MENAinFocus

Issue no. 75 - September 14, 2010

Rebased Performance of Regional Indices

115

Inside This Issue In Focus 1: UAE Cement Market: Grueling Times Ahead With little to impress, UAE cement manufacturers face challenging times ahead, driven by significant excess supply and near historical low prices. We would still refrain from calling this the bottom as the key demand drivers for the industry lack direction. Accordingly, in the short- to medium-term we view the UAE cement sector as unexciting from the investors perspective as developments in the UAE real estate and construction sector fail to inspire. The downside risks of oversupply in the industry along with weak economic fundamentals, sliding cement prices, margin pressures, and negligible free cash flows leading to potential discontinuation in dividends seem imminent. By: Mala Pancholia

105

95

85 Aug-09 Oct-09 Dec-09 Mar-10 May-10 Jul-10 Aug-10 MSCI Arabian Markets MSCI GCC Countries MSCI Jordan+Egypt+Morocco

MENA Market Caps

Saudi Arabia UAE Qatar Kuwait Egypt Morocco Jordan Bahrain Oman Lebanon Tunisia Palestine 0 3% 2% 2% 1% 1% 0% 50 100 150 200 250 300 350 8% 7% 12% 12% 14% 37%

In Focus 2: Omani Banks: 1H2010 Update In this section, we examine the performance of a sample of Omani banks during 1H2010. The period was characterized by slow growth as evidenced by the marginal loan growth of 2% in the overall banking sector between December 2009 and May 2010. Most of the sampled banks were able to increase their operating income supported by strong growth in net interest income, while net profit growth was supported by a general decline in loan loss provisioning charges in 1H2010. Non-performing loans (NPLs) grew for half of the sampled banks in 1H2010, although at a slower pace than seen in FY2009, but NPL coverage stayed above 100% for all banks. All the banks witnessed a decline in their capital adequacy ratios (CARs) between December 2009 and June 2010. By: Munira Mukadam and Tariq van der Loo

(%) Share of MENA Market Cap

Market Cap. (USD billion)

Summary of Performance of MENA Indices

Index Level as of INDEX 31-Aug-10 REGIONAL MSCI Arabian Mkts MSCI GCC Mkts MSCI Jordan, Egypt & Morocco GCC MSCI Bahrain MSCI Kuwait MSCI Oman MSCI Qatar MSCI Saudi Domestic MSCI UAE OTHER MENA MSCI Egypt MSCI Jordan MSCI Morocco MSCI Lebanon MSCI Tunisia Palestine SE 1,334 261 402 956 1,587 492 1,577 327 441 1,200 1,587 533 1,179 250 344 954 1,172 481 -15.4% -20.2% -8.8% -20.3% 0.0% -7.7% 13.2% 4.3% 16.9% 0.2% 35.4% 2.2% 1.7% -4.0% -3.4% -5.4% 4.6% -1.9% 5.4% -17.1% 9.2% -14.3% 24.0% -0.2% 73 28 59 11 10 2 12.1 19.3 18.9 7.9 16.5 10.5 1.8 1.7 4.3 1.0 2.1 1.3 270 633 854 641 388 197 400 715 930 680 451 297 250 516 782 575 356 178 -32.7% -11.5% -8.1% -5.8% -13.9% -33.5% 7.6% 22.8% 9.2% 11.3% 9.2% 10.7% 6.7% 6.1% -0.5% 2.3% -2.9% -1.8% -18.9% 15.6% 1.8% 5.3% -0.3% -13.8% 17 106 17 106 321 124 11.5 16.8 12.0 11.3 14.5 10.5 1.1 1.6 1.8 2.2 2.0 1.0 473 414 1,104 530 463 1,264 443 386 1,003 -10.8% -10.6% -12.7% 6.8% 7.2% 10.0% -0.4% -0.4% 0.1% 2.3% 2.3% 4.6% 895 691 159 13.3 13.1 15.1 1.7 1.6 2.3 % Change 52-Week High 52-Week Low % below % over 1-Mth Period 52-Week High 52-Week Low YTD Market Cap (USD billions) Trailing PE PB

nbkcapital.com

September 14, 2010

MENAinFocus

IN FOCUS 1

UAE CEMENT MARkET: GRUElING TIMES AhEAd

Clouded by oversupply, the United Arab Emirates (UAE) cement industry is undergoing a transition phase. Weak economic fundamentals, tanking demand, sliding cement prices, and margin pressures pose major challenges for the UAE cement players going forward. Essentially, cement is the building block of an economy, a key component for construction. However, the UAE cement story, a commodity business and cyclical by nature, has little to impress. The trillion-dollar Gulf Cooperation Council (GCC) economy boasts a colossal project pipeline of USD 1.8 trillion. Given that the bulk of these projects are UAE (Dubai) real estate focused, planned or announced but un-awarded, considerable uncertainty exists over the active project portfolio. Moreover, the gradual shift of project focus from real estate and construction to oil and gas, water, power, etc. holds little promise for the UAE cement industry. At the end of 2009, the 11 integrated cement manufacturers added up to a combined cement capacity of 24 million tons per annum (Mtpa) compared to a demand of 18.2 Mtpa. Local demand is expected to slide by another 25% to 30% this year to about 1314 million tons. Adding to the woes of the cement manufacturers, bulk cement prices in the domestic market have nearly halved to about AED 190 per ton (the lowest in the GCC) since their peak in 2008, and going forward, we believe cement prices in the UAE will influence cement prices in neighboring GCC countries. As domestic demand-supply fundamentals deteriorate, UAE manufacturers are entering survival mode, tapping the export markets with a focus on breaking even. As evident from the 1H2010 results, most UAE cement companies are in the red and are barely EBITDA positive. The relatively high cash costs of production plus the sizeable freight cost (20% to 30% of the landed UAE cement price) make the UAE cement price uncompetitive versus its regional peers, given the current pricing in the other GCC markets. Ideally, except for the export ban, Saudi Arabian cement players are better positioned to challenge UAE exports within the region due to the Saudi companies low-cost structure and proximity to supply-deficient markets such as Iraq. Backed by a floundering UAE construction outlook, UAE cement manufacturers face a challenging road ahead. With very few positives to boast, we feel UAE cement companies in general, from an investment perspective, are unexciting in the near- to mid-term. EBITDA margins deteriorating to historic lows, net losses after years of profitability, and the potential discontinuation of cash dividends owing to negligible free cash flows have resulted in negative year-to-date stock returns. Hopes of a recovery on the back of the Abu Dhabi nuclear deal seem based on extremely optimistic assumptions. While consolidation seems to be the way forward in the saturated UAE cement sector, the risk-reward tradeoff seems heavily weighed down by the overall negativity in the sector, lack of clarity on the UAE real estate sector, low investor appetite for cement stocks, tight credit markets, regional economic ambiguity, and margin contraction leading to weakening cash flows. Amid all the negativity, the low gearing and near-replacement cost valuations for the UAE cement companies stand out somewhat. With little to offer for investors in the near- to mid-term, we retain a cautious view of the UAE cement sector. Going forward, in an excess supply scenario, volume push through exports and survival in a low-price scenario are likely to be the key sustainability drivers for the industry.

