ras al khaimah cement - نادي خبراء المال -...

July 16, 2009

nbkcapi ta l .com

Ras Al Khaimah CementAttractive Despite Sector Negativity

** Please refer to page 23 for recommendations and risk ratings.

Ras Al Khaimah Cement Company (RAK Cement) is a 1.1 •million ton per annum (Mtpa) integrated plant. The company specializes in manufacturing ordinary portland cement (OPC) and fly ash cement.

We expect the UAE cement market to be in an over-supply •situation from 2009 onwards. In line with the demand-supply forecasts for the sector going forward, we expect the average cement prices for the company to decline in addition to a drop in quantities sold. In general we forecast total revenue to decrease at a 6-year CAGR of 3.2%.

RAK Cement has embarked on a cost-control exercise to rein •in rising energy costs that have increased from 21.5% of sales in 2005 to 45% of sales in 2008. With the supply shortages of natural gas, the company had to resort to more expensive fuels such as diesel to generate electricity and heavy fuel oil (HFO) to fire the kiln. However, after investing AED 60 million in a coal mill to replace HFO; we expect the kiln firing energy mix to be coal and natural gas in the proportion of 80:20. Accordingly, we expect the EBITDA margin to expand significantly from 23.7% in 2008 to 31.5% in 2009, and then to gradually stabilize in the range of 23%-27% over our forecast horizon.

RAK Cement stands to benefit from its relationship with Hydra •Properties, which acquired a 20% stake in the company in 2007. We feel this strategic tie-up is a win-win scenario for both concerned parties. Hydra Properties’ impressive pipeline of projects means steady business for RAK Cement, worth highlighting in the current difficult times.

We are optimistic about the company’s future dividend •payouts, keeping in mind significant free-cash-flow generating abilities, cash-rich and deleveraged balance sheet status, and no planned capacity additions. On an expected payout of 75% for 2009, the company is currently trading at an attractive dividend yield of 10.9%.

We arrived at a 12-month fair value for RAK Cement of AED •1.44 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison (using forward EV/EBITDA multiples). With an upside of 20%, we are initiating coverage on the company with a “Buy” recommendation.

HighlightsKey Data

Key Ratios

Rebased Performance

Analysts

Wadie KhouryT. +965 2259 5118E. [email protected]

Rajat BagchiT. +965 2259 5115E. [email protected]

* As of July 15, 2009. Sources: Zawya, Reuters, and NBK Capital

Sources: Reuters and NBK Capital

Sources: Company Financials and NBK Capital; a = actual, f = forecast

12-Month Fair Value: AED 1.44

Recommendation: Buy – Risk Level**: 4

Reason for Report: Initiation of Coverage

1Q2009 EBiTdA a 3Q2009 EBiTdA fAED 33.6 million KD 19.5 millionAED 24.4 million

2Q2009 EBiTdA f 4Q2009 EBiTdA fAED 28.5 million AED 22.3 million

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09

RAK Cement MSCI UAE

2008 a 2009 f 2010 f 2011 f 2012 f

EBITDA Margin 23.7% 31.5% 23.6% 23.7% 23.9%

Net Profit Margin 18.6% 24.4% 15.3% 15.6% 16.1%

ROAE 10.5% 10.3% 5.4% 5.7% 6.2%

P/E 7.3 6.9 12.9 12.3 11.1

EV / EBITDA 5.2 4.8 7.5 7.3 6.8

Dividend Payout Ratio 66.5% 75% 75% 75% 75%

Dividend Yield 9.2% 10.9% 5.8% 6.1% 6.7%

Closing price* Avg. value Traded per day

AED 1.20 AED 9.6 million

52-Week High market Cap.

AED 3.71 AED 580.8 million

52-Week low Shares outstanding

AED 0.77 484 million

Reuters Bloomberg

RKCC.AD RAKCC.DH

Closely Held : 45.03% Public: 54.97%

ownership Structure

http://www.nbkcapital.com/BR/RESEARCH/MER/Pages/default.aspx

mailto:[email protected]


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GCC Cement Sector – RAK Cement Co.July 16, 2009

CoNtENtS

ExECuTivE SummARy 3

vAluATion 4

DiscounteD cash Flow Valuation 4

Peer GrouP comParison 6

risk anD challenGes 7

BullS vS. BEARS 8

Bull story 8

Bear story 8

uAE CEmEnT SECToR 9

historical trenD in the uae cement sector 10

uae cement sector – what’s in store 11

CompAny BACKGRound And BuSinESS modEl diSCuSSion 12

FinAnCiAl ovERviEW And FoRECASTS 13

total reVenue 13

ProDuction caPacity anD caPacity utilization 13

clinker anD cement ProDuction 14

excess suPPly to Put Pressure on cement Prices GoinG ForwarD 14

Quantity oF cement solD anD reVenue 15

enerGy cost 16

eBitDa anD eBitDa marGin 17

trenD in net ProFit anD net ProFit marGin 18

caPital exPenDiture anD DePreciation 19

trenD in return ratios 19

DeleVeraGeD Balance sheet 19

hiGh Free cash Flows are likely to leaD to attractiVe DiViDenD Payouts 20

1Q2009 results – stronG cement Prices leaD to eBitDa marGin exPansion 20

FinAnCiAl STATEmEnTS 22


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ExECutIVE SuMMARy

The construction boom over the past few years in the UAE resulted in cement demand increasing from 6.9 Mtpa in 2003 to 20.5 Mtpa in 2008, growing at a CAGR of 24%. This growth was higher than any other comparable market in the GCC. Cement production increased at a 5-year CAGR of 18.4% till 2008. The UAE is the largest cement consumer (on a per capita basis) in the world, outpacing the average global consumption by more than eight times. Cement consumption per capita reached 4,350 kgs in 2008, more than double of any other GCC nation. However, due to the recent global financial crisis, some of the ongoing projects in the UAE were delayed while many others were cancelled at the planning stage. Cement demand is expected to decrease, the signs of which are visible in cement prices retracting from the recent highs of AED 340–360 per ton in 2008 to its current level of AED 280 per ton. As per Cemtech, cement demand in the UAE is expected to dip from 20.5 Mtpa in 2008, to 18 Mtpa in 2009, while production capacities are expected to be on the rise. We expect an excess supply scenario in the UAE cement sector in the medium term from 2009 onwards. This could be exacerbated as there are no official restrictions on cement imports in the UAE, which would allow UAE cement distributors to easily access cheap imports. In line with the demand-supply forecasts for the sector going forward, we expect the average cement prices for the company to decline by 13.4% year-on-year (y-o-y), to AED 295 per ton in 2009 and to further decline by an additional 15% y-o-y, to AED 250.7 per ton in 2010.

Apart from the dip in cement prices, we forecast a 14.8% decrease in quantity of cement sold by RAK Cement resulting in a 20.1% decline in the company’s revenue to AED 340.3 million in 2009 compared to 2008. In general we forecast total revenue to decrease at a 6-year CAGR of 3.2% from AED 425.9 million in 2008 to AED 351 million in 2014.

The company, plagued with energy problems, invested in an AED 60 million coal mill, which became fully operational in 2H2009, and replaced HFO with coal to fire its kiln. This move would resolve the company’s energy problem due to shortages of electricity and natural gas in the UAE which were met by using more expensive fuels like diesel to generate electricity and heavy fuel oil (HFO) to fire the kiln. We expect the kiln firing energy mix to be coal and natural gas in the proportion of 80:20, which should bring the energy cost down to 32.9% of revenue by 2009, a significant drop from 45% of revenue in 2008. Accordingly, we expect the EBITDA margin to expand significantly from 23.7% in 2008 to 31.5% in 2009, and then to gradually stabilize in the range of 23%-27% over our forecast horizon.

