. It ramped up its cement capacity by way of constructing a new cement factory on the site of Arkan Industrial Park. The factory has a clinker and cement capacity of 3.2mtpa & 4.5mtpa and has come online by the end of 2009. This has taken Arkan’s total annual capacity of clinker and cement to 4.0mtpa and 5.7mtpa respectively.

Cement & Blocks Expansion

Source: Company Reports

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Clinker (mtpa) - LHS Cement (mtpa) - LHS Blocks per Annum (mn) - RHS

While on the other hand construction of the new block factory in Al Mafraq and Al Ain has also been completed which has increased the blocks production capacity from 23.5mn to 75mn by the end of 2009. Blocks business is expected to continue well as not many players are engaged in that business within the region but on the other hand the cement business is expected to face the music as the cement makers in UAE as well as in the GCC are ramping up their production capacity to 40.6mtpa and 121.6mtpa by the end of 2011 from 34.1mtpa and 98.2mtpa at the end of 2009 respectively.

19


Operating Performance… Cement sales revenue of the Company rose at a CAGR of 8.5% during 2005-08 while during the same period revenue from the block segment increased at a CAGR of 24.3%. In 2008, cement sales revenue increased to AED325.8mn from AED317.1mn a year earlier while on the other hand block sales revenue increased significantly by 61.1% to AED65.8mn in 2008 as against AED40.8mn in 2007. On the whole the net sales of the company increased at a CAGR of 34% during 2005-08. During 2008, cement production and sales dropped by 8.2% and 7.8% to 0.95mn and 0.96mn respectively. While o the other hand cement realization price increased by 11% to AED339/ton in 2008 as compared to AED304/ton in 2007. Arkan sales revenue dropped by 17.8% to AED194.3mn in 9M-2009 and it was able to roll out 561,199tons of cement at an average realization price of AED346.2/ton. On the other hand blocks business continued to perform well registering an increase of 53% to AED71.2mn in 9M-2009 as compared to AED46.4mn in 9M-2008. Arkan sales revenue from the steel segment continued to increase. Revenue rose from the segment to AED251.7mn as compared to AED168.9mn recorded during 1H-2009. Nevertheless segment’s gross losses declined to AED14.2mn for 9M-2009 as compared AED14.6 during 1H-2009.

Cement & Block Sales


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Cement Sales (mn tons) - LHS Block Sales (mn) - RHS

Arkan continues to get cushioned from profit of associates. The profit rose to AED20.9mn in 9M-2009 as compared to AED12.6mn in the corresponding period last year. The losses reported by the Company due to write down of inventory and write-down of machinery has been recorded till 1H-2009 and 3Q-2009 figures are purely the operation numbers. Depressed sales prices and lesser volumes declined the gross margins of the Company to 23.7% for 9M-2009 as compared to 36.9% in 9M-2008. Third quarter margins were pretty depressed as compared to previous quarter of 2009 at 19.9%. The Company announced 9M-2009 net loss of AED14.9mn (LPS: AED0.01), 109% decline as compared to AED158.9mn (EPS: AED0.09) in 9M-2008. 3Q-2009 net profit at AED28.2mn (EPS: AED0.016) is down 8.2% on a Y-o-Y basis. Going forward we expect the Company’s revenue to increase at a CAGR of 8.8% during 2008-12 on account of continuation of cement projects in Abu Dhabi where Arkan has stationed its big clinker and cement factory. The blocks business would also continue to bode well for the Company as it has not many competitors in the region.

20





of Arkan comes out to be AED1.77 per share.

(AED mn) 2009 (F) 2010 (F) 2011 (F) 2012 (F) Free Cash Flow (333.4) 175.7 234.8 325.2 Discounted Cash Flow (333.4) 158.9 191.4 239.1 Terminal Value 4,229.9 Primary Value 256.0 Discounted Terminal Value 3,109.3 Value of Investments 370.2 ( 9M-2009)Cash 168.1 ( 9M-2009)Debt 799.1 ( 9M-2009)Equity Value 3,104.5 Shares Outstanding (mn) 1,750.0 Per Share Value (AED) 1.77 Source : Global Research.

Arkan - Equity Valuation by DCF

Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital is shown in table below. The table provides estimated fair values for Arkan’s shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives.

Arkan - Sensitivity Analysis

WACC 1.0% 2.0% 3.0% 4.0% 5.0%8.9% 1.85 2.14 2.52 3.06 3.87 9.9% 1.59 1.81 2.09 2.47 3.00 10.9% 1.39 1.56 1.77 2.05 2.42 11.9% 1.22 1.36 1.53 1.74 2.01 12.9% 1.08 1.20 1.33 1.50 1.70

Source: Global Research


Weighted Average Share Value – SELL with a downside of 33.5% To arrive at the peer-set P/E multiple, we have computed the average industry P/E of the four listed cement companies in UAE, based on their current market prices and projected earnings for 2010. The weighted average P/E for the UAE cement industry, thus arrived at, is 9.48x. On the basis of the weighted average P/E for the industry and Arkan’s projected 2010 earnings, the company’s stock valuation comes to AED1.32 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, we have provided a lower weightage of 20% to the peer valuation method, and 80% weightage to DCF. Hence the value of Arkan’s shares derived from the weighted average of the DCF and relative valuation methods is AED1.68 per share. Hence we recommend SELL on the stock at its prevailing price levels.

