EMEA Emerging Markets - Amazon Web Servicestwitmails3.s3-website-eu-west-1.amazonaws.com › users... · 15E) coverage-relative above-median (1) earnings (EBITDA) growth (2) cash

November 25, 2011

EMEA Emerging Markets

Equity Research

Prospecting for alpha and growth: Expanding our MENA coverage – Part 1

We are expanding our MENA coverage

We initiate coverage on 80 new stocks in the

MENA region and resume coverage of an

additional 10 stocks. We now cover 121 stocks in

MENA across ten countries, including 23 banks,

while our total coverage in the CEEMEA region

reaches 341 stocks.

Prospecting for key themes we identify three

We identify three key drivers for the energy-rich

MENA economies: (1) basic resources, with the

region benefiting from high oil prices; (2)

infrastructure development (including real estate),

as current account surpluses from energy exports

allow for significant investment into local

economies, also through stimulus packages; and

(3) rising consumer spending as a result of

increasing (and in the case of GCC countries

already high) GDP per head and population levels.

Above-average returns, discount multiples

MENA markets trade on 10.3x 2012E P/E, a

discount to the global P/E of 11.6x, despite similar

EPS growth and higher returns (CROCI).

We identify 28 new Buys in MENA...

We have 28 new Buys in our MENA non-financials

coverage (with more than 50% potential valuation

upside) which fit our three themes. With our oils

team forecasting high oil prices over 2012-13, we

believe GDP growth in MENA could be more

resilient than consensus implies, but our top picks

also offer sustainable medium-term strengths.

Eight also offer sustainable strengths

We have further screened our MENA stocks for

sustainable (2011-15E) above-median (1) growth

(2) cash returns (CROCI) and (3) balance sheet

strength. Eight Buy-rated names fit these criteria

and offer exposure to our three key themes of

resources, infrastructure, consumption: Arab

Potash (Fertilizers, Jordan), Aramex (Logistics,

UAE), Drake and Scull (Construction, UAE),

Industries Qatar (Chemicals, Qatar), Jordan

Phosphate (Fertilizers, Jordan), Juhayna

(Consumer staples, Egypt), Orascom Construction

Industries (Construction/Fertilizers, Egypt) and

Wataniya Telecom (Telecoms, Kuwait). We add

Industries Qatar to the CEEMEA Focus.

RELATED RESEARCH PUBLISHED TODAY

EMEA Emerging Markets: Expanding coverage in expanding

economies: From the Bosphorus to the Gulf

EMEA Emerging Markets: Short-term turbulence, long-term

convergence: Expanding our Turkish coverage

EMEA Emerging Markets: Prospecting for alpha and growth:

Expanding our MENA coverage - Part 2

Matija Gergolet +971(4)428-2399 [email protected] Goldman Sachs International Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Eshan Toorabally, CFA +971(4)428-2384 [email protected] Goldman Sachs International Arsalan Mustafa, CFA +971(4)428-2368 [email protected] Goldman Sachs International

Alexander Balakhnin +7(495)645-4016 [email protected] OOO Goldman Sachs Bank

The Goldman Sachs Group, Inc. Global Investment Research

November 25, 2011 EMEA Emerging Markets

Goldman Sachs Global Investment Research 2

Table of contents

Introduction: Expanding our footprint in MENA to 121 stocks across ten countries 3

MENA economy 23

Commodities 37

Construction, Cement, Real Estate 73

Telecoms, Retail 141

Companies:

Al Khodari – Aramex 166

Bahrain Telecom – Drake & Scull 258

Egyptian Resorts – ezzsteel 305

Fawaz Abdulaziz Alhokair – Industries Qatar 359

Jarir Marketing – Lafarge Ciments 406

Prices in this report are based on market close as of November 17, 2011 unless otherwise stated. Note that the circles denoting peer group averages in the Investment Profile charts

for stocks in the Europe New Markets MENA Non Financials peer group do not currently show meaningful values.

Dubai MoscowMatija Gergolet Eshan Toorabally, CFA Alexander Balakhnin Anton FarlenkovArsalan Mustafa, CFA Asli Tuncer Maxim Loginov

Dubai (banks)Waleed Mohsin Ali Shekofti

Team assistantCharlotte Buchanan

Head of CEEMEA ResearchSergei Arsenyev

We would like to thank for their significant contribution Harsh Mehta, Sinu Padmanabhan, Balram Ramesh and Abdallah Shunnar

GS GIR MENA coverage



Expanding our footprint in MENA to 121 stocks across ten countries

We initiate coverage on 80 new stocks in the MENA region and resume coverage of an additional 10 names. In addition to the 31

stocks already under coverage (including 23 banks), we now cover 121 stocks in the region across ten countries. In this report, we

discuss the macroeconomic outlook for the MENA region, the key sectors driving the local economies (resources, infrastructure and

consumer) and include a company profile for each non-financial company. We now cover 341 stocks in the CEEMEA region.

Exhibit 1: Report structure: Macro overview, key sector drivers of the economy and company profiles

Source: Goldman Sachs Research estimates.

... is best captured by three main economic drivers...

Our top‐down view on the MENA economy...

... which we have analysed by screening almost 200 companies in the region and we initiate on 80 new companies (plus resume coverage of an additional 10). We now cover 121 stocks in the MENA, covering over 70% of the regional market cap

Macro: Strong demographics combined with large oil & gas reserves ...

… strong demographics trends in the MENA region, with a young and growing 400mn population, or 7% of the world’s total...

...and c.50% of the world oil & gas reserves…

... lead to a US$2.4 trn economy, larger than any of the BRICs except China...

... and expected GDP growth rates are above the global average.

Within the region, the Gulf Cooperation Council (GCC) countries stand out with high GDP per capita and high current account surpluses, supported by high oil prices.

Resources: the regional oil companies are generally non listed, but the oil & gas wealth can be captured indirectly

Regional chemicals and fertilizer companies have among the highest returns globally and are a good way to benefit indirectly from the region’s oil & gas wealth

Infrastructure: The large current account surpluses are being increasingly invested locally...

.. leading to significant government spending in infrastructure, housing and real estate in order to meet the growing demand

Consumption: The strong demographic trends and rising wealth level also lead to an increase in household consumption...

Telcos have already significantly benefitted from the rise in domestic consumption, while consumer discretionary should still observe large growth in the region

Company section: We are initiating coverage on 80 non‐financial companies across 10 countries and resuming coverage of a further 10 names. Combined with our existing coverage of MENA banks (23), telcos (7) and DP World, our coverage in MENA stands at 121 stocks, representing around 75% of the market cap, spread across Saudi Arabia (47 stocks), UAE (22), Egypt (18), Qatar (11), Kuwait (9), Oman (5), Morocco (4), Jordan (3), Bahrain (1) and Lebanon (1).

In the company sections, we provide a snapshot for each non‐financial company in our coverage, with five years ‘estimates, analysis of the historical and expected profitability and valuation.

Our valuations are based on the companies’ mid‐cycle multiples, indicating a median upside of 35%. Our preferred picks combine high valuation upside supported by high cash returns (CROCI), strong balance sheet and sustainable growth even under an assumption of normalized oil prices over the medium term.

Buy: High valuation upside

Buy: High valuation upside + high growth+ high CROCI

+ strong balance sheet

Watch list – Neutral rated: High growth

+ high CROCI + strong balance sheet

Resources

Advanced Petrochemical SABIC Taqa Tasnee Yansab

Arab Potash Industries Qatar Jordan Phosphate Orascom Construction

Industries

Infrastructure

Dar Al ArkanReal Estate Sorouh Real

Estate Emaar

Properties

Galfar Palm Hills

Developments Red Sea

Housing TMG Holding

Aramex Drake and Scull

Consumption

Agthia Air Arabia Al Othaim Arabian

Cement Batelco Qtel

Orascom Telecom Rak Ceramics SADAFCO Savola Saudi

Ceramics

Juhayna Wataniya Telecom

Du Halwani Herfy Jarir

23 37

73

141

165



We cover around 75% of the market cap in the MENA region

Exhibit 2: Market cap composition in the largest MENA markets: Saudi

Arabia is the largest (market cap US$329 bn) Market cap composition of Saudi stock market. NC: not covered; blue shading are

sectors covered by GS, grey not covered

Exhibit 3: ...followed by the UAE (US$121 bn) Market cap composition of UAE stock market (Abu Dhabi and Dubai; NC: not

covered; blue shading are sectors covered by GS, grey not covered

Source: Bloomberg, Goldman Sachs Research estimates.


Exhibit 4: ...and Qatar (US$96 bn) Market cap composition of Qatar stock market; NC: not covered; blue shading are

sectors covered by GS, grey not covered

Exhibit 5: Egypt’s market cap is US$30 bn Market cap composition of Egyptian stock market; NC: not covered; blue shading

are sectors covered by GS, grey not covered



Consumer Staples3%

Real Estate1%

Utilities4%

Chemicals36%

Financials22%

Basic Materials2%

Industrials3%

Cement4%

Telecommunication Services

9%

Others1%

Consumer Discretionary -NC1%

Financials -NC9%

Real Estate -NC1%

Industrials - NC1%

Others -NC3% Industrials

11%

Energy1%

Real Estate10%


21%

Utilities2%

Others1%

Financials37%

Industrials -NC1%

Financials -NC12%

Cement -NC1%

Others -NC3%

Industrials3%

Energy3%

Chemicals21%


13%

Financials43%

Energy -NC1%

Financials -NC12%

Real Estate -NC4%

Industrials29%

Consumer Staples2%

Energy2%

Financials13%

Real Estate6%

Basic Materials2%


28%

Financials -NC9%

Real Estate -NC1%

Cement -NC1%

Chemicals -NC3%

Basic Materials -NC3%

Others -NC1%



Our MENA picks combine thematic exposure, strong fundamentals and valuation upside

We identify three key drivers for the MENA economy and our preferred picks are supported by a strong positioning in

each: (1) basic resources, with the region benefiting from the high oil price which drives regional GDP growth to a

large extent; (2) infrastructure development (including real estate), as current account surpluses allow for significant

investment into local economies, also through stimulus packages; and (3) rising consumer spending as a result of

increasing (and in some cases already high) GDP per head and population levels. We identify 28 new Buy-rated stocks

which fit these three themes, eight of which also have sustainable, above-median earnings growth, cash returns and

balance sheets. With our oils team forecasting high oil prices over 2012-13, we believe GDP growth in MENA will be

more resilient than global levels in 2012, but our top picks also offer sustainable medium-term strength. Of these

stocks, we add Industries Qatar to the CEEMEA Focus List.

Our eight MENA top picks are exposed to themes with strong growth, returns and balance sheet

We have 28 new Buy ratings in our MENA non-financials coverage and we have further screened our stocks for sustainable (2011-

15E) coverage-relative above-median (1) earnings (EBITDA) growth (2) cash returns (CROCI) and (3) balance sheets (net debt/equity).

Eight of these fit all these criteria and offer exposure to our three key themes of resources, infrastructure and consumption: Arab

Potash (Fertilizers, Jordan), Aramex (Logistics, UAE), Drake and Scull (Construction, UAE), Industries Qatar (Chemicals, Qatar),

Jordan Phosphate (Fertilizers, Jordan), Juhayna (Consumer staples, Egypt), Orascom Construction Industries

(Construction/Fertilizers, Egypt) and Wataniya Telecom (Telecoms, Kuwait).

23 Buy-rated stocks attractively valued and exposed to themes, but lack one or more strengths

There are 23 Buy-rated stocks which fit our themes and are attractively valued, but do not screen as having above-median EBITDA

growth, CROCI or balance sheet strength.

The watchlist: Four stocks with sustainable strength but less valuation upside

Four names which offer exposure to our themes and display sustainably high returns, strong balance sheets and growth are

Neutral-rated as we do not find the valuation compelling: Emirates Integrated Telecommunication Company (Du) (Telecoms, UAE),

Halwani Brothers (Consumer Staples, Saudi Arabia), Herfy (Restaurants, Saudi Arabia) and Jarir (Retail, Saudi Arabia).

Among the banks, SAMBA and FGB are our preferred picks in MENA

We cover 22 banks and one exchange in the MENA space with an aggregate market capitalization of US$170 bn. Our nine Buy-rated

stocks offer on average 55% upside potential. At 1.3x 2012E book, SAMBA trades at the lower end of its 3-year trading history

despite our expected normalized ROE of 17%. The bank has substantial funding headroom, with among the lowest loan to deposit

ratios of c.60%, allowing it to benefit from the long-term credit growth opportunity in Saudi. First Gulf Bank remains well capitalized

with a Tier-I ratio of 19% (top quartile within MENA banks) and offers exposure to the relatively resilient Abu Dhabi market. The

stock trades at a 20% discount to 2012E book value, or almost a 40% discount to EM banks with our projected normalized ROE of

15% for 2012.



Our thematic framework and key picks in MENA

Exhibit 6: Our key picks for MENA (non-financials) are grouped around three key themes: Resources, Infrastructure and Consumption: 31 are Buy-rated based on valuation upside,

of which eight also show high CROCI, strong balance sheet and high medium term growth

Source: Goldman Sachs Research estimates

Buy: High valuation upside

Buy: High valuation upside + high growth+ high CROCI

+ strong balance sheet

Watch list – Neutral rated: High growth

+ high CROCI + strong balance sheet

Resources

Advanced Petrochemical SABIC Taqa Tasnee Yansab

Arab Potash Industries Qatar Jordan Phosphate Orascom Construction

Industries

Infrastructure

Dar Al ArkanReal Estate Sorouh Real

Estate Emaar

Properties

Galfar Palm Hills

Developments Red Sea

Housing TMG Holding

Aramex Drake and Scull

Consumption

Agthia Air Arabia Al Othaim Arabian

Cement Batelco Qtel

Orascom Telecom Rak Ceramics SADAFCO Savola Saudi

Ceramics

Juhayna Wataniya Telecom

Du Halwani Herfy Jarir



All MENA countries trade at discounts to historical P/E multiples in 2012E

Exhibit 7: Most MENA countries trade below global EV/EBITDA multiples

2012E median EV/EBITDA by country vs. selected regions (x)

Exhibit 8: All MENA countries bar Morocco trade below global P/E levels

2012E median P/E by country vs. selected regions (x)

Source: Goldman Sachs Research estimates. Turkey and MENA non-financial coverage only.

Source: Goldman Sachs Research estimates. Turkey and MENA include financial and non-financials.

Exhibit 9: MENA countries are trading at a significant discount to history…

2012E median EV/EBITDA relative to 5-year historical median

Exhibit 10: ......as well as on 5-year median P/E

2012E median P/E relative to 5-year historical median



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4

6

8

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12

14

16

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-26% -27% -29% -30%

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-60%

-50%

-40%

-30%

-20%

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Turkey Qatar Morocco Kuwait Jordan Oman Egypt Saudi Arabia

United Arab

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-17% -17%

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-31%-33%

-35% -37%-40%

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Turkey Morocco Egypt Oman Qatar Jordan Saudi Arabia

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Kuwait



MENA EPS growth at or above global levels in 2012E due to high oil price

Exhibit 11: We forecast Gulf EPS growth at or above global levels in 2012E…

2012E median EPS growth by country vs. selected regions

Exhibit 12: ...with most of MENA generating CROCI above global levels

2012E median CROCI by country vs. selected regions


Source: Goldman Sachs Research estimate. Turkey and MENA non-financial coverage only.

Exhibit 13: We expect EPS growth to be sustained over the medium term

(assuming US$85/bbl oil from 2014)... 2011-15E median EPS growth by country

Exhibit 14: …as well as CROCI

2011E-15E median CROCI by country



22%

15%13% 12% 12% 12%

11%9%

8%

11%14%

18%

13%

0%

5%

10%

15%

20%

25% 17%16%

14% 14% 13%11% 11%

10%9%

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14%15%

12%

0%

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4%

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Jordan Turkey Qatar Kuwait Egypt Saudi Arabia

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14%13% 13%

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6%

8%

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12%

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16%

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Jordan Morocco Qatar Saudi Arabia

Kuwait Egypt Oman Turkey United Arab

Emirates



We see median upside of 35% for new MENA stocks in our coverage

We estimate a 35% median upside for the 90 new MENA stocks (80 initiations; 10 resumptions of coverage). Given the high average

valuation upside, we assign a Buy rating to names with more than 50% potential upside to our 12-month price targets, while the

Sell-rated names are those with absolute downside.

Exhibit 15: The median potential upside for new stocks in our coverage is 35%; our new Buys have average upside of 69% Potential upside/(downside) for new stocks under coverage in MENA

All price targets have 12-month timeframe


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Our MENA stocks under coverage have median potential upside of 32%

We have 40 Buy-rated stocks and 20 Sell-rated in MENA

Exhibit 16 illustrates the potential upside/downside for our entire MENA coverage. Taking into account also stocks already under

coverage (banks, telcos and DP World), our median upside for MENA is 32%. In our MENA coverage, we have 40 Buy-rated stocks,

including 28 from our new coverage and nine banks. We are Sell-rated on 20 stocks, including 12 Sells from our new coverage.

Exhibit 16: The median upside for our entire MENA coverage (new and existing stocks) is 32%; our Buys have 62% potential upside on average New and existing MENA stocks potential upside

All price targets have 12-month timeframe except Commercial International Bank (Egypt), EFG Hermes, Burgan Bank, Commercial Bank of Kuwait, Kuwait Finance House, National Bank of Kuwait, which have

two-year timeframe.


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BUY NEUTRAL SELL



Screening our MENA non-financials Buy and Sell rated stocks

Exhibit 17: Our Buy-rated MENA non-financial stocks have 66% median upside

Summary of MENA non-financials Buy and Sell rated stocks and key screening data and valuation multiples. Quartiles relative to MENA non-financials universe


Source: Goldman Sachs Research estimates, Factset, IBES, Datastream.

EBITDA growth CROCI

Net debt/ equity

EBITDA vs. consensus

Price perf. (US$)

Dividend Yield

EV/ EBITDA

EV/ EBITDA

EV/ EBITDA PE PE PE

Ticker Company name

Market cap

(US$mn) RatingADV -12M (US$mn) Sector (Level 3) Ccy

Current price

Price target

Upside/ (downside)

Quartile 11-15E

Quartile 11-15E

Quartile 11-15E 2012E YTD 2012 2012 2013

5-yr median 2012 2013

5-yr median

BUY RATINGSJOPH.AM Jordan Phosphate Mines Co. 1,438 Buy 0.5 Agriculture JOD 13.6 27.1 99% 1 2 2 35% -20% 2.9% 4.7 3.7 8.7 6.6 5.6 13.0DSI.DU Drake and Scull International 482 Buy 2.3 Engineering & Construction AED 0.83 1.54 87% 2 2 1 -3% -21% 5.2% 4.2 3.4 6.0 8.5 7.4 9.7RKCE.AD Ras Al Khaimah Ceramic Company (RAK Ceramics) 304 Buy 0.1 Construction Products AED 1.50 2.80 87% 4 4 3 -38% 0.0% 5.0 4.6 9.5 9.0 7.6 9.8ARMX.DU Aramex 725 Buy 1.4 Logistics AED 1.82 3.31 82% 2 1 1 5% -12% 5.1% 6.6 5.7 11.4 10.6 9.1 18.4SOR.AD Sorouh Real Estate 693 Buy 2.5 Developers AED 0.97 1.73 78% 1 4 2 -17% -40% 0.0% 6.8 5.5 9.5 5.7 4.9 10.52060.SE National Industrialization Company (Tasnee) 5,900 Buy 17.4 Chemicals SAR 39.7 70.8 78% 2 2 3 -2% 23% 5.0% 7.3 6.8 16.1 8.4 7.8 17.32330.SE Advanced Petrochemical Company 1,044 Buy 10.7 Plastics SAR 27.7 49.2 78% 4 1 2 11% 2% 10.8% 5.3 4.8 12.3 7.6 7.2 25.8IQCD.QA Industries Qatar 20,496 Buy 12.3 Diversified QAR 136 240 77% 2 1 1 14% -2% 6.7% 6.3 4.8 10.3 7.9 6.5 11.13010.SE Arabian Cement 900 Buy 3.8 Building Materials SAR 42.2 74.5 77% 1 3 3 4% 23% 4.8% 6.8 6.6 11.4 9.2 9.0 12.7AIRA.DU Air Arabia 795 Buy 2.0 Airlines AED 0.63 1.10 76% 1 3 2 -12% -24% 12.5% 6.6 5.7 10.0 10.4 6.3 14.7JUFO.CA Juhayna Food Industries 546 Buy 0.9 Food EGP 4.50 7.82 74% 2 1 2 -9% -28% 2.2% 7.4 6.3 7.4 13.6 11.0 16.1OCIC.CA Orascom Construction Industries 7,831 Buy 6.3 Multi-Industry EGP 228 388 70% 2 2 2 8% -23% 6.4% 4.7 3.7 10.0 9.4 7.8 16.2AGTH.AD Agthia Group 270 Buy 0.1 Packaged & Manufacturing AED 1.65 2.81 70% 3 3 2 -9% -23% 2.9% 6.8 5.5 14.7 10.6 9.0 26.32290.SE Yanbu National Petrochemicals (YANSAB) 6,659 Buy 22.3 Chemicals SAR 44.4 74.8 68% 3 1 3 6% -7% 4.5% 6.4 5.1 12.1 7.2 6.1 85.74300.SE Dar Al Arkan Real Estate Development Company (Dar Al-Arkan) 1,785 Buy 11.3 Developers SAR 6.20 10.4 67% 3 4 3 -24% -31% 0.0% 7.8 6.2 12.1 5.7 4.6 10.6APOT.AM Arab Potash Company 4,937 Buy 0.1 Agriculture JOD 42.0 69.8 66% 1 1 1 21% -3% 6.0% 6.7 5.9 11.6 10.1 9.2 17.7EMAR.DU Emaar Properties 4,411 Buy 10.3 Developers AED 2.66 4.40 65% 4 4 2 11% -25% 3.0% 4.5 4.6 8.0 8.2 8.6 10.62270.SE Saudi Dairy and Foodstuff Company (SADAFCO) 372 Buy 3.4 Packaged & Manufacturing SAR 42.9 70.1 63% 3 2 1 1% 7.0% 5.6 5.3 9.6 10.3 9.8 9.64001.SE Abdullah Al Othaim Markets Company 575 Buy 3.2 Supermarkets SAR 95.0 152 60% 1 1 3 16% 22% 4.2% 7.7 6.2 8.9 9.9 8.6 10.6TAQA.AD Abu Dhabi National Energy (Taqa) 2,015 Buy 0.3 IPPs AED 1.22 1.94 59% 3 3 4 -18% 8.3% 5.2 4.9 8.6 5.0 4.8 12.6PHDC.CA Palm Hills Developments 217 Buy 2.3 Developers EGP 1.24 1.97 59% 3 4 3 -66% -81% 0.0% 5.9 5.3 10.7 4.9 4.0 10.82010.SE Saudi Basic Industries Corporation (SABIC) 76,589 Buy 161.7 Chemicals SAR 95.8 151 58% 3 1 2 2% -9% 5.2% 7.5 6.1 10.8 10.3 8.7 16.92040.SE Saudi Ceramic Company 917 Buy 1.7 Construction Products SAR 138 216 57% 3 2 3 -1% -7% 3.4% 9.7 8.1 13.0 11.6 9.7 15.9BTEL.BH Bahrain Telecom 1,505 Buy 0.1 Telecom Wireless BHD 0.39 0.61 55% 4 2 1 -22% -23% 10.2% 2.6 2.4 5.8 8.1 7.7 9.42050.SE Savola Group 3,453 Buy 3.5 Packaged & Manufacturing SAR 25.9 39.8 54% 2 3 3 -7% -19% 4.8% 4.8 4.1 15.2 9.6 8.6 31.9TMGH.CA Talaat Mostafa Group Holding Company (TMG Holding) 1,135 Buy 3.6 Developers EGP 3.29 5.04 53% 2 4 2 -51% -62% 0.0% 9.3 7.2 12.8 9.6 7.0 14.6GECS.OM Galfar Engineering & Contracting 300 Buy 0.5 Engineering & Construction OMR 0.35 0.53 51% 2 3 4 -22% -38% 3.3% 6.5 6.7 8.9 16.0 12.2 22.84230.SE Red Sea Housing 333 Buy 2.6 Infrastructure SAR 41.6 62.3 50% 2 2 3 -23% 4.8% 7.4 6.9 11.0 10.0 9.2 15.7NMTC.KW Wataniya Telecom 3,540 Buy 0.6 Telecom Wireless KWD 1.94 2.70 39% 2 1 1 3% 4% 3.4% 3.5 3.0 7.4 9.4 7.7 12.4ORTE.CA Orascom Telecom 2,807 Buy 5.4 Telecom Services EGP 3.11 4.10 32% 2 1 4 11% -30% 9.6% 1.9 1.4 6.3 5.1 3.8 18.1QTEL.QA Qtel 7,115 Buy 1.8 Telecom Wireless QAR 147 181 23% 3 2 3 7% -1% 3.6% 4.7 4.0 7.1 7.0 6.1 10.2

SELL RATINGS3060.SE Yanbu Cement Company 1,652 Sell 1.1 Building Materials SAR 59.0 58.8 0% 2 3 2 6% 38% 6.0% 10.8 9.5 10.1 12.1 11.0 12.2QGTS.QA Qatar Gas Transport 2,731 Sell 4.4 Shipping QAR 18.0 17.7 -1% 4 3 4 -6% -10% 6.5% 11.0 10.3 20.4 11.0 9.7 82.53040.SE Qassim Cement Company 1,620 Sell 1.8 Building Materials SAR 67.5 65.6 -3% 4 1 1 -2% 8% 7.1% 10.2 10.2 9.9 12.8 12.8 12.32260.SE Sahara Petrochemical 1,720 Sell 14.9 Chemicals SAR 22.1 21.3 -3% 1 4 4 -16% -7% 2.3% 9.6 7.7 10.3 8.9 35.4JTEL.AM Jordan Telecom 1,961 Sell 0.1 Telecom Wireless JOD 5.56 5.37 -3% 4 2 1 3% 3% 6.7% 6.4 6.1 5.7 14.6 13.5 13.95110.SE Saudi Electricity Company (SEC) 14,775 Sell 13.4 Electric Utilities SAR 13.3 12.5 -6% 2 4 4 -3% -5% 5.3% 9.1 8.0 10.9 16.3 11.6 34.4SUCE.CA Suez Cement Company 791 Sell 0.2 Building Materials EGP 26.0 24.5 -6% 4 3 1 -39% -34% 4.6% 4.7 4.2 4.5 12.3 10.0 6.6ZAIN.KW Zain 13,034 Sell 9.7 Telecom Wireless KWD 0.93 0.87 -6% 4 2 1 -1% -38% 5.9% 5.8 5.2 7.7 10.1 9.5 11.12350.SE Saudi Kayan 7,519 Sell 48.8 Chemicals SAR 18.8 15.5 -18% 1 3 4 -34% -2% 4.0% 15.0 9.1 40.0 10.5 68.1VFQS.QA Vodafone Qatar 1,751 Sell 0.8 Telecom Wireless QAR 7.54 5.40 -28% 1 4 2 -27% -9% 0.0% 20.2 12.3 ODHN.S Orascom Development Holding AG 450 Sell 0.8 Developers CHF 16.7 11.7 -30% 1 4 3 -46% -70% 0.0% 16.2 10.1 12.0 29.8 12.7 19.57030.SE Zain KSA 2,053 Sell 16.3 Telecom Wireless SAR 5.50 3.80 -31% 1 4 4 -27% -29% 0.0% 15.8 11.2 84.5 4030.SE The National Shipping Company of Saudi Arabia (NSCSA) 941 Sell 4.9 Shipping SAR 11.2 7.11 -37% 4 4 4 -3% -36% 3.6% 10.3 10.2 10.5 14.1 12.9 14.3IAM.PA Maroc Telecom 15,207 Sell 0.2 Telecom Services EUR 12.8 7.80 -39% 4 2 3 -1% -4% 6.8% 8.0 8.0 8.0 14.8 14.9 15.0

REFERENCE DATA OPERATING DATA VALUATION DATA



Our valuation approach is based on stock mid-cycle multiples

Our valuation approach is based on a stock’s own mid-cycle multiples

Our valuation approach in setting our 12-month price targets is based on applying historical mid-cycle multiples. We use the stock’s

own 5-year median EV/EBITDA multiple and apply it to 2012E and 2013E earnings (thus capturing both the potential risk from the

current economic slowdown and the potential upside from growth in 2013) and average the two.

Where this is not relevant, we use peer multiples

Where the stock’s historical EV/EBITDA multiples have been volatile or there is a lack of trading history, for example if it has recently

listed, we apply the mid-cycle (5-year median) EV/EBITDA of peers (regional or global, as appropriate, depending on the structure of

the industry). In cases where EV/EBITDA is not relevant, we apply either the stock’s mid-cycle P/E or that of its peers (e.g. highly

geared companies or companies with material associates), P/B or SOTP for holdings.

We apply a 10% premium to high CROCI companies, a discount for low CROCI

We apply a premium/discount to historical multiples to take into account the company’s cash returns (CROCI), gearing, potential

legal risks and the holding nature of the group. Specifically, as illustrated in Exhibit 18, we apply a 10% premium to the historical

multiples for companies moving into first-quartile CROCI and a 10% discount for those moving into four-quartile CROCI relative to

the coverage group. This is to reflect the fact that historically companies moving into first-quartile CROCI tend to be rerated, while

companies moving into four-quartile tend to derate - see our European Tactical Research team’s December 2010 report Europe –

Cash generation at record highs: Reaping the rewards from reinvestment.

Where we use peer multiples, we apply a 10% premium relative to peers for companies with first-quartile CROCI and a 10% discount

for four-quartile CROCI companies relative to peers, to reflect the fact that high CROCI companies tend to trade at a premium (and

low CROCI trade at a discount), as observed by our European Tactical Research team.

We apply a 10% discount for high gearing or liquidity risk

We apply a 10% discount for companies with increasing gearing (either where net debt/EBITDA is forecast to exceed 3x on average

in 2012-13, or is already above that level and increasing further). If we use peer multiples, we apply a discount where the gearing is

more than twice the peer group average. We also apply a 10% discount if we view the company as having material liquidity (or

refinancing) risk. Conversely, for companies that are significantly improving their balance sheet, we apply a 10% premium.



For telcos, we use tax, capex and growth-adjusted multiples

For telecom stocks, we use EV/EBITDA multiples that are adjusted to reflect (1) different tax rates of the countries where they

operate (which range from as low as 2.5% to above 50%, leading to significant differences in how much of the EBITDA can be

converted to cash for shareholders); (2) capex efficiency measured as capex/sales; and (3) medium-term growth prospects.

And a 15%-25%-45% discount for holding companies and where there is legal uncertainty

For holdings we apply a 25% discount to the SOTP, in line with the historical discount observed for holdings in EMEA. As complex

holdings tend to trade at larger discounts, we increase the discounts for complex holdings to 45%, while we halve it for focused

holdings (holding with all subsidiaries in related industries). We also apply a 15% or 30% discount for potential legal risk (eg

pending lawsuits or reputational risks), depending on their materiality.

Exhibit 18: We apply a set of rules to derive premia or discounts to historical multiples based on cash returns (CROCI), gearing,

legal risk and holdings


If the stock has own history, we apply a premium (discount) for

CROCI 2012-13 CROCI relative to 2006-10 is moving into 1Q 10%2012-13 CROCI relative to 2006-10 is moving out of 1Q -10%2012-13 CROCI relative to 2006-10 is moving out of 4Q 10%2012-13 CROCI relative to 2006-10 is moving into 4Q -10%

Gearing Net debt/EBITDA moving above 3x, or growing if already above this level or liquidity risk -10%Net debt/EBITDA moving below 3x 10%

Legal risk Limited legal or reputational risk -15%Significant legal risk -30%

If we use peer multiples, we apply a premium (discount) forCROCI 1Q CROCI relative to peers 10%

4Q CROCI relative to peers -10%

Gearing Net debt/EBITDA more than twice the sector average net debt/EBITDA or liquidity risk -10%Net debt/EBITDA reducing to less than twice the sector average net debt/EBITDA 10%

Legal risk Limited legal or reputational risk -15%Significant legal risk -30%

For holdings, we apply a discount based on the business mix:Focused holding All subsidiaries in related businesses -15%Standard discount Conglomerate holding, controlling different businesses -25%Complex holding Holding with complex structure or corporate governance -45%



Exhibit 19: Our price target methodology for new stocks under coverage (and for stocks where coverage is resumed) is based on applying the stock own

historical 5-year (mid-cycle) multiple....



Ticker Stock Country Ccy Sector Multiple used 2012E 2013E Price target

2012E per share value


Average upside

(to price target)

Stock own multiple2280.SE Almarai Company Saudi Arabia SAR Consumer Staples 91.8 21,103 5,627 EVEBITDA Stock 5-year median 13.7 116 130 123 27% 41% 34%APOT.AM Arab Potash Company Jordan JOD Basic Materials 42 3,499 4,937 EVEBITDA Stock 5-year median 11.6 67.0 72.6 69.8 59% 73% 66%ARMX.DU Aramex United Arab Emirates AED Transportation 1.82 2,665 725 Other Stock 5-year median 10.6 3.06 3.56 3.31 68% 96% 82%SCM.CS Ciments du Maroc Morocco MAD Industrials 1000 14,436 1,743 EVEBITDA Stock 5-year median 10.9 1142 1393 1268 14% 39% 27%4220.SE Emaar the Economic City Saudi Arabia SAR Financial Services 6.4 5,440 1,450 PB Stock 5-year median 1.0 8.66 8.69 8.67 35% 36% 36%4240.SE Fawaz Abdulaziz Alhokair and Company Saudi Arabia SAR Consumer Cyclicals 58 4,060 1,083 EVEBITDA Stock 5-year median 11.10 81.5 90.6 86.1 41% 56% 48%HOL.CS Holcim Maroc Morocco MAD Industrials 1800 7,578 915 EVEBITDA Stock 5-year median 10.1 2485 2863 2674 38% 59% 49%IQCD.QA Industries Qatar Qatar QAR Basic Materials 136 74,635 20,496 EVEBITDA Stock 5-year median 10.3 215 264 240 59% 94% 76%4190.SE Jarir Marketing Company Saudi Arabia SAR Consumer Staples 203 8,130 2,168 EVEBITDA Stock 5-year median 14.8 240 293 266 18% 44% 31%JOPH.AM Jordan Phosphate Mines Co. Jordan JOD Basic Materials 13.6 1,019 1,438 EVEBITDA Stock 5-year median 8.7 24.8 29.5 27.1 82% 117% 100%LAC.CS Lafarge Ciments Morocco MAD Industrials 1448 25,295 3,054 EVEBITDA Stock 5-year median 12.0 2009 2304 2157 39% 59% 49%FOOD.KW Kuwait Food Company (Americana) Kuwait KWD Consumer Cyclicals 1.48 595 2,154 EVEBITDA Stock 5-year median 6.6 1.88 2.01 1.94 27% 36% 31%3040.SE Qassim Cement Company Saudi Arabia SAR Industrials 67.5 6,075 1,620 EVEBITDA Stock 5-year median 9.9 65.6 65.5 65.6 -3% -3% -3%QANC.QA Qatar National Cement Company Qatar QAR Industrials 109.1 5,357 1,471 EVEBITDA Stock 5-year median 10.6 121 148 134 11% 36% 23%QNNC.QA Qatar Navigation Qatar QAR Transportation 77.9 8,922 2,450 EVEBITDA Stock 5-year median 5.3 106 112 109 36% 44% 40%2010.SE Saudi Basic Industries Corporation (SABIC) Saudi Arabia SAR Basic Materials 95.8 287,250 76,589 EVEBITDA Stock 5-year median 10.8 139 163 151 45% 70% 58%2020.SE Saudi Arabia Fertilizer Company (SAFCO) Saudi Arabia SAR Basic Materials 184 45,875 12,232 EVEBITDA Stock 5-year median 10.3 202 217 210 10% 18% 14%2040.SE Saudi Ceramic Company Saudi Arabia SAR Industrials 138 3,438 917 EVEBITDA Stock 5-year median 13.0 196 237 216 42% 72% 57%2270.SE Saudi Dairy and Foodstuff Company (SADAFCO) Saudi Arabia SAR Consumer Staples 42.9 1,394 372 EVEBITDA Stock 5-year median 9.6 68.4 71.7 70.1 59% 67% 63%SOLA.BY Solidere Lebanon USD Financial Services 13.5 2,718 2,718 EVEBITDA Stock 5-year median 17.7 16.3 19.4 17.8 21% 43% 32%3050.SE Southern Cement Saudi Arabia SAR Industrials 74.0 10,360 2,762 EVEBITDA Stock 5-year median 11.0 90.4 92.3 91.4 22% 25% 23%3020.SE Yamama Cement Saudi Arabia SAR Industrials 61.0 8,235 2,196 EVEBITDA Stock 5-year median 10.9 78.7 82.1 80.4 29% 35% 32%3060.SE Yanbu Cement Company Saudi Arabia SAR Industrials 59.0 6,195 1,652 EVEBITDA Stock 5-year median 10.1 54.8 62.7 58.8 -7% 6% 0%Stock own multiples with premium (discount)AGLT.KW Agility The Public Warehousing Company (Agility) Kuwait KWD Transportation 0.40 414 1,497 EVEBITDA Stock 5-year median 3.2 0.39 0.51 0.45 -1% 29% 14%AIRA.DU Air Arabia United Arab Emirates AED Transportation 0.63 2,921 795 Other Stock 5-year median 8.8 0.94 1.26 1.10 50% 101% 76%ARTC.DU Arabtec Holding United Arab Emirates AED Industrials 1.37 2,048 558 Other Stock 5-year median 5.4 1.32 1.68 1.50 -3% 23% 10%4300.SE Dar Al Arkan Real Estate Saudi Arabia SAR Financial Services 6.20 6,696 1,785 PE Stock 5-year median 8.5 9.2 11.5 10.4 48% 86% 67%PHDC.CA Palm Hills Developments Egypt EGP Financial Services 1.24 1,300 217 PE Stock 5-year median 7.0 1.76 2.19 1.97 42% 76% 59%QEWC.QA Qatar Electricity and Water Company (QEWC) Qatar QAR Utilities 140 14,000 3,845 PE Stock 5-year median 11.2 170 185 177 21% 32% 27%4230.SE Red Sea Housing Saudi Arabia SAR Industrials 41.6 1,248 333 EVEBITDA Stock 5-year median 9.9 59.9 64.8 62.3 44% 56% 50%RSC.OM Renaissance Services Oman OMR Energy 0.56 159 413 EVEBITDA Stock 5-year median 5.1 0.50 0.82 0.66 -11% 46% 17%2160.SE Saudi Arabian Amiantit Company Saudi Arabia SAR Industrials 14.7 1,692 451 EVEBITDA Stock 5-year median 6.3 16.4 16.7 16.6 12% 14% 13%SOR.AD Sorouh Real Estate United Arab Emirates AED Financial Services 0.97 2,546 693 PE Stock 5-year median 9.4 1.61 1.86 1.73 66% 92% 79%SUCE.CA Suez Cement Company Egypt EGP Industrials 26.0 4,736 791 EVEBITDA Stock 5-year median 4.1 23.4 25.5 24.5 -10% -2% -6%TMGH.CA Talaat Mostafa Group Holding Company (TMG Holding) Egypt EGP Financial Services 3.29 6,789 1,135 PE Stock 5-year median 12.4 4.24 5.83 5.04 29% 77% 53%4030.SE The National Shipping Company of Saudi Arabia (NSCSA) Saudi Arabia SAR Transportation 11.2 3,528 941 EVEBITDA Stock 5-year median 8.4 6.98 7.24 7.11 -38% -35% -37%

Current price

Upside/(downside) to (%)Market cap (in

pricing currency)

Market cap (in US$) Methodology Multiple used

Per share value



Exhibit 20: ...or peer multiples where the stock own multiples have been volatile or history limited MENA price target methodology, continued



Ticker Stock Country Ccy Sector Multiple used 2012E 2013E Price target



Average upside

(to price target)

Peer multiplesTAQA.AD Abu Dhabi National Energy (Taqa) United Arab Emirates AED Utilities 1.22 7,595 2,068 PE Regional energy 5-year median 7.8 1.89 1.98 1.94 55% 63% 59%AGTH.AD Agthia Group United Arab Emirates AED Consumer Staples 1.65 990 270 EVEBITDA Global food 5-year median 10.2 2.52 3.10 2.81 52% 88% 70%3010.SE Arabian Cement Saudi Arabia SAR Industrials 42.2 3,376 900 EVEBITDA Regional cement 5-year medina 10.9 73.6 75.4 74.5 74% 79% 76%DSI.DU Drake and Scull International United Arab Emirates AED Industrials 0.83 1,770 482 EVEBITDA Global construction 5-year median 8.6 1.45 1.64 1.54 76% 98% 87%EMAR.DU Emaar Properties United Arab Emirates AED Financial Services 2.66 16,203 4,411 PE Global real estate developers 5-year median 13.9 4.52 4.28 4.40 70% 61% 65%GECS.OM Galfar Engineering & Contracting Oman OMR Industrials 0.35 116 300 EVEBITDA Global construction 5-year median 8.6 0.54 0.53 0.53 54% 51% 52%AUTO.CA GB Auto Egypt EGP Consumer Cyclicals 23.8 3,066 513 EVEBITDA Global autos 5-year median 7.1 23.3 33.2 28.3 -2% 40% 19%6001.SE Halwani Brothers Saudi Arabia SAR Consumer Staples 35.5 1,014 270 EVEBITDA Global food 5-year median 10.2 47.0 55.3 51.1 32% 56% 44%MOIL.CA Maridive and Oil Services Egypt USD Energy 1.77 544 544 EVEBITDA Global oil services 5-year median 7.0 2.15 2.91 2.53 21% 65% 43%QGTS.QA Qatar Gas Transport Qatar QAR Transportation 18.0 9,946 2,731 PE Global shipping 5-year median 10.2 16.6 18.8 17.7 -8% 5% -1%2380.SE Rabigh Refineries and Petrochemicals (Petro Rabigh) Saudi Arabia SAR Basic Materials 22.7 19,841 5,290 EVEBITDA Global chemicals 5-year median 8.2 19.1 27.6 23.3 -16% 22% 3%2260.SE Sahara Petrochemical Saudi Arabia SAR Basic Materials 22.1 6,450 1,720 EVEBITDA Global chemicals 5-year median 8.2 19.3 23.5 21.4 -12% 7% -3%3030.SE Saudi Cement Company (SCC) Saudi Arabia SAR Industrials 63.3 9,677 2,580 EVEBITDA Regional cement 5-year median 10.9 67.5 75.9 71.7 7% 20% 13%1320.SE Saudi Steel Pipe Saudi Arabia SAR Industrials 24.9 1,270 339 EVEBITDA Global construction 5-year median 8.6 24.4 31.2 27.8 -2% 25% 12%OCDI.CA Sixth of October Development and Investment Company (SEgypt EGP Financial Services 12.9 1,172 196 PE Global real estate developers 5-year median 13.9 11.5 24.8 18.2 -11% 92% 41%Peer multiples with premium (discount)1330.SE Al Khodari Saudi Arabia SAR Industrials 51.5 2,189 584 EVEBITDA Global construction 5-year median 9.5 64.4 73.4 68.9 25% 42% 34%4001.SE Abdullah Al Othaim Markets Company Saudi Arabia SAR Consumer Staples 95.0 2,157 575 EVEBITDA Regional retail 5-year median 10.9 137 167 152 44% 76% 60%ADNH.AD Abu Dhabi National Hotels United Arab Emirates AED Consumer Cyclicals 2.50 2,500 681 EVEBITDA Global hotels 5-year median 8.0 2.63 2.63 2.63 5% 5% 5%2330.SE Advanced Petrochemical Company Saudi Arabia SAR Basic Materials 27.7 3,916 1,044 EVEBITDA Global chemicals 5-year median 9.0 47.5 51.0 49.2 71% 84% 78%ALDR.AD Aldar Properties United Arab Emirates AED Financial Services 1.03 3,481 948 PE Global real estate developers 5-year median 12.5 0.70 1.73 1.22 -32% 68% 18%DANA.AD Dana Gas United Arab Emirates AED Energy 0.55 3,630 988 PE Regional energy 5-year median 7.0 0.70 0.88 0.79 27% 60% 43%SWDY.CA Elsewedy Electric Company Egypt EGP Industrials 20.0 4,471 747 EVEBITDA Global capital good 5-year median 7.8 25.5 32.2 28.9 28% 61% 44%EGTS.CA Egyptian Resorts Company (ERC) Egypt EGP Financial Services 0.96 1,008 168 PE Global real estate developers 5-year median 9.7 0.66 1.42 1.04 -31% 48% 8%ESRS.CA ezzsteel Egypt EGP Basic Materials 5.50 2,988 499 EVEBITDA Global steel 5-year median 4.4 5.93 10.0 7.97 8% 82% 45%6002.SE Herfy Saudi Arabia SAR Consumer Cyclicals 74.8 2,243 598 EVEBITDA Global restaurants&pubs 5-year median 10.3 77.3 93.6 85.5 3% 25% 14%JUFO.CA Juhayna Food Industries Egypt EGP Consumer Staples 4.50 3,269 546 EVEBITDA Global food 5-year median 11.2 7.16 8.48 7.82 59% 88% 74%2060.SE National Industrialization Company (Tasnee) Saudi Arabia SAR Basic Materials 39.7 22,130 5,900 EVEBITDA Global chemicals 5-year median 9.8 66.5 75.1 70.8 68% 89% 78%OCAB.OM Oman Cables Industry Oman OMR Industrials 0.73 65 169 EVEBITDA Global capital good 5-year median 9.4 0.83 1.00 0.91 15% 38% 26%ODHN.S Orascom Development Holding AG Egypt CHF Financial Services 16.7 413 450 PE Global real estate developers 5-year median 12.5 7.01 16.4 11.7 -58% -2% -30%RKCE.AD Ras Al Khaimah Ceramic Company (RAK Ceramics) United Arab Emirates AED Industrials 1.50 1,115 304 EVEBITDA Global construction 5-year median 6.9 2.66 2.94 2.80 77% 96% 87%2110.SE Saudi Cable Company Saudi Arabia SAR Industrials 11.75 893 238 EVEBITDA Global capital good 5-year median 8.4 9.58 15.3 12.4 -18% 30% 6%2290.SE Yanbu National Petrochemicals (YANSAB) Saudi Arabia SAR Basic Materials 44.4 24,975 6,659 EVEBITDA Global chemicals 5-year median 9.0 67.2 82.4 74.8 51% 86% 69%2240.SE Zamil Industrial Investment Company Saudi Arabia SAR Industrials 26.2 1,572 419 PE Global construction 5-year median 12.5 32.5 36.6 34.6 24% 40% 32%Telcos (tax, growth, capex adjusted multiples)BTEL.BH Bahrain Telecom Bahrain BHD Telecom Services 0.39 567 1,505 Other Telcos growt, tax and capex adjusted multiple 5.9 0.60 0.62 0.61 53% 58% 55%DU.DU Emirates Integrated Telecommunications Company (Du) United Arab Emirates AED Telecom Services 2.88 13,166 3,584 Other Telcos growt, tax and capex adjusted multiple 4.5 3.23 3.87 3.55 12% 34% 23%ETEL.AD Emirates Telecommunications Corporation (Etisalat) United Arab Emirates AED Telecom Services 9.99 78,982 21,503 Other Telcos growt, tax and capex adjusted multiple 4.4 11.6 13.0 12.3 16% 30% 23%7020.SE Etihad Etisalat Co Saudi Arabia SAR Telecom Services 51.0 35,700 9,519 Other Telcos growt, tax and capex adjusted multiple 5.7 58.8 58.8 58.8 15% 15% 15%JTEL.AM Jordan Telecom Jordan JOD Telecom Services 5.56 1,390 1,961 Other Telcos growt, tax and capex adjusted multiple 6.0 5.26 5.48 5.37 -5% -1% -3%NWRS.OM Omani Qatari Telecommunication Company (Nawras) Oman OMR Telecom Services 0.62 406 1,053 Other Telcos growt, tax and capex adjusted multiple 6.1 0.80 0.95 0.87 28% 52% 40%OTL.OM Oman Telecom Oman OMR Telecom Services 1.20 897 2,328 Other Telcos growt, tax and capex adjusted multiple 4.9 1.59 1.68 1.63 33% 40% 37%7010.SE Saudi Telecom Company Saudi Arabia SAR Telecom Services 33.3 66,600 17,757 Other Telcos growt, tax and capex adjusted multiple 5.6 39.6 39.6 39.6 19% 19% 19%VFQS.QA Vodafone Qatar Qatar QAR Telecom Services 7.54 6,374 1,751 Other Telcos growt, tax and capex adjusted multiple 8.0 5.40 5.40 5.40 -28% -28% -28%7030.SE Zain KSA Saudi Arabia SAR Telecom Services 5.50 7,700 2,053 Other Telcos growt, tax and capex adjusted multiple 7.6 3.80 3.80 3.80 -31% -31% -31%Other methodology4200.SE Aldrees Petroleum and Transport Services Saudi Arabia SAR Consumer Cyclicals 41.8 1,045 279 SOTP SOTP of retail and transport businesses 56.6 61.6 59.1 35% 47% 41%2002.SE National Petrochemicals Company (Petrochem) Saudi Arabia SAR Basic Materials 21.7 10,416 2,777 Other Global chemicals 5-yr med applied to 2013 18.8 28.3 23.6 -13% 31% 9%1211.SE Saudi Arabian Mining (Maaden) Saudi Arabia SAR Basic Materials 25.9 23,958 6,388 SOTP Peer multiples for DAP IC for alumininium 24.8 47.0 35.9 -4% 81% 39%5110.SE Saudi Electricity Company (SEC) Saudi Arabia SAR Utilities 13.3 55,416 14,775 Other Historical dividend yield method 12.5 12.5 12.5 -6% -6% -6%2350.SE Saudi Kayan Saudi Arabia SAR Basic Materials 18.8 28,200 7,519 Other Global chemicals 5-year median applied to 2013 15.5 15.5 15.5 -18% -18% -18%2310.SE Saudi International Petrochemicals (Sipchem) Saudi Arabia SAR Basic Materials 20.0 7,333 1,955 Other Global chemicals 5-year median, IC for expansion 23.8 30.4 27.1 19% 52% 35%HoldingsCCAP.CA Citadel Capital Egypt EGP Financial Services 3.11 2,711 453 SOTP 4.12 4.12 4.12 32% 32% 32%KPRO.KW Kipco Kuwait KWD Financial Services 0.32 401 1,451 SOTP 0.39 0.39 0.39 24% 24% 24%OCIC.CA Orascom Construction Industries Egypt EGP Industrials 228 46,853 7,831 SOTP 365 411 388 60% 81% 71%2250.SE Saudi Industrial Investment Group (SIIG) Saudi Arabia SAR Basic Materials 19.4 8,708 2,322 SOTP 26.2 30.0 28.1 36% 55% 45%2050.SE Savola Group Saudi Arabia SAR Consumer Staples 25.9 12,950 3,453 SOTP 37.0 42.6 39.8 43% 64% 54%

Current price

Upside/(downside) to (%)Market cap (in

pricing currency)

Market cap (in US$) Methodology Multiple used

Per share value



Exhibit 21: We also apply a premium/discount for high returns (CROCI), gearing, legal risk and holding structure of the companies

Premium/discounts applied to MENA stocks’ historical or peer multiples


CROCI Gearing Legal risk Holding Sum premia (discount) Reason for premium / (discount) Reason for not using stock own

EV/EBITDAStock own multiples with premium (discount)Air Arabia -10% -10% Weaker balance sheet going forward Adjusted for leases (using EV/EBITDAR) Agility The Public Warehousing Company (Agility) -10% -30% -40% Major legal risk (major lawsuit); CROCI moving into 4Q Arabtec Holding -10% -10% CROCI moving out of 1Q Adjusted for leases (using EV/EBITDAR) Dar Al Arkan Real Estate -10% -10% -20% CROCI moving into 4Q; gearing increasing above 3x net debt/EBITDA Using PE for real estatePalm Hills Developments -10% -10% -15% -35% Minor legal risk; CROCI moving into 4Q; liquidity risk Using PE for real estateQatar Electricity and Water Company (QEWC) 10% 10% CROCI moving into 1Q EV/EBITDA volatile, P/E consistent Red Sea Housing -10% -10% CROCI moving into 4QRenaissance Services -15% -15% Potenatial reputational riskSaudi Arabian Amiantit Company -10% -10% CROCI moving into 4QSorouh Real Estate -10% -10% CROCI moving into 4Q Using PE for real estateSuez Cement Company -10% -10% CROCI moving into 4QTalaat Mostafa Group Holding Company (TMG Holding) -15% -15% Minor legal risk (relating to part of land bank) Using PE for real estateThe National Shipping Company of Saudi Arabia (NSCSA) -10% -10% -20% CROCI moving into 4Q; gearing increasing above 3x net debt/EBITDAPeer multiples with premium (discount)Al Khodari 10% 10% 1Q CROCI relative to peers Limited historyAbdullah Al Othaim Markets Company 10% 10% 1Q CROCI relative to peers Limited historyAbu Dhabi National Hotels -10% -10% -20% 4Q CROCI relative to peers; high gearing relative to peers Volatile multiplesAdvanced Petrochemical Company 10% 10% 1Q CROCI relative to peers Limited historyAldar Properties -10% -10% Balance sheet/convertible dilution Volatile multiplesDana Gas -10% -10% Liquidity risk Volatile multiplesElsewedy Electric Company -10% -15% -25% Minor legal risk (Syria and Libya); high gearing relative to peers Volatile multiplesEgyptian Resorts Company (ERC) -30% -30% Major legal risk (risk to land bank) No EBITDAezzsteel -30% -30% Major legal risk (lawsuit against chairman and major shareholder) Volatile multiplesHerfy 10% 10% 1Q CROCI relative to peers Limited historyJuhayna Food Industries 10% 10% 1Q CROCI relative to peers Limited historyNational Industrialization Company (Tasnee) 10% 10% 20% 1Q CROCI relative to peers; degearing Volatile multiplesOman Cables Industry -10% -10% High gearing relative to peers Volatile multiplesOrascom Development Holding AG -10% -10% High gearing relative to peers Using PE for real estateRas Al Khaimah Ceramic Company (RAK Ceramics) -10% -10% -20% 4Q CROCI relative to peers; high gearing relative to peers Volatile multiplesSaudi Cable Company -10% -10% -20% 4Q CROCI relative to peers, high gearing relative to peers Volatile multiplesYanbu National Petrochemicals (YANSAB) 10% 10% 1Q CROCI relative to peers Limited historyZamil Industrial Investment Company -10% -10% 4Q CROCI relative to peers Volatile multiplesHoldingsCitadel Capital -25% -25% Holding HoldingKipco -15% -15% Focused holding Focused holdingOrascom Construction Industries -25% -25% Holding HoldingSaudi Industrial Investment Group (SIIG) -15% -15% Focused holding Focused holdingSavola Group -25% -25% Holding Holding



We now cover 121 stocks in the MENA region

We are initiating coverage on 80 new stocks and resuming coverage on 10 stocks

Exhibit 22: MENA stocks, price targets and ratings under our coverage Sorted by country, then by company name alphabetically

All price targets 12 months except Commercial International Bank (Egypt), EFG Hermes, Burgan Bank, Commercial Bank of Kuwait, Kuwait Finance House, National Bank of Kuwait, which have two-year timeframe.

Source: Goldman Sachs Research. Shaded rows refer to existing coverage prior to this report.

Ticker Company Name Country GS Industry Lvl 1 GS Industry Lvl 2 RatingMarket

cap (US$mn)

ADV -12m (US$mn) Currency Price Price

target

Potential upside/

(downside)PT Period Primary analyst

BTEL.BH Bahrain Telecom Bahrain Telecom Services Wireless Buy 1,505 0.1 BHD 0.39 0.61 55% 12 months Matija GergoletCCAP.CA Citadel Capital Egypt Financial Services Diversified Financials Neutral 453 3.1 EGP 3.11 4.12 32% 12 months Matija GergoletCOMI.CA Commercial International Bank (Egypt) Egypt Financial Services Banks Neutral 2,365 9.4 EGP 23.7 34.7 46% 2 years Waleed MohsinHRHO.CA EFG Hermes Egypt Financial Services Banks Neutral 976 3.7 EGP 12.2 19.1 57% 2 years Waleed MohsinEGTS.CA Egyptian Resorts Company (ERC) Egypt Financial Services Real Estate Neutral 168 1.2 EGP 0.96 1.04 8% 12 months Eshan Toorabally, CFASWDY.CA Elsewedy Electric Company Egypt Industrials Capital Goods Neutral 747 1.3 EGP 20.0 28.9 44% 12 months Arsalan Mustafa, CFAESRS.CA ezzsteel Egypt Basic Materials Steel Neutral 499 2.6 EGP 5.50 7.97 45% 12 months Matija GergoletAUTO.CA GB Auto Egypt Consumer Cyclicals Automobiles Neutral 513 0.4 EGP 23.8 28.3 19% 12 months Eshan Toorabally, CFAJUFO.CA Juhayna Food Industries Egypt Consumer Staples Food Buy 546 0.9 EGP 4.50 7.82 74% 12 months Matija GergoletMOIL.CA Maridive and Oil Services Egypt Energy Energy: Oil Services Neutral 544 1.0 USD 1.77 2.53 43% 12 months Matija GergoletEMOB.CA MobiNil Egypt Telecom Services Telecom Services Neutral 1,677 1.3 EGP 100 98.0 -2% 12 months Alexander BalakhninOCIC.CA Orascom Construction Industries Egypt Industrials Construction Buy 7,831 6.3 EGP 228 388 70% 12 months Eshan Toorabally, CFAODHN.S Orascom Development Holding AG Egypt Financial Services Real Estate Sell 450 0.8 CHF 16.7 11.7 -30% 12 months Eshan Toorabally, CFAORTE.CA Orascom Telecom Egypt Telecom Services Telecom Services Buy 2,807 5.4 EGP 3.11 4.10 32% 12 months Alexander BalakhninPHDC.CA Palm Hills Developments Egypt Financial Services Real Estate Buy 217 2.2 EGP 1.24 1.97 59% 12 months Eshan Toorabally, CFAOCDI.CA Sixth of October Development and Investment Company (SODIC) Egypt Financial Services Real Estate Neutral 196 0.7 EGP 12.9 18.2 41% 12 months Eshan Toorabally, CFASUCE.CA Suez Cement Company Egypt Industrials Construction Sell 791 0.2 EGP 26.0 24.5 -6% 12 months Eshan Toorabally, CFATMGH.CA Talaat Mostafa Group Holding Company (TMG Holding) Egypt Financial Services Real Estate Buy 1,135 3.5 EGP 3.29 5.04 53% 12 months Eshan Toorabally, CFAETEL.CA Telecom Egypt Egypt Telecom Services Telecom Services Neutral 3,977 2.0 EGP 13.9 16.0 15% 12 months Alexander BalakhninAPOT.AM Arab Potash Company Jordan Basic Materials Agriculture Buy 4,937 0.1 JOD 42.0 69.8 66% 12 months Matija GergoletJOPH.AM Jordan Phosphate Mines Co. Jordan Basic Materials Agriculture Buy 1,438 0.5 JOD 13.6 27.1 99% 12 months Matija GergoletJTEL.AM Jordan Telecom Jordan Telecom Services Wireless Sell 1,961 0.1 JOD 5.56 5.37 -3% 12 months Matija GergoletAGLT.KW Agility The Public Warehousing Company (Agility) Kuwait Transportation Transportation: Logistics Neutral 1,497 2.4 KWD 0.40 0.45 14% 12 months Eshan Toorabally, CFABURG.KW Burgan Bank Kuwait Financial Services Banks Neutral 2,421 2.8 KWD 0.47 0.60 28% 2 years Waleed MohsinCBKK.KW Commercial Bank of Kuwait Kuwait Financial Services Banks Sell 3,684 0.7 KWD 0.80 0.75 -7% 2 years Waleed MohsinKPRO.KW Kipco Kuwait Financial Services Diversified Financials Neutral 1,451 1.2 KWD 0.32 0.39 24% 12 months Arsalan Mustafa, CFAKFIN.KW Kuwait Finance House Kuwait Financial Services Banks Sell 8,403 7.3 KWD 0.90 0.95 6% 2 years Waleed MohsinFOOD.KW Kuwait Food Company (Americana) Kuwait Consumer Cyclicals Restaurants & Pubs Neutral 2,154 0.4 KWD 1.48 1.94 31% 12 months Matija GergoletNBKK.KW National Bank of Kuwait Kuwait Financial Services Banks Neutral 16,561 9.9 KWD 1.16 1.42 22% 2 years Waleed MohsinNMTC.KW Wataniya Telecom Kuwait Telecom Services Wireless Buy 3,540 0.6 KWD 1.94 2.70 39% 12 months Alexander BalakhninZAIN.KW Zain Kuwait Telecom Services Wireless Sell 13,034 9.7 KWD 0.93 0.87 -6% 12 months Alexander BalakhninSOLA.BY Solidere Lebanon Financial Services Real Estate Neutral 2,718 0.7 USD 13.5 17.8 32% 12 months Eshan Toorabally, CFASCM.CS Ciments du Maroc Morocco Industrials Construction Neutral 1,743 0.2 MAD 1,000 1,268 27% 12 months Eshan Toorabally, CFAHOL.CS Holcim Maroc Morocco Industrials Construction Neutral 915 0.3 MAD 1,800 2,674 49% 12 months Eshan Toorabally, CFALAC.CS Lafarge Ciments Morocco Industrials Construction Neutral 3,054 0.6 MAD 1,448 2,157 49% 12 months Eshan Toorabally, CFAIAM.PA Maroc Telecom Morocco Telecom Services Telecom Services Sell 15,207 0.2 EUR 12.8 7.80 -39% 12 months Alexander BalakhninGECS.OM Galfar Engineering & Contracting Oman Industrials Construction Buy 300 0.5 OMR 0.35 0.53 51% 12 months Eshan Toorabally, CFAOCAB.OM Oman Cables Industry Oman Industrials Capital Goods Neutral 169 0.1 OMR 0.70 0.91 31% 12 months Arsalan Mustafa, CFAOTL.OM Oman Telecom Oman Telecom Services Wireless Neutral 2,328 0.6 OMR 1.20 1.63 36% 12 months Matija GergoletNWRS.OM Omani Qatari Telecommunication Company (Nawras) Oman Telecom Services Wireless Neutral 1,053 1.0 OMR 0.62 0.87 40% 12 months Matija GergoletRSC.OM Renaissance Services Oman Energy Energy: Oil Services Neutral 413 1.5 OMR 0.56 0.66 17% 12 months Matija GergoletCOMB.QA Commercial Bank of Qatar Qatar Financial Services Banks Buy 5,579 5.3 QAR 82.1 114 39% 12 months Waleed MohsinDOBK.QA Doha Bank Qatar Financial Services Banks Neutral 3,576 4.2 QAR 63.0 71.3 13% 12 months Waleed MohsinIQCD.QA Industries Qatar Qatar Basic Materials Chemicals Buy 20,496 12.2 QAR 136 240 77% 12 months Matija GergoletQEWC.QA Qatar Electricity and Water Company (QEWC) Qatar Utilities Utilities: Power Neutral 3,845 2.5 QAR 140 177 26% 12 months Matija Gergolet



Exhibit 22 cont'd: MENA stocks, price targets and ratings under our coverage Sorted by country, then by company name alphabetically




cap (US$mn)


target

Potential upside/


QGTS.QA Qatar Gas Transport Qatar Transportation Transportation: Shipping Sell 2,731 4.4 QAR 18.0 17.7 -1% 12 months Matija GergoletQISB.QA Qatar Islamic Bank Qatar Financial Services Banks Sell 5,112 4.8 QAR 82.2 87.5 6% 12 months Waleed MohsinQNBK.QA Qatar National Bank Qatar Financial Services Banks Buy 26,535 8.4 QAR 152 197 30% 12 months Waleed MohsinQANC.QA Qatar National Cement Company Qatar Industrials Construction Neutral 1,471 0.6 QAR 109 134 23% 12 months Eshan Toorabally, CFAQNNC.QA Qatar Navigation Qatar Transportation Transportation: Infrastructure Neutral 2,450 2.1 QAR 77.9 109 40% 12 months Eshan Toorabally, CFAQTEL.QA Qtel Qatar Telecom Services Wireless Buy 7,115 1.8 QAR 147 181 23% 12 months Alexander BalakhninVFQS.QA Vodafone Qatar Qatar Telecom Services Wireless Sell 1,751 0.8 QAR 7.54 5.40 -28% 12 months Matija Gergolet1330.SE Abdullah Abdul Mohsin Al-Khodari Sons Company (Al Khodari) Saudi Arabia Industrials Construction Neutral 584 4.0 SAR 51.5 68.9 34% 12 months Eshan Toorabally, CFA4001.SE Abdullah Al Othaim Markets Company Saudi Arabia Consumer Staples Retail (Consumer Staples) Buy 575 3.2 SAR 95.0 152 60% 12 months Arsalan Mustafa, CFA2330.SE Advanced Petrochemical Company Saudi Arabia Basic Materials Chemicals Buy 1,044 10.6 SAR 27.7 49.2 78% 12 months Arsalan Mustafa, CFA4200.SE Aldrees Petroleum and Transport Services Saudi Arabia Consumer Cyclicals Retail Neutral 279 1.4 SAR 41.8 59.1 41% 12 months Arsalan Mustafa, CFA2280.SE Almarai Company Saudi Arabia Consumer Staples Food Neutral 5,627 6.6 SAR 91.8 123.0 34% 12 months Matija Gergolet1120.SE Al-Rajhi Bank Saudi Arabia Financial Services Banks Neutral 27,496 24.5 SAR 68.8 91.4 33% 12 months Waleed Mohsin1080.SE Arab National Bank Saudi Arabia Financial Services Banks Buy 6,323 1.5 SAR 27.9 40.7 46% 12 months Waleed Mohsin3010.SE Arabian Cement Saudi Arabia Industrials Construction Buy 900 3.8 SAR 42.2 74.5 77% 12 months Eshan Toorabally, CFA1050.SE Banque Saudi Fransi Saudi Arabia Financial Services Banks Buy 8,022 1.7 SAR 41.6 63.0 51% 12 months Waleed Mohsin4300.SE Dar Al Arkan Real Estate Development Company (Dar Al-Arkan) Saudi Arabia Financial Services Real Estate Buy 1,785 11.3 SAR 6.20 10.4 67% 12 months Eshan Toorabally, CFA4220.SE Emaar the Economic City Saudi Arabia Financial Services Real Estate Neutral 1,450 11.1 SAR 6.40 8.67 35% 12 months Eshan Toorabally, CFA7020.SE Etihad Etisalat Co Saudi Arabia Telecom Services Wireless Neutral 9,519 17.2 SAR 51.0 58.8 15% 12 months Alexander Balakhnin4240.SE Fawaz Abdulaziz Alhokair and Company Saudi Arabia Consumer Cyclicals Retail Neutral 1,083 2.5 SAR 58.0 86.1 48% 12 months Arsalan Mustafa, CFA6001.SE Halwani Brothers Saudi Arabia Consumer Staples Food Neutral 270 3.0 SAR 35.5 51.1 44% 12 months Arsalan Mustafa, CFA6002.SE Herfy Saudi Arabia Consumer Cyclicals Restaurants & Pubs Neutral 598 1.2 SAR 74.8 85.5 14% 12 months Matija Gergolet4190.SE Jarir Marketing Company Saudi Arabia Consumer Staples Retail (Consumer Staples) Neutral 2,168 1.8 SAR 203 266 31% 12 months Arsalan Mustafa, CFA2060.SE National Industrialization Company (Tasnee) Saudi Arabia Basic Materials Chemicals Buy 5,900 17.3 SAR 39.7 70.8 78% 12 months Matija Gergolet2002.SE National Petrochemicals Company (Petrochem) Saudi Arabia Basic Materials Chemicals Neutral 2,777 8.5 SAR 21.7 23.6 9% 12 months Matija Gergolet3040.SE Qassim Cement Company Saudi Arabia Industrials Construction Sell 1,620 1.8 SAR 67.5 65.6 -3% 12 months Eshan Toorabally, CFA2380.SE Rabigh Refineries and Petrochemical (Petro Rabigh) Saudi Arabia Basic Materials Chemicals Neutral 5,290 17.8 SAR 22.7 23.3 3% 12 months Matija Gergolet4230.SE Red Sea Housing Saudi Arabia Industrials Construction Buy 333 2.6 SAR 41.6 62.3 50% 12 months Arsalan Mustafa, CFA1010.SE Riyad bank Saudi Arabia Financial Services Banks Neutral 9,419 2.5 SAR 23.6 29.0 23% 12 months Waleed Mohsin2260.SE Sahara Petrochemical Saudi Arabia Basic Materials Chemicals Sell 1,720 14.9 SAR 22.1 21.3 -3% 12 months Matija Gergolet1090.SE SAMBA Saudi Arabia Financial Services Banks Buy 11,374 3.3 SAR 47.4 86.0 81% 12 months Waleed Mohsin2020.SE Saudi Arabia Fertilizer Company (SAFCO) Saudi Arabia Basic Materials Agriculture Neutral 12,232 8.9 SAR 184 210 14% 12 months Matija Gergolet2160.SE Saudi Arabian Amiantit Company Saudi Arabia Industrials Construction Neutral 451 4.8 SAR 14.7 16.6 13% 12 months Arsalan Mustafa, CFA1211.SE Saudi Arabian Mining (Maaden) Saudi Arabia Basic Materials Metals & Mining Neutral 6,388 19.7 SAR 25.9 35.9 39% 12 months Matija Gergolet2010.SE Saudi Basic Industries Corporation (SABIC) Saudi Arabia Basic Materials Chemicals Buy 76,589 161.3 SAR 96 151 58% 12 months Matija Gergolet1060.SE Saudi British Bank Saudi Arabia Financial Services Banks Buy 7,999 1.5 SAR 40.0 55.3 38% 12 months Waleed Mohsin2110.SE Saudi Cable Company Saudi Arabia Industrials Capital Goods Neutral 238 6.1 SAR 11.8 12.4 6% 12 months Arsalan Mustafa, CFA3030.SE Saudi Cement Company (SCC) Saudi Arabia Industrials Construction Neutral 2,580 3.3 SAR 63.3 71.7 13% 12 months Eshan Toorabally, CFA2040.SE Saudi Ceramic Company Saudi Arabia Industrials Construction Buy 917 1.7 SAR 138 216 57% 12 months Eshan Toorabally, CFA2270.SE Saudi Dairy and Foodstuff Company (SADAFCO) Saudi Arabia Consumer Staples Food Buy 372 3.4 SAR 42.9 70.1 63% 12 months Arsalan Mustafa, CFA5110.SE Saudi Electricity Company (SEC) Saudi Arabia Utilities Utilities: Power Sell 14,775 13.4 SAR 13.3 12.5 -6% 12 months Matija Gergolet2250.SE Saudi Industrial Investment Group (SIIG) Saudi Arabia Basic Materials Chemicals Neutral 2,322 8.1 SAR 19.4 28.1 45% 12 months Matija Gergolet2310.SE Saudi International Petrochemicals (Sipchem) Saudi Arabia Basic Materials Chemicals Neutral 1,955 11.6 SAR 20.0 27.1 36% 12 months Arsalan Mustafa, CFA2350.SE Saudi Kayan Saudi Arabia Basic Materials Chemicals Sell 7,519 48.7 SAR 18.8 15.5 -18% 12 months Matija Gergolet1320.SE Saudi Steel Pipe Saudi Arabia Industrials Construction Neutral 339 1.8 SAR 24.9 27.8 12% 12 months Arsalan Mustafa, CFA



Exhibit 22 cont'd: MENA stocks, price targets and ratings under our coverage Sorted by country, then by company name alphabetically




cap (US$mn)


target

Potential upside/


7010.SE Saudi Telecom Company Saudi Arabia Telecom Services Telecom Services Neutral 17,757 9.2 SAR 33.3 39.6 19% 12 months Alexander Balakhnin2050.SE Savola Group Saudi Arabia Consumer Staples Food Buy 3,453 3.5 SAR 25.9 39.8 54% 12 months Matija Gergolet3050.SE Southern Cement Saudi Arabia Industrials Construction Neutral 2,762 0.6 SAR 74.0 91.4 24% 12 months Eshan Toorabally, CFA4030.SE The National Shipping Company of Saudi Arabia (NSCSA) Saudi Arabia Transportation Transportation: Shipping Sell 941 4.9 SAR 11.2 7.11 -37% 12 months Eshan Toorabally, CFA3020.SE Yamama Cement Saudi Arabia Industrials Construction Neutral 2,196 2.2 SAR 61.0 80.4 32% 12 months Eshan Toorabally, CFA3060.SE Yanbu Cement Company Saudi Arabia Industrials Construction Sell 1,652 1.1 SAR 59.0 58.8 0% 12 months Eshan Toorabally, CFA2290.SE Yanbu National Petrochemicals (YANSAB) Saudi Arabia Basic Materials Chemicals Buy 6,659 22.3 SAR 44.4 74.8 68% 12 months Matija Gergolet7030.SE Zain KSA Saudi Arabia Telecom Services Wireless Sell 2,053 16.2 SAR 5.50 3.80 -31% 12 months Alexander Balakhnin2240.SE Zamil Industrial Investment Company Saudi Arabia Industrials Construction Neutral 419 3.8 SAR 26.2 34.6 32% 12 months Arsalan Mustafa, CFAADCB.AD Abu Dhabi Commercial Bank United Arab Emirates Financial Services Banks Sell 4,418 1.1 AED 2.90 2.82 -3% 12 months Waleed MohsinTAQA.AD Abu Dhabi National Energy (Taqa) United Arab Emirates Utilities Utilities: Power Buy 2,015 0.3 AED 1.22 1.94 59% 12 months Matija GergoletADNH.AD Abu Dhabi National Hotels United Arab Emirates Consumer Cyclicals Lodging Neutral 681 0.2 AED 2.50 2.63 5% 12 months Eshan Toorabally, CFAAGTH.AD Agthia Group United Arab Emirates Consumer Staples Food Buy 270 0.1 AED 1.65 2.81 70% 12 months Matija GergoletAIRA.DU Air Arabia United Arab Emirates Transportation Transportation: Airlines Buy 795 2.0 AED 0.63 1.10 76% 12 months Eshan Toorabally, CFAALDR.AD Aldar Properties United Arab Emirates Financial Services Real Estate Neutral 948 6.5 AED 1.03 1.22 18% 12 months Eshan Toorabally, CFAARTC.DU Arabtec Holding United Arab Emirates Industrials Construction Neutral 558 6.6 AED 1.37 1.50 9% 12 months Eshan Toorabally, CFAARMX.DU Aramex United Arab Emirates Transportation Transportation: Logistics Buy 725 1.4 AED 1.82 3.31 82% 12 months Eshan Toorabally, CFADANA.AD Dana Gas United Arab Emirates Energy Energy: Oil Neutral 988 2.5 AED 0.55 0.79 44% 12 months Matija GergoletDPW.DI DP World United Arab Emirates Transportation Transportation: Infrastructure Neutral 8,965 2.9 USD 10.8 14.2 31% 12 months Anton FarlenkovDSI.DU Drake and Scull International United Arab Emirates Industrials Construction Buy 482 2.3 AED 0.83 1.54 87% 12 months Eshan Toorabally, CFADFM.DU Dubai Financial Market United Arab Emirates Financial Services Capital Markets Sell 2,115 2.8 AED 0.97 0.85 -13% 12 months Waleed MohsinDISB.DU Dubai Islamic Bank United Arab Emirates Financial Services Banks Sell 2,079 1.7 AED 2.01 1.89 -6% 12 months Waleed MohsinEMAR.DU Emaar Properties United Arab Emirates Financial Services Real Estate Buy 4,411 10.2 AED 2.66 4.40 65% 12 months Eshan Toorabally, CFADU.DU Emirates Integrated Telecommunications Company (Du) United Arab Emirates Telecom Services Wireless Neutral 3,584 1.8 AED 2.88 3.55 23% 12 months Matija GergoletENBD.DU Emirates NBD United Arab Emirates Financial Services Banks Neutral 4,918 0.4 AED 3.25 4.79 47% 12 months Waleed MohsinETEL.AD Emirates Telecommunications Corporation (Etisalat) United Arab Emirates Telecom Services Wireless Neutral 21,503 4.1 AED 10.0 12.3 23% 12 months Matija GergoletFGB.AD First Gulf Bank United Arab Emirates Financial Services Banks Buy 6,126 2.1 AED 15.0 23.3 55% 12 months Waleed MohsinNBAD.AD National Bank of Abu Dhabi United Arab Emirates Financial Services Banks Buy 8,166 1.0 AED 10.5 15.2 45% 12 months Waleed MohsinRKCE.AD Ras Al Khaimah Ceramic Company (RAK Ceramics) United Arab Emirates Industrials Construction Buy 304 0.1 AED 1.50 2.80 87% 12 months Eshan Toorabally, CFASOR.AD Sorouh Real Estate United Arab Emirates Financial Services Real Estate Buy 693 2.5 AED 0.97 1.73 78% 12 months Eshan Toorabally, CFAUNB.AD Union National Bank United Arab Emirates Financial Services Banks Buy 1,984 0.6 AED 2.92 5.25 80% 12 months Waleed Mohsin



Key data: Screening our MENA non-financials stocks

Exhibit 23: We favour companies with high attractive valuation and strong fundamentals

Summary of MENA non-financials Buy and Sell rated stocks and key screening data and valuation multiples. Quartiles relative to MENA non-financials universe



EBITDA growth CROCI Net debt/

equityEBITDA vs. consensus

Price perf. (US$)

Dividend Yield

EV/ EBITDA

EV/ EBITDA

EV/ EBITDA PE PE PE

Ticker Company name RatingMarket

cap (US$mn)

ADV -12M (US$mn) Sector (Level 3) Ccy Current

pricePrice target

Upside/ (downside)

Quartile 11-15E

Quartile 11-15E

Quartile 11-15E 2012E YTD 2012 2012 2013 5-yr

median 2012 2013 5-yr median

JOPH.AM Jordan Phosphate Mines Co. Buy 1,438 0.5 Agriculture JOD 13.6 27.1 99% 1 2 2 35% -20% 2.9% 4.7 3.7 8.7 6.6 5.6 13.0DSI.DU Drake and Scull International Buy 482 2.3 Engineering & Construction AED 0.83 1.54 87% 2 2 1 -3% -21% 5.2% 4.2 3.4 6.0 8.5 7.4 9.7RKCE.AD Ras Al Khaimah Ceramic Company (RAK Ceramics) Buy 304 0.1 Construction Products AED 1.50 2.80 87% 4 4 3 -38% 0.0% 5.0 4.6 9.5 9.0 7.6 9.8ARMX.DU Aramex Buy 725 1.4 Logistics AED 1.82 3.31 82% 2 1 1 5% -12% 5.1% 6.6 5.7 11.4 10.6 9.1 18.4SOR.AD Sorouh Real Estate Buy 693 2.5 Developers AED 0.97 1.73 78% 1 4 2 -17% -40% 0.0% 6.8 5.5 9.5 5.7 4.9 10.52060.SE National Industrialization Company (Tasnee) Buy 5,900 17.4 Chemicals SAR 39.7 70.8 78% 2 2 3 -2% 23% 5.0% 7.3 6.8 16.1 8.4 7.8 17.32330.SE Advanced Petrochemical Company Buy 1,044 10.7 Plastics SAR 27.7 49.2 78% 4 1 2 11% 2% 10.8% 5.3 4.8 12.3 7.6 7.2 25.8IQCD.QA Industries Qatar Buy 20,496 12.3 Diversified QAR 136 240 77% 2 1 1 14% -2% 6.7% 6.3 4.8 10.3 7.9 6.5 11.13010.SE Arabian Cement Buy 900 3.8 Building Materials SAR 42.2 74.5 77% 1 3 3 4% 23% 4.8% 6.8 6.6 11.4 9.2 9.0 12.7AIRA.DU Air Arabia Buy 795 2.0 Airlines AED 0.63 1.10 76% 1 3 2 -12% -24% 12.5% 6.6 5.7 10.0 10.4 6.3 14.7JUFO.CA Juhayna Food Industries Buy 546 0.9 Food EGP 4.50 7.82 74% 2 1 2 -9% -28% 2.2% 7.4 6.3 7.4 13.6 11.0 16.1OCIC.CA Orascom Construction Industries Buy 7,831 6.3 Multi-Industry EGP 228 388 70% 2 2 2 8% -23% 6.4% 4.7 3.7 10.0 9.4 7.8 16.2AGTH.AD Agthia Group Buy 270 0.1 Packaged & Manufacturing AED 1.65 2.81 70% 3 3 2 -9% -23% 2.9% 6.8 5.5 14.7 10.6 9.0 26.32290.SE Yanbu National Petrochemicals (YANSAB) Buy 6,659 22.3 Chemicals SAR 44.4 74.8 68% 3 1 3 6% -7% 4.5% 6.4 5.1 12.1 7.2 6.1 85.74300.SE Dar Al Arkan Real Estate Development Company (Dar Al-Arkan) Buy 1,785 11.3 Developers SAR 6.20 10.4 67% 3 4 3 -24% -31% 0.0% 7.8 6.2 12.1 5.7 4.6 10.6APOT.AM Arab Potash Company Buy 4,937 0.1 Agriculture JOD 42.0 69.8 66% 1 1 1 21% -3% 6.0% 6.7 5.9 11.6 10.1 9.2 17.7EMAR.DU Emaar Properties Buy 4,411 10.3 Developers AED 2.66 4.40 65% 4 4 2 11% -25% 3.0% 4.5 4.6 8.0 8.2 8.6 10.62270.SE Saudi Dairy and Foodstuff Company (SADAFCO) Buy 372 3.4 Packaged & Manufacturing SAR 42.9 70.1 63% 3 2 1 1% 7.0% 5.6 5.3 9.6 10.3 9.8 9.64001.SE Abdullah Al Othaim Markets Company Buy 575 3.2 Supermarkets SAR 95.0 152 60% 1 1 3 16% 22% 4.2% 7.7 6.2 8.9 9.9 8.6 10.6TAQA.AD Abu Dhabi National Energy (Taqa) Buy 2,015 0.3 IPPs AED 1.22 1.94 59% 3 3 4 -18% 8.3% 5.2 4.9 8.6 5.0 4.8 12.6PHDC.CA Palm Hills Developments Buy 217 2.3 Developers EGP 1.24 1.97 59% 3 4 3 -66% -81% 0.0% 5.9 5.3 10.7 4.9 4.0 10.82010.SE Saudi Basic Industries Corporation (SABIC) Buy 76,589 161.7 Chemicals SAR 95.8 151 58% 3 1 2 2% -9% 5.2% 7.5 6.1 10.8 10.3 8.7 16.92040.SE Saudi Ceramic Company Buy 917 1.7 Construction Products SAR 138 216 57% 3 2 3 -1% -7% 3.4% 9.7 8.1 13.0 11.6 9.7 15.9BTEL.BH Bahrain Telecom Buy 1,505 0.1 Telecom Wireless BHD 0.39 0.61 55% 4 2 1 -22% -23% 10.2% 2.6 2.4 5.8 8.1 7.7 9.42050.SE Savola Group Buy 3,453 3.5 Packaged & Manufacturing SAR 25.9 39.8 54% 2 3 3 -7% -19% 4.8% 4.8 4.1 15.2 9.6 8.6 31.9TMGH.CA Talaat Mostafa Group Holding Company (TMG Holding) Buy 1,135 3.6 Developers EGP 3.29 5.04 53% 2 4 2 -51% -62% 0.0% 9.3 7.2 12.8 9.6 7.0 14.6GECS.OM Galfar Engineering & Contracting Buy 300 0.5 Engineering & Construction OMR 0.35 0.53 51% 2 3 4 -22% -38% 3.3% 6.5 6.7 8.9 16.0 12.2 22.84230.SE Red Sea Housing Buy 333 2.6 Infrastructure SAR 41.6 62.3 50% 2 2 3 -23% 4.8% 7.4 6.9 11.0 10.0 9.2 15.7LAC.CS Lafarge Ciments Neutral 3,054 0.6 Building Materials MAD 1448 2157 49% 3 1 2 5% -31% 4.9% 8.7 7.6 12.0 14.4 12.4 18.8HOL.CS Holcim Maroc Neutral 915 0.3 Building Materials MAD 1800 2674 49% 4 2 3 -1% -32% 5.1% 7.9 7.1 10.1 15.9 13.4 18.24240.SE Fawaz Abdulaziz Alhokair and Company Neutral 1,083 2.5 Retail SAR 58.0 86.1 48% 1 1 3 16% 35% 4.3% 8.0 8.2 11.1 10.5 12.2 13.32250.SE Saudi Industrial Investment Group (SIIG) Neutral 2,322 8.1 Chemicals SAR 19.4 28.1 45% 1 3 4 48% -11% 5.2% 4.7 3.6 27.9 7.2 6.8 22.5ESRS.CA ezzsteel Neutral 499 2.6 Steel EGP 5.50 7.97 45% 2 3 4 -7% -73% 11.9% 4.3 3.3 8.0 4.2 3.2 11.7SWDY.CA Elsewedy Electric Company Neutral 747 1.3 Electrical Equipment EGP 20.0 28.9 44% 3 3 4 6% -53% 0.0% 7.0 6.2 10.4 6.7 5.8 12.56001.SE Halwani Brothers Neutral 270 3.0 Packaged & Manufacturing SAR 35.5 51.1 44% 2 2 2 -11% 4.2% 8.0 6.8 8.4 11.5 10.0 13.1DANA.AD Dana Gas Neutral 988 2.5 E&P AED 0.55 0.79 44% 2 3 2 15% -25% 0.0% 2.3 1.6 17.2 5.5 4.4 30.9MOIL.CA Maridive and Oil Services Neutral 544 1.0 Oil Services USD 1.77 2.53 43% 2 2 3 13% -50% 6.7% 6.2 4.9 10.8 7.4 6.0 12.94200.SE Aldrees Petroleum and Transport Services Neutral 279 1.4 Retail SAR 41.8 59.1 41% 3 1 2 -6% -13% 4.8% 7.3 6.8 11.1 10.5 9.7 17.2OCDI.CA Sixth of October Development and Investment Company (SODIC) Neutral 196 0.7 Developers EGP 12.9 18.2 41% 1 1 1 -79% -71% 0.6% 7.7 3.3 21.2 15.6 7.2 26.6QNNC.QA Qatar Navigation Neutral 2,450 2.1 Infrastructure QAR 77.9 109 40% 1 4 2 29% -17% 8.9% 2.2 1.7 5.3 6.8 6.4 14.3NWRS.OM Omani Qatari Telecommunication Company (Nawras) Neutral 1,053 1.0 Telecom Wireless OMR 0.62 0.87 40% 3 1 2 2% -22% 6.5% 4.9 4.2 6.0 7.6 6.7 9.7NMTC.KW Wataniya Telecom Buy 3,540 0.6 Telecom Wireless KWD 1.94 2.70 39% 2 1 1 3% 4% 3.4% 3.5 3.0 7.4 9.4 7.7 12.41211.SE Saudi Arabian Mining (Maaden) Neutral 6,388 19.8 Metals & Mining SAR 25.9 35.9 39% 1 4 4 -26% 19% 0.0% 17.2 10.4 74.5 33.6 14.7 54.4OTL.OM Oman Telecom Neutral 2,328 0.6 Telecom Wireless OMR 1.20 1.63 36% 4 1 1 13% -7% 8.4% 3.6 3.3 4.6 7.2 7.0 8.82310.SE Saudi International Petrochemicals (Sipchem) Neutral 1,955 11.6 Chemicals SAR 20.0 27.1 36% 2 2 3 19% -21% 5.0% 8.1 7.1 15.3 10.0 8.1 18.14220.SE Emaar the Economic City Neutral 1,450 11.1 Developers SAR 6.40 8.67 35% 1 4 3 -4258% -10% 0.0% 36.1 40.7 110.3 208.4 556.02280.SE Almarai Company Neutral 5,627 6.7 Packaged & Manufacturing SAR 91.8 123 34% 3 3 4 -2% -18% 2.5% 11.4 10.5 13.7 13.8 13.0 17.41330.SE Abdullah Abdul Mohsin Al-Khodari Sons Company (Al Khodari) Neutral 584 4.0 Engineering & Construction SAR 51.5 68.9 34% 3 1 4 9% -4% 4.2% 8.0 7.1 8.1 10.5 9.2 9.4CCAP.CA Citadel Capital Neutral 453 3.1 Multi-Sector Holdings EGP 3.11 4.12 32% 1 4 2 -158% -67% 0.0% 37.7 39.8 165.8 87.2 20.52240.SE Zamil Industrial Investment Company Neutral 419 3.8 Infrastructure SAR 26.2 34.6 32% 3 3 4 -1% -25% 5.7% 9.0 8.4 15.0 10.1 8.9 17.5ORTE.CA Orascom Telecom Buy 2,807 5.4 Telecom Services EGP 3.11 4.10 32% 2 1 4 11% -30% 9.6% 1.9 1.4 6.3 5.1 3.8 18.13020.SE Yamama Cement Neutral 2,196 2.2 Building Materials SAR 61.0 80.4 32% 4 1 1 -4% 18% 6.7% 8.1 7.7 10.9 12.6 12.1 14.6SOLA.BY Solidere Neutral 2,718 0.7 Developers USD 13.5 17.8 32% 3 4 3 161% -25% 4.7% 14.8 12.7 17.7 17.5 14.5 21.0DPW.DI DP World Neutral 8,965 2.9 Infrastructure USD 10.8 14.2 31% 3 4 3 -7% -14% 2.4% 10.9 10.2 186.1 16.5 13.5 490.7FOOD.KW Kuwait Food Company (Americana) Neutral 2,154 0.4 Restaurants KWD 1.48 1.94 31% 3 2 3 4% -8% 4.4% 5.1 4.8 6.6 11.0 9.8 17.3




Exhibit 23 cont'd: Summary of MENA non-financials Buy and Sell rated stocks and key screening data and valuation multiples. Quartiles relative to MENA non-financials universe



EBITDA growth CROCI Net debt/

equityEBITDA vs. consensus

Price perf. (US$)

Dividend Yield

EV/ EBITDA

EV/ EBITDA

EV/ EBITDA PE PE PE

Ticker Company name RatingMarket

cap (US$mn)

ADV -12M (US$mn) Sector (Level 3) Ccy Current

pricePrice target

Upside/ (downside)

Quartile 11-15E

Quartile 11-15E

Quartile 11-15E 2012E YTD 2012 2012 2013 5-yr

median 2012 2013 5-yr median

4190.SE Jarir Marketing Company Neutral 2,168 1.8 Retail SAR 203 266 31% 1 1 2 10% 35% 5.4% 12.6 10.2 14.8 13.5 11.0 15.5SCM.CS Ciments du Maroc Neutral 1,743 0.2 Building Materials MAD 1000 1268 27% 3 3 2 -11% -16% 3.0% 9.4 7.5 10.9 16.5 12.9 19.3QEWC.QA Qatar Electricity and Water Company (QEWC) Neutral 3,845 2.5 IPPs QAR 140 177 26% 3 2 4 5% 10% 6.4% 8.9 8.2 12.4 9.2 8.5 10.2OCAB.OM Oman Cables Industry Neutral 169 0.1 Electrical Equipment OMR 0.73 0.91 26% 3 3 4 20% -38% 5.5% 8.8 8.0 12.3 6.6 6.3 14.3KPRO.KW Kipco Neutral 1,451 1.2 Multi-Sector Holdings KWD 0.32 0.39 24% 4 4 1 -22% 6.5% 0.8 10.6 9.4 15.23050.SE Southern Cement Neutral 2,762 0.6 Building Materials SAR 74.0 91.4 24% 4 1 1 -3% 21% 6.9% 8.6 8.3 11.0 13.1 12.9 14.3DU.DU Emirates Integrated Telecommunications Company (Du) Neutral 3,584 1.9 Telecom Wireless AED 2.88 3.55 23% 1 1 2 4% 1% 3.5% 3.5 3.0 11.7 11.1 9.3 25.9QANC.QA Qatar National Cement Company Neutral 1,471 0.6 Building Materials QAR 109 134 23% 4 2 1 -11% 2% 4.6% 9.5 7.6 10.6 12.4 10.2 13.8ETEL.AD Emirates Telecommunications Corporation (Etisalat) Neutral 21,503 4.1 Telecom Wireless AED 9.99 12.3 23% 4 2 1 -2% -7% 5.8% 3.6 3.0 5.7 10.6 9.7 13.5QTEL.QA Qtel Buy 7,115 1.8 Telecom Wireless QAR 147 181 23% 3 2 3 7% -1% 3.6% 4.7 4.0 7.1 7.0 6.1 10.2AUTO.CA GB Auto Neutral 513 0.4 Automobiles EGP 23.8 28.3 19% 2 2 4 -17% -47% 0.0% 7.2 5.7 9.9 13.1 9.3 14.77010.SE Saudi Telecom Company Neutral 17,757 9.2 Telecom Services SAR 33.3 39.6 19% 4 3 3 0% -22% 7.5% 4.6 4.2 7.6 7.5 6.8 10.9ALDR.AD Aldar Properties Neutral 948 6.5 Developers AED 1.03 1.22 18% 1 4 4 -24% -55% 0.0% 20.9 15.6 51.5 16.2 7.1 56.9RSC.OM Renaissance Services Neutral 413 1.5 Oil Services OMR 0.56 0.66 17% 4 3 4 -3% -49% 3.5% 5.3 4.3 6.0 5.7 4.2 8.37020.SE Etihad Etisalat Co Neutral 9,519 17.2 Telecom Wireless SAR 51.0 58.8 15% 3 1 2 -5% -8% 7.8% 4.9 4.4 7.9 7.1 6.7 10.2ETEL.CA Telecom Egypt Neutral 3,977 2.0 Telecom Services EGP 13.9 16.0 15% 4 4 1 6% -25% 9.9% 1.2 1.1 3.4 7.9 7.2 9.62020.SE Saudi Arabia Fertilizer Company (SAFCO) Neutral 12,232 8.9 Agriculture SAR 184 210 14% 4 1 1 15% 15% 8.2% 9.2 8.5 10.3 10.9 10.0 12.46002.SE Herfy Neutral 598 1.2 Restaurants SAR 74.8 85.5 14% 2 1 1 4% 5% 3.7% 10.0 8.2 11.9 13.3 11.2 15.5AGLT.KW Agility The Public Warehousing Company (Agility) Neutral 1,497 2.4 Logistics KWD 0.40 0.45 14% 2 4 1 -18% -23% 5.0% 3.0 1.8 5.4 9.9 6.7 8.43030.SE Saudi Cement Company (SCC) Neutral 2,580 3.3 Building Materials SAR 63.3 71.7 13% 3 2 2 -5% 27% 6.7% 10.2 9.1 12.5 12.7 11.4 13.82160.SE Saudi Arabian Amiantit Company Neutral 451 4.8 Infrastructure SAR 14.7 16.6 13% 4 4 3 -17% -29% 10.2% 5.8 5.8 7.0 11.5 11.3 17.31320.SE Saudi Steel Pipe Neutral 339 1.8 Infrastructure SAR 24.9 27.8 12% 2 3 1 -30% 3% 2.0% 8.8 6.1 10.1 13.8 10.4 17.6ARTC.DU Arabtec Holding Neutral 558 6.7 Engineering & Construction AED 1.37 1.50 9% 4 2 1 -5% -13% 0.0% 5.5 4.8 5.8 10.3 6.8 7.62002.SE National Petrochemicals Company (Petrochem) Neutral 2,777 8.5 Chemicals SAR 21.7 23.6 9% 1 3 4 31% -4% 1.9% 8.9 6.9 10.6 8.1EGTS.CA Egyptian Resorts Company (ERC) Neutral 168 1.2 Developers EGP 0.96 1.04 8% 1 3 1 -30% 0.0% 3.9 6.62110.SE Saudi Cable Company Neutral 238 6.1 Electrical Equipment SAR 11.8 12.4 6% 1 4 4 -26% -16% 0.0% 9.2 7.3 10.9 8.9 7.0 22.0ADNH.AD Abu Dhabi National Hotels Neutral 681 0.2 Hotels AED 2.50 2.63 5% 1 4 3 6% -17% 15.0% 7.8 7.8 6.6 6.9 6.7 10.92380.SE Rabigh Refineries and Petrochemicals (Petro Rabigh) Neutral 5,290 17.9 Chemicals SAR 22.7 23.3 3% 2 3 4 -5% 1% 0.0% 8.9 7.3 23.6 10.0 8.43060.SE Yanbu Cement Company Sell 1,652 1.1 Building Materials SAR 59.0 58.8 0% 2 3 2 6% 38% 6.0% 10.8 9.5 10.1 12.1 11.0 12.2QGTS.QA Qatar Gas Transport Sell 2,731 4.4 Shipping QAR 18.0 17.7 -1% 4 3 4 -6% -10% 6.5% 11.0 10.3 20.4 11.0 9.7 82.5EMOB.CA MobiNil Neutral 1,677 1.3 Telecom Services EGP 100 98 -2% 4 2 4 2% -41% 6.1% 4.2 3.7 6.7 14.7 10.2 9.93040.SE Qassim Cement Company Sell 1,620 1.8 Building Materials SAR 67.5 65.6 -3% 4 1 1 -2% 8% 7.1% 10.2 10.2 9.9 12.8 12.8 12.32260.SE Sahara Petrochemical Sell 1,720 14.9 Chemicals SAR 22.1 21.3 -3% 1 4 4 -16% -7% 2.3% 9.6 7.7 10.3 8.9 35.4JTEL.AM Jordan Telecom Sell 1,961 0.1 Telecom Wireless JOD 5.56 5.37 -3% 4 2 1 3% 3% 6.7% 6.4 6.1 5.7 14.6 13.5 13.95110.SE Saudi Electricity Company (SEC) Sell 14,775 13.4 Electric Utilities SAR 13.3 12.5 -6% 2 4 4 -3% -5% 5.3% 9.1 8.0 10.9 16.3 11.6 34.4SUCE.CA Suez Cement Company Sell 791 0.2 Building Materials EGP 26.0 24.5 -6% 4 3 1 -39% -34% 4.6% 4.7 4.2 4.5 12.3 10.0 6.6ZAIN.KW Zain Sell 13,034 9.7 Telecom Wireless KWD 0.93 0.87 -6% 4 2 1 -1% -38% 5.9% 5.8 5.2 7.7 10.1 9.5 11.12350.SE Saudi Kayan Sell 7,519 48.8 Chemicals SAR 18.8 15.5 -18% 1 3 4 -34% -2% 4.0% 15.0 9.1 40.0 10.5 68.1VFQS.QA Vodafone Qatar Sell 1,751 0.8 Telecom Wireless QAR 7.54 5.40 -28% 1 4 2 -27% -9% 0.0% 20.2 12.3 ODHN.S Orascom Development Holding AG Sell 450 0.8 Developers CHF 16.7 11.7 -30% 1 4 3 -46% -70% 0.0% 16.2 10.1 12.0 29.8 12.7 19.57030.SE Zain KSA Sell 2,053 16.3 Telecom Wireless SAR 5.50 3.80 -31% 1 4 4 -27% -29% 0.0% 15.8 11.2 84.5 4030.SE The National Shipping Company of Saudi Arabia (NSCSA) Sell 941 4.9 Shipping SAR 11.2 7.11 -37% 4 4 4 -3% -36% 3.6% 10.3 10.2 10.5 14.1 12.9 14.3IAM.PA Maroc Telecom Sell 15,207 0.2 Telecom Services EUR 12.8 7.80 -39% 4 2 3 -1% -4% 6.8% 8.0 8.0 8.0 14.8 14.9 15.0MENA median 32% -2% -16% 4.8% 7.3 6.2 10.5 10.3 9.0 14.6




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MENA Economy



MENA economic overview: A meaningful economy, too big to ignore

MENA is a fast-growing US$2.4 trillion economy

The Middle East and North Africa region (MENA) has a population of c.400mn, representing 6% of the global population, and a

combined GDP of US$2.4 trillion, which exceeds any BRIC country except China. Including Turkey, which is conventionally not

included in MENA, the population of the regional countries in our coverage would approach 500mn with a combined GDP of

US$3 trillion. The MENA region contains large oil & gas reserves, and the utilization of oil revenue for the development of the non-

oil private sector represents significant growth potential, in our view. Although the MENA region is far from homogenous, Arab

culture and common language is an important common denominator for most countries in the group.

Exhibit 24: About 400mn people live in the region, with significant difference in wealth levels MENA countries ranked by GDP/capita. GCC is highlighted blue

Source: IMF, Goldman Sachs Global ECS Research.

GDP/Capita Ranking

6

15

107

1

2

12

9

4

11

3

13

814

5

13. SyriaGDP 3

Population 21

15. IraqGDP 3

Population 33

12. IranGDP 4

Population 76

13. Tunisia

4. BahrainGDP 22

Population 1

1. QatarGDP 89

Population 2

2. UAEGDP 49

Population 5

5. OmanGDP 19

Population 3

17. YemenGDP 1

Population 25

6. Saudi ArabiaGDP 18

Population 28

11. JordanGDP 5

Population 6

7. LebanonGDP 11

Population 4

14. EgyptGDP 3

Population 79

8. LibyaGDP 11

Population 7

10. TunisiaGDP 5

Population 11

9. AlgeriaGDP 5

Population 37

16. MoroccoGDP 3

Population 32

GDP/ Capita, 000 US$

Population (mn)

GDP/Capita Ranking 3. KuwaitGDP 35

Population 4

16

17



The GCC makes up only 10% of the MENA population, yet almost 50% of GDP

The richest part of the MENA region is the Gulf Cooperative Council (GCC), comprising the oil-exporting countries of Saudi Arabia,

United Arab Emirates, Kuwait, Qatar, Oman and Bahrain, which in 2010 had only 42mn people, representing c.10% of the MENA

total, yet a combined GDP of US$1.1 trillion with Saudi Arabia contributing approximately half of the total. The oil & gas sector

continues to be a significant component of GDP, ranging from 29% in Bahrain to 60% for Kuwait. Within the MENA region, we cover

listed equities in the six GCC countries, Egypt, Jordan, Lebanon and Morocco.

High oil prices provide resilient support to GCC, while domestic consumption is the key driver for other economies

Most countries in MENA had largely recovered from the 2008 global financial crisis by the end of 2010. For the GCC countries,

growth reached pre-crisis levels, exceeding 5%, supported by high international oil prices, although the pace has been slower than

in the boom years of 2006-08. Since 2000, the GCC real GDP has expanded by an annual average rate of 5.4%. In the North African

markets (where we aggregate Egypt, Jordan, Lebanon and Morocco), due to the relatively domestic-focused nature of the

economies, where consumption remained strong, real GDP only slowed to 5% in 2010 from an average of 6.5% over the previous

three years (2006-08).

Exhibit 25: MENA is a US$2.4 trillion economy, the seventh largest in the

world… 2010 GDP in US$ bn

Exhibit 26: …and most MENA countries are forecast to grow faster than the

average global growth rate Real GDP growth rates

Source: IMF for MENA countries, Goldman Sachs Global ECS Research for other countries.


2,365

2,099

1,729

1,483

1,090

715

448 407 302

215 131 127 81 91 58 39 26 23 0

500

1000

1500

2000

2500

Men

a

Braz

il

Indi

a

Rus

sia

GC

C to

tal

Turk

ey

Saud

i Ar

abia

Iran

UAE

Egyp

t

Kuw

ait

Qat

ar

Iraq

Mor

occo

Om

an

Leba

non

Jord

an

Bahr

ain

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011E 2012E

BRIC

GCCNorth Africa

EU 27

TurkeyUS



Slowdown in 2011 in several countries due to political unrest, yet overall region still growing above global average

In early 2011, political unrest resulted in political change in Egypt, with some spill-over impact on several neighbouring countries.

The IMF estimates growth in Egypt will now average 1% and 3% in 2011 and 2012, respectively, as domestic demand picks up,

buoyed by government consumption. The current IMF estimates are a significant revision downwards from the earlier estimate of

5.5% growth in 2011. Jordan and Lebanon’s growth is also estimated to be affected by the slowdown in Egypt due to significant

trade links (Jordan depends on Egyptian gas for 60% of its electricity production, while Egypt is Lebanon’s main export market for

processed foods, fruits and vegetables). Qatar in the GCC is expected to continue to have the highest growth of 6% in 2012,

although slowing from the double-digit growth witnessed in 2010-11 as the new liquefied natural gas (LNG) facilities boosted LNG

volumes. Overall in the GCC, spurred by higher government spending, growth is estimated to average 4% in 2012. In the global

context, the average MENA growth (of countries we are covering listed equities) of 4% will be above the global average of a forecast

3.5% in 2012.

Exhibit 27: MENA 2012 growth screens as attractive... 2012E GDP growth rates

Exhibit 28: ...with a strong outlook in the medium-term as well 2013-15E average GDP growth rates


Source: IMF

Oil prices and government spending to drive GCC GDP in the medium term

The oil & gas sector continues to be a significant component of the GCC GDP, ranging from 29% in Bahrain to 60% for Kuwait. Eight

of the 12 Organization of Petroleum Exporting Countries (OPEC) members come from the MENA region: four of the six GCC

countries (Saudi Arabia, UAE, Kuwait and Qatar), as well as Algeria, Iran, Iraq and Libya, are members of OPEC. Saudi Arabia, UAE

and Kuwait are also among the few countries that have some spare oil capacity, which we estimate at c.2mboe/day. According to

OPEC, the organization members control 81% of global oil reserves, highlighting that the evolution of the energy sector and its

prices will continue to be a key driver of growth for the entire region.

7.2%

6.0%

4.6% 4.5%4.1% 3.8% 3.6% 3.6% 3.6% 3.5% 3.5%

3.0% 2.9%

1.6% 1.5%

0.1%0%

1%

2%

3%

4%

5%

6%

7%

8%

BRIC

S

Qat

ar

Mor

occo

Kuw

ait

GC

C a

vera

ge

UAE

Om

an

Bahr

ain

Saud

i Ara

bia

Leba

non

Wor

ld

Egyp

t

Jord

an US

Turk

ey

Euro

-zon

e

5.4%5.2%

4.9%4.4% 4.4% 4.2% 4.2% 4.1% 4.0% 4.0%

0

0.01

0.02

0.03

0.04

0.05

0.06

Egyp

t

Mor

occo

Kuw

ait

Saud

i Ar

abia

Bahr

ain

UAE

Qat

ar

Om

an

Jord

an

Leba

non



Exhibit 29: The oil & gas sector makes up a significant portion of GCC GDP

Oil & Gas % of GDP (LHS) and Oil & Gas global production share (RHS)

Exhibit 30: Large proven oil reserves mean oil sector will continue to be an

important driver in the medium term World proven oil reserves (billion barrels) 2010

Source: National sources, BP, Goldman Sachs Research estimates.

Source: OPEC.

Current oil windfall more directed to infrastructure spending than sovereign wealth funds accumulation

The GCC has historically directed oil windfall gains to its sovereign wealth funds (SWF) and to the development of the non-oil sector.

The aggregated SWF assets under management currently exceed 100% of regional GDP. With the onset of regional political unrest,

the GCC states have directed greater spending domestically. We estimate there are currently US$2 trillion worth of ongoing planned

projects spread across the infrastructure, real estate, utilities and energy sectors (US$0.5 trillion for energy), in addition to a number

of social measures announced. This additional spending is forecast by the World Bank to push the breakeven oil price (the oil price

required for countries to reach a fiscal balance) for the GCC countries to US$72/barrel in 2011 from US$57/barrel in 2009, still below

current prices. The new spending will be going towards current expenditure (social security) as well as domestic investment which

may leaves fewer funds available for the SWF and pose some upside risk to inflation. The reconstruction of and large investments in

the energy sector in Iraq (with the country aiming to increase oil production from the current 3mboe/day to 12mboe/day over the

medium term, matching the current capacity of Saudi Arabia) and Qatar winning the 2022 World Cup bid (for which the country

plans to invest US$60 bn over the next 10 years) are also noteworthy.

GS estimates an oil price of US$120/bbl and US$130/bbl in 2012 and 2013, respectively, which in our view represents upside risks to

the IMF’s GCC GDP estimate, which assumes an oil price of US$103 and US$100 for 2012 and 2013, respectively.

3.2% 3.2%

12.0%

1.5%1.0%

3.2%

0.0%

5.3%

0.9%0.1%

0%

2%

4%

6%

8%

10%

12%

14%

0%

10%

20%

30%

40%

50%

60%

70%

Kuw

ait

Iraq

Saud

i

Qat

ar

Om

an

UAE

Bahr

ain

Iran

Egyp

t

Turk

ey

Oil and Gas as a% of GDP Oil and Gas % of global production

297

265

102 9879

25 246 4

0

50

100

150

200

250

300

350

Ven

ezue

la

Sau

di A

rabi

a

Kuw

ait

UA

E

Rus

sia

Qat

ar US

Om

an

Egy

pt



Exhibit 31: Higher oil prices will boost GCC current account surplus…

2012E current account surplus

Exhibit 32: …but higher infrastructure spending will boost domestic

investment and capital goods imports… Current planned projects in the GCC by type and amount

Source: IMF.

Source: Zawya projects.

Exhibit 33: …this may mean less saving through the SWFs, but these already

have assets of c.100% of GDP % 2011 GDP

Exhibit 34: Higher government expenditures (infrastructure and current

expenditures) will also push the breakeven oil price Breakeven oil price for the GCC to reach a fiscal balance

Source: SWF Institute, IMF.

Source: World Bank.

33% 33%

21% 21%

15%13%

10%

2% 0% -2% -5% -5%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%Ku

wai

t

Qat

ar

GC

C

aver

age

Saud

i Ar

abia

Om

an

Bahr

ain

UAE

BRIC

S

EU

Egyp

t

Turk

ey

Mor

occo

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Alternative energy Industry Infrastructure Oil and gas

Petrochemicals Power and water Real estate

US$ 122b US$ 207b US$ 119b US$ 207b US$ 578b US$ 790b

-100%

-50%

0%

50%

100%

150%

200%

250%

UAE Kuwait Saudi Qatar

FX reserves SWF Assets External debt

45

55

70 7280 80

100

0

20

40

60

80

100

120

Kuw

ait

Qat

ar

UAE

GC

C

avve

rage

Saud

i Ar

abia

Om

an

Bahr

ain



Exhibit 35: Saudi Arabia is estimated to have the highest social stimulus package as a % of GDP Summary of social measure in the MENA countries

Source: World Bank, Goldman Sachs Global ECS Research.

Exhibit 36: 2022 World Cup-related infrastructure spending is estimated at US$60 bn US$ bn

Source: Factiva, Reuters.

Country Wages Subsidies Tax cuts Transfers Infrastructure Jobs Total cost % of 2010 GDP

BahrainIncrease in food subsidies, including flour and meat by

44 mn dinars

25% cut in housing instalment payments US$ 2600 per family

Constructuion of public housing by at least 6000 units per year

20,000 new jobs at Ministry of Interior

KuwaitFree food for 13 months through discount price

program

US$ 3600 grant to all Kuwaiti citizens

US$4 billion forconstruction of new

housing.

OmanUnemployment benefit program of

US$ 390 per month; US$ 520 min. wage

Pay subsidies and fix the prices of essential

commoditiesDevelopment plan

A new public sectoremployment program

covering 50,000citizens.

USD 11bn 20% of GDP

Saudi Arabia

Unemployment allowance wasset at SR 2000 (US$530) per

month, and a SR3000(US$800) per month.

minimum wage was instituted for nationals working in the

public sector.

US$300 mn in grants for charities and

needy students, a bonus payment of

2 months‘ salary/stipend to

all public employees and scholarship

students.

0.5 mn newhouses to be built

with budgetallocation of SR250

billion

Add 60,000 newsecurity jobs in theMinistry of Interior;

add 500 new jobs atMinistry of

Commerce andIndustry.

USD 130bn 29% of GDP

QatarGross salaries of all Qatari public sector employees raised by 60% and defence personnel by 120%

Jordan

Raised the salaryof civil servants,the military, andretirees by JD 20(US$28) a month

for a cost ofUS$233 mn.

New subsidies ofUS$550 mn; allocating

transfers to the state-runconsumer corporations to

subsidize the price of sugar, rice and frozen

poultry, and to implement income generating projects

in poor areas.

Total of US$169mn. Suspending

the special sales tax on kerosene and

diesel; reducing thetax on gasoline from 18

to 12 %.

Total of US$57 mn,Allocating transfers to

the state-runconsumer corporations to subsidize the price of sugar, rice and frozen

poultry, and implementing

incomegenerating projects in poor

areas.

USD0.5bn 2.1% of GDP

Egypt15 % increase in wages and

pensions (LE2 bn or 0.17 % ofGDP)

Increase in subsidy of about 0.2 % of GDP due to the rise in global food prices (LE2.8

bn)

Addition of 150,000 families to the socialsolidarity program

(LE100 mn)

To permanently hirethe temporary

contract employees(about 450,000)

USD 2bn 0.8% of GDP.

Morocco

Injected approximatelyUS$ 2 bn in subsidies to

curb price hikes forstaples.

Set up an employment program for educatedunemployed. The new

budget law hasprovided 18,802 new

job positions.

World cup related projects Estimated value (US$-bn)Mass rapid transit 23Spending on road network, hotels and tourism 17New airport 11New deep-water seaport 6Construction and renovation of stadiums 3Total 60



Strong demographics to support long-term growth for the entire MENA region

Exhibit 37: MENA has a favourable demographic profile…

Population size mn (LHS) and population growth (%) RHS

Exhibit 38: …and much better than most BRIC countries

% of population <15 years, 2011

Source: IMF.

Source: IMF.

2% population growth and large young population

MENA has a favourable demographic profile with an expected population growth of c.2% in the coming years (IMF forecast) and a

large segment of the population below the age of 15 years. This will lead to a falling dependency ratio over the coming decades, and

a plentiful supply of labour, as an increasing majority of the population will be of working age. In terms of population size, Egypt

and Iran are the most populous countries, with populations of c.80 mn and c.75 mn, respectively. The GCC combined has a

population of 42 mn, with Saudi (27 mn) being the most populous and Bahrain (1.1 mn) being the least.

Literacy rates and women participation in the workforce are areas for potential productivity improvement

Another aspect of the MENA region is that some countries still have relatively low literacy rates (vs. US and European levels of 99%).

While high literacy rates in themselves do not guarantee economic development, this is normally a pre-requisite to developing

human capital further, contributing to higher productivity. Increasing female labour force participation would also have a marked

positive effect on output. Morocco and Egypt have the lowest literacy rates within the MENA region in our coverage, while also

having the lowest GDP per capita in the region. Within the GCC states, Saudi Arabia has the lowest literacy and female participation

rates. Increased investment in education should allow the country to depend less on an expatriate workforce (c.20% of the overall

population) and more on nationals, and thereby reduce overall unemployment, which at 11% is currently the highest among the

GCC peers.

1.7%

1.2%

1.7%

2.2%

0.9%

2.2% 2.3%

3.0%

1.3%

2.0%

3.1%

4.0%

2.0%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

0

10

20

30

40

50

60

70

80

90

100

Egyp

t

Turk

ey

Iran

Iraq

Mor

occo

Saud

i

Jord

an

UAE

Leba

non

Kuw

ait

Om

an

Qat

ar

Bahr

ain

Population size Pop growth 10-15E

0%

5%

10%

15%

20%

25%

30%

35%

40%

Iraq

Jord

an

Egyp

t

Om

an

Indi

a

Saud

i

Mor

occo

Turk

ey

Braz

il

Kuw

ait

Iran

Leba

non

Qat

ar

Bahr

ain

UAE

Chi

na

EU-2

7

Rus

sia



Exhibit 39: Saudi Arabia among the GCC states has the highest

unemployment rate.... Expatriate population proportion (LHS) and unemployment (RHS)

Exhibit 40: ….which should improve with investment in education and

increased female participation (US average 58%) Women participation ratio % LHS and Unemployment RHS

Source: National sources, CIA fact book.

Source: IMF, World Bank.

Development of the non-oil sector in the GCC can significantly increase output

Although the GCC has a relatively high absolute GDP/capita of US$26,000 and significant oil reserves (c.12 thousand bbl /capita),

approximately half of the GDP is derived from the oil & gas sector. The emirate of Dubai has been the best example of utilizing its

relatively limited oil wealth (initial oil reserves in the emirate amounted to c.6bnboe) to diversify its economy into trade, general

manufacturing, logistics, tourism and services. If all of the GCC countries were to achieve the diversification levels of Dubai, the GCC

could potentially become a US$2.7 trillion economic bloc, behind only China among the BRIC countries. Please see section Case

study GCC for more details (page 36).

There are significant fuel subsidies in the domestic GCC markets which may steer resources towards more capital-intensive

industries and as an unintended consequence reduce employment opportunity e.g. Saudi Arabia, by subsidizing the price of natural

gas to US$0.75/mmBTU (among the lowest in the world), has become the largest player in the region in the capital-intensive

petrochemical sector.

2%

3%

4%

6%

8%

9% 9%

11% 11% 11%

13%

0%

2%

4%

6%

8%

10%

12%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Ku

wai

t

UAE

Qat

ar

Bahr

ain

Leba

non

Egyp

t

Mor

occo

Iran

Turk

ey

Saud

i

Jord

anExpatriate population unemployment 2011

26%22%

14%

32%

21%24%

50%

22%

32%

42%

23%

45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mor

occo

Egyp

t

Iraq

Iran

Saud

i

Turk

ey

Qat

ar

Leba

non

Bahr

ain

UAE

Jord

an

Kuw

ait

Literacy rates Female participation rates



Exhibit 41: Oil and gas are large contributors towards wealth levels in the

GCC… Oil and gas production per capita (LHS) and GDP/Capita (2011) RHS, thousands of

barrel (GDP/Capita – US$’ 000)

Exhibit 42: … while reserves show they will be an important source of funds

for the development of the non-oil sector Oil and gas reserves/capita, thousands of barrels of oil equivalent

Source: BP, IMF.

Source: BP, IMF.

89

35

49

18 19 22

4 3 3

115 3

11

-

10

20

30

40

50

60

70

80

90

100

0

100

200

300

400

500

600

700

Qat

ar

Kuw

ait

UAE

Saud

i

Om

an

Bahr

ain

Iran

Iraq

Egyp

t

Turk

ey

Jord

an

Mor

occo

Leba

non

o il production per capita Gas production/capita GDP/ Capita

3

2720

12 103 1 1 0 0 0 0 0 0

90

3 8

6 2

1 2 2 0 0 - - - -0

10

20

30

40

50

60

70

80

90

Qat

ar

Kuw

ait

UAE

GC

C a

vera

ge

Saud

i

Iraq

Iran

Om

an

Bahr

ain

Egyp

t

Turk

ey

Mor

occo

Jord

an

Leba

non

Thou

sand

s

Gas reserve/capita Oil reserve/capita



Inflation is subdued for GCC but significantly higher for Egypt

Based on IMF estimates, inflation will likely remain in double digits for Egypt and according to the World Bank sustained external

food and oil price increases may potentially be exacerbated by exchange rate depreciation expectation, even though recent

estimates have been more benign (in October 2011, inflation fell to 7.5% from 8.2% in September). Inflation in the GCC is estimated

to remain subdued due to the continued domestic food and energy subsidies and a currency peg with the US dollar, minimizing

imported inflation.

With the exception of the GCC, low income levels in some of the MENA countries imply that living standards are affected by prices

of food as reflected by the large weight of food in the CPI baskets of the respective states. On this metric in Egypt, food accounts for

44% of household consumption expenditure, in Tunisia 33% and in Algeria 43%. The food weights may potentially have been higher

if it weren’t for subsidies, as most MENA countries either subsidize prices of basic staples or distribute them at low prices to the

poorer part of the population. A study done by World Bank to understand domestic food subsidies in the MENA region found pass-

through of international food prices to domestic prices ranged from 20%-40% for a large group of MENA countries.

Exhibit 43: Inflation is likely to average 4% for GCC in 2012, accelerating from

the current 3% 2012E inflation forecast

Exhibit 44: Food has a high weight in CPI in some MENA countries Share of food in CPI basket


Source: Haver analytics, ILO, national central banks.

11%

6% 5%5%

4% 4% 4%3% 3%

3% 2% 2%2% 2%

0%

2%

4%

6%

8%

10%

12%

Egyp

t

Jord

an

Saud

i Ara

bia

Leba

non

BRIC

GC

C

aver

age

Qat

ar

Kuw

ait

Om

an

Mor

occo

UAE U

S

Bahr

ain

EU 2

7

0%

10%

20%

30%

40%

50%

60%

70%

Qat

ar

UA

E

Bah

rain

Kuw

ait

Sau

di A

rabi

a

Iran

Om

an

Tuni

sa

Liby

a

Jord

an

Syr

ia

Alg

eria

Egy

pt

Iraq



MENA has a more favourable growth profile than BRICs – GS Economist team GES score

The growth environment score (GES), a GS proprietary index measuring 13 key variables across five major categories (macro

stability, macro conditions, human capital, technology, and political condition) across more than 180 countries indicates MENA

countries are well positioned for long-term growth. Countries with a higher GES have on average experienced higher GDP/capita

growth subsequently (please see our Global Economics paper no: 206, December 15, 2010). At the end of 2010, MENA had a higher

overall score and rank than the BRICs. The average rank of the MENA countries improved from 97 in 1997 to 88 in 2010, with GCC

countries showing a higher rank than the other MENA countries. While Egypt, the largest of the North African economies, improved

its score from 1997, before its GES score deteriorated in 2010 and is likely to have fallen further in 2011.

Exhibit 45: MENA countries have a higher GES score, which on average

subsequently translated into a higher GDP/capita growth... GES Score

Exhibit 46: ….while the average MENA GES rank has also improved over time

GES rank

Source: Goldman Sachs Global ECS Research.

Source: Goldman Sachs Global ECS Research.

