Oman Cement Sector. Global Research - Oman Sector

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1 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 EV/TON (US$) (mn) (RO) Global Research - Oman Sector Cement Sector Data Market Cap (RO mn): Market Cap (US$bn): 1,205.6 Sector Mkt Cap as % of Total Market: P/E 2011e (x): 19.0% 10.7 P/Bv 2011e (x): 1.7 Price Performance Oman Cement CMP(RO): Target Price (RO): High /Low (RO): / Average Volume : 258,992 Price Performance Raysut Cement CMP(RO): Target Price (RO): High /Low (RO): / Average Volume : 84,928 OCOI & RCCI Price Volume Performance Source: Zawya OCOI Vol OCOI Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone: Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Phone: RCCI Vol RCCI Oman Cement Sector UAE dumping excess cement in Oman Sector to benefit from government & private infrastructure spending Price decline to suppress the margins BUY Oman Cement, REDUCE Raysut Cement Capacity increasing through expansion and planned acquisitions Oman cement companies have continued to ramp up their capacities. Earlier by increasing their clinker and cement capacities and now by intention of acquiring companies abroad. Overall clinker and cement capacity of the companies in Oman has increased to 4.80mtpa and 5.30mtpa respectively by the end of 9M UAE cement dumping in Oman taking down the realization prices In 9M-2010 average cement prices were US$74.0/ton (RO28.5/ton) as compared to an average price of US$82.7/ton (RO31.9/ton) during 9M Cement prices in 9M-2010 declined marginally when compared with 1H-2010 by 2.9%. Going forward, if the government does not take any action to control the dumping of cement by UAE companies it would result in a further price war between Oman and UAE cement companies and the gap between the prices of UAE and Oman would start to diminish. Positioning PE and EV/Ton Source: Global Research Oman Cement Arabian Cement Qassim Cement Yanbu Cement Qatar Cement Yamama Cement Saudi Cement Eastern Cement Raysut Cement (PE) Raysut Cement planning to acquire Pioneer Cement of UAE Global Research believes that the idea of acquiring a cement plant in UAE would not be favorable for Raysut Cement as there is a huge margin difference between Omani and UAE companies. Average gross margins of Omani cement companies during 2008 and 2009 were at 40.0% and 45.6% respectively as compared to those of UAE at 27.5% and 21.8%. The situation has further worsened during the 9M-2010 period as the UAE margins stand at 11.6% whereas those of Oman has further improved to 50.5%. 1

2 Valuation & Recommendation For arriving at the fair value of cement companies, we have used a blend of two valuation methods: Cash flow approach represented by the Discounted Cash Flow Method. Relative valuation approach based on 2011e P/E multiple of the Omani cement sector. Dividend Cash flow Method - DCF The DCF is based on a 4-year forecast of free cash flows to the firm ( ). The free cash flows for the forecasted period and the terminal value are then discounted back at the weighted average cost of capital (WACC) to arrive at the total net present value (NPV) of the company. Subsequently cash and non-operating assets are added while long-term debt is subtracted to arrive at the equity value. Cost of Equity is derived using the Capital Asset Pricing Model (CAPM) using: Yield of the government long term bond (10 years) as the risk free rate. Market risk premiums of 6.0% for Oman. Beta of 5 years monthly figures. If the actual beta of the cement company is less than 1, to more appropriately reflect associated risk, we have taken it as 1. Cost of debt of 7.0%. WACC is based on the weighted average of cost of equity and cost of debt. The calculation of terminal value is based on the Gordon Growth model. We have taken 2.5% as the terminal growth rate beyond the forecasted period. Relative Valuation Method We have used relative valuation based on the Omani Cement sector 2011e P/E multiple. Omani cement sector 2011e P/E multiple is based on weighted average 2011e P/E multiple of companies under our coverage. This sector P/E is then multiplied with the forecasted 2011 EPS of the cement company to arrive at the fair value of the cement company. Blended Price The blended price is then calculated after applying weight of 80% to the value from DCF and 20% to the value from Relative Valuation method. Oman Cement Sector Valuations Oman Cement Raysut Cement Risk Free Rate (%) 5.8% 5.8% Risk Premium (%) 6.0% 6.0% Beta WACC (%) 11.3% 12.1% Fair Value - DCF (Weight: 80%): Fair Value - Relative P/E (Weight: 20%): Fair Value (RO): Current Market Price (12 Dec 2010) : Rating : BUY REDUCE Upside Potential / (Downside) (%) : 36.1% -13.9% Source: Global Research 2 Oman Cement Sector December 2010

