Stock Volatility Kuwait Financial Centre Markaz R E S E A R C H Markaz Research is available on Bloomberg Type MRKZ <Go> Thomson Financial Reuters Knowledge Zawya Investor Noozz M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Layla Al-A mmar Senior Analyst lammar@markaz.com +965 2224 8000 Ext: 1205 Kuwait Financial Centre Markaz P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 www.markaz.com Yanbu Cement Company SSE Code: 3060 Reuters Code: 3060.SE Bloomberg Code: YNCCO AB Current Market Price: SAR 43.7 (As of June 28, 2010) Initial Coverage: Low Medium High Expected Return () Low Medium High The Yanbu Cement Company (Yanbu) underperformed the Tadawul (TASI), losing 11% YTD compared to the latter s 3.0% gain. The Yanbu stock advanced 36% in 2009, while the index gained 27%. Yanbu s P/E declined 1.8% on YTD basis and currently trades at a P/E of 10.1x. The company s PE expanded 57% in 2009. We place the fair value PE at 10.0x, indicating fair value at this juncture. Yanbu s revenue dropped 13.7% YoY to US D 63.8 Mn in 1Q10 due to declining sales volume and prices in the Kingdom, but gained 26% on a QoQ basis. In 2009, the company s revenues declined 13.7% YoY to USD 251.2 Mn due to a drop in sales volumes and cement prices on account of intense competition. Separately, among the Saudi cement companies, Yanbu witnessed the largest decline in its market share in 1Q10 primarily due to the entry of new players and export ban. The weak top-line performance led to a 13.8% YoY decline in the company s net income to USD 131.7 Mn in 2009. Net income declined 18.8% YoY to USD 32.8 Mn in 1Q10 due to poor sales volumes and lower prices. Yanbu s strategic location provides a competitive advantage. The company is situated in the Western region, which is rich in gypsum and limestone (primary raw material for cement). The company is also likely to benefit from its proximity to Makkah, Madinah and Jeddah, which are seeing increased construction activity. Yanbu is expanding and is currently in the process of commissioning its fifth production line with the capacity to produce 10,000 tpd of clinker. This will take annual production capacity to 6.8 Mtpa by 2011 and bolster top-line growth. Furthermore, factors such as increased production capacity, lifting of the export ban, and proximity to the Red Sea coast and Yanbu Port are expected to benefit Yanbu in the long run. We remain concerned about the entry of new players and intensifying competition in the Western province, which could further erode Yanbu s market share. We expect Yanbu s revenues to grow 4.8% YoY due to increased sales volume on account of higher government spending on infrastructure coupled with increasing construction activities in the Kingdom. However, we remain concerned about Yanbu s revenue growth in the me dium term, especially until the export ban is lifted. We expect the company s net income to grow 2% YoY to USD 131.7 Mn in 2010. USD Mn 2004 2005 2006 2007 2008 2009 2010F Revenues 206 207 225 312 291 251 263 Net Income 114 121 136 176 150 129 132 P/E (LFY) 16.69 25.26 11.46 12.22 6.32 9.96 10.1 P/B (LFI) 3.54 5.90 2.82 3.47 1.50 1.99 1.71 M. Cap 1,899 3,051 1,563 2,149 942 1,278 1,210 Stock Returns 61% -49% 37% -56% 36% -11%(YTD) 2010 figures - P/E, P/B on 1Q-2010 ending results and M.Cap. as on 20 Source: Reuters Knowledge, Tadawul Stock Exchange
