Saudi Building Materials

Saudi Building Materials
Focus on Mid-Caps
Santhosh Balakrishnan
+966-11-203-6809
santhosh.balakrishnan@riyadcapital.com
Ahmed Al Fozan
October 15, 2014 +966-11-203-6814
ahmed.al-fozan@riyadcapital.com
Initiating Coverage Report
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 2

Recommendation Summary
Saudi Ceramics Company (SCC)
Saudi Ceram ics Co. (SCC) We initiate coverage on SCC and recommend a Buy owing to robust mix of capex plans
TASI Code 2040 and potential benefits from an uptick in the construction sector. SCC is the second
Rating Buy largest manufacturer in GCC with ceramic capacity of 60 million m2. The conviction is
Current Price 142.81 supported by SCC’s planned capex additions in ceramics segment and entry in red
Target Price 182.00 bricks segment apart from doubling its sanitary production lines. Revenue is expected
Upside to Target 27.4% 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
Baw an Co. (Baw an) target price of SAR 95, an upside of 30%. Bawan remains the major beneficiary of any
TASI Code 1302 uptick in KSA’s spending in construction and electrical sector due to its diversified
Rating Buy product range catering to both sectors. The Company is a successful combination of
Current Price 73.12 13 subsidiaries operating mainly in four segments with nearly 20+ product lines
Target Price 95.00 mainly focused in KSA, which contribute 90% of its revenue. We forecast revenue
Upside to Target 29.9% 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
United Wire Factories Co. (Aslak)
especially on the steel rebar segments while costs are escalating due to inherent
TASI Code 1301
Rating Hold
volatility in international raw materials prices. Aslak is currently trading at a P/E of
Current Price 47.54 17.7x to our 2014E EPS and 16.3x to our 2015E EPS estimates. We believe peers are
Target Price 52.00 trading at much lower valuations and any high target multiples in excess of index
Upside to Target 9.4% 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
National Co. for Glass Ind. (Zoujaj) 46, suggesting upside of 7%. Large capex spending, significant margin expansion and
TASI Code 2150 revenue growth of 10.2% CAGR meets enough comfort for conviction but not
Rating Hold supported by attractive valuation. Zoujaj after a stock rally of 73% over the last twelve
Current Price 43.15 months, trades at expensive levels with trailing P/E of 24.9x. This remains unjustified
Target Price 46.00 when TASI is trading at 16.8x. We believe a rally upon absence of any large news flows
Upside to Target 6.6% 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
Saudi Arabian Am iantit Co.(Am iantit)
term concerns on the topline growth has led to the above assessment. We expect cost
TASI Code 2160
Rating Sell
re-alignment to be a necessity at this point in order to support any gradual
Current Price 17.94
improvement in margins. The higher D/E ratio and compressing ROE has led to
Target Price 16.00 further weakening on its fundamental outlook. Amiantit with nearly 40+ subsidiaries
Upside to Target -10.8% 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.
October 15, 2014 3

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 4

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.
Table 1: Key Projects in KSA as of 2Q14

No. P roje c t Na me S e 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
The construction market is categorized into i) Infrastructure, ii) Residential and iii)
Commercial. Here are some key developments in each category.
Riyadh Metro and four
large economic cities Infrastructure sector caters mainly to government projects, run by ministries and
are the much talked Government Related Entities (GRE) such as Saudi Aramco and GOSI (General
about projects 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.
October 15, 2014 5

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 Fundamental indicators: GDP growth, population and per capita income levels of
to aid industry growth citizens in the country ii) Leading indicators: employment, demographics and credit
over long term 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
Growth in population
sector. IMF (International Monetary Fund) expects KSA’s real GDP growth per annum
and per capita GDP
to average 4.4% through 2017 and reach SAR 3.2 trillion. It also expects per capita
largely supportive to
GDP levels to grow at a CAGR of 2% during 2014-17 to reach SAR 101k.
construction market
Exhibit 1: GDP Growth and Current Account Surplus Exhibit 2: Population by Age Group
25.0%
> 60 < 19
20.0% 7% 12%
50 - 59
15.0% 10%
8.6%
45 - 49
7.4%
10.0%
8% 20 - 34
5.8%
37%
4.2%
4.1%
3.8%
5.0%
40 - 44
11%
0.0% 35 - 39
2010 2011 2012 2013 2014E 2015E 14%
Real GDP Growth Current Account Balance (% of GDP)
Source: IMF Source: IMF
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.
October 15, 2014 6

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
Nearly 3 million
residential unit versus villa and proximity from city center expectations need to align
housing units required
to put home ownership within reach of a larger slice of the population. A study
over next 10 years 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
Exhibit 3: Nominal GDP Forecast Exhibit 4: Population Growth Forecast (mln)
100.0 32.5
GDP (SAR tln)
31.9
Per Capita GDP (SAR 000s)
98.0 31.2
30.6
30.0
96.0
3.2
29.2
3.1
3.0
2.9
94.0
2.8
2.8
92.0
2012 2013 2014E 2015E 2016E 2017E 2012 2013 2014E 2015E 2016E 2017E
Source: IMF Source: IMF
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
Credit expansion in the billion. Labor initiatives to deport undocumented workers started in 2013 and exacted
construction sector to a toll on construction which is primarily staffed with foreigners. Consequently project
fuel growth 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 5: Bank Credit (SAR bln) and Growth Exhibit 6: Construction Sector Credit (SAR bln) and Growth
18% 32%
15% 24%
12% 16%
9% 8%
1,121
1,000
6%
77
0%
75
70
857
775
737
56
3% -8%
45
0% -16%
-3% -24%
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Source: CDSI, SAMA Source: CDSI, SAMA
October 15, 2014 7

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
Government supported 2008-13, bank issued real estate loans jumped at 25% CAGR. The much anticipated
lending to provide Mortgage Law gained traction towards becoming reality in the past two years. Banks,
further boost to the although excited about the opportunity created by mortgage financing, see gradual
sector climb in the coming years. From the lenders perspective, affordable housing supply
needs to enter the market before mortgages gain appeal for young families.
Exhibit 7: REDF Funding (SAR bln)
140
Total Credit Disbursements
120
100
80
60
40
20
0
2009 2010 2011 2012 2013
Source: CDSI, SAMA
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-
Home ownership rates demand gap.
set to increase
Exhibit 8: Occupancy by Dwelling Type
Other
6%
Traditional
house
26%
Apartment
41%
Villa
18%
A floor in
traditional A floor
8%
house
14%
Source: CDSI
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.
Lagging indicators
proves industry set to
 Cement consumption in the country has reached 43MT, while production
witness robust growth remains at par with consumption, a positive on continued activity in cement
ahead sector.
October 15, 2014 8

 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.
Exhibit 9: Cement Production and Sales (mln tons)
Cement Production
Cement Sales
43
43
42
42
38
37
34
33
32
31
30
28
2008 2009 2010 2011 2012 2013
Source: CDSI, Bloomberg
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.
October 15, 2014 9

Sector Focus Charts: Spending likely to be twice in 2016

Exhibit 10: Sectorwise Projects (SAR Bln) Exhibit 11: Break up by sector
159
Rail Projects accounted 101

Transport
78 Utilities 41%
for 30% of all awards 20%
during 2013 with Riyadh 19 17 15

Metro being the highest Oil
Construction
Gas
Oil
Industrials
Transport
Utilities
8%
Industrials
5%
Construction
26%
Source: MEED Source: MEED
Exhibit 12: GCC Contract Awards (US$ Bln) Exhibit 13: Saudi Contract Awards (US$ Bn)
Saudi is the biggest

145
140
135
128
128
122
69
market among GCC in
115
110
59
55
54
51
terms of government
38
spending
32
31
2010
2011
2012
2013
2006
2007
2008
2009
2006
2007
2010
2011
2008
2009
2012
2013
Source: MEED Source: MEED
Exhibit 14: Contract Awards Forecast-2014 (US$ Bln) Exhibit 15: Awarded (2007-12) Vs Planned (2013-17)
55 500 2007-12 2013-17

450
400
33 350
Saudi accounts for 32
30
300
roughly 30% of GCC 250
market with growth rate 11
200
150
of 21% during 2005-12 4
100
50
Bahrain
Kuwait
Oman
KSA
Qatar
UAE
0
Bahrain Kuwait Oman Qatar KSA UAE
Source: MEED Source: MEED (Fig in US$ Mn)
Exhibit 16: Residential (Riyadh and Jeddah)-'000 Units Exhibit 17: Office Supply (Riyadh and Jeddah)-'000 M 2
1,857
4,677
1,796
1,741
4,340
1,675
1,644
Among building and

3,634
2,772
construction,
2,510
Residential to witness
the biggest growth
2013
2014
2012
2015
2016
2013
2014
2012
2015
2016
Source: JLL Source: JLL
October 15, 2014 10

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.
Table 2: TASI Building Materials Sector Stocks Trailing Multiples

Mcap EV 52 Wk- 52 Wk-
Price SAR SAR EV/ EV/ Div.Y Hi Lo
Com pany Nam e (SAR) Mln Mln P/E P/B P/S Sales EBITDA ld YTD (SAR) (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
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
Exhibit 18: TASI Building Materials Sector Trailing P/B to Historical 5 Year Average ROE
TASI
30%
25%
Aslak
Baw an
20% SCC
5 Yr Avg ROE
Zamil
15%
Zoujaj Red Sea

SIDC Saudi Steel Pipes
10%
Amiantit National Gypsum
5%
0%
1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x
P/B
Source: Bloomberg
October 15, 2014 11

Saudi Ceramics Company
Buy 12-month Target Price SAR 182
October 15, 2014 Capex Drives Conviction

