Orascom Construction Industries

Transcription

1 Orascom Construction Industries Reaching further afield Strong Buy Orascom Construction Industries (OCI) s [OCIC] 3Q11 results beat our estimates; it recorded USD183mn compared with USD151mn. Also, we expect management is flexing its business model to broaden the company s reach. According to its recent holding company initiative, the company has amalgamated its multiple subsidiaries under two official pillars, which has facilitated the restructuring of granted loans as well as their refinances. We have adjusted our model accordingly to incorporate OCI s recent activities, increasing our estimated LTFV and marginally raising TP from EGP357/share and EGP287/share to EGP377/share and EGP294/share, respectively. While we note that OCI s LTFV mix is still favoring the fertilizer business, we believe that the contracting segment could stand to benefit from the Arab Spring, and with a cash position of c.usd2bn, we will not rule out the possibility of an upcoming fertilizer M&A. According to our newly proposed TP, OCI s share price holds a 34% upside potential, thus we upgrade OCI s rating to Strong Buy from Buy. Strong diversified business: OCI s management is officially consolidating its subsidiaries under two major brackets contracting and fertilizers through the establishment a holding company. Meanwhile, it continues to enjoy the advantage of a globally expanding fertilizer business. Some recent developments include: the establishment of a new Brazilian plant (OCI s second full-build), with potentially favorable feed stock prices; and the possible use of its USD2bn cash position to capitalize on fertilizers assets currently up for sale. This could also grant access to additional distribution channels and increase the company s fertilizer market share at favorable N or P feed stock costs. MENA government spending partial to infrastructure: OCI s backlog has increasing for the first time in the last six quarters to reach USD5.23bn, a sum slanted towards infrastructure and industrial projects, with 65% & 15% respectively. We expect the LoB s revenues growth to benefit from MENA governments spending packages, of which the GCC s announced energy plan amounts to USD25bn over the coming decade. Valuation and recommendation: OCI benefits from worldwide fertilser assets and diversified risk. Looking to the short-term, we have changed our TP/share of EGP286.9 to EGP294. With an 34% upside potential remaining, we upgrade OCI s rating to Strong Buy from Buy. USD mn 2009 A 2010 A 2011 P 2012 P 2013 P Revenues 3, , , , ,946.7 Growth rate 2.7% 28.2% 10.2% 21.6% 5.9% EBITDA , , , ,005.4 Growth rate -10.1% 37.2% 33.0% 38.7% 0.1% EBITDA margin 20.7% 22.2% 26.8% 30.6% 28.9% Net income , ,054.7 Growth rate -55.9% 36.8% 21.6% 44.7% 0.8% Net margin 11.4% 12.1% 13.4% 16.0% 15.2% PER 16.8x 11.9x 9.2x 6.0x 5.9x P/BV 2.7x 2.5x 2.3x 2.2x 2.2x EV/EBITDA 11.3x 8.9x 8.7x 6.3x 6.3x Net debt/ebitda 1.5x 1.8x 3.3x 2.5x 2.5x Dividend yield 4.8% 5.4% 4.7% 6.8% 6.8% Source: Company reports and CI Capital Research estimates Please Read Last Page For Contact Details and Important Disclaimer STRONG BUY (UPGRADED) LTFV EGP377 / USD61 (GDR) (UPGRADED) TP EGP294 / USD48 (GDR) (UPGRADED) COMPANY SYNOPSIS Orascom Construction Industries [OCIC] was incorporated under Law No. 159/1981 in April 1998 as a shareholding company, to undertake contracting business and other related activities. OCIC's operations include construction and fertilisers (nitrogen) and, in 1999, OCIC entered the cement business. This was the same year it listed on the Egyptian Exchange (EGX). In January 2008, OCIC divested its cement segment to Lafarge S.A., in a deal worth EUR8.8bn (USD12.9bn) and assumed USD2bn in debt in a deal executed on the EGX also marked OCIC first venture into the fertiliser industry through its merger with Egyptian Fertilizers Company (EFC). The deal amounted to USD1.59bn (cash and shares), with OCIC assuming EFC's USD1.1bn net debt. Through EFC, OCIC owns a 13.5% stake in Notore Fertilizers, a Nigerian company. In addition, OCIC owns 60% of Egyptian Basic Industries Company (EBIC), another Egyptian fertiliser manufacturer. A third fertiliser plant, Sorfert, is underway in Algeria, to be launched in 2011, whilst OCIC has also acquired a c.20% stake in Gavilon, a US fertiliser distribution company. OCIC is reported to also have considered a DAP/MAP (phosphate fertilisers) project in either Algeria or Morocco. SHAREHOLDER STRUCTURE Sawiris Family 54.0% Free Float 46.0% Total 100.0% STOCK DATA Reuters; Bloomberg OCIC.CA Recent price as of 20-Nov-11 EGP No. of O/S shares mn Market cap EGP 46,039.6 mn 52-wk high / low EGP 294.5/ EGP 0 Avg. daily volume / turnover 0.12 mn / LE mn STOCK PERFORMANCE 52 WEEKS Nov-10 EGP Dec-10 Jan-11 Source: Bloomberg Volume OCIC EGX 30 - rebased Feb-11 Mar-11 Mar-11 May-11 Jun-11 Jun-11 Aug-11 mn shares Sep-11 Oct-11 Nov MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG -

2 Recent news and 3Q11 highlights Recent news OCI announced today that its Fertilizer Group has signed an agreement to acquire minorities in its Texas-based subsidiary Pandora Methanol LLC (Pandora) one week ahead of scheduled ammonia production. The acquisition takes the Group s stake to 100%. Pandora has been renamed to OCI North America. 3Q11 operational analysis Fertilizers drive revenues again: OCI reported consolidated revenues of USD1,360mn (vs. USD1,250mn last year) a QoQ 8% decrease. Revenues came in 22% higher than CI Capital Research estimates USD1,116mn. Fertilizer LoB: Strong operating performance coupled with high utilization rates: o The Fertilizer LoB sold approximately 1.2mn tons of nitrogen-based fertilizers. o Supported with high corn and wheat prices, fertilizer prices increased north of 25% QoQ. Also, fundamentals for nitrogen have been further supported by rising coal prices which are a key input for urea production in China. The latter s government extended the export tariff on nitrogenbased fertilizer products to satisfy local market demand. As a result, Chinese exports are down 62% during the first nine months compared to the same period last year. Contracting LoB: The contracting LoB reported a 13.6% increase in backlog over 2Q11, the second increase in two consecutive quarters. The LoB secured USD1.42bn in new construction work during 3Q11, with new awards for 9M11 totalling USD2.74bn. The segment is negotiating a number of key projects and other high potential projects are currently under bidding. In line EBITDA figure: EBITDA came in at USD371mn, higher than both CICRe and market consensus estimates of c.usd336mn and USD358mn, respectively. The fertilizer business has been operating at near to 100% utilization rates to capture the increasing prices. Moreover, the contracting LoB s margin recorded 15.6% which is lower than our estimates of 16.5% and higher than 2Q11 margin of 13%. Net income: Net income from continuing operations of USD183mn, which beat our estimates of USD151mn. Said performance is 11% higher than 2Q11 s figure of USD165mn, and 24% higher than 3Q10 s USD148mn. Going forward: In light of both the results and our positive outlook for both the company s business segments, we note the following: Fertilizers: The Fertilizer Group continues to focus on organic initiatives and underway capacity additions in Egypt, Algeria, the Netherlands and the US. Once these initiatives are complete by the end of the first quarter of 2012, the Fertilizer Group would have increased total production capacity by approximately 60%. 2