3 F 2011F 2012F (mtpa) Oman Cement Sector Capacity Enhancement Continues Oman cement companies have continued to ramp up their capacities. Earlier by increasing their clinker and cement capacities and now by intention of acquiring companies abroad. Overall clinker and cement capacity of the companies in Oman has increased to 4.80mtpa and 5.30mtpa respectively by the end of 9M Raysut Cement has recently announced plans of acquiring Pioneer Cement Industries, UAE. Pioneer Cement is a 51:49 joint venture between RAK Investment Authority (RAKIA) and Penna Cement Industries Limited, India. Pioneer Cement has a capacity of 1.6mtpa and post acquisition it would raise the capacity of Raysut Cement to 4.4mtpa. Earlier, Pioneer Cement bid went futile for Star Cement, UAE. New entrant in Oman, Al Madina Cement Company is also to establish its foot hold in Oman with a cement capacity of 0.8mtpa. With the expected acquisition of Pioneer Cement and the new entrant Al Madina Cement, the combined capacity of Oman cement sector would increase to 7.8mtpa by Oman Cement Sector Capacity % 7.0% 6.0% 5.0% 4.0% 3.0% Oman Capacity Oman as % of GCC GCC Capacity Oman as % of GCC ex - Pioneer Source: Oman & Raysut Cement Reason behind the expansion of capacities and acquisition of other cement companies by Oman are: Demand supply gap. Dumping of low cost cement by neighboring countries specially UAE. Continuous and increasing clinker and cement imports. Despite economic slowdown worldwide as well as in the region demand supply gap in Oman has continued to widen as the construction activity has picked up a lot in the last few years. Local cement demand increased at a CAGR of 18.6% during Local sales volume 3 Oman Cement Sector December 2010

4 (mn tons) (mn tons) increased from 2.17mn tons in 2005 to 4.29mn tons in Demand continued to pick up during the worst times as well, as during 2009 it witnessed an increase of 5.7%. To cater to the local cement demand and fill in the clinker deficit, Omani cement companies continued to import huge amounts of clinker and cement. Overall clinker and cement imports rose to 2.84mn tons in 2009 from 0.38mn tons in 2005, CAGR growth of 64.9%. Clinker imports witnessed a CAGR of 40.1% while cement imports witnessed CAGR of 85.0%. In volumetric terms cement imports were 71.4% of the total in 2009 as compared to 45.1% in Clinker & Cement Imports M-2010 Clinker Cement Total Imports Source: Oman & Raysut Cement However, post 2009 the imports have declined as in 9M-2010, the industry imported a total of 0.78mn tons of clinker and cement which if annualized results in a figure of just over 1mn tons. Cement imports were 0.35mn tons whereas clinker imports were 0.43mn tons. Such decline in imports can be attributed to the recent ramp up of clinker and cement capacity by the manufacturers as well as take up of market share by other regional cement manufacturers. Exports M-2010 Source: Oman & Raysut Cement 4 Oman Cement Sector December 2010

5 Along with the imports, Oman is an exporter also and Raysut Cement is actively catering to regional markets such as Yemen, East Africa, Somalia, Zanzibar, and the Gulf States. Overall export volumes has remained range bound between mn tons between Export volumes dropped in 2008 and 2009 as the local demand picked up and Raysut Cement diverted its sales to cater to local demand. Going forward, we assume that the clinker imports would continue to shrink as both the companies have ramped up their clinker capacities and result of it can already been seen in the imports volume of current year. Exports on the other hand would continue as Oman is strategically located to cater to the deficit market of Yemen and other East African countries. Demand Estimations On an overall basis, Oman sector produced 3.2mn tons of clinker and 3.73mn tons of cement in The same during 9M-2010 has been at 2.47mn tons and 2.87mn tons respectively. While in 9M-2010 clinker and cement sales have been recorded at 0.32mn tons and 2.89mn tons respectively. In 2010 we assume overall cement sales would be less by 25% amounting to 3.96mn tons while clinker sales would triple to 0.42mn tons as compared to 0.14mn tons in Oman Cement Demand Expectations Overall Project Announcements (US$mn) 101,081.0 ( ) (As of Sep 2010) On Hold Projects - Conservative Estimates 6.9% 6,970.0 Active Projects 93.1% 94,111.0 Expected Building & Construction Related Projects 40.0% 37,644.4 Require Cement, Blocks & Others 60.0% 22,586.6 Cement Revenue as % of Build & Cons Sector in Oman 13.1% 2,951.4 Cement Price per Ton as of 9M-10 (US$/Ton) 74.5 Resulting Cement Demand ( ) (mn Tons) 39.6 Annual Cement Demand (mn Tons) 5.7 Source: MEED & Global Research However, going forward we are optimistic about the projects pipeline in Oman. Government is highly focused on various infrastructure projects such as extension and modernization of Muscat and Salalah airport. Notable Projects in Oman Project Name Value (US$mn) Masirah Island Causeway 2,500 Muscat International Airport 1,836 Duqm Port (Marine, Ship Repair & Other Works) 1,798 Salalah Airport 780 Salalah Port (Expansion and Other Works) 645 Sultan Qaboos Port 400 Muscat Expressway 330 Al Duqm Airport 186 Source: MEED 5 Oman Cement Sector December 2010

