overcapacity in 2012 undermines current attractive...

1 / 37 pages kindly refer to the important disclosures and disclaimers on back page

initiation of coverage

Neutral on SCGC and SC; Sell MBSC And MCQC We are neutral on Suez Cement Group (SCGC) and Sinai Cement Co (SC), as their fair values (FV) imply 6% and 0% upside potential to the current share prices, respectively. However, we place a Sell rating on i) Misr Beni Suef Cement Co (MBSC) (27% below market price) as we see company’s growth and strong margins are more than reflected in the share price, and ii) Misr Cement Qena Co (MCQC) (35% below market price), due to the 100% use of mazote, high operating leverage, and the EGP15/tonne development fee that they will both have to pay starting July 2010.

Attractive Near Term Multiples are Not Sustainable The significant rise in capacity expected 2012e and energy cost inflation and end of tax-exemptions will pressure margins and profitability across the board. We estimate 2012 P/E and EV/EBITDA to reach 11.7x and 6.6x, compared to the industry average of 9.9x and 6.9x, respectively. This explains why 2010 valuations are attractive, trading at an average PE of 7.3x (38% lower than global peers), 4.5x EV/EBITDA (40% discount to global peers). Moreover, Egypt cement producers’ EV/tonne stands at USD177 (27% lower than global peers), and estimated dividend yield at 8% in 2010.

15 Million-Ton-Surplus by 2012; 20% Drop In Utilisation Rates We estimate local demand to grow by only 5% Y-o-Y in 2010 and 3% in 2011 (vs 25% in 2009), on reduced government spending, and to decline by 4% Y-o-Y in 2012 to 49 million tons following the completion of Cairo's mega projects. This will coincide with the start of new, 14 million tonne per annum (mtpa) cement plants that will raise capacity to 64 mtpa and create an estimated surplus of 15 mt in 2012. Moreover, we see limited export opportunities, given the current slowdown in Europe. We thus expect utilisation rates to drop to 77% in 2012 from 105% in 2009 in light of decreased cement demand and increased number of producers.

EBITDA Margins to be Squeezed to c40% in 2012 From 48% Currently We estimate that electricity costs will rise by c10% Y-o-Y in 2010, 20% Y-o-Y in 2011 and 10% Y-o-Y in 2012 on higher demand from new plants, and in light of recently-raised electricity prices (by 50%) during peak production hours. We estimate that the price of mazote, which will be used by the new plants, will increase by c20% Y-o-Y in 2012. We believe that a decline in local prices is likely given the expected cement surplus by 2012 and the fact that Egypt’s average cement prices (USD82/tonne) are the highest amongst regional peers (USD65/tonne on average).

Malak Youssef

+20 2 3535 6044

[email protected]

Ahmed Gad, CFA

+971 4 364 1904

[email protected]

CONTENTS

I. INVESTMENT THESIS 2

II. EGYPT CEMENT INDUSTRY 4

III. FINANCIAL STATEMENT ANALYSIS 14

IV. VALUATION 18

COMPANIES

SUEZ CEMENT GROUP 24

SINAI CEMENT COMPANY 27

MISR BENI SUEF CEMENT COMPANY 30

MISR CEMENT QENA COMPANY 33

egypt cement sector 18 October 2010

Overcapacity in 2012 Undermines Current Attractive Valuations

basic materials │ egypt

STOCKS ANALYSED IN THIS REPORT

Price* (EGP)

Rating Fair Value (EGP)

PE* (x) EV/EBITDA* (x) Div Yield

10e 11e 12e 10e 11e 12e

SCGC 42 Neutral 45 5.7 7.0 11.4 2.6 3.2 4.6 8%

SCC 48 Neutral 48 4.5 5.5 9.4 3.7 4.6 6.2 9%

MBSC 90 Sell 65 10.6 7.5 11.2 6.6 5.2 7.1 4%

MCQC 100 Sell 65 8.1 9.1 14.6 5.1 5.7 8.5 10% *Prices as at 14 October 2010 Source: EFG Hermes estimates

2 / 37 pages

overcapacity in 2012 undermines current attractive valuations 18 October 2010


I. INVESTMENT THESIS

15 MILLION TONNE SURPLUS EXPECTED IN 2012 Local demand growth reached a peak of 25% Y-o-Y (48 million tonnes) in 2009, outpacing supply (46 million tonnes), driven mainly by declining steel prices, government stimulus spending and high retail activity. Local consumption grew by only 6% Y-o-Y in 1H2010 on slower construction activities, and we estimate that it will be only 5% higher Y-o-Y in 2010 on reduced government investment spending (to pre-crisis levels). We estimate that demand will grow by only 3% Y-o-Y in 2011 and decline by 4% Y-o-Y in 2012, driven mainly by the expected completion of Cairo's mega projects (cement sales in Greater Cairo contributed to over 30% of local sales in 2009). This will coincide with the start of the new cement plants, creating an estimated surplus of 15 million tonnes of cement in 2012.

EXPECTED C20% DROP IN UTILISATION RATES Exceptional cement demand in 2009 led producers to operate above full capacity (105% on average) despite the introduction of a ban on cement exports from April 2009 to October 2010. In 2009, Egypt imported over 1.5 million tonnes. We believe that utilisation rates will decline in 2010 and 2011 to 100% and 93%, respectively, before dropping to 77% in 2012 due mainly to: i) increased competition from massive capacity additions expected in 2012, ii) the expected decline in local demand, and iii) limited export opportunities.

CONTINUING COST PRESSURE ON PRODUCERS We believe that cost inflation could increase the threat from regional competition, especially now that the export ban has been lifted and once oversupply occurs after the new cement capacity additions. Since May 2008, average production costs for cement producers have risen by over 40% to cUSD35/tonne on higher natural gas prices (USD3/mbtu from USD1.25/mbtu in 2007) and increasing electricity costs. In July 2010, electricity prices rose by 50% for peak production hours. We forecast electricity costs to rise by c10% in 2010, 20% in 2011 and 10% in 2012 given Egypt’s recent electricity outages and increased energy demand expected thanks to the new cement plants. We think that a 20% increase in mazote prices in 2012 is likely given that most of the new plants will use it as fuel.

MARGINS TO CONTRACT; MCQC TO WITNESS THE LARGEST SQUEEZE We expect prices to remain flat Y-o-Y in 2010, but to decline by 3% Y-o-Y and 5% Y-o-Y in 2011 and 2012, respectively, driven by the estimated excess capacity and current prices, which are the highest amongst regional peers. We believe that higher costs, along with lower prices, will squeeze average cash margins for local cement companies to 48% (from 57% in 2010, the second highest among regional and global peers). Competition should also increase the companies' distribution expenses starting in 2012, in our view. This will lead to a decline of average EBITDA margins to 40% in 2012 from 48% currently. We believe MCQC will witness the largest squeeze in margins, with its EBITDA margin expected to reach 40% in 2012 (from 55% in 1H2010). We believe this is due to: i) MCQC’s 100% use of mazote as fuel, ii) its relatively high operating leverage, with fixed costs estimated at EGP74/tonne, and iii) the EGP15/tonne development fee (initially imposed on clay extraction) that the company will have to start paying (it did not pay any fees before compared to other companies, which paid either EGP37/tonne or EGP9/tonne).

MBSC ENJOYS THE HIGHEST MARGINS; SCGC THE LOWEST In our view, MBSC enjoys the lowest production costs a regional context, estimated at USD30/tonne, and the highest EBITDA margin in the industry (an estimated 58% in 2010 vs the local average of 48%) because it: i) uses 100% natural gas as fuel, ii) uses the dry kiln

3 / 37 pages



process in production, and iii) has SG&A expenses that represent only 2% of sales. SCGC is the least cost efficient, with production costs estimated at USD45/tonne, due to: i) the use of old, wet production kilns in over 20% of HCC’s capacity, ii) the use of mazote in 40% of the company’s production, iii) its production facilities, which are scattered across three locations in Egypt, including central Egypt. High production costs and high wages in Egypt’s central area have contributed to an estimated EBITDA margin of 37% in 2010, the lowest locally. Moreover, SCGC’s high fixed costs (EGP105/tonne) have increased its operating leverage.

STRONG CASH GENERATION ALLOWS FOR ATTRACTIVE DIVIDENDS All of the companies in our coverage universe enjoy strong balance sheets with net cash positions (average net cash/EBITDA estimated at 1x in 2010). They also enjoy strong cash generation, with an average FCF yield estimated at 16% in 2010, which allows for an attractive average dividend yield of 8% in 2010. In 2012, we estimate the average FCF yield and dividend yield to drop to 5%, with SCC and MCQC estimated to have the highest yields (6%) and MBSC the lowest (4%).

NEUTRAL RATING FOR SC AND SCGC; SELL FOR MBSC AND MCQC Our DCF valuation leads to neutral ratings on both SCGC (6% upside potential) and SCC (0% downside). SCGC, Italcementi’s subsidiary, is Egypt’s largest, most integrated cement producer with 24% local market share. SC, Vicat’s subsidiary, has increased its market share to over 7% (from 4.8%) since its capacity doubled to 3 mtpa in 2009. Both companies enjoy strategic locations close to Cairo and the Delta, with relatively low exposure to competition expected to arise from Upper Egypt. We recommend selling both MBSC and MCQC as their current market prices do not factor in the expected threat of competition from plants in Upper Egypt, which will coincide with an overall slowdown in demand, in our view.