3 o The Fertilizer Group announced a new state-of-the-art integrated nitrogen-based fertilizer Greenfield project in Brazil in joint venture with Rio-de-Janeiro-based EBX Group (EBX). Once commissioned, the project will constitute a milestone in the path of making Brazil a self-sufficient producer and consumer of nitrogen fertilizers thereby improving reliability and availability of strategic fertilizer supplies for the domestic farming industry. o Sorfert Algeria is scheduled to start production within the coming 4-8 weeks and OCI s management expects to book our first shipment in February Sorfert will add 1.2mn tons of urea and 0.8mn tons of ammonia annually. o o o OCI Nitrogen is on track with the expansion of its CAN line which is expected to increase capacity by 300,000 tons per annum or approximately 25%. The capacity increase will be complete during 1Q12. In addition, OCI Nitrogen is also on track to restart an idle 30,000 ton melamine plant in Geleen. In addition, OCI Nitrogen is close to completing its debottlenecking initiative on its ammonium nitrate (AN) liquor capacity which will maximize production capacity of its urea ammonium nitrate (UAN) line. In the US, the OCI Fertilizer Group has signed an agreement to acquire minorities in Pandora Methanol LLC (Pandora) taking the Group s stake to 100% one week ahead of scheduled ammonia production. Pandora has been renamed to OCI North America and rehabilitation of the plant is on-track with ammonia commissioning currently underway. The methanol production lines are scheduled to start during the second quarter of OCI North America will add 250,000 tons of ammonia and 750,000 tons of methanol production capacities to the Group. The plant will supply product to adjacent customers through pipeline connections and will also nearby port access to ship both ammonia and methanol along the Gulf Coast. Egyptian Fertilizer Company (EFC) continues on track with its debottlenecking initiatives at both its urea production lines which are expected to be complete by the end of 1Q12. The debottlenecking at EFC will increase capacity by 250,000 tons per annum or approximately 20% to an annual capacity of 1.55 million tons. Contracting o o The segment is expected leverage on both its presence in the Middle East & North Africa (MENA) region. In addition, the segment is currently in advanced negotiation stages in several markets across the region for contracts totaling north of USD1bn, which should reflect positively to company s backlog. These markets include Egypt, UAE, Iraq, Morocco and Saudi Arabia. We expect the contracting activities to witness a pickup in bid evaluations and new award negotiations. The segment should continue to benefit from its several bids for sizable infrastructure projects across the region however delayed. 3

4 Figure 1 OCI Quarterly Performance Highlights Consolidated Financials (USD mn) 1Q11 A 2Q11 A 1H10 A 3Q11 A 3Q11 e Variance 9M11 A 9M11 e Variance Mar-11 Jun-11 Jun-10 Sep-11 Sep-11 A vs. E Sep-11 Sep-11 A vs. E Fertilizers LoB * , % 1, , % Construction LoB , % 2, , % Total Revenues 1, , , , , % 4, , % YoY growth 28.0% 9.8% 17.5% 8.9% -10.7% 14.5% 7.7% QoQ growth -4.4% 16.8% -7.7% -24.2% Gross Profit % 1, , % Gross Margin 32.4% 32.3% 32.3% 27.2% 27.2% 0 bps 30.6% 30.8% -23 bps YoY growth 36.8% 26.0% 30.7% -0.3% -18.2% 19.8% 13.5% QoQ growth -1.5% 16.6% -22.4% -36.3% EBITDA % 1, , % EBITDA Margin 26.5% 24.5% 25.4% 27.3% 30.1% -281 bps 26.0% 26.8% -74 bps YoY growth 43.2% 33.9% 38.2% 39.6% 26.4% 38.7% 34.2% QoQ growth 5.3% 7.7% 3.0% -6.8% EBIT % % EBIT Margin 21.3% 19.7% 20.4% 22.4% 24.7% -231 bps 21.1% 21.7% -59 bps YoY growth 45.8% 40.5% 43.0% 56.5% 41.6% 47.5% 42.6% QoQ growth 10.6% 8.2% 5.1% -4.9% Net inc. from contin. operations % % Net margin from (cont. operations) 16.3% 11.2% 13.6% 13.4% 13.6% -12 bps 13.5% 13.6% -3 bps YoY growth 76.8% 14.7% 42.5% 23.9% 2.6% 35.7% 28.0% QoQ growth 10.8% -19.8% 10.7% -8.4% Inc. from disc. operations (net of tax) % % Net inc. incl. disc. operations % % Gain on sale of disc. operations Net income % % YoY growth 76.8% 14.7% 42.5% 23.9% 3.5% 2037 bps 35.7% 28% 776 bps QoQ growth 10.8% -19.8% 10.7% -8.4% Source: OCI reports & CI Capital Research estimates 4

