NEUTRAL. Jabal Omar Development Co. (4250.SE)

Transcription

1 Jabal Omar Development Co. (4250.SE) NEUTRAL CMP SAR Target SAR Upside 4.1% MSCI GCC Index Tadawul All Share Index 6, Key Stock Data Sector Real Estate Reuters Code 4250.SE Bloomberg Code JOMAR AB Equity Net Out. Shares (bn) Market Cap (SAR bn) Market Cap (USD bn) Avg. 12m Vol. ( 000) Volatility (30 day) Volatility (180 day) Stock Performance (%) 52 week high / low (SAR) / M 3M 12M Absolute (%) Relative (%) Shareholding Pattern (%) Makkah Construction and Development Co Government 7.58 Saudi Investors Public Jabal Omar and Tadawul All Share Index Executive Summary Established in 2006, Jabal Omar Development Company (Jabal Omar) is engaged in real estate investment, development and property management of Jabal Omar area near the grand mosque of Makkah. The company s major project, Jabal Omar, is expected to be completed in 2010 covering an area of 230,000 sqmt including 39 high-rise buildings, residential facilities for 45,000 pilgrims, prayer facilities for 202,000 pilgrims, a central transport station and parking facility for 12,000 vehicles, five-star hotels and other commercial centres. Net loss of SAR 22 million during 1H09 The company s major project, Jabal Omar, is expected to be completed only in 2010, as a result of which, the company is presently not generating any sales. However, the company did report selling, general & administrative (SG&A) expenses of SAR million in 1H09 compared to SAR million in 1H08. In addition, the company reported SAR million in pre-establishment expenses and SAR 8.85 million in other expenses in 1H08. As a result, operating loss was reported at SAR million compared to SAR million for 1H08. Jabal Omar also reported a decline in other income from SAR million in 1H08 to SAR 4.74 million during 1H09. Zakat for 1H09 amounted to SAR million compared to nil for 1H08. Accordingly, the company reported a net loss of SAR million for 1H09 compared to the earlier SAR million. Adjusted annualised LPS for 1H09 stood at SAR 0.07 compared to SAR 0.13 during 1H08. Outlook The performance of the real estate sector has been marred by weak demand and liquidity woes following the financial crisis. However, on a positive note, the sector has been witnessing a gradual recovery as demand is picking up and the liquidity is easing out. The demand drivers of the Saudi Arabian real estate sector look promising given the inherent strong demand from a rising population and the government s support and initiatives to strengthen the sector. The company s Jabal Omar project will benefit from its close proximity to Jabal Omar area, near the grand mosque of Makkah, which is likely to emerge as a centre for massive infrastructure development to cater to pilgrims. The growth drivers of the area imply immense earnings potential for the company in the coming years. However, the project is yet to generate cash flows and the uncertainties associated with the timely completion of the project weigh down on the positives. Further, as the stock s current price has already discounted the future earnings flow, we recommend a cautious outlook until earnings visibly improve. To determine the value of the company, we have used the DCF valuation method. As we expect Jabal Omar to incur losses during 2009 and 2010, the stock s P/E multiple for the periods remains nonconclusive. At the same time, we expect the company to trade at P/B multiples of 2.09x and 2.10x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has underperformed the index gaining only 1.5% compared to a 31.5% rise in the Tadawul All Share Index. Considering the above factors, we initiate our coverage with price target of SAR 21.44, which exhibits an upside of 4.1% from its closing price of SAR (as on October 07, 2009). Therefore, we initiate our coverage on Jabal Omar Development Co. with a NEUTRAL recommendation. SAR Million 2008A 2009E 2010E 2011E EBITDA Net Profit Adjusted EPS (SAR) Total Assets 6,704 6,881 7,499 8,254 RoAE NA Adjusted BVPS (SAR) Call us on or us at research@taib.com

2 Background Jabal Omar is engaged in developing and constructing the Jabal Omar area Jabal Omar is a Saudi Arabian joint stock company established in 2006 by the Makkah Construction & Development Co. The company is into real estate investment, development and property management of the Jabal Omar area, near the grand mosque of Makkah. The company s activities include construction, sale, rental, lease and development of residential properties, hotels, commercial centres and parking lots in the Jabal Omar area, supported by local and international sub-contractors. In June 2007, the company launched a public issue offering 30% or million shares and was subsequently listed on the Saudi Stock Exchange (Tadawul) in December The company s major project, Jabal Omar, is expected to be completed in Covering an area of 230,000 square meters, the project includes 39 high-rise buildings of between 20 and 48 stories, residential facilities for 45,000 pilgrims, prayer facilities for 202,000 pilgrims, a central transport station and parking facilities for 12,000 vehicles, five-star hotels, commercial centres, 4,500 shops and 3,000 showrooms. Jabal Omar would also develop roads, open areas, gardens, fire and police stations, schools, medical centres and other facilities as part of the project. Board of Directors Chaired by Abdulrahman Abdulkader Mohammed Fakih HH Sheikh Ahmad Bin Abdulaziz Bin Suleiman Al Hamdan Tarek Abdulrahman Abdulkader Mohammed Fakih Mansour Bin Abdullah Suleiman Bin Saeed Ibrahim Abdullah Ibrahim Al Subaiee Mohammed Bin Ibrahim Al Essa Mohieddine Saleh Abdullah Kamel Anas Hamzah Mohammed Saleh Sayrafi Ziad Bassam Mohammed Suleiman Al Bassam Abdulghani Mahmood Abdulghani Sabbagh Dr Abdulrahman Suleiman Al Matroudi Source: Zawya Business Model Strategic agreements with local and international contracting companies for development activities in the area Subsidiaries/ Associates/ Investments Jabal Omar established to implement a massive real estate development project close to the grand mosque of Makkah JABAL OMAR The company conducts all types of construction, maintenance, demolishment and surveying works Jabal Omar has no subsidiary/ associates as of 1H09. Acquiring properties in the Jabal Omar area and developing the same into organized plots, managing, investing, selling and leasing