We feel the strategic tie-up between Hydra Properties and RAK Cement to be a win-win scenario for both the concerned parties. Hydra Properties’ impressive pipeline of ongoing and future projects in the UAE means steady business for RAK Cement, worth highlighting especially in the context of the expected supply overhang in the sector going forward.

We are optimistic about the company’s future dividend payouts keeping in mind no planned capacity additions, significant free cash flow generating abilities and cash rich and deleveraged balance sheet status. On an expected payout of 75% for 2009, the company is currently trading at an attractive dividend yield of 10.9%.

We arrived at a 12-month fair value for RAK Cement of AED 1.44 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison (using forward EV/EBITDA multiples). With an upside of 20%, we are initiating coverage on the company with a “Buy” recommendation. We have assigned RAK Cement a risk rating of 4 (on a scale of 1 to 5). This follows our subjective criteria for risk, such as risks associated to developments in the sector.


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VALuAtIoN

The purpose of this valuation exercise is to arrive at a fair-value estimate of the share price through the use of fundamental analysis that should prevail for RAK Cement over the next 12 months. This does not represent a guarantee that this value is achievable within this time frame, as a wide range of variables and market dynamics affect the market price of an asset.

Each investor must use his or her favorite mix of fundamental research, technical analysis, and market intelligence to arrive at an investment decision that matches his or her objectives and risk tolerance. We arrived at a 12-month fair value for RAK Cement of AED 1.44 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison based on forward EV/EBITDA multiples. We specified a weight for each method, as shown in Figure 1. A greater weight is assigned to DCF, as this method examines the fundamentals of the company to determine its future cash-generating ability. The 12-month fair value target of AED 1.44 is 20% higher than the last closing price on July 15, 2009, hence, our “Buy” recommendation.

Our DCF valuation (Figure 2) is based on forecasted financial results through 2014. The DCF valuation is a function of the following major variables, which have been estimated using our models:

Future net operating profit less adjusted taxes (NOPLAT), which is driven primarily by •expectations of revenues and operating expenses

Future changes in working capital •

Future net expenditures on fixed assets •

The weighted average cost of capital (WACC), which is a weighted average of our estimated •cost of equity and the after-tax cost of debt

The long-term expected growth rate in NOPLAT and the expected rate of return on net new •invested capital (RONIC)

From the forecasted financial results, we extracted the free cash flows that were used in our valuation. We discounted those cash flows to a point in time 12 months into the future, to obtain an estimate of the value of the company’s operations. After subtracting net debt and minority interest, and adding the value of non-operating assets, we arrived at a total equity value of AED 730.7 million.

To estimate the value of RAK Cement’s operations, we incorporated a varying WACC into our model. Our selection of a cost of equity of 12.5% is based mainly on interest rate levels and the operating environment.

Our 12-month fair value for

RAK Cement is AED 1.44,

20% higher than its current

price

Source: NBK Capital

Weighted Average Fair Value per ShareFigure 1

DiscounteD cash Flow Valuation

valuation method value (AEd) Weight

Discounted cash flow 1.51 80%

Peer comparison 1.15 20%

Weighted average fair value 1.44 100%


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The long-term investment portfolio of AED 30.61 million is composed of unquoted investments at cost. RAK Cement has invested AED 15.3 million and AED 10.26 million in an airline company and a financing company, respectively. The remaining AED 5.05 million is invested in a petroleum company.

Using the DCF valuation

method, we arrived at a

fair value per share of AED

1.51

* Except per-share value. Source: NBK Capital

DCF ValuationFigure 2

Sensitivity Analysis

We performed a sensitivity analysis (Figure 3) on two important inputs for our DCF valuation model: the cost of equity and the perpetual growth rate used in computing the terminal value.

* Variations in the cost of equity result in variations in WACC. Source: NBK Capital

DCF SensitivityFigure 3

Figures in AEd Thousands*Fiscal year Ends december 2009 2010 2011 2012 2013 2014

net operating profit After Tax 84,611 45,135 47,591 52,499 60,508 70,466

Add: Depreciation and Amortization 24,143 24,324 24,519 24,715 24,913 25,112

Gross Cash Flow 108,754 69,460 72,110 77,214 85,421 95,578

(Increase)/ Decrease in Working Capital (13,077) 18,412 9,410 2,115 (6,651) (13,713)

(Incr.)/ Decrease in Operating Fixed Assets (5,086) (5,487) (5,897) (5,944) (5,992) (6,039)

Free Cash Flow from operations 90,592 82,385 75,623 73,385 72,778 75,825

Terminal value 575,189

value of operations in 12 months 630,497

Add: Excess Cash 68,497

Add: Value of Long-Term Investments 30,613

Add: Value of Other Long-Term Assets 6,163

Less:Total Debt (5,000)

Less: Minority Interest -

value of Equity in 12 months 730,770

per Share value in AEd 1.51

Forecast

2.00% 2.50% 3.00% 3.50% 4.00%

11.50% 1.623 1.629 1.636 1.643 1.650

12.00% 1.562 1.566 1.570 1.573 1.577

12.50% 1.506 1.508 1.510 1.511 1.512

13.00% 1.456 1.456 1.456 1.455 1.454

13.50% 1.410 1.409 1.407 1.405 1.402

perpetual Growth Rate

Cos

t of

Equ

ity*


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Peer GrouP comParison

We compared RAK Cement with publicly traded regional cement players that share similar characteristics. We obtained the consensus forward EBITDA for each of the companies for 2010. The peers we chose are all Gulf Cooperation Council (GCC) players from Saudi Arabia, Oman, and the UAE. We did not include cement companies from other regional countries due to a lack of information on consensus forward estimates for EBITDA in 2010. This limited our peer basket to 11 companies. For the purpose of valuation, we obtained the current EV (in this case from 1Q2009 year-end results) and consensus 2010 EBITDA for each company to arrive at the forward EV/EBITDA multiple. We calculated the enterprise value for RAK Cement only on the basis of a simple average (excluding outliers) of the forward EV/EBITDA multiple for the peer basket.

Using the simple average (excluding outliers) of forward EV/EBITDA multiples of the peer basket, we estimated the value of a RAK Cement share to be AED 1.15.

Using the simple average

(excluding outliers)

of forward EV/EBITDA

multiple for the sample,

we arrived at a fair value

of AED 1.15 per share for

RAK Cement

*Prices as of last close. Sources: Respective company financials, Reuters Knowledge, and NBK Capital

Forward EV/2010 EBItDA Multiples ComparisonFigure 4

Although trailing EV per ton was not accounted for in our final computation of fair value, the significance of that multiple was too important to forego. We did not consider trailing EV per ton in our final computation of fair value because of a lack of information on the installed cement capacity of the peer companies directly from the respective companies or other authentic sources. However, we compared RAK Cement to its peers on a trailing EV per ton basis to get an idea of how the company compares to its regional counterparts.

The simple average (excluding outliers) for EV per ton for our sample was USD 227 per ton. RAK Cement currently trades at USD 142 per ton, a significant discount to the peer group simple average (excluding outliers). Most Saudi cement companies trade at a significantly higher EV per ton; this premium is justified due to cost efficiencies (both for raw materials and energy). On the other hand, most UAE cement companies get penalized due to high raw material and energy costs.