0

1

2

3

4

5

6

7

8

Eur

o A

rea

US

GC

C

Mid

dle

Eas

t

BR

IC

Egy

pt

2010 2009 1997

0

20

40

60

80

100

120

140

Eur

o A

rea

US

GC

C

Mid

dle

Eas

t

BR

IC

Egy

pt

2010 2009 1997



Case study Egypt: Historically, recovery has been sharp post political change

There has been significant academic research into the impact on economic growth of political transition, such as the one being

experienced by Egypt. One such report by the World Bank, utilizing existing research examining political transitions around the

world, shows that average annual income growth declines by 3-4 percentage points during transition, with the dip lasting only one

year, after which growth quickly resumes or exceeds pre-transition rates. The report also notes there are studies that show GDP

growth tends to stabilize at a higher rate, with lower volatility post transition. The IMF estimates a gradual recovery in 2012 for

Egypt; however, if the transition brings better and more accountable institution, recovery may be sharper in our view but, on the

other hand, there are significant macroeconomic challenges domestically and the current global slowdown may well exacerbate

downside growth risks in Egypt.

Exhibit 47: GDP is forecast to recover gradually in Egypt...

Egypt real GDP growth

Exhibit 48: …while historical experience suggest a sharper recovery is

possible, but significant macroeconomic challenges domestically and global

slowdown may well exacerbate downside growth risks in Egypt Average income growth over time, scaled by date of transition, where zero is the

first year of transition


Source: World Bank.

0%

1%

2%

3%

4%

5%

6%

7%

8%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

-1%

0%

1%

2%

3%

4%

5%

-10.0 -8.8 -7.5 -7.5 -5.0 -1.0 0.0 3.7 4.0 6.0 7.5 9.0 10.0years before (-) and after (+) transition year



Case study GCC: A potential US$3 trillion economic bloc if the GCC replicates Dubai’s success

Although the GCC has a relatively high absolute GDP/capita of c.US$26,000, approximately half of the GDP is derived from the oil &

gas sector. Excluding the oil & gas sector, GDP/capita drops to c.US$13,000. Over the last three decades, the GCC countries have

been trying to diversify their economies, first by building infrastructure and basic industries for the domestic market or energy-

intensive industry which has been export-oriented and more recently is becoming more service-oriented. The emirate of Dubai has

been the best example of utilizing relatively limited oil wealth (initial oil reserves in the emirate amounted to c.6bnboe) to diversify

the economy into trade, general manufacturing, logistics, tourism and services. Today, despite being a US$50,000 GDP/per capita

economy, only 2% of its economy is based on the oil & gas sector.

While the success of Dubai might not be easy to replicate, the potential and the example is there. If all of the GCC countries were to

achieve the diversification levels of Dubai, the GCC could potentially become a US$2.7 trillion economic bloc, bigger than any other

BRIC economy except for China and similar to the current size of the French economy. If the entire MENA region was able to reach

Dubai GDP per head levels, the MENA region total GDP could reach US$20 trillion.

Exhibit 49: Average GCC GDP/capita falls to half on average if the non-oil

sector is excluded GCC GDP/capita split between oil and non-oil contribution, US$ thousands

Exhibit 50: If the GCC non-oil sector reaches that of Dubai levels, the GCC

economy has the potential to reach US$2.7 trillion GDP US$ bn. Comparison of global peers with current GCC size and potential

GCC size



48

18 21 6 10 10 14 1

42

31 14

15 9 8 13

50

0

10

20

30

40

50

60

70

80

90

100

Qat

ar

UAE

Kuw

ait

Bahr

ain

Om

an

Saud

i

GC

C

aver

age

Dub

ai

GDP/capita oil sector GDP/capita non-oil sector

5,892

2,096 2,099 1,729 1,483 537

563

563

0

1000

2000

3000

4000

5000

6000

7000

Chi

na

GC

C

pote

ntia

l

Braz

il

Indi

a

Rus

sia

GC

C

curr

ent

non oil sector for GCC oil sector for GCC



Industry Section: Commodities



MENA Commodities: Fertile opportunities to exploit the oil & gas wealth

With the major oil & gas companies in the region not listed, investors can only gain exposure to the rich regional oil & gas

resources indirectly. The strong energy cost component in basic chemicals and nitrogen fertilizer products leads to a strong

correlation between oil and basic chemicals/fertilizer prices. With the availability of cheap feedstock, particularly natural gas

in the GCC as well as in most of the MENA region, chemical and fertilizer companies have a strong cost advantage over

international companies and are thus well positioned to indirectly capture the regional oil & gas wealth. We initiate

coverage of 11 chemical companies in MENA (10 in Saudi and 1 in Qatar), four fertilizer companies (and resume coverage of

an additional fertilizer producer), three power companies and five companies in oil & gas or related services. We also initiate

on three Turkish companies in this space. In terms of size, liquidity, returns and diversification, SABIC, Industries Qatar and

Orascom Construction Industries stand out from the group. In fertilizers, Jordan’s Arab Potash and Jordan Phosphate, while

having limited liquidity, offer a good track record and significant growth prospects, with significant valuation upside in our

view.

Strong correlation between oil prices and petrochemicals and fertilizer products

While chemicals prices and fertilizers are subject to volatility and their demand depends on the economic cycle, underlying prices

are strongly correlated to the price of petroleum products. Indeed, despite industry developments and economic cycles which have

affected the profitability of the naptha-based producers, basic chemicals such as ethylene and propylene exhibit on average a more

than 80% R2 correlation to the oil price over the last 20 years (using the annual average Brent price), as have nitrogen-based

fertilizers (e.g. urea and ammonia).

Can’t invest in local unlisted oil companies? Buy chemicals and fertilizers instead

Chemical and fertilizer companies utilize natural gas (methane), associated petroleum gasses (ethane, propane or butane) or naptha

as feedstocks to produce chemicals and nitrogen fertilizers such as urea and ammonia. In Saudi Arabia (but also in other MENA

markets) these feedstocks, usually derived directly as a byproduct of oil production, are either supplied at fixed prices (well below

international levels) or set at a fixed percentage discount to international benchmark naptha prices: in both cases, the absolute

advantage for the domestic players compared with international peers increases with rising energy prices. Such attractive pricing of

hydrocarbons is a direct result of their abundance in the region.

SABIC the largest player in basic chemicals, yet several new players also starting

Saudi Basic Industries Corporation (SABIC) is the dominant chemicals player in the region as well as the most diversified, present in

chemicals, fertilizers and metals, in Saudi and abroad. Its global leadership is supported by high returns relative to comparable

peers as it successfully exploits its Saudi feedstock cost advantage. Similarly, Industries Qatar has been able to leverage on the gas

wealth of Qatar, with several organic growth projects still in the pipeline and first-quartile cash returns. Tasnee has become, with

SABIC, the most international of the Saudi chemical companies after acquiring the second-largest titanium dioxide producer

worldwide, while it still benefits from its domestic feedstock cost advantage.



Exhibit 51: New stocks under coverage with exposure to commodities in MENA and Turkey Tekfen Holding is existing coverage, Orascom Construction Industries was Coverage Suspended previously, all other are new coverage

Source: Goldman Sachs Research estimates, Bloomberg, Datastream, Zawya.

Several fertilizer companies in the region

In the MENA region, there are also several fertilizer companies, producing nitrogen-based fertilizers but also potash and phosphate.

Both the Saudi and Qatari fertilizer companies are controlled by a larger parent (SABIC and Industries Qatar); however, SABIC’s

main fertilizer arm (SAFCO) also has an independent listing. Orascom Construction Industries also owns several fertilizer plants and

the fertilizer contribution has now surpassed that of the traditional construction business. Its fertilizers production is diversified

across several countries and the company has turned into the world’s third-largest and most diversified fertilizer company. Saudi’s

Maaden and Jordan Phosphates both mine phosphates and produce phosphate-based fertilizers, while Arab Potash produces

potash. Finally, within our coverage, Nakilat in Qatar operates a fleet of natural gas (LNG) tankers, supporting the domestic gas

industry, while NSCSA in Saudi Arabia operates a fleet of petrochemicals and oil tankers, working with regional companies.

Ticker Company name Country Main business Market cap (US$ mn) Average daily volume - 12m (US$ mn)

2010.SE Saudi Basic Industries Corporation (SABIC) Saudi Arabia Petrochemicals, nitrogen fertilizers, steel 76,800 160 IQCD.QA Industries Qatar Qatar Petrochemicals, nitrogen fertilizers, steel 20,519 12 2350.SE Saudi Kayan Saudi Arabia Petrochemicals 7,100 49 2290.SE Yanbu National Petrochemicals (YANSAB) Saudi Arabia Petrochemicals 6,630 23 2060.SE National Industrialization Company (Tasnee) Saudi Arabia Petrochemicals, titanium dioxide 5,872 17 2380.SE Rabigh Refineries and Petrochemicals (Petro Rabigh) Saudi Arabia Petrochemicals and refining 5,291 18 2002.SE National Petrochemicals Company (Petrochem) Saudi Arabia Petrochemicals 2,758 9 2250.SE Saudi Industrial Investment Group (SIIG) Saudi Arabia Petrochemicals 2,298 8 2310.SE Saudi International Petrochemicals (Sipchem) Saudi Arabia Petrochemicals 1,921 12 2260.SE Sahara Petrochemical Saudi Arabia Petrochemicals 1,560 15 2330.SE Advanced Petrochemical Company Saudi Arabia Petrochemicals 1,037 11 PETKM.IS Petkim Petrokimya Turkey Petrochemicals 1,192 17 SODA.IS Soda Sanayii Turkey Soda ash 487 1 Fertilizers2020.SE Saudi Arabia Fertilizer Company (SAFCO) Saudi Arabia Nitrogen fertilizers 12,250 9 OCIC.CA Orascom Construction Industries Egypt Nitrogen fertilizers, construction 8,135 6 TKFEN.IS Tekfen Holding A.S. Turkey Nitrogen fertilizers, construction 1,263 6 GUBRF.IS Gubre Fabrikalari (Gubretas) Turkey Nitrogen fertilizers 611 5 Mining/fertilizers1211.SE Saudi Arabian Mining (Maaden) Saudi Arabia Gold, phosphate fertilizers, aluminium 6,561 19 APOT.AM Arab Potash Company Jordan Potash 4,797 0.1 JOPH.AM Jordan Phosphate Mines Co. Jordan Phosphate rock mining and fertilizers 1,405 1 Power/utilities5110.SE Saudi Electricity Company (SEC) Saudi Arabia Power generation and distribution 14,889 14 QEWC.QA Qatar Electricity and Water Company (QEWC) Qatar Power generation 3,819 3 TAQA.AD Abu Dhabi National Energy (Taqa) UAE Power generation and oil&gas E&P 1,985 0.3 Oil&gas and related servicesQGTS.QA Qatar Gas Transport Qatar LNG transport 2,732 5 DANA.AD Dana Gas UAE Oil&gas E&P 953 3 4030.SE The National Shipping Company of Saudi Arabia (NSCSA) Saudi Arabia Oil and chemicals transport 920 5 MOIL.CA Maridive and Oil Services Egypt Oil services 574 6 RSC.OM Renaissance Services Oman Oil services 468 2 SteelESRS.CA ezzsteel Egypt Steel 540 2



The oil and gas wealth provide a strong setting for the chemicals and fertilizers sectors

Exhibit 52: With around 61% and 45% of proven oil and gas reserves, the MENA region is the world’s main source of energy

Oil-exporting Gulf Cooperative Council (GCC) highlighted in blue

Source: BP, OPEC.

The only regionally listed company operating directly in the oil & gas sector in the region is the relatively small Dana Gas, which has

operations in Sharjah (UAE), Kurdistan and Egypt and is listed in Abu Dhabi. Two oil services companies, Renaissance Services and

Maridive and Oil Services, are also listed, in Oman and Egypt.

15. MoroccoOP. 0.00 %OR. 0.00 %GP. 0.00 %GR. 0.00 %

1. Saudi ArabiaOP. 12.15 %OR. 19.85 %GP. 2.59 %GR. 4.22 %

7. LibyaOP. 2.07 %OR. 3.32%GP. 0.51 %GR. 0.82 %

13. TunisiaOP. 0.11 %OR. 0.05 %GP. 0.00 %GR. 0.00 %

12. YemenOP. 0.37 %OR. 0.20 %GP. 0.00 %GR. 0.26 %

10. EgyptOP. 0.93 %OR. 0.33 %GP. 2.10 %GR. 1.17 %

8. QatarOP. 1. 68%OR. 2.01%GP. 2.99 %GR. 13.53 %

6. AlgeriaOP. 2.27 %OR. 0.92 %GP. 2.73 %GR. 2.40 %

4. IraqOP. 3.10 %OR. 8.63 %GP. 0.00 %GR. 1.69 %

3. U.A.E

OP. 3.25 %OR. 7.34 %GP. 1.63 %GR. 3.43 %

9. OmanOP. 1.01 %OR. 0.42 %GP. 0.83 %GR. 0.52 %

11. SyriaOP. 0.47 %OR. 0.19 %GP. 0.19 %GR. 0.15 %

5. KuwaitOP. 3.10 %OR. 7.61 %GP. 0.42 %GR. 0.95 %

14. Bahrain

OP. 0.00 %OR. 0.00 %GP. 0.43 %GR. 0.05 %

Oil production (OP)Oil reserves (OR)Natural gas production (GP)Natural gas reserves (GR)

Oil production 2. IranOP. 5.27 %OR. 10.32 %GP. 4.39 %GR. 15.79 %

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Power (and oil) sector mostly unlisted: IPPs more attractive than integrated power plays

In the power sector, companies are divided into two categories: independent power producers (IPPs), such as QWEC or TAQA, or

integrated players, such as Saudi’s SEC. While IPPs tend to get a return on their investments, typically linked to inflation,

irrespective of volumes and do not bear feedstock costs (the cost of which is passed through in the contracts), SEC is in a different

position, suffering from the double combination of having large capex programmes to implement as domestic demand keeps

growing, while having to supply electricity at subsidized rates (average final supply tariff in 2010 was US$33/MWh), thus earnings

returns well below cost of capital.

A recent increase to Saudi industrial tariffs has helped to alleviate the issue – however, low and fixed residential tariffs (which make

up almost 50% of total volumes) and the need for further investments in the grid are likely to remain a drag on profitability. Of the

regional integrated utilities, only Saudi’s SEC is listed. While the government (which is a main shareholder) tries to subsidize in an

effort to keep prices low (in the form of interest-free loans, repayable at the discretion of the company, or by waiving its right to

dividends as long as the dividend remains below a certain threshold), the company will likely continue to earn very low returns on

its invested capital until it is allowed to raise prices further.

Mining: Potentially attractive, but only at the start of the journey

There are three major mining companies in the region. Two of these are in Jordan, Arab Potash (mining potash and bromine) and

Jordan Phosphate (phosphates mining and fertilizers production) which, given the nature of the product, are better categorized

under the fertilizer/agriculture sector. The Saudi Arabian Mining Company (Maaden, established in 1997) has on the other hand a

wider range of projects and is the largest miner in the region. While the existing business is gold mining (and the company targets

to triple gold production over the next five years with five new mines), it is developing two large projects: an integrated phosphates

project and an aluminum project. In phosphates, Maaden is in JV with SABIC (which has a 30% stake) and will be vertically

integrated from the mining of phosphate rock to the production of DAP, having invested US$5 bn which should give it a 10% share

of world DAP production by 2013.

Maaden will also be vertically integrated from bauxite mining to aluminum smelting and aluminium foil production; Alcoa has a

25% stake in the US$11 bn project which is due to become operational by 2014 and which should become, according to Alcoa, the

lowest-cost vertically integrated aluminum production site in the world. These projects are laying the cornerstones of a potential

regional mining champion: with the overall Arabian shield still relatively unexplored from a mining perspective, the potential for

further projects is still large. While there are several aluminium companies in the region (Dubai, Abu Dhabi, Bahrain, Oman),

Maaden’s is the only vertically integrated aluminium project.

While there are no vertically integrated steel companies in the region, SABIC and Industries Qatar have also developed steel

production among their products, as the GCC has traditionally been a net importer of steel. In Egypt, ezzsteel has a strong market

position in the regional market, with a c.50% share, even though it has been recently affected by legal disputes.



Exhibit 53: Maaden mining projects in Saudi Arabia: From gold, to phosphates and bauxite

Source: Company data, Goldman Sachs Research estimates.

Government and retail ownerships give some protection against adverse government legislation

Most of the listed natural resources companies in the region are still government-controlled. In Saudi Arabia, these are either owned

directly or through the General Organization for Social Insurance (GOSI), a state controlled entity, or the Saudi Public Investment

Fund. However, the government in recent years has forced many companies to IPO (in order to grant them cheap feedstock

allocation) to allow the participation of Saudi retail to the development and exploitation of national energy resources. As a result of

this policy, we think that the listed companies should be relatively insulated from direct government intervention as long as the

government has the capacity to balance its budget in other ways (primarily with oil revenues thanks to high oil prices). Longer term,

we believe that pressure will build to stimulate more energy efficiency which will likely to lead to higher energy costs, at least for

new projects.

Tabuk

Jeddah

Abha

Jubail

Riyadh

Al Jalamid

Al Baitha

Ras Az Zawr

Al Madeanah Industrial

Dharghat

Sukhaybarat

Bulgah

Mahad Ad Dahab

Medina

Al Amar

Al Hajar

Gold PhosphateBauxiteMagnesiteIndustrial minerals

Dammam



Saudi government also often offers attractive financing for projects

The Saudi government agencies also often provide favourable financing for these projects, one of which is the Saudi Industrial

Development Fund. Most of the projects are executed under project financing, with debt/assets of 60%-70%, with ample funding

available from well-capitalized local banks.



The gas cost advantage is at the core of the high profitability and oil price exposure

Saudi chemical and fertilizer companies benefit from attractively priced feedstock compared with international prices. Saudi

companies pay US$0.75/mmBTU for ethane (the basic gas used to produce ethylene) or natural gas, which compares with US$4 in

the US for natural gas (and US$10-11 for ethane) and US$10-15 in Europe and Asia. The price has remained flat since 1999, and

while over the last decade energy prices have increased several-fold, in Saudi the price of gas (as well as gasoline) has not changed

and is now at an 80%-95% discount to the world average. When it comes to other feedstock (propane, butane, naptha), the pricing

mechanism guarantees domestic producers a discount of 28%-31% to Japanese naptha netback prices (i.e. Japanese price less cost

it would take Saudi Aramco to deliver the products to Asia). Such cost advantage is at the core of the higher profitability of the

Saudi chemical companies relative to global peers and thus their profitability and earnings increase proportionally in an

environment of higher oil prices.

Middle Eastern producers have lower feedstock costs, making them exposed to oil prices

Exhibit 54: Thanks to cheap gas, the Middle East benefits from high

margins in an environment of high oil prices... World ethylene cost curve, 2010

Exhibit 55: ...which makes the chemicals and fertilizer stock profits highly

sensitive to oil prices 2012E EBITDA and net income sensitivity of the larger MENA chemicals and

fertilizers to a scenario of US$85 and US$60 average oil price; base case US$120

Source: CMAI.


As a result of the cost advantage increasing with the absolute oil price levels, the returns of the chemicals and fertilizer companies in

the region are highly correlated to the oil price evolution, as can be seen in the case of SABIC.

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0%SABIC Industries Qatar Safco OCI

EBITDA under 85$ oil Net income under 85$ oil

EBITDA under 60$ oil Net income under 60$ oil



Why is the gas price so advantaged and will it change?

The attractive pricing of not only natural gas but also other naptha-priced products such as propane or butane is ultimately derived

from their abundance in the region. Before SABIC was established in 1976, natural gas derived from oil production (associated gas)

was flared as a waste. The Saudi Kingdom has been successful in capturing the gas and creating a strong domestic chemicals

industry in JV with foreign partners. The oil & gas resources of the Gulf region dwarfs the oil & gas reserves of the world’s oil

majors and the local economies have tried to diversify their economies away from the pure oil & gas industries by expanding into

related businesses first. In order to do so, the local governments have started offering international JV partners attractively priced

gas (ethane or methane) or petroleum gasses such as propane or butane. In more recent years, as the availability of gas has been

lower, petrochemicals have started using more products with pricing based on naptha (such as propane and butane) and whose

discounts, while smaller than gas, are still material (c.30% discount to international gas prices ). Price for gas and other feedstock in

Saudi is determined by Saudi Aramco (100% government-owned) or the government.

Some existing contracts provide a guarantee for a fixed price for up to seven years; others are shorter. Several companies expect a

new framework for gas and other feedstock prices in 2012. In our estimates, we assume that the current price of US$0.75 is

increased to US$1.5mmBTU from 2012, as we believe that the Saudi government will want the country to continue to have the

lowest cost of gas in the region.

While the Saudi government has significant room to increase the gas price, we believe it is unlikely that gas prices will go up to

European or Asian levels for several reasons:

Gas prices in neighbouring yet competing countries (eg Qatar or Iran) are currently around US$2-3/mmBTU. In the US, spot gas

prices are currently as low at US$4/mmBTU. Increasing gas prices above these levels would put the Saudi chemical industry at

a relative disadvantage.

In recent years, the government has insisted that all companies which receive a “gas allocation” IPO in order for the general

public to be able to the share the benefits of the national resources. Increasing gas prices materially would therefore equate to

taxing local investors. While we believe that some price increases would be sensible to incentivize energy efficiency, we believe

that this is unlikely to happen in the short term as long as the national budgets are in surplus, supported by the high oil prices.

Exhibit 56: Saudi Chemicals IPOs in recent years have expanded retail ownership of chemical companies in Saudi

Source: Zawya. Prices as of November 2, 2011.

Stock Listing Date IPO price (SR)

Size of offering (US$ mn)

Current market cap (SR mn)

Current share price

(SR)

Performance since IPO

Yanbu National Petrochemicals Company (Yansab) 20 Feb 2006 50 525 24,863 44.2 342%Saudi International Petrochemical Company (Sipchem) 11 Nov 2006 55 660 7,205 19.7 34%Advanced Petrochemical Company 20 Jan 2007 10 177 3,888 27.5 175%

Saudi Kayan Petrochemical Company (Kayan) 23 Jun 2007 10 1,800 26,625 17.8 78%Rabigh Refining and Petrochemical Company (Petro Rabigh) 27 Jan 2008 21 1,228 19,841 22.7 8%Basic Chemical Industries Company 16 Jun 2008 30 53 648 23.6 -2%Saudi Arabian Mining Company (Maaden) 28 Jul 2008 20 2,467 24,605 26.6 33%Methanol Chemicals Company (Chemanol) 16 Sep 2008 12 193 1,399 11.6 -3%National Petrochemical Company (Petrochem) 08 Aug 2009 10 640 10,344 21.6 116%



Saudi gas prices are very low by international standards, but broadly in line with most of MENA

Exhibits 57 and 58 detail gas prices in the MENA sector (which differ for different sectors) and relative to European, Asian and North

American prices. Of the US, Europe and Asia (Japan-Korea), the US has the lowest gas prices, thanks to the development of shale

gas, while Asia remains exposed to LNG imports, having only limited domestic gas. Most of the gas supplied to Europe has prices

linked to oil prices (eg imports from Russia or from North Africa), yet Europe also has only limited domestic production.

We assume a doubling of the natural gas and ethane price for Saudi and Egypt (fertilizers and chemicals) from 2012. Even so, the

overall impact on EBITDA is relatively modest given the high margins currently enjoyed by the companies. Some neighbouring

countries have recently increased gas prices – most notably Iran in December 2010, which quadrupled its gas prices from US$0.5 to

US$2/mmBTU (and plans further increases), and also Bahrain and Oman which are also targeting gas price increases for their

fertilizer and aluminium companies.

Exhibit 57: Saudi natural gas price is low relative to international gas prices

(but not the lowest) Saudi natural gas price relative to international gas prices

Exhibit 58: Our assumptions of a doubling of gas prices in Saudi and Egypt

have a 2%-8% impact on our 2012E EBITDA for the major companies In our estimates, we assume a doubling of gas prices in Saudi and Egypt



The end of excess gas and Saudi Aramco’s entry into petrochemicals

JVs with international partners are usually started on the basis of the local partner having secured feedstock (ethane, butane or

propane from Saudi Aramco), while the local partner contributes its own expertise and this was the basis for SABIC’s growth since

the 1980s. In recent years, however, two shifts have been observed. Firstly, most of the associated gas that comes with oil

production is now being utilized, while at the same time domestic electricity and industrial production keeps growing, and while

Saudi does have large gas reserves, this is mostly linked to oil (associated gas) and therefore its production can be only combined

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SABIC Safco OCI



with oil. Secondly, while the petrochemical space was once the exclusive domain of SABIC (and its partners), several other private

players are now on the scene (SIIG, Sahara Petrochemicals, Advanced Petrochemical Company, with several projects build in recent

years) and Aramco itself (which is providing all these players with the basic feedstock) is entering the game with new

petrochemicals at its refineries.

The oil & gas wealth in the region is a multiple of the oil majors

As the giants in oil % gas, Saudi Aramco and Qatar Petroleum are worth a special mention. On one hand, Saudi Aramco has started

expanding into petrochemicals domestically with foreign partners. Following a JV with the Japanese Sumitomo Chemical

Sumitomo, in 2009 it started the first petrochemical complex at Rabigh, on the Red Sea, with a US$10 bn investment to upgrade its

existing refinery and build a 2.4mt basic petrochemical complex. In addition, Saudi Aramco has two further joint ventures, one with

Total (SATORP, for a refinery and a petrochemical) and one with Dow Chemical, announced in 2011, which targets a US$20 bn

petrochemical complex, including more specialty chemicals. A requirement to secure the feedstock is to IPO each of these

companies so that Saudi citizens have the chance to gain exposure to the kingdom’s national resources. All allocations of gas or

petroleum derivatives in recent years have been made on condition of the company going public.

Exhibit 59: National oil and gas companies in GCC and MENA have

significantly larger reserves than Western oil & gas majors

Oil & gas production and reserves, 2010

Exhibit 60: Saudi, UAE, Iraq and Kuwait reserves are mostly oil; Iran and

Qatar mostly gas

Bn bbl of oil equivalent


Source: IEA, Goldman Sachs Research estimates.

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BPRDS

Total

EniStatoil

EU Oil&gas sector

Chevron

Conoco

Exxon

US Oil&gas sector

Saudi Arabia (Saudi Aramco)

UAE (mostly ADNOC)

Kuwait (Kuwait Petroleum Corporation)

Qatar (mostly Qatar Petroleum)

Oman (mostly Petroleum Development Oman)Bahrain (mostly Bapco)

Egypt

Iran (NIOC)

Iraq

Gazprom

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Saudi Iran Qatar UAE Iraq Kuwait Egypt Oman Bahrain

Proven oil reserves, mn bbl Proven gas reserves, mn boe



Qatar best positioned in terms of gas wealth

The oil & gas wealth of Qatar is managed by Qatar Petroleum, which is also the parent company of Industries Qatar. Within the

region, Qatar is clearly the country best endowed with natural gas. This should allow the national industrial petrochemical company,

Industries Qatar, to enjoy a strong platform for growth relying on cheap and competitive feedstock (its average cost is

c.US$2/mmBTU).

Ownership by Qatar Petroleum and listing (with Qatari retail investors thus holding a direct stake) should guarantee some protection

against gas price increases, in our view. However, after having reached the plateau of 77mt of annual LNG exports in May this year,

Qatar has now imposed a gas moratorium on any new supply of gas until 2014, on the grounds that it wants to better understand

the reaction of the giant North field before deciding on further gas allocations. A recent plan by Industries Qatar to expand its steel

business (using cheap gas) has recently been postponed on the basis of the gas contract.



Chemicals: Capitalizing on cost advantage and global demand growth

Saudi and Gulf chemical companies are world leaders on several measures. SABIC is the largest chemicals company in the

world in terms of net income, second in terms of EBITDA and third in terms of revenues; it is the largest in terms of market

cap. Most of the chemicals in MENA have first- or second-quartile CROCI relative to global peers, particularly those that use

ethane as the core feedstock. With demand for petrochemicals (plastics) driven by the growing emerging market economies,

particularly Asia (which gives the Gulf producers some logistics advantage) and utilitisation rates for ethylene (a basic

monomer used in the production of plastics) close to ten-year lows, we view the medium-term outlook as strong, despite

the potential increase in the domestic gas price for Saudi companies that we expect from 2012.

Exhibit 61: SABIC is the third-largest chemicals company globally in terms of

revenues

Exhibit 62: ... but the largest in terms of market cap



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Americas Europe Asia

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Exhibit 63: SABIC has the second-highest EBITDA globally among chemicals

2012E EBITDA at MENA chemicals and leading chemicals worldwide

Exhibit 64: ...yet due to the low tax rate, it has the highest net income

2012E net income at MENA chemicals and leading chemicals worldwide



Exhibit 65: Most GCC companies have EBITDA margins above global peers

2012E EBITDA margins for MENA and Turkish chemicals and global peers

Exhibit 66: ...which leads to higher CROCI

2012E CROCI for MENA and Turkish chemicals and global peers



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0%

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The GCC chemicals companies – focus on basic chemicals, entry into specialties

Exhibit 67 illustrates the installed capacity of the MENA and Turkish commodities companies in our coverage and their current

installed capacity, as well as the installed capacity relative to world capacity. The focus of the region is still on basic chemicals, even

though some of them, particularly SABIC, Tasnee and Sipchem, are trying to integrate more into specialty chemicals. SABIC has a

stated aim of deriving 20% of its revenues from specialty chemicals by 2020. Tasnee has a notable presence in the niche Titanium

dioxide market (TiO2), while Sipchem is present in both basic and specialty chemicals.

Exhibit 67: The stocks under coverage in the MENA region have around 10% of the global ethylene, polyethylene, propylene, poylproylene, methanol and MTBE

capacity; SABIC is also the world leader in polycarbonates

Source: CMAI, Goldman Sachs Research estimates.

End 2011E data, '000t Under construction

Total chemicals capacity

Company Ethylene Polyethylene Propylene Polypropylene Ethylene Glycol/Oxide Polycarbonates PVC and precursors Chlorine Methanol Caustic Soda MTBE OtherSABIC globally 15,099 8,719 4,064 3,535 5,725 1,103 920 826 7,560 934 3,050 6,409 56,944 of which SABIC in Saudi Arabia 12,173 6,715 2,700 2,230 5,365 260 900 690 7,560 780 3,050 5,409 47,832 of which Yansab (SABIC 52%) 1,300 800 400 400 770 375 4,045 of which Kayan (SABIC 35%) 1,478 700 630 350 1,165 260 1,110 274 5,967 of which Safco (SABIC 43%) 0 of which SABIC outside Saudi Arabia 2,926 2,004 1,364 1,305 360 843 20 136 154 NA 9,112SIIG 1,165 1,100 595 400 1,340 4,600 of which Petrochem (SIIG 50%) 1,165 1,100 445 400 300 3,410PetroRabigh 1,250 900 900 900 600 4,550Sipchem 330 1,049 880 300 2,559Tasnee 1,000 800 740 700 866 100 4,206Sahara 467 450 275 1,192Advanced Petrochemical 455 450 905Maaden 4,000 275 4,275

QatarIndustries Qatar 878 320 500 305 240 2,243

TurkeyPetkim (Turkey) 520 713 1,203 117 2,553Gubretas 1,135 1,135Tekfen

EgyptOrascom ConstructionEzzsteel

JordanArab PotashJordan Phosphate

Total stocks covered in region 19,912 12,552 7,221 6,435 6,325 1,103 1,250 826 9,109 934 3,355 14,833 1,307 85,162Global capacity 149,000 94,000 99,000 65,000 47,000 4,000 51,000 79,000 89,000 84,000 24,000 785,000As % of global capacity 13% 13% 7% 10% 13% 28% 2% 1% 10% 1% 14% 9%

Chemical products



Basic chemicals (and fertilizer) prices are strongly correlated to oil prices

Despite being a cyclical industry, basic petrochemicals (such as ethylene and propylene) show a strong correlation to oil prices, with

an average 0.9 R2 correlation over the last 20 years.

Exhibit 68: The ethylene (basic chemical) price has been strongly correlated

with oil prices 1991-2010, average annual prices; R2 0.87

Exhibit 69: .... as have been fertilizers prices 1991-2010, average annual prices; R2 0.82

Source: Datastream, Goldman Sachs Research estimates.


Slightly weaker correlation for chemicals over the last five years due to shale gas developments..

This correlation between basic chemicals and oil has remained significant, albeit slightly weaker (R2 47% over the last five years),

despite the strong economic cycle over the last five years and the development of shale gas in the US, which has changed the

global cost curve for basic chemicals, making North American producers more competitive than in the past. Nonetheless, despite

the significant shift in the global cost curve as North American producers started using more and cheaper natural gas, 55% of the

world ethylene is still produced with naptha (an oil-derivative produced by refineries, which has more than a 90% correlation with

crude oil prices), which leads us to believe that the correlation with oil prices will also remain strong in the coming years.

y = 11.30x + 239.84R² = 0.87

0

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.. while urea and ammonia remain strongly correlated to oil

Similarly, the price of ammonia and urea (the basis for all nitrogen-based fertilizers) has shown a weaker, yet still significant

correlation to oil prices despite the economic cycle (R2 56%). Urea is produced from ammonia, which in turn is produced with

natural gas or (mostly in Asia, China) with coal. Approximately half of the world’s ammonia is upgraded to urea. According to Yara,

the world’s largest nitrogen-based fertilizer producer, at a cost of US$7/mmBTU (somewhere midway between the US

US$4-5/mmBTU gas prices and the European and Asian oil-linked gas prices of US$10-15/bbl), the natural gas cost represents 90%

of the ammonia cash costs. The strong correlation between Brent and urea prices leads us to believe that, despite the highly

fragmented global urea market, marginal producers utilize oil-linked gas to produce urea.

Exhibit 70: Ethylene and Brent correlation has weakened over the last five

years, with R2 reducing Brent and ethylene prices, last five years, monthly observations

Exhibit 71: While urea and brent prices have remained strongly correlated

also over the last five years Brent and urea correlation, last five years, monthly observations



Growing demand and utilization rates at cyclical lows provide good medium-term outlook

Ethylene is one of the basic (monomer) chemicals used in the production of different types of plastics (polymers), such as low

density polyethylene (LDPE), linear low density polyethylene (LLDPE), high density polyethylene (HDPE), used for producing various

plastic products from transparent film for packaging to shampoo containers and caps on bottles, as well as ethylene glycol, which

mixed with terephtalic acid produces PET (used for producing bottles for the drinks industry). Ethylene can be produced from ethane

(an associated petroleum gas, C2H6) or from naptha cracking.

y = 0.0584x + 17.589R² = 0.47

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y = 4.7614x - 51.99R² = 0.56

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Exhibit 72: Plastics consumption is still low in emerging countries

Global plastics consumption, kg per year

Exhibit 73: Ethylene demand has been outstripping global GDP growth

Global ethylene demand growth and global GDP growth

Source: Petkim, Goldman Sachs Research estimates.


Exhibit 74: World ethylene demand has been growing at a CAGR of 2.4% World ethylene demand, ‘000 tonnes

Exhibit 75: Propylene demand has been growing at a CAGR of 3.5%, yet from

a lower base; propylene is mostly obtained as a byproduct of ethylene World propylene demand, ‘000t tonnes



0

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USA Western

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Turkey China World Brazil India

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(8%)

(6%)

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---

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2011E

Global Ethylene Demand Growth % Global GDP Growth %

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The operating rates of ethylene plants are close to the decade low...

As a result of large planned investments in the middle of the previous decade, when ethylene utilization rates were high (close to

90%), as well as the economic recession in many countries in 2008-09 (which coincided with the new capacity coming online),

ethylene capacity additions have largely outstripped demand growth in 2009 and 2010, leading to a significant reduction in global

operating rates and thus margin compression (the margin for ethylene is measured as a spread of ethylene versus the cost of

naptha crackers). Between 2008 and 2011, more than half of the world’s additional ethylene capacity (22mt) has been added in the

Middle East (13mt). However, as the projects in the region complete (with the Saudi Kayan 1.5mt and Petrochem 1.2mt ethylene

startup in 4Q this year, the last material capacity additions in Saudi), incremental capacity in the coming years is likely to come from

higher-cost regions, which should support a recovery in prices.

Exhibit 76: Ethylene prices tend to be correlated with operating rates Change in ethylene plants operating rate (in basis points) and ethylene prices (%)

Exhibit 77: We expect operating rates to be close to the trough Ethylene capacity additions, by region, demand growth and utilization rates (in %)

Source: CMAI, Goldman Sachs Research estimates


...while world ethylene demand should continue to grow, driven by Asia

Our Asian Chemical analysts expect global ethylene demand to grow by 2.8% in 2012 and 4.5% in 2013. While North American and

European demand should grow by only 0.5% over the period, global demand should be driven by Asia, where our analysts expect

demand to grow by 4.8% in 2012 and 7.5% in 2013 (Asian demand grew by 11.6% in 2010 and 8.6% in 2009).

(50%)

(40%)

(30%)

(20%)

(10%)

0%

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Op Rate Change (bps) Ethylene Price Change (%)

78%

80%

82%

84%

86%

88%

90%

92%

94%

(4,000)

(2,000)

‐‐‐‐

2,000

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Op

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North America Europe Middle East India

Northeast Asia Southeast Asia & ROW Add'l Annual Demand (LHS) Global Operating Rate (RHS)

Additional annual demand (LHS)

Global operating rate (RHS)



Exhibit 78: The chemicals value chain: GCC chemicals are particularly strong in basic chemicals (“building blocks”), yet they are

trying to integrate into intermediates and end use derivatives (specialty)


Caustic SodaSalt EDC VCM PVC

ChlorineEthane Polyethylenes

Ethylene (LDPE, HDPE, LLDPE)

Ethylene Oxide Ethylene Glycol Antifreeze

Propylene Oxide Propylene Glycol Polyester / PET

Acrylic FibresAcrylonitrile

ABS

Propylene Paints & Coatings

Polypropylene

Propylene Oxide Polyols Polyurethanes

Butadiene Rubbers

HMDA Nylon 6, 6

Ethylbenzene Styrene Polystyrene

Naphtha Cumene Phenol Polycarbonates

Benzene Cyclohexane Caprolactam Nylon 6

Nitrobenzene MDIPolyurethanes

Toluene TDI

O-xylene Phthalic Anhydride PlasticisersXylenes

P-xylene DMT / PTA Polyester / PET

MTBE

Acetic Acid VAM PVAMethanol

Formaldehyde Adhesives

Acrylic Acid & crylates

Feedstock Building Blocks Major Chemical Intermediates Major End Use Derivatives



The cost advantage for fertilizers is in the cheap local cost of gas

The gas cost advantage in the MENA region provides the backbone of the high profitability of nitrogen-based fertilizers,

such as ammonia and urea. According to Yara, the world’s largest fertilizer producer, gas represents as much as 90% of the

cash cost of ammonia. While there are several fertilizer companies in the MENA space (including SABIC and Industries

Qatar), overall the presence is smaller than in basic chemicals. Jordan’s Arab Potash and Jordan Phosphate, while having

limited liquidity, offer a good track record and strong growth prospects, with significant valuation upside in our view. While

Saudi Arabian Mining Company (Maaden) is building up its regional presence in mining, its main product will be phosphates

until its aluminum project is completed.

Exhibit 79: Regional fertilizer players are mid-sized relative to global leaders,

both in terms of revenues Revenues of largest fertilizer companies, by region, US$ mn

Exhibit 80: ...and market cap

Market cap of largest fertilizer companies by region, US$ mn



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Exhibit 81: MENA fertilizer companies are significantly smaller than the

global leader in terms of EBITDA 2012E EBITDA of largest fertilizer companies by region, US$mn

Exhibit 82: ... and net income

2012E net income of largest fertilizer companies by region, US$ mn



Exhibit 83: Some of them are leaders in terms of EBITDA margins... 2012E EBITDA margin by region; Orascom Construction is shown with the

construction business included; ex construction, the margin is 39%

Exhibit 84: ...which results in leading CROCI globally

2012E CROCI by region



0

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N.AEurope

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Prices of all key fertilizers are strongly correlated with oil, consumption with demographics

Fertilizers are used to enhance crop yield, although c.20% of nitrogen is also used for industrial purposes. Using a correct

application of nitrogen, for example applying 192kg of nitrogen per hectare of wheat (equivalent to 417kg of urea), it is possible to

increase wheat yield from 2.1t/ha to 9.3t/ha. As a result, nitrogen (and more generally all fertilizer) economics (and thus prices) are

directly correlated with international food prices – the higher these are, the more convenient it is to spend on fertilizers to enhance

the yield. Rising world population (and the increased demand for proteins in Asia, which requires more feed for animals) is the main

driver of increased food demand and increased fertilizer consumption.

In the US, one-third of the corn production, of which the US is a major producer, is directed towards ethanol production. Brazil is

another major producer of ethanol (from sugar cane), while other crops are also converted into biofuels (in Europe particularly to

biodiesel). As the cost attractiveness of ethanol and other biofuels is directly correlated with oil price levels (as a fuel alternative),

fertilizer prices are thus indirectly correlated with oil price levels. In other words, the higher the oil price, the more convenient it is to

enhance fertilizer consumption to increase crop yield as part of the crops then get converted to biofuels.

Exhibit 85: Prices of different fertilizers are strongly correlated – DAP seems

to be the most volatile, while potash prices lag other fertilizers Price evolution of key fertilizers

Exhibit 86: Strong correlation between different fertilizers and oil prices

Brent and fertilizers price performance since January 1, 2007, rebased to 100

Source: Bloomberg.

Source: Bloomberg.

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Urea Ammonia DAP Potash

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Significant demand potential, as current fertilizer applications globally are below optimal levels

Nitrogen, phosphate and potash fertilizer can be applied to the ground in different formats to improve crop yield. The most common

fertilizer worldwide is urea. Other common types of fertilizers are ammonia, nitrates, diammnonium or monoammonium phosphate

(DAP or MAP), urea and ammonium nitrate (UAN), calcium ammonium nitrate (CAN) and compound fertilizers such as NPK,

containing both nitrogen, phosphates and potassium. Each type of fertilizer is optimized for a certain type of soil or crop, with corn

being generally the most intensive crop in terms of fertilizers; after corn, soybeans require mostly potash, while wheat requires

more phosphates.

Different fertilizer products contain different amounts of fertilizer content, as measured in terms of nutrient content (Nitrogen, N,

phosphoric acid P2O5 for phosphate and K for potassium). For example, ammonia contains 82% of nitrogen, urea 46% and DAP

contains 18% nitrogen and 46% of phosphorus pentoxide (P2O5), the key phosphorus-based nutrient.

Exhibit 87: Current applications remain below optimal levels Kg of nutrient per ha compared with scientifically recommended levels

Exhibit 88: as China and India still have significant room to catch up in

fertilizers use Nutrient usage and crop yield

Source: IFA, IPNI Studies, Ohio State University Studies.

Source: ICL, USDA.

60

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112

5966

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Nitrogen Phosphate Potash

Current application rate Scientif ically recommended application rate

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Phosphate Nitrogen Potash Yield



...leading to a significant demand growth potential

Exhibit 89: World urea demand has been growing at 3.7% CAGR between

2000 and 2009, reaching 147mt... World urea production, mt

Exhibit 90: .. of which only c.20%-25% is traded

World urea traded, mt

Source: IFA.

Source: IFA.

Exhibit 91: MENA countries are large exporters of urea

Major urea exporters, 2009, mt

Exhibit 92: ...while India, US and Thailand are large importers

Major urea importers, 2009, mt

Source: IFA.

Source: IFA.

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Asia is the biggest driver of demand, particularly for urea

Exhibit 93: Asia represents almost three-quarters of urea demand

World urea demand by region, 2008

Exhibit 94: ... and more than half of overall ammonia demand

Ammonia demand by region, 2008

Source: IFA, Goldman Sachs Research estimates.


Exhibit 95: Half of world’s phosphates are consumed in Asia

World phosphates consumption by region, 2008

Exhibit 96: ... while most potash is consumed in Europe and North America

World potash consumption by region, 2008



W. and C. Europe

5%

E. Europe & C. Asia8%

N. America6%

Latin America3%

Africa4%

W. Asia 10%

S. Asia19%

E. Asia and Oceania

45%

W. and C. Europe

10%


N. America9%

Latam6%

Africa4%W. Asia

7%S. Asia11%

E.Asia and Oceania

40%

W. and C.Europe1%


N. America23%

Latam5%

Africa9%W. Asia

4%

S. Asia9%

E. Asia and Oceania

40%

W. and C.Europe, 9%

E. Europe & C. Asia, 32%

N. America, 25%

Latam, 6%

W. Asia, 16%

E. Asia, 11%



Potash and phosphates markets are most concentrated

Exhibit 97: The Potash market is relatively concentrated...

2010 potash production; market size 61mt

Exhibit 98: ...as are phosphates, dominated by China, US and Morocco 2010

phosphate rock production; market size 176mt (or.54mt of P2O5)

Source: K+S, IFA, Company data, Goldman Sachs Research estimates.

Source: USGS Mineral Yearbook.

Exhibit 99: While urea is more fragmented... 2010 market share of urea based on nitrogen content

Exhibit 100: ... as is ammonia production 2010 market share of ammonia

Source: Fetercon, SKW Stickstoffwerke Piesteritz GmBH.

Source: Yara, IFA, Company data, Goldman Sachs Research estimates.

Canpotex32%

BPC23%

K+S10%

IPC9%

ICL9%

APC4%

SQM2%

Chinese producers

8%

Others3%

China37%

United States15%

Morocco (incl W. Sahara)

15%

Jordan (Jordan Phosphates)

4%

Russia6%

Brazil3%

Other MENA11%

Australia1%

South Africa1%

Vietnam1%

Other6%

IFFCO7%

Yara7%

Sinopec6%

CF Industries5%

NFL5%

Kaltim5%

Agrium4%

SAFCO4%Group DF

4%Pusri4%

Industries Qatar3%

Orascom2%

Others44%

Yara6% CF Industries

5%Agrium

2%TOAZ

2%

Orascom1.1%

PCS1%

Chinese Producers

35%

Other non Chinese

46%

Industries Qatar0.7%

JOPH0.2%

Maaden0.8%



The companies in our coverage have different fertilizer products

Exhibit 101: Five MENA fertilizer companies have urea or ammonia fertilizer

capacity, while four have DAP capacity (with Maaden and Jordan Phosphate

also mining phosphate rock) and one has potash capacity End 2011E fertilizer installed capacity

Exhibit 102: Fertilizers come in different formats – the key is their content of

nitrogen (N), potassium (K) and phosphates (P) Illustrative example of several nitrogen, potassium and phosphates based

fertilizers


Source: Yara, Goldman Sachs Research estimates.

End 2011E data, '000t Under construction

Total fertilizers

Company Urea and ammonia Potash DAP OtherSABIC globally 6,940 30% stake in Maaden DAP 6,940 of which SABIC in Saudi Arabia 6,940 of which Yansab (SABIC 52%) of which Kayan (SABIC 35%) of which Safco (SABIC 43%) 4,900 1,000 5,900 of which SABIC outside Saudi ArabiaSIIG of which Petrochem (SIIG 50%)PetroRabighSipchemTasneeSaharaAdvanced PetrochemicalMaaden 1,100 2,900 1,500 5,500

QatarIndustries Qatar 3,694 27 3,151 6,872

TurkeyPetkim (Turkey)Gubretas 1,931 450 940 300 3,621Tekfen 427 1,390 1,817

EgyptOrascom Construction 2,450 2,625 3,000 8,075Ezzsteel

JordanArab Potash 2,450 2,450Jordan Phosphate 1,300 1,625 2,925

Total stocks covered in region 16,115 2,450 5,077 8,107 6,451 31,260

Fertilizers

* 15-15-15 is just an example

* 1 ton of phosphoric acid requires 1 ton of sulphur

Phosphate rock

Phosphoric acid(100% P2O5)

MAP(11% N, 52%

P2O5)

DAP(14% N, 46%

P2O5)

TSP(11% N, 52%

P2O5)

Sulphur*

Ammonia(82%N)

Ammonia(82% N)

Urea(46% N)

AN(33.5%N)

CAN(27% N)

NPK(15-15-15)*

P and K



MENA and Turkish chemicals and fertilizers multiples and growth relative to global peers

In Exhibits 103 and 104, we provide the 2011E P/E and EV/EBITDA for the MENA and Turkish chemicals and fertilizer companies

relative to global peers. Note that we value the stocks based on their own 5-year median multiple if available, and if this is not

available, we utilize the global 5-year median multiple for chemicals (8.2x EBITDA) or fertilizers (10.2x EBITDA). For example, SABIC

and Industries Qatar have historically traded on higher EV/EBITDA multiples than global chemicals or fertilizers, likely due to their

low tax rate and high returns, and we continue to apply such mid-cycle multiples to the stocks when determining their target prices.

Exhibit 103: While on EV/EBITDA the regional chemicals do not look that

attractive relative to their EBITDA growth...

Chemicals EV/EBITDA and 2011-2013E EBITDA growth relative to global peers

Exhibit 104: ...several do on P/E relative to EPS growth as low tax rates in the

region let a higher share of EBITDA fall though to EPS

Chemicals EV/EBITDA and 2011-2013E EBITDA growth relative to global peers

Source: Goldman Sachs Research estimates. Prices as of 04/11/2011


R² = 0.376

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A 2

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EBITDA growth 2011-2013E

SABICIndustries QatarYansabTasnee

Sipchem

Sahara Petrochem

Petkim

Advanced Petrochem

Soda Sanayii

Aksa Sanayi

Dupont

Dow Chemical

LyondellBasell

BASF SEBayer AG

Akzo Nobel

Asahi Kasei

Mitsubishi Chemical

Sumitomo Chemical

R² = 0.5544

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SABIC Industries QatarYansabTasnee

SIIG

Sipchem

Sahara Petrochem

Petkim

Advanced Petrochem

Soda SanayiiAksa Sanayi

Dupont

Dow Chemical

LyondellBasell

BASF SE

Bayer AG

Akzo Nobel Asahi Kasei

Mitsubishi Chemical Sumitomo Chemical



Exhibit 105: Orascom Construction, Gubretas and Jordan Phosphate have

high EBITDA growth relative to their current EV/EBITDA Fertilizers EV/EBITDA and 2011-2013E EBITDA growth relative to global peers

Exhibit 106: ...as well as high EPS growth relative to their P/E Fertilizer companies’ P/E and 2011-2013E EBITDA growth relative to global peers.

Gubretas is out of scale (P/E of 12.5x and EPS growth of 68%)



EV capacity only a rough measure of companies’ values

Companies in the region achieve different returns partly due to higher/lower efficiency, marketing strategies and feedstock utilized,

but also due to different equipment costs. This might be in some cases a result of the timing of the construction of the facilities and

the timing of the procurement and engineering contracts. Companies in the region would typically trade on high EV/capacity due to

the high CROCI achieved. Most of the companies trade on an EV/capacity of US$1-2 mn per ‘000 tonne – however, some companies

such as Gubretas, Jordan Phosphate and Soda Sanayi trade well below the other peers despite reasonable returns. Petkim also

trades on low multiples, yet that can be justified given the low CROCI. Exhibit 107 provides a rough estimate of the different

EV/capacity for the different companies in our coverage.

0

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EBITDA growth 2011-2013E

SAFCO

Orascom Construction

Arab Potash

Jordan PhosphateTekfen Holding

Gubretas

Potash Corp. Mosaic

Agrium Inc.

Uralkali

Israel ChemicalsYara

Qinghai Salt Lake

China BlueChemical

Hubei Yihua Chemical

0

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P/E

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EPS growth 2011-2013E

SAFCO Orascom ConstructionArab Potash

Jordan Phosphate

Tekfen Holding A.S.

Potash Corp. Mosaic

Agrium Inc.

Uralkali

Israel Chemicals

Yara

Qinghai Salt Lake

China BlueChemical

Hubei Yihua Chemical



Exhibit 107: Industries Qatar and SABIC most diversified companies

Tasnee Ti02 business here classified as industrial activity under “metals”

Exhibit 108: EV/capacity varies significantly due to different levels of

profitability For Petro Rabigh, the calculation does not include the refining capacity



Our key price assumptions for basic chemicals and fertilizers

We expect ethylene margins to be stable in 2011 and 2012 and recover in 2013

Our estimates for naptha-based producers are aligned with the GS Chemicals team’s in Asia; we expect ethylene margins for naptha

producers to stay at US$270-275/tonne for 2011, 2012 and then rise to US$370/tonne in 2013 as demand picks up. From 2014, we use

normalized margin levels (based on the ten-year average margin of the product as well as normalized oil price levels). Middle

Eastern producers, for which Asia is the main export market, should have higher margins as their cost base is significantly below

that of international chemicals companies that use naptha to produce ethylene, as described above. Some 55% of the world’s

ethylene capacity is still based on naptha cracking, while ethylene producers in the Gulf use mostly ethane (natural gas).

End 2011E data, '000t Chemicals Fertilizers Metals

Company Chemicals Fertilizers MetalsSABIC globally 56,944 6,940 4,800 83% 10% 7% of which SABIC in Saudi Arabia 47,832 0 0 100% 0% 0% of which Yansab (SABIC 52%) 4,045 0 0 100% 0% 0% of which Kayan (SABIC 35%) 5,967 0 0 100% 0% 0% of which Safco (SABIC 43%) 0 5,900 0 0% 100% 0% of which SABIC outside Saudi Arabia 9,112 0 0 100% 0% 0%

SIIG 4,600 0 0 100% 0% 0% of which Petrochem (SIIG 50%) 3,410 0 0 100% 0% 0%PetroRabigh 4,550 0 0 100% 0% 0%Sipchem 2,559 0 0 100% 0% 0%Tasnee 3,340 0 866 79% 0% 21%Sahara 1,192 0 0 100% 0% 0%Advanced Petrochemical 905 0 0 100% 0% 0%Maaden 4,275 5,500 0 44% 56% 0%

QatarIndustries Qatar 2,243 6,872 6,140 15% 45% 40%

TurkeyPetkim (Turkey) 2,553 0 0 100% 0% 0%Gubretas 1,135 3,621 0 24% 76% 0%Tekfen 0 1,817 0 0% 100% 0%

EgyptOrascom Construction Industries 0 7,755 0 0% 100% 0%Ezzsteel 0 0 5,800 0% 0% 100%

JordanArab Potash 0 2,450 0 0% 100% 0%Jordan Phosphate 0 2,925 0 0% 100% 0%

Total stocks covered in region 85,162 30,940 11,940 67% 24% 9%

As % of total capacity Company EV (US$ mn) Capacity ('000t) EV/CapacityAdvanced Petrochemicals 1,132 905 1.25Aksa Akrilik Kimya Sanayi 573 310 1.85Arab Potash Company 4,167 2,450 1.70Gubretas 1,301 4,756 0.27Industries Qatar 19,969 15,255 1.31Jordan Phospate Mins. Co 1,387 2,925 0.47Tasnee 12,902 4,106 3.14Petrochem 7,799 3,410 2.29Petkim Petrokimya 1,189 2,553 0.47Petro Rabigh 11,691 2,400 4.87Sahara Petrochemicals 1,204 917 1.31SAFCO 10,477 5,900 1.78Maaden 9,062 9,875 0.92SABIC 128,890 68,684 1.88SIIG 6,704 4,600 1.46Sipchem 3,986 2,259 1.76Saudi Kayan 14,239 5,967 2.39Soda Sanayii 370 1,502 0.25Yansab 9,314 4,045 2.30



Exhibit 109: Our price assumptions for basic petrochemicals


Fertilizer prices driven by price of natural gas, which is still oil-linked

As discussed previously, fertilizer prices globally tend to have a strong correlation with oil prices. This is due to the indirect link that

exists in several markets between gas prices and oil prices (several gas exporting countries are selling their gas to Europe and Asia

under oil-linked contracts and these countries still produce fertilizers locally, even though their market share is shrinking). We thus

derive our urea and ammonia price forecasts (Middle East FOB) on the basis of the GS oil price assumptions driving gas prices in

these (marginal) fertilizer producing countries (where gas prices are still oil linked).

Historical average(US$/tonne) 2008 2009 2010 2011E 2012E 2013E 2014N 2015N 10 year averageCrude oil and productsBrent ($/bbl) 98 61 79 111 120 130 85 85 55y-o-y growth 35% -37% 29% 40% 8% 8% -35% 0%Naphtha 772 523 684 911 983 1,061 723 723 466y-o-y growth 18% -32% 31% 33% 8% 8% -32% 0%Benzene 993 686 926 1,100 1,100 1,250 850 850 710

Ethylene chainPricesEthylene 1,160 863 1,071 1,186 1,253 1,411 1,121 1,121 864y-o-y growth -1% -26% 24% 11% 6% 13% -21% 0%High-density PE 1,441 1,109 1,223 1,376 1,433 1,561 1,260 1,260 1000Linear low-density PE 1,506 1,149 1,294 1,351 1,393 1,613 1,287 1,287 1026Low-density PE 1,609 1,172 1,476 1,611 1,653 1,806 1,365 1,365 1104Naptha-based marginsEthylene-naphtha 388 339 387 275 270 350 398 398 398HDPE – 1.015 x ethylene 263 234 136 172 161 129 123 123 123LLDPE – 1.015 x ethylene 328 273 207 147 121 181 149 149 149LDPE – 1.015 x ethylene 432 297 389 407 381 374 227 227 227HDPE – naphtha 669 586 539 465 450 500 538 538 534LLDPE – naphtha 733 625 610 440 410 552 564 564 560LDPE – naphtha 837 649 792 700 670 745 642 642 638

Propylene chainPricesPropylene 1,261 939 1,187 1,381 1,458 1,541 1,146 1,146 889y-o-y growth 10% -26% 26% 16% 6% 6% -26% 0%Polypropylene 1,471 1,052 1,299 1,571 1,653 1,741 1,276 1,276 1017AN 1,820 1,244 2,176 2,519 2,654 2,795 1,615 1,615 1319Naptha-based marginsPropylene-naphtha 489 415 503 470 475 480 423 423 423PP – 1.01 x propylene 197 104 100 176 180 185 118 118 118PP – naphtha 698 528 615 660 670 680 551 551 551AN margin 433 211 870 1,000 1,050 1,100 355 355 355

GS FORECAST Historics Normalized assumptions



Our assumptions for potash (Arab Potash) are aligned with those used for other companies producing potash under GS coverage. It

is worth noting that the prices in the table are spot prices, while there tends to be a lag in achieving such spot prices in a rising price

environment. For DAP, we assume the prices to be correlated with ammonia and potash, yet assume a 10% discount from 2012 to

take into account the large increase in capacity following the entry into operation of Maaden’s additional capacity (10% of world’s

DAP production).

Exhibit 110: Our price assumptions for fertilizers US$/tonne


GS estimates, $/tonne 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014N 2015EAmmonia Middle East 245 271 485 243 357 460 495 535 412 413Urea Middle East 223 308 499 227 289 401 417 446 338 339Potash (spot) 204 246 568 466 396 530 595 600 620 620DAP 260 433 967 323 448 595 590 614 558 558Phosphate rock 44 71 346 122 123 163 162 169 153 153y-o-y growthAmmonia Middle East 2% 11% 79% -50% 47% 29% 8% 8% -23% 0%Urea Middle East 1% 38% 62% -55% 27% 39% 4% 7% -24% 0%Potash (spot) 7% 21% 131% -18% -15% 34% 12% 1% 3% 0%DAP 5% 66% 124% -67% 39% 33% -1% 4% -9% 0%Phosphate rock 5% 60% 387% -65% 1% 33% -1% 4% -9% 0%

Explicit GS forecasts GS normalized



Exhibit 111: Our calculations behind our ammonia and urea assumptions


Marginal gas price assumption 2011E 2012E 2013E 2014N 2015EOil price, $/bbl 111 120 130 85 85Energy equivalent ($/mmBTU) 17.3 18.8 20.3 13.3 13.3Gas discount to oil, % 35% 35% 35% 25% 25%Marginal gas price assumption, $ mmBTU 11.3 12.2 13.2 10.0 10.0

Ammonia/urea price model 2011E 2012E 2013E 2014N 2015EAmmonia cost per tonneGas price, $/mmBTU 0.75 0.75 11.3 12.2 13.2 10.0 10.0Gas consumption (mmBTU/tonne) 38 38 38 38 38 38 38Gas costs 29 29 428 463 502 379 379Other costs per tonne, $/tonne 31 31 32 32 33 34 34y-o-y growth 2% 2% 2% 2% 2%Total ammonia cost per tonne (Gulf) 60 60 460 495 535 412 413

Ammonia cash cost 60 60 460 495 535 412 413* Ammonia use (0.58NH3 per tonne of urea) 0.58 0.58 0.58 0.58 0.58 0.58 0.58Ammonia cost 35 35 267 287 310 239 239Additional gas required, mmBTU per tonne) 5.2 5.2 5.2 5.2 5.2 5.2 5.2Other gas costs 3.9 3.9 59 63 69 52 52Other cash costs 25.0 25.5 26 27 27 28 28y-o-y growth 2% 2% 2% 2% 2%Additional spread 50 40 40 20 20Total urea cost per tonne (Gulf) 63 64 401 417 446 338 339



The energy efficiency debate – high energy resources, yet poor energy efficiency

The GCC countries are relatively inefficient users of energy in terms of energy consumption per unit of GDP, well surpassing energy

importing and therefore energy efficient places like Europe or Japan. For example, with a population of c.28mn currently, in 2010

Saudi Arabia consumed 2.7mboe/day of oil while producing 8.2mboe/day. Its population has tripled over the last 30 years. Should it

triple again (and oil consumption per head remains unchanged, thus tripling overall), Saudi Arabia would consume its entire oil

production domestically. Part of this reason is due to the fact that approximately half of the domestic power generation in Saudi is

still oil-fired. While this ensures security of supply, developing power plants with other technologies (for example coal or nuclear

plants are absent in the kingdom) could lead to energy efficiencies. Kuwait also uses fuel or crude oil for some of its power plants.

In fact, should Saudi power demand, which is currently at the same level as Germany (despite a lower GDP per head), reach the

same levels of its wealthy neighbours (UAE, Qatar, Kuwait), total power demand could increase from the current level of 200TWh to

c.500TWh – the incremental demand is almost equivalent to the size of the Italian power market and would require an investment in

excess of US$100 bn, in our view, when significant energy savings could be achieved for example, through better insulation.

Relatively little has also been invested into renewables. While solar could offer potentially large deployment opportunities longer

term, its costs are still non-competitive and in certain locations plant efficiency might also suffer from high dust levels.

Exhibit 112: GCC oil consumption per head is not only well above global

average but also above the US levels Oil consumption per head, bbl/year

Exhibit 113: GCC power consumption relative to European and BRIC markets GCC power consumption per head relative to European and BRIC markets and

GDP level

Source: IAE, Goldman Sachs Research estimates.

Source: Calendario Atlante de Agostini, Goldman Sachs Research estimates.

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Consumption above relative GDP level

QatarFinland

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GermanyCzech RepublicRussia Spain

United Kingdom

ItalyGreece

Slovakia

Oman

Bulgaria

Poland

ChinaIran

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Brazil

EgyptIraq

MoroccoIndia



The Iranian example: Replacing cost subsidies with direct subsidies to stimulate efficiency

A significant debate in the industry has been the potential increase in the cost of gas. Saudi Arabia has the lowest cost of gas in the

region and some neighbouring countries have started increasing energy prices. According to an IMF working paper (WP/11/167), the

price increases in Iran (gas price has been quadrupled and diesel prices increased up to 20 times) have been an economic success.

The Iranian government plans to increase some domestic gas and energy prices further up to 75% and 90% of the international price

as it tries to encourage more energy efficiency domestically and thus try to maximize exports. The increase in these commodities is

being subsidized by direct cash transfers to families. In Dubai, gasoline prices were increased in 2010, yet the government has

recently resisted further price increases at the pump, while non-integrated companies were forced to acquire petrol at market prices,

which has led one oil retailer to close in some Emirates (ENOC). In Saudi, oil retailers (like Aldrees Petroleum), on the other hand,

enjoy a fixed margin on their sales (the price for gasoline in Saudi is currently US$0.16/litre).

As mentioned above, Bahrain and Oman have also started increasing domestic gas prices for their industry. Bapco, the Bahraini oil

company, has notified Alba, the Bahraini aluminium producer, that it will increase gas prices from US$1.50 to US$2.25mmBTU

effective January 1, 2012, while Oman is seeking to increase its gas prices to the fertilizer company Omifco from US$0.77mmBTU to

US$3mmBTU, as well as to the country’s first aluminium company in Sohar.



Infrastructure section: Construction, Cement, Real Estate



MENA construction: US$815 bn of projects to be awarded in the GCC from 2011E-15E

We estimate that the MENA construction market was worth US$170 bn in 2010 and has been growing at 14% per annum on

average since 2000. The countries that have exhibited the highest level of growth over that period have been Qatar, Oman

and the UAE. The total value of ongoing projects in the region is US$2.6 trn, which is approximately 108% of MENA total

GDP. The majority of projects relate to the real estate, oil and gas and infrastructure sectors. Construction in the MENA

region is driven by economic growth (largely influenced by the oil price), favourable demographics and government spend

or stimulus programs. Over the next five years, we forecast the value of construction projects to be awarded in the GCC

(c.77% of MENA construction activity) to reach US$815 bn, driven mainly by Saudi Arabia, Qatar and the UAE (mainly Abu

Dhabi) and that this will lead to growth in GCC construction spend of 4% per annum over 2011-15. We launch coverage of

seven construction related companies in the MENA region and resume coverage of an additional two stocks. Our top picks

are Orascom Construction Industries and Drake and Scull.

Exhibit 114: Construction spend as % of GDP stood at 3.4% on average in

2010 Average MENA construction spending as % of GDP 1990-2010

Exhibit 115: We forecast construction spend to grow by 4% pa on average in

the GCC over 2011-15, with Bahrain, Saudi Arabia and Qatar to be the

strongest markets

Construction spend yoy, GCC countries 2011-15E

Source: Datastream, IMF, Bahrain Ministry of Finance, Egypt Ministry of Economic Development, The Hashemite Kingdom of Jordan DOS, Kuwait Ministry of Planning, Morocco Haut-Commissariat au Plan, Oman MONE, Qatar Statistics Authority, SAMA, Central Bank of the UAE, Goldman Sachs Research estimates.


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

-40%

-20%

0%

20%

40%

60%

80%

100%

2011E 2012E 2013E 2014E 2015E

Bahrain Kuwait Oman Qatar

Saudi Arabia UAE GCC Total



Saudi Arabia is now the largest market for new construction projects in MENA

From 2006 to 2009, the UAE was the largest construction market in the MENA region, driven primarily by a boom in the Dubai real

estate market. Exhibit 117 illustrates that the aftermath of the boom in Dubai was severe retrenchment, with c.US$160 bn worth of

projects that had been announced in the Emirate from 2005-08 subsequently cancelled, including US$45 bn in 2008. New project

awards in Dubai in 2009 and 2010 approximated the levels in 2003 and 2004, but it should be pointed out that projects

completed/under construction in Dubai between 2005 and 2010 totalled c.US$120 bn, signifying significant and successful

investment in the infrastructure of the Emirate. Since the slowdown of the Dubai market (and by extension the UAE market), Saudi

Arabia has emerged as the strongest market in the GCC (and also MENA) for new projects in 2010, with project wins of c.US$66 bn

ahead of the UAE at c.US$48 bn.

Exhibit 116: Saudi Arabia overtook the UAE to become the largest market in

the GCC for new projects in 2010 New project awards by GCC country, 2004-2010 (US$ bn)

Exhibit 117: US$45bn of projects were cancelled in 2008 in Dubai Dubai projects market 2003-2010 (US$ bn)

Source: MEED, Goldman Sachs Research.

Source: MEED, Goldman Sachs Research.

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2004 2005 2006 2007 2008 2009 2010

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Projects completed or under construction Projects awarded and subsequently put on hold or cancelled



There are ongoing projects worth US$2.6 trillion in MENA

At present, there are US$2.6 trillion worth of ongoing projects in the MENA region, which is equivalent to c.108% of total MENA

GDP in 2010. Some US$2.0 trillion (c.77%) of the value of projects comes from the GCC countries. UAE and Saudi Arabia are the two

largest construction markets in MENA based on ongoing projects, with US$790 bn worth of projects in the UAE and US$578 bn in

Saudi Arabia – these two countries account for over 50% of ongoing projects in MENA. Real estate currently accounts for the largest

share (43%) of ongoing projects in the region, with oil and gas (22%) and infrastructure (18%) also prominent. The largest projects in

the region relate to the reconstruction of Iraq, while the GCC rail network (US$30 bn) is the third largest ongoing project in MENA

currently. We forecast US$815 bn of new projects in the GCC region to be announced between 2011 and 2015, with 41% of this to

come from Saudi Arabia, 23% from the UAE and 13% from Qatar. The analysis below shows the budgeted value of previously

announced projects in the region – it is possible, according to MEED Projects, that some projects may end up being cancelled (in

real estate especially).

Exhibit 118: Iraqi reconstruction, GCC infrastructure and Omani real estate constitute the largest projects in the MENA region Top 5 ongoing projects as at November 2011 in MENA, Egypt, Qatar, UAE and Saudi Arabia

Source: Zawya, Goldman Sachs Research estimates.

MENA - Top 5 ongoing and planned projects by value Value (USD bn) Sector Country CompletionIraq MOO - Oil and Gas Pipeline Rehabilitation Project 50.0 Oil and gas Iraq May-17NIC Iraq - Housing Units Program 50.0 Real estate Iraq Jan-13Gulf Cooperation Council - GCC Rail Network 30.0 Infrastructure Bahrain Mar-17DSME/Omran - Frontier Town 20.0 Real estate Oman Apr-20Oman Ministry of Finance - Duqm New Downtown 20.0 Real estate Oman Feb-20

Egypt - Top 5 ongoing and planned projects by value Value (USD bn) Sector CompletionTalaat Moustafa Group (TMG) - Madinaty 14.0 Real estate Sep-32Al Futtaim - Cairo Festival City 9.0 Real estate Apr-20Barwa Real Estate Company - Barwa New Cairo 9.0 Real estate Aug-23Damac Properties - Hyde Park 7.0 Real estate Nov-18Saudi-Egyptian Business Council- Saudi/Egypt Causeway 4.0 Infrastructure Mar-12

Qatar - Top 5 ongoing and planned projects by value Value (USD bn) Sector CompletionQatar Railways Development Company - Qatar Rail Network Program 42.9 Infrastructure Nov-20QP - Qatar North Gas Field Development 20.0 Oil and gas Mar-14UDC - The Pearl Qatar 14.0 Real estate Jan-13NDIASC - New Doha International Airport 11.0 Infrastructure Jan-13QP/ExxonMobil - Barzan Gas Development 8.6 Oil and gas Jan-15

Saudi Arabia - Top 5 ongoing and planned projects by value Value (USD bn) Sector CompletionModon - Sudair Industrial City 40.0 Real estate Feb-28SAGIA - Ras Al Zour Economic City 25.0 Real estate Apr-20Sadara Chemical Company - Jubail Petrochemicals Complex 20.0 Petrochemicals Jul-15Khuzam Real Estate Company - Qasr Khuzam 13.3 Real estate Apr-14Saudi Kayan - Jubail Petrochemicals Complex 12.5 Petrochemicals Dec-13

UAE - Top 5 ongoing & planned projects by value Value (USD bn) Sector Column1 CompletionMeraas Development - Jumeirah Gardens City 95.0 Real estate Oct-24Abu Dhabi Urban Planning Council - Capital District 40.0 Real estate Mar-30ENEC - Nuclear Power Plant 40.0 Power and water Jan-20ALDAR Properties - Yas Island Development 40.0 Real estate Sep-15Dubai World Central (DWC) 33.0 Real estate Aug-20



Exhibit 119: The UAE and Saudi Arabia account for over 50% of MENA

ongoing projects Value (US$ bn) of ongoing projects in MENA, November 2011 – total value

US$2.6 trn

Exhibit 120: Real estate accounts for the largest portion of ongoing projects

MENA ongoing projects by type, November 2011



Exhibit 121: We expect US$815 bn of new projects to be announced in the

GCC between 2011 and 2015, with Saudi Arabia to see the highest share New project awards 2004-2015E, GCC countries

Exhibit 122: Current projects are geared to real estate in Egypt, Oman, Saudi

Arabia and UAE, while oil and gas projects are prominent in Iraq and KuwaitOngoing projects by type, for 8 largest projects markets in MENA currently

Source: MEED Projects, Goldman Sachs Research estimates.


0

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700,000

800,000

900,000 Alternative energy0.1% Industry

3.1%

Infrastructure17.8%

Oil and gas21.9%

Petrochemicals6.2%

Power and water7.8%

Real estate43.0%

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Bahrain Egypt Iraq Kuwait Oman Qatar Saudi Arabia

UAE

Alternative energy Industry Infrastructure Oil and gas

Petrochemicals Power and water Real estate



Construction spend drivers: Economic growth, demographics and government expenditure

In general, we think the three main drivers of construction growth in the MENA region are: (1) economic growth; (2) demographics

and (3) government stimulus.

As can be seen below, there is a strong relationship between economic growth and construction spend growth over time in the

MENA region, with an R-squared of 36% over 1991-2010. It can also be seen that construction spend growth in MENA tends to be

more volatile than GDP growth over time, with the median construction growth to GDP multiplier equating to 1.2x between 1991

and 2010. The IMF forecasts real GDP growth of c.4% between 2013 and 2015 for the MENA region, which bodes well for regional

construction spend in our view.

Exhibit 123: There is a good relationship between construction spend and

GDP Average nominal construction spend growth vs. average nominal GDP growth

1991-2010 scatter – based on data for Bahrain, Egypt, Jordan, Kuwait, Morocco,

Oman, Qatar, Saudi Arabia and UAE

Exhibit 124: Construction spend has been more volatile over time Average nominal construction spend growth vs. average nominal GDP growth

1991-2010 line chart – based on data for Bahrain, Egypt, Jordan, Kuwait, Morocco,

Oman, Qatar, Saudi Arabia and UAE



R² = 36%

-5%

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0% 2% 4% 6% 8% 10% 12% 14% 16%

Aver

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Average nominal construction spend growth Average nominal GDP growth



The oil price is a significant driver of GDP in MENA…and therefore of construction spend

With oil representing c.30%-60% of GDP by country in MENA, it can be seen below how close the relationship is between oil price

growth and GDP growth is (correlation of 49% between 1993 and 2010). As shown above, there is a strong relationship between

GDP growth and construction spend growth, so it is no surprise that the oil price is also a significant driver of construction spend in

MENA. Given the Goldman Sachs forecast for the oil price of US$120/bbl in 2012 and US$130/bbl in 2013, we think the outlook for

MENA construction spend is well underpinned.

Exhibit 125: The oil price is a strong driver of MENA GDP growth… Average annual brent oil price vs. annual total MENA (ex-Iraq) nominal GDP

growth 1993-2010

Exhibit 126: …and is therefore a strong driver of MENA construction spend

growth Average annual brent oil price vs. average MENA nominal construction spend

growth 1993-2010

Source: Datastream, IMF, Goldman Sachs Research.

Source: Datastream, Bahrain Ministry of Finance, Egypt Ministry of Economic Development, The Hashemite Kingdom of Jordan DOS, Kuwait Ministry of Planning, Morocco Haut-Commissariat au Plan, Oman MONE, Qatar Statistics Authority, SAMA, Central Bank of the UAE, Goldman Sachs Research estimates.

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MENA nominal construction spend growth Average Brent Oil Price growth (RHS)



Demographics: MENA has higher birth rates and a younger population than global levels

The MENA region has one of the youngest populations in the world with c.30% of its population below the age of 15. Within the

region, Iraq and Yemen are the countries with the youngest populations in terms of % of population below the age of 15. Other

sizeable countries with young populations are Egypt and Saudi Arabia, which both have a higher % of population below the age of

15 than the global level. This is further evidenced by the birth rate, which at 23 per 1,000 population for MENA on average, is above

the global level of c.20 per 1,000. The Economist Intelligence Unit forecasts that total population for MENA countries will grow by

34% between 2010 and 2030, with the highest growth rates in that period to come from GCC countries – Qatar, Bahrain, UAE, Saudi

Arabia and Kuwait. Demographics and population growth drive construction in our view as it leads to increased demand for housing,

schools, infrastructure, utilities and so on.

Exhibit 127: MENA’s birth rate (average 23 per 1,000 population) is higher

and population is younger (30% below 15 years old) than global levels Birth rate per 1,000 population (2009) and % of population below 15 years old

(2010)

Exhibit 128: The potential growth in MENA population is projected to

significantly exceed world population growth Projected total population growth between 2010 and 2030

Source: World Bank Development Indicators (WDI), Datastream.

Source: EIU, Datastream, Goldman Sachs Research estimates.

05

101520253035404550

Birth rate (per 1000) % of population below 15 years old

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120%



Government: Spending and stimulus are major factors behind construction

Government expenditure is a major factor behind construction growth in the region. Oil and gas wealth have increased reserves and

this has allowed governments to spend more on infrastructure and non-oil parts of the economy. Several countries, including Abu

Dhabi, Kuwait and Qatar have long-term development plans, as summarized below. Qatar’s significant infrastructure investment

plans have been strengthened following the award of the 2022 World Cup. Abu Dhabi (the capital Emirate of the UAE) also has a

2030 plan that assumes growth in population to 3.2mn by 2030 vs. the c.0.9mn in 2009. Kuwait is a wealthy country and also has

significant plans, although implementation has been moderately paced up to now. On top of these long-term plans, the political

upheaval witnessed in MENA this year has led directly and indirectly to extra stimulus spending, with Saudi Arabia and Oman in

particular seeing stimulus plans announced that are significant in terms of GDP. Taking into account country oil and gas wealth and

announced plans to date, we think that Saudi Arabia, Qatar and Abu Dhabi will be the strongest construction markets in MENA in

the medium term.

Exhibit 129: Abu Dhabi and Qatar have major ongoing plans, as does Kuwait although implementation has been moderately paced Details of major infrastructure ongoing plans in Qatar, Abu Dhabi and Kuwait

Source: Abu Dhabi Urban Planning Council, Mega Project Agency; Kuwait Ministry of Public Works, General Secretariat for Development Planning; Qatar

Country Development plan period Major projects

Total spending in mid term

development plan(US$ bn)

Abu Dhabi Plan Abu Dhabi 2030Mid term development plan 2009-2013

The plan includes development of Central Business district, Capital district, Grand Mosque district and the Lulu island. It plans to accommodate 3.17mn people, develop 7.5mn sqm of office space, 4.1mn sqm of retail space 15mn sqm of Industrial area and 74,500 hotel rooms 160

Kuwait Kuwait strategic vision 2035Mid term development plan 2010-2014

The plan includes development of silk city which will spread in an area of 250sqkm with 750,000 residents and 175,000 residential units. Constructing Kuwait university city spread across 4.9mn sqm to accomodate4 40,000 students. Expansion of Kuwait international airport, rail network and highways, The Bubiyan Island and Failaka Island development and increasing oil and natural gas production. 125

Qatar Qatar National Vision 2030Mid term development plan 2011-2016

Increasing hydrocarbon and petroleum output, real estate and construction projects, infrastructure spending through a series of transportation schemes including new Doha International airport, Doha port and new railway network and metro. 82



Exhibit 130: Recent stimulus spending announced by governments in MENA bolster regional construction growth prospects in our view Stimulus spending by MENA governments

`

Source: World Bank MENA Regional Economic Update, May 2011

Country Wages Subsidies Tax cuts Transfers Infrastructure Jobs Total cost

BahrainIncrease in food subsidies, including flour and meat by 44 mn dinars

25% cut in housing instalment payments USD 2600 per family

Construction of public housing by at least 6000 units per year

20,000 new jobs at Ministry of Interior

Kuwait Free food for 13 months through discount price program

USD 3600 grant to all Kuwaiti citizens

USD4 billion forconstruction of newhousing.

Oman Unemployment benefit program of USD 390 per month; USD 520 min. wage

Pay subsidies and fix the prices of essential commodities Development plan

A new public sectoremployment programcovering 50,000citizens. 20% of GDP

Saudi Arabia

Unemployment allowance wasset at SR 2000 (USD530) permonth, and a SR3000(USD800) per month.minimum wage was instituted for nationals working in thepublic sector.

USD300 mn in grants for charities andneedy students, a bonus payment of2 months‘ salary/stipend toall public employees and scholarshipstudents.

0.5 mn newhouses to be builtwith budgetallocation of SR250billion (USD67billion).

Add 60,000 newsecurity jobs in theMinistry of Interior;add 500 new jobs atMinistry ofCommerce andIndustry. 25% of GDP

Jordan

Raised the salaryof civil servants,the military, andretirees by JD 20(USD28) a monthfor a cost ofUSD233 mn.

New subsidies ofUSD550 mn; allocatingtransfers to the state-runconsumer corporations tosubsidize the price of sugar, rice and frozenpoultry, and to implement income generating projects in poor areas.

Total of USD169mn. Suspendingthe special sales tax on kerosene anddiesel; reducing thetax on gasoline from 18 to 12 %.

Total of USD57 mn,Allocating transfers to the state-runconsumer corporations to subsidize the price of sugar, rice and frozen poultry, and implementing income generating projects in poorareas. 2.1% of GDP

Egypt 15 % increase in wages and pensions (LE2 bn or 0.17 % ofGDP)

Increase in subsidy of about 0.2 % of GDP due to the rise in global food prices (LE2.8 bn)

Addition of 150,000 families to the socialsolidarity program (LE100 mn)

To permanently hirethe temporarycontract employees(about 450,000) 0.8% of GDP.

Morocco Injected approximatelyUSD 2 bn in subsidies to curb price hikes forstaples.

Set up an employment program for educatedunemployed. The new budget law hasprovided 18,802 newjob positions.



Largest contractors in the GCC

The chart below shows the largest contractors in the GCC region based on work under execution, with Saudi Binladin Group, Al

Habtoor Leighton and Saudi Oger the largest contractors operating in the GCC.

Exhibit 131: The contracting market is highly fragmented; Saudi Binladin Group, Al Habtoor Leighton and Saudi Oger are currently

the largest in GCC Top 10 contractors in the GCC by value of work under execution in the infrastructure and construction sectors

Source: MEED Projects

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May-11 Jun-10



We initiate coverage of nine construction stocks

We initiate coverage of seven construction stocks and resuming coverage of additional two names with a combined market cap of

US$11.6 bn that are spread across four countries in MENA – Egypt, Oman, Saudi Arabia and the UAE. We cover five construction

contractors, three of which are regional in focus (Orascom Construction Industries, Arabtec and Drake and Scull) with the other two

more focused on their domestic markets (Al Khodari and Galfar). We also cover three construction products companies based in

Saudi Arabia – Amiantit, Zamil and Saudi Steel Pipe. Red Sea Housing specializes in modular building solutions for industry.

Orascom Construction Industries is the largest construction company under our MENA construction coverage, in terms of revenues,

backlog and market cap. We note, however, that since 2007 the company has been making significant investments into fertilizers –

we project that fertilizers will account for c.80% of the company’s EBITDA by end 2012.

We also launch coverage of MENA real estate and cement stocks, which are also construction related, but include them in their own

specific sections.

Exhibit 132: We are initiating on seven construction stocks in the MENA region and resuming coverage of Orascom Construction

Industries and Arabtec Holding

Summary of MENA construction stocks we are initiating on in this report

Source: FactSet, DataStream, Goldman Sachs Research.

Ticker Company name Country Main businessMarket cap

(USDmn)12 month Average daily

volume (USD mn)OCIC.CA Orascom Construction Industries Egypt Construction contractor 7,838 6.331330.SE Abdullah Abdul Mohsin Al-Khodari Sons Company (Al Khodari) Saudi Arabia Construction contractor 584 4.01ARTC.DU Arabtec Holding United Arab Emirates Construction contractor 558 6.72DSI.DU Drake and Scull International United Arab Emirates Construction contractor 482 2.30GECS.OM Galfar Engineering & Contracting Oman Construction contractor 300 0.542160.SE Saudi Arabian Amiantit Company Saudi Arabia Construction products 451 4.852240.SE Zamil Industrial Investment Company Saudi Arabia Construction products 419 3.861320.SE Saudi Steel Pipe Saudi Arabia Construction products 339 1.804230.SE Red Sea Housing Saudi Arabia Modular buildings 333 2.64



Exhibit 133: Orascom Construction Industries is the largest MENA

construction stock in our coverage Stocks ranked by current market cap (US$ bn)

Exhibit 134: Our coverage constituted US$10.4 bn in revenues in 2010…

Stocks ranked by 2010 revenues, US$ mn

Source: FactSet.

Source: Company data.

Exhibit 135: …and US$1.8 bn of EBITDA Stocks ranked by 2010 EBITDA, US$ mn

Exhibit 136: OCI and Arabtec had the largest backlogs at the end of 2010 Stocks ranked by end 2010 reported backlog, US$ mn



7,838

584 558 482 451 419 339 333 300

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OCI Al Khodari Arabtec Holding

Drake and Scull

Amiantit Zamil Industrial

Saudi Steel Pipe

Red Sea Housing

Galfar

4,887

1,488 1,072 961 821

505 286 199 158

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Industries

Arabtec Holding

Zamil Industrial

Investment Company

Galfar Engineering

& Contracting

Saudi Arabian Amiantit

Company

Drake and Scull

International

Abdullah Abdul

Mohsin Al-Khodari Sons Company (Al

Khodari)

Red Sea Housing

Saudi Steel Pipe

1,073

191 139 108 93 92

54 41 26 -

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Arabtec Holding

Saudi Arabian Amiantit

Company

Zamil Industrial

Investment Company

Galfar Engineering

& Contracting

Abdullah Abdul

Mohsin Al-Khodari Sons Company (Al

Khodari)

Drake and Scull

International

Red Sea Housing

Saudi Steel Pipe

5,620

1,859 1,634 1,595

907 800

282

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Arabtec Holding Drake and Scull International

Galfar Engineering & Contracting

Saudi Arabian Amiantit Company

Abdullah Abdul Mohsin Al-Khodari Sons Company (Al

Khodari)

Red Sea Housing



Exhibit 137: We forecast Al Khodari and OCI to have the highest CROCI

within our Construction coverage… Average CROCI 2006-10 and 2011E-15E

Exhibit 138: …reflecting their sector leading margins

Average EBITDA margins 2006-10 and 2011E-15E



Exhibit 139: We forecast Drake and Scull to achieve the highest revenue

growth from 2011-15E… Average sales growth 2006-10 and 2011E-15E

Exhibit 140: …as well as the strongest balance sheet from 2011-15E Average net debt/equity 2006-10 and 2011E-2015E

Source Company data, Goldman Sachs Research estimates.


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Saudi Steel Pipe has seen the strongest stock price performance ytd; on average the sector has

underperformed the MSCI EEMEA

Exhibit 141: Galfar has been the weakest stock YTD; Saudi Steel Pipe has been the strongest performer

YTD share price performance of GS-covered MENA construction stocks vs. MSCI EEMEA

Source: Datastream, FactSet, Goldman Sachs Research estimates.

MSCI EEMEA

Al Khodari

Arabtec Holding

Drake and Scull International

Galfar

OCIRed Sea Housing

Amiantit

Saudi Steel Pipe

Zamil

50

60

70

80

90

100

110

120

130

140

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11

MSCI EEMEA Al Khodari Arabtec Holding Drake and Scull International Galfar

OCI Red Sea Housing Amiantit Saudi Steel Pipe Zamil



We expect MENA cement markets to grow by 6% pa through 2015E

The cement market in the MENA region has been growing by 9% pa over 2000-10 to stand at 259mn tonnes (c.8% of global

cement demand) at the end of 2010. We are launching coverage of 11 cement companies in this region, with companies

based in Egypt, Morocco, Qatar and Saudi Arabia. Of these four markets, we expect the strongest average growth over

2011-15 to come from Saudi Arabia (8% pa), driven by robust construction spending and GDP growth. We expect Egypt to

show the weakest growth (average of 2% of 2011-15) as the economic recovery following this year’s political upheaval is

uncertain. Our top picks in the sector is Arabian Cement, while our least preferred are Yanbu Cement, Qassim Cement and

Suez Cement.

We are launching coverage of 11 cement stocks in the MENA region spanning four countries, Saudi Arabia, Morocco, Egypt and

Qatar. The total cement tonnage sold in these markets was c.111mn in 2010 vs. the 259mn tonnes for the MENA cement market

overall. In terms of the markets we are covering, Egypt is the largest (48mn tonnes in 2010) and Qatar the smallest (7.2mn tonnes).

Over 2011-15E, we expect our MENA cement market coverage to grow 5.8% pa on average in volume terms from 111mn tonnes to a

total 153mn tonnes of cement consumption, driven by GDP growth and infrastructure spending (especially in Saudi Arabia and

Qatar).

Exhibit 142: Egypt is the largest of the cement markets that we are covering

MENA cement consumption/sales 2010 (mn tons)

Exhibit 143: We forecast Saudi Arabia to exhibit the highest market growth

rates on average from 2011-15E GS forecasts for MENA cement demand growth 2011-15E

Source: CemNet, Yamama Cement, EIP, APC, IMF, Goldman Sachs Research estimates. Black bars indicate markets where we are launching coverage of stocks in this report.


56.0

48.1

41.2

19.014.6

12.011.77.5 7.2 7.0 7.0

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Qatar

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2011E 2012E 2013E 2014E 2015E



Increasing GDP per capita is the key to increasing cement consumption per capita

There is a good correlation between GDP per capita and cement consumption per capita. Within the MENA region, the highest level

of cement consumption per capita was in Qatar in 2010, with over 4 tonnes per capita consumed. This is largely reflective of Qatar’s

high level of GDP per capita in our view. Saudi Arabia also consumed a high level of cement, especially in relation to its GDP per

capita vs. international levels. Egypt and Morocco exhibit low levels of consumption per capita within MENA and globally, although

it is notable that these countries exceeded consumption per capita in the US and Western Europe in 2010. These developed regions

have experienced a significant slowdown in private and public construction spend since 2008 and less need for infrastructure spend

vs. developing countries. The scope for Egypt and Morocco to increase cement consumption levels per capita will be driven in our

view by these countries’ ability to increase GDP per capita.

Exhibit 144: Qatar consumed the most cement per capita in the MENA region

in 2010 MENA countries cement consumption per capita, 2010 (kg)

Exhibit 145: GDP per capita is a strong indicator of cement consumption

trends Cement consumption per capita (kg) vs. GDP per capita (US$), 2010

Source: CemNet, Yamama Cement, EIP, APC,IMF, Goldman Sachs Research estimates. Black bars indicate markets where we are launching coverage of stocks in this report.

Source: CemNet, Yamama Cement, EIP, APC,TCMB, IMF, Goldman Sachs Research estimates. Black points and bold are MENA and Turkey cement market coverage.

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GDP per capita (USD), 2010

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Egypt

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Lebanon

Morocco

Oman

Qatar

Saudi Arabia

Tunisia

UAE

US

Western EuropeAlgeria

Syria

Libya

Jordan

Kuwait



We are initiating coverage on 11 cement companies in the MENA region

Within this report, we are launching coverage on 11 cement companies in the MENA region, spanning 4 countries:

Egypt: Suez Cement

Morocco: Ciments du Maroc, Holcim Maroc and Lafarge Ciments

Qatar: Qatar National Cement

Saudi Arabia: Arabian Cement, Qassim Cement, Saudi Cement, Southern Cement, Yamama Cement and Yanbu Cement.

In terms of size, Lafarge Ciments is currently the largest in terms of market cap, with the average market cap for the group being

US$1.8 bn. Suez Cement is the smallest in terms of market cap, despite having ranked as the largest in our group in terms of

revenues in 2010. The average revenue for our companies in 2010 was US$424 mn.

Exhibit 146: Lafarge Ciments is the largest MENA cement stock we cover in

terms of market cap… Current market cap, US$ mn

Exhibit 147: …while Suez Cement had the largest revenues in 2010

Revenues 2010, US$ mn

Source: FactSet.


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We expect MENA cement stocks to generate average CROCI of 15% in 2011-15E

In 2011-15E, we forecast our MENA cement companies to generate average CROCI of 15%, which is slightly down on the 18% that

was generated over 2006-10 on average by the same group of companies. We think this is mainly due to higher average costs due to

the elevated oil price relative to history. Nevertheless, the 15% average CROCI we forecast is above the 12% median forecast for GS-

covered global cement peers over the same period. We expect Southern Cement (Saudi Arabia) to generate the highest level of

CROCI on average (21%) in 2011-15E, while we forecast Suez Cement (Egypt) to generate the lowest CROCI on average (9%) over

this period.

The higher CROCI generated by MENA cement companies relative to global peers seems to be mainly driven by higher margins. We

forecast an average EBITDA margin of 48.3% over 2011-15E, which is almost double that of global peers on 25.8%. We believe that

lower energy costs in the MENA region are the main factor behind the margin advantage.

Saudi Arabian cement companies generate significant margins (we forecast an average EBITDA margin of 56% over 2011-15) and

CROCI and benefit from a trio of advantages: very low energy costs, a closed market (practically no imports or exports) and a low

tax rate (we assume 2.5%). The deterioration we forecast in Suez Cement’s returns and margins is driven mainly by the weakness in

the Egyptian market this year following the political upheaval in January 2011.

Exhibit 148: Southern Cement will generate the highest average CROCI…

MENA cement companies’ CROCI 2006-10 and 2011E-15E averages

Exhibit 149: …while Yamama Cement will have the highest margins

MENA cement companies’ EBITDA margin 2006-10 and 2011E-15E averages



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Top-line growth of 8% pa in 2011-15E in line with global cement peers

Although margins and CROCI are higher than the global peer group medians, our forecast average top-line growth of 8% is in line

with that forecast by GS for the global cement peer group. In some cases, lower growth than might be expected is due to capacity

constraints (Qassim Cement and Yamama Cement, both Saudi Arabia). Suez Cement’s (Egypt) weakness is again due to weakening

demand and prices in Egypt this year and at this stage it is hard to gauge how strong any recovery would be and when this would

take place.

In terms of gearing, MENA cement companies are relatively strong vs. global peers, with 7 out of 11 companies forecast to be net

cash over 2011-15E. We forecast average net debt/equity for the group of -6% (i.e. net cash) over 2011-15E vs. the median GS

forecast for global cement peers of +6% (i.e. net debt).

Exhibit 150: We forecast Yanbu Cement to exhibit the highest revenue

growth MENA cement companies’ revenue growth 2006-10 and 2011E-15E averages

Exhibit 151: We forecast 7 out of 11 companies to have net cash positions MENA cement companies’ net debt/equity 2006-10 and 2011E-15E averages



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MENA cement stocks have outperformed MSCI EEMEA by 19% YTD on an equal-weighted basis

Exhibit 152: The Saudi Arabian cement companies have been the strongest performers in 2011

Share price performance of GS-covered MENA cement stocks in US$, YTD, rebased to 100 at 31/12/2010

Source: FactSet.

MSCI EEMEA

Arabian Cement

Ciments du Maroc

Holcim MarocLafarge Ciments

Qassim Cement

Qatar Nat. Cement

Saudi Cement

Southern Cement

Suez Cement

Yamama Cement

Yanbu Cement

60

70

80

90

100

110

120

130

140

150

160




Saudi Arabian cement: Construction growth to outweigh potential feedstock increases

The Saudi Arabian cement sector offers indirect exposure to the oil wealth of Saudi Arabia on account of globally low

feedstock (fuel) prices, a low tax rate and rising demand, bolstered by the stimulus package announced this year. The

cement sector has grown at an average 9% pa since 2002 and we expect it to continue growing at an average 8% pa (YTD

2011 volumes are up 12% yoy) until 2015 given the government housing plan as well as the strong economic and

demographic fundamentals that we anticipate. A near-term headwind is our expectation of a doubling in feedstock prices

during 2012. We initiate coverage on six cement stocks in Saudi Arabia – our top pick in the space is Arabian Cement and

our least preferred is Yanbu Cement.

Cement consumption to grow 8% pa until 2015E

The Saudi Arabian cement sector has grown 9% pa since 2002 to stand at a 2010 domestic volume level of 41.2mn tonnes, which

made it the third-largest cement market in MENA in 2010 behind Iran and Egypt. Saudi Arabia accounts for approximately two-thirds

of GCC cement production and half the consumption. Growth has mainly been driven by construction growth, which has outpaced

GDP growth since 2000 in real terms. We expect this trend in construction spending to continue, driven by a strong economy,

government initiatives and strong demographics. Saudi Arabia has c.30% of its population below the age of 15 years, and the

government has this year announced a plan to build 500,000 housing units at a total cost of SR250 bn over the coming years.

Exhibit 153: Saudi’s cement sales have witnessed continuous growth Saudi’s domestic cement sales volumes (mn tonnes) and growth 2002-2015E

Exhibit 154: Rising per capita consumption highlights the high pace of

construction in Saudi

Cement consumption per capita (kg) 2002-2010

Source: Yamama Cement, Goldman Sachs Research estimates.


0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

Domestic sales (mn tons) Growth yoy (RHS)

1,036

926

988

1,056

1,044

1,104

1,200

1,377

1,496

0 200 400 600 800 1000 1200 1400 1600

2002

2003

2004

2005

2006

2007

2008

2009

2010



Exhibit 155: Construction spend growth has outpaced GDP growth since

2000 Real GDP and real construction spend indexed at 100 in 2000

Exhibit 156: Construction growth has correlated to GDP growth in Saudi

Arabia Real GDP growth vs. real construction spend growth 2001-10

Source: Datastream, SAMA, IMF.

Source: Datastream, SAMA, IMF.

Exhibit 157: Saudi Arabian construction spend reached US$19.0 bn in 2010,

or 4% of GDP Saudi Arabia nominal construction spend and % of nominal GDP (RHS), US$ bn

Exhibit 158: Exports accounted for c.7% of total production in 2006-10 Domestic and exported cement sales volumes 2006-2015E (mn tonnes)

Source: SAMA, IMF, Datastream, Goldman Sachs Research estimates.


80

90

100

110

120

130

140

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP Construction

R² = 39%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Con

stru

ctio

n sp

end

grow

th

Real GDP growth

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

11.1 11.5 11.912.6

13.614.7

15.8

17.318.2 18.1

19.0

0%

1%

2%

3%

4%

5%

6%

7%

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

10

20

30

40

50

60

70

Domestic sales (mn tons) Exports (mn tons)



Market composition: 14 companies, 10 listed, and accounts for c.4.3% of Tadawul market cap

Cement production in Saudi Arabia was initiated in 1955 by Arabian Cement Company (3010.SE) with a production capacity of

90,000 tonnes p.a. Today, there are 14 cement companies in Saudi Arabia, 10 of which are listed on the Tadawul Stock Exchange

and which account for c.4.3% of the market value of Tadawul All Share Index (TASI). The companies are located across Saudi Arabia

with a greater concentration in the more populous areas such as Riyadh, Jeddah, Mecca and Dammam. Saudi Cement currently has

the largest market share with 16% of volumes sold in 2010. The market is relatively fragmented, with the top five players accounting

for 60%.

Exhibit 159: GS covered companies account for 67% of total market, Saudi

Cement is the leader with a 16% market share

Market share % by 2010 volume sold, GS covered are in bold

Exhibit 160: Cement sector accounts for c.4.3% of TASI market cap Market cap by company (SR mn) and % of Tadawul All Share Index

Source: Yamama Cement. Hail Cement listed in 2011 and will not start operations until 2013, so not included in data above.

Source: Datastream.

Yamama Cement, 13%

Saudi Cement, 16%

Eastern Cement, 7%

Qassim Cement, 10%Yanbu Cement,

9%

Arabian Cement, 7%

Southern Cement, 12%

Tabuk Cement, 3%

Riyadh Cement, 6%

Najran Cement, 7%

Madina Cement, 5%

Northern Cement, 3%

Jouf Cement, 1%

10,360 9,677

8,201

6,169 6,075

4,0423,472

1,931 1,8141,253

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%

0

2000

4000

6000

8000

10000

12000

Market Cap (SR mn) % of TASI (RHS)



Exhibit 161: 14 cement companies spread over the country’s regions with more concentration in the populous areas Location map of Saudi Arabian cement producers


Yamama Cement

Qassim Cement

Yanbu Cement

Arabian Cement

Southern Province Cement

City Cement Company

Eastern Cement

Tabuk Cement

Riyadh Cement

Najran Cement

Al Jouf Cement

Hael Cement(Plant still under construction )

Qassim Area (Central Region)

Tabuk Area (in the north)

Hael

Yanbu (Western Region)

Jeddah (Western Region)

Abha (Southern Region)

Najran (Southern Region)

Dammam (Eastern Province Area)

Northern RegionSaudi Cement

Riyadh Area

Northern Cement



Low feedstock cost: A material advantage for Saudi Arabian cement companies

Energy dependent industries in Saudi Arabia, including cement, benefit from low feedstock prices (fuel and energy) relative to their

regional and international peers; the price of fuel oil is c.US$6/bbl and the price of gas is US$0.75/mmbtu, which are c.10% of global

prices. This cost advantage can be seen in the EBITDA margins of Saudi Arabian cement companies vs. international peers over

time; average cement 2006-10 EBITDA margins of GS-covered Saudi cement companies averaged c.63% vs. the global GS-covered

median of 30%. We expect Saudi Aramco to double feedstock prices during 2012 from current levels which could reduce EBITDA

margins to around 55% in 2012. Despite this, we expect EBITDA margins to remain well above global levels. Exhibit 163 shows that

our assumption for feedstock price increases lowers our 2012E EBITDA margin assumption by 700bp on average across our Saudi

cement coverage.

Exhibit 162: Low input cost have provided a significant margin advantage for

Saudi cement companies vs. international peers 2006-10 average EBITDA margins for GS-covered cement companies by

country/region. Global = median margin

Exhibit 163: 2012E EBITDA margins would be on average 7% points higher

than our estimates if current feedstock prices prevail GS 2012E EBITDA margins vs. 2012E EBITDA margins assuming current feedstock

prices



63%

53%

44%

35%30%

0%

10%

20%

30%

40%

50%

60%

70%

Saudi Arabia MENA Morocco Turkey Global (median)

54%59%

55% 56% 56%

48%

61%65%

62% 62% 61%56%

0%

10%

20%

30%

40%

50%

60%

70%

Arabian Cement

Yamama Cement

Saudi Cement Qassim Cement

Southern Cement

Yanbu Cement

2012E EBITDA margin 2012E EBITDA margin using current feedstock prices



Saudi Arabian clinker capacity has more than doubled in the last five years

Over the last five years, several cement companies undertook expansions in clinker capacity to meet growing demand. Industry

clinker capacity increased from 22.5mn tonnes in 2006 to 47mn tonnes in 2010, an increase of 109%. Some companies are still

expanding their capacity, and we expect c.7mn tonnes of capacity to be added through 2015 (3.2mn tonnes by Yanbu Cement to be

completed in 2012, 1.7mn tonnes from Hail Cement in 2013 and c.2.2mn tonnes from Arabian Cement in 2014). Despite the 15%

capacity addition we expect between 2010 and 2013, we believe demand trends will be sufficiently robust to drive capacity

utilization upwards towards 100% in 2015E.

Companies currently operating at full capacity utilization and without large inventory stocks may not be able to fully capture growth.

Within our coverage, we expect Arabian Cement, Yanbu Cement and Saudi Cement to be the main beneficiaries from market growth

due to adequate capacity. On the other hand, Qassim Cement and Yamama Cement are already operating at high utilization rates

and may be capacity constrained, in our view.

Exhibit 164: Despite our expectation of strong clinker capacity growth… Clinker capacity evolution in Saudi Arabia (mn tonnes)

Exhibit 165: …we think demand will be strong enough to increase utilization

rates Clinker production (mn tonnes) and capacity utilization rate

Source: Yamama Cement, Goldman Sachs Research estimates

Source: Yamama Cement, Goldman Sachs Research estimates

22.5

28.5

33.4

45.147.0 47.0

51.854.0 54.0 54.0

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

0%

20%

40%

60%

80%

100%

120%

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Clinker production (mn tons) Utilization rate (RHS)



We expect stable trends in cement prices going forwards

Given the strong demand we expect through 2015 and the ability of the market to absorb new capacity, we expect pricing to remain

robust. We forecast cement prices in Saudi Arabia to average SR278 per tonne through 2015. We do not envisage a similar scenario

to 2008 when an export ban and weak demand led to increased clinker inventories and pricing pressure.

The export ban (to all countries except for Bahrain) was imposed by the government in mid-2008. It was later amended to allow

exporting cement only if the exporter sells cement to the domestic market at a fixed price of SR200/tonne, which is low relative to

the domestic market price. While total exports are only a small portion of the total market (c. 7% in the last five years), some players

were more negatively affected by the export ban than others; Saudi Cement exported 20% of its sales in 2007 for example.

Exhibit 166: Clinker inventories increased partially due to an export ban in

2008… Saudi Arabian industry clinker inventories (mn tonnes), 2005-2010

Exhibit 167: …driving down prices in 2008-10; we expect price stability going

forward Saudi Arabia cement prices per tonne 2005-2015E



2.72.0

1.6

7.4

10.910.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2005 2006 2007 2008 2009 2010240

245

250

255

260

265

270

275

280

285

290

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E



We expect Moroccan cement demand to grow by 6% pa through 2015E

Cement production has a long history in Morocco with the first cement plant with 20,000 tonnes of capacity having started

production in Casablanca in 1915. Progression since then has been significant and Morocco’s cement industry demand has been

growing at a CAGR of 7% pa to reach 14.6mn tonnes. The growth in the last decade was driven by strong construction activity in

Morocco with increasing infrastructure, investment in tourism, low interest rates and private and public investments (including a

government focus on social housing). The last decade represents an acceleration following the CAGRs of 4.7% in the 1990s and

2.4% in the 1980s. In 2010, per capita cement consumption in Morocco reached 462kg, which is below the 540kg level in North Africa

(according to APC data).

Exhibit 168: Cement consumption in Morocco increased at a CAGR of 7.2% in

the last decade… Cement consumption in Morocco (000 tons), 1980-2015E

Exhibit 169: …almost doubling per capita cement consumption to 462 kg in

2010 from 263 kg in 2000 Cement consumption per capita (kg) 2000-2010

Source: APC (L’Association Professionnelle des Cimentiers du Maroc).

Source: APC.

Construction growth in Morocco has outpaced real GDP growth by an average of 16% in the last five years, with residential

construction in particular the major end-market for the cement industry, accounting for c.80% of consumption in 2010 as can be

seen in Exhibit 171. We believe that construction demand will continue to be driven by the residential sector. According to a recent

Jones Lang LaSalle report, Morocco has a total affordable housing shortage of 600,000 homes, despite having one of the most

mature affordable housing markets in the MENA region. We believe that the government’s ongoing social housing programmes as

well as GDP growth will underpin cement demand growth in Morocco. We forecast a CAGR of 5.8% from 2010-15E, and in 2011 YTD

demand has grown by 9%.

0

5,000

10,000

15,000

20,000

25,000

CAGR 4.7%

CAGR 7.2%

CAGR 2.4%

CAGR 5.8%

0 50 100 150 200 250 300 350 400 450 500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Per capita cement consumption (kg)



Exhibit 170: Construction in Morocco has outpaced GDP growth since 2002

Growth in Moroccan nominal GDP and construction, indexed to 100 in 2002

Exhibit 171: Residential construction accounts for 80% of cement demand

Cement demand breakdown by final destination; 2010

Source: Ciments du Maroc.

Source: Ciments du Maroc.

Exhibit 172: Cement demand has grown by 9% YTD in Morocco…

Monthly and YTD cement demand growth yoy

Exhibit 173: …with Tadla-Azilal the strongest region

YTD cement demand growth by region, yoy

Source: APC.

Source: APC.

80

100

120

140

160

180

200

2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP Construction

Residential (including civil engineering for social housing

programme), 80%

Non-Residential, 6%

Infrastructure, 14%

17%

6%

11%

-1%

5%

8% 8%

-5%

36%

17%

12% 11%

8% 7% 7% 7%6%

9%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

yoy change in monthly sales yoy change in YTD sales

-12.6%

31.1% 28.4%

8.6% 7.7% 7.4%0.0%

9.3% 9.9%6.8%

-1.5%

72.4%

-1.5%

34.0%

1.4% 2.2%8.7%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Oue

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-Dah

ab-L

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Laay

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Taou

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Tang

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TOTA

L



Cement demand is most concentrated in the northern and coastal regions of Morocco

As can be seen in Exhibit 174 below, cement consumption is concentrated in the northern and coastal parts of Morocco (in Tanger

and Casablanca in particular). This reflects a greater level of urbanization in these areas. The central regions are exhibiting the

highest growth rates which we think mainly reflects the focus of current residential construction activity in Morocco. The IMF

estimates Morocco’s population to grow at 1.0% pa through 2015, so we expect the trend of urbanization and increase in housing

demand to continue.

Exhibit 174: The high cement demand regions are concentrated in the

northern and coastal regions of Morocco Morocco map with cement demand density and top 5 rankings regions for YTD

cement consumption in 2011

Exhibit 175: The major market players have complementary cement plant

locations Location of cement facilities in Morocco

Source: Ciments du Maroc, Goldman Sachs Research estimates.


Fes - Bouleman (34.0% growth YTD)

1

Cement Demand (2009, kt)200 – 400 401 – 600601 – 800801 – 10001001 – 12001201 – 14001401 – 1600>1600

* Rankings 1-5 given based on highest Cement consumption growth YTD as of September 2011

1

2

3

4

5

Tadla-Azilal (72.4% growth YTD)

Laayoun-Boujdour-S.Elhamra (31.1% growth YTD)

Guelmim-Es-Smara (28.4% growth YTD)

Grand Casablanca (9.9% growth YTD)

Ciment Du MarocHolcim CimentsLafarge CimentsCiments de’ AtlasCimpor

Cements plantsGrinding center

CASABLANCAMEKNES

TANGER

LAAYOUNE

AGADIR

MARRAKECH

SAFI

AL HOLCEIMA

OUJDA

FES



Three main players dominate; we expect the market to absorb a 20% capacity increase by 2014

The industry is dominated by the subsidiaries of leading global cement companies Lafarge (Lafarge Ciments), Italcementi (Ciments

du Maroc) and Holcim (Holcim Maroc). Together these three players account for 90% of installed capacity. However, a new domestic

player, Ciments de l’Atlas, entered the market in 2010, increasing slightly the level of competition in the market. In terms of the

location of capacity in Morocco, the larger companies tend to have complementary locations. Lafarge Ciments’ plants are mainly in

north-west and west Morocco; Ciments du Maroc’s plants are mainly located in south-west and west Morocco; Holcim Maroc’s

facilities are located mainly in the north and east. Ciments de l’Atlas plant is located in the north-west, in direct local competition

with Lafarge Ciments.

As can be seen in Exhibit 177, we forecast cement capacity in Morocco to increase from 18.8 mn tonnes at end-2010 to 22.2mn

tonnes by 2014 (+20%). The main capacity increases we expect are (1) a 1.6mn-tonne plant from Ciments de l’Atlas in 2011 (2) a

0.6mn-tonne addition by Holcim Maroc in its Fes plant in 2012 and (3) a c.1.2mn tonne addition (though this eventually could be as

large as 1.5mn tonnes) from Lafarge Ciments (Sous plant) in 2014. Despite these additions, our demand forecast of 5.8% growth pa

would see this capacity absorbed by the market with industry utilization to increase to reach 87% by end 2015E. We do not think

therefore that the additional capacity will be detrimental to prices, if demand develops as we expect.

Exhibit 176: The three largest players account for c.90% of the domestic

market Market share by capacity in Morocco, 2010

Exhibit 177: We expect market capacity to grow by 20% between 2010 and

2014E Installed cement capacity by company, mn tonnes



Lafarge Ciments,

39%

Ciments du Maroc30%

Holcim Maroc21%

Cimpor6%

Cimat (Ciments de

l'Atlas)9%

6.3 6.3 6.3 6.3 7.5 7.5

5.7 5.7 5.7 5.75.7 5.7

4.0 4.0 4.6 4.64.6 4.6

1.2 1.2 1.2 1.21.2 1.21.6

3.2 3.2 3.23.2

3.2

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

0

5

10

15

20

25

2010 2011E 2012E 2013E 2014E 2015E

Lafarge Ciments Ciments du Maroc

Holcim Maroc Cimpor

Cimat (Ciments de l'Atlas) Industry capacity utilisation (RHS)



Cost inflation to pressure margins in the medium term

We believe that fuel/energy accounts for c.60% of the operating costs of cement companies in Morocco. With commodities at high

levels relative to history, we expect margins to be lower than the peak levels of 2009 – we forecast an average industry EBITDA

margin of 41% from 2011-2015E vs. the 2006-2010 average of 44%. According to GS estimates, oil prices (ICE Brent) are expected to

increase 38%/8%/8% in 2011E/2012E/2013E while coal price evolution is expected to be +26%/-2%/+ 4% over the same period. It is to

be noted that despite our view on margins relative to history, EBITDA margins for our Moroccan companies will remain well above

the global GS-covered cement average of 19% from 2011-15E in our view.

Exhibit 178: We expect the margins to trend lower vs. history due to higher fuel and energy expenses

EBITDA margins; 2006-2015E

Source: Company data, Goldman Sachs Research.

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Ciments du Maroc Lafarge Ciments Holcim Ciments Global cement median



Egyptian cement: Facing headwinds in the short term

We are initiating coverage of Suez Cement, which is an Egyptian cement producer. The Egyptian cement market has grown by 13%

pa in 2006-10, although we forecast a 7% fall in volumes in 2011. This is due to the slowdown in economic activity that has taken

place in Egypt since the political upheaval in January. In terms of the cement market, this weakness has manifested itself in terms of

a slowdown in construction and public works in particular. YTD, volumes have fallen by 3%, having recovered from the fall of 9% in

1Q2011 immediately following the political unrest. At the current time, we do not forecast growth rates returning to historical levels;

we are forecasting average growth of 6% in 2012-15E inclusive and this includes our expectation of a partial recovery of 4% in

volumes in 2012E. While pricing data is difficult to obtain, comments from global cement company Italcementi point to a fall at the

half-year stage of 8% in prices vs. the December 2010 level.

Exhibit 179: We forecast a 7% fall in cement volumes in Egypt in 2011 due

mainly to the slowdown in economic activity following political unrest Annual Egyptian cement volumes(mn tonnes) 2006-15E

Exhibit 180: Cement volumes have fallen by 3% YTD with August and

September growth rates affected by Ramadan 2011 cement volume sold (mn tonnes) and yoy growth rates by month

Source: EIP. Goldman Sachs Research estimates.

Source: EIP.

-10%

-5%

0%

5%

10%

15%

20%

25%

-15

0

15

30

45

60

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Annual volume sold yoy growth (RHS)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-5

-4

-3

-2

-1

0

1

2

3

4

5

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

Cement volume sold yoy change (RHS)



Qatari cement: Robust real GDP growth supplemented by construction spending

We are initiating coverage of Qatar National Cement, a Qatari cement company with about 85% domestic market share. Since the

end of 2005, the Qatari cement market has grown by an average of 13% pa, which reflects the growth of real GDP in the country,

which has averaged 20% over the same period. The IMF forecasts average real GDP growth for Qatar of 7% pa in 2011-15 and our

cement consumption growth forecast of 6% pa on average over the same period reflects this. We think that the growth prospects for

Qatar are underpinned by significant levels of construction spend to come through over the coming decade leading up to the World

Cup in 2022. Based on data from MEED, we expect new construction project awards in Qatar to total US$135 bn in 2011-16 which in

total equates to 106% of 2010 nominal GDP.

Exhibit 181: We forecast 6% pa average growth in cement volumes for Qatar

reflecting robust real GDP growth Qatar annual cement consumption 2006-2015E (mn tons) vs. yoy growth

Exhibit 182: Qatar’s cement consumption per capita was the highest in the

MENA region in 2010 Qatar cement consumption per capita 2000-2010 (kg)

Source: CemNet, Goldman Sachs Research estimates.

Source: CemNet, IMF, Goldman Sachs Research estimates.

0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Cement consumption yoy growth (RHS)

1,864

1,772

2,230

2,326

2,194

4,505

3,839

3,915

4,040

3,966

4,235

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010



MENA real estate: Strong underlying drivers for the medium term

With a young and fast-growing population and with high GDP per capita levels, we believe that the drivers underlying real

estate in the MENA region are strong for the medium term. We are launching coverage on seven real estate stocks in MENA

and resuming coverage of an additional five names, spanning four different countries – UAE, Egypt, Saudi Arabia and

Lebanon. Within the UAE, we think that growth potential is greater in Abu Dhabi than in Dubai, although both markets are

suffering from oversupply in the short term. Egyptian real estate, while appearing to benefit from strong demographics and

urbanization trends, is currently weak due to the political upheaval in 2011. The outlook for Saudi Arabia real estate looks

strong owing to favourable demographics and stimulus plans, although it is a fragmented market for developers. Our top

picks in the sector are Emaar Properties (UAE), Sorouh (UAE), Dar Al Arkan (Saudi Arabia), Talaat Moustafa Group (Egypt)

and Palm Hills Development (Egypt). We have a Sell rating on Orascom Development (Switzerland listed but operations

mainly in Egypt and the rest of MENA).

In our view, the main underlying drivers of real estate are the wealth of a country’s citizens and demographics. Historically within

MENA, real estate sector spending has been correlated to per capita GDP with a correlation R-squared of 38% (see Exhibit 138). In

terms of demographics, two key factors behind real estate evolution are, in our view, population growth and the age structure. The

IMF estimates that the MENA population will grow at an average 2% pa over 2011-2015, with a significant statistic being that 62% of

the population is below 29 years old. Given the high expected population growth rate, large youth population and high GDP per

capita, we believe MENA real estate demand is well underpinned in the medium term.

Exhibit 183: Real estate spending correlated to per capita GDP in MENA Real estate spending growth and per capita GDP growth in MENA 2002-2010

Exhibit 184: We see population growth as a key driver of real estate demand

in MENA Real estate sector and population growth 2006-2010


Source: Datastream, IMF, Goldman Sachs Research estimates.

R² = 38%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-30% -20% -10% 0% 10% 20% 30%

ME

NA

real

est

ate

spen

din

g g

row

th 2

002-

2010

Per capita GDP growth 2002-2010

2002 2003 2004

2005

2006

2007

2008

2009

2010

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010

MEN

A Po

pula

tion

grow

th

Rea

l est

ate

spen

ding

(US$

mn)

MENA real estate spending (US$ mn) Population growth



Exhibit 185: Egypt has the highest population …

Total population (in mn), 2010

Exhibit 186: …while Yemen and Iraq have the highest percentage of

population below 29 years in the MENA region % of population below 29 years, 2010

Source: IMF, Goldman Sachs Research.

Source: IMF, Goldman Sachs Research.

We now cover 12 real estate companies in the MENA region

The 12 MENA real estate companies we cover span four countries:

UAE: Aldar Properties, Abu Dhabi National Hotels, Emaar Properties and Sorouh Real Estate

Egypt: Egyptian Resorts Company, Orascom Development Holding, Palm Hills Development, Talaat Moustafa Group Holdings

and SODIC.

Lebanon: Solidere

Saudi Arabia: Dar Al Arkan Real Estate Development Company, Emaar the Economic City

0

10

20

30

40

50

60

70

80

90

Egyp

t

Alge

ria

Mor

occo

Iraq

Saud

i Ara

bia

Yem

en

Syria

Tuni

sia

Isra

el

Liby

a

Jord

an

UAE

Leba

non

Kuw

ait

Om

an

Qat

ar

Bahr

ain

Population(in mn)

73%

68% 66% 65% 64%61% 61%

56% 56%54%

51% 51% 51% 49% 48% 48% 48%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Yem

en Iraq

Syria

Jord

an

Om

an

Liby

a

Saud

i Ara

bia

Mor

occo

Alge

ria

Kuw

ait

Leba

non

Isra

el

Tuni

sia

UAE

Egyp

t

Bahr

ain

Qat

ar

% < 29 years age



The combined market cap for real estate companies in MENA is currently US$14.9 bn, while the total in terms of 2010 revenues is

US$664 mn. In terms of size, Emaar Properties is the largest in terms of market cap (US$4.4 bn) and revenue (US$3.3 bn) while

Egyptian Resorts Company is the smallest (US$168 mn market cap, US$3 mn 2010 revenue). The average 2010 revenue for the

MENA real estate companies in our coverage is US$664 mn.

Of the 12 real estate stocks we cover, six have exposure to all segments of real estate including residential, commercial, retail, hotel,

resorts and other. Abu Dhabi National Hotels is the only company which is focused on a single segment of upscale and midscale

hotels. Solidere is the sole Lebanese company in our coverage, with the business model focused on developing Beirut Central

District.

Exhibit 187: We expect average sales growth for our coverage in the MENA

region to be higher than the GS-covered global real estate median MENA real estate companies’ revenue growth 2006-10 and 2011E-15E averages

Exhibit 188: 50% of the companies in our MENA real estate coverage have

exposure to residential, commercial, retail and hotels and resorts Exposure of MENA real estate companies to segments of real estate



-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%


Company/ Business Segments Residential Commercial Retail Others

Emaar PropertiesAldar PropertiesSorouh Real EstateAbu Dhabi National HotelsTMG HoldingPalm Hills DevelopmentsSODICEgyptian Resorts CompanyOrascom Development SolidereDar Al-ArkanEmaar the Economic City

PS: Others include hotels, resorts and tourism related developments.



We expect MENA real estate stocks to generate average EBITDA margins of 28% in 2011-15E

In Exhibits 189-192, we benchmark our stocks on returns, margins, balance sheet strength and valuation.

Returns: We forecast Solidere to generate the highest margins and highest ROE in the region over 2011-15E due to its strong

market position in Beirut and land bank concentrated in Beirut Central District. Our forecast average ROE of MENA real estate

stocks is lower than the median of global real estate stocks in 2011-15E.

Margins: For 2011-15E, we forecast our MENA real estate companies to generate an average EBITDA margin of 28%, higher

than that generated over 2006-10 by the same group. We think this mainly reflects a re-alignment of business models, with

several developers moving to a more recurring revenue stream (investment portfolios generating rental income and revenues

from hotels for example) rather than lumpy real estate development revenues.