We initiate coverage on Saudi Ceramics Company (SCC) with a Buy recommendation and
Expected Total Return
assign a 12-month target price of SAR 182. Our view stems from its capex initiatives to meet
Price as of Oct-13, 2014 SAR 142.81 the upturn in the Saudi construction cycle. SCC is on an expansion spree with capacity
Upside to Target Price 27.4% expansion (annual) of 4 million m2 in tiles, 18K metric tons (MT) in sanitary ware and entry
Expected Dividend Yield 2.1% into red bricks segment with 264K MT during 2014-15E. We believe such initiatives could
Expected Total Return 29.5%
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
Market Data Ceramic Tiles (AACT) of Oman.
52 Week H/L SAR 154.75/105.75
Highest realization in GCC and EPS CAGR of 10.8%
Market Capitalization SAR 5,355 mln
We forecast revenue growth at 7.6% CAGR for 2014-17E to reach SAR 2.2 billion signifying an
Enterprise Value SAR 6,189 mln
above average industry growth. SCC has the highest ceramic realization among GCC peers
Shares Outstanding 37.5 mln
during 2013 with SAR 23.1/ m2 compared to SAR 17.4/ m2 for AACT, which is a key positive.
Free Float 72.0% We believe the expansion plans are likely to bring in additional strength to manage
12-Month ADTV (000’s) 163.1 competition. SCC’s geographical focus in Riyadh and Western region is growth supportive due
TASI Weight 0.4% 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
Reuters Code 2040.SE
improvement in revenue and margins our EPS estimates are expected to register at 10.8%
Bloomberg Symbol SCERCO AB
CAGR during 2014-17E.
SCC is well positioned in the industry being the largest manufacturer
1-Year Price Performance
160
The KSA ceramic tile market estimated at 300 million m2 by capacity with SCC commanding
150 20% market share and positioned as the largest manufacturer. Additionally, SCC has the
140 largest share of net income among tile producers and has the second highest margins in GCC.
130 SCC’s value chain progression proves fruitful with its backward and forward integration
120 gaining traction and support SCC’s sales efforts. The industry is fragmented with majority of
110 tiles imported from other Middle East countries, Europe and China. The key positives are the
100 strong demand for housing driven by a robust demographics and income profile of citizens.
90 We expect such fundamental drivers to support overall industry growth amid positive effects
S O N D J FM A M J J A S O of government spending.
SCC TASI TBMCI
Valuation discount of 18% on 2015E P/E and 7% on replacement cost basis
Source: Bloomberg
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/
SCC TASI TBMCI
m2 of SAR 89.2, lower than AACT at SAR 96.1/ m2 even though SCC is 4x larger than AACT by
Oct-13- 2014 142.81 10,378 4,538 ceramics capacity. The consistent payout of 30% and dividend yield of 2.1% signifies a
Total Change reasonable yield and retention ratio mix.
6-months 2.2% 10.1% 12.2%
1-Year 16.1% 30.0% 31.7%
2-Year 82.5% 55.3% 57.8%
Key Financials
Shareholding Structure
FY December 31 (SAR mln) 2013A 2014E 2015E 2016E
GOSI 16.4%
Revenue 1,601 1,776 1,917 2,063
Khalid Saleh Al-Rajhi 6.2%
EBITDA 469 504 550 604
Public Investment Fund 5.4%
Net Profit 309 338 368 408
Public Float 72.0%
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
Valuation Snapshot
5-Year Valuation Trend
3.8
P/E Trend Dividend Yield Trend
18 3.6
3.4
16 3.2
3.0
14 2.8
2.6
12 2.4
2.2
10 2.0
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Aug-09
Dec-09
Aug-10
Aug-11
Aug-12
Aug-13
Dec-10
Dec-11
Dec-12
Dec-13
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Aug-09
Aug-10
Aug-11
Dec-09
Dec-10
Aug-12
Aug-13
Dec-11
Dec-12
Dec-13
P/E 3 Yr Avg 12M Avg Div.Yild 3 Yr Avg 12M Avg
Key Modeling Assumptions

Core We base our revenue forecasts mainly on growth prospects of two segments, ceramics and water heaters.
Forecasting Ceramics being the major segment; we forecast revenues of 6.8% CAGR by assuming capacity addition to
2
Assumptions 3.5 million m 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 Our bull case derives a DCF valuation of SAR 211 assuming revenue CAGR of 7.2% for 2016-19E and
Assumptions terminal growth rate assumed at 2.5%. We have modeled higher growth in realization and 86 million m 2
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.
Base Case Our base case suggests a DCF valuation of SAR 182 with revenue CAGR of 6.8% and EPS CAGR of 8.4%
Assumptions 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 Our bear case arrived a DCF valuation of SAR 133 with revenue CAGR of 3.3% upon delayed capex putting
Assumptions 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.
DCF Valuation Scenario Analysis Using Bear-Base-Bull Case Assumptions
12 211
11 6
182
133 16
15
17
Bear 2% CAGR in 1% increase in Terminal growth at Base 2.5% CAGR in 1.5% inc in Terminal growth at Bull
realization Opex to Sales 1.75% realization Capex/Sales 2.5%
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
October 15, 2014 13

September 2, 2014
Overview
Key Data Saudi Ceramics Comapny (SCC) established in 1977 and headquartered in Riyadh is the
Share Capital (SAR mln) 375 leading manufacturer of ceramic tiles in Saudi Arabia. Listed on Tadawul during 1993,
Par Value per Share (SAR) 10 SCC has a solid record of financial performance among listed companies. SCC has 3,300
Shares Outstanding (mln) 37.5 employees and a paid-up capital of SAR 375 million (par value of SAR 10) with 37.5
Employees 3,300 million shares outstanding as of 1H2014.
TASI Code 2040
SCC has eleven factories located in the Second Industrial City southeast of Riyadh, across
Management
an area of one million m2. The eleven factories include four tile production factories, one
Saad Ibrahim Al-Moajel Chairman sanitary ware factory, two electrical water heaters factories, two frit plants, one grinding
Abdulkarim Al-Nafie CEO plant and one plastic products plant. SCC’s product lines are categorized as ceramic and
Ali Saleh Al-Naim CFO 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.
Public
Float
SCC has a public float of 72% with General Organization for Social Insurance (GOSI) being
72.0%
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
Khalid with relevant sub committees thus following good corporate governance standards. It
has capable management team comprising of experienced professionals. SCC traded with
Saleh Al-
Rajhi
average daily turnover of 163K shares and has TASI weight of 0.4%. The share price
6.2%
PIF
5.4%
GOSI
16.4% traded in a 52-week range of SAR 155 to SAR 106 returning 28%.
October 15, 2014 14

September 2, 2014
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
SCC is the second demand for ceramic tiles in KSA. SCC expects an upsurge in demand driven from housing
largest tile producer market and commencement of large commercial projects. SCC expects to add up to 15
and has the highest million m2 through 2017, despite doubling capacity in sanitary ware. We believe the
realization in GCC
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.
Exhibit 19: Revenue Forecasts (SAR Mln) Exhibit 20: Ceramic Production (Mln m 2) and Realization (SAR/m2)
Revenue YoY Production Realization
20% 27
26
15% 25
2,214
73
2,063
69
24
65
1,917
61
1,776
58
1,601
10%
52
1,447
43
23
1,221
34
1,080
22
5%
2014E
2017E
2015E
2016E
2011
2010
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Source: Company reports and Riyad Capital Source: Company reports and Riyad Capital
Riyadh region contribute 35% of revenue
We expect Riyadh region to be the major contributor of revenue and expect 9% CAGR
Riyadh segment enjoys during 2014-17 outpacing other regions. The Western region, remaining KSA and exports
proximity to plant segment is forecasted to grow at 8%, 6% and 5% respectively through 2017. The
location 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 21: Geographic Revenue contribution Exhibit 22: Product Segment Contribution (SAR Mln)
Riyadh West remaining KSA Exports Ceramics Water heaters

392
374
13% 13% 11% 11% 11% 11% 10%

356
339
25%
323
26% 26% 26% 26% 26%

30%
316
273
1,822
29%
1,689
28% 28% 28% 29%

1,561
28%
1,437
26%
1,278
1,132
948
31% 33% 35% 35% 35% 36% 37%

2014E
2015E
2016E
2017E
2011
2012
2013
2014E
2015E
2016E
2017E
2011
2012
2013
October 15, 2014 15

September 2, 2014
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
Capacity addition to be million in 2017. The water heater segment is highly competitive in Saudi Arabia with
gradual for 2014-17 cheap imports from China and some of the Middle East producers. However, SCC exports
unlike 2009-12 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.
Exhibit 23: Opex Forecasts (SAR Mln) Exhibit 24: Cost Structure (% of total cost) during 2013
Total Opex YoY

25%
D&A
20% 11%
Salaries
15% 9%
1,733
1,634
1,530
1,421
1,272
1,192
COGS- Freight
980
10%
860
Excl D&A 6%
71% Others
5% 4%
2016E
2014E
2015E
2017E
2010
2011
2012
2013
SCC’s gross profit is forecasted to reach SAR 809 million in 2017 primarily driven by the
Ceramics segment ceramic segment with an average of 86.9% contribution between 2014-17 versus
contributed 87% of average of 85.4% during 2010-13. The standalone ceramic segment gross margins is
gross profit during 2013 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.
October 15, 2014 16

September 2, 2014
Exhibit 25: EBITDA Forecasts (SAR Mln) Exhibit 26: EBITDA Margin Forecasts
EBITDA YoY
25%
20%
30.5%
29.7%
29.7%
676
15%
29.3%
29.3%
604
28.7%
28.4%
550
504
469
10%
26.6%
385
362
321
5%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
SCC has the largest 87% to the group net income, primarily supports the group’s earnings due to its high
share of net income margins. We forecast ceramic’s share of earnings at an average of 88% and margins at
among GCC peers with 21% between 2014-17. The water heaters segment should contribute the rest and
45% during 2013 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.
Exhibit 27: Net Profit (SAR Mln) and Margin Forecasts Exhibit 28: Net Margin Forecasts
Net profit YoY

30%
25%
20%
20.7%
20.2%
459
19.8%
19.2%
19.2%
408
19.0%
15%
18.8%
368
338
307
16.9%
10%
245
218
230
5%
2014E
2016E
2015E
2017E
2011
2010
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Consistency in dividends We forecast EPS to reach SAR 12.24 in 2017 supported a steady growth during 2014-16.
despite maintaining high The stable payout with DPS of SAR 3.00 for 2014 and SAR 3.50 for 2015 is satisfactory to
retention ratios for growth 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 29: EPS Forecasts (SAR) Exhibit 30: DPS (SAR) and Payout Ratio Forecasts
Dividends Payout Ratio
45%
40%
12.24
4.00
4.00
10.88
3.50
9.81
9.01
35%
3.00
3.00
8.18
2.50
2.50
2.40
6.54
6.13
5.82
30%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
October 15, 2014 17