CHEAP 2010E MULTIPLES, ATTRACTIVE EV/TONNE Egypt cement stocks currently trade at an average of 7.3x earnings, or at a 38% discount to global industry players. On an EV/EBITDA basis, Egypt’s cement stocks trade at 4.5x in 2010, 40% cheaper than global peers. We estimate 2010 average dividend yield to reach 8%, slightly higher than the industry average of 7%. Moreover, Egypt cement producers enjoy a low EV/tonne of USD177 on average, which is 27% lower than global peers. We estimate margins to drop to 40% in 2012 from 48% in 2010, which is 2% below the estimated global average (42% in 2012). SCGC has the lowest EV/tonne at USD95 per tonne, which we believe is justified by the relatively low margins in a local context (an estimated 37% in 2010 and 28% in 2012). MCQC remains our least favourable stock given its relatively high EV/tonne of USD220/tonne, and margins are estimated to drop to 40% in 2012 from 55% in 1H2010.

DISCOUNT TO BE ELIMINATED IN 2012E However, we expect cement companies in Egypt to lose their attractive valuations starting in 2012 because of: i) the estimated overcapacity resulting from the drop in demand, which will coincide with the entry of new capacities, ii) expected increases in energy costs, and iii) the end of the tax exemption period for SC in 2012, MCQC in 2013 and MBSC in 2014. We expect Egypt stocks to trade at 11.7x P/E and 6.6x EV/EBITDA in 2012, compared to a global average P/E and EV/EBITDA of 9.9x and 6.9x, respectively. SC trades at the lowest estimated P/E of 4.5x in 2010 and 9.4x in 2012, while SCGC has the lowest estimated EV/EBITDA of 2.6x in 2010 and 4.6x in 2012. We see MCQC as the most expensive stock in 2012, with P/E and EV/EBITDA estimated at14.6x and 8.5x in 2012, respectively.

4 / 37 pages



II. EGYPT CEMENT INDUSTRY

A. RECENT DEVELOPMENTS In 2009, local demand growth reached a peak of 25% Y-o-Y (compared to a CAGR of 11% in 2005-2008) at 48 million tonnes, outpacing supply (46 million tonnes). This led producers to operate at above full capacity (105% on average), and Egypt to import over 1.5 million tonnes. We believe the main drivers were: i) declining steel prices, which stimulated developers to accelerate construction activities (steel represents 15-20% of construction costs, and cement 6-10%), ii) the government’s stimulus spending and high retail activity following the changes in the municipality rules for new urban communities’ borders, as well as iii) a push by consumers to buy more cement given the rise in prices despite the global crisis, which raised inflationary pressure on the commodity. However, local demand growth is decelerating this year, growing by only 2% Y-o-Y to 33 million tonnes during January-August 2010.

FIGURE 1: CEMENT CONSUMPTION VS STEEL PRICES In thousand tonnes (LHS), in EGP/tonne (RHS)

Source: Information and Decision Support Center (IDSC), Ezz Steel Industries

Egypt’s Greater Cairo and Nile Delta, where almost half of Egypt’s population is concentrated, contributed 64% of local cement consumption in 2009, while Upper Egypt contributed 11%. The Residential segment has been the main driver for cement demand, capturing 57% of overall local demand in 2009. Real estate developers exploited the low-cost environment to execute their construction plans, especially as many projects approach their delivery phase. Meanwhile, infrastructure comprised 20% of local cement consumption, while the remaining 23% was absorbed by other segments such as tourism and industrials.

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Exceptional demand growth in 2009

Residential segment main driver for cement

demand

5 / 37 pages



FIGURE 2: 2009 CEMENT CONSUMPTION BREAKDOWN BY SEGMENT

FIGURE 3: 2009 CEMENT CONSUMPTION BREAKDOWN BY REGION

Source: SCGC Source: SCGC

Local demand for cement peaks with increasing construction work during the summer. With Ramadan coming in the third quarter the last two years, 3Q switched from peak to off season.

FIGURE 4: QUARTERLY DEMAND SEASONALITY In thousand tonnes, unless otherwise stated

Source: IDSC

The government have removed on October 1st a ban on cement exports, which was initially imposed in April 2009 until October 2009, and then extended to October 2010. The ban, which was introduced to meet with the growing demand in 2009, has been removed given the low demand growth this year (2% Y-o-Y during January-August 2010). Historically, the government had constrained cement exports in 2007 by introducing an export duty of EGP65/tonne in February, which was raised to EGP85/tonne in August. Exports dropped by 23% Y-o-Y in 2007, 64% in 2008 and 84% in 2009.

Resid.57%

Infrast.20%

Tourism & Ind.23%

Greater Cairo33%

Delta31%

Upper Egypt11%

Others25%

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6 / 37 pages



FIGURE 5: EGYPT CEMENT EXPORTS In mtpa (LHS), in % (RHS)

Source: EFG Hermes

Until 2007, Egypt cement producers enjoyed highly competitive cost structures due to: i) government-subsidised energy and fuel , ii) lower environmental regulations vs developed markets, iii) an abundance of raw materials at a relatively low cost, and iv) low-cost labour. Since May 2008, however, the average production costs for cement producers has risen by over 40% to cUSD35/tonne, which is close to the average MENA production cost of USD38/tonne. This is a result of the government’s decisions to remove subsidies on energy for intensive users (including cement producers), raising natural gas prices to USD3/mbtu from USD1.25/mbtu, and increasing electricity costs.

FIGURE 6: EGYPT PRODUCTION COSTS IN A REGIONAL CONTEXT In USD /tonne, unless otherwise stated

FIGURE 7: EGYPT PRODUCTION COSTS BY COMPANY In USD/tonne, unless otherwise stated

Source: Companies Financials, EFG Hermes estimates Source: Companies Financials, EFG Hermes estimates

In 2009, ex-factory cement prices reached EGP470/tonne, almost 25% higher than in 2007. We believe this jump was driven by: i) an over 40% jump in production costs after more than doubling natural gas and mazote prices; and ii) a 25% jump in local demand in the same period. In 1H2010, Egypt was the only country in the region where cement prices remained at their high 2009 levels despite the slowdown in construction activity, while cement prices in the GCC dropped by almost 16% Y-o-Y on average. This places Egypt cement prices above the regional average of USD65/tonne, the highest among regional peers (excluding deficit markets such as Sudan, Libya, Morocco, Iraq, Syria, Bahrain and Jordan). This has allowed producers to

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margins

7 / 37 pages



pass on part of the cost increase to consumers, therefore maintaining healthy cash margins of c57%, down from 62% in 2007, but still the second highest globally (after Saudi producers).

FIGURE 8: EGYPT CEMENT PRICES IN A REGIONAL CONTEXT in USD/tonne, unless otherwise stated

FIGURE 9: EGYPT CEMENT CASH MARGINS IN A REGIONAL CONTEXT

Source: Company Data, EFG Hermes estimates Source: Company Data, EFG Hermes estimates

B. INDUSTRY OUTLOOK CAPACITY EXPANSIONS Total cement capacity currently stands at c50 million tonnes per annum (mtpa), fragmented amongst 15 main producers. Since 2007, cement capacity has increased by a CAGR of 7%, driven mainly by: i) 4 mtpa capacity expansions in 6 already existing companies; and ii) the start up of four new greenfields with a capacity of 5 mtpa each. In 2012, cement capacity is expected to reach 64 mtpa following: i) addition of 1.5 mtpa to Assiut Cement (Cemex) and Misr Beni Suef Cement each, ii) addition of 2.5 mtpa to Arabian Cement Co, and iii) the start up of five new greenfields, with a combined capacity of 7.5 mtpa.

Additionally, the government announced that it will issue 12 new licences this year, which will raise total capacity to 80 mtpa in 2014. The new plants will build their own power plants and import energy, according to the government, and this would be factored into the cost of the licenses. We highly doubt that investor interest will be sparked due to: i) the slowdown in local demand, and ii) the uncertainty of production costs.

Egypt’s eastern region currently accounts for the largest share of overall capacity (39%), followed by the southern region (28%), the central region (23%) and the northern region (10%). The southern region is expected to witness the largest increase in supply (61% of capacity additions in 2010-2012), followed by the eastern region (36%), and the central region (3%).

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in Egypt’s south

8 / 37 pages



FIGURE 10: EGYPT CEMENT CAPACITY

Company Location Cement Production Capacity (mtpa)

2005a 2006a 2007a 2008a 2009a 2010e 2011e 2012e

North Coast Region

Alexandria Cement (Titan) Alexandria 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7

Ameriya Cement Ameriyah 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6

Total Region 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3

Central Region

Helwan Cement Helwan 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6

National Cement Helwan 3.1 3.2 3.2 3.2 3.5 3.5 3.5 3.5

Torah Cement Torah 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2

Shoura Cement Cairo-Alex road - - - 0.6 0.6 0.6

Total Region 10.9 11.0 11.0 11.0 11.3 11.9 11.9 11.9

Eastern Region

Egyptian Cement Ain Sukhna 8.5 9.0 10.0 10.0 10.3 10.3 10.3 10.3

Sinai Cement Sinai 1.5 1.5 1.5 2.3 3.0 3.0 3.0 3.0

Suez Cement Suez 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2

Arabian Cement Company Ain Sukhna - - - - - 1.9 2.5 5.0

El Sewedy Cement Suez - - - - - - 0.8 1.5

North Sinai Cement Sinai - - - - - - - -

Total Region 14.2 14.7 15.7 16.5 17.5 19.4 20.8 24.0

Southern Region

Assuit Cement (CEMEX) Assiut 5.0 5.0 5.0 5.0 5.0 5.0 6.5 6.5

Misr Beni Suef Cement Beni Suef 1.5 1.5 1.5 1.5 1.5 1.5 3.0 3.0

Misr Qena Cement Qena 1.5 1.5 1.5 1.5 1.9 1.9 1.9 1.9

Beni Suef Cement (Titan) Beni Suef 1.5 1.5 1.5 1.5 1.5 3.0 3.0 3.0

Medcom Cement Aswan - - - - 0.4 0.8 0.8 0.8

South Valley Cement Beni Suef - - - - 1.5 1.5 1.5 1.5

Wady El Nile Beni Suef - - - - - - 0.8 1.5

Al Arabiya Al Wataniya Minya - - - - - - - 1.5

Al Nahda Industries Qena - - - - - - - 1.5

Egyptian Kuwaiti Holding Assiut - - - - - - - 1.5

Building Material Industries Assiut - - - - - - - -

El Wadi Cement New Valley - - - - - - - -

Total Region 9.5 9.5 9.5 9.5 11.8 13.7 17.5 22.7

Total Designed Capacity 39.9 40.5 41.5 42.3 45.9 50.3 55.4 63.9

Source: Company Data, EFG Hermes estimates

SUPPLY/DEMAND BALANCE We estimate that local cement consumption should reach 50 million tonnes in 2010 (4% higher Y-o-Y)We believe this relatively-low growth is attributed to reduced government investment spending in 2010 by 23% Y-o-Y (investment spending is back to pre-crisis levels at c3.0% of GDP from 4.0% in FY2009-2010), with the economy showing stronger growth levels. Beyond, we estimate demand to grow by 3% Y-o-Y in 2011, then decline by 4% Y-o-Y in 2012 (due mainly to an expected drop in demand from the residential segment following the completion of Cairo's mega projects). We highlight that this will coincide with the coming online of the new cement plants, which will create an estimated surplus of 15 million tonnes in the local market in 2012.

