NEUTRAL. Arabian Cement Company (3010.SE)

Transcription

1 Arabian Cement Company (3010.SE) NEUTRAL CMP SAR Target SAR Potential Upside 8.0% MSCI GCC Index Tadawul All Share Index 4, Key Stock Data Sector Cement Reuters Code 3010.SE Bloomberg Code ARCCO AB Equity No. of Shares (mn) Market Cap (SAR bn) Market Cap (USD bn) Avg. 12m Vol. ( 000) Volatility (30 day) Volatility (180 day trend) Stock Performance (%) 52 week high / low (SAR) / M 3M 12M Absolute (%) -32.0% -55.1% -62.0% Relative (%) -20.2% -49.7% -52.9% Shareholding Pattern (%) Public 59.0 Government 16.4 Others 24.6 ACC and TASI Movement Executive Summary Arabian Cement Company (ACC) was the first cement producer in Saudi Arabia and the Arabian Gulf. The original plant, located north of Jeddah, started production in 1959 with 300 tonnes per day (tpd) of clinker and 100 tpd of lime. The company s products include Ordinary Portland Cement (OPC), Sulfate Resistant Cement (SRC), Portland Pozzolan Cement (PPC) and other types of cement. Listed on the Saudi Stock Exchange (Tadawul), ACC is currently the seventh largest cement company in Saudi Arabia by market value and the sixth largest player in terms of total assets. The cement manufacturer now has a total production capacity of 2.5 million tonnes (mt) of clinker per year and 2.8 mt of cement per year. Higher price realisations of SAR up 30% For the nine months ended September 2008, ACC reported a 9.4% decline in net profits to reach SAR million, mainly due to higher expenses and finance charges coupled with decrease in share of investment and other income. Consequently, ACC s annualized EPS decreased to SAR 4.63 in 9M08 as against SAR 5.52 in 9M07. Its gross profit inched up 1.0% to SAR million. The company s revenues however, witnessed a 30.5% y-o-y rise to SAR million on improved cement price realizations during 9M08. While the cement sales volume remained flat at 2.20 mt, price realizations jumped 30.2% to SAR per tonne. Buoyant cement demand on account of the construction boom witnessed by the industry catapulted the cement prices. Despite a healthy rise in the revenues during 9M08, costs increased at a much higher pace eating away the margins. Outlook and valuation Saudi Arabia is taking major initiatives to become a regional economic powerhouse by spending billions of dollars in major infrastructural development projects. The aggregate cost of infrastructural and real estate projects over the next five years is estimated to exceed USD 350 billion. Saudi s budget for cement in such projects usually ranges at around 6% to 10% of a project s total value, thereby providing immense opportunities for the local cement producers. Currently, ACC is in the process of setting up a plant with 2.5 mtpa capacity in Al-Qatarana, Jordan. This plant is expected to come on-stream by mid 2010 and will help ACC to capitalize on opportunities in the Jordan s cement sector. However, ACC presently stands as the last among the listed cement companies in Saudi Arabia in terms of profit margins and return on investment ratios, despite having the best average price realization among peers. Its sharply rising operating costs together with financial leverage may continue to pressurize bottom-line growth and profit margins. We have used DCF valuation technique to arrive at the Fair Value of the company at SAR At the current market price, ACC s stock is trading at a P/E multiple of 7.11x and 7.41x on 2008E and 2009E earnings. The stock exhibits an 8.0% upside from its closing price of SAR (as on November 25, 2008). Accordingly, we initiate our coverage on the ACC s stock with a NEUTRAL recommendation. SAR million 2006A 2007A 2008E 2009E 2010E Revenue ,022 EBITDA Net Profit EPS (SAR) EBITDA Margin 56.74% 60.80% 48.08% 49.83% 48.40% Net Profit Margin 45.10% 54.74% 38.05% 36.93% 35.15% Total Assets 1,810 2,366 3,225 3,692 3,975 ROAE 20.58% 22.65% 16.92% 14.50% 15.25% Call us on or us at research@taib.com

2 Background First cement producer in Arabian Gulf Advantage of abundant limestone deposits and proximity and easy accessibility to major markets It is the sixth largest player in terms of total assets Board of Directors Chaired by Abdullah Mohammed Al Issa Mohammed Abdulqadir Mohammed Al Fadel Dr Ghassan Ahmad Abdullah Al Suleiman Saud Abdulaziz Al Suleiman Moussa Omran Mohammed Al Omran Ibrahim Suleiman Abdulaziz Al Rajhi Ibrahim Mohammed Said Shams Ibrahim Abdullah Ibrahim Al Soubayi Abdulhadi Ali Saif Shayif Abdullah Abdulazim Khooja - Secretary of the Board Source: Zawya.com Founded in 1955, the Arabian Cement Company (ACC) was the first cement producer in Saudi Arabia and the Arabian Gulf. The original plant, located north of Jeddah, started production in 1959 with 300 tonnes per day (tpd) of clinker and 100 tpd of lime. But with the expansion of Jeddah city towards the north and the construction of King Abdul Aziz international airport, a new plant was inaugurated in 1984 in Rabigh area keeping in view the advantages like proximity to the limestone deposits and easy access to major markets, such as Jeddah, Makkah and Madinah. This plant had a capacity of 4,000 tpd of clinker, consisting of four long kilns, which was further increased to 4,400 tpd. As a result of high demand growth, ACC embarked on an expansion program in A new 4,000 tpd capacity short kiln was erected, along with vertical raw mill, pre-heater and grinding mill, and was inaugurated in early By the end of 2007, its cement capacity stood at 2.8 mtpa and clinker capacity was 2.5 mtpa. The company s products include Ordinary Portland Cement (OPC), Sulfate Resistant Cement (SRC), Portland Pozzolan Cement (PPC) and other types of cement. Listed on the Saudi Stock Exchange (Tadawul), ACC is currently the seventh largest cement company in Saudi Arabia by market value and the sixth largest player in terms of total assets (SAR 3.08 billion as of September 30, 2008). Marking its foray into other Middle Eastern and African countries, the company established a wholly owned subsidiary in Bahrain. Through this company it acquired 36% stake in Jordan-based Ready Mix Concrete & Construction Supplies, involved in the business of ready mix concrete, supporting equipment, block making and steel structures. ACC also has a 33.3% stake in Cement Product Industry Company, which is involved in the manufacture of paper bags for cement packaging. Business Model ACC adopted the following business model: Benefiting largely from its location in Rabigh, the company has the advantage of easy accessibility to neighbouring Jeddah, Mecca and Madinah cities, which are witnessing expansion in the real estate, tourism and infrastructure sectors. Its joint venture - Arabian Ready Mix Company with Italcementi, world s fifth largest cement producer, aims for rapid expansion in the west of Saudi Arabia over the next 3 years, in the areas of Jeddah, Mecca, Taif, Yanbu and Madinah. To increase its regional footprint, ACC plans to target the African and Middle Eastern markets. Currently, ACC is in the process of setting up a plant with 2.5 mtpa capacity in Al-Qatarana, Jordan of which it holds 95% stake. This plant is expected to come on stream by mid 2010 and will help ACC to capitalize on opportunities in Jordan s cement sector. Affiliates of Arabian Cement Arabian Cement has a number of subsidiaries, affiliates and strategic investments. SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY SHARE Arabian Cement Bahrain Bahrain % Arabian Ready Mix Company Saudi Arabia 50.00% Ready Mix Concrete and Construction Supplies (via Arabian Cement Bahrain) Jordan 36.00% Cement Product Industry Company Saudi Arabia 33.30% Source: Zawya.com

