Lafarge Cement Jordan Equity Report

Transcription

1 Equity Report December 13, 1 Serene Zawaydeh Head of Research Research Division Awraq Investments szawaydeh@awraq.com Jordan

2 Table of Contents Executive Summary... 4 Ownership Structure... 4 Regional Presence of Lafarge Group... 4 Competition in Jordan s Cement Market... 5 s Financial Highlights... 7 Stock Price Valuation Appendix Disclaimer Table of Figures Figure 1: Ownership Structure (Dec 1)... 4 Figure 2: Summary of Indicators... 4 Figure 3: Cement Producers in Jordan... 5 Figure 4: Production, Cost and Prices... 7 Figure 5: Revenues, Net Profit, and Net Profit Margin... 8 Figure 6: Revenues Growth Figure 7: Net Profit Growth%... 8 Figure 8: Quarterly Revenues and Net Profit... 9 Figure 9: Quarterly Profit as % of Annual Profit (79)... 9 Figure 1: Local and Export Sales... 1 Figure 11: Cost of Sales... 1 Figure 12: Quarterly Revenues and Cost of Sales Figure 13: Gross Profit Figure 14: Provision for Employees Termination Benefits Figure 15: Headcount Figure 16: Sales and Marketing Expenses Figure 17: Depreciation and Amortization Figure 18: Earnings per Share and P/E Ratio Figure 19: Assets, Liabilities and Shareholders Equity Figure : Book Value per Share and Return on Equity Figure 21: Liquidity Ratios Figure 22: Working Capital and Working Capital Investments Figure 23: Inventory Figure 24: Cash and Short Term Deposits Figure 25: Interest Income Figure 26: Cash Flow from Operating, Investing and Financing Activities Figure 27: Quarterly Cash Flow from Operations Figure 28: Capital Expenditure P a g e 2

3 Figure 29: Dividends Figure 3: JOCM versus Lafarge Group Stock Price Figure 31: JOCM Annual Low and High Stock Price Figure 32: Profit Margin for Cement Producers... Figure 33: Valuation Figure 34: Sensitivity to Beta and Growth Rates Figure 35: Sensitivity of Valuation to Applied Weights Appendix Figure 36: Cement Producers Stock Prices (21) P a g e 3

4 Figure 1: Ownership Structure (Dec 1) Mayloud Shoaibi 1.31% Free Float 17.57% Social Security 21.85% Lafarge Group 5.28% Source: Securities Depository Center Figure 2: Summary of Indicators JOCM JR JOCM.AM Ticker (Bloomberg) (Reuters) 52Wk Low 52 Wk H Close Target Price 4.63 JD 7.73 JD 4.61 JD /4/1 4/13/1 13/12/ E # of Shares (m) Stock Price (JD) Market JD 39 m JD 429 m JD 275 m Capitalization US$ 277 m US$ 35 m US$ 195m Revenues (JD m) Earnings (JD m) EPS (JD) P/E Sh. Equity (JD m) BV per share (JD) P/BV Dividends (JD m) Div. per Share (JD) Dividend Yield 1% 9% 14% Source: Company s Financials, Awraq Investments Target Price: JD 4.19 Recommendation: HOLD Executive Summary (Ticker: JOCM) had a 5 year concession agreement. The company s monopoly period ended in 2, and merchants were given the right to import cement. Actual competition started when Saudi companies started producing, importing and selling cement in the local market. s sales and net profit declined in the first 9 months of 1 as Saudi competitors acquired part of its market share. The company s stock price dropped and is back to 3 levels. It closed at JD 4.61 on December 13, 1, compared to JD 4.63 on May 13, 3. s stock price might drop further, with increased pressure from competition. Saudi cement producers have higher net profit margin than due to lower energy costs, which can enable them to reduce their prices to gain market share. Awraq Investments valuation of yielded JD 4.19 per share, 9% below the close price on December 13, 1 of JD Based on this valuation, our recommendation for is Hold. Ownership Structure The government had established the cement factory in Fuhais in In 1982, the government established South Cement in Rashadiya for export purposes only. In 1984, the two companies were merged, following South Cement s poor performance. Fuhais cement s stock price was valued at JD 1 compared to JD 1 for South cement s stock price. In 1998, the government sold 49% of its share in Jordan Cement to the French producer, Lafarge Group. Subsequently, Lafarge increased its stake to 5.275% controlling share and maintained voting rights. Lafarge Cement Jordan officially launched its new logo and identity in May 9. Its trade name and logo became the same as that of Lafarge Group. currently has a paid up capital of JD million. In addition to Lafarge Group, the Social Security owns 21.87% of the company; the Moroccan investor, Mayloud Shoaiby owns 1.31%, while free float is 17.57%. Regional Presence of Lafarge Group Lafarge Group, established in 1833, is a global cement producer. It is ranked first in the Cement business, third in Aggregate and Concrete, third in Gypsum. The group s workforce exceeded 9, employees in 79 countries in 9. Lafarge expanded its presence in Arab countries through acquisitions. It acquired Orascom Cement in 8, thereby expanding its presence in the region. In addition to its presence in Jordan, Lafarge currently operates in Egypt, Saudi Arabia, Syria, Iraq, UAE, Oman, Qatar, Turkey and Cyprus. It has 9 cement production sites in the Middle East, 9 aggregates quarries; 61 ready mix concrete plants; and 5 Gypsum production sites. P a g e 4

