Positive outlook on the UAE cement sector. We recommend a “HOLD” on <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Fujairah Cement stock.
Company Background
Global Investment House – Fujairah Cement Industries Results Update. Fujairah Cement Industries (FCI) is one of the seven listed cement companies operating in UAE. It has its plant in Fujairah, UAE, with clinker capacity of 1.6mt and cement capacity of 1.75mt. The company produces various types of cement, such as ordinary portland cement, sulphate resisting cement, moderate sulphate resisting cement, oil well cement and blast furnace slag cement.
FCI is planning to expand its cement capacity by another 0.65mt, to be commissioned by the middle of the next year.
The company is listed on the Kuwait Stock Exchange. In addition, it was also listed on the ADSM in July 2005. The stock turnover of the company has been 310% on the KSE in the year to December 2005, and a more sedate 5% (annualized) on the ADSM during July-December 2005. The high/low prices of the stock on the KSE over the last one year have been KD0.610/0.305.
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Analysis of 3rd Quarter 2005 Results
Sales for FCI increased by 4.8% y-o-y during the quarter to AED91.8mn, taking the total for the first three quarters up by 21.4% y-o-y to AED265.5mn. The cost of sales of AED54.8mn, on the other hand, was almost at the same level as in 3Q2004, with the total for the first three quarters going up by 13.2% y-o-y to AED157.5mn. On the operating expenses side, the general & administrative expenses increased by 56.8% y-o-y during 3Q2005, with the total for the first three quarters going up by 36.3%. The net profit of the company of AED35.4mn increased by 13.7% y-o-y during 3Q2005, with the total for the first three quarters of AED102.7mn going up by 39.5%. The EPS of the company rose by 39.5% to AED0.37 in the first nine months of 2005, from AED0.27 in the first nine months of 2004.
The total assets of the company of AED703.1mn at the end of September 2005 were up 4.7% during year-to-date. While there was an increase of 14.4% in the trade accounts receivable (137 average receivable-days at the end of September 2005, at the same level as at the end of December 2004), inventories increased by 14.8% (131 average inventory-days at the end of September 2005, down from 164 average inventory-days at the end of December 2004) during year-to-date. On the liabilities side, there was a rise in the trade payables of 10.2% year-to-date at the end of September 2005 (115 average payable-days at the end of September 2005, marginally down from 117 average payable-days at the end of December 2004), and a year-to-date decline of 35.2% in the non-current bank borrowings to AED22.5mn at the end of September 2005.
UAE Cement Sector Outlook
According to MEED Projects, projects currently under execution in the GCC, Iran and Iraq are in excess of US$697bn. Out of these, UAE is believed to account for about 32%, or US$224bn worth of projects. Out of an amount of US$294bn proposed to be invested in construction projects all across the GCC (over the next 3-4 years), UAE is believed to account for about 60%, or about US$177bn. Assuming that all the investment projects valued at US$177bn announced in UAE so far are implemented, we project a cement demand growth at a CAGR of over 25% in volume-terms during 2005-’09.
On the supply side, announcements have been made by various incumbent as well as new cement companies for expansion of existing capacities and/or setting up new capacities. New clinker capacities of about 10.9mt and cement capacities of about 16.9mt are believed to be coming up in the UAE in the coming 2-3 years – by way of expansions as well as greenfield projects.
Valuation & Recommendation
In our previous Research Report on FCI in October 2004, with which we had initiated coverage of the stock, we had arrived at a weighted average share value of KD0.455 (AED5.68) per share, and had recommended a 'Buy' on the stock at the then prevailing price of KD0.275. The stock has since then had a good run at the stock markets, touching a high/low of KD0.610/KD0.255 (AED7.63/AED3.19) over the 13 months since our Report was released, thereby, justifying our 'Buy' recommendation.
The positive newsflows favorably impacting the UAE cement sector, as well as the excellent YTD performance of FCI have prompted us to revisit our earlier projections. We have accordingly revised our projections for sales, gross profit, operating profit and net profit for 2005 to AED360.0mn, AED176.4mn, AED134.4mn and AED134.5mn respectively, to better reflect the company's first 9 months results this year.
Besides the changes in the projections, we have also made a change in the risk-free rate and cost of debt from that assumed in our earlier Report. The combination of the revised financial projections and WACC has led to an upward revision in the DCF value of FCI to AED7.43 (KD0.595) now, from AED6.05 (KD0.484) in the October 2004 Report. Based on the Sector P/E multiple of 13.9x (up from 10.7x at the time of the earlier Report), the peer valuation too has increased now to AED6.79 from AED4.20 earlier. The combined effect of these two has led to an upward revision in the Weighted Average Share Value of FCI, which is now AED7.30 (KD0.584), as against AED5.68 (KD0.455) in our October 2004 Report.
At the current market price of AED7.00 on the ADSM and KD0.435 on the KSE, there is, thus, a potential upside of 4.3% and 34.3% in the FCI stock on the respective Exchanges. We, therefore, downgrade our recommendation on the FCI stock to 'Hold'. At the current price levels on KSE and ADSM, the stock presents an arbitrage opportunity.
