UAE cement companies - Global research

[sharewadi]

Global (GLOBAL) recently released a research report about some UAE cement companies. Here's a useful summary from EB yesterday, although there's nothing obvious to explain why Arkan and RAK Cement have recently been so popular. See also the March 2008 TNI UAE cement report.

Emirates Business 10 June 2008:

UAE cement firms to strengthen in 2008-2009 By Muna Ahmad Cement firms in the UAE are expected to perform well in 2008 and 2009 because of a host of big-ticket infrastructure and real estate projects that are under way or have been announced. A Global Investment House (GIH) report on the sector says companies will have a neutral to positive outlook, driven mainly by expectations of sustained growth in future revenues. The favourable verdict comes despite a projected fall in cement prices. Researchers carried out valuations on five of the nine listed cement companies in the UAE: Arkan Building Materials (ARKAN) Fujairah Cement Industries (FCI) Gulf Cement Company (GCEM) Ras Al Khaimah Cement Company (RAKCC) Union Cement Company (UCC) Arkan's long-term strategy is to grow and manage a portfolio of related businesses that will add value to its core operations. To achieve this the company is continuously looking for opportunities to buy into existing businesses, acquire facilities and establish joint ventures and strategic alliances with other participants in the regional construction sector. At the current price Arkan's shares are trading at a price/earnings (P/E) multiple of 56.9 for 2008 and 51.9 for 2009. The report, therefore, says the stock is a SELL based on a medium-term perspective. FCI has been continuously pursuing a path towards quality by upgrading its technology. The company is taking steps to integrate the latest quality control and cost-saving measures. It is in the process of expanding its clinker capacity further by 2.25 million tonnes per annum (mtpa) to 3.75mtpa. The additional capacity will be available in 2009 and will help FCI to maintain its position as a preeminent player. It has a potential upside of 30.8 per cent from its current price level. At the current price FCI shares are trading at a P/E multiple of 11.9 and 7.0 for 2008 and 2009 respectively. The study says the stock is a BUY. GCEM inaugurated a second clinker production line in May last year, expanding its annual production capacity to 2.7mtpa of cement and 3.8mtpa of clinker. To save on energy costs the company has installed a burning system that can be converted from one fuel type to another. The stock has a potential upside of 15 per cent from its current price level. At the current price, GCEM's shares are trading at a P/E multiple of 12.9 and 12.3 for 2008 and 2009 respectively. The research says the shares are a BUY. RAKCC has no current plans to expand its current clinker or cement capacities. Movement in its revenues in the coming years could, therefore, be more price-driven than volume-driven. Its free cash flows remain positive throughout the projected period. Any major capacity expansion planned in the next two to three years could, however, impact its free cash flows adversely. It has a potential downside of 19.1 per cent from its current level. At current price, RAKCC shares are trading at a P/E multiple of 29.25 and 26.34 for 2008 and 2009 respectively and, therefore, the research recommends REDUCE on the stock. UCC's Dh1billion two-year expansion programme has turned it into the largest cement producer in the country with a capacity of 4.3 mtpa of clinker and 4.5mtpa of cement in 2007. Apart from setting up a clinker kiln, the project also involved building completely covered limestone and silica storage facilities and two clinker silos. At the current price it has a downside of eight per cent. UCC shares are trading at a P/E multiple of 22.2 and 18.2 for 2008 and 2009 respectively. The research, therefore, recommend a HOLD on the stock. The UAE accounts for most of the ongoing and planned infrastructure projects among the GCC countries, amounting to estimated investments of more than $700bn (Dh2.56 trillion) over the next few years. Cement consumption in the UAE has been strong, increasing at a compound annual growth rate (CAGR) of 24 per cent during the past four years. Going forward, it is expected that demand for cement will touch 35 million tonnes by 2011 as firms and governments utilise their capital to fund construction projects. Several players have announced capacity expansions and the establishment of new capacities. The total cement capacity is expected to touch almost 41 million tonnes by 2011. Out of this, 60 per cent would be supplied by the listed firms while the rest would come from the unlisted ones. In the UAE cement prices have risen on account of the real estate boom. Recently, the Ministry of Economy signed an agreement with the Cement Factories and Producers Group to increase production and cap the price of cement in an attempt to control domestic inflation, with similar steps to be taken to curb rising energy prices. Under the memorandum of understanding, the cost of a 50kg sack of cement will be capped at Dh16, down from Dh17, with an unpacked tonne priced at Dh340. Net sales revenues earned by the UAE's cement companies increased at a CAGR of 33 per cent between 2003 and 2007. The revenues in 2003 amounted to Dh1,481m which rose to Dh4,593mn in 2007. The sector's net profit increased at a CAGR of 48 per cent from Dh397m in 2003 to Dh1,895m in 2007. In 2007 the contribution from Gulf and Sharjah Cement to total industry profits stood at 22 per cent. National Cement Company followed in third position with a profit of Dh202m. On the aggregate level the sector's financial results over the past year show the substantial impact rising energy costs have had on margins. UAE cement factories are largely dependent on heavy fuel and natural gas. During 2007 the country suffered large shortages of direct electricity supplies which were compounded by a lack of natural gas, resulting in reliance by cement production facilities on far more expensive heavy fuel to power their plants. The industry, as a whole, has responded to rising energy costs through investment in the gradual transformation of fueling systems to multi-fuel burning systems.

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