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Global Research Investment Update Equity UAE Cement & Building Material Sector June, 2011

HOLD

Arkan Building Materials Company


Market Data Bloomberg Code: Reuters Code: CMP (12 June 2011): O/S (mn) Market Cap (AED mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (AED): Low (AED): Average Volume: (000) 1m -3.5 -3.6 3m -3.5 -3.6 2.29 1.05 906.0 12m -18.3 -7.0 ARKAN UH ARKN.AD AED1.32 1,750.0 2,310.0 628.9 60.0 1.4

Target Price AED1.26

Drop in net income despite growth in the top line Presence in Abu Dhabi and Al Ain to act as a savior New businesses i.e. Lime & Dry Mortar to support the income Start of new cement plant to bolster volumes & cushion the margins

Increase in cost restricts bottom line growth


Arkan Building Materials Company declared its 1Q11 results. Company recorded net income of AED9.3mn in 1Q11, lower by 51.5% Y-o-Y and 39.5% Q-o-Q. Major reason for the tumult in profit was 5.7% decline in the cement prices along with over 25% decline in prices of blocks. Along with that jittery capital markets dropped the value of investments in equities, resulting in a loss of AED2.6mn.
Interim Results (AED mn) Sales Revenue Cost of Sales Gross Profit Operating Profit Net Profit Gross Margins Operating Margins Net Margins Source: Company Reports

Absolute (%) Relative (%)

Price Volume Performance


10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Jul-10 Sep-10 Nov-10 May-10 Jan-11 May-11 Mar-11

2.5
2.0 1.5 1.0 0.5 -

1Q10 66.5 36.6 29.9 10.3 19.2 44.9% 15.5% 28.8%

1Q11 68.8 43.7 25.1 6.0 9.3 36.5% 8.7% 13.5%

Change 3.4% 19.2% -15.9% -42.0% -51.5% -

Biggest cement manufacturer in UAE


ARKAN has become the biggest cement manufacturer in UAE as it has fully completed the new cement plant which has raised its cement capacity to 5.5mtpa from 1.01mtpa earlier. In terms of size the closest competitor of ARKAN in UAE is Union Cement Company at 4.5mtpa. The newly installed plant has been installed by Chinese contracts with the machinery being imported from Germany which vouch greater quality and gives Company more flexibility to compete on prices as it is gas based as well.

Dry mortar plant to start commercial production by 2013


Arkan started working on its new dry mortar plant in 2010. The project will have a production capacity of 1,000tpd and the construction cost is AED100mn (USD27.2mn). The new facility, spread over more than 57,000sq.m, will be Arkans first dry mortar plant in Al Mafraq UAE. Construction at the site has started, and the unit is scheduled to be fully operational in the second quarter of 2013. Raw materials required for production are sand, limestone, cement and hydrated lime. Arkan has hands on approach on most of the raw materials as it already operates a cement plant and is in the process of commissioning a lime plant by 2013. Potential competitor of the company are: Plaxit Dry Mortars L.L.C - Abu Dhabi RAKfix Dry Mortars L.L.C - Ras Al Khaimah Dubai Plaster Co. L.L.C - Ras Al Khaimah We have come to know from our sources that the current prevailing prices of Dry Mortar are AED300-310/ton (dry mix plaster with silo and machine). Hence to be on the conservative side our 2013 and onwards price ranges between AED260-270/ton.

Volume (000)

Arkan (AED)

Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) 22951270 Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Tel.: (965) 22951281 Global Investment House www.globalinv.net

Global Research UAE Lime plant to become operational in 2013

Arkan Building Materials Company

Arkan has initiated works on new lime plant. The plant capacity is 900tpd (600 quick-lime + 300 dolo-lime) and is expected to come online by 2Q13. The plant will be located within Al Ain Industrial Park. The plant will produce high quality quick lime and hydrated lime using 100 per cent indigenous raw materials and will primarily cater to the growing demand for industrial lime for construction and chemicals industries in the UAE and wider region. As an essential chemical, lime--both burnt and hydrated--is used extensively across industries, including in steel, environmental effluents, agro-food, paper and construction. Potential competitor of the company are: NOORA Ras Al Khaimah CMI Oman GEERCO, Saudi Arabia Current prevailing prices of Lime are AED340-350/ton. Hence to be on the conservative side our 2013 and onwards price ranges between AED320-330/ton.

Change in fundamentals and sector dynamics


Looking few years back when equity, commodity, construction and real estate market were booming, the plans of increasing capacity looked quite viable. However, post the financial crisis various fundamentals and sectoral outlook has changed. Real estate activity is witnessing an unabated fall, liquidity crunch has put a halt on more than 50% of projects in UAE, cement supply has overrun demand and recent political turmoil in the region has further exacerbated the situation. As a result we see Arkan s capacity utilization post commissioning of new plant in the range of 50-60% for our forecasted period which currently ranges between 80-90 (%).

Valuation update
ARKAN has always traded on a higher multiple as compared to other cement manufacturers, reason being its extra high outstanding shares of 1.75bn. With such high number of shares, the price on a relative basis turns out to be lower which drops our weighted average value. We have upgraded our fair value by to AED1.26/share as compared to AED0.95/share earlier. Increase in the fair value resulted because of commissioning of new cement capacity and also because of addition of lime and dry mortar plant. Despite increase in our target price we recommend a HOLD on the stock as our fair value is 4.9% lower than current market price of AED1.32/share.