FiGure 4

market Cap.* Ev 2010

(USD '000) (USD '000) (USD '000)

Saudi Cement KSA 1,536,992 1,856,880 350,444 5.3

Yamama Cement KSA 1,450,981 1,471,719 221,510 6.6

Yanbu Cement KSA 1,330,166 1,309,231 192,053 6.8

Arabian Cement KSA 1,045,464 1,300,410 256,832 5.1

Eastern Cement KSA 993,137 920,163 106,083 8.7

Raysut Cement Oman 720,298 681,078 89,605 7.6

Gulf Cement Company UAE 536,741 507,022 86,859 5.8

Oman Cement Oman 484,587 453,463 57,332 7.9

Tabuk Cement KSA 472,859 368,770 38,944 9.5

Union Cement Company UAE 369,879 359,458 96,201 3.7

Fujairah Cement UAE 283,996 395,124 75,446 5.2

Simple Average 6.6

Simple Average (excluding outliers) 6.6

Weighted Average 6.6

Company name Country

market data EBiTdA EV / 2010 EBITDA


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According to Holtec Consulting, when equipment is procured from European suppliers, the required investment for setting up a 1 Mtpa integrated cement plant in the region is around USD 160 per ton. However, when only critical equipment is sourced from European suppliers and the rest is sourced from Chinese suppliers, the required investment is likely to be around USD 130 per ton. Taking this into consideration, we feel RAK Cement is attractively valued on EV per ton compared to both the peer basket and the initial investment for a greenfield cement plant. However, RAK Cement’s significantly lower EBITDA margin justifies to an extent the company’s relatively lower EV per ton compared to the company’s peer basket.

RAK Cement currently

trades at a significant

discount on trailing EV per

ton of USD 142 compared

to peers’ USD 227 per ton

*Prices as of last close. Sources: Company Financials, Reuters Knowledge, and NBK Capital

trailing EV per ton Multiples Figure 5

risk anD challenGes

We expect excess supply in the UAE cement sector from 2009 onwards, leading to a •softening of cement prices. The situation can further worsen due to cheap import threats from neighboring countries such as Saudi Arabia, Pakistan, and India. Saudi Arabia, the largest cement market in the GCC in terms of both installed cement capacity and consumption, is expected to have a significant excess supply of cement from 2009 onwards as well. The ongoing export ban in Saudi Arabia comes as a temporary respite, but we feel the situation is likely to change in the near term. Subsequent lifting of the export ban in Saudi Arabia is likely to have serious repercussions for the regional cement sector, let alone the UAE. With no official restrictions on cement imports in the UAE, the local cement market is exposed to cheap imports from other cement-exporting countries as they can sell directly to independent UAE cement distributors, which is likely to put UAE cement prices under pressure.

The entrance of any new player(s) in the UAE cement industry is likely to further intensify •competition, thus aggravating the pressure on cement prices.

Similar to any other manufacturing company, RAK Cement is vulnerable to technical •breakdowns of its plant and machinery. Any unexpected shutdown of either the clinker or cement production facility can adversely impact the company’s operations.

The global economic slowdown due to the subprime crisis and the subsequent drop in oil •prices has significantly dampened growth prospects in regional economies. This has already impacted cement demand in the UAE, and we expect the trend to continue in the medium term, which is likely to have a negative impact on the company.

Ev / Ton

market Cap.* Ev 2010

('000 Tons) (USD '000) (USD '000) (%) (USD)

Saudi Cement KSA 11,500 1,536,992 1,856,880 55.1% 161

Yamama Cement KSA 6,370 1,450,981 1,471,719 70.7% 231

Yanbu Cement KSA 4,530 1,330,166 1,309,231 60.8% 289

Arabian Cement KSA 5,000 1,045,464 1,300,410 62.1% 260

Eastern Cement KSA 3,500 993,137 920,163 52.1% 263

Raysut Cement Oman 2,700 720,298 681,078 51.6% 252

Gulf Cement Company UAE 2,700 536,741 507,022 34.8% 188

Oman Cement Oman 2,160 484,587 453,463 32.1% 210

Tabuk Cement KSA 1,300 472,859 368,770 65.4% 284

Union Cement Company UAE 4,200 369,879 359,458 31.2% 86

Fujairah Cement UAE 2,100 283,996 395,124 28.6% 188

Simple Average 49.5% 219

Simple Average (excluding outliers) 49.5% 227

RAK Cement uAE 1,100 158,192 156,014 23.6% 142

Company name Country

market dataCapacity EBiTdA margin


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Bull story

RAK Cement stands to benefit from its relationship with Hydra Properties, which acquired •a 20% stake in the company in 2007. We feel this strategic tie-up is a win-win scenario for both concerned parties. Hydra Properties, a noted UAE developer, has several ongoing projects and has massive construction projects planned in the UAE. Hydra Properties hopes that having a strategic investment in RAK Cement will enable the company to procure cement on a priority basis in addition to diversifying Hydra Properties investments within sectors that are related to real estate. From RAK Cement’s standpoint, the importance of this strategic tie-up is significant, especially in the context of the expected supply overhang in the sector as this tie-up means steady business for the company in market downturns.

RAK Cement has entered into a joint venture with Royal Group of Abu Dhabi, whereby RAK •Cement acquired a 20% stake in Reem Ready Mix. Reem Ready Mix intends to start concrete batch plants on Al Reem Island to supply ready-mix concrete to construction companies in Abu Dhabi. The deal involved a total cash consideration of AED 40 million and was completed in 1Q2009. Taking guidance from the management discussion, we expect the share of profit from this stake to be in the range of AED 2.5–3 million per annum going forward.

RAK Cement has embarked on a cost-control exercise to rein in rising energy costs that have •increased from 21.5% of sales in 2005 to 45% of sales in 2008. Energy is by far the largest cost component for RAK Cement (3-year average of 58.4% of total cost of production). With the supply shortages of electricity and natural gas in the UAE, RAK Cement had to resort to more expensive fuels such as diesel to generate electricity and heavy fuel oil (HFO) to fire the company’s kiln. However, management has already invested AED 60 million in a coal mill so that HFO can be replaced with coal to fire the kiln. The coal mill became fully operational in 2H2009 and we expect the kiln-firing energy mix to be coal and natural gas in the proportion of 80:20, which should bring the energy costs down to 32.9% of sales by 2009.

We are optimistic about the company’s future dividend payouts, keeping in mind significant •free-cash-flow-generating abilities, cash-rich and deleveraged balance sheet status, and no planned capacity additions. On an expected payout of 75% for 2009, the company is currently trading at an attractive dividend yield of 10.9%. Our free-cash-flow analysis suggests there is still significant upside potential for the dividend yield from the current levels.

RAK Cement, unlike many of its competitors, is refraining from increasing its production •capacity. Given the concern that we hold with respect to new capacities being commissioned, we believe this to be a prudent decision. During periods of over-supply in the sector, capacity utilization rates of plants with larger capacities are likely to be more severely affected.

Bear story

Cement is a cyclical industry. Due to robust construction activity in the past few years, the •UAE cement industry witnessed heightened cement consumption, leading to a record rise in cement prices. The excess demand prompted several existing and new players to announce major expansion plans of their existing capacities or installing new capacities. We expect that the market will be in an over-supply situation from 2009 onwards, thereby weakening cement prices and hurting the profitability of cement companies. We expect the average cement prices for RAK Cement to decline by 13.4% y-o-y, to AED 295 per ton in 2009 and to further decline by an additional 15% y-o-y, to AED 250.7 per ton in 2010.

The UAE cement sector is exposed to cheap import threats from neighboring countries such •as Saudi Arabia. Imports from Pakistan and India should not be ruled out, either. With no official restrictions on cement imports in the UAE, cement distributors can easily access cheap imports, which is likely to put UAE cement prices under pressure.

BuLLS VS. BEARS


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In the past decade, the UAE has emerged as the face of the region’s economic boom. In 2003, construction activity took off faster than anyone expected and significantly boosted cement demand. The UAE is the largest cement consumer (on a per-capita basis) in the world, outpacing the average global consumption by more than eight times. Increased cement demand resulted in cement capacity almost tripling to 31.3 Mtpa as of the end of 2008 compared to 11.2 Mtpa in 2003. The UAE is the second-largest cement market in the GCC basket, after Saudi Arabia, in terms of both installed cement capacity and consumption. We have tried to analyze the industry by applying Michael Porter’s Five Forces Model. The concept is used to derive five forces that determine the competitive intensity, and therefore the attractiveness, of a market.

