2011: A harsh year for cement Growth Driversmec.biz/term/uploads/SCEM-23-05-2011.pdf · Cement...

EGYPT | CEMENT 23rd May 2011

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2011: A harsh year for cement Following a difficult period of unrest and production disruptions, the cement sector has paid the price of the revolution. Despite a temporary rush to take advantage of unrest by building on agricultural lands and slums free from bureaucracy, cement consumption nonetheless declined 11.7% YoY in 1Q11 vs. 10.1% YoY growth in 1Q10. Meanwhile, consumers are currently tending toward keeping their assets in cash form, rather than investing in real-estate. On the export front, local producers continue to face serious difficulties in re-establishing a presence in their former export markets. In general, we believe 2011 will continue to be a rocky year for cement. We expect local consumption to decrease by 8.3% YoY in 2011. Moreover, the oversupply in the local market and competition from cheaply priced imports will lead to a 5% YoY decline in local selling prices. In the meantime, exports prices are expected to remain at low level in the current year, due to the fierce competition in foreign markets. Our coverage universe currently houses three cement companies: Misr Beni Suef Cement [MBSC], Misr Cement (Qena) [MCQE], and Sinai Cement [SCEM]. The first of these, MBSC, is our top pick, with a Target Price of EGP107 with an upside potential of 51%. MBSC: Resolving legal issues and technical problems; Double kick move: MBSC experienced repeated technical problems in 2010 resulting in lower utilization rates compared to its historical trends. Fortunately, by mid January 2011, these problems were resolved, hopefully to be non-recurring. Hence, this positive note is to outweigh the negative effect of the recent unrest on MBSC’s utilization rates. Meanwhile, MBSC’s top management official has been involved in legal issues related to the second production line. In light of this, we used to value MBSC’s stock via two scenarios: one resulting in the second line continuity, while the other results in its shutdown. Fortunately, these legal issues were resolved and we have accordingly dropped the shutdown scenario. In sum, we increased MBSC’s LTFV and TP by 42%, to EGP107/share, leaving 51% upside potential. Overall, we upgraded our Sell recommendation to a Strong Buy. MCQE: Unambitious local player facing tough times: We have cut our estimates for the local cement market indicators (utilization rates, demand, and prices) given our negative sentiment for the instability following the January 25th uprising. As one of the existing local cement players, we have revised MCQE’s model by lowering its own KPIs. Moreover, we have factored in to our model the lower cash position to be achieved for the hefty dividends paid out. However, we have reduced our projection for MCQE’s capex expenditure to reflect MCQE’s usual trend. The net result of these revisions is such that we have decreased MCQE’s LTFV and TP by 15%, to EGP108/share, leaving 5% upside potential. Overall, we downgraded our BUY recommendation to an Underweight. SCEM: Problematic geographical place in tough times: Given the political and economic repercussions of the Egyptian uprising, we have negatively revised our estimates for the local cement market indicators (utilization rates, demand, and prices). Being one of the existing local cement players, we have revised SCEM’s model by lowering its own KPIs. Additionally, SCEM’s plant was shut down for 11 working days for the attack of Bedouin activists in Sinai. What increased the risk of Sinai as a geographical location was the natural gas pipeline in Al-Arish that was bombed twice year-to-date and yet to be repaired and secured. This has forced SCEM to switch to costly mazut as a temporary replacement. Meanwhile, we have factored in to our model the lower cash position to be attained for the hefty dividends paid-out. We have therefore decreased SCEM’s LTFV and TP by 29%, to EGP53/share, leaving 17% upside potential. Overall, we downgraded our Strong Buy recommendation to a Hold.

CompanyLast

Price *LCY

TP (LCY)

Up/Downto TP

LTFV (LCY) Rec. PER 11e

EV/EBITDA

11e

DividendYield11e

MBSC 70.8 107.1 51% 107.1 SB 7.0x 4.2x 9.3%MCQE 103.4 108.1 5% 108.1 UW 8.9x 6.8x 10.9%SCEM 45.0 52.7 17% 52.7 H 6.0x 3.9x 14.9%* As of 22-May-11

BASMA SHEBETA [email protected]

GHADA REFKY [email protected]

Growth Drivers

Abundant raw materials

Despite the decrease in selling prices, local producers still enjoy high margins vs. regional peers

Expected pick-up in private investments and government spending when things settle in Egypt will boost construction activities

Despite the recent events, outstanding real estate projects still secure demand for cement

Risks

Recurring GoE intervention in the industry Reduced energy availability Oversupply in the local market may lead to price

war between domestic players Lower prices in the export markets Competition from cheap imports, particularly Turkey Rising competition regionally as countries such as

