Re-initiation Egypt Cement Sector September Potential (%) Target price (TP, EGP)

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1 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Re-initiation Egypt Cement Sector September 2013 EGYPT CEMENT SECTOR Stories untold! EGX 30 Index vs. Rebased share prices Company Recom. Current price (EGP) Target price (TP, EGP) Potential (%) 7,500 6,500 Suez Cement (SUCE) BUY Misr Beni-Suef (MBSC) BUY Sinai Cement (SCEM) BUY ,500 4,500 Misr Qena (MCQE) BUY ,500 South Valley (SVCE) ACCUM Closing price as of 5 September ,500 Early signs of a recovery, but timing is key. While 1H13 plant operating rates have been at all-time lows, post the July 3rd revolt, we infer a slow but gradual sign of a recovery in terms of production volumes. Our views are backed by insights gathered from sources and experts within the cement industry. Although not suggesting an outright entry into the stocks right away, having the tickers in close radar could lead to easy pickings in the medium term. Plants although underutilised in 2013, to improve in 2014, With the ongoing limitations posed by energy supply shortages, utilisation rates are likely to remain low. While 1H13 did witness plant operating rates allegedly plummeting to 5, a gradual pick up is expected towards the end of However, for 2014 and 2015, we believe that production levels should improve further more on the back of energy supplies getting restored back towards normal levels a year of challenges. Egypt s cement industry is currently facing major challenges; continuous electricity cuts and energy supply shortages that impede production, along with a continued string of labor strikes that have been rampant since the 2011 revolution. Rising energy costs are bound to occur. In line with Egypt s overall strategy to phase-out energy subsidies by the next 3-4 years, we expect input costs (natural gas and mazut) to rise. The price of natural gas and mazut, levied on industries, in the long term should increase to USD10/mmBtu (currently USD6/mmBtu) and EGP3,000/ton (currently EGP1,600/ton), respectively. Since bulk of COGS composes of energy, we expect industry margins to be pressured in Rising cement prices, to an extent, should partially offset these higher costs. We recommend a BUY on SUCE, MBSC, MCQE and SCEM. Our recommendations are backed mainly by fundamentals, persistency in local demand, along with the relatively cheap multiples that are reflected within valuations. Given the economic and political crisis that has engulfed Egypt resulting in plummeting plant utilisation rates, energy shortages and higher costs, cement stocks trade at a 35-4 discount to regional and emerging market peers. Being wary of the concerns to prevail in the near term, ultimately, with stability slowly getting restored back into Egypt s political and economic landscape, significant value-unlocking is bound to occur. Our estimates could be subject to upward revisions, depending on the pace of Egypt s recovery. EGX30 SVCE Rebased MBSC Rebased SUCE Rebased MCQE Rebased SCEM Rebased Source: Bloomberg, NAEEM Research Egypt cement sector statistics 2012a 2013e 2014f 2015f Capacity (m tons) YoY growth (%) Production (m tons) YoY growth (%) Exports (m tons) YoY growth (%) (33.3) Utilisation (%) PCCC (kg) Source: CBE, Company data, NAEEM estimates Key ratios and valuation indicators EV/ton (USD) Price/ton (USD) Dividend Yield (%) South Valley Cement Misr Beni-Suef Suez Cement Misr Qena Sinai Cement na MENA Average Source: Bloomberg, NAEEM Research Allen Sandeep Allen.sandeep@naeemholding.com Pakinam El-Etriby pakinam.eletriby@naeemholding.com 1

2 THE EGYPT CEMENT SECTOR The industry transformation and outlook YTD 2013 production levels dropped on account of energy shortages The supply squeeze impacted cement prices; QoQ rising more than 3 in 2Q13 If not for the impacts of higher energy costs, earnings have remained stubborn on solid demand from real estate 2013 has been a challenging year for the Egyptian cement industry. The year has witnessed rampant fuel supply shortages, rising costs (5 increase in natural gas and mazut prices) and persistent labor unrests. All resulting in suboptimal production volumes; in some cases leading to plant shutdowns. With 2013 production levels having dropped to lows, the supply squeeze led to exfactory cement prices increasing by more than 3, and wholesalers quoting more than EGP800/ton. Major price fluctuations were also seen when temporary recoveries in production (in 1H13) resulted in cement prices trading within a wide range of EGP450-EGP800/ton in a short span of time. What comes as a clear indication of fundamental strength in the Egyptian cement sector, is the stubbornness of earnings (at constant energy costs) indirectly depicting the strength in local demand inspite of the ongoing political impasse. Roughly 8 of cement in Egypt is consumed by the residential sector (private and public) wherein demand has continued to remain healthy even on the back of local unrest. The robust demand for real estate (both from the organised and unorganised sectors) has translated into solid demand for cement, and to an extent, reflecting the price bargaining power of cement companies. Egypt cement production and sales Margins consolidated since 2010 highs mtons In contrast to concerns raised over energy shortages impacting production, 1H13 industry volumes seem surprisingly resillient % Industry-wide gross margins have dropped since 2010, mainly due to a 10 rise in energy costs of natural gas and mazut % a 2011a 2012a 1H13 (annualised) Local dispatches Utilisation rates (RHS) 2010a 2011a 2012a 1Q13a MBSC MCQE SUCE SVCE SCEM Source: CBE, NAEEM estimates Source: CBE, NAEEM estimates We expect utilisation rates to gradually recover starting 3Q13 through to 2015 No new licenses expected until 2015 Prices to increase triggered by cost inflation and continued strength in demand We note that plant operating rates since the July 3 rd change in the political landscape are gradually witnessing signs of recoveries. The increase in production levels could be indirectly indicated by the correction in cement prices that have occurred starting July. This could be attributed to slight improvements in energy supplies to industries witnessed lately given the better liquidity offered to oil & gas contractors in Egypt; helped by FX boosts provided by the Gulf aid packages (totaling USD12bn as of now). However, we maintain a cautiously optimistic view on the medium-term outlook for the industry, not expecting optimum utilisation rates to be achieved before the year The cement industry in Egypt has a design capacity of around 67mtpa as of With 25% of capacities still remaining unutilized (as of 2012) and with difficulties faced in securing additional energy and electricity concessions, we do not expect any new plants or licenses to be tendered until Although expecting a correction from the mid-year peaks of 2013, average annual prices should increase by mid-to-high-single digit rates over Our assumptions are based mainly on conservative estimates, foreseeing cost inflationary pressures, to an extent being passed on to the market. Given the 2