5 Projection Assumptions Consolidated level 1. We have increased the weighted average equity risk premium (ERP) from c.16% to c.19% (increase 269bps or +17%). The upward shift is in view of the political risks following the rise of the Arab Spring. The increase in ERP was mostly driven by the fertilizer segment than the contracting segment. Accordingly, we have increased the applied fertilizer ERP from c.17% to 20%, while we have upped the contracting segment s ERP by a marginal 1% i.e. from our old c.14% to c.15%. The slant follows our belief that there could be hidden risks of a natural gas (NG) contract revision in Egypt and/or Algeria. Figure 2 OCIC s New & Old ERP Source: CI Capital Research estimates Old ERP Additional Risk (%) Additional Risk (bps) New ERP OCI Holding 15.7% 269 bps 18.4% Fertilizers LoB 16.6% 347 bps 20.1% Middle East - Egypt EBIC 25.0% 20% 500 bps 30.0% EFC 25.0% 20% 500 bps 30.0% - Algeria Sorfert 20.0% 50% 1000 bps 30.0% International - Netherlands OCI Nitrogen 25.0% 0% 0 bps 25.0% - USA Pandora (new) 0.0% 0% 2500 bps 25.0% Contracting LoB 13.5% 123 bps 14.7% Middle East Egypt 4.4% 20% 88 bps 5.3% Algeria 1.3% 20% 26 bps 1.6% Qatar 3.2% 0% 0 bps 3.2% Abu Dhabi 2.4% 0% 0 bps 2.4% Dubai 0.4% 20% 8 bps 0.5% International Aisa 0.3% 0% 0 bps 0.3% Europe 0.9% 0% 0 bps 0.9% Other 0.5% 0% 0 bps 0.5% 2. As per management s guidance, we have revisited the company s loan structure following its announced plans to undertake a holding structure. This includes the repayment decision for the company s bonds amounting to EGP1.65bn issued in September We believe that the loan restructuring will mute the effect of a bullet payment for a number of loans by finding refinance solutions. Accordingly, we did not change our assumed consolidated debt-to-equity ratio of 3:1. 5

6 Fertilizer LoB We have rolled our estimates forward one year for each of the fertilizer companies in the business line and allocated companies respective loans. Our previous NG assumptions remain unchanged, and we have incorporated Pandora OCI s newly acquired company. EFC & EBIC (Middle East Egypt) We have increased our estimates for N fertilizer prices following their recent rally, while maintaining our previous estimates for NG costs over the coming years as well as their future escalation years. Starting 2011, we have increased the corporate tax rate from 20% to 25% following the increase in Egyptian corporate income tax rate by the same percentage for any corporate profits above EGP10mn. We note that the increase resulted in total tax adjustments of approximately USD23mn during 2Q11, of which USD17mn were deferred tax adjustments related to 2Q11 and previous periods. We have increased the risk premium used to discount companies cash flows from 25% to 30%, reflecting the new political conditions prevalent within Egypt. This is in view of expected higher premiums. We have incorporated the new company s management guidance relating the new loan agreements. We continue to assume that OCI s fertilizer plants located in Egypt sell up to 10% of their volumes to the local market. We note that OCI s strategy consists of exporting almost all of its Egypt s fertilizer products, with negligible local exposure to local dynamics, which imports at international prices. Sorfert (Middle East Algeria) Although Algeria seems to have escaped the shockwaves of the Arab Spring, we have nonetheless accounted for possible odds by increasing the risk premium used to discount company s cash flows from 20% to 30 matching Egypt s new ERP. We continue to assume that the Sorfert plant will start operations starting early We had two confirmations, one from OCI s management and another from Sonatrach s chairman interview in the Algerian newspapers. OCI Nitrogen (Europe Netherlands & Others) We decreased the operational capacity for the calcium ammonium nitrate (CAN) in 2012 from 1,450,000 to 1,300,000 tons per year in 2012 and we ramped it up to 1,450,000 tons per year starting This follows OCI s new guidance. We have maintained the previous ERP assumption of 25%. OCI North America previously Pandora (North America USA) Added We have increased OCI s stake to 100% up from 50% + 1 share. We have incorporated the valuation based on the production capacities according to OCI s management. We have applied a 25% ERP, similar to OCI Nitrogen. 6