3 Industry Scenario Global economy expected to witness negative growth of 1.1% in 2009 According to estimates by the International Monetary Fund (IMF), the world economy will recede 1.1% during 2009 as a result of the continued economic slowdown. This is contrary to the growth rates of 5.2% and 3.0% registered for 2007 and 2008, respectively. However, the trend is likely to reverse with growth rebounding to 3.1% in The Middle East region s GDP, which registered a healthy real growth of 5.7% and 6.2% during 2006 and 2007 respectively, is anticipated to come down from 5.4% in 2008 to 2.0% for 2009 before expanding back to 4.2% in Within the region, the GCC countries witnessed GDP growth of 6.4% in 2008, but are likely to grow at a mere 1.3% during 2009 owing to multiple factors that include weak oil prices, contraction of global demand and trade-related activity, squeezed liquidity, lower tourism and reduced remittances. However, the GCC s growth is expected to normalize to 4.2% in 2010 on improving market dynamics. Saudi Arabia s real GDP grew at an average 4.4% over the period , on the back of high oil prices and subsequent economic development. However, unlike the overall GCC region, Saudi Arabia s real GDP is expected to contract 0.9% during 2009 before bouncing back to a positive 4.0% in As per preliminary estimates, Saudi Arabia s nominal GDP increased 22.0% YoY to reach SAR 1, billion in 2008 from SAR 1, billion in 2007, driven by record oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel (bbl) in 2008 from USD 67.6 per bbl in The mining & quarrying sector (up 37.2% to SAR 1, billion) was the largest contributor to the GDP at 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues worth SAR billion during 2008 accounting for 4.1%. The finance, insurance, real estate and business services sectors together contributed 6.6%. In light of the financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 19.2% decline in nominal GDP for However, a reversal is expected, as economic growth is likely to rebound to 16.7% in The country is estimated to run a budget deficit of SAR 65 billion (USD 16 billion) in 2009 the first in six years. However, massive fiscal surpluses registered during have allowed Saudi Arabia to boost its foreign assets, which supported higher spending and offset the pressure due to the global crisis. 2,000 1,600 1, Saudi Arabia's Nominal GDP E 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 70.0% 56.0% 42.0% 28.0% 14.0% 0.0% Contribution to GDP (%) E Nominal GDP (SAR Billions) Nominal GDP Grow th (%) Source: SAMA, Central Department of Statistics & Information Oil to GDP Non-oil to GDP Saudi ranks second in terms of infrastructure spending With the regional economies recycling their oil windfalls into their economic development especially to provide domestic infrastructure and basic services for their citizens, and the ever increasing expatriate population led to higher demand for modern and efficient infrastructure. There has been an unprecedented expansion seen in the construction sector & industrial projects and huge investments in infrastructure by private players that has led to an impressive growth in the real estate sector across the GCC. According to the Middle East Economic Digest (MEED) as of September 28, 2009, projects worth USD 2.13 trillion are either planned or underway in the region, which in turn implies attractive growth prospects for the real estate sector. Saudi Arabia and the UAE are the biggest project markets with a 70.3% share of the total projects in the region. With investments to the tune of USD billion, the UAE tops the list in terms of infrastructure spending, followed by Saudi Arabia (USD billion), Kuwait (USD billion) and Qatar (USD billion). However, the recent global credit crisis and cautious spending in the sector has slowed down the growth rate to some extent. The sector has witnessed price corrections and delays or postponement of projects during the last few months. As of September 28, 2009, the UAE, Saudi Arabia and Kuwait had projects worth USD billion, USD billion and USD billion, respectively on hold. There are also emerging opportunities in the region s health care infrastructure sector. There are currently more than 100 hospitals in the various stages of planning across the Middle East and Africa, and approximately USD 14 billion is being spent in the Arabian Gulf countries alone on new hospitals and healthcare facilities.