Demand to decline in 2012 on expected drop

in residential construction

9 / 37 pages



FIGURE 11: CEMENT CONSUMPTION GROWTH BY SEGMENT

FIGURE 12: CEMENT SUPPLY/DEMAND BALANCE

Source: Company Data, EFG Hermes estimates Source: Company Data, EFG Hermes estimates

DEMAND DRIVERS The residential segment has been the main driver for cement demand (57% of total demand in 2009). However, we estimate a decline in this sector’s contribution going forward as we expect real estate growth to slow and Cairo’s mega real estate projects to be completed in the coming years. We estimate that the infrastructural segment, which comprised 20% of 2009 local cement consumption, will be one of the biggest demand drivers in the long term. Our economist views the infrastructure outlook positively (please see our latest Egypt Economics Note - Growth Accelerating as Domestic Demand Story Takes Shape, published on 23 August 2010), and expects that a pickup in private investment spending will compensate for lower public investment. Below are the other main estimated growth drivers:

i) The Public Private Partnership (PPP) Law: Introduced in June 2010, it will facilitate awarding projects to the private sector by setting a clear framework for the implementation of this type of investment. Egypt’s first PPP project, The New Cairo Waste Water Treatment Plant, was awarded in June 2009.

ii) Infrastructure Funds: Includes a USD4 billion joint fund between Orascom Construction Industries (OCI) and Morgan Stanley devoted to long-term investments in infrastructure assets in MENA. According to OCI, Egypt remains amongst the most attractive markets for such projects. In parallel, EFG Hermes Private Equity is raising USD600 million to invest in Egypt’s power, transportation and water sectors. EFG Hermes has also devoted one fund, The Infra-Egypt Fund, to the Egyptian market, with total investments of EGP3 billion, and allocated a minimum EUR100 million for Egypt within its wider MENA Fund.

iii) Projects currently being tendered: Includes two waste water treatment plants (Sixth of October, Abu Rawash), Rod El Farag Road, a number of independent power projects (IPPs) and two hospitals affiliated with the University of Alexandria. Egypt’s infrastructure requirements are rising due to increasing demand for power, roads, harbours and the country’s growing economy

Greater Cairo and the Nile Delta, where almost half of Egypt’s population is concentrated, comprised 64% of local consumption in 2009. We estimate that this will decline following the completion of Cairo’s major mega real estate projects.

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Increasing demand potential in Upper Egypt

10 / 37 pages



However, we estimate higher cement demand in Upper Egypt, because of accelerated construction activity following the establishment of the Red Sea-Upper Egypt road.The 414-km road from Sohag to Safaga Port will help revive industrial zones in Upper Egypt as well as link them to Red Sea harbours that are under development. This road is expected to revive trade and investment in projects in agriculture, industry, tourism and urban development in Upper Egypt. The road will be tendered in October 2010.

COMPETITION AND REDISTRIBUTION OF MARKET SHARE There has been a redistribution of market share since 2007 from the sector’s initial cartel like-system. We estimate that the 11 cement companies (which have already existed before 2010) will have lost 7% of market share in 2010 following the entry of new producers, and expected them to lose another 10% in 2012. Only Sinai Cement, Titan’s Alexandria&Beni Suef Cement and Misr Cement Qena saw increased market share in 2010.

FIGURE 13: 2007 MARKET SHARES FIGURE 14: 2010 MARKET SHARES FIGURE 15: 2012 MARKET SHARES

*Suez Cement Group includes: Suez Cement Co, Torah Portland Cement Co, and Helwan Cement Co. Source: Cement Companies, EFG Hermes estimates

Source: EFG Hermes estimates Source: EFG Hermes estimates

MBSC is the only company in our coverage that is expected to gain further market share because it will double its production capacity by 2011. We estimate the biggest market loser to be ECC, with a 4% decline in market share in 2012 compared to 2009. We believe ACC will benefit from the highest increase of 5% in market share during the same period.

FIGURE 16: CHANGE IN MARKET SHARE 2009-2012

Source: Company Reports, EFG Hermes estimates

Alex+Beni Suef 10%

Amereiya8%

Assuit14%

MBSC2%

MCQC5%ECC

23%

NCC7%

Suez Cem.

Group30%

Sinai Cem.5%

Alex+Beni Suef 10%

Amereiya8%

Assuit12%

MBSC3%

MCQC4%

ECC19%

NCC6%

Suez Cem.

Group24%

Sinai Cem.7%

SVC2%

Medcom 2%

Al Shoura1% ACC

2%Alex+Ben

i Suef 8%

Amereiya6%Assuit11%

MBSC5%

MCQC3%

ECC17%

NCC6%

Suez Cem.

Group19%

Sinai Cem.6%

SVC2%

Medcom 1%

Al Shoura1%

ACC8%

Wadi Al-Nil1%

Al-Sewedy

1%

Arab National

1%

Al-Nahda 1%

EKH1%

BMI1%

-8%-6%-4%-2%0%2%4%6%8%

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Market to become more competitive

11 / 37 pages



Historically, favourable production economics in Egypt’s cement industry has attracted global players, which currently capture 81% of the local market. In 2012, their market share is expected to contract to 67%, with the entry of new players.

FIGURE 17: MULTINATIONALS MARKET SHARES

Multinational Ownership Company 2010 Market Shares 2012 Market Shares

Cemex 95.8% Assiut Cement 12% 11% Cimpor 96.4% Amereyah Cement 8% 6% Italcementi 57.0% Suez Cement Group 24% 19% Lafarge/Holcim 53.65% / 43.7% Egyptian Cement 19% 17% Titan 99.6% Alexandria+Beni Suef 10% 8% Vicat 39.6% Sinai Cement 7% 6% Total 81% 67%

Source: EFG Hermes estimates

EXPORTS The government has lifted on October 1st a ban on cement exports, which has been imposed for eighteen months. We however see limited export opportunities; especially that Europe, which has been the main export destination before the ban’s introduction, is currently facing a slowdown in construction activity (European cement producers control c80% of Egypt’s market). We view the following as possible export destinations:

i) MENA (ie, Sudan, Yemen, Syria and Iraq): Some countries in the region are expected to face supply shortages. However, competition from Turkey (and low-cost Saudi producers in the case that Saudi removes its export ban) poses a threat to local cement exports.

iii) Sub-Sahara Africa: This is a promising export market because its average per capita consumption is the lowest at only 80 kg, compared to 480kg in Northern Africa’s highly-saturated market, and because of 2009’s cement shortage of over 15 million tonnes.

UTILISATION RATES We believe that utilisation rates will decline in 2010 and 2011 from the high (105%) of 2009 to 100% and 93%, respectively, on capacity additions and slowdown in local demand growth. We estimate that the bulk of new capacity (c8.5 mtpa) that will start in 2012, along with the expected negative demand growth that year (-4% Y-o-Y), will bring utilisation rates down to c77% in 2012. We believe that the southern region will have the lowest utilisation rate as it will see a forecasted 61% of total capacity additions.

Multinationals shares to drop to estimated 67%

in 2012

Limited export opportunities

Utilisation rates to drop to77% in 2012 from current full capacity

12 / 37 pages



FIGURE 18: CAPACITY & UTILISATION RATES In million tonnes (LHS), unless otherwise stated

FIGURE 19: 2012 UTILISATION RATES BY COMPANY


PRODUCTION COSTS The government recently raised electricity prices by 50% during peak production hours, which we estimate will raise electricity costs by c10% in 2010. Beyond 2010, we expect the government to increase the number of hours subject to the new electricity prices, given the country’s recent electricity outages and increased demand expected from the new plants. We thus estimate electricity costs to increase by 20% Y-o-Y in 2011 and 10% in 2012. Moreover, we expect new plants to use mazote as fuel, since they would have to import natural gas if they decided to use it as fuel. We think this might call for a rise in mazote prices during our forecast horizon (an estimated 20% increase by 2012, in our view). We believe cost inflation could increase the threat of regional competition now that the export ban has been lifted and the oversupply that will arise from capacity expansion.

In July 2010, the government amended development fees for cement companies (which were initially imposed on clay extraction) to EGP15/tonne of cement from EGP37/tonne of cement (or EGP27/tonne of clay) in May 2008. We expect the EGP22/tonne reduction to offset the 10% Y-o-Y rise in electricity costs and to maintain 2010 average costs at 2009 levels (cEGP205/tonne). In 2012, we estimate average costs to reach EGP225/tonne.

According to cement producers, the EGP37/tonne fee was based on a false clay/clinker conversion ratio of 1.3 (they use 0.3 tonnes of clay to produce 1 tonne of clinker, which means that fees of EGP27/tonne of clay imply only EGP9/tonne of cement). As a result of the confusion, some producers paid only EGP9/tonne, some paid EGP37/tonne, and the remainder paid nothing, keeping the imposed amount as provisions.