21



Profit & Loss Statement Net Sales Revenue 319.9 346.4 695.2 627.3 732.4 863.5 975.7 Cost of Sales (155.0) (168.1) (415.2) (476.3) (474.2) (551.0) (615.1) Gross Profit 164.9 178.2 280.0 150.9 258.3 312.5 360.6 Selling and Distribution Expense (4.5) (5.9) (6.0) (4.6) (11.0) (13.0) (14.6) General & Administrative Expense (32.3) (52.8) (84.5) (55.0) (95.2) (112.3) (126.8) Operating Profit 128.0 119.6 189.4 91.3 152.1 187.3 219.1 Other Income 4.8 8.1 7.8 9.4 13.1 17.1 22.2 Net Gain on Revaluation of Investments - 10.3 (100.3) 30.1 34.6 39.8 45.7 Write down of Inventory - - (429.5) (50.3) - - - Other Expenses - - - (70.3) - - - Share of Profit from Associates - - 19.4 24.2 27.9 32.1 36.9 Net Finance Income 42.3 64.7 21.5 (16.2) 15.3 16.9 18.6 Net Profit 175.1 202.7 (291.6) 18.3 243.0 293.0 342.5

Balance SheetCash and Bank Balance 1,236.6 1,012.7 200.8 209.3 345.3 299.7 294.8 Receivables and Prepayments 116.6 146.3 129.0 154.7 180.6 212.9 240.6 Investment at FV - 72.4 47.2 51.9 57.1 62.8 69.1 Inventories 35.7 58.4 376.5 101.8 77.9 81.5 91.0 Current Assets 1,388.9 1,289.8 753.5 517.7 661.0 657.0 695.5

Investment in Associates - - 183.9 202.3 222.6 244.8 269.3 Available for Sale Investments - - 148.7 111.5 122.6 134.9 148.4 Goodwill 128.4 128.4 128.4 128.4 128.4 128.4 128.4 Other Intangible Assets 203.8 195.3 186.8 179.4 172.2 165.3 158.7 Property, Plant and Equipment 474.7 543.1 1,157.6 1,311.2 1,365.3 1,403.1 1,427.2 Non-Current Assets 806.9 866.8 1,805.5 1,932.8 2,011.1 2,076.6 2,132.0 Total Assets 2,195.7 2,156.7 2,558.9 2,450.5 2,672.1 2,733.5 2,827.5

Payables & Accruals 47.8 76.3 509.3 68.7 100.3 165.6 267.3 Medium Term Loans 147.7 - 323.9 226.7 181.4 108.8 65.3 Long Term Loans - - 110.2 560.2 504.2 453.8 408.4

Paid -up Capital 1,750.0 1,750.0 1,750.0 1,750.0 1,750.0 1,750.0 1,750.0 Legal Reserve 17.5 37.8 37.8 37.8 62.1 91.4 125.6 Capital Reserve 3.8 3.8 3.8 3.8 3.8 3.8 3.8 Investment Revaluation Reserve - - 1.7 (37.2) 11.1 12.3 13.5 Retained Earnings 228.9 288.8 (177.8) (159.5) 59.2 147.9 193.6 Total Shareholders Equity 2,000.2 2,080.4 1,615.5 1,594.9 1,886.2 2,005.4 2,086.6 Total Equity & Liability 2,195.7 2,156.7 2,558.9 2,450.5 2,672.1 2,733.5 2,827.5

Cash Flow StatementCash Flow from Operating Activities 156.1 130.5 (69.3) (141.8) 271.5 316.2 394.4 Cash Flow from Investing Activities (112.3) (84.2) (1,001.7) (202.5) (34.1) (63.9) (47.9) Cash Flow from Financing Activities 1,009.0 (270.2) 259.1 352.8 (101.4) (298.0) (351.4) Net Cash at End 1,236.6 1,012.7 200.8 209.3 345.3 299.7 294.8

Ratio AnalysisCurrent Ratio (x) 29.1 16.9 1.5 7.5 6.6 4.0 2.6 Quick Ratio (x) 28.3 16.1 0.7 6.1 5.8 3.5 2.3 Gross Profit Margin 51.5% 51.5% 40.3% 24.1% 35.3% 36.2% 37.0%Operating Margin 40.0% 34.5% 27.2% 14.6% 20.8% 21.7% 22.5%Net Profit Margin 54.7% 58.5% -42.0% 2.9% 33.2% 33.9% 35.1%Return on Average Assets 13.0% 9.3% -12.4% 0.7% 9.5% 10.8% 12.3%Return on Average Equity 14.3% 9.9% -15.8% 1.1% 14.0% 15.1% 16.7%Current Liability / Equity 0.02 0.04 0.32 0.04 0.05 0.08 0.13 Total liabilities / Assets 0.09 0.04 0.33 0.12 0.11 0.10 0.12 Debt / Equity 0.07 - 0.27 0.49 0.36 0.28 0.23 EPS (AED) 0.10 0.12 (0.17) 0.01 0.14 0.17 0.20 Book Value Per Share (AED) 1.14 1.19 0.92 0.91 1.08 1.15 1.19 Asset Per Share (AED) 1.25 1.23 1.46 1.40 1.53 1.56 1.62 Cash Flow per Share (AED) 0.09 0.07 (0.04) (0.08) 0.16 0.18 0.23 Market Price (AED) * 3.80 3.80 6.02 2.34 2.53 2.53 2.53 Market Capitalization (AED mn) 6,650.0 6,650.0 10,535.0 4,095.0 4,427.5 4,427.5 4,427.5 Cash Return On Capital Invested (%) 9.6% 10.6% -16.7% 3.5% 15.1% 16.8% 18.6%EV/Ton (AED) 5,055.6 5,124.8 9,789.4 4,247.8 836.4 822.9 808.1 Free Cash Flow Yield (%) 0.0% 0.7% -6.7% -8.1% 4.0% 5.3% 7.3%Dividend Yield (%) 0.0% 1.8% 1.7% 0.0% 0.0% 4.0% 5.9%EV/Revenues (x) 17.38 16.28 15.49 7.45 6.51 5.43 4.72 EV/EBITDA (x) 28.84 25.50 N/M 83.11 16.75 13.93 11.88 P/E Ratio (x) 37.98 32.81 N/M 223.88 18.22 15.11 12.93 P/BV Ratio (x) 3.32 3.20 6.52 2.57 2.35 2.21 2.12 Source: Company Reports & Global Research* Market price for 2010 and subsequent years as per closing prices on ADX on Jan 11, 2010