Barriers to Entry – HIGH

High initial capital requirements – Initial outlay for an integrated 1 Mtpa greenfield cement •plant typically ranges from USD 130 per ton to USD 160 per ton, which equates to an initial capital outlay of USD 130–160 million. A high initial investment coupled with a commissioning time period of 30–36 months for a greenfield project results in very high switching costs for new players.

Competitive Market – There are around 17 cement producers (8 of which are listed) in the UAE •with an installed cement and clinker capacity of 31.3 Mtpa and 18.6 Mtpa, respectively, as of 2008 year-end. The installed cement capacity was well above the cement demand of 20.5 Mtpa in 2008. Furthermore, two additional companies are expected to be up and running by mid-2009, with more under way in 2010 and 2011, adding to the excess supply.

Bargaining Power of Suppliers – HIGH

The UAE government is the lone supplier of limestone (80% of the raw material for cement) •for cement companies. However, for fuel sources such as natural gas and diesel there are other suppliers in addition to the government. Our understanding is that most UAE cement companies procure natural gas and other sources of energy from the government at market prices while a few others have independent long-term contracts with private suppliers. Hence, UAE cement companies are not left with many alternatives when it comes to procuring raw material and energy. UAE cement players do not have the luxury of government subsidies of energy costs as do Saudi Arabian and Omani manufacturers. Energy costs typically account for 50% to 55% of the total cost of cement production in the UAE. Due to the lack of energy subsidies by the government, cement companies resort to procuring natural gas and diesel at market prices. The UAE government has been working on allocating energy to cement companies through the national electricity grid, the cheapest form of energy available. None of the cement companies have yet been connected to the grid, and as a result, many cement companies have invested in coal mills.

Bargaining Power of Buyers – HIGH

We feel the UAE cement sector, a perfect competition, will eventually mature as a price- •sensitive buyers’ market. Hence, UAE cement players are likely to enjoy very little bargaining power in the medium- to long-term time frame.

With no official restrictions on cement imports in the UAE, cement distributors can easily •access cheap imports, thus passing more bargaining power to buyers.

Threat of Substitute Products – VERY LOW

Cement does not have any substitutes. It serves as a binding agent and is a necessity in •almost all infrastructure and civil projects. Ready-mix concrete, which is extensively used in developed construction markets globally, uses cement as a raw material.

uAE CEMENt SECtoR



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Competitive Rivalry within the Industry – HIGH

All UAE cement players have the ability to use any operational advantages (i.e., cost-cutting •initiatives or better marketing strategies) desired to gain local market share, which could lead to a price war.

With more efficient cement producers in the region, such as Saudi Arabian cement players, •excess cement produced in these countries could be dumped in the UAE at cheaper prices. This could further aggravate the competition, leading to margin contraction.

historical trenD in the uae cement sector

The construction boom over the past few years took the UAE cement sector by storm. Cement demand jumped from 6.9 Mtpa in 2003 to 20.5 Mtpa in 2008, growing at a CAGR of 24%, higher than any other comparable market in the GCC. Although local cement grinding capacity was able to keep pace with the increased demand, actual cement production lagged. Cement production increased from 7.3 Mtpa in 2003 to 17 Mtpa in 2008, growing at a CAGR of 18.4%. Part of the problem associated with the lag in the growth of cement production can be attributed to the lack of investment in clinker facilities. As a result, demand had to be met through importing the required clinker and cement.

The UAE is the largest cement consumer (on a per-capita basis) in the world, outpacing the average global consumption by more than eight times. Cement consumption per capita reached 4,350 kg, more than double any other GCC nation. Although the nominal GDP per capita is relatively high on a global scale, this does not entirely justify these high levels of per-capita consumption of cement. We are wary regarding the sustainability of these levels of cement consumption.

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The UAE per-capita

consumption of cement

stands out as the highest in

the world

* Denotes average for highlighted cells. Sources: IMF World Economic Outlook, Bloomberg, Global Cement Report (2007), CIA World Factbook, Central Bank Data of respective countries, and NBK Capital

Global Comparisons of Per-capita Consumption of CementFigure 6

Following the global financial crisis, it seems the infrastructure development wave has suddenly hit a roadblock. Some of the ongoing projects were delayed while many others were cancelled at the planning stage. Demand for cement is expected to follow suit, the signs of which are visible in cement prices retracting from the highs of AED 340–360 per ton in 2008 to the current level of AED 280 per ton. Have prices seen the bottom, or will the trend continue?

With excess cement grinding capacity, and additional cement capacities coming into play, local cement production is expected to outpace local demand for the first time since 2003. Per Cemtech, cement demand in the UAE is expected to dip from 20.5 Mtpa in 2008 to 18.0 Mtpa in 2009, while clinker and cement grinding capacities are expected to increase. We expect an excess supply scenario in the UAE cement sector in the medium term.

We expect that the market will be in an over-supply situation from 2009 onwards. With no official restrictions on cement imports in the UAE, cement distributors can easily access cheap imports, which is likely to further worsen the situation.

uae cement sector – what’s in store

We expect that the UAE

cement market will be in an

over-supply situation from

2009 onwards

Sources: Cemtech and NBK Capital

trend in Demand and Supply of Cement in the uAEFigure 7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Clinker Capacity (Mtpa) 7.9 8.1 8.5 8.9 16.1 18.6 23.3 27 28.8 28.8 28.8

Cement Capacity (Mtpa) 11.2 11.6 14.6 15.6 27.4 31.3 32.1 36.6 38.6 38.6 38.6

Cement Demand (Mtpa) 6.9 10.2 12.7 14.0 17.2 20.5 18.0 18.0 20.7 23.9 26.7

Gdp 2008 population Cement Consumption Gdp* Cement Consumption*

(USD million) (million) million tons 2008 per capita (USD) per capita (kgs)

KSA 490,133 24.9 37.2 19,686 1,496

UAE 253,036 4.7 20.5 53,696 4,350

Kuwait 148,685 3.4 5.0 43,222 1,453

Qatar 102,303 1.4 2.4 70,630 1,657

Oman 50,254 2.9 4.4 17,448 1,528

Bahrain 21,995 1.1 1.7 20,160 1,522

GCC 1,066,406 38 71 27,721 1,851

GCC (ex. uAE) 813,371 34 51 24,095 1,502

Brazil 1,664,662 191.9 48.4 8,676 252

Russia 1,778,693 141.4 61.2 12,579 432

India 1,237,445 1,186.2 187.0 1,043 158

China 4,222,423 1,327.7 1,438.9 3,180 1,084

BRiC 8,903,223 2,847 1,735 3,127 610

United States 14,264,600 304.2 123.3 46,888 405

Japan 5,611,525 127.7 52.5 43,960 412

Germany 3,410,996 82.1 26.0 41,531 317

France 2,978,120 63.9 24.5 46,579 383

Italy 2,399,290 59.3 44.3 40,450 747

United Kingdom 2,092,380 61.0 15.3 34,291 251

Canada 1,315,311 33.5 10.0 39,258 298

G7 32,072,222 732 296 43,827 404

World 54,347,038 6,678 2,934,000 8,139 439

Countries




RAK Cement, a 1.1 Mtpa integrated cement player, was incorporated in the emirate of Ras Al Khaimah in 1995 to benefit from the ample limestone available in the region for the production of Portland cement. RAK Cement started commercial operations in 2000.

RAK Cement stands to benefit from its relationship with Hydra Properties, which acquired a 20% stake in the company in 2007. We feel this strategic tie-up is a win-win scenario for both concerned parties. Hydra Properties has several ongoing projects and has massive construction projects planned on the Al Reem Island. From RAK Cement’s standpoint, the importance of this strategic tie-up is significant, especially in the context of the expected supply overhang in the sector as it means steady business for the company in market downturns.

