Orascom Construction Industries

Transcription

1 Orascom Construction Industries OCI Time for a breather Orascom Construction Industries [OCIC] has rallied with the market this year (up 21% since mid-may 2009) boosted by the announcement of an agreement to acquire DSM s Agro and Melamine assets for EUR310mn (at 0.63x 2009 EV/sales of EUR489mn.) The cash deal will be effective from January 1st, 2010, and is expected to close in 2Q10, though OCI s management announced that it may refinance EUR150mn of the deal at a later date. According to OCI, the acquisition is at 0.43x average EV/sales and 3.5x average EV/EBITDA. We believe the acquisition will expand OCI s customer base and add a new range of products to the company s fertiliser segment, in addition to resulting in a slight EPS increase during We therefore revise OCI s LTFV/share to EGP359.3, up from EGP However, we maintain its TP/share of EGP306, at which OCI s fertiliser line of business (LoB) will be fairly traded at an EV/EBITDA of 8.7x in 2011 (versus an average peer multiple of 8.4x). OCI s shares rallied strongly on the acquisition news, though we feel that the market s attention has now shifted elsewhere. With only 8% potential upside to our target price we expect the shares to pause for a breather. We therefore change our recommendation to Underweight consider taking profits in the short term. High cash cost acquisition: While the acquisition appears to be occurring on favourable multiples, we believe that OCI has now shifted to a higher cost base for fertiliser production, with increased exposure to developed markets. We believe that DSM Agro has a high cash cost basis due to high natural gas prices being driven by oil-linked formula contracts (over USD6/MMBtu), compared with OCI s North African fertiliser plants more favourable hedged natural gas prices. Price rally: OCI s share price has already reacted to the DSM news by advancing 7% since the start of April 2010, though the deal s implications may further impact price movements in the future. Valuation and recommendation: OCI benefits from worldwide fertilser assets and diversified risk, but its global investments make it sensitive to fertiliser price trends. Following news of the DSM acquisition, this led us to upgrade our LTFV to EGP359.3 (from EGP338.5). Looking to the short term, we maintain our TP/share of EGP306, constrained by high static valuation multiples. The recent price rally has resulted in a reduced upside potential of 8.3% from recent market price. Over the short run, we see the shares as overbought. As a result, some profit-taking may creep in, or the shares may underperform for a while. With 8.3% upside potential remaining, we downgrade OCI to Underweight from Buy. USD mn 2008 A 2009 A 2010 P 2011 P 2012 P Revenues 3, , , , ,515.2 Growth rate 55.4% 2.7% 28.8% 19.3% 11.0% EBITDA , , ,857.6 Growth rate 98.7% -10.1% 29.0% 52.3% 19.4% EBITDA margin 23.7% 20.7% 20.8% 26.5% 28.5% Net income Growth rate -91.6% -55.9% 26.8% 44.1% 21.9% Net margin 26.5% 11.4% 11.2% 13.5% 14.8% PER 14.7x 23.5x 16.7x 11.5x 9.2x P/BV 3.4x 3.7x 3.2x 3.1x 3.1x EV/EBITDA 12.7x 15.2x 18.5x 12.3x 10.3x Net debt/ebitda 0.5x 1.5x 7.9x 5.3x 4.5x Dividend yield 2.0% 3.5% 2.6% 3.7% 4.5% Source: Company reports and CICR estimates COMPANY SYNOPSIS UNDERWEIGHT (DOWNGRADED) LT FAIR VALUE EGP359.3 (UPGRADED) TARGET PRICE EGP306.1 (MAINTAINED) Orascom Construction Industries was incorporated under Law no. 159/1981 in April 1998 as a shareholding company, to undertake contracting activities and other related activities. OCI's operations encompass construction, fertilisers (nitrogen), and previously cement. In 1999, OCI joined in the cement business and had its shares listed on the Egyptian Exchange (EGX). Afterwards, it owned and operated a cement group. In January 2008, OCI divested the cement LoB to Lafarge S.A., which paid EUR8.8bn (USD12.9bn) and assumed USD2bn in debt; the deal was executed on the EGX. Starting 2008, OCI ventured in the fertilisers business by merging Egyptian Fertilisers Company (EFC). The deal amounted to USD1.59bn (cash and shares), also OCI assumed EFC's USD1.1bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilisers, a Nigerian company. In addition, OCI owns 60% in Egyptian Basic Industries Company (EBIC), another fertiliser plant in Egypt. A third fertilisers plant, Sorfert, is underway in Algeria, to be launched in 2H10. Also, OCI acquired 20% stake in Gavilon, a US fertiliser distribution company. Furthermore, OCI schemed a DAP/MAP project phosphate fertilisers in Algeria or Morocco. SHAREHOLDER STRUCTURE Sawiris Family 54.0% Free Float 46.0% Total 100.0% STOCK DATA Reuters; Bloomberg OCIC.CA Recent price as of 12-Apr-10 EGP No. of O/S shares mn Market cap EGP 58,487.6 mn 52-wk high / low EGP 285/ EGP 148 Avg. daily volume / turnover 0.29 mn / LE mn STOCK PERFORMANCE 52 WEEKS Apr-09 EGP May-09 Source: Bloomberg Volume OCIC EGX 30 - rebased Jun-09 Jul-09 Aug-09 Sep-09 Oct MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG Nov-09 Dec-09 Jan-10 mn shares Feb-10 Mar-10