4 Value of Projects in GCC (USD billion as of September 28, 2009) Value of Projects On Hold in GCC (in USD billion as of September 28, 2009) 1, Bahrain Oman Qatar Kuwait Saudi Arabia UAE - Bahrain Qatar Oman Kuwait Saudi Arabia UAE Source: MEED Saudi transforming itself into one of the most dynamic states within the GCC region Saudi Arabia experienced an unprecedented construction boom during the past two decades, as the country s infrastructure underwent rapid expansion. The creation of new airports, highways and even new cities attracted construction professionals from all over the world. In addition, a less open economy, restrictions on foreign ownership and a smaller expatriate population helped Saudi Arabia escape the real estate bubble that sent property prices plummeting in the UAE. However, transforming the business environment with the introduction of various reforms over the years, Saudi Arabia is now turning into one of the most dynamic states within the region. Further, as per the International Finance Corporation - World Bank 2009 Report on Ease of Doing Business, Saudi Arabia was ranked 16 th among 181 countries globally, and number 1 in MENA region. Currently, the country s property market is growing fast and at least a dozen real estate funds have got approval and have been established during the past six months. In addition, 75 applications for new funds have been registered with the Capital Market Authority. Going forward, the Saudi government is expected to continue pumping capital in huge projects as the country s 2009 budget, the largest in its history, allocated USD 60 billion to new projects. Moreover, the country has announced its aggressive spending plans for 2009 to take advantage of cheaper commodities such as steel, which has fallen by 70% since the last summer. Further, it aims to spend USD 400 billion until 2013 to upgrade its infrastructure and has also launched a plan to build economic and industrial cities to create new jobs. While the residential sector makes up the biggest share of the market in terms of value, education and healthcare comprises of most projects. In addition, across sectors, projects in the study, planned, design and bidding phases make up a significant proportion of number of projects and budgets. At least 10 major new city and real estate projects are currently underway in Saudi Arabia Mega Projects of Saudi Arabia Projects Value (in USD Billions) King Abdullah Economic City 93.0 Prince Abdulaziz bin Mousaed Economic City 53.0 Jizan Economic City 30.0 Jeddah Project Mile High Tower 10.0 Shamieh Project 9.3 Madinah Knowledge Economic City 7.0 Al-Zahira City 4.0 Jabal Omar 3.3 Injaz 3.0 Riyadh Marriland Leisure Park 3.0 An estimated USD 6 billion allocated for various residential projects in the country The country s residential sector has been negatively impacted by reduced consumer confidence and limited credit availability. However, slight recovery of the real estate market recently boosted investor confidence as Saudi Arabia was identified as the only country in the MENA where investors are optimistic of price rise in housing industry over the next 12 months. Saudi Arabia currently owns one of the world s most comprehensive housing development programmes with an estimated USD 6 billion being allocated for various residential projects. At an initial cost of around USD 87.8 billion, the country is pursuing an ambitious super project that aims to build six Economic Cities, which will be home to 2.5 million residents. According to the Saudi Arabian General Investment Authority (SAGIA), the new cities will contribute USD 150 billion to the country s GDP by They are also expected to provide job opportunities to 1.3 million people for those living in the cities.

5 Affordable housing represents a big untapped market in Saudi Arabia for developers and investors Demand for housing in Saudi Arabia is driven by the young and growing population seeking affordable homes instead of luxurious villas and penthouses. Nearly 60% of its people cannot afford own homes due to higher prices of property resulting in huge demand-supply gap. Therefore, affordable housing represents a big untapped market in Saudi Arabia for developers and investors as the demand for housing is likely to pickup. According to CB Richard Ellis (CBRE), in Saudi Arabia, many cities witnessed reverse migration as a large number of people departed from urbanized central areas owing to spiralling prices. It also projected that the country is currently facing a shortage of around two million homes due to pent up demand, easily available finance and a move towards smaller households. Additionally, the country will also need 1.4 million additional homes in the next decade to meet the rising demand from growing population. Earlier, the country planned to build 200,000 housing units every year under the development plan for , but the delivery rate has been very low at less than 50%. Hence, to prevent the shortfall getting bigger, Riyadh needs to build more than 12,000 new homes every year, yet only 5,000 units are currently under construction by major developers. Therefore, total new investment in housing is expected to be around USD 180 billion over the next seven years. Residential Performance Indicators (as of 1Q 2009) City Average Rent (USD per sqmt) Sales Price (USD per sqmt) Average Rental Yield Riyadh % Makkah % Madinah % Jeddah 62 1, % Eastern Province % Source: Colliers International Government undertakes various measures to ease housing problems In order to ease the housing problems the Saudi government is continuously taking various steps. Riyadh s metropolitan development strategy, known as Medstar, is an attempt to create new commercial centres on the outskirts of the city. Also, in March, the authorities banned the sale of offplan properties without the approval of a committee that comprises the Commerce Ministry, the Saudi Arabian Monetary Agency (Sama), the central bank, and the General Commission for Housing. Finally, once the mortgage law that has been approved by the Majlis al-shura (Consultative Council) comes into existence, mid-range homes will be available to about 50% of its households. Presently, only 25% of families own their homes, and banks remain reluctant to lend in the absence of the security that would come with mortgages guaranteed by law. Last year, bank credit to the private sector was equivalent to 40.7% of GDP, which is low compared with the UAE s 78.4% and Bahrain s 91.5%. Office Performance Indicators (as of 1Q 2009) City Average Rent (USD per sqmt) Average Sales Price (USD per sqmt) Average Rental Yield Riyadh 314 2,920 11% Makkah Madinah Jeddah 265 2, % Eastern Province 120 1,090 11% Source: Colliers International Office market to get a boost with proposed establishment of the central bank for the GCC Monetary Union in Riyadh Meanwhile, the office market in Riyadh is expected to see 1.1 million sqmt of office space being delivered during the period The already high demand due to economic activity built up over the years of high oil prices, has been further boosted by the announcement that the central bank for the GCC Monetary Union will be set-up in the King Abdullah Financial District being built in Riyadh. Moreover, according to Colliers International (CI), total office space net leasable area (NLA) delivered along the city s core business area reached 277,550 million sqmt between 1Q08 and 1Q09. Rental rates at Riyadh s central business district (CBD), King Fahad Road reached an annual average of USD 400 per sqmt for primary grade office and USD 226 per sqmt for secondary grade office, while its average occupancy rates until 1Q09 stood at 91% across primary and secondary CBD s. However, as a consequence of subdued market conditions along with a total NLA of over 550,000 sqmt expected to enter the market up to 2011, average rents are anticipated to fall slightly over the short to mediumterm.