September 2, 2014
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
Strong balance sheet
maintained an excellent capex/ sales ratio with an average of 20% between 2010-13 and
structure, superior
intends to maintain at least 18% for 2014-17. Such level of capex/sales ratio is the
capex/sales ratio and
highest among TASI building materials sector, which on an average ranges 5-6%, though
steady ROE are the key
incomparable. Additionally, the improving cash cycle is noteworthy highlighting its
highlights
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.
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
3Q14E results to be
QoQ growth 11% 3% -6% 7% 9% 6% -11% 0% 11% 3% -4% 15%
lower followed by EBITDA 92 96 92 107 125 124 111 110 128 119 117 139
recovery in 4Q14E 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
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.
October 15, 2014 18

September 2, 2014
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.
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
Im plied 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%
Terminal FCF multiple Net incom e 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%
of 17.6x is convincing
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 m etrics
Term inal 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
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 6: Sensitivity Analysis of WACC and Terminal Growth Rate

Term inal Grow th 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
WACC
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
October 15, 2014 19

September 2, 2014
#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
Table 7: Price Sensitivity and Target EV/EBITDA Valuation using Bear-Base-Bull Case EBITDA Estimates
EV/EBITDA 2013A 2014E 2015E 2016E 2017E

Actuals Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull
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
EV/EBITDA Range (x)
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
Valuation based on EV/EBITDA

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
Estim ated valuation at EV/EBITDA of 9.0x 143.2 154.2 167.2 184.5
#3: Target P/E of 15.0x suggest valuation of SAR 147.21

Scope for valuation
We have valued SCC using target P/E method by valuing using a weighted average of a
upside on the P/E front
last 5 years deriving a multiple of 15.0x. We assigned the same to our 2015E EPS
once TASI re-rates to
estimates to arrive at a valuation of SAR 147.21. We believe 2015E EPS would serve as a
the new levels
right direction to valuation due to its assumed completion of capex program and effect of
new normal earnings.
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
P/E Range(x)
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
Valuation based on P/E

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 Estim ated valuation at PER of 15.0x 135.1 147.2 163.2 183.7
October 15, 2014 20

September 2, 2014
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.
Table 9: Global Comparables for SCC

EV Mcap 52 Wk- 52 Wk-
Price US$ US$ EV/ EV/ Div. Hi Lo
MENA region has the Com pany Nam e Country (LCL) Mln Mln P/E P/B P/S Sales EBITDA Yld YTD (LCL) (LCL)
MENA
lowest median P/E 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
multiple of 16.9x among 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
global peers 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
Am ericas
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
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 10: MENA Comparables (US$ Mln)

Com pany Country Revenue Net Profit Net Margins
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
October 15, 2014 21

September 2, 2014
Exhibit 31: 5 Year Price Multiples Trading History
Last 5Y: Price to Book Last 1Y: Last 1y

4.5 Avg: 3.1x 3.8 P/Sales Ratio
Avg: 3.3x Avg: 3.0x
High: 4.0x High: 3.7x High: 3.5x
4.0 Low : 2.0x Low : 2.7x Low :2.5x
3.3
3.5
2.8
3.0
Last 3Y: Last 5Y: Last 3Y:
Most multiples trades 2.5 Avg: 3.0x 2.3 Avg: 2.8x
High: 3.6x
Avg: 2.7x
High: 3.5x
High: 3.7x
above long term 2.0
Low : 2.0x 1.8
Low : 1.6x Low : 1.8x
Apr-10
Apr-12
Apr-11
Apr-13
Apr-14
Aug-12
Aug-09
Aug-10
Aug-11
Aug-13
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Apr-10
Apr-12
Apr-11
Apr-13
Apr-14
Aug-10
Aug-13
Aug-09
Dec-09
Dec-10
Aug-11
Dec-11
Aug-12
Dec-12
Dec-13
averages since 2014
P/B 3 Yr Avg 5 Yr Avg YTD Avg p/s 3 Yr Avg 5 Yr Avg YTD Avg
EV/Sales Ratio Last 1Y: Last 5Y:

4.5 17.0 EV/EBITDA Ratio Last 1Y:
Avg: 3.5x Avg: 12.6x
4.3 High: 3.9x Avg: 12.8x
16.0 High: 15.8x
4.1 Low :3.0x Low : 9.3x High: 14.4x
3.9 15.0 Low : 10.6x
3.7 14.0
3.5 13.0
3.3 12.0
3.1 Last 5Y: Last 3Y: Last 3Y:
Avg: 3.5x Avg: 3.3x 11.0 Avg: 12.0x
2.9
High: 4.3x High: 3.9x 10.0 High: 14.4x
2.7 Low : 2.5x
Low : 2.5x Low : 9.3x
2.5 9.0
Apr-12
Apr-13
Apr-14
Apr-10
Apr-11
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Aug-12
Aug-13
Aug-09
Aug-10
Aug-11
Apr-10
Apr-13
Apr-11
Apr-12
Apr-14
Aug-10
Aug-13
Aug-09
Aug-11
Aug-12
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
EV/Sales 3 Yr Avg 5 Yr Avg YTD Avg EV/EBITDA 3 Yr Avg 5 Yr Avg YTD Avg
Source: Bloomberg
Exhibit 32: Share Price and P/E trading bands at various multiple levels
175
150
SCC witness new P/E

125
bands since 2012 and
over the last 2 years 100
stock price rallied by
+83% 75
50
25
Jul-09
Jul-11
Jul-13
Jul-07
Jul-08
Mar-09
Jul-10
Mar-11
Jul-12
Mar-13
Jul-14
Mar-08
Mar-10
Mar-12
Mar-14
Sep-08
Sep-10
Sep-12
Sep-14
Sep-07
Sep-09
Sep-11
Sep-13
Jan-08
Jan-13
Jan-09
Nov-09
Jan-10
Jan-11
Nov-11
Jan-12
Nov-13
Jan-14
Nov-07
Nov-08
Nov-10
Nov-12
May-08
May-10
May-12
May-14
May-09
May-11
May-13
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
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.
October 15, 2014 22

September 2, 2014
Summary Financials and Ratios

Table 11: Financial Projections Summary (SAR Mln)
2010 2011 2012 2013 2014E 2015E 2016E 2017E
Profit& Loss Statem ent
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
Com m on 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
October 15, 2014 23

September 2, 2014
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%
October 15, 2014 24

September 2, 2014
Bawan Company
Buy 12-Month Target Price SAR 95
October 15, 2014 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
Price as of Oct-13, 2014 SAR 73.12 10.9% CAGR for 2014-17E is attractive coupled with forward ROE average of 21%. Dividend
Upside to Target Price 29.9% yield of 3.5% with 44% retention ratio for 2014-17 satisfies reinvestment needs and income
Expected Dividend Yield 3.0% 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
Market Data segments is noteworthy. It is a successful combination of 13 subsidiaries managing nearly 20+
52 Week H/L SAR 85.40/36.00 product lines highlighting the management efficiency. We rely on such positives and believe
Market Capitalization SAR 3,656 mln the investment case proves to be realistic for a compelling Buy story.
Enterprise Value SAR 4,270 mln Positioning for next spending cycle
Shares Outstanding 50.0 mln We expect revenues to reach at SAR 3.9 billion in 2017 owing to steady growth rates across all
Free Float 39.5% segments. The largest contribution from metals is likely to support topline, while electrical is
9M ADTV (000’s) 1,209.5 the key contributor of margins. EBITDA margins are set to expand by +70 bps in 2017 to
TASI Weight 0.1% 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
Bloomberg Symbol BAWAN AB
valuation.
Price Performance (since listing)
Diversification is noteworthy
250
The target industry is the construction sector coupled with electrical sector, which accounted
225
for 15% of GDP on a combined basis. This implies the robust performance these sectors will
200
enjoy on continuing large scale economic activity in the country. The construction market is
175 likely to gain large momentum with Bawan’s product lines catering mainly to suppliers and
150 users who prefer backward integration. The Company is currently expanding its electrical and
125 concrete business, which we believe is an appropriate strategy since the market is witnessing
100 steady growth with expectations of a large pick up.
D J F M A M J J A S
Bawan TASI TBMCI
Valuation good on intrinsic basis, relative valuation should subside
Source: Bloomberg 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
Bawan TASI TBMCI
front will have necessary adjustment towards our topline estimates. The consistency in
Oct-13- 2014 73.12 10,378 4,538 dividends with an expected DPS of SAR 2.20 in 2014 and SAR 2.50 in 2015 is attractive with
Total Change yield of 3.2% average. This coupled with stability in margins going forward should augment
6-months 16.9% 10.1% 12.2% our positive view. We recommend a Buy.
1-Year NA 30.0% 31.7%
2-Year NA 55.3% 57.8%
Key Financials
Revenue 2,448 2,890 3,148 3,480
Atheel Holding Company 46.6%
EBITDA 276 277 293 319
Maaly Holding Co. 9.0%
Net Profit 168 199 208 230
Azdan Arabic Commercial 4.9%
EPS (SAR) 3.36 3.98 4.15 4.60
Public Float 39.5% 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
Bawan Company
Valuation Snapshot
Valuation Trend Since Listing
24.0 4.5 Dividend Yield

P/E Trend
22.0 4.0
20.0
3.5
18.0
3.0
16.0
14.0 2.5
Jun-14
Dec-13
Jan-14
Jul-14
May-14
Apr-14
Feb-14
Mar-14
Jan-14
Dec-13
Jun-14
Jul-14
Apr-14
Mar-14
May-14
Feb-14
P/E 3 M Avg 6M Avg Div.Yild 3 M Avg 6M Avg