2 Summary OCI announced that it has reached an agreement to acquire DSM s Agro and Melamine assets for EUR310mn. DSM is a leading Western European ammonia and nitrate fertiliser producer headquartered in Sittard, in the Netherlands. We believe that the acquisition will expand OCI s customer base and add a new range of products to the company s fertiliser segment. OCI s current products include ammonia, CAN, UAN and ammonium sulphate (AS), with an estimated total annual capacity of 1.7mn ton per year. DSM Melamine has melamine operations in Europe, Indonesia and China. It controlled a 16% share of the worldwide market in Total capacity is 255kmtpa, including the proportionate share in the company s Chinese joint venture (49%). DSM has production plants in the Netherlands, as well as distribution and warehousing facilities across Western Europe. OCI announced that it will pay for the EUR310mn acquisition deal in cash with the intention to refinance EUR150mn at a later date. The deal will be effective from January 1st, 2010, and is expected to close in 2Q10. According to OCI, the acquisition represents 0.43x average EV/sales and a 3.5x average EV/EBITDA. While the transaction was executed at a favorable multiple, we would like to note that it does change the company s profile. OCI has now transitioned to having exposure to higher-cost fertiliser production with increased developed market exposure. We believe that DSM Agro has a high cash cost basis due to high natural gas prices that are being driven by oil-linked formula contracts (>US$6/MMBtu). We estimate that the acquisition of DSM Agro and DSM Melamine will be 3.3% accretive to 2010e EPS and will expand 2011e EPS 4.6%. We believe that the consideration amount is fair given the relatively low profitability of the acquired entity. In our view, the most attractive aspect of the deal is the potential for OCI to capitalise on the shared distribution network. It also provides OCI a foothold in European markets and possible distribution synergies with the existing distribution network through which the company may sell its North African plants low-price fertiliser. Buying distribution assets, but with highcost production DSM Agro & Melamine slightly accretive to EPS The target company has substantial sales and distribution synergy in key European markets, including: France, Germany, the Netherlands, Belgium, the UK and Ireland. We view that the new business will offer geographically diverse fertiliser production assets from North Africa to Europe. In addition DSM exports approximately 400k tons per year of ammonium sulphate (AS) to Brazil. As per OCI s management decision, AS will now be distributed through the Fertipar joint venture (JV), which should reflect positively on company s trading activities.

3 Figure 1 Impact of OCI s acquisition on fertiliser LoB capacity mn ton per year Ammonia* Urea* UAN** CAN AS OCI DSM Group *Sellable capacities **Produced at the fertiliser LoB s discretion subject to market conditions. Source: OCI In terms of costs, OCI stated that in 2010 the business blended gas price will be approximately EUR5/MMBtu. This is equivalent to USD6.5+/MMBtu and compares with costs of less than USD1-USD1.50/MMBtu at its Egyptian and Algerian plants. As per company guidance, DSM Agro agreed to have natural gas hedge contracts (less favorable than those of OCI s North African plants, however). These contracts are expected to expire within the next three years. By 2013, the company s gas buying is expected to occur on a spot basis 100% of the time. Currently, the natural gas contract terms are summarised as follows: In 2010 & 2011: will source 50% of its natural gas requirements at spot prices. In 2012: will source 75% of its natural gas requirements at spot prices. In 2013 onwards: will source 100% of its natural gas requirements at spot prices. We view DSM as a mature asset with high cash cost base and therefore low margin (12% EBITDA margin vs. the 70% EBITDA margin of OCI s North-African plants).