Saudi Arabia bring new capacities on stream

Key Performance Indicators 2009A 2010A 2011F

Consumption (mn tons) 47.79 49.49 45.39 YoY Growth (%) 24.6% 3.5% -8.3%Production (mn tons) 46.98 48.27 45.67 YoY Growth (%) 17.9% 2.7% -5.4%Exports (mn tons) 0.36 0.05 0.28 Exports ' s hare of product ion (%) 0.8% 0.1% 0.6%Imports (mn tons) 1.09 1.64 0.73 Imports' share of consumption (%) 2.3% 3.3% 1.6% Source: CI Capital Research database

3%

8%

2%

6%

0%

5%10%

-6%

-14%

10%6%

1%

-7%

-21%

-3%

11%14%

6%

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3%7%

9%

-14%

-7%

13%

9%

-7%

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5.0mn tons

Production ConsumptionProduction YoY Growth Consumption YoY Growth

Production and Consumption



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Key Developments

Despite the temporary rush to take advantage of unrest by building on agricultural lands and slums free from bureaucracy, construction and real-estate sectors were amongst the most entangled by recent upheavals in Egypt. It seems that most consumers are reluctant to build new homes and currently prefer to keep their money in a liquid form. As for real-estate developers, most are rushing to finish their existing projects, yet showing no intention of investing in any new projects in the near future, particularly since some of them are facing lawsuits over land sales. Overall, the cement market has cooled down, accompanied by the following developments:

Cement consumption declined 11.7% year-on-year (YoY) in 1Q11, compared

with a 10.1% YoY growth in 1Q10. Production decreased 10.1% in 1Q11, vs. 4.1% YoY increase in 1Q10. A reduction in market deficit from 0.69mn tons in 1Q10, to 0.41mn tons in

1Q11. Imports totalled 0.24mn tons in 1Q11, compared with 0.56mn tons in 1Q10. 23.8k tons were exported in 1Q11, compared to 10k tons the same period a

year ago, reflecting the difficulties facing local producers in regaining their export markets due to the lengthy export ban (18 months).

Cement ex-factory prices– including transportation costs— decreased by 2.3% to EGP507/ton in 1Q11, down from EGP519/ton in 1Q10.

El-Sewedy Cement began cement production in March, capturing 1.9% of local cement sales over the same month with 0.83mn tons sold. El-Sewedy Cement was one of seven winners of the seven Greenfield licenses offered in October 2007, granting it a capacity of 1.5mn tons. El-Sewedy was granted the license for EGP201mn and has established its factory in Suez.

MBSC’s second grinder was finally repaired in January 2011, raising the company’s market share from 2.3% in February to 4.2% in March.

On April 28, 2011, the Judiciary rejected Al-Wadi’s Cement lawsuit against the Industrial Development Authority (IDA) meant to cancel its decision to revoke the license previously granted to the company in the October 2007 Greenfield auction. The lawsuit’s rejection and the withdrawal of Al-Wadi Cement license followed the company’s violation of one of the IDA’s conditions which prohibits the sale of any stake of its shares before start of factory operations. This requirement was mandated by the IDA in order to prevent the potential for trading the industrial licenses.

After the Egyptian uprising, the IDA announced that it will postpone launching the 12 new cement licenses from the current year until further notice. The postponement responds to the fact that most investors, either local or foreign, will likely be less willing to invest large amounts of money until things stabilize in the country.

On May 10, 2011, the Judiciary halted the IDA’s decision to withdraw the license acquired by North Sinai Cement because the company presented proofs that it agreed with a Chinese company to supply it with the machinery and equipment needed for its new factory.



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Going Forward

We believe cement producers will grapple with consumption declining 8.3% YoY in 2011, as construction and real-estate sectors are expected to remain disrupted over the year by continuous instability. We expect consumption to merely increase by 3.7% YoY in 2012 and to regain full momentum in 2013 posting a 10.2% YoY increase. Over 2014-2015, consumption is forecasted to increase 7.3% AAGR to reach 59.7mn tons in 2015.

Recent events in the country have changed the schedules previously announced by producers. Hence, it is now 2011 and 2012, rather than 2012 alone, which will see significant capacity additions (6.2mn tons and 6.9mn tons) and 2013 will remain the completion date for the pending capacity additions.

The new capacities coming on stream over 2011-2012 amounting to 13.1mn tons will cut utilization rates until they reach their lowest level of 77.7% by 2012. Nevertheless, starting 2013, added demand will go on to outpace added capacity, driving utilization rates up to 93.7% in 2015.

The market is set to reverse from the deficit realized in 2010 to a surplus in 2011 with new capacities starting operations over the same year. We believe the market will realize a surplus of 0.32mn tons in 2011, increasing to c.3mn tons in 2015.

Although the local cement market will enter into a surplus in 2011, we believe cheaply-priced imports will continue to penetrate the domestic market over 2011 and 2012. However, imports are anticipated to fade in 2013 with all new capacities commencing production.

Cement exports are expected to relent under several pressures in 2011, such as the weak demand on cement abroad and lower prices offered at present - USD51/ton1. Consequently, we believe Egypt will export only 0.32mn tons of cement in 2011. That said we expect exports to recover in 2012.