Company Overview Yanbu s current clinker production capacity stands at 3.8 Mtpa Yanbu Cement Company (Yanbu) was established in 1977 and is situated in Ras Baridi (Western Saudi Arabia) and headquartered in Jeddah. Yanbu entered the Kingdom s cement market with an initial clinker production capacity of 1.2 Million tons per annum (Mtpa). In line with its expansion strategy, the company increased production capacity to 3.8 Mtpa in 2005 (Table 1). Yanbu produced 3.9 Mtpa of cement in 2009, or 10.4% of total cement produced in the Kingdom. The company commenced the commissioning of a fifth production line in July 2008 by signing a contract with Sinoma International Engineering Company. The expansion phase, likely to be completed by the first half of 2011, would take Yanbu s total production capacity to 6.8 Mtpa by 2Q11 making it one of the largest cement producers in the Kingdom. Table 1: Yanbu s Expansion and Production Capacity Details Year Addition (Tons per day) Cum. Prod. Capacity (Mtpa) Prod. Line Type of Kiln 1977 1,500 0.45 1 Long Dry process Kiln 1977 1,500 0.90 2 Long Dry process Kiln 1982 1,000 1.20 3 Long Dry process Kiln 1997 7,000 3.30 4 Short Dry Process Kiln 2005 1,500 3.75 4 Short Dry Process Kiln 2011 10,000 6.75 5 Details not available Source: Company Website, Markaz Research Yanbu is primarily engaged in the production and distribution of cement. Its product portfolio comprises Ordinary Portland cement (OPC), Sulphar Resistant cement (SRC) and Pozolanic cement. The company s current clinker capacity stands at 12,500 tons per day (tpd) with plans to increase clinker capacity by 10,000 tpd by 2011. Yanbu Cement uses both long dry process kiln and short dry process kiln in different production lines for cement production. Part of the company s operational efficiency is attributed to its short dry process kiln that uses the digital process to control efficient power and fuel consumption and makes minimum use of manpower. Short dry process kilns enhance operational efficiencies Key shareholders Suleiman Bin Abdulaziz Saleh Al Rajhi holds the single largest stake (24%) other major shareholders are General Organization for Social Insurance (12%), Public Investment Fund (10%) and Abdullah Bin Abdulaziz Saleh Al Rajhi (6%). Figure 1: Shareholding pattern (as of May 2010) 48% 6% 24% Suleiman Bin Abdulaziz Saleh Al Rajhi General Organisation for Social Insurance - Saudi Arabia Public Investment Fund 10% 12% Abdullah Bin Abdulaziz Saleh Al Rajhi Public Source: Zawya, Markaz Research Kuwait Financial Centre Markaz 2
Yanbu holds 60% stake in Yanbu Saudi Kuwaiti Paper Products Company (YSKPPC). YSKPPC, which was established in 2005 with a paid-up capital of USD 3.4 Mn, is a joint venture between Yanbu and Shuaiba Paper Products Company (a subsidiary of Kuwait-based Al-Ahlia Investment Company). The company manufactures 90 million multi-ply Kraft paper bags per annum. YSKPPC is likely to complement Yanbu s business by providing packaging material to the latter. The paper bags can be used to pack various materials, including cement, lime, gypsum and other construction materials (Table 2) Table 2: Investments by YACCO Company Country Stake Yanbu Saudi Kuwaiti Paper Products Company Saudi Arabia 60.00% [YSKPPC] Source: Zawya YSKPPC is a joint venture between Yanbu and Shuaiba Paper Products Company Investment Highlights Competitive Advantage Location Saudi Arabia s western region has rich mineral reserves, especially gypsum and limestone, the primary raw materials used in the manufacture of cement. Yanbu is situated in Ras Baridi along the shores of the Red Sea, 70 Km from the Yanbu Al Bahr Port. The company s proximity to raw material sources is likely to improve cost effectiveness. Yanbu Cement s proximity to Makkah, Madinah and Jeddah is also likely to provide a competitive advantage. The Kingdom is witnessing major construction activities in these regions. The construction of four economic cities King Abdullah Economic City in Jeddah, Knowledge Economic City in Madinah, Prince AbdulAziz bin Mousaed Economic City in Hail, and Jazan Economic City would aid revenue growth. The four economic cities are estimated to