saudi building materials - riyad capital 2014_10_15...saudi building materials initiating coverage...

Santhosh Balakrishnan +966-11-203-6809 [email protected] Ahmed Al Fozan +966-11-203-6814 [email protected]

Saudi Building Materials

Focus on Mid-Caps

October 15, 2014

mailto:[email protected]


Saudi Building Materials Initiating Coverage Report

October 15, 2014 2

Executive Summary

Kingdom of Saudi Arabia (KSA) is the largest economy in the Middle East with 2013

nominal GDP of SAR 2.9 trillion and according to IMF estimates, real GDP is expected to grow at an average of 4.4% for 2014-17. IMF expects international oil prices to be steady in the range of US$ 90-95/bbl for 2014-17 upon absence of any political and macro headwinds. Such stable prices coupled with high production levels in excess of 10 million barrels/day are the key attributes that adds to KSA’s economic value proposition. The robust production levels and stable oil prices has led to large budget

surpluses and as % of GDP, the same is expected to average 12.5% through 2017 (as per IMF) aiding large spending on its future budgets.

Large spending focused budgets could result in government aiming to drive the construction sector with record project allocations. As per 2014 budget, KSA plans to spend SAR 855 billion and a large portion is allocated to the construction market. These economic factors are likely to create additional cushion and confidence in the

country’s economic growth prospects. We believe that KSA’s macro-economic fundamentals are supportive and provide comfort to equity investors who emphasize on top-down investment approach.

With this approach, we intend to shed more attention on KSA construction market, which is one of the largest contributors to its non-oil GDP. The construction market is expected to grow at robust growth rate during 2014-17 according to MEED. It expects

KSA’s total project awards to cross SAR 1.7 trillion over the next 3-4 years after a record spending exceeding SAR 1.2 trillion during 2007-13. Given the importance and its relation to other sectors, we have tried to analyze the key developments in the sector, through this report. The focus of our report is to establish the importance of construction sector in KSA’s economy along with investment potential in the building materials sector.

In this context of picking the fundamental companies in the first phase, we have initiated coverage on five companies in the building material sector. We recommend a Buy on Saudi Ceramics Company (SCC) and Bawan Company (Bawan), while we recommend a Hold on United Wire Factories (Aslak) and National Company for Glass Industries (Zoujaj) and a Sell on Saudi Arabian Amiantit Co (Amiantit).

The building materials segment is highly impacted by developments in the KSA

construction sector. As such, the key risk would be that of a slowdown in the construction cycle in the country primarily led by oil price volatility, liquidity concerns in banking sector, labor market regulations and overall change in income structure of Saudi citizens.


October 15, 2014 3

Recommendation Summary

Saudi Ceramics Company (SCC)

We initiate coverage on SCC and recommend a Buy owing to robust mix of capex plans and potential benefits from an uptick in the construction sector. SCC is the second largest manufacturer in GCC with ceramic capacity of 60 million m2. The conviction is supported by SCC’s planned capex additions in ceramics segment and entry in red bricks segment apart from doubling its sanitary production lines. Revenue is expected

to grow at 7.6% CAGR and EPS to grow at a CAGR of 10.8% for 2014-17E. We assign a 12-month target price of SAR 182 using a DCF method and the target price offers an upside of 27%. SCC trades at a P/E of 14.6x to our 2015E EPS estimates lower than its trailing P/E of 16.9x, offering 18% discount on a 1 year forward basis.

Bawan Company (Bawan)

We initiate coverage on Bawan with a Buy recommendation and assign a 12-month

target price of SAR 95, an upside of 30%. Bawan remains the major beneficiary of any uptick in KSA’s spending in construction and electrical sector due to its diversified product range catering to both sectors. The Company is a successful combination of 13 subsidiaries operating mainly in four segments with nearly 20+ product lines mainly focused in KSA, which contribute 90% of its revenue. We forecast revenue CAGR of 10.5% for 2014-17E and significant EPS CAGR of 10.9% over the next three years. We believe the stock has the make up to be a compelling Buy story.

United Wire Factories Company (Aslak)

We initiate coverage on ASLAK with a Hold recommendation and assign a 12-month target price of SAR 52, an upside of 9%. We believe the business is getting competitive especially on the steel rebar segments while costs are escalating due to inherent

volatility in international raw materials prices. Aslak is currently trading at a P/E of 17.7x to our 2014E EPS and 16.3x to our 2015E EPS estimates. We believe peers are trading at much lower valuations and any high target multiples in excess of index deemed over optimistic. However, the stocks offers 4.7% yield, which has remained consistent.

National Company for Glass Industries (Zoujaj)

We initiate coverage on Zoujaj with a Hold rating and a 12-month target price of SAR 46, suggesting upside of 7%. Large capex spending, significant margin expansion and revenue growth of 10.2% CAGR meets enough comfort for conviction but not supported by attractive valuation. Zoujaj after a stock rally of 73% over the last twelve months, trades at expensive levels with trailing P/E of 24.9x. This remains unjustified

when TASI is trading at 16.8x. We believe a rally upon absence of any large news flows is overly optimistic. The excess optimism does not warrant large valuation upside.

Saudi Arabia Amiantit Company (Amiantit)

We initiate coverage on Amiantit with a Sell recommendation and assign a 12-month target price of SAR 16, a downside of 11%. A volatile track record of earnings and near term concerns on the topline growth has led to the above assessment. We expect cost re-alignment to be a necessity at this point in order to support any gradual improvement in margins. The higher D/E ratio and compressing ROE has led to further weakening on its fundamental outlook. Amiantit with nearly 40+ subsidiaries and associates forms a complex structure for integration. At a P/E of 20.9x, Amiantit’s valuations are not supportive for a positive rating.

Saudi Ceramics Co. (SCC)

TASI Code 2040

Rating Buy

Current Price 142.81

Target Price 182.00

Upside to Target 27.4%

Bawan Co. (Bawan)

TASI Code 1302

Rating Buy

Current Price 73.12

Target Price 95.00


United Wire Factories Co. (Aslak)

TASI Code 1301

Rating Hold

Current Price 47.54

Target Price 52.00


National Co. for Glass Ind. (Zoujaj)

TASI Code 2150

Rating Hold

Current Price 43.15

Target Price 46.00


Saudi Arabian Amiantit Co.(Amiantit)

TASI Code 2160

Rating Sell

Current Price 17.94

Target Price 16.00

Upside to Target -10.8%


October 15, 2014 4

Table of Contents

Sector Outlook and Growth Indicators........................................................... 5

Saudi Ceramics Company……………………………………..…………..…….. 12

Overview…………………………………………………………..…...……......... 14

Financial Analysis........................................................................................ 15

Valuation……………………………………………………………………..…… 18

Summary Financials and Ratio’s……………………………………..… 23

Bawan Company………………………………………………………….…..……. 25

Overview…………………………………………………………..…………….... 27


Valuation……………………………………………………………………….… 36

Summary Financials and Ratio’s………………………………….…… 39

United Wire Factories Company……………………………………....…….. 42

Overview…………………………………………………………….…………..... 43

Financial Analysis....................................................................................... 44

Valuation…………………………………………………………………….…… 47

Summary Financials and Ratio’s……………………………….….…… 49

National Company for Glass Industries………………………….....…….. 51

Overview……………………………………………………………..………….... 52

Financial Analysis....................................................................................... 53

Valuation………………………………………………………………..…..…… 55

Summary Financials and Ratio’s……………………………...…….…. 57

Saudi Arabian Amiantit Company…………....………………..…….…….. 60

Overview…………………………………………………………..…….…..…..... 62


Valuation………………………………………………………………..……….. 66

Summary Financials and Ratio’s………………………………….…..… 69

Conclusion...……………………………………………………………………….... 71

Appendix...……………………………………………………………….………...... 72

Disclaimer…………………………………………...................................................... 75


October 15, 2014 5

Sector Overview

The Construction sector in KSA has achieved remarkable growth and accounts for

10% of GDP as of 2013 driven by the government’s initiatives to diversify away from a hydrocarbon based economy. The Ministry of Economy and Planning (MEP) targets construction-related government spending of SAR 863 billion by 2025 as per the guidelines devised in its strategic “Long term vision 2025” program. Some of the recent projects are large sized in nature; hence KSA is likely to witness large scale spending.

The construction market is categorized into i) Infrastructure, ii) Residential and iii) Commercial. Here are some key developments in each category.

Infrastructure sector caters mainly to government projects, run by ministries and Government Related Entities (GRE) such as Saudi Aramco and GOSI (General

Organization for Social Insurance). This segment accounts for 55% of the entire construction sector and are primarily large-scale developments in the form of roads, railways, ports, economic zones, public utilities and services. Some of the recent large projects are Riyadh Metro project amounting to SAR 87 billion and four Economic Cities costing nearly SAR 350 billion.

Table 1: Key Projects in KSA as of 2Q14

No. Proje c t Na me Se c tor SAR Bln

1 Riyadh Light Rail Transit (Riyadh Metro): Lines 1 & 2 Transport 35.4

2 Haramain High- Speed Rail Network: Phase 2 Transport 31.5

3 Riyadh Light Rail Transit (Riyadh Metro): Lines 4, 5 & 6 Transport 29.3

4 Riyadh Light Rail Transit (Riyadh Metro): Line 3 Transport 19.5

5 King Abdulaziz International Airport: Phase 1: New Terminal: Package 1 Transport 15.1

6 Housing Development: Phase 2 Construction 13.5

7 Abraj Kudai in Mecca Construction 13.1

8 Rabigh Power Plant Extension: Phase 6 Power 12.8

9 King Abdullah Project: Security Forces Medical Complex: Jeddah Construction 12.6

10 King Abdullah Project: Security Forces Medical Complex: Riyadh Construction 12.6

11 Shuqaiq Steam Power Plant Power 12.4

12 King Abdulaziz International Airport: Phase 1: New Terminal: Package 2 Transport 12.0

13 Jeddah South Thermal Power Plant Power 11.7

14 Haramain High- Speed Rail Network: Phase 1: Package 1 (Civil Works) Transport 10.8

15 Qurayyah IPP 1 & 2 Power 10.7

16 Grand Mosque Expansion in Mecca Construction 9.4

17 Yanbu Export Refinery: Gasoline Block: EPC 3 Oil 9.4

18 Jizan Refinery IGCC Power Plant: Combined Cycle Power Plant Power 9.4

19 Ras Al- Khair Power Plant Power 9.1

20 Housing Development: Phase 1 Construction 7.8

21 Ministry of Interior - Security Compound: KAP 1 Construction 7.6

22 Jizan Economic City: Steel Plant: Phase 2 Industrial 7.5

23 King Abdullah International Conference Center in Jeddah Construction 7.1

24 Jizan Refinery IGCC Power Plant: Offsites & Utilities Power 6.4

25 Jubail New Petrochemical Complex: Utilities&Offsites Chemical 6.2

26 Master Gas System EWG Loop 1 & Loop 2 P/L And EWG 1 to KAEC P/L Gas 6.2

27 Jeddah Economic City: Kingdom Tower Construction 6.1

28 Petro- Rabigh: Expansion of Rabigh Aromatics Complex (RP2): Phase 2 Chemical 5.6

29 Khobar Lakes Construction 5.6

30 Prophet Mosque Expansion in Medina Construction 5.6

31 Arabiyah - Hasbah Development Programme: Gas Processing Plant Gas 5.6

32 Arabiyah - Hasbah Development Programme: Sulphur Recovery Unit Gas 5.6

33 Aluminium Project: Ras Al- Khair Alumina Refinery Industrial 5.6

34 Yanbu Export Refinery: Offsite & Utilities: SP4 Oil 5.6

35 Yanbu Power Plant: Phase 3 Power 5.6

36 Medina Knowledge Economic City: Infrastructure Transport 5.6

Source: MEED

Riyadh Metro and four

large economic cities

are the much talked

about projects


October 15, 2014 6

Residential sector accounts for 31% and is primarily driven by the housing market estimated at SAR 50 billion as per SAMA (Saudi Arabian Monetary Agency). As per the latest census, the housing market has a current size of 4.65 million units for a

population size of 30 million (including non-Saudis), a penetration rate of 15%. However, this is deemed to be slightly lower as average household size ranges from 8-10 persons on a traditional basis which includes extended families. According to the MEP, KSA needs to spend SAR 1 trillion for construction of 2.4 million housing units by 2016 to meet the fast growing housing demand. The recent study by Jones Lang LaSalle (JLL) also suggested that the two most urbanized cities Riyadh and Jeddah’s

housing market is expected to grow at a 3.5% CAGR during 2014-16 to 1.9 million units of available supply showing the supply-demand gap of 0.5 million units.

Commercial segment caters to office space and buildings used for commercial purposes and accounts for roughly 14% of total construction sector. It aims to attract investment inflows to the country particularly in the non-oil sector. According to a recent survey by JLL, the combined real estate space in Riyadh and Jeddah is projected

to grow at a CAGR of 19% in office market, 10% in retail space for malls and 10% in hotel rooms between 2014-16.

Given the nature of construction in KSA, the sector drivers are classified as i) Fundamental indicators: GDP growth, population and per capita income levels of citizens in the country ii) Leading indicators: employment, demographics and credit expansion in real estate and iii) Lagging indicators: data on building permits, house

ownership, cement consumption and real estate developers activities. The sector is a direct beneficiary of favorable trends in above indicators, while ancillary segments enjoy a marginal share of growth.

Favorable economic and population growth trends

With rising GDP and large current account surpluses year after year, the country has comfortably absorbed expansionary budgets, which has fueled growth in construction sector. IMF (International Monetary Fund) expects KSA’s real GDP growth per annum to average 4.4% through 2017 and reach SAR 3.2 trillion. It also expects per capita GDP levels to grow at a CAGR of 2% during 2014-17 to reach SAR 101k.

Meanwhile Saudi population is expected to grow at 2.1% reaching 32.5 million in the

next three years. The per capita GDP points to the rising purchasing power while population growth depicts the needs for additional housing units, hence affordability combined with demand should drive supply.

Exhibit 1: GDP Growth and Current Account Surplus Exhibit 2: Population by Age Group

Source: IMF Source: IMF

7.4

% 8.6

%

5.8

%

3.8

%

4.1

%

4.2

%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2010 2011 2012 2013 2014E 2015E

Real GDP Growth Current Account Balance (% of GDP)

< 1912%

20 - 3437%

35 - 3914%

40 - 4411%

45 - 498%

50 - 5910%

> 607%

Fundamental indicators

to aid industry growth

over long term

Growth in population

and per capita GDP

largely supportive to

construction market


October 15, 2014 7

Supportive demographics

With 60% of the population below the age of 30, demand for housing units is sustainable. Two factors to consider include, a maturing population getting married

and starting families will demand living space. Second, the trend to move out of an extended family household is gaining traction. Affordable housing and possible shifts in preferences will help bridge the supply-demand gap. Adjusting to apartment style residential unit versus villa and proximity from city center expectations need to align to put home ownership within reach of a larger slice of the population. A study conducted by the Housing Ministry determined that 3 million housing units need to be

provided over the next ten years, however given the population growth rates, industry experts peg the need at five million units. The emphasis on higher education and job creation is expected to provide better trained entrants into the workforce. Salary demands will rise along with the purchasing power of young Saudis. Availability and uptake of mortgage financing will enable young families to target starter homes, similar to the pattern witnessed in developed economies

Credit uptake: Major indicator to watch

KSA’s construction credit has witnessed growth of 7% CAGR between 2008-13 to SAR 77 billion and could potentially rise by as much as 15% this year. The appetite for

funding mass projects and need for incremental housing among Saudi citizens has been the major driver for credit expansion in the sector. Overall, the construction sector enjoys 7% share of total credit with a current outstanding amount of SAR 81 billion. Labor initiatives to deport undocumented workers started in 2013 and exacted a toll on construction which is primarily staffed with foreigners. Consequently project delays hampered construction credit uptake. We believe labor-related issues are

gradually abating and the sector should get back on path for strong growth. The impact of Riyadh Metro will begin to surface as early as 4Q2014 as ground breaks and the project moves into development from design phase. Contractors will turn to lenders for working capital financing.

Exhibit 3: Nominal GDP Forecast Exhibit 4: Population Growth Forecast (mln)

Source: IMF Source: IMF

2.8 2.8

2.9 3

.0 3.1

3.2

92.0

94.0

96.0

98.0

100.0

2012 2013 2014E 2015E 2016E 2017E

GDP (SAR tln)

Per Capita GDP (SAR 000s)

29.2

30.0

30.6

31.2

31.9

32.5

2012 2013 2014E 2015E 2016E 2017E

Exhibit 5: Bank Credit (SAR bln) and Growth Exhibit 6: Construction Sector Credit (SAR bln) and Growth

Source: CDSI, SAMA Source: CDSI, SAMA

737

775

857 1,0

00

1,1

21

-3%

0%

3%

6%

9%

12%

15%

18%

2009 2010 2011 2012 2013

45

56

70 75 77

-24%

-16%

-8%

0%

8%

16%

24%

32%

2009 2010 2011 2012 2013

Credit expansion in the

construction sector to

fuel growth

Nearly 3 million

housing units required

over next 10 years


October 15, 2014 8

Real estate consumer loans on the rise

The Real Estate Development Fund (REDF) provides interest-free loans to Saudi citizens to build and own homes. The maximum loan amount was raised from SAR

300,00 to SAR 500,000 to meet the rising cost of real estate. Just in the past three years funding of REDF increased at 15% CAGR to SAR 117 billion. While between 2008-13, bank issued real estate loans jumped at 25% CAGR. The much anticipated Mortgage Law gained traction towards becoming reality in the past two years. Banks, although excited about the opportunity created by mortgage financing, see gradual climb in the coming years. From the lenders perspective, affordable housing supply

needs to enter the market before mortgages gain appeal for young families.

KSA witnessed a gradual rise in home ownership but still lags the ownership rates in

other countries. It is estimated that nearly 60% of 20 million citizens live in rented homes. The government is tackling such issues with affordable housing as costs become a concern in urban areas, driven by rising land prices. Consultancy firm, Colliers estimate the cost of a standard villa ranges between SAR 1800-2400/ M2, while a medium to premium would be in the range of SAR 3,050- 4,550/ M2. Some SAR 250 billion have been allocated for the construction of 500,000 homes across the

country. Government officials indicate that the housing scheme will continue irrespective of the economic environment suggesting the urgency to fill supply-demand gap.

Indicators on cement and building permits

The sector boasts favorable lagging indicators with growth rates across cement consumption, building permits and activities of real estate developers.

Cement consumption in the country has reached 43MT, while production remains at par with consumption, a positive on continued activity in cement sector.

Exhibit 7: REDF Funding (SAR bln)

Source: CDSI, SAMA

0

20

40

60

80

100

120

140

2009 2010 2011 2012 2013

Total Credit Disbursements

Exhibit 8: Occupancy by Dwelling Type

Source: CDSI

Traditional house

26%

Villa18%

A floor8%

A floor in traditional

house14%

Apartment41%

Other6%

Government supported

lending to provide

further boost to the

sector

Home ownership rates

set to increase

Lagging indicators

proves industry set to

witness robust growth

ahead


October 15, 2014 9

The real estate firm’s activities (revenue and profit trends) are on a gradual rise after a lull between 2009-11 following the credit crisis, which in turn signifies the comeback of the sector.

The building permits issued by authorities have registered double-digit growth rates during 2006-12 suggesting incremental developments in the construction sector. The number of permits issued in 2012 were 101K (10% CAGR from 55K in 2006).

The amount of development in terms of area has grown at a CAGR of 14% to 122.5 million m2 in 2012 from 55.4 million m2 in 2006.

Residential and commercial market forecast

As per the latest forecasts from JLL, the combined developments in KSA’s two major cities Riyadh and Jeddah are set to witness double digit growth rates during 2014-16. These two cities account for 70% of the country’s construction spending and 40% of total population. We re-iterate the importance of the sector with our sector focus charts (exhibits-10-17) giving a clear picture of the planned growth phase, KSA is likely to witness over the coming years. Over all the growth patterns are conclusive as well as attractive with large investment potential anticipated in the coming years.

Exhibit 9: Cement Production and Sales (mln tons)

Source: CDSI, Bloomberg

30 3

2 34

38

42 43

28

31 3

3

37

42 43

2008 2009 2010 2011 2012 2013

Cement Production

Cement Sales


October 15, 2014 10

Sector Focus Charts: Spending likely to be twice in 2016

Exhibit 10: Sectorwise Projects (SAR Bln) Exhibit 11: Break up by sector

Source: MEED Source: MEED

Exhibit 12: GCC Contract Awards (US$ Bln) Exhibit 13: Saudi Contract Awards (US$ Bn)

Source: MEED Source: MEED

Exhibit 14: Contract Awards Forecast-2014 (US$ Bln) Exhibit 15: Awarded (2007-12) Vs Planned (2013-17)

Source: MEED Source: MEED (Fig in US$ Mn)

Exhibit 16: Residential (Riyadh and Jeddah)-'000 Units Exhibit 17: Office Supply (Riyadh and Jeddah)-'000 M2

Source: JLL Source: JLL

135

128

122 1

45

140

128

110

115

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Industrials5%

Construction26%

Oil8%

Utilities20%

Transport41%

19

101

17

78

159

15

Ind

ust

rial

s

Co

nst

ruct

ion

Oil

Uti

litie

s

Tra

nsp

ort

Ga

s

38

32

31

55 59

69

51 54

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

4

32

11

30

55

33

Ba

hra

in

Ku

wa

it

Om

an

Qat

ar

KSA

UA

E

0

50

100

150

200

250

300

350

400

450

500

Bahrain Kuwait Oman Qatar KSA UAE

2007-12 2013-17

1,6

44

1,6

75

1,7

41

1,7

96

1,8

57

201

2

201

3

201

4

201

5

201

6

2,5

10

2,7

72

3,6

34

4,3

40

4,6

77

201

2

201

3

201

4

201

5

201

6

1,6

44

1,6

75

1,7

41

1,7

96

1,8

57

201

2

201

3

201

4

201

5

201

6

2,5

10

2,7

72

3,6

34

4,3

40

4,6

77

201

2

201

3

201

4

201

5

201

6

Saudi is the biggest

market among GCC in

terms of government

spending

Rail Projects accounted

for 30% of all awards

during 2013 with Riyadh

Metro being the highest

Saudi accounts for

roughly 30% of GCC

market with growth rate

of 21% during 2005-12

Among building and

construction,

Residential to witness

the biggest growth


October 15, 2014 11

Sector Valuations at a Glance

The KSA building and construction sector has 13 companies operating in a diverse

nature of business but primarily catering to the construction industry. Most of the companies operate in multi segments except Saudi Ceramics which primarily cater to the ceramics and sanitary segment. The sector valuations are mixed and incomparable fully with valuations over the last five years have exceeded an average of 21x P/E and traded at a premium to TASI P/E. Over the last 1 year, the trailing P/E has been high in the range of 25-26x. Most of the companies have mixed trends in earnings due to its

cyclical nature of business they operate and primarily mix of metals, ready mix, float glass etc. Our report currently considered companies with positive earnings and revenue trends and are primarily in the top end of mid caps space in excess of SAR 2 billion market capitalization.

The P/E multiples are inconsistent in certain scenario’s, while price/book and average average ROE metric on our universe stocks suggested ROE premium is prevalent in its multiples. Most stocks have a high ROE of 20% with lower debt component. However to conclude the sector valuations suggest most stocks command a P/E

multiple in excess of 20x and price/book of 2.5x

Table 2: TASI Building Materials Sector Stocks Trailing Multiples

Company Name

Price

(SAR)

Mcap

SAR

Mln

EV

SAR

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.Y

ld YTD

52 Wk-

Hi

(SAR)

52 Wk-

Lo

(SAR)

Saudi Ceramic 142.81 5,355 6,189 16.9x 3.4x 3.3x 3.8x 13.2x NM 28% 154.75 105.75

Zamil Industrial Investment Co 62.43 3,746 6,627 15.1x 2.2x 0.7x 1.1x 11.2x 1.3 44% 70.00 42.50

Baw an Co 73.12 3,656 4,270 20.6x 5.0x 1.3x 1.6x 15.0x 1.1 15% 85.00 36.00

Red Sea Housing Services Co 56.56 3,394 3,590 19.7x 3.8x 3.1x 3.5x 13.6x NM 55% 67.25 30.47

Abdullah A.M. Al-Khodari Sons 60.52 3,215 4,550 52.7x 3.9x 1.9x 2.3x 16.2x NM 84% 70.00 32.50

United Wire Factories Co 47.54 2,086 1,912 17.2x 4.4x 2.1x 1.5x 10.5x 0.7 34% 57.25 34.04

Saudi Arabian Amiantit Co 17.94 2,072 4,039 20.9x 1.4x 0.7x 1.4x NM 4.1 17% 20.50 13.95

Saudi Steel Pipe Co 35.60 1,816 2,163 37.8x 2.3x 2.2x 2.5x 23.9x NM 0% 41.30 29.40

Arabian Pipes Co 29.61 1,184 1,643 97.7x 1.7x 3.2x 4.1x 108.3x 3.0 22% 34.80 21.40

Middle East Specialized Cables 18.67 1,120 1,923 41.0x 2.2x 1.0x 1.8x 19.7x NM 36% 21.10 13.15

National Gypsum 34.48 1,092 1,064 77.8x 2.3x 15.0x 14.6x 34.0x NM 12% 44.00 28.60

Saudi Cable Co 12.49 949 2,196 NM 1.7x 0.5x 1.1x NM 3.6 (1%) 15.15 11.70

SIDC 20.16 806 722 19.5x 1.9x 2.6x 2.4x 24.2x 8.1 2% 24.95 16.00

Sector Median* 30,491 40,889 20.8x 2.3x 2.1x 2.3x 16.2x 3.0 80%

Source: Bloomberg, Market Cap and EV are total

Exhibit 18: TASI Building Materials Sector Trailing P/B to Historical 5 Year Average ROE

Source: Bloomberg

Amiantit

Red Sea

Saudi Steel Pipes

Baw an

National Gypsum

Aslak

SCC

SIDC

Zamil

Zoujaj

0%

5%

10%

15%

20%

25%

30%

1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x

5 Y

r A

vg

RO

E

P/B

TASI

Saudi Ceramics Company Initiating Coverage Report

Buy 12-month Target Price SAR 182

Capex Drives Conviction

We initiate coverage on Saudi Ceramics Company (SCC) with a Buy recommendation and assign a 12-month target price of SAR 182. Our view stems from its capex initiatives to meet the upturn in the Saudi construction cycle. SCC is on an expansion spree with capacity expansion (annual) of 4 million m2 in tiles, 18K metric tons (MT) in sanitary ware and entry into red bricks segment with 264K MT during 2014-15E. We believe such initiatives could transform SCC to be one of the major beneficiaries of KSA’s attractive housing and commercial market while participating in large government projects. We used a DCF valuation to arrive at our target price, while SCC’s trailing P/E of 16.9x is also cheap versus 17.4x for Al Anwar Ceramic Tiles (AACT) of Oman.

Highest realization in GCC and EPS CAGR of 10.8%

We forecast revenue growth at 7.6% CAGR for 2014-17E to reach SAR 2.2 billion signifying an above average industry growth. SCC has the highest ceramic realization among GCC peers during 2013 with SAR 23.1/ m2 compared to SAR 17.4/ m2 for AACT, which is a key positive. We believe the expansion plans are likely to bring in additional strength to manage competition. SCC’s geographical focus in Riyadh and Western region is growth supportive due to presence of large projects. The economies of scale upon expansion are expected to improve cost efficiency and boost EBITDA margins by +210 bps to 30.5% in 2017E. With such improvement in revenue and margins our EPS estimates are expected to register at 10.8% CAGR during 2014-17E.