We expect local cement prices to decrease by 4.9% YoY and 5% YoY in 2011 and 2012, respectively, due to several factors. The first of these is companies’ attempts to fuel demand for cement in light of the recent stagnation in the local market. Additionally, considerable capacity additions are scheduled for this period, and competition from cheaper imported cement is intensifying. However, from 2013 through 2015, prices are expected to record a 3.7% AAGR, as additions to demand will outstrip those in capacities.

Export prices2 are expected to average USD42 in 2011. However, these will improve in 2012 to USD47/ton due to the recovery in global markets, after having reached a very low level in 2011. Throughout 2013-2015, export prices will increase subject to market dynamics due to fierce competition. Prices are anticipated to grow by 2.5% AAGR to reach USD50/ton in 2015.

1 Export prices expressed in FOB terms 2 Export prices expressed in ex-factory terms



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Market Performance

Figure 1 | Consumption Pattern (Jan10-Mar11) Figure 2 | Production & Consumption (Jan10-Mar11)

11.5%13.8%

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mn tons2010 20112010 YoY Growth 2011 YoY Growth

4.13.9

4.4 4.3 4.2 4.14.4

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Source: CI Capital Research database Source: CI Capital Research database

Figure 3 | Market Surplus/Deficit (Jan10-Mar11) Figure 4 | Imports Pattern (Jan10-Mar11)

-0.23 -0.23 -0.22

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mn tons2010 2011


Figure 5 | Exports Pattern (Jan10-Mar11) Figure 6 | Local Prices by Month* (Jan10-Mar11)

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EGP/ton2010 2011


* Local prices are ex-factory including transportation costs * Export prices are ex-factory



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Future Outlook Figure 7 | Demand & Production (’09-’15F) Figure 8 | Surplus/Deficit & Imports (’09-’15F)

48 4945 47

5256

60

47 4846

48

5458

63102.2%98.2%

82.5%

77.7%80.2%

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mn tonsDemand Production Utilization Rate

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1.64

0.73

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-1.22

0.28

1.29

1.79

2.27

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2009A 2010A 2011F 2012F 2013F 2014F 2015F

mn tonsImports Surplus/Deficit

Source: CI Capital Research database & estimates Source: CI Capital Research database & estimates

Figure 9 | Cement Exports (’09-’15F) Figure 10 | Local & Export Prices* (’09-’15F)

0.36

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mn tons

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54

42

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USD/tonEGP/tonLocal Prices Exports Prices

Source: CI Capital Research database & estimates Source: CI Capital Research database & estimates

* Local prices are ex-factory including transportation costs * Export prices are ex-factory



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Figure 11 | Changes to our Projected Market Indicators (‘09-‘15F) 2009A 2010A 2011F 2012F 2013F 2014F 2015F

Capacity (mn tons)Old 45.96 49.16 56.96 63.48 66.88 66.88New 45.96 49.16 55.33 62.23 66.88 66.88 66.88

Demand (mn tons)Old 47.79 49.49 53.23 55.93 58.78 61.79 New 47.79 49.49 45.39 47.06 51.87 55.79 59.68

Production (mn tons)Old 46.98 48.27 54.61 57.79 61.13 64.62 New 46.98 48.27 45.67 48.35 53.66 58.06 62.68

Utilization Rate %Old 102.2% 98.2% 98.7% 92.9% 91.4% 96.6%New 1.02 0.98 0.83 0.78 0.80 0.87 0.94

Imports (mn tons)Old 1.09 1.64 0.75 - - - - New 1.09 1.64 0.73 0.24 - - -

Exports (mn tons)Old 0.36 0.05 1.38 1.86 2.34 2.82 - New 0.36 0.05 0.28 1.29 1.79 2.27 3.00

Local Prices* (EGP/ton)Old 508 510 551 563 588New 508 510 538 554 582

Export Prices (USD/ton)Old 80 54 70 71 72 73 - New 80 54 42 47 48 49 50* Ex-factory prices include transportation costs Source: CI Capital Research database & estimates Figure 12 | Planned Capacity Additions (‘09-‘15F)

2009A 2010A 2011F 2012F 2013F 2014F 2015FCapacity Additions in mn tons (Old) 4.10 3.20 7.80 6.53 3.40 - - Capacity Additions in mn tons (New) 4.10 3.20 6.18 6.90 4.65 - - Total Grinding Capacity in mn tons (Old) 45.96 49.16 56.96 63.48 66.88 66.88 66.88 Total Grinding Capacity in mn tons (New) 45.96 49.16 55.33 62.23 66.88 66.88 66.88 Source: CI Capital Research database

