Global Research Sector Construction Contractors Equities - MENA June 26, 2011

MENA Construction Contractors

MENA Construction
Faisal Hasan, CFA Head of Research [email protected] Tel: (965) 2295-1270 Hettish Karmani Senior Financial Analyst [email protected] Tel: (965) 2295-1281 Digvijay Tanwar, CFA Senior Financial Analyst [email protected] Tel.: (965) 22951275 Global Investment House www.globalinv.net

Global Research contractors universe profits expected to go up by 30% in 2011e Saudi Arabia, Abu Dhabi and Qatar to lead projects market Margins to remain under pressure in the long run Strong Buy: DSI; BUY: Al Khodari, MMG & OCI; HOLD: ARABTEC

Long-term growth in MENA contractors to remain firm

Regardless of the collapse in regional real estate markets, we believe long-term outlook for MENA contractors remains attractive. The region displays relatively unique characteristics, in our view: decent demographics, strong state budget surpluses fueled by high oil prices, muscular sovereign wealth funds and a drive to diversify economies. Hence we believe the infrastructure and construction boom in MENA region would translate well in terms of profitability for the regional contractors.

Saudi Arabia, Qatar & Abu Dhabi to remain as key markets

In our view Dubai construction market will remain fundamentally weak in the coming years as the Emirate is facing issues related to its debt maturities. However there are ample opportunities for contractors in other MENA geographies, in our view, namely Abu Dhabi, Saudi Arabia & Qatar. These markets have undertaken massive infrastructure spending plans backed by government and government related entities.

Margins to shrink in the long run

MENA region contractors margins have remained significantly higher than the international peers. These were higher as during the construction boom, developers were awarded high margin contracts. However, lately that phase has passed and now the competition has emerged which has forced contractors to shift their business mix. Nevertheless we believe that margins would remain under pressure in the long run as many international contractors have entered the market.

Diversified contractors remain our top pick: OCI, DSI & Al Khodari
We initiate on Al Khodari as BUY, as we believe the stock has profound value, less risks and an appealing story. Al Khodari enjoys the highest margins in our universe due to its ability to serve across all segments of infrastructure where others lack expertise and reach. Orascom Construction is also a well diversified company which has the ability to overcome the shortcomings of one business by other. Secondly the company is present across three continents which reduces its risks and increases it reach. We have a Hold stance on Arabtec as we believe the stock has inherent risks and less diversification ability. Drake & Scull on the other hand is relatively similar to Arabtec but with lower risks and upside potential attached. The company is a former Dubai-based MEP contractor that has started to diversify in regional and international markets.
Global Research - MENA Construction Contractor Sector
Com pany Mkt. Cap EV/Backlog EV/EBITDA (USD m n) 2011e 2011e 787.7 516.9 589.3 9,580.1 733.3 0.89 0.13 0.35 2.04 0.78 10.24 2.74 10.88 14.44 9.60 EV/Rev. 2011e 2.7 0.3 0.9 2.3 1.4 P/E 2011e 11.8 8.8 10.2 12.1 21.6 11.8 CMP (LC) Target Upside / Price (LC) (Dow nside) 80.50 1.34 1.28 326.90 25.20 15.8% 5.5% Rec.

Al Khodari Arabtec Holding Drake & Scull Orascom Cons. Mojil Group

69.50 1.27 0.99 272.60 22.00

BUY HOLD

29.3% Strong Buy 19.9% 14.5% BUY BUY

Sector 1.08 11.89 1.8 Source: Bloomberg & Global Research * AKS, MMG price as of 22nd June while the rest are as of 23rd June

Global Research MENA

Construction Sector

Valuation
BUY Target Price SAR80.5
Al Khodari Sons Company (AKS) Initial Coverage
We initiate coverage on Al-Khodari with a BUY rating and a price target of SAR80.5 per share. Al-Khodari shares are trading at a PE of 11.8x in 2011e and 10.2x in 2012e. We see strong pick-up in construction activity in Saudi Arabia, which interprets into revenue and net income CAGR of 16.7% and 12.9% during 2010-14. Al-Khodari has a strong history of securing government contracts, consistent order book growth and managements focus on high-margin sustainability. The Company is a well diversified contractor in the infrastructure segment, which differentiates it from others that are more horizontally diversified. Company is an ideal proxy to gauge the Saudi Arabia construction and infrastructure boom.

HOLD Target Price AED1.34

Arabtec Holding (ARABTEC) Investment Update

Arabtecs recent performance has been significantly marred by a combination of the significant slowdown in the real estate and construction sectors regionally, as well as tight liquidity within. Margins have tightened on account of higher fixed costs in Dubai and lower margins elsewhere with minority eating significantly into profitability. In the near term, project delays, cancellations and a slow pipeline of opportunities are expected to be the primary challenge for Arabtec. From an internal company perspective, receivables management is the primary cause of concern since almost 65% of the balance sheet size is tied in receivables. The value of Arabtecs shares derived from the DCF is AED1.34/share. At current price, Arabtecs shares are trading at a P/E and P/B multiples of 8.8x and 0.7x, respectively for 2011e. Valuations now look fair and imply that the stock is trading at a discount of 5.5% from our target price. We maintain our HOLD recommendation.

Strong Buy Target Price AED1.28

Drake & Scull International (DSI) Investment Update

Unlike other contractors in UAE, Drake & Sculls equity story is relatively less risky and a diversified contractor that has expanded its reach from Dubai to MENA and now turning to Asia as well. Post its recent acquisitions in Saudi Arabia, the company was able to acquire its highest ever order of SAR2bn which raised its backlog to sales ratio from 1.5x in 2009 to 2.6x in 2011. Despite recent acquisition, Drake & Scull still has over AED500mn of cash which can be used for its future acquisitions and joint ventures. This cash position offers a huge cushion against any negative surprises regarding receivables. Its cash balance accounts for almost 50% of the companys market cap. Company has a huge upside potential of 29.3% and we recommend Strong Buy. DSI is currently trading at 2011e and 2012e PE of 10.2x and 9.7x respectively.

BUY Target Price SAR25.2

Mohammad Al-Mojil Group (MMG) Initial Coverage

We initiate coverage of MMG with a BUY rating and a price target of SAR25.2 per share. MMG shares are trading at a PE of 21.8x in 2011e and 19.6x in 2012e. Strong pick-up in the industrial segment specially oil & gas in Saudi Arabia with projects worth over USD50bn budget for the next five years would decipher continued flow of projects to Mojil which is a specialized oil and gas contractor. Company has secured YTD contracts of SAR2.8bn in 2011, while its backlog stands at SAR4.2bn, which is 1.8 times its 2011 revenues. Company has recently established two joint ventures and have acquired three companies to support its core business. Apart from that it has diversified its client base and has opened a new branch in Abu Dhabi whereby the group has now permission to work in oil, gas, petrochemical and also in civil construction sector.

BUY Target Price EGP326.9

Orascom Construction Industries (OCI) Investment Update

We view OCI as a high-quality stock. In our view, its construction business downturn would be compensated by its fertilizer business. Construction business backlog stands at EGP35.3bn, which is 1.9 times its 2011 revenues down from above 2 times previously. Since 2010, OCI has acquired three companies in the fertilizer segment and has entered into four joint ventures in the construction segment. Three of the joint ventures were in Italy, US and India in a way to diversify its backlog from their local market which has 27% share of the total. OCIs value generation capability after shelving of its cement business has been the nitrogen fertilizer which is on its way to be among 5 largest worldwide. The stock has enjoyed a strong rally since the Egyptian bourse reopened after the political turmoil. Stock has a further potential upside of 19.9% based on our SOTP value. At their current price, OCIs shares are trading at a P/E multiple of 12.1x and 9.7x for 2011 and 2012 respectively. We therefore recommend a BUY on the stock.

June 2011

Global Research - MENA

Construction Sector

Valuation Methodology
For arriving at the fair value, we have used a blend of two valuation methods: Cash flow approach represented by the Discounted Cash Flow method. Relative valuation using peer group P/E multiple.

Valutions
AKS (SAR mn) DCF PV of Cash Flows & Terminal Value Yr 1 Yr 2 Yr 3 Yr 4 Terminal MMG (SAR mn) ARABTEC (AED mn) DSI (AED mn)

154 202 171 284 3,981

8 102 140 284 4,318

(37) 176 87 141 1,706

(168) 167 70 171 2,335

Assumptions Growth Rate Beta Risk Free Rate Risk Premium COE WACC Equity Value DCF based Fair Value per Share Relative Valuation Peer Group Multiple Price based on Relative Valuation Method Fair Value Fair Value - DCF (80%) Fair Value - Relative Valuation (20%) Fair Value
Source: Global Research

3% 1.0 5.6% 7.0% 12.6% 10.3% 3,538 83.30

3% 1.0 5.6% 7.0% 12.6% 9.8% 3,561 28.50

3% 1.2 4.2% 7.0% 13.4% 11.5% 2,022 1.35

3% 1.0 4.2% 7.0% 11.7% 10.5% 2,852 1.31

11.80 69.40

11.80 11.90

11.80 1.31

11.80 1.15

83.30 69.40 80.52

28.50 11.90 25.18

1.35 1.31 1.34

1.31 1.15 1.28

* Orascom Construction is not presented because of its value being derived from SOTP method.

June 2011

Global Research - MENA

MENA Listed Contractors Multiples - 2011e
Ticker Name of the Company Market Cap (USD mn) 1m (%) 3m (%) 12m (%)

Construction Sector

P/E (x)

P/Bv (x)

MENA ALKHODAR AB ARTC UH DSI UH MMG AB DEPA DU DPW DU CGC KK NASS BI GECS OM OCIC EY UEGC EY Al Khodari & Sons Company Arabtec Holding Drake & Scull Mohammad Al-Mojil Group DEPA DP World Combined Contracting Group Nass Corporation Galfar Engg & Contracting Orascom Construction Ind. El Saed Contracting Co. 787.7 516.9 589.3 733.3 338.1 10,142.6 632.0 93.2 260.5 9,580.1 94.2 3.3% -2.3% -0.6% -6.5% -4.8% -0.8% 0.2% -8.0% -8.8% 7.4% 27.5% 15.6% 0.5% -4.4% 28.1% -13.5% 22.5% 3.3% 9.4% -4.3% 36.6% N/A N/A -16.9% 22.4% 19.7% -24.0% 50.5% 21.7% -23.2% 12.0% 20.7% -2.9% 11.8 8.8 10.2 21.8 NA 28.0 18.8 7.0 12.6 12.1 6.8 13.8 3.8 0.7 0.8 1.7 NA 1.3 4.4 0.7 1.2 2.6 1.2 1.8

World 1186 HK LT IN AEG SJ GAM MK VOVOS GA 6305 JT China Railway & Cons. Larsen & Toubro AVENG Limited GAMUDA Babis Vovos Int. Cons Hitachi Construction 10,771.6 22,638.0 1,953.7 2,537.0 48.1 4,638.4 2.3% 11.8% 0.4% 4.1% 37.2% -16.8% -20.5% 6.3% -3.1% 1.6% -16.3% -22.5% -25.9% 3.2% 2.7% 32.2% -39.5% -7.9% 7.4 23.3 9.9 19.2 24.0 33.8 18.8
Source: Zawya & Global Research

1.1 1.4 1.1 2.1 0.4 1.2 1.3

June 2011

Global Research - MENA

Construction Sector

Sensitivity Analysis
Al Khodari 80.49 8.3% 1.0% 84.6 72.7 63.3 55.8 49.6 Terminal Growth Rate 2.0% 3.0% 4.0% 97.9 82.5 70.9 61.7 54.4 116.1 95.5 80.5 69.1 60.2 142.7 113.3 93.1 78.5 67.4 5.0% 185.2 139.3 110.5 90.9 76.6 80.49 10.6% 11.6% 102.9 95.5 88.9 83.1 78.0 COE 12.6% 92.1 86.0 80.5 75.6 71.2 13.6% 83.1 78.0 73.3 69.1 65.3 14.6% 75.6 71.2 67.2 63.5 60.2

5.0% 116.1 6.0% 107.0 7.0% 99.0 8.0% 92.1 9.0% 86.0

WACC

9.3% 10.3% 11.3% 12.3%

Arabtec 1.34 1.0% 1.39 1.26 1.16 1.07 0.99 Terminal Growth Rate 2.0% 3.0% 4.0% 1.53 1.37 1.24 1.14 1.05 1.71 1.50 1.34 1.22 1.12 1.95 1.68 1.47 1.32 1.20 5.0% 2.31 1.92 1.65 1.45 1.30 1.34 6.0% 7.0% 8.0% 9.0% 10.0% 11.4% 1.71 1.63 1.56 1.49 1.43 12.4% 1.57 1.50 1.44 1.39 1.34 COE 13.4% 1.45 1.39 1.34 1.30 1.25 14.4% 1.35 1.30 1.26 1.22 1.18 15.4% 1.26 1.22 1.18 1.15 1.12

WACC

12.5% 13.5%

Drake & Scull 1.28 8.5% 9.5% 10.5% 11.5% 12.5% Terminal Growth Rate 1.0% 2.0% 3.0% 4.0% 1.32 1.47 1.67 1.96 1.19 1.30 1.44 1.64 1.08 1.17 1.28 1.42 1.00 1.07 1.15 1.26 0.93 0.98 1.05 1.13 5.0% 2.42 1.92 1.61 1.39 1.23 1.28 5.0% 6.0% 7.0% 8.0% 9.0% COE 9.7% 10.7% 11.7% 12.7% 13.7% 1.67 1.49 1.35 1.24 1.15 1.61 1.44 1.31 1.21 1.12 1.55 1.40 1.28 1.18 1.10 1.49 1.35 1.24 1.15 1.07 1.44 1.31 1.21 1.12 1.05

WACC

Mojil Group 25.18 7.8% Terminal Growth Rate 1.0% 2.0% 3.0% 4.0% 26.6 22.0 18.5 15.7 13.4 32.0 25.9 21.4 17.9 15.2 39.5 31.1 25.2 20.8 17.4 51.1 38.5 30.3 24.5 20.2 5.0% 71.0 49.8 37.5 29.5 23.8 25.18 5.0% 6.0% 7.0% 8.0% 9.0% COE 10.6% 11.6% 12.6% 13.6% 14.6% 39.5 34.9 31.1 27.9 25.2 34.9 31.1 27.9 25.2 22.8 31.1 27.9 25.2 22.8 20.8 27.9 25.2 22.8 20.8 19.0 25.2 22.8 20.8 19.0 17.4

WACC

8.8% 9.8% 10.8% 11.8%

* Orascom Construction is not presented because of its value being derived from SOTP method.

June 2011

COD

COD

COD

9.5% 10.5% 11.5%

COD

Global Research - MENA

Construction Sector

Global Research - Contractors Universe - 2011e

4.0 3.2 2.4 1.6 2.5 2.0 1.5 1.0 0.5 ARABTEC

0.8 MOJIL
AKS

DSI

OCI

Backlog / Sales (x)

3.0 2.4 1.8 1.2 0.6 15.0 12.0 9.0 6.0 3.0

EV/Backlog (x)

AKS OCI ARABTEC

ARABTEC MOJIL
MOJIL AKS AKS AKS

DSI

EV/Revenues (x)
5.0 4.0 3.0 2.0 1.0

DSI

EV/EBITDA (x)
25.0 20.0 15.0 10.0 5.0

AKS OCI ARABTEC

OCI ARABTEC MOJIL

MOJIL

DSI

P/Bv (x)
30.0% 24.0% 18.0% 12.0%

DSI

OCI

P/E (x)
20.0% 16.0% 12.0% 8.0%

6.0% 0.0%
AKS

4.0% 0.0%
OCI ARABTEC OCI ARABTEC
MOJIL MOJIL DSI DSI

Gross Margins
Source: Global Research

Net Margins

June 2011

ARABTEC

MOJIL

AKS

DSI

OCI

Global Research - MENA

Construction Sector

MENA Projects & Construction Market

MENA region is on track for a recovery from the global crisis. Growth accelerated to 3.8% in 2010 from 1.8% in 2009, mainly driven by the regions oil exporters. For 2011, IMF projects GDP growth of MENA to the tune of 4.1%. Oil importers within the region are expected to do exceptionally well as compared to 2010 mainly because of expectation of higher average oil prices in 2011 as compared to those in 2010. Within MENA, GCC region is expected to post nominal and real GDP growth in 2011 of 29.3% and 7.8% respectively.

MENA Country Comparison Active Backlog (USD bn) 601.9 411.4 229.0 217.2 95.1 85.0 80.0 64.0 316.4 2,100.0 GDP 2011e (USD bn) 578.6 363.8 172.8 194.3 66.0 174.9 231.1 26.5 402.0 2,210.0 Backlog/GDP (x) 1.04 1.13 1.33 1.12 1.44 0.49 0.35 2.42 0.79 0.95

Saudi Arabia UAE Kuwait Qatar Oman Algeria Egypt Bahrain Other MENA
Source: IMF, MEED & Global Research

Overall projects market size in the MENA region as of 2010 stood at USD2.1tn. Projects are spread over a period of 5-10years. Saudi Arabia stood out with a backlog share of 29% (USD601.9bn) followed by 20% of UAE at USD411.4bn.
Backlog Market Share - 2010 Break down of MENA Projects by Status - 2010 EPC Bid/PQ 12%

Bahrain 3% Algeria 4% Oman 4%

Other 15%

Egypt 4%

Saudi Arabia 29%

On Hold 31%

Execution 12%

Qatar 10% Kuwait 11%

UAE 20% Cancelled 16% Study/Desi gn 29%

Source: MEED, Zawya & Global Research

The prospects for new construction awards in Middle East and North African markets are positive. Growth rates in the MENA region remain high for the medium-term, both in terms of GDP and construction sector growth. With over USD1tn of planned infrastructure projects announced by the MENA regions governments through to 2016, many contractors are well positioned to benefit from the MENA regions robust bidding pipeline over the medium term.