3 THE EGYPT CEMENT SECTOR strength in local demand coming mainly from the housing sector and with no new plants expected to come on-stream anytime soon, price bargaining power of the cement industry should be preserved to a large extent. Margins to correct in 2014 and consolidate after that Cement producer margins in general should witness correction across the board in 2014, impacted by rising energy costs. However, expecting cost increases to be passed on to the market, margins should consolidate starting By 2015, natural gas costs are likely to reach USD8/mmbtu (up 33% from 2013), while mazut should cost EGP2,500/ton (up 56% from 2013). Starting 2016, we expect energy costs to increase, albeit at a slower rate, with margins improving on the back of rising cement prices. The looming risks Stability in Egypt s political and economic landscape Fuel shortages Energy cost increases with chances of much more to come Probability of price regulations Threat of imports Continuing labor strikes Exports would be harder Concerns of a long term spillover effect from an overheated Saudi market Access to management; disclosures are hard to come by With investor sentiment and confidence centered mainly around the changing variables in Egypt s political and macro-economic scene, it is paramount that stability is restored for assets to be fairly priced. Any escalation in the political front, could send risk premiums even higher. Persistent energy shortages (worse than expected) could lead to production levels remaining depressed for a longer duration. It should be noted that Egypt s energy crisis (driven by a liquidity squeeze) is yet to be sorted out. With Egypt s long term goals to phase-out subsidies, energy costs could increase much more rapidly than expected. Our estimates assume natural gas and mazut costs to increase to USD8/mmBtu and EGP2,500/ton respectively by Post this our cost assumptions are capped at USD10/mmBtu for gas and EGP3,000/ton for mazut. Import parity for gas is somewhere in the range of USD12-14/mmBtu. On the backdrop of the latest 3 surge in local cement prices (2Q13), the authorities were mulling regulating cement prices to curb speculation and reduce inflationary prices. While the proposal could go down well for taming inflation, this could however prove disastrous to the industry. With rising costs, break-even/support level for cement producers increases. Although at current ex-factory prices, the possibility of imports (Turkey) does seem minimal, concern over import parity does emerge when prices touch EGP650/ton. Rampant labor strikes have hindered industry production levels since the 2011 revolution, with the main demand being over salary hikes. Although most of these disputes (being company specific) are sorted out for now, there is always a doubt of the rifts remerging. MBSC, which is one of the companies under our coverage list exposed to exports, has already witnessed a considerable drop in export volumes (mainly Libya). With widening costs, export competitiveness is bound to erode. Although not a concern until 2016, worries loom over the repercussions of Saudi Arabia finally having to lift its export ban (activated in 2008), in order to keep its industry afloat. To keep up with demand, the kingdom s cement production capacity, currently at 47mMt, is slated to reach 65mMt by the next two years. With majority of the five-year infrastructure projects expected to achieve completion by end 2017, questions arise on the impacts of an oversupplied market spilling over regionally. With most of the companies being closely held by promoters, access to management is always a challenge for gaining insights into some of these stocks. In addition, limited disclosure of financials in English is another barrier for foreign investors interested in investing in the sector. 3

4 With risks priced in, valuations are compelling THE EGYPT CEMENT SECTOR Cement stocks in Egypt trade at a significant discount to regional and EM peers Given the risks that have raised investor concerns and led to a substantial rise in risk premiums, the impacts seem apparent on valuations. Taking indications from plants that have been recently added (as greenfields), a replacement cost of EGP1,225/ton in terms of plant capacity is a good parameter to infer valuations. With all the risks looming over the Egyptian cement sector, most plants currently are valued at below the replacement cost. Compared to regional peers (Turkey and Saudi Arabia), the valuation implies of more than a 6 discount. This discount, reflecting a higher risk premium, lower utilisation rates, cash cost differentials, currency volatility, labor risks etc. in our opinion, should ease through the next two years. While we do believe that cement stocks in Egypt, would trade at a discount to regional peers on account of the cash cost differential, the gap should narrow by a good margin, when the other variables normalise. Egypt cement valuations compared Price/ton EGP/ton 3,000 Regional peer valuations 2,500 2,000 1,500 Replacement cost per ton 1, Source: CBE, NAEEM estimates Sinai Cement Misr Beni-Suef Misr Cement Suez Cement South Valley Latest Yields, Payout Ratio PE, ROE (2012) % 65% 65% 53% 12% 8% 1 6% SVCE MBSC SUCE MCQE SCEM Dividend Yield (%) Payout Ratio (%) PE (x) ROE SVCE SUCE MCQE MBSC SCEM Source: Company Data, NAEEM Research Source: Company Data, NAEEM Research 4