Figure 13 | Planned Market Capacities by Company (‘09-‘15F) in mn tons

Company Name 2009A 2010A 2011F 2012F 2013F 2014F 2015F

Tourah Cement 3.33 3.33 3.33 3.33 3.33 3.33 3.33 Helwan Cement 4.50 4.50 4.50 4.50 5.40 5.40 5.40 National Cement 3.50 3.50 3.50 3.50 3.50 3.50 3.50 Assiut Cement (Cemex) 5.00 5.00 5.00 5.00 6.50 6.50 6.50 Al-Amreyah Cement (Cimpor) 3.70 3.70 3.70 3.70 3.70 3.70 3.70 Alexandria & Beni Suef Cement (Titan) 3.25 4.50 4.50 4.50 4.50 4.50 4.50 Suez Cement 4.20 4.20 4.20 4.20 4.20 4.20 4.20 Egyptian Cement Co. (ECC) (Lafarge) 10.30 10.30 10.30 10.30 10.30 10.30 10.30 Sinai Cement 3.20 3.20 3.20 3.20 3.20 3.20 3.20 Misr Cement (Qena) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 Misr Beni Suef Cement 1.50 1.50 2.50 3.00 3.00 3.00 3.00 Arabian Cement - 1.58 3.15 4.20 4.20 4.20 4.20 Madcom Aswan 0.38 0.75 0.75 0.75 0.75 0.75 0.75 Arab National Cement Co. (ANCC) - - - - 1.50 1.50 1.50 Wadi El-Nile Cement - - 0.75 1.50 1.50 1.50 1.50 El-Sweedy Cement - - 1.25 1.50 1.50 1.50 1.50 North Sinai Cement - - - - - - - South Valley Cement 1.00 1.00 1.00 1.50 1.50 1.50 1.50 Al-Nahda Industries - - - 1.50 1.50 1.50 1.50 Building Materials Industries - - - 0.75 1.50 1.50 1.50 Al-Wadi Cement - - - - - - - Al-Shouraa Cement 0.60 0.60 0.60 0.60 0.60 0.60 0.60 Ministry of Defense Plant - - 1.60 3.20 3.20 3.20 3.20 Total Effective Capacities 45.96 49.16 55.33 62.23 66.88 66.88 66.88 Added Capacity 4.10 3.20 6.18 6.90 4.65 - - Source: CI Capital Research database

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May 23rd, 2011

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Please Read Last Page for Contact Details and Important Disclaimer

Misr Beni Suef Cement

Resolving legal issues and technical problems; Double kick move…… MBSC experienced repeated technical problems in 2010 resulting in lower utilization rates compared to its historical trends. Fortunately, by mid January 2011, these problems were resolved, hopefully to be non-recurring. Hence, this positive note is to outweigh the negative effect of the recent unrest on MBSC’s utilization rates. Meanwhile, MBSC’s top management official has been involved in legal issues related to the second production line. In light of this, we used to value MBSC’s stock via two scenarios: one resulting in the second line continuity, while the other results in its shutdown. Fortunately, these legal issues were resolved and we have accordingly dropped the shutdown scenario. In sum, we increased MBSC’s LTFV and TP by 42%, to EGP107/share, leaving 51% upside potential. Overall, we upgraded our Sell recommendation to a Strong Buy. Cutting estimates for MBSC’s KPIs: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices. We have thus revised MBSC’s model by lowering its own revenues and EBITDA margins by an average of 3%, and 550bps, respectively, during 2011-2015e.

Resolving technical problems and increasing utilization rates: Fortunately, by mid-January 2011, the broken grinder of its first production line was repaired. Hence, we increased our estimates for MBSC’s utilization rates.

Decreased capex: We have reduced our projection for MBSC’s capex to reflect a reasonable trend for capital expenditure compared to its peers. Trial grinding for the second production line commenced: The trial grinding for MBSC’s second 1.5mtpa-production line started via two new grinders on March 16 and 21, 2011. That said, we believe phase II of this second line (cement production) will operate at its full capacity in May 2011. Valuation and recommendation: Due to the resolution of the legal issues involving the second production line, we have dropped the valuation scenario that incorporated the shutdown of this line. Thus, we have increased our LTFV and TP by 42% to EGP107/share, leaving MBSC with 51% upside potential. Hence, we upgraded our Sell recommendation to a Strong Buy. Key Performance Indicators

Source: Company reports & CI Capital Research estimates

GHADA [email protected]


STRONG BUY (Upgraded) LT FAIR VALUE | EGP107 (Upgraded) TARGET PRICE | EGP107 (Upgraded)

COMPANY SYNOPSIS

Misr Beni Suef Cement [MBSC] was incorporated in November 1997 as a shareholding company for the production of cement and associated products and in August 1999 the company had its shares listed on the Egyptian Exchange (EGX). MBSC was established with a paid-in capital of EGP120mn distributed over 12mn shares at a par value of EGP10/share. Currently, MBSC has a paid-in capital of EGP400mn distributed over 40mn shares at a par value of EGP10/share.