3 Industry Scenario The GCC cement industry going through some exciting times Saudi Arabia - the largest cement manufacturer and consumer among GCC countries Sector s 9M 2008 aggregate cement production and sales ascended 11.1% and 10.0%, respectively Presently, the GCC cement sector is witnessing an unprecedented boom and demand expansion, owing to the spiraling construction activities in the real estate and infrastructure sectors along with the governments planned initiatives to diversify economies from oil & natural gas. According to industry analysts, cement consumption in the GCC region grew at a healthy CAGR of 14% over the last four years, whereas production ascended 12%. Interestingly, there are nearly three thousand projects, with an estimated value of USD 2.5 trillion, either planned or underway in the region, which will further augment demand. In the GCC region, Saudi Arabia is the largest producer and consumer of cement. According to industry sources, the country s cement consumption was estimated at 33 million tonnes, accounting for 53% of the GCC s total cement consumption in Moreover, cement consumption has been growing at/near double-digit rates since 2000, putting the country at the higher-end of the global per capita cement consumption scale. The central, eastern, and western regions account for maximum cement demand whereas the southern and the northern regions contribute a lesser share. Over the last three years, the country s construction sector has accounted for on an average 4.5% of the nominal GDP. In addition, there is a renewed construction boom in the country on the back of the government s increasing emphasis on diversifying its oil-dependent economy, creating employment opportunities for the rising population, and massive liquidity-fuelled infrastructure investments, and fostering public and public-sponsored investments. This includes massive investments in schools, hospitals, roads, railways, power and water plants, petrochemicals, fertilizers, steel, telecom, tourism, expansion of industrial facilities, and establishing new Economic Cities. According to the Londonbased MEED magazine, several projects worth over USD 460 billion are either announced or currently in progress in the country in the oil & gas, petrochemicals and industrial sector. Additionally, easy access to abundant limestone deposits (the much-needed raw material for cement manufacturing) and low energy costs due to large natural gas reserves are driving cement industry s growth. Currently, the cement sector in Saudi Arabia includes eight publicly listed cement companies, in addition to four small private players, namely Riyadh Cement Co. (RCC), Najran Cement Co. (NCC), Madina Cement Co. (MCC) and Western Cement Co. (WCC). The eight listed players are: Yamama Saudi Cement Co. (YSCC), Saudi Cement Co. (SCC), Eastern Province Cement Co. (EPCC), Qassim Cement Co. (QCC), Yanbu Cement Co. (YCC), Arabian Cement Co. (ACC), Southern Province Cement Co. (SPCC), and Tabuk Cement Co. (TCC). With a present installed capacity of over 37 million tonnes, the Saudi cement sector boasts of seven out of the top 10 cement companies in the Gulf region. In tandem with the rising demand, cement players have been operating at or near 100% capacity. For the nine months ended September 30, 2008, the aggregate cement production of all the twelve cement companies increased 11.1% to million tonnes, whereas clinker production reached million tonnes, registering a healthy expansion of 26.0%. During 9M 2008, domestic cement deliveries stood at million tonnes (accounting for 89.2% of aggregate cement production) as compared to million tonnes (89.6% of the aggregate cement production) in the year ago comparable period. In tandem with the spiraling regional demand, total cement exports ascended to 2.58 million tonnes, translating an increase of 5.1% over 2.45 million tonnes in 9M Eight out of the twelve players exported cement to other regional countries during 9M 2008 as against five companies in the year-ago comparable period, while SCC and EPCC dominating the export market. During 9M 2008, SCC achieved the highest production and sales figures, closely followed by SPCC and YSCC.