6 Cumulative Retail Supply (as of 1Q 2009) City Grade A Malls Rent (USD per sqmt) Grade B Malls Rent (USD per sqmt) Leasable Area Riyadh ,800 sqmt by 2012 Makkah ,000 sqmt by 2012 Jeddah NA Eastern Province ,000 sqmt by 2010 Source: Colliers International, GLA for Riyadh and Makkah; NLA for Eastern Province Efforts focused to strengthen the domestic tourism Rapid developments in religious tourism throw tremendous opportunities Revamping transport sector, besides laying emphasis on modernizing of education system While religious visitors remain the backbone of the Saudi tourism industry, the country s tourism drive is geared toward domestic tourism. The government is investing in an ambitious infrastructure building programme and allocated nearly SAR 385 million (USD 102 million) to the tourism sector in its 2009 budget. In March 2008, it had approved USD 38 billion tourism masterplan for the Red Sea coastline, under which 19 locations would be developed. In addition, a USD 10 billion Gulf coast development at Al-Auqair, south of Dammam was also approved and Supreme Commission for Tourism (SCT) received three bids in July 2008 for a 100-square-kilometre site at Al-Auqair and is now awaiting a decision from HH King Abdullah before launching talks with the bidders. As a result of diversification of the economy there has been a rise in the number of business visitors, which has inevitably led to the rise in demand and subsequent growth of the country s hospitality sector. As per CI, corporate tourism represented approximately 35% of the total visitor base in the capital city, Riyadh last year, whereas travelling for shopping or other leisure related activities constituted 25%. With a total of 82 hotels and 8,000 rooms, Riyadh accounts for 7.7% of total supply in Saudi Arabia, translating into a moderately sized but highly profitable hospitality sector. Riyadh is considered second only to Abu Dhabi in reported Gross Operating Profit per Available Room (GOPPAR) revenue in the MENA region. An increase in religious tourism continues to drive Saudi Arabia s real estate growth. According to official figures, last year nearly 1.73 million foreign pilgrims performed Hajj in addition to approximately 750,000 Saudi pilgrims. These pilgrims visiting the holy cities of Makkah and Medina to perform Umrah and Hajj are expected to reach 8 million by next year. With return on investment almost guaranteed, coupled with higher room rates at hotels which overlook the Haram Mosque and the Kaaba, massive developments surrounding the holy sites, the property market is now attracting timeshare and end users and professional investors. Apart from this, statistics reveal that last year 1.5 million pilgrims arrived by air, 131,000 by land, and nearly 23,000 by sea. Therefore, the demand for infrastructure (roads, airports, port upgrades as well as hospitals and clinics) is also immense and holds tremendous opportunities especially for public-private partnerships. Over the coming years, surroundings of the Grand Mosque in Makkah will witness one of the biggest property developments in the Gulf region including five-star hotels, 4,500 shops, a central transport station, prayer facilities for more than 200,000 worshippers and parking for 12,000 vehicles. Government s focus on providing other basic amenities to the citizens is expected to further enhance the country s infrastructural developments. Saudi Arabia s transport sector is one of the key areas being revamped with plans to develop a national and regional rail network. In February 2009, the largest contract was awarded for the construction of the Haramain high-speed railway linking Makkah and Medina via Jeddah to Al-Rajhi Construction Group (RCG), France s Alstom and China s Railway Engineering (RE). It was announced in April that the freight line of the 1,200 km North-South Railway, which will link the northern mineral belt with Riyadh and Jubail, will be ready during Recently, the Transport Ministry announced inviting companies to bid for 100 new road contracts ranging between SAR 20 million and SAR 700 million. Meanwhile, major emphasis was laid on the continuing modernisation of education in the country in this year s budget by allocating around SAR 122 billion for spending on education and manpower development. The education ministry currently undertaking a huge scheme to provide new schools for 1.7 million pupils, revealed plans to build around 3,500 schools of different sizes across the country at a total cost of SAR 20 billion. For this, it signed a SAR 2 billion (USD 533 million) contract with the China Railway Construction Corp. (CRCC) to build 200 schools across the country. Riyadh-based Al-Rashid Trading & Contracting Co. was awarded a SAR 1.6 billion contract to build residences for academic staff at King Saud University in Riyadh in January this year and Saudi Binladin Group was granted an SAR 8 billion contract for the construction of housing facilities at a new women s college at the university. In addition to these awards, as part of Riyadh s plans to build 1,500 schools and rehabilitate 2,000 existing educational facilities, a significant number of tenders were issued in January, focusing mainly on housing facilities for educational establishments throughout the country.

