NEUTRAL. Mohammad Al-Mojil Group (1310.SE)

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1 Mohammad Al-Mojil Group (1310.SE) NEUTRAL CMP SAR Target SAR Potential Upside 2.9% MSCI GCC Index Saudi Tadawul 5, Key Stock Data Sector Heavy-Engineering Reuters Code 1310.SE Bloomberg Code MMG AB Equity Net Out. Shares (mn) Market Cap (SAR bn) 3.30 Market Cap (USD bn) Avg. 12m Vol. ( 000) 2, Volatility (30 day) Volatility (180 day) Stock Performance (%) 52 week high / low (SAR) / M 3M 12M Absolute (%) Relative (%) Shareholding Pattern (%) Mohammad Hamad Abdulkarim Al Mojil Adel Mohammad Hamad Al Mojil 5.00 Al Mojil Holdings Limited 5.00 Al Mojil Investment Limited 5.00 Mohammad Hamad Al Mojil International Company for Investments 5.00 Public MMG and Tadawul Movement Executive Summary Mohammad Al-Mojil Group (MMG) is a Saudi Arabia-based company that started operations in 1954 as a diversified construction and engineering services provider. The company is involved in the construction, contracting, maintenance, and supply of equipments for the petrochemicals, oil and gas and other industries. Revenues drop 17% in 1H09 For 1H09, the company reported revenues of SAR 1, million, down 17.0% from SAR 1, million a year ago. Sales got affected as clients scaled back their plans on some existing contracts. CoS also witnessed a 6.0% decrease during the first half of However, as a percentage of revenue, it rose 933 bps to 79.7% in 1H09 compared to 70.4% in 1H08. Consequently, gross profit fell 43.2% to SAR million compared to SAR million in 1H08. Gross profit margin also decreased to 20.3% in 1H09 compared to 29.6% in 1H08. SG&A expenses rose 40.2% to SAR million during the first half of The company s operating profit decreased to SAR million, down 65.2% from SAR million in 1H08. Total finance expenses amounted to SAR 9.32 million from SAR 5.89 million in 1H08. Subsequently, net profit declined 94.9% to SAR million, as the company increased provisions for outstanding payments due from its clients. Net profit margin stood at 1.4% compared to 22.1% in 1H08. Annualised adjusted EPS fell to SAR 0.27 from SAR Outlook and Valuation The global slowdown coupled with weak oil prices has affected the economies in the Gulf countries due to high dependence on oil revenues. As equity markets fell following the real estate turmoil, companies saw investment values toppling from their life-time highs. Real estate prices crashed after 1H08, prompting many developers to shelve or postpone projects due to the severe liquidity crunch in the market. This in turn forced companies to scale back their plans of further expansion. However, on a positive note, the governments remain focused on reviving the economies through suitable regulations and bail-outs. Eventually, companies are expected to perform well as their economies revive with improving oil prices and recovering equity markets. Further, huge infrastructure investments are expected to keep the long-term growth drivers of the sector intact. The company enjoys the advantage of diversified presence across multisectors. The company s thrust to grow by expanding investments horizon is likely to provide more income earning opportunities in the coming years, but in the short term, the company is expected to face subdued growth. Based on these factors, we recommend a cautious outlook on the stock until the economic revival. To determine the value of the company, we have used the DCF valuation method. Currently, the stock is trading at a P/E multiple of 16.82x and 14.20x on 2009E and 2010E earnings, and at a P/B multiple of 1.65x and 1.57x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has lost 25.2% since the beginning of this year as against a rise of 18.9% by the Saudi s Tadawul. Considering the above factors, we initiate our coverage with price target of SAR 27.18, which exhibits a potential upside of 2.9% from its closing price of SAR (as on September 09, 2009). Therefore, we initiate our coverage on MMG with a Neutral opinion. SAR Million 2007A 2008A 2009E 2010E 2011E Total Revenue 1,955 3,345 2,576 2,807 3,094 EBITDA EBITDA Margin (%) Net Profit Net Profit Margin (%) Adjusted EPS (SAR) Total Assets 2,225 3,669 3,723 4,001 4,286 RoAE (%) Call us on or us at research@taib.com

2 Background Engaged in diversified construction and engineering services Divested non-core activities to its sister concerns Mohammad Al-Mojil Group (MMG) is a Saudi Arabia-based company that started operations in 1954 as a diversified construction and engineering services provider. The company focuses on civil, structural, electrical, mechanical and related contract-based construction and maintenance activities within the oil, gas and petrochemical industries. Its service offerings cover onshore, which includes structural, mechanical, electrical and instrumental services; offshore, which includes maintenance, mechanical, electrical works, offshore wellhead tie-ins, offshore hook up and commissioning; steel fabrication, which includes pipe, structural steel and plate works; technical and maintenance services, which includes regular maintenance, shutdown and turnkey contracts, calibration and testing services; and marine, which includes offshore construction, maintenance and drilling support for oil rigs and oil production platforms. MMG also owns a heavy machinery and equipment facility to maintain, store and service construction-related equipment. In April 2007, Al Mojil increased its paid up capital to SAR 875 million and further to SAR 1 billion in May In April 2008, it went public through an IPO raising SAR 2.1 billion after listing 30% of its shares on the Saudi Stock Exchange. The IPO was priced at SAR 70 per share against a face value of SAR 10 per share. The company plans to grow by expanding its scope of activities, including engineering services within the contracting domain. It is also looking to scale up its operations by focusing on small to medium scale projects. During 2006, the company divested its non-core activities to multiple sister companies. MMG transferred its material supply and mechanical packaging and insulation divisions to Mohammad Al Mojil & Partners - Supply & Services Co. WLL. The travel agency division was transferred to Mohammad Al Mojil & Partners - Travel & Tourism Agency Co. MMG was the first Saudi company to offer a fully serviced fleet of vessels with dedicated equipment and skilled manpower to service Saudi Aramco s offshore projects. It owns and operates a full charter of nineteen vessels covering offshore construction, maintenance and drilling support for oil rigs and oil production platforms, and material handling services. MMG s equipment services unit manages and maintains a fleet of about 2,400 cranes, earthmovers, air-compressors, forklifts, pumps, trailer-tractors, blasting machines and other construction-related equipment. This fleet is held at the company s equipment maintenance and staging facility situated along the new Dammam-Riyadh highway. Business Model MMG s core business is execution of construction and related projects Board of Directors Chaired by Mr. Adel Mohammad Hamad Al Mojil Mr. Jassem Mohammad Al Ansari Mr. Ibrahim Saad Al Shweir Nader Abdulkarim Al Ibrahim Mr. Zaki Mansour Abdulsaud Mr. Ahmad Nasser Al Suwaidan Mr. Jamal Al Nager Source: Zawya It is involved in steel fabrication work Mohammad Al-Mojil Group The company s growth strategy is inclined towards organic operational expansions Operating across multisectors like oil, gas and petrochemical industry, power, desalination and cement plants