5 Per capita (tons) THE EGYPT CEMENT SECTOR The industry and its outlook in a nutshell Egypt cement capacity, consumption, surplus/deficit '000 tons '000 tons 81,000 20,000 17,000 61,000 14,000 41,000 11,000 8,000 21,000 5,000 1,000 2,000 Capacity Cunsumption surplus/ (deficit) (RHS) Source: CBE, NAEEM estimates Egypt s per capita cement consumption compared UAE Qatar Saudi Kuwait Libya Egypt Iraq Algeria Source: NAEEM estimates Current cement consumption patterns depict significant growth potential for Egypt, Iraq, Algeria and Libya Fuel prices/energy input costs EGP/ton USD/mbtu 2, , , , , ,350 1, a 2011a 2012a 2013e 2014f 2015f Cement Prices EGP/ton Mazut Source: CBE, NAEEM estimates Natural Gas (RHS) Source: CBE, NAEEM estimates Cement Prices Demand Breakdown by region Demand Breakdown by sector Upper Egypt & red sea 2 Sinai 5% Greater Cairo 38% Commercial 5% Infrastructure 15% Canal 7% Delta & Alexandria 3 Residential 8 Source: Company Data, NAEEM estimates Source: Company Data, NAEEM estimates 5

6 THE EGYPT CEMENT SECTOR Cement Market Main Consumers 6 5 Household Real estate 1 Governmental 15% Tourism 5% Industrial 1% Institutional 4% Water, sewage & electricity 7% Roads, tunnels & bridges 4% Residential Commercial Infrastructure Irrigation construction 4% Source: Company Data, NAEEM Research 6

7 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Re-initiation Egypt Cement Sector September 2013 SUEZ CEMENT The largest of the lot, with a solid supply-chain BUY Upside potential: The huge capacity bandwidth is likely to render an instant upside to earnings once Egypt gets back on the growth trajectory. Suez Group is Egypt's largest cement producer, with an 18% market share and total controlled production capacity of 12mtpa Inspite of having a solid B/S with a net cash of EGP1,480m as of 1H13, SUCE trades at more than a 5 discount to its replacement cost. More than a 7 discount to regional peers A switch in energy source could lead to margin improvements in the longer term. The group plans to replace old kiln and mill production lines, shifting to coal from gas and mazut to overcome fuel shortage and the expected increase in fuel prices SUCE s main shareholder, Italcementi, has earlier announced investing into the wind energy sector in Egypt with a planned capacity of 400MW (split in two phases). This, in turn will be transmitted to plants run by Suez Cement, as a secured source of power for its plants that have been affected by the ongoing energy crisis Downside risks: Probability of the Egyptian regulatory authorities hastening the process of eliminating energy subsidies could place SUCE on a spot, given its size and the relatively higher operating leverage For long term margin sustenance, quick resolutions by the government to authorize coal usage is paramount for a company the size of SUCE With industry utilisation rates dropping significantly since January 2013, there is a probability of operating rates dropping further because of energy supply shortages continuing Any price controls implemented by the government would be bad news for SUCE Company profile Suez Cement Co., along with its subsidiaries, is engaged in the manufacture and supply of cement and related building materials. It operates through five production facilities in Suez, Kattameya, Tourah, Helwan and El Minya. Its products include ordinary Portland cement, Portland limestone cement, Portland slag cement, OPC superfine, blast furnace cement, sulphate-resistant cement, white cement, masonry cement, and oil well cement. In addition, it produces and sells hydrated lime. SUCE has a cement capacity of 12mtpa. SUCE s main subsidiaries are Torah Cement (66%), Suez Bags Co. (56%), Helwan Cement Co. (99%), Ready-Mix Concrete Production Co. (52%), Ready-Mix Concrete Production Co. (52%), Techno Gravel for Quarries-Egypt (45%), Hilal Cement Co. Kuwait (51%). Recommendation BUY Market Price (EGP) 22.5 Target Price (EGP) 30.7 Upside Potential (%) 36.8 Reuters Code SUCE.CA Bloomberg Code SUCE EY Market Cap (EGPm) 4,084 Market Cap (USDm) 592 Free Float (%) 10.2 SUCE vs. EGX30 Rebased Price (EGP) SUCE EGX 30 Rebased Source: Bloomberg, NAEEM Research Financial indicators and valuation multiples Year to 31 Dec. 2011a 2012a 2013e 2014f 2015f Revenue (EGP) 4,820 4,597 5,217 6,086 7,217 Revenue (% Δ) (21.6) (4.6) EBITDA (EGP) 1, ,297 1,081 1,509 EBITDA (% Δ) (50.9) (16.8) 42.8 (16.6) 39.5 EPS (EGP) EPS (% Δ) (54.0) (7.8) (11.9) P/E P/FCF Yield (%) ROE (%) Net Debt/Equity (x) Int. Cov. (x) nm nm nm nm nm Closing price as of 5 September