7 Government financing providing impetus to complete several mega projects amid prevailing economic turbulence Growing young population to drive growth of the sector over the coming years As a result of global meltdown, several international banks have withdrawn from financing the multibillion dollar projects. Though local banks are in better shape than their foreign counterparts, they do not have the capacity to fund multi-billion-dollar projects. Consequently, the government is playing an active role supporting the progress of the country s developmental programme and ensuring work to continue uninterrupted on several mega development projects. So far, the government has extended financing worth more than SAR 11 billion to offset a marked decline in the volume of financing from the banking sector. The government financing is being extended mainly through the Public Investment Fund (PIF), which extended support to several vital projects in the power, petrochemical and transport sectors, especially the railways. The government s intervention to save several mega projects reflects its determination and keenness to implement and complete these projects on schedule, thereby displaying its strength and potential to support the economy. Further, with a population of 25 million people growing at 2.5% annually, Saudi Arabia is set to double its population in 28 years. In addition, 40% of Saudi nationals are under the age of 20 and 70% under 30, and over 65% of families currently do not own a home. Such statistics reflects the country s potential market for further expansion and huge demand in the coming years. Vast under-supply of housing, notably in the middle income sector will continue to drive demand in the local market, and Jeddah and Riyadh offer the most potential with the new economic cities starting to hit the market towards the end of the year. Despite international markets reeling under financial crisis, development and investment in Saudi Arabia s real estate sector is expected to remain strong. Recently, Jeddah released a 20-year vision as its official plan to guide the future expansion of the city including construction of new urban infrastructure, redevelopment and regeneration of older inner city neighbourhoods, upgrading the Corniche area to provide improved amenities and attract luxury residential development and gradual resettlement of almost 900,000 people from unplanned settlements to affordable housing. On the other hand, Riyadh, the biggest city in the GCC, is witnessing development of more residential accommodation, besides increasing demand for hotels and commercial properties are on a rise in the city. Most of the projects in the country are scheduled to be completed by Finally, the country is embarking on much-needed reforms and is introducing new laws and formulating a regulatory framework to ensure that its real-estate sector growth is healthy and viable. Apart from the proposed mortgage law, certain important new set of laws will regulate developers of housing. The new rules require developers to be registered with the Ministry of Commerce and create escrow accounts for offplan sales, based on a model of regulation similar to those developed during the past two years in Dubai. It is also expected to create more qualified real estate developers and require them to make available financial records in order to ensure they are of good financial standing. Financial Performance FY 2008 Net loss at SAR 53 million during 2008 The Jabal Omar project covering an area of 230,000 sqmt is expected to be completed only next year as a result of which, the company is presently not generating any sales. The company reported SAR million as SG&A expenses, which includes pre-establishment costs. Other expenses amounted to SAR 8.85 million during 2008, while depreciation charge was reported at SAR 4.03 million for the year. Accordingly, operating expenses comprising of pre-operating costs stood at SAR million during At the same time, the company did generate investment income of SAR million and other income of SAR 4.69 million during Accounting for a zakat of SAR million for the year, Jabal Omar reported a net loss of SAR million for the year. Adjusted LPS stood at SAR 0.08 for the year.

8 Chart Gallery Operating Profit (SAR Million) Net Profit (SAR Million) H08 1H H08 1H09 Total Assets (SAR Million) Shareholders' Equity (SAR Million) 7,500 7,500 6,000 6,000 4,500 4,500 3,000 3,000 1, H08 1H09 1, H08 1H09

9 Size of the Company The salient features of the balance sheet are: Total assets remained flat at SAR 6, million during 1H09 as increases in capital projects under process and net furniture & equipment were offset by a decline in cash & cash equivalents. Non-current assets base witnessed an increase of 14.3% to SAR 6, million in 1H09 led by expansion in capital projects under process. The value of capital projects under process increased 49.2% to SAR 1, million compared to SAR 1, million in 1H08. Accordingly, its share in total assets went up to 25.7% in 1H09 from 17.3% in 1H08. In addition, net furniture & equipment accounting for 62.7% of total assets increased 3.7% to SAR 4, million during 1H09. However, these were offset by a 55.0% decline in cash & cash equivalents to SAR million from SAR 1, million in 1H08. Jabal Omar s total liabilities comprising only of accounts payable and provisions for employees termination increased from SAR 2.67 million in 1H08 to SAR million in 1H09. This can be attributed to an increase in accounts payable from SAR 2.41 million to SAR million in 1H09. Shareholders equity, which accounted for almost entire balance sheet during 1H09, remained flat at SAR 6, million. The share capital of the company remained flat at SAR 6, million, while accumulated losses increased to SAR million as against SAR million in 1H08. Financial Performance Analysis 1H 2009 Jabal Omar reported a net loss of SAR 22 million in 1H09 Jabal Omar reported SG&A expenses of SAR million in 1H09 compared to SAR million in 1H08. In addition, the company reported SAR million in pre-establishment expenses and SAR 8.85 million in other expenses in 1H08. As a result, operating loss was reported at SAR million compared to SAR million for 1H08. Jabal Omar also reported a decline in other income from SAR million in 1H08 to SAR 4.74 million during 1H09. Zakat for 1H09 amounted to SAR million compared to nil for 1H08. Accordingly, the company reported a net loss of SAR million for 1H09 compared to the earlier SAR million. Adjusted annualised LPS for 1H09 stood at SAR 0.07 compared to SAR 0.13 during 1H08. The company reported a negative return of 0.7% on both average assets and equity for 1H09.