Gearing: We forecast a higher gearing of 28% for MENA real estate stocks in 2011-15E versus 16% for 2006-2010, due mainly to

weakened cash flows vs. the historical period which was characterized by a real estate boom in the UAE. Egyptian companies

have a relatively stronger balance sheet versus other MENA real estate stocks, with several having net cash positions.

Valuation: With the exception of Abu Dhabi National Hotels and Solidere, MENA real estate companies trade below 1.0x P/B

(2012E).



Exhibit 189: Solidere will generate the highest average ROE…

MENA real estate companies’ ROE 2006-10 and 2011E-15E averages

Exhibit 190: …and will have the highest margins

MENA real estate companies’ EBITDA margin 2006-10 and 2011E-15E averages



Exhibit 191: Aldar Properties will remain the most highly levered… MENA real estate companies’ net debt/equity 2006-10 and 2011E-15E averages

Exhibit 192: …while Abu Dhabi National Hotels continues to trade at the

highest P/B MENA real estate companies’ price/book value for 2006-10 (average) and 2012E



-5%

0%

5%

10%

15%

20%

25%

2006-2010 Average 2011E-2015E Average

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

150%


-50%

0%

50%

100%

150%

200%


0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x2006-2010 Average 2012E



Exhibit 193: MENA real estate companies have underperformed the MSCI EEMEA through most of 2011 Share price performance of GS-covered MENA real estate stocks in US$, YTD, rebased to 100 at 31/12/2010

Source: Company data, Goldman Sachs Research estimates, Factset.

MSCI EEMEA

Emaar Properties

Dar Al Arkan

Abu Dhabi Natl. Hotels

Aldar PropertiesERC

SODIC

Palm Hills

Talaat Moustafa Group

Sorouh

Orascom Development

Solidere

0

20

40

60

80

100

120




UAE real estate: Supply growth likely to constrain pricing

The UAE real estate sector has grown at 13% CAGR in 2001-2010, with Abu Dhabi and Dubai representing 85% of the total

real estate market. We believe growth during the period was driven by GDP growth/rising oil prices, strong population

growth, easy mortgage availability, but also speculative demand in Dubai in particular. While the IMF estimates UAE real

GDP growth at 4% for 2012 and 2013 (following 3.3% growth in 2011), we expect the key real estate markets of Abu Dhabi

and Dubai to remain over-supplied as strong deliveries of residential units and commercial space are expected in the near

term and this will likely keep prices stable in the near term.

Favourable demographics, but structural headwinds to limit growth

Historically, UAE real estate sector growth has been highly correlated to GDP growth. The IMF estimates UAE real GDP growth of

4% in 2012-13, which we believe will be supported by high oil prices. GS estimates the ICE Brent crude price at U$120/bbl in 2012

and U$130/bbl in 2013. The IMF estimates average population growth in UAE at 3% pa in 2011-15E which makes it among the top

three fastest-growing countries by population within the MENA region. UAE per capita GDP was US$48,821 in 2010 and the IMF

expects CAGR 2% growth in 2010-15. While we view UAE’s economics and demographics as favourable for real estate sector growth,

supported by population growth and high per capita GDP, we expect limited upside to property prices due to over-supply concerns.

Exhibit 194: Abu Dhabi and Dubai constitute 85% of real estate in UAE UAE real estate and business service sector spend and growth 2002-2010

Exhibit 195: Real estate growth has been related to GDP growth in UAE Nominal GDP growth vs. nominal real estate growth 2002-2010

Source: UAE Department of Economic Statistics, Goldman Sachs Research estimates.

Source: UAE Department of Statistics, Goldman Sachs Research estimates.

4652

63

71

81

111

126

107115

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008 2009 2010

Dubai real estate spend (AED bn) Abu Dhabi real estate spend (AED bn)

Other Emirates real estate spend (AED bn) Real estate and Business service growth

Average brent crude price growth

R² = 51%

-20%

-10%

0%

10%

20%

30%

40%

-20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

Nom

inal

real

est

ate

and

busi

ness

ser

vice g

row

th

Nominal GDP growth

2002 2003

2004

2005

2006

2007

2008

2009

2010



Population growth: High domestic and expatriate population growth to support demand

UAE’s population has grown at average 4% pa between 2006 and 2010; however, the population of Abu Dhabi and Dubai has grown

at a higher rate of an average 7% pa during the same period. Expatriates constituted an average 79% of the total population in Abu

Dhabi and Dubai between 2006 and 2010. The IMF estimates UAE GDP growth of 4% in 2012 and 2013 which we believe will be

supported by higher oil prices. We expect GDP growth will lead to growth in commercial activities in Abu Dhabi and Dubai to

support expatriate population growth. Furthermore, some 66% of the total population in Dubai and Abu Dhabi is in the age group of

20-44 and per capita GDP is high at US$48,821 in 2010 which we believe will drive strong real estate demand growth across all asset

class.

Exhibit 196: Expatriates constitute an average 75% of Abu Dhabi’s

population in 2006-2010 Abu Dhabi total population and growth rate 2006-2010

Exhibit 197: Expatriates constitute average 83% of Dubai population in 2006-

2010 Dubai total population and growth rate 2006-2010

Source: Statistics Centre-Abu Dhabi, Goldman Sachs Research.

Source: Dubai Statistics Centre, Goldman Sachs Research.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008 2009 2010

Abu

Dha

bi p

opul

atio

n (m

n)

Expatriate Nationals Growth (RHS)

6.8%

6.9%

7.0%

7.1%

7.2%

7.3%

7.4%

7.5%

7.6%

7.7%

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008 2009 2010

Dub

ai p

opul

atio

n (m

n)

Expatriate Nationals Growth (RHS)



Exhibit 198: 86% of Abu Dhabi population is below 45 years

Abu Dhabi population breakdown by age 2010

Exhibit 199: 89% of Dubai population is below 45 years

Dubai population breakdown by age 2010

Source: Statistics Centre-Abu Dhabi, Goldman Sachs Research estimates.

Source: Dubai Statistics Centre, Goldman Sachs Research estimates.

High supply to offset the benefits of demand growth in the near term

While prospects for growth in demand look promising, supported by population growth and high per capita income, in the near

term we think real estate supply coupled with tighter credit availability will more than offset demand growth and have a dampening

effect on prices and rents. One bright spot is the hospitality market which has seen improving occupancy levels.

Following the Dubai real estate crash in late 2008/early 2009, real estate construction activity slowed during 2009-10, with new

projects postponed or cancelled. We believe some of these projects will be completed in the coming years and new real estate

supply will enter the market in 2012-13. Jones Lang LaSalle (JLL) projects that the Dubai residential market will receive 64,000 new

units, retail space will increase by 0.1mn sqm and commercial space will increase by 2.2mn sqm between 2011 and 2013, and the

Abu Dhabi residential market will receive 61,000 new units, retail space will increase by 1mn sqm and commercial space will

increase by 1.32mn sqm.

Demand/supply balance remains an issue in the UAE. According to JLL, in Abu Dhabi the commercial segments and upper

residential segments are oversupplied. Conversely, the residential segment has latent demand for affordable and middle income

houses, while the retail segment is undersupplied. In Dubai, JLL expects the retail, commercial and residential segments to remain

oversupplied. With supply generally outpacing demand, we expect vacancy rates to increase and do not forecast significant

improvement in prices and rents across the real estate segment in Abu Dhabi and Dubai in the near term.

0-1927%

20-4459%

Above 4414%

0-1915%

20-4474%

Above 4411%



Exhibit 200: Prices fell by 50% between 2Q08 and 2Q09 House price index, Dubai 1Q2008-3Q2011

Source: Datastream, Colliers HPI 1Q08-1Q11, Goldman Sachs Research estimates 2Q11-3Q11.

0

50

100

150

200

250

1Q 2008

2Q 2008

3Q 2008

4Q 2008

1Q 2009

2Q 2009

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

3Q 2011

House price index



Exhibit 201: New residential supply in Dubai to be strong till 2013

Dubai residential property supply, sale prices and rents

Exhibit 202: Retail space supply growth to decline in Dubai over 2011-13

Dubai retail property demand, supply and lease rents, AED

Source: Jones Lang LaSalle, Goldman Sachs Research estimates.


Exhibit 203: Dubai commercial supply growth will slow in 2011-13E Dubai commercial property market demand, supply and lease rents, AED

Exhibit 204: Dubai hotel ADRs to improve with higher occupancy rates Dubai hotel rooms demand, supply and ADR, AED



256 273309 340 370

1736

3130

3

0

2

4

6

8

10

12

0

50

100

150

200

250

300

350

400

2009 2010 2011E 2012E 2013E

Sal

e pr

ice

and

rent

per

mon

th (A

ED

pe

r sqm

' 00

0)

Dub

ai R

esid

entia

l uni

ts ('

000)

Existing stock Additions Avg sale price (RHS) Avg rent (pm) (RHS)

1.982.23 2.42 2.52 2.52

0.250.19

0.100.00 0.00

0

500

1,000

1,500

2,000

2,500

3,000

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011E 2012E 2013E

Dub

ai R

etai

l spa

ce (

mn

sqm

)

Existing stock Additions Lease (RHS)

3.424.32

5.206.20

7.100.90

0.88

1.00

0.90

0.30

0

500

1,000

1,500

2,000

2,500

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2009 2010 2011E 2012E 2013E

Dub

ai c

omm

erci

al s

pace

(m

n sq

m)

Existing stock Additions Office rent/sqm (RHS)

4351 55

6065

3036

44 48 50

0

200

400

600

800

1000

1200

0

10

20

30

40

50

60

70

2009 2010 2011E 2012E 2013E

Hot

el A

DR

Dub

ai h

otel

room

s ('

000)

Hotel room supply Hotel room demand ADR (RHS)



Exhibit 205: JLL data suggests strong supply in the residential segment in

Abu Dhabi in 2011-13E… Abu Dhabi residential property supply, sale prices and rents

Exhibit 206: ….and also in the retail segment

Abu Dhabi retail property market demand, supply and lease rents



Exhibit 207: Commercial space will see strong supply growth in 2011-13E

Commercial property market demand, supply and office rents

Exhibit 208: Hotel ADRs to improve with higher occupancy rates

Abu Dhabi hotel demand, supply and ADR



170 177 185 204224

7 819

2022

0

2

4

6

8

10

12

14

16

0

50

100

150

200

250

300

2009 2010 2011E 2012E 2013E

Sale

pric

e an

d re

nt p

er m

onth

(per

sqm

'000

)

Abu

Dha

bi re

side

ntia

l uni

ts (

'000

)

Existing stock Additions Avg sale price (RHS) Avg rent (pm) (RHS)

1.32 1.43 1.541.80

2.04

0.110.11

0.26

0.24

0.41

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011E 2012E 2013E

Abu

Dha

bi R

etai

l spa

ce (

mn

sqm

)

Existing supply Addition Lease (RHS)

1.60 1.812.19

2.533.08

0.210.38

0.35

0.55

0.43

0

500

1000

1500

2000

2500

3000

3500

0.0

0.5

1.0

1.5

2.0

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4.0

2009 2010 2011E 2012E 2013E

Abu

Dha

bi c

omm

erci

al s

pace

(m

n sq

m)

Existing supply Additions Office rent/sqm (RHS)

1214

1619

79

1213

0

100

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300

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500

600

700

800

900

1000

0

2

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2009 2010 2011E 2012E

Hot

el A

DR

Abu

Dha

bi h

otel

room

s ('

000)

Hotel room supply Hotel room demand ADR (RHS)



Loans to the real estate sector have slowed significantly but terms starting to become favourable

to potential buyers

As commercial banks started to clean their balance sheets during the recession in 2008, credit growth to the real estate sector

slowed to a CAGR of 14% in 2008-10 vs. 94% in 2005-08. Furthermore, the average LTV ratio of commercial banks for real estate in

the UAE has declined from 88% in 2008 to 77% in 2010 and most of the banks increased their mortgage rates by an average 100 bp

during the period, although we see some normalization in the mortgage market as interest rates are starting to come off their peak

of 2009 and average LTV ratio are increasing.

Exhibit 209: LTV for the real estate sector is improving

Maximum and minimum LTV ratio in Dubai from 2008-11

Exhibit 210: Mortgage rates have started to decline

Maximum and minimum mortgage rates in Dubai from 2008-11

Source: ATESCO, Goldman Sachs Research estimates.

Source: ATESCO, Goldman Sachs Research estimates.

95% 95%

80%

85% 85%

90% 90% 90% 90% 90% 90% 90% 90% 90%

80%

70%

60%

50% 50% 50% 50% 50% 50% 50% 50% 50% 50%

70%

40%

50%

60%

70%

80%

90%

100%

Max

Min

10.0%

8.8%

9.5% 9.5%

10.6% 10.5%10.3%

10.5%10.3%

10.5%

10.0% 10.0%

10.5% 10.5%

7.0%

5.8%

6.3% 6.3%

7.2%

7.8%

6.9%

6.3% 6.3%6.0%

5.5% 5.5% 5.5%

5.0%

4%

5%

6%

7%

8%

9%

10%

11% Max

Min



Real estate developers: No more a pure play on property development

After the financial crisis, real estate developers in UAE changed their business model to include recurring and stable revenue

streams. This has included diversifying towards developing leasing property portfolios, hospitality business, operating schools and

undertaking government contracts to build affordable housing which provide more security of revenue.

The real estate developers in UAE were highly dependent on land sales and property development prior to crisis; however, they

suffered a severe slowdown in revenue growth during the financial crisis as pre-sale bookings declined, debtors defaulted on

payments and many ongoing projects were kept on hold or cancelled. Most real estate developers had huge debts on their books to

fund their ongoing development plans, and a sudden slowdown in economic activity led to a liquidity crunch as debts became due

for repayment. In November 2009, Dubai World, which is backed by the government of Dubai, entered into a restructuring

agreement for the repayment of the U$3.52 bn debt of its subsidiary Nakheel which it was unable to repay on maturity.

Subsequently, Dubai World in May 2010 entered into agreement to restructure its debt of US$23.5 bn, with US$8.9 bn to be

converted into equity and the balance to be repaid under new terms.

Subsequent to the financial crisis, the large real estate developers have made significant efforts to reduce their market risk through

expanding into new geographical locations, as well as developing new revenue stream to secure recurring and stable revenue

through long-term lease contracts of their property, and diversifying into hospitality business.

Exhibit 211: CDS spreads for Dubai and Abu Dhabi spiked in December 2009

as Nakheel failed to repay its maturity CDS spreads for Dubai and Abu Dhabi in Sep 2009-April 2010

Exhibit 212: Recurring revenue streams of constitute 50% of total revenue

for real estate companies in our coverage by 2014E Revenue break up between real estate revenue and recurring revenue for MENA

stocks



0

20

40

60

80

100

120

140

160

180

200

0

1000

2000

3000

4000

5000

6000

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10

Abu

Dha

bi C

DS

spre

ad

Dub

ai C

DS

spre

ad

CDS Dubai CDS Abu-Dhabi

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

UAE

real

est

ate

sect

or re

venu

e (A

ED'm

n)

Recurring revenue Property development and sales



Market composition: Real estate sector constitutes 15% of Dubai Financial Market (DFM) and 4%

of Abu Dhabi Stock Exchange (ADSE) by market cap

Within Dubai, there are three listed real estate companies that constitute of 15% of the DFM by market capitalization. Emaar

Properties is the largest by market cap and revenues in 2010 and its operations expand globally to Saudi Arabia, Jordan, Syria,

Lebanon, Morocco, Egypt, Turkey, India, Pakistan, the US and Canada. The company has evolved its business model from property

development to leasing and hospitality.

Exhibit 213: Emaar Properties accounts for 73% of revenues of listed real

estate companies in Dubai Share of Dubai-listed real estate companies by 2010 revenues, GS covered in bold

Exhibit 214: Real estate accounts for 15% of DFM Market cap by company (AED bn) and % of Dubai Financial Market

Source: DataStream, Goldman Sachs Research estimates.


Deyaar Development

4%

Emaar Properties

73%

Union Properties

24%

16.2

1.41.0

0%

2%

4%

6%

8%

10%

12%

14%

-

2

4

6

8

10

12

14

16

18

Emaar Properties Deyaar Development Union Properties

Market cap (AED bn) % of DFM (RHS)



In Abu Dhabi, there are five listed real estate companies that constitute 4% of the ADSE by market cap. Aldar Properties is the

largest by market cap and revenues in 2010. Aldar Properties operates within Abu Dhabi and has exposure in property development,

leasing, hospitality and school business.

Exhibit 215: GS covered companies account for 82% of real estate market

share of listed companies on ADSE Market share by 2010 revenues of listed real estate companies, GS covered in

bold

Exhibit 216: Real estate accounts for 4% of ADSI Market cap by company (AED bn) and % of Abu Dhabi Stock Exchange



Aldar Properties 27%

Rak Properties 8%

Sorouh Real Estate 21%

Abu Dhabi National Hotels

34%

National Corporation for Tourism and Hotels 10%

2.94

2.55 2.50

0.790.66

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aldar Properties Sorouh Real Estate

Abu Dhabi National Hotels

National Corporation for Tourism and

Hotels

RAK Properties

Market cap (AED bn) % of ADSE (RHS)



Egyptian real estate: Near-term demand weakness and legal issues to weigh on outlook

In our view, the Egyptian real estate sector has solid demand fundamentals that have driven the robust growth of the past

few years. Based on the data for companies in our coverage alone, Egyptian real estate recorded a 30% CAGR in sales in

2006-10 reflecting favourable demographics, increasing urbanization and improving foreign direct investments. However,

post the political upheaval in January, a decline in demand and initiation of legal cases against several major real estate

companies has dampened the outlook for the Egyptian real estate sector in the near term. We initiate coverage on four real

estate stocks in Egypt and resume coverage of Palm Hills Development with a Buy rating. Orascom Development is rated

Sell.

Demographics favourable for commercial, retail, middle and low income residential real estate

Egypt has demographics that are favourable to real estate development, in our view. According to the IMF, Egypt has the largest

population in the MENA region with 78.3mn people, and we believe that with 48% of the population below 29 years of age and a

c.2% population growth rate, the demand fundamentals for residential, retail and commercial real estate is strong. In Egypt, 86% of

housing is low and middle income housing.

Exhibit 217: IMF expects Egyptian population to grow at 2% pa through

2016.. Population growth; 2000-2016E

Exhibit 218: …with residential housing skewed to low/middle incomeCurrent income segment based on housing types, 2010

Source: IMF.

Source: IMF and Goldman Sachs Research. Note: For Egypt CAPMAS and USAID defines low income households as average annual family income of £E90,000, middle income as £E165,600, Upper middle - £E384,000 and high income as £E820,800 (Dec, 2009)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

10

20

30

40

50

60

70

80

90

100

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

Population ( in mn) (LHS) Population growth (RHS)

Middle Income, 35%

Upper Middle, 12%

High Income, 2%

Low Income, 51%



In residential real estate, we believe the strongest demand will be in the affordable housing segment, stimulated by government

initiatives to bridge the 1.5mn-housing demand-supply gap. According to the American Chambers of Commerce in Egypt, the

market for luxury property in Egypt is near saturation and we believe that the potential demand for low income and middle income

housing is exacerbated by an underdeveloped mortgage industry. Egypt has a mortgage to GDP ratio of 2%, significantly lower than

the average of 15% in MENA and 80% in developed markets like the UK.

For Egypt, we believe the increasing trend of urbanization and favourable demographics offer a promising market for commercial

and retail real estate sector in the country. The percentage of urban population has increased from 32% in 1950 to 43% in 2010 (see

Exhibit 219) According to Jones Lang LaSalle (JLL), 2009 and 2010 recorded increased interest from international corporates and

retailers to open their offices and outlets in Egypt, particularly Cairo, although this trend may have been interrupted by the political

upheaval in the country in 2011.

Exhibit 219: The increasing urbanization trend has resulted in c.43% of the population living in urban areas vs. 32% in 1950 Percentage of urban population vs. rural population; 1950-2010

Source: United Nations Population Division.

68% 65% 62% 59% 58% 57% 56% 56% 57% 57% 57% 57% 57% 56%

32% 35% 38% 41% 42% 44% 44% 44% 44% 43% 43% 43% 43% 44%

0%

20%

40%

60%

80%

100%

120%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015E

% of rural population % of urban population



Exhibit 220: Our companies’ properties are mostly concentrated in Cairo Geographical distribution of properties of real estate companies in our coverage

universe

Exhibit 221: Three out of five companies in our Egyptian real estate coverage

are focused on luxury and upscale residential real estate GS Egyptian real estate coverage by scale (luxury, midscale, budget





Following political upheaval in 2011, real estate demand has weakened and legal cases involving

real estate companies have been filed

Following the political unrest in early 2011, real estate was among the sectors that saw a decline in activity. The real estate sector

had been seeing a rise in share of FDI into Egypt, reaching 4.5% of total FDI investments in FY2009/2010. However, after the

revolution, the FDI in real estate recorded a 96% decline for the quarter ending June 2011 (according to data from the Middle East

News Agency).

Exhibit 222: Though FDI to Egypt had declined in recent years… Net foreign direct investments in Egypt, FY2004/05 – FY2009/10

Exhibit 223: …investment in real estate as a percentage of total had

increased Net foreign direct investments in Egyptian real estate , FY2004/05 – 1Q2010/11

Source: Ministry of Investment, Egypt

Source: Ministry of Investment, Egypt.

Real estate activity came to a near standstill in 1Q2011. According to JLL, in Cairo alone, cancelled/delayed construction reduced the

2011 supply pipeline by 26% for commercial real estate, 25% for residential real estate and 27% for retail real estate (see Exhibit 224).

3.9

6.1

11.1

13.2

8.1

6.8

0

2

4

6

8

10

12

14

2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010

( USD

bn)

Net FDI in Egypt

0.4% 0.4% 0.4%

3.0%

1.7%

4.5%

2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 1Q2010/11

FDI in Egyptian real estate



Exhibit 224: Following the political upheaval in Egypt, the supply pipeline contracted by 26% for offices, 27% for retail spaces and

25% for residential units in and around Cairo

Status of pipeline of various real estate developments in and around Cairo

Source: Jones Lang LaSalle.

The change in regime also resulted in a review of the ownership of land sold to developers by the previous government. Companies

such as Palm Hills Development have legal cases filed against portions of their land bank while Egyptian Resorts Company’s

approval for the third phase of its Sahl Hasheesh development has been withdrawn. As there is no clarity on the outlook for these

land banks, we believe investors/clients will adopt a wait-and-watch approach before investing in these properties.

Demand in residential real estate is skewed towards budget housing rather than upscale

Through 2010, Egyptian real estate attracted foreign investor demand due to the country’s strategic location as a tourist destination

with coasts on the Mediterranean Sea and the Red Sea. Foreign investor interest was mostly in luxury and upper-upscale residential,

resort and hotel sectors in resort/tourist locations along the sea coasts and in Greater Cairo. Greater Cairo also attracts significant

domestic demand, housing c.25% of the Egyptian population and a concentration of economic wealth. However, aggressive

construction in the luxury and upper-upscale housing segments in 2004-08 has resulted in a decline in the demand-supply gap, and

post the political upheaval in the country, demand from outside of Egypt has weakened significantly. This is evident in the 96%

decline in FDI in Egyptian real estate in quarter ending June 2011.

We believe that the attractiveness of Egyptian upscale real estate is partly due to the country’s attractiveness as a tourist destination.

2Q2011 was weak, with tourist visits down 35% post the political upheaval. 3Q saw a rebound, up 23% yoy, but ongoing

improvement will only be seen when political stabilization occurs in our view.

Offices Residential Retail

(sqm of grade A)(compound units in New Cairo and 6th October)

(sqm in retail malls)

Status at the end of FY2010 688,000 46,000 741,000Anticipated supply in 2011(pre-political upheaval)Anticipated supply in 2011(post-political upheaval)% Reduction in 2011 supply 26% 25% 27%

117,000 17,000 445,000

87,000 12,750 325,000



Exhibit 225: International tourist visits to Egypt were up 23% in 2010, but declined 35.4% in 2Q2011 after the political upheaval Number of international tourists (in mn) to Egypt and yoy change

Source: Trading Economics, WTO, RNW.

However, while there is a relative weakening of demand in the luxury and upscale residential real estate sectors currently, we

believe there is pent-up demand in the budget (affordable) housing segment due to a demand-supply gap. According to JLL, Egypt

has total demand of 16.9 mn affordable houses, while the current supply is only 15.4 mn, resulting in a 1.5 mn shortage in this

segment.

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

2

4

6

8

10

12

14

16

Number of international tourists (mn) (LHS) % yoy change (RHS)



Exhibit 226: Egypt has the highest shortage of affordable (budget) housing in absolute numbers; but Iraq has the highest

percentage

Demand-supply details of affordable budget housing, 2010


Based on the data from JLL, affordability of housing is a major issue in the country, with average house prices worth 18x average

income levels which is the among the highest ratios in the MENA region. An underdeveloped mortgage industry estimated at 2% of

GDP vs. the MENA average of 15% compounds the supply shortage scenario. The shortage of affordable housing has recently

attracted more government attention, with the Minister of Housing, Utilities and Urban Development announcing in February 2011

development plans to add c.1 mn affordable housing units of 70sqm over the next five years. According to the American Chambers

of Commerce in Egypt, the funding for the project is expected to be carried out by the Ministry of Finance in conjunction with

development partners, although it is clear that the successful execution of this initiative will be dependent on political stability in the

country.

1.5

1.0 0.6 0.40.0 0.0 0.0

3.6

9%

34%

18%15%

17%

5% 5%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

5

10

15

20

25

30

35

Egypt Iraq Morocco KSA Bahrain UAE Oman TotalDemand (mn units) Demand Supply gap (mn units) Gap as a % of demand



Exhibit 227: The housing values relative to incomes in Egypt are among the

highest worldwide… Housing affordability ratio (Income levels/housing price), 2010

Exhibit 228: …while Egypt has among the lowest levels of mortgage

penetration in MENA Ratio of Mortgage/GDP, 2010


Source: Source: ERS Real estate, Arabian Business, Government data, Global Property Guide and Goldman Sachs Research NB: Lebanon data is as of Dec 2008.

2.85.1 5.2

6.4

9.4 9.512.0

18.3 18.4

24.8

29.6 30.0

0

5

10

15

20

25

30

35

Num

ber o

f yea

rs o

f in

com

e

17%15%

8% 6% 6% 5% 2% 2%

15%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%



Commercial real estate resilience is another bright spot in a tough year

For retail and commercial real estate, we believe the outlook for corporate and retail outlet client interest will depend on how quickly

the political outlook of the country improves. Egypt offers strong demand fundamentals for both corporate and retail players. For

example, according to JLL data, Cairo had among the highest commercial rental rates and lowest vacancy rates in the MENA region

post the political unrest in 1Q2011 and this supports our view on the strong long-term demand fundamentals.

Exhibit 229: Cairo had among the highest rentals in MENA region…. Commercial rental rates per sqm per annum (US$), 1Q2011

Exhibit 230: …and lowest vacancy rates in 1Q2011 Vacancy rates across major MENA cities, 1Q2011



$536$624

$381

$763

$455

$235$276

$125

0

100

200

300

400

500

600

700

800

900

Abu

dhab

i

Cai

ro

Cas

blan

ca

Doh

a

Dub

ai

Jedd

ah

Riy

adh

Tuni

s

US$

/ sq

m / p

a

10%

5%

10%10%

44%

13% 12% 14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Abu

dhab

i

Cai

ro

Cas

blan

ca

Doh

a

Dub

ai

Jedd

ah

Riy

adh

Tuni

s

US$

/ sq

m / p

a



Market composition: 32 listed companies; 6 included in EGX 30 accounting for c.7% of the index

According to government statistics and company data, the Egyptian real estate sector represented c.2.8% of GDP in 2009 and

contributed 4.5% of FDI investments to the country in FY2009/10. Currently there are 32 real estate companies listed on the Egyptian

stock exchange, with six companies included in the EGX 30 index. The real estate sector contributes to 5.2% of the total market cap

of the Egyptian stock exchange (c.7% of EGX 30). We are initiating on three real estate stocks (Talaat Moustafa Group, SODIC and

Egyptian Resorts) and resuming coverage of one additional stock (Palm Hills Development), which together account for c.5.6% of

EGX 30. We are also initiating on Orascom Development with a market cap of US$529 mn which is listed on the Swiss Stock

Exchange, although its developments are based mainly in Egypt and MENA. Talaat Moustafa Group has the highest market cap of

US$1.1 bn in the real estate space and the top five stocks we cover account for 54% of the total real estate market cap. The average

share prices in the GS-covered sector have fallen by 63% YTD due mainly, we believe, to the political upheaval in Egypt and global

economic concerns.

Exhibit 231: We cover 54% of Egyptian real estate sector by market cap Market cap of Egyptian real estate companies as on Nov 17, 2011, in US$

Exhibit 232: Real estate accounts for 6.9% of EGX 30 Market cap by company and as a % of EGX 30

NB: Shades of blue in the above chart – GS covered companies

Source: Datastream; Goldman Sachs Research.

Source: Datastream; Goldman Sachs Research.

Talaat Moustafa

Group, 36%

Palm Hills Development,

7%

SODIC, 6%Egyptian Resorts

Company, 5%

Amer Group, 7%

United Housing, 2%

Others, 37%

1,108

217193 170

53

232

-0.1%

0.9%

1.9%

2.9%

3.9%

0

200

400

600

800

1,000

1,200

TMG

PHD

SOD

IC

ERC

United

Housing & D

ev.

AMER

Market cap (USD mn) as a % of EGX 30



Exhibit 233: Talaat Moustafa Group had the largest market cap at the end of

2010 Market cap of Egyptian real estate companies, Dec 31, 2010

Exhibit 234: … average Egyptian real estate market cap is now down

63%YTD Market cap of Egyptian real estate companies, Nov 17, 2011

Source: Datastream, Goldman Sachs Research.

Source: Datastream, Goldman Sachs Research.

145

487

189158

1,091

-200

0

200

400

600

800

1,000

1,200

1,400

(US

$ m

n)

Market cap (in USD mn)


Egyptian Resorts Company

Orascom DevelopmentSODIC

Palm Hills Development362

1,476

1,145

673

2,993

0

500

1000

1500

2000

2500

3000

3500

(mn

US

$)

Market cap (in USD mn)


Egyptian Resorts Company

Orascom Development

SODIC

Palm Hills Development



Saudi Arabia real estate sector: Strong growth driven by demographics and economy

The prospects for the Saudi Arabian real estate market look strong owing to favourable demographics and economic

growth. The housing sector in Saudi Arabia is underpenetrated, in our view, with a low rate of home ownership and

undersupplied housing. The IMF estimates Saudi Arabia real GDP growth at an average 5% pa in 2011-15E and population

growth at an average 2% pa. We believe strong economic performance coupled with favourable demographics and

government stimulus will result in increased real estate demand in Saudi Arabia.

Favourable demographics, growing economy; real estate development structurally strong

The real estate sector in Saudi Arabia has grown at a CAGR of 4% in 2005-10, outpacing real GDP CAGR of 3% and contributing an

average 7% to GDP. The IMF estimates average real GDP growth of Saudi Arabia at 5% pa in 2011-15E which we believe will be

supported by high oil prices. GS estimates the ICE Brent crude price at U$120/bbl in 2012 and U$130/bbl in 2013. We believe the

market will benefit from high GDP growth coupled with strong population growth and high GDP per capita.

Exhibit 235: The Saudi Arabia real estate sector has grown at a CAGR 4%

in 2005-10 Saudi Arabia real estate spend and growth 2002-2010

Exhibit 236: GDP is highly related to oil price

Real GDP growth vs. average Brent crude price growth 2003-2010

Source: Saudi Arabia Central Department of Statistics and Information, Goldman Sachs Research estimates

Source: UAE Department of Statistics, Goldman Sachs Research estimates

0%

1%

2%

3%

4%

5%

6%

7%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real estate sector Growth

R² = 41%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0% 2% 4% 6% 8% 10%

Aver

age

Bren

t cru

de p

rice

grow

th 2

003-

2010

Real GDP growth rate 2003-2010

2003

2004

2005

2006

2007

2008

2009

2010



Population growth: Large young population with purchasing power

We believe demand for real estate in Saudi Arabia will be robust on account of the high population with a low ownership rate and

high per capita GDP. The Saudi Arabian population has grown at a 2% CAGR between 2005 and 2010. The IMF estimates that the

population will grow at an average 2% pa in 2011-15E. As of 2009, expatriates constituted 36% of the total population and 78% of the

population was below 40 years of age. The home ownership rate in Saudi Arabia is low at 60%, while 35% of families stay in rented

housing and 5% stay in employer-provided housing, all of which indicates strong potential demand, in our view.

We believe growing per capita income and availability of finance will provide the young population greater means to invest in real

estate over the coming years. Per capita GDP in Saudi Arabia was US$23,826 in 2010 and the IMF estimates it will grow at an

average 4% pa in 2011-14. Furthermore, the government has set up the Real Estate Development Fund (REDF) to provide mortgage

finance with a target of 109,000 units to be financed between 2010 and 2014. The government estimates housing demand at 1.25mn

houses and aims to build 1mn houses through public and private sector between 2010 and 2014.

Exhibit 237: Population grew at an average 2% pa in 2005-10 Saudi Arabia total population and growth rate 2006-10

Exhibit 238: 78% of the population is below 40 years old Saudi Arabia population break down by age

Source: IMF

Source: Saudi Arabia Central Department of Statistics and Information.

0%

1%

1%

2%

2%

3%

3%

0

5

10

15

20

25

30

35

Saud

i Ara

bia

popu

latio

n gr

owth

Saud

i Ara

bia

popu

latio

n (m

n)

Population (mn) Population growth

0 - 14 years, 32.0%

15 - 39 years, 45.7%

40 - 64 years, 19.6%

Above 64 years, 2.8%



Real estate developers: A fragmented supplier market with strong government influence

Real estate developers in Saudi Arabia operate in a fragmented market, with a large number of small developers that build up small

residential communities. The government plays an important role in the sector by providing land, mortgage facilities and

constructing houses on its own as well as in partnership with private players. With 82% of the population residing in urban areas,

the larger part of demand comes from these areas. Hence, developers tend to be highly focused on Jeddah and Riyadh which are

the most populated cities in Saudi Arabia.

The government estimates total demand of 1.25 mn houses and 350 mn sqm of land in 2010-14. The government plans to create

total of 1mn houses between 2010-2014 by providing 266 mn sqm of land to be developed by the government and private sector.

Under the stimulus plans announced by the government in March 2011, some 500,000 houses will be created with a budget

allocation of US$67 bn.

With the objective of diversifying the economy, the government is also developing four integrated economic cities with a focus on

ports, industrial parks, residential zones and tourism. The government plans to invest U$69 bn to develop these cities which would

provide housing to 4mn residents and create 1.5 mn jobs.

Exhibit 239: Real estate supply is expected to be robust across the asset

class through 2013

Real estate supply in Saudi Arabia 2011-2013

Exhibit 240: The government is developing 429 mn sqm through four economic

cities

Economic cities being developed in Saudi Arabia


Source: Saudi Arabia General Investment Authority.

Existing stockJeddah real estate sector Q3 2011 Q4 2011 2012 2013Residential units (000 units) 703 16 18 19Commercial office (000 sqm) 445 60 159 31Retail (000 sqm) 770 46 26 75Hotel rooms 11,500 0 750 1,100

Expected future additionEconomic city Master developer Location

Size (mn sqm)

Investment size (US$

bn)King Abdullah Economic City (KAEC) Emaar, The Economic City Rabigh 168 27Jazan Economic City MMC International South West Saudi Arabia 100 27Prince Abdulaziz bin Musaid Economic City (PABMEC) Rakisa Holding Company Hael 156 8Knowledge Economic City (KEC) Quad International Madinah 4.8 7Total 429 69



Exhibit 241: The government is developing four economic cities with master developers. TEC and Eastern Province are proposed

developments

The economic city location map, Saudi Arabia.

Source: Saudi Arabia General Investment Authority, Goldman Sachs Research estimates. Those in dark shades are currently under development

PABMEC

KEC

KAEC

JEC

TEC

Eastern Province



Market composition: We cover 37% of the real estate sector on the Tadawul stock exchange

Within Saudi Arabia, there are seven listed real estate companies, of which Jabal Omar Development Company is the largest by

market cap, while Dar Al Arkan Real Estate Development Company is the largest by revenue in 2010. We cover Dar Al Arkan Real

Estate Development Company and Emaar the Economic city within the real estate sector in Saudi Arabia. Together they constitute

37% of the real estate market cap on TASI.

Exhibit 242: GS covered Dar Al Arkan comprises 66% of the revenues of

listed developers in Saudi Arabia Market share by 2010 revenues of listed real estate companies, GS covered in

bold

Exhibit 243: Real estate accounts for 3% of TASI Market cap by company (SR bn) and % of TASI



Arriyadh Development Co.

6.19%

Dar Al Arkan Real Estate

Development Company 66.44%

Emaar the Economic City

3.50%

Jabal Omar Development Co

0.01%

Knowledge Economic city

0.07%

Saudi Real Estate Co. 13.14%

Taiba Holding Co. 10.64%

10.78

6.70

5.44

2.902.75 2.70

1.63

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

0

2

4

6

8

10

12

Jabal Omar Development

Co

Dar Al Arkan Real Estate

Development Company

Emaar The Economic City

Knowledge Economic city

Saudi Real Estate Co.

Taiba Holding Co.

Arriyadh Development

Co.

Market cap (SR bn) % of TASI (RHS)






Consumer: Telecoms, Retail



MENA mobile: Good growth, but in the past

MENA mobile operators have delivered strong growth over the last five years. Service revenues have grown at a 2006-11E

CAGR of 15% on the back of strong demographic trends, rapid growth in private consumption, expansion of mobile

penetration and limited competition. We forecast the regional mobile market to grow at a 7% CAGR 2011-14E, driven by

ongoing growth in private consumption and slight growth in penetration. We expect Saudi Arabia, Iran and Iraq to be the

main drivers of incremental service revenue growth owing to the size of their population and oil-price driven expansion of

private consumption growth.

The Middle East and Northern Africa mobile market expanded at a 15% CAGR in 2006-11E, driven by penetration growth, private

consumption expansion, favourable demographics and reasonable competitive dynamics. Mobile penetration grew from 39% on

average in 2006 to 107% in 2011E on the back of increasing affordability of mobile services (average price per minute has declined

by 1%-59% over the last five years) and handsets. Population growth in the region was c.2% pa on average, contributing to a

favourable demographics development. Private consumption increased 14.6% pa in 2006-11E. As a result, the MENA region mobile

market grew from US$26.6 bn in 2006 to US$52.3 bn in 2011E, and even grew during the 2008-2009 crisis, supported by healthy

drivers and currency stability.

Exhibit 244: Service revenues grew at 2006-11E CAGR of 15%

MENA mobile market volume (US$ bn)

Exhibit 245: Mobile penetration grew from 39% on average in

2006 to 107% in 2011E MENA average mobile penetration

Source: Company data, Informa, IMF, Goldman Sachs Research estimates.


26.6

34.2

42.3 43.947.8

52.356.6

60.464.0

28.8%

23.8%

3.8%

8.8% 9.4%8.1%

6.8%5.9%

0%

5%

10%

15%

20%

25%

30%

35%

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

MENA mobile market growth rate

39%

55%

70%

84%

97%107%

116%124%

131%

15.6%15.0%

13.8%13.2%

10.2%9.5%

8.0%

6.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0%

20%

40%

60%

80%

100%

120%

140%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

MENA Average Penetration change



Iran was the biggest contributor to both revenue and subscriber base growth in the region in 2006-11E, reflecting strong population

growth, increasing local private consumption and the gradual introduction of competition (MTN launched operations in 2006). Other

noticeable contributors to revenue and subscriber base expansion in MENA were Saudi Arabia and Iraq which also benefited from a

reasonable competitive environment and growing population wealth. The contribution to revenue and subscriber growth was far

from even, however. In particular, while some countries were substantial contributors to subscriber growth, their contribution to

revenue growth was more moderate (e.g. Egypt). Conversely, while UAE was the fourth-largest contributor to regional mobile

revenue expansion (reflecting a high level of mobile spending), its contribution to subscriber base growth was negligible due to the

small size of the population.

Exhibit 246: Iran, Saudi Arabia and Iraq contributed the most

to growth of MENA region mobile service revenues in 2006-

2011E (US$ bn)

Exhibit 247: Iran, Egypt and Saudi Arabia contributed the most

to growth of MENA region mobile subscribers in 2006-2011E (mn)



Key drivers of mobile: Private consumption, penetration, external environment

We see three main drivers of mobile market growth – expansion of private consumption, penetration growth and impact of external

factors. The level of total consumption is the natural driver for the money value of the mobile market. Mobile spend is part of total

consumption; higher consumption should drive mobile spending. In developed countries with mature mobile markets, mobile

spend accounts for a relatively stable portion of total consumption. In immature markets, an increase in penetration increases the

proportion of total mobile telephony consumption. With penetration growth, more people use mobile phones, and that increases

the volume of the mobile market. While the correlation is not linear (incremental subscribers traditionally generate lower per-user

revenues), penetration growth is a major driver of mobile market volumes in underpenetrated markets.

26.6

43.9

52.3

6.2

5.4

2.7

3.0

1.7

1.20.8

0.8

3.9

SR '06 Iran Saudi

Arabia

Iraq UAE Egypt Morocco Syria Algeria Other SR '11

130.0

319.9

394.9

73.1

61.1

37.7

18.1

15.913.7

10.28.3

26.9

Subs '06 Iran Egypt Saudi

Arabia

Iraq Morocco Algeria Yemen Syria Other Subs '11



Exhibit 248: Structural drivers of mobile market growth

Exhibit 249: Growth of private consumption contributed 104%

of MENA mobile market growth in 2006-11E Factor analysis of drivers contribution to market growth (US$ bn)



External factors include regulation, competition and the level of the foreign labour force in the economy:

In countries where regulation stimulates usage through lower prices, total mobile revenues benefit from price elasticity.

However, excessive pricing and interconnect regulation or revenue sharing may result in value redistribution from companies

(and shareholders) to consumers and the state, leading to a lower total telecom spend.

Mild competition is positive for mobile market development, as moderate pricing deflation leads to expansion of usage.

However, if the competitive environment becomes irrational, mobile operator revenues decline as a proportion of total

consumer spending, as excessive pressure on pricing leads to value redistribution from operators to consumers.

In countries with a noticeable foreign workforce, mobile operator revenues account for a relatively higher portion of consumer

spending, as foreign workers call abroad more (especially in countries where cheaper fixed-line telephony is not available). This

partly explains the relatively high proportion of spend in the GCC countries.

Mobile

market

volume

Consumer spending

• Regulation

• Competition

• Foreign workforce

Mobile

penetration

26.6

52.3

26.0

-0.3

SR '06 Private Consumption Other SR '11



Exhibit 250: Private consumption is a main driver of mobile

market growth Mobile spending p.c. (y-axis) vs private consumption (x-axis)

(US$), 2010E

Exhibit 251: Penetration growth is a major driver of mobile

market volumes in underpenetrated markets Mobile spending as a share of total consumption (y-axis) vs mobile

penetration (x-axis), 2010E



In 2006-11, the region enjoyed a relatively mild competitive environment, as regulators introduced competition gradually. Markets

comprised 1-3 players over the last five years, and the biggest markets (Saudi Arabia, UAE, Qatar) saw almost no competition.

Meanwhile, only a few countries consider a fourth licence as a step to improve competition in the markets. Core regional markets –

Saudi Arabia, UAE, Qatar – remain 1-3 player markets.

R² = 0.90

0

400

800

1,200

0 5,000 10,000 15,000 20,000 25,000Algeria

EgyptIran

IraqMorocco

Saudi Arabia

Jordan

UAE

Lebanon

Kuwait

Oman

Qatar

Bahrain

Palestinian

self-rule areas

Syria

Tunisia

Yemen2.0%

4.0%

6.0%

8.0%

0% 50% 100% 150% 200% 250%

Algeria

Egypt

Iran

Iraq

Morocco

Saudi Arabia

Jordan

UAELebanon

Kuwait

Oman

Qatar

Bahrain

Syria

Tunisia

Yemen



Exhibit 252: Introduction of competition in the MENA mobile market in 2006-11

Source: Company data, Informa, Goldman Sachs Research estimates.

2006 2008 2009 2010 2011

STC launched

operations

MTN launched

operations

Korek Telecom

launched operations

Viva launched

operations

Wana launched

operations

Wataniya launched

operations

Vodafone launched

operations

Zain launched

operations

France Telecom

launched operations

Unitel launched

operations

One-player market Three-players market

Two-players market Four-players market

Du launched operations

Iraqna acquired by Zain

Saudi Arabia

Syria

Tunisia

UAE

Yemen

2007

Etisalat launched

operations

Kuwait

Lebanon

Morocco

Oman

Palestine

Qatar

Algeria

Bahrain

Egypt

Iran

Iraq

Jordan



The gradual introduction of competition has led to a change of balance of market powers in the MENA countries. The biggest

change of concentration happened in Qatar, UAE, Iran, Bahrain and Saudi Arabia, where increased numbers of players eroded the

market positions of the incumbents. In some markets, concentration even increased such as in Iraq, where the licence issue process

squeezed Orascom Telecom out of the market, and turned the country into a two-player market as a result.

Exhibit 253: Herfindahl–Hirschman Index Change of market concentration in MENA markets in 2006 (x-axis)

and 2011E (y-axis)

Exhibit 254: Most MENA mobile markets have grown 9%-14%

pa over the last five years

MENA markets 2006-11E service revenues CAGR



We forecast that most MENA mobile markets will grow at an average rate of 7%-10% pa in the next three years (see Exhibit 255),

broadly in line with nominal private consumption growth. The fastest-growing markets, on our estimates, will be Iran, Iraq and the

Palestinian self-rule areas, driven by ongoing growth of penetration and increasing population wealth. We expect the market size in

the region to reach nearly US$64 bn by 2014. We expect only marginal regulatory pressure and incremental competition to affect

overall revenue growth. As we do not forecast major regulatory changes in the region, we expect mobile service revenues to grow

in line with private consumption, supported by higher usage and better adoption of mobile broadband.

20%

40%

60%

80%

100%

20% 40% 60% 80% 100%

Algeria

Egypt

Iran

Iraq

Morocco

Saudi Arabia

Jordan

UAELebanon

Kuwait

Oman

Qatar

Bahrain

Palestinianself-rule areas

Syria

Tunisia

Yemen

48%

42%

27%

19%17%

14%12% 12% 11% 11% 11% 11% 9% 9%

6% 6% 4%



Exhibit 255: Most MENA mobile markets will grow on average

7%-10% pa MENA mobile markets growth outlook in 2011-14E, in US$

Exhibit 256: Private consumption expansion is a primary

source of service revenues growth Consumption growth contribution to MENA mobile service

revenue growth in 2011-14E (US$ bn)



We forecast that Iran, Iraq, Saudi Arabia and UAE will be the biggest contributors to MENA mobile market expansion, supported by

currency stability, strong demographics and growth of private consumption. We highlight that while Saudi Arabia average annual

growth will be below the MENA average, the size of the market (Saudi Arabia accounts for 25% of MENA mobile service revenues)

will mean it will remain a sizeable contributor to market growth. We still see upside for above-average growth in Iran and Iraq,

supported by improvement of use elasticity. In particular, average monthly usage in Iran is a mere 60 minutes, and unlocking usage

growth potential will translate into faster mobile revenue growth.

13%

12% 12%

10%9% 9%

8% 8%

6% 6% 6%5%

5%4%

3%1%

52.3

64.0

12.5

-0.9

SR '11 Private Consumption Other SR '14



Exhibit 257: Iran, Saudi Arabia and Iraq will contribute the

most to MENA mobile service revenue growth in 2011-14E (US$ bn)

Exhibit 258: Iran, Egypt and Saudi Arabia will contribute the

most to MENA subscriber numbers growth in 2011-14E (mn)



We project only small changes in the competitive landscape in the MENA region. In most countries, regulators are not considering

plans to increase the number of market participants. The exceptions are Iran (third license issuance discussed for a couple of years

already), Iraq (the government is discussing prospects for issuing a fourth license) and Syria (third license may be issued). Moreover,

local regulators are not considering steps to increase competition through measures aimed at eroding the network effect (mobile

number portability – MNP, or mobile termination rates regulation). Again, there are a number of exceptions – MNP may be launched

in Qatar, which may contribute to the competitive dynamics between Qtel and Vodafone Qatar. We note that MNP introduction does

not typically change competitive dynamics considerably, especially in pre-paid markets (where the value of unchanged mobile

numbers is highly deflated). In Qatar or UAE, where value subscribers represent a substantial part of Qtel’s subscriber base, the

impact of MNP introduction may be more visible. However, our forecasts on ongoing market share redistribution (we project

Vodafone Qatar to increase revenue market share to 32% in 2014E from 24% currently and Du to increase its revenue market share

to 42% in 2014E from 35% in 2011) capture these expectations.

52.3

59.9

64.0

3.0

2.6

1.8

0.20.8

0.7

0.60.4

1.5

SR '11 Iran Saudi

Arabia

Iraq UAE Morocco Kuwait Syria Algeria Other SR '14

394.9

469.7

512.9

27.1

22.5

13.2

12.1

10.9

9.1

6.86.6

9.7

Subs '11 Iran Egypt Saudi

Arabia

Iraq Algeria Yemen Syria Morocco Other Subs '14



Exhibit 259: Summary of macro assumptions for service revenue outlook in 2011-14E


2010 2011E 2014ECAGR

'11-14E2010 2011E 2014E

CAGR

'11-14E2010 2014E 2010 2014E

Algeria 4,467 5,561 5,940 2% 36.1 36.7 38.4 1% 92% 123% 5% 5% 35%

Bahrain 20,424 23,407 26,539 4% 1.1 1.1 1.2 2% 130% 131% 7% 6% 37%

Egypt 2,732 2,834 3,393 6% 78.3 79.9 84.8 2% 89% 119% 3% 2% 72%

Iran 4,788 5,548 6,240 4% 75.4 76.6 80.6 2% 97% 139% 4% 5% 42%

Iraq 2,569 3,308 4,500 11% 32.0 32.8 35.2 2% 75% 112% 6% 7% 63%

Jordan 4,508 4,797 5,805 7% 6.1 6.3 6.7 2% 112% 137% 5% 5% 77%

Kuwait 36,372 47,707 52,788 3% 3.6 3.7 3.9 2% 124% 166% 5% 5% 30%

Lebanon 10,087 10,793 12,640 5% 3.9 4.0 4.1 1% 72% 109% 4% 4% 76%

Morocco 2,856 2,740 3,280 6% 31.9 32.2 33.2 1% 91% 116% 5% 6% 61%

Oman 18,632 21,393 22,331 1% 3.0 3.1 3.4 3% 152% 139% 6% 5% 31%

Palestinian self-rule areas 3,835 4,218 5,617 10% 2.5 2.5 2.7 2% 106% 157% 6% 6% 90%

Qatar 76,166 109,879 112,782 1% 1.7 1.8 2.0 4% 165% 188% 4% 4% 19%

Saudi Arabia 16,972 21,655 23,487 3% 26.1 26.7 28.5 2% 198% 249% 8% 7% 34%

Syria 2,890 3,249 3,845 6% 20.6 21.1 22.7 2% 53% 86% 6% 5% 61%

Tunisia 4,196 4,512 5,305 6% 10.5 10.7 11.0 1% 103% 129% 5% 4% 59%

UAE 59,711 69,865 74,854 2% 5.1 5.2 5.7 3% 239% 227% 4% 3% 38%

Yemen 1,281 1,560 1,643 2% 24.4 25.1 27.5 3% 43% 81% 3% 3% 73%

* - Average consumption to GDP ratio for 2010-14E

Country

Population (mn)GDP per capita (US$)

Cons. / GDP *

Penetration (%) SR / Cons.



Exhibit 260: STC is losing market share to Zain KSA Saudi Arabia revenue market share dynamics

Exhibit 261: Du will have 42% revenue market share by 2014E UAE revenue market share dynamics



Exhibit 262: Vodafone revenue market share will grow to 32% by 2014E Qatar revenues market share dynamics

Exhibit 263: Zain is losing market share to Viva Kuwait revenues market share dynamics



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Saudi Telecom Company Etihad Etisalat Zain KSA PTC (Bravo)

Saudi Telecom

Telecom

Etihad Etisalat

Zain KSA

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Etisalat Du

Etisalat

Du

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Q-Tel Vodafone

Q-Tel

Vodafone

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Wataniya Telecom Viva Zain

Wataniya

Viva

Zain



Exhibit 264: Korek is expanding at the cost of Zain Iraq revenues market share dynamics

Exhibit 265: Oman revenue market share will stabilize to 55% by 2014E Oman revenues market share dynamics



Exhibit 266: Batelco is losing market share to STC Bahrain revenues market share dynamics

Exhibit 267: Etisalat is taking market share from Mobinil Egypt revenues market share dynamics



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AsiaCell Zain Korek Telecom Sanatel

AsiaCell

Zain

Korek Telecom

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Nawras Oman Mobile

Nawras

Oman Mobile

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Batelco Zain STC

Batelco

Zain

STC

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Mobinil Vodafone Etisalat

Mobinil

Vodafone

Etisalat



Consumer cyclical and staples: Changing consumer habits leading to secular growth

We forecast top-quartile consumer demand growth for MENA countries, driven by rising populations, improving wealth

levels and low penetration. We expect Jarir Marketing Company to deliver the fastest revenue growth among our coverage

as the company extends its dominant position in the Saudi electronics retail market, one of the fastest-growing in the

region. Jarir, along with Herfy, which has the second-largest market share in Saudi Arabia for fast foods, will generate the

highest returns, on our estimates (average 2011-13E CROCI of 48% and 28%, respectively). Almarai, the largest food

company in MENA, is forecast to continue to generate the highest EBITDA margin in the region given its dominance in fresh

milk in the GCC (50% market share), translating into greater bargaining power with the fragmented grocery retailers. While

smaller in terms of size, packaged food manufacturers Juhayna, Sadafco and Agthia offer the most attractive valuation

upside, in our view.

Relatively few listed consumer-focused names in MENA

Given the region’s focus on capital-intensive industries (partially reflecting the attractive domestic fuel price), there are relatively few

listed companies in the consumer staples and consumer cyclical space. In Saudi Arabia, domestic petrochemical and cement players

receiving natural gas allocation (where prices are low relative to international prices) are required by law to list on the local

exchange, meaning these companies are particularly well represented on the local equity market. We believe this balance may

change in the future as the region (especially the GCC) plans to utilize its oil wealth to develop the non-oil sector and realign

incentives which should allow new players in the non-oil sector to emerge.

Exhibit 268: Most the listed consumer names are based in Saudi Arabia

The featured company in this section

Market cap as of November 17, 2011.


Consumer staples

Ticker Company Name Country Main product category Market shareMarket Cap US$ mn

2280.SE Almarai Saudi Arabia Fresh milk 50% GCC 5,5662050.SE Savola Group Saudi Arabia Edible oil 40%-50% Saudi, Egypt and Iran 3,4672050.SE Savola Group Saudi Arabia Grocery retail 10% Saudi 3,467JUFO.CA Juhayna Food Industries (Juhayna) Egypt Long life milk 73%Egypt 5844001.SE Abdullah Al Othaim Markets Co (Othaim Markets) Saudi Arabia Grocery retail 5% Saudi 5682270.SE Sadafco Saudi Arabia Long life milk 52% Saudi 373AGTH.AD Agthia UAE Bottled water, entry into dairy 27% UAE 2766001.SE Halwani Bros Saudi Arabia Frozen Meat & packaged food 60% Egypt & 40% Saudi 261

Consumer cyclicals

Ticker Company Name Country Main product category Market shareMarket Cap US$ mn

FOOD.KW Kuwait Food Co (Americana) Kuwait Fast food Franchise operator 5-10% in Saudi, Egypt and UAE 2,1824190.SE Jarir Marketing Company (Jarir) Saudi Arabia Electronics and books retailer 40-50% in Saudi 2,1494240.SE Fawaz Abdulaziz Alhokair (Alhokair) Saudi Arabia Fashion franchise operator 40-50% in Saudi 1,1066002.SE Herfy Saudi Arabia Fast food operator 5% Saudi 6104200.SE Aldrees Saudi Arabia Petrol station operator 5%in Saudi 278



Egypt and Saudi Arabia are the largest food markets in the region

Egypt and Saudi Arabia are among the largest food markets in the region with annual consumption of 33 mn and 12 mn tonnes pa

of cereals, respectively. This is a function of the large domestic population in Egypt (78 mn) and relatively high per capita income in

Saudi Arabia (c.US$18,000).

MENA countries are dependent on imports for major food categories, with imports accounting for over 70% in the case of sugar and

55% in the case of cereals; in fact, in 2007 the MENA region was the largest net importer of cereals in the world, according to the

World Bank. Within the MENA region, the GCC countries are the major importers with an overall self sufficiency ratio (calculated as

consumption/local production) of c.30% vs. 70% for MENA as a whole. In the GCC, the available arable land average is c.2%,

explaining the heavy dependence on imports for consumer staples.

Exhibit 269: Egypt and Saudi are the largest food markets Cereals consumption ‘000 tones LHS. GDP/capita RHS US$

Exhibit 270: MENA imports major food categories, with GCC countries on

average more dependent on imports relative to the region Self sufficiency ratio, calculated as consumption/local production

Source: Arab Agriculture yearbook 2009.

Source: Arab Agriculture yearbook 2009.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Egypt Saudi Arabia

Morocco Algeria Sudan Iraq Syria

Cereals GDP/Capita

11%

21%24% 25%

38%42%

82%87%

91%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Qatar

Kuwait

UAE

Bahrain

Saudi

Om

an

Syria

Egypt

Sudan



MENA staple demand growth is expected to be in the top quartile of the global range

There is a strong positive correlation between consumption/capita and GDP/capita in major consumer staples categories such as

packaged food, soft drinks, tobacco, sugar and confectionary. In a report published by our GS SUSTAIN team on September 19,

2010, analyzing major consumer staples demand in developed and emerging countries, the R2 – utilizing GDP/capita as an

explanatory variable – ranged from 72% for soft drink consumption to 82% for packaged food consumption (see GS SUSTAIN –

Consumer Staples: Stockpiling staples for the long term: Unilever on to GS SUSTAIN, 5 global winners). Extending the same

framework for dairy consumption, given the four listed dairy-focused companies in the region (Almarai, Sadafco, Juhayna Food and

Agthia), we find a similar relationship.

Utilizing the above framework to forecast per capita consumption growth and using IMF population growth forecasts, we estimate

the regional staple demand growth to be in the top quartile of the global range (2011-15E).

Exhibit 271: Similar to other staples, dairy consumption is strongly correlated

with wealth levels Milk consumption per capita (litres/year) regressed against US$ GDP/capita (x

axis)

Exhibit 272: Based on population and GDP/capita growth, MENA staple

demand growth is expected to be in the top quartile of the global range Staple demand calculated as sum of GDP/capita growth and population growth

2010-15E

Source: FAO, Goldman Sachs Research estimates.

Source: IMF, Goldman Sachs Research estimates.

Saudi Arabia

UAEEgypt

Switzerland

US

Brazil

India

Sweden

R² = 0.82

0

50

100

150

200

250

300

350

400

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

8%

7%

5%

4%4%

3%

3%

2% 2% 2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Iraq

BR

IC

GC

C

Eg

yp

t

Iran

Jo

rdan

Un

ited

Sta

tes

Germ

an

y

UK

Sw

itzerla

nd

Average GDP/capita Growth (2010-15E) Average Population Growth(2010-15E)



Certain food segments are expected to grow faster than population growth and wealth levels suggest

Demand for some staple foods such as fresh milk in Saudi Arabia and packaged milk in Egypt have been growing at a rate faster

than overall population growth and wealth levels. This in our view is related to changing consumer habits leading certain food

segments to grow at a significantly higher rate than levels of wealth and population growth suggest.

In Saudi Arabia, although overall demand for milk has been growing at 4% pa over the past five years, demand for fresh and

packaged milk has been growing at a faster rate at the expense of powered milk. Powdered milk currently makes up one-third of

the overall milk market which is a significantly higher proportion than in western markets. Both Almarai and Sadafco are well

positioned to benefit from this trend given their dominant market share in fresh milk in the GCC and long-life milk in Saudi,

respectively.

In Egypt, most of the dairy production is non-packaged (or loose milk). Loose milk is transported to the consumer via milk

middle men who purchase milk from small-scale farms in rural areas and then delivery it by bicycle or small van to consumers

in urban areas. Loose milk accounted for 88% of the total Egyptian market in 2010. However, with increased awareness of the

potential health risks of unpasteurized fresh milk, packaged milk (dominated by UHT milk, c.98%) has been growing at 13% pa

(2007-09) vs. loose milk growth of 2.8% over the same time period. Juhayna, with its dominant market share in packaged milk

in Egypt, will be the prime beneficiary of this secular growth trend, in our view.

Exhibit 273: Packaged milk in Egypt, which makes up 12% of

the milk market, is growing much faster than loose milk… 2007-09 growth rate of packaged and loose milk in Egypt (pa)

Exhibit 274: …while in Saudi Arabia packaged milk is growing

significantly faster at the expense of powdered milk 2005-10 growth rate of packaged and powdered milk in Saudi (pa)


Source: Euromonitor.

13%

3%

0%

2%

4%

6%

8%

10%

12%

14%

Package milk growth Loose milk growth

5%

-1%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Packaged milk Powdered milk



However, raising prices in consumer staples may become difficult in the short run post the political change

The staple food companies in the GCC countries despite achieving strong top-line growth saw some margin pressure in 2Q11 and

3Q11. The primary reason for this is the inability to fully pass on to customers higher input costs stemming from higher soft

commodity prices. Although domestic food manufacturers also benefit from attractively priced water, electricity and certain food

input costs, a portion of the cost is related to imports. Post the regional political change, some governments have made it difficult

for staple packaged food manufacturers to increase prices.

In Saudi Arabia, for example, Almarai, the largest dairy producer in the Gulf region, had to reverse its price increase for its

flagship 2-litre fresh milk in the Saudi market. Halwani Brothers, with a dominant market share in Tahina/sesame paste (regional

dish) in Saudi, has also kept prices unchanged this year despite higher input costs pressuring margins.

In Egypt, although Juhayna, the largest packaged milk producer in the country, was able to increase milk prices by 10% in 2011

over several phases, the Egyptian competition commission labeled the company’s effort to formalize the price paid to farmers

based on fodder prices as price fixing.

A study done by the World Bank to understand the impact of domestic food subsidies in the MENA region found pass-through of

international food prices to domestic prices ranged from 20%-40% for a large group of MENA countries, with Egypt and UAE

showing relatively high pass-through to domestic prices (pass-through coefficient exceeding 0.4%). For almost all MENA companies,

the study found that there was very little pass-through when international food prices decreased, implying packaged food

manufacturer margins are likely to benefit when international food prices fall.

Exhibit 275: International food prices are at multi-year highs……. World Bank food index 1960-2010

Exhibit 276: …. while domestic pass-through in the MENA region is relatively

low due to domestic food subsidies and partial absorption by local food

manufacturers, in our view % change in domestic price change for a 1% change in international food price

Source: IMF, Goldman Sachs Research estimates.

Source: World Bank.

0.00

50.00

100.00

150.00

200.00

250.00

300.00

1960

1962

1964

1966

1968

19701972

1974

1976

1978

1980

1982

1984

19861988

1990

1992

1994

1996

1998

20002002

2004

2006

2008

2010

-0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5

Egypt

UAE

Morocco

Jordan

Qatar

Bahrain

Saudi Arabia

Kuwait

Oman

Lebanon 12 month pass through(increase in food price)

12 month pass through(decrease in food price)



Listed grocery retailers provide an attractive way to gain exposure to MENA staple demand growth

With the exception of dairy producers (and small divisions of large players), there is a relatively limited number of listed players

producing consumer staples in the region; hence, we believe grocery retailers provide an attractive way to gain exposure to this

growth. However, growth trends in grocery retailing are likely be to be divergent, with retailers focused on modern formats

(supermarket and hypermarkets) likely to gain market share at the expense of those with a focus on traditional outlets (such as

corner stores). In most MENA markets, the share of supermarkets and hypermarkets in grocery retailing is still low relative to global

levels; this according to Euromonitor should lead to modern grocery market share increasing in most MENA markets.

Exhibit 277: Modern grocery retail share in the MENA region is low and

increasing..…

Share of modern grocery in overall grocery market

Exhibit 278: …and is forecast to continue increasing for most MENA markets Share of modern grocery in overall grocery market (2010-15E)



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010

0%

10%

20%

30%

40%

50%

60%

70%

Morocco Lebanon Egypt Jordan Kuwait Bahrain Saudi Arabia

Qatar

2010 2011E 2012E 2013E 2014E 2015E



Saudi grocery retailers also offer consolidation potential

In Saudi Arabia, in addition to modern formats gaining market share (overall grocery retailing CAGR 2005-10 of 9% vs.14% in

supermarkets and hypermarkets), the market is highly fragmented, providing large players opportunity to consolidate the market.

The top three players in Saudi Arabia command a market share of less than 15% vs. more than 50% for most European countries.

The potential to consolidate along with the shifting trend towards modern formats positions players like Savola Group and

Othaim Markets to significantly increase market share, in our view. Savola Group owns the largest grocery retailer under the

Panda brand at c.10% market share while the second-largest player Othaim Markets has a market share of less than 5%. The current

fragmented grocery market is an advantage for the local food producers, however, which for large players like Almarai translates

into greater bargaining power.

Exhibit 279: In Saudi Arabia, supermarkets and hypermarkets are not only

growing faster Saudi supermarket and hypermarket share in grocery market

Exhibit 280: …but the fragmented market provides opportunity for large

players to consolidate Market share of top 3 retailers


Source: Goldman Sachs Research estimates, Company data.

35%

41% 43%

‐

5

10

15

20

25

30

35

40

2005 2009 2010Supermarket and hypermarkets share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sweden

Denmark

Norw

ay

Finland

Switzerland

Belgium

Austria

France

Turkey

Saudi Arabia



MENA staple companies screen well in terms of growth and margins among global peers

Among the consumer staples companies, we forecast Juhayna and Othaim Markets to grow the fastest in the region while Almarai

not only generates one of the highest EBITDA margins regionally but also internationally. Almarai is the largest food company in

MENA and has a dominant market position in most of the segments it operates in, translating into strong barging power vs.

suppliers and distributors. The company is a planning a major expansion in the poultry segment, allocating over US$1 bn for

growth in this segment. It believes that, similar to fresh milk, consumers will switch to fresh chicken if high-quality fresh chicken is

widely available. Currently in Saudi Arabia, corner stores (which have a large share of the retail market) only offer imported frozen

chicken which has a market share of c.60% in poultry. We believe Almarai will increase its poultry market share to 23% from 5%

currently by 2014.

Exhibit 281: Juhayna Foods and Othaim Markets screen well in terms of

revenue growth among GS covered global and regional peers… Average revenue growth. Savola’s historical growth reflects impact of acquisitions

and Halwani’s shows impact of restructuring

Exhibit 282: …while Almarai generates one of the highest EBITDA margins

2011-13E average EBITDA margins



-5%

0%

5%

10%

15%

20%

25%

Juhayna Food Industries

GS covered food peers m

edian

Abdullah Al Othaim

Markets C

ompany

Savola Group

Almarai C

ompany

Halw

ani Brothers

Agthia Group

Saudi Dairy and Foodstuff C

ompany

(SADAFC

O)

2011-2013 2008-2010

0%

5%

10%

15%

20%

25%

30%

Almarai C

ompany


GS covered food peers m

edian

Halw

ani Brothers

Saudi Dairy and Foodstuff C

ompany

(SADAFC

O)

Agthia Group

Savola Group

Abdullah Al Othaim

Markets C

ompany



Consumer cyclicals to benefit from rising wealth, population growth and increasing pricing power

In the GCC, non-grocery retail market share is larger than the global average given the higher-than-average wealth levels, placing

specialty retailers such as fashion apparel (Alhokair) and electronics retailers (Jarir ) in an attractive position. Additionally we believe

that unlike consumer staple manufacturers, specialist retailers selling discretionary items will feel less regulatory pressure to keep

prices low.

In fact, Saudi Arabia is one of the fastest-growing consumer electronics markets globally. Over the last five years, the consumer

electronics markets has been growing at 21% CAGR due to a relatively young population and a popular culture of spending on

electronics. This in our view is likely to continue with the recent introduction of tablets and smart phones in the country and still

relatively lower-than-average per capita spend vs. developed markets.

Exhibit 283: Non-grocery retail market share is higher than the global

average in the GCC Retail spend/capita US$

Exhibit 284: Saudi Arabia is one of the fastest-growing electronics markets

globally 2005-2010 consumer electronics US$/capita spend and growth rates (RHS)



43%

52%

8% 7% 7%

37%

62%

10% 10%14%

0%

10%

20%

30%

40%

50%

60%

70%

Grocery Non-grocery Clothing & footwear

Electronics and appliance

Leisure and personal

Global average (%) GCC average (%)

0.3%-1.1%

5.1%

9.1%

3.0%

9.6%

21.2%

-1.3%

10.0%

5.5% 5.5%

-2.0%

-5%

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

600

700

Bulgaria

Rom

ania

Egypt

Turkey

Russia

Poland

Saudi Arabia

Greece

Italy

Spain

Germ

any

United Kingdom

2005 2006 2007 2008 2009 2010 CAGR 2005-2010 (RHS)



MENA consumer cyclical companies also screen well in terms of growth and margins among global peers

We forecast most MENA consumer cyclical names wil generate revenue growth in the top quartile among GS covered retail peers,

with Jarir Marketing Company expected to deliver the fastest revenue growth. Its already dominant position in consumer electronics

(and books) in Saudi Arabia is expected to further improve as the company accelerates store opening to five a year over the next

five years (compared with an average of two a year during the previous five years).

Among the regional players Herfy, given its dominant position in the Saudi Arabia fast-food market, generates one of the highest

EBITDA margins among the consumer cyclical peers. The higher EBITDA margin is also a reflection of its business model which,

unlike Americana and Alhokair’s, does not use franchises but instead focuses on developing its own local brand.

Exhibit 285: Most MENA consumer cyclical names will generate revenue

growth in the top-quartile among GS covered retail peers, with Jarir

Marketing Company delivering the fastest revenue growth... 2011-13E average revenue growth

Exhibit 286: …while Herfy and Alhokair are forecast to generate the highest

EBITDA margins 2011-13E average EBITDA margins



0%

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Jarir Marketing Com

pany

Fawaz A

bdulaziz Alhokair and

Company

Herfy

Savola Group

Aldrees Petroleum

and Transport Services

Kuwait Food Com

pany (Americana)

GS covered retail m

edian

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Fawaz A

bdulaziz Alhokair and Com

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GS covered retail m

edian

Jarir Marketing Com

pany

Aldrees Petroleum

and Transport Services

Savola Group



Valuation and returns: Juhayna, Sadafco, Othaim Markets and Agthia offer the most upsides

Based on our valuation methodology, Juhayna, Sadafco, Agthia and Othaim Markets offer the most upside among our consumer

names. However, looking purely on EV/EBITDA vs. EBITDA growth and CROCI vs. EV/GCI, Alhokar, Othaim Markets, Sadafco screen

well.

Exhibit 287: Purely on EV/EBITDA and EBITDA growth, Alhokair, Othaim,

Halwani, and Sadafco screen well… EBITDA growth 2011-13E x axis and EV/EBITDA 2011E y axis

Exhibit 288: ..while also appearing attractive on CROCI and EV/GCI matrix

CROCI x axis and EV/GCI y axis

Source: Goldman Sachs Research estimates. Prices as of November 17, 2011

Source: Goldman Sachs Research estimates. Prices as of November 17, 2011

R² = 0.3512

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0% 5% 10% 15% 20% 25%

Almarai Company

Saudi Dairy and Foodstuff Company (SADAFCO)

Halwani Brothers


Agthia Group

Kuwait Food Company (Americana)

Herfy

Abdullah Al Othaim Markets Company

Savola Group

Fawaz Abdulaziz Alhokair and Company

Jarir Marketing Company

Aldrees Petroleum and Transport Services

R² = 0.9523

0.00

1.00

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7.00

0% 10% 20% 30% 40% 50% 60%

Almarai Company

Saudi Dairy and Foodstuff Company (SADAFCO)

Halwani Brothers


Agthia Group

Kuwait Food Company (Americana)

Herfy

Abdullah Al Othaim Markets Company

Savola Group

Fawaz Abdulaziz Alhokair and Company

Jarir Marketing Company







Company Section A-L



Abdullah A M Al Khodari Sons Company

(1330.SE)

Neutral: Return potential: 34%

Eshan Toorabally, CFA

[email protected]

Matija Gergolet

[email protected]

Arsalan Mustafa,CFA

[email protected]

Saudi Arabia: Construction

Expansion and diversification, the next phase of growth

Abdullah A M Al Khodari Sons Company (Al Khodari) is one of the oldest and leading contractors

in Saudi Arabia with exposure to diverse sectors. The company is primarily engaged in executing

government contracts, and it is now expanding its geographical profile, client base and type of

contract to drive growth. The stock is down 5% ytd, outperforming the MSCI EEMEA by 12%, and

we believe that the stock is currently fairly priced. We initiate with a Neutral rating.

Investment thesis: Neutral rating

Al Khodari primarily executes government contracts in Saudi Arabia. The company is

classified as a grade 1 contractor in the field of road and building construction and city

cleaning contracts. This enables the company to bid for projects without any limit on contract

value. We believe that, with massive infrastructure expansion on going in Saudi Arabia, Al

Khodari is well placed to benefit from a strong order pipeline from the government.

At 3x sales coverage, Al Khodari’s current order book of c.SR3 bn is very strong and diverse.

We believe the order book provides clear visibility on the company’s revenue growth and

relative certainty over cash flow in the medium term as it is exposed to government. We

forecast that the company’s revenue will grow at a CAGR of 7% through 2010-2014E.

Al Khodari has the highest EBITDA margins relative to MENA engineering and construction

peers, and has 1Q CROCI. This is a result of the high-margin contribution of its trading

business, which sells its used equipment fleet on completion of contracts through auctions to

realize better prices. The company also enjoys high margins in its contracting segment, being

able to bid for large contracts as a result of its grade 1 classification, thereby facing low

competition. Additionally, it uses new fleets of equipment for each contract which ensures

better operational efficiency. We forecast a stable EBITDA margin of 30% in 2011-2015E.

Valuation: Trades above its peers

Al Khodari trades on a 2012E EV/EBITDA of 8.0x, in line with the 5-year median of 8.6x for global

construction peers covered by Goldman Sachs. We value Al Khodari on 2012/13E EV/EBITDA

using a median multiple of 9.5x, a 10% premium to global construction peers covered by GS,

reflecting its 1Q CROCI vs. peers. Our 12-month price target is SR68.9, which implies 34% potential

upside.

Source: Company data, Goldman Sachs Research estimates, Datastream.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Abdullah Abdul Mohsin Al-Khodari Sons Company (Al Khodari)

Europe New Markets MENA Non Financials Peer Group Average

Key data Current

Price (SR) 51.50

12 month price target (SR) 68.89

Upside/(downside) (%) 33.8

Market cap ($ mn) 583.6

Free Float (%) 40.0

Number of shares outstanding (mn) 42.50

12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 1,073.9 1,128.5 1,220.2 1,289.7

EBIT (SR mn) 234.3 224.7 230.4 258.7

EPS (SR) 5.22 4.76 4.92 5.62

EV/EBITDA (X) 8.1 9.0 8.0 7.1

P/E (X) 9.4 10.8 10.5 9.2

Dividend yield (%) 4.7 4.1 4.2 4.8

FCF yield (%) 1.5 (0.2) 8.7 11.2

CROCI (%) 21.1 17.0 16.5 16.5

EV/GCI (X) 1.6 1.4 1.3 1.2

Net Debt/EBITDA (X) 2.0 2.3 1.9 1.4

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Price performance chart

Abdullah Abdul Mohsin Al-Khodari Sons Company (Al Khodari)

(L)



Investment drivers: High infrastructure spending, to drive growth for Al Khodari

Key issues and core drivers of growth

Under its ninth five-year plan, Saudi Arabia targets average annual GDP growth of 5.2%, driven

by private sector growth of 6.6% pa during the period, with a focus on construction sector

growth of 7.2% pa. We expect construction spending in Saudi Arabia to grow at a 10% CAGR

through 2010-2014E, and believe that Al Khodari will benefit from the planned spending and

growth in sectors it is directly exposed to.

As a part of its growth strategy, the company is expanding its operations in Qatar to benefit

from high infrastructure spending in that country. It has established JVs with national and

international contractors to bid for large government projects in new sectors such as railways

and ports in Saudi Arabia. It also plans to expand its operations by bidding for private sector

contracts in Saudi Arabia. We believe such expansion will help the company enhance its

revenue. We forecast sales CAGR from construction contracts of 10% through 2010-2014.

Al Khodari is diversifying its operations to develop a stable and recurring revenue stream,

focussing on operation and maintenance contracts of 5-7 years within the infrastructure sector

and BOT (build-operate-transfer) contracts. We believe that expansion and diversification can

together open up new sources of contract orders and help grow order backlog.

Risk to the investment case

Any delay by the government awarding infrastructure contracts, or by Al Khodari executing

them, would affect the company’s revenue.

Better than expected pricing or margins on new contracts are an upside risk.

Industry context

Under its ninth five-year plan, the government plans to increase its oil and gas reserves through

exploration and drilling in new areas, and to increase its crude oil production to 12.5 mn bpd by

2014E. To achieve this, the government plans to increase its investment in the oil and gas sector by

7.9% pa during the period. Further, with its objective to diversify its economy from its reliance on oil,

the government plans to grow other sectors by increasing its investment; construction is one such

major sector. The government plans an average annual growth rate of the construction sector of

7.2%, with investment growth at 23.7% pa through the period. The government, as part of its

stimulus package announced earlier this year, plans huge investment developing houses, hospitals

and schools. We believe this provides a strong growth opportunity to Al Khodari. Its main

competitor is Saudi Binladin group.

Company description Abdullah A M Al Khodari Sons Company (Al Khodari) is a

leading construction contractor in Saudi Arabia, with activities

in the oil & gas, rails, roads & bridges and water and

associated work sectors. The company was established in

1966, and was listed on the Tadawul stock exchange in 2010.

The company bids for government contracts independently or

through a JV with other leading national and international

contractors. Al Khodari has set up a branch in Qatar to expand

its operations outside Saudi Arabia. As at October 2011, the

company has 11,750 employees.

Sales by geography (2010A)

Sales by division (2011E)


Saudi Arabia100%

Contracting96%

Trading4%



Key financial ratios: We forecast that Al Khodari will have stable margins and Q1 CROCI

Exhibit 289: We expect Al Khodari’s sales to grow and margins to stabilize...

Exhibit 290: ...but expect CROCI to be stable through 2015E



Exhibit 291: The promoters hold a 60% stake in the company; foreigners are

permitted to invest up to 49%

Exhibit 292: We forecast that gearing will improve through 2015E



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GCI CROCI (RHS)

Abdullah A M Al Khodari Sons Investment

Holding Company

60%

Free Float40%

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Net debt (cash) / equity Net debt (cash) / EBITDA (RHS)



Valuation, growth and returns: Stable growth and high returns, but fairly priced

Exhibit 293: Al Khodari trades on 2012E EV/EBITDA of 8.0x, in line with the 5-year historical sector median of 8.6x


Abdullah A M Al Khodari Sons Company IndustrialsY/E December ConstructionSRmn Engineering & Construction

Price (SR) 51.50 12M price target (SR) 68.9 SR/$ (spot) 3.75Market cap 2,189 Potential upside/(downside) 34%

Valuation 2010 2011E 2012E 2013E Price target calculation EBITDA 2012E

EBITDA 2013E

EV/EBITDA multiple

Implied EV 2012E

Implied EV 2013E Price target

EV/Sales 2.6 2.7 2.4 2.1 Group EBITDA 363 386 9.5 3,445 3,671EV/EBITDA 8.1 9.0 8.0 7.1 Group EBITDA 363 386 9.5 3,445 3,671EV/EBIT 12.0 13.3 12.6 10.6 AddEV/DACF 7.9 9.2 8.1 7.2 Associates 4 4EV/NOPLAT 12.5 13.7 12.9 10.9 Investments 0 0EV/GCI 1.6 1.4 1.3 1.2 EV post associates and investments 3,449 3,675

Less 0 0P/E 9.4 10.8 10.5 9.2 Net debt/(cash) 681 528P/B 3.6 3.2 2.7 2.3 Minorities 0 0P/CFO 6.1 7.0 6.4 6.0 Pensions and other 30 30FCF yield 1.5% -0.2% 8.7% 11.2% Equity Value 2,738 3,118Dividend yield 4.7% 4.1% 4.2% 4.8% No. of shares 43 43

Implied per share valuation (SR) 64.4 73.4 68.9

Returns and gearing 2010 2011E 2012E 2013E Growth 2010 2011E 2012E 2013ECROCI 21.1% 17.0% 16.5% 16.5% Sales growth 2.5% 5.1% 8.1% 5.7%

ROIC 18.3% 15.7% 14.9% 16.7% EBITDA growth -1.8% -3.5% 8.8% 6.6%

ROE 40.5% 31.6% 27.8% 27.0% EBIT growth -1.6% -4.1% 2.5% 12.3%

Net debt/EBITDA 2.0 2.3 1.9 1.4 Net income growth 1.5% -8.7% 3.2% 14.4%

Net debt/equity 115.8% 112.9% 83.7% 55.0% EPS growth 1.5% -8.7% 3.2% 14.4%



Financials: Improving FCF should lead to better gearing ratio

Al Khodari is a leading contractor in Saudi Arabia with exposure to different sectors. The company was listed on the Tadawul Stock

exchange in 2010. While the company reported 2.5% sales growth in 2010, we believe this was mainly on account of large building

contracts in its backlog (where revenues generally take longer time due to initial excavation period). However, this also implies that

revenue is booked at a higher rate at the later stage of these contracts. Hence, we forecast revenue growth of 8% in 2012 (following

5% growth in 2011E). We expect the company to continue rewarding its shareholders by paying dividends. We forecast a dividend

payout ratio of 44% through 2011-2015E.

In 9M2011, revenue rose 3% yoy, due to a significant decline in trading income (down 85% yoy), though contract income was up

15% yoy. Operating profit was down by 41% yoy, mainly due to a decline in margins in the contracting segment as the share of

government contracts in the overall contract mix has increased.

Exhibit 294: We expect sales to grow at 8% in 2012E 2006-15E P&L, SR mn


Abdullah A M Al Khodari Sons CompanySummarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGroup revenues 523 1,059 1,159 1,048 1,074 1,129 1,220 1,290 1,425 1,531Growth 102.5% 9.5% -9.6% 2.5% 5.1% 8.1% 5.7% 10.5% 7.4%

Group EBITDA (clean) 207 401 389 352 345 333 363 386 430 466Group EBITDA margin 39.6% 37.9% 33.6% 33.5% 32.2% 29.5% 29.7% 30.0% 30.2% 30.5%

Group EBIT (clean) 119 276 251 238 234 225 230 259 300 332Group EBIT margin 22.8% 26.0% 21.6% 22.7% 21.8% 19.9% 18.9% 20.1% 21.1% 21.7%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items -22 -41 -28 -14 -2 -17 -16 -14 -16 -16Pre-tax (clean) 97 235 223 224 233 208 214 245 284 317Non-recurring Items 0 0 0 0 0 0 0 0 0 0Pre-tax (reported) 97 235 223 224 233 208 214 245 284 317Tax -2 -6 -7 -6 -11 -5 -5 -6 -7 -8Tax rate (%) 2% 3% 3% 3% 5% 3% 3% 3% 3% 3%

Profit after tax (reported) 96 229 216 219 222 202 209 239 277 309Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 96 229 216 219 222 202 209 239 277 309Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 96 229 216 219 222 202 209 239 277 309

EPS (clean, fully diluted) 2.25 5.38 5.09 5.14 5.22 4.76 4.92 5.62 6.52 7.26DPS 0.69 0.24 2.55 3.20 2.30 2.10 2.17 2.48 2.87 3.20



Exhibit 295: We expect improved free cash flow and a dividend payout of 44% Balance sheet and cash flow statement, 2006-15E, SR mn


Summarised cash flow2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 119 276 251 238 234 225 230 259 300 332Depreciation/Amortisation 88 126 138 114 111 108 132 128 130 134Net financial items -28 -44 -32 -21 -14 -17 -16 -14 -16 -16Taxes paid -2 -6 -7 -6 -11 -5 -5 -6 -7 -8Other items -50 -1 12 3 22 0 0 0 0 0

Change in working capital 9 47 -287 -197 -221 -43 -18 6 -31 -1Cash flow from operations 137 397 76 131 121 267 323 373 376 442

Capex -276 -378 -123 -59 -89 -271 -132 -128 -130 -134Capex/D&A 315.0% 301.2% 89.1% 52.1% 80.5% 250% 100% 100% 100% 100%capex/sales (%) 52.8% 35.7% 10.6% 5.6% 8.3% 24.0% 10.8% 9.9% 9.1% 8.8%Free cash flow pre-dividend -139 18 -48 72 32 -4 191 245 246 307Free cash flow pre-dividend/revenues (%) -26.7% 1.7% -4.1% 6.8% 3.0% -0.3% 15.6% 19.0% 17.2% 20.1%

Other investing activities 38 31 48 67 46 0 0 0 0 0Dividend -20 -29 -10 -109 -136 -98 -89 -92 -105 -122Cash surplus (post dividend) -122 20 -10 31 -58 -101 102 153 140 185Other and financing 26 -47 -102 -49 0 0 0 0 0 0Change in net cash (net debt) -96 -27 -112 -18 -58 -101 102 153 140 185Net debt (cash) 465 492 604 622 681 782 681 528 387 202

Summarised balance sheet2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 25 29 27 20 37 39 43 45 50 53Receivables 304 340 474 573 696 732 754 759 796 809Cash and cash equivalents 41 90 33 33 71 71 71 71 71 71Other 66 88 164 311 574 603 634 651 698 727Current assets 436 547 699 937 1,379 1,445 1,502 1,526 1,614 1,660

Tangible assets 484 705 628 502 434 596 596 596 596 596Intangible assets 0 0 9 7 10 10 10 10 10 10Other 4 4 4 4 4 4 4 4 4 4Non-current assets 488 709 641 513 448 610 610 610 610 610

Total assets 924 1,256 1,340 1,450 1,826 2,056 2,112 2,136 2,224 2,270

Short-term interest-bearing liabilities 226 207 242 152 241 241 241 241 241 241Accounts payables 171 225 201 251 442 464 502 531 586 630Other 57 107 127 6 11 11 12 13 14 15Current liabilities 454 539 569 410 693 716 755 784 841 886

Long-term interest-bearing liabilities 280 375 396 503 511 613 511 358 218 33Pension provisions 19 21 23 27 30 30 30 30 30 30Other 30 4 4 4 4 4 4 4 4 4Non-current liabilities 329 400 423 534 545 646 545 392 252 66

Total Common Equity 140 317 348 506 588 693 813 960 1,131 1,318Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 924 1,256 1,340 1,450 1,826 2,056 2,112 2,136 2,224 2,270



Abdullah Al-Othaim Markets Co. (4001.SE)

Buy: Return potential: 60%

Arsalan Mustafa, CFA

[email protected]

Matija Gergolet

[email protected]


[email protected]

Saudi Arabia: Retail

Well-positioned to benefit from rising consumer spending

We expect Al-Othaim Markets to benefit from rising consumer spending and a rebound in

economic activity in Saudi Arabia. Given the company’s strong cash generation ability (20%

CROCI 2011E), we believe it will easily achieve its target of opening 10 supermarkets pa and

maintain its position as the second-largest grocery retailer in the country.

Investment thesis: Buy rating

We forecast sales at Al-Othaim to average 14% over the next five years (vs. an average 15%

over the last three years), driven by a strong rebound in consumer spending in Saudi Arabia

and favourable demographics (57% of the population below the age of 25).

However, we expect the improvement in EBITDA margins to slow due to government

regulations limiting price increases for basic commodities, and forecast earnings will grow at

13% over the next five years. The company’s EBITDA margins have continuously improved

over the last three years as its strategy of adding 10 supermarkets pa has allowed it to reach a

critical size to increase its own brand offering and improve bargaining power with suppliers.

We forecast a step-down in capex in 2012 as the large purchases of land to build a mall and

warehouses are largely complete. We expect this to result in an expansion of CROCI from 2012.

Al-Othaim Markets is currently in the process of seeking shareholder and regulatory approval

to acquire 100% of its unlisted real estate associate involved in mall management. If the

acquisition is completed (c.40% of market cap), the company will have a different earnings

and structure than we forecast.

Valuation: We value the company at EV/EBITDA of 10.9x, a 10% premium to peers

Al-Othaim Markets trades on a 2012E EV/EBITDA of 7.7x, which is a discount to its 3-year median

multiple of 8.9x (the stock was listed in 2008). The 5-year median multiple of Regional market GS-

covered consumer staples is 9.9x. Given the limited history of the stock, we use the peer multiple

but apply a 10% premium to account for higher returns, as we forecast CROCI to move into the

first quartile. Based on our 2012/13E EV/EBITDA methodology our 12-month price target is SR152,

implying 60% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Abdullah Al Othaim Markets Company (4001.SE)


Key data Current

Price (SR) 95.00




Free Float (%) 48.7


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 3,518.8 4,226.4 4,782.8 5,387.6

EBIT (SR mn) 147.6 177.3 204.8 237.5

EPS (SR) 6.97 8.15 9.56 10.99

EV/EBITDA (X) 8.9 9.4 7.7 6.2

P/E (X) 9.7 11.7 9.9 8.6

Dividend yield (%) 4.4 3.7 4.2 4.7

FCF yield (%) (1.5) 2.0 8.4 10.7

CROCI (%) 23.6 22.4 23.0 24.3

EV/GCI (X) 1.8 2.0 1.7 1.5


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Abdullah Al Othaim Markets Company (L) MSCI EM EMEA (R)



Investment drivers: Store opening to drive growth


Driven by rising consumer wealth and favourable demographics, we expect sales growth to

average 14% over the next five years. We believe the company will continue its strategy of

opening 10 supermarkets pa, which has resulted in average sales growth of 15% over the last

three years. EBITDA margins improved from 3.4% in 2008 to 5.6% 2010 as the group benefited

from economies of scale and increased its own brand offering. We forecast the improvement in

EBITDA margins to slow due to a higher minimum wage for Saudi employees (SR3,000 from no

minimum) and increased regulation limiting pricing increases of basic commodities.

Given the company’s strong CROCI profile (average of 20% over the last five year), we believe

Al-Othaim Markets is in a good position to achieve its targeted store openings. In fact, given the

very low debt ratio (net debt/EBITDA of 0.8x 2012E), we believe it can grow much faster through

acquisition given the fragmented nature of the grocery retailing market in Saudi Arabia.

Currently, the group has used the excess cash to increase capex in land to improve future

revenue from mall management. The company invested SR98 mn in 2010 to buy land in

Medina, Saudi Arabia, where it is planning to build a new mall. Continued investment in land for

mall management will result in a different CROCI profile than we forecast.

Al-Othaim Markets has signed an MOU to acquire 100% of the equity of its associate Abdullah

Al-Othaim Real Estate Investment & Development Company. The acquisition is awaiting

regulatory and shareholder approval. According to the company, the share swap deal values Al-

Othaim Markets at SR2.2 bn and Al-Othaim Real Estate Co. at SR0.82 bn. Given the size of the

potential acquisition, we believe the potential new structure will have significantly different

value drivers. We continue to value Al-Othaim Real Estate as a 13.65% unlisted associate at book.


If the new company acquisition receives regulatory approval, the market may view Al-Othaim

Markets as a holding company and attribute a conglomerate discount. Given most of the stores

are rented, faster than forecast increases in rent will result in lower than expected earnings.

Industry context

The market for grocery retailers in the Saudi Arabia is fragmented. Al-Othaim Markets is the second-

largest in the country with a share of only 4%. The largest retailer in the country, Panda (owned by

the Savola group), has a market share of 8%. The market for grocery retailing is seeing a shift in

spending patterns away from corner stores to supermarkets and hypermarkets. The grocery

retailing market in Saudi Arabia stood at US$24 bn at the end of 2010. The retail market has been

growing at 8%-12% over the last five years, with the share of traditional retailing falling.

Supermarket and hypermarket share increased from 35% in 2005 to 43% in 2010.

Company description

Al-Othaim Markets is the second-largest grocery retailer in

Saudi Arabia with a market share of c.4%. It operates 104

outlets composed of Hypermarkets (7), supermarkets (63),

wholesale stores (8) and corner stores (26). The company is

also the operator of two malls in the country. Al-Othaim is

currently in the process of seeking shareholder approval to

acquire 100% of its real estate associate, Abdullah Al-Othaim

Real Estate Investment & Development Company. Al-Othaim

Markets is part of the wider Al-Othaim group which has

interests in contracting, real estate and mall management. The

company was listed in 2008 and has over 6,000 employees.




Central Region-Saudi

(Riyad), 68%

Norther region-

Saudi, 22%

Rest of Saudi Arabia,

10%

Retail Revenue

95%

Rent Revenue

5%



Key financial ratios: The company can grow much faster given the low debt levels

Exhibit 296: We forecast a slowdown in EBITDA margin improvement due to

increased regulations on pricing

Exhibit 297: We forecast CROCI to decline in 2011 due to increased capex

from land purchases in 2010 and 2011 made to support medium-term growth



Exhibit 298: Al-Othaim Markets is part of the wider Al-Othaim group

Exhibit 299: Low gearing gives the company option to grow much faster

through acquisition



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Al Othaim Holding

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Al-Othaim Family24%

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40%

60%

80%

100%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Faster growth through acquisition represents upside risk

Exhibit 300: At our target price the company would be trading at 2012 P/E of 16x; we value real estate associate at book value


Abdullah Al-Othaim Markets Company Consumer staplesY/E December RetailSRmn Retail (supermarkets)

Share price (SR) 95.0 12-month target price (SR) 152 $/SR (spot) 3.75Market cap 2,138 Potential upside/(downside) 60%

Valuation 2008 2009 2010 2011E 2012E 2013E Target price calculation EBITDA 2012E

EBITDA 2013E

EV/EBITDA multiple EV 2012E EV 2013E Target price

EV/Sales 0.4 0.4 0.5 0.6 0.5 0.4 Abdullah Al-Othaim Markets Comp 299 350 10.9 3,258 3,817EV/EBITDA 11.5 8.5 8.9 9.4 7.7 6.2 Group EBITDA 299 350 10.9 3,258 3,817EV/EBIT 18.7 12.6 11.9 13.5 11.2 9.1 AddEV/DACF 12.0 10.1 8.4 9.7 7.9 6.4 Associates (at book value) 118 125EV/NOPLAT 19.2 13.0 12.2 13.8 11.5 9.3 Investments 0 0EV/GCI 1.6 1.5 1.8 2.0 1.7 1.5 EV post-discount 3,376 3,942

Less 0 0P/E 15.1 10.6 9.7 11.7 9.9 8.6 Net debt/(cash) 243 117P/B 3.1 3.0 3.4 3.8 3.1 2.5 Minorities 0 0P/CFO 9.5 8.4 7.1 8.4 7.1 6.1 Pensions and other 29 29Adjusted FCF yield -18% 6% -1% 2% 8% 10% Equity Value 3,105 3,796Dividend yield 3.6% 5.5% 4.4% 3.7% 4.2% 4.7% No. of shares, mn 23 23

Implied per share valuation (SR) 138 169 152

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 16.0% 15.8% 23.6% 22.4% 23.0% 24.3% Sales growth 25.0% 8.2% 12.1% 20.1% 13.2% 12.6%

ROIC 15.7% 18.3% 24.4% 23.0% 23.8% 26.5% EBITDA growth 8.0% 41.0% 43.4% 28.6% 17.9% 17.2%

ROE 23% 24% 41% 36% 34% 32% EBIT growth 0.5% 54.7% 58.5% 20.1% 15.5% 16.0%

Net debt/EBITDA 2.65 1.67 1.55 1.32 0.81 0.33 Net income growth 4.2% 54.7% 62.9% 16.8% 17.4% 14.9%

Net debt/equity 86% 67% 68% 59% 35% 14% EPS growth 4.2% 54.7% 62.9% 16.8% 17.4% 14.9%



Financials: We forecast average sales growth of 14% over the next five years

We forecast average sales growth of 14% in 2011-15E, driven by the opening of 10 supermarkets pa and average growth of 4% in

same store sales over the period. We estimate this will translate into net income growth of 15% in 2011-15E due largely to

economies of scale. The company has recently increased capex on land acquisition. In 2010, it purchased land in Medina for

SR98 mn to build a mall and in 2011 the company announced the purchase of land in Riyad for SR102 mn to build a warehouse and

employee accommodation. 9M2011 results showed sales growth of 20% and EPS growth of 11%.

Exhibit 301: We forecast higher rental income from the opening of the Dammam mall to offset the higher minimum wage for Saudi

employees in 2011

2006-2015E P&L, SR mn


Summarised P&L SOCPA SOCPA SOCPA SOCPA SOCPA SOCPA SOCPA SOCPA SOCPA SOCPA2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Grocery Operations 1,771 2,274 2,841 3,065 3,422 4,026 4,559 5,138 5,818 6,555Rental Income 53 46 60 73 96 200 224 249 276 303Group revenues 1,823 2,320 2,900 3,139 3,519 4,226 4,783 5,388 6,094 6,858Growth 25.5% 27.2% 25.0% 8.2% 12.1% 20.1% 13.2% 12.6% 13.1% 12.5%



Share of associates 0 0 5 6 14 15 16 17 18 18Net financial items 4 2 -1 -1 -1 -5 0 -1 2 9Pre-tax (clean) 60 62 64 99 161 188 221 254 283 321Non-recurring Items 0 0 0 -19 5 0 0 0 0 0Pre-tax (reported) 60 62 64 80 166 188 221 254 283 321Tax -1 -2 -2 -2 -4 -5 -6 -6 -7 -8Tax rate (%) 2% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Profit after tax (reported) 58 60 62 78 162 183 215 247 276 312Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 58 60 62 78 162 183 215 247 276 312Post-tax exceptionals 0 0 0 -19 5 0 0 0 0 0Net income (clean, continuing operations) 58 60 62 96 157 183 215 247 276 312




Exhibit 302: We forecast the company to be free cash flow positive after the purchase of land in 2010 and 2011E Balance sheet and cash flow statement, 2006-2015E, SR mn


Summarised cash flow \2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 56 60 60 93 148 177 205 237 264 294Depreciation/Amortisation 21 30 37 44 50 76 94 113 132 152Net financial items 1 -3 -3 -4 -5 -5 -4 -5 -2 5Taxes paid -1 -2 -2 -2 -4 -5 -6 -6 -7 -8Other items 7 11 6 -9 27 9 14 14 14 15

Change in working capital -44 -19 16 97 57 57 45 49 57 62Cash flow from operations 40 77 115 218 272 310 348 402 458 519

Capex -154 -97 -283 -153 -293 -271 -178 -186 -193 -201Capex/D&A 721.8% 316.5% 757.1% 345.4% 590.0% 355% 189% 165% 147% 132%capex/sales (%) 8.4% 4.2% 9.8% 4.9% 8.3% 6.4% 3.7% 3.5% 3.2% 2.9%Free cash flow pre-dividend -114 -19 -168 65 -21 40 169 216 265 318Free cash flow pre-dividend/revenues (%) -6.3% -0.8% -5.8% 2.1% -0.6% 0.9% 3.5% 4.0% 4.3% 4.6%

Other investing activities 0 0 2 -3 1 0 0 0 0 0Dividend 0 0 0 -34 -56 -68 -79 -90 -101 -113Cash surplus (post dividend) -114 -19 -166 29 -76 -28 91 126 163 205Other and financing 0 0 0 0 0 0 0 0 0 0Change in net cash (net debt) -114 -19 -166 29 -76 -28 91 126 163 205Net debt (cash) 73 92 258 230 306 334 243 117 -46 -251


Inventories 146 208 217 220 285 343 388 437 494 556Receivables 0 0 0 0 0 0 0 0 0 0Cash and cash equivalents 22 18 27 107 45 45 45 171 335 540Other 42 105 135 90 82 98 111 125 141 159Current assets 209 331 379 417 412 486 544 733 970 1,255

Tangible assets 302 368 612 721 948 1,142 1,227 1,300 1,361 1,410Intangible assets 1 0 0 0 15 15 15 15 15 15Other 85 85 90 99 105 111 118 125 132 140Non-current assets 388 453 702 820 1,067 1,268 1,359 1,439 1,508 1,565

Total assets 597 784 1,081 1,237 1,480 1,754 1,903 2,172 2,478 2,819

Short-term interest-bearing liabilities 64 84 276 95 172 172 172 172 172 172Accounts payables 226 389 427 472 569 684 774 871 986 1,109Other 33 37 54 64 82 99 112 126 142 160Current liabilities 322 510 757 631 823 954 1,057 1,169 1,300 1,441


Total Common Equity 238 237 299 343 449 564 701 858 1,033 1,233Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 597 784 1,081 1,237 1,480 1,754 1,903 2,172 2,478 2,819



Abu Dhabi National Energy Co. (TAQA.AD)


Matija Gergolet

[email protected]


[email protected]

United Arab Emirates: Power

Stable utility business and exposure to high energy prices offset balance sheet risk

TAQA’s inflation-protected domestic power and water business should allow the group to

adequately manage its relatively high gearing, while its upstream oil and gas business should

allow it to benefit from high global energy prices. Our 12-month price target based on a P/E

multiple of 7.8x, which is the CEEMEA 5-year median peer multiple, implies 59% potential upside.


We expect TAQA’s downstream electricity and water business to continue to offer stable

growth in the coming years due to the long-term nature of these contracts. TAQA’s domestic

contracts, which accounted for 78% of power & water revenues in 2010, are capacity-based

and inflation-indexed. These characteristics mean that TAQA is hedged against fluctuations in

volumes as well as any feedstock price changes since feedstock cost is passed on. We

forecast revenues to grow in line with UAE’s inflation rate over the coming years.

The E&P business is the main swing factor in TAQA’s profitability. We expect TAQA to deliver

improved earnings from its oil and gas business in the North Sea and North America, based

on Goldman Sachs oil price forecasts of US$120 and US$130/bbl for 2012 and 2013,

respectively (and a normalized US$85/bbl oil price assumption thereafter), even though its

realized gas prices in North America are likely to remain under pressure. Regarding the

Netherlands gas project, we don’t expect any contribution until 2014, in line with the company

guidance about the project commencement date.

Although TAQA has high net debt/EBITDA (5.1x in 2011E), we expect the group to continue to

delever, driven by high FCF.

Valuation: Stock seems undervalued relative to CEEMEA peer group

TAQA trades on a 2012E P/E multiple of 5.0x, which is below the CEEMEA 5-year median peer

multiple of 7.8x. We prefer to use the P/E multiple instead of EV/EBITDA in our valuation due to

the high sensitivity associated with EV/EBITDA as a result of TAQA’s high leverage, high tax rate

linked to the E&P business and high minorities in the power business. We use the CEEMEA 5-year

median energy peer multiple to reflect the high weight of TAQA’s energy assets. Based on our

2012E/13E P/E methodology and applying the CEEMEA 5-year median peer multiple of 7.8x, our

12-month price target is AED 1.94, which implies 59% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Abu Dhabi National Energy (Taqa) (TAQA.AD)


Key data Current

Price (AED) 1.22

12 month price target (AED) 1.94


Market cap ($ mn) 2,067.7

Free Float (%) 27.5

Number of shares outstanding (mn) 6,225.00

12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 21,401.0 26,651.8 28,503.6 29,720.5

EBIT (AED mn) 5,912.0 8,815.0 9,914.5 10,551.9

EPS (AED) 0.14 0.25 0.24 0.25

EV/EBITDA (X) 7.7 5.8 5.2 4.9

P/E (X) 8.8 4.9 5.0 4.8

Dividend yield (%) 8.0 8.2 8.2 8.2

FCF yield (%) (35.7) (2.4) 10.8 19.7

CROCI (%) 9.1 8.2 8.4 8.2

EV/GCI (X) 0.7 0.7 0.7 0.6


260

310

360

410

460

510

560

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Nov-10 Feb-11 May-11 Sep-11


Abu Dhabi National Energy (Taqa) (L) MSCI EM EMEA (R)



Investment drivers: Growth in utilities business and energy prices to determine earnings


We believe that TAQA’s electricity and water business, which accounted for 57% of 2010

revenues, will continue to offer moderate growth. TAQA’s contracts were designed to ensure

that all costs are covered in addition to a margin. The capacity-based contracts also hedge

TAQA against any seasonal volume fluctuations. The inflation indexation provides a source of

growth even in the absence of capacity additions. The plan of the UAE government to invest

AED5.7 bn in Northern Emirates utilities announced in March could also present an opportunity

for TAQA to grow its domestic utilities portfolio.

TAQA’s oil and gas investments in North America, where gas accounts for two-thirds of

production, and the North Sea, where production is mainly oil, exposes TAQA to risks and

rewards of energy prices. With Goldman Sachs’ bullish view on oil for 2012/13 (yet bearish on

North American gas prices, expected to stay at US$4-4.5 mmbtu), we forecast improved results.

However, we expect energy prices to normalise to US$85 between 2014 and 2015.


TAQA’s energy businesses expose the company to fluctuations in global energy prices. TAQA

has already witnessed a drop in gas prices from around US$6 in 2008 to US$4.3 in 1H2011,

which negatively impacted its results in North America. A fluctuation in energy prices presents

risks to TAQA.

As an energy company, TAQA’s future performance is dependent on its reserves. While TAQA

had a reserve replacement ratio of 235% in the North American operations in 2010, the ratio was

only 72% in the North Sea, implying declining reserves. TAQA is currently conducting two

drilling operations.

TAQA has experienced legal issues with regards to its Netherlands gas storage project, which

resulted in project delay. Further delays in the permitting process could affect TAQA’s results.

Industry context

TAQA provides exposure to the utilities sector in the UAE, as well as the global energy sector. In

power and water, TAQA has grown to become the sixth-largest global independent power producer.

TAQA is supported by the government of Abu Dhabi though ADWEA, its largest shareholder. This

relationship allows TAQA to utilize its leverage and benefit from the high rating of ADWEA’s credit.

In the E&P segment, TAQA’s gas operations in North America have been impacted by the decline in

gas prices following the development of shale gas. In the North Sea, the group’s ability to increase

its reserves is vital for its oil business given the reserve life of only c.7.3 years at the end of 2010.

Company description

Abu Dhabi National Energy Company (TAQA) was founded in

2005 as a subsidiary to the Abu Dhabi Water & Electricity

Authority to supply electricity and water for the Emirate of

Abu Dhabi. TAQA was IPO’d in 2006 and expanded into E&P

with global operations in the GCC, Europe, Asia and North

America. In 2010, TAQA had 16.9 GW of power capacity of

which 10.8GW was in the UAE. In 2010, TAQA’s proven and

probable reserves totalled 587 mmboe, and production stood

at 135kboed. TAQA has c.2,800 employees.




UAE37%

Americas24%

United Kingdom

20%

Netherlands4%

Africa 13%

Others2%

Power & Water

Generation 53%

Oil & Gas47%



Key financial ratios: Growth and returns to be affected by future energy prices

Exhibit 303: Lower oil & gas sales due to lower assumed prices in 2014-15

Exhibit 304: Improving CROCI 2012-13 due to higher oil price forecasts



Exhibit 305: TAQA shareholding structure – TAQA’s ownership is restricted

to UAE nationals

Exhibit 306: We expect TAQA to deleverage and have a better net debt

position



0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

14%

16%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Abu Dhabi Water and Electricity Authority (ADWEA)

51%

Farm Owners' Financial

Support Fund21%

Free Float28%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

0%

100%

200%

300%

400%

500%

600%

700%

800%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Stock trades at a discount relative to its peers in our view

Exhibit 307: Our valuation reflects our expected growing returns in 2012-14 on the back of our assumption of high energy prices


Abu Dhabi National Energy Company (TAQA) Utilities Y/E December PowerAEDmn IPPs

3

Share price (AED) 1.22 12-month price target (AED) 1.94 $/AED (spot) 3.67Market cap 7,595 Potential upside/(downside) 59%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation Clean net income 2012E

Clean net income 2013E

P/E multiple Equity value 2012E

Equity value 2013E Price target

EV/Sales 4.4 4.0 3.7 3.1 2.9 2.8EV/EBITDA 7.6 8.6 7.7 5.8 5.2 5.0EV/EBIT 11.9 17.2 13.5 9.3 8.3 7.8 Abu Dhabi National Energy 1,469 1,543 7.8 11,458 12,035EV/DACF 8.4 6.6 9.2 8.9 8.3 7.9EV/NOPLAT 16.9 37.9 30.1 21.1 19.8 18.5EV/GCI 0.9 0.8 0.7 0.7 0.7 0.6 Equity Value 11,458 12,035

No. of shares, mn 6,066 6,066P/E 8.4 15.0 8.8 4.9 5.0 4.8 Implied per share valuation (QR) 1.89 1.98 1.94P/B 3.0 1.0 0.8 0.7 0.7 0.6P/CFO 2.8 1.9 1.1 1.0 0.9 0.9FCF yield 5% 22% -20% -2% 7% 14%Dividend yield 3.4% 6.5% 8.0% 8.2% 8.2% 8.2%


ROIC 8.6% 3.0% 3.8% 4.9% 5.2% 5.4% EBITDA growth 119.8% -19.1% 30.8% 34.8% 12.6% 4.8%

ROE 29% 2% 11% 16% 13% 13% EBIT growth 106.8% -36.7% 48.7% 49.1% 12.5% 6.4%

Net debt/EBITDA 5.6 7.4 6.9 5.1 4.6 4.3 Net income growth 99.4% -63.9% 38.5% 73.9% -2.6% 5.0%

Net debt/equity 715% 471% 472% 427% 396% 364% EPS growth 65.1% -70.5% 40.0% 73.9% -2.6% 5.0%



Financials: We expect earnings to rise in 2012 and 2013 due to higher energy prices

Our estimates for the power and water business assume continuous growth, driven by inflation indexation as well as the

contribution of the Shuwiehat power plant expected online in 2012. We also expect the oil and gas business to witness growth

driven by high energy prices until 2013, followed by a decline from 2014 on the back of our assumption of a normalization in energy

prices. This results in estimated revenues falling from 2014. We expect a lower tax rate in 2014 due to lower revenues from oil and

gas. We assume TAQA maintain its dividend of AED0.10 per share through the period.

In 9M2011, TAQA reported 24% sales growth yoy, mainly on higher revenues from oil and gas and the contribution of the Fujairah 2

power plant. EBITDA increased by 35% while EPS grew by 66% due to operating leverage.

Exhibit 308: We expect revenues to grow at an average of 4.4% until 2015

2006-2015E P&L, AED mn


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Power & Water Generation 4,841 6,912 8,602 9,595 12,238 14,148 15,077 15,260 15,801 15,972Oil & Gas 0 1,424 8,203 7,288 9,201 12,504 13,427 14,461 10,081 9,642Unallocated 0 0 0 -28 -38 0 0 0 0 0Group revenues 4,841 8,337 16,806 16,855 21,401 26,652 28,504 29,721 25,882 25,614Growth 61.4% 72.2% 101.6% 0.3% 27.0% 24.5% 6.9% 4.3% -12.9% -1.0%

Group EBITDA (clean) 2,699 4,469 9,823 7,951 10,402 14,026 15,794 16,547 13,167 13,039Group EBITDA margin 55.7% 53.6% 58.5% 47.2% 48.6% 52.6% 55.4% 55.7% 50.9% 50.9%

Power & Water Generation 1,826 5,975 2,948 3,262 4,083 4,875 5,446 5,536 5,876 5,989Oil & Gas 0 934 3,403 920 2,030 4,122 4,650 5,198 1,472 1,338Unallocated 0 -3,869 -64 -205 -201 -182 -182 -182 -182 -182Group EBIT (clean) 1,826 3,041 6,288 3,977 5,912 8,815 9,915 10,552 7,166 7,145Group EBIT margin 37.7% 36.5% 37.4% 23.6% 27.6% 33.1% 34.8% 35.5% 27.7% 27.9%

Share of associates 8 25 40 135 402 420 428 437 446 455Net financial items -1,028 -1,906 -3,347 -3,350 -3,524 -4,173 -4,937 -5,300 -5,553 -5,774Pre-tax (clean) 806 1,160 2,980 762 2,790 5,062 5,406 5,689 2,059 1,826Non-recurring Items 0 158 128 -278 245 108 0 0 0 0Pre-tax (reported) 806 1,318 3,108 484 3,035 5,170 5,406 5,689 2,059 1,826Tax 0 57 -913 289 -1,152 -2,660 -2,887 -3,046 -726 -617Tax rate (%) 0% -4% 30% -83% 44% 56% 58% 58% 45% 45%

Profit after tax (reported) 806 1,376 2,195 773 1,883 2,510 2,519 2,643 1,333 1,209Minorities -321 -341 -370 -591 -864 -950 -1,050 -1,100 -533 -484Net income (reported) 485 1,035 1,825 182 1,019 1,560 1,469 1,543 800 725Post-tax exceptionals 0 165 91 -444 152 52 0 0 0 0Net income (clean, continuing operations) 485 870 1,735 626 867 1,508 1,469 1,543 800 725




Exhibit 309: TAQA to improve FCF, leading to lower net debt/EBITDA Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT 1,826 3,041 6,288 3,977 5,912 8,815 9,915 10,552 7,166 7,145Depreciation/Amortisation 872 1,428 3,535 3,974 4,490 5,211 5,879 5,995 6,001 5,893Net financial items -1,065 -2,007 -3,604 -3,659 -3,855 -4,445 -4,937 -5,300 -5,553 -5,774Taxes paid 0 57 -913 289 -1,152 -2,660 -2,887 -3,046 -726 -617Other items 280 289 1,158 345 1,540 590 214 218 223 227

Change in working capital -303 -962 -2,171 -155 -2,199 -519 -183 -120 380 26Cash flow from operations 1,611 1,846 4,293 4,771 4,736 6,992 8,001 8,299 7,490 6,901

Capex -6,778 -4,194 -3,211 -2,010 -7,503 -7,221 -6,922 -6,229 -4,994 -4,587Capex/D&A 777.2% 293.8% 90.8% 50.6% 167.1% 139% 118% 104% 83% 78%capex/sales (%) 140.0% 50.3% 19.1% 11.9% 35.1% 27.1% 24.3% 21.0% 19.3% 17.9%Free cash flow pre-dividend -5,167 -2,348 1,082 2,761 -2,767 -229 1,079 2,070 2,496 2,314Free cash flow pre-dividend/revenues (%) -106.7% -28.2% 6.4% 16.4% -12.9% -0.9% 3.8% 7.0% 9.6% 9.0%

Other investing activities -1,485 -13,527 -18,846 -3,659 -166 1,152 0 0 0 0Dividend -103 -286 -571 -1,184 -945 -976 -1,177 -1,237 -1,267 -926Cash surplus (post dividend) -6,755 -16,161 -18,335 -2,082 -3,878 -53 -98 834 1,229 1,388Other and financing 1,728 -3,386 7,212 -161 -10,500 0 0 0 0 0Change in net cash (net debt) -5,027 -19,548 -11,123 -2,243 -14,378 -53 -98 834 1,229 1,388Net debt (cash) 24,699 44,246 55,369 58,483 71,990 72,043 72,141 71,307 70,077 68,689


Inventories 946 1,495 1,729 1,773 2,115 2,634 2,817 2,937 2,558 2,531Receivables 0 1,526 3,508 3,875 5,332 6,640 7,102 7,405 6,448 6,382Cash and cash equivalents 16,021 7,601 4,191 4,374 5,581 5,581 5,581 5,581 5,581 5,581Other 2,607 1,154 264 297 1,370 1,706 1,825 1,903 1,657 1,640Current assets 19,574 11,776 9,692 10,319 14,398 16,561 17,324 17,826 16,244 16,134

Tangible assets 29,328 46,051 60,026 59,329 78,651 79,598 80,641 80,875 79,868 78,562Intangible assets 988 3,467 10,358 13,540 13,945 13,945 13,945 13,945 13,945 13,945Other 1,878 6,550 6,311 8,657 9,065 9,275 9,489 9,708 9,931 10,158Non-current assets 32,193 56,068 76,695 81,526 101,661 102,818 104,075 104,527 103,744 102,664

Total assets 51,767 67,844 86,388 91,845 116,059 119,379 121,399 122,353 119,988 118,798

Short-term interest-bearing liabilities 1,132 4,863 2,099 4,642 6,200 6,200 6,200 6,200 6,200 6,200Accounts payables 1,187 629 4,141 3,730 6,271 7,810 8,352 8,709 7,584 7,506Other 2,010 3,059 312 254 430 536 573 597 520 515Current liabilities 4,329 8,551 6,552 8,626 12,901 14,545 15,125 15,506 14,304 14,220

Long-term interest-bearing liabilities 39,588 47,017 57,461 58,215 71,371 71,424 71,522 70,688 69,458 68,070Pension provisions 1 57 0 0 0 0 0 0 0 0Other 280 4,091 14,628 12,594 16,549 16,549 16,549 16,549 16,549 16,549Non-current liabilities 39,869 51,165 72,089 70,809 87,920 87,973 88,071 87,237 86,007 84,619

5,840 6,694 5,969 9,302 9,504 10,531 11,393 12,329 12,522 12,641Minorities 1,729 1,435 1,779 3,108 5,734 6,331 6,811 7,281 7,154 7,318

Total equity and liabilities 51,767 67,844 86,388 91,845 116,059 119,379 121,399 122,353 119,988 118,798



Abu Dhabi National Hotels (ADNH.AD)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Lodging

Strong revenue profile and market positioning, but strengths are priced in

Abu Dhabi National Hotels has a leading position within the UAE hospitality sector. The company

operates in the hotels, catering and transportation segments; it currently offers 2,374 rooms and

targets 3,650 rooms by 2012. While we forecast sales CAGR of 11% (2010-15E) and average EBITDA

margin at 21% (2011-15E), we believe its strengths are priced in and resume coverage with a Neutral

rating.


Abu Dhabi National Hotels (ADNH) has major hotels in Abu Dhabi and Dubai. Six are managed

by international brands such as Hilton, Sheraton and Le Meridian and offer 1,661 rooms. ADNH

plans to open two more hotels with Ritz-Carlton and Park Hyatt, adding a further 838 rooms by

2012. The company manages 10 hotels itself; offering 713 rooms and plans to add 438 rooms by

2012. We believe ADNH is well positioned in terms of diverse hotel offerings to benefit from

increases in tourism. We forecast a hotels segment sale CAGR of 12% (2010-15E).

ADNH’s catering division is a joint venture with UK’s Compass group which is world’s largest

catering company. The division is engaged in acquiring catering contracts for business and

industry, in offshore, healthcare and defence. The company has successfully acquired new

contracts in 9M11. We believe the catering segment provides stable revenues and margins

given its exposure to high growth and defensive sectors, and low inflation in Abu Dhabi.

ADNH’s current expansion plan is the largest in scale since its inception in 1978. It commenced

operation of its retail segment in 2H11 and is foraying into the restaurant business with eight

new restaurants in addition to 1,276 new hotel rooms by 2012. We estimate total capex of

AED3.5 bn through 2014E resulting in negative FCF until 2012E and high gearing with net

debt/EBITDA to grow to c.4x in 2013E from 0.2x in 2010.

Valuation: Trading below historical multiples, but we see more upside elsewhere

Abu Dhabi National Hotels trades on a 2012E EV/EBITDA of 7.8x, in line with the current median

multiple of our global hotel sector coverage on 8.0x. The stock is down 17% YTD, in line with MSCI

EEMEA. Based on our 2012E/13E EV/EBITDA methodology and applying a multiple of 8.0x (a 20%

discount to reflect falling CROCI and rising gearing) to the global hotels historical multiple of 10x,

our 12-month price target is AED2.63, which implies 5% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Abu Dhabi National Hotels (ADNH.AD)


Key data Current

Price (AED) 2.50




Free Float (%) 82.5


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 1,749.3 2,015.8 2,588.0 2,704.3

EBIT (AED mn) 121.6 237.6 352.5 366.3

EPS (AED) 0.14 0.25 0.36 0.37

EV/EBITDA (X) 12.6 8.3 7.8 7.8

P/E (X) 24.9 10.1 6.9 6.7

Dividend yield (%) 7.2 9.2 14.4 14.9

FCF yield (%) (16.9) (32.0) (36.6) 7.6

CROCI (%) 4.5 3.9 5.1 4.9

EV/GCI (X) 0.4 0.3 0.4 0.4


260

280

300

320

340

360

380

400

420

440

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3



Abu Dhabi National Hotels (L) MSCI EM EMEA (R)



Investment drivers: Capacity over supply concerns


With the objective of diversifying its economy, UAE has focused on developing tourism and the

financial sector. Dubai and Abu Dhabi are primary tourist destination within UAE, and target

annually 15mn and 3mn guests respectively by 2015, which we believe will create strong demand

in the hospitality sector. ADNH has a leading position within UAE hotel segment; we believe high

demand for hotel rooms will help it maintain high occupancy levels. We forecast an average 2011-

15E hotel occupancy rate of 74% and sales CAGR of 12% (2010-15E).

While tourism demand within UAE looks promising, we expect high supply of new hotel rooms:

total new rooms in Dubai and Abu Dhabi of c.16,000 and c.6,200 respectively by 2013. We believe

the supply growth will offset the benefit of a higher occupancy rate and therefore expect revpar to

remain stable (3% growth in 2012E and 2013E following a decline of 7% in 2011E).

Abu Dhabi National Hotels’ new Park Hyatt hotel, which offers 306 rooms, is located at Saadiyat

Island and The Ritz-Carlton, 532 rooms, is located adjacent to Sheikh Zayed Grand Mosque. ADNH

expects the new hotels to be operational by 2012. The new additions, which together will offer

34% of total international rooms, are strategically located to attract customers.


