drake & scull int l Fully Valued key data 12-Month Fair Value: AED 1.02 Recommendation: Hold-Risk Level: 4** Reason for Report: FY2010 Results

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1 drake & scull int l Fully Valued March 24, 2011 key data Fair Value per Share (AED) 1.02 Closing Price (AED) * week High / Low (AED) 1.16 / YTD / 12-month Return 0.0% / 7.2% Trailing P/E 15.5 Market Cap (AED Millions) 2231 Shares Outstanding (Millions) 2145 Free Float 55% Reuters / Bloomberg DSI.DU / DSI UH *Price close as of March 23, Sources: Bloomberg and NBK Capital key metrics 2010A 2011F 2012F 2013F EPS EPS Growth -48% 28% 14% 7% P/E Dividend Yield 0.0% 0.0% 0.0% 0.0% EV/EBITDA Revenue (Millions) 1,855 2,280 2,544 2,709 Revenue Growth -3% 23% 12% 7% EBITDA (Millions) EBITDA Growth -30% 33% 9% 5% EBITDA Margin 9.9% 10.7% 10.4% 10.2% Sources: Company and NBK Capital quarterly forecasts AED Millions 1Q2010A 4Q2010A 1Q2011F 2Q2011F Revenue EBITDA Sources: Company financial statements and NBK Capital Rebased Performance Highlights 12-Month Fair Value: AED 1.02 Recommendation: Hold-Risk Level: 4** Reason for Report: FY2010 Results 4Q2010 revenues and net profit came in above our forecast, mainly due to a higher-than-expected contribution from the newly acquired subsidiary in Saudi Arabia. Revenues of AED 624 million were 7.4% ahead of our forecast, while net profit of AED million beat our estimate of AED million. The greater deviation at the net level is further explained by higher-than-anticipated, unexplained other income. FY2010 figures are basically in line with our estimates. FY2010 revenues of AED 1.85 billion were a touch ahead of our estimate of AED 1.81 billion. The FY2010 gross margin of 19.5% was exactly in line with our forecast, while the 8.3% net margin was slightly ahead of our estimate of 7.9%. Working capital developments were also in line with our expectations. The receivable-to-payable ratio deteriorated slightly from 1.36x in FY2009 to 1.39x in FY2010, while on a pro forma basis the working capital as a percentage of revenue deteriorated from 21% to 29%. We have adjusted our revenue estimates for the coming years, essentially to reflect the strong performance in terms of the 1Q2011 backlog awards. This will have an impact mainly from FY2012 onwards, as these awards are in the start-up phase and therefore are not expected to contribute significantly to FY2011. Our profitability estimates remain unchanged. DSI s share price has held up remarkably well in the context of Middle East and North Africa (MENA) construction, being essentially unchanged year-to-date (YTD). This means the stock is now trading at a significant premium to its peers. While we think this is justified by stronger growth prospects, we feel the premium is unlikely to expand. Based on our new estimates, we derive a fair value of AED 1.02 per share versus our earlier fair value of AED 1.07 per share. In view of the limited upside, we are downgrading our recommendation from Accumulate to Hold. 0 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Drake and Scull MSCI UAE Sources: Reuters and NBK Capital Analysts Mala Pancholia Loic Pelichet T T E. mala.pancholia@nbkcapital.com E. loic.pelichet@nbkcapital.com ** Please refer to page 7 for recommendations and risk ratings. nbkcapital. com