3 Sister Companies of MMG MMG has two sister companies. SISTER COMPANIES COUNTRY % SHARE Mohammed Al Mojil & Partners - Supply & Services Company Saudi Arabia - Mohammed Al Mojil & Partners - Travel & Tourism Agency Company Saudi Arabia - Source: Zawya IMF forecasts a 1.3% growth for the GCC countries in 2009 Industry Scenario Saudi Arabia s nominal GDP advanced 22.0% YoY to reach SAR 1, billion in 2008 from SAR 1, billion in 2007, driven by soaring oil prices during the first half of the year. Average oil prices for 2008 stood at USD 95.0 per barrel compared to USD 67.6 per barrel in The mining & quarrying sector (up 37.2% to SAR 1, billion) was the largest contributor to the GDP with 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues of SAR billion during 2008, accounting for 4.1%, while finance, insurance, real estate and business services together contributed 6.6% to the total. However, in light of the current economic slowdown along with weaker oil prices, the IMF forecasts a 22.3% decline in nominal GDP for However, a reversal in the trend is expected as the nominal GDP growth is likely to be 13.3% in The country is likely to run a budget deficit of SAR 65 billion (USD 16 billion) for the first time in six years. However, massive fiscal surpluses registered during have allowed Saudi Arabia to boost its foreign assets, which supported higher spending and offset the pressure due to the global crisis. 2,000 1,600 1, Saudi Arabia's Nominal GDP E 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 70.0% 56.0% 42.0% 28.0% 14.0% 0.0% Contribution to GDP (%) E Nominal GDP (SAR Billions) Nominal GDP Growth (%) Source: SAMA, Central Department of Statistics & Information Oil to GDP Non-oil to GDP Saudi Arabia experienced an unprecedented construction boom during the past two decades, as the country s infrastructure underwent rapid expansion. The development of new airports, highways and even new cities attracted construction companies and professionals from all over the world. However, a conservative approach and restrictions on foreign ownership helped Saudi Arabia escape the bursting of the real estate bubble that saw property prices plummeting in the neighbouring UAE. Furthermore, transforming the business environment with the introduction of various reforms in recent years, Saudi Arabia is turning into one of the most dynamic states within the region. As per the International Finance Corporation - World Bank 2009 Report on Ease of Doing Business, Saudi Arabia ranked number one in the entire MENA region and 16 th among 181 countries globally. Despite international markets reeling under the financial crisis, development and investment in Saudi Arabia s real estate sector is expected to remain strong. Recently, Jeddah released a 20-year vision as its official plan to guide the future expansion of the city that includes construction of new urban infrastructure, re-development and regeneration of older inner city neighbourhoods, upgrading the Corniche area to provide improved amenities and attract luxury residential development and gradual resettlement of almost 900,000 people from unplanned settlements to affordable housing. On the other hand, Riyadh, the biggest city in the GCC, is witnessing development of more residential accommodation, even as demand for hotels and commercial space is on the rise. Most of the significant projects in the country are scheduled to be completed by The country is ushering in much-needed reforms and introducing new laws around a regulatory framework that ensures healthy and sustainable growth. Apart from the proposed mortgage law, another important new set of laws will regulate developers, who will be required to register with the Ministry of Commerce and create escrow accounts for off-plan sales, based on a similar model practised in Dubai in recent years. The move will help create more qualified real estate developers requiring them to disclose financial records and prove their financial standing.