7 Contracting LoB We have increased the risk premium used to discount segment s cash flows from 13.5% to 14.7%, reflecting the current political change across the MENA region. Also, we expect that most of the LoB s backlog increase should be coming from countries other than Qatar and the UAE. We have maintained our previous forecasts for the LoB s backlog growth, although the need for further contracting activities could come under the spotlight, especially after the Arab Spring. Figure 3 OCI Segment Projections KPIs Figures US '000 Earnings EBITDA Revenue Source: CI Capital Research estimates Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 New Gross Fertilizers LoB * 1,746,441 2,591,903 2,656,263 2,547,492 2,569,452 Growth rate 26.1% 48.4% 2.5% -4.1% Old Gross Fertilizers LoB 1,639,953 2,161,981 2,093,845 2,092,910 2,165,465 Growth rate 18.4% 31.8% -3.2% 0.0% 3.5% % Chg. Gross Fertilizers LoB 6.5% 19.9% 26.9% 21.7% 18.7% New Gross Construction LoB 3,733,860 3,965,026 4,290,419 4,683,905 5,134,519 Growth rate 5.9% 6.2% 8.2% 9.2% 9.6% Old Gross Construction LoB 3,733,860 3,965,026 4,290,419 4,683,905 5,134,519 Growth rate 5.9% 6.2% 8.2% 9.2% 9.6% % Chg. Construction LoB 0.0% 0.0% 0.0% 0.0% 0.0% New Consolidated 5,394,009 6,556,929 6,946,681 7,231,397 7,703,971 Old Consolidated 5,287,521 6,127,007 6,384,264 6,776,816 7,299,984 % Chg. Consolidated 2.0% 7.0% 8.8% 6.7% 5.5% New Fertilizers LoB 970,411 1,474,712 1,430,987 1,376,258 1,365,469 Growth rate 74.8% 52.0% -3.0% -3.8% -0.8% EBITDA Margin - Fertilizers LoB 55.6% 56.9% 53.9% 54.0% 53.1% Old Fertilizers LoB 884,299 1,275,112 1,220,514 1,215,763 1,244,987 Growth rate 59.3% 44.2% -4.3% -0.4% 2.4% EBITDA Margin - Fertilizers LoB 53.9% 59.0% 58.3% 58.1% 57.5% % Chg. Fertilizers LoB 9.7% 15.7% 17.2% 13.2% 9.7% New Construction LoB 474, , , , ,451 Growth rate -10.7% 11.4% 8.7% 9.7% 10.1% EBITDA Margin - Construction LoB 12.7% 13.3% 13.4% 13.4% 13.5% Old Construction LoB 474, , , , ,451 Growth rate -10.7% 11.4% 8.7% 9.7% 10.1% EBITDA Margin - Construction LoB 12.7% 13.3% 13.4% 13.4% 13.5% % Chg. Construction LoB 0.0% 0.0% 0.0% 0.0% 0.0% New Consolidated 1,444,796 2,003,264 2,005,420 2,006,172 2,058,919 Old Consolidated 1,358,684 1,803,664 1,794,947 1,845,677 1,938,438 % Chg. Consolidated 6.3% 11.1% 11.7% 8.7% 6.2% New Fertilizers LoB 591, , , , ,393 Growth rate 91.1% 53.8% -2.1% -1.3% -0.6% Net Margin - Construction LoB 33.9% 35.1% 33.5% 34.5% 34.0% Old Fertilizers LoB 527, , , , ,891 Growth rate 70.2% 48.3% -6.2% -1.1% 3.5% Net Margin - Construction LoB 32.2% 36.2% 35.0% 34.7% 34.7% % Chg. Fertilizers LoB 12.2% 16.4% 21.5% 21.2% 16.4% New Construction LoB 309, , , , ,341 Growth rate -8.5% 22.2% 8.9% -2.9% 11.3% Net Margin - Construction LoB 8.3% 9.5% 9.6% 8.5% 8.7% Old Construction LoB 294, , , , ,774 Growth rate -12.9% 12.6% 0.0% 0.0% 0.0% Net Margin - Construction LoB 7.9% 8.4% 7.7% 7.1% 6.5% % Chg. Construction LoB 5.0% 14.1% 24.2% 20.6% 34.2% New Old % Chg. Consolidated before minority 841,137 1,288,947 1,303,052 1,279,402 1,322,420 interest Growth rate 29.8% 53.2% 1.1% -1.8% 3.4% Consolidated before minority 822,136 1,114,151 1,084,211 1,127,585 1,200,765 interest Growth rate 26.8% 35.5% -2.7% 4.0% 6.5% Consolidated before minority interest 2.3% 15.7% 20.2% 13.5% 10.1% 7