8 SUEZ CEMENT Latest operating trends SUCE 2Q13 Results Review: Net profit for 2Q13 came in at EGP168m cf. EGP125m in 2Q12, up 34% YoY, and declining by 24% QoQ. 2Q13 revenues were up c. 11% YoY, reaching EGP1,302m vs. EGP1,175m in 2Q12 The bottom-line for 2Q13 exceeded our preliminary estimate for the quarter by 1 The YoY increase in profitability was the result of various cost-control efforts deployed which led to achieving manufacturing efficiencies The company's 2Q13 production levels were hampered by energy supply shortages which led to the reduction of plant utilisation rates SUCE's plant utilisation rates for 2Q13 averaged 67% vs. 71% in 1Q13 Quarterly results snapshot 2Q12 3Q12 4Q12 1Q13 2Q13 Figures are in EGPm unless otherwise indicated Revenue 1,175 1,008 1,188 1,273 1,302 GPM (%) EBITDA Margin (%) Net Profit Key performance indicators 2011a 2012a 2013e 2014f 2015f Figures in EGPm unless otherwise indicated Market Share (%) Capacity (mtpa) Sales (mtpa) GPM (%) EBITDA Margin (%) Net Profit Assumptions for calculation of WACC (%) Risk-free rate of return 12. Pre-tax cost of debt 15. Equity risk premium 6. Beta 1.0 Tax rate 25. Target debt to equity 0:100 Cost of equity 18. WACC 18. Shareholder structure Free float, 10.2% Others, 19.3% Italcementi, 55.0 Gazelle, 7.61% Abdelmoneim Rashed, 7.91% 8

9 SUEZ CEMENT Our assumptions on SUCE Capacity, Cement Sales & Utilisation rates mtons % % % % Capacity Cement Sales Utilisation% (RHS) Local sales, market share, and exports mtons % % a 2010a 2011a 2012a Local Cement Sales Cement Exports Market share % (RHS) Revenue, EBITDA, and net profit (YoY ) 6 Margins Revenue, % EBITDA, % Net Profit, % Goss Profit Margin EBITDA Margin Net Profit Margin Breakdown of COGS as of 2012 EPS, DPS, and dividend yield (%) Others, 42.2% Ready Bags, Mix, Raw Materials, 6.1% Electricity, 15. Fuel, 21.5% Labour Cost, 2.2% EGP EPS DPS Dividend yield (RHS) 26% 22% 18% 14% 1 6% 9

10 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Driven by fundamentals BUY Re-initiation Egypt Cement Sector September 2013 MISR BENI-SUEF CEMENT Upside potential: MBSC s 2013 YTD plant operating rates feature among the healthiest in Egypt, clicking above 85% levels inspite of the prevailing energy shortage. With latest cement dispatch indications being positive, we could be in for an earnings surprise A geographical advantage with plant sales exposed to the growing Upper Egypt market. Proximity to Cairo serves as another added advantage, in case of local demand falling short With a sizeable cash pile of EGP393m (zero-debt), alternative avenues for growth (organic or inorganic) could always arise if not for a much more generous dividend policy (a current yield of 7.6%) With 10 energy exposure towards natural gas which is bound to see subsidy removals by the next few years, switching to coal (currently awaiting ministerial approvals) should keep margins healthy over the long term The proximity to limestone quarries (with facilities located in Upper Egypt), provides a competitive edge to MBSC in terms of margins Downside risks: Subsidies on gas (for industries) could be removed faster than expected by the industry. Gas (energy) prices are already expected to reach USD8/mmBtu in 2014 (vs. USD6/mmBtu currently), increasing pressure on margins. In addition, the painful effects of a 15% devaluation of the EGP (vs. the US dollar) Natural gas supplies could ultimately impact production levels if Egypt s liquidity crisis isn t resolved quickly If recent rumors over the government s plans to regulate cement prices prove to be true, the move could turn out to be disastrous for the industry Approval to switch into coal usage is important for long term margin sustainability, MBSC would depend on regulatory approvals for using coal as an alternative energy source. Declination of these approvals would raise doubts over long term profitability Company profile Misr Beni-Suef Company was incorporated in November 1997 to produce cement and associated products. The group began production in 1997 with a capacity of 1.5mtpa, which was increased 10 in 2011 to 3mtpa. It was listed on the EGX in August The company uses natural gas to fuel its kilns. All its output is sold to wholesalers. Recommendation BUY Market Price (EGP) 45.9 Target Price (EGP) 61.0 Upside Potential (%) 32.8% Reuters Code MBSC.CA Bloomberg Code MBSC EY Market Cap (EGPm) 3,444 Market Cap (USDm) 499 Free Float (%) 37.5 MBSC vs. EGX30 Rebased Price (EGP) MBSC EGX 30 Rebased Source: Bloomberg, NAEEM Research Financial indicators and valuation multiples Year to 31 Dec. 2011a 2012a 2013e 2014f 2015f Revenue (EGP) 936 1,104 1,307 1,352 1,541 Revenue (% Δ) EBITDA (EGP) EBITDA (% Δ) (14.3) (29.3) 32.9 EPS (EGP) EPS (% Δ) (9.7) (2.9) 2.8 (52.6) 64.3 P/E P/FCF Yield (%) ROE (%) Net Debt/Equity (x) Int. Cov. (x) nm nm nm nm nm Closing price as of 5 September

