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HOLD
Drop in net income despite growth in the top line Presence in Abu Dhabi and Al Ain to act as a savior New businesses i.e. Lime & Dry Mortar to support the income Start of new cement plant to bolster volumes & cushion the margins
2.5
2.0 1.5 1.0 0.5 -
Volume (000)
Arkan (AED)
Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) 22951270 Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Tel.: (965) 22951281 Global Investment House www.globalinv.net
Arkan has initiated works on new lime plant. The plant capacity is 900tpd (600 quick-lime + 300 dolo-lime) and is expected to come online by 2Q13. The plant will be located within Al Ain Industrial Park. The plant will produce high quality quick lime and hydrated lime using 100 per cent indigenous raw materials and will primarily cater to the growing demand for industrial lime for construction and chemicals industries in the UAE and wider region. As an essential chemical, lime--both burnt and hydrated--is used extensively across industries, including in steel, environmental effluents, agro-food, paper and construction. Potential competitor of the company are: NOORA Ras Al Khaimah CMI Oman GEERCO, Saudi Arabia Current prevailing prices of Lime are AED340-350/ton. Hence to be on the conservative side our 2013 and onwards price ranges between AED320-330/ton.
Valuation update
ARKAN has always traded on a higher multiple as compared to other cement manufacturers, reason being its extra high outstanding shares of 1.75bn. With such high number of shares, the price on a relative basis turns out to be lower which drops our weighted average value. We have upgraded our fair value by to AED1.26/share as compared to AED0.95/share earlier. Increase in the fair value resulted because of commissioning of new cement capacity and also because of addition of lime and dry mortar plant. Despite increase in our target price we recommend a HOLD on the stock as our fair value is 4.9% lower than current market price of AED1.32/share.
June 2011
Financial Statement
(AED mn) Sales Revenue Cost of Sales Gross Profit General & Administrative Expense Operating Profit Non-Core Income Share of Profit from Associates Net Financing Income Other Expenses Taxation Net Profit Cash and Bank Balance Receivables and Prepayments Inventories Investments at Fair Value Long Term Investments Goodwill Other Intangible Assets Property, Plant and Equipment Non-Current Assets Total Assets Payables & Accruals Medium Term Loans Long Term Loans Paid -up Capital Legal Reserve Capital Reserve Investment Revaluation Reserve Retained Earnings Owners Account Shareholders Equity Total Equity & Liability Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Net Cash Movement Net Cash at End
Cash Flow
2008 695 (415) 280 (91) 189 (522) 19 22 (292) 201 129 376 47 333 128 187 1,158 1,805 2,559 509 324 110 1,750 38 4 2 (178) 1,615 2,559 (69) (1,002) 259 (812) 201 1.5 0.7 40.3% 27.2% -42.0% -12.4% -15.8% 0.27 -16.7% 10,661.7 1.7% 15.49 N/M (0.17) 0.92 6.02 10,535.0 N/M 6.5
2009 563 (414) 149 (71) 78 (96) 25 (4) 3 86 152 77 49 299 128 178 1,510 2,117 2,481 77 112 728 1,750 38 4 (53) (175) 0 1,564 2,481 (119) (402) 406 (115) 86 4.7 3.7 26.4% 13.8% 0.5% 0.1% 0.2% 0.54 1.8% 4,801.6 0.0% 8.61 171.50 0.00 0.89 2.34 4,095.0 1,487.5 2.6
2010 245 (136) 109 (73) 36 (2) 18 1 (0) 53 65 89 78 51 287 128 170 1,722 2,308 2,591 71 273 652 1,750 43 4 (76) (128) 0 1,594 2,591 121 (220) 78 (21) 65 4.0 2.9 44.6% 14.8% 21.7% 2.1% 3.4% 0.58 5.1% 3,815.3 0.0% 15.73 47.46 0.03 0.91 1.71 2,992.5 56.3 1.9
2011e 277 (182) 95 (73) 21 (1) 17 1 39 149 87 77 54 259 128 163 1,793 2,343 2,710 152 273 652 1,750 47 4 (76) (93) 0 1,632 2,710 185 (101) 84 149 2.4 1.9 34.2% 7.7% 13.9% 1.5% 2.4% 0.57 5.4% 3,056.1 0.0% 11.14 34.82 0.02 0.93 1.32 2,310.0 60.0 1.4
2012e 472 (303) 169 (125) 44 3 19 1 67 135 142 122 56 266 128 157 1,831 2,381 2,837 259 260 620 1,750 54 4 (76) (33) 0 1,699 2,837 137 (105) (46) (14) 135 1.8 1.3 35.8% 9.3% 14.2% 2.4% 4.0% 0.52 7.0% 554.3 0.0% 6.47 25.61 0.04 0.97 1.32 2,310.0 34.5 1.4
2013e 572 (363) 209 (135) 73 8 21 1 103 163 149 139 59 273 128 150 1,845 2,396 2,907 313 234 558 1,750 64 4 (76) 60 0 1,802 2,907 198 (81) (88) 28 163 1.6 1.2 36.5% 12.8% 18.0% 3.6% 5.9% 0.44 8.7% 533.2 0.0% 5.14 18.71 0.06 1.03 1.32 2,310.0 22.4 1.3
2014e 671 (424) 247 (145) 102 14 23 1 140 178 110 126 62 280 128 144 1,840 2,393 2,869 358 210 446 1,750 78 4 (76) 98 0 1,854 2,869 300 (64) (222) 14 178 1.3 1.0 36.8% 15.2% 20.8% 4.8% 7.6% 0.35 10.5% 506.2 3.8% 4.16 14.31 0.08 1.06 1.32 2,310.0 16.5 1.2
Current Ratio (x) Quick Ratio (x) Gross Profit Margin (%) Operating Profit Margin (%) Net Profit Margin (%) Return on Average Assets (%) Return on Average Equity (%) Debt / Equity (x) Cash Return On Capital Invested (%) EV/Ton (AED) Dividend Yield (%) EV/Revenues (x) EV/EBITDA (x) EPS (AED) Book Value Per Share (AED) Market Price (AED) * Market Capitalization (AED mn) P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Glob al Research
Ratio Analysis
June - 2011
Balance Sheet
Disclosure
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Arkan Building Materials Company Recommendation HOLD Bloomberg Ticker ARKAN UH Reuters Ticker ARKN.AD Price AED1.32 Disclosure 1,10
1.
Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY Fair value of the stock is >20% from the current market price BUY Fair value of the stock is between +10% and +20% from the current market price HOLD Fair value of the stock is between +10% and -10% from the current market price SELL Fair value of the stock is < -10% from the current market price
Disclaimer
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June 2011
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