SCC is well positioned in the industry being the largest manufacturer

The KSA ceramic tile market estimated at 300 million m2 by capacity with SCC commanding 20% market share and positioned as the largest manufacturer. Additionally, SCC has the largest share of net income among tile producers and has the second highest margins in GCC. SCC’s value chain progression proves fruitful with its backward and forward integration gaining traction and support SCC’s sales efforts. The industry is fragmented with majority of tiles imported from other Middle East countries, Europe and China. The key positives are the strong demand for housing driven by a robust demographics and income profile of citizens. We expect such fundamental drivers to support overall industry growth amid positive effects of government spending.

Valuation discount of 18% on 2015E P/E and 7% on replacement cost basis

On a forward P/E basis, earnings growth has resulted in a valuation discount of 18% to 2015E P/E of 14.6x from its trailing P/E. SCC, on a replacement cost basis is valued at adjusted EV/ m2 of SAR 89.2, lower than AACT at SAR 96.1/ m2 even though SCC is 4x larger than AACT by ceramics capacity. The consistent payout of 30% and dividend yield of 2.1% signifies a reasonable yield and retention ratio mix.

Key Financials

FY December 31 (SAR mln) 2013A 2014E 2015E 2016E

Revenue 1,601 1,776 1,917 2,063

EBITDA 469 504 550 604

Net Profit 309 338 368 408

EPS (SAR) 8.24 9.01 9.81 10.88

DPS (SAR) 3.00 3.00 3.50 4.00

BVPS (SAR) 40.57 46.58 53.39 61.29

ROAA 11% 12% 12% 12%

ROAE 22% 21% 20% 19%

P / E 17.4x 15.9x 14.6x 13.1x

P / B 3.5x 3.1x 2.7x 2.3x

P / S 3.3x 3.0x 2.8x 2.6x

EV/ EBITDA 16.2x 13.2x 12.2x 11.1x

EV/ Sales 3.9x 3.5x 3.2x 3.0x

October 15, 2014

Expected Total Return

Price as of Oct-13, 2014 SAR 142.81

Upside to Target Price 27.4%

Expected Dividend Yield 2.1%

Expected Total Return 29.5%

Market Data

52 Week H/L SAR 154.75/105.75

Market Capitalization SAR 5,355 mln

Enterprise Value SAR 6,189 mln

Shares Outstanding 37.5 mln

Free Float 72.0%

12-Month ADTV (000’s) 163.1

TASI Weight 0.4%

Reuters Code 2040.SE

Bloomberg Symbol SCERCO AB

1-Year Price Performance

Source: Bloomberg

SCC TASI TBMCI

Oct-13- 2014 142.81 10,378 4,538

Total Change

6-months 2.2% 10.1% 12.2%

1-Year 16.1% 30.0% 31.7%

2-Year 82.5% 55.3% 57.8%

Shareholding Structure

GOSI 16.4%

Khalid Saleh Al-Rajhi 6.2%

Public Investment Fund 5.4%

Public Float 72.0%

90

100

110

120

130

140

150

160

S O N D J F M A M J J A S OSCC TASI TBMCI


October 15, 2014 13 September 2, 2014

13

Valuation Snapshot

5-Year Valuation Trend

10

12

14

16

18

Aug

-09

Dec-0

9

Ap

r-10

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r-12

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-12

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r-13

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-13

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Ap

r-14

P/E Trend

P/E 3 Yr Avg 12M Avg

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

Aug

-09

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Dividend Yield Trend

Div.Yild 3 Yr Avg 12M Avg

Base Case

Assumptions

Our base case suggests a DCF valuation of SAR 182 with revenue CAGR of 6.8% and EPS CAGR of 8.4%

for forecast period, assuming a terminal growth rate of 1.75%. We assume capacity utilization to reach 98-

99% and remain stabilized and expect benefits of capacity addition to flow in from 2015 onwards leading to

margin expansion for subsequent two years.

Bear Case

Assumptions

Our bear case arrived a DCF valuation of SAR 133 with revenue CAGR of 3.3% upon delayed capex putting

pressure on utilization rates and volumes. We expect partial benefit of capex to derive post 2015. EBITDA

margins could face pressure because of lower utilization and associated costs during 2015-16. We have

assumed conservative terminal growth rate of 1.5% to derive this valuation.

Key Modeling Assumptions

Core

Forecasting

Assumptions

We base our revenue forecasts mainly on growth prospects of two segments, ceramics and water heaters.

Ceramics being the major segment; we forecast revenues of 6.8% CAGR by assuming capacity addition to

3.5 million m2

on average for 2016-19E and 1.8% growth in realization. The water heaters segment is

forecasted at 5.2% CAGR. On a group basis, the margin improvement to be gradual and aid growth of

+200 bps improvement in EBITDA margin through 2019. We expect salary costs to rise and distribution

costs to smoothen, while the resultant effect of revenue growth and cost control could lead to an EPS CAGR

of 8.4% between 2014-19E.

BBB -Bull-Base-Bear case approach on DCF valuation

Bull Case

Assumptions

Our bull case derives a DCF valuation of SAR 211 assuming revenue CAGR of 7.2% for 2016-19E and

terminal growth rate assumed at 2.5%. We have modeled higher growth in realization and 86 million m2

capacity by 2019E. Our key expectation is the higher cost benefits arising out of utilization and further cost

realignment leading to EPS CAGR of 9.1% for 2016-19E.

DCF Valuation Scenario Analysis Using Bear-Base-Bull Case Assumptions

133

17

1516

18211 6

12 211

Bear 2% CAGR in

realization

1% increase in

Opex to Sales

Terminal growth at

1.75%

Base 2.5% CAGR in

realization

1.5% inc in

Capex/Sales

Terminal growth at

2.5%

Bull

Valuation Method Fair Value Upside Comments

Discounted cash flow method (DCF) 181.85 27% Selected approach; intrinsic valuation meets current scenario

P/E valuation @15.0x 2015E EPS-historical range 147.21 (1%) Market yet to capture potential: re rating anticipated

EV/EBITDA valuation @9.0x 2015E EBITDA 154.17 8% Historical range makes no compelling valuation

Adopted-DCF Method 181.85 27% SAR 182- 12 month target price



14

Overview

Saudi Ceramics Comapny (SCC) established in 1977 and headquartered in Riyadh is the leading manufacturer of ceramic tiles in Saudi Arabia. Listed on Tadawul during 1993, SCC has a solid record of financial performance among listed companies. SCC has 3,300

employees and a paid-up capital of SAR 375 million (par value of SAR 10) with 37.5 million shares outstanding as of 1H2014.

SCC has eleven factories located in the Second Industrial City southeast of Riyadh, across an area of one million m2. The eleven factories include four tile production factories, one sanitary ware factory, two electrical water heaters factories, two frit plants, one grinding plant and one plastic products plant. SCC’s product lines are categorized as ceramic and

porcelain tiles, decorative tiles, tile accessories, sanitary wares, electric water heater and road markers. It has a current capacity of 60 million m2 in ceramics and 3.5 million units of sanitary ware products. SCC also advanced its capability on technology with new frit and grinding factories with a production capacity of 33K MT/year. It has an excellent distribution network with 30 retail stores in addition to diverse clientele of local and international contractors.

The Company is in the process of installing new production line for ceramic tile in its first factory and expected to be operational in 4Q14. It plans to add its second sanitary ware plant and expected to commence by 1H15. The pilot project on red brick production is also underway in Duhrma industrial city and scheduled to commence production by 1Q15.

Revenue comprises of 80% ceramic tiles and 20% from water heaters, while it sells

nearly 89% of its products locally and rest 11% through different markets in Middle East and Asia. The focus of its exports lies in water heaters business, with half of them sold outside KSA. On a group basis, Riyadh is the main region of its revenue contribution at 35%, followed by Western region with 28%, 26% to the rest of KSA and the remainder is exported.

SCC has a public float of 72% with General Organization for Social Insurance (GOSI) being

the major shareholder holding 16.4% followed by Khalid Saleh Al-Rajhi with 6.2% and Public Investment Fund (PIF) with 5.4%. SCC’s board is comprised of seven directors with relevant sub committees thus following good corporate governance standards. It has capable management team comprising of experienced professionals. SCC traded with average daily turnover of 163K shares and has TASI weight of 0.4%. The share price traded in a 52-week range of SAR 155 to SAR 106 returning 28%.

Share Capital (SAR mln) 375

Par Value per Share (SAR) 10

Shares Outstanding (mln) 37.5

Employees 3,300

TASI Code 2040

Saad Ibrahim Al-Moajel Chairman

Abdulkarim Al-Nafie CEO

Ali Saleh Al-Naim CFO

Key Data

Management

GOSI16.4%

Khalid Saleh Al-

Rajhi

6.2%

PIF5.4%

Public Float

72.0%



15

Financial Analysis

Capacity expansion to fuel revenue growth

We forecast revenue to grow at 7.6% CAGR between 2014-17 to reach SAR 2.2 billion. The key drivers being the ongoing capacity expansion plans aimed to meet robust

demand for ceramic tiles in KSA. SCC expects an upsurge in demand driven from housing market and commencement of large commercial projects. SCC expects to add up to 15 million m2 through 2017, despite doubling capacity in sanitary ware. We believe the ongoing capacity additions are likely to bring in economies of scale and restrict competitive pricing fears. We assume SCC has produced 58 million m2 of tiles for 2013 and expected to produce 73 million m2 by end of 2017. Assuming 99% utilization and

lower finished goods inventory levels, we believe SCC is able to sell 95% of the produced tiles every year. This could lead to a lower backlog; representing efficient inventory turnover with an average of 1.8 over the next three years. Our calculation on ceramic segment realization indicates SCC’s realization at SAR 23.1/ m2 as of 2013 and we expect this to reach SAR 24.9/ m2 by 2017. The growth rates align well with Saudi Building Materials index movement, which grew by 3.2% during 2010-2013 according to CDSI

data. However, considering the low cost of imports of Chinese tiles, we believe there could be a slight pressure over the medium term on pricing.

Riyadh region contribute 35% of revenue

We expect Riyadh region to be the major contributor of revenue and expect 9% CAGR during 2014-17 outpacing other regions. The Western region, remaining KSA and exports segment is forecasted to grow at 8%, 6% and 5% respectively through 2017. The

proximity to plants resulted in Riyadh region being the most advantageous compared to other regions. We believe the implications of add-on cost due to transportation, could limit realization levels to all regions except Riyadh

Exhibit 19: Revenue Forecasts (SAR Mln) Exhibit 20: Ceramic Production (Mln m2) and Realization (SAR/m

2)

Source: Company reports and Riyad Capital Source: Company reports and Riyad Capital

1,0

80

1,2

21

1,4

47

1,6

01

1,7

76

1,9

17

2,0

63

2,2

14

5%

10%

15%

20%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Revenue YoY

34 43 52 58

61

65

69

73

22

23

24

25

26

27

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Production Realization

Exhibit 21: Geographic Revenue contribution Exhibit 22: Product Segment Contribution (SAR Mln)


948

1,1

32

1,2

78

1,4

37

1,5

61

1,6

89

1,8

22273 3

16 323 3

39 356 374 392

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Ceramics Water heaters

31% 33% 35% 35% 35% 36% 37%

26% 28% 28% 28% 28% 29% 29%

30% 26% 26% 26% 26% 26% 25%

13% 13% 11% 11% 11% 11% 10%

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Riyadh West remaining KSA Exports

SCC is the second

largest tile producer

and has the highest

realization in GCC

Riyadh segment enjoys

proximity to plant

location



16

Ceramics contributes 80% of revenues

SCC, on the heed of double-digit revenue growth between 2009 and 2013, SCC’s management has exuded confidence in continued momentum. The growth was primarily led by capacity addition of 25 million m2 during 2009-12. The construction market witnessed an increase in resumption of stalled projects after 2008 crisis, which aided the demand. In our view, SCC might focus on acquiring more value chain if growth slowdown is witnessed over the next 3-4 years. We account such caution amid positives in to our forecasts and considering the market competition in future, we resort to conservative forecast of 8.2% CAGR between 2014-17 to reach SAR 1.8 billion for ceramics. Water heaters revenue is expected to grow at a CAGR of 5% during 2014-17 to reach SAR 392 million in 2017. The water heater segment is highly competitive in Saudi Arabia with

cheap imports from China and some of the Middle East producers. However, SCC exports 60% of its production in water heaters to neighboring markets.

Stable cost structure along with efficiency helps SCC to improvise margins

We forecast opex to grow at 7.4% CAGR during 2014-17. As a percentage of sales, opex would be in the range of 69-70% and reduced scope for any further upside. This is due to an improvement in plant efficiency as well as control over distribution costs. The availability of natural gas at concessional rates from the government proves to be the key benefit, while a pass through mechanism on freight costs and overall value chain integration limits risk of cost inflation. Salaries cost account for 9% of total opex, which we believe could increase to 10% in 2015 owing to slight Saudization pressure, as SCC’s production lines are labour intensive.

SCC’s gross profit is forecasted to reach SAR 809 million in 2017 primarily driven by the ceramic segment with an average of 86.9% contribution between 2014-17 versus average of 85.4% during 2010-13. The standalone ceramic segment gross margins is expected to average 38.2% between 2014-17, while the water heaters segment is expected to average 13.1%.

EBITDA margins to expand by +110 bps through 2017

Our EBITDA assumptions are projected to reach SAR 676 million in 2017 representing a

10.3% CAGR. SCC maintained a low volatility in EBITDA margins with variance of +40 bps during 2010-13. It witnessed a lull phase with EBITDA margins declining during 2010-12 from 29.7% to 26.6% in 2012, however the trend reversed to 29.3% in 2013. We forecast a gradual improvement in margins of +110 bps through 2017. The slight pressure on margins during 2014 is due to the higher D&A charges, in addition to labour issues encountered during since 2013.

Exhibit 23: Opex Forecasts (SAR Mln) Exhibit 24: Cost Structure (% of total cost) during 2013


860

980

1,1

92

1,2

72

1,4

21

1,5

30

1,6

34

1,7

33

5%

10%

15%

20%

25%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Total Opex YoY

COGS-Excl D&A

71%

D&A11%

Salaries9%

Freight6%

Others4%

Ceramics segment

contributed 87% of

gross profit during 2013

Capacity addition to be

gradual for 2014-17

unlike 2009-12



17

Steady net margins for 2014-15 followed by large pick up in 2016-17

SCC is expected to post a robust earnings growth with a 10.8% CAGR for 2014-17E to reach SAR 459 million. The outcome of our expectations has stemmed from effective cost control amid decrease in interest expense. The ceramics segment; which contributed 87% to the group net income, primarily supports the group’s earnings due to its high

margins. We forecast ceramic’s share of earnings at an average of 88% and margins at 21% between 2014-17. The water heaters segment should contribute the rest and average margins of 12% during 2014-17. We forecast a slight downfall of -50 bps in water heater margins for our forecast period. Over the forecast period, we forecast +150 bps increase in group margins to 20.7% in 2017.

We forecast EPS to reach SAR 12.24 in 2017 supported a steady growth during 2014-16.

The stable payout with DPS of SAR 3.00 for 2014 and SAR 3.50 for 2015 is satisfactory to its growth. The payout ratios averages 35% for 2014-17 and believe the retention cash flows are re-invested at much better yields to support growth.

Exhibit 25: EBITDA Forecasts (SAR Mln) Exhibit 26: EBITDA Margin Forecasts


321

362

385

469

504

550

604

676

5%

10%

15%

20%

25%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

EBITDA YoY

29.7

%

29.7

%

26.6

%

29.3

%

28.4

%

28.7

%

29.3

% 30.5

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Exhibit 27: Net Profit (SAR Mln) and Margin Forecasts Exhibit 28: Net Margin Forecasts


218

230

245 307

338

368

408 459

5%

10%

15%

20%

25%

30%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Net profit YoY20.2

%

18.8

%

16.9

%

19.2

%

19.0

%

19.2

%

19.8

% 20.7

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Exhibit 29: EPS Forecasts (SAR) Exhibit 30: DPS (SAR) and Payout Ratio Forecasts


2.4

0

2.5

0

2.5

0 3.0

0

3.0

0 3.5

0 4.0

0

4.0

0

30%

35%

40%

45%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Dividends Payout Ratio

5.8

2

6.1

3

6.5

4 8.1

8

9.0

1

9.8

1

10.8

8

12.2

4

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

SCC has the largest

share of net income

among GCC peers with

45% during 2013

Consistency in dividends

despite maintaining high

retention ratios for growth



18

SCC’s balance sheet structure intact and liquidity remains high

The ability to deleverage with D/E Ratio of 27% by 2017E gives it a flexible balance sheet, while average ROE of 18% for 2014-17 is rewarding despite deleveraging. SCC maintained an excellent capex/ sales ratio with an average of 20% between 2010-13 and intends to maintain at least 18% for 2014-17. Such level of capex/sales ratio is the highest among TASI building materials sector, which on an average ranges 5-6%, though incomparable. Additionally, the improving cash cycle is noteworthy highlighting its efforts in maintaining an efficient working capital cycle. The company maintains lower cash and equivalents to the tune of 3% of current assets, which denoted a tighter measure in cash management, as yields are lower in bank deposits, hence utilize its cash effectively for its operations.

3Q14E to be lower upon effect of slowdown in economic activity during Ramadan

SCC reported revenue of SAR 438 million in 2Q14 (+2% YoY and +3% QoQ) and net income of SAR 84 million (+2% YoY and -4% QOQ). Net margins were slightly lower by -140 bps to 19.2% in 2Q14 from 20.6% in 1Q14, but flat from 2Q13. We believe this could be due to slight opex pressure resulting labour issues and gradual downside effect on utilization. We expect a slight slowdown in 3Q14 owing to seasonal impact and slow business environment due to Ramadan, while 4Q14 would be a test stage for most of the new capacities. We forecast revenue of SAR 420 million in 3Q14E and SAR 485 million in 4Q14E, while our net income estimates are at SAR 78 million for 3Q14E and SAR 91 million in 4Q14E.

Valuation

We tested SCC’s valuation using various approaches such as discounted cash flow method (DCF), target P/E, EV/EBITDA method using historical and sector average. In our view, DCF would be appropriate due to its intrinsic value approach considering SCC’s growth in earnings and expansion. The other relative valuation parameters deemed less suitable for SCC, given the current valuation scenario. We have factored business risk and modeled our forecasts to nullify any probable anomalies to the extent possible.

#1: DCF valuation suggests fair value of SAR 181.85

The DCF method adopted a Bear-Base-Bull approach to stress test any possible upside/downside in cashflows for 2016-19E, while testing our assumptions to derive a range of fair values. The stress tests also evaluates key outliers in valuations such as the terminal growth rates, capex and revenue assumptions. We arrived at a fair value of SAR 181.85 for the stock using base case DCF.

Table 3: Quarterly projections (SAR Mln)

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Revenue 360 369 346 372 406 429 383 382 424 438 420 485

QoQ growth 11% 3% -6% 7% 9% 6% -11% 0% 11% 3% -4% 15%

EBITDA 92 96 92 107 125 124 111 110 128 119 117 139

QoQ growth 8% 5% -4% 16% 17% -1% -11% -1% 16% -7% -2% 19%

Net Income 63 63 56 66 82 82 72 73 87 84 78 91

QoQ growth 18% 1% -12% 19% 24% 0% -13% 2% 19% -4% -7% 16%

EPS (SAR) 1.67 1.69 1.48 1.76 2.19 2.19 1.91 1.95 2.33 2.24 2.08 2.42

EBITDA Margins 25.4% 26.0% 26.7% 28.8% 30.8% 29.0% 29.0% 28.9% 30.1% 27.2% 27.9% 28.7%

Net Margins 17.4% 17.2% 16.0% 17.8% 20.2% 19.2% 18.7% 19.2% 20.6% 19.2% 18.6% 18.7%

Source: Company Reports and Riyad Capital

3Q14E results to be

lower followed by

recovery in 4Q14E

Strong balance sheet

structure, superior

capex/sales ratio and

steady ROE are the key

highlights



19

We used a long-term growth rate of 1.75% and a beta of 0.8 in our model. Our risk-free rate assumption of 3.8% includes a premium for country risk over 10-year US risk-free rate of 2.4%. A cost of equity of 8.8% and an assumed cost of debt of 4.5% leads us to a WACC of 7.5% assuming a long-term capital structure of 70% equity and 30% debt weighting.

The terminal growth rate and WACC Sensitivity to valuation range tends to decrease an average of 4% on an increase of +20 bps in WACC assumptions. The valuation range increases by 5% on +25 bps increase in terminal growth rate.

Table 4: DCF Assumptions

Cost of Equity (Ke) Cost of Debt (kd)

Market Return (Rm) 10.3% Effective Intrest rate/ Yield on Senior Debt 4.5%

Risk Free Rate (Rf) 3.8% Tax Rate (%) 2.5%

Beta 0.8 Long Term Debt/Total Debt 48.2%

Market Risk Premium 6.5% Debt/Equity 0.6

Implied Cost of Equity 8.8% After Tax Cost of Debt 4.5%

WACC (Ko)

Market Value of Equity((E) 5,588

Market Value/Book Value of Debt (d) 874

Total Capital (d+e) 6,461

Long Term Capital Structure 70:30

Equity Weight 86%

Debt Weighting 14%

Weighted Average Cost of Capital (Ko) 7.5%

Source: Riyad Capital

Table 5: DCF Valuation Using Bear-Base-Bull Case Assumptions (SAR Mln)

Bear Case Base Case Bull Case

2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E

Revenue 452,606 458,881 1,912 1,984 2,055 2,127 2,063 2,214 2,346 2,466 2,184 2,338 2,517 2,688

% growth 1% 4.3% 3.8% 3.6% 3.5% 7.6% 7.3% 5.9% 5.1% 9.8% 7.0% 7.7% 6.8%

EBITDA 209,331 202,709 551 587 589 621 604 676 700 753 646 720 763 837

% growth 4.9% 6.6% 0.3% 5.4% 9.8% 12.0% 3.6% 7.5% 13.2% 11.4% 5.9% 9.7%

Net income 368 392 382 407 408 459 465 506 439 492 512 569

% growth 5.0% 6.4% -2.6% 6.5% 10.8% 12.6% 1.4% 8.8% 14.8% 11.9% 4.2% 11.2%

NOPLAT 108,456 113,257 388 413 408 433 429 481 494 536 461 515 542 601

Net adjustments in w orking capital, capex and D&A (162) (146) (206) (58) (152) (131) (94) (57) (179) (179) (274) (158)

Free cash flow to the firm 226 267 202 375 276 350 399 479 282 336 267 443

PV of FCFF 211 233 165 285 257 303 321 358 262 290 215 331

DCF metrics

Terminal value 6,218 8,428 10,067

PV of terminal value 4,727 6,303 7,529

Sum of PV of FCFF till terminal year 894 1,239 1,099

Value of the firm 5,621 7,542 8,628

Less: net debt (626) (723) (727)

Implied value of equity 4,995 6,819 7,901

No of shares outstanding (mln) 37.5 37.5 37.5

Fair value per share (SAR) 133.21 181.85 210.70


Table 6: Sensitivity Analysis of WACC and Terminal Growth Rate

Terminal Growth Rate

##### 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75%

6.9% 152 158 164 170 177 185 193 202 213 224 236 250 266 284 305 328

7.1% 148 154 159 165 172 179 187 195 205 215 227 239 254 270 288 310

7.3% 145 150 155 161 167 174 181 189 198 207 218 229 243 257 274 293

7.5% 141 145 150 156 161 168 174 182 190 199 208 219 231 244 259 276

7.7% 138 142 147 152 158 164 170 177 185 193 202 212 223 235 249 265

7.9% 135 139 143 148 154 159 165 172 179 187 195 204 215 226 238 253

8.1% 132 136 140 145 150 155 161 167 173 181 189 197 207 217 229 242

8.3% 129 133 137 141 146 151 156 162 168 175 183 191 199 209 220 232


W

AC

C

Terminal FCF multiple

of 17.6x is convincing



20

#2: Target EV mutlples suggest valuation of SAR 154.17

We tested EBITDA estimates by performing sensitivity on multiples ranging 8x-13X forward EBITDA based on bear, base and bull indicators. Our analysis suggests 9X forward EBITDA of 2015E to be appropriate in valuing SCC and derived a fair value of SAR 154.17

#3: Target P/E of 15.0x suggest valuation of SAR 147.21

We have valued SCC using target P/E method by valuing using a weighted average of a last 5 years deriving a multiple of 15.0x. We assigned the same to our 2015E EPS estimates to arrive at a valuation of SAR 147.21. We believe 2015E EPS would serve as a right direction to valuation due to its assumed completion of capex program and effect of new normal earnings.

Table 7: Price Sensitivity and Target EV/EBITDA Valuation using Bear-Base-Bull Case EBITDA Estimates

EV/EBITDA 2013A

Actuals Base Base Base Base

EBITDA

(SAR Mln) 469 494 504 511 525 550 571 551 604 646 587 676 720

8.0x 122.3 127.5 129.8 131.2 134.2 139.5 144.0 139.7 151.1 160.1 139.7 151.1 160.1

8.5x 128.5 134.1 136.5 138.0 141.2 146.8 151.6 147.0 159.1 168.7 147.0 159.1 168.7

9.0x 134.8 140.7 143.2 144.8 148.2 154.2 159.2 154.4 167.2 177.4 154.4 167.2 177.4

9.5x 141.0 147.3 150.0 151.6 155.2 161.5 166.8 161.7 175.2 186.0 161.7 175.2 186.0

10.0x 147.3 153.9 156.7 158.5 162.2 168.8 174.4 169.0 183.3 194.6 169.0 183.3 194.6

10.5x 153.5 160.5 163.4 165.3 169.2 176.2 182.0 176.4 191.3 203.2 176.4 191.3 203.2

11.0x 159.8 167.0 170.1 172.1 176.2 183.5 189.7 183.7 199.4 211.8 183.7 199.4 211.8

11.5x 166.0 173.6 176.9 178.9 183.2 190.8 197.3 191.1 207.4 220.4 191.1 207.4 220.4

12.0x 172.3 180.2 183.6 185.7 190.2 198.2 204.9 198.4 215.5 229.1 198.4 215.5 229.1

12.5x 178.5 186.8 190.3 192.5 197.2 205.5 212.5 205.8 223.5 237.7 205.8 223.5 237.7

13.0x 184.8 193.4 197.0 199.3 204.2 212.8 220.1 213.1 231.6 246.3 213.1 231.6 246.3

2014E 2015E 2016E 2017E

EBITDA Estimates (SAR Mln) 504 550 604 676

EV/EBITDA based valuation (SAR)

Valuation at last 5 year average of 12.6x 191.7 206.9 225.1 249.4

Based on MENA Median EV/EBITDA of 11.0x 170.1 183.5 199.4 220.6

Estimated valuation at EV/EBITDA of 9.0x 143.2 154.2 167.2 184.5


E

V/E

BIT

DA

Range (

x)

2014E 2015E

Bear Bull Bear Bull Bear Bull

2017E

Bear Bull

2016E

Valuation based on EV/EBITDA

Table 8: Price Sensitivity and Target P/E Valuation using Bear-Base-Bull Case EPS Estimates

2013A 2014E 2015E 2016E 2017E

Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull

EPS (SAR) 8.24 8.81 9.01 9.13 9.36 9.81 10.20 9.82 10.88 11.71 10.46 12.24 13.11

10.0x 82.4 # 88.1 90.1 91.3 93.6 98.1 102.0 98.2 108.8 117.1 104.6 122.4 131.1

11.0x 90.6 # 96.9 99.1 100.4 102.9 108.0 112.2 108.1 119.6 128.8 115.0 134.7 144.2

12.0x 98.9 # 105.8 108.1 109.5 112.3 117.8 122.4 117.9 130.5 140.5 125.5 146.9 157.3

13.0x 107.1 # 114.6 117.1 118.6 121.6 127.6 132.6 127.7 141.4 152.3 135.9 159.2 170.4

14.0x 115.4 # 123.4 126.1 127.8 131.0 137.4 142.8 137.5 152.3 164.0 146.4 171.4 183.5

15.0x 123.6 # 132.2 135.1 136.9 140.4 147.2 153.0 147.4 163.2 175.7 156.8 183.7 196.6

16.0x 131.8 # 141.0 144.1 146.0 149.7 157.0 163.2 157.2 174.0 187.4 167.3 195.9 209.7

17.0x 140.1 # 149.8 153.1 155.2 159.1 166.8 173.5 167.0 184.9 199.1 177.7 208.2 222.8

18.0x 148.3 # 158.6 162.1 164.3 168.4 176.7 183.7 176.8 195.8 210.8 188.2 220.4 235.9

2014E 2015E 2016E 2017E

Net profit estimates (SAR Mln) 338 368 408 459

EPS (SAR) 9.01 9.81 10.88 12.24

P/E based valuation (SAR)

Valuation at 5 year historical average of 14.7x 132.4 144.3 159.9 180.0

Based on a sector average of 18.7x 168.4 183.5 203.4 229.0

Our Estimated valuation at PER of 15.0x 135.1 147.2 163.2 183.7


P

/E R

ange(x

)

Valuation based on P/E

Scope for valuation

upside on the P/E front

once TASI re-rates to

the new levels



21

Valuations are specific to respective markets

SCC is the largest company by market capitalization with higher liquidity in the local market. It trades in the median range to regional trailing P/E multiples and lower to GCC peers except higher to RAK ceramics P/E of 10.1x, which is cheaper due to its earnings contraction amid low margins. The Egypt based tile producers are incomparable due to its nature of contribution from ceramic tiles. However, MENA peer group is valued lower at 16.9x when Global sector P/E multiples are trading at median of 23.1x. We refer to these multiples for comparison sake, as other regional multiples are incomparable and many of them do operate in multi segments unlike SCC.