4 Cement Production and Sales in Saudi Arabia (in thousands tonnes) Production Cement Sales Domestic Cement Cement Clinker Domestic Exports Sales to Production Companies 9M M M M M M M M M M 2008 YSCC 3,626 3,589 3,290 3,605 3,373 3, % 91.2% SCC 3,954 4,102 3,563 4,252 3,149 3, % 77.5% EPCC 2,633 2,447 2,519 2,521 1,777 1, % 78.1% QCC 2,515 2,491 2,038 2,524 2,259 2, % 87.6% YSC 3,622 3,311 2,835 2,635 3,652 3, % 99.7% ACC 2,186 2,178 1,917 1,910 2,190 2, % 100.8% SPCC 3,579 3,915 3,111 3,982 3,312 3, % 92.9% TCC 1, , % 100.0% RCC 0 1, , NA 80.6% NCC NA 86.9% MCC NA 86.7% WCC NA 94.2% Total 23,173 25,756 20,231 25,492 20,774 22,979 2,452 2, % 89.2% Source: Yamama Cement Aggregate bottom-line of listed cement players dropped 6.8% on rising operating costs and declining sales volume Ban on cement export may have an adverse impact on players top-line growth For our peer-analysis, we have taken into consideration all the listed cement companies in Saudi Arabia. For the nine months period ending September 30, 2008, the aggregate top-line of the listed cement companies ascended only 3.5% to reach SAR 6.08 billion on declining cement sales volume, mainly impacted by the Government s cement export ban. The aggregate cement sales volume (including domestic as well as export deliveries) of all the listed players shrank 1.8% to million tonnes. However, the spiraling construction activities spurred the average price realization of the peer group to reach SAR in 9M 2008 from SAR in 9M 2007, translating an upsurge of 6.3%. During the period under review, ACC registered the highest average price realization at SAR , whereas YCC witnessed the lowest average price realization at SAR among the peer group. Similarly, the listed cement companies witnessed a 6.8% decrease in their aggregate bottom-line to SAR 3.29 billion, on rising cost of sales and operating expenses together with the shrinking sales volume. The average gross profit margin, operating profit margin EBITDA margin and net profit margin of the peer group dipped 522 bps, 605 bps, 340 bps and 613 bps to 57.3%, 52.9%, 64.1% and 54.5%, respectively. In 9M 2008, SPCC reported the highest top and bottom-line figures (SAR 1.04 billion and SAR 0.62 billion, respectively) among the listed cement companies in Saudi Arabia, followed by SCC (SAR 1.02 billion and SAR 0.49 billion) and YSCC (SAR 0.93 billion and SAR 0.54 billion). YSCC and SCC stood as second and third best among the peers in terms of absolute bottomline figures. In terms of profit margins, QCC stood as the best among the peers, whilst ACC ranked the last. In terms of return on investment ratios (ROAE and ROAA), SPCC ranked first among the peers, whereas ACC stood last during 9M During June 2008, the Government of Saudi Arabia imposed a ban on cement exports to check the supply bottleneck and rising inflation, amidst spiraling cement demand both in the domestic and neighboring Gulf countries. As of June 30, 2008, eight out of the sector s eleven cement players exported 2.32 million tonnes (12.6% of total cement production) as compared to five exporting 1.40 million tonnes (9.2% of total cement production) in the year-ago comparable period. The ban is expected to have an adverse effect on the revenue and profitability growth of top cement companies during 2008 and in the upcoming years (unless the ban is lifted soon), as they have increased production capacity to capitalize on rising export opportunities. However, the ban will variedly affect players and can be partially offset by the local demand growth and exports to Bahrain, which is exempt from export. On the other hand, SCC, being the largest cement exporter in the sector with substantial capacity addition coming on stream, may witness a severe hit in its revenue and profitability growth during second half, followed by EPCC, YSCC, SPCC, QCC and RCC.

5 Price realization and markets shares will be under pressure in the near future Recently, the massive petro-dollar surplus driven infrastructure investments and spiraling construction/real estate activities in Saudi Arabia have prompted the existing players to upgrade/expand their capacity and encouraged the establishment of new cement companies. According to various industry experts and analysts, the country s aggregate cement capacity is expected to reach nearly 44 mtpa by end-2008, 50 mtpa by end-2009 and 70 mtpa by end-2013 from 31 mtpa in However, we believe that strong domestic demand might cushion over-supply. However, the government had recently announced to offer seven new cement licenses in the country through a direct bidding process. Most of the new plants are expected to operate at or above design capacity, since plants are usually built with 10-15% excess capacity. Consequently, the ongoing substantial capacity expansion, the entry of new players together with the recent cement export ban may lead to considerable downward pressure on price realization and loss of market shares through intense competition in the near medium-term. Financial Performance FY 2007 Net profits increased 17.1% to SAR million in 2007 Profitability rises y-o-y ACC reported a 17.1% y-o-y increase in its profitability to SAR million in 2007 mainly led by reduced expenses and effective tax rate during the year. The company s healthy bottom-line rise was also supported by increase in other income. Consequently, it reported earnings per share of SAR 5.60 in 2007 compared to SAR 5.56 in Benefiting from the cost efficiency attained by the company, operating profit increased 13.5% y-o-y to SAR million while gross profit was higher 13.1% y-o-y at SAR million in Revenues fall on lower sales volume ACC s revenues decreased 3.5% y-o-y to SAR million in 2007 driven by lower cement production volumes, which subsequently led to a decline in sales volumes. The company s cement production volumes declined 6.7% y-o-y to 2.82 mt, which reduced the cement sales volume by 6.5% y-o-y to 2.83 mt during the year. The reported decline in production volumes can be attributed to absence of imported clinker in 2007 compared to 248,000 tonnes available for use in However, the decrease in production volume was partially offset by higher cement price realizations, which improved 3.2% y-o-y to SAR per tonne in 2007 followed by higher demand emanating from Saudi Arabia as a result of the construction boom. Net profit margins increased 964 bps to 54.7% in 2007 Impetus on cost efficiency boosts margins Despite declining revenues, ACC witnessed an overall improvement in margins supported by its costreduction endeavors. The company s Cost of Goods Sold (COGS) as a percentage of revenues declined 859 bps y-o-y to 41.6% in As a result, ACC s gross margins improved 859 bps to 58.4%, while its operating margins improved 808 bps to 54.0% in Furthermore, higher other income and income from associates and a 237 bps reduction in effective tax rate to 2.6% contributed to 964 bps expansion in net profit margin to 54.7% in Key financial data All figures in SAR million Revenues Gross Profit Margin (%) Operating Profit Margin (%) Net Profit Margin (%) EPS (SAR per share) Source: Arabian Cement Company data