A better than expected occupancy rate is an upside risk to our view and price target.

A delay in ADNH’s current hotel or new restaurant division expansion plans will affect revenue

growth.

An increase in price competition for catering contracts or increases in input costs will affect the

contracting segment.

Industry context

With the objective of decreasing its reliance on hydrocarbons, UAE has focused on developing

alternative sectors. Tourism is a major sector that is growing rapidly in the UAE. Abu Dhabi and Dubai

are growing in popularity as destinations within UAE for business and leisure tourism. The tourism

sector has a 13% CAGR (2005-10) in Abu Dhabi. Abu Dhabi hotels served a total of 1.8 mn guests in

2010 representing a CAGR of 7% (2007-10). The government of Abu Dhabi targets 3 mn tourists

annually by 2013. There are c.11,700 rooms available in Abu Dhabi currently, rising to c.16,000 by 2013

as per JLL estimates. Dubai hotels served 8.6 mn guests in 2010, representing 10% growth over 2009.

The government targets 15 mn tourists annually by 2015. There are 52,300 hotel rooms in Dubai

currently, increasing to c.60,000 by 2013. ADNH has c.11% of total hotel rooms in Abu Dhabi and 1% in

Dubai. Its major competitor in UAE is Rotana (c.29% of total hotel rooms).

Company description Abu Dhabi National Hotels operates in the hospitality sector

providing a wide range of services in UAE. It was

established in 1978 and is one of the oldest hotel companies

in Abu Dhabi. It owns six hotels in UAE which are managed

by international operators and plans to add two more hotels

by 2012. ADNH manages 10 hotel properties itself and plans

to add one hotel by 2012. The company currently offers

2,374 rooms which shall increase to 3,650 after the planned

additions in 2012. ADNH undertakes catering service for

industries, defence and hospitals; it also operates transport

services and has a fleet of 250 limousines, 450 buses and

1,000 taxis.




UAE79%

Rest of Middle East

21%

Hotels37%

Catering and

contracting services

41%

Transport services

13%

Retail9%



Key financial ratios: High sales growth aided by high occupancy but stable revpar will

keep margins constant

Exhibit 310: We expect sales to grow but EBITDA margins to remain stable

2011-2015E

Exhibit 311: And also CROCI to remain low single digit in 2011-15E



Exhibit 312: Government owns 17% through Abu Dhabi Investment Council;

foreigners are permitted to hold up to 25%

Exhibit 313: We expect high gearing to fund its expansion plans through

2015E



0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Abu Dhabi Investment

Council17%

Free Float83%

-3.0x

-2.0x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Net debt (cash)/equity Net debt (cash)/EBITDA



Valuation, growth and returns: ADNH trades in line with global peers and offers low

single digit CROCI 2011-15E

Exhibit 314: Abu Dhabi National Hotels trades in line with global peers on EV/EBITDA for 2012E and offers low CROCI and high gearing


Abu Dhabi National Hotels Consumer CyclicalsY/E December LodgingAEDmn Hotels


Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EBITDA 2012E

EBITDA 2013E

EV/EBITDA multiple EV 2012E EV 2013E Price Target

EV/Sales 3.3 1.6 1.9 1.7 1.7 1.7 Abu Dhabi National Hotels 565 588 8.0 4,519 4,705EV/EBITDA 10.1 6.6 12.6 8.3 7.8 7.8 Group EBITDA 565 588 8.0 4,519 4,705EV/EBIT 12.1 8.6 27.4 14.0 12.4 12.5 AddEV/DACF 11.1 8.1 8.9 9.3 8.2 8.2 Associates 13 13EV/NOPLAT 12.2 8.7 27.8 14.2 12.6 12.7 Investments 244 244EV/GCI 0.7 0.4 0.4 0.3 0.4 0.4 EV 4,776 4,963

Less 0 0P/E 13.4 10.6 24.9 10.1 6.9 6.7 Net debt/(cash) 2,083 2,275P/B 0.8 0.5 0.4 0.3 0.3 0.3 Minorities 0 0P/CFO 11.6 9.0 8.4 6.3 4.4 4.2 Pensions and other 58 58FCF yield 0% -2% -16% -29% -33% 7% Equity value 2,635 2,629Dividend yield 3% 7% 7% 9% 14% 15% No. of shares, mn 1,000 1,000

Implied per share valuation (AED) 2.63 2.63 2.63

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 10.0% 4.8% 4.5% 3.9% 5.1% 4.9% Sales growth 31.6% 3.7% -3.0% 15.2% 28.4% 4.5%

ROIC 11.1% 4.5% 1.6% 2.8% 3.6% 3.5% EBITDA growth 26.7% -23.2% -38.6% 52.0% 40.2% 4.1%

ROE 5.2% 5.3% 2.0% 2.8% 4.4% 4.5% EBIT growth 28.9% -29.2% -63.4% 95.5% 48.4% 3.9%

Net debt/EBITDA -0.8 -1.3 0.2 2.6 3.7 3.9 Net income growth 23.2% -28.5% -61.0% 78.7% 45.1% 3.6%

Net debt/equity -5.7% -7.0% 0.8% 12.7% 25.3% 27.5% EPS growth 23.2% -28.5% -61.0% 78.7% 45.1% 3.6%



Financials: New room additions to help sales growth, but margins to decline

With planned new hotel room additions in 2012, in both the international and regional segments, we expect sales to grow 28% in

2012, but broadly stabilize thereafter through 2015E in line with low single digit revpar growth (4% in 2012E and 3% in 2013E). The

catering and contracting segment is showing improvement with new contracts acquired by the company in 1H11. ADNH’s s current

expansion plans require capex of AED3.5 bn leading to high gearing reflected through high net debt/EBITDA of 4x by 2013E.

However we expect the company to continue to reward its shareholders with a 100% dividend payout ratio through 2013E.

At 9M 2011, the company reported sales growth of 7% yoy and an EBITDA margin of 19%, mainly on account of improvements in

the catering and contracting segment.

Exhibit 315: We forecast top-line growth to 28% in 2012

2006-2015E P&L, AED mn, year to December



Group revenues 1,196 1,322 1,740 1,803 1,749 2,016 2,588 2,704 2,804 2,908Growth 11.3% 10.5% 31.6% 3.7% -3.0% 15.2% 28.4% 4.5% 3.7% 3.7%



Share of associates 1 0 0 0 0 0 0 0 0 0Net financial items 40 43 33 28 20 15 13 13 17 21Pre-tax (clean) 316 408 504 360 141 252 366 379 386 392Non-recurring Items -21 67 -208 77 26 -20 0 0 0 0Pre-tax (reported) 295 475 295 437 167 232 366 379 386 392Tax -2 -3 -3 -4 -2 -3 -5 -5 -5 -5Tax rate (%) 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

Profit after tax (reported) 293 472 293 433 164 229 361 374 380 386Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 293 472 293 433 164 229 361 374 380 386Post-tax exceptionals -21 66 -207 76 25 -20 0 0 0 0Net income (clean, continuing operations) 314 405 499 357 139 249 361 374 380 386




Exhibit 316: We forecast negative FCF in 2012, improving thereafter, but dividend payout ratio to be maintained at 100% (2011-

13E)

Balance Sheet and cash flow statement, 2006-2015E, AED mn, year to December



EBIT 275 365 470 332 122 238 353 366 369 371Depreciation/Amortisation 85 79 92 99 144 165 212 222 230 239Net financial items 27 28 12 17 9 6 5 5 9 13Taxes paid -2 -3 -3 -4 -2 -3 -5 -5 -5 -5Other items -23 8 9 -22 139 -12 8 8 8 8

Change in working capital 3 -49 8 176 50 40 87 18 15 16Cash flow from operations 364 427 588 599 460 435 660 613 626 641

Capex -137 -320 -619 -657 -1,001 -1,153 -1,480 -444 -460 -477Capex/D&A 161.7% 405.1% 670.2% 661.1% 697.1% 697% 697% 200% 200% 200%capex/sales (%) 11.4% 24.2% 35.6% 36.4% 57.2% 57.2% 57.2% 16.4% 16.4% 16.4%Free cash flow pre-dividend 227 107 -30 -58 -541 -718 -821 169 165 163Free cash flow pre-dividend/revenues (%) 19.0% 8.1% -1.7% -3.2% -30.9% -35.6% -31.7% 6.3% 5.9% 5.6%

Other investing activities 106 -13 34 374 148 0 0 0 0 0Dividend -144 -144 -128 -200 -250 -250 -229 -361 -374 -380Cash surplus (post dividend) 189 -50 -125 116 -643 -968 -1,050 -191 -208 -217Other and financing 0 0 0 0 0 0 0 0 0 0Change in net cash (net debt) 189 -50 -125 116 -643 -969 -1,050 -192 -209 -217Net debt (cash) -643 -593 -468 -578 65 1,033 2,083 2,275 2,484 2,701


Inventories 29 35 50 48 50 58 74 78 81 84Receivables 221 232 324 260 210 242 310 324 336 349Cash and cash equivalents 670 621 490 590 425 425 425 425 425 425Other 359 446 305 99 127 146 188 197 204 211Current assets 1,279 1,334 1,169 998 813 872 998 1,024 1,046 1,069

Tangible assets 563 796 6,967 7,485 8,335 9,323 10,591 10,813 11,043 11,282Intangible assets 5 5 5 5 5 5 5 5 5 5Other 787 1,264 618 401 257 257 257 257 257 257Non-current assets 1,356 2,065 7,590 7,892 8,598 9,585 10,853 11,075 11,305 11,544

Total assets 2,635 3,399 8,759 8,890 9,410 10,457 11,852 12,099 12,352 12,613

Short-term interest-bearing liabilities 13 19 16 10 16 16 16 16 16 16Accounts payables 150 150 234 272 169 195 250 261 271 281Other 165 146 304 290 483 557 715 747 774 803Current liabilities 328 314 554 573 668 767 981 1,024 1,061 1,100

Long-term interest-bearing liabilities 14 10 6 2 474 1,443 2,493 2,684 2,893 3,110Pension provisions 45 49 51 57 58 58 58 58 58 58Other 0 0 0 0 73 73 73 73 73 73Non-current liabilities 58 58 57 59 606 1,575 2,625 2,816 3,025 3,242

Shareholders' equity 2,249 3,027 8,149 8,258 8,136 8,115 8,247 8,259 8,266 8,271Minorities 0 0 0 0 0 0 0 0 0 0




Advanced Petrochemical Company (2330.SE)


Arsalan Mustafa CFA

[email protected]

Matija Gergolet

[email protected]

Eshan Toorabally CFA

[email protected]

Saudi Arabia: Chemicals

A polypropylene pure play

Advanced Petrochemical Company (Advanced), with 450,000 tonnes of polypropylene capacity (c.8%

of total Saudi capacity), is leveraged to polypropylene prices which in turn are closely correlated to oil

prices. Given strong demand from Asia and the ongoing upward trend in polypropylene prices,

Advanced is well positioned to realise revenue gains and healthy EPS growth rates in our view. Its

significant cost advantages provide a reasonable cushion against polypropylene price stagnation and

we believe the current valuation offers a compelling entry point, therefore we initiate coverage with a

Buy rating.


As Advanced is currently purely a polypropylene company, the growth drivers will be price and

volume. The company currently has no specific expansion plans and hence polypropylene prices

will be the key determinant of its revenues. Polypropylene prices are up 24% ytd, therefore we

expect the company to post 31% growth in sales in 2011. We forecast a price of US$1605/t for

2011 and US$1837/t for 2012.

Advanced has secured its propane and gas requirements via a 20-year contract with Aramco. The

propane prices are at a c.30% discount to Japanese naphtha prices (until 2011). This pricing

mechanism provides considerable competitive advantage to the company (avg. 2010 COGS =

c.US$ 827/t).

We expect Advanced to operate at slightly above nameplate capacity, capturing debottle-necking

gains and with strong demand from China and South Asia; the company should be able to sell its

entire capacity. We expect 1st quartile CROCI at 23% in 2012 vs. 18% in 2010.

Advanced has entered an off-take agreement (10-year) for 100% of its capacity with leading

distributors across the globe – e.g., Vinmar (US), Mitsubishi (Japan) and Domo (Germany) – at

market prices less marketing costs, providing assured sales.

Valuation: Significant discount to peers

Advanced trades on 5.3x 2012E EV/EBITDA, well below the global chemical 5-year median of 8.2x. We

use the global chemical 5-year median EV/EBITDA multiple to which we apply a 10% premium for the

1Q CROCI and apply 9.0x to our 2012/13E estimates to derive our 12-month price target of SR49.2,

implying 78% potential upside. Advanced currently trades at 7.6x 2012E earnings vs. its historical

median of 25.8x and the global median of 16.4x; at our price target it would trade at 13.5x 2012E P/E.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Advanced Petrochemical Company (2330.SE)


Key data Current

Price (SR) 27.70




Free Float (%) 81.7


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 2,031.0 2,685.0 2,725.2 2,891.8

EBIT (SR mn) 358.2 567.7 540.5 566.0

EPS (SR) 2.25 3.73 3.63 3.86

EV/EBITDA (X) 7.0 5.5 5.3 4.8

P/E (X) 10.0 7.4 7.6 7.2

Dividend yield (%) 7.8 9.0 10.8 12.6

FCF yield (%) 16.7 18.0 16.8 17.6

CROCI (%) 17.9 24.2 23.0 23.3

EV/GCI (X) 1.3 1.4 1.2 1.1

Net Debt/EBITDA (X) 1.4 0.4 0.1 (0.3)

260

290

320

350

380

410

440

470

22

24

26

28

30

32

34

36



Advanced Petrochemical Company (L) MSCI EM EMEA (R)



Investment drivers: Polypropylene price increase to drive revenue growth


Advanced uses propane to produce its propylene, which it then utilizes to produce

polypropylene. The key metric of the propylene and polypropylene profitability is the naphtha/

polypropylene spread, as the marginal producers utilize naphtha to produce polypropylene,

which thus determines the profitability of Advanced. Although both are highly correlated to oil

(naphtha 91% and polypropylene 85% correlation), prices do show variance as a result of market

dynamics. A widening spread is beneficial for the company. Our estimates for Brent Oil for 2012

and 2013 are US$120 and US$130 respectively.

While we believe that gas prices in Saudi will double from 2012 at 1.5$/mmBTU, we expect the

current naphtha/propane pricing policy of 28%-30% discount to international netback prices to

continue, as such a discount is considerably lower than the discount of domestic gas to

international gas prices, which is currently between 80% and 95%.

The company could expand into new downstream products as it seeks to deploy its cash (20%

of total assets by 2012) in more productive avenues. Advanced has land available at its Jubail

facility and could therefore build new units at its existing site.


Advanced is a one-commodity company and any adverse movement in the polypropylene price

would severely impact its profitability. A concern is that India imposed a 1.5%/t (July 2009) anti-

dumping duty on polypropylene exports from Saudi. A similar move by other countries could

dent the company’s margins.

The subsidised naphtha price (c.30% discount to the international netback price) is applicable

until end 2011. A change in government policy may impact the company negatively. We assume

a discount of 28% in line with the discount applied to other companies.

Any unscheduled shutdown may lead to a drop in production levels affecting total revenue.

Also, unfavourable renegotiation of off take agreements presents revenue risk.

Industry context

Polypropylene (the second largest plastic resin by volume) has made some headway in replacing

LDPE in certain areas of manufacturing owing to good heat properties and low density. Prices track

oil prices and in line with the rising oil prices, average polypropylene prices rose c.59% in 2010. The

strong demand from Asia and high operating rates for Advanced (2009 = 96% & 2010 =100%) and

the industry indicate a seller’s market. We maintain an optimistic view on the Saudi propylene

industry given its feedstock advantage and anticipate that prices will remain strong over the next

couple of years as a result of high oil prices and oil derivatives globally.

Company description

Advanced Petrochemical Company is a project company with

a 450,000 tons pa capacity for polypropylene (PP), which is fed

from its 455,000 tons pa propylene plant. PP is produced

commercially in a white pelletized form and end uses include

clothing, automotive plastics, pipes, bottles and packaging.

The company started operation in Jubail in mid 2008. In 2009,

the company changed its name from Advanced Polypropylene

to Advanced Petrochemical Company to reflect its ambition to

diversify its revenue stream. Advanced has c.260 employees.



Source: Company data, Goldman Sachs Research estimates,

China29%

Turkey22%

South-East Asia16%

Saudi 10%

Africa8%

Other15%

Polypropylene 100%



Key financial ratios: CROCI to rise to 23% in 2013 aided by higher polypropylene prices

Exhibit 317: Margins to rise in tandem with increasing polypropylene prices

Exhibit 318: Higher margins to drive CROCI going forward



Exhibit 319: Advanced Petrochemical shareholding

Exhibit 320: The net cash position provides an opportunity for future

expansion



21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n


0%

5%

10%

15%

20%

25%

30%

2,950

3,000

3,050

3,100

3,150

3,200

3,250

3,300

3,350

3,400

3,450

2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Public Pension Agency

6%National

polypropylene Company

8%

Free Float86%

-1.0x-0.5x0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x

-20%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: At a discount vs. global peers; high and increasing CROCI

The declining EV and price multiples illustrate the strong operating performance of the company. The increasing cash flow and

dividend yield offer attractive value.

Exhibit 321: Advanced Petrochemical trades on a 2012E EV/EBITDA of 5.3x which is below the global peer 5-year historical median multiple of 8.2x

Advanced Petrochemical valuation, growth and returns summary


Advanced Petrochemical Company Basic MaterialsY/E December ChemicalsSRmn Plastics

Share price (SR) 27.7 Price target (SR) 49.2 $/SAR (Spot) 3.75Market cap 3,916 Potential upside/(downside) 78%


EBITDA 2013E

EV/EBITDA multiple EV 2012E EV 2013E Target Price

EV/Sales 5.2 3.0 2.0 1.6 1.5 1.3 Refining and Petrochemicals 751 777 9.00 6,762 6,991EV/EBITDA 20.6 12.3 7.0 5.5 5.3 4.8 Group EBITDA 751 777 9.00 6,762 6,991EV/EBIT 29.6 25.3 11.2 7.5 7.3 6.5 AddEV/DACF 20.4 12.2 7.1 5.6 5.4 4.9 Associates 0 0EV/NOPLAT 29.9 22.4 10.1 7.8 7.6 6.8 Investments 0 0EV/GCI 2.3 1.4 1.3 1.4 1.2 1.1 EV 6,762 6,991

LessP/E 30.0 25.8 10.0 7.4 7.6 7.2 Net debt/(cash) 42 -224P/B 3.7 1.9 1.8 1.9 1.7 1.7 Pensions and others 0 0P/CFO 18.7 10.2 6.0 5.3 5.4 5.2 Minorities 11 11FCF yield -9% 13% 17% 18% 17% 18% Equity value 6,709 7,204Dividend yield 0.0% 4.4% 7.8% 9.0% 10.8% 12.6% No. of shares, mn 141 141


Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2009 2010 2011E 2012E 2013ECROCI 13.1% 11.2% 17.9% 24.2% 23.0% 23.3% Sales growth 0.5% 38.5% 32.2% 1.5% 6.1%

ROIC 9.1% 6.5% 14.0% 20.8% 21.1% 23.5% EBITDA growth -2.4% 59.5% 36.7% -3.5% 3.4%

ROE 13.3% 7.5% 18.2% 27.1% 23.6% 23.6% EBIT growth -31.9% 107.1% 58.5% -4.8% 4.7%

Net debt/EBITDA 4.1 3.3 1.4 0.4 0.1 -0.3 Net income growth -38.5% 156.8% 66.2% -2.9% 6.4%

Net debt/equity 92.5% 70.5% 44.6% 16.6% 1.9% -9.4% EPS growth -38.5% 156.8% 66.2% -2.9% 6.4%



Financials: Strong sales growth and margin expansion

Given the robust price potential, we expect strong sales growth for Advanced Petrochemical. Almost all of the price increase in

polypropylene passes through to the bottom line owing to lower input costs. We expect 31% yoy growth in sales in 2011 followed

by a modest growth rate of 5.6% in 2012. We project a decline in sales in 2014 on the back of lower polypropylene prices. Advanced

reported 9M11 revenues of SR2,127 mn, up 46% yoy, an EBITDA of SR596 mn, up 43% yoy and a net income of SR422 mn, up 33%

yoy.

Exhibit 322: We expect Advanced Petrochemical’s profit to grow on higher polypropylene prices and subsidized input costs Advanced Petrochemical, 2008-2015 P&L, SR mn, year to December


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Polypropylene 1,459 1,467 2,031 2,685 2,725 2,892 2,099 2,109Group revenues 1,459 1,467 2,031 2,685 2,725 2,892 2,099 2,109Growth 0.5% 38.5% 32.2% 1.5% 6.1% -27.4% 0.5%

Group EBITDA (clean) 366 357 570 778 751 777 566 567Group EBITDA margin 25.1% 24.3% 28.0% 29.0% 27.6% 26.9% 27.0% 26.9%

Group EBIT (clean) 254 173 358 568 541 566 355 356Group EBIT margin 17.4% 11.8% 17.6% 21.1% 19.8% 19.6% 16.9% 16.9%

Share of associates 0 0 0 0 0 0 0 0Net financial items -44 -46 -30 -22 -10 -2 2 2Pre-tax (clean) 210 127 328 546 530 564 357 359Non-recurring Items 0 0 0 0 0 0 0 0Pre-tax (reported) 210 127 328 546 530 564 357 359Tax -9 -3 -11 -18 -17 -18 -12 -12Tax rate (%) 4% 3% 3% 3% 3% 3% 3% 3%

Profit after tax (reported) 201 124 318 528 513 545 346 347Minorities 0 0 0 0 0 0 0 0Net income (reported) 201 124 318 528 513 545 346 347Post-tax exceptionals 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 201 124 318 528 513 545 346 347

EPS (clean, fully diluted) 1.42 0.87 2.25 3.73 3.63 3.86 2.45 2.46DPS 0.00 1.00 1.75 2.50 3.00 3.50 3.50 3.50



Exhibit 323: Limited maintenance capex leads to higher FCF and net cash position by 2012 should support high dividend yield

Advanced Petrochemical’s balance sheet and cash flow statement, 2006-2015E, SR mn, year to December



EBIT -2 -1 254 173 358 568 541 566 355 356Depreciation/Amortisation 0 0 112 184 211 211 211 211 211 211Net financial items 0 0 -48 -48 -32 -22 -10 -2 2 2Taxes paid 0 -1 -9 -3 -11 -18 -17 -18 -12 -12Other items 4 4 15 6 5 0 0 0 0 0

Change in working capital 121 -78 -437 122 122 31 -1 -3 16 0Cash flow from operations 123 -76 -113 434 653 770 723 753 572 558

Capex -1,448 -994 -401 -34 -119 -63 -63 -63 -63 -63Capex/D&A 359.8% 18.2% 56.4% 30% 30% 30% 30% 30%capex/sales (%) 27.5% 2.3% 5.9% 2.4% 2.3% 2.2% 3.0% 3.0%Free cash flow pre-dividend -1,325 -1,070 -515 401 534 706 660 690 509 494Free cash flow pre-dividend/revenues (%) -35.3% 27.3% 26.3% 26.3% 24.2% 23.8% 24.3% 23.4%

Other investing activities 0 0 0 -12 12 0 0 0 0 0Dividend 0 0 0 -70 -176 -247 -353 -424 -495 -495Cash surplus (post dividend) -1,325 -1,070 -515 319 370 459 306 266 14 0Other and financing 1,414 0 0 0 0 0 0 0 0 0Change in net cash (net debt) 88 -1,070 -515 319 370 459 306 266 14 0Net debt (cash) -88 981 1,496 1,177 807 348 42 -224 -238 -238


Inventories 0 3 195 221 166 161 164 174 126 127Receivables 5 9 345 272 174 230 234 248 180 181Cash and cash equivalents 361 89 216 296 457 457 457 722 722 722Other 0 0 20 44 23 31 31 33 24 24Current assets 367 101 776 833 820 879 885 1,177 1,052 1,054

Tangible assets 1,409 2,383 2,643 2,498 2,419 2,271 2,124 1,976 1,828 1,681Intangible assets 39 61 88 83 111 111 111 111 111 111Other 0 0 0 0 15 15 15 15 15 15Non-current assets 1,448 2,444 2,731 2,581 2,545 2,397 2,249 2,102 1,954 1,807

Total assets 1,815 2,545 3,507 3,414 3,365 3,276 3,134 3,279 3,006 2,860


Long-term interest-bearing liabilities 128 1,070 1,400 1,240 1,005 546 240 240 225 226Pension provisions 1 2 5 7 11 11 11 11 11 11Other 0 0 0 0 0 0 0 0 0 0Non-current liabilities 129 1,072 1,405 1,247 1,016 557 251 251 236 237

Total Common Equity 1,415 1,416 1,617 1,670 1,811 2,092 2,251 2,373 2,224 2,076Minorities 0 0 0 0 0 0 0 0 0 0




Agility Public Warehousing Company KSC

(AGLT.KW)



[email protected]

Eshan Toorabally,CFA

[email protected]

Matija Gergolet

[email protected]

Kuwait: Logistics

Legal case outcome to determine future direction

Agility is trading at a significant discount to peers and its own historical multiples. However, we

believe this discount reflects the uncertain outcome of the ongoing legal case with the US

government. The freight forwarding and contract logistics business (GIL) has been largely

unaffected by the legal case and looks set to be the core earnings driver in the future. We resume

coverage with a Neutral rating.


Thanks to the profit generated from US government contracts to transport food and

equipment (DGS divisions) since early 2000, Agility established a freight forwarding platform

in 2005 through various acquisitions. Prior to the expansion of DGS, industrial real estate

management was Agility’s core business.

Following the legal case in 2009, Agility was barred from bidding for new US government

contracts. Consequently, all the DGS business contracts, which generated c.38% of revenue

and gross profit in 2008 have been winding down; we forecast only a 1% revenue contribution

from the DGS division in 2011.

Agility’s portfolio investments in trade facilitation businesses (ground handling, cargo

consultancy and scrap trading), industrial real estate development business and convertible

debt in Iraq’s third mobile developer Korek Telecom give it an option to retransform its

business. However, such transformation will take time to materialize, in our view.

If Agility were to win the case, there may be significant upside risk to our price target.

Conversely, if the financial loss arising from the case is significantly more than the current

market discount, material downside risk could arise.

Valuation: We value the company at 3.2x EV/EBITDA, a 40% discount to history

Our 12-month price target of KD0.45 is based on 3.2x EBITDA applied to an average of 2012 and

2013 estimates; this represents a 40% discount to the stock’s five-year median EV/EBITDA multiple

of 5.3x to account for legal risk from the US case and lower returns relative to history (CROCI

falling to 4Q). To put the case into perspective, US$8.5 bn of food contracts since 2005 are in

dispute. Applying the company’s average net profit margin of 12% (2005-10), this translates into

an estimated US$1 bn of profit generated by Agility from the US contracts.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Agility The Public Warehousing Company (Agility) (AGLT.KW)


Key data Current

Price (KD) 0.40

12 month price target (KD) 0.45



Free Float (%) 50.0


12/10 12/11E 12/12E 12/13E

Revenue (KD mn) 1,605.7 1,273.1 1,375.1 1,486.4

EBIT (KD mn) 67.5 32.2 44.4 65.1

EPS (KD) 0.06 0.03 0.04 0.06

EV/EBITDA (X) 3.3 4.2 3.0 1.8

P/E (X) 8.6 14.0 9.9 6.7

Dividend yield (%) 7.7 5.1 5.1 5.1

FCF yield (%) 30.8 1.6 18.0 25.0

CROCI (%) 8.9 5.1 6.0 7.5

EV/GCI (X) 0.4 0.3 0.3 0.2

Net Debt/EBITDA (X) (0.7) (0.6) (0.9) (1.2)

260

290

320

350

380

410

440

470

500

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60



Agility The Public Warehousing Company (Agility) (L) MSCI EM EMEA (R)



Investment drivers: Freight forwarding business to drive future growth


The freight forwarding and logistics industry is a leveraged play on global/regional GDP growth.

Growth in global trade has averaged 2x GDP growth: according to the WTO, export growth has

averaged 6% compared with global GDP growth of 3.1% over the last two decades (1990-2008).

We forecast average revenue growth of 8% (2011-15) for Agility, driven by higher than global

GDP growth in the Middle East, Asia and Africa. Despite the company’s Middle East exposure

shrinking to 11% with the winding down of the DGS divisions in 2011, we still expect 45% of its

revenue to come from the higher-growth economies of Asia, Africa and the Middle East.

Freight forwarding is an asset light business with a low marginal cost of expansion (the

company does not own trucks or planes). The expansion in the network acts as a significant

barrier to entry by creating economies of scale for the incumbent. Additional expansion for

Agility, however, may be difficult to finance given the overhang of the legal case.


Agility is currently involved in a legal case with the US government for allegedly overcharging

on certain contracts. The outcome and financial impact of this case is uncertain. Additional

reputational damage could affect other divisions of the firm.

A significant slowdown in economic trade and activity in the region would reduce shipping

volumes. An increase in air and sea shipping charges would reduce margins, and the threat of

competition from global peers is a further risk. Conversely, higher-than-forecast GDP growth

could translate into faster revenue growth than we expect.

Industry context

Logistics is a supply chain process that manages goods/products from the point of origin to the

point of delivery. Logistics can be split into courier, freight forwarding and supply chain

management (SCM). Agility does not operate in the courier business, where the UAE-based player

Aramex has a leading market share in the region (domestic express) followed by the international

players UPS, Fed EX and DHL. The freight forwarding market, where the company mainly operates,

is highly fragmented and competitive.

Company description

Established in 1979, Agility is a provider of supply chain and

freight solutions to companies and government organizations

in the Middle east and globally. The company has recently

reorganized into two main divisions: (1) Global integrated

logistics (GIL), looking at freight forwarding and contract

logistics; and (2) Portfolio business, which includes industrial

real estate management, private equity investments (including

US$250 mn convertible debt in Iraq’s Korek Telecom) and

DGS (government services). Agility is currently involved in a

legal case with the US government.

Sales by geography exposure (2010A)



Middle east34%

Europe26%

Asia23%

America16%

Africa1%

Global Integrated Logistics

(GIL)92%

Defence & government Services

(DGS)1%

RE devlpment

7%



Key financial ratios: End of US contracts and slowing global growth pressures margins

Exhibit 324: Agility sales and margin performance, 2006-15E

Exhibit 325: Agility GCI and CROCI, 2006-15E



Exhibit 326: Agility shareholding and group

Exhibit 327: Agility gearing, 2006-15E



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

KD

mn


0%

5%

10%

15%

20%

25%

30%

35%

0

200

400

600

800

1,000

1,200

1,400

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

KD

mn

GCI CROCI (RHS)

NBK capital22%

PIFFS10%

Wafra6%

Al aman4%

NREC4%Treasury

4%

Free Float50%

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

-30%

-20%

-10%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: We value Agility at a 40% discount to historical multiple

Exhibit 328: At our price target, the company would trade at 8x 2013E earnings


Agility Public Warehousing Company KSCY/E DecemberKDmn

Share price (KD) 0.40 12-month target price (KD) 0.45 $/KD (spot) 0.28Market cap 398 Potential upside/(downside) 14%


EBITDA 2013E


EV/Sales 0.6 0.5 0.2 0.2 0.2 0.1 Agility Public Warehousing Compa 77 99 3.2 245 317EV/EBITDA 5.4 4.1 3.3 4.2 3.0 1.8 Group EBITDA 77 99 3.2 245 317EV/EBIT 6.9 5.2 5.4 8.2 5.2 2.8 AddEV/DACF 6.0 4.9 4.5 6.5 4.9 3.3 Associates 0 0EV/NOPLAT 7.2 5.5 6.7 9.8 6.2 3.3 Investments 121 121EV/GCI 1.1 0.8 0.4 0.3 0.3 0.2 EV post-discount 366 438

Less 0 0P/E 7.1 6.0 8.6 14.0 9.9 6.7 Net debt/(cash) -71 -122P/B 1.4 1.0 0.6 0.5 0.4 0.4 Minorities 8 6P/CFO 5.2 4.8 5.3 7.1 5.8 4.5 Pensions and other 20 20FCF yield 12.7% 16.9% 24.3% 1.2% 12.7% 17.5% Equity Value 410 534Dividend yield 0.1% 4.3% 7.7% 5.1% 5.1% 5.1% No. of shares, mn 1,047 1,047


Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 19.2% 17.2% 8.9% 5.1% 6.0% 7.5% Sales growth 10.1% -7.1% -5.8% -20.7% 8.0% 8.1%

ROIC 18.9% 18.8% 6.7% 3.5% 4.8% 7.2% EBITDA growth -7.1% 4.5% -48.2% -43.7% 22.1% 29.2%

ROE 19% 18% 3% 4% 4% 6% EBIT growth -7.7% 5.0% -60.0% -52.4% 38.2% 46.6%

Net debt/EBITDA 0.78 0.18 -0.67 -0.64 -0.93 -1.23 Net income growth -8.2% 10.6% -61.3% -53.0% 41.0% 48.4%

Net debt/equity 20% 4% -8% -4% -8% -13% EPS growth -6.0% 12.7% -61.4% -53.0% 41.0% 48.4%



Financials: Stable earnings from 2012E as the last of the US government contracts ends.

We expect Agility’s revenue and EBITDA to settle at a significantly lower level at the end of 2011 post the winding up of all the US

government contracts and to demonstrate more steady growth from 2012 onwards. Agility was cash positive at the end of 2010.

Following the legal case, Agility deleveraged as CFO from its core business continued and bank debt decreased significantly.

Exhibit 329: We expect earnings to be driven by the freight forwarding and contract logistics business (GIL) 2006-15E P&L, KD mn


Exhibit 330: Gross profit margin to improve as greater volumes will allow better negotiations on air and sea freight charges

Divisional gross profit 2007-15E P&L, KD mn



Global Integrated Logistics (GIL) 1,326 1,054 1,193 1,036 1,209 1,269 1,371 1,482 1,609 1,753Defence & government Services (DGS) 0 643 689 715 421 13 0 0 0 0Infrastructure/ intersegment 0 -30 -46 -46 -24 -9 4 4 5 5Group revenues 1,326 1,667 1,836 1,705 1,606 1,273 1,375 1,486 1,614 1,758Growth 192.6% 25.7% 10.1% -7.1% -5.8% -20.7% 8.0% 8.1% 8.6% 8.9%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 6 -1 -2 -2 -1 2 2 4 8 14Pre-tax (clean) 180 173 158 166 67 35 47 69 97 131Non-recurring Items 0 0 0 0 -35 9 0 0 0 0Pre-tax (reported) 180 173 158 166 32 43 47 69 97 131Tax -11 -9 -10 -10 -7 -7 -7 -11 -16 -21Tax rate (%) 6% 5% 7% 6% 22% 16% 16% 16% 16% 16%

Profit after tax (reported) 169 163 148 156 25 36 39 58 82 110Minorities -3 -9 -7 1 1 1 1 1 2 2Net income (reported) 167 154 141 156 25 37 40 60 84 113Post-tax exceptionals 0 0 0 0 -35 9 0 0 0 0Net income (clean, continuing operations) 167 154 141 156 61 28 40 60 84 113


Y/E December 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGross profit by SegmentGlobal Integrated Logistics (GIL) 312 312 318 292 298 329 371 418 473Defence & government Services (DGS) 248 234 236 140 3 0 0 0 0Infrastructure/ RE development 50 58 59 73 80 91 98 106 116Others/intersegment -4 49 14 -17 -17 -17 -17 -17 -17Total Gross profit 606 653 627 488 365 403 451 508 572



Exhibit 331: Agility was cash positive at the end of 2010. We believe capex will now only be maintenance level leading to healthy

cash generation.

Balance sheet and cash flow statement, 2006-15E, KD mn



EBIT 174 174 161 169 68 32 44 65 89 118Depreciation/Amortisation 35 48 45 47 44 31 32 34 36 38Net financial items -2 -9 -7 -3 -4 -2 -2 0 4 10Taxes paid -11 -9 -10 -10 -7 -7 -7 -11 -16 -21Other items 5 -3 10 2 3 4 4 4 4 4

Change in working capital 31 -42 18 18 67 -38 -4 -4 -5 -6Cash flow from operations 232 157 216 222 170 20 67 88 112 142

Capex -47 -72 -84 -62 -40 -15 -16 -17 -18 -19Capex/D&A 136.1% 151.9% 186.3% 133.1% 91.3% 50% 50% 50% 50% 50%capex/sales (%) 3.6% 4.3% 4.6% 3.6% 2.5% 1.2% 1.2% 1.1% 1.1% 1.1%Free cash flow pre-dividend 185 85 132 160 130 5 51 71 95 123Free cash flow pre-dividend/revenues (%) 14.0% 5.1% 7.2% 9.4% 8.1% 0.4% 3.7% 4.8% 5.9% 7.0%

Other investing activities -46 -174 -49 -34 25 0 0 0 0 0Dividend -37 -76 -85 -1 -40 -40 -20 -20 -20 -20Cash surplus (post dividend) 102 -166 -2 124 115 -35 31 51 74 103Other and financing 15 0 -47 11 0 0 0 0 0 0Change in net cash (net debt) 116 -165 -49 135 115 -35 31 51 74 103Net debt (cash) -60 100 160 39 -75 -40 -71 -122 -196 -300


Inventories 59 66 73 66 12 51 55 59 64 70Receivables 272 346 322 340 290 230 248 268 291 317Cash and cash equivalents 315 247 253 314 204 204 204 204 278 381Other 56 72 92 99 99 79 85 92 100 109Current assets 703 731 740 820 605 563 592 623 733 877


Total assets 1,320 1,536 1,642 1,784 1,495 1,446 1,458 1,473 1,565 1,690



688 757 755 941 912 910 930 969 1,033 1,125Minorities 17 28 31 12 9 9 8 6 5 2




Agthia Group (AGTH.AD)


Matija Gergolet

[email protected]


[email protected]

UAE: Food

Niche local company with regional ambitions and accelerating growth

While the Agthia Group (Aghtia) is a niche player in the GCC market, its ambitions are clearly for a

bigger regional presence. We expect Agthia to accelerate growth in the coming years as it

expands its product range and its brands strengthen. While the flour/animal feed business adds

some volatility, the company should continue to grow in bottled water and we expect the new

product range in dairy and frozen bakery currently being introduced to expand margins and

accelerate growth in 2012.


While a relatively small food company, Agthia has significant market share in some segments

in the UAE market, for example in bottled water (joint market leader with a 27% share), flour

(41% market share), animal feed (47%) and fruits and vegetables (15%). The challenge (and

ambition) is to expand into new product categories while maintaining profitability.

The rapid growth of the bottled water business and new divisions (dairy, bakery and baked

products starting in 2011/2012) should diversify Agthia business away from the traditional

flour business, which has in the past been distorted by subsidies and suffered from volatile

margins. We expect expansion of the product offering to increase Agthia’s distribution power

and thus its pricing power, further allowing it to better manage its margins.

The key risk for Agthia is linked to food price inflation (particularly flour) and its capacity to

pass such increases on to the final users, considering the local government focus on food

inflation. After years of improving CROCI, which has risen from 5.5% in 2006 to 11.8% in 2010

under the new management team, we expect the company to achieve lower returns in 2011

on the back of food price inflation but also higher capital commitments for the new product

launches. We expect returns to recover again from 2012 once the new investments ramp up.

Valuation: At a discount to global food companies

Our valuation for Agthia is based on the global food sector mid cycle (5-year) median EV/EBITDA

multiple of 10.2x. While the company has historically traded on higher multiples (14.7x), we

believe this may reflect the high valuations in the UAE stock market in the past and the low

liquidity. Applying the 10.2x EBITDA multiple to the average of our 2012 and 2013 estimates, we

derive a 12-month target price of AED2.81.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Agthia Group (AGTH.AD)


Key data Current

Price (AED) 1.65




Free Float (%) 44.0


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 1,006.1 1,173.3 1,288.7 1,401.5

EBIT (AED mn) 109.4 91.6 98.9 115.9

EPS (AED) 0.19 0.15 0.16 0.18

EV/EBITDA (X) 7.3 7.2 6.8 5.5

P/E (X) 10.3 11.0 10.6 9.0

Dividend yield (%) 2.5 3.0 3.0 3.8

FCF yield (%) 4.7 (6.8) (3.9) 7.7

CROCI (%) 11.8 9.3 9.2 10.1

EV/GCI (X) 0.8 0.6 0.6 0.5

Net Debt/EBITDA (X) (0.8) (0.2) 0.3 0.0

260

310

360

410

460

510

560

1.6

1.7

1.8

1.9

2.0

2.1

2.2



Agthia Group (L) MSCI EM EMEA (R)



Investment drivers: New products should accelerate growth


The current management team joined in 2006 and then set on expanding the company’s

product offering. The next 12 months should witness significant new launches: the fresh fruit

and vegetables products are just being launched, the dairy products under the Yoplait brand

should follow during 4Q2011 and frozen bakery is expected for 1Q2012. This should drive

sustained top-line growth, although initially margins could come under slight pressure as the

company tries to achieve market share in the distribution channels.

Water has been the core driver of Agthia’s growth over the last few years and the company is

contending with Masafi, the No.1 in the UAE, with revenues and gross profit growing at a CAGR

of 37% since 2006. From 2011, water will overtake flour and animal feed as the main contributor

to Agthia’s profitability.

The company is considering entering into poultry, which could require major capital

commitments (we estimate several hundred AED mn). No decision has been made yet.


While Agthia has been trying to expand its brand recognition (Al Ain), its brand has two main

challenges: a leading UAE milk producer shares the same name, and its major product, flour, is

marketed under a different brand (Grand Mills). Its water is also sold under two brands, Al Ain

(bottled water) and Crystal (for home/office delivered water, HOD) and the entry into dairy will

be under the Yoplait brand, while its beverages are sold under the Capri Sun brand. One of the

key challenges for the company will be to expand the value of its existing brands given the

multiple brands under which it operates.

The flour segment operates under a subsidy scheme – while the price is fixed (regulated) in Abu

Dhabi (where its General Mills has a dominant market share), the company receives a subsidy

which is equal to the difference between the average price in the Northern Emirates less the

Abu Dhabi regulated price – implying that when the producers in the Northern Emirates are not

able to fully pass on their cost, this also has a negative effect on Agthia’s margins.

Industry context

Agthia operates predominately in the UAE, with a small factory in Egypt and some limited sales

across Arab countries. The key sectors are flour, animal feed and bottled water. The UAE bottled

water market is c.US$165 mn and is growing at 3%-4% pa, while the HOD market is worth US$70 mn

and has remained flat in recent years. The flour and animal feed market in the UAE is worth US$290

mn, with the feed market US$215 mn, both growing at c.3%-5% pa. The UAE dairy market is worth

US$135 mn and the frozen bakery is US$55 mn, both of which have been growing at 8%-10% pa.

Company description

Agthia, founded in 2004, is a UAE packaged food producer,

based in Abu Dhabi. The company’s main product has

traditionally been flour and animal feed, yet in recent years it

has diversified into bottled water (under the Al Ain brand),

beverages (Capri Sun brand) and frozen vegetables. Agthia

has several projects under way to expand its product offering,

first as the sole manufacturer and distributor of Yoplait dairy

products in the UAE, then fresh processed fruit and frozen

bakery. Other expansions (e.g. chicken farming) could also be

a possibility. The company has c.1,450 employees.

Sales by geography (2010E)


Source: Company data, Goldman Sachs Research estimates

GCC (UAE)95%

Egypt5%

Flour & Animal Feed67%

Bottled water and Beverages

28%

Tomato paste and

Frozen vegetable

5%



Key financial ratios: Solid balance sheet, improving margins and returns

Exhibit 332: Agthia sales and margin performance, 2006-2015E

Exhibit 333: Agthia GCI and CROCI, 2006-2015E



Exhibit 334: Agthia shareholding; foreign ownership limit is 25%

Exhibit 335: Agthia gearing, 2006-2015E



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

200

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

14%

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

General Holding

Corporation51%

Abu Dhabi Public

Pension Fund5%

Free Float44%

-3.0x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Undemanding multiples given the growth

Exhibit 336: Agthia trades on undemanding multiples, on 6.8x 2012E EBITDA and 10.6x P/E


Agthia Consumer StaplesY/E December FoodAED mn Packaged & Manufacturing

Share price (AED) 1.65 12-month price target (AED) 2.81 $/AED (spot) 3.67Market cap 990 Potential upside/(downside) 70%


EBITDA 2013E

EV/EBITDA multiple EV 2012E EV 2013E Price target

EV/Sales 1.5 0.9 1.1 0.8 0.8 0.7 Flour & Animal Feed 154 184 10.2 1573 1879EV/EBITDA 17.6 6.1 7.3 7.2 6.8 5.5 Group EBITDA 154 184 10.2 1573 1879EV/EBIT 27.3 8.2 10.0 10.8 10.7 8.7 AddEV/DACF 14.8 5.8 6.9 7.2 6.9 5.5 Associates 0 0EV/NOPLAT 27.3 8.2 10.0 10.8 10.8 8.8 Investments 0 0EV/GCI 1.0 0.7 0.8 0.6 0.6 0.5 EV 1573 1879

LessP/E 27.6 8.7 10.3 11.0 10.6 9.0 Net debt/(cash) 47 1P/B 1.5 1.0 1.2 0.9 0.9 0.8 Minorities 0 0P/CFO 14.6 6.4 7.4 7.3 6.7 5.6 Pensions and other 17 17FCF yield -11.7% 18.3% 4.7% -6.8% -3.9% 7.7% Equity Value 1509 1861Dividend yield 0.0% 3.2% 2.5% 3.0% 3.0% 3.8% No. of shares, mn 600 600



ROIC 6.1% 12.2% 12.6% 9.4% 8.7% 9.5% EBITDA growth 32.7% 90.8% 6.4% -8.2% 12.7% 19.5%

ROE 9.5% 12.5% 12.3% 8.9% 8.7% 9.6% EBIT growth 46.9% 123.1% 3.8% -16.2% 7.9% 17.2%

Net debt/EBITDA 1.1 -0.6 -0.8 -0.2 0.3 0.0 Net income growth 14.8% 144.2% 8.2% -21.8% 3.3% 17.5%

Net debt/equity 10.5% -9.8% -12.1% -2.1% 4.3% 0.1% EPS growth 14.8% 144.2% 8.2% -21.8% 3.3% 17.5%



Financials: We expect margins to recover from 2012, driven partly by new products

Agthia’s margins expanded in 2009 and 2010 as soft commodities prices fell from previous highs. This margin expansion is clearly

evident in the flour & animal feed segment. During 2011, however, the company has been again suffering from lower margins in the

segment on the back of price inflation in grains. On the positive side, the gross margin in bottled waters has shown steady growth

and resilience. After some margin pressure during 2011 owing to higher commodity prices, we expect margins to recover from 2012,

driven partly by the ramp-up of the new products, where we expect higher gross profit margins (particularly in dairy and frozen

bakery). At 9M, Agthia revenues and EBITDA were +14% and -1%, respectively, while net income was down 24%.

We expect the new investments to generate good returns as the processing of dairy and vegetables can be done at the same facility

of Al Ain, creating thus a synergy. The total capex associated with these two projects is c.AE80 mn. The new products should benefit

margins, with the company expecting to achieve 40%-50% gross margin on dairy and frozen bakery vs. 20%-30% for most of the

existing products.

Exhibit 337: We expect high single-digit revenue growth and margin improvement in 2012 and 2013 due to new product launches 2006-2015E P&L, AED mn



Flour & Animal Feed 360 480 673 669 687 779 788 815 851 890Bottled water and Beverages 74 99 139 206 265 321 370 409 434 458Tomato paste and Frozen vegetable 0 0 43 46 54 53 56 58 61 64New divisions 0 0 0 0 0 20 75 120 160 185Group revenues 434 579 854 921 1,006 1,173 1,289 1,402 1,506 1,597Growth 8.3% 33.5% 47.6% 7.9% 9.2% 16.6% 9.8% 8.8% 7.5% 6.0%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 5 6 -3 2 6 -1 -5 -5 -3 0Pre-tax (clean) 29 38 44 108 115 90 94 111 150 167Non-recurring Items 0 0 28 -1 0 0 0 0 0 0Pre-tax (reported) 29 38 72 106 115 90 94 111 150 167Tax 0 0 0 -1 0 0 -1 -1 -1 -2Tax rate (%) 0% 0% 0% 1% 0% 0% 1% 1% 1% 1%

Profit after tax (reported) 29 38 72 106 116 90 93 110 148 165Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 29 38 72 106 116 90 93 110 148 165Post-tax exceptionals 0 0 28 -1 0 0 0 0 0 0Net income (clean, continuing operations) 29 38 44 107 116 90 93 110 148 165




Exhibit 338: Agthia’s bottled water becoming the largest contributor to group gross profit Divisional EBITDA, 2006-2015E, AED mn


Y/E December 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGross Profit by SegmentFlour & Animal Feed 60 84 123 169 159 136 142 147 162 169Bottled water and Beverages 36 45 65 100 128 135 155 180 195 206Tomato paste and Frozen vegetable 0 0 15 13 5 5 6 6 6 6New divisions 0 0 -1 -1 -3 6 20 38 64 78Total Gross Profit 96 129 201 281 288 282 323 371 427 459

Gross Profit MarginsFlour & Animal Feed 17% 18% 18% 25% 23% 18% 18% 18% 19% 19%Bottled water and Beverages 48% 45% 47% 49% 48% 42% 42% 44% 45% 45%Tomato paste and Frozen vegetable 34% 28% 9% 10% 10% 10% 10% 10%New divisions 30% 27% 32% 40% 42%Total Gross Profit 22% 22% 24% 31% 29% 24% 25% 26% 28% 29%



Exhibit 339: We expect significant capex linked to new product launches, followed by strong FCF Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT 24 32 47 105 109 92 99 116 153 167Depreciation/Amortisation 24 23 26 35 40 45 55 68 71 73Net financial items 3 3 -4 -2 4 -1 -5 -5 -3 0Taxes paid 0 0 0 -1 0 0 -1 -1 -1 -2Other items 4 8 14 8 8 0 0 0 0 0

Change in working capital -5 -127 -129 105 -11 -47 -33 -32 -30 -25Cash flow from operations 50 -61 -46 250 150 88 116 146 189 213

Capex -5 -11 -96 -79 -94 -156 -155 -70 -63 -66Capex/D&A 20.5% 46.8% 364.4% 226.6% 236.0% 344% 280% 103% 89% 89%capex/sales (%) 1.2% 1.9% 11.2% 8.6% 9.3% 13.3% 12.0% 5.0% 4.2% 4.1%Free cash flow pre-dividend 45 -72 -142 171 56 -67 -39 76 127 148Free cash flow pre-dividend/revenues (%) 10.4% -12.4% -16.6% 18.6% 5.5% -5.7% -3.0% 5.4% 8.4% 9.3%

Other investing activities 0 3 3 0 1 0 0 0 0 0Dividend 0 0 0 0 -30 -30 -30 -30 -37 -49Cash surplus (post dividend) 45 -68 -139 172 26 -97 -69 46 89 99Other and financing 0 0 0 -1 5 0 0 0 0 0Change in net cash (net debt) 45 -68 -139 171 31 -97 -69 46 89 99Net debt (cash) -124 -56 83 -88 -119 -22 47 1 -88 -187


Inventories 158 184 164 232 214 250 274 298 321 340Receivables 98 101 90 91 103 120 132 143 154 163Cash and cash equivalents 124 92 40 190 269 269 269 269 269 368Other 9 71 265 130 152 178 195 212 228 242Current assets 389 448 559 643 738 816 870 923 972 1,112


Total assets 823 867 1,060 1,190 1,337 1,525 1,678 1,733 1,774 1,906



Shareholders' equity 685 723 795 899 984 1,045 1,108 1,188 1,299 1,415Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 823 867 1,060 1,190 1,337 1,525 1,678 1,733 1,774 1,906



Air Arabia (AIRA.DU)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Airlines

Fleet expansion under way at a cost, but value proposition still attractive

Air Arabia is a low-cost airline based in Sharjah, UAE and undertaking a significant fleet

expansion, which should almost double its number of aircraft in operation through 2016. As a

result, we expect significant growth in Air Arabia’s top line and EBITDA, although this growth is

being obtained through significant investment. We see value to the stock after underperformance

this year and resume coverage with a Buy rating.


Air Arabia’s revenues have grown rapidly from under AED200 mn in 2004 to AED2,080 mn in

2010. This mirrors the growth in its aircraft fleet, from three in 2004 to 25 in 2010, and in the

number of destinations, which has risen from 15 to 65. This growth is set to continue as the

company is in the middle of a transformational fleet expansion – over the next six years, it is

expecting delivery of a further 42 aircraft.

Reflecting this fleet growth and the subsequent increase in passenger capacity, we forecast

significant EBITDA growth (average of 23% for 2011-15E). Air Arabia has averaged a load

factor of 83% in the last five years; our forecasts for 2011-15 average 75% and we see upside

risk to this estimate.

Our 2012 EBITDA forecast is c.12% below Reuters consensus, reflecting, we believe, our

expectation that fuel costs will rise another 12% in 2012.

In 2011 so far, Air Arabia has been very successful in raising its revenue per passenger to

more than offset increasing costs (primarily fuel). A downside risk for 2012 would be revenue

per passenger undershooting increases in costs by more than we currently expect.

Valuation: Air Arabia trades below historical EV/EBITDAR multiples

Air Arabia trades on a 2012E EV/EBITDAR of 6.6x. This is below its four-year median multiple of

9.8x, although above global peers under Goldman Sachs’ coverage, which trade on a median

2012E EV/EBITDAR of 3.8x. Air Arabia’s stock has fallen by 24% YTD, underperforming the MSCI

EEMEA by 7% – this underperformance provides a good entry point, in our view. Based on our

2012/13E EV/EBITDAR valuation methodology and using a multiple of 8.8x (a 10% discount to the

historical multiple, reflecting our expectation of a weaker balance sheet going forward), our 12-

month price target is AED1.10, implying 76% potential upside. Our rating is Buy.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Air Arabia (AIRA.DU)


Key data Current

Price (AED) 0.63




Free Float (%) 55.0


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 2,080.3 2,474.4 3,037.7 3,896.3

EBIT (AED mn) 199.7 223.6 250.7 467.3

EPS (AED) 0.06 0.06 0.06 0.10

EV/EBITDA (X) 13.0 9.9 12.0 9.5

P/E (X) 14.5 10.2 10.4 6.3

Dividend yield (%) 9.1 12.6 12.4 12.7

FCF yield (%) (0.6) (8.8) (4.3) 4.6

CROCI (%) 6.7 9.3 8.8 10.8

EV/GCI (X) 0.7 0.5 0.6 0.6

Net Debt/EBITDA (X) (7.2) (3.1) (0.6) 0.5

260

310

360

410

460

510

560

0.60

0.65

0.70

0.75

0.80

0.85

0.90



Air Arabia (L) MSCI EM EMEA (R)



Investment drivers: Fleet expansion, local competition and ability to pass through costs


We believe growth in passenger numbers for Air Arabia will be driven by the strong local

economic outlook in the medium term, as well as the increase in fleet size and number of

destinations/routes offered. The company placed an order of 44 Airbus A320 aircraft in 2007,

which started being delivered in 2010; 38 of these aircraft remain to be delivered (after 9M11).

Historically, Air Arabia has had a strong net cash position, but as it pays for the new fleet (the

value of the order was AED13 bn/US$3.6 bn), we expect this to turn into a net debt position. Air

Arabia will pay 20% of the cost of the aircraft (after any discount applicable) upfront over 2011-

2014, with the remaining 80% to be paid on delivery of each aircraft. It has the option to either

buy or lease the planes – we assume that 50% of the planes will be bought and 50% leased.

Air Arabia has also been expanding its number of destinations and as of 9M2011 flies to 69

destinations. Given the sizeable expat community in the UAE from the Indian subcontinent, this

has become an important region for Air Arabia, representing c.35% of sales in 2010. The

company was India’s first foreign low-cost carrier (LCC) and has been flying to India for six years.

With regard to efficiency, Air Arabia has operated at an extremely high average passenger load

factor (PLF) of 83% over the last five years. We think the delivery of new aircraft will lower these

figures and forecast an average of 75% from 2011 to 2015. However, if Air Arabia achieves a PLF

in line with its history, this will represent upside risk to our current revenue assumptions.


Cost pressure would be a downside risk to our view. At the 9M2011 stage, the company raised

its revenue per passenger by 10% yoy, offsetting the 8% increase in cost per passenger

(including fuel, which accounts for c.50% of COGS ex-depreciation). Any decrease in pricing

power would be a risk to our view as we forecast another 12% increase in fuel costs in 2012.

Slower-than-expected economic growth in the Middle East in 2012 would also be a risk,

although this would most likely be caused by a fall in the oil price, mitigating the previous risk.

Industry context

Based on the size of the fleet of Arab airlines in 2010 (856), we estimate that Air Arabia held about a

2.9% market share in the region. According to company data, another 680 aircraft will be delivered

to the region by 2019, a CAGR of 7%. We expect Air Arabia to increase market share slightly to 3.0%

in 2019, based on the fleet of 47 it intends to achieve by 2016. Air Arabia was the first LCC in the

Middle East; LCC competitors that have since emerged are Jazeera Airways (Kuwait), RAK Airways

(UAE), Sama (Saudi Arabia), NAS (Saudi Arabia) and Fly Dubai (UAE).

Company description

Air Arabia is a low-cost carrier based at Sharjah International

Airport. Established in 2003 by the ruler of Sharjah, Air Arabia

has grown significantly, increasing its fleet size. Air Arabia

currently operates a total fleet of 27 (leased and owned)

Airbus A320 aircraft and flies to more than 65 destinations in

the Middle East, North Africa, Asia and Europe. We estimate

that this operating fleet will grow by another 40 planes

through 2016. Air Arabia offers air travel at low fares. It

operates from three hubs, Sharjah in the UAE, Casablanca in

Morocco and Alexandria in Egypt, and expects to start

operations at a fourth hub in Jordan in 2011.




GCC14%

Middle East (ex-GCC)

14%

North Africa11%

Central Asia5%

Europe21%

Indian Subcontine

nt35%

Passenger Revenue

92%

Other Revenue

8%



Key financial ratios: We expect fleet growth to drive revenues; margin will be driven by

fuel costs vs. price

Exhibit 340: We expect Air Arabia’s revenues to grow in line with fleet

growth

Exhibit 341: We forecast Air Arabia to generate CROCI above 10% on average



Exhibit 342: Air Arabia’s shares have a 49% foreign ownership limit

Exhibit 343: We believe that Air Arabia will move from net cash to net debt



0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

14%

16%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Department of Civil Aviation -

Sharjah17%

Al Maha Holding

Company9%

Abraaj Capital6%

Other13%

Free Float55%

-20.0x

-15.0x

-10.0x

-5.0x

0.0x

5.0x

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Net debt (cash)/equity Net debt (cash)/EBITDA (RHS)



Valuation, growth and returns: Air Arabia trades below historical multiples in 2012E

Exhibit 344: Air Arabia trades on a 2012E EV/EBITDAR of 6.6x, which is below the historical median of 9.8x


Air Arabia P.J.S.C TransportationY/E December AirlinesAEDmn Airlines

Price (AED) 0.63 12M price target (AED) 1.10 AED/$ (spot) 3.67Market cap 2,921 Potential upside/(downside) 76%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EBITDAR 2012E

EBITDAR 2013E

EV/EBITDAR multiple

Implied EV 2012E


EV/Sales 2.2 0.7 0.7 0.5 0.7 0.6 Group EBITDAR 662 972 8.8 5,826 8,557EV/EBITDAR 11.7 6.2 6.9 5.6 6.6 5.7 Group EBITDAR 662 972 8.8 5,826 8,557EV/EBIT 20.8 13.3 16.6 14.2 17.5 12.0 AddEV/DACF 17.8 11.1 10.9 6.5 7.4 6.4 Associates 0 0EV/NOPLAT 12.3 6.7 7.6 6.7 7.9 6.5 Investments 756 756EV/GCI 1.1 0.5 0.4 0.3 0.3 0.3 EV post associates and investments 6,582 9,314

Less 0 0P/E 15.0 11.0 14.5 10.2 10.4 6.3 Net debt/(cash) -215 316P/B 1.4 0.8 0.8 0.6 0.6 0.5 Minorities 13 19P/CFO 19.7 14.1 15.4 7.0 6.9 4.7 Pensions and other (mainly leases) 2,416 3,091FCF yield -3.0% 3.4% -0.5% -6.5% -3.2% 3.4% Equity Value 4,367 5,888Dividend yield 6.0% 10.1% 9.1% 12.6% 12.4% 12.7% No. of shares 4,667 4,667


Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 10.7% 7.6% 6.7% 9.3% 8.8% 10.8% Sales growth 157.0% -4.5% 5.5% 18.9% 22.8% 28.3%


ROE 9.8% 8.3% 5.6% 5.4% 5.3% 8.9% EBIT growth 88.3% -14.2% -19.8% 12.0% 12.2% 86.4%

Net debt/EBITDA -5.5 -6.7 -7.2 -3.1 -0.6 0.5 Net income growth 83.2% -18.7% -32.8% 1.7% -2.5% 66.9%

Net debt/equity -32.8% -36.5% -34.3% -18.5% -4.1% 5.9% EPS growth 83.2% -18.7% -32.8% 1.7% -2.5% 66.9%



Financials: Top-line growth to come through, but leverage to increase

Given the expansion of the fleet, we forecast revenues to increase by 17% on average from 2011 to 2015. The group margin will be

affected by the timing of cost increases and recovery from pricing; for example, the margin remained relatively high in 2009 as

pricing came down more slowly than fuel costs, but the margin fell in 2010 as prices reacted more slowly than fuel costs, which

started rising again. By 2015, we forecast that Air Arabia will have a net debt position of AED1.7 bn compared with a net cash

position of AED1.8 bn at end 2010 – this is due to the payments to be made on the delivery of aircraft.

At the 9M2011 stage, Air Arabia grew revenues by 17% yoy, while its achieved EBIT margin was 8.5%, an improvement on the 8.1%

achieved at the 9M2010 stage.

Exhibit 345: We forecast average revenue growth of 17% from 2011 to 2015

Air Arabia 2007-15E P&L, AED mn


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Passenger Revenue 766 1,937 1,804 1,889 2,273 2,827 3,675 3,748 4,310Other Revenue 38 129 168 192 201 211 222 233 244Group revenues 804 2,066 1,972 2,080 2,474 3,038 3,896 3,981 4,555Growth 7.3% 157.0% -4.5% 5.5% 18.9% 22.8% 28.3% 2.2% 14.4%

Group EBITDA (clean) 159 320 299 255 319 364 590 701 674Group EBITDA margin 19.8% 15.5% 15.2% 12.3% 12.9% 12.0% 15.1% 17.6% 14.8%

Group EBIT (clean) 154 290 249 200 224 251 467 565 518Group EBIT margin 19.2% 14.0% 12.6% 9.6% 9.0% 8.3% 12.0% 14.2% 11.4%

Share of associates 0 0 -32 -38 -30 -25 -20 -15 -10Net financial items 128 226 203 124 97 58 26 -20 -94Pre-tax (clean) 282 517 420 286 291 283 473 531 414Non-recurring Items 0 -7 32 24 0 0 0 0 0Pre-tax (reported) 282 510 452 310 291 283 473 531 414Tax 0 0 0 0 0 0 0 0 0Tax rate (%) 0% 0% 0% 0% 0% 0% 0% 0% 0%

Profit after tax (reported) 282 510 452 310 291 283 473 531 414Minorities 0 0 0 -4 -4 -3 -6 -6 -5Net income (reported) 282 510 452 306 287 280 467 524 409Post-tax exceptionals 0 -7 32 24 0 0 0 0 0Net income (clean, continuing operations) 282 517 420 282 287 280 467 524 409

EPS (clean, fully diluted) 0.06 0.11 0.09 0.06 0.06 0.06 0.10 0.11 0.09DPS 0.00 0.10 0.10 0.08 0.08 0.08 0.08 0.08 0.08



Exhibit 346: We forecast a swing from a net cash position in 2010 to a net debt position in 2013 Air Arabia balance sheet and cash flow statement, 2007-15E, AED mn


Summarised cash flow2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 154 290 249 200 224 251 467 565 518Depreciation/Amortisation 5 30 50 55 96 113 122 136 156Net financial items 0 164 0 -1 59 29 1 -50 -122Taxes paid 0 0 0 0 0 0 0 0 0Other items 46 -91 27 12 38 29 24 30 28

Change in working capital -107 51 85 180 26 37 57 6 38Cash flow from operations 98 445 411 446 443 459 672 687 618

Capex -206 -678 -257 -468 -634 -553 -571 -831 -873Capex/D&A 3943.2% 2276.7% 511.9% 844.1% 661% 490% 467% 612% 561%capex/sales (%) 25.7% 32.8% 13.0% 22.5% 25.6% 18.2% 14.7% 20.9% 19.2%Free cash flow pre-dividend -108 -234 154 -22 -192 -95 101 -144 -256Free cash flow pre-dividend/revenues (%) -13.5% -11.3% 7.8% -1.0% -7.8% -3.1% 2.6% -3.6% -5.6%

Other investing activities -388 -925 491 644 -301 -301 -301 -301 0Dividend 0 0 -467 -467 -373 -368 -331 -365 -350Cash surplus (post dividend) -497 -1,158 179 156 -866 -764 -531 -810 -606Other and financing 3,267 -44 50 -307 0 0 0 0 0Change in net cash (net debt) 2,770 -1,203 229 -152 -866 -764 -531 -810 -606Net debt (cash) -2,970 -1,767 -1,996 -1,845 -979 -215 316 1,126 1,732

Summarised balance sheet2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 1 2 5 6 8 9 12 12 14Receivables 87 110 94 106 126 154 198 202 231Cash and cash equivalents 2,970 1,767 1,996 1,845 1,845 1,845 1,845 1,845 1,845Other 49 132 199 469 558 685 879 898 1,028Current assets 3,106 2,010 2,294 2,426 2,536 2,694 2,934 2,957 3,118

Tangible assets 285 972 1,186 1,838 3,072 3,865 4,666 6,056 7,467

Intangible assets 1,327 1,314 1,308 1,282 1,274 1,266 1,257 1,250 1,245Other 619 1,565 1,284 824 896 1,025 1,154 1,168 881Non-current assets 2,231 3,851 3,778 3,944 5,242 6,155 7,077 8,474 9,593

Total assets 5,338 5,862 6,071 6,370 7,778 8,849 10,010 11,431 12,711

Short-term interest-bearing liabilities 0 0 0 0 0 0 0 0 0Accounts payables 31 74 76 111 132 162 207 212 242Other 267 390 481 609 724 889 1,140 1,165 1,333Current liabilities 298 464 557 719 856 1,050 1,347 1,377 1,575

Long-term interest-bearing liabilities 0 0 0 0 866 1,630 2,161 2,970 3,577Pension provisions 8 14 23 29 29 29 29 29 29Other 2 0 23 244 733 930 1,122 1,538 1,949Non-current liabilities 10 14 46 274 1,628 2,589 3,311 4,537 5,555

Shareholders' equity 5,029 5,384 5,468 5,371 5,284 5,196 5,333 5,492 5,550Minorities 0 0 0 6 10 13 19 25 30

Total equity and liabilities 5,338 5,862 6,071 6,370 7,778 8,849 10,010 11,431 12,711



Aldar Properties (ALDR.AD)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Real Estate

Growing investment portfolio and recovering earnings, but gearing is the concern

Aldar Properties (Aldar) is one of the largest property developers operating in Abu Dhabi. While

the company has successfully delivered some large scale projects such as Ferrari World, Yas

Island and the F1 Circuit, the company’s financial position has been less secure, although it has

been supported by the Government of Abu Dhabi. Despite this and a growing investment property

portfolio, we believe gearing will remain high and convertible bonds maturing at end-2011 will

lead to significant dilution for existing shareholders. We resume coverage with a Neutral rating.


We forecast Aldar to be EBITDA positive in from 2011 onwards, mainly as a result of an

improved real estate delivery schedule. Also prominent over 2011-13 is the growing portfolio

of investment properties and operating assets, which we forecast will constitute AED3.1 bn of

revenues in 2013 or 36% of group revenues. This portfolio of hotels, schools and investment

properties provides a more stable revenue stream compared to development in our view.

Aldar’s gearing is high – coming into 2011 it was at risk of breaching a debt covenant – the

Government of Abu Dhabi has lent some support (through Mubadala) by agreeing to take on

an AED2.8 bn convertible bond and to buy real estate assets worth AED16.4 bn. Despite this,

Aldar’s gearing will average above 200% of equity through 2015E and the convertible bond

will prove dilutive for existing shareholders when the first tranche matures on December 15.

Taking the mandatory convertible into account, Mubadala would have a c.50% stake in Aldar

by end-2013 and its influence is reinforced by the recent (October 20) appointment of Greg

Fewer as CFO, who is the deputy head of the structured finance and capital markets unit for

Mubadala. The main upside risk is further government support, dilution notwithstanding.

Valuation: Share price takes into account risks in our view

The stock price has fallen 55% ytd, underperforming the MSCI EEMEA by 38%. On a fully diluted

basis, Aldar trades on a 2012E P/B of 0.6x, in line with global peers trading on 0.7x, but ahead of

local peers Emaar and Sorouh which trade on 0.5x and 0.3x respectively. Our 12-month price

target is based on a 10% discount (given high gearing) to the global real estate developers’

historical P/E multiple of 13.9x applied to 2012E/13E EPS, giving a price target of AED1.22 and

implying 18% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Aldar Properties (ALDR.AD)


Key data Current

Price (AED) 1.03




Free Float (%) 61.5


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 1,791.1 5,918.0 8,326.4 8,570.6

EBIT (AED mn) (794.6) (175.8) 516.5 876.4

EPS (AED) (0.44) (0.15) 0.06 0.14

EV/EBITDA (X) NM 62.0 20.9 15.6

P/E (X) NM NM 18.3 7.4

Dividend yield (%) 0.0 0.0 0.0 0.0

FCF yield (%) (79.9) 127.1 12.8 1.7

CROCI (%) 0.7 5.4 4.5 5.0

EV/GCI (X) 1.1 0.8 0.8 0.8

Net Debt/EBITDA (X) -- 53.4 16.3 11.8

260

310

360

410

460

510

560

0.0

0.5

1.0

1.5

2.0

2.5

3.0



Aldar Properties (L) MSCI EM EMEA (R)



Investment drivers: Balance sheet the main concern; investment portfolio growing


As of June 2011, Aldar has a land bank of 15 mn sqm available. It is currently developing over

3,000 residential units for sale, to be completed over 2011-2012. Its school capacity will reach

5,010 pupils by end-2011, including two schools to be completed in 2H11. In its investment

properties portfolio, it is currently developing Central Market which will add a hotel, over 74,000

sqm of office space, over 63,000 sqm of retail space and 474 residential units by end-2013. Also

under development are the Yas Mall and Community Retail projects.

With the above developments, the investment properties and operational businesses portfolio

will grow from just AED87 mn of revenue in 2008 to our forecast of AED3.1 bn by end-2013.

While successful in terms of execution of projects, Aldar’s financial situation has come into

focus historically as a result of problems with gearing levels and debt repayment schedules.

Coming into 2011, Aldar was at risk of breaching a debt covenant which stipulated that net

assets should exceed AED6.0 bn. To alleviate this, the company received government support in

January 2011, through the issue of a mandatory convertible bond to Mubadala of AED2.8 bn

which will begin to mature in December 2011, at strike price between AED1.75 and AED2.3 (we

assume AED1.75).

In addition to the convertible, the Government of Abu Dhabi also helped Aldar by pledging to

buy Yas assets and Ferrari World Abu Dhabi (including infrastructure and land) for AED10.9 bn,

and agreeing to buy residential units and land at Raha Beach for AED5.5 bn.


The main upside/downside risk to our view is an acceleration/slowing of Aldar’s development

portfolio, reflecting future development of the Abu Dhabi real estate market – we currently have

visibility for projects to be completed by 2013, but not beyond.

Financing developments would also be an upside/downside risk for Aldar. The Government of

Abu Dhabi is a major shareholder in the company and may provide further support, but the

extent to which this is positive would depend on the level of dilution for existing shareholders.

Industry context

Aldar is one of the largest real estate developers in Abu Dhabi. The “Plan Abu Dhabi 2030”

envisages the population increasing from c.1.3 mn in 2013 to 3.1 mn by 2030 and related CAGRs of

5% for tourist arrivals, 6% for residential units and 7% in hotel rooms over the same period. Other

significant real estate developers in Abu Dhabi are Sorouh Real Estate, Hydra and Al Qudra, while

Emaar Properties (Dubai and international) is the largest listed real estate company in the UAE.

Company description

Aldar Properties was created in 2005 as a master developer for

Abu Dhabi, the capital emirate of the UAE. It is undertaking

large civic projects to help develop Abu Dhabi into an

international business hub and tourist destination. Examples

of projects the company has built: Yas Island, Ferrari World

and the F1 Circuit. Major ongoing projects: Yas Mall, Central

Market and Al Zeina/Al Muneera residential units. Aldar has a

hotels portfolio comprising 2,429 rooms and operates schools

which will have over 5,000 available places at end-2011. Aldar

has a remaining land bank of over 15 mn sqm and c.3,400

employees.

Sales by geographical exposure (2010A)



UAE100%

Property Development

and sales78%

Investment properties

11%

Hotels8% Schools

2%Leisure

1%



Key financial ratios: Low visibility post 2013 on projects; gearing to remain elevated

Exhibit 347: Our sales forecasts fall post 2013 given a lack of visibility on

future projects

Exhibit 348: We forecast CROCI to remain at or below 5% from 2012 onwards



Exhibit 349: Aldar’s shareholding structure; the foreign ownership limit is

40%

Exhibit 350: After help from the Abu Dhabi government, gearing will reduce

but will remain above 200% on average from 2011E



-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


-15%

-10%

-5%

0%

5%

10%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Mubadala Development

Company28%

Abu Dhabi Investment Company

6%

National Bank of Abu Dhabi

5%

Free Float61%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

800%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Net debt (cash) / equity



Valuation, growth and returns: Trading below book in 2012E – a premium to local peers

Exhibit 351: Taking into account our estimate of dilution, Aldar trades on a 2012E price/book of 0.6x, which is above local peers Emaar and Sorouh


Aldar Properties Financial ServicesY/E December Real EstateAEDmn Real Estate Developers

Share price (AED) 1.03 12M price target (AED) 1.22 AED/$ (spot) 3.67Market cap 4,720 Potential upside/(downside) 18%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EPS 2012E EPS 2013E P/E multiple Value 2012E Value 2013E Price target

EV/Sales 7.0 19.3 21.1 3.9 2.3 2.2 EPS 0.06 0.14 12.50 0.70 1.73EV/EBITDA 19.6 -35.4 -134.9 65.6 20.9 15.6EV/EBIT 19.8 -32.6 -47.6 -129.8 36.7 21.2 Implied per share valuation (AED) 0.70 1.73 1.22EV/DACF 21.9 -32.3 136.4 14.2 17.7 16.1EV/NOPLAT 19.7 -33.1 -47.6 -129.8 36.7 21.2EV/GCI 1.3 0.9 1.1 0.9 0.8 0.8

P/E 12.6 -11.0 -7.2 -5.6 16.2 7.1P/B 1.6 0.6 1.9 0.7 0.6 0.6P/CFO 13.8 -10.8 -47.1 3.9 5.5 5.2FCF yield -48.7% -162.6% -84.1% 79.3% 11.3% 1.5%Dividend yield 1.3% 1.2% 0.0% 0.0% 0.0% 0.0%

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 8.4% -3.3% 0.7% 5.4% 4.5% 5.0% Sales growth 305.8% -60.2% -9.5% 230.4% 40.7% 2.9%

ROIC 9.9% -3.4% -2.2% -0.7% 2.6% 4.7% EBITDA growth 907.8% -160.6% NM NM 160.3% 31.3%

ROE 29.1% 6.2% -121.1% 12.0% 6.8% 8.7% EBIT growth 1013.0% -166.8% NM NM NM 69.7%

Net debt/EBITDA 5.9 NM NM 53.4 16.3 11.8 Net income growth 1494.2% -149.9% 33.8% NM -146.9% 146.5%

Net debt/equity 65.6% 170.5% 709.7% 264.5% 196.2% 156.5% EPS growth 1041.1% -147.8% NM NM NM 126.8%



Financials: Aldar’s profitability to slowly recover but financial position the main concern

We forecast Aldar to be EBITDA positive in 2011 following two years of EBITDA losses. This partly reflects the increasing importance

of the company’s recurring revenue portfolio (investment properties, hotels, schools and leisure) but also reflects improved unit

deliveries in property development, especially from the Al Raha Gardens and Al Zeina projects. Related to government support, we

forecast exceptional disposal gains of AED1.3 bn in 2011 and AED200 mn in 2012, reflecting the government purchases of Yas

Assets, Ferrari World and Raha Beach assets announced in January 2011. We note that in 2010 the company made an impairment of

AED11 bn – we do not forecast further writedowns at this stage.

Gearing remains a concern to us – even after the support from the Government of Abu Dhabi, net gearing will average above 200%

on our forecasts from 2011 onwards.

Exhibit 352: We forecast Aldar to be EBITDA positive in 2011 after two years of EBITDA losses; post 2013E evolution will depend on

property development visibility 2006-2015E P&L, AED mn, year to December



Property Development and sales 8 268 1,115 1,663 909 4,619 6,508 5,473 0 0Investment properties 24 30 87 201 416 660 1,071 2,259 3,206 4,007Hotels 0 0 0 57 314 459 520 591 662 731Schools 0 0 0 52 91 112 153 165 179 198Leisure 0 0 0 6 71 79 86 95 105 115Other and eliminations 156 929 3,776 0 -9 -10 -11 -13 -14 -15Group revenues 188 1,227 4,978 1,979 1,791 5,918 8,326 8,571 4,136 5,036Growth -45.2% 554.2% 305.8% -60.2% -9.5% 230.4% 40.7% 2.9% -51.7% 21.7%

Group EBITDA (clean) -231 177 1,782 -1,080 -280 348 906 1,190 698 1,001Group EBITDA margin -123.0% 14.4% 35.8% -54.6% -15.7% 5.9% 10.9% 13.9% 16.9% 19.9%

Group EBIT (clean) -234 158 1,758 -1,174 -795 -176 516 876 346 604Group EBIT margin -124.7% 12.9% 35.3% -59.3% -44.4% -3.0% 6.2% 10.2% 8.4% 12.0%

Share of associates 0 24 47 -88 -28 -6 25 42 17 29Net financial items 69 -62 109 308 -455 -440 -250 -200 -498 -861Pre-tax (clean) -165 120 1,914 -955 -1,277 -622 292 719 -136 -227Non-recurring Items 1,414 1,821 1,533 1,961 -11,381 1,300 200 0 0 0Pre-tax (reported) 1,250 1,941 3,447 1,007 -12,658 678 492 719 -136 -227Tax 0 0 0 0 0 0 0 0 0 0Tax rate (%) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Profit after tax (reported) 1,250 1,941 3,447 1,007 -12,658 678 492 719 -136 -227Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 1,250 1,941 3,447 1,007 -12,658 678 492 719 -136 -227Post-tax exceptionals 1,414 1,821 1,533 1,961 -11,381 1,300 200 0 0 0Net income (clean, continuing operations) -165 120 1,914 -955 -1,277 -622 292 719 -136 -227

EPS (clean, fully diluted) -0.10 0.04 0.54 -0.26 -0.44 -0.15 0.06 0.14 -0.03 -0.04DPS 0.08 0.10 0.13 0.05 0.00 0.00 0.00 0.00 0.00 0.00



Exhibit 353: Government aid to help reduce net debt in 2011 but this net debt/equity will average above 200% through 2015 in our

view Balance sheet and cash flow statement, 2006-2015E, AED mn, year to December



EBIT -234 158 1,758 -1,174 -795 -176 516 876 346 604Depreciation/Amortisation 3 19 25 94 514 524 390 313 353 397Net financial items 84 -294 -332 -749 113 -440 -250 -200 -498 -861Taxes paid 0 0 0 0 0 0 0 0 0 0Other items 3 -5 381 859 -6 1,300 200 0 0 0

Change in working capital 288 1,000 -740 -693 -2,360 4,921 1,452 554 -157 -397Cash flow from operations 144 878 1,092 -1,663 -2,534 6,130 2,309 1,544 43 -256

Capex -1,026 -3,695 -13,356 -15,384 -4,338 -2,387 -1,775 -1,469 -1,654 -1,861Capex/D&A 32410.7% 19520.8% 54215.4% 16400.1% 843.9% 456% 456% 469% 469% 469%capex/sales (%) 547.4% 301.2% 268.3% 777.2% 242.2% 40.3% 21.3% 17.1% 40.0% 37.0%Free cash flow pre-dividend -883 -2,817 -12,264 -17,048 -6,872 3,743 534 75 -1,611 -2,117Free cash flow pre-dividend/revenues (%) -470.8% -229.6% -246.3% -861.3% -383.7% 63.2% 6.4% 0.9% -38.9% -42.0%

Other investing activities -432 -2,973 -396 -9 5,822 5,700 3,300 0 0 0Dividend -75 -138 -232 -322 -129 0 0 0 0 0Cash surplus (post dividend) -1,390 -5,928 -12,892 -17,378 -1,179 9,443 3,834 75 -1,611 -2,117Other and financing -41 2,722 5,317 -484 -576 2,105 0 695 0 0Change in net cash (net debt) -1,430 -3,206 -7,575 -17,863 -1,756 11,548 3,834 770 -1,611 -2,117Net debt (cash) -260 2,946 10,522 28,384 30,140 18,592 14,758 13,989 15,599 17,717


Inventories 0 0 0 0 422 592 833 857 414 504Receivables 0 800 2,091 1,413 653 1,775 2,498 2,571 2,482 2,014Cash and cash equivalents 895 7,616 12,066 10,313 2,432 2,432 2,432 2,432 2,432 2,432Other 1,038 5,455 10,690 24,004 24,609 19,234 20,816 20,569 11,375 13,849Current assets 1,933 13,871 24,847 35,730 28,116 24,032 26,578 26,429 16,702 18,799

Tangible assets 2,853 8,339 22,784 27,212 14,969 11,132 9,217 10,373 11,674 13,138Intangible assets 38 65 163 40 25 25 25 25 25 25Other 285 441 1,973 3,243 4,235 4,229 4,254 4,296 4,313 4,342Non-current assets 3,176 8,844 24,920 30,495 19,228 15,385 13,495 14,693 16,011 17,505

Total assets 5,109 22,715 49,767 66,224 47,344 39,417 40,073 41,123 32,713 36,304

Short-term interest-bearing liabilities 618 757 2,683 4,696 14,811 14,811 14,811 14,811 14,811 14,811Accounts payables 206 460 1,237 1,380 1,517 2,367 3,331 3,428 1,448 2,014Other 359 2,706 8,363 7,621 7,469 7,457 10,491 10,799 2,895 4,029Current liabilities 1,183 3,923 12,283 13,697 23,797 24,635 28,633 29,038 19,154 20,854

Long-term interest-bearing liabilities 17 9,805 19,905 34,001 17,761 6,213 2,379 1,609 3,220 5,337Pension provisions 4 9 22 34 49 49 49 49 49 49Other 634 1,289 1,524 1,842 1,490 1,490 1,490 1,490 1,490 1,490Non-current liabilities 655 11,103 21,451 35,877 19,300 7,752 3,918 3,149 4,759 6,877






(4200.SE)



[email protected]

Matija Gergolet

[email protected]


[email protected]


Fixed petrol prices limit upside potential, but option to grow inorganically remains

We believe Aldrees is well positioned to benefit from a strong medium-term Saudi economic

outlook (through its commercial trucking division) and growth in vehicle traffic in the country

(through its petrol station operations). However, since domestic petrol prices are fixed by the state

oil company, we see little room for margin improvement at the company’s largest division.


In our view, volume growth will be the key driver of earnings in the petrol division given that

margins for petrol station operators in Saudi Arabia are fixed. In line with company plans, we

forecast Aldrees will add 25 stations a year, resulting in average annual sales growth of 11%

over the next five years.

There could be upside risks to our estimates if Aldrees continues to consolidate the very

fragmented petrol station operator market. Aldrees is the largest player and only operates 5%

of the stations in the country. The company’s strong cash-generating ability (we forecast net

cash by 2014) provides an option to grow much faster through acquisitions, in our view. The

company purchased 35 stations from a competitor in 2010.

EBITDA margins in the trucking division are significantly higher (40%, 2010) vs. the petrol

station operations (5%, 2010). However, due to large single-party contracts, earnings can be

relatively volatile when a transportation contract expires. We forecast revenues in the trucking

division to fall 7% in 2011 and then to grow an average 8% pa over the next five years, in line

with GDP growth.

As has been the case historically, changes in domestic petrol pricing could result in a margin

increase/decrease for petrol station operators.

Valuation: Organic growth priced in

Aldrees trades at a multiple of 7.3x 2012E EV/EBITDA. The stock’s own 5-year multiple has been

very volatile (ranging from 54x to 7.2x over 2006-10); we therefore use the global average. We

value the petrol station operations at 9.1x (the global retail 5-year median) and the trucking

division at 10.5x (global transportation logistics 5-year median). Based on our 2012/13E EV/EBITDA

SOTP methodology, our 12-month target price is SR59.1, which implies 41% upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Aldrees Petroleum and Transport Services (4200.SE)


Key data Current

Price (SR) 41.80




Free Float (%) 45.0


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 1,480.4 1,674.0 1,865.4 2,018.3

EBIT (SR mn) 94.1 95.5 105.1 113.1

EPS (SR) 3.46 3.55 3.97 4.33

EV/EBITDA (X) 8.6 8.3 7.3 6.8

P/E (X) 12.1 11.8 10.5 9.7

Dividend yield (%) 4.8 4.8 4.8 4.8

FCF yield (%) 0.0 5.7 7.8 5.5

CROCI (%) 20.3 17.9 18.0 17.6

EV/GCI (X) 1.6 1.4 1.3 1.1


260

280

300

320

340

360

380

400

420

440

32

34

36

38

40

42

44

46

48

50



Aldrees Petroleum and Transport Services (L) MSCI EM EMEA (R)



Investment drivers: Company plans to add 25 new stations a year


In our view, there is an opportunity to consolidate the fragmented Saudi petrol operator market.

The company’s strong cash-generating ability, stemming from 30-day credit terms from the

state oil supplier Aramco, gives it the option to grow through acquisition. Aldrees did use this

strategy in 2010 when it acquired 35 stores from a competitor. We conservatively do not

forecast any growth from acquisitions; hence this could represent upside risk to our estimates.

Aldrees monitors the performance of every station and actively aims to reduce expenses of

underperforming stations; this initiative partially increased EBITDA margins to 5.4% in 2010

from 4.2% the year before. The company also increased sales in 2010 by offering credit sales to

corporate customers.

Aldrees also has one of the largest fleet of commercial trucks in Saudi Arabia (1050). The

company generates a significantly higher margin in the transport division (40% EBITDA margin,

2010) relative to the petrol operation. Of total transport revenue, 25% is generated from SABIC,

the largest petrochemical company in Saudi Arabia. Cement companies are the other big group

of customers in this segment. We forecast revenue to fall in 2011 (in line with first half) as the

company’s contracts to transport wheat from farms to cities expired (Saudi Arabia, in order to

preserve fresh water, is now importing wheat). We forecast transport revenue to recover in 2012

due to expansion plans by the petrochemical and cement sectors and forecast average sales

growth of 8% (2011-15E), in line with GDP growth.


Large single-party transport contracts may result in significant volatility in transport revenue.

Changes in domestic fuel prices may result in lower- or higher-than-expected revenue in the

petrol station operations.

Industry context

Aldrees is the largest petrol station operator in Saudi Arabia with a market share of c.5%. Demand

for petrol has been growing at 7% historically, in line with GDP growth. In the trucking division, the

company is the fourth-largest player. Most companies in the trucking business are unlisted Saudi

players. Margin for petrol station operators in the country is fixed (SR0.09/litre). Although the two

grades of petrol have different selling prices (Octane 95 for SR0.60/litre and Octane91 for

SR0.45/litre), petrol operators generate the same margin.

Company description

Aldrees has two main business divisions, the managing of

petrol stations and commercial trucking, both located in Saudi

Arabia. It operates 417 petrol stations in the Kingdom with the

majority of the stations concentrated in the central region.

Margin for petrol station operators in the country is fixed

(SR0.09/litre) along with domestic petrol prices (SR0.60/litre or

US$16 cents/ litre). Aldrees also owns a fleet of 1050 trucks to

transport heavy fuel oil and petrochemicals in the country

(along with an immaterial catering operation). Aldrees has

c.5,000 employees.

EBIT by segment (2011E)



Petrol Stations

57%

Transport43%

Petrol Stations

90%

Transport10%



Key financial ratios: We forecast a recovery in transport revenue from 2012

Exhibit 354: We forecast the fixed margin on fuel to continue and a small

decrease in transport division margins due to employee cost pressure

Exhibit 355: Strong free cash flow generation provides scope to consolidate

the fragmented petrol station operator market



Exhibit 356: Aldrees shareholding structure

Exhibit 357: We forecast net cash by 2014


Source: Company data, Goldman Sachs Research estimates..

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n


0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Aldrees family55%

Free Float45%

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

-20%

-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Organic growth priced in

Exhibit 358: At our target price, Aldrees would trade at 15x 2012E earnings


Aldrees Petroleum and Transport Services CompanyY/E DecemberSRmn

Share price (SR) 41.80 12-month target price (SR) 59.1 $/SR (spot) 3.75Market cap 1,045 Potential upside/(downside) 41%


EBITDA 2013E


EV/Sales 0.9 0.7 0.8 0.7 0.6 0.6 Petrol Stations 91 98 9.1 825 893EV/EBITDA 11.1 7.8 8.6 8.3 7.3 6.8 Transport 66 71 10.5 693 742EV/EBIT 16.6 11.5 12.7 12.3 10.9 10.1 Group EBITDA 157 169 9.7 1,518 1,634EV/DACF 11.1 7.7 8.4 8.2 7.3 6.7 AddEV/NOPLAT 17.0 11.8 13.0 12.6 11.2 10.3 Associates 0 0EV/GCI 1.8 1.4 1.6 1.4 1.3 1.1 Investments 0 0

EV post-discount 1,518 1,634P/E 17.2 11.8 12.1 11.8 10.5 9.7 Less 0 0P/B 2.9 2.3 2.7 2.4 2.2 1.9 Net debt/(cash) 78 70P/CFO 10.9 7.4 7.8 7.7 6.9 6.4 Minorities 0 0FCF yield -2.7% 5.4% 0.0% 5.7% 7.8% 5.5% Pensions and other 24 24Dividend yield 4.1% 4.6% 4.8% 4.8% 4.8% 4.8% Equity Value 1,416 1,540

No. of shares, mn 25 25Implied per share valuation (SR) 56.62 61.59 59.1



ROE 17% 21% 23% 22% 22% 21% EBIT growth 20.0% 28.9% 18.2% 1.5% 10.1% 7.6%





Financials: We forecast strong cash generation due to low working capital requirements

We assume the fixed margin will remain constant in the petroleum division. Historical volatility in the petroleum division’s margins

can be explained by changes in the domestic pricing structure. In 2008, the government reduced the domestic petrol retail price

from SR0.65/litre to SR0.60/litre, while the petrol operator continued to pay SR0.53 to the state-oil company, resulting in a margin

squeeze. In late 2009, the state oil company reduced the price charged to operators to SR0.51, resulting in a margin recovery.

Exhibit 359: Drop in transport revenue in 1H2011 should lead to flat EBIT growth in 2011 2006-2015E P&L, SR mn


Exhibit 360: We forecast stable margins for the petrol division given that selling prices are fixed Divisional EBITDA, 2005-2015, SR mn



Petrol Stations 702 761 979 1,131 1,302 1,508 1,685 1,824 1,984 2,156Transport 78 103 152 175 175 163 177 190 207 225Group revenues 784 866 1,134 1,310 1,480 1,674 1,865 2,018 2,195 2,385Growth 0.1% 10.5% 30.9% 15.4% 13.0% 13.1% 11.4% 8.2% 8.7% 8.7%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 5 0 -8 -9 -5 -5 -4 -2 -2 -2Pre-tax (clean) 42 51 54 70 89 91 102 111 120 130Non-recurring Items 0 0 0 0 -1 0 0 0 0 0Pre-tax (reported) 42 51 54 70 88 91 102 111 120 130Tax 0 -1 -1 -2 -2 -2 -2 -2 -3 -3Tax rate (%) 1% 2% 2% 2% 2% 2% 2% 2% 2% 2%

Profit after tax (reported) 41 50 53 69 86 89 99 108 118 127Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 41 50 53 69 86 89 99 108 118 127Post-tax exceptionals 0 0 0 0 -1 0 0 0 0 0Net income (clean, continuing operations) 41 50 53 69 87 89 99 108 118 127

EPS (clean, fully diluted) 1.66 2.02 2.12 2.76 3.46 3.55 3.97 4.33 4.70 5.10DPS (clean, fully diluted) 0.00 1.20 1.50 1.50 2.00 2.00 2.00 2.00 2.50 2.50

Y/E December 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EEBITDA by SegmentPetrol Stations 27 31 34 37 48 70 81 91 98 107 116Transport 23 20 39 56 70 69 61 65 70 75 81Total EBITDA 50 51 74 93 118 140 142 157 169 183 198

EBITDA MarginsPetrol Stations 4% 4% 4% 4% 4% 5% 5% 5% 5% 5% 5%Transport 31% 26% 38% 37% 40% 40% 37% 37% 37% 36% 36%Total EBITDA 6% 7% 9% 8% 9% 9% 9% 8% 8% 8% 8%



Exhibit 361: We expect higher capex in 2013 to expand the trucking division Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 37 51 62 80 94 96 105 113 122 132Depreciation/Amortisation 14 22 31 39 46 47 52 56 60 66Net financial items -2 -4 -9 -10 -8 -8 -6 -5 -5 -5Taxes paid 0 -1 -1 -2 -2 -2 -2 -2 -3 -3Other items 7 6 1 3 5 3 3 3 3 3

Change in working capital 44 -64 41 11 -35 1 -15 -13 -4 -4Cash flow from operations 99 11 125 120 99 136 136 151 174 189

Capex -57 -117 -149 -76 -99 -77 -55 -93 -51 -54Capex/D&A 403.6% 519.8% 480.5% 197.3% 216.0% 165% 106% 167% 85% 82%capex/sales (%) 7.3% 13.5% 13.1% 5.8% 6.7% 4.6% 2.9% 4.6% 2.3% 2.3%Free cash flow pre-dividend 42 -106 -24 44 0 59 81 58 123 135Free cash flow pre-dividend/revenues (%) 5.4% -12.2% -2.1% 3.3% 0.0% 3.5% 4.4% 2.9% 5.6% 5.6%

Other investing activities -8 23 1 6 5 0 0 0 0 0Dividend 0 0 -30 -38 -38 -50 -50 -50 -50 -63Cash surplus (post dividend) 35 -83 -53 12 -32 9 31 8 73 72Other and financing 0 0 -2 -2 -2 0 0 0 0 0Change in net cash (net debt) 35 -83 -55 10 -34 9 31 8 73 72Net debt (cash) -43 40 95 85 119 109 78 70 -3 -75




Total assets 416 531 664 734 770 831 878 951 1,044 1,137



Total Common Equity 245 296 317 347 393 432 482 540 607 672Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 416 531 664 734 770 831 878 951 1,044 1,137



Almarai Company (2280.SE)


Matija Gergolet

[email protected]


[email protected]


[email protected]

Saudi Arabia: Food

Transforming from a dairy company to a food group

Almarai is the largest dairy company in the GCC (Gulf Cooperative Council) with a market share of

over 50% in the fresh milk segment. The group is planning significant investments in the poultry

sector, where it is looking to replicate its success in fresh milk. Nevertheless, we see more upside

elsewhere in our coverage.


Almarai plans to spend over US$1 bn to expand its poultry business, increasing capacity from

25 million to 150 million birds by 2014. We believe this will translate into a market share of

23% from 5% currently. The company believes, similar to fresh milk, that consumers will

switch to fresh chicken if high-quality fresh chicken is widely available. Currently in Saudi

Arabia, corner stores (which have a large share of the retail market) only offer imported frozen

chicken which has a market share of c.60% in poultry.

Given Almarai’s already large dominant market share in the fresh milk segment, we believe

further market share gains in this segment will be difficult. Growth in fresh dairy has been

slowing recently (average growth of 13% in 2009-10 vs. 22% in 2006-08), and we expect this

trend to continue, resulting in slowing overall revenue growth.

The company was recently required by the government to reverse a price increase for one of

its main products (fresh 2-litre milk) in Saudi Arabia. Continued increases in input costs

without permission to raise prices may lead to lower-than-expected margins for the company.

Valuation: We value the stock at 13.7x EV/EBITDA, in line with its 5-year history

Almarai is trading on a 2012E EV/EBITDA of 11.4x and P/E of 13.8x. These multiples are below the

company’s average multiples over 2006-10 of 13.7x and 17.5x, respectively (global GS-covered

consumer stable peers 10.3x and 16.6x, respectively). Based on our 2012E/13E EV/EBITDA

methodology and using the stock’s own multiple, our 12-month price target is SR123, implying

34% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Almarai Company (2280.SE)


Key data Current

Price (SR) 91.75




Free Float (%) 32.0


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 6,930.9 7,977.6 8,934.7 9,871.1

EBIT (SR mn) 1,459.5 1,500.4 1,780.0 1,948.3

EPS (SR) 5.59 5.60 6.63 7.06

EV/EBITDA (X) 13.7 12.9 11.4 10.5

P/E (X) 17.4 16.4 13.8 13.0

Dividend yield (%) 2.3 2.5 2.5 3.3

FCF yield (%) (1.6) (4.9) (3.3) (1.2)

CROCI (%) 14.4 12.9 12.9 12.5

EV/GCI (X) 1.9 1.6 1.4 1.3


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Almarai Company (L) MSCI EM EMEA (R)



Investment drivers: Poultry investment to drive future growth


In addition to consolidating its position in the dairy market, where its share has been steadily

growing in recent years and currently stands at 51%, Almarai is planning to expand in the infant

formula, bakery, juice and poultry segments.

Drivers of growth should come primarily from poultry, current only 3% of sales and where the

company expects to invest SR4 bn by 2013. By 2014, we expect this division, which is being

built on top of the HADCO platform acquired in 2009, to represent 14% of sales.

Other areas of potential expansion are bakery, where Almarai sees ample room to expand its

sales and fully utilize its factories (currently running at only 45%-50% capacity) and in juices,

where we see ample room for growth in the GCC market (considering that the sale of alcohol is

restricted, thus favouring other drinks).

Almarai’s two JVs (equity accounted) are yet to contribute to the firm’s earnings. In the first JV

(International Paediatric Nutrition Company with Mead Jonson in Saudi), the factory for infant

nutrition will be fully operational in 2012. The company is targeting a market share in the range

of 20%-25% and we estimate it will achieve this target in 2015. The second JV (International

Dairy and Juice, with Pepsi Co in Egypt and Jordan) is targeting to break even in 2011. The

company believes its recent investments in the manufacturing and distribution network will lead

to a positive contribution in 2012.


While we believe that the company’s business should allow for security in cash flows, we view

the current gearing (net debt/EBITDA of 2.9x for 2012E) as relatively high vs. history.

Inflation in soft commodities, which are the key ingredients for the group’s products (as well as

for animal feed), can have a material negative impact on its margins.

Industry context

Almarai is the leading dairy and food producer in the GCC. Its market share is over 50% in the fresh

milk segment, around 30% in the cheese and butter and bakery segments and just over 10% in long-

life dairy and fruit juices. The Saudi poultry market stands at SR12 bn (or 1.2 million MT chicken

meat), growing at 5%-10% pa. The poultry market is made up of two main categories: fresh chicken

(28% of total) and frozen poultry (mainly imported). Almarai (through HADCO) has an overall market

share of 5%. The infant nutrition market size in the GCC is estimated by the company at 40k tonnes.

Company description

Almarai is largest listed dairy company in the Middle East. The

company has a leading market share in fresh milk (with c.50%)

and a significant share in fresh juice, baked goods and cheese

in the GCC region. Almarai produces 800+m litres of fresh milk

on seven dairy farms with a distribution fleet covering 44,000

retail stores. The company acquired a local poultry operator in

2009 (HADCO) and has entered into 50% JV with Mead

Johnson to produce infant formula milk in the Gulf. Its JV with

Pepsi Co targets expansion into Egypt and Jordan in the milk

and juice category. Almarai’s investments also include a 2.5%

stake in Zain KSA. Almarai has 17,000+ employees.




Saudi Arabia71%

Other GCC28%

Other 1%

Fresh dairy46%

Long life dairy9%

Fruit Juices11%

Cheese and butter

18%

Bakery12%

Poultry3%



Key financial ratios: Stable margins and returns

Exhibit 362: We expect a fall in 2011 margins due to the company’s inability

to pass on the high feedstock costs in Saudi.

Exhibit 363: CROCI to decline modestly as the company continues to invest

and fresh milk sales growth declines



Exhibit 364: Shareholding structure

Exhibit 365: Net debt to increase due to rapid expansion into poultry



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Savola Group30%

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Mohammed29%

Al Omran Family

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Valuation, growth and returns: Expansion into poultry and infant formula priced in

Exhibit 366: At our price target, the company would trade at 18.6x 2012E earnings


Almarai Consumer staplesY/E December FoodSRmn Packaged & Manufacturing

Share price (SR) 91.8 12-month price target (SR) 123 $/SR (spot) 3.75Market cap 21,103 Potential upside/(downside) 34%


EBITDA 2013E


EV/Sales 4.0 3.6 3.8 3.3 3.1 2.9 Almarai 2,441 2,699 13.7 33,443 36,970EV/EBITDA 15.0 12.7 13.7 12.9 11.4 10.5 Group EBITDA 2,441 2,699 13.7 33,443 36,970EV/EBIT 18.8 16.3 18.2 17.8 15.6 14.5 AddEV/DACF 15.4 12.9 14.1 13.5 12.0 11.1 Associates (at 12x earnings) 577 815EV/NOPLAT 19.3 16.7 18.6 18.1 15.9 14.8 Investments 395 395EV/GCI 2.2 1.7 1.9 1.6 1.4 1.3 EV post-discount 34,415 38,180

Less 0 0P/E 18.5 16.2 17.4 16.4 13.8 13.0 Net debt/(cash) 7,125 7,782P/B 4.7 3.3 3.6 3.1 2.7 2.3 Minorities (at 12x earnings) 333 368P/CFO 14.0 11.5 12.2 11.2 9.6 9.0 Pensions and other 206 206FCF yield -4.5% 1.8% -1.5% -4.7% -3.2% -1.1% Equity Value 26,750 29,823Dividend yield 2.3% 2.6% 2.3% 2.5% 2.5% 3.3% No. of shares, mn 230 230




ROE 27% 24% 22% 20% 21% 19% EBIT growth 35.9% 20.5% 14.1% 2.8% 18.6% 9.5%





Financials: Company plans to double revenue in five years; we forecast it will take longer

Almarai has an impressive track record of revenue growth while being able to maintain overall stable EBIT margins at around 20%

and double digit CROCI returns. Almarai targets SR15 bn of revenues by 2015; we are more conservative in our estimates, partly

due to our expectation that while volumes will increase, the group will be able to pass on only half of the inflation in the largest

segment (dairy and juice).

In our underlying market assumptions, we also factor in a population growth of 2.5% in GCC (anchored by 2.2% expected population

growth for Saudi) vs. 3%-4% expected by Almarai. Despite achieving sales growth of 16% in 9M2011, Almarai earnings were flat due

to margin pressure; we forecast a similar trend for the rest of the year. In 2012, we expect a recovery in margins as the company

counters margin pressure by reducing package sizes and increasing higher-margin product offerings.

Exhibit 367: We expect revenue growth to slow on the back of slower market share gains in the fresh milk segment

2006-2015E P&L, SR mn


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dairy and Juice 2,128 2,736 3,401 4,515 5,178 5,886 6,622 7,223 7,784 8,334 8,915Bakery 0 0 369 515 618 821 979 1,098 1,202 1,312 1,429Poultry and others 18 21 0 0 73 224 377 614 885 1,150 1,452Group revenues 2,146 2,757 3,770 5,030 5,869 6,931 7,978 8,935 9,871 10,797 11,797Growth 28.5% 36.7% 33.4% 16.7% 18.1% 15.1% 12.0% 10.5% 9.4% 9.3%

0 0 0 0 0 0 0 0 0 0 0Group EBITDA (clean) 559 708 1,008 1,331 1,642 1,944 2,075 2,441 2,699 2,955 3,234Group EBITDA margin 26.0% 25.7% 26.7% 26.5% 28.0% 28.1% 26.0% 27.3% 27.3% 27.4% 27.4%

Group EBIT (clean) 432 535 781 1,061 1,279 1,460 1,500 1,780 1,948 2,113 2,290Group EBIT margin 20.1% 19.4% 20.7% 21.1% 21.8% 21.1% 18.8% 19.9% 19.7% 19.6% 19.4%

Share of associates 0 0 0 0 -2 -6 2 12 68 114 141Net financial items -36 -56 -95 -125 -148 -121 -164 -209 -331 -381 -435Pre-tax (clean) 396 479 686 935 1,129 1,333 1,338 1,583 1,685 1,846 1,996Non-recurring Items 0 0 0 0 0 0 0 0 0 0 0Pre-tax (reported) 396 479 686 935 1,129 1,333 1,338 1,583 1,685 1,846 1,996Tax -10 -14 -18 -25 -29 -26 -26 -31 -31 -34 -36Tax rate (%) 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2%

Profit after tax (reported) 386 465 668 911 1,100 1,307 1,312 1,553 1,654 1,812 1,960Minorities 0 0 -1 -1 -3 -22 -25 -28 -31 -34 -37Net income (reported) 386 465 667 910 1,097 1,285 1,287 1,525 1,623 1,779 1,923Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 386 465 667 910 1,097 1,285 1,287 1,525 1,623 1,779 1,923

EPS (clean, fully diluted) 1.68 2.02 2.90 3.96 4.77 5.59 5.60 6.63 7.06 7.73 8.36DPS 0.00 0.87 1.17 1.65 1.98 2.25 2.25 2.25 3.00 3.00 3.00



Exhibit 368: We expect flat dividends in 2011 and 2012 as the company increases capex Balance sheet and cash flow statement, 2006-2015E, SR mn


Summarised cash flow2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 432 535 781 1,061 1,279 1,460 1,500 1,780 1,948 2,113 2,290Depreciation/Amortisation 127 174 228 270 363 485 574 661 750 842 944Net financial items -36 -56 -95 -125 -148 -121 -164 -209 -331 -381 -435Taxes paid -10 -14 -18 -25 -29 -26 -26 -31 -31 -34 -36Other items 13 16 20 23 77 40 0 1 4 20 34

Change in working capital -25 -83 -270 -313 112 47 -89 -81 -79 -78 -85Cash flow from operations 501 572 645 891 1,655 1,885 1,796 2,121 2,260 2,482 2,712

Capex -666 -878 -1,099 -1,656 -1,335 -2,237 -2,800 -2,800 -2,500 -2,500 -2,000Capex/D&A 524.5% 505.0% 482.8% 613.4% 367.5% 461.3% 487% 423% 333% 297% 212%capex/sales (%) 31.0% 31.8% 29.2% 32.9% 22.7% 32.3% 35.1% 31.3% 25.3% 23.2% 17.0%Free cash flow pre-dividend -165 -306 -454 -765 320 -352 -1,004 -679 -240 -18 712Free cash flow pre-dividend/revenues (%) -7.7% -11.1% -12.0% -15.2% 5.4% -5.1% -12.6% -7.6% -2.4% -0.2% 6.0%

Other investing activities 52 54 -389 84 -376 49 100 100 100 100 100Dividend -250 0 -199 -270 -380 -455 -518 -518 -518 -690 -690Cash surplus (post dividend) -363 -252 -1,042 -952 -436 -759 -1,422 -1,097 -657 -608 122Other and financing 0 0 -91 8 -35 21 0 0 0 0 0Change in net cash (net debt) -363 -252 -1,133 -944 -472 -737 -1,422 -1,097 -657 -608 122Net debt (cash) 1,069 1,321 2,454 3,398 3,869 4,606 6,029 7,125 7,782 8,390 8,268

Summarised balance sheet2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 321 431 734 1,097 1,219 1,299 1,496 1,675 1,851 2,024 2,212Receivables 218 223 368 410 455 614 706 791 874 956 1,045Cash and cash equivalents 42 67 138 247 508 241 241 241 241 241 241Other 0 0 1 7 0 7 8 8 9 10 11Current assets 580 722 1,240 1,760 2,182 2,160 2,450 2,715 2,975 3,231 3,508

Tangible assets 2,396 3,046 4,041 5,343 7,017 8,636 10,762 12,801 14,450 16,008 16,965Intangible assets 0 0 549 549 793 793 793 793 793 793 793Other 0 0 506 530 995 981 983 995 1,059 1,153 1,260Non-current assets 2,396 3,046 5,096 6,422 8,805 10,411 12,539 14,589 16,303 17,955 19,018

Total assets 2,976 3,768 6,336 8,181 10,987 12,571 14,989 17,304 19,278 21,186 22,526

Short-term interest-bearing liabilities 119 111 182 511 396 546 546 546 546 546 546Accounts payables 370 403 575 670 963 1,253 1,443 1,616 1,785 1,953 2,133Other 0 0 10 108 82 79 91 102 113 123 135Current liabilities 489 514 768 1,289 1,440 1,878 2,080 2,264 2,444 2,622 2,814

Long-term interest-bearing liabilities 992 1,277 2,409 3,133 3,981 4,301 5,724 6,820 7,477 8,085 7,963Pension provisions 66 82 105 128 166 206 206 206 206 206 206Other 0 0 0 0 0 0 0 0 0 0 0Non-current liabilities 1,058 1,360 2,514 3,261 4,147 4,507 5,930 7,026 7,683 8,291 8,169

Total Common Equity 1,429 1,894 3,053 3,617 5,383 6,134 6,903 7,910 9,016 10,105 11,338Minorities 0 0 0 14 17 52 77 104 135 169 205

Total equity and liabilities 2,976 3,768 6,336 8,181 10,987 12,571 14,989 17,304 19,278 21,186 22,526



Arabian Cement Company (3010.SE)



[email protected]

Matija Gergolet

[email protected]

Saudi Arabia: Construction

Company to recover from recent drawbacks, and the stock too

We expect Arabian Cement to deliver top-line improvement vs. The 2010 results due to better

market conditions and consistent production. The improvement in Saudi Arabia’s construction

sector is likely to result in higher demand, in our view. We also expect Arabian Cement to operate

at near 100% utilization rates in the coming years. Our valuation based on an EV/EBITDA multiple

of 10.9x returns potential upside of 76% on a 12-month view.


We expect Arabian Cement to deliver average annual sales growth of 7% over the coming

years owing to an expected improvement in cement demand combined with Arabian

Cement’s prime location in the Western region and close to King Abdullah Economic City.

Arabian Cement has already reported 9M2011 sales up 45% yoy.

Arabian Cement plans to increase its capacity by 2.24mn tons of clinker pa. The new capacity

is expected to come online by the end of 2014 and will provide long-term future growth.

Arabian Cement has tried to diversify its operations through a 50% stake in a concrete plant in

Rabigh in addition to an 87% stake in a cement plant and a 37% stake in a concrete plant in

Jordan. These businesses are operating at losses and we don’t expect them to make any

material contribution in the short term.

Arabian Cement faces the downside risk of a slower-than-expected economy as well as

higher-than-expected energy prices. However, we do not expect these risks to materialize. On

the other hand, lifting the cement export ban could result in better-than-expected results, but

we do not assume any change in the short term.

Valuation: We value the stock at the peer EV/EBITDA multiple of 10.9x

Arabian Cement trades on a 2012E EV/EBITDA multiple of 6.8x, which is below the 5-year median

peer multiple of 10.9x. Based on our 2012E/13E EV/EBITDA methodology and applying the peer

5-year median multiple of 10.9x, our 12-month price target is SR74.5, which implies 76% potential

upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Arabian Cement (3010.SE)


Key data Current

Price (SR) 42.20




Free Float (%) 59.8


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 744.6 1,107.6 1,135.2 1,169.2

EBIT (SR mn) 272.9 496.1 419.0 423.0

EPS (SR) 3.34 5.68 4.61 4.68

EV/EBITDA (X) 10.5 6.2 6.8 6.6

P/E (X) 11.5 7.4 9.2 9.0

Dividend yield (%) 2.6 4.7 4.8 4.8

FCF yield (%) (0.4) 13.2 7.2 6.3

CROCI (%) 7.2 11.5 9.7 9.3

EV/GCI (X) 0.8 0.7 0.7 0.6


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Arabian Cement (L) MSCI EM EMEA (R)



Investment drivers: Better demand, better operations and capacity addition


The Saudi Arabian real estate sector is set to benefit from increased construction activity, driven

by a shortage in affordable housing units and government spending. These fundamentals are

likely to drive local demand for cement. We expect Arabian Cement to benefit from this trend in

terms of higher sales and improved prices in the coming years.

Arabian Cement is considering capacity expansion of 7,000 tons/day. The project is expected to

come online by end of 2014, which will allow for further growth in our view.

Arabian Cement has investments in cement and concrete plants in Jordan and another concrete

plant in Saudi. The value of these investments exceeds SR500 mn, but the projects have not

contributed materially yet. We do not assume any material contribution in the short term.


Due to the sensitivity of Saudi Arabia to oil prices, which represent c.57% of GDP, we believe

any drop in oil revenues could result in an economic downturn. The outcome to this scenario

could be a cut in government spending, translating into lower demand, accumulating

inventories, and putting pressure on prices. However, we do not expect these downside risks to

materialize, with Goldman Sachs forecasting an oil price of US$120/barrel for 2012.

There is uncertainty regarding future feedstock prices in Saudi Arabia, which represent c.20% of

total costs of cement in Saudi. Since the current price is materially low relative to neighbouring

countries and global prices (gas currently at US$0.75/mmbtu and fuel oil currently at US$6/bbl),

we expect prices to double during 2012. However, if feedstock prices remain unchanged, our 12-

month price target would imply 105% upside.

There is an indirect export ban imposed on Saudi Arabian cement producers since June 2008.

While Arabian Cement sales volumes were not materially affected by the export ban, it resulted

in a mismatch between supply and demand. We believe that a lifting of the export ban would be

positive for the cement market in Saudi, but we remain neutral on this upside risk.

Industry context

Arabian Cement competes in the Western region of Saudi Arabia with its capacity of 3.5mn tons of

clinker and 3.9mn tons of cement pa. In 2010, the company had a market share of 8%. Arabian

Cement competes with its plant’s prime location in Rabigh, which is close to King Abdullah

Economic City. It is also close to Mecca and Medina, where construction activity is accelerating. The

Saudi cement market is composed of 14 companies, ten of which are listed, with a capacity of 48mn

tonnes. The cement sector witnessed 13% volume growth in 2010.

Company description

Founded in 1955 in Jeddah, Arabian Cement was the first

cement manufacturer in Saudi Arabia. The company operates

through its plant in Rabigh with an annual capacity of 3.5mn

tons of clinker and 3.9mn tons of cement as of 2010 year-end.

The company also has investments in two concrete factories

in Rabigh and Jordan and another cement plant in Jordan.

Recently, the company announced that management is

considering the addition of 7,000 tonnes/day of capacity which

is expected to be operational by the end of 2014. Arabian

Cement has 870 employees.




Saudi Arabia100%

Cement 100%



Key financial ratios: Margins and sales to improve with capacity

Exhibit 369: Sales to grow along with new capacity and margins to improve

Exhibit 370: We expect CROCI to improve as GCI stabilizes



Exhibit 371: Arabian Cement shareholding structure

Exhibit 372: Arabian Cement to have an improved net debt position



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Suleiman Bin Abdulaziz

Saleh Al Rajhi12% National

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Abdulaziz Bin Abdullah

Suleiman Al Suleiman

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Saleh Al Rajhi6%

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Valuation, growth and returns: Using peer multiples returns upside of 76%

Exhibit 373: Arabian Cement trades at a discount relative to its peers based on EV/EBITDA multiples


Arabian Cement Company Industrials Y/E December ConstructionSRmn Building Material

Share price (SR) 42.2 12-monthprice target (SR) 74.5 $/SR (spot) 3.75Market cap 3,376 Potential upside/(downside) 76%


EBITDA 2013E


EV/Sales 3.9 5.6 5.6 3.8 3.6 3.5 Arabian Cement Company 610 619 10.9 6,646 6,752EV/EBITDA 8.9 9.1 10.5 6.2 6.8 6.6 Group EBITDA 610 619 10.9 6,646 6,752EV/EBIT 10.7 12.1 15.3 8.5 9.9 9.7 AddEV/DACF 9.5 9.7 10.9 6.5 7.3 7.1 Associates 121 123EV/NOPLAT 11.0 13.4 15.8 8.7 10.1 9.9 Investments 137 137EV/GCI 0.8 0.8 0.8 0.7 0.7 0.6 EV 6,904 7,012

Less 0 0P/E 9.5 10.1 11.5 7.4 9.2 9.0 Net debt/(cash) 929 892P/B 1.4 1.4 1.3 1.2 1.1 1.1 Minorities 54 54P/CFO 7.8 6.9 7.7 5.3 6.1 5.9 Pensions and other 36 36FCF yield -20.6% -16.9% -0.4% 12.2% 6.7% 5.8% Equity Value 5,886 6,031Dividend yield 7.8% 3.3% 2.6% 4.7% 4.8% 4.8% No. of shares, mn 80 80



ROIC 14.7% 10.2% 7.8% 13.6% 11.2% 10.9% EBITDA growth -4.6% 11.2% -11.1% 71.4% -10.6% 1.6%

ROE 16% 8% 11% 18% 13% 12% EBIT growth -10.2% 0.8% -19.3% 81.8% -15.6% 1.0%

Net debt/EBITDA 1.52 2.75 3.16 1.47 1.52 1.44 Net income growth -17.3% -6.0% -12.3% 70.0% -18.9% 1.5%

Net debt/equity 26% 54% 50% 36% 31% 28% EPS growth -23.4% -6.2% -12.3% 70.0% -18.9% 1.5%



Financials: We expect average EBITDA growth of 5% in the coming five years

We expect Arabian Cement revenues to grow moderately in 2012-13 and then to accelerate when the company operates its new

production line. While we forecast a lower EBITDA margin in 2012 due to our double feedstock cost assumption, we expect an

improvement in 2013-15.

Arabian Cement reported sales growth of 45% in 9M2011. Volume growth was 22%, implying Arabian Cement achieved better

prices. EPS grew 36% in 9M11, and we expect 70% growth in EPS for the full year (4Q10 was impacted by maintenance and a one-

off write down on the Jordanian investment).

Exhibit 374: Arabian Cement’s sales to growth to accelerate when new capacity comes online

2006-2015E P&L, SR mn



Group revenues 748 722 917 737 745 1,108 1,135 1,169 1,315 1,418Growth 8.8% -3.5% 27.1% -19.6% 1.0% 48.8% 2.5% 3.0% 12.5% 7.8%



Share of associates 1 2 2 2 2 2 2 2 2 2Net financial items 26 28 3 -4 0 -37 -43 -42 -39 -29Pre-tax (clean) 351 403 340 337 275 461 378 384 457 516Non-recurring Items 0 0 0 -147 -12 0 0 0 0 0Pre-tax (reported) 351 403 340 190 263 461 378 384 457 516Tax -18 -10 -10 -18 -10 -11 -9 -10 -11 -13Tax rate (%) 5% 3% 3% 10% 4% 3% 3% 3% 3% 3%

Profit after tax (reported) 334 392 330 171 254 450 369 374 446 504Minorities 0 0 -6 1 2 5 0 0 0 0Net income (reported) 334 392 324 172 255 455 369 374 446 504Post-tax exceptionals 0 0 0 -133 -12 0 0 0 0 0Net income (clean, continuing operations) 334 392 324 305 267 455 369 374 446 504




Exhibit 375: Arabian Cement is able to maintain its dividends despite large expenditures on the new plant Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 324 373 335 338 273 496 419 423 494 544Depreciation/Amortisation 81 49 68 110 125 186 191 196 221 238Net financial items 0 0 -8 -10 -8 -54 -48 -47 -44 -34Taxes paid -18 -10 -10 -18 -10 -11 -9 -10 -11 -13Other items 23 29 11 25 18 17 5 5 5 5

Change in working capital 3 72 -213 14 -83 -101 80 40 16 22Cash flow from operations 413 513 183 458 316 533 637 608 681 762

Capex -180 -787 -839 -987 -328 -115 -407 -410 -417 -142Capex/D&A 222.4% 1602.7% 1242.7% 899.0% 262.5% 62% 213% 208% 189% 60%capex/sales (%) 24.1% 109.1% 91.5% 133.9% 44.1% 10.3% 35.9% 35.0% 31.7% 10.0%Free cash flow pre-dividend 233 -274 -656 -529 -12 418 230 199 264 620Free cash flow pre-dividend/revenues (%) 31.2% -38.0% -71.6% -71.8% -1.7% 37.8% 20.2% 17.0% 20.1% 43.7%

Other investing activities 0 -143 -35 8 0 0 0 0 0 0Dividend -198 -228 -331 -235 -22 -160 -159 -162 -161 -192Cash surplus (post dividend) 35 -645 -1,022 -756 -34 258 71 37 103 428Other and financing 2 -31 575 138 6 0 0 0 0 0Change in net cash (net debt) 37 -676 -447 -618 -28 258 71 37 103 428Net debt (cash) -510 166 612 1,230 1,258 999 929 892 789 361



Tangible assets 853 1,591 2,361 3,099 3,316 3,245 3,463 3,678 3,875 3,780Intangible assets 0 29 64 17 16 15 14 12 11 9Other 178 353 270 304 258 260 262 264 266 268Non-current assets 1,031 1,972 2,694 3,420 3,589 3,520 3,739 3,954 4,152 4,058

Total assets 1,810 2,366 3,665 3,830 4,155 4,289 4,436 4,621 4,844 4,757


Long-term interest-bearing liabilities 0 185 873 1,074 1,191 933 862 825 722 294Pension provisions 28 35 36 36 36 36 36 36 36 36Other 0 0 0 0 0 0 0 0 0 0Non-current liabilities 28 220 909 1,110 1,227 969 898 861 758 330





Arab Potash Corporation (APOT.AM)


Matija Gergolet

[email protected]

Eshan Toorabally

[email protected]

Jordan: Agriculture

Rising fertilizer prices and capacity expansion support lively returns

Arab Potash Corporation (Arab Potash) should benefit from rising potash prices, as growth in food

consumption drives fertilizer demand worldwide. Debottlenecking at its existing facilities on the

Dead Sea should allow Arab Potash to grow its production by a further 10% from the 2011 level

over the next three years, and the company has potential to further expand its facilities over the

medium term.