June 2011

Global Research - MENA

Status of MENA projects by geography - 2010 100% 80%
60%

Construction Sector
Status of MENA projects by segment - 2010 100% 80%
60%

40% 20%
0% Dubai Qatar Abu Dhabi KSA Egypt MENA

40% 20%
0% Cons. Indst. Oil & Gas IWP

Cancelled/On Hold Execution Planned

EPC Bid/PQ Study/Design

Cancelled/On Hold Execution Planned

EPC Bid/PQ Study/Design

Cancelled MENA projects by segment/geography - 2010 100%

80%

Ongoing MENA projects by segment/geography - 2010 100%

80%

60% 40%
20%

60% 40%
20%

0%
Dubai Qatar Abu Dhabi KSA Egypt MENA

0%
Dubai Qatar Abu Dhabi KSA Egypt MENA

Construction

Industrial

Oil & Gas

IWP

Construction

Industrial

Oil & Gas

IWP

Source: MEED, Zawya & Global Research

Contracts Awarded in MENA

25
20

(USD bn)

15 10 5

2Q-07 4Q-07 1Q-08 3Q-08 2Q-09 4Q-09 1Q-10 3Q-10 2Q-11 Avg . 2008 Avg . 2010
Avg . 2007 Avg . 2009

4Q-11

1Q-07

3Q-07

2Q-08

4Q-08

1Q-09

3Q-09

2Q-10

4Q-10

1Q-11

3Q-11

Source: MEED

June 2011

Avg . 2011

Global Research - MENA

Construction Sector

GCC Projects Market

The road to recovery from the global economic downturn has unfortunately not remained an easy route for the GCC nations as it treads along a path of uneven recovery fuelled by a steady increase in oil prices. Despite witnessing a steady stream of investments flowing into the construction sector, the concentration has been skewed more towards energy and infrastructural developments. GCC projects market has witnessed an unparalleled growth. The projects market grew from USD633bn in 2005 to USD2.1tn at the end of 2010. Pre crisis level of projects market was USD2.5tn at the end of 2008. However after the initiation of crisis the projects market continued to deteriorate and the fall has not yet stopped.
GCC Project Markets (USD bn) 3,000 2,400
1,800 1,200

GCC Project (USD bn) - Country Wise - 2010 1,000 800 600 400 200 0
Kuwait Oman Qatar Bahrain KSA UAE

600 -

2008

2009

2005

2006

2007

Projects on Hold
Source: MEED

Projects

2010

Projects on Hold

Projects

In terms of overall size of the projects market, UAE stands at the top at USD815bn. However of these USD404bn worth of projects are on hold or either cancelled making it second biggest active projects market after Saudi Arabia. Saudi Arabia overall market size is USD680bn of which USD78bn are on hold or cancelled making it the top most projects market in the GCC. Within GCC, the smallest project market is Bahrain with active number of projects at USD63.9bn as of 2010. Post political turmoil in the country, it is actively pursuing some of its big scale projects as Durrat Al Bahrain and Bahrain Monorail which are worth over USD12bn. Within Global Research contractor universe, none of the Companies have either subsidiaries or operate in Bahrain. Recently the country received aid package worth USD10bn from the GCC governments to take on its developments plans ahead and help revive the economy. Oman is fifth biggest projects market in the GCC with active projects amounting to USD95.1bn. It was also one of the GCC country which witnessed political issues during the past six months. Even before it political disorder, country was going ahead with OMR30bn spending plan.

GCC Countries Construction Sector GDP - 2010 (USD b n) Nominal GDP Kuwait 129.0 Bahrain 21.7 Oman 53.8 Qatar 108.9 UAE 252.7 KSA 434.8
Source: IMF & Global Research

Construction Sector GDP CS as part of GDP 2.5 2.0% 1.0 4.7% 5.0 9.3% 8.2 7.6% 20.4 8.1% 21.3 4.9%

We have talked about other core markets of GCC in detail as our contractors universe have significant amount of backlog exposure in them.

June 2011

Global Research - MENA

Construction Sector

Saudi Projects Market

The projects in Saudi Arabia have grown at a CAGR of 16.8% during 2006-10. Saudi Arabia alike Qatar witnessed an increase in the order book despite the economic slowdown, for which the credit goes to the continued flow of petro dollar liquidity. Projects as of 2010 have reached USD680bn. Of the total projects, USD78bn worth of projects have either been delayed or postponed as of 2010. Nevertheless the active number of projects are highest in the GCC at USD602bn.

Saudi Arabia Projects - (USDbn)

1,000

800 600 400 200

-

2004

2005

2006 Projects on Hold

2007 Projects

2008

2009

2010

Source: MEED & Zawya

In 2011 alone the Kingdom is expected to spend USD155bn. The investment is quite necessary as the Kingdom is facing lot of political pressures over the increase in unemployment. Government originally budgeted spending of SAR540bn but with budgeted oil prices above USD70/barrel, the Kingdom has huge cushion to keep pushing its development programs.

Major Projects in Saudi Arabia

Project Name Sudair Industrial City Jazan Economic City King Abdullah Economic City Ras Al Zour Economic City Jazan Industrial City
Source: MEED & Zawya

Size (USDbn) 40.0 27.0 27.0 25.0 17.0

Project Name Saudi Landbridge Makkah, Madinah Rail Link Mina, Arafa Railway King Abdulaziz Int. Airport Devp. Project Ras Al Zour Port

Size (USDbn) 6.6 6.0 5.3 5.3 0.7

Within the development programs of 2011 the Kingdom has announced construction projects worth USD86bn alone. KSA construction sector accounts for a major share of the economy. The construction sectors real GDP growth was 2% in 2008, increase in government investment improved this annual growth rate to 5% in 2010 and it is expected to grow even faster at 6% in 2011. Saudi Arabia has major plans to improve its rail network, investing an estimated USD25bn and adding 3,900km of track through three major railway projects. The government recently announced plans to invest USD53bn in water projects over the coming 15 years. In response to power shortage concerns, the government has announced plans to spend USD80bn on increasing its power generation capacity and transmission network over the next 10 years.

Booming housing demand

Although the Kingdom is witnessing huge developments in the housing construction, housing market still suffers from large demand-supply gap due to rapid expansion of expatriate population along with domestic population and rapidly declining household size. Moreover, majority of the Kingdoms populace does not have their own houses and live in rented houses. Post recent political ups and downs in the country the Kingdom announced construction of 500,000 houses by 2015. To put this into outlook, the largest Saudi contractor, Saudi Bin Laden Group has the capacity to build 5,000 units per annum. To be conservative even if 200,000 units are being built the Kingdom would require some 8 groups of the size as big as Saudi Bin Laden to meet the housing demand.

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Construction Sector
Saudi King Abdullahs pledged to increase spending on housing by SAR55bn (USD15bn) to relieve the countrys home shortage. Saudi Arabias Real Estate Development Fund, which provides interest-free loans, will get SAR40bn. Another SAR15bn will be added to the housing budget to build affordable homes for state employees.

Oil & gas related projects Mojil to be key beneficiary

Saudi Arabia has embarked on a number of new mega-projects in a variety of industries. The majority of them are focused on the sectors of their economy in which the Kingdom has advantages, specifically in the oil and petrochemical industries. Oil and gas industry alone, is undertaking about SAR259bn, one fourth of the total. Some of the mega projects that Saudi Arabia is pursuing: USD10bn Aramco-Sumitomo chemical refining and petrochemical joint venture SAR37.5bn Aramco-Total export refinery SAR22.5bn Aramco-ConocoPhillips export refinery

Meanwhile, work continues on Aramco's USD20bn crude oil expansion program, which aims at raising Saudi oil production capacity from the current 11.3mbpd to 12.5mbpd by 2009. The gas initiative has been succeeding in conjunction with the expansion. This involves exploration for gas in Aramco's joint ventures with several foreign oil and gas companies, with the intention of supplying gas for local industrial use and power generation, eventually freeing up more crude oil for export. Companies involved in the development include Shell, Total, Russia's Lukoil, China's Sinopec, and Repsol of Spain. Mojil Group is expected to be key beneficiary of these oil gas projects as the Company is the only within our universe which specializes in oil and gas contracting. Company has already tieups with Aramco and Sabic which as of 2009 and 2010 contributed over 75% of the revenue. Going forward with Aramco and Sabic huge expansion plans we believe continued flow of projects to the Company.

Global Research contractors universe backlog exposure to Saudi Arabia

Out of the five contractors under Global Research coverage four operate quite actively in Saudi Arabia as two of them Saudi based. As of 2010, Saudi Arabia is the most active market within our construction companies in terms of their backlog share. Combined backlog exposure of companies under our coverage to Saudi Arabia is USD3.6bn which has increased from USD2.2bn in 2009.

Global Research contractors universe backlog exposure in Saudi Arabia

1.5
1.2

2009

2010

(USD bn)

0.9
0.6

0.3 Arabtec DSI Mojil Al Khodar

Source: Company Reports

Market share of the backlog in Saudi Arabia has increased from 18% in 2009 to 29% in 2010. Within Global Research universe, Company with most backlog exposure to Saudi Arabia is Arabtec at USD1.45bn followed by Mojil Group at USD0.9bn.

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Construction Sector

UAE Projects Market

UAE projects market is second biggest market in the GCC. The projects in UAE have grown at a CAGR of 14.9% during 2006-10. Projects touched the maximum in 2008 when it reached USD1.2tn. However post economic slowdown worldwide and issues related to Dubai government debt, the projects market witnessed an unabated fall. As of 2010, projects market stands at USD815bn of which half are on hold or delayed. Most of the projects which have been delayed are in Dubai while on the other hand Abu Dhabi is continuing to limit the fall in projects markets of UAE by announcing billions of new projects which are actively going ahead as planned.

UAE Projects - (USDbn)

1,500

1,200 900 600 300

-

2004

2005

2006

2007 Projects

2008

2009

2010

Projects on Hold
Source: MEED & Zawya

Within UAE, total value of all construction projects in Abu Dhabi is currently calculated at USD562.8bn. By sector, buildings contributes USD304.4bn to the total value of construction projects in Abu Dhabi, energy (oil and gas, petrochemicals and power & water projects) adds USD129bn, and projects in infrastructure (roads, bridges, rail, sewerage, wastewater and marine projects) account for USD129.3bn.

Major Projects in UAE

Project Name Jumeirah Gardens City Abu Dhabi Capital District Nuclear Power Plant Dubai World Central Saadiyat Island Development
Source: MEED & Zawya

Size (USDbn) 95.0 40.0 40.0 33.0 27.2

Project Name Dubai Metro Expansion Al Maktoum International Airport (JXB) Abu Dhabi Airport Expansion Abu Dhabi Metro Ajman Airport

Size (USDbn) 12.0 8.3 8.1 7.0 3.4

Global Research contractors universe backlog exposure to UAE

Within Globals contractors universe, 2 of the Companies are headquartered in UAE while 2 others have their branches and actively bid for the projects. As of 2010, combined backlog exposure of companies under our coverage to UAE is USD3.41bn which has dropped from USD4.1bn in 2009. Market share of the backlog in UAE has dropped from 18% in 2009 to 13% in 2010. Within UAE their order book to Abu Dhabi has remained the same at USD1.8bn while their exposure to Dubai has declined to USD1.6bn in 2010 from USD2.3bn in 2009.

Global Research contractors universe backlog exposure in UAE

2.00
1.60

2009

2010

(USD bn)

1.20
0.80

0.40 ARTC - Dubai ARTC - Abu Dhabi DSI - Dubai DSI - Abu Dhabi OCI - Dubai OCI - Abu Dhabi

Source: Company Reports

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Construction Sector

Qatar Projects Market

The projects in Qatar have grown at a CAGR of 16.8% during 2006-10. Qatar is the only projects market whose order book has continued to increase despite the economic slowdown thanks to its continued flow of gas based revenues. Projects as of 2010 have reached USD245bn. Nevertheless, there are some projects which have either been delayed or postponed amounting to USD18bn as of 2010.

Qatar Projects - (USDbn)

300

240 180 120 60

0

2004

2005

2006

2007 Projects

2008

2009

2010

Projects on Hold
Source: MEED & Zawya

According to MEED, Qatar has dedicated over 40% of its budget towards infrastructure expansion projects with expenditures also going to the private sector for the creation of more job opportunities. The move translates to over USD66bn worth of infrastructure projects that are either in the planning stage or is already under way in Qatar at present. Construction industry spending alone is projected to drive in more than USD22bn in new contract awards by 2012, an increase from the USD20.2bn worth of contracts awarded in 2010.

Major Projects in Qatar

Project Name Qatar Rail Network Program Qatar North Gas Field Devp. The Pearl Qatar New Doha International Airport Barzan Gas Development
Source: MEED & Zawya

Size (USDbn) 42.9 20.0 14.0 11.0 8.2

Project Name Education City New Doha Port Lusail Development Qatar UPDA - Doha Rail Network Ras Laffan Dry Dock (Phase 1)

Size (USDbn) 8.3 7.0 5.5 1.0 0.6

Global Research contractors universe backlog exposure to Qatar

As of 2010, combined backlog exposure of companies under our coverage to Qatar is USD1.6bn which has dropped from USD1.7bn in 2009. Market share of the backlog in Qatar has dropped from 13.2% in 2009 to 12.6% in 2010. With Global Research universe, Company with most backlog exposure to Qatar is OCI at USD1.1bn followed by Arabtec and DSI at USD0.4bn and DSI at USD40mn.

Global Research contractors universe backlog exposure in Qatar

1.25
1.00

2009

2010

(USD bn)

0.75
0.50

0.25 Arabtec DSI OCI

Source: Company Reports

Going forward, country has recently won the bid for the World Cup 2022 hosting. For World Cup alone the country is planning to build 12 stadiums, 70,000 hotel rooms, and USD43bn of infrastructure which will directly benefit the regional contracts who operate in these segments.

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Construction Sector

Egypt Projects Market

Egypt stands as one of the key markets within our universe. Country was witnessing continued flow of high profile real estate and construction activity till 2010. However in early 2011 the political turmoil which started from Tunis swept across almost whole middle east and Egypt was amongst the first batch which took the brunt. Before the political upheaval, in 2006 government's strategized to promote and increase the private sector involvement in the country's economic and social development plan- particularly in the area of public utility services- the Government took initiative to introduce the Public Private Partnership program (PPP). The projects covered were in health care, infrastructure, oil and gas, transport and hospitality sectors.

EGYPT Big Ticket Projects (2010-15) Rod El Farag - 6 of October Highway Matrouh Railway Line Relocation Railway (Cairo line 10th of Ramadan) East Port Said Flagship Project Damietta Port Projects Alexandria & Dekhila Ports Projects Second Phase Petrochemical Industry Projects Tourism project in the City of Luxor Ras El Hekma project in Marsa Matruh Qarun Lake Touristic Project in the Northern Coast Education Related Projects in PPP
Source: PPPCU Egypt

EGP3bn EGP360mn EGP4bn EGP3bn EGP10.2bn EGP14bn EGP35bn EGP1.6bn EGP12bn EGP1bn EGP10bn EGP30bn

However the situation post the political turmoil hangs in no mans land. The Egyptian government is pondering the possibility of delaying bidding deadlines for more than a few public infrastructure spending initiatives which are worth an estimated EGP25-30bn and are to be completed over the next five years. Ministry of Investment's data shows that there are currently 46 projects lined up with an estimated investment cost of USD16.2bn and spans a number of different sectors and will be carried out under the PPP umbrella. Global Research believes that most of these PPP projects would be delayed but there will be continuation of some of the necessary projects related to health care and infrastructure which are required to boost the overall investment theme post revolution.

Global Research contractors universe exposure to Egypt

Within our contractors universe, Orascom Construction which is headquartered in Egypt, has backlog exposure of 27% in Egypt. Apart from that UAE based contractors have lately started bidding for projects in Egypt in an attempt to expand in the region amid a real estate slump in its home market. Arabtec Egypt for Construction SAE, a subsidiary of Arabtec Holding PJSC has been awarded the contract to build the Hanging Gardens, a project being developed by the Amer Group with an estimated construction value in excess of AED195mn and a completion period of 14 months. The Hanging Gardens project will consist of six residential buildings featuring 726 apartments located at Golf Porto Sokhna, a residential and mixed-use vacation resort covering 2.2mn square-meters of cliff face with spectacular views of the Red Sea, that is home to Egypts only mountain top 18-hole championship golf course and a Spa complex. Recently, DSI won couple of contract in Egypt. First one was worth USD127mn, a mixed-use Nile Corniche Project (NCP), situated in Downtown Cairo and being developed by Qatari Diar Real Estate Investment Company, includes construction of a hotel as well as serviced apartments. While the second project was for a value of AED80mn which is in the hospitality sector.