11 MISR BENI-SUEF CEMENT Latest operating trends MBSC 2Q13 Results Review: Net profit for 2Q13 came in at EGP112m, up 3% YoY and 3 QoQ. Revenues for the quarter grew by 31% YoY and 19% QoQ, reaching EGP371m Overall, MBSC s performance exceeded our estimates both on the top and bottom-line; the net profit beats our expectation of EGP95m by 18% Gross profit margin of 27%, grew by 4.8pps QoQ, while having declined by 1.3pps YoY Most interestingly, the group surprised us with very healthy utilisation rates; touching 97% in 2Q13 cf. 89% in 1Q13. Exports, which accounted for 22% of total volumes, rose by c. 25% QoQ As expected by us, cement prices grew by c. 1 QoQ and weighed positively on revenues. Prices in general were expected to be higher on the back of supply shortages in the local market Quarterly results snapshot Figures in EGPm unless otherwise indicated 2Q12 3Q12 4Q12 1Q13 2Q13 Revenue GPM (%) EBITDA Margin (%) Net Profit Source: Company data, NAEEM Research Key performance indicators Figures in EGPm unless otherwise indicated 2011a 2012a 2013e 2014f 2015f Market Share (%) Capacity (mtpa) Sales (mtpa) GPM (%) EBITDA Margin (%) Net Profit Assumptions for calculation of WACC (%) Risk-free rate of return 12. Pre-tax cost of debt 15. Equity risk premium 6. Beta 1.0 Tax rate 25. Target debt to equity 0:100 Cost of equity 18. WACC 18. Shareholder structure National Investment Bank, 20.1% Fee Float, 37.5% Farouq Ahmed, 6.7% Fayeq Alqasrawy, 5.9% Others, 24.3% Wagdi Bakr, 5.6% 11

12 MISR BENI-SUEF CEMENT Our assumptions on MBSC Capacity, Cement Sales & Utilisation rates Local sales, market share, and exports mtons mtons % % a 2010a 2011a 2012a 3.5% Capacity Cement Sales Utilisation% (RHS) Local Cement Sales Cement Exports Market share % (RHS) Revenue, EBITDA and, net profit (YoY ) % 65% 55% 45% 35% 25% 15% Margins -10 5% Revenue, % EBITDA, % Net Profit, % Goss Profit Margin EBITDA Margin Net Profit Margin Breakdown of COGS EPS, DPS, and dividend yield (%) Raw Materials, 9% Labour Cost, 3% EGP % 13% others, 48% Electricity, 11% % 9% Fuel, 29% 2 1 7% 0 5% EPS DPS Dividend yield (RHS) 12

13 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 With high returns come high risks BUY Re-initiation Egypt Cement Sector September 2013 SINAI CEMENT Upside potential: Substantial production volumes (more than 4 idle capacity) and earnings could get unlocked once security is restored in the Sinai region. Utilisation rates have been hit the maximum due to the turbulence in Sinai Maximum demand potential exists for SCEM, given its location and minimal competition. Additionally, proximity to export markets (Palestine) will always be a buffer Cement prices for SCEM could increase at a relatively higher pace when market sentiments reverse in Egypt. This because of better price bargaining power, due to the remote location of operations and the market it serves Payouts are currently at 65%, with cash ever-increasing, any surge in yields would trigger an immediate upside Downside risks: The Sinai cement plant, which is located in North Sinai, has suffered from a row of militant attacks both directly and indirectly, raising doubts over continuation The Army's Arish plant which commenced in 2011 is also located in Sinai, leading to competition in terms of local market share with SCEM Utilisation rates have dropped to below 5, post June As per latest information from sources SCEM s plant had been shut for days. Continued instability could hinder volumes worse than what we estimate Cement price regulation is a threat to both SCEM and the entire Egyptian cement industry Company profile Sinai Cement Co. SAE is engaged in the manufacture of different types of cement and cement-related products. The company, through its cement production facility in north Sinai, produces clinker, cement and other related products. In addition, the company also focuses on the production of cement packing bags. The group has a cement capacity of 3.2mtpa. As of December 31, 2012, the Company produced 2.1mMt of clinker and 2.27mMt of cement. The company has investment stakes in other subsidiaries, including Sinai Cement Services Company (99.96%) and Sinai Cement for International Trading (99%). Recommendation BUY Market Price (EGP) Target Price (EGP) Upside Potential (%) 25.4% Reuters Code SCEM.CA Bloomberg Code SCEM EY Market Cap (EGPm) 1,191 Market Cap (USDm) 173 Free Float (%) 27.8 SCEM vs. EGX30 Rebased Price (EGP) SCEM EGX 30 Rebased Source: Bloomberg, NAEEM Research Financial indicators and valuation multiples Year to 31 Dec. 2011a 2012a 2013e 2014f 2015f Revenue (EGP) 1, ,051 1,051 1,344 Revenue (% Δ) (26.3) (27.1) EBITDA (EGP) EBITDA (% Δ) (53.9) (45.8) 24.6 (55.9) EPS (EGP) EPS (% Δ) (64.2) (66.6) 30.8 (74.0) P/E P/FCF Yield (%) ROE (%) Net Debt/Equity (x) Int. Cov. (x) nm nm nm nm nm Closing price as of 5 September