Thanks to low-cost facilities (direct solar energy is used to obtain potash from the Dead Sea

brine through evaporation) and relative proximity to the Asian markets via the Aqaba port,

Arab Potash benefits from low-cost production, which allows it to generate first-quartile

CROCI returns.

The company expanded its capacity in 2010 to 2.45mt from 2.0mt, allowing it to benefit from

both rising volumes and prices. Over the medium term, the group could expand its capacity

further to 3mt, although this is likely to require investments of JD0.8-1 bn (Dow Jones

newswires, August 11, 2011). However, given the company’s prudent management style, we

believe that the group is not yet ready to undertake such expansion projects at current potash

prices.

The strong balance sheet (the company is net cash) and lack of other immediate expansion

projects (apart from low capex-high return debottlenecking) should allow Arab Potash to

implement an increasingly attractive dividend policy: we expect the dividend to triple by 2016

and, in the absence of further expansion projects, could go even higher.

Valuation: Significant value once 2012 and 2013 growth is taken into account

Arab Potash trades on attractive multiples relative to its history and to the sector, on 6.7x 2012E

EBITDA and 10.1x P/E, while offering a 6.0% 2012E dividend yield. We value the company applying

the stock’s 5-year median multiple of 11.6x (the global agricultural 5-year median EV/EBITDA

multiple is 10.2x) to the average of our 2012 and 2013 estimates to derive a 12-month price target

of JD69.8.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Arab Potash Company (APOT.AM)


Key data Current

Price (JD) 42.00

12 month price target (JD) 69.80



Free Float (%) 2.3


12/10 12/11E 12/12E 12/13E

Revenue (JD mn) 559.0 754.6 858.5 906.1

EBIT (JD mn) 181.5 303.7 359.6 382.1

EPS (JD) 1.94 3.46 4.17 4.57

EV/EBITDA (X) 11.6 8.3 6.7 5.9

P/E (X) 17.7 12.1 10.1 9.2

Dividend yield (%) 3.6 4.8 6.0 7.1

FCF yield (%) 6.4 8.3 10.2 11.5

CROCI (%) 18.1 30.0 32.7 33.1

EV/GCI (X) 2.5 2.7 2.4 2.2

Net Debt/EBITDA (X) (0.9) (1.1) (1.3) (1.7)

260

280

300

320

340

360

380

400

420

440

34

36

38

40

42

44

46

48

50

52



Arab Potash Company (L) MSCI EM EMEA (R)



Investment drivers: Potash prices and capacity expansion key drivers


Arab Potash’s key strength is the vast potash resource that it is allowed to exploit from the Dead

Sea and its low-cost position. Debottlenecking of its plant is likely to lead to gradual growth in

capacity until it reaches its technical limit of 2.6mt. Further expansion of its existing site is

possible but would require large capex.

Among its associates, Jordan Bromine (where Arab Potash has a 50% stake but is entitled to

receive 3%0-40% of profits) should benefit from rising bromine prices and a doubling of

capacity. As the Dead Sea contains as much as 50% of economically viable bromine reserves

worldwide, Jordan Bromine, which currently represents c.15% of global bromine supply, should

have further room to grow (the market size is c.US$3 bn).


The key risk for Arab Potash would be a fall in international wholesale prices.

The Jordanian government has in the past increased the fees payable by Arab Potash. In

addition to paying 1.5mn pa of lease fee for the potash production site, Arab Potash pays a

royalty to the Jordanian government of JD125 per tonne of exported potash (up to a limit of

25% of group profits). While further increases cannot be ruled out, given that the government’s

overall take from Jordanian potash is close to 50% (also taking into account corporate taxes and

its shareholdings), we believe that further material increases are unlikely.

Arab Potash is currently a low-cost producer (cash costs including freight of US$145/tonne in

2010 vs. high-cost producers in excess of US$200/tonne); its labour costs have been agreed until

2013, while fuel costs, which are out of the company’s control, account for not more than 20% of

overall costs. This cost position is, in our view, structural, linked to the quality of the potash

resource and the site. We are therefore less concerned about rising costs.

Industry context

Arab Potash is one of c.20 potash producers worldwide. The industry is relatively concentrated, with

four players (Canadian Potash, Mosaic, Uralkali-Silvinit and Belarusalkali) controlling c.70% of the

world capacity of 67mt. Market prices are generally set by either the Canadian or the Russian-

Belarussian export agents, with the minor companies, such as Arab Potash, typically following.

Demand has been growing by 1.7% pa over the last decade. Arab Potash is the seventh-largest

potash producer worldwide and has an annual production representing 3.7% of global capacity. The

company exploits the potash reserves in the Dead Sea (its installations are just opposite ICL’s),

where reserves are very sizeable, estimated at c.2,000mt. Unlike ICL, Arab Potash does not have

issues with water levels or salt storage at its installations.

Company description

Arab Potash was established in 1956 and in 1958 was granted

a 100-year concession to exploit minerals and salts of the

Dead Sea brine. Arab Potash’s main product is potash, where

its capacity was upgraded in 2010 to 2.45mt (from 2mt).

Further debottlenecking could increase its production capacity

to c.2.6mt. Arab Potash has other minor subsidiaries, among

which the most relevant is 100%-owned Arab Fertilizers

(Kemapco), which produces potash-based fertilizers, and

associates such as 50% of Jordan Bromine Company and 20%

of Nippon-Jordan Fertilizer. Arab Potash has c.2,300

employees.




India40%

China15%

Malaysia10%

Jordan8%

Indonesia7%

Other20%

Arab Potash

90%

Kemapco & other10%



Key financial ratios: Potash prices drive first-quartile returns; company is net cash

Exhibit 376: Arab Potash sales and margin performance, 2006-2015E

Exhibit 377: Arab Potash GCI and CROCI, 2006-2015E



Exhibit 378: Arab Potash shareholding and group structure

Exhibit 379: Arab Potash gearing, 2006-2015E: Net cash



0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

JDm

n


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1,000

1,200

1,400

1,600

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

JDm

n

GCI CROCI (RHS)

Potash Co of Saskatchewan

28%

Jordan Ministry of Finance

27%Arab Metals

20%

Islamic Development Bank Jeddah

5%

Social Security

Corporation5%

Iraq Government

5%

Lafico4%

Kuwait Investment Authority

4%

Others and free float

2%

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Applying sector-median multiples indicates high upside

Exhibit 380: We apply the stock own 5-year median EV/EBITDA to derive a 12-month target price of JD69.8


Arab Potash Basic MaterialsY/E December AgricultureJDmn Agriculture

Share price (JD) 42.0 12-month price target (JD) 69.8 $/JOD (spot) 0.71Market cap 3,499 Potential upside/(downside) 66%


EBITDA 2013E


EV/Sales 6.55 7.7 4.7 4.0 3.3 2.9 Potash and other (net of royalty) 425 448 11.6 4,928 5,192EV/EBITDA 11.88 16.9 11.6 8.3 6.7 5.9 Group EBITDA 425 448 11.6 4,928 5,192EV/EBIT 12.66 20.5 14.4 10.0 7.9 6.9 AddEV/DACF 13.52 19.3 13.7 9.3 7.6 6.7 Associates 79 99EV/NOPLAT 14.54 24.5 17.2 11.8 9.3 8.1 Investments 1 1EV/GCI 4.83 2.8 2.4 2.7 2.4 2.2 Less

Net debt/(cash) -572 -755P/E 14.63 23.2 17.7 12.1 10.1 9.2 Minorities 0 0P/B 7.08 4.2 3.5 3.5 2.9 2.6 Pensions and other 0 0P/CFO 13.78 19.2 14.4 10.2 8.8 8.2 Equity Value 5,580 6,047FCF yield 3% 1% 6% 8% 10% 11% No. of shares 83 83Dividend yield 1.3% 1.9% 3.6% 4.8% 6.0% 7.1% Implied per share valuation (JD) 67.0 72.6 69.8

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 39.5% 15.3% 18.1% 29.9% 32.6% 33.1% Sales growth 129% -44.0% 49.6% 35.0% 13.8% 5.5%

ROIC 79.5% 22.9% 27.0% 46.5% 55.4% 60.4% EBITDA growth 201% -53.9% 31.8% 64.4% 15.5% 5.4%

ROE 60.3% 19.1% 21.2% 31.6% 31.6% 29.9% EBIT growth 240% -59.3% 29.2% 67.4% 18.4% 6.3%

Net debt/EBITDA -0.4 -0.5 -0.9 -1.1 -1.3 -1.7 Net income growth 107% -58.2% 24.7% 78.1% 20.3% 9.7%

Net debt/equity -20.6% -12.6% -25.0% -38.6% -48.1% -55.4% EPS growth 107% -58.2% 24.7% 78.1% 20.3% 9.7%



Financials: Growth sustained by high potash prices and volume growth

We expect Arab Potash to deliver double-digit earnings growth through 2013 on the back of higher potash prices and capacity

expansion and debottlenecking. The associate line should also benefit from higher profitability at Jordan Bromine, where the

company is entitled to 30% of profits (40% from 2013), while the financial line benefits from the net cash position. Debottlenecking

should also lead to a moderate, yet very profitable, rise in volumes. We assume a dividend payout of c.60%, although this could be

even higher, in our view, if the company decides not to pursue further expansion. At 1H2011, Arab Potash’s revenues were up 22%,

EBITDA 46% and net income 79%. As of 9M2011, revenues were up 36% yoy, EBITDA +70% yoy and net income +85% yoy.

Exhibit 381: Rise in Potash prices lead to a step up in profits 2006-2015E P&L, JD mn


Exhibit 382: Arab potash capacity production and achieved potash prices


Arab PotashSummarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EArab Potash 210 253 595 345 507 677 761 804 888 920Kemapco & other 1 38 72 28 52 78 97 102 104 106Group revenues 210 291 668 374 559 755 859 906 993 1,026Growth -6.3% 38.7% 129.1% -44.0% 49.6% 35.0% 13.8% 5.5% 9.6% 3.4%



Share of associates -15 61 12 7 6 22 30 40 40 40Net financial items 6 5 -2 7 5 10 13 19 29 41Pre-tax (clean) 49 168 355 154 192 336 403 441 504 530Non-recurring Items 0 0 0 0 1 0 0 0 0 0Pre-tax (reported) 49 168 355 154 193 336 403 441 504 530Tax -10 -17 -44 -25 -30 -47 -56 -60 -70 -74Tax rate (%) 16% 16% 13% 17% 16% 15% 15% 15% 15% 15%


EPS (clean, fully diluted) 0.47 1.80 3.73 1.56 1.94 3.46 4.17 4.57 5.21 5.48DPS (clean, fully diluted) 0.35 0.70 0.70 0.70 1.25 2.00 2.50 3.00 3.25 3.50

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015ECapacity, mt 2.00 2.00 2.00 2.00 2.00 2.45 2.45 2.50 2.55 2.60 2.60APC Production, mt 1.84 1.70 1.80 2.00 1.12 1.19 2.28 2.33 2.40 2.47 2.50Production as % of capacity 92% 85% 90% 100% 56% 49% 93% 93% 94% 95% 96%Average international price for potash, $/tonne 190 204 246 568 466 396 530 595 600 620 620Achieved price for potash, $/tonne 175 181 193 444 500 344 424 458 474 508 521Revenues, JD mn 224 210 253 595 345 507 677 761 804 888 920



Exhibit 383: Arab Potash enjoys strong cash flow following the completion of the expansion project Balance sheet and cash flow statement, 2006-2015E, JD mn



EBIT 58 101 345 140 181 304 360 382 435 449Depreciation/Amortisation 23 21 23 29 42 64 65 65 66 66Net financial items 4 3 4 7 5 8 13 19 29 41Taxes paid -10 -17 -44 -25 -30 -47 -56 -60 -70 -74Other items 4 10 2 4 0 13 15 20 20 20

Change in working capital -10 -48 -65 61 38 -23 -12 -6 -10 -4Cash flow from operations 69 70 265 218 236 319 385 421 470 498


Other investing activities 0 0 0 0 0 0 0 0 0 0Dividend -17 -29 -58 -58 -58 -100 -167 -208 -250 -271Cash surplus (post dividend) 10 -16 98 -43 121 184 183 182 195 203Other and financing -44 9 -2 1 -6 0 0 0 0 0Change in net cash (net debt) -34 -7 96 -43 115 184 183 182 195 203Net debt (cash) -43 -36 -132 -90 -205 -389 -572 -755 -950 -1,152


Inventories 23 31 47 59 30 40 46 48 53 55Receivables 61 98 223 109 135 182 207 219 240 248Cash and cash equivalents 92 102 187 132 235 419 602 785 979 1,182Other 17 48 58 48 41 55 62 65 71 74Current assets 193 280 516 348 441 696 917 1,117 1,343 1,558


Total assets 400 543 873 886 1,008 1,245 1,451 1,636 1,841 2,036



268 389 642 715 820 1,009 1,189 1,362 1,546 1,732Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 400 543 873 886 1,008 1,245 1,451 1,636 1,841 2,036



Exhibit 384: We forecast Arab Potash to have a net cash position from 2011E-2015E, but liquidity is tied up in high receivables Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT 207 544 1,073 919 403 208 299 453 519 567Depreciation/Amortisation 92 121 260 314 297 273 264 255 243 213Net financial items 4 22 -3 -34 -23 -13 -4 5 42 131Taxes paid 0 -1 -14 -34 -10 -3 -4 -7 -8 -10Other items 19 54 213 118 -16 13 25 22 21 23

Change in working capital -327 772 -1,459 -887 -290 88 -112 -161 30 90Cash flow from operations -5 1,511 70 397 361 565 467 568 847 1,015

Capex -166 -314 -868 -300 -222 -206 -202 -199 -195 -192Capex/D&A 180.6% 259.8% 333.3% 95.7% 74.7% 76% 77% 78% 80% 90%capex/sales (%) 5.9% 7.3% 8.9% 3.9% 4.1% 4.1% 3.4% 2.8% 2.7% 2.6%Free cash flow pre-dividend -171 1,198 -797 97 139 359 264 369 652 823Free cash flow pre-dividend/revenues (%) -6.1% 28.0% -8.2% 1.3% 2.5% 7.2% 4.5% 5.2% 8.9% 11.4%

Other investing activities 2 -283 -37 66 86 0 0 0 0 0Dividend 0 -78 -339 -22 -31 -31 0 0 0 0Cash surplus (post dividend) -169 837 -1,174 141 194 328 264 369 652 823Other and financing 18 -40 0 128 -206 0 0 0 0 0Change in net cash (net debt) -150 797 -1,174 269 -13 328 264 369 652 823Net debt (cash) 29 -768 405 136 149 -179 -444 -813 -1,465 -2,288


Inventories 215 184 1,017 648 369 339 397 480 496 489Receivables 1,071 1,604 4,069 4,164 3,216 2,955 3,402 4,040 4,105 3,973Cash and cash equivalents 101 904 757 634 588 916 1,181 1,550 2,202 3,025Other 225 670 1,443 1,571 2,012 1,849 2,106 2,474 2,485 2,377Current assets 1,611 3,363 7,286 7,016 6,185 6,059 7,085 8,544 9,288 9,864

Tangible assets 416 750 1,381 1,363 1,272 1,249 1,227 1,205 1,183 1,162Intangible assets 179 514 495 448 391 347 308 273 247 247Other 129 214 298 284 832 832 832 832 832 832Non-current assets 724 1,477 2,174 2,094 2,495 2,428 2,367 2,310 2,262 2,241

Total assets 2,335 4,840 9,460 9,110 8,680 8,487 9,452 10,854 11,550 12,105

Short-term interest-bearing liabilities 157 209 1,102 770 627 627 627 627 627 627Accounts payables 922 1,015 2,119 2,031 661 607 711 859 888 876Other 313 2,037 3,789 3,200 3,848 3,536 4,082 4,862 4,955 4,811Current liabilities 1,391 3,261 7,010 6,001 5,135 4,769 5,419 6,348 6,470 6,313


784 1,250 1,893 2,392 2,698 2,796 2,995 3,295 3,658 4,109Minorities 26 138 225 336 404 479 595 769 980 1,241




Arabtec Holding (ARTC.DU)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Construction

Revenues to stabilize in 2012, but liquidity concerns and valuation not compelling

Arabtec Holding (Arabtec) is one of the largest construction contractors in the gulf region. The

company has diversified its backlog away from Dubai building construction to focus more

regionally. Despite our view that revenues will stabilize in 2012, the company’s liquidity position

has been affected by slow recovery of receivables and the stock’s outperformance in 2011 leaves

valuation less than compelling, in our view. We resume coverage with a Neutral rating.


Arabtec is in the top 5 contractors by work under execution in the GCC (source: MEED) despite

projects worth AED30 bn having been cancelled/suspended from its backlog since end-2008.

The company has reduced its backlog exposure from Dubai to 22% at 9M2011 vs. 85% in

2007. Saudi Arabia and Qatar now account for c.43% of the order backlog, which stands at

AED13.9 bn at end 9M11. It has also diversified away from pure building construction into

other segments such as marine construction and drainage/electromechanical work.

We forecast an 8% fall in revenues in 2011 to AED5 bn, before a rise in 2012 of 17%. Our

forecasts are in line with the latest guidance from the company for 2011 and 2012 top line. We

forecast revenue growth of 6% on average from 2011-15.

Arabtec’s liquidity position has been negatively affected by the slow recovery of receivables

following the Dubai real estate slowdown. The group’s recent decision not to go ahead with a

rights issue and US$150 mn convertible bond issue may signal an improvement in liquidity.

The main downside risk to our forecasts would be delays or cancellations of projects. The

main upside risk would be a faster pace of order wins than we currently expect.

Valuation: Trading below history on EV/EBITDAR, but above history and peers on P/E

Arabtec trades on a 2012E EV/EBITDAR of 5.5x, which is slightly below its 5-year median multiple

of 6.0x. On a P/E basis, the stock is trading on a 2012E multiple of 10.3x, which is above its 5-year

multiple of 7.6x, and marginally below global E&C peers on 10.8x. The stock is down 13% ytd,

outperforming the MSCI EM EMEA index by 4%. Based on our 2012E/13E EV/EBITDAR valuation

methodology and applying a 10% discount to the historical multiple of 6.0x (reflecting falling

profitability, CROCI moving into 4Q)), our 12-month price target is AED1.50, implying 10%

potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Arabtec Holding (ARTC.DU)


Key data Current

Price (AED) 1.37




Free Float (%) 55.0


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 5,463.7 5,020.1 5,878.7 7,104.9

EBIT (AED mn) 402.9 207.6 298.8 453.0

EPS (AED) 0.18 0.09 0.13 0.20

EV/EBITDA (X) 6.6 6.9 6.3 5.5

P/E (X) 9.2 15.4 10.3 6.8

Dividend yield (%) 0.0 0.0 0.0 0.0

FCF yield (%) 3.7 12.9 8.3 9.8

CROCI (%) 17.1 12.5 14.1 15.9

EV/GCI (X) 1.0 0.7 0.7 0.7

Net Debt/EBITDA (X) 0.2 (0.4) (0.8) (1.1)

260

290

320

350

380

410

440

470

500

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7



Arabtec Holding (L) MSCI EM EMEA (R)



Investment drivers: Regional backlog growth set against liquidity concerns


After the Dubai slowdown and subsequent cancellation or suspension of AED30 bn worth of

contracts, Arabtec’s order backlog has changed significantly over the last 3-4 years. Dubai now

accounts for less than 25% of the backlog vs. a peak of 85% in 2007. Key markets include Saudi

Arabia, Qatar and Abu Dhabi, which together account for c.61% of the current backlog. In our

view, these three geographies will continue to grow in importance for Arabtec. We forecast total

project wins to grow on average by 6% pa from 2011-15. Arabtec has already shown it is

competitive in this area with the AED5 bn project won in 3Q2010 to build 5,000 villas in Riyadh.

An issue that has arisen since the Dubai slowdown has been a slowdown in receivables

collection. This has decreased the company’s liquidity position substantially, in our view.

Arabtec had impaired AED1.5 bn of ageing receivables at end-2010 and has another AED701 mn

of past due receivables. We forecast that Arabtec’s net working capital as a % of sales to have

increased to 20% at the end of 2011 from 5% in 2008 (though in line with 2010). So while we

forecast the company to have a net cash position from 2011, we believe liquidity is tied up in

receivables.

Partly to address this, Arabtec announced in January plans for a rights issue and a 5-year

US$150 mn convertible bond issue which would also have been used to fund expansion plans.

However, the company was recently quoted as stating (source: Reuters, October 6) that it no

longer needs to go ahead with these plans, which could be a signal that liquidity has improved.

The company is currently in a contract dispute with Meydan over the cancellation of the Meydan

Racecourse contract at end-2008. This is scheduled to be resolved in 1Q2012.


The main downside risks to our view would be further delays/cancellations coming through and

potential dilution to existing shareholders from future rights/convertible bond issues.

An upside risk to our forecasts would be a faster pace of contract wins than we currently expect.

Industry context

In terms of annual contracts awarded, the GCC construction market has grown by an average 26%

pa since 2004 to stand at, we estimate, US$142 bn at the end of 2010. We estimate that projects

ongoing in the whole MENA region currently stand at US$2.6 trillion, with the UAE, Saudi Arabia

and Iraq the biggest markets. E&C in the region is very fragmented with regional players competing

for projects across MENA. The biggest contracting groups in the GCC region and among Arabtec’s

biggest competitors are Saudi Binladin Group, Al Habtoor Leighton, Saudi Oger and Al Jaber.

Company description

Arabtec Holding was formed in 1975 and specialises in a

variety of construction segments including providing

construction equipment for commercial, residential and

mixed-use buildings. Arabtec also has significant expertise in

industrial and infrastructure works and in oil and gas, pipeline

construction, power generation, marine works and general

manufacturing facilities. Markets in which it operates include

Abu Dhabi, Dubai, Jordan, Qatar, Russia, Saudi Arabia, Syria

and Egypt. It was the first private construction firm to go

public in Dubai in 2005. Arabtec has c.60,000 employees.

Order backlog by geography (9M 2011)



Abu Dhabi17.0%

Bahrain1.4%

Dubai22.1%

Egypt2.6%India

5.4%Kuwait6.5%

Other1.3%

Qatar8.6%

Saudi Arabia35.2%

Building Constructio

n63%Precast

and Concrete

Production2%

Drainage and

Electromechanical Works26%

Marine Constructio

n6%

Trading & Others

3%



Key financial ratios: We forecast top line and margin stabilization in 2012

Exhibit 385: We expect sales and margins to stabilize in 2012

Exhibit 386: We forecast average CROCI of 15% from 2011 to 2015



Exhibit 387: Arabtec has a 55% free float and a 49% foreign ownership limit

Exhibit 388: We forecast Arabtec to have a net cash position going forwards



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Riad Burhan Taher Kamal

6%

Construction Products Holding

Company5%

Other Investors

34%Free Float55%

-3.5x

-3.0x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Trading above global peers on P/E

Exhibit 389: Arabtec trades on a 2012E P/E of 10.3x, which is above its 5-year median of 7.6x but below global peers on 10.9x


Arabtec Holding PJSC IndustrialsY/E December ConstructionAED mn Engineering & Construction

Price (AED) 1.37 12M target price (AED) 1.50 AED/$ (spot) 3.67Market cap 2,048 Potential upside/(downside) 10%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EBITDAR 2012E

EBITDAR 2013E

EV/EBITDAR multiple

Implied EV 2012E


EV/Sales 1.0 0.6 0.9 0.7 0.6 0.5 Group EBITDAR 645 808 5.4 3,476 4,354EV/EBITDAR 6.8 3.7 6.0 6.0 5.5 4.8 Group EBITDAR 645 808 5.4 3,476 4,354EV/EBIT 8.4 4.5 10.0 13.2 9.7 6.8 AddEV/DACF 6.0 3.5 6.2 5.9 5.3 4.7 Associates 3 3EV/NOPLAT 8.2 4.9 8.9 10.4 8.6 6.7 Investments 0 0EV/GCI 2.6 1.0 0.9 0.6 0.6 0.6 EV post associates and investments 3,479 4,358

Less 0 0P/E 7.6 3.7 9.2 15.4 10.3 6.8 Net debt/(cash) -444 -813P/B 3.9 1.2 0.9 0.7 0.7 0.6 Minorities 1,158 1,738P/CFO 4.8 2.3 3.9 4.3 3.5 2.8 Pensions and other 785 922FCF yield -9.4% 2.5% 3.7% 12.8% 8.3% 9.7% Equity Value 1,980 2,510Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% No. of shares 1,495 1,495



ROIC 56.7% 29.1% 14.7% 9.6% 12.5% 16.2% EBITDA growth 100.7% -7.5% -43.2% -31.3% 17.1% 25.9%

ROE 61.0% 23.1% 12.1% 4.7% 6.9% 9.5% EBIT growth 97.4% -14.3% -56.2% -48.5% 43.9% 51.6%

Net debt/EBITDA 0.3 0.1 0.2 -0.4 -0.8 -1.1 Net income growth 79.0% -18.2% -65.2% -51.1% 49.8% 50.1%

Net debt/equity 19.1% 5.0% 4.8% -5.5% -12.4% -20.0% EPS growth 79.0% -18.2% -65.2% -51.1% 49.8% 50.1%



Financials: After a decline in revenues in 2011E, we forecast resumed growth in 2012E

After significant falls in revenues of 21% and 29% in 2009 and 2010, respectively, following the Dubai slowdown, we forecast

another more moderate fall in revenues for 2011 (-8%). Our AED5 bn forecast is in line with the company’s guidance at the 2Q2011

results. We forecast an increase in revenues in 2012, driven partly by the large residential project won in Saudi Arabia in 2010

starting to contribute to the top line. We forecast another EBITDA margin decline in 2011 to 9.6% from 12.8% in 2010 reflecting a

more competitive market, but stabilization in 2012 followed by a gradual recovery.

At the 9M2011 results, Arabtec’s revenues fell by 14% yoy to AED3.5 bn, driven mainly by a fall in building construction. The group

EBIT margin fell to 3.9% from 8.4% a year earlier.

Exhibit 390: We forecast average revenue growth of 6% for Arabtec from 2011E-15E

2006-2015E P&L, AED mn



Building Construction 2,810 4,273 8,442 6,573 4,272 3,418 4,002 4,837 5,003 4,931Precast and Concrete Production 0 0 607 368 162 130 152 183 190 187Drainage and Electromechanical Works 0 0 958 1,149 1,382 1,451 1,700 2,054 2,124 2,094Marine Construction 0 0 375 129 155 311 364 439 455 448Trading & Others 0 0 381 167 121 151 177 214 221 218Elimination 0 0 -1,042 -721 -629 -440 -515 -623 -644 -635Group revenues 2,810 4,273 9,722 7,665 5,464 5,020 5,879 7,105 7,348 7,242Growth 9.5% 52.1% 127.5% -21.2% -28.7% -8.1% 17.1% 20.9% 3.4% -1.4%

Group EBITDA (clean) 299 664 1,333 1,233 700 480 563 708 762 780Group EBITDA margin 10.6% 15.5% 13.7% 16.1% 12.8% 9.6% 9.6% 10.0% 10.4% 10.8%

Group EBIT (clean) 207 544 1,073 919 403 208 299 453 519 567Group EBIT margin 7.4% 12.7% 11.0% 12.0% 7.4% 4.1% 5.1% 6.4% 7.1% 7.8%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 12 35 23 20 0 4 21 27 63 154Pre-tax (clean) 219 579 1,096 939 403 211 320 480 583 721Non-recurring Items 0 0 0 -308 35 -4 0 0 0 0Pre-tax (reported) 219 579 1,096 631 438 207 320 480 583 721Tax 0 -1 -16 -39 -6 -3 -4 -7 -8 -10Tax rate (%) 0% 0% 1% 6% 1% 1% 1% 1% 1% 1%

Profit after tax (reported) 219 578 1,080 592 432 204 315 473 574 711Minorities -2 -42 -122 -97 -124 -75 -116 -174 -211 -261Net income (reported) 217 535 958 495 307 129 200 300 363 450Post-tax exceptionals 0 0 0 -289 35 -4 0 0 0 0Net income (clean, continuing operations) 217 535 958 784 273 133 200 300 363 450




Exhibit 391: We forecast Arabtec to have a net cash position from 2011E-2015E, but liquidity is tied up in high receivables Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT 207 544 1,073 919 403 208 299 453 519 567Depreciation/Amortisation 92 121 260 314 297 273 264 255 243 213Net financial items 4 22 -3 -34 -23 -13 -4 5 42 131Taxes paid 0 -1 -14 -34 -10 -3 -4 -7 -8 -10Other items 19 54 213 118 -16 13 25 22 21 23

Change in working capital -327 772 -1,459 -887 -290 88 -112 -161 30 90Cash flow from operations -5 1,511 70 397 361 565 467 568 847 1,015

Capex -166 -314 -868 -300 -222 -206 -202 -199 -195 -192Capex/D&A 180.6% 259.8% 333.3% 95.7% 74.7% 76% 77% 78% 80% 90%capex/sales (%) 5.9% 7.3% 8.9% 3.9% 4.1% 4.1% 3.4% 2.8% 2.7% 2.6%Free cash flow pre-dividend -171 1,198 -797 97 139 359 264 369 652 823Free cash flow pre-dividend/revenues (%) -6.1% 28.0% -8.2% 1.3% 2.5% 7.2% 4.5% 5.2% 8.9% 11.4%

Other investing activities 2 -283 -37 66 86 0 0 0 0 0Dividend 0 -78 -339 -22 -31 -31 0 0 0 0Cash surplus (post dividend) -169 837 -1,174 141 194 328 264 369 652 823Other and financing 18 -40 0 128 -206 0 0 0 0 0Change in net cash (net debt) -150 797 -1,174 269 -13 328 264 369 652 823Net debt (cash) 29 -768 405 136 149 -179 -444 -813 -1,465 -2,288


Inventories 215 184 1,017 648 369 339 397 480 496 489Receivables 1,071 1,604 4,069 4,164 3,216 2,955 3,402 4,040 4,105 3,973Cash and cash equivalents 101 904 757 634 588 916 1,181 1,550 2,202 3,025Other 225 670 1,443 1,571 2,012 1,849 2,106 2,474 2,485 2,377Current assets 1,611 3,363 7,286 7,016 6,185 6,059 7,085 8,544 9,288 9,864

Tangible assets 416 750 1,381 1,363 1,272 1,249 1,227 1,205 1,183 1,162Intangible assets 179 514 495 448 391 347 308 273 247 247Other 129 214 298 284 832 832 832 832 832 832Non-current assets 724 1,477 2,174 2,094 2,495 2,428 2,367 2,310 2,262 2,241

Total assets 2,335 4,840 9,460 9,110 8,680 8,487 9,452 10,854 11,550 12,105

Short-term interest-bearing liabilities 157 209 1,102 770 627 627 627 627 627 627Accounts payables 922 1,015 2,119 2,031 661 607 711 859 888 876Other 313 2,037 3,789 3,200 3,848 3,536 4,082 4,862 4,955 4,811Current liabilities 1,391 3,261 7,010 6,001 5,135 4,769 5,419 6,348 6,470 6,313


784 1,250 1,893 2,392 2,698 2,796 2,995 3,295 3,658 4,109Minorities 26 138 225 336 404 479 595 769 980 1,241




Aramex (ARMX.DU)


Eshan Toorabally CFA

[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Logistics

Strong market positions, high CROCI and EM exposure

Aramex has a very strong market position in the Middle East in the logistics segments in which it

operates. We believe that Aramex’s c.80% revenue exposure to emerging markets (MENA and

Asia) gives it the opportunity to grow revenues organically by 10%-15% annually and also pursue

inorganic growth opportunities. The company generates high CROCI, which is helped by the low

asset intensity of its business model. We believe these strengths are not fully reflected in the

stock’s valuation and resume coverage with a Buy rating.


Aramex has very strong market shares in its International Express business (c.25% in the

markets in which it operates) and Domestic Express business (varying between 50% and 70%

depending on the market). This strong market positioning will, in our view, allow Aramex to

continue to generate CROCI of above 15%, which places the company in the top quartile of

our MENA non-financials coverage.

With c.80% of its revenues coming from fast-growing markets (MENA and Asia), we think that

Aramex will benefit from strong top-line growth in coming years. We forecast the company’s

revenues to grow by an average of 13% from 2011 to 2015.

The company aims to grow organically and through small and medium-sized acquisitions to

expand its global network further. Africa and Asia are the geographies the company is

focused on and successful execution of this strategy will represent upside to our current

forecasts.

The main downside risk to our view would be lower global GDP than we currently expect.

Valuation: Trading below historical EV/EBITDA multiples in 2012E

Aramex trades on a 2012E EV/EBITDA of 8.5x, below its five-year historical median multiple of

13.7x, but above global logistics and air freight peers under Goldman Sachs’ coverage, which are

trading on a median multiple of 6.2x. The stock is down 12% YTD, outperforming the MSCI

EEMEA by 5%. Based on our 2012/13E EV/EBITDAR methodology and applying the stock’s

historical EV/EBITDAR median multiple of 10.6x, our 12-month price target is AED3.31, which

implies 82% potential upside. Our rating is Buy.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Aramex (ARMX.DU)


Key data Current

Price (AED) 1.82




Free Float (%) 90.1


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 2,212.0 2,553.6 2,814.9 3,122.0

EBIT (AED mn) 226.5 236.3 284.2 327.9

EPS (AED) 0.14 0.14 0.17 0.20

EV/EBITDA (X) 9.8 10.2 8.5 7.3

P/E (X) 12.4 12.6 10.6 9.1

Dividend yield (%) 4.4 4.3 5.1 5.9

FCF yield (%) 4.9 5.0 7.8 11.6

CROCI (%) 17.7 16.1 17.1 18.2

EV/GCI (X) 1.3 1.2 1.1 1.0

Net Debt/EBITDA (X) (1.9) (1.8) (1.7) (1.9)

260

290

320

350

380

410

440

470

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2



Aramex (L) MSCI EM EMEA (R)



Investment drivers: Aramex is making a push into Africa


Aramex has high market shares in the Middle East, giving it a strong position in a fast-growing

and prosperous market. About 9% of its revenues in 2011E will come from Asia, which means

that c.80% of revenues are linked to fast GDP growth markets. The company is looking to

expand its global network through further geographical expansion into Africa, CIS, India and

other Asia. Aramex aims to be the leading emerging market logistics company.

Aramex’s focus on Africa is evidenced by recent acquisitions made in Kenya. We believe

Aramex will continue to focus on this continent through 2012 by expanding further, either

organically or inorganically. It sees various opportunities in Africa, such as bringing in e-

commerce and warehousing expertise or connecting these markets to its global network.

Compared with global peers, Aramex uses an asset-light model in which it does not own planes

or trucks. The company believes that its customers look above all to pricing and reliability of

service and, in the markets in which it operates, believes that it can achieve this adequately by

using commercial aircraft and independent trucking.

Aramex has historically focused on smaller or medium-sized acquisitions to support its organic

growth, although its strong net cash position could support a larger acquisition, in our view.

Aramex tends to target inexpensive asset-light companies with good margins (at least in line

with Aramex’s own margins), and a strong management team and track record.

Aramex has generated an average CROCI of 16% since 2005 and we forecast an improvement to

an average of 18% for 2011-15, driven by revenue growth and margin improvement from

operational leverage.


Our economists currently forecast global GDP growth of 3.5% for 2012. Lower economic growth

than this would be a downside risk to our forecasts.

2011 has been challenging for Aramex as some of its MENA operations have been adversely

affected by political unrest. Prolonged uncertainty into 2012 would be a downside risk.

Industry context

Logistics is a supply chain process that manages goods/products from the point of origin to the

point of delivery. Logistics can be split into Courier and Express Delivery, Freight Forwarding and

Supply-Chain Management (SCM). Aramex’s main competitors are global players such as UPS, Fed

Ex and DHL. International and Domestic Express markets where Aramex operates are well

consolidated, whereas Freight Forwarding is much more fragmented.

Company description

Aramex (formerly known as Arab International Logistics

Company) was established in 1982. It is a global provider of

comprehensive logistics and transportation solutions. The

range of services offered by Aramex includes international

and domestic express delivery, freight forwarding, logistics

and warehousing, records and information management

solutions, e-business solutions, and online shopping services.

Its main hubs are in Dubai, Amman, Hong Kong, Liege,

London, New York and Singapore. The company was publicly

listed for the second time in 2002. Aramex has over 8,675

employees, having more than doubled from c.4,000 in 2005.




International Express

38%

Freight Forwarding

40%

Domestic Express

12%

Logistics4%

Others6%

Middle East and North

Africa71%

Europe18%

North America

2%

Asia9%



Key financials: We expect Aramex to steadily grow its top line in the coming years

Exhibit 392: We expect Aramex to grow sales by 14% per annum on average

Exhibit 393: We forecast Aramex to generate high-double-digit CROCI



Exhibit 394: Aramex has a foreign ownership limit of 49%

Exhibit 395: We forecast Aramex to consolidate its net cash position



0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Levant Logistics Holdings

10%

Free Float90%

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Our 12-month target price implies 82% potential upside

Exhibit 396: Aramex trades at a 2012E EV/EBITDA of 8.5x and P/E of 10.6x, which is below its five-year medians of 13.7x and 18.4x respectively


Aramex TransportationY/E December LogisticsAEDmn Logistics

Price (AED) 1.82 12-month target price (AED) 3.31 AED/$ (spot) 3.67Market cap 2,665 Potential upside/(downside) 82%

Valuation 2008 2009 2010 2011E 2012E 2013E Target price calculation EBITDAR 2012E

EBITDAR 2013E

EV/EBITDAR multiple

Implied EV 2012E

Implied EV 2013E Target price

EV/Sales 1.4 1.0 1.2 1.2 1.1 0.9 Group EBITDAR 451 516 10.6 4,782 5,471EV/EBITDA 13.7 7.7 9.8 10.2 8.5 7.3 Group EBITDAR 451 516 10.6 4,782 5,471EV/EBIT 17.2 9.4 11.9 12.5 10.5 8.9 AddEV/DACF 9.9 5.9 7.5 8.1 6.9 5.9 Associates 19 18EV/NOPLAT 13.3 7.3 9.3 9.6 8.2 7.1 Investments 4 4EV/GCI 1.3 0.7 1.0 0.9 0.8 0.7 EV post associates and investments 4,804 5,493

Less 0 0P/E 18.4 9.6 12.4 12.6 10.6 9.1 Net debt/(cash) -600 -757P/B 1.9 1.1 1.4 1.4 1.3 1.2 Minorities 39 54P/CFO 11.3 6.6 8.4 9.2 7.7 6.6 Pensions and other 890 980FCF yield 5.1% 12.5% 4.9% 5.0% 7.7% 11.6% Equity Value 4,475 5,217Dividend yield 0.0% 0.0% 4.4% 4.3% 5.1% 5.9% No. of shares 1,464 1,464




ROE 10.9% 12.3% 12.1% 11.5% 12.9% 13.9% EBIT growth 22.5% 17.5% 10.0% 4.3% 20.3% 15.4%

Net debt/EBITDA -1.4 -1.9 -1.9 -1.8 -1.7 -1.9 Net income growth 21.2% 25.1% 10.7% 3.3% 19.2% 15.9%

Net debt/equity -21.0% -29.5% -29.6% -27.6% -29.1% -33.9% EPS growth 21.2% 25.1% 10.7% 3.4% 19.2% 15.9%



Financials: We forecast average revenue growth of c.13% pa through 2015

Driven by its c.80% MENA and Asian sales exposure, we expect Aramex to grow its revenues by 13% pa from 2010 to 2015 on

average. We believe its asset-light business model will allow the company to generate strong FCF and continue to generate CROCI

in the high double digits. We expect Aramex’s net cash position to more than double by 2015 versus 2010. There is also ample

balance sheet headroom to pursue sizeable acquisitions, although the company has previously stated that it prefers to focus on

small and medium-sized acquisitions.

In 3Q2011, the company grew revenues by 19%, with a net profit margin of 7.4%, below the 9.2% achieved in 2010. Margins have

been affected partly by an increase in overheads due to salaries having been increased in April for the first time in three years. We

forecast a fall in the full-year net profit margin in 2011 to 8.3%, before a recovery to 8.9% in 2012E.

Exhibit 397: We forecast slow improvement in Aramex’s EBITDA margin from 2010 to 2015

Aramex 2006-15E P&L, AED mn



International Express 597 753 905 922 1,001 1,196 1,314 1,452 1,644 1,884Freight Forwarding 709 955 1,071 925 1,100 1,240 1,351 1,483 1,663 1,886Domestic Express 177 225 296 317 346 384 420 461 517 588Logistics 53 112 142 128 105 110 120 132 149 169Others 138 117 135 153 168 183 196 210 222 233Elimination -310 -379 -469 -484 -508 -559 -587 -616 -647 -679Group revenues 1,364 1,784 2,080 1,961 2,212 2,554 2,815 3,122 3,549 4,081Growth 197.2% 30.8% 16.6% -5.7% 12.8% 15.4% 10.2% 10.9% 13.7% 15.0%



Share of associates 0 0 0 0 0 0 0 0 0 -1Net financial items 4 8 5 12 18 18 19 24 57 108Pre-tax (clean) 113 151 180 218 245 254 303 351 449 573Non-recurring Items 0 0 0 0 0 0 0 0 0 0Pre-tax (reported) 113 151 180 218 245 254 303 351 449 573Tax -4 -9 -11 -11 -15 -17 -20 -24 -30 -38Tax rate (%) 4% 6% 6% 5% 6% 7% 7% 7% 7% 7%

Profit after tax (reported) 109 141 169 207 230 237 283 328 419 535Minorities -14 -20 -22 -22 -25 -26 -31 -36 -46 -59Net income (reported) 95 122 147 184 204 211 251 291 372 475Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 95 122 147 184 204 211 251 291 372 475




Exhibit 398: We forecast Aramex to more than double its net cash position from 2010 to 2015 Aramex balance Sheet and cash flow statement, 2006-15E, AED mn



EBIT 109 143 175 206 226 236 284 328 392 466Depreciation/Amortisation 25 36 44 46 49 53 64 74 85 85Net financial items 8 4 2 12 15 16 17 21 54 105Taxes paid -4 -8 -6 -12 -10 -17 -20 -24 -30 -38Other items 7 18 24 16 19 2 2 3 2 2

Change in working capital -59 -47 -4 9 -38 -17 -13 -15 -21 -26Cash flow from operations 85 146 236 277 261 273 334 387 483 594


Other investing activities -166 0 -3 -26 -36 -10 0 0 0 0Dividend 0 -14 -14 -14 -22 -132 -135 -157 -178 -222Cash surplus (post dividend) -136 33 122 184 67 -8 73 157 220 288Other and financing -20 -16 -11 -7 -11 0 0 0 0 0Change in net cash (net debt) -157 17 111 177 56 -8 73 157 220 288Net debt (cash) -173 -191 -302 -479 -535 -527 -600 -757 -977 -1,265


Inventories 0 0 0 0 0 0 0 0 0 0Receivables 262 319 346 349 404 466 514 570 648 745Cash and cash equivalents 223 239 344 502 555 555 628 785 1,005 1,293Other 78 96 98 87 98 113 124 138 157 180Current assets 563 654 788 938 1,056 1,134 1,266 1,493 1,810 2,219

Tangible assets 128 193 240 247 332 430 493 493 493 493Intangible assets 807 807 808 859 872 871 870 869 868 867Other 14 21 9 14 26 25 25 25 24 24Non-current assets 950 1,021 1,057 1,120 1,230 1,327 1,389 1,387 1,386 1,384

Total assets 1,512 1,675 1,845 2,058 2,286 2,461 2,655 2,880 3,196 3,603







Bahrain Telecommunications Company (Batelco)

(BTEL.BH)


Matija Gergolet

[email protected]


[email protected]

Bahrain: Telecoms

Restructuring potential, execution risk, attractive valuation

Bahrain Telecommunications Company (Batelco) has a mixed bag of opportunities and challenges

ahead: among the challenges are the ongoing competitive pressures in Bahrain and uncertainties

regarding its Saudi and Indian operation; on the other hand, it has been able to build significant

positions in Jordan and Yemen. The new management has the opportunity to unlock value by

restructuring the business. Given the compelling valuation and 10% dividend yield, we initiate

with a Buy.


While domestically Batelco is suffering increasing competition in mobile and a shrinking

fixed-line business, in Jordan, its second-largest market, its business is performing well. The

large weight in the overall mix of the domestic business implies low growth rates going

forward for the group, however.

The new management team, with a new CEO starting in October, is likely to review Batelco’s

existing businesses and international platform. So far, Batelco’s biggest success has been in

Jordan. While the company should be well supported by the strong balance sheet (net cash)

and continue to pay high dividends on the back of the strong domestic cash flows, the new

management team could look to restructure parts of the business.

Exposure to the Yemen and Indian markets, both of which are underpenetrated, represent

significant medium-term opportunities, yet execution risks remain high. The company in April

decided to put the Indian operation up for sale. The investment in the fixed-line Saudi

operator Atheeb has also proven loss making so far and has been put up for sale.

Valuation: Stock trading on 8.1x 2012E P/E, 10% dividend yield and is net cash

Batelco’s valuation appears undemanding, with the stock trading on just 3.1x 2012E EBITDA (our

EV/EBITDA adjusts for the value of the associates). Batelco is also at a discount to other telecoms,

on 8.1x 2012E P/E vs. the peer group of 8.5x, while offering a 10% dividend yield.

Our price target is based on an EV/EBITDA methodology adjusted for tax and growth. The ongoing

margin pressure in Bahrain leads us to apply a 5.9x 2012/13E EBITDA (compared with the

historical median multiple of 6.3x), which produces a 12-month price target of BD0.61.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Bahrain Telecom (BTEL.BH)


Key data Current

Price (BD) 0.39

12 month price target (BD) 0.61



Free Float (%) 22.8


12/10 12/11E 12/12E 12/13E

Revenue (BD mn) 340.3 324.2 315.3 311.6

EBIT (BD mn) 106.5 84.3 71.3 72.9

EPS (BD) 0.06 0.05 0.05 0.05

EV/EBITDA (X) 4.0 2.9 3.1 2.9

P/E (X) 9.4 7.4 8.1 7.7

Dividend yield (%) 8.0 10.2 10.2 10.2

FCF yield (%) 19.4 19.4 16.7 17.9

CROCI (%) 20.2 16.5 14.2 14.0

EV/GCI (X) 0.9 0.6 0.5 0.5

Net Debt/EBITDA (X) (0.6) (0.7) (1.0) (1.2)

260

310

360

410

460

510

560

0.30

0.35

0.40

0.45

0.50

0.55

0.60



Bahrain Telecom (L) MSCI EM EMEA (R)



Investment drivers: Looking for an international growth platform


Batelco’s strong domestic position allows for solid cash flow generation and high capex

efficiency (capex/sales only 8.5% in 2010), thus leading to high FCF. The key issue (and, we

believe, ambition) is how to reinvest this domestic cash flow to create a strong international

company or at least a niche regional player.

Batelco, together with Kingdom Holding of Saudi Arabia, has submitted a bid for 25% of Zain

Saudi Arabia, the third mobile operator in the kingdom, for US$950 mn. The due diligence was

completed at the end of September and, at the end of the process, Batelco decided not to carry

on with the acquisition.


In addition to competitive pressure domestically, the key risks are linked to the group’s

investments in Saudi Arabia (Atheeb) and India (S-tel). Atheeb requires a capital increase of

US$313 mn by year-end as its losses have exceeded the company capital. The shares have been

suspended from trading and Batelco has categorized this investment as for sale. Batelco has

committed to contribute its share of the capital increase with BD17.7 mn and has also existing

bank guarantees for its Saudi investment for BD36.9 mn.

In India, Batelco put up its associate for sale in April. Certain regional government have

commenced litigation against S-tel saying that the company was ineligible to be granted the

Unified Access service. The company has taken legal action to defend its position.

Batelco’s Yemen associate (Sabafone) could potentially suffer from further political instability in

the country; however, Sabafone has remained profitable through 2Q.

Industry context

Batelco is the incumbent in Bahrain, with a 45% market share in the mobile segment and 770,000

customers at the end of 2010. Its competitors are Zain and Viva (Saudi Telecom). The penetration

rate in Bahrain is high at c.130%, yet it has been falling in recent years as the number of mobile

customers in Bahrain has stabilized around 1.4-1.5mn. The second-largest market for Batelco is

Jordan, where it operates under the Umniah brand, competing with Zain and Jordan Telecom

(Orange mobile), and where its customers have reached 2.3mn. All three players have between 30%

and 40% market shares, yet Batelco is so far the only operator that has not yet launched 3G services.

Batelco also has a 27% stake in Yemeni mobile operator Sabafone, which leads the market with a

65% market share – penetration rates in Yemen are among the lowest in the world at just 25%; and a

42.7% stake in S-tel in India where it has been awarded a C licence for rural areas. The Indian

associate has been put up for sale.

Company description

Batelco, founded in 1981, is Bahrain’s largest integrated

communication service provider. The company operates in six

countries: Bahrain, Jordan, Kuwait, Yemen (associate), India

(associate) and (an investment) Saudi Arabia. The company

had 9.2mn subscribers at the end of 2010, and this increased

to 10.3mn as of 1H2011. In mobile, Batelco is market leader in

Bahrain and Yemen, while it is slightly behind the market

leader in Jordan. The company offers fixed-line and

broadband operations in Bahrain, Jordan, Kuwait and Saudi

Arabia, the latter being loss making, however. The company

has c.1200 employees.




Bahrain66%

Jordan25%

Kuwait9%

Mobile 49%

Fixed line10%

Internet12%

Data communica

tion17%

Wholesale and other

12%



Key financial ratios: Falling margins and CROCI

Exhibit 399: Batelco sales and margin performance, 2006-2015E

Exhibit 400: Batelco GCI and CROCI, 2006-2015E



Exhibit 401: Batelco shareholding structure

Exhibit 402: Batelco gearing, 2006-2015E: Company remaining net cash



0%

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30%

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50%

60%

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50

100

150

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400

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(BD

mn)


0%

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200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(BD

mn)

GCI CROCI (RHS)

Bahrain Mumtalakat

Holding Company

37%

Amber Holdings

20%

General Organization

for Social Insurance -

Bahrain10%

The Pension Fund

Comission10%

Free Float23%

-1.8x

-1.6x

-1.4x

-1.2x

-1.0x

-0.8x

-0.6x

-0.4x

-0.2x

0.0x

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Batelco main subsidiaries and associates

Exhibit 403: Batelco main subsidiaries and associates; Atheeb is considered an investment


Fully consolidated Trade name Stake Business Mobile customers end 2010, '000

Data and broadband customers, end 2010, '000 Market position

Fully consolidatedBahrain Batelco 100.0% Fixed, mobile and broadband 770 274 #1/3Jordan Umniah 96.0% Mobile, data, broadband 2,139 19 #2/3Kuwait QualityNet 44.0% Broadband 39 #1Equity accountedYemen Sabafon 26.9% Mobile 3,584 #1India S-tel 42.7% Mobile 2,320Saudi Arabia Atheeb 15.0% Fixed 104 #2



Valuation, growth and returns: Undemanding multiples

Exhibit 404: Batelco trades on inexpensive multiples while offering a 10% dividend yield


Batelco Telcoms ServicesY/E December Telecom WirelessBD mn Telecom Wireless

Share price (BD) 0.39 12-month price target (BD) 0.61 $/BD (spot) 0.377Market cap 567.4 Potential upside/(downside) 55%


EBITDA 2013E


EV/Sales 3.0 1.8 1.7 1.1 1.1 1.0 Batelco 107 108 5.9 633 638EV/EBITDA 6.6 4.2 4.0 2.9 3.1 2.9 Group EBITDA 107 108 5.9 633 638EV/EBIT 9.6 5.8 5.5 4.2 4.7 4.2 AddEV/DACF 6.3 4.6 4.3 3.6 3.9 3.6 Associates 126 128EV/NOPLAT 8.2 5.0 4.6 3.4 3.7 3.4 Investments 34 34EV/GCI 1.4 1.0 0.9 0.6 0.5 0.5 EV 793 800

Less 0 0P/E 9.4 8.0 9.4 7.4 8.1 7.7 Net debt/(cash) -107 -127P/B 2.4 1.7 1.6 1.1 1.1 1.1 Minorities 34 34P/CFO 7.4 5.4 5.4 4.7 5.3 5.1 Pensions and other 0 0FCF yield 9.8% 15.1% 15.9% 15.2% 12.9% 13.8% Equity Value 866 893Dividend yield 6.6% 8.6% 8.0% 10.2% 10.2% 10.2% No. of shares, mn 1,440 1,440

Implied per share valuation (BD) 0.60 0.62 0.61

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 22.2% 21.4% 20.2% 16.5% 14.2% 14.0% Sales growth 8.9% 8.7% -1.9% -4.7% -2.7% -1.2%

ROIC 22.8% 23.9% 23.5% 19.1% 16.9% 17.3% EBITDA growth 8.5% 5.1% -2.8% -16.8% -11.8% 0.9%

ROE 24% 22% 17% 15% 14% 14% EBIT growth 5.1% 10.3% -2.3% -20.8% -15.5% 2.3%

Net debt/EBITDA -0.3 -0.3 -0.6 -0.7 -1.0 -1.2 Net income growth 2.7% 0.8% -17.4% -11.9% -8.2% 5.2%

Net debt/equity -9% -8% -17% -18% -21% -24% EPS growth -4.5% -9.7% -17.4% -11.9% -8.2% 5.2%



Financials: We expect stable revenues and EBITDA over the next few years

We expect Batelco’s business to remain under pressure, both domestically in mobile and in fixed line, and then to start growing

again after 2013 as Jordan accounts for a bigger share of the business. Batelco also has two material associates in Yemen and in

India (S-tel) and a smaller, loss-making investment in Saudi Arabia (Atheeb). In 2Q2011, S-tel was classified as associate available

for sale and no longer contributes to the P&L, while a BD11.6 mn writeoff of Atheeb was booked directly against equity. Yemen has

been generally profitable and has already started paying dividends. In 9M2011, Batelco’s revenues fell by 4% and its EBITDA by 17%.

Associates reported a BD3.3 mn loss compared with a loss of BD9.5 mn in 9M2010.

Exhibit 405: We expect Batelco to have flat revenues and falling EBITDA margins ...

2006-2015E P&L, BD mn. 1 BD=US$0.377



Mobile 114 149 155 163 162 150 143 139 139 141Fixed 44 39 38 39 34 29 25 23 21 20Internet, data, wholesale, other 77 105 126 145 144 145 147 150 153 157Group revenues 235 293 319 347 340 324 315 312 313 318Growth 11.0% 24.7% 8.9% 8.7% -1.9% -4.7% -2.7% -1.2% 0.5% 1.6%



Share of associates 0 2 4 1 -13 -2 4 6 8 10Net financial items 6 9 8 2 1 1 1 1 3 5Pre-tax (clean) 91 105 110 112 94 83 76 80 87 95Non-recurring Items 0 0 0 0 0 0 0 0 0 0Pre-tax (reported) 91 105 110 112 94 83 76 80 87 95Tax 0 -1 -2 -3 -4 -3 -3 -3 -3 -3Tax rate (%) 0% 1% 2% 3% 4% 4% 4% 4% 4% 4%

Profit after tax (reported) 91 104 108 109 91 80 74 77 84 92Minorities -2 -3 -4 -4 -4 -4 -3 -3 -3 -4Net income (reported) 89 101 104 105 87 76 70 74 81 88Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 89 101 104 105 87 76 70 74 81 88




Exhibit 406: ... yet free cash flow generation should remain very strong Balance sheet and cash flow statement, 2006-2015E, BD mn. 1 BD=US$0.377



EBIT 84 94 99 109 106 84 71 73 76 80Depreciation/Amortisation 30 38 44 41 40 37 36 35 34 34Net financial items 4 -1 -1 0 1 1 1 1 3 5Taxes paid 0 -1 -2 -3 -4 -3 -3 -3 -3 -3Other items 3 11 8 8 6 2 2 4 5 6

Change in working capital 15 13 4 6 9 -3 -2 -1 0 1Cash flow from operations 136 153 153 162 158 118 106 110 116 123

Capex -40 -43 -46 -35 -29 -32 -32 -32 -31 -31Capex/D&A 132% 113% 104% 83% 73% 85% 90% 90% 90% 90%capex/sales (%) 16.8% 14.6% 14.4% 9.9% 8.5% 9.8% 10.3% 10.2% 9.9% 9.7%Free cash flow pre-dividend 97 110 107 127 130 86 73 78 85 92Free cash flow pre-dividend/revenues (%) 41.1% 37.7% 33.5% 36.6% 38.1% 26.7% 23.3% 25.1% 27.1% 28.9%

Other investing activities -151 -58 -26 -60 5 -18 0 0 0 0Dividend -61 -59 -56 -75 -73 -65 -58 -58 -58 -65Cash surplus (post dividend) -115 -6 24 -7 62 4 16 20 27 27Other and financing -12 -7 -7 7 -15 0 0 0 0 0Change in net cash (net debt) -127 -13 18 0 47 4 16 20 27 27Net debt (cash) -36 -23 -40 -40 -87 -91 -107 -127 -154 -182

0 0 0 0 0 0 0 0 0 0Summarised balance sheet

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EInventories 1 4 3 3 2 2 2 2 2 2Receivables 46 54 70 58 69 66 64 63 63 64Cash and cash equivalents 46 214 154 76 87 91 107 127 154 182Other 1 5 3 5 0 0 0 0 0 0Current assets 94 277 229 142 158 159 173 192 220 248


Total assets 481 735 715 673 661 658 671 689 716 745



Shareholders' equity 363 407 452 493 505 505 517 534 557 580Minorities 8 10 11 11 12 16 19 22 26 29

Total equity and liabilities 481 735 715 673 661 658 671 689 716 745



Ciments du Maroc (SCM.CS)



[email protected]

Matija Gergolet

[email protected]

Morocco: Construction

Attractive market positioning partly offset by higher fuel and energy costs

Ciments du Maroc has the second largest domestic market share and attractive market positioning

especially in south Morocco. However, we expect near-term margins to be under pressure owing

to higher forecast fuel and energy costs. We also do not see any immediate catalyst for stock price

movement and the valuation is not compelling on our estimates. We initiate with a Neutral rating.


With a production capacity of c. 5.8mn tonnes, Ciments du Maroc has a domestic market

share of 26% in the Moroccan cement industry and the strategic location of its cement

production plants gives it relatively more access to the industrial network in south Morocco

vs. competitors.

We forecast the company’s total volumes (cement, ready mix and aggregates) to increase

3.0% in 2011, 5.3% in 2012 and 7.3% in 2013 vs. 1.7% in 2010E as we expect activity in the

construction sector to increase on the back of the government’s incentives to revive its social

housing program, infrastructure and tourism. We forecast 4% sales growth in 2011, 8.5% in

2012 and 13% in 2013.

However, we expect operating margins to be lower than historical levels in the near term

owing to higher fuel and energy costs partly offset by higher volumes and cost savings at the

new Ait Baha plant. We forecast EBIT margins of 33% in 2011, 34% in 2012 and 36% in 2013

vs. 40% in 2010 and 42% in 2009.

We forecast Ciments du Maroc’s CROCI to average 11%-14% over 2011-15, which places the

company in 2nd quartile of our MENA non-financials coverage.

The downside risk to our view is pricing pressure from the two new cement plants of Ciment

de l’Atlas in Ben Ahmed and Beni Mellal. Upside risk to our view is higher than expected

domestic construction activity.

Valuation: Trading slightly below the historical multiple, no immediate catalyst

On our estimates, Ciments du Maroc currently trades at 9.4x 2012 EV/EBITDA vs. historical

median/global 5-year median of 10.9x/8.6x. The stock is down 17% ytd, but has outperformed

MSCI EEMEA by 2%. Based on our 2012E/13E EV/EBITDA valuation methodology; using historical

median multiple of 10.9x, we derive a 12-month price target of Dh1,268 implying 27% upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Ciments du Maroc (SCM.CS)


Key data Current

Price (Dh) 1,000.00

12 month price target (Dh) 1,267.51



Free Float (%) 17.3


12/10 12/11E 12/12E 12/13E

Revenue (Dh mn) 3,640.6 3,787.9 4,108.8 4,629.6

EBIT (Dh mn) 1,155.3 947.4 1,083.2 1,357.2

EPS (Dh) 64.85 53.41 60.45 77.37

EV/EBITDA (X) 10.3 10.8 9.4 7.5

P/E (X) 16.7 18.7 16.5 12.9

Dividend yield (%) 2.8 2.7 3.0 3.9

FCF yield (%) (0.1) 5.1 5.8 7.7

CROCI (%) 12.4 10.3 11.0 12.5

EV/GCI (X) 1.7 1.5 1.4 1.3

Net Debt/EBITDA (X) 0.6 0.6 0.3 (0.1)

260

310

360

410

460

510

1,000

1,050

1,100

1,150

1,200

1,250



Ciments du Maroc (L) MSCI EM EMEA (R)



Investment drivers: In line with industry dynamics


The government has initiated major programs including tax breaks, subsidies for developers

and buyers and has made available 3,853 hectares of land for social housing to bridge the 1mn

unit deficit in affordable housing in Morocco. We believe this initiative with the current goal of

building 200,000 units a year will drive cement industry demand through 2015. We currently

forecast a 5% CAGR in the domestic consumption of cement through 2015.

We forecast lower EBITDA margins than the 5-year historical average of 39% owing to a higher

price outlook for energy and fuel. We forecast EBITDA margins of 33% for 2011, 34% for 2012

and 36% for 2013.

Ciments du Maroc has consistently paid dividends historically and we expect the company to

increase its dividend payout ratio to 50% vs. the 5-year historical average of 46% given that we

expect positive FCF from 2011 following the completion of Ait Baha plant.

The company also benefits in terms of technology and expertise from its relationship with its

major shareholder (62.8%), Italcementi Group, the world’s fifth largest cement producer.


The entry of the new domestic player Ciment de ‘l Atlas and the revamp in capacity by existing

players resulted in an excess supply of 4.2mn tonnes for the industry in 2010. A continuation of

this trend could result in an oversupplied cement sector, which could in turn pressure the

pricing. However, it should be noted that construction slowed down in 2010 owing to floods and

lack of government initiatives. Higher-than-expected construction activity is an upside risk.

Industry context: Positive demand outlook threatened by increased number of players

The Moroccan cement industry has been growing at an 8% CAGR since 2002 owing to a consistent

increase in demand from the construction industry. 80% of cement demand is from residential

construction (including civil engineering for housing programme), 14% from infrastructure and 6%

from non-residential construction. The country’s current cement production capacity is 18.8mn

tonnes, while consumption is 14.6mn tonnes. Moroccan per capita cement consumption is 462kg vs.

540kg in North Africa.

The Moroccan cement industry is currently dominated by international players operating 13 cement

plants in Morocco running at an average utilization of c.78%. Most of the cement plants are located

in the north and northwest of Morocco catering to the region with the high cement consumption.

Lafarge has the highest domestic market share of 38.9%, followed by Ciments du Maroc with 26%;

Holcim Maroc has 24.5% while the new domestic player Ciment de l’Atlas has 2.9% market share.

Company description

Ciments du Maroc, a subsidiary of Italcementi Group, is the

second largest cement producer in Morocco and the largest

operator in ready-mix concrete and aggregate production

through its subsidiary Betomar. The company has c.26%

market share in domestic market and has four cement

production plants (D' Ait Baha, Agadir, Safi and Marrakech), a

grinding centre (Laayoune) and a bagging centre (Jorf Lasfar).

Ciments du Maroc has a production capacity of 5.7mn tonnes

and has an established network in south Morocco while the

competitors are concentrated in the north and northwest. The

company has c.1,080 employees.




Morocco100%

Cement and

Concrete100%



Key financial ratios: Falling leverage and improving but lower margins vs. history

Exhibit 407: We expect margins to be below peak through 2015E

Exhibit 408: Improving CROCI after the trough in 2011E



Exhibit 409: Ciments du Maroc shareholding and group structure

Exhibit 410: Falling leverage and net cash position post 2013E



0%

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25%

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45%

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0

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2,000

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6,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n


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2,000

4,000

6,000

8,000

10,000

12,000

14,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n

GCI CROCI (RHS)

Ciments Francais

(Italcementi)59%

Caisse Interprofessio

nnelle Marocaine de

Retraites8%

Fipar Holding6%

Abu Dhabi Fund for

Development5%

Procimar3%

Other2%

Free Float17%

-1.0x

-0.8x

-0.6x

-0.4x

-0.2x

0.0x

0.2x

0.4x

0.6x

0.8x

-30%

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-15%

-10%

-5%

0%

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Details of production facilities of Ciments du Maroc

Exhibit 411: Ciments du Maroc caters mostly to South West and West Morocco

Distribution of cement plants of Ciments du Maroc in Morocco

Source: Company data and Goldman Sachs Research

Exhibit 412: Ciments du Maroc increased capacity by 31% through the Ait Baha plant in 2010

Production, capacity and average revenue per ton for Ciments du Maroc, 2010-2015E

Source Company data and Goldman Sachs Research


LAAYOUNE

AGADIR

MARRAKECH

SAFI

Revenue Drivers 2010 2011E 2012E 2013E 2014E 2015EVolumes SoldCement (000 tons) 3,788 3,963 4,235 4,610 4,882 5,016Ready-mix (000 tons) 1,662 1,688 1,754 1,856 1,910 1,929Aggregates (000 tons) 2,574 2,615 2,717 2,876 2,959 2,989Total 8,024 8,266 8,705 9,342 9,751 9,934

Average revenue per ton sold 454 458 472 496 515 536Growth -0.8% 1% 3% 5% 4% 4%

Capacity (Cement+Clinker) 9,760 9,760 9,760 9,760 9,760 9,760



Valuation, growth and returns. At a premium to global peers, but lower than its history

Exhibit 413: Ciments du Maroc trades on a 2012E EV/EBITDA of 9.4x, above global peer 5-year historical median multiple of 8.6x, below history of 10.9x

Ciments du Maroc valuation, growth and returns summary


Ciments du Maroc IndustrialsY/E December ConstructionDhmn Construction: Building Materials

Share price (Dh) 1,000 12-month price target (Dh) 1,268 $/Dh (spot) 8.29Market cap 14,436 Potential upside (downside) 27%


EBITDA 2013E


EV/Sales 3.8 2.7 4.1 3.6 3.2 2.7 Cement and Concrete 1,399 1,682 10.9 15,250 18,338EV/EBITDA 12.2 6.4 10.3 10.8 9.4 7.5 Group EBITDA 1,399 1,682 10.9 15,250 18,338EV/EBIT 16.0 7.4 13.0 14.3 12.2 9.3 AddEV/DACF 18.7 10.0 14.7 14.8 13.0 10.5 Associates & Investments 1,615 1,615EV/NOPLAT 22.3 10.3 17.1 18.8 16.0 12.3 EV 16,865 19,952EV/GCI 3.1 1.3 1.7 1.5 1.4 1.3 Less

Net debt/(cash) 359 -187P/E 23.3 11.2 16.7 18.7 16.5 12.9 Pensions 0 0P/B 3.6 2.3 3.0 2.6 2.4 2.1 Minorities 23 27P/CFO 17.7 9.4 13.1 13.3 12.1 10.0 Provisions/other 0 0FCF yield -1.8% -2.5% -0.1% 4.5% 5.2% 6.9% Equity value 16,483 20,113Dividend yield 2.4% 3.7% 2.8% 2.7% 3.0% 3.9% No. of shares 14 14

Implied per share valuation, Dh 1,142 1,393 1,268


ROIC 32.3% 31.9% 20.9% 15.3% 17.0% 20.6% EBITDA growth -7.1% 37.7% -4.4% -13.8% 11.5% 20.2%

ROE 15.8% 21.5% 17.3% 14.2% 15.0% 17.4% EBIT growth -15.2% 57.1% -12.5% -18.0% 14.3% 25.3%

Net debt/EBITDA -0.1 0.3 0.6 0.6 0.3 -0.1 Net income growth -13.5% 48.2% -3.1% -17.6% 13.2% 28.0%

Net debt/equity -2.6% 10.8% 17.7% 12.8% 5.9% -2.8% EPS growth -13.5% 48.2% -3.1% -17.6% 13.2% 28.0%



Financials: Strong sales growth partially offset by margin constraints in the short term

We expect the company to deliver strong sales post 2011 due to government initiatives in construction sector and full fledged

capacity utilization of Ait Baha plant. We forecast sales growth of 8.5% growth in 2012 and 12.7% in 2013 on the back of volume

growth of 5.3% and 7.3% and growth in revenue per pack of 3% and 5% respectively. However, we believe margins will be lower

than 5-year historical average of 39% owing to the higher cost of fuel and energy.

Exhibit 414: We expect Ciment du Maroc revenues to grow 4% and 9% in 2011E and 2012 but operating margins below historical

average of 39% Ciments du Maroc, 2006-2015E P&L Dh mn



Group revenues 2,700 3,097 3,511 3,608 3,641 3,788 4,109 4,630 5,026 5,325Growth 11.2% 14.7% 13.4% 2.8% 0.9% 4.0% 8.5% 12.7% 8.6% 5.9%


Group EBIT (clean) 980 992 841 1,320 1,155 947 1,083 1,357 1,563 1,732Group EBIT margin 36.3% 32.0% 23.9% 36.6% 31.7% 25.0% 26.4% 29.3% 31.1% 32.5%

Share of associates 0 0 1 2 0 0 0 0 0 0Net financial items 66 74 75 36 94 82 82 134 312 626Pre-tax (clean) 1,047 1,065 917 1,358 1,249 1,029 1,165 1,491 1,874 2,358Non-recurring Items -24 -62 -25 -4 -94 0 0 0 0 0Pre-tax (reported) 1,022 1,003 892 1,354 1,155 1,029 1,165 1,491 1,874 2,358Tax -267 -289 -254 -384 -284 -253 -286 -366 -460 -579Tax rate (%) 26% 29% 29% 28% 25% 25% 25% 25% 25% 25%

Profit after tax (reported) 755 714 638 970 872 777 879 1,125 1,414 1,779Minorities -6 -4 -3 -6 -6 -6 -6 -8 -10 -13Net income (reported) 749 710 635 964 865 771 873 1,117 1,404 1,766Post-tax exceptionals -18 -44 -18 -3 -71 0 0 0 0 0Net income (clean, continuing operations) 767 754 652 966 936 771 873 1,117 1,404 1,766




Exhibit 415: Ciment du Maroc’s FCF turns positive in 2011 due to higher utilization and we expect the balance sheet to strengthen

in the forecast years Ciments du Maroc balance sheet and cash flow statement, 2006-2015E Dh mn



EBIT 980 992 841 1,320 1,155 947 1,083 1,357 1,563 1,732Depreciation/Amortisation 186 199 266 203 300 307 316 325 335 344Net financial items 66 74 75 36 94 82 82 134 312 626Taxes paid -267 -289 -254 -384 -284 -253 -286 -366 -460 -579Other items -39 -71 -67 -19 -67 0 0 0 0 0

Change in working capital -39 121 -170 314 -179 -1 -2 -4 -3 -2Cash flow from operations 887 1,025 690 1,470 1,020 1,083 1,193 1,447 1,746 2,122

Capex -163 -467 -961 -1,739 -1,032 -430 -442 -455 -468 -482Capex/D&A 88.0% 234.0% 361.7% 858.7% 343.7% 140% 140% 140% 140% 140%capex/sales (%) 6.1% 15.1% 27.4% 48.2% 28.3% 11.3% 10.8% 9.8% 9.3% 9.1%Free cash flow pre-dividend 723 558 -271 -270 -12 653 751 991 1,278 1,640Free cash flow pre-dividend/revenues (%) 26.8% 18.0% -7.7% -7.5% -0.3% 17.2% 18.3% 21.4% 25.4% 30.8%

Other investing activities 1 -383 0 0 2 0 0 0 0 0Dividend -306 -329 -329 -365 -402 -438 -393 -445 -568 -712Cash surplus (post dividend) 418 -154 -600 -634 -412 215 357 546 710 927Other and financing 0 0 0 7 0 0 0 0 0 0Change in net cash (net debt) 418 -154 -600 -627 -412 215 357 546 710 927Net debt (cash) -862 -708 -108 519 930 716 359 -187 -897 -1,823


Inventories 289 425 571 443 465 484 525 592 642 680Receivables 368 354 427 412 505 525 569 642 697 738Cash and cash equivalents 974 827 408 536 415 415 415 961 1,671 2,597Other 88 102 205 110 236 245 266 300 326 345Current assets 1,719 1,708 1,611 1,500 1,620 1,669 1,775 2,494 3,335 4,361

Tangible assets 996 1,262 1,979 3,529 4,259 4,391 4,526 4,664 4,806 4,952Intangible assets 288 287 287 286 286 277 269 261 254 246Other 1,312 1,696 1,712 1,722 1,725 1,724 1,724 1,724 1,724 1,724Non-current assets 2,595 3,245 3,978 5,538 6,269 6,393 6,519 6,650 6,784 6,922

Total assets 4,314 4,953 5,589 7,038 7,890 8,062 8,295 9,144 10,119 11,283

Short-term interest-bearing liabilities 112 118 171 184 575 575 575 575 575 575Accounts payables 377 441 602 448 507 527 572 645 700 741Other 255 448 439 669 672 699 759 855 928 983Current liabilities 743 1,007 1,213 1,301 1,754 1,802 1,906 2,075 2,203 2,300


Total common equity 3,478 3,862 4,172 4,774 5,242 5,580 6,064 6,741 7,582 8,641Minorities 12 11 10 19 21 22 23 27 33 41




Citadel Capital (CCAP.CA)


Matija Gergolet

[email protected]


[email protected]

Egypt: Diversified Financials

Uncertainty creates an overhang on individual investments of the fund; Neutral rating

Citadel Capital is a private equity fund which manages and co-invests in its platform companies.

The company has generated a 167% IRR on full exits and 105% IRR on partial exits of its

investments since 2004. However, we believe it will struggle to exit its investments at a profit in

the near term due to the political and economic uncertainty in its markets. We initiate with a

Neutral rating.


Citadel Capital is the only private equity fund in our coverage. The company generates

revenues through two major streams: (1) capital gains on its principal investments and (2) an

asset management business which earns advisory fees, management fees and carried interest

above the 12% hurdle rate.

Citadel has investments through 19 companies in 15 different industries including energy,

mining, agri-foods, cement, glassworks, transportation and financial services, and 42% of

these investments are greenfield investments. We view this strategy of investing in diverse

industries as lacking in focus and believe the company may struggle to generate profitable

returns from all the investments.

Assets under management (AUM) increased 9% by 4Q2010 since the IPO in December 2009

and rose another 1% in 1H2011. We view this increase in AUM as a positive trend given the

unstable political and economic environment in Citadel’s markets, especially Egypt.

However, the group’s recent £E1.05 bn right issue was not completely subscribed in the first

round and it had to initiate a second round among the shareholders to get the issue fully

subscribed, signalling a tighter financing environment.

We believe that, as with the delay of TAQA Arabia’s IPO, the current uncertain political and

economic environment will continue to push back planned exits by the company.

Valuation: Trading at a slight discount to 2012E book value at 0.91x

We derive a 12-month price target of £E4.12 using P/NAV methodology and assigning a discount

of 25% for the group’s diversified portfolio exposure. This implies potential upside of 33% and we

are Neutral rated on the stock.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Citadel Capital (CCAP.CA)


Key data Current

Price (£E) 3.11

12 month price target (£E) 4.12



Free Float (%) 44.8


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 94.1 119.0 124.8 130.9

EBIT (£E mn) (237.4) (39.7) (39.9) (40.0)

EPS (£E) (0.34) (0.26) (0.04) 0.04

EV/EBITDA (X) NM 37.8 37.7 39.8

P/E (X) NM NM NM 87.2

Dividend yield (%) 0.0 0.0 0.0 0.0

FCF yield (%) (24.1) (2.5) 7.7 6.8

CROCI (%) (25.1) (1.3) (1.4) (0.9)

EV/GCI (X) 2.1 0.8 0.8 0.8

Net Debt/EBITDA (X) -- -- -- --

260

290

320

350

380

410

440

470

3

4

5

6

7

8

9

10



Citadel Capital (L) MSCI EM EMEA (R)



Investment drivers: Lack of clarity on political and economic outlook creates uncertainty


We believe a major portion of Citadel’s top line will comprise advisory fees over the forecast

period as the company could struggle to exit its funds to realise capital gains. Our lack of

confidence on exiting the funds is due to the uncertainty in the political and economic

environment of Citadel’s markets.

The major companies in which Citadel has made investments are:

(1) ASEC Holdings – providing exposure to cement, engineering and construction and

contributing 27% of Citadel’s total investment value. The after-effects of the regime change

in Egypt has depressed cement demand and weighed on the backlog of the engineering and

construction segment, resulting in losses in 1H2011.

(2) TAQA Arabia – a profit-making energy distribution company focussed on gas and electricity

distribution and fuel marketing mostly in Egypt. Though not a mature business, the

company is in a relatively more advanced stage of development vs. others. Citadel planned

to exit TAQA through an IPO in early 2011, but had to freeze its plans due to the political

turmoil in the country.

(3) Gozour – focuses on production and distribution of agriculture, dairy and dry consumer

foods in Egypt and Sudan. The company has a 54% market share in non-UHT milk in Egypt

and a leading market share in confectionaries in Egypt and Sudan. The group reported

1H2011 revenues up 2% yoy despite the uncertain macro environment.


The key risk to Citadel is its ability to raise adequate financing to fund its greenfield projects.

Citadel currently operates in politically unstable economies and we believe this may pose a risk

to the exit timings and strategies of individual OSFs.

Lack of geographical diversification from Middle East and Africa poses a risk to Citadel’s

consolidated top line.

Given the diversified portfolio, we do not rule out M&A prospects for the company which may

translate into more upside to the stock price.

Industry context: Private equity activity sluggish but not dead

Private equity activity in MENA was shielded from the political turmoil in the region as most of the

funds are based out of the GCC which was mostly insulated. According to a survey conducted by

PWC, most of the general partners in funds are delaying exiting the funds until 2012 due to lack of

clarity on the global and regional outlook. The major players include Abraaj, Citadel, Etqaan.

Company description

Citadel Capital is a private equity firm incorporated in Egypt

and focused on opportunities in MENA. The company

manages 19 Opportunity-Specific Funds (OSF) that control

platform companies with investments, where it is a co-

investor with c.US$8.7 bn spanning 15 countries and c.15

industries including energy (oil production, refining, power),

mining, agri-foods, cement, transportation and financial

services. The company accounted for c.27.5% of all private

equity funds raised for investment in MENA in 2010. It became

public in 2009 and currently employs 78 people.




Egypt74%

Algeria8%

Emirates1%

Iraq1%

Sudan 15% Syria

1%

Investment Revenue

100%



Key financial ratios: Depressed sales and margins, low CROCI; improving gearing

Exhibit 416: We expect sales to be low due to a slowdown in top-line activity

Exhibit 417: We expect negative CROCI in the near term



Exhibit 418: Shareholding structure of Citadel Capital

Exhibit 419: Improving leverage after recent capital increase



-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n


-30%

-20%

-10%

0%

10%

20%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n

GCI CROCI (RHS)

Citadel Capital Partners

38%

Emirates International Investment Company

8%Suleiman Bin Abdul Mohsen Bin Abdullah Abanumay

7%Others

2%

Free Float45%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Net debt (cash) / equity



Valuation, growth and returns: Trading at 0.9x 2012E book value, lower than 2y history

Exhibit 420: Citadel Capital trades in line with global peers at 0.9x 2012E book value, but at a discount to its own history


Citadel Capital Financial ServicesY/E December Diversified Financials£Emn Multi-Sector Holdings

Share price(£E) 3.11 12-month price target (£E) 4.12 $/£E (spot) 5.98Market cap 2,711 Potential upside/(downside) 33%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation Investment cost P/BV Value Price target

EV/Sales nm 57.5 38.6 -9.4 -9.0 -9.1 Equity investments 4,066 1.1 4,474EV/EBITDA nm 165.7 -15.9 37.8 37.7 39.8 Convertible investments 480 1.3 622EV/EBIT nm -52.9 -15.3 28.3 28.2 29.9 Total Investments 4,546 1.1 5,096EV/DACF nm 36.9 -8.2 -62.7 -62.9 -97.9 Cash 270EV/NOPLAT nm -54.4 -15.3 28.3 28.3 29.9 Land, buildings 32EV/GCI nm 2.2 2.1 0.8 0.8 0.8 Due from platform companies and related parties 339

Total Assets 5,737P/E nm 20.4 -21.8 -12.0 -82.9 87.2 LessP/B nm 2.2 2.8 0.9 0.9 0.9 Total Liabilities -954P/CFO nm 34.0 -6.8 -23.8 -22.6 -22.1 NAV 4,783FCF yield nm -8.3% -9.2% 1.0% -3.3% -3.3% Shares outstanding, mn 872Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% NAV per share, £E 5.49

Discount to NAV 25% 4.12

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 1.9% 4.0% -25.1% -1.3% -1.4% -0.9% Sales growth -26.5% -96.0% 3.1% 26.5% 4.9% 4.9%

ROIC -6.0% -4.6% 8326.7% 7.0% 6.1% 5.8% EBITDA growth -100.4% -868.2% -819.6% -87.0% 0.5% 0.3%

ROE -2.1% 4.9% -45.9% -8.2% -1.0% 1.0% EBITA growth -117.4% -32.3% 139.2% -83.3% 0.4% 0.2%

Net debt/EBITDA* -160.8 17.1 nm nm nm nm Net Income growth -145.7% -223.6% -176.4% -24.0% -85.6% -195.1%

Net debt/equity 11.2% 14.9% 42.6% 0.3% 3.2% 6.0% EPS growth -145.7% -223.6% -176.4% -24.0% -85.6% -195.1%PS: * EBITDA is negative from 2010 to 2015E giving negative Net debt/EBITDA



Exhibit 421: We forecast a price target of £E4.12 using the NAV valuation method and applying a 25% discount for the company’s diversified portfolio Detailed valuation methodology for Citadel Capital


Holdings Company BusinessValue (£E

mn)Value per

shareMultiple (P/BV)

Notes

1 ASEC Holdings Cement, Construction & Engineering 1,386 1.59 1.5 Cement plants2 ASCOM Mining 102 0.12 Market value3 Nile Logistics Transport & Logistics 276 0.32 1.54 East Africa Railways Transport & Logistics 267 0.31 1.5 US$164mn financing secured5 Gozour Agri-Food 232 0.27 1.06 Gozour Real Estate Real Estate 102 0.12 2.0 40sqm next to the Cairo-Alexandria road7 Wafra Agriculture 180 0.21 1.5 Good prospects; irrigation rights secured8 National Petroleum Company Upstream Oil & Gas 180 0.21 0.5 Partly written off9 NOPC/Rally Energy Group Upstream Oil & Gas 0 0.00 0.0 Written off, insolvent10 Nile Valley Petroleum Upstream Oil & Gas 66 0.08 1.011 Egyptian Refining Company Petroleum Refining 278 0.32 1.012 TAQA Arabia Energy Distribution 348 0.40 1.5 Utility type multiple, implies 9.5x 2010A P/E13 Mashreq Energy Distribution 39 0.04 1.014 Glass Works Glass Manufacturing 204 0.23 1.515 Finance Unlimited Financial Services 270 0.31 1.5 1.5x book - similar to EM financials16 Bonyan Speciality Real Estate 154 0.18 1.017 Tawazon Solid Waste Management 48 0.06 1.018 United Foundries Company Metallurgy 107 0.12 1.019 Tanweer Media 165 0.19 1.020 Grandview Mid-Cap/Multisector 70 0.08 1.0Total Equity investments 4,474 5.1Convertible Investments1 ASEC Holding Convertible Cement, Construction & Engineering 426 0.49 1.52 National Petroleum Company Upstream Oil & Gas 52 0.06 1.03 NOPC/Rally Energy Group Upstream Oil & Gas 72 0.08 1.04 United Foundries Company Metallurgy 72 0.08 1.0Total Convertible investments 622 0.7Total Investments 5,096 5.8

Other AssetsCash 270 0.3 End 2011ELand, buildings 32 0.0 End 2011EDue from platform companies and related parties 339 0.4 End 2010ATotal Assets 5,737 6.6

Other LiabilitiesDue to CCP -706 -0.81 End 2010ADue to platform companies and related parties -79 -0.09 End 2010ACash (Bank debt) 9 0.01 End 2011E Adjusted for capital increaseOverhead costs net of advisory/management fees -178 -0.20 6x SG&A 2011ETotal Liabilities -954 -1.09

NAV 4,783 5.49Shares outstanding, mn 872Per share NAV, £E 5.49

Discount to NAV 25% Diverse portfolio

Target price 4.12



Exhibit 422: Citadel Capital has invested in 19 different Opportunity Specific Funds (OSF) Current investment portfolio of Citadel Capital as of June 30, 2011

Source: Company data

ASEC Holdings

NPC

WafraBonyan Development

& Trade

ASCOM Geology & Mining

Nile Logistics

Africa Railways

Gozour(Gazour consumer

foods & Gazour real estate)

Grandview Investment

Holdings

Finance Unlimited

United Foundries

Tanweer

Tawazon

GlassworksRally Energy Group

(NOPC)

Mashreq PetroleumNile Valley

Petroleum Ltd.

TAQA ArabiaEgyptian Refining

Company

CITADEL CAPITAL

48.5% 39.2%

30.1%

20.0%

20.0%

37.5%

15.0%

10.4%

15.0%13.1%35.2%

27.3%

21.0%

100.0%

32.1%

33.3%

100.0%

13.0%



Financials: Sales improving, but no fund exit seen in the near term

We expect consolidated sales to come in lower than in the pre-IPO period as the company no longer consolidates revenues from

cement, construction, energy (oil production, refining, power), mining, agri-foods, transportation and financial services. There is lack

of clarity on the political and economic outlook in the markets in which Citadel operates. The lower revenues are also due to the

high percentage of greenfield companies in Citadel’s portfolio. In 1H2011, revenues were driven by advisory fees, which were up

20% yoy. We do not factor in any revenues from capital gains on carried interest as we expect the company to wait on the sidelines

until the stock markets improve to liquidate its positions.

Exhibit 423: We expect sales to be mostly driven by revenues from advisory fees than other segments

Citadel Capital, 2006-2015E consolidated P&L £E mn


Summarised P&L EAS EAS EAS EAS EAS EAS EAS EAS EAS EAS2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Advisory fees 0 9 67 91 91 116 122 128 134 141Management fee 0 0 0 0 3 3 3 3 3 3Consulting fees 13 15 16 0 0 0 0 0 0 0Dividend income 5 1,142 0 0 0 0 0 0 0 0Other 1,117 1,944 2,204 0 0 0 0 0 0 0Group revenues 1,136 3,110 2,287 91 94 119 125 131 137 144Growth 173.9% -26.5% -96.0% 3.1% 26.5% 4.9% 4.9% 4.9% 4.9%

Group EBITDA (clean) 139 917 -4 32 -228 -30 -30 -30 -30 -30Group EBITDA margin 12.3% 29.5% -0.2% 34.7% -242.6% -25.0% -24.0% -22.9% -21.9% -20.9%

Group EBIT (clean) 57 841 -147 -99 -237 -40 -40 -40 -40 -40Group EBIT margin 5.0% 27.1% -6.4% -108.8% -252.5% -33.4% -32.0% -30.6% -29.2% -27.8%

Share of associates 0 10 24 48 -88 -103 97 164 221 292Net financial items -21 -75 -168 272 37 -84 -90 -93 -61 -49Pre-tax (clean) 37 777 -290 220 -288 -226 -33 31 120 203Non-recurring Items -35 -36 187 -121 -1,073 0 0 0 0 0Pre-tax (reported) 2 741 -104 100 -1,361 -226 -33 31 120 203Tax -52 -45 -43 -1 1 0 0 0 0 0Tax rate (%) NM 6% -34% 1% 0% 0% 0% 0% 0% 0%

Profit after tax (reported) -50 696 -147 99 -1,360 -226 -33 31 120 203Minorities -53 -39 96 60 -5 0 0 0 0 0Net income (reported) -103 657 -51 159 -1,365 -226 -33 31 120 203Post-tax exceptionals 1,074 -34 265 -231 -1,067 0 0 0 0 0Net income (clean, continuing operations) -1,177 691 -316 390 -298 -226 -33 31 120 203

EPS (clean, fully diluted) -1.35 0.79 -0.36 0.45 -0.34 -0.26 -0.04 0.04 0.14 0.23DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00



Exhibit 424: We expect FCF to improve, but not turn positive due to the high percentage of investments in greenfield projects

Citadel Capital balance sheet and cash flow statement, 2007-2015E £E mn



EBIT 57 841 -147 -99 -237 -40 -40 -40 -40 -40Depreciation/Amortisation 82 76 142 131 9 10 10 10 10 10Net financial items -9 -70 -152 4 2 -84 -90 -114 -124 -133Taxes paid -1 0 0 -1 1 0 0 0 0 0Other items -97 -76 152 199 -727 0 0 21 63 84

Change in working capital -150 -548 -289 166 345 152 35 37 39 41Cash flow from operations -118 223 -293 400 -607 38 -85 -85 -52 -38

Capex -663 -1,111 -1,210 -1,061 -5 -10 -10 -10 -10 -10Capex/D&A 807.7% 1469.9% 848.9% 810.3% 53.5% 100% 100% 100% 100% 100%capex/sales (%) 58.4% 35.7% 52.9% 1162.9% 5.3% 8.4% 8.0% 7.6% 7.3% 6.9%Free cash flow pre-dividend -781 -888 -1,503 -661 -612 28 -95 -95 -62 -48Free cash flow pre-dividend/revenues (%) -68.8% -28.5% -65.7% -724.2% -651.0% 23.9% -75.9% -72.9% -45.2% -33.3%

Other investing activities -426 -1,042 -895 -417 -808 0 0 0 0 0Dividend -349 -9 -7 -9 0 0 0 0 0 0Cash surplus (post dividend) -1,557 -1,938 -2,405 -1,086 -1,420 28 -95 -95 -62 -48Other and financing 2,371 1,183 1,682 1,609 490 1,050 0 0 0 0Change in net cash (net debt) 814 -755 -723 522 -930 1,078 -95 -95 -62 -48Net debt (cash) -814 -59 664 542 1,090 11 106 201 263 311


Inventories 353 475 636 1 0 0 0 0 0 0Receivables 689 1,183 1,322 845 526 666 698 732 768 805Cash and cash equivalents 1,302 1,131 1,158 269 163 270 270 270 270 270Other 54 49 36 5 20 26 27 28 30 31Current assets 2,398 2,838 3,152 1,120 709 962 995 1,031 1,068 1,107

Tangible assets 696 1,641 3,336 101 146 146 146 146 146 146Intangible assets 383 482 177 2 0 0 0 0 0 0Other 786 1,883 2,881 3,699 4,147 4,045 4,142 4,306 4,527 4,819Non-current assets 1,865 4,005 6,394 3,802 4,294 4,191 4,289 4,452 4,673 4,965

Total assets 4,264 6,843 9,546 4,921 5,003 5,153 5,284 5,483 5,741 6,072

Short-term interest-bearing liabilities 244 590 770 2 96 96 96 96 96 96Accounts payables 774 967 1,324 407 900 1,139 1,194 1,252 1,314 1,378Other 178 167 198 19 220 279 293 307 322 337Current liabilities 1,196 1,724 2,291 429 1,217 1,514 1,583 1,655 1,731 1,811

Long-term interest-bearing liabilities 244 482 1,052 808 1,156 185 280 376 438 485Pension provisions 0 0 0 0 0 0 0 0 0 0Other 8 48 290 59 74 74 74 74 74 74Non-current liabilities 253 530 1,342 867 1,230 259 354 450 512 560

Total Common Equity 1,177 1,996 2,944 3,594 2,359 3,183 3,150 3,181 3,301 3,504Minorities 1,638 2,593 2,969 32 197 197 197 197 197 197




Dana Gas (DANA.AD)


Matija Gergolet

[email protected]


[email protected]

United Arab Emirates: Oil

Improving performance, but lots of potential still locked

We expect high hydrocarbon prices in 2012-13 to allow Dana Gas to achieve higher prices and

earnings. In addition, Dana Gas’s capacity expansion plans in Egypt, Kurdistan and UAE (Sharjah)

should also allow it to double production by 2013, in our view. Based on our peer P/E multiple,

adjusted for gearing, of 7x, we derive a 12-month price target of AED0.79.


We expect Dana Gas’s total production to double by 2013, driven by higher capacity in

Kurdistan following recent capacity upgrades in addition to the expected contribution of the

Sharjah offshore gas project by the end of 2012. Dana Gas is also expanding its gas

processing capacity in Egypt by 62% over the next two years. Overall, we expect

hydrocarbons-billed production to rise from 50kboe/day in 2010 to 99kboe/day in 2013.

Despite the fact that Dana Gas supplies part of its gas to Kurdistan power plants for free and

sells gas to the Egyptian government at a fixed price, high energy prices still have a positive

impact on its LPG and condensate sales (average prices rose 33% in 2010 and accounted for

41% of gross revenue growth). With Goldman Sachs forecasting oil prices at US$120/130bbl

for 2012/13 respectively, we expect Dana Gas to achieve higher prices in 2012-13.

Dana Gas is due to commence operations at the Sharjah offshore gas project in 2H2012 with a

capacity of 60MMscfpd. We expect the project to account for 14% of 2013 revenues.

The status of the UAE project to import gas from Iran is still unclear in our view. The gas

project, in which Dana Gas holds c. US$1.1 bn of assets, entered into international arbitration

following several years of delay. We don’t assume any contribution from this project in the

short term; however, a positive outcome could materially improve its earnings power.

Valuation: Our valuation implies 43% potential upside

Dana Gas trades on a 2012E P/E multiple of 5.5x, which is below the CEEMEA 5-year median

energy peer group multiple of 7.8x. We prefer to use the P/E multiple instead of EV/EBITDA in our

valuation as it better reflects the high tax rate. We use the CEEMEA 5-year median energy peer

multiple as the stock’s own historical P/E has been volatile, yet apply a 10% discount for its

liquidity risk (sukuk refinancing). Applying such multiple to our 2012E/13E P/E methodology, our

12-month price target is AED0.79, which implies 43% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Dana Gas (DANA.AD)


Key data Current

Price (AED) 0.55




Free Float (%) 34.6


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 1,785.0 2,552.7 3,049.6 3,502.1

EBIT (AED mn) 623.0 1,167.2 1,430.3 1,677.2

EPS (AED) 0.03 0.08 0.10 0.13

EV/EBITDA (X) 6.4 3.0 2.3 1.6

P/E (X) 30.9 7.1 5.5 4.4

Dividend yield (%) 0.0 0.0 0.0 0.0

FCF yield (%) (9.2) 9.2 20.7 35.4

CROCI (%) 5.3 9.2 9.7 10.5

EV/GCI (X) 0.6 0.5 0.4 0.3


260

310

360

410

460

510

560

0.50

0.55

0.60

0.65

0.70

0.75

0.80



Dana Gas (L) MSCI EM EMEA (R)



Investment drivers: Higher production and higher expected energy prices


Dana Gas is currently increasing its gas processing capacity in Egypt by 160MMscfpd to reach

420MMscfpd by 2012. This capacity addition will allow it to increase its production and revenues

from Egypt. We also expect the Sharjah offshore concession project, expected online by

2H2012, to add another source of revenues for Dana Gas.

In Kurdistan, Dana Gas completed its LPG plant with both LPG trains fully operational resulting

in total capacity of 400 MMscfpd. Dana Gas can sell the LPG and condensate at market prices.

However, the first 300mscfpd of gas are to be supplied for free to the local power plant. We

expect Kurdistan operations to be key to Dana Gas’s future operations. The group controls 40%

of the Khor Mor Field through Pearl Petroleum. The field is estimated to have recoverable gas

reserves of 1.8Tcf. The project also includes appraising the potential of the Chemchemal Gas

Field, which is estimated to have recoverable gas reserves of 2.1Tcf.


Dana Gas holds around US$1.1 bn of assets related to the UAE gas project to process and

transport imported gas from Iran. The project never commenced operations and after several

delays it entered in international arbitration. Due to the unclear outcome regarding the future of

this project, we don’t assume any related revenue streams in our forecasts. However, the impact

could be significant if the project is carried out.

Since the end of 2010, Dana Gas has not been receiving full payments for its gas produced in

the Kurdistan region and total receivables reached AED1.58 bn in June 2011 vs. AED758 mn in

September 2010. This increase resulted in lower cash flows and Dana Gas decided to limit its

capital expenditure as a result. Dana Gas could face financial difficulties if the issue is not

resolved.

Dana Gas has US$920 mn of convertible Sukuk maturing in 2012. The group has been

evaluating several options to refinance the Sukuk. The company’s balance sheet does not show

enough cash to repay the Sukuk. However, its c.3% stake in the Hungarian oil & gas company

MOL, valued at AED1.3 bn in June 2011, could be utilized in the repayment, in our view.

Industry context

Dana Gas is the only listed oil & gas sector company in the GCC that offers direct exposure to the

energy resources within the GCC, thanks to its exposure to Sharjah gas. Dana Gas supplies its gas to

a diversified customer base, mainly governments, and in different geographic locations including

Kurdistan and Egypt.

Company description

Dana Gas, established in 2005, is a Sharjah-based upstream

oil and gas company with operations in Egypt, Kurdistan and

UAE (Sharjah only). Gas comprises the majority of Dana Gas’s

production, yet it also produces condensates and LPG. In

2010, the company had a production capacity of 56kboepd and

Egypt’s proven and probable reserves reached 152 MMboe. In

Sharjah, Dana Gas is currently developing the Zora gas field

expected to come onstream in 2H2012. Dana Gas also holds

US$1.1 bn of assets related to a project to supply gas from

Iran. After more than four years of delays, the project entered

into international arbitration. Dana Gas has 350 employees.




Egypt76%

Kurdistan 23%

UAE & Other

1%

Gas, Condensate

& LPG100%



Key financial ratios: Sales and returns estimates reflect our energy prices assumptions

Exhibit 425: We expect sales to go down in 2014 due to our normalized

energy price assumptions, but for margins to be sustained

Exhibit 426: CROCI growth is highly affected by energy prices



Exhibit 427: Dana Gas shareholding structure

Exhibit 428: We forecast an improvement in the net debt position



0%

10%

20%

30%

40%

50%

60%

70%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Crescent Petroleum Company

20%

Arabian Oud Company

3%

Other Investors

42%

Free Float35%

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Stock is undervalued based on CEEMEA peer P/E of 7.8x

Exhibit 429: Dana Gas returns are relatively low since around one-third of its assets are associated with the UAE gas project currently on hold awaiting

international arbitration


Dana Gas PJSC EnergyY/E December OilAEDmn Oil & Gas- E&P


Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation Clean net income 2012E

Clean net income 2013E

P/E multiple Equity value 2012E

Equity value 2013E Price target

EV/Sales 11.4 5.5 3.8 1.9 1.5 1.0EV/EBITDA 24.5 10.6 6.4 3.0 2.3 1.6EV/EBIT 62.2 -83.9 10.8 4.3 3.1 2.1 Dana Gas PJSC 656 828 7.0 4,592 5,795EV/DACF 55.0 26.3 12.7 5.3 4.4 3.3EV/NOPLAT NM NM 28.9 7.3 5.7 3.9EV/GCI 1.3 0.7 0.6 0.5 0.4 0.3 Equity Value 4,592 5,795

No. of shares, mn 6,600 6,600P/E NM -68.1 30.9 7.1 5.5 4.4 Implied per share valuation (QR) 0.70 0.88 0.79P/B 1.5 0.7 0.6 0.4 0.4 0.4P/CFO 80.8 22.4 9.3 3.7 3.1 2.7FCF yield -11.1% -11.1% -7.1% 6.3% 14.1% 24.1%Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


ROIC 1.1% -0.3% 2.5% 6.9% 7.8% 9.1% EBITDA growth 12.7% 25.4% 57.7% 55.0% 18.5% 14.1%

ROE 2% 1% 2% 6% 7% 9% EBIT growth 7.7% -140.2% NM 87.4% 22.5% 17.3%

Net debt/EBITDA 4.4 3.6 2.6 1.5 1.0 0.5 Net income growth -124.8% NM NM 205.5% 28.3% 26.2%

Net debt/equity 32% 31% 34% 29% 21% 11% EPS growth -124.8% NM NM 205.5% 28.3% 26.2%



Financials: We forecast EPS to grow at an average 27% in 2012-13

Our sales estimates reflect our energy prices assumptions. We expect average growth of 17% for 2012-13 followed by a decline due

to normalization of our energy price forecasts. We expect sustainable EBITDA margins at an average of 63% over the coming five

years. Our tax rate estimate of 50% reflects the company’s most recent reported tax rate. We also forecast an improvement in the

company’s cash generation as capex gradually declines, leading to an improvement in the group’s net debt position. We expect the

group to retain its earnings over the coming years in anticipation of potential investment opportunities.

In 9M2011, Dana Gas reported a 52% increase in sales yoy mainly attributed to higher realized hydrocarbon prices. EBITDA grew by

59% yoy and net income was up 254% yoy. The company’s receivables from KRI went up and negatively affected cash generation.

Exhibit 430: We expect Dana Gas to grow its sales at an average of 11% over the coming 5 years 2006-2015E P&L, AED mn



Group revenues 3 1,036 1,139 1,279 1,785 2,553 3,050 3,502 2,850 2,886Growth NM 9.9% 12.3% 39.6% 43.0% 19.5% 14.8% -18.6% 1.3%

Group EBITDA (clean) -6 472 532 667 1,052 1,631 1,932 2,205 1,771 1,790Group EBITDA margin NM 45.6% 46.7% 52.2% 58.9% 63.9% 63.4% 63.0% 62.1% 62.0%

Group EBIT (clean) -6 194 209 -84 623 1,167 1,430 1,677 1,227 1,237Group EBIT margin NM 18.7% 18.3% -6.6% 34.9% 45.7% 46.9% 47.9% 43.0% 42.9%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 820 -118 -225 -165 -176 -293 -238 -172 -78 5Pre-tax (clean) 814 76 -16 -249 447 874 1,193 1,505 1,149 1,242Non-recurring Items 0 205 274 513 -25 0 0 0 0 0Pre-tax (reported) 814 281 258 264 422 874 1,193 1,505 1,149 1,242Tax 0 -170 -138 -176 -264 -363 -537 -677 -517 -559Tax rate (%) 0% 60% 53% 67% 63% 42% 45% 45% 45% 45%

Profit after tax (reported) 814 111 120 88 158 511 656 828 632 683Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 814 111 120 88 158 511 656 828 632 683Post-tax exceptionals 0 81 127 171 -9 0 0 0 0 0Net income (clean, continuing operations) 814 30 -7 -83 167 511 656 828 632 683

EPS (clean, fully diluted) 0.12 0.00 0.00 -0.01 0.03 0.08 0.10 0.13 0.10 0.10DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00



Exhibit 431: We expect production to double by 2013 Production breakdown by region and product type 2006-2015E excluding the free gas in Kurdistan


Billied Production by Region & Product Type 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Egypt 0 29 29 35 42 44 44 41 39 36Kurdistan 0 0 2 7 8 21 25 27 27 27UAE 0 0 0 0 0 0 5 25 36 41Total, kboe/day 0 29 31 42 50 64 74 93 102 104Of Which:Gas 0 23 23 28 34 47 54 72 81 84Condensate & Oil 0 4 6 14 16 14 13 13 12 12LPG 0 2 2 0 0 4 7 8 8 8Total, kboe/day 0 29 31 42 50 64 74 93 102 104



Exhibit 432: Although c. AED4 bn of assets are not revenue generating, we expect significant improvement in FCF Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT -6 194 209 -84 623 1,167 1,430 1,677 1,227 1,237Depreciation/Amortisation 0 278 323 751 429 464 502 527 544 553Net financial items 820 -118 -225 -165 -176 -293 -238 -172 -78 5Taxes paid 0 -170 -138 -176 -264 -363 -537 -677 -517 -559Other items -26 -46 -37 -74 -58 0 0 0 0 0

Change in working capital -41 81 -244 -84 -301 -346 -193 -176 111 -16Cash flow from operations 747 219 -112 168 253 629 965 1,179 1,288 1,220

Capex -229 -638 -1,072 -798 -623 -400 -450 -300 -200 -100Capex/D&A 229.5% 331.9% 106.3% 145.2% 86% 90% 57% 37% 18%capex/sales (%) NM 61.6% 94.1% 62.4% 34.9% 15.7% 14.8% 8.6% 7.0% 3.5%Free cash flow pre-dividend 518 -419 -1,184 -630 -370 229 515 879 1,088 1,120Free cash flow pre-dividend/revenues (%) NM -40.4% -104.0% -49.3% -20.7% 9.0% 16.9% 25.1% 38.2% 38.8%

Other investing activities 0 -4,138 139 650 135 0 0 0 0 0Dividend 0 0 0 0 0 0 0 0 0 0Cash surplus (post dividend) 518 -4,557 -1,045 20 -235 229 515 879 1,088 1,120Other and financing 4,045 343 80 -92 -58 0 0 0 0 0Change in net cash (net debt) 4,563 -4,214 -965 -72 -293 229 515 879 1,088 1,120Net debt (cash) -2,839 1,375 2,340 2,412 2,705 2,476 1,961 1,082 -6 -1,126


Inventories 0 145 211 169 187 267 319 367 299 302Receivables 2 286 484 728 935 1,404 1,677 1,926 1,710 1,732Cash and cash equivalents 2,839 1,983 798 781 583 583 583 583 583 1,703Other 0 142 28 40 40 57 68 78 64 65Current assets 2,841 2,556 1,521 1,718 1,745 2,312 2,648 2,955 2,655 3,802

Tangible assets 862 2,353 2,996 3,449 3,828 3,764 3,712 3,485 3,141 2,688Intangible assets 3,140 5,660 5,878 5,055 4,967 4,967 4,967 4,967 4,967 4,967Other 0 282 403 1,180 1,291 1,291 1,291 1,291 1,291 1,291Non-current assets 4,002 8,295 9,277 9,684 10,086 10,022 9,970 9,743 9,399 8,946

Total assets 6,843 10,851 10,798 11,402 11,831 12,334 12,619 12,698 12,054 12,748

Short-term interest-bearing liabilities 0 0 0 0 0 0 0 0 0 0Accounts payables 25 154 194 231 246 351 420 482 392 397Other 4 216 210 236 268 384 459 527 429 434Current liabilities 29 370 404 467 514 735 878 1,008 821 831

Long-term interest-bearing liabilities 0 3,358 3,138 3,193 3,288 3,059 2,544 1,665 577 577Pension provisions 0 0 4 7 7 7 7 7 7 7Other 0 16 31 44 55 55 55 55 55 55Non-current liabilities 0 3,374 3,173 3,244 3,350 3,121 2,606 1,727 639 639





Dar Al Arkan Real Estate Development Company

(4300.SE)



[email protected]

Matija Gergolet

[email protected]

Arsalan Mustafa,CFA

[email protected]

Saudi Arabia: Real Estate

Deleveraging the balance sheet and business model: Key to outperformance

Dar Al Arkan (Daar) is a leading real estate developer in Saudi Arabia. The company’s business

model is highly levered towards selling of land. With c.1.25mn houses needed in the kingdom

over the next five years, demand for land will be high. We believe Daar is uniquely placed to

benefit from this growth. We are Buy-rated on the stock.


Daar’s business model is heavily reliant on land sales, contributing 91% of sales in 2010. The

company develops land with basic infrastructure and sells the developed land with high

margins. The government estimates demand of c.350mn sqm of land in 2010-14 for

residential construction. Daar’s landbank in 2010 was SR12.9 bn, and we expect the company

to benefit from high residential construction activity. We forecast Daar’s land sales to grow at

3% CAGR in 2010-15 with high operating margins of 43%.

Daar’s residential and commercial property is focused towards the middle-income segment.

The company engages primarily in developing master-planned communities. We estimate

significant delivery in 2012-13 from two of its projects, Shams Alriyadh and Shams Al-Arous,

contributing strongly to the company’s top line. We forecast CAGR sales growth of 27% in

2010-15E for this segment.

Daar is highly leveraged: it has SR6.2 bn of debt due for repayment in 2012-15, of which

SR3.75 bn is due April 2012. We believe the recent share price underperformance largely

relates to the lack of visibility around the group’s debt repayment. Our estimates suggest that

Daar will have to use a mix of internal accruals and refinancing to repay the debt. We believe

once the company announces its plan for repayment, the valuation discount will reduce.

Valuation: High valuation discount due to debt overhang

Daar trades on a 2012E P/E of 5.7x, well below its five-year median of 10.6x and the 5-year

historical median of GS-covered global real estate developer peers of 14x. The stock is down 33%

YTD, underperforming the MSCI EEMA by 16% due to debt repayment concerns. Based on our

2012/13E P/E methodology and using a multiple of 8.5x, a 20% discount to the stock’s historical

multiple to reflect high leverage and consistent Q4 CROCI through 2011-15E relative to our MENA

non financial peers, our 12-month price target is SR10.4, which implies 67% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Dar Al Arkan Real Estate Development Company (Dar Al-Arkan)


Key data Current

Price (SR) 6.20




Free Float (%) 31.0


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 4,142.0 3,335.8 3,612.9 4,402.7

EBIT (SR mn) 1,642.5 1,283.9 1,397.9 1,690.6

EPS (SR) 1.35 1.01 1.08 1.36

EV/EBITDA (X) 11.3 8.9 7.8 6.2

P/E (X) 9.0 6.1 5.7 4.6

Dividend yield (%) 0.0 0.0 0.0 11.0

FCF yield (%) 5.4 (0.8) 9.7 8.5

CROCI (%) 8.5 6.2 6.3 7.4

EV/GCI (X) 0.9 0.6 0.6 0.5


260

280

300

320

340

360

380

400

420

440

460

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0



Dar Al Arkan Real Estate Development Company (Dar Al-Arkan)

(L)



Investment drivers: Strong revenue growth in all segments; balance sheet main concern


Under its ninth five-year plan, the government of Saudi Arabia estimates a requirement of

350mn sqm of land for residential construction. Furthermore, under the stimulus package

announced in March 2011, the government plans to construct 500,000 homes. This we believe

will create strong demand for land. Since Daar has a high reliance on land sales, it should

benefit from this growth.

Daar is currently developing two master-planned communities, Shams Alriyadh and Shams

Al-Arous. The total units under development are c.4,694 and will commence delivery from 2012.

We believe the delivery will be spread through 2012-14. The total planned units on Shams Al-

Arous is 10,000, of which only 2,000 units are being constructed under the first phase, which we

believe provides visibility on future delivery after 2014 as new units are developed.

As a part of its diversification strategy, Daar has started developing a portfolio of investment

property to provide it with recurring and stable cash flows through leases. The company’s

investment portfolio comprises a mix of residential, commercial property and a mall on its

master-planned community, Al-Qasr. We estimate the total NLA of 315,621sqm. The company

plans to reserve some of the units on its new master-planned communities for lease which will

further increase the land under lease.


Slower-than-expected demand for land is the key downside risk to our forecasts.

With regard to development property, slower-than-expected demand, delays in delivery or

declines in price would affect revenues adversely.

Delay in debt refinancing.

Industry context

Under the ninth five-year plan, the government of Saudi Arabia estimates total demand of 1.25mn

houses in 2010-14E. The government plans to construct 80% of the requirement through the public

and private sector. Furthermore, under the stimulus package announced in March 2011, the

government aims to construct 500,000 houses and invest SR250 bn. Housing finance is a major

problem in Saudi Arabia due to lack of financing and mortgage regulations in the market; however,

the government is trying to address the issue through its Real Estate Development Fund to finance

construction of 109,000 units in 2010-14. Under the 2007 home demographic survey, 60% of Saudi

nationals owned their own home, 35% lived in rented house and 5% lived in houses provided by

their employer. Daar is the leading real estate company in Saudi Arabia. The market is characterized

by a large number of small developers.

Company description

Dar Al Arkan is a leading real estate development company in

Saudi Arabia. It specializes in the development of master-

planned lifestyle residential communities offering developed

land parcels, apartments and villas and malls. The company

was established in 1994 and was listed on the TASI in 2007. To

complement its core business, Daar established Saudi Home

Loans Company to provide Sharia-compliant home loans. The

company currently has c.450 employees.




Saudi Arabia100%

Land97%

Development property

2%

Investment Property

1%



Key financial ratios: Daar offers high margin but weak balance sheet

Exhibit 433: Sales to grow; margins are high on land sales

Exhibit 434: We forecast CROCI to improve



Exhibit 435: Shareholder structure for DAAR; the foreign ownership limit of

the stock is 49%

Exhibit 436: High gearing levels, but we forecast an improvement on

deleveraging



0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Khaled Bin Abdullah

Shalash Al Shalash

9%Youssef Bin

Abdullah Shalash Al Shalash

8%

Hazlol Bin Saleh

Mohammed Al Hazlol

7%Majed Bin

Abdulrahman Abdulziz Al

Kassim5%

Other investors

40%

Free Float31%

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Trading well below book value

Exhibit 437: Daar trades at 5.7x 2012E P/E vs. a global average of 14x


Dar Al Arkan Financial ServicesY/E December Real EstateSRmn Real Estate Developers

Share price (SR) 6.20 12M price target (SR) 10.4 SR/$ (spot) 3.75Market cap 6,696 Potential upside/(downside) 67%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EPS 2012E EPS 2013E P/E multiple Value 2012E Value 2013E Price Target

EV/Sales 6.3 4.0 4.5 3.5 3.1 2.4 EPS 1.08 1.36 8.50 9.18 11.5EV/EBITDA 13.0 9.3 11.3 8.9 7.8 6.2 Implied per share valuation (SR) 9.18 11.5 10.4EV/EBIT 13.1 9.4 11.4 9.1 7.9 6.3EV/DACF 13.5 9.8 11.3 9.7 8.9 7.2EV/NOPLAT 13.5 9.6 11.6 9.4 8.3 6.6EV/GCI 1.9 1.1 0.9 0.6 0.6 0.5

P/E 12.2 7.8 9.0 6.1 5.7 4.6P/B 2.4 1.2 0.9 0.4 0.4 0.4P/CFO 11.9 7.5 8.6 6.0 5.6 4.5FCF yield -4.2% 3.3% 4.9% -0.7% 8.2% 7.1%Dividend yield 0.0% 6.5% 0.0% 0.0% 0.0% 11.0%


ROIC 16.5% 12.5% 8.3% 6.2% 6.6% 7.7% EBITDA growth 15.8% -12.4% -29.8% -20.8% 8.8% 20.6%

ROE 20.7% 16.6% 10.4% 7.4% 7.3% 8.5% EBIT growth 17.0% -12.3% -29.9% -21.8% 8.9% 20.9%

Net debt/EBITDA 2.6 2.6 3.9 4.3 3.5 2.6 Net income growth 16.6% -9.9% -31.4% -24.9% 6.7% 25.8%

Net debt/equity 2.2% 27.8% 58.9% 43.4% 44.8% 36.1% EPS growth 16.6% -9.9% -31.4% -24.9% 6.7% 25.8%



Financials: Strong land sales will support revenue growth

Daar’s business model is heavily reliant on land sales which contributed 91% of revenue in 2010. The company is focusing on

developing other sources of revenue, mainly development property and investment property. We believe these segments will grow

steadily and eventually contribute 20% of the total revenue by 2013.

In 9M2011, Daar reported sales of SR2.5 bn, a 21% decline yoy on account of lower sales from the land and property segment.

Exhibit 438: We forecast top line growth of 8% in 2012 2006-2015E P&L, SR mn


Summarised P&L SFRS SFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Group revenues 2,484 4,197 4,353 4,926 5,611 5,464 4,142 3,336 3,613 4,403 5,190 5,745Growth 69.0% 3.7% 13.2% 13.9% -2.6% -24.2% -19.5% 8.3% 21.9% 17.9% 10.7%

Group EBITDA (clean) 1,181 1,991 2,082 2,325 2,694 2,361 1,657 1,311 1,426 1,720 1,990 2,226Group EBITDA margin 47.6% 47.4% 47.8% 47.2% 48.0% 43.2% 40.0% 39.3% 39.5% 39.1% 38.3% 38.7%

Group EBIT (clean) 1,179 1,976 2,064 2,283 2,671 2,343 1,643 1,284 1,398 1,691 1,958 2,193Group EBIT margin 47.5% 47.1% 47.4% 46.3% 47.6% 42.9% 39.7% 38.5% 38.7% 38.4% 37.7% 38.2%

Share of associates 0 0 0 0 0 -5 0 0 0 0 0 0Net financial items 0 67 34 -233 -255 -166 -160 -146 -183 -162 -184 -215Pre-tax (clean) 1,179 2,043 2,097 2,050 2,417 2,173 1,483 1,138 1,215 1,528 1,774 1,978Non-recurring Items -61 -122 -13 -13 0 0 0 0 0 0 0 0Pre-tax (reported) 1,118 1,922 2,084 2,037 2,417 2,173 1,483 1,138 1,215 1,528 1,774 1,978Tax -29 -146 -270 -29 -60 -50 -27 -46 -49 -61 -71 -79Tax rate (%) 3% 8% 13% 1% 3% 2% 2% 4% 4% 4% 4% 4%

Profit after tax (reported) 1,089 1,775 1,814 2,009 2,356 2,123 1,456 1,093 1,166 1,467 1,703 1,899Minorities 0 0 0 0 0 0 0 0 0 0 0 0Net income (reported) 1,089 1,775 1,814 2,009 2,356 2,123 1,456 1,093 1,166 1,467 1,703 1,899Post-tax exceptionals -59 -112 -12 -12 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 1,148 1,888 1,826 2,021 2,356 2,123 1,456 1,093 1,166 1,467 1,703 1,899

EPS (clean, fully diluted) 5.32 8.74 8.45 1.87 2.18 1.97 1.35 1.01 1.08 1.36 1.58 1.76DPS 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.68 0.95 1.06



Exhibit 439: We forecast net debt to remain at high levels, though decrease steadily through 2015 Balance sheet and cash flow statement, 2006-2015E, SR mn


Summarised cash flow2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 1,179 1,976 2,064 2,283 2,671 2,343 1,643 1,284 1,398 1,691 1,958 2,193Depreciation/Amortisation 2 14 18 42 22 18 14 27 28 30 31 33Net financial items 0 65 0 -278 -267 -169 -214 -206 -183 -162 -184 -215Taxes paid -29 -146 -270 0 -24 0 -27 -46 -49 -61 -71 -79Other items -62 -115 22 6 16 7 107 60 0 0 0 0

Change in working capital -4,023 -4,564 -1,012 7,597 -3,287 -702 -474 296 522 22 86 -64Cash flow from operations -2,933 -2,769 822 9,650 -869 1,497 1,049 1,417 1,717 1,519 1,820 1,868

Capex -79 -66 -49 -10,936 -350 -929 -399 -1,465 -1,130 -997 -836 -869Capex/D&A 3244.8% 462.8% 268.6% 25750.5% 1570.8% 5300.1% 2794.6% 5333% 4000% 3333% 2667% 2667%capex/sales (%) 3.2% 1.6% 1.1% 222.0% 6.2% 17.0% 9.6% 43.9% 31.3% 22.6% 16.1% 15.1%Free cash flow pre-dividend -3,012 -2,835 772 -1,286 -1,219 568 650 -49 586 522 984 1,000Free cash flow pre-dividend/revenues (%) -121.3% -67.6% 17.7% -26.1% -21.7% 10.4% 15.7% -1.5% 16.2% 11.9% 19.0% 17.4%

Other investing activities -368 112 92 83 -1,026 -45 0 913 0 0 0 0Dividend 0 -1,292 -1,620 -1,620 -1,620 0 -1,080 0 0 0 -734 -1,022Cash surplus (post dividend) -3,380 -4,016 -756 -2,823 -3,865 523 -430 864 586 522 250 -22Other and financing 3,409 4,476 0 0 0 265 0 0 0 0 0 0Change in net cash (net debt) 29 460 -756 -2,823 -3,865 787 -430 864 586 522 250 -22Net debt (cash) -66 -526 230 3,053 6,919 6,131 6,491 5,626 5,040 4,518 4,268 4,290

Summarised balance sheet2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 0 0 0 0 0 0 0 0 0 0 0 0Receivables 509 438 481 484 2,742 849 1,668 1,344 903 925 882 977Cash and cash equivalents 66 526 184 3,347 716 2,223 1,189 1,189 1,189 1,189 1,189 1,189Other 5,097 9,588 10,762 3,408 1,269 1,197 1,012 815 810 988 1,164 1,289Current assets 5,672 10,552 11,426 7,238 4,728 4,269 3,869 3,347 2,902 3,101 3,235 3,454

Tangible assets 80 134 166 10,948 14,190 18,067 18,316 18,841 19,943 20,910 21,715 22,551Intangible assets 5 4 3 114 0 0 0 0 0 0 0 0Other 295 135 88 75 1,247 1,261 1,164 1,164 1,164 1,164 1,164 1,164Non-current assets 380 272 256 11,136 15,436 19,328 19,480 20,005 21,107 22,074 22,879 23,715

Total assets 6,053 10,824 11,682 18,374 20,164 23,597 23,349 23,352 24,009 25,175 26,114 27,169

Short-term interest-bearing liabilities 0 0 414 400 1,635 2,700 1,000 1,000 1,000 1,000 1,000 1,000Accounts payables 106 95 45 105 275 471 424 341 370 450 531 588Other 487 309 608 865 510 635 734 591 640 780 919 1,018Current liabilities 593 404 1,067 1,370 2,420 3,806 2,158 1,932 2,010 2,230 2,450 2,606

Long-term interest-bearing liabilities 0 0 0 6,000 6,000 5,655 6,679 5,815 5,228 4,706 4,456 4,478Pension provisions 1 2 3 4 8 12 13 13 13 13 13 13Other 0 0 0 0 0 0 0 0 0 0 0 0Non-current liabilities 1 2 3 6,004 6,008 5,667 6,692 5,827 5,241 4,719 4,469 4,491

Total Common Equity 5,459 10,418 10,612 11,000 11,736 13,859 14,235 15,328 16,494 17,961 18,930 19,808Minorities 0 0 0 0 0 265 265 265 265 265 265 265

Total equity and liabilities 6,053 10,824 11,682 18,374 20,164 23,597 23,349 23,352 24,009 25,175 26,114 27,169



DP World (DPW.DI)


Anton Farlenkov

[email protected]

Yulia Gerasimova

[email protected]

EMEA: Transportation

Strong during the period of macro recovery

DP World is a world-class logistics and port operator. By equity-adjusted throughput, DPW is

fourth in the league table of the largest ports worldwide. DP World operates in a fast-growing

industry in which volume growth exceeds the speed of capacity additions during periods of strong

economic growth. As DP World is more focused on resilient, faster-growing emerging markets,

with more of its revenue coming from stable container business with pricing power (O&D cargo),

we believe it is better positioned than its competitors to achieve good volume growth and sustain

solid margins.