6 F 2011F 2012F 2013F F 2011F 2012F 2013F (RO / Ton) With the above notable projects along with various other small and medium size contracts, we expect a total of 39.6mn tons of demand spread over , the period in which these projects are expected to complete. Such a demand would mean an average annual cement demand of around 5.7mtpa. Realization Prices Oman cement companies enjoyed long period of increase in cement prices. Through cement prices continued to perch from RO18.1/ton in 2003 to RO31.4/ton in The price went slightly down in 2009 to RO31.0/ton. However, the drop in 2009 was quite minimal as compared to other GCC countries. Local & Export Prices OCC - Local Price RCC - Local Price OCC - Export Price RCC - Export Price Source: Company Reports & Global Research Recently most of the GCC countries have ended up in a surplus cement situation. Reason for that has been two sided: demand going down post economic slowdown and capacity enhancement by various cement manufacturers. Such a situation has given rise to price war between the GCC countries where by various steps were taken by many of the countries to control price either from going down as well as up. - Saudi Arabia clamped down the exports to control prices and suffice demand of local market. - Qatar controlled the upward price movement since last couple of years by fixing the price of cement at QR /ton. UAE is one of the country whose cement industry is going through lot of turbulent times. The demand has gone down to merely 18mn tons while the supply has crossed almost 40mn tons by Such a mesh have dropped the utilization and realization levels of the UAE cement manufacturers resulting in a price drop of 22.7% in 2009 and YTD drop of 26.9%. Apart from the price drop the manufacturers have started off loading their excess cement in neighboring countries, specially Oman, Yemen and Saudi Arabia. 6 Oman Cement Sector December 2010

7 Oman & UAE Cement Prices M-10 UAE Oman Source: Global Research Going forward, if the government does not take any action to control the dumping of cement by UAE companies it would result in a further price war between Oman and UAE cement companies and the gap between the prices of UAE and Oman would start to diminish. Nevertheless both the Omani companies have taken steps to control such a situation. Oman Cement has increased its clinker capacity thereby they have got further room to scale down their prices while Raysut Cement is planning on acquiring Pioneer Cement of UAE. 7 Oman Cement Sector December 2010

8 Financial Performance of the Sector Oman cement sector continued its upbeat performance till 2009 as the local demand was till then only catered by the local companies. Post 2009, UAE started dumping their excess cement in Oman at low prices whereby taking away the revenue and market share of the local companies. Consolidated revenues of Omani Cement companies for 2009 were RO157.6mn (US$409.4mn) while the same during 2008 was RO152.6mn (US$396.3mn), an increase of 3.3%. Top line growth for Omani cement companies in 2009 was on the back of demand supply gap and sale of 5.1mn tons of cement and clinker as compared to 4.9mn tons in In 2009, cement price in Oman were slightly down when compared to their average prices in In 2009 average cement prices was US$80.5/ton as compared to an average price of US$81.6/ton during While in 9M-2010 average cement prices were US$74.0/ton (RO28.5/ton) as compared to an average price of US$82.7/ton (RO31.9/ton) during 9M Cement prices in 9M-2010 declined marginally when compared with 1H-2010 by 2.9%. Oman Cement Sector (RO 000) M M-10 Sales Revenue 152, , ,630 90,497 Cost of Sales 91,523 68,042 85,730 44,782 Gross Profit 61,080 56,474 71,900 45,716 Operating Expense 19,108 16,487 20,389 11,453 Non Core Income 3,178 3,421 7,975 10,562 Operating Profit 41,972 39,987 51,511 34,263 Financial Charges Net Profit 39,648 41,088 52,915 41,844 Assets 250, , , ,782 Equity 215, , , ,455 Debt 5,696 4,516 6,942 9,243 Liabilities 34,646 27,998 34,143 34,327 Ratios M M-10 Gross Margins (%) 40.0% 45.4% 45.6% 50.5% Operating Expense as % of Assets (%) 7.6% 6.3% 7.4% 4.0% Non-Core Income as % of PAT (%) 8.0% 8.3% 15.1% 25.2% Operating Margins (%) 27.5% 32.1% 32.7% 37.9% Net Margins (%) 26.0% 33.0% 33.6% 46.2% Financial Charges as % of Debt (%) 1.3% 3.0% 2.3% 0.8% Debt as % of Assets (%) 2.3% 1.7% 2.5% 3.2% Liabilities as % of Assets (%) 13.8% 10.7% 12.3% 12.0% Equity as % of Assets (%) 86.2% 89.3% 87.7% 88.0% Return on Equity (%) 18.4% 17.6% 21.8% 16.6% Return on Assets (%) 15.8% 15.7% 19.1% 14.6% Source: Oman & Raysut Company Filings Gross margins of the sector have witnessed an increasing trend since In 2008, Omani cement companies had lower clinker capacities which made them import huge amount of 8 Oman Cement Sector December 2010