In December 2006, MBSC signed a supplying and installation contract with the French company Polysius in order to double its annual production capacity. Just over a year later, in February 2008, MBSC signed a contract to import two cement grinders. In 2010, MBSC reached 2% local market share, selling 1,165k tons with no exports recorded. SHAREHOLDER STRUCTURE

Top Management 25.99%National Investment Bank 20.11%Individuals 11.2%Others 2.9%Free Float 39.8% STOCK DATA

Reuters; Bloomberg MBSC.CA; MBSC EYRecent price as of 22-May-11 EGP70.78No. of listed shares 40.0mnMarket cap EGP2831.2mn52-wk high / low EGP94.5/ EGP52Avg. daily volume / turnover 0.02mn / EGP1.32mn

STOCK PERFORMANCE | 52 WEEKS

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mnsharesEGP

Volume MBSC EGX 30 - rebased

Source: Bloomberg

EGP mn 2008 A 2009 A 2010 A 2011 F 2012 F

Revenues 659.95 835.59 749.04 1047.54 1107.81Growth rate 26.6% -10.4% 39.9% 5.8%

EBITDA 421.03 497.13 477.26 574.23 554.78Growth rate 18.1% -4.0% 20.3% -3.4%EBITDA margin 63.8% 59.5% 63.7% 54.8% 50.1%

Net income 202.41 390.57 303.87 402.65 356.69Growth rate 93.0% -22.2% 32.5% -11.4%Net margin 30.7% 46.7% 40.6% 38.4% 32.2%

PER 14.0x 7.2x 9.3x 7.0x 7.9xP/BV 3.4x 2.0x 1.8x 1.6x 1.6xEV/EBITDA 6.3x 5.2x 5.3x 4.2x 4.0xNet debt/EBITDA -0.4x -0.5x -0.7x -0.8x -1.1xDividend yield 2.8% 4.2% 7.1% 9.3% 8.8%

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The Egyptian Uprising and MBSC As we detailed earlier, construction and real-estate are among the sectors that are expected to be hardest hit by recent political events in Egypt. We believe these events will have a negative repercussion on our estimates for all the local cement market indicators (utilization, demand, and prices) that we believe to drive negatively our estimates for those indicators for all the cement companies. However, on a specific basis, we believe MBSC was negatively affected.

The blackout period: During the approximate week-long period of heightened political unrest, (Jan, 30th-to-Feb, 5th), we believe all the cement players (including MBSC) temporarily halted all selling operations during that period. However, operations resumed – albeit modestly – immediately after the blackout week.

Phase II of its second production line delayed: Due to the recent political unrest and the resultant precautionary actions of several foreign countries advising their citizens to leave Egypt, the introduction of phase II (cement production) of the new 1.5mtpa-production line was postponed until May 2011, essentially until the foreign experts responsible for its installation returned to Egypt. MBSC Recent Developments Higher traders’ cash incentives in 1Q11: MBSC’s 1Q11 net profits declined 37% YoY to EGP66mn, compared to EGP106mn in 1Q10. MBSC’s revenue decreased 17% YoY to EGP171mn in 1Q11, hurt by a 16%, 38%, and 15% lower cement sales volume, clinker sales volume, and clinker average selling price, respectively. This decline can be mainly attributed to 1Q11 witnessing the Egyptian uprising and its ensuing economic repercussions, which negatively impacted the construction and cement sectors. On a quarterly basis, MBSC reported 34% higher revenues in 1Q11. This was mainly due to 54% higher cement volume sold for MBSC’s repaired grinder in January 2011. MBSC delivered a 59% EBITDA margin in 1Q11, compared to 62% in 1Q10. MBSC began paying the resource development fees in 3Q10; hence, we attribute this YoY contraction to this resource development fees payment. The company reported SG&A/ton of EGP28 (+362% vs. 1Q10). This was due to higher-than-expected marketing expenses that came in at EGP23/ton (vs. EGP3/ton in 1Q10). This can be attributed to the considerable marketing expenses for the traders’ cash incentives as a compensation for facing a squeezed cement market in 1Q11.

MBSC was affected in general and in particular

MBSC stopped operations during the blackout period

Phase II of the second production line to commence in May

1Q11 income declined YoY by 37%

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May 23rd, 2011

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Income Statement Summary – MBSC (Actual Results vs. CI Capital Research estimates)


AGM approved a stock and a cash dividend: In its AGM held on April 30, 2011, MBSC approved a DPS of EGP5 with a dividend yield of 7%. This DPS will be distributed on June 1, 2011, to share buyers till May 29, 2011. Furthermore, the AGM approved to increase MBSC’s issued and paid-in capital by EGP100mn to reach EGP500mn via a 25% stock dividend. This stock dividend distribution is still till date subject to the approval of the company’s EGM and the Egyptian Financial Supervisory Authority (EFSA).