14 SINAI CEMENT Latest operating trends SCEM 2Q13 Results Review: A net profit of EGP26.1m vs. EGP51.5m in 2Q12, down 49% YoY but up 4.9% QoQ. Revenue for the quarter reached EGP221.8m, down 13% YoY but up 1 QoQ The results were weak, given both profitability and revenues falling short of our initial expectations Operations were impacted maximum by the continuous militant attacks that are on-going in Sinai, and during some weeks, even resulting in plant shut downs According to our estimates, utilization rates plummeted to around 44% during June on account of the unrest The only bright spot for SCEM was with cement prices having peaked during 2Q13, growing 12% QoQ. Prices in general were high during the quarter, as a result of an highly undersupplied local Egyptian market Quarterly results snapshot 1Q12 2Q12 3Q12 4Q12 1Q13 Figures are in EGPm unless otherwise indicated Revenue GPM (%) EBITDA Margin (%) Net Profit Key performance indicators 2011a 2012a 2013e 2014f 2015f Figures in EGPm unless otherwise indicated Market Share (%) Capacity (mtpa) Sales (mtpa) GPM (%) EBITDA Margin (%) Net Profit Assumptions for calculation of WACC (%) Risk-free rate of return 12. Pre-tax cost of debt 15. Equity risk premium 8. Beta 1.0 Tax rate 25. Target debt to equity 0:100 Cost of equity 20. WACC 20. Shareholder structure Note: 2Q13 financials are yet to be released Fee Float, 27.8% Vicat Cement Egypt, 39.6% Others, 7.5% Arab Industrial Investments, 6.2% Social Insurance Fund (Government Sector), 9.4% Sama Cement, 9.4% 14

15 SINAI CEMENT Our assumptions on SCEM Capacity, Cement Sales & Utilisation rate Local sales, market share, and exports mtons mtons % % 4% % a 2011a 2012a 2013e 2014f 2015f a 2011a 2012a Capacity Cement Sales Utilisation% (RHS) Local Cement Sales Cement Exports Market share % (RHS) Revenue, EBITDA, and net profit (YoY ) Margins a 2012a 2013e 2014f 2015f 2016f Revenue, % EBITDA, % Net Profit, % 1 Goss Profit Margin EBITDA Margin Net Profit Margin Breakdown of COGS as of 2012 EPS, DPS, and dividend yield (%) EGP 7 4 others, 34.1% Raw Materials, 27.9% Electricity, 11.3% Labour Cost, 0.4% % 3 25% 2 15% 1 5% Fuel, a 2012a 2013e 2014f 2015f 2016f EPS DPS Dividend yield (RHS) 15

16 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Fundamentally strong, healthy yields BUY Re-initiation Egypt Cement Sector September 2013 MISR CEMENT QENA Upside potential: 13.9% ownership in the newly functional USD360m ASEC Minya cement plant (2mMtpa capacity) could reap substantial returns in the medium-term, depending on the pace of economic stability being restored back in Egypt With most of the organic expansions plans having achieved completion (and with a zero-debt B/S), the group could implement a much more generous dividend policy, resulting in higher yields and an upward re-rating of the stock Any signals of a reversal in investor sentiments in Egypt, should lead to an instant upside to margins, driven by higher-thanexpected prices and the positive impacts of operating leverage Switching to coal as an alternative energy source could turn out to be most beneficial for MCQE, as its parent company ASEC Cement, could pass on the benefits of synergies through ASEC Trading (another subsidiary which specialises as a trading arm to purchase coal or petcoke) Downside risks: The group s YTD 2013 utilisation rates are among the healthiest in the industry, inspite of the most talked about energy supply disruptions. Volumes could be hit hard if this crisis intensifies in the months ahead Cost of Mazut, which we assume to be reaching a maximum of EGP3,000/ton by 2017 (currently EGP1,600/ton), could be raised to even higher levels and triggering downside risks to valuation Delays in government approvals for the switch to coal use (from Mazut), could add concerns over long term margin sustainability Any price controls implemented by the government would be bad news for MCQE, putting a cap on margins/returns Labor strikes would be an ongoing issue for cement producers in general Company brief Misr Cement Company Qena (MCQE) was established in Its activities include the production and distribution of different types of cement and cement-related products and construction materials. MCQE has a cement capacity of 1.5mtpa. Recommendation BUY Market Price (EGP) Fair Value (EGP) 84.1 Upside Potential (%) 21.9% Reuters Code MCQE.CA Bloomberg Code MCQE EY Market Cap (EGPm) 2,070 Market Cap (USDm) 300 Free Float (%) 12.8 MCQE vs. EGX30 Rebased Price (EGP) MCQE EGX 30 Rebased Source: Bloomberg, NAEEM Research Financial indicators and valuation multiples Year to 31 Dec. 2011a 2012a 2013e 2014f 2015f Revenue (EGP) ,055 Revenue (% Δ) (11.0) (5.7) EBITDA (EGP) EBITDA (% Δ) (26.5) (13.6) 29.8 (28.4) 21.3 EPS (EGP) EPS (% Δ) (26.2) 1.8 (14.2) (30.0) 24.5 P/E P/FCF Yield (%) ROE (%) Net Debt/Equity (x) Int. Cov. (x) nm nm nm nm nm Closing price as of 5 September