4 Largest oil & gas reserves in the world Oil & Gas Sector Overview According to BP statistical review, total proven reserves of crude oil in the Middle East grew at a CAGR of 1.1% to trillion barrels between 2001 and 2008, with Qatar recording the maximum growth of 9.6%. While consumption grew at a CAGR of 4.1% to million tonnes, production grew at a CAGR of merely 1.2% during the same period. Demand in the Middle East increased due to rapid population growth and accelerated economic development. This led to a rapid increase in investments in power generation and water desalination projects, which further added to the demand. The World Energy Council predicted investments worth USD 45.6 billion in power generation and energy projects between 2005 and 2015 in the GCC countries. In a move to diversify from oil-based to non-oil based economies, GCC nations have invested heavily in real estate, manufacturing and industrial sectors, thereby raising the demand for oil and natural gas. Saudi Arabia is the world s largest producer and net exporter of total petroleum liquids. The economy is expected to remain heavily dependent on oil and related industries like refining and petrochemicals. The state-owned oil company Saudi Aramco, which is the world s largest company in terms of proven reserves, dominates the country s hydrocarbon sector. According to BP, Saudi Arabia s total oil reserves were estimated at trillion barrels at the end of 2008, while output from these reserves stood at million barrels per day. The nation has around 100 major oil and gas fields and more than 1,500 wells. The future investment in the hydrocarbon sector will particularly be in upstream gas and downstream capacity and will remain high, as seen in 1H09, when total investments exceeded SAR 77 billion. Saudi Aramco announced an ambitious five year plan to pump in USD 129 billion into new energy projects during Saudi Arabia has the fourth largest proven natural gas reserves in the world, estimated at 7.57 tcm at the end of Almost one-third of these reserves are in the Ghawar oil field, in the form of associated gases, and in other large fields like Safiniya and Zuluf. During , Saudi Arabia s gas production increased at a CAGR of 2.6% compared to the world production CAGR of 1.6%. The government is encouraging initiatives that help reduce dependence on oil and investing into non-oil based developmental activities. Gas is used as a major feedstock in the petrochemical sector and this has been a key factor behind the strong growth for gas. The global economic slowdown significantly reduced energy demand during the fourth quarter of 2008 and the first quarter of This resulted crude oil prices falling from a 2008 mid-summer high of USD 146 per barrel to as low as USD 34 per barrel in mid-february With falling energy prices, project viability for companies has become questionable, exploration budgets for 2009 have been trimmed, and demand and pricing for available drilling rigs is declining. Currently, companies are trying to renegotiate or terminate contracts due to credit problems, filing for bankruptcy protection, thereby directly affecting the pace of new contracting activity. Saudi Arabia accounted for 25.5% of onshore drilling expenditure within the MENA region at over USD 1 billion in 2008 and we expect this to increase to 26.7% by Between 2007 and 2012, the country can expect a growth of 42.4% in onshore drilling expenditure alone. Increased demand from Asian economies drives petrochemical industry growth Petrochemical industry The global petrochemical industry witnessed healthy growth in the years prior to the global economic crisis on rising demand from emerging Asian economies. Rising population coupled with unparalleled growth in these economies over the last few years led to a rise in demand for petrochemicals. The demand for petrochemical products increased at a CAGR of 4% during With demand being the key driver for any increase in capacity and utilization rates, global petrochemical capacity increased in line at a CAGR of 3.3% to million tonnes during this period and capacity utilization reached 91.7% in 2007 compared to 87% in Consequently, petrochemical production increased at a CAGR of 3.9% to million tonnes during The first half of the year 2008 continued to witness soaring oil and gas prices, which contributed significantly to the top-line and bottom-line growth of companies is operating within the industry. Further, on the cost front, the Middle East & North Africa (MENA) region holds the advantage of lower feedstock costs owing to its rich oil fields and gas reserves. According to a study by the Association of Petrochemicals Producers in Europe (APPE), Middle Eastern producers enjoy the highest profit margins compared to producers in Eastern Europe, Americas, and South East Asia. The trend is likely to continue as the region holds about 65% of the world s oil reserves and 49% of the gas reserves. Additionally, the willingness of MENA countries to diversify their economies beyond oil and gas has led to an increased interest in the sector.

5 The MENA region accounts for approximately 66% of the global petrochemical capacity of which the Gulf region (the six GCC countries and Iran) contributes about 86%, while the rest is contributed by North African countries like Egypt, Libya, and Algeria. Saudi Arabia has the maximum share in this capacity amongst the Gulf countries, accounting for approximately 43% of the total. The Saudi Basic Industries Corp. (Sabic) accounts for approximately 54% and 28% of the total production capacity of Saudi Arabia and the MENA respectively, and is the biggest petrochemical company in the region. Saudi ranks second in terms of infrastructure spending Infrastructure Sector Overview With the regional economies recycling their oil windfalls into their economic development especially to provide domestic infrastructure and basic services for their citizens, and the ever increasing expatriate population led to higher demand for modern and efficient infrastructure. There has been an unprecedented expansion seen in the construction sector & industrial projects and huge investments in infrastructure by private players that has led to an impressive growth in the real estate sector across the GCC. According to the Middle East Economic Digest (MEED), projects worth USD 2.15 trillion are either planned or underway in the region, which in turn implies attractive growth prospects for the real estate sector. Saudi Arabia and the UAE are the biggest project markets with a 70.5% share of the total projects in the region. With investments to the tune of USD billion, the UAE tops the list in terms of infrastructure spending, followed by Saudi Arabia (USD billion), Kuwait (USD billion) and Qatar (USD billion). However, the recent global credit crisis and cautious spending in the sector has slowed down the growth rate to some extent. The sector has witnessed price corrections and delays or postponement of projects during the last few months. As of August 24, 2009, the UAE, Saudi Arabia and Kuwait had projects worth USD billion, USD billion and USD billion, respectively on hold. 1, Value of Projects Planned or Underway in GCC (in USD Billions as of August 24, 2009) Source: MEED Bahrain Oman Qatar Kuw ait Saudi Arabia UAE Value of Projects On Hold in GCC (in USD billion as of August 24, 2009) Bahrain Qatar Oman Kuw ait Saudi Arabia UAE World steel production declined 1.8% in 2008 Steel Sector The global slowdown has taken a severe toll on the global steel sector. Total world production stood at 1,326.5 mmt in 2008, down from 1,351.3 mmt in Steel prices have dropped after the spike in 1H08. Crude oil price declined by more than 50.0% following the all time high reached in July 2008 and the resultant decrease in production and freight costs, slowdown in world economic growth and decline in raw material prices is expected to put downward pressure on steel prices. Massive growth in the real estate sector and a thrust on economic diversification has accelerated steel consumption. The booming real estate sector was one of the main drivers behind the recent steel consumption growth, as favorable demographics, increasing population and easy access to finance created demand for new and more modern housing. Middle East Finished Steel Products Industry Snapshot Million metric tons Million metric tons Per capita steel production Per capita consumption (kg) Source: World Steel Association