9 2006 1Q-07 1H-07 9M Q-08 1H-08 9M M M Q-07 1H-07 9M Q-08 1H-08 9M M M-10 clinker at high prices. However, post 2009, Oman Cement doubled its clinker capacity to 2.4mn tons thereby reducing the imported clinker. As of 9M-2010, gross margins of the sector has risen to 50.5%. Amongst the two cement manufacturers, Raysut Cement has the highest margins at 55.8% while the margins of Oman Cement stood at 44.0%. Gross Margins 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Sector Non-Core Income as % of PAT 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Raysut Cement Sector Margins Oman Cement Source: Company Filings Over the years, Raysut Cement has continued to enjoys higher margins due to its first mover advantage whereby its clinker capacity has always remained higher than the Oman Cement. In 2006, Raysut Cement increased its clinker capacity to 1.8mtpa in 2006 while at that time the capacity of Oman Cement was 1.2mtpa. However as of now the clinker capacity of both Oman and Raysut Cement has reached 2.4mtpa. Non-core income has remained a consistent segment to the net income of the sector. Non-core income of the sector arises from Company s profit from associates, return on cash balances, dividend income, income from investments, interest on bonds, rental and various other sources. As of 9M-2010, the contribution has reached its peak at 25.0%. Lowest contribution was recorded in 9M-2008 period because of the financial crisis where investment income induced the down fall. Net profit of the sector for 2009 witnessed an increase of 33.5% to US$137.4mn as compared to US$102.9mn during Out of the two Oman Cement company posted a gain of 93.2% while Raysut Cement company posted an increase of 5.8%. While net income for Omani cement companies for 9M-2010 was US$108.6mn while the same during 9M-2009 was US$106.7mn, increase of 1.8%. Assets of the sector rose from US$650.9mn at the end of 2008 to US$719.1mn at the end of Equity of the sector rose by 12.4% while liabilities declined by 1.5%. Debt as percentage of assets declined from 3.4% in 2008 to 2.5% in During 9M-2010, debt of the Omani cement sector rose due to an increase in the leverage by Oman Cement Company due to their upcoming expansion. Overall sector debt rose from US$11.7mn to US$24.0mn in 9M Oman Cement Sector December 2010

10 Oman Cement Sector 52.0% 30.0% 50.0% 24.0% 48.0% 18.0% 46.0% 12.0% 44.0% 6.0% 42.0% 0.0% 9M-09 9M-10 9M-09 9M-10 Gross Margins (%) Non-Core Income as % of PAT 40.0% 50.0% 37.0% 46.0% 34.0% 42.0% 31.0% 38.0% 28.0% 34.0% 25.0% 30.0% 9M-09 9M-10 9M-09 9M-10 Operating Margins (%) Net Margins (%) 3.0% 5.0% 2.4% 4.0% 1.8% 3.0% 1.2% 2.0% 0.6% 1.0% 0.0% 0.0% 9M-09 9M-10 9M-09 9M-10 Financial Charges as % of Debt Debt as % of Assets 12.5% 89.5% 12.0% 89.0% 11.5% 88.5% 11.0% 88.0% 10.5% 87.5% 10.0% 87.0% 9M-09 9M-10 9M-09 9M-10 Liabilities as % of Assets Equity as % of Assets 18.0% 16.0% 17.6% 15.5% 17.2% 15.0% 16.8% 14.5% 16.4% 14.0% 16.0% 9M-09 9M % 9M-09 9M-10 Return on Equity (%) Return on Assets (%) Source: Company Reports & Global Research * Combined Financials of Two Listed Omani Companies 10 Oman Cement Sector December 2010

11 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Oman Cement Company BUY Target Price: RO0.871 Market Data Bloomberg Code: Reuters Code: CMP (12 Dec 2010): O/S (mn): Mkt Cap (RO mn): Mkt Cap (US$bn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High /Low (LE): / Average Volume : 258,992 1m 3m 12m Absolute (%) Relative (%) OCC Price Volume Performance OCOI OM OCCO.OM RO Revenue to record CAGR of 4.6% during Oman Cement revenue is expected to decline by 19.0% to RO55.3mn in 2010 as against RO68.3mn in This decline would be because of 15.3% decline in sales volume along with a 4.3% decline in realization price during Going forward we expect, Oman Cement s revenue to report a CAGR growth of 4.6% during Gross margins expected to improve In 2010, we expect the overall cost to drop by 26.2% to RO31.0mn (Gross Margins: 43.9%) as compared to RO42.0mn (Gross Margins: 38.4%) reported in Gross margins are expected to improve as the additional clinker capacity has come online which in turn will favor the Company in terms of less clinker and cement imports. New clinker capacity to be operational by 1Q-2011 After a considerable delay the new clinker line of the Company is expected to come online by 1Q-2011, which will raise the clinker capacity of the Company to 2.4mtpa. With the new line being operational for nine months during 2011, we expect the clinker utilization level to drop to 77% in 2011 from an expected 101.1% in 2010 and 96.7% recorded in Going forward with the new line the clinker imports are expected to drop to nil and the utilization levels are expected to increase to as high as 88% in Net income to drop in 2011 During 2010, Government of Oman fully reimbursed the Company for losses incurred in the year 2008 and 2009 on import of clinker and cement. The amount of RO7.34mn received by the Company in 2010 is expected to raise the full year net income to RO29.0mn (EPS: RO0.088) as compared to RO24.2mn (EPS: RO0.07.) in However in 2011, Company s net income is expected to drop to RO23.2mn (EPS: RO 0.070) on account of exclusion of one time gain incurred in 2010 along with a drop in cement prices by almost 3%. Source: Zawya Volume (000) Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Phone: OCC (RO) Investment Indicators Year F 2011 F 2012 F 2013 F Revenue (RO mn) Net Profit (RO mn) Diluted EPS (RO) Diluted BVPS (RO) EV/EBITDA (x) P/E (x) P/BV (x) Source : Company Annual Reports & Global Research. Historical P/E & P/BV multiples based on respective year-end prices, while those for future years are based on current market price in the MSM as on December 12, Oman Cement Sector December 2010