cost US D 90 1 Bn. Yanbu s cement company is the closest to Knowledge Economic City. This would enable the company to win orders and pass on the benefit of lower transportation costs to its customers. Yanbu is situated in the Western province of Kingdom, 70 Km from the port of Yanbu Al Bahr New production lines to enhance performance Yanbu plans to enlarge its production capacity to 6.8 Mtpa. The company initiated the expansion procedure in July 2008. It plans to add an additional 10,000 tpd of clinker production capacity, which would take total production capacity to 22,500 tpd of clinker. The company is commissioning its fifth production line in order to benefit from the growing demand for cement in the Kingdom. The new production line is expected to start commercial production in late 2011 and is estimated to cost around USD 453 2 Mn. We expect Yanbu s strategy to operate more efficient and larger plants to increase the effectiveness of its production process and reduce operating costs. This is likely to improve profitability, going forward. 1 Wall Street Journal 2 Zawya Projects Kuwait Financial Centre Markaz 3
Existing mining and quarrying licenses to help Yanbu expand production Yanbu s expansion phase is scheduled to complete by Q2-10 Yanbu s proximity to raw material sources along the Red Sea coast complements the raw material quarry licenses it has for exploration of cement. According to the Deputy Ministry for Mineral Resource, Yanbu covers an area of around 64.5 Km 2 (Table 3). The existing quarry license for raw material exploration would further complement the company s new production line. Proximity to raw material sources also helps cut costs. Table 3: Raw material quarry licenses License No Minerals Location Area M/10, 4/3/1398AH Limestone, Clay & Gypsum North Yanbu 50.00 Km 2 M/6, 29/2/1419AH Limestone, Gypsum Ras Baridi, North Yanbu 10.50 Km 2 M/42, 2/7/1424AH Pozzolan for Cement Ras Qara, Tabuk 2.93 Km 2 M/42, 2/7/1424AH Iron for Cement Jamum Province, Mecca Region 0.96 Km 2 Source: Deputy Ministry for Mineral Resources, Markaz Research Yanbu s has four minerals licenses encapsulating an area of around 64.5 Km2 Separately, the company also benefits from its proximity to the export port Yanbu Al Bahar, Madinah, a new channel for exports to neighboring countries such as Egypt, Sudan, Ethiopia and Eritrea. Export ban, increasing competition worrisome The Saudi government imposed a ban on cement exports in July 2008 to curb construction activity and check the shortfall in supply. The export ban deviated manufacturers focus toward the Western province, where construction activities and cement demand were strong. Earlier, Yanbu and Arabian Cement Company, major market players in the western province, competed with each other. However, due to the export ban, Yanbu and Arabian Cement lost 6.5% and 1.8% market share, respectively, to new entrants and existing players. In fact, YNNCO lost the maximum market share compared to other companies in the industry. Figure 2: Market Share gain/loss during 2007 & 1Q10 Yanbu lost the highest market share of 6.5% during 2007 and Q1-10 New players fast gaining market presence 6% 5% 5% Riyadh Najran Madina 4% Western -1% -1% -1% -2% -2% -3% -4% Qassim Tabuk Arabian Southern Yamama Saudi Eastern -6% Yanbu -10% -5% 0% 5% 10% Source: Yamamah Cement, Markaz Research Kuwait Financial Centre Markaz 4