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• RAKCC witnessed a revenue CAGR of 14.6% during 2004-08 RAKCC witnessed a revenue CAGR of 14.6% during 2004-08 on account of increased construction and real estate activity within the country. In 2008, revenue increased by 27.2% to AED425.9mn as compared to AED334.9mn at the end of 2007. While the same during 9M/2009 declined by 24% to AED225.8mn in 9M-2009 as compared to AED297.4mn in 9M-2008. In 2009, it is expected that Company would post revenue of AED297.7mn as compared to AED425.9mn in 2008, decline of 30%. • Margins to increase going forward With the implementation of various cost control measures we expect RAKCC gross margins to go up to as high as 31% in 2009 as compared to 21% in 2008. Going forward with the continuation of such measures we expect the gross margins to touch 33% by 2011. • Benefiting from Hydra Properties Hydra Properties acquired 20% stake in Ras Al-Khaimah Cement Company as part of the company's strategy to diversify its investments within sectors that are related to real estate. Since Hydra Properties has many ongoing and planned construction developments in the UAE, holding a stake in Ras Al-Khaimah Cement Company will enable Hydra Properties to avail cement supplies on a priority basis and will benefit RAKCC with a continuing outflow of cement volumes even during the market downturns. • JV with Royal Group of Abu Dhabi RAKCC entred into a joint venture with Royal Group of Abu Dhabi, whereby the Company acquired 20% shareholding in Reem Readymix at a cost of AED40mn. We expect the share of profit from this stake to be in the range of AED8-10mn in the coming years. As an affiliate of RAK Cement, and one of the top 5 Readymix producers in Abu Dhabi, the company has an integrated position in the demanding construction market. • Valuations Based on our future earnings projections, the DCF value of RAKCC comes out to be AED1.50 per share. While on the basis of the weighted average P/E for the industry and RAKCC’s projected 2010 earnings, the company’s stock valuation comes to AED1.74 per share. Hence the value of RAKCC derived from the weighted average of the DCF and relative valuation methods is AED1.55 per share. • Upside Potential of 48.7% The stock closed at AED1.04 on the ADX at the end of trading on Jan 11, 2010. Hence it has, a potential downside of 48.7% from its current price level.

Ras Al Khaimah Cement Company (RAKCC)

Recommendation: BUYDownside: 48.7%Target Price: AED 1.55Current Price: AED 1.04

Bloomberg Code: RAKCC UH

Reuters Code: RAKCC.AD


Absolute 6% -31% -39%

Relative 2% -30% -68%



Market Cap (AED mn) 503.4



Average volume (000) 6,719



0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70

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Volume (mn) Price (AED)Key Figures & Ratios (AED mn) 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)Net Profit 54.9 80.0 85.5 88.9 94.3 99.6 EV/Ton (AED) 858.9 294.9 323.1 329.7 304.9 342.2 EPS (AED) 0.11 0.17 0.18 0.18 0.19 0.21 BVPS (AED) 1.49 1.66 1.69 1.72 1.76 1.82 EV/EBITDA (x) 12.42 3.17 3.25 3.20 2.81 3.01 P/E (x) 18.59 4.90 5.77 5.66 5.34 5.06 P/BV (x) 1.41 0.49 0.61 0.60 0.59 0.57 Source: Company Reports & Global Research

* Market price for 2010 and subsequent years as per closing prices on ADX on Jan 11, 2010