6 Middle East industry to post subdued growth inline with global markets Overall optimism in expectations of a global recovery In 2008, the Middle East steel industry followed a trend similar to that of the global industry. At the starting of the year, production levels were high, driven by major ongoing infrastructural and housing projects in various parts of the region, as well as strong financial performance by the industry. However, during the second half of 2008, as the global financial turmoil intensified, production levels started falling from their early highs. Further, as liquidity in the region dried up, project cancelations and delays halted steel production in many countries. Another factor that contributed to the decline in steel production was the high dependence on the real estate sector in major economies. The demand for petroleum and petrochemicals has remained weak given the ongoing global slowdown and the trend is likely to continue in the coming years as some of the world s major economies are still not out of the chaos. This, in turn, has led to closure of production facilities, delays in capacity addition plans and industry-wide merger and acquisition activity. Capacity additions have faced delays or postponements mainly during the financing and engineering stages with reduced credit availability. Saudi Aramco and Dow Chemical-operated Ras Tanura project estimated at USD 26 billion and touted as the biggest petrochemical project in the sector, is faced with apprehensions regarding the scheduled completion in However, on a positive note, the demand situation is expected to improve in the medium term. Petrochemical prices, which have already seen multi-year lows, have been slowly, but definitely, recovering. On the other hand, with a decline in construction costs, petrochemical players are renegotiating contracts with their engineering partners. Apart from this, the present situation is throwing up an array of consolidation and merger opportunities with the Middle East being considered a potential buyer for distressed assets across Asian and European petrochemical companies. Companies are also taking preparatory steps towards streamlining operations, enhancing vertical integration, reducing capacity and realigning portfolios to focus on core businesses and see off the global turmoil. Financial Performance FY 2008 Sales increased 71% led by economic growth Revenue MMG s total sales rose 71.1% to SAR 3, million in 2008 compared to SAR 1, million in The increase is primarily driven by the surplus generated by high oil prices and rising investments in the petrochemicals sector and non-petrochemical infrastructure projects. Expenses The company s CoS rose 92.5% to SAR 2, million compared to SAR 1, million in 2007, due to rise in raw material costs. Subsequently, as a percentage of revenue, it rose 797 bps to 71.6% compared to 63.6% in 2007, as cost of sales increased more than revenue. Selling, general & administration expenses soared 40.4% to SAR million from SAR million a year ago, due to increase in employee salaries and benefits. Depreciation and amortisation expenses increased to SAR million from SAR million, due to the addition of new assets. Financing charges increased to SAR million from SAR 3.62 million due to the increase in short-term borrowings. EPS rose to SAR 5.32 from SAR 4.39 Profitability The company s gross profit increased 33.6% to SAR million from SAR million led by higher sales and partially offset by a rise in cost of sales. Gross margin contracted to 28.4% from 36.4% in Total operating expenses increased 89.9% to SAR 2, million and rose to 79.0% from 71.2% as percentage of revenue in Profit from operations rose 24.6% YoY to SAR million in Net profit increased 21.3% to SAR million from SAR million in 2007, while net profit margin contracted 816 bps to 19.9% in 2008 from 28.1% a year ago. Adjusted EPS rose to SAR 5.32 from SAR 4.39 in Subsequently, RoAE decreased to 41.6% from 50.4% on higher equity base, while RoAA fell from 31.2% to 22.6% on higher asset base.

7 Chart Gallery Revenues (SAR million) Net Profit (SAR million) 4, , , , H08 1H H08 1H09 EBIT and EBIDTA Margin Net Profit Margin 40% 32% 24% 16% 8% 0% H08 1H09 EBIT Margin EBITDA Margin 30% 24% 18% 12% 6% 0% H08 1H09 Return on Average Equity (RoAE) Return on Average Assets (RoAA) 60% 40% 48% 32% 36% 24% 24% 16% 12% 8% 0% H08 1H09 0% H08 1H09 Total Assets (SAR million) Shareholders' Equity (SAR million) 4,000 2,000 3,200 1,600 2,400 1,200 1, H08 1H H08 1H09