Thousand TPA USD mn USD per tonne R E S E A R C H Yanbu s operating margin contracted marginally by 20 basis points YoY to 51.5% in 2009 Discussion Notes Looking Back 2009 Results Yanbu s revenues declined 13.7% YoY to US D 251.2 mn in 2009 primarily due to the combined effect of declining sales volume and falling prices of cement. The company s sale volume declined 9.2% YoY to 3.9 Mt of clinker in 2009, primarily due to the ban on export by the Saudi government. This increased both supply and competition in the Kingdom s Western province. Furthermore, on the price front, the average realized selling price of cement declined 5% to USD 64.3 per ton in 2009, whereas the average cost declined 6% to US D 29.6 per ton in 2009. Consequently, profit per ton declined 4% to USD 34.7 per ton in 2009. Figure 3: Revenues Vs Average cost price trend 350 300 250 200 35 30 25 20 150 100 50 - ` 2005 2006 2007 2008 2009 1Q10 15 10 5 0 Yanbu announced that its board has approved a cash dividend of USD 93 Mn for 2009 Revenues Average Cost Price (RHS) Source: Reuters Knowledge, Markaz Research The company s operating margin contracted a marginal 20 basis points (bps) YoY to 51.5% in 2009; primarily due to effective cost control. However, in absolute terms, Yanbu s operating profit declined 1.7% YoY to US D 131.5 Mn in 2009 due to a decline in sales during the year. Figure 4: Operating Performance - Production Trends 2004-2009 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-2005 2006 2007 2008 2009 20% 15% 10% 5% 0% -5% -10% Cement Production Clinker Production Change in Avg Selling Prices (%) Source: Yamamah Cement, Markaz Research Kuwait Financial Centre Markaz 5
USD Mn USD Mn R E S E A R C H Dividend Trend Yanbu s reported a dividend payout of 75% in 2008. In 1Q10, the company announced that its board had recommended a cash dividend of USD 93 Mn (or USD 0.8 per share) for 2009. The company s dividend yield stood at 6.56% in 2009, down from 11.87% in 2008. Figure 5: Net profit and Dividend Trend We expect YNCCO s operating margin to decline by 153 bps YoY to 50% in 2010 200 180 160 140 120 100 80 60 40 20-2004 2005 2006 2007 2008 2009* 140% 120% 100% 80% 60% 40% 20% 0% Net Profit Dividend Paid Dividend Payout % (RHS) Source: Reuters Knowledge, Markaz Research * 2009 data based on Yanbu Board s recommendation on 2 nd Yanbu s revenues declined 13.7% YoY in 1Q10 (Figure 6). The decline was primarily ascribed to lower sales volume and cement prices. The export ban increased supply within the Kingdom. This enhanced competition in the market and adversely impacted the company s revenue. Figure 6: Total Revenue (Sales) Quarterly Growth Trend Competition among cement manufacturers in Saudi Arabia is region-specific 100 90 80 70 60 50 40 30 20 10-1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 65% 60% 55% 50% 45% 40% 35% 30% Total Revenue Source: Reuters Knowledge, Markaz Research Operating margin (%) - RHS Looking forward 2010 Yanbu s revenues are expected to grow 4.8% YoY to US D 263.2 Mn in 2010. We expect a revival in demand for cement due to increased infrastructure and construction-related activities to be the prime driver of the company s sales growth. Furthermore, Yanbu s strategic location, encompassing Kuwait Financial Centre Markaz 6
USD mn R E S E A R C H We expect company s net income to decline by 2% YoY to US D 263.2 Mn in 2010. Makkah, Madinah and Jeddah, is likely to contribute to top-line growth. On the profitability front, we expect the company s operating margin to expand 153 bps YoY to 50% in 2010 owing to cost rationalization initiatives. Yanbu s net income is estimated to increase 2% YoY to US D 263.2 Mn during the same period. Table 4: Broker estimates Vs Markaz estimates -2010f Broker Estimate Table (2010 f) Annual (USD Mn) Beltone NCBC EFG Hermes Markaz Date of Estimates Jan-10 June-10 June-10 June-10 ROA: 17% 14.8% - 15.9% ROE: 20% 17.3% 26.8% 19.8% Revenue: 294 230 1,428 263 EBITDA: - 146 746 161 EBIT: 136 117 558 132 Net Profit: 134 114 427 132 Growth 4% -12% 231% -15% Source: Zawya, Reuters Knowledge, Markaz Research Our call on 2010 net profit is a weighted product of three scenarios the Bull Case (with a 6% growth in earnings, and a 15% probability of occurrence), Base Case (with a 4% rise in net earnings and a 60% probability of occurrence), and Bear Case (with a decline of 5% and a 25% probability of occurrence). Figure 7: Net Income Trend 180 160 140 120 136 134 132 123 100 80 60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F P ro bable (2%) B ull (6%) B ase (4%) B ear (-5%) Source: Reuters Knowledge, Markaz Research Kuwait Financial Centre Markaz 7