Mala Pancholia
T. +971 4365 2811 E. mala.pancholia@nbkcapital.com

nbkcapital.com | 2

September 14, 2010

MENAinFocus

Illusive GCC Projects Outlook Activity in the construction sector is a precursor to the demand for cement in the UAE; housing and infrastructure projects qualify as the top consumers. Typically, 2-10% of a building projects cost could be attributed to cement. According to a research paper produced by the University of the Witwatersrand for Pretoria Portland Cement Company, the cost of cement can range from 8.5% for low-cost housing to just about 2% for a high-end residential unit or a shopping center. This range can vary in response to cement prices as well as the overall project cost inflation. Cement, due to its bulky nature, tends to be a zone-bound commodity, and therefore, the UAEs cement demand depends significantly on the construction activity in the local market. However, any pickup in construction activity within the GCC can also act as a demand driver in the short- to medium-term. According to the MEED presentation dated May 24, 2010, a total of USD 467 billion worth of projects are currently under construction in the GCC. Another USD 1.3 trillion worth of projects have been announced but not yet awarded. At the same time, almost USD 600 billion worth of projects have been either put on hold or canceled across the GCC. (See Figure 1-1.)
Figure 1-1 GCC Projects A Promising Pipeline Weighed Down with Delays and Slowdowns
500 450 438 447 401

The GCCs colossal project pipeline could be deceptive. Although the UAEs project pipeline, largely driven by real estate, accounts for the largest under construction project base, it also accounts for the highest project cancellations and/or suspensions
USD Billions

400 350 300 250 200 150 100 50 55 16 15 Bahrain 23 25 Kuwait 24 15 Oman 66 131 132 252 220

52

39

53

Qatar

Saudi Arabia

UAE

Value of Projects Under Construction Value of Projects Active but Un-awarded

Value of Projects on Hold / Canceled

Sources: MEED Presentation at Arabian World Construction Summit, May 2010 and NBK Capital

According to International Monetary Fund (IMF) data, the 30-year average investment/gross domestic product (GDP) ratio for the Middle East and North Africa (MENA) region has been 24%; the lowest was 21% in 2000. In addition, the World Bank indicated that the gross capital formation/GDP ratio for the GCC averaged 22% from 1990 to 2007. In line with the long-term average, the above-mentioned colossal project outlook seems unsustainable. With cautious optimism and backed by planned budgetary government spending, it could be concluded that around USD 200 billion in projects are likely to be awarded in the GCC in the next few years, with the bulk materializing in Saudi Arabia, Qatar, and Abu Dhabi. Although the active project stream contains USD 1.8 trillion worth of projects (excluding the canceled/on-hold projects), only projects under construction19% of the total project stream account for tangible activity in the region. In the UAE alone, approximately 55% of the total

nbkcapital.com | 3

September 14, 2010

MENAinFocus

construction and infrastructure projects considered active are in the planned and/or bidding stage, clouded by uncertainty. Although MEED recently reported that USD 200 billion worth of construction projects in Abu Dhabi are in the study, design, or tendering phase, given the current state of affairs in the UAE, Abu Dhabi neither excites nor relieves the ambiguity surrounding the future of the UAEs construction industry. Essentially, weak real estate demand, halted work, and delayed payments continue to haunt the road to recovery in the construction sector, which traditionally accounted for the majority of the project activity during 2005-2008. Hence, the impact is expected to be significant in the UAEs floundering building materials sector.
Figure 1-2 Only the Under Construction Project Stream Appears Sustainable

USD 467 Billion 19%

Only 19% of the projects announced so far are under construction and can be considered sustainable. Substantial uncertainty prevails over the announced but un-awarded portion
USD 1.3 Trillion, 56% USD 593 Billion 25%

Projects Under Construction in the GCC Projects Active but Un-awarded in the GCC

Projects on Hold / Canceled in the GCC

Sources: MEED Presentation at Arabian World Construction Summit, May 2010 and NBK Capital

In the past 18 months, the rate of construction project re-evaluations and subsequent suspensions, delays, and/or cancellations has far outpaced the rate of new contract awards. The UAE has an attractive project pipeline, second only to Saudi Arabia, and the former also accounts for more than 75% of the project suspensions to date. Therefore, although construction continues to be the dominant sector in the pipeline of un-awarded contracts, it remains to be seen if the declared project pipeline will buoy the cement sector in the near- to mid-term. In addition to the re-evaluation of project feasibility, UAE cement manufacturers are faced with another challenge as the GCC shifts its focus from real estate and construction to other sectors such as transport, infrastructure, oil and gas, power, and water in the GCC. (See Figure 1-3.) According to MEED, 2009 was an excellent year for the oil and gas industry as engineering, procurement, and construction (EPC) costs plunged. Unsurprisingly, the mix of contracts awarded has very amicably shifted from real estate and construction to other sectors from 2007/2008 to 2009 and thereafter.

nbkcapital.com | 4

September 14, 2010

MENAinFocus

Figure 1-3 Project Focus Shifts from Real Estate and Construction to Other Sectors
180 160 140 120 55% 51% 73%

USD Billions

As real estate goes out of flavor, other sectors such as infrastructure, oil and gas, etc. benefit from the government stimulus packages

100 80 60 40 20 45% 49%

59% 27% 41%

2007

2008 Construction

2009 Other Sectors

Jan'10-Jul'10

Sources: MEED Presentation at Arabian World Construction Summit, May 2010 and NBK Capital

The shift in the project focus theme ties in well with the UAEs construction and real estate services contribution to the GDP story. (See Figure 1-4.) The total contribution of this sector to non-oil GDP slumped from a high of 26% in 2008 to 19% in 2009, the lowest since 2000 (it averaged 22% from 2000 to 2009). The regions weak credit scenario along with sluggish foreign direct investment (FDI) flow into the UAE (down 70% year on year [YoY] in 2009 versus a compound annual growth rate [CAGR] of 42% in the preceding eight years) only exaggerate the sectors woes. The International Institute of Finance (IIF) report GCC Regional Overview released in May 2010 stated that historically 25% of the UAEs loan book was exposed to the speculative real estate sector. The Central Bank data indicates that, while the UAEs total bank credit growth declined from 43% YoY in 2008 to 4% in 2009, the loan growth in particular for the building and construction sector dipped from 74% YoY to 6% YoY. Unfavorable industry dynamics particularly in the UAE have led to a depressed demand for cement and other building materials.
Figure 1-4 Contribution of Real Estate and Related Sectors UAE GDP
700 600 500 21% 20% 22% 22% 22% 22% 26% 23% 24% 566 466 399 12% 199 12% 228 260 9% 10% 8% 6% 5% 5% 2003 2004 2005 2006 2007 2008 2009 -2% -200 UAE Non Oil GDP, AED Billions UAE Real GDP Growth Building & Construction & Real Estate Business Services Contribution to Non-Oil GDP -5% 10% 182 327 649 25% 30%

400 300 200 100 170

19%

20%

Declining contribution of the real estate, construction, and related sectors tends to have a profound impact on the cyclical building materials sector

15%

2% 2000 -100 2001

3% 2002

0%

Sources: UAE Central Bank, IIF, and NBK Capital

nbkcapital.com | 5

Growth / Contribution, Percentage

UAE Non-oil GDP, AED Billion

September 14, 2010

MENAinFocus

UAE Cement demand and Supply dynamics A Bleak Picture Currently, there are 21 players in the UAE cement industry, 11 of which are integrated cement manufacturers. Four are based in Ras Al Khaimah close to the port as well as to the limestone quarries. In 2006, the real estate and construction boom attracted many new entrants, resulting in a three-and-half-fold increase in clinker manufacturing capacity, from 6.6 Mtpa to 23.3 Mtpa by the end of 2009. During the same period, the cement grinding capacity almost tripled from 11.8 Mtpa to 33 Mtpa in 2009 and is likely to further rise to 40.7 Mtpa by the end of 2010. The clinker production capacity reflects the true supply scenario in the industry as opposed to the overall grinding capacity. While grinders flourish in a period of growth, they are most prone to be driven out of business in an economic downturn. Between 2004 and 2008, demand for cement almost doubled, from 10.5 million tons to a historical high of 20.8 million tons. However, the economic meltdown led to a virtual freeze in the UAEs real estate and construction sector. Project slowdown and the shift from the construction sector predictably weakened the demand for cement, which decreased to 18.2 million tons in 2009. The UAE Cement Manufacturers Association expects the cement demand to slide another 25% to 30% YoY in 2010. Significant surplus capacity is a new experience for the sector, which has compelled manufacturers to look for other viable options to offload production. Most players have opted to export to Oman, Iraq, Sudan, etc. However, high transportation costs (almost 30% of the landed cement price) significantly limit the competitiveness of UAE products.
Figure 1-5 UAE Cement Industry Dynamics From Attractive to Lackluster
50 50% 40% 30%
27 23 18 13

Demand and Supply in Million Tons per Annum (Mtpa)