5 Competition in Jordan s Cement Market The profitable operation of attracted competition into the market. The company s net profit had reached JD 67 million in 5, and stood at JD 45 million in 9. Prolonged licensing procedures and a ban on cement exports in Saudi Arabia delayed competition in the market till the second half of 9. Two Saudi companies had applied for licenses to produce cement in 6 and 7, but the licensing procedure took over two years. Furthermore, the Saudi government lifted a yearlong ban on cement exports in May 9. This allowed Saudi cement producers to export part of their surplus production provided they meet domestic demand; set a price of SAR (US$ 53) per ton in Saudi, and maintain a portion of production as inventory. The Saudi cement producers expanded outside their local market which is highly competitive. There are 12 cement producers including 8 publicly listed companies (1). Supply of cement in Saudi exceeds demand. In 9, excess cement capacity stood at 11 million tons. Local cement sales in Saudi Arabia reached 22.1 million tons in the first six months of 1 versus 18.9 million tons a year earlier, while exports surged 37.2% to 678, tons. With the introduction of the Saudi companies in Jordan, supply of Cement in Jordan exceeds demand. The production capacity is around 11 million tons in 1 and 11, while estimated demand in the market is 56 million tons. The construction of Aqaba s US$ 1 billion Marsa Zayed project is expected to increase demand. Some Saudi cement producers operating in Jordan will be exporting their production to Iraq, where demand exceeds supply. According the Ministry of Industry and Trade, the production capacity for Cement in Iraq is around 7 million tons per year, while demand is around 14 million ton per year. The cement production process starts with mining, then producing clinker, which requires heating at very high temperatures, with high fuel consumption. In Saudi Arabia, the low cost of energy and using coal instead of fuel, reduces the production cost, and provides cement producers high profit margins. Cement Producers in Jordan Two Saudi cement producers started production in the second half of 1, namely Northern Cement and Al Rajihi Cement. Competition will intensify further as the Ministry of Industry and Trade reports there are 6 licensed Saudi cement producers as indicated in the following figure. Saudi companies investment in Jordan s cement market exceeds JD 1.4 billion. The biggest investment is JD 3 million, by Thab Investment for Building Materials, while the total investment for the two companies that had started production in 9, amounts to JD million. Figure 3: Cement Producers in Jordan Factory Investment (JD million) Production Capacity (million Tons) Sales Notes Lafarge Jordan Cement 4.9 Local Northern Cement Local Started production in 9 Al Rajihi Cement 15 2 Export Started production in 9 Qatrana Cement Export Started production in Oct 1 Modern Jordanian for Cement and Mining Test production, end 1 Saudi Jordanian Co. for Building and Construction Materials 1 NA Building factory, 1 Thab Investment for Building Materials 3 3 NA Total Capacity Source: Ministry of Industry and Trade (1) P a g e 5

