• Global initiates its coverage on Arkan Building Materials and values the stock at AED4.56 with a SELL recommendation.
• Global initiates its coverage on Union Cement and values the stock at AED4.63 with a HOLD recommendation.
• Global values Fujairah Cement at AED7.91 and recommends a BUY on the stock.
• Global values Ras Al Khaimah Cement at AED2.78 and recommends a REDUCE on the stock.
• Global values Gulf Cement at AED8.06 and recommends a BUY on the stock.
Global Investment House – Kuwait – UAE Cement Sector - UAE accounts for most of the ongoing and planned infrastructure projects among the GCC countries, amounting to an estimated over US$700bn in investments over the next few years. The infrastructure projects being planned in the UAE, many of which are still on the drawing board will see that the construction activity would continue to be brisk for quite some time.
The cement consumption in the UAE has been pretty strong, growing over CAGR of 24% during past four years. Going forward, it is expected that the demand for cement will touch 35mn tons by 2011 as companies and governments utilize their petrodollars into construction and real estate projects. Looking at the scope of it, several players have announced capacity expansions and establishment of new capacities. The total cement capacity is expected to touch almost 41m tons by 2011. Out of which, 60% would account to the listed companies while the rest would be contributed by the unlisted companies.
In UAE, cement prices have gushed on account of booming real estate and construction growth. Recently U.A.E. Ministry of Economy signed an agreement with the cement Factories and Producers Group to increase production and cap prices of cement in another attempt to control domestic inflation, with similar steps to be taken to curb rising energy prices. Under the memorandum of understanding, the cost of a 50-kilogram sack of cement will be capped at AED16, down from AED17, and an unpacked metric ton priced at AED340.
Net sales revenue earned by the cement companies in UAE has increased at a CAGR of 33% during 2003-07. The revenue earned by the company in 2003 amounted to AED1,481mn which rose to AED4,593mn in 2007.
Net profit of the sector increased at a CAGR of 48% from AED397mn in 2003 to AED1,895mn in 2007. In 2007, contribution by Gulf and Sharjah Cement in the total industry profits stood at 22%. National Cement Company follows at third position with a profit of AED202mn and a contribution of 11%.
We have done valuations of five out nine listed cement companies of UAE, which are: Arkan Building Materials (Arkan), Fujairah Cement Industries (FCI), Gulf Cement Company (GCEM), Ras Al Khaimah Cement Company (RAKCC) and Union Cement Company (UCC).
Arkan’s long term strategy is to grow and manage a related portfolio of business that add value to the core operations of the company. For that purpose the company would be continuously looking into buying into existing businesses, acquisition of prominent facilities, joint ventures and strategic alliances with other participants in the regional construction sector. At current price, Arkan’s shares are trading at a P/E multiple of 56.9x and 51.9x for 2008 and 2009 respectively. We, therefore, recommend a ‘SELL’ on the Arkan’s stock, for a medium-term perspective.
Fujairah Cement has been continuously pursuing the path of quality by upgrading its technology. The company is taking steps to integrate the latest quality control and cost saving measures. The company is in the process of expanding its clinker capacity further by 2.25mtpa to 3.75mtpa. The additional capacity would be available upstream in 2009 and would help FCI to maintain its position as a pre-eminent player in the state. It has, a potential upside of 30.8% from its current price level. At current price, FCI shares are trading at a P/E multiple of 11.9x and 7.0x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the FCI stock.
Gulf Cement inaugurated addition of a second clinker production line in May 2007. With the commissioning of the new production line, GCEM expanded its annual production capacity of cement to 2.7mtpa and 3.8mtpa of clinker. To save on rising energy costs, the company has installed a multi-fuel burning system that has the flexibility of converting from one fuel type to another. The stock has a potential upside of 15% from its current price level. At current price, GCEM’s shares are trading at a P/E multiple of 12.9x and 12.3x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the GCEM stock.
Ras Al Khaimah Cement does not have any plans to expand its current clinker or cement capacities at this point in time. Movement in its revenues in the coming years could, therefore, be more price-driven than volume-driven. Its free cash flows remain positive throughout the projected period. Any major capacity expansion planned in the next 2-3 years could, however, impact its free cash flows adversely. Currently, it has, a potential downside of 19.1% from its current price level. At current price, RAKCC shares are trading at a P/E multiple of 29.25x and 26.34x for 2008 and 2009 respectively and, therefore, recommend a ‘REDUCE’ on the stock.
Union Cement’s two-year long massive expansion program implemented at a cost of AED1bn turned it into the largest cement producer in the country with a capacity of 4.3mn tons of clinker and 4.5mn tons of cement in 2007. Apart from the setting up of the clinker kiln, the project also involved setting up of completely covered limestone and silica storage facilities and two clinker silos. At current price, it has, a downside of 8%. UCC shares are trading at a P/E multiple of 22.2x and 18.2x for 2008 and 2009 respectively. We, therefore, recommend a ‘HOLD’ on the stock.
Based on our analysis, we recommend a neutral to positive outlook on the UAE cement sector, driven, mainly, by expectations of sustained growth in future revenues thanks to a plethora of big ticket infrastructure and real estate projects announced/currently underway.
Table 1: Recommendations summary
Company Name Symbol CMP* P/E (08F) P/Bv (08F) Share Value Upside/Downside Recommendation
Arkan Building Materials ARKAN 6.20 56.90 5.20 4.56 -26.5% Sell
Gulf Cement GCEM 7.04 12.89 2.86 8.06 14.5% Buy
Fujairah Cement FCI 6.05 11.90 2.30 7.91 30.7% Buy
Ras Al Khaimah Cement RAKCC 3.44 29.25 2.28 2.78 -19.2% Reduce
Union Cement UNION 5.04 22.20 2.20 4.63 -8.1% Hold
Source : Global Research
* Price As on June 1, 2008
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