6 Chart Gallery Revenue (SAR Millions) Net Profit (SAR Millions) M M M M 2008 EBITDA Margin Net Profit Margin 90% 90% 75% 75% 60% 60% 45% 45% 30% 30% 15% 15% 0% M M % M M 2008 Return on Average Equity (RoAE) Return on Average Assets (RoAA) 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% M M % M M 2008 Total Assets (SAR Millions) Shareholders' Equity (SAR Millions) 3,200 2,800 2,400 2, , , M M M M 2008

7 Size of the Company The salient points about the balance sheet are as follows: The share of the non-current assets in total assets base decreased marginally to 78.7% in 9M08 from 79.9% in the comparable period a year ago. Fixed Assets increased 54.9% to SAR 2, million in 9M08, taking its share in the total asset base to 87.4%. The share of current assets in total assets increased to 21.3% in 9M08 from 20.1% in 9M07. This was led by a substantial increase of 205.6% in the accounts receivable to SAR million. A 12.8% rise in inventory to SAR million further improved the contribution of current assets to total asset base. However, there was a significant decline of 64.0% in the company s cash and cash equivalents to SAR million in 9M08. Shareholders equity increased to SAR 2.24 billion in 9M08 The shareholders equity increased 29.8% to SAR 2.24 billion in 9M08 from 1.73 billion over the corresponding period of the last year. This can be mainly attributed to 33.3% y-o-y rise in paid up capital to SAR 800 million and contribution of share premium of SAR million in 9M08 following the rights and bonus issue by the company. Although a 15.6% decline in the retained earnings to SAR million in 9M08 had a negative impact on the increasing shareholders equity. During 9M08, the company s total current liabilities increased a whopping 103.0% over 9M07, led by a four-fold increase in current portion of long-term debt to SAR million along with a 75.7% increase in accounts payable to SAR million during the first nine months of Increases in zakat payable and dividends payable also contributed to the rise in current liabilities. The non-current liabilities increased more than five-fold to SAR million on account of nearly eight times rise in long-term debt to SAR million. Financial Performance Analysis 9M08 Bottom-line declined 9.4%, while top-line increased 30.5% For the nine months ended September 2008, ACC reported a 9.4% decline in net profits to reach SAR million. This drop can be attributed to higher expenses and finance charges coupled with decrease in share of investment and other income during 9M08. Consequently, ACC s annualized earnings per share decreased to SAR 4.63 during 9M08 compared to SAR 5.52 in 9M07. Furthermore, while the company s gross profit inched up 1.0% to SAR million in 9M08, operating profit was lower by 2.6% at SAR million. The company s revenues however, witnessed a 30.5% y-o-y rise to SAR million mainly driven by improved cement price realizations during 9M08. While the cement sales volume remained flat at 2.20 mt, price realizations jumped 30.2% to SAR per tonne. Buoyant cement demand on account of the construction boom witnessed by the industry catapulted the cement prices. Despite a healthy rise in the revenues during 9M08, costs increased at a much higher pace eating away the margins. The company s COGS as a percentage of revenues rose 1,302 bps to 55.5% contributing to a 1,302 bps contraction in the gross margins to 44.5% during 9M08. Though selling and distribution expenses were slightly on the lower side, higher administrative and general expenses further contributed to the windfall decline in margins. As a result, the company s operating margin contracted 1,330 bps to 39.1% in 9M08. Due to increase in debt, the company incurred finance charges of SAR 5.39 million. At the same time, reduced investment income (down 14.7% y-o-y to SAR 7.62 million) and other income (lower 49.3% y-o-y to SAR 8.16 million) contributed to 1,678 bps reduction in net profit margin to 38.1% in 9M08. Furthermore, while the company s annualized ROAE dipped to 18.1% in 9M08 compared to 24.2% in 9M07, annualized ROAA declined to 13.6% as against 21.6% during the same period.

8 Working Capital Snapshot SAR ' A 2007A 9M M 2008 Current Assets 778, , , ,149 Net Inventory 134, , , ,026 Inventory Conversion Period (Days) Accounts Receivables 133, , , ,656 Average Collection Period (Days) Cash & Cash Equivalents , ,483 43,681 Securities & Short -term investments 509, Current Liabilities 135, , , ,529 Accounts Payable 67, ,440 57, ,049 Average Payament Period (Days) Long-Term Debts - Current Portion 0 96,734 36, ,909 Net Core Working Capital 200, , , ,633 Average Core Working Capital Cycle (Days) Net Current Assets 642,966 88, , ,620 Average Working Capital Cycle (Days) Source: Yanbu Cement Financial Statements Peer Comparison In order to do a peer comparison we have considered all the eight listed players in Saudi Arabia. Financial Performance of Listed Cement Companies in Saudi Arabia FY 2007 SCC YSCC SPCC EPCC QCC ACC TCC YCC Efficiency Ratios: Total Assets Turnover Ratio (x) Fixed Assets Turnover Ratio (x) Working Capital Turnover Ratio (x) Profitability Ratios: Gross Profit Margin (GPM) 63.0% 64.8% 68.8% 68.7% 74.2% 64.8% 79.9% 58.1% Operating Profit Margin (OPM) 49.1% 62.1% 60.0% 57.0% 63.5% 53.6% 60.0% 56.0% EBITDA Margin 58.0% 69.7% 66.6% 64.9% 71.9% 60.4% 77.2% 66.3% Net Profit Margin 50.4% 61.7% 60.9% 58.6% 63.8% 54.7% 64.6% 56.5% ROAE 26.6% 34.0% 31.0% 27.4% 38.4% 22.7% 23.6% 30.0% ROAA 20.9% 21.7% 27.4% 23.0% 28.3% 18.9% 17.5% 27.5% Market Indicators: EPS (SAR) P/E (x) BVPS (SAR) P/BV (x) Current Market Capitalization 6,095 4,847 7,280 3,500 4,095 2,504 1,841 3,780 Net Sales 1,362 1,186 1, , Average Price Realization (SAR) Gross Profit Operating Profit EBITDA Net Profit Total Assets 3,861 3,604 2,648 2,496 2,059 2,366 1,366 2,563 Shareholders' Equity 2,739 2,365 2,344 2,114 1,523 1,841 1,031 2,324 Sources: Zawya.Com, Yamama Cement and ACC Financial Statements