Core Our revenue assumptions are based on growth in volumes and realization resulting in segment level
Forecasting revenue forecasts. We believe Bawan with spare capacity levels can adjust production accordingly with
Assumptions 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 Our Bull case derive a valuation of SAR 117 with revenue CAGR of 8.5% for 2016-19E and terminal growth
Assumptions 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.
Base Case Our Base case derive a valuation of SAR 95 with a revenue CAGR of 7.3% and EPS CAGR of 11.1% for
Assumptions 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 Our Bear case suggested a valuation of SAR 75 with revenue CAGR of 5.7% and assumptions are based
Assumptions 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.
117
5
8
9
95
4
7
9
75
Bear 5% CAGR in 10% increase in Terminal growth at Base 8% CAGR in 15% increase in Terminal growth at Bull
group realization utilization ratio 2% group realization utilization ratio 2.5%

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
October 15, 2014 26

September 2, 2014
Bawan Company
Overview
Key Data Bawan Company (Bawan) emerged out of a joint venture between Al-Muhaidib and
Share Capital (SAR mln) 500
Niedermeier & Weibel Company Ltd, established in 1980. Later Niedermeier & Weibel
Par Value per Share (SAR) 10
Company Ltd sold their shareholding of 30% to Al-Muhaidib group in 1987. After a series
Shares Outstanding (mln) 50 of shareholder churn within Al Muhaidib Holding, the promoter group sold 40% of their
Employees 2,810 shareholding to Al Fozan Holding during 2008. With the entry of Al Fozan Holding, both
TASI Code 1302 groups with decades of operational experience in KSA decided to expand strategically.
Management
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
Abdullah Al Fozan Chairman
paid-up capital of SAR 500 million (par value of SAR 10 per share) with 50 million shares
Eng. SulaimanAbu Lehyah CEO
Mohammad Al Balawi CFO
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
Maa'ly
Holding
Co.
the ready-mix concrete factory in Jeddah during 2015.
Atheel
Holding 9.0% Azdan
Company Arabic
46.6% Commerci
al
Atheel Holding Company is the major shareholder with 46.6% followed by Ma’aly
4.9%
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
Public
Float nine months and comprises TASI weight of 0.1%. Bawan listed on Tadawul in December
39.0%
2013, and touched a high of SAR 85 and low of SAR 36 with YTD return of 15%.
October 15, 2014 27

September 2, 2014
Bawan Company
Financial Analysis
Growth favoring all segments
Projected group revenue CAGR of 10.5% during 2014-17 is driven by stellar performance
Group revenue mainly across segments aided by optimal mix in volume and price. As construction sector picks
driven by even growth up in KSA, we believe metals and concrete are likely to benefit at first. Largely convincing
across all segments 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.
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
Grow th (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
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
Revenue to grow 18%
should lead group revenue comfortably to SAR 3.9 billion by 2017. The revenue trends
for 2014E and stabilize
are remarkable with a surge of 18.0% in 2014E followed by stabilized performance of
for 2015-17 to reach
9.0% in 2015E and average of 11% for 2016-2017E. The continued focus in the local
SAR 3.9 billion
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.
Exhibit 33: Revenue Forecasts (SAR Mln) Exhibit 34: Local vs International Revenue (SAR Mln)
24%
195
Revenue YoY Saudi Arabia Intl,Sales

226
20%
236
231
16%
254
3,701
3,895
229
3,254
3,480
2,912
3,148
1,651 206
2,659
12%
2,890
1,480 94
2,448
2,194
2,086
1,857
1,857
1,574
8%
4%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
October 15, 2014 28

September 2, 2014
Bawan Company
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
Metals to witness steel rebar products in building structures primarily in the concreting stage. Hence,
growth of 11.5% CAGR consumption of steel in relation to construction market acts as growth indicators. It is
for 2014-17 further divided into sub segments i) cutting and bending ii) wiredrawing and mesh and
iii) others segment (door and window frames).
Exhibit 35: Metals Segment Revenues (SAR Mln) Exhibit 36: Sub-segment Revenue Contribution-2013
36%
Metals YoY
32%
28% Wire
draw ing
24% and
Cutting Mesh
1,681
20% 44%
and
1,489
1,333
16% bending
1,214
51%
1,023
12%
900
850
8%
644
4% Others
2014E
2015E
2016E
2017E
2011
2012
2010
2013
5%
The cutting and bending caters to heavy construction projects primarily bridges and tall
structures, hence very susceptible to customized requirements wherein Bawan adds
Bawan adds value to value to clients. This segment is likely to contribute 54% of revenue by 2017 and grow at
contractors through its a CAGR of 13.1% to SAR 915 million in 2017. We forecast realization to improve by 2.2%
varied products 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.
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%
Volum es ('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%
October 15, 2014 29

September 2, 2014
Bawan Company
Woods segment: Driven by long-term contract
Woods segment caters to the needs of industrial packaging, furniture and interior
Woods have a niche designing industry. The industry excluding raw lumbers as estimated by PWC stands at
clientele, mainly SAR 2.2 billion as of 2013 with Bawan having a market share of 35%. It operates in
petrochemical and demand rated capacity model as the Company imports raw materials and then re-process
heavy industrials to cater to client needs. Hence, any uptick in industrial production and finalization of
producers construction projects should drive volumes for the sector. The sub segments are
classified as i) packaging items ii) laminated panels and iii) joinery items.
Exhibit 37: Woods Segment Revenues (SAR Mln) Exhibit 38: Sub-segment Revenue Contribution-2013
35%
Woods YoY
30%
25%
20% Packaging Laminated
items Panels
970
15%
55%
893
35%
824
10%
738
5%
593
578
544
512
0%
-5%
Joinery
2014E
2015E
2016E
2017E
2010
2011
2012
2013
items
10%
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 drives packaging segment contributed 55% share of revenue during 2013. The realization of
overall segment growth 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.
Table 15: Woods-Sub Segment Forecasts for Revenue, Volumes and Realization
2010 2011 2012 2013 2014E 2015E 2016E 2017E

Packaging item s
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%
Lam inated 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 item s
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%
October 15, 2014 30

September 2, 2014
Bawan Company
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
Bawan has high market
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
share in transformers
transformers, substations and low voltage panels, which cater mainly to the electricity
business with 18%
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.
Exhibit 39: Electrical Segment Revenues (SAR Mln) Exhibit 40: Electrical Revenue Contribution-2013
60%
Electrical YoY
50%
40% Transforme
rs
30% 72%
988
862
20%
770
734
664
10%
439
337
354
Substations
0% and Others
28%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
Transformers forms the competition from international manufacturers is a slight concern as these producers are
key diversification path 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.
Table 16: Electrical-Sub Segment Forecasts For Revenue, Volumes and Realization
2010 2011 2012 2013 2014E 2015E 2016E 2017E

Transform ers
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%
October 15, 2014 31

September 2, 2014
Bawan Company
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,
Bawan plans to expand with concrete segment focusing on mid stage construction process unlike metals in early
with its new RMC plant stage process. The product lines are hollow cores, pre-cast panels and ready mix concrete
in Jeddah (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.
Exhibit 41: Concrete Segment Revenues (SAR Mln) Exhibit 42: Concrete Revenue To Total Revenue
50%
Concrete YoY
40%
30%
7.5%
7.3%
257
7.1%
236
7.0%
20%
221
6.7%
6.7%
204
183
153
5.8%
108
10%
5.2%
82
0%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
Commodity price are on
2010-13, opex accounted for 90.7% of total sales and we forecast slight increase to
a falling trend and will
91.7% due to the nature of volatile commodity price in international markets. Most of the
help margin growth
segments have a suitable proportion of opex-to-sales.
Exhibit 43: Total Opex and Growth (SAR Mln) Exhibit 44: Cost Break-Up by segments -2013
25%
Total OPEX
Wood
20% 24%
15%
3,558
3,213
2,900
10%
2,654
2,210
Electrical
1,929
1,689
Metal
1,404
5% 25%
43%
0%
Concrete
2014E
2015E
2016E
2017E
2010
2011
2012
2013
8%
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.
October 15, 2014 32

September 2, 2014
Bawan Company
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.
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%
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
World bank predicts flat the global commodity market. The trend analysis suggests commodity prices have been
growth price trends 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.
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
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
Electrical to contribute
13.2% CAGR. The key contributor to group EBITDA would be electrical with 45% for
45% to group EBITDA
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.
October 15, 2014 33

September 2, 2014
Bawan Company
Exhibit 45: EBITDA Forecasts and Growth (SAR Mln) Exhibit 46: EBITDA Margin Forecasts
EBITDA YoY
50%
40%
30%
12.8%
20%
401
11.3%
10%
10.8%
319
10.3%
293
276
277
9.6%
9.2%
9.3%
9.2%
0%
202
200
192
-10%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
We forecast electrical EBITDA margins to average 18.2% for 2014-17 and contribute
Capacity to peak by 45% on an average. Additionally, most segments are expected to witness margin growth
2017 and next capex averaging +50 to +150 bps by 2017. Bawan’s capacity utilization currently on a group
cycle due during 2018 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.
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%
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
Margins to expand by operating model, which essentially means, it’s more of a semi-processing industry
+40 bps through 2017 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.
October 15, 2014 34

September 2, 2014
Bawan Company
Exhibit 47: Net Profit Forecasts and Growth(SAR Mln) Exhibit 48: Net Margin Forecasts
Net profit YoY

40%
30%
20%
272
8.9%
230
10%
208
199
7.3%
7.0%
6.9%
6.9%
6.6%
6.6%
168
6.3%
0%
140
135
131
-10%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
We forecast EPS to reach SAR 5.44 in 2017 after a stagnant growth in 2014-16 while
Bawan expected to pay stable payouts with DPS of SAR 2.20 in 2014 and DPS of SAR 2.50 for 2015-16 is
DPS of SAR 2.20 in achievable. The payout ratios averages 56% for 2014-17 and believe it’s apt to maintain
2014 such levels as cash flows are not affected and any increase will add pressure on near term
working capital.
DPS Payout Ratio
100%
80%
3.00
5.44
60%
2.55
2.50
2.50
4.60
2.30
2.20
2.20
4.15
3.98
3.36
40%
2.79
2.70
2.62
1.06
20%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
The average retention ratio of 44% during 2014-17 should support growth of 4.0%
Superior ROE of 21% capex/sales and aid debt repayment by cutting 50% of its debt exposure, thereby
for 2014-17, while maintaining a reasonable debt to equity ratio of 0.17x. It has one of the best ROE among
retention ratio of 44% is the building materials peers delivering an average ROE of 23% during 2009-13 and we
remarkable 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.
Table 20: KSA Comparables for Bawan

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
October 15, 2014 35

September 2, 2014
Bawan Company
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.