EX-FACTORY PRICES In 1H2010, Egypt’s cement prices remained at their high 2009 levels, despite a slowdown in construction activity. We believe that this, coupled with the excess capacity of 15 million tonnes in 2012 allows space for a decline in local prices. . On the other hand, we believe the expected cost push to partially limit prices downside potential. We expect prices to remain flat Y-o-Y in 2010, then to decline by 3% and 5% Y-o-Y in 2011 and 2012, respectively.

We believe the higher costs, along with lower prices, will squeeze average cash margins for local cement companies to 48%, which is still above the current regional average of 43%.

60%

70%

80%

90%

100%

110%

120%

0

10

20

30

40

50

60

2004

2005

2006

2007

2008

2009

e

2010

e

2011

e

2012

e

Capacity (LHS)

Utilisation Rate (RHS)

0%20%40%60%80%

100%120%140%

Ale

x+Be

ni S

uef

Amer

eiya

Assu

itM

BSC

MCQ

CEC

CN

CCSu

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Wad

i Al-

Nil

Al-S

ewed

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ab N

atio

nal

Al-N

ahda

EK

HBM

I

2010e 2012e

Production costs to be inflated by higher energy

prices

Amended clay extraction fees to keep 2010 costs

flat Y-o-Y

Prices to decline on lower demand and

higher competition

Increasing margin pressure

13 / 37 pages



FIGURE 20: CASH MARGINS VS PRICES & COSTS


FIGURE 21: SUMMARY OF OPERATIONAL ASSUMPTIONS FOR COMPANIES

2009a 2010e 2011e 2012e 2013e

Cement Capacity (mtpa)

SCGC 12.0 12.0 12.0 12.0 12.0

SCC 3.0 3.0 3.0 3.0 3.0

MBSC 1.5 1.5 3.0 3.0 3.0

MCQC 1.9 1.9 1.9 1.9 1.9

Cement Sales Volumes (mtpa)

SCGC 11.7 12.0 10.8 9.4 9.4

SCC 3.5 3.7 3.1 2.7 2.7

MBSC 1.9 1.4 2.6 2.2 2.2

MCQC 1.9 2.0 1.9 1.6 1.6

19.0 19.0 18.4 16.0 15.9

UR %

SCGC 98% 100% 90% 79% 79%

SCC 117% 122% 103% 91% 90%

MBSC 128% 94% 86% 74% 74%

MCQC 96% 103% 101% 83% 83%

Market Share %

SCGC 24.7% 23.9% 21.0% 19.1% 19.1%

SCC 7.3% 7.3% 6.0% 5.5% 5.5%

MBSC 4.0% 2.8% 5.0% 4.5% 4.5%

MCQC 3.7% 3.9% 3.7% 3.2% 3.2%

Prices (EGP/ton)

SCGC 464 464 450 427 427

SCC 433 440 427 405 405

MBSC 439 455 441 419 419

MCQC 437 450 437 415 415

Costs (EGP/ton)

SCGC (60%Gas/40%Mazote) 254 243 251 263 265

SCC(50%Gas/50%Mazote) 190 183 178 191 192

MBSC (50%Gas/50%Mazote starting 2011) 167 177 196 209 210

MCQC (100%Mazote) 197 217 224 245 247

EBITDA Margin (EGP/ton)

SCGC 34.1% 37.5% 34.0% 27.5% 27.7%

SCC 49.5% 51.1% 50.9% 45.1% 44.8%

MBSC 59.5% 57.5% 53.5% 47.5% 47.1%

MCQC 53.1% 50.6% 47.8% 40.4% 39.9%

Source: Companies data, EFG Hermes estimates

370

450 470 470 456433

139186 202 205 212 227

62% 59% 57% 56%53%

48%

-5%

5%

15%

25%

35%

45%

55%

65%

050

100150200250300350400450500

2007 2008 2009 2010 2011 2012

Price/ton Costs/ton Cash Margins %

14 / 37 pages



III. FINANCIAL STATEMENT ANALYSIS

REVENUE

Local cement companies in our coverage universe have witnessed their sales volume grow by 12% Y-o-Y on average, driven mainly by: i) a 25% Y-o-Y growth in local cement consumption; and ii) Sinai Cement doubling its capacity to 3 mtpa in 2009. SCC witnessed the highest Y-o-Y growth in volumes (47%) and increased market share to 7.3% in 2009 from 4.8% in 2008. MCQC was the only company to see a decline in volumes (-6% Y-o-Y). The company’s market share contracted to 3.7% in 2009 from 4.1% in 2008, but recovered in 1H2010 to 2008 levels. For the four companies, The overall Y-o-Y rise in volumes during 2009 (12%), along with a 4% Y-o-Y average price increase, has led to combined revenue growth of 21% Y-o-Y in 2009 (All companies witnessed higher revenue Y-o-Y).

We forecast volumes to decline for all companies, excluding-MBSC, which recently doubled its capacity to 3 mtpa. We estimate average ex-factory prices to decline by 3% Y-o-Y and 5% Y-o-Y in 2011 and 2012, respectively due to: i) weak demand, estimated to grow 5% and 3% in 2010 and 2011, respectively, before decreasing by 4% in 2012; and ii) increased competition from new market entries in mid-2011-2012, which will reduce the existing companies’ market share and selling prices. We believe this could lead to lower revenue for existing companies (-7% CAGR in 2009-2012 on average) except for MBSC (+4% CAGR).

FIGURE 22: REVENUE FORECASTS In EGP million, unless otherwise stated

Source: Company Financials, EFG Hermes estimates

COSTS AND MARGINS

MBSC is the most cost efficient producer because it: i) uses natural gas as fuel, ii) produces using the dry kiln process, and iii) has selling, general and administrative (SG&A) expenses that represent only 2% of sales. As a result, the company enjoys the lowest production costs, estimated at USD30/tonne, and the highest EBITDA margin in the industry (estimated at 58% in 2010 compared to the local average of 48%). SC enjoys the lowest operating leverage as fixed costs are an estimated cEGP40/tonne in 2010 (c22% of total costs), in our view.

SCGC is the least cost efficient as production costs are an estimated USD45/tonne given: i) its use of old, wet production kilns in over 20% of HCC’s capacity, ii) its use of mazote in 40% of cement production, and ii) the scattering of its production facilities across three locations. High production costs, along with high wages in Egypt’s central area compared to in Upper Egypt, has resulted in an estimated EBITDA margin of 37% in 2010, the lowest locally.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

SCGC SCC MBSC MCQC

2008a 2009a 2010e 2011e 2012e

CAGR -8%

CAGR -10%CAGR 4% CAGR -6%

15%

67%27% 9%

2009 combined revenuegrows 21% Y-o-Y

Overall revenue to decline by 7% CAGR in

2009-2012 on lower volumes and prices

MBSC has lowest estimated 2010 costs;

SC the lowest operating leverage

SCGC least cost efficientproducer

15 / 37 pages



Furthermore, the high fixed costs component (estimated at EGP105/tonne in 2010, or 40% of total costs) increases the company’s operating leverage.

FIGURE 23: ESTIMATED BREAKDOWN FOR COMPANIES' COSTS IN 2010 In EGP/Tonne, unless otherwise stated


The amendment of development fees to EGP15/tonne of cement (from EGP37/tonne) will have different impacts on producers depending on how much they have paid in fees since May 2008. Producers who paid the EGP37/tonne fee (SCGC and SC) will see their clay costs decline by EGP22/tonne of cement. Those who paid only EGP9/tonne will their clay fees increase by EGP6/tonne. Producers who never paid and kept the imposed amount as provisions will be hit the hardest. Those companies include MBSC and MCQC (which does not use clay in cement production but will have to pay the amended development fees).

Prices should decline by 3% and 5% Y-o-Y in 2011 and 2012, respectively, on weak demand and increasing competition, in our view. We estimate that the rise in electricity and mazote prices in 2012 will raise the average production costs for cement companies in our coverage universe to EGP225/tonne, c10% higher than the current costs. We also expect additional distribution expenses on rising competition starting in 2012. This will lead to a decline of average EBITDA margins to 40% in 2012, from the current 48%

MCQC will witness the largest squeeze in margins, with the EBITDA margin estimated to reach 40% in 2012, down from 55% in 1H2010, in our view. We believe this is mainly because: i) MCQC uses 100% mazote as fuel, which will increase in price, ii) it has relatively high operating leverage, with estimated fixed costs of cEGP74/tonne in 2010, or 34% of total costs, and iii) it will be hard hit by the EGP15/tonne development fee.

0

50

100

150

200

250

300

SCGC MCQC SC MBSC

Fuel Electricity Clay Other raw materials Fixed Costs

EGP15/tonnedevelopment fees

should have mixed effect on producers

2012 margins to drop on higher costs and lower

prices

MCQC to witness largest squeeze in margins

16 / 37 pages



FIGURE 24: ESTIMATED Y-O-Y CHANGE IN COMPANIES’ COSTS

FIGURE 25: HISTORICAL & FORECASTED EBITDA MARGINS


NET INCOME Egypt cement companies are exempted from income taxes for 10 years after the start of production. This period ends in 2011 for SC, 2012 for MCQC, and 2013 for MBSC. Companies are subject to a 20% income tax afterwards. SCGC is the only company in our coverage universe that currently pays 20% income taxes as it is one of Egypt’s oldest cement producers.

We project a decrease in net income over our forecast horizon by an average CAGR of 15% 2009-12 given the expected decline in revenues, rise in costs and end of tax exemptions.