Price (rebased) Traded Volume (in '000) May-10 Mar-10 Feb-10 Dec-09 Nov-09 Sep-09 Aug-09 Jun-09 May-09 Mar-09 Feb-09 Dec-08 Nov-08 Sep-08 Aug-08 Jun-08 May-08 Mar-08 Feb-08 Jan-08 May-10 Apr-10 Feb-10 Jan-10 Nov-09 Oct-09 Aug-09 Jul-09 Jun-09 Apr-09 Mar-09 Jan-09 Dec-08 Oct-08 Sep-08 Jul-08 Jun-08 May-08 Mar-08 Feb-08 Jan-08 R E S E A R C H Valuation Yanbu s stock price declined 11% YTD, underperforming the TASI, which rose 3.0%. However, in 2009, the company s stock price advanced significantly by 36%, while the index grew 27% (Figure 8). Yanbu s current PE stands at 9.9x; its PE multiple has declined marginally by 1.8% YTD at 10.1x since 2009. Furthermore, we place the fair value PE at 10.0x, indicating fair value at this juncture. The company s expansion strategy coupled with its strategic location could provide a competitive advantage. Furthermore, the lifting of the export ban in the near-to-medium term is likely to act as an additional advantage by providing Yanbu an expanded market space and share along with increased production capacity. However, until then we remain concerned about the company s revenue growth due to its declining market share; cement prices are likely to remain under pressure due to growing competition. We expect Yanbu s net income to increase 2.0% YoY to US D 131.7 Mn in 2010. Yanbu s turnover velocity declined to 29.5% in 2009 (from 32.7% in 2008) due to weak trade values. Despite Yanbu having a volatility band wider than that of the index (Figure 10) its current MVX level is lower than that of the index, leading us to predict the stock will provide low return with medium volatility going forward. 110 Figure 8: Price & Volume Trend Volume Yanbu TASI 3,000 15 Figure 9: PE Trend & Fair Value Yanbu P E (T T M ) F air Value P E 90 2,500 12 2,000 70 1,500 9 50 1,000 500 6 30-3 Source: Bloomberg Source: Bloomberg, Markaz Research Figure 10: Markaz Volatility Index (May 2010) Source: Markaz Research, Reuters Kuwait Financial Centre Markaz 8
Appendix 1: Industry Overview Saudi cement sector s total production capacity is expected to increase to 53.0 Mn tons in 2010 The Saudi construction sector contributed around 7.2% to the Kingdom s GDP in 2009. Cement is one of the key raw materials in the construction sector and there are 12 cement manufacturing companies (eight listed on the Saudi Stock Exchange) across Saudi Arabia. Table 5: Construction sector & GDP growth All figures in USD Mn, unless otherwise stated 2004 2005 2006 2007 2008 2009 Gross Domestic Product (GDP) 192,286 202,964 209,373 213,597 222,629 223,974 3.1% Construction 12,918 13,535 14,527 15,123 15,344 16,066 4.5% GDP YoY Growth 5.3% 5.6% 3.2% 2.0% 4.2% 0.6% Construction YoY Growth 6.5% 4.8% 7.3% 4.1% 1.5% 4.7% Construction Contribution to GDP 6.7% 6.7% 6.9% 7.1% 6.9% 7.2% Cement Production (Mn Tonnes) 25,474 26,032 27,053 30,290 32,888 37,847 8.2% Cement production YoY Growth 5.7% 2.2% 3.9% 12.0% 8.6% 15.1% Source: SAMA, Markaz Research CAGR % Qassim Cement Company is a Tier I company with 11.2% market share In 2009, the Kingdom s cement production capacity was estimated to be around 46.0 Mn tonnes and reach 53.0 Mn tons in 2010. According to the Ministry of Commerce and Industry, demand for cement is projected to increase by around 22%, while