2 Financial Performance 4Q2010 revenue and margins improvement attributed to the higher-than-expected contribution from the consolidation of the Saudi Arabian acquisition. DSI registered revenue of AED 624 million, up 20% year-on-year (YoY) and 7.4% above our estimate of AED million. This is mostly the result of a higher-than-expected contribution from Saudi Arabia. On October 1, 2010, the company acquired a 65% stake in Drake & Scull International WLL (Saudi Arabia) ( DSI-Saudi Arabia ) for AED 243 million, which contributed AED 123 million of revenue to the group, versus our estimate of AED 91.5 million. Gross margin for the quarter was 17.9%, slightly ahead of our estimate of 17.5%. Saudi Arabia contribution in 4Q2010 boosts group net margins. Net profit for the quarter was AED million, ahead of our estimate of AED million, mainly due to the following: 1) the consolidation of AED 11.9 million of net income from the Saudi Arabian acquisition versus our expectation of AED 5.5 million and 2) the higher-than-anticipated other income of AED 11.6 million versus our estimate of AED 6.4 million. The significantly higher margin of the Saudi Arabian business effectively boosted the group net margin for the period (5.7% versus our estimate of 4%). Ex-DSI Saudi Arabia, the 4Q2010 net income and net margin would have been AED 23.8 million and 4.8%, respectively. For FY2010, revenues and margins are basically in line with our estimates. The group s revenue for the year was AED 1.85 billion, 2.4% ahead of our estimate of AED 1.81 billion and -3% YoY. We hereby provide some comparative metrics of the group s top line: Ex- DSI Saudi, the group s revenue for the year would have been AED 1.72 million. Excluding the acquisitions of Passavanat Roediger, DSI Kuwait, DSI Qatar, DSI Saudi, and DSI Oman, the group s revenue would have been AED 1.66 million for FY2010 versus AED 1.76 million in FY2009. If all acquisitions undertaken thus far are consolidated from the start of the respective years, then the group s revenue would have been AED 2.11 billion in FY2010, same as that in FY2009. DSI s FY2010 margins at the gross (19.5%) and net level (8.3%) were almost in line with our estimates of 19.5% and 7.9%, respectively. Full-year net margin benefits from Saudi Arabia; minorities remain relatively insignificant. The full-year net profit was AED million versus our estimate of AED million, attributed to the higher-than-expected contribution from Saudi Arabia, as well as higher-than-expected other income, in 4Q2010. However, in FY2010 the minorities were slightly higher than our expectation, AED 6.9 million versus our estimate of AED 5.8 million. Given the relatively small scale of minorities, we do not anticipate a significant deterioration of the net income to shareholders over our forecast horizon. Excluding the contribution from the DSI Saudi Arabia acquisition, the net profit for the full year would have been AED million, in line with our estimate. Working capital requirements rise in FY2010. In line with the premise stated in our UAE Contractors initiation report dated December 15, 2010, during FY2010 we expected working capital requirements to rise versus The receivable-to-payable ratio of 1.36x in FY2009 increased to 1.39x for FY2010. Working capital as a percentage of revenue during the same period rose from 23% to 33%, although this is partly due to Saudi Arabia being consolidated from 4Q2010 only. On a pro-forma basis, the working capital as a percentage of sales rose from 21% to 29%. We note here that the receivables for FY2010 are slightly distorted due to 1) consolidation of acquisitions during the year and 2) rollover of an AED 187 million receivable from IFA Hotels and Developments into debt (more details to follow). nbkcapital. com 2

3 Adjusting Our Forecasts We have adjusted our revenue estimates for the coming years, mainly to reflect the strong order inflow from 1Q2011 (where AED 2.5 billion in new orders was added to the backlog). Our revenue estimate is little changed for FY2011, with revisions upwards for the following years, with our main assumptions the following: We expect the AED 1.9 billion contract won in Saudi Arabia in 1Q2011 (which forms the bulk of the new orders won in that quarter) to make little contribution to FY2011. We estimate 2Q2011 will see the contract s start-up phase, which yields little revenue, while 3Q2011 will be impacted by Ramadan. We are modeling more significant contribution from FY2012 onwards but are taking a conservative stance on the total duration of the contract s execution. The target for completion is FY2013; however, experience with large contracts in Saudi Arabia shows they have a tendency to take longer than expected to complete. In addition, we note that another order worth AED 456 million secured in 1Q2011 is in Egypt, and we expect the start-up to be delayed. We expect a rapid decline in the Dubai-based business, at the backlog and revenue levels. DSI s mechanical, electrical, and plumbing (MEP) division benefitted during the boom years of work sub-contracted by the main contractors. With the slowdown in construction activity, the main contractors have taken the MEP activity back in-house. In our view, DSI will suffer proportionally more than, for instance, Arabtec from the slowdown in Dubai activity. We have left our profitability estimates unchanged, as we already modeled a 50-basis-point drop in gross margins over our forecast horizon to account for the change in the business mix (with an increasing proportion of lower-margin construction replacing higher-margin MEP). Our new estimates are as follows: Figure 1 DSI Revised Estimates and Forecast Multiples AED Million 1Q2011F 2Q2011F 2011F 2012F 2013F 2014F 2015F Revising our top line estimates upwards to reflect the strong 1Q2011 backlog momentum Old Revenue ,219 2,376 2,550 2,724 2,930 New Revenue ,280 2,544 2,709 2,880 3,022 Revenue Growth YoY 50% 27% 23% 12% 7% 6% 5% Old EBITDA Old EBITDA Margin 11% 11% 11% 10% 10% 10% 9% New EBITDA New EBITDA Margin 11% 11% 11% 10% 10% 10% 10% Old Net Profit New Net Profit P/E EV/EBITDA Source: NBK Capital On the working capital requirements front, we have modified our assumptions slightly. This is to reflect DSI s reclassification of an AED 187 million receivable from IFA Hotels and Developments into an interest-bearing loan. There is increased visibility on the repayment of this loan, which DSI assures us has commenced. We have therefore modeled full repayment by FY2012. We have also raised our capex estimates to reflect the levels reached in FY2010, although, given the low capital intensity of DSI, this change is hardly material. nbkcapital. com 3