40 30
20% 33 20% 21% 26 21% 21 19 33

41 25% 16% 17%

With a virtual freeze of activity in the UAEs prominent real estate and construction sector, demand for cement is expected to decline by almost 25%-30% YoY in 2010

20 10

20% 10% 0%

3% 6 6 6 6 6 6 7 6 7

11 6

11

13 8

13% 17 1719 13 14 10

2000 -10 -20

2001

2002

2003

2004

2005

2006

2007

2008

2009 2010e
-13%

-10% -20% -30% -40%

-30%

-30 Cement Consumption Cement Production Capacity

Sources: Union Cement Company and NBK Capital

Clinker Production Capacity Change in Demand

little Opportunity in the doom With real estate and construction out of flavor, cement manufacturers are faced with surplus capacity, historically low cement prices, stretched receivables, and limited export opportunities (which will be discussed in detail later). Volume growth in the UAE, essentially the key determinant in this commodity business, remains insignificant in the near-term.

nbkcapital.com | 6

Change in Demand, Percentage

September 14, 2010

MENAinFocus

Although we foresee consolidation as the only way forward for the troubled UAE cement industry, we must highlight that the region lacks concrete historical evidence of such activity within the sector. While cement companies are trading at attractive valuations (close to replacement cost and even lower than replacement cost in some cases), long-term investors remain skeptical of the risk-reward tradeoff. In addition to the cyclical nature of the business, the general lack of business confidence surrounding the UAE real estate and construction industry continues to deter potential investors. UAE Nuclear deal: Cement Producers hopes likely to hit the Wall In addition to tapping export opportunities in the near-term, the Cement Manufacturers Association views Abu Dhabis upcoming nuclear deal as a potential driver for the cement industry. In 2010, the demand for cement in UAE is likely to slide by another 25% to 30% to reach 13 to 14 million tons, and the situation is unlikely to improve in the near-term. At the end of 2009, Abu Dhabi awarded a USD 20 billion contract to a Korean consortium to build four nuclear power plants. (The USD 20 billion price includes construction, commissioning, and fuel loads for the four plants.) The Nuclear Energy Institute stated that a new nuclear power plant could require an investment of USD 68 billion, including interest during construction, and is likely to consume approximately 400,000 cubic yards of concrete, 66,000 tons of steel, 44 miles of piping, 300 miles of electrical wiring, and 130,000 electrical components. In line with the above guidance, it can be estimated that building the four nuclear reactors (total capacity of 5,600 MW) is likely to consume between 1 and 2 million tons of cement over the first 24 months of Phase I, which is expected to commence in 2012. In a larger, developed, and relatively stable economy, construction of a nuclear power plant could have an overall positive impact for the state in terms of additional job creation, rising housing and socio-economic demands, higher direct and indirect spending, and other community benefits. However, it remains to be seen if a sustainable story will emerge for the UAE, thus providing the much-needed push for the UAE cement industry. UAE Cement Prices Steep decline from historical highs In the period between early 2003 and May 2004, limited UAE production capacity coupled with robust demand and trader monopolies led to a steep price increase of about 55% (from USD 63 to USD 98 per ton). In mid-2004, the Ministry of Economy intervened and agreed with the Cement Manufacturers Association to ease cement prices. Despite these government efforts, cement prices continued to escalate on the back of soaring construction demand. The bulk price was officially capped at USD 80.3 (AED 295) per ton in July 2007. Although the cement manufacturers agreed to adhere to the price cap, they had ample opportunities to sell cement at more than USD 100 (AED 365) per ton. As demand for materials surged and commodity prices hit the roof (oil hit a high of USD 148 per barrel [bbl] in June 2008), the alleged black market cement prices rose to almost USD 136 (AED 500) per ton. The UAE Ministry of Economy revised the price cap upward in early 2008 to AED 360 per ton (USD 98) in an attempt to dampen the high inflationary environment. Unaffected by the price cap, the cement price in Abu Dhabi was vulnerable to wide fluctuations. In the first half of 2008, the Abu Dhabi Department of Planning and Economy reported that cement prices were up 30% YoY in 2007 and rose a further 46% until June 2008 to hit AED 645 per ton (USD 175). In mid-2008, the global financial meltdown led to a virtual collapse of the booming regional construction industry. The UAE in particular suffered the most as almost 80% of the ongoing construction projects were halted, indefinitely suspended, or canceled. Accordingly, demand for building materials more or less evaporated.

nbkcapital.com | 7

September 14, 2010

MENAinFocus

We estimate that bulk cement prices in the UAE have halved from their peak, ranging between AED 180 and 200 per ton (pre-2002 levels). See Figure 1-6.
Figure 1-6 UAE Cement Price Trend Been through the Highs and Lows
400 370 350 300 Bulk OPC Price, AED per ton 250 8% 200 162 150 -18% 100 -30% 50 -38% -40% -50% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e Bulk OPC Price, AED per ton
Sources: Union Cement Company and NBK Capital

50% 40% 30% 17% 11% 232 2% 4% 4% 5% 190 19% 20% 10% 0% -10% -20% Change in Price, YOY

43%

Portland cement price in the UAE has declined 50% since the peak in mid-2008 and is likely to hover around this range in the near-term

Change in Price, YOY

The UAEs per-capita cement consumption of > 4,200 kg (five times the world average) during the peak of 2008 was unsustainable. The UAE cement industry was deeply impacted by the global downturn. Domestic players have since entered survival mode as the local selling prices are fast approaching the actual cash cost of production. Local cement industry players perceive exports to be instrumental to counter the excess capacity albeit limited by their cost structure, a key determinant of the companies resilience from here on. Given the bulky nature of the commodity, cement is costly to ship due to a sizeable freight element. Nevertheless, for the UAE players, the existing price differentials of 10-20% in the neighboring Middle East and Africa markets versus UAE domestic prices (plus freight) enhance the export landscape in the near-term. In addition, the most-cost-effective market of Saudi Arabia poses no or little threat to UAEs export markets due to an active export ban. Gradual erosion of these tempting price differentials is almost undeniable, and before long, UAE cement companies could soon reassess their export strategy to avoid 1) margin contraction leading to potential cash-flow stress and 2) a lower capacity utilization rate.

nbkcapital.com | 8

September 14, 2010

MENAinFocus

Figure 1-7 Opportunities Surface Around the Current Flow of Cement across the GCC*
QATAR Capacity: 6.0-6.5 Mtpa Domestic Price: USD 68/ton Transport from UAE: USD 15/ton

UAE Capacity: 33.8 Mtpa Domestic Price: USD 52-58/ ton Transport from RAK to AUH/DXB: USD 5-10/ton

IRAQ * Active Capacity: 3 Mtpa Domestic Price: USD 120-150/ton Freight to MENA: USD 10-30/ton SAUDI ARABIA Capacity: 48 Mtpa Domestic Price: USD 60/ton Selling Price FOB: USD 40-50/ton Prominent Cement Exporter

SUDAN / OTHER AFRICAN REGIONS* Sudan Capacity: 1Mtpa (6 Mtpa by 2011) Sudan Cement Import 09: 2.35 million tons Sudan Cement Consumption 09: 3.3 million tons Domestic Market Price: USD 250-270/ton Freight UAE to Khartoum+ Clearance: USD 100-200/ton
Indicates potential supply opportunities from Saudi Arabia Indicates the export markets pursued by the UAE cement manufacturers

OMAN Capacity: 5.3-5.5 Mtpa Domestic Price: USD 70-72/ton Transport from the UAE: USD 5-10/ton

*Data for Sudan is per the CEMEX report on the Sudan cement industry; the government of Sudan has currently fixed a minimum price of USD 60 per ton, and data for Iraq was reported by the United States Agency for International Development (USAID) as of November 25, 2007 Sources: MEED and NBK Capital