The broken grinder was repaired and trial grinding for the second production line commenced: MBSC’s revenue decreased 44% YoY to EGP128mn in 4Q10, largely attributable to MBSC's broken grinder. The grinder in question broke down in 1Q10 and was repaired in May 2010. It broke down again in September 2010. Fortunately, by mid January 2011, this grinder was repaired and functional again. Hence, MBSC reported 34% higher QoQ revenues in 1Q11, mainly due to 54% higher cement volume sold for MBSC’s repaired grinder. Moreover, the trial grinding for MBSC’s second 1.5mtpa-production line started via two other grinders on March 16 and 21, 2011. Hence, we believe phase II of this second line (cement production) will operate with its full capacity in May 2011.

Legal difficulties with top management official resolved: Since June 2010, MBSC’s top management official has been under investigation for bribery charges. This alleged bribery was related to the new production line, and as such we had considered that investigation could potentially result in this production line’s shutdown. Fortunately, by the beginning of 2011, a final court decision cleared this official and the new grinders started trial operations in March 2011.

MBSC to distribute 25% stock dividend on June 1, 2011

MBSC’s technical problems resolved; phase II of the second production line to start in May

MBSC’s top management official was cleared

EGP mn 1Q10 A 1Q11 A % YoY 1Q11 E A/E 4Q10 A % QoQ

Revenues 207 171 -17% 171 0% 128 34%Cement volume sold (Cement 000 tons) 401 336 -16% 336 0% 218 54%

Cement avg. selling price (EGP/ton) 451 468 4% 468 0% 468 0%

Clinker volume sold (000 tons) 75 46 -38% 46 0% 85 -46%Clinker avg. selling price (EGP/ton) 348 295 -15% 295 0% 300 -2%

Cost of Goods Sold (76) (60) -21% (66) -9% (38) 58%Cost/ton (Clinker+Cement) sold (EGP/ton) 160 158 -2% 173 -9% 126 25%

COGS/Sales 37% 35% -162 bps 39% -345 bps 30% 534 bps

SG&A (3) (11) 272% (7) 57% (9) 24%SG&A/ton (Clinker+Cement) sold (EGP/ton) 6 28 362% 18 57% 28 -2%

SG&A/Sales 1% 6% 480 bps 4% 225 bps 7% -51 bps

Opex (79) (71) -10% (73) -3% (47) 52%Opex/ ton (cement+clinker) sold (EGP/ton) 166 185 11% 191 -3% 154 20%

Opex/Sales 38% 41% 317 bps 43% -121 bps 37% 483 bps

EBITDA 128 100 -22% 98 2% 81 24%EBITDA margin 62% 59% -317 bps 57% 121 bps 63% -483 bps

Depreciation (13) (39) 198% (45) -13% (38) 3%

Net income 106 66 -37% 58 14% 83 -20%Net margin 51% 39% -1246 bps 34% 491 bps 65% -2593 bps

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A decision to stop paying the installments of the license fees: During the auction held in October 2007, MBSC was obliged to pay EGP251mn to acquire a license for its new production line, prompting the company to initiate legal proceedings in protest to the amount of the fee. In the end, MBSC was able to gain an approval from the governmental authorities setting the fees at just EGP134.5mn. MBSC was one of the existing companies that were obliged to pay the license fees for their under-establishment production lines without participating in the auction in 2007. Hence, we referred to those licenses by then as “reconciliation licenses”. These companies (as well as MBSC) had already acquired the needed approvals for the establishment of their production lines before the initiation of the auction system in 2007. In 2009, MBSC managed to reach an agreement with the authorities to acquire a five-year (interest bearing) contract for the license fees at a total amount of EGP134.5mn.

Recently, MBSC has decided to stop paying the rest of the installments amounting to EGP91mn (excluding interest) for its license fees acquired for the 1.5mtpa-second production line. Moreover, the company is intending to sue the Industrial Development Authority (IDA) for the total reimbursement of EGP55mn (including interest) that was paid till December 2010. Although this news appears to be positive, we believe it is still early to judge the repercussions of such decisions or the outcome of the lawsuit MBSC intends to proceed with. Hence, we did not factor this decision into our model, and so our model still comprises the c.EGP23mn-installement for this license to be paid by June 2011. However, if this issue was finalized in favor of MBSC, (all other things unchanged) this will bring us to a LTFV and a TP of EGP110/share.

Changes to our Forecasts since our Last Note Cutting local cement market estimates: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices between 2011-2015e by an average 1,192bps, 13% and 6%, respectively. We have thus revised MBSC’s model by lowering its own revenues and EBITDA margins during 2011-2015e, by an average of 3% and 550bps, respectively.

Increased utilization rates for technical problems resolved: During 2010, MBSC witnessed ongoing technical problems from the repeated braking down of the second grinder of the first line. Fortunately, by mid January 2011, this grinder was repaired and functional again. Hence, we fine tuned our estimates for MBSC’s utilization rates to increase during 2011-2015e by an average of 293bps.