FIGURE 26: COMPANIES' HISTORICAL & FORECASTED NET INCOME In EGP million, unless otherwise stated


-4% -4%

2%

10%

3%

-3%

11%

3%5%

7% 7%

10%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

SCGC SC MSBC MCQC

2010 2011 2012

20%25%30%35%40%45%50%55%60%65%70%

200

7

200

8

200

9

201

0

201

1

201

2

SCGC SCC MBSC MCQC

0

200

400

600

800

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1,200

1,400

SCGC SCC MBSC MCQC

2008 2009 2010 2011 2012

CAGR -20%

CAGR -19%

CAGR -9%CAGR -17%

25%

62%

93%16%

Tax exemption ends in 2011-2013

17 / 37 pages



DIVIDENDS All of the companies in our coverage universe enjoy strong balance sheets with net cash positions (average net cash/EBITDA estimated at 1x in 2010). They enjoy strong cash generation with average FCF yield estimated at 14% in 2010, allowing for an attractive average dividend yield of 8% in 2010. We estimate MCQC to have the highest dividend yield (10%), while MBSC has the lowest (4%). In 2012, we estimate average FCF yield and dividend yield to drop to 5%.

FIGURE 27: HISTORICAL & PROJECTED FCF YIELD

FIGURE 28: HISTORICAL & PROJECTED DIVIDEND YIELD


0%2%4%6%8%

10%12%14%16%18%20%

SCGC SCC MBSC MCQC

2009a 2010e 2011e 2012e

0%

2%

4%

6%

8%

10%

12%

SCGC SCC MBSC MCQC

2008 2009a 2010e 2011e 2012e

Attractive estimated dividend yields of 8% in

2010 to drop to 5% in 2012

18 / 37 pages



IV. VALUATION

A. DISCOUNTED CASH FLOW (DCF) DCF SUMMARY We use a discounted free cash flow (DCF) method to arrive at our fair value (FV) estimates for SCGC, SC, MBSC and MCQC based on the following assumptions: i) a conservative perpetual growth rate of 3% given the cyclicality of the construction/real estate sector (end user) and future capacity additions; and ii) a risk free rate of 9.5% and a risk premium of 6.5% (7% for MBSC given its new 1.5 mtpa expansion plan).

We estimate the return on average equity for the four companies to drop to 14% in 2012 from an average of 34% in 2009, which is lower than our estimated cost of equity of 16%. This reflects our conservative assumptions of deteriorating margins and end of tax exemptions.

FIGURE 29: CEMENT COMPANIES' ROAE


Our DCF valuation leads to Neutral ratings on both SCGC (FV 6% over the market price) and SC (equivalent to the market price). SCGC, Italcementi’s subsidiary, is Egypt’s largest, most integrated cement producer with 24% local market share. SC, Vicat’s subsidiary, has increased its market share to over 7% (from 4.8%) since after its capacity doubled to 3 mtpa in 2009. Both companies enjoy strategic locations close to Cairo and the Delta (over 60% of cement demand in 2009), with low exposure to the competition expected to arise from Upper Egypt (61% of 2012 cement capacity additions).

We place a Sell on MBSC and MCQC as we believe their current market prices do not factor in the expected threat of competition in Upper Egypt (where they operate). Additionally, our FV for MBSC implies 27% downside potential, and its high profitability and strong growth following capacity expansion are both already priced in, in our view. Our FV for MCQC implies 35% downside potential given that: i) the company uses 100% mazote as fuel, ii) has relatively high operating leverage, and iii) will be hard hit by the EGP15/tonne fees for clay extraction, as it did not pay any fees before.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2009 2010 2011 2012

SCGC SCC MBSC MCQC

RoAE to drop below cost of equity in 2012

Neutral on SCGC and SCC

Sell MBSC and MCQC

19 / 37 pages



FIGURE 30: DCF VALUATION SUMMARY

Company Cost of Equity WACC LTFV Current Price* (%) Upside/ Downside

Rating

SCGC 16.0% 15.7% 45 42 6% Neutral

SCC 16.0% 16.0% 48 48 0% Neutral

MBSC 16.5% 16.2% 65 90 -27% Sell

MCQC 16.0% 16.0% 65 100 -35% Sell

*as at 14 October 2010 Source: EFG Hermes estimates

FIGURE 31: IMPLIED VALUATION MULTIPLES

PE (x) EV/EBITDA (x) EV/Tonne (x)

2010 2011 2012 2010 2011 2012

SCGC 6.1 7.4 12.1 2.7 3.4 4.9 100

SCC 4.5 5.4 9.3 3.6 4.4 5.9 177

MBSC 7.7 5.5 8.2 4.6 3.6 5.0 137

MCQC 5.3 6.0 9.5 2.8 3.2 4.7 126


RISKS TO OUR VALUATION i) Future Construction Activities: Faster or slower-than-expected progress in Cairo’s new mega projects, new project announcements and implementation, and private sector activity could highly impact cement consumption growth. We conduct a sensitivity analysis on different future scenarios for local demand and arrive at the following:

FIGURE 32: SENSITIVITY ANALYSIS TO OUR LOCAL DEMAND ASSUMPTIONS

2010-13 CAGR in Local Demand

-5% -3% -1% (Base case) 3% 5%

SCGC 35 40 45 54 59

SCC 41 44 48 53 56

MBSC 51 55 65 77 84

MCQC 55 60 65 73 78


ii) Price Outlook: Ex-factory price is now around USD82/ton, the highest in the region, and we believe there’s room for price decline with the excess capacity expected in 2012. We expect prices to remain flat Y-o-Y in 2010, then to decline by 3% and 5% Y-o-Y in 2011 and 2012, respectively. Any delays in the start up of new capacities or a pickup in demand would positively reflect in prices, in our view. Government regulation of prices could also lead to lower forecasts. Our sensitivity analysis to different price assumptions shows the following:

20 / 37 pages



FIGURE 33: SENSITIVITY ANALYSIS TO OUR CEMENT PRICE ASSUMPTIONS

2010-2013 CAGR in Local Prices

3% 0% -3% -5% -8%

SCGC 64 54 45 38 29

SCC 71 63 48 50 43

MBSC 86 76 65 61 53

MCQC 85 74 65 56 46


iii) Future Capacity Additions: We forecast aaggregate Egypt cement capacity to reach 64 mtpa in 2012, including capacity expansions in existing companies and the establishment of new greenfields. We do not include the 12 new licenses to be awarded at end-2010 as we doubt there would be any investor interest due to: i) the slowdown in local demand; and ii) the uncertainty of production costs. Any increase in the expected new capacities should add to the expected oversupply and fierce competition, while any delays in ongoing expansion plans could lead to better utilisation rates and pricing power for current producers.

iv) Lower/Higher-Than-Expected Cost Increases: We conservatively estimate electricity costs to rise by c10% Y-o-Y in 2010, 20% in 2011 and 10% in 2012 given the recent electricity outages in the country and expected increase in demand from new cement plants. Most of the new plants are expected to use mazote as fuel, which should push the government to raise mazote prices by an estimated 20% in 2012, in our view. Any higher/lower cost increases could impact companies’ margins.

FIGURE 34: SENSITIVITY TO MAZOTE COST ASSUMPTIONS In EGP/Share, unless otherwise stated

FIGURE 35: SENSITIVITY TO ELECTRICITY COST ASSUMPTIONS In EGP/Share, unless otherwise stated

2010-13 CAGR in Mazote Costs

0% 3% 6% 10% 14%

SCGC 48 46 45 43 40

SCC 57 56 48 54 53

MBSC 70 68 65 64 63

MCQC 68 66 65 60 56

2010-13 CAGR in Electricity Costs

3% 7% 10% 16% 20%

SCGC 48 46 45 42 40

SCC 57 56 48 54 53

MBSC 69 68 65 64 63

MCQC 66 65 65 61 60


v) Export Assumptions: We conservatively assumed no exports for our covered companies, despite the lift of export ban, as we see limited export opportunities to Europe (major export market), and increasing regional competition from other exporting countries such as Turkey. However, a faster-than-estimated recovery in Europe’s construction sector and/or higher-than-expected opportunities in Africa could impact our forecasts, valuations and recommendations. The following table shows the impact on our FV in the case that exports resume in 2011 at average 2007-2008 levels and assuming an export price of USD70/tonne.

21 / 37 pages



FIGURE 36: SENSITIVITY TO EXPORTS In EGP/Share, unless otherwise stated

No Exports (Base Case)

With Exports

SCGC 45 49

SCC 48 58

MBSC 65 88

MCQC 65 92


vi) Cost of Equity and Perpetual Growth Assumptions: Our DCF valuations are sensitive to our subjective choices of both the cost of equity and the terminal growth rate. In the tables below, we illustrate the sensitivity of each company to changes in both sets of assumptions.

FIGURE 37: SUEZ CEMENT GROUP

FIGURE 38: SINAI CEMENT COMPANY

Cost of Equity

14% 15% 16% 17% 18%

Perp

etua

l G

row

th

1% 47.9 45.1 42.6 40.5 38.7

2% 49.3 46.2 43.5 41.3 39.3

3% 50.9 47.5 44.6 42.1 40.0

4% 52.9 49.0 45.8 43.1 40.8

5% 55.3 50.9 47.2 44.2 41.7

Cost of Equity

14% 15% 16% 17% 18%

Perp

etua

l G

row

th

1% 52.2 48.7 45.7 43.0 40.7

2% 53.8 49.9 46.7 43.8 41.4

3% 55.6 51.4 47.8 44.8 42.1

4% 57.8 53.1 49.2 45.8 43.0

5% 60.5 55.2 50.8 47.1 44.0


FIGURE 39: MISR BENI SUEF CEMENT

FIGURE 40: MISR CEMENT QENA

Cost of Equity

15% 16% 17% 18% 19%

Perp

etua

l G

row

th

1% 70.9 66.4 62.5 59.1 56.1

2% 72.9 68.0 63.8 60.1 56.9

3% 75.3 69.9 65.3 61.4 57.9

4% 78.1 72.1 67.0 62.8 59.1

5% 81.5 74.7 69.1 64.4 60.4

Cost of Equity

14% 15% 16% 17% 18%

Perp

etua

l G

row

th

1% 69.9 66.2 62.9 60.1 57.7

2% 71.6 67.5 64.0 61.0 58.4

3% 73.6 69.1 65.3 62.0 59.3

4% 76.0 71.0 66.8 63.2 60.2

5% 79.0 73.2 68.5 64.6 61.3


B. COMPARABLE MULTIPLES VALUATION Egypt cement stocks currently trade at an average of 7.3x earnings, or around 38% discount to global peers. On an EV/EBITDA basis, Egypt’s stocks trade at 4.5x in 2010, 40% cheaper than global peers. We estimate the 2010 average dividend yield in Egypt to reach 8%, comparing to the industry average of 7%.