6 Northern Cement (Shamaliya) is the primary competitor for in the local market. It started production in the second half of 9, and its production capacity is 1 million ton per year. The company imports bulk Clinker from Saudi Arabia, creating unfair competition, as stated by Lafarge Cement Jordan. It uses coal, and not fuel oil when producing clinker in Saudi Arabia. Its production cost per ton is estimated at around JD 25 per ton, compared to around JD 5 per ton for. The company is also exempted from taxes for 1 years, as per the investment promotion incentives. Northern Cement produces dark Pozzolana cement, which is darker than the cement produced by Lafarge Cement Jordan, which is due to the nature of desert mountains in Saudi Arabia. This might attract contractors who might prefer darker cement. It is noteworthy that in October 1, Saudibased Rajihi Cement Company signed a US$3 million accord with Shamaliya Cement company to provide it with 6% of its needs of clinker. Al Rajihi Cement Company has a total investment of JD 15 million. It started production by end of 9 with a production capacity 2 million ton per year. Its production is mainly for export purposes. Reportedly, the company faced challenges and had failing test, due to the high concentration of materials that negatively affect the strength of cement, in lands acquired for mining. Qatrana Cement is a subsidiary of Saudi s publicly listed cement producer, Arabian Cement Company. Its investment amounts to JD 2.5 million and is the second highest investment following Thab. It has a daily production capacity of around 5 tons, and an annual production capacity of 2 million tons. It will be exporting its production outside Jordan. Arab Company for White Cement Industry The Arab Company for White Cement Industry was established in 1982 with paid up capital JD 1 million. The Syrian Jordanian public shareholding company started production of white Portland cement in Its shareholders include the following: Syrian Jordanian Company for Industry (Jordan) Syrian National Cement Corporation (Syria) Jordan Investment Corporation (Jordan) Social Security Corporation (Jordan) The company s production capacity is 1, ton per year, and its sales range between 1, and 8, tons annually. The company exports its products to Syria, Saudi Arabia, Yemen and Iraq. It is the only producer of White Cement in Jordan. It faces competition from Egypt, but not Saudi producers and Lafarge Cement Jordan, which produce black cement. P a g e 6

7 JD million tons s Financial Highlights Production, Cost and Prices has two plants in Fuhais and Rashadiyeh and an export terminal in Aqaba. The location of the plant in Fuhais creates an advantage compared to other producers. The company starts the production process with mining, then producing clinker which requires high temperatures. Cost of sales is primarily cost of fuel, which is bought from Jordan Petroleum Refinery Company. 8 had the highest cost of sales, due to the increase in oil prices. The company seeks alternative sources for energy to reduce cost. The business cycle for the cement producers is short. It is around 45 days from mining to sales. The company sells all its production without leaving quantities in stock. The company has a production capacity of 4.9 million tons. Production covered local demand between 1 and 5. It was increased from 4.5 million in 5 to reach the highest production level of 4.28 million tons in 8, along with a boom in the real estate market. The company adjusts its production based on demand. Along with a decline in real estate activity in 9, and competition in the market, it reduced its production to 3.83 million tons in 9. Figure 4: Production, Cost and Prices Average Cost per Ton Average Price per Ton Production (million tons) Note: Prices per ton are excluding tax The company adjusts cement prices along with changes in fuel oil prices, regardless of the direction, in line with the agreement with the Ministry of Industry and Trade. The company has a leading market share, and other cement producers follow similar prices. s average price increased from JD 64 per ton in 7 to JD 75 per ton in 8, and remained at JD 74 per ton in 9. Increased competition and supply could ignite a price war, driving prices down, and reducing revenues. However, due to fixed costs, the average cost per ton would remain high even as production declines. Revenues and Net Profit s revenues increased at a Compound Annual Growth Rate (CAGR) of 18% between 3 and 8, but dropped by 11% in 9. Revenues had increased from JD million in 3 and peaked in 8 reaching JD 321 million, then slipped by 11% in 9 to reach JD million in 9 along with competition in the market. In the first 9 months of 1, revenues amounted to JD 133 million, representing 42% decline over revenues in first 9 months of 9 which stood at JD 23 million. The company had double digit revenues growth rates between 4 and 8, with 7 being the only year with 8% growth rate. P a g e 7