Cost Structure Vital to Survival In the current excess supply scenario, it essentially comes down to survival of the fittest, which can be achieved only through cost efficiencies. Energy remains a crucial component of the total cost of production for cement companies. The UAE cement companies are at a disadvantage compared to some of their GCC peers with regard to the energy issue since the gas prices for the UAE cement players are not subsidized by the local government, unlike significantly subsidized rates for gas in other GCC countries.
Figure 1-8 Average Cash Cost Analysis UAE Manufacturers Lack Competitive Edge
EBITDA Margins 2008 70% 57% 64% 60% 66% 66% 31% 35% 23% 17% 40% 23% 2009 65% 60% 58% 62% 65% 63% 28% 29% 30% 24% 36% 39% 1H 2010 65% 57% 54% 59% 63% 63% 16% 15% 7% 6% 46% 47% Cash Cost (USD) / Ton 2008 19.7 28.3 25.9 25.4 22.6 19.2 62.3 56.7 68.6 60.8 25.1 31.7 2009 18.7 25.0 25.9 23.0 21.5 16.9 53.4 51.5 53.4 45.0 35.2 32.9 1H 2010 19.7 22.2 30.0 24.2 23.7 17.5 47.0 40.9 45.4 52.7 27.4 45.6

Company Name

Country

Optimizing for cost efficiency will be key to survival for the cement players in the UAE in the near- to mid-term

Yamama Cement Saudi Arabia Saudi Cement Saudi Arabia Eastern Province Cement Saudi Arabia Yanbu Cement Southern Cement Tabuk Cement Fujairiah Cement Gulf Cement Ras Al Khaimah Cement Union Cement Raysut Oman Cement Saudi Arabia Saudi Arabia Saudi Arabia United Arab Emirates United Arab Emirates United Arab Emirates United Arab Emirates Oman Oman

Sources: Reuters Knowledge, company financial statements, and NBK Capital

nbkcapital.com | 9

September 14, 2010

MENAinFocus

In Saudi Arabia, the average cash cost of production was USD 20-30 per ton in 1HQ2010 while for the UAE players, the average cash cost of production was USD 4050 per ton. (Refer to Table 1-8.) Of late, the declining volumes, sliding prices, and relatively higher total cost of production in the UAE led to unattractive EBITDA margins of around 8% to 10% versus the healthy average EBITDA margin of around 60% for the Saudi Arabian players. Worth highlighting is that the UAE producers cash cost of production is nudging closer to the prevailing market price of cement, leaving the manufacturers very little room. Lowering costs by using the most efficient mix of energy, cost cutting in other areas, avoiding inventory piles through volume push, and thus surviving through the lean period will define the modus operandi for the cement players in the UAE in the near- to mid-term. Among the UAE players, our cost analysis shows that, in the last two years, Gulf Cement Company followed by Ras Al Khaimah Cement Company have the lowest fixed cost per ton while Union Cements fixed costs are about 35-40% higher. The lower fixed costs are favorable for the former companies in difficult economic conditions as these companies benefit from additional operating leverage versus Union Cement.
Figure 1-9 Fixed Cost (FC) and Variable Costs (VC) Comparison of Select UAE Players
Values in AED Gulf Cement FC/Ton VC/Ton 25.4 21.7 14.5 194.9 171.4 138.1 Union Cement FC/Ton VC/Ton 25.4 34.0 33.3 207.5 144.2 174.8 Ras Al Khaimah Cement FC/Ton VC/Ton 17.8 24.7 16.8 244.5 185.5 159.9

Lower fixed costs are desirable in tough economic conditions

2008 2009 1H 2010*

*NBK Capital estimates Sources: Company financial statements and NBK Capital estimates

As a result of the higher cost of production and unfavorable market prices, the EBITDA margins of UAE companies deteriorated significantly between 2009 and 1H2010. Saudi Arabia, on the other hand, benefits from relatively attractive EBITDA margins. dividend Play Theme Could Vanish For the last two years, cement companies in the UAE have paid handsome dividends. Long-term investors viewed the cement sector favorably for the rich payout ratios despite declining profits. However, in the current conditions, UAE cement results are not only perturbed by low volume and declining prices, but a selected few are also burdened with losses in investment portfolios. With deteriorating EBITDA margins for the UAE cement players, and possibly strained free cash flows (FCF) in the near- to mid-term despite low capital expenditures (capex) (see Figure 1-10), cement companies may opt to shrink dividends in the near future. Most UAE cement companies are net debt negative, implying significant cash balances, which is ideally suited for the current scenario. However, on the back of weak fundamentals, contracting margins, and diminishing returns on equity, it should not be surprising if manufacturers chose to retain the cash balances to manage working capital requirements rather than distribute dividends. Up until FY2009, a few UAE cement companies paid dividends by dipping into previous earnings, but the trend seems unlikely to continue as companies seek to break even in the near- to mid-term.

n b k c a p i t a l . c o m | 10

September 14, 2010

MENAinFocus

Figure 1-10 UAE Dividend Story Could Dissipate with Tightening FCF/share
Div Dividend FCF/Share Yield Payout Current 2009 2008 2009 2008 1H 2010 2009 2008 (%) Dividend per Share 0.06 0.10 0.45 0.10 0.09 0.10 0.22 0.15 0.45 0.11 0.23 0.09 0.10 2.00 0% 26% 0% 40% 83% 67% 51% 358% 43% (0.00) (0.08) (0.02) (0.47) (0.08) (0.09) 0.03 (0.02) (0.32) (0.50) 0.21 0.14 0.23 0.09 0.12 0.08 (0.03) (0.01) (0.06) (0.04) DIV /FCF Payout 2009 .48x .7x .86x 2008 -.16x 1.87x -4.23x -1.57x -2.66x

Weak fundamentals could prompt UAE cement manufacturers to prioritize cash retention versus dividend distribution considering the potential of stretched working capital requirements in the near future

Company Name

Arkan Building Materials Company PJSC Fujairah Cement Industries PSC Gulf Cement Company PSC National Cement Company PSC Ras Al Khaimah Cement Company PSC Sharjah Cement & Industrial Development Umm AlQaiwain Cement Industries Co. PSC Union Cement Company PSC

(0.56) (1.42) -.11x (0.19) 0.11

6.90 227% 5810% 12.93 121% 14.49 67% 10.20 49% 0%

-2.34x 4.08x .39x -15.55x

7.35 118%

Sources: Reuters Knowledge and NBK Capital

Peer Comparison Further dampens UAE Cement Sector Attractiveness The UAE cement industry averages an enterprise value (EV) per ton of USD 99, bordering on the replacement cost in India and/or China. According to industry sources, setting up a greenfield cement project in the UAE could cost USD 120180 per ton; the higher end reflects European machinery, and the lower end reflects high-grade machinery imported from China. The graph below mirrors the current position of GCC cement players based on their EV per ton versus the trailing-twelve-month (TTM) EBITDA margin. Presently, no GCC cement company appears in the preferred zone (top-left quadrant; high EBITDA and low EV per ton). Meanwhile, some Saudi manufacturers, although expensive, have the potential to outperform other GCC peers and, hence, they appear in the top-right quadrant, edging closer to the average EV per ton.
Figure 1-11 UAE Cement Players Low EBITDA Margins Justify Cheap Valuations
70 TCC 60 SCC EPCC YSCC YCC

EBITDA Margin LTM

Unsurprisingly, UAEs integrated cement players with their deteriorating EBITDA margins remain lackluster versus GCC peers with higher margins driven by the low cash cost of production

50 OCOI 40 RCCI QNCD 30

20

GCEM RAKCC FCI SCIDC UCC

10

0 0 50 100 200 250 EV/Ton (USD) EV/Ton Versus EBITDA Margin LTM 150 300 350

Sources: Reuters Knowledge, Bloomberg, and NBK Capital

While the average EV per ton for the GCC players is USD 255, the same for the UAE players averages 60% lower due to the various issues of high costs of production, surplus capacity, weak industry outlook, and limited export opportunities, as discussed earlier. Long-term strategic investors could be eyeing the UAE as a doorway to tap African markets.