RAK Cement specializes in the manufacture of ordinary Portland cement (OPC) and fly ash cement (sold under the brand Powercrete). Fly ash cement is a new product that the company has started producing very recently (first consignment sold in February 2008) and is sold at a premium over OPC. Fly ash cement has special strength and other properties that make this product ideal for use in the foundation of buildings/structures. RAK Cement is presently selling around 20,000 tons per month of fly ash cement in the domestic market. Fly ash cement is produced from a blending operation in which RAK Cement mixes OPC with fly ash in the ratio of 70:30.

Currently, in addition to RAK Cement, there are four other integrated cement producers in Ras Al Khaimah—Gulf Cement, Union Cement, RAK White Cement, and Pioneer Cement. Pioneer started production most recently with a capacity of 1 Mtpa. STAR Cement, an associate of ETA-ASCON, is also planning to establish a greenfield cement plant with a capacity of 5,500 tons per day in Ras Al Khaimah.

CoMPANy BACKGRouND AND BuSINESS MoDEL DISCuSSIoN




In this section, we discuss the historical and future trends of total revenue for RAK Cement. To do so, we analyzed the trend in clinker and cement capacity utilization, clinker-to-cement ratio, clinker and cement production, cement prices, quantity of cement sold, and finally total revenue for our explicit forecast period (2009–2014).

FINANCIAL oVERVIEW AND FoRECAStS

total reVenue

ProDuction caPacity anD caPacity utilization

Clinker capacity utilization at RAK Cement was affected in 2007 as the company operated at only 97%, in comparison to 109% in 2006. This was due to supply shortages of natural gas and the use of alternate expensive fuels significantly increased energy costs, thereby forcing management to run the plant at lower-than-optimum capacity. However, the cement mill was run at a utilization rate of 111% in 2007 to meet the market demand. Consequently, the company had to purchase 133,552 tons of clinker. Though the company purchased around 30,000 tons of clinker in 1Q2009, we feel there will be no need for any additional clinker purchases for the rest of the forecast period. The coal mill, expected to be commissioned at the beginning of 2H2009 (management indicated that this plan is on track), will solve the energy problems for the company to a great extent and will also be sufficient to provide energy for firing the clinker kiln.

Going forward, we have assumed that the clinker capacity utilization in 2009 would be 92.5%, as we believe that the overall slowdown in the cement demand in the UAE will force the company to slash both clinker and cement production.

We expect the clinker-to-cement production ratio to be at 1:1.12 (last 5-year average) for the forecast period. The above-discussed trend in the clinker-to-cement production ratio will result in a cement capacity utilization level of 96.7% in 2009, and will finally lead to full capacity utilization by 2013, as shown in Figure 8. We therefore expect a gradual increase in both clinker and cement capacity utilization going forward.

We predict a steady

increase in utilization rates

for both clinker and cement

capacities going forward

Sources: Company Financials and NBK Capital

Clinker and Cement Capacity utilizationFigure 8

109%

97%101%

93%95% 95%

98% 99% 100%

112% 111% 114%

97% 97% 98% 99% 100% 100%

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Clinker Capacity Utilization (%) Cement Capacity Utilization (%)




We forecast clinker production to marginally decrease at a 6-year (2008–2014) CAGR of 0.2% to reach 1 Mtpa (full capacity) by 2014. As for cement production, we expect it to decrease at a 6-year CAGR of 2.2% to 1.1 Mtpa (full capacity) by 2014.

clinker anD cement ProDuction

We expect clinker and

cement production to

decrease at a 6-year

CAGR of 0.2% and 2.2%,

respectively, for the

forecast period


Clinker and Cement Production Figure 9

In the past five years, RAK Cement has witnessed an upward trend in domestic cement prices, which rose appreciably from AED 232.3 per ton in 2004 to AED 340.4 per ton in 2008. This can be attributed to the spiraling demand for cement in the UAE. In May 2008, the UAE Ministry of Economy and the Cement Producers Group signed a memorandum of understanding according to which a price cap of AED 340 per ton was imposed on bulk cement prices.

We anticipate domestic cement prices in 2009 to decline by 13.4% to AED 294.9 per ton compared to AED 340.4 per ton in 2008. Though domestic cement prices were extremely strong in 1Q2009 with the company selling cement at an average price of AED 349.7 per ton, we estimate domestic prices have already declined from 1Q2009 levels to AED 300–305 per ton in 2Q2009. We expect the slide in domestic cement prices to further continue to AED 265 per ton in 2H2009. The excess in the average domestic price over the government-imposed price cap in 1Q2009 and 2008 was due to the company’s product portfolio, which is composed of cement types other than OPC.

From 2010 onwards, we expect domestic prices to continue to weaken by 15% to AED 250.7 per ton, due to new supply concerns. Most of the UAE cement producers have either expanded recently or plan to do so in the next 1–3 years. New players are setting up greenfield cement plants as well. It is unlikely that all projects announced so far will actually materialize. But there is significant industry concern that the new capacities will lead to declines in operating rates, cement prices, and eventually impact the profitability of the cement companies.

1.09

0.971.01

0.930.95 0.95

0.98 0.99 1.00

1.23 1.221.25

1.06 1.06 1.08 1.09 1.10 1.10

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Clinker Production (Mtpa) Cement Production (Mtpa)

excess suPPly to Put Pressure on cement Prices GoinG ForwarD




RAK Cement exports a very small percentage of its cement (less than 1% of total quantity of cement sold in 2008), and we believe from our discussion with the management that the company will continue to focus on the domestic market for generating sales. We have assumed that export prices would be higher than domestic cement prices by AED 5 per ton.

On a conservative basis, for 2009, we have assumed that the company would sell its fly ash cement at AED 314.9 per ton, an excess of AED 20 per ton over OPC. We have gradually reduced the additional margin to AED 10 per ton by 2011. We believe that, since production of fly ash cement requires a very low capital investment and fly ash cement is manufactured through a simple blending operation, other manufacturers can very easily produce the same and hence erode the excess margins over time.

Domestic cement prices

in the UAE will be under

pressure in the medium

term due to excess supply


trend in Cement Prices Going ForwardFigure 10

Since RAK Cement is presently not contemplating any increase in capacity, the company’s revenue will be mostly driven by changes in cement prices and the revenues derived from the fly ash cement that the company introduced in 2008.

We expect the total quantity of cement sold to decrease by 14.8% to 1.06 Mtpa in 2009 compared to 1.25 Mtpa in 2008 mainly due to the overall slowdown in the UAE. Going forward, we forecast the quantity of cement sold will decrease at a 6-year (2008–2014) CAGR of 2.1% to reach 1.1 Mtpa by 2014. We have assumed that the quantity of fly ash cement sold would continue to stay at 240,000 tons per annum over the entire forecast period. Hence, total revenue will decrease by 20.1% to AED 340.4 million in 2009 compared to 2008 and further slip by 15.1% in 2010. In general, we forecast total revenue to decrease at a 6-year CAGR of 3.2% from AED 425.9 million in 2008 to AED 351 million in 2014.

We expect fly ash cement will contribute AED 26 million to total revenue in 2009, thus offsetting the decrease in total revenue to some extent compared to 2008. We expect revenue from fly ash cement to contribute an average of 21.5% of the total revenue for the forecast period.

Quantity oF cement solD anD reVenue

220

240

260

280

300

320

340

360

380

400

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Domestic Prices (AED/ton) Export Prices (AED/ton)




The cost of energy depends on the type of fuel the cement producer consumes. Energy costs for cement companies in the UAE are higher since they rely on heavy fuel oil (HFO) to fire their kilns as opposed to only natural gas in neighboring countries. Energy costs also rise when companies use diesel to produce electricity from their own generators as opposed to purchasing electricity from the national grid. Energy costs vary depending on the fuel efficiency of the plant—that is, some plants employ better technology and thereby consume less fuel. UAE cement players do not have the luxury of government subsidies of energy costs as do Saudi Arabian and Omani players. Energy costs typically account for 50% to 55% of the total cost of production for the UAE cement players and is the largest cost component. Due to the lack of government energy subsidies, cement companies resort to procuring natural gas and diesel at market prices.