8 M 8 9M 9 9M M 8 9M 9 9M % JD million Net profit was highest in 5 as it reached JD 67 million. Although Lafarge Group acquired the company in 1998, it was not producing at full capacity prior to 5. The company increased production in 5, and this was accompanied with an increase in revenues and net profit. However, with increasing energy cost, net profit declined by 31% between 5 and 9 to reach JD 46 million. The competition had a bigger effect on net profit in 1, as it slipped by 75% in the first 9 months of 1 to reach JD 13 million, compared to JD 54 million in the first 9 months of 9. Figure 5: Revenues, Net Profit, and Net Profit Margin Revenues Net Profit Net Profit Margin 35 31% 33% 35% % 23% 19% 15% 16% 23% 17% 3% 25% % 15% 1% 1% 5 5% M 8 9M 9 9M 1 % Figure 6: Revenues Growth Revenues Growth% Figure 7: Net Profit Growth% Net Profit Growth% % 3% % 1% % 1% % 3% % 5% % 22% 17% 8% 24% 11% 29% 7% 42% 15% % 5% % 5% % 94% 29% 2% 18% 13% 7% 2% 29% 75% P a g e 8

9 JD million An overview of the quarterly results for between 7 and 1 indicate the importance of the second quarter. Revenues were highest in Q2 8, having reached JD 96 million. Net profit was highest in Q2 9, as it reached JD 25.7 million, with a net profit margin of 28%. In Q2 1, net profit amounted to JD 52 million, with a net profit margin of 14%. The second and third quarters generate the majority of the company s annual profit. In 7, Q2 and Q3 generated 7% of total profit for the year; compared to 62% in 8; while Q2 and Q3 generated 98% of 9 profit. The combined profit for Q2 and Q3 1 amounted to JD 11 million compared to JD 44.8 million in 9. The net profit for the first three quarters of 1 amounted to JD million, 75% lower than the net profit for the first three quarters of 9, which stood at JD 53.7 million. The fourth quarter of 9 recorded a net loss of JD 8 million versus net profit of JD 7.7 million in 8. Figure 8: Quarterly Revenues and Net Profit Revenues Net Profit Net Profit Margin 28% 28% 25% 17% 19% 18% 16% 17% 14% 14% 9% 11% 11% 4% 15% () Q1 7 Q2 7 Q3 7 Q4 7 Q1 8 Q2 8 Q3 8 Q4 8 Q1 9 Q2 9 Q3 9 Q4 9 Q1 1 Q2 1 Q3 1 35% 3% 25% % 15% 1% 5% % 5% 1% 15% % Figure 9: Quarterly Profit as % of Annual Profit (79) 18% Quarterly Profit as % of Annual Profit Q4 16% 12% Q3 Q2 31% 27% 31% 42% 42% 56% Q1 19% 22% 18% % % % % % 6% P a g e 9

10 JD million JD million Local and Export Sales Local sales generated 98% of total sales in 9. The company used to export to Iraq, Sudan and Eritria. However, Lafarge Group s presence in Egypt enables it to export to Sudan from Egypt s operation. The group is also present in Iraq. Therefore, will not be exporting production, and export revenues will be eliminated. Figure 1: Local and Export Sales Local Sales Export Sales Cost of Sales In 6, the government liberalized the prices of petroleum products. This was accompanied by an increase in cost of fuel for. Cost of sales was highest in 8, as it reached JD 231 million, along with the increase in fuel prices and accounted for 72% of total revenues. In the first 9 months of 1, revenues declined, while fixed cost remained high, increasing cost of sales to 8% of revenues. In the first two quarters of 1, the cost of sales accounted for 82% of revenues, compared to 56% back in 5. Figure 11: Cost of Sales Cost of Sales Cost of Sales / Revenues % 55% 56% 62% 65% 72% 68% 71% 72% 8% % 8% 6% % 5 % M 8 9M 9 9M 1 % P a g e 1