8 Valuation Summary We have used only DCF and multiples to value OCI s fundamental and relative, respectively. The following are summaries for our approaches: DCF valuation Upgraded: We have increased the company s fundamental valuation despite higher risk premiums. EGP377 vs. old EGP357 per share Multiple valuations Maintained: We have left the company s relative almost unchanged based on the EV/EBITDA multiple. Technical valuation Removed: Although the technical analysis view of the stock suggests EGP231/share as a support, we chose not to incorporate the technical price due to the recent political changes....usd38 eq. EGP231 TP Upgraded: We blended the two approaches (DCF and multiple valuations), as opposed to our previous method, which had included the technical analysis. We have summarized our findings below. Figure 4 OCI s valuation summary Valuation methodology LTFV Multiple Overall effect Weights Change Value Change DCF Technical Relative TP Value - EGP Source: CI Capital Research estimates Valuation Methodology DCF We incorporated the newly acquired Pandora. We have also increased our estimate for the company shareholders value from USD12,334mn to USD12,823mn. Also, we still see that the fertilizer LoB still denominates. 8

9 Figure 5 OCI s New & Old Valuation (mn except for per share data) Note: OCI s fertilizer group acquired Pandora, which is a US fertilizer company during 1H11. The transaction involved acquiring 50% + 1 share via OCI Nitrogen and increased it to 100% in 3Q11. Source: CI Capital Research estimates New Valuation We ran a sensitivity analysis on our suggested OCI s LTFV on the occasion that any of the countries change its natural gas contractual agreement. According to our sensitivity, each USD1/MMBtu increase in NG prices will make OCI s LTFV change by +/- USD4.69 or 7.7% of our estimated LTFV (eq. EGP28.8 change). Also, Egypt s plants will contribute with the highest change in OCI s LTFV followed by Algeria, and lastly Netherlands. Figure 6 OCI s LTFV sensitivity to NG cost % of total value OLD Valuation Enterprise Equity Enterprise Equity Subsidiary Value (EV) share OCI's share Subsidiary Value (EV) share OCI's share EBIC $2,053 60% $1, % EBIC $1,997 60% $1, % EFC $4, % $4, % EFC $4, % $4, % Sorfert $4,542 51% $2, % Sorfert $4,219 51% $2, % Gavilon $1,700 18% $ % Gavilon $1,700 18% $ % OCI Nitrogen $2, % $2, % OCI Nitrogen $2, % $2, % Pandora $ % $ % Pandora $0 0% $0 0.0% Total Fertilizers $15,175 $10, % Total Fertilizers $14,523 $10, % Contracting $4, % $4, % Contracting $4, % $4, % Other Investments $69 $69 0.5% Other Investments $42 $42 0.3% Sum $19,431 $15,173 99% Sum $18,608 $14, % Net debt (2,350) Net debt (2,014) Shareholders' value $12,823 Shareholders' value $12,334 No. of shares ('mn) 209 No. of shares ('mn) 209 Fair value/gdr $61.4 Fair value/gdr $59.0 EGP/USD 6.1 EGP/USD 6.1 Fair value/local share Fair value/local share % of total value OCI's LTFV if respective country(ies) changes its NG contractual supply cost Nothing Happens Netherlands Algeria Egypt All changes OCI's LTFV USD EGP USD 61.4 USD 0.0 USD USD 1.0 USD USD 1.7 USD USD 2.0 USD USD 4.7 USD USD USD USD USD USD 0.0 -USD 6.1 -USD USD USD 28.7 Source: CI Capital Research estimates 9

10 Relative Valuation OCI s local share and GDR are currently trading at a 2013E PER of 6x and a 2013E EV/EBITDA of 6.3x. We believe investors would be more concerned with the company s multiples for 2013 one year from now; thus we used 2013 multiples to reach a multiple-based valuation vis-à-vis peers. Figure 7 OCI s Relative Value EBITDA (USD mn) Year Peers' EV/EBITDA EV (USD mn) % of total value Construction > x 2, % EBIC > x % EFC > x 3, % Sorfert > x 1, % OCI Nitrogen > x % Pandora 60.7 > x % Gavilon 0.3 0% Total Ent. Value 9, % Peer EV/EBITDA multiple: (1) Construction: a sample including regional and international companies, (2) Fertilizer: implied EV/EBITDA multiple from selected fertilizer EV/EBITDA multiple. Source: CI Capital Research estimates Net debt ($2,350) Shareholders' Value $7,176.0 No. of shares ('mn) Relative Value (USD) 34.3 Exchange rate 6.1 Relative Value (EGP)