8 Size of the Company The salient features of the balance sheet are: Total Assets rose 15% in 1H09 Total assets of the company increased 15.4% to SAR 3, million in 1H09 from SAR 3, million in 1H08, led by an increase in fixed assets, due from other parties and accounts receivables. The share of current assets in the total assets base increased to 60.7% in 1H09 from 59.4% in the previous year, led by a rise in accounts receivables. Inventories, which accounted for 0.9% of the total assets base (0.7% in 1H08), increased to SAR million compared to the earlier SAR million. Accounts receivables spiked 5.4% YoY to SAR 1, million for 1H09. On the other hand, due from other parties increased to SAR million compared to nil in the same period year ago. Cash and cash equivalents declined 6.7% to SAR million taking its share in total assets down to 3.4% (4.1% in 1H08). Prepayments and other assets decreased 21.1% to SAR million from SAR million in 1H08. Further, down payments to suppliers fell 41.1% to SAR million in 1H09. The share of non-current assets in total assets decreased to 39.3% in 1H09 from 40.6% in 1H08. Property and equipment increased 12.7% to SAR 1, million from SAR 1, million during the comparable period of last year. Long term investment rose 3.2% to SAR million, while its share in total assets stood at 2.9% for 1H09 (3.2% in 1H08). However, deferred expenses fell to SAR 0.95 million from SAR 2.14 million in 1H08. Current liabilities spiked 18.3% to SAR 1, million with its share in total assets rising from 43.8% in 1H08 to 44.9% in 1H09. This was led by an 11.1% rise in short-term murabaha financing and a 34.2% rise in accounts payable to SAR million compared to SAR million in 1H08. Prepayments from clients soared to SAR million from SAR million in 1H08. During 1H09, non-current liabilities increased 40.0% to SAR million with its share in total assets rising to 2.9% from 2.4% in 1H08 due to a rise in provisions for employee termination benefits. Shareholders equity increased 11.9% to SAR 1, million due to a 31.6% increase in share capital and a 2.9% increase in legal reserves. Share capital stood at SAR 1, million, up from SAR 1, million in 1H08. However, retained earnings fell 15.8% to SAR million from SAR million, due to the bonus issue. Adjusted book value per share (BVPS) rose to SAR compared to SAR in 1H08. Further, shareholders equity to total asset ratio fell to 0.52 in 1H09 compared to 0.54 in the same period of previous year. Revenue fell 17% in 1H09 Financial Performance Analysis 1H 2009 For the six months ended June 2009, MMG reported a 17.0% decline in revenues to SAR 1, million as against SAR 1, million in the same period last year. Revenue was affected by clients scaling back their plans on some existing contracts. The company also witnessed a 6.0% YoY decrease in CoS during the first half of However, as a percentage of revenue, it rose 933 bps to 79.7% for 1H09 compared to 70.4% in 1H08. Subsequently, gross profit fell 43.2% to SAR million compared to SAR million in the same period last year. Gross profit margin also decreased to 20.3% for 1H09 compared to 29.6% in 1H08. SG&A expenses rose 40.2% to SAR million during the first half of The company s operating profit decreased to SAR million, down 90.7% from SAR million in 1H08. Total finance expenses amounted to SAR 9.32 million, up from SAR 5.89 million in 1H08. Consequently, net profit declined 94.9% to SAR million, as the company increased provisions for outstanding payments due from clients. Net profit margin stood at 1.4% compared to 22.1% in 1H08. Annualised adjusted EPS fell to SAR 0.27 from SAR However, RoAA fell from 25.2% to 1.0% on lower profits, while RoAE dropped from 45.2% to 1.8%.

9 Working Capital Snapshot SAR A 2008A 1H08A 1H09A Total Current Assets 1,099,621 2,324,120 1,793,644 2,112,888 Cash & Cash Equivalents 63,152 85, , ,714 Account Receivables 884,148 1,424,020 1,494,104 1,574,961 Average Collection Period (Days) Due from others 0 505, ,332 Inventories 22,945 30,555 21,931 32,983 Inventory Conversion Period (Days) Down Payments to suppliers 45, ,265 76,776 45,194 Prepaid Expenses and other assets 83,990 67,887 75,696 59,704 Total Current Liabilities 869,982 1,679,762 1,320,337 1,561,927 Murabaha Financing Short Term 200, , , ,000 Payables 214, , , ,277 Average Payment Period (Days) Prepayments from Clients 260, , , ,078 Accrued Expenses and other liabilities 149, , , ,115 Due to related parties 46,108 46,905 24,431 5,457 Net Core Working Capital 692,805 1,079,380 1,221,435 1,212,667 Average Core Working Capital Cycle (Days) Net Current Assets 229, , , ,961 Average Working Capital Cycle (Days) Source: MMG s financial statements

10 Peer Comparison In order to do a peer comparison, we have taken comparable companies as Galfar Engineering, Mushrif Trading, and Mohammad Al- Mojil Group (MMG). Galfar Mushrif MMG H H H09 Ratios: Total Assets Turnover Ratio (x) * * * EBITDA Margin 12.6% 9.9% -11.9% 2.9% 25.4% 15.7% Net Profit Margin 6.3% 3.9% -12.6% 3.2% 19.9% 1.4% RoAE 29.8% 19.9% -47.6% 10.5% 41.6% 1.8% RoAA 7.3% 4.5% -10.0% 2.5% 22.6% 1.0% Market Indicators: Adj. EPS (USD) P/E (x) Adj. BVPS (USD) P/BV (x) Current Market Capitalisation (USD Million) (USD Millions) Sales % YoY change EBITDA % YoY change NA Net Profit % YoY change NA Total Assets % YoY change Shareholders' Equity % YoY change Source: Zawya, MMG Financials

