Europe, Middle East & Africa: Multi-Industry · development, construction, building materials, utilities, mortgage finance, logistics and transportation. Together, they represent

September 28, 2007 Europe, Middle East & Africa: Multi-Industry

Goldman Sachs Global Investment Research 1

September 28, 2007

Europe, Middle East & Africa: Multi-Industry

Initiating coverage in the Middle East: We select our top ten beneficiaries of the boom

Geared to infrastructure investment

The Middle East is experiencing an economic

boom, born out of structural reform and

supported by the strong liquidity effects of high

oil prices, low interest rates and a weak US dollar.

Equity markets, having overshot in 2005, now

look inexpensive relative to mainstream emerging

markets.

We initiate coverage of 30 stocks in the UAE and

Turkey, which provide exposure to the theme of

infrastructure development in the region. Our

coverage stocks span sectors including real estate

development, construction, building materials,

utilities, mortgage finance, logistics and

transportation. Together, they represent over 80%

of the non-financial market cap of the Dubai

Financial Market and c.40% of the non-financial

stocks of the Abu Dhabi Securities Market that

can be purchased by non-GCC entities.

Potential upside is attractive, at c.20% to price

target for the coverage group, and c.50% for our

Buy list, on a weighted average basis. We see

downside risks, including the impact of falling oil

prices on regional economies as moderate.

Best buy ideas

Emaar Properties

Aldar Properties

Union Properties

Arabtec Holding

Tabreed

Tamweel

Abu Dhabi National Hotels

Agility

Aramex

Dubai Financial Market

Best sell ideas

UAE cement sector:

Union Cement

National Cement

RAK White Cement

Gulf Cement

ACTION

12-month PotentialPrice price target up/downside

Buy list stocksEmaar Properties Dh10.70 Dh16.2 51%Aldar Properties Dh7.35 Dh14.4 96%Union Properties Dh3.16 Dh5.9 87%Arabtec Holding Dh6.25 Dh8.6 38%Tabreed Dh2.43 Dh3.2 32%Tamweel Dh4.0 Dh7.0 75%Abu Dhabi Nat'l Hotels Dh5.85 Dh7.6 30%Agility KD1.82 KD2.4 32%Aramex Dh2.55 Dh3.4 33%Dubai Financial Market Dh3.14 Dh4.1 31%

Sell list stocksUnion Cement Dh4.74 Dh4.0 -16%National Cement Co Dh9.65 Dh8.0 -17%RAK White Cement Dh2.14 Dh1.9 -11%Gulf Cement Dh6.45 Dh5.4 -16%

Neil Wedlake +44(20)7552-0158 | [email protected] Goldman Sachs International

The Goldman Sachs Group, Inc. 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 certification, see the text preceding the disclosures. For other important disclosures go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam.

The Goldman Sachs Group, Inc. Global Investment Research



Table of contents

Overview: We identify top ten beneficiaries of the Middle East boom 4

Middle East economies are booming, while equities look cheap 6

GCC markets appear set for recovery 7

Initiating on UAE markets with a positive regional outlook 9

The macro underpin: Well-oiled economies booming, and diversifying 11

UAE is diversifying rapidly: Real estate takes over from oil as growth leader 23

On-shoring of capital is the driver as diversification takes a new form 26

Will the GCC economies run out of fuel? Our oil view suggests not 28

Potential for currency appreciation to enhance returns 31

Investing in infrastructure: How to gain exposure to the theme 33

Real estate developers: Buy Emaar, Aldar, Union Properties 36

Contractors and materials suppliers: Buy Arabtec 40

Mortgage finance: Buy Tamweel 42

Cement: Sell Union, Gulf, RAK White and National 43

Other sectors: Buy Tabreed, Agility, Aramex, DFM, ADNH 45

We identify stocks with attractive growth at a reasonable price 46

Real Estate company summaries 51

Construction and Materials company summaries 77

Mortgage Finance company summaries 103

Logistics and Transportation company summaries 117

Other UAE company summaries 137

UAE Cement company summaries 157

Turkish Cement company summaries 195

Disclosures 232

The prices in the body of this report are based on the market close of September 26, 2007.

We would like to thank Neville Shaw for his contribution to the preparation of this report.



Overview: We identify top ten beneficiaries of the Middle East boom

We initiate coverage of 22 UAE-listed equities and a further six Turkish stocks, of which we identify ten Buy and four Sell

ideas (see Exhibit 1). The Middle East is experiencing an economic boom, born out of structural reform and supported by the

strong liquidity effects of high oil prices, low interest rates and a weak US dollar. Nominal GDP growth in the UAE reached

23% in 2006, led by construction and real estate, as economies continued to diversify from the oil sector and invest in new

infrastructure.

The theme of infrastructure investment is the unifying thread through our coverage universe, which we believe provides broad

exposure to the economic transformation taking place in the region, and the UAE specifically. Our coverage stocks span sectors

including real estate development, construction, building materials, utilities, mortgage finance, logistics and transportation.

Equity markets in the region look inexpensive relative to alternative emerging markets (and the developed world) and have showed

low or negative correlation to global equities. A combination of strong growth, low valuations and low correlation is highly

attractive in any environment, but all the more when global markets (and the oil price) are around all-time highs.

Exhibit 1: Goldman Sachs New Markets Research: Top ten beneficiaries of the Middle East boom

Our top ten Buy ideas have average upside to 12-month price target of 50%, while our four Sells have average potential downside of 16%

Company name SectorMarket

cap (USD bn)

Investment list

Valuation Methodology Price Target price Potential

upside

Director's Cut

Quartile

Multiple vs Peers

Emaar Properties Real Estate Developers 17.71 Buy DCF/Adj NAV Dh 10.70 Dh 16.20 51%Aldar Properties Real Estate Developers 3.45 Buy DCF/Adj NAV Dh 7.35 Dh 14.40 96%Union Properties Real Estate Developers 2.39 Buy DCF Dh 3.16 Dh 5.90 87%Abu Dhabi National Hotels Company Hotels 1.15 Buy DCF Dh 5.85 Dh 7.60 30%Arabtec Holding PJSC Construction 1.02 Buy DCF Dh 6.25 Dh 8.60 38%Agility Transportation: Logistics 6.19 Buy DCF KD 1.82 KD 2.40 32%Aramex PJSC Transportation: Logistics 0.76 Buy DCF Dh 2.55 Dh 3.40 33%Tabreed Utilities 0.75 Buy DCF Dh 2.43 Dh 3.20 32%Tamweel PJSC Financial Services 1.09 Buy WEV/DDM Dh 4.00 Dh 7.00 75%Dubai Financial Market Capital Markets 6.84 Buy DCF Dh 3.14 Dh 4.10 31%Union Cement Construction: Cement 0.72 Sell DCF/SOTP Dh 4.74 Dh 4.00 -16%RAK White Cement Construction: Cement 0.27 Sell DCF/SOTP Dh 2.14 Dh 1.90 -11%National Cement Company Construction: Cement 0.73 Sell DCF/SOTP Dh 9.65 Dh 8.00 -17%Gulf Cement Construction: Cement 1.25 Sell DCF/SOTP Dh 6.45 Dh 5.40 -16%

Source: DataStream, Goldman Sachs Research estimates



Exhibit 2: Substantial upside/downside to our Buy and Sell list stocks

Potential upside or downside to our 12 month price targets

Exhibit 3: Our coverage is dominated by real estate and construction

Share of coverage market capitalisation, by sector

-40%

-20%

0%

20%

40%

60%

80%

100%

ALDR UPRO TAML EMAR ARTC TABR ARMX ADNH AGLT DFM RAKC UCC GCEM NCC

24.9

17.3

3.9

5.6

8.6

0.8

3.1

6.9

Real Estate Construction UAE Cement Turkey CementTransport Utilities Specialty Finance DFM

Source: Goldman Sachs Research estimates.

Source: Bloomberg, Goldman Sachs Research estimates.



Middle East economies are booming, while equities look cheap

We believe that Middle East equity markets are set for recovery, as continued strong growth, attractive valuation and

improving market access should provide the ingredients for sustained growth from lows earlier this year. In this report we

set out the background case for ongoing economic transformation and describe our qualitative and quantitative approaches

to identifying our top ten Buy picks in the UAE market, which is home to the exchanges most open to foreign investors.

We recap the views of our economics and oils teams on the drivers of growth in the region: high oil prices and economic

transformation and diversification. We reproduce our Economics Research team’s forecasts on Gulf Cooperation Council (GCC)

countries’ future growth potential: they forecast a potential windfall to the region from hydrocarbons at over US$5 tn over the next

25 years, in 2006 terms.

Using relatively conservative assumptions, our Economics Research team forecasts that the GCC’s economy by 2050 could be

comparable in size to Germany or Italy. Under slightly more aggressive assumptions of high population growth, better use of

technology and improving education, the region’s economy could overtake that of the UK and GDP per capita could equal that of

the G7 over the same period.

Looking specifically at the UAE, we see evidence of improvement in some of the factors in our Economics Team’s analysis. Very

high population growth, through immigration, is immediately raising growth potential, as the economy is certainly not capital-

constrained, while simultaneously improving the country’s skill base.

The UAE is ,in essence, a reverse of the model of growth we find in most of the BRICs and other emerging economies.

Rather than being the beneficiary of developed markets off-shoring capital to exploit labour cost differentials, the UAE is on-

shoring its own capital, which in previous cycles would have been invested off-shore, and importing the labour required,

both low-cost and high-skill as required.

This flow of capital is augmented by oil prices that are at all-time highs, at least in nominal US dollar terms. Although economies

are diversifying rapidly and would not be under fiscal stress unless prices were much lower, the process should be aided by

sustained high oil prices in the medium term. The Goldman Sachs view here is also positive. In a recent research paper, our Global

Energy Research team raised their forecasts for 2008 and 2009 oil prices to US$80/bbl and US$90/bbl respectively. They believe that

energy markets are now in 'phase 2' of a multi-year 'super spike' era, before they fall back to a normalised level. This view supports

the rationale of diversifying economies for the longer term and, if true, would suggest that economies will have the capital to invest.

Having set out the economic case, we briefly outline our investment philosophy and the rationale behind our ten Buy list and four

Sell list stocks in our launch coverage group. In short, we identify, both qualitatively and quantitatively, those stocks that we believe

possess unrecognised sustainability in growth or returns. We believe that the stocks on our Buy list have strong potential to remain

or become leaders in their industries and continue to earn superior returns on capital in a region that looks set to remain one of the

fastest growing in the world over the foreseeable future.



GCC markets appear set for recovery

After peak-to-trough corrections of c.55% to April this year, we believe UAE equity markets are attractive. Improved market

access and lowering of restrictions on foreign ownership should provide stabilisation to more volatile retail liquidity flows

that have historically driven these markets.

Exhibit 4: GCC equity markets have significantly underperformed global, and other emerging markets

MSCI indices, rebased to January 1, 2006

40

60

80

100

120

140

160

30/12

/2005

10/02

/2006

24/03

/2006

05/05

/2006

16/06

/2006

28/07

/2006

08/09

/2006

20/10

/2006

01/12

/2006

12/01

/2007

23/02

/2007

06/04

/2007

18/05

/2007

29/06

/2007

10/08

/2007

EMEA AC World GCC UAE

Source: Factset, Goldman Sachs Research estimates.



The collapse in equity markets across the GCC region in 2005 to early 2007 has not hindered the region’s economies, with

economic growth remaining robust and earnings growth strong, outside the banking sector. This has allowed valuations to

retreat to very attractive levels in many instances.

In aggregate, we believe GCC markets are now attractively valued, standing at a discount to EMEA emerging markets on P/E

multiples, despite higher ROE, strong medium-term growth prospects, and a lower cost of capital.

Exhibit 5: UAE is the cheapest market in our EMEA coverage on P/E …

Our forecast 2009 P/E of our UAE coverage group, relative to I/B/E/S consensus

Exhibit 6: … while its companies generate the highest ROE

Forecast 2009 ROE of our coverage group, relative to I/B/E/S consensus

6

7

8

9

10

11

12

13

14

15

16

Morocc

oCze

chPolan

dJo

rdan

Israe

lHungary

Russia

Egypt

South Afri

caTurke

y

UAE

14

15

16

17

18

19

20

21

UAE Hungary Turkey Poland Czech SouthAfrica

Israel Russia

Source: I/B/E/S, Factset, Goldman Sachs Research estimates.

Source: I/B/E/S, Factset, Goldman Sachs Research estimates.

Market volatility has reduced, and we believe that the entry of more foreign institutional funds should help to improve

liquidity and reduce further the influence of more volatile retail money on market movement. GCC markets are becoming

increasingly ‘on benchmark’. We believe that liquidity would be further enhanced by changes to IPO procedures.

IPOs are pre-funded in most regional markets and (due to high multiples of oversubscription historically) therefore drain substantial

liquidity from the market. The Saudi market is moving to a book-building mechanism and we expect other GCC markets to follow

suit, improving conditions for equity issuance and secondary trading.

Additionally, a recent decision in the UAE to drop the requirement for companies to offer 55% of their shares in an IPO should

remove a substantial disincentive for private companies to go public. Many large private companies are family-owned and have

historically shown a reluctance to lose control.



Initiating on UAE markets with a positive regional outlook

As we show below, the macro environment in the region is highly supportive to equity performance: growth is strong and

resilient, interest rates are low, currencies are very well supported and valuations are the lowest in the EMEA region. Upside

to many of our Neutral rated stocks is high and, we believe, more susceptible to upward than downward estimate revision.

Exhibit 7: GCC equities experienced an extreme bubble into 2005

ADSM and DFM indices, rebased

Exhibit 8: We believe UAE markets reached their trough in April this year

DFM and ADSM market performance, year-to-date, indexed

0

100

200

300

400

500

600

700

800

900

12/27

/2003

3/27/2

004

6/27/2

004

9/27/2

004

12/27

/2004

3/27/2

005

6/27/2

005

9/27/2

005

12/27

/2005

3/27/2

006

6/27/2

006

9/27/2

006

12/27

/2006

3/27/2

007

6/27/2

007

9/27/2

007

Inde

x re

base

d

DFM General Index ADSM General Index

85

90

95

100

105

110

115

120

125

130

1/2/07 4/2/07 7/2/07

Inde

x re

base

d

DFM General Index ADSM General Index

Source: Bloomberg.

Source: Bloomberg.



Exhibit 9: Goldman Sachs New Markets Research: Middle East coverage universe

Valuations at current and 12-month target prices

P/E EV/EBITDA3 Dividend Yield EV/GCI5 CROCI/WACC PE at TargetEV/EBITDA at

TargetDividend Yield at

Target

Company name Price Target priceTarget

price period

Potential upside Investment list

Market cap (bn)

EV (bn)1 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E

Simple average: Middle East 21.4% 3.78 14.5x 13.4x 11.9x 11.0x 10.6x 8.2x 5.8% 5.9% 7.1% 1.7x 1.6x 1.4x 1.7x 1.6x 1.6x 16.0x 16.7x 14.1x 13.7x 12.3x 11.2x 5.1% 5.1% 5.6%Weighted average: Middle East 45.0% 45.0% 71.79 13.4x 10.9x 8.9x 11.7x 8.9x 7.0x 3.4% 4.8% 9.1% 2.0x 1.7x 1.5x 1.7x 1.7x 2.0x 18.0x 15.8x 12.4x 16.3x 13.0x 10.0x 2.6% 3.4% 5.8%Emaar Properties Dh 10.70 Dh 16.20 12 mo 51% Buy $ 17.7 Dh 72.45 10.1x 8.2x 7.1x 11.0x 7.9x 6.3x 1.0% 1.8% 2.8% 1.6x 1.4x 1.2x 1.7x 1.8x 1.8x 15.2x 12.4x 10.7x 16.1x 11.4x 9.2x 0.7% 1.2% 1.9%Aldar Properties Dh 7.35 Dh 14.40 12 mo 96% Buy $ 3.45 Dh 15.80 4.4x 3.2x 4.8x 5.5x 4.1x 5.8x 5.7% 10.7% 13.6% 1.7x 1.2x 1.1x 1.2x 1.8x 1.3x 8.6x 6.4x 9.3x 9.9x 7.1x 9.8x 2.9% 5.5% 7.0%Union Properties Dh 3.16 Dh 5.90 12 mo 87% Buy $ 2.39 Dh 10.51 13.9x 13.4x 2.5x 24.5x 19.8x 1.4x NM NM 40.1% 1.5x 1.3x 0.9x 1.0x 0.7x 5.0x 25.9x 24.9x 4.7x 42.5x 33.7x 3.5x NM NM 21.5%Abu Dhabi National Hotels Company Dh 5.85 Dh 7.60 12 mo 30% Buy $ 1.15 Dh 3.43 9.1x 10.0x 10.5x 7.4x 7.1x 7.3x 5.5% 5.0% 7.1% 1.6x 1.4x 1.3x 2.5x 2.0x 1.8x 11.8x 13.0x 13.7x 10.2x 9.8x 10.1x 4.2% 3.8% 5.5%Simple average: Real Estate 24.7 9.4x 8.7x 6.2x 12.1x 9.7x 5.2x 4.1% 5.8% 15.9% 1.6x 1.3x 1.1x 1.6x 1.6x 2.5x 15.4x 14.2x 9.6x 19.7x 15.5x 8.1x 2.6% 3.5% 9.0%Weighted average: Real Estate 8.7x 7.0x 5.8x 9.8x 7.2x 5.3x 2.6% 4.7% 13.1% 1.6x 1.3x 1.1x 1.6x 1.7x 2.0x 15.2x 12.8x 10.1x 17.5x 12.9x 8.7x 1.5% 2.6% 7.2%Orascom Construction Industries £E 459.52 £E 462.00 12 mo 1% Neutral $ 16.6 £E 117.01 28.1x 22.0x 14.8x 18.6x 14.1x 10.5x 1.4% 2.3% 5.1% 3.7x 3.0x 2.6x 1.8x 1.8x 2.0x 28.3x 22.1x 14.8x 18.7x 14.1x 10.6x 1.4% 2.3% 5.1%Arabtec Holding PJSC Dh 6.25 Dh 8.60 12 mo 38% Buy $ 1.02 Dh 3.96 12.6x 11.3x 9.5x 9.4x 8.0x 6.7x NM 2.1% 5.0% 2.6x 2.2x 2.0x 2.9x 2.9x 3.1x 17.4x 15.6x 13.1x 13.1x 11.3x 9.5x NM 1.5% 3.6%Bildco Dh 3.80 Dh 4.20 12 mo 11% Neutral $ 0.31 Dh 1.19 13.8x 12.0x 11.0x 13.4x 12.3x 11.9x 6.9% 7.9% 8.7% 1.8x 1.7x 1.7x 1.4x 1.4x 1.4x 15.2x 13.2x 12.1x 14.7x 13.4x 13.0x 6.2% 7.2% 7.8%Aerated Concrete Industries Company KD 0.54 KD 0.60 12 mo 11% Neutral $ 0.38 KD 0.15 10.8x 9.2x 8.6x 16.1x 13.7x 12.9x 6.4% 7.5% 5.8% 1.5x 1.4x 1.3x 0.9x 1.0x 1.0x 12.0x 10.2x 9.6x 17.4x 14.8x 13.9x 5.8% 6.8% 5.2%Simple average: Construction 18.3 16.3x 13.6x 11.0x 14.4x 12.0x 10.5x 4.9% 5.0% 6.1% 2.4x 2.1x 1.9x 1.7x 1.8x 1.9x 18.2x 15.3x 12.4x 16.0x 13.4x 11.7x 4.5% 4.4% 5.4%Weighted average: Construction 25.2x 20.1x 14.1x 17.6x 13.5x 10.3x 1.9% 2.7% 5.2% 3.4x 2.8x 2.5x 1.8x 1.8x 2.0x 27.1x 21.3x 14.6x 18.3x 14.0x 10.6x 1.8% 2.5% 5.0%Union Cement Dh 4.74 Dh 4.00 12 mo -16% Sell $ 0.72 Dh 2.61 12.2x 14.7x 19.5x 9.3x 10.4x 12.6x 6.1% 6.8% 5.1% 1.7x 1.6x 1.6x 1.9x 1.5x 1.2x 10.3x 12.4x 16.4x 7.8x 8.7x 10.6x 7.3% 8.1% 6.1%SCIDC Dh 4.50 Dh 5.90 12 mo 31% Neutral $ 0.58 Dh 1.67 7.1x 10.2x 14.5x 4.8x 6.7x 9.2x 10.5% 9.8% 6.9% 1.5x 1.5x 1.5x 2.6x 2.1x 1.6x 9.3x 13.4x 19.0x 6.7x 9.4x 12.9x 8.0% 7.5% 5.3%RAK White Cement Dh 2.14 Dh 1.90 12 mo -11% Sell $ 0.27 Dh 0.73 25.2x NM NM 13.4x 30.1x NM 3.0% 1.8% NM 1.0x 1.0x 1.0x 0.5x 0.3x 0.0x 22.4x 49.8x 0.0x 11.3x 25.6x NM 3.4% 2.0% NMRAK Cement Dh 2.08 Dh 2.60 12 mo 25% Neutral $ 0.27 Dh 0.83 6.5x 9.7x 13.8x 4.8x 7.0x 9.6x 11.6% 10.3% 7.3% 1.1x 1.1x 1.1x 2.2x 1.5x 1.1x 8.1x 12.1x 17.2x 6.3x 9.1x 12.5x 9.2% 8.3% 5.8%National Cement Company Dh 9.65 Dh 8.00 12 mo -17% Sell $ 0.73 Dh 2.44 21.1x 38.2x NM 17.5x 30.7x NM 3.6% 2.6% 1.2% 1.2x 1.2x 1.2x 0.5x 0.3x 0.2x 17.5x 31.6x NM 14.2x 25.0x 45.3x 4.3% 3.2% 1.5%Gulf Cement Dh 6.45 Dh 5.40 12 mo -16% Sell $ 1.25 Dh 4.67 8.5x 11.3x 15.4x 12.0x 11.5x 15.7x 8.8% 8.8% 6.5% 2.3x 2.2x 2.2x 2.0x 1.9x 1.4x 7.1x 9.5x 12.9x 10.1x 9.7x 13.3x 10.5% 10.5% 7.8%Simple average: Construction: Cement 3.81 13.4x 16.8x 15.8x 10.3x 16.1x 11.8x 7.3% 6.7% 5.4% 1.5x 1.4x 1.4x 1.6x 1.3x 0.9x 12.5x 21.5x 16.4x 9.4x 14.6x 18.9x 7.1% 6.6% 5.3%Weighted average: Construction: Cement 10.2x 13.5x 15.8x 9.4x 11.5x 12.7x 8.4% 8.2% 6.2% 1.6x 1.6x 1.5x 1.7x 1.4x 1.0x 11.2x 17.8x 15.4x 9.7x 13.4x 19.2x 8.5% 8.5% 6.4%Adana Cimento A YTL 9.70 YTL 10.50 12 mo 8% Neutral $ 0.83 YTL 0.42 9.3x 10.2x 11.6x 6.2x 4.3x 5.2x 4.0% 6.4% 5.6% 0.9x 0.8x 0.8x 1.7x 1.3x 1.0x 10.1x 11.0x 12.6x 7.0x 4.8x 5.9x 3.7% 5.9% 5.2%Adana Cimento B YTL 4.68 YTL 5.60 12 mo 20% Neutral $ 0.24 YTL 0.07 6.3x 6.9x 7.9x 6.2x 4.3x 5.2x 5.9% 9.4% 8.3% 0.9x 0.8x 0.8x 1.7x 1.3x 1.0x 7.6x 8.3x 9.4x 8.0x 5.6x 6.7x 4.9% 7.8% 6.9%Adana Cimento C YTL 0.80 YTL 1.00 12 mo 25% Neutral $ 0.85 YTL -0.12 7.8x 8.5x 9.7x 6.5x 4.5x 5.5x 4.8% 7.6% 6.7% 0.9x 0.8x 0.8x 1.7x 1.3x 1.0x 9.7x 10.6x 12.1x 8.8x 6.3x 7.6x 3.8% 6.1% 5.4%Akcansa Cimento YTL 9.35 YTL 10.00 12 mo 7% Neutral $ 1.46 YTL 1.61 14.4x 14.3x 13.0x 11.7x 8.7x 7.9x 3.9% 5.3% 5.8% 1.7x 1.6x 1.5x 1.4x 1.3x 1.3x 15.4x 15.2x 13.9x 12.6x 9.4x 8.5x 3.6% 4.9% 5.4%Bolu Cimento YTL 2.62 YTL 3.70 12 mo 41% Neutral $ 0.28 YTL 0.26 6.9x 7.4x 7.7x 6.7x 4.8x 4.9x 8.9% 11.1% 10.7% 1.6x 1.5x 1.4x 2.8x 2.5x 2.3x 9.8x 10.5x 10.9x 10.2x 7.4x 7.5x 6.3% 7.8% 7.6%Cimsa (Cimento Sanayi) YTL 10.00 YTL 10.70 12 mo 7% Neutral $ 0.99 YTL 1.33 8.2x 9.4x 10.8x 7.8x 6.4x 7.0x 6.9% 8.0% 6.9% 1.2x 1.2x 1.1x 1.5x 1.3x 1.1x 8.7x 10.1x 11.6x 8.3x 6.8x 7.4x 6.4% 7.4% 6.5%Mardin Cimento YTL 7.40 YTL 7.70 12 mo 4% Neutral $ 0.44 YTL 0.51 6.2x 9.0x 10.3x 7.0x 6.9x 7.8x 9.9% 9.2% 8.0% 2.4x 2.4x 2.2x 3.4x 2.4x 2.0x 6.5x 9.3x 10.8x 7.3x 7.2x 8.1x 9.5% 8.8% 7.7%Unye Cimento YTL 6.80 YTL 7.60 12 mo 12% Neutral $ 0.53 YTL 0.58 11.0x 10.0x 10.4x 8.4x 5.8x 6.1x 6.5% 9.7% 9.3% 2.8x 2.5x 2.4x 2.9x 2.9x 2.5x 12.3x 11.2x 11.6x 9.5x 6.6x 6.9x 5.8% 8.6% 8.3%Simple average: Construction: Cement 5.63 8.8x 9.5x 10.2x 7.6x 5.7x 6.2x 6.3% 8.3% 7.7% 1.6x 1.4x 1.4x 2.2x 1.8x 1.5x 10.0x 10.8x 11.6x 9.0x 6.8x 7.3x 5.5% 7.2% 6.6%Weighted average: Construction: Cement 8.8x 9.7x 10.5x 7.9x 6.1x 6.5x 5.9% 7.9% 7.2% 1.5x 1.4x 1.3x 1.9x 1.6x 1.4x 11.0x 11.6x 12.2x 9.4x 7.1x 7.5x 5.3% 6.9% 6.3%Agility KD 1.82 KD 2.40 12 mo 32% Buy $ 6.19 KD 1.80 15.5x 9.0x 6.9x 11.7x 7.6x 5.8x 3.2% 5.5% 7.2% 2.0x 1.7x 1.4x 2.1x 2.7x 2.9x 20.4x 11.8x 9.1x 15.5x 9.9x 7.6x 2.4% 4.2% 5.4%Aramex PJSC Dh 2.55 Dh 3.40 12 mo 33% Buy $ 0.76 Dh 3.26 20.0x 19.2x 16.2x 14.9x 14.4x 12.8x 3.7% 3.9% 4.6% 2.1x 1.9x 1.8x 1.7x 1.6x 1.6x 26.7x 25.6x 21.6x 20.2x 19.4x 17.2x 2.8% 2.9% 3.4%Air Arabia Dh 1.31 Dh 1.20 12 mo -8% Neutral $ 1.66 Dh 3.81 22.2x 23.8x 24.6x 8.6x 7.5x 6.3x NM 1.0% 2.0% 1.3x 1.2x 1.1x 1.5x 1.0x 1.0x 20.4x 21.8x 22.5x 7.3x 6.4x 5.5x NM 1.1% 2.2%Simple average: Transportation 8.62 19.2x 17.3x 15.9x 11.8x 9.8x 8.3x 3.4% 3.5% 4.6% 1.8x 1.6x 1.4x 1.7x 1.8x 1.8x 22.5x 19.7x 17.7x 14.3x 11.9x 10.1x 2.6% 2.7% 3.7%Weighted average: Transportation 16.8x 10.8x 8.5x 11.5x 8.0x 6.3x 3.2% 5.0% 6.7% 1.9x 1.6x 1.4x 1.9x 2.3x 2.4x 20.9x 15.0x 12.8x 14.3x 10.0x 8.0x 2.4% 3.8% 5.1%Tabreed Dh 2.43 Dh 3.20 12 mo 32% Buy $ 0.75 Dh 4.85 29.5x 22.9x 20.7x 23.4x 15.9x 12.3x NM 2.2% 3.6% 1.3x 1.1x 1.0x 0.7x 0.9x 1.0x 38.9x 30.1x 27.3x 27.7x 18.6x 14.4x NM 1.7% 2.7%Simple average: Utilities 0.75 29.5x 22.9x 20.7x 23.4x 15.9x 12.3x NM 2.2% 3.6% 1.3x 1.1x 1.0x 0.7x 0.9x 1.0x 38.9x 30.1x 27.3x 27.7x 18.6x 14.4x NM 1.7% 2.7%Weighted average: Utilities 29.5x 22.9x 20.7x 23.4x 15.9x 12.3x NM 2.2% 3.6% 1.3x 1.1x 1.0x 0.7x 0.9x 1.0x 38.9x 30.1x 27.3x 27.7x 18.6x 14.4x NM 1.7% 2.7%AMLAK Finance Dh 3.18 Dh 3.40 12 mo 7% Neutral $ 1.30 - 19.8x 13.7x 10.6x NM NM NM NM NM 2.4% 2.4x 2.0x 1.7x 1.1x 1.3x 1.4x 21.2x 14.6x 11.4x NM NM NM NM NM 2.2%Tamweel PJSC Dh 4.00 Dh 7.00 12 mo 75% Buy $ 1.09 - 14.8x 11.2x 8.5x NM NM NM NM NM 2.3% 1.9x 1.6x 1.4x 1.2x 1.3x 1.5x 25.9x 19.6x 15.0x NM NM NM NM NM 1.3%Oasis International Leasing Dh 1.82 Dh 1.80 12 mo -1% Neutral $ 0.74 - 17.4x 13.3x 11.5x NM NM NM NM 1.9% 4.4% 1.5x 1.3x 1.2x 0.7x 0.9x 0.9x 17.2x 13.1x 11.4x NM NM NM NM 1.9% 4.4%Simple average: Specialty Finance 3.13 17.3x 12.7x 10.2x NM NM NM NM 1.9% 3.0% 1.9x 1.7x 1.4x 1.0x 1.2x 1.3x 21.4x 15.8x 12.6x NM NM NM NM 0.6% 2.6%Weighted average: Specialty Finance 17.2x 12.5x 9.7x NM NM NM NM 1.9% 2.5% 2.1x 1.8x 1.5x 1.1x 1.3x 1.4x 23.2x 16.8x 13.1x NM NM NM NM 1.9% 1.9%Dubai Financial Market Dh 3.14 Dh 4.10 12 mo 31% Buy $ 6.84 - 42.3x 27.2x 20.1x NM NM NM NM 1.8% 3.7% 9.1x 6.8x 5.6x 2.0x 2.4x 2.6x NM 35.5x 26.2x NM NM NM NM 1.4% 2.9%Simple average: Capital Markets 6.84 42.3x 27.2x 20.1x NM NM NM NM 1.8% 3.7% 9.1x 6.8x 5.6x 2.0x 2.4x 2.6x NM 35.5x 26.2x NM NM NM NM 1.4% 2.9%Weighted average: Capital Markets 42.3x 27.2x 20.1x NM NM NM NM 1.8% 3.7% 9.1x 6.8x 5.6x 2.0x 2.4x 2.6x 35.5x 26.2x NM NM NM NM 1.4% 2.9%

2007E 2008E 2009E 2007E 2008E 2009E

P/BV ROE/KeNotes:1 EV is here defined as average market cap plus net debt plus market value of minorities plus pension deficit plus leases.2 For EV/EBITDAR, EV is defined as average market cap plus net debt plus market value of minorities plus pension deficit plus leases less market value of associates. Lease payments have been added back to EBITDAR.3 For EV/EBITDA, EV is defined as average market cap plus net debt plus market value of minorities plus pension deficit less market value of associates.4 For EV/EBIT, EV is defined as average market cap plus net debt plus market value of minorities plus pension deficit plus leases less market value of associates. Adjusted lease payments have been added back to EBIT.5 For EV/GCI, EV is defined as average market cap plus net debt plus market value of minorities plus pension deficit plus leases.

Source: Factset, Datastream, Goldman Sachs Research estimates.



The macro underpin: Well-oiled economies booming, and diversifying

A recent Goldman Sachs Economics Paper (‘The GCC Dream: Between the BRICs and the Developed World’, Ahmet Akarli,

April 17, 2007) concluded that strong global energy demand, particularly from BRICs and N11 nations, is likely to secure a

windfall for GCC countries of US$4-5 tn (in 2006 dollars) over the next 25 years. With continued structural reform and

increased investment, GCC per capita incomes could exceed those of the G7 by 2050. This chapter is extracted from that

report.

Oil windfall comes as a blessing for the GCC region

GCC economies have clearly benefited from the surge in global energy prices in recent years. The massive oil and natural gas

windfall has allowed GCC economies to improve their overall net foreign asset and fiscal positions over the past four years, and

post strong, investment-driven economic growth. Regional current account and budget surpluses soared to 30% and 23% of

regional GDP in 2006, respectively, and economic growth rebounded strongly to an estimated 7% in 2006 – well above the 3.5%

average for 1990-2002.

This robust economic performance is likely to continue uninterrupted in the next few years, as the region continues to benefit from

high energy prices, which will be reinforced by a combination of strong demand growth and supply-side constraints. But what is

more interesting from our perspective is the region’s longer-term economic potential. Not surprisingly, the region’s growing

importance in energy markets and as a supplier of capital to the rest of the world is commonly acknowledged and widely discussed.

What is less clearly appreciated, however, is the ongoing economic transformation of the Gulf region and its long-term economic

potential. The region is becoming an economic power to be reckoned with. The GCC currently boasts a GDP level of about

US$735 bn, comparable to that of such sizeable economies as Mexico (US$810 bn), Australia (US$745 bn) and the Netherlands

(US$665 bn). Average regional per capita income is also fairly high at US$20,500, and ranks 27th on a global scale, just after New

Zealand (US$24,500), Greece (US$22,000) and Cyprus (US$21,000), and above Israel (US$20,000), Portugal (US$18,000) and Korea

(US$18,000).

But we believe that the region has a lot more to offer as it continues to benefit from strong global energy demand growth in the

coming decades. Rapid economic development of the BRICs and N-11 economies will exert considerable pricing pressure on global

energy markets, especially in the coming 10 to 15 years. This strong demand-side stimulus will, in turn, secure an (extra-normal) oil

and natural gas windfall for the GCC, allowing the region’s economies to sustain very high investment levels and generate strong,

welfare-enhancing economic growth in the coming decades.

The region’s economic convergence process is unlikely to be as explosive as that of the BRICs or some leading N-11 economies.

Certain economic rigidities, political constraints and general regional instability will likely continue to prevent the GCC from

realising its full economic potential. But with a little extra effort, placing more emphasis on improving the overall investment

climate and facilitating strong total factor productivity growth, we believe the GCC can emerge as one of the most prosperous

regions in the world in the coming decades.



GCC ideally positioned to benefit from rising energy demand

As is commonly known, the GCC region is exceptionally well-endowed with crude oil and natural gas reserves and, as such, it will

continue to play a crucial role in global energy production in the coming decades.

Currently, the region’s proven oil reserves stand at 484.3 billion barrels and natural gas reserves at 41.4 trillion cubic meters –

accounting for 40.3% of the world’s proven oil and 23% of natural gas reserves, respectively. The region produces roughly 6.7

billion barrels of crude oil and 195.9 billion cubic metres of natural gas every year. So, even if production levels were to rise

substantially through time, the vast natural resource base of the GCC region would still be sufficient to comfortably sustain steady

oil and natural gas production for a long time.

More importantly perhaps, the GCC is set to capture an increasingly large share of the global energy pie in the coming decades.

The region’s share of global oil (22.8%) and natural gas production (7.1%) is currently below its share of proven reserves, which

suggests that going forward the GCC will contribute increasingly to global oil and natural gas supply. The IEA estimates that during

2005-2030 roughly 38% of the projected increase in the global oil supply will come from the GCC region, with regional production

growing 72%. GCC natural gas production is also projected to grow rapidly, by more than 200%, during the same period,

accounting for roughly 46% of the total projected increase in global natural gas supply.

Exhibit 10: The GCC nations account for 22 percent of global oil output …

2005 production

Exhibit 11: … but almost twice that share of future reserves

Share of estimated reserves, 2006

78%

3%

14%

1%

1%3%

Kuwait Oman Qatar Saudi Arabia United Arab Emirates Rest of World

61%

8%

22%

1%

0%8%

Kuwait Oman Qatar Saudi Arabia United Arab Emirates Rest of World

Source: BP. Source: BP.



That said, it will be quite a challenge to increase the region’s production capacity at a pace that would match the world’s growing

demand for energy, and considerable capex will be required to bring new capacity on stream. The region’s crude oil reserves are

abundant but some of the giant oil fields in the region are aging gradually, with natural ‘decline rates’ approaching 12% pa in

places. Likewise, the region (especially Qatar) boasts some of the largest natural gas reserves in the world, but considerable

investment is needed to bring existing reserves into use.

The IEA estimates the total capex needed to sustain a steady 2.2% pa increase in crude oil and 5.6% increase in regional natural gas

production at roughly US$650 bn (measured in 2006 prices) in the coming 25 years.

This is a substantial figure, but the GCC governments see further opportunities building in the global economy. They understand

the importance of providing affordable energy sources for the overall health of the world economy, and are matching production to

growing demand and committing considerable resources to capacity expansion.

Besides this, financing is not as pressing a problem for the more prosperous GCC region as it is for some of the less developed

African, Middle Eastern and Central Asian energy producers. The latter are subject to more serious sovereign risks and do not enjoy

the financial means available to the more prosperous GCC economies. They also face much higher extraction costs upstream.

The likelihood of serious ‘investment failure’ remains relatively limited in the GCC – hence, the region will most likely consolidate

its lead as the world’s prime energy exporter. This implies sustained and increasing oil and natural revenue inflow into the region,

probably well beyond what we have seen in previous decades.

GCC’s cumulative energy windfall could reach US$5 tn in the next 25 years

To put the region’s long-term windfall potential into some quantitative perspective, we projected GCC oil and natural gas revenues

going into 2030. We developed two scenarios: base and the historical trend. Our base scenario more or less captures the picture we

depict above: i.e., sustained, strong global demand for carbon-based fuels, coupled with robust capex growth, and steady capacity

expansion. We set all parameters in line with our global energy demand forecasts. More specifically, we assume that oil and natural

gas exports from the region will grow on average by 2.5% and 5.5% pa during 2005-2030, consistent with our global energy

demand growth projections.

We set the average oil price at US$48/bbl, above the US$35/bbl post-war average (both measured in 2006 prices). We basically

assumed that prices would prove ‘sticky’ in the coming 15 years, due mainly to strong demand growth and supply-side constraints.

Beyond 2020, we assumed that the pressure would ease as new production capacity comes on stream and as demand pressures

moderate somewhat, allowing the oil price to retreat gradually towards US$40/bbl. We assumed US$1.2 tn capex (measured in

2006 prices) during the forecast period, well above the US$650 bn projected by the IEA. As such, we accounted for potential supply-

side challenges involved in raising production levels to match growing demand.

The oil and natural gas revenues projected under the base policy scenario, measured in NPV terms (using a discount rate of 6.5%),

reach a cumulative US$5.1 tn in the base scenario, significantly higher than the US$3.6 tn implied by the historical trend scenario.



Exhibit 12: Revenues from hydrocarbons could total US$5 tn by 2030

Exhibit 13: Population growth absorbs some of the windfall

Population growth by emirate, percent

0

1000

2000

3000

4000

5000

6000

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Base Scenario Historical trend

The windfall over and above historical trend revenues amounts to a NPV of $1.5tr in the base scenario

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2001 2002 2003 2004

Abu Dhabi Dubai

Source: IEA, Goldman Sachs Economics Research estimates.

Source: IMF, UAE MoE.

Population growth is expected to remain fairly robust throughout the region during the forecast period, so there will be more GCC

citizens to share the windfall in the coming decades. But, reducing our forecasts to per capita terms does not change the picture

fundamentally. Specifically, our projections put the cumulative per capita oil and natural gas export revenue (again measured in

NPV terms) at US$115,500 in the base scenario, well above the relatively modest US$84,250 implied by our historical trend scenario.

Note that regional (nominal) per capita income currently stands at around US$20,500, which implies serious wealth creation in the

region during the forecast period under the base scenario.

Inflows will peak in the next 15 years. Our projections suggest that the bulk of the windfall is likely to accrue in the coming decade

or so, when we expect BRICs demand to peak, and alternative energy use and energy efficiency gains to remain limited. In the base

scenario, roughly 65%-70% of the total projected revenues accrue within the next 15 years.



Old challenges and new opportunities: Risks to the investment case

The sizeable windfall implied by our projections suggests that the GCC will remain as a structural current account surplus

region in the global economy and will be able sustain high investment levels and generate strong, welfare-enhancing

economic growth in the coming decades. The key question is whether this potential will be realised or not.

We believe that important challenges will have to be overcome, and we also see certain macroeconomic and institutional

weaknesses that could undermine the region’s long-term growth potential. However, we believe that, with some effort and good

economic management, the region can make a leap forward and emerge as one of the most prosperous regions of the world in the

coming decades. We see two main, overarching impediments/rigidities: one related to the broader Middle East risk and the other

linked to the so-called ‘natural resource curse’.

The Middle East risk: The GCC is located in what has been one of the most unstable regions of the World. Many complex examples

from the past and today are well known, including the Arab-Israeli conflict, Iraq’s ongoing instability, Iran’s external relations,

growing friction within different religious faiths. They all still stand as key risk factors that could destabilise the broad Middle East

region (and the rest of the world) in a major way. GCC countries may (controlling a good chunk of the world’s hydrocarbon

reserves) have to commit considerable resources to enhancing their defense capabilities, diverting resources form possibly more

efficient uses. The need to constantly secure domestic political stability surrounding the GCC could dent political and economic

reforms, rendering it more difficult to address deep-rooted incumbency problems.

‘Natural Resource Curse’ – Rent-Seeking and ‘Voracity’: The GCC represents an extreme resource endowment case, characterized

by strong rent-seeking opportunities and motives and relatively weak institutional (market) structures. In the past, the distribution

and use of economic resources have not necessarily taken place in efficient allocation. All too often, networks of patronage and

clientelism have led to economic inefficiency. Past windfalls have resulted in dramatic increases in government spending, leading

to considerable economic waste. It is possible that any future revenue windfall implied by our projections could repeat past

tendencies, creating considerable inertia in the region’s transition to a more market based economy characterized by more

commonly accepted rule of law and strong market institutions.



Exhibit 14: GES scores for GCC countries are high but can improve … Exhibit 15: … if economic stability leads to higher levels of investment

0

1

2

3

4

5

6

7

8

9

Qatar United ArabEmirates

Kuwait Oman Bahrain Saudi Arabia

GCC GES Mean HIC Mean UMC Mean LMI Mean LIC

0

2

4

6

8

10

12

Macro Stability Macro Conditions Human Capital Political Conditions TechnologicalCapabilities

GCC Average Growth Environment Score (GES)High Income Group Best in Class GES

Source: Goldman Sachs Economics Research estimates.


Overall the GCC’s growth environment has improved significantly

That said, the GCC economies are undergoing a major economic transformation. The GCC governments now place a great deal of

emphasis on economic diversification, openness and market regulation, as well as on infrastructure and human resource

development. These reform efforts, combined with the oil and natural gas revenue boon, are helping to improve the overall growth

environment and pulling the region’s long-term growth potential above the rather disappointing 3.5% average of the past few

decades.

Our Growth Environment Score (GES) indices capture the fundamental improvement that has taken place across the region and the

solid growth potential. The GES is an objective summary measure of 13 variables that drive productivity and help to achieve a

country’s growth potential. We look at a set of key socio-economic and demographic parameters. We then typically use our GES

measures to compare growth conditions across a broad range of countries and to assess whether our long-term GDP and per capita

income growth projections are likely to become a reality or not.

The results of our recently updated GES measures show a rather encouraging picture for the GCC region. Without exception, the

GCC economies now occupy top positions in our global rankings. Specifically, Qatar and UAE rank 24th and 25th, while Kuwait,

Oman, Bahrain and Saudi Arabia occupy 32nd, 39th, 42nd and 43rd places (out of 177) in the GES rankings, above (for example)

Greece (44th), Hungary (47th), Poland (54th), China (58th) and Mexico (68th).



Among developing economies, the region stands out: Qatar and UAE rank 1st and 2nd, and Kuwait, Oman, Bahrain and Saudi

Arabia follow in 4th, 8th, 9th and 10th place, respectively – all well above the BRICs and the N-11 (save South Korea). Among

developed high income group countries, Qatar and UAE compare quite well with their peers, while Kuwait, Oman, Bahrain and

Saudi Arabia also do fairly well – although in the latter group there is considerable room for improvement, especially in human

resource development, technology use, political stability and governance. In any case, our GES indices show that the region’s

growth potential remains as good as that of any developing economy.

The base line: Solid growth and rapid convergence

In order to put the region’s potential in quantitative perspective, we used our GDP projection models, which we first used in our

BRICs projections. The model is based on neo-classical growth theory and sets labour, capital and total factor productivity (TFP) as

key determinants of long-term economic growth. In projecting GDP levels for the GCC going into 2050, as base-line, we made a

conscious effort to keep our assumptions as conservative as possible:

Investment levels, at average for past 10 years: We set the underlying gross investment rate at the average over the past 10 years

for each GGC economy; specifically, at 15.2% for Bahrain, 15.6% for Kuwait, 15.7% for Oman, 17.9% for Saudi Arabia, 24.7% for

UAE and 28.5% for Qatar. As such, we did not factor in a major improvement in the overall investment climate in constructing our

base-line projections, and we assumed reasonably low investment levels, notwithstanding the extra-normal revenue inflow. In

other words, we assumed that the region would remain a capital exporter and diversify more gradually going forward.

Relatively subdued productivity growth: Despite the high GES rankings of the GCC economies, we set the convergence ratio (the

other key parameter in our projection models capturing TFP growth) at 0.8% for the entire 2006-2050 period – towards the lower

end of the c.1%-1.5% we use for our BRICs and most of our N-11 projections. As such, we conservatively assumed relatively

subdued TFP growth for the region, reflecting the overall growth-retarding effects of the above-mentioned structural rigidities and

geopolitical challenges.

Gradual demographic normalisation: Lastly, we set regional population growth rates around 2%-2.5% until 2015, around 1.5% until

2040 and slightly above 1% until 2050. As such, we assumed a gradual demographic ‘normalisation’.



Exhibit 16: GDP per capita for the GCC is forecast to close in on the G7

GDP per capita

Exhibit 17: UAE and Qatar benefit form rich resources and small

populations

GDP per capita

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2006

US

D

BRICs N-11 G7 GCC

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2006

US

$

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates



Under these fairly conservative assumptions, our projections suggest reasonably rapid economic growth and convergence. By the

first half of the 21st century, the GCC could become comparable to major developed economies – both in terms of size and per

capita income levels. Specifically, we project the region’s total GDP in 2050 at US$4.5 tn, or just under the projected GDP levels of

Germany (US$4.9 tn) and France (US$4.5 tn). We estimate the region’s 2050 per capita GDP at US$63,250, which compares

favourably with that of such leading industrial economies as Japan (US$69,000), Germany (US$67,000) and Italy (US$58,000).

Accordingly, we project the income gap with the G-7 to narrow quite significantly, to roughly 77% of the projected G-7 average, up

from the current 50%.

An alternative ‘dream scenario’

The region potentially could have a lot more to offer than our conservative base-line projections suggest. The growth and

convergence potential implied by the base-line scenario is no doubt impressive, but it also does not suggest as robust a

convergence as that of the BRICs or some of the stronger N-11 economies. To realise its full potential, the region will have to put

stronger emphasis on improving the overall investment climate, and more importantly on technology and human resource

development.



Investment levels are low: The investment levels prevailing throughout the region remain fairly low by international standards. The

rapidly diversifying economies of Qatar and the UAE are the big spenders of the region, with average investment levels hovering

around 25%-30%. These compare well with the levels in China (34%), Korea (31%), Vietnam (29%), Japan (26%) and India (23%) (all

10-year averages). These economies are probably testing the limits of their absorption capacity; they are already growing rapidly

and can probably do very little to bolster investment levels further without creating more serious macroeconomic imbalances –

namely chronic inflation, both in goods and service and asset prices. However, Saudi Arabia, Oman, Kuwait and Bahrain are still

well behind, with their respective investment levels averaging a mere 15%-18%. Relative to the massive pool of economic resources

at their disposal, the absorption level of these economies probably remains well below potential. They can comfortably raise

investment levels and commit more resources to economic diversification.

Exhibit 18: A wide divergence in investment across the GCC …

Gross fixed capital formation as a share of GDP, %

Exhibit 19: … reflected also in FDI inflows of capital

Foreign direct investment as a share of GDP, %

0

5

10

15

20

25

30

35

40

China

Korea, R

ep.

VietnamQata

rIra

nJa

pan

United

Arab

EmiratesIndia

Banglad

esh

Indonesia

Nigeria

Turkey

German

yMex

icoCan

ada

Philippin

esBraz

ilIta

ly

United

States

France

Egypt

Saudi A

rabia

Russia

United Kingdom

South A

frica

OmanPak

istan

Kuwait

Bahrai

n

Gross Fixed Capital Formation (% GDP, 10-yr ave)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

00 01 02 03 04 05

Percent

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Source: IMF, Goldman Sachs Research estimates.

Source: IMF, Goldman Sachs Research estimates.

The region is lagging its peers in technology use. Our GES indices also show that the region is lagging behind its peers in high

income countries (HIC) in terms of technology use and human resource development. On technology use, the region is well behind

the HIC and resembles more closely an upper middle income economy (UMC). The GCC can therefore benefit immensely from

greater economic openness, which would help facilitate the transfer of technology and know-how.

Human resource base is not sufficiently strong. On human resource development, the region is ranked just below the HIC and

slightly above UMC averages, but there is still considerable room for improvement. Specifically, the region can benefit immensely



from a further improvement in education and health standards, which would help bolster TFP growth and further economic

development over the longer term. Another major constraint here is the low female labour participation ratio, which still hovers

around a disappointing 25%-30%. There are cultural obstacles here, but the region could benefit immensely from the incorporation

of women into the active labour force, which would help strengthen the region’s demographic dynamics even further.

In order to demonstrate the hidden potential here, we adjusted two key parameters of our GDP projection models to capture the

impact of a more robust investment climate, and stronger technology and human resource base:

We set the investment ratio one standard deviation above the 10-year average for Saudi Arabia (19.7%), Kuwait (21.6%), Oman

(18.9%) and Bahrain (19%) and left investment ratios for the region’s big spenders, UAE and Qatar, unchanged at 24.7% and 28.5%,

respectively.

We set the convergence ratio at 1% until 2035 and to 1.2% thereafter, above the 0.8% we assumed in the base line and more

consistent with the region’s exceptionally high GES scores – with a view to incorporating the productivity gains to be reaped from

technology transfer and diffusion and human resource development.

Under these assumptions, the region comfortably achieves promotion to the league of advanced economies. Specifically, the

region’s GDP hits US$5.5 tn by 2050 (well above the US$4.5 tn projected in the base line), overtaking such leading industrial

economies as the UK and Germany (both around US$5 tn) and moving closer to Indonesia (US$6.7 tn) and Japan (US$7 tn).

In tandem, per capita GDP reaches US$78,800 and the income gap with the G-7 and the GCC disappears almost completely,

with GCC per capita GDP reaching 97% of the G-7 average.

As we have discussed above, the odds against this ‘dream’ scenario are high and there is a risk that deep-rooted structural

weaknesses and regional instability might continue to hold back the GCC region from fully realising this huge economic potential. It

is more likely that the region will grow into a ‘dual’ economic structure characterised, on the one hand, by ultra modern Dubai-like

‘growth-poles’ and, on the other, by continuing inefficiency and ‘waste’ in general resource utilisation.

However, the GCC’s long-term economic potential is immense and we firmly believe that, with a little bit of effort, the region can

capitalise on the new opportunities presented by the fast-globalising world economy and emerge as a leading economic power in

the coming decades.

This globally driven economic transformation and development process will also provide some strong support for regional asset

prices (particularly to equity prices) and drive regional currency substantially stronger in the coming decades. In that sense, we do

not see the GCC solely as a source of capital for the rest of the world, but also as a long-term investment story, with significant

upside potential.



Exhibit 20: GCC economies enjoying the windfall of high oil prices

Selected economic indicators

2003 2004 2005 2006 2007*UAECurrent account ($ million) 7,600 10,600 26,500 33,300 22,700Current account balance (% of GDP) 8.6 10.3 20.0 20.4 13.0Real GDP growth (%) 11.9 9.7 8.2 8.9 5.7Inflation (%) 3.1 7.0 10.5 11.0 8.5

BAHRAIN Current account ($ million) 201 415 1,575 1,918 1,018Current account balance (% of GDP) 2.1 3.7 11.8 12.3 6.1Real GDP growth (%) 7.2 5.6 7.8 7.1 6.8Inflation (%) 1.6 2.3 2.6 2.1 2.5

QATARCurrent account ($ million) 5,800 7,600 7,100 11,300 6,800Current account balance (% of GDP) 24.4 23.8 16.6 21.5 12.5Real GDP growth (%) 3.5 20.8 6.1 6.0 6.6Inflation (%) 2.3 6.8 8.8 11.9 12.5

SAUDI ARABIA Current account ($ million) 28,000 52,000 90,700 113,800 84,000Current account balance (% of GDP) 4.5 11.4 18.8 19.9 13.8Real GDP growth (%) 6.5 4.0 6.5 4.4 4.0Inflation (%) 0.6 0.3 0.4 2.3 2.6

Source: MEED, IMF.

What is true of GCC markets in aggregate is, of course true of the UAE in particular. Its macroeconomic indicators, as

summarised in Exhibit 20, are typical in terms of growth, current account balance and inflation. As our Economists point out,

however, UAE and Qatar are particularly well positioned to develop a higher growth path, given their higher level of

infrastructure investment, and in the case of the UAE, immigration-driven higher population growth, which is an import

vector for skills and intellectual capital.



Exhibit 21: Rapid growth makes MENA markets meaner than the BRICs in some instances

Targeting high population and GDP growth

International CDP/Capita Growth vs. Population Growth

United States

UK

Turkey

Syrian Arab Republic

Serbia

Saudi Arabia

Poland

Pakistan

Morocco

Libya

Jordan

Italy

IndonesiaIndia

HungaryGermany

France

Egypt

CzechCroatia

China

Bulgaria

Algeria

United Arab Emirates

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%Expected GDP/Capita Growth (CAGR 2005 - 2008E)

Expe

cted

Pop

ulat

ion

Gro

wth

(CAG

R 2

005

-200

8E)

Western Europe

MENA growth markets

Eastern Europe

-0.1%10.7%Eastern Europe

0.3%5.6%Western Europe

1.0%4.0%US

2.3%9.5%MENA



1.0%4.0%US

2.3%9.5%



1.0%4.0%US

2.3%9.5%MENA



1.0%4.0%US

2.3%9.5%

CAGR05 – 08E

CAGR05 – O8E

Population Growth

GDP/Capita Growth

CAGR05 – 08E

CAGR05 – O8E

Population Growth

GDP/Capita Growth

CAGR05 – 08E

CAGR05 – O8E

Population Growth

GDP/Capita Growth

CAGR05 – 08E

CAGR05 – O8E

Population Growth

GDP/Capita Growth

Source: IMF - World Economic Database (April 2007).

As can be seen above, the UAE stands out among countries of the MENA region and developed and emerging Europe for the

combination of economic and population growth. In fact, much of the population growth expected in the coming years comes from

other MENA growth markets, underlining the current attractiveness of the UAE as a place to work. It is quite possible that this ‘first

mover advantage’ will become still more entrenched over time, as cities such as Dubai and Abu Dhabi become established as the

financial and commercial capitals of the region.



UAE is diversifying rapidly: Real estate takes over from oil as growth leader

The substantial rise in the price of oil over the last few years has undoubtedly boosted the rate of economic growth and

pace of economic transformation in the UAE, but it is important to note that the share of the oil and gas sector in GDP has

fallen over this time as the economy continues to diversify. Growth in services and industrial sectors has been higher in real

terms than the oil sector, as a consequence of economic policies devised in a period of lower hydrocarbon prices.