11 JD million JD million Figure 12: Quarterly Revenues and Cost of Sales Revenues Cost of Sales Cost of Sales / Revenues 84% 82% 82% 72% 74% 75% 76% 7% 7% 61% 64% 65% 6% 5% 76% % 8% 6% % % Q1 7 Q2 7 Q3 7 Q4 7 Q1 8 Q2 8 Q3 8 Q4 8 Q1 9 Q2 9 Q3 9 Q4 9 Q1 1 Q2 1 Q3 1 % Gross Profit The company s gross profit was on average JD 9.8 million between 5 and 9. The gross profit margin declined from 44% in 5 to 32% in 9. In the first 9 months of 1, the gross profit declined to JD 27 million, with a profit margin of %. The gross profit for the year 1 is therefore expected below the average for the past 5 years. Figure 13: Gross Profit Gross Profit Gross Profit Margin % 45% 44% 38% 35% 28% 32% % % 5% % 3% % 1% % M 1 Restructuring Fees When Lafarge Group acquired the company in 1998, the company had 28 employees. The company had started the first phase of restructuring the company in 1. The second phase started in 7. On September 24, 6, signed an agreement with the Union of Construction Workers, to compensate employees for voluntary termination of service. The agreement was extended to another year in November 9. The company estimates the cost of termination of services at around JD 65, per employee. P a g e 11

12 JD million JD million The total amount of provisions for employees termination benefits reached JD 54 million between 6 and 9. Headcount dropped from 1453 employees in 6 to 128 in 9. It is planned to decline by another in 1 to reach 828 employees. Figure 14: Provision for Employees Termination Benefits Figure 15: Headcount Provision for Employees' Termination Benefits Fuhais Plant Rashadya Plant Tafila Headcount Sales and Marketing Expenses Sales and marketing expenses declined from JD 13.7 million in 3 to JD 4.2 million, due to reclassification of expenses. The cost of cement bags was changed from Sales and Marketing expenses, into Cost of Sales. Figure 16: Sales and Marketing Expenses Sales and Marketing Expenses Sales and Marketing Expenses / Revenues % 12% 1% 8% 8 6% % % % 1% % 1% 1% 1.1 4% 2% % M 1 P a g e 12

13 JD JD million Depreciation and Amortization In 5, the company revalued its assets, and changed the depreciation method to be in line with Lafarge Group. Depreciation for machines that was previously used was over 3 years, while Lafarge Group used depreciation over 12 years. Depreciation and amortization amounted to JD 1.3 million in 5, and declined to JD 8.3 million in 6. Figure 17: Depreciation and Amortization Depreciation & Amortization Depreciation & Amortization /Revenues % 6.% 5.1% 3.5% 3.2% 3.4% 4.8% 7.7% % 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Sept 1 Earnings per Share Earnings per share were highest in 5, having reached JD The P/E ratio was below 15 between 3 and 9, and stood at 7.9 in 8. The decline in profit in the first 9 months of 1 led to a decline in earnings per share, and the P/E ratio retreated to 52.7 based on the trailing 12 months till September 1, with JD.9 Earnings per Share. Figure 18: Earnings per Share and P/E Ratio Earnings per Share (JD) P/E Ratio T12M till Sept 1, Bloomberg P a g e 13

14 JD JD million Balance Sheet Highlights s total assets amounted to JD 235 million at the end of September 1, down from JD 296 million at the end of September 9. Shareholders equity accounted for 69% of total assets at the end of Q3 1, and stood at JD 163 million, down from 189 million at the end of 9. Total liabilities accounted for 31% of assets at the end of September 1 and stood at JD 72 million. Liabilities are mainly accounts payable due to suppliers, including Jordan Petroleum Refinery Company and National Electric Power Company. Long term and short term loans were only JD 2.7 million at the end of September 1. The company s mining lands in Fuhais were bought from the government in the fifties. They are valued at historical cost, and therefore are undervalued. Figure 19: Assets, Liabilities and Shareholders Equity Total Assets Total Shareholders' Equity Total Liabilities Sept 1 Book Value and Return on Equity Book value per share was JD 2.7 at the end of Q3 1, down from JD 3.1 at the end of 9. The company s return on equity was above % between 3 and 9. However, ROE dropped to 3% based on the T12M profit for the period ended September 1. Figure : Book Value per Share and Return on Equity % % Book Value per Share Return on Equity % 33% 28% 27% 24% 3% Sept 1 % 35% 3% 25% % 15% 1% 5% % P a g e 14