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Capitalizing on Existing Conditions... Ras Al-Khaimah Cement Company (RAKCC) which was earlier considered as one of the laggard in terms of not catching up with the growing demand scenario and not undergoing any expansion, would be one of the safest players in tougher times as of now. RAKCC clinker and cement capacity stands at 1mtpa and 1.1mtpa respectively. Apart from capacity expansion RAKCC has taken many other major initiatives for prospering their cement business which include: Benefiting from Hydra Properties Hydra Properties acquired 20% stake in RAKCC as part of the company's strategy to diversify its investments within sectors that are related to real estate. Since Hydra Properties has many ongoing and planned construction developments in the UAE, holding a stake in Ras Al-Khaimah Cement Company will enable Hydra Properties to avail cement supplies on a priority basis and will benefit RAKCC with a continuing outflow of cement volumes even during the market downturns. RAKCC JV with Royal Group of Abu Dhabi RAKCC entered into a joint venture with Royal Group of Abu Dhabi, whereby the Company acquired 20% shareholding in Reem Readymix at a cost of AED40mn. We expect the share of profit from this stake to be in the range of AED8-10mn in the coming years. With almost 200 employees, Reem Readymix is a leading supplier of all types of Readymix concrete and cement-based plastering materials. The company has expertise in all concrete-related services, from production to final product placing, using the latest equipment and experienced personnel. As an affiliate of RAK Cement, and one of the top 5 Readymix producers in Abu Dhabi, the company has an integrated position in the demanding construction market through a strong supply chain. Four fully-automated state-of-the-art 4 batching plants produce 480 cubic m./hour , together with a 400 tons/day ice producing-facilities, and a fully integrated laboratory equipped with latest technology testing facility. Harnessing Cost With the expected supply shortage of electricity and natural gas in UAE, RAK Cement commenced multiple projects to rein in their cost. Back in 2005 due to shortage of natural gas in UAE, RAKCC was forced to consume diesel to produce electricity. In 2007 and 2008, the Company also consumed HFO for firing operations which took the gross margins down significantly. In that reference, Topaz Engineering successfully installed and commissioned complete Electrical and Instrumentation (E&I) works in the Coal Mill building for RAK Cement. One of the key highlights of the project was the safe completion of 78,000 man hours without any lost time injury (LTI). Topaz executed the E&I works on a turnkey basis which included the supply, installation and testing of cables, cable trays, profibus cables, MLDB (main lighting distribution boards) panels and light fittings in the total Electrical and Instrumentation package. The contract also comprised the installation of 11 KV sub stations with HV switchgear, distribution transformers, motor control centre panels for low voltage distribution, PLC panels and other control panels. In addition to electrical and instrumentation works, the company also executed mechanical works comprising the fabrication and supply of static equipments like coal bins, bag filters, cyclones, interconnecting ducting, conveyor system totaling approximately 460 Tons of fabrication and erection works within a very tight time schedule. With the implementation of such measures we expect RAKCC gross margins to go up to as high as 31% in 2009 as compared to 21% in 2008. Going forward with the continuation of such measures we expect the gross margins to touch 33% by 2011.

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Operating Performance… RAKCC witnessed a revenue CAGR of 14.6% during 2004-08 on account of increased construction and real estate activity within the country. In 2008, revenue increased by 27.2% to AED425.9mn as compared to AED334.9mn at the end of 2007. While the same during 9M/2009 declined by 24% to AED225.8mn in 9M-2009 as compared to AED297.4mn in 9M-2008. Decline in sales during the current calendar year was due to the continued uncertainty in the construction market whereby many big ticket projects were put on hold. In 2009, it is expected that Company would post revenue of AED297.7mn as compared to AED425.9mn in 2008, decline of 30%.

Revenue & Gross Margins


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

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45.0%

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2006 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)

Sales Revenue (AED mn) Gross Margins

On the sales volume front the company’s dispatches grew at a CAGR of 2.1% during 2004-08. Relatively lesser growth in dispatches was because of the Company’s fixed capacity. In 9M-2009, RAKCC was able to dispatch 639.4k tons of cement while in the third quarter the sales touched 209k tons. For 2009 alone we expect the Company to sell around 0.85mn tons of cement. Lesser growth in the sales volume was well supported by the increase in the realization prices of cement. In the last five years its price grew at a CAGR of 12.3% from AED214.2/ton in 2004 to AED340.7/ton in 2008. Even during the 9M-2009 cement prices inched upto AED353.2/ton in 9M-2009. However we expect the prices to dip by 3% to AED340.5/ton in 2010 and thereafter increase at a slower pace. Investments Company’s available for sale investment is fully invested in the local market of UAE. As of 9M-2009, Company has investments worth of AED28.6mn, of which majority chunk is invested in an airline company amounting to AED12.7mn. Second highest investment is in the financing companies which accounts for AED10.2mn. Rest of the amounting around AED5.5mn is being put in petroleum and power company. Majority of the investments are unquoted and their value has declined by over 6.5%. Going forward with the expected revival of equity markets in the country in 2010 we expect the unquoted investment value to increase and result in better return on investment in the days to come. While Company’s investment of AED40mn in Reem Ready Mix, Abu Dhabi has been paying off quite well as RAKCC managed to grab AED6.7mn in profits during 9M-2009, which at the end of the year are expected to touch to AED7.4mn. Going forward we expect Reem Ready Mix to add around AED8-10mn to the bottom line of RAKCC during 2010-12.

25





of RAKCC comes out to be AED1.50 per share.

(AED mn) 2009 (F) 2010 (F) 2011 (F) 2012 (F) Free Cash Flow 145.6 75.3 100.1 31.7 Discounted Cash Flow 145.6 67.4 80.0 22.6 Primary Value 315.6 Terminal Value 257.9 Cash 77.4 (As of 9M-2009)Value of Investments 75.3 (As of 9M-2009)Debt 1.6 (As of 9M-2009)Equity Value 724.7 Outstanding Shares (mn) 484.0 Per Share Value (AED) 1.50 Source: Global Research.

RAK Cement - Equity Valuation by DCF

Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital is shown in table below. The table provides estimated fair values for RAKCC’s shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives.

RAK Cement - Sensitivity Analysis

WACC 1.0% 2.0% 3.0% 4.0% 5.0%10.04% 1.53 1.60 1.70 1.82 2.00 11.04% 1.45 1.51 1.59 1.68 1.80 12.04% 1.39 1.44 1.50 1.57 1.66 13.04% 1.34 1.38 1.43 1.48 1.55 14.04% 1.30 1.33 1.37 1.41 1.47



Weighted Average Share Value – BUY with an upside of 48.7% To arrive at the peer-set P/E multiple, we have computed the average industry P/E of the four listed cement companies in UAE, based on their current market prices and projected earnings for 2010. The weighted average P/E for the UAE cement industry, thus arrived at, is 9.48x. On the basis of the weighted average P/E for the industry and RAKCC’s projected 2010 earnings, the company’s stock valuation comes to AED1.74 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, we have provided a lower weightage of 20% to the peer valuation method, and 80% weightage to DCF. Hence the value of RAKCC’s shares derived from the weighted average of the DCF and relative valuation methods is AED1.55 per share. Hence we recommend BUY on the stock at its prevailing price levels.