11 Target Price & Recommendation Target Price We have altered the process through which we calculate OCI s target price. We have not incorporated the market sentiment (as reflected in our technical analysis view) in our modified methodology. Though we continue to blend fair values, we did so according to a different weight scheme (50%-50% for LTFV and relative valuation, respectively). Our old method had been weighted 50%-10%-40% for LTFV, technical and relative valuation, respectively. Although our technical desk suggests a target price of EGP231/share, we think this might be a short term target and we chose to stick to a more longer term target. Hence, we have assigned a new target price of EGP294/share, which marginally higher than our old estimate of EGP286.9/share. Recommendation The suggested TP will put OCI trading at 2012E EV/EBITDA of 7.4x, which is similar to OCI s historical trends. In addition, OCI s TP suggests a 34% upside potential from current market price, so we increased OCI s rating from Buy to Strong Buy recommendation. Figure 8 OCI s TP USD EGP Assigned Weights Weighted Value (EGP) Scenario New Old New Old New Old New Old LTFV % 50% Technical Price % 10% Relative Price % 40% TP 100% 100% Source: CI Capital Research estimates Risks to Recommendation Downside Risks Revoking natural gas contracts by any of the countries, in which fertilizer plants operate, might negatively affect the fertilizers LoB: o Profitability MENA: OCI s management has marked its NG supply in the MENA region well below its international peers. Accordingly, margins might be negatively affected if contracts clauses were revisited upwards by government officials. o Profitability Europe: A jump in natural gas prices in the European market might outweigh benefits from natural gas hedge contracts during ; in this case, they would hurt OCI s Nitrogen subsidiary s fertilizer profitability. An increase in the number of global fertilizer players could increase supply and pressure prices, thereby narrowing margins. OCI operates in emerging markets in the MENA region, exposing it to riskier business environments. 11

12 OCI could follow global trends and suffer delays in the opening of its new fertilizer plants. Several countries (such as India and Pakistan) are attempting to fix their feedstock prices. Their margins are expected to improve and could initiate price competition as a result. Although there are no current signals for cash flow issues, government s assignments, which represent 60% of backlog, might encourage company s management revisit its contracting credit terms. Similar to recent Egypt s tax increase (increasing from 20% to 25%), OCI s profitability might be negatively affected should other MENA countries decide to increase their applied tax. 12