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Construction Sector

Global Research Contractors Universe Backlog Performance

According to MEED, the MENA backlog has more or less started to stabilize. Almost 75% of projects are ongoing as per schedule. Year-to-date contracts awarded are up 24%, primarily driven by the development plans and reforms announced by various countries in the MENA. However, slowdown in the Dubai construction industry is hindering the growth. But nevertheless we believe that there are ample opportunities for contractors in other countries such as Abu Dhabi, Saudi Arabia, Qatar and Kuwait which have undertaken massive infrastructure spending plans backed by strong oil prices. Global Research construction universe backlog at the end of 2010 stood at USD12.4bn. The backlog witnessed a decline of 1.9% when compared with the figures of 2009 at USD12.6bn. However if we exclude the Orascoms backlog, the backlog grew by 14.6% during 2010.
Companies Backlog Performance 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 AKS Arabtec 2008
Source: Company Reports & Stock Exchange Websites

(USD bn)

DSI 2009 2010

MOJIL

OCI

In terms of share within our construction universe, OCI leads with a market share of 48% in 2010 despite a decline from 54% in 2009. The drop in the backlog of OCI was due to the slowdown in contract awards in Egypt (~25% of total backlog) due to delays in approving Public Private Partnership (PPP) legislation. The PPP law was passed in July 2010, paving the way for the country to begin tenders for over USD15bn worth of projects in the education, healthcare, utilities and transportation sectors. But delays in PPP followed by political unrest in the country marred the backlog growth.
2009 AKS 4% OCI 48% 2010 AKS 6%

Arabtec 29%

OCI 54%

Arabtec 28%
DSI 7% MOJIL 7%

DSI 10% MOJIL 7%

Source: Company Reports & Global Research

June 2011

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Construction Sector
The backlog of rest of the companies grew during the period. Arabtec backlog grew from USD3.6bn in 2009 to USD4.1bn in 2010 and hence its market share increased to 29% in 2010 as compared to 28% in 2009. Saudi Arabia with a total backlog of AED5.3bn was Arabtecs largest market and accounted for 38% of its backlog. This was followed by Dubai with AED4.3bn backlog or ~31% of the companys total backlog. Abu Dhabi with a 17% contribution to the backlog is the third largest market while Qatar at 10% is fourth. The pace of project execution in the region continues to be slow marred mainly by the tight liquidity in Dubai and the current unrest in the MENA region elsewhere. Drake and Scull backlog grew from USD0.9bn in 2009 to USD1.3bn in 2010 and hence its market share increased from 7% in 2009 to 10% in 2010. Company was able to get AED3.38bn worth of new contracts during the year which were higher by 47% as compared to the last year. Highest number of contracts availed were during 2Q10 at AED1,385mn while the least contracts acquired were in 3Q10 at AED215mn. At the year end, backlog of the Company stood at AED4.8bn as compared to AED3.3bn, increase of 46.3%. While amongst our Saudi contractors, Al Khodari managed to increase its share to 6% in 2010 from 4% in 2009 while Mojil Group share remained the same during 2009 and 2010 at 7%.

Contractors Backlog Exposure

Global construction universe companies are most exposed to Saudi Arabia as of 2010. Saudi Arabia share of backlog stands at 29% of the total and is worth USD3.6bn as compared to 18% in 2009 at USD2.2bn. Such a phenomenonal growth of 61% in the backlog was due to active participation of Dubai based contractors DSI and Arabtec. DSI and Arabtec backlog in Saudi grew by 99.7% and 140.9% in 2010.
2009 Others 36% Dubai 18% Others 31% 2010 Dubai 13% Abu Dhabi 14%

Abu Dhabi 15%

Saudi Arabia 18%

Source: Company Reports & Global Research

Qatar 13%

Saudi Arabia 29%

Qatar 13%

Their exposure to Dubai decreased from 19% in 2009 to 14% in 2010. The backlog total of Dubai stands at USD1.6bn as compared to USD2.3bn at the end of 2009, decline of 29.4%. Arabtecs exposure to Dubai declined from USD1.8bn (48.4% of the total) in 2009 to USD1.2bn (30.8% of the total) in 2010. DSI Dubai backlog stood at USD0.3bn as compared to USD0.29bn in 2009. The backlog of DSI in Dubai grew, however its percentage to the total backlog declined to 23.0% in 2010 as compared to 32.0% in 2009. Orascom Construction order book for Dubai declined to USD0.15bn in 2010, 2.6% of the total backlog as compared to USD0.24bn in 2009, 3.6% of the total. Post Dubais debt restructuring and the overall financial crisis, most of the companies have tried to limit their exposure to Dubai considering it might get risky or it might affect the their cash flows going forward.

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Construction Sector

Contracting Companies - Backlog Break-up Geography Wise

Arabtec 2009 Saudi Arabia 17% Others 3% Saudi Arabia 38% Dubai 48% Arabtec 2010 Others 4%

Qatar 16%
Abu Dhabi 16% OCI 2009 Others 18% Abu Dhabi 15% Dubai 3% Egypt 28% Algeria 20%

Dubai 31% Qatar 10% Abu Dhabi 17%

OCI 2010

Others 21% Abu Dhabi 15%

Dubai 3%

Algeria 14%

Egypt 27% Qatar 20%

Qatar 16%

DSI 2009 Others 15% Qatar 3%

DSI 2010 Others 17%

Qatar 3%
Dubai 32% Abu Dhabi 26%

Dubai 23%

Saudi Arabia 24%

Saudi Arabia 33%

Abu Dhabi 24%

Mojil 2010

Al Khodari 2010

Saudi Arabia 100%

Saudi Arabia 100%

Source: Company Reports

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Construction Sector

Contracting Companies - Backlog Break-up Sector Wise

Arabtec 2009 Arabtec 2010

Residenti al 19% Infrastruc ture 3%

Mix Use 78%

Mix Use 38% Residenti al 49% Infrastruc ture 13%

OCI 2010 Commer cial 25%

OCI 2009 Commer cial 25%

Industrial 15% DSI 2009 Civil 23%

Infrastruc ture 60%

Industrial 16%

Infrastruc ture 59%

DSI 2010 Civil 27%

Infrastruc ture, Water & Power 34%

Mechani cal, Electrical & Plumbi

Infrastruc ture, Water & Power 22%

Mechani cal, Electrical & Plumbi

Mojil 2010

Al Khodari 2010 Others 13%

Industrial - Oil & Gas 100%

Road, Rail & Bridges 25% Water & Power 7%

Buildings 55%

Source: Company Reports

June 2011

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Construction Sector

Global Research Contractors Universe Financial Performance

Globals contractors universe includes: Al Khodari, Arabtec Holding, Drake & Scull, Mojil Group and Orascom Construction Industries (Construction Segment Only). Overall revenue of the sector witnessed a decline of 13.4% to USD5.9bn as compared to USD6.9bn in 2009. Reason for decline in revenue is continued slowdown in the projects market. Within our universe Arabtec witnessed the most decline followed by Mojil Group. Al Khodari and and Orascom Construction were the ones who witnessed an increase in the revenue. Al Khodari because of its government backed projects while Orascom because of its its presence across many geographies.

Global Research Contractors Universe (USD mn) Revenue Cost Gross Profit Operating Profit Net Profit Cash Receivables Inventories Loan Equity Total Assets
Source: Company Reports * OCI Construction Segment P&L numbers are taken

2009 6,890 5,695 1,195 797 586 1,589 3,929 449 3,183 5,089 13,432

2010 5,970 4,936 1,035 765 417 1,357 4,074 465 3,791 5,259 14,403

Change -13.4% -13.3% -13.4% -4.1% -28.8% -14.6% 3.7% 3.4% 19.1% 3.4% 7.2%

Overall gross margins of the sector were almost the same as compared to last year at 17.3%. On an individual basis Al Khodari outperformed with gross margins of 26.9% in 2010. Drake & Scull followed with margins at 18.6%. Orascom was also not far behind at 18.% while the least margins were of the Mojil Group at 11.2% during 2010.
Gross Margins
20% 18% 16%

Net Margins
15%

12% 9% 6% 3% 0%

14% 12% 10%

2008

2009

2008

2009

Source: Company Reports

Al Khodari margins are combinations of contracting and trading business. Its contracting business margins as of 2010 are 23.7% while its trading business margins are at 49.2%. Reason for higher margins is Al Khodari is a diversified infrastructure contractor, which operates in almost segments and sub segments of infrastructure whereas others contractors in the Gulf, fall under the vertical construction, industrial, or MEP. Secondly Al Khodari is an A grade contractor by virtue of which it can bid for an unlimited amount of contract as compared to others. It is classified into A category for bidding of road, rail, buildings and dam related contracts. Gross Margins of the MENA contractors are almost in line or relatively higher than their Global Peers. ENKAI INSAAT which is one of the biggest construction company operating across the crossroads of Europe and Asia enjoys highest gross margins of 17.4% amongst its international

June 2011

2010

2010

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Construction Sector
peers. However its gross margins are lower than the gross margins reported by Al Khodari, Drake & Scull and Orascom Construction. Despite growth in the oil prices, MENA contractors did well in terms of controlling their operating expenses. Their operating expense fell by 32.1% to USD270mn (4.5% of the revenue) as compared to USD398mn (5.8% of the revenue) in 2009. Al Khodari operating margins of 21.4% were higher amongst its local as well international peers. In terms of profits only one of the Company in our Universe was in losses while other witnessed decline in profitability except Al Khodari & Orascom. Mojil Group ended in losses because of provisions related to doubtful debts. Orascom outperformed with a construction segment profit growth of 1.5% followed by Al Khodari at 0.4%. At the end of 2010, combined receivables of the construction contractors stand at USD4.0bn, higher by 3.7% when compared with 2009 receivables at USD3.9bn.

Receivables Outstanding (Days)

300 240 180 120 60

Inventory Stock (Days)

40 37 34 31 28 25

2008

2009

2010

2008

2009

Source: Company Reports & Global Research

The receivables outstanding days of the sector stand at 249 days at the end of 2010 as compared to 208 days at the end of 2009. Within our universe, Company with highest receivables days is Mojil Group at 345.0 days followed by Arabtec at 278.7days.

Debt as % of Assets
30.0%

Cash Covering Debt

70.0%

28.0% 26.0%
24.0% 22.0%

62.0% 54.0%
46.0% 38.0%

20.0%
2008 2009 2010

30.0%

2008

2009

Source: Company Reports & Global Research

In the case of Arabtec and Mojil Group, the reason being for higher number of receivables days is higher portion of government-driven projects which on an average pay later than private customers. This cost benefit relationship continues amongst them as they have good repute with the government in terms of getting new contracts while they cost them in terms of delayed payments.

June 2011

2010

2010

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Construction Sector

Contractors acquisitions and JV on the rise

Prior to the economic slowdown and Dubai debt issues, the ever-expanding pie of work in GCC, coupled with attractive margins, encouraged significant capacity build up. In addition to organic growth, well-established contractors took the acquisition route to expand their scope of activity, as well as their geographical presence. In 4Q08, UAE particularly Dubai came to an unprecedented halt, and several projects were either cancelled or put to a halt. Projects market continued to deteriorate which encouraged these companies to pursue inorganic growth initiatives for backlog replenishment and business continuity.
Contractors Acquisitions and Joint Ventures Company Year Quarter Country DSI 2009 4Q09 Germany 4Q09 Kuwait 2010 1Q10 Qatar 4Q10 Saudi Arabia 2011 1Q11 Saudi Arabia Arabtec 2009 1Q09 Saudi Arabia 2010 4Q10 Egypt 4Q10 Bahrain OCI 2010 1Q10 US 2Q10 Netherland 3Q10 Netherland 2Q10 India 2011 1Q11 Italy 2Q11 Egypt 2Q11 US Al Khodari 2011 2Q11 South Korea 2Q11 Saudi Arabia Mojil Group 2011 1Q11 Oman 1Q11 Saudi Arabia 2Q11 Saudi Arabia 2Q11 Saudi Arabia 2Q11 Saudi Arabia
Source: Company Reports & Zawya

Share 82% 75% 100% 65% 100% 45% 55% N/A 50% NA NA NA 50% NA 50% 55% NA 51% 20% 50% NA 50%

Company Name Passavant-Roediger Electrical Contracting Co. DSI Qatar DSI MEP Saudi / Civil ICCC * CPS Services / Prime Group Amer Group Musawa Holding Morgan Stanley Royal DSM N - OCI Nitrogen MICRO Chemie B.V. Hindustan Construction Co. Maire Tecnimont Arab Contractors Pandora Methanol LLC Lotte Engg & Construction Co Al Yamama Co. / Al Kifah Group National Training Institute Saudi Masader Company 3W Networks MMG Gulf Elite Gen Contracting Co. Al Rushaid Petroleum Inv. Co.

Business Construction Construction Construction Construction Construction Construction Construction Construction Construction Fertilizer Fertilizer Construction Construction Construction Fertilizer Construction Construction Construction Construction Construction Construction Construction

Acquisition / JV Acquisition Acquisition Acquisition Acquisition Acquisition JV JV JV JV Acquisition Acquisition JV JV JV Acquisition JV JV JV Acquisition JV Acquisition JV

Given the companies current cash balances of USD1.4bn and their fundamental outlook, we believe OCI and DSI would outpace others. Mojil and Al Khodari operate in a strong project market hence for them at the moment its not necessary to expand geographically.

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COMPANY PROFILES

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Construction Sector

Al Khodari Sons Company

Market Data Bloomberg Code: Reuters Code: CMP (22 June 2011): O/S (mn) Market Cap (SAR mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (SAR): Low (SAR): Average Volume: (000) 1m 3.3 7.1 3m 15.6 13.1 72.0 43.0 459.3 12m NA NA
ALKHODAR AB

BUY Target Price SAR80.5

1330.SE SAR69.5 42.5 2,953.8 787.7 11.8 3.8

A-grade contractor with highest margins in the industry Revenue to grow at CAGR of 16.7% during 2010-14 2011e backlog expected at SAR3.9bn, 3.0x of sales New joint ventures to support the business

Initiating coverage
Global Research initiates its coverage of on Al Khodari Sons & Company (Al Khodari). The Company is a multifaceted contracting company. The Company earns its revenue from contracting and trading segment. Contracting revenue major contributors are building, water and power while the trading revenue comes from sales of companys used contracting equipment and instruments, scraps and outdated spare parts.

Construction boom in Saudi to translate into higher backlog & revenue

Company is capitalizing well on the Saudi construction boom which is evident from the CAGR in backlog of 35.8% during 2008-10 of the Company as compared to CAGR of Saudi Arabia projects at 5.1% during the same period. Going forward, we believe the Company backlog CAGR of 19.6% during 2010-14 would translate into contracting revenue CAGR of 18.5% during 2010-14.

Absolute (%) Relative (%)

Price Volume Performance

6.0 5.0 4.0 3.0 2.0 1.0 50.0 40.0 80.0 70.0

Working capital to gradually improve

The receivables days of the Company rose to 233days as of 2010 as compared to 186days in 2009. Gradually we believe that as more and more public and private companies projects are rolled out and Al Khodari gets some share of those, the receivables days of the Company would come down to 190 by 2014. Nevertheless at current point in time the receivables days of the Company are lower than many of its local and regional peers and lesser than many of the Company under Global Research contractors universe.

60.0

Margins expected to remain higher than the peers

Its contracting business margins as of 2010 are 23.7% as compared to sector average of 17.3%. Reason for higher margins are, Al Khodari is a diversified infrastructure contractor, which operates in almost segments and sub segments of infrastructure whereas others contractors in the Gulf, fall under the vertical construction, industrial, or MEP. Secondly Al Khodari is an A grade contractor by virtue of which it can bid for an unlimited amount of contract as compared to others.

Oct-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

30.0

Valuations
Vol. (mn) - LHS AKS (SAR)

The value of Al Khodaris shares derived from the weighted average of the DCF and relative valuation methods is SAR80.5/share. The stock closed at SAR69.5/share on nd the Tadawul at the end of trading on 22 June 2011, which implies that the weighted average value of Al Khodaris shares is at a premium of 15.8% to the shares current market price. At their current price, Al Khodaris shares are trading at a P/E multiple of 11.8x and 10.2x for 2011 and 2012 respectively. We therefore recommend a BUY on the Al Khodari stock at its prevailing price levels.
Investment Indicators Revenue (SAR mn) Net Profit (SAR mn) EV/Revenues (x) EV/Backlog (x) EV/EBITDA (x) P/E (x) P/BV (x) 2009 1,048 217 0.6 0.3 1.8 2010 1,074 218 2.8 1.0 8.7 10.5 3.9 2011e 1,315 249 2.7 0.9 10.3 11.8 3.8 2012e 1,568 290 2.2 0.7 8.7 10.2 3.0 2013e 1,791 323 1.8 0.6 7.6 9.1 2.4 2014e 1,991 354 1.5 0.5 6.5 8.3 2.0

Hettish Karmani Senior Financial Analyst [email protected] Tel.: (965) 22951281

Source: Company Reports & Global Research

June 2011

23

Global Research - MENA Valuation Explained Assumptions for Discounted Cash Flow (DCF)

Construction Sector

In order to compute the cost of equity for the DCF method, we have used the Capital Asset Pricing Model (CAPM). The following assumptions have been made in order to arrive at the DCF value of Al Khodari. A risk-free rate of 5.6% has been taken which is yield on 10-yr Saudi government bond. A market risk premium of 7.0% has been assumed. Beta taken from Bloomberg comes out to be 1.46. But since the Company is trading since October 2010 only, we have taken beta as 1.0. The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 12.6%. The cost of debt has been assumed at 7.0%. Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to be 10.3%. Terminal growth rate of 3.0% has been assumed. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of the Company comes out to be SAR83.3/share.

DISCOUNTED CASH FLOW (SAR mn) Free Cash Flow Discounted Cash Flow Terminal Value Primary Value Discounted Terminal Value Investments Cash Debt Enterprise Value Equity Value Shares Outstanding Per Share Value (SAR)
Source: Global Research

2011e 162 154 5,640 811 3,981 4 49 653 4,192 3,538 42.5 83.3 (As of 1Q11) (As of 1Q11) (As of 1Q11)

2012e 235 202

2013e 220 171

2014e 402 284

Relative Valuation
To arrive at the peer-set P/E multiple, we have computed the weighted average P/E of the five listed regional construction companies based on their current market prices and 2011 earnings estimates. The weighted average forward P/E for the peer set, thus arrived at, is 11.8x. On the basis of the weighted average forward P/E for the peer set and Companys 2011 earnings, the companys stock valuation comes to SAR69.4/share.