11 New Projects and Strategies The company signed a contract to build parts for Saudi Polymers ethylene plant worth SAR million. The project is expected to be completed by the end of July The company has also entered into a SAR 1.51 billion contract with Snamprogetti Saudi Arabia, a unit of Italy s oil company Eni S.p.A. (E), on the Manifa project. The project located offshore in the Persian Gulf is aimed at producing 900,000 barrels a day of heavy, high-sulphur crude oil. SWOT Analysis STRENGTHS Diversified revenue streams with presence across building projects related to different sector like oil & gas and residential projects Strong brand recognition Well-established player in the market WEAKNESS Declining sales affecting profitability due to heavy dependence on the oil and gas sector Most of the revenues coming from a few customers THREATS Real estate projects might face delay or postponement due to tight liquidity conditions Scale-down of investments in oil & gas and petrochemical sectors owing to subdued demand Pricing pressure due to competition from local and international companies OPPORTUNITIES Government s focus on diversifying towards a non-oil based economy to provide investment opportunities Government s initiatives to inject liquidity into the system to act as catalyst for growth Risks and Concerns: The dearth of liquidity may curtail/postpone the country s infrastructure expansion plans. The slow economic growth has negatively impacted demand across the real estate and construction sectors. Going forward, if the economic conditions remain weak, companies engaged in real estate activities might face restrained bottom-line growth. The current economic downturn has tightened liquidity across most GCC economies. Lower oil prices have proved detrimental to the budget surpluses enjoyed by the regional governments till the last year. Consequently, mobilisation of funds towards infrastructure projects has been adversely impacted, leading to a further slowdown in the overall economic activity. In addition, weak economic growth has negatively impacted demand across sectors, thereby restricting consumer spending. Consequently, the region s economies will likely witness slower/negative growth through 2009 despite some improvement during the second half of the year. Furthermore, as demand for petrochemicals is heavily dependent on economic growth, companies may witness restrained revenue growth. The prices of petrochemical products are mainly determined by the demand/supply scenario and tend to follow the global price trends for crude oil and natural gas, which are the basic raw materials. Therefore, any significant dip in crude oil and natural gas prices will lead to lower price realisations, while at the same time, lower input costs may help improve operating margins as well.

12 Valuation Methodology: We have used DCF valuation method to arrive at the fair value of MMG, as discussed below: Cost of Equity: 11.83% WACC: 10.76% Assumptions: (i) Risk free Rate (Rf) of 3.21%, equivalent to 12-months average yield on 10 year US T- bill. (ii) Unlevered Beta of 1.21 (iii) A terminal growth rate of 2.0% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 11.83% and a WACC of 10.76%.

13 DCF Calculations DCF Valuation (FCFF Model) (in SAR 000) 2009E 2010E 2011E 2012E 2013E Operating Profit (EBIT) 186, , , , ,250 Income Tax 5,394 10,382 12,223 13,739 14,286 Effective Tax Rate 2.9% 2.9% 2.9% 2.9% 2.9% NOPAT 180, , , , ,964 Add: Depreciation and Amortisation 79, , , , ,617 Less: Capex 63, , , , ,385 Less: Change in Net Working Capital 136, ,573 71, ,977 89,427 Operating Free Cash Flows to Firm (OFCFF) 60, , , , ,769 Non-Operating Income 765 2,559 3,130 3,749 4,290 Tax on Non-Operating Income Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 743 2,485 3,039 3,640 4,166 Free Cash Flow to Firm (FCFF) 61, , , , ,935 WACC (Ko) 10.76% 10.76% 10.76% 10.76% 10.76% Present Value / Discount Long-Term Growth Rate (g) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 4,344,307 Present Value of Free Cash Flows 58, , , , ,493 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 1,153,979 Terminal Value: Residual Cash Flow (FCFF of 2013E) 372,935 WACC 10.76% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 8.76% Equals Nominal Terminal Value 4,344,307 Implied Multiple of 2013E EBITDA 6.01 Times PV/Discount Factor 0.63 Present Value of Terminal/Residual Value 2,743,250 Enterprise Value 3,897,229 Implied Multiple of 2013E EBITDA 5.39 Less: Market Value of Long-term Debts 500,000 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 3,397,229 Net shares outstanding ( 000) 125,000 Fair Value Per Share (SAR) * figures in SAR 000 unless specified 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% 8.76% 4,856,336 5,216,671 5,630,339 6,110,130 6,673, % 4,301,716 4,584,817 4,904,419 5,268,067 5,685, % 3,860,792 4,089,490 4,344,307 4,629,988 4,952, % 3,501,853 3,690,754 3,899,017 4,129,781 4,386, % 3,203,979 3,362,866 3,362,866 3,727,116 3,937,243