production capacity is expected to grow 15.2% in 2010. The cement industry is among the growing sectors in the Kingdom as it benefits from the abundance of natural resources such as natural gas and limestone. Until 1956, Saudi Arabia was completely dependent on cement imports to cater to the demand. Thereafter, the cement industry picked up with the entry of new cement producers, thereby enhancing domestic production capacity and reducing dependence on imports. Figure 11: Cement Industry in Saudi Arabia Tabuk Cement C : 1.3 mm P : 1.3 mm Qassim Cement C : 3.2 mm P : 4.3 mm Yanbu Cement C : 4.0 mm P : 3.9 mm Eastern Province Cement C : 3.4 mm P : 3.2 mm Madina Cement C : 2.9 mm P : 1.6 mm Saudi Cement C : 8.6 mm P : 5.5 mm Arabian Cement C : 4.8 mm P : 3.0 mm Riyadh Cement C : 1.9 mm P : 1.7 mm Southern Cement C : 5.8 mm P : 5.2 mm Najran Cement C : 1.6 mm P : 1.6 mm C: Clinker Capacity in 2009 P: Cement Production in 2009 Yamama Cement C : 6.0 mm P : 5.2 mm * Excludes new entrant Western cement Source: Yamamah Cement, Markaz Research Kuwait Financial Centre Markaz 9
Cement sector s total production capacity estimated to increase to 53.0 Mn tons in 2010 The cement industry in Saudi Arabia is classified as Tier I, Tier II, and Tier III. Tier I comprises companies with a high market share and contributes 63% to the Kingdom s total cement production capacity, while Tier II and Tier III include companies with medium and low market shares, accounting for 17% and 20%, respectively, of the total cement production capacity. Tier I cement companies include SACCO (14.63% market share), Yamama Cement (13.67%), Southern Cement (13.61%), Qassim Cement (11.23%) and Yanbu (10.36%). Tier II consists of Eastern Cement (8.5%) and Arabian Cement (8%), while, Tier III comprises new entrants such as Riyadh Cement (4.5%), Najran Cement (4.2%), Madina (4.2%), Western Cement (3.9%), and Tabuk Cement (3.4%). New Tier III players, Al Jouf Cement and Al Safwa Cement, are also expected to commence production in 2010. The Saudi cement industry, with 12 major players, is relatively concentrated; the top five accounted for 61.6% of the total cement produced in 1Q10 and 63% in 2009. Competition increased with the entry of four new players in 2008 the combined market share of Riyad Cement, Madina Cement, Najran Cement and Western Cement increased to 16.7% in 2009 from 11.4% in 2008. However, the market shares of Yanbu and Saudi Cement dipped 5% and 3%, respectively (Table 6). Table 6: Shift in market share since 2007 Companies 2007 2008 2009 1Q-2010 Inc/Dec in Mkt Share Yanbu 15.3% 13.1% 10.4% 8.8% -6.5% Eastern 11.5% 9.5% 8.5% 7.2% -4.3% Southern 15.2% 14.9% 13.6% 12.2% -3.1% Arabian 9.3% 8.3% 7.9% 7.5% -1.8% Yamama 15.4% 13.3% 13.7% 13.8% -1.5% Tabuk 4.5% 3.5% 3.4% 3.2% -1.3% Qassim 11.4% 9.8% 11.2% 10.4% -1.0% Saudi 17.4% 16.3% 14.6% 16.4% -1.0% Western 1.4% 3.9% 4.1% 4.1% Riyadh New Entrants 4.2% 4.4% 4.9% 4.9% Madina 3.3% 4.2% 5.2% 5.2% Najran 2.4% 4.2% 6.4% 6.4% Source: Markaz Research Export ban restricting growth potential Saudi Ministry of Commerce and Trade withdrew the export ban in October 2009; local market price of cement remains fixed at US D 2.67 per bag Cement exports totaled 3.5 Mn tons in 2007 and continued to grow prior to the government ban on exports in July 2008 to curb the rising price of cement in the Kingdom. The ban coupled with a slowdown in construction due to the global economic crisis created overcapacity in the cement industry and restricted growth. However, the Saudi Ministry of Commerce and Industry conditionally lifted the ban in October 2009 due to easing of inflation and decrease in demand for cement. Saudi cement companies can Kuwait Financial Centre Markaz 10