10 Peer Comparison In order to do a peer comparison, we have taken comparable companies from the real estate sector in Saudi Arabia, which includes Saudi Real Estate Co. (SRE), Saudi Hotels & Resorts Areas Co. (SHRA), Taiba Holding (Taiba) and Jabal Omar. Financial Performance of Comparable Companies SRE SHRA Taiba Jabal Omar H H H H09 Ratios: Total Assets Turnover Ratio (x) NA NA Operating Profit Margin (%) NA NA EBITDA Margin (%) NA NA Net Profit Margin (%) NA NA RoAA (%) NA -0.7 RoAE (%) NA -0.7 Market Indicators: Adj. EPS (SAR) * * * * P/E (x) NM NM Adj. BVPS (SAR) P/BV (x) Current Market Capitalisation (SAR Millions) 3,264 3,264 2,098 2,098 2,573 2,573 13,831 13,831 (SAR Million) Revenues NA NA % YoY change NA NA Operating Profit % YoY change % NA NA EBITDA % YoY change NA NA Net Profit % YoY change NA NA Total Assets 3,235 3,120 1,953 1, ,704 6,683 % YoY change NA 0.1 Shareholders Equity 3,085 3,012 1,348 1, ,661 6,639 % YoY change NA -0.5 NA: Not applicable, NM: Not meaningful Source: Zawya, Jabal Omar s financial statements

11 New Projects and Strategies Aims to complete the project as scheduled In January 2009, Jabal Omar awarded a contract worth SAR 250 million to Premco Ready-Mix, a subsidiary of Construction Products Holding Co. (CPC), to supply ready-mix concrete for the project in Makkah. The project requires nearly 1.1 million cubic meters of concrete, of which 80% will be supplied as part of this contract. Earlier, in November 2008, Saudi Readymix, a leading ready-mixed concrete producer in Saudi Arabia, started supplying concrete to the project with an estimated average requirement of nearly 40,000 cubic meters per month over a period of 24 months. For this, Saudi Readymix set up a new factory near the project site comprising two batching plants with a production capacity of 480 cubic meters per hour, or 115,000 cubic meters per month. In June 2009, Jabal Omar s shareholders approved a Sukuk issue after the company faced problems in raising a multi-billion dollar financing for the project. In May 2009, the firm appointed Al Rajhi Financial Services, an affiliate of Al Rajhi Bank, to arrange financing worth USD 3.31 billion. SWOT Analysis STRENGTHS Unique location in the neighborhood of Haram, which will help provide extensive services for pilgrims and visitors Strategic alliance with key regional players for implementing the project One of the largest development projects in Makkah region WEAKNESS No historical performance to support manufacturing business record of the company THREATS Real estate projects may face delay or postponement due to tight liquidity conditions OPPORTUNITIES Saudi Arabia s objective to diversify its economy and increase private sector participation in economic growth Government s initiatives to inject liquidity in the economy to act as catalyst for growth Considerable investments by Saudi authorities into Makkah to improve infrastructure Risks and Concerns: The lack of liquidity may curtail/postpone infrastructure expansion plans. Slow economic growth has negatively impacted demand across the real estate and construction sectors. Going forward, if the economic growth remains weak, companies engaged in real estate activities are likely to face restrained bottom-line growth. Companies in the tourism space may get affected by the economic downturn, as lower disposable incomes and threat from the H1N1 virus lead to reduced activity in the sector.

12 Valuation Methodology: We have used DCF valuation method to arrive at the fair value of Jabal Omar, as discussed below: Assumptions: Cost of Equity: 7.12% WACC: 7.12% (i) Risk free Rate (Rf) of 3.19%, equivalent to 12-months average yield on 10 year US T- bill. (ii) Beta of 0.55 (iii) A terminal growth rate of 2.0% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 7.12%. As the company is debt free the corresponding WACC also equals 7.12%. DCF Calculations DCF Valuation (FCFF Model) (in SAR Million) 2009E* 2010E 2011E 2012E 2013E 2014E 2015E NOPAT , , Add: Depreciation and Amortisation Less: Capex Less: Change in Net Working Capital Operating Free Cash Flows to Firm (OFCFF) , Free Cash Flow to Firm (FCFF) , WACC (Ko) 7.12% 7.12% 7.12% 7.12% 7.12% 7.12% 7.12% Present Value / Discount Long-Term Growth Rate (g) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 21, Present Value of Free Cash Flows *2009E excludes 1H09A Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) Terminal Value: Residual Cash Flow (FCFF of 2013E) 1, WACC 7.12% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 5.12% Equals Nominal Terminal Value 21, Implied Multiple of 2013E EBITDA Times PV/Discount Factor 0.64 Present Value of Terminal/Residual Value 13, Enterprise Value 14, Implied Multiple of 2013E EBITDA 9.88 Less: Market Value of Long-term Debts 0 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 14, Net shares outstanding (Million) 671 Fair Value Per Share (SAR) * figures in SAR Million unless specified