12 (F) 2011 (F) 2012 (F) 2013 (F) Revenue to record CAGR of 4.6% during Oman Cement revenue recorded an increase of 7.5% in 2009 to RO68.2mn as compared to RO63.5mn in This increase was because of a marginal improvement in sales volume by 1.1% and a handsome double digit increase in export sales price to RO43.9/ton and 5.7% increase in local sales price to RO31.4/ton. In 9M-2010, Oman Cement sales revenue declined by 23.0% to RO40.6mn as compared to RO52.7mn in 9M Drop in sales revenue was because of 20.5% drop in sales volume to 1.33mn tons in 9M-2010 as compared to RO1.67mn in 9M Sales Revenue % 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Revenue (RO mn) Growth Source: Company Reports & Global Research For 2010, we expect revenue to decline by 19.0% to RO55.3mn as against RO68.2mn in This decline would be because of 15.3% decline in sales volume along with a 4.3% decline in realization price during Going forward we expect, Oman Cement s revenue to report a CAGR growth of 4.6% during Continuation of deficit ranging between mtpa during our forecasted period is expected to keep the revenue rolling during Gross margins expected to improve In 2009, Oman Cement cost of sales declined by 15.3% to RO42.0 as compared to RO49.6mn in This decline was due to lesser production and sales volume along with a significant drop in the cost of imported clinker. During 2009, Oman Cement imported clinker at a cost of RO24.4/ton as against RO33.7/ton, a drop of 27.5%. During 9M-2010, Company was able to reduce its cost by 32.4% to RO22.7mn as compared to RO33.6mn in 9M In 9M-2010, Company s imported clinker cost was RO17.9/ton as against RO31.3/ton in the same period last year. To this year surprise, cement import cost also declined by 31.3% to RO22.8/ton as against RO33.2/ton in 9M In 2010, we expect the overall cost to drop by 26.2% to RO31.0mn (Gross Margins: 43.9%) as compared to RO42.0mn (Gross Margins: 38.4%) reported in Gross margins are expected 12 Oman Cement Sector December 2010

13 (F) 2011 (F) 2012 (F) 2013 (F) to improve as the additional clinker capacity has come online which in turn will favor the Company in terms of less clinker and cement imports. Gross Profit & Margins % 48.0% 43.0% 38.0% 33.0% 28.0% 23.0% 18.0% Gross Profit (RO mn) Gross Margins - RHS Source: Company Reports & Global Research New clinker capacity to be operational by 1Q-2011 After a considerable delay the new clinker line of the Company is expected to come online by 1Q-2011, which will raise the clinker capacity of the Company to 2.4mtpa. With the new line being operational for nine months during 2011, we expect the clinker utilization level to drop to 77% in 2011 from an expected 101.1% in 2010 and 96.7% recorded in Operational Performance Post New Clinker Facility (F) 2011 (F) 2012 (F) 2013 (F) Clinker Imported (tons) Clinker Production 1,150 1,180 1,160 1,213 1,842 1,965 2,104 Cement Production 1,865 2,000 2,070 1,798 1,934 2,063 2,210 Cement Sales 1,879 2,153 2,178 1,844 1,976 2,101 2,243 Clinker Cap. Utilization (%) 95.8% 98.3% 96.7% 101.1% 76.7% 81.9% 87.7% Source: Global Research & Company Filings Going forward with the new line the clinker imports are expected to drop to nil and the utilization levels are expected to increase to as high as 88% in Net income to drop in 2011 One-off gain in 2010 During 2010, Government of Oman fully reimbursed the Company for losses incurred in the year 2008 and 2009 on import of clinker and cement. The amount of RO7.34mn received by the Company in 2010 is expected to raise the full year net income to RO29.0mn (EPS: RO0.088) as compared to RO24.2mn (EPS: RO0.073) in However in 2011, Company s net income is expected to drop to RO23.2mn (EPS: RO 0.070) on account of exclusion of one time gain incurred in 2010 along with a drop in cement prices by almost 3%. 13 Oman Cement Sector December 2010