26



Profit & Loss Statement Sales Revenue 325.2 335.0 426.0 297.8 279.6 286.6 301.3 Cost of Sales (191.1) (272.8) (336.5) (205.5) (190.1) (192.0) (201.9) Gross Profit 134.1 62.2 89.5 92.3 89.5 94.6 99.4 Gen & Admn Expenses (11.4) (11.0) (11.9) (11.1) (11.3) (12.0) (13.0) Distribution Expenses (0.2) (1.4) (1.0) (1.0) (0.9) (0.9) (1.0) Operating Profit 122.6 49.7 76.5 80.3 77.3 81.6 85.4 Non-Core Income 3.4 5.5 3.6 1.7 2.3 2.4 2.8 Finance Charges (0.2) (0.3) (0.1) (0.5) (0.2) (0.2) (0.1) Share of Profit from an Associate - - - 7.4 8.2 9.0 9.9 Impairment of Available for Sale Investment - - - (3.4) 1.4 1.5 1.7 Net Profit 125.8 54.9 80.0 85.5 88.9 94.3 99.6

Balance SheetBank & Cash Equivalents 108.0 76.5 94.3 138.2 140.7 167.9 127.0 Trade Receivables 115.7 118.4 168.9 89.7 91.9 94.2 123.8 Other Receivables 8.4 8.7 19.9 16.3 15.3 15.7 24.8 Inventories 41.4 50.6 58.7 61.9 62.5 63.1 83.0 Total Current Assets 273.6 254.3 341.7 306.2 310.4 341.0 358.5

Investments Available for Sale 30.8 31.0 30.6 29.1 30.5 32.1 33.7 Capital Spare Parts - 6.7 6.2 5.5 6.1 6.7 7.4 Net Fixed Assets 469.5 483.4 525.4 542.2 552.9 548.0 542.6 Total Assets 773.9 775.4 903.9 883.1 900.0 927.8 942.1

Short-term Loan - - 26.6 - - - - Trade Payable 21.3 24.9 26.6 33.8 36.5 42.1 35.9 Other Payables 8.4 25.0 45.5 31.0 28.6 28.9 22.1 Total Current Liabilities 29.8 49.9 98.7 64.7 65.1 71.0 58.1

Employee Indemnity Provision 2.0 2.1 2.2 2.4 2.6 2.9 3.2

Paid-up Capital 484.0 484.0 484.0 484.0 484.0 484.0 484.0 Statutory Reserve 42.4 47.9 55.9 64.5 73.4 82.8 92.8 Voluntary Reserve 41.5 47.0 55.0 63.5 72.4 81.8 91.8 Retained Earnings 174.3 144.4 208.4 204.2 202.7 205.5 212.6 Shareholders Equity 742.2 723.4 803.0 816.0 832.2 853.9 880.9 Liabilities & Owners' Equity 773.9 775.4 903.9 883.1 900.0 927.8 942.1

Cash Flow StatementCash Flow from Operating Activities 123.9 72.7 52.4 184.4 110.6 120.5 52.3 Cash Flow from Investing Activities (29.3) (30.0) (61.0) (41.3) (35.6) (20.6) (20.6) Cash Flow from Financing Activities (4.7) (74.2) 21.5 (99.2) (72.6) (72.6) (72.6) Net Cash at End 108.0 76.5 94.3 138.2 140.7 167.9 127.0

Ratio AnalysisCurrent Ratio (x) 9.2 5.1 3.5 4.7 4.8 4.8 6.2 Quick Ratio (x) 7.8 4.1 2.9 3.8 3.8 3.9 4.7 Gross Profit Margin 41.2% 18.6% 21.0% 31.0% 32.0% 33.0% 33.0%Operating Margin 37.7% 14.9% 18.0% 27.0% 27.6% 28.5% 28.4%Net Profit Margin 38.7% 16.4% 18.8% 28.7% 31.8% 32.9% 33.0%Return on Average Assets 17.6% 7.1% 9.5% 9.6% 10.0% 10.3% 10.6%Return on Average Equity 18.5% 7.5% 10.5% 10.6% 10.8% 11.2% 11.5%Current Liability / Equity 0.04 0.07 0.12 0.08 0.08 0.08 0.07 Total liabilities / Assets 0.04 0.07 0.11 0.08 0.08 0.08 0.06 Debt / Equity - - 0.03 - - - - EPS (AED) 0.26 0.11 0.17 0.18 0.18 0.19 0.21 Book Value Per Share (AED) 1.53 1.49 1.66 1.69 1.72 1.76 1.82 Asset Per Share (AED) 1.60 1.60 1.87 1.82 1.86 1.92 1.95 Cash Flow per Share (AED) 0.26 0.15 0.11 0.38 0.23 0.25 0.11 Market Price (AED) * 2.04 2.11 0.81 1.02 1.04 1.04 1.04 Market Capitalization (AED mn) 987.36 1,021.24 392.04 493.68 503.36 503.36 503.36 EV/Ton (AED) 799.4 858.9 294.9 323.1 329.7 304.9 342.2 Free Cash Flow Yield (%) 11.9% 3.7% -2.9% 29.5% 15.0% 19.9% 6.3%Dividend Yield (%) 0.0% 7.1% 0.0% 14.7% 14.4% 14.4% 14.4%EV/Revenues (x) 2.7 2.8 0.8 1.2 1.3 1.2 1.2 EV/EBITDA (x) 6.0 12.4 3.2 3.3 3.2 2.8 3.0 P/E Ratio (x) 7.8 18.6 4.9 5.8 5.7 5.3 5.1 P/BV Ratio (x) 1.3 1.4 0.5 0.6 0.6 0.6 0.6 Source: Company Reports & Global Research* Market price for 2010 and subsequent years as per closing prices on ADX on Jan 11, 2010