In GCC, RAK Ceramics and SCC are the largest manufacturers with RAK Ceramics having the highest capacity of 117 million m2. Though it remains the highest, it operates at low utilization in the range of 65-70% and sells products in different countries due to capacity glut in UAE. Additionally the volatility in its margins due to the effect of currency makes RAK ceramics trail behind SCC by ceramics realization and lower share of net profit. However, AACT in Oman has the highest margins, though SCC is closer with 22% ceramic margins, which is above MENA pure-play weighted average of 17%. The Egypt based manufacturer’s have less than 50% contribution from ceramic tiles leading to low margins, hence incomparable.

Table 9: Global Comparables for SCC

Company Name Country

Price

(LCL)

EV

US$

Mln

Mcap

US$

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.

Yld YTD

52 Wk-

Hi

(LCL)

52 Wk-

Lo

(LCL)

MENA

Ras Al Khaimah Ceramics UAE 3.5 1,237 779 10.1x 1.1x 0.8x 1.3x 11.0x 3.9 23% 4.0 2.2

Saudi Ceramics Co. Saudi Arabia 142.8 1,650 1,428 16.9x 3.5x 3.4x 3.8x 13.2x 2.1 28% 154.8 105.8

EL EZZ Ceramics and Porcelain Egypt 9.6 88 68 12.0x 1.5x 0.7x 0.8x 5.0x 2.4 128% 11.5 3.0

Lecico Egypt SAE Egypt 10.6 201 119 54.1x 1.0x 0.5x 0.9x 3.8x 5.2 22% 12.2 8.0

Al Anw ar Ceramic Tile Co Oman 0.6 359 364 17.4x 3.8x 5.3x 5.3x 13.9x 3.3 2% 0.6 0.5

Americas

Portobello SA Brazil 4.9 452 315 8.8x 3.7x 0.9x 1.2x 7.0x 2.0 (1%) 5.5 4.1

Internacional de Ceramica SAB Mexico 32.7 529 396 31.5x 2.2x 0.8x 1.0x 9.3x 1.5 14% 32.7 28.0

Grupo Lamosa SAB de CV Mexico 26.4 1,085 738 15.2x 1.6x 1.0x 1.5x 9.0x 1.0 (7%) 28.7 23.8

Armstrong World Industries Inc United States 55.2 3,993 3,030 24.2x 4.1x 1.1x 1.5x 11.6x NM (4%) 61.9 48.4

Quanex Building Products Corp United States 17.8 533 666 196.3x 1.5x 0.8x 0.6x 8.7x 0.9 (11%) 21.4 16.5

Builders FirstSource Inc United States 5.4 845 525 23.1x 21.4x 0.3x 0.7x 16.3x NM (25%) 9.4 5.1

Europe

Rovese SA Poland 1.4 577 333 NM 0.7x 0.6x 1.0x 7.7x NM (35%) 2.5 1.2

James Halstead PLC UK 294.0 920 983 19.3x 6.7x 2.7x 2.8x NM 3.4 (6%) 343.8 260.0

Asia

Dynasty Ceramic PCL Thailand 57.5 751 724 19.2x 8.7x 3.2x 3.4x 13.4x 4.7 18% 61.5 48.0

Union Mosaic Industry PCL Thailand 7.3 252 188 146.0x 3.6x 1.8x 2.0x 36.2x 1.5 10% 13.4 5.5

Thai-German Ceramic Industry Thailand 3.4 179 177 22.5x 1.9x 2.1x 2.0x 13.2x 1.6 10% 3.9 2.8

Shanghai CIMIC Tile Co Ltd China 7.4 634 529 193.2x 4.2x 3.5x 3.7x NM NM 12% 7.8 5.5

Keramika Indonesia Assosiasi Indonesia 149.0 166 183 37.1x 1.1x 2.3x 2.0x 10.0x 1.0 (4%) 190.0 110.0

Kajaria Ceramics Ltd India 646.2 836 790 38.7x 9.2x 2.6x 1.6x 10.3x 0.5 107% 690.1 214.1

Median/Total

Global 14,048 11,556 23.1x 3.5x 1.4x 1.6x 10.2x 1.8 3%

MENA 3,536 2,758 16.9x 1.5x 0.8x 1.3x 11.0x 3.3x 72%

Americas 7,436 5,670 23.6x 2.9x 0.9x 1.1x 9.2x 1.3 (7%)

Europe 1,497 1,316 19.3x 3.7x 1.7x 1.9x 7.7x 3.4 (16%)

Asia 2,817 2,591 37.9x 3.9x 2.5x 2.0x 13.2x 1.5 30%

US 5,370 4,221 24.2x 4.1x 0.8x 0.7x 11.6x 0.9x (8%)

Source: Bloomberg

Table 10: MENA Comparables (US$ Mln)

Company Country

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Ras Al Khaimah Ceramics UAE 1,027 908 908 863 957 65 74 56 61 77 6% 8% 6% 7% 8%

Saudi Ceramics Saudi Arabia 255 288 326 386 427 53 59 62 66 83 21% 20% 19% 17% 19%

Al Anw ar Ceramic Tile Co Oman 41 44 48 58 69 13 14 15 17 20 31% 31% 31% 29% 30%

Al Maha Ceramics Oman NA 6 9 10 11 NA 0 1 2 3 NA NA 2% 11% 24%

EL EZZ Ceramics and Porcelain Egypt 58 73 73 91 90 0 (0) (5) 1 3 0% -1% -6% 2% 4%

Lecico Egypt SAE Egypt 190 181 163 211 218 20 17 (3) 10 (3) 10% 9% -2% 5% -1%

Source: Company Reports and Bloomberg

Revenue Net Profit Net Margins

MENA region has the

lowest median P/E

multiple of 16.9x among

global peers



22

Risks to valuation

The key risks would be the anticipated delay in the capacity additions or any issues with

the test stage of new production lines. Additionally, the crackdown in undocumented workers has resulted in projects being stalled during 2013, which had a direct impact on construction sector leading to lower demand for ceramic products. The availability of natural gas or any impact in pricing on concession agreements would have an effect on raw material costs. impact of any environment claims related to mining licenses could also have a downside impact on our forecasts.

Exhibit 31: 5 Year Price Multiples Trading History

Source: Bloomberg

2.0

2.5

3.0

3.5

4.0

4.5

Aug-0

9

Dec-

09

Apr-

10

Aug-1

0

Dec-

10

Apr-

11

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

Price to Book

P/B 3 Yr Avg 5 Yr Avg YTD Avg

Last 5Y:Avg: 3.1x

High: 4.0xLow : 2.0x

Last 3Y:Avg: 3.0x


Last 1Y:Avg: 3.3x


1.8

2.3

2.8

3.3

3.8

Aug-0

9

Dec-

09

Apr-

10

Aug-1

0

Dec-

10

Apr-

11

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

P/Sales Ratio

p/s 3 Yr Avg 5 Yr Avg YTD Avg

Last 5Y:Avg: 2.8x


Last 3Y:Avg: 2.7x


Last 1yAvg: 3.0x

High: 3.5xLow :2.5x

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

Aug-0

9

Dec-

09

Apr-

10

Aug-1

0

Dec-

10

Apr-

11

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

EV/EBITDA Ratio

EV/EBITDA 3 Yr Avg 5 Yr Avg YTD Avg

Last 5Y:Avg: 12.6x


Last 3Y:Avg: 12.0x


Last 1Y:Avg: 12.8x


2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Aug-0

9

Dec-

09

Apr-

10

Aug-1

0

Dec-

10

Apr-

11

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

EV/Sales Ratio

EV/Sales 3 Yr Avg 5 Yr Avg YTD Avg

Last 5Y:Avg: 3.5x


Last 3Y:Avg: 3.3x


Last 1Y:Avg: 3.5x

High: 3.9xLow :3.0x

Exhibit 32: Share Price and P/E trading bands at various multiple levels


25

50

75

100

125

150

175

Jul-0

7

Sep-0

7

Nov-0

7

Jan-0

8

Ma

r-0

8

Ma

y-08

Jul-0

8

Sep-0

8

Nov-0

8

Jan-0

9

Ma

r-0

9

Ma

y-09

Jul-0

9

Sep-0

9

Nov-0

9

Jan-1

0

Ma

r-1

0

Ma

y-10

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Ma

r-1

1

Ma

y-11

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2

Ma

r-1

2

Ma

y-12

Jul-1

2

Sep-1

2

Nov-1

2

Jan-1

3

Ma

r-1

3

Ma

y-13

Jul-1

3

Sep-1

3

Nov-1

3

Jan-1

4

Ma

r-1

4

Ma

y-14

Jul-1

4

Sep-1

4

Actual Price Price @ 10.0x P/E Price @ 12.0x P/E Price @ 14.0x P/E Price @ 16.0x P/E Price @ 18.0x P/E Price @ 20.0x P/E

Most multiples trades

above long term

averages since 2014

SCC witness new P/E

bands since 2012 and

over the last 2 years

stock price rallied by

+83%



23

Summary Financials and Ratios

Table 11: Financial Projections Summary (SAR Mln)

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Profit& Loss Statement

Revenue 1,080 1,221 1,447 1,601 1,776 1,917 2,063 2,214

COGS (686) (782) (973) (1,021) (1,135) (1,217) (1,316) (1,405)

Gross Profit 394 440 474 579 641 700 747 809

SG&A (174) (198) (219) (251) (286) (313) (318) (328)

Operating Profit 220 242 256 329 355 387 429 481

Net Financing Income(Cost) (9) (17) (16) (12) (16) (16) (16) (16)

Others/One-off items 13 13 15 (1) 8 7 6 6

Profit before Tax 225 237 254 316 347 378 419 471

Income Tax (6) (7) (9) (7) (10) (10) (11) (12)

Net Profit 218 230 245 309 338 368 408 459

EBITDA 321 362 385 469 504 550 604 676

EPS (SAR) 5.82 6.13 6.54 8.24 9.01 9.81 10.88 12.24

DPS (SAR) 2.40 2.40 2.50 3.00 3.00 3.50 4.00 4.00

Margins

Gross Margins 36.5% 36.0% 32.8% 36.2% 36.1% 36.5% 36.2% 36.5%

EBITDA Margins 29.7% 29.7% 26.6% 29.3% 28.4% 28.7% 29.3% 30.5%

Operating Margins 20.4% 19.8% 17.7% 20.5% 20.0% 20.2% 20.8% 21.7%

PBT Margins 20.8% 19.4% 17.5% 19.7% 19.6% 19.7% 20.3% 21.3%

Net Margins 20.2% 18.8% 16.9% 19.3% 19.0% 19.2% 19.8% 20.7%

Balance Sheet

Cash and Equivalents 39 64 57 42 41 38 34 35

Short Term Investments 65 57 106 123 123 123 123 123

Inventories 425 535 598 610 624 657 711 773

Receivables 100 136 132 148 151 153 144 155

Current Assets 629 793 893 922 939 972 1,012 1,086

Plant Property and Equipment 1,054 1,138 1,288 1,359 1,519 1,708 1,937 2,170

Investments-Long Term 259 338 365 524 529 539 547 572

Non current Assets 1,313 1,476 1,653 1,883 2,048 2,247 2,484 2,742

Total Assets 1,941 2,269 2,546 2,806 2,987 3,218 3,497 3,828

Short Term Debt 330 355 333 452 439 417 396 376

Payables and Others 148 265 273 350 340 359 380 400

Current Liabilities 479 620 607 803 779 775 776 776

Long Term Debt 430 454 570 421 400 380 361 343

Others 38 48 52 60 60 60 60 60

Non-Current Liabilities 468 502 622 482 461 441 422 404

Total Liabilities 947 1,122 1,229 1,285 1,240 1,216 1,198 1,180

Shareholders Equity (SE) 994 1,147 1,317 1,521 1,747 2,002 2,299 2,648

Total Liabilities & SE 1,941 2,269 2,546 2,806 2,987 3,218 3,497 3,828

Common Size Balancesheet

Current Assets 32% 35% 35% 33% 31% 30% 29% 28%

Non Current Assets 68% 65% 65% 67% 69% 70% 71% 72%

Current Liabilities 25% 27% 24% 29% 26% 24% 22% 20%

Total Iiabilities 49% 49% 48% 46% 42% 38% 34% 31%

Shareholders Equity 51% 51% 52% 54% 58% 62% 66% 69%

Cashflow

Net Operating Cashflow 179 350 297 481 489 488 528 574

Net Investing Cashflow (172) (285) (310) (372) (342) (336) (379) (424)

Net Financing Cashflow (4) (40) 6 (125) (147) (154) (152) (150)

Net Change in Cash 3 25 (7) (16) (1) (3) (4) 0

Cash (Opening) 36 39 64 57 42 41 38 34

Cash (Closing) 39 64 57 42 41 38 34 35

Source: Company reports and Riyad Capital



24

Table 12: Ratio Analysis Summary

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Valuation

P/E 24.5x 23.3x 21.8x 17.3x 15.9x 14.6x 13.1x 11.7x

P/B 5.4x 4.7x 4.1x 3.5x 3.1x 2.7x 2.3x 2.0x

P/S 5.0x 4.4x 3.7x 3.3x 3.0x 2.8x 2.6x 2.4x

P/CF 30.0x 15.3x 18.0x 11.1x 11.0x 11.0x 10.1x 9.3x

EV/EBITDA 22.0x 18.9x 16.9x 16.2x 13.2x 12.2x 11.1x 10.1x

EV/Sales 5.6x 5.0x 4.2x 3.9x 3.5x 3.2x 3.0x 2.7x

Dividend Yield 1.7% 1.8% 1.8% 2.1% 2.1% 2.5% 2.8% 2.8%

Per share (SAR)

EPS 5.82 6.13 6.54 8.23 9.01 9.81 10.88 12.24

DPS 2.40 2.50 2.50 3.00 3.00 3.50 4.00 4.00

BVPS 26.51 30.58 35.12 40.57 46.58 53.39 61.29 70.57

Sales per share 28.80 32.57 38.60 42.68 47.36 51.11 55.01 59.04

OCF/Share 4.76 9.33 7.93 12.83 13.03 13.00 14.08 15.31

ICF/Share (0.11) 2.02 0.33 2.97 3.90 4.05 4.02 4.13

FCF/Share (0.11) (0.34) (2.05) 0.43 0.90 1.05 1.02 1.13

Capex

Capex/Sales 17% 23% 20% 23% 19% 17% 18% 18%

Capex/Depreciation 183% 229% 222% 267% 226% 200% 212% 205%

Liquidity

Cash Ratio 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0

Current Ratio 1.3 1.3 1.5 1.1 1.2 1.3 1.3 1.4

Quick Ratio 0.4 0.4 0.5 0.4 0.4 0.4 0.4 0.4

Cash Cycle

Inventory Turnover 1.8 1.6 1.7 1.7 1.8 1.9 1.9 1.9

Accounts Payable Turnover 7.8 7.3 5.5 4.5 4.5 4.8 4.9 4.9

Receivables Turnover 10.8 9.0 10.9 10.8 11.8 12.5 14.3 14.3

Inventory Days 208 224 213 216 198 192 190 193

Payable Days 47 50 66 81 81 76 74 74

Receivable Days 34 41 33 34 31 29 26 26

Cash Cycle 195 215 180 168 149 146 141 144

Risk Ratio

Pay out Ratio 41% 41% 38% 36% 33% 36% 37% 33%

Net Interest Cover 4% 7% 6% 4% 5% 4% 4% 3%

Net Debt/EBITDA 225% 205% 220% 177% 158% 138% 120% 101%

Returns Ratio

ROAA 11.7% 10.9% 10.2% 11.5% 11.7% 11.9% 12.1% 12.5%

ROAE 23.6% 21.5% 19.9% 21.8% 20.7% 19.6% 19.0% 18.6%

ROIC 12.5% 12.4% 11.5% 13.7% 13.7% 13.8% 14.0% 14.3%

DUPONT Analysis

Total Asset to Equity 1.95 1.98 1.93 1.84 1.71 1.61 1.52 1.45

Net Income/Sales 0.20 0.19 0.17 0.19 0.19 0.19 0.20 0.21

Sales/Total Assets 0.56 0.54 0.57 0.57 0.59 0.60 0.59 0.58

Dupont ROE 22.0% 20.0% 18.6% 20.3% 19.3% 18.4% 17.7% 17.4%

Cash Flow Ratio's

Cashflow to Revenue 0.17 0.29 0.21 0.30 0.28 0.25 0.26 0.26

Cashflow to EBITDA 0.56 0.97 0.77 1.03 0.97 0.89 0.87 0.85

Cash return on assets 9.2% 15.4% 11.7% 17.2% 16.4% 15.2% 15.1% 15.0%

Cash return on equity 18.0% 30.5% 22.6% 31.6% 28.0% 24.4% 23.0% 21.7%


Bawan Company Initiating Coverage Report

Buy 12-Month Target Price SAR 95

Diversified Business Limits Downside

We initiate coverage on Bawan with a Buy recommendation and assign a 12-month target price of SAR 95, suggesting an upside of 30%. Revenue and earnings growth of 10.5% and 10.9% CAGR for 2014-17E is attractive coupled with forward ROE average of 21%. Dividend yield of 3.5% with 44% retention ratio for 2014-17 satisfies reinvestment needs and income distribution. On the valuation front, the trailing P/E of 20.6x is justified, when sector trades at 27.2x. The market has re-rated the stock to higher levels over a span of 9 months with stock rallying by +106% since listing. The top-down study suggests Bawan to be one of the major beneficiary of any upcycles in the KSA construction sector while diversification through other segments is noteworthy. It is a successful combination of 13 subsidiaries managing nearly 20+ product lines highlighting the management efficiency. We rely on such positives and believe the investment case proves to be realistic for a compelling Buy story.

Positioning for next spending cycle

We expect revenues to reach at SAR 3.9 billion in 2017 owing to steady growth rates across all segments. The largest contribution from metals is likely to support topline, while electrical is the key contributor of margins. EBITDA margins are set to expand by +70 bps in 2017 to 10.3% after a transitory phase during 2015-2016. Bawan with increasing production trend should witness high utilization levels for 2014-17 with capacity peaking in 2017. This would lead to the next spending cycle and boost momentum which we account in our intrinsic valuation.

Diversification is noteworthy

The target industry is the construction sector coupled with electrical sector, which accounted for 15% of GDP on a combined basis. This implies the robust performance these sectors will enjoy on continuing large scale economic activity in the country. The construction market is likely to gain large momentum with Bawan’s product lines catering mainly to suppliers and users who prefer backward integration. The Company is currently expanding its electrical and concrete business, which we believe is an appropriate strategy since the market is witnessing steady growth with expectations of a large pick up.

Valuation good on intrinsic basis, relative valuation should subside

Bawan trades at 17.6x to 2015E EPS offering slight discount to weighted sector P/E of 18.7x which remains justified due to growth. However we have relied on the DCF method to derive our 12-month target price. The capability to improve utilization and any initiatives on this front will have necessary adjustment towards our topline estimates. The consistency in dividends with an expected DPS of SAR 2.20 in 2014 and SAR 2.50 in 2015 is attractive with yield of 3.2% average. This coupled with stability in margins going forward should augment our positive view. We recommend a Buy.

Key Financials


Revenue 2,448 2,890 3,148 3,480

EBITDA 276 277 293 319

Net Profit 168 199 208 230

EPS (SAR) 3.36 3.98 4.15 4.60

DPS (SAR) 2.20 2.20 2.50 2.50

BVPS (SAR) 15.39 17.20 18.90 20.94

ROAA 9.7% 10.1% 9.7% 10.0%

ROAE 23.1% 24.4% 23.0% 23.1%

P / E 21.8x 18.4x 17.6x 15.9x

P / B 4.8x 4.3x 3.9x 3.5x

P / S 1.5x 1.3x 1.2x 1.1x

EV/ EBITDA 21.4x 15.3x 15.2x 14.3x

EV/ Sales 1.7x 1.5x 1.3x 1.2x






Market Data

52 Week H/L SAR 85.40/36.00




Free Float 39.5%

9M ADTV (000’s) 1,209.5

TASI Weight 0.1%


Bloomberg Symbol BAWAN AB

Price Performance (since listing)

Source: Bloomberg

Bawan TASI TBMCI

Oct-13- 2014 73.12 10,378 4,538

Total Change

6-months 16.9% 10.1% 12.2%

1-Year NA 30.0% 31.7%

2-Year NA 55.3% 57.8%


Atheel Holding Company 46.6%

Maaly Holding Co. 9.0%

Azdan Arabic Commercial 4.9%

Public Float 39.5%

100

125

150

175

200

225

250

D J F M A M J J A S

Bawan TASI TBMCI

October 15, 2014



26

Valuation Snapshot

Valuation Trend Since Listing

14.0

16.0

18.0

20.0

22.0

24.0

Dec-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-14

Ap

r-14

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

P/E Trend

P/E 3 M Avg 6M Avg

2.5

3.0

3.5

4.0

4.5

Dec-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-14

Ap

r-14

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Dividend Yield

Div.Yild 3 M Avg 6M Avg

Base Case

Assumptions

Our Base case derive a valuation of SAR 95 with a revenue CAGR of 7.3% and EPS CAGR of 11.1% for

forecast period, assuming a terminal growth rate of 2%. We have modeled lower capex for 2018-19E and

aid FCF growth, while our revenue assumptions are based on moderate growth rates in 2014-15 and

slightly higher for 2016-17.

Bear Case

Assumptions

Our Bear case suggested a valuation of SAR 75 with revenue CAGR of 5.7% and assumptions are based

on slow pick up in construction activity leading to lower volume growth amid a price de-growth. We expect

higher raw material costs to bring in volatility in cost structure especially the Metals segment. We forecast

EPS CAGR of 8.1% with expected growth to slow down in 2016-19E and slight improvement in 2017E.


Core

Forecasting

Assumptions

Our revenue assumptions are based on growth in volumes and realization resulting in segment level

revenue forecasts. We believe Bawan with spare capacity levels can adjust production accordingly with

demand and believe capacity utilization to increase after 2015. The appropriate levels of capacity utilization

across each segments are considered. We believe Bawan is likely to improve its margins on cost control

and drive its high margin products such as Electrical. The uptick in the sector is likely to drive demand for

Bawan’s products primarily metals and concrete, which accounts for 50% of revenue.


Bull Case

Assumptions

Our Bull case derive a valuation of SAR 117 with revenue CAGR of 8.5% for 2016-19E and terminal growth

rate assumed at 2.5%. We modeled high growth in volumes during 2015-17 with a reasonable

improvement in realization and assume metals to have high volume growth, with electrical to support on

margins. Our key expectation is the better cost benefits leading to an EPS CAGR of 12% for 2016-19.


75

97

495

98

5117

Bear 5% CAGR in

group realization

10% increase in

utilization ratio

Terminal growth at

2%

Base 8% CAGR in

group realization

15% increase in

utilization ratio

Terminal growth at

2.5%

Bull


Discounted cash flow method 95.25 30% We believe intrinsic valuation would be apt

Sum of the parts (SOTP) method 93.25 28% Peer multiples not suitable for valuing segments

Target P/E valuation @18.7x 77.68 (3%) Trading history is limited, hence target P/E not appropriate

Adopted: DCF valuation 95.25 30.3% Selected method is DCF; sanity checks provides direction



27

Overview

Bawan Company (Bawan) emerged out of a joint venture between Al-Muhaidib and

Niedermeier & Weibel Company Ltd, established in 1980. Later Niedermeier & Weibel Company Ltd sold their shareholding of 30% to Al-Muhaidib group in 1987. After a series of shareholder churn within Al Muhaidib Holding, the promoter group sold 40% of their shareholding to Al Fozan Holding during 2008. With the entry of Al Fozan Holding, both groups with decades of operational experience in KSA decided to expand strategically. They merged and restructured some of the group’s key businesses under one holding

company and renamed it Bawan Co. Listed on Tadawul during 2013, the Company has a paid-up capital of SAR 500 million (par value of SAR 10 per share) with 50 million shares outstanding. The Company employs 2,810 personnel across KSA and Middle East.

It supports its clients with their backward integration needs and has nearly 13 subsidiaries operating in different product lines with nine subsidiaries located in Riyadh, while the rest are across the Middle East. The Company operates mainly in KSA deriving

90% of revenues locally and the rest 10% from Middle East. The key segments are metals, woods, electrical and concrete. Metals accounted for 42% of the revenue as of 2013 followed by woods with 24%, while electrical contributed 27% and the rest is concrete with 7%. The major product lines are steel cutting and bending, wire drawing, mesh, wood packaging items, laminated panels, wood joinery items, electrical transformers, substations, low voltage panels, ready mix concrete and pre-cast panels.

Bawan has plans to expand its production capacity during 2016 in electrical segment mainly increasing its transformers production to cater to utility companies apart from SABIC and Aramco. It also plans to expand its pre-cast factory and establish a new site for the ready-mix concrete factory in Jeddah during 2015.

Atheel Holding Company is the major shareholder with 46.6% followed by Ma’aly Holding Company with 9.1% and Azdan Arabic Commercial with 4.9%. The board is comprised of nine directors and the chairman is Abdullah Al Fozan who controls Atheel Holding Company. It traded with average daily volumes of 1.21 million shares for last nine months and comprises TASI weight of 0.1%. Bawan listed on Tadawul in December 2013, and touched a high of SAR 85 and low of SAR 36 with YTD return of 15%.

Atheel Holding

Company

46.6%

Maa'ly Holding

Co.