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%
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
DCF valuation is apt We used a long-term growth rate of 2.25% and a beta of 1.0 in our model. The risk-free
given the shorter rate assumption of 3.8% includes a premium for country risk over 10-year US risk-free
history of relative rate of 2.4%. Cost of equity of 9.9% and cost of debt of 4.7% leads to a WACC of 8.4%
valuation trends assuming a long-term capital structure of 70% equity and 30% debt weighting.
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
Im plied 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%
October 15, 2014 36

September 2, 2014
Bawan Company
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.
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 incom e 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 m etrics
Term inal value 4,708 5,817 7,047
Sum of PV of FCFF 855 1,020 1,160
Less: net debt (469) (475) (476)
Im plied value of equity 3,770 4,762 5,834
No of shares outstanding (mln) 50 50 50
Fair value (SAR) 75.40 95.25 116.68
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.

##### 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
WACC
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
#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.
October 15, 2014 37

September 2, 2014
Bawan Company
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 firm 5,189
Less: Net Debt (2015E) (527)
Value of equity 4,662
Shares outstanding (Mln) 50
Fair value per share (SAR) 93.25
#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.
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
P/E Range(x)
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
Estim ated fair value at sector w eighted P/E of 18.7x 74.5 77.7 86.1 101.6
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.
October 15, 2014 38

September 2, 2014
Bawan Company

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 Incom e/Profit before MI 147 148 144 192 182 193 212 277
Minority Interest (7) (12) (13) (24) 17 15 18 (5)
Net Incom e/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
October 15, 2014 39

September 2, 2014
Bawan Company
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%
October 15, 2014 40

September 2, 2014
Bawan Company
Exhibit 51: Pictorial Representation of Dupont 5-Stage ROE Analysis
Sales
2,448
-
Cost of Sales Earnings Available
(2,055) 192
Income Statement
-
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 Return on Com m on

(PPE) Total Assets multiplied by Equity (ROE)
440 1,702 24%
Balance Sheet
Total Liabilities
1,109
Current Liabilities
981 Total Liab + SE = Total

+ Assets
+ 1,878
Long Term Liabilities
Financial
128 Stockholder Equity Leverage
(SE) divided by m ultiplier
770 2.44
Com m on stock equity

770
October 15, 2014 41

September 2, 2014
United Wire Factories Company
HOLD 12-Month Target Price SAR 52
October 15, 2014 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
Price as of Oct-13, 2014 SAR 47.54 net cash position makes the investment case attractive but valuation have already priced in
Upside to Target Price 9.4% such positives. Consequently, a lower capex spending with a capex/sales ratio of 3.5% vs
Expected Dividend Yield 4.7% 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
Market Data 17.8x to its 2015E EPS to derive our 12-month target price.
52 Week H/L SAR 57.25/34.04
Utilization should drive margins
Revenue is expected to reach SAR 1.3 billion in 2017 driven by higher growth in steel rebar
Enterprise Value SAR 1,912 mln
segment and reasonable growth rates across other segments. With incremental utilization and
Shares Outstanding 44.0 mln further softening of international iron ore prices, we believe margin improvement is
Free Float 88.0% imminent. We forecast EBITDA margins to gradually improve and increase by +50 bps to
12-Month ADTV (000’s) 380.9 14.5% by 2017. Net income is forecasted to reach SAR 150 million by 2017 sounding a steady
TASI Weight 0.2% 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.
Bloomberg Symbol ASLAK AB Industry cyclical in nature; barriers to entry is very low
1-Year Price Performance The size of the rebar market grew at a CAGR of 7.8% during 2008-13 to SAR 27.5 billion with a
180 portion of the demand being met through imports. The industry is fragmented due to low
170 barriers to entry amid presence of unorganized peers thereby enhancing high competition.
160 The thin margins and high volatility in raw material prices are the normal characteristics of
150 this cyclical industry and believe efficiency is derived when utilization and costs are at
140
130 optimum levels. The industry is expected to receive further boost once construction sector
120 picks up and expect renewed demand to follow through.
110
100 Dividend yields attractive but valuations expensive
90
S O N D J F M A M J J A S O
Aslak currently trades at trailing P/E of 17.2x, which we believe is cheaper compared to
ASLAK TASI TBMCI 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
Source: Bloomberg
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
Aslak TASI TBMCI dividend yield of 4.7%. We recommend a Hold on valuations and retain our long term positive
Oct-13- 2014 47.54 10,378 4,538 view until we see more clarity on capex and integration benefits.
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%
Shareholding Structure Key Financials

Khaled Saad Abdulrahman Kanhal 7.0% FY December 31 (SAR mln) 2013A 2014E 2015E 2016E
Nihaz Investment Co. 5.0% Revenue 1,001 1,051 1,125 1,192
Public Float 88.0% 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
Overview
Key Data United Wire Factories Company (Aslak) was founded in 1990 born out of a merger
Share Capital (SAR mln) 439 between group of factories to operate as one firm in 2007. Listed on Tadawul during
Par Value per Share (SAR) 10 2011, the Company mainly caters to the ancillary sector within the construction market.
Shares Outstanding (mln) 44 It has a paid-up capital of SAR 439 million (par value of SAR 10) with 44 million shares
Employees n.a
outstanding currently.
TASI Code 1301
Management Aslak manufactures products across its 8 factories located in Central, Western, Southern
Khaled Saad Al-kanhal Chairman and Northern regions. The operational lines consist of construction, civil, industrial and
Abdulkarim Al-Shamikh CEO
projects related businesses. However, Aslak reports its revenue under i) steel rebar and
Khalid Abdulaziz CFO
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.
Khaled
The major shareholders are its Chairman, Khaled Saad Bin Abdul Rahman Alkhanhal
Saad
Abdulrah
with 7.0% and Nihaz Investment Co. with 5.0%. Aslak’s board is comprised of seven
Public
Float
man
Kanhal
directors and has capable management team comprised of experienced professionals.
88.0% 7.0%
Some 381K Aslak shares trade per day on average over the trailing 12-months, an
Nihaz 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
Investme
nt Co.
basis.
5.0%
October 15, 2014 43

September
September2,2,2014
2014
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
Steel rebar segment to continue with 2012-13 being the revival stage of many projects and the demand is likely
witness highest growth to be extended over the next 2-3 years. Steel rebar’s is set to witness the highest growth
rate of 7.2% CAGR of 7.2% CAGR for 2014-17 and reaching SAR 739 million, while growth rates across
amongst all segments 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.
Exhibit 52: Revenue Forecasts (SAR Mln) Exhibit 53: Segment Revenues (SAR Mln)
60% Nails & Cloth Hangers Mesh
Revenue YoY
Wires Steel Rebar & Steel Rolls
50%
251
237
40% 229
149 210 145
206 142
117 135 140
30% 134 126
1,276
118 131
1,192
118
1,125
113 115 116

1,051
111
1,005
1,001
20% 112 116

855
68
107 682 739
642
571
10% 625 565 599

491
284
0%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
Source: Company reports and Riyad Capital 2013

Given the historical revenue mix in products and geographies, we do not expect major
Even revenue mix shift in contribution for 2014-17 except Central region witnessing shift in revenue mix to
across all geographies 38% in 2014. The reason being its proximity to client locations whilst it’s two key
within KSA 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 54: Geographic Segment Contribution Exhibit 55: Product Segment Contribution
Central Eastern Western Southern Northern Nails & Cloth Hangers Mesh
Wires Steel Rebar & Steel Rolls
19% 21% 17% 20% 20% 21% 21% 21% 16% 15%
20% 21% 20% 20% 20% 20%
13% 12% 11% 11% 11% 13% 12%
17% 12% 12% 12% 12% 11%
12% 12% 12%
11%
24% 22% 14% 11% 11% 11% 11% 11%
28% 24% 23% 22% 19%
24% 27%
4% 7% 8% 8% 8% 9%
5% 4%
57% 62% 57% 57% 57% 57% 58%

35% 36% 38% 37% 38% 38% 37% 38% 50%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2015E
2017E
2014E
2016E
2012
2010
2011
2013
October 15, 2014 44

September
September2,2,2014
2014
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
Cost not to peak upon for 85% of sales in 2013, while the forecast for 2014-17 averaged 86% owing to
softening of iron ore expectations of rising salaries. Aslak has a commodity linked cost structure with iron ore
prices
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.
Exhibit 56: Opex Forecasts (SAR Mln) Exhibit 57: Direct Costs and Iron Ore (US$/dmt)
Total Opex YoY Direct cost Iron ore prices

70% 180
60%
160
50%
40% 140
1,127
86.5%
86.3%
86.3%
86.3%
86.2%
1,057
85.4%
85.0%
998
30%
935
120
880
868
740
20%
76.8%
100
449
10%
0% 80
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Source: Company reports and Riyad Capital Source: Company reports and World bank projections
EBITDA margins to expand by +50 bps by 2017
EBITDA to improve on EBITDA is forecasted to reach SAR 184 million in 2017 registering a 7.7% CAGR during
cost efficiencies but 2014-17. EBITDA margins have declined largely from 26.7% in 2009 to 13.8% in 2013
mainly in 2017E 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.
EBITDA YoY
30%
20%
10%
24.2%
184
169
0%
160
147
138
138
133
121
-10%
14.5%
14.2%
14.2%
14.0%
14.1%
13.2%
13.8%
-20%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
October 15, 2014 45

September
September2,2,2014
2014
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
Net margins for 2014-17 by the volatility in raw material prices due to credit crisis and 2011-13 average of 11%
to average 11.5%
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%.
Exhibit 60: Net Profit Forecasts (SAR Mln) Exhibit 61: Net Margin Forecasts
Net profit YoY