The discount disappears in 2012, when Egypt stocks are forecasted to trade at 11.7x P/E and 6.6x EV/EBITDA, compared to the global average P/E and EV/EBITDA of 9.9x and 6.9x, respectively. We believe Egypt’s cement companies will lose their attractive valuations starting in 2012, due to: i) the estimated overcapacity resulting from the drop in demand following the entry of new capacities, ii) the expected increase in energy costs, and iii) the end of the tax exemption period for SC in 2012, MCQC in 2013 and MBSC in 2014.

Cheap in 2010e, discount eliminated in

2012

22 / 37 pages



SC trades at the lowest estimated P/E of 4.5x in 2010 and 9.4x in 2012, while SCGC has the lowest estimated EV/EBITDA of 2.6x in 2010 and 4.6x in 2012. We see MCQC as the most expensive stock in 2012, with P/E and EV/EBITDA estimated at 14.6 and 8.5x, respectively.

FIGURE 41: MULTIPLE VALUATION

Country Company EV/EBITDA (x) P/E (x) Div. Yield

2010e 2011e 2012e 2010e 2011e 2012e

UAE Ras Al Khaimah Cement Co. 8.6 6.9 5.5 15.9 12.6 7.9 13%

UAE Gulf Cement Co. 7.5 4.2 3.8 17.9 7.3 6.4 6%

Oman Oman Cement Co. 7.1 6.5 6.1 7.6 8.8 7.9 6%

Oman Raysut Cement Co. 7.7 7.4 7.2 9.7 9.7 8.6 8%

Regional Avg (excl. Saudi) 7.7 6.3 5.6 12.8 9.6 7.7 8%

KSA Arabian Cement Co. 9.8 9.3 9.1 10.3 9.9 9.5 10%

KSA Yamamah Saudi Cement Co. 7.5 7.3 7.4 10.5 10.3 10.9 6%

KSA Saudi Cement Co. 8.9 8.8 9.2 10.2 9.7 10.1 8%

KSA Qassim Cement Co. 8.9 9.1 9.7 11.1 11.3 12.1 9%

KSA Southern Province Cement Co. 10.0 9.8 9.4 12.8 12.5 12.0 8%

KSA Yanbu Cement Co. 8.9 8.7 7.6 9.9 9.6 8.3 7%

KSA Eastern Province Cement Co. 8.0 7.6 7.8 10.0 9.5 9.9 7%

KSA Tabouk Cement Co. 6.2 5.9 6.2 11.2 10.5 11.3 7%

Saudi Average 8.5 8.3 8.3 10.7 10.4 10.5 8%

Regional Average (incl. Saudi) 8.2 7.6 7.4 11.4 10.1 9.6 8%

Switzerland Holcim Ltd 7.4 6.7 6.0 15.0 11.8 9.8 2%

Greece Titan Cement Company S.A. 6.7 6.2 5.7 10.4 9.4 8.4 1%

France Lafarge SA 7.9 6.9 6.3 12.7 9.8 7.9 5%

Italy Italcementi 6.6 5.8 5.2 24.6 15.7 10.0 2%

Turkey Akcansa Cimento 9.1 7.6 7.1 16.3 11.7 10.1 5%

Turkey Cimsa 8.9 7.8 7.1 12.9 11.6 9.9 5%

South Africa Pretoria Portland Cement 7.8 6.9 6.2 13.2 11.1 9.8 6%

Other Average 7.8 6.8 6.2 15.0 11.6 9.4 4%

Egypt Suez Cement Group 2.6 3.2 4.6 5.7 7.0 11.4 8%

Egypt Misr Beni Suef Cement Co. 6.6 5.2 7.1 10.6 7.6 11.2 7%

Egypt Sinai Cement Co. 3.7 4.6 6.2 4.5 5.5 9.4 8%

Egypt Misr Qena Cement Co. 5.1 5.7 8.5 8.1 9.1 14.6 10%

Egypt Average 4.5 4.7 6.7 7.3 7.3 11.7 8%

Average 7.5 6.9 6.9 11.8 10.1 9.9 7%

Source: Reuters, EFG Hermes estimates

23 / 37 pages



Egypt cement producers enjoy relatively low EV/tonne of USD177 on average, equivalent to the local replacement cost, and 27% below the global average EV/ton. This validates our estimated cheap multiples for 2010, before the bulk of new capacities come on stream, then producers' margins are expected to drop to 40% in 2012 from 48% in 2010. SCGC has the lowest EV/tonne of USD95, which is justified by its low margins in a local context (estimated 37% in 2010 and 28% in 2012). MCQC remains our least favourable stock given its relatively high EV/tonne of USD226/tonne, while we expect margins to drop to an estimated 40% in 2012 from 55% in 1H2010 (the largest margin contraction in our coverage).

FIGURE 42: ESTIMATED EV/TONNE VS 2012 EBITDA MARGIN

Source: Reuters, EFG Hermes estimates

0%

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MBSC

SCGC

CimsaTitan

Raysut PretoriaLafarge

HolcimGCC

ItalcementiRAK

Akcansa

OCC

Attractive EV/tonnevalidates cheap 2010e

multiples

[stock name] rating [recommend.]


Neutral Rating At A Fair Value of EGP45/share We are Neutral on the stock as our fair value (FV) of EGP45/share implies 6% upside potential to the market price. We think the industry risks discussed earlier, in addition to the company’s large market share and low margins, are already in the price. The stock’s trading multiples are relatively cheap in 2010 (5.7x PE, 2.6x EV/EBITDA) and in 2011 (7.0x PE and 3.2x EV/EBITDA), before rising in 2012 to 11.4x PE, and 4.6x EV/EBITDA. SCGC’s EV/tonne is the lowest (USD95), which could be justified by low margins. However, if we exclude the old plants to be relocated, the adjusted EV/ton becomes USD153 (still lower than the local average of USD177). We estimate a dividend yield of 8% in 2010, which will drop to 5% in 2012.

The Largest, Most Integrated Local Cement Player Suez Cement Group of Companies (SCGC) is Egypt’s largest and most integrated cement producer (12 mtpa capacity). Italcemeni, the world’s fifth largest cement producer, owns 55% of the Group. SCGC operates five plants through its subsidiaries Suez Cement Co SCC (100%), Helwan Cement Co HCC (98%) and Tourah Portland Cement Co TPCC (66%). SCGC captures c24% of the grey cement market, 50% of white cement and 35% of ready mix. It also owns 51% of Kuwait’s Hilal Cement. We expect utilisation rates of 100% in 2010, 90% in 2011 and 79% in 2012 (on lower demand and higher competition), generating revenue of EGP6.6 billion in 2010 (3% Y-o-Y), EGP5.8 billion in 2011 (-12% Y-o-Y) and EGP4.9 billion in 2012 (-15% Y-o-Y).

Lowest Margins In The Local Market SCGC is the least cost efficient (USD45/tonne) local cement company, due to: i) the use of old, wet production kilns in over 20% of HCC’s capacity, ii) the use of mazote in 40% of production, and iii) and the scattering of plants. This, along with relatively-high wages in the plants’ locations, has contributed to an EBITDA margin of 36%, the lowest among local peers. Furthermore, the high fixed costs component (cEGP105/tonne of cement) has increased operating leverage. There are plans to relocate HCC plants to North Sinai for environmental reasons, where wet kilns will be replaced by dry ones.

KEY FINANCIAL HIGHLIGHTS

December Year End (EGP mn) 2009a 2010e 2011e 2012e

Revenue 6,380 6,579 5,815 4,938

EBITDA 2,177 2,454 1,970 1,360

Operating Profit 1,860 2,133 1,638 1,019

Net Income 1,300 1,332 1,093 673

EPS (EGP) 7.15 7.33 6.01 3.70

DPS (EGP) 3.26 3.50 3.00 2.00

Net Debt (Cash) (1,247) (1,855) (2,095) (1,626)

P/E* (x) (Attrib.) 5.9 5.7 7.0 11.4

EV/EBITDA* (x) 2.9 2.6 3.2 4.6

P/BV* (x) 1.1 1.0 0.9 0.9

P/CF* (x) 5.4 4.1 5.9 24.9

Div. Yield* 7.8% 8.3% 7.1% 4.8%

ROAE 19.8% 18.2% 13.7% 8.0%

*Prices as at 14 October 2010

Source: Suez Cement Group of Companies (SCGC), EFG Hermes estimates

Malak Youssef+20 2 3535 6044

[email protected]

Ahmed Gad, CFA+971 4 364 1904

[email protected]

NEUTRAL

Price EGP42*

Fair Value EGP45Last Div. / Ex Date EGP3.26 on 27 Apr 10

Mkt. Cap / Shares (mn) EGP7,640 / 182

Av. Mthly Liqdty (mn) EGP55

52-Week High / Low EGP51 / EGP32

Bloomberg / Reuters SUCE.EY / SUCE.CA

Est. Free Float 14%

SHARE PRICE PERFORMANCE RELATIVE TO HFI REBASED

suez cement group of companies (scgc)

Low Profitability, Industry Risks Priced In, Initiate With Neutral


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FINANCIAL STATEMENTS INCOME STATEMENT (DECEMBER YEAR END)