We like the company’s strong position in the fast-growing emerging markets (75% of gross

volumes from EM in 2010). In an environment of strong world trade and macro recovery, DP

World should be a key beneficiary of global economic realignment, as global economic growth is

reflected in the company’s own growth profile. However, we remain concerned by current global

macroeconomic conditions: our economists expect global GDP growth to slow from 5.1% in 2010

to 3.8% in 2011E and to 3.5% in 2012E, which, in our view, may put pressure on the global trade

growth near term. Despite this, DPW is better positioned (vs. its competitors) to maintain volume

throughput against macro headwinds, thanks to its high exposure to emerging markets and to

O&D (c.73% of its cargo was O&D in 2010; this cargo is considered more defensive as it is linked

to a specific region close to a port’s operations). In our view, these positives are priced in. The

company trades at 16.5x 2012E P/E, a 12% premium to global container ports in GS’s coverage.

We maintain a Neutral rating on DPW.

Valuation: High quality asset but all positives are priced in

We value DPW using DCF methodology since we believe that: (1) it captures long-term

fundamentals; and (2) cash flows generated by ports are more predictable than in many other

industries. We separately value DPW and its joint ventures and associates. DCF assumptions

include (1) a WACC of 8.5% for DPW and its JVs/associates; (2) a terminal growth rate of 3%; (3)

explicit free cash flow forecasts to 2015. Our revised 12-month price target of US$14.2 (from

US$13.6) implies 31% upside potential. Given limited upside and a full valuation we maintain our

Neutral rating.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





DP World (DPW.DI)

Europe New Markets Non Financials Peer Group Average

Key data Current

Price ($) 10.80

12 month price target ($) 14.20



Free Float (%) 19.6


12/10 12/11E 12/12E 12/13E

Revenue ($ mn) 3,078.1 2,927.5 3,204.3 3,455.9

EBIT ($ mn) 641.9 683.7 784.7 869.2

EPS ($) 0.02 0.56 0.65 0.80

EV/EBITDA (X) 157.3 12.5 11.6 10.8

P/E (X) 446.8 19.2 16.5 13.5

Dividend yield (%) 0.1 2.0 2.3 2.8

FCF yield (%) 0.1 0.4 (0.2) 1.4

CROCI (%) 6.4 6.5 6.9 7.0

EV/GCI (X) 8.6 0.8 0.8 0.8


260

280

300

320

340

360

380

400

420

440

460

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0



DP World (L) MSCI EM EMEA (R)



Investment drivers: Attractive exposure to global economic realignment

Key drivers of growth

We believe that the key top-down growth drivers for DPW include: (1) global GDP realignment and

(2)an increase in containerization levels across emerging markets. Currently, about 75% of DP

World’s gross container throughput is from emerging markets. Moreover, the majority of DPW’s

new container capacity is expected to come from emerging markets as well. On top of this, we

believe that DPW is strategically well placed to benefit from continuing containerization of general

cargo. In developed countries, the process of containerization has been largely completed but in

emerging market regions such as, Africa, the Middle East, Asia, the CIS, and Latam etc., key growth

markets for DPW, this process continues.


With world trade a function of GDP, DPW’s financial performance is vulnerable to global economic

conditions. A faster/slower than expected slowdown/recovery in world trade is the main risk for

DPW as its volumes are strongly linked to the state of the world trade. This could be a result of

economic factors (a prolonged slump/period of economic growth of the back of successful reforms),

or political factors (increased/decreased protectionism). Company-specific risks include acquisition

issues or a change in the regulatory environment. DP World has grown rapidly, particularly by

acquisition, and thus could suffer integration issues in managing such a large organization.

Furthermore anti-trust rules may restrict growth by acquisition in some areas. Additionally, DPW

does not have management control over its associates, which will be responsible for 28% of pre-

exceptional, pre-tax profits in 2011 on our estimates. Investment in ports may not generate expected

returns because of the failure of associated infrastructure investment (e.g. road and rail links), or

regulatory or other disputes with the relevant government.

Industry context

DPW is one of four major global port operators that jointly control 29.6% of total world container

throughput by equity share (46.8% by gross throughput). The market share of these four leading

stevedores has remained stable at 29%-30% for the last few years. However, DPW has managed to

increase its market share for the last five years from 2.5% in 2005 to 6.7% in 2009. Despite barriers to

entry in the port industry being very high, and the likelihood that no new major players will enter the

market, the global container terminal market is competitive. Not only do ports compete for

throughput, inside ports there might be severe competition for volumes among terminals. The

fiercest competition is in transhipment, not in O&D (origin and destination). DP World stands out

from its peer group, having no head-to-head competition in its home port and a high share of O&D

cargo in total container throughput.

Company description

DPW is one of the largest container terminal operators in the

world by capacity and throughput (market share of c.10% in

2010). The company is also one of the most geographically

diversified container terminal operators in the world. DPW

operates over 60 container terminals across six continents. It

had a gross capacity of 67 mn TEUs and consolidated capacity

of 35 mn TEUs as of end-2010. The company was incorporated

on August 9, 2006 as the holding company for the ports-

related businesses for Dubai World. The largest shareholder is

Emirate of Dubai controlling 80% of the company, the rest

(20%) is free float.


Sales by division (2010A)


Asia-Pacif ic and India15%

Australia and Americas

28%EMEA57%

Containers79%

Bulk/other21%



Key financial ratios: Well positioned to improve returns

Exhibit 440: Margins to expand on better cost efficiency

Exhibit 441: Improvement in profitability to support returns



Exhibit 442: DP World shareholding and group structure

Exhibit 443: Deleveraging to strengthen balance sheet



31%

32%

33%

34%

35%

36%

37%

38%

39%

40%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

US$

mn


0%

1%

2%

3%

4%

5%

6%

7%

8%

0

5,000

10,000

15,000

20,000

25,000

30,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

US$

mn

GCI CROCI (RHS)

Dubai World Corporation

80%

Free Float20%

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Limited upside and a full valuation

Exhibit 444: Our 12-month DCF-based price target of US$14.2 implies 31.5% upside potential for DP World


DP World TransportationY/E December Transportation: InfrastructureUSD mn Transportation: Infrastructure

Share price (US$) 10.80 12M price target (US$) 14.20 $/$ 1Market cap 8,823 Potential upside/(downside) 31.5%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation Value Price Target

EV/Sales 4.0x 2.2x 2.8x 4.8x 4.5x 4.2x WACC, % 8.5%EV/EBITDA 6.2x 7.9x 12.5x 11.6x 10.8x Terminal growth, % 3%EV/EBIT 11.5x 7.2x 9.4x 16.9x 15.3x 14.2x Present value of FCF (2012-2015), US$ mn 1,454EV/DACF 10.8x 6.2x 7.0x 12.5x 11.9x 11.2x Present value of terminal value, US$ mn 12,016EV/NOPLAT 13.7x 9.4x 11.7x 20.8x 19.0x 17.7x DPW Enterprise value, US$ mn 13,470EV/GCI 0.8x 0.3x 0.4x 0.8x 0.8x 0.8x Add

Associates 3,750P/E 26.7x 20.2x 22.3x 19.2x 16.5x 13.5x LessP/B 1.0x 1.0x 1.4x 1.1x 1.1x 1.0x Net debt, US$ mn 4,319P/CFO 19.2 11.5 11.6 17.0 15.9 13.8x Minorities, US$ mn 895FCF yield -3.2% -9.5% 1.1% 0.4% -0.2% 1.5% Pension liabilities, US$ mn 504Dividend yield 0.9% 2.3% 1.7% 2.0% 2.4% 2.9% Equity value, US$ mn 11,502

No. of shares, mn 830Implied per share valuation (US$) 14.2 14.20

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 7.3% 5.7% 6.4% 6.5% 6.9% 7.0% Sales growth 20.2% -14.1% 9.1% -4.9% 9.5% 7.9%


ROE 6.8% 4.3% 5.0% 6.0% 6.6% 7.7% EBIT growth 36.6% -29.6% 7.1% 6.5% 14.8% 10.8%

Net debt/EBITDA 3.4x 5.0x 4.8x 3.3x 3.1x 2.9x Net income growth -56.4% -38.7% 26.5% 25.1% 16.1% 22.5%

Net debt/equity 59% 63% 62% 42% 42% 39% EPS growth -56.4% -38.7% 26.5% 25.1% 16.1% 22.5%



Financials: Solid cash-flow generation and fast deleveraging to support further expansion

On the back of our expectation of a slowdown in global trade (as a result of lower GDP growth) we revise downwards our revenue

forecasts for 2012-15 by 5% on average.

Port operators are highly operationally geared businesses. In many cases, the land and quaysides, etc. are government-owned,

while the terminal equipment is owned by the operator and annual concession fees are paid (though some of these are linked to

revenues). DP World has indicated that 40% of its costs are fixed and consequently, with volumes declining, margins are expected to

suffer. However, thanks to solid results from its emerging market terminals, improving terminal efficiencies and a strong focus on

managing costs across the portfolio, we believe that its EBITDA margin (including associates) will improve slightly – we expect a

38.6% margin in 2011E, increasing to 39.5% in 2015E.

DP World has managed to significantly improve its balance sheet: net debt/EBITDA has declined from 5.3x in 2009 to 3.8x in 2011E.

A US$3 bn syndicated loan is maturing in October 2012, and we believe the company is well positioned to pay off its debt, with a

cash balance of US$2.5 bn at the end of 2011 on our estimates.

Exhibit 445: We forecast a sales/EBITDA 2011-15E CAGR of 9.5%/10.2% P&L statement , 2007-2015E, US$ mn


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Group revenues 2,731 3,283 2,929 3,078 2,927 3,204 3,456 3,770 4,063Growth 20.2% -10.8% 5.1% -4.9% 9.5% 7.9% 9.1% 7.8%

Group EBITDA (clean) 995 1,224 996 1,104 1,131 1,240 1,349 1,480 1,603Group EBITDA margin 36.4% 37.3% 34.0% 35.9% 38.6% 38.7% 39.0% 39.3% 39.5%

Group EBIT (clean) 624 852 582 642 684 785 869 970 1,065Group EBIT margin 22.8% 26.0% 19.9% 20.9% 23.4% 24.5% 25.2% 25.7% 26.2%

Share of associates 105 114 69 140 161 177 186 194 206Net financial items -109 -389 -227 -279 -245 -263 -202 -231 -222Pre-tax (clean) 619 577 424 503 600 699 853 933 1,049Non-recurring Items 522 -97 -74 -153 -145 -159 -171 -187 -201Pre-tax (reported) 1,141 480 350 351 455 540 682 746 847Tax -81 -47 -54 -53 -60 -77 -102 -121 -147Tax rate (%) 8% 13% 19% 25% 20% 21% 21% 22% 23%

Profit after tax (reported) 1,060 434 296 297 395 464 579 625 701Minorities -45 -48 -37 -76 -73 -79 -86 -93 -101Net income (reported) 1,105 482 333 374 468 543 665 718 801Post-tax exceptionals 611 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 494 482 333 374 468 543 665 718 801




Exhibit 446: DP World balance sheet and cash flow statement, 2007-2015E Balance Sheet and cash flow statement, 2007-2015E, US$ mn



EBIT 624 852 582 642 684 785 869 970 1,065Depreciation/Amortisation 371 372 414 462 447 455 479 510 538Net financial items -109 -389 -227 -279 -245 -263 -202 -231 -222Taxes paid -81 -47 -54 -53 -60 -77 -102 -121 -147Other items -43 -91 -131 -27 0 0 0 0 0

Change in working capital 99 156 -293 249 -110 26 27 37 34Cash flow from operations 860 854 291 994 717 926 1,071 1,164 1,268

Capex -742 -1,265 -828 -902 -676 -949 -928 -826 -868Capex/D&A 199.7% 340.4% 200.0% 195.2% 151% 208% 194% 162% 161%capex/sales (%) 27.2% 38.5% 28.3% 29.3% 23.1% 29.6% 26.9% 21.9% 21.4%Free cash flow pre-dividend 119 -411 -537 92 41 -23 143 338 400Free cash flow pre-dividend/revenues (%) 4.3% -12.5% -18.3% 3.0% 1.4% -0.7% 4.2% 9.0% 9.9%

Other investing activities 0 0 0 0 0 0 0 0 0Dividend -11 -252 -132 -191 -143 -179 -207 -254 -274Cash surplus (post dividend) 107 -663 -669 -99 -102 -202 -64 84 126Other and financing -1,817 -209 107 1 0 0 0 0 0Change in net cash (net debt) -1,710 -871 -563 -98 -102 -202 -64 84 126Net debt (cash) 2,843 4,215 5,059 5,250 3,723 3,882 3,897 3,758 3,567


Inventories 54 57 60 53 46 49 53 57 61Receivables 704 741 807 653 642 702 757 826 890Cash and cash equivalents 3,059 1,204 2,910 2,520 4,047 887 2,829 3,086 3,325Other 20 10 28 2,085 2,085 2,085 2,085 2,085 2,085Current assets 3,837 2,013 3,806 5,310 6,819 3,724 5,724 6,054 6,361

Tangible assets 3,915 4,253 4,859 5,086 4,397 5,135 5,827 6,387 6,960Intangible assets 6,018 5,995 6,599 5,248 4,365 4,221 4,078 3,934 3,790Other 3,420 3,239 3,697 3,715 4,047 4,082 4,120 4,159 4,200Non-current assets 13,353 13,486 15,155 14,049 12,809 13,438 14,024 14,479 14,950

Total assets 17,190 15,499 18,961 19,360 19,629 17,162 19,748 20,533 21,311

Short-term interest-bearing liabilities 294 222 495 349 349 349 349 349 349Accounts payables 1,190 1,386 1,164 1,308 1,180 1,269 1,355 1,465 1,567Other 0 0 0 0 0 0 0 0 0Current liabilities 1,484 1,609 1,659 1,657 1,529 1,619 1,704 1,814 1,916

Long-term interest-bearing liabilities 5,608 5,197 7,475 7,420 7,420 4,420 6,377 6,494 6,543Pension provisions 266 231 358 595 595 595 595 595 595Other 1,460 1,290 1,432 1,192 1,192 1,192 1,192 1,192 1,192Non-current liabilities 7,334 6,717 9,264 9,206 9,206 6,206 8,163 8,280 8,329

Total Common Equity 7,716 6,433 7,231 7,682 8,007 8,371 8,829 9,293 9,820Minorities 657 740 806 814 887 966 1,052 1,145 1,246




Drake and Scull International (DSI.DU)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Construction

Growing backlog, exposure to MENA infrastructure spend and low valuation multiples

Drake and Scull International (DSI) is a UAE based E&C company. Its order backlog has grown

42% ytd and, given its exposure to MENA infrastructure spend, we think that backlog growth will

continue and will translate into strong revenue and earnings growth which is not priced into the

current valuation in our view. We initiate coverage with a Buy rating.


As at 9M11, DSI’s order backlog had grown 42% yoy to AED6.7 bn. Given its exposure to

infrastructure spend in MENA, we think DSI’s order backlog will continue to grow, driven in

particular by strength in Saudi Arabia, Qatar and Abu Dhabi as the company continues to

move away from the still-slowing Dubai market.

We forecast a growing MENA construction market (average 4% pa growth in GCC

construction spend, or 8% excl UAE), but we think that DSI can grow faster than the market

overall given its relatively low exposure to UAE real estate which is still slowing. We forecast

revenues to grow at an average of 20% pa through 2015.

Our EBITDA forecast of AED304 mn in 2012 is broadly in line with consensus. We forecast

2011 revenue of AED2.8 bn, which represents growth of 53% yoy, although this could prove to

be conservative given the 81% growth the company recorded at the 9M11 stage.

Spending budgets are representative of the high oil price which is a significant driver of GDP

in the MENA region. A sharp fall in the oil price therefore constitutes the main risk to our view

on DSI, if it were to lead to a reining in of infrastructure plans.

Valuation: Trading well below global E&C peers

DSI is trading on a 2012E EV/EBITDA of 4.2x and P/E of 8.5x, below its average multiples over

2009-10 of 6.0x and 9.7x respectively, and also below our global engineering and construction

coverage on 6.4x and 10.8x respectively. DSI’s stock price has fallen by 21% ytd, underperforming

MSCI EEMEA by 4%. Based on our 2012E/13E EV/EBITDA valuation methodology and using the

global construction 5-year median multiple of 8.6x, our 12-month price target is AED1.54, implying

87% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Drake and Scull International (DSI.DU)


Key data Current

Price (AED) 0.83




Free Float (%) 55.6


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 1,854.6 2,838.3 3,161.1 3,452.0

EBIT (AED mn) 131.9 186.9 195.2 217.2

EPS (AED) 0.07 0.09 0.10 0.11

EV/EBITDA (X) 8.1 5.1 4.2 3.4

P/E (X) 12.5 8.9 8.5 7.4

Dividend yield (%) 0.0 5.1 5.3 6.1

FCF yield (%) (8.5) 11.4 11.6 14.0

CROCI (%) 13.6 12.1 12.3 12.9

EV/GCI (X) 0.7 0.6 0.5 0.4

Net Debt/EBITDA (X) (2.1) (1.8) (2.1) (2.4)

260

280

300

320

340

360

380

400

420

440

460

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20



Drake and Scull International (L) MSCI EM EMEA (R)



Investment drivers: Gaining exposure to the faster growing regional markets


DSI’s strong order backlog growth ytd has been driven partly by the acquisition of ICC, a civil

focused business in Saudi Arabia which added AED800 mn to the backlog, but also by new

orders totalling AED3.6 bn in Oman, Egypt, Kuwait, Saudi Arabia, UAE, Asia and Europe.

The company’s segments, MEP (Mechanical, Engineering and Plumbing), IWP (Water and

Power) and CW (Civil Works) are predominantly infrastructure based and therefore less cyclical

than other forms of building construction such as residential and commercial. Infrastructure

demand is driven by factors such as population growth, but also government fiscal health.

The GCC region in particular has benefited from high oil prices and healthy government

budgets, and we think that infrastructure growth in the region is likely to be strong. Countries

such as Saudi Arabia, Qatar, Kuwait and the emirate of Abu Dhabi will become increasingly

important for DSI – we forecast infrastructure order growth from these countries to average 7%-

10% over 2011-15. For example, Saudi Arabia accounted for c.45% of the 9M11 AED6.7 bn

backlog. Another example is the recently announced (September 26) opening of civil and

building activities in Qatar.


Spending plans in this region are dependent on the health of government budgets and

ultimately the oil price. Any fall in the oil price to levels below US$70-80/bbl would be a

potential negative for the recently announced spending plans.

The political unrest in the MENA region this year has affected some of DSI’s operations, in

Egypt and Syria in particular. Political instability would be a risk to our view.

Another risk would be low cost competitors being attracted to the strong infrastructure markets

and competing down margins – we assume stable margins in our analysis.

Industry context

In terms of annual contracts awarded, the GCC construction market has grown by an average 26%

pa since 2004 to stand at, we estimate, US$142 bn at end-2010. We estimate that projects ongoing

in the whole MENA region currently stand at US$2.6 tn, with the UAE, Saudi Arabia and Iraq the

biggest markets. DSI does very little real estate and removing real estate projects would mean

ongoing projects in MENA are worth c.US$1.5 tn. E&C in the region is very fragmented with regional

players competing for projects across MENA. The biggest contracting groups in the GCC region, and

among DSI’s biggest competitors, are Saudi Binladin Group, Al Habtoor Leighton, Saudi Oger , Al

Jaber and Arabtec.

Company description

Drake and Scull International (DSI), is a regional E&C

company. Its contracting work relates to the construction

industry and includes mechanical, electrical, plumbing,

infrastructure, water, power, property, sanitation and real

estate work. DSI established its first office in Abu Dhabi in

1966 and now has operations in Egypt, Kuwait, Libya, Oman,

Saudi Arabia, Syria, Qatar, Jordan and Thailand. It also

manages some projects in Europe. The company listed in

Dubai in 2009 and has c.20,000 employees.

Order backlog by geography (9M11)



Dubai13%

Abu Dhabi16%

Saudi Arabia45%

Others26%

Mechanical, Electrical

and Plumbing

47%

Water and Power19%

Civil Works34%



Key financial ratios: Strong revenue growth backed by a strong balance sheet

Exhibit 447: We expect average sales growth of 20% pa from 2011E to 2015E

Exhibit 448: We forecast an average CROCI of 13% from 2011E to 2015E



Exhibit 449: DSI has a 49% foreign ownership shareholding limit

Exhibit 450: We forecast DSI to remain a net cash company through 2015E



0%

2%

4%

6%

8%

10%

12%

14%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

KRT2 Limited9%

KRT3 Limited9%

Khaldoun Rashid Tabari

8%

Al Mal Capital5%

SHUAA Partners Fund

I, L.P.4%

Other Investors

9%

Free Float56%

-3.5x

-3.0x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Trading on very low multiples relative to peers in 2012E

Exhibit 451: Drake and Scull International trades on a 2012E P/E multiple of 8.5x, well below global E&C peers on 10.8x despite offering significant growth

potential


Drake & Scull International PJSC IndustrialsY/E December ConstructionAED mn Engineering & Construction

Price (AED) 0.83 12M target price (AED) 1.54 AED/$ (spot) 3.67Market cap 1,770 Potential upside/(downside) 87%

Valuation 2009 2010 2011E 2012E 2013E Price target calculation EBITDA 2012E

EBITDA 2013E

EV/EBITDA multiple

Implied EV 2012E


EV/Sales 0.5 0.9 0.5 0.4 0.3 Group EBITDA 304 332 8.6 2,612 2,852EV/EBITDA 3.8 8.1 5.1 4.2 3.4 Group EBITDA 304 332 8.6 2,612 2,852EV/EBIT 5.0 12.2 7.4 6.5 5.1 AddEV/DACF 5.9 5.9 5.0 4.2 3.4 Associates 0 0EV/NOPLAT 4.3 9.8 5.9 5.3 4.3 Investments 13 13EV/GCI 0.7 0.7 0.6 0.5 0.4 EV post associates and investments 2,625 2,865

Less 0 0P/E 6.8 12.5 8.9 8.5 7.4 Net debt/(cash) -629 -796P/B 0.8 0.8 0.7 0.6 0.6 Minorities 90 101P/CFO 6.6 6.6 6.0 5.4 4.9 Pensions and other 50 50FCF yield -7.8% -8.5% 11.4% 11.5% 13.9% Equity Value 3,114 3,511Dividend yield 7.8% 0.0% 5.1% 5.3% 6.1% No. of shares 2,145 2,145


Returns and gearing 2009 2010 2011E 2012E 2013E Growth 2010 2011E 2012E 2013ECROCI 11.4% 13.6% 12.1% 12.3% 12.9% Sales growth -16.1% 53.0% 11.4% 9.2%

ROIC 23.8% 7.2% 8.5% 8.4% 8.9% EBITDA growth -30.5% 37.5% 11.4% 9.2%

ROE 14.4% 6.3% 7.8% 7.6% 8.3% EBIT growth -38.7% 41.8% 4.4% 11.3%

Net debt/EBITDA -2.5 -2.1 -1.8 -2.1 -2.4 Net income growth -45.3% 29.1% 4.0% 14.8%

Net debt/equity -28.7% -16.6% -18.3% -21.9% -26.2% EPS growth -44.8% 29.0% 3.9% 14.8%



Financials: Top-line growth supported by backlog and exposure to strong markets

We forecast DSI’s project wins to grow strongly in 2011 and then average 8% growth from 2012 to 2015 inclusive. This is based on

our constructive view of the region’s construction markets and Saudi Arabia, Qatar and Abu Dhabi in particular. With this potential

growth in the company’s backlog, we estimate revenue growth of 20% on average (2011-15) and cumulative EBITDA growth of 54%

over that period. We also forecast strong FCF growth and a strengthening net cash position which would both support dividends in

our view.

At the 9M11 stage, revenues increased 81% yoy to AED2.2 bn, while the group EBITDA margin was 9.1%, in line with the 1H11

margin. Our full year forecast is a margin of 9.6%.

Exhibit 452: We forecast DSI’s EBITDA will grow by a cumulative 54% between 2011E and 2015E 2009-2015E P&L, AED mn, year to December


Summarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS2009 2010 2011E 2012E 2013E 2014E 2015E

Mechanical, Electrical and Plumbing 1,306 1,088 1,396 1,449 1,521 1,695 1,912Water and Power 417 487 567 599 699 830 950Civil Works 589 438 1,034 1,288 1,427 1,621 1,754Corporate Office/Eliminations -100 -158 -158 -176 -195 -223 -250Group revenues 2,212 1,855 2,838 3,161 3,452 3,922 4,367Growth -16.1% 53.0% 11.4% 9.2% 13.6% 11.3%

Group EBITDA (clean) 285 198 273 304 332 377 420Group EBITDA margin 12.9% 10.7% 9.6% 9.6% 9.6% 9.6% 9.6%

Group EBIT (clean) 215 132 187 195 217 255 290Group EBIT margin 9.7% 7.1% 6.6% 6.2% 6.3% 6.5% 6.6%

Share of associates 0 0 0 0 0 0 0Net financial items 71 24 22 22 32 93 212Pre-tax (clean) 286 156 209 217 249 349 502Non-recurring Items 51 0 0 0 0 0 0Pre-tax (reported) 337 156 209 217 249 349 502Tax -1 5 0 0 0 0 0Tax rate (%) 0% -3% 0% 0% 0% 0% 0%

Profit after tax (reported) 336 162 209 217 249 349 502Minorities -2 -7 -9 -9 -11 -15 -21Net income (reported) 334 155 200 208 238 334 480Post-tax exceptionals 51 0 0 0 0 0 0Net income (clean, continuing operations) 283 155 200 208 238 334 480

EPS (clean, fully diluted) 0.13 0.07 0.09 0.10 0.11 0.16 0.22DPS 0.07 0.00 0.04 0.04 0.05 0.07 0.10



Exhibit 453: We forecast DSI to generate strong FCF in line with its growing top line Balance Sheet and cash flow statement, 2009-2015E, AED mn, year to December


Summarised cash flow2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 215 132 187 195 217 255 290Depreciation/Amortisation 70 66 86 109 115 122 130Net financial items 62 60 15 22 32 93 212Taxes paid -1 -5 0 0 0 0 0Other items -55 37 7 0 0 0 0

Change in working capital -424 -361 -14 3 25 10 37Cash flow from operations -133 -71 280 328 388 481 669

Capex -21 -98 -70 -114 -128 -143 -161Capex/D&A 29.7% 147.8% 81% 105% 112% 118% 124%capex/sales (%) 0.9% 5.3% 2.5% 3.6% 3.7% 3.7% 3.7%Free cash flow pre-dividend -154 -169 210 214 261 337 508Free cash flow pre-dividend/revenues (%) -7.0% -9.1% 7.4% 6.8% 7.5% 8.6% 11.6%

Other investing activities -254 -111 -128 0 0 0 0Dividend 0 -150 0 -90 -93 -107 -150Cash surplus (post dividend) -408 -430 82 124 167 230 358Other and financing 1,174 131 0 0 0 0 0Change in net cash (net debt) 766 -299 82 124 167 230 358Net debt (cash) -721 -422 -504 -629 -796 -1,026 -1,384

Summarised balance sheet2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 13 25 24 27 29 33 37Receivables 984 1,266 1,703 1,818 1,899 2,059 2,183Cash and cash equivalents 1,160 705 788 912 1,079 1,309 1,667Other 961 1,360 1,728 1,772 1,785 1,842 1,862Current assets 3,118 3,356 4,243 4,529 4,792 5,243 5,749

Tangible assets 212 250 408 459 515 578 649Intangible assets 822 1,149 1,103 1,057 1,014 973 933Other 249 115 115 115 115 115 115Non-current assets 1,282 1,514 1,626 1,631 1,644 1,666 1,698

Total assets 4,401 4,871 5,869 6,160 6,436 6,909 7,447

Short-term interest-bearing liabilities 503 787 787 787 787 787 787Accounts payables 786 963 1,474 1,579 1,655 1,802 1,919Other 372 525 803 863 908 993 1,061Current liabilities 1,661 2,275 3,065 3,229 3,350 3,582 3,767

Long-term interest-bearing liabilities 160 2 2 2 2 2 2Pension provisions 35 50 50 50 50 50 50Other 30 2 2 2 2 2 2Non-current liabilities 224 53 53 53 53 53 53

Shareholders' equity 2,477 2,470 2,669 2,787 2,932 3,159 3,489Minorities 39 72 81 90 101 116 137

Total equity and liabilities 4,401 4,871 5,869 6,160 6,436 6,909 7,447



Egyptian Resorts Company (EGTS.CA)



[email protected]

Matija Gergolet

[email protected]

Egypt: Real Estate

Risks offset any revenue generating activity in the near term

Egyptian Resorts Company (ERC) derives its revenues from the landbank of Sahl Hasheesh on the

Red Sea Coast, south of Hurghada. We expect reduced real estate activity in the luxury segment in

2011-12, and with the lack of clarity on the status of the development approval license of Phase III

of Sahl Hasheesh (68% of the total landbank), we initiate on ERC with a Neutral rating.

Investment thesis: Lower sales and margins, landbank approval pending; Neutral

ERC‘s primary source of income is the real estate sales of Sahl Hasheesh International Resort

Community (Phase I, II and III) to sub-developers, management fees for services and utilities

provided in the community.

We believe end-consumer demand for luxury apartments, villas, resorts and hotels will be

muted through 2012 due to our economists’ expectation of a global economic slowdown and

a time lag for consumer demand normalising after the political events in Egypt this year. We

forecast net real estate sales of 0.05mn sqm in 2011 and 0.25mn sqm in 2012 for Phase I and

Phase II and no sales for Phase III.

We believe ERC’s 2011-12 margins will come under pressure from the high inflation

environment and inability of the company to pass on increased costs to developers in the

near term. We expect margins to recover only late 2012, when the company benefits from the

management fees collection starting 2012 and implementation of the community

management model that passes on the cost increases to the developers. We estimate

operating margins of -34% in 2011, -15% in 2012 and 57% in 2013.

In April 2011, the Tourism Development Authority (TDA) withdrew preliminary approval for

the allocation of Phase III which contributes to 68% of the total landbank. Though the

company has appealed against the TDA action, the status quo remains unchanged.

Valuation: Trading above book value despite landbank risk

Our 12-month price target of £E1.04 for ERC is based on an average 2012/13E P/E and P/B

methodology. We apply a 9.7x P/E multiple, reflecting a 30% discount (to factor in risk relating to

the Sahl Hasheesh phase III landbank) to the 5-year multiple of 13.9x for GS-covered real estate

developers. Due to negative EPS in 2012E, we use a floor P/B valuation of 0.77x based on ERC’s

history to arrive at a 2012 per share value. Our price target implies 8% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Egyptian Resorts Company (ERC) (EGTS.CA)


Key data Current

Price (£E) 0.96




Free Float (%) 31.9


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 14.9 48.6 189.8 343.8

EBIT (£E mn) (28.1) (16.6) (28.9) 197.3

EPS (£E) 0.00 0.00 (0.01) 0.15

EV/EBITDA (X) NM NM NM 3.9

P/E (X) NM NM NM 6.6

Dividend yield (%) NM 0.0 0.0 3.0

FCF yield (%) -- (5.4) (6.0) 9.3

CROCI (%) (2.1) 0.0 (1.3) 17.0

EV/GCI (X) NM 0.9 0.9 0.8

Net Debt/EBITDA (X) -- -- -- (1.2)

260

310

360

410

460

0.90

0.95

1.00

1.05

1.10

Oct-10 Jan-11 May-11 Aug-11


Egyptian Resorts Company (ERC) (L) MSCI EM EMEA (R)



Industry drivers: Headwinds of weak tourism and weak luxury real estate sales


Since ERC‘s primary source of revenue generation is real estate sales of Sahl Hasheesh

International Resort Community (gross land area of 41mn sqm), the revenues of the company

tend to be lumpy and not a linear progression of a business driven by a traditional sales cycle.

Following the political turmoil in Egypt, we believe that the current environment is not

conducive to the sale of luxury real estate in Egypt and this will weigh on the land sale of Sahl

Hasheesh through 2012. We assume the remaining land sale of 0.09 mn m2 for Phase I and sale

of only 0.21 mn m2 for Phase II through 2011-12, recovering to 0.5 mn m2 in 2013. Approximately

18% of our revenues forecasts of £E190 mn for 2012 and £E344 mn for 2013 are contributed by

rendered services vs. c.1% in the past, highlighting our view of weak land sales.

ERC has a strong balance sheet with a net cash position which may help the company manage

the current low sales environment. We forecast net debt/equity of -22% for 2011 and -16% for

2012 versus the 3-year historical average of -31%. However, the book value of the company is at

risk due to issues related to the landbank.


Withdrawal of the approval for allocation of Phase III would impact the development and sales

of 28mn sqm of land (68% of the land bank) which includes the back areas of Phase I and II. It is

currently unclear whether ERC would have to pay an extra amount for previously acquired land

or whether this will result in a loss of land, or no action at all.

An upside risk would be political stability in Egypt and improvements in real estate activity.

Industry context: Industry overshadowed by weak demand and legal issues

The Egyptian real estate is driven by primary housing demands of the growing middle-income

population, demand for secondary units for residential and investment purposes from upper/upper

middle-income groups and non-resident Egyptians, low-income affordable housing initiatives by the

government and commercial activities primarily in the urban region. The sector was among the

most important destinations of FDI investments in Egypt. Real estate investments accounted for

0.4% of FDI in FY2004-05, increased to 4.5% in FY2009-10 but post the regime change FDI was down

96% for quarter ending June 2011. According to the American Chamber of Commerce in Egypt, the

market for luxury property was near saturation prior to January 2011 which exposes sub-developers

of Sahl Hasheesh to the additional task of attracting foreign demand for the developments.

Currently, the real estate sector is overshadowed by legal issues mostly related to the previous

regime’s land allocation to developers and approval of sites for development. The major players in

the industry are Palm Hills, TMG, SODIC and ERC.

Company description

Egyptian Resorts Company (ERC) is a master developer

focused on building mega communities. The company derives

revenues from the sale of project-defined land plots to sub-

developers, sale of utilities and community management fees

and the development and operation of strategic one-off and

recurring revenue assets. The company’s current focus is

developing Sahl Hasheesh International Resort Community

(gross saleable land of 36.3mn sqm) which has been divided

into three phases. Only 0.09mn sqm is remaining to be sold in

Phase I while Phase II has 5.02mn sqm and Phase III has

25.3mn sqm. The company currently has c.200 employees.




Egypt99%

Others1%

Land and Villa Sales

46%Rendered services &

others54%



Key financial ratios: Low margins and low CROCI in the near term

Exhibit 454: Sales and margins pick up only after 2013E

Exhibit 455: CROCI and GCI depressed in the near term



Exhibit 456: Egyptian Resorts Company shareholding and group structure

Exhibit 457: We forecast ERC to remain a net cash company through 2015E



-150%

-100%

-50%

0%

50%

100%

150%

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n


-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n

GCI CROCI (RHS)

Misr Insurance Company

15%

KATO Investment

12%

First Arabian Real Estate and Tourism

Investment Co10%

Rowad Tourism

Company10%

Al Ahli Capital Holding

9%

Orascom Development

Holding4%

Other Investors

8%

Free Float32%

-50.0x

0.0x

50.0x

100.0x

150.0x

200.0x

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Landbank details of Egyptian Resorts Company

Exhibit 458: A total of 30.38 mn sqm of land remains to be sold (including Phase III land) Details of landbank of Egyptian Resorts Company


Total area (mn sqm)

Sellable area (mn sqm)

Remaining area to be sold (mn sqm)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -->2023

TOTAL 40.93 36.36 30.38

Plot salesProjects' Development

25.27

Phase I

Phase II

Phase III 28.3 25.37

6.32

Plot salesProjects' Development

Plot sales

5.6 4.67 0.09

7.03 5.02Projects' Development



Valuation, growth and returns: Trading above book value despite landbank risk

Exhibit 459: ERC CROCI will remain depressed in 2011 and 2012 in our view


Egyptian Resorts Company Financial ServicesY/E December Real Estate£Emn Developers

Share price (E£) 0.96 12-month price target (E£) 1.04 $/£E (spot) 5.98Market cap 1,008 Potential upside/(downside) 8%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EPS 2012E EPS 2013 P/E multiple Value 2012E Value 2013E Price target

EV/Sales 11.6 75.8 133.6 17.8 4.8 2.4 EPS -0.01 0.15 9.7 0.66 1.42EV/EBITDA 12.2 -1080.0 -130.5 -323.5 -66.4 3.9 Implied per share valuation (£E) 0.66 1.42 1.04EV/EBIT 12.3 -260.6 -71.0 -52.0 -31.6 4.2EV/DACF 11.9 -24.7 -102.2 -4567.4 -75.8 4.7 Due to negative EPS in 2012, our 2012 per share valuation is based on a floor P/B multiple of 0.77x based onEV/NOPLAT 16.0 626.5 -59.7 -65.0 -39.5 5.2 ERC's history.EV/GCI 5.4 2.0 2.3 0.9 0.9 0.8

P/E 15.9 -338.9 572.9 -581.4 -119.7 6.6P/B 4.2 2.0 2.4 1.1 1.1 1.0P/CFO 12.1 -36.4 -458.7 103.6 -191.9 5.6FCF yield 3.0% -5.3% -1.6% -5.4% -6.0% 9.3%Dividend yield 1.3% 2.9% 2.9% 0.0% 0.0% 3.0%

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 55.5% -9.2% -2.1% 0.0% -1.3% 17.0% Sales growth -1.1% -92.6% -42.1% 225.5% 290.9% 81.1%

ROIC 48.5% 0.5% -4.7% -2.0% -3.2% 20.5% EBITDA growth 15.0% -100.5% 744.5% -82.5% 416.1% -1652.7%

ROE 24.8% -0.4% -0.4% -0.2% -0.9% 15.7% EBIT growth 14.8% -102.3% 274.8% -40.9% 74.4% -781.6%

Net debt/EBITDA -1.1 NM NM NM NM -1.2 Net income growth -0.4% -102.4% -159.4% -145.3% 385.6% -1924.2%

Net debt/equity -33.2% -26.8% -27.8% -22.0% -15.8% -22.4% EPS growth -30.7% -102.1% -159.4% -145.3% 385.6% -1924.2%



Financials: Lumpy revenues due to non-uniform real estate sales

The political unrest in Egypt in 1Q2011 has resulted in lower construction activity and tourist arrivals into Egypt. Though

construction has restarted in Sahl Hasheesh and the sub-developers are seeing increased visitor numbers to the resort city, we

believe the company’s top line will be driven more by fees of services rendered and utilities than real estate sales in 2011 and 2012.

We forecast total sales growth of 225.5% in 2011, 291% in 2012 and 81% in 2013 vs. -42% in 2010 and -93% in 2009. The sales growth

rates are high due to the low base effect of 2009 and 2010, when no land was sold. Notably, the revenue generation in 2011 is from

rendered services rather than land sales. The company reported £E24.5 mn in 1H2011 revenues with a 69% contribution from

rendered services and others segment.

Exhibit 460: We expect margins to recover beginning only in 2013 after incurring losses in 2011 to 2012

Egyptian Resorts Company, 2006-2015E P&L £E mn


Summarised P&L EAS EAS EAS EAS EAS EAS EAS EAS EAS EAS2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Land and Villa Sales 326 349 338 0 0 23 159 279 523 581Rendered Services & Other 0 3 10 26 15 26 31 65 105 112Group revenues 326 352 348 26 15 49 190 344 627 693Growth 285.4% 8.0% -1.1% -92.6% -42.1% 225.5% 290.9% 81.1% 82.5% 10.5%

Group EBITDA (clean) 238 288 331 -2 -15 -3 -14 214 383 416Group EBITDA margin 73.0% 81.9% 95.2% -7.0% -102.4% -5.5% -7.3% 62.2% 61.0% 60.1%

Group EBIT (clean) 237 287 329 -7 -28 -17 -29 197 362 394Group EBIT margin 72.9% 81.5% 94.6% -29.1% -188.3% -34.2% -15.2% 57.4% 57.7% 56.8%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items -1 2 28 22 27 12 9 7 8 10Pre-tax (clean) 236 289 357 14 -1 -4 -20 204 370 404Non-recurring Items 0 0 -11 -6 -6 0 0 0 0 0Pre-tax (reported) 236 289 345 8 -8 -4 -20 204 370 404Tax 0 -3 -80 -11 -2 0 0 -41 -74 -81Tax rate (%) 0% 1% 23% 142% -19% 0% 0% 20% 20% 20%

Profit after tax (reported) 236 286 265 -3 -9 -4 -20 164 296 323Minorities -4 -6 -1 -1 6 2 12 -10 -18 -20Net income (reported) 231 280 264 -4 -4 -2 -8 154 278 303Post-tax exceptionals 4 6 -9 2 -8 0 0 0 0 0Net income (clean, continuing operations) 227 274 273 -6 4 -2 -8 154 278 303

EPS (clean, fully diluted) 0.32 0.43 0.29 -0.01 0.00 0.00 -0.01 0.15 0.26 0.29DPS 0.00 0.05 0.06 0.06 0.06 0.00 0.00 0.03 0.05 0.06



Exhibit 461: Balance sheet remains strong in our view, although there is risk to the carrying value of the landbank

Egyptian Resorts Company balance sheet and cash flow statement, 2006-2015E £E mn



EBIT 237 287 329 -7 -28 -17 -29 197 362 394Depreciation/Amortisation 0 2 2 6 13 14 15 17 21 23Net financial items 1 11 22 24 18 12 9 7 8 10Taxes paid 0 -3 -80 -11 -2 0 0 -41 -74 -81Other items -2 -7 84 -71 -6 0 0 0 0 0

Change in working capital -162 -186 -75 10 11 -22 -8 44 -374 -86Cash flow from operations 74 104 281 -50 6 -12 -13 224 -57 259

Capex -18 -39 -150 -70 -42 -46 -50 -124 -69 -75Capex/D&A 6228.7% 2572.2% 6897.5% 1227.3% 330.4% 332% 332% 750% 332% 332%capex/sales (%) 5.5% 11.1% 43.3% 270.7% 283.9% 95.2% 26.5% 36.1% 10.9% 10.8%Free cash flow pre-dividend 56 65 131 -120 -36 -58 -64 100 -126 185Free cash flow pre-dividend/revenues (%) 17.2% 18.4% 37.6% -464.0% -240.5% -120.3% -33.5% 29.1% -20.1% 26.6%

Other investing activities 0 0 0 0 0 0 0 0 0 0Dividend 0 -7 -170 0 0 0 0 0 -31 -56Cash surplus (post dividend) 56 58 -39 -120 -35 -58 -64 100 -157 129Other and financing 0 328 -52 58 0 0 0 0 0 0Change in net cash (net debt) 56 386 -91 -62 -35 -58 -64 100 -157 129Net debt (cash) -76 -462 -371 -309 -274 -215 -152 -252 -95 -224


Inventories 0 0 0 0 1 3 13 23 42 47Receivables 206 329 323 394 251 243 247 344 627 693Cash and cash equivalents 76 462 371 309 274 274 274 274 274 274Other 176 189 377 388 454 486 475 516 941 1,040Current assets 458 980 1,071 1,091 979 1,005 1,008 1,156 1,885 2,053


Total assets 668 1,253 1,550 1,497 1,432 1,490 1,528 1,784 2,560 2,780



Total Common Equity 485 1,090 1,041 1,076 912 910 902 1,055 1,302 1,550Minorities 15 16 78 78 73 71 58 68 87 106




Elsewedy Electric Company (SWDY.CA)



[email protected]


[email protected]

Matija Gergolet

[email protected]

Egypt: Capital Goods

African growth potential but valuation not compelling

Elsewedy provides exposure to secular growth in electricity generation and transmission in the

Middle East and Africa. Although current cable utilization is low at 50% (the company doubled

cable capacity over 2005-10), future cable growth will be possible with minimal capex. We believe

the large order backlog in the high-margin turnkey division will allow Elsewedy to offset weakness

in the cable business. Current valuation does not seem compelling, however.


Through considerable investment in IT infrastructure to link geographies, Elsewedy is able to

consider production and distribution holistically. As the 2Q11 results show, Elsewedy was

able to fully offset the fall in Egyptian demand for cables with exports to the Gulf and Africa

(the decrease in 2Q net income was due higher interest income and taxes).

The African continent’s entire generation capacity is equivalent to that of Spain. Given

Elsewedy’s local presence and experience in the region (30% of revenue, 2011) it is well-

positioned to benefit from this growth. This is especially true in the turnkey segment, where

70% of the backlog is outside Egypt.

Gross profit margin in the turnkey segment is double that of the cable business. We therefore

forecast that despite a fall in gross profit margin for the cable business and higher interest

costs, growth in the turnkey division will allow Elsewedy to largely maintain earnings over the

next two years (average of -4%), before growing in 2013.

Net debt/EBITDA is high at 3.7x (2011E) vs. historical levels of 2x (2006-08) and the company’s

target of 2.5-3x. Elsewedy has some 8% of cable production located in Syria (an export hub

for Iraq) and Libya historically has consumed c.10% of sales (2010). Resolution/deterioration in

these markets would impact forecast earnings.

Valuation: We value the company at 7.8x EV/EBITDA, a 25% discount to peers

The company trades on a 2012E EV/EBITDA of 7.0x, below GS-covered global capital market

goods peers which trade on a 5-year median EV/EBITDA multiple of 10.5x. The stock’s own 4-year

multiple has been volatile, ranging from 12x-20x. Based on our 2012E/13E EV/EBITDA valuation

methodology and using the peer multiple with a 25% discount for (1) higher leverage and (2) legal

risk, our 12-month price target is £E28.9, implying 44% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Elsewedy Electric Company (SWDY.CA)


Key data Current

Price (£E) 20.01




Free Float (%) 33.6


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 12,902.0 15,688.7 16,083.4 18,086.8

EBIT (£E mn) 1,136.7 1,126.5 1,133.7 1,338.6

EPS (£E) 3.56 3.25 2.98 3.47

EV/EBITDA (X) 9.9 7.1 7.0 6.2

P/E (X) 11.8 6.2 6.7 5.8

Dividend yield (%) 1.8 0.0 0.0 5.2

FCF yield (%) (11.1) (18.3) 1.9 (2.3)

CROCI (%) 15.3 11.4 10.0 10.5

EV/GCI (X) 1.4 0.8 0.8 0.7


260

310

360

410

460

510

20

25

30

35

40

45

Oct-10 Jan-11 Apr-11 Jul-11


Elsewedy Electric Company (L) MSCI EM EMEA (R)



Investment drivers: Turnkey projects in Africa to accelerate revenues


Elsewedy is set to benefit from large investments expected to take place in electricity projects in

the Gulf and Africa. The World Bank estimates that Chinese financing commitments in Africa’s

infrastructure increased from less than US$1 bn pa in 2001-2003 to US$6 bn pa in 2006-07. On

the back of the oil surplus, governments in the Gulf are investing significant amounts to address

the medium-term shortfall in electricity. Kuwait plans to spend US$15 bn to double power

capacity by 2020 and Saudi Arabia plans to spend US$45 bn to add 30,000 megawatts to the

current 46,000 megawatts of power generation capacity by 2020 at a cost of US$45 bn. The

budget for cables in these projects can range from 5% in power generation to 80% for

distribution and transmission projects.

The company generates a lower cable gross profit/tonne in the Gulf than in Egypt. We therefore

expect the cable business to come under margin pressure as the Gulf’s share in total sales

increases. However, we expect cross selling of services from the turnkey division to continue

and largely offset this margin pressure. The turnkey division’s gross profit contribution

increased to 19% in 2010 from 11% in 2006. We forecast this trend to continue and expect the

gross profit contribution to reach 25% in 2013.

The largest revenue contributor of the electrical products division is electrical meters (40%,

2010) followed by transformers (29%, 2010) and other electrical products including wind (27%,

2010). The electrical meters unit was established in 2007 following the acquisition of Slovenians

Iskreameco. Given that most of the unit sales are to European countries, we forecast muted

growth of 3% (2012-15E).


Corporate taxes in Egypt were increased from 20% to 25% in 2011. Future changes in tax law

and/or revisions to the tax exemption granted to Elsewedy would materially impact earnings.

Higher-than-forecast interest charges may result from the refinancing/rolling over of debt and

higher working capital resulting from higher-than-forecast copper prices. Disruption to

production facilities in Egypt and Syria may result in lower-than-forecast earnings.

Industry context

The company is the largest player in the Middle East with a dominant market share in cables in

Egypt (40%). The second player in Egypt has a share of c.15%. Saudi Cables and Riyad Cable are the

two largest players in Saudi Arabia and the Gulf. We forecast that despite a strong recovery in Gulf

cable demand (13% average growth 2011-13E), pricing (gross profit/ tonne) is unlikely to increase

significantly over this period given the significant excess capacity in the region.

Company description

Elsewedy is a fully integrated energy solutions provider, with

more than 10,000 employees and 30 production facilities in 15

countries. With a cables production output of 280k metric

tonnes, Elsewedy is the largest producer in the MENA region.

More than half of the cable production capacity is located in

Egypt, followed by Saudi Arabia (10%) and Syria (8%). The

turnkey division delivers electricity generating, transmission

and distribution networks on an EPC (engineering,

procurement, and construction) basis, focused mainly in

Africa. The electrical products divisions include production of

transformers, wind generation and electrical meters.

Sales by geography exposure 2010A

Sales by division 2011E


Egypt28%

GCC and Levant27%

Africa33%

Europe12%

Cables74%

Turnkey projects

15%

Electrical products

11%



Key financial ratios: Growth to pick up in 2013

Exhibit 462: We expect a recovery in margin from 2012 as the share of the

turnkey business increases

Exhibit 463: Elsewedy’s significant capacity addition in 2007-10 means future

growth will come without major capex. 2006-2015E



Exhibit 464: Elsewedy shareholding

Exhibit 465: Elsewedy is targeting net debt/EBITDA of 2.5x-3x; we expect

this target to be achieved in 2013 (2006-2015E)



0%

2%

4%

6%

8%

10%

12%

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n


0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n

GCI CROCI (RHS)

El Sewedy Family64%

Mohammad abdulsalam

2%

Free Float34%

0.0x

0.5x

1.0x

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Correction overdone given only c.30% of sales from Egypt

Exhibit 466: At our target price, the company would be trading at 10x 2012E earnings


Elsewedy Electric CompanyY/E December£Emn

Share price (£E) 20.0 12-month target price (£E) 28.9 $/£E (spot) 5.98Market cap 4,466 Potential upside/(downside) 44%


EBITDA 2013E


EV/Sales 2.0 1.6 1.1 0.7 0.6 0.6 Elsewedy Electric Company 1,458 1,667 7.8 11,370 13,006EV/EBITDA 20.7 14.7 9.9 7.1 7.0 6.2 Group EBITDA 1,458 1,667 7.8 11,370 13,006EV/EBIT 23.5 18.1 12.3 9.1 8.9 7.7 AddEV/DACF 21.4 14.2 10.1 8.1 8.1 7.2 Associates 10 10EV/NOPLAT 24.0 19.1 13.7 10.7 10.8 9.2 Investments 14 14EV/GCI 2.9 1.8 1.4 0.8 0.8 0.7 EV post-discount 11,394 13,030

Less 0 0P/E 23.1 16.3 12.8 6.2 6.7 5.8 Net debt/(cash) 5,243 5,355P/B 5.0 2.6 1.9 0.8 0.7 0.6 Minorities 451 472P/CFO 17.7 12.2 7.5 4.2 4.4 4.0 Pensions and other 0 0Adjusted FCF yield -7% -1% -11% -18% 2% -2% Equity Value 5,700 7,203Dividend yield 0.7% 0.0% 1.8% 0.0% 0.0% 5.2% No. of shares, mn 223 223

Implied per share valuation (SR) 25.54 32.28 29



ROE 24% 16% 17% 14% 11% 12% EBIT growth 7.2% -15.4% 39.7% -0.9% 0.6% 18.1%

Net debt/EBITDA 3.2 3.6 3.0 3.7 3.6 3.2 Net income growth 14.2% -17.5% 6.9% -0.7% -8.1% 16.5%

Net debt/equity 84% 78% 80% 90% 79% 72% EPS growth 13.5% -17.4% 6.8% -0.7% -8.1% 16.5%



Financials: Low cable utilization rates; turnkey to support growth

We expect falling gross profit margins in the cable division and higher interest costs to be largely offset by higher growth in the

turnkey segment. We expect average growth of 20% (2011-13E) in the turnkey division on the back of the strong African backlog

(c.50%) compared with average 4% volume growth in the cable division (2011-13E).

Exhibit 467: We expect flat earnings for 2011E and 2012E and an increase in cable utilization from 52% in 2011E to 61% in 2013E 2006-2015E P&L, £E mn


Exhibit 468: Firm gross profit margin to bottom in 2012 as higher margin turnkey and Electrical division contribution increases Divisional Gross profit, 2008-20015E, £E mn



Cables 7,993 8,468 9,211 7,438 9,803 11,623 11,742 13,410 15,361 14,515Turnkey projects 266 658 1,040 860 1,690 2,366 2,615 2,889 3,192 3,528Electrical products 149 222 1,194 993 1,409 1,699 1,727 1,788 1,852 1,919Group revenues 5,746 9,348 11,446 9,291 12,902 15,689 16,083 18,087 20,405 19,961Growth 81.3% 62.7% 22.4% -18.8% 38.9% 21.6% 2.5% 12.5% 12.8% -2.2%

Group EBITDA (clean) 637 984 1,096 1,006 1,416 1,446 1,458 1,667 1,939 2,199Group EBITDA margin 11.1% 10.5% 9.6% 10.8% 11.0% 9.2% 9.1% 9.2% 9.5% 11.0%

Group EBIT (clean) 571 897 962 814 1,137 1,127 1,134 1,339 1,606 1,860Group EBIT margin 9.9% 9.6% 8.4% 8.8% 8.8% 7.2% 7.0% 7.4% 7.9% 9.3%

Share of associatesNet financial items -26 -116 -47 -97 -302 -252 -310 -379 -465 -433Pre-tax (clean) 545 781 915 716 835 875 824 959 1,140 1,427Non-recurring Items 0 0 0 -52 73 0 0 0 0 0Pre-tax (reported) 545 781 915 665 908 875 824 959 1,140 1,427Tax -11 -24 -19 -34 -91 -131 -140 -163 -194 -243Tax rate (%) 2% 3% 2% 5% 10% 15% 17% 17% 17% 17%

Profit after tax (reported) 533 757 896 631 817 744 684 796 946 1,185Minorities -25 -32 -68 3 -21 -19 -18 -21 -24 -31Net income (reported) 508 724 827 634 796 724 666 776 922 1,154Post-tax exceptionals 0 0 0 -49 66 0 0 0 0 0Net income (clean, continuing operations) 508 724 827 683 730 724 666 776 922 1,154


Y/E December 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGross Profit by SegmentCables 1,083 1,126 1,442 1,332 1,344 1,519 1,751 1,964Turnkey projects 291 335 429 577 611 675 746 825Electrical products 285 268 379 406 412 427 442 458Total Gross Profit 1,661 1,735 2,267 2,314 2,368 2,621 2,939 3,247Elimination/ HQTotal Gross Profit Margin 15% 19% 18% 15% 15% 14% 14% 16%



Exhibit 469: After reaching the net debt/EBITDA target of 2.5-3x, we expect resumption of dividend payouts from 2013E onwards Balance sheet and cash flow statement, 2006-2015E, £E mn



EBIT 571 897 962 814 1,137 1,127 1,134 1,339 1,606 1,860Depreciation/Amortisation 66 87 134 192 279 319 324 329 334 339Net financial items -31 -99 5 -179 -176 -252 -310 -379 -465 -433Taxes paid -11 -24 -19 -34 -91 -131 -140 -163 -194 -243Other items 21 17 -4 123 108 0 0 0 0 0

Change in working capital -1,399 -616 -1,216 370 -1,783 -1,707 -665 -987 -1,143 219Cash flow from operations -783 261 -138 1,286 -526 -644 342 138 138 1,743

Capex -124 -456 -1,201 -1,442 -552 -250 -250 -250 -250 -250Capex/D&A 188.0% 522.6% 896.7% 750.5% 197.7% 78% 77% 76% 75% 74%capex/sales (%) 2.2% 4.9% 10.5% 15.5% 4.3% 1.6% 1.6% 1.4% 1.2% 1.3%Free cash flow pre-dividend -908 -195 -1,340 -156 -1,078 -894 92 -112 -112 1,493Free cash flow pre-dividend/revenues (%) -15.8% -2.1% -11.7% -1.7% -8.4% -5.7% 0.6% -0.6% -0.6% 7.5%

Other investing activities -942 32 -412 222 97 0 0 0 0 0Dividend -232 0 -18 -185 -24 -172 0 0 -233 -277Cash surplus (post dividend) -2,082 -162 -1,770 -119 -1,005 -1,066 92 -112 -345 1,216Other and financing 1,108 178 -438 59 322 0 0 0 0 0Change in net cash (net debt) -974 16 -2,208 -59 -683 -1,066 92 -112 -345 1,216Net debt (cash) 980 1,318 3,527 3,586 4,269 5,335 5,243 5,355 5,700 4,484


Inventories 1,746 2,075 3,170 2,779 3,700 4,863 5,308 5,969 6,734 6,587Receivables 1,233 1,646 2,703 2,931 4,398 5,491 5,790 6,511 7,346 7,186Cash and cash equivalents 397 802 714 715 1,000 1,000 1,000 1,000 1,000 1,000Other 598 180 604 311 569 569 569 569 569 569Current assets 3,974 4,704 7,192 6,737 9,667 11,924 12,667 14,049 15,649 15,342

Tangible assets 703 1,472 2,828 3,749 3,815 3,746 3,672 3,593 3,509 3,420Intangible assets 0 0 0 28 166 166 166 166 166 166Other 203 76 414 849 296 296 296 296 296 296Non-current assets 906 1,549 3,241 4,626 4,277 4,208 4,134 4,055 3,971 3,882

Total assets 4,880 6,252 10,433 11,363 13,944 16,132 16,801 18,104 19,620 19,224

Short-term interest-bearing liabilities 1,955 2,261 4,091 3,624 4,765 4,765 4,765 4,765 4,765 4,765Accounts payables 415 508 993 1,815 2,472 3,006 3,082 3,466 3,910 3,825Other 29 33 221 95 72 87 90 101 114 111Current liabilities 2,399 2,802 5,305 5,534 7,310 7,859 7,937 8,332 8,789 8,702

Long-term interest-bearing liabilities 19 40 755 989 1,073 2,139 2,047 2,159 2,504 1,288Pension provisions 0 0 0 0 0 0 0 0 0 0Other 50 107 197 256 220 220 220 220 220 220Non-current liabilities 69 147 952 1,245 1,293 2,359 2,267 2,379 2,724 1,508





Emaar Properties (EMAR.DU)



[email protected]

Matija Gergolet

[email protected]

United Arab Emirates: Real Estate

Trading well below book value which could contain significant hidden value

Emaar Properties (Emaar) has evolved its business model with leasing, hospitality and

international operations prominent alongside Dubai-based real estate development. We think the

current share price significantly undervalues its recurring revenue portfolio and land bank even

before taking into account potentially significant understated land bank value. We resume

coverage with a Buy rating.


Emaar has diversified its business model over time; in addition to revenue from Dubai real

estate development, a significant proportion (23% in 2010) now comes from more stable

sources such as leasing (mainly malls) and hospitality (hotels). Its development activities are

now significantly weighted to international operations vs. almost 100% Dubai focused

historically.

Emaar plans to deliver c.8,300 residential units over 2011-13 both in Dubai and internationally.

Occupancy levels of its hospitality group are currently c.80% and its leasing operations

(including malls) are seeing GLA (gross leasable area) occupancy of over 90%.

Emaar has a land bank of c.239 mn sqm (gross, inc associates), of which a significant portion

is recorded at little or no value on the balance sheet as a result of the preferential terms on

which the company was able to acquire the land. Emaar’s current book value is therefore

potentially significantly understated in terms of land bank value. We do not take this into

account in our valuation, but highlight this as significant hidden value.

The main risk to forecasts is slower real estate deliveries than Emaar currently anticipates.

While real estate activity in Dubai picked up in 2011, we continue to view the local market as

oversupplied and negative sentiment or a lack of price recovery could impede performance.

Valuation: Low price/book valuation especially taking into account “hidden” value

Emaar trades on a 2012E price/book of 0.5x, below the median of our global real estate developer

coverage on 0.7x. Taking into account the company-provided fair valuation of its book value,

Emaar would be trading on 0.3x price/book, illustrating the potential hidden value. Our 12-month

2012/13 P/E based price target (applying the historical global peer multiple of 13.9x) is AED4.40,

implying 65% potential upside. At our price target, Emaar would trade at 0.8x 2012E price/book.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Emaar Properties (EMAR.DU)


Key data Current

Price (AED) 2.66




Free Float (%) 68.8


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 12,150.3 8,169.8 7,931.6 6,624.3

EBIT (AED mn) 3,243.5 2,631.2 2,407.2 2,135.8

EPS (AED) 0.44 0.31 0.33 0.31

EV/EBITDA (X) 4.9 4.8 4.5 4.6

P/E (X) 8.0 8.6 8.2 8.6

Dividend yield (%) 2.8 2.6 3.0 2.9

FCF yield (%) (4.0) 2.5 22.3 14.0

CROCI (%) 9.4 7.9 7.5 6.6

EV/GCI (X) 0.7 0.6 0.5 0.5


260

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3.8

4.0



Emaar Properties (L) MSCI EM EMEA (R)



Investment drivers: Leasing and hospitality provide stability, development the growth


In 2008, Dubai focused development represented 90% of revenues, whereas in 2010 it had

reduced to 69% of revenues, with 23% now coming from leasing (malls) and hospitality (hotels)

and a further 8% from international operations. In our view, leasing and hospitality are more

stable recurring revenue streams, and the international portfolio offers a diversification of

country- or market-specific risk.

We believe that Emaar’s recurring revenue assets are well positioned – its hospitality portfolio is

mainly located around Downtown Dubai (Address hotels is the main brand), and its most

significant leasing asset is the Dubai Mall (c.340,000 sqm of GLA).

In terms of Dubai real estate development, Emaar delivered almost 3,000 units in 2010, boosted

significantly by the completion of the Burj Khalifa and the delivery of units in Downtown Dubai.

It is currently developing 2,382 residential units and 2.1 mn sqft of commercial space to be

delivered between 2011 and 2013.

Internationally, the company’s subsidiaries aim to deliver 5,873 residential units over 2011-2013,

which represents a significant increase over the c.600 units delivered internationally in 2009 and

2010. From a country perspective, Egypt is the most important, representing approximately half

of international units to be developed over 2011-13.


The main risk to our forecasts is a delay in real estate deliveries, domestically or internationally,

as a result of economic or political factors.

Emaar’s share price has been 78% correlated to Dubai residential house prices (1Q08 to 1Q11),

with residential prices roughly stable since 1Q09. We believe the Dubai residential market

remains oversupplied and a lack of pricing recovery could impede share price performance.

While the land bank is likely understated, in our view, there is some market uncertainty

surrounding its investment in Amlak which had a book value of AED766 mn as at June 2011 and

which may need to be written down, as a result of the financial restructuring it is undertaking,

although Emaar does not currently expect this.

Industry context

Emaar Properties is the largest publicly-listed property developer in the MENA region. It has a

strong record of execution, delivering over 32,000 residential units to date and has developed

flagship projects such as the Burj Khalifa and Dubai Mall. Nakheel, Deyaar, and Dubai Properties are

other real estate companies prominent in Dubai.

Company description

Emaar Properties was incorporated in 1997 and was listed on

the DFM in March 2000. The company started out as primarily

a master planner of communities in Dubai and has now

diversified its business model into new disciplines such as

property development, malls, hospitality and leisure. It also

exports its expertise in the planning of communities to other

countries. The company has operations in the UAE, Saudi

Arabia, Jordan, Syria, Lebanon, Morocco, Egypt, Turkey, India,

Pakistan, the US and Canada. As of June 2011, the company’s

land bank totalled almost 240 mn sqm (including associates).




UAE92%

Others8%

Real Estate56%

Leasing and related

activities27%

Hospitality17%



Key financial ratios: Solid balance sheet profitability, but cash returns low vs. history

Exhibit 470: Margins are high, but sales evolution is driven by the delivery

schedule of real estate units)

Exhibit 471: Lower pricing and volumes vs. the Dubai peak have impaired

cash returns for Emaar



Exhibit 472: The Dubai government owns 31% of Emaar; the foreign

ownership limit of the stock is 49%

Exhibit 473: Gearing levels have increased since 2008, but remain at solid

levels in our view, with the potential of deleveraging going forward



0%

5%

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20%

25%

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40%

45%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

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16,000

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20,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

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0

5,000

10,000

15,000

20,000

25,000

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35,000

40,000

45,000

50,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Investment Corporation of

Dubai31%

Free Float69% -1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Emaar Properties: Potential hidden value but catalysts for performance unclear

Exhibit 474: Emaar’s land bank is substantial…

Emaar’s land bank by country as of June 2011 (gross, including associates)

Exhibit 475: …and its value may not be fully reflected in the balance sheet…

Comparison of book NAV and fair NAV as provided by Emaar for 2010, AED mn


According to Emaar, fair value of land included in development properties, investment properties and revenue generating fixed assets carried out by CBRE and other independent valuers.


Exhibit 476: …but its share price moves in line with Dubai property prices…

Dubai house price index vs. Emaar share price 1Q 2008 – 3Q 2011

Exhibit 477: …the evolution of which is uncertain given additional supply still

expected and demand in a global economic slowdown scenario in 2012 Dubai residential supply 2010 – 2013, as of 3Q 2011

Source: Datastream, Colliers HPI 1Q08-1Q11, Goldman Sachs Research estimates 2Q11-3Q11.


Country Land area (mn sqm)Saudi Arabia 172.76UAE 20.92Morocco 16.23Egypt 14.73Pakistan 6.51North America 3.00Turkey 1.86Jordan 1.75Lebanon 0.65Syria 0.30Total 238.71

2010 2010

Book value Emaar fair valueCash and bank balances 5,042 5,042Trade and other receivables 3,757 3,757Development properties 26,492 45,543Investment in associates 7,592 7,237Securities and loans to associates 2,926 2,926Investment properties 8,110 13,265Fixed assets 8,539 9,658Goodwill 46 46Total assets 62,504 87,474Total liabilities (incl. minority interest) -31,435 -33,099Net asset value 31,069 54,375Number of shares outstanding 6,091 6,091Net asset value per share (AED) 5.1 8.9

0.0

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14.0

0

50

100

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250

1Q 2008

2Q 2008

3Q 2008

4Q 2008

1Q 2009

2Q 2009

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

3Q 2011

House price index Emaar share price (RHS)

315326 331

358

5

27

11

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2010 2011 2012 2013

Num

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f uni

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00)

Completed stock Future supply



Exhibit 478: Emaar’s revenues have shifted away from Dubai development…

Emaar revenues by activity 2008 – 2010

Exhibit 479: …to include a larger pro portion from stable streams such as

hospitality Portfolio of Emaar Hospitality Group of June 2011



Exhibit 480: In terms of real estate development, Emaar has relatively little

left in Dubai following a strong record of execution… Emaar’s Dubai real estate development schedule as of June 2011

Exhibit 481: …the majority of the development schedule is currently

international Emaar’s international real estate development schedule as of June 2011



9,641

5,675

8,401

1,076

2,1012,776

637 973

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010

AED

mill

ions

Dubai Operations Leasing & Hospitality International

90%

67%

69%

10%25%

23%

8% 8%

Current projectsManagement

Company Category Rooms OperationalArmani Hotel at Burj Khalifa EH&R 5 Star 160 2010The Address Downtown Dubai TAH&R 5 Star 196 2008Al Manzil Hotel Southern Sun 4 Star 197 2007Qamardeen Hotel Southern Sun 4 Star 186 2007The Palace Old Town TAH&R 5 Star 242 2007The Address Dubai Mall TAH&R 5 Star 244 2009The Address Dubai Marina TAH&R 5 Star 200 2009The Address Montgomerie Dubai TAH&R Standard 21 2006The Dubai Polo & Equestrian Club Emaar Hospitality Standard 11 2007Nuran Marina Residences Nuran Standard 90 2006Nuran Greens Residences Nuran Standard 228 2006

ProjectUnits Under

DevelopmentDeliveries

2011Deliveries

2012Deliveries

2013

Downtown Dubai 2,016 320 947 749Umm Al Quwain 277 277 0 0Arabian Ranches 89 89 0 0

Downtown Dubai commercial units (sq ft) 1,353,034 974,501 378,533Dubai Marina commercial units (sq ft) 758,237 758,237

Grand Total (excluding commercial units) 2,382 686 947 749Grand Total (commerical units - sq ft) 2,111,271 1,732,738 378,533 0

Country Entity Units CompletedUnits Under

Development

To be Developed 2011-2013

Deliveries 2009

Deliveries 2010

Deliveries 2011

Deliveries 2012

Deliveries 2013

SubsidiariesEgypt Emaar Misr 100 1,829 3,684 0 100 380 1,325 1,066Saudi Arabia Emaar Middle East 32 523 866 0 31 133 381 481Pakistan Emaar DHA Islamabad 76 198 47 40 11 91 98 0

Emaar GIGA Karachi 0 300 300 0 0 0 300 0Syria Emaar IGO 443 0 971 32 262 72 77 192Morocco Emaar Tinja 0 123 107 0 0 0 123 107Canada Emaar Properties (Canada) Ltd 65 43 0 21 11 40 36 0Turkey Emaar Turkey 174 54 740 96 6 24 102 457Lebanon Metn Renaissance 0 147 535 0 0 87 154 147

Total 890 3,217 7,250 189 421 827 2,596 2,450

AssociatesIndia Emaar MGF 100 15,408 0 0 100 2,524 3,850 4,230Jordan Samarah Project 68 115 219 0 22 26 55 122

Total 168 15,523 219 0 122 2,550 3,905 4,352

Grand Total 1,058 18,740 7,469 189 543 3,377 6,501 6,802



Valuation, growth and returns: Trading well below book value

Exhibit 482: Emaar trades at just 0.5x 2012E price/book vs. a global average of 0.7x, despite what we believe to be significant “hidden” value in the balance

sheet


Emaar Properties Financial ServicesY/E December Real EstateAEDmn Real Estate Developers

Share price (AED) 2.66 12M price target (AED) 4.40 AED/$ (spot) 3.67Market cap 16,203 Potential upside/(downside) 65%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation EPS 2012E EPS 2013E P/E multiple Value 2012E Value 2013E Price Target

EV/Sales 3.2 1.9 1.6 2.0 1.9 2.1 EPS 0.33 0.31 13.9 4.52 4.28EV/EBITDA 8.0 5.1 4.9 4.8 4.5 4.6 Implied per share valuation (AED) 4.52 4.28 4.40EV/EBIT 8.4 6.3 6.1 6.2 6.2 6.6EV/DACF 9.7 7.7 7.7 7.4 7.0 7.3EV/NOPLAT 8.4 6.3 6.1 6.5 6.5 6.9EV/GCI 1.4 0.7 0.7 0.6 0.5 0.5

P/E 8.4 39.8 8.0 8.6 8.2 8.6P/B 1.6 0.6 0.7 0.5 0.5 0.5P/CFO 8.5 5.4 6.0 5.3 5.0 5.4FCF yield -0.8% -18.9% -2.5% 1.4% 12.6% 8.0%Dividend yield 0.0% 0.0% 2.8% 2.6% 3.0% 2.9%

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 15.0% 8.0% 9.5% 7.9% 7.5% 6.6% Sales growth -8.8% -47.5% 44.4% -32.8% -2.9% -16.5%

ROIC 20.7% 8.6% 11.6% 8.1% 7.1% 6.2% EBITDA growth 2.2% -51.0% 26.9% -16.8% -1.0% -8.9%

ROE 8.4% 6.5% 8.2% 5.4% 6.0% 5.4% EBIT growth 0.3% -58.8% 27.0% -18.9% -8.5% -11.3%

Net debt/EBITDA 0.6 2.0 1.5 2.0 1.5 1.4 Net income growth -0.9% -93.2% 485.0% -30.0% 5.0% -5.4%

Net debt/equity 5.4% 8.0% 10.3% 22.0% 19.6% 21.0% EPS growth -0.9% -93.2% 485.0% -30.0% 5.0% -5.4%



Financials: Growing hospitality and leasing revenues provide stable revenues/cash flow

Our forecast revenues are dependent on the delivery schedule of residential and commercial units over the coming years. Any delay

to this would be a downside risk to our forecasts. We forecast stable occupancy levels for the recurring revenues of Emaar in the

coming years and we also project a stable EBITDA margin, averaging 42% from 2011 to 2015.

At the 9M11 stage, Emaar’s revenues fell by 29% yoy, which is reflective of the real estate revenues facing a tough comparison –

Emaar delivered over 1,000 units from the newly completed Burj Khalifa/surrounding Downtown Dubai developments in 2010, for

example. Leasing revenues increased 18% yoy, while Hospitality revenues increased 26% yoy, supporting our view that these

revenue streams can provide stability against the more uncertain evolution of real estate deliveries.

Exhibit 483: Real estate revenues are lumpy given the uneven delivery schedule, but increasing recurring mix provides steady cash

flows 2006-2015E P&L, AED mn, year to December



Real Estate 14,006 17,566 14,939 6,236 9,270 4,617 4,316 2,834 7,361 7,091Leasing and related activities 0 0 499 1,510 1,901 2,186 2,186 2,295 2,410 2,530Hospitality 0 0 577 667 980 1,367 1,430 1,495 1,556 1,618Group revenues 14,006 17,566 16,015 8,413 12,150 8,170 7,932 6,624 11,327 11,239Growth 67.5% 25.4% -8.8% -47.5% 44.4% -32.8% -2.9% -16.5% 71.0% -0.8%


Group EBIT (clean) 6,051 6,184 6,205 2,555 3,244 2,631 2,407 2,136 3,573 3,589Group EBIT margin 43.2% 35.2% 38.7% 30.4% 26.7% 32.2% 30.3% 32.2% 31.5% 31.9%

Share of associates 128 402 265 -534 -430 -349 -200 -100 100 200Net financial items 274 242 341 139 -90 -173 8 56 138 386Pre-tax (clean) 6,453 6,828 6,810 2,159 2,723 2,109 2,215 2,092 3,811 4,175Non-recurring Items -51 -278 -3,732 -131 -245 -172 0 0 0 0Pre-tax (reported) 6,403 6,551 3,078 2,028 2,478 1,937 2,215 2,092 3,811 4,175Tax -47 -14 3 24 -1 -114 -121 -110 -186 -199Tax rate (%) 1% 0% 0% -1% 0% 5% 5% 5% 5% 5%

Profit after tax (reported) 6,356 6,536 3,081 2,051 2,477 1,823 2,095 1,982 3,626 3,976Minorities 15 39 -25 38 -29 -100 -115 -109 -199 -218Net income (reported) 6,371 6,575 3,055 2,089 2,448 1,723 1,980 1,874 3,427 3,758Post-tax exceptionals -50 -277 -3,736 -1,895 -244 -162 0 0 0 0Net income (clean, continuing operations) 6,421 6,852 6,791 3,984 2,693 1,885 1,980 1,874 3,427 3,758




Exhibit 484: Net debt stepped up between 2008 and 2009 in line with NWC requirements, but gearing ratios are not high in our

view Balance sheet and cash flow statement, 2006-2015E, AED mn, year to December



EBIT 6,051 6,184 6,205 2,555 3,244 2,631 2,407 2,136 3,573 3,589Depreciation/Amortisation 118 181 301 636 805 738 930 906 947 981Net financial items 274 242 341 139 -220 -173 8 56 138 386Taxes paid -6 -49 -10 -3 0 -114 -121 -110 -186 -199Other items -64 -539 -133 54 -267 0 0 0 0 0

Change in working capital -3,485 -46 -1,152 -5,012 -3,317 -2,331 -336 -850 540 -84Cash flow from operations 2,888 5,973 5,552 -1,632 244 752 2,889 2,139 5,012 4,673

Capex -2,504 -3,876 -5,997 -1,866 -779 -517 -706 -760 -821 -886Capex/D&A 2122.1% 2141.8% 1992.1% 293.5% 96.8% 70% 76% 84% 87% 90%capex/sales (%) 17.9% 22.1% 37.4% 22.2% 6.4% 6.3% 8.9% 11.5% 7.2% 7.9%Free cash flow pre-dividend 384 2,098 -446 -3,498 -535 235 2,183 1,378 4,191 3,786Free cash flow pre-dividend/revenues (%) 2.7% 11.9% -2.8% -41.6% -4.4% 2.9% 27.5% 20.8% 37.0% 33.7%

Other investing activities -8,856 -3,182 814 -754 665 -325 0 0 0 0Dividend -2,355 -1,199 -1,199 -4 -1 -609 -429 -493 -466 -853Cash surplus (post dividend) -10,827 -2,284 -830 -4,256 129 -699 1,755 886 3,725 2,934Other and financing 1,481 185 26 28 -7 0 0 0 0 0Change in net cash (net debt) -9,346 -2,098 -804 -4,228 122 -699 1,755 886 3,725 2,934Net debt (cash) 1,663 2,977 3,781 6,358 6,127 6,826 5,071 4,186 461 -2,473


Inventories 0 0 0 0 0 0 0 0 0 0Receivables 601 746 1,867 750 711 572 555 464 793 787Cash and cash equivalents 2,329 4,727 5,393 2,267 5,042 5,042 5,042 5,042 5,042 7,975Other 4,410 3,243 5,321 5,216 5,086 4,085 3,966 2,981 5,097 5,058Current assets 7,340 8,716 12,581 8,233 10,839 9,698 9,563 8,486 10,932 13,820

Tangible assets 22,276 29,263 37,840 46,444 43,142 43,245 43,021 42,875 42,749 42,655Intangible assets 2,962 2,962 439 439 46 46 46 46 46 46Other 9,111 13,851 9,830 9,029 8,477 7,956 7,756 7,656 7,756 7,956Non-current assets 34,350 46,075 48,110 55,912 51,665 51,247 50,822 50,577 50,551 50,657

Total assets 41,690 54,791 60,691 64,145 62,504 60,946 60,385 59,064 61,483 64,477

Short-term interest-bearing liabilities 2,933 1,563 4,564 4,500 4,455 4,455 4,455 4,455 4,455 4,455Accounts payables 349 776 1,296 1,215 881 654 635 530 906 899Other 6,372 8,561 13,018 25,018 18,767 15,523 15,070 13,249 15,857 15,735Current liabilities 9,654 10,900 18,877 30,732 24,103 20,631 20,159 18,233 21,218 21,089

Long-term interest-bearing liabilities 1,059 6,140 4,610 4,125 6,714 7,413 5,659 4,773 1,048 1,048Pension provisions 12 18 37 47 59 59 59 59 59 59Other 420 543 604 361 329 329 329 329 329 329Non-current liabilities 1,491 6,702 5,251 4,534 7,102 7,801 6,046 5,161 1,435 1,435





Emaar The Economic City (4220.SE)



[email protected]

Matija Gergolet

[email protected]

Saudi Arabia: Real Estate

Execution will be the key to growth

Emaar The Economic City (EEC) is master developer of King Abdullah Economic City (KAEC) in

Saudi Arabia. The project is being developed in four phases through to 2026. We believe

execution will be key to EEC’s huge venture, to avoid time and cost overrun and thereby generate

high revenue growth and protect margins. We have a Neutral rating on the stock.


The Industrial Valley (IV) within the KAEC is one of the major revenue drivers. Under the

existing plan, the IV will be spread across 65mn sqm accommodating 2,500 manufacturers.

EEC plans to develop the IV in three phases and will be fully operational in 2017. The

company will generate revenue by a mix of land sales and lease income from the IV. We

estimate a total of 1.5mn sqm of the land will be sold and 3.2mn sqm of the land will be

leased through 2015, providing the company with a stable and recurring revenue stream.

Another major revenue driver will be the sea port. The company plans to develop the port in

four phases with a total container loading capacity of 20mn TEU when fully operational in

2030, which will make it the region’s largest port. We assume a total of 2.6mn TEU capacity to

be operational by 2015. We expect the port to attract significant volume and a throughput of

48%. We estimate revenue will start to accrue in 2012 and grow at a 40% CAGR through 2015

on capacity expansion.

EEC plans to develop residential property for the high-end, mid-end and affordable segments.

It plans to sell part of it, while retaining some property as its investment portfolio to lease and

get the benefit of recurring income. It also plans to sell developed land parcels. The company

plans to develop property by entering into JV with real estate developers and contributing

capital in kind by way of land. This, we believe, is an ideal trade as its cost of land is fairly low

at SR45/sqm (including infrastructure cost at SR600/sqm) compared with the current market

value of land, which provides significant margins. We estimate a total of 62,000 sqm of

property will be delivered in 2011-2014, thereby significantly enhancing the revenue.

Valuation: Low price/book valuation especially when taking into account hidden value

EEC trades on a 2012E price/book of 0.7x, in line with the median of GS-covered global real estate

developers on 0.7x but below their 5-year median multiple of 1.7x. Owing to the lack of visibility

over execution at this stage, we use a NAV-based methodology and apply 1x P/B for 2012 and

2013. Our 12-month NAV-based price target is SR8.7, implying 36% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Emaar the Economic City (4220.SE)


Key data Current

Price (SR) 6.40




Free Float (%) 30.0


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 90.9 491.3 738.4 990.9

EBIT (SR mn) (306.9) 36.5 145.7 144.1

EPS (SR) (0.36) (0.02) 0.06 0.03

EV/EBITDA (X) NM 71.4 36.1 40.7

P/E (X) NM NM 110.3 208.4

Dividend yield (%) 0.0 0.0 0.0 0.0

FCF yield (%) (7.0) (29.2) (19.1) (22.3)

CROCI (%) (3.8) 1.5 2.3 2.1

EV/GCI (X) 1.0 0.8 0.8 0.8

Net Debt/EBITDA (X) -- 13.2 10.6 15.9

260

310

360

410

460

510

560

5.0

5.5

6.0

6.5

7.0

7.5

8.0



Emaar the Economic City (L) MSCI EM EMEA (R)



Investment drivers: Development of IV and sea port to increase demand for houses


EEC is planning to develop the KAEC in four phases through to 2025. Under the new strategy, it

will develop the IV and port and invest in utilities while transferring real estate development to

contractors through JVs and taking minority stakes by way of providing capital in kind – i.e.

contributing land and infrastructure. We believe the new strategy will allow the company to

focus on its core project and at the same time leverage on its business partners to develop its

property segment and non-cash transactions will provide the company a liquidity ease.

We believe IV and the port will be the key growth drivers for EEC. With the construction, a total

of 1mn jobs are planned to be created. This we believe will create follow-up demand for

residential units. The company has leased c.550,000 sqm of industrial land and has allocated

another 720,000 sqm – we estimate a total of 3.2mn sqm of IV to be leased, providing a

substantial recurring revenue stream, and 1.5mn sqm to be sold. The company is also

developing a port with a JV with Saudi Binladin Group and we expect a total of 2.6mn TEU

capacity to be operational by 2014. We expect a throughput of 48% given the port will benefit

from its location on the Red Sea which connects all major trade routes between East and West.

EEC received a SR5 bn loan from the government in May 2011. The company plans to invest

c.80% in IV, c.15% on the port and the balance on residential property. We believe the loan

provides clear financial visibility and demonstrates the government’s commitment to EEC’s

growth. We estimate a high gearing ratio with net debt/EBITDA at 10.6x in 2012E but gradually

declining to 7x in 2015E as the group’s operations expand and EBITDA improves.


Better-than-expected demand for land or better-than-expected prices and rents represent upside

risks.

Delays in the execution of the port and IV development phases.

Industry context

Under the ninth five-year plan, the government of Saudi Arabia estimates total demand of 1.25mn

houses in 2010-14. The government plans to construct 80% of the requirement through the public

and private sector. Furthermore, under the stimulus package announced in March 2011, the

government aims to construct 500,000 houses and invest SR250 bn. King Abdullah Economic City

(KAEC) is one of the economic cities spread over 168mn sqm in the north of Jeddah. EEC is

managing the development of the city, which will include an industrial valley, a port, a residential

zone, resorts, an education zone and a central business district with an investment size of US$27 bn

– the largest in the private sector in Saudi Arabia.

Company description

Emaar The Economic City (EEC) leads the master-planning

and development of the 168mn sqm King Abdullah Economic

City (KAEC), a project being built off the Red Sea in the north

of Jeddah. KAEC has six segments - sea port, industrial valley,

educational zone, central business district, resorts and

residential area. Once fully operational, the Sea port will have

capacity to handle 20mn TEU, the Industrial Valley will provide

for 2,500 manufacturers and the residential zone will

accommodate 2mn people. The total investment is expected

to be US$27 bn and will generate 1mn jobs. The company had

c.300 employees as at April 2011.




Saudi Arabia100%

Property Developme

nt33%

Investment Property

3%

Land Sales64%



Key financial ratios: EEC offers high growth and margins but low returns

Exhibit 485: Sales to grow; margins are high, on land sales

Exhibit 486: .. but offers low CROCI due to low DACF margins



Exhibit 487: Emaar Properties holds 30.5% in EEC; the foreign ownership

limit of the stock is 49%

Exhibit 488: We forecast high gearing levels for EEC



-400%

-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n


-6%

-4%

-2%

0%

2%

4%

6%

8%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Emaar Properties

31%

Others39%

Free Float30%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Trading in line with global peers

Exhibit 489: EEC trades at 0.7x 2012E price/book vs. a global average of 0.7x, and offers low return


Emaar The Economic City Financial ServicesY/E December Real EstateSRmn Real Estate Developers

Share price (SR) 6.4 12M price target (SR) 8.67 SR/$ (spot) 3.75Market cap 5,440 Potential upside/(downside) 36%

Valuation 2008 2009 2010 2011E 2012E 2013EPrice target calculation NAVPS

2012ENAVPS 2013E

P/NAV multiple

Implied price 2012E

Implied price 2013E Price target

EV/Sales 135.8 28.6 75.6 13.2 10.2 8.8 Emaar The Economic City 8.66 8.69 1.0 8.66 8.69EV/EBITDA -36.8 -34.9 -27.6 71.4 36.1 40.7 NAVPS 8.66 8.69EV/EBIT -34.6 -29.7 -22.4 178.0 51.5 60.3EV/DACF -39.0 -31.1 -26.6 56.8 37.0 41.6 Implied per share valuation (SR) 8.66 8.69 8.67EV/NOPLAT -43.2 -37.2 -28.0 179.8 52.1 60.9EV/GCI 2.3 1.1 1.0 0.8 0.8 0.8

P/E -54.8 -33.1 -24.0 -409.2 110.3 208.4P/B 2.0 1.1 1.0 0.7 0.7 0.7P/CFO -66.3 -36.2 -28.1 81.3 48.8 57.1FCF yield -11.3% -15.4% -6.9% -28.4% -18.5% -21.7%Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI -5.1% -3.7% -3.8% 1.5% 2.3% 2.1% Sales growth 156.5% -65.1% 440.3% 50.3% 34.2%

ROIC -6.0% -3.1% -3.7% 0.5% 1.6% 1.4% EBITDA growth 138.5% -42.9% 16.4% -136.6% 128.4% 2.6%

ROE -3.5% -3.8% -7.7% 0.2% 0.7% 0.4% EBIT growth 135.0% -37.2% 22.3% -111.9% 299.0% -1.1%

Net debt/EBITDA 13.2 10.6 15.9 Net income growth NM -14.0% 22.3% -95.7% -471.0% -47.1%

Net debt/equity -7.5% -27.1% -11.0% -4.6% 16.5% EPS growth NM -14.0% 22.3% -95.7% -471.0% -47.1%



Financials: Strong land sales will support revenue growth

EEC is in the initial stage of its growth. The company’s business model is highly reliant on the sale of development property,

contributing 100% of sales in 2010. However, with the change in business strategy, we expect land sales, which include IV and

developed land, to contribute significantly to the top line. We forecast the segment to contribute an average 54% of revenues in

2011-15E.

In 1H2011, EEC reported sales of SR252 mn, 310% growth yoy on account of the sale of plot land and revisions in the distribution of

infrastructure costs. Operating margins were 57%.

Exhibit 490: We forecast top-line growth of 50% in 2012, with future revenues dependent on execution

2007-2015E P&L, SR mn


Summarised P&L SFRS SFRS SFRS SFRS SFRS SFRS SFRS SFRS SFRS2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Group revenues 0 102 261 91 491 738 991 1,869 2,048Growth 156.5% -65.1% 440.3% 50.3% 34.2% 88.6% 9.6%

Group EBITDA (clean) -157 -375 -214 -249 91 208 213 662 585Group EBITDA margin -368.9% -82.1% -273.8% 18.5% 28.2% 21.5% 35.4% 28.6%

Group EBIT (clean) -170 -399 -251 -307 37 146 144 585 505Group EBIT margin -393.0% -96.3% -337.5% 7.4% 19.7% 14.5% 31.3% 24.6%

Share of associates 0 0 0 0 0 0 0 0 0Net financial items 207 141 14 3 -50 -96 -118 -136 -143Pre-tax (clean) 37 -259 -237 -304 -13 50 26 449 362Non-recurring Items 0 0 -54 -274 26 0 0 0 0Pre-tax (reported) 37 -259 -292 -578 13 50 26 449 362Tax -11 -34 -17 -6 0 0 0 -4 -4Tax rate (%) 29% -13% -6% -1% 1% 1% 1% 1% 1%

Profit after tax (reported) 26 -292 -309 -584 12 49 26 445 358Minorities 0 0 0 0 0 0 0 0 0Net income (reported) 26 -292 -309 -584 12 49 26 445 358Post-tax exceptionals 0 0 -58 -277 26 0 0 0 0Net income (clean, continuing operations) 26 -292 -251 -307 -13 49 26 445 358

EPS (clean, fully diluted) 0.03 -0.34 -0.30 -0.36 -0.02 0.06 0.03 0.52 0.42DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00



Exhibit 491: We forecast net debt to increase through 2015E Balance sheet and cash flow statement, 2007-2015E, SR mn



EBIT -170 -399 -251 -307 37 146 144 585 505Depreciation/Amortisation 13 24 37 58 54 62 69 77 80Net financial items 207 141 12 2 -51 -97 -118 -136 -144Taxes paid -11 -11 -33 -13 0 0 0 -4 -4Other items 12 3 5 -2 27 1 1 1 1

Change in working capital 49 1,248 -369 -76 -577 -185 -189 -657 -134Cash flow from operations 100 1,006 -599 -338 -510 -73 -94 -135 305

Capex -634 -2,823 -684 -170 -1,033 -935 -1,087 -486 -412Capex/D&A 4976.7% 11539.9% 1850.0% 293.1% 1895% 1502% 1572% 629% 512%capex/sales (%) 2779.2% 262.7% 186.6% 210.2% 126.6% 109.7% 26.0% 20.1%Free cash flow pre-dividend -534 -1,816 -1,284 -508 -1,543 -1,009 -1,181 -621 -107Free cash flow pre-dividend/revenues (%) -1788.4% -492.7% -558.2% -314.0% -136.6% -119.2% -33.2% -5.2%

Other investing activities -3,400 3,395 -71 -17 0 0 0 0 0Dividend 0 0 0 0 0 0 0 0 0Cash surplus (post dividend) -3,934 1,579 -1,355 -525 -1,543 -1,009 -1,181 -621 -107Other and financing 0 0 0 0 0 0 0 0 0Change in net cash (net debt) -3,934 1,579 -1,355 -525 -1,543 -1,009 -1,181 -621 -107Net debt (cash) -640 -2,219 -864 -339 1,204 2,212 3,393 4,014 4,121


Inventories 0 0 0 0 0 0 0 0 0Receivables 18 155 384 99 534 803 1,078 2,033 2,227Cash and cash equivalents 640 2,219 864 339 3,796 3,796 3,796 3,796 3,796Other 18 130 526 1,134 613 921 1,236 2,331 2,553Current assets 676 2,503 1,773 1,572 4,943 5,520 6,110 8,160 8,576

Tangible assets 4,671 7,024 7,315 6,884 7,862 8,735 9,753 10,161 10,493Intangible assets 0 0 0 0 0 0 0 0 0Other 3,400 5 217 429 429 429 429 429 429Non-current assets 8,071 7,029 7,532 7,313 8,292 9,164 10,182 10,591 10,922

Total assets 8,747 9,532 9,305 8,885 13,235 14,685 16,292 18,750 19,499

Short-term interest-bearing liabilities 0 0 0 0 0 0 0 0 0Accounts payables 21 235 467 637 344 517 694 1,309 1,434Other 242 1,059 831 806 435 654 878 1,656 1,814Current liabilities 263 1,294 1,298 1,442 779 1,171 1,572 2,965 3,248

Long-term interest-bearing liabilities 0 0 0 0 5,000 6,009 7,189 7,810 7,917Pension provisions 1 4 8 5 5 5 5 5 5Other 0 43 118 140 140 140 140 140 140Non-current liabilities 1 48 126 145 5,145 6,154 7,335 7,955 8,062

Total Common Equity 8,483 8,191 7,882 7,298 7,310 7,360 7,386 7,830 8,189Minorities 0 0 0 0 0 0 0 0 0




Emirates Integrated Telecommunications

Company (Du) (DU.DU)


Matija Gergolet

[email protected]


[email protected]

UAE: Telecoms

Strong delivery in mobile bodes well for future opportunities, yet royalty key

Emirates Integrated Telecommunications Company operates under the brand name Du. Having

secured a strong foothold in the UAE mobile market, with a near 45% share of the customer base,

the group has scope to significantly increase its market share in fixed line in our view. The

regulation on the federal royalty is key, however, to Du’s valuation. We initiate coverage with a

Neutral rating.


While Du has secured a sizeable share in UAE mobile, gaining almost 45% of the customer

base in just four years, its share of mobile revenues is notably lower (we estimate 35% for

2011) given the significantly lower proportion of post-paid customers in the mix. The

introduction of number portability, expected over the coming months, could allow Du to

attract some of the high value-added post-paid customers currently with Etisalat.

The likely opening up of access to the fixed-line infrastructure in the UAE should offer Du new

opportunities to expand outside of its Dubai hub in fixed line and pay-TV service; we estimate

the company has only 11% of national fixed lines (and only in Dubai).

The evolution of the federal royalty system (a tax on profit before taxes) is key to Du’s

valuation, however. To put its importance into perspective, applying the 50% royalty currently

determined by the federal law for Etisalat puts Du on a 2012E P/E of 11.8x and 2013E P/E of

9.9x. However, assuming a 15% royalty, as was granted to the company for 2010, would make

the P/E only 6.9x for 2012E and 5.7x for 2013E.

Valuation: Attractiveness depends on royalty payable

Our valuation for Du is based on our telecom sector methodology, which adjusts multiples for tax

rates and growth. While the current royalty tax is 50% for Du, there is discussion to potentially

change the royalty system and reduce the royalty. Considering that Du was granted a 15% royalty

in 2010, for our valuation we assume that the royalty is fixed over the medium term somewhere

between the 2010 level and the previous level of 50%, so 32.5%. On this basis, we derive an

EV/EBITDA multiple for Du of 4.5x. Applying this multiple to our 2012/13 estimates, we derive a 12-

month price target of AED3.55. Historical multiples for Du are less meaningful as the company

was only launched in 2006 and broke even at the EBITDA level in 2008.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Emirates Integrated Telecommunications Company (Du) (DU.DU)


Key data Current

Price (AED) 2.88




Free Float (%) 21.3


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 7,074.1 8,847.3 9,889.3 10,673.7

EBIT (AED mn) 1,277.4 1,923.8 2,306.4 2,738.6

EPS (AED) 0.24 0.20 0.24 0.29

EV/EBITDA (X) 6.1 4.8 4.0 3.4

P/E (X) 10.5 14.2 11.8 9.9

Dividend yield (%) 0.0 2.1 3.5 5.2

FCF yield (%) (2.2) 4.1 2.8 5.8

CROCI (%) 30.2 22.8 22.4 22.0

EV/GCI (X) 1.5 1.4 1.2 1.0


260

290

320

350

380

410

440

470

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4



Emirates Integrated Telecommunications Company (Du) (L) MSCI EM EMEA (R)



Investment drivers: Growth opportunities still present in post paid and fixed line


Number portability, expected to be introduced over the coming months after some delays,

could represent a material opportunity for Du, as it will allow the group to target more post-paid

customers, most of which are currently with Etisalat. The high importance and uniqueness of

telephone numbers in the UAE cannot be underestimated (for example, expats generally cannot

open a bank account until they have a local telephone number), and the introduction of number

portability would allow people to switch operator without losing their personal telephone

number. Thus, the introduction of number portability could allow for a material migration from

Etisalat (which has more of the post-paid customer case, having started operations in the

country first) to Du. As of 1H2011, Du had only 323,000 post-paid customers, or 25.2% of the

UAE total.

In fixed line, Du has been given the monopoly in some parts of Dubai, while Etisalat is present

throughout the country and in all major cities. The opening up of the network (common sharing)

should allow Du to address a significantly wider audience, in terms of voice offering and also

broadband and pay-TV.


Number portability and the opening up of the common infrastructure have been widely talked

about; however, actual implementation has been delayed. While we expect both to be

implemented over the next 12 months, further delays cannot be ruled out.

The UAE telecom market is currently a duopoly for Du and Etisalat. While we do not see an

imminent threat, a third licence is a possibility over the medium term which could erode Du’s

customer base and margins.

Industry context

Du is the second mobile operator in the UAE. The penetration rate in the UAE is very high (over

200%) reflecting high GDP per capita of c.US$60,000, implying that the market has reached 11mn

customers, despite a population of 5.7mn as of 2Q2011 according to the UAE telecommunication

authority.

Du’s market share in the mobile segment reached 43.6% of the customer base at the end of the first

half, with 4.776 mn active customers (active in the last 90 days) and its market share 45.2%. At 9M11,

mobile customers reached 4.938 mn; in fixed line, Du had 200,300 lines vs. 1.2 mn for Etisalat,

which gives it a market share of just 14%.

Company description

Emirates Integrated Telecommunications Company, which

operates under the brand name Du, is an integrated

telecommunications service provider in the UAE, having

launched mobile services in February 2007. The company also

provides internet and pay TV services in some new zones of

Dubai and fixed-line services for voice nationwide. At the end

of 1H2011, Du had 4.8mn mobile customers and a 43.6%

market share in terms of customers based on TRA data. In

fixed line, the company had 191k mn fixed-line customers,

111k broadband lines, 104k pay TV lines and 222k call select

customers (its nationwide fixed-line voice service).




UAE100%

Mobile77%

Fixed line17%

Wholesale and

broadcasting6%



Key financial ratios: CROCI now comfortably double digit

Exhibit 492: Du sales and margin performance, 2006-2015E

Exhibit 493: Du GCI and CROCI, 2006-2015E; 2010 benefitted from lower

royalty



Exhibit 494: Du shareholding; the foreign ownership limit is 22%

Exhibit 495: Du gearing, 2006-2015E: Comfortably under control



-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(AED

mn)


-30%

-20%

-10%

0%

10%

20%

30%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(AED

mn)

GCI CROCI (RHS)

Emirates Investment Authority

39%

Mubadala Development

Company20%

Emirates International

Telecom.20%

Free Float21%

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




We expect Du’s market share in UAE mobile to stabilize at around 45%

Exhibit 496: Summary key data and estimates for the UAE mobile telecom market*

*Du data source from Du, Etisalat from Etisalat; market numbers derived by adding the two estimates, which may differ in terms of definition from the data provided by the UAE TRA, Telecom Regulatory Authority. For example, at the end of June 2011, Etisalat declared 7.5mn customers, Du 4,776,000 customers yet the TRA stated that there were 11,179,767 mobile subscriptions in the UAE. Population series and forecasts based on IMF data.

Source: Company data, Goldman Sachs Research estimates, IMF.

UAE mobile telecom market 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016EEtisalat revenues, AED mn 21,340 21,340 26,808 26,060 24,294 23,884 24,106 24,797 25,513 26,142 26,839Du revenues, AED mn 434 1,537 3,951 5,339 7,074 8,847 9,889 10,674 11,294 11,746 12,104Total, AED mn 21,774 22,877 30,759 31,399 31,368 32,731 33,995 35,471 36,807 37,888 38,943y-o-y growth 5.1% 34.5% 2.1% -0.1% 4.3% 3.9% 4.3% 3.8% 2.9% 2.8%Etisalat % 98% 93% 87% 83% 77% 73% 71% 70% 69% 69% 69%Du % 2% 7% 13% 17% 23% 27% 29% 30% 31% 31% 31%

Etisalat mobile revenues, AED mn 17,713 15,292 13,692 12,723 12,126 11,892 11,891 12,029 12,168Du mobile revenues, AED mn 2,629 3,727 5,312 6,774 7,540 8,076 8,485 8,741 9,005Total, AED mn 20,342 19,019 19,004 19,497 19,666 19,968 20,376 20,770 21,174y-o-y growth -6.5% -0.1% 2.6% 0.9% 1.5% 2.0% 1.9% 1.9%Etisalat % 87% 80% 72% 65% 62% 60% 58% 58% 57%Du % 13% 20% 28% 35% 38% 40% 42% 42% 43%

Etisalat mobile subscribers, '000 5,500 6,400 7,252 7,741 7,764 7,531 7,456 7,418 7,493 7,605 7,719Du mobile subscribers, '000 0 1,200 2,498 3,477 4,333 5,070 5,374 5,589 5,756 5,872 5,989Total, '000 5,500 7,600 9,750 11,218 12,097 12,601 12,830 13,007 13,249 13,477 13,708y-o-y growth 38.2% 28.3% 15.1% 7.8% 4.2% 1.8% 1.4% 1.9% 1.7% 1.7%Etisalat % 100% 84% 74% 69% 64% 60% 58% 57% 57% 56% 56%Du % 0% 16% 26% 31% 36% 40% 42% 43% 43% 44% 44%

Mobile ARPU, AED/monthEtisalat, AED/month 216.3 170.0 147.2 138.6 134.9 133.2 132.9 132.8 132.3Du, AED/month 118.5 104.0 113.4 120.1 120.3 122.8 124.7 125.3 126.5

UAE population, mn 4.23 4.49 4.77 4.91 5.06 5.21 5.36 5.52 5.69 5.86 6.02Mobile penetration rate 130% 169% 205% 229% 239% 242% 239% 235% 233% 230% 228%GDP per capita, $, nominal 52,520 57,520 66,075 55,080 59,719 69,870 71,638 72,883 74,857 77,400 80,084



Valuation, growth and returns: Our AED3.55 12m price target indicates moderate upside

Exhibit 497: We expect Du to start paying dividends from 2011; Du trades on 4.0x 2012E EBITDA, but on 11.8x P/E


Du Telcoms ServicesY/E December Telecom WirelessAED mn Telecom Wireless

Share price (AED) 2.88 12-moth price target (AED) 3.55 $/AED (spot) 3.67

Market cap 13,166 Potential upside/(downside) 23%


EBITDA 2013E


EV/Sales 5.8 2.5 1.7 1.6 1.4 1.3 Du 3,444 4,019 4.5 15,497 18,088EV/EBITDA 49.0 11.7 6.1 4.8 4.0 3.4 Group EBITDA 3,444 4,019 15,497 18,088EV/EBIT 4636 24.8 9.6 7.3 6.0 5.0 AddEV/DACF 36.5 12.1 5.5 6.7 5.7 4.9 Associates 0 0EV/NOPLAT 161 28.9 8.6 12.0 10.3 8.7 Investments 0 0EV/GCI 4.7 2.1 1.5 1.4 1.2 1.0 Less

Net debt/(cash) 633 325P/E 5205 41.3 10.5 14.2 11.8 9.9 Minorities 0 0P/B 8.5 3.9 2.3 2.2 1.9 1.7 Pensions and other 78 78P/CFO 39.7 11.3 5.7 6.8 5.8 5.0 Equity Value 14,786 17,685FCF yield -5.9% 0.1% -2.2% 4.1% 2.8% 5.8% No. of shares, mn 4,571 4,571Dividend yield 0.0% 0.0% 0.0% 2.1% 3.5% 5.2% Implied per share valuation (AED) 3.23 3.87 3.55

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 16.3% 19.5% 30.2% 22.8% 22.4% 22.0% Sales growth 35% 33% 25% 12% 8%

ROIC 2.9% 6.6% 16.9% 12.4% 13.1% 13.7% EBITDA growth 144% 76% 46% 18% 17%

ROE 4.1% 9.5% 23.3% 16.3% 17.2% 17.9% EBIT growth 494% 113% 47% 17% 16%

Net debt/EBITDA 3.2 2.0 0.6 0.3 0.2 0.1 Net income growth 6377% 295% -11% 20% 19%

Net debt/equity 59.7% 81.4% 25.0% 12.1% 9.2% 4.2% EPS growth 6377% 284% -16% 20% 19%



Financials: EBITDA margin growing to 40%, yet federal royalty key driver of EPS

Du turned profitable in 2008 as customer numbers kept increasing, allowing scale benefits, and the EBITDA margin has been

steadily increasing. We expect an EBITDA margin of 33% for 2011 and just under 35% for 2012.

In our forecasts, we continue to assume a 50% royalty, after the one-off benefit of a reduced royalty of 15% last year. As future

royalty payments are currently under discussion and the overall figure, 50%, is very high by international and regional standards,

we believe that it is likely the royalty will come down. While our estimates incorporate a continued 50% royalty, as per the current

legislation, due to lack of short-term visibility about how it will change, in our valuation we reflect the potential upside from a lower

royalty by ascribing a higher target EV/EBITDA multiple, assuming that medium-term the royalty will come down to 32.5%. We

expect Du to announce its first dividend in 2011, starting with a small payout of 30% and then increasing the dividend payout to 60%

over time by 2014 as the company increases its FCF generation. The company has no stated dividend policy. As of 9M11, Du

reported revenues of AED6,443 mn, up 28% yoy, while EBITDA reached AED2,068 mn, up 54% yoy.

Exhibit 498: Du turned profitable in 2008 and margins have been steadily increasing; we expect EBITDA margins to approach 40%

over the medium term 2006-2015E P&L, AED mn, year to December



Mobile 434 1,537 3,951 3,727 5,312 6,774 7,540 8,076 8,485 8,741Fixed line 970 1,177 1,494 1,785 2,039 2,265 2,471Wholesale and boradcasting 641 585 580 565 559 544 534Group revenues 434 1,537 3,951 5,339 7,074 8,847 9,889 10,674 11,294 11,746Growth 254.2% 157.0% 35.1% 32.5% 25.1% 11.8% 7.9% 5.8% 4.0%

Group EBITDA (clean) -673 -713 465 1,134 2,001 2,924 3,444 4,019 4,425 4,637Group EBITDA margin -155% -46.4% 11.8% 21.2% 28.3% 33.0% 34.8% 37.7% 39.2% 39.5%

Group EBIT (clean) -755 -930 5 535 1,277 1,924 2,306 2,739 3,013 3,110Group EBIT margin -174% -60.5% 0.1% 10.0% 18.1% 21.7% 23.3% 25.7% 26.7% 26.5%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 146 45 3 -7 -51 -68 -72 -74 -61 -31Pre-tax (clean) -609 -885 8 528 1,226 1,856 2,234 2,664 2,952 3,080Non-recurring Items 0 0 0 0 268 0 0 0 0 0Pre-tax (reported) -609 -885 8 528 1,494 1,856 2,234 2,664 2,952 3,080Tax 0 0 -4 -264 -184 -928 -1,117 -1,332 -1,476 -1,540Tax rate (%) 0% 0% 50% 50% 12% 50% 50% 50% 50% 50%

Profit after tax (reported) -609 -885 4 264 1,310 928 1,117 1,332 1,476 1,540Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) -609 -885 4 264 1,310 928 1,117 1,332 1,476 1,540Post-tax exceptionals 0 0 0 0 268 0 0 0 0 0Net income (clean, continuing operations) -609 -885 4 264 1,042 928 1,117 1,332 1,476 1,540

EPS (clean, fully diluted) -0.146 -0.212 0.001 0.063 0.243 0.203 0.244 0.291 0.323 0.337DPS 0.000 0.000 0.000 0.000 0.000 0.060 0.100 0.150 0.200 0.200



Exhibit 499: We expect Du to start paying dividend in 2012 and become net cash by 2014 Balance sheet and cash flow statement, 2006-2015E, AED mn, year to December


2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EEBIT -755 -930 5 535 1,277 1,924 2,306 2,739 3,013 3,110Depreciation/Amortisation 82 217 460 599 724 1,000 1,137 1,281 1,412 1,527Net financial items 145 43 -8 -7 -41 -87 -72 -74 -61 -31Taxes paid 0 0 -4 -264 -184 -928 -1,117 -1,332 -1,476 -1,540Other items 125 118 81 107 258 19 0 0 0 0

Change in working capital 233 794 387 764 -777 259 -200 -204 17 -184Cash flow from operations -169 242 922 1,734 1,257 2,187 2,054 2,409 2,905 2,883

Capex -965 -1,047 -2,166 -1,718 -1,501 -1,646 -1,681 -1,644 -1,626 -1,468Capex/D&A 1171% 483% 471% 287% 207% 165% 148% 128% 115% 96%% sales 222.4% 68.1% 54.8% 32.2% 21.2% 18.6% 17.0% 15.4% 14.4% 12.5%

Dividend 0 0 0 0 0 0 -274 -457 -686 -914Other investing activities 2,781 -752 -345 -790 1,245 0 0 0 0 0Free cash flow pre-dividend -1,134 -805 -1,244 16 -244 541 373 765 1,278 1,415Other and financing 3,914 -752 -454 -823 1,244 0 0 0 0 0Cash surplus (post dividend) 1,646 -1,557 -1,589 -774 1,001 541 99 308 592 500Net debt (cash) -1,646 -89 1,499 2,274 1,273 732 633 325 -267 -768


Inventories 6 36 53 39 47 65 72 78 82 86Receivables 132 394 599 901 1,122 1,283 1,385 1,548 1,468 1,527Cash and cash equivalents 1,646 89 1,276 869 2,785 2,785 2,785 3,093 3,686 4,186Other 168 236 374 416 717 664 692 747 791 822Current assets 1,953 755 2,302 2,225 4,672 4,796 4,934 5,466 6,027 6,621

Tangible assets 1,207 2,466 4,284 6,107 6,689 7,512 8,204 8,674 8,945 8,945Intangible assets 975 1,127 1,190 1,200 1,159 982 833 727 670 611Other 0 0 0 0 0 0 0 0 0 0Non-current assets 2,182 3,593 5,474 7,307 7,848 8,494 9,038 9,401 9,615 9,556

Total assets 4,135 4,348 7,776 9,532 12,520 13,290 13,972 14,867 15,642 16,177

Short-term interest-bearing liabilities 0 0 0 143 3,154 3,154 3,154 3,154 3,154 3,154Accounts payables 540 1,692 2,425 3,480 3,210 3,539 3,461 3,416 3,388 3,289Other 0 0 16 54 78 133 148 213 226 235Current liabilities 540 1,692 2,441 3,677 6,441 6,825 6,763 6,783 6,768 6,678

Long-term interest-bearing liabilities 0 0 2,775 3,000 905 364 265 265 265 265Pension provisions 7 16 50 64 78 78 78 78 78 78Other 197 134 0 0 0 0 0 0 0 0Non-current liabilities 204 150 2,825 3,064 982 441 342 342 342 342





Emirates Telecommunications Corporation

(Etisalat) (ETEL.AD)


Matija Gergolet

[email protected]


[email protected]

UAE: Telecoms

International expansion compensating for domestic margin pressure

Emirates Telecommunications Corporation (Etisalat) has been suffering in recent years from

increased competition in the domestic mobile market, where its share has fallen to c.55% from

100% in less than five years. We expect domestic pressure to continue, but believe Etisalat’s

international ventures should offset domestic margin contraction as they mature, turn cash flow

positive and start making a material contribution to net income.


We expect margin pressure in the domestic market to continue with the introduction of

number portability for mobile phones, which will expose Etisalat’s dominant position in the

high value-added postpaid segment (where it maintains 75% market share), and the opening

up of access for the fixed-line infrastructure, where it still has over 80% of the market.

Internationally Etisalat has established some strong positions in potentially attractive markets

such as Saudi Arabia, Egypt, Nigeria and India, as well as in smaller markets like Afghanistan,

Sri Lanka and West Africa. As these markets mature, the cash flow and profitability of

Etisalat’s international operations are likely to benefit and we forecast they will contribute 32%

of net income by 2015E vs. 7% in 2010.

The key risk for Etisalat would be faster-than-expected margin erosion in the domestic market

or a price war with Du, or failure to execute in international markets where it is present or

political instability in some of those markets.

Valuation: Royalty tax key issue driving valuation

Our valuation for Etisalat is based on an EV/EBITDA multiple, adjusted for growth and tax, of 4.4x

(its own 5-year historical multiple is 5.7x), which we apply to the average of our 2012 and 2013

estimates to derive a 12-month price target of AED12.3. While Etisalat is currently required to pay

a 50% royalty (similar to a corporate tax) on its pre-tax profit, we believe the royalty system is

likely to be changed (as it was for Du which in 2010 was required to pay a royalty of only 15%).

While our estimates continue to contain a provision for 50% royalty, in our target price we assume

a medium-term royalty of 32.5% (mid way between the current 50% and the 15% applied to Du in

2010). Discussions on the royalty system between the telecom companies and authorities are

currently under way.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Emirates Telecommunications Corporation (Etisalat) (ETEL.AD)


Key data Current

Price (AED) 9.99




Free Float (%) 40.0


12/10 12/11E 12/12E 12/13E

Revenue (AED mn) 31,929.5 32,351.6 33,895.9 35,821.7

EBIT (AED mn) 13,384.0 12,187.2 12,677.4 13,405.3

EPS (AED) 0.97 0.88 0.94 1.03

EV/EBITDA (X) 4.2 4.0 3.6 3.0

P/E (X) 11.0 11.3 10.6 9.7

Dividend yield (%) 5.4 5.8 5.8 6.0

FCF yield (%) 4.1 6.3 8.3 11.2

CROCI (%) 17.6 13.8 13.6 13.6

EV/GCI (X) 1.4 1.2 1.1 1.0

Net Debt/EBITDA (X) (0.2) (0.2) (0.3) (0.4)

260

310

360

410

460

510

560

9.0

9.5

10.0

10.5

11.0

11.5

12.0



Emirates Telecommunications Corporation (Etisalat) (L) MSCI EM EMEA (R)



Investment drivers: Managing domestic margin pressure, growing abroad


The domestic market provides strong cash flows to Etisalat, with relatively low capex

requirements (capex to sales was 9% in 2010 and 7% in 1H2011). The key issue for Etisalat is to

mitigate market share loss to Du while maintaining its margins. Any further delays to number

portability and the opening of the fixed-line infrastructure would play into its favour.

The international platform provides the company opportunity to grow. It has a 27% stake in the

second player in Saudi Arabia, Mobily, and a 40% stake in the fourth player in Nigeria, while it

controls with 66% the third player in Egypt and 100% of Atlantique Telecom (Moov), which

operates in six countries in West Africa.

Etisalat is the largest listed company by market cap in the UAE. However, its bylaws provide

that only Emirati nationals may own its shares. The opening up of capital to more GCC or

international investors would allow new investors to invest in the stock and potentially act as a

positive catalyst.


We see three key risks for Etisalat: (1) increased competitive pressure from Du domestically, (2)

execution risk in the international operations and (3) acquisition risk, where the approach for

Kuwaiti Zain in 2011 demonstrated the group is not afraid of targeting transformational deals.

Etisalat is net cash and we expect it to remain FCF positive post dividend. Given that in many of

its international markets it is in joint venture with international partners, or in some cases it has

minority stakes, a potential deployment of cash could be acquiring further stakes in these

countries. The failed attempt to acquire Zain’s international assets clearly demonstrated the

group’s international ambitions. In 2010, Etisalat spent c.US$100 mn in increasing its stakes in

some of its subsidiaries, for example in Sudan, Tanzania and West Africa.

Industry context

Etisalat is the incumbent in UAE, with only Du a competitor in mobile. It still holds over 55% of

mobile customers (and c.75% of the postpaid customer base) and over 80% of the fixed lines, as Du

currently offers fixed line only in Dubai. The UAE market is well penetrated, with penetration rates of

over 200% thanks to high GDP levels (nominal GDP of close to US$60,000 in 2011). Internationally, in

addition to owning a stake in an operator in India, Etisalat generally has No.2 to No.4 positions in

countries with large population pools (e.g. Egypt, Nigeria, Pakistan, Indonesia, Sudan, Afganistan,

Tanzania, Saudi Arabia): we estimate that Etisalat’s total addressable population (excluding India) to

be around 800mn people. At the end of June 2011, the company had 31.6mn subscribers in Africa,

6.3mn in Asia and 7.5mn in the UAE at its controlled subsidiaries.

Company description

Etisalat is the integrated telecom incumbent in the UAE, with

7.5mn mobile, 1.1mn fixed line and 1.4mn internet subscribers

as of 1H2011. In recent years, Etisalat has expanded abroad in

mobile and is now present in 18 countries across Asia, the

Middle East and Africa, reaching a total of 39mn subscribers at

its consolidated subsidiaries internationally as of 1H2011. It

largest international markets are Egypt, India, Afghanistan,

Tanzania, Sri Lanka and West Africa, while it also has material

equity stakes in Saudi Arabia (where it owns 27% of Mobily),

Nigeria (40% of EMTS Nigeria), Pakistan (23% of PTCL) and

Indonesia (13% of PT XL). Etisalat has c.50,000 employees.