30%
20%
10%
19.0%
0%
150
135
-10%
128
118
11.8%
11.5%
11.4%
11.4%
110
11.2%
10.5%
11.0%
108
106
-20%
98
-30%
2014E
2015E
2016E
2017E
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2010
2011
2012
2013
High payout ratio of
85% is attractive upon EPS forecasts are expected to reach SAR 3.42 for 2017E, while DPS is forecasted to reach
absence of any large SAR 2.75. Aslak paid a DPS of SAR 2.22 in 2013 and expects to pay SAR 2.25 for 2014 in
capex spending 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.
100%
80%
3.42
60%
3.09
2.92
2.75
2.68
2.50
2.50
2.50
2.47
2.41
2.25
2.22
2.24
1.67
40%
0.56
20%
2015E
2017E
2014E
2016E
2010
2012
2011
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
The Company has zero debt and has capitalized through funding from equity and
Attractive balance sheet operating cash flow, generating an unlevered ROE of 24% during 2013. However, with no
with zero debt, high expansion on the cards, the Company might face concerns on growth prospects. While,
cash reserves and we argue it should be utilizing a healthy leverage ratio to further boost ROE. Over the
current ratio of 2.5x 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.
October 15, 2014 46

September
September2,2,2014
2014

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%
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.
Table 30: Comparables with in KSA

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
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
We use a weighted weights to sector P/E for periods ranging from 6 months to 3 years. We use a trailing P/E
sector P/E to value as forward consensus estimates are unavailable, while the lack of pure peers restricts
Aslak 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.
October 15, 2014 47

September
September2,2,2014
2014
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
PER Range(x)
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
Estim ated fair value at P/E of 17.8x 47.7 51.9 54.9 60.9
Exhibit 64: Price Multiples Trading History For Past three years
Price to Book 60
5.5 Share Price
5.0
4.5 50
4.0
3.5 40
3.0
2.5 30
2.0
1.5
20
Apr-14
Apr-12
Apr-13
Dec-11
Dec-12
Dec-13
Aug-11
Aug-12
Aug-13
Aug-14
Apr-12
Apr-13
Apr-14
Aug-12
Aug-13
Aug-11
Aug-14
Dec-11
Dec-12
Dec-13
P/B 3 Yr Avg 12M Avg
P/E Ratio Dividend Yield

20.0 7.0
6.0
15.0 5.0
4.0
10.0 3.0
2.0
5.0 1.0
Apr-13
Apr-12
Apr-14
Apr-14
Apr-12
Apr-13
Dec-11
Dec-12
Dec-13
Aug-11
Aug-12
Aug-13
Aug-14
Dec-11
Dec-12
Dec-13
Aug-11
Aug-12
Aug-13
Aug-14
P/E 3 Yr Avg 12M Avg Div.Yild 3 Yr Avg 12M Avg
Source: Bloomberg
October 15, 2014 48

September
September2,2,2014
2014

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
October 15, 2014 49

September
September2,2,2014
2014
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%
October 15, 2014 50

September
September2,2,2014
2014
National Company for Glass Industries
Hold 12-Month Target Price SAR 46
October 15, 2014 Valuation Unappealing

We initiate coverage on National Company for Glass Industries (Zoujaj) with a Hold rating and
Expected Total Return a 12-month target price of SAR 46, suggesting upside of 7%. Large capex spending, significant
Price as of Oct-13, 2014 SAR 43.15 margin expansion and revenue growth of 10.2% CAGR meets enough comfort for conviction
Upside to Target Price 6.6% but not supported by attractive valuation. Zoujaj after a stock rally of 73% over the last twelve
Expected Dividend Yield 3.2%
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
Market Data
We remain positive on its business model with revenue set to reach SAR 146 million in 2017
52 Week H/L SAR 48.00/27.30
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.
Enterprise Value SAR 1,268 mln Earnings support from associates, who operate in float glass segment is likely to provide large
Shares Outstanding 30.0 mln cushion. However, the extent of positive impact needs more clarity though it contributed an
Free Float 73.8% average of 55% to net income during 2010-13. Our forecast considers such robust
12-Month ADTV (000’s) 803.4 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
TASI Weight 0.1%
expect to decline to an average ROE of 9.1% for 2014-17, which Zoujaj needs to resolve.
Bloomberg Symbol Zoujaj AB
Industry positioning firm, any uptick in demand benefits Zoujaj
1-Year Price Performance 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
200
190 caters to food, medicine and other industrial packaging needs with key driver being the
180
170 growth in population driven by higher consumption patterns. The demands from personal to
160
150
industrial needs are the potential catalysts. Renewed demand is likely, with soft drink
140 manufacturers such as Coca-Cola, Pepsi and other local manufacturers increasing their order
130
120 for glass bottles due to environment concerns on PET bottles. Zoujaj’s float glass business is
110
100 expected to show some pick upon renewed construction activity in KSA and UAE, mainly from
90 the commercial construction.
S O N D J F M A M J J A S O
Zoujaj TASI TINDI Valuations unsupportive; recommend Hold
Source: Bloomberg 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
Zoujaj TASI TINDI using a DCF method as valuation checks suggest DCF method to be more relevant. The
Oct-13- 2014 43.15 10,378 8,410 consistency in dividends with payout ratio of 76% during 2010-13 and 67% for 2014-17 is
Total Change
worth mentioning, We believe at such peak valuations, the Hold rating is warranted while
expansion plans could be a catalyst.
6-months 33.3% 10.1% 7.3%
1-Year 73.4% 30.0% 29.4%
2-Year 61.1% 55.3% 54.3%
Shareholding Structure Key Financials

Riyad Mohammed Alhumaidan 26.2% FY December 31 (SAR mln) 2013A 2014E 2015E 2016E
Public Float 73.8% 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
Overview
Key Data National Company for Glass Industries (Zoujaj) incorporated in 1990 is the leading glass
Share Capital (SAR mln) 300 manufacturer in KSA. It has a paid-up capital of SAR 300 million (par value of SAR 10)
Par Value per Share (SAR) 10 with 30 million shares outstanding currently. Listed on Tadawul during 1992, the
Shares Outstanding (mln) 30 Company has two plants, located in Riyadh and Dammam, mainly producing glass
Employees 300 containers. It has three other factories through joint venture investments in UAE and KSA
TASI Code 2150 mainly producing float glass used for buildings. The key product lines are glass bottles,
Management flint, hollow glass, mirrors, float glass, lamps and other glass based electrical products. Its
Riadh Mohamed Al Humaidan Chairman key clientele in the glass segment are bottling companies for Coca Cola, Pepsi and other
Yousef Al Salman CEO leading juice manufacturers in KSA in addition to industrial consumption. In the float
Hatem Al Fadli CFO 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.
Public
Riadh
Mohamed
The major shareholder is its Chairman, Riadh Mohammed Al Humaidan holding 26.2%
float
73.8%
Al
Humaidan
with no other shareholder stakes exceeding 5.0%. The board is comprised of eight
26.2%
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.
October 15, 2014 52

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
Stable growth in
volumes to reach 91k MT by 2017. The continued local demand from bottling companies
realization and volumes is likely to aid growth in revenue. We forecast a normalized average revenue growth of
to drive 10.2% revenue 7.1% for 2014-15 and 12% by 2016-17 to reach SAR 146 million by 2017. Zoujaj’s new
CAGR 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.
Exhibit 65: Revenue Forecasts (SAR Mln) Exhibit 66: Production (MT) and Realization (SAR/MT)
15% Production Realization
Revenue YoY 1,650
10% 1,600
1,550
5%
1,500
91,189
146
86,027
0% 1,450
79,655
131
78,013
77,858
77,576
1,400
76,591
72,944
118
-5%
117
1,350
113
111
102
109
1,300
-10%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
The glass industry’s procurement costs are lower, given its proximity and abundant
Zoujaj’s procurement availability of natural resources within KSA. The availability of silica sand, limestone and
costs are lower, hence feldspar are the key components, while small concentrations of procurement are met
average opex to sales through imports from Europe. As a result, the procurement from KSA forms a stable cost
ratio at 57.6% for 2014- line and remains attractive with opex-to-sales ratio of 58.9% during 2009-13. We
17 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 67: Opex Forecasts (SAR Mln) Exhibit 68: EBITDA (SAR Mln) and Margin Forecasts
Total Opex YoY EBITDA EBITDA Margins
20% 46%
10% 42%
85
64
76
74
55
0%
71
52
38%
51
66
65
64
45
44
61
42
36
-10% 34%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2016E
2014E
2015E
2017E
2010
2011
2012
2013
October 15, 2014 53

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
Noncore income to forecasted to contribute 47% on average during 2014-17, which we have factored in our
contribute 47% to pre- forecasts. The non-core income yielded an average 12.2% over 2010-13 and we forecast
zakat earnings between an average yield of 10.0% between 2014-17, on the investment book. We have taken into
2014-17 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.
Exhibit 69: Net Profit (SAR Mln) and Margin Forecasts Exhibit 70: Non Core Income (SAR Mln) and Share of Net Income
Net profit Net Margins Non Core Income % of Net profit

70% 70%
60% 60%
55
50%
81
71
50%
71
35
33
64
32
32
30
60
40%
57
25
20
45
44
40%
2017E
2014E
2015E
2016E
2010
2012
2011
2013
30%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Slight growth in DPS We expect stable growth should follow 2015 trends as EPS rises to SAR 2.38 by 2017.
during 2014-17, with Historically Zoujaj maintained a consistent record in dividend payouts averaging 76% for
2014 DPS at SAR 1.30 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%.
100%
80%
60%
2.71
2.25
2.38
2.37
2.14
2.00
1.90
1.55
1.40
1.35
1.30
40%
1.25
1.25
1.25
1.50
1.45
20%
2015E
2017E
2014E
2016E
2010
2012
2011
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
Low D/E ratio of 0.1x
the spending cycle is returning after a large gap of ten years. Zoujaj has strong liquidity
and current ratio of 3.1x
ratios with current ratio exceeding 3.1x in 2013 and forecasted to reach 5.7x by 2017.
makes it a flexible
The consistent cash cycle, efficient working capital management and lower inventory
balance sheet redundancy are some of the key balance sheet highlights.
October 15, 2014 54

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.