4 Figure 2 Leading global N fertiliser producer by capacity in 2012 (mn tons) mn tons per year Ammonia Urea CAN Nitrates Yara CF/Terra OCI Post Acquizition PotashCorp Agrium QAFCO SAFCO Pequiven Koch Source: OCI

5 Valuation We have upgraded our forecasts to reflect OCI s acquisition of DSM s Agro and melamine businesses from the Royal DSM. We estimate that DSM will contribute 13% of the OCI s new enterprise value. Our 2010e EPS forecasts are raised by 3.2%. The consideration of the deal totaled EUR310m or c.us$420m, translating to a 2010e EV/EBITDA multiple of less than 5.8x. OCI has stated it plans to raise EUR150mn as part of the financing of the deal. We continue to use our DCF model to determine OCI s LTFV. We have used comparative multiples for both construction and fertiliser peers to value OCI based on relative value. Also, we have utilised the relative value approach by using the recent EV/EBITDA multiple derived from recent merger & acquisition (M&A) offers in the fertiliser industry. We continued to use the average peers 2011 EV/EBITDA multiple for the construction business. We have blended the LTFV based on DCF and OCI s relative value to reach a target price for OCI. In calculating OCI s TP, we have used a 50%:50% weighting for LTFV and relative value, respectively. A summary of our findings is featured below. DCF method: LTFV of EGP359.3/share vs. old estimate of EGP338.5/share. Multiples method: Value of EGP252.8/share vs. old estimate of EGP273.6/share. TP value: EGP306/share DCF Figure 3 OCI s New & Old Valuation ( 000) Note: we have added the acquisition cost of new Royal DSM fertiliser & melamine business in the net debt calculation. Source: CICR estimates New Valuation % of total value Subsidiary Enterprise Value (EV) Equity share OCI's share Subsidiary Enterprise Value (EV) Equity share OCI's share Total Fertilizers $12,088,514 $10,237, % Total Fertilizers $13,355,692 $9,053, % Construction $5,169, % $5,169, % Construction $5,142, % $5,142, % Other Investments $30,520 $30, % Other Investments $30,520 $30, % Sum $17,288,901 $15,437, % Sum $18,528,252 $14,226, % Net debt ($1,811,600) Net debt ($1,393,100) Shareholders' value $13,625,852 Shareholders' value $12,833,089 No. of shares (outstanding) 206,918 No. of shares (outstanding) 206,918 Fair value/gdr $65.9 Fair value/gdr $62.0 EGP/USD 5.5 EGP/USD 5.5 Fair value/local share Fair value/local share OLD Valuation % of total value

6 Projection Assumptions & Highlights While maintaining our previous forecasts for OCI, we have increased our estimate for the company shareholders value from USD12,833mn to USD14,847mn. The increase is mainly due to the incorporation of the newly-acquired fertiliser & melamine business from DSM. Assumptions & management guidance for DSM: Agro s oil-based contracts all expire within the next three years. The splits for these years (including 2010) are as follows: 2010: 50% of gas from oil-based formula contracts, 50% sourced at spot. 2011: remains unchanged. 2012: 75% spot, 25% oil-based. 2013: 100% spot gas. Two thirds of ammonia produced is captive; one third is sold. Nitric acid capacity is an intermediate product. Urea capacity is an intermediate product. UAN capacity depicted in Fig. 1 is maximum capacity production. Ammonium sulphate capacity is at maximum capacity production. CAN capacity will increase to 1,200kt in 2011 and 1,450kt in Melamine 2: as per the management guidance, it was shut down and will resume its operations in Melamine 4: although DSM owns 49% of the Chinese JV - translating to ownership capacity of 24.5kt - it has the right to market 90% (45ktpa) of the product produced. CAPEX: OCI management announced that the CAPEX program for DSM will be EUR41.8mn in 2010, EUR65mn in 2011, and EUR16.5mn in Tax rate applicable on Dutch subsidiary is 25.5%, while both Indonesia and China are taxed at a rate of 25%. OCI plans to raise debt of approximately EUR150mn, with 5-year loan and 2 years of grace period.

7 Relative Valuation We have used the implied EV/EBITDA multiple for 2011 for mergers & acquisitions (M&A) in the fertiliser sector and applied a liquidity discount. For example, several M&As had been announced since the start of the year. The deals included a battle between Yara (a Norwegian fertiliser company), and CF Industries (a US-based fertiliser company) for control of Terra (a US nitrogen fertiliser producer). These companies offered USD4.1bn and USD4.7bn, respectively. Both offers imply EV/EBITDA multiple of 7.55x. We have applied a liquidity discount of 20% to reflect a liquidity discount for OCI s fertilisers LoB. In addition, we continued to use an average EV/EBITDA multiple for construction peers for the construction LoB for 2011.