Higher marketing expenses for distributors’ cash incentives and export activities: Due to the exports activity that we expect MBSC to start by mid 2011 and the price squeeze brought on by lower expected local demand and increased competition, we believe MBSC will increase its marketing expenses for exports’ administrative fees and distributors’ cash incentives. Hence, we have increased our estimate for MBSC’s marketing expense/ton during 2011-2015e by an average of 685%, as we believe these expenses will grow from an average of EGP5/ton during 2007-2010 to EGP27/ton in 2011 (as a starting year). Capex decreases, in line with peers’ usual trend: We have reduced our projection for MBSC’s capex by an average 36% over 2011-2015e to reflect a reasonable trend for its capital expenditure compared to its pears to be on average of 8% of its revenues during 2011-2015e.

MBSC decided not to pay the rest of the licenses fees of EGP91mn

MBSC’s indicators revised to match downgraded cement market indicators

Utilization rates increased on average by 293bps

Estimates for MBSC’s marketing expense/ton increased by 685% during 2011-2015e

Reduced capex

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Valuation and Recommendation Long-Term Fair Value (LTFV) and Target Price (TP) increased by 42%. We valued MBSC using a discounted cash flow (DCF) model for free cash flow to the firm (FCFF) to derive its LTFV. We used a risk free rate of 11%, an equity risk premium of 10%, a Beta of 0.68x, hence, WACC of 17.76%, and a perpetual growth rate of 0%.

Valuation – MBSC

Source: CI Capital Research estimates

As we stated in our old update dated December 1, 2010, our LTFV and TP (set at this LTFV) were calculated by applying a 40% probability that MBSC’s new 1.5-mtpa production line will be shut down for the risk of the legal issues surrounding that line which were fortunately resolved recently. Hence, we have dropped the shutdown scenario and increased MBSC’s LTFV and TP (set at this LTFV) by 42% to EGP107/share, implying 51% upside potential. Hence, we upgraded MBSC from Sell to Strong Buy.

MBSC is to distribute a DPS of EGP5 on June, 1, 2011, hence, our LTFV and TP post the distribution should be EGP102/share.

Risks to our Recommendation A worse-than-expected downward trend in construction activities.

Failure by MBSC to achieve the expected local market shares following the introduction of the neighbouring competitors of their production.

Another round of technical problems that may take long times as before.

Increased LTFV and TP to EGP107/share

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Terminal ValueNOPAT 435,963 335,866 425,570 397,681 426,544Depreciation & Amortization 181,322 214,495 226,244 240,273 255,615Net Plant Expend. -104,978 -101,316 -116,472 -124,139 -96,242Change W.I. -1,556 -689 -962 -1,049 -905Free Cash Flow to the Firm 510,751 448,356 534,380 512,766 585,012 3,294,513Perpetual Growth Rate 0%Discount Factor 0.91 0.77 0.65 0.56 0.47 0.47 Discounted Free Cash Flow to the Firm 462,542 344,808 349,150 284,634 275,892 1,553,695

WACC 17.76%Prepetual Growth rate 0%

Corporate value (EGP000) 3,270,722

Total Debt (Mar-11-EGP000) (22,945)Total Cash (Mar-11-EGP000) 387,330

Equity value (EGP000) 3,635,106

Total Number of shares 40,000,000

LTFV (EGP) 107.1LTFV (EGP) after the destribution of EGP5-DPS 102.1

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MBSC’s Historical & Forecast Financial Statements

Balance Sheet (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PAssets Cash & Cash Equivalent 331.8 461.4 637.1 812.0 984.0 1,190.7Net Receivables 0.2 0.3 0.4 0.4 0.5 0.6Total Inventory 122.2 193.3 226.1 269.6 317.7 359.2Advance Payments 4.3 6.8 8.0 9.5 11.2 12.7Other Trading Assets 0.0 0.0 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0Total Current Assets 458.5 661.9 871.6 1,091.5 1,313.3 1,563.1Net Plant 1,622.1 1,545.8 1,432.6 1,322.8 1,206.7 1,047.3Long-Term Investments 0.0 0.0 0.0 0.0 0.0 0.0Other Trading Non-Current Assets 0.1 0.1 0.1 0.1 0.1 0.1Other Non-current Assets 98.2 55.0 60.0 65.0 70.0 75.0Intangibles 0.0 0.0 0.0 0.0 0.0 0.0Total Assets 2,179.0 2,262.8 2,364.3 2,479.4 2,590.1 2,685.5

