The National Investor (TNI) released a report yesterday (26 March 08 ) on the UAE cement sector. Great reading if you want to know more about some of the listed UAE cement companies.
The report (download, 64 pages) covers the cement industry in general and the following UAE cement companies in detail...
TNI 26 March 2008:
Arkan Building Materials (ARKAN) 30
Small start, big ambitions 30
Catch me if you can: shocking stock price performance 31
A strong balance sheet 33
Base-case valuation at AED 3.45: Fairly priced 34
Gulf Cement Company (GCEM) 38
Large player with excess clinker 38
Exposure to the stock market 38
Range-bound with low volumes 40
Base-case valuation at AED 6.70: Fairly priced 40
RAK Cement Company (RAKCC) 44
Small player with struggling operations 44
Base case valuation at AED 2.26: Fairly priced 47
Union Cement Company (UCC) 50
Largest producer with growing export market 50
Base-case valuation at AED 3.99: Fairly priced 52
RAK White Cement Company (RAKWCT) 55
A white cement producer with identity crisis 55
DCF valuation at AED 2.49 58
Ratings Definitions 63
Two companies I've always thought seemed to look promising in the cement sector - Sharjah Cement Industry (SCIDC) or Fujairah Cement Industries (FCI) are covered in the general section.
Interestingly, TNI flagged SCIDC as one of the top 4 in terms of riskiness due to large proportion of capital invested in the stock market. I must go back and review their accounts in more detail, I hadn't noticed that. RAK White Cement (RAKWCT), Umm Al Quwain Cement (QCEM), and Gulf Cement (GCEM) are ahead of SCIDC for proportion of balance sheet in stocks. I was interested to see RAK Cement are way down the list, I thought they were more heavily invested - perhaps they sold off their stocks to pay for all those extra energy costs that have been a problem for them the past year or more.
TNI 26 March 2008:
Slowdown priced in
The UAE cement market is booming
With real estate as one of the key positioning statements for the UAE today, cement demand continues to be buoyant. Between 2003 and 2006, cement consumption in the UAE grew at a CAGR of 24.7%. These rates are expected to be sustained in the future as the smaller emirates join the real estate frenzy. We believe that the demand for cement will touch 26.2m tonnes by 2011 as companies and governments plough petrodollars into construction projects. In Abu Dhabi alone, planned real estate projects are valued at more than $150bn.
There are definite supply worries
In the recent past, nearly all major UAE listed companies have undertaken expansion. Not all of this new capacity has come on line yet. We expect the bulk of new capacity to hit the market between 2008 and 2010. In some cases like Arkan, companies are quadrupling their capacity, vying for market share and the top spot. This sector-wide expansion has led to supply overhang worries. A consolation is that demand is growing at unprecedented rates because of the boom in real estate activity in the UAE. Moreover the export market is also growing for some companies.
Cementing the prices at AED 295 and higher
As demand for cement soared during the last two years, cement prices shot up very quickly. To alleviate the inflationary pressures for construction companies, the UAE Government imposed a cap of AED 295/ton to be effective till the end of 2007. Now that cap is no longer in force and prices have started soaring again. The Government might set another cap for 2008, which we believe will be at a higher level, given the growth in prices.
Listed cement companies are risky
Local cement companies have a flare for investing in the regional stock markets. As a percentage of the sector balance sheet size, about 25% is in the form of investments. Some companies take this too far with 70% of their assets resting in stock markets. The companies do not have any debt, a strong net cash position and fluctuating net margins due to a volatile investment income component. Sectoral net margins have varied between 69% and 35% during the last three years.
The market is pricing in a pessimistic outlook
Due to significant uncertainty in the sector, we have used two approaches in our DCF valuation: falling and rising cement prices. In the case first (base) case, our recommendation for all companies is Fairly Priced. This makes our outlook neutral on the sector. In the second case, two out of four grey cement companies offer attractive returns with an Underpriced rating. We are initiating coverage on five companies which collectively represent 62% of the sector’s capitalization.
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