9.0% Azdan Arabic

Commerci

al

4.9%

Public Float

39.0%



Shares Outstanding (mln) 50

Employees 2,810

TASI Code 1302

Abdullah Al Fozan Chairman

Eng. SulaimanAbu Lehyah CEO

Mohammad Al Balawi CFO

Key Data

Management



28

Financial Analysis

Growth favoring all segments

Projected group revenue CAGR of 10.5% during 2014-17 is driven by stellar performance across segments aided by optimal mix in volume and price. As construction sector picks up in KSA, we believe metals and concrete are likely to benefit at first. Largely convincing is the expected 11.5% CAGR in revenue for metals during 2014-17 to SAR 1.7 billion. Despite high competition, concrete is projected to witness 8.0% CAGR reaching SAR 257 million by 2017. The improved realization and pick up in industrial production should

aid growth in woods segment to register 9.5% CAGR to SAR 970 million by 2017.

Followed by such double-digit growth rates in metals, electrical segment is likely to record 10.4% CAGR and reach SAR 988 million in 2017. Overall, these supportive drivers should lead group revenue comfortably to SAR 3.9 billion by 2017. The revenue trends are remarkable with a surge of 18.0% in 2014E followed by stabilized performance of 9.0% in 2015E and average of 11% for 2016-2017E. The continued focus in the local market should drive KSA sales to SAR 3.7 billion by 2017 and contribute 95% to topline. While overseas division is expected to scale down to 5% at SAR 195 million. We have made our own calculations in deriving sub segment data for 2H13 and based on historical assumptions and trends, while 2014-17 are based on our own forecasts.

Table 13: Segment Revenue Forecasts with YoY Growth and Contribution

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue (SAR Mln)

Metals 644 850 900 1,057 1,214 1,333 1,489 1,681

Woods 633 639 700 684 738 824 893 970

Electrical 337 354 439 669 734 770 862 988

Concrete 82 108 153 183 204 221 236 257

Growth (YoY)

Metals 79.1% 32.0% 5.9% 13.7% 14.8% 9.8% 11.7% 12.9%

Woods 46.3% 6.3% 9.1% -2.5% 7.9% 11.7% 8.4% 8.5%

Electrical 77.9% 5.2% 24.1% 51.1% 9.7% 5.0% 11.8% 14.7%

Concrete 72.4% 32.4% 41.7% 19.7% 11.5% 8.0% 7.0% 9.0%

Share of total `

Metals 40.7% 47.0% 44.1% 43.4% 45.0% 46.0% 46.6% 48.6%

Woods 34.9% 31.3% 30.1% 24.5% 27.0% 27.0% 27.5% 26.1%

Electrical 19.8% 16.3% 19.2% 24.2% 22.0% 21.0% 20.7% 20.0%

Concrete 4.6% 5.5% 6.6% 7.9% 6.0% 6.0% 5.2% 5.3%

Source: Company Reports and Riyad Capital, Note: 2010-13 Segment revenue is net of adjustments

Exhibit 33: Revenue Forecasts (SAR Mln) Exhibit 34: Local vs International Revenue (SAR Mln)


1,5

74

1,8

57

2,0

86

2,4

48

2,8

90

3,1

48

3,4

80

3,8

95

4%

8%

12%

16%

20%

24%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Revenue YoY

1,4

80

1,6

51

1,8

57

2,1

94

2,6

59

2,9

12

3,2

54

3,7

01

94 2

06 229 2

54

231 236 2

26 1

95

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Saudi Arabia Intl,Sales

Group revenue mainly

driven by even growth

across all segments

Revenue to grow 18%

for 2014E and stabilize

for 2015-17 to reach

SAR 3.9 billion



29

Metals segment: Key contributor of revenues

The steel rebar industry is fragmented in nature and estimated at SAR 27.5 billion as of 2013. Bawan having a thin market share of 3% continues in the business as this form the

largest volumes for the group. Metals account for 43.4% as of 2013 and expected to contribute 48.6% of group revenue by 2017. The contractors being the key clientele use steel rebar products in building structures primarily in the concreting stage. Hence, consumption of steel in relation to construction market acts as growth indicators. It is further divided into sub segments i) cutting and bending ii) wiredrawing and mesh and iii) others segment (door and window frames).

The cutting and bending caters to heavy construction projects primarily bridges and tall structures, hence very susceptible to customized requirements wherein Bawan adds value to clients. This segment is likely to contribute 54% of revenue by 2017 and grow at a CAGR of 13.1% to SAR 915 million in 2017. We forecast realization to improve by 2.2% and volumes to reach 284K tons by 2017. Wire drawing and mesh revenue is forecasted at SAR 708 million by 2017 on mixed use of large-scale commercial and residential developments due to its usage in concreting stage. The volume is supportive with 9.3% CAGR for 2014-17 while realization could be volatile with 1.0% growth. The other segment includes the fabrication of frames using aluminum and steel and expected to grow at 1.8% CAGR during 2014-17.

Exhibit 35: Metals Segment Revenues (SAR Mln) Exhibit 36: Sub-segment Revenue Contribution-2013


64

4 85

0

90

0

1,0

23

1,2

14

1,3

33

1,4

89

1,6

81

4%

8%

12%

16%

20%

24%

28%

32%

36%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Metals YoY

Cutting and

bending51%

Wire draw ing

and Mesh44%

Others5%

Table 14: Metals-Sub Segment Forecasts for Revenue, Volumes and Realization

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue (SAR Mln)

Cutting and bending 301 407 432 540 633 711 808 915

% Growth 78.4% 35.2% 6.1% 25.0% 17.3% 12.2% 13.7% 13.3%

Wire draw ing and mesh 271 359 410 467 526 567 625 708

% Growth 75.9% 20.3% 17.0% 20.6% 15.0% 10.0% 8.0% 10.0%

Others (fabricated doors) 72 84 58 51 54 55 56 57

% Growth 81.6% 16.5% -30.8% -11.8% 5.9% 1.9% 1.8% 1.8%

Volumes ('000 Tons)

Cutting and bending 109 137 147 182 209 230 258 284

% Growth 75.1% 24.8% 7.5% 24.1% 15.0% 10.0% 12.0% 10.0%

Wire draw ing and mesh 100 120 141 170 195 215 232 255

% Growth n.a 20.3% 17.0% 20.6% 15.0% 10.0% 8.0% 10.0%

Realization (SAR/Ton)

Cutting and bending 2,707 2,982 2,912 2,750 2,695 2,641 2,694 2,775

% Growth n.a 10.1% -2.3% -5.6% -2.0% -2.0% 2.0% 3.0%

Wire draw ing and mesh 2,751 2,982 2,945 2,967 3,026 3,087 3,133 3,227

% Growth 1.9% 8.4% -1.2% 0.8% 2.0% 2.0% 1.5% 3.0%


Metals to witness

growth of 11.5% CAGR

for 2014-17

Bawan adds value to

contractors through its

varied products



30

Woods segment: Driven by long-term contract

Woods segment caters to the needs of industrial packaging, furniture and interior designing industry. The industry excluding raw lumbers as estimated by PWC stands at

SAR 2.2 billion as of 2013 with Bawan having a market share of 35%. It operates in demand rated capacity model as the Company imports raw materials and then re-process to cater to client needs. Hence, any uptick in industrial production and finalization of construction projects should drive volumes for the sector. The sub segments are classified as i) packaging items ii) laminated panels and iii) joinery items.

The drivers are the ongoing demand for packaging across industries with Bawan’s major

client base being petrochemical producers followed by multi industrial users. The packaging segment contributed 55% share of revenue during 2013. The realization of SAR 76/unit and volumes of 7.0 million units should drive revenues to SAR 532 million by 2017. Laminated panels cater to the needs of the furniture manufacturers and as well to individuals for interior designing. It comprises 35% of 2013 revenues and likely to continue at similar pace with 9.0% CAGR for 2014-17 to grow to SAR 348 million in

2017. We forecast volumes at 5.2 million units and realization at SAR 67/unit during 2017, an average growth of 1.5%. The joinery division accounted for 10% of revenue and expected to grow at a CAGR of 4.4% to reach SAR 89 million by 2017.

Exhibit 37: Woods Segment Revenues (SAR Mln) Exhibit 38: Sub-segment Revenue Contribution-2013


51

2

54

4

59

3

57

8

73

8 82

4 89

3 97

0

-5%

0%

5%

10%

15%

20%

25%

30%

35%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Woods YoY

Packaging items

55%

Laminated Panels

35%

Joinery items

10%

Table 15: Woods-Sub Segment Forecasts for Revenue, Volumes and Realization

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Packaging items

Revenue (SAR Mln) 429 386 398 373 391 445 488 532

% Growth 88.6% -10.0% 3.1% -6.4% 4.8% 14.0% 9.5% 9.1%

Volumes ( Mln Units) 6.4 6.9 7.1 5.4 5.5 6.1 6.5 7.0

% Growth n.m 7.8% 2.9% -23.9% 1.9% 10.9% 6.6% 7.7%

Realization (SAR/Unit) 67 56 56 69 71 73 75 76

% Growth n.m -16.5% 0.2% 23.1% 2.9% 2.8% 2.7% 1.3%

Laminated panels

Revenue (SAR Mln) 165 220 244 240 269 295 320 348

% Growth 62.6% 33.3% 10.9% -1.6% 12.0% 9.7% 8.4% 9.0%


% Growth 56.1% 30.3% 2.3% -9.1% 5.0% 4.8% 6.8% 10.6%

Realization (SAR/Unit) 50 51 55 60 64 67 68 67

% Growth n.a 2.3% 8.4% 8.2% 6.7% 4.7% 1.5% -1.5%

Joinery items

Revenue (SAR Mln) 38 34 58 71 78 84 86 89

% Growth 80.9% -11.8% 73.3% 22.7% 10.0% 7.3% 2.5% 3.4%


% Growth 78.6% -22.0% 56.4% -18.0% 12.0% 3.6% 6.9% 6.5%

Realization (SAR/Unit) 1,520 1,718 1,903 2,850 2,800 2,900 2,780 2,700

% Growth 1.3% 13.0% 10.8% 49.7% -1.8% 3.6% -4.1% -2.9%


Woods have a niche

clientele, mainly

petrochemical and

heavy industrials

producers

Packaging drives

overall segment growth



31

Electrical to be a niche segment and aid margin growth

The ongoing expansion plans of electric utilities in KSA and Middle East should drive demand for electrical segment especially with incremental demand for transformers and

substations. Bawan holds a large share of the local transformer market with 18%, which is higher than ABB and other international producers. The product lines are transformers, substations and low voltage panels, which cater mainly to the electricity distribution system. The key client is SEC, while other utility majors in GCC and large GRE’s in KSA such as Aramco, SABIC and Petro Rabigh also form part of the client base. KSA is expected to have robust demand for electricity production with Saudi Electricity &

Cogeneration Regulatory Authority forecasting 57,808 MW by 2023 from 40,000 MW currently. We believe with incremental electricity production requirement, the usage for transformers and substations would be on the rise and have factored this into our forecasts.

The transformers accounted for 72% of revenue as of 2013 and expected to grow at a CAGR of 9.8% for 2014-17 due to continued order flows from utility companies. The

competition from international manufacturers is a slight concern as these producers are focusing on developing markets like KSA. The segment is likely to have volume growth of 3.6% CAGR and production to reach 20K units. The substations and others contributed 28% of revenue as of 2013 and we forecast 12.0% CAGR for 2014-17 to SAR 288 million. Bawan produced 4,050 units (substations) as of 2013 with output expected at 4,700 units by 2017.

Exhibit 39: Electrical Segment Revenues (SAR Mln) Exhibit 40: Electrical Revenue Contribution-2013


33

7

35

4

43

9

66

4

73

4

77

0

86

2 98

8

0%

10%

20%

30%

40%

50%

60%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Electrical YoY

Transformers

72%

Substations and Others

28%

Table 16: Electrical-Sub Segment Forecasts For Revenue, Volumes and Realization

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Transformers

Revenue (SAR Mln) 335 359 380 465 529 558 622 700

% Growth 78.4% 35.2% 6.1% 25.0% 17.3% 12.2% 13.7% 13.3%

Volumes (Units) 10,800 11,000 12,700 16,600 18,000 18,250 19,000 20,000

% Growth n.m 1.9% 15.5% 30.7% 8.4% 1.4% 4.1% 5.3%

Realization (SAR/Unit) 31,019 32,636 29,921 28,000 29,400 30,576 32,716 35,006

% Growth n.m 5.2% -8.3% -6.4% 5.0% 4.0% 7.0% 7.0%

Substations & others

Revenue (SAR Mln) 3 18 105 205 205 212 240 288

% Growth n.m 461.8% 475.5% 95.1% 0.1% 3.7% 13.0% 19.9%

Volumes ( Mln Units) n.a n.a 2,100 4,050 3,900 3,800 4,100 4,700

% Growth n.m n.m n.m 92.9% -3.7% -2.6% 7.9% 14.6%

Realization (SAR/Unit) n.a n.a 49,524 50,000 52,000 54,600 57,330 60,197

% Growth n.m n.m n.m 1.0% 4.0% 5.0% 5.0% 5.0%


Transformers forms the

key diversification path

Bawan has high market

share in transformers

business with 18%



32

Concrete segment is value chain integration

The market is highly competitive and low margin based industry amid alleged dumping from regional companies. The indicators of demand is linked to the construction market,

with concrete segment focusing on mid stage construction process unlike metals in early stage process. The product lines are hollow cores, pre-cast panels and ready mix concrete (RMC). This is an add-on value which Bawan intends to offer to its clientele and also a strategy to focus on its forward integration. We forecast revenue to reach SAR 257 million in 2017, a gradual pick up contrasting high growth rates in other segments.

International raw material prices, a trend indicator to cost structure

We forecast group opex at SAR 3.5 billion by 2017, a CAGR of 8.8%. On an average during 2010-13, opex accounted for 90.7% of total sales and we forecast slight increase to 91.7% due to the nature of volatile commodity price in international markets. Most of the

segments have a suitable proportion of opex-to-sales.

The cost structure varies upon raw material prices due to its procurement from international markets complementing local procurement. The same is applicable in most of the segments except in case of metals where steel is procured from steel producers locally due to quota restrictions. However, wood is procured from international markets, hence Bawan would be susceptible to international price volatility. Copper is the main

raw material for electrical and follows the same trend as woods while cement prices remain the cost driver for concrete, which is procured locally.

Exhibit 41: Concrete Segment Revenues (SAR Mln) Exhibit 42: Concrete Revenue To Total Revenue


82 10

8 15

3 18

3

20

4

22

1

23

6

25

7

0%

10%

20%

30%

40%

50%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Concrete YoY

5.2

% 5.8

%

7.3

%

7.5

%

7.1

%

7.0

%

6.7

%

6.7

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Exhibit 43: Total Opex and Growth (SAR Mln) Exhibit 44: Cost Break-Up by segments -2013


1,4

04

1,6

89

1,9

29

2,2

10

2,6

54

2,9

00

3,2

13

3,5

58

0%

5%

10%

15%

20%

25%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Total OPEX

Metal43%

Wood24%

Electrical25%

Concrete8%

Bawan plans to expand

with its new RMC plant

in Jeddah

Commodity price are on

a falling trend and will

help margin growth



33

Our forecast on a segmental level suggests metals would have the largest cost concentration in entire group’s cost line, which we believe is due to the nature of volumes.

The World Bank commodity price forecasts drive our assumptions on Bawan’s cost trends and suggest moderate inflation for 2014-17 upon absence of any price jitters in the global commodity market. The trend analysis suggests commodity prices have been falling over the last few quarters in international markets, which would aid in incremental margins for Bawan. However, the market supply-demand factors would play a major role in rationalizing such price trends. The international wood prices are on a fall currently due to falling demand for paper pulp, while consumption driven slowdown from emerging markets mainly China has affected steel and iron ore prices. Iron ore prices have grown by 5% in 2013 while it fell by 6% in 1H2014 and currently trading at USD 94/DMT. Steel prices on the spot market are trading around USD 675/MT, with expectations to decline.

EBITDA margins to shrink initially and expand by +70 bps in 2017

Bawan’s group EBITDA is forecasted to reach SAR 401 million in 2017 registering a 13.2% CAGR. The key contributor to group EBITDA would be electrical with 45% for

2014 followed by the woods segment with 25%. The slight erosion in margins during 2015 is transitory and set to expand gradually to 10.3% in 2017. The improving operational efficiency upon incremental utilization amid falling raw material prices are positive attributes to EBITDA growth. Over the medium term, we expect slight pressure on margins in 2014 and 2015, erosion of -170 bps and -30 bps respectively.

Table 17: Segment Costs Forecasts With Growth And Contribution

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Metals (SAR Mln) 577 788 844 930 1,112 1,245 1,406 1,632

YoY growth n.m 36.6% 7.1% 10.2% 19.5% 12.0% 12.9% 16.1%

Share of total 40.7% 47.0% 44.1% 43.4% 45.0% 46.0% 46.6% 48.6%

Woods (SAR Mln) 495 525 575 525 667 731 821 869

% Growth n.m 6.1% 9.5% -8.7% 27.1% 9.6% 12.3% 5.9%

Share of total 34.9% 31.3% 30.1% 24.5% 27.0% 27.0% 27.5% 26.1%

Electrical (SAR Mln) 281 273 367 520 544 569 625 672

YoY growth n.m -2.8% 34.4% 41.7% 4.5% 4.6% 9.8% 7.5%

Share of total 19.8% 16.3% 19.2% 24.2% 22.0% 21.0% 20.7% 20.0%

Concrete (SAR Mln) 65 92 127 170 148 162 157 178

YoY growth n.m 41.5% 38.0% 33.9% -12.8% 9.6% -3.4% 13.4%

Share of total 4.6% 5.5% 6.6% 7.9% 6.0% 6.0% 5.2% 5.3%


Table 18: World Bank Commodity Price Projections

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Timber Logs ($/ M3) 429 485 451 464 475 480 485 491

YoY growth 2% 13% -7% 3% 2% 1% 1% 1%

Steel ($/MT) 735 651 634 654 602 632 657 677

YoY growth 19% -11% -3% 3% -8% 5% 4% 3%

Aluminium ($/MT) 2,173 2,401 2,023 1,847 1,800 1,840 1,869 1,898

YoY growth 31% 10% -16% -9% -3% 2% 2% 2%

Copper ($/MT) 7,538 8,828 7,962 7,332 6,900 6,880 6,872 6,864

YoY growth 46% 17% -10% -8% -6% 0% 0% 0%

Iron Ore ($/DMT) 146 168 128 135 100 110 113 116

YoY growth 83% 15% -24% 5% -26% 10% 3% 3%

Source: World Bank Estimates

World bank predicts flat

growth price trends

Electrical to contribute

45% to group EBITDA



34

We forecast electrical EBITDA margins to average 18.2% for 2014-17 and contribute 45% on an average. Additionally, most segments are expected to witness margin growth averaging +50 to +150 bps by 2017. Bawan’s capacity utilization currently on a group level assumed to be in the range of 60-70% on an average and expected to increase to

90% by 2017. This suggests the next spending cycle after 2018.

Net margins to remain flat but in line with industry

We forecast group earnings to reach SAR 272 million by 2017 a growth of 10.9% CAGR upon anticipation of savings from interest cost through debt repayment. Bawan has a

very low D&A charges ranging to 1.5% of sales (3% of Fixed PP&E). The mid value chain operating model, which essentially means, it’s more of a semi-processing industry signifying lower operational risk. The absence of volatility in non-core earnings through effective forex hedging and lower history of one-off expenses limits earnings volatility. The margins could remain flat for 2014-16 and improve by +40 bps in 2017. Bawan would see margins gradually expanding by few notches as most of the cost savings are

based on commodity prices. We have taken some caution on its subsidiaries and adjusted some losses arising out of its subsidiaries during 2014-17.

Exhibit 45: EBITDA Forecasts and Growth (SAR Mln) Exhibit 46: EBITDA Margin Forecasts


20

2

20

0

19

2 27

6

27

7

29

3

31

9 4

01

-10%

0%

10%

20%

30%

40%

50%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

EBITDA YoY

12

.8%

10

.8%

9.2

%

11

.3%

9.6

%

9.3

%

9.2

%

10

.3%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Table 19: Segment EBITDA Forecasts with Growth and Contribution

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Metals (SAR Mln) 51 52 43 55 55 60 66 86

YoY growth n.m 1.3% -16.9% 28.6% -0.1% 8.6% 9.2% 30.8%

Share of total 25.3% 25.9% 22.4% 20.0% 19.9% 20.5% 20.5% 21.4%

Margins 7.9% 6.1% 4.8% 5.2% 4.6% 4.5% 4.4% 5.1%

Woods (SAR Mln) 103 83 83 68 79 87 93 116

YoY growth n.m -19.7% -0.1% -17.7% 16.7% 10.2% 6.3% 25.2%

Share of total 50.9% 41.3% 43.0% 24.6% 28.5% 29.8% 29.1% 29.0%

Margins 16.2% 12.9% 11.8% 9.9% 10.8% 10.6% 10.4% 12.0%

Electrical (SAR Mln) 45 57 52 136 130 132 146 180

YoY growth n.m 25.9% -7.5% 158.4% -4.5% 1.7% 11.2% 22.8%

Share of total 22.3% 28.4% 27.3% 49.2% 46.6% 44.9% 45.8% 44.8%

Margins 13.4% 16.0% 12.0% 20.3% 17.7% 17.1% 17.0% 18.2%

Concrete (SAR Mln) 3 9 14 17 14 14 15 19

YoY growth n.m 198.3% 56.0% 21.8% -17.2% 0.2% 3.7% 31.9%

Share of total 1.5% 4.5% 7.3% 6.2% 5.1% 4.8% 4.6% 4.8%

Margins 3.7% 8.3% 9.1% 9.3% 6.9% 6.4% 6.2% 7.5%


Margins to expand by

+40 bps through 2017

Capacity to peak by

2017 and next capex

cycle due during 2018



35

We forecast EPS to reach SAR 5.44 in 2017 after a stagnant growth in 2014-16 while

stable payouts with DPS of SAR 2.20 in 2014 and DPS of SAR 2.50 for 2015-16 is achievable. The payout ratios averages 56% for 2014-17 and believe it’s apt to maintain such levels as cash flows are not affected and any increase will add pressure on near term working capital.

The average retention ratio of 44% during 2014-17 should support growth of 4.0% capex/sales and aid debt repayment by cutting 50% of its debt exposure, thereby

maintaining a reasonable debt to equity ratio of 0.17x. It has one of the best ROE among the building materials peers delivering an average ROE of 23% during 2009-13 and we forecast an average 21% for 2014-17. The investment in PP&E is limited as most of the raw materials are semi processed, delivering high ROA of 10.2% in 2013.

Comparable Analysis

Bawan on a peer valuation basis are not fully comparable as it operates in different

business segments. However its major line of business being Metals can be compared with Aslak though the end usage could be different, while Zamil could be compared due to its conglomerate nature. Most valuations mutliples are at a spread of 15-30%, hence we consider the mid-cap multiples for comparison purposes.

Exhibit 47: Net Profit Forecasts and Growth(SAR Mln) Exhibit 48: Net Margin Forecasts


14

0

13

5

13

1

16

8

19

9

20

8

23

0 27

2

-10%

0%

10%

20%

30%

40%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Net profit YoY

8.9

%

7.3

%

6.3

%

6.9

%

6.9

%

6.6

%

6.6

%

7.0

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E



1.0

6

2.5

5

2.3

0

2.2

0

2.2

0

2.5

0

2.5

0 3.0

0

20%

40%

60%

80%

100%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

DPS Payout Ratio

2.7

9

2.7

0

2.6

2 3.3

6 3.9

8

4.1

5

4.6

0 5.4

4

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Table 20: KSA Comparables for Bawan

Company Name

Price

(SAR)

Mcap

SAR

Mln

EV

SAR

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.Y

ld YTD

52 Wk-

Hi

(SAR)

52 Wk-

Lo

(SAR)


Baw an Co 73.12 3,656 4,270 20.6x 5.0x 1.3x 1.6x 15.0x 1.1 15% 85.00 36.00



Source: Bloomberg

Bawan expected to pay

DPS of SAR 2.20 in

2014

Superior ROE of 21%

for 2014-17, while

retention ratio of 44% is

remarkable



36

1H2014 results recap

Bawan reported revenue of SAR 758 million in 2Q14 (+22% YoY and -2% QoQ), while it reported a net income of SAR 47 million in 2Q14 (+7% YoY and +1% QOQ). Net margins

were slightly lower by -110 bps to 6.2% in 2Q14 from 7.1% in 1Q14, but were flat from 2Q13. Our net income forecasts for 3Q14E is flat at SAR 48 million, while we see some recovery in 4Q14E at SAR 57 million.

Valuation

Our valuation methods using different scenarios suggested DCF based valuation to be

ideal considering Bawan’s business model. Lack of pure comparable due to its conglomerate nature and limited trading history of 9 months limits our argument to use target P/E based valuation. Most multiples in comparison to itself are on an upswing due to stock’s rally of 61% in the first few trading sessions. We performed sanity checks on

SOTP method, but justification in multiples and lacks of segmental peers contain the usage of SOTP. The DCF valuation proved logical, as FCF trends for 2016-19E showed consistency due to Bawan’s ability to generate sustainable cash flows. However, under both methods the valuation ranges between SAR 90-95 except target P/E based fair value of SAR 78. 22.

#1: DCF yields fair value of SAR 95.25

We used a long-term growth rate of 2.25% and a beta of 1.0 in our model. The risk-free rate assumption of 3.8% includes a premium for country risk over 10-year US risk-free rate of 2.4%. Cost of equity of 9.9% and cost of debt of 4.7% leads to a WACC of 8.4% assuming a long-term capital structure of 70% equity and 30% debt weighting.

Table 21: Quarterly projections (SAR Mln)Table 18: Quarterly projections (SAR Mln)

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Revenue 572 620 616 641 773 758 650 708

QoQ growth 7% 8% -1% 4% 21% -2% -14% 9%

EBITDA 59 79 84 56 79 72 61 67

QoQ growth 9% 33% 7% -34% 41% -9% -15% 10%

Net Income 40 44 45 39 47 47 48 57

QoQ growth 8% 9% 2% -14% 20% 1% 2% 19%

EPS (SAR) 0.81 0.88 0.90 0.78 0.93 0.94 0.96 1.14

EBITDA Margins 10.3% 12.7% 13.7% 8.7% 10.2% 9.4% 9.4% 9.5%

Net Margins 7.1% 7.1% 7.3% 6.1% 6.0% 6.2% 7.4% 8.1%


Table 22: WACC Assumptions

Cost of Equity (Ke) Cost of Debt (kd)

Market Return (Rm) 10.0% Effective Intrest rate/ Yield on Senior Debt 4.7%

Risk Free Rate (Rf) 3.8% Tax Rate (%) 2.5%

Beta 1.0 Long Term Debt/Total Debt 12.1%

Market Risk Premium 6.3% Debt/Equity 0.8

Implied Cost of Equity 9.9% After Tax Cost of Debt 4.7%

WACC (Ko)

Market Value of Equity((E) 4,018

Market Value/Book Value of Debt (d) 622

Total Capital (d+e) 4,640

Long Term Capital Structure 70:30

Equity Weight 87%

Debt Weighting 13%

Weighted Average Cost of Capital (Ko) 8.4%


EPS CAGR at

11.4% with focus

year to be 2014E

post Capex

completion

DCF valuation is apt

given the shorter

history of relative

valuation trends



37

The DCF method was applied on the group FCF and adopted bearish to bullish scenarios to back test the FCF stress for 2016-19E, which suggests a fair value of SAR 95.25 per share using base case. The DCF method is sensitive to beta assumptions as we applied the

weekly beta average since listing. However, we continue with our judgment on usage of intrinsic valuation, being a more justified approach.