15 JD million Liquidity Ratios The company maintained a current ratio above 1. Current assets were 1.4 times current liabilities at the end of September 1. The quick ratio, however, dropped to.49 at the end of September 1 versus.94 at the end o 9. Figure 21: Liquidity Ratios Current Ratio 3.5 Quick Ratio Sep1 Working Capital The company has positive working capital, as current assets exceed current liabilities. However, excluding cash from current assets, results in negative working capital investments. This is due to inventory and spare parts. 7% of Inventory consists of imported expensive spare parts needed for machinery. For example, the cost of each gear box is around JD 6,. The company has high accounts payable which increases the current liabilities. It was able to negotiate better terms with suppliers, and increased days payable from 3 days in 8 to 6 days in 9. Figure 22: Working Capital and Working Capital Investments 5 (5) Current Assets Current Liabilities (Current Assets Cash) (Current Liabilities Interest bearing Debt) (1) (26) (7) (23) Sept 1 P a g e 15

16 JD million JD million Figure 23: Inventory Inventory and Spare Parts Inventory and Spare Parts/ Current Assets 6 65% 7% % 3% 27% 43% 44% 54% 36% Sept 1 6% 5% % 3% % Cash and Short Term Deposits The company s cash and short term deposits had reached JD 88 million at the end of 5. Cash and short term deposits dropped from JD 61 million at the end of 9, to JD 8 million at the end of September 1. The deposits accounted for 12% of current assets at the end of Q3 1 versus 47% at the end of Q3 9, and had accounted for 53% of current assets at the end of 9. Figure 24: Cash and Short Term Deposits 8 6 Cash and Short Term Deposits Cash & Short Term Deposits / Current Assets 65% 61% 7% 5% 53% 88 49% 6% 47% % 5% 34% % % 34 % 12% 22 1% 8 % Sept9 Sept1 Finance revenues amounted to JD 1.42 million at the end of 9, compared to JD 2.47 million in 6. This decline accompanied a decline in interest rates. The company is not allowed to have cash deposits for longer than 1 month, and all cash deposits are in Jordanian Dinar. P a g e 16

17 (91) (38) (39) (38) (41) () () (32) (38) (12) (7) (15) (16) (23) (7) (8) (4) (.7) JD million JD million Figure 25: Interest Income Interest Income Interest Income / Cash and Short Term Deposits % 2.% 4.8% 3.8% 3.3% 2.3% 6.% 5.% 4.% 3.% 2.% %.% Cash Flow The company had positive cash flow from operations between 3 and 9. In the first 9 months of 1, it recorded negative cash flow from operations of JD 12 million, compared to positive cash flow from operations amounting to JD 63 million in the first 9 months of 9. Cash flow from financing activities had reached JD 91 million in 6 and stood at JD 41 at the end of 9. Figure 26: Cash Flow from Operating, Investing and Financing Activities Operating Investing Financing (12) (5) () Sep9 Sep1 The following figure provides the quarterly cash flow from operations between 7 and 1. Lafarge Cement Jordan was able to maintain positive cash flow from operations throughout 9, with the second quarter of the year recording JD 51.5 million operating cash flow. In 1, the company had negative cash flow from operations in the first quarter and the third quarter, having reached negative JD 18 million and JD 7.3 million respectively. P a g e 17

18 JD million JD million Figure 27: Quarterly Cash Flow from Operations Cash Flow from Operations (1) () (3) (3.1) (7.3) (18.) Q1 7 Q2 7 Q3 7 Q4 7 Q1 8 Q2 8 Q3 8 Q4 8 Q1 9 Q2 9 Q3 9 Q4 9 Q1 1 Q2 1 Q3 1 Capex In 7, increased its produciton capacity to 4.9 million tons, compared to 4.2 million tons in 5. This required added Capital Expenditure which reached JD 37.6 million in 7. Capex accounted for 15% of revenues in 7, compared to 7% in 6. It declined from JD 15 million in 8 to JD 9.5 million in 9, and stood at JD 1.5 million in the first 9 months of 1 versus JD 5.5 million in the first 9 months of 9. On July 31, 8, acquired 51% of Al Aloul Group, which consists of four limited liabiliy companies specialized in producing ready mix concrete. This added JD 64 thousand in profit the same year. A two year project entitled Treasury project was launched in 9 with the objective of cutting costs and increasing liquidity. The company is working on improving operational efficiency, reducing maintenance costs, using alternative resources, in addition to reducing headcount. Capex might increase by JD 11 million in 11, to be accompanied with JD 5 million reduction in cost. Figure 28: Capital Expenditure CAPEX CAPEX/ Revenues 15% 8% 6% 7% 4% 5% 3% 1% Sept 1 16% 14% 12% 1% 8% 6% 4% 2% % P a g e 18