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• Revenue to drop in 2009 We expect GCEM to report a substantial 35% y-o-y decline in revenues due to an anticipated 13% y-o-y reduction in the realization prices and an expected lower sales volume of 2.52mn tons (2008: 3.38mn tons) due to the lower regional cement demand and the month-long maintenance shutdown in Q1 2009. Further, we forecast a reduction in the cement and clinker capacity utilization rates to around 94% and 70%, respectively, in 2009. Going forward, we expect Company to report CAGR of 2.5% in revenue during 2009-12. Lesser growth in the revenue would be because of continuation of capacity expansion by various cement players in the region, resulting in a drop in the utilization rate and market share. • Strong Balance Sheet GCEM balance sheet has remained quite strong over the years. During the 9M-2009, GCEM was able to reduce its debt by 24.7% to AED94.6mn as compared to AED124.9mn at the end of 2008. We expect Company’s balance sheet to remain healthy with a further 20% reduction in the debt during the last quarter to AED74.9mn at the end of 2009 (a debt to equity ratio of 0.05x). At the same time, cash and cash equivalents amount to AED165.8mn at the end of 9M-2009 which are equal to 12.6% of current market capitalization. Consequently, we see only a limited default risk associated with trade receivables. • Income/loss from investment is the prime driver The income/loss from investment in securities is the prime driver for fluctuations in the bottom line. With an investment income of AED174.2mn in 2007 (42.1% of PAT), GCEM was able to increase its net income to AED413.8mn. However the same turned into a night mare in 2008 as the investment losses amounted to AED341.9mn which dragged the profit down to merely AED2.1mn. We expect the same trend to continue in 2009 and anticipate GCEM to report investment losses of AED45.4mn in 2009. • Valuations Based on our future earnings projections, the DCF value of GCEM comes out to be AED2.21 per share. While on the basis of the weighted average P/E for the industry and Arkan’s projected 2010 earnings, the company’s stock valuation comes to AED2.11 per share. Hence the value of Arkan derived from the weighted average of the DCF and relative valuation methods is AED2.19 per share. • Upside of 36.9% The stock closed at AED1.60 on the ADX at the end of trading on Jan 11, 2010. Hence it has, a potential downside of 36.9% from its current price level.

Gulf Cement Company (GCEM)


Recommendation: BUYDownside: 36.9%Target Price: AED 2.19Current Price: AED 1.60

Bloomberg Code: GCEM UHReuters Code: GCEM.AD


Absolute 9% -24% -14%

Relative 5% -22% -42%



Market Cap (AED mn) 1,313.7





1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 3.00 3.20

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Volume (000) Price (AED)Key Figures & Ratios (AED mn) 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)Net Profit 413.8 2.1 144.9 183.1 207.1 228.6 EV/Ton (AED) 1,518.2 668.7 443.4 435.1 456.7 433.7 EPS (AED) 0.50 0.00 0.18 0.22 0.25 0.28 BVPS (AED) 2.10 1.90 1.88 1.90 2.01 2.08 EV/EBITDA (x) 8.16 26.75 5.71 4.74 4.53 3.98 P/E (x) 10.56 875.80 9.07 7.18 6.34 5.75 P/BV (x) 2.54 1.19 0.85 0.84 0.80 0.77 Source: Company Reports & Global Research* Market price for 2010 and subsequent years as per closing prices on ADX on Jan 11, 2010

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Revenue to drop in 2009 despite losses Gulf Cement Company (GCEM) reported CAGR of 19.5% during 2005-08. In 2008, revenue witnessed an increase of 31% to AED1.0bn as compared to AED0.82bn in 2007. During 9M-2009 revenue dropped 30% to AED543.8mn as compared to AED776.6mn in 9M-2008. The drop during the nine month can be attributed to the drop in the realization prices as well as the drop in sales volume. During 9M-2009, GCEM was able to roll out 2.0mn as compared to 2.47mn during the same period last year. While on the other hand realization prices also added to the tumult by dropping 15.6% to AED264.5/ton in 9M-2009 as against AED313.4/ton during the same period last year.

Sales Revenue Performance


225.0

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Revenue (AED mn) - LHS Realization Price (AED/ton) - RHS

For the full year, we expect GCEM to report a substantial 35% y-o-y decline in revenues due to an anticipated 13% y-o-y reduction in the realization prices and an expected lower sales volume of 2.52mn tons (2008: 3.38mn tons) due to the lower regional cement demand and the month-long maintenance shutdown in Q1 2009. Further, we forecast a reduction in the cement and clinker capacity utilization rates to around 94% and 70%, respectively, in 2009. Going forward, we expect Company to report CAGR of 2.5% in revenue during 2009-12. Lesser growth in the revenue would be because of continuation of capacity expansion by various cement players in the region, resulting in a drop in the utilization rate and market share. Strong Asset Base GCEM balance sheet has remained quite strong over the years. During the 9M-2009, GCEM was able to reduce its debt by 24.7% to AED94.6mn as compared to AED124.9mn at the end of 2008. We expect Company’s balance sheet to remain healthy with a further 20% reduction in the debt during the last quarter to AED74.9mn at the end of 2009 (a debt to equity ratio of 0.05x). At the same time, cash and cash equivalents amount to AED165.8mn at the end of 9M-2009 which are equal to 12.6% of current market capitalization. The Company reported AED 202mn in trade receivables with 91% fully covered by unconditional bank guarantees issued by local banks. Consequently, we see only a limited default risk associated with trade receivables. Under the equity section, statutory and voluntary reserves are expected to rise to 28.1% of the total assets of the Company in 2009 as compared to 24.9% in 2008. Company’s equity accounted to 80.2% of the total assets in 2006 and 86.4% in 2008 is expected to rise to 90.7% in 2009 and to as high as 94.3% in 2012. Increase in equity would be a direct result of continuation of profit add back to the reserves along with the decline in the loan amount taken by the Company.