14 Ratio Analysis Cash Flow Balance Sheet Profit & Loss Statement Financial Statement (RO 000) (F) 2011 (F) 2012 (F) 2013 (F) Net Sales Revenue 49, , , , , , ,325.8 Cost of Sales (29,460.8) (49,652.7) (42,034.8) (31,017.8) (32,295.9) (33,215.3) (34,469.0) Gross Profit 20, , , , , , ,856.8 General & Administrative Expense (2,638.8) (2,898.4) (2,506.0) (2,323.4) (2,554.9) (2,783.3) (3,039.6) Operating Profit 17, , , , , , ,817.2 Other Income 3, , , , , , ,387.4 Share of Result of Associates (16.6) Reimbursement from Government of Oman , Net Finance Income (23.0) (66.5) (21.4) (15.1) (16.0) (17.0) (18.2) Profit Before Taxation 19, , , , , , ,289.8 Taxation (2,077.6) (1,567.4) (3,131.2) (3,590.9) (3,015.9) (3,131.8) (3,253.3) Net Profit 17, , , , , , ,036.4 Cash and Bank Balance 2, , , , , , ,329.5 Receivables and Prepayments 6, , , , , , ,583.2 Inventories 4, , , , , , ,221.0 Investments 1, , , , , ,655.0 Other Assets 18, , , , , , ,081.4 Held to Maturity Investments 3, , , , , , ,605.8 Long-term Deposits 19, , , , , , ,672.2 Investments in Associates Investments Available-for-Sale 21, , , , , , ,347.9 Other Assets 13, Net Fixed Assets 44, , , , , , ,602.9 Total Assets 134, , , , , , ,023.2 Loans 2, , , , , ,372.1 Payables 4, , , , , , ,288.4 Others 16, , , , , , ,403.0 Paid -up Capital 33, , , , , , ,087.3 Reserves 39, , , , , , ,570.0 Share Premium 6, , , , , , ,724.1 Retained Earnings 31, , , , , , ,539.2 Revaluation Surplus Total Shareholders Equity 110, , , , , , ,959.8 Total Equity & Liability 134, , , , , , ,023.2 Cash Flow from Operating Activities 20, , , , , , ,373.0 Cash Flow from Investing Activities (7,135.9) 8,114.1 (30,846.8) (21,080.8) (7,517.4) (6,865.2) (7,247.2) Cash Flow from Financing Activities (11,822.8) (9,233.6) (4,108.6) (9,901.5) (15,642.2) (17,223.9) (17,158.8) Net Cash at End 2, , , , , , ,329.5 Current Ratio (x) Quick Ratio (x) Gross Profit Margin (%) 41.0% 21.8% 38.4% 43.9% 44.4% 45.1% 45.6% Operating Margin (%) 35.7% 17.3% 34.8% 39.7% 40.0% 40.5% 40.8% Net Profit Margin (%) 35.3% 19.7% 35.5% 52.5% 40.0% 39.8% 39.5% Return on Average Assets (%) 13.7% 9.4% 16.9% 17.9% 13.2% 13.1% 13.0% Return on Average Equity (%) 17.1% 11.0% 19.1% 20.3% 14.9% 14.6% 14.4% Debt / Equity (x) EPS (RO) Book Value Per Share (RO) Market Price (RO) * Market Capitalization (RO mn) Cash Return On Capital Invested (%) 21.3% 15.4% 22.5% 24.3% 19.1% 18.7% 18.3% EV/Ton (RO) Dividend Yield (%) 4.1% 0.0% 2.9% 6.3% 7.0% 7.8% 7.8% EV/Revenues (x) EV/EBITDA (x) P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2010 and subsequent years as per closing prices on MSM on Dec 12, Oman Cement Sector December 2010

15 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Raysut Cement Company REDUCE Target Price: RO1.088 Market Data Bloomberg Code: Reuters Code: RCCI OM RAYC.OM CMP (12 Dec 2010): (RO) O/S (mn): Mkt Cap (RO mn): Mkt Cap (US$bn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High /Low (LE): / Average Volume : 84,928 1m 3m 12m Absolute (%) Relative (%) RCCI Price Volume Performance Revenue to drop by 25% in 2010 Global Research expects Raysut Cement revenue to decline by 25.1% to RO66.9mn as against RO89.3mn in This decline would be because of 24.6% decline in sales volume along with a meaningful decline in realization price during Going forward we expect, Raysut Cement s revenue to remain range bound during Gross margins expected to shrink In 2010, we expect the overall cost to drop by 30.4% to RO30.4mn (Gross Margins: 54.5%) as compared to RO43.6mn (Gross Margins: 51.1%) reported in Gross margins are expected to decline going forward as we expect Raysut Cement to face tough competition because of its location along with price war amongst local and regional cement players. Acquisition of Pioneer Cement Not Fruitful Global Research believes that the idea of acquiring a cement plant in UAE would not be favorable for the Company as there is a huge margin difference between Omani and UAE companies. Average gross margins of Omani cement companies during 2008 and 2009 were at 40.0% and 45.6% respectively as compared to those of UAE at 27.5% and 21.8%. The situation has further worsened during the 9M-2010 period as the UAE margins stand at 11.6% whereas those of Oman has further improved to 50.5%. Net income to decline in 2011 During 2010, we expect the Company to report a net income of RO22.9mn (EPS: RO0.11) as compared to RO28.6mn (EPS: RO0.14) in The drop in the net income would trickle from the top line as we forecast a 25% decline in the top line. The savior to the Company this time again would be the non-core income along with an expected increase in the margins during Source: Zawya Volume (000) Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Phone: RCCI (RO) Investment Indicators Year F 2011 F 2012 F 2013 F Revenue (RO mn) Net Profit (RO mn) Diluted EPS (RO) Diluted BVPS (RO) EV/EBITDA (x) P/E (x) P/BV (x) Source : Company Annual Reports & Global Research. Historical P/E & P/BV multiples based on respective year-end prices, while those for future years are based on current market price in the MSM as on December 12, Oman Cement Sector December 2010