Key risk to valuation


Exposure to equity market: Companys investment value had continued to deteriorate ever since the economic slowdown started. During 1Q11, Company incurred a loss of AED2.6mn on its investments in equities. With further deterioration in equity markets the Company could incur more losses on its investments which will reduce the profitability. UAE MSCI (Morgan Stanley Capital International) upgrade: UAE Securities and Commodities Authority recently announced that it has finalized all the arrangements necessary to get an MSCI upgrade. MSCI upgrade would mean that UAE stocks will get greater international prominence. With Arkans trading volumes at almost 1mn per day we believe the stock can witness price increase if MSCI upgrade materializes. Delays in Commissioning of Lime & Dry Mortar plant: Companys both dry mortar and lime plant are estimated to come online by 2Q13. Although so far most of the arrangement are on schedule but any delays in construction or commissioning would affect cash flows.

June 2011

Global Research UAE

Arkan Building Materials Company

Financial Statement
(AED mn) Sales Revenue Cost of Sales Gross Profit General & Administrative Expense Operating Profit Non-Core Income Share of Profit from Associates Net Financing Income Other Expenses Taxation Net Profit Cash and Bank Balance Receivables and Prepayments Inventories Investments at Fair Value Long Term Investments Goodwill Other Intangible Assets Property, Plant and Equipment Non-Current Assets Total Assets Payables & Accruals Medium Term Loans Long Term Loans Paid -up Capital Legal Reserve Capital Reserve Investment Revaluation Reserve Retained Earnings Owners Account Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Net Cash Movement Net Cash at End
Cash Flow

2008 695 (415) 280 (91) 189 (522) 19 22 (292) 201 129 376 47 333 128 187 1,158 1,805 2,559 509 324 110 1,750 38 4 2 (178) 1,615 2,559 (69) (1,002) 259 (812) 201 1.5 0.7 40.3% 27.2% -42.0% -12.4% -15.8% 0.27 -16.7% 10,661.7 1.7% 15.49 N/M (0.17) 0.92 6.02 10,535.0 N/M 6.5

2009 563 (414) 149 (71) 78 (96) 25 (4) 3 86 152 77 49 299 128 178 1,510 2,117 2,481 77 112 728 1,750 38 4 (53) (175) 0 1,564 2,481 (119) (402) 406 (115) 86 4.7 3.7 26.4% 13.8% 0.5% 0.1% 0.2% 0.54 1.8% 4,801.6 0.0% 8.61 171.50 0.00 0.89 2.34 4,095.0 1,487.5 2.6

2010 245 (136) 109 (73) 36 (2) 18 1 (0) 53 65 89 78 51 287 128 170 1,722 2,308 2,591 71 273 652 1,750 43 4 (76) (128) 0 1,594 2,591 121 (220) 78 (21) 65 4.0 2.9 44.6% 14.8% 21.7% 2.1% 3.4% 0.58 5.1% 3,815.3 0.0% 15.73 47.46 0.03 0.91 1.71 2,992.5 56.3 1.9

2011e 277 (182) 95 (73) 21 (1) 17 1 39 149 87 77 54 259 128 163 1,793 2,343 2,710 152 273 652 1,750 47 4 (76) (93) 0 1,632 2,710 185 (101) 84 149 2.4 1.9 34.2% 7.7% 13.9% 1.5% 2.4% 0.57 5.4% 3,056.1 0.0% 11.14 34.82 0.02 0.93 1.32 2,310.0 60.0 1.4

2012e 472 (303) 169 (125) 44 3 19 1 67 135 142 122 56 266 128 157 1,831 2,381 2,837 259 260 620 1,750 54 4 (76) (33) 0 1,699 2,837 137 (105) (46) (14) 135 1.8 1.3 35.8% 9.3% 14.2% 2.4% 4.0% 0.52 7.0% 554.3 0.0% 6.47 25.61 0.04 0.97 1.32 2,310.0 34.5 1.4

2013e 572 (363) 209 (135) 73 8 21 1 103 163 149 139 59 273 128 150 1,845 2,396 2,907 313 234 558 1,750 64 4 (76) 60 0 1,802 2,907 198 (81) (88) 28 163 1.6 1.2 36.5% 12.8% 18.0% 3.6% 5.9% 0.44 8.7% 533.2 0.0% 5.14 18.71 0.06 1.03 1.32 2,310.0 22.4 1.3

2014e 671 (424) 247 (145) 102 14 23 1 140 178 110 126 62 280 128 144 1,840 2,393 2,869 358 210 446 1,750 78 4 (76) 98 0 1,854 2,869 300 (64) (222) 14 178 1.3 1.0 36.8% 15.2% 20.8% 4.8% 7.6% 0.35 10.5% 506.2 3.8% 4.16 14.31 0.08 1.06 1.32 2,310.0 16.5 1.2

Current Ratio (x) Quick Ratio (x) Gross Profit Margin (%) Operating Profit Margin (%) Net Profit Margin (%) Return on Average Assets (%) Return on Average Equity (%) Debt / Equity (x) Cash Return On Capital Invested (%) EV/Ton (AED) Dividend Yield (%) EV/Revenues (x) EV/EBITDA (x) EPS (AED) Book Value Per Share (AED) Market Price (AED) * Market Capitalization (AED mn) P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Glob al Research
Ratio Analysis

June - 2011

Balance Sheet

Profit & Loss Statement

Global Research UAE

Arkan Building Materials Company

Disclosure
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Arkan Building Materials Company Recommendation HOLD Bloomberg Ticker ARKAN UH Reuters Ticker ARKN.AD Price AED1.32 Disclosure 1,10

1.

Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY Fair value of the stock is >20% from the current market price BUY Fair value of the stock is between +10% and +20% from the current market price HOLD Fair value of the stock is between +10% and -10% from the current market price SELL Fair value of the stock is < -10% from the current market price

Disclaimer
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June 2011

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