8 Figure 4 OCI s Relative Value EBITDA (USD mn) Year Peers' EV/EBITDA EV (USD mn) % of total value Construction > x 3, % EBIC > x 1, % EFC > x 2, % Sorfert > x 2, % DSM > x % Gavilon % Total Ent. Value 11, % Peer EV/EBITDA multiple: (1) Construction: a sample including regional and international companies, (2) Fertiliser: implied EV/EBITDA multiple from recent Yara/CF M&A offers to acquire Terra; in addition, we applied a 20% liquidity discount. Source: CICR estimates New TP & Recommendation Net debt ($1,812) Shareholders' Value $9,583.3 No. of shares (outstanding) Relative Value (USD) 46.3 Exchange rate 5.5 Relative Value (EGP) We expect the acquisition of DSM Agro and DSM Melamine to be slightly accretive to earnings and we believe that the valuation is fair considering the high cash cost base of the business. We are confident that OCI s management is expanding its customer base and product mix, both of which will ensure a greater product mix. Hence, we upgrade OCI s LTFV to EGP359.3/share. However, we have maintained OCI s TP of EGP306/share to reflect the medium term constraint of its valuation multiples. In calculating OCI s TP, we have assigned a 50/50 weighting to LTFV and relative value. Thus, we have downgraded OCI s rating to Underweight from Buy.

9 Figure 5 OCI s TP OCI's Target price EGP = Multiple Weight = LTFV Weight 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: CICR estimates Risks to Recommendation Upside Risks Although not quantified, we expect OCI s new fertiliser plants in cost advantageous regions could benefit the fertiliser business The company should benefit from large planned MENA region infrastructure spending (c.usd2.5tn+) Should fertiliser prices increase above our estimates for 2010, OCI s LTFV would increase by 7% (cumulative sensitivity) to every USD10/ton change in fertiliser prices.

10 Figure 6 OCI s LTFV Sensitivity to Changes in Fertiliser Prices 150 Urea effect on LTFV - Left Ammonia effect on LTFV - Left UAN effect on LTFV - Left Melamine effect on LTFV - Right AS effect on LTFV - Left CAN effect on LTFV - Left Base case 100 Change OCI's LTFV LE 50 - (50) 50 - (50) (100) (100) (150) (100) (90) (80) (70) (60) (50) (40) (30) (20) (10) Change Ammonia/Urea/UAN/AS/CAN/Melamine USD/ton (150) Source: CICR estimates We have run a sensitivity exercise by increasing USD10/ton for all products resulting in a c.3% enhanced earnings for The current natural gas forward for 4Q10 is c.usd5.5/mmbtu c.6x higher than OCI s feedstock. We expect that higher feedstock price to enhance OCI s North Africa fertiliser plants cost advantage. Delayed commissioning of global N-fertiliser production capacities may prolong sustainable margins for OCI s fertiliser LoB Should MENA s governments tax shelters increase (as suggested by the Qatari government) the construction LoB s earnings should improve Downside Risks Jump in natural gas prices in the European market might outweigh benefits from natural gas hedge contracts during ; in this case, they would hurt DSM fertiliser s profitability. OCI operates in emerging markets (namely Algeria & Nigeria), exposing it to riskier business environments. An increase in the number of global fertiliser players could increase supply and pressure prices, therefore narrowing margins. OCI could follow global trends and suffer delays in the opening of its new fertiliser plants