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%
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.
Absence of local peers The DCF method suggest valuation of SAR 45.63, which is convincing with implied fair
and lack of even value per share at P/E of 22.3x to its 2015 EPS estimates.
historical trends to
Table 35: DCF Valuation (SAR Mln)
justify DCF valuation
method 2016E 2017E 2018E 2019E DCF Valuation Assum ptions
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 firm 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
October 15, 2014 55

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
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
P/E Range(x)
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
Valuation based on PER

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
Estim ated fair value at P/E of 20.0x 38.0 39.9 42.8 47.6
#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.
October 15, 2014 56


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 Incom e/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
Com m on 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 57

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 58

Table 39: Global Comparables in Glass Manufacturing

EV Mcap 52 52 Wk-
Price US$ US$ EV/ EV/ Div.Y Wk-Hi Lo
Com pany Nam e Country (LCL) Mln Mln P/E P/B P/S Sales EBITDA ld YTD (LCL) (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
Zoujaj trades at a Gulf Glass Manufacturing Co KS
Kuw 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 Manufacturin
Egypt 125.4 180 70 22.6x 2.6x 0.9x 1.4x 5.7x NM 10% 125.4 109.4
premium to MENA 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
peers
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
Am ericas
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)

Zoujaj margins are Com pany Country Revenue Net Profit Net Margins
superior due to the 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%
presence of associate Gulf Glass Manufacturing Co KS Kuw ait 39 43 41 41 40 7 11 10 9 9 18% 27% 24% 23% 23%
income hence peer 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%
margin analysis not Beta Glass Co PLC Nigeria 71 74 82 81 89 10 9 10 10 8 13% 13% 13% 12% 10%
suitable
Exhibit 73: Price Multiples Trading History For Past Five years
Price to Book
2.6 46 Share Price
2.4
41
2.2
2.0 36
1.8
31
1.6
26
1.4
1.2 21
1.0
16
May-10
May-13
May-11
Jan-12
May-12
Jan-14
May-14
Jan-10
Jan-11
Jan-13
Sep-09
Sep-12
Sep-14
Sep-10
Sep-11
Sep-13
May-11
May-14
May-10
May-12
May-13
Jan-10
Jan-12
Jan-13
Jan-11
Jan-14
Sep-10
Sep-13
Sep-09
Sep-11
Sep-12
Sep-14
P/B 3 Yr Avg 5 Yr Avg 12M Avg
Stock rallied by 73%
over 12 months and has 28.0
P/E Ratio
10.0
Dividend Yield
9.0
breached all long term 8.0
23.0
averages 7.0
6.0
18.0
5.0
4.0
13.0 3.0
2.0
8.0 1.0
Jan-12
Jan-13
May-10
May-11
Jan-10
Jan-11
Jan-14
May-12
May-13
May-14
May-10
May-14
Jan-10
Jan-11
Jan-12
May-11
May-12
May-13
Jan-13
Jan-14
Sep-10
Sep-11
Sep-09
Sep-12
Sep-13
Sep-14
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
P/E 3 Yr Avg 5 Yr Avg 12M Avg Div.Yild 3 Yr Avg 5 Yr Avg 12M Avg
Source: Bloomberg
October 15, 2014 59

Saudi Arabian Amiantit Company
Sell 12-Month Target Price SAR 16
October 15, 2014 Restructuring Could Boost Earnings

We initiate coverage on Saudi Arabian Amiantit Company (Amiantit) with a Sell
Expected Total Return recommendation and a 12-month target price of SAR 16. Flat revenue growth expected over
Price as of Oct-13, 2014 SAR 17.94 the next three years sheds focus on strategy. Earnings will be equally unremarkable at 3.7%
Upside to Target Price (10.8%) CAGR between 2014-2017E. Historical performance is not an indicator of future outlook as
Expected Dividend Yield 3.9%
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.
Expected Total Return (7.9%)
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
Market Data comparable Zamil (TASI: 2240) at 12.1x.
52 Week H/L SAR 20.5/13.95 Missing feel good factors
We forecast revenues to reach SAR 2.8 billion by 2017 owing to de-consolidation and sale of
Enterprise Value SAR 4,039 mln non-core businesses. Stiff competition in the local market and slowdown in water
Shares Outstanding 115.5mln infrastructure spending in overseas markets has resulted in bearish revenue outlook with -9%
Free Float 77.4% and -5% de-growth in 2014 and 2015 followed by an average of +3% growth in following two
12-Month ADTV (000’s) 1,994.5 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
TASI Weight 0.2%
cash flow.
Bloomberg Symbol SAAC AB
Competition and slowdown pose headwinds
1-Year Price Performance

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
160
allocated nearly SAR 17 billion on desalination projects which could boost demand for
150
Amiantit’s product lines. The Ministry has also envisaged long-term plans for over SAR 247
140
billion capital investments over the next 10 years. However, international competition could
130
win share away from Amiantit.
120
110 Valuations expensive and yields not sustainable; recommend Sell
100
We value Amiantit using a target 2015E P/E multiple of 18.5x to derive a per share fair value
90
S O N D J F M A M J J A
of SAR 16. Our target P/E is selected based on median multiple for regional peers. Weak
Amiantit TASI TBMCI 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,
Source: Bloomberg
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.
SAAC TASI TBMCI Large improvement in order backlog locally and lower losses from overseas businesses could
Oct-13- 2014 17.94 10,378 4,538 warrant a re-evaluation but for now we initiate with a Sell recommendation.
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%
Key Financials
Al Mawarid Investment Co 9.4%
Revenue 3,130 2,849 2,707 2,788
HH Prince Ahmed Bin Khaled 7.4%
EBITDA 296 273 270 278
Abdullah Saleh Al Bassam 5.8%
Net Profit 113 98 99 104
Public Float 77.4%
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
Valuation Snapshot
5-Year Valuation Trend
23.0 P/E Trend 14 Dividend Yield Trend
20.0 12
17.0 10
14.0 8
11.0 6
8.0 4
5.0 2
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
P/E 3 Yr Avg 5 Yr Avg YTD Avg Div.Yild 3 Yr Avg 5 Yr Avg YTD Avg

Core Our revenue assumptions are based on expectations of flat growth in pipes segment with no large order
Forecasting flows from overseas and local markets. The growth rates on both segments have been declining over the
Assumptions 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 Our Bull case derives a DCF valuation of SAR 21.25 assuming a revenue CAGR of 3.5% for 2016-19E and
Assumptions 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.
Base Case Our Base case derives a DCF valuation of SAR 18.23 with revenue forecast of 2.3% CAGR and 8.7% EPS
Assumptions 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 Our Bear case derives a DCF valuation of SAR 14.49 with revenue CAGR of 1.7% for 2016-19E upon slower
Assumptions 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.
1.00
21.23
1.90 0.10
18.23
14.49
0.50 0.14
3.10
Bear Revenue @1.7% Inc.in Opex/Sales Inc. in Terminal Base Revenue growth Margin increase Terminal growth at Bull
CAGR growth @3.5% CAGR 2%

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 61

Overview
Key Data
Saudi Arabian Amiantit Company (Amiantit) established in 1968 and headquartered in
Share Capital (SAR mln) 1,155
Dammam (KSA) is one of the leading manufacturers of specialized pipes for water and
Par Value per Share (SAR) 10
industrial projects, while it offers consultancy services in water management. Formed as
Shares Outstanding (mln) 115.5
a result of acquisition of many pipe technologies and entities including acquiring the
Employees 3,171
largest fiberglass pipes group of companies & technology Flowtite in 2001 which is
TASI Code 2160
located in Europe, Africa, Asia & Latin America. Listed on Tadawul during 1996, the
Management
Company provides unique business exposure. It has a paid-up capital of SAR 1.15 billion
Prince Ahmad Bin Khaled Chairman (par value of SAR 10) with 115 million shares outstanding and employs 3,171 personnel
Dr Solaiman A. Al-Twaijri CEO
across thirty countries.
Pierre Sommereijns CFO
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
Public
Float Al
Mawarid
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%.
(less than
9.4%
5%)
77.4%
HH Prince
Ahmad Amiantit has a public float of 77.4% implying reasonable liquidity and large mix of retail
Bin
Khaled 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
7.4%
Abdullah
Al
Bassam
5.8% 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.
October 15, 2014 62

Financial Analysis
Industry slowdown and lack of new orders
Flat revenue growth We forecast Amiantit’s consolidated revenues to be flat with slight dip during 2014.
expected for forecast 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
period
since 2011 is due to considerable slowdown in deliveries in Saudi Arabia which was
further exasperated by labor issues in 2013.
Exhibit 74: Revenue Forecasts (SAR Mln) Exhibit 75: Product Segment Contribution
18%
Revenue YoY Pipes Water Management
10%
10%
11%
10%
8%
9%
13%
12%
14%
6%
3,563
3,455
92%
91%
91%
0%
90%
89%
89%
86%
85%
3,130
3,078
2,858
2,849
2,788
2,707
-6%
-12%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
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
Overseas revenue to coming years to SAR 229 million by 2017. Amiantit has started deconsolidating its
witness setback on subsidiaries in India, Germany and various other countries in Europe which we expect to
industry slowdown 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.
Exhibit 76: Geographical Segments (SAR Mln) Exhibit 77: Product Segments (SAR Mln)
Saudi Arabia Intl,Sales Pipes Water Management
457
357
351
1,107
1,416
422
229
256
279
1,109
271
772
1,401
809
940
839
3,081
3,075
2,780
2,629
2,605
2,593
2,537
2,436
2,348
2,147
2,086
2,021
1,979
1,909
1,868
1,677
2014E
2015E
2016E
2017E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
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
October 15, 2014 63

legal entities, forty subsidiaries (stakes ranging from 50% to 100%) and ten associates.
Complex subsidiary The group has a complex subsidiary structure with nature of operational expenditure
structure with varied varying across countries. The most important of the cost considerations are minimum
trends in opex/sales salary standards in each country, tax rates, foreign currency exchange adjustments and
ratio 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.
Exhibit 78: Opex Forecasts (SAR Mln) Exhibit 79: Opex Structure During 2013 (% of total Opex)
Total Opex YoY