13 Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes. Discount Factor Sensitivity Analysis of Nominal Terminal Value (SAR Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 5.12% 25,840 29,551 34,451 41,218 51, % 20,796 23,160 26,096 29,842 34, % 17,400 19,041 21,002 23,388 26, % 14,958 16,166 17,572 19,229 21, % 13,116 14,046 15,106 16,326 17,745 Discount Factor Sensitivity Analysis of Discounted Terminal Value (SAR Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 5.12% 18,674 21,356 24,897 29,788 36, % 14,132 15,738 17,734 20,280 23, % 11,125 12,174 13,428 14,953 16, % 9,003 9,730 10,577 11,574 12, % 7,436 7,963 8,564 9,256 10,060 Discount Factor Sensitivity Analysis of Enterprise Value (SAR Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 5.12% 20,668 23,350 26,891 31,782 38, % 16,026 17,632 19,628 22,174 25, % 12,925 13,974 14,396 16,753 18, % 10,715 11,442 12,289 13,285 14, % 9,065 9,592 10,193 10,884 11,689

14 Investment Opinion Fair Value: SAR Investment Opinion: NEUTRAL Saudi Arabia s real estate sector witnessed an unprecedented expansion drive over the past years following huge investments in infrastructure, construction and industrial projects, which were well supported by the healthy economic growth, higher disposable incomes, and the rising affluent population. However, there was a reversal in the sector s performance following weak demand and liquidity woes due to the economic crisis. Going forward, though economies around the world are still not fully out of the crisis that reached its peak last year, a gradual recovery appears around the corner. According to MEED, as of September 28, 2009, projects worth USD 2.13 trillion were either planned or underway in the region, implying strong growth prospects for the sector in future. Saudi Arabia and the UAE are the biggest project markets with a 70.3% share of the total projects in the region. Saudi Arabia s infrastructure spending of USD billion is only next to the UAE, which tops the list with USD billion. Moreover, the Saudi Arabian real estate s long term growth story on the back of the inherent demand from its rising population stays intact. With 40% of Saudi nationals being under the age of 20 and 70% under 30, and over 65% of families not owning a home, the potential for further expansion in coming years remains strong. It is projected that the country is faced with a shortage of around two million homes and will need another 1.4 million units over the next decade to meet the rising demand from a rapidly growing population. Earlier, the country had planned to build 200,000 housing units every year as part of the development plan for , but the delivery rate has stayed low at less than 50%, bringing rentals under pressure. In order to bridge this shortfall, investments to the tune of USD 180 billion are being planned over the next seven years. Prestigious projects already in the pipeline include the construction of six Economic Cities at an initial cost of around USD 87.8 billion, which will be home to 2.5 million residents. In addition, increasing focus on tourism in the region is expected to further boost the sector. The government has allocated nearly SAR 385 million (USD 102 million) for tourism in its 2009 budget. Further, over the coming years, areas surrounding the Grand Mosque in Makkah are expected to witness one of the biggest property developments in the Gulf region that will include five-star hotels, 4,500 shops, a central transport station, prayer facilities for more than 200,000 worshippers and parking for 12,000 vehicles. The government s focus on enhancing the country s infrastructure and bailing out projects from the financial crisis through aids (amounting to more than SAR 11 billion) calls for an optimistic view. Jabal has the expertise and experience to carry out massive infrastructure projects. At the same time, strategic agreements with local and international contracting companies provide the company with the relevant technical knowhow. However, the company is yet to generate cash flows from its projects, which coupled with uncertainties associated with the timely completion may play spoilsport. Moreover, the stock s current price has already discounted the expected earnings flow. Consequently, we recommend a cautious outlook till the earnings visibility improves. As we expect Jabal Omar to incur losses during 2009 and 2010, the stock s P/E multiple for the periods remain non-conclusive. At the same time, we expect the company to trade at P/B multiples of 2.09x and 2.10x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has underperformed the index gaining only 1.5% compared to a 31.5% rise in the Tadawul All Share Index. Considering the above factors, we initiate our coverage with price target of SAR 21.44, which exhibits an upside of 4.1% from its closing price of SAR (as on October 07, 2009). Therefore, we initiate our coverage on Jabal Omar Development Co. with a NEUTRAL recommendation.