RAK Cement depended on natural gas for firing the company’s kiln and for captive electricity production (grinding and other uses). However, in 2005, shortages of natural gas in the UAE forced the company to consume diesel to produce electricity. In 2007, RAK Cement also started consuming HFO in addition to natural gas for the firing operation and continued with the same energy sources in 2008 as well.

We estimate that the firing costs of producing clinker by burning coal will be the lowest at AED 60 per ton for RAK Cement, assuming the company buys coal (South African variant) at AED 460 per ton (USD 125 per ton). The firing costs from burning natural gas are estimated to be higher at AED 72 per ton of clinker, if the company procures natural gas at an average price of AED 22.5 per MmBtu. The firing costs from burning HFO are estimated to be highest for the company, at AED 95 per ton of clinker produced, assuming HFO costs AED 1,700–1800 per ton.

Since natural gas is in short supply in the UAE, RAK Cement has set up a coal grinding mill so that the company can start using coal for firing operations. The company is planning to procure the South African variant of coal at USD 125 per ton. The coal mill, with an initial investment of AED 60 million, is expected to be fully operational from 2H2009. Using coal for the firing operation will allow the company to divert some natural gas from the firing operation

Revenue to decline due to a

decrease in cement prices

and quantity of cement sold

in 2009


trends in total RevenueFigure 11

325.2335.0

426.0

340.4

289.1297.9

316.2334.3

351.0

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Total Revenues (AED Million)

enerGy cost




to electricity generation. This will enable RAK Cement to reduce its energy cost, as the company will then consume less of the comparatively more expensive diesel for firing and electricity generation purposes. Consequently, we assume that 80% of RAK Cement’s requirement of energy for the firing operation will be met from burning coal. The rest will be from natural gas. We expect the coal to natural gas mix of 80:20 to continue for the entire forecast period. Once this happens, the company will be able to produce more electricity from natural gas, thereby displacing diesel and reducing costs.

Furthermore, RAK Cement is trying to get connected to the UAE’s national electricity grid. Although the company has invested AED 17 million in setting up the required infrastructure to get the electricity from the grid, RAK Cement has yet to get the connection from the grid. Though management expects that the company will be able to get the connection in the near term, we have conservatively ignored this assumption in our entire forecast. We will incorporate electricity from the grid as an energy source once further clarity on the same is received from the company. Currently, the cheapest alternative is to procure electricity from the grid at AED 330 per MwH. We expect the company to use a natural gas to diesel mix of 80:20 for electricity generation purposes for the entire forecast period. The connection to the national grid will replace the diesel and further reduce energy costs.

Energy costs at RAK Cement have increased significantly from only 20.2% of total revenue in 2004 to 45% of total revenue in 2008. In 2009, we expect that energy cost will decrease significantly to 32.9% of total revenue mainly due to the use of coal for firing purposes and decreased use of diesel. However, going forward, we forecast energy costs to account for an average of 38.5% of total revenue.

Use of coal will reduce

energy costs for the

company


Energy CostsFigure 12

We expect the EBITDA margin to expand significantly from 23.7% in 2008 to 31.5% in 2009 and then to gradually stabilize in the range of 23% to 27% over our forecast horizon. The increase in 2009 EBITDA margins is due to the change in the energy mix with the introduction of coal. However, the shift to coal as an energy source will not be enough to offset the decline in cement prices (discussed earlier) and the increase in energy sources prices. We would like to highlight that, historically, EBITDA margins peaked at 47.8% in 2005 and then plunged to 23.7% in 2008, mainly due to a notable rise in energy costs.

eBitDa anD eBitDa marGin

96.5

145.2191.7

111.9 111.7120.2

128.5134.4

136.4

29.7%

43.3%

45.0%

32.9%

38.6%

40.3% 40.6%40.2%

38.8%

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Energy Cost (AED Million) As a % of Total Revenue (%)




The company has experienced significant contraction in the net profit margin, which was more than halved from 38.3% in 2006 to 18.6% in 2008. This was mainly due to high energy costs. Following a trend similar to that of the EBITDA margin, we expect the net profit margin to rise to 24.4% in 2009. However, going forward, the net profit margin is expected to decline in 2010, and then exhibit an uptrend until 2014.

We expect EBITDA margin

to gradually stabilize in the

range of 23% to 27% over

our forecast horizon


trends in EBItDA and EBItDA MarginFigure 13

146.7

76.2

101.7108.8

69.5 72.1 77.285.4

95.6

44.7%

22.4%

23.7%

31.5%

23.6% 23.7% 23.9%24.9%

26.5%

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

EBITDA (AED Million) EBITDA Margin (%)

trenD in net ProFit anD net ProFit marGin

Similar trend seen in net

profit margin as that of

EBIDTA margin


trends in Net Profit and Net Profit MarginFigure 14

125.8

54.9

80.084.3

44.9 47.352.2

60.2

70.2

38.3%

16.1%

18.6%

24.4%

15.3% 15.6%16.1% 17.6%

19.5%

2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Net Profit (AED Million) Net Profit Margin (%)




From our discussion with management, we believe that RAK Cement does not have any plans for capacity additions in the near future. Hence, we forecast meager additions to property, plant, and equipment (PP&E) and expect the total net block to decrease at a 6-year CAGR of 4% over the forecasted period. We have assumed a depreciation rate of 3.3% (5-year historical average).

RAK Cement invested AED 35.5 million in PP&E in 2007, a major proportion (AED 17 million) of which was spent on setting up the infrastructure to receive electricity from the national electricity grid. In 2008, the company further invested AED 60 million in setting up the coal mill.

caPital exPenDiture anD DePreciation

DeleVeraGeD Balance sheet

From a net debt perspective, RAK Cement is a debt-free company. At the end of 1Q2009, the company’s total debt consisted of short-term bank borrowing of AED 8.3 million while cash and a cash equivalent balance was AED 16.3 million. That balance decreased significantly from AED 94.2 million at 2008 year-end to AED 16.3 million in 1Q2009 mainly due to the AED 40 million investments in Reem Ready Mix and AED 18.3 million repayment of short-term debt.

With the turmoil in global and regional stock markets, we are keeping a very close watch on the available-for-sale and held-for-trading investment portfolios for the companies we cover. We prefer companies with nil or negligible (we are comfortable at anything less than or equal to 5% of shareholders’ equity) allocation to non-core assets. At the end of 1Q2009, RAK Cement had only 3.6% of its assets invested in investment portfolios (3.9% of shareholders’ equity).

trenD in return ratios

RAK Cement has displayed a declining net profit margin trend since 2005, mainly due to high energy costs. Revenue increased at a CAGR of 9.3%, whereas cost of goods sold increased at twice the rate, at a CAGR of 20.7% from 2005 to 2008. As a result, net profit margins declined from 40.7% in 2005 to 18.6% in 2008. The decrease in the net profit margin was mainly instrumental for the drag on the company’s Return on Average Equity (RoAE), which more than halved from 22% in 2005 to 10.5% in 2008.

As shown in Figure 15, we expect RoAE to continue to dip after 2008 despite RAK Cement’s shift to a coal-based energy source. Although the shift in energy from diesel and HFO to coal will help the net profit margin rise to 24.4% in 2009, going forward, it is expected to decline in the medium term. We feel the shift to coal as an energy source will not be enough to offset the decline in cement prices. Furthermore, depressed demand will continue to affect total revenue, resulting in a decline in the asset turnover ratio. A dip in net profit margin, coupled with a decline in the asset turnover ratio, will have a dual impact on the RoAE, leading to lows of 5.4% in 2010, only to recover slowly to 8% in 2014. The same logic applies to the decline in the Return on Average Assets (RoAA).