9 Financial Performance of Listed Cement Companies in Saudi Arabia 9M 2008 SCC YSCC SPCC EPCC QCC ACC TCC YCC Efficiency Ratios: Total Assets Turnover Ratio (x) Fixed Assets Turnover Ratio Working Capital Turnover Ratio Profitability Ratios: Gross Profit Margin (GPM) 54.4% 61.0% 60.8% 59.5% 65.2% 44.5% 57.5% 55.1% Operating Profit Margin (OPM) 47.4% 56.8% 58.5% 52.8% 63.1% 39.1% 52.7% 53.1% EBITDA Margin 55.3% 72.4% 68.9% 63.0% 72.6% 46.1% 70.4% 64.0% Net Profit Margin 48.1% 58.1% 59.0% 57.1% 65.0% 38.1% 58.4% 52.3% ROAE 23.9% 27.8% 36.1% 24.0% 36.0% 18.1% 18.3% 25.7% ROAA 15.8% 20.1% 31.5% 20.4% 26.9% 13.6% 14.7% 23.3% Market Indicators: EPS (SAR) P/E (x) BVPS (SAR) P/BV (x) Current Market Capitalization 6,095 4,847 7,280 3,500 4,095 2,504 1,841 3,780 Net Sales 1, , Average Price Realization (SAR) Gross Profit Operating Profit EBITDA Net Profit Total Assets 4,414 3,538 2,559 2,212 2,154 3,080 1,212 2,462 Shareholders' Equity 2,716 2,798 2,189 1,877 1,632 2,243 1,037 2,236 Sources: Zawya.Com, Yamama Cement, ACC Financial Statements

10 New Projects and Strategy Exploring opportunities in the other Middle Eastern countries Strategically located operations In a bid to expand its local presence, ACC revealed that it is eyeing acquisitions in Africa and the Middle East. The company s announced investments are put at around USD 900 million to more than double its capacity to 7 mtpa in the Saudi market by It perceives countries such as Sudan, Zimbabwe and others in East Africa as particularly attractive. Of these investments, in October 2007, the company started construction of its first plant outside Saudi Arabia a USD 400 million Al- Qutranah cement plant (Jordan), to be located in the southern Qatrana area. The location of the plant in Al Qatranah, around 90 km south of Amman in the Karak Governorate, enables ACC to tap into the sizeable local deposits of limestone - a key basic raw material in cement production. Al Qatranah has limestone beds that are up to 40 metres deep at places, while in Sultani, just 15 km south of Al Qatranah, and in Siwaqa Damekhi, to the north east of the city, the beds are even deeper. Currently, Jordan has only one player, Jordan Cement Factories Company (JCFC), a unit of France s Lafarge which has a production capacity of 4.4 mtpa. The country is a net importer of cement. Taking advantage of such a scenario, ACC s plant will have an initial capacity of 2.5 mtpa and is expected to come on stream by mid The cement will primarily supply to Jordan s domestic market but it is likely to support the needs of other neighbouring countries such as Iraq, Syria and the Palestinian territories. For this plant, in August 2007, ACC awarded a SAR million contract to Germany s KHD Humboldt to supply equipment. In line with these developments, in November 2007, the company s wholly owned subsidiary Arabian Cement Bahrain acquired a 36% stake in Ready Mix Concrete & Construction Supplies Co. (Jordan) for a total value of SAR 143 million. Earlier, in the previous month, the company entered into a 50:50 joint venture with Italcementi to set up Arabian Ready Mix Company. The venture s first plant will be built near the city of Jeddah, where it will benefit from high demand relating to construction of King Abdullah City. The plant will have an annual ready mixed concrete capacity of one million m3. Along with same partner through a 50:50 joint venture, the company is also setting up a cement plant in Labouna with a production capacity of 3.0 mtpa of clinker. With a net investment of SAR 2 billion, the plant is expected to commence operations by the end of For financing its huge developmental activities, in September 2008, ACC signed a 7-year SAR 450 million loan agreement with Riyad Bank. Simultaneously, it was granted a USD 120 million Shariahcompliant loan from BNP Paribas (France) to finance the establishment of the cement plant in Jordan. SWOT Analysis Strength: Growth initiatives aimed at increasing the production capacity base remain a key positive. Impetus on local and regional expansion, which includes a 2.5 mtpa plant under construction in Al-Qatarana, Jordon amongst others provide a competitive edge. Focus on increasing the efficiency and controlling its costs. The company s sixth cement production facility will use heavy fuel instead of crude oil, which is likely to substantially reduce its costs. ACC enjoys favourable positioning as it is located in the western region which is the hub of major construction activities in Saudi Arabia like the King Abdullah Economic City. The company s plants, located in Rabigh are in close proximity to Jeddah, Mekkah and Al Madinah, which are witnessing expansion across real estate, tourism and infrastructure sectors. Abundant raw materials such as limestone deposits are located in the close vicinity to ACC s plants. This not only guarantees availability of raw material in plenty but also mitigates risks associated with transportation costs. Weakness: No exposure to exports increases the risks of operating in a single country.