We believe that the region’s growth trajectory is less dependent now on the level of oil prices than in previous periods, as

economies continue to diversify. In the UAE, the non-oil segment of GDP is over 62% and non-oil growth has been resilient to

recent dips in oil prices. The key to the non-oil sectors’ ability to keep pace with the growth of the petrochemical complex lies in the

increased commitment to reform and increased investment that many GCC governments have shown in this cycle.

Reform momentum in the UAE has been led by Dubai, which recently renewed its ten-year strategic plan, first formulated in 2000,

to stretch to 2015. It outlines the reforms required to achieve targets that include reaching GDP of US$108 bn by 2015 (11%

compound annual growth from 2005) and GDP per capita of US$44,000, equivalent to that of the US today.

Exhibit 22: The non-oil sector has been growing rapidly

Components of GDP, Dh mn, current prices

Exhibit 23: At constant prices, diversification is even more evident

Share of GDP, constant prices

0

100,000

200,000

300,000

400,000

500,000

600,000

2000 2001 2002 2003 2004 2005

Oil sector Government sector Private sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2005

Crude Oil & Natural Gas Agriculture Industry Services

Source: IMF, UAE Ministry of Economy.

Source: IMF, UAE Ministry of Economy.



Exhibit 24: Growth in GDP now being led by real estate and construction …

Growth in components of GDP, current prices (%)

Exhibit 25: … in Dubai 95% of the economy is non-oil

Non-oil share of GDP, current prices (%)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2001 2002 2003 2004 2005 2006*

Cha

nge

y-o-

y, %

Gross domestic product Construction Real estate

0

10

20

30

40

50

60

70

80

90

100

1975 1980 1985 1990 1995 2000 2005

Source: IMF.

Source: IMF.

The UAE is positioning itself as a highly competitive and efficient hub for a variety of industries and services. Its favourable

geographical location, as a gateway between Asia and Europe or Africa, is a natural endowment like its oil, but much has

been achieved politically to enhance the economy’s attractiveness, including:

• Zero income tax on individuals and corporate entities. Budget revenues come largely (about two-thirds) from revenues of

the state-owned oil and gas producers; this sector effectively faces a 100% tax burden.

• Economic free zones where foreign entities can own 100% of local firms, are exempt from duties and can fully repatriate

capital. Several of these zones specialise in certain industry segments: Dubai is home to Dubai Media City, Dubai Internet City,

Dubai International Finance Centre, for example, as well as the original Jebel Ali Free Zone. These areas have been

instrumental to Dubai attracting such strong flows of FDI in recent years; not only is the taxation and regulation environment

attractive, but the ‘clustering’ of sector specialism leads to positive externalities. Even outside these zones, companies may

enjoy tax holidays and freedom to repatriate capital, but ownership is generally restricted to 49%.

• Foreign ownership of real estate, which was until relatively recently not possible even for nationals. Freehold ownership is

currently restricted to certain foreign ownership zones (FOZ). This, in fact, is an important factor in allowing controlled

expansion of the real estate market, lessening the potential for a property crash, as seen in other regions.



Exhibit 26: UAE’s current account is in massive surplus …

Current account balance, share of GDP (%)

Exhibit 27: … as is the fiscal balance: Petrodollars are driving investment

Federal budget balance, share of GDP (%)

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005

-5

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005

Source: IMF.

Source: IMF.

Exhibit 28: Investment in the non-oil sector has increased dramatically …

Growth in Gross Fixed Capital Formation, nominal (%)

Exhibit 29: … meaning that overall GDP growth is less impacted by oil

prices

Growth in GDP by sector, constant 2000 prices (%)

-15.0

-10.0

-5.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2001 2002 2003 2004 2005

Crude Oil & Natural Gas Manufacturing IndustriesConstruction Real Estate & Business Services

-10.0

-5.0

0.0

5.0

10.0

15.0

2001 2002 2003 2004 2005

Crude Oil & Natural Gas Agriculture Industry Services

Source: IMF.

Source: IMF.



Exhibit 30: UAE’s economy is showing strong growth across almost all sectors

Growth rates of GDP and components, current prices (%)

Growth, % 2001 2002 2003 2004 2005 2006*

Gross domestic product -1.5 6.2 18.7 19.8 27.3 22.5Crude oil production -13.5 -6.9 30.4 32.9 43.3 29.6Other sectors 4.6 11.7 14.6 14.7 19.9 18.6Agriculture -2.0 2.7 0.5 10.4 9.2 11.0Industry 2.2 11.5 15.8 15.5 28.3 15.2Mining and quarrying 2.2 4.0 5.5 8.2 10.3Manufacturing 1.1 7.3 11.9 18.8 37.4 6.5Electricity and water 6.0 0.8 21.9 11.8 17.6 20.5Construction 3.5 23.1 21.4 11.1 15.5 34.9Services 6.5 12.6 15.1 14.5 16.3 21.1Trade 3.6 23.5 20.2 21.0 20.7 1.4Wholesale and retail trade 2.6 26.5 22.7 22.6 20.8 19.2Restaurants and hotels 8.1 10.9 8.3 12.5 20.8 17.6Transportation, storage, and communication 13.6 11.0 13.6 10.4 17.6 20.1Finance and insurance 13.3 2.8 14.9 17.4 17.6 29.8Real estate 3.1 14.6 12.6 18.4 17.6 30.7Government services 5.7 3.1 10.3 5.6 7.1 9.9

* preliminary data

Source: IMF, UAE MoE.

On-shoring of capital is the driver as diversification takes a new form

Potentially the most important decision in policy direction that the UAE appears to have made is how best to diversify its

petrodollar income stream. This, in our view, is central to the acceleration in the economy’s growth trajectory over the last

few years, and supportive to the sustainability of such trends if oil prices moderate.

Historically, much of the emirates’ hydrocarbon revenues had been invested offshore, either in foreign treasuries or in equities via

government investment funds such as ADIA. Such activity is likely to continue across the GCC regions (as witnessed by numerous

recent major acquisitions by institutions such as Qatar’s Delta Two) but it is clear that from around 2002-2003 there was a step

change in levels of investment in the non-oil sectors of the domestic economy (see Exhibit 30).

This coincided, of course, with a pick up in oil prices, but there were other factors that led to changes in capital, and hence

investment, flows. For example, following 9/11 Gulf investors either found obstacles to investing in foreign markets, especially the

US, or were afraid of funds becoming frozen. At the same time, perceptions were that the US dollar would weaken and speculation

rose that GCC currencies may eventually abandon their peg to the US dollar, making GCC assets more attractive.



There were political changes too. The present leaders of the UAE and Dubai, Sheikh Khalifa bin Zayed Al Nahayan and Sheikh

Mohammed bin Rashid Al Maktoum, had already become more involved in the political process, prior to succession, and each had

visions as to how to liberalise their emirate’s economies, as witnessed by the relaxation of property laws, for example.

The retention, and attraction, of financial capital is finding its natural corollary in migration of labour and consequent high rates of

population growth. By lowering barriers to movement of labour, and building appropriate infrastructure, the UAE has created the

conditions for human and financial capital to combine and generate sustainable economic growth.

In short, the mode of hedging the emirate’s oil wealth shifted from external to internal diversification. In effect, Gulf states

began incrementally ‘on-shoring’ their own financial capital. This makes an interesting contrast with BRICs economies (with

the exception of Russia) that have benefitted from the off-shoring of foreign capital to tap their low cost labour pools.

Exhibit 31: GDP expansion further aided by rapid population growth …

UAE population and forecasts

Exhibit 32: … driving per capita growth rates into high double digits

Per capita GDP growth, %

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

8% CAGR

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2001 2002 2003 2004 2005 2006

Abu Dhabi Dubai

Source: World Bank.

Source: UAE MoE.



Will the GCC economies run out of fuel? Our oil view suggests not

That the GCC economies are, at least initially, driven by the hydrocarbon sector cannot be disputed, although we discuss the

ongoing diversification of economies in some detail in this report. While in transition, a high oil price should support

investment in infrastructure while other sectors grow. The outlook for the medium-term oil price is therefore more

important than long-term projections. Our Energy Research team’s outlook is positive.

The importance of the oil price outlook is moderated by ongoing diversification of the economy, as we have noted, but remains a

significant source of fiscal revenues, and certainty of revenue stability would be a major factor in the scaling of future investment

planning. From a total revenue perspective, however, it is worth noting that the UAE plans to increase its production capacity to

3 mn bbl per day over the next two to three years, which would either help offset price declines or result in an outright increase in

revenues.

Exhibit 33: UAE plans to increase output to 3.0 mn barrels per day by 2010

Oil output and revenues from oil and oil products, Dh mn

Exhibit 34: Average Abu Dhabi oil prices on the up

Export oil prices, US$ per barrel

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2001 2002 2003 2004 2005

Bar

rels

per

day

, mn

0

10,000

20,000

30,000

40,000

50,000

60,000

Rev

enue

, Dh

mn

Crude oil and condensates Oil and product exports

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006

Average Abu Dhabi oil export price

Source: : IMF, UAE MoE.

Source: : IMF, UAE MoE.



Our Global Energy Research team recently raised their forecasts for medium-term oil prices, and believe markets are now in

‘phase 2’ of a multi-year ‘super-spike’ era (see ‘The next leg up for oil markets – Still searching for demand destruction

tipping point’, September 14, 2007). Resilient demand has moved their forecasts to the top end of their former US$50-

105/bbl oil price band. As such, our base-case forecasts now reflect the upper portion of that band, including US$80/bbl for

2008 and US$90/bbl in 2009 for crude oil.

Based on the updated view of the price that might destroy demand, the team raised the high side of their ‘super-spike’ range to

US$135/bbl for crude oil, although they note that prices may not need to go so high to lower demand. The remainder of this chapter

is extracted from the report and summarises the team’s view.

We believe oil markets have begun what looks to us to be the next big leg up, what we are calling ‘phase 2’ of a multi-year, three-phase ‘super-spike’ era. The core drivers of our long-standing ‘super spike’ framework remain firmly intact:

spare capacity throughout the oil value chain remains limited, supply is struggling to grow, and demand growth continues. It

remains our view that oil and refined product prices need to move to a high enough level for a long enough period of time in order

to stimulate a multi-year reduction in demand only after which might lower prices return.

Key trends underpinning our bullish view include:

• Demand growth remains resilient. We expect ~1.5 mn b/d per annum of demand growth over the remainder this decade,

which is consistent with ~ 4% global GDP growth. Importantly, after two years of deceleration, global oil demand growth re-

accelerated in 2007 despite continued US$60-70/bbl oil.

• Non-OPEC crude oil supply is struggling to grow. We expect not more than 0.7 mn b/d per annum of non-OPEC crude oil

growth in coming years, which also provides some cushion should oil demand growth disappoint due to US GDP weakness.

Non-OPEC supply continues to fall well short of consensus expectations that have called for ~1.5 mn b/d of growth each year.

• Upstream industry cost curve continues to rise as well as steepen. We believe the marginal producer (defined as the

bottom portion of the fourth quartile of our global coverage universe) now requires a stunning US$75-80/bbl WTI/Brent oil price

in order to earn a cost-of-capital (i.e., 8%) return. Effectively, the marginal producer is unable to grow supply, resulting in an

exponential increase in its costs. While the price needed by the ‘average’ producer is much lower—in the low US$40s/bbl—in

an environment of limited spare capacity, we believe the marginal producer will set the clearing price for oil.

• OPEC spare capacity expected to remain at minimal levels. As global oil demand growth continues and non-OPEC crude

oil supply falls short, the world we think is becoming increasingly dependent on OPEC (i.e., Saudi Arabia) being able to

sustainably grow its production. Our base-case view assumes Saudi Arabia meets its ~3% per annum production capacity

growth target, despite the fact that just about all of the super majors fell well short of their own production growth targets.

Note, even if Saudi Arabia meets its objectives, we see little-to-no increase in likely spare capacity given resilient oil demand

growth.

• Refining capacity remains tight. Global refining spare capacity seems even tighter than that of crude oil. New construction

appears likely to be right around the levels of demand growth over the remainder of this decade, suggesting no increase in

spare capacity. Excluding Asia capacity adds (but including Reliance Petroleum’s new facility since it is targeting western

markets), Atlantic Basin supply/demand looks especially tight. Tightness in heavy-coking refining capacity coupled with new

near sulfur-free gasoline and diesel regulations in Western Europe and the United States are contributing to a widening

premium for light-sweet crude oils like WTI and Brent.



Given lack of supply response, we continue to focus on point at which global oil demand growth will turn negative. We

believe the experience of the last two years shows that the low end of our previous US$50-105/bbl oil price band has not resulted in

demand destruction. As such, we are now building the upper portion of the previous band into our base-case forecast. We now

forecast US$80/bbl for 2008, US$90/bbl in 2009, and US$80/bbl in 2010 for crude oil and a corresponding US$14/bbl, US$16/bbl, and

US$14/bbl for Gulf Coast 3:2:1 refining margins. For US natural gas, our 2008 forecast of US$8.50/MMBtu is unchanged and we are

raising our 2009 forecast to US$10/MMBtu followed by a return to US$8.50/MMBtu in 2010.

Exhibit 35: We believe we are now in ‘phase 2’ of a multi-year, three-phase ‘super-spike’ period

'70-'06 avg. = $40

The last "super spike" was from 1979-1985

'86-'98 avg. = $28

'70-'86 avg. = $47

During Phase 1, oil prices moved

sharply higher from old $15-$25 trading

band

We believe Phase 2 represents the next big leg up Phase 3: "the big

leg down" and a return to a lower "normalized" range,but timing is uncertain

$0

$20

$40

$60

$80

$100

$120

$140

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

E

2010

E

2012

N

$/bb

l


Exhibit 36: Goldman Sachs Global Investment Research commodity price forecast changes

new old new old new old new old new old new old2007E:

1Q $58.09 $58.09 $58.08 $58.08 $10.07 $10.07 $3.98 $3.98 ($13.10) ($13.10) $7.06 $7.062Q 64.95 64.95 68.73 68.73 23.58 23.58 4.59 4.59 (9.76) (9.76) 7.65 7.653QE 73.00 68.00 73.00 69.00 12.00 12.00 5.10 5.44 (11.50) (13.60) 6.13 7.254QE 72.00 68.00 72.00 68.00 9.00 9.00 5.76 5.44 (14.40) (16.32) 7.25 7.50Year $67.01 $64.76 $67.95 $65.95 $13.66 $13.66 $4.86 $4.86 ($12.19) ($13.20) $7.02 $7.37

2008E $80.00 $68.00 $80.00 $65.00 $14.00 $12.00 $6.40 $5.44 ($16.00) ($17.00) $8.50 $8.502009E 90.00 68.00 90.00 65.00 16.00 12.00 7.20 5.44 (18.00) (17.00) 10.00 8.502010E 80.00 45.00 80.00 42.00 14.00 7.00 6.40 3.60 (16.00) (11.25) 8.50 6.002011E 75.00 N/A 75.00 N/A 13.00 N/A 6.00 N/A (15.00) N/A 7.00 N/A 2012N 50.00 N/A 49.00 N/A 8.00 N/A 4.00 N/A (10.00) N/A 6.00 N/A

Maya-WTI ($/bbl) HH nat gas ($/MMBtu)WTI spot oil ($/bbl) Brent ($/bbl) GC 3:2:1 ($/bbl) WTI-WTS ($/bbl)




Potential for currency appreciation to enhance returns

Our Economics Research team have argued that the existing GCC currency pegs are unsustainable and that the region will

have to move to a more flexible exchange rate regime (see ‘GCC: Fed cut raises likelihood of revaluation’, September 20,

2007). We have not made assumptions of currency revaluations in our forecasts. The remainder of this chapter is extracted

from the report and summarises our Economics Research team’s views.

Recent developments in the US, as well as in the energy markets, have intensified the policy dilemmas for GCC central banks and

increased the likelihood of a peg adjustment, especially in the UAE and Qatar, both of which are struggling with serious inflation

pressures. Likewise, Kuwaiti authorities could allow for further KD appreciation, in response to recent US dollar weakness.

We believe that price and currency stability objectives cannot be reconciled, given the favourable terms of trade and rapid public

expenditure growth.

So far, regional central banks have allowed for inflation, reluctant to let go of the existing currency pegs which have served as a

firm nominal anchor. Regional governments were also unwilling or unable to impose meaningful fiscal restraint; the ensuing

sterilisation problem has fuelled inflation pressures, especially in the rapidly diversifying economies of the UAE and Qatar, where

official inflation rates recently surged to around 15%.

Exhibit 37: GCC currencies do not look extremely overvalued, yet …

Real Effective Exchange Rate Index. 1990 =100.

Exhibit 38: … but petrodollar inflows and rising inflation = upward pressure

Annual CPI Inflation, 2006

40

50

60

70

80

90

100

110

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Bahrain Kuwait OmanQatar Saudi Arabia United Arab Emirates

0

1

2

3

4

5

6

7

8

9

10

UAE Qatar Kuwait Bahrain Saudi Arabia Oman

Source: IIF.

Source: IMF, IIF, Goldman Sachs Research estimates.



The pressure on regional central banks to allow for exchange rate flexibility has intensified over the past few months

• First, the structural pricing pressure in global energy markets has intensified, leading to a surge in oil prices. Our commodities

team sees the WTI average price at US$85/bbl in 2008. Other things being equal, this would imply a further improvement in the

terms of trade for the GCC region, which, unless it is counterbalanced by some fiscal restraint or currency appreciation, will

give way to further inflation.

• Secondly, the global environment remains US dollar bearish, with the US economy set to slow due to troubles in the housing

sector. The GCC region will import some inflation through US dollar weakness, a factor that recently forced the Kuwaiti

authorities to abandon the US dollar peg and allow for further exchange rate flexibility, tracking a composite currency basket

against the KWD.

• Finally, our US economics team expects the Fed to cut rates by a further 75 bp to 4.0% by early next year.

This poses a huge challenge for GCC central banks. To keep their pegs sustainable against the US dollar, the GCC central banks

should keep their policy rates broadly in line with the US. But the higher inflation means that real rates are already negative in the

GCC, and a further reduction in local policy rates would only push inflation higher. On the other hand, if the GCC central banks do

not follow the Fed's lead, it would lead to a widening of interest rate differentials and intensify appreciation pressure on their

currencies; hence the policy impasse.

In a recent meeting in Damascus, the GCC central bank governors expressed their commitment to the existing currency regimes

and said that they would ease policy rates in line with the Fed. However, the Saudi Arabian Monetary Authority (SAMA) announced

this morning that it will not cut rates, in view of inflation risks. This clearly undermines the credibility of the Saudi peg. However,

Saudi authorities are determined to maintain the existing peg arrangement and are unlikely to make a move anytime soon. But

clearly, a combination of higher oil prices, USD weakness, Fed easing and mounting inflation pressures will render it increasingly

more difficult for the two big spenders of the region, the UAE and Qatar, to hang on to the USD pegs. We believe the probability of

a revaluation has increased after recent events in the US and global energy markets, although the exact timing of a potential move

is very difficult to ascertain.



Real estate and infrastructure: How to gain exposure to the theme

Exhibit 39: Real estate and infrastructure development are at the centre of the structural transformation of the UAE economy

We are not concerned about overheating at this point; Real estate development is not the driver of economic growth, but the vehicle

Political transformationand master planning

Rapid economic growth• GDP CAGR 22% 2002–06

• Construction >20% CAGR

• Diversification from oil


PPoolliittiiccaall ttrraannssffoorrmmaattiioonnaanndd mmaasstteerr ppllaannnniinngg


Rapid economic growth• GDP CAGR 22% 2002–06

• Construction >20% CAGR

• Diversification from oil

Inward migrationcontains inflation

Rapid population growth• Attracted by employment

prospects and low taxes

• Proximity to low cost labourmarkets

Inward migrationcontains inflation

• Atpros

•IInnwwaarrdd mmiiggrraattiioonnccoonnttaaiinnss iinnffllaattiioonnInward migrationcontains inflation

Rapid population growth• Attracted by employment

prospects and low taxes

• Proximity to low cost labourmarkets

Houses and attractsemployees

Property law and economicreform

• Foreign ownership zones

• Free enterprise zones

• Freehold property reform


se

d property

HHoouusseess aanndd aattttrraaccttsseemmppllooyyeeeess


Property law and economicreform

• Foreign ownership zones

• Free enterprise zones

• Freehold property reform

Highlysupportive

external conditions

Low interest rates and highliquidity

• Interest rates and currencypegged to US

• High oil prices

• Curr a/c surplus c.15% of GDP

Highlysupportive

external conditions

est rates aquidit

Highlysupportive

external conditions

Highlysupportive

external conditions

Low interest rates and highliquidity

• Interest rates and currencypegged to US

• High oil prices

• Curr a/c surplus c.15% of GDP

RealEstateboom

RealEstateboom

Source: Goldman Sachs Research



The investment case for the region is rooted in its ability to build sufficient infrastructure to support economic diversification

and growth while avoiding the ‘boom-bust’ cycle of over-investment that has befallen other economies in the past. Likewise,

the investment case for our coverage stocks is rooted in the sustainability of their returns on capital.

In selecting our ten Buy list stocks in our coverage universe providing exposure to the infrastructure theme in the UAE, we apply

qualitative and well as quantitative criteria, although the former are in essence reflected in the latter via our modelled forecasts. We

find that our Buy list stocks, with the greatest upside to price target, tended to populate the ‘attractive’ segment of our EV/GCI

versus CROCI/WACC chart, or were migrating in that direction, despite this analysis being based only on static 2009 forecasts.

This hints at the sustainability of expected returns of these companies, and thus we circle back to the qualitative aspects of our

analysis. Exhibit 40 shows a similar dispersal of our coverage universe as the valuation chart if the axes become their position in

the ‘value chain’ and their degree of market dominance, measured by share or pricing power. Naturally, we prefer stocks with long-

term pricing power and believe that the market may be mispricing some sectors or stocks in the UAE markets on expectation of

sustainability that may not occur, or by not believing in the sustainability of premium market returns.

We believe that stocks such as Emaar, Union Properties and Aramex belong in the latter category and are thus undervalued,

and that stocks such as the cement companies in our coverage group are in the former; their pricing power should reduce

substantially over the coming few years, along with their market ratings.

Below we summarise our sector views. For more detail, please see the individual company summaries that follow.

Exhibit 40: Our Buy list stocks occupy the top end of the value chain; developers, contractors, logistics suppliers

Our Sell ideas are in the cement sector; commoditised, fragmented, with low barriers to entry

Mar

ketS

hare

/Pric

ing

Pow

er

MasterPlanners

SecondaryDevelopers Contractors Suppliers

High

Low

Emmar

AldarUnion

CementCompanies

ACIC

Bildco

ArabtecOCI

Our Buy liststocks have

pricing powerand are higherup the value

chain Our Sell list stocks are in fragmentedindustries with no pricing power

Source: Goldman Sachs Research.



Exhibit 41: Many of our Buy list stocks fall in the ‘right’ segment of the EV/GCI vs CROCI/WACC scatter chart; we expect those outside to migrate as they grow

Based on estimates for 2009E

ALDR UPRO

ADNH

OCIC

ARTC

ACIC

SCID

RKCC

NCC

ADANA

AKCNS

MRDIN

UNYEC

AGLT

ARMXAMLK

TAML

OILC

GCEM

BOLUC

UCC

TABRRAKC

AIRA

BILD

EMARCIMSA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

CROCI/WACC

EV

/GC

I

ALDR UPRO

ADNH

OCIC

ARTC

ACIC

SCID

RKCC

NCC

ADANA

AKCNS

MRDIN

UNYEC

AGLT

ARMXAMLK

TAML

OILC

GCEM

BOLUC

UCC

TABRRAKC

AIRA

BILD

EMARCIMSA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

CROCI/WACC

EV

/GC

I

AA High growth and / or cash generationB Deteriorating fundamentalsBB Deteriorating fundamentals

A

B

A

B

B

Buy

Sell

AA

BB

AA

BB

BB

Buy

Sell

Source: Factset, Bloomberg, Goldman Sachs Research estimates, Quantum database.

Stocks populating the upper-left quadrant of our EV/GCI versus CROCI/WACC scatter chart (see the valuation chapter for a detailed

description) are those in the bottom right of our value chain, i.e. companies with limited pricing power and therefore inferior

returns on capital. We do not see much scope for improvement in the case of the cement companies, for example, as capacity

additions come on stream, so these stocks should de-rate further, in our view.

Stocks in the lower-right segment including Emaar, Union Properties, Arabtec, Agility and ADNH are earning a wide premium of

return over cost of capital and could therefore trade at a much higher valuation if those returns are sustainable. We believe they are

more sustainable than the market currently gives credit for and hence rate them as Buy. Aldar, Tabreed and Aramex will grow into

the premium return section as their businesses mature and fully leverage their capital base, we believe.



Real estate developers: Buy Emaar, Aldar, Union Properties

We believe high returns on capital are sustainable for the primary developers in the UAE and their shares are therefore

significantly undervalued. At this point we do not believe that development is at excess: in our view, real estate is not the

driver of growth in the UAE, but the vehicle for the region’s development, to achieve a level of infrastructure and activity

commensurate with its earning power. This process still has a long way to go, in our view.

The real estate sector in Dubai and other areas of the region has been experiencing a boom since property reforms were enacted

and economies began to feel the effect of higher oil prices. This, of course, raises the risk of oversupply in coming years, which we

believe is a major reason behind the discount to NAV at which developers trade.

We believe that growth and returns are more sustainable than the market appears to believe. It is true that growth in construction

and real estate is at all time highs (34% and 31% y-o-y in 2006 according to GDP data) but it is less clear that this is excessive, given

rapidly-rising demand. Rents are rising, as an indication of real end-user demand, rather than off-plan sales, and vacancy rates are

low in both residential and commercial segments.

Our analyses of demand and supply in the Dubai and Abu Dhabi markets do not suggest substantial oversupply over the

medium term. We believe demand and supply will remain in reasonable balance.

Our demand estimates are based on: (i) expected population growth, (ii) the proportion of the workforce in communal

accommodation, and (iii) the ratio of inhabitants per household. We show a summary of our Dubai model in Exhibit 43.

For Dubai, for example, we expect excess supply in certain geographical or market segments but, overall, demand and supply

appear balanced. Our estimates suggest demand for over 200,000 residential units between 2006 and 2010, which is likely to be

outstripped by supply marginally around 2008, before the market regains balance.

We forecast higher supply and lower demand than consensus. While the market remains tight overall, this does not imply stable or

rising unit prices. In fact, for developers such as Emaar, we forecast unit prices diminishing by as much as 25% over the next three

years or so, although this is in part due to changes in mix (more apartments than villas, for example) than outright declines in

values per square metre.

Taking into account growth rates in the region’s economies and populations, and all we have discussed about the nature of

structural reform and the sustainability of economic expansion, we believe there is substantial unpriced, profitable growth

for each of the developers in our coverage universe. We initiate coverage of Aldar Properties, Emaar Properties and Union

Properties on our Buy list.



Exhibit 42: Is this a boom-bust cycle? Unprecedented investment plans feature our coverage companies such as Emaar and Aldar properties

Announced projects by value, as tracked by the Middle East Economic Digest

Ranking Developer Headquarters Selected projects Project cost($ million) Location Status/completion

Project portfolio value ($ million)

1 Emaar Properties Dubai Emirates Living 2,000 UAE Completion fourth quarter 2007 84,619Dubai Marina 4,360 UAE Completion 2010-12Umm al-Quwain Marina 3,267 UAE Phase 1 completion 2009Burj Dubai 20,000 UAE Under construction. Completion 2008-09Samarah Dead Sea Golf Beach Resort 500 Jordan Construction started January 2007

Bahia Bay 1,225 Morocco Completion 2011King Abdullah Economic City 26,600 Saudi Arabia Completion third quarter 2008Eighth Gate 500 Syria Under construction. Completion 2012

2 Aldar Properties Abu Dhabi Raha Beach 15,000 UAE Under construction. Final completion 2020 60,000Yas Island 40,000 UAE Under construction. Final completion 2014Central Market 1,200 UAE Construction due to start 2007. Completion 2010Al-Gurm Resort 300 UAE Ground work started. Completion 2008

3 Tatweer Dubai Dubailand 20,000 UAE First-phase completion 2010 47,000Tiger Woods Dubai tba UAE Ground work started. Completion 2009Bawadi 27,000 UAE Not yet started

4 Dubai Properties Dubai Business Bay 40,000 UAE Work started. Completion 2010 43,212Jumeirah Beach Residence 360 UAE Under construction. Completion due 2007Mirdif Villas 327 UAE Under construction. Completion 2008Al-Quoz accommodation 490 UAE Under construction. Completion 2008Mudun 400 UAE Under construction. Completion 2009

5 Nakheel Dubai Palm Jumeirah na UAE Completion 2012 30,000+Dubai Waterfront and The Palm Jebel Ali na UAE 95 per cent of the land has been reclaimed

Tall Tower na UAE Planned tbaPalm Deira na UAE 20 per cent of the land reclaimedThe World na UAE Reclamation completed 2008

6 Al-Futtaim Real Estate Dubai Dubai Festival City 16,540 UAE Some parts finished. Final completion 2012 27,240Abu Dhabi Festival City 9,500 UAE Not yet started

7 Tourism Development & Investment Company Abu Dhabi Saadiyat Island 27,200 UAE Under construction. Final completion 2018 27,200

Source: MEED.



Exhibit 43: UAE real estate: Our macro model supports a doubling of housing stock by 2015

Extract from our Dubai demand/supply model (Population in thousands)

Demand 1995 2005 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Population, '00 689 1,130 1,366 1,503 1,638 1,769 1,893 2,006 2,107 2,212 2,322 2,439Growth, % 21 10 9 8 7 6 5 5 5 5% in communal housing 36 34 33 31 30 28 26 25 23 22 20Pop requiring individual housing 723 896 1,010 1,127 1,245 1,363 1,477 1,584 1,699 1,821 1,951

Pop per unit 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Housing Units, '000 112 238 295 334 374 414 454 492 528 566 607 650Growth, % 24 13 12 11 10 8 7 7 7 7

Incremental unit demand, '000 58 38 40 40 40 38 36 38 41 43

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

High growth locations, per Colliers International: 4 35 80 11Percentage development in HGLs 80 75 75 75

Incremental unit supply, '000 5 47 107 14 28 35 41 45 47 49

Cumulative deficit (53) (44) 23 (4) (16) (18) (14) (7) (1) 5


Exhibit 44: UAE real estate: Our forecasts are conservative, relative to consensus, but we still see a tight market

We forecast demand and supply in cumulative balance to 2015

(80)

(60)

(40)

(20)

0

20

40

60

80

100

120

Incremental unit demand, '000 Incremental unit supply, '000 Cumulative deficit

Market in surplus in 2008, tight thereafter

Estimates for 2006 - 2010 Supply DemandEmaar 107 300EFG 270 250Global Investment House 170Colliers (low) 170 151Colliers (high) 240 180Asteco 210 215SICO 200 390Emirates Specialities Co. 175 200MEED 175 180Average 191 233Goldman Sachs 201 217

Estimates for 2006 - 2010 Supply DemandEmaar 107 300EFG 270 250Global Investment House 170Colliers (low) 170 151Colliers (high) 240 180Asteco 210 215SICO 200 390Emirates Specialities Co. 175 200MEED 175 180Average 191 233Goldman Sachs 201 217

Emaar’s own estimate of demand is substantially higher than ours

Source: Industry estimates, Goldman Sachs Research estimates.



Exhibit 45: Leading GDP up; construction and real estate rise sharply

Change year on year, current prices (%)

Exhibit 46: Housing the highest CPI component; result of tight supply

Annual change in components of CPI (%)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2001 2002 2003 2004 2005 2006*

Cha

nge

y-o-

y, %

Gross domestic product Construction Real estate

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2002 2003 2004 2005

% C

hang

e

Food & tobacco Clothing Rent & housingMedical services Transport & comms Education and leisureOther goods and services

Source: IMF, UAE Ministry of Economy. * - preliminary figures

Source: IMF.

Exhibit 47: Prime office rentals in Dubai have risen sharply …

US$ per square foot

Exhibit 48: … as vacancies have reduced to nil

Vacancy rate for prime office space, %

0

10

20

30

40

50

60

70

80

1998 1999 2000 2001 2002 2003 2004 2005 2006

0%

5%

10%

15%

20%

25%

30%

35%

40%

1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Colliers International.

Source: Colliers International.



Contractors and materials suppliers: Buy Arabtec

The construction sector in the GCC has been experiencing a boom since property reforms were enacted and economies began to

feel the effect of higher oil prices. Substantial investments in infrastructure to support the growing economy and population result

in an exceptionally large construction sector relative to other economies, even in the emerging world.

Since 2003, the construction sector has contributed around 8% of total GDP in the UAE and grown at a nominal CAGR above 20%.

MEED, a regional economic digest, estimates project values in the UAE totaling almost US$700 bn and over US$1.6 tn in the GCC in

total. This clearly provides a high-growth environment, at least in the medium term, but it also attracts much competition.

From a stock perspective, we believe it is the sustainability of pricing power that drives value, rather than growth, and

companies in the construction sector are beginning to find the balance of power moving back to developers after a few

years of excess demand for their services pushing up costs. They are therefore potentially moving into a pinch point,

squeezed between continued inflation in labour and materials costs, and downward pressure on rates from developers on

revenues. As large-scale projects are delivered, contractors will need to find new employment for their labour and capital.

We initiate coverage of four Middle East construction companies, Arabtec, Orascom Construction Industries (OCI), Aerated Concrete

Industries, (ACIC) and Bildco.

Of the group, we include only Arabtec on our Buy list. While we believe OCI is a strong regional operator, its large exposure to

cement reduces the sustainability of its returns, in our opinion, while Arabtec enjoys a longer-term advantage as a pure-play

contractor. It is the contractor of choice to a number of the leading property developers, has strong political patronage and should

benefit from the technical expertise gained from building the Burj Dubai, the world’s tallest building, as further mega projects are

planned throughout the region. ACIC and Bildco are in competitive businesses of material supply and mid-tier contacting and are

under constant margin pressure.

Exhibit 49: Announced projects worth over US$1.6 tn in the Gulf, with almost US$700 mn in the UAE

Announced projects by value, as tracked by the Middle East Economic Digest

Announced project values, USD mn 10-Sep-07 10-Aug-07 % change on

month 10-Sep-06 % change on year

Bahrain 31,435.00 31,055 1.2 30,975 1.5Kuwait 252,662 252,757 0 212,635 18.8Oman 46,016 44,496 3.4 40,216 14.4Qatar 142,466 144,851 -1.6 117,437 21.3Saudi Arabia 363,278 365,239 -0.5 283,731 28UAE 662,984 665,101 -0.3 370,778 78.8GCC total 1,498,841 1,503,499 -0.3 1,055,772 42Iran 106,350 110,800 -4 103,433 2.8Iraq 25,747 26,202 -1.7 28,888 -10.9Gulf total 1,630,938 1,640,501 -0.6 1,188,093 37.3

Source: MEED



Exhibit 50: Arabtec is the lead contractor by 2006 orders, but much of the construction sector is in private hands of offshore

Announced contracts by value, as tracked by the Middle East Economic Digest

Company Based New orders2005 ($ million)

New order2006 ($ million) Change, %

Arabtec Construction UAE 832 1,793 16Arabian Construction Company Lebanon UAE 1,042 1,631 57Al-Hamad Contracting Company UAE 545 954 75Dubai Contracting Company UAE 274 855 212Al-Shalar General Contracting UAE 460 640 39Six Construct Belgium 376 553 47Snimizu Corporation Japan 0 544 nmAlec UAE 358 513 43Consolidated Contractors International Company Athens-based 527 502 -5Al-Naboodah Laing O'Rourke UAE/UK 381 490 29Al-Basti & Muktha UAE 272 463 70Dutco Balfour Beatty UAE/UK 258 436 69Al-Habtoor Engineering Enterprises UAE 1,251 310 -75Multiplex Australia 816 272 -67Murray & Roberts South Africa 400 200 -50Baytur Construction & Contracting Comp Turkey 0 108 nmAl-Muhairy General Contracting Compan UAE 49 89 82Al-Arrab Contracting Company Saudi Arabia 19 57 200Mushrif Trading & Contracting Company Kuwait 28 28 0Gull Leignton Australia 0 27 nm

Source: MEED.



Mortgage finance: Buy Tamweel

We initiated coverage of two UAE Islamic mortgage finance companies, Tamweel and Amlak, both of which we expect to

deliver strong asset growth in the coming years and improvement in ROE. We believe that, of the two stocks, Tamweel

provides more rapid growth at a cheaper valuation.

Liberalisation of property laws in UAE has greatly stimulated the real estate sector, with support from low interest rates and strong

economic and population growth. We forecast almost 50% CAGR in mortgage loans from 2007 to 2010.

UAE’s mortgage market is under-penetrated relative to global comparables, while the population structure (young, expatriate)

should encourage mortgage take-up. Amlak and Tamweel currently account for c.50% of UAE’s mortgage market.

Low mortgage penetration is a function of the lack of available loan products and the youth of UAE’s property market. Our forecast

for the mortgage market in 2010, based on expectations for property delivery, pricing, mortgage take-up and typical LTV, implies

mortgage/GDP of 9.7%, well below the level supported by UAE’s GDP/capita. Despite the distortions of the large hydrocarbon sector,

we believe our bottom-up projections are reasonable from a macro perspective.

Exhibit 51: UAE’s mortgage market is immature

Mortgage penetration is low relative to GDP per capital

Exhibit 52: UAE’s mortgage penetration is very low

Our forecast 13% mortgage/GDP in 2015 is low in global terms

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000GDP per Capita USD

Mor

tgag

e D

ebt G

DP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UKUSA

German

yJa

panMala

ysia

South Afri

caMoro

cco

HungaryKuwait

ChinaJo

rdan

Bulgaria

Poland

Tunisia

IndiaUAE

Leban

onTurke

yBah

rain

OmanQata

rIndones

ia

Saudi A

rabia

Egypt

Mor

tgag

e de

bt G

DP

Source: Goldman Sachs Research estimates, World Bank, IMF, Central Banks.

Source: Goldman Sachs Research estimates, World Bank, IMF, Central Banks.



Cement: Sell Union, Gulf, RAK White and National

We initiate coverage of six cement producers in the UAE, with four on our Sell list. We believe that cement stocks in

aggregate are mispriced, as a classic case of confusion of short-term profitability with long-term sustainable returns on

capital. We assume that oversupply will cause significant downward pressure on cement prices and profitability over the

coming two or three years, which we factor into our valuations.

UAE’s infrastructure developments have led to strong demand for cement and other building materials. We forecast cement

demand CAGR at over 12% in 2006-2010; prices have climbed to an all-time high. However, utilisation and prices will likely fall by

mid-2008 as increased capacity, new entrants and imports result in oversupply. We expect capacity to reach 28 mn tonnes next year,

over 50% above the forecast of 18 mn tonnes. We expect a peak-to-trough fall in prices of over 25% through 2010, towards cash

costs. Increased competition and price deflation will pressure all producers with declining sales volumes and lower margins, we

believe. ROIC will likely decline across the sector until capacity is shut down and the demand/supply balance is restored.

We believe National, RAK White, Union and Gulf are overvalued, with downside to our price targets, which are based on the

DCF values of core businesses plus the value of significant traded portfolios. SCIDC and RAK Cement offer some potential

upside, in our view, but due to our negative view on the sector we rate them Neutral.

Exhibit 53: Cement consumption per head is at extreme high

Consumption per capita, Kg

Exhibit 54: Economic growth the primary driver

Extraordinary growth, but sustainability unlikely

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

IndiaGrea

t Brit

ain Iraq

German

yRus

sia USAJa

pan Iran

China

OmanSpa

inSau

diKuw

aitBah

rain

UAEQata

r

Cement Consumption per Capita (kg)

Consumption per capita is highest in the GCC countries. 2006 per capita consumption in the UAE of 3,000 kg is expected to rise to over 4,000 kg before levelling off. Historical average for industrialising countries has been between 1,000 - 1,500kg

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Cement Consumption (Mn Tons) Cement Capacity (Mn Tons)

Capacity increases expected beyond 2008 and into 2009 will hold up capacity expansions and result in many producers operating at well below capacity. Sector already operating at less than 100% utilisation

Source: ICR, IMF, Goldman Sachs Research estimates.

Source: ICR, IMF, Goldman Sachs Research estimates.



Exhibit 55: Pricing environment: Gradual decline from highs in mid-2006

-

20

40

60

80

100

120

140

2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

UA

E C

emen

t Pric

e (U

S$/to

n)

Union Gulf RAK National RAK White SCIDC

White cement trades at a premium to ordinary Portland cement. Price correlation across the different types is high and stable

Average prices peaked in 2006 at around $80/ton, but have lost little during 2007, currently averaging c. $75/ton

Prices not expected to decline materially during 2007 as demand remains robust. Deflation will accelerate beyond year-end and throughout 2008 bottoming-out at around $55/ton

-

20

40

60

80

100

120

140

2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

UA

E C

emen

t Pric

e (U

S$/to

n)

Union Gulf RAK National RAK White SCIDC

White cement trades at a premium to ordinary Portland cement. Price correlation across the different types is high and stable

Average prices peaked in 2006 at around $80/ton, but have lost little during 2007, currently averaging c. $75/ton

Prices not expected to decline materially during 2007 as demand remains robust. Deflation will accelerate beyond year-end and throughout 2008 bottoming-out at around $55/ton

Source: Company data, Goldman Sachs Research estimates.



Other sectors: Buy Tabreed, Agility, Aramex, DFM, ADNH

We apply a similar qualitative overlay in selecting Buy list stocks from other sectors; we favour those stocks that we believe

possess unrecognised, sustainable growth or return on capital potential.

These are stocks such as district cooling provider Tabreed, whose quasi-monopoly position in its areas of operation, long-term

growth prospects and cost-hedged pricing model should generate long-duration returns at a premium to its cost of capital.

Agility and Aramex in the logistics space are asset light operators in an industry that typically grows revenues at a premium to GDP

growth. They enjoy barriers to entry from the very nature of the networks they operate and have consistently maintained margins

in respective lines of business.

Abu Dhabi National Hotels is another example of mispricing of organic growth, in our opinion, and we see further value in the

substantial land bank the company possesses.

Meanwhile, the DFM is a play on the validity of our call on the region and its capital markets as a whole. We expect sustained

strong growth from increasing volumes and new listings and believe the market has not priced-in the impact of new product

development (such as derivatives) proposed changes in IPO laws (allowing less than 55% of a company to be floated) or the ability

to replace trading commissions (if pricing comes under pressure) with charges for other services such as data provision. Thus we

believe that premium returns on its relatively light asset base are sustainable for a longer period than the market believes and that

the shares deserve to trade on high near-term multiples.

Exhibit 56: Goldman Sachs New Markets Research: Top ten beneficiaries of the Middle East boom

Our top ten Buy ideas have average upside to 12-month price target of 50%, while our four Sells have average potential downside of 16%

Company name SectorMarket

cap (USD bn)

Investment list

Valuation Methodology Price Target price Potential

upside

Director's Cut

Quartile

Multiple vs Peers

Emaar Properties Real Estate Developers 17.80 Buy DCF/Adj NAV Dh 10.75 Dh 16.20 51%Aldar Properties Real Estate Developers 3.49 Buy DCF/Adj NAV Dh 7.42 Dh 14.40 94%Union Properties Real Estate Developers 2.43 Buy DCF Dh 3.21 Dh 5.90 84%Abu Dhabi National Hotels Company Hotels 1.14 Buy DCF Dh 5.82 Dh 7.60 31%Arabtec Holding PJSC Construction 1.01 Buy DCF Dh 6.19 Dh 8.60 39%Agility Transportation: Logistics 6.23 Buy DCF KD 1.84 KD 2.40 30%Aramex PJSC Transportation: Logistics 0.78 Buy DCF Dh 2.60 Dh 3.40 31%Tabreed Utilities 0.75 Buy DCF Dh 2.44 Dh 3.20 31%Tamweel PJSC Financial Services 1.08 Buy WEV/DDM Dh 3.95 Dh 7.00 77%Dubai Financial Market Capital Markets 6.91 Buy DCF Dh 3.17 Dh 4.10 29%Union Cement Construction: Cement 0.73 Sell DCF/SOTP Dh 4.81 Dh 4.10 -15%RAK White Cement Construction: Cement 0.27 Sell DCF/SOTP Dh 2.17 Dh 1.90 -12%National Cement Company Construction: Cement 0.76 Sell DCF/SOTP Dh 10.15 Dh 8.00 -21%Gulf Cement Construction: Cement 1.26 Sell DCF/SOTP Dh 6.46 Dh 5.40 -16%

Source: DataStream, Goldman Sachs Research estimates.



We identify stocks with attractive growth at a reasonable price

We use a range of methodologies to set target prices for the stocks under our coverage to account for sector characteristics:

our principal valuation methodology is DCF, but for real estate we also employ adjusted NAV values, and for mortgage

companies we have developed a variant of the Warranted Equity Valuation to adjust for extreme near-term growth rates.

DCF is most appropriate methodology

Given potentially very high medium- and long-term growth prospects, limited coverage of relevant peer groups, diversity of

‘consensus’, we believe that DCF is the most appropriate valuation methodology for most of our coverage universe.

Adjusted NAV for property developers

In our coverage group, Aldar and Emaar publish ‘fair values’ for their land bank, which the market uses to set an adjusted NAV for

valuation purposes. We have adjusted these fair values to account for the developer’s expected margin. This is subtracted from

surveyors’ fair values and is implicit in market transactions. The published fair value of Emaar’s land bank, for example, is derived

by various methodologies, but we believe all are ‘pre-developer’s’ margin. Assuming a 15% developers margin on cost, and 45%

gross margin, we derive an additional fair value adjustment of 22.5% of the published fair value. We believe this is appropriate: ‘fair

value’ for land is an assessment of the price at which a profit can still be made on its development, so, in valuing the developer, we

believe it is appropriate to add back an estimate of this profit to the NAV. This accounts for the expected profitability of the business

in the same way we would assume profits accruing from future activities of an industrial company.

Exhibit 57: We adjust real estate ‘fair value’ adjustments to account for developers margin

(% of development value)

4537

55

8

0

10

20

30

40

50

60

70

80

90

100

Developmentvalue

Less: directcosts

Gross profit Less developer'smargin

Land 'Fair Value' Add backdeveloper

margin

22% on fa

ir

value

15% on cost

Land fair

value




Adjusted WEV methodology for mortgage finance companies

Significant near-term growth is a challenge for typical ROE-based valuation methodologies, such as the Warranted Equity Valuation

(WEV) method: Target P/BV multiple = (ROE-g)/(Ke-g).

Rapid earnings growth in the next few years for Amlak and Tamweel means both ROE-g and Ke-g will be negative and the

methodology breaks down. Even as growth rates begin to normalise, the methodology leads to distorted results that are not

reasonable or sustainable. We take two approaches to compensate for short-term growth rates far in excess of long-term

expectations, and for the excess capital that the companies are obliged to carry to smooth out fluctuations in rapid growth.

One is to adjust our DDM models for excess capital, which we achieve via hypothetical dividend adjustments (positive and

negative), targeting a 20% ratio of capital to risk-adjusted assets. This is above the central bank’s threshold of 15%.

More innovatively, we adjust the WEV approach by projecting P/BV calculations further into the forecast period at a conservative

target long-term growth rate (5%) and discounting values back to the price target date. Discounted future dividend payments are

added back, since projected fair values are calculated from forecast (post-dividend) balance sheets. Our 12-month WEV price target

is the average of these discounted values.

Exhibit 58: Our adjusted WEV valuation is close to DDM value

Adjusted WEV valuation, Tamweel, based on our financial forecasts

Exhibit 59: Graphically, we see future potential nominal performance

Adjusted WEV valuation, Tamweel and Amlak

WEV calculation - Tamweel 2008 2009 2010 2011 2012 Target P/BV 1.95 2.26 2.53 2.50 2.31 BV 2.45 2.92 3.42 3.96 4.54 PT at 5% long-term growth 4.78 6.60 8.65 9.92 10.49 Discounted value 4.78 5.97 7.09 7.35 7.03 Plus NPV of dividends post 2008 0.00 0.08 0.19 0.30 0.42 Total 4.78 6.05 7.27 7.65 7.45 Average 6.85 6.85 6.85 6.85 6.85 DDM Value 7.17 7.17 7.17 7.17 7.17

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

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

PT at 5% long-term growth Discounted value Average DDM Value Amlak - nominal





P/Es and PEGs provide a useful check

Clearly, more basic ratios such as P/Es do not capture growth potential, unless used within a PEG framework, or at long time

horizons, over which forecast error (ours and consensus) increases materially. We do not believe the market is using P/E ratios

across the Middle East region, given wide dispersion; in our opinion a reversion to a tighter range is likely as research coverage

deepens and market consensus consequently narrows.

Exhibit 60: Forecast P/Es at our target prices appear reasonable …

At our target prices, only Tabreed and DFM would trade above 15x 2009E

earnings; this is because of the longer duration of growth and cash flow

Exhibit 61: … as do EV/EBITDA multiples

EV/EBITDA multiples for our coverage sectors at target prices.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Real Estate Construction UAE Cement TurkeyCement

Transport Utilities SpecialtyFinance

DFM

2007E 2008E 2009E

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Real Estate Construction UAE Cement Turkey Cement Transport Utilities

2007E 2008E 2009E





Director’s Cut and IP scoring screens

Another technique that we incorporate is our Director’s Cut methodology, comparing the relationship of the ratios of EV to invested

capital and returns versus WACC, thereby attempting to judge whether the market is providing the correct premium to capital

employed to reflect the value creation on that capital.

The basic premise behind the Director’s Cut methodology is to consider how the market values the cash invested in a business

(EV/GCI) relative to the returns (value) created by the company from those assets (CROCI/WACC).

Exhibit 62: Definition of economic returns spread

EV CROCI

GCI WACC

The total capitalisation The spread of economic of the cash invested in = return over economicthe business cost of capital

Where:

EV (Enterprise value) = Market capitalisation + net debt + minorities + unfunded pensions

GCI (Gross cash invested) = Gross tangible and intangible assets (before depreciation or write offs) + investments in associates + working capital

CROCI (Cash return on cash invested) = Post tax, pre interest cash flow as a percentage of average GCI

WACC (Weighted average cost of capital) = Economic cost of equity (dividend yield + long term growth) + cost of debt, adjusted for capital structure

The definition of economic return valuation or CROCI

=EV CROCI

GCI WACC

The total capitalisation The spread of economic of the cash invested in = return over economicthe business cost of capital

Where:

EV (Enterprise value) = Market capitalisation + net debt + minorities + unfunded pensions

GCI (Gross cash invested) = Gross tangible and intangible assets (before depreciation or write offs) + investments in associates + working capital

CROCI (Cash return on cash invested) = Post tax, pre interest cash flow as a percentage of average GCI

WACC (Weighted average cost of capital) = Economic cost of equity (dividend yield + long term growth) + cost of debt, adjusted for capital structure

The definition of economic return valuation or CROCI

=

For full details of the methodology behind Director’s Cut and the results of

back-testing work, please see our series of Director’s Cut reports, the most

recent being: ‘Valuing the laggards’, February 23, 2006.


Basic methodology assumes reversion to sector average; incorporating ‘sustainability premia’ drives higher returns

At a simple level, we compare a company’s ratio of EV/GCI vs. CROCI/WACC against the sector average ratio. The basic theory is

that over the long term, the company’s ratio will converge with the sector average as under/overvaluations are arbitraged away.

However, our Tactical Research Group has also developed (and back-tested) more advanced methodologies which capture the fact

that companies generating either particularly high sustained returns or particularly low returns relative to the sector do not tend to

follow the same pattern as stocks closer to the average.

• Where relevant, we incorporate the findings of this work into our analysis. We also look at whether the stock has tended to

trade at a discount or premium to its sector over time and how this ratio is expected to change in the future.

• The Director’s Cut methodology does not fully capture growth, as it is a snapshot of the returns that we forecast for a particular

year. Therefore, the market’s expectations of above-average growth for a particular stock are likely to be manifested in the



stock appearing expensive on this screen. This is one of the reasons why we do not take a purely quantitative approach to

interpreting the results of the Director’s Cut screen.

• Furthermore, this methodology is inappropriate for companies with rapidly changing capital bases or very high growth, such as

for Tabreed and the DFM. Hence, we do not use Director’s Cut to inform our investment view for these companies.

Exhibit 63: Many of our Buy list stocks fall in the ‘right’ segment of the EV/GCI vs. CROCI/WACC scatter chart; we expect those outside to migrate as they grow

Based on estimates for 2009E

ALDR UPRO

ADNH

OCIC

ARTC

ACIC

SCID

RKCC

NCC

ADANA

AKCNS

MRDIN

UNYEC

AGLT

ARMXAMLK

TAML

OILC

GCEM

BOLUC

UCC

TABRRAKC

AIRA

BILD

EMARCIMSA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

CROCI/WACC

EV

/GC

I

ALDR UPRO

ADNH

OCIC

ARTC

ACIC

SCID

RKCC

NCC

ADANA

AKCNS

MRDIN

UNYEC

AGLT

ARMXAMLK

TAML

OILC

GCEM

BOLUC

UCC

TABRRAKC

AIRA

BILD

EMARCIMSA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

CROCI/WACC

EV

/GC

I

AA High growth and / or cash generationB Deteriorating fundamentalsBB Deteriorating fundamentals

A

B

A

B

B

Buy

Sell

AA

BB

AA

BB

BB

Buy

Sell

Source: Factset, Bloomberg, Goldman Sachs Research estimates, Quantum database.



Exhibit 64: Valuation is linked to financial performance, strategy and competitive advantage

0.0 0.5 1.5

1

CROCI/WACC

EV

/ G

CI

Companies with returns spreads less than 1x are destroying value. To add value they must shrink their business by restructuring and capital discipline, and grow returns

As the returns spread grows and value is created a growth strategy can be pursued, but it must be balanced growth and the asset base can still be upgraded

As returns reach industry leadership, returns must be held and the capital base grown as quickly as possible. Reaching this limit can result in acquisitions, especially if the company has highly rated paper

Why aren’t all companies in Q1 trading on a premium? The answer lies in understanding the duration of competitive advantage. Those companies spending less than 3 years in Q1will be valued on the basis of a return to sector average. Those with sustainable advantage enjoy premium ratings that widen with time. Understanding this duration of competitive advantage and relative valuation can result in high pay-offs for investors

Why doesn’t the market punish all those companies destroying value with discount ratings? The market expects either improvement in performance or corporate action. If companies remain in Q4 for a sustained period, valuation discount widens. Much improvement tends to be priced in by a market looking one year out.

Stocks close to the regression line are reliant on growth in returns to effect a re-rating. There is margin for error either side of the line. Limited investment opportunities

2.5

Quartile 4 Quartile 3 Quartile 2 Quartile 1

Regression line for perfect valuation

Line in practice. Determined by sector specifics

1 2




Real Estate company summaries

Aldar Properties 52

Emaar Properties 58

Union Properties 64

Abu Dhabi National Hotels Company 70



Aldar Properties (ALDR.AD)

RATING: Return potential: 96%

United Arab Emirates: Real Estate

INVESTMENT LIST MEMBERSHIP

Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile: ALDR.AD

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.

Aldar Properties

Europe New Markets Non Financi Peer Group Average

Key data (*)

Price (Dh) 7.35Price target (Dh) 14.4Market cap ($ mn) 3,453Average daily trading volume ($ mn) NAFree float 75%Bloomberg code ALDAR DB

2006 2007E 2008E 2009ESales (Dh mn) 187.5 2,483 7,107 6,954EBITDA (Dh mn) 1,185 2,897 4,351 3,177EV / EBITDAR 6.7x 5.5x 4.1x 5.8xP / E 10.1x 4.4x 3.2x 4.8xDividend yield 0.0% 5.7% 10.7% 13.6%(*) multiples and ratios are calendarised

Substantial upside to NAV and DCF valuations

Investment thesis: Buy recommendation

• Aldar is the premier property developer in Abu Dhabi, where the real estate market is seeing

the beginning of a transformation similar to that currently under way in Dubai. The fair value

of its 34 mn sq m land bank is independently appraised at Dh38 bn, or Dh11.42 per share,

while its portfolio comprises US$50 bn of projects over the next ten years in the residential,

commercial and hospitality segments.

• Aldar provides concentrated exposure to one of the world’s fastest growing economies. Abu

Dhabi enjoys the highest GDP per capita in the world (US$46,185 in 2005) and growth

remains strong. Aldar is focused on this market, with no businesses outside the emirate at

present. Its strategy of retaining 40% of residential property and all commercial space for

rental provides a long-term income stream.