n b k c a p i t a l . c o m | 11

September 14, 2010

MENAinFocus

For instance, the recent acquisition by UltraTech of ETA Star Cement Co. assets in the UAE, Bahrain, and Bangladesh was concluded at an EV per ton of USD 120. ETA Star Cements facilities include a 2.3 Mtpa clinker plant and 2.1 Mtpa of cement grinding capacity in the UAE as well as 0.4 Mtpa and 0.5 Mtpa of grinding capacity in Bahrain and Bangladesh. It is not surprising that well-established players such as UltraTech weigh the risks of the weak industry dynamics primarily in the GCC and the potential for negative return on investment in the near-term against the rewards of the attractive valuations in the UAE and the long-term expansion of the geographical footprint to close in on an EV/ton of USD 120 (enterprise value of USD 380 million).
Figure 1-12 UAE Cement Players EV/ton is 60% Lower than the GCC Peer Average
EBITDA MCap. EV (USD Performance EV/EBITDA Margin (USD MM) MM) (% YTD) (% LTM) 148 324 291 248 91 1,832 1,836 1,179 1,025 432 996 649 584 213 193 450 238 78 2,159 1,733 1,336 987 316 1,096 633 578 (17.7) (9.4) 0.0 (19.1) (31.7) 17.1 7.6 (13.2) (10.2) (7.0) 3.2 (16.1) (8.1) (15.6) (3.3) 13.1 5.9 28.2 24.9 8.6 9.3 8.0 9.7 8.3 6.7 9.5 8.1 8.1 16.1 8.5 9.0 17.7 14.6 5.8 13.5 59.5 63.9 58.6 54.3 64.5 34.4 39.9 45.0 12.1 52.5 EV/Ton (USD) 106 70 178 70 72 239 275 318 276 233 248 228 222 99 255

Company Name

Country

Sharjah Cement & Industrial Development United Arab Emirates Gulf Cement Company PSC Fujairah Cement Industries PSC Union Cement Company PSC Ras Al Khaimah Cement Company PSC Saudi Cement Company Yamama Saudi Cement Company. Ltd. Yanbu Cement Company Eastern Province Cement Company Tabuk Cement Company Qatar National Cement Company (QSC) Raysut Cement Company SAOG Oman Cement Company SAOG Average UAE Peer Average United Arab Emirates United Arab Emirates United Arab Emirates United Arab Emirates Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Qatar Oman Oman

At less than half the EV/ton versus peers, UAE cement players could attract long-term investors for M&A activity, but equity investors are likely to shun the industry in the nearmidterm

Sources: Reuters Knowledge, Bloomberg, and NBK Capital

Overall, the UAE cement sector remains lackluster. Contracting EBITDA margins, demand vaporization, and limited growth prospects justify the cheap valuations and make this industry unattractive in the near- to mid-term. Moreover, the notably low trading liquidity in the sector discourages investors. While the long-term view for merger and acquisition (M&A) activity seems reasonable, the overall cement sector remains less than favorable in the near- to mid-term.

n b k c a p i t a l . c o m | 12

September 14, 2010

MENAinFocus

IN FOCUS 2

OMANI BANkS: 1h2010 UPdATE

We examine the performance of a sample of Omani banks in 1H2010 in terms of balance sheet growth, liquidity, profitability, asset quality, and capitalization. The sample includes the six local commercial banks listed on the Muscat Securities Market (MSM). The Omani banking sector performance in 1H2010 was largely similar to the regional performance, which was characterized by lackluster economic activity and decreased demand for credit, in general. Most of the sampled banks were able to increase their operating income, supported by strong growth in net interest income, while net profit growth was supported by a general decline in loan loss provisioning charges in 1H2010. NPLs grew for half of the sampled banks in 1H2010, although at a slower pace than seen in FY2009, but NPL coverage stayed above 100% for all banks. All the sampled banks witnessed a decline in their CARs between December 2009 and June 2010; however, the CARs were still above the 12% minimum required by the Central Bank of Oman (CBO). Between December 2009 and May 2010, total banking sector loans in Oman grew by a marginal 2%, after growing by 6% in FY2009, and an average of 40% in the two years before. The sampled banks posted mixed results, with the smaller banks posting stronger loan growth than their larger peers. Ahli Bank, the smallest bank in our sample in terms of total assets, recorded the highest loan growth in 1H2010 at 20%, driven by a surge (+36%) in corporate loans. Bank Sohar was the outperformer in FY2009, posting a 24% growth rate in loans, driven primarily by an increase in credit extended to financial institutions. Bank Muscat, on the other hand, the largest bank in Oman, witnessed a considerable slowdown in lending, as the bank posted a slight decline (-0.3%) in net loans in 1H2010, following modest 3% growth in FY2009. Oman International Bank (OIB) was the only bank to post a decline in loans in FY2009 (-1.9%) and 1H2010 (-2.4%). In Figure 2-1, we plot the growth in loans and deposits for our sampled banks in FY2009 and 1H2010.
Figure 2-1 Growth in Loans and Deposits in 1H2010 and FY2009
60%
52%

50% 40% 30%

24%

46%

Ahli Bank recorded the highest loan growth in 1H2010, driven by a surge in corporate loans

20% 10%
3% 4%

17%

20% 18% 13% 8% 10% 4% 3% 5% 0.1% 1% 12%

0% -10%

-0.3%

-0.03% -3%

-2% -2%

-3% -6%

Bank NBO Muscat

Bank Bank Dhofar Sohar Growth in Loans

OIB

Ahli Bank NBO Bank Muscat

Bank Bank Dhofar Sohar Growth in Deposits

OIB

Ahli Bank

Munira Mukadam
T. +971 4365 2858 E. munira.mukadam@nbkcapital.com Sources: Banks financial statements and NBK Capital

2009

1H2010

Tariq van der Loo

T. +971 4365 2812 E. tariq.vanderloo@nbkcapital.com

Deposit growth, however, was healthier than loan growth in 1H2010, with all banks experiencing positive growth. At the sector level, deposits grew by 7% between December 2009 and May 2010,

n b k c a p i t a l . c o m | 13

September 14, 2010

MENAinFocus

after growing by just 6% in FY2009. Ahli Bank and Bank Muscat outperformed the sector and their Omani peers with deposits increasing by 12% and 10%, respectively, in 1H2010. In FY2009 and 1H2010, the focus on raising low-cost deposits increased in anticipation of downward pressure on net interest margins due to slow loan growth. At Bank Muscat, for example, the cheaper current and call deposits grew by 21% in 1H2010. Comparatively, the more expensive time deposits grew by just 8% in the same period. Similarly, National Bank of Oman (NBO) witnessed a 17% increase in current and savings deposits, whereas time deposits declined by 4% in 1H2010. The upside of the slowdown in lending in 1H2010 was improved liquidity. Several banks witnessed a decline in the simple loans-to-deposits ratio (LDR) in 1H2010, as deposit growth exceeded loan growth in that period, enhancing the liquidity position of these banks (Figure 2-2).
Figure 2-2 Loans-to-Deposits Ratios: June 2010 versus December 2009
140%
125%

120%

113% 108% 108%

108%

105% 95% 96% 84% 82% 95%

102%

100%

Loans-to-deposits ratios decreased for several banks in 1H2010, resulting in an enhanced liquidity position for these banks

80%

60%

40%

20%

0% Bank Muscat NBO Bank Dhofar 2009 Bank Sohar Jun-2010 OIB Ahli Bank

Sources: Banks financial statements and NBK Capital

At the sector level, the LDR dropped from 107% in December 2009 to 102% in May 2010. OIB has historically maintained the lowest LDR among the sampled banks. The bank continued to do so at the end of June 2010, with an LDR of 82%, versus an LDR of 108% for the banks peers, giving OIB an advantage to expand its loan book more easily compared to its peers when lending appetite returns. Bank Muscat, on the other hand, had an LDR of 113% at the end of June 2010, the highest among the banks peers. We would like to note that the lending ratio implemented by the CBO is 87.5%; however, the deposit base in this case includes borrowings and equity. As mentioned earlier, most of the sampled banks managed to increase their operating income in 1H2010 as illustrated in Figure 2-3. The increase in operating income was primarily supported by growth in net interest income (+10% for the combined banks in 1H2010), despite sluggish loan growth during the period. Fee and commission income, on the other hand, was weak in 1H2010, posting a combined growth of merely 2% in 1H2010. Bank Sohar, the youngest bank (established in 2007) in the sample, outperformed peers in FY2009, as the banks operating income grew by 64% driven by net interest income that more than doubled in that year. In 1H2010, Ahli Bank posted the largest increase in operating income at 55%, driven by a 43% expansion in net interest income.