The terminal growth rate and WACC sensitivity to valuation range tends to decrease an average of -6% on an increase of +40 bps in WACC assumptions. The valuation range increases by +4% on +25 bps increase in terminal growth rate.

#2: SOTP method suggests fair value of SAR 93.25

The SOTP method used EV/EBITDA multiples of peer companies who operate in similar segments. For instance, we used Aslak’s average EV/EBITDA multiple of 14.2x to value its metal segment, while using a spread on GCC comparable Voltamp Energy for electrical. For woods, the group’s own multiple is assigned due to lack of peer comparison and for concrete, we used the average of KSA’s cement sector multiples. The value thus arrived is SAR 93.25 which is at 12.9x to group’s 2015E EBITDA. However, we highlight this method’s drawback given Bawan’s limited trading history.

Table 23: DCF Valuation Using Bear-Base-Bull Case Assumptions

Bear Case Base Case Bull Case

Fig in SAR Mln 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E

Revenue 452,606 458,881 3,312 3,516 3,759 3,914 3,480 3,895 4,077 4,305 3,800 4,113 4,500 4,858

% growth 1% 8.0% 6.2% 6.9% 4.1% 10.5% 11.9% 4.7% 5.6% 10.9% 8.2% 9.4% 8.0%

EBITDA 209,331 202,709 293 339 367 383 319 401 412 437 361 422 467 515

% growth 8.8% 15.6% 8.4% 4.2% 9.1% 25.5% 2.8% 6.1% 10.8% 16.9% 10.6% 10.3%

Net income 208 219 250 262 230 272 295 315 265 289 333 373

% growth 11% 5% 14% 5% 11% 18% 9% 7% 13% 9% 15% 12%

NOPLAT 108,456 113,257 238 276 300 312 260 330 338 359 297 347 385 426

Net adjustments in WC, capex and D&A (23) (11) (48) 18 (9) 21 (37) (11) (12) (8) (11) (1)


PV of FCFF 197 225 196 237 232 299 236 252 264 290 295 311

DCF metrics

Terminal value 4,708 5,817 7,047


Sum of PV of FCFF 855 1,020 1,160


Less: net debt (469) (475) (476)


No of shares outstanding (mln) 50 50 50

Fair value (SAR) 75.40 95.25 116.68




##### 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

7.2% 96.8 100.7 105.1 109.9 115.1 120.9 127.4 134.6 142.8 152.0 162.6 174.9 189.2 206.2

7.6% 91.3 94.9 98.7 102.8 107.3 112.3 117.8 123.9 130.7 138.3 146.9 156.7 167.9 181.0

8.0% 86.6 89.7 93.0 96.7 100.6 104.9 109.6 114.8 120.6 126.9 134.1 142.1 151.2 161.5

8.4% 82.6 85.4 88.4 91.7 95.2 99.0 103.1 107.7 112.6 118.1 124.2 131.0 138.6 147.1

8.8% 78.6 81.1 83.7 86.6 89.7 93.0 96.6 100.5 104.8 109.4 114.6 120.2 126.5 133.5

9.2% 75.2 77.4 79.8 82.4 85.1 88.1 91.3 94.7 98.5 102.5 107.0 111.8 117.2 123.1

9.6% 72.1 74.1 76.3 78.6 81.1 83.7 86.6 89.6 92.9 96.5 100.4 104.6 109.2 114.3

10.0% 69.3 71.1 73.1 75.2 77.5 79.9 82.4 85.1 88.1 91.2 94.7 98.4 102.4 106.8


W

AC

C



38

#3: Target P/E valuation suggest SAR 77.68

We valued Bawan using target P/E based method by using building materials sector weighted P/E of 18.7x to derive a fair value of SAR 77.70. However, the same suggests valuation near to current market prices. We believe Bawan’s historical or sector multiples is unjustified for a valuation based on target P/E as it requires long term average to cross check any abnormal movement.

Risks to valuation

The risks to our forecasts would be the slowdown in construction sector and any heightened volatility in international commodity prices. The availability of concessional

natural gas and any supply constraints would have an effect on expansion and production costs. Other potential operational risk to our estimates include lower than expected capacity utilization, currency hedge and inter group adjustments, higher wage costs and larger imports from China on metals.

Table 25: SOTP Valuation Method

2014E 2015E 2016E 2017E

EBITDA forecasts (SAR Mln)

Metal 55 60 66 86

Wood 79 87 93 116

Electrical 130 132 146 180

Concrete 14 14 15 19

Group EBITDA 278 293 320 401

Metals Woods Electrical Concrete Group

2015E EBITDA (SAR Mln) 60 87 132 14 293

% of total EBITDA 21% 29% 45% 5% 100%

Target Multiple 14.2x 17.0x 20.0x 15.0x 12.9x

Implied EV (SAR Mln) 852 1,485 2,640 212 5,189

% of total EV 16% 29% 51% 4% 100%

Value of the f irm 5,189

Less: Net Debt (2015E) (527)

Value of equity 4,662

Shares outstanding (Mln) 50

Fair value per share (SAR) 93.25



2013A 2014E 2015E 2016E 2017E


EPS 3.84 4.16 3.98 5.30 4.38 4.15 5.77 4.99 4.60 6.65 5.24 5.44 7.45

11.0x 42.2 0 45.7 43.8 58.3 48.2 45.7 63.5 54.9 50.6 73.2 54.9 50.6 73.2

12.0x 46.0 0 49.9 47.8 63.6 52.5 49.8 69.3 59.9 55.2 79.8 59.9 55.2 79.8

13.0x 49.9 0 54.0 51.8 68.9 56.9 54.0 75.0 64.9 59.8 86.5 64.9 59.8 86.5

14.0x 53.7 0 58.2 55.7 74.2 61.3 58.2 80.8 69.9 64.4 93.1 69.9 64.4 93.1

15.0x 57.5 0 62.4 59.7 79.5 65.7 62.3 86.6 74.9 69.0 99.8 74.9 69.0 99.8

16.0x 61.4 0 66.5 63.7 84.9 70.1 66.5 92.4 79.9 73.6 106.4 79.9 73.6 106.4

17.0x 65.2 0 70.7 67.7 90.2 74.4 70.6 98.1 84.9 78.2 113.1 84.9 78.2 113.1

18.0x 69.0 0 74.8 71.7 95.5 78.8 74.8 103.9 89.9 82.9 119.7 89.9 82.9 119.7

19.0x 72.9 0 79.0 75.6 100.8 83.2 78.9 109.7 94.9 87.5 126.4 94.9 87.5 126.4

2014E 2015E 2016E 2017E

Net profit estimates (SAR Mln) 199 208 230 272

EPS (SAR) 3.98 4.15 4.60 5.44


Valuation at Baw an's 6M average of 19.5x 77.6 81.0 89.8 106.0

Valuation at Baw an's 3M average of 21.0x 83.6 87.2 96.7 114.1

Estimated fair value at sector weighted P/E of 18.7x 74.5 77.7 86.1 101.6


P

/E R

an

ge

(x)




39


Table 27 : Financial Projections Summary (SAR Mln)

2010 2011 2012 2013 2014E 2015E 2016E 2017E


Revenue 1,574 1,857 2,086 2,448 2,890 3,148 3,480 3,895

COGS (1,298) (1,575) (1,807) (2,055) (2,471) (2,708) (3,017) (3,357)

Gross Profit 276 282 278 394 419 441 463 539

SG&A (105) (114) (121) (155) (183) (192) (196) (200)


Net Financing Income/Cost (10) (14) (18) (20) (21) (19) (17) (14)

Others/One-off items (4) 4 10 (16) (23) (26) (26) (32)

Profit before Zakat 156 158 150 203 192 204 224 293

Zakat (9) (10) (5) (11) (11) (11) (12) (16)

Net Income/Profit before MI 147 148 144 192 182 193 212 277

Minority Interest (7) (12) (13) (24) 17 15 18 (5)

Net Income/Profit 140 135 131 168 199 208 230 272

EBITDA 202 200 192 276 277 293 319 401

EPS 2.79 2.70 2.62 3.36 3.98 4.15 4.60 5.44

DPS 1.06 2.55 2.30 2.20 2.20 2.50 2.50 3.00

Margins

Gross Margins 17.5% 15.2% 13.4% 16.1% 14.5% 14.0% 13.3% 13.8%

EBITDA Margins 12.8% 10.8% 9.2% 11.3% 9.6% 9.3% 9.2% 10.3%


PBT Margins 9.9% 8.5% 7.2% 8.3% 6.7% 6.5% 6.5% 7.5%

Net Margins 8.9% 7.3% 6.3% 6.9% 6.9% 6.6% 6.6% 7.0%

Balance Sheet

Cash 73 42 39 52 49 49 56 43

Inventories 387 468 416 558 642 758 784 907

Receivables 375 489 565 651 692 626 718 740

Current Assets 835 999 1,021 1,262 1,383 1,433 1,558 1,690

Plant Property and Equipment 348 350 392 440 525 611 669 725

Good w ill 172 174 175 175 175 175 175 175

Total Assets 1,355 1,523 1,587 1,877 2,083 2,219 2,403 2,590

Short Term Debt 279 445 394 547 531 504 454 386

Payables 383 313 364 434 568 650 784 907

Current Liabilities 663 759 758 981 1,099 1,154 1,238 1,292

Long Term Debt 40 32 97 75 71 68 64 61

Others 37 50 47 53 53 53 53 53

Non Current Liabilities 77 81 144 128 124 121 117 114

Total Liabilities 739 840 903 1,109 1,223 1,275 1,355 1,406

Shareholders Equity 616 684 684 769 860 945 1,048 1,184

Total Liabilities & Shareholders Equity 1,355 1,523 1,587 1,877 2,083 2,219 2,403 2,590


Current Assets 62% 66% 64% 67% 66% 65% 65% 65%



Non Current Liabilities 6% 5% 9% 7% 6% 5% 5% 4%



Cashflow

Net Operating Cash Flow 119 (15) 200 98 248 281 290 326

Net Investing Cash Flow (134) (43) (86) (94) (121) (126) (104) (117)

Net Financing Cash Flow 56 27 (118) 8 (130) (155) (179) (221)

Net Change in Cash 41 (31) (3) 13 (3) 0 6 (12)

Cash (Opening) 33 73 42 40 52 49 49 56

Cash (Closing) 73 42 39 52 49 49 56 43




40


2010 2011 2012 2013 2014E 2015E 2016E 2017E

Valuation

P/E 26.2x 27.0x 27.9x 21.8x 18.4x 17.6x 15.9x 13.5x

P/B 5.9x 5.3x 5.3x 4.8x 4.3x 3.9x 3.5x 3.1x

P/S 2.3x 2.0x 1.8x 1.5x 1.3x 1.2x 1.1x 0.9x

P/CF 30.7x n.m 18.2x 37.2x 14.7x 13.0x 12.6x 11.2x



Dividend Yield 1.5% 3.5% 3.1% 3.0% 3.0% 3.4% 3.4% 4.1%

Per share (SAR)

EPS 2.79 2.70 2.62 3.36 3.98 4.15 4.60 5.44

DPS 1.06 2.55 2.30 2.20 2.20 2.50 2.50 3.00

BVPS 12.32 13.67 13.70 15.39 17.20 18.90 20.94 23.64

Sales per share 31.48 37.13 41.71 48.97 57.79 62.97 69.60 77.91

OCF/Share 2.38 (0.31) 4.01 1.97 4.96 5.63 5.79 6.51

ICF/Share (0.31) (1.12) 2.35 0.16 2.54 3.11 3.74 4.26

FCF/Share (0.31) (3.67) 0.05 (2.04) 0.34 0.61 1.24 1.26

Capex

Capex/Sales 2% 2% 4% 4% 4% 4% 3% 3%


Liquidity

Cash Ratio 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0

Current Ratio 1.3 1.3 1.3 1.3 1.3 1.2 1.3 1.3

Quick Ratio 0.7 0.7 0.8 0.7 0.7 0.6 0.6 0.6

Cash Cycle




Inventory Days 84 99 89 87 89 94 93 92

Payable Days 76 77 70 66 72 79 86 89

Receivable Days 87 96 99 97 88 73 77 69

Cash Cycle 94 118 118 117 105 89 84 73

Risk Ratio

Pay out Ratio 38% 94% 88% 66% 55% 60% 54% 55%

Retention Ratio 62% 6% 12% 34% 45% 40% 46% 45%


Net Debt/EBITDA 122% 217% 236% 206% 201% 180% 149% 101%

Returns Ratio

ROAA 14.5% 9.4% 8.4% 9.7% 10.1% 9.7% 10.0% 10.9%

ROAE 31.2% 20.8% 19.2% 23.1% 24.4% 23.0% 23.1% 24.4%

ROIC 18.2% 14.4% 13.3% 17.2% 16.1% 16.4% 17.1% 20.8%

DUPONT Analysis


Net Income/Sales 0.09 0.07 0.06 0.07 0.07 0.07 0.07 0.07


Dupont ROE 31.2% 20.8% 19.2% 23.1% 24.4% 23.0% 23.1% 24.4%

Leverage

Debt/total Capital 34% 41% 42% 45% 41% 38% 33% 27%

Debt to Total Assets ratio 24% 31% 31% 33% 29% 26% 22% 17%

Debt/Equity 24% 31% 31% 33% 29% 26% 22% 17%

EBIT to Total Assets 13% 11% 10% 13% 11% 11% 11% 13%




41

Exhibit 51: Pictorial Representation of Dupont 5-Stage ROE Analysis

Sales

2,448

-

Cost of Sales Earnings Available

(2,055) 192

-

Operating Expense divided by Net Profit Margin

(128) 8%

-

Interest Expense Sales

(20) 2,448

-

Tax Expense

(11)

-

Others multiplied by ROA

0 0.11

Sales

2,448

Current Assets Total Asset Turnover

1,262 divided by 1.44

+

Net Fixed Assets

(PPE) Total Assets multiplied by

440 1,702

Total Liabilities

1,109

Current Liabilities

981 +

Total Liab + SE = Total

Assets

+ 1,878

Long Term Liabilities

128 Stockholder Equity

(SE) divided by

Financial

Leverage

multiplier

770 2.44

Common stock equity

770


Inco

me S

tate

men

t

Return on Common

Equity (ROE)

24%

Bala

nce S

heet

United Wire Factories Company Initiating Coverage Report

HOLD 12-Month Target Price SAR 52

Lack of Reinvestment Caps Growth

We initiate coverage on United Wire Factories (Aslak) with a Hold recommendation and a 12-month target price of SAR 52, suggestng an upside of 9%. Steady earnings growth and strong net cash position makes the investment case attractive but valuation have already priced in such positives. Consequently, a lower capex spending with a capex/sales ratio of 3.5% vs industry average of 6-7% has dimmed growth prospects despite revenue growth of 6.7% CAGR and EPS CAGR of 8.4% for 2014-17. At a time when KSA construction sector is picking up, we expect Aslak to have a higher growth capex to support long term sustainable cash flows. We remain conservative in our valuation and assign a weighted sector P/E multiple of 17.8x to its 2015E EPS to derive our 12-month target price.

Utilization should drive margins

Revenue is expected to reach SAR 1.3 billion in 2017 driven by higher growth in steel rebar segment and reasonable growth rates across other segments. With incremental utilization and further softening of international iron ore prices, we believe margin improvement is imminent. We forecast EBITDA margins to gradually improve and increase by +50 bps to 14.5% by 2017. Net income is forecasted to reach SAR 150 million by 2017 sounding a steady growth. The effect of lower leverage could lead to slow ROE expansion which is currently at 24.8% and expected to reach 26.9% by 2017, which we believe Aslak should amicably address.

Industry cyclical in nature; barriers to entry is very low

The size of the rebar market grew at a CAGR of 7.8% during 2008-13 to SAR 27.5 billion with a portion of the demand being met through imports. The industry is fragmented due to low barriers to entry amid presence of unorganized peers thereby enhancing high competition. The thin margins and high volatility in raw material prices are the normal characteristics of this cyclical industry and believe efficiency is derived when utilization and costs are at optimum levels. The industry is expected to receive further boost once construction sector picks up and expect renewed demand to follow through.

Dividend yields attractive but valuations expensive

Aslak currently trades at trailing P/E of 17.2x, which we believe is cheaper compared to Bawan Co. (TASI: 1302) at 20.6x, with its major segment being steel rebars. With a P/E of 17.7x in 2014 and 16.3x in 2015, the target P/E of 17.8x holds firm when mid-cap equities are expected to re-rate once foreign fund flows start in to Saudi market. Given Aslak’s solid cash position and dividend track record, we forecast DPS to stabilize to SAR 2.25 in 2014 giving a dividend yield of 4.7%. We recommend a Hold on valuations and retain our long term positive view until we see more clarity on capex and integration benefits.

Key Financials


Revenue 1,001 1,051 1,125 1,192

EBITDA 138 147 160 169

Net Profit 110 118 128 135

EPS (SAR) 2.50 2.68 2.92 3.09

DPS (SAR) 2.22 2.25 2.50 2.50

BVPS (SAR) 10.78 11.24 11.71 12.35

ROAA 23% 22% 23% 24%

ROAE 25% 24% 25% 26%

P / E 19.0x 17.7x 16.3x 15.4x

P / B 4.4x 4.2x 4.1x 3.8x

P / S 2.1x 2.0x 1.9x 1.7x

EV/ EBITDA 14.9x 14.4x 13.6x 12.6x

EV/ Sales 2.0x 1.9x 1.8x 1.7x

October 15, 2014






Market Data

52 Week H/L SAR 57.25/34.04




Free Float 88.0%

12-Month ADTV (000’s) 380.9

TASI Weight 0.2%


Bloomberg Symbol ASLAK AB


Source: Bloomberg

Aslak TASI TBMCI

Oct-13- 2014 47.54 10,378 4,538

Total Change

6-months 26.4% 10.1% 12.2%

1-Year 43.3% 30.0% 31.7%

2-Year 94.8% 55.3% 57.8%


Khaled Saad Abdulrahman Kanhal 7.0%

Nihaz Investment Co. 5.0%

Public Float 88.0%

90100110120130140150160170180

S O N D J F M A M J J A S O

ASLAK TASI TBMCI



43

September 2, 2014

43

Overview

United Wire Factories Company (Aslak) was founded in 1990 born out of a merger

between group of factories to operate as one firm in 2007. Listed on Tadawul during 2011, the Company mainly caters to the ancillary sector within the construction market. It has a paid-up capital of SAR 439 million (par value of SAR 10) with 44 million shares outstanding currently.

Aslak manufactures products across its 8 factories located in Central, Western, Southern and Northern regions. The operational lines consist of construction, civil, industrial and

projects related businesses. However, Aslak reports its revenue under i) steel rebar and rolls ii) wires iii) mesh iv) nail and cloth hangers. Aslak has a geographic revenue mix of 37% from Central region followed by Western region with 24%, while the other regions accounts for 39% of revenue.

Comprising 57% of total sales, steel rebar was the biggest segment as of 2013 with a capacity of 109K MT from its two plants in Riyadh. The product range includes wires

used for varied stages of construction namely, steel rebars and rolls, fence wires, barbing wires, steel wires, cloth hangers, galvanized wires apart from large-scale steel wire fencing. On the other hand, the other three segments have a combined capacity of 130K MT of ancillary products including wires, fences, nails and barbed wire. Wires segment accounts for 11% of revenues and mainly used for industrial purposes with wires ranging from PVC coated, galvanized and black drawn wires. Mesh segment accounts for

12% and the product range including wire mesh welding used in ingot floors and precast walls. Lastly, nails and cloth hangers (ancillary hardware material) account for the remaining 20% of total revenues.

The major shareholders are its Chairman, Khaled Saad Bin Abdul Rahman Alkhanhal with 7.0% and Nihaz Investment Co. with 5.0%. Aslak’s board is comprised of seven directors and has capable management team comprised of experienced professionals. Some 381K Aslak shares trade per day on average over the trailing 12-months, an increase compared to the 39% YoY decline of trading in 2013. It has a weight of 0.2% in TASI and touched a 52-week high of SAR 57 and low of SAR 34, returning 34% on a YTD basis.

Key Data




Employees n.a

TASI Code 1301

Management

Khaled Saad Al-kanhal Chairman

Abdulkarim Al-Shamikh CEO

Khalid Abdulaziz CFO

Khaled Saad

Abdulrahman

Kanhal7.0%

Nihaz Investme

nt Co.5.0%

PublicFloat88.0%



44

September 2, 2014

44

Financial Analysis

Higher utilization rates to drive revenue

We forecast Aslak’s revenue at a CAGR of 6.7% during 2014-17 to reach SAR 1.3 billion in 2017E mainly driven by efficient mix of volume and price. The pickup in construction sector and finalization stages of large projects has led to peaked demand for steel and ancillary products. The ongoing demand for steel and related products is likely to continue with 2012-13 being the revival stage of many projects and the demand is likely to be extended over the next 2-3 years. Steel rebar’s is set to witness the highest growth

of 7.2% CAGR for 2014-17 and reaching SAR 739 million, while growth rates across product segments are expected to stabilize. We expect other segments such as wires and mesh to witness a CAGR of 6.7% and 4.9% to reach SAR 140 million and SAR 145 million respectively by 2017. The utilization rates are expected to pick up on all segments and cross 80% hurdle rate to meet desired operating efficiencies. Steel rebar could be even higher on anticipation of volume increases to restrict any downfall in realization. Lastly

nail and cloth hangers segment is expected to grow at 6.1% CAGR through 2017 to reach SAR 251 million.

Given the historical revenue mix in products and geographies, we do not expect major shift in contribution for 2014-17 except Central region witnessing shift in revenue mix to 38% in 2014. The reason being its proximity to client locations whilst it’s two key factories are operating in Riyadh. However, steel rebars being the key segment will continue its dominance in the range of 57-58% as other product lines are a combination

of small portfolios’ and are relatively smaller in terms of addressable market size.

Exhibit 52: Revenue Forecasts (SAR Mln) Exhibit 53: Segment Revenues (SAR Mln)


57

1

85

5

1,0

05

1,0

01

1,0

51

1,1

25

1,1

92

1,2

76

0%

10%

20%

30%

40%

50%

60%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Revenue YoY

284

491625 565 599 642 682 739107

116

115111 116

118131

140

68

113

117118

126135

142145

112

134

149 206210

229237

251

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Nails & Cloth Hangers Mesh

Wires Steel Rebar & Steel Rolls

Exhibit 54: Geographic Segment Contribution Exhibit 55: Product Segment Contribution


35% 36% 38% 37% 38% 38% 37% 38%

5% 4% 4% 7% 8% 8% 8% 9%

24% 27% 28% 24% 24% 23% 22% 22%

17% 12%13% 12% 11% 11% 12% 11%

19% 21% 17% 20% 20% 21% 21% 21%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Central Eastern Western Southern Northern

50%57% 62% 57% 57% 57% 57% 58%

19%14%

11%11% 11% 11% 11% 11%

12%13% 12%

12% 12% 12% 12% 11%

20% 16% 15% 21% 20% 20% 20% 20%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Nails & Cloth Hangers Mesh

Wires Steel Rebar & Steel Rolls

Steel rebar segment to

witness highest growth

rate of 7.2% CAGR

amongst all segments

Even revenue mix

across all geographies

within KSA



45

September 2, 2014

45

Cost trends highly correlated with international iron ore prices

We forecast Opex to reach SAR 1.1 billion in 2017, a growth of 6.5% CAGR for 2014-17 versus 28.4% in 2009-13. As a percent of sales, the total direct cost structure accounted

for 85% of sales in 2013, while the forecast for 2014-17 averaged 86% owing to expectations of rising salaries. Aslak has a commodity linked cost structure with iron ore being the major raw material and any inflation in international prices will have a negative effect on margins. With softening of international iron ore prices by -18% to US$ 110/dmt (dry metric ton) in 1H2014, we believe Aslak would be able to improve its margins excluding any market jitters, which affect the prices. We believe, barring any

uncertainties in international commodity prices which occurred during 2009, with iron ore prices swinging by -49% in 2009 and +82% in 2010, such volatility poses higher risk to our estimates. With world bank’s flat projections for iron ore prices reaching US$ 106/ dmt by 2017, we do not see any major cost escalation. Instead we may see further softening due to slowdown in China’s manufacturing sector.

EBITDA margins to expand by +50 bps by 2017

EBITDA is forecasted to reach SAR 184 million in 2017 registering a 7.7% CAGR during 2014-17. EBITDA margins have declined largely from 26.7% in 2009 to 13.8% in 2013 due to volatility in raw material price and we believe this could be the new range. We

believe that if Aslak addresses concerns of lower utilization rates, margin improvement may be achievable and could pose upside risk to our estimates. We forecast margins to improve by +50 bps during 2014-17 to 14.5%. Aslak is in the process of integrating its plants to a centralized location which could aid margin growth.

Net income is forecasted to grow at 8.4% CAGR for 2014-17 to reach SAR 150 million. We believe net margins would improve because of cost containment in direct cost structure

Exhibit 56: Opex Forecasts (SAR Mln) Exhibit 57: Direct Costs and Iron Ore (US$/dmt)

Source: Company reports and Riyad Capital Source: Company reports and World bank projections

449 7

40

880

868

935

998

1,0

57

1,1

27

0%

10%

20%

30%

40%

50%

60%

70%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Total Opex YoY

76.8

%

85.4

%

86.3

%

85.0

%

86.5

%

86.2

%

86.3

%

86.3

%

80

100

120

140

160

180

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Direct cost Iron ore prices



138

121

133

138

147

160

169

184

-20%

-10%

0%

10%

20%

30%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

EBITDA YoY

24.2

%

14.1

%

13.2

%

13.8

%

14.0

%

14.2

%

14.2

%

14.5

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Cost not to peak upon

softening of iron ore

prices

EBITDA to improve on

cost efficiencies but

mainly in 2017E



46

September 2, 2014

46

and we expect this to aid +60 bps increase in margins to reach 11.8% in 2017. The lucrative margins of 19.9% on an average during 2009-10 are incomparable as explained by the volatility in raw material prices due to credit crisis and 2011-13 average of 11%

would be a re-initiating point. The higher effective zakat rates of 9.2% during 2013 limits any tax savings in absence of any interest cost. We have assumed a zakat rate of 8% lower from historical rate of 9.5%.

EPS forecasts are expected to reach SAR 3.42 for 2017E, while DPS is forecasted to reach SAR 2.75. Aslak paid a DPS of SAR 2.22 in 2013 and expects to pay SAR 2.25 for 2014 in line with historical trends. We forecast average payout ratio of 85% for 2014-17as Aslak has not cited big plans for capex spending implying high retention ratio.

The Company has zero debt and has capitalized through funding from equity and

operating cash flow, generating an unlevered ROE of 24% during 2013. However, with no expansion on the cards, the Company might face concerns on growth prospects. While, we argue it should be utilizing a healthy leverage ratio to further boost ROE. Over the past five years, Aslak is a net cash company with healthy cash reserves of SAR 173 million as at 1H2014. It also possesses strong current ratio in excess of 2.5x, while our forecasts suggest even higher, which we believe could lead to working capital redundancy.


Aslak reported revenue of SAR 262 million in 2Q14 (12% YoY and -7% QoQ) and reported net income of SAR 30 million in 2Q14 (-11% YoY and -1% QOQ). Net margins were slightly higher by +80 bps to 11.5% in 2Q14 from 10.7% in 1Q14, but were lower from 2Q13. We believe the same could be due to slight opex pressure due to volumes and lower utilization pressuring gross margins. We forecast revenue of SAR 249 million

in 3Q14E and net income of SAR 27 million, a little weaker results but higher than 3Q13.