11 Opportunities: With the completion of construction of plant in Jordan, the company can tap the demand and enhance its market share in the country further aided by the presence of single cement player (Jordon Cement Factories Company). With the abolition of the export ban imposed by the Saudi Arabian government, the company can venture into exports with capacity expansion initiatives of support it. Planned infrastructure activities worth USD 350 billion are likely to boost demand for cement, presenting higher opportunities to increase market share. Single player in the cement market (Yanbu Cement), within the region, presents increased opportunities to tap demand. Threats: The Saudi Arabian government intends to award seven new cement licenses. This could intensify competition and disturb the orderly growth of the cement industry. Planned capacity expansion by the existing players amidst the prevalent economic downturn could lead to oversupply implying that cement prices would cool off. Risks and Concerns: Saudi Arabia is witnessing a construction boom, which has increased the demand for cement and price realizations for the companies. With the global downturn impacting investments, infrastructure projects are likely to witness longer gestation periods. It is speculated that 60% of the projects in GCC have been shelved. Lower oil revenues on account of sharp fall in crude oil prices is driving away the investments from the infrastructure sector. Despite efforts by the Saudi Arabian government to increase liquidity in the economy with the latest initiative in the form of 100 bps repo rate cut to 3%, the demand in the sector is expected to witness a downfall, thereby reducing cement price realizations. The cement capacity is expected to increase from 31 mt in 2007 to 49.1 mt by the end of Rising cement capacities is likely to lead to oversupply that would result in loss of market share and price declines. Cost of Equity: 11.24% WACC: 9.98% Valuation Methodology: We have used DCF valuation method for arriving at the fair value of Arabian Cement Company (YCC), as discussed below: Assumptions: (i) Risk free Rate (Rf) of 3.25% (ii) Historical equity premium of US equities over the risk-free rate. (iii) Country premium of 1.05% using Moody s long-term country rating (A1 for Saudi Arabia) and estimating the default spread for the rating, based upon the difference in yields for traded country bonds. (iv) Unlevered industry Beta for emerging markets petrochemical companies of (v) 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 11.24%. Taking into consideration the long-term debt of YCC, we have arrived at the Weighted Average Cost of Capital (WACC) of 9.98%.

12 DCF Calculations DCF Valuation (FCFF Model) SAR 000 4Q08E Operating Profit (EBIT) 75, , , , ,888 Less: Zakat on EBIT 2,675 12,475 13,403 13,631 13,880 Effective Tax Rate 3.56% 3.56% 3.56% 3.56% 3.56% NOPAT 72, , , , ,008 Add: Depreciation and Amortization 18,239 87,888 98, , ,438 Less: Capex 90, , , , ,510 Less: Change in Net Working Capital -35,871 16,961 78,298 52,470 51,480 Operating Free Cash Flows to Firm (OFCFF) 36, , , , ,456 Non-Operating Income 6,354 21,981 24,442 25,258 26,000 Tax on Non-Operating Income Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 6,127 21,199 23,572 24,359 25,075 Free Cash Flow to Firm (FCFF) 42,155-79, , , ,531 WACC 9.98% 9.98% 9.98% 9.98% 9.98% Present Value / Discount Long-Term Growth Rate (g) 2.00% Present Value of Free Cash Flows 41,491-71, , , ,500 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 484,659 Terminal Value: Residual Cash Flow (FCFF of 2012E) 302,531 WACC 9.98% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalization Rate (WACC - g) 7.98% Equals Nominal Terminal Value 3,865,006 Implied Multiple of 2012E EBITDA 7.47 Times PV/ Discount Factor 0.67 Present Value of Terminal/Residual Value 2,599,825 Enterprise Value 3,084,484 Implied Multiple of 2012E EBITDA 5.96 Less: Market Value of Long-term Debts 381,038 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 2,703,446 Net Outstanding Shares ('000) 80,000 Fair Value Per Share (SAR) 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 000) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 7.98% 4,377,594 4,738,715 5,160,223 5,658,650 6,257, % 3,829,023 4,105,197 4,420,936 4,785,401 5,210, % 3,401,120 3,619,393 3,865,006 4,143,436 4,461, % 3,061,684 3,239,121 3,436,318 3,656,769 3,904, % 2,782,842 2,930,045 2,930,045 3,271,034 3,470,007

13 Sensitivity Analysis of Discounted Terminal Value (SAR 000) Discount Long-Term Growth Rate Factor 1.00% 1.50% 2.00% 2.50% 3.00% 7.98% 3,179,106 3,441,359 3,747,469 4,109,437 4,544, % 2,675,940 2,868,945 3,089,602 3,344,311 3,641, % 2,287,789 2,434,612 2,599,825 2,787,113 3,001, % 1,983,539 2,098,493 2,226,249 2,369,070 2,529, % 1,736,747 1,828,615 1,929,689 2,041,424 2,165,601 Sensitivity Analysis of Enterprise Value (SAR 000) Discount Long-Term Growth Rate Factor 1.00% 1.50% 2.00% 2.50% 3.00% 7.98% 3,694,702 3,956,956 4,263,065 4,625,033 5,059, % 3,175,770 3,368,776 3,589,433 3,844,142 4,141, % 2,772,448 2,919,271 3,084,484 3,271,772 3,485, % 2,453,764 2,568,718 2,696,474 2,839,295 3,000, % 2,193,068 2,284,936 2,386,009 2,497,744 2,621,922 Investment Opinion Fair Value: SAR Investment Opinion: NEUTRAL The cement sector in the GCC region is witnessing a period of unprecedented expansion in demand, on the back of amplified construction and real estate activities coupled with initiatives in place by the local governments to diversify from an oil and gas dependent economy. Furthermore, about three thousand projects with an estimated total project value of USD 2.5 trillion, either planned or underway, are expected to drive cement demand in the region. Among the GCC economies, Saudi Arabia is the largest manufacturer and consumer of cement, accounting for more than half of GCC region s total cement consumption. Moreover, Saudi Arabia s cement consumption has been growing at near double-digit rates since 2000, putting the country at the higher end of the global per capita cement consumption scale. In addition, renewed construction boom finds support from the government s increased emphasis on diversifying its oil-dependent economy through massive investments in schools, hospitals, roads, railways, power and water plants, petrochemicals, fertilizers, steel, telecom, tourism, expansion of industrial facilities, and establishing new Economic Cities. According to the London-based MEED magazine, several projects worth over USD 460 billion have either been announced or currently in progress in the oil & gas, petrochemicals and other sectors, which will continue to keep the demand in positive. In turn, ACC s impetus on local and regional expansion, which includes a 2.5 mtpa plant under construction in Al-Qatarana, Jordon provide a competitive edge. On the flip side, with the global downturn impacting investments, infrastructure projects are likely to witness longer gestation periods. It is speculated that 60% of the projects in GCC have been shelved. Lower oil revenues on account of sharp fall in crude oil prices is driving away the investments from the infrastructure sector. Despite efforts by the Saudi Arabian government to increase liquidity in the economy with the latest initiative in the form of 100 bps repo rate cut to 3%, the demand in the sector is expected to witness a downfall, thereby reducing cement price realizations. Furthermore, ongoing capacity expansions, threat of entry of new players along with the recent cement export ban may intensify competition and exert considerable downward pressure on price realizations in the near to medium-term. Based on our outlook of an impending slack in the demand for cement driven by slowdown in the economy, we hold a cautious look on the stock. At the current market price, ACC s stock is trading at a P/E multiple of 7.11x and 7.41x on 2008E and 2009E earnings, and at a P/B multiple of 1.08x and 1.07x on 2008E and 2009E BVPS, respectively. We have arrived at a Fair Value of SAR The stock exhibits an 8.0% upside from its closing price of SAR (as on November 25, 2008). Accordingly, we initiate our coverage on the ACC s stock with a NEUTRAL recommendation.