UAE77%

Egypt13%

West Africa5%

Afganistan2%

Sri Lanka1%

Sudan1%

Tanzania1%

UAE mobile30%

UAE fixed6%

UAE internet

15%

UAE data16%

UAEinterconnect

and other4%

International (mobile)

29%



Key financial ratios: We expect returns to stabilize

Exhibit 500: Etisalat sales and margin performance, 2006-2015E: Down from

high levels

Exhibit 501: Etisalat GCI and CROCI, 2006-2015E: We expect rising returns

internationally to offset domestic decline



Exhibit 502: Etisalat shareholding; only Emirati citizens can own Etisalat

Exhibit 503: Etisalat gearing, 2006-2015E: Company to remain net cash



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn


0%

5%

10%

15%

20%

25%

30%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

AED

mn

GCI CROCI (RHS)

Emirates Investment Authority

60%

Free Float40%

-0.7x

-0.6x

-0.5x

-0.4x

-0.3x

-0.2x

-0.1x

0.0x

-30%

-25%

-20%

-15%

-10%

-5%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Etisalat has built up a presence in 17 countries outside of UAE

Exhibit 504: Etisalat international operations


EMTS Nigeria

ETISALATSubsidiary

Associate

Zantel Canar Etisalat Misr(Egypt)

Etisalat Afghanistan

PT XL Axiata Tbk

Etisalat Sri Lanka

Thuraya Mobily PTCL Etisalat DBAtlantique Telecom Etisalat

Benin

Stake: 40%

Acquired in 2008

Stake: 65%

Tanzania

Stake: 89%

Sudan

Stake: 66%

Established in 2006

Stake: 100%

Established in 2006

Stake: 13%

Acquired in 2007

Indonesia

Stake: 100%

Acquired in 2009

Stake: 28%

Acquired in 1997

Stake: 27%

Established in 2005

KSA

Stake: 23%

Acquired in 2006

Pakistan

Stake: 45%

India

Stake: 100%

Acquired in 2008

EMTS Nigeria



Valuation, growth and returns: Limited upside to our AED12.3 12-month price target

Exhibit 505: We derive a target price of AED12.3 for Etisalat based on our tax and growth-adjusted EV/EBITDA, averaging the 2012 and 2013 implied per share

valuation


Etisalat Telcoms ServicesY/E December Telecom WirelessAED mn Telecom Wireless



EBITDA 2013E


EV/Sales 3.8 1.8 2.1 1.9 1.7 1.4 Domestic Business 12,776 12,647EV/EBITDA 5.7 2.9 4.2 4.0 3.6 3.0 International 3,427 4,520EV/EBIT 6.7 3.3 5.1 5.1 4.6 3.8 Group EBITDA 16,203 17,167 4.4 71,291 75,533EV/DACF 12.8 6.8 8.4 9.2 8.4 7.6 AddEV/NOPLAT 13.6 6.8 10.8 11.4 10.6 9.0 Associates 19,473 24,564EV/GCI 2.6 1.3 1.4 1.2 1.1 1.0 Investments 517 517

EV 91,281 100,614P/E 13.5 8.5 11.0 11.3 10.6 9.7 LessP/B 4.0 2.1 2.2 1.9 1.8 1.6 Net debt/(cash) -4,581 -6,357P/CFO 13.1 7.0 8.1 9.0 8.4 7.7 Minorities 3,299 3,099FCF yield 6.0% 4.8% 3.3% 5.0% 6.3% 7.8% Pensions and other 834 834Dividend yield 3.1% 5.8% 5.4% 5.8% 5.8% 6.0% Equity Value 91,728 103,037

No. of shares, mn 7,906 7,906Implied per share valuation (AED) 11.6 13.0 12.3


ROIC 63.6% 50.2% 28.7% 21.7% 20.5% 20.2% EBITDA growth 10.9% 13.0% -16.1% -5.8% 5.1% 5.9%

ROE 32.6% 27.0% 20.3% 17.5% 17.4% 17.5% EBIT growth 8.4% 15.1% -21.1% -8.9% 4.0% 5.7%

Net debt/EBITDA -0.5 -0.3 -0.2 -0.2 -0.3 -0.4 Net income growth 18.2% 2.0% -13.6% -8.4% 6.4% 9.2%

Net debt/equity -25% -17% -9% -8% -10% -12% EPS growth 18.2% 2.0% -13.6% -8.4% 6.4% 9.2%



Financials: Growing weight of international operations offsetting domestic pressure

The increase in the international contribution for Etisalat should come from both its fully consolidated operations and the associate

line. While we expect the share of international consolidated revenues to grow to 33.8% by 2015E from 22.7% in 2010, we expect the

associate line (Saudi Arabia, Nigeria, Pakistan and Indonesia) to also show a material increase, rising to 21.7% of reported net profit

for 2015E from 11.7% in 2010. At the end of 2010, 45% of Etisalat’s assets were outside of the UAE and 62% of 2010 capex was spent

internationally. In 1H2011, international consolidated revenues represented 26% of total revenues. Overall, Etisalat reported a 1% fall

in revenues and 16% decline in EBITDA in 1H: while domestically revenues were down 6% and EBITDA was down 20%,

internationally the company recorded 18% revenue growth and 23% EBITDA growth. Excluding a one-off provision in Egypt,

underlying international EBITDA grew by 45% yoy. As of 9M2011, revenues were up 2.9% while EBITDA was down 5.8%.

Exhibit 506: We expect data, internet and international to drive Etisalat growth while domestic mobile and fixed line stagnate

2006-2015E P&L, AED mn



Domestic Business 26,808 26,060 24,294 23,884 24,106 24,797 25,513 26,142 of which mobile 15,012 12,591 10,991 10,022 9,425 9,191 9,190 9,328 of which fixed 2,949 2,825 2,450 1,895 1,637 1,509 1,346 1,202 of which other (data, internet, interconnect, other) 8,847 10,644 10,853 11,967 13,043 14,098 14,977 15,613International 2,552 4,957 7,238 8,468 9,790 11,024 12,009 12,853Other/reconciliation 16,290 21,340 -3,241 -186 397 0 0 0 0 0Group revenues 16,290 21,340 26,119 30,831 31,929 32,352 33,896 35,822 37,522 38,995Growth 26.6% 31.0% 22.4% 18.0% 3.6% 1.3% 4.8% 5.7% 4.7% 3.9%

Domestic Business 17,134 18,195 15,168 13,136 12,776 12,647 12,756 12,809International 67 1,013 1,574 2,286 3,427 4,520 5,044 5,527Other/reconciliation 12,611 15,561 56 296 -373 0 0 0 0 0Group EBITDA (clean) 12,611 15,561 17,257 19,504 16,369 15,422 16,203 17,167 17,800 18,336Group EBITDA margin 77.4% 72.9% 66.1% 63.3% 51.3% 47.7% 47.8% 47.9% 47.4% 47.0%


Share of associates 267 380 473 682 1,243 1,540 1,947 2,456 2,649 2,814Net financial items 214 233 1,796 12 533 73 104 263 463 674Pre-tax (clean) 11,695 14,213 17,008 17,663 15,160 13,800 14,729 16,124 16,936 17,652Non-recurring Items -25 -73 0 0 0 0 0 0 0 0Pre-tax (reported) 11,670 14,139 17,008 17,663 15,160 13,800 14,729 16,124 16,936 17,652Tax -5,860 -7,419 -8,842 -9,080 -7,731 -7,111 -7,541 -8,201 -8,572 -8,903Tax rate (%) 50% 52% 52% 51% 51% 52% 51% 51% 51% 50%

Profit after tax (reported) 5,810 6,720 8,166 8,583 7,429 6,689 7,188 7,924 8,364 8,749Minorities 50 576 499 254 202 300 250 200 100 -100Net income (reported) 5,860 7,297 8,665 8,836 7,631 6,989 7,438 8,124 8,464 8,649Post-tax exceptionals -13 -35 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 5,872 7,331 8,665 8,836 7,631 6,989 7,438 8,124 8,464 8,649




Exhibit 507: Etisalat to remain strongly FCF positive Balance sheet and cash flow statement, 2006-2015E, AED mn



EBIT 11,214 13,599 14,740 16,969 13,384 12,187 12,677 13,405 13,823 14,164Depreciation/Amortisation 1,397 1,962 2,518 2,535 2,985 3,235 3,525 3,761 3,977 4,172Net financial items 347 179 12 193 640 73 104 263 463 674Taxes paid -4,256 -5,982 -7,359 -8,740 -8,974 -7,111 -7,541 -8,201 -8,572 -8,903Other items -1,377 -1,022 -1,003 -240 2,255 373 616 974 1,474 1,589

Change in working capital 1,790 2,512 2,094 -154 -1,508 188 689 859 759 657Cash flow from operations 9,115 11,249 11,002 10,563 8,783 8,946 10,071 11,061 11,924 12,354

Capex -12,668 -3,587 -3,661 -6,798 -5,899 -4,853 -4,881 -4,700 -4,728 -4,695Capex/D&A 906.8% 182.8% 145.4% 268.2% 197.6% 150% 138% 125% 119% 113%capex/sales (%) 77.8% 16.8% 14.0% 22.0% 18.5% 15.0% 14.4% 13.1% 12.6% 12.0%Free cash flow pre-dividend -3,553 7,662 7,340 3,765 2,884 4,093 5,190 6,362 7,197 7,659Free cash flow pre-dividend/revenues (%) -21.8% 35.9% 28.1% 12.2% 9.0% 12.7% 15.3% 17.8% 19.2% 19.6%

Other investing activities -4,824 -3,243 197 -167 -219 39 0 0 0 0Dividend -2,042 -2,836 -3,244 -3,893 -4,492 -4,564 -4,054 -4,586 -4,744 -4,981Cash surplus (post dividend) -10,419 1,582 4,293 -295 -1,828 -432 1,136 1,776 2,453 2,678Other and financing 2,546 937 -62 -1,434 -1,103 0 0 0 0 0Change in net cash (net debt) -7,873 2,520 4,231 -1,729 -2,931 -432 1,136 1,776 2,453 2,678Net debt (cash) -1,786 -4,306 -8,537 -6,808 -3,877 -3,445 -4,581 -6,357 -8,810 -11,488


Inventories 66 175 203 272 316 320 336 355 372 386Receivables 631 1,634 2,917 3,264 4,070 4,123 4,320 4,566 4,782 4,970Cash and cash equivalents 10,304 9,433 11,295 11,309 10,277 10,277 10,277 10,277 10,277 12,955Other 2,552 1,659 2,372 4,717 4,651 4,713 4,938 5,218 5,466 5,680Current assets 13,553 12,901 16,787 19,563 19,314 19,433 19,870 20,415 20,897 23,992

Tangible assets 8,496 11,876 14,108 17,585 20,675 23,063 25,232 26,995 28,571 29,912Intangible assets 11,230 13,886 15,468 16,778 15,550 14,742 13,928 13,104 12,279 11,460Other 12,629 13,785 15,708 17,452 20,068 21,235 22,566 24,049 25,224 26,449Non-current assets 32,355 39,547 45,285 51,816 56,293 59,039 61,726 64,147 66,073 67,820

Total assets 45,908 52,448 62,072 71,379 75,607 78,472 81,597 84,563 86,970 91,812

Short-term interest-bearing liabilities 1,537 343 722 1,079 1,195 1,195 1,195 1,195 1,195 1,195Accounts payables 875 5,934 16,330 2,205 2,442 2,474 2,592 2,740 2,870 2,982Other 11,193 11,388 5,797 20,204 20,841 21,116 22,124 23,381 24,491 25,453Current liabilities 13,605 17,665 22,850 23,488 24,478 24,786 25,912 27,316 28,556 29,630

Long-term interest-bearing liabilities 6,981 4,784 2,036 3,422 5,205 5,637 4,501 2,725 272 272Pension provisions 440 534 787 882 834 834 834 834 834 834Other 3,488 3,570 2,799 3,197 2,525 2,525 2,525 2,525 2,525 2,525Non-current liabilities 10,909 8,887 5,621 7,501 8,564 8,996 7,860 6,084 3,631 3,631

Shareholders' equity 19,187 24,057 29,045 36,392 38,716 41,141 44,525 48,063 51,783 55,451Minorities 2,208 1,838 4,556 3,998 3,849 3,549 3,299 3,099 2,999 3,099




Etihad Etisalat Co (Mobily) (7020.SE)

Neutral: Return potential:15%

Alexander Balakhnin

[email protected]

Maxim Loginov

[email protected]

Saudi Arabia: Telecom Wireless

Growth to slow down, valuation fair

We believe Mobily’s business will benefit from its ongoing focus on network quality improvement,

as this will help it to avoid erosion of market share and to benefit from a growing demand for

mobile broadband services. While EPS growth is fairly moderate, we see a scope for dividend

growth as a result of a higher payout ratio – we forecast DPS of SR3 and SR4 in 2011E and 2012E,

respectively. However, in our view Mobily’s growth and cash flow generation potential is fairly

reflected in the price (as we see limited room for profitability improvement while capex will

remain high Mobily is committed to high-speed mobile internet development). We therefore

initiate coverage with a Neutral rating.

Investment thesis: Initiate as Neutral

Mobily has a strong track record in the Saudi mobile market. After operations were launched

in 2005, it managed grab 28% revenue market share, and has been able to retain share despite

increased competition.

The company is perceived as the most technologically advanced in Saudi Arabia, as it

continues to invest in network capacity expansion and new technologies, which will help it

maintain market share.

The company is developing 4G and WiMAX internet access which will help it benefit from

growing demand for high-speed internet. However, the development will likely require Mobily

to maintain a relatively high level of investments in the medium term.

However, given slowing market growth and a continuing high level of investments, we find

the current valuation fair. The stock currently trades on 2012E EV/EBITDA of 4.9x, which is in

line with GCC mobile operators. We believe that the revenue slowdown and limited potential

for profitability improvement, means the multiple is unlikely to rerate. As we see 15%

potential upside to our 12m price target of SR58.8, we initiate coverage with a Neutral rating.

Valuation: Valuation reflects growth slowdown, elevated capex

We value Mobily on EV/EBITDA multiples, based on normalized profitability, capex requirements,

cash flow growth potential and the tax environment of the business. Our 12-month price target is

based on average 2012-13E EBITDA.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Etihad Etisalat Co (7020.SE)


Key data Current

Price (SR) 51.00




Free Float (%) 27.4


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 16,013.1 19,276.5 21,106.6 22,533.2

EBIT (SR mn) 4,354.8 4,978.3 5,220.4 5,463.2

EPS (SR) 6.02 6.83 7.22 7.64

EV/EBITDA (X) 6.7 5.6 4.9 4.4

P/E (X) 8.4 7.5 7.1 6.7

Dividend yield (%) 4.0 5.9 7.8 9.0

FCF yield (%) 5.9 10.8 11.6 13.3

CROCI (%) 23.3 23.2 22.5 21.8

EV/GCI (X) 1.4 1.2 1.1 0.9


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Etihad Etisalat Co (L) MSCI EM EMEA (R)



Investment drivers: Strong execution, DPS growth visibility, but capex remains high


We estimate the growing population and private consumption expansion in Saudi Arabia will

drive a mobile market 2010-13E CAGR of 8%. Mobily has been able to grow and protect its

revenue market share despite increasing competition. Also, Mobily benefits from higher share

of handsets and other services in revenues, which will help the company show 20% yoy revenue

growth in 2011E.

We forecast stable revenue market share for Mobily in the medium term, which should be

supported by development of internet-related services.

We expect Mobily’s EBITDA margin to stabilize at 36% going forward, as we think incremental

deterioration of the competitive environment is unlikely (given we do not expect the

introduction of a fourth license or MTR(Mobile Termination Rate) reduction).

We estimate capex will stay relatively high as the company continues to invest in network

capacity and widening of technological advantage over the competitors. We forecast the

company capex to sales ratio will be 17% on average in 2011-14.

We forecast Mobily will be able to increase dividends per share from SR2 in 2010 to SR3 and

SR4 in 2011 and 2012, respectively, which implies a 2012E dividend yield of 7.8%. We think the

expansion of DPS will be driven by completion of the aggressive network roll-out program.


Mobily’s business can benefit from an ongoing commitment to improvements in network

quality and capacity as they may allow the company not just to retain but also gain market

share in Saudi Arabia, which is an upside risk to our price target.

Etisalat Group, the parent company of Mobily, may be interested in increasing its stake in the

operator, which creates a risk of a minority buyout at a higher valuation.

Given its commitments to high network quality and technological innovation, Mobily may

choose to maintain a high level of capex in the longer term, which will limit the scope for

dividend growth in the medium term.

Industry context

Mobily is the second largest mobile operator in Saudi Arabia by revenues and holds 28% of the

Saudi mobile market by revenues. While there is competitive pressure from Zain KSA, the third

operator, Mobily’s position allows it to maintain market share.

Company description

Etihad Etisalat (Mobily) was established in 2004 by a

consortium led by Etisalat Group, the UAE based telecom

conglomerate. Mobily is the official brand name of Etihad

Etisalat, renowned as the second mobile service provider in

the Kingdom of Saudi Arabia. Mobily owns the vast majority

of shares in the Saudi National Fiber Network (SNFN) which

comprises 12,800 KM of structured fiber cable, divided into

seven fully protected rings covering 35 Saudi cities plus

access to 60 major hubs for telecommunications prime points

of presence, and complimented with 20 inter-metropolis fiber

loops in major Saudi cities

Sales by geography exposure (2010A) - all SA



Mobile100%



Key financial ratios for Mobily: Strong execution delivers solid returns

Exhibit 508: Mobily sales and margin evolution, 2006-2015E

Exhibit 509: Mobily GCI and CROCI, 2006-2015E



Exhibit 510: Mobily shareholding base

Exhibit 511: Mobily gearing, 2006-2015E



32%

33%

34%

35%

36%

37%

38%

39%

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(SA

R m

n)


0%

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20%

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5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(SA

R m

n)

GCI CROCI (RHS)

Etisalat Group61.4%

GOSI11.2%

Free float27.4%

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Our 12m target price of SR58.8 indicates potential upside

Exhibit 512: Mobily valuation and trading multiples


Telecom ServicesY/E December WirelessSAR mn Wireless

Share price (SAR) 51.00 12m Target price (SAR) 58.8 $/SAR (spot) 3.75

Market cap 35,700 Potential upside/(downside) 15%

Valuation 2008 2009 2010 2011E 2012E 2013E Price target calculation Stake 100% EV EV

EV/Sales 2.8 2.6 2.6 2.1 1.8 1.6EV/EBITDA 7.9 7.0 6.7 5.6 4.9 4.4EV/EBIT 12.0 10.6 9.6 8.0 7.2 6.5EV/DACF 9.7 7.7 6.6 5.6 5.0 4.4EV/NOPLAT 12.0 10.7 9.7 8.1 7.3 6.6EV/GCI 1.4 1.4 1.4 1.2 1.1 0.9

P/E 10.2 8.7 8.4 7.5 7.1 6.7 Mobily 100% 45,007 45,007P/B 1.6 2.5 2.5 1.9 1.6 1.5 LessFCF yield 2.8% 3.4% 5.9% 10.8% 11.6% 13.3% Net debt/(cash) 3,869Dividend yield 1.5% 2.5% 3.9% 5.9% 7.8% 9.0%

Equity Value 41,139No. of shares, mn 700Implied per share valuation (SAR) 58.8

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 16.2% 19.1% 23.3% 23.2% 22.5% 21.8% Sales growth 27.9% 21.0% 23% 20.4% 9.5% 6.8%


ROE 21.4% 24.6% 27.0% 25.3% 23.1% 21.9% EBIT growth 30.2% 28.6% 35.8% 14.3% 4.9% 4.7%


Net debt/equity 87.4% 62.6% 40.5% 20.4% 8.4% -0.5% EPS growth 45.0% 7.6% 39.7% 13.5% 5.7% 5.8%

Etihad Etisalat Co



Financials: Outperforms competitors in 2011E

We forecast a 2010-13E revenue CAGR of 12% on the back of an 8% mobile market CAGR, stable market share (the company

currently holds 28% of the Saudi mobile market by revenues) and a higher share of handsets sales. We expect Mobily’s margins to

stabilize at 36% going forward, as we think incremental deterioration in the competitive environment is unlikely. We assume the

company will keep increasing dividends (from DPS of SAR2 in 2010, to SAR3 and SAR4 in 2011E and 2012E, respectively) given its

commitment to shareholder remuneration.

Exhibit 513: Mobily P&L 2006-2015E, SAR mn, year to December


2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGroup revenues 5,841 8,440 10,795 13,058 16,013 19,276 21,107 22,533 23,701 24,746Growth 44.5% 27.9% 21.0% 22.6% 20.4% 9.5% 6.8% 5.2% 4.4%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items -479 -555 -437 -204 -146 -143 -71 -17 25 72Pre-tax (clean) 677 1,360 2,058 3,004 4,208 4,836 5,149 5,446 5,698 5,930Non-recurring Items 24 43 41 41 70 35 0 0 0 0Pre-tax (reported) 700 1,404 2,099 3,045 4,279 4,871 5,149 5,446 5,698 5,930Tax 0 -24 -7 -31 -67 -91 -96 -101 -106 -111Tax rate (%) 0% 2% 0% 1% 2% 2% 2% 2% 2% 2%

Profit after tax (reported) 700 1,380 2,092 3,014 4,211 4,780 5,053 5,345 5,592 5,819Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 700 1,380 2,092 3,014 4,211 4,780 5,053 5,345 5,592 5,819Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 700 1,380 2,092 3,014 4,211 4,780 5,053 5,345 5,592 5,819




Exhibit 514: Turning net cash from 2013E Balance sheet and cash flow statement, 2006-2015E, SAR mn, year to December



EBIT 1,156 1,916 2,495 3,208 4,355 4,978 5,220 5,463 5,674 5,858Depreciation/Amortisation 845 1,031 1,298 1,629 1,810 2,147 2,416 2,646 2,828 2,968Net financial items -479 -555 -437 -204 -146 -143 -71 -17 25 72Taxes paid 0 -24 -7 -31 -67 -91 -96 -101 -106 -111Other items -2,525 -606 -707 -389 166 35 37 39 41 43

Change in working capital 2,931 559 905 33 -647 771 432 337 276 247Cash flow from operations 1,928 2,320 3,547 4,246 5,470 7,697 7,938 8,366 8,736 9,076

Capex -1,819 -2,043 -2,954 -3,343 -3,392 -3,855 -3,799 -3,605 -3,318 -3,217Capex/D&A 215.3% 198.2% 227.5% 205.2% 187.4% 180% 157% 136% 117% 108%capex/sales (%) 31.1% 24.2% 27.4% 25.6% 21.2% 20.0% 18.0% 16.0% 14.0% 13.0%Free cash flow pre-dividend 109 277 593 902 2,078 3,842 4,139 4,761 5,418 5,859Free cash flow pre-dividend/revenues (%) 1.9% 3.3% 5.5% 6.9% 13.0% 19.9% 19.6% 21.1% 22.9% 23.7%

Other investing activities 0 -2 -2,630 454 165 0 0 0 0 0Dividend 0 0 -250 -525 -875 -1,400 -2,100 -2,800 -3,207 -3,355Cash surplus (post dividend) 109 275 -2,287 832 1,368 2,442 2,039 1,961 2,211 2,504Other and financing 254 -119 2,848 -1,162 -641 -2,442 -1,659 -1,161 -813 -569Change in net cash (net debt) 362 156 561 -331 728 -1 380 800 1,398 1,935Net debt (cash) 7,292 8,220 8,526 7,662 6,310 3,869 1,830 -131 -2,343 -4,846


Inventories 38 69 108 132 297 357 391 417 439 458Receivables 734 1,460 3,098 5,481 5,736 6,905 7,561 8,072 8,490 8,864Cash and cash equivalents 548 703 1,264 933 1,661 1,661 2,041 2,841 4,239 6,174Other 722 881 1,102 1,431 1,271 1,271 1,271 1,271 1,271 1,271Current assets 2,041 3,113 5,571 7,977 8,965 10,194 11,264 12,601 14,439 16,768

Tangible assets 3,848 5,479 8,117 10,370 12,457 14,596 16,413 17,811 18,749 19,447Intangible assets 11,800 11,287 12,453 11,980 11,558 11,128 10,694 10,255 9,807 9,358Other 0 2 1,050 600 450 450 450 450 450 450Non-current assets 15,648 16,767 21,620 22,949 24,465 26,174 27,556 28,516 29,006 29,255

Total assets 17,689 19,881 27,192 30,926 33,430 36,367 38,820 41,117 43,446 46,023

Short-term interest-bearing liabilities 7,840 1,011 3,148 2,147 2,442 1,659 1,161 813 569 398Accounts payables 3,204 4,907 7,523 9,831 9,533 11,475 12,565 13,414 14,109 14,731Other 500 111 78 211 281 338 370 395 416 434Current liabilities 11,543 6,029 10,749 12,189 12,256 13,472 14,096 14,622 15,094 15,564

Long-term interest-bearing liabilities 0 7,912 6,642 6,448 5,529 3,870 2,709 1,896 1,328 929Pension provisions -13 -26 -46 -47 -66 -66 -66 -66 -66 -66Other 1,626 53 93 93 131 166 203 242 282 325Non-current liabilities 1,613 7,939 6,688 6,495 5,595 3,971 2,847 2,073 1,544 1,188

Total shareholders' equity 4,533 5,913 9,754 12,243 15,580 18,924 21,877 24,422 26,807 29,271Minorities 0 0 0 0 0 0 0 0 0 0




ezzsteel (ESRS.CA)


Matija Gergolet

[email protected]


[email protected]

Egypt: Steel

Margin improvement and attractive valuation offset by the potential risks

Recent news flow regarding the former ezzsteel chairman and major shareholder, as well as the

withdrawal of two licences, has raised concerns over ezzsteel’s future profitability. We assume the

new direct reduced iron unit (DRI), which was due online in 1Q2012 and which should help to

replicate the higher margin of ezzsteel’s EZDK division, to be delayed by six months and apply a

30% discount to our target multiples to reflect the legal risk surrounding the company. Our 12-

month price target indicates 45% upside, after factoring in the positives and risks; with this

broadly in line with our wider MENA coverage, we initiate as a Neutral.


ezzsteel is the leader in the fast-growing Egyptian steel market, with a c.50% share. Thanks to

recent investments in a DRI module and the availability of relatively cheap gas (fixed at

US$3/mmBTU), ezzsteel’s EZDK division has been achieving industry-leading 29% EBITDA

margins over the last three years. The company is trying to replicate the success at its other

two divisions and is building a new 1.8mt DRI at a cost of US$400 mn, which was expected to

enter into operations in 1Q2012.

Such a proposition does not come without risks. The group’s major shareholder and former

chairman Mr Ezz is currently in jail following the January 25 revolution – he was sued by the

Egyptian Public Prosecutor and on September 18 a ruling was issued condemning him to ten

years in prison. Mr Ezz has declared he will appeal the ruling.

ezzsteel also had its licence for the DRI module withdrawn (in combination with other licences

for other steelmakers in Egypt) and the company is considering its legal options, having

already spend £E1.7 bn out of the £E2.5 bn required for the DRI investment, half of which was

financed through bank loans. The government could also decide to increase industrial gas and

electricity tariffs, which are a large cost component.

Valuation: Undemanding even taking into account legal risk

Our valuation is based on the global steel makers’ 5-year median EV/EBITDA of 6.3x, to which we

apply a 30% discount to reflect the legal uncertainty to derive a multiple of 4.4x EBITDA, applied to

the average of our 2012/13 estimates. We assume the DRI unit is built as it benefits the economy,

but suffers a 6-month delay. On this basis, we derive a 12-month target price of £E7.97.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





ezzsteel (ESRS.CA)


Key data Current

Price (£E) 5.50




Free Float (%) 34.0


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 16,621.4 18,409.1 19,266.5 19,595.3

EBIT (£E mn) 1,555.1 1,776.9 2,301.3 2,746.3

EPS (£E) 0.60 0.59 1.32 1.74

EV/EBITDA (X) 10.1 5.8 4.3 3.3

P/E (X) 31.8 9.3 4.2 3.2

Dividend yield (%) 1.3 4.5 12.0 15.9

FCF yield (%) (10.7) 6.1 12.2 42.0

CROCI (%) 9.1 8.4 9.9 10.9

EV/GCI (X) 0.9 0.6 0.5 0.4


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ezzsteel (L) MSCI EM EMEA (R)



Investment drivers: New DRI unit key to margins improvement, but its execution a risk


Egyptian rebar steel prices are linked to global prices and therefore significantly impacted by

global demand and supply. Transport accounts for only 5%-10% of the product cost, which

results in a high correlation of steel prices in different countries. ezzsteel has been able to

increase prices this year to £E4,800/tonne versus £E4,000/tonne at the beginning of the year.

To put the cost benefit of the DRI unit into perspective, ezzsteel’s EZDK division, which has been

operating integrated with a DRI module, reported average EBITDA margins of 29% in 2007-10

compared with an average EBITDA margin of only 4.7% at the ESR/ERM division, while the EFS

division was even loss making in 2009. With steel costs being driven by iron ore and energy,

ezzsteel should benefit in an environment of high energy prices worldwide.

Over the medium term, ezzsteel has the potential to build a further DRI unit at its plant for

ESM/ESR (which the company estimates could cost US$400 mn), as well as an additional steel

melting unit (estimated cost c.US$250 mn) and is pursuing a steel plant in Algeria in a JV with

the local government. Ezzsteel’s goal is to become one of the top 20 steel companies worldwide.

Due to the uncertainty about the timing, as well as current financial constraints, none of these

projects are included in our estimates.


The key risk for ezzsteel is the legal uncertainty regarding its DRI unit project, as well as the

current lawsuit against ezzsteel/EZDK.

ezzsteel benefits from low energy prices: while the company pays the normal industrial gas and

electricity tariffs in Egypt, these are still at a discount to international gas prices – yet at a

premium to Gulf prices. ezzsteel pays US$3mmBTU for its gas and US$4c/MWh for electricity.

Should the new Egyptian government decide to increase industrial gas or electricity prices, this

would negatively affect ezzsteel’s profitability, particularly as the 3.2mt DRI is a large consumer

of natural gas (0.9bcm pa). We estimate that an increase in the gas price of US$1/mmBTU would

have a negative impact of LE200 mn pa, or £E310 mn once the second unit enters operation.

Industry context

ezzsteel is the market leader in steel in Egypt, with a 48% market share in long products (rebars,

used for construction) and a 46% share in long products in 2010. The Egyptian steel market has seen

a 10.5% CAGR since 2002 and demand is currently 7mt pa for long product and 1mt pa for flat

products. On a per capita basis, Egypt’s annual per capita consumption is low, at 100kg pa

compared with a global average of over 200kg per year. The domestic industry is dominated by

ezzsteel, with other notable producers being Beshay, AlGahri, Bouriene, Marakby and Eisco. Imports

represent 15% of demand for long products and 40% of flat products.

Company description

ezzsteel (formerly Al Ezz Steel Rebars SAE) is the largest

producer of steel in the MENA, with an annual capacity of

5.8mt, of which 3.5mn is long products (rebars) and 2.3mn is

flat products. ezzsteel operates four facilities: EZDK (3mt

capacity), ERM/ESR (1.5mt) and EFS (1.3mt). All its facilities

are located in Egypt with good access to ports. ezzsteel has a

3.2mt pa DRI (directly reduced iron) module at its EZDK

subsidiary and is building a second 1.8mt DRI unit at its EFS

subsidiary. Projects for a 3mt pa facility in Algeria are

currently on hold. ezzsteel has c.7,000 employees.




Egypt81%

Others19%

ESR/ERM26%

EZDK60%

EFS14%



Key financial ratios: We expect gearing to come down rapidly

Exhibit 515: ezzsteel sales and margin performance, 2006-2015E

Exhibit 516: ezzsteel GCI and CROCI, 2006-2015E



Exhibit 517: ezzsteel shareholding and group structure

Exhibit 518: ezzsteel gearing, 2006-2015E



0%

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30%

35%

0

5,000

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£E m

n


0%

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0

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£E m

n

GCI CROCI (RHS)

Ezz Industries Free Float

ezzsteel

EZDKSteel company-Alexandria

ERMEFSAl Ezz Flat Steel

66% 34%

99%34%55%

55%0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

0%

20%

40%

60%

80%

100%

120%

140%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Undemanding multiples

Exhibit 519: We estimate ezzsteel will deliver 11% CROCI once the DRI is in operation – yet it is trading on only 4.3x 2012E EBITDA


EZZ Steel Basic materialsY/E December Steel£E mn Steel

Share price (£E) 5.50 Price target (£E) 7.97 $/£E (spot) 5.98 Market cap 2,936 Upside/downside 45%


EBITDA 2013E


EV/Sales 0.8 1.2 1.3 0.8 0.7 0.6 ESR/ERM 2,961 3,406 4.4 13,030 14,988EV/EBITDA 3.8 8.8 10.1 5.8 4.3 3.3 Group EBITDA 2,961 3,406 4.4 13,030 14,988EV/EBIT 4.4 13.5 13.9 7.8 5.5 4.1 AddEV/DACF 4.6 10.6 11.0 7.0 5.3 4.1 Associates 110 110EV/NOPLAT 5.7 21.8 19.0 10.4 7.3 5.5 Investments 0 0EV/GCI 1.0 0.7 0.9 0.6 0.5 0.4 EV 13,140 15,098

LessP/E 5.0 127.1 31.8 9.3 4.2 3.2 Net debt/(cash) 8,273 6,874P/B 1.2 1.4 2.2 0.6 0.5 0.5 Minorities (35% of the group) 1,703 2,878P/CFO 1.8 7.6 7.2 2.4 1.7 1.4 Provisions and other 0 0FCF yield 22% -20% -11% 6% 12% 41% Equity Value 3,163 5,345Dividend yield 8% 11% 1% 5% 12% 16% No. of shares, mn 534 534

Implied per share valuation (£E) 5.93 10.01 7.97

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 21.4% 7.5% 9.1% 8.4% 9.9% 10.9% Sales growth 35% -42% 32% 11% 5% 2%

ROIC 28.0% 5.4% 7.7% 8.9% 11.1% 13.6% EBITDA growth 10% -63% 26% 11% 25% 15%

ROE 21.1% 1.9% 5.3% 6.4% 12.8% 15.3% EBIT growth 12% -72% 41% 14% 30% 19%

Net debt/EBITDA 0.8 3.7 3.9 3.4 2.8 2.0 Net income growth 12% -96% 534% -1% 123% 32%

Net debt/equity 51% 99% 128% 116% 104% 77% EPS growth 9% -98% 534% -1% 123% 32%



Financials: We expect profitability to rebound and strong FCF generation post 2012

ezzsteel has not yet produced quarterly 2010 figures and its 2010 consolidated accounts were only been published in August 2011 as

a result of the legal issues surrounding the company. This was due to the fact that the accounts of one of its subsidiaries, EZDK, had

not been audited by the public auditor. While capex should remain high in 2011 as the group completes its 1.8mt DRI unit at the EFS

facility in Suez (yet the DRI will be owned by ERM/ESR, thus not increasing minorities), we expect net debt/EBITDA to reach 3.4x in

2011 and then reduce rapidly to 2.0x in 2013 as EBTDA improves and the company generates significant FCF.

The DRI is expected to cost £E2.5 bn, of which £E1.7bn has already been incurred as of September 2011. Given that half of the DRI

unit has been financed through bank loans (and therefore banks would be left with an unusable stranded asset if the unit is not

completed), we believe that the DRI will eventually be built but assume it is delayed by six months and that ezzsteel has to pay

£E600 mn to the government to obtain the licences again (the original licences were annulled by the court ruling). Several steel

licences, and not just ezzsteel’s, have been annulled by the court and it is estimated that local bank financing to the steel sector for

new projects is around £E6 bn: as the government will, in our view, want to avoid leaving the banks with such stranded assets, we

expect a negotiated (even though costly) resolution of the issue. In 1H, ezzsteel managed to increase its volumes slightly (up c.5%

yoy) despite a fall in the overall Egyptian market of c.30% by increasing its market share.

Exhibit 520: ezzsteel 2006-2015E P&L, £E mn



ESR/ERM 4,537 6,565 4,293 5,295 4,802 4,913 4,956 5,070 5,127EZDK 8,695 11,589 8,187 9,988 11,005 10,597 10,443 10,443 10,443EFS 2,927 3,689 109 1,338 2,601 3,757 4,196 4,443 4,443Group revenues 11,643 16,159 21,843 12,589 16,621 18,409 19,266 19,595 19,956 20,013Growth 38.8% 35.2% -42.4% 32.0% 10.8% 4.7% 1.7% 1.8% 0.3%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items -528 -634 -557 -665 -687 -931 -852 -836 -630 -504Pre-tax (clean) 2,542 2,824 3,310 436 868 846 1,449 1,911 2,256 2,393Non-recurring Items 21 51 28 60 -96 0 0 0 0 0Pre-tax (reported) 2,563 2,875 3,337 497 772 846 1,449 1,911 2,256 2,393Tax -611 -653 -751 -190 -208 -212 -362 -478 -564 -598Tax rate (%) 24% 23% 23% 38% 27% 25% 25% 25% 25% 25%

Profit after tax (reported) 1,952 2,222 2,586 307 565 635 1,087 1,433 1,692 1,795Minorities -957 -1,100 -1,489 -219 -313 -317 -380 -502 -592 -628Net income (reported) 995 1,122 1,097 88 252 317 706 931 1,100 1,167Post-tax exceptionals 16 39 -115 37 -70 0 0 0 0 0Net income (clean, continuing operations) 979 1,083 1,212 51 322 317 706 931 1,100 1,167




Exhibit 521: ezzsteel production and divisional EBITDA


2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015ETotal steel production, '000t 4,732 4,814 4,608 4,265 4,872 4,600 5,000 5,160 5,255 5,270EBITDA by division, £E mnESR/ERM 312 314 148 264 176 240 590 892 1,014 1,025EZDK 3,400 3,500 4,300 1,600 1,800 1,981 2,119 2,193 2,193 2,193EFS 343 287 21 -179 73 130 225 294 311 311Other income -424 16 57 4 83 26 27 27 28 28Total EBITDA 3,631 4,117 4,526 1,689 2,132 2,377 2,961 3,406 3,546 3,557



Exhibit 522: ezzsteel balance sheet and cash flow statement, 2006-2015E £E mn



EBIT 3,070 3,458 3,866 1,101 1,555 1,777 2,301 2,746 2,886 2,897Depreciation/Amortisation 561 659 659 588 577 600 660 660 660 660Net financial items -539 -643 -455 -690 -687 -931 -852 -836 -630 -504Taxes paid -611 -653 -751 -190 -208 -212 -362 -478 -564 -598Other items 0 0 0 41 177 0 0 0 0 0

Change in working capital -1,101 505 153 -1,380 -589 -149 -111 -43 -47 -7Cash flow from operations 1,380 3,326 3,472 -529 825 1,086 1,635 2,050 2,305 2,447

Capex -111 -197 -527 -1,212 -2,241 -736 -1,098 -198 -198 -198Capex/D&A 19.8% 29.9% 79.9% 206.1% 388.2% 123% 166% 30% 30% 30%capex/sales (%) 1.0% 1.2% 2.4% 9.6% 13.5% 4.0% 5.7% 1.0% 1.0% 1.0%Free cash flow pre-dividend 1,269 3,129 2,945 -1,741 -1,416 350 537 1,852 2,107 2,249Free cash flow pre-dividend/revenues (%) 10.9% 19.4% 13.5% -13.8% -8.5% 1.9% 2.8% 9.5% 10.6% 11.2%

Other investing activities 11 0 1 -11 -272 0 -600 0 0 0Dividend -992 -945 -2,590 -1,386 -345 -133 -133 -453 -666 -850Cash surplus (post dividend) 288 2,185 356 -3,138 -2,032 216 -196 1,399 1,441 1,399Other and financing 0 -950 1,362 469 -55 0 0 0 0 0Change in net cash (net debt) 288 1,235 1,718 -2,668 -2,086 216 -196 1,399 1,441 1,399Net debt (cash) 6,491 5,257 3,538 6,207 8,293 8,077 8,273 6,874 5,433 4,033


Inventories 2,565 2,548 3,179 2,679 3,734 3,314 3,468 3,527 3,592 3,602Receivables 636 612 495 806 802 920 963 980 998 1,001Cash and cash equivalents 799 1,892 4,096 1,581 1,415 1,415 1,415 1,415 1,415 1,415Other 131 125 50 142 106 426 444 450 457 459Current assets 4,130 5,177 7,821 5,208 6,057 6,075 6,290 6,372 6,462 6,476


Total assets 15,347 15,848 18,628 16,601 19,457 19,611 20,864 20,484 20,112 19,664

Short-term interest-bearing liabilities 2,388 3,257 3,914 3,371 4,649 4,649 4,649 4,649 4,649 4,649Accounts payables 1,448 2,020 2,269 1,390 1,807 1,841 1,927 1,960 1,996 2,001Other 782 668 998 403 533 368 385 392 399 400Current liabilities 4,618 5,945 7,181 5,165 6,989 6,858 6,961 7,000 7,044 7,050

Long-term interest-bearing liabilities 4,902 3,892 3,736 4,427 5,117 4,901 5,097 3,698 2,257 858Pension provisions 0 0 0 0 0 0 0 0 0 0Other 676 709 746 735 862 862 862 862 862 862Non-current liabilities 5,578 4,601 4,482 5,162 5,980 5,764 5,960 4,561 3,119 1,720

Shareholder's equity 2,867 3,330 5,191 4,599 4,761 4,945 5,518 6,096 6,730 7,347Minorities 2,283 1,971 1,775 1,675 1,727 2,045 2,425 2,827 3,219 3,547




Fawaz Abdulaziz Alhokair & Company (4240.SE)


Arsalan Mustafa,CFA

[email protected]

Matija Gergolet

[email protected]


[email protected]


Aiming to replicate domestic success internationally

With a share of c.45% in Saudi Arabia’s fashion apparel market, Alhokair is well positioned to

benefit from rising consumer spending in the country, in our view. We believe the company’s new

strategy to replicate its success internationally by expanding in the MENA and CIS regions is likely

to accelerate revenues, but with the current valuation limiting upside, we initiate as Neutral.


Alhokair aims to increase its number of stores by 70% from 1,000 currently to 1,700 in the next

five years. We forecast that this will translate into average sales growth of 18% in 2012-16.

The company plans to open a large number of its new stores outside Saudi Arabia, targeting

Jordan, Egypt, Morocco and the CIS regions. It has a medium-term international sales

contribution target of 40% compared with 9% currently.

In Saudi Arabia, Alhokair already has a leading market share of c.45% and aims to expand

more cautiously mainly through high-end brands. It recently acquired the right to distribute

the Burberry brand in Saudi as part of this strategy.

Given the company’s strong cash flow generation ability, we expect it to achieve its store

opening target with minimal use of leverage (we forecast net debt/EBITDA will remain below

1.5x), while maintaining high CROCI (c.20% in 2012-16).

In our view, finding new stores in prime locations quickly outside Saudi Arabia could be a

challenge. In Saudi Arabia, Alhokair is able to leverage its parent company (one of the largest

mall operators in the country), an advantage not available internationally. On the other hand,

faster than expected international store sales may result in higher than forecast earnings.

Valuation: We value the company at 11.1x EV/EBITDA, in line with history

Alhokair trades on a 2012E EV/EBITDA of 8x, below its five-year median multiple of 11.1x and the

median 2012E EV/EBITDA multiple of 9.1x for its global peers. The stock has strongly outperformed

the local index recently (up 35% YTD), which in our view caps the upside for the stock. Our 12-

month price target is SR86.1, implying 48% potential upside, and is derived from an EV/EBITDA

multiple of 11.1x applied to our 2012 and 2013 estimates; this is based on the stock’s five-year

median multiple. At our price target, Alhokair would trade at 16x 2012E earnings, similar to the

stock’s five-year mid-cycle multiple. We are rated Neutral on the shares.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Fawaz Abdulaziz Alhokair and Company (4240.SE)


Key data Current

Price (SR) 58.00




Free Float (%) 30.0


3/11 3/12E 3/13E 3/14E

Revenue (SR mn) 2,574.6 3,232.7 3,920.6 4,464.1

EBIT (SR mn) 261.9 422.3 395.3 442.7

EPS (SR) 4.33 5.52 4.76 5.17

EV/EBITDA (X) 8.6 8.0 8.2 7.2

P/E (X) 9.9 10.5 12.2 11.2

Dividend yield (%) 5.8 4.3 4.3 4.3

FCF yield (%) 8.2 1.2 0.8 1.9

CROCI (%) 23.0 25.0 20.2 19.6

EV/GCI (X) 1.7 1.9 1.7 1.4


260

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510

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30

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45

50

55

60



Fawaz Abdulaziz Alhokair and Company (L) MSCI EM EMEA (R)



Investment drivers: Store openings to drive growth


Alhokair aims to increase its number of outlets by 70% from 1,000 currently to 1,700 in the next

five years. We forecast that this will translate into average sales growth of 18% in 2012-16. Over

the last five years, the company’s sales growth has averaged 15% while its number of stores has

risen by 47% (from c.680 in 2007 to 1,000 in 2011). Alhokair aims to open a large number of its

new store outside Saudi Arabia, specifically targeting Kazakhstan, where it has generated

significantly higher revenue per store than in Saudi Arabia (we estimate 2x in 2011). In early

2010, Alhokair opened its first Zara store in Kazakhstan.

In Saudi Arabia, Alhokair aims to further expand through high-end brands, and recently

acquired distribution brand rights for Burberry as part of this strategy. The company has a

leading market share in the medium end of the fashion brand segment in Saudi Arabia, with

c.880 stores. Its international expansion plans are driven by its view that the Saudi market is

already well penetrated in this segment. In 2008-09, the company quickly expanded in Saudi

Arabia, but realized that it was cannibalizing its own sales and ended up closing 117 stores.

Alhokair has two main profit-sharing arrangements with its international brand partners. In the

first case (pull model), it generates gross margins in the range of 50%-60% and takes on all the

risk of selling the inventory. In the second case (push model), the company generates a lower

gross margin (40%-45%) but only acts as a provider of shelf space without taking on the risk of

unsold inventory. Alhokair has a pull model agreement with the top brands with which it plans

to expand internationally; we forecast little incremental EBITDA margin improvement as we

estimate higher gross margin to be partially offset by higher international operating costs.


Alhokair’s expansion plan is subject to execution risk given the target of opening a large

number of stores in a short span of time. In Saudi, the company was able to leverage its

relationship with the wider Al-Hokair group (one of the largest mall operators in the country).

A few of the company’s top brands generate a large share of its revenue. Discontinuations of

the franchise agreements would result in lower-than-forecast earnings. Faster than forecast

store openings may result in faster than expected sales growth.

Industry context

Alhokair has a dominant market share in Saudi Arabia, which we estimate at c.45%. The company

competes with a number of other international brands that are franchised by large family groups. We

estimate that the fashion retail market has been growing at 10%-15% over the last five years.

Company description

Alhokair is the franchisee of 72 international fashion brands

through its 919 stores in over 70 malls in Saudi Arabia. The

company’s anchor brands include Zara, Marks & Spencer,

GAP, Aldo and Monsoon. Alhokair also has a presence in

Jordan (60 stores), Egypt (25), Kazakhstan (20) and the US

(52). The US operation was recently started with the firm’s

acquisition of Strasburg Jarvis Inc (Children’s wear). Alhokair

also has relatively small investments in shopping centres in

the Gulf region. The company is part of the wider Alhokair

group, one of the largest mall operators in Saudi Arabia.




Saudi Arabia 91%

Kazakhstan4%

Egypt3%

Jordan2%

Department stores 47%

Women Clothes

35%

Kids Clothes

5%

Shoe Sales8%

Men Clothes

2%

Other 3%



Key financial ratios: We expect CROCI to remain at c.20%

Exhibit 523: We forecast a pickup in margins from the greater use of the pull

model to be partially offset from higher SG&A from international expansion

Exhibit 524: We forecast CROCI to remain c.20%



Exhibit 525: The company is part of the wider Al-Hokair group, one of the

largest mall operators in Saudi Arabia

Exhibit 526: We forecast a small increase in medium-term borrowing as the

firm opens new stores



0%

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25%

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

SRm

n


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500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Fawaz Alhokair Group49%

Alhokair family21%

Free Float30%

-0.5x

0.0x

0.5x

1.0x

1.5x

2.0x

-20%

-10%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E




Valuation, growth and returns: We value Alhokair at 11.1x EV/EBITDA, in line with history

Exhibit 527: At our target price, the stock would trade at 16x 2012E earnings


Fawaz Abdulaziz Al Hokair & Company Consumer cyclicalsY/E March RetailSRmn Retail

Share price (SR) 58.0 12-month price target (SR) 86.1 $/SR (spot) 3.75Market cap 4,060 Potential upside/(downside) 48%

Valuation 2008 2009 2010 2011 2012E 2013E Price target calculation EBITDA 2012E*

EBITDA 2013E*


EV/Sales 2.4 1.4 1.2 1.2 1.4 1.2 Fawaz Abdulaziz Al Hokair & Company 556 625 11.1 6,176 6,939EV/EBITDA 14.9 11.4 7.5 8.6 8.0 8.2 Group EBITDA 556 625 11.1 6,176 6,939EV/EBIT 18.3 15.7 10.0 12.0 10.5 11.5 AddEV/DACF 15.3 9.8 7.1 7.7 8.5 9.0 Associates* 124 124EV/NOPLAT 19.4 16.4 10.4 12.0 11.0 12.3 Investments* 95 95EV/GCI 3.2 2.0 1.4 1.7 1.9 1.7 EV post-discount 6,395 7,158

Less 0 0P/E 19.2 13.1 10.6 9.9 10.5 12.2 Net debt/(cash)* 602 714P/B 4.3 3.1 2.1 2.7 3.3 2.9 Minorities* 41 47P/CFO 15.4 9.0 6.4 7.2 7.8 8.1 Pensions and other* 42 42FCF yield -1.4% 9.7% 6.3% 7.6% 1.1% 0.7% Equity Value 5,710 6,355Dividend yield 5.0% 4.6% 6.1% 5.8% 4.3% 4.3% No. of shares, mn 70 70

Implied per share valuation (SR) 82 91 86.1* Calendarized, company has 31 March year end

Returns and gearing 2008 2009 2010 2011 2012E 2013E Growth 2008 2009 2010 2011 2012E 2013ECROCI 24.0% 22.1% 21.9% 23.0% 25.0% 20.2% Sales growth 6.9% 19.9% 9.2% 24.1% 25.6% 21.3%

ROIC 26.9% 19.0% 22.5% 21.7% 28.8% 21.5% EBITDA growth -11.3% -8.6% 37.0% 14.3% 50.9% 1.7%

ROE 24% 23% 24% 29% 33% 26% EBIT growth -15.3% -19.2% 43.6% 8.7% 61.2% -6.4%

Net debt/EBITDA 0.29 1.49 0.92 0.77 0.90 1.14 Net income growth -18.5% 0.5% 6.7% 40.4% 27.6% -13.9%

Net debt/equity 8% 40% 26% 25% 39% 45% EPS growth -18.5% 0.5% 6.7% 40.4% 27.6% -13.9%



Financials: We forecast average sales growth of 18% over the next five years

We forecast average sales growth of 18%, driven by opening of 130 stores/year and average same-store sales growth of 5% pa

(2012-16E). On our estimates, this will translate into average EBITDA growth of 24% as the company uses more of the pull profit

share model in its international expansion. Alhokair reported exceptionally high sales growth of 27% in its first half (ended

September 2011), which we believe reflects the impact of the Saudi stimulus package (all government employees and many private

sector employees were given two months’ salary as a bonus), while EBIT was up 55% yoy, largely due to operating leverage. We

forecast a moderation in growth for the rest of the year.

Exhibit 528: 1HFY12 sales were exceptionally high due to the Saudi stimulus; we forecast a moderation for the rest of the year

Fawaz Abdulaziz Alhokair & Company 2006-15E P&L, SR mn



Group revenues 1,481 1,584 1,899 2,074 2,575 3,233 3,921 4,464 5,098 5,785Growth 6.9% 19.9% 9.2% 24.1% 25.6% 21.3% 13.9% 14.2% 13.5%



Share of associates 0 0 13 -30 -17 0 0 0 0 0Net financial items 14 6 29 16 78 -10 -34 -45 -48 -46Pre-tax (clean) 259 213 210 227 322 412 361 398 457 529Non-recurring Items 0 0 0 16 12 0 0 0 0 0Pre-tax (reported) 259 213 210 243 335 412 361 398 457 529Tax -11 -12 -7 -11 -15 -19 -23 -30 -39 -50Tax rate (%) 4% 6% 4% 4% 4% 5% 6% 8% 9% 9%

Profit after tax (reported) 247 201 202 232 320 393 338 368 417 479Minorities 0 0 0 0 -4 -6 -5 -6 -7 -8Net income (reported) 247 201 202 232 315 387 333 362 411 471Post-tax exceptionals 0 0 0 16 12 0 0 0 0 0Net income (clean, continuing operations) 247 201 202 216 303 387 333 362 411 471




Exhibit 529: Strong cash generation will lead to limited use of debt to increase stores Fawaz Abdulaziz Alhokair & Company balance sheet and cash flow statement, 2006-15E, SR mn



EBIT 245 208 168 241 262 422 395 443 504 575Depreciation/Amortisation 42 47 65 78 102 127 163 205 248 293Net financial items -1 -7 -12 -13 -16 -24 -34 -45 -48 -46Taxes paid -11 -12 -7 -11 -15 -19 -23 -30 -39 -50Other items 15 16 83 63 86 15 0 0 0 0

Change in working capital -123 -101 131 -61 -115 -106 -110 -87 -102 -110Cash flow from operations 166 151 426 296 304 415 392 486 563 662

Capex -108 -205 -170 -150 -71 -368 -361 -411 -430 -450Capex/D&A 261.2% 439.8% 262.1% 194.0% 69.9% 289% 221% 201% 174% 154%capex/sales (%) 7.3% 13.0% 8.9% 7.3% 2.8% 11.4% 9.2% 9.2% 8.4% 7.8%Free cash flow pre-dividend 57 -55 257 146 232 46 30 74 133 211Free cash flow pre-dividend/revenues (%) 3.9% -3.4% 13.5% 7.0% 9.0% 1.4% 0.8% 1.7% 2.6% 3.7%

Other investing activities 39 -59 -210 -98 30 0 0 0 0 0Dividend 0 -70 -245 0 -261 -262 -175 -175 -175 -175Cash surplus (post dividend) 97 -184 -198 48 2 -215 -145 -101 -42 36Other and financing -7 14 -74 5 12 0 0 0 0 0Change in net cash (net debt) 90 -170 -272 53 15 -215 -145 -101 -42 36Net debt (cash) -96 74 346 293 279 494 638 739 781 745


Inventories 282 353 365 476 599 752 911 1,038 1,185 1,345Receivables 12 4 0 0 0 0 0 0 0 0Cash and cash equivalents 96 28 24 77 107 107 107 107 107 107Other 200 260 284 306 430 540 655 746 852 966Current assets 590 645 673 858 1,136 1,399 1,674 1,891 2,144 2,419

Tangible assets 257 379 489 605 613 854 1,052 1,259 1,442 1,600Intangible assets 13 25 16 139 143 143 143 143 143 143Other 102 185 411 284 278 278 278 278 278 278Non-current assets 372 589 916 1,029 1,033 1,274 1,472 1,679 1,862 2,020

Total assets 963 1,233 1,590 1,887 2,169 2,673 3,146 3,570 4,006 4,438

Short-term interest-bearing liabilities 0 102 370 70 161 161 161 161 161 161Accounts payables 68 100 163 150 285 358 434 495 565 641Other 103 104 166 220 331 415 503 573 654 743Current liabilities 171 305 698 439 777 934 1,099 1,229 1,380 1,545


Total Common Equity 774 905 863 1,094 1,095 1,220 1,378 1,565 1,801 2,097Minorities 0 0 0 16 31 37 43 49 56 63




Galfar Engineering & Contracting (GECS.OM)



[email protected]

Matija Gergolet

[email protected]

Oman: Construction

Strong order pipeline and high execution capability to drive growth

We believe that Galfar is in a prime position to benefit from robust infrastructure spending in

Oman in 2011-15 under the country’s eighth five-year plan. Given its robust and diverse order

backlog, strong order inflow and execution capability and exposure to high-growth regions like

India and Kuwait, we expect the company to generate optimal returns. We initiate as Buy.


At 2x coverage, Galfar’s current order book size of c.RO600 mn is very strong and diverse. We

believe the order book will grow owing to a strong pipeline of new orders in Oman,

particularly in the road segment on the back of increased infrastructure spending.

We believe Galfar’s key strength lies in its execution capabilities, supported by its expertise

and resources and reflected in its above-average backlog conversion ratio of 66%. Given its

robust order book, strong order inflow and execution capability, we expect Galfar to generate

a 6% sales CAGR sales in 2011E-15E.

Galfar has recently expanded its operations to high growth regions in the Middle East, Asia

and Africa. While it is still a new player in these regions, the company is partnering with

established players in niche markets. We believe Galfar will benefit from high infrastructure

spending in these regions.

Although Galfar’s operating margins have declined, it has completed low-margin contracts

and its new contracts are in line with industry standard margins. We expect Galfar’s margins

to improve through backward integration with its JV with Unibeton Ready Mix LLC for supply

of RMC. We forecast operating margin expansion of 192 bps between 2010 and 2014.

Valuation: Trades below historical multiples and peers

Galfar trades on a 2012E EV/EBITDA of 6.5x, below its five-year historical median multiple of 8.9x

and the five-year median of 8.6x for GS covered global construction peers. The stock is down 38%

YTD, underperforming the MSCI EEMEA by 21%. Based on our 2012/13E EV/EBITDA methodology

and using the global construction peers 5-year median multiple of 8.6x, our 12-month price target

is RO0.53, which implies 52% potential upside. Our rating is Buy.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Galfar Engineering & Contracting (GECS.OM)


Key data Current

Price (RO) 0.35

12 month price target (RO) 0.53



Free Float (%) 40.0


12/10 12/11E 12/12E 12/13E

Revenue (RO mn) 370.2 343.0 328.0 339.9

EBIT (RO mn) 11.8 12.4 11.1 14.1

EPS (RO) 0.02 0.02 0.02 0.03

EV/EBITDA (X) 7.3 5.9 6.5 6.7

P/E (X) 27.1 16.5 16.0 12.2

Dividend yield (%) 2.1 3.1 3.2 4.1

FCF yield (%) (6.2) 10.5 12.5 (13.6)

CROCI (%) 16.0 10.2 8.3 7.9

EV/GCI (X) 0.8 0.6 0.6 0.6


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Galfar Engineering & Contracting (L) MSCI EM EMEA (R)



Investment drivers: High infrastructure spending to drive growth for Galfar


Under its eighth five-year plan, Oman plans to increase its oil output to 924bpd by 2015 from

865bpd in 2010. It also has a strong focus on infrastructure growth, with c.68% of the total

planned spending of RO12 bn allocated to infrastructure development of roads, airports, and

utilities. We believe this will open up large orders in the field of oil & gas, roads & bridges and

civil & utilities. Given Galfar’s market-leading position and exposure to these sectors, it is very

well placed to benefit from strong order inflow.

Galfar is successfully expanding its operations geographically. In India, its subsidiary operates

through an SPV, partnering with local contractors. It has acquired road contracts on a Build,

Own, Operate and Transfer (BOOT) infrastructure projects basis of c.RO300 mn, with toll

collection rights for a concession period of up to 26 years. While the BOOT projects have the

typical cost & revenue profile of capital-intensive business, current contracts are well placed to

reach the breakeven threshold. We believe Galfar’s exposure to high-growth regions and

diverse contracts will provide it with a long-term recurring revenue stream, improve its market

risk profile and enhance its margins.


We believe the key to Galfar’s growth is its strong order inflow and execution capability. Any

delays by the government in awarding infrastructure contracts or by Galfar in executing them

will affect the company’s revenue.

While infrastructure spending in Oman has increased substantially, it has also attracted global

contracting companies in the country. We believe this increase in competition and aggressive

bidding by Galfar could affect its profitability.

Higher-than-expected raw material prices would affect the company’s margins.

Industry context

Galfar is Oman’s largest construction company, with EPC capabilities in oil & gas, roads & bridges

and civil & utilities. The government of Oman is focused on improving infrastructure facilities and

has spending plans of RO8 bn in 2011-15. A large part of the spending is allocated for roads, airports

and sea port development. Expenditure on the oil & gas sector is also set to rise as the government

plans to increase output and as Petroleum Development Oman plans to develop some low-yield

petroleum fields through enhanced recovery techniques. This has attracted large global companies

to bid for contracts in Oman and hence increased competition. However, we believe Galfar, being

the largest construction company in Oman, is set to benefit from the large order pipeline in that

country and from its exposure to India and Kuwait.

Company description Galfar Engineering & Contracting (Galfar) is one of the largest

construction companies in the Middle East, with EPC

capability in the oil & gas, roads & bridges and civil & utilities

sectors. The company is expanding its operations outside

Oman, in Kuwait, India, Qatar and Abu Dhabi. The Indian

subsidiary of the company is actively engaged in BOOT sector

infrastructure projects for road. Galfar has recently established

a JV with Unibeton to produce ready mix concrete to lessen

its production costs and has set up a subsidiary, Aspire

Projects and Services, to carry out small works. The company

currently has a fleet of 7,000 units of equipment and c.28, 000

employees.




Oman100%

Construction

99%

Hiring1%



Key financial ratios: We forecast stable margins and an improving balance sheet

Exhibit 530: We expect Galfar’s sales to grow and margins to stabilize…

Exhibit 531: …and expect CROCI to remain stable at c.10% to 2015E



Exhibit 532: Galfar shareholding structure

Exhibit 533: We forecast Galfar to improve its gearing through 2015E



0%

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

OM

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

OM

Rm

n

GCI CROCI (RHS)

Dr. Salim Saeed Hamad Al Fannah

Al Araimi18%

Al Siraj Investments and Projects

12%

Aimmar United Investments and

Projects12%

Dr. Parambathekandi

Mohammed Ali10%

PMA International5%

Qhassya Projects and Investments

3%

Free Float40%

0.0x

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: High sales growth, but below historical EV/EBITDA

Exhibit 534: Galfar trades on 2012E EV/EBITDA of 6.5x, well below its five-year historical median of 8.9x


Galfar Engineering & Contracting IndustrialsY/E December ConstructionROmn Engineering & Construction

Share price (RO) 0.35 12-month price target (RO) 0.53 $/RO (spot) 0.39Market cap 116 Potential upside/(downside) 52%


EBITDA 2013E


EV/Sales 1.4 0.7 0.7 0.6 0.6 0.6 Galfar Engineering & Contracting 30 32 8.6 260 272EV/EBITDA 10.7 9.1 7.3 5.9 6.5 6.7 Group EBITDA 30 32 8.6 260 272EV/EBIT 17.6 41.1 22.3 17.0 17.8 15.2 AddEV/DACF 9.0 47.7 5.7 6.4 7.1 7.4 Associates 9 9EV/NOPLAT 20.0 48.7 27.3 20.0 21.0 17.9 Investments 0 0EV/GCI 1.8 1.0 0.8 0.6 0.6 0.6 EV post-discount 269 282

Less 0 0P/E 18.5 77.0 27.1 16.5 16.0 12.2 Net debt/(cash) 84 100P/B 4.8 2.1 1.9 1.3 1.2 1.2 Minorities 1 1P/CFO 7.7 93.5 3.7 3.8 4.4 4.3 Pensions and other 7 7FCF yield -12% 2% -6% 10% 12% -12% Equity value 178 174Dividend yield 1% 2% 2% 3% 3% 4% No. of shares, mn 330 330

Implied per share valuation (OMR) 0.54 0.53 0.53

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 24.1% 2.0% 16.0% 10.2% 8.3% 7.9% Sales growth 35.5% 12.8% -10.0% -7.3% -4.4% 3.6%

ROIC 17.1% 3.3% 5.9% 6.1% 5.7% 7.0% EBITDA growth 13.4% -36.9% 22.6% -1.1% -15.0% 4.6%

ROE 29.8% 4.6% 7.2% 8.2% 8.1% 10.0% EBIT growth 3.2% -77.0% 80.9% 5.4% -10.5% 26.5%

Net debt/EBITDA 2.0 3.0 2.9 2.7 2.8 3.1 Net income growth 1.4% -89.6% 158.9% 19.5% 3.0% 30.8%

Net debt/equity 110.9% 107.0% 122.1% 107.3% 89.8% 100.3% EPS growth 1.4% -89.6% 158.9% 19.5% 3.0% 30.8%



Financials: We expect strong operating cash flow on revenue growth and high margins

While we forecast negative sales growth in 2011 (-10%) due to a lower level of contract completion, we forecast that the company

will post a 6% sales CAGR in 2011-15 on the back of higher contract revenues. We expect operating margins to improve to 13% in

2014 from 10% in 2010, mainly owing to lower operating costs achieved by acquiring high-margin contracts and by sourcing

cheaper raw material through backward integration. We therefore forecast Galfar to have strong operating cash flow and maintain a

dividend payout ratio of 50% in 2011-15.

For 9M2011, Galfar reported revenue of RO239mn down 10% yoy and operating profit of RO34mn up by 6% yoy owing to better

margins, at 14% vs. 11% yoy.

Exhibit 535: We expect Galfar’s sales to grow on the back of better execution and completion of its existing contracts

Galfar 2006-15E P&L, RO mn


Galfar Engineering & ContractingSummarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EGroup revenues 166 269 365 411 370 343 328 340 379 433Growth 61.9% 35.5% 12.8% -10.0% -7.3% -4.4% 3.6% 11.4% 14.2%



Share of associates 0 0 0 0 0 0 0 0 0 1Net financial items -1 -3 -4 -4 -5 -4 -3 -3 -3 -3Pre-tax (clean) 19 25 25 3 7 8 8 11 21 36Non-recurring Items 0 1 1 2 0 0 0 0 0 0Pre-tax (reported) 19 26 26 4 7 8 9 11 21 37Tax -3 -3 -3 -1 -1 -1 -1 -2 -3 -5Tax rate (%) 14% 13% 12% 16% 18% 15% 15% 15% 15% 15%





Exhibit 536: Galfar has a strong balance sheet, as evidenced by its low gearing ratio Galfar balance sheet and cash flow statement, 2006-15E, RO mn



EBIT 20 27 28 7 12 12 11 14 24 39Depreciation/Amortisation 9 14 18 23 24 23 19 18 18 19Net financial items -2 -3 -4 -4 -5 -5 -4 -4 -4 -4Taxes paid -3 -1 -3 -1 0 -1 -1 -2 -3 -5Other items 0 0 13 -22 13 1 1 1 1 1

Change in working capital 0 -30 -51 31 -40 -7 -3 -20 7 -15Cash flow from operations 24 7 1 32 3 23 23 7 42 35

Capex 0 -40 -49 -29 -13 -12 -10 -21 -22 -11Capex/D&A 0.0% 295.0% 268.9% 126.0% 52.1% 52% 52% 120% 120% 60%capex/sales (%) 0.0% 14.9% 13.4% 7.0% 3.4% 3.5% 3.0% 6.2% 5.8% 2.6%Free cash flow pre-dividend 24 -33 -47 4 -9 11 13 -15 20 24Free cash flow pre-dividend/revenues (%) 14.7% -12.4% -13.0% 0.9% -2.5% 3.3% 4.1% -4.3% 5.4% 5.5%

Other investing activities 0 1 2 1 -6 -2 0 0 0 0Dividend 0 -6 -10 -5 -3 -3 -4 -4 -5 -9Cash surplus (post dividend) 24 -38 -56 -1 -19 6 10 -18 16 15Other and financing 0 24 0 -4 2 2 2 2 2 2Change in net cash (net debt) 24 -14 -56 -4 -16 9 12 -16 18 17Net debt (cash) 23 37 93 88 105 96 84 100 81 64




Total assets 173 258 371 368 421 404 391 421 456 499



Shareholders equity 30 70 83 82 85 89 93 99 112 134Minorities 0 1 1 1 1 1 1 1 1 1




GB Auto (AUTO.CA)



[email protected]

Matija Gergolet

[email protected]

Egypt: Automobiles

Trading above global peers; future opportunities represent upside risk

GB Auto’s domestic market share in passenger cars has increased this year, which, together with

strong growth in Two and Three Wheelers has largely offset significant weakness in Buses and

Trailers. The stock is trading below historical multiples, but well above global autos peers. The

possible opening up of its assembly platform to brands other than Hyundai and strong growth

potential in the Iraqi market have the potential to surprise significantly to the upside.


2011 is a year that has been affected by the Egyptian revolution in 1Q. We forecast a fall in

2011 EBITDA of 10% yoy due mainly to reduced domestic volumes. Our EBITDA forecast is

17% below Reuters consensus for 2012, reflecting our more conservative volume assumptions

for 2H2011 and 2012.

GB Auto’s Hyundai and Mazda brands currently enjoy a total 32% share of the local passenger

car market. 3Q domestic volumes recovered somewhat to trend down 6% yoy following

significant 1Q weakness (-57% yoy) owing to the impact of the revolution. Two and Three

Wheeler sales (especially the latter) have grown strongly since the beginning of 2011 – 3Q

volumes are up 82% yoy (+66% ytd) for this segment. Buses and Trailers have been extremely

weak, with volumes falling by 47% yoy in 3Q2011.

GB Auto is looking into the possibility of assembling an entry level car in partnership with a

global car manufacturer other than Hyundai. This, along with the growth potential of Iraqi

operations, represents significant further upside potential to our forecasts.

GB Auto’s share price has fallen by 45% ytd, underperforming the MSCI EEMEA index by 30%

(US$ basis) over the same period.

Valuation: Trading below historical and peer multiples

GB Auto trades on 2012/13E EV/EBITDA of 7.2x/5.7x respectively, below its four-year (reflecting its

years of trading) historical median of 9.9x, but well above the median 2012/13E multiples of

4.4x/3.9x for global automobile stocks covered by Goldman Sachs. Based on our 2012/13E

EV/EBITDA methodology and applying the global autos historical multiple of 7.1x, our 12-month

price target is £E28.3, implying 19% potential upside to the current share price. Our rating is

Neutral.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





GB Auto (AUTO.CA)


Key data Current

Price (£E) 23.77




Free Float (%) 23.1


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 6,873.8 7,441.3 8,714.2 9,624.1

EBIT (£E mn) 557.0 455.0 600.6 721.7

EPS (£E) 2.18 1.31 1.81 2.55

EV/EBITDA (X) 9.8 9.2 7.2 5.7

P/E (X) 17.6 18.2 13.1 9.3

Dividend yield (%) 2.6 0.0 0.0 5.4

FCF yield (%) (7.5) (21.2) 1.9 10.7

CROCI (%) 15.2 11.4 12.3 13.9

EV/GCI (X) 1.8 1.1 1.1 1.0


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GB Auto (L) MSCI EM EMEA (R)



Investment drivers: Impact from domestic weakness, but mid-term growth potential


GB Auto’s market share in Egypt has risen to 32.1% ytd versus 27.7% in 2010. The new Accent

and Elantra models have helped drive this. The company is therefore consolidating a strong

share in its home market, which is underpenetrated in terms of vehicle ownership. Smaller

businesses such as Two and Three Wheelers and Tires (distribution of Lassa tires)/Financing are

also growing strongly.

Iraqi operations currently represent c.30% of sales for GB Auto, but the company sees this

market as a significant growth opportunity given low automotive penetration rates. GB Auto

currently distributes Hyundai CBU (completely built up, imported) units in the country and

intends to capitalise on its first mover advantage in Iraq by investing in an after-sales network

and potentially introducing new products to the market.

GB Auto recently completed a US$20 mn CKD (completely knocked down, assembled units)

capacity increase, more than doubling its production capacity to 70,000 CKD units per annum. It

is seeking to use this increase in two main ways: (1) exploring the opportunity to assemble an

entry level car in Egypt in partnership with a global car manufacturer, with distribution rights in

Egypt, MEA and parts of Europe; and (2) looking to assemble pick-up trucks and microbuses,

which are currently gaps in its product offering. These initiatives could represent significant

upside risk to our forecasts if they materialise.


Prolonged political uncertainty in Egypt and the negative effect on economic activity would be

the main downside risk to our view. Egypt currently accounts for c.77% of sales. Another risk is

further £E weakening given that the company imports CKD kits and CBU models, although it has

hedged its exposure following the revolution.

The main operational upside/downside risk would be stronger/weaker volume progression than

our current forecasts of passenger car volumes rising 10%/7% for GB Auto in 2012/13.

Industry context: Market share leader in Egyptian passenger cars

GB Auto is the leader in Egyptian passenger cars, with a 32% market share. The Egyptian passenger

car market demonstrated a CAGR of 15% (including a fall of 20% yoy in 2009) from 2005 to 2010 to

stand at c.193,000 units sold in 2010. Owing to high custom duties on bigger engines, just 9% of the

market is represented by engines larger than 1.6L. GB Auto focuses on CKD assembly in the largest

market segment, engines of 1.5L-1.6L, representing 67% of the Egyptian market in the year to

August. Just 30 vehicles are owned per 1,000 people (GB Auto data) in Egypt, which is significantly

below Morocco’s 53 and Turkey’s 145. GB Auto’s main competitors by brand are Chevrolet and Kia.

Company description

GB Auto assembles, imports and distributes passenger cars,

buses, trucks and trailers in Egypt. The company is the

exclusive distributor for Hyundai, Mazda, Mitsubishi and

Volvo in Egypt and for Hyundai in Iraq, It aims to be a “one-

stop” automotive shop and also distributes motorcycles, tuk-

tuks, tires and commercial vehicles in Egypt and offers micro

and corporate financing solutions. GS Auto has the largest

Egyptian distribution and after-sales network and aims to

introduce ten new service centres in 2011 and 2012. Currently,

the company has c.5,520 employees.




Egypt77%

Iraq23%

Passenger Car76%

Buses and Trailers

4%

Two & Three

Wheelers14%

Other Operations

6%



Key financial ratios: Sales growth, margin and CROCI to recover after a difficult 2011

Exhibit 537: We forecast a recovering margin for GB Auto post 2011

Exhibit 538: We forecast an average CROCI of 14% for GB Auto for 2011-15



Exhibit 539: GB Auto shareholding and structure

Exhibit 540: After a peak in 2011E, we forecast a sharp improvement in

gearing



0%

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£Em

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2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

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GCI CROCI (RHS)

Dr Raouf Hanna Kamel

Ghabbour 37%

Nader Raouf Kamel Hanna

Ghabbour 9%Dina Raouf

Kamel Hanna Ghabbour

8%

Kamal Raouf Hanna

Ghabbour 8%

Ola Lotfy Zaki Wahba

8%

Suleiman Abdulmohsen

Abdullah Abanumay

7%

Free Float23%

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Valuation, growth and returns: Trading below historical multiples in 2012E

Exhibit 541: GB Auto trades on 2012E EV/EBITDA of 7.2x and P/E of 13.1x vs. five-year medians of 9.9x and 14.7x respectively


GB Auto Consumer CyclicalsY/E December Automobiles£Emn Automobiles

Share price (£E) 23.8 12M price target (£E) 28.3 E£/$ (spot) 5.98Market cap 3,066 Potential upside/(downside) 19%


EBITDA 2013E


EV/Sales 1.3 0.8 0.9 0.7 0.6 0.5 Group EBITDA 724 858 7.1 5,144 6,089EV/EBITDA 10.0 8.1 9.8 9.2 7.2 5.7 Group EBITDA 724 858 7.1 5,144 6,089EV/EBIT 10.9 9.2 11.2 11.5 8.7 6.8 AddEV/DACF 11.4 11.5 12.7 11.3 9.0 7.1 Associates 2 2EV/NOPLAT 13.2 11.9 14.0 14.5 11.2 8.8 Investments 0 0EV/GCI 2.5 1.2 1.8 1.1 1.1 1.0 EV 5,146 6,091

Less 0 0P/E 14.9 13.5 17.6 18.2 13.1 9.3 Net debt/(cash) 1,872 1,512P/B 3.5 1.4 2.5 1.5 1.4 1.2 Minorities 263 297P/CFO 12.0 13.9 14.0 10.2 8.0 6.1 Pensions and other 0 0FCF yield -5.4% 1.5% -7.5% -21.2% 1.9% 10.7% Equity value 3,011 4,283Dividend yield 0.0% 4.8% 2.6% 0.0% 0.0% 5.4% No. of shares, mn 129 129

Implied per share valuation (£E) 23.3 33.2 28.3


ROIC 26.6% 11.1% 14.8% 9.6% 10.8% 12.6% EBITDA growth 36.3% -36.5% 47.6% -10.4% 27.1% 18.4%

ROE 32.5% 11.0% 13.1% 8.4% 10.9% 13.5% EBIT growth 30.9% -40.1% 48.1% -18.3% 32.0% 20.2%

Net debt/EBITDA 1.3 1.7 1.7 3.4 2.6 1.8 Net income growth 13.3% -50.6% 42.0% -40.1% 39.0% 40.8%

Net debt/equity 48.8% 37.3% 49.9% 85.1% 74.0% 52.2% EPS growth -2.7% -50.6% 42.0% -40.1% 39.0% 40.8%



Financials: We forecast a rebound in revenues from 2012

Following a slowdown in 2011, we forecast a rebound in revenues from 2012. However, we do not forecast the EBITDA margin to

return to the 2010 level of 9.3% until 2014. We do not factor in any potential benefit from GB Auto assembling cars for brands other

than Hyundai in our forecasts, so this represents an upside risk. Following 2011, we expect the company’s gearing to subside after

capex moderates.

Exhibit 542: We forecast a rebound in GB Auto’s sales in 2012, but do not see margins recovering to 2010 levels until 2014 2007-15E P&L, £E mn


Summarised P&L EAS EAS EAS EAS EAS EAS EAS EAS EAS2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Passenger Car 3,292 3,675 2,893 5,383 5,662 6,488 7,132 7,737 8,403Buses and Trailers 590 741 645 665 320 418 509 624 661Two & Three Wheelers 528 571 598 625 1,001 1,134 1,254 1,316 1,382Other Operations 220 205 122 201 458 674 730 766 803Group revenues 4,630 5,192 4,258 6,874 7,441 8,714 9,624 10,443 11,249Growth 49.2% 12.1% -18.0% 61.4% 8.3% 17.1% 10.4% 8.5% 7.7%

Group EBITDA (clean) 498 679 431 636 570 724 858 984 1,101Group EBITDA margin 10.8% 13.1% 10.1% 9.3% 7.7% 8.3% 8.9% 9.4% 9.8%

Group EBIT (clean) 479 628 376 557 455 601 722 838 948Group EBIT margin 10.4% 12.1% 8.8% 8.1% 6.1% 6.9% 7.5% 8.0% 8.4%

Share of associates 0 0 0 0 0 0 0 0 0Net financial items -90 -135 -114 -171 -220 -266 -250 -234 -218Pre-tax (clean) 390 493 262 386 235 335 471 604 730Non-recurring Items 111 19 5 -29 0 0 0 0 0Pre-tax (reported) 501 512 267 357 235 335 471 604 730Tax -51 -94 -63 -73 -49 -77 -108 -139 -168Tax rate (%) 10% 18% 24% 20% 21% 23% 23% 23% 23%

Profit after tax (reported) 450 418 203 284 185 258 363 465 562Minorities 3 -2 -2 -26 -17 -24 -33 -43 -52Net income (reported) 454 416 201 258 168 234 330 422 510Post-tax exceptionals 100 15 3 -23 0 0 0 0 0Net income (clean, continuing operations) 353 400 198 281 168 234 330 422 510




Exhibit 543: We forecast gearing to peak in 2011 due to capex and working capital movements, and de-levering thereafter Balance sheet and cash flow statement, 2007-15E, £E mn



EBIT 479 628 376 557 455 601 722 838 948Depreciation/Amortisation 19 51 55 79 115 124 136 147 153Net financial items -104 -125 -137 -175 -218 -266 -250 -234 -218Taxes paid -60 -51 -84 -66 -49 -77 -108 -139 -168Other items -13 -7 -17 -43 -2 0 0 0 0

Change in working capital -697 -549 83 -315 -334 -50 -3 50 -141Cash flow from operations -376 -53 276 36 -33 332 496 661 574

Capex -188 -269 -236 -421 -668 -268 -135 -146 -153Capex/D&A 1004.9% 526.9% 428.6% 532.1% 581% 217% 100% 100% 100%Capex/sales (%) 4.1% 5.2% 5.5% 6.1% 9.0% 3.1% 1.4% 1.4% 1.4%Free cash flow pre-dividend -564 -321 40 -385 -701 63 361 515 421Free cash flow pre-dividend/revenues (%) -12.2% -6.2% 0.9% -5.6% -9.4% 0.7% 3.7% 4.9% 3.7%

Other investing activities 36 11 12 16 0 0 0 0 0Dividend 0 0 0 -177 -129 0 0 -165 -211Cash surplus (post dividend) -527 -311 52 -546 -830 63 361 350 210Other and financing 864 11 53 185 0 0 0 0 0Change in net cash (net debt) 337 -300 105 -360 -830 63 361 350 210Net debt (cash) 550 850 745 1,105 1,936 1,872 1,512 1,162 952


Inventories 613 1,345 1,184 1,661 2,009 2,091 2,117 2,089 2,250Receivables 583 500 519 692 749 877 969 1,051 1,132Cash and cash equivalents 266 124 142 829 829 829 829 829 829Other 226 231 248 412 446 522 576 625 674Current assets 1,689 2,201 2,093 3,593 4,032 4,319 4,491 4,594 4,884

Tangible assets 476 1,195 1,368 1,694 2,248 2,393 2,393 2,393 2,393Intangible assets 188 188 184 182 181 180 180 179 179Other 73 46 48 50 50 50 50 50 50Non-current assets 736 1,428 1,601 1,925 2,478 2,623 2,622 2,622 2,622

Total assets 2,425 3,629 3,694 5,518 6,510 6,942 7,113 7,216 7,506

Short-term interest-bearing liabilities 565 863 864 886 886 886 886 886 886Accounts payables 598 710 642 1,156 1,251 1,465 1,618 1,756 1,892Other 162 141 106 122 133 155 171 186 200Current liabilities 1,325 1,713 1,612 2,165 2,270 2,507 2,676 2,828 2,978

Long-term interest-bearing liabilities 251 111 23 1,048 1,878 1,815 1,454 1,104 894Pension provisions 0 0 0 0 0 0 0 0 0Other 13 63 65 89 89 89 89 89 89Non-current liabilities 264 174 87 1,136 1,967 1,903 1,543 1,193 983

Shareholders' equity 830 1,726 1,928 1,995 2,034 2,268 2,598 2,855 3,154Minorities 6 15 67 222 240 263 297 339 391




Halwani Brothers Company (6001.SE)


Arsalan Musafa, CFA

[email protected]

Matija Gergolet

[email protected]


[email protected]

Saudi Arabia: Food

Doubling of capacity, but largely priced in

Halwani is well-positioned to benefit from rising processed meat consumption in Egypt (where it

has the leading market share of 60%) and a continued rise in ready-to-eat packaged food in Saudi

Arabia. The company is roughly doubling its production capacity which we believe will lead to an

acceleration of revenue growth in 2013. At EV/EBITDA of 8.0x 2012E the share price has limited

upside potential in our view.


While a relatively small food company, Halwani has a leading market share in processed meat

in Egypt (60%) and in some ready-to-eat processed food segments in Saudi Arabia (sesame

paste/Tahina and date pastry/Mamoul 45%).

We expect an acceleration of revenue growth in 2013 after the company completes its

capacity expansion in Saudi and Egypt. The current high capacity utilization of the plants (we

estimate 85%) has driven the company to double capacity in its Egyptian plant and increase

the Saudi plant capacity by 70%.

Given the company’s strong cash-generation ability, we forecast it will achieve its expansion

through minimum use of debt (net debt/EBITDA to remain below 1x) and expect CROCI to

bottom out at 13% by 2014.

The company is dependent on a few core products for large parts of its revenue. A

fall/increase in demand for these products may lead to lower/higher-than-forecast revenue.

Valuation: We value the company at 10.2x EV/EBITDA, in line with global peers

Our valuation for Halwani is based on the global food sector mid cycle (5-year) median EV/EBITDA

multiple of 10.2x. The company has limited history given it was only listed in 2008; the EV/EBITDA

multiple since then has averaged 9x. The stock is down 11% ytd, marginally underperforming the

local market. Applying the 10.2x EBITDA multiple to the average of our 2012 and 2013 earnings

estimates produces a 12-month price target of SR51.1. Our rating is Neutral.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Halwani Brothers (6001.SE)


Key data Current

Price (SR) 35.50




Free Float (%) 37.6


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 732.0 870.2 957.3 1,070.3

EBIT (SR mn) 97.8 105.5 112.6 131.1

EPS (SR) 2.82 2.95 3.08 3.54

EV/EBITDA (X) 8.4 8.1 8.0 6.8

P/E (X) 13.1 12.0 11.5 10.0

Dividend yield (%) 4.1 4.2 4.2 8.5

FCF yield (%) 0.1 (8.8) (6.2) 7.4

CROCI (%) 17.2 14.1 12.7 12.7

EV/GCI (X) 1.4 1.2 1.1 1.0

Net Debt/EBITDA (X) (1.0) 0.1 0.8 0.5

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Halwani Brothers (L) MSCI EM EMEA (R)



Investment drivers: Expansion forecast to finish by end-2012


We expect an acceleration of revenue in 2013 after the company completes its capacity

expansion in Saudi and Egypt at the end of 2012. The current high capacity utilization of the

plant (we estimate 85%) has led the company to double capacity in its Egyptian plant and

increase the Saudi plant’s capacity by 70%. This we forecast will translate into average revenue

growth of 15% over the next five years vs. an average 11% over the last four years.

We forecast stable EBITDA margins as we expect higher raw materials costs to be offset by

improved efficiencies from the new plant and faster growth in higher-margin processed meat.

The company has recently faced difficulty in raising prices in Saudi Arabia due to the

authorities’ greater focus on limiting price increases of basic commodities. This we forecast will

result in average revenue growth in processed meat (17%, 2011-15E), where most of the sales

are in Egypt with no price controls, outstripping growth in other ready-to-eat packaged food

items (14% 2011-15E).

Halwani’s margins improved in 2009 and 2010 as prices of raw materials (raw meat, sesame

seed, butter and cheddar) came down and the company optimized its product mix (it reduced its

product offerings, SKUs, to 400 from c.1200). Although in 1H2011, the group continued to face

margin pressure due to higher raw material costs, it has developed a number of strategies to

mitigate this impact, including reducing package sizes, introducing higher-margin products and

further reducing unprofitable product offerings.


Halwani is moving its production facility in Saudi Arabia as it increases capacity; this could lead

to a partial disruption to production. Continued political unrest in Egypt may have a negative

impact on the company’s Egyptian plant.

The company is dependent on a few core products for a large part of its revenue. A fall/increase

in demand for these products may lead to lower/higher-than-forecast revenue.

Industry context

The processed meat industry in Egypt has been growing at 8%-12% over the last five years due to

rising wealth levels and increased input costs passing through to selling prices. In Egypt, the

company has the largest market share at 60% and competes with the Kuwaiti group Americana and

the local player Faragallah. In Saudi Arabia, Halwani has a market share of 40%-45% in some of its

ready-to-eat packaged food items such as tahina sauce and Mamoul (date pastry) and competes

with local players Almarai, Sadafco and the Jamjoom company.

Company description

Established in 1952 and listed in 2008, Halwani has two main

business hubs, one based in Saudi Arabia and the other in

Egypt. The business unit in Egypt mainly sells processed meat

and has a leading market share in the country. The Saudi unit

has a leading market share in the Tahina (sesame paste) and

Mamoul (date pastry) segments. The other products of the

company include jams, cheese, juices and ice cream. The

company is currently in the process of doubling the capacity

of its Egyptian plant and the expanding Saudi plant capacity

by 70%. The new Saudi plant will have 7x more space than the

current location. The company employs 2,300 employees.




Saudi Arabia 49%

Egypt 38%

Other 13%

Meat Business

41%

Sesame Business

28%

Other Products

31%



Key financial ratios: New products and efficiency of new plants to stabilize margins

Exhibit 544: We forecast stable margins as the impact of restructuring

product offerings peaks

Exhibit 545: CROCI to recover post the completion capex in 2012 and 2013



Exhibit 546: Halwani shareholding

Exhibit 547: Gearing in our view would pick up to finance part of the

expansion



7%

8%

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17%

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SRm

n

GCI CROCI (RHS)

Dallah Industrial

Investment Company

55%

Mohammed Abdulhamid Mahmoud Halwani

7%

Free Float38%

-2.5x

-2.0x

-1.5x

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: We value the company in line with global peers

Exhibit 548: At our target price, Halwani would trade at 14x 2013E earnings (the first year of full operations)


Halwani Brothers Company Consumer staplesY/E December FoodSRmn Food (packaged and manufacturing)

Share price (SR) 35.5 12-month price target (SR) 51.1 $/SR (spot) 3.75Market cap 1,014 Potential upside/(downside) 44%


EBITDA 2013E


EV/Sales 0.8 1.2 1.3 1.2 1.2 1.1 Halwani Brothers Company 146 166 10.2 1,493 1,696EV/EBITDA 8.0 9.0 8.4 8.1 8.0 6.8 Group EBITDA 146 166 10.2 1,493 1,696EV/EBIT 11.5 11.8 9.9 10.0 10.3 8.6 AddEV/DACF 7.7 10.1 8.6 9.6 9.4 8.1 Associates 0 0EV/NOPLAT 14.2 15.7 12.4 12.5 12.9 10.8 Investments 0 0EV/GCI 0.9 1.2 1.4 1.2 1.1 1.0 EV post-discount 1,493 1,696

Less 0 0P/E 11.5 20.0 13.1 12.0 11.5 10.0 Net debt/(cash) 122 90P/B 1.4 1.8 2.1 1.8 1.7 1.6 Minorities 0 0P/CFO 9.3 11.9 9.3 9.2 8.3 7.4 Pensions and other 28 28FCF yield -4.5% 10.0% 0.1% -8.8% -6.2% 7.4% Equity Value 1,343 1,579Dividend yield 0.0% 0.0% 4.1% 4.2% 4.2% 8.5% No. of shares, mn 29 29

Implied per share valuation (SR) 47 55 51.1



ROE 16% 9% 17% 16% 15% 16% EBIT growth 28.9% 19.1% 56.7% 7.9% 6.7% 16.4%

Net debt/EBITDA -1.63 -1.77 -1.01 0.12 0.83 0.54 Net income growth 83.1% -30.1% 88.6% 4.9% 4.2% 15.2%

Net debt/equity -25% -31% -23% 3% 20% 14% EPS growth 83.1% -30.1% 88.6% 4.9% 4.2% 15.2%



Financials: We forecast average revenue growth of 15% over the next five years

Despite forecasting revenue growth to slow in 2012 as the company nears capacity utilization, we expect an acceleration from 2013

as the new capacity is fully integrated. In 9M2011, revenues were up 14% but net profit grew only 3% due to margin pressure from

higher input costs. Although we expect margin pressure to continue for the remainder of 2011, we forecast revenues to accelerate in

the last quarter, due to improved capacity utilization (the Saudi plant was shut for 45 days in 1Q due to the flooding caused by

seasonal rain.

Exhibit 549: We expect a pick-up in sales in the last quarter after sales increased 14% in 9M2011 2006-2015E P&L, SR mn



Meat Business 233 317 360 423 499 589 690Sesame Business 180 198 243 255 272 329 372Other Products 205 217 267 279 299 361 407Group revenues 517 551 758 618 732 870 957 1,070 1,278 1,469Growth 6.7% 37.4% -18.4% 18.4% 18.9% 10.0% 11.8% 19.4% 14.9%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 3 2 22 -6 3 0 -3 -4 -5 -5Pre-tax (clean) 48 43 75 57 101 106 110 127 160 189Non-recurring Items 0 0 0 0 0 0 0 0 0 0Pre-tax (reported) 48 43 75 57 101 106 110 127 160 189Tax -9 -10 -14 -14 -20 -21 -22 -25 -32 -38Tax rate (%) 19% 22% 18% 25% 20% 20% 20% 20% 20% 20%





Exhibit 550: We forecast a step-up in dividend post completion of the investment in 2013 Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 45 41 52 62 98 105 113 131 165 194Depreciation/Amortisation 17 18 23 19 18 26 34 35 37 38Net financial items -4 -4 -4 -1 2 0 -3 -4 -5 -5Taxes paid -9 -10 -14 -14 -20 -21 -22 -25 -32 -38Other items 21 9 18 6 16 0 0 0 0 0


Capex -24 -32 -38 -29 -73 -160 -160 -29 -30 -31Capex/D&A 141.3% 173.0% 165.7% 152.0% 413.2% 621% 474% 82% 82% 82%capex/sales (%) 4.7% 5.7% 5.0% 4.7% 10.0% 18.4% 16.7% 2.7% 2.4% 2.1%Free cash flow pre-dividend 29 -1 -31 86 1 -90 -63 75 75 103Free cash flow pre-dividend/revenues (%) 5.6% -0.1% -4.1% 13.8% 0.1% -10.3% -6.6% 7.0% 5.8% 7.0%

Other investing activities 1 2 30 2 3 0 0 0 0 0Dividend 0 0 0 -64 -29 -43 -43 -43 -86 -86Cash surplus (post dividend) 30 1 -2 23 -25 -132 -106 32 -11 17Other and financing -22 -21 162 -1 -2 0 0 0 0 0Change in net cash (net debt) 8 -20 160 22 -27 -132 -106 32 -11 17Net debt (cash) 18 37 -122 -144 -117 16 122 90 101 84




Total assets 424 438 646 570 653 849 1,014 1,058 1,145 1,223




Total equity and liabilities 424 438 646 570 653 849 1,014 1,058 1,145 1,223



Herfy Food Services Company (Herfy) (6002.SE)


Matija Gergolet

[email protected]


[email protected]

Saudi Arabia: Restaurants

Fast growth, supersize returns

We believe Herfy will be able to leverage its proven track record to capitalize further on the growth

of the fast-food market in Saudi Arabia (and GCC) that is being driven by young demographics

and rising consumer spending. More vertical integration is also likely to reduce its risk. While

multiples already imply some growth expectations, we believe that the company has the potential

to more than double its size over the medium term.


Herfy has been able to deliver high growth rates in the fast-food restaurant market, maintain

leadership in Saudi (Herfy has almost as many restaurants in the kingdom as McDonald’s and

Burger King combined) and generate first-quartile CROCI (>20%).

In addition to achieving like-for-like (lfl) sales growth at its existing 179 restaurant (6.5% lfl on

average over the last five years), the company targets 20-25 new restaurant pa, as well as a

new Herfy Cafe format and an expansion of its bakery factory. This should allow it to continue

to deliver high growth rates in the coming years. While fast-food consumption in Saudi is

already relatively high, Herfy could double the number of its outlets in Saudi if it replicates the

same penetration of stores it has in Riyadh in the rest of the country.

The key risk for Herfy, in our view, is food price inflation and cost pressure on wages,

particularly with Saudi employees (linked to the Saudisation programme). Given the group’s

strong balance sheet, M&A risk cannot be ruled out.

Valuation: High CROCI deserves a premium

Our valuation is based on the global sector average EV/EBITDA multiple of 10.3x to which we

apply a 10% premium to recognize Herfy’s consistent high CROCI generation (24% CROCI on

average over the last five years, with each of the years >20%) and strong growth prospects. We

expect Herfy to deliver 16% EBITDA and 16% EPS growth over the next five years. Applying this

multiple (10.3x) to our 2012 and 2013 estimates produces a 12-month price target of SR85.5. The

higher EV/EBITDA in our view also better reflects Herfy’s (and Saudi) low tax rate: in fact, applying

the global restaurants median 5-year P/E multiple of 16.1x to the average of our 2012 and 2013

estimates would give us a valuation for Herfy of SR99. Herfy currently trades on 13.3x 2012E P/E,

which is at a discount to most global fast-food and restaurants peers.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Herfy (6002.SE)


Key data Current

Price (SR) 74.75




Free Float (%) 30.7


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 579.9 692.9 823.3 946.0

EBIT (SR mn) 128.2 146.6 175.0 206.8

EPS (SR) 4.14 4.72 5.64 6.65

EV/EBITDA (X) 11.9 12.1 10.0 8.2

P/E (X) 15.5 15.8 13.3 11.2

Dividend yield (%) 3.5 3.3 3.7 4.0

FCF yield (%) 3.9 2.6 4.7 7.2

CROCI (%) 26.8 26.6 27.2 28.4

EV/GCI (X) 3.1 3.0 2.6 2.2

Net Debt/EBITDA (X) (0.1) 0.0 (0.2) (0.4)

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Herfy (L) MSCI EM EMEA (R)



Investment drivers: Still room for expansion in Saudi and GCC


The GCC markets are high consumers of fast food. However, looking at the US market, there is

still significant potential for growth. For example, if Herfy was able to replicate McDonald’s

success in the US, with the same penetration levels (1 store every c.21,000 people), it could

achieve in excess of 1,200 stores across Saudi Arabia. Even just replicating the concentration it

has achieved in Riyadh (85 stores, or approximately one every 70,000 people) across the country

would allow the company to reach c.400 stores across Saudi. However, considering the lower,

yet rising, GDP per capital in Saudi Arabia, we think that, over the long term, a target of c.500

stores is achievable. Over the last five years, the company has opened on average 14 new

restaurants pa. We assume 96 new openings in 2011-15.

In addition to establishing its own fast-food franchise in Saudi Arabia, Herfy is looking to

introduce a Herfy Café. While the formula here is not tested, the track record in the Herfy brand

makes us optimistic about its success.

While Herfy’s operations are currently limited to Saudi Arabia, the company has, in our view,

potential to expand the franchise in other GCC countries. Currently it has a few franchise

restaurants in the UAE, Kuwait, Bahrain and Egypt, from which it earned SR1.5 mn of royalties

in 2010. However, if Herfy managed to expand its brand outside of Saudi Arabia, these revenues

could increase significantly (we have conservatively not assumed that in our estimates).


The recent investments in the bakery and meat factory provide more vertical integration (25% of

the bakery and 65% of the meat processed is for internal consumption); however, it also

exposes Herfy to new markets with potentially different dynamics.

Cost inflation in the Saudi market is also a risk. While the company has 25%-30% Saudisation,

higher requirements for Saudi employees could push costs higher (Saudi workers cost

approximately twice as much as non-Saudi).

M&A is a potential risk as Herfy could look for acquisitions to complement its existing

geographical presence in Saudi Arabia. For example, Herfy has a weak presence in the eastern

part of the country (including Jedda).

Industry context

Herfy is the market leader in the fast-food industry in Saudi Arabia, with 172 stores at the end of

2010 and fifteen more opened in 9M2011. As a comparison, McDonald’s had 120 stores and

Burger King had 67.

Company description Founded in 1981, Herfy is the leading fast-food restaurant in

Saudi, with 172 restaurants as of end 2010. Of these, 20

restaurants were owned and 152 leased, generally for a term

of 15 years. Seven additional stores were opened in 1H2011.

Herfy is particularly dominant in Riyadh, where approximately

half of its stores are located, and has generally a strong

presence across the kingdom, with the exception of the West

coast. Herfy also has a small number of franchises in the

Middle East. In Saudi, Herfy also owns a bakery, which it is

expanding, and a meat processing plant, which it has

expanded recently, for a total combined investment of close to

SR100 mn. Herfy pays its dividends biannually.




Saudi Arabia100%

Restaurants80%

Meat Factory

3%

Bakery Factory

17%



Key financial ratios: CROCI consistently above 20%

Exhibit 551: Herfy Foods sales and margin performance, 2006-2015E

Exhibit 552: Herfy Foods GCI and CROCI, 2006-2015E



Exhibit 553: Herfy shareholding structure

Exhibit 554: Herfy gearing, 2006-2015E



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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

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GCI CROCI (RHS)

Savola Group49%

Ahmad Hamad Saed

20%

Free Float31%

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: High cash returns and growth justify premium EV/EBITDA

Exhibit 555: Herfy – we apply a 10% premium to the global sector EV/EBITDA multiple for the high CROCI; at 13.3x 2012E P/E the stock is at a discount to global

peers, yet with higher growth


Herfy Food Services Company Consumer CyclicalsY/E December Restaurants & PubsSRmn Restaurants

Share price (SR) 74.75 Price target (SR) 85.5 $/SR (spot) 3.75Market cap 2,243 Potential upside/(downside) 14%


EBITDA 2013E


EV/Sales 3.3 3.3 2.7 2.3 Herfy 224 264 10.3 2,306 2,718EV/EBITDA 11.9 12.1 10.0 8.2 Group EBITDA 224 264 10.3 2,306 2,718EV/EBIT 15.1 15.4 12.7 10.4 AddEV/DACF 12.2 12.4 10.2 8.3 Associates 0 0EV/NOPLAT 15.5 15.8 13.1 10.7 Investments 0 0EV/GCI 3.1 3.0 2.6 2.2 EV 2,306 2,718

LessP/E 15.5 15.8 13.3 11.2 Net debt/(cash) -38 -117P/B 5.1 4.9 4.1 3.4 Minorities 0 0P/CFO 12.2 12.3 10.3 8.7 Provisions/other 26 26FCF yield 3.9% 2.6% 4.7% 7.2% Equity value 2,318 2,809Dividend yield 3.5% 3.3% 3.7% 4.0% No. of shares, mn 30 30




ROE 37.0% 39.6% 35.7% 33.9% 33.7% 32.9% EBIT growth 44.1% 26.5% 7.9% 14.4% 19.4% 18.1%

Net debt/EBITDA 0.1 0.0 -0.1 0.0 -0.2 -0.4 Net income growth 48.2% 25.6% 8.4% 13.9% 19.4% 18.0%

Net debt/equity 3.3% -0.6% -4.2% -1.5% -6.9% -17.6% EPS growth 48.2% 25.6% 8.4% 13.9% 19.4% 18.0%



Financials: We expect growth and high returns to continue

In 9M2011, Herfy delivered revenue growth of 21.3%, with EBITDA up 18.8% and net income up 17.3%. EBITDA margin decreased

slightly to 26.7% compared vs. 27.6% a year earlier. While we expect margins to come under slight pressure on the back of rising

food prices (margins peaked in 2009), we expect rising consumer spending to lead to higher growth rates as the company achieves

economies of scale. Herfy is also expanding its bakery business, with an investment of SR80 mn, most of which was already spent

as of 9M2011, when capex reached SR70 mn. The company is also expanding its meat factory in 3Q2011 at a cost of SR12 mn. We

expect the company to invest SR80-100 mn pa going forward for the opening up of new stores (we assume an average of 19 new

stores pa through 2015).

The capex figure could vary depending on whether the company decides to lease or buy the place for its operation. Herfy owns 20

of its outlets and rents out the rest. In general, its rent is nominal or fixed plus a percentage of sales and we therefore do not expect

the rental cost to have a negative impact on Herfy’s margins.

Exhibit 556: We expect Herfy’s net income to double between 2011 and 2015E 2006-2015E P&L, SR mn



Restaurants 248 288 364 404 461 554 650 748 847 942Meat Factory 0 5 10 13 18 23 29 32 33 35Bakery Factory 76 82 93 101 100 116 144 166 183 197Group revenues 324 375 466 518 580 693 823 946 1,062 1,174Growth 22.4% 15.8% 24.4% 11.0% 12.0% 19.5% 18.8% 14.9% 12.3% 10.5%



Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 0 -2 0 -1 0 -1 -1 -2 -2 -2Pre-tax (clean) 55 64 94 118 128 145 174 205 238 265Non-recurring Items -7 0 0 0 0 0 0 0 0 0Pre-tax (reported) 49 64 94 118 128 145 174 205 238 265Tax -1 -2 -3 -3 -3 -4 -5 -6 -6 -7Tax rate (%) 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Profit after tax (reported) 47 62 91 115 124 142 169 200 231 258Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 47 62 91 115 124 142 169 200 231 258Post-tax exceptionals -6 0 0 0 0 0 0 0 0 0Net income (clean, continuing operations) 54 62 91 115 124 142 169 200 231 258




Exhibit 557: Herfy combines top-line growth with FCF Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 56 65 94 119 128 147 175 207 240 267Depreciation/Amortisation 17 20 24 28 34 40 49 57 64 71Net financial items -1 -1 -2 -1 0 -1 -1 -2 -2 -2Taxes paid -1 -2 -3 -3 -3 -4 -5 -6 -6 -7Other items 0 0 0 1 0 0 0 0 0 0

Change in working capital -2 -8 -14 5 0 -13 -14 -14 -13 -12Cash flow from operations 69 74 100 148 157 169 203 243 283 316


Other investing activities -6 0 7 7 1 0 0 0 0 0Dividend -10 -30 -60 -60 -61 -68 -75 -83 -90 -105Cash surplus (post dividend) 11 -15 13 11 15 -10 31 80 103 112Other and financing 0 0 0 0 -1 0 0 0 0 0Change in net cash (net debt) 11 -15 13 11 14 -10 31 80 103 112Net debt (cash) 7 22 9 -2 -16 -7 -38 -117 -220 -332



Tangible assets 179 217 222 272 321 392 441 465 491 520Intangible assets 1 1 0 0 1 0 0 0 -1 -1Other 4 4 4 4 4 4 4 4 4 4Non-current assets 184 222 226 277 326 397 445 469 495 523

Total assets 272 325 355 411 499 594 701 830 984 1,148



Shareholders' equity 199 231 262 317 380 454 548 665 807 960Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 272 325 355 411 499 594 701 830 984 1,148



Holcim Maroc (HOL.CS)



[email protected]

Matija Gergolet

[email protected]

Morocco: Construction

Attractive industry dynamics offset by loss of market share due to competition

Holcim Maroc’s cement plants are strategically positioned in the country, primarily catering to the

high demand regions of East and Central Morocco. However, the company is losing market share

to its competitors, resulting in a decline in volumes. We believe the group will continue to see

relative weakness in volumes and margins as it continues to face increased competition from new

players like Ciments de l'Atlas. We initiate on Holcim Maroc with a Neutral rating.


Holcim Maroc is the third-largest cement manufacturer in Morocco with a market share of

24.5%. Though it is the only company with a facility in the Oriental region that accounts for

c.8% of Moroccan cement consumption, its volumes declined 13% in 1H2011 due to

competition in other regions (data from parent company Holcim).

We expect volumes to decline further in 2011 with new entrant Ciments de l'Atlas (which

began operations in 2010) running at full capacity and increasing supply in the industry.

However, we believe that as the affordable housing stimulus programme by the government

gains traction, volumes will recover slightly. We forecast Holcim Maroc’s net volumes

declining by 11.6% in 2011, before growing 5.3% in 2012 and 7.3% in 2013.

We believe the company will face margin pressure in the short term, in line with the industry,

due to higher fuel and energy costs. We estimate EBIT margins to be 25% in 2011, 26% in

2012 and 27% in 2013 versus the five-year average of 31%.

We expect the company to continue paying dividends due to a relatively strong cash position.

We estimate a dividend payout ratio of 84% for the forecast years vs. a 5-year average of 73%.

An upside risk to our view is better-than-expected volumes due to higher construction activity

than we expect. A downside risk is further pressure on volumes/pricing due to new competition.

Valuation: Trading at a slight discount to global peers and own history

Holcim Maroc trades at 7.9x 2012E EV/EBITDA, below its 5-year median of 10.1x and the global

peer group 5-year median of 8.6x. The stock is down 32% YTD, and down 15% vs. MSCI EEMEA.

Based on our 2012/13E EV/EBITDA valuation methodology and using the stock’s historical multiple

of 10.1x, we derive a 12-month price target of Dh2,674, with 49% potential upside. We are Neutral

rated on Holcim Maroc.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Holcim Maroc (HOL.CS)


Key data Current

Price (Dh) 1,800.00




Free Float (%) 35.2


12/10 12/11E 12/12E 12/13E

Revenue (Dh mn) 3,543.8 3,165.7 3,435.1 3,816.5

EBIT (Dh mn) 1,248.1 805.1 890.9 1,047.3

EPS (Dh) 162.24 101.61 113.14 134.67

EV/EBITDA (X) 8.0 8.5 7.9 7.1

P/E (X) 14.6 17.7 15.9 13.4

Dividend yield (%) 5.5 4.7 5.3 6.3

FCF yield (%) 3.3 4.7 5.4 6.4

CROCI (%) 21.4 15.4 15.2 15.7

EV/GCI (X) 2.2 1.6 1.5 1.4


260

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2,800



Holcim Maroc (L) MSCI EM EMEA (R)



Industry drivers: In line with the industry; threatened by competition


The government has initiated major programmes including tax breaks and subsidies for

developers and buyers and made available 3,853 hectares of land for social housing to bridge

the 1mn affordable housing unit deficit in Morocco. We believe this initiative with the current

goal of building 200,000 units a year will drive demand for the cement industry through to 2015.

We currently estimate a 5% CAGR in domestic consumption of cement through to 2015.

However, we expect increased competition to partially offset the gains for Holcim Maroc.

Holcim Maroc has production capacity of 4.5mn tonnes and has also initiated capacity addition

at its Fes plant which will cater to the highest cement consumption growth region of Fes –

Bouleman (YTD 31% vs. average YTD Moroccan cement consumption of 6%). The Fes plant will

be operational in 2012 with 0.86mn tonnes (double the original) clinker production capacity

which will help volumes recover in 2012E from the trough of 2011E. However, we believe

operating margins will come under near term pressure from industry-wide increases in fuel and

energy costs. We expect EBITDA margins to decline over 700 bp yoy to 38.3% in 2011, and not

to rise again before 2013.

The company also benefits in terms of technology and expertise from its relationship with its

major shareholder (51%) Holcim, one of the world’s leading cement producers.


By 2012, Ciments de l'Atlas’ second plant will become operational, doubling its capacity.

Continuation of increasing capacity and entrance of new players into the industry will result in

over-supply which may adversely impact Holcim Maroc’s pricing power. Higher than expected

construction activity is an upside risk.

Industry context: Demand outlook strong; increased number of players distort supply

The Moroccan cement industry has grown at a CAGR of 8% since 2002 given consistent growth in

demand from construction. Some 80% of cement demand is from residential construction (inc civil

engineering for housing programmes), 14% from infrastructure and 6% from non-residential. Total

cement production capacity in the country is 18.8mn tonnes currently while consumption is 14.6mn

tonnes. Moroccan per capita cement consumption is 470kg versus 540kg in North Africa. The

outlook for the Moroccan cement industry is positive due to the social housing stimulation

programme initiated by the government. It is currently dominated by international players operating

13 cement plants in Morocco running at an average utilization of 78%. Most of the cement plants are

located in the North and North-West part of Morocco, catering to the high cement consumption

region. Lafarge has the highest domestic market share of 38.9%, followed by Ciments de l'Atlas with

26%; Holcim Maroc has 24.5% while the new domestic player Ciments de l'Atlas has 2.9%.

Company description

Holcim Maroc, a subsidiary of the global player Holcim (Swiss

cement company), was established in 1978. The company has

the third-highest market share of 24.5% in Morocco. It is also

involved in the production of aggregates and ready-mix beton,

real estate development and recycling services, apart from

cement production. The company operates three cement

plants in Morocco with total annual production capacity of

4.5mn tonnes. Through Holcim Concrete (subsidiary), Holcim

caters to standard and special concrete markets of Eastern,

Central and North-Central Morocco. Holcim currently has

c.1,000 employees.




Morocco100%

Cement48%

Clinker36%

Aggregates & Others

16%



Key financial ratios: Stable margins and CROCI; decreasing leverage

Exhibit 558: Holcim Maroc’s margins stabilize at a lower level vs. history

Exhibit 559: We forecast CROCI below historical peaks



Exhibit 560: Holcim Maroc’s shareholding structure

Exhibit 561: We forecast decreasing leverage over time



0%

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500

1,000

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3,000

3,500

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4,500

5,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n


0%

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1,000

2,000

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5,000

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8,000

9,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n

GCI CROCI (RHS)

Holcim Group51%

Banque Islamique de

Développement 14%

Free Float35%

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Details of Holcim du Maroc’s production facilities

Exhibit 562: Holcim du Maroc caters to North and East Morocco, mostly the Oriental region Distribution of cement plants of Holcim du Maroc in Morocco


Exhibit 563: Holcim du Maroc plans to double the capacity of the Fez plant in 2012, increasing net capacity to 5.1mn tonnes

Production, capacity and average revenue per ton for Holcim du Maroc, 2010-2015E



EL JADIDA

OUJDA

FES

AL HOLCEIMA

Revenue Drivers 2010 2011E 2012E 2013E 2014E 2015EVolumes SoldCement (000 tons) 3,570 3,213 3,434 3,738 3,958 4,067Clinker (000 tons) 2,663 2,317 2,406 2,547 2,621 2,693Aggregates & Others (000 tons) 1,160 1,009 1,049 1,110 1,142 1,174Total 7,393 6,539 6,889 7,395 7,721 7,933

Average revenue per ton sold 479 484 499 516 534 553Growth 2.0% 1.0% 3.0% 3.5% 3.5% 3.5%

Capacity 4.5 4.5 5.1 5.1 5.1 5.1



Valuation, growth and returns: Trading at a discount to history and global peers

Exhibit 564: Holcim trades on a 2012E EV/EBITDA of 7.9x, below its 5-year median of 10.1x and the global peer group 5-year median of 8.6x


Holcim Maroc IndustrialsY/E December ConstructionDhmn Construction: Building Materials



EBITDA 2013E


EV/Sales 4.2 2.7 3.6 3.2 3.0 2.7 Cement and Concrete 1,305 1,470 10.1 13,185 14,850EV/EBITDA 10.1 6.1 8.0 8.5 7.9 7.1 Group EBITDA 1,305 1,470 10.1 13,185 14,850EV/EBIT 14.2 8.0 10.3 12.8 11.6 9.9 AddEV/DACF 13.1 8.1 11.0 10.9 10.2 9.3 Associates & Investments 57 58EV/NOPLAT 18.8 11.7 15.5 19.1 17.3 14.9 EV 35,484 40,607EV/GCI 2.8 1.9 2.2 1.6 1.5 1.4 Less

Net debt/(cash) 1,273 1,073P/E 18.6 11.1 14.6 17.7 15.9 13.4 Pensions 0 0P/B 5.9 3.7 4.7 3.8 3.6 3.3 Minorities 1,453 1,729P/CFO 10.7 6.5 8.7 8.4 7.8 7.0 Provisions/other 0 0FCF yield -2.0% 9.9% 3.3% 4.7% 5.4% 6.4% Equity Value 10,464 12,052Dividend yield 3.6% 7.4% 5.5% 4.7% 5.3% 6.3% No. of shares 4 4

Implied per share valuation, Dh 2,485 2,863 2,674

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 22.9% 24.0% 21.4% 15.4% 15.2% 15.7% Sales growth 32.0% 12.4% 0.0% -10.7% 8.5% 11.1%

ROIC 21.4% 23.7% 22.7% 13.7% 14.9% 17.2% EBITDA growth 42.1% 19.4% 2.3% -25.3% 7.8% 12.6%

ROE 32.7% 35.5% 31.6% 20.6% 23.0% 25.6% EBITA growth 42.9% 28.4% 3.5% -35.5% 10.7% 17.6%

Net debt/EBITDA 1.2 0.7 0.8 1.2 1.0 0.7 Net Income growth 16.0% 22.4% 1.6% -37.4% 11.3% 19.0%

Net debt/equity 82.5% 47.4% 49.7% 55.9% 46.9% 36.0% EPS growth 16.0% 22.4% 1.6% -37.4% 11.3% 19.0%



Financials: Margins to stabilize at lower levels due to higher costs, relatively lower sales

As part of its half-year results, the parent company of Holcim Maroc, Holcim, reported Moroccan volume declines of 13% yoy (and

flat pricing), attributable to increased competition. We expect this trend to continue and forecast net sales declining 10.7% in 2011

before slowly recovering to 8.5% growth in 2012 and 11.1% in 2013 – on the back of volume growth of a respective -11.6%, 5.3% and

7.3% and growth in revenue per tonne of 1.0%, 3.0% and 3.5%. We model a positive rebound in volumes in 2012 as we expect the

doubling of capacity at the Fez plant to strengthen the company’s position slightly vs. 2011.

Exhibit 565: Margins compressed but stable. We forecast a dividend payout of 84% vs. the 5-year average of 73% Holcim Maroc 2006-2015E P&L Dh mn



Group revenues 1,995 2,388 3,152 3,543 3,544 3,166 3,435 3,817 4,125 4,386Growth 13.8% 19.7% 32.0% 12.4% 0.0% -10.7% 8.5% 11.1% 8.1% 6.3%

Group EBITDA (clean) 720 934 1,328 1,585 1,622 1,211 1,305 1,470 1,613 1,743Group EBITDA margin 36.1% 39.1% 42.1% 44.7% 45.8% 38.3% 38.0% 38.5% 39.1% 39.7%

Group EBIT (clean) 602 657 939 1,206 1,248 805 891 1,047 1,182 1,303Group EBIT margin 30.2% 27.5% 29.8% 34.0% 35.2% 25.4% 25.9% 27.4% 28.7% 29.7%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items -3 -12 -91 -72 -46 -48 -48 -44 -48 -52Pre-tax (clean) 600 645 849 1,134 1,202 757 843 1,003 1,133 1,250Non-recurring Items 6 4 -23 -6 -36 0 0 0 0 0Pre-tax (reported) 605 649 825 1,128 1,167 757 843 1,003 1,133 1,250Tax -190 -179 -207 -362 -395 -257 -286 -340 -384 -424Tax rate (%) 31% 28% 25% 32% 34% 34% 34% 34% 34% 34%

Profit after tax (reported) 415 470 618 766 771 500 557 663 749 826Minorities 24 6 -86 -97 -112 -72 -81 -96 -109 -120Net income (reported) 439 477 532 669 659 428 476 567 641 706Post-tax exceptionals 4 3 -18 -4 -24 0 0 0 0 0Net income (clean, continuing operations) 435 474 549 672 683 428 476 567 641 706




Exhibit 566: Balance sheet continues to strengthen as leverage falls

Holcim Maroc’s balance sheet and cash flow statement, 2006-2015E Dh mn



EBIT 602 657 939 1,206 1,248 805 891 1,047 1,182 1,303Depreciation/Amortisation 118 277 389 380 374 406 415 423 431 440Net financial items -3 -12 -91 -72 -46 -48 -48 -44 -48 -52Taxes paid -190 -179 -207 -362 -395 -257 -286 -340 -384 -424Other items 6 -277 -74 -6 -36 0 0 0 0 0

Change in working capital -116 -40 -530 106 -138 -9 7 9 8 6Cash flow from operations 417 426 426 1,251 1,007 897 978 1,095 1,188 1,273

Capex -1,024 -748 -664 -407 -625 -477 -487 -497 -507 -518Capex/D&A 867.7% 269.7% 170.7% 107.2% 167.2% 117% 117% 118% 118% 118%capex/sales (%) 51.3% 31.3% 21.1% 11.5% 17.6% 15.1% 14.2% 13.0% 12.3% 11.8%Free cash flow pre-dividend -607 -322 -238 844 382 420 491 598 681 755Free cash flow pre-dividend/revenues (%) -30.4% -13.5% -7.5% 23.8% 10.8% 13.3% 14.3% 15.7% 16.5% 17.2%

Other investing activities 0 10 -69 0 0 0 0 0 0 0Dividend -223 -282 -324 -362 -556 -552 -358 -398 -474 -536Cash surplus (post dividend) -830 -594 -631 482 -174 -131 134 200 207 219Other and financing 0 0 0 0 0 0 0 0 0 0Change in net cash (net debt) -830 -594 -631 482 -174 -131 134 200 207 219Net debt (cash) 1,281 1,460 1,583 1,101 1,275 1,407 1,273 1,073 866 647


Inventories 205 261 448 267 317 283 307 341 369 392Receivables 184 238 408 338 389 347 377 419 452 481Cash and cash equivalents 24 101 602 816 741 741 741 741 741 741Other 218 259 266 332 347 310 337 374 404 430Current assets 631 860 1,724 1,753 1,793 1,681 1,761 1,874 1,966 2,044


Total assets 3,815 4,210 5,430 5,483 5,780 5,738 5,891 6,078 6,245 6,400

Short-term interest-bearing liabilities 0 49 335 217 316 316 316 316 316 316Accounts payables 530 622 872 640 721 644 699 777 839 892Other 253 278 369 523 420 375 407 452 488 519Current liabilities 783 949 1,577 1,380 1,457 1,335 1,422 1,544 1,644 1,728

Long-term interest-bearing liabilities 1,305 1,512 1,849 1,700 1,700 1,831 1,698 1,498 1,291 1,071Pension provisions 0 0 0 0 0 0 0 0 0 0Other 105 90 85 79 55 55 55 55 55 55Non-current liabilities 1,410 1,602 1,934 1,779 1,755 1,887 1,753 1,553 1,346 1,127





Industries Qatar (IQCD.QA)


Matija Gergolet

[email protected]

Eshan Toorabally

[email protected]

Qatar: Chemicals

Strong positioning, high returns and growth, attractive valuation: Buy

We believe Industries Qatar (IQ) offers attractive indirect exposure to Qatar’s gas wealth thanks to

its operations in petrochemicals, fertilisers and steel, which utilize gas as a key feedstock. Several

expansion projects should allow the group to double its fertilizers capacity and increase its

petrochemicals production by 15% by 2013. High steel demand from the Qatari construction

sector should also support its steel division. This, combined with an attractive valuation relative to

history, leads us to initiate on IQ with a Buy rating and add it to the CEEMEA Focus List.


IQ offers a strong industry positioning relative to other global fertilizer and chemicals players,

being able to capitalize on cheap feedstocks and strong logistics, leading to sector-leading

returns. IQ is also dominant in steel (c.95% local market share), which leaves it well positioned

ahead of the planned infrastructure spending by the Qatari government.

IQ has been instrumental to the industrialisation of Qatar and, owing to its history and link to

state-owned Qatar Petroleum (which still owns 70% of IQ), has been able to leverage on

attractively priced natural gas, which is a key cost component of its products, to obtain sector-

leading returns. Its gas costs c.US$2-3/mmBTU vs. US$4-15/mmBTU globally.

The company has invested US$3 bn in doubling its fertilizer capacity and increasing its

petrochemicals business, which will start contributing to its P&L only from 2012/13. Combined

with high prices for its products, we expect 21% average EPS CAGR in 2012/13, well above

consensus (our EPS estimates are 13% and 28% above IBES consensus for 2012/13).

The key risk would be unexpected operational issues, a fall in global urea or ammonia prices

or decline in local demand for steel, or a renegotiation of existing gas contracts.

Valuation: Significant discount to history and mid-cycle multiples

IQ is trading at a 2012E EV/EBITDA of 6.3x and P/E of 7.9x, which is lower than its 5-year median

EBITDA of 10.3x and 5-year median P/E of 11.1x. IQ has historically traded on higher EV/EBITDA

yet lower P/E multiples than global chemicals (5-year median EV/EBITDA of 8.2x and P/E of 16x),

which we believe reflects its zero tax rate and low depreciation charge. Applying the historical

multiple to the average of our 2012E and 2013E EBITDA, our 12-month price target is QR240,

implying 76% potential upside. We initiate on IQ with a Buy rating.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Industries Qatar (IQCD.QA)


Key data Current

Price (QR) 135.70

12 month price target (QR) 240.00



Free Float (%) 25.0


12/10 12/11E 12/12E 12/13E

Revenue (QR mn) 12,330.9 17,026.7 20,149.9 23,081.4

EBIT (QR mn) 5,330.7 8,139.9 9,688.4 11,559.3

EPS (QR) 9.97 14.31 17.27 20.99

EV/EBITDA (X) 10.3 8.3 6.3 4.8

P/E (X) 11.1 9.5 7.9 6.5

Dividend yield (%) 5.0 5.2 6.6 8.1

FCF yield (%) 6.7 5.9 12.3 15.6

CROCI (%) 19.0 24.5 27.5 30.9

EV/GCI (X) 1.8 1.9 1.7 1.5

Net Debt/EBITDA (X) 0.4 0.1 (0.4) (0.8)

260

290

320

350

380

410

440

470

500

115

120

125

130

135

140

145

150

155



Industries Qatar (L) MSCI EM EMEA (R)



Investment drivers: Capacity expansion and higher prices support growth


Since 2008, IQ has started expanding its capacity, accumulating significant work in progress,

which as of 9M2011 amounted to QR11.5 bn (US$3.2 bn) vs. less than US$0.1 bn at the end of

2007. The bulk (over 80%) is represented by expansion of its fertilizer capacity.

The expansion of Qafco 5 and 6, which should occur gradually between the end of 2011 and

early 2013, should expand the group’s ammonia capacity by a gross 3.2mt, increasing the

current gross capacity of 3.7mt by 85% (data net of minorities). As some of the ammonia is used

for producing urea, the saleable fertilizer capacity will increase from 2.4mt to 5mt, thus doubling

the final sales capacity. Ammonia and urea are produced using attractively priced natural gas:

we expect these new investments to be significantly value and EPS accretive for IQ.