14 Discount Factor Sensitivity Analysis of Discounted Terminal Value (SAR 000) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 8.76% 3,328,639 3,575,621 3,859,158 4,188,017 4,574, % 2,829,515 3,015,729 3,225,952 3,465,146 3,739, % 2,437,930 2,582,344 2,743,250 2,923,646 3,127, % 2,123,619 2,238,174 2,364,471 2,504,412 2,660, % 1,866,632 1,959,200 2,060,373 2,171,411 2,293,831 Discount Factor Sensitivity Analysis of Enterprise Value (SAR 000) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 8.76% 4,541,038 4,788,019 5,071,557 5,400,416 5,786, % 4,012,136 4,198,350 4,408,573 4,647,767 4,922, % 3,591,909 3,736,323 3,897,229 4,077,625 4,281, % 3,250,036 3,364,591 3,490,887 3,630,828 3,786, % 2,966,513 3,059,080 3,160,254 3,271,292 3,393,711 Investment Opinion Fair Value: SAR Investment Opinion: NEUTRAL The oil & gas sector witnessed healthy growth till 1H08, as sound economic growth across economies worldwide kept the demand high. At the same time, price realisations followed an upward trajectory leading to record top-line and bottom-line growth for companies operating in the sector. However, towards the later part of 2008, the sector witnessed slower growth as demand for oil & gas took a sharp U-turn as a result of the economic slump. The slowdown across the world driven by multiple factors including the subprime mortgage crisis and falling capital markets, have been the major factors in pulling down the demand for oil & gas. On a positive note however, there has been a reversal in the prices of crude oil and natural gas that have now started displaying some positive momentum. The OPEC crude increased from USD per bbl at the start of the year from nearly USD 70 per bbl. However, the reduced demand for petroleum and petrochemicals has remained weak given the ongoing global slowdown and the trend is projected to continue in the medium to short term till world economies revive. This in turn has led to the closure of production facilities, delays in capacity addition plans and industry-wide merger and acquisition activity. Capacity additions have been facing delays or postponement mainly in the financing and engineering stages with tightened credit availability, thereby directly impacting the performance of the company in the short to medium term. Among the GCC countries, Saudi Arabia is the largest economy with a population of 25 million people growing at 2.5% annually, as the government aims to spend USD 400 billion until 2013 to upgrade and develop new infrastructure, reflecting the vast opportunities in the coming years. The region s infrastructure sector witnessed unprecedented expansion during the past years on healthy economic growth, higher disposable incomes and rising share of affluent population. The company s main operations are in the oil & gas sector and hence are exposed to the changes in the demand and price volatility of the products. Even though strong demand and pricing resulted in an improved top-line performance during 2008, a reversal in the trend seen towards the end of the second half of Meanwhile, economies slipping into recession and companies cutting costs and expansion plans also eroded the company s profitability. The company s focus on expanding its portfolio across the Middle East is also expected to drive its long term growth. Furthermore, even though improving demand and consolidating oil & gas prices support a bright future outlook, major revenue concentration in the current scenario calls for a cautious approach until a definite, sustained recovery is in sight. Currently, the stock is trading at a P/E multiple of 16.82x and 14.20x on 2009E and 2010E earnings, and at a P/B multiple of 1.65x and 1.57x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has lost 25.2% since the beginning of this year as against a rise of 18.9% by the Saudi Tadawul. Considering the above factors, we initiate our coverage with a price target of SAR 27.18, which exhibits a potential upside of 2.9% from its closing price of SAR (as on September 09, 2009). Therefore, we initiate our coverage on MMG with a Neutral opinion.

15 Financial Statements Consolidated Balance Sheet (in SAR 000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Cash & Cash Equivalents 63,152 85, , , , , ,653 Account Receivables 884,148 1,424,020 1,494,104 1,574,961 1,590,459 1,695,142 1,791,760 Due from others 0 505, , , , ,172 Inventories 22,945 30,555 21,931 32,983 36,546 45,231 55,695 Down Payments to suppliers 45, ,265 76,776 45, , , ,657 Prepaid Expenses and other assets 83,990 67,887 75,696 59,704 65,174 74,028 83,604 Total Current Assets 1,099,621 2,324,120 1,793,644 2,112,888 2,344,816 2,544,159 2,806,541 Non-Current Assets Long-Term Investment 78, ,235 97, , , , ,006 Property and Equipment 1,044,147 1,224,823 1,124,039 1,266,728 1,249,707 1,298,437 1,313,234 Deferred Expense 2,738 1,541 2, ,343 1, Total Non-Current Assets 1,125,556 1,344,598 1,223,647 1,368,234 1,378,490 1,456,414 1,479,928 Total Assets 2,225,177 3,668,718 3,017,291 3,481,122 3,723,306 4,000,572 4,286,469 LIABILITIES AND EQUITY Liabilities Current Liabilities Murabaha Financing Short Term 200, , , , , , ,000 Payables 214, , , , , , ,499 Prepayments from Clients 260, , , , , , ,289 Accrued Expenses and other liabilities 149, , , , , , ,430 Due to related parties 46,108 46,905 24,431 5,457 13,283 22,273 45,298 Total Current Liabilities 869,982 1,679,762 1,320,337 1,561,927 1,608,303 1,752,614 1,844,515 Non-Current Liabilities Provision for Employees' Termination Benefits 60,589 87,040 72, , , , ,772 Total Non-Current Liabilities 60,589 87,040 72, , , , ,772 Total Liabilities 930,572 1,766,802 1,392,886 1,663,472 1,725,205 1,895,078 2,012,287 Equity Paid Up Capital 1,000,000 1,000,000 1,000,000 1,250,000 1,250,000 1,250,000 1,250,000 Legal Reserve 54, ,626 87, , , , ,853 Retained Earning 239, , , , , , ,329 Equity attributable to equity holders 1,294,605 1,901,916 1,624,405 1,817,650 1,998,101 2,105,495 2,274,182 Total Liabilities and Equity 2,225,177 3,668,718 3,017,291 3,481,122 3,723,306 4,000,572 4,286,469

16 Consolidated Income Statement (in SAR 000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Sales 1,955,101 3,345,024 1,496,237 1,241,892 2,575,669 2,807,479 3,093,842 Cost of Sales -1,244,351-2,395,421-1,053, ,405-2,004,166-2,156,466-2,348,581 Gross Profit 710, , , , , , ,261 Depreciation & Amortization -77, ,797-59,030-75, , , ,035 SG&A Expenses -70,874-99,473-39,936-56, , , ,223 Operating Profit 562, , , , , , ,003 Murabaha Financing Costs -3,617-19,038-5,890-9,319-18,138-18,638-19,138 Other Income 994 3, ,325 2,090 2,559 3,130 Provision for doubtful debt ,868-87, , ,547 Net Profit before Zakat/Minority interests 560, , ,644 23, , , ,447 Zakat -11,539-19,850-8,466-6,885-5,852-6,932-8,760 Net Profit 548, , ,178 16, , , ,687