We believe a deleveraged balance sheet is not always desirable, as is the case with RAK Cement. For high-cash-generating companies such as RAK Cement, an equally weighted capital mix of debt and equity should bring down the weighted average cost of capital significantly. This will not only comparatively enhance the return ratios but will also make the company more valuable.




hiGh Free cash Flows are likely to leaD to attractiVe DiViDenD Payouts

RAK Cement has historically exhibited an exceptional ability to generate significant free cash flows from operations (FCFOs). Given that management is not contemplating any increase in capacity in the foreseeable future, we expect the company to generate healthy FCFOs going forward as well.

We expect healthy FCFOs to play a significant role in boosting the dividend yields going forward. We have maintained future dividend payout ratios at 75%. Since RAK Cement has not planned any capacity additions, a likely increase in the future payout cannot be ruled out either. On an expected payout of 75% for 2009, the company is currently trading at an attractive dividend yield of 10.9%. On a trailing 12-month basis, the stock is trading at a dividend yield of 9.2%. Our free cash flow analysis suggests there is still significant upside potential for the dividend yield from current levels taking into account a notable free-cash-flow yield of 15.6% and 14.2% on forecasted FCFOs of 2009 and 2010.

We are optimistic about the company’s future dividend payouts, keeping in mind significant free-cash-flow-generating abilities, cash-rich and deleveraged balance sheet status, and no planned capacity additions. We believe high dividend payouts to be a major trigger for the stock going forward as such payouts not only ensure recurring streams of future cash flows for investors but also greatly cushion the potential downside of the stock price.

A depressed net profit

margin, coupled with

a decline in the asset

turnover ratio, will squeeze

RoAE going forward


Return RatiosFigure 15

Our free-cash-flow analysis

suggests significant upside

potential for the dividend

yield from current levels


trends in Free Cash Flows and Dividend PayoutFigure 16

1Q2009 results – stronG cement Prices leaD to eBitDa marGin exPansion

Despite a general slowdown in the UAE, RAK Cement reported a 20.3% increase in total revenues to AED 97.7 million in 1Q2009 compared to AED 81.2 million in 1Q2008. This was entirely due to an increase in the average cement price from AED 286.5 per ton in 1Q2008 to AED 349.7 per ton in 1Q2009. The quantity of cement sold decreased marginally by 1.7% in 1Q2009 to 279,000 tons compared to 1Q2008.

Cost of goods sold (COGS) dipped 3.3% to AED 60.7 million in 1Q2009 compared to the same period a year ago. This was mainly due to the decline in the market prices of energy. The dip in COGS coupled with the increase in revenues led to a significant expansion in EBITDA margins.

2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Net Profit Margin 40.7% 38.3% 16.1% 18.6% 24.4% 15.3% 15.6% 16.1% 17.6% 19.5%

Asset Turnover Ratio 0.47 0.46 0.44 0.51 0.38 0.33 0.34 0.36 0.38 0.39

Equity Multiplier 1.15 1.05 1.06 1.10 1.10 1.08 1.08 1.07 1.06 1.05

RoAE (%) 22.0% 18.5% 7.5% 10.5% 10.3% 5.4% 5.7% 6.2% 7.0% 8.0%

RoAA (%) 19.1% 17.6% 7.1% 9.5% 9.3% 5.0% 5.3% 5.8% 6.6% 7.6%

RoCE (%) 22.2% 20.1% 8.5% 11.4% 11.1% 5.9% 6.5% 7.4% 8.8% 10.4%

2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f

all figures in AED millions, otherwise stated

Free Cash Flow from Operations 122.6 117.2 37.1 -12.4 90.6 82.4 75.6 73.4 72.8

Cash Dividends 0.0 72.6 0.0 53.2 63.2 33.6 35.5 39.1 45.2

Cash Dividends per share (AED) 0.00 0.15 0.00 0.11 0.13 0.07 0.07 0.08 0.09

FCFO / Net Profit (%) 100% 93% 68% -16% 107% 184% 160% 141% 121%

Dividend Cover (x) - 1.6 - -0.2 1.4 2.4 2.1 1.9 1.6

Dividend Payout Ratio (%) 0% 58% 0% 67% 75% 75% 75% 75% 75%

Free Cash Flow Yield (%) 7.0% 11.9% 3.6% -3.1% 15.6% 14.2% 13.0% 12.6% 12.5%

Cash Dividend Yield (%) 0.0% 7.4% 0.0% 9.2% 10.9% 5.8% 6.1% 6.7% 7.8%




EBITDA more than doubled from AED 14.9 million in 1Q2008 to AED 33.6 million in 1Q2009, thus expanding the margins from 18.3% to 34.4%. Net income almost tripled to AED 29.4 million in 1Q2009 compared to AED 10.2 million in 1Q2008, mainly due to growth at the EBITDA level. The share of profits from associates (absent in 1Q2008) amounting to AED 0.61 million in 1Q2009 also boosted net profits for the quarter.

A significant increase

in EBITDA margins was

observed


1Q2009 Financial overviewFigure 17

Key Financial data

income Statement (AEd million) 1Q2009 1Q2008 y-o-y Growth

Domestic Revenue 97.5 81.2 20.1%

Export Revenue 0.2 0.0 N/M

Total Revenue 97.7 81.2 20.3%

Gross Profit 37.0 18.4 100.8%

EBITDA 33.6 14.9 125.6%

EBIT 28.0 9.4 196.8%

Net Profit before tax 29.4 10.2 187.0%

Balance Sheet (AEd million) 1Q2009 1Q2008 y-o-y Growth

Property, Plant and Equipment 520.2 525.4 -1.0%

Current Assets 244.8 341.7 -28.3%

Total Assets 843.0 903.9 -6.7%

Total Debt 8.3 26.6 -68.8%

Liabilities 66.3 100.9 -34.3%

Equity 776.8 803.0 -3.3%

operating Highlight 1Q2009 1Q2008 y-o-y Growth

Domestic Sales (Mtpa) 0.28 0.28 -1.7%

Total Sales (Mtpa) 0.28 0.28 -1.7%

Local Cement Prices (AED/ton) 349.7 286.5 22.1%

Export Cement Prices (AED/ton) 343.1 N/A N/A

Average Cement Prices (AED/ton) 350.5 286.5 22.3%




FINANCIAL StAtEMENtS


income Statement (AEd Thousands)

Fiscal year Ends december 2007 2008 2009 2010 2011 2012 2013 2014

Total Revenue 340,508 429,605 345,202 294,133 304,001 323,545 342,704 360,426Cost of Revenue 251,830 315,023 220,279 208,771 217,741 231,310 241,405 248,175Gross profit 88,677 114,582 124,922 85,362 86,260 92,235 101,299 112,251Selling/General/Admin. Expenses 12,451 12,911 16,168 15,902 14,151 15,021 15,879 16,673Depreciation/Amortization 20,945 21,481 24,143 24,324 24,519 24,715 24,913 25,112operating income 55,282 80,190 84,611 45,135 47,591 52,499 60,508 70,466Interest Income (Exp), Net Non-Operating (347) (149) (300) (275) (300) (300) (300) (300)net income 54,935 80,040 84,311 44,860 47,291 52,199 60,208 70,166

Historical Forecast

Balance Sheet (AEd Thousands)


ASSETS

Cash and Short-Term Investments 81,472 94,279 75,396 91,710 133,826 172,359 206,591 237,796 Total Receivables, Net 127,177 188,762 178,698 159,023 148,955 150,210 150,429 157,957 Total Inventory 50,643 58,668 64,672 65,055 59,582 50,597 50,143 49,142