export cement provided they sell the same at USD 2.67 per bag (US D 53.4 per ton) in the local market and maintain a 10% reserve stock. Following the export ban, cement inventory levels improved. Stocks, as a percentage of sales, declined to 1.7% in 2009 from 2.2% in 2008. The improvement in inventory levels was driven by the 22.9% YoY growth in domestic sales in 2009 relative to the 15.1% YoY increase in production. However, clinker stock grew 47% YoY in 2009, resulting in a combined 11.4 Mn tonnes of cement and clinker inventory at the end of 2009. Overcapacity to intensify competition Average price of cement stood at USD 62.50 per ton in 1Q10 The Saudi cement market continues to witness overcapacity. Expansion plans of existing players and the advent of new companies are likely to worsen the situation. Two new companies, Al Jouf Cement Co. and Al Safwa Cement Co, are expected to commence production in 2010 and add 3 Mn tonnes. Arabian Cement and Tabuk Cement also are likely to enhance their production capacities by 2.5 Mn tonnes and 1.5 Mn tonnes, respectively. Excess capacity could result in fierce competition and cement price cuts, going forward. The average cement price in the Kingdom fell 6.34% YoY to USD 63.59 per ton in 2009, followed by another 1.7% decline to US D 62.50 per ton in 1Q10. The decrease in cement sales price coupled with an increase in the cost of production could have an adverse impact on the sector s profitability. The cost for production of cement increased 1.4% to USD 29.67 per ton in 1Q10 from USD 29.24 per ton in 2009. Sector Outlook In 2010, we expect construction activity to pick up in Saudi Arabia, with projects worth USD 653.6 Bn 3 either underway or announced as of February 2010. However, the conditional ban on exports and rising competition are likely to exert pressure on cement prices through 2010. Nevertheless, volume growth (led by an anticipated recovery in construction and real estate activities), issuance of new licenses for the production of cement and improved plant utilization rates are likely to drive profitability in the sector. 3 Source: MEED Projects, GIH Real Estate report March 2010. Kuwait Financial Centre Markaz 11
Appendix 2: Key Statistics ` 2004 2005 2006 2007 2008 2009 2010e Income Statement Revenues 206 207 225 312 291 251 263 Gross Profit 87 81 84 131 135 115 124 Operating Profit 115 122 135 175 149 129 Net profit 114 121 136 176 150 129 132 Balance Sheet Total Current Assets 167 157 170 278 247 193 Non-Current Assets 395 440 429 405 446 560 Total Assets 562 597 599 683 692 754 Current Liabilities 20 43 31 49 49 63 Long Term Loans 0 30 4 3 1 32 Non-Current Liabilities 5 7 10 12 14 16 Total Liabilities 25 80 44 64 65 110 Total Shareholder's Equity 537 517 555 619 627 643 Analytics Gross Margin % 42% 39% 38% 42% 47% 46% 47% Return on Equity (%) 21.2% 23.4% 24.6% 28.5% 23.9% 20.1% 19.8% Return on Assets (%) 20.3% 20.2% 22.8% 25.9% 21.6% 17.1% 15.9% Revenue Growth (%) 5.1% -6.9% 4.9% 54.5% 3.7% -14.7% 7.4% Earnings Growth (%) 13.2% 6.1% 13.0% 29.3% -15.2% -13.8% 2.0% Historical EV (USD Mn) 1,899 3,080 1,567 2,152 944 1,309 P/E 16.69 25.26 11.46 12.22 6.32 9.96 Price/Book 3.54 5.90 2.82 3.47 1.50 1.99 EPS (USD) 1.08 1.15 1.30 1.67 1.42 1.22 BVPS (USD) 5.11 4.93 5.29 5.89 5.97 6.13 DPS 1.07 1.07 1.20 1.33 1.07 0.00 Market Price (SR) 67.94 109.12 55.92 76.87 33.70 45.70 Assets Growth (%) 6% 0% 14% 1% 9% Equity Growth (%) -4% 7% 11% 1% 3% Annual Trading Volume (Mn) 94,672 131,136 98,670 34,565 26,926 26,620 Annual Trading Value (USD Mn) 2,005 4,373 3,434 701 505 327 Turnover Velocity N/A 177% 149% 38% 32.71% 29.46% M Cap (USD Mn) 1,899 3,051 1,563 2,149 942 1,278 Source: Reuters Knowledge, Company Accounts, Markaz Research Kuwait Financial Centre Markaz 12
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