19 1/1/8 4/1/8 7/1/8 1/1/8 1/1/9 4/1/9 7/1/9 1/1/9 1/1/1 4/1/1 7/1/1 1/1/1 Euro JD JD.65 75% %.65 71%.65 82%.65 8%.65 86% JD Dividends maintained a dividend distribution policy, and distributed JD.65 per share between 6 and 9, which amounted to JD 39.3 million annually. The company distributed JD 1.5 per share based on 5 profit, amounting to JD 9.7 million, thereby increasing the dividend yield to 12.6%. The company might distribute lower dividends in 11 due to lower profit. Retained earnings declined from JD 89 million at the end of 9, to JD 63 million at the end of September 1. Figure 29: Dividends % 12.6% Dividend per Share Dividends/ Net Profit Dividend per Share / Stock Price 5.3% 5.8% 1.4% 1.5% 15.% 1.% 5.% % Stock Price s stock price was highest in 6 having reached JD Although the company recorded the highest sales and net profit in 8, the stock lost 58% of its value, dropping from JD on March 16, 8 to JD 5.32 on November 24, 8, which accompanied the drop in Amman Stock Exchange Index following the global financial downturn. The stock had started sliding in July 8, along with the increase in oil prices and costs. Despite competition in the second half of 9, the stock price ranged between JD 6.12 and JD 7.65 in 9. In 1, the stock price peaked at JD 7.73 on April 11, 1, prior to dividend distribution, but dropped by 45% to reach JD 4.27 on September 23, 1. s stock price is highly correlated to Lafarge Group s price, with a correlation coefficient of 91% between January 8 and December 13, 1. Figure 3: JOCM versus Lafarge Group Stock Price Source: Bloomberg Lafarge SA Figure 31: JOCM Annual Low and High Stock Price Source: Bloomberg JOCM Annual Low and High Stock Price Till Dec 13, 1 P a g e 19

20 Cement Producers Profit Margin In addition to Lafarge Group, we selected 8 publicly listed Saudi cement producers for the peer valuation, namely: Arabian Cement, Eastern Cement, Tabuk Cement, Saudi Cement, Yamamah Saudi Cement, Southern Province Cement, and Qassim Cement. The net profit margin for Saudi producers is significantly higher than and Lafarge Group, which accompanies lower costs. had a profit margin of 2.8% for the trailing 12 months till September 1, although it stood at 13.6% in Q2 1 and 9.9% in Q3 1. Lafarge Group s profit margin was 4.6% for the trailing 12 months till September 1, while Saudi producers profit margin ranged between 21.3% and 58.8%. The Saudi producers are able to compete, while maintaining high profit margins, which increases threat of price competition for. Figure 32: Profit Margin for Cement Producers Company Ticker (Bloomberg) Profit Margin T12M till Sept 1 Q3 1 Q2 1 JOCM JR Equity 2.8% 9.9% 13.6% Lafarge Group LG FP Equity 4.6% 8.3% 7.4% Arabian Cement ARCCO AB Equity 21.3% 49.7% 41.8% Eastern Cement EACCO AB Equity 38.5% 37.1% 45.% Yanbu Cement YNCCO AB Equity 47.% 49.2% 45.% Tabuk Cement TACCO AB Equity 45.2% 39.9% 54.1% Saudi Cement SACCO AB Equity 43.9% 42.9% 45.3% Yamamah Saudi Cement YACCO AB Equity 5.6% 51.6% 57.% Southern Province Cement SOCCO AB Equity 52.1% 42.9% 51.6% Qassim Cement QACCO AB Equity 58.8% 53.8% 53.1% Source: Bloomberg P a g e