Blended Price
The blended price is then calculated after applying weight of 80% to the DCF value and 20% to the value from relative valuation method. The weighted average value comes to SAR80.5 per share.

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Global Research - MENA About the company

Construction Sector

Global Research initiates its coverage on Al Khodari Sons & Company (Al Khodari). The Company is a multifaceted contracting company. The Company was established in 1966. Post its establishment it has gone through various phases, which are limited partnership, joint stock company and last being IPO. Companies wide scope of activities include: civil engineering, roads and bridges, railways, buildings and infrastructure, water & waste water treatment, oil & gas and pipelines in support of petrochemical production, city cleaning, environmental control, land transportation and operation & maintenance activities. Apart from that company is also engaged in trading of the companys used contracting equipment and instruments, scraps and outdated spare parts. Foreign ownership limit in the Company is to a maximum of 49% while GCC nationals can hold cent percent of the Company.

Shareholding structure
Before IPO the founding shareholders Abdullah A. M. AlKhodari Sons Investment Holding Company owned 85.7% which as of 2010 dropped to 60.0%. Before IPO Khodari family owned around 14% of the Company which as of current has dropped to 10%. Hence the free float or the shares available public stand around 30% as of latest.
Shareholding Structure - Pre IPO Khodari Family 14% Shareholding Structure - Current Public 30%

Abdullah A M Al Khodari Sons Investment Holding Co. 86%

Source: IPO Prospectus

Khodari Family 10%

Source: Zawya

Abdullah A M Al Khodari Sons Investment Holding Co. 60%

Al Khodari revenue to grow at CAGR of 16.7% during 2010-14

Revenues of the Company witnessed a growth of 2.5% to SAR1,075mn as compared to SAR1,048mn in the same period last year. Growth in revenues emanated from the contracting segments, whose revenue growth was 2.6% as compared to that of trading segment at 1.5% during 2010. Contracting segment contribution to the total revenue of the Company stood at 87.3% in 2010, marginally higher when compared to 87.2% in 2009.
Contracting Revenue
2,000

Trading Revenue
200

1,600
(SAR mn)
1,200

160
(SAR mn)
2008 2009 2010 2011e 2012e 2013e 2014e 120

800
400

80
40

2008 2009 2010 2011e 2012e 2013e 2014e

Source: Company Reports & Glob al Research

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Construction Sector
Going forward we believe that construction segment would continue to add more than the trading segment. Construction segment revenue is expected to grow at a CAGR of 18.5% during 2010-14. While on the other hand trading segment would continue to support the construction revenue with a CAGR of 1% during 2010-14.

Backlog growth to ride on Saudi construction boom

Company backlog grew at a CAGR of 35.8% during 2008-10. As of 2010, Companys backlog stands at SAR3.0bn, higher by 84.5% and 54.8% over 2008 and 2009 backlog. Capitalizing on the construction boom in the Kingdom, the Company managed to grab SAR2.0bn worth of new orders and managed to roll out SAR0.93bn worth of completed projects during the period. As of 2010, Buildings segment carried the highest chunk of the backlog at 55% worth around SAR1.7bn followed by Infrastructure, Water and Power segment at 32% (SAR0.97bn) and the rest being contributed by other segments.
2010 Other Services , 13.0% Other Services , 7.0% 2014e

Infrastructur e, Water & Power, 32.0%

Buildings , 55.0%

Infrastructur e, Water & Power, 38.0%

Buildings , 55.0%

Source: Al Khodari & Global Research

Going forward we believe, the Companys overall backlog to register a CAGR of 19.6% during 2010-14 to SAR6.2bn. Within its segment we believe the Company would focus more on its Infrastructure, Water and Power segment as more and more projects are being announced in the Kingdom followed by Building segment. Infrastructure, Water and Power segment backlog are estimated to grow at a CAGR of 24.8% followed by 19.6% by Building and the rest of the segment to grow at a CAGR of 2.4%.

Highest gross margins in the industry

Overall Al Khodari enjoys the highest gross margins within our contractors universe. The difference between the gross margins of Al Khodari (26.9%) and second best Drake & Scull (18.6%) stands at 8.3%. Such high margins emanate from its trading segment which as of 2010 stand at 49.2%. While if we look at the stand alone margins of contracting segment they are still higher than that of Drake & Scull and Orascom Construction.
Contracting Margins
30.0%

Trading Margins 50.0%

48.0%

27.0% 24.0% 21.0%

18.0%

46.0% 44.0%
42.0%

15.0%
2008 2009 2010 2011e 2012e 2013e 2014e

40.0% 2008 2009 2010 2011e 2012e 2013e 2014e

Source: Company Reports & Global Research

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Global Research - MENA

Construction Sector
Its contracting business margins as of 2010 are 23.7% while its trading business margins are at 49.2%. Reason for higher margins are, Al Khodari is a diversified infrastructure contractor, which operates in almost segments and sub segments of infrastructure whereas others contractors in the Gulf, fall under the vertical construction, industrial, or MEP. Secondly Al Khodari is an A grade contractor by virtue of which it can bid for an unlimited amount of contract as compared to others. It is classified into A category for bidding of road, rail, buildings and dam related contracts. Going forward we believe that the overall Al Khodaris gross margins are expected to decline as the competition in the Kingdom heats up over various projects being rolled by the Government post its economic and financial reforms. Even when we forecast declining margins, we believe that Al-Khodari will remain the most profitable contractor within our MENA construction space with its gross margins averaging 23.7% by 2014 (22.0% of contracting and 46% of trading).

Net income
Net profit earned by the Company during 2010 was almost the same as of 2009 at SAR218mn. However higher zakat during 2010 limited the net profit growth to 0.4% as compared to profit before zakat growth of 2.7%. The company managed to control its operating cost quite effectively during 2010 which reduced the impact of declining gross margins during 2010.
400.0 21.0%

350.0

20.0% 19.0% 18.0%

17.0%

(SAR mn)

300.0 250.0
200.0

150.0
2008 2009 2010 2011e 2012e 2013e 2014e

16.0% Net Profit Net Margins

Source: Company Reports & Global Research

Going forward we believe that the net income is estimated to register a CAGR of 12.9% during 2010-14. While on the other hand the net margins are expect to follow the trend of the gross margins and drop to 19.0% and 17.8% during 2011 and 2014 respectively. Nevertheless the net margins of the industry would remain higher than any of its regional and local peers.

Receivables Not much of an issue

Al Khodari receivable rose from 138days in 2008 to 186days at the end of 2009 which currently stand at 233days. Receivables break-up revealed that, contract receivable were at 173days during 2010 as compared to 129days in 2009, while the retention receivable rose from 26days in 2009 to 28days by 2010. During 2010, Al Khodari did not take any provisions related to foreseeable losses which in 2009 they provisioned around SAR13.9mn.

Receivables Days 250 2008 200 138 150 12 100

50

Inventories Days 2009 186 10 2010 233 17 2011e 200 17 20 2012e 16 190 12 16 8 4 2008 2009 2010 2011e 2012e 2013e 2014e 2013e 190 15 2014e 188 12

2008 2009 2010 2011e 2012e 2013e 2014e

Source: Company Reports & Global Research

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Global Research - MENA

Construction Sector
In 2011, we believe the receivables would drop down to around 200 which are further expected to go down to 190 by 2014. While inventory receivables are expected to follow the trend and reach 12days by 2014 as compared to 17 in 2010. By the end of 1Q-2010, DSI receivables rose further to 237days. Further breakup of the receivables revealed that the contract receivables were at 156days and retentions were at 81days.

Dividend yield to remain low in the short term

Dividend paid by the Company during 2010 remained at SAR55mn which translated into a dividend payout of 25.4% and dividend yield of 2.4%. Going forward we believe that as the profit growth continues the payout would increase to a maximum of around 36% during our forecast period which will translate into a yield of 4.2%.
40.0% 32.0%
24.0% 16.0%

8.0% 0.0%
2010 2011e 2012e 2013e 2014e

Dividend Payout
Source: Company Reports & Global Research

Divided Yield

The payout and dividend yield of the Company is in line with many of its local as well as regional players and sounds appropriate considering the opportunistic growth of Saudi construction boom where the Company has to capitalize.

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Global Research - MENA

Al Khodari - Chart Gallery
1.3
1.0 0.8 0.5 0.3 2008 2009 2010 2011e 2012e 2013e 2014e

Construction Sector

3.0
2.4 1.8 1.2 0.6 2008 2009 2010 2011e 2012e 2013e 2014e 2014e 2014e 2014e 2014e

EV/Backlog (x)

EV/Revenue (x)

12.5 10.0 7.5 5.0 2.5 2008 2009 2010 2011e 2012e 2013e 2014e

5.0 4.0 3.0 2.0 1.0 2008 2009 2010 2011e 2012e 2013e 2013e 2013e 2013e

EV/EBITDA (x)

Backlog/Revenue (x)

125.0% 100.0% 75.0% 50.0% 25.0% 0.0%

2008 2009 2010

35.0% 31.0% 27.0% 23.0% 19.0% 15.0%

2008 2009 2010

2013e

2014e

2011e

2012e

2011e

Cash Loan Coverage

Gross Margins

25.0% 22.0% 19.0% 16.0% 13.0% 10.0%

2008 2009 2010 2011e 2012e 2013e 2014e

22.0% 21.0% 20.0% 19.0% 18.0% 17.0%

2008 2009 2010 2011e 2012e 2012e

Operating Margins

Net Margins

100.0% 80.0% 60.0%

40.0% 20.0% 0.0%
2008 2009 2010

20.0% 17.0% 14.0%

11.0% 8.0% 5.0%
2008 2009 2010

2013e

2014e

2011e

2012e

ROE

ROA

Source: Company Reports & Bloomberg

June 2011

2011e

2012e

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Global Research - MENA

Construction Sector

Financial Statements
(SAR mn) Revenue Cost of Sales Gross Profits General & Administrative Expenses Provisions for Doubtful Debts Operating Profit Murabaha Charges Other Income Net Profit before Zakat Provisions for Doubtful Debts Zakat Net Profit Cash and Bank Balance Receivables Inventories Advance Payment & Others Total Current Assets Plant and Equipment Other Assets Total Assets 2008 1,159 (824) 335 (48) (13) 274 (34) 6 246 (7) 240 33 438 27 201 699 628 13 1,340 188 26 53 295 6 569 396 27 300 48 348 1,340 76 (75) (57) (57) 33 2009 1,048 (753) 295 (46) (13) 236 (21) 7 223 (6) 217 33 534 20 351 937 502 11 1,450 120 248 32 6 3 410 506 27 400 11 96 506 1,450 131 8 (140) (1) 33 2010 1,074 (785) 289 (45) (13) 230 (14) 12 229 (11) 218 71 687 37 583 1,379 434 14 1,826 230 437 11 11 5 693 515 30 425 22 141 588 1,826 121 (44) (39) 38 71 2011e 1,315 (976) 339 (58) (12) 269 (20) 14 263 (13) 249 90 721 47 685 1,542 398 20 1,959 207 455 11 12 6 690 464 32 425 43 306 774 1,959 208 (51) (138) 19 90 2.2 1.2 25.8% 20.5% 19.0% 13.2% 36.6% 0.9 0.9 2.7 10.3 5.9 18.2 69.5 2,953.8 2.2% 11.8 3.8 2012e 1,568 (1,177) 392 (71) (13) 308 (18) 15 305 (15) 290 168 816 52 773 1,809 360 25 2,194 186 548 12 13 6 765 417 33 425 43 511 979 2,194 283 (53) (151) 78 168 2.4 1.4 25.0% 19.7% 18.5% 14.0% 33.1% 0.8 0.6 2.2 8.7 6.8 23.0 69.5 2,953.8 2.9% 10.2 3.0 2013e 1,791 (1,356) 435 (82) (14) 339 (15) 17 340 (17) 323 187 932 56 883 2,058 321 40 2,418 168 632 13 14 7 833 334 35 425 43 749 1,217 2,418 270 (65) (186) 19 187 2.5 1.4 24.3% 18.9% 18.1% 14.0% 29.4% 0.7 0.4 1.8 7.6 7.6 28.6 69.5 2,953.8 2.9% 9.1 2.4 2014e 1,991 (1,519) 472 (92) (14) 366 (12) 18 373 (19) 354 315 1,026 50 873 2,264 280 70 2,613 151 713 13 14 8 899 234 36 425 43 976 1,444 2,613 455 (83) (244) 128 315 2.5 1.5 23.7% 18.4% 17.8% 14.1% 26.6% 0.6 0.3 1.5 6.5 8.3 34.0 69.5 2,953.8 4.3% 8.3 2.0

Balance Sheet Ratio Analysis Cash Flow

Income Statement

Current Portion of Term Loan Accounts Payable Short Term Loans Others Due To Sister Companies Total Current Liabilities Term Loans Employee Indemnity Provision Paid-up Capital Statutory Reserves Retained Earnings & Others Total Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End

Current Ratio (x) 1.2 2.3 2.0 Quick Ratio (x) 0.9 1.4 1.1 Gross Profit Margin 28.9% 28.2% 26.9% Operating Margin 23.6% 22.6% 21.4% Net Profit Margin 20.7% 20.7% 20.3% Return on Average Assets 17.9% 15.6% 13.3% Return on Average Equity 68.9% 50.8% 39.8% Current Liability / Equity (x) 1.6 0.8 1.2 Debt / Equity (x) 1.7 1.2 1.3 EV/Revenues (x) 0.5 0.6 2.8 EV/EBITDA (x) 1.4 1.8 8.7 Adjusted EPS (SAR) 5.6 5.1 5.1 Adjusted Book Value Per Share (SAR) 8.2 11.9 13.8 Market Price (SAR) * 53.7 Market Capitalization (SAR mn) 2,282.3 Dividend Yield 2.4% P/E Ratio (x) 10.5 P/BV Ratio (x) 3.9 Source: Company Reports & Glob al Research * Market price for 2011 and sub sequent years as per closing prices on June 22, 2011

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Global Research - MENA

Construction Sector

Arabtec Holding
Market Data Bloomberg Code: Reuters Code: CMP (23 June 2011): O/S (mn) Market Cap (AED mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (AED): Low (AED): Average Volume: (000) 1m -2.3 -2.0 3m 0.5 -3.6 1.87 0.91 22,767 12m -16.9 -19.7 ARTC UH ARTC.DU AED1.27 1,495.0 1,898.7 516.9 8.8 0.7

HOLD Target Price AED1.34

Slow project execution and regional turmoil impacts revenue High minority interest further dents earnings Outlook remain cautious despite increase in backlog Downgraded to HOLD from Strong Buy

Slow project execution and regional turmoil impacts 1Q11 revenue

Arabtecs total revenue for 1Q11 stood at AED1,242mn, falling 20% yoy and 8% qoq. Minimal progress on the orders won in 2010 and significant slowdown on other orders impacted 1Q11 revenues. Gross margin came down at 13.3% from 15.4% in 4Q10 and 16.6% in 1Q10 on account of lower contract margins. Operating profit stood at AED53.0mn against AED162mn reported in 1Q10.

Net profit takes a further hit in 1Q11 due to higher minority interest
Net profit after minority interest of Arabtec stood at AED26.6mn, and was almost half of our estimate of AED52.4mn on account of both lower margins and higher minority interest that stood at 51%.

Absolute (%) Relative (%)

Price Volume Performance

120 100 80 60 40 20 0 1.9

Cash balance improves while receivables decrease

Arabtecs cash balance increased 8% qoq to AED633mn while bank borrowings decreased 20% qoq to AED590mn in 1Q11. Total receivables came down by 4% qoq to AED4.7bn. Payables remain almost unchanged at AED4.2bn. Consequently, payables to receivables ratio has come down to 1.14x from 1.19x during 4Q10.

1.7
1.5

Backlog to grow at a CAGR of 13.4% during 2010-14

Backlog growth has started to pick up in recent quarters driven by new order wins in Saudi Arabia and Qatar. Given Arabtecs key focus on these markets, going forward, we believe these two markets are likely to add to the growth in backlog. We expect a CAGR of 13.4% during our forecast period during which the backlog is expected to go up from AED13.9bn to AED22.9bn.

1.3
1.1 0.9

Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

Valuation Update
At the current price, Arabtecs shares are trading at a P/E and P/B multiples of 8.8x and 0.7x respectively for 2011e. Given the recent run up in Arabtecs share price along with revision in our target price (We lower our target price to AED1.34 per share from AED1.46 per share on account of weak 1Q11 numbers and revised forecasts), valuations now look rich and imply that the stock is trading at a discount of 5.5% from our target price. We, therefore reiterate Hold stance on the Company.
Investment Indicators Year Revenue (AED mn) Net Profit (AED mn) EPS (AED) EV/Revenues (x) EV/EBITDA (x) P/E (x) P/BV (x)

Volume ('000)

ARTC (AED)

Digvijay Tanwar, CFA Senior Financial Analyst [email protected] Tel.: (965) 22951275

2009 7,665 495 0.33 0.43 2.7 6.5 1.3

2010 5,464 307 0.21 0.42 3.3 7.7 0.9

2011e 5,784 215 0.14 0.31 2.7 8.8 0.7

2012e 6,544 322 0.22 0.23 1.8 5.9 0.6

2013e 7,198 388 0.26 0.19 1.5 4.9 0.5

2014e 7,918 437 0.29 0.13 1.0 4.3 0.5

Source: Company Reports & Global Research

June 2011

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Global Research - MENA Dubai slowdown impacts growth

Construction Sector
Arabtecs total revenues for 2010 were AED5.5bn, a decline of 29% over 2009. A combination of the significant slowdown in the real estate construction sectors regionally, as well as tight liquidity, marred Arabtecs performance lately. This followed a decline of 21% in 2009 over the peak of AED9.7bn recorded in 2008. Market conditions continue to remain challenging and the company reported a 20% YoY and 8% QoQ decline in revenues in 1Q11. We estimate the top line of Arabtec to grow by 6% in 2011 to AED5783.5bn and post a low double digit growth rate from 2012 onwards. We expect Arabtecs revenue to grow at a CAGR of 10% from 2010-14e. We have been conservative in our revenue growth assumptions and estimates in the context of the existing liquidity condition of the company as well as the opaqueness that surrounds companys ability to expand abroad in the absence of adequate funding. However, it should be noted that, if the Company is able to raise the funds and if the expansion plans come to fruition, the upside potential rises significantly.