17 Consolidated Cash Flow Statement (in SAR 000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E OPERATING ACTIVITIES Net income for the period 560, , ,644 23, , , ,447 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful debt ,868 87, , ,547 Depreciation and Amortization 77, ,797 59,030 75, , , ,035 Gain (Loss) from sale fixed assets 2, Provision for Employees' Termination Benefits 25,335 32,869 12,479 16,215 26,930 28,347 28,846 (Increase) Decrease in operating assets Account Receivables -452, , , , , , ,443 Due from others 0-505, , ,165-45,361-46,381 Inventories -10,967-11,091 1,014-2,428-5,991-8,685-10,464 Down Payments to suppliers -18, ,982-31, ,071 38,864-12,304-42,208 Prepaid Expenses and other assets -37,717 11,253 8,294 8,183 2,713-8,854-9,577 Due to related parties 17,610-91,361-21,677-41,448-33,622 8,990 23,024 Payables 84, ,825 80,312 20,082 48, ,822 54,947 Prepayments from clients 114, ,168 57,210-27,156-49,711-27,623-42,868 Accrued Expenses 70,732 33,229 89,158-58,631-64, ,148 Paid Zakat -4,190-13,113-13,113-17,567-17,567-5,852-6,932 Paid Employee's Termination Benefits -1,487-1, ,710-2,102-2,786-3,538 Cash from operations 427, ,651-49, , , , ,584 Investing Activities Net proceeds from fixed assets -535, , , , , , ,477 Net proceeds from Long term investments ,206-29,493-9,072 Net cash used in investing activities -535, , , , , , ,549 Financial Activities Murabaha Financing and Long Term Debt 200,000 2,350, , , , Instalments paid for Murabaha financing & Long Term Debt 0-2,000, , , , Distributions of Dividend -135, , , , ,000 Board of Directors Benefits ,252-1,252-1,252-1,252 Net cash (used in) from financing activities 65, , , , , , ,252 Increase/Decrease in Cash and Cash Equivalents -42,989 61,399 61,986 31,030 76,578 60,607 98,784 Cash and cash equivalents beginning of the period 106,141 24,285 63,152 85,684 85, , ,869 Cash and cash equivalents end of period 63,152 85, , , , , ,653

18 Common Size Statements Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Cash & Cash Equivalents 2.8% 2.3% 4.1% 3.4% 4.4% 5.6% 7.5% Account Receivables 39.7% 38.8% 49.5% 45.2% 42.7% 42.4% 41.8% Due from others 0.0% 13.8% 0.0% 8.1% 8.9% 8.9% 8.9% Inventories 1.0% 0.8% 0.7% 0.9% 1.0% 1.1% 1.3% Down Payments to suppliers 2.0% 5.7% 2.5% 1.3% 4.2% 3.7% 4.0% Prepaid Expenses and other assets 3.8% 1.9% 2.5% 1.7% 1.8% 1.9% 2.0% Total Current Assets 49.4% 63.3% 59.4% 60.7% 63.0% 63.6% 65.5% Non-Current Assets Long-Term Investment 3.5% 3.2% 3.2% 2.9% 3.4% 3.9% 3.9% Property and Equipment 46.9% 33.4% 37.3% 36.4% 33.6% 32.5% 30.6% Deferred Expense 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% Total Non-Current Assets 50.6% 36.7% 40.6% 39.3% 37.0% 36.4% 34.5% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Murabaha Financing Short Term 9.0% 13.6% 14.9% 14.4% 13.4% 12.5% 11.7% Payables 9.6% 10.2% 9.8% 11.4% 11.4% 13.6% 14.0% Prepayments from Clients 11.7% 14.3% 10.5% 14.3% 13.1% 12.1% 10.7% Accrued Expenses and other liabilities 6.7% 6.3% 7.7% 4.7% 4.9% 5.1% 5.6% Due to related parties 2.1% 1.3% 0.8% 0.2% 0.4% 0.6% 1.1% Total Current Liabilities 39.1% 45.8% 43.8% 44.9% 43.2% 43.8% 43.0% Non-Current Liabilities Provision for Employees' Termination Benefits 2.7% 2.4% 2.4% 2.9% 3.1% 3.6% 3.9% Total Non-Current Liabilities 2.7% 2.4% 2.4% 2.9% 3.1% 3.6% 3.9% Total Liabilities 41.8% 48.2% 46.2% 47.8% 46.3% 47.4% 46.9% Equity Paid Up Capital 44.9% 27.3% 33.1% 35.9% 33.6% 31.2% 29.2% Legal Reserve 2.5% 3.2% 2.9% 3.3% 3.6% 4.0% 4.4% Retained Earning 10.8% 21.4% 17.8% 13.0% 16.5% 17.4% 19.5% Equity attributable to equity holders 58.2% 51.8% 53.8% 52.2% 53.7% 52.6% 53.1% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

19 Common-Size Consolidated Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales -63.6% -71.6% -70.4% -79.7% -77.8% -76.8% -75.9% Gross Profit 36.4% 28.4% 29.6% 20.3% 22.2% 23.2% 24.1% Depreciation & Amortization -3.9% -4.4% -3.9% -6.1% -6.0% -6.2% -6.2% SG&A Expenses -3.6% -3.0% -2.7% -4.5% -4.3% -4.2% -4.3% Operating Profit 28.8% 21.0% 23.0% 9.6% 11.9% 12.8% 13.6% Murabaha Financing Costs -0.2% -0.6% -0.4% -0.8% -0.7% -0.7% -0.6% Other Income 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Provision for doubtful debt 0.0% 0.0% 0.0% -7.1% -3.4% -3.7% -3.3% Net Profit before Zakat/Minority interests 28.6% 20.5% 22.6% 1.9% 7.8% 8.5% 9.8% Zakat -0.6% -0.6% -0.6% -0.6% -0.2% -0.2% -0.3% Net Profit 28.1% 19.9% 22.1% 1.4% 7.6% 8.3% 9.5%