14 Financial Statements Consolidated Balance Sheet (in SAR '000) 2006A 2007A 9M M E 2009E 2010E ASSETS Current Assets Cash & Cash Equivalents , ,483 43,681 35,456 46,543 57,846 Securities & Short -term investments 509, Accounts Receivables 133, , , , , , ,568 Net Inventory 134, , , , , , ,539 Total Current Assets 778, , , , , , ,738 Non-Current Assets Total Long term Investments 178, , , , , , ,404 Prepaid Expenses 0 28, Goodwill ,280 32,280 32,280 32,280 Fixed Assets 853,011 1,590,967 1,367,417 2,118,073 2,190,374 2,612,273 2,761,839 Total Non-Current Assets 1,031,466 1,972,358 1,571,564 2,424,319 2,593,088 3,033,510 3,202,523 Total Assets 1,809,594 2,365,727 1,967,048 3,080,468 3,225,139 3,692,335 3,975,261 LIABILITIES AND EQUITY Current Liabilities Accounts Payable 67, ,440 57, , , , ,085 Long-Term Debts - Current Portion 0 96,734 36, , , , ,080 Short-Term Debts Zakat Payable 16,164 13,067 12,967 13,940 13,145 11,905 13,035 Dividend Payable 51,146 50,913 51,304 53,632 53,632 53,429 52,654 Total Current Liabilities 135, , , , , , ,854 Non-Current Liabilities Long Term Debt 0 185,412 47, , , ,857 1,042,300 End of Service Provisions 27,653 34,618 33,042 36,235 38,253 42,269 46,919 Total Non-Current Liabilities 27, ,030 80, , , ,127 1,089,219 Total Liabilities 162, , , , ,203 1,246,488 1,484,073 Capital and Reserves Paid-up Capital 600, , , , , , ,000 Share Premium , , , ,565 Statutory/Legal Reserve 300, , , , , , ,217 General Reserve 95,000 95,000 95,000 95,000 95,000 95,000 95,000 Un-Realized Gain from Investment 103, , ,046 87,946 87,946 87,946 87,946 Retained Earnings 548, , , , , , ,429 Equity attributable to Equity holders of Parent Co. 1,646,779 1,840,544 1,728,282 2,243,391 2,320,838 2,336,542 2,373,156 Minority Interest , , , ,033 Total Equity 1,646,779 1,840,544 1,728,282 2,342,667 2,421,936 2,445,846 2,491,189 Total Liabilities and Equity 1,809,594 2,365,727 1,967,048 3,080,468 3,225,139 3,692,335 3,975,261

15 Consolidated Income Statement (in SAR '000) 2006A 2007A 9M M E 2009E 2010E Gross Revenue 747, , , , , ,296 1,021,880 Cost of Goods Sold -375, , , , , , ,527 Gross Profit 372, , , , , , ,353 Selling & Distributing expenses -5,158-5,043-4,379-4,002-6,237-6,436-7,551 Administrative and General Expenses -24,130-26,864-24,453-35,623-42,940-41,143-47,517 Net Operating Profit 343, , , , , , ,285 Provision of end of service indemnity -4,448-9, ,031-12,343-13,795 Spare Parts Provisions -8,271-3, ,464-3,765-4,463 Other Provisions -1, Other Expenses -1,443-1, ,157-1,143-1,533 Finances Charges ,388-7,562-14,047-19,769 Income from associates 633 1, ,778 1,867 1,960 Other Income 26,452 27,773 25,036 15,784 20,360 20,115 22,481 Minority Interests ,736-8,558-8,207-8,729 Net Profit Before Taxes/Zakat 354, , , , , , ,437 Tax / Zakat Provision -17,507-10,400-10,300-10,237-12,999-12,466-13,259 Net Profit After Taxes or Zakat 337, , , , , , ,178 Net Outstanding Shares ('000) 60,000 70,000 60,000 80,000 80,000 80,000 80,000 EPS (SAR)

16 Consolidated Cash Flow Statement (in SAR '000) 2006A 2007A 9M M E 2009E 2010E OPERATING ACTIVITIES Net Income before Tax and Minority Interest 333, , , , , , ,178 Adjustments for: Depreciation & Amortization 80,986 49,109 36,107 50,960 69,199 87,888 98,346 Realized gain from ST investment -16,900-8, Share of Profit from associated companies , ,778-1,867-1,960 Dividend Income -6,142-8,933-16,887-10,557-9,261-8,557-8,576 Minority Interest ,736 8,558 8,207 8,729 Profit on sale of property & equipment Operating profit before changes in working capital 390, , , , , , ,716 Working Capital Changes: Trade and Other Receivables -20,392-35,619-23, , ,535-3,640-74,671 Investories ,891 17,876-19,477-30,521-12,047-27,940 Trade and Other Payables 18,008 76,588-10, ,430-23,393-1,274 24,312 Change in Provisions 2,673 6,965 5,389 1,617 3,635 4,017 4,650 Zakat Payable 3,140-3,097-3, ,240 1,130 Cash Flows from Operating Activities 393, , ,047-34,886 80, , ,197 INVESTING ACTIVITIES (Inc) dec in investments ,072-11,733 44,317-63,981-18,522-19,448 (Inc) dec in ST Investments -92, , , Dividend Received 23,674 19,320 7,954 2,936 12,965 12,641 12,252 Net Purchase of property, plant and equipment -180, , , , , , ,912 Proceeds from sale of property, plant and equipment Cash Flows from Investing Activities -248, ,474-44, , , , ,108 FINANCING ACTIVITIES Dividend Paid during the year -198, , , , , , ,996 Increase/Decrease in Loans 0 253,548 83, , , , ,268 Increase in Capital , , Share Premium , , Increase/Decrease in Minority Interest ,540 92,540 8,207 8,729 BOD Members Benefits -2,150-1,667-1,667-1,788-1,788-1,788-1,788 Cash Flows from Financing Activities -200,164 23, , , , , ,787 Net change cash & cash equivalents -55, , ,514-72,934-81,160 11,088 11,303 Cash & cash equiv at start of year 56, , ,616 35,456 46,543 Cash & cash equiv at year end , ,483 43,681 35,456 46,543 57,846