n b k c a p i t a l . c o m | 14

September 14, 2010

MENAinFocus

Figure 2-3 Growth in Operating Income and Net Profit in 1H2010 and FY2009
125% 100% 75% 50%

261% 98%

64% 55% 43% 26% 7% 16% 11% 18% 9% 7% 44%

Most banks achieved positive growth in net profit and operating income in 1H2010; however, OIB underperformed the group

25% 0%
-3% -7% -3%

-4%

-8% -21% -22% -42% -27% -22%

-25% -50% -75% Bank Muscat NBO Bank Dhofar Bank Sohar OIB Ahli Bank

Bank Muscat

NBO

Bank Bank Dhofar Sohar * Growth in Net Profit

OIB

Ahli Bank

Growth in Op. Income 2009 1H2010

* Bank Sohar reported a net profit in 2009 versus a net loss in 2008 Sources: Banks financial statements and NBK Capital

With regard to bottom-line growth, half the banks experienced a decline in net profit in FY2009, on the back of high provisioning charges (Figure 2-3). NBO witnessed the largest decline in net profit of 42% in FY2009 as net loan loss provisions surged to RO 12.95 million (33% of income before loan loss provisions [IBP]). Bank Sohar, on the other hand, recorded a decline in net provisioning from RO 5.4 million in 2008 to RO 2.7 million in 2009, driven by a decline in general provisioning charges. There was some improvement in 1H2010, as net loan loss provisioning charges declined for most banks, compared with 1H2009. Total provisioning charges for the sampled banks declined by 61% in 1H2010. Bank Muscat was the main reason for this drop as the bank witnessed the largest decline in provisioning, from RO 46.6 million in 1H2009 to RO 14 million in 1H2010. To put things into perspective, loan loss provisions accounted for 23% of Bank Muscats IBP in 1H2010, versus 44% of IBP in 1H2009. However, the bank recorded a year-on-year (Y-o-Y) decline in net profit in 1H2010 due to a large one-off gain (sale of the stake in HDFC Bank in India) of RO 53.2 million recorded in 1H2009, which inflated net profit during that period. After being adjusted for that one-off gain, Bank Muscats net profit in 1H2010 compares favorably to the adjusted net profit of RO 7.2 million in 1H2009. Bank Sohar and Ahli Bank outperformed their Omani peers, with growth in the bottom line mainly supported by robust net interest income growth in 1H2010. OIBs net interest income, on the other hand, declined in 1H2010 (down 9%), resulting in an 8% drop in operating income in 1H2010 and a 22% decline in net profit. In Figure 2-4, we compare the net loan loss provisioning charges to average gross loans in FY2009 and 1H2010. This measure (risk cost) decreased for all banks in 1H2010, with the exception of Ahli Bank. Bank Muscat and Bank Dhofar had the largest drops in their risk costs, which declined to 0.7% and 0.15%, respectively, in 1H2010 (annualized), compared to 2.23% and 0.89%, respectively, in FY2009.

n b k c a p i t a l . c o m | 15

September 14, 2010

MENAinFocus

Figure 2-4 Net Loan Loss Provisioning Charges-to-Average Gross Loans: 1H2010 versus FY2009
2.5%
2.23%

2.0%

1.5%

1.0%

0.90% 0.70%

Risk cost declined in 1H2010 compared with FY2009 for the majority of the sampled banks
0.5%

0.83%

0.89%

0.38% 0.15%

0.29% 0.06% 0.08%

0.0%
-0.12% -0.11%

-0.5% Bank Muscat NBO 2009 Bank Dhofar Bank Sohar 1H2010 (annualized) OIB Ahli Bank

Sources: Banks financial statements and NBK Capital

The decline in provisioning was accompanied by a slowdown in NPL formation for the Omani banks, in general. Bank Muscat, for example, saw its NPLs increase by 7% in 1H2010, while NPLs had increased more than two-fold in 2009, driven by the banks exposure to some troubled Saudi conglomerates. Three of the sampled banks saw an increase in the NPLs-to-gross loans ratio between December 2009 and June 2010 as seen in Figure 2-5. NBO and Bank Dhofar, on the other hand, witnessed a notable drop in NPLs, of 10% and 12%, respectively, in 1H2010, resulting in a drop in the banks NPLs-to-gross loans ratio at the end of June 2010.
Figure 2-5 NPLs-to-Gross Loans Ratios: June 2010 versus December 2009
7.0%

6.0% 5.0% 5.0% 4.3% 4.0% 4.6% 4.3% 3.7% 3.1% 3.0% 2.7%

5.0%

Three of the sampled banks witnessed an increase in the NPLs-to-gross loans ratio between December 2009 and June 2010
1.0% 2.0%

0.2% 0.3% 0.0% Bank Muscat NBO Bank Dhofar 2009 Bank Sohar Jun-2010 OIB

0.3% 0.3%

Ahli Bank

Sources: Banks financial statements and NBK Capital

n b k c a p i t a l . c o m | 16

September 14, 2010

MENAinFocus

The NPL coverage ratios of the Omani banks, however, were comfortable at the end of June 2010, despite a decline in net provisioning charges in 1H2010. In fact, between December 2009 and June 2010, NPL coverage increased for most of the banks. Bank Sohar exhibited the highest NPL coverage ratio, nearly 500% (Figure 2-6), as of June 2010. All the other banks also maintained coverage ratios of more than 100% as of June 2010. Although the Omani banks asset quality indicators have shown some positive signs in 1H2010, we believe the banking sector is still vulnerable due to the lackluster economic growth. Furthermore, a few of the banks have exposure to Dubai World: Bank Muscat, RO 19.25 million; National Bank of Oman, RO 8.7 million; and Bank Sohar, RO 1.6 million. The final resolution regarding the Dubai World restructuring plan will determine the impact of these exposures on the respective banks, especially in terms provisioning requirements. Thus, we would not rule out weakening of asset quality in the latter half of 2010. Bank Dhofar, OIB, and Ahli Bank announced that they do not have any exposure to Dubai World.
Figure 2-6 NPL Coverage Ratios: June 2010 versus December 2009
250%

706% 498% 221% 200%

200%

150%

The NPL coverage ratios of the Omani banks were comfortable at the end of June 2010, despite a decline in net provisioning charges in 1H2010
50% 100% 107% 108% 94% 109% 109%

127% 97% 103%

0% Bank Muscat NBO Bank Dhofar 2009 Bank Sohar Jun-2010 OIB Ahli Bank

Sources: Banks financial statements and NBK Capital

All the sampled banks witnessed a decline in their CARs between December 2009 and June 2010. Nevertheless, at the end of June 2010, the banks were sufficiently capitalized as illustrated in Figure 2-7, with CARs ranging between 12.4% (Bank Sohar) and 15.2% (OIB). In March 2010, the required ratio imposed by the CBO was raised from 10% to 12%, effective December 2010. The hike in the required CAR by the CBO will put additional pressure on some of the banks that have ratios close to the 12% mark.

n b k c a p i t a l . c o m | 17

September 14, 2010

MENAinFocus

Figure 2-7 Capital Adequacy Ratios: June 2010 versus December 2009
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Bank Muscat NBO Bank Dhofar 2009 Bank Sohar Jun-2010 OIB Ahli Bank*
15.2% 17.6% 17.6%

14.5%

15.1%

14.8%

15.3% 15.2% 14.4% 12.9% 12.4%

The capital adequacy ratios declined for all banks in 1H2010

Sources: Banks financial statements and NBK Capital *CAR unavailable as of June 2010