16 (F) 2011 (F) 2012 (F) 2013 (F) (RO mn) Revenue to drop by 25% in 2010 Raysut Cement reported a marginal increase in revenue in 2009 to RO89.3mn as compared to RO89.0mn in Overall sales volume rose by 2.6% to 2.78mn tons but on the other hand price went down by 2.3% to RO32.1/ton as compared to RO32.8/ton in During 9M-2010, the revenue dropped by 30.5% to RO49.8mn as compared to RO71.8mn in the same period last year. Drop in the top line during the current interim period was because of 19.1% drop in sales volume despite 20.1% increase in production along with a decline in average realization price by 14.1% to RO26.6/ton as against RO31.0/ton in the comparable period last year. Sales Revenue % % 40% 20% 0% -20% -40% Revenue Growth Source: Company Reports & Global Research For 2010, we expect revenue to decline by 25.1% to RO66.9mn as against RO89.3mn in This decline would be because of 24.6% decline in sales volume along with a meaningful decline in realization price during Going forward we expect, Raysut Cement s revenue to remain range bound during Continuation of deficit ranging between mtpa during our forecasted period is expected to keep the revenue rolling but drop in the realization prices would continue to hinder the top line growth. Gross margins expected to shrink In 2009, Raysut Cement cost of sales increased by 4.4% to RO43.6mn as compared to RO41.8mn in Growth in cost was contributed by an increase in the cost of imported cement and clinker in absolute terms. On the whole the Company imported RO20.2mn tons of cement and clinker as compared to RO17.4mn tons in the same period last year. However, in real terms the per ton cost of import went down from RO29.6/ton to RO17.9/ton as during mn tons of clinker/cement was imported as compared to 0.6mn tons in the same period last year. Hence with an average realization price of 2008 at RO32.9/ton, the Company was able to sell the 16 Oman Cement Sector December 2010

17 (F) 2011 (F) 2012 (F) 2013 (F) (RO mn) imported cement at a margin of 9.9% while the same during 2009, when the average realization price was RO32.1/ton, the imported cement/clinker was sold at a margin of 44.3%. Gross Profit & Margins % 58% % 46% 40% Gross Profit Gross Margins Source: Company Reports & Global Research In 2010, we expect the overall cost to drop by 30.4% to RO30.4mn (Gross Margins: 54.5%) as compared to RO43.6mn (Gross Margins: 51.1%) reported in Gross margins are expected to decline going forward as we expect Raysut Cement to face tough competition because of its location. Acquisition of Pioneer Cement Not yet factored in Raysut Cement has recently announced plans of acquiring Pioneer Cement Industries, UAE. Pioneer Cement is a 51:49 joint venture between RAK Investment Authority (RAKIA) and Penna Cement Industries Limited, India. Pioneer Cement has a capacity of 1.6mtpa and post acquisition it would raise the capacity of Raysut Cement to 4.4mtpa. It has been heard from the market sources that the price Raysut Cement has agreed to pay for Pioneer Cement is ranging between US$ mn. However the final price is yet to be announced. Global Research believes that the idea of acquiring a cement plant in UAE would not be favorable for the Company as there is a huge margin difference between Omani and UAE companies. Average gross margins of Omani cement companies during 2008 and 2009 were at 40.0% and 45.6% respectively as compared to those of UAE at 27.5% and 21.8%. The situation has further worsened during the 9M-2010 period as the UAE margins stand at 11.6% whereas those of Oman has further improved to 50.5%. Net income to drop in 2011 During 2009, Raysut Cement reported 5.8% increase in the bottom line to RO28.6mn (Net Margins: 34.2%) as compared to RO27.1mn (Net Margins: 32.1%) in Increase in the net income during 2009 was mainly funded by the non-core income sources which contributed 14.9% to the bottom line as compared to a negative of 0.1% in Oman Cement Sector December 2010