11 Several countries (such as India) are attempting to fix their feedstock prices. Their margins are expected to improve and could initiate price competition as a result. Figure 7 OCI Segment Breakdown Figures US '000 Earnings EBITDA Sales Consolidated before minority 648, ,864 1,171,922 1,149,993 1,040,923 New interest Growth rate 41.2% 44.6% 25.1% -1.9% -9.5% Old Consolidated before minority 627, ,424 1,131,243 1,079, ,502 interest Growth rate 35.5% 42.6% 26.3% -4.6% Consolidated before minority % Chg. interest 3.2% 4.6% 3.6% 6.5% 13.2% Source: CICR estimates The acquisition deal is expected to be concluded in 2Q10; however, OCI s management announced that it will assume responsibility for the the Dec-10 Dec-11 Dec-12 Dec-13 Jan-14 New Gross Fertilizers LoB * 1,192,198 1,813,902 2,161,981 2,093,845 2,092,910 Growth rate 161.2% 52.1% 19.2% -3.2% 0.0% Old Gross Fertilizers LoB 609,763 1,129,683 1,431,723 1,325,655 1,253,617 Growth rate 22.0% 85.3% 26.7% -7.4% -5.4% % Chg. Gross Fertilizers LoB 95.5% 60.6% 51.0% 57.9% 66.9% New Gross Construction LoB 3,932,513 4,140,516 4,353,230 4,619,396 4,923,473 Growth rate 17.0% 5.3% 5.1% 6.1% 6.6% Old Gross Construction LoB 3,932,513 4,140,516 4,353,230 4,619,396 4,923,473 Growth rate 9.4% 5.3% 5.1% 6.1% 6.6% % Chg. Construction LoB 0.0% 0.0% 0.0% 0.0% 0.0% New Consolidated 4,916,876 5,868,126 6,515,212 6,713,241 7,016,383 Old Consolidated 4,334,441 5,183,908 5,784,953 5,945,050 6,177,089 % Chg. Consolidated 13.4% 13.2% 12.6% 12.9% 13.6% New Fertilizers LoB 549,175 1,023,480 1,274,337 1,219,740 1,223,520 Growth rate 70.2% 86.4% 24.5% -4.3% 0.3% EBITDA Margin - Fertilizers LoB 46.1% 56.4% 58.9% 58.3% 58.5% Old Fertilizers LoB 477, ,861 1,145,215 1,043, ,369 Growth rate 40.3% 88.8% 27.1% -8.9% EBITDA Margin - Fertilizers LoB 78.3% 79.7% 80.0% 78.7% % Chg. Fertilizers LoB 15.1% 13.6% 11.3% 16.9% 25.4% New Construction LoB 472, , , , ,693 Growth rate -4.0% 12.7% 9.7% 6.4% 6.9% EBITDA Margin - Construction LoB 12.0% 12.8% 13.4% 13.4% 13.5% Old Construction LoB 472, , , , ,693 Growth rate -1.8% 12.7% 9.7% 6.4% EBITDA Margin - Construction LoB 12.0% 12.8% 13.4% 13.4% 0.0% % Chg. Construction LoB 0.0% 0.0% 0.0% 0.0% New Consolidated 1,021,184 1,555,204 1,857,626 1,840,558 1,887,213 Old Consolidated 1,184,899 1,546,132 1,447,707 1,224,670 % Chg. Consolidated -13.8% 0.6% 28.3% 50.3% NM New Fertilizers LoB 326, , , , ,894 Growth rate 250.9% 79.5% 32.8% -6.3% -0.1% Net Margin - Construction LoB 27.4% 32.3% 36.0% 34.9% 34.8% Old Fertilizers LoB 306, , , , ,473 Growth rate 58.4% 77.8% 35.5% -10.7% Net Margin - Construction LoB 50.2% 48.2% 51.5% 49.7% % Chg. Fertilizers LoB 6.6% 7.6% 5.5% 10.7% 20.0% New Construction LoB 321, , , , ,030 Growth rate 14.6% 9.1% 12.1% 6.8% -25.7% Net Margin - Construction LoB 8.2% 8.5% 9.0% 9.1% 6.3% Old Construction LoB 321, , , , ,030 Growth rate 18.4% 9.1% 12.1% 6.8% Net Margin - Construction LoB 8.2% 8.5% 9.0% 9.1% % Chg. Construction LoB 0.0% 0.0% 0.0% 0.0% 0.0%

12 business results of DSM Agro and DSM Melamine from January 1 st, 2010 onwards. Our analysis suggests that the DSM Agro/Melamine acquisition will be slightly accretive to earnings (3.2% 2010E) and remains very sensitive to CAN prices. We view the deal as a strategic step that could enhance returns in the long run as OCI leverages the acquired distribution network.