To conclude, the performance of the sampled banks has been satisfactory in 1H2010, with modest growth in net interest income and operating income for most banks. Similar to most regional banks, the bottom line of Omani banks suffered in FY2009 due to high provisioning. However, a decline in provisioning charges in 1H2010 supported growth in net profit in that period. Lending was sluggish and was outpaced by deposit growth in 1H2010, resulting in improved liquidity for several banks. The NPLs-to-gross loans ratio of some of the Omani banks has increased; however, NPL formation has slowed so far in 2010, and NPL coverage ratios remain above 100% for all the sampled banks. Furthermore, a notable drop in loan loss provisioning charges resulted in a general decline in the banks risk costs in 1H2010. Finally, the capitalization of the banks was sufficient at the end of June 2010, despite declining since December 2009. While these factors provide a positive indication for the sectors ability to face any further economic uncertainty, we remain cautious about weak balance sheet growth and a further weakening in asset quality in 2010.

n b k c a p i t a l . c o m | 18

September 14, 2010

MENAinFocus

COMPANIES IN FOCUS (PRICES AS OF AUGUST 31, 2010)

Sector Cou n try Cu rren cy Closin g Date of 12-Mon th Price L ast Rep ort F air V alu e Recommen d ation PE T 12M 2010 PB 2011 L atest 2010 2011

B a nk i ng
Abu Dhabi Commercial Bank Arab National Bank BankMuscat Banque Saudi Fransi The Commercial Bank of Qatar First Gulf Bank National Bank of Abu Dhabi Qatar National Bank Riyad Bank Samba Financial Grp. The Saudi British Bank Union National Bank UAE Oman Qatar UAE UAE Qatar AED OMR QAR AED AED QAR 1.70 37.90 0.843 43.90 75.40 13.85 11.35 140.70 27.40 61.75 43.50 3.02 01-Aug-10 13-Jul-10 01-Sep-10 12-Jul-10 28-Jul-10 28-Jul-10 28-Jul-10 07-Jul-10 12-Jul-10 13-Jul-10 13-Jul-10 29-Jul-10 1.80 51.20 0.86 49.30 92.80 20.90 14.10 157.50 34.10 60.60 51.10 3.80 Accumulate Buy Hold Accumulate Buy Buy Buy Accumulate Accumulate Hold Accumulate Buy na 11.2 18.8 12.7 12.2 5.5 8.0 11.4 13.2 12.4 19.6 5.3 na 10.5 12.9 11.6 11.7 5.4 8.3 10.5 12.6 11.8 12.8 5.8 3.6 9.7 10.5 10.3 9.6 4.1 6.6 9.4 10.6 10.9 10.1 4.3 0.4 1.6 1.5 1.9 1.5 0.8 1.2 2.6 1.4 2.3 2.3 0.6 0.4 1.5 na 1.8 1.4 0.8 1.2 2.3 1.4 2.1 2.1 0.6 0.4 1.4 na 1.6 1.3 0.7 1.0 2.0 1.3 1.9 1.8 0.5 Saudi Arabia SAR Saudi Arabia SAR

Saudi Arabia SAR Saudi Arabia SAR Saudi Arabia SAR UAE AED

Sector

Cou n try

Cu rren cy

Closin g Date of 12-Mon th Price L ast Rep ort F air V alu e

Recommen d ation

PE T 12M 2010

EV /EBIT DA 2011 T 12M 2010 2011

Ce me nt
Oman Cement Co. Ras Al Khaimah Cement Co. Raysut Cement Co. Qatar National Cement Co. Oman UAE Oman Qatar Kuwait OMR AED OMR QAR KWD 0.677 0.68 1.239 80.00 0.255 26-Jul-10 21-Feb-10 18-Jul-10 26-Apr-10 0.88 1.06 1.44 84.50 Under Review Buy Hold Accumulate Hold 7.1 16.9 9.9 8.5 10.6 10.8 14.6 10.6 10.7 na 9.1 13.0 9.7 10.7 na 8.4 8.9 8.0 7.2 9.8 8.9 7.5 8.2 9.9 na 7.4 7.1 7.6 9.9 na

R e a l Esta te
Salhia Real Estate Co.

Te l e c o mmuni c a ti o ns
Bahrain Telecommunications Co. du Etihad Etisalat Co. Jordan Telecom Grp. Oman Telecommunications Co. Qatar Telecom Saudi Telecom Telecom Egypt Vodafone Qatar Wataniya Bahrain UAE BHD AED EGP JOD OMR QAR EGP QAR KWD 0.555 2.09 52.75 172.81 5.19 1.144 171.00 38.10 16.92 7.85 1.800 16-Aug-10 26-Jul-10 18-Aug-10 22-Jul-10 11-Aug-10 27-Jul-10 01-Aug-10 28-Jul-10 17-Aug-10 18-Aug-10 0.700 2.55 66 194 4.57 1.800 205 Under Review 20.10 9.60 2.240 Accumulate Buy Buy Buy Buy Buy Buy Reduce Buy Buy 8.2 22.9 10.6 9.5 13.2 7.6 8.6 8.3 9.5 na 13.8 7.2 22.6 10.3 10.7 12.5 8.4 6.5 na 11.4 na 11.3 7.1 16.2 8.9 11.8 12.3 8.7 7.4 na 12.1 na 11.8 5.0 7.3 7.9 4.8 6.3 4.0 4.0 5.3 5.9 na 4.5 5.0 6.8 7.7 4.8 6.0 3.9 3.9 na 6.0 66.4 4.1 4.9 5.2 6.7 4.7 5.9 3.9 3.7 na 6.3 22.5 3.9

Saudi Arabia SAR Jordan Oman Qatar Egypt Qatar Kuwait

Egyptian Company for Mobile Svcs. Egypt

Saudi Arabia SAR

Tra nspo rta ti o n & Lo g i sti c s

Agility Air Arabia Aramex DP World Jazeera Airways Kuwait UAE UAE UAE Kuwait KWD AED AED USD KWD 0.435 0.79 1.72 0.48 0.102 26-Jul-10 19-Aug-10 Under Review Under Review 1.91 0.57 Under Review Accumulate Hold 3.9 10.4 13.0 26.7 nmf na na 13.0 23.0 na na na 11.1 16.6 na 2.6 8.2 7.7 12.1 nmf na na 7.7 10.5 na na na 6.8 9.4 na

O the rs
Almarai Dana Gas Lecico Qatar Electricity and Water Co. Savola The Sultan Center* Orascom Construction Saudi Arabia SAR UAE Egypt Qatar Kuwait Egypt AED EGP QAR KWD EGP 198.00 0.77 13.75 105.90 32.20 0.19 251.80 12-Jul-10 11-Aug-10 13-Jun-10 25-Jul-10 25-Aug-10 18-Aug-10 01-Sep-10 219.00 1.01 16.95 131.00 41.00 0.27 270.00 Accumulate Buy Buy Buy Buy Buy Accumulate 18.9 nmf 7.4 10.8 15.2 23.4 19.3 16.6 39.4 7.3 9.3 13.7 16.0 18.1 15.1 9.4 6.4 7.9 13.7 23.8 13.4 15.7 13.0 4.9 13.4 13.9 12.6 11.8 14.4 8.6 4.7 12.6 11.8 9.6 11.4 12.9 4.8 4.3 10.9 10.8 10.4 9.1

Saudi Arabia SAR

*Adjusted

n b k c a p i t a l . c o m | 19

September 14, 2010

MENAinFocus

RISk ANd RECOMMENdATION GUIdE

RECOMMENdATION BUY ACCUMULATE HOLD REDUCE SELL RISk lEVEl lOW RISk hIGh RISk UPSIdE (dOWNSIdE) POTENTIAl MORE THAN 20% BETWEEN 5% AND 20% BETWEEN -10% AND 5% BETWEEN -25% AND -10% LESS THAN -25%