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Investments Investments have always played a pivotal role in GCEM balance sheet. The Company over the past years has remained heavily invested in the equity markets. In the booming periods, GCEM has gained significantly from their investments while in the downturn they have booked heavy losses as well. In Q1-2009, GCEM reported a net loss of AED11.7mn mainly due to an unrealized loss of AED 63.1mn on held–for–trading investments. However, in the second quarter the Company reported a substantial increase in net profit to AED 82.1mn largely attributable to the recognition of a AED43.6mn unrealized gain on held-for-trading investments following a strong rally in regional stock markets. As of June 30, 2009, the Company reported total investment securities of AED 305.2mn, including AED 266.8mn in held–for–trading and AED38.4mn in available-for-sale investments, together representing 18.1% of total assets.

GCEM Investments


20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

36.0%

38.0%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2006

2007

2008

2009

(F)

2010

(F)

2011

(F)

2012

(F)

(AED

mn)

Investments Total Assets Investments as % of Assets

For 2009, we expect GCEM investments to increase by 2.9% to AED416.7mn as compared to AED404.8mn in 2008. Investments as percentage of assets are expected to rise to 24.5% in 2009 as compared to 22.4% in 2008.

Investment Income Contribution to Net Income


(400.00)

(200.00)

-

200.00

400.00

600.00

800.00

2006 2007 2008 2009 (F) 2010 (F) 2011 (F) 2012 (F)

Investment Income / (Loss) Total Income

The income/loss from investment in securities is the prime driver for fluctuations in the bottom line. With an investment income of AED174.2mn in 2007 (42.1% of PAT), GCEM was able to increase its net income to AED413.8mn. However the same turned into a night mare in 2008 as the investment losses amounted to AED341.9mn which dragged the profit down to merely AED2.1mn. We expect the same trend to continue in 2009 and anticipate GCEM to report investment losses of AED45.4mn in 2009.

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12.6%. • The cost of debt taken is 7.0%. • Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to be 12%. • Based on our future earnings projections and the above assumptions for DCF computations, the DCF value

of GCEM comes out to be AED2.21 per share.

(AED mn) 2009 (F) 2010 (F) 2011 (F) 2012 (F) Free Cash Flow 198.5 287.8 199.8 74.3 Discounted Cash Flow 198.5 257.7 159.6 53.0 Primary Value 668.8 Terminal Value 604.2 Cash 165.8 (As of 9M-09)Investments 469.7 (As of 9M-09)Debt 94.7 (As of 9M-09)Equity Value 1,813.8 No. of Equity Shares Outstanding (mn) 821.1 Per Share Value (AED) 2.21 Source: Global Research.

Gulf Cement - Equity Valuation by DCF

Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital is shown in table below. The table provides estimated fair values for GCEM’s shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives.

Gulf Cement - Sensitivity Analysis

WACC 1.0% 2.0% 3.0% 4.0% 5.0%10.0% 2.25 2.35 2.49 2.66 2.91 11.0% 2.15 2.23 2.33 2.46 2.63 12.0% 2.06 2.13 2.21 2.31 2.44 13.0% 1.99 2.05 2.11 2.19 2.29 14.0% 1.93 1.98 2.03 2.09 2.17



Weight Average Share Value - BUY with an upside of 36.9% To arrive at the peer-set P/E multiple, we have computed the average industry P/E of the four listed cement companies in UAE, based on their current market prices and projected earnings for 2010. The weighted average P/E for the UAE cement industry, thus arrived at, is 9.48x. On the basis of the weighted average P/E for the industry and GCEM’s projected 2010 earnings, the company’s stock valuation comes to AED2.11 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, we have provided a lower weightage of 20% to the peer valuation method, and 80% weightage to DCF. Hence the value of GCEM’s shares derived from the weighted average of the DCF and relative valuation methods is AED2.19 per share. Hence we recommend BUY on the stock at its prevailing price levels.

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Profit & Loss Statement Sales Revenue 663.7 822.8 1,078.1 701.1 689.8 726.9 755.3 Cost of Sales (410.5) (572.9) (737.7) (493.9) (495.7) (513.6) (525.0) Gross Profit 253.3 249.9 340.4 207.2 194.0 213.3 230.3 Gen & Admn Expenses (16.1) (17.8) (22.8) (13.4) (17.8) (19.3) (20.8) Distribution Expenses (0.7) (0.9) (1.2) (0.9) (0.9) (0.9) (1.0) Operating Profit 236.5 231.2 316.4 192.9 175.3 193.1 208.5 Non-Core Income / (Loss) (122.8) 191.3 (305.7) (42.3) 11.2 16.0 21.3 Finance Charges (3.5) (8.7) (8.6) (5.7) (3.4) (2.1) (1.2) Net Profit 110.2 413.8 2.1 144.9 183.1 207.1 228.6