• At 0.5x 2006 adjusted book value and 3.0x 2008E P/E, Aldar is undervalued, in our opinion,

although we acknowledge that the long lead time of developments means that re-rating is

likely to be more gradual than for other major UAE developers. The year end revaluation of

the land bank will be a key catalyst, in our opinion.

Valuation: 12-month target price of Dh14.40

Our 12-month price target for Aldar is the average of our adjusted NAV and DCF values and is

more than 100% above the current share price. Our price target implies 2008E and 2009E P/Es of

6.4x and 9.3x, compared with European real estate peer group averages of 23.8x and 21.7x,

despite more rapid growth. We calculate an adjusted NAV valuation of Dh14.40 per diluted share

to 2008 year-end, based on fair value adjustments for land, assumed conversion of the

convertible bond issued in 2007, and an adjustment for anticipated developer’s margin. Our DCF

calculation takes into account only explicitly planned projects and the existing land bank. We

believe there is further upside to the shares’ valuation from projects yet to be planned in full on

Aldar’s existing land bank and from future additions to its land assets.

0.00.20.40.60.81.01.21.41.61.82.0

30/10

/2006

14/11

/2006

29/11

/2006

14/12

/2006

29/12

/2006

15/01

/2007

30/01

/2007

14/02

/2007

01/03

/2007

16/03

/2007

02/04

/2007

17/04

/2007

02/05

/2007

17/05

/2007

01/06

/2007

18/06

/2007

03/07

/2007

18/07

/2007

02/08

/2007

17/08

/2007

03/09

/2007

350

400

450

500

550

600

ALDR.AD (Dh) MSCI EM Europe & Middle East

Source: Company data, Goldman Sachs Research estimates, Datastream.



Aldar Properties: Overview Company description Aldar Properties is an Abu Dhabi-based property

development company listed on the ADSM and with

significant government shareholdings. It is the primary

developer in Abu Dhabi, with a large land bank

donated by the government, and is involved in

commercial, residential, retail, hospitality as well as

entertainment projects. In November 2006, the

company launched the Yas Island project, one of the

largest mixed-use developments in the region. The

US$40 bn project will also include the world’s first

‘Ferrari World’ theme park.

Shareholder structure (2007)

60%17%

14%

9%

PublicOther Mubadala Development Company The Abu Dhabi Retirement Pensions and Benefits Fund

Sales by division (2007E)

Core drivers of growth

• Population growth, a booming economy and property law reform are the drivers for demand

growth in the emirate. We forecast a 75% increase in housing stock in Abu Dhabi between 2007

and 2015, with the market remaining in balance over the period as a whole. Aldar controls a

substantial proportion of known supply.

• We see further potential upside from modifying our assumption of medium-term selling prices

at a 15%-20% discount to Dubai. We believe that strong demographics and economic growth

should drive prices closer to parity, but currently reflect the lesser maturity of the Abu Dhabi

market in lower values. Also, Aldar’s land bank contains large plots that are not yet planned out

or reflected in our forecasts.

Risk to the investment case

• The sustainability of UAE’s property boom and in particular, the ability of Abu Dhabi to attract

sufficient investment to compete with other major regional cities, in particular Dubai.

• Execution of a very large portfolio of developments is the principal risk to our investment case.

The total announced development cost of US$50 bn (Dh184 bn) is greater than the equivalent

figure for Emaar Properties of Dh140 bn, while Aldar does not yet have an established track

record of deliveries. However, we include only Dh28 bn of developments in our forecasts.

Industry context

Abu Dhabi’s real estate market lagged that of Dubai, due to slower reform of property law until

2004. Now, however, UAE nationals enjoy unrestricted property ownership and foreigners may buy

surface property on renewable 99-year leases. The government has stimulated the market by gifting

land to developers such as Aldar, with a remit to develop a balance of residential and commercial

space, including hotels, to stimulate the government’s plan of turning Abu Dhabi into a world class

tourist and cultural destination and diversify its economy from oil and gas.

We see potential for a temporary oversupply of units in 2010-2012, if current delivery plans are met.

As in Dubai, we believe there is a high probability of late delivery, either due to logistical constraints

or better to match demand. The revenue impact on Aldar may not be significant, given the

substantial proportion of off-plan sales and the ability to control much of the market’s supply.

100%

Land sale




Aldar Properties: Overview

Leverage ratios Sales and EBIT margins

-6.0x-5.0x-4.0x-3.0x-2.0x-1.0x0.0x1.0x2.0x3.0x4.0x

05 06 07E 08E 09E 10E 11E 12E-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Net Debt / EBITDA (LHS) Net Interest / EBITDA (RHS)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

05 06 07E 08E 09E 10E 11E 12E36%

136%

236%

336%

436%

536%

636%Dhmn (LHS) EBIT Margin (RHS)

Strengths Weaknesses

Very large land bank in areas central to Abu Dhabi’s master plan for

redevelopment. Gifted by the government.

Strong market presence and key positioning across the full spectrum of

real estate developments.

Retention of a substantial portion of developments for rental income to

benefit from yield convergence over time.

Long lead time on developments and lack of substantial deliveries to date

mean the stock may trade weaker to NAV in the near term than would

otherwise be the case.

Opportunities Threats

Very large scale projects in Abu Dhabi should keep an adequate pipeline

in the medium term, but Aldar may extend its geographical footprint into

countries of the region.

Susceptible to a slowdown in the regional real estate market, as well as

the possibility of demand and supply mismatches in the future.

Cost inflation in the region is already pressuring development margins,

although Aldar will agree construction on fixed-price contracts as far as

possible.




Aldar Properties: Summary financials Income statement (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 396.8 187.5 2,483 7,107 6,954 5,426 6,812 7,354 0.9%EBITDAR 321.9 1,185.0 2,897 4,351 3,177 2,447 3,989 5,474EBITDA 321.9 1,185.0 2,897 4,351 3,177 2,447 3,989 5,474

EBITDA margin 81.1% NM NM 61.2% 45.7% 45.1% 58.6% 74.4%EBIT 321.3 1,181.9 2,879 4,316 3,166 2,434 3,974 5,457 6.0%

EBIT margin 81.0% NM NM 60.7% 45.5% 44.9% 58.3% 74.2%Net interest expense 355.9 67.8 6 (440) (505) (521) (596) (634)Associate income / other 5.3 (0.0) 0 0 (0) (0) (0) (0)Profit before tax 682.5 1,249.7 2,884 3,877 2,661 1,914 3,378 4,822Adjusted PBT 682.6 1,250.6 2,896 3,903 2,661 1,914 3,378 4,822 5.4%Tax 0.0 0.0 0 0 0 0 0 0Exceptional items 0.0 0.0 0 0 0 0 0 0Minority interest 0.0 0.0 0 0 0 0 0 0Net income 682.5 1,249.7 2,884 3,877 2,661 1,914 3,378 4,822Adjusted net income 682.6 1,250.6 2,896 3,903 2,661 1,914 3,378 4,822 5.4%

Per share data (Dh) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 1,725 1,725 1,725 1,725 1,725 1,725 1,725 1,725No. of diluted shares outstanding (*) 1,725 1,725 3,355 3,355 3,355 3,355 3,355 3,355EPS (basic) 0.40 0.72 1.67 2.25 1.54 1.11 1.96 2.80 5.6%EPS (diluted) 0.40 0.72 0.86 1.16 0.79 0.57 1.01 1.44EPS (adjusted, basic) 0.40 0.72 1.68 2.26 1.54 1.11 1.96 2.80 5.4%

Annual growth 83.2% NM 34.7% -31.8% -28.1% 76.5% 42.8%EPS (adjusted, diluted) 0.40 0.72 0.86 1.16 0.79 0.57 1.01 1.44DPS 0.04 0.00 0.42 0.79 1.00 0.83 0.98 1.40 15.5%

Annual growth -100.0% NM 88.2% 27.5% -17.0% 17.7% 42.8%(*) weighted average number of shares; in millions




Aldar Properties: Summary financials Balance sheet (Dh mn, year ending Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 1,760 895 8,246 6,052 5,540 3,026 1,750 1,796Other current assets 182 2,591 7,229 7,973 6,409 3,083 3,236 1,849Total current assets 1,942 3,486 15,475 14,026 11,949 6,109 4,986 3,645 -28.6%Long term investments & other 502 1,572 3,683 8,095 11,998 17,631 21,019 25,607Property, plant and equipment 4 13 44 71 95 110 129 148Intangible assets 23 38 26 0 0 0 0 0Total assets 2,472 5,109 19,228 22,192 24,042 23,849 26,133 29,400 7.3%

Trade payables 37 206 1,360 1,168 1,715 1,338 1,680 1,813Short term debt 21 635 1,635 1,635 1,635 1,635 1,635 1,635Long term debt 49 32 9,113 9,113 9,113 9,113 9,113 9,113Pension liabilities 85 622 622 622 622 622 622 622Other liabilities 139 343 343 343 343 343 343 343Total liabilities 330 1,838 13,073 12,881 13,427 13,051 13,392 13,526 1.2%Minority interests 0 0 0 0 0 0 0 0Shareholders' equity 2,142 3,271 6,155 9,311 10,615 10,799 12,741 15,874Total equity and liabilities 2,472 5,109 19,228 22,192 24,042 23,849 26,133 29,400 7.3%

Cash flow (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 8.5 (8.0) (2,698.3) (997.6) 1,385 (236.4) 789 2,406 NMNet interest paid 355.9 67.8 5.6 (439.6) (505) (520.8) (596) (634)Tax paid 0.0 0.0 0.0 0.0 0 0.0 0 0Operating cash flow 364.4 59.8 (2,692.7) (1,437.2) 880 (757.2) 193 1,771 NMCapex on PP&E (4.6) (11.2) (37.2) (35.5) (35) (27.1) (34) (37)Other investing cash flow (104.5) (1,381.4) 0.0 0.0 0 0.0 0 0Investing cash flow (109.1) (1,392.6) (37.2) (35.5) (35) (27.1) (34) (37) 0.9%

Operating free cash flow (*) 359.8 48.6 (2,730.0) (1,472.7) 845 (784.3) 159 1,735 NMFree cash flow (**) 255.3 (1,332.8) (2,730.0) (1,472.7) 845 (784.3) 159 1,735 NM

Dividends paid 0.0 (75.0) 0.0 (721.1) (1,357) (1,729.5) (1,435) (1,689)Share buybacks / issuances 1,500.0 0.0 0.0 0.0 0 0.0 0 0Other 4.6 518.9 10,081.0 0.0 0 0.0 0 0Financing cash flow 1,504.6 443.9 10,081.0 (721.1) (1,357) (1,729.5) (1,435) (1,689) 23.7%

Change in cash and cash equivalents (864.9) 7,351.0 (2,193.8) (512) (2,513.8) (1,276) 46(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Aldar Properties: Valuation summary

Relative to GS New Markets Non-financials coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 18.6x 10.1x 4.4x 3.2x 4.8x 6.6x

GS coverage 23.0x 15.5x 16.4x 11.8x 9.9x 9.4x

EV / DACF lease adj'd NA 3.6x 20.1x 7.8x 8.8x 18.7x


EV / EBITDA lease adj'd NA 6.7x 5.5x 4.1x 5.8x 8.6x


EV / NOPAT lease adj'd NA 6.7x 5.5x 4.1x 5.8x 8.6x


P / book 5.9x 3.9x 2.1x 1.4x 1.2x 1.2x


FCF yield NA -43.0% -21.5% -11.6% 6.7% -6.2%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.6% 0.0% 5.7% 10.7% 13.6% 11.3%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%

Returns and liquidity

2005 2006 2007E 2008E 2009E 2010E

CROCI NA NM 12.1% 19.2% 13.5% 6.3%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE NA 46.2% 61.2% 50.1% 26.7% 17.9%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC NA NA 1.2x 1.8x 1.3x 0.6x


EV / GCI NA 2.2x 1.7x 1.2x 1.1x 1.1x


GCI (*) NA 3,678 9,321 14,719 16,560 19,281

Net debt / (cash) * (1,690) (228) 2,502 4,696 5,208 7,721

Pension liabilities * 85 622 622 622 622 622

Net Debt / Equity -0.8x -0.1x 0.4x 0.5x 0.5x 0.7x

Net Debt / EBITDA -5.3x -0.2x 0.9x 1.1x 1.6x 3.2x

Net interest / EBITDA NM -5.7% -0.2% 10.1% 15.9% 21.3%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 81.1% NA NA 61.2% 45.7% 45.1%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 81.0% NA NA 60.7% 45.5% 44.9%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 81.0% NA NA 61.1% 45.5% 44.9%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 1.2% 6.0% 1.5% 0.5% 0.5% 0.5%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%

Capex / depreciation 8.5x 5.0x 6.1x 4.2x 3.2x 2.1x

Relative to GS New Markets Non-financials coverage

2008E EV/GCI vs CROCI/WACC

ALDR.ADSector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x

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EV /

GC

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SectorALDR.AD

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Premium to the sector (RHS)Emerging Markets Non-FinALDR.AD




Emaar Properties (EMAR.DU)




Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: EMAR.DU

Low High





Emaar Properties


Key data (*)

Price (Dh) 10.7Price target (Dh) 16.2Market cap ($ mn) 17,705Average daily trading volume ($ mn) 78.7Free float 70%Bloomberg code EMAAR DB

2006 2007E 2008E 2009ESales (Dh mn) 14,006 16,810 31,394 45,548EBITDA (Dh mn) 5,860 6,486 9,391 11,737EV / EBITDAR 15.2x 11.0x 7.9x 6.3xP / E 10.1x 10.1x 8.2x 7.1xDividend yield 0.0% 1.0% 1.8% 2.8%(*) multiples and ratios are calendarised

Growth assets at a value price


• Emaar is the largest listed real estate developer in the GCC, with strong ties to the UAE

government, yet trades at a substantial discount to the value of its assets, on our estimates.

We believe the recent cancellation of the proposed land-for-shares deal with Dubai Holding

should be a positive catalyst for the share, although we believe it was sound in concept.

• The company is central to Dubai’s economic transformation plans, being one of the emirate’s

‘master developers’. This has ensured access to the best land plots for free or at highly

advantageous prices and significant working capital advantages through sales of sub-plots

and properties off-plan in iconic developments.

• Emaar seeks to replicate this formula through partnerships in the MENA region and sub-

continent and has already announced around US$35 bn of projects outside the UAE. Some

US$11 bn of this pipeline is not yet incorporated in our explicit projections due to

uncertainties over timing or pricing. Likewise, Emaar has substantial land not yet valued in

its NAV, such as 200 mn sq m in Libya, providing still further upward potential to fair value.


Emaar trades at a steep discount to its sector on all metrics, and also to intrinsic value based on

adjusted Net Asset Value or DCF, on our estimates. Our price target of Dh16.20 is the average of

an adjusted NAV valuation and DCF. At our price target, the stock would trade at 12.4x and 10.7x

2008E and 2009E P/E, compared with the European peer group at 23.8x and 21.7x.

We adjust NAV for Emaar’s listed securities and the published value of the company’s land bank,

which we further augment to account for the implicit developer’s margin. This yields an adjusted

NAV for 2008E of Dh16.10 per share. We calculate a DCF valuation of Dh16.40 on the basis of our

explicit forecasts for announced development projects, a terminal growth rate on identifiable

recurring revenue streams (not property sales) of 3%, and a WACC of 9.5%.

0.0

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EMAR.DU (Dh) MSCI EM Europe & Middle East




Emaar Properties: Overview Company description Emaar Properties listed on the DFM in 2000 and is now

one of the world’s largest listed real estate developers.

Historically, Emaar’s primary market has been in

Dubai, but the group is diversifying via acquisitions

and projects throughout the MENA region and in South

Asia, the US and Europe. Its Burj Dubai development

will house the world’s tallest building. Emaar’s primary

activities are the development and management of

residential and commercial real estate projects. Other

divisions include healthcare, education, retail and

hospitality.


68%

32%

Public Government of Dubai



• A strong pipeline of projects in the UAE such as the Burj Dubai development, should provide a

solid platform for revenues and profitability since much is pre-sold.

• In the medium term, Emaar’s growth story lays increasingly outside the UAE. The company

targets markets with high population and economic growth, typically in the MENA and sub-

continent region. Real estate markets in such countries are underdeveloped and Emaar has

succeeded in securing large banks of land and participation in large scale projects, often with

local partners. We expect 65% of revenues to come from outside the UAE by 2010.

• Recurring revenue streams such as rental income on retail and commercial property, and

hospitality, provide a further source of growth. We forecast 13% of revenues from such sources

by 2012E, up from just 1% in 2007E.


• Execution risk in multiple large-scale projects across a wide geographical region is perhaps the

greatest risk to our investment case. We believe diversification of exposure to individual

property markets is a positive for the stock, but it does put strain on management resource.

• The sustainability of the UAE’s real estate boom is a perceived risk, although Emaar’s exposure

to the country’s property market is diminishing rapidly.

• The dilution risk associated with the proposed land-for-shares deal with Dubai Holding has

been removed, with the announcement that the deal will not go ahead and the parties will

instead pursue joint venture projects. There remains, however, the possibility that Emaar will

not have total control over the timing and nature of its future investments in Dubai.

Industry context

The real estate sector in Dubai and other areas of the region have been experiencing a boom since

property reforms were enacted and economies began to feel the effect of higher oil prices. As one

of three government-sponsored ‘master developers’ Emaar has been a pioneer in this market,

delivering over 16,000 residential units to date, of a total 88,500 planned. The Dubai example has

stimulated property markets not just in the remainder of the UAE, but across the GCC and the wider

region. Emaar is more actively expanding from its base in the UAE and diversifying its exposure.

72%

14%

14%

Sale of development properties JL Homes Sale of land




Emaar Properties: Overview


-3.5x-3.0x-2.5x-2.0x-1.5x-1.0x-0.5x0.0x0.5x1.0x1.5x

03 04 05 06 07E 08E 09E 10E 11E 12E-20.0%

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-10.0%

-5.0%

0.0%

5.0%

10.0%


05,000

10,00015,00020,00025,00030,00035,00040,00045,000

02 03 04 05 06 07E 08E 09E 10E 11E 12E13.3%

18.3%

23.3%

28.3%

33.3%

38.3%

43.3%

48.3%Dhmn (LHS) EBIT Margin (RHS)


The company’s status as master developer in Dubai confers significant

advantages in terms of access to attractive land plots and the ability to

reduce working capital requirements.

Free, or very cheap, land enhances margins and reduces cash outlay.

The plan to diversify operations geographically and by segment spreads

exposure to individual economies and property markets.

Potential for overstretch, taking on very large scale developments in

multiple countries. Senior management’s resources are finite.

Perceived opacity, due to the difficultly in assimilating and

communicating detailed information from diverse operations.


Substantial expansion opportunities in the near region as economies and

populations continue to grow rapidly.

Expansion of divisions generating recurring revenue streams, such as

retail and hotels.

Perceived risk of government interference, as seen by market reaction to

the Dubai Holding proposal.

Softening of the property market in UAE and across the region; rising

interest rates.

Regional political tensions would decrease asset values and may

complicate access to new land and projects.




Emaar Properties: Summary financials

Income statement (Dh mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 1,335 3,721 5,246 8,361 14,006 16,810 31,394 45,548 45,690 31,897 30,484 -0.7%EBITDAR 468 696 1,692 4,034 5,860 6,486 9,391 11,737 12,343 11,333 11,547EBITDA 468 696 1,692 4,034 5,860 6,486 9,391 11,737 12,343 11,333 11,547

EBITDA m argin 35.1% 18.7% 32.2% 48.3% 41.8% 38.6% 29.9% 25.8% 27.0% 35.5% 37.9%EBIT 451 617 1,596 3,935 5,742 6,197 8,677 10,538 10,737 9,490 9,480 2.2%

EBIT margin 33.8% 16.6% 30.4% 47.1% 41.0% 36.9% 27.6% 23.1% 23.5% 29.8% 31.1%Net interes t expense 59 30 56 326 274 (166) (522) (805) (1,021) (1,037) (771)Associate income / other 7 29 40 467 386 610 641 674 708 744 782Profit before tax 516 676 1,692 4,729 6,403 6,642 8,796 10,407 10,424 9,197 9,490Adjus ted PBT 516 676 1,692 4,729 6,403 6,642 8,796 10,407 10,424 9,197 9,490 1.9%Tax 0 0 0 0 (47) (189) (864) (1,254) (1,223) (625) (515)Exceptional items 0 0 0 0 0 0 0 0 0 0 0Minority interest 1 0 (1) 2 15 15 15 15 15 15 15Net incom e 517 676 1,691 4,731 6,371 6,468 7,948 9,168 9,216 8,587 8,991Adjus ted net income 517 676 1,691 4,731 6,371 6,468 7,948 9,168 9,216 8,587 8,991 3.1%

Per share data (Dh) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of bas ic shares outs tanding (*) 5,381 5,381 5,052 5,565 5,988 6,076 6,076 6,076 6,076 6,076 6,076No. of diluted shares outs tanding (*) 5,381 5,381 5,052 5,666 6,096 6,183 6,183 6,183 6,183 6,183 6,183EPS (bas ic) 0.10 0.13 0.33 0.85 1.06 1.06 1.31 1.51 1.52 1.41 1.48 3.1%EPS (diluted) 0.10 0.13 0.33 0.84 1.05 1.05 1.29 1.48 1.49 1.39 1.45EPS (adjus ted, bas ic) 0.10 0.13 0.33 0.85 1.06 1.06 1.31 1.51 1.52 1.41 1.48 3.1%

Annual growth 30.8% NM NM 25.1% 0.1% 22.9% 15.4% 0.5% -6.8% 4.7%EPS (adjus ted, diluted) 0.10 0.13 0.33 0.84 1.05 1.05 1.29 1.48 1.49 1.39 1.45DPS 0.00 0.06 0.09 0.40 0.00 0.11 0.20 0.30 0.76 1.06 1.48 65.7%

Annual growth NM 45.8% NM -100.0% NM 84.3% 53.8% 151.3% 39.8% 39.6%(*) weighted average num b er of shares; in m illions




Emaar Properties: Summary financials Balance sheet (Dh mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 2,156 1,975 1,835 10,368 2,329 2,116 4,356 8,813 8,268 17,133 19,177Other current assets 978 3,052 3,018 5,672 13,903 23,729 31,536 38,143 37,777 23,654 21,847Total current assets 3,134 5,027 4,853 16,040 16,232 25,846 35,892 46,957 46,044 40,787 41,024 3.4%Long term inves tm ents & other 3,378 4,000 8,088 14,290 18,312 18,517 23,153 26,987 32,366 34,831 36,138Property, plant and equipm ent 126 178 273 1,876 4,185 6,922 10,917 15,184 18,147 18,856 19,228Intangible assets 0 0 0 0 2,962 2,962 2,962 2,962 2,962 2,962 2,962Total assets 6,638 9,206 13,214 32,205 41,690 54,246 72,925 92,090 99,519 97,437 99,352 8.0%

Trade payables 722 1,589 2,326 5,528 6,265 7,369 13,762 19,966 20,029 13,982 13,363Short term debt 0 0 639 0 1,100 1,100 1,100 1,100 1,100 1,100 1,100Long term debt 0 0 0 239 2,893 7,893 12,893 17,893 17,893 17,893 17,893Pens ion liabilities 2 6 1,577 9 12 12 12 12 12 12 12Other liabilities 185 949 619 733 876 876 876 876 876 876 876Total liabilities 909 2,544 5,160 6,508 11,145 17,249 28,642 39,846 39,909 33,862 33,243 3.8%Minority interes ts 0 1 3 135 566 551 535 520 504 489 473Shareholders ' equity 5,729 6,661 8,052 25,561 29,979 36,447 43,748 51,724 59,106 63,085 65,636Total equity and liabilities 6,638 9,206 13,214 32,205 41,690 54,246 72,925 92,090 99,519 97,437 99,352 8.0%

Cash flow (Dh mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 1,235 (180.4) 3,099 5,740 2,655 (1,737.6) 8,502 11,885 13,351 20,017 13,373 12.0%Net interes t paid 59 30.4 56 326 274 (165.6) (522) (805) (1,021) (1,037) (771)Tax paid 0 0.0 0 0 (47) (189.1) (864) (1,254) (1,223) (625) (515)Operating cash flow 1,293 (150.0) 3,155 6,066 2,882 (2,092.3) 7,116 9,826 11,107 18,354 12,087 14.2%Capex on PP&E (54) (114.2) (216) (1,482) (2,504) (3,025.8) (4,709) (5,466) (4,569) (2,552) (2,439)Other inves ting cash flow 931 169.1 (2,876) (5,255) (8,856) (95.0) (4,520) (3,712) (5,249) (2,329) (1,163)Investing cash flow 877 54.9 (3,092) (6,736) (11,361) (3,120.8) (9,229) (9,177) (9,819) (4,881) (3,602) -21.0%

Operating free cash flow (*) 1,239 (264.2) 2,939 4,584 378 (5,118.0) 2,407 4,360 6,538 15,802 9,648 41.5%Free cash flow (**) 2,170 (95.1) 63 (671) (8,478) (5,213.0) (2,113) 649 1,288 13,473 8,485 NM

Dividends paid (326) (124.6) (312) (340) (2,355) 0.0 (647) (1,192) (1,834) (4,608) (6,440)Share buybacks / issuances 0 0.0 0 8,078 1,478 0.0 0 0 0 0 0Other 0 2.0 639 (265) 1,561 5,000.0 5,000 5,000 0 0 0Financing cash flow (326) (122.6) 327 7,472 684 5,000.0 4,353 3,808 (1,834) (4,608) (6,440) NM

Change in cash and cash equivalents (180.7) (140) 8,533 (8,039) (213.0) 2,240 4,457 (545) 8,865 2,044(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Emaar Properties: Valuation summary

Relative to GS New Markets Non-Financials coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 12.6x 10.1x 10.1x 8.2x 7.1x 7.1x


EV / DACF lease adj'd 17.5x 9.0x 10.7x 8.3x 6.9x 6.5x


EV / EBITDA lease adj'd 21.5x 15.2x 11.0x 7.9x 6.3x 6.1x


EV / NOPAT lease adj'd 22.1x 15.5x 11.5x 8.5x 7.1x 7.0x


P / book 2.4x 2.2x 1.8x 1.5x 1.3x 1.1x


FCF yield -7.9% -18.8% -9.1% -11.1% -5.7% -7.1%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 3.7% 0.0% 1.0% 1.8% 2.8% 7.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%

Returns and liquidity 2005 2006 2007E 2008E 2009E 2010E

CROCI 40.6% 41.7% 17.6% 18.1% 18.3% 16.7%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 29.6% 23.0% 19.5% 19.8% 19.2% 16.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC 4.0x 4.1x 1.7x 1.8x 1.8x 1.6x


EV / GCI 5.5x 2.8x 1.6x 1.4x 1.2x 1.0x


GCI (*) 17,267 40,186 53,294 62,700 73,381 83,999

Net debt / (cash) * (10,129) 1,663 6,876 9,636 10,179 10,725


Net Debt / Equity -0.4x 0.1x 0.2x 0.2x 0.2x 0.2x

Net Debt / EBITDA -2.5x 0.3x 1.1x 1.0x 0.9x 0.9x

Net interest / EBITDA -14.2% -4.8% 2.6% 5.6% 6.9% 8.3%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 48.3% 41.8% 38.6% 29.9% 25.8% 27.0%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 47.1% 41.0% 36.9% 27.6% 23.1% 23.5%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 47.1% 41.0% 36.9% 27.6% 23.1% 23.5%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 17.7% 17.9% 18.0% 15.0% 12.0% 10.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%


Relative to GS New Markets Non-Financials coverage


EMAR.DUSector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x


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I


SectorEMAR.DU

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I

EV/GCI / CROCI/WACC

0.0x

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0.4x

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1.2x

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1.6x

03 04 05 06 07E 08E 09E 10E-40%

-30%-20%

-10%

0%10%

20%30%

40%

50%60%

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Premium to the sector (RHS)Emerging Markets Non-FinEMAR.DU




Union Properties (UPRO.DU)




Pan Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: UPRO.DU

Low High





Union Properties


Key data (*)

Price (Dh) 3.16Price target (Dh) 5.90Market cap ($ mn) 2,394Average daily trading volume ($ mn) 2.33Free float 51%Bloomberg code UPP DB

2006 2007E 2008E 2009ESales (Dh mn) 2,525 2,390 2,667 11,984EBITDA (Dh mn) 377.0 429.3 555.3 3,637EV / EBITDAR 25.7x 24.5x 19.8x 1.4xP / E 14.3x 13.9x 13.4x 2.5xDividend yield 0.0% 0.0% 0.0% 40.1%(*) multiples and ratios are calendarised

Cheap, after accounting (for) differences


• UP is regarded as one of the higher quality developers in Dubai, whose developments have

enjoyed strong demand. It has branded its projects, Green Community and Uptown, and

plans to extend them in the UAE and, potentially, in other markets. This reduces design and

marketing costs, speeds time to market, improves margins and reduces working capital

requirements.

• Contracting and rental income underpin UP’s revenues and net income in the short term.

However, its 0.25 mn sq m rental portfolio will be dwarfed by the delivery for sale of 0.9 mn

sq m of properties in 2009-10. We expect revenues in 2009 of almost Dh12 bn, compared with

Dh2.4 bn in 2007, and net income to exceed Dh3.5 bn, putting the stock on a P/E ratio of 2.5x.

• We believe the market undervalues UP due to its accounting treatment for development

properties, which differs from that of peers such as Emaar and Aldar. It accounts for property

sales only on delivery, not on a partial completion basis. This depresses near-term earnings.

Valuation: 12-month target price Dh5.90

UP’s comparable valuations are distorted by its accounting treatment, but an average P/E over

2007E to 2009E of 9.8x compares with the European real estate sector at around 19x.

Our DCF-based price target incorporates our explicit forecasts, including the large development

portfolio due for delivery in 2009-10, but beyond that we assume a much lower level of activity in

property development, to reflect the fact that UP has not yet announced projects that would be

large enough to replace those revenues in 2010-11. We believe this is prudent and it is likely that

new developments in UAE and potentially beyond will be announced over the coming quarters.

Our estimates also do not include revenues related to the Formula One theme park, which we

expect to begin operations in 2009.

0.00.10.20.30.40.50.60.70.80.91.0

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/2007

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/2007

350

400

450

500

550

600

UPRO.DU (Dh) MSCI EM Europe & Middle East




Union Properties: Overview Company description Union Properties is one of the largest real estate

developers in the GCC region. The company’s primary

activities include investing in and developing a variety

of commercial and residential properties, maintaining

and managing its own properties, and providing a

variety of property-related services to third parties.

Notable projects for the company include the Green

Community and the Motor City development. In 2006

the company was also awarded exclusive rights to

develop Formula 1 theme parks worldwide. Union

Properties listed on the DFM in 1993.


51%49%

Public Emirates Bank International



• The delivery of 0.9 mn sq m of sellable area over a number of projects in Motor City and the

Dubai International Financial Centre (DIFC) dwarfs all other growth drivers for the company.

We expect sales revenues of almost Dh12 bn over 2009 and 2010, compared with Dh400 mn in

2006. We believe that UP will continue to move up the value chain in its property portfolio, but

also maintain a material rental portfolio that should benefit from yield convergence.

• The firm’s contracting businesses provide further growth, with smaller units such as ServeU

and Fitout growing at very high rates, albeit from a low base. We forecast Thermo, the

company’s mechanical, electrical and plumbing (MEP) contractor that provides most of the

company’s revenues until 2009, to continue growing its top line at high single-digit rates.

• Finally, we expect accelerating growth from the company’s hotel operations from 2009, as

hotels are brought into operation in both Motor City and DIFC developments.


• The sustainability of Dubai’s property boom is a clear risk factor, yet our estimates of demand

and supply suggest scope for further large developments and appreciation in unit values.

• Execution risk in multiple large-scale developments and the availability of land at reasonable

valuations; UP is well connected, but not one of the big three master developers.

• Lack of visibility regarding the Formula One theme park franchise, although this does not

feature in our explicit forecasts at this stage.

Industry context

The real estate sector in Dubai and other areas of the region has been experiencing a boom since

property reforms were enacted and economies began to feel the effect of higher oil prices. This

raises the inevitable risk of oversupply in coming years; we expect excess supply in certain

geographical or market segments but, overall, demand and supply appear balanced. Our estimates

suggest demand for over 200,000 residential units between 2006 and 2010, which is likely to be

outstripped by supply marginally around 2008, before the market regains balance. In this context of

strong demand, UP looks well positioned, with a large land bank and a track record of delivering

high-quality properties.

76%

11%

13%

Contracting Property Rentals Property Sales




Union Properties: Overview


-4.0x

-2.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-40.0%

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-10.0%

0.0%

10.0%

20.0%

30.0%


0

2,000

4,000

6,000

8,000

10,000

12,000

02 03 04 05 06 07E 08E 09E 10E 11E 12E10.0%

15.0%

20.0%

25.0%

30.0%

Dhmn (LHS) EBIT Margin (RHS)


Strong market presence with an extensive order book of development

projects.

Access to the full spectrum of real estate projects, including niche

developments such as the MotorCity and F1 theme park projects.

Dependency on a number of service providers creates exposure to

delays, shortages of materials and other inputs.

Concentration risk. The company is highly geared to the momentum of

the real estate market.


Further growth prospects throughout its local market, the MENA region

and beyond.

Union has sole development rights for the first F1 theme park in Dubai,

as well as all subsequent F1 parks worldwide.

Company could potentially lever its relationship with the FIA and export

its MotorCity concept internationally.

Highly competitive market with a variety of competing firms across the

full spectrum of development projects.

A pullback or slowdown in the region’s real estate market.

Due to long lead times of developments, business is exposed to the risk

of mismatches in demand and supply.




Union Properties: Summary financials Income statement (Dh mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 338.6 404.5 569.9 1,388 2,525 2,390 2,667 11,984 5,149 5,385 5,634 20.6%EBITDAR 68.4 76.4 84.6 303 377 429 555 3,637 1,122 1,051 976EBITDA 68.4 76.4 84.6 303 377 429 555 3,637 1,122 1,051 976

EBITDA m argin 20.2% 18.9% 14.8% 21.8% 14.9% 18.0% 20.8% 30.3% 21.8% 19.5% 17.3%EBIT 59.6 65.9 71.6 273 343 394 517 3,596 1,078 1,002 921 15.5%

EBIT m argin 17.6% 16.3% 12.6% 19.7% 13.6% 16.5% 19.4% 30.0% 20.9% 18.6% 16.3%Net interes t expense 2.7 (21.2) 31.0 8 (8) (50) (59) (76) 105 71 64Associate incom e / other 10.4 42.5 45.8 303 279 290 200 8 12 13 15Profit before tax 72.6 87.2 148.4 585 614 634 658 3,528 1,196 1,086 1,000Adjus ted PBT 73.1 87.2 148.5 585 614 634 658 3,528 1,196 1,086 1,000 11.0%Tax 0.0 0.0 0.0 0 0 0 0 0 0 0 0Exceptional item s 0.0 0.5 0.0 0 0 0 0 0 0 0 0Minority interes t (0.5) (0.5) 0.0 0 0 0 0 0 0 0 0Net incom e 72.1 87.2 148.4 585 614 634 658 3,528 1,196 1,086 1,000Adjus ted net incom e 72.5 86.8 148.5 585 614 634 658 3,528 1,196 1,086 1,000 11.0%


No. of bas ic shares outs tanding (*) 2,781 2,781 2,781 2,569 2,781 2,781 2,781 2,781 2,781 2,781 2,781No. of diluted shares outs tanding (*) 2,781 2,781 2,781 2,569 2,781 2,781 2,781 2,781 2,781 2,781 2,781EPS (bas ic) 0.03 0.03 0.05 0.23 0.22 0.23 0.24 1.27 0.43 0.39 0.36 11.0%EPS (diluted) 0.03 0.03 0.05 0.23 0.22 0.23 0.24 1.27 0.43 0.39 0.36EPS (adjus ted, bas ic) 0.03 0.03 0.05 0.23 0.22 0.23 0.24 1.27 0.43 0.39 0.36 11.0%

Annual growth 20.3% 71.2% NM -3.0% 3.2% 3.8% NM -66.1% -9.2% -7.9%EPS (adjus ted, diluted) 0.03 0.03 0.05 0.23 0.22 0.23 0.24 1.27 0.43 0.39 0.36DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.27 0.43 0.39 0.36 NM

Annual growth NM NM NM NM NM NM NM -66.1% -9.2% -7.9%(*) weighted average num b er of shares; in m illions




Union Properties: Summary financials Balance sheet (Dh mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 110 117 52 1,292 112 305 258 6,903 4,738 4,530 4,344Other current assets 214 323 367 1,098 2,355 2,220 2,439 3,598 1,945 2,037 2,134Total current assets 324 439 418 2,391 2,467 2,525 2,698 10,501 6,683 6,567 6,478 24.5%Long term inves tm ents & other 1,539 1,795 2,118 3,596 4,676 6,555 8,585 3,159 3,171 3,184 3,198Property, plant and equipm ent 35 44 353 367 367 379 394 413 420 452 481Intangible assets 0 0 0 40 40 40 40 40 40 40 40Total assets 1,897 2,279 2,889 6,394 7,550 9,500 11,718 14,113 10,314 10,243 10,198 -3.4%

Trade payables 136 166 240 880 1,170 1,048 1,169 1,313 846 885 926Short term debt 164 376 463 192 776 1,276 1,776 2,376 1,376 1,376 1,376Long term debt 231 214 482 598 607 607 607 607 607 607 607Pens ion liabilities 12 60 75 396 140 140 140 140 140 140 140Other liabilities 46 72 92 442 305 1,243 2,181 305 305 305 305Total liabilities 589 889 1,353 2,507 2,997 4,314 5,873 4,741 3,274 3,313 3,354 -13.1%Minority interes ts 4 0 0 0 0 0 0 0 0 0 0Shareholders ' equity 1,304 1,390 1,537 3,888 4,553 5,187 5,844 9,372 7,040 6,930 6,844Total equity and liabilities 1,897 2,279 2,889 6,394 7,550 9,500 11,718 14,113 10,314 10,243 10,198 -3.4%


CAGRCash from operations 82.2 39.7 117 876 (969.0) 682 458 2,622 2,309 998 920 19.1%Net interes t paid 2.7 (21.2) 31 8 (8.1) (50) (59) (76) 105 71 64Tax paid 0.0 0.0 0 0 0.0 0 0 0 0 0 0Operating cash flow 84.8 18.5 148 884 (977.1) 632 398 2,546 2,414 1,069 984 25.4%Capex on PP&E (208.3) (98.2) (482) (1,331) (524.1) (48) (53) (60) (51) (81) (85)Other inves ting cash flow 4.9 (106.1) (71) 21 (233.1) (1,830) (1,830) 5,435 0 0 0Investing cash flow (203.3) (204.3) (553) (1,310) (757.2) (1,878) (1,883) 5,375 (51) (81) (85) -54.0%

Operating free cash flow (*) (123.5) (79.7) (334) (446) (1,501.1) 584 345 2,487 2,363 988 900 27.1%Free cash flow (**) (118.5) (185.8) (405) (426) (1,734.3) (1,246) (1,485) 7,921 2,363 988 900 NM

Dividends paid (44.5) 0.0 0 0 0.0 0 0 0 (3,528) (1,196) (1,086)Share buybacks / issuances 0.0 0.0 0 1,776 12.8 0 0 0 0 0 0Other 40.2 (11.8) 296 114 244.2 1,438 1,438 (1,277) (1,000) 0 0Financing cash flow (4.4) (11.8) 296 1,890 257.0 1,438 1,438 (1,277) (4,528) (1,196) (1,086) NM

Change in cash and cash equivalents 6.4 (65) 1,241 (1,180.0) 193 (46) 6,644 (2,165) (208) (186)(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Union Properties: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 13.9x 14.3x 13.9x 13.4x 2.5x 7.4x


EV / DACF lease adj'd 12.6x NA 15.7x 19.9x 1.4x 5.5x






P / book 2.3x 1.9x 1.7x 1.5x 0.9x 1.2x


FCF yield -18.0% -31.1% -27.6% -29.3% NM 26.7%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 0.0% 40.1% 13.6%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 30.3% NM 10.2% 7.2% 51.6% 21.4%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 21.6% 14.5% 13.0% 11.9% 46.4% 14.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC 2.9x NA 1.0x 0.7x 5.0x 2.1x


EV / GCI 3.2x 1.6x 1.5x 1.3x 0.9x 1.3x


GCI (*) 4,042 6,257 7,262 8,533 6,087 4,991

Net debt / (cash) * (502) 1,271 1,578 2,125 (3,920) (2,755)


Net Debt / Equity -0.1x 0.3x 0.3x 0.4x -0.4x -0.4x

Net Debt / EBITDA -1.7x 3.4x 3.7x 3.8x -1.1x -2.5x

Net interest / EBITDA -2.8% 2.1% 11.7% 10.7% 2.1% -9.4%* Dh mn

Margins and other 2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 21.8% 14.9% 18.0% 20.8% 30.3% 21.8%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 19.7% 13.6% 16.5% 19.4% 30.0% 20.9%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 19.7% 13.6% 16.5% 19.4% 30.0% 20.9%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 95.9% 20.8% 2.0% 2.0% 0.5% 1.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




UPRO.DUSector

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Abu Dhabi National Hotels Company (ADNH.AD)


United Arab Emirates: Lodging


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: ADNH.AD

Low High





Abu Dhabi National Hotels Company


Key data (*)

Price (Dh) 5.85Price target (Dh) 7.60Market cap ($ mn) 1,147Average daily trading volume ($ mn) NAFree float 83%Bloomberg code ADNH DB

2006 2007E 2008E 2009ESales (Dh mn) 1,196 1,378 1,533 1,623EBITDA (Dh mn) 350.9 464.1 476.7 458.4EV / EBITDAR NM 7.4x 7.1x 7.3xP / E 14.4x 9.1x 10.0x 10.5xDividend yield 3.4% 5.5% 5.0% 7.1%(*) multiples and ratios are calendarised

Cheap exposure to the growth of Abu Dhabi’s tourism sector


• ADNH is uniquely exposed to the growth planned for Abu Dhabi’s tourist sector, which has

been ear-marked by the government as a key to the emirate’s economic diversification and

growth. A recent paper released by the emirate’s Urban Planning Council forecasts tourist

arrivals increasing from 1.8 mn per annum in 2007 to 3.3 mn in 2013 and to 7.9 mn by 2030.

• The stock appears cheap, even on existing organic growth rates and is thus protected to the

downside if such grand plans do not come to fruition. Additionally, ADNH owns large plots of

land in Abu Dhabi that could be utilised or sold; depending on how exactly the emirate’s

economy develops.


Our 12-month price target is based on DCF valuation, with reasonableness checks including

EV/GCI versus CROCI/WACC and implied P/E ratios at target prices relative to the coverage group.

We use a two-stage terminal value calculation, stepping growth down from the rate at the end of

the explicit forecast period to a 3% perpetual value. We use a WACC of 10.5%, which is higher

than the average of our UAE coverage, to account for the lower liquidity of the share.

At our price target, the stock would trade at 13x and 13.7x 2008E and 2009E P/E respectively,

compared with the European peer group average of 23.8x and 21.7x.

We have not fully incorporated the potential for growth through new developments, due to lack of

visibility on nature, magnitude and timing. If Abu Dhabi’s ambitious plans to develop its tourism

sector come to fruition, ADNH would be in a highly favourable position to expand its portfolio

significantly. Alternatively, ADNH could release some of its considerable land bank. We do not

calculate a Net Asset Valuation at present, due to lack of information on the size and value of the

land bank, but we believe there could be substantial upside to an operational DCF valuation if

more information became available to investors.

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Abu Dhabi National Hotels Company: Overview Company description Abu Dhabi National Hotels Company (ADNH) began

operations in 1975 with the purchase of three

government hotels. The company now owns or

manages hotels belonging to the Hilton, Mercure,

Meridien and Sheraton brands, and its own Al Diar

chain. ADNH diversified into catering, entering a JV

with Compass that services airlines, schools, hospitals

and so on, with an estimated 85% market share in Abu

Dhabi. The company also has a transportation

subsidiary, with taxi and limousine services.


82%

18%

Public Abu Dhabi Investment Council



• In the near-term, rising room rates (RevPAR) and occupancy rates are the drivers of revenue

growth, as supply increases are unlikely to reach market until at least 2009. ADNH reports a

year-on-year increase in room rates of around 35% in June of this year, and continuation of

strong pricing power.

• We expect margins to expand in the hotels business, as the rate of cost increases, while

tangible, is much lower than that of RevPAR expansion. We forecast gross margin to rise to

50% in 2007 from 46% in 2006, but with much of the additional revenue flowing straight to the

bottom line, we see upside risk to this assumption.

• We see much more muted revenue expansion in the catering and transportation segments over

the next two or three years. Catering already enjoys such high market share that significant

growth is difficult to achieve organically. The terms of the JV with Compass also mean that

revenue and profitability in the unit would have to increase substantially if ADNH were to

receive more than its guaranteed contribution.

• Longer term growth drivers are government plans for a more than seven-fold increase in the

number of hotel rooms in the emirate by 2030.


• Government plans currently are just that; there is no guarantee that Abu Dhabi will succeed in

developing its tourism industry as aggressively as planned with strong competition from

neighbours in the region such as Dubai; however, the shares look inexpensive on the basis of

organic growth, on our estimates.

• Regional tensions or a fall in the oil price may impact negatively Abu Dhabi’s plans to expand

it’s tourism sector.

Industry context

Abu Dhabi’s government has identified the tourism sector as key to driving, and diversifying the

sources of, economic growth in the emirate. Both the Policy Agenda 2007-2008 of the Executive

Council, and the more recent Urban Structure Framework Plan, envisage stimulation of the tourism

sector to become a primary sector in the future economy.

52%39%

9%

Hotels Catering & Contract Transport




Abu Dhabi National Hotels Company: Overview


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0200400600800

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Dominance in market share of Abu Dhabi’s existing hotel portfolio.

Represents high-quality international hotel brands.

Possesses large land bank that could be employed for expansion or sold

for development.

Strong balance sheet with substantial investments to be revalued.

The shares are relatively illiquid.


Abu Dhabi’s government plans for substantial expansion of the tourism

sector, providing a growth environment and political patronage.

Expansion out of Abu Dhabi into Dubai and surrounding emirates and

countries.

Dubai challenging Abu Dhabi as a regional financial and commercial

centre, yet ADNH at liberty to expand there also.




Abu Dhabi National Hotels Company: Summary financials Income statement (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 1,050 1,043 1,074 1,196 1,378 1,533 1,623 1,700 1,771 1,845 4.7%EBITDAR 223 253 290 351 464 477 458 483 505 528EBITDA 223 253 290 351 464 477 458 483 505 528

EBITDA margin 21.3% 24.3% 27.0% 29.3% 33.7% 31.1% 28.3% 28.4% 28.5% 28.6%EBIT 170 176 218 266 383 395 374 394 409 424 1.8%

EBIT margin 16.2% 16.9% 20.3% 22.2% 27.8% 25.8% 23.1% 23.2% 23.1% 23.0%Net interest expense 40 62 114 26 19 25 26 28 28 28Associate income / other (0) 0 0 0 60 0 (0) 0 (0) (0)Profit before tax 210 238 332 293 462 420 400 421 437 452Adjusted PBT 210 238 332 293 462 420 400 421 437 452 1.9%Tax 0 0 0 0 0 0 0 0 0 0Exceptional items (0) (0) 0 0 0 0 0 0 0 0Minority interest 0 0 0 0 0 0 0 0 0 0Net income 210 238 332 293 462 420 400 421 437 452Adjusted net income 210 238 332 293 462 420 400 421 437 452 1.9%

Per share data (Dh) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 720 720 720 720 720 720 720 720 720 720No. of diluted shares outstanding (*) 720 720 720 720 720 720 720 720 720 720EPS (basic) 0.29 0.33 0.46 0.41 0.64 0.58 0.56 0.59 0.61 0.63 1.9%EPS (diluted) 0.29 0.33 0.46 0.41 0.64 0.58 0.56 0.59 0.61 0.63EPS (adjusted, basic) 0.29 0.33 0.46 0.41 0.64 0.58 0.56 0.59 0.61 0.63 1.9%

Annual growth 13.0% 39.6% -11.8% 57.8% -9.1% -4.8% 5.3% 3.7% 3.5%EPS (adjusted, diluted) 0.29 0.33 0.46 0.41 0.64 0.58 0.56 0.59 0.61 0.63DPS 0.25 0.20 0.40 0.20 0.32 0.29 0.42 0.44 0.46 0.47 12.7%

Annual growth -20.0% 100.0% -50.0% 60.4% -9.1% 42.8% 5.3% 3.7% 3.5%(*) weighted average number of shares; in millions




Abu Dhabi National Hotels Company: Summary financials Balance sheet (Dh mn, year ending Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 449 477 479 670 868 911 970 981 993 1,009Other current assets 604 586 670 609 692 785 850 889 925 963Total current assets 1,052 1,064 1,149 1,279 1,560 1,696 1,819 1,869 1,918 1,972 3.8%Long term investments & other 243 574 1,297 792 792 792 792 792 792 792Property, plant and equipment 464 494 528 563 620 692 770 851 932 1,012Intangible assets 0 0 0 0 0 0 0 0 0 0Total assets 1,759 2,132 2,974 2,635 2,973 3,181 3,382 3,513 3,642 3,776 4.4%

Trade payables 111 83 151 150 170 189 200 210 218 227Short term debt 6 6 6 13 13 13 13 13 13 13Long term debt 31 25 20 14 14 14 14 14 14 14Pension liabilities 157 126 94 62 62 62 62 62 62 62Other liabilities 121 163 104 147 147 147 147 147 147 147Total liabilities 426 403 374 386 406 425 436 446 454 464 2.2%Minority interests 0 0 0 0 0 0 0 0 0 0Shareholders' equity 1,333 1,729 2,600 2,249 2,567 2,756 2,946 3,067 3,188 3,312Total equity and liabilities 1,759 2,132 2,974 2,635 2,973 3,181 3,382 3,513 3,642 3,776 4.4%

Cash flow (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 174 196 195 297 461 402 405 453 478 500 5.6%Net interest paid 40 62 114 26 19 25 26 28 28 28Tax paid 0 0 0 0 0 0 0 0 0 0Operating cash flow 213 257 309 323 480 427 431 481 506 528 5.5%Capex on PP&E (134) (113) (97) (101) (138) (153) (162) (170) (177) (184)Other investing cash flow 68 195 (84) 111 0 0 0 0 0 0Investing cash flow (66) 82 (181) 10 (138) (153) (162) (170) (177) (184) 4.7%

Operating free cash flow (*) 79 145 212 222 342 273 269 311 329 344 5.9%Free cash flow (**) 147 340 127 334 342 273 269 311 329 344 5.9%

Dividends paid (120) (132) (120) (144) (144) (231) (210) (300) (316) (328)Share buybacks / issuances 0 0 0 0 0 0 0 0 0 0Other (6) (6) (6) (6) 0 0 0 0 0 0Financing cash flow (126) (138) (126) (150) (144) (231) (210) (300) (316) (328) 9.1%

Change in cash and cash equivalents 29 1 191 198 42 59 11 13 16(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Abu Dhabi National Hotels Company: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 12.7x 14.4x 9.1x 10.0x 10.5x 10.0x


EV / DACF lease adj'd NM NM 6.5x 7.1x 7.3x 6.9x


EV / EBITDA lease adj'd NM NM 7.4x 7.1x 7.3x 6.9x


EV / NOPAT lease adj'd NM NM 9.0x 8.6x 8.9x 8.4x


P / book 1.6x 1.9x 1.6x 1.5x 1.4x 1.4x


FCF yield -1.8% 1.9% 6.7% 6.5% 6.4% 7.4%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 6.8% 3.4% 5.5% 5.0% 7.1% 7.5%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 10.6% 10.8% 25.5% 21.0% 18.4% 17.9%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 15.3% 12.1% 19.2% 15.8% 14.0% 14.0%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%


GS coverage NA NA NA NA NA NA

EV / GCI NA NA 1.6x 1.4x 1.3x 1.2x


GCI (*) 2,631 2,172 2,471 2,812 3,147 3,467

Net debt / (cash) * (453) (643) (841) (884) (943) (954)


Net Debt / Equity -0.2x -0.3x -0.3x -0.3x -0.3x -0.3x

Net Debt / EBITDA -1.6x -1.8x -1.8x -1.9x -2.1x -2.0x

Net interest / EBITDA -39.2% -7.5% -4.0% -5.2% -5.7% -5.7%* Dh mn


EBITDA margin 27.0% 29.3% 33.7% 31.1% 28.3% 28.4%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 20.3% 22.2% 27.8% 25.8% 23.1% 23.2%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 20.3% 22.3% 27.8% 25.8% 23.1% 23.2%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 9.0% 8.5% 10.0% 10.0% 10.0% 10.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




ADNH.ADSector

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Construction and Materials company summaries

Arabtec Holding PJSC 78

Orascom Construction Industries 84

Aerated Concrete Industries Co 90

Bildco 96



Arabtec Holding PJSC (ARTC.DU)


United Arab Emirates: Construction


Pan Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: ARTC.DU

Low High





Arabtec Holding PJSC


Key data (*)

Price (Dh) 6.25Price target (Dh) 8.60Market cap ($ mn) 1,018Average daily trading volume ($ mn) 3.40Free float 66%Bloomberg code ARTC DB

2006 2007E 2008E 2009ESales (Dh mn) 2,810 3,611 4,522 6,122EBITDA (Dh mn) 298.1 391.0 467.6 645.0EV / EBITDAR 8.6x 9.2x 8.0x 6.8xP / E 16.4x 12.6x 11.3x 9.5xDividend yield 0.0% 0.0% 2.1% 5.0%(*) multiples and ratios are calendarised

Leading contractor in the UAE still offers attractive upside potential


• Arabtec is one of the leading construction companies in the UAE and the only contractor listed

on the DFM. The company enjoys strong relationships with both government and leading

property developers such as Emaar, and has distinguished itself as the leading contractor on

mega projects such as the Burj Dubai.

• The UAE’s booming construction sector provides strong demand for Arabtec’s services. The

company has an order book in excess of Dh16 bn and has recently embarked on a regional

expansion strategy, diversifying its operations away from the domestic market. We forecast a

five-year revenue CAGR of 15% at an EBITDA margin of c.11%.

• We expect Arabtec to remain the dominant contractor in the UAE and believe it will be able to

leverage its expertise on new mega projects in the region. With its extensive pipeline of

notable projects and strong relationships with leading developers, we consider the shares’

valuation attractive, and initiate our coverage on our Buy list.



EV/GCI versus CROCI/WACC and implied P/E ratios at target prices relative to the peer group.


the explicit forecast period to a 3% perpetual value. We use a WACC of 10.5%.

At our price target, the stock would trade at 15.6x and 13.1x 2008E and 2009E P/E respectively,


We have not incorporated potential expansion into new product groups or geographical areas,

which might provide some upside potential.

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Arabtec Holding PJSC: Overview Company description Arabtec invests in the construction sector by acquiring

interests in existing companies in the UAE to be at the

forefront of the construction boom taking place in the

region. The group’s primary activities are carried out

through Arabtec Construction Company, Arabtec

Engineering services, and Arabtec Precast. In 2005 the

group acquired Austrian Arabian Ready Mix Concrete

company. Arabtec is the contractor of choice for

leading property developer Emaar, and is the leading

contractor for the Burj Dubai mega project.


55%

19%

11%

15%

Public Riad Burhan KamalOther Abraaj Capital [via Abraaj Real Estate Fund]



• Arabtec is the contractor of choice to a number of the leading property developers and has strong

political patronage. Being at the forefront of the infrastructure boom, Arabtec currently has an

order book in excess of Dh16 bn. Arabtec should benefit from the technical expertise gained from

building the Burj as further mega projects are planned throughout the region.

• The company’s close relationship with Emaar should continue to generate order flow for the

company, particularly with regard to the construction of Villas and other residential properties.

Our estimates suggest demand for over 200,000 residential units in Dubai alone between 2006

and 2010. Emaar also provides Arabtec with growth potential in other markets, such as Pakistan.

Management targets 40% of revenues from outside the UAE by 2010. Our forecasts, based on

announced backlog and expected contract awards, are in line with this target.

• We expect some widening of margin, as the company is able to re-price new contracts to

compensate for cost inflation over the last two or three years.


• Capacity constraints and potential shortages of materials and access to a skilled labour force are

the key risks in our view. Wage and material inflation (particularly steel and cement) is also a

concern. With a workforce of 24,000, Arabtec is particularly exposed to the risk of wage inflation.

• A slowdown in construction activity in UAE and increased competition as new entrants are

attracted to the regions rapidly growing construction industry.

Industry context

The real estate sector in Dubai and other areas of the UAE have been experiencing a boom since

property reforms were enacted and economies began to feel the effect of higher oil prices.

Substantial investments in infrastructure to support the growing economy and population result in

an exceptionally large construction sector relative to other economies, even in the emerging world.