17 MISR CEMENT - QENA Latest operating trends MCQE 2Q13 Results Review: A net profit of EGP64.5m down 21.7% YoY and 19.7% QoQ, but exceeding our estimate of EGP60.3m Revenues for 2Q13 reached EGP222m, up 13.7% YoY and decreasing by 0.6% QoQ An official source from the company stated; the main reason behind the YoY decline in the bottom-line was due to commencement of a 25% tax on profits (tax holiday ended) starting 1Q13 Moreover, the YoY increase in revenue was referred to several factors, among which was taking advantage of low production volumes seen among some of the peers. Selling prices on average increased Although MCQE's bottom-line does reflect a QoQ decline, we picture the reason for this as being a drop in production volumes led by mazut (energy source) shortages. Our estimates had already accounted for a QoQ drop in utilisation rates Quarterly results snapshot Figures are in EGPm unless otherwise indicated 2Q12 3Q12 4Q12 1Q13 2Q13 Revenue GPM (%) EBITDA Margin (%) Net Profit Source: Company data, NAEEM Research Key performance indicators Figures in EGPm unless otherwise indicated 2011a 2012a 2013e 2014f 2015f Market Share (%) Capacity (mtpa) Sales (mtpa) GPM (%) EBITDA Margin (%) Net Profit Assumptions for calculation of WACC (%) Risk-free rate of return 12. Pre-tax cost of debt 15. Equity risk premium 6. Beta 0.9 Tax rate 25. Cost of equity 17.1% WACC 17.1% Shareholder structure Free Float, 12.8% Asek Cement, 27.6% Others, 28.9% Misr Insurance Co., 10.9% Kuwaiti Egyptian Inv, 9.9% Egypt Invest Project,

18 Our assumptions on MCQE Capacity, Cement Sales & Utilisation rate Local sales, market share, and exports MISR CEMENT - QENA mtons % 131% 13 mtons 3 5% % % 127% 126% 125% 1 4% % a 2010a 2011a 2012a 3% Capacity Cement sales Utilisation% (RHS) Local Sales Exports Market share % (RHS) Revenue, EBITDA, and net profit (YoY ) 6 Margins 55% % 35% 25% -4 15% Revenue, % EBITDA, % Net Profit, % GPM (%) EBITDA Margin (%) Net Profit Margin Breakdown of COGS as of 2012 EPS, DPS, and dividend yield (%) EGP 18 25% others, 17% Fuel, 34% Raw Materials, 18% Labour Cost, 19% % 1 5% Electricity, 12% a EPS DPS Dividend Yield (RHS) 18

19 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Still room for growth ACCUMULATE Re-initiation Egypt Cement Sector September 2013 SOUTH VALLEY CEMENT Upside potential: Dividend payouts starting 2013 could instill positive sentiments and an upward re-rating based on yields Under-utilised capacity depicts room for organic growth SVCE has entered a growth phase, with 2012 sales having increased 10 on volumes. With utilisation rates still at around 6 as of 1H13, potential for growth still remains A turnaround story The completion of its in-house clinker line, as well as the installation of the fuel and electricity feeder lines, enabled margins to improve in GPM reached 4 (vs. 14% in 2011), while EBITDA margin stood at 4 (vs. 12%) With a good chunk of the group s balance sheet parked into tradable securities (mainly listed equities), instant upside to valuations exist when sentiments are reversed in Egypt Downside risks: Any price controls (for cement) implemented by the government (currently being mooted) would be bad news for cement producers in general Ongoing gas/energy shortages in the local market could in fact hurt near-term operating rates more than initially expected by the market A relatively geared balance sheet unlike peers (mostly zero-debt), given its restructuring and start-up operational requirements. Net debt in 2012 reached EGP378m, up 23% YoY Company Profile South Valley Cement was established in 1997 and is engaged mainly in the production of cement. The group has a cement capacity of 1.5mtpa. The company's range of products include clinker, ordinary portland cement and ready-mix concrete. It operates through two main production facilities in the Beni-Suef Industrial Zone and in Borg El Arab, Alexandria. SVCE also owns and manages a portfolio of diverse, multi-sector direct and indirect investments. Recommendation ACCUMULATE Market Price (EGP) 4.28 Target Price (EGP) 4.90 Upside Potential (%) 14.5 Reuters Code SVCE.CA Bloomberg Code SVCE EY Market Cap (EGPm) 2,109 Market Cap (USDm) 306 Free Float (%) 42.3 SVCE vs. EGX30 Rebased Price (EGP) SVCE EGX 30 Rebased Source: Bloomberg, NAEEM Research Financial indicators and valuation multiples Year to 31 Dec. 2011a 2012a 2013e 2014f 2015f Revenue (EGP) Revenue (% Δ) (40.3) EBITDA (EGP) EBITDA (% Δ) (78.2) (23.4) (24.5) 79.3 EPS (EGP) EPS (% Δ) (78.3) nm 1.9 (25.8) P/E P/FCF nm nm Yield (%) ROE (%) Net Debt/Equity (x) Int. Cov. (x) nm Closing price as of 5 September