17 Common Size Statements Common-Size Consolidated Balance Sheet (in SAR '000) 2006A 2007A 9M M E 2009E 2010E ASSETS Current Assets Cash & Cash Equivalents 0.1% 4.9% 6.2% 1.4% 1.1% 1.3% 1.5% Securities & Short -term investments 28.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Accounts Receivables 7.4% 7.1% 8.0% 15.6% 14.2% 12.5% 13.5% Net Inventory 7.5% 4.6% 6.0% 4.3% 4.3% 4.1% 4.5% Total Current Assets 43.0% 16.6% 20.1% 21.3% 19.6% 17.8% 19.4% Non-Current Assets Total Long term Investments 9.9% 14.9% 10.4% 8.9% 11.5% 10.5% 10.3% Prepaid Expenses 0.0% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% Goodwill 0.0% 0.0% 0.0% 1.0% 1.0% 0.9% 0.8% Fixed Assets 47.1% 67.3% 69.5% 68.8% 67.9% 70.7% 69.5% Total Non-Current Assets 57.0% 83.4% 79.9% 78.7% 80.4% 82.2% 80.6% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Current Liabilities Accounts Payable 3.7% 6.1% 2.9% 3.3% 3.8% 3.2% 3.6% Long-Term Debts - Current Portion 0.0% 4.1% 1.8% 4.9% 4.9% 4.6% 4.7% Short-Term Debts 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Zakat Payable 0.9% 0.6% 0.7% 0.5% 0.4% 0.3% 0.3% Dividend Payable 2.8% 2.2% 2.6% 1.7% 1.7% 1.4% 1.3% Total Current Liabilities 7.5% 12.9% 8.0% 10.4% 10.7% 9.6% 9.9% Non-Current Liabilities Long Term Debt 0.0% 7.8% 2.4% 12.4% 13.0% 23.0% 26.2% End of Service Provisions 1.5% 1.5% 1.7% 1.2% 1.2% 1.1% 1.2% Total Non-Current Liabilities 1.5% 9.3% 4.1% 13.5% 14.2% 24.2% 27.4% Total Liabilities 9.0% 22.2% 12.1% 24.0% 24.9% 33.8% 37.3% Capital and Reserves Paid-up Capital 33.2% 29.6% 30.5% 26.0% 24.8% 21.7% 20.1% Share Premium 0.0% 0.0% 0.0% 12.8% 12.2% 10.7% 9.9% Statutory/Legal Reserve 16.6% 14.3% 15.3% 11.0% 10.5% 9.2% 8.5% General Reserve 5.2% 4.0% 4.8% 3.1% 2.9% 2.6% 2.4% Un-Realized Gain from Investment 5.7% 5.7% 5.5% 2.9% 2.7% 2.4% 2.2% Retained Earnings 30.3% 24.2% 31.8% 17.1% 18.8% 16.8% 16.5% Equity attributable to Equity holders of Parent Co. 91.0% 77.8% 87.9% 72.8% 72.0% 63.3% 59.7% Minority Interest 0.0% 0.0% 0.0% 3.2% 3.1% 3.0% 3.0% Total Equity 91.0% 77.8% 87.9% 76.0% 75.1% 66.2% 62.7% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

18 Common-Size Consolidated Income Statement (in SAR '000) 2006A 2007A 9M M E 2009E 2010E Gross Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold -50.2% -41.6% -42.4% -55.5% -54.1% -54.6% -55.8% Gross Profit 49.8% 58.4% 57.6% 44.5% 45.9% 45.4% 44.2% Selling & Distributing expenses -0.7% -0.7% -0.8% -0.5% -0.7% -0.7% -0.7% Administrative and General Expenses -3.2% -3.7% -4.4% -4.9% -4.6% -4.5% -4.7% Net Operating Profit 45.9% 54.0% 52.4% 39.1% 40.6% 40.2% 38.8% Provision of end of service indemnity -0.6% -1.3% 0.0% 0.0% -1.3% -1.4% -1.4% Spare Parts Provisions -1.1% -0.4% 0.0% 0.0% -0.4% -0.4% -0.4% Other Provisions -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other Expenses -0.2% -0.2% -0.2% -0.1% -0.1% -0.1% -0.2% Finances Charges 0.0% 0.0% 0.0% -0.7% -0.8% -1.5% -1.9% Income from associates 0.1% 0.2% 0.0% 0.0% 0.2% 0.2% 0.2% Other Income 3.5% 3.8% 4.5% 2.2% 2.2% 2.2% 2.2% Minority Interests 0.0% 0.0% 0.0% -0.9% -0.9% -0.9% -0.9% Net Profit Before Taxes/Zakat 47.4% 56.2% 56.7% 39.5% 39.5% 38.3% 36.4% Tax / Zakat Provision -2.3% -1.4% -1.8% -1.4% -1.4% -1.4% -1.3% Net Profit After Taxes or Zakat 45.1% 54.7% 54.9% 38.1% 38.1% 36.9% 35.1%