Since 2003, the construction sector has contributed around 8% of total GDP in the UAE and grown

at a nominal CAGR above 20%. MEED, a regional economic digest, estimates project values in the

UAE totaling almost US$700 bn and over US$1.6 tn in the GCC in total. Arabtec looks well

positioned to benefit from high growth in the UAE, as well as through its regional expansion.

94%

6%

Contracts Electrical and Drainage




Arabtec Holding PJSC: Overview


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Contractor of choice for the major property developers such as Emaar.

Involved in many of the major projects in Dubai and Abu Dhabi such as

Burj Dubai and Dubai Pearl.

Strong partnerships and JV arrangements with a number of leading

property developers in the region.

Strong pipeline of projects and developments.

Arabtec’s projects are still largely concentrated in the UAE, creating the

need to diversify geographically.

Capacity constraints could stretch the group in keeping up with demand.


The ongoing construction boom should continue to present opportunities

and new projects for the company. As projects become more elaborate,

technical expertise plays more of a role, improving group prospects.

Barriers to entry. Limited number of companies with the capacity to

undertake the scale of projects that Arabtec manages.

Significant room for expansion beyond the company’s home market of

the UAE.

A slowdown in construction activity in the UAE.

Shortages of materials and skilled labor could persist as development

activity remains strong.

Sharp increases in input costs could put margins under pressure.




Arabtec Holding PJSC: Summary financials Income statement (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 2,566 2,810 3,611 4,522 6,122 6,593 6,957 7,196 12.3%EBITDAR 251 327 429 515 709 745 809 848EBITDA 234 298 391 468 645 677 736 773

EBITDA margin 9.1% 10.6% 10.8% 10.3% 10.5% 10.3% 10.6% 10.7%EBIT 172 206 287 345 495 534 564 585 14.1%

EBIT margin 6.7% 7.3% 7.9% 7.6% 8.1% 8.1% 8.1% 8.1%Net interest expense (6) (1) (1) 8 13 17 19 19Associate income / other (0) 14 (0) 0 0 (0) 0 (0)Profit before tax 166 219 286 353 508 551 583 603Adjusted PBT 177 230 300 371 532 577 611 612 13.3%Tax 0 0 0 (10) (36) (44) (51) (56)Exceptional items 0 0 0 0 0 0 0 0Minority interest 0 (2) (5) (30) (101) (121) (139) (153)Net income 166 217 281 313 370 386 393 394Adjusted net income 177 228 296 331 395 412 421 403 5.0%


No. of basic shares outstanding (*) 598 598 598 598 598 598 598 598No. of diluted shares outstanding (*) 598 598 598 598 598 598 598 598EPS (basic) 0.28 0.36 0.47 0.52 0.62 0.65 0.66 0.66 5.9%EPS (diluted) 0.28 0.36 0.47 0.52 0.62 0.65 0.66 0.66EPS (adjusted, basic) 0.30 0.38 0.49 0.55 0.66 0.69 0.70 0.67 5.0%

Annual growth 29.0% 29.6% 11.8% 18.9% 4.4% 2.0% -3.9%EPS (adjusted, diluted) 0.30 0.38 0.49 0.55 0.66 0.69 0.70 0.67DPS 0.00 0.00 0.00 0.13 0.31 0.48 0.49 0.49 39.4%

Annual growth NM NM NM 136.6% 56.3% 1.9% 0.3%(*) weighted average number of shares; in millions




Arabtec Holding PJSC: Summary financials Balance sheet (Dh mn, year ending Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 122 129 370 542 676 739 734 745Other current assets 1,093 1,482 1,690 2,119 2,869 3,089 3,259 3,371Total current assets 1,215 1,611 2,060 2,660 3,545 3,828 3,994 4,116 11.5%Long term investments & other 242 218 218 218 218 218 218 218Property, plant and equipment 331 416 543 709 951 1,230 1,503 1,755Intangible assets 101 90 105 87 63 37 9 0Total assets 1,890 2,335 2,926 3,675 4,777 5,313 5,724 6,090 13.5%

Trade payables 1,227 1,234 1,583 1,982 2,684 2,890 3,050 3,154Short term debt 0 157 107 107 107 107 107 107Long term debt 0 0 0 0 0 0 0 0Pension liabilities 89 134 140 147 155 163 171 179Other liabilities 0 0 0 0 0 0 0 0Total liabilities 1,316 1,525 1,830 2,237 2,945 3,160 3,327 3,440 11.4%Minority interests 0 26 31 61 162 283 422 576Shareholders' equity 574 784 1,065 1,378 1,670 1,871 1,974 2,074Total equity and liabilities 1,890 2,335 2,926 3,675 4,777 5,313 5,724 6,090 13.5%Cash flow (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 201 (4.0) 539 445 604 670 734 774 14.8%Net interest paid (6) (1.2) (1) 8 13 17 19 19Tax paid 0 0.0 0 (10) (36) (44) (51) (56)Operating cash flow 195 (5.2) 538 443 580 643 702 737 13.6%Capex on PP&E (107) (165.7) (217) (271) (367) (396) (417) (432)Other investing cash flow (283) (4.0) (30) 0 0 0 0 0Investing cash flow (390) (169.7) (247) (271) (367) (396) (417) (432) 12.3%

Operating free cash flow (*) 88 (171.0) 321 172 213 248 284 306 15.5%Free cash flow (**) (195) (175.0) 291 172 213 248 284 306 15.5%

Dividends paid 0 0.0 0 0 (78) (185) (289) (295)Share buybacks / issuances 400 0.0 0 0 0 0 0 0Other (112) 182.0 (50) 0 0 0 0 0Financing cash flow 288 182.0 (50) 0 (78) (185) (289) (295) NM

Change in cash and cash equivalents 7.2 241 172 135 63 (5) 11(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Arabtec Holding PJSC: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 21.1x 16.4x 12.6x 11.3x 9.5x 9.1x








P / book 6.5x 4.8x 3.5x 2.7x 2.2x 2.0x


FCF yield -10.7% -9.5% 7.6% 4.4% 5.5% 6.4%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 2.1% 5.0% 7.7%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA 38.4% 29.9% 29.5% 30.9% 26.3%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE NA 32.0% 30.4% 25.6% 24.3% 21.8%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC NA 3.8x 2.9x 2.9x 3.1x 2.6x


EV / GCI 3.5x 2.1x 2.6x 2.2x 2.0x 1.7x


GCI (*) 837 1,469 1,725 2,206 2,903 3,722

Net debt / (cash) * (122) 28 (263) (435) (570) (632)


Net Debt / Equity -0.2x 0.0x -0.2x -0.3x -0.3x -0.3x

Net Debt / EBITDA -0.5x 0.1x -0.7x -0.9x -0.9x -0.9x

Net interest / EBITDA 2.5% 0.4% 0.2% -1.7% -2.0% -2.5%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 9.1% 10.6% 10.8% 10.3% 10.5% 10.3%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 6.7% 7.3% 7.9% 7.6% 8.1% 8.1%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 7.3% 8.1% 8.6% 8.3% 8.8% 8.8%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 4.2% 5.9% 6.0% 6.0% 6.0% 6.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




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Premium to the sector (RHS)Emerging Markets Non-FinARTC.DU




Orascom Construction Industries (OCIC.CA)


Egypt: Construction


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: OCIC.CA

Low High





Orascom Construction Industries


Key data (*)

Price (£E) 459.5Price target (£E) 462.0Market cap ($ mn) 16,609Average daily trading volume ($ mn) NAFree float 36%Bloomberg code ORCI EY

2006 2007E 2008E 2009ESales (£E mn) 16,475 22,823 29,883 37,249EBITDA (£E mn) 4,441 6,406 8,745 11,947EV / EBITDAR 13.6x 18.3x 14.1x 10.5xP / E 33.7x 28.1x 22.0x 14.8xDividend yield 1.2% 1.4% 2.3% 5.1%(*) multiples and ratios are calendarised

Regional heavyweight with attractive prospects, but fully valued

Investment thesis: Neutral recommendation

• Orascom Construction Industries (OCI) is the largest cement producer in the Middle East and

has a large and rapidly growing construction business that spans the MENA region. We believe

OCI offers attractive growth potential and it is the only listed entity in the region with such a

wide exposure to the regional infrastructure boom.

• Construction and infrastructure developments in OCI’s core markets are driving strong demand

for building materials and construction services. OCI’s revenue growth has been c.40% over the

last two years, and we expect it to continue to grow at a CAGR of 23% over the next five years,

generating net income margins in excess of 15%.

• Given the diversity of operations and the growth potential, we consider OCI to be the most

complete investment play on the regional infrastructure boom, but we feel that this is fully

reflected in the share price. We initiate coverage on OCI as Neutral.

Valuation: 12-month target price of £E462




the explicit forecast period to a 3% perpetual value. We use a WACC of 10% and calculate a 12-

month target price of £E462.




which might provide some additional upside potential.

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OCIC.CA (£E) MSCI EM Europe & Middle East




Orascom Construction Industries: Overview Company description Orascom Construction Industries (OCI) is an Egypt-

based construction company and manufacturer of

cement. The company is a heavyweight in the MENA

region with operations in over 20 countries. OCI

operates cement plants in Egypt, Algeria, Pakistan,

Iraq, Turkey and the UAE, with year-end 2007 capacity

expected to reach 31 mn tonnes. The company also

has significant contracting operations through its 50%

stake in the Besix Group and 100% stake in Contrack.

The company’s key markets for construction include

Egypt, Algeria and the GCC countries.


60%

40%

Saw iris family Public



• Rapid regional expansion from both the cement and construction divisions provides a strong

growth environment. OCI also has a proven track record in completing successful acquisitions.

We expect the company to continue to acquire complimentary operations as part of its expansion

plans, although no explicit account has been made in our forecasts.

• Cement demand in emerging markets is at an all-time high leading to large-scale investments in

new capacity. OCI has is set to increase capacity by 86% from 2006 levels to 39 mn tonnes by

2009. Contracting revenue is also showing signs of significant growth with the backlog standing

at US$3.45 bn, with US$1.8 bn in new contract awards in 1H07. We expect the construction

business to generate revenue CAGR in excess of 20% out to 2009.

• OCI is expanding into the fertilizer business with two investments in natural gas in Egypt and

Algeria. OCI will likely have access to a number of high growth markets in the Middle East and

should operate at a very competitive cash cost. We expect the fertilizer business to be a core

driver of growth in the medium to longer tem.


• A slowdown in construction activity across the MENA region remains a threat to the group. OCI’s

geographic spread mitigates the downside risk in isolated markets but a region-wide slowdown

could significantly affect the company.

• Increased competition as new entrants are attracted to the region’s rapidly growing construction

industry. This is likely to be particularly evident in the cement sector where pricing pressure in a

number of the company’s key markets remains a concern. Strong demand across the region is

also driving up the cost of inputs and labour costs, placing margins under pressure.

Industry context

Substantial investments in infrastructure to support growing economies and populations in

emerging markets, have resulted in exceptionally large construction sectors relative to other

economies, even in the emerging world. MEED, a regional economic digest, estimates values of

over US$1.6 tn in the GCC alone. As the largest player in the Middle East and with a diverse and

growing operational base, OCI is well positioned to benefit from the developments taking place.

69%

31%

Construction Cement




Orascom Construction Industries: Overview


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03 04 05 06 07E 08E 09E 10E 11E 12E0.0%

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05,000

10,00015,00020,00025,00030,00035,00040,00045,000

02 03 04 05 06 07E 08E 09E 10E 11E 12E16.2%

18.2%

20.2%

22.2%

24.2%

26.2%

28.2%

£Emn (LHS) EBIT Margin (RHS)


Geographic expansion has opened up new growth markets and reduced

concentration risk.

Barriers to entry. Limited number of companies with the capacity to

match the scale of OCI’s operations.

Strong pipeline of construction projects and large-scale cement

expansion plans.

Competes with more focused companies that specialize in their

respective markets.


The ongoing infrastructure boom should continue to present

opportunities and new projects for the company.

The fertilizer business presents attractive growth potential for the group

going forward.

New entrants in rapidly expanding markets.

A slowdown in construction activity, either in a boom-bust scenario, or a

longer-term natural decline in construction activity as large projects draw

to a close.

Oversupply in the cement operations, particularly in relatively new

growth markets such as the UAE.




Orascom Construction Industries: Summary financials Income statement (£E mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 2,911 4,403 8,556 11,367 16,475 22,823 29,883 37,249 40,057 43,685 46,178 11.5%EBITDAR 801 1,204 2,224 2,683 4,441 6,406 8,745 11,947 12,309 13,400 14,003EBITDA 801 1,204 2,224 2,683 4,441 6,406 8,745 11,947 12,309 13,400 14,003

EBITDA margin 27.5% 27.3% 26.0% 23.6% 27.0% 28.1% 29.3% 32.1% 30.7% 30.7% 30.3%EBIT 590 945 1,909 2,559 3,817 4,966 6,684 9,367 9,456 10,255 10,557 12.1%

EBIT margin 20.3% 21.5% 22.3% 22.5% 23.2% 21.8% 22.4% 25.1% 23.6% 23.5% 22.9%Net interest expense (216) (253) (315) (330) (461) (432) (849) (1,032) (1,016) (945) (851)Associate income / other 101 161 (13) 76 194 (0) (0) (0) (0) (0) 0Profit before tax 475 853 1,581 2,304 3,550 4,534 5,836 8,335 8,440 9,311 9,705Adjusted PBT 496 875 1,522 1,991 3,550 4,534 5,836 8,335 8,440 9,311 9,705 13.6%Tax (9) (29) (77) (114) (136) (227) (292) (417) (422) (466) (485)Exceptional items 0 0 0 0 0 0 0 0 0 0 0Minority interest (102) (266) (403) (489) (743) (1,029) (1,347) (1,680) (1,806) (1,970) (2,082)Net income 364 558 1,101 1,700 2,671 3,278 4,196 6,239 6,212 6,875 7,138Adjusted net income 385 580 1,042 1,387 2,671 3,278 4,196 6,239 6,212 6,875 7,138 14.2%

Per share data (£E) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 191 191 190 189 196 200 200 200 200 200 200No. of diluted shares outstanding (*) 191 191 190 189 196 200 200 200 200 200 200EPS (basic) 1.91 2.93 5.81 8.97 13.62 16.35 20.93 31.12 30.99 34.30 35.61 14.2%EPS (diluted) 1.91 2.93 5.81 8.97 13.62 16.35 20.93 31.12 30.99 34.30 35.61EPS (adjusted, basic) (2.85) (12.22) 5.51 7.40 13.62 16.35 20.93 31.12 30.99 34.30 35.61 14.2%

Annual growth NM NM 34.3% 83.9% 20.1% 28.0% 48.7% -0.4% 10.7% 3.8%EPS (adjusted, diluted) (2.85) (12.22) 5.51 7.40 13.62 16.35 20.93 31.12 30.99 34.30 35.61DPS 0.5 0.5 0.9 2.0 5.5 6.5 10.5 23.3 23.2 25.7 26.7 26.4%

Annual growth 0.0% 98.0% 124.0% 175.0% 18.9% 60.0% 123.0% -0.4% 10.7% 3.8%(*) weighted average number of shares; in millions




Orascom Construction Industries: Summary financials Balance sheet (£E mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 787 925 1,643 3,009 3,211 970 684 1,247 3,613 6,717 10,136Other current assets 1,665 1,956 4,023 5,173 7,797 11,118 14,517 17,865 19,349 21,114 22,382Total current assets 2,453 2,881 5,667 8,183 11,008 12,088 15,201 19,111 22,962 27,831 32,518 20.9%Long term investments & other 170 241 388 620 2,063 2,063 2,063 2,063 2,063 2,063 2,063Property, plant and equipment 3,705 4,989 6,696 8,807 15,545 23,234 28,013 31,134 31,084 30,998 30,784Intangible assets 0 0 0 0 0 0 0 0 0 0 0Total assets 6,327 8,111 12,750 17,610 28,616 37,384 45,277 52,308 56,108 60,891 65,364 9.6%

Trade payables 1,017 939 2,405 1,274 3,189 3,752 4,912 6,123 6,585 7,181 7,591Short term debt 758 714 983 1,344 2,988 2,988 2,988 2,988 2,988 2,988 2,988Long term debt 1,656 2,563 3,493 5,518 6,262 11,262 13,762 13,762 13,762 13,762 13,762Pension liabilities 82 138 295 617 1,329 1,329 1,329 1,329 1,329 1,329 1,329Other liabilities 499 453 1,042 2,628 3,688 3,688 3,688 3,688 3,688 3,688 3,688Total liabilities 4,012 4,808 8,219 11,381 17,456 23,019 26,679 27,890 28,352 28,948 29,358 2.4%Minority interests 876 1,146 1,487 1,965 2,488 3,518 4,865 6,545 8,351 10,321 12,403Shareholders' equity 1,439 2,158 3,044 4,264 8,672 10,847 13,732 17,873 19,406 21,622 23,603Total equity and liabilities 6,327 8,111 12,750 17,610 28,616 37,384 45,277 52,308 56,108 60,891 65,364 9.6%

Cash flow (£E mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 902 833 1,283 2,479 4,428 3,648 6,506 9,810 11,287 12,231 13,145 19.2%Net interest paid (216) (253) (315) (330) (461) (432) (849) (1,032) (1,016) (945) (851)Tax paid (9) (29) (77) (114) (136) (227) (292) (417) (422) (466) (485)Operating cash flow 677 551 891 2,034 3,831 2,990 5,366 8,361 9,849 10,821 11,808 21.8%Capex on PP&E (692) (1,408) (1,616) (2,921) (7,468) (9,129) (6,840) (5,700) (2,804) (3,058) (3,232)Other investing cash flow 35 (66) (102) (971) (450) 0 0 0 0 0 0Investing cash flow (657) (1,474) (1,718) (3,891) (7,918) (9,129) (6,840) (5,700) (2,804) (3,058) (3,232) -17.1%

Operating free cash flow (*) (15) (857) (724) (886) (3,637) (6,139) (1,474) 2,661 7,045 7,763 8,576 NMFree cash flow (**) 21 (923) (827) (1,857) (4,086) (6,139) (1,474) 2,661 7,045 7,763 8,576 NM

Dividends paid (45) (95) (143) (172) (404) (1,102) (1,311) (2,098) (4,679) (4,659) (5,156)Share buybacks / issuances (78) 89 (12) (10) 2,193 0 0 0 0 0 0Other (182) 1,059 1,697 2,631 2,867 5,000 2,500 0 0 0 0Financing cash flow (305) 1,053 1,542 2,449 4,656 3,898 1,189 (2,098) (4,679) (4,659) (5,156) NM

Change in cash and cash equivalents 138 718 1,366 202 (2,242) (286) 563 2,366 3,104 3,419(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Orascom Construction Industries: Valuation summary

Relative to the GS New Markets Non-Financial coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 62.1x 33.7x 28.1x 22.0x 14.8x 14.8x








P / book 20.4x 10.6x 8.5x 6.7x 5.2x 4.7x


FCF yield -8.7% -11.4% -6.7% -1.6% 2.9% 7.6%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.4% 1.2% 1.4% 2.3% 5.1% 5.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 46.2% 31.4% 23.7% 23.0% 25.5% 23.3%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 46.5% 41.3% 33.6% 34.1% 39.5% 33.3%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 3.4x 3.0x 3.7x 3.0x 2.6x 2.4x


GCI (*) 18,267 35,167 45,585 55,749 64,799 69,154

Net debt / (cash) * 3,853 6,038 13,280 16,066 15,503 13,137

Pension liabilities * 617 1,329 1,329 1,329 1,329 1,329

Net Debt / Equity 0.6x 0.5x 0.9x 0.9x 0.6x 0.5x

Net Debt / EBITDA 1.4x 1.4x 2.1x 1.8x 1.3x 1.1x

Net interest / EBITDA 12.3% 10.4% 6.7% 9.7% 8.6% 8.3%* £E mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 23.6% 27.0% 28.1% 29.3% 32.1% 30.7%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 22.5% 23.2% 21.8% 22.4% 25.1% 23.6%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 19.8% 23.2% 21.8% 22.4% 25.1% 23.6%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 25.7% 45.3% 40.0% 22.9% 15.3% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%


Relative to GS New Markets Non-Financial coverage


OCIC.CA

Sector

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20%

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120%

Premium to the sector (RHS)Emerging Markets Non-FinOCIC.CA




Aerated Concrete Industries Co (ACIC.KW)


Kuwait: Construction


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: ACIC.KW

Low High





Aerated Concrete Industries Company


Key data (*)

Price (KD) 0.54Price target (KD) 0.60Market cap ($ mn) 376.1Average daily trading volume ($ mn) 502.6Free float 72%Bloomberg code ACICO KK

2006 2007E 2008E 2009ESales (KD mn) 54.5 41.9 49.4 55.1EBITDA (KD mn) 8.87 9.16 10.8 11.6EV / EBITDAR 13.5x 16.0x 13.7x 12.9xP / E 7.8x 10.8x 9.2x 8.6xDividend yield 8.8% 6.4% 7.5% 5.8%(*) multiples and ratios are calendarised

Transition brings uncertainties


• Aerated Concrete Industries Company (ACICO) presents a spread of exposure to the themes

of real estate development and construction in the Middle East. It operates in several

countries in the region, so is not a concentrated play on Dubai or the UAE. Its original line of

business was the production and distribution of aerated concrete blocks, but it is now

involved in engineering, contracting and real estate development. There are some synergies

between these activities, as evidenced by the high level of inter-segment eliminations in the

company’s financial statements; we believe this raises concentration risk.

• The shares look inexpensive, but the company is going through a transition phase that raises

risks, and is in a highly competitive market to start. Revenues in the first half of this year

declined by 44% compared with 1H2006 as property development revenues dropped

significantly, but there were declines across all business segments.

• The shares appear cheap, but the environment is challenging; we initiate as Neutral.

Valuation: 12-month target price of KD0.60





than the average of our UAE coverage, to account for the lower liquidity and transparency.


compared with the European building materials peer group average of 17.2x and 15.8x, which

may appear to be rather a wide discount for illiquidity and higher cost of capital, but we also

believe the medium-term outlook is challenging from a pricing perspective, as we discuss in more

detail in our coverage of the UAE cement sector.

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ACIC.KW (KD) MSCI EM Europe & Middle East




Aerated Concrete Industries Company: Overview Company description Aerated Concrete Industries Company (ACICO) was

established in Kuwait in 1990 and was listed on the

KSE in 1997 and on the DFM in 2006. The company

was originally involved purely in the production of

autoclaved aerated concrete blocks, licensed by Hebel

Germany. It subsequently began contracting

operations, and this now forms the majority of

revenues, albeit at a lower margin. The company also

has a real estate development arm, and has operations

in Kuwait, UAE, Qatar and Saudi Arabia.


72%

16%

12%

Public

Ghassan Ahmad Saud Al Khaled

Ahmad Ghassan Ahmad Saud Al Khaled



• Restoration of growth in the core contracting and concrete production businesses.

Manufacturing plants in Saudi Arabia and Qatar should become operational in the second half

of 2007, while recent contracts signed with Nakheel for construction of villas at Jebel Ali should

contribute to revenues in 2H2007 and 2008.

• Revenues should also begin to accrue from ACICO’s first hotel development, which became

operational in May 2007. The five-star hotel in Fujairah, owned by ACICO but operated by

Japanese Airlines (JAL) will be a model for future developments.


A slowdown in economic and construction activity in the Middle East, caused either by falling

oil prices, rising political tensions, or a boom-bust cycle of overinvestment.

Competition from new suppliers and materials or techniques.

Overstretch of management resource across multiple divisions and countries.

Industry context

The real estate and constructions sectors in the GCC have been experiencing a boom since property

reforms were enacted and economies began to feel the effect of higher oil prices. Substantial

investments in infrastructure to support the growing economy and population result in an

exceptionally large construction sector relative to other economies, even in the emerging world.



UAE totaling almost US$700 bn and over US$1.6 tn in the GCC in total.

ACICO is positioned in several segments of the real estate and construction sectors, engineering,

industrial, contracting and real estate development and thus is exposed to several sources of

growth and is capable of extracting synergies from its various operations.

100%

Contracting




Aerated Concrete Industries Company: Overview


0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x

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0.0

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20.0

30.0

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12.6%

14.6%

16.6%

18.6%

20.6%

22.6%

24.6%KDmn (LHS) EBIT Margin (RHS)


Reputation for high quality and holder of a licence from Hebel

International, the originator of autoclaved aerated concrete, a very

versatile construction material.

Partly integrated vertically into the supply chain, by establishing its own

lime plant.

Synergies between various business divisions; engineering, industrial,

contracting and real estate development.

Concrete is a commoditized business and margins are thin. Despite

ACICO’s product being a ‘premium’ material, pricing power is poor.

Diverse business activities may spread risk, but may also reduce focus,

as management resource is finite.


Expansion of production capacity in high growth markets, such as Saudi

Arabia.

Development of its real estate business in Kuwait and outside, such as

the hotel development in Fujairah that opened in May 2007.

A slowdown in economic and construction activity in the Middle East,

caused either by falling oil prices, rising political tensions, or a boom-

bust cycle of overinvestment.

Competition from new suppliers and materials or techniques.




Aerated Concrete Industries Company: Summary financials Income statement (KD mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 27.0 27.8 43.8 34.0 54.5 41.9 49.4 55.1 58.4 61.9 65.6 7.4%EBITDAR 5.4 6.2 8.9 8.8 8.9 9.2 10.8 11.6 12.2 12.7 13.3EBITDA 5.4 6.2 8.9 8.8 8.9 9.2 10.8 11.6 12.2 12.7 13.3

EBITDA margin 20.0% 22.5% 20.4% 25.8% 16.3% 21.9% 21.9% 21.1% 20.8% 20.5% 20.3%EBIT 4.2 4.7 7.4 7.1 7.2 7.6 9.3 10.1 10.6 11.1 11.7 6.0%

EBIT margin 15.6% 17.0% 16.8% 21.0% 13.3% 18.1% 18.8% 18.3% 18.2% 18.0% 17.9%Net interest expense 0.0 0.1 0.0 0.0 0.1 (2.4) (2.3) (2.4) (2.4) (2.4) (2.4)Associate income / other (0.5) (0.3) 5.1 1.5 7.3 5.6 5.6 5.6 5.6 5.6 5.6Profit before tax 3.7 4.5 12.5 8.6 14.6 10.8 12.5 13.3 13.7 14.3 14.9Adjusted PBT 3.9 4.8 12.8 8.7 14.7 10.9 12.6 13.4 13.8 14.4 15.0 4.5%Tax (0.0) (0.1) (0.3) (0.3) (0.5) (0.4) (0.4) (0.4) (0.4) (0.5) (0.5)Exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest (0.2) (0.3) (0.6) (0.5) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7)Net income 3.4 4.1 11.5 7.9 13.3 9.7 11.3 12.1 12.6 13.1 13.7Adjusted net income 3.7 4.4 11.8 8.0 13.4 9.8 11.4 12.2 12.7 13.2 13.8 4.8%

Per share data (KD) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 107 113 132 141 152 195 195 195 195 195 195No. of diluted shares outstanding (*) 107 113 195 195 195 195 195 195 195 195 195EPS (basic) 0.03 0.04 0.09 0.06 0.09 0.05 0.06 0.06 0.06 0.07 0.07 4.8%EPS (diluted) 0.03 0.04 0.06 0.04 0.07 0.05 0.06 0.06 0.06 0.07 0.07EPS (adjusted, basic) 0.03 0.04 0.06 0.04 0.07 0.05 0.06 0.06 0.06 0.07 0.07 4.8%

Annual growth 14.1% 55.6% -32.3% 67.7% -27.4% 17.2% 6.8% 3.6% 4.4% 4.5%EPS (adjusted, diluted) 0.03 0.04 0.06 0.04 0.07 0.05 0.06 0.06 0.06 0.07 0.07DPS 0.00 30.62 39.37 0.04 0.05 0.03 0.04 0.03 0.03 0.03 0.04 -3.7%

Annual growth NM 28.6% -99.9% 8.7% -27.0% 17.2% -23.8% 3.6% 4.4% 4.5%(*) weighted average number of shares; in millions




Aerated Concrete Industries Company: Summary financials Balance sheet (KD mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 3.0 1.3 0.5 2.5 6 8 6 5 6 7 9Other current assets 24.9 31.7 27.3 24.8 24 16 19 21 22 24 25Total current assets 27.9 33.0 27.9 27.3 30 24 25 25 28 31 34 7.6%Long term investments & other 3.1 2.9 27.2 21.5 16 21 27 32 38 44 49Property, plant and equipment 12.6 14.8 15.1 29.9 63 62 62 61 61 61 61Intangible assets 1.9 1.8 1.7 1.6 1 1 1 1 1 0 0Total assets 45.5 52.4 71.8 80.3 109 108 114 120 127 135 143 5.9%

Trade payables 1.3 1.7 2.3 3.3 7 5 5 6 6 7 7Short term debt 19.4 22.2 21.2 22.0 17 17 17 17 17 17 17Long term debt 0.0 1.8 5.2 7.5 29 29 29 29 29 29 29Pension liabilities 0.2 0.3 0.4 0.5 1 1 1 1 1 1 1Other liabilities 2.1 3.1 2.7 3.8 0 0 0 0 0 0 0Total liabilities 23.0 29.1 31.9 37.1 54 52 53 54 54 54 55 0.8%Minority interests 0.6 0.7 1.0 1.0 1 2 3 3 4 5 6Shareholders' equity 21.9 22.7 38.9 42.2 53 54 58 63 69 76 83Total equity and liabilities 45.5 52.4 71.8 80.3 109 108 114 120 127 135 143 5.9%

Cash flow (KD mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations (2.7) 0.9 11.3 13.2 12.3 14.7 8.8 10.1 11.3 11.8 12.3 8.7%Net interest paid 0.0 0.1 0.0 0.0 0.1 (2.4) (2.3) (2.4) (2.4) (2.4) (2.4)Tax paid (0.0) (0.1) (0.3) (0.3) (0.5) (0.4) (0.4) (0.4) (0.4) (0.5) (0.5)Operating cash flow (2.7) 0.8 10.9 12.9 11.9 11.9 6.1 7.3 8.4 8.9 9.4 11.8%Capex on PP&E (1.8) (0.8) (1.1) (3.1) (0.9) (0.8) (1.0) (1.1) (1.2) (1.2) (1.3)Other investing cash flow (0.7) (2.5) (16.3) (4.9) (11.2) 0.0 0.0 0.0 0.0 0.0 0.0Investing cash flow (2.5) (3.3) (17.4) (8.0) (12.2) (0.8) (1.0) (1.1) (1.2) (1.2) (1.3) 7.4%

Operating free cash flow (*) (4.5) 0.1 9.8 9.8 11.0 11.1 5.1 6.2 7.2 7.7 8.1 12.6%Free cash flow (**) (5.2) (2.5) (6.4) 4.9 (0.3) 11.1 5.1 6.2 7.2 7.7 8.1 12.6%

Dividends paid (3.4) (3.4) (3.6) (5.9) (6.7) (9.3) (6.8) (7.9) (6.1) (6.3) (6.6)Share buybacks / issuances 3.6 0.0 2.0 0.0 1.3 0.0 0.0 0.0 0.0 0.0 0.0Other 7.3 3.9 7.3 1.3 5.4 0.0 0.0 0.0 0.0 0.0 0.0Financing cash flow 7.5 0.6 5.7 (4.6) (0.0) (9.3) (6.8) (7.9) (6.1) (6.3) (6.6) -0.8%

Change in cash and cash equivalents (1.8) (0.7) 2.0 3.6 1.8 (1.7) (1.8) 1.2 1.4 1.6(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Aerated Concrete Industries Company: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 13.1x 7.8x 10.8x 9.2x 8.6x 8.3x








P / book 2.5x 2.0x 2.0x 1.8x 1.7x 1.5x


FCF yield 13.1% 4.2% 5.3% -0.5% 0.6% 1.6%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 8.1% 8.8% 6.4% 7.5% 5.8% 6.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 12.7% 7.9% 8.4% 9.5% 9.5% 9.3%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 19.5% 27.9% 18.1% 20.2% 20.0% 19.1%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 1.5x 1.2x 1.5x 1.4x 1.3x 1.2x


GCI (*) 103 176 177 187 196 205

Net debt / (cash) * 27 40 39 40 42 41




Net interest / EBITDA 0.0% -0.7% 26.1% 21.6% 20.5% 20.1%* KD mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 25.8% 16.3% 21.9% 21.9% 21.1% 20.8%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 21.0% 13.3% 18.1% 18.8% 18.3% 18.2%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 21.3% 13.5% 18.3% 18.9% 18.5% 18.4%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 9.1% 1.7% 2.0% 2.0% 2.0% 2.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




ACIC.KWSector

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Premium to the sector (RHS)Emerging Markets Non-FinACIC.KW




Bildco (BILD.AD)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: BILD.AD

Low High





Bildco


Key data (*)

Price (Dh) 3.80Price target (Dh) 4.20Market cap ($ mn) 310.5Average daily trading volume ($ mn) NAFree float 73%Bloomberg code BILDCO DB

2006 2007E 2008E 2009ESales (Dh mn) 827.6 993.1 1,142 1,256EBITDA (Dh mn) 67.8 88.9 100.4 106.8EV / EBITDAR 33.8x 13.4x 12.3x 11.9xP / E 15.4x 13.8x 12.0x 11.0xDividend yield 6.6% 6.9% 7.9% 8.7%(*) multiples and ratios are calendarised

Reasonable growth, but little pricing power


• Bildco is placed at the centre of the construction boom underway in the UAE. It is an

established company in the materials supply business and is attempting to move further up

the value chain from wholesale trading to production of certain building materials, such as

concrete blocks, paving and steel reinforcement.

• Its products are, however, commoditised, and we believe Bildco will struggle to expand

margins in a highly competitive environment. Management has indicated that it might

consider entering the cement business, which we would view as a negative step. Revenue

growth is likely to remain strong, but margins will likely come under continued pressure.

• With 11% upside to our 12-month price target we initiate as Neutral, as we see more

attractive ways to gain exposure to construction in the UAE, although the shares’ high

dividend yield might be considered an attraction.






than the average of our UAE coverage to account for the lower liquidity and transparency.




which might provide some upside potential. However, the most likely expansion opportunities are

in highly competitive industries and are unlikely to be highly value accretive, in our view.

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BILD.AD (Dh) MSCI EM Europe & Middle East




Bildco: Overview Company description Abu Dhabi National Company for Building Materials

(Bildco) was established over 30 years ago as an

importer and distributor of building materials. The

company has gradually shifted its focus from its

original retail operations at three stores in the UAE to

wholesale supply and into production of materials such

as paving stone and interlock and steel rebar. The

company plans to construct two new factories, one for

milled steel and the other for light concrete blocks,

which are expected to come into operation by 2009.


73%

20%

7%

Public

Ali Nasser Rsheid Al Omeira

Khaled Ali Risheid Al Omeira



• UAE’s booming construction sector provides strong demand for building materials. Bildco’s

revenue growth has been 25%-30% over the last two years, although gross margin has fallen

from 11% in 2004 to 9% last year. We expect a continuation of this trend; strong revenue

growth will likely come at the expense of margin. We expect earnings growth in high single

digits unless management succeed in developing new lines of business or expand

geographically.

• Management has expressed a desire to expand the company’s production of light concrete and

steel products, and recently signed contracts for the construction of factory facilities. The

company expects production to commence in 2009, although we do not include these potential

revenue streams (or the required investment) in our forecasts due to uncertainties over their

nature and magnitude and timing of investment.


• A slowdown in construction activity in UAE.

• Increased competitive threats as new entrants are attracted to the regions rapidly growing

construction industry.

• On the positive side, it is possible that management will succeed in making value-enhancing

investments.

Industry context

The real estate sector in Dubai and other areas of the UAE have been experiencing a boom since

property reforms were enacted and economies began to feel the effect of higher oil prices. Our

estimates suggest demand for over 200,000 residential units in Dubai alone between 2006 and 2010.

Substantial investments in infrastructure to support the growing economy and population result in

an exceptionally large construction sector relative to other economies, even in the emerging world.



UAE totaling almost US$700 bn and over US$1.6 tn in the GCC in total. Bildco is positioned to

benefit from construction activity, but is in a very competitive field.

100%

Building materials




Bildco: Overview


-8.0x

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-4.0x

-2.0x

0.0x

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4.0x

6.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-30.0%

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-5.0%

0.0%

5.0%


0

200

400

600

800

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1,200

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7.4%

8.4%

9.4%



Established position in the building materials segment; over 30 years in

the market.

Strong balance sheet. High dividend yield from cash generative business.

Low barriers to entry and low value of building materials puts constant

downward pressure on margins.


Expansion across the region, providing economies of scale such as

increased purchase sizes.

Expansion of production activities, although this is likely to be in

commoditised products.

New entrants in a rapidly expanding markets.

A slowdown in construction activity, either in a boom-bust scenario, or a

longer-term natural decline in construction activity as large projects draw

to a close.




Bildco: Summary financials Income statement (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 207.1 504.8 659.4 827.6 993.1 1,142 1,256 1,344 1,438 1,539 7.7%EBITDAR 17.4 39.8 34.3 67.8 88.9 100 107 115 124 133EBITDA 17.4 39.8 34.3 67.8 88.9 100 107 115 124 133

EBITDA margin 8.4% 7.9% 5.2% 8.2% 8.9% 8.8% 8.5% 8.5% 8.6% 8.6%EBIT 11.3 33.9 28.1 60.9 82.0 94 104 111 119 127 7.7%

EBIT margin 5.5% 6.7% 4.3% 7.4% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%Net interest expense (0.7) 10.7 44.3 14.3 (2.4) (3) (4) (5) (6) (7)Associate income / other 0.2 (0.0) 0.0 (0.0) (0.0) 0 (0) (0) 0 (0)Profit before tax 10.9 44.6 72.3 75.3 79.7 92 100 106 113 120Adjusted PBT 10.9 44.6 72.3 75.3 79.7 92 100 106 113 120 7.0%Tax 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0Exceptional items (0.5) 0.0 0.0 0.0 0.0 0 0 0 0 0Minority interest (1.0) (1.7) (1.3) (1.0) (1.0) (1) (1) (1) (1) (1)Net income 9.4 42.9 71.0 74.2 78.6 90 99 105 112 119Adjusted net income 9.9 42.9 71.0 74.2 78.6 90 99 105 112 119 7.1%


No. of basic shares outstanding (*) 72.0 72.0 186 300 285 285 285 285 285 285No. of diluted shares outstanding (*) 72.0 72.0 186 300 285 285 285 285 285 285EPS (basic) 0.13 0.60 0.38 0.25 0.28 0.32 0.35 0.37 0.39 0.42 7.1%EPS (diluted) 0.13 0.60 0.38 0.25 0.28 0.32 0.35 0.37 0.39 0.42EPS (adjusted, basic) 0.14 0.60 0.38 0.25 0.28 0.32 0.35 0.37 0.39 0.42 7.1%

Annual growth NM -35.9% -35.2% 11.5% 15.1% 9.0% 6.2% 6.6% 6.6%EPS (adjusted, diluted) 0.14 0.60 0.38 0.25 0.28 0.32 0.35 0.37 0.39 0.42DPS 0.07 0.25 0.30 0.25 0.26 0.30 0.33 0.35 0.37 0.40 7.1%

Annual growth NM 20.0% -16.7% 4.8% 15.1% 9.0% 6.2% 6.6% 6.6%(*) weighted average number of shares; in millions




Bildco: Summary financials Balance sheet (Dh mn, year ending Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 25 58 380 309 295 253 216 187 156 125Other current assets 135 278 323 465 521 599 659 706 755 808Total current assets 160 335 702 774 816 852 875 892 911 932 2.3%Long term investments & other 31 37 205 233 233 233 233 233 233 233Property, plant and equipment 28 24 26 25 28 34 43 53 62 72Intangible assets 0 0 0 0 0 0 0 0 0 0Total assets 219 396 933 1,032 1,078 1,119 1,151 1,178 1,207 1,237 2.5%

Trade payables 48 119 109 126 163 188 207 221 236 253Short term debt 91 144 166 387 387 387 387 387 387 387Long term debt 0 0 0 0 0 0 0 0 0 0Pension liabilities 2 2 2 3 3 3 3 3 3 3Other liabilities 3 7 9 7 7 7 7 7 7 7Total liabilities 143 272 287 523 561 585 604 618 634 650 2.7%Minority interests 3 5 6 6 7 8 9 10 11 12Shareholders' equity 73 120 640 503 510 526 539 550 562 575Total equity and liabilities 219 396 933 1,032 1,078 1,119 1,151 1,178 1,207 1,237 2.5%


CAGRCash from operations (26.8) (63.1) (38.0) (83.2) 69.8 46.7 65.6 83.2 89.7 96.6 19.9%Net interest paid (0.7) 10.7 44.3 14.3 (2.4) (2.8) (4.0) (5.1) (6.0) (6.9)Tax paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Operating cash flow (27.6) (52.4) 6.2 (68.9) 67.5 43.9 61.6 78.1 83.7 89.7 19.5%Capex on PP&E (1.4) (1.8) (8.4) (6.4) (9.9) (11.4) (12.6) (13.4) (14.4) (15.4)Other investing cash flow (2.8) 5.8 (158.9) (115.6) 0.0 0.0 0.0 0.0 0.0 0.0Investing cash flow (4.2) 4.0 (167.2) (122.0) (9.9) (11.4) (12.6) (13.4) (14.4) (15.4) 7.7%

Operating free cash flow (*) (28.9) (54.2) (2.1) (75.3) 57.5 32.5 49.0 64.6 69.3 74.3 23.0%Free cash flow (**) (31.7) (48.4) (161.0) (190.9) 57.5 32.5 49.0 64.6 69.3 74.3 23.0%

Dividends paid (4.8) (4.8) (12.0) (60.0) (71.3) (74.7) (86.0) (93.7) (99.6) (106.1)Share buybacks / issuances 0.0 0.0 456.0 (62.6) 0.0 0.0 0.0 0.0 0.0 0.0Other 33.0 53.1 22.2 221.5 0.0 0.0 0.0 0.0 0.0 0.0Financing cash flow 28.2 48.3 466.2 98.9 (71.3) (74.7) (86.0) (93.7) (99.6) (106.1) 9.2%

Change in cash and cash equivalents 32.3 322.4 (71.2) (13.7) (42.2) (37.0) (29.1) (30.3) (31.8)(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Bildco: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 10.0x 15.4x 13.8x 12.0x 11.0x 10.3x








P / book 1.8x 2.2x 2.1x 2.1x 2.0x 2.0x


FCF yield NA -8.9% 5.3% 3.0% 4.5% 6.0%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 7.9% 6.6% 6.9% 7.9% 8.7% 9.2%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA 7.9% 14.1% 14.8% 14.5% 14.6%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 18.7% 13.0% 15.5% 17.5% 18.5% 19.3%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 3.7x 1.8x 1.7x 1.7x 1.6x


GCI (*) NA 624 657 731 837 883

Net debt / (cash) * (214) 79 92 135 172 201




Net interest / EBITDA NM -21.1% 2.7% 2.8% 3.8% 4.5%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 5.2% 8.2% 8.9% 8.8% 8.5% 8.5%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 4.3% 7.4% 8.3% 8.3% 8.3% 8.3%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 4.3% 7.4% 8.3% 8.3% 8.3% 8.3%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 1.3% 0.8% 1.0% 1.0% 1.0% 1.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




BILD.ADSector

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Mortgage Finance company summaries

Tamweel PJSC 104

AMLAK Finance 110



Tamweel PJSC (TAML.DU)


United Arab Emirates: Banks


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: TAML.DU

Low High





Tamweel PJSC

Europe New Markets Banks Peer Group Average

Key data (*)

Price (Dh) 4.00Price target (Dh) 7.00Market cap ($ mn) 1,089Average daily trading volume ($ mn) NAFree float 50%Bloomberg code TAMEEL DB

2006 2007E 2008E 2009ESales (Dh mn) 269.5 425.1 578.4 751.6EBITDA (Dh mn) EV / EBITDAR NA NA NA NAP / E 29.4x 14.8x 11.2x 8.5xDividend yield 0.0% 0.0% 0.0% 2.3%(*) multiples and ratios are calendarised

Stronger growth at a cheaper valuation than its peer


• Tamweel is the faster growing of the two major Islamic mortgage providers yet trades at

lower multiples and a greater discount to intrinsic value than its peer, Amlak, on our

estimates. We believe it has shown greater focus on its core business than its competitor, as

evidenced by becoming number one in terms of assets this year, having launched operations

in 2004, four years after Amlak.

• We believe momentum, and innovation, will continue to favour Tamweel in the medium term

in terms of both asset growth and funding. The company recently launched the UAE’s first

Sharia’a-compliant mortgage-backed security and intends to use such funding aggressively

to reduce risk and utilize equity most effectively.

• The market appears to believe that the failure to secure a retail banking licence is a negative

for the company; we disagree. Retail deposits may be cheap in terms of interest cost, but

require an expensive branch network to service. We believe the overall impact on Tamweel’s

profitability is, in fact, positive if MBS funding remains readily available.


Our 12-month price target is the average of values derived from a dividend discount model (DDM)

and a variation of a Warranted Equity Valuation (WEV) method. To account for the very rapid

growth rates in assets and returns in the next few years, we project our WEV valuation further

forward than would typically be the case, and take the average of values discounted to our price

target date. We employ a cost of equity of 10.5% and assume a terminal growth rate of 5%.

Tamweel looks inexpensive in comparison with its direct peer, Amlak, on near term multiples,

trading at 11.2x 2008E P/E and 1.6x 2008E P/BV versus 13.7x and 2.0x respectively for Amlak. The

share also trades on lower multiples than central European banks and at similar multiples to

Turkish banks, although its cost of equity is cheaper.

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TAML.DU (Dh) MSCI EM Europe & Middle East




Tamweel PJSC: Overview Company description Tamweel is a finance provider in the UAE providing

Sharia’a-compliant mortgage products. The company

began as a joint venture between Dubai Islamic Bank

and Istithmar in 2004 and was listed on the DFM in July

2006. Like its competitor Amlak, Tamweel provides

only Sharia’a-compliant financing facilities, which it

believes provides focus and the widest possible

potential customer base. From inception in 2004 it has

already become the largest mortgage lender in the

UAE by assets and plans to expand into other countries

of the region, such as Saudi Arabia.


49%

22%

20%

9%

Public Istithmar Dubai Islamic Bank Other



• Tamweel has good visibility on the growth of its loan book, since much of the property now

reaching market has been pre-financed and is disclosed as a commitment in its financial

statements. Acceleration of property hand-over in 2H07 and into 2008 means that much of the

present commitment balance should convert to assets. We forecast an average 70% annual

growth rate in assets in 2007E-2009E.

• Tamweel has already established a JV in Saudi Arabia and has disclosed its intention to

expand across the MENA region over time. We believe that its experience in the UAE and its

relationships with developers there will put it in a strong competitive position in regional

markets. We do not yet include this potential in our financial forecasts.


• The home loan market in the UAE is already competitive and we expect more finance providers

to target the Sharia’a-compliant sector, pressuring margins and taking market share.

• Tamweel is unlikely to receive a banking licence and will therefore need to attract more costly

sources of funding such as corporate deposits, although its Sukuk programme may in fact turn

out to be a cheaper source of funding, once costs of a branch network are taken into account.

Industry context

Rapid economic and population growth in the UAE create the conditions for a robust property

market, and potentially an even stronger market for mortgage products, given high levels of inward

immigration and substantial addition to a small initial housing stock.

Mortgage penetration in the UAE is very low, relative to its GDP per capita. We understand that GDP

is distorted by the large hydrocarbon sector, but still see substantial upside potential to our

estimation of the current ratio of mortgage loans to GDP of c.3.5%. UAE’s GDP per capita would be

supportive of a level ten times this figure, although we do not explicitly forecast such a dramatic

increase in the medium term. We forecast 9.7% by 2010.

We expect Sharia’a-compliant financing to continue to take a large share of the mortgage market,

since it does not exclude non-Islamic customers and hence caters to the widest customer base.

48%

26%

26%

Income from f inancing and investing assets

Non-Finance Income

Income from sale of development properties




Tamweel PJSC: Overview


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04 05 06 07E 08E 09E 10E 11E 12E-100.0%-90.0%-80.0%-70.0%-60.0%-50.0%-40.0%-30.0%-20.0%-10.0%0.0%



Strong brand and market position as the largest Islamic mortgage lender

in the UAE.

Policy of securitizing assets moves much of the company’s risk off the

balance sheet and optimizes leverage.

Financing operations complimented and returns augmented by the real

estate development portfolio.

The refusal of the central bank to grant a retail banking licence means

that Tamweel cannot accept retail deposits, which are potentially a cheap

source of funding.


Continued economic and population expansion present ongoing growth

potential for mortgage finance.

Expansion into new markets in the rest of the region to cater for the

demand in Sharia’a-compliant finance products.

Mortgage finance is a competitive environment, with Tamweel facing

competition from a number of banks and other mortgage providers.

A softening in the UAE real estate market would impact future growth

rates and existing collateral, potentially raising financing costs.




Tamweel PJSC: Summary financials Income Statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRFinance income 8.2 46.2 128.5 269.5 466.2 763.2 1103.6 1394.8 1574.9 1685.1 1803.1 1929.3 35.6

Net finance incom e 7.6 24.1 78.0 151.6 219.7 291.0 386.1 471.2 535.1 596.9 659.0 726.0 Net Finance Margin, % 92.6 52.2 60.7 56.2 47.1 38.1 35.0 33.8 34.0 35.4 36.5 37.6

Non-finance incom e 8.0 31.2 94.4 147.4 220.0 314.8 403.6 470.6 503.4 535.1 568.6 604.3

Non-finance expense -18.2 -35.6 -54.5 -85.0 -130.8 -181.7 -228.8 -289.3 -328.0 -352.8 -379.4 -407.9Net operating income 18.0 42.2 163.6 270.7 357.4 467.8 599.2 692.7 752.7 823.5 894.6 971.3 20.5

Associate income / other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Incom e before taxes 18.0 42.2 163.6 270.7 357.4 467.8 599.2 692.7 752.7 823.5 894.6 971.3 As a % of sales 218.8 91.3 127.3 100.4 76.7 61.3 54.3 49.7 47.8 48.9 49.6 50.3

Adjus ted PBT 18.0 42.2 163.6 270.7 357.4 467.8 599.2 692.7 752.7 823.5 894.6 971.3 20.5Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tax rate, % 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minorities 0.0 0.0 -27.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Pos t tax exceptionals 0.0 0.0 699.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjus ted net incom e 18.0 42.2 835.2 270.7 357.4 467.8 599.2 692.7 752.7 823.5 894.6 971.3 20.5

Per Share Data 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E CAGR

No. of bas ic shares outs tanding (*) 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000

No. of diluted shares outs tanding (*) 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000EPS (bas ic) 0.02 0.04 0.85 0.27 0.36 0.47 0.60 0.69 0.75 0.82 0.89 0.97 20.5

EPS (diluted) 0.02 0.04 0.85 0.27 0.36 0.47 0.60 0.69 0.75 0.82 0.89 0.97EPS (adjus ted, bas ic) 0.02 0.04 0.14 0.27 0.36 0.47 0.60 0.69 0.75 0.82 0.89 0.97 20.5

Annual growth NM NM -0.68 0.32 0.31 0.28 0.16 0.09 0.09 0.09 0.09

EPS (adjus ted, diluted) 0.02 0.04 0.14 0.27 0.36 0.47 0.60 0.69 0.75 0.82 0.89 0.97DPS 0.00 0.00 0.00 0.00 0.00 0.09 0.15 0.17 0.19 0.21 0.22 0.24 NM

Annual growth NM NM NM NM NM 0.60 0.16 0.09 0.09 0.09 0.09




Tamweel PJSC: Summary financials Balance Sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRCash & Deposits 88 162 380 598 330 466 508 584 796 868 960 1,072 Financing & Investing Assets 267 1,303 2,584 4,604 7,827 12,524 16,907 20,288 21,708 23,228 24,854 26,594

Other Inves tments 0 1 72 72 72 72 72 72 72 72 72 72 Total Financing & Inves ting Assets 354 1,466 3,036 5,274 8,229 13,061 17,486 20,944 22,576 24,167 25,885 27,737 28.7

Associates & Other Assets 56 107 195 195 195 195 195 195 195 195 195 195

Property, Plant & Equipment, Net 5 18 31 41 45 54 68 86 104 122 139 156 Total Assets 415 1,591 3,262 5,510 8,469 13,311 17,750 21,225 22,876 24,485 26,220 28,088 28.2

Investm ent Depos its 75 1,005 1,231 1,846 2,400 3,000 3,600 3,960 4,237 4,534 4,851 5,191 Trade Payables 22 71 205 66 115 188 272 344 388 416 445 476

Mortgage Backed Securities 0 0 0 1,500 3,500 7,200 10,450 12,950 13,700 14,350 15,050 15,800 Pens ion & Other Provis ions 0 0 0 0 0 0 0 0 0 0 0 0

Total Liabilities 97 1,083 1,443 3,419 6,022 10,395 14,329 17,261 18,332 19,306 20,353 21,473 32.1

Minority Interes ts 0 0 0 0 0 0 0 0 0 0 0 0 Total Shareholders ' Equity 318 508 1,820 2,090 2,448 2,916 3,421 3,964 4,543 5,179 5,868 6,615

Total Liabilities & Equity 415 1,591 3,262 5,510 8,469 13,311 17,750 21,225 22,876 24,485 26,220 28,088 28.2




Tamweel PJSC: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 94.8x 29.4x 14.8x 11.2x 8.5x 6.7x


EV / DACF lease adj'd NA NA NA NA NA NA


EV / EBITDA lease adj'd NA NA NA NA NA NA


EV / NOPAT lease adj'd NA NA NA NA NA NA


P / book 7.9x 2.2x 1.9x 1.6x 1.4x 1.2x


FCF yield NA NA NA NA NA NA

GS coverage NA NA NA NA 57.4% 26.7%

Dividend yield 0.0% 0.0% 0.0% 0.0% 2.3% 3.7%

GS coverage 1.4% 1.6% 2.1% 2.5% 3.2% 5.0%


CROCI NA NA NA NA NA NA

GS coverage 39.4% 52.2% 38.5% NM NM 92.5%

ROE 10.2% 71.8% 13.8% 15.8% 17.4% 18.9%

GS coverage 26.4% 23.6% 21.5% 21.1% 20.7% 17.8%

CROCI / WACC NA NA NA NA NA NA


EV / GCI NA NA NA NA NA NA


GCI (*) NA NA NA NA NA NA

Net debt / (cash) * NA NA NA NA NA NA


Net Debt / Equity NM NM NM NM NM NM

Net Debt / EBITDA NA NA NA NA NA NA

Net interest / EBITDA NA NA NA NA NA NA* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin NA NA NA NA NA NA

GS coverage 51.7% NA 47.9% 43.5% 41.1% 41.2%

EBIT margin NA NA NA NA NA NA

GS coverage 1.7% 2.0% 1.9% 2.1% 2.5% 22.4%

NOPAT margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GS coverage 1.3% 1.8% 1.8% 2.0% 2.4% 20.4%

Capex / sales NA NA NA NA NA NA

GS coverage 23.2% 16.4% 14.0% 11.6% 146.5% 77.3%

Capex / depreciation NA NA NA NA NA NA



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Premium to the sector (RHS)Emerging Markets Non-FinTAML.DU




AMLAK Finance (AMLK.DU)


United Arab Emirates: Banks


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: AMLK.DU

Low High





AMLAK Finance

Europe New Markets Banks Peer Group Average

Key data (*)

Price (Dh) 3.18Price target (Dh) 3.40Market cap ($ mn) 1,299Average daily trading volume ($ mn) 8.45Free float 55%Bloomberg code AMLAK DB

2006 2007E 2008E 2009ESales (Dh mn) 206.7 342.5 480.9 613.0EBITDA (Dh mn) EV / EBITDAR NA NA NA NAP / E 36.6x 19.8x 13.7x 10.6xDividend yield 0.0% 0.0% 0.0% 2.4%(*) multiples and ratios are calendarised

Strong growth already reflected in valuation


• Amlak is well positioned in the high growth sector of Islamic mortgage financing, yet we find

its valuation less attractive than its direct peer, Tamweel, and initiate as Neutral.

• Amlak is the longest established Sharia’a-compliant mortgage finance company in the UAE,

although its market leadership has been overtaken by its competitor Tamweel. Its revised

management team has pledged to restore focus on the core mortgage business and we expect

some improvement in asset growth and ROE over the next two to three years.

• Delays in property deliveries through 2006 and early 2007 have constrained balance sheet

growth and ROE. We expect an acceleration of loan growth from 2H07 as a number of major

developments begin handover. This should help to absorb some of Amlak’s excess equity.