Revenue and Growth (2008-2014e)

10.0 8.0
AED bn

160% 120% 80% 40% 0% -40% 2008 2009 2010 2011e 2012e 2013e 2014e

6.0 4.0 2.0 -

Sales Revenue
Source: Company data, Global Research

YoY Growth

Backlog Analysis
Arabtecs 1Q11 backlog stood at AED15.1bn which is up 9.0% q-o-q and is 2.76x times its 2010 revenues. On a YoY basis the backlog is up by 19.5%. Saudi Arabia with a total backlog of AED5.1bn was Arabtecs largest market and accounted for 33% of its backlog. This was followed by Dubai with AED4.5bn backlog or ~30% of the companys total backlog. Abu Dhabi with a 17% contribution to the backlog is the third largest market while Qatar at 8.7% is fourth. Although, the pace of project execution in Dubai remains slow, in Abu Dhabi it is strong and as per our analysis has contributed the most to Arabtecs 1Q11 revenues.

2010 Backlog Break-Up

2014e Backlog Break-Up

Qatar 10%

Saudi Arabia 38% Qatar 11%

Saudi Arabia 37% Others 10%

Abu Dhabi 17%

Others 4%

Dubai 31%

Abu Dhabi 17%

Dubai 25%

Source: Company Reports & Global Research

Backlog growth has started to pick up in recent quarters driven by new order wins in Saudi Arabia and Qatar. Given Arabtecs key focus on these markets, going forward, we believe these

June 2011

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Global Research - MENA

Construction Sector
two markets are likely to add to the growth in backlog. We expect a CAGR of 13.4% during our forecast period during which the backlog is expected to go up from AED13.9bn to AED22.9bn.

Margins to remain under pressure

Arabtecs total direct costs in 2010 stood at AED4.6bn, implying gross profit of AED827mn. Gross margins stood at 15.1% - 217bps lower than 2009 figures. For 1Q11, gross profit has declined by 36% YOY while gross margin stood at 13.3%, down 330bps lower over previous year. The margins are on the decline due to projects being renegotiated, an increase in competition and lower realization of margins from projects in Abu Dhabi and Saudi Arabia Arabtecs key growth markets. However, we expect Arabtecs margins to improve slightly and record gross margin of 13.6% in 2011 and thereon gradually improve in the next three years. Arabtecs EBITDA margin in 2010 stood at 12.6%, 330bps lower than 2009. We expect an EBITDA margin of 11.5% in 2011. Given that gross margins are expected to inch a little, we estimate EBITDA margin to follow the same trend and stand around 12.8% during our forecast period.

Gross Profit and Gross Margins (2008-2014e)

1.6 1.2 18%
17%

EBITDA and EBITDA Margins (2008-2014e)

1.6 1.2 16%

15%
14%

AED bn

0.8
15% 0.4 14% 13%

AED bn

16%

0.8 0.4
-

13%
12%

11%
10%

2012e

2011e

2013e

2014e

2010

2008

2009

2010

2012e

2008

2009

2011e

2013e

Gross Profit

Gross Profit Margin

EBITDA

EBITDA Margin

Source: Company data, Global Research

Higher minority share to impact profitability

Net profit for 2010 stood at AED307.1mn, down 38% YoY, primarily impacted by 38% drop in EBITDA. Consequently, net margin for 2010 stood at 5.6%. For 1Q11, the company reported a net profit of AED27mn and a net margin of 2.1%. The significant decline in net profit margin is on account of higher minority interest and took away 50% of the profit.
Arabtecs Net Profit and Net Profit Margins (2008-2014e)
1.2
1.0

2014e
12%
10%

AED bn

0.8 0.6
0.4

8% 6%
4%

0.2 0.0
2008 2009 2010 2011e 2012e 2013e 2014e

2% 0% Net Profit Net Margin %

Source: Company data, Global Research

In light of the recent results, we expect net profit attributable to parent to come down to AED215mn with net profit margin expected at 3.7% in 2011 on account of tight market conditions as well as higher share of minority. Nonetheless, we expect margins to inch upwards to 5.5% by the end of 2014.

Receivables cause of concern

Arabtec registered AED4.7bn in accounts receivables including in 1Q11 almost unchanged from 2010 ending period. Due from related parties has however, gone up from AED724mn at the end of 2010 to AED849mn at the end of 1Q11. Collectively the two account for 64% of

June 2011

33

Global Research - MENA

Construction Sector
Arabtecs total assets and remain a big concern. Most of these receivables are due from ongoing projects in Dubai and it needs to be seen how Arabtec is able to sail out of this situation. The company had ~AED 2.2bn in past due receivables in 2010 including AED 1.6bn in impaired receivables, when it had last disclosed the ageing profile of its receivables. However, total balance sheet provisions fell to AED265mn in 2010 from AED299m in 2009. Working capital remains restricted, driven by the tight liquidity conditions and poor payment terms across the value chain. Given the current situation, we do not rule out further delays and potential for provisioning. We continue to factor high working capital requirements into our estimates for the next few quarters, and see them easing only very gradually thereafter.

June 2011

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Global Research - MENA

Arabtec - Chart Gallery
1.0
0.8 0.6 0.4 0.2 -

Construction Sector

0.5
0.4 0.3 0.2 0.1 -

2008

2010

2011e

2013e

2010

2009

2008

2009

2013e

2012e

2014e

2011e

2012e

Debt/Equity (x)

EV/Revenue (x)

5.0 4.0 3.0 2.0 1.0 2008 2010

2009

20.0% 16.0% 12.0% 8.0% 4.0% 0.0%

2010
2008 2009

2012e

2013e

2011e

2011e

2013e

2012e

EV/EBITDA (x)
200.0% 160.0% 120.0% 80.0% 40.0% 0.0% 20.0% 16.0% 12.0% 8.0% 4.0% 0.0%

2014e

EBITDA Margin

2009

2011e

2012e

2014e

2010

2008

2010

2008

2009

2012e

2013e

2013e

2011e

Cash Loan Coverage

12.5% 10.0% 7.5% 5.0% 2.5% 0.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0%

Gross Margins

2008

2010

2013e

2010

2009

2008

2009

2012e

2013e

2011e

2012e

2014e

2011e

Operating Margins

Net Margins

75.0% 60.0% 45.0%

30.0% 15.0% 0.0%

20.0% 16.0% 12.0%

8.0% 4.0% 0.0%

2008

2010

2013e

2010

2009

2008

2009

2012e

2013e

2011e

2012e

2014e

2011e

ROE
Source: Company Reports & Bloomberg

ROA

June 2011

2014e

2014e

2014e

2014e

2014e

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Global Research - MENA

Construction Sector

Financial Statements
(AED mn) Total Revenues Cost of Production Gross Profit General & Administrative Expenses Staff Costs Other Operating Income Depreciation & Amortisation Provision for bad debts Total Operating Income EBITDA Other Income Profit Before Tax Taxation Net Profit Minority Interest Net Profit Attributable to Parent Cash & cash equivalents Trade & other receivables Due from related parties Inventories Other current assets Total Current Assets Intangible assets and Goodwill Retentions receivable (Non-current) Net fixed assets Other non-current assets Total Assets Bank borrowings (Current) Trade & other payables Due to related parties Total Current Liabilities Retentions payable (Non-current) Bank borrowings (Non-current) Employee Indemnity Provision Paid-up Capital Retained Earnings Other Reserves Shareholders' Equity Non-controlling interest Total Equity & Liability Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities Change in Cash Net Cash at End Gross Profit Margin Operating Margin EBITDA Margin Net Profit Margin Current Ratio (x) Debt/Equity (x) ROAA ROAE Adjusted EPS (AED) Adjusted BVPS (AED) Market Price (AED) * Market Capitalization (AED mn) EV/EBITDA (x) P/E Ratio (x) P/BV Ratio (x) 2008 9,722 (8,230) 1,492 (242) (272) 167 (66) (5) 1,073 1,339 23 1,096 (16) 1,080 (122) 958 757 4,983 278 1,017 251 7,286 495 237 1,381 61 9,460 1,102 5,735 173 7,010 154 114 64 1,196 516 182 1,893 225 9,460 70 (745) 687 11 757 15.3% 11.0% 13.8% 9.9% 1.0 0.7 13.4% 67.4% 0.6 1.3 1.81 2,703.0 0.0 2.8 1.4 2009 7,665 (6,338) 1,327 (156) (253) 70 (82) (294) 611 1,219 20 631 (39) 592 (97) 495 634 4,678 720 648 336 7,016 448 211 1,363 72 9,110 770 4,855 376 6,001 187 138 57 1,196 961 235 2,392 336 9,110 397 (236) (284) (123) 634 17.3% 8.0% 15.9% 6.5% 1.2 0.4 5.3% 23.1% 0.3 1.6 2.14 3,205.3 0.0 6.5 1.3 2010 5,464 (4,637) 827 (225) (173) 47 (83) 32 425 689 13 438 (6) 432 (124) 307 588 4,172 724 369 333 6,185 391 775 1,272 58 8,680 627 4,161 348 5,135 110 128 204 1,196 1,242 260 2,698 404 8,680 361 (157) (250) (46) 588 15.1% 7.8% 12.6% 5.6% 1.2 0.3 3.5% 12.1% 0.2 1.8 1.58 2,356.1 0.0 7.7 0.9 2011e 5,784 (4,995) 789 (191) (202) 58 (87) (42) 325 662 27 351 (11) 341 (126) 215 474 4,247 792 438 411 6,361 344 871 1,177 62 8,815 564 4,173 274 5,011 77 150 220 1,495 1,136 284 2,915 442 8,815 287 (217) (184) (114) 474 13.6% 5.6% 11.5% 3.7% 1.3 0.2 2.5% 7.7% 0.1 1.9 1.27 1,898.7 0.0 8.8 0.7 2012e 6,544 (5,601) 942 (196) (229) 98 (96) (22) 497 834 35 532 (21) 511 (189) 322 649 4,428 807 491 415 6,790 297 896 1,162 67 9,211 508 4,297 230 5,035 54 170 215 1,495 1,425 318 3,239 499 9,211 697 (310) (212) 175 649 14.4% 7.6% 12.8% 4.9% 1.3 0.2 3.6% 10.5% 0.2 2.2 1.27 1,898.7 0.0 5.9 0.6 2013e 7,198 (6,160) 1,038 (205) (259) 108 (102) 580 921 53 632 (25) 607 (219) 388 730 4,575 868 540 456 7,169 257 887 1,170 72 9,556 457 4,303 169 4,929 38 192 203 1,495 1,775 360 3,630 565 9,556 682 (381) (220) 81 730 14.4% 8.1% 12.8% 5.4% 1.5 0.1 4.1% 11.3% 0.3 2.4 1.27 1,898.7 0.0 4.9 0.5 2014e 7,918 (6,783) 1,135 (210) (293) 119 (116) 635 1,021 66 701 (28) 673 (235) 437 951 4,816 954 595 515 7,831 247 759 1,183 78 10,099 411 4,367 186 4,964 27 217 186 1,495 2,169 406 4,070 635 10,099 843 (400) (222) 221 951 14.3% 8.0% 12.9% 5.5% 1.6 0.1 4.4% 11.4% 0.3 2.7 1.27 1,898.7 0.0 4.3 0.5

June 2011

Ratio Analysis

Cash Flow

Balance Sheet

Income Statement

Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on DFM on June 23, 2011

36

Global Research - MENA

Construction Sector

Drake & Scull International

Market Data Bloomberg Code: Reuters Code: CMP (23 June 2011): O/S (mn) Market Cap (AED mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (AED): Low (AED): Average Volume: (mn) 1m -0.6 -0.2 3m -4.4 -8.5 1.14 0.77 9.3 12m 22.4 19.6 DSI UH DSI.AD AED0.99 2,177.8 2,156.0 589.3 10.2 0.8

Strong Buy Target Price AED1.28

1Q11 results in-line with our estimates Year to date new order win reaches AED3.0bn in 2011 Acquisition in Saudi Arabia paying off Margins to remain under pressure

Entry into international markets and acquisitions boosts backlog

Majority of DSIs activities were previously centered in UAE. However, looking at the growth potential in the regional markets, DSI initiated its geographical diversification strategy and entered into Saudi Arabia, Egypt and now it is planning to setup a unit in India. Despite unrest in Saudi Arabia and Egypt, DSI was able to win contracts at both the places. Egyptian contract is worth AED80mn while that of Saudi Arabia is worth AED2bn. Overall year to date contract win by the Company has touched AED3.0bn, which we have assumed to reach AED5bn by the end of the year.
DSI Quarterly Performance 9.0 7.5 6.0 4.5 3.0 1.5 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
New Awards Backlog - Quarter End Revenue

Price Volume Performance

45 40 35 30 25 20 15 10 5 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70

Source: Company Reports

1Q11 results aligned with our estimates

During 1Q11 DSI reported net income of AED45.9mn (EPS: AED0.021) as compared to AED42.2mn (EPS: AED0.019) in 1Q10. Global Research estimated 1Q11 profit of AED45.4mn, deviation of a percent. The results as expected was higher because of remarkable backlog growth and continuation of receiving big ticket awards locally as well as regionally. During the quarter the Company revenue swelled by 67% to AED645.1mn as compared to AED386.4mn in the same period last year. The only negative during the quarter was the drop in the gross margins to 15.6% as compared to 19.2% in 1Q10.

Valuation Update
The value of DSIs shares derived from the weighted average of the DCF and relative valuation methods is AED1.31/share. The stock closed at AED0.99/share on the rd Dubai Financial Market at the end of trading on 23 June 2011, which implies that the weighted average value of DSIs shares is at a premium of 29.3% to the shares current market price. At their current price, DSIs shares are trading at a P/E multiple of 10.2x and 9.7x for 2011 and 2012 respectively. We therefore recommend Strong Buy on the Company.
Investment Indicators Year Revenue (AED mn) Net Profit (AED mn) EV/Revenues (x) EV/Backlog (x) EV/EBITDA (x) P/E (x) P/BV (x)

Vol. (mn) - LHS

DSI (AED)

(AED bn)

Absolute (%) Relative (%)

Hettish Karmani Senior Financial Analyst [email protected] Tel.: (965) 22951281

2009 2,212 337 4.3 5.8 0.8

2010 1,855 162 0.7 4.3 12.8 14.0 0.9

2011e 2,820 211 1.3 12.8 11.0 10.2 0.8

2012e 3,204 222 0.9 11.0 9.9 9.7 0.8

2013e 3,599 227 0.8 9.9 9.5 9.5 0.7

2014e 3,947 245 0.7 9.5 8.2 8.8 0.7

Source: Company Reports & Global Research

June 2011

37

Global Research - MENA Revenue to increase at a CAGR of 20.8% during 2010-14

Construction Sector

DSI contract revenue declined by 16.1% in 2010 to AED1.8bn as compared to AED2.2bn in 2009. Although the Company received higher number of new awards during the period but most of the contracts are for a longer period of time hence the project completion rate during the period dropped. Amongst the three business segments, only IWP witnessed an increase of 16.8% during 2010 reaching AED487mn as compared to AED417mn in the same period last year. MEP and civil segment revenue dropped by 16.7% and 25.5% respectively.

Revenue 5,000
4,000

Revenue by Segment 100% 80% 60% 40% 20% 0%

(AED mn)

3,000 2,000
1,000

2009

2008

2010

2011e

2012e

2012e

2013e

2011e

2014e

CIVIL

IWP

MEP

Source: Company Reports & Global Research

During 1Q11, DSI contract revenues was recorded at AED645.1mn as compared to AED386.4mn in the corresponding period of last year, growth of 67.0%. MEP business contribution remained higher during the period at 47.3% followed by Civil at 45.4%.
Revenue Assumptions (AED mn) Opening backlog New Contracts Awarded Monthly run-rate Project Completion Value of Work Completed (Revenue) Closing Backlog
Source: Global Research

2009 3,212 2,300 192 40% 2,212 3,300

2010 3,300 3,382 282 28% 1,855 4,828

2011e 4,828 5,242 437 28% 2,820 7,250

2012e 7,250 4,194 349 28% 3,204 8,240

2013e 8,240 4,613 384 28% 3,599 9,254

In 2011, we expect the Companys revenue to increase by 52.0% to AED2.8bn. Such an increase is expected because the Company has already availed projects worth AED3.0bn in 2011 which we expect to touch AED5.2bn by the end of the year. Post 2011, we expect the revenue to increase at a CAGR of 11.9% during 2011-14. Although the Company has plans to move their IWP segment contribution to the total revenue higher because IWP contracts generally have higher gross margins when compared to those of MEP and Civil. But recently most of the big ticket contracts availed by the Company are in the Civil business. Hence we have assumed Civil segment contribution to the total revenue to increase from 23.6% in 2010 to 45.0% in 2011. While the contribution of MEP and IWP is assumed to drop to 38.0% and 17.0% respectively in 2011. In terms of revenue break-up geographically we have assumed that, Saudi Arabia would contribute the most in 2011 and would reach 40% while Abu Dhabi would contribute around 25% to the total revenue of the Company.