4 Updating Our Valuation Finally, we have tweaked our valuation criteria to reflect the prevailing market uncertainties, as we did for Arabtec in our recent update. In detail, we have done the following: Raised our cost of equity by 100 basis points (bps), taking our weighted average cost of capital (WACC) assumption to 12.2% on average over our forecast period; Modified the balance between our discounted cash flow (DCF) and comparative valuation from 90:10 to 80:20. The DCF method tends to be more skewed to the long term, and we feel this new balance better reflects the current uncertain climate. Figure 2 Weighted Average Fair Value As a result of our new valuation criteria, the weighted average fair value declines to AED 1.02 per share versus our earlier fair value of AED 1.07 per share Valuation Method Value (AED) Weight DCF % Peers Comparison (EV/EBITDA) % Weighted Fair Value 1.02 Upside/ Rating -2% HOLD Source: NBK Capital Figure 3 DCF Valuation Figures in AED Millions Forecast Fiscal Year Ends December Net Operating Profit after Tax Add: Depreciation and Amortization Gross Cash Flow (Incr.)Decr. in Working Capital (25) (Incr.)Decr. in Operating Fixed Assets (65) (65) (65) (65) (65) Free Cash Flow from Operations Terminal Value 1,681 Value of Operations in 12 Months 1,847 Add: Excess Cash 961 Add: Value of Long-Term Investments 15 Add: Value of Other Long-Term Assets 87 Less: Total Debt (570) Less: Minority Interest (79) Value of Equity in 12 Months 2,261 Per-share Value in AED 1.05 Source: NBK Capital Figure 4 DCF Sensitivity Cost of Equity* Growth -0.50% -0.25% Base 0.25% 0.50% -1.0% AED 1.12 AED 1.13 AED 1.13 AED 1.13 AED % AED 1.09 AED 1.09 AED 1.09 AED 1.09 AED 1.09 Base AED 1.05 AED 1.05 AED 1.05 AED 1.06 AED % AED 1.02 AED 1.02 AED 1.02 AED 1.02 AED % AED 0.99 AED 0.99 AED 0.99 AED 0.99 AED 0.99 Source: NBK Capital nbkcapital. com 4

5 DSI s share price performance has actually held up remarkably well in the context of the construction industry, globally and in the MENA region, with the share price essentially unchanged YTD. This means the shares are starting to look expensive on a comparative basis. The company s rapid growth, organically as well as inorganically, and the successful execution of the firm s implementation in new markets underpin these valuations. However, we think DSI s valuation premium is unlikely to extend at this point. Our DCF valuation, using our new assumptions, also offers little upside. For this reason, we are downgrading our recommendation from Accumulate to Hold, with a fair value of AED 1.02 per share versus our earlier fair value of AED 1.07 per share. nbkcapital. com 5

6 Financial Statements Income Statement (A ED M illio ns ) Historical Forecast Fiscal Year Ends December Contract Revenues 1,917 1,855 2,280 2,544 2,709 2,880 3,022 Contract Costs 1,513 1,492 1,833 2,052 2,188 2,330 2,448 Gross Profit Selling/General/Admin. Expenses Management Fee EBITDA Depreciation/Amortization Operating Income Finance Income (Exp), Net (1) Other Income, Net Net Income before Taxes Provision for Income Taxes Net Income after Taxes* Minority Interest (6) (7) (7) (8) (8) (9) (9) Net Income Balance Sheet (A ED M illio ns ) Historical Forecast Fiscal Year Ends December ASSETS Cash and Bank Balances 1,295 1,024 1,075 1,451 1,593 1,816 2,256 Contract Receivables and Retentions, Net 1,579 2,075 2,200 2,369 2,435 2,395 2,261 Inventories Development Properties Other Current Assets Total Current Assets 3,022 3,356 3,443 3,898 4,108 4,292 4,602 Property/Plant/Equipment, Total - Net Goodwill and Intangibles, Net 880 1,149 1,116 1,082 1,049 1, Loans and Advances Investments and Other Assets TOTAL ASSETS 4,365 4,871 4,949 5,393 5,588 5,755 6,044 LIABILITIES & EQUITY Accounts Payables, Accruals and Due to R 1,158 1,488 1,593 1,748 1,798 1,820 1,816 Term Loans and Due to Banks Total Current Liabilities 1,662 2,275 2,163 2,384 2,340 2,252 2,269 Term Loans Minority Interest Other Liabilities, Total Total Liabilities 1,896 2,401 2,298 2,532 2,503 2,429 2,463 Total Equity 2,469 2,470 2,651 2,861 3,086 3,326 3,581 TOTAL LIABILITIES AND EQUITY 4,365 4,871 4,949 5,393 5,588 5,755 6,044 Cash Flow (A ED M illio ns ) Fiscal Year Ends December Cash from Operating Activities (195) (131) Cash from Investing Activities (343) (219) (8) (1) Cash from Financing Activities 1,284 (266) (254) 39 (121) (132) 1 Transl. Diff./Change of Consol. Method (3) (4) Net Change in Cash 743 (620) Sources: Company financials and NBK Capital Historical Forecast nbkcapital. com 6

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