While the market seems to have taken as negative the central bank’s decision not to award

Amlak a banking licence, and hence allow it to take retail deposits, we do not believe this is so

bad in the medium term. Amlak will avoid the additional cost of a more extensive branch

network and can use securitization as a means to increase leverage to equity. Signs that this is

to happen more aggressively would be positive for the stock.

Valuation: 12-month target price Dh3.40

Our 12-month price target is the average of a dividend discount model (DDM) value and a value

derived by a variation of a Warranted Equity Valuation (WEV) method. To account for the very

rapid growth rates in assets and returns in the next few years, we project our WEV valuation

further forward than would typically be the case, and take an average of values discounted to our

price target date. For both methods we employ a cost of equity of 10.5% and our DDM valuation

assumes a terminal growth rate of 5%.

Amlak looks expensive in comparison with its direct peer, Tamweel, on near term multiples,

trading at 13.7x 2008E P/E and 2.0x 2008E P/BV versus 11.2x and 1.6x respectively for Tamweel.

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AMLK.DU (Dh) MSCI EM Europe & Middle East




AMLAK Finance: Overview Company description Amlak Finance was the first specialist provider of

Islamic home finance in the UAE. It was established in

2000 by master developer Emaar and listed on the DFM

in 2004. The company provides a wide range of

Sharia’a-compliant financial products, although

management has expressed an intention to refocus on

the core mortgage business, having lost market

leadership to new entrant, Tamweel. Amlak plans to

expand across the MENA region, and recently

established ventures in Egypt and Saudi Arabia.


55%

45%

Public Emaar Properties



• Amlak has good visibility on the growth of its loan book, since much of the property now

reaching market has been pre-financed and is disclosed as a commitment in its financial

statements. Acceleration of property hand-over in 2H07 and into 2008 means that much of the

present commitment balance should convert to assets. We forecast an average 40% annual

growth rate in assets in 2007E-2009E.

• Amlak has been more active in its pursuit of regional expansion than its peer, Tamweel, as it

tends to follow its parent, Emaar, into new markets. It has established JVs in Saudi Arabia and

Egypt and has ventures in Sudan and Bahrain. We believe its experience in the UAE, and ties to

major regional developers put it in a strong position in regional markets, but do not yet include

this potential in our financial forecasts.


• The home loan market in the UAE is already competitive and we expect more finance providers

to target the Sharia’a-compliant sector, pressuring margins.

• Amlak has not been successful in its application for a retail banking licence and will therefore

need to attract more expensive sources of funding such as corporate deposits, although a

Sukuk programme may in fact turn out to be a cheaper source of funding.

Industry context

Rapid economic and population growth in the UAE create the conditions for a robust property

market, and potentially an even stronger market for mortgage products, given high levels of inward

immigration and substantial addition to a small initial housing stock.

Mortgage penetration in the UAE is very low, relative to its GDP per capita. We understand that GDP

is distorted by the large hydrocarbon sector, but still see substantial upside potential to our

estimation of the current ratio of mortgage loans to GDP of c.3.5%. UAE’s GDP per capita would be

supportive of a level ten times this figure, although we do not explicitly forecast such a dramatic

increase in the medium term.

We expect Sharia’a-compliant financing to continue to take a large share of the mortgage market,

since it does not exclude non-Islamic customers and hence caters to the widest customer base.

76%

24%

Income from f inancing and investing assets

Non-Finance Income




AMLAK Finance: Overview


0.0x

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40.0%

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0100200300400500600700800900

1,000

04 05 06 07E 08E 09E 10E 11E 12E-100.0%-90.0%-80.0%-70.0%-60.0%-50.0%-40.0%-30.0%-20.0%-10.0%0.0%



Strong balance sheet, with sufficient equity to expand assets

aggressively.

Move to issue asset-backed securities reduces risk and further

strengthens the company’s balance sheet.

Close ties to Emaar properties, provide market intelligence and access to

development pipeline.

Focus on mortgage financing means Amlak would suffer the full effects

of a slowdown in residential real estate activity.

Net interest margin may be narrower than banks with a retail deposit

base; Amlak will need to control cost and secure reliable wholesale

financing.


Geographical expansion into new markets such as Saudi Arabia, Egypt

and Morocco.

Increasing levels of competition in the housing finance space from

existing Islamic banks.




AMLAK Finance: Summary financials Income Statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRFinance income 62.4 171.0 301.5 413.5 591.7 819.7 1123.1 1412.0 1592.8 1704.3 1822.9 1949.1 28.1

Net finance incom e 52.1 68.3 128.2 233.7 337.7 431.4 530.6 619.9 684.1 741.0 801.8 866.8 Net Finance Margin, % 83.5 39.9 42.5 56.5 57.1 52.6 47.2 43.9 42.9 43.5 44.0 44.5

Non-finance incom e 18.3 64.1 78.5 108.8 143.2 181.5 223.3 251.7 265.4 279.9 295.3 311.7

Non-finance expense -22.6 -57.5 -86.7 -101.5 -131.7 -164.1 -224.7 -284.3 -322.0 -346.0 -371.8 -399.3

Net operating incom e 47.8 74.8 120.0 241.0 349.1 448.9 529.2 587.4 627.5 674.9 725.4 779.3 15.8

Associate incom e / other 0.0 31.2 10.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Incom e before taxes 47.8 106.0 130.4 241.0 349.1 448.9 529.2 587.4 627.5 674.9 725.4 779.3 As a % of sales 76.6 62.0 43.3 58.3 59.0 54.8 47.1 41.6 39.4 39.6 39.8 40.0

Adjusted PBT 47.8 106.0 130.4 241.0 349.1 448.9 529.2 587.4 627.5 674.9 725.4 779.3 15.8

Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tax rate, % 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Pos t tax exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjusted net income 47.8 106.0 130.4 241.0 349.1 448.9 529.2 587.4 627.5 674.9 725.4 779.3 15.8


No. of bas ic shares outs tanding (*) 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500

No. of diluted shares outs tanding (*) 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500

EPS (bas ic) 0.03 0.07 0.09 0.16 0.23 0.30 0.35 0.39 0.42 0.45 0.48 0.52 15.8

EPS (diluted) 0.03 0.07 0.09 0.16 0.23 0.30 0.35 0.39 0.42 0.45 0.48 0.52

EPS (adjus ted, bas ic) 0.03 0.07 0.09 0.16 0.23 0.30 0.35 0.39 0.42 0.45 0.48 0.52 15.8

Annual growth NM 0.23 0.85 0.45 0.29 0.18 0.11 0.07 0.08 0.07 0.07

EPS (adjus ted, diluted) 0.03 0.07 0.09 0.16 0.23 0.30 0.35 0.39 0.42 0.45 0.48 0.52

DPS 0.00 0.00 0.00 0.00 0.00 0.07 0.09 0.10 0.10 0.11 0.12 0.13 NM

Annual growth NM NM NM NM NM 0.18 0.11 0.07 0.08 0.07 0.07

(*) weighted average num ber of shares ; in m illions




AMLAK Finance: Summary financials Balance Sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRCash & Depos its 223 749 268 330 325 460 461 499 537 565 582 589

Financing & Inves ting Assets 1,490 3,184 4,126 5,817 8,124 11,352 15,307 18,358 19,640 21,012 22,480 24,051

Other Investm ents 55 552 545 409 307 230 173 129 97 73 55 41 Total Financing & Inves ting Assets 1,769 4,485 4,939 6,556 8,756 12,043 15,940 18,985 20,274 21,650 23,117 24,682 23.4

Associates & Other Assets 21 210 98 98 98 98 98 98 98 98 98 98

Property, Plant & Equipm ent, Net 7 7 9 13 20 29 41 55 70 85 99 113 Total Assets 1,797 4,702 5,046 6,667 8,873 12,169 16,078 19,138 20,442 21,833 23,314 24,892 23.2

Inves tm ent Deposits 202 2,169 2,509 3,387 4,741 7,586 11,075 13,678 14,499 15,369 16,291 17,268 Trade Payables 5 0 0 0 0 0 0 0 0 0 0 0

Mortgage Backed Securities 0 698 698 1,198 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 Pens ion & Other Provis ions 0 0 0 0 0 0 0 0 0 0 0 0

Total Liabilities 992 2,917 3,277 4,658 6,514 9,361 12,853 15,458 16,282 17,154 18,079 19,059 25.7

Minority Interests 0 0 0 0 0 0 0 0 0 0 0 0 Total Shareholders ' Equity 806 1,785 1,769 2,010 2,359 2,808 3,225 3,680 4,161 4,679 5,235 5,833

Total Liabilities & Equity 1,797 4,702 5,046 6,667 8,873 12,169 16,078 19,138 20,442 21,833 23,314 24,892 23.2




AMLAK Finance: Valuation summary

Relative to the GS New Markets Banks coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 45.0x 36.6x 19.8x 13.7x 10.6x 9.0x




EV / EBITDA lease adj'd NA NA NA NA NA NA




P / book 2.7x 2.7x 2.4x 2.0x 1.7x 1.5x



GS coverage NA NA NA NA 57.4% 26.7%

Dividend yield 0.0% 0.0% 0.0% 0.0% 2.4% 2.8%

GS coverage 1.4% 1.6% 2.1% 2.5% 3.2% 5.0%



GS coverage 39.4% 52.2% 38.5% NM NM 92.5%

ROE 8.2% 7.3% 12.8% 16.0% 17.4% 17.5%

GS coverage 26.4% 23.6% 21.5% 21.1% 20.7% 17.8%






Net debt / (cash) * NA NA NA NA NA NA



Net Debt / EBITDA NA NA NA NA NA NA


Margins and other

2005 2006 2007E 2008E 2009E 2010E


GS coverage 51.7% NA 47.9% 43.5% 41.1% 41.2%

EBIT margin NA NA NA NA NA NA

GS coverage 1.7% 2.0% 1.9% 2.1% 2.5% 22.4%

NOPAT margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GS coverage 1.3% 1.8% 1.8% 2.0% 2.4% 20.4%


GS coverage 23.2% 16.4% 14.0% 11.6% 146.5% 77.3%


Relative to the GS New Markets Banks coverage


Sector

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Premium to the sector (RHS)Emerging Markets Non-FinAMLK.DU







Logistics and Transportation company summaries

Aramex PJSC 118

Agility 124

Air Arabia 130



Aramex PJSC (ARMX.DU)


United Arab Emirates: Logistics


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: ARMX.DU

Low High





Aramex PJSC


Key data (*)

Price (Dh) 2.55Price target (Dh) 3.40Market cap ($ mn) 764.0Average daily trading volume ($ mn) 1.96Free float 75%Bloomberg code ARMX DB

2006 2007E 2008E 2009ESales (Dh mn) 1,364 1,701 2,066 2,463EBITDA (Dh mn) 134.2 190.5 200.8 231.0EV / EBITDAR 23.7x 13.5x 12.9x 11.6xP / E 29.2x 20.0x 19.2x 16.2xDividend yield 3.6% 3.7% 3.9% 4.6%(*) multiples and ratios are calendarised

Strong growth prospects not fully reflected in valuation


• Aramex offers a wide spectrum of distribution services and has established itself as a

heavyweight in the region in international and domestics express, freight forwarding and

logistics. The business model is asset light, creating economies of scale and generating gross

margins in excess of 50% across most divisions.

• Aramex established the Global Distribution Alliance (GDA), a network of 40 express companies

around the globe. This allows the company to penetrate markets at low cost and leads to

franchising as part of its regional expansion programme.

• Following the successful integration of TwoWay-Vanguard and other smaller acquisitions, the

company is well positioned to deliver strong organic growth; we forecast revenue CAGR of

c.19% over the next five years.

• Despite trading at relatively high multiples, we do not believe that the share price fully reflects

the growth potential of Aramex. With its strong and expanding global presence, attractive

growth prospects and margins, we initiate coverage on Aramex on our Buy list with a 12-

month price target of Dh3.40.





the explicit forecast period to a 3% perpetual value. We use a WACC of 10.5% and calculate a 12-

month target price of Dh3.40.



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ARMX.DU (Dh) MSCI EM Europe & Middle East




Aramex PJSC: Overview Company description Aramex is a Middle East-based provider of

transportation solutions with a global presence,

providing a range of transport services including

international and domestic express delivery, freight

forwarding, logistics and warehousing. The company

leads the Global Distribution Alliance (GDA), which

allies 40 independent express companies from around

the globe. Each company specializes in its own region

whilst retaining common standards and procedures

across the group. The network has over 12,000 offices,

33,000 vehicles, and 66,000 employees worldwide.


55%27%

10%

8%

Public Other Levant Logistics Holdings AIL Holding



• Sustained levels of strong economic growth and trade should underlie activity levels in freight

and logistics. Aramex is well positioned to benefit from this, particularly in the Middle East and

Asia.

• Expansion into new markets of China and the US, and leveraging the Global Distribution Alliance

(GDA) to penetrate smaller markets.

• Ambitious plans to become the fifth-largest logistics and express transport provider worldwide.

• A strong expected performance from TwoWay-Vanguard and further acquisitions should also

play a major role in growth for the company. We expect earnings CAGR of 22% over the next five

years with net margins being maintained at c.8%.


• The company’s aggressive acquisition strategy may pose some challenges in terms of extracting

synergies and value. Expanding into new and relatively unknown markets adds additional risk,

despite the assistance of the GDA.

• A slowdown in global economic growth and the subsequent impact on trade volumes would

impact the group. Our estimates show that freight forwarding and logistics have typically grown

at multiples of 2.0x and 1.5x GDP growth, respectively. Aramex is therefore geared to a decline in

economic growth and trade activity.

Industry context

The global logistics market is a highly fragmented and competitive environment, yet few of the

large international players have a significant presence in the Middle East, where Aramex is

dominant. The closest competitor regionally is Agility; but the business models of the two

companies are not directly comparable. In the international express business, Aramex competes

with a number of large international courier companies, resulting in the group needing to leverage

the GDA to compete.

45%

30%

14%

11%

Freight Forw arding International Express

Domestic Express Logistics




Aramex PJSC: Overview


-7.0x

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-5.0x

-4.0x

-3.0x

-2.0x

-1.0x

0.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-30.0%

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-20.0%

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-10.0%

-5.0%

0.0%


0

500

1,000

1,500

2,000

2,500

3,000

3,500

03 04 05 06 07E 08E 09E 10E 11E 12E6.4%

7.4%

8.4%

9.4%

10.4%

11.4%

12.4%

13.4%

14.4%



Extensive global network with key contacts and management expertise.

Relatively high barriers to entry with significant economies of scale.

Asset-light business that leverages off specialised knowledge and access

to relevant service providers. As a result, the marginal cost of expansion

is very low.

Highly dependent on third-party service providers.

Geared to the economic cycle and therefore susceptible to declines in

trade activity.


Directly benefits from increasing economic activity and trade.

Global network allows for easier expansion into new markets through

partnerships and joint ventures.

Has a proven track record of successful acquisitions and plans to pursue

growth through investments in related businesses.

Strong competition among existing players such as Fedex, DHL and TNT

express, particularly as the industry becomes more global.

High and sustained fuel prices may impact margins depending on the

extent to which the company can pass on costs to the customer.

Slowdown in global and regional economic activity and trade.




Aramex PJSC: Summary financials Income statement (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 556.6 693.2 458.9 1,364 1,701 2,066 2,463 2,881 3,307 3,733 15.9%EBITDAR 61.9 72.7 61.3 168 242 263 305 372 443 513EBITDA 61.9 72.7 52.9 134 191 201 231 286 344 401

EBITDA margin 11.1% 10.5% 11.5% 9.8% 11.2% 9.7% 9.4% 9.9% 10.4% 10.7%EBIT 47.2 57.9 43.7 109 161 167 200 248 296 342 19.6%

EBIT margin 8.5% 8.4% 9.5% 8.0% 9.5% 8.1% 8.1% 8.6% 9.0% 9.2%Net interest expense (0.5) 0.0 13.4 5 5 5 5 4 4 4Associate income / other (2.3) 0.0 0.9 (1) 0 (0) (0) 0 0 (0)Profit before tax 44.4 58.0 58.0 113 166 173 205 252 300 347Adjusted PBT 46.7 58.0 58.4 114 167 174 206 252 300 347 18.8%Tax (1.7) (3.2) (2.3) (4) (6) (7) (8) (10) (12) (14)Exceptional items (0.0) 0.0 0.0 0 0 0 0 0 0 0Minority interest (5.8) (7.2) (4.5) (14) (20) (21) (25) (30) (36) (42)Net income 36.9 47.6 51.2 95 139 145 172 212 252 291Adjusted net income 39.2 47.6 51.6 96 140 146 173 212 252 291 18.8%


No. of basic shares outstanding (*) 1,100 1,100 1,017 1,100 1,100 1,100 1,100 1,100 1,100 1,100No. of diluted shares outstanding (*) 1,100 1,100 1,017 1,100 1,100 1,100 1,100 1,100 1,100 1,100EPS (basic) 0.03 0.04 0.05 0.09 0.13 0.13 0.16 0.19 0.23 0.26 19.1%EPS (diluted) 0.03 0.04 0.05 0.09 0.13 0.13 0.16 0.19 0.23 0.26EPS (adjusted, basic) (0.12) 0.04 0.05 0.09 0.13 0.13 0.16 0.19 0.23 0.26 18.8%

Annual growth NM 17.3% 72.0% 46.0% 4.2% 18.6% 22.1% 19.1% 15.6%EPS (adjusted, diluted) (0.12) 0.04 0.05 0.09 0.13 0.13 0.16 0.19 0.23 0.26DPS 0.00 0.00 0.00 0.09 0.09 0.10 0.12 0.14 0.17 0.20 19.1%

Annual growth NM NM NM 4.4% 4.1% 18.7% 23.0% 19.1% 15.6%(*) weighted average number of shares; in millions




Aramex PJSC: Summary financials Balance sheet (Dh mn, year ending Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 55 54 340 223 250 221 198 196 211 239Other current assets 128 146 179 340 366 454 548 641 729 814Total current assets 182 200 519 563 616 675 746 837 940 1,054 11.8%Long term investments & other 88 37 637 818 818 818 818 818 818 818Property, plant and equipment 39 45 78 128 168 208 265 328 396 468Intangible assets 0 0 4 4 3 1 0 0 0 0Total assets 310 282 1,238 1,512 1,604 1,702 1,829 1,983 2,154 2,340 8.3%

Trade payables 47 65 71 131 163 198 236 276 317 358Short term debt 5 5 6 36 37 38 39 40 41 41Long term debt 3 3 5 13 13 13 13 13 13 13Pension liabilities 16 19 24 41 41 41 41 41 41 41Other liabilities 36 45 67 123 123 123 123 123 123 123Total liabilities 107 136 172 345 378 414 453 494 535 577 8.7%Minority interests 10 12 15 19 39 60 85 116 152 194Shareholders' equity 192 134 1,051 1,148 1,187 1,228 1,291 1,374 1,467 1,569Total equity and liabilities 310 282 1,238 1,512 1,604 1,702 1,829 1,983 2,154 2,340 8.3%


CAGRCash from operations 35.4 133 54.0 77.8 196 147 175 233 296 357 24.7%Net interest paid (0.5) 0 13.4 5.3 5 5 5 4 4 4Tax paid (1.7) (3) (2.3) (4.4) (6) (7) (8) (10) (12) (14)Operating cash flow 33.3 130 65.0 78.7 195 146 172 227 288 347 24.2%Capex on PP&E (13.0) (18) (39.4) (55.3) (68) (72) (86) (101) (116) (131)Other investing cash flow (1.3) 5 (692.0) (157.6) 0 0 0 0 0 0Investing cash flow (14.3) (13) (731.3) (212.9) (68) (72) (86) (101) (116) (131) 15.9%

Operating free cash flow (*) 20.3 112 25.7 23.4 127 74 85 126 172 217 30.9%Free cash flow (**) 19.0 117 (666.3) (134.2) 127 74 85 126 172 217 30.9%

Dividends paid 0.0 (108) 0.0 (10.5) (100) (104) (109) (129) (159) (189)Share buybacks / issuances 0.0 0 1,000.0 0.0 0 0 0 0 0 0Other (9.7) (10) 2.8 (1.4) 1 1 1 1 1 1Financing cash flow (9.7) (118) 1,002.8 (11.9) (99) (103) (108) (128) (158) (188) 16.1%

Change in cash and cash equivalents (1) 286.3 (117.8) 28 (30) (22) (2) 14 29(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Aramex PJSC: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 50.3x 29.2x 20.0x 19.2x 16.2x 13.3x






EV / NOPAT lease adj'd NM 32.9x 18.3x 18.0x 15.7x 13.4x


P / book 2.7x 2.4x 2.4x 2.3x 2.2x 2.0x


FCF yield -23.0% -8.2% 4.5% 2.6% 3.0% 4.5%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 3.6% 3.7% 3.9% 4.6% 5.7%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 17.2% 18.5% 15.9% 15.2% 15.5% 16.7%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 8.6% 8.7% 11.9% 12.0% 13.7% 15.9%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 6.1x 2.9x 2.1x 1.9x 1.8x 1.6x


GCI (*) 907 1,411 1,629 1,869 2,179 2,464

Net debt / (cash) * (330) (173) (200) (169) (146) (143)





Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 11.5% 9.8% 11.2% 9.7% 9.4% 9.9%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 9.5% 8.0% 9.5% 8.1% 8.1% 8.6%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 10.2% 8.9% 10.5% 9.1% 9.1% 9.6%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 8.6% 4.1% 4.0% 3.5% 3.5% 3.5%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




ARMX.DUSector

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SectorARMX.DU

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Premium to the sector (RHS)Emerging Markets Non-FinARMX.DU




Agility (AGLT.KW)


Kuwait: Logistics


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: AGLT.KW

Low High





Agility


Key data (*)

Price (KD) 1.82Price target (KD) 2.40Market cap ($ mn) 6,189Average daily trading volume ($ mn) NAFree float 75%Bloomberg code TPWC KK

2006 2007E 2008E 2009ESales (KD mn) 1,013 1,525 2,149 2,739EBITDA (KD mn) 209.0 153.8 248.7 322.5EV / EBITDAR 7.5x 11.7x 7.6x 5.8xP / E 9.7x 15.5x 9.0x 6.9xDividend yield 4.1% 3.2% 5.5% 7.2%(*) multiples and ratios are calendarised

Strong growth prospects not reflected in valuation


• Through a number of large-scale acquisitions in recent years, Agility has grown from a niche

provider of warehousing and government supply services into a fully- integrated global

logistics player. From the profits generated from lucrative US Defense contracts, Agility made

three key acquisitions in 2005, building a freight forwarding platform.

• Agility partnered with US-based Dyncorp and was recently awarded a US$50 bn ten-year US

Defense contract. Agility’s role extends to supply chain services and warehousing. We expect

Agility’s economic interest in the partnership to be c.35%, but this has not been confirmed by

management. A number of new contract wins and renewals have also been announced that

should continue to underpin the logistics business.

• Expansion into the freight forwarding business has reduced reliance on logistics revenue and

opened up new growth avenues. The freight forwarding business is asset-light, has attractive

margins and allows Agility to leverage its network and derive significant economies of scale.

• With an expanding global presence, strong growth prospects, and attractive valuation we

initiate our coverage on Agility on our Buy list.

Valuation: 12-month target price of KD2.40




the explicit forecast period to a 3% perpetual value. We use a WACC of 12% and calculate a 12-

month rounded price target for Agility of KD2.40.



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Agility: Overview Company description Formerly known as Public Warehousing Company,

Agility is a logistics provider with presence in over 100

countries across six continents through a network of

warehousing facilities and transport and freight

management businesses. Agility currently operates a

fleet of over 3,000 transportation and delivery vehicles.

In 2005 the company acquired Trans-Link,

Transoceanic and Geologistics, expanding the group’s

services to include freight and project forwarding and

events and exhibitions logistics. Agility listed on the

DFM in February 2006.


61%24%

15%

Other

National Real Estate Company

Public Institution for Social Security



• The acquisition strategy of Agility has launched the company from a niche warehousing and

service provider to a global integrated logistics business. Although no large-scale acquisitions

appear on the agenda in the short term, we expect the company will continue to add

complimentary businesses, providing greater economies of scale.

• Global economic growth and the positive impact on trade continue to drive expansion of the

logistics market. Specifically, ongoing contract wins in the Defense and Government Services

(DGS) business provide attractive and relatively predictable income streams several years out.

These contracts are, however, subject to renewal.

• Ongoing contract wins in the DGS business, other than the US$50 bn US Defense contract,

include a US$345 mn contract for the provision of a variety of logistics services at US bases in

Iraq. Agility will also partner Transcar in the c.US$200 mn Pearl GTL project. We expect the

strong growth of the division to generate revenue CAGR of 25% between 2007 and 2012.


• A reduction in troop deployment in the region would negatively impact the group as the DGS

business accounts for over 30% of total revenue. A mitigating factor, however, would be the

transferability of transport assets from DGS to the Global Integrated Logistics (GIL) division.

• Higher fuel costs would also impact the group through lower demand from customers, and

margin pressure where increases cannot be passed through to the end user.

• Growth in recent years in freight forwarding and contract logistics has averaged 2.0x and 1.5x

GDP growth respectively, on our estimates. Agility is therefore geared to the economic cycle and

the risk of a slowdown and reduction in trade volumes.

Industry context

The global freight forwarding and logistics market is fragmented but competitive. Few of the large

international players have a significant presence in the Middle East, where Agility enjoys the largest

network. The logistics operations under the defence contracts are highly specialised and require an

extensive network, with which few other regional players can compete. In our view, the company is

very well positioned to win the ongoing contracts available in the region.

61%

39%

Freight and Project forw arding Logistics services




Agility: Overview


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Supply chain manager of choice for the US armed forces in Kuwait, Iraq,

Qatar, and Afghanistan. Recently secured a number of large ongoing

contracts with the US Department of Defense.

Acquisition of Geologistics and other niche logistics companies elevated

the group to a global logistics solutions provider.

Focus on acquisitive growth. Need to ensure operational synergies and

shift focus towards more sustainable organic growth.

Geared to the economic cycle by between 1.5 and 2.0x GDP growth, and

therefore susceptible to declines in trade volumes.

Dependency on third-party service providers.


Directly benefits from increases in economic activity and trade.

Recent acquisitions have successfully opened up a number of new

markets internationally, allowing the group a number of new growth

opportunities.

Ongoing presence of armed forces throughout the Middle East.

Highly competitive market with strong competition from companies such

as DHL, UPS and Kuehne and Nagel.

Gradual reduction in troop deployment in Middle East expected to impact

DGS business.

Sharp and sustained increases in the oil price.

Slowdown in global and regional economic activity and trade.




Agility: Summary financials Income statement (KD mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 140.9 453.2 1,013 1,525 2,149 2,739 3,127 3,437 3,645 14.1%EBITDAR 91.1 143.8 209 154 249 323 331 370 389EBITDA 91.1 143.8 209 154 249 323 331 370 389

EBITDA m argin 64.7% 31.7% 20.6% 10.1% 11.6% 11.8% 10.6% 10.8% 10.7%EBIT 83.5 126.0 174 124 211 274 272 299 310 10.1%

EBIT m argin 59.3% 27.8% 17.2% 8.1% 9.8% 10.0% 8.7% 8.7% 8.5%Net interes t expense (2.0) (4.3) (2) (5) (6) (9) (9) (9) (8)Associate incom e / other 31.9 34.3 17 (0) 0 (0) 0 0 (0)Profit before tax 113.4 156.0 189 119 204 266 263 290 302Adjus ted PBT 113.4 156.0 191 122 207 270 268 295 303 10.0%Tax (3.3) (5.8) (11) (7) (11) (15) (15) (16) (17)Exceptional item s (10.6) (7.5) (9) 0 0 0 0 0 0Minority interes t (1.1) (0.9) (3) (3) (3) (3) (3) (3) (3)Net incom e 98.5 141.9 167 110 190 248 246 271 282Adjus ted net incom e 109.1 149.3 177 112 193 252 251 276 284 10.1%

Per share data (KD) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of bas ic shares outs tanding (*) 833 888 942 951 951 951 951 951 951No. of diluted shares outs tanding (*) 833 888 942 951 951 951 951 951 951EPS (bas ic) 0.12 0.16 0.18 0.12 0.20 0.26 0.26 0.28 0.30 10.4%EPS (diluted) 0.12 0.16 0.18 0.12 0.20 0.26 0.26 0.28 0.30EPS (adjus ted, bas ic) 0.13 0.17 0.19 0.12 0.20 0.26 0.26 0.29 0.30 10.1%

Annual growth 28.3% 11.9% -37.4% 72.4% 30.4% -0.6% 10.1% 2.9%EPS (adjus ted, diluted) 0.13 0.17 0.19 0.12 0.20 0.26 0.26 0.29 0.30DPS 0.01 0.04 0.08 0.06 0.10 0.13 0.13 0.14 0.15 10.4%

Annual growth NM 88.2% -23.0% 73.0% 30.5% -0.9% 10.1% 4.3%(*) weighted average num b er of shares; in m illions




Agility: Summary financials Balance sheet (KD mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 19 203 317 259 178 184 174 211 260Other current assets 144 307 385 654 1,030 1,311 1,508 1,657 1,759Total current assets 163 510 703 913 1,207 1,496 1,682 1,868 2,019 13.7%Long term inves tm ents & other 120 334 385 385 385 385 385 385 385Property, plant and equipm ent 97 197 212 245 297 362 433 504 572Intangible assets 0 0 20 18 15 11 6 1 0Total assets 381 1,040 1,320 1,561 1,904 2,254 2,506 2,759 2,977 11.8%

Trade payables 99 189 302 501 706 900 1,028 1,130 1,198Short term debt 35 26 92 92 92 92 92 92 92Long term debt 34 229 163 163 163 163 163 163 163Pens ion liabilities 1 31 44 44 44 44 44 44 44Other liabilities 5 11 15 15 15 15 15 15 15Total liabilities 174 485 615 815 1,020 1,214 1,341 1,443 1,512 10.3%Minority interes ts 3 8 17 20 23 25 28 31 33Shareholders ' equity 203 547 688 727 862 1,015 1,137 1,285 1,432Total equity and liabilities 381 1,040 1,320 1,561 1,904 2,254 2,506 2,759 2,977 11.8%

Cash flow (KD mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 82.0 101 245 85.2 77.7 235 262 322 356 46.3%Net interes t paid (2.0) (4) (2) (4.6) (6.4) (9) (9) (9) (8)Tax paid (3.3) (6) (11) (6.7) (11.5) (15) (15) (16) (17)Operating cash flow 76.7 91 232 73.9 59.8 211 239 297 331 53.3%Capex on PP&E (96.8) (107) (47) (61.0) (86.0) (110) (125) (137) (146)Other inves ting cash flow (0.2) (144) (162) 0.0 0.0 0 0 0 0Investing cash flow (97.0) (251) (209) (61.0) (86.0) (110) (125) (137) (146) 14.1%

Operating free cash flow (*) (20.0) (16) 185 12.9 (26.1) 102 114 159 185 NMFree cash flow (**) (20.2) (160) 23 12.9 (26.1) 102 114 159 185 NM

Dividends paid (8.6) (0) (37) (71.3) (54.9) (95) (124) (123) (135)Share buybacks / issuances 0.0 187 15 0.0 0.0 0 0 0 0Other 44.3 156 (2) 0.0 0.0 0 0 0 0Financing cash flow 35.7 343 (24) (71.3) (54.9) (95) (124) (123) (135) 25.3%

Change in cash and cash equivalents 184 114 (58.4) (81.1) 7 (10) 36 50(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Agility: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 10.8x 9.7x 15.5x 9.0x 6.9x 6.9x








P / book 3.1x 2.5x 2.4x 2.0x 1.7x 1.5x


FCF yield -19.9% -1.7% 0.7% -1.5% 5.9% 6.6%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 2.2% 4.1% 3.2% 5.5% 7.2% 7.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 35.9% 28.3% 18.0% 23.5% 24.8% 22.1%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 39.8% 28.5% 15.5% 23.9% 26.4% 22.9%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 3.1x 2.1x 2.0x 1.7x 1.4x 1.2x


GCI (*) 743 812 994 1,278 1,509 1,742

Net debt / (cash) * 51 (63) (4) 77 70 80


Net Debt / Equity 0.1x -0.1x 0.0x 0.1x 0.1x 0.1x

Net Debt / EBITDA 0.4x -0.3x 0.0x 0.3x 0.2x 0.2x

Net interest / EBITDA 3.0% 1.2% 3.0% 2.6% 2.7% 2.6%* KD mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 31.7% 20.6% 10.1% 11.6% 11.8% 10.6%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 27.8% 17.2% 8.1% 9.8% 10.0% 8.7%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 27.8% 17.4% 8.3% 10.0% 10.2% 8.8%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 23.6% 4.7% 4.0% 4.0% 4.0% 4.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




AGLT.KWSector

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Premium to the sector (RHS)Emerging Markets Non-FinAGLT.KW




Air Arabia (AIRA.DU)

RATING: Return potential: -8%

United Arab Emirates: Airlines


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: AIRA.DU

Low High





Air Arabia


Key data (*)

Price (Dh) 1.31Price target (Dh) 1.20Market cap ($ mn) 1,665Average daily trading volume ($ mn) NAFree float 45%Bloomberg code AIRARABI DB

2006 2007E 2008E 2009ESales (Dh mn) 749.2 1,163 1,501 1,993EBITDA (Dh mn) 75.9 203.9 224.3 257.1EV / EBITDAR NA 8.5x 7.7x 6.9xP / E 60.4x 22.2x 23.8x 24.6xDividend yield 0.0% 0.0% 1.0% 2.0%(*) multiples and ratios are calendarised

Overcapitalized and fully valued


• Air Arabia is the first and largest low-cost carrier (LCC) operating from the Middle East. We

expect its fleet of nine planes, based at its Sharjah hub just 15 km from the emirate of Dubai, to

grow to 22 by year-end 2010 and to 53 by 2015. Management has also announced its intention

to add further hubs in the region in order to extend its range and addressable market.

• The company raised Dh3.3 bn in its recent IPO and private placement to fund plane purchases,

set up a new regional hub and provide financing for acquisitions and other opportunities,

according to management. We believe the company is now overcapitalized; unless acquisitions

can be made, return on capital will remain diluted. The shares look expensive on an ROE basis.

• Sharjah’s proximity to Dubai, its function as a dormitory town for (often lower-income) Dubai

workers, its low cost per passenger, subsidies from the emirate’s government and rapid

turnaround times make the low-cost model viable, in our view. At 23.8x 2008E P/E, 1.1x NAV

and ROE of 4.8%, Air Arabia looks expensive, on our estimates. We expect strong organic

growth but believe new, value-accretive developments need to be announced to justify its

present valuation.

• We initiated coverage as Neutral with a 12-month price target of Dh1.20, based on a DCF

valuation to year-end 2008. Our valuation implies limited upside without additional, presently

undefined, acquisitions or other expansion opportunities. We believe our assumptions of

organic growth are prudent but not overly conservative in the light of our expectations for

increased competition in the sector.


Our valuation approach is based on a DCF analysis. The key inputs for our DCF calculation

beyond our explicit forecast period are: a WACC of 10.5%, growth rate in perpetuity of 3% and a

terminal NOPAT margin of 12%. We calculate a price target for Air Arabia of Dh1.20.

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AIRA.DU (Dh) MSCI EM Europe & Middle East




Air Arabia: Overview Company description Air Arabia is the first low-cost carrier in the GCC region

and is based at Sharjah Airport in the UAE. Air Arabia

currently operates a fleet of nine Airbus A320 aircraft,

but expects to grow the fleet to over 50 aircraft by

2015. The company typically offers fares that are on

average 40% cheaper than conventional carriers in the

region. Air Arabia currently flies to 35 destinations

throughout the MENA region and has flown 4 mn

passengers since it launched. The company listed on

the DFM in July 2007.


57%

17%

10%

9%7%

Other Abraaj Capital Department of Civil Aviation - Sharjah Al Maha Holding Sharjah International Airport



• Strong growth of regional economies and populations (mostly expatriates from surrounding

countries) provides a positive backdrop for growth in the LCC market. Low-priced air travel is the

most viable method of transportation for a large section of the local population and inbound

regional tourists. LCC penetration in the Middle East is very low, compared with developed

markets. Market share should grow in this expanding aviation market.

• The company’s strategy of operating a single class of aircraft reduces operating overheads and

turnaround time, thereby enhancing flight frequency and margins. We do not foresee dramatic

margin expansion from the current level, however, as competition rises.

• The company’s geographical expansion through the establishment of new hubs should drive

customer numbers and diversify income streams across the MENA region. We expect growth in

ancillary revenues such as an airport hotel and holiday operations, ground handling services,

cargo, catering and maintenance services.


• Air Arabia has a high exposure to fuel prices, which account for c.40% of operating costs. The

company does attempt to mitigate this risk by hedging its exposure to fuel prices; this may

reduce volatility of earnings, but in the long term must add to cost.

• The threat of competition will likely grow, particularly as the group expands beyond its home

market. Regulatory factors may also play a negative role as regional expansion depends on

securing hubs at crucial locations abroad.

• General slowdown in tourism and business activity and the failure to find suitable avenues for

the capital raised also presents significant opportunity cost.

Industry context

Strong economic growth and the subsequent impact on tourism and business travel drive demand

in the sector. Airbus expects passenger traffic to grow at c.7% until 2010, the highest level globally.

LCC penetration in the Middle East is less than 1%, compared to over 10% in Europe and 75% in

North America; we expect this penetration to grow significantly as the economic boom continues in

the region. Air Arabia is very well positioned, in our view, to capitalize on these developments.

100%

Passenger Revenue




Air Arabia: Overview


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First mover advantage in the LCC space, reinforced with a strong and

recognizable brand.

Single model and young fleet improves safety and lowers operational

and maintenance cost per aircraft.

Cost leadership and an efficient distribution network.

Presently overcapitalized, which is diluting return on capital.

Flying out of Sharjah increases journey times for passengers transferring

via Dubai or Abu Dhabi.

Minimal ancillary revenue items at present.


High levels of economic growth and the positive effect on business and

related travel. Strong growth in inbound and outbound tourism in the

UAE, as well as being the natural choice for the large number of migrant

laborers traveling to and from the region.

The establishment of additional hubs, creating the potential for new

routes into North Africa and the Mediterranean.

Expansion into ancillary business lines of accommodation, catering and

aircraft-related services.

Threat of new entrants into the LCC market in the region.

Competition for traffic and landing rights at new airport destinations.

Exposed to sharp increases in fuel and aircraft spares prices.




Air Arabia: Summary financials Income statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 181.3 411.2 749.2 1,163 1,501 1,993 2,470 3,085 3,851 26.6%EBITDAR 24.5 68.1 180.2 327 397 499 604 744 945EBITDA (1.7) 12.6 75.9 204 224 257 311 428 613

EBITDA margin -0.9% 3.1% 10.1% 17.5% 14.9% 12.9% 12.6% 13.9% 15.9%EBIT (1.7) 12.6 75.9 171 158 157 176 239 361 23.0%

EBIT margin -0.9% 3.1% 10.1% 14.7% 10.5% 7.9% 7.1% 7.8% 9.4%Net interest expense 1.3 18.7 25.3 104 99 92 68 33 (15)Associate income / other (0.0) 0.0 (0.0) 0 (0) 0 0 (0) (0)Profit before tax (0.4) 31.3 101.2 275 257 249 244 272 346Adjusted PBT (0.4) 31.3 101.2 275 257 249 244 272 346 7.8%Tax 0.0 0.0 0.0 0 0 0 0 0 0Exceptional items 0.0 0.0 0.0 50 0 0 0 0 0Minority interest 0.0 0.0 0.0 0 0 0 0 0 0Net income (0.4) 31.3 101.2 325 257 249 244 272 346Adjusted net income (0.4) 31.3 101.2 275 257 249 244 272 346 7.8%

Per share data (Dh) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 4,667 4,667 4,667 4,667 4,667 4,667 4,667 4,667 4,667No. of diluted shares outstanding (*) 4,667 4,667 4,667 4,667 4,667 4,667 4,667 4,667 4,667EPS (basic) (0.00) 0.01 0.02 0.07 0.05 0.05 0.05 0.06 0.07 7.8%EPS (diluted) (0.00) 0.01 0.02 0.07 0.05 0.05 0.05 0.06 0.07EPS (adjusted, basic) (0.00) 0.01 0.02 0.06 0.05 0.05 0.05 0.06 0.07 7.8%

Annual growth NM NM NM -6.7% -3.0% -1.9% 11.3% 27.4%EPS (adjusted, diluted) (0.00) 0.01 0.02 0.06 0.05 0.05 0.05 0.06 0.07DPS 0.00 0.00 0.00 0.00 0.01 0.03 0.04 0.04 0.06 41.9%

Annual growth NM NM NM NM 94.0% 47.2% 11.3% 27.4%(*) weighted average number of shares; in millions




Air Arabia: Summary financials Balance sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 63.0 100 182 3,296 3,217 3,556 4,132 4,583 5,054Other current assets 0.0 36 75 112 144 191 237 296 369Total current assets 63.0 135 257 3,408 3,361 3,747 4,369 4,879 5,424 12.7%Long term investments & other 31.5 59 111 111 111 111 111 111 111Property, plant and equipment 0.0 0 0 467 900 1,300 1,686 2,306 2,996Intangible assets 0.0 0 0 1,400 1,400 1,400 1,400 1,400 1,400Total assets 94.5 195 368 5,385 5,772 6,557 7,565 8,696 9,930 14.5%

Trade payables 0.0 56 115 191 247 328 406 507 633Short term debt 0.0 0 0 0 0 0 0 0 0Long term debt 0.0 0 0 0 74 595 1,404 2,345 3,311Pension liabilities 12.3 11 10 10 10 10 10 10 10Other liabilities 43.9 45 69 69 69 69 69 69 69Total liabilities 56.2 112 194 270 399 1,001 1,888 2,931 4,023 78.1%Minority interests 0.0 0 0 0 0 0 0 0 0Shareholders' equity 38.4 83 174 5,116 5,372 5,557 5,677 5,765 5,908Total equity and liabilities 94.6 195 368 5,385 5,772 6,557 7,565 8,696 9,930 14.5%

Cash flow (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations (1.3) (18.7) (25.3) 243 247 291 343 470 665 28.0%Net interest paid 1.3 18.7 25.3 104 99 92 68 33 (15)Tax paid 0.0 0.0 0.0 0 0 0 0 0 0Operating cash flow 0.0 0.0 0.0 348 346 383 411 503 650 17.1%Capex on PP&E 0.0 0.0 0.0 (500) (500) (500) (520) (809) (941)Other investing cash flow 0.0 0.0 0.0 0 0 0 0 0 0Investing cash flow 0.0 0.0 0.0 (500) (500) (500) (520) (809) (941) 17.1%

Operating free cash flow (*) 0.0 0.0 0.0 (152) (154) (117) (109) (307) (291) 17.3%Free cash flow (**) 0.0 0.0 0.0 (152) (154) (117) (109) (307) (291) 17.3%

Dividends paid 0.0 0.0 0.0 0 0 (64) (124) (183) (204)Share buybacks / issuances 0.0 0.0 0.0 3,267 0 0 0 0 0Other 0.0 0.0 0.0 0 74 520 809 941 966Financing cash flow 0.0 0.0 0.0 3,267 74 456 685 758 762 79.0%

Change in cash and cash equivalents 36.6 82.6 3,114 (79) 339 576 452 471(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Air Arabia: Valuation summary

Relative to GS New Markets Non-Financial coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E NA 60.4x 22.2x 23.8x 24.6x 25.0x


EV / DACF lease adj'd NA NA 11.7x 11.0x 10.2x 9.5x


EV / EBITDA lease adj'd NA NA 8.5x 7.7x 6.9x 6.4x


EV / NOPAT lease adj'd NA NA 18.1x 20.3x 21.5x 21.0x


P / book 74.1x 35.2x 1.2x 1.1x 1.1x 1.1x


FCF yield NA NA -2.5% -2.5% -1.9% -1.8%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 1.0% 2.0% 3.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA NA 17.8% 12.1% 11.8% 11.6%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 51.8% 78.9% 10.4% 4.9% 4.6% 4.3%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC NA NA 1.5x 1.0x 1.0x 1.0x


EV / GCI NA NA 1.3x 1.2x 1.1x 1.0x


GCI (*) NA NA 3,620 4,695 5,916 7,029

Net debt / (cash) * (100) (182) (3,296) (3,143) (2,961) (2,728)




Net interest / EBITDA NM -33.3% -51.2% -44.1% -35.7% -21.9%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 3.1% 10.1% 17.5% 14.9% 12.9% 12.6%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 3.1% 10.1% 14.7% 10.5% 7.9% 7.1%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 7.5% 14.7% 18.2% 14.3% 11.9% 11.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 0.0% 0.0% 43.0% 33.3% 25.1% 21.1%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%

Capex / depreciation NA NA 15.0x 7.5x 5.0x 3.9x



AIRA.DUSector

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Premium to the sector (RHS)Emerging Markets Non-FinAIRA.DU







Other UAE company summaries

Dubai Financial Market 138

Tabreed 144

Oasis International Leasing 150



Dubai Financial Market (DFM.DU)


United Arab Emirates: Capital Markets


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: DFM.DU

Low High





Dubai Financial Market


Key data (*)

Price (Dh) 3.14Price target (Dh) 4.10Market cap ($ mn) 6,842Average daily trading volume ($ mn) 45.5Free float 20%Bloomberg code DFM DB

2006 2007E 2008E 2009ESales (Dh mn) 789.1 545.2 805.6 1,074EBITDA (Dh mn) EV / EBITDAR NA 45.6x 29.6x 21.2xP / E 31.5x 42.3x 27.2x 20.1xDividend yield 0.0% 0.0% 1.8% 3.7%(*) multiples and ratios are calendarised

A capital market play on capital formation


• The Dubai Financial Market (DFM) is the first exchange to be listed in the Middle East, and has

become the natural destination for the larger UAE firms seeking a listed presence. DFM is being

converted into an Islamic Market, making it the only Sharia’a-compliant exchange globally.

• DFM should directly benefit from new listings and increasing market turnover as capital

markets continue to deepen and recover from the fall from 2005 to 2007. The company

operates with negligible overheads and generates gross margins above 90%, which we expect

to continue over our forecast period due to its relative monopoly and government sponsorship.

• Management expects trading values to average Dh1 bn per day during 2007. A number of new

listings scheduled this year and in 2008 should bring additional revenues. DFM intends to

expand the type of securities offered to include derivatives, and should begin generating rental

income from its new premises from 2009.

• The tie up with the DIFX under the umbrella of government-owned Bourse Dubai provides

interesting opportunities for overseas expansion and the import of trading technology.

• We initiate coverage of DFM with as a Buy, with a 12-month target price of Dh4.10.




terminal NOPAT margin of 92%. We calculate a price target for DFM of Dh4.10.

On a multiples basis, DFM appears cheap relative to global peers given our growth forecasts. Our

2008E P/E multiple for DFM of 27x compares with 21.5x for Nasdaq, 30.9x for CME Group and 25x

for Euronext.

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DFM.DU (Dh) MSCI EM Europe & Middle East




Dubai Financial Market: Overview Company description The Dubai Financial Market (DFM) was established in

2000 and listed in March 2007. The IPO was the first of

its kind in the region and resulted in 20% of the

company’s shares being floated. DFM acts as a primary

and secondary market for the regulation and trading of

a number of securities such as equities, federal and

local government bonds, corporate debt (including

Islamic Sukuk), and listed mutual funds. DFM is an

order-driven market which operates off an automated

screen-based trading platform. There are currently 51

listed equities on the DFM.


80%

20%

Government of Dubai Public



• Growth will likely be driven primarily by increases in trading activity and sales volumes. We

expect these to remain high on the back of rapid economic growth and high demand for primary

capital.

• Plans are underway to expand the current offering of financial assets on the DFM to include

derivatives. Derivative products account for a significant amount of trading volume on developed

exchanges and therefore present a significant growth opportunity for the DFM, in our view.

• We expect that any pressure on the current 20 bp fee earned per transaction can be offset by

levying additional charges for data, listing fees and deposits, which currently are not charged.

• The new premises of the DFM will house 120 brokers’ offices, which will be sold and leased and

should generate material additional revenue for the company.

• The consolidation of DFM and DIFX into Borse Dubai should allow the company to explore joint

opportunities in capital markets, including the recent deal with OMX and Nasdaq whereby Borse

Dubai will take a stake in Nasdaq and the London Stock Exchange.


• A correction or pullback in regional or emerging markets would have a material impact on the

DFM. With c.95% of revenues derived from trading margins, a pullback similar in scale to that

seen last year, would impact the DFM.

• Margin squeeze on the revenue derived per transaction and increased competition from regional

exchanges could have a material impact on the group’s earnings going forward.

Industry context

International capital flows across the region have increased significantly in recent years, as foreign

investors chase the strong growth in the oil-rich economies of the Middle East. Dubai has

positioned itself as the financial centre of the region, thereby creating strong externalities for the

DFM. DFM also enjoys a relative monopoly with little real competition from other regional

exchanges. The DIFX, a secondary exchange in Dubai, does not compete with the DFM with the

majority of its listings being Sukuk.

93%

7%

Trading Commission's Broker's Fees




Dubai Financial Market: Overview


-5.0x-4.5x-4.0x-3.5x-3.0x-2.5x-2.0x-1.5x-1.0x-0.5x0.0x

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Primary securities exchange in the region in terms of liquidity,

transparency and market depth.

Virtual monopoly with captive market and relative freedom in terms of

pricing and commissions. The company operates with a very low cost

base, with negligible capital requirements.

Barriers to entry. Highly regulated market with significant legislative

hurdles for potential competitors.

Almost entirely dependent on market turnover and the frequency and

size of new listings.

Introduction of new securities and products could take some time to

implement, with progress likely to be dictated by legislative procedures.


Natural choice for all multinational corporations wanting a listed

presence in the Middle East.

Currently no derivatives trading on DFM, creating opportunity for large

expansion of listed products and services.

Economic boom in the region leads to higher capital requirements and

therefore greater number of listings.

The potential for other regional exchanges becoming more attractive to

international listings.

Highly exposed to pull-back in global or regional equity markets, in terms

of both market turnover and new listings.




Dubai Financial Market: Summary financials Income Statement (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRSales 1289.5 789.1 545.2 805.6 1074.0 1221.0 1335.4 1431.3 1500.5 1568.2 1639.2 15.5EBITDAR 1249.0 734.0 501.8 743.6 998.8 1135.4 1241.8 1331.0 1395.4 1458.1 1523.9EBITDA 1249.0 734.0 501.8 743.6 998.8 1135.4 1241.8 1331.0 1395.4 1458.1 1523.9 EBITDA Margin, % 96.9 93.0 92.0 92.3 93.0 93.0 93.0 93.0 93.0 93.0 93.0EBIT 1246.1 728.2 498.6 739.6 993.7 1129.1 1234.2 1321.9 1384.8 1445.9 1510.1 15.6 EBIT Margin, % 96.6 92.3 91.5 91.8 92.5 92.5 92.4 92.4 92.3 92.2 92.1Net interes t expense 6.8 67.6 99.2 190.0 262.4 323.7 363.0 396.4 430.2 464.2 499.6Associate incom e / other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Profit before tax 1253.9 797.6 593.4 925.1 1251.6 1448.3 1592.7 1713.8 1810.5 1905.6 2005.2Adjus ted PBT 1253.9 797.6 593.4 925.1 1251.6 1448.3 1592.7 1713.8 1810.5 1905.6 2005.2 16.7Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional item s 0.0 0.0 468.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interes t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Incom e 1253.9 797.6 1061.4 925.1 1251.6 1448.3 1592.7 1713.8 1810.5 1905.6 2005.2Adjus ted net incom e 1253.9 797.6 1061.4 925.1 1251.6 1448.3 1592.7 1713.8 1810.5 1905.6 2005.2 16.7

Per Share Data 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E CAGR

No. of bas ic shares outs tanding (*) 7999 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000No. of diluted shares outs tanding (*) 7999 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000EPS (bas ic) 0.16 0.10 0.13 0.12 0.16 0.18 0.20 0.21 0.23 0.24 0.25 16.7EPS (diluted) 0.16 0.10 0.13 0.12 0.16 0.18 0.20 0.21 0.23 0.24 0.25EPS (adjus ted, bas ic) 0.16 0.10 0.07 0.12 0.16 0.18 0.20 0.21 0.23 0.24 0.25 16.7 Annual growth, % -36.40 -25.60 55.91 35.29 15.71 9.97 7.60 5.64 5.25 5.23EPS (adjus ted, diluted) 0.16 0.10 0.07 0.12 0.16 0.18 0.20 0.21 0.23 0.24 0.25DPS 0.00 0.00 0.00 0.06 0.12 0.14 0.16 0.17 0.18 0.19 0.20 31.2 Annual growth, % NM NM NM 102.94 23.43 9.97 7.60 5.64 5.25 5.23(*) weighted average num ber of shares ; in m illions




Dubai Financial Market: Summary financials Balance Sheet (Dh mn, year ending Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGR

Cash and cash equivalents 1,341 1,241 2,375 3,281 4,047 4,538 4,954 5,377 5,802 6,245 6,712

Other current assets 58 584 30 44 59 67 73 78 82 86 90

Total Current Assets 1,399 1,824 2,405 3,325 4,106 4,605 5,028 5,456 5,884 6,331 6,801 13.2

Inves tm ents in finance leases and loans 50 499 499 499 499 499 499 499 499 499 499

Operating lease assets 17 28 39 47 58 70 82 94 106 118 128

Property, plant and equipm ent 0 0 0 0 0 0 0 0 0 0 0 Total Assets 1,465 2,351 2,942 3,870 4,662 5,173 5,608 6,049 6,489 6,947 7,429 11.8

Short-Term Debt 98 149 149 149 149 149 149 149 149 149 149

Trade Payables 18 8 6 8 11 13 14 15 16 16 17

Long-Term Debt 0 0 0 0 0 0 0 0 0 0 0

Pens ion liabilities 1 1 1 1 1 1 1 1 1 1 1

Other liabilities 7 22 22 22 22 22 22 22 22 22 22

Total Liabilities 124 181 178 181 184 185 187 188 188 189 190 0.9Minority Interes ts 0 0 0 0 0 0 0 0 0 0 0

Total Shareholders ' Equity 1,341 2,170 2,764 3,689 4,478 4,988 5,422 5,861 6,301 6,758 7,239

Total Liabilities & Equity 1,465 2,351 2,942 3,870 4,662 5,173 5,608 6,049 6,489 6,947 7,429 11.8

Cash flow (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGR

Cash from operations 1,252 267 1,053 732 987 1,129 1,237 1,327 1,392 1,455 1,521 16.0

Net interes t received 7 68 99 190 262 324 363 396 430 464 500

Tax paid 0 0 0 0 0 0 0 0 0 0 0 Operating cash flow 1,257 334 1,148 918 1,245 1,448 1,595 1,719 1,818 1,915 2,016 17.0

Purchase of operating lease assets (0) 0 0 0 0 0 0 0 0 0 0

Sale (Purchase) of Intangible & Fin Assets (709) (224) 0 0 0 0 0 0 0 0 0 Capex on PP&E (18) (17) (14) (12) (16) (18) (20) (21) (23) (24) (25)

Inves ting cash flow (727) (242) (14) (12) (16) (18) (20) (21) (23) (24) (25) 15.5

Free Cash Flow 531 93 1,134 906 1,229 1,430 1,575 1,697 1,796 1,891 1,991 17.0

Short-Term Debt (Decrease) Increase 0 0 0 0 0 0 0 0 0 0 0

Long-Term Debt (Decrease) Increase (42) 0 0 0 0 0 0 0 0 0 0

Dividends paid 0 0 0 0 (463) (939) (1,159) (1,274) (1,371) (1,448) (1,525)

Share buybacks / issuances 0 0 0 0 0 0 0 0 0 0 0 Others 0 0 0 0 0 0 0 0 0 0 0

Financing cash flow (42) 0 0 0 (463) (939) (1,159) (1,274) (1,371) (1,448) (1,525) NM

Change in cash and cash equivalents 489 93 1,134 906 766 491 417 423 425 443 467




Dubai Financial Market: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 20.0x 31.5x 42.3x 27.2x 20.1x 17.3x




EV / EBITDA lease adj'd NA NA 45.6x 29.6x 21.2x 18.3x




P / book 18.7x 11.6x 9.1x 6.8x 5.6x 5.0x



GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 1.8% 3.7% 4.6%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%



GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE NA 45.4% 24.1% 28.7% 30.7% 30.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%






Net debt / (cash) * (1,242) (1,091) (2,226) (3,131) (3,898) (4,389)





Margins and other

2005 2006 2007E 2008E 2009E 2010E


GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 96.6% 92.3% 91.5% 91.8% 92.5% 92.5%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%


GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




Sector

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Premium to the sector (RHS)Emerging Markets Non-FinDFM.DU




Tabreed (TABR.DU)


United Arab Emirates: Utilities


Pan-Europe Buy List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: TABR.DU

Low High





Tabreed


Key data (*)

Price (Dh) 2.43Price target (Dh) 3.20Market cap ($ mn) 750.5Average daily trading volume ($ mn) 2.38Free float 25%Bloomberg code TABREED DB

2006 2007E 2008E 2009ESales (Dh mn) 470.0 509.7 672.1 885.6EBITDA (Dh mn) 104.5 205.9 333.1 431.0EV / EBITDAR 44.0x 23.4x 15.9x 12.3xP / E 56.2x 29.5x 22.9x 20.7xDividend yield 0.0% 0.0% 2.2% 3.6%(*) multiples and ratios are calendarised

Must gear up for substantial growth


• Tabreed is the leading provider of district cooling (DC) services in the Middle East. The

company builds and operates stations to chill water, which is circulated through the air

conditioning systems of neighboring buildings. Tabreed is market leader in providing an

essential utility, cool air, in a rapidly growing market, enjoying a quasi-monopoly position in

the areas where it operates. We suspect that pricing to date has not fully exploited this

advantage.