Exhibit 60: Net Profit Forecasts (SAR Mln) Exhibit 61: Net Margin Forecasts


108

98

106

110

118

128

135 150

-30%

-20%

-10%

0%

10%

20%

30%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Net profit YoY

19.0

%

11.5

%

10.5

%

11.0

%

11.2

%

11.4

%

11.4

%

11.8

%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E



0.5

6 1.6

7 2.2

2

2.2

5

2.5

0

2.5

0

2.7

5

20%

40%

60%

80%

100%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E


2.4

7

2.2

4

2.4

1

2.5

0

2.6

8

2.9

2

3.0

9

3.4

2

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

EPS CAGR at

11.4% with focus

year to be 2014E

post Capex

completion

Net margins for 2014-17

to average 11.5%

High payout ratio of

85% is attractive upon

absence of any large

capex spending

Attractive balance sheet

with zero debt, high

cash reserves and

current ratio of 2.5x



47

September 2, 2014

47

Comparable Analysis

Aslak can be compared with Bawan though 35% of the revenues come from rebar segment; hence mid cap multiples are applicable to compares Aslak’s valuations.

Valuation

We value Aslak using a target P/E method and assign a multiple of 17.8 xs to its 2015E EPS estimate to arrive at our 12-month target price of SAR 52. The EV/EBITDA does not look practical given the absence of any peer multiples. The DCF method using FCFE holds lower valuation of SAR 45.24 due to inconsistent trends in working capital. The dividend

discount model valuation of SAR 40.23 suggest a stressed valuation which does not hold true considering Alsek’s current trading trends. Hence, we rely on this method and recommend a Hold.

Target P/E Method: Fair value of SAR 51.90

We used the weighted sector P/E method to derive our target price wherein we assign weights to sector P/E for periods ranging from 6 months to 3 years. We use a trailing P/E as forward consensus estimates are unavailable, while the lack of pure peers restricts assigning any multiples for valuation. Aslak’s limited trading history of 3 years also

confines our usage of median multiples. The sector P/E over the last three years averaged 17.2x and we assign higher weighting of 50% due to the long-term duration and lower weights for medium term ranging 3 months to 2 years. The method derived a weighted P/E of 17.8x for the sector and we apply this multiple to our 2015 EPS estimates to derive our target price of SAR 52. The sector trailing P/E is currently is at 26.5x and Aslak at 17.2x, while the target P/E of 17.8x proved our conservative stance in

valuing Aslak.


1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Revenue 278 283 210 235 278 268 226 229 280 262 249 260

QoQ growth 18% 2% -26% 12% 19% -4% -16% 1% 22% -6% -5% 4%

EBITDA 37 34 25 39 44 38 28 29 35 34 32 46

QoQ growth 85% -7% -26% 53% 13% -14% -27% 5% 20% -2% -6% 44%

Net Income 33 30 21 32 40 34 23 25 30 30 27 31

QoQ growth 97% -9% -30% 52% 23% -15% -31% 7% 22% -1% -10% 15%

EPS (SAR) 0.75 0.68 0.48 0.73 0.90 0.77 0.53 0.57 0.69 0.68 0.61 0.70

EBITDA Margins 13.2% 12.0% 12.1% 16.5% 15.7% 14.1% 12.3% 12.7% 12.4% 13.0% 12.9% 17.7%

Net Margins 11.9% 10.6% 10.1% 13.7% 14.2% 12.6% 10.3% 10.9% 10.9% 11.4% 10.8% 11.9%


Table 30: Comparables with in KSA

Company Name

Price

(SAR)

Mcap

SAR

Mln

EV

SAR

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.Y

ld YTD

52 Wk-

Hi

(SAR)

52 Wk-

Lo

(SAR)



Baw an Co 73.12 3,656 4,270 20.6x 5.0x 1.3x 1.6x 15.0x 1.1 15% 85.00 36.00


Middle East Specialized Cables 18.67 1,120 1,923 41.0x 2.2x 1.0x 1.8x 19.7x NM 36% 21.10 13.15

Saudi Cable Co 12.49 949 2,196 NM 1.7x 0.5x 1.1x NM 3.6 (1%) 15.15 11.70

Source: Bloomberg

We use a weighted

sector P/E to value

Aslak

EPS CAGR at

11.4% with focus

year to be 2014E

post Capex

completion



48

September 2, 2014

48

Table 31: Sensitivity and Fair Value Derivation using Target P/E Using Bear-Base-Bull Case EPS

2013A 2014E 2015E 2016E 2017E


EPS 2.50 2.46 2.68 2.85 2.39 2.92 3.15 2.60 3.09 3.60 2.76 3.42 3.87

12.0x 30.0 # 29.5 32.2 34.2 28.7 35.0 37.7 31.2 37.0 43.2 33.1 41.1 46.5

13.0x 32.5 # 32.0 34.9 37.0 31.1 37.9 40.9 33.8 40.1 46.8 35.9 44.5 50.4

14.0x 35.0 # 34.5 37.5 39.9 33.5 40.8 44.0 36.4 43.2 50.4 38.6 47.9 54.2

15.0x 37.6 # 36.9 40.2 42.7 35.9 43.8 47.2 39.0 46.3 54.0 41.4 51.3 58.1

16.0x 40.1 # 39.4 42.9 45.6 38.3 46.7 50.3 41.6 49.4 57.6 44.1 54.8 62.0

17.0x 42.6 # 41.8 45.6 48.4 40.7 49.6 53.5 44.2 52.5 61.2 46.9 58.2 65.9

18.0x 45.1 # 44.3 48.3 51.3 43.1 52.5 56.6 46.8 55.5 64.8 49.6 61.6 69.7

19.0x 47.6 # 46.8 50.9 54.1 45.5 55.4 59.8 49.4 58.6 68.4 52.4 65.0 73.6

20.0x 50.1 # 49.2 53.6 57.0 47.9 58.3 62.9 52.0 61.7 72.0 55.2 68.4 77.5

2014E 2015E 2016E 2017E

Net profit Estimates (SAR mln) 118 128 135 150

EPS (SAR) 2.68 2.92 3.09 3.42

P/E based Valuation (SAR)


Based on a peer valuation of 22.5x 60.3 65.6 69.4 77.0

Estimated fair value at P/E of 17.8x 47.7 51.9 54.9 60.9


P

ER

R

an

ge

(x)


Exhibit 64: Price Multiples Trading History For Past three years

Source: Bloomberg

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

Aug-1

4

Price to Book

P/B 3 Yr Avg 12M Avg

20

30

40

50

60

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

Aug-1

4

Share Price

5.0

10.0

15.0

20.0

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

Aug-1

4

P/E Ratio

P/E 3 Yr Avg 12M Avg

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Aug-1

1

Dec-

11

Apr-

12

Aug-1

2

Dec-

12

Apr-

13

Aug-1

3

Dec-

13

Apr-

14

Aug-1

4

Dividend Yield

Div.Yild 3 Yr Avg 12M Avg



49

September 2, 2014

49



2010 2011 2012 2013 2014E 2015E 2016E 2017E


Revenue 571 855 1,005 1,001 1,051 1,125 1,192 1,276

COGS (443) (740) (878) (865) (909) (970) (1,029) (1,100)

Gross Profit 127 115 127 137 142 155 163 176

SG&A (8) (8) (9) (11) (13) (14) (14) (13)


Net Financing Income/Cost 1 1 1 1 0 0 0 0

Others/One-off items 0 0 0 0 0 0 0 0

Profit before Tax 117 107 115 121 129 140 148 161

Income Tax (9) (9) (9) (11) (11) (12) (13) (11)

Net Profit 108 98 106 110 118 128 135 150

EBITDA 138 121 133 138 147 160 169 184

EPS 2.47 2.24 2.41 2.50 2.68 2.92 3.09 3.42

DPS 0.00 0.56 1.67 2.22 2.25 2.50 2.50 2.75

Margins

Gross Margins 22.3% 13.5% 12.6% 13.6% 13.5% 13.8% 13.7% 13.8%

EBITDA Margins 24.2% 14.1% 13.2% 13.8% 14.0% 14.2% 14.2% 14.5%


PBT Margins 20.6% 12.5% 11.4% 12.1% 12.2% 12.4% 12.4% 12.7%

Net Margins 19.0% 11.5% 10.5% 11.0% 11.2% 11.4% 11.4% 11.8%

Balance Sheet

Cash 74 79 61 104 105 81 68 63

ST Investments 13 13 18 11 11 11 11 11

Inventtories 139 135 151 139 136 155 165 176

Receivables 49 72 86 132 137 146 155 166

Current Assets 275 299 316 386 389 394 399 416


Total Assets 385 418 434 517 540 557 586 624

Short Term Debt 0 0 0 0 0 0 0 0

Payables and Others 54 37 19 41 43 40 42 43


Long Term Debt 0 0 0 0 0 0 0 0


Total Liabilities 57 41 24 47 50 47 48 50

Shareholders Equity (SE) 329 378 411 473 494 514 541 575

Total Liabilities & SE 385 418 434 517 540 557 586 624


Current Assets 72% 72% 73% 75% 72% 71% 68% 67%





Cashflow

Net Operating Cash Flow 123 80 72 124 132 123 137 150

Net Investing Cash Flow (27) (25) (17) (31) (34) (39) (43) (38)

Net Financing Cash Flow (58) (49) (73) (49) (98) (107) (107) (117)

Net Change in Cash 37 6 (18) 44 1 (24) (13) (5)

Cash (Opening) 36 74 80 61 104 105 81 68

Cash (Closing) 74 79 61 104 105 81 68 63




50

September 2, 2014

50

Table 33 : Ratio Analysis Summary

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Valuation

P/E 19.3x 21.2x 19.7x 19.0x 17.7x 16.3x 15.4x 13.9x

P/B 6.3x 5.5x 5.1x 4.4x 4.2x 4.1x 3.8x 3.6x

P/S 3.7x 2.4x 2.1x 2.1x 2.0x 1.9x 1.7x 1.6x

P/CF 17.0x 26.1x 28.9x 16.9x 15.7x 17.0x 15.2x 13.9x



Dividend Yield n.m. 1.2% 3.5% 4.7% 4.7% 5.3% 5.3% 5.8%

Per share

EPS 2.47 2.24 2.41 2.50 2.68 2.92 3.09 3.42

DPS 0.00 0.56 1.67 2.22 2.25 2.50 2.50 2.75

BVPS 7.49 8.62 9.38 10.78 11.24 11.71 12.35 13.11

Sales per share 13.01 19.49 22.91 22.82 23.96 25.64 27.18 29.08

OCF/Share 2.80 1.82 1.65 2.82 3.02 2.80 3.12 3.42

ICF/Share 2.26 1.24 1.26 2.15 2.25 1.91 2.19 2.64

FCF/Share 2.26 0.13 (0.41) 1.04 0.03 (0.54) (0.25) (0.03)

Capex

Capex/Sales 5% 3% 2% 3% 3% 4% 4% 3%


Liquidity

Cash Ratio 1.4 2.1 3.1 2.5 2.4 2.0 1.6 1.4

Current Ratio 5.1 8.0 16.3 9.4 9.0 9.8 9.6 9.2

Quick Ratio 2.5 4.4 8.5 6.0 5.9 5.9 5.6 5.3

Cash Cycle




Inventory Days 100 68 60 62 55 55 57 56

Payable Days 19 18 7 6 11 10 9 9

Receivable Days 31 31 31 48 47 47 47 47

Cash Cycle (Days) 112 81 84 104 92 93 95 95

Risk Ratio

Payout Ratio 0% 25% 69% 89% 84% 86% 81% 80%

Retention Ratio 100% 75% 31% 11% 16% 14% 19% 20%

Returns Ratio

ROAA 31.5% 24.4% 24.8% 23.1% 22.3% 23.3% 23.7% 24.8%

ROAE 35.6% 27.8% 26.8% 24.8% 24.4% 25.4% 25.6% 26.9%

ROIC 35.4% 27.9% 27.8% 25.3% 26.1% 27.2% 27.3% 28.1%

ROCE 35.2% 27.7% 27.6% 25.1% 25.9% 27.1% 27.1% 27.9%

Dupont Analysis


Net Income/Sales 0.19 0.11 0.11 0.11 0.11 0.11 0.11 0.12


Dupont ROE 35.6% 27.8% 26.8% 24.8% 24.4% 25.4% 25.6% 26.9%

Cash Flow Ratio's

Cashflow to Revenue 22% 9% 7% 12% 13% 11% 11% 12%

Cashflow to EBITDA 89% 66% 54% 90% 90% 77% 81% 81%

Cash return on assets 32% 19% 17% 24% 25% 22% 23% 24%

Cash return on equity 37% 21% 18% 26% 27% 24% 25% 26%


National Company for Glass Industries Initiating Coverage Report

Hold 12-Month Target Price SAR 46

Valuation Unappealing

We initiate coverage on National Company for Glass Industries (Zoujaj) with a Hold rating and a 12-month target price of SAR 46, suggesting upside of 7%. Large capex spending, significant margin expansion and revenue growth of 10.2% CAGR meets enough comfort for conviction but not supported by attractive valuation. Zoujaj after a stock rally of 73% over the last twelve months, trades at expensive levels with trailing P/E of 24.9x. This remains unjustified when TASI is trading at 20.0x and industry at 21.2x. We believe a rally upon absence of any large news flows is overly optimistic. The excess optimism does not warrant large valuation upside.

Strong business model with large support from associates

We remain positive on its business model with revenue set to reach SAR 146 million in 2017 driven by CAGR of 6% in volumes and 4% in realization. The superior EBITDA margins averaging 39.4% during 2010-13 is likely to expand by +320 bps to 43.8% through 2017. Earnings support from associates, who operate in float glass segment is likely to provide large cushion. However, the extent of positive impact needs more clarity though it contributed an average of 55% to net income during 2010-13. Our forecast considers such robust contribution levels and net income to grow at 7.7% CAGR for 2014-17 to reach SAR 71 million. Leaving all such positives aside, ROE of 14.3% during 2010-11 remains a glory of past and expect to decline to an average ROE of 9.1% for 2014-17, which Zoujaj needs to resolve.

Industry positioning firm, any uptick in demand benefits Zoujaj

With large sized population, KSA is the largest glass container market in GCC and Zoujaj’s industry positioning stays firm with its 85% sales from KSA. The glass container industry caters to food, medicine and other industrial packaging needs with key driver being the growth in population driven by higher consumption patterns. The demands from personal to industrial needs are the potential catalysts. Renewed demand is likely, with soft drink manufacturers such as Coca-Cola, Pepsi and other local manufacturers increasing their order for glass bottles due to environment concerns on PET bottles. Zoujaj’s float glass business is expected to show some pick upon renewed construction activity in KSA and UAE, mainly from the commercial construction.

Valuations unsupportive; recommend Hold

Zoujaj trades at trailing P/E of 24.9x which remains expensive to peers such as Gulf Glass (GGMC KK) and Middle East Glass (MEGM EY) trades lower at 22.6x and 21.4x. We value Zoujaj using a DCF method as valuation checks suggest DCF method to be more relevant. The consistency in dividends with payout ratio of 76% during 2010-13 and 67% for 2014-17 is worth mentioning, We believe at such peak valuations, the Hold rating is warranted while expansion plans could be a catalyst.

Key Financials


Revenue 102 109 117 131

EBITDA 36 44 51 55

Net Profit 45 57 60 64

EPS (SAR) 1.50 1.90 2.00 2.14

DPS (SAR) 1.25 1.30 1.35 1.40

BVPS (SAR) 19.69 21.86 22.87 23.84

ROAA 7.2% 8.1% 7.6% 7.9%

ROAE 7.6% 8.7% 8.7% 9.0%

P / E 28.8x 22.7x 21.6x 20.2x

P / B 2.2x 2.0x 1.9x 1.8x

P / S 12.7x 11.8x 11.1x 9.8x

EV/ EBITDA 28.9x 32.4x 27.6x 23.9x

EV/ Sales 11.9x 10.6x 10.5x 9.2x

October 15, 2014






Market Data

52 Week H/L SAR 48.00/27.30




Free Float 73.8%

12-Month ADTV (000’s) 803.4

TASI Weight 0.1%


Bloomberg Symbol Zoujaj AB


Source: Bloomberg

Zoujaj TASI TINDI

Oct-13- 2014 43.15 10,378 8,410

Total Change

6-months 33.3% 10.1% 7.3%

1-Year 73.4% 30.0% 29.4%

2-Year 61.1% 55.3% 54.3%


Riyad Mohammed Alhumaidan 26.2%

Public Float 73.8%

90100110120130140150160170180190200

S O N D J F M A M J J A S O

Zoujaj TASI TINDI


October 15, 2014 52

Overview

National Company for Glass Industries (Zoujaj) incorporated in 1990 is the leading glass

manufacturer in KSA. It has a paid-up capital of SAR 300 million (par value of SAR 10) with 30 million shares outstanding currently. Listed on Tadawul during 1992, the Company has two plants, located in Riyadh and Dammam, mainly producing glass containers. It has three other factories through joint venture investments in UAE and KSA mainly producing float glass used for buildings. The key product lines are glass bottles, flint, hollow glass, mirrors, float glass, lamps and other glass based electrical products. Its

key clientele in the glass segment are bottling companies for Coca Cola, Pepsi and other leading juice manufacturers in KSA in addition to industrial consumption. In the float glass segment, it has a clientele of mainly contractors and builders across KSA and UAE.

The first factory, National Factory for Glass Bottles (NFGB), located in Riyadh, has production capacity of 66K metric tons (MT) of glass containers (flint) per annum. The second being Dammam Factory for Glass Bottles (DFGB), located in Dammam, has

current capacity of 18K MT of glass containers (hollow glass or glass bottles) per annum. The joint venture based factories are 45% partnership with the first being i) Saudi-Guardian International Float Glass Co. Ltd., Jubail and ii) Guardian-Zoujaj International Float Glass Co. LLC, Ras Al Khaimah, and a 50% partnership with iii) The Saudi National Lamps and Electrical Limited, Hofuf.

Zoujaj reports revenue only from the glass bottles as float glass segment is accounted as

associates hence revenue contribution is not available. Zoujaj derives 82% of its sales in domestic market, while 15% of sales came from Asia and 3% from GCC.

After a large capex spending in 2004, Zoujaj is in the process of expanding its glass segment especially in its NFGB plant, by doubling its capacity to nearly 132K MT. The production is due to start in 1Q2015 after a lag of one quarter as announced earlier. It had earlier announced SAR 275 million for its expansion plans in float glass segment and grow the electrical segment (bulbs and lamps) over the long term. The key strategy is to double the capacity and capitalize on the early mover advantage with spare capacity. The international expertise from Saint Gobain of France and Technipetrol of Italy has helped Zoujaj to streamline operations and run plants efficiently.

The major shareholder is its Chairman, Riadh Mohammed Al Humaidan holding 26.2% with no other shareholder stakes exceeding 5.0%. The board is comprised of eight

directors while management team consists of experienced professionals in the glass industry domain. The shares on an average traded 803K/day over the last 12-months. It has a weight of 0.1% in TASI with 52-week high of SAR 48 and low of SAR 27. The shares returned 44% YTD and 73% on a 12-month basis.

Public float

73.8%

Riadh Mohamed

Al

Humaidan

26.2%




Employees 300

TASI Code 2150

Riadh Mohamed Al Humaidan Chairman

Yousef Al Salman CEO

Hatem Al Fadli CFO

Key Data

Management


October 15, 2014 53

Financial Analysis

Volume growth to align well with demand; capex is a long term story

The combined effort of volume growth and realization drive our revenue forecasts for 2014-17 at 10.2% CAGR. Our forecasts suggest realization to reach SAR 1,605/MT and volumes to reach 91k MT by 2017. The continued local demand from bottling companies is likely to aid growth in revenue. We forecast a normalized average revenue growth of 7.1% for 2014-15 and 12% by 2016-17 to reach SAR 146 million by 2017. Zoujaj’s new capacity addition remains a key positive for long term, which we believe, should

translate into robust sales over the next 5-6 years. Over the forecast period, we do not see significant pick up in volume despite new capacity as Zoujaj aims production levels to meet near term demand. We believe the management would make conscious efforts to meet utilization targets in the range of 60-70% for 2015-17.

The glass industry’s procurement costs are lower, given its proximity and abundant availability of natural resources within KSA. The availability of silica sand, limestone and feldspar are the key components, while small concentrations of procurement are met

through imports from Europe. As a result, the procurement from KSA forms a stable cost line and remains attractive with opex-to-sales ratio of 58.9% during 2009-13. We forecast an opex-to-sales ratio of 57.6% for 2014-17. Such cost benefits should translate to EBITDA CAGR of 13.1% reaching SAR 64 million by 2017. The margins are likely to improve by +320 bps to 43.8% by 2017 despite an escalation in fixed costs as new capacity is added over the medium term. We have factored the impact of lower

utilization on fixed costs in our estimates through 2016. We remain watchful on cost buildup in 2014 due to maintenance issues in 3Q2014 amid capex delays.

Exhibit 65: Revenue Forecasts (SAR Mln) Exhibit 66: Production (MT) and Realization (SAR/MT)


11

1 11

8

11

3

10

2

10

9 11

7

13

1

14

6

-10%

-5%

0%

5%

10%

15%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Revenue YoY

78,0

13

77,5

76

77,8

58

72,9

44

76,5

91

79,6

55

86,0

27

91,1

89

1,300

1,350

1,400

1,450

1,500

1,550

1,600

1,650

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Production Realization

Exhibit 67: Opex Forecasts (SAR Mln) Exhibit 68: EBITDA (SAR Mln) and Margin Forecasts


61

74

71

65

64

66

76 8

5

-10%

0%

10%

20%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Total Opex YoY

52

45

42

36 4

4 5

1 55 6

4

34%

38%

42%

46%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

EBITDA EBITDA Margins

Stable growth in

realization and volumes

to drive 10.2% revenue

CAGR

Zoujaj’s procurement

costs are lower, hence

average opex to sales

ratio at 57.6% for 2014-

17


October 15, 2014 54

Non-core income and margin improvement to drive bottom line

Zoujaj has sizeable portion of non-operational income, which are from its associates. We forecast non-core income to reach SAR 32 million by 2017 and likely to give a large boost

to earnings stream. The basis of such confidence stems from historical patterns of a 50% contribution to profit before zakat from non-operational income during 2013. It is forecasted to contribute 47% on average during 2014-17, which we have factored in our forecasts. The non-core income yielded an average 12.2% over 2010-13 and we forecast an average yield of 10.0% between 2014-17, on the investment book. We have taken into account the effect of one time gain of SAR 5.8 million in 1H2014 in our 2014 net profit

numbers. Net income is forecasted to reach SAR 71 million by 2017 mainly due to improvement in operational margins and effect of non-core income. However, we expect slight volatility in net margins due to the impact of one–off gains in 2014-15 and gradually stabilize at 48.8% by 2017.

We expect stable growth should follow 2015 trends as EPS rises to SAR 2.38 by 2017. Historically Zoujaj maintained a consistent record in dividend payouts averaging 76% for

2010-14 except high DPS of SAR 2.25 in 2011. Payout ratio is expected to moderate to 65% for 2014-17 due to the ongoing capex commitments. The DPS levels are expected to improve to SAR 1.30 by 2014 and reach SAR 1.55 by 2017, a CAGR of 6%.

Zoujaj has a lower debt to equity ratio of 0.1x amounting to SAR 74 million as of 1H2014 signifying lower leverage commitments. Retention ratio is set to improve for 2014-17 as

the spending cycle is returning after a large gap of ten years. Zoujaj has strong liquidity ratios with current ratio exceeding 3.1x in 2013 and forecasted to reach 5.7x by 2017. The consistent cash cycle, efficient working capital management and lower inventory redundancy are some of the key balance sheet highlights.

Exhibit 69: Net Profit (SAR Mln) and Margin Forecasts Exhibit 70: Non Core Income (SAR Mln) and Share of Net Income


71 8

1

44

45 5

7

60

64 71

30%

40%

50%

60%

70%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Net profit Net Margins

35

55

20 2

5

33

30 32

32

40%

50%

60%

70%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Non Core Income % of Net profit



1.2

5

2.2

5

1.2

5

1.2

5

1.3

0

1.3

5

1.4

0

1.5

5

20%

40%

60%

80%

100%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E


2.3

7 2.7

1

1.4

5

1.5

0 1.9

0

2.0

0

2.1

4

2.3

8

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Noncore income to

contribute 47% to pre-

zakat earnings between

2014-17

Slight growth in DPS

during 2014-17, with

2014 DPS at SAR 1.30

Low D/E ratio of 0.1x

and current ratio of 3.1x

makes it a flexible

balance sheet


October 15, 2014 55

2Q2014 results summary

Zoujaj reported revenue of SAR 21 million in 2Q14 (-27% YoY and -29% QoQ), while it reported a net income of SAR 14 million in 2Q14 (+7% YoY and -5% QOQ). However,

EBITDA margins declined to 30% in 2Q14 from 40% in 2Q13. Net margins significantly improved to 27.1% in 2Q14 from 34.9% in 1Q14. We forecast revenue of SAR 22 million in 3Q14E and SAR 36 million in 4Q14E, while our net income estimates are expected to be lower for 3Q14E at SAR 13 million and improve at SAR 15 million in 4Q14E.

Valuation

We value Zoujaj using a DCF method to arrive at our 12-month target price of SAR 46. We look at each and perform our sanity checks using relevant parameters.

#1: EV/EBITDA valuation derived SAR 39.21

The EV/EBITDA holds a inconsistent valuation with larger peer spread due to its comparable peer Gulf Glass, Middle East Glass, Majan Glass valued quite lower at 7-8x EV/EBITDA, hence country specific comparable multiples apply for valuing Zoujaj. For

comparison, we apply the valuations applied historical average of 17.5x to 2015 EBITDA, the valuations derived is SAR 39.21, which remains unjustified.


The DCF method suggest valuation of SAR 45.63, which is convincing with implied fair value per share at P/E of 22.3x to its 2015 EPS estimates.


1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Revenue 26 30 26 31 24 29 24 25 30 21 22 36

QoQ growth -3% 18% -12% 16% -21% 20% -16% 2% 21% -29% 4% 64%

EBITDA 10 12 10 10 8 11 9 8 10 6 12 16

QoQ growth 9% 25% -20% -5% -15% 37% -22% -11% 34% -45% 109% 33%

Net Income 18 16 12 -2 9 13 13 10 15 14 13 15

QoQ growth 234% -10% -26% -114% -646% 52% 2% -27% 51% -5% -8% 15%

EPS (SAR) 0.59 0.53 0.39 -0.05 0.29 0.44 0.45 0.33 0.49 0.47 0.43 0.50

EBITDA Margins 39.1% 41.5% 37.8% 31.0% 33.5% 38.4% 36.0% 31.6% 34.9% 27.1% 54.5% 44.4%

Net Margins 69.2% 52.8% 44.1% -5.1% 35.6% 45.2% 55.3% 39.9% 49.6% 66.3% 59.1% 41.7%


Table 35: DCF Valuation (SAR Mln)

2016E 2017E 2018E 2019E DCF Valuation Assumptions

NOPLAT 41 48 52 55 Cost of equity 9.9%

Add: depreciation &amortization 14 16 18 19 After tax cost of debt 4.5%

Change in w orking capital 2 (1) (3) 5 Long term debt/total debt 100.0%

Less: capex (5) (6) (6) (7) WACC 8.0%

Free cash flow 53 57 61 72 Long term capital structure 75:25

PV of free cash flow 49 49 48 53 Terminal grow th rate 3.0%

DCF valuation Risk free rate 3.8%

Terminal value 1,472 Market return 10.0%

PV of terminal value 1,081 Market risk premium 6.3%

Value of the f irm 1,280 5 yr w eekly adj.beta 1.0

Less: debt (59) Current D/E ratio 0.1

Add:cash and equivalents 148 Shares O/S 30.0

Value of equity 1,369 Current market cap 1,295

Fair value per share (SAR) 45.63 Current EV 1,268


EPS CAGR at

11.4% with focus

year to be 2014E

post Capex

completion

Absence of local peers

and lack of even

historical trends to

justify DCF valuation

method


October 15, 2014 56

We used a long-term growth rate of 3% and a beta of 1.0 in our model. The risk-free rate assumption of 3.8% includes a premium for country risk over 10-year US risk-free rate of 2.4%. Cost of equity of 9.9% and cost of debt of 4.5% leads to a WACC of 8.0% assuming a

long-term capital structure of 75% equity and 25% debt weighting.