24%
18%
COGS-Excl D&A
D&A 2%
12%
90%
3,238
6%
3,191
2,903
0% Salaries
2,685
2,650
2,642
5%
2,579
2,505 -6%
Freight
-12% 1%
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Others
3%
EBITDA margins to expand by +80 bps by 2017

Margin expansion to be We forecast EBITDA at 2.8% CAGR to reach SAR 297 million in 2017 with higher growth
a late entrant amid of 6.5% YoY in 2017 owing to pick up in KSA based projects. Amiantit would be able to
expectations of recover from cost pressure once revenue reaches scale. For example, 2008 revenues of
restructuring benefits 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.
EBITDA YoY
10%
0%
-10%
16.9%
520
475
-20%
13.3%
377
10.9%
10.4%
10.0%
10.0%
-30%
9.5%
9.6%
297
296
278
273
270
-40%
2015E
2014E
2015E
2016E
2017E
2014E
2016E
2017E
2010
2011
2012
2013
2010
2011
2012
2013
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.
October 15, 2014 64

Exhibit 82: Net Profit Forecasts (SAR Mln) Exhibit 83: Net Margin Forecasts
Net prof it YoY

10%
0%
5.4%
-10%
165
151
4.2%
3.9%
3.7%
3.7%
3.6%
3.5%
-20%
3.2%
112
111
111
104
99
98
-30%
2014E
2015E
2016E
2017E
2015E
2014E
2016E
2017E
2010
2011
2012
2013
2010
2011
2012
2013
Our EPS is projected to reach SAR 0.96 in 2017 after a slight fall in 2014. On a historical
Declining DPS due to comparison, though EPS growth is set to be slower for 2014-17, this is largely better
failing earnings power 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.
EPS YoY DPS Payout Ratio

10% 140%
0% 120%
1.50
-10% 100%
1.43
1.25
1.31
1.00
1.00
0.70
0.70
-20% 80%
0.60
0.60
0.97
0.96
0.96
0.90
0.86
0.85
-30% 60%
2014E
2017E
2015E
2016E
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2010
2011
2012
2013
Amiantit has a higher debt to equity ratio of 1.1x which might pressure its fundamentals
ROE deterioration by when there is declining ROIC and compressing ROE. This signals declining reward to
half during 2010-14 and shareholders with ineffective usage of leverage to boost ROE’s. Our model derived ROE
high debt levels pose to be less than 5.2% for 2014-17, (ROE was 12.5% in 2009) due to lower financial
concern 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.
October 15, 2014 65


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%
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.
Table 42: Near Comparables in KSA

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
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.

Stressed FCF provides The DCF method adopted bearish to bullish scenarios and back tested the FCF stress for
inconsistency to DCF 2016-19E suggests a fair value of SAR 18.23 per share using base case. The DCF method
valuation 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.
October 15, 2014 66

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 incom e 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 m etrics
Term inal 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)
Im plied value of equity 1,674 2,106 2,454
No of shares outstanding (mln) 116 116 116
Fair value per share (SAR) 14.49 18.23 21.25
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.
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
Im plied 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%
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.
October 15, 2014 67


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
WACC
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
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 use a infrastructure
mid-cap multiple to We valued Amiantit using target P/E method using comparable multiples of
value Amiantit 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.
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
P/E Range(x)
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
Estim ated fair value at 18.5x 2015E P/E 15.8 15.9 16.7 17.8
October 15, 2014 68


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 69

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 70

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 71

Appendix
Exhibit 86: Volumes Mln Shares-SCC Exhibit 87: Volumes Mln Shares-Aslak
1.0 10.0
0.9
0.8 8.0
0.7
0.6 6.0
0.5
0.4 4.0
0.3
0.2 2.0
0.1
0.0 0.0
Jun-12
Jun-13
Jun-14
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Mar-12
Mar-13
Mar-14
Sep-11
Dec-11
Sep-12
Sep-13
Dec-12
Dec-13
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Sep-09
Dec-09
Sep-10
Dec-10
Sep-11
Dec-11
Sep-12
Dec-12
Sep-13
Dec-13
-2.0
Source: Bloomberg Source: Bloomberg
Exhibit 88: Volumes Mln Shares-Zoujaj Exhibit 89: Volumes Mln Shares-Amiantit
2.5 16.0
14.0
2.0
12.0
1.5 10.0
8.0
1.0 6.0
4.0
0.5
2.0
0.0 0.0
Sep-09
Dec-09
Sep-10
Dec-10
Sep-11
Dec-11
Sep-12
Dec-12
Sep-13
Dec-13
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Sep-09
Dec-09
Sep-10
Dec-10
Sep-11
Dec-11
Sep-12
Dec-12
Sep-13
Dec-13
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Exhibit 90: Last 12 Months Value Traded (SAR Mln) Exhibit 91: Last 12 Months ADTV ('000 Shares)
2,500
70
60 58 1,926
2,000
50
1,500
40
33
28 1,000
30 828
22
611
20 16
500 399
10 172
0 0
SCC Aslak Zoujaj Amiantit Bawan SCC Aslak Zoujaj Amiantit Bawan
Exhibit 92: Building And Construction Sector P/E Trends
30
28
26
24
22
20
18
16
14
12
10
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
May-10
May-11
May-12
May-13
May-14
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sector P/E 5 Yr 3Yr LTM Wtd
Source: Bloomberg
October 15, 2014 72

Exhibit 93: Sector Revenue Trends (SAR Mln) Exhibit 94: Sector Earnings Trends (SAR Mln)
Revenue YoY 24%
18% Net Income
12% 18%
6% 12%
0% 6%
-6% 0%
1,396
18,762
18,532
1,337
-12%
1,259
-6%
16,598
1,175
-18%
14,405
-12%
14,146
1,004
-24%
-18%
-30%
-36% -24%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Source: Company reports Source: Company reports
Exhibit 95: Sector Net Margins Exhibit 96: Sector Total Equity Value (SAR Mln) and ROE
Sector Shareholders Equity ROE
14.0%
13.5%
13.0%
12.5%
12.0%
11,603
11.5%
9.9%
10,967
11.0%
10,602
8.7%
10,496
10,202
10.5%
7.1%
10.0%
6.3%
6.0%
9.5%
9.0%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Source: Company reports Source: Company reports
Exhibit 97: TASI sector-12 Month Average P/E (Trailing) Exhibit 98: TASI sector-12 Month Average Yield (Trailing)
43 15.0
32
28 29
18 20 19 18
17 18
15 15 15 4.7
3.8 3.3 3.5 3.7 3.7
3.0 2.5 2.8 2.5
2.2
1.3
Industries
Petrochem
Transport
Building
Holding
Telecom
Real Estate
Energy
Cement
Hotels
Retail
Banks
TASI
Telecom
Building
Industries
Petrochem
Holding
Transport
Banks
Energy
Hotels
Cement
Real Estate
TASI
Retail
Exhibit 99: TASI sector-12 Month Average P/B (Trailing) Exhibit 100: TASI sector-12 Month Index Performance
7.1 73%
69%
5.8 58%
48%
44%
38% 38% 39% 38%
3.3 35% 36%
30%
2.2 2.5 2.3 2.5 23%
2.0 2.0 2.2
1.9 1.7 16%
1.2
8%
Real…
Telecom
Insurance
Building
Industries
Transport
Holding
Petchem
Banks
Media
Cement
Energy
Hotels
TASI
Retail
Telecom
Petrochem
Building
Industries
Transport
Holding
Banks
Energy
Cement
Hotels
Real Estate
TASI
Retail
October 15, 2014 73

Table 49: Building and Constrution Sector Stocks Revenue and Earnings Trends (SAR Mln)
Com pany Revenue Net Profit Net Margins
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%
October 15, 2014 74

Stock Rating
Strong Buy Buy Hold Sell Not Rated
Expected Total Return Expected Total Return Expected Total Return Under Review/
Overvalued
≥ 25% ≥ 15% < 15% Restricted
Head Office
Riyad Capital
P.O. Box 21116
Riyadh 11475
Saudi Arabia
Phone
800 124 0010
Website
www.riyadcapital.com
Email
research@riyadcapital.com
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Saudi Building Materials

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

October 15, 2014 2

October 15, 2014 3

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

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

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

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

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

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

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

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

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

October 15, 2014 4

Table 1: Key Projects in KSA as of 2Q14

October 15, 2014 5

Favorable economic and population growth trends

Real GDP Growth Current Account Balance (% of GDP)

Source: IMF Source: IMF

October 15, 2014 6

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

Source: IMF Source: IMF

Credit uptake: Major indicator to watch

Source: CDSI, SAMA Source: CDSI, SAMA

October 15, 2014 7

Real estate consumer loans on the rise

Exhibit 7: REDF Funding (SAR bln)

Source: CDSI, SAMA

Indicators on cement and building permits

October 15, 2014 8

Exhibit 9: Cement Production and Sales (mln tons)

2008 2009 2010 2011 2012 2013

Source: CDSI, Bloomberg

Residential and commercial market forecast

October 15, 2014 9

Sector Focus Charts: Spending likely to be twice in 2016

Rail Projects accounted 101

during 2013 with Riyadh 19 17 15

Source: MEED Source: MEED

Saudi is the biggest

55 500 2007-12 2013-17

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

Among building and

Source: JLL Source: JLL

October 15, 2014 10

Sector Valuations at a Glance

Table 2: TASI Building Materials Sector Stocks Trailing Multiples

Source: Bloomberg, Market Cap and EV are total

Zoujaj Red Sea

Amiantit National Gypsum

October 15, 2014 11

October 15, 2014 Capex Drives Conviction

Key Modeling Assumptions

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

Valuation Method Fair Value Upside Comments

October 15, 2014 13

October 15, 2014 14

Riyadh region contribute 35% of revenue

Riyadh West remaining KSA Exports Ceramics Water heaters

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

26% 26% 26% 26% 26%

28% 28% 28% 29%

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

October 15, 2014 15