20 SOUTH VALLEY CEMENT Latest operating trends 1Q13 indications: SVCE net profit for 1Q13 came in at EGP29.2m an improvement compared to a loss of EGP30m in 4Q12. The bottom-line fell marginally short of our estimate for the quarter. 1Q13 GPM shrank to 38%, down YoY, while being significantly up QoQ Revenues declined YoY by 29% but surged 24% QoQ While SVCE's QoQ improvement reflected in the 1Q13 bottom-line, comes in line with most local peers in the industry, the performance was relatively weak on a YoY basis The annual decline in profits and revenues were mainly driven by the company's 1Q13 production levels that had been affected by energy shortages hampering plant utilisation reaching 63% (from 89% in 1Q12). Moreover, prices in 1Q13 had increased marginally by 2% YoY Quarterly results snapshot Figures in EGPm unless otherwise indicated 1Q12 2Q12 3Q12 4Q12 1Q13 Revenue GPM (%) EBITDA Margin Net Profit (30) 29 Source: Company data, NAEEM Research Key operational indicators 2011a 2012a 2013e 2014f 2015f Figures in EGPm unless otherwise indicated Market Share (%) Capacity (mtpa) Sales (mtpa) GPM (%) EBITDA Margin (%) Net Profit Assumptions for calculation of WACC (%) [ Risk-free rate of return 12. Pre-tax cost of debt 15. Equity risk premium 6. Beta 1.0 Tax rate 0. Target debt to equity 15:80 Cost of equity 18. WACC 16.7% Shareholder structure Free Float, 42.3% Blue Nile Limited Co, 37.4% Gazelle Ltd Inc, 9.3% Others, 3. Al Nuhla Trdg & Cont, 8.1% 20

21 SOUTH VALLEY CEMENT Our assumptions on SVCE Capacity, Cement Sales & Utilisation rates Local sales, market share, and exports mtons EGPm % % a 2010a 2011a 2012a 0.5% Capacity Cement Sales Utilisation% (RHS) Local Sales Market share % (RHS) Revenue, EBITDA, and net profit (YoY ) 90 Margins Revenue, % EBITDA, % Net Profit, % Net Profit Margin Gross Profit Margin EBITDA Margin Breakdown of COGS as of 2012 EPS, DPS, and dividend yield (%) EGP 0.6 9% others 26% Raw Materials 18% Labour Cost 6% % 7% 6% 5% 4% 0.2 3% Fuel 32% Electricity 18% EPS DPS Dividend Yield (RHS) 2% 1% 21

22 Disclosure Appendix Disclaimer This report is based on publicly available information. It is not intended as an offer to buy or sell, nor is it a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this report were prepared by the NAEEM Research Department ( NAEEM ) from sources it believed to be reliable at the time of publication. NAEEM accepts no liability or legal responsibility for losses or damages incurred from the use of this publication or its contents. NAEEM has the right to change opinions expressed in this report without prior notice. This research report (including all appendices) contains information that is intended to be conveyed only to the intended recipients, which insofar as the United Sates is concerned, are major U.S. institutional investors (i.e., U.S. institutional investors having total assets under management in excess of USD100 million, or investment advisers that are registered with the U.S. Securities and Exchange Commission and have total assets under management in excess of USD100 million). If the reader or recipient of this research report is not the intended recipient, please notify NAEEM immediately, and promptly destroy this research report without retaining any portion in any manner. The unauthorized use, dissemination, distribution or reproduction of this research report by any person other than the intended recipient is strictly prohibited. Analyst Certification The primary research analyst/analysts covering the company (or companies) mentioned in this report certify that their views about the company (or companies) and their securities are accurately expressed. Further, no part of their compensation, whether pecuniary or in-kind, was, is, or will be, directly or indirectly related to the recommendations or views expressed in this research report. Unless otherwise stated, individuals listed on the front cover/page of the report are the research analysts. Stock Ratings NAAEM believes that an investor s decision to buy or sell a stock should depend on individual circumstances (including, but not limited to the investor s existing holdings and financial standing) and other considerations. Different securities firms use a range of rating terms and rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each report. In addition, since NAEEM s research reports contain complete information about the analyst s views, investors should read NAEEM reports in their entirety, and not infer the contents from the ratings alone. Ratings (and/or research) should not be relied upon as an investment advice. NAEEM assigns ratings to stocks on the following basis: Rating Upside/Downside potential Rating distribution as of 12 September 2013 BUY >2 42% ACCUMULATE >1 to 2 13% HOLD +1 to -1 39% REDUCE <-1 to -2 3% SELL < -2 3% Research Contacts Allen Sandeep Director, Research allen.sandeep@naeemholding.com Harshjit Oza Assistant Director, Research harshjit.oza@naeemholding.com Sales and Trading Contacts Nayal Khan Regional Sales Director nayal.khan@naeemholding.com Teymour El Derini Director of MENA Sales & Trading teymour.elderini@naeemholding.com Tarek Abaza Head of Trading Desk - Egypt tarek.abaza@naeemholding.com Islam Batrawy Deputy Director, Sales & Trading islam.batrawy@naeemholding.com