#3: Target P/E valuation at SAR 39.90

We used the sector P/E method to cross check valuation range mainly using the TASI industry sector as a reference multiple. We assign a trailing 12-month average P/E of 20.0x on 2015 EPS estimates of SAR 2.00 to derive a value of SAR 39.90

#4: DDM method derives valuation of SAR 26.12

The dividend discount model suggests a valuation of SAR 26.12 with assumptions of payout averaging 67% for 2014-19. The DDM model assumes a required return of 9.9% and growth rate of 3% in line with cost of equity. Given, Zoujaj’s dividend flows, the yields translates to less than 3% making it less attractive. Additionally, with long-term expansion plans on float glass and Dammam plant, Zoujaj will focus on higher retention ratio, in this case DDM valuation proves to be less reliable given declining payout ratio.

Table 36: Fair Value Sensitivity to Target P/E Using Bear-Base-Bull Case EPS

2013A 2014E 2015E 2016E 2017E


EPS 1.50 1.47 1.90 2.00 1.67 2.00 2.10 1.83 2.14 2.27 1.93 2.38 2.50

14.0x 21.0 # 20.5 26.6 28.0 23.3 28.0 29.4 25.7 30.0 31.7 25.7 30.0 31.7

15.0x 22.5 # 22.0 28.5 30.0 25.0 30.0 31.5 27.5 32.1 34.0 27.5 32.1 34.0

16.0x 24.0 # 23.5 30.4 32.0 26.7 32.0 33.6 29.3 34.2 36.3 29.3 34.2 36.3

17.0x 25.5 # 24.9 32.3 34.0 28.3 34.0 35.7 31.2 36.4 38.5 31.2 36.4 38.5

18.0x 27.0 # 26.4 34.2 36.0 30.0 35.9 37.8 33.0 38.5 40.8 33.0 38.5 40.8

19.0x 28.5 # 27.9 36.1 38.0 31.7 37.9 39.9 34.8 40.7 43.1 34.8 40.7 43.1

20.0x 30.0 # 29.3 38.0 40.0 33.3 39.9 42.0 36.7 42.8 45.3 36.7 42.8 45.3

21.0x 31.5 # 30.8 39.9 42.0 35.0 41.9 44.1 38.5 44.9 47.6 38.5 44.9 47.6

22.0x 33.0 # 32.3 41.8 44.0 36.7 43.9 46.2 40.3 47.1 49.9 40.3 47.1 49.9

2014E 2015E 2016E 2017E

Net profit estimates (SAR mln) 57 60 64 71

EPS (SAR) 1.90 2.00 2.14 2.38


Valuation at 5 year average of 14.5x 27.6 29.0 31.0 34.5

Based on 12-month average P/E of 22.4x 42.6 44.7 47.9 53.3

Estimated fair value at P/E of 20.0x 38.0 39.9 42.8 47.6


P

/E R

an

ge

(x)

Valuation based on PER


October 15, 2014 57



2010 2011 2012 2013 2014E 2015E 2016E 2017E


Revenue 111 118 113 102 109 117 131 146

COGS (61) (74) (71) (65) (64) (66) (76) (84)

Gross Profit 50 44 42 37 45 51 55 62

SG&A (10) (11) (12) (12) (13) (14) (14) (14)



Others/One-off items (4) 2 3 10 8 4 4 3

Income from Associates 40 54 18 15 25 26 28 29

Profit Before Zakat 75 88 50 50 62 65 70 78

Zakat (4) (7) (6) (5) (5) (5) (6) (6)

Net Income/Profit 71 81 44 45 57 60 64 71

EBITDA 52 45 42 36 44 51 55 64

EPS 2.37 2.71 1.45 1.50 1.90 2.00 2.14 2.38

DPS 1.25 2.25 1.25 1.25 1.30 1.35 1.40 1.55

Margins

EBITDA Margins 47.3% 38.0% 37.2% 35.1% 40.6% 43.4% 42.1% 43.8%


PBT Margins 67.6% 74.4% 43.9% 48.7% 56.7% 55.6% 53.1% 53.0%

Net Margins 64.1% 68.8% 38.7% 44.1% 52.2% 51.2% 48.8% 48.8%

Balance Sheet

Cash and Equivalents 69 92 75 84 135 143 148 165

Short Term Investments 2 2 2 3 3 3 3 3

Inventories 18 13 12 15 15 15 18 19

Receivables 16 14 19 14 16 15 17 18

Current Assets 105 121 108 117 169 176 186 204



Total Current Assets 476 508 504 523 605 624 639 655

Total Assets 582 630 612 640 775 800 825 859

Short Term Debt 5 9 3 0 0 0 0 0

Payables 7 8 8 11 10 12 14 15

Others 23 27 26 26 26 26 26 26


Long Term Debt 12 3 0 1 73 66 59 53

Others 9 10 10 10 10 10 10 10


Total Liabilities 57 56 48 49 119 114 109 106

Shareholders Equity (SE) 525 574 564 591 656 686 715 753

Total Liabilities & SE 582 630 612 640 775 800 825 859

Common Size Balance sheet

Current Assets 18% 19% 18% 18% 22% 22% 23% 24%





Cash flow

Operating Cash Flow 61 56 40 43 69 71 72 86

Investing Cash Flow 1 12 21 5 (51) (16) (15) (16)

Financing Cash Flow (19) (44) (77) (40) 33 (48) (52) (54)

Net Changes in Cash Flow 44 23 (17) 9 51 8 6 16

Opening Cash 26 69 92 75 84 135 143 148

Closing Cash 69 92 75 84 135 143 148 165



October 15, 2014 58

Table 38 : Ratio Analysis Summary

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Valuation

P/E 18.2x 15.9x 29.7x 28.8x 22.7x 21.6x 20.2x 18.1x

P/B 2.5x 2.3x 2.3x 2.2x 2.0x 1.9x 1.8x 1.7x

P/S 11.7x 11.0x 11.5x 12.7x 11.8x 11.1x 9.8x 8.8x

P/CF 21.1x 23.2x 32.6x 29.8x 18.7x 18.1x 17.9x 15.0x



Dividend Yield 2.9% 5.2% 2.9% 2.9% 3.0% 3.1% 3.2% 3.6%

Per share (SAR)

EPS 2.37 2.71 1.45 1.50 1.90 2.00 2.14 2.38

DPS 1.25 2.25 1.25 1.25 1.30 1.35 1.40 1.55

BVPS 17.50 19.12 18.81 19.69 21.86 22.87 23.84 25.12

Sales per share 3.69 3.93 3.76 3.40 3.64 3.90 4.38 4.88

OCF/Share 2.04 1.86 1.32 1.45 2.31 2.38 2.41 2.87

ICF/Share 1.79 2.26 2.02 0.27 0.60 1.85 1.97 2.48

FCF/Share 1.79 1.00 (0.22) (0.98) (0.70) 0.50 0.47 0.88

Capex

Capex/Sales 3% 5% 3% 77% 5% 5% 4% 4%


Liquidity

Cash Ratio 1.9 2.1 2.0 2.2 3.8 3.8 3.7 3.9

Current Ratio 3.0 2.8 2.9 3.1 4.7 4.6 4.7 4.8

Quick Ratio 2.5 2.5 2.5 2.7 4.3 4.2 4.2 4.3

Cash Cycle




Inventory Days 107 75 64 77 85 83 78 78

Payable Days 27 38 41 53 60 59 59 60

Receivable Days 51 45 61 51 55 47 47 44

Cash Cycle 131 81 84 75 79 71 66 62

Risk Ratio

Pay out Ratio 53% 83% 86% 83% 68% 68% 65% 65%

Retention Ratio 47% 17% 14% 17% 32% 32% 35% 35%

Returns Ratio

ROAA 13.0% 13.4% 7.0% 7.2% 8.1% 7.6% 7.9% 8.5%

ROAE 14.5% 14.2% 7.7% 7.6% 8.7% 8.7% 9.0% 9.5%

ROIC 7.4% 5.6% 5.2% 4.2% 4.4% 5.0% 5.3% 6.0%

ROCE 7.3% 5.6% 5.1% 4.1% 4.4% 5.0% 5.2% 5.9%

DUPONT Analysis


Net Income/Sales 0.64 0.69 0.39 0.44 0.52 0.51 0.49 0.49


Dupont ROE 13.5% 14.2% 7.7% 7.6% 8.7% 8.7% 9.0% 9.5%

Cash Flow Ratio's

Cashflow to Revenue 0.55 0.47 0.35 0.43 0.63 0.61 0.55 0.59

Cashflow to EBITDA 1.17 1.25 0.95 1.22 1.56 1.41 1.31 1.34

Cash return on assets 0.11 0.09 0.06 0.07 0.09 0.09 0.09 0.10

Cash return on equity 0.12 0.10 0.07 0.07 0.11 0.10 0.10 0.11

Leverage Ratio's

Net Cash (debt) 52 80 72 83 62 77 89 112



Debt/Equity 3% 2% 1% 0% 9% 8% 7% 6%



October 15, 2014 59

Table 39: Global Comparables in Glass Manufacturing

Company Name Country

Price

(LCL)

EV

US$

Mln

Mcap

US$

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.Y

ld YTD

52

Wk-Hi

(LCL)

52 Wk-

Lo

(LCL)

MENA

Zoujaj Saudi Arabia 43.2 338 345 24.9x 2.3x 12.9x 11.1x 34.1x 2.9 44% 48.0 27.3

Gulf Glass Manufacturing Co KSKuw ait 700.0 100 108 21.4x 2.1x 2.7x 1.9x 6.3x 4.1 10% 750.0 530.0

Middle East Glass ManufacturinEgypt 125.4 180 70 22.6x 2.6x 0.9x 1.4x 5.7x NM 10% 125.4 109.4

Majan Glass Co Oman 0.29 37 31 17.2x 1.0x 1.2x 1.4x 10.9x NM (7%) 0.3 0.3

Beta Glass Co PLC Nigeria 20.0 71 61 6.8x 0.7x 0.7x 0.6x NM NM 39% 21.5 11.3

Asia

Shandong Glass China 14.0 607 585 29.4x 1.7x 2.2x 1.9x NM 1.1 40% 14.3 8.9

Hindusthan National Glass India 137.2 689 194 NM 1.6x 0.6x 2.0x 16.1x NM (9%) 168.0 128.7

Piramal Glass Ltd India 138.6 388 181 29.9x 3.0x 0.6x 1.2x 7.7x 0.7 58% 139.5 67.5

Nihon Yamamura Glass Co LtdJapan 168.0 350 172 NM 0.3x 0.2x 0.5x 15.8x 3.0 (10%) 195.0 150.0

Ghani Glass Ltd Pakistan 56.8 102 68 6.8x 1.0x 0.5x 0.7x 4.4x NM (5%) 77.5 47.2

Piramal Glass Ceylon PLC Sri Lanka 4.7 47 34 7.8x 1.3x 0.9x 1.2x 6.8x 8.1 4% 5.6 3.3

Europe

Resilux Belgium 106.4 339 266 26.1x 2.6x 0.7x 0.9x 8.1x 1.3 14% 110.7 74.9

Drujba Glassw orks AD Bulgaria 3.9 204 136 NM 1.3x NM NM NM 3.6 (1%) 4.7 3.0

Groupe Guillin France 132.7 432 310 10.7x 1.6x 0.5x 0.4x 3.6x 1.5 45% 150.0 87.0

Saint-Gobain Oberland AG Germany 442.5 843 559 44.6x 4.7x 0.8x 1.3x 9.3x 2.8 3% 453.8 396.0

Zignago Vetro SpA Italy 5.4 706 599 18.4x 3.9x 1.8x 2.1x 9.0x 4.1 9% 6.6 4.6

Americas

Rigolleau SA Argentina 28.0 259 240 24.6x 5.3x 2.0x 1.8x 12.4x 5.4 30% 29.5 20.0

Ow ens-Illinois Inc United States 25.9 7,841 4,266 9.3x 2.4x 0.6x 1.3x 7.9x NM (28%) 35.9 25.7

Median/Total

Global 13,533 8,227 22.0x 1.9x 0.8x 1.3x 8.1x 2.9 46%

MENA 725 615 22.0x 2.1x 1.2x 1.4x 8.6x 3.5 51%

Asia 2,183 1,235 18.6x 1.5x 0.6x 1.2x 7.7x 2.0 110%

Europe 2,524 1,871 22.2x 2.6x 0.8x 1.1x 8.5x 2.8 51%

Americas 8,100 4,507 16.9x 3.8x 1.3x 1.6x 10.2x 5.4 33%

Source: Bloomberg

Table 40: MENA Comparables (US$ Mln)

Company Country

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

National Co for Glass Manufact Saudi Arabia 33 30 31 30 27 18 12 19 22 12 62% 37% 64% 69% 39%

Gulf Glass Manufacturing Co KS Kuw ait 39 43 41 41 40 7 11 10 9 9 18% 27% 24% 23% 23%

Middle East Glass Manufacturin Egypt 21 45 60 77 81 3 1 7 4 5 NM 5% 15% 7% 6%

Majan Glass Co Oman 28 26 23 19 19 5 8 7 3 2 19% 29% 28% 12% 13%

Beta Glass Co PLC Nigeria 71 74 82 81 89 10 9 10 10 8 13% 13% 13% 12% 10%



Exhibit 73: Price Multiples Trading History For Past Five years

Source: Bloomberg

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

Jan-1

3

May-

13

Sep-1

3

Jan-1

4

May-

14

Sep-1

4

Price to Book

P/B 3 Yr Avg 5 Yr Avg 12M Avg

16

21

26

31

36

41

46

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

Jan-1

3

May-

13

Sep-1

3

Jan-1

4

May-

14

Sep-1

4

Share Price

8.0

13.0

18.0

23.0

28.0

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

Jan-1

3

May-

13

Sep-1

3

Jan-1

4

May-

14

Sep-1

4

P/E Ratio

P/E 3 Yr Avg 5 Yr Avg 12M Avg

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

Jan-1

3

May-

13

Sep-1

3

Jan-1

4

May-

14

Sep-1

4

Dividend Yield

Div.Yild 3 Yr Avg 5 Yr Avg 12M Avg

Stock rallied by 73%

over 12 months and has

breached all long term

averages

Zoujaj margins are

superior due to the

presence of associate

income hence peer

margin analysis not

suitable

Zoujaj trades at a

premium to MENA

peers

Saudi Arabian Amiantit Company Initiating Coverage Report

Sell 12-Month Target Price SAR 16

Restructuring Could Boost Earnings

We initiate coverage on Saudi Arabian Amiantit Company (Amiantit) with a Sell recommendation and a 12-month target price of SAR 16. Flat revenue growth expected over the next three years sheds focus on strategy. Earnings will be equally unremarkable at 3.7% CAGR between 2014-2017E. Historical performance is not an indicator of future outlook as changing business conditions require cost re-alignment. Average net margins are set to decline to 3.7% through 2017. The added stress on free cash flows appears to be a near term concern. While compressing ROE of 5.2% from 8.6% is alarming. Given this scenario, valuation premium appears unjustified – shares are trading 20.9x trailing earnings versus nearest comparable Zamil (TASI: 2240) at 12.1x.

Missing feel good factors

We forecast revenues to reach SAR 2.8 billion by 2017 owing to de-consolidation and sale of non-core businesses. Stiff competition in the local market and slowdown in water infrastructure spending in overseas markets has resulted in bearish revenue outlook with -9% and -5% de-growth in 2014 and 2015 followed by an average of +3% growth in following two years. Net income is projected to recover following a dip in 2014. Restructuring should help gradually improve margins. Tighter working capital has led to weak and volatile operating cash flow.

Competition and slowdown pose headwinds

KSA is the largest producer of desalinated water in the world with the Ministry of Water and Electricity and related entities plans to drive large scale spending in the sector. 2014 budget allocated nearly SAR 17 billion on desalination projects which could boost demand for Amiantit’s product lines. The Ministry has also envisaged long-term plans for over SAR 247 billion capital investments over the next 10 years. However, international competition could win share away from Amiantit.

Valuations expensive and yields not sustainable; recommend Sell

We value Amiantit using a target 2015E P/E multiple of 18.5x to derive a per share fair value of SAR 16. Our target P/E is selected based on median multiple for regional peers. Weak outlook diminishes the case for valuation premium. Direct foreign investment in Saudi equities could potentially lift multiples higher and rerate mid-cap names. Even in such a scenario, better value can be achieved elsewhere, in our view. Current dividend yield of 4.1% is not sustainable as we forecast a cut in dividends to SAR 0.70 during 2014 from SAR 1.00 in 2013. Large improvement in order backlog locally and lower losses from overseas businesses could warrant a re-evaluation but for now we initiate with a Sell recommendation.

Key Financials


Revenue 3,130 2,849 2,707 2,788

EBITDA 296 273 270 278

Net Profit 113 98 99 104

EPS (SAR) 0.97 0.85 0.86 0.90

DPS (SAR) 1.00 0.70 0.70 0.60

BVPS (SAR) 14.75 14.80 14.83 15.30

ROAA 2.4% 2.2% 2.3% 2.4%

ROAE 6.6% 5.8% 5.8% 6.0%

P / E 18.5x 21.1x 20.9x 19.9x

P / B 1.2x 1.2x 1.2x 1.2x

P / S 0.7x 0.7x 0.8x 0.7x

EV/ EBITDA 10.2x 12.5x 13.1x 12.8x

EV/ Sales 1.2x 1.3x 1.3x 1.2x

October 15, 2014



Upside to Target Price (10.8%)


Expected Total Return (7.9%)

Market Data

52 Week H/L SAR 20.5/13.95



Shares Outstanding 115.5mln

Free Float 77.4%

12-Month ADTV (000’s) 1,994.5

TASI Weight 0.2%


Bloomberg Symbol SAAC AB


Source: Bloomberg

SAAC TASI TBMCI

Oct-13- 2014 17.94 10,378 4,538

Total Change

6-months 1.6% 10.1% 12.2%

1-Year 37.2% 30.0% 31.7%

2-Year 36.8% 55.3% 57.8%


Al Mawarid Investment Co 9.4%

HH Prince Ahmed Bin Khaled 7.4%

Abdullah Saleh Al Bassam 5.8%

Public Float 77.4%

90

100

110

120

130

140

150

160

S O N D J F M A M J J A

Amiantit TASI TBMCI


October 15, 2014 61

Valuation Snapshot

5-Year Valuation Trend

5.0

8.0

11.0

14.0

17.0

20.0

23.0

Ju

l-0

9

Ju

l-1

0

Ju

l-1

1

Ju

l-1

2

Ju

l-1

3

P/E Trend

P/E 3 Yr Avg 5 Yr Avg YTD Avg

2

4

6

8

10

12

14

Ju

l-0

9

Ju

l-1

0

Ju

l-1

1

Ju

l-1

2

Ju

l-1

3

Dividend Yield Trend

Div.Yild 3 Yr Avg 5 Yr Avg YTD Avg

Base Case

Assumptions

Our Base case derives a DCF valuation of SAR 18.23 with revenue forecast of 2.3% CAGR and 8.7% EPS

CAGR for 2016-19. Terminal growth rate is assumed at 2%. We have modeled cost benefits upon

realignment to flow in from 2015 onwards leading to slight margin expansion in subsequent two years. We

expect Amiantit subsidiaries and associates to perform slightly better from 2015 onwards.

Bear Case

Assumptions

Our Bear case derives a DCF valuation of SAR 14.49 with revenue CAGR of 1.7% for 2016-19E upon slower

flow of contracts and Amiantit continues on existing order backlog. We expect cost pressure to be high

across all verticals especially water segment with continued losses. The cost realignment benefits to be

less effective and expect potential write-downs, which is likely to have an impact on top to bottom line over

the near term. We have assumed terminal growth rate of 1% to derive this valuation.


Core

Forecasting

Assumptions

Our revenue assumptions are based on expectations of flat growth in pipes segment with no large order

flows from overseas and local markets. The growth rates on both segments have been declining over the

years, while cost escalation in foreign subsidiaries has led to lower profitability. Our model considers a

declining segment level growth and a cost matrix based on historical trends. Non-availability of detailed

information on business trends and limitations on order backlog data led to reliance on historical trends for

forecast assumptions.


Bull Case

Assumptions

Our Bull case derives a DCF valuation of SAR 21.25 assuming a revenue CAGR of 3.5% for 2016-19E and

terminal growth rate at 2.5%. We expect higher inflow of contracts from the domestic market especially in

the infrastructure segment from Ministry of Water and GREs. The cost realignment across all group entities

particularly foreign subsidiaries should resulting in exiting non-profitable businesses. These initiatives

could lead to EPS CAGR of 11.8% for 2016-19E amid margin sustainability.


14.49

0.50 0.14 3.10

18.23

1.90 0.10

1.00 21.23

Bear Revenue @1.7%

CAGR

Inc.in Opex/Sales Inc. in Terminal

growth

Base Revenue growth

@3.5% CAGR

Margin increase Terminal growth at

2%

Bull


Discounted cash flow 18.23 2% FCF sustainability is a concern

Target 2015E P/E valuation @ 18.5x 15.87 (12%) Infrastructure mid-caps command a 18x forward multiple

Historical range - EV/EBITDA 14.00 (22%) High debt distorts EV/EBITDA based valuation

2015E EV/EBITDA @ 13.0x 11.00 (39%) Insufficient peer data available

Terminal exit multiple 16.31 (9%) Suitability affected by FCF de-growth

Adopted - Target 2015E P/E 15.87 (12%) SAR 16 12-month target price


October 15, 2014 62

Overview

Saudi Arabian Amiantit Company (Amiantit) established in 1968 and headquartered in

Dammam (KSA) is one of the leading manufacturers of specialized pipes for water and industrial projects, while it offers consultancy services in water management. Formed as a result of acquisition of many pipe technologies and entities including acquiring the largest fiberglass pipes group of companies & technology Flowtite in 2001 which is located in Europe, Africa, Asia & Latin America. Listed on Tadawul during 1996, the

Company provides unique business exposure. It has a paid-up capital of SAR 1.15 billion (par value of SAR 10) with 115 million shares outstanding and employs 3,171 personnel across thirty countries.

The Company is primarily involved in i) manufacture and sale of pipe systems ii) patents and trademarks in pipe technologies iii) water management consultancy and engineering services and iv) manufacture and supply of polymer products. Amiantit group comprises

of thirty pipe system manufacturing plants, six technology companies, four materials suppliers and eight supply and engineering subsidiaries. It has two R&D centers one in Norway and one in KSA. It operates its plants either fully owned or through joint ventures.

The Company together with its subsidiaries has started enhancement programs on some of its product lines to increase and efficiency in its plants at a cost of SAR 55 million.

Additionally it is in the process of deconsolidating some of the underperforming subsidiaries and divesting units in India and Germany.

Amiantit derived 65% of its revenue from KSA and 35% from overseas markets as of 2013. Geographic mix significantly shifted from 52% in KSA and 48% international in 2009. Revenue reported by business units comprises 89% from pipes manufacturing and 11% from water management.

The major shareholders who represent more than 5% stake are Al Mawarid Investment Company with 9.4% followed by Prince Ahmad Bin Khaled Bin Abdullah Bin Abdulrahman Al Saud with 7.4% and Abdullah Saleh Abdullah Al Bassam at 5.8%. Amiantit has a public float of 77.4% implying reasonable liquidity and large mix of retail shareholders. Amiantit’s board is comprised of nine directors with the CEO as one of the directors. The management team is restructured to different roles reporting to the CEO

for efficiency re-alignment.

Amiantit shares witnessed 12-month ADTV (average daily trading volume) of 1.9 million shares denoting an ADTV/free float ratio of 2.8%. The stock prices witnessed a low of SAR 14 and high of SAR 21 during the last 52 weeks and returned 17% on a year to date (YTD) basis. Trading volumes are ascending with average daily YTD volumes of 2.2 million shares, a 47% rise from 1.5 million shares in 2013.

Share Capital (SAR mln) 1,155


Shares Outstanding (mln) 115.5

Employees 3,171

TASI Code 2160

Prince Ahmad Bin Khaled Chairman

Dr Solaiman A. Al-Twaijri CEO

Pierre Sommereijns CFO

Key Data

Management

Al Mawarid

9.4%

HH Prince Ahmad

Bin

Khaled

7.4%Abdullah

Al

Bassam

5.8%

Public Float

(less than

5%)

77.4%


October 15, 2014 63

Financial Analysis

Industry slowdown and lack of new orders

We forecast Amiantit’s consolidated revenues to be flat with slight dip during 2014. Growth in 2015-2017 will take total revenues to SAR 2.8 billion and gets stabilized. We expect a gradual recovery, but not on the scale of 2007-08 period. The revenue decline since 2011 is due to considerable slowdown in deliveries in Saudi Arabia which was further exasperated by labor issues in 2013.

Revenue from pipes is expected to be lackluster over the next three years reaching some SAR 2.6 billion. On the other hand, water management is projected to decline in the

coming years to SAR 229 million by 2017. Amiantit has started deconsolidating its subsidiaries in India, Germany and various other countries in Europe which we expect to continue over subsequent two years. Its emphasis to cut exposure to underperforming subsidiaries and associates led to lower forecast for international segment to witness a de-growth of -6.4% CAGR during 2014-17 and reach SAR 772 million. This would lead to revenue contribution of 29% by 2017 and raise KSA revenue contribution to 71% subsequently reaching SAR 2.0 billion. Although this may be a positive strategic move, revenues will contract as a consequence in the initial phase of restructuring but improve forming a new normalized base.

Cost trends are varied due to complex subsidiary structure

We benchmark our opex forecasts on historical average rate of 92.3% for 2014-17E to reach SAR 2.6 billion. The cost synergies will be effective following the restructuring and gradual sale of underperforming subsidiaries during 2013. Amiantit operates with five

Exhibit 74: Revenue Forecasts (SAR Mln) Exhibit 75: Product Segment Contribution


3,0

78 3,5

63

3,4

55

3,1

30

2,8

49

2,7

07

2,7

88

2,8

58

-12%

-6%

0%

6%

12%

18%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Revenue YoY

85%

86%

89%

89%

91%

90%

91%

92%

14%

13%

10%

11%

9%

10%

10%

8%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Pipes Water Management

Exhibit 76: Geographical Segments (SAR Mln) Exhibit 77: Product Segments (SAR Mln)


1,6

77

2,1

47

2,3

48

2,0

21

1,9

09

1,8

68

1,9

79

2,0

86

1,4

01 1

,416

1,1

07

1,1

09

940

839

809

772

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Saudi Arabia Intl,Sales

2,6

05

3,0

81

3,0

75

2,7

80

2,5

93

2,4

36

2,5

37

2,6

29

422

457

357

351

256

271

279

229

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Pipes Water Management

Flat revenue growth

expected for forecast

period

Overseas revenue to

witness setback on

industry slowdown


October 15, 2014 64

legal entities, forty subsidiaries (stakes ranging from 50% to 100%) and ten associates. The group has a complex subsidiary structure with nature of operational expenditure varying across countries. The most important of the cost considerations are minimum

salary standards in each country, tax rates, foreign currency exchange adjustments and other associated costs including transfer pricing. The impact of raw material prices especially ethylene and iron ore prices are on a slight rise, which can materially impact production costs for fiberglass and iron ore ductile pipes. This might have a negative impact on margins as Amiantit generates high volumes of these products. Declining utilization in international markets and higher fixed costs in local markets are the key

points to watch for any trends.