21 Valuation In this valuation, we applied equal weights to the Discounted Cash Flow model, Dividend Discount Model, and P/E and P/BV valuation models. For the peer analysis, we used the previously mentioned 8 publicly listed cement producers in Saudi Arabia, in addition to Lafarge Group. Figure 33: Valuation Model Valuation Weighted Weight (JD) Valuation (JD) Average (FCFE, FCFF) % 2.78 DDM 4.9 %.98 P/E Valuation %.13 P/BV Valuation 3.3 1%.3 Target Price % 4.19 Stock Price ( 13121) 4.61 Valuation vs Market Price % 9.% Source: Awraq Investments Figure 34: Sensitivity to Beta and Growth Rates Weighted Beta Valuation: DCF 6%; Ke 12.4% 11.7% 1.% DDM %; P/E 1% P/BV 1% WACC 9.7% 9.3% 8.2% JD 1.% Terminal Growth 1.5% Rate (G) 2.% Source: Awraq Investments The Discounted Cash Flow model yielded JD 4.63 with estimated Earnings per share of JD.331 for 1 and JD.34 for 16. We assumed revenues will decline by % in 1 to reach JD 17 million, and would be around JD 161 million in 16. The company s future earnings and cash flows depend on market share dynamics, and the company s future plans to face competition. Total capital expenditure between 1 and 16 is estimated at around JD 61 million. The total liabilities are taken into consideration in the WACC calculation, and not only the company s debt. The weight of equity in the WACC calculation is 64%, while weight of debt is 36% of total assets. The dividend discount model yielded JD 4.9 per share, based on the assumption that the company will distribute JD.5 per share in 11, as a result of lower profit in 1. The results of the first 9 months of 1 were used in the peer analysis and reduced the target price. The P/E valuation yielded JD 1.33 due to a drop in earnings for the trailing 12 months till September 1. The P/BV valuation yielded JD 3.5 per share. The sensitivity analysis in Figure 34 provides the weighted valuation results after changing Beta, and the corresponding changes in Cost of Equity and Weighted Average Cost of Capital, in addition to changes in the terminal growth rate. We used values of Beta ranging between 1.2 and.8, while the terminal growth rate was changed between 1% and 2%. The resulting weighted valuation lies between JD 3.83 and JD The DCF model is weighted at 6%, DDM is weighted at %, while P/E and P/BV valuation models are weighted at 1% each. The weighted valuation is sensitive to the weight applied to each valuation method as indicated in the following figure. The average value obtained for the different schemes is JD 4.6. Figure 35: Sensitivity of Valuation to Applied Weights Valuation Method Sensitivity to Weights Applied to Valuation Methods DCF 25% % 6% 7% % 1% DDM 25% 3% % 1% % 7% P/E 25% 15% 1% 1% 1% 1% P/BV 25% 15% 1% 1% 1% 1% Weighted Valuation (JD) Average (JD) 4.6 Valuation vs Market Price % 24.7% 13.9% 9.1% 9.5% 7.8% 6.1% Source: Awraq Investments P a g e 21

22 Our fair value is based on Beta of 1.8, Cost of Equity of 11.7%, WACC of 9.3%, and terminal growth rate of 1.5%, with applied weight of 6% to DCF, % to DDM and 1% to P/E and P/BV valuation. Our target price is JD 4.19, which is 9% lower than the stock price on December 13, 1 which closed at JD Our recommendation for is HOLD. The limited free float for the share which is 17.6% can limit the share s volatility and keep it above JD 4, despite fierce competition. P a g e 22

23 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 SAR 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 SAR SAR SAR 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 SAR SAR SAR 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 1/1/2 7/1/2 1/1/3 7/1/3 1/1/4 7/1/4 1/1/5 7/1/5 1/1/6 7/1/6 1/1/7 7/1/7 1/1/8 7/1/8 1/1/9 7/1/9 1/1/1 7/1/1 JD Euro SAR Appendix Figure 36: Cement Producers Stock Prices (21) Lafarge Group Arabian Cement Eastern Cement Saudi Cement Southern Province Cement 25 Qassim Cement 1 Tabouk Cement Yamamah Saudi Cement Yanbu Cement Source: Bloomberg P a g e 23

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