• The company currently operates 25 cooling plants in the UAE, and we expect installed capacity

to increase to 185,000 tons of refrigeration (TR) by year end 2007. We forecast an increase in

capacity of 150% by year-end 2010 and strong organic growth thereafter.

• Much ‘un-priced’ potential exists, from projects such as the Dubai Metro and the company’s

announced JV with Aldar, which plans to develop sizeable projects in Abu Dhabi. These, and

potential overseas expansion, are not reflected in our forecasts.

• We initiate coverage with a Buy rating and a 12-month price target of Dh 3.20 based on a DCF

valuation, implying c.32% potential upside to the current price. At 23x 2008E P/E, Tabreed does

not appear cheap, but this is due to building out capacity due to come on line over the next few

years. We believe that the market does not recognize even the near-term growth that is already

under contract.



the explicit forecast period to a 3% perpetual value. We use a WACC of 11% and arrive at a price

target of Dh3.20.


compared with its new markets peer group average of 34.2x and 28.7x.

0.00.10.20.30.40.50.60.70.80.91.0

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550

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TABR.DU (Dh) MSCI EM Europe & Middle East




Tabreed: Overview Company description Tabreed is the leading provider of district cooling

services throughout the GCC region. District cooling

involves the supply of chilled water for air conditioning

purposes to a variety of industrial, commercial and

residential buildings. The group currently operates 25

cooling plants with year end capacity projected at

185,000 tons of capacity. In 2005, the group was

awarded the prestigious Dubai Metro project, which

will peak at 350,000 tons. Cooling facilities are powered

by gas or electricity off the local grid and consume half

the energy of conventional air conditioning systems.


79%

7%

6%8%

Other General Pensions and SSA

General Investments Abdulraouf Waleed Al Bitar



• Visibility on near-term growth is high, since construction of new facilities takes time and does not

commence until sufficient contracts are in place to cover fixed costs. We expect growth in

capacity of c.150% to 2010 and c.125% in revenues. We forecast economies of scale and increase

in gearing to push ROE from 8.8% in 2006 to c.18% by 2015E.

• Tabreed has announced the formation of a JV with Aldar, the prime developer in Abu Dhabi, that

could require a total of 1.4 mn tons of capacity, which we have not accounted for in our forecasts.

The company also signed an agreement to provide the entire Dubai Metro project with DC

services, expected to peak at 350,000 TR. We expect further growth to come from expansions

away from public towards private sector customers.

• Tabreed has already established a presence in the wider GCC region, including Saudi Arabia,

Qatar, Bahrain and Oman, although we do not yet forecast revenues from these sources

explicitly. Tie-ups with developers will likely be important to ensure access to future investment

opportunities.


• Share issuance to manage gearing; we believe the company could be more aggressively geared.

• Competition is rising, but Tabreed should maintain a monopoly in its areas of operation;

regulation is unlikely in the medium term, but may pose some risk in the longer term.

• An overall slowdown in real estate developments, although not likely in the near-term, could

occur in the longer term and hinder organic growth. Another risk could arise as the company

runs into capacity constraints and the extent to which further capacity can be financed.

Industry context

Tabreed is the market leader in district cooling services in the GCC region, with only moderate

levels of competition. The industry comprises a handful of specialist district cooling players (such

as Emicool) and a number of developers that provide their own in-house DC services. Tabreed’s

diversity across a variety of developments from military installations to hospitals also insulates the

company from the risks of a real estate correction.

44%

25%

18%

13%

Chilled Water Manufacturing Contracting Services




Tabreed: Overview


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Revenue derived from long dated contracts, sometimes out to 20 years,

providing predictable income streams.

DC has half the energy requirement of conventional A/C, and can save

contractors up to 10% on construction costs, making it the preferred

method for cooling.

The company has close ties with governments, municipalities and

leading property developers.

District cooling is a capital intensive business, and requires high levels of

gearing.

Depends on having a number of serviced buildings in close proximity to

each cooling plant in order to achieve economies of scale.

Once maximum capacity is achieved, there is significant lead time before

new capacity can be brought online.


Currently controls only 10% of the total cooling market. Room for growth.

Major player in the UAE, but still relatively small in other GCC countries.

Large expansion opportunities both regionally and internationally.

DC is a necessity in the GCC region. Directly benefits from the real estate

and economic boom in the UAE and neighboring countries.

Expansion potential of the company may be hindered by Tabreed’s

ability to continue to raise capital in the future.

Risk of developers sourcing new business from competitors or providing

cooling services through subsidiaries.




Tabreed: Summary financials Income statement (Dh mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 85.4 191.0 242.1 400.9 470.0 509.7 672.1 885.6 1,062 1,139 1,209 15.8%EBITDAR 11.9 30.2 48.4 82.0 104.5 205.9 333.1 431.0 512 563 612EBITDA 11.9 30.2 48.4 82.0 104.5 205.9 333.1 431.0 512 563 612

EBITDA margin 14.0% 15.8% 20.0% 20.4% 22.2% 40.4% 49.6% 48.7% 48.2% 49.4% 50.6%EBIT 1.5 6.2 11.1 38.5 45.1 125.0 176.3 243.9 316 361 404 23.0%

EBIT margin 1.7% 3.2% 4.6% 9.6% 9.6% 24.5% 26.2% 27.5% 29.8% 31.7% 33.4%Net interest expense (1.0) (6.1) (16.4) (25.7) (40.3) (54.5) (81.9) (139.4) (165) (164) (160)Associate income / other 0.8 0.9 3.6 10.7 61.5 40.0 42.0 44.1 46 49 51Profit before tax 1.2 0.9 (1.8) 23.6 66.2 110.4 136.3 148.5 198 246 295Adjusted PBT 2.0 1.7 (0.9) 23.6 66.2 110.4 136.3 148.5 198 246 295 21.2%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0Exceptional items 10.5 24.1 37.3 44.0 59.0 0.0 0.0 0.0 0 0 0Minority interest (3.5) (1.6) (3.9) (16.5) (20.9) (24.0) (24.7) (25.4) (26) (27) (28)Net income 8.1 23.4 31.6 51.1 104.4 86.4 111.6 123.1 172 219 267Adjusted net income (1.6) 0.1 (4.8) 7.1 45.4 86.4 111.6 123.1 172 219 267 24.3%


No. of basic shares outstanding (*) 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050No. of diluted shares outstanding (*) 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050EPS (basic) 0.01 0.02 0.03 0.05 0.10 0.08 0.11 0.12 0.16 0.21 0.25 24.3%EPS (diluted) 0.01 0.02 0.03 0.05 0.10 0.08 0.11 0.12 0.16 0.21 0.25EPS (adjusted, basic) (0.00) 0.00 (0.00) 0.01 0.04 0.08 0.11 0.12 0.16 0.21 0.25 24.3%

Annual growth NM NM NM NM 90.4% 29.2% 10.3% 39.6% 27.4% 21.9%EPS (adjusted, diluted) (0.00) 0.00 (0.00) 0.01 0.04 0.08 0.11 0.12 0.16 0.21 0.25DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.05 0.09 0.12 0.16 0.25 47.9%

Annual growth NM NM NM NM NM NM 65.4% 39.6% 27.4% 62.5%(*) weighted average number of shares; in millions




Tabreed: Summary financials Balance sheet (Dh mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 256 111 255 596 975 887 905 596 702 771 866Other current assets 131 107 213 316 1,023 365 413 493 550 586 619Total current assets 387 218 468 912 1,998 1,251 1,318 1,088 1,252 1,357 1,484 3.0%Long term investments & other 4 33 41 46 111 151 193 237 284 332 383Property, plant and equipment 744 992 1,105 1,647 2,038 3,357 4,438 4,487 4,440 4,379 4,304Intangible assets 12 0 30 38 38 38 38 38 38 38 38Total assets 1,146 1,243 1,644 2,644 4,185 4,798 5,988 5,850 6,014 6,106 6,210 0.9%

Trade payables 112 81 72 158 165 168 221 291 349 374 398Short term debt 112 40 72 165 562 1,062 1,062 762 762 712 662Long term debt 394 452 840 995 1,839 1,839 2,339 2,339 2,339 2,339 2,339Pension liabilities 2 48 7 18 45 45 45 45 45 45 45Other liabilities 0 71 89 161 264 264 264 264 264 264 264Total liabilities 620 693 1,079 1,498 2,875 3,378 3,931 3,701 3,759 3,734 3,708 -1.5%Minority interests 6 8 15 65 122 146 171 196 222 249 277Shareholders' equity 520 542 550 1,081 1,188 1,274 1,886 1,953 2,033 2,123 2,225Total equity and liabilities 1,146 1,243 1,644 2,644 4,185 4,798 5,988 5,850 6,014 6,106 6,210 0.9%


CAGRCash from operations (30.6) 77.4 (53.8) 218 87.9 867 338 422 512 552 602 15.5%Net interest paid (1.0) (6.1) (16.4) (26) (51.3) (55) (82) (139) (165) (164) (160)Tax paid 0.0 0.0 0.0 0 0.0 0 0 0 0 0 0Operating cash flow (31.6) 71.2 (70.2) 192 36.6 812 256 282 348 389 442 14.6%Capex on PP&E (4.7) (4.5) (5.7) (26) (63.4) (1,400) (1,238) (236) (149) (141) (133)Other investing cash flow (339.5) (270.6) (177.9) (674) (903.9) 0 0 0 0 0 0Investing cash flow (344.2) (275.0) (183.6) (700) (967.3) (1,400) (1,238) (236) (149) (141) (133) -42.8%

Operating free cash flow (*) (36.4) 66.8 (75.9) 166 (26.8) (588) (981) 46 199 248 309 NMFree cash flow (**) (375.9) (203.8) (253.8) (508) (930.7) (588) (981) 46 199 248 309 NM

Dividends paid 0.0 0.0 (15.0) (25) 0.0 0 0 (56) (92) (129) (164)Share buybacks / issuances 178.8 71.2 (5.1) 495 0.0 0 500 0 0 0 0Other 378.1 (18.8) 411.6 218 1,108.8 500 500 (300) 0 (50) (50)Financing cash flow 556.9 52.4 391.6 688 1,108.8 500 1,000 (356) (92) (179) (214) NM

Change in cash and cash equivalents (145.7) 144.8 341 378.2 (88) 19 (310) 106 69 95(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Tabreed: Valuation summary

Relative to GS New Markets Non-Financial coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E NA 56.2x 29.5x 22.9x 20.7x 14.8x


EV / DACF lease adj'd NM 5.9x 23.6x 16.0x 12.4x 10.3x


EV / EBITDA lease adj'd NM 44.0x 23.4x 15.9x 12.3x 10.2x


EV / NOPAT lease adj'd NM NM 38.5x 30.1x 21.8x 16.5x


P / book 2.4x 2.1x 2.0x 1.4x 1.3x 1.3x


FCF yield -2.5% -50.1% -24.6% -40.1% 0.1% 6.0%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 2.2% 3.6% 5.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 14.9% 32.4% 6.2% 7.6% 8.4% 9.5%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 0.9% 4.0% 7.0% 7.1% 6.4% 8.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 1.6x 1.3x 1.1x 1.0x 1.0x


GCI (*) 3,644 5,206 7,386 9,898 9,681 9,914

Net debt / (cash) * 564 1,427 2,015 2,496 2,506 2,399




Net interest / EBITDA 31.3% 38.6% 26.5% 24.6% 32.4% 32.2%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 20.4% 22.2% 40.4% 49.6% 48.7% 48.2%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 9.6% 9.6% 24.5% 26.2% 27.5% 29.8%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 9.6% 9.6% 24.5% 26.2% 27.5% 29.8%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 6.5% 13.5% 274.7% 184.1% 26.7% 14.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




TABR.DUSector

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EV /

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Sector

TABR.DU

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Premium to the sector (RHS)Emerging Markets Non-FinTABR.DU




Oasis International Leasing (OILC.AD)


United Arab Emirates: Specialty Finance


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: OILC.AD

Low High





Oasis International Leasing


Key data (*)

Price (Dh) 1.82Price target (Dh) 1.80Market cap ($ mn) 743.5Average daily trading volume ($ mn) NAFree float 83%Bloomberg code OILC DB

2006 2007E 2008E 2009ESales (Dh mn) 307.6 423.1 533.3 653.0EBITDA (Dh mn) EV / EBITDAR 16.7x 19.2x 17.3x 16.9xP / E 28.5x 17.4x 13.3x 11.5xDividend yield 0.0% 0.0% 1.9% 4.4%(*) multiples and ratios are calendarised

Definitely maybe


• Oasis is a company in transition; even its name is changing to Oasis Capital. The change in

name reflects the change in the company’s focus after new management took control last

year and implemented a thorough review of operations and strategy with Boston Consulting

Group. We believe there is great potential for financial performance to improve; the company

currently does not cover its cost of capital, but we have limited visibility on how, and over

what time scale, this might be achieved.

• Were management to succeed in simultaneously expanding assets and improving margin,

the stock should re-rate, as it currently prices-in only modest growth. Diversification from the

traditional aircraft leasing business opens new avenues for expansion, and provides

diversification of risk. Targeting the financing of infrastructure projects in the GCC seems to

be a sensible move, given the vast scale of developments under construction or in planning.


Our 12-month price target is the average of a DDM value and a value derived by a variation of a

Warranted Equity Valuation (WEV) method. To account for the rapid growth rates in assets and

returns in the next few years, we project our WEV valuation further forward than would typically

be the case, and take an average of values discounted to our price target date. For both methods

we employ a cost of equity of 9.5% and our DDM valuation assumes a terminal growth rate of 3%.

Oasis looks fairly valued, compared with intrinsic valuations, and also in comparison with other

financial service companies in our coverage universe. With ROE/Ke of 0.9x in 2009, on our

estimates and 1.2x book value for the same year, Oasis’ share price reflects expectations of

moderate growth, but limited improvement in balance sheet gearing. If management succeed in

its plans to aggressively increase its asset base and better utilise its equity base, we would expect

a substantial re-rating of the share. We await more clarity before taking a view on this possibility.

0.00.10.20.30.40.50.60.70.80.91.0

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17/08

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350

400

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500

550

600

OILC.AD (Dh) MSCI EM Europe & Middle East




Oasis International Leasing: Overview Company description Oasis International Leasing was set up in 1997 as part

of the Abu Dhabi government’s ‘offset’ (i.e. re-

investment) scheme with British military supplier BAE,

conceived as a provider of lease financing for high

value assets such as aircraft, ships and infrastructure

assets. Since the BAE deal mostly involved aircraft, this

became a specialism for Oasis and the core of its

business to the present. A management change in

2006 has led to a strategic review and a strategy to

leverage the company’s balance sheet more

aggressively and pursue new growth opportunities.


83%

17%

Other Mubadala Development Company



• Focusing of management on growth strategy: to develop the company’s core competence in

aircraft leasing, and to expand more aggressively into other areas of financing, for example

shipping and infrastructure developments.

• Oasis has already entered a JV with Tabreed, provider of central cooling in Abu Dhabi, to

finance plants, and has invested in a MENA infrastructure fund alongside Dubai International

Capital (DIC) and HSBC. Oasis capital outlay is an initial US$50 mn, which we expect to be

drawn down and augmented with debt at the project level, over the next two to three years.

• Oasis intends to set up a niche investment bank, focusing on execution of infrastructure-related

transactions. We do not forecast revenues from this source at this stage, due to lack of

visibility, but see it as an indication of new management’s desire to leverage all aspects of

financing of the economic transformation taking place in the Middle East.


• Visibility on the company’s transformation is limited. We believe the market will want to see

one or two more major transactions announced before assigning the share a multiple reflecting

higher growth and greater capital efficiency.

• Diversifying from aircraft leasing should make Oasis’ business less cyclical, which should in

turn allow the company to increase gearing and grow assets further, but there is heightened

execution risk in the early stages, in our view.

Industry context

The Middle East is undergoing an economic transformation that has sparked a significant wave of

infrastructure investment. We estimate that construction activity has increased by 35% in nominal

terms in the UAE between 2005 and 2006, for example, and MEED estimates the value of

announced projects in the GCC region at over US$1.6 tn. Transportation assets to service these

growing economies are also in great demand. Airbus estimates that the UAE alone will demand

US$71 bn worth of aircraft over the coming years, the seventh highest figure globally.

Oasis intends to benefit from this growth in assets by expanding its financing activities from its core

competence of aircraft leasing, and into shipping and other infrastructure-related financing.

51%40%

9%

Operating leases Finance leases Loan investments




Oasis International Leasing: Overview


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Core competence in aircraft leasing; the twentieth largest in the world

currently. Provides a solid base for expansion.

Strong ties with the government of the UAE.

New and motivated management team.

Visibility on the nature and potential viability of the company’s transition

is currently poor.


Significant potential financing market arising from unprecedented levels

of infrastructure development in the region.

Establishment of an investment bank would further enhance ROE and

provide a source of origination.

Loss of focus on core business.

Entry of competition with larger balance sheets and greater ability to

redistribute risk.




Oasis International Leasing: Summary financials

Income Statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGRSales 177.0 187.3 307.6 423.1 533.3 653.0 785.0 919.4 1057.0 1203.7 1360.2 1527.4 18.7

EBITDAR 128.6 130.3 193.7 275.1 356.6 424.3 501.5 581.0 658.5 737.0 819.9 908.0EBITDA 128.6 130.3 193.7 275.1 356.6 424.3 501.5 581.0 658.5 737.0 819.9 908.0

EBITDA Margin, % 72.7 69.5 63.0 65.0 66.9 65.0 63.9 63.2 62.3 61.2 60.3 59.4

EBIT 7.3 7.7 66.9 144.6 207.2 240.9 271.9 295.2 307.9 313.8 315.8 313.9 10.4 EBIT Margin, % 4.1 4.1 21.7 34.2 38.9 36.9 34.6 32.1 29.1 26.1 23.2 20.6

Net interes t expense 2.5 23.4 23.4 12.0 9.3 9.2 9.7 8.0 6.2 5.6 5.3 5.0

Associate incom e / other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Profit before tax 9.8 31.1 90.3 156.6 216.5 250.1 281.6 303.2 314.1 319.4 321.1 318.9

Adjus ted PBT 9.8 31.1 90.3 156.6 216.5 250.1 281.6 303.2 314.1 319.4 321.1 318.9 9.7Tax -1.9 -2.9 5.5 0.0 -10.8 -12.5 -14.1 -15.2 -15.7 -16.0 -16.1 -15.9

Exceptional item s 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minority interes t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Incom e 7.9 28.1 95.8 156.6 205.7 237.6 267.5 288.1 298.4 303.5 305.0 303.0

Adjus ted net incom e 7.9 28.1 95.8 156.6 205.7 237.6 267.5 288.1 298.4 303.5 305.0 303.0 9.7


No. of bas ic shares outs tanding (*) 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500No. of diluted shares outs tanding (*) 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500

EPS (bas ic) 0.01 0.02 0.06 0.10 0.14 0.16 0.18 0.19 0.20 0.20 0.20 0.20 9.7

EPS (diluted) 0.01 0.02 0.06 0.10 0.14 0.16 0.18 0.19 0.20 0.20 0.20 0.20EPS (adjus ted, bas ic) 0.01 0.02 0.06 0.10 0.14 0.16 0.18 0.19 0.20 0.20 0.20 0.20 9.7

Annual growth, % NM 255.82 240.37 63.54 31.34 15.52 12.60 7.67 3.58 1.71 0.51 -0.68

EPS (adjus ted, diluted) 0.01 0.02 0.06 0.10 0.14 0.16 0.18 0.19 0.20 0.20 0.20 0.20DPS 0.00 0.00 0.00 0.00 0.03 0.08 0.13 0.19 0.20 0.20 0.20 0.20 55.2

Annual growth, % NM NM NM NM NM 131.04 68.90 43.56 3.58 1.71 0.51 -0.68(*) weighted average num ber of shares ; in m illions




Oasis International Leasing: Summary financials Balance Sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGR

Cash and cash equivalents 158 885 400 310 306 323 268 207 187 176 167 153

Other current assets 6 28 29 39 49 61 73 86 99 114 129 146

Total Current Assets 164 913 429 350 355 384 341 293 286 290 296 299 -5.2

Inves tm ents in finance leases and loans 42 96 1,881 2,742 3,494 4,150 4,745 5,208 5,716 6,275 6,889 7,563 Operating lease assets 1,756 1,841 1,591 1,772 2,168 2,722 3,376 4,106 4,874 5,680 6,529 7,423

Property, plant and equipm ent 0 0 2 3 3 4 5 6 7 8 9 10 Total Assets 1,962 2,850 3,902 4,867 6,021 7,260 8,466 9,613 10,883 12,253 13,723 15,294 16.0

Short-Term Debt 0 310 118 118 118 118 118 118 118 118 118 118 Trade Payables 64 100 127 185 234 286 344 403 463 528 596 670

Long-Term Debt 1,145 860 1,987 2,737 3,637 4,637 5,637 6,637 7,837 9,137 10,537 12,037

Pens ion liabilities 0 0 0 0 0 0 0 0 0 0 0 0 Other liabilities 0 0 0 0 0 0 0 0 0 0 0 0

Total Liabilities 1,208 1,269 2,233 3,041 3,990 5,042 6,100 7,159 8,419 9,783 11,252 12,825 20.5Minority Interes ts 0 0 0 0 0 0 0 0 0 0 0 0

Total Shareholders ' Equity 753 1,580 1,669 1,826 2,031 2,218 2,366 2,454 2,464 2,469 2,471 2,469

Total Liabilities & Equity 1,962 2,850 3,902 4,867 6,021 7,260 8,466 9,613 10,883 12,253 13,723 15,294 16.0

Cash flow (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 08E-12E

CAGR

Cash from operations 120 145 200 322 395 466 547 627 705 787 873 965 15.6

Net interes t received 3 23 23 12 9 9 10 8 6 6 5 5

Tax paid (2) (3) 5 0 (11) (13) (14) (15) (16) (16) (16) (16) Operating cash flow 121 165 229 334 393 462 542 620 696 776 862 954 15.3

Purchase of operating lease assets 52 (379) 233 (312) (546) (736) (884) (1,016) (1,118) (1,230) (1,353) (1,488)

Sale (Purchase) of Intangible & Fin Assets 4 (83) (1,694) (897) (752) (656) (594) (463) (509) (559) (614) (674) Capex on PP&E (0) (0) (2) (1) (1) (1) (1) (1) (1) (1) (1) (1)

Inves ting cash flow 56 (462) (1,463) (1,209) (1,298) (1,393) (1,479) (1,480) (1,628) (1,789) (1,967) (2,163) 5.8

Free Cash Flow 177 (297) (1,235) (875) (905) (931) (937) (860) (932) (1,013) (1,105) (1,209) 0.7

Short-Term Debt (Decrease) Increase 0 0 0 0 0 0 0 0 0 0 0 0

Long-Term Debt (Decrease) Increase (280) 55 936 750 900 1,000 1,000 1,000 1,200 1,300 1,400 1,500 Dividends paid 0 0 0 0 0 (51) (119) (201) (288) (298) (303) (305)

Share buybacks / issuances 173 770 0 0 0 0 0 0 0 0 0 0 Others (2) (1) 0 0 0 0 0 0 0 0 0 0

Financing cash flow (110) 824 936 750 900 949 881 799 912 1,002 1,097 1,195 0.3

Change in cash and cash equivalents 67 527 (299) (125) (5) 17 (55) (61) (20) (11) (9) (14)




Oasis International Leasing: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 97.0x 28.5x 17.4x 13.3x 11.5x 10.2x








P / book 1.7x 1.6x 1.5x 1.3x 1.2x 1.2x



GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 0.0% 1.9% 4.4% 7.4%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%



GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 2.4% 5.9% 9.0% 10.7% 11.2% 11.7%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%






Net debt / (cash) * 285 1,706 2,545 3,450 4,432 5,488







GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 4.1% 21.7% 34.2% 38.9% 36.9% 34.6%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%


GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




Sector

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EV /

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Sector

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I

EV/GCI / CROCI/WACC

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20%

40%

60%

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100%

120%

Premium to the sector (RHS)Emerging Markets Non-FinOILC.AD







UAE Cement company summaries

Gulf Cement 158

National Cement Company 164

RAK Cement 170

RAK White Cement 176

Sharjah Cement Co 182

Union Cement 188



Gulf Cement (GCEM.AD)




Pan-Europe Sell List

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: GCEM.AD

Low High





Gulf Cement


Key data (*)

Price (Dh) 6.45Price target (Dh) 5.40Market cap ($ mn) 1,254Average daily trading volume ($ mn) NAFree float 72%Bloomberg code GFCC DB


Dominant market position, but downside to share price

Investment thesis: Sell recommendation

• Gulf continues to enjoy leadership in the market with robust prices and operating at full

capacity in both clinker and cement production. As the only producer of excess clinker in the

UAE, Gulf has strengthened its position in the sector. As the industry moves towards excess

supply and prices fall from current levels, we expect Gulf to be more resilient than some of its

peers, due to the fact that to export clinker is more efficient than cement.

• First half results reflected the buoyant industry environment with 27% year-on-year growth,

and a reversal of the trading losses that the company suffered on its portfolio during the

market correction last year. We expect revenues to peak in 2009 before turning negative as the

full impact of oversupply and price deflation occurs.

• We forecast a 2006-2008 revenue CAGR of 19% and expect net margins to remain above 30%.

With 40% of its NAV in listed securities net margins will likely be driven to a large extent by the

performance of the local stock markets.

• Gulf’s leading position in the sector – its cost advantages, market share and prospects – are

appreciated by the market and reflected in its price. Despite its operational strengths we view

Gulf as a relatively strong player in an industry with a negative outlook. We initiate coverage on

our Sell list with a 12-month target price of Dh5.40.


Our sector-wide valuation approach involves a modified sum-of-the-parts, whereby we calculate

the value of the core operations of the business using a DCF, and then add back the value of the

portfolio at the most recent balance sheet date (June 2007). The key inputs for our DCF calculation


terminal NOPAT margin of 28.9%. This calculation gives a fair value for Gulf of Dh 4.53. The

portfolio value per share amounts to Dh0.87 resulting in our rounded SOTP price target of Dh5.40.

0.00.20.40.60.81.01.21.41.61.82.0

19/10

/2006

03/11

/2006

20/11

/2006

05/12

/2006

20/12

/2006

04/01

/2007

19/01

/2007

05/02

/2007

20/02

/2007

07/03

/2007

22/03

/2007

06/04

/2007

23/04

/2007

08/05

/2007

23/05

/2007

07/06

/2007

22/06

/2007

09/07

/2007

24/07

/2007

08/08

/2007

23/08

/2007

07/09

/2007

350

400

450

500

550

600

GCEM.AD (Dh) MSCI EM Europe & Middle East




Gulf Cement: Overview Company description GCC is a Ras Al Khaimah based producer of clinker and

cement products. It is the largest producer in the UAE

on both market capitalization and market share. In

December 2006 GCC added an additional 2.4 mn

tonnes of clinker capacity to its 1.3 mn tonnes per

annum facility, making it the largest clinker producer in

the UAE. GCC currently runs four mills with total

annual production capacity of 3.7 mn tonnes of clinker

and 2.5 mn tonnes of cement. GCC therefore produces

1.2 mn tonnes of excess clinker and is the only cement

producer in the UAE to do so.


52%

24%

9%

9%6%

Other National Investments Company Hamad Bin Abdulaziz Bin Hamad Al Younis Government of Ras Al Khaimah Banque Saudi Fransi



• The regional infrastructure boom taking place, particularly in Dubai and Abu Dhabi, has created a

sharp increase in cement demand in the UAE. Capacity increases have lagged these

developments, resulting in rapid price increases and high margins across the industry.

• Capacity additions that brought total clinker production to 3.7 mn mean Gulf no longer needs to

purchase clinker to achieve maximum cement capacity. Clinker is also cheaper to export than

cement, placing the company in a stronger position when the industry in the UAE hits

oversupply. Mixed fuel burning and the use of coal also generate cost benefits.


• Our base view is that oversupply will drive prices down to around US$55/tonne by 2010, forcing

unprofitable capacity out of the market. A risk to this view is that a sharp rise in development

projects in Abu Dhabi and Ras Al Khaimah might provide support to domestic cement prices.

• Competition in domestic/foreign markets will likely dictate utilization rates, a fall-off in planned

capacity expansions and successful penetration into export markets remains a risk to the upside.

• Lower fuel costs should cushion the negative impact on margins and ROIC stemming from price

declines, although Gulf is already operating at the lower end of the production cost curve through

the use of its coal and mixed-use burning systems.

• With an investment portfolio representing 40% of NAV, GCC’s earnings will be largely affected by

the performance of its investments. The rebound in the local markets led to Gulf earning a profit

on investments of Dh140 mn in 1H2007, almost recovering the losses incurred for FY 2006.

Recent market volatility and its impact on company performance remains a concern.

Industry context

Demand in the industry to is set to remain robust, but excess supply is expected from mid-2008.

Prices are expected to gradually decline from current levels as a wave of new capacity and new

entrants are likely to result in the UAE market moving from a production deficit to excess supply.

Gulf Cement is the largest producer in the UAE in terms of both market capitalization and market

share, which is currently around 16%. Its positioning and cost leadership are expected to make it

more defensive to the effect of excess supply and lower prices.

100%

Local Sales




Gulf Cement: Overview


-3.0x-2.5x-2.0x-1.5x-1.0x-0.5x0.0x0.5x1.0x1.5x2.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%


0100200300400500600700800900

02 03 04 05 06 07E 08E 09E 10E 11E 12E1.8%

6.8%

11.8%

16.8%

21.8%

26.8%

31.8%

36.8%

41.8%



Currently the only producer of excess clinker in the UAE. Produces all the

clinker necessary for its own production and has an advantage in terms

of ease and cost of exporting.

Production process utilizes only coal, providing a cost advantage and

protection from the significantly more expensive oil-based fuels used by

competitors.

Largest producer in terms of market share and clinker production.

Significant portion of company assets are tied up in a listed investment

portfolio, creating significant exposure to regional and global equity

markets.


Most domestic supply is currently directed towards Dubai. Abu Dhabi

and to a lesser degree Ras Al Khaimah, are also experiencing significant

investment in infrastructure and real estate. This could potentially drive

demand much higher and offset much of the forecast excess supply.

With cost advantages and dominant market share we believe Gulf is best

positioned to weather the challenges facing the sector.

Large-scale, industry-wide capacity increases to lead to oversupply in

2008, with negative impact on prices.

Number of new entrants expected in the UAE cement market over the

next two to three years will likely add to existing competition.

Excess supply from GCC neighbours could potentially flood the local

market following a pullback in demand in those countries.




Gulf Cement: Summary financials Income statement (Dh mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 188.3 247.5 484.0 632.2 663.7 843.5 940.2 842.5 789.6 819.8 851.1 -2.5%EBITDAR 30.3 63.1 164.1 226.6 259.2 389.9 410.4 310.7 253.5 271.0 290.7EBITDA 30.3 63.1 164.1 226.6 259.2 389.9 410.4 310.7 253.5 271.0 290.7

EBITDA margin 16.1% 25.5% 33.9% 35.8% 39.1% 46.2% 43.6% 36.9% 32.1% 33.1% 34.2%EBIT 4.1 35.6 131.3 203.1 238.1 350.3 362.5 254.7 190.0 200.3 213.0 -12.5%

EBIT margin 2.2% 14.4% 27.1% 32.1% 35.9% 41.5% 38.6% 30.2% 24.1% 24.4% 25.0%Net interest expense 0.0 0.0 3.0 0.9 10.9 (10.4) (8.5) (10.1) (14.4) (17.6) (19.1)Associate income / other 4.5 30.7 52.4 298.5 (138.8) 200.0 51.8 55.4 59.3 63.5 67.9Profit before tax 8.6 66.3 186.7 502.5 110.2 539.9 405.8 299.9 234.9 246.1 261.7Adjusted PBT 8.6 66.3 186.7 502.5 110.2 539.9 405.8 299.9 234.9 246.1 261.7 -10.4%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional items 2.1 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 10.7 67.8 186.7 502.5 110.2 539.9 405.8 299.9 234.9 246.1 261.7Adjusted net income 8.6 66.3 186.7 502.5 110.2 539.9 405.8 299.9 234.9 246.1 261.7 -10.4%


No. of basic shares outstanding (*) 470 470 673 714 714 714 714 714 714 714 714No. of diluted shares outstanding (*) 470 470 673 714 714 714 714 714 714 714 714EPS (basic) 0.02 0.14 0.28 0.70 0.15 0.76 0.57 0.42 0.33 0.34 0.37 -10.4%EPS (diluted) 0.02 0.14 0.28 0.70 0.15 0.76 0.57 0.42 0.33 0.34 0.37EPS (adjusted, basic) 0.02 0.14 0.28 0.70 0.15 0.76 0.57 0.42 0.33 0.34 0.37 -10.4%

Annual growth NM 96.8% NM -78.1% NM -24.8% -26.1% -21.7% 4.8% 6.3%EPS (adjusted, diluted) 0.02 0.14 0.28 0.70 0.15 0.76 0.57 0.42 0.33 0.34 0.37DPS 0.00 0.10 0.10 0.61 0.26 0.57 0.57 0.42 0.33 0.34 0.37 -10.4%

Annual growth NM 0.0% NM -57.1% 117.4% 0.2% -26.1% -21.7% 4.8% 6.3%(*) weighted average number of shares; in millions




Gulf Cement: Summary financials Balance sheet (Dh mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 78 127 194 695 93 261 310 271 268 323 381Other current assets 131 168 261 363 397 468 442 410 395 409 424Total current assets 209 295 455 1,057 490 729 752 681 663 732 805 1.7%Long term investments & other 19 20 79 88 591 791 843 898 958 1,021 1,089Property, plant and equipment 175 158 234 399 651 671 689 692 683 670 652Intangible assets 0 0 0 0 0 0 0 0 0 0 0Total assets 403 473 767 1,545 1,732 2,191 2,284 2,271 2,305 2,423 2,546 2.8%

Trade payables 31 34 56 104 115 116 103 92 87 90 93Short term debt 0 0 26 1 43 147 251 355 460 564 668Long term debt 0 0 27 110 170 170 170 170 170 170 170Pension liabilities 9 9 10 10 11 11 11 11 11 11 11Other liabilities 8 8 9 3 4 4 4 4 4 4 4Total liabilities 49 51 129 228 343 448 539 633 731 838 946 15.1%Minority interests 0 0 0 0 0 0 0 0 0 0 0Shareholders' equity 355 422 639 1,317 1,390 1,744 1,744 1,639 1,573 1,585 1,600Total equity and liabilities 403 473 767 1,545 1,732 2,191 2,284 2,271 2,305 2,423 2,546 2.8%


CAGRCash from operations 16.7 30.5 91.0 159 221 320 424 331 263 260 280 -9.9%Net interest paid 0.0 0.0 3.0 1 11 (10) (8) (10) (14) (18) (19)Tax paid 0.0 0.0 0.0 0 0 0 0 0 0 0 0Operating cash flow 16.7 30.5 93.9 159 232 310 416 321 249 242 260 -11.0%Capex on PP&E (2.8) (11.1) (107.8) (194) (263) (59) (66) (59) (55) (57) (60)Other investing cash flow 6.8 (43.5) (26.4) (89) (127) 0 0 0 0 0 0Investing cash flow 3.9 (54.6) (134.3) (283) (390) (59) (66) (59) (55) (57) (60) -2.5%

Operating free cash flow (*) 13.8 19.4 (13.9) (35) (31) 251 350 262 194 185 201 -12.9%Free cash flow (**) 20.6 (24.1) (40.3) (124) (158) 251 350 262 194 185 201 -12.9%

Dividends paid (0.5) (0.2) (22.9) (1) (0) (186) (405) (406) (300) (235) (246)Share buybacks / issuances 0.0 0.0 0.0 0 0 0 0 0 0 0 0Other 0.0 0.0 53.9 248 101 104 104 104 104 104 104Financing cash flow (0.5) (0.2) 31.1 246 101 (82) (301) (302) (196) (131) (142) -17.1%

Change in cash and cash equivalents 48.7 67.1 501 (602) 169 49 (40) (2) 54 59(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Gulf Cement: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 9.2x 41.8x 8.5x 11.3x 15.4x 19.6x








P / book 3.5x 3.3x 2.6x 2.6x 2.8x 2.9x


FCF yield NA -24.7% 1.1% 6.5% 4.5% 2.9%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 9.4% 4.0% 8.8% 8.8% 6.5% 5.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA 19.1% 21.1% 19.9% 14.4% 11.2%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 51.4% 8.1% 34.5% 23.3% 17.7% 14.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 1.6x 2.3x 2.2x 2.2x 2.2x


GCI (*) NA 2,489 2,571 2,633 2,699 2,789

Net debt / (cash) * (584) 121 56 111 255 361




Net interest / EBITDA -0.4% -4.2% 2.7% 2.1% 3.3% 5.7%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 35.8% 39.1% 46.2% 43.6% 36.9% 32.1%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 32.1% 35.9% 41.5% 38.6% 30.2% 24.1%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 32.1% 35.9% 41.5% 38.6% 30.2% 24.1%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 30.7% 39.6% 7.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




GCEM.AD

Sector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x


EV /

GC

I


Sector

GCEM.AD

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x


EV /

GC

I

EV/GCI / CROCI/WACC

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

06 07E 08E 09E 10E0%

20%

40%

60%

80%

100%

120%

140%

Premium to the sector (RHS)Emerging Markets Non-FinGCEM.AD




National Cement Company (NCC.DU)





Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: NCC.DU

Low High





National Cement Company


Key data (*)

Price (Dh) 9.65Price target (Dh) 8.00Market cap ($ mn) 725.4Average daily trading volume ($ mn) 0.01Free float 16%Bloomberg code NCC DB


Appears extremely overvalued


• National is currently operating at maximum capacity, producing 1.6 mn tonnes of cement, and

accounts for 10% of the domestic market. As the industry moves towards excess supply and

prices fall we expect National will struggle to retain its market positioning and margins.

• First-half results reflected reasonable top-line growth of 11%, but net income was down 27%,

due largely to adverse mark-to-market adjustments on securities. As shown by the first-half

results, with 76% of its NAV in listed securities, overall profitability will largely be driven by the

performance of the underlying securities portfolio.

• With no expansion plans and limited scope for cost reduction, we do not have a positive

outlook for the cement operations. Given the size of the investment portfolio, however, the

company is as much a play on the local markets as it is on the core operations. However, there

is no logic, in our view, for the shares to trade at a premium to the value of the core operation

and the investment portfolio. Investors would normally demand a discount for excess capital

and prefer to manage portfolio risk themselves. Our target price for the stock is Dh8.00 and we

initiate coverage of National Cement on our Sell list.


Our sector-wide valuation approach involves a sum-of-the-parts, whereby we calculate the core

operations of the business using a DCF analysis. We then add back the value of the portfolios to

derive the SOTP value. We allocate a higher WACC to those companies with higher portfolio

exposures, with a range of 10.5%-12.0%. The key inputs for our DCF calculation beyond our

explicit forecast period are: a WACC of 12% given the high proportion of listed securities to NAV,

growth rate in perpetuity of 3% and a terminal NOPAT margin of 12%.

This gives a fair value for National’s core operations of Dh2.27. The portfolio value per share

equates to Dh5.74 bringing the total rounded SOTP value to Dh8.00.

0.00.51.01.52.02.53.03.54.04.55.0

22/09

/2006

10/10

/2006

26/10

/2006

13/11

/2006

29/11

/2006

15/12

/2006

02/01

/2007

18/01

/2007

05/02

/2007

21/02

/2007

09/03

/2007

27/03

/2007

12/04

/2007

30/04

/2007

16/05

/2007

01/06

/2007

19/06

/2007

05/07

/2007

23/07

/2007

08/08

/2007

24/08

/2007

350

400

450

500

550

600

NCC.DU (Dh) MSCI EM Europe & Middle East




National Cement Company: Overview Company description National Cement is based in the Emirate of Ras Al

Khaimah and was established in 1968 to domestically

produce the basic materials required to drive expected

developments in the UAE. National Cement has current

annual production capacity of 1.2 mn tonnes of clinker

and 1.6 mn tonnes of cement, following recent kiln

modifications designed to increase capacity. The

company holds a sizeable investment portfolio

comprising 75% of net asset value at the end of the

first-half 2007. National trades on the Dubai Financial

Market.


63%

37%

Al Ghurair Investment Public



• The regional infrastructure boom taking place, in particular in Dubai and Abu Dhabi, has created

a sharp increase in cement demand in the UAE. Capacity increases have lagged these


• Recent kiln modifications have reduced operational overheads which should result in cost

benefits going forward. However, we do not believe this will be sufficient to maintain margins if

prices fall as we forecast through to 2010.


• Our base view is that oversupply will drive prices down to around US$55 per tonne by 2010, in

order to force unprofitable capacity out of the market. A risk to this view is that a sharp rise in

development projects in Abu Dhabi and Ras Al Khaimah, similar in scale to those seen in Dubai,

might provide support to domestic cement prices.

• Competition in domestic/foreign markets will likely dictate utilisation rates, a fall-off in planned

capacity expansions and successful penetration into export markets remains a risk to the upside.

• National currently uses fuel oil in its production process and therefore remains largely exposed

to rising prices. A marked reduction in the cost of fuel inputs would have a beneficial impact on

margins and company results.

• With an investment portfolio representing 76% of NAV, National’s earnings will be largely

affected by the performance of its investment portfolio. Portfolio investment decisions are

managed by the controlling shareholder in the company making it unlikely, in our view, that the

portfolio will be distributed as cash to shareholders or re-invested into the cement operations. In

such an instance the assets may end up financing the losses of the cement business.

Industry context

Demand in the industry looks set to remain robust, but excess supply is likely to occur in the market

from mid-2008. We expect prices to gradually decline off current levels as a wave of new capacity

and new entrants will likely result in the UAE market moving from a production deficit to excess

supply. We expect National to struggle as the impact of higher costs and lower prices takes full

effect on the sector.

100%

Domestic Sales




National Cement Company: Overview


-7.0x

-6.0x

-5.0x

-4.0x

-3.0x

-2.0x

-1.0x

0.0x

04 05 06 07E 08E 09E 10E 11E 12E-25.0%

-20.0%

-15.0%

-10.0%

-5.0%


050

100150200250300350400450

04 05 06 07E 08E 09E 10E 11E 12E1.9%

6.9%

11.9%

16.9%

21.9%

26.9%

31.9%

36.9%



Recent kiln modifications allow the introduction of slag to the production

process, improving cost and capacity efficiencies.

Strong performance from the investment portfolio may significantly

offset losses in the cement business and correlations with the sector.

Over 75% of National’s NAV lies in listed securities, creating significant

exposure to regional and global equity markets.

No plans to expand capacity is likely to result in the full impact of price

deflation being felt by the company.

Reliant on clinker imports to achieve maximum grinding capacity.






Large scale, industry-wide capacity increases to lead to oversupply in




Excess supply from GCC neighbors could potentially flood the local





National Cement Company: Summary financials Income statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 326.7 450.4 456.3 420.4 357.3 321.6 308.6 327.2 340.4 -1.2%EBITDAR 72.3 183.1 167.4 139.7 79.9 44.8 28.3 41.3 49.8EBITDA 72.3 183.1 167.4 139.7 79.9 44.8 28.3 41.3 49.8

EBITDA margin 22.1% 40.7% 36.7% 33.2% 22.3% 13.9% 9.2% 12.6% 14.6%EBIT 56.4 168.0 155.0 124.1 62.6 25.7 7.5 18.8 25.5 -20.1%

EBIT margin 17.3% 37.3% 34.0% 29.5% 17.5% 8.0% 2.4% 5.8% 7.5%Net interest expense 15.5 11.8 12.0 2.3 7.2 6.8 5.8 5.3 5.4Associate income / other 41.6 75.0 49.2 0.0 (0.0) (0.0) (0.0) (0.0) 0.0Profit before tax 113.4 254.7 216.3 126.4 69.8 32.5 13.3 24.1 30.9Adjusted PBT 113.4 254.7 216.3 126.4 69.8 32.5 13.3 24.1 30.9 -18.4%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional items (0.3) (0.2) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 113.1 254.5 216.1 126.4 69.8 32.5 13.3 24.1 30.9Adjusted net income 113.4 254.7 216.3 126.4 69.8 32.5 13.3 24.1 30.9 -18.4%


No. of basic shares outstanding (*) 276 276 276 276 276 276 276 276 276No. of diluted shares outstanding (*) 276 276 276 276 276 276 276 276 276EPS (basic) 0.41 0.92 0.78 0.46 0.25 0.12 0.05 0.09 0.11 -18.4%EPS (diluted) 0.41 0.92 0.78 0.46 0.25 0.12 0.05 0.09 0.11EPS (adjusted, basic) 0.41 0.92 0.78 0.46 0.25 0.12 0.05 0.09 0.11 -18.4%

Annual growth NM -15.1% -41.5% -44.8% -53.4% -59.0% 80.8% 28.3%EPS (adjusted, diluted) 0.41 0.92 0.78 0.46 0.25 0.12 0.05 0.09 0.11DPS 0.12 0.17 0.00 0.34 0.25 0.12 0.05 0.09 0.11 -18.4%

Annual growth 42.9% -100.0% NM -26.4% -53.4% -59.0% 80.8% 28.3%(*) weighted average number of shares; in millions




National Cement Company: Summary financials Balance sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 43 125 78 241 227 194 176 180 183Other current assets 222 286 282 227 191 179 176 184 190Total current assets 266 411 360 468 418 374 352 365 373 -2.8%Long term investments & other 939 2,044 1,587 1,587 1,587 1,587 1,587 1,587 1,587Property, plant and equipment 105 161 209 214 222 225 226 227 226Intangible assets 0 0 0 0 0 0 0 0 0Total assets 1,310 2,616 2,155 2,270 2,227 2,186 2,166 2,178 2,187 -0.5%

Trade payables 42 41 64 52 34 31 30 31 33Short term debt 0 1 0 0 0 0 0 0 0Long term debt 0 0 0 0 0 0 0 0 0Pension liabilities 16 18 18 18 18 18 18 18 18Other liabilities 1 24 9 9 9 9 9 9 9Total liabilities 59 84 91 78 61 57 56 58 59 -0.7%Minority interests 0 0 0 0 0 0 0 0 0Shareholders' equity 1,250 2,532 2,065 2,191 2,166 2,129 2,110 2,121 2,127Total equity and liabilities 1,310 2,616 2,155 2,270 2,227 2,186 2,166 2,178 2,187 -0.5%


CAGRCash from operations 77.3 170 228 182 98.8 52.8 30.0 35.1 45.1 -17.8%Net interest paid 15.5 12 12 2 7.2 6.8 5.8 5.3 5.4Tax paid 0.0 0 0 0 0.0 0.0 0.0 0.0 0.0Operating cash flow 92.8 182 240 184 106.0 59.6 35.8 40.4 50.5 -16.9%Capex on PP&E (15.9) (74) (60) (21) (25.0) (22.5) (21.6) (22.9) (23.8)Other investing cash flow (37.6) (1) (159) 0 0.0 0.0 0.0 0.0 0.0Investing cash flow (53.5) (75) (219) (21) (25.0) (22.5) (21.6) (22.9) (23.8) -1.2%

Operating free cash flow (*) 76.9 107 180 163 81.0 37.1 14.2 17.5 26.7 -24.2%Free cash flow (**) 39.2 106 21 163 81.0 37.1 14.2 17.5 26.7 -24.2%

Dividends paid (27.6) (32) (46) 0 (94.8) (69.8) (32.5) (13.3) (24.1)Share buybacks / issuances 0.0 0 0 0 0.0 0.0 0.0 0.0 0.0Other 0.0 0 0 0 0.0 0.0 0.0 0.0 0.0Financing cash flow (27.6) (32) (46) 0 (94.8) (69.8) (32.5) (13.3) (24.1) -29.0%

Change in cash and cash equivalents 81 (47) 163 (13.8) (32.7) (18.3) 4.2 2.6(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




National Cement Company: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 10.5x 12.3x 21.1x 38.2x 81.9x NA






EV / NOPAT lease adj'd 48.4x 27.3x 19.7x 39.2x 96.7x NM


P / book 1.1x 1.3x 1.2x 1.2x 1.3x 1.3x


FCF yield -12.5% 10.0% 6.1% 3.0% 1.4% 0.5%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 1.7% 0.0% 3.6% 2.6% 1.2% 0.5%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 12.7% 8.9% 6.9% 3.9% 2.2% 1.4%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 13.5% 9.4% 5.9% 3.2% 1.5% 0.6%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 3.3x 2.1x 1.2x 1.2x 1.2x 1.2x


GCI (*) 2,521 2,196 2,161 2,177 2,197 2,223

Net debt / (cash) * (124) (78) (241) (227) (194) (176)


Net Debt / Equity 0.0x 0.0x -0.1x -0.1x -0.1x -0.1x



Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 40.7% 36.7% 33.2% 22.3% 13.9% 9.2%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 37.3% 34.0% 29.5% 17.5% 8.0% 2.4%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 37.3% 34.0% 29.5% 17.5% 8.0% 2.4%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 16.5% 13.2% 5.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




NCC.DU

Sector

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Premium to the sector (RHS)Emerging Markets Non-FinNCC.DU




RAK Cement (RKCC.AD)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: RKCC.AD

Low High





RAK Cement


Key data (*)

Price (Dh) 2.08Price target (Dh) 2.60Market cap ($ m n) 274.2Average daily trading volum e ($ m n) NAFree float 34%Bloom berg code RAKCC DB

2006 2007E 2008E 2009ESales (Dh m n) 325.2 372.8 313.7 279.5EBITDA (Dh m n) 144.3 172.2 118.7 87.8EV / EBITDAR 6.3x 4.8x 7.0x 9.6xP / E 8.0x 6.5x 9.7x 13.8xDividend yield 7.2% 11.6% 10.3% 7.3%(*) m ultiples and ratios are calendarised

Attractive growth profile fairly well reflected in valuation


• In anticipation of the oversupply facing the industry, RAK opted not to invest in additional

capacity but turned its focus on operating efficiencies. As the industry moves towards excess

supply and prices fall from current levels, with no additional capacity and rising costs RAK

faces a challenging future. However, we believe our forecasts adequately account for these

factors.

• First-half results were fairly weak, with revenue down by 1% and net income dropping 39%.

Restrictions on natural gas supply led to the use of more expensive liquid fuels and a shortfall

in clinker production. We expect these negative influences to carry through until year-end but

an upgrade to hybrid fuel burning capabilities should alleviate margin pressure from 2008.

• Despite the challenges facing the sector, as a smaller, niche player RAK may not face the idle

capacity issues that a number of its peers will. Although we expect margin deterioration, we

expect it to level out at 22% in 2010 before recovering to 28% at the end of our forecast horizon.

• Our target price is Dh2.60, and despite attractive potential upside to the present share price, we

believe there are better ways to gain exposure to the UAE infrastructure story, with potentially

higher return and lower risk. If we are wrong on the outlook for cement prices, RAK would be

an attractive story at the current price. We initiate coverage of RAK Cement as Neutral.


Our sector-wide valuation approach involves a sum-of-the-parts, whereby we calculate the core

operations of the business using a DCF, and then add back the value of the portfolio at the most

recent balance sheet date. With no portfolio exposure we value RAK solely with our DCF. The key

inputs for the DCF calculation beyond the explicit forecast period are: a WACC of 10.5%, growth

rate in perpetuity of 3% and a terminal NOPAT margin of 27%. This calculation gives our price

target for RAK of Dh2.60.

0.00.10.20.30.40.50.60.70.80.91.0

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13/11/200627/11/200

611/12

/2006

25/12 /2006

08/01/20

0722/01

/2007

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/03/200719

/03/200702/04/200

716/04

/2007

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0728/0

5 /200711

/06/200725

/06/200709/0

7/200723

/07/200706/08/200720/08/200

703/09

/2007

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RKCC.AD (Dh) MSCI EM Europe & Middle East




RAK Cement: Overview Company description RAK Cement is one of the mid-tier cement producers in

the UAE selling all of its capacity in the local market.

The company has annual production capacity of 1m

tonnes of clinker and 1.2m tonnes of cement. RAK

commands a 7% market share in the UAE, and

currently has no expansion plans. Unlike the majority

of its sector peers, RAK does not hold a material

portfolio of listed securities.


47%

20%

17%

16%

Other Hydra Properties

RAK White Cement Union Cement Company






• RAK has not invested in new capacity, but made modifications that allows fly ash to be added to

the production process at a similar cost to clinker. This should add an extra 10%-15% to existing

capacity in 2008. Modifications to the fuel burning system are also underway to mitigate rising

fuel costs.

• As a niche player, we expect that RAK will be less likely to shut in capacity as prices fall and

operate defensively as margin and cost pressures pressure the sector.






• Cost-reducing steps should filter through to margin improvement from next year, potentially

providing upside risks to our Neutral view on the share.

• With lower market share RAK will likely feel the marginal effects of a decline in capacity more

than some of its larger peers as competition and oversupply develop in the market.

Industry context

Demand in the industry is set to remain robust, but excess supply will likely occur from mid-2008.

We expect prices to gradually decline from current levels as a wave of new capacity and new

entrants will likely result in the UAE market moving from a production deficit to excess supply.

RAK has shown the ability to remain competitive in the past, and we expect this to continue.

Although it will likely feel the impact of the deteriorating fundamentals in the industry, we believe

cost containment and its position as a niche player will help in its defence.

100%

UAE Market




RAK Cement: Overview


-3.0x

-2.0x

-1.0x

0.0x

1.0x

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3.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%

Net Debt / EBITDA (LHS) Net Interest / EBITDA (RHS)

0

50

100

150

200

250

300

350

03 04 05 06 07E 08E 09E 10E 11E 12E16.0%

21.0%

26.0%

31.0%

36.0%

41.0%



Strong balance sheet positions the group to withstand operating

pressures.

RAK produces the majority of the clinker requirements to meet its

grinding capacity.

With no investment portfolio, RAK is insulated from market movements

and entirely focused on its core cement operations.

Sells majority of cement production in the domestic market and hence is

fully exposed to UAE developments. Could also potentially be more

difficult to migrate production to export markets.

Uses mixed fuels which incur higher operating costs, investments to

combat this will likely only show benefits from 2008.





local demand much higher and offset much of the forecast excess

supply.

Recent kiln modifications allow the introduction of fly ash to the cement

production process at a similar cost to clinker. This should allow an

increase in capacity from 2008.



New entrants to the UAE cement market over the next two to three years

will likely add to existing competition.