Total Current Assets 259,292 341,709 318,765 315,788 342,363 373,166 407,163 444,895

Property/Plant/Equipment, Total - Net 483,431 525,434 506,377 487,539 468,917 450,146 431,225 412,152 Long-Term Investments 30,988 30,613 71,227 71,227 71,227 71,227 71,227 71,227 Other Long-Term Assets, Total 6,667 6,163 6,163 6,163 6,163 6,163 6,163 6,163 ToTAl ASSETS 780,378 903,919 902,532 880,718 888,670 900,702 915,777 934,437

liABiliTiES & EQuiTy

Accounts Payable 24,878 72,126 61,268 57,827 52,134 47,435 41,451 35,101 Short-Term Debt 4,999 26,601 5,000 5,000 5,000 5,000 5,000 5,000 Total Current liabilities 54,885 98,727 66,268 62,827 57,134 52,435 46,451 40,101

Other Liabilities 2,129 2,163 2,163 2,163 2,163 2,163 2,163 2,163 Total liabilities 57,014 100,890 68,431 64,989 59,297 54,597 48,614 42,264

Total Equity 723,364 803,030 834,101 815,728 829,373 846,104 867,163 892,173

ToTAl liABiliTiES And EQuiTy 780,378 903,919 902,532 880,718 888,670 900,702 915,777 934,437

Historical Forecast

Cash Flow (AEd Thousands)


Cash from Operating Activities 72,662 51,887 101,956 85,310 81,959 80,245 79,673 82,701 Cash from Investing Activities (29,962) (60,533) (45,699) (5,487) (5,897) (5,944) (5,992) (6,039) Cash from Financing Activities (69,248) 21,453 (75,141) (63,508) (33,945) (35,768) (39,449) (45,456) Net Change in Cash (26,548) 12,807 (18,884) 16,314 42,116 38,533 34,232 31,205

Historical Forecast


DISCLAIMER

this document and its contents are prepared for your personal information purposes only and do not constitute

an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of

potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain.

the information and any views expressed are given as of the date of writing and are subject to change. While

the information has been obtained from sources believed to be reliable, we do not represent that it is accurate

or complete and it should not be relied on as such. Watani Investment Company (NBK Capital), its affiliates and

subsidiaries accept no liability for any direct, indirect or consequential loss arising from use of this document or

its contents. At any time, the employees of NBK Capital and its affiliates and subsidiaries may, at their discretion,

hold a position, subject to change, in any securities or instruments referred to, or provide services to the issuer

of those securities or instruments.

RISK AND RECoMMENDAtIoN GuIDE

Recommendation upside (Downside) Potential

Buy more than 20%

Accumulate between 10% and 20%

Hold between -5% and 10%

Reduce between -10% and -5%

Sell less than -10%

RISK LEVEL

Low Risk High Risk

1 2 3 4 5

© 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.




NBK CAPItAL

Kuwait

Head Office17th Floor, Dar Al-Awadi BuildingAhmed Al-Jaber Street, SharqP.O.Box 4950, Safat 13050KuwaitT. +965 2224 6900F. +965 2224 6905

Kuwait

national Bank of Kuwait SAKAbdullah Al-Ahmed StreetP.O. Box 95, Safat 13001Kuwait City, KuwaitT. +965 2242 2011F. +965 2243 1888Telex: 22043-22451 NATBANK

INtERNAtIoNAL NEtWoRK

Bahrain

national Bank of Kuwait SAKBahrain BranchSeef Tower, Al-Seef District P.O. Box 5290, Manama, BahrainT. +973 17 583 333F. +973 17 587 111

Saudi Arabia

national Bank of Kuwait SAKJeddah BranchAl-Andalus Street, Red Sea PlazaP.O. Box 15385Jeddah 21444, Saudi ArabiaT. +966 2 653 8600F. +966 2 653 8653

united Arab Emirates

national Bank of Kuwait SAKdubai BranchSheikh Rashed Road, Port Saeed Area, ACICO Business ParkP.O. Box 88867, DubaiUnited Arab EmiratsT. +971 4 2929 222F. +971 4 2943 337

Jordan

national Bank of Kuwait SAK

Head OfficeAl Hajj Mohd Abdul Rahim Street Hijazi Plaza, Building # 70P.O.Box 941297, Amman -11194, JordanT. +962 6 580 0400F. +962 6 580 0441

lebanon

national Bank of Kuwait (lebanon) SAlSanayeh Head OfficeBAC Building, Justinian StreetP.O. Box 11-5727, Riyad El Solh1107 2200 Beirut, LebanonT. +961 1 759 700F. +961 1 747 866

iraq

Credit Bank of iraqStreet 9, Building 187Sadoon Street, District 102P.O.Box 3420, Baghdad, IraqT. +964 1 7182198/7191944 +964 1 7188406/7171673F. +964 1 7170156

Egypt

Al Watany Bank of Egypt13 Al Themar StreetGameat Al Dowal AlArabiaFouad Mohie El Din SquareMohandessin, Giza, EgyptT. +202 333 888 16/17F. +202 333 79302

united States of America

national Bank of Kuwait SAKNew York Branch299 Park Avenue, 17th FloorNew York, NY 10171, USAT. +1 212 303 9800F. +1 212 319 8269

united Kingdom

national Bank of Kuwait (Intl.) PlcHead Office13 George Street, London W1U 3QJ, UKT. +44 20 7224 2277F. +44 20 7224 2101

nBK investmentmanagement limited13 George StreetLondon W1U 3QJ, UKT. +44 20 7224 2288F. +44 20 7224 2102

France

national Bank of Kuwait (intl.) plcparis Branch90 Avenue des Champs-Elysees75008 Paris, FranceT. +33 1 5659 8600F. +33 1 5659 8623

Singapore

national Bank of Kuwait SAKSingapore Branch9 Raffles Place #51-01/02Republic Plaza, Singapore 048619T. +65 6222 5348F. +65 6224 5438

vietnam

national Bank of Kuwait SAKVietnam Representative OfficeRoom 2006, Sun Wah Tower115 Nguyen Hue Blvd, District 1Ho Chi Minh City, VietnamT. +84 8 3827 8008F. +84 8 3827 8009

China

national Bank of Kuwait SAKShanghai Representative OfficeSuite 1003, 10th Floor, Azia Center, 1233 Lujiazui Ring Rd.Shanghai 200120, ChinaT. +86 21 6888 1092F. +86 21 5047 1011

ASSoCIAtES

Qatar

international Bank of Qatar (QSC)Suhaim bin Hamad StreetP.O.Box 2001Doha, QatarT. +974 447 3700F. +974 447 3710

Turkey

Turkish BankHead OfficeValikonagl Avenue No. 1P.O.Box 34371 Nisantasi,Istanbul, TurkeyT. +90 212 373 6373F. +90 212 225 0353

NAtIoNAL BANK oF KuWAIt

mEnA Research19th Floor, Dar Al-Awadi BuildingAhmed Al-Jaber Street, Sharq, P.O.Box 4950, Safat 13050, KuwaitT. +965 2224 6663F. +965 2224 6905E: [email protected]

Brokerage8th Floor, Dar Al-Awadi BuildingAhmed Al-Jaber Street, SharqP.O.Box 4950, Safat 13050, KuwaitT. +965 2224 6964F. +965 2224 6978E: [email protected]

united Arab Emirates

nBK Capital limitedPrecinct Building 3, Office 404Dubai International Financial CenterP.O.Box 506506Dubai, UAET. +971 4 365 2800F. +971 4 365 2805

Turkey

nBK CapitalArastima ve Musavirlik AS, Sun Plaza, 30th Floor, Dereboyu Sk. No.24Maslak 34398, Istanbul, TurkeyT. +90 212 276 5400F. +90 212 276 5401





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