Backlog Saudi share to increase

DSIs 1Q11 backlog stood at AED7.5bn which is up 55.3% higher on a q-o-q basis and 82.9% higher on a y-o-y basis. The backlog is 2.7x times its 2011 revenues. Saudi Arabia with a total backlog of AED3.7bn was DSIs largest market and accounted for 49% of its backlog. This was followed by Abu Dhabi with AED1.1bn backlog or ~15% of the companys total backlog. The project market activity in UAE specially Dubai has witnessed an unabated fall which to some extent has been arrested by Abu Dhabi. Company exposure to Dubai related contracts has continued to drop. From 32.0% in 2009 it fell down to 23.0% in 2010. As per the latest the backlog has further reduced to 14% of the total.

June 2011

2014e
2014e 9,254 4,844 404 28% 3,947 10,150

2013e

2008

2009

2010

38

Global Research - MENA

Backlog 12,000 10,000 8,000 6,000 4,000 2,000 Backlog Break-Up 100% 80% 60% 40% 20% 0%

Construction Sector

(AED mn)

2012e

2013e

2011e

2014e

2009

2008

2008

2009

2010

2010

2011e

2012e

MEP

IWP

CIVIL

Source: Company Reports & Global Research

Going forward in 2011 we expect, Companys backlog to touch AED7.2bn, around 2.6x times revenue and 0.4x of the enterprise value. While in the long term we believe that backlog will grow at a CAGR of 20.4% during 2010-14. In terms of backlog breakup we expect the civil segment contribution to drop from 47% as of 1Q11 to 45% as of 2012 and around 38% by 2014. While on the other hand IWP segment where the Company wants to focus more, its contribution would increase to 20% by 2014 as compared to 12% as of 1Q11.

Gross margins to remain under pressure

During 1Q11, DSI gross margins were recorded at 15.6% as compared to 19.2% in the corresponding period last year. The margins as expected were lower when compared to previous year because of tough contractors market and increasing competition. Moving forward, we expect Companys margins to remain at 15.9% in 2011 and then further drop to 15% by 2014.
Gross Profit & Gross Margins 600 500 400
300 200

EBITDA & EBITDA Margins 20.0% 18.0% 16.0%

14.0% 12.0%

400 340 280

220 160

100 2008 2009 2010 2011e 2012e 2013e

Gross Margins

10.0%

100 2008 2009 2010 2011e 2012e 2013e

EBITDA Margins

Gross Profit (AED mn)

Source: Company Reports & Global Research

EBITDA (AED mn)

Earlier, during the boom time the main priority was to find a contractor, however the financial crisis has drastically changed the overall outlook and these days developers bargaining power is on the upswing and contractors capacity utilization rates are going down. The economic downturn affected some of the regional markets, but Abu Dhabi, KSA and Kuwait remained lucrative. However, due to DSIs strong presence in Abu Dhabi, which they had concentrated on developing and maintaining over the past few years, along with their positive track record and recent big ticket project wins in Saudi Arabia, we expect the Company to bargain well for the upcoming projects.

Acquisitions
Post its IPO, the Company amassed huge cash which it kept a side for potential acquisitions. Post IPO, Company has so far accomplished five acquisition worth over AED600mn in the last three years. Recently, Company announced the successful completion of the agreement for its second acquisition in Saudi Arabia. DSI acquired 100% stake of International Centre for Contracting Co. (ICCC) for an enterprise value of SAR128mn.

June 2011

2014e
20.0% 17.0% 14.0%
11.0% 8.0%

2013e

5.0%

39

Global Research - MENA

DSI Acquisitions Year Date Country 2009 2010 2011 4Q09 4Q09 1Q10 4Q10 1Q11 Germany Kuwait Qatar Saudi Arabia Saudi Arabia

Construction Sector

Company Name Passavant-Roediger Electrical Contracting Co. DSI Qatar DSI MEP Saudi / Civil ICCC *

Purchase Price (AEDmn) 60.0 85.0 96.0 244.0 128.0

Order Backlog (AEDmn) 410.0 70.0 167.0 488.0 640.0

EV/Backlog (x) 0.15 1.21 0.57 0.50 0.20

EV/Sales (x) 0.40 0.80 0.90 0.80 0.50

Source: DSI & Zawya * ICC Purchase price and order book is in SAR mn

We believe that post the acquisition of ICCC, Company will still have sufficient cash reserves over AED500mn, which would be utilized by the Company for future geographic expansions in other emerging markets.

Net income to increase at a CAGR of 11.0% during 2010-14

In 2010, DSI net profit almost halved to AED162mn as compared to AED337mn in 2009. However, during the 1Q-2011, DSI was able to post a net income of AED45.9mn at net margins of 7.1% as compared to 1Q10 margins of 10.9%. Nevertheless the profit was higher by 8.6% yo-y due to the healthy backlog and new contracts wins. In 2011, DSI is expected to report net income of AED211mn (EPS: AED0.10) as compared to AED162mn (EPS: AED0.07) in 2010. While on the net margin front we expect the net margins to be 7.5% in 2011 as compared to 8.7% in 2010. Post 2011, we expect the Company to report higher income on the back of expected economic recovery in the Middle East. Qatar, Saudi Arabia and Abu Dhabi government spending worth billions would benefit the regional contractors and we believe DSI would get sizable new projects during that period. We expect net profit of DSI to grow at a CAGR of 11.0% during 2010-14 and expect net margins to remain in the range of 6.2-7.5% during 2011-14.

June 2011

40

Global Research - MENA

DSI - Chart Gallery
0.5
0.4 0.3 0.2 0.1 -

Construction Sector

1.5
1.2 0.9 0.6 0.3 -

2009

2010

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

2013e

EV/Backlog (x)

EV/Revenue (x)

15.0 12.0 9.0 6.0 3.0 2009 2010 2011e 2012e 2013e 2014e

3.0 2.6 2.2 1.8 1.4 1.0

2009 2010 2011e 2012e 2013e 2014e 2014e 2014e 2014e

EV/EBITDA (x)
180.0% 150.0% 120.0% 90.0% 60.0% 30.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0%

Backlog/Revenue (x)

2009

2010

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

Cash Loan Coverage

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 20.0% 16.0% 12.0% 8.0% 4.0% 0.0%

Gross Margins

2009

2010

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

Operating Margins

Net Margins

15.0% 12.0% 9.0%

6.0% 3.0% 0.0%

10.0% 8.0% 6.0%

4.0% 2.0% 0.0%

2009

2010

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

ROE
Source: Company Reports & Global Research

ROA

June 2011

2013e

2013e

2013e

2014e

41

Global Research - MENA

Construction Sector

Financial Statements
(AED mn) Contract Revenue Contract Costs Gross Profit Amortization of Intangible Assets Selling, Gen. & Administrative Expense Management Fees Operating Profit Other Income Financial Charges Profit Before Tax Income Tax Profit After Tax Cash and Bank Balance Contract Receivables & Retentions Contract Work in Progress Inventories Other Assets Total Current Assets Goodwill & Other Assets Long Term Investments Prepayments Property, Plant & Equipment Loans & Advances Total Non-Current Assets Total Assets Loans Payables Others Share Capital Statutory Reserve Treasury Shares Minority Interest Foreign Currency Translation Reserve Retained Earnings Total Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End
Cash Flow

2008 1,425 (1,149) 276 (123) (13) 140 26 (7) 158 158 162 520 226 2 48 958 147 13 115 172 45 491 1,450 262 532 345 15 8 14 274 311 1,450 (11) (96) 144 37 175

2009 2,212 (1,776) 436 (38) (183) (17) 199 114 (17) 337 (1) 337 1,160 984 405 13 556 3,118 822 198 30 212 22 1,282 4,401 663 786 436 2,178 34 (29) 39 (7) 301 2,515 4,401 (195) (343) 1,535 998 1,160

2010 1,855 (1,510) 344 (34) (179) (15) 117 72 (33) 156 5 162 705 1,266 622 25 738 3,356 1,203 13 15 250 34 1,514 4,871 789 963 576 2,178 49 (29) 72 (8) 280 2,542 4,871 (131) (219) (266) (616) 705

2011e 2,820 (2,371) 448 (36) (226) (21) 165 67 (19) 213 (2) 211 386 1,622 812 39 1,004 3,863 1,241 14 16 309 37 1,617 5,481 708 1,234 886 2,178 70 (29) 77 356 2,652 5,481 (93) (22) (204) (319) 386 1.4 1.4 15.9% 5.9% 7.5% 3.9% 8.0% 0.27 0.35 0.91 10.96 0.10 1.22 0.99 2,156.0 5.1% 10.2 0.8

2012e 3,204 (2,708) 497 (38) (256) (24) 178 63 (18) 224 (2) 222 464 1,580 890 45 1,053 4,033 1,303 15 17 347 38 1,720 5,753 638 1,335 1,014 2,178 92 (29) 83 441 2,765 5,753 273 (19) (176) 78 464 1.4 1.4 15.5% 5.6% 6.9% 3.9% 8.0% 0.23 0.29 0.75 9.86 0.10 1.27 0.99 2,156.0 5.1% 9.7 0.8

2013e 3,599 (3,059) 540 (40) (288) (27) 185 60 (16) 229 (2) 227 436 1,676 964 50 1,085 4,210 1,369 15 18 380 40 1,822 6,033 574 1,425 1,151 2,178 115 (29) 89 530 2,883 6,033 169 (23) (175) (29) 436 1.4 1.4 15.0% 5.1% 6.3% 3.8% 7.9% 0.20 0.26 0.66 9.52 0.10 1.32 0.99 2,156.0 5.1% 9.5 0.7

2014e 3,947 (3,355) 592 (42) (316) (30) 205 57 (14) 248 (2) 245 558 1,784 1,030 55 1,060 4,487 1,437 16 19 415 42 1,929 6,416 516 1,609 1,271 2,178 140 (29) 95 636 3,020 6,416 327 (30) (174) 123 558 1.4 1.3 15.0% 5.2% 6.2% 3.8% 8.1% 0.17 0.22 0.56 8.19 0.11 1.39 0.99 2,156.0 5.1% 8.8 0.7

Current Ratio (x) 0.9 1.9 1.5 Quick Ratio (x) 0.9 1.9 1.5 Gross Profit Margin 19.4% 19.7% 18.6% Operating Margin 9.8% 9.0% 6.3% Net Profit Margin 11.1% 15.2% 8.7% Return on Assets 10.9% 7.6% 3.3% Return on Equity 51.0% 13.4% 6.4% Debt / Equity (x) 0.84 0.26 0.31 EV/Backlog (x) 0.45 0.50 EV/Revenues (x) 0.68 1.31 EV/EBITDA (x) 4.30 12.83 EPS (AED) 0.07 0.15 0.07 Book Value Per Share (AED) 0.14 1.16 1.17 Market Price (AED) * 0.90 1.04 Market Capitalization (AED mn) 1,960.0 2,264.9 Dividend Yield 0.0% 0.0% 6.7% P/E Ratio (x) 5.8 14.0 P/BV Ratio (x) 0.8 0.9 Source: Company Reports & Glob al Research * Market price for 2011 and sub sequent years as per closing prices on June 23, 2011

June 2011

Ratio Analysis

Balance Sheet

Income Statement

42

Global Research - MENA

Construction Sector

Mohammad Al-Mojil Group

Market Data Bloomberg Code: Reuters Code: CMP (22 June 2011): O/S (mn) Market Cap (SAR mn): Market Cap (USD mn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (SAR): Low (SAR): Average Volume: (mn) 1m -6.5 -2.7 3m 28.1 25.7 22.7 14.5 1.2 12m 19.7 14.7 MMG AB 1310.SE SAR22.0 125.0 2,750.0 733.3 21.8 1.7

BUY Target Price SAR25.2

Benefitting in worlds largest oil producer as oil & gas contractor YTD contract win reaches SAR2.8bn in 2011, backlog at SAR4.2bn Establishing new joint ventures to support business Margins to remain range bound

Initiating coverage
We initiates its coverage on Mojil Group. The Company is one of the leading oil & gas construction contractors in the Kingdom of Saudi Arabia. The Company has key clients such Aramco, Sabic and Maaden whose average contribution to the Companys revenue ranges between 70-90%. Mohammad Bin Hamad Abdulkarim Al Mojil is the leading stake holder in the Company at 50% at the end of 2010.

Aramcos spending to benefit Mojil

Aramco is planning to spend USD125bn on various projects over the next five years. Aramco projects contributed 63% revenue to the Company in 2010 and as of year to date it has given projects worth SAR1.7bn to Mojil Group. Going forward with such huge amount kept for spending we believe the Company would continue to benefit as it is one of few contractors who specialize in oil and gas contracting segment.

Absolute (%) Relative (%)

Sabics expansions would promote Mojils order book

Price Volume Performance
14.0 12.0 30.0 25.0 20.0 15.0 10.0 5.0

As per Meed, Sabic expansion projects during 2011-20 include additional capacities of various oil derivatives which will cost around USD48-50bn. During 2008 and 2009, Sabics projects to Mojil contributed 57.3% and 40.9% revenue to the Company and with more expansions we believe sizable chunk would go to Mojil as well because of its track record and expertise in the field.

10.0 8.0
6.0 4.0 2.0

YTD contracts and backlog rise to SAR2.8bn & SAR4.2bn, respectively

Since the start of the year, the Company received sizable orders which raised its new contracts to SAR2.8bn of which SAR1.7bn have been contributed from Aramco alone. Other major project wins were from Wasit Gas Development Project worth SAR746.2mn and Daelim Saudi Arabia worth SAR256mn. Company recently issued a statement that its backlog has touched SAR4.2bn till the mid of 2011, which is going to last till 2014. Global research estimates for new contracts and ending backlog 2011 are SAR3.5bn and SAR4.2bn respectively.

Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

Valuations
The value of Mojils shares derived from the weighted average of the DCF and relative valuation methods is SAR25.3/share. The stock closed at SAR22.0/share on nd the Tadawul at the end of trading on 22 June 2011, which implies that the weighted average value of Mojils shares is at a premium of 14.5% to the shares current market price. At their current price, Mojils shares are trading at a P/E multiple of 21.8x and 19.6x for 2011 and 2012 respectively. We therefore recommend a BUY on the stock at its prevailing price levels.
Investment Indicators Revenue (SAR mn) Net Profit (SAR mn) EV/Revenues (x) EV/Backlog (x) EV/EBITDA (x) P/E (x) P/BV (x) 2009 2,216 40 1.5 1.0 9.2 74.4 1.6 2010 1,731 (179) 1.6 0.9 11.9 (13.2) 1.5 2011e 2,364 126 1.4 0.8 9.6 21.8 1.7 2012e 2,786 140 1.2 0.6 8.5 19.6 1.6 2013e 3,257 153 1.0 0.5 7.7 17.9 1.6 2014e 3,709 162 0.8 0.4 6.8 17.0 1.7

Vol. (mn) - LHS

MMG (SAR)

Hettish Karmani Senior Financial Analyst [email protected] Tel.: (965) 22951281

Source: Company Reports & Global Research

June 2011

43

Global Research - MENA Valuation Explained Assumptions for Discounted Cash Flow (DCF)

Construction Sector

In order to compute the cost of equity for the DCF method, we have used the Capital Asset Pricing Model (CAPM). The following assumptions have been made in order to arrive at the DCF value of Mojil. A risk-free rate of 5.6% has been taken which is yield on 10-yr Saudi government bond. A market risk premium of 7.0% has been assumed. Beta taken from Bloomberg comes out to be less than 1.0. Hence to be conservative we have taken beta as 1.0. The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 12.6%. The cost of debt has been assumed at 7.0%. Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to be 9.8%. Terminal growth rate of 3.0% has been assumed. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of the Company comes out to be SAR28.5/share.

DISCOUNTED CASH FLOW (SAR mn) Free Cash Flow Discounted Cash Flow Terminal Value Primary Value Discounted Terminal Value Investments Cash Debt Enterprise Value Equity Value Shares Outstanding Per Share Value (SAR)
Source: Global Research

2011e 9 8 6,009 535 4,318 10 39 670 4,231 3,561 125 28.5 (As of 1Q11) (As of 1Q11) (As of 1Q11)

2012e 118 102

2013e 177 140

2014e 396 284

Relative Valuation
To arrive at the peer-set P/E multiple, we have computed the weighted average P/E of the five listed regional construction companies based on their current market prices and 2011 earnings estimates. The weighted average forward P/E for the peer set, thus arrived at, is 11.8x. On the basis of the weighted average forward P/E for the peer set and Companys 2011 earnings, the companys stock valuation comes to SAR11.9/share.

Blended Price
The blended price is then calculated after applying weight of 80% to the DCF value and 20% to the value from relative valuation method. The weighted average value comes to SAR25.2 per share.

June 2011

44

Global Research - MENA About the company

Construction Sector

Mohammad Al Mojil Group (MMG) is one of the leading oil & gas construction contractors in the Kingdom of Saudi Arabia with over 50 years of experience and around SAR50bn worth of projects completed since inception. The Company went public in May 2008 and raised around USD560mn. The Company is a licensed general contractor specializing in onshore and offshore oil & gas and petrochemical projects. The Companys core activity is the construction of onshore and offshore oil & gas and petrochemical facilities on a subcontract basis from the primary project contractor who provides the technical requirements, designs and specifications of the project. Al-Mojil role is then to execute the construction as per the requirements. Companys scope of work includes all construction activities involving civil, structural, mechanical, electrical, instrumental and maintenance. Foreign ownership limit in the Company is to a maximum of 49% while GCC nationals can hold cent percent of the Company.