1
dISClAIMER

The information, opinions, tools, and materials contained in this report (the Content) are not addressed to, or intended for publication, distribution to, or use by, any individual or legal entity who is a citizen or resident of or domiciled in any jurisdiction where such distribution, publication, availability, or use would constitute a breach of the laws or regulations of such jurisdiction or that would require Watani Investment Company KSCC (NBK Capital) or its subsidiaries or its affiliates to obtain licenses, approvals, or permissions from the regulatory bodies or authorities of such jurisdiction. The Content, unless expressly mentioned otherwise, is under copyright to NBK Capital. Neither the Content nor any copy of it may be in any way reproduced, amended, transmitted to, copied, or distributed to any other party without the prior express written consent of NBK Capital. All trademarks, service marks, and logos used in this report are trademarks or service marks or registered trademarks or registered service marks of NBK Capital. The Content is provided to you for information purposes only and is not to be used, construed, or considered as an offer or the solicitation of an offer to sell or to buy or to subscribe for any investment (including but not limited to securities or other financial instruments). No representation or warranty, express or implied, is given by NBK Capital or any of its respective directors, partners, officers, affiliates, employees, advisors, or representatives that the investment referred to in this report is suitable for you or for any particular investor. Receiving this report shall not mean or be interpreted that NBK Capital will treat you as its customer. If you are in doubt about such investment, we recommend that you consult an independent investment advisor since the investment contained or referred to in this report may not be suitable for you and NBK Capital makes no representation or warranty in this respect. The Content shall not be considered investment, legal, accounting, or tax advice or a representation that any investment or strategy is suitable or appropriate for your individual circumstances or otherwise constitutes a personal recommendation to you. NBK Capital does not offer advice on the tax consequences of investments, and you are advised to contact an independent tax adviser. The information and opinions contained in this report have been obtained or derived from sources that NBK Capital believes are reliable without being independently verified as to their accuracy or completeness. NBK Capital believes the information and opinions expressed in this report are accurate and complete; however, NBK Capital gives no representations or warranty, express or implied, as to the accuracy or completeness of the Content. Additional information may be available upon request. NBK Capital accepts no liability for any direct, indirect, or consequential loss arising from the use of the Content. This report is not to be relied upon as a substitution for the exercise of independent judgment. In addition, NBK Capital may have issued, and may in the future issue, other reports that are inconsistent with and reach different conclusions from the information presented in this report. Those reports reflect the different assumptions, views, and analytical methods of the analysts who prepared the reports, and NBK Capital is under no obligation to ensure that such other reports are brought to your attention. NBK Capital may be involved in many businesses that relate to companies mentioned in this report and may engage with them. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions, and estimates contained in this report reflect a judgment at the reports original date of publication by NBK Capital and are subject to change without notice. The value of any investment or income may fall as well as rise, and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price, or income of that investment. In the case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or to obtain reliable information about their value or the extent of the risk to which they are exposed. NBK Capital has not reviewed the addresses of, the hyperlinks to, or the websites referred to in the report and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to NBK Capitals own website material) is provided solely for your convenience and information, and the content of the linked site does not in any way form part of this document. Accessing such websites or following such links through this report or NBK Capitals website shall be at your own risk.

COPyRIGhT NOTICE
This is a publication of NBK Capital. No part of this publication may be reproduced or duplicated without the prior consent of NBK Capital.

n b k c a p i t a l . c o m | 20

September 14, 2010

MENAinFocus

NBk CAPITAl Kuwait Head Office 38th Floor, Arraya II Al Shuhada Street, Block 6, Sharq P.O.Box 4950, Safat 13050 Kuwait T. +965 2224 6900 F. +965 2224 6905 United Arab Emirates NBK Capital Limited Precinct Building 3, Office 404 Dubai International Financial Center P.O.Box 506506 Dubai, UAE T. +971 4 365 2800 F. +971 4 365 2805 MENA Research 35th Floor, Arraya II Al Shuhada Street, Block 6, Sharq P.O.Box 4950, Safat 13050, Kuwait T. +965 2224 6663 F. +965 2224 6905 E. menaresearch@nbkcapital.com.kw Turkey NBK Capital Arastima ve Musavirlik AS, Sun Plaza, 30th Floor, Dereboyu Sk. No.24 Maslak 34398, Istanbul, Turkey T. +90 212 276 5400 F. +90 212 276 5401 Brokerage 37th Floor, Arraya II Al Shuhada Street, Block 6, Sharq P.O.Box 4950, Safat 13050, Kuwait T. +965 2224 6964 F. +965 2224 6978 E. brokerage@nbkcapital.com

NATIONAl BANk OF kUWAIT Kuwait National Bank of Kuwait SAK Abdullah Al-Ahmed Street P.O. Box 95, Safat 13001 Kuwait City, Kuwait T. +965 2242 2011 F. +965 2243 1888 Telex: 22043-22451 NATBANK INTERNATIONAl NETWORk Bahrain National Bank of Kuwait SAK Bahrain Branch Seef Tower, Al-Seef District P.O. Box 5290, Manama, Bahrain T. +973 17 583 333 F. +973 17 587 111 Saudi Arabia National Bank of Kuwait SAK Jeddah Branch Al-Andalus Street, Red Sea Plaza P.O. Box 15385 Jeddah 21444, Saudi Arabia T. +966 2 653 8600 F. +966 2 653 8653 United Arab Emirates National Bank of Kuwait SAK Dubai Branch Sheikh Rashed Road, Port Saeed Area, ACICO Business Park P.O. Box 88867, Dubai United Arab Emirates T. +971 4 2929 222 F. +971 4 2943 337 Jordan National Bank of Kuwait SAK Head Office Al Hajj Mohd Abdul Rahim Street Hijazi Plaza, Building # 70 P.O.Box 941297, Amman -11194, Jordan T. +962 6 580 0400 F. +962 6 580 0441 Lebanon National Bank of Kuwait (Lebanon) SAL Sanayeh Head Office BAC Building, Justinian Street P.O. Box 11-5727, Riyad El Solh 1107 2200 Beirut, Lebanon T. +961 1 759 700 F. +961 1 747 866 Iraq Credit Bank of Iraq Street 9, Building 187 Sadoon Street, District 102 P.O.Box 3420, Baghdad, Iraq T. +964 1 7182198/7191944 +964 1 7188406/7171673 F. +964 1 7170156 Egypt Al Watany Bank of Egypt 13 Al Themar Street Gameat Al Dowal AlArabia Fouad Mohie El Din Square Mohandessin, Giza, Egypt T. +202 333 888 16/17 F. +202 333 79302 United States of America National Bank of Kuwait SAK New York Branch 299 Park Avenue, 17th Floor New York, NY 10171, USA T. +1 212 303 9800 F. +1 212 319 8269 United Kingdom National Bank of Kuwait (Intl.) Plc Head Office 13 George Street, London W1U 3QJ, UK T. +44 20 7224 2277 F. +44 20 7224 2101 NBK Investment Management Limited 13 George Street London W1U 3QJ, UK T. +44 20 7224 2288 F. +44 20 7224 2102 France National Bank of Kuwait (Intl.) Plc Paris Branch 90 Avenue des Champs-Elysees 75008 Paris, France T. +33 1 5659 8600 F. +33 1 5659 8623 Singapore National Bank of Kuwait SAK Singapore Branch 9 Raffles Place #51-01/02 Republic Plaza, Singapore 048619 T. +65 6222 5348 F. +65 6224 5438 Vietnam National Bank of Kuwait SAK Vietnam Representative Office Room 2006, Sun Wah Tower 115 Nguyen Hue Blvd, District 1 Ho Chi Minh City, Vietnam T. +84 8 3827 8008 F. +84 8 3827 8009 China National Bank of Kuwait SAK Shanghai Representative Office Suite 1003, 10th Floor, Azia Center, 1233 Lujiazui Ring Rd. Shanghai 200120, China T. +86 21 6888 1092 F. +86 21 5047 1011 ASSOCIATES Qatar International Bank of Qatar (QSC) Suhaim bin Hamad Street P.O.Box 2001 Doha, Qatar T. +974 447 3700 F. +974 447 3710 Turkey Turkish Bank Head Office Valikonagl Avenue No. 1 P.O.Box 34371 Nisantasi, Istanbul, Turkey T. +90 212 373 6373 F. +90 212 225 0353

n b k c a p i t a l . c o m | 21

KUWAIT

DUBAI

ISTANBUL

CAIRO