13 Company Financials ( P) Balance Sheet (in USD mn) Dec-10A Dec-11P Dec-12P Dec-13P Dec-14P Assets Cash & Cash Equivalent 1, , , ,167.2 Net Receivables 2, , , , ,106.6 Total Inventory Advance Payments to Suppliers Other Current Assets 0.0 4, , , ,897.1 Total Current Assets 3, , , , ,033.6 Net Plant 3, , , , ,640.3 Long-Term Investments Other Non-Current Assets 1, , , , ,855.5 Intangibles Total Assets 9, , , , ,360.9 Liabilities & Shareholders' Equity Current Portion of LT Debt Accounts Payable 2, , , , ,894.6 Total Current Liabilities 3, , , , ,698.7 Total Long-Term Debt 2, , , , ,559.0 Other Non-Current Liabilities Total Liabilities 5, , , , ,257.7 Provisions Minority Interest Shareholders' Equity 3, , , , ,453.0 Total Liab. & Equity 9, , , , ,360.9 Income Statement (in USD mn) Dec-10A Dec-11P Dec-12P Dec-13P Dec-14P Revenues 4, , , , ,231.4 COGS (3,439.6) (3,540.4) (4,081.3) (4,436.9) (4,693.4) Gross Profits 1, , , , ,538.0 SG&A (288.8) (403.2) (460.4) (491.7) (520.3) Other Operating Income Provisions (84.0) (38.1) (40.7) (41.9) (41.6) EBITDA 1, , , , ,006.2 Depreciation & Amortization (258.7) (201.5) (273.6) (292.3) (301.4) EBIT , , , ,704.8 Interest Expense (120.4) (217.0) (150.8) (128.1) (159.9) Interest Income Investment Income Other Non-Operating Expenses (5.5) EBT , , , ,631.8 Taxes (148.4) (231.1) (364.8) (363.7) (352.4) NPAT , , ,279.4 Minority Interest (54.0) (118.5) (243.0) (248.3) (246.3) Extraordinary Items Attributable Profits , , ,033.1 Note: A= Actual; P Projected Cash Flow (in USD mn) Dec-10A Dec-11P Dec-12P Dec-13P Dec-14P NOPAT , , ,116.8 Depreciation & Amortization Gross Cash Flow (COPAT) , , , ,418.2 WI Change (293.8) 2,604.8 (152.4) (109.5) (22.7) Other Current Items 0.0 (4,633.3) (40.9) Cash After Current Operations (969.8) 1, , ,438.4 Financing Payments (120.4) (217.0) (461.4) (513.3) (414.1) Cash Before Long-Term Use (1,186.8) ,024.3 Net Plant Change (677.8) (879.1) (187.9) (230.6) (213.9) FCFF , , , ,181.5 Others (283.7) (77.4) Cash Before Financing (387.2) (2,143.3) Short-Term Debt , Long-Term Debt (0.8) (0.8) Net-worth 3.5 (9.6) (501.4) (527.4) (516.5) Grey Area 42.3 (344.4) (1.0) (1.1) (3.8) Dividends (417.9) (361.3) (523.0) (527.4) (516.5) Change in Cash (255.7) (119.8) Fact Sheet Dec-10A Dec-11P Dec-12P Dec-13P Dec-14P ROE 19.3% 21.1% 30.3% 30.5% 29.9% ROS 12.1% 13.4% 16.0% 15.2% 14.3% ROA 6.3% 4.9% 6.9% 6.9% 6.7% ROIC 10.6% 8.9% 11.3% 11.0% 11.1% Gross Profit Margin 29.7% 34.4% 37.8% 36.1% 35.1% EBITDA Margin 22.2% 26.8% 30.6% 28.9% 27.7% ATO WI/ Sales 45.0% 78.5% 67.6% 64.4% 61.7% Net Profit Margin 13.2% 15.6% 19.7% 18.8% 17.7% ALEV Debt/ Equity 181% 311% 321% 324% 326% Current Ratio Per-Share Ratios Dec-10A Dec-11P Dec-12P Dec-13P Dec-14P Share Price New No. Of Shares ' , , , , ,938 Actual No. Of Shares ' , , , , ,938 EPS Diluted EPS DPS Diluted P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company Reports & CICR estimates 13

14 Research Amr Hussein Elalfy, CFA Co-Head of Research Mona Mansour Co-Head of Research CI Capital Securities Brokerage (Egypt &UAE) KhaledAbd El Rahman MD & Global Head of Securities Brokerage Dynamic Securities Ahmed Roushdy MD CI Capital Holding 8 Nadi El-Seid Street, Third Floor Dokki Giza, Egypt Tel: +2(02) Disclaimer The information used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. CICR does not make any guarantee, representation or warranty and accepts no responsibility or liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and with the use of specific financial techniques that reflect the personal opinions of the authors of the commentary and is subject to change without notice. It is acknowledged that different assumptions can always be made and that there is a wide choice of techniques that can be adopted each of which can lead to a different conclusion. Therefore, all that is stated herein is of an indicative and informative nature as forward-looking statements, projections and fair values quoted may not be realized. Accordingly, CICR does not take any responsibility for decisions made on the basis of the content of this commentary. This commentary is made for the sole use of CICR s customers and no part or excerpt of its content may be redistributed, reproduced or conveyed in any form, written or oral, to any third party without the prior written consent of CICR. This commentary does not constitute a solicitation or an offer to buy or sell securities. Rating System In February 2008, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This is to make one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV), nor have we stopped our detailed industry and company research. What we did is change the target price to trade in the balance of where a share should trade and where we think it will trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts and perceptions. Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given prevailing interest rates and risks (Please see table below.) Rating Strong Buy >30% Buy >20%<30% Hold >10%<20% Underweight >0% <10% Sell <0% Potential Upside/Downside