18 (F) 2011 (F) 2012 (F) 2013 (F) (RO mn) Net Profit % 50% 40% 30% 20% 10% 0% Net Profit Net Margins (%) Source: Company Reports & Global Research During 2010, we expect the Company to report a net income of RO22.9mn (EPS: RO0.11) as compared to RO28.6mn (EPS: RO0.14) in The drop in the net income would trickle from the top line as we forecast a 25% decline in the top line. The savior to the Company this time again would be the non-core income along with an expected increase in the margins during Post 2010, with the cement market heating up and dumping of UAE cement in Oman we expect the company to report a negative CAGR of 5.7% during Oman Cement Sector December 2010

19 Ratio Analysis Cash Flow Balance Sheet Profit & Loss Statement Financial Statement (RO 000) (F) 2011 (F) 2012 (F) 2013 (F) Net Sales Revenue 63, , , , , , ,252.8 Cost of Sales (24,593.6) (41,870.5) (43,695.0) (30,413.4) (31,896.9) (33,009.6) (34,122.3) Gross Profit 38, , , , , , ,130.4 General & Administrative Expense (10,937.3) (16,210.0) (17,883.2) (12,912.2) (12,531.6) (12,635.8) (12,786.8) Operating Profit 27, , , , , , ,343.7 Other Income 2,746.5 (1,890.6) 2, Share of Result of Associates 3, , , , , ,132.7 Gonu-Cyclone Relief Fund (1,000.0) Net Finance Income (77.9) (7.2) Profit Before Taxation 33, , , , , , ,451.4 Taxation (3,185.0) (3,861.0) (3,347.0) (2,673.1) (2,364.3) (2,282.4) (2,241.6) Net Profit 30, , , , , , ,209.8 Cash and Bank Balance 3, , , , , , ,737.7 Receivables and Prepayments 7, , , , , , ,795.1 Inventories 5, , , , , , ,283.4 Investments 8, , , , , , ,288.9 Other Assets 12, , , , , , ,000.0 Investments & Advances 3, , , , , , ,735.5 Investments Available for Sale Gross Fixed Assets 103, , , , , , ,912.0 Less: Accumulated Depreciation 31, , , , , , ,512.2 Net Fixed Assets 71, , , , , , ,399.8 Total Assets 113, , , , , , ,415.5 Loans 7, , , , , Payables 2, , , , , , ,150.2 Others 11, , , , , , ,883.6 Paid-up Capital 20, , , , , , ,000.0 Share Premium 13, , , , , , ,456.9 Legal Reserve 6, , , , , , ,666.7 Voluntary Reserve 6, , , , , , ,352.4 Asset Replacement Reserve 3, , , , , , ,647.6 Retained Earnings 40, , , , , , ,551.0 Total Equity & Liability 113, , , , , , ,415.5 Cash Flow from Operating Activities 25, , , , , , ,087.9 Cash Flow from Investing Activities (18,588.2) 3,451.3 (2,703.6) (10.0) (1,757.8) (1,869.9) (1,812.6) Cash Flow from Financing Activities (18,061.0) (22,899.2) (22,145.0) (23,050.6) (22,448.1) (22,337.5) (20,254.3) Net Cash at End 3, , , , , , ,737.7 Current Ratio (x) Quick Ratio (x) Gross Profit Margin (%) 61.0% 53.0% 51.1% 54.5% 50.9% 49.6% 48.5% Operating Margin (%) 43.6% 34.8% 31.1% 35.2% 31.6% 30.3% 29.2% Net Profit Margin (%) 47.8% 30.4% 32.1% 34.2% 31.2% 29.9% 29.0% Return on Average Assets (%) 28.7% 23.5% 23.8% 18.8% 17.0% 16.7% 16.6% Return on Average Equity (%) 37.2% 28.7% 28.0% 21.4% 19.0% 18.7% 18.6% Debt / Equity (x) EPS (RO) Book Value Per Share (RO) Market Price (RO) * Market Capitalization (RO mn) Cash Return On Capital Invested (%) 39.7% 36.1% 34.1% 27.9% 25.7% 25.6% 25.6% EV/Ton (RO) Dividend Yield (%) 5.1% 9.1% 6.7% 8.7% 8.7% 8.7% 7.9% EV/Revenues (x) EV/EBITDA (x) P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2010 and subsequent years as per closing prices on MSM on Dec 12, Oman Cement Sector December 2010

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21 The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Ticker Price Disclosure Oman Cement Company Raysut Cement Company BUY REDUCE OCOI OM OCCO.OM RCCI OM RAYC.OM RO RO ,10 1,10 1. did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of serves on the board of directors of this company. 7. Within the past year, has managed or co-managed a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition Buy Fair value of the stock is >10% from the current market price Hold Fair value of the stock is b/w +10%/-10% from the current market price Reduce Fair value of the stock is b/w -10%/-20% from the current market price Sell Fair value of the stock is < -20% from the current market price This material was produced by KSCC ( Global ), a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. 21 Oman Cement Sector December 2010

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