RAK Cement: Summary financials Income statement (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 172.7 246.8 300.8 325.2 372.8 313.7 279.5 265.6 273.5 281.7 -2.7%EBITDAR 57.1 122.9 144.4 144.3 172.2 118.7 87.8 73.4 79.0 85.0EBITDA 57.1 122.9 144.4 144.3 172.2 118.7 87.8 73.4 79.0 85.0

EBITDA m argin 33.1% 49.8% 48.0% 44.4% 46.2% 37.8% 31.4% 27.7% 28.9% 30.2%EBIT 36.1 101.8 123.2 123.0 152.0 98.5 67.6 53.1 58.5 64.0 -10.2%

EBIT m argin 20.9% 41.2% 41.0% 37.8% 40.8% 31.4% 24.2% 20.0% 21.4% 22.7%Net interes t expense (5.8) (4.6) (1.9) 2.9 3.2 5.4 5.5 4.9 4.6 4.7Associate incom e / other 0.3 0.3 0.2 0.3 0.0 (0.0) 0.0 0.0 0.0 0.0Profit before tax 30.6 97.4 121.5 126.3 155.2 103.9 73.1 58.0 63.1 68.7Adjus ted PBT 30.6 97.4 121.5 126.3 155.2 103.9 73.1 58.0 63.1 68.7 -9.8%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional item s (0.6) (0.5) (1.8) (0.5) 0.0 0.0 0.0 0.0 0.0 0.0Minority interes t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net incom e 30.0 96.9 119.7 125.8 155.2 103.9 73.1 58.0 63.1 68.7Adjus ted net incom e 30.6 97.4 121.5 126.3 155.2 103.9 73.1 58.0 63.1 68.7 -9.8%


No. of bas ic shares outs tanding (*) 440 440 440 484 484 484 484 484 484 484No. of diluted shares outs tanding (*) 440 440 440 484 484 484 484 484 484 484EPS (bas ic) 0.07 0.22 0.27 0.26 0.32 0.21 0.15 0.12 0.13 0.14 -9.8%EPS (diluted) 0.07 0.22 0.27 0.26 0.32 0.21 0.15 0.12 0.13 0.14EPS (adjus ted, bas ic) 0.07 0.22 0.28 0.26 0.32 0.21 0.15 0.12 0.13 0.14 -9.8%

Annual growth NM 24.7% -5.5% 22.9% -33.1% -29.6% -20.7% 8.7% 9.0%EPS (adjus ted, diluted) 0.07 0.22 0.28 0.26 0.32 0.21 0.15 0.12 0.13 0.14DPS 0.00 0.00 0.00 0.15 0.24 0.21 0.15 0.12 0.13 0.14 -9.8%

Annual growth NM NM NM 60.3% -10.7% -29.6% -20.7% 8.7% 9.0%(*) weighted average num b er of shares; in m illions




RAK Cement: Summary financials Balance sheet (Dh mn, year ending Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 0 0 18 108 183 187 167 157 161 165Other current assets 80 115 141 158 176 153 141 136 140 143Total current assets 80 115 159 266 359 340 308 294 301 308 -2.5%Long term inves tm ents & other 9 9 13 38 38 38 38 38 38 38Property, plant and equipm ent 520 504 484 470 468 470 469 467 466 465Intangible assets 0 0 0 0 0 0 0 0 0 0Total assets 609 628 656 774 865 848 815 799 805 811 -1.1%

Trade payables 55 20 19 21 26 21 19 18 19 19Short term debt 142 100 4 0 4 4 4 4 4 4Long term debt 0 0 0 0 0 0 0 0 0 0Pens ion liabilities 1 1 2 2 2 2 2 2 2 2Other liabilities 9 8 14 8 8 8 8 8 8 8Total liabilities 207 129 38 32 40 36 34 33 33 34 -1.6%Minority interes ts 0 0 0 0 0 0 0 0 0 0Shareholders ' equity 402 499 617 742 825 812 781 766 771 777Total equity and liabilities 609 628 656 774 865 848 815 799 805 811 -1.1%


CAGRCash from operations 46.8 55.2 126 121 159 137 97.7 77.1 76.3 82.2 -12.1%Net interes t paid (5.8) (4.6) (2) 3 3 5 5.5 4.9 4.6 4.7Tax paid 0.0 0.0 0 0 0 0 0.0 0.0 0.0 0.0Operating cash flow 41.0 50.6 124 124 162 143 103.2 82.0 80.9 86.9 -11.7%Capex on PP&E (1.8) (4.2) (1) (7) (19) (22) (19.6) (18.6) (19.1) (19.7)Other inves ting cash flow 0.0 0.1 (4) (23) 0 0 0.0 0.0 0.0 0.0Investing cash flow (1.8) (4.1) (6) (29) (19) (22) (19.6) (18.6) (19.1) (19.7) -2.7%

Operating free cash flow (*) 39.2 46.4 123 117 144 121 83.6 63.4 61.8 67.2 -13.7%Free cash flow (**) 39.2 46.5 118 95 144 121 83.6 63.4 61.8 67.2 -13.7%

Dividends paid 0.0 0.0 0 0 (73) (116) (103.9) (73.1) (58.0) (63.1)Share buybacks / issuances 0.0 0.0 0 0 0 0 0.0 0.0 0.0 0.0Other (39.2) (46.5) (100) (5) 4 0 0.0 0.0 0.0 0.0Financing cash flow (39.2) (46.5) (100) (5) (69) (116) (103.9) (73.1) (58.0) (63.1) -14.2%

Change in cash and cash equivalents (0.0) 18 90 75 4 (20.3) (9.8) 3.7 4.1(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




RAK Cement: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 7.5x 8.0x 6.5x 9.7x 13.8x 17.4x








P / book 1.5x 1.4x 1.2x 1.2x 1.3x 1.3x


FCF yield NA 7.1% 14.3% 12.0% 8.3% 6.3%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 7.2% 11.6% 10.3% 7.3% 5.8%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%

Returns and liquidity

2005 2006 2007E 2008E 2009E 2010E

CROCI NA 19.7% 23.4% 15.7% 11.5% 9.5%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 21.8% 18.6% 19.8% 12.7% 9.2% 7.5%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 1.3x 1.1x 1.1x 1.1x 1.1x


GCI (*) NA 1,169 1,269 1,325 1,377 1,413

Net debt / (cash) * (14) (108) (179) (183) (163) (153)

Pens ion liabilities * 2 2 2 2 2 2

Net Debt / Equity 0.0x -0.1x -0.2x -0.2x -0.2x -0.2x


Net interes t / EBITDA 1.3% -2.0% -1.9% -4.5% -6.3% -6.7%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 48.0% 44.4% 46.2% 37.8% 31.4% 27.7%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT m argin 41.0% 37.8% 40.8% 31.4% 24.2% 20.0%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT m argin 41.0% 37.8% 40.8% 31.4% 24.2% 20.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 0.5% 2.1% 5.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




RKCC.AD

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Premium to the sector (RHS)Emerging Markets Non-FinRKCC.AD




RAK White Cement (RAKC.AD)





Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: RAKC.AD

Low High





RAK White Cement


Key data (*)

Price (Dh) 2.14Price target (Dh) 1.90Market cap ($ mn) 267.1Average daily trading volume ($ mn) NAFree float 68%Bloomberg code RAKWCT AD

2006 2007E 2008E 2009ESales (Dh mn) 206.8 223.4 189.4 164.2EBITDA (Dh mn) 47.4 52.2 24.8 3.73EV / EBITDAR NA 13.4x 30.1x NMP / E 14.8x 25.2x 56.0x NADividend yield 7.3% 3.0% 1.8% 0.0%(*) multiples and ratios are calendarised

Interesting niche producer, but overvalued


• RAK White operates as a niche producer at the higher end of the market, producing premium-

priced white cement and clinker, as well as limestone. RAK White commands 100% of the local

limestone market, producing 130k tonnes per annum, and 480k tonnes of white cement.

• With 75% of its NAV in listed assets, RAK White is highly geared towards the performance of

the stock market with net earnings and margins highly correlated to investment performance.

• First-half trading results saw revenue down by 2%. Net income of Dh77 mn was reported with

almost all of its profits generated from trading gains. The net margins of 73% for 1H07

compared to -30% for the same period in 2006, emphasizes the volatility of earnings.

• Although we do not believe that RAK White will be as exposed to the market downturn as its

peers, the company will likely still face a challenging environment. Without a positive outlook

for its core operations and volatility in performance due to its market exposure, we are bearish

on the stock.

• Our target price for the stock is Dh1.90 and we initiate coverage of RAK Cement on our Sell list.



the value of the core operations of the business using DCF. We allocate a higher WACC to those

companies with higher portfolio exposures, with a range of 10.5%-12.0%.

The key inputs for our DCF calculation beyond our explicit forecast period are: a WACC of 12%

due to RAK White’s large market exposure, growth rate in perpetuity of 3% and a terminal NOPAT

margin of 11%. We calculate a fair value for the production operations of Dh0.24. Portfolio value

per share of Dh1.62 results in a total rounded SOTP valuation of Dh1.90.

0.00.10.20.30.40.50.60.70.80.91.0

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RAKC.AD (Dh) MSCI EM Europe & Middle East




RAK White Cement: Overview Company description Ras Al Khaimah Company for White Cement and

Construction Materials is involved in the manufacture

and supply of white cement and lime products, with its

two subsidiaries Ras Al Khaimah Lime Co. and Ras Al

Khaimah Lime brick factory. The company has total

annual production capacity of 480,000 tonnes of white

cement and 130,000 tonnes of lime. The group also

owns a 17% shareholding in RAK Cement.


68%

23%

9%

Public

Abdullatif Abdullah Al Mehry

Government of Ras Al Khaimah




sharp increase in cement demand in the UAE. Capacity increases have until now lagged these

developments, resulting in price increases and high margins across the industry. White cement

demand has risen in line with that of ordinary building materials but trades at a premium.

• RAK White has not invested in new capacity, but enjoys a dominant market share position in both

limestone and white cement.

• Earnings are largely driven by the performance of the company’s investment portfolio. This has

led to volatile swings in the past and is expected to continue for the foreseeable future.






• With an investment portfolio representing 75% of NAV, RAK White’s earnings will be mostly

affected by the performance of its investment portfolio.

• Pricing pressures in the overall sector may not have the same impact on the niche products

provided by the company as with the rest of the UAE market. With the bulk (80%) of its product

destined for export markets, RAK will be more susceptible to competition in white cement and

limestone from other regional players.

Industry context

Demand in the industry is set to remain robust, but excess supply will likely occur from mid-2008.


entrants results in the UAE market moving from a production deficit to excess supply. Supply from

other regional markets, producing at lower costs, is another negative risk factor. RAK White

occupies an attractive, albeit uncertain, niche in the UAE cement sector. With the bulk of its

production destined for export markets, we expect the group to experience strong competition as

regional heavyweights begin offloading surplus capacity in their own markets.

52%

32%

16%

GCC Exports UAE Market Other




RAK White Cement: Overview


-15.0x

-10.0x

-5.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

04 05 06 07E 08E 09E 10E 11E 12E-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%


0

50

100

150

200

04 05 06 07E 08E 09E 10E 11E 12E-16.7%

-11.7%

-6.7%

-1.7%

3.3%

8.3%

13.3%



RAK White is the only producer of lime in the UAE and enjoys an

effective monopoly.

White cement sells at a significant premium to ordinary types of cement

such as Portland.

Strong balance sheet positions the group to withstand operating

pressures.

Company has a large component of its assets in listed securities, creating

significant exposure to both regional and global equity markets.

Sells majority of cement production in the foreign markets and is unlikely

to be able to compete with other regional players in the long run on a

cost-basis.





local demand much higher and offset much of the forecast excess

supply.










RAK White Cement: Summary financials Income statement (Dh mn, year to Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 136.2 163.0 206.8 223.4 189.4 164.2 152.9 157.7 162.1 -3.8%EBITDAR 24.9 37.1 47.4 52.2 24.8 3.7 (8.8) (11.3) (8.8)EBITDA 24.9 37.1 47.4 52.2 24.8 3.7 (8.8) (11.3) (8.8)

EBITDA margin 18.3% 22.8% 22.9% 23.4% 13.1% 2.3% -5.7% -7.2% -5.4%EBIT 1.9 11.2 31.9 37.2 9.7 (11.4) (21.2) (19.3) (17.7) NM

EBIT margin 1.4% 6.9% 15.4% 16.7% 5.1% -6.9% -13.9% -12.3% -10.9%Net interest expense 1.3 (2.7) (1.6) 2.4 8.1 7.6 7.2 6.9 6.4Associate income / other 37.5 100.3 37.1 (0.0) (0.0) 0.0 0.0 0.0 0.0Profit before tax 40.7 108.7 67.4 39.6 17.8 (3.8) (14.0) (12.4) (11.3)Adjusted PBT 40.7 108.7 67.4 39.6 17.8 (3.8) (14.0) (12.4) (11.3) NMTax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 40.7 108.7 67.4 39.6 17.8 (3.8) (14.0) (12.4) (11.3)Adjusted net income 40.7 108.7 67.4 39.6 17.8 (3.8) (14.0) (12.4) (11.3) NM


No. of basic shares outstanding (*) 444 447 467 467 467 467 467 467 467No. of diluted shares outstanding (*) 444 447 467 467 467 467 467 467 467EPS (basic) 0.09 0.24 0.14 0.08 0.04 (0.01) (0.03) (0.03) (0.02) NMEPS (diluted) 0.09 0.24 0.14 0.08 0.04 (0.01) (0.03) (0.03) (0.02)EPS (adjusted, basic) 0.09 0.24 0.14 0.08 0.04 (0.01) (0.03) (0.03) (0.02) NM

Annual growth NM -40.7% -41.2% -55.0% NM NM -11.4% -8.8%EPS (adjusted, diluted) 0.09 0.24 0.14 0.08 0.04 (0.01) (0.03) (0.03) (0.02)DPS 0.06 0.13 0.16 0.06 0.04 0.00 0.00 0.00 0.00 NM

Annual growth 98.7% 25.0% -59.4% -40.0% -100.0% NM NM NM(*) weighted average number of shares; in millions




RAK White Cement: Summary financials Balance sheet (Dh mn, year ending Dec) 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 100 292 94 284 265 254 244 227 211Other current assets 140 113 332 106 113 104 101 103 105Total current assets 240 405 426 390 378 358 345 330 317 -4.3%Long term investments & other 465 970 537 537 537 537 537 537 537Property, plant and equipment 150 83 69 70 68 64 62 65 68Intangible assets 0 0 0 0 0 0 0 0 0Total assets 854 1,457 1,031 997 983 959 945 932 921 -1.6%

Trade payables 10 11 16 15 13 11 10 11 11Short term debt 0 0 0 0 0 0 0 0 0Long term debt 0 0 5 5 5 5 5 5 5Pension liabilities 5 5 6 6 6 6 6 6 6Other liabilities 15 23 26 26 26 26 26 26 26Total liabilities 31 39 54 53 51 49 48 48 49 -0.9%Minority interests 0 0 0 0 0 0 0 0 0Shareholders' equity 823 1,418 978 944 932 910 896 884 873Total equity and liabilities 854 1,457 1,031 997 983 959 945 932 921 -1.6%


CAGRCash from operations (2.4) 50.1 71.0 277 15.8 10.4 (5.9) (13.3) (10.6) NMNet interest paid 1.3 (2.7) (1.6) 2 8.1 7.6 7.2 6.9 6.4Tax paid 0.0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0Operating cash flow (1.1) 47.4 69.4 279 23.9 18.0 1.3 (6.3) (4.2) NMCapex on PP&E (13.7) (24.2) (1.9) (16) (13.3) (11.5) (10.7) (11.0) (11.3)Other investing cash flow (33.0) 39.9 (25.1) 0 0.0 0.0 0.0 0.0 0.0Investing cash flow (46.6) 15.7 (27.1) (16) (13.3) (11.5) (10.7) (11.0) (11.3) -3.8%

Operating free cash flow (*) (14.8) 23.2 67.5 264 10.6 6.5 (9.4) (17.3) (15.5) NMFree cash flow (**) (47.8) 63.1 42.3 264 10.6 6.5 (9.4) (17.3) (15.5) NM

Dividends paid (20.0) (21.7) (47.7) (73) (29.7) (17.8) 0.0 0.0 0.0Share buybacks / issuances 0.0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0Other 0.0 (0.8) 4.6 0 0.0 0.0 0.0 0.0 0.0Financing cash flow (20.0) (22.5) (43.1) (73) (29.7) (17.8) 0.0 0.0 0.0 NM

Change in cash and cash equivalents 191.6 (198.1) 191 (19.1) (11.4) (9.4) (17.3) (15.5)(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




RAK White Cement: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 8.8x 14.8x 25.2x 56.0x NA NA


EV / DACF lease adj'd NA NA 13.9x 30.1x NM NA


EV / EBITDA lease adj'd NA NA 13.4x 30.1x NM NM


EV / NOPAT lease adj'd NA NA 18.7x 77.0x NM NM


P / book 0.7x 1.0x 1.1x 1.1x 1.1x 1.1x


FCF yield NA NA 26.4% 1.1% 0.6% -0.9%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 5.9% 7.3% 3.0% 1.8% 0.0% 0.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA NA 6.1% 3.3% 0.5% NM

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 9.7% 5.6% 4.1% 1.9% NM NM

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%

CROCI / WACC NA NA 0.5x 0.3x 0.0x NA


EV / GCI NA NA 1.0x 1.0x 1.0x 1.0x


GCI (*) NA NA 789 819 830 860

Net debt / (cash) * (292) (88) (279) (260) (248) (239)



Net Debt / EBITDA -7.9x -1.9x -5.3x -10.5x -66.6x 27.2x

Net interest / EBITDA 7.3% 3.4% -4.6% -32.9% NM 82.4%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 22.8% 22.9% 23.4% 13.1% 2.3% -5.7%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 6.9% 15.4% 16.7% 5.1% -6.9% -13.9%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 6.9% 15.4% 16.7% 5.1% -6.9% -13.9%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 14.9% 0.9% 7.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




RAKC.AD

Sector

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RAKC.AD

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Premium to the sector (RHS)Emerging Markets Non-FinRAKC.AD




Sharjah Cement Co (SCID.AD)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: SCID.AD

Low High





Sharjah Cement & Industrial Development Corporatio


Key data (*)

Price (Dh) 4.50Price target (Dh) 5.90Market cap ($ m n) 575.8Average daily trading volum e ($ m n) NAFree float 30%Bloom berg code SCIDC DB

2006 2007E 2008E 2009ESales (Dh m n) 671.8 696.5 597.9 543.5EBITDA (Dh m n) 314.0 346.6 240.0 178.0EV / EBITDAR 6.0x 4.8x 6.7x 9.2xP / E 7.5x 7.1x 10.2x 14.5xDividend yield 5.2% 10.5% 9.8% 6.9%(*) m ultiples and ratios are calendarised

Reasonable upside but with limited visibility


• Following recent capacity additions, Sharjah Cement and Industrial Development Company

(SCIDC) has 1.85 mn tonnes of clinker and 2.5 mn tonnes of cement capacity. The group also

holds an investment portfolio that accounts for 40% of estimated net asset value.

• First half 2007 results reflected the buoyant industry environment with 37% yoy growth in

revenues as the group experienced the benefits of increased capacity. Margins declined as

input costs rose, a challenge likely to remain for the foreseeable future, on our estimates.

• With an estimated 40% of NAV in listed securities, company profitability and net margins will

be largely influenced by the performance of the local markets.

• On our estimates SCIDC trades at a discount to the sum of its portfolio and DCF valuation and

in fact trades at a slight discount to our valuation for its core business. However, with limited

transparency and a negative sector outlook, we believe there are better investment stories in

the UAE market. Were our outlook on cement prices to turn more positive, SCIDC would be a

preferred investment in the sector, along with RAK cement. Our price target is Dh5.90 and we

initiate coverage of SCIDC as Neutral.


Our sector-wide valuation approach involves a modified SOTP whereby we calculate the value of

the core operations of the business using a DCF. We then add back the value of the portfolios at

the last balance sheet date (June 2007). We allocate a higher WACC to those companies with

higher portfolio exposures, with a range between 10.5% and 12%.

The key inputs for our DCF calculation beyond our explicit forecast period are: a WACC of 11.25%,

growth rate in perpetuity of 3% and a terminal NOPAT margin of 25%. This calculation derives a

value for the core operations of SCIDC of Dh4.94. Portfolio value per share amounts to Dh0.97

resulting in our rounded SOTP valuation of Dh5.90.

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SCID.AD (Dh) MSCI EM Europe & Middle East




Sharjah Cement & Industrial Development Corporation: Overview Company description SCIDC is one of the oldest cement producers in the

UAE. Its primary business includes the production of

cement but it is also involved in the manufacture of

paper sacks, synthetic ropes and plastics. Following

recent capacity upgrades, SCIDC currently has total

annual clinker and cement production capacity of

1.85 mn tonnes and 2.5 mn tonnes respectively.

Similar to its peers, SCIDC holds a large investment

portfolio which accounted for c.40% of NAV in 1H07.

The company is dual-listed in both Abu Dhabi and

Kuwait.


70%

30%

Public Government of Sharjah



• The regional infrastructure boom taking place, in particular that of Dubai and Abu Dhabi, has

created a sharp increase in cement demand in the UAE. Capacity increases have lagged these


• Capacity additions and cost benefits derived from investment in new production capabilities

should position SCIDC in a relatively stronger position to withstand the pricing and oversupply

challenges facing the industry. If cement prices hold above our current forecasts in the period to

2010, we expect our price target for SCIDC to rise proportionally more than the average for the

peer group, due to efficiency improvements and the higher share of core operational value in our

SOTP than average.






• Increased competition in domestic and foreign markets is also expected to impact utilization

rates, and may impact SCIDC’s ability to shift its new capacity.

• The extent to which SCIDC can contain costs, particularly those relating to energy, will likely

dictate the group’s competitiveness and performance.

• With a material exposure to market movements, SCIDC’s earnings will be largely affected by the

performance of its investment portfolio.

Industry context

Demand within the industry to is set to remain robust but we expect excess from mid-2008. We

expect prices to gradually decline from current levels as a wave of new capacity and new entrants

result in the UAE market moving from a production deficit to excess supply.

We believe SCIDC is reasonably well positioned within the sector and trades at enough of a

discount to its price target to account for the challenging periods ahead.

100%

Domestic Sales




Sharjah Cement & Industrial Development Corporation: Overview


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Reasonably large producer within the industry and operating modern

plant following recent capacity expansions.

Significant portion of assets are tied up in a listed investment portfolio,

creating significant exposure to regional and global equity markets.


Most domestic supply is currently directed towards Dubai. Abu Dhabi,




Large-scale, industry-wide capacity increases could lead to oversupply in









Sharjah Cement & Industrial Development Corporation: Summary financials Income statement (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 567.6 671.8 696.5 597.9 543.5 521.5 542.5 564.4 -1.4%EBITDAR 380.2 314.0 346.6 240.0 178.0 148.7 163.3 178.8EBITDA 380.2 314.0 346.6 240.0 178.0 148.7 163.3 178.8

EBITDA m argin 67.0% 46.7% 49.8% 40.1% 32.7% 28.5% 30.1% 31.7%EBIT 348.0 277.9 305.7 197.2 133.5 102.6 115.4 128.9 -10.1%

EBIT m argin 61.3% 41.4% 43.9% 33.0% 24.6% 19.7% 21.3% 22.8%Net interes t expense (12.3) (15.1) (8.5) 10.2 12.4 11.3 10.7 11.2Associate incom e / other 105.1 20.8 (0.0) 0.0 0.0 (0.0) (0.0) (0.0)Profit before tax 440.8 283.7 297.2 207.3 145.9 113.9 126.1 140.0Adjus ted PBT 440.8 283.7 297.2 207.3 145.9 113.9 126.1 140.0 -9.3%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional item s (105.1) (33.3) 0.0 0.0 0.0 0.0 0.0 0.0Minority interes t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net incom e 335.7 250.4 297.2 207.3 145.9 113.9 126.1 140.0Adjus ted net incom e 440.8 283.7 297.2 207.3 145.9 113.9 126.1 140.0 -9.3%


No. of bas ic shares outs tanding (*) 392 470 470 470 470 470 470 470No. of diluted shares outs tanding (*) 392 470 470 470 470 470 470 470EPS (bas ic) 0.86 0.53 0.63 0.44 0.31 0.24 0.27 0.30 -9.3%EPS (diluted) 0.86 0.53 0.63 0.44 0.31 0.24 0.27 0.30EPS (adjus ted, bas ic) 1.13 0.60 0.63 0.44 0.31 0.24 0.27 0.30 -9.3%

Annual growth -46.4% 4.8% -30.2% -29.7% -21.9% 10.8% 11.0%EPS (adjus ted, diluted) 1.13 0.60 0.63 0.44 0.31 0.24 0.27 0.30DPS 0.23 0.23 0.47 0.44 0.31 0.24 0.27 0.30 -9.3%

Annual growth 0.0% 103.1% -7.0% -29.7% -21.9% 10.8% 11.0%(*) weighted average num b er of shares; in m illions




Sharjah Cement & Industrial Development Corporation: Summary financials Balance sheet (Dh mn, year ending Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 599 47 669 743 706 688 703 719Other current assets 383 822 383 296 275 269 278 287Total current assets 982 869 1,052 1,040 981 957 981 1,007 -0.8%Long term inves tm ents & other 84 106 106 106 106 106 106 106Property, plant and equipm ent 535 640 647 646 640 630 620 610Intangible assets 0 0 0 0 0 0 0 0Total assets 1,601 1,615 1,805 1,793 1,727 1,694 1,708 1,723 -1.0%

Trade payables 25 35 38 41 37 36 37 39Short term debt 114 129 129 129 129 129 129 129Long term debt 98 86 86 86 86 86 86 86Pens ion liabilities 12 13 13 13 13 13 13 13Other liabilities 101 136 136 136 136 136 136 136Total liabilities 350 399 402 405 401 400 401 403 -0.1%Minority interes ts 0 0 0 0 0 0 0 0Shareholders ' equity 1,251 1,216 1,403 1,388 1,326 1,294 1,307 1,321Total equity and liabilities 1,601 1,615 1,805 1,793 1,727 1,694 1,708 1,723 -1.0%

Cash flow (Dh mn, year to Dec) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 169 284 789 329 196 153 156 171 -15.1%Net interes t paid (12) (15) (9) 10 12 11 11 11Tax paid 0 0 0 0 0 0 0 0Operating cash flow 157 269 781 339 208 164 166 182 -14.4%Capex on PP&E (48) (140) (49) (42) (38) (37) (38) (40)Other inves ting cash flow (29) (55) 0 0 0 0 0 0Investing cash flow (77) (196) (49) (42) (38) (37) (38) (40) -1.4%

Operating free cash flow (*) 109 129 732 297 170 128 128 143 -16.8%Free cash flow (**) 80 73 732 297 170 128 128 143 -16.8%

Dividends paid (32) (91) (110) (223) (207) (146) (114) (126)Share buybacks / issuances 0 0 0 0 0 0 0 0Other (34) 1 0 0 0 0 0 0Financing cash flow (65) (91) (110) (223) (207) (146) (114) (126) -13.3%

Change in cash and cash equivalents (553) 622 75 (37) (18) 15 16(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Sharjah Cement & Industrial Development Corporation: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 4.0x 7.5x 7.1x 10.2x 14.5x 18.6x








P / book 1.4x 1.7x 1.5x 1.5x 1.6x 1.6x


FCF yield NA -18.3% 34.6% 14.1% 8.1% 6.0%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 5.2% 5.2% 10.5% 9.8% 6.9% 5.4%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA 58.8% 26.7% 22.3% 16.8% 13.7%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE NA 23.0% 22.7% 14.9% 10.7% 8.7%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 1.3x 1.5x 1.5x 1.5x 1.5x


GCI (*) NA 1,929 1,529 1,508 1,553 1,609

Net debt / (cash) * (387) 169 (454) (528) (491) (473)


Net Debt / Equity -0.3x 0.1x -0.3x -0.4x -0.4x -0.4x

Net Debt / EBITDA -1.0x 0.5x -1.3x -2.2x -2.8x -3.2x

Net interes t / EBITDA 3.2% 4.8% 2.5% -4.2% -7.0% -7.6%* Dh mn


EBITDA margin 67.0% 46.7% 49.8% 40.1% 32.7% 28.5%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT m argin 61.3% 41.4% 43.9% 33.0% 24.6% 19.7%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT m argin 61.3% 41.4% 43.9% 33.0% 24.6% 19.7%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 8.4% 20.9% 7.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




SCID.ADSector

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Premium to the sector (RHS)Emerging Markets Non-FinSCID.AD




Union Cement (UCC.AD)





Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: UCC.AD

Low High





Union Cement


Key data (*)

Price (Dh) 4.74Price target (Dh) 4.00Market cap ($ mn) 715.7Average daily trading volume ($ mn) NAFree float 17%Bloomberg code UCC UH


Large-scale capacity increases planned, despite declining cement prices


• Union has developed from a mid-tier producer to having the largest capacity in the UAE at

4.6 mn tonnes, and number two in terms of production. Clinker capacity increased to 3.7 mn

tonnes as part of the expansion, putting the company in control of around 80% of its clinker.

• Increasing capacity levels should partially offset the pricing declines we believe are facing the

industry as a whole and position Union as one of the more resilient performers going forward.

• First-half results reflected the buoyant industry environment, with 34% year-on-year revenue

growth and net margins of 43%. Despite efforts at cost containment, we believe it will be

difficult for Union to avoid the impact of reduced cement prices as industry capacity expands in

the coming years.

• We forecast 2006-2009 revenue CAGR of 23%, the highest in our peer group, but expect net

margins to dip into the mid-teens during the periods of oversupply before recovering to 21% in

the terminal year. With only 15% of its NAV in listed securities, Union has a far more acceptable

level of stock market exposure relative to its peers. Our target price for Union Cement is Dh4.00

and we initiate coverage on our Sell list.



the value of the core operations of the business using a DCF, and then add back the value of the

portfolio at the most recent balance sheet date (June 2007). We allocate a higher WACC to those

companies with higher portfolio exposures, with a range of 10.5%-12.0%.

The key inputs for our DCF calculation beyond our explicit forecast period are: a WACC of 11%

due to the moderate component of 15% of NAV in listed securities, growth rate in perpetuity of

3% and a terminal NOPAT margin of 22%. We calculate a fair value for Union of Dh3.70. Portfolio

value per share amounts to Dh0.34 for a rounded SOTP total of Dh4.00.

0.00.20.40.60.81.01.21.41.61.82.0

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UCC.AD (Dh) MSCI EM Europe & Middle East




Union Cement: Overview Company description Union Cement Company (UCC) was the first producer

set up in the limestone and silica-rich emirate of Ras Al

Khaimah. UCC recently completed a large scale

expansion bringing total grinding capacity of 1.3 mn

tonnes per annum up to 4.6 mn tonnes per annum

during the first half of 2007. Maximum clinker capacity

is now 3.6 mn tonnes. The new capacity makes UCC

the largest cement producer in the UAE and also

incorporates a multi-fuel burning process, allowing the

company to mitigate energy related costs. UCC also

owns a minority interest of 19% in RAK Cement Co.


41%

22%

20%

17%

Government of Ras Al Khaimah Khalid Abdullah Al Qasimi Abu Dhabi Investment Authority Public






• Investments in capacity at Union have increased clinker production to 3.7 mn tonnes and

grinding capabilities to 4.6 mn tonnes. This creates scope to capture market share in the longer

term, but due to very high investment across the industry, we believe cement prices will decline

significantly through to 2010 towards cash costs.






• Competition in domestic/foreign markets will likely dictate utilization rates, a fall-off in planned

capacity expansions and successful penetration into export markets remain risks to the upside.

• Declining fuel prices and higher-than-expected sales volumes could also sustain profitability at

higher levels for a longer period.

• With an investment portfolio representing 15% of NAV, Union Cement’s earnings will still be

impacted by the performance of its investment portfolio, albeit to a lesser extent than sector

peers. Recent market volatility and its impact on company performance remains a concern.

Industry context

Demand in the industry to is set to remain robust, but excess supply will likely occur from mid-2008.


entrants will likely result in the UAE market moving from a production deficit to excess supply. With

economies of scale we expect Union to gain market share in the longer-term, with growing sales

volumes partially offsetting price declines. Given the commoditized nature of the industry and the

challenges faced, however, we view Union as one of the more resilient players in an industry with

an unfavourable outlook.

100%

UAE Market




Union Cement: Overview


-3.5x

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-2.5x

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800900

03 04 05 06 07E 08E 09E 10E 11E 12E12.0%

17.0%

22.0%

27.0%

32.0%

37.0%



Following new capacity investment, now the largest producer in terms of

grinding capacity and second largest by clinker production.

New production capacity utilizes mixed-fuel burning systems which

generate cost savings.

Relatively low exposure to the market through its portfolio investments,

comprising 15% of NAV, provides moderate insulation from market

volatility.

Although lower relative to peers, Union still has exposure to market

movements through its listed investment portfolio.

Sells majority of cement production in the domestic market and hence is

fully exposed to UAE developments. Could also potentially be more

difficult to migrate production to export markets.






As the largest producer by capacity, Union has the greatest potential to

absorb high and sustained levels of demand and to shift excess

production into export markets.

Large scale, industry-wide capacity increases to lead to oversupply in









Union Cement: Summary financials Income statement (Dh mn, year to Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 195.2 314.5 399.3 401.8 602.1 690.9 746.2 779.8 843.4 877.3 6.2%EBITDAR 51.2 124.3 156.1 130.1 281.8 252.4 212.3 186.9 212.8 235.2EBITDA 51.2 124.3 156.1 130.1 281.8 252.4 212.3 186.9 212.8 235.2

EBITDA margin 26.2% 39.5% 39.1% 32.4% 46.8% 36.5% 28.4% 24.0% 25.2% 26.8%EBIT 38.5 110.3 142.4 120.8 226.7 189.7 146.2 117.2 139.3 157.8 -4.5%

EBIT margin 19.7% 35.1% 35.7% 30.1% 37.6% 27.5% 19.6% 15.0% 16.5% 18.0%Net interest expense 2.5 3.3 (4.4) 8.7 (5.1) (4.5) (4.8) (6.6) (7.5) (7.0)Associate income / other 13.7 38.9 394.1 55.9 0.0 (0.0) (0.0) 0.0 (0.0) (0.0)Profit before tax 54.7 152.5 532.2 185.4 221.5 185.2 141.4 110.7 131.9 150.8Adjusted PBT 54.7 152.5 532.2 185.4 221.5 185.2 141.4 110.7 131.9 150.8 -5.0%Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest (8.0) (6.9) (7.5) (6.5) (6.5) (6.5) (6.5) (6.5) (6.5) (6.5)Net income 46.7 145.7 524.7 178.8 215.0 178.7 134.9 104.1 125.3 144.3Adjusted net income 46.7 145.7 524.7 178.8 215.0 178.7 134.9 104.1 125.3 144.3 -5.2%


No. of basic shares outstanding (*) 462 462 554 554 554 554 554 554 554 554No. of diluted shares outstanding (*) 462 462 554 554 554 554 554 554 554 554EPS (basic) 0.10 0.32 0.95 0.32 0.39 0.32 0.24 0.19 0.23 0.26 -5.2%EPS (diluted) 0.10 0.32 0.95 0.32 0.39 0.32 0.24 0.19 0.23 0.26EPS (adjusted, basic) 0.10 0.32 0.95 0.32 0.39 0.32 0.24 0.19 0.23 0.26 -5.2%

Annual growth NM NM -65.9% 20.2% -16.9% -24.5% -22.8% 20.3% 15.1%EPS (adjusted, diluted) 0.10 0.32 0.95 0.32 0.39 0.32 0.24 0.19 0.23 0.26DPS 0.00 0.00 0.00 0.00 0.29 0.32 0.24 0.19 0.23 0.26 -5.2%

Annual growth NM NM NM NM 10.8% -24.5% -22.8% 20.3% 15.1%(*) weighted average number of shares; in millions




Union Cement: Summary financials Balance sheet (Dh mn, year ending Dec) 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 89 144 472 250 271 261 202 171 189 219Other current assets 217 252 186 169 263 326 365 389 418 432Total current assets 306 396 658 418 534 587 567 561 607 651 2.6%Long term investments & other 178 218 204 361 361 361 361 361 361 361Property, plant and equipment 54 45 347 738 864 850 836 821 806 790Intangible assets 0 0 0 0 0 0 0 0 0 0Total assets 538 659 1,209 1,517 1,759 1,797 1,764 1,742 1,774 1,802 0.1%

Trade payables 10 12 27 13 33 47 51 53 58 60Short term debt 0 0 0 0 0 0 0 0 0 0Long term debt 0 0 0 180 180 180 180 180 180 180Pension liabilities 15 14 14 14 14 14 14 14 14 14Other liabilities 9 13 14 22 22 22 22 22 22 22Total liabilities 33 40 55 229 249 264 267 270 274 276 1.2%Minority interests 2 2 2 2 8 15 21 28 34 41Shareholders' equity 503 618 1,152 1,287 1,502 1,519 1,476 1,445 1,466 1,485Total equity and liabilities 538 659 1,209 1,517 1,759 1,797 1,764 1,742 1,774 1,802 0.1%


CAGRCash from operations 36.0 93.6 140 133 207 204 177 165 188 224 2.3%Net interest paid 2.5 3.3 (4) 9 (5) (4) (5) (7) (7) (7)Tax paid 0.0 0.0 0 0 0 0 0 0 0 0Operating cash flow 38.5 96.9 136 142 202 199 172 158 181 217 2.1%Capex on PP&E (14.5) (4.9) (316) (401) (181) (48) (52) (55) (59) (61)Other investing cash flow 2.3 3.2 365 (50) 0 0 0 0 0 0Investing cash flow (12.2) (1.6) 50 (451) (181) (48) (52) (55) (59) (61) 6.2%

Operating free cash flow (*) 23.9 92.1 (180) (259) 22 151 120 104 122 155 0.7%Free cash flow (**) 26.2 95.3 186 (309) 22 151 120 104 122 155 0.7%

Dividends paid (31.4) (31.4) (21) (0) 0 (161) (179) (135) (104) (125)Share buybacks / issuances 0.0 0.0 0 0 0 0 0 0 0 0Other (109.1) (8.5) 80 170 0 0 0 0 0 0Financing cash flow (140.5) (39.9) 59 170 0 (161) (179) (135) (104) (125) -6.1%

Change in cash and cash equivalents 55.4 328 (223) 22 (10) (59) (31) 18 30(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Union Cement: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 5.0x 14.7x 12.2x 14.7x 19.5x 25.2x








P / book 2.3x 2.0x 1.7x 1.7x 1.8x 1.8x


FCF yield NA -19.0% 0.8% 5.8% 4.6% 3.9%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 0.0% 0.0% 6.1% 6.8% 5.1% 4.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI NA 13.0% 20.0% 15.9% 12.6% 10.6%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 59.3% 14.7% 15.4% 11.8% 9.0% 7.1%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI NA 1.9x 1.7x 1.6x 1.6x 1.5x


GCI (*) NA 2,071 2,014 2,088 2,198 2,297

Net debt / (cash) * (472) (69) (91) (81) (22) 9


Net Debt / Equity -0.4x -0.1x -0.1x -0.1x 0.0x 0.0x

Net Debt / EBITDA -3.0x -0.5x -0.3x -0.3x -0.1x 0.0x

Net interest / EBITDA 2.8% -6.7% 1.8% 1.8% 2.3% 3.5%* Dh mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 39.1% 32.4% 46.8% 36.5% 28.4% 24.0%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 35.7% 30.1% 37.6% 27.5% 19.6% 15.0%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 35.7% 30.1% 37.6% 27.5% 19.6% 15.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 79.1% 99.8% 30.0% 7.0% 7.0% 7.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




UCC.ADSector

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Sector UCC.AD

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EV/GCI / CROCI/WACC

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06 07E 08E 09E 10E-10%

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80%

Premium to the sector (RHS)Emerging Markets Non-FinUCC.AD







Turkish Cement company summaries

Adana Cimento 196

Akcansa Cimento 202

Bolu Cimento 208

Cimsa (Cimento Sanayi) 214

Mardin Cimento 220

Unye Cimento 226



Adana Cimento A (ADANA.IS)


Turkey: Construction


Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: ADANA.IS

Low High





Adana Cimento A


Key data (*)

Price (YTL) 9.70Price target (YTL) 10.5Market cap ($ mn) 831.5Average daily trading volume ($ mn) 0.48Free float 86%Bloomberg code ADANA TI

2006 2007E 2008E 2009ESales (YTL mn) 251.4 306.3 316.8 324.2EBITDA (YTL mn) 108.8 112.0 96.4 80.8EV / EBITDAR NM 0.5x 0.4x 0.7xP / E 8.9x 9.3x 10.2x 11.6xDividend yield 5.3% 5.4% 6.4% 5.6%(*) multiples and ratios are calendarised

Attractive growth profile fairly well reflected in valuation


• As the flagship company in the Oyak group, Adana benefits from a number of competitive

strengths including a popular brand, strong presence in both local and foreign markets, and

margin expansion from the introduction of slag to the production process. The company is also

expanding white cement capacity.

• Adana is the second largest producer in Turkey, with clinker and cement capacity of 2.3 mn and

4.5 mn tonnes, respectively. It is based in the eastern Mediterranean region and enjoys

proximity to a port and the lucrative Iraq and Syrian export markets.

• Following the dissolution of the Sabanci-Oyak partnership in Oysa, Adana received the

Iskenderun steel works and three ready-mix concrete terminals. Acquisition of the steel plant

should allow the introduction of slag to the grinding process, allowing a cheaper mix and

margin benefits.

• Attractive growth prospects and the flexibility of its exposure to both the domestic and foreign

market makes Adana attractive in our view. The three classes of share offer attractive yields but

are fairly valued in our view. We initiate coverage on Adana’s A, B and C classes of share as

Neutral.

Valuation: 12-month target price of TL10.50 (Adana A)

Adana has three separate classes of share, A, B and C, each with a different economic right to

equity and dividends. The respective claims on equity and dividends are: 26% and 54% for the A

share, 25% and 36% for the B share, and 49% and 10% for the C share.

The key inputs for our DCF calculation beyond our explicit forecast period are: a WACC of 12%,

growth rate in perpetuity of 3% and a terminal NOPAT margin of 17%. We calculate 12-month

price targets for Adana A shares of TL10.50, TL5.60 for Adana B shares and TL1.00 for Adana C

shares. Our preferred pick in the group is the A shares.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

22/09

/2006

10/10

/2006

26/10

/2006

13/11

/2006

29/11

/2006

15/12

/2006

02/01

/2007

18/01

/2007

05/02

/2007

21/02

/2007

09/03

/2007

27/03

/2007

12/04

/2007

30/04

/2007

16/05

/2007

01/06

/2007

19/06

/2007

05/07

/2007

23/07

/2007

08/08

/2007

24/08

/2007

350

400

450

500

550

600

ADANA.IS (YTL) MSCI EM Europe & Middle East




Adana Cimento A: Overview Company description Adana is the flagship company and largest producer in

the Oyak Cement group of companies. It is also the

second largest producer in Turkey. Adana produces

both grey clinker and cement, ready mix concrete, and,

more recently, white cement. Total grinding capacity is

currently 2.3 mn tonnes of clinker and 4.5 mn tonnes of

cement, following its production expansion last year.

Adana sells most of its cement production in the local

market but also has an export presence in Syria and

Iraq. In addition, Adana holds a 16% stake in Cimsa,

the third largest producer in Turkey.


57%

43%

Oyak Group Public



• The acquisition of the Iskenderun facility allows the introduction of slag to the production

process. Slag is added to cement at lower cost than clinker. Slag cement is popular due to its

resistance to salt water, and although the benefits are unlikely to impact capacity utilization, we

forecast a positive impact on margins. Capacity additions should also enable production of up to

400k tonnes of premium-priced white cement by the end of 2007.

• Strong demand from both the Turkish and foreign markets should underpin growth. Adana has

also shown the ability to shift production between the domestic and export markets depending

on the relative attractiveness of each.


• In response to the recent pick-up in demand for building materials, most local producers have

stepped up capacity investments and new players have entered the market. Most of this new

capacity should come on stream towards the end of this year and into 2008. We expect the

excess supply to exert downward pressure on local prices.

• Any potential fall-off in housing demand is likely to be offset by higher levels of public

expenditure, but the risk of this mitigating factor not happening remains.

• Possibility of waning demand in Iraq and higher levels of competition in the region could detract

from a lucrative component of the group’s export operations.

• Adana is currently operating at full capacity, with its recent investments only likely to come on

stream in 2008 and 2009. This creates the timing risk of missing the present opportunities in the

market as the present demand for construction materials remains high.

Industry context

Demand in Turkey is being driven by robust housing demand, with the introduction of new

mortgage laws and a number of new infrastructure projects. The cement industry is competitive

with a number of large players. Total cement production reached 43 mn tonnes in 2006, and is on

track to top 46 mn tonnes in 2007. Industry sources expect capacity to reach c.62 mn tonnes by

2009. Adana should retain its key position in the industry and also has the added ability to switch

production with relative ease between domestic and export markets.

80%

20%

Domestic Sales Export Sales




Adana Cimento A: Overview


-3.5x

-3.0x

-2.5x

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03 04 05 06 07E 08E 09E 10E 11E 12E-40.0%

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-5.0%


0

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100

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02 03 04 05 06 07E 08E 09E 10E 11E 12E4.2%

9.2%

14.2%

19.2%

24.2%

29.2%

34.2%

39.2%YTLmn (LHS) EBIT Margin (RHS)


Ability to export into Iraq and Syria at prices well above those prevailing

in the local market.

Dominant position in the eastern Mediterranean region of Turkey, where

local demand is strong and in close proximity to port and export markets.

Currently operating at maximum capacity, the time lag between the

introduction of new capacity has resulted in Adana having to turn away

new business from new European markets.


Declining interest rates in Turkey and the positive impact on housing

developments.

Higher demand for building materials stemming from higher levels of

public infrastructure spend, both domestically and in export markets.

With 16% shareholding, Adana should benefit from the solid growth

expected from Cimsa.

Increasing levels of supply should exert downward pressure on prices.

Tightening up of the export markets will likely make it more difficult to

shift production in foreign markets, particularly Iraq.

Slowdown in the housing market not being offset by higher numbers of

public developments.

Political instability and rising fuel prices.




Adana Cimento A: Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E



EBIT margin 16.0% 5.2% 17.1% 30.0% 37.7% 32.0% 26.0% 20.5% 20.0% 20.0% 20.0%Net interest expense 3.1 3.2 3.1 10.0 28.6 6.2 6.8 7.0 6.4 6.2 6.0Associate income / other 11.4 13.5 18.5 29.9 34.8 46.1 48.3 47.2 46.1 44.9 44.6Profit before tax 38.2 25.7 54.0 108.3 158.1 150.3 137.4 120.7 117.4 116.5 116.5Adjusted PBT 38.2 25.7 54.0 108.4 158.2 150.4 137.5 120.8 117.4 116.6 116.6 -4.0%Tax (9.4) (8.4) (14.6) (24.6) (24.9) (23.6) (21.6) (19.0) (18.5) (18.3) (18.3)Exceptional items (0.9) 0.2 (3.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 27.8 17.5 36.4 83.7 133.2 126.7 115.8 101.7 98.9 98.2 98.2Adjusted net income 28.8 17.3 39.4 83.8 133.3 126.7 115.9 101.8 99.0 98.3 98.3 -4.0%

Per share data (YTL) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E CAGR

No. of basic shares outstanding (*) 65.8 65.8 65.8 65.8 65.8 65.8 65.8 65.8 65.8 65.8 65.8No. of diluted shares outstanding (*) 251 251 251 251 251 251 251 251 251 251 251EPS (basic) 0.05 0.03 0.07 0.16 0.25 0.24 0.21 0.19 0.18 0.18 0.18 -4.0%EPS (diluted) 0.11 0.07 0.15 0.33 0.53 0.51 0.46 0.41 0.39 0.39 0.39EPS (adjusted, basic) 0.24 0.14 0.32 0.69 1.09 1.04 0.95 0.84 0.81 0.81 0.81 -4.0%

Annual growth -39.8% NM NM 59.1% -4.9% -8.6% -12.1% -2.8% -0.7% 0.0%EPS (adjusted, diluted) 0.11 0.07 0.16 0.33 0.53 0.51 0.46 0.41 0.39 0.39 0.39DPS 0.37 0.00 0.44 1.07 0.52 0.52 0.62 0.54 0.53 0.52 0.52 -4.0%

Annual growth -100.0% NM 143.3% -51.4% 0.4% 18.8% -12.1% -2.8% -0.7% 0.0%(*) weighted average number of shares; in millions




Adana Cimento A: Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 38 34 72 160 208 227 235 215 207 201 197Other current assets 57 55 54 40 63 68 70 74 74 75 76Total current assets 94 89 126 200 270 295 305 289 281 277 273 -2.7%Long term investments & other 76 114 158 250 240 279 320 361 400 437 475Property, plant and equipment 124 122 97 83 79 81 82 84 86 87 88Intangible assets 0 0 0 0 1 1 1 1 0 0 0Total assets 295 325 381 534 590 655 708 735 767 801 836 4.2%

Trade payables 12 13 13 13 9 11 12 12 12 12 12Short term debt 9 4 0 0 0 0 0 0 0 0 0Long term debt 5 0 0 0 0 0 0 0 0 0 0Pension liabilities 6 7 6 7 12 12 12 12 12 12 12Other liabilities 20 15 22 11 13 13 13 13 13 13 13Total liabilities 52 39 40 31 34 36 36 36 36 37 37 0.3%Minority interests 0 0 0 0 0 0 0 0 0 0 0Shareholders' equity 243 286 340 503 556 619 672 698 731 765 799Total equity and liabilities 295 325 381 534 590 655 708 735 767 801 836 4.2%

Cash flow (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash from operations 0.0 0.0 0.0 101 108 115 102 83.4 86.3 87.3 88.5 -3.6%Net interest paid 3.1 3.2 3.1 10 29 6 7 7.0 6.4 6.2 6.0Tax paid (9.4) (8.4) (14.6) (25) (25) (24) (22) (19.0) (18.5) (18.3) (18.3)Operating cash flow (6.3) (5.2) (11.5) 87 112 97 88 71.5 74.3 75.1 76.2 -3.4%Capex on PP&E 0.0 0.0 0.0 (6) (10) (15) (16) (16.2) (16.2) (16.3) (16.5)Other investing cash flow 0.0 0.0 0.0 73 13 0 0 0.0 0.0 0.0 0.0Investing cash flow 0.0 0.0 0.0 67 3 (15) (16) (16.2) (16.2) (16.3) (16.5) 1.0%

Operating free cash flow (*) (6.3) (5.2) (11.5) 80 102 82 72 55.3 58.1 58.8 59.8 -4.5%Free cash flow (**) (6.3) (5.2) (11.5) 154 115 82 72 55.3 58.1 58.8 59.8 -4.5%

Dividends paid 0.0 0.0 0.0 (26) (63) (63) (63) (75.3) (66.1) (64.3) (63.8)Share buybacks / issuances 0.0 0.0 0.0 0 0 0 0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 (0) (0) 0 0 0.0 0.0 0.0 0.0Financing cash flow 0.0 0.0 0.0 (26) (63) (63) (63) (75.3) (66.1) (64.3) (63.8) 0.2%

Change in cash and cash equivalents (4.1) 38.6 88 47 19 8 (20.0) (8.1) (5.5) (4.1)(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Adana Cimento A: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 14.1x 8.9x 9.3x 10.2x 11.6x 11.9x




EV / EBITDA lease adj'd 1.3x NM 0.5x 0.4x 0.7x 0.7x


EV / NOPAT lease adj'd 1.6x NM 0.6x 0.5x 0.8x 0.9x


P / book 4.8x 4.4x 3.9x 3.6x 3.5x 3.3x


FCF yield 19.1% 21.1% 5.8% 3.9% 1.4% 2.1%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 11.0% 5.3% 5.4% 6.4% 5.6% 5.4%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 20.1% 30.1% 22.8% 17.2% 13.0% 11.6%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 19.8% 25.2% 21.6% 17.9% 14.9% 13.8%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 0.3x 0.7x 0.9x 0.8x 0.8x 0.7x


GCI (*) 382 414 480 546 615 680

Net debt / (cash) * (160) (207) (226) (235) (215) (207)




Net interest / EBITDA -11.6% -26.3% -5.6% -7.0% -8.7% -8.1%* YTL mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 37.9% 43.3% 36.5% 30.4% 24.9% 24.5%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 30.0% 37.7% 32.0% 26.0% 20.5% 20.0%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 30.0% 37.7% 32.0% 26.0% 20.5% 20.0%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 2.7% 4.0% 5.0% 5.0% 5.0% 5.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




ADANA.IS

Sector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x


EV /

GC

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Sector

ADANA.IS

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

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EV /

GC

I

EV/GCI / CROCI/WACC

0.0x

0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

05 06 07E 08E 09E 10E-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Premium to the sector (RHS)Emerging Markets Non-FinADANA.IS




Akcansa Cimento (AKCNS.IS)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: AKCNS.IS

Low High





Akcansa Cimento


Key data (*)

Price (YTL) 9.35Price target (YTL) 10.0Market cap ($ m n) 1,465Average daily trading volum e ($ m n) 1.00Free float 21%Bloom berg code AKCNS TI

2006 2007E 2008E 2009ESales (YTL m n) 582.7 623.5 742.6 816.9EBITDA (YTL m n) 216.4 183.6 184.6 200.1EV / EBITDAR 6.6x 8.8x 8.7x 7.9xP / E 12.2x 14.4x 14.3x 13.0xDividend yield 0.0% 5.2% 5.3% 5.8%(*) m ultiples and ratios are calendarised

Leading market position, but fully valued


• Akcansa is the largest cement producer in Turkey and is continuing to expand its capacity and

geographical reach. It enjoys a strong position in the Aegean and Marmara regions, the latter

showing the highest demand growth in the Turkish market in 1H2007.

• Akcansa recently acquired Ladik for US$158 mn, adding additional capacity of 0.6 mn tonnes of

clinker and 1.2 mn tonnes of cement.

• Ladik brings a number of benefits, including access to the more lucrative North Eastern/Black

Sea region of the country, where it holds 13% market share. We expect the Black Sea area to be

one of the fastest growing industrial regions in Turkey, with a number of concrete-intensive

infrastructure projects underway, such as motorways and dams.

• The company is currently expanding its existing capacity at the Canakkale plant, which should

increase total clinker capacity by 1.9 mn tonnes by year end.

• Following completion of the Canakkale upgrades, total group capacity should reach 6.2 mn

tonnes of clinker and 9.6 mn tonnes of cement. Canakkale should also aid the group in growing

its export presence, particularly into the lucrative Russian market.

• With its dominant domestic market position and a growing presence in export markets, we

expect Akcansa to continue to perform well. Following a surge in the share price in recent

months, however, we consider it fairly valued and initiate as Neutral, with a 12-month target

price of TL10.00.

Valuation: 12-month target price of TL10.00

Our valuation approach is based solely on a DCF analysis. The key inputs for our DCF calculation

beyond our explicit forecast period are: a WACC of 11%, growth rate in perpetuity of 3% and a

terminal NOPAT margin of 16%.

0.01.02.03.04.05.06.07.08.09.0

22/09/2006

09/10/2006

24/10/2006

08/11/200623/11/200

608/12/200625/12/200

609/01

/2007

24/01/2007

08/02/20

0723/02

/2007

12/03/200

727/03

/2007

11/04 /200726/04

/2007

11/05 /2007

28/05 /2007

12/06 /2007

27/06 /2007

12/07/2007

27/07 /2007

13/08/2007

28/08/2007

350

400

450

500

550

600

AKCNS.IS (YTL) MSCI EM Europe & Middle East




Akcansa Cimento: Overview Company description Akcansa is a joint venture between Sabanci Holding

and CBR International, and is currently the largest

producer of clinker, cement and ready-mix concrete

(RMC) in Turkey. Annual capacity is currently c.6 mn

tonnes but should exceed 9 mn tonnes in 2008. The

company produces most of its cement for the local

market, with the remainder being exported to Italy,

Spain, France and North America. Akcansa operates in

the Marmara and Aegean regions, where it runs three

cement terminals. The Betonsa brand, acquired in

1998, operates 20 RMC plants in the region.


39%

40%

21%

Sabanci Holdings Heidelberg Cement Other



• Cement demand in Turkey is strong, driven by robust housing demand after the introduction of

new mortgage laws, and a number of large new infrastructure projects.

• Large-scale capacity additions create room for significant growth, with production capabilities

increasing to 6.2 mn tonnes of clinker and 9.6 mn tonnes of cement by the end of next year. We

do not expect this capacity to be fully utilized from the outset, but see potential for 15%-20% pa

growth in sales volumes over the next year or two. Strong housing demand and large-scale

investment in infrastructure projects should continue to drive demand for cement.

• The expansion at Canakkale provides extra capacity in the higher-growth Black Sea region of

Turkey, which enjoys the highest selling prices domestically. The factory is also well positioned

for exports to surrounding countries such as Russia, where demand and prices are high.


In response to the recent pick-up in demand for building materials, most of the local producers have

stepped up capacity investments with new players entering the market as well. We expect most

new capacity to come on stream towards the end of this year and into 2008. We expect excess

supply to exert downward pressure on local prices.

The potential fall-off in housing demand; potentially offset by higher levels of public expenditure.

Rising fuel and energy costs and the need to import clinker to meet capacity have had a negative

impact on margins, and we expect them to remain a challenge to Akcansa.

Industry context

The Turkish cement industry is competitive, with a number of large players. Total production

reached 43 mn tonnes in 2006, and we expect c.7% CAGR through 2010. We forecast an additional

10 mn tonnes of clinker capacity by 2008 and a total reaching c.62 mn tonnes by 2009. We expect

prices to decline into 2008 as supply-side pressures mount, but demand to catch up from 2009.