In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e

Revenue 6,380 6,579 5,815 4,938 4,991

Cash Costs (3,884) (3,809) (3,566) (3,307) (3,334)

Depreciation and Amortisation (317) (321) (332) (341) (350)

Gross Profit 2,179 2,449 1,918 1,290 1,307

S,G&A (320) (316) (279) (272) (275)

EBITDA 2,177 2,454 1,970 1,360 1,382

EBITDA Margin 34% 37% 34% 28% 28%

Net Operating Profit 1,860 2,133 1,638 1,019 1,032

Net Operating Margin 29% 32% 28% 21% 21%

Net Interest Income (Expense) 8 58 82 64 48

Other Income (Expense) (3) (222) (105) (88) (88)

Earnings before Taxes 1,864 1,969 1,616 994 992

Taxes (380) (401) (329) (203) (202)

Net Income before Minority 1,484 1,567 1,286 791 790

Minority Interest (185) (235) (193) (119) (118)

Net Income 1,300 1,332 1,093 673 671

Source: SCGC, EFG Hermes estimates

BALANCE SHEET (DECEMBER YEAR END)

In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e

Cash and Time Deposits 1,486 2,125 2,130 1,648 1,238

Receivables 199 252 223 189 191

Inventory 863 859 1,042 1,731 2,428

Other Debit Balances 352 451 398 338 342

Total Current Assets 2,899 3,687 3,793 3,906 4,199

Net Fixed Assets 3,956 3,864 3,735 3,566 3,390

Other LT Assets 2,767 2,975 3,141 3,258 3,372

Total Assets 9,622 10,526 10,669 10,730 10,962

ST Debt 230 236 12 7 7

Payables 402 417 391 362 365

Other Current Liabilities 1,174 1,355 1,264 1,144 1,133

Total Current Liabilities 1,807 2,009 1,667 1,513 1,506

LT Debt 8 34 22 16 8.18

Other Liabilities 182 182 182 182 182

Minority Interest 650 619 569 481 420

Net Worth 6,975 7,681 8,229 8,538 8,845


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suez cement group of companies (scgc) 18 October 2010


CASH FLOW STATEMENT (DECEMBER YEAR END) In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e

Operating Profit after Tax 1,797 2,053 1,641 1,157 1,180

Change in Working Capital (378) (191) (343) (849) (817)

Cash Flow after Change in WC 1,419 1,862 1,298 308 363

CAPEX (230) (437) (363) (281) (281)

Free Cash Flow 1,188 1,425 935 27 82

Non-operating Cash Flow 93 16 14 10 10

Cash Flow before Financing 1,281 1,441 948 37 92

Net Financing (796) (802) (943) (518) (502)

Change in Cash 485 639 5 (482) (410)




Initiate Coverage With A Neutral At Fair Value Of EGP48/share Based on our discounted cash flow valuation, our fair value (FV) of EGP48/share is equivalent to the current market price. We believe that SCC’s strong story and industry risks are currently priced in. SCC trades at an estimated P/E of 4.5x in 2010, which jumps to an estimated 9.4x in 2012, and an estimated EV/EBITDA of 3.7x and 6.2x in 2010 and 2012, respectively. EV/tonne stands at USD185, above the local average of USD177, which could be justified by SCC’s higher-than-average margins.

Capacity Doubled in 2009, Strong 2010e Revenue Not Sustainable Sinai Cement Co (SCC), 40% owned by France’s Vicat, operates two dry plants, one fuelled by natural gas and the other by mazote. It has doubled capacity to 3 mtpa in 2009, which boosted revenue and EBITDA by 67% and 60% Y-o-Yin 2009, respectively. SCC managed to maintain operating rates at 117% in 2009 and 120% in 1H2010, despite the slowdown in local demand growth this year. We believe the high operating rates are mainly due to low competition, which has allowed SCC to increase its market share to 7.4% in 1H2010 from 4.8% in 2008. We estimate revenue will reach EGP1.6 billion in 2010 (+7% Y-o-Y), but drop to an estimated EGP1.3 billion in 2011 and EGP1.1 billion in 2012 on weaker demand lower market share (estimated at 5.5%).

Strong Margins, Attractive FCF and Dividend Yields SCC enjoys low production costs estimated at EGP185/tonne, driven by its proximity to raw materials and low operating leverage (fixed costs of EGP40/tonne). The company has high selling, general and administrative (SG&A) expenses of EGP33/tonne, due to high labour costs in the Sinai region. We estimate EBITDA margin of 51% in 2010 and 2011, and 45% in 2012, higher than the local averages of 49%, 47% and 40% in 2010, 2011 and 2012. We highlight that SCC will pay a 20% income tax rate starting in 2012. We estimate FCF yields of 21% in 2010, 19% in 2011 and 10% in 2012 allow for dividend yields of 9%, 8% and 6% in 2010, 2011 and 2012, respectively.



Revenue 1,513 1,614 1,322 1,101

EBITDA 749 825 673 497

Operating Profit 676 748 598 419

Net Income 671 746 621 362

EPS (EGP) 9.59 10.66 8.87 5.17

DPS (EGP) 4.00 4.50 4.00 3.00

Net Debt (Cash) (294) (709) (1,059) (1,184)

P/E* (x) (Attrib.) 5.1 4.5 5.5 9.4

EV/EBITDA* (x) 4.1 3.7 4.6 6.2

P/BV* (x) 1.8 1.5 1.3 1.2

P/CF* (x) 5.3 4.5 5.1 9.5

Div. Yield* 8.2% 9.3% 8.2% 6.2%

ROAE 39.5% 35.9% 25.0% 13.2%


Source: Sinai Cement Company (SCC), EFG Hermes estimates Malak Youssef

+20 2 3534 [email protected]

Ahmed Gad, CFA+971 4 364 1904

[email protected]

NEUTRAL

Price EGP48*

Fair Value EGP48Last Ex / Div. Date EGP4 on 8 Apr 10



52-Week High / Low EGP58.5 / EGP38.3

Bloomberg / Reuters SCEM.EY / SCEM.CA

Est. Free Float 36%


sinai cement company (scc)

Neutral Rating, Cost Efficiency And Industry Risks Priced In


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FINANCIAL STATEMENTS INCOME STATEMENT (DECEMBER YEAR END) In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e

Revenue 1,513 1,614 1,322 1,101 1,101

Cash Costs (665) (671) (552) (518) (521)


Gross Profit 775 866 695 505 499

S,G&A (99) (118) (97) (86) (86)

EBITDA 749 825 673 497 493

EBITDA Margin 49% 51% 51% 45% 45%

Net Operating Profit 676 748 598 419 413




Earnings before Taxes 674 749 623 452 450

Taxes (3) (3) (2) (90) (90)

Net Income 671 746 621 362 360

Source: SCC, EFG Hermes estimates

BALANCE SHEET (DECEMBER YEAR END) In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e

Cash and Time Deposits 294 709 1,059 1,184 1,297

Receivables 30 70 58 48 48

Inventory 134 134 134 188 243


Total Current Assets 505 985 1,309 1,469 1,636

Net Fixed Assets 1,398 1,402 1,392 1,370 1,345

Other LT Assets 101 101 111 122 134

Total Assets 2,003 2,487 2,812 2,961 3,115

ST Debt - - - - -

Payables 97 101 83 78 79

Other Current Liabilities 57 73 75 78 81

Total Current Liabilities 154 175 159 156 160

LT Debt - - - - -

Other Liabilities - - - - -

Net Worth 1,849 2,313 2,654 2,805 2,956


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sinai cement company (scc) 18 October 2010



2009a 2010e 2011e 2012e 2013e

Operating Profit after Tax 746 822 671 407 403


Cash Flow after Change in WC 647 758 665 356 339

CAPEX (99) (81) (66) (55) (55)

Free Cash Flow 547 677 599 301 284

Non-operating Cash Flow (2) (1) (1) (1) (1)

Cash Flow before Financing 545 677 598 300 283

Net Financing (369) (262) (248) (174) (171)

Change in Cash 177 415 350 125 112




Initiate With Sell Despite High Profitability And Doubled Capacity Our DCF model for Misr Beni Suef Cement Co (MBSC) yields a fair value of EGP65/share, accounting for the company's high margins and doubled capacity. This is 27% below the market price, which we think implies 100% utilisation rates starting 2011 (highly unlikely given the expected drop in 2012 demand and increased number of producers). We estimate MBSC’s P/E and EV/EBITDA to reach 10.6x and 6.6x in 2010, 7.5x and 5.2x in 2011 (after doubling the capacity), and 11.2x and 7.1x in 2012. EV/tonne stands at USD391/tonne in 2010 (USD196/tonne in 2011), above the local average of USD175/tonne.

Exceptional Growth in 2011 On Doubled Capacity, Not Sustainable MBSC runs a 1.5 mtpa cement plant and recently completed a 1.5 mtpa expansion. MBSC exported 40% of production before the export ban was introduced, then managed to increase local market share to 4% in 2009 (from 2.4% in 2008) and reach operating rates of 124% . In 1H2010, MBSC’s operating rates and market share dropped to 95% and 3%, respectively, driven by the slowdown in demand and a broken grinder. We estimate the new capacity to increase MBSC’s sales by a 2009-11 CAGR of 17% to EGP1.1 billion, before dropping by 18% Y-o-Y in 2012 to EGP932 million on lower demand and increased supply.

Highest Margins, Lowest Dividend Yields MBSC enjoys the lowest production costs in the local industry, estimated at USD30/tonne, and the highest EBITDA margin (estimated 58% in 2010 and 49% in 2012 compared to the local average of 48% and 40%, respectively).This is mainly because MBSC: i) uses natural gas as fuel (although the new capacity will use mazote), ii) uses a dry kiln process, and iii) has selling, general and administrative expenses representing only 2% of sales. We estimate MBSC to generate the lowest FCF yield of 4% in 2010 (7% in 2012), leading to the lowest dividend yield of 4.5% in 2010 and 2012. We highlight that MBSC will start to pay 20% income taxes in 2014.