15 Financial Statements Consolidated Balance Sheet (in SAR Million) 2008A* 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash & Cash Equivalents , Net Receivables & Prepaid Expenses ST Total Current Assets , Non-Current Assets Net Furniture & Equipment 4, , , , , , Capital Projects under process 1, , , , , , Due from - prepaid instalment Total Non-Current Assets 5, , , , , , Total Assets 6, , , , , , LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts Payable & accruals Total Current Liabilities Non-Current Liabilities Provision for Employees' Termination Benefits Debt Total Non-Current Liabilities Total Liabilities , Equity Paid-up Capital 6, , , , , , Accumulated losses Total Shareholders Equity 6, , , , , , Total Liabilities and Equity 6, , , , , , * Represents consolidated results for 14 months

16 Consolidated Income Statement (in SAR Million) 2008A* 1H08A 1H09A 2009E 2010E 2011E Sales NA NA NA NA NA 1, Cost of sales NA NA NA NA NA Gross profit NA NA NA NA NA Selling, general and administrative expenses Expenses before establishment Other expenses Depreciation expense Operating profit/ loss Other income Investment income Finance expense Profit before zakat Zakat Net profit/ (loss) Adjusted EPS ** -0.07** * Represents consolidated results for 14 months ** Annualised

17 Consolidated Cash Flow Statement (in SAR Million) 1H08A 1H09A 2009E 2010E 2011E OPERATING ACTIVITIES Net income for the period Adjustment in: Provision for Employees' Termination Benefits Equipment & Properties Depreciation Finance costs Change In Assets & Liabilities: Account Receivables Account Payable Cash from operations Zakat Cash Flows from Operating Activities Investing Activities Purchasing Furniture & Equipment Projects under process -1, Due from - prepaid instalment Net cash used in investing activities -1, Financing Activities Paid-up Capital 2, Finance costs paid Long term loans Net cash (used in) from financing activities 2, Increase/Decrease in Cash and Cash Equivalents 1, Cash and cash equivalents beginning of the year Cash and cash equivalents end of period 1,

18 Common Size Statements Common-Size Consolidated Balance Sheet 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash & Cash Equivalents 14.1% 20.4% 9.2% 9.2% 9.4% 7.6% Net Receivables & Prepaid Expenses ST 0.0% 0.0% 0.0% 0.1% 0.2% 3.1% Total Current Assets 14.1% 20.4% 9.2% 9.3% 9.7% 10.7% Non-Current Assets Net Furniture & Equipment 62.5% 60.5% 62.7% 61.0% 56.8% 52.9% Capital Projects under process 21.4% 17.3% 25.7% 27.5% 31.5% 34.6% Due from - prepaid Instalment 2.1% 1.8% 2.4% 2.2% 2.0% 1.8% Total Non-Current Assets 85.9% 79.6% 90.8% 90.7% 90.3% 89.3% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Accounts Payable & Accruals 0.6% 0.0% 0.7% 0.8% 1.3% 2.2% Total Current Liabilities 0.6% 0.0% 0.7% 0.8% 1.3% 2.2% Non-Current Liabilities Provision for Employees' Termination Benefits 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt 0.0% 0.0% 0.0% 2.9% 11.1% 11.6% Total Non-Current Liabilities 0.0% 0.0% 0.0% 2.9% 11.1% 11.6% Total Liabilities 0.6% 0.0% 0.7% 3.7% 12.4% 13.8% Equity Paid-up Capital 100.1% 100.6% 100.5% 97.6% 89.5% 81.3% Accumulated losses -0.8% -0.6% -1.1% -1.3% -1.9% 4.8% Equity attributable to equity holders 99.4% 100.0% 99.3% 96.3% 87.6% 86.2% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

19 Common-Size Consolidated Income Statement 2008A 1H08A 1H09A 2009E 2010E 2011E Sales NA NA NA NA NA 100.0% Cost of sales NA NA NA NA NA -50.3% Gross profit NA NA NA NA NA 49.7% Selling, general and administrative expenses NA NA NA NA NA -3.0% Expenses before establishment NA NA NA NA NA 0.0% Other expenses NA NA NA NA NA 0.0% Depreciation expense NA NA NA NA NA -5.5% Operating profit/ loss NA NA NA NA NA 41.2% Other income NA NA NA NA NA 0.0% Investment income NA NA NA NA NA 0.0% Finance expense NA NA NA NA NA -1.4% Profit before zakat NA NA NA NA NA 39.8% Zakat NA NA NA NA NA -4.0% Net profit/ (loss) NA NA NA NA NA 35.8%

20 Financial Ratios Liquidity Ratios: 2008A 1H08A 1H09A 2009E 2010E 2011E Current Ratio (x) Profitability Ratios: Return on Average Equity (RoAE) (%) NA NA -0.7* Return on Average Assets (RoAA) (%) NA NA -0.7* Leverage Ratios: Debt to Equity (D/E) Ratio (x) NA NA NA Shareholders' Equity to Total Assets Ratio (x) Total Liabilities to Total Assets Ratio (x) 0.01 NA Current Liabilities to Equity Ratio (x) 0.01 NA Growth Rates: % YoY Growth in Total Assets NA NA % YoY Growth in Shareholders' Equity NA NA Ratios used for Valuation: Adj. EPS (SAR) * -0.07* Adj. BVPS (SAR) P/E Ratio (x) P/BV Ratio (x) Current Market Price (SAR)** * Annualised * Current Market Price as on October 07, 2009