Akcansa is the largest producer in Turkey in terms of both clinker and cement capacity. Being

predominantly domestically focused, Akcansa is sensitive to domestic market prices, with exports

only gradually becoming material in the coming periods. We expect export contributions to account

for c.11% of revenues by 2010, diversifying income streams.

92%

8%

Domestic Sales Foreign Sales




Akcansa Cimento: Overview


-2.0x-1.8x-1.6x-1.4x-1.2x-1.0x-0.8x-0.6x-0.4x-0.2x0.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%


0

100

200

300

400

500

600

700

800

02 03 04 05 06 07E 08E 09E 10E 11E 12E4.3%

9.3%

14.3%

19.3%

24.3%

29.3%

34.3%YTLmn (LHS) EBIT Margin (RHS)


The recent acquisition of Ladik and upgrades at Canakkale increase

capacity and also open up new export markets and growth opportunities.

Akcansa is currently the largest single producer in Turkey in terms of

both clinker and cement capacity, and will likely remain so for the

foreseeable future.

Bias towards the local market makes Akcansa more exposed to domestic

prices and less sensitive to strong demand in regional export markets.

Exposed to devaluation of the Lira through the dollar-denominated loan

secured for the Ladik acquisition.



developments of new mortgage laws.



Increasing levels of supply will likely exert downward pressure on prices.

Increased competition in export markets, particularly Iraq and Syria.

Slowdown in the housing market not offset by higher public

infrastructure spend.

Political tension and rising fuel prices.




Akcansa Cimento: Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E


EBITDA m argin 19.5% 16.1% 30.1% 33.3% 37.1% 29.5% 24.9% 24.5% 24.6% 24.8% 24.9%EBIT 27.6 17.2 77.4 104.5 180.0 143.4 142.6 156.8 158.8 160.7 162.7 3.4%

EBIT m argin 9.2% 5.3% 20.8% 25.0% 30.9% 23.0% 19.2% 19.2% 19.2% 19.2% 19.2%Net interes t expense 0.0 0.0 0.0 14.6 14.3 4.1 6.3 6.6 7.5 8.7 10.0Associate incom e / other 1.1 10.6 0.6 24.3 (20.8) 0.0 (0.0) (0.0) (0.0) 0.0 (0.0)Profit before tax 28.7 27.8 77.9 143.5 173.5 147.5 148.9 163.5 166.3 169.4 172.7Adjus ted PBT 28.7 27.8 77.9 143.5 173.5 147.5 148.9 163.5 166.3 169.4 172.7 3.8%Tax (5.5) 13.6 (11.6) (27.6) (26.2) (22.3) (22.5) (24.7) (25.2) (25.6) (26.1)Exceptional item s 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interes t (0.8) (0.7) (3.0) (2.4) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)Net incom e 22.5 40.7 63.3 113.6 146.5 124.4 125.6 137.9 140.4 143.0 145.8Adjus ted net incom e 22.5 40.7 63.3 113.6 146.5 124.4 125.6 137.9 140.4 143.0 145.8 3.8%


No. of bas ic shares outs tanding (*) 191 191 191 191 191 191 191 191 191 191 191No. of diluted shares outs tanding (*) 191 191 191 191 191 191 191 191 191 191 191EPS (bas ic) 0.12 0.21 0.33 0.59 0.77 0.65 0.66 0.72 0.73 0.75 0.76 3.8%EPS (diluted) 0.12 0.21 0.33 0.59 0.77 0.65 0.66 0.72 0.73 0.75 0.76EPS (adjus ted, bas ic) 0.12 0.21 0.33 0.59 0.77 0.65 0.66 0.72 0.73 0.75 0.76 3.8%

Annual growth 81.0% 55.6% 79.3% 29.0% -15.1% 0.9% 9.9% 1.8% 1.9% 1.9%EPS (adjus ted, diluted) 0.12 0.21 0.33 0.59 0.77 0.65 0.66 0.72 0.73 0.75 0.76DPS 0.09 0.10 0.27 0.46 0.00 0.49 0.49 0.54 0.55 0.56 0.57 3.8%

Annual growth 21.2% 161.7% 68.5% -100.0% NM 0.9% 9.9% 1.8% 1.9% 1.9%(*) weighted average num b er of shares; in m illions




Akcansa Cimento: Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 24 51 103 148 148 229 246 285 331 379 429Other current assets 87 92 103 121 159 192 232 255 259 262 265Total current assets 111 143 206 269 307 421 479 540 589 641 694 9.8%Long term inves tm ents & other 90 120 132 193 167 167 167 167 167 167 167Property, plant and equipm ent 367 397 381 381 439 461 456 454 450 446 439Intangible assets 12 14 14 14 15 15 15 15 15 15 15Total assets 581 674 732 856 928 1,065 1,117 1,177 1,222 1,269 1,316 4.2%

Trade payables 19 26 30 28 60 65 77 85 86 87 88Short term debt 14 12 9 7 2 9 16 23 30 37 44Long term debt 2 2 1 1 4 4 4 4 4 4 4Pens ion liabilities 70 57 48 48 32 32 32 32 32 32 32Other liabilities 4 4 16 22 28 28 28 28 28 28 28Total liabilities 109 101 105 107 127 138 157 172 180 188 196 5.7%Minority interes ts 5 6 9 11 12 13 14 14 15 16 17Shareholders ' equity 467 567 619 738 790 914 946 990 1,027 1,065 1,103Total equity and liabilities 581 674 732 856 928 1,065 1,117 1,177 1,222 1,269 1,316 4.2%


CAGRCash from operations 53.0 50.4 108 116 194 154 157 185 201 205 209 7.5%Net interes t paid 0.0 0.0 0 15 14 4 6 7 8 9 10Tax paid (5.5) 13.6 (12) (28) (26) (22) (23) (25) (25) (26) (26)Operating cash flow 47.6 63.9 96 103 182 136 141 166 184 188 193 8.2%Capex on PP&E (20.7) (13.2) (18) (34) (89) (62) (37) (41) (41) (42) (42)Other inves ting cash flow (9.4) (19.1) (36) 84 4 0 0 0 0 0 0Investing cash flow (30.1) (32.3) (54) 50 (86) (62) (37) (41) (41) (42) (42) 3.4%

Operating free cash flow (*) 26.9 50.7 78 69 93 74 103 126 143 146 151 9.8%Free cash flow (**) 17.5 31.6 42 153 96 74 103 126 143 146 151 9.8%

Dividends paid (3.7) (18.9) (21) (52) (90) 0 (93) (94) (103) (105) (107)Share buybacks / issuances 0.0 0.0 0 0 0 0 0 0 0 0 0Other (3.4) (1.3) (2) (2) (7) 7 7 7 7 7 7Financing cash flow (7.1) (20.2) (23) (54) (96) 7 (86) (87) (96) (98) (100) 3.8%

Change in cash and cash equivalents 27.5 52 45 0 81 17 38 46 48 50(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Akcansa Cimento: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 15.8x 12.2x 14.4x 14.3x 13.0x 12.8x








P / book 2.4x 2.3x 2.0x 1.9x 1.8x 1.7x


FCF yield 10.9% 9.2% 4.1% 5.8% 7.0% 8.0%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 4.9% 0.0% 5.2% 5.3% 5.8% 5.9%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 14.9% 21.2% 17.8% 16.5% 16.8% 16.4%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 16.7% 19.2% 14.6% 13.5% 14.2% 13.9%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 1.1x 1.7x 1.7x 1.6x 1.5x 1.4x


GCI (*) 1,004 1,153 1,273 1,359 1,447 1,519

Net debt / (cash) * (140) (142) (216) (226) (257) (296)




Net interes t / EBITDA -10.5% -6.6% -2.2% -3.4% -3.3% -3.7%* YTL mn


EBITDA margin 33.3% 37.1% 29.5% 24.9% 24.5% 24.6%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT m argin 25.0% 30.9% 23.0% 19.2% 19.2% 19.2%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT m argin 25.0% 30.9% 23.0% 19.2% 19.2% 19.2%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 8.1% 15.3% 10.0% 5.0% 5.0% 5.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




AKCNS.ISSector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x


EV /

GC

I


Sector AKCNS.IS

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EV /

GC

I

EV/GCI / CROCI/WACC

0.0x

0.2x

0.4x

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0.8x

1.0x

1.2x

1.4x

03 04 05 06 07E 08E 09E 10E-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Premium to the sector (RHS)Emerging Markets Non-FinAKCNS.IS




Bolu Cimento (BOLUC.IS)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: BOLUC.IS

Low High





Bolu Cimento


Key data (*)

Price (YTL) 2.62Price target (YTL) 3.70Market cap ($ mn) 275.6Average daily trading volume ($ mn) 0.25Free float 51%Bloomberg code BOLUC TI

2006 2007E 2008E 2009ESales (YTL mn) 157.8 164.4 184.5 191.9EBITDA (YTL mn) 62.2 53.2 55.0 53.4EV / EBITDAR 4.7x 5.0x 4.8x 4.9xP / E 4.7x 6.9x 7.4x 7.7xDividend yield 17.4% 11.9% 11.1% 10.7%(*) multiples and ratios are calendarised

Domestic player offering attractive yield


• Bolu Cimento is the second largest producer in the Oyak Cement Group, but unlike its peers

produces all of its cement for the domestic market. This dependency on conditions in Turkey

exposes the company to concentration risk and we expect a softening of domestic prices as

large capacity increases come on stream over the course of the next few years.

• Bolu has been the cement producer of choice to a number of large-scale projects and benefits

from its proximity to Turkey’s two major cities, Ankara and Istanbul.

• We forecast domestic sales growth to reach 10% this year, with net margins being maintained

above 20% until 2010.

• Unlike many of its peers, Bolu is currently operating at under two-thirds capacity, thereby

offering growth potential with minimal required investment.

• The acquisition of Deniz Cement, a grinding facility near the Erdemir Steal works is almost

complete. Construction of a new facility inside Erdemir has commenced, and upon completion

in 2009 should add an extra 200,000 tonnes to production capabilities. The new plant will also

allow the introduction of slag to the process, bringing cost and production efficiencies.

• Bolu offers the highest dividend yield in our coverage group with 2008 and 2009 yields of

11.1% and 10.7% respectively. Despite the attractive prospects, we consider Bolu to be fairly

valued and initiate coverage as Neutral.



beyond the explicit forecast period are: a WACC of 11%, growth rate in perpetuity of 3% and a

terminal NOPAT margin of 13%.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

22/09

/2006

10/10

/2006

26/10

/2006

13/11

/2006

29/11

/2006

15/12

/2006

02/01

/2007

18/01

/2007

05/02

/2007

21/02

/2007

09/03

/2007

27/03

/2007

12/04

/2007

30/04

/2007

16/05

/2007

01/06

/2007

19/06

/2007

05/07

/2007

23/07

/2007

08/08

/2007

24/08

/2007

350

400

450

500

550

600

BOLUC.IS (YTL) MSCI EM Europe & Middle East




Bolu Cimento: Overview Company description Bolu Cimento is the smallest of the Oyak group by

market cap, but second behind Adana in terms of

cement capacity. Following recent kiln rehabilitations,

Bolu now has a total annual production capacity of

1.5 mn tonnes of clinker and 3 mn tonnes of cement.

The company supplies all of its capacity to the local

market and also produces ready mix concrete. The

company has a grinding facility in Ankara, and packing

facilities in both Istanbul and Ankara.


57%

43%

Oyak Group Public



• New capacity of 3 mn tonnes generates the potential for a further 50% growth in production

volumes from 2008 levels, depending on local demand.

• The Turkish housing market has been invigorated by the passing of the new mortgage law and

large-scale infrastructure projects should continue to drive domestic cement demand for the next

two to three years.


• In response to the recent pick-up in demand for building materials, most local producers have

stepped up capacity investments and new players are entering the market. Most of this new

capacity should come on stream towards the end of this year and into 2008. We expect the

supply to exert downward pressure on local prices.

• The potential fall-off in housing demand is likely to be offset by higher levels of public

expenditure.

• Bolu’s sole provision of its product to the local market creates concentration risk. A slowdown in

domestic demand would facilitate the need to move into export markets. This would be difficult

in terms of gaining market share and would also add to the cost base, given the location of Bolu’s

facilities.

Industry context


reached 43 mn tonnes in 2006, and we expect c.7% CAGR through 2010. We forecast an additional


prices to decline into 2008 as supply-side pressures mount, but demand to catch up from 2009.

With no exposure to export markets, and unutilized capacity, Bolu is the most sensitive company in

our peer group to the Turkish economy and the infrastructure and housing developments taking

place.

100%

Domestic Sales




Bolu Cimento: Overview


-4.0x

-3.5x

-3.0x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%


0

50

100

150

200

02 03 04 05 06 07E 08E 09E 10E 11E 12E6.3%

11.3%

16.3%

21.3%

26.3%

31.3%

36.3%

YTLmn (LHS) EBIT Margin (RHS)


Recent capacity additions create significant room for growth, with 2006

sales volumes below two-thirds of total capacity.

Strong proximity to the major cities of Istanbul and Ankara.

With no export presence, Bolu is entirely dependent on the performance

of the local market. Bias towards the local market does create an

opportunity cost against the higher selling prices prevalent in export

markets.

Currently operating at maximum capacity may forego the opportunity of

the strong growth in the domestic market.



developments.


public infrastructure spend.









Bolu Cimento: Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E



EBIT margin 24.8% 7.9% 20.3% 28.1% 33.7% 26.7% 24.7% 22.8% 21.0% 19.3% 17.7%Net interest expense 4.3 14.1 14.2 8.3 7.2 2.6 0.2 0.2 0.3 0.4 0.5Associate income / other 4.4 (7.8) (10.1) 6.6 28.5 14.3 10.7 10.7 10.7 10.7 10.7Profit before tax 32.2 15.3 28.4 50.0 88.9 60.8 56.5 54.7 51.7 48.9 46.1Adjusted PBT 32.2 15.3 28.4 50.1 89.1 60.9 56.6 54.8 51.8 49.0 46.3 -4.9%Tax (10.6) (8.9) (11.5) (12.0) (17.8) (12.2) (11.3) (10.9) (10.4) (9.8) (9.2)Exceptional items (0.2) 1.1 7.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 21.4 7.5 24.1 38.0 71.1 48.6 45.2 43.7 41.3 39.1 36.9Adjusted net income 21.6 6.4 17.0 38.1 71.2 48.7 45.3 43.8 41.5 39.2 37.0 -4.9%


No. of basic shares outstanding (*) 129 129 129 129 129 129 129 129 129 129 129No. of diluted shares outstanding (*) 129 129 129 129 129 129 129 129 129 129 129EPS (basic) 0.17 0.06 0.19 0.30 0.55 0.38 0.35 0.34 0.32 0.30 0.29 -4.9%EPS (diluted) 0.17 0.06 0.19 0.30 0.55 0.38 0.35 0.34 0.32 0.30 0.29EPS (adjusted, basic) 0.17 0.05 0.13 0.30 0.55 0.38 0.35 0.34 0.32 0.30 0.29 -4.9%

Annual growth -70.4% NM NM 87.1% -31.6% -6.9% -3.3% -5.4% -5.5% -5.5%EPS (adjusted, diluted) 0.17 0.05 0.13 0.30 0.55 0.38 0.35 0.34 0.32 0.30 0.29DPS 0.14 0.00 0.16 0.25 0.46 0.31 0.29 0.28 0.26 0.25 0.24 -4.9%

Annual growth -100.0% NM 60.4% 81.9% -31.7% -7.0% -3.3% -5.4% -5.5% -5.6%(*) weighted average number of shares; in millions




Bolu Cimento: Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 40 35 51 51 87 125 123 127 131 135 139Other current assets 45 46 38 47 59 62 71 75 76 78 79Total current assets 85 81 89 98 146 188 194 201 207 213 218 2.9%Long term investments & other 8 9 17 23 8 8 8 8 8 8 8Property, plant and equipment 78 79 68 70 78 77 77 77 77 77 76Intangible assets 0 0 0 0 0 0 0 0 0 0 0Total assets 171 170 174 191 233 274 280 287 292 297 302 1.9%

Trade payables 12 12 7 7 9 9 10 11 11 11 11Short term debt 3 3 1 2 1 1 1 1 1 1 1Long term debt 4 1 0 0 0 50 50 50 50 50 50Pension liabilities 3 5 3 2 2 2 2 2 2 2 2Other liabilities 22 17 7 3 4 4 4 4 4 4 4Total liabilities 43 38 18 13 16 66 67 68 68 68 68 0.3%Minority interests 0 0 0 0 0 0 0 0 0 0 0Shareholders' equity 128 132 156 178 217 207 212 219 224 229 234Total equity and liabilities 171 170 174 191 233 274 280 287 292 297 302 1.9%


CAGRCash from operations 0.0 0.0 0.0 37.5 66.9 64.8 58.4 60.9 59.9 57.3 54.9 -1.5%Net interest paid 4.3 14.1 14.2 8.3 7.2 2.6 0.2 0.2 0.3 0.4 0.5Tax paid (10.6) (8.9) (11.5) (12.0) (17.8) (12.2) (11.3) (10.9) (10.4) (9.8) (9.2)Operating cash flow (6.4) 5.2 2.7 33.9 56.3 55.2 47.3 50.1 49.8 47.9 46.2 -0.6%Capex on PP&E 0.0 0.0 0.0 (12.0) (17.0) (8.2) (9.2) (9.6) (9.7) (9.8) (9.9)Other investing cash flow 0.0 0.0 0.0 14.4 2.7 0.0 0.0 0.0 0.0 0.0 0.0Investing cash flow 0.0 0.0 0.0 2.5 (14.3) (8.2) (9.2) (9.6) (9.7) (9.8) (9.9) 1.8%

Operating free cash flow (*) (6.4) 5.2 2.7 21.9 39.3 47.0 38.1 40.5 40.1 38.1 36.3 -1.2%Free cash flow (**) (6.4) 5.2 2.7 36.3 41.9 47.0 38.1 40.5 40.1 38.1 36.3 -1.2%

Dividends paid 0.0 0.0 0.0 (20.1) (32.2) (58.6) (40.0) (37.2) (36.0) (34.1) (32.2)Share buybacks / issuances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 (3.2) 0.0 50.0 0.0 0.0 0.0 0.0 0.0Financing cash flow 0.0 0.0 0.0 (23.2) (32.2) (8.6) (40.0) (37.2) (36.0) (34.1) (32.2) -5.3%

Change in cash and cash equivalents (5.5) 16.3 (0.5) 36.3 38.4 (2.0) 3.2 4.1 4.1 4.1(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Bolu Cimento: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 8.8x 4.7x 6.9x 7.4x 7.7x 8.1x








P / book 1.9x 1.5x 1.6x 1.6x 1.5x 1.5x


FCF yield 10.2% 13.1% 10.6% 8.8% 9.5% 9.4%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 9.6% 17.4% 11.9% 11.1% 10.7% 10.1%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 30.0% 41.1% 35.5% 31.8% 28.6% 25.8%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 22.7% 35.9% 22.9% 21.5% 20.3% 18.7%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 1.4x 1.9x 1.6x 1.5x 1.4x 1.3x


GCI (*) 158 179 194 216 235 252

Net debt / (cash) * (49) (86) (74) (72) (75) (79)




Net interest / EBITDA -18.8% -11.6% -4.8% -0.4% -0.3% -0.5%* YTL mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 35.6% 39.4% 32.4% 29.8% 27.8% 26.1%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 28.1% 33.7% 26.7% 24.7% 22.8% 21.0%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 28.2% 33.8% 26.8% 24.8% 22.9% 21.1%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 9.6% 10.8% 5.0% 5.0% 5.0% 5.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




BOLUC.ISSector

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x


EV /

GC

I


Sector BOLUC.IS

0.0x

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EV /

GC

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EV/GCI / CROCI/WACC

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0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x

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0.9x

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05 06 07E 08E 09E 10E-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Premium to the sector (RHS)Emerging Markets Non-FinBOLUC.IS




Cimsa (Cimento Sanayi) (CIMSA.IS)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: CIMSA.IS

Low High





Cimsa (Cimento Sanayi)


Key data (*)

Price (YTL) 10.0Price target (YTL) 10.7Market cap ($ mn) 992.5Average daily trading volume ($ mn) 1.65Free float 28%Bloomberg code CIMSA TI


Appealing growth prospects but fully reflected in valuation


• Cimsa is Turkey’s third largest cement producer and the major producer in the Central

Anatolian and Mediterranean regions, where we expect demand to remain strong.

• Following the dissolution of the Sabanci-Oyak partnership in Oysa, Cimsa merged with Oysa in

May 2007. The deal resulted in an additional 400k tonnes of clinker and 850k tonnes of cement

capacity. As part of the split, Sabanci (Cimsa’s parent) acquired the Nigde plant and four ready-

mix concrete terminals. Oysa is currently 41% consolidated.

• We forecast full consolidation of Oysa by year-end will lead to a slight dilution in margins in the

near-term. However, this should be offset by higher growth beyond 2008.

• Cimsa benefits from its presence in export markets, particularly Iraq and Syria, where prices

are higher. Forecast capacity expansion should drive growth in both domestic and foreign

markets over the next couple of years. Expansion is also underway in the lucrative Russian

market.

• Cimsa expects to fully utilize its 1.1 mn tonnes of white cement assets this year. A growing

proportion of white cement exports are also destined for Russia where the company expects

sales to reach 150k tonnes in 2008 and over 200k tonnes thereafter and where prices are

currently c.US$95/ tonne. We forecast grey clinker capacity to reach 4.2 mn tonnes by 2008.

• Cimsa’s attractiveness lies in its resilience to a pricing downturn in the domestic market, given

its exposure to exports and white cement. Cimsa trades at moderate multiples and offers a

2008E dividend yield of 8%. However, we find better value elsewhere in our coverage universe

and initiate coverage with a Neutral rating and a 12-month price target of TL10.7.


Our valuation is based solely on a DCF analysis. The key inputs beyond our explicit forecast

period are: a WACC of 11%, growth rate in perpetuity of 3% and a terminal NOPAT margin of 17%.

0.01.02.0

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/2007

24/08

/2007

350

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500

550

600

CIMSA.IS (YTL) MSCI EM Europe & Middle East




Cimsa (Cimento Sanayi): Overview Company description Cimsa is a Turkish manufacturer of ready mix concrete

and cement. The company operates 23 plants

throughout the country and has total clinker production

capacity of 3.6 mn tonnes and 4.4 mn tonnes of

grinding capacity. In May Cimsa merged with the Oysa

cement group, with the new entity retaining the Cimsa

name. The merger resulted from the dissolution of the

Sabanci-Oyak partnership that had previously formed

Oysa cement. Cimsa has a strong presence in both the

domestic and export markets, deriving 23% of

revenues from foreign markets in 2006.


39%

28%

16%

10%7%

Sabanci Holdings Other Adana Cimento

Akcansa Cimento Akbank Tekaut



• Cimsa’s Clinker capacity is set to increase from 3.6 mn tonnes to 5.3 mn tonnes by 2009. We

believe that strong market leadership in white cement will also generate growth for the company.

• The Turkish housing market has been invigorated with the passing of the new mortgage law and

large-scale infrastructure projects should contribute to strong domestic cement demand in the

coming years. High levels of demand in Iraq and Syria are also key to growth.

• The growth focus in the domestic market is centered on acquiring aggregate assets and

increasing ready-mix concrete capacity. We believe the company is likely to seek organic cement

growth abroad in regions such as North Africa and Russia.


• Industry-wide capacity increases are expected to come on stream towards the end of this year

and into 2008, exerting downward pressure on prices. The potential fall off in housing demand is

likely to be offset by higher levels of public expenditure.

• Demand waning in key export markets such as Iraq, Syria and Russia as well as stronger

competition as local production in these markets develops.

• Rising input costs, notably transportation and petrocoke, have put margins under pressure. This

is likely to remain a risk to the extent that Cimsa can utilize cheaper alternative sources of fuel

and generate other cost efficiencies.

Industry context

The Turkish cement industry is competitive with a number of large players. Total production

reached 43m tonnes in 2006 and we forecast a c.7% CAGR through 2010. We forecast an additional

10 mn tonnes of clinker capacity by 2008 and a total reaching c.62 mn tons by 2009. We expect

prices to decline into 2008 as supply-side pressures mount but for demand to catch up from 2009.

Since Cimsa is a major white cement producer and commands c.20% in the rapidly growing

Mediterranean and Central Anatolia regions, we believe the company may be more insulated than

many of its peers from price declines. The group controls c.7% of the overall Turkish market and is

the world’s third largest producer of white cement with 5% of the global market.

64%

22%

14%

Domestic Sales Foreign Sales Discounts




Cimsa (Cimento Sanayi): Overview


-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

03 04 05 06 07E 08E 09E 10E 11E 12E-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%


0

100

200

300

400

500

02 03 04 05 06 07E 08E 09E 10E 11E 12E13.0%

18.0%

23.0%

28.0%

33.0%

38.0%



Significant exposure to more lucrative export markets and market

leadership in premium-priced white cement.

Major player in the Central Anatolian and Mediterranean regions of

Turkey where local demand remains robust.

Need to generate cheaper methods of fuel burning in order to sustain

margins.

Exposed to sharp devaluation of the Turkish lira through the dollar-

denominated loan secured for the Eskensihir acquisition.


Declining interest rates in Turkey, new mortgage law and the positive

impact on housing developments driving growth.







Political tension and rising input costs, particularly fuel.




Cimsa (Cimento Sanayi): Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E



EBIT margin 20.1% 16.3% 26.9% 29.7% 37.7% 33.0% 29.0% 25.4% 22.2% 20.0% 20.0%Net interest expense 7.8 20.8 (0.6) (1.0) (25.3) (8.3) (7.1) (6.2) (5.4) (4.6) (3.8)Associate income / other (49.9) 5.6 13.4 19.5 (2.5) 0.0 0.0 0.0 0.0 (0.0) (0.0)Profit before tax 7.9 71.2 92.2 125.0 163.4 178.3 154.7 134.4 116.6 106.3 108.0Adjusted PBT 7.9 71.2 92.2 125.0 163.4 178.3 154.7 134.4 116.6 106.3 108.0 -8.6%Tax (21.6) (13.6) (27.2) (28.2) (27.3) (29.7) (25.8) (22.4) (19.5) (17.7) (18.0)Exceptional items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income (13.8) 57.7 65.1 96.8 136.1 148.5 128.9 112.0 97.2 88.6 89.9Adjusted net income (13.8) 57.7 65.1 96.8 136.1 148.5 128.9 112.0 97.2 88.6 89.9 -8.6%


No. of basic shares outstanding (*) 121 121 121 121 121 121 121 121 121 121 121No. of diluted shares outstanding (*) 121 121 121 121 121 121 121 121 121 121 121EPS (basic) (0.11) 0.48 0.54 0.80 1.12 1.22 1.06 0.92 0.80 0.73 0.74 -8.6%EPS (diluted) (0.11) 0.48 0.54 0.80 1.12 1.22 1.06 0.92 0.80 0.73 0.74EPS (adjusted, basic) (0.11) 0.48 0.54 0.80 1.12 1.22 1.06 0.92 0.80 0.73 0.74 -8.6%

Annual growth NM 12.8% 48.8% 40.5% 9.1% -13.2% -13.1% -13.2% -8.8% 1.5%EPS (adjusted, diluted) (0.11) 0.48 0.54 0.80 1.12 1.22 1.06 0.92 0.80 0.73 0.74DPS 0.27 0.21 0.39 0.37 0.87 0.92 0.80 0.69 0.60 0.55 0.56 -8.6%

Annual growth -22.7% 85.8% -5.1% 135.1% 5.6% -13.2% -13.1% -13.2% -8.9% 1.5%(*) weighted average number of shares; in millions




Cimsa (Cimento Sanayi): Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 52 66 73 35 54 95 123 150 175 202 240Other current assets 65 74 90 110 154 173 175 177 180 184 185Total current assets 117 140 163 145 208 267 298 327 355 386 425 9.3%Long term investments & other 71 178 200 405 396 396 396 396 396 396 396Property, plant and equipment 210 207 216 319 350 337 323 309 294 279 264Intangible assets 0 0 0 23 22 22 22 22 22 22 22Total assets 398 525 580 892 975 1,022 1,039 1,054 1,067 1,083 1,106 1.6%

Trade payables 11 14 15 21 28 31 31 30 30 30 31Short term debt 12 1 3 46 74 74 74 74 74 74 74Long term debt 0 5 0 163 110 110 110 110 110 110 110Pension liabilities 38 28 25 29 24 24 24 24 24 24 24Other liabilities 9 16 20 18 37 37 37 37 37 37 37Total liabilities 70 64 64 276 273 276 275 275 275 275 276 0.0%Minority interests 0 0 0 0 0 0 0 0 0 0 0Shareholders' equity 328 461 516 616 703 746 763 779 792 807 831Total equity and liabilities 398 525 580 892 975 1,022 1,039 1,054 1,067 1,083 1,106 1.6%


CAGRCash from operations 83.4 69.6 107 136 239 213 201 180 161 150 154 -6.4%Net interest paid 7.8 20.8 (1) (1) (25) (8) (7) (6) (5) (5) (4)Tax paid (21.6) (13.6) (27) (28) (27) (30) (26) (22) (19) (18) (18)Operating cash flow 69.6 76.8 79 107 186 175 168 151 137 128 132 -5.8%Capex on PP&E (6.6) (11.3) (44) (67) (73) (28) (28) (28) (28) (28) (28)Other investing cash flow (16.7) (16.6) (8) (176) 1 0 0 0 0 0 0Investing cash flow (23.3) (27.9) (52) (242) (72) (28) (28) (28) (28) (28) (28) 0.0%

Operating free cash flow (*) 63.0 65.5 35 41 114 147 140 123 109 100 104 -7.1%Free cash flow (**) 46.3 48.9 27 (135) 114 147 140 123 109 100 104 -7.1%

Dividends paid (29.1) (37.5) (27) (47) (45) (106) (111) (97) (84) (73) (66)Share buybacks / issuances 0.0 0.0 0 0 0 0 0 0 0 0 0Other (17.8) (3.9) (1) 204 (51) 0 0 0 0 0 0Financing cash flow (46.9) (41.3) (28) 157 (96) (106) (111) (97) (84) (73) (66) -12.1%

Change in cash and cash equivalents 14.5 7 (38) 18 41 29 27 25 27 38(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Cimsa (Cimento Sanayi): Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 12.5x 8.9x 8.2x 9.4x 10.8x 12.5x








P / book 2.0x 1.7x 1.6x 1.6x 1.6x 1.5x


FCF yield -42.4% 8.8% 12.1% 11.5% 10.2% 9.0%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 3.7% 8.7% 9.2% 8.0% 6.9% 6.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 16.2% 24.9% 18.9% 16.3% 14.3% 12.6%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 17.1% 20.6% 20.5% 17.1% 14.5% 12.4%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 1.1x 1.2x 1.2x 1.2x 1.1x 1.1x


GCI (*) 1,112 1,206 1,262 1,315 1,368 1,419

Net debt / (cash) * 174 130 89 60 34 9




Net interest / EBITDA 0.7% 10.9% 3.6% 3.5% 3.4% 3.3%* YTL mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 39.0% 45.6% 40.4% 36.5% 33.0% 29.8%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 29.7% 37.7% 33.0% 29.0% 25.4% 22.2%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 29.7% 37.7% 33.0% 29.0% 25.4% 22.2%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 18.6% 14.3% 5.0% 5.0% 5.0% 5.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




CIMSA.ISSector

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EV /

GC

I


SectorCIMSA.IS

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x


EV /

GC

I

EV/GCI / CROCI/WACC

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

03 04 05 06 07E 08E 09E 10E-40%

-30%

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-10%

0%

10%

20%

30%

40%

Premium to the sector (RHS)Emerging Markets Non-FinCIMSA.IS




Mardin Cimento (MRDIN.IS)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: MRDIN.IS

Low High





Mardin Cimento


Key data (*)

Price (YTL) 7.40Price target (YTL) 7.70Market cap ($ mn) 442.9Average daily trading volume ($ mn) 0.26Free float 44%Bloomberg code MRDIN TI


Strong export presence, but fairly valued


• Mardin generates the highest selling prices within the Oyak group owing to favourable

economics in the local market and strong demand for exports.

• Government incentives allow the company to pay 40% of its calculated corporate tax rate up

until 2008, while energy incentives result in Mardin paying 31% lower electricity charges.

• These two factors resulted in Mardin having the highest net income margins in the sector,

reaching 61% in 2006.

• Mardin benefits from its proximity to the lucrative Iraqi market and has recently begun

exporting into Syria. Selling prices in both markets average over 50% the domestic price in

Turkey.

• The completion of its capacity additions in 2Q2007 has added an additional 1 mn tonnes of

clinker capacity to the group, bringing total production capabilities to 2 mn tonnes of clinker

and cement. The timing of the completion of the new capacity fits well with the strong demand

present in the local and export markets.

• With its strong position in both domestic and foreign markets and attractive prospects, our

outlook for Mardin over the next medium-term remains positive.

• Despite a supportive operating environment, we believe the share is fairly valued. We initiate

our coverage on Mardin as Neutral, with a 12-month target price of TL7.70.




terminal NOPAT margin of 17%. We calculate a price target for Mardin of TL7.70.

0.0

1.0

2.0

3.0

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22/09

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30/04

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16/05

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19/06

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05/07

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23/07

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08/08

/2007

24/08

/2007

350

400

450

500

550

600

MRDIN.IS (YTL) MSCI EM Europe & Middle East




Mardin Cimento: Overview Company description Mardin Cimento is the largest exporter within the Oyak

Group, selling almost of half of its annual capacity

abroad. The company is located in the South Eastern

region of Turkey providing close proximity to both

Syria and Iraq and facilitating its presence in those

markets. Mardin added an additional 1m tonnes of

clinker capacity in 2Q07 bringing its total capacity to

2m tonnes of cement and clinker respectively.


56%

44%

Oyak Group Public



• Demand in Iraq is expected to remain high at least until 2008, with relative price stability over the

same period. We expect sales of over 800k tonnes in its export markets in 2008, at significantly

higher prices ($100+) than domestic operations.

• Owing to recent profitability of the local market and sales in Iraq, previously no exports were sold

into Syria. Recent capacity expansions however have paved the way for penetration into this

market for the first time in 2H2007, at prices well above domestic levels and in line with those

enjoyed in Iraq.

• The Turkish housing market will likely remain robust during the course of this year and a number

of infrastructure projects should drive local cement demand.


• Increased competition and the subsequent rise in supply, both domestically and in export

markets of Iraq and Syria, could erode the attractive pricing Mardin currently enjoys.

• The potential fall-off in housing demand is likely to be offset by higher levels of public

expenditure.

• Rising input costs, notably fuel, have placed margins under pressure. This is likely to remain a

risk to the extent that Mardin can utilize cheaper alternative sources of fuel and generate other

cost efficiencies.

Industry context


reached 43 mn tonnes in 2006, and we forecast a c.7% CAGR through 2010. We forecast an

additional 10 mn tonnes of clinker capacity by 2008 and a total reaching c.62 mn tonnes by 2009.

We expect prices to decline into 2008 as supply-side pressures mount, but for demand to catch up

from 2009.

Mardin offers the best geographical diversification with our 2007 forecasts suggesting an even split

between domestic and foreign sales.

57%

43%

Export Sales Domestic Sales




Mardin Cimento: Overview


-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

Net Debt / EBITDA (LHS) Net Interest / EBITDA (RHS)

0

50

100

150

200

02 03 04 05 06 07E 08E 09E 10E 11E 12E16.8%

21.8%

26.8%

31.8%

36.8%

41.8%

46.8%

51.8%



Attractive selling prices in the local market of c. US$77/tonne and over

US$100/tonne in exports to Iraq.

Strong local demand and low cost base due to government incentives on

tax and electricity.

Enjoys premium brand status in Iraq, selling at US$10/tonne more than

other brands. Split between local and export markets removes

concentration risk.

Reliance on export markets and susceptibility to growing levels of

competition within those markets.



developments.



Growth of exports into Syria.


Tightening up of the export markets would make it more difficult to shift

production in foreign markets, particularly Iraq.

Slowdown in the housing market not being offset by increased public

developments.





Mardin Cimento: Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E



EBIT margin 25.5% 22.2% 32.8% 46.5% 50.0% 41.0% 36.0% 31.5% 27.5% 23.8% 21.0%Net interest expense 0.2 1.1 1.1 1.1 8.1 2.1 (2.8) (3.0) (3.1) (3.1) (3.1)Associate income / other 7.0 (0.1) 3.2 15.2 12.2 0.0 (0.0) 0.0 (0.0) 0.0 (0.0)Profit before tax 17.7 16.4 32.3 72.8 93.9 91.9 63.6 55.1 48.1 41.8 36.9Adjusted PBT 17.7 16.4 32.3 72.8 93.9 91.9 63.6 55.1 48.1 41.8 36.9 -12.7%Tax (2.7) (2.3) (4.3) (7.7) (4.8) (4.7) (3.3) (2.8) (2.5) (2.1) (1.9)Exceptional items (0.6) 0.6 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income 14.3 14.7 29.8 65.1 89.1 87.2 60.3 52.3 45.6 39.6 35.0Adjusted net income 15.0 14.1 28.0 65.1 89.1 87.2 60.3 52.3 45.7 39.7 35.0 -12.7%


No. of basic shares outstanding (*) 66.1 66.1 66.1 66.1 73.1 73.1 73.1 73.1 73.1 73.1 73.1No. of diluted shares outstanding (*) 66.1 66.1 66.1 66.1 73.1 73.1 73.1 73.1 73.1 73.1 73.1EPS (basic) 0.22 0.22 0.45 0.99 1.22 1.19 0.82 0.71 0.62 0.54 0.48 -12.7%EPS (diluted) 0.22 0.22 0.45 0.99 1.22 1.19 0.82 0.71 0.62 0.54 0.48EPS (adjusted, basic) 0.23 0.21 0.42 0.99 1.22 1.19 0.82 0.72 0.62 0.54 0.48 -12.7%

Annual growth -6.1% 99.0% NM 23.6% -2.1% -30.8% -13.3% -12.7% -13.2% -11.7%EPS (adjusted, diluted) 0.23 0.21 0.42 0.99 1.22 1.19 0.82 0.72 0.62 0.54 0.48DPS 0.16 0.00 0.37 0.76 1.01 0.98 0.68 0.59 0.52 0.45 0.40 -12.7%

Annual growth -100.0% NM 106.9% 32.6% -2.1% -30.8% -13.3% -12.7% -13.2% -11.7%(*) weighted average number of shares; in millions




Mardin Cimento: Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 23.3 35 59 103 74 146 137 136 136 136 137Other current assets 12.5 12 18 18 28 46 41 43 46 48 50Total current assets 35.7 46 78 122 102 193 178 180 182 184 187 1.2%Long term investments & other 11.3 20 25 47 47 47 47 47 47 47 47Property, plant and equipment 40.2 43 41 40 96 122 123 124 124 124 124Intangible assets 0.0 0 0 0 0 0 0 0 0 0 0Total assets 87.3 109 144 209 244 361 348 350 353 355 357 0.7%

Trade payables 3.2 4 4 5 7 10 8 8 8 8 9Short term debt 0.1 4 2 4 5 5 5 5 5 5 5Long term debt 0.0 0 0 0 0 100 100 100 100 100 100Pension liabilities 2.6 3 3 8 6 6 6 6 6 6 6Other liabilities 3.7 4 7 8 7 7 7 7 7 7 7Total liabilities 9.5 15 16 25 25 128 126 126 127 127 127 0.1%Minority interests 0.0 0 0 0 0 0 0 0 0 0 0Shareholders' equity 77.8 95 128 184 219 233 221 224 226 228 230Total equity and liabilities 87.3 109 144 209 244 361 348 350 353 355 357 0.7%


CAGRCash from operations 0.0 0.0 0.0 77.7 78.5 81.3 77.8 64.4 57.8 52.1 48.1 -11.3%Net interest paid 0.2 1.1 1.1 1.1 8.1 2.1 (2.8) (3.0) (3.1) (3.1) (3.1)Tax paid (2.7) (2.3) (4.3) (7.7) (4.8) (4.7) (3.3) (2.8) (2.5) (2.1) (1.9)Operating cash flow (2.5) (1.2) (3.2) 71.0 81.8 78.7 71.8 58.6 52.3 46.9 43.1 -12.0%Capex on PP&E 0.0 0.0 0.0 (2.9) (52.5) (32.8) (9.2) (9.2) (9.3) (9.4) (9.5)Other investing cash flow 0.0 0.0 0.0 4.6 39.3 0.0 0.0 0.0 0.0 0.0 0.0Investing cash flow 0.0 0.0 0.0 1.7 (13.3) (32.8) (9.2) (9.2) (9.3) (9.4) (9.5) 0.8%

Operating free cash flow (*) (2.5) (1.2) (3.2) 68.1 29.3 45.8 62.6 49.3 43.0 37.5 33.6 -14.4%Free cash flow (**) (2.5) (1.2) (3.2) 72.7 68.5 45.8 62.6 49.3 43.0 37.5 33.6 -14.4%

Dividends paid 0.0 0.0 0.0 (24.2) (50.1) (73.6) (72.0) (49.8) (43.2) (37.7) (32.7)Share buybacks / issuances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 1.5 1.0 100.0 0.0 0.0 0.0 0.0 0.0Financing cash flow 0.0 0.0 0.0 (22.7) (49.2) 26.4 (72.0) (49.8) (43.2) (37.7) (32.7) -17.9%

Change in cash and cash equivalents 11.7 24.5 43.7 (29.1) 72.3 (9.4) (0.5) (0.2) (0.2) 0.9(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Mardin Cimento: Valuation summary

Relative to the GS New Markets Non-Financials coverage (multiples are calendarised)

Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 7.5x 6.1x 6.2x 9.0x 10.3x 11.8x








P / book 2.7x 2.5x 2.3x 2.4x 2.4x 2.4x


FCF yield 14.9% 11.2% 8.5% 11.6% 9.1% 7.9%

GS coverage 33.9% 12.1% 5.7% 6.1% 7.8% 9.5%

Dividend yield 10.2% 13.6% 13.3% 9.2% 8.0% 7.0%

GS coverage 2.8% 2.6% 2.4% 2.8% 3.2% 3.1%


CROCI 81.3% 62.9% 48.8% 32.9% 28.4% 24.4%

GS coverage 15.6% 18.8% 17.7% 18.5% 18.9% 17.6%

ROE 41.8% 44.1% 38.5% 26.5% 23.5% 20.3%

GS coverage 25.1% 26.5% 22.4% 23.2% 23.0% 20.0%



EV / GCI 1.6x 2.9x 2.4x 2.4x 2.2x 2.1x


GCI (*) 110 245 293 294 311 328

Net debt / (cash) * (99) (69) (41) (32) (31) (31)




Net interest / EBITDA -1.8% -10.4% -2.1% 3.7% 4.6% 5.1%* YTL mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 49.7% 52.8% 44.1% 40.3% 36.1% 32.2%

GS coverage 35.7% 35.5% 34.9% 36.1% 36.2% 35.7%

EBIT margin 46.5% 50.0% 41.0% 36.0% 31.5% 27.5%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT margin 46.5% 50.1% 41.0% 36.0% 31.5% 27.5%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 2.4% 35.7% 15.0% 5.0% 5.0% 5.0%

GS coverage 16.9% 16.7% 17.7% 17.3% 15.2% 13.6%




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Unye Cimento (UNYEC.IS)




Neutral

Neil Wedlake

[email protected]

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile: UNYEC.IS

Low High





Unye Cimento


Key data (*)

Price (YTL) 6.80Price target (YTL) 7.60Market cap ($ m n) 529.4Average daily trading volum e ($ m n) 0.06Free float 11%Bloom berg code UNYEC TI

2006 2007E 2008E 2009ESales (YTL m n) 184.9 181.1 227.7 247.8EBITDA (YTL m n) 106.9 91.3 100.1 96.6EV / EBITDAR 3.2x 6.3x 5.8x 6.1xP / E 8.1x 11.0x 10.0x 10.4xDividend yield 12.0% 8.7% 9.7% 9.3%(*) m ultiples and ratios are calendarised

Strong competitive position fairly well reflected in valuation


• Unye Cimento enjoys a very strong competitive niche in the domestic market: it operates in the

Black Sea region where there is limited competition at present but where there is the threat of

Akcansa’s imminent entry. Prices in the northeast of the country are higher than anywhere else

at c.US$85/tonne.

• Unye also benefits from export market exposure. Expansion into markets such as Romania and

Bulgaria, as well as existing growth in the lucrative Russian market should benefit the group.

• Following recent investments, total annual cement production capacity is now at 2.5 mn

tonnes, with the company also selling clinker in both the local and foreign markets.

• The company also enjoys significant cost reductions owing to government incentives on taxes

and electricity rates, which are 28% lower than in the rest of Turkey. As a result, Unye enjoys

the highest EBITDA margins in our Turkey coverage, recording 58% in 2006 and we forecast

these to average 33% beyond 2010.

• Dividend yields are also very attractive with forecast dividend yields of 9.7% 2008 and 9.3% for

2009.

• We consider Unye to be fairly valued at current levels and are also mindful of the relatively low

liquidity of the stock. We initiate coverage as Neutral.




terminal NOPAT margin of 21%. We calculate a 12-month price target for Unye of TL7.60. 0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

22/09/2006

09/10/2006

24/10/2006

08/11/200623/11/200

608/12/200625/12/200

609/01

/2007

24/01/2007

08/02/20

0723/02

/2007

12/03/200

727/03

/2007

11/04 /200726/04

/2007

11/05 /2007

28/05 /2007

12/06 /2007

27/06 /2007

12/07/2007

27/07 /2007

13/08/2007

28/08/2007

350

400

450

500

550

600

UNYEC.IS (YTL) MSCI EM Europe & Middle East




Unye Cimento: Overview Company description Unye Cimento is part of the Oyak Group and the

second largest in terms of market cap. Unye is located

in the Black Sea area in the northeast of Turkey where

it has no competition and enjoys the highest average

domestic selling prices. The company sells both clinker

and cement in both the local market and abroad. Using

its proximity to the Black Sea, traditional export

markets include Spain, Portugal, Italy and the UK, with

new export markets expected to open up in Romania

and Bulgaria. Current annual production capacity is

1.5 mn tonnes of clinker and 2.5 mn tonnes of cement.


51%49%

Oyak Group Public



• As the only producer in the Black Sea region, Unye operates in a competitive vacuum and enjoys

the benefit of the highest domestic selling prices. We expect expansion into new markets of

Romania and Bulgaria to drive forecast growth, although we fear downside risk to pricing as

competition is finally established in the region.

• Unye is currently only operating at roughly 80% of capacity, with strong demand in both the

domestic and export markets expected to close the production gap.

• We expect the Turkish housing market to remain robust during the course of this year driving

local cement demand. Exports to western Europe are also expected to remain strong on the back

of sustained regional demand.


• In response to the recent pick-up in demand for building materials, most of the local producers

have stepped up capacity investments with new players also entering the market. We expect

most of this new capacity to come on stream towards the end of this year and into 2008. We

expect excess supply to exert downward pressure on local prices beyond 2008.

• Growing competition in export markets is also a threat, with Akcansa and other producers

entering the Black Sea region, targeting the domestic market as well as the lucrative export

routes from the region’s ports.

• The potential fall-off in housing demand is likely to be offset by higher levels of public spending.

Industry context


reached 43 mn tonnes in 2006 and we forecast a 7% CAGR through 2010. We forecast an additional


prices to decline into 2008 as supply-side pressures mount but for demand to catch up from 2009.

Unye operates within a very attractive niche and is not exposed to the local markets economics in

the same way as the rest of our peer group, although the entry of Akcansa into its market is a

medium term threat to market share and pricing.

81%

19%

Domestic Sales Export Sales




Unye Cimento: Overview


-20.0x

-15.0x

-10.0x

-5.0x

0.0x

5.0x

03 04 05 06 07E 08E 09E 10E 11E 12E-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


0

50

100

150

200

250

02 03 04 05 06 07E 08E 09E 10E 11E 12E-23.2%

-13.2%

-3.2%

6.8%

16.8%

26.8%

36.8%

46.8%



Enjoys highest selling prices (c. $85) and highest additives ratio in

Turkey.

Benefits from low cost base owing to technological advancement and

government incentives on tax and electricity.

No significant rivals within the isolated Black Sea domestic market.

Has packaging terminal in Rize and own port within 2 km.

Currently operating at maximum capacity may forego the opportunity of

the strong growth in the domestic market.

Bias towards the local market does create an opportunity cost against the

higher selling prices prevalent in export markets.

Relatively illiquid.



developments.




Tightening up of the export markets would make it more difficult to shift

production in foreign markets, particularly Iraq.

Akcansa moving into the Black Sea region through the acquisition of

Ladik.





Unye Cimento: Summary financials Income statement (YTL mn, year to Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRSales 61.3 83.5 99.1 138.8 184.9 181.1 227.7 247.8 254.8 257.0 259.3 3.3%EBITDAR (11.8) (4.6) 11.8 64.9 106.9 91.3 100.1 96.6 88.7 85.7 86.5EBITDA (11.8) (4.6) 11.8 64.9 106.9 91.3 100.1 96.6 88.7 85.7 86.5

EBITDA m argin -19.3% -5.5% 11.9% 46.8% 57.8% 50.4% 44.0% 39.0% 34.8% 33.4% 33.4%EBIT (11.8) (4.6) 11.8 51.9 94.6 79.6 88.8 85.4 77.6 74.5 75.1 -4.1%

EBIT m argin -19.3% -5.5% 11.9% 37.4% 51.1% 44.0% 39.0% 34.5% 30.4% 29.0% 29.0%Net interes t expense 4.5 2.8 1.4 0.0 0.0 2.4 1.8 1.6 1.3 1.0 0.9Associate incom e / other (23.9) 3.3 (3.6) 9.1 17.8 (0.0) 0.0 (0.0) (0.0) (0.0) (0.0)Profit before tax (31.2) 1.5 9.6 60.9 112.4 82.0 90.6 87.0 78.9 75.5 76.1Adjus ted PBT (31.2) 1.5 9.6 61.3 112.4 82.0 90.6 87.1 78.9 75.6 76.1 -4.3%Tax 0.0 0.0 0.0 6.3 (32.2) (23.5) (25.9) (24.9) (22.6) (21.6) (21.8)Exceptional item s (6.9) 0.0 6.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Minority interes t 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net incom e (38.1) 1.5 16.2 67.2 80.2 58.5 64.6 62.1 56.3 53.9 54.3Adjus ted net incom e (31.2) 1.5 9.6 67.6 80.2 58.6 64.7 62.2 56.4 54.0 54.3 -4.3%


No. of bas ic shares outs tanding (*) 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2No. of diluted shares outs tanding (*) 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2 95.2EPS (bas ic) (0.40) 0.02 0.17 0.71 0.84 0.62 0.68 0.65 0.59 0.57 0.57 -4.3%EPS (diluted) (0.40) 0.02 0.17 0.71 0.84 0.62 0.68 0.65 0.59 0.57 0.57EPS (adjus ted, bas ic) (0.33) 0.02 0.10 0.71 0.84 0.62 0.68 0.65 0.59 0.57 0.57 -4.3%

Annual growth NM NM NM 18.6% -27.0% 10.4% -3.9% -9.4% -4.2% 0.7%EPS (adjus ted, diluted) (0.33) 0.02 0.10 0.71 0.84 0.62 0.68 0.65 0.59 0.57 0.57DPS 0.00 0.00 0.00 0.25 0.81 0.59 0.66 0.63 0.57 0.55 0.55 -4.3%

Annual growth NM NM NM NM -27.0% 10.4% -3.9% -9.4% -4.2% 0.7%(*) weighted average num b er of shares; in m illions




Unye Cimento: Summary financials Balance sheet (YTL mn, year ending Dec) 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 08E-12E

CAGRCash and cash equivalents 25 13 14 57 140 120 114 105 95 92 92Other current assets 23 27 28 36 47 50 65 73 78 80 80Total current assets 48 40 42 93 187 170 179 178 173 171 172 -1.1%Long term inves tm ents & other 3 4 8 9 3 3 3 3 3 3 3Property, plant and equipm ent 158 165 143 146 142 140 140 141 143 144 146Intangible assets 11 12 14 0 0 1 1 1 0 0 0Total assets 220 220 208 248 333 314 323 323 320 319 322 -0.1%

Trade payables 4 5 3 3 5 5 6 7 7 7 7Short term debt 18 19 17 11 10 10 10 10 10 10 10Long term debt 80 64 43 26 22 22 22 22 22 22 22Pens ion liabilities 5 4 2 7 19 19 19 19 19 19 19Other liabilities 3 2 1 2 21 21 21 21 21 21 21Total liabilities 110 94 66 48 77 77 78 79 79 79 79 0.3%Minority interes ts 0 0 0 0 0 0 0 0 0 0 0Shareholders ' equity 110 126 142 199 256 237 245 245 241 240 243Total equity and liabilities 220 220 208 248 333 314 323 323 320 319 322 -0.1%


CAGRCash from operations 0.0 0.0 0.0 60.3 141 89.1 85.9 88.8 84.3 84.2 85.9 0.0%Net interes t paid 4.5 2.8 1.4 0.0 0 2.4 1.8 1.6 1.3 1.0 0.9Tax paid 0.0 0.0 0.0 6.3 (32) (23.5) (25.9) (24.9) (22.6) (21.6) (21.8)Operating cash flow 4.5 2.8 1.4 66.6 109 68.0 61.8 65.5 63.1 63.6 65.1 1.3%Capex on PP&E 0.0 0.0 0.0 (1.8) (9) (9.1) (11.4) (12.4) (12.7) (12.9) (13.0)Other inves ting cash flow 0.0 0.0 0.0 0.6 10 (0.6) 0.0 0.0 0.0 0.0 0.0Investing cash flow 0.0 0.0 0.0 (1.3) 1 (9.7) (11.4) (12.4) (12.7) (12.9) (13.0) 3.3%

Operating free cash flow (*) 4.5 2.8 1.4 64.8 100 58.9 50.4 53.1 50.3 50.8 52.1 0.8%Free cash flow (**) 4.5 2.8 1.4 65.4 110 58.3 50.4 53.1 50.3 50.8 52.1 0.8%

Dividends paid 0.0 0.0 0.0 0.0 (23) (77.5) (56.5) (62.4) (60.0) (54.4) (52.1)Share buybacks / issuances 0.0 0.0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 (22.4) (5) 0.0 0.0 0.0 0.0 0.0 0.0Financing cash flow 0.0 0.0 0.0 (22.4) (29) (77.5) (56.5) (62.4) (60.0) (54.4) (52.1) -2.0%

Change in cash and cash equivalents (12.1) 0.9 43.0 82 (19.1) (6.1) (9.4) (9.7) (3.6) 0.0(*) Operating cash flow - Capex on PP&E, (**) Operating cash flow - Investing cash flow




Unye Cimento: Valuation summary


Valuation 2005 2006 2007E 2008E 2009E 2010E

P / E 9.6x 8.1x 11.0x 10.0x 10.4x 11.5x








P / book 3.2x 2.5x 2.7x 2.6x 2.6x 2.7x


FCF yield 30.5% 22.4% 9.0% 7.8% 8.2% 7.8%


Dividend yield 3.6% 12.0% 8.7% 9.7% 9.3% 8.4%

GS coverage 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


CROCI 38.2% 60.4% 34.7% 34.5% 30.2% 25.8%


ROE 39.4% 35.3% 23.8% 26.8% 25.4% 23.2%




EV / GCI 1.0x 1.8x 2.8x 2.5x 2.4x 2.3x


GCI (*) 251 253 276 316 351 383

Net debt / (cash) * (20) (108) (89) (83) (73) (64)




Net interes t / EBITDA 0.0% 0.0% -2.6% -1.8% -1.7% -1.5%* YTL mn

Margins and other

2005 2006 2007E 2008E 2009E 2010E

EBITDA margin 46.8% 57.8% 50.4% 44.0% 39.0% 34.8%


EBIT m argin 37.4% 51.1% 44.0% 39.0% 34.5% 30.4%

GS coverage 23.4% 24.3% 21.9% 22.9% 24.2% 25.9%

NOPAT m argin 37.6% 51.2% 44.0% 39.0% 34.5% 30.5%

GS coverage 23.5% 24.5% 22.1% 23.0% 24.3% 25.9%

Capex / sales 1.3% 4.9% 5.0% 5.0% 5.0% 5.0%





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Premium to the sector (RHS)Emerging Markets Non-FinUNYEC.IS




Reg AC

I, Neil Wedlake, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that

no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's

coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,

ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

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Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

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Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for

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investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12

months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage

group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic

transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock,

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should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.



Ratings, coverage views and related definitions prior to June 26, 2006

Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no

more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the

analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary

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Definitions

Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the

median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe

over the next 12 months.

Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The

investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12

months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated

Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and

the relevant Regional Investment Review Committee.

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