Revenue 836 849 1,139 932

EBITDA 497 495 627 459


Net Income 391 337 479 319

EPS (EGP) 19.53 8.44 11.98 7.97

DPS (EGP) 6.00 4.00 5.00 4.00

Net Debt (Cash) (282) (295) (718) (831)

P/E* (x) (Attrib.) 9.2 10.6 7.5 11.2

EV/EBITDA *(x) 6.6 6.6 5.2 7.1

P/BV* (x) 2.5 2.2 1.9 1.8

P/CF* (x) 13.7 5.6 12.9 11.9

Div. Yield* 6.7% 4.5% 5.6% 4.5%

ROAE 34.4% 22.2% 27.4% 16.2%


Source: Misr Beni Suef Cement (MBSC), EFG Hermes estimates

Malak Youssef+20 2 3535 6044

[email protected]

Ahmed Gad, CFA+971 4 364 1904

[email protected]

SELL

Price EGP90*

Fair Value EGP65Last Div. / Ex Date EGP4 on 13 May 10




Bloomberg / Reuters MBSC EY / MBSC.CA

Est. Free Float 70%


misr beni suef cement (mbsc)

Initiate With Sell, Market Price Overvalues Growth And Profitability

basic materials │ Egypt

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misr beni suef cement (mbsc) 18 October 2010



2009a 2010e 2011e 2012e 2013e

Revenue 836 849 1,139 932 931

Cash Costs (320) (341) (487) (448) (451)


Gross Profit 452 376 501 329 323

S,G&A (18) (13) (25) (25) (25)

EBITDA 497 495 627 459 455

EBITDA Margin 59% 58% 55% 49% 49%






Taxes 1 - - - -

Net Income 391 337 479 319 319

Source: MBSC, EFG Hermes estimates


2009a 2010e 2011e 2012e 2013e

Cash and Time Deposits 333 354 748 831 976


Inventory 29 29 80 206 334

Other Debit Balances - - - - -

Total Current Assets 428 430 890 1,089 1,361

Net Fixed Assets 1,557 1,596 1,502 1,394 1,283

Other LT Assets - - - - -

Total Assets 1,986 2,026 2,392 2,483 2,645

ST Debt - 29 30 - -

Payables 75 107 153 141 142



LT Debt 51 30 0 - -


Net Worth 1,431 1,609 1,888 2,047 2,206


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misr beni suef cement (mbsc) 18 October 2010



2009a 2010e 2011e 2012e 2013e


Change in Working Capital (237) (174) 15 (181) (153)


CAPEX (370) (170) (57) (47) (47)

Free Cash Flow (108) 151 586 231 255

Non-operating Cash Flow (1) 1 1 1 1

Cash Flow before Financing (109) 152 587 232 256

Net Financing 214 (134) (193) (149) (111)

Change in Cash 106 18 394 83 145




Fair Value of EGP65/share; Initiate With Sell Rating

We initiate coverage with a Sell on Misr Cement Qena (MCQC), at a fair value (FV) of EGP65/share, 35% below the current market price, which we think does not factor in the expected contraction in EBITDA margin to 40% in 2012, from 55% in 1H2010 (the largest margins squeeze in our coverage). Moreover, MCQC trades at relatively expensive multiples, with an estimated P/E of 8.1x in 2010, 9.1x in 2011 and 14.6x in 2012, and an estimated EV/EBITDA of 5.1x, 5.7x and 8.5x in 2010, 2011 and 2012, respectively. The EV/tonne stands at USD226/tonne, the highest locally.

Strong 2010 Sales, Strategic Investments MCQC captured 4% of the local market in 1H2010 (from 3.7% in 1H2009), and has recently upgraded its cement production capacity by 20% to 1.9 million tonnes per annum (mtpa). We estimate this should raise revenue by 10% Y-o-Y in 2010 to EGP925 million, before dropping 5% Y-o-Y in 2011 to EGP876 million and 21% Y-o-Y in 2012 to EGP696 million, on both lower demand and increased competition. In addition, MCQC has entered into strategic investments in the supply chain, including: i) a ready-mix joint venture with ASEC Cement; and ii) a 15% stake in the newly established Arab National Cement Company, expected to produce 1.5 mtpa starting 2012.

To Witness The Largest Margins Squeeze We believe MCQC will witness the largest squeeze in margins amongst its local peers in 2010-12, with the EBITDA margin estimated to reach 40% in 2012, down from 55% in 1H2010. We believe this is mainly because: i) MCQC uses mazote as fuel in 100% of production (we estimate mazote price to rise by 20% in 2012), ii) it has relatively-high operating leverage, with fixed costs estimated at EGP74/tonne, and iii) it will be hard-hit by an EGP15/tonne development fee. Furthermore, the company will start paying 20% income taxes in 2013. This should reduce the company’s estimated dividend yield to 5.5% in 2012 (4.5% in 2013) from 10% in 2010 (the highest among local peers).



Revenue 845 925 876 696

EBITDA 448 469 419 281


Net Income 352 370 328 205

EPS (EGP) 11.79 12.39 10.97 6.86

DPS (EGP) 10.00 10.00 9.00 5.50

Net Debt (Cash) (640) (743) (809) (801)

P/E* (x) (Attrib.) 8.5 8.1 9.1 14.6

EV/EBITDA* (x) 5.3 5.1 5.7 8.5

P/BV* (x) 2.9 2.7 2.6 2.5

P/CF* (x) 7.0 7.1 8.6 18.4

Div. Yield* 10.0% 10.0% 9.0% 5.5%

ROAE 41.9% 35.2% 29.3% 17.6%


Source: Misr Cement Qena Company (MCQC), EFG Hermes estimates Malak Youssef

+20 2 3535 [email protected]

Ahmed Gad, CFA+971 4 364 1904

[email protected]

SELL

Price EGP100*

Fair Value EGP65Last Div. / Ex Date EGP10 on 07 Apr 10




Bloomberg / Reuters MCQE EY / MCQE.CA

Est. Free Float 14%


misr cement qena company (mcqc)

Attractive Dividends Priced In, Initiate With Sell On Large Margin Contraction


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misr cement qena company (mcqc) 18 October 2010



2009a 2010e 2011e 2012e 2013e

Revenue 845 925 876 696 695

Cash Costs (367) (424) (427) (387) (390)


Gross Profit 436 458 404 262 257

S,G&A (29) (32) (30) (28) (28)

EBITDA 448 469 419 281 278

EBITDA Margin 53% 51% 48% 40% 40%






Taxes (7) (7) (6) (4) (41)

Net Income 352 370 328 205 163

Source: MCQC, EFG Hermes estimates


2009a 2010e 2011e 2012e 2013e

Cash and Time Deposits 642 743 809 801 785


Inventory 56 43 40 95 151


Total Current Assets 722 813 875 917 957

Net Fixed Assets 546 550 549 537 524

Other LT Assets 12 11 12 13 15

Total Assets 1,281 1,374 1,436 1,468 1,495

ST Debt 2 - - - -

Payables 21 35 35 32 32



LT Debt - - - - -


Net Worth 1,017 1,088 1,147 1,187 1,216


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misr cement qena company (mcqc) 18 October 2010


FIGURE 43: CASH FLOW STATEMENT (DECEMBER YEAR END) In EGP million, unless otherwise stated

2009a 2010e 2011e 2012e 2013e




CAPEX (4) (46) (44) (35) (35)

Free Cash Flow 426 373 305 127 90

Non-operating Cash Flow (12) 1 0 0 0

Cash Flow before Financing 415 374 305 127 90

Net Financing (263) (273) (239) (135) (106)

Change in Cash 152 101 65 (7) (16)


EGYPT SALES TEAM Local call center 16900 [email protected] Head of Western Institutional Sales Mohamed Ebeid +20 2 35 35 6054 [email protected] Local Institutional Sales Amr El Khamissy +20 2 35 35 6045 [email protected]

UAE SALES TEAM call center +971 4 306 9333 [email protected] Western Institutional Sales Julian Bruce +971 4 363 4092 [email protected] Head of GCC Institutional Sales Amro Diab +971 4 363 4086 [email protected] Gulf HNW Sales Chahir Hosni +971 4 363 4090 [email protected] UAE Retail Sales Reham Tawfik +971 4 306 9418 [email protected]

KSA SALES TEAMcall center +800 123 4566 [email protected] [email protected] Director of Client Relationship Mazen Matraji +9661 279 8640 [email protected] Client Relationship Khalid S. Al-Bihlal +9661 279 8670 [email protected]

RESEARCH MANAGEMENTCairo General + 20 2 35 35 6140 UAE General + 971 4 363 4000 [email protected] Head of Research Wael Ziada +20 2 35 35 6154 [email protected] Head of Publ. and Distribution Rasha Samir +20 2 35 35 6142 [email protected]

DISCLOSURES We, Malak Youssef and Ahmed Gad, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities that are traded in The Egyptian Exchange. EFG Hermes Holding may own less than 1% of the securities that are the subject of this report.,

Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are the subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report.

DISCLAIMER This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement.

Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation to the clients of EFG Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

GUIDE TO ANALYSIS EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment.

Effective 16 December 2009, EFG Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential together with any applicable dividend yield into consideration.

In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value.

For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:

Rating Potential Upside (Downside) %

Buy Above 15%

Neutral (10%) and 15%

Sell Below (10%)

EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst’s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating.

COPYRIGHT AND CONFIDENTIALITY No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available.

CONTACTS AND STATEMENTS Background research prepared by EFG Hermes Holding SAE. Report prepared by EFG Hermes Holding SAE (main office), Building No. B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, P.O. Box 220, 12577 Egypt, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP 1,939,320,000.

Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it.

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