EBITDA margins to expand by +80 bps by 2017

We forecast EBITDA at 2.8% CAGR to reach SAR 297 million in 2017 with higher growth of 6.5% YoY in 2017 owing to pick up in KSA based projects. Amiantit would be able to recover from cost pressure once revenue reaches scale. For example, 2008 revenues of SAR 3.5 billion yielded EBITDA of SAR 758 million. We believe the industry has shifted away from high margin zones. Otherwise, it would need to curtail group expenses, which we believe is more manageable in the local market unlike international markets. On an operational level, the local market is virtually supporting the entire operations’ profitability. We believe the Company is facing major headwinds with water management segment bearing losses on a segmental level consecutively, which is a medium term concern.

Amiantit expects net income to reach SAR 111 million in 2017 and our forecasts assume potential write down from sales of associates and adjustments in minority interest, which we have partially adjusted in our earnings model through 2017. We expect the loss from subsidiaries to decline and enable for further smoothening of margins by +50 bps to

3.9% by 2017.

Exhibit 78: Opex Forecasts (SAR Mln) Exhibit 79: Opex Structure During 2013 (% of total Opex)


2,6

85 3

,238

3,1

91

2,9

03

2,6

50

2,5

05

2,5

79

2,6

42

-12%

-6%

0%

6%

12%

18%

24%

201

0

201

1

201

2

201

3

201

4E

201

5E

201

6E

201

7E

Total Opex YoY

COGS-Excl D&A

90%

D&A2%

Salaries5%

Freight1%

Others3%



520

475

377

296

273

270

278

297

-40%

-30%

-20%

-10%

0%

10%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E

EBITDA YoY

16.9

%

13.3

%

10.9

%

9.5

%

9.6

%

10.0

%

10.0

%

10.4

%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E

Complex subsidiary

structure with varied

trends in opex/sales

ratio

Margin expansion to be

a late entrant amid

expectations of

restructuring benefits


October 15, 2014 65

Our EPS is projected to reach SAR 0.96 in 2017 after a slight fall in 2014. On a historical comparison, though EPS growth is set to be slower for 2014-17, this is largely better unlike de-growth in 2010-12. Amiantit has flat trends in dividend during 2011-12, consequently we estimated lower DPS of SAR 0.70 for 2014-15 and SAR 0.60 for 2016-17

due to added stress in cash flows amid a drain in earnings.

Amiantit has a higher debt to equity ratio of 1.1x which might pressure its fundamentals when there is declining ROIC and compressing ROE. This signals declining reward to shareholders with ineffective usage of leverage to boost ROE’s. Our model derived ROE to be less than 5.2% for 2014-17, (ROE was 12.5% in 2009) due to lower financial leverage multiplier. The net debt to EBITDA ratio has reached 5.5x in 2013 from 1.2x in

2010 signifying the declining earnings power. It has larger exposure to short-term debt of SAR 1.8 billion as of 1H14 and lower proportion of long term debt of SAR 55 million. However with short term debt to be repayable within one year, we believe Amiantit will contemplate refinancing options, while negative SAR 180 million of net investing cash flow denotes a large discomfort on cash flow patterns. The earnings erosion could lead to lower coverage ratio and thereby high cost of re-financing.


Amiantit reported revenues of SAR 717 million in 2Q2014 (+3% YoY and -13% QoQ), with net income of SAR 25 million in 2Q14 (+19% YoY and -20% QoQ). Net margins were slightly higher by +40 bps to 3.4% in 2Q14 from 3.0% in 1Q14, but were lower by 30 bps from 2Q13. Revenue declined due to the slowdown in sales of its main product GRE pipes and lower average diameter mix in the fiberglass market. The lower volume had a direct

impact on fixed costs reducing gross margins by 150 bps. We forecast revenue of SAR 660 million in 3Q14E and net income of SAR 21 million and expect restructuring initiatives to continue and gain/losses are expected to realized over the next few quarters.

Exhibit 82: Net Profit Forecasts (SAR Mln) Exhibit 83: Net Margin Forecasts


165

151

111

112

98

99

104

111

-30%

-20%

-10%

0%

10%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E

Net prof it YoY

5.4

%

4.2

%

3.2

%

3.6

%

3.5

%

3.7

%

3.7

%

3.9

%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E



1.5

0

1.2

5

1.0

0

1.0

0

0.7

0

0.7

0

0.6

0

0.6

0

60%

80%

100%

120%

140%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E

DPS Payout Ratio

1.4

3

1.3

1

0.9

6

0.9

7

0.8

5

0.8

6

0.9

0

0.9

6

-30%

-20%

-10%

0%

10%

20

10

20

11

20

12

20

13

20

14

E

20

15

E

20

16

E

20

17

E

EPS YoY

EPS CAGR at

11.4% with focus

year to be 2014E

post Capex

completion

Declining DPS due to

failing earnings power

ROE deterioration by

half during 2010-14 and

high debt levels pose

concern


October 15, 2014 66

Peer Analysis

Amiantit derives 65% of revenue from KSA and the closest comparable would be Saudi Steel Pipes who operates in similar nature of operations. However both have large spread in valuations by any parameter which makes it difficult to choose any local peers. While international peers for Amiantit, the valuations are much aligned to their respective markets valuations.

Valuation

Our forecasts are back tested using different scenarios with bull, bear and base approaches to determine the possible range of valuations across discounted cash flow (DCF), P/E, EV/EBITDA and exit multiples. The free cash flow stress and profitability drain over 2014-17 and lack of pure play comparisons make us choose target P/E method, wherein we assign a sector multiple to determine our 12-month target price. The other parameters deemed less proportionate and provided large downside deviation to current market price. However, our selected method using target 2015E P/E of 18.5x appropriately reflects factors in our investment case.


The DCF method adopted bearish to bullish scenarios and back tested the FCF stress for 2016-19E suggests a fair value of SAR 18.23 per share using base case. The DCF method is sensitive to declining revenue and uneven working capital patterns affecting FCF forecasts. Such cash flow variations weaken the case for DCF based valuation until we see more clarity on deconsolidation and realignment.

Table 41: Quarterly projections (SAR Mln)1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

Revenue 900 896 769 890 859 830 761 680 698 717 680 755

QoQ growth -12% 0% -14% 16% -3% -3% -8% -11% 3% 3% -5% 11%

EBITDA 103 113 80 81 101 104 68 28 64 78 61 71

QoQ growth -27% 9% -29% 2% 24% 3% -34% -59% 127% 22% -22% 16%

Net Income 35 30 16 30 30 31 18 34 21 25 21 32

QoQ growth 2% -14% -47% 82% 3% 1% -43% 93% -39% 19% -15% 52%

EPS (SAR) 0.30 0.26 0.14 0.26 0.26 0.27 0.15 0.29 0.18 0.21 0.18 0.28

EBITDA Margins 11.5% 12.6% 10.4% 9.2% 11.7% 12.5% 9.0% 4.1% 9.1% 10.9% 9.0% 9.4%

Net Margins 3.9% 3.4% 2.1% 3.3% 3.5% 3.7% 2.3% 5.0% 3.0% 3.4% 3.1% 4.2%


Table 42: Near Comparables in KSA

Company Name

Price

(SAR)

Mcap

SAR

Mln

EV

SAR

Mln P/E P/B P/S

EV/

Sales

EV/

EBITDA

Div.Y

ld YTD

52 Wk-

Hi

(SAR)

52 Wk-

Lo

(SAR)


Saudi Arabian Amiantit Co 17.94 2,072 4,039 20.9x 1.4x 0.7x 1.4x NM 4.1 17% 20.50 13.95

Saudi Steel Pipe Co 35.60 1,816 2,163 37.8x 2.3x 2.2x 2.5x 23.9x NM 0% 41.30 29.40

Arabian Pipes Co 29.61 1,184 1,643 97.7x 1.7x 3.2x 4.1x 108.3x 3.0 22% 34.80 21.40

Source: Bloomberg

Stressed FCF provides

inconsistency to DCF

valuation


October 15, 2014 67

We used a long-term growth rate of 2% and a beta of 1.2 in our model. The risk-free rate assumption of 3.8% includes a premium for country risk over 10-year US risk-free rate of 2.4%. Cost of equity of 11.1% and cost of debt of 4.0% leads to a WACC of 8.6% assuming a long-term capital structure of 65% equity and 35% debt weighting. We have assumed a

long-term tax rate of 15% due to its international operations operating in taxable countries.

The terminal growth rate and WACC sensitivity to valuation range tends to decrease an average of 6% with an increase of +20 bps in WACC assumption. The valuation range increases by 7% on +25 bps increase in terminal growth rate.

Table 43: DCF Valuation Using Bear-Base-Bull Case Assumptions

Bear Case Base case Bull case

Discounted Cash Flow 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E

Revenue 452,606 458,881 2,734 2,775 2,816 2,873 2,788 2,858 2,929 2,988 2,972 3,076 3,199 3,295

% growth 1% 1.0% 1.5% 1.5% 2.0% 3.0% 2.5% 2.5% 2.0% 3.0% 3.5% 4.0% 3.0%

EBITDA 209,331 202,709 272 290 307 315 278 297 316 325 297 322 351 378

% growth 0.7% 6.8% 5.9% 2.6% 3.3% 6.5% 6.5% 2.8% 3.3% 8.3% 9.0% 7.7%

Net income 91 92 101 109 104 111 122 134 115 127 144 161

NOPLAT 108,456 113,257 173 181 196 202 177 184 201 215 190 200 225 246

Net adjustments in w orking capital, capex and D&A 124 (121) 75 58 133 40 35 24 134 90 184 52


PV of FCFF 272 51 210 185 286 190 185 172 295 241 309 206

DCF metrics

Terminal value 3,296 3,677 4,242


Sum of PV of FCF till terminal year 717 832 1,052


Less: net debt (1,380) (1,368) (1,527)


No of shares outstanding (mln) 116 116 116

Fair value per share (SAR) 14.49 18.23 21.25


Table 44: DCF Assumptions

Cost of equity (ke) Cost of debt (kd)

Market return (rm) 10.0% Effective intrest rate/ yield on senior debt 4.7%

Risk free rate (rf) 3.8% Tax rate (%) 15.0%

Beta 1.2 Long term debt/total debt 5.5%

Market risk premium 6.2% Debt/equity 1.0

Implied cost of equity 11.1% After tax cost of debt 4.0%

WACC

Market value of equity((e) 2,186

Market value/book value of debt (d) 1,779

Total capital (d+e) 3,965

Long term capital structure 65:35

Equity w eight 55%

Debt w eighting 45%

Weighted average cost of capital (ko) 8.6%



October 15, 2014 68

Risks to valuation

The key risks would be the continued fall in overseas demand and eventual deconsolidation of subsidiaries, which might affect our revenue estimates. The delay in project announcements and phased execution could have an impact on the topline. The international iron ore and petrochemical prices primarily ethylene (used for production

of pipes) could have an impact on profitability apart from foreign currencies exchange adjustments. Overall, cost control remains the major factor for any deviation from our forecasts.

#2: Target P/E valuation

We valued Amiantit using target P/E method using comparable multiples of infrastructure mid-caps in GCC with median 2015E P/E of 18.5x, to derive a fair value of

SAR 15.87. We believe 2015E P/E is appropriate basis for valuation assuming an increase in investor appetite for mid-cap exposure. The new P/E trends also suggest Amiantit to trade at levels exceeding 17.0x though the 3-year and 5-year averages are 12.7x and 11.2x, respectively.



18.231 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

8.0% 16.8 17.6 18.6 19.5 20.6 21.8 23.0 24.4 26.0 27.7 29.5 31.6 34.0 36.7 39.7

8.2% 16.2 17.0 17.9 18.8 19.8 20.9 22.1 23.4 24.8 26.3 28.1 30.0 32.1 34.6 37.3

8.4% 15.6 16.4 17.2 18.1 19.0 20.1 21.2 22.4 23.7 25.1 26.7 28.5 30.5 32.7 35.2

8.6% 15.0 15.7 16.5 17.3 18.2 19.2 20.2 21.3 22.5 23.9 25.3 26.9 28.7 30.7 32.9

8.8% 14.6 15.3 16.0 16.8 17.6 18.6 19.5 20.6 21.7 23.0 24.4 25.9 27.5 29.4 31.5

9.0% 14.1 14.8 15.5 16.2 17.0 17.9 18.8 19.8 20.9 22.0 23.3 24.7 26.3 28.0 29.9

9.2% 13.7 14.3 14.9 15.7 16.4 17.2 18.1 19.0 20.0 21.1 22.3 23.6 25.1 26.6 28.4

9.4% 13.2 13.8 14.4 15.1 15.8 16.6 17.4 18.3 19.3 20.3 21.4 22.6 24.0 25.4 27.0


W

AC

C


2013A 2014E 2015E 2016E 2017E


EPS 0.80 0.83 0.85 0.89 0.86 0.86 0.95 0.79 0.90 1.00 0.80 0.96 1.10

15.0x 12.0 12.4 12.8 13.4 12.9 12.9 14.3 11.8 13.5 15.0 12.0 14.5 16.5

16.0x 12.8 13.2 13.6 14.3 13.7 13.7 15.2 12.6 14.4 16.0 12.8 15.4 17.6

17.0x 13.6 14.0 14.5 15.2 14.6 14.6 16.2 13.4 15.3 17.0 13.6 16.4 18.7

18.0x 14.4 14.9 15.3 16.1 15.4 15.4 17.1 14.2 16.2 18.0 14.4 17.3 19.8

19.0x 15.2 15.7 16.2 17.0 16.3 16.3 18.1 14.9 17.1 19.0 15.2 18.3 20.9

20.0x 16.0 16.5 17.0 17.9 17.1 17.2 19.0 15.7 18.0 20.0 15.9 19.3 22.0

21.0x 16.8 17.3 17.9 18.8 18.0 18.0 20.0 16.5 18.9 21.0 16.7 20.2 23.1

22.0x 17.6 18.2 18.7 19.7 18.9 18.9 20.9 17.3 19.8 22.0 17.5 21.2 24.2

23.0x 18.4 19.0 19.6 20.6 19.7 19.7 21.9 18.1 20.8 23.0 18.3 22.2 25.3

2014E 2015E 2016E 2017E

Our Net Profit Estimates (SAR Mln) 98 99 104 111

EPS (SAR) 0.85 0.86 0.90 0.96

P/E based Valuation (SAR)


Based on a peer average P/E of 16.4x 14.0 14.1 14.8 15.8

Estimated fair value at 18.5x 2015E P/E 15.8 15.9 16.7 17.8


P

/E R

an

ge

(x)


We use a infrastructure

mid-cap multiple to

value Amiantit


October 15, 2014 69


Table 47: Financial Projections Summary (SAR Mln)

2010 2011 2012 2013 2014E 2015E 2016E 2017E


Revenue 3,078 3,563 3,455 3,130 2,849 2,707 2,788 2,858

COGS (2,351) (2,920) (2,898) (2,661) (2,413) (2,290) (2,361) (2,417)

Gross Profit 727 643 557 469 436 417 427 441

SG&A (334) (319) (293) (243) (237) (215) (218) (224)



Others/One-off items (34) (22) (37) (4) (6) (5) (3) (6)

Profit before Zakat/Tax 305 230 140 137 118 122 135 143

Zakat/Income Tax (106) (70) (45) (44) (36) (38) (40) (36)

Net Profit before MI 199 160 95 93 81 84 94 107

Minority Interest (34) (9) 16 20 17 15 10 4

Net Profit 165 151 111 113 98 99 104 111

EBITDA 520 475 377 296 273 270 278 297

EPS (SAR) 1.43 1.31 0.96 0.97 0.85 0.86 0.90 0.96

DPS (SAR) 1.00 1.50 1.00 1.00 0.70 0.70 0.60 0.60

Margins

EBITDA Margins 16.9% 13.3% 10.9% 9.5% 9.6% 10.0% 10.0% 10.4%


PBT Margins 9.9% 6.4% 4.1% 4.4% 4.1% 4.5% 4.8% 5.0%

Net Margins 5.4% 4.2% 3.2% 3.6% 3.5% 3.7% 3.7% 3.9%

Balance Sheet

Cash 375 392 127 149 194 313 240 251

ST Investments 84 204 173 301 301 301 301 301

Inventories 922 1,050 1,482 1,244 1,183 1,099 1,086 1,088

Receivables 1,557 1,748 2,023 1,831 1,738 1,651 1,701 1,657

Current Assets 2,938 3,394 3,806 3,525 3,415 3,364 3,327 3,297



Total Assets 4,071 4,407 4,822 4,412 4,333 4,347 4,283 4,254

Short Term Debt 920 1,210 1,730 1,682 1,598 1,598 1,518 1,442

Payables 446 569 664 514 507 527 496 485

Others 591 450 402 300 312 312 312 312

Current Liabilities 1,956 2,229 2,795 2,496 2,417 2,437 2,326 2,239

Long Term Debt 87 225 170 97 92 83 75 71


Total Liabilities 2,192 2,602 3,122 2,708 2,624 2,635 2,516 2,425

Shareholders Equity (SE) 1,879 1,805 1,700 1,703 1,709 1,713 1,767 1,829

Total Liabilities & SE 4,071 4,407 4,822 4,412 4,333 4,347 4,283 4,254

Cashflow

Net Operating Cash Flow 147 (171) (426) 341 334 317 168 246

Net Investing Cash Flow (16) 52 (97) (139) (120) (108) (84) (86)

Net Financing Cash Flow (203) 268 259 (180) (170) (90) (157) (149)

Net Change in Cash (73) 149 (263) 22 45 119 (73) 12

Cash (Opening) 448 243 392 127 149 194 313 240

Cash (Closing) 375 392 127 149 194 313 240 251


Current Assets 72% 77% 79% 80% 79% 77% 78% 78%


Total Assets 100% 100% 100% 100% 100% 100% 100% 100%







October 15, 2014 70


2010 2011 2012 2013 2014E 2015E 2016E 2017E

Valuation

PE 12.6x 13.7x 18.6x 18.5x 21.1x 20.9x 19.9x 18.6x

P/B 1.1x 1.1x 1.2x 1.2x 1.2x 1.2x 1.2x 1.1x

P/S 0.7x 0.6x 0.6x 0.7x 0.7x 0.8x 0.7x 0.7x

P/CF 14.1x -12.1x -4.9x 6.1x 6.2x 6.5x 12.3x 8.4x



Dividend Yield 8.4% 7.0% 5.6% 5.6% 3.9% 3.9% 3.3% 3.3%

Per share (SAR)

EPS 1.43 1.31 0.96 0.97 0.85 0.86 0.90 0.96

DPS 1.50 1.25 1.00 1.00 0.70 0.70 0.60 0.60

BVPS 16.27 15.63 14.72 14.75 14.80 14.83 15.30 15.84

Sales per share 26.65 30.85 29.91 27.10 24.67 23.44 24.14 24.74

OCF/Share 1.27 (1.48) (3.68) 2.96 2.89 2.75 1.46 2.13

ICF/Share 1.24 (0.99) (4.41) 1.82 1.86 1.81 0.75 1.42

FCF/Share 1.24 (2.49) (5.62) 0.85 1.16 1.11 0.15 0.82

Capex

Capex/Sales 2% 2% 3% 4% 4% 4% 3% 3%


Liquidity

Cash Ratio 0.2 0.2 0.0 0.1 0.1 0.1 0.1 0.1

Current Ratio 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.5

Quick Ratio 1.0 1.1 0.8 0.9 0.9 0.9 1.0 1.0

Cash Cycle




Inventory Days 132 123 159 187 183 182 169 164

Payable Days 62 61 68 89 79 85 79 74

Receivable Days 185 179 214 214 223 223 223 212

Cash Cycle 254 242 306 312 327 319 312 302

Risk Ratio

Pay out Ratio 105% 95% 104% 103% 82% 82% 67% 62%


Net Debt/EBITDA 122% 219% 470% 551% 548% 507% 486% 425%

Returns Ratio

ROAA 4.1% 3.6% 2.4% 2.4% 2.2% 2.3% 2.4% 2.6%

ROAE 8.8% 8.2% 6.4% 6.6% 5.8% 5.8% 6.0% 6.2%

ROIC 13.7% 10.0% 7.3% 6.5% 5.9% 6.0% 6.2% 6.5%

DUPONT Analysis


Net Income/Sales 0.06 0.04 0.03 0.03 0.03 0.03 0.03 0.04


Dupont ROE 10.6% 8.9% 5.6% 5.4% 4.7% 4.9% 5.3% 5.9%

Cash Flow Ratio's

Cashflow to Revenue 0.05 (0.05) (0.12) 0.11 0.12 0.12 0.06 0.09

Cashflow to EBITDA 0.28 (0.36) (1.13) 1.15 1.22 1.18 0.60 0.83

Cash return on assets 0.04 (0.04) (0.09) 0.08 0.08 0.07 0.04 0.06

Cash return on equity 0.08 (0.09) (0.25) 0.20 0.20 0.19 0.10 0.13

Leverage



Debt/Equity 54% 79% 112% 104% 99% 98% 90% 83%

EBIT to Total Assets 10% 7% 5% 5% 5% 5% 5% 5%



October 15, 2014 71

Conclusion

In our view, the Saudi building materials stocks are likely to portray large investment

potential over the coming years benefitting investors who take the early mover advantage. The sector as a whole might re-rate purely on a fundamental basis and the key outliers would be SCC and Bawan who remain in our preferred list for a Buy. Also in our list to look for are Aslak and Zoujaj who are potential outperformers once valuation smoothens making an entry point for investors. We prefer these companies on its robust

ROE growth coupled with low debt patterns offering a mix of dividend and retain a portion for future capex requirements. The companies are likely to take an expansionary mode once the renewed demand indicators are signaled from the demand side of the market. Interestingly, most of them offer EPS growth ranging 8% to 10% for 2014-17 amid a P/E valuation of 20.0x on a forward basis, which is convincing when large caps are nearing the maturity curve with valuations exceeding 15.0x. We believe, given the

current volatility in equity markets on account of oil price volatility, stocks have corrected by nearly 10-15% offering cheaper valuations, which investors should capture such opportunities. We continue to remain positive on sector’s outlook and recommend a Buy on SCC and Bawan, while we recommend a Hold for Aslak and Zoujaj and a Sell recommendation for Amiantit.


October 15, 2014 72

Appendix

Exhibit 86: Volumes Mln Shares-SCC Exhibit 87: Volumes Mln Shares-Aslak

Source: Bloomberg Source: Bloomberg

Exhibit 88: Volumes Mln Shares-Zoujaj Exhibit 89: Volumes Mln Shares-Amiantit


Exhibit 90: Last 12 Months Value Traded (SAR Mln) Exhibit 91: Last 12 Months ADTV ('000 Shares)


Exhibit 92: Building And Construction Sector P/E Trends

Source: Bloomberg

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

Dec-1

3

Mar-

14

Jun

-14

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

Dec-1

3

Mar-

14

Jun

-14

0.0

0.5

1.0

1.5

2.0

2.5

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

Dec-1

3

Mar-

14

Jun

-14

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

Dec-1

3

Mar-

14

Jun

-14

10

12

14

16

18

20

22

24

26

28

30

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

Jan

-14

May-1

4

Sector P/E 5 Yr 3Yr LTM Wtd

22

16

28

33

58

0

10

20

30

40

50

60

70

SCC Aslak Zoujaj Amiantit Bawan

172

399

828

1,926

611

0

500

1,000

1,500

2,000

2,500

SCC Aslak Zoujaj Amiantit Bawan


October 15, 2014 73

Exhibit 93: Sector Revenue Trends (SAR Mln) Exhibit 94: Sector Earnings Trends (SAR Mln)

Source: Company reports Source: Company reports

Exhibit 95: Sector Net Margins Exhibit 96: Sector Total Equity Value (SAR Mln) and ROE

Source: Company reports Source: Company reports

14,1

46

14,4

05

16,5

98

18,5

32

18,7

62

-36%

-30%

-24%

-18%

-12%

-6%

0%

6%

12%

18%

20

09

20

10

20

11

20

12

20

13

Revenue YoY

1,3

96

1,2

59

1,0

04 1,1

75 1,3

37

-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

20

09

20

10

20

11

20

12

20

13

Net Income

9.9

%

8.7

%

6.0

%

6.3

% 7.1

%

20

09

20

10

20

11

20

12

20

13

10,2

02

10,4

96

10,6

02

10,9

67

11,6

03

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

20

09

20

10

20

11

20

12

20

13

Sector Shareholders Equity ROE

Exhibit 97: TASI sector-12 Month Average P/E (Trailing) Exhibit 98: TASI sector-12 Month Average Yield (Trailing)


Exhibit 99: TASI sector-12 Month Average P/B (Trailing) Exhibit 100: TASI sector-12 Month Index Performance


1815

32

1720

28

1915

18

43

29

1518

TA

SI

Ban

ks

Build

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Cem

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ldin

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co

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Tra

nsport

3.0 2.5 2.8

4.73.8 3.3

2.2

15.0

3.5

1.3

3.7 3.72.5

TA

SI

Ban

ks

Build

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Cem

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2.2 2.02.5

3.3

1.2

5.8

2.0 1.92.3

1.7

7.1

2.52.2

TA

SI

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ks

Build

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ldin

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Petr

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Real E

sta

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Reta

il

Tele

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Tra

nsport

35%30%

38%

16%

36%

69%

38%

48%

8%

39%38%44%

58%

23%

73%

TA

SI

Ban

ks

Build

ing

Cem

en

t

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Ho

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Ind

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ies

Insura

nce

Med

ia

Ho

ldin

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Petc

hem

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Reta

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m

Tra

nsport


October 15, 2014 74

Table 49: Building and Constrution Sector Stocks Revenue and Earnings Trends (SAR Mln)

Company

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Saudi Arabian Amiantit Co 3,293 3,077 3,563 3,455 3,131 202 165 151 111 113 6% 5% 4% 3% 4%

Red Sea Housing Services Co 854 746 777 867 974 124 61 78 121 153 14% 8% 10% 14% 16%

Abdullah A.M. Al-Khodari Sons 1,048 1,074 1,146 1,524 1,530 217 218 158 135 64 21% 20% 14% 9% 4%

Saudi Steel Pipe Co 539 593 629 726 839 113 73 60 54 79 21% 12% 10% 7% 9%

Baw an Co 946 1,574 1,857 2,086 2,448 65 140 135 131 168 7% 9% 7% 6% 7%

National Gypsum 203 154 108 82 81 89 53 30 20 18 44% 34% 28% 24% 22%

Aslak 417 571 855 1,005 1,001 81 108 98 106 110 19% 19% 11% 11% 11%

Arabian Pipes Co 439 256 275 680 383 25 (4) (7) (25) 10 6% -1% -2% -4% 3%

Saudi Ceramic 958 1,080 1,221 1,447 1,601 197 218 230 245 309 21% 20% 19% 17% 19%

SIDC 223 232 301 314 320 (4) 101 25 33 35 -2% 43% 8% 11% 11%

Middle East Specialized Cables 1,024 1,029 1,139 991 932 51 (95) (120) 31 31 5% -9% -11% 3% 3%

Zamil Industrial Investment Co 4,204 4,018 4,728 5,355 5,522 230 211 154 201 235 5% 5% 3% 4% 4%

Saudi Cable Co 2,458 1,857 3,200 2,688 2,448 104 (88) 5 (156) (229) 4% -5% 0% -6% -9%



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