13 Company Financials (2009A-2012 P) Balance Sheet (in USD mn) Dec-09A Dec-10P Dec-11P Dec-12P Assets Cash & Cash Equivalent 1, ,011.7 Net Receivables 2, , , ,964.5 Total Inventory Advance Payments to Suppliers Other Current Assets 0.0 4, , ,970.6 Total Current Assets 3, , , ,738.4 Net Plant 2, , , ,720.1 Total Assets 8, , , ,041.3 Liabilities & Shareholders' Equity Current Portion of LT Debt Total Current Liabilities 2, , , ,539.1 Total Long-Term Debt 2, , , ,483.9 Other Non-Current Liabilities Total Liabilities 4, , , ,022.9 Provisions Minority Interest Shareholders' Equity 2, , , ,451.2 Total Liab. & Equity 8, , , ,041.3 Income Statement (in USD mn) Dec-09A Dec-10P Dec-11P Dec-12P Revenues 3, , , ,515.2 COGS (2,787.2) (3,494.2) (3,864.7) (4,175.2) Gross Profits 1, , , ,340.0 SG&A (230.7) (396.7) (441.4) (474.0) Other Operating Income Provisions (42.9) (38.1) (38.1) (38.1) EBITDA , , ,857.6 Depreciation & Amortization (182.6) (135.1) (244.5) (265.7) EBIT , ,591.9 Interest Expense (107.6) (138.3) (183.5) (180.9) Interest Income Investment Income Other Non-Operating Expenses EBT , ,460.6 Taxes (86.1) (144.3) (237.1) (288.7) NPAT ,171.9 Minority Interest (24.9) (97.3) (143.6) (205.2) Extraordinary Items Attributable Profits Note: A= Actual; P Projected Source: Company Reports & CICR estimates

14 Company Financials (2009A-2012 P) Cash Flow (in USD mn) Dec-09A Dec-10P Dec-11P Dec-12P NOPAT ,106.0 Depreciation & Amortization Gross Cash Flow (COPAT) , ,371.7 WI Change (1,127.0) (38.2) (112.6) Other Current Items 0.0 (4,509.8) (101.5) (41.8) Cash After Current Operations (4,871.6) 1, ,217.3 Financing Payments (107.6) (138.3) (266.8) (317.8) FCFF (386.1) (1,541.5) ,148.6 Others (405.6) Cash Before Financing (266.4) (6,595.2) Change in Cash (387.2) (542.2) Fact Sheet Dec-09A Dec-10P Dec-11P Dec-12P ROE 15.0% 16.2% 23.1% 28.0% ROS 11.4% 11.2% 13.5% 14.8% ROA 5.1% 3.9% 5.3% 6.4% ROIC 7.7% 4.9% 7.1% 8.3% Gross Profit Margin 27.0% 28.9% 34.1% 35.9% EBITDA Margin 20.7% 20.8% 26.5% 28.5% EPS Diluted EPS DPS Diluted P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT EV/ EBITDA P/ BV Note: A= Actual; P Projected Source: Company Reports & CICR estimates

15 Contacts and Disclaimer: CI CAPITAL RESEARCH Mark Rorison Group Director, Head of Research Amr Hussein Elalfy, CFA Director Mona Mansour Director CI CAPITAL SECURITIES BROKERAGE (EGYPT & UAE) Amr Mostafa MD & Global Head of Securities Brokerage DYNAMIC SECURITIES CI CAPITAL HOLDING 8, Nadi El-Seid Street, Third Floor Dokki, Giza Egypt Reuters pages: COIW, COIX, COIY, and COIZ Bloomberg page: COIB <GO> For more information, please contact CI Capital Research on +2 (02) , send to or visit our website at Ahmed Roushdy Managing Director RATING SYSTEM In February 2009, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This is to make one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV), nor have we stopped our detailed industry and company research. What we did is changing the target price to trade in the balance of where a share should trade and where we think it w ill trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The target price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts, and perceptions. Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions as may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given prevailing interest rates and risks. (Please see table below.) Recommendation structure: Change to Target Price Strong BUY > 30% Strong Conviction BUY > 20% < 30% Hold > 10% < 20% Underw eight > 0% < 10% SELL < 0% DISCLAIMER The information used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. CICR does not make any guarantee, representation or warranty and accepts no responsibility or liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and w ith the use of specific financial techniques that reflect the personal opinion of the authors of the commentary and is subject to change without notice. It is acknowledged that different assumptions can always be made and that there is a w ide choice of techniques that can be adopted each of which can lead to a different conclusion. Therefore, all that is stated herein is of an indicative and informative nature as forward-looking statements, projections, and fair values quoted may not be realized. Accordingly, CICR does not take any responsibility for decisions made on the basis on the content of this commentary. This commentary is made for the sole use of CICR s customers and no part or excerpt of its content may be redistributed, reproduced or conveyed in any form, w ritten or oral, to any third party without the prior written consent of CICR. This commentary does not constitute a solicitation or an offer to buy or sell securities.