Shareholding structure
Before IPO the founding shareholder Mohammad Bin Hamad Abdulkarim Al Mojil owned 80% which at the end of 2010 dropped to 50%. Post IPO, Adel Mohammad Al-Mojil and Al-Mojil Holdings Limited retained its shareholding in the Company at 5%. Hence today the free float or the shares available to public stand around 40%.
Shareholding Structure - Pre IPO
Al-Mojil Investment Limited, 5% Mohammad Hamad AlMojil International Company for Investments, 5% Adel Mohammad Al-Mojil, 5% Al-Mojil Holdings Limited, 5%

Shareholding Structure - Current

Al-Mojil Holdings Limited, 5%

Mohammad Hamad AlMojil, 50%

Public , 40%

Mohammad Hamad AlMojil, 80%

Adel Mohammad Al-Mojil, 5% Source: Zawya

Source: IPO Prospectus

Revenue to the grow at a CAGR of 21% during 2010-14

During 2010, Company witnessed a fall of 22% to SAR1.7bn as compared to SAR2.2bn in 2009. During 2010, revenue generation through SABICs projects declined to merely 0.3% of the total which at the end of 2009 stood at 40.9%. SABIC did not undergo many new projects during the period because of which the Company was not able to secure new orders from them.
Revenue
4,000

Revenue Break-Up
75.0% 60.0% 45.0% 30.0% 15.0%

(SAR mn)

3,400 2,800 2,200 1,600

1,000
2008 2009 2010 2011e 2012e 2013e 2014e

0.0%
2008 2009 2010

Source: Company Reports & Global Research

June 2011

45

Global Research - MENA

Construction Sector
During 2011, the Company has secured new orders over SAR1.7bn from Aramco, whose contracts completion contributed around 63% to the total revenue of the Company in 2010. Going forward we believe that the Company would register a revenue CAGR of 21.4% during 2010-14. The revenue would be driven by various oil and gas related project being announced in Saudi Arabia and Abu Dhabi, where MMG operates.

The order book to grow as more oil/gas projects are carried out locally
Companys order book is expected to grow as various projects worth billions have been announced by the government of Saudi Arabia. The company has already won projects worth SAR2.8bn and there are still six months to go. However just to be conservative we have assumed new orders of the Company during 2011 at SAR3.5bn.

New Contract Awarded 5,000

Backlog 7,000

(SAR mn)

3,000
2,000

(SAR mn)
2011e 2012e 2013e 2014e

4,000

6,000 5,000
4,000

1,000 -

3,000 2,000 2011e 2012e 2013e 2014e

Source: Global Research

Going forward, we have assumed new contract and backlog CAGR of 10.0% and 17.9% during 2011-14. The new order and backlog is expected to touch SAR4.5bn and SAR6.9bn at the end of 2014.

Margins to contract as competition heats up in the Kingdom

During 2010, cost of sales declined but the cost as a percentage of sales increased which dropped the gross margins to 11.2% in 2010 as compared to 15.5% in 2009. While during 1Q11, the Companys gross margins rose slightly to 11.6%. We expect MMG to record gross margin of 12.0% for 2011 and thereon gradually decline to 10.5%.
Gross Profit & Gross Margins 1,000 800
600

EBITDA & EBITDA Margins 25.0% 21.0%

17.0%

1,000 800
600

25.0% 21.0%
17.0%

400 200
-

13.0% 9.0%
5.0%

400 200
-

13.0% 9.0%
5.0%

2008 2009 2010 2011e 2012e 2013e 2014e

Gross Profit (SAR mn) Source: Company Reports & Global Research Gross Margins

2008 2009 2010 2011e 2012e 2013e 2014e

EBITDA (SAR mn) EBITDA Margins

MMGs EBITDA margin in 2010 stood at 13.8%. We expect an EBITDA margin of 14.4% in 2011. Given that gross margins are expected to decline, we estimate EBITDA margin to follow the same trend and come down to 12.0% by 2014.

Net income
Net loss reported by the Company during 2010 was SAR179mn. This loss was reported by the Company because of provisions of doubtful debts worth over SAR236mn in 2010 which in 2009 stood at SAR154mn. During 1Q11, Company reported net income of SAR32.6mn which was higher by 213.5% when compared to 1Q10 net profit of SAR10.4mn.

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Global Research - MENA

Net Income
800

Construction Sector

600

(SAR mn)

400 200
-

(200) (400) 2008 2009 2010 2011e 2012e 2013e 2014e

Source: Company Reports & Global Research

Going forward we believe that the net income is estimated to register a CAGR of 8.7% during 2011-14. While on the other hand the net margins are expect to follow the trend of the gross margins and drop to 5.3% and 4.4% during 2011 and 2014 respectively.

Working capital higher currently expected to go down

During 2010, the Companys receivables stand at SAR1.6bn, less by 6.3% when compared to that of 2009 at SAR1.7bn. Although there was a decline in receivable but the receivables outstanding days increased during 2010 to 357days as compared to 312days in 2009. On the other hand the inventory rose to SAR84mn as compared to SAR31mn in 2009. A surge in inventories raised the inventory stock days to 14 as compared to 6 in 2009.

Receivables Outstanding (Days) 400

340

Inventory Stock (Days) 20 15 10

280
220

160
100

5
-

2008

2009

2010

2011e 2012e 2013e 2014e

2008

2009

2010

2011e 2012e 2013e 2014e

Source: Company Reports & Global Research

Gradually we believe that as more and more public and private companies projects are rolled out and Mojil gets some share of those, the receivables days of the Company would come down to 200 by 2014. Nevertheless at current point in time the receivables days of the Company are higher than many of its local and regional peers and higher when compared to our contractors coverage.

Key Risk to Valuation

The Company currently pays its Murabaha facilities on a variable rate basis, exposing it to higher financing cost in case of any associated increase in rate prices which will adversely affect its financial results. The Company depends on a number of key clients such as Aramco and SABIC. The Companys operations and financial results could be adversely affected in case of the Companys inability to secure further contracts with these clients. During 2009 and 2010, MMG reported provisions related to doubtful debts at a sum of SAR154mn and SAR236mn respectively. There is no guidance from the Company related to any provisions in 2011, however, if the amount appears it would be in 4Q11, which can take the profits down.

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Mojil - Chart Gallery
1.3
1.0 0.8 0.5 0.3 -

Construction Sector

2.0
1.6 1.2 0.8 0.4 -

2008

2009

2010

2008

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

2013e

EV/Backlog (x)

EV/Revenue (x)

15.0 12.0 9.0 6.0 3.0 2008 2009 2010 2011e 2012e 2013e 2014e

2.0 1.6 1.2 0.8 0.4 2008 2009 2010 2011e 2012e 2013e 2014e 2014e 2014e 2014e

EV/EBITDA (x)

Backlog/Revenue (x)

50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

2008

2009

2010

2008

2009

2011e

2012e

2013e

2014e

2010

2011e

2012e

Cash Loan Coverage

Gross Margins

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

25.0% 15.0% 5.0%

-5.0%
-15.0%

2008

2009

2010

-25.0%
2011e 2012e 2013e 2014e 2008 2009 2010 2011e 2012e 2013e 2013e

Operating Margins

Net Margins

10.0% 8.0% 6.0%

4.0% 2.0% 0.0%

6.0% 4.8% 3.6%

2.4% 1.2% 0.0%

2008

2009

2010

2008

2009

2011e

2012e

2013e

2014e

2010

2011e

ROE

ROA

Source: Company Reports & Bloomberg

June 2011

2012e

2013e

2014e

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Financial Statements
(SAR mn) Contract Revenues Cost of Sales Gross Profits General & Administrative Expenses Provisions for Doubtful Debts Operating Profit Murabaha Charges Other Income Net Profit before Zakat Provisions for Doubtful Debts Zakat Net Profit Cash and Bank Balance Receivables Inventories Advance Payment & Others Total Current Assets Plant and Equipment Other Assets Total Assets
Balance Sheet

2008 3,345 (2,544) 801 (99) 701 (19) 3 685 (20) 665 86 2,048 31 278 2,442 1,225 2 3,669 500 375 525 232 47 1,680 87 1,000 116 786 1,902 3,669 123 (411) 350 61 86

2009 2,216 (1,872) 344 (119) 225 (15) 2 212 (154) (17) 40 41 1,745 31 58 1,876 1,196 1 3,073 450 386 135 168 3 1,142 91 1,250 120 470 1,840 3,073 240 (131) (153) (44) 41

2010 1,731 (1,537) 194 (110) 84 (11) 2 75 (236) (18) (179) 46 1,636 84 82 1,849 1,095 2,944 490 374 109 274 11 1,259 25 94 1,250 120 197 1,566 2,944 96 (63) (29) 5 46

2011e 2,364 (2,080) 284 (106) 177 (12) 2 167 (41) 126 74 1,910 114 112 2,211 1,107 10 3,328 564 570 115 301 13 1,562 38 99 1,250 120 260 1,630 3,328 195 (196) 29 28 74 1.4 1.3 12.0% 7.5% 5.3% 4.0% 7.9% 1.0 0.4 1.4 9.6 1.0 13.0 22.0 2,750.0 2.3% 21.8 1.7

2012e 2,786 (2,465) 320 (125) 195 (11) 2 186 (45) 140 98 1,984 135 168 2,386 1,121 15 3,521 535 675 120 331 14 1,676 34 103 1,250 120 338 1,708 3,521 323 (210) (89) 24 98 1.4 1.3 11.5% 7.0% 5.0% 4.1% 8.4% 1.0 0.3 1.2 8.5 1.1 13.7 22.0 2,750.0 2.3% 19.6 1.6

2013e 3,257 (2,899) 358 (147) 212 (11) 2 203 (50) 153 111 2,053 159 196 2,519 1,135 30 3,684 509 794 126 364 15 1,809 30 109 1,250 120 366 1,736 3,684 402 (240) (149) 13 111 1.4 1.3 11.0% 6.5% 4.7% 4.3% 8.9% 1.0 0.3 1.0 7.7 1.2 13.9 22.0 2,750.0 4.5% 17.9 1.6

2014e 3,709 (3,319) 389 (167) 223 (10) 2 215 (53) 162 205 1,930 164 193 2,492 1,151 60 3,703 483 909 133 372 17 1,914 27 114 1,250 120 278 1,648 3,703 644 (278) (272) 94 205 1.3 1.2 10.5% 6.0% 4.4% 4.4% 9.6% 1.2 0.3 0.8 6.8 1.3 13.2 22.0 2,750.0 9.1% 17.0 1.7

Income Statement Ratio Analysis Cash Flow

Short Term Murabaha Facilities Accounts Payable Down Payments Accured Expenses & Other Liabilities Due To Sister Companies Total Current Liabilities Long Term Murabaha Facilities Employee Indemnity Provision Paid-up Capital Statutory Reserves Retained Earnings Total Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End

Current Ratio (x) 1.5 1.6 1.5 Quick Ratio (x) 1.3 1.6 1.4 Gross Profit Margin 23.9% 15.5% 11.2% Operating Margin 21.0% 10.1% 4.9% Net Profit Margin 19.9% 1.8% -10.4% Return on Average Assets 18.1% 1.2% -6.0% Return on Average Equity 35.0% 2.2% -10.5% Current Liability / Equity (x) 0.9 0.6 0.8 Debt / Equity (x) 0.3 0.2 0.3 EV/Revenues (x) 1.2 1.5 1.6 EV/EBITDA (x) 4.7 9.2 11.9 Adjusted EPS (SAR) 5.3 0.3 (1.4) Adjusted Book Value Per Share (SAR) 15.2 14.7 12.5 Market Price (SAR) * 35.3 24.0 18.9 Market Capitalization (SAR mn) 3,528.0 3,000.0 2,362.5 Dividend Yield 0.0% 3.3% 4.0% P/E Ratio (x) 6.6 74.4 (13.2) P/BV Ratio (x) 2.3 1.6 1.5 Source: Company Reports & Glob al Research * Market price for 2011 and sub sequent years as per closing prices on June 22, 2011

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Orascom Construction Industries

Market Data Bloomberg Code: Reuters Code: CMP (23 June 2011): O/S (mn) Market Cap (EGP bn): Market Cap (USD bn): P/E 2011e (x): P/Bv 2011e (x): Price Performance 1-Yr High (EGP): Low (EGP): Average Volume: (000) 1m 7.4 3.9 3m 36.6 27.8 291.7 204.4 178 12m 20.7 34.0 OCIC EY OCIC.CA EGP272.6 208.9 56.9 9.6 12.1 2.6

BUY Target Price EGP326.9

New acquisitions to strengthen revenues and net income Construction segment to benefit from MENA govts spending plans Renegotiation of gas contracts in Egypt to look out for Fertilizer product prices on the rise to benefit the Company

Net income grew by 76.9% in 1Q11

Orascom Construction Industries (OCI) reported net income of USD206.1mn in 1Q11 as compared to USD116.5mn in the comparable period last year. Such an exceptional growth in profits emanated from 28% increase in the top line along with drop in the cost which raised the gross margins to 32.4% in 1Q11 compared to 30.2% in 1Q10. 1Q11 reflects financial contribution from OCI Nitrogen which was not included during the same period last year. As per management presentation for 1Q11, the net income growth was also aided by strong results from Gavilon.
Interim Results (USD mn) Sales Revenue Cost of Sales Gross Profit Operating Profit Net Profit Gross Margins Operating Margins Net Margins
Source: Company Reports

Absolute (%) Relative (%)

Price Volume Performance

2.5 300.0

1Q10 985.4 688.3 297.1 183.9 116.5 30.2% 18.7% 11.8%

1Q11 1,261.6 853.4 408.2 268.3 206.1 32.4% 21.3% 16.3%

Change 28.0% 24.0% 37.4% 45.9% 76.9% -

2.0 1.5 1.0

0.5 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

280.0 260.0 240.0

220.0 200.0

Pandora acquisition
During 2Q11, Company announced that its wholly owned subsidiary, OCI Nitrogen (Netherlands), acquired an integrated ammonia-methanol plant located in Beaumont, Texas, on the Gulf Coast of the United States. OCI acquired the plant through a joint venture with Janus Methanol AG (Janus), named Pandora Methanol LLC, in which OCI holds 50% plus 1 share. The plant has a production capacity of 0.25mtpa of ammonia and 0.75mtpa of methanol. Ammonia production is expected to commence in 4Q11 while methanol production is targeted to start in 2Q12. As per our analysis, Pandora would add around EGP1.2bn revenue to OCI Nitrogen in 2012 and EGP1.6bn by 2014.

Valuation update
Based on future earnings projections, the DCF based SOTP value of OCI comes out to be EGP326.9/share. We have upgraded our value by 2%. The upgrade would have been further higher but we have downgraded the value of construction business to EGP168.1 from EGP200.8 because of expected slowdown in the local Egyptian market till the political scenario normalizes in the country. At current price, we recommend a BUY on the stock.
Investment Indicators Revenue (EGP mn) Net Profit (EGP mn) EV/Revenues (x) EV/EBITDA (x) Dividend Yield (%) P/E (x) P/BV (x) 2009 21,819 2,417 2.7 12.7 4.1% 21.3 3.0 2010 27,552 3,344 2.6 11.1 3.9% 17.9 3.2 2011e 29,513 4,708 2.3 8.3 3.5% 12.1 2.6 2012e 34,346 5,889 1.9 6.5 5.0% 9.7 2.2 2013e 37,566 6,469 1.6 5.8 6.2% 8.8 2.0 2014e 40,389 6,568 1.4 5.4 6.8% 8.7 1.8

Vol. (mn)

Price (EGP) - RHS

Hettish Karmani Senior Financial Analyst [email protected] Tel.: (965) 22951281

Source: Company Reports & Global Research

June 2011

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Construction Sector Revenue growth to be aided by fertilizer expansions and acquisitions

OCI revenue increased by 26.3% in 2010 to EGP27.5bn as compared to EGP21.8bn in 2009. During the period construction revenue went up marginally by a percent while the real growth emanated from the fertilizer segment which topped with a revenue growth of 208.6%. In terms of contribution, construction revenue topped with 70% share of total while the rest was contributed by fertilizer segment. Growth in fertilizer revenue can be attributed to improved prices across OCIs product portfolio and the consolidation of OCI Nitrogen. While the revenue of construction segment arose from its projects in Egypt and Algeria, Contrack projects in the Gulf area, Cementech projects, and BESIX projects in Europe, Gulf area and Africa. During 1Q11, OCI consolidated revenues grew by 28.0% to USD1,261.6mn (EGP7,383.3mn) versus USD985.4mn (EGP 5,400.1mn) in 1Q10. The contribution to the revenue from the segments was not available but we are clear that the fertilizer revenue contribution to the total would have increased because of increase in fertilizer prices during the quarter as well as lost of 10 days of construction site activity in Egypt during the quarter.

Revenue (EGP mn)

40,000 60%

Revenue Composition
100%

32,000 24,000 16,000 8,000 2008 2009 2010 2011e 2012e 2013e 2014e
Revenue Growth

48% 36% 24% 12% 0%

80% 60%
40%

20% 0% 2008 2009 2010 2011e 2012e 2013e 2014e

Fertilizer Revenue

Construction Revenue

Source: Company Reports & Global Research

During 2011, we expect the revenue to register a growth of 7.1% to EGP29.5bn. Fertilizer segment revenue is estimated to grow by 26.5% while that of construction segment is estimated to report a drop of a percent. Growth in the fertilizer segment revenue would be contributed by increase in the product prices along with commercial commencement of some Sorfert Algerie products as well as full throttle addition from OCI Nitrogen. In the long run we estimate the revenue to grow at a CAGR of 10% during 2010-14. Within the revenue, construction revenue is estimated to grow at a CAGR of 4.5% while the fertilizer revenue is expected to report a CAGR of 20.4%.

Construction backlog performance

During 2010, construction backlog of the Company decreased by 7.7% while new contracts awarded declined by 12.1%. Backlog split by sector reveals that the infrastructure segment backlog was 58.6% of the total, 16.6% of industrial and the rest by commercial segment.