Balance SheetBank & Cash Equivalents 92.5 178.6 175.2 191.4 184.0 107.7 159.1 Trade Receivables 275.3 289.7 341.8 211.3 207.9 258.9 269.0 Other Receivables 36.9 32.2 36.5 28.8 34.0 79.7 82.8 Inventories 85.0 139.8 228.5 250.1 250.0 308.7 315.6 Trading Investment Portfolios 540.8 654.2 347.7 382.5 401.6 421.7 442.7 Total Current Assets 1,030.5 1,294.5 1,129.8 1,064.1 1,077.5 1,176.6 1,269.1

Investments Available for Sale 50.5 55.3 57.2 34.3 36.0 37.8 39.7 Net Fixed Assets 651.5 663.7 623.7 604.5 578.3 546.0 506.7 Total Assets 1,732.4 2,013.4 1,810.6 1,702.8 1,691.8 1,760.4 1,815.6

Short-term Loan 43.0 44.0 41.6 25.0 15.0 9.0 5.4 Trade Payable 67.7 62.3 79.3 47.6 47.6 49.4 50.5 Other Payables 51.0 42.7 30.6 23.8 23.8 24.7 25.2 Total Current Liabilities 161.7 149.0 151.5 96.4 86.4 83.1 81.1

Medium-term Loan 170.1 131.5 83.3 50.0 30.0 18.0 10.8 Employee Indemnity Provision 10.7 11.8 11.8 11.7 11.9 11.9 11.9

Paid-up Capital 620.9 714.0 821.1 821.1 821.1 821.1 821.1 Statutory Reserve 282.8 324.1 324.4 338.8 357.1 377.9 400.7 Voluntary Reserve 84.1 125.4 125.7 140.1 158.4 164.2 164.2 Retained Earnings 398.4 543.2 293.0 244.6 226.9 284.3 325.8 Shareholders Equity 1,389.9 1,721.1 1,564.1 1,544.7 1,563.6 1,647.5 1,711.8 Liabilities & Owners' Equity 1,732.4 2,013.4 1,810.6 1,702.8 1,691.8 1,760.4 1,815.6

Cash Flow StatementCash Flow from Operating Activities 232.0 186.7 222.5 327.8 234.8 104.9 257.1 Cash Flow from Investing Activities (389.9) 32.5 (34.9) (97.4) (48.0) (40.1) (30.7) Cash Flow from Financing Activities 96.0 (133.2) (190.9) (214.2) (194.2) (141.2) (175.0) Net Cash at End 92.5 178.6 175.2 191.4 184.0 107.7 159.1

Ratio AnalysisCurrent Ratio (x) 6.4 8.7 7.5 11.0 12.5 14.2 15.6 Quick Ratio (x) 5.8 7.7 5.9 8.4 9.6 10.4 11.8 Gross Profit Margin 38.2% 30.4% 31.6% 29.6% 28.1% 29.3% 30.5%Operating Margin 35.6% 28.1% 29.3% 27.5% 25.4% 26.6% 27.6%Net Profit Margin 16.6% 50.3% 0.2% 20.7% 26.5% 28.5% 30.3%Return on Average Assets 6.7% 22.1% 0.1% 8.2% 10.8% 12.0% 12.8%Return on Average Equity 8.1% 26.6% 0.1% 9.3% 11.8% 12.9% 13.6%Current Liability / Equity 0.12 0.09 0.10 0.06 0.06 0.05 0.05 Total liabilities / Assets 0.10 0.08 0.09 0.06 0.06 0.05 0.05 Debt / Equity 0.15 0.10 0.08 0.05 0.03 0.02 0.01 EPS (AED) 0.13 0.50 0.00 0.18 0.22 0.25 0.28 Book Value Per Share (AED) 1.69 2.10 1.90 1.88 1.90 2.01 2.08 Asset Per Share (AED) 2.79 2.82 2.21 2.07 2.06 2.14 2.21 Cash Flow per Share (AED) 0.37 0.26 0.27 0.40 0.29 0.13 0.31 Market Price (AED) * 3.06 5.32 2.26 1.60 1.60 1.60 1.60 Market Capitalization (AED mn) 1,899.85 3,798.47 1,855.68 1,313.75 1,313.75 1,313.75 1,313.75 EV/Ton (AED) 808.17 1,518.15 668.66 443.43 435.07 456.68 433.66 Free Cash Flow Yield (%) -1.2% 3.6% 10.7% 21.9% 15.2% 5.7% 17.7%Dividend Yield (%) 0.0% 2.8% 7.5% 12.5% 12.5% 9.4% 12.5%EV/Revenues (x) 3.04 4.61 1.67 1.71 1.70 1.70 1.55 EV/EBITDA (x) 14.99 8.16 26.75 5.71 4.74 4.53 3.98 P/E Ratio (x) 22.80 10.56 875.80 9.07 7.18 6.34 5.75 P/BV Ratio (x) 1.81 2.54 1.19 0.85 0.84 0.80 0.77 Source: Company Reports & Global Research

* Market price for 2010 and subsequent years as per closing prices on ADX on Jan 11, 2010

The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

Disclosure ChecklistCompany Recommendation Bloomberg Ticker Reuters Ticker Price (AED) DisclosureGCEM BUY GCEM UH GCEM . AD 1.60 1, 10ARKAN SELL ARKAN UH ARKAN . AD 2.53 1, 10RAKCC BUY RAKCC UH RAKCC . AD 1.04 1, 10FCI BUY FCEM KK FCEM . KW 2.17 1, 10

Global Research: Equity Ratings DefinitionsGlobal Rating DefinationBUY 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

7. Within the past year , Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 10. Please see special footnote below for other relevant disclosures.

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company.

This material was produced by Global Investment House KSCC (‘Global’), a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment what so ever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

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