In petrochemicals, the company will bring online a new low density polyethylene plant (LDPE) in

early 2012, growing the saleable capacity by c.15%. The plant will utilise butane, purchased at

market price. In steel, IQ is the leader in the domestic market with over 95% share. The company

also has investments in Saudi Arabia (South Steel), where it has a 5% market share, and has a

10% share in the UAE market (Qatar Steel FZE). The large infrastructure spending planned by

the Qatari government (over US$60 bn projects expected to be completed by 2016) should

support local demand for steel.

IQ’s CROCI over the last five years has averaged 25%, a sector-leading level. While the large

work in progress and lower fertilizers and chemical prices reduced CROCI in 2009 and 2010 (to

17% on average), we expect the rise in energy commodities (and related chemicals) and

completion of the expansion to lead to average CROCI of 29% over 2012 and 2013.


IQ had to put on hold its QR8 bn steel expansion plans due to Qatar’s moratorium on new gas

supply contracts until 2014 while Qatar Petroleum observes the evolution of the Qatar North

field following the ramp-up of LNG production. Such restrictions may impinge of IQ’s expansion

plans in the future. We have not included the steel expansion plans into our forecasts.

A reduction in energy prices may lower the company’s feedstock cost advantage and may lead

to lower end product prices causing downward pressure on profitability.

Industry context

IQ is a holding company with interests in petrochemicals, fertilizers and steel. All the products in the

company’s portfolio are global commodities and their pricing is determined by global demand

supply dynamics and the cost of the marginal producer. IQ enjoys significant cost advantages due to

Qatar’s low domestic gas prices, which is a key component of the product cost.

Company description

Industries Qatar (IQ), one of the largest chemical and steel

conglomerates in the Middle East, controls three major

companies - 80% of QAPCO (petrochemicals, with 1.7mt of

capacity, mostly ethylene chain and methanol-MTBE, in a JV

with Total); 85% of QAFCO (fertilizers, with 3.0mt of urea and

0.9mt of ammonia capacity by end-2011 in a JV with Yara);

Qatar Steel (2.3mt of capacity, mostly long steel) - and two

smaller ones, QAFAC (fuel additives) and FEREEJ (real estate).

IQ is targeting QR12.6 bn in capex through 2015, focused on

expanding the fertilizer business and steel. The latter has been

recently put on hold, however. It employs c.3000 people.




Qatar

25%

MENA

22%

Americas

4%Europe

1%

Asia

38%

Other

10%

Petrochemicals38%

Fertilisers24%

Steel38%



Key financial ratios: Improving margins and rising CROCI

Exhibit 567: We forecast strong margin expansion till 2013

Exhibit 568: CROCI to surpass 30% in 2013 on an increasing asset base



Exhibit 569: Industries Qatar shareholding structure; 70% controlled by Qatar

Petroleum

Exhibit 570: The net cash position exemplifies IQ’s strong cash generation



0%

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80%

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

QA

Rm

n


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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

QA

Rm

n

GCI CROCI (RHS)

Qatar Petroleum

70%Government

of Qatar0.1%

Private Companies

and Institutions

4%

Free Float26%

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

-50%

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-30%

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-10%

0%

10%

20%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015ENet debt (cash) / equity Net debt (cash) / EBITDA (RHS)

November 25, 2011

Goldman Sachs Global Investment Research

Industries Qatar: An indirect pla

Industries Qatar (IQ) provid

as gas is one of the main fe

Qatar Petrochemicals Co. (Q

ammonia (where the cost o

natural gas in the direct red

minorities at the group leve

Estate Co. Each of these div

Exhibit 571: Industries Qata

Source: Company data, Goldman Sach

QAPCO (Petrochemicals)

QAPCO (20% owned by Tot

derivatives LDPE and LLDPE

and LLDPE. The capacity ha

petrochemical capacity to 1

well positioned due to their

85% globally), underlying th

advantages. Ethylene dema

entire petrochemical chain.

QAFCO (Fertilizers)

Urea (a nitrogen fertilizer) d

greater demand for food an

expect strong demand from

significant feedstock compe

QAFCO (25% owned by Yar

and targets to expand this t

y on Qatar’s gas wealth

es an opportunity to indirectly gain exposure to Qatar’s abundant gas

eedstocks for producing its products. All its three major divisions use m

QAPCO) produces ethylene and its derivatives, Qatar Fertilizers Co. (QA

of natural gas can represent 90% of the global cost) and Qatar Steel Co

duced iron (DRI) process. The subsidiaries are proportionally consolida

el. Minor divisions are Qatar Fuel Additive Co. (QAFAC), producing me

visions has further subsidiaries except Fareej.

ar holding structure

hs Research estimates.

)

tal via Atofina) produces ethylene (partially sold and partially used inte

E with a total capacity of 1.4mt. The net saleable capacity is 0.9mt as e

as been expanded in recent years and a further expansion of LDPE in 2

.7mt by 2012 and the saleable capacity to 1.1mt. IQ and other ethylene

r favourable cost structure (attractively priced natural gas) and have op

heir cost competitiveness. Also, the proximity to Asian end-markets pr

and depends on demand for its derivatives and is often viewed as a su

Most of the ethylene produced is used up for downstream production

demand is mostly driven by population growth and rising prosperity in

nd proteins. Due to current lower application levels in developing coun

m these economies, particularly Asia. Gulf countries are well placed to

etitiveness and favorable logistics.

ra) had a net saleable installed capacity of 2.4mt as of 2010 (of which 0

to 5mt by 2012 with the onstreaming of Qafco 5 and Qafco 6 (capacity

EMEA Emerging Markets

399

reserves, the world’s third-largest,

material quantities of natural gas:

AFCO) producers urea and

. (QASCO) produces steel, utilizing

ated, leading to only immaterial

thanol and MTBE, and Fareej Real

ernally for other processes) and its

ethylene is used to produce LDPE

2012 of 240kt should bring the total

e players in the Gulf are generally

perating rates of 95%+ (vs. 80%-

rovides significant logistics cost

rrogate for the performance of the

n.

n emerging economies, leading to

ntries vs. developed markets, we

capture this demand, aided by

0.3mt was ammonia and 2.1mt urea)

numbers here are for IQ’s share,



net of minorities). Qafco 5 (1.5mt of ammonia and 1.3mt of urea for 100%) should come online by the end of 2011, while Qafco 6 is

expected to commence by the end of 2012/early 2013.

We expect urea prices to grow to US$417/tonne in 2012 from US$301 in 2010 and rise through 2013, when we expect them to reach

at US$446/tonne. We assume lower urea prices of US$338/tonne from 2014 on the back of our normalized US$85/bbl oil price.

QASCO (Steel)

Steel making in the GCC is mainly electric arc furnace (EAF) based with preferred feedstock being directly reduced iron (DRI) due to

the abundant and cheap natural gas. GCC is a net importer of steel and has a total finished steel capacity of c.26 mn tonnes (2010).

QASCO uses the electric arc method ensuring zero dependence on coking coal. It enjoys attractively priced gas at only

US$1/mmBTU, but its margins are significantly lower than those of the other divisions due to imported iron ore (EBITDA margin of

30% vs. 60% for petrochemicals and 65% for fertilizers), although it is protected by a 20% import duty on steel, which provides a

reasonable cushion helping in offsetting market-linked input prices. QASCO is well positioned to reap maximum benefits from the

region’s infrastructure development, such as the 2022 FIFA World Cup and similar projects.

QAFAC (fuel additive Chemicals)

Methanol, which is derived from natural gas, is used predominantly in the manufacture of formaldehyde, acetic acid and MTBE

while also being used directly as fuel. MTBE is added to gasoline to lower carbon monoxide emissions and also finds uses as a

solvent and an anti-knocking agent.

QAFAC currently has an installed saleable capacity of 0.4mn tonnes of methanol and 0.3mn tones of MTBE.



Petrochemicals remain the largest division within Industries Qatar, fertilizers the fastest growing

Exhibit 572: IQ divisional EBITDA: Petrochemicals the largest contributors,

but fertilizers growing fastest; Year wise percentage contribution of each

segment

Exhibit 573: IQ divisional EBITDA: Fertilizers key driver of growth QR mn



4240

36

28

47

43 4341

39 3937 37

47

17

31

3942

46 46 46

19 21

15

55

24

1815

1316 16

2 2 30

-2

0 0 0 0 0

-10

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Petrochemicals Fertilisers Steel Real Estate and other

Y/E December 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EEBITDA by segmentPetrochemicals 1,626 1,987 2,669 1,487 2,800 3,944 4,771 5,444 3,868 3,916Fertilisers 1,418 1,860 3,453 870 1,876 3,291 4,400 5,682 4,403 4,447Steel 752 1,027 1,078 2,904 1,413 1,675 1,738 1,754 1,557 1,562Real Estate 0 0 0 1 2 2 2 2 2 2Other adjustments 60 112 186 2 -125 0 0 0 0 0Total EBITDA 3,856 4,986 7,385 5,264 5,967 8,912 10,910 12,881 9,831 9,927

EBITDA MarginsPetrochemicals 59% 63% 61% 47% 60% 61% 60% 60% 56% 55%Fertilisers 63% 68% 75% 35% 64% 66% 66% 67% 62% 62%Steel 27% 30% 19% 73% 30% 30% 31% 31% 30% 30%Real Estate 42% 48% 48% 48% 48% 48% 48%AdjustmentsTotal EBITDA 50% 53% 50% 55% 48% 52% 54% 56% 51% 51%

EBITDA GrowthPetrochemicals 4% 22% 34% -44% 88% 41% 21% 14% -29% 1%Fertilisers -4% 31% 86% -75% 116% 75% 34% 29% -23% 1%Steel 20% 37% 5% 169% -51% 19% 4% 1% -11% 0%Total EBITDA 4% 29% 48% -29% 13% 49% 22% 18% -24% 1%



Valuation, growth and returns: Rising dividend yield and income present good value

Industries Qatar trades on attractive multiples while providing top-quartile CROCI returns. In recent years, the company has traded

at consistent EV/EBITDA multiples of around 10x, while the P/E has remained stable at around 11x. At our target price, IQ would

trade on 12.5x and 12.6x 2012E and 2013E P/E.

Exhibit 574: Industries Qatar - We value the stock using its 5-year median: current 2012E P/E multiple of 7.9x compares favourably relative to its history,

as does the 6.3x 2012E EBITDA


Industries Qatar Basic MaterialsY/E December ChemicalsQARmn Diversified

Share price (QR) 136 Price target (QR) 240 $/QR (Spot) 3.64Market cap 74,635 Potential upside/(downside) 76%


EBITDA 2013E


EV/Sales 5.2 5.5 5.0 4.3 3.4 2.7 Petrochemicals 4,771 5,444EV/EBITDA 10.4 10.0 10.3 8.3 6.3 4.8 Fertilisers 4,400 5,682EV/EBIT 11.1 11.1 11.5 9.1 7.1 5.4 Steel 1,738 1,754EV/DACF 10.1 13.3 10.5 8.5 6.4 5.0 Real Estate 2 2EV/NOPLAT 11.0 11.3 11.4 9.2 7.2 5.5 Group EBITDA 10,910 12,881 10.3 112,377 132,678EV/GCI 3.3 1.9 1.8 1.9 1.7 1.5 Add

Associates & Investments 2,098 2,228P/E 11.1 11.0 11.1 9.5 7.9 6.5 LessP/B 4.5 2.8 2.8 2.8 2.3 1.9 Net debt/(cash) -4,109 -10,443P/CFO 10.3 12.5 10.2 8.5 6.9 5.7 Minorities 32 42FCF yield 7.0% 6.7% 6.5% 5.8% 12.0% 15.1% Pensions and other 201 201Dividend yield 5.4% 5.1% 5.0% 5.2% 6.6% 8.1% Equity value 118,351 145,105

No. of shares, mn 550 550Implied per share valuation (QR) 215 264 240



ROE 45.6% 26.2% 27.3% 33.3% 32.7% 32.8% EBITA growth 50.9% -31.5% 12.4% 52.7% 19.0% 19.3%

Net debt/EBITDA -0.5 0.0 0.4 0.1 -0.4 -0.8 Net Income growth 53.4% -33.2% 11.3% 43.6% 20.6% 21.6%

Net debt/equity -18.7% 0.9% 10.3% 3.7% -12.6% -26.4% EPS growth 53.4% -33.2% 11.3% 43.6% 20.6% 21.6%



Financials: Strong free cash flow following completion of the capex programme

We expect IQ to generate FCF pre-dividends of around SR9 bn in 2012 and SR11 bn in 2013, while growing its EPS by 21% on

average in 2012 and 2013. The strong balance sheet with a net cash position by 2012 coupled with a c.50% dividend payout also

underpins the dividend policy and allows room for higher payouts in the future. As of 9M2011, IQ reported revenues up 45% to

QR12.5 bn, EBITDA up 88% to QR6.8 bn and EPS of QR11.35, up 54% yoy.

Exhibit 575: We expect rising petrochemical and fertilizer prices and increased volumes to drive sales CAGR to 23% from 2010 to

2013 2006-2015E P&L, QR mn


Total ammonia capacity at Industries Qatar at the end of 2010 is 1,551kt, rising to 2,706kt (net to IQ), yet most of it is used to produce urea. The gross

ammonia capacity, including minorities’ share is 3.2mt, yet IQ proportionally consolidates its capacity (minorities on the balance sheet and P&L are

immaterial). The net excess ammonia capacity which can be sold by IQ was thus 308kt at the end of 2010, and this should rise to 884kt by the end of


Petrochemicals 2,748 3,157 4,384 3,187 4,693 6,440 7,916 9,015 6,918 7,067Fertilisers 2,239 2,734 4,590 2,480 2,910 4,963 6,681 8,471 7,068 7,185Steel 2,790 3,435 5,770 3,987 4,725 5,620 5,549 5,592 5,216 5,226Real Estate 0 0 0 2 4 4 4 4 4 4Adjustments 0 0 0 0 0 0 0 0 0 0Group revenues 7,778 9,326 14,743 9,657 12,331 17,027 20,150 23,081 19,205 19,482Growth 18.2% 19.9% 58.1% -34.5% 27.7% 38.1% 18.3% 14.5% -16.8% 1.4%

Petrochemicals 1,626 1,987 2,669 1,487 2,800 3,944 4,771 5,444 3,868 3,916Fertilisers 1,418 1,860 3,453 870 1,876 3,291 4,400 5,682 4,403 4,447Steel 752 1,027 1,078 2,904 1,413 1,675 1,738 1,754 1,557 1,562Real Estate 0 0 0 1 2 2 2 2 2 2Adjustments 60 112 185 1 -125 0 0 0 0 0Group EBITDA (clean) 3,856 4,986 7,385 5,264 5,967 8,912 10,910 12,881 9,831 9,927Group EBITDA margin 49.6% 53.5% 50.1% 54.5% 48.4% 52.3% 54.1% 55.8% 51.2% 51.0%


Share of associates 20 52 270 30 117 100 130 130 100 100Net financial items 127 165 176 281 37 -160 -71 161 456 655Pre-tax (clean) 3,480 4,804 7,368 5,052 5,484 8,080 9,748 11,850 9,065 9,360Non-recurring Items 142 181 -91 -49 94 0 0 0 0 0Pre-tax (reported) 3,622 4,985 7,278 5,003 5,578 8,080 9,748 11,850 9,065 9,360Tax 0 0 0 -125 0 0 0 0 0 0Tax rate (%) 0% 0% 0% 3% 0% 0% 0% 0% 0% 0%

Profit after tax (reported) 3,622 4,985 7,278 4,878 5,578 8,080 9,748 11,850 9,065 9,360Minorities -3 -1 -2 -2 -2 -8 -10 -10 -10 -10Net income (reported) 3,620 4,983 7,276 4,876 5,575 8,072 9,738 11,840 9,055 9,350Post-tax exceptionals 142 181 -91 -48 94 200 240 293 224 232Net income (clean, continuing operations) 3,477 4,802 7,367 4,923 5,482 7,873 9,497 11,547 8,831 9,119




2011. We assume gas costs for the fertilizer business are linked to global fertilizer prices, while for petrochemicals we assume they are linked to

plastics prices and model a gradual increase as the butane bought for LDPE is linked to market prices (which are higher).

Exhibit 576: Key operational data for Industries Qatar – includes only Industries Qatar’s share of capacity


2008 2009 2010 2011E 2012E 2013E 2014E 2015EEthylene capacity, '000 t (saleable) 256 256 331 331 331 331 331 331Utilisation 120% 124% 101% 100% 105% 110% 110% 110%Ethylene production, '000 t 308 317 335 331 348 364 364 364Ethylene achieved price, $/t 884 643 842 1,186 1,253 1,411 1,121 1,121

LDPE and LLDPE capacity, '000 t 320 320 547 547 787 787 787 787Utilisation 102% 101% 76% 98% 95% 98% 101% 104%LDPE and LLDPE production, '000 t 327 322 436 536 731 761 792 822LDPE, LLDPE avg. achieved price, $/t 1,144 1,343 1,481 1,523 1,710 1,326 1,326 1,326

Methanol and MTBE capacity, '000 t 695 695 695 695 695 695 695 695Utilisation 102% 105% 86% 85% 88% 88% 88% 88%Methanol and MTBE production, '000 t 708 727 596 582 602 602 602 602Methanol,MTBE avg. achieved price, $/t 568 414 515 792 856 927 588 588

Urea capacity, '000 t 2,043 2,043 2,043 3,041 4,039 4,039 4,039 4,039Utilisation 114% 107% 107% 85% 80% 95% 105% 107%Urea production, '000 t 2,332 2,195 2,194 2,585 3,231 3,837 4,241 4,322Urea achieved price, $/t 475 268 301 401 417 446 338 339

Ammonia capacity, '000 t (saleable) 308 308 308 884 884 884 884 884Utilisation 110% 124% 133% 70% 100% 120% 130% 130%Ammonia production, '000 t 338 382 411 619 884 1,061 1,149 1,149Ammonia achieved price, $/t 453 243 339 460 495 535 412 413

Steel bars, '000 t 2,040 1,600 1,773 1,836 1,800 1,800 1,800 1,800Utilisation 80% 78% 87% 90% 92% 93% 94% 95%Steel bars production, '000 t 1,632 1,600 1,773 1,836 1,800 1,800 1,800 1,800Steel bars achieved price, $/t 866 527 629 700 700 700 650 650

Direct Reduced Iron (DRI)/Hot briquetted iron (HBI), '000 t 691 692 693 693 693 693 693 693Utilisation 26% 99% 51% 70% 72% 76% 77% 78%DRI/HBI production, '000 t 180 682 354 485 499 527 534 541DRI/HBI achieved price, $/t 535 252 367 420 420 420 390 390

Gas price, $/mmBTU, fertilizers 2.25 2.35 2.50 2.65 2.85 2.18 2.18Gas price and other feedstock, $/mmBTU, petrochemicals 1.23 1.75 2.00 2.30 2.50 2.60 2.70



Exhibit 577: Sustained capex through 2014, yet strong cash flow allows for potentially increasing dividend payout; net cash in 2012 Balance sheet and cash flow statement, 2006-2015E, QR mn



EBIT 3,332 4,587 6,923 4,741 5,331 8,140 9,688 11,559 8,509 8,605Depreciation/Amortisation 524 399 462 523 636 772 1,222 1,322 1,322 1,322Net financial items -44 -80 -144 115 12 -160 -71 161 456 655Taxes paid 0 0 0 -125 0 0 0 0 0 0Other items 242 320 660 -915 -6 0 0 0 0 0

Change in working capital 7 851 -1,980 319 -819 -1,055 -701 -658 870 -62Cash flow from operations 4,062 6,077 5,921 4,658 5,154 7,697 10,138 12,384 11,158 10,520

Capex -2,118 -2,501 -222 -1,005 -1,191 -3,400 -1,200 -1,100 -1,060 -670Capex/D&A 404.0% 626.1% 48.0% 192.1% 187.2% 440% 98% 83% 80% 51%capex/sales (%) 27.2% 26.8% 1.5% 10.4% 9.7% 20.0% 6.0% 4.8% 5.5% 3.4%Free cash flow pre-dividend 1,944 3,576 5,700 3,653 3,963 4,297 8,938 11,284 10,098 9,850Free cash flow pre-dividend/revenues (%) 25.0% 38.3% 38.7% 37.8% 32.1% 25.2% 44.4% 48.9% 52.6% 50.6%

Other investing activities -69 -804 -3,020 -3,990 -3,237 0 0 0 0 0Dividend -1,752 -2,502 -2,001 -4,401 -2,752 -3,025 -3,850 -4,950 -6,050 -4,950Cash surplus (post dividend) 123 270 678 -4,738 -2,026 1,272 5,088 6,334 4,048 4,900Other and financing 47 0 0 1,166 -61 0 0 0 0 0Change in net cash (net debt) 169 270 678 -3,573 -2,087 1,272 5,088 6,334 4,048 4,900Net debt (cash) -2,459 -2,730 -3,408 165 2,252 979 -4,109 -10,443 -14,490 -19,390


Inventories 1,142 1,373 2,521 1,377 1,833 2,531 2,996 3,432 2,855 2,896Receivables 852 936 968 1,060 1,495 2,064 2,442 2,798 2,328 2,361Cash and cash equivalents 4,626 6,171 9,445 5,834 5,290 5,290 10,379 16,712 16,712 21,613Other 868 1,073 1,141 1,090 1,421 1,963 2,323 2,660 2,214 2,246Current assets 7,489 9,553 14,076 9,360 10,040 11,848 18,139 25,602 24,109 29,116

Tangible assets 6,504 8,642 11,448 15,829 19,743 22,371 22,349 22,127 21,865 21,213Intangible assets 72 72 72 96 128 128 128 128 128 128Other 816 1,874 1,854 1,836 1,997 2,097 2,227 2,357 2,457 2,557Non-current assets 7,392 10,589 13,374 17,761 21,868 24,596 24,704 24,612 24,450 23,898

Total assets 14,880 20,142 27,450 27,121 31,908 36,444 42,844 50,214 48,560 53,014

Short-term interest-bearing liabilities 205 1,084 2,668 307 1,424 1,424 1,424 1,424 1,424 1,424Accounts payables 592 1,392 617 365 287 396 468 536 446 453Other 898 1,373 1,775 1,258 1,693 2,338 2,767 3,170 2,638 2,676Current liabilities 1,695 3,849 5,059 1,930 3,405 4,159 4,660 5,131 4,508 4,553

Long-term interest-bearing liabilities 1,962 2,358 3,369 5,692 6,118 4,845 4,845 4,845 798 798Pension provisions 119 154 177 180 201 201 201 201 201 201Other 41 103 590 260 423 423 423 423 423 423Non-current liabilities 2,121 2,615 4,136 6,131 6,741 5,469 5,469 5,469 1,421 1,421





Jarir Marketing Company (4190.SE)


Arsalan Mustafa,CFA

[email protected]

Matija Gergolet

[email protected]


[email protected]


Not just a bookstore; offers exposure to rising consumer spending

Jarir Marketing Company (JMC) is well-positioned to benefit from increased spending by the

Saudi government in the education sector (70% market share in books and stationery) and rising

spending on smart phones (30% market share) and electronics (50% market share) in the kingdom.

The stock has significantly outperformed the local market (up 35% YTD) on strong 3Q11 results

reflecting an acceleration in new stores and in smart phone sales. This limits upside in our view.


The company plans to accelerate the number of store openings to five a year over the next

five years (compared with an average of two during the previous five years, which increased

the number of stores to 28 from 20). We forecast that this will result in average sales growth

of 24% over the next five years (vs. 21% in 2006-10).

Thanks to the company’s strong cash flow generating ability, we forecast that the expansion

will be financed without debt while maintaining a cash dividend payout of c.80%.

Jarir stores generate among the highest sales/square feet among peers (US$842). This is due

to Jarir’s strong brand equity and leading market share in different product segments.

We forecast the capital-light business model of leasing stores (vs. owning them) will result in

improved CROCI (50% by 2014 from 43% currently) and a net cash position by 2013.

The company’s expansion plan includes stores outside the main cities of Riyadh and Jeddah,

where sales/store may be below our forecasts. Meanwhile, faster than forecast smart phone

sales may result in higher than forecast earnings

Valuation: At our target price, the stock would trade at 18x 2012E earnings

Jarir trades on a 2012E EV/EBITDA of 12.6x, below its 5-year median multiple of 14.8x. The stock is

up 35% YTD, outperforming the local index by c.40%.Based on our 2012E/2013E EV/EBITDA

valuation methodology and applying the historical multiple of 14.8x, our 12-month price target is

SR266, which implies 31% potential upside. At our target price, the stock would be trading on 18x

2012E earnings.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Jarir Marketing Company (4190.SE)


Key data Current

Price (SR) 203.25




Free Float (%) 42.9


12/10 12/11E 12/12E 12/13E

Revenue (SR mn) 3,014.6 4,179.3 5,281.1 6,488.9

EBIT (SR mn) 395.7 498.9 622.1 753.4

EPS (SR) 10.02 12.29 15.10 18.40

EV/EBITDA (X) 14.8 15.7 12.6 10.2

P/E (X) 15.1 16.5 13.5 11.0

Dividend yield (%) 5.2 4.6 5.4 6.4

FCF yield (%) 5.4 4.3 5.1 6.8

CROCI (%) 42.8 45.1 47.3 49.2

EV/GCI (X) 5.7 6.6 5.6 4.8

Net Debt/EBITDA (X) 0.2 0.1 0.0 (0.1)

260

280

300

320

340

360

380

400

420

440

120

130

140

150

160

170

180

190

200

210



Jarir Marketing Company (L) MSCI EM EMEA (R)



Investment drivers: Young population, increased government spend on education


Jarir’s strategy involves providing a product offering for every demographic in the average

Saudi family. This strategy has resulted in success over the last five years (21% average sales

growth). The company plans to leverage on its now established brand to double the number of

stores; we forecast revenue will increase on average by 24% over the next five years.

Saudi government spending on education has more than tripled since 2000 to provide for the

57% population which are below the age of 25. The US$40 bn education budget in 2011 will

involve building 610 new schools in addition to 3,200 already under construction. This in our

view will continue to drive demand for books and school supplies.

Growth in electronics sales over the last five years has averaged 33% vs. overall sales growth of

21% and we forecast this trend to continue given the new technology product offering of smart

phones and tablets (2Q sales were up 44% YoY, driven by smart phones). However, this should

result in the margin contracting given that the company generates a lower margin on

electronics sales.

Jarir owns only six of its 28 outlets, resulting in low capacity intensity and therefore high CROCI.

The company only own stores if the store is in a prime location and a top performer.


The business plan involves execution risk as the company looks for prime properties to open its

stores (three new stores have been opened year to date). Additionally, moving away from the

main cities may result in a lower revenue/store than we currently assume.

Capex will be significantly higher if the company decides to own stores as opposed to leasing

them (capex required to own a store is approximately equal to capex required to open 12

stores).

Although online retailing is not common in Saudi Arabia currently (due to lack of residential

mailboxes in the country), Jarir may face competition from this segment in the future.

Industry context

Jarir faces competition on a product level given its varied product mix. In laptop and electronics, the

company competes with eXtra, Best and Electro and has a strong market share of 50% in laptops

and 30% in smart phones. In books, Jarir competes with local player Obeikan, and in office supplies

with Al Maktaba. In both the books and office supplies segments, Jarir estimates that it has a market

share of 70%. According to Euromonitor, the Saudi consumer electronics market is one of the

fastest-growing in the region with a growth rate of 21% (CAGR 2005-10E).

Company description

Jarir Marketing Company operates 28 specialty retail stores

(24 in Saudi and four in the Gulf) in prime locations through

its "Jarir bookstore" outlet with an average store size of 30,000

sq ft. The company owns six of the 28 outlets, all of which are

based in Saudi Arabia. The company’s major product range

includes laptops, smart phones, books, office equipment and

school supplies. Jarir’s publication division translates English

best seller books into Arabic which it also exports to GCC and

Egypt. According to Forbes (Arab Edition), Jarir bookstore is

among the top ten most recognized brand names in the

Middle East. The company has 2,027 employees.




Saudi Arabia88%

GCC and Egypt12%

Computer and

electronics56%

Others44%



Key financial ratios: The capital-light renting of stores model will keep returns high

Exhibit 578: We forecast margin pressure to continue as lower-margin

electronics share continues to increase

Exhibit 579: We forecast the business model of leasing stores will continue

to improve the returns profile (50% CROCI by 2014E)



Exhibit 580: Jarir shareholding owned by the Al Agil family

Exhibit 581: We expect net cash by 2013 (gearing increased in 2007 after the

company purchased one of the outlets)



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SR m

n


0%

10%

20%

30%

40%

50%

60%

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

SR m

n

GCI CROCI (RHS)

Al Agil Family45%

Jarir Investment Co

12%

Free Float43%

-0.6x

-0.4x

-0.2x

0.0x

0.2x

0.4x

0.6x

0.8x

-30%

-20%

-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Jarir product offering and peer group comparison

Taking a sample of global peers shows Jarir’s returns are one of the highest in the sample. In our view, this is a result of both

company and country factors. Jarir operates in a market where the population is significantly younger, where competition from

other players is low and where corporate taxes are low (c.3%).

Exhibit 582: Jarir generates one of the highest sales/square feet compared with selected global players Sales/square feet comparison 2010 (except where stated)

Source: Company data. 2009 data for Barnes & nobles. Office Depot and Staples are the North America retail division

Exhibit 583: Jarir product offering comparison with the selected global players


865 842

311278

180

0

100

200

300

400

500

600

700

800

900

1000

Best Buy Jarir Barnes & Nobles Staples Office Depot

USD

Product type Jarir Staples Office Depot Best Buy fnac Barnes & NoblesOffice Supplies School supplies PC & peripherals Portable devices (Ipods, digitcal Cams) Gaming Books Art supplies



Valuation, growth and returns: Trading below its historical EV/EBITDA multiple

Exhibit 584: At our target price, the stock would trade at 18x 2012E earnings


Jarir Marketing CompanyY/E DecemberSR mn

Share price (SR) 203 12-month target price (SR) 266 $/SR (spot) 3.75Market cap 8,130 Potential upside/(downside) 31%


EBITDA 2013E


EV/Sales 2.1 2.1 2.0 2.0 1.5 1.2 Jarir Marketing Company 650 785 14.8 9,614 11,620EV/EBITDA 14.7 12.9 14.8 15.7 12.6 10.2 Group EBITDA 650 785 14.8 9,614 11,620EV/EBIT 15.3 13.5 15.5 16.4 13.1 10.7 AddEV/DACF 15.1 12.0 14.0 15.8 12.9 10.5 Associates 0 0EV/NOPLAT 15.7 13.9 16.0 16.9 13.5 11.0 Investments 28 28EV/GCI 5.4 5.3 5.7 6.6 5.6 4.8 EV post-discount 9,642 11,648

Less 0 0P/E 15.5 13.6 15.1 16.5 13.5 11.0 Net debt/(cash) 22 -92P/B 7.6 7.1 7.6 8.3 6.8 5.4 Minorities 0 0P/CFO 15.0 12.0 14.0 15.8 12.9 10.6 Pensions and other 34 34FCF yield 5.0% 7.9% 5.4% 4.3% 5.1% 6.8% Equity Value 9,586 11,706Dividend yield 6.5% 6.3% 5.2% 4.6% 5.4% 6.4% No. of shares, mn 40 40




ROE 51% 53% 53% 55% 56% 55% EBIT growth 27.0% 10.6% 1.7% 26.1% 24.7% 21.1%

Net debt/EBITDA 0.46 0.24 0.24 0.12 0.03 -0.12 Net income growth 21.4% 12.9% 5.9% 22.7% 22.9% 21.8%

Net debt/equity 24% 13% 12% 6% 2% -6% EPS growth 21.4% 12.9% 5.9% 22.7% 22.9% 21.8%



Financials: Doubling the number of stores over five years

We forecast average sales growth of 24% over the next five years as the company doubles the number of stores. However, we

forecast margin pressure to continue as Smartphone sales accelerate in the company mix and EBIT margin falls to 11.9% by 2015E.

(The group’s EBIT margin decreased from 16% in 2006 to 13% in 2010 as the share of lower-margin electronics sales increased.

Electronics now constitute 56% of overall sales vs. 29% in 2004). Some of the margin pressure, in our view, would be offset by

economies of scale and the company’s ability to increase prices in non-electronics segment where it has its own brands.

Revenue/store has increased 10% on average over the last five years; we forecast revenue/store over the next five years to increase

at an average 8%, in line with GDP plus inflation growth.

Despite increased capex requirements, we believe a dividend payout of 75%-80% will be maintained due to the company’s strong

cash flow-generation ability. As the year 2007 shows, capex can increase significantly if the company decides to own the stores.

Exhibit 585: Sales growth was up 42% in 9M2011 with an EBIT margin of 12% – an early indication that the new strategy is

delivering 2006-2015E P&L, SR mn



Group revenues 1,505 1,741 2,520 2,555 3,015 4,179 5,281 6,489 7,920 9,142Growth 24.4% 15.7% 44.7% 1.4% 18.0% 38.6% 26.4% 22.9% 22.1% 15.4%

Group EBITDA (clean) 254 291 366 408 415 522 650 785 942 1,088Group EBITDA margin 16.9% 16.7% 14.5% 16.0% 13.8% 12.5% 12.3% 12.1% 11.9% 11.9%

Group EBIT (clean) 242 277 352 389 396 499 622 753 906 1,047Group EBIT margin 16.1% 15.9% 14.0% 15.2% 13.1% 11.9% 11.8% 11.6% 11.4% 11.5%

Share of associates 0 0 0 0 0 0 0 0 0 0Net financial items 10 8 -8 0 17 8 1 6 15 18Pre-tax (clean) 252 285 344 389 413 507 623 759 921 1,065Non-recurring Items 0 0 -3 -5 0 0 0 0 0 0Pre-tax (reported) 252 285 342 385 413 507 623 759 921 1,065Tax -9 -9 -9 -11 -12 -15 -19 -23 -28 -32Tax rate (%) 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Profit after tax (reported) 243 276 333 374 401 492 604 736 894 1,033Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 243 276 333 374 401 492 604 736 894 1,033Post-tax exceptionals 0 0 -3 -5 0 0 0 0 0 0Net income (clean, continuing operations) 243 276 335 379 401 492 604 736 894 1,033




Exhibit 586: As year 2007 shows, capex to own a new store is significantly higher than leasing one Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 242 277 352 389 396 499 622 753 906 1,047Depreciation/Amortisation 12 14 14 19 20 23 28 32 36 41Net financial items -5 -5 -13 -13 -11 -7 -4 0 10 13Taxes paid -9 -9 -9 -11 -12 -15 -19 -23 -28 -32Other items 0 0 0 0 39 15 5 5 5 5



Other investing activities -27 0 1 0 0 0 0 0 0 0Dividend -120 -300 -255 -338 -326 -314 -378 -440 -520 -620Cash surplus (post dividend) 41 -216 3 28 0 37 39 114 167 228Other and financing 0 0 0 0 0 0 0 0 0 0Change in net cash (net debt) 41 -216 2 28 0 37 39 114 167 228Net debt (cash) -33 172 168 97 98 61 22 -92 -260 -488


Inventories 307 377 391 421 543 753 951 1,169 1,427 1,647Receivables 138 153 190 181 212 251 338 415 507 585Cash and cash equivalents 33 18 24 40 52 52 52 166 334 562Other 11 0 0 37 36 49 62 77 94 108Current assets 488 549 605 679 843 1,105 1,404 1,827 2,361 2,902


Total assets 843 1,069 1,163 1,250 1,433 1,748 2,100 2,577 3,165 3,760

Short-term interest-bearing liabilities 1 190 42 37 50 50 50 50 50 50Accounts payables 160 238 241 277 351 486 615 755 922 1,064Other 32 7 10 68 100 139 175 215 263 303Current liabilities 192 435 293 382 501 675 840 1,021 1,235 1,418


Total Common Equity 633 609 687 723 798 975 1,201 1,498 1,871 2,284Minorities 0 0 0 0 0 0 0 0 0 0




Jordan Phosphates Mines Co. (JOPH.AM)


Matija Gergolet

[email protected]


[email protected]

Jordan: Agriculture

Unappreciated value and growth in fertilizers

We believe Jordan Phosphates Mines Co. (Jordan Phosphates) offers attractive exposure to rising

fertilizer prices while valuation looks compelling, relative to both the wider agriculture sector and

its own history. The company is undergoing several expansion projects that should allow it to

grow its phosphate rock and fertilizer production by a further 20% by 2014.


Jordan Phosphate combines attractive valuation with growth. While we expect such growth to

be primarily driven by rising prices for phosphate rock and DAP (diammonium phosphates)

over the next three years, we also expect it to benefit from volume growth.

The company targets total spend of US$550 mn on downstream expansion projects by 2013,

half of which it has already spent. Rising capex is countered by a strong balance sheet and

growing cash flow on the back of expanding profitability, which was already evident in 1H.

The major project will be the expansion of the group’s phosphate rock production from c.7mt

pa currently to 8.75mt pa by the end of 2013 and the incremental rock will be supplied to Indo-

Jordan Fertilizer Company (48% owned), which will produce 475kt of phosphoric acid pa.

We believe that the limited consensus estimates for the company are considerably too

conservative. Phosphate prices are strongly correlated with other fertilizer prices, which are

driven by rising world food demand, as well as increasing prices of energy used in production

(this is in particular valid for urea and ammonia products, where gas costs can represent 90%

of the total cash cost). As Jordan Phosphates owns its own phosphate mines, it is relatively

immune from cost pressure, while it can benefit from a large resource base.

To take into account the price risk linked to the significant increase in DAP capacity post the

new large Maaden project, which is currently coming online, from 2012 we assume a negative

10% price impact to DAP prices (relative to other fertilizers) to reflect the incremental supply.

Valuation: Attractive multiples, growth potential and rising returns

Jordan Phosphates is trading at attractive multiples (2012E P/E 6.6x; EV/EBITDA 4.7x) relative to

historical multiples and vs. fertilizer peers. We apply the company’s own 5-year median

EV/EBITDA of 8.7x (vs. a global agriculture 5-year median EV/EBITDA of 10.2x) to the average of

our 2012E and 2013E EBITDA, which gives us a 12-month price target of JD27.1.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Jordan Phosphate Mines Co. (JOPH.AM)


Key data Current

Price (JD) 13.59




Free Float (%) 11.0


12/10 12/11E 12/12E 12/13E

Revenue (JD mn) 563.9 809.1 847.7 949.6

EBIT (JD mn) 83.8 172.2 179.1 201.8

EPS (JD) 1.22 2.04 2.06 2.41

EV/EBITDA (X) 10.5 5.2 4.7 3.7

P/E (X) 13.0 6.7 6.6 5.6

Dividend yield (%) 1.3 2.2 2.9 5.9

FCF yield (%) (3.4) (4.3) 6.1 12.7

CROCI (%) 10.1 15.0 16.0 16.8

EV/GCI (X) 1.3 1.0 0.9 0.7

Net Debt/EBITDA (X) (0.5) 0.4 0.2 (0.2)

260

290

320

350

380

410

440

470

500

11

12

13

14

15

16

17

18

19



Jordan Phosphate Mines Co. (L) MSCI EM EMEA (R)



Investment drivers: Several growth opportunities in attractive Asian markets


Jordan Phosphates’ strategy is to gradually integrate downstream. Of its total production of

c.7mt pa of rock, the company currently exports 4mt, while 3mt is consumed domestically in the

production of DAP and other fertilizers.

After the acquisition in 2010 of the full capital of Indo-Jordan Chemicals Company (225kt of

phosphoric acid capacity) for JD51 mn (US$72 mn), in 2011 the company increased its stake in

Nippon-Jordan Fertilizer Company, which produces 300ktpa of compound fertilizer (NPK), for

JD4 mn and completed the expansion of its Aqaba fertilizer plants from 750kt to 1,000kt of DAP.

In 2011, the Jafcco Company, in which it has a minority stake, but to which it supplies

phosphate rock, commenced operations. Jordan Phosphate has also signed a project with PT

Petrokimia Gresik for a 200kt phosphoric acid plant in Indonesia, to which it will supply the rock.

The group is revamping the existing industrial port in Aqaba (in a JV with Arab Potash, at a cost

of US$80 mn), as well as building a new port for the export of phosphates (US$220 mn cost,

fully owned by Jordan Phosphates). The new facility will almost eliminate the current port fees

paid (US$14 mn in 2010) and allow better handling and optimisation of its logistics.


The key risk for Jordan Phosphates is its exposure to DAP and phosphate rock prices. While 70%

of its consolidated cost base is variable, a US$10/tonne change in the price of phosphate rock

would nonetheless reduce its EBITDA by 2% and net income by 3.5%, we estimate.

While demand for phosphates has grown by 2.5% pa since the mid 1990s, now exceeding 50mt

of P2O5 (phosphoric acid-nutrient content), Maaden’s 3.0mt DAP project (with 1.4mt of P2O5) will

significantly expand the availability of DAP, adding 10% to the world’s supply of DAP products.

However, while the Maaden project has already started production, it will likely take several

quarters to fully ramp-up production, allowing some time for the incremental supply to be

absorbed by market demand.

While Jordan Phosphates pays a mining fee of US$2 per tonne of rock mined, in the event of a

substantial rise in DAP prices, the Jordanian government (which owns a stake in the company)

could decide to increase such fees further.

Industry context

Jordan Phosphates mines phosphate rock. Its reserves are 6% of global reserves and it accounts for

3.6% of world production, which we expect to amount to 189mf of rock and over 50mt of P2O5 for

2011.

Company description

Jordan Phosphate Mines Co. (JPMC) is the world's sixth-

largest phosphate rock producer with three mining facilities in

Jordan. The company has an annual production of c.7mt of

phosphate rock and 925mn tonnes of proven and probable

phosphate reserves (end-2010). JPMC also operates a fertilizer

complex in Aqaba with capacity of 1,000kt of DAP, as well as

phosphoric acid and aluminium fluoride. The company has

entered into joint ventures in Jordan with fertilizer companies

from India, Japan and Bahrain and is looking to expand

further with similar partnerships with companies from Bahrain

and Indonesia. The company had 3,775 employees (end 2010).




Europe2%

Asia80%

Africa14%

Jordan2%

Other2%

Phosphates39%

Fertilizers60%

Trading and other1%



Key financial ratios: Improving margins and returns

Exhibit 587: Jordan Phosphates sales and margin performance, 2006-2015E

Exhibit 588: Jordan Phosphates GCI and CROCI, 2006-2015E



Exhibit 589: Jordan Phosphates shareholding structure

Exhibit 590: Jordan Phosphates gearing, 2006-2015E



0%

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0

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

JD m

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2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

JD m

n

GCI CROCI (RHS)

Kamil Holdings

37%

Jordan Finance Ministry

26%

Jordanian Social security Corporation

16%

Government of Kuwait

10%

Passport Global Master

Fund2%

Jordan Islamic Bank5%

Other free float4%

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

2.0x

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Compelling multiples despite increasing returns

Jordan Phosphates trades on attractive multiples. Even taking into account the risk of potentially higher government fees on

phosphate mining (for example assuming a royalty of 25% of net income on all production, as is the case for Arab Potash) would

still leave the group on an attractive 2012E P/E of 8.8x).

Exhibit 591: We expect Jordan Phosphate CROCI to increase to 15.9% in 2012E from 10.1% in 2010


Jordan Phosphate Mines Company PLC Basic MaterialsY/E December AgricultureJD mn Agriculture

Share price (JD) 13.6 12-month price target (JD) 27.1 $/JOD (spot) 0.71Market cap 1,019 Potential upside/(downside) 100%


EBITDA 2013E


EV/Sales 2.8 2.6 1.9 1.2 1.1 0.9 Phosphates 77 93 8.7 674 805EV/EBITDA 8.2 10.3 10.5 5.2 4.7 3.7 Fertilizers 129 144 8.7 1,121 1,254EV/EBIT 8.6 11.6 12.9 5.8 5.4 4.3 Trading and other 1 1 8.7 10 10EV/DACF 9.4 11.8 14.8 7.4 5.6 4.5 Group EBITDA 207 238 8.7 1,805 2,069EV/NOPLAT 9.8 13.2 13.5 6.5 6.0 4.8 AddEV/GCI 3.7 1.9 1.3 1.0 0.9 0.7 Associates 82 87

Investments 7 7P/E 10.6 15.1 13.0 6.7 6.6 5.6 EV 1,893 2,163P/B 6.1 3.0 2.2 1.6 1.3 1.1 LessP/CFO 10.08 13.30 15.37 7.09 5.66 4.82 Net debt/(cash) 37 -51FCF yield 7.0% 6.1% -3.3% -3.9% 5.5% 11.5% Minorities 0 0Dividend yield 1.5% 1.1% 1.3% 2.2% 2.9% 5.9% Pensions and other 0 0

Equity Value 1,857 2,213No. of shares, mn 75 75Implied per share valuation (JD) 24.8 29.5 27.1



ROE 78.2% 20.9% 19.8% 20.9% 21.7% 21.2% EBIT growth 434.8% -62.7% -17.9% 105.5% 4.0% 12.7%

Net debt/EBITDA -0.5 -1.5 -0.5 0.4 0.2 -0.2 Net income growth 4.2 -0.6 0.0 0.7 0.0 0.2

Net debt/equity -33.0% -35.5% -10.5% 10.9% 4.7% -5.5% EPS growth 417.5% -61.1% -1.8% 67.6% 1.2% 16.6%



Financials: Room to significantly increase the dividend once capex is implemented

While we expect Jordan Phosphates’ profitability and cash flow to improve in the coming years, we nonetheless expect the

company to maintain a conservative dividend policy of c.16% payout until the capex programme is fully implemented in 2013 (for

the last three years, the payout has stayed at 16%). At that point, considering the group’s strong balance sheet with a net cash

position, we expect the dividend payout to rise gradually to 50%. At 1H2011, Jordan Phosphates’ revenues were up 52%, clean

EBITDA 190% and net income 82%; at 9M2011 revenues were up 49% yoy, EBITDA increased 175% and net income rose 100%.

Exhibit 592: We expect rising phosphate prices and increased volumes to drive growth through 2015E 2006-2015E P&L, JD mn


Jordan Phosphate Mines Company PLCSummarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015EPhosphates 127 152 435 286 270 313 328 391 417 489Fertilizers 148 188 392 167 285 488 511 550 531 542Trading and other 16 15 20 5 9 9 9 9 9 9Group revenues 290 355 847 458 564 809 848 950 957 1,040Growth 3.1% 22.4% 138.7% -45.9% 23.1% 43.5% 4.8% 12.0% 0.7% 8.7%


Phosphates 9 16 216 80 28 53 64 77 86 120Fertilizers 9 34 57 21 54 121 114 124 99 100Trading and other 1 1 0 1 1 -2 1 1 1 1Group EBIT (clean) 19 51 274 102 84 172 179 202 187 220Group EBIT margin 6.4% 14.4% 32.3% 22.3% 14.9% 21.3% 21.1% 21.3% 19.5% 21.2%

Share of associates 4 0 2 2 6 3 3 5 15 20Net financial items -6 -5 -3 1 5 -6 -10 -7 0 6Pre-tax (clean) 17 46 273 105 95 169 172 200 202 246Non-recurring Items 0 0 0 0 9 -32 0 0 0 0Pre-tax (reported) 17 46 273 105 104 137 172 200 202 246Tax -1 0 -34 -12 -4 -13 -17 -19 -19 -23Tax rate (%) 5% 0% 13% 12% 4% 10% 10% 10% 10% 10%

Profit after tax (reported) 16 46 239 93 100 124 155 180 183 224Minorities 0 0 0 0 0 0 0 0 0 0Net income (reported) 16 46 239 93 100 124 155 180 183 224Post-tax exceptionals 0 0 0 0 9 -29 0 0 0 0Net income (clean, continuing operations) 16 46 239 93 91 153 155 180 183 224




Exhibit 593: Sustained capex through 2013 yet strong cash flow makes the group FCF positive by 2012 Balance sheet and cash flow statement, 2006-2015E, JD mn



EBIT 19 51 274 102 84 172 179 202 187 220Depreciation/Amortisation 14 12 13 13 19 23 28 36 37 40Net financial items -6 -5 -3 1 1 -6 -10 -7 0 6Taxes paid -1 0 -34 -12 -4 -13 -17 -19 -19 -23Other items 3 2 2 2 -22 -32 0 0 0 0

Change in working capital 6 4 -52 19 -44 -63 -10 -26 -2 -21Cash flow from operations 35 64 200 124 33 81 170 185 203 222

Capex -5 -7 -23 -39 -72 -120 -114 -68 -32 -16Capex/D&A 35.2% 58.3% 179.4% 298.0% 374.3% 528% 400% 189% 85% 40%capex/sales (%) 1.7% 2.0% 2.8% 8.4% 12.8% 14.9% 13.4% 7.2% 3.3% 1.5%Free cash flow pre-dividend 30 57 177 85 -39 -40 57 117 172 206Free cash flow pre-dividend/revenues (%) 10.4% 16.0% 20.9% 18.6% -6.9% -4.9% 6.7% 12.3% 17.9% 19.8%

Other investing activities 0 0 -13 -2 -59 -71 0 0 0 0Dividend 0 -7 -15 -37 -11 -16 -23 -30 -60 -91Cash surplus (post dividend) 30 49 148 46 -109 -127 34 87 112 115Other and financing 20 -7 -6 -16 -3 0 0 0 0 0Change in net cash (net debt) 50 42 142 30 -111 -127 34 87 112 115Net debt (cash) 47 5 -138 -168 -56 71 37 -51 -162 -277




Total assets 321 318 551 574 659 872 1,024 1,099 1,223 1,364



Shareholders' equity 155 194 417 472 538 645 778 928 1,051 1,183Minorities 0 0 0 0 0 0 0 0 0 0

Total equity and liabilities 321 318 551 574 659 872 1,024 1,099 1,223 1,364



Jordan Telecom Group (JTEL.AM)

Sell: Return potential: -3%

Matija Gergolet

[email protected]


[email protected]

Jordan: Telecoms

Cash rich, yet unattractive valuation

We expect moderate growth at Jordan Telecom in the coming years, with growth in mobile and

broadband offsetting declines in the traditional fixed-line business. The strong net cash position is

likely to support a strong dividend policy. However, with valuation looking expensive relative to

history and emerging markets peers, we initiate with a Sell rating.

Investment thesis: Strong cash flow generation, but unattractive valuation; Sell

Jordan Telecoms has opportunity to capitalize on the still relatively underpenetrated mobile

market in Jordan, where demographic trends and economic growth remain healthy.

The group has been paying dividends based on close to 100% payout for the last five years.

Given the net cash position (net cash of JD267 mn, or US$378 mn at the end of 2010) and

JD98 mn of distributable reserves, we expect the company to maintain a payout ratio of

around 100%.

The key risks for Jordan Telecom come from further erosion of fixed-line business margins,

where it maintains close to a 99% share, and from potential price wars with the other mobile

operators.

M&A risk cannot be ruled out. However, unless majority shareholder France Telecom decides

to leverage Jordan Telecom’s platform to consolidate its operations in neighbouring countries

(e.g. Syria, Iraq), the opportunities to deploy its meaningful cash may be relatively limited. On

the other hand, a buyout by France Telecom of the minorities is also a possibility.

Valuation: High dividend not enough for premium valuation; Sell

Jordan Telecom trades on 6.4x 2012E EBITDA and 14.6x P/E, a premium to emerging market

telecoms peers (5.4x EBITDA and 10.5x P/E) and to its own history. Our valuation is based on an

EV/EBITDA method adjusted for growth and taxes, in line with other telecom operations. On this

basis, we derive an EV/EBITDA multiple of 6.0x, which compares with the stock’s 5-year EBITDA

average of 5.7x. Applying this to our average 2012/13 estimates gives us a 12-month price target

of JD5.37 which, despite the high dividend, makes Jordan Telecom unattractive, in our view.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Jordan Telecom (JTEL.AM)


Key data Current

Price (JD) 5.56


Upside/(downside) (%) (3.4)


Free Float (%) 7.1


12/10 12/11E 12/12E 12/13E

Revenue (JD mn) 402.1 418.3 434.3 445.3

EBIT (JD mn) 118.3 114.5 118.9 125.6

EPS (JD) 0.38 0.35 0.38 0.41

EV/EBITDA (X) 6.2 6.7 6.4 6.1

P/E (X) 13.9 15.8 14.6 13.5

Dividend yield (%) 7.2 6.3 6.9 7.4

FCF yield (%) 7.8 7.4 7.9 8.3

CROCI (%) 18.8 16.8 16.8 16.5

EV/GCI (X) 1.4 1.4 1.3 1.2

Net Debt/EBITDA (X) (1.5) (1.6) (1.7) (1.8)

260

280

300

320

340

360

380

400

420

440

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6.0

6.1



Jordan Telecom (L) MSCI EM EMEA (R)



Investment drivers: Shrinking fixed line partly offsets growth in mobile


Jordan Telecom was the first company in Jordan to acquire a 3G licence in 2009, paying

JD50.3 mn. The start-up of 3G services during 2010 and the promotions associated have

increased operating costs as Jordan Telecom tries to capitalize on the unique service offering,

leading to reduced margins in the short term for its mobile. However, Zain, the market leader,

has now also acquired a second licence and therefore going forward, after the initial campaign

to capture more high value-added customers, we believe that Jordan Telecom will be less

inclined to pursue aggressive marketing campaigns.

The current mobile penetration rate in Jordan of c.120% is well below that of most Middle East

countries reflecting lower domestic GDP per capita. The IMF forecasts Jordan GDP growth of

close to 4% in 2012 and then accelerating to 5.5% by 2014 and expects 2.3% pa population

growth which, combined with the country’s young demographics, should support further

expansion of mobile services. ARPUs are currently relatively low, at c.US$10-11, indicating

potential upside on the back of rising GDP.

Jordan Telecom operates its mobile business under the Orange brand. The company pays

Orange a 1.6% fee for using the Orange brand and in 2010 paid an additional JD3.3 mn

management fee to France Telecom pursuant to the business support agreement. While this

allows the company to leverage on France Telecom’s expertise, it also has a slightly negative

impact on operating margins. Orange mobile also pays a 10% royalty fee on the net revenues of

the mobile division to the Jordanian Telecommunication Commission.

In fixed-line, while the sector was liberalized seven years ago, the company still holds 98%

share, with competition only visible on international traffic. While the traditional fixed-line

business is experiencing a secular fall in revenues, broadband services are becoming

increasingly popular. In 2010, Jordan Telecom broadband revenues increased by 35%.


The key risk would be a start of a price war between the three leading mobile operators (Zain,

Orange and Umniah), as they all have similar market shares of 30%-35%. A faster-than-expected

decline in fixed line could also negatively affect profitability (revenue CAGR in fixed line has

been a nominal -4.5% since 2006; we forecast -2.2% CAGR over the next five years).

Industry context

Jordan Telecom is the leading telecom company in Jordan. In 2010, it had a 98% market share in

fixed line, 58% in internet and 31%-33% in mobile telecoms, where it is the No.2 player behind Zain

and ahead of Umniah (Batelco).

Company description Jordan Telecom is the historical (fixed line) incumbent in

Jordan. The company is now part of the France Telecom

group and has operated under the Orange brand in Jordan

since 2007. The company launched as the second mobile

operator (after Zain) in Jordan, Orange mobile, and currently

offers both mobile, fixed line and internet/broadband. Jordan

Telecom was the first company to offer 3G in Jordan in 2010.

As of end 2Q2011, the company had 3.4mn customers, of

which mobile are over 2mn. The company also has a 51%

stake in Lightspeed, which offers broadband in Bahrain yet

makes an immaterial contribution. The company had 2,227

employees at the end of 2010.




Jordan100%

Fixed line voice42%

Mobile communication

44%

Data services

14%



Key financial ratios: Slight recovery in margins; slight fall in CROCI

Exhibit 594: Jordan Telecom sales and margin performance, 2006-2015E

Exhibit 595: Jordan Telecom GCI and CROCI, 2006-2015E



Exhibit 596: Jordan Telecom shareholding; free float 7%

Exhibit 597: Jordan Telecom gearing, 2006-2015E



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GCI CROCI (RHS)

France Telecom

51%

Social Security

Corporation29%

Noor Telecom Company-

Kuwait 10%

Armed Forces & Securities

Fund3%

Free Float7%

-2.0

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: Unattractive valuation

Exhibit 598: Valuation overall unattractive at 6.4x 2012E EV/EBITDA and 14.6x P/E


Jordan Telecom Telcoms ServicesY/E December Telecom WirelessJD mn Telecom Wireless

Share price (JD) 5.56 Price target (JD) 5.37 $/JOD 0.71Market Cap 1,390 Upside/(downside) -3%


EBITDA 2013E Multiple EV 2012E EV 2013E Price target

EV/Sales 3.0 2.5 2.7 2.7 2.6 2.4 Jordan Telecom 172 178 6.0 1,034 1,069EV/EBITDA 6.6 5.6 6.2 6.7 6.4 6.1 Group EBITDA 172 178 6.0 1,034 1,069EV/EBIT 9.7 7.9 9.1 9.9 9.3 8.7 AddEV/DACF 7.8 6.7 7.4 8.3 7.8 7.4 Associates 0 0EV/NOPLAT 13.3 10.4 11.6 13.1 12.0 11.2 Investments 0 0EV/GCI 1.8 1.3 1.4 1.4 1.3 1.2 EV

Less 1,034 1,069P/E 14.9 12.1 13.9 15.8 14.6 13.5 Net debt/(cash)P/B 3.6 3.0 3.2 3.4 3.4 3.3 Pensions and other -297 -318P/CFO 9.0 7.9 8.8 9.8 9.3 8.9 Minorities 0 0FCF Yield 7.9% 4.8% 7.8% 7.4% 7.9% 8.3% Pensions and other 17 17Dividend Yield 6.8% 8.4% 7.2% 6.3% 6.9% 7.4% Equity Value 1,314 1,369

No. of shares 250 250Implied per share valuation (JD) 5.26 5.48 5.37



ROE 24.0% 24.9% 22.9% 21.6% 23.4% 24.9% EBIT growth 6.3% 3.2% -5.7% -2.5% 3.5% 5.1%

Net Debt/EBITDA -1.7 -1.5 -1.5 -1.6 -1.7 -1.8 Net income growth 5.1% 4.7% -8.6% -7.3% 8.3% 8.2%

Net Debt/Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EPS growth 5.1% 4.7% -8.6% -7.3% 8.3% 8.2%



Financials: We forecast shrinking margins due to further fall in fixed-line business

We expect Jordan Telecom margins to remain under pressure in 2011 and 2012 as the fixed-line business contracts further and

mobile incurs start-up and marketing expenses for its 3G expansion. However, as the relative weight of mobile overtakes fixed line,

we expect the trend to start reversing, with margins starting to improve from 2013. Capex requirements should remain relatively

low (eg in fixed line), leading to significant free cash flow generation. In 9M2011, Jordan Telecom reported overall revenues up 3.8%,

EBITDA down 5.6% and net income down 5.4%. Total customers number (fixed and mobile) increased to 3.47mn from 3.017mn, up

15% YTD, due to promotion packages in movies and internet services as well as higher demand for ADSL service.

Exhibit 599: Shrinking margins as mobile growth is offset by decline in fixed line

2006-2015E P&L, JD mn


IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Fixed line voice 220 210 202 186 183 177 173 169 167 164Mobile communication 132 174 179 181 175 185 194 202 210 219Data services 10 14 21 33 45 56 67 74 81 89Group Revenues 363 398 401 400 402 418 434 445 458 472Growth -3.6% 9.6% 0.9% -0.3% 0.5% 4.0% 3.8% 2.5% 2.9% 3.1%



Share of Associates 0 0 0 0 0 0 0 0 0 0Net Financial Items 10 15 17 12 8 8 8 12 15 16Pre-Tax (clean) 124 131 140 139 126 122 127 138 148 158Non-recurring Items 0 0 0 0 0 0 0 0 0 0Pre-Tax (reported) 124 131 140 139 126 122 127 138 148 158Tax -37 -38 -41 -36 -32 -34 -32 -34 -37 -39Tax Rate (%) 30% 29% 29% 26% 25% 28% 25% 25% 25% 25%

Profit After Tax (reported) 87 94 99 103 95 88 95 103 111 118Minorities 0 1 0 1 0 0 0 0 0 0Net Income (reported) 87 95 99 104 95 88 95 103 111 118Post-tax exceptionals 0 0 0 0 0 0 0 0 0 0Net Income (clean, continuing operations) 87 95 99 104 95 88 95 103 111 118




Exhibit 600: Jordan Telecom likely to remain highly cash-flow generative, 2006-2015E Balance sheet and cash flow statement, 2006-2015E, JD mn


Summarised Cash Flow2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EBIT 113 117 123 127 118 115 119 126 133 142Depreciation/Amortisation 56 54 56 53 55 54 53 53 53 52Net financial items 10 15 17 13 7 8 8 12 15 16Taxes paid -12 -21 -38 -33 -32 -34 -32 -34 -37 -39Other items 6 8 6 -1 1 0 0 0 0 0

Change in Working Capital 26 15 8 5 -5 5 5 3 4 4Cash flow from operations 199 187 172 163 145 147 154 159 167 175

Capex -42 -60 -56 -103 -41 -44 -44 -43 -43 -43Capex/D&A 74% 111% 99% 193% 74% 82% 82% 82% 82% 82%% sales 11.5% 15.0% 13.9% 25.8% 10.2% 10.5% 10.1% 9.7% 9.5% 9.0%

Dividend -84 -85 -95 -100 -105 -95 -88 -95 -103 -111Other Investing Activities -2 -9 -2 -2 2 0 0 0 0 0Free Cash Flow pre-dividend 158 127 116 60 104 103 110 116 124 132Other and financing -4 -6 -3 -3 1 0 0 0 0 0Cash surplus (post dividend) 71 34 19 -41 0 8 22 21 21 22Net debt (cash) -255 -289 -308 -267 -267 -275 -297 -318 -339 -360

Summarised Balance Sheet2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Inventories 4 5 8 6 7 7 7 7 8 8Receivables 57 79 73 84 88 92 95 98 100 104Cash and cash equivalents 289 323 342 302 275 283 305 326 347 368Other 0 0 0 0 0 0 0 0 0 0Current Assets 351 407 423 392 370 382 408 431 455 480


Total Assets 597 665 676 692 657 659 675 689 703 719

Short-term interest-bearing liabilities 0 1 1 26 1 1 1 1 1 1Accounts payables 149 206 210 223 222 231 240 246 253 261Other 0 0 0 0 0 0 0 0 0 0Current Liabilities 150 206 210 249 223 232 241 247 254 262


Shareholders' equity 402 411 417 421 411 404 411 419 426 434Minorities 0 0 -1 -1 -1 -1 -1 -1 -1 -1

Total Equity and Liabilities 597 665 676 692 657 659 675 689 703 719



Juhayna Food Industries (JUFO.CA)


Matija Gergolet

[email protected]


[email protected]

Egypt: Food

Strong market positioning and attractive valuation offsets commodity price risk

Juhayna Food Industries (Juhayna) has a strong market position in Egypt with a leading share in

the dairy market. The strong demand fundamentals and group’s attractive valuation more than

offset near-term risks associated with sourcing price of milk and potential headwinds from higher

soft commodity prices, in our view.


Egyptian consumption of milk, yogurt and juices are well below the global average, with a per

capital dairy consumption of only 22kg versus a global average of 103kg. Only 14% of

Egyptian milk consumed is packaged vs. for example 60% in Turkey. We expect the market

share of packaged milk to grow to 18% by 2015 and expand further over the coming years.

Juhayna is particularly strong in packaged milk with a 73% share as of 1H2011, which should

allow it to benefit from the significant demand in this segment.

Juhayna also has leading shares in yoghurt and juices. The company has been in the market

for over 25 years and has an established distribution network which will be difficult to

replicate for relatively new competitors. Also, Juhayna has a wide product range (all

segments inclusive) of 153 SKUs catering across multiple income segments.

While profitability could be affected by rising soft commodities, the group’s product range is

relatively price inelastic and it has been successful in implementing a 10% increase in milk

prices, 20% in yogurt prices and 20% in juices prices in several phases in FY2011 alone. This

highlights the company’s pricing power and ability to pass on costs to consumers.

Juhayna is in the process of vertically integrating its processes by introducing dairy farms and

fruit farms and by adding capacity, with the medium-term target of deriving 40%-50% of its

dairy requirement from its own farms. This initiative will help the company improve its overall

efficiency and reduce exposure to domestic wholesale milk prices.

Valuation: Trading well below global peers, despite high growth potential

Juhayna trades at 7.4x 2012E EV/EBITDA vs. the 5-year global peer median of 10.1x. Based on our

2012/13E EV/EBITDA methodology and using 10% premium to mid-cycle multiple for packaged

food producers, we derive a 12-month price target of £E7.82, with 74% potential upside. We are

assigning a premium of 10% to the multiple as Juhayna falls into 1Q CROCI relative to its peers.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Juhayna Food Industries (JUFO.CA)

Europe New Markets Non Financials Peer Group Average

Key data Current

Price (£E) 4.50




Free Float (%) 49.3


12/10 12/11E 12/12E 12/13E

Revenue (£E mn) 1,861.5 2,256.0 2,659.0 3,106.4

EBIT (£E mn) 311.8 310.4 335.1 404.9

EPS (£E) 0.33 0.31 0.33 0.41

EV/EBITDA (X) 8.1 8.3 7.4 6.3

P/E (X) 16.1 14.5 13.6 11.0

Dividend yield (%) 0.0 0.0 2.2 2.7

FCF yield (%) (2.2) (4.2) 1.5 3.9

CROCI (%) 19.0 16.8 15.8 16.4

EV/GCI (X) 1.6 1.4 1.2 1.1


300

330

360

390

420

450

480

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Sep-10 Dec-10 Mar-11 Jul-11


Juhayna Food Industries (L) MSCI EM EMEA (R)



Investment drivers: Strong market position with attractive top-line growth trends


Only c.14% of Egyptian milk consumed is packaged. Given the increasing urbanization trend in

Egypt and awareness of hygiene, we assume the market share of packaged milk to increase

from 14% in 2010 to 18% by 2015, while we expect total milk consumption (loose and packaged)

to growth at a compound 4% until 2015. We believe this secular trend will benefit Juhayna more

than any market participant due to its presence in Egypt for almost 30 years and its strong brand

image. We estimate sales growth of 21% in 2011, 18% in 2012 and 17% in 2013.

Higher soft commodity prices tend to compress margins of the food and beverage industry. The

FAO Food Price Index (FFPI) index (which has dairy as one of its main components) is up 26%

yoy and, given the current inflation scenario of Egypt (up 8.5% in August), we expect margins to

be under pressure in 2011 and 2012.


Until recently, there was no specific rule or formal guidelines for price of milk sourced from the

dairy farms. Management recently announced a formula which links the price of milk to fodder

and claimed that half of the farmers had approved the formula. Juhayna has implemented such

a formula since July with 37 of its 69 farmers which supply it with milk. However, the Dairy

Producers Association of Egypt has rejected the formula and the Competition Commission has

accused Juhayna and other dairy producers of price fixing. Lack of clarity on the sourcing price

of milk, which is the primary input to dairy segment, may lead to some uncertainty.

Given that the company is in the process of vertical integration and expansion of its processes,

the bottlenecks and execution risks associated with starting and running dairy and fruit farms

may pose challenges.

We expect the current political situation in Libya to negatively affect Juhayna in the short term.

However, with improvement in the political stability in the country, we expect Juhayna to

successfully resume exports. Juhayna had a c.20% market share before the Libyan crisis.

Industry context

Juhayna Food Industries has a leading share of 73% in Egyptian dairy market, 89% in drinkable

yogurt, 31% in spoonable yogurt and 15% in juices. Egypt is an underdeveloped market in terms of

milk, yogurt and juices consumption, with current per capita milk consumption at only 22 kg pa vs.

the global average of 103 while juice consumption is 3 litres pa vs. 4.4 for Middle East and Africa.

The total value of yogurt sold in Egypt in 2010 is only US$0.2 bn vs. US$0.43 bn in the Middle East.

The main players in the product line offered by Juhayna are Nile Company for Food Industries

(milk), Danone (yogurt), and International Company for Agro-Industrial Projects (dairy and juices).

Company description

Juhayna Food Industries is the market leader in Egyptian dairy

and operates through eight subsidiaries divided into four key

business segments – dairy (packaged UHT milk, cream and

cheese), yogurt products (spoonable and drinkable yogurt),

juice and concentrates. The company is trying to vertically

integrate its business segments by starting a fruit and a dairy

farm, as well as expanding existing capacity. As of March

2011, Juhayna has total production capacity of 2,700 tonnes

per day for its dairy, yogurt and juice segments and 880

tonnes per day for its concentrates segment. The company

became public in 2010. It has c. 3,000 employees.




Egypt89%

Libya8%

Others3%

Dairy segment

54%

Yogurt segment

25%

Juices segment

20%

Concentrates segment

1%



Key financial ratios: Stable margins, improving CROCI and low gearing

Exhibit 601: Juhayna sales and margin performance, 2006-2015E

Exhibit 602: Juhayna GCI and CROCI, 2006-2015E



Exhibit 603: Juhayna shareholding and group structure

Exhibit 604: Juhayna gearing, 2006-2015E



0%

5%

10%

15%

20%

25%

30%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n


0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

£Em

n

GCI CROCI (RHS)

Pharon Investment

51%

Free Float49%

-2.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

-100%

0%

100%

200%

300%

400%

500%

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Net debt (cash)/equity Net debt (cash)/EBITDA (RHS)



Valuation, growth and returns: At a discount vs. global peers and generates high CROCI

Exhibit 605: Juhayna trades on a 2012E EV/EBITDA of 7.4x which is below global peer 5-year historical average/median multiples of 11.8x/10.1x


Juhayna Food Industries Consumer StaplesY/E December Food£Emn Food

Share price (£E) 4.50 12-month price target (£E) 7.82 $/£E (spot) 5.98Market cap 3,269 Potential upside/(downside) 74%


EBITDA 2013E


EV/Sales nm nm 2.2 1.7 1.4 1.2 Dairy segment 243 291 11.2 2,717 3,257EV/EBITDA nm nm 8.1 8.3 7.4 6.3 Others 263 303 11.2 2,944 3,394EV/EBIT nm nm 13.3 12.1 11.1 9.3 Group EBITDA 505 594 11.2 6,950 8,159EV/DACF nm nm 10.6 9.2 8.2 7.0 AddEV/NOPLAT nm nm 14.9 13.7 12.6 10.6 Associates 6 9EV/GCI nm nm 1.9 1.4 1.2 1.1 Investments 39 39

EV 5,706 6,699P/E nm nm 16.1 14.5 13.6 11.0 LessP/B nm nm 2.3 1.7 1.6 1.4 Net debt/(cash) 184 142P/CFO nm nm 10.99 8.37 7.54 6.33 Pensions 0 0FCF yield -125494% 10% -2% -4% 2% 4% Minorities 320 397Dividend yield nm nm 0% 0% 2% 3% Provisions/other 0 0

Equity value 5,203 6,159No. of shares 726 726Implied per share valuation (£E) 7.16 8.48 7.82


ROIC 2.2% 18.1% 17.5% 14.6% 13.5% 15.0% EBITDA growth -9.8% 207.4% 12.8% 3.4% 11.6% 17.5%

ROE 1.9% 35.5% 18.2% 12.8% 12.1% 13.4% EBIT growth -26.4% 317.2% 7.1% -0.4% 7.9% 20.8%

Net debt/EBITDA 9.2 2.5 0.1 0.5 0.4 0.2 Net income growth -88.6% 2264.4% 75.3% 11.5% 6.3% 24.2%

Net debt/equity 461.0% 167.9% 2.3% 11.4% 8.7% 6.1% EPS growth -88.6% 1635.0% -49.3% -5.4% 6.3% 24.2%



Financials: Strong sales growth partially offset by margin constraints in the short term

Given the strong demand potential, we expect strong sales growth in dairy, yogurt and juices and modest growth in the

concentrates segment. We forecast total sales growth of 21% for 2011, 18% for 2012 and 17% for 2013. However, due to rising soft

commodity prices, we expect operating margins to contract slightly. We estimate EBITDA margins of 20.1% for 2011, 19% for 2012

and 19.1% for 2013 vs. a 4-year historical average of 17.5% and margins above 20% in the last two years. As of 1H2011, EBITDA was

up 7% yoy and EBIT was up 5%.

Juhayna has restrictions in distributing dividends as per covenants on the debt taken from multiple banks which will remain valid

until 2011. We expect the company to start paying dividends from its 2012 results, while spending c.£E1 bn in expansion of its

facilities over the next three years. This will primarily include the expansion of a fruit farm, a new yoghurt facility and the start of a

project for a dairy farm, for which the company is in the process of buying land.

Exhibit 606: We expect Juhayna revenues to grow 21% and 18% in 2011 and 2012 but operating margins to contract by 300 bp and

120 bp due to higher commodity prices Juhayna, 2007-2015E P&L £E mn


Summarised P&L EAS EAS EAS EAS EAS EAS EAS EAS EAS EAS2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Dairy segment 669 918 907 1,037 1,221 1,464 1,733 2,016 2,368 2,774Yogurt segment 184 262 364 402 567 664 756 858 973 1,104Juices segment & Others 208 282 307 423 468 532 617 709 815 937Group revenues 1,061 1,463 1,578 1,861 2,256 2,659 3,106 3,582 4,156 4,814Growth 37.9% 7.9% 18.0% 21.2% 17.9% 16.8% 15.3% 16.0% 15.9%


Dairy segment 42 39 171 199 174 177 213 252 300 357Yogurt segment 6 -10 71 80 103 108 123 141 165 191Juices segment & Others 47 40 50 32 33 50 69 78 87 100Group EBIT (clean) 95 70 291 312 310 335 405 470 552 648Group EBIT margin 8.9% 4.8% 18.5% 16.8% 13.8% 12.6% 13.0% 13.1% 13.3% 13.5%

Share of associates 0 0 -1 3 3 3 3 3 3 3Net financial items -41 -55 -119 -59 -29 -36 -32 -28 -17 2Pre-tax (clean) 54 15 171 255 285 302 375 445 538 653Non-recurring Items 0 0 35 0 0 0 0 0 0 0Pre-tax (reported) 54 15 206 255 285 302 375 445 538 653Tax -11 -10 -21 -28 -34 -36 -45 -53 -64 -78Tax rate (%) 21% 66% 10% 11% 12% 12% 12% 12% 12% 12%

Profit after tax (reported) 43 5 185 228 251 266 331 392 473 575Minorities 0 0 -38 -26 -25 -27 -33 -39 -47 -57Net income (reported) 43 5 147 202 225 240 298 353 426 517Post-tax exceptionals 0 0 32 0 0 0 0 0 0 0Net income (clean, continuing operations) 43 5 115 202 225 240 298 353 426 517




Exhibit 607: Juhayna continues to be in cash flow generative mode with a strong balance sheet over the forecast period Juhayna balance sheet and cash flow statement, 2007-2015E £E mn



EBIT 95 70 291 312 310 335 405 470 552Depreciation/Amortisation 45 57 97 126 143 170 189 216 237Net financial items -43 -51 -125 -57 -29 -36 -32 -28 -17Taxes paid -11 -10 -21 -28 -34 -36 -45 -53 -64Other items -1 -5 32 -5 0 0 0 0 0

Change in working capital -141 27 3 -138 -183 -39 -93 -99 -120Cash flow from operations -56 88 277 210 208 395 423 506 588

Capex -16 -570 -230 -288 -357 -341 -283 -280 -308Capex/D&A 34.8% 1008.1% 237.1% 227.8% 250% 200% 150% 130% 130%capex/sales (%) 1.5% 39.0% 14.6% 15.5% 15.8% 12.8% 9.1% 7.8% 7.4%Free cash flow pre-dividend -72 -482 47 -78 -149 54 140 225 280Free cash flow pre-dividend/revenues (%) -6.8% -33.0% 3.0% -4.2% -6.6% 2.0% 4.5% 6.3% 6.7%

Other investing activities -5 -56 35 54 0 0 0 0 0Dividend -18 -12 -7 -26 -26 -25 -99 -122 -145Cash surplus (post dividend) -94 -550 75 -50 -175 29 41 103 135Other and financing -433 -87 121 980 0 0 0 0 0Change in net cash (net debt) -527 -637 197 930 -175 29 41 103 135Net debt (cash) 527 1,164 967 37 212 184 142 39 -95


Inventories 216 310 225 280 451 479 559 645 748Receivables 112 170 178 300 363 428 500 577 669Cash and cash equivalents 31 50 67 724 724 724 724 724 724Other 0 0 0 0 0 0 0 0 0Current assets 359 529 470 1,303 1,538 1,631 1,783 1,945 2,141

Tangible assets 603 1,239 1,279 1,289 1,503 1,673 1,767 1,832 1,903Intangible assets 46 97 97 97 97 97 97 97 97Other 0 28 48 39 42 45 48 51 54Non-current assets 649 1,364 1,424 1,425 1,642 1,815 1,913 1,980 2,054

Total assets 1,009 1,894 1,894 2,728 3,180 3,446 3,696 3,926 4,195

Short-term interest-bearing liabilities 459 911 612 377 377 377 377 377 377Accounts payables 94 266 184 217 263 309 361 417 484Other 9 15 24 29 35 42 49 56 65Current liabilities 562 1,192 820 623 675 728 787 850 926

Long-term interest-bearing liabilities 99 303 422 384 559 530 489 386 251Pension provisions 0 0 0 0 0 0 0 0 0Other 89 146 76 77 77 77 77 77 77Non-current liabilities 188 449 498 461 636 608 566 463 329

Total common equity 259 252 576 1,643 1,869 2,108 2,334 2,598 2,918Minorities 0 0 1 0 0 1 8 14 22




Kuwait Projects Company Holding K.S.C (KIPCO)

(KPRO.KW)



[email protected]

Matija Gergolet

[email protected]


[email protected]

Kuwait: Multi-sector holding

Disclosure on unlisted investment holding back stock

KIPCO is one of the largest listed holding companies in the Middle East, with investments mainly

in financial services and the media sector. In our view, the key issue affecting stock performance is

the lack of disclosure on the company’s largest unlisted media company, OSN. If OSN’s (which is

yet to turn profitable) book value is used, the NAV discount seems marginally more vs. history.

However, if the company-provided NAV (which values OSN at 2x book) is used, the NAV discount

widens to 45% – a level seen only during the 2008-09 crisis. Given limited financial disclosure on

OSN, we believe there is limited catalysts that would drive a higher market value. We use a NAV

discount of 15%, in line with the calculated historical average for the company, to derive our 12-

month target price. This implies upside potential of 24% for the stock.


In 3Q2009, Showtime, KIPCO’s unlisted media holding, merged with Orbit to form OSN.

According to KIPCO, the company was valued at c.2.0x book value after the merger. However,

we believe that until the company publishes details on the valuation and full financials of

OSN, the market is unlikely to assign a value significantly higher than book to this investment.

This makes a considerable impact on valuation given that OSN is the second-largest

contributor to KIPCO’s NAV (20%) after Burgan Bank (46% contribution to NAV).

Burgan Bank is likely to be the primary beneficiary of the US$100 bn Kuwait development

plan within KIPCO’s holdings. Our banks team expect loan growth to accelerate and average

9% (2011-14) on the back of this fiscal stimulus after a contraction in 2010.

Leverage at the parent level has increased over the last few years (from net cash in 1Q2008 to

a 46% debt/equity ratio in 2Q2011); increasing leverage has historically led to NAV

tightening/widening during times of rising/falling markets.

Valuation: We value the company at a 15% discount to NAV, in line with history

Our 12-month price target of KD 0.39 for KIPCO is risk-weighted and NAV-based, where we: (1) use

our analysts’ price targets for covered listed holdings; (2) use market prices when we do not cover

the underlying listed holding; (3) adjust according to the holding structure net debt; and (4) adjust

for assumed NAV discount (see valuation section for details of our NAV discount approach).


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Kipco (KPRO.KW)


Key data Current

Price (KD) 0.32




Free Float (%) 35.0


12/10 12/11E 12/12E 12/13E

Revenue (KD mn) 46.8 47.0 50.8 54.8

EBIT (KD mn) (109.8) (103.1) (108.0) (115.4)

EPS (KD) 0.02 0.03 0.03 0.03

EV/EBITDA (X) NM NM NM 2.5

P/E (X) 23.7 11.8 10.3 9.1

Dividend yield (%) 4.9 6.3 6.3 6.3

FCF yield (%) (0.5) 14.7 24.7 54.8

CROCI (%) (13.7) 0.1 0.3 0.2

EV/GCI (X) 1.0 0.8 0.7 0.5

Net Debt/EBITDA (X) -- -- -- --

260

280

300

320

340

360

380

400

420

440

460

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50



Kipco (L) MSCI EM EMEA (R)



Investment drivers


Kuwait’s US$100 bn, four-year development plan focuses on upgrading infrastructure and

expanding the hydrocarbon sector. Although the development plan has stalled recently, we

expect spending to start to accelerate from 2012. This, according to our banks team, should

translate into loan growth of 9% (2011-14 CAGR) for Burgan and lead ROE to accelerate to 14%

in 2014. Reflecting Burgan’s reliance on North African markets, which constitute 30% of its

revenue (2010), this 9% loan growth forecast is below the expected sector growth of 11%.

OSN is the largest digital satellite premium pay-TV operator in the MENA region, with a

subscriber base of 498,000 (2Q2011). OSN is a scarce asset and has the potential to grow quickly

given the low penetration levels in the region (5%). However, pay-TV operators have yet to

demonstrate success in the region owing to piracy. OSN continues to make losses two years

after the merger. Given that the company only discloses headline numbers, we find it difficult to

assign a value higher than 1.25x book, compared with the company-assigned value of 2.0x for

the NAV calculation. To cross-check our valuation approach, we have used price/sales multiples

for global peers, which imply a similar valuation.

All other investments of KIPCO group (United Gulf Bank, United Industries Company, United

Real Estate Company and Gulf Insurance) are listed, and we value them at market prices. Any

exit over and above the current market price would lead to upside risk to our price target (the

company has a track record of generating 20% IRR since 1995).


Recent changes in capital market law in Kuwait now require bidders to make a 100% tender

offer if the stake sold is over 30%. In our view, this would make it difficult for KIPCO to exit its

controlling stakes in listed companies as the buyer would need to offer the same price to all the

shareholders. We conservatively do not assign a control premium on KIPCO’s holdings.

Longer than expected delays in the Kuwait development plan would affect our valuation on

Burgan Bank.

Industry context

The group’s holdings are predominantly financials and media. Burgan Bank is the fourth-largest

commercial bank in the country by assets, with market shares of 8% in loans and 6% in deposits.

OSN is the largest pay TV operator in MENA, where pay TV penetration is only 5% versus 91% in the

US and 55% in the UK. Burgan Bank and OSN represent c.70% of KIPCO’s NAV.

Company description

KIPCO is one of the largest listed holding companies in the

Middle East, with significant stakes in financial services,

industrial and media companies. It owns 59.5% of Burgan

Bank (commercial bank), 95.9% of United Gulf Bank (asset

mgmt and investment banking), 44% of Gulf insurance, 60.4%

of Orbit Showtime (media), 67% of United Industries Company

(owns SADAFCO) and 61% of United Real Estate Company. All

the holdings except OSN are listed. The KIPCO group focuses

on investments in the MENA region and has over 8,000

employees.

Revenue by geography exposure (2010A)

NAV by holding 2011E


Kuwait68%

Rest of GCC13%

MENA19%

United Gulf Bank 21%

Burgan Bank 46%

Gulf Insurance

5%

United Real Estate

company5%

United Industries company

3%

OSN20%



Key financial ratios for KIPCO: Current NAV discount in line with historical average

Exhibit 608: NAV discount if OSN is valued at book is relatively small

Exhibit 609: Average price/book multiple for the company is 1.15x; however,

KIPCO has traded below book after 4Q2008



Exhibit 610: KIPCO is majority owned by the Kuwait ruling family

Exhibit 611: Gearing at the parent level has been trending upwards (parent

level net debt, 2006-15E)



-48%-45%

-6%-9% -10%

-17%

2% 1%

7%

-42%-46%

-12%

-4%

24%

-23%-20%

-26%-32%

-24%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Average discount 15%

company

provided NAV

GS calcualated NAV

1.99

0.72 0.660.81

0.00

0.50

1.00

1.50

2.00

2.50

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Average 1.15x

Al Futtooh Holding

Company (AFH)58%

Treasury shares

7%

Free Float35%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11

Parent level Net debt (Cash) Parent level Net debt (cash) / equity



Holding company profiles: Predominantly financials and media

Burgan Bank: 46% of NAV

Burgan Bank is Kuwait’s fourth-largest commercial bank by assets, and has 23 branches. Burgan is one of the most diversified banks

in the region, generating 30% of revenues from North Africa (2010). Burgan has controlling stakes in Gulf Bank of Algeria, Jordan

Kuwait Bank and Bank of Baghdad. Burgan is listed on the Kuwait Stock Exchange.

Orbit Showtime Network (OSN): 20% of NAV

OSN is the leading pay-TV operator in the MENA region. The company is the result of a merger between Showtime and Orbit, which

was completed in 2009. OSN offers 85 channels providing the latest Hollywood movies and series, international sports and Arabic

content. The company is unlisted.

United Gulf Bank: 21% of NAV

United Gulf bank (UGB) is KIPCOs investment banking operation based in Bahrain. Offering a range of commercial and investment

banking services, the bank also manages a diversified portfolio of investments in private equity funds. UGB is listed on the Kuwait

and Bahrain Stock Exchanges.

Gulf Insurance Company (GIC): 5% of NAV

Gulf Insurance Company is the leading insurance company in Kuwait, with offices in Saudi Arabia, Jordan, Lebanon, Syria, Egypt

and Bahrain. GIC offers a full range of products including life, motor, accident and medical insurance. The company is listed on the

Kuwait Stock Exchange.

United Real Estate Company: 5% of NAV

United Real Estate Company (UREC) is KIPCO’s real estate development company. UREC is currently developing properties in

Kuwait, Oman, Egypt, Qatar, Jordan, Syria, the UAE and Lebanon. These properties include residential, commercial, leisure and

retail projects. The company is listed on the Kuwait Stock Exchange.

United Industries Company (UIC): 3% of NAV

United Industries Company (UIC) is KIPCO’s industrial holding company. UIC has holdings in a variety of industrial sectors including

stakes in SADAFCO (one of the leading food manufacturers in Saudi Arabia) and Qurain Petrochemical Industries (investment in

ethylene and benzene plants). UIC is listed on the Kuwait Stock Exchange.



Exhibit 612: To calculate NAV discount for KIPCO, we start with the historical discount and adjust for the factors highlighted below 21 interrelated factors driving holding company NAV discount and premium


Holding company discount/premium

Company leverage

Relative liquidity

Asset scarcity

Diversification

TurnoverTransparency

Org. complexity

Control of holdings

Regulatory risks Yield enhancement

Minority protection

Borrow stability

Synchronization risk

Convergence risk

Risk aversion

Stub volatility

Company-specific factors Limits to arbitragePortfolio management

Arbitrage costs

Track record

Investment style

Contingencies

Operating costs



Valuation: NAV-based approach leads to 12-month target price of KD0.39

Exhibit 613: Valuation methodology


Listed Holding

Reuters ticker Company name Sector % stake* Market cap (KD m) Target price NAV (KD m) Analyst % of NAVBurg. KW Burgan Bank Financials 40.95% 674 0.58 350 Waleed Mohsin 65%UGBB.BH United Gulf bank Financials 85.55% 181 155 NC 29%GINS.KW Gulf Insurance Financials 38.77% 91 35 NC 7%UICK.KW United Industreis Co KSC Industrial 40.07% 51 20 NC 4%UREK.KW United Real Estate Co KSC Real Estate 33.11% 119 39 NC 7%

Unlisted Holdings Valuation methodology Multiple Year % of NAVOSN Media 60.40% Book value 1.25x 187.5 2010 35%GS comparable universe** Implied Price/Sales 2012 3.7x

Parent level Net debt Valuation methodology NAV (KD m) % of NAV-246 -46%

NAV Value pre discount 540 100%

Holding discountCompany historical level discount (2007-2010) 15%Adjustment for latest changesChange in capital market law 5%Acquisition of unique Asset (post merger OSN is the largest media company) -5%Assumed NAV discount 15%

NAV Value post discount 459 Upsides

NAV / share 0.39 24%



Financials: Burgan Bank’s performance to drive earnings

Given Burgan Bank’s large share of KIPCO’s financials (as the second-largest holding, OSN, is yet to be profitable), we continue to

expect the bank to drive earnings growth for KIPCO. Our banks analysts forecast net income growth for Burgan Bank to reach 17%

(2011-14 CAGR), driven by 6% growth in net interest income and cost of risk normalizing to 0.560% in 2014 (from 2.83% in 2010)–

shown in net financial items. Group sales are generated only from OSN; sales at the company were down 19% in 2010 as it moved

to a new platform. Given that KIPCO consolidates Burgan Bank, it generates the largest part of income from financial items,

resulting in negative EBITDA and a net cash position in the cash flow statement. No depreciation figure was provided prior to 2009.

Exhibit 614: KIPCO earnings to be driven by cost of risk normalization for Burgan and acceleration in loan growth

2006-16E P&L, KD mn


Kuwait Projects Company Holding K.S.CSummarised P&L IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016EGroup Sales 4 44 53 57 47 47 51 55 59 64 69Growth 1130.2% 19.9% 8.6% -18.5% 0.4% 8.0% 8.0% 8.0% 8.0% 8.0%

Group EBITDA (clean) -46 -105 -78 -56 -84 -78 -83 -91 -97 -97 -96Group EBITDA margin -1281.4% -237.2% -148.4% -97.1% -180.1% -165.0% -163.2% -165.2% -163.9% -151.8% -138.6%

Group EBIT (clean) -46 -105 -78 -80 -110 -103 -108 -116 -123 -123 -122Group EBIT margin

Share of associates 57 53 -3 -1 5 9 9 9 10 10 10Net financial items 54 174 127 130 152 145 156 171 173 176 158Pre-tax (clean) 65 122 46 49 47 50 57 64 60 63 46Non-recurring ItemsPre-tax (reported) 65 590 46 55 75 50 57 64 60 63 46Tax 0 -15 -4 -8 -13 -8 -9 -10 -9 -10 -7Tax rate (%) 0% 3% 7% 14% 19% 19% 19% 19% 19% 19% 19%

Profit after tax (reported) 65 576 42 47 62 42 48 54 51 53 39Minorities -15 -54 -18 -10 -17 -11 -13 -15 -14 -14 -10Net income (reported) 50 522 24 37 45 31 35 39 37 39 29Post-tax exceptionals 0 456 0 -3 -25 0 0 0 0 0 0Net income (clean, continuing operations) 50 978 24 33 20 31 35 39 37 39 29

EPS (clean, fully diluted) 0.040 0.053 0.021 0.028 0.017 0.026 0.030 0.034 0.031 0.033 0.025DPS (clean, fully diluted) 0.02 0.04 0.08 0.04 0.02 0.02 0.02 0.02 0.02 0.02 0.02



Exhibit 615: We expect Burgan Bank’s loan growth to accelerate to 10% in 2013 – shown in receivables Balance sheet and cash flow statement, 2006-15E, KD mn



EBIT -46 -105 -78 -80 -110 -103 -108 -116 -123 -123Depreciation/Amortisation 0 0 0 24 25 26 26 26 26 26Net financial items -31 13 61 67 69 70 75 84 84 84Taxes paid 0 -15 -4 -13 -13 -8 -9 -10 -9 -10Other items 22 105 109 18 10 75 82 88 90 92

Change in working capital 92 -320 293 92 16 8 59 207 234 264Cash flow from operations 37 -321 381 109 -3 67 123 277 300 333

Capex 0 0 0 0 0 0 0 0 0 0Capex/D&A 0.0% 0.0% 0% 0% 0% 0% 0%capex/sales (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Free cash flow pre-dividend 37 -321 381 109 -3 67 123 277 300 333Free cash flow pre-dividend/revenues (%) 1039.1% -728.2% 719.8% 189.8% -6.4% 142.8% 243.2% 505.3% 507.5% 520.6%

Other investing activities -63 931 -21 -97 159 0 0 0 0 0Dividend -26 -51 -92 -52 -33 -24 -24 -24 -24 -24Cash surplus (post dividend) -51 558 268 -39 123 44 100 253 277 309Other and financing 12 -29 -34 17 -11 0 0 0 0 0Change in net cash (net debt) -39 529 234 -22 112 44 100 253 277 309Net debt (cash) 343 -313 -401 -363 -186 -230 -330 -583 -860 -1,169


Inventories 0 0 0 0 0 0 0 0 0 0Receivables 72 1,696 2,519 2,425 2,271 2,397 2,547 2,791 3,058 3,351Cash and cash equivalents 212 879 972 1,028 1,144 1,144 1,144 1,144 1,421 1,730Other 0 0 0 0 0 0 0 0 0 0Current assets 284 2,575 3,491 3,453 3,415 3,541 3,690 3,935 4,479 5,081

Tangible assets 7 64 74 118 492 466 441 415 390 364Intangible assets 142 319 417 526 499 499 499 499 499 499Other 925 1,321 1,196 1,230 1,255 1,264 1,272 1,282 1,291 1,301Non-current assets 1,074 1,704 1,687 1,874 2,246 2,229 2,213 2,196 2,180 2,164

Total assets 1,359 4,279 5,178 5,327 5,661 5,770 5,903 6,131 6,659 7,245

Short-term interest-bearing liabilities 262 298 397 368 419 419 419 419 419 419Accounts payables 322 1,622 2,484 2,408 2,573 2,742 2,941 3,261 3,615 4,008Other 155 1,109 1,280 1,386 1,119 1,084 1,093 1,224 1,370 1,534Current liabilities 739 3,029 4,161 4,162 4,110 4,244 4,452 4,903 5,404 5,961


232 663 544 544 560 567 579 595 608 624Minorities 94 319 300 324 452 463 476 491 504 518




Kuwait Food Company – Americana (FOOD.KW)


Matija Gergolet

[email protected]


[email protected]

Arsalan Mustafa,CFA

[email protected]

Kuwait: Restaurants & Beverages

Expanding both the franchise restaurants and meat business

Americana is the leading casual dining franchise operator in the MENA region and is planning to

accelerate restaurant openings over the next three years including entering new markets in the

CIS region. In the frozen and processed meat division, the company has a leading market share in

Kuwait and a large share in Saudi and Egypt and plans to increase its product offering through co-

branding activities.


Americana plans to open c.130 new restaurants pa over the next three years vs. 85 openings

pa over the previous two years. The company plans to expand its most popular franchise of

KFC, Pizza Hut and Hardee’s in Kazakhstan while in the home market of MENA it intends on

expanding its offering in the higher-end segment. It recently acquired the franchise of Red

Lobster, Olive Garden and Longhorn Steakhouse from the Darden group for most countries in

the MENA region. We conservatively estimate the company will open 100 new restaurants pa

over the next three years.

In the manufactured food segment, which largely comprises frozen meat in the Gulf and fresh

poultry in Egypt, Americana plans to increase outsourcing activities in the areas of logistics

and some manufacturing activities. This will increase efficiencies and keep capex low, in our

view.

Although increased capex will be required for new restaurants openings, we forecast strong

cash flow generation will keep net debt to EBITDA below 1.0x over the forecast horizon.

Given the company’s relatively large operation in Egypt, continued political unrest in the

country may result in lower-than-forecast earnings. Higher-than-expected revenue/store and

new store openings represent upside risks to our estimates.

Valuation: We value the company at 6.6x EV/EBITDA, in line with history

Americana is trading on a 2012E EV/EBITDA and P/E of 5.1x and 11x, respectively, which is below

the median multiples of the last 5 years of 6.6x and 17.3x, respectively. Americana’s stock price

has fallen by 10% YTD, outperforming the local index by 6%. Based on our average 2012/2013

EV/EBITDA methodology, and using the firm’s historical multiple, our 12-month price target is

KD1.94, which implies 31% potential upside. Our rating is Neutral.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Kuwait Food Company (Americana) (FOOD.KW)


Key data Current

Price (KD) 1.48




Free Float (%) 33.2


12/10 12/11E 12/12E 12/13E

Revenue (KD mn) 680.7 728.9 800.5 877.6

EBIT (KD mn) 58.1 62.4 74.9 82.9

EPS (KD) 0.09 0.10 0.13 0.15

EV/EBITDA (X) 6.1 5.6 5.1 4.8

P/E (X) 17.3 14.3 11.0 9.8

Dividend yield (%) 4.3 4.4 4.4 4.4

FCF yield (%) 11.4 1.6 2.3 3.9

CROCI (%) 19.0 14.1 13.2 13.0

EV/GCI (X) 1.1 1.0 0.9 0.8


260

290

320

350

380

410

440

470

500

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

1.70



Kuwait Food Company (Americana) (L) MSCI EM EMEA (R)



Investment drivers: Restaurant expansion to drive growth


The company plans to add 400 new food and beverage outlets over the next three years from

the current 1,200 outlets. This represents an acceleration of store openings vs. the previous two

years when 169 outlets were added. To achieve this target, Americana plans to expand outside

the MENA region, specifically targeting Kazakhstan where it has the franchise for Hardee’s, Pizza

Hut and KFC. In the GCC, the firm is focusing on higher-end segments and plans to expand the

recent franchise addition of Red Lobster, Olive Garden and Longhorn Steakhouse from the

Darden group. Americana secured the franchise for the three brands in seven countries (six Gulf

countries + Lebanon and Egypt) and has stated plans to open 60 restaurants of the Darden

group over the next five years.

In the industrial sector, which largely comprises frozen meat in the Gulf and fresh poultry in

Egypt, the company plans to increase its product offering through co-packaging activities,

allowing it to leverage its strong brand in the region while keeping capex low. Additionally, it

plans to expand the use of outsourcing in the fields of logistics, utilizing the warehouse facilities

of third-party specialist to reduce costs and focus on the core business. We forecast this

increased use of outsourcing will reduce SG&A expenses as a % of sales to 8.8% in 2012E from

9.2% in 2010.

Although leverage is expected to pick up with the increase in capex for new restaurant

openings, we expect strong cash flow generation to keep net debt/EBITDA below 1.0x and

CROCI to average 13% over the next five years.


As part of its liquidity management, Americana regularly invests in listed equity securities.

Gains or losses on these securities may result in higher/lower-than-forecast cash generation.

Given the company’s relatively large operation in Egypt, continued political unrest in the

country may result in lower-than-forecast earnings.

Industry context

The market for chain consumer foodservices in Saudi Arabia (the largest market in the Gulf) stood at

SR20 bn at the end of 2010, and has been growing at 7%-10% over the last five years. Americana’s

franchise of KFC and Pizza Hut are among the top five players, each with a market share of 4%. The

largest player in the Saudi market is McDonalds with a market share of 8% (source Euromonitor). In

the frozen and processed meat segment, the company has the leading market share in Kuwait with

39% and 55%, respectively.

Company description

Americana (Kuwait Food Company) was established in 1964

and has two business segments: (1) Operating franchised food

& beverage outlets and (2) Manufacturing food products

across the MENA region. The company has over 1,200 outlets

and is a franchise operator for 20 leading chains such as KFC,

Pizza Hut, Hardees’s, Costa Coffee etc and also operates nine

own brand chains. Americana, under its manufactured food

business, is present in frozen meat & poultry (owns the listed

Cairo Poultry in Egypt), canned foods, snacks, animal feed and

manufactures retail brands like Koki, Americana meat. It has

c.45,000 employees.




Kuwait13%

Saudi Arabia18%

South Gulf24%

Egypt and Africa40%

Shams and others

5%

Restaurant sector54%

Manufactured food

45%



Key financial ratios: We forecast CROCI to remain over 13%

Exhibit 616: We forecast margins to gradually improve as the share of

higher-margin restaurants increases in the overall sales mix

Exhibit 617: CROCI increased in 2010 due to one-off dividend income from

investments



Exhibit 618: Kharafi group is a private Kuwaiti-based holding company with

investments in financial services, telecom, retail and construction

Exhibit 619: We expect a pick-up in gearing as the firm increases capex to

open 400 new restaurants over the next three years



8%

10%

12%

14%

16%

18%

20%

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

KD

mn


0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

KD

mn

GCI CROCI (RHS)

Al Kharafi group67%

Free Float33%

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Valuation, growth and returns: We use 6.6x EV/EBITDA, in line with history

Exhibit 620: At our price target, the company would trade at 14x 2012E earnings


Kuwait Food Company Consumer cyclicalsY/E December Restaurants and BeveragesKDmn Restaurants

Share price (SR) 1.48 12-month price target (SR) 1.94 $/SR (spot) 0.28Market cap 595 Potential upside/(downside) 31%


EBITDA 2013E


EV/Sales 1.6 1.0 0.9 0.8 0.7 0.7 Kuwait Food Company 114 125 6.6 753 825EV/EBITDA 8.6 6.8 6.1 5.6 5.1 4.8 Group EBITDA 114 125 6.6 753 825EV/EBIT 11.7 11.4 10.2 9.1 7.9 7.4 Add

EV/DACF 9.0 7.2 6.0 7.4 7.3 6.8 Associates 0 0EV/NOPLAT 13.0 13.3 11.5 10.1 8.8 8.2 Investments 184 184EV/GCI 1.8 1.1 1.1 1.0 0.9 0.8 EV post-discount 937 1,010

Less 0 0P/E 15.4 22.0 17.3 14.3 11.0 9.8 Net debt/(cash) 100 108P/B 3.6 2.0 1.8 1.7 1.5 1.4 Minorities 61 72P/CFO 7.9 6.4 5.3 6.3 5.8 5.3 Pensions and other 22 22FCF yield -3.4% 11.4% 8.5% 1.1% 1.6% 2.7% Equity Value 755 808Dividend yield 3.3% 4.5% 4.3% 4.4% 4.4% 4.4% No. of shares, mn 402 402




ROE 12% 14% 15% 15% 14% 15% EBIT growth 79.5% -32.0% 11.3% 7.5% 19.9% 10.7%

Net debt/EBITDA 1.38 1.10 0.69 0.85 0.87 0.86 Net income growth 109.6% -55.6% 39.2% 17.1% 30.4% 11.3%

Net debt/equity 51% 29% 17% 21% 22% 22% EPS growth 109.6% -55.6% 39.2% 17.1% 30.4% 11.3%



Financials: We forecast average revenue growth of 9% over the next five years

We forecast average revenue growth of 9% in 2011-15, driven by 12% growth in the restaurant division and 6% growth in the

manufactured food segment. In the restaurant sector, we forecast average growth of 4% in same restaurant sales vs. 7% over the

last five years. In the manufactured food segment, the company generates 60% revenue from the Egyptian market and 20% from the

Saudi market. In the Egyptian operation, it generates a large part of its revenue from the listed Cairo Poultry – a vertically integrated

poultry producer with operations that span the entire poultry cycle along with animal feed. In Saudi Arabia, the group is one of the

leading providers of frozen meat and related products. We forecast the Egyptian and Saudi operation to grow in line with population

growth and inflation.

Exhibit 621: We forecast EBIT growth of 8% for 2011 (was up 10% at 9M2011) thanks to the opening of new restaurants

2006-2015E P&L, SR mn



Restaurant sector 185 229 283 322 364 398 451 508 560 607Manufactured food 139 206 275 292 320 334 355 377 400 426Group revenues 324 435 557 616 681 729 801 878 952 1,022Growth 33.2% 34.3% 28.2% 10.6% 10.4% 7.1% 9.8% 9.6% 8.5% 7.4%



Share of associates 0 1 1 0 0 0 0 0 0 0Net financial items -5 -7 -11 -14 -9 -7 -5 -5 -4 -2Pre-tax (clean) 34 36 66 39 49 55 70 78 92 104Non-recurring Items 5 28 -21 11 12 10 0 0 0 0Pre-tax (reported) 39 64 45 50 61 65 70 78 92 104Tax -3 -5 -4 -7 -7 -7 -7 -8 -9 -10Tax rate (%) 8% 8% 10% 14% 11% 10% 10% 10% 10% 10%

Profit after tax (reported) 36 59 41 43 54 59 63 70 83 93Minorities -2 -4 -6 -6 -8 -8 -10 -11 -13 -14Net income (reported) 34 55 35 36 46 50 53 59 70 79Post-tax exceptionals 5 28 -21 11 12 10 0 0 0 0Net income (clean, continuing operations) 29 27 56 25 35 41 53 59 70 79




Exhibit 622: We forecast a pick-up in leverage to finance the capex in the restaurant sector Balance sheet and cash flow statement, 2006-2015E, SR mn



EBIT 38 43 77 52 58 62 75 83 97 105Depreciation/Amortisation 15 19 28 35 36 36 39 42 44 45Net financial items -5 -8 -10 -13 -9 -7 -5 -5 -4 -2Taxes paid -3 -5 -4 -7 -7 -7 -7 -8 -9 -10Other items 11 18 22 21 37 10 0 0 0 0

Change in working capital -13 1 -53 30 -7 -3 -4 -5 -5 -4Cash flow from operations 44 67 59 118 108 92 98 107 122 134

Capex -41 -53 -90 -49 -52 -85 -87 -89 -53 -54Capex/D&A 284.2% 284.8% 327.8% 139.0% 142.4% 234% 222% 212% 122% 120%capex/sales (%) 12.8% 12.3% 16.2% 7.9% 7.6% 11.7% 10.9% 10.2% 5.6% 5.3%Free cash flow pre-dividend 3 14 -31 69 56 7 10 18 69 80Free cash flow pre-dividend/revenues (%) 0.8% 3.1% -5.6% 11.1% 8.2% 1.0% 1.3% 2.0% 7.2% 7.8%

Other investing activities -37 -11 -16 13 4 0 0 0 0 0Dividend -8 -14 -11 -29 -25 -26 -26 -26 -26 -32Cash surplus (post dividend) -42 -12 -58 52 34 -19 -16 -8 43 48Other and financing -2 -26 -1 -4 -3 0 0 0 0 0Change in net cash (net debt) -44 -38 -58 48 31 -19 -16 -8 43 48Net debt (cash) 47 85 144 96 65 84 100 108 65 17




Total assets 416 584 555 590 626 686 751 816 843 869







Lafarge Ciments SA (LAC.CS)



[email protected]

Matija Gergolet

[email protected]

Morocco: Construction/Building Materials

Loss of market share and excess supply offset attractive industry demand dynamics

The Moroccan cement industry enjoys a strong demand outlook and Lafarge Ciments SA (Lafarge

Ciments) has a leading market share. However, the group has been losing share to Ciments de

l’Atlas and currently caters to the North and North-Western Morocco market which is

oversupplied. We initiate with a Neutral rating as we see limited upside to the company’s market

share and believe it will suffer relative pricing pressure due to its oversupplied end-markets.


Lafarge Ciments’s market share has declined to 38.9% in 2010 from 41% 2009 due to the entry

of a new domestic player, Ciments de l'Atlas. Given that Lafarge Ciments has the largest

market share versus the other three major players, and caters to the same region as Ciments

de l'Atlas which began operations in 2010, we see downside risk to its market share.

Lafarge Ciments’s production facilities are located in North West and West Morocco which

has 62% of cement capacity in the country, resulting in a highly competitive market which

may pressure pricing in the near term. We estimate the company’s revenue per tonne to grow

1% in 2011, 2.5% in 2012 and 4% in 2013.

We expect the Moroccan cement industry to benefit from increased activity in the

construction sector on the back of the government’s incentives to revive social housing,

infrastructure and tourism. However, in our view, loss of market share will partially offset any

volume gains for Lafarge Ciments. We forecast total volumes (cement, ready mix and

aggregates) to rise 3.2% in 2011, 5.5% in 2012 and 7.5% in 2013.

We also expect the company to increase its dividend payout ratio to 70% vs. 68% in 2010 and

60% in 2009 on the back of an improving cash position.

The downside risk to our view is greater-than-expected pressure on pricing. An upside risk is

higher-than-expected construction activity.

Valuation: Trading lower than the historical median, but above global peers

Lafarge Ciments trades on 8.7x 2012E EV/EBITDA, above the global peer group 5-year median of

8.6x but below its historical median of 12.0x. The stock is down 32% YTD, and down 14% YTD vs.

MSCI EEMEA. Based on our 2012/13E EV/EBITDA valuation methodology using the stock’s 5-year

multiple of 12.0x, we derive a 12-month price target of Dh2,157, implying 49% potential upside.


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Lafarge Ciments (LAC.CS)


Key data Current

Price (Dh) 1,448.00




Free Float (%) 12.6


12/10 12/11E 12/12E 12/13E

Revenue (Dh mn) 5,353.7 5,579.9 6,033.4 6,744.6

EBIT (Dh mn) 2,405.7 2,317.4 2,501.6 2,887.4

EPS (Dh) 97.16 93.86 100.80 116.37

EV/EBITDA (X) 12.0 9.4 8.7 7.6

P/E (X) 19.9 15.4 14.4 12.4

Dividend yield (%) 3.4 4.5 4.9 5.6

FCF yield (%) 4.8 4.0 4.2 5.0

CROCI (%) 22.6 19.4 19.0 19.7

EV/GCI (X) 3.4 2.3 2.1 1.9


260

280

300

320

340

360

380

400

420

440

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300



Lafarge Ciments (L) MSCI EM EMEA (R)



Investment drivers: Positive industry outlook offset by location disadvantage


The government has initiated major programmes including tax breaks and subsidies for

developers and buyers and made available 3,853 hectares of land for social housing to bridge

the 1mn affordable housing unit deficit in Morocco. We believe this initiative, with the current

goal of building 200,000 units a year, will drive demand for cement through 2015. We currently

estimate 5% CAGR in domestic consumption of cement through 2015 and expect Lafarge

Ciments to benefit from this demand uptick.

However, we expect the company’s top line to grow at a slightly slower pace than competitors’

due to the location of its plants in the North and North-Western parts of Morocco.

We also expect operating margins to be under pressure, in line with industry-wide increases in

fuel and energy costs near term. We model operating margins of 42% in 2011 and 2012 and 43%

in 2013 versus 50% in 2009 and 45% in 2010.

Lafarge Ciments is planning to construct a new cement plant in Souss with an estimated

capacity of 1.2-1.5mn tonnes to tap the demand in South Morocco. The facility is expected to be

operational in 2014 and will help the company increase its market share in the South.

The world’s largest cement producer Lafarge has a 69% stake in Lafarge Ciments, giving the

company access to advanced technology and best practices.


Lafarge lost 2.1% market share to the new player Ciments de l'Atlas in 2010 and it may lose

more share as Ciments de l’Atlas’s second plant becomes operational. Higher-than-expected

construction activity in Morocco is an upside risk.

Industry context: Outlook positive with the government housing stimulation programme

The Moroccan cement industry has been growing at a CAGR of 8% since 2002 due to consistent

growth in demand from the construction industry. Some 80% of cement demand is from residential

construction (including civil engineering for housing programmes), 14% from infrastructure and 6%

from non-residential construction. Total cement production capacity in the country is 18.8mn tonnes

currently while the consumption is 14.6mn tonnes. Moroccan per capita cement consumption is

470kg versus 540kg in North Africa. The outlook for the Moroccan cement industry is positive due to

the social housing stimulation programme initiated by the government. It is currently dominated by

international players operating 13 cement plants in Morocco running at an average utilization of

78%. Lafarge has the highest domestic market share of 38.9%, followed by Ciments du Maroc with

26%; Holcim Maroc has 24.5% while the new domestic player Ciments de l’Atlas has 2.9%.

Company description

Lafarge Ciments, a subsidiary of the world’s largest cement

producer Lafarge, was established in 1968. The company has

a leading market share of 39% in Morocco. It currently has

6.3mn tonnes of installed capacity and plans to add

1.2-1.5mn tonnes by 2014. Lafarge services the North and

North-Western part of the country through its cement plants in

Bouskara (Casablanca), Méknes and Tétouan and grinding

plant in Tanger. The plants in Tanger and Méknes are

operated in partnership with Société Nationale

d’Investissement (SNI). The company has c.1,022 employees.




Morocco100%

Cement57%Aggregate

& Concrete35%

Plaster & Others

8%



Key financial ratios: Falling leverage, rising CROCI and stable margins

Exhibit 623: We are forecasting stable margins post 2012E

Exhibit 624: CROCI to improve post 2012E, but not to historical levels



Exhibit 625: Lafarge Ciments’ shareholding structure

Exhibit 626: Low gearing; net cash position after 2013E



0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n


0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Dhm

n

GCI CROCI (RHS)

Lafarge Maroc69%

Groupe Caisse de

Dépôt et de Gestion

8%

Banque Islamique de Développeme

nt 5%

Caisse Interprofessio

nnelle Marocaine de

Retraites4%

Lafarge Cementos

1%

Free Float13%

-1.0x

-0.8x

-0.6x

-0.4x

-0.2x

0.0x

0.2x

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E




Details of Lafarge Ciments’ production facilities

Exhibit 627: Lafarge caters to North and North-Western Morocco

Distribution of cement plants of Lafarge in Morocco


Exhibit 628: Lafarge plans to increase capacity by 1.2-1.5mn tonnes in 2014E

Production, capacity and average revenue per tonne for Lafarge, 2010-2015E

Source: Company data, Goldman Sachs Research (2010 ready mix and aggregates & others are GS estimates).


CASABLANCAMEKNES

TANGER

Revenue Drivers 2010E 2011E 2012E 2013E 2014E 2015EVolumes SoldCement (000 tons) 5,668 5,929 6,336 6,897 7,304 7,505Ready-mix (000 tons) 3,000 3,048 3,166 3,351 3,448 3,543Aggregates & Others (000 tons) 2,000 2,032 2,111 2,234 2,299 2,362Total 10,668 11,009 11,613 12,483 13,051 13,410

Average revenue per ton sold 502 507 520 540 562 584Growth 1.0% 1.0% 2.5% 4.0% 4.0% 4.0%

Capacity 6.3 6.3 6.3 6.3 7.7 7.7



Valuation, growth and returns: Lafarge Ciments is trading below historical multiples

Exhibit 629: Lafarge trades on a 2012E EV/EBITDA of 8.7x, above the global peer group 5-year median multiple of 8.6x but below its own 5-year median of 12.0x


Lafarge Ciments IndustrialsY/E December ConstructionDhmn Construction: Building Materials



EBITDA 2013E


EV/Sales 7.3 4.8 6.3 4.6 4.2 3.8 Cement and Concrete 2,952 3,379 12.0 35,427 40,549EV/EBITDA 14.1 8.5 12.0 9.4 8.7 7.6 Group EBITDA 2,952 3,379 12.0 35,427 40,549EV/EBIT 15.7 9.5 14.1 11.0 10.2 8.9 AddEV/DACF 19.3 11.5 15.2 12.4 11.5 10.1 Associates & Investments 57 58EV/NOPLAT 21.6 13.4 19.8 15.5 14.4 12.5 EV 35,484 40,607EV/GCI 4.1 2.7 3.4 2.3 2.1 1.9 Less

Net debt/(cash) 103 69P/E 21.0 13.3 19.9 15.4 14.4 12.4 Pensions 276 276P/B 6.3 4.2 5.4 3.8 3.5 3.1 Minorities 8 8PEG (rolling 3-year CAGR) 3.2 1.3 1.0 0.9 Provisions/other 0 0P/CFO 18.8 11.4 15.1 12.3 11.4 10.0 Equity Value 35,097 40,254FCF yield 1.3% 4.7% 4.8% 4.0% 4.2% 5.0% No. of shares 17 17Dividend yield 4.7% 4.5% 3.4% 4.5% 4.9% 5.6% Implied per share valuation, Dh 2,009 2,304 2,157

Returns and gearing 2008 2009 2010 2011E 2012E 2013E Growth 2008 2009 2010 2011E 2012E 2013ECROCI 23.0% 24.4% 22.6% 19.4% 19.0% 19.7% Sales growth 12.8% 10.7% -1.6% 4.2% 8.1% 11.8%


ROE 30.1% 31.8% 27.3% 25.4% 25.1% 26.3% EBIT growth 20.3% 19.3% -12.0% -3.7% 7.9% 15.4%

Net debt/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 Net income growth 14.6% 13.5% -11.7% -3.4% 7.4% 15.5%

Net debt/equity 1.1% 2.3% -2.0% 0.3% 1.4% 0.8% EPS growth 14.6% 13.5% -11.7% -3.4% 7.4% 15.5%



Financials: Modest sales growth to partially offset margin pressure in the short term

We expect the company to deliver sales growth of 4.2% in 2011, 8.1% in 2012 and 11.8% in 2013 on the back of net volume growth

of a respective 3.2%, 5.5% and 7.5% and growth in revenue per tonne of 1.0%, 2.5% and 4%. These growth rates are lower versus

peers due to high competition in the regions serviced by Lafarge Ciments. We expect margins to be lower than history in the near

term due to higher energy costs.

Exhibit 630: We expect sales to grow modestly due to competition and margins to stabilize at a lower level vs. history Lafarge Ciments’, 2006-2015E P&L Dh mn



Group revenues 3,732 4,356 4,914 5,441 5,354 5,580 6,033 6,745 7,334 7,837Growth 18.4% 16.7% 12.8% 10.7% -1.6% 4.2% 8.1% 11.8% 8.7% 6.9%



Share of associates 0 0 1 2 0 0 0 0 0 0Net financial items -42 39 40 -13 -11 -4 -17 -19 30 172Pre-tax (clean) 1,324 1,943 2,333 2,723 2,395 2,314 2,485 2,869 3,241 3,729Non-recurring Items 0 -35 -13 -93 -32 0 0 0 0 0Pre-tax (reported) 1,324 1,908 2,320 2,630 2,364 2,314 2,485 2,869 3,241 3,729Tax -346 -456 -633 -769 -685 -670 -720 -831 -939 -1,080Tax rate (%) 26% 24% 27% 29% 29% 29% 29% 29% 29% 29%

Profit after tax (reported) 978 1,452 1,686 1,861 1,679 1,644 1,765 2,038 2,302 2,649Minorities -1 -3 -4 -6 -4 -4 -4 -5 -6 -7Net income (reported) 977 1,449 1,683 1,856 1,675 1,640 1,761 2,033 2,297 2,642Post-tax exceptionals 0 -27 -10 -66 -22 0 0 0 0 0Net income (clean, continuing operations) 977 1,476 1,692 1,921 1,697 1,640 1,761 2,033 2,297 2,642




Exhibit 631: Lafarge Ciments’ FCF continues to improve; we forecast a higher dividend payout ratio of 70%

Lafarge Ciments’ balance sheet and cash flow statement, 2006-2015E Dh mn



EBIT 1,366 1,905 2,292 2,734 2,406 2,317 2,502 2,887 3,211 3,556Depreciation/Amortisation 348 261 261 316 428 413 451 492 536 525Net financial items 42 39 40 -13 -11 -4 -17 -19 30 172Taxes paid -346 -456 -633 -769 -685 -670 -720 -831 -939 -1,080Other items -9 -220 -66 -25 92 0 0 0 0 0

Change in working capital -191 185 70 -26 -354 -9 -18 -28 -24 -20Cash flow from operations 1,209 1,714 1,963 2,217 1,876 2,048 2,198 2,501 2,815 3,153

Capex -643 -810 -1,514 -1,010 -245 -1,033 -1,127 -1,229 -349 -315Capex/D&A 184.9% 310.4% 580.6% 319.7% 57.2% 250% 250% 250% 65% 60%capex/sales (%) 17.2% 18.6% 30.8% 18.6% 4.6% 18.5% 18.7% 18.2% 4.8% 4.0%Free cash flow pre-dividend 567 903 449 1,207 1,631 1,015 1,071 1,272 2,466 2,838Free cash flow pre-dividend/revenues (%) 15.2% 20.7% 9.1% 22.2% 30.5% 18.2% 17.7% 18.9% 33.6% 36.2%

Other investing activities 17 25 17 25 37 0 0 0 0 0Dividend -515 -1,226 -1,677 -1,427 -1,515 -1,158 -1,153 -1,238 -1,428 -1,613Cash surplus (post dividend) 69 -298 -1,212 -194 153 -143 -82 34 1,038 1,225Other and financing 71 -99 104 117 107 0 0 0 0 0Change in net cash (net debt) 141 -397 -1,108 -77 260 -143 -82 34 1,038 1,225Net debt (cash) -1,444 -1,047 60 138 -122 21 103 69 -969 -2,195


Inventories 322 380 477 402 408 425 460 514 559 597Receivables 691 407 504 542 701 731 790 884 961 1,027Cash and cash equivalents 1,444 1,178 99 164 187 187 187 187 1,226 2,451Other 19 146 183 161 158 164 178 199 216 231Current assets 2,475 2,111 1,264 1,270 1,454 1,508 1,615 1,784 2,961 4,306


Total assets 5,806 7,490 7,846 8,553 8,632 9,305 10,089 10,995 11,985 13,120

Short-term interest-bearing liabilities 0 5 5 196 63 63 63 63 63 63Accounts payables 746 420 510 576 597 622 672 752 817 873Other 304 412 568 470 456 475 514 575 625 668Current liabilities 1,050 837 1,083 1,242 1,116 1,160 1,250 1,389 1,505 1,604

Long-term interest-bearing liabilities 0 126 155 106 2 145 227 193 193 193Pension provisions 0 276 259 250 276 276 276 276 276 276Other 302 670 737 893 1,012 1,012 1,012 1,012 1,012 1,012Non-current liabilities 302 1,072 1,150 1,249 1,290 1,433 1,515 1,481 1,481 1,481





Financial advisory disclosure

Goldman Sachs is acting as financial advisor to Saudi Telecom Co in an announced strategic transaction.



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