OCI Backlog & New Awards 50.0

(EGP bn)

40.0 30.0 20.0

10.0 2011 2012 2013

1Q-07

2Q-07

3Q-07

4Q-07

1Q-08

2Q-08

3Q-08

4Q-08

1Q-09

2Q-09

3Q-09

4Q-09

1Q-10

2Q-10

3Q-10

4Q-10

Backlog

New Awards

Source: OCI & Glob al Research

June 2011

1Q-11

2014

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Construction Sector
As of 2010, Egyptian backlog dropped to 27.4% of the total amounting to EGP9.7bn, highest in a country. While in terms of region middle east amounted to EGP14.6bn (41.5% of the total). Going forward, we anticipate backlog to report a CAGR of -1% during 2010-14 while the same for new contracts is expected to report a CAGR of 8.7% during the same period.

Margins expected to remain range bound

In 2010, OCI cost of sales rose by 21.5% to EGP20.7bn as compared to EGP17.1bn in 2009. This increase was due to increase in the cost of fertilizer segment by to EGP5.0bn as compared to EGP1.0bn in 2009. Increase in cost during 2010 was due to commencement of various product lines and additions from OCI Nitrogen at the end of the year. On the other hand, construction segment cost went up marginally. In terms of contribution in 2010, construction segment contributed the most at 77.2% while the remaining was covered by fertilizer.
OCI Margins
35%

Segment Margins
100%

30% 25% 20% 15% 10% 2008 2009 2010 2011e 2012e 2013e 2014e

80% 60% 40% 20% 0% 2008 2009 2010 2011e 2012e 2013e 2014e Fertilizer Margins Construction Gross Margins

OCI Gross Margins

Source: Company Reports & Global Research

In 2011, we expect the overall cost to grow by 4.0% to EGP21.5bn (Gross Margins: 26.8%) as compared to EGP20.7bn (Gross Margins: 24.6%) reported in 2010. Gross margins of the fertilizer segment are expected to go up during the forecasted period. In 2011, fertilizer margins are expected to be higher at 42.6% compared to 38.2% in 2010. Even post 2011, we expect the margins to prop up because of commissioning of new low cost production lines at fertilizer segment which will increase the margins to 43.6% by 2014. Construction segment margins are expected to drop as the sector becomes much tougher in terms of getting newer contracts because of increasing competition. We expect the construction segment margins to drop from 18.2% in 2010 to 15.0% in 2014.

Gas prices renegotiation a step to look out to

Various frameworks are under scrutiny in Egypt and we assume that there might be changes in relation to the gas pricing in the country. OCI avails gas at quite cheaper rate of around 1.5 USD/mmbtu for Egypt Fertilizer Company and 1.25 USD/mmbtu for Egypt Basic Industries Corporation. For that purpose we have done sensitivity if the prices of gas is raised to 2 USD/mmbtu and 3 USD/mmbtu for both EFC and EBIC during 2011-14.
Change in Prices of EBIC and EFC and decline in Fertilizer Income 2011 Current Fertilizer Prices per USD/mmbtu EFC EBIC Raised to 2 USD/mmbtu for EFC and EBIC during 2011-14 Loss of Income (EGP mn) Raised to 3 USD/mmbtu for EFC and EBIC during 2011-14 Loss of Income (EGP mn)
Source: Global Research

2012 1.50 1.25 187 503

2013 2.00 1.25 88 432

2014 2.00 1.25 89 432

1.50 1.25 81 214

If the price is raised to 2 USD/mmbtu then during 2011, the Company would report a drop in net income by EGP81mn while if the same is raised to 3 USD/mmbtu then the Company would report a loss of EGP214mn.

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Construction Sector
However we believe if any such thing happens the Company would actively plan in advance to compensate for it through either new acquisitions or through increasing capacity at different plants which are located worldwide.

Net income
In the past, OCI has witnessed significant jump in its bottom line numbers due to divestment of its various businesses and business segments. In 2011, we expect the net income to improve by 40.8% to EGP4.7bn (Net Margins: 16.0%). Fertilizer segment is expected to contribute the most to the change with a net income growth of 64.0% to EGP2.8bn (Net Margins: 34.3%) while the construction segment is expected to register a growth of 16.1% to EGP1.8bn (Net Margins: 10.1%). Fertilizer segment contribution to the net income is expected to increase from 51.5% in 2010 to 60.0% by 2011 while for the construction sector it is expected to drop from 48.5% to 40.0%.
Net Income (EGP mn)
7,500 6,000

Income Segment Wise 5,000 4,000

3,000

4,500 3,000
1,500 2008 2009 2010 2011e 2012e 2013e 2014e

2,000 1,000 2008 2009 2010 2011e 2012e 2013e 2014e Fertilizer PAT Construction PAT

Source: Company Reports & Global Research

Going forward, we expect the Company to register a CAGR growth of 18.4% in the net income during 2010-14. Fertilizer segment would register a CAGR of 23% whereas the construction segment is expected to grow at a CAGR of 12.8%.

June 2011

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OCI - Chart Gallery
2.5
2.0 1.5 1.0 0.5 2011e 2012e 2013e 2014e 2008 2009 2010

Construction Sector

3.0
2.4 1.8 1.2 0.6 2011e 2012e 2013e 2014e 2014e 2014e 2014e 2014e 2008 2009 2010

EV/Backlog (x)

EV/Revenue (x)

15.0 12.0 9.0 6.0 3.0 2011e 2012e 2013e 2014e 2008 2009 2010

2.5 2.0 1.5 1.0 0.5 2011e 2012e 2013e 2013e 2013e 2013e 2008 2009 2010

EV/EBITDA (x)

Backlog/Revenue (x)

125.0% 100.0% 75.0% 50.0% 25.0% 0.0%

35.0% 31.0% 27.0% 23.0% 19.0% 15.0%

2011e

2013e

2014e

2011e

2012e

Cash Loan Coverage

Gross Margins

25.0% 22.0% 19.0% 16.0% 13.0% 10.0%

2011e 2012e 2013e 2014e 2008 2009 2010

30.0% 24.0% 18.0% 12.0% 6.0% 0.0%

2011e 2012e 2012e 2008 2009 2010

Operating Margins

Net Margins

40.0% 34.0% 28.0%

22.0% 16.0% 10.0%
2011e 2012e 2013e 2014e 2008 2009 2010

15.0%
10.0% 5.0% 0.0%
2011e 2008 2009 2010

ROE Source: Company Reports & Bloomberg

ROA

June 2011

2012e

2008

2009

2008

2009

2010

2010

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Financial Statements
(EGP mn) Revenue Costs Gross Profit Other Operating Income Selling, Gen. & Administrative Expense Operating Profit Non-Core Income Interest Expense Provisions Minority Interest Income Tax Profit After Tax Cash and Bank Balance Trade & Other Receivables Inventories Other Assets Investments Intangible Assets Long Term Receivables Deffered Tax Assets Property, Plant & Equipment Payment for Purchase of Investments Total Non-Current Assets Total Assets Loans Trade & Other Payables Due to Clients Other Current Liabilities Provisions Deffered Tax Liability Other Long Term Liabilities Share Capital Retained Earning & Others Total Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Net Cash at End
Cash Flow

2008 20,764 (15,463) 5,300 64 (1,093) 4,271 2,606 (668) (201) (77) (576) 5,367 8,269 8,236 1,462 1,892 268 9,910 255 36 9,912 2,785 23,167 43,026 11,425 8,318 1,600 1,090 1,891 507 613 1,074 16,508 17,581 43,026 3,255 63,840 (62,743) 4,352 8,269

2009 21,819 (17,087) 4,732 168 (1,284) 3,616 269 (632) (212) (134) (491) 2,417 5,925 9,750 1,402 2,274 2,358 9,874 247 38 14,991 27,508 46,858 13,485 8,494 3,659 1,011 1,913 582 571 1,035 16,108 17,143 46,858 3,186 (4,616) (914) (2,344) 5,925

2010 27,552 (20,768) 6,785 21 (1,639) 5,166 495 (672) (500) (305) (840) 3,344 5,649 11,452 1,886 2,668 3,083 11,062 339 36 18,606 33,125 54,780 17,593 10,346 2,964 1,338 2,148 773 713 1,045 17,860 18,905 54,780 2,212 (4,184) 1,708 (275) 5,649

2011e 29,513 (21,594) 7,919 23 (1,728) 6,215 719 (619) (180) (291) (1,135) 4,708 6,474 12,129 2,071 3,218 3,249 11,284 366 85 17,487 32,471 56,362 16,212 10,945 2,371 1,361 1,933 858 785 1,045 20,853 21,898 56,362 4,219 223 (3,618) 824 6,474 1.4 1.3 26.8% 21.1% 16.0% 8.4% 22.9% 0.8 0.7 2.3 8.3 22.5 104.8 272.6 56,952.9 3.5% 12.1 2.6

2012e 34,346 (24,506) 9,841 25 (1,960) 7,905 790 (573) (183) (383) (1,667) 5,889 8,329 14,115 2,350 3,586 3,412 11,509 384 125 15,781 31,211 59,592 15,000 12,219 1,897 1,544 1,740 983 863 1,045 24,300 25,345 59,592 5,252 893 (4,290) 1,855 8,329 1.6 1.5 28.7% 23.0% 17.1% 9.9% 24.9% 0.7 0.6 1.9 6.5 28.2 121.3 272.6 56,952.9 5.0% 9.7 2.2

2013e 37,566 (26,888) 10,679 28 (2,151) 8,555 869 (532) (192) (404) (1,827) 6,469 11,273 15,438 2,578 3,726 3,582 11,739 404 137 13,991 29,853 62,869 13,929 13,260 1,518 1,842 1,566 1,120 949 1,045 27,640 28,685 62,869 6,786 1,048 (4,889) 2,944 11,273 1.8 1.7 28.4% 22.8% 17.2% 10.3% 24.4% 0.6 0.5 1.6 5.8 31.0 137.3 272.6 56,952.9 6.2% 8.8 2.0

2014e 40,389 (29,480) 10,909 30 (2,358) 8,581 956 (496) (200) (417) (1,857) 6,568 14,377 16,598 2,827 4,176 3,761 11,974 424 139 12,134 28,432 66,411 12,976 14,619 1,214 2,100 1,409 1,259 1,044 1,045 30,743 31,788 66,411 7,056 1,193 (5,145) 3,104 14,377 2.0 1.8 27.0% 21.2% 16.3% 9.9% 22.5% 0.6 0.4 1.4 5.4 31.4 152.1 272.6 56,952.9 6.8% 8.7 1.8

Current Ratio (x) 1.4 1.3 1.2 Quick Ratio (x) 1.3 1.2 1.1 Gross Profit Margin 25.5% 21.7% 24.6% Operating Margin 20.6% 16.6% 18.8% Net Profit Margin 25.8% 11.1% 12.1% Return on Average Assets 12.5% 5.2% 6.1% Return on Average Equity 30.9% 14.7% 18.7% Current Liability / Equity (x) 0.8 0.9 1.0 Debt / Equity (x) 0.6 0.8 0.9 EV/Revenues (x) 1.6 2.7 2.6 EV/EBITDA (x) 4.4 12.7 11.1 Adjusted EPS (EGP) 25.7 11.6 16.0 Book Value Per Share (EGP) 84.1 82.0 90.5 Market Price (EGP) * 139.0 246.0 287.1 Market Capitalization (EGP mn) 29,040.6 51,401.3 59,988.8 Dividend Yield 223.4% 4.1% 3.9% P/E Ratio (x) 5.4 21.3 17.9 P/BV Ratio (x) 1.7 3.0 3.2 Source: Company Reports & Glob al Research * Market price for 2011 and sub sequent years as per closing prices on June 23, 2011

June 2011

Ratio Analysis

Balance Sheet

Income Statement

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Construction Sector

APPENDIX
MENA Construction Sector Indicators
20%
18% 16%

15%
14% 13% 12% 11% 10%

14%
12% 10%

2011e

2012e

2013e 2013e 2013e 2013e 2013e

2011e

2012e

2013e

2014e

Gross Margins 15% 13% 25% 20%

Operating Margins

11%
9% 7% 5%

15%
10% 5% 0%

2010

2008

2009

2011e

2012e

2013e

2014e

2010

2008

2009

2011e

2012e

Net Margins

ROE

10%
8%

50% 44%
38% 32% 26% 20%

6%
4% 2%

0%
2011e 2012e 2013e 2014e
2008 2009 2010

2008

2009

2010

2011e

2012e

ROA
1.0 0.8 1.3 1.0

Equity as % of Assets

0.6 0.4
0.2 -

0.8 0.5
0.3 -

2010

2008

2009

2011e

2012e

2013e

2014e

2010

2008

2009

2011e

2012e

Debt to Equity (x)

Cash Covering Debt (x)

300
240 180 120 60

40 30
20 10

0
2011e 2012e 2013e 2014e
2008 2009 2010

0
2008 2009 2010 2011e 2012e 2014e

Receivables Outstanding (Days)

Source: Company Reports & Global Research * Financials of AKS, ARABTEC, DSI, MOJIL, & OCI

Inventory Stock (Days)

June 2011

2014e

2014e

2014e

2014e

2008

2009

2010

2008

2009

2010

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Company Wise Ratios

2008 Gross Margins (%) AKS ARABTEC DSI MOJIL OCI Operating Margins (%) AKS ARABTEC DSI MOJIL OCI Net Margins (%) AKS ARABTEC DSI MOJIL OCI ROE (%) AKS ARABTEC DSI MOJIL OCI ROA (%) AKS ARABTEC DSI MOJIL OCI Debt to Equity (x) AKS ARABTEC DSI MOJIL OCI Liabilities to Equity (x) AKS ARABTEC DSI MOJIL OCI
Source: Company Reports & Global Research * OCI Consolidated numbers are taken

2009

2010

2011e

2012e

2013e

2014e

28.9% 15.3% 19.4% 23.9% 25.5%

28.2% 17.3% 19.7% 15.5% 21.7%

26.9% 15.1% 18.6% 11.2% 24.6%

25.8% 13.6% 15.9% 12.0% 26.8%

25.0% 14.4% 15.5% 11.5% 28.7%

24.3% 14.4% 15.0% 11.0% 28.4%

23.7% 14.3% 15.0% 10.5% 27.0%

23.6% 11.0% 9.8% 21.0% 20.6%

22.6% 8.0% 9.0% 10.1% 16.6%

21.4% 7.8% 6.3% 4.9% 18.8%

20.5% 5.6% 5.9% 7.5% 21.1%

19.7% 7.6% 5.6% 7.0% 23.0%

18.9% 8.1% 5.1% 6.5% 22.8%

18.4% 8.0% 5.2% 6.0% 21.2%

20.7% 9.9% 11.1% 19.9% 25.8%

20.7% 6.5% 15.2% 1.8% 11.1%

20.3% 5.6% 8.7% -10.4% 12.1%

19.0% 3.7% 7.5% 5.3% 16.0%

18.5% 4.9% 6.9% 5.0% 17.1%

18.1% 5.4% 6.3% 4.7% 17.2%

17.8% 5.5% 6.2% 4.4% 16.3%

68.9% 50.6% 51.0% 35.0% 30.9%

42.9% 20.7% 13.4% 2.2% 14.7%

37.0% 11.4% 6.4% -11.5% 18.7%

32.2% 7.4% 8.0% 7.7% 22.9%

29.6% 9.9% 8.0% 8.2% 24.9%

26.6% 10.7% 7.9% 8.8% 24.4%

24.5% 10.7% 8.1% 9.8% 22.5%

17.9% 10.1% 10.9% 18.1% 12.5%

15.0% 5.4% 7.6% 1.3% 5.2%

11.9% 3.5% 3.3% -6.1% 6.1%

12.7% 2.4% 3.9% 3.8% 8.4%

13.2% 3.5% 3.9% 4.0% 9.9%

13.4% 4.1% 3.8% 4.2% 10.3%

13.6% 4.3% 3.8% 4.4% 9.9%

1.83 0.64 0.84 0.26 0.65

1.30 0.38 0.26 0.24 0.79

1.28 0.28 0.31 0.33 0.93

0.88 0.25 0.27 0.37 0.74

0.63 0.21 0.23 0.33 0.59

0.42 0.18 0.20 0.31 0.49

0.28 0.15 0.17 0.31 0.41

2.85 4.00 3.66 0.93 1.45

1.86 2.81 0.75 0.67 1.73

2.11 2.22 0.92 0.88 1.90

1.53 2.02 1.07 1.04 1.57

1.24 1.84 1.08 1.06 1.35

0.99 1.63 1.09 1.12 1.19

0.81 1.48 1.12 1.25 1.09

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Global Research - MENA

Construction Sector

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Global Research - MENA

Construction Sector

Disclosure
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Al Khodari Arabtec Holding Drake & Scull International Mojil Group Orascom Construction Industries 1. Recommendation BUY HOLD Strong Buy BUY BUY Bloomberg Ticker ALKHODAR AB ARTC UH DSI UH MMG AB OCIC EY Reuters Ticker 1330.SE ARTC.DU DSI.DU 1310.SE OCIC.CA Price SAR 69.5 AED 1.27 AED 0.99 SAR 22.0 EGP 272.6 Disclosure 1,10 1,10 1,10 1,10 1,10

Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year , Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 10. Please see special footnote below for other relevant disclosures.

Global Research: Equity Ratings Definitions Global Rating Defination STRONG BUY Fair value of the stock is BUY Fair value of the stock is HOLD Fair value of the stock is SELL Fair value of the stock is

>20% from the current market price between +10% and +20% from the current market price between +10% and -10% from the current market price < -10% from the current market price

Disclaimer
This material was also produced by Global Investment House KSCC (Global),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities (securities), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

June 2011

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