Liabilities & Shareholders' EquityShort-Tem Debt 0.0 0.0 0.0 0.0 0.0 0.0CP Of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Accounts Payable 65.5 103.6 121.2 144.5 170.2 192.5Accrued Expenses 58.5 92.6 108.3 129.1 152.1 172.0Down Payments 0.0 0.0 0.0 0.0 0.0 0.0Taxes Payable 0.0 0.0 0.0 0.0 0.0 0.0Dividends Payable 2.6 3.5 3.3 4.4 4.5 5.4Other Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Other Current Liabilities 91.1 50.0 30.0 10.0 5.0 1.0Total Current Liabilities 217.7 249.7 262.7 288.0 331.9 370.887Total Long Term Debts 21.2 15.9 10.6 5.3 0.0 0.0Other Non-Current Liabilities 0.0 0.0 0.0 0.0 0.0 0.0Long Term Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Total Liabilities 238.9 265.6 273.3 293.3 331.9 370.9Tax Provision 93.3 24.5 23.5 22.5 22.5 21.500Other Provisions 232.3 237.6 243.1 249.7 257.3 265.647Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Shareholders' Equity 1,614.4 1,735.2 1,824.3 1,914.0 1,978.5 2,027.5Total Liabilities & Equity 2,179.0 2,262.8 2,364.3 2,479.4 2,590.1 2,685.5

Income Statement (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PCapacity '000 Tons 1,500 2,500 3,000 3,000 3,000 3,000 Tons Sold '000 Tons 1,165 2,215 2,485 2,823 3,176 3,429 Revenues 749.0 1,047.5 1,107.8 1,314.9 1,518.4 1,678.2Cost of Goods Sold (252.9) (400.2) (469.3) (558.1) (657.6) (743.4)Gross Profits 496.2 647.4 638.5 756.9 860.8 934.7SG&A (18.9) (73.1) (83.7) (98.6) (115.3) (130.1)EBITDA 477.3 574.2 554.8 658.2 745.5 804.6Depreciation & Amortization (130.5) (181.3) (214.5) (226.2) (240.3) (255.6)EBIT 346.8 392.9 340.3 432.0 505.3 549.0Interest Expense (0.3) (0.3) 0.0 0.0 0.0 0.0Provisions (7.6) (5.2) (5.5) (6.6) (7.6) (8.4)Interest Income 28.2 13.1 22.1 32.2 44.1 76.0Investment Income 0.0 0.0 0.0 0.0 0.0 0.0Other Non-Operating Income 0.6 1.8 1.0 0.8 0.6 0.4Other Non-Operating Expenses 2.8 3.0 3.3 (3.9) (4.5) (4.9)EBT 370.5 405.3 361.1 454.5 537.9 612.1Taxes (66.6) (2.6) (4.4) (6.4) (107.6) (122.4)NPAT 303.9 402.6 356.7 448.1 430.3 489.7Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Extraordinary Items 0.0 0.0 0.0 0.0 0.0 0.0Attributable Profits 303.9 402.6 356.7 448.1 430.3 489.7Dividends (200.0) (263.4) (250.0) (335.0) (341.9) (411.9)

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MBSC’s Historical & Forecast Financial Statements (Con’t) Source: Company reports & CI Capital Research estimates

Cash Flow (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PNOPAT 274.5 436.0 335.9 425.6 397.7 426.5Depreciation & Amortization 130.5 181.3 214.5 226.2 240.3 255.6Gross Cash Flow (COPAT) 405.0 617.3 550.4 651.8 638.0 682.2Working Investment Change (66.5) (1.6) (0.7) (1.0) (1.0) (0.9)Other Current Items (46.1) (41.1) (20.0) (20.0) (5.0) (4.0)Cash After Current Operations 292.5 574.6 529.7 630.9 631.9 677.3Financing Payments (12.9) 1.6 6.2 5.7 7.3 8.9Cash Before Long-Term Use 279.6 576.2 535.9 636.6 639.2 686.2Net Plant Change (195.2) (105.0) (101.3) (116.5) (124.1) (96.2)FCFF 143.3 510.8 448.4 534.4 512.8 585.0Others 258.9 (44.2) (138.6) (81.0) (69.9) (85.7)Cash Before Financing 343.3 427.0 295.9 439.1 445.1 504.2Short-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Long-Term Debt (29.6) (5.3) (5.3) (5.3) (5.3) 0.0Net Worth 79.2 0.0 0.0 0.0 0.0 0.0Grey Area 60.9 (68.8) (1.0) (1.0) 0.0 (1.0)Dividends (200.3) (281.0) (267.7) (357.4) (365.7) (439.8)Change in Cash 253.4 71.9 21.9 75.4 74.1 63.5

Fact Sheet 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PROE 18.8% 23.2% 19.6% 23.4% 21.8% 24.2%ROS 40.6% 38.4% 32.2% 34.1% 28.3% 29.2%ROA 13.9% 17.8% 15.1% 18.1% 16.6% 18.2%ROIC 14.0% 21.7% 16.0% 19.4% 17.6% 18.4%Gross Margin 66.2% 61.8% 57.6% 57.6% 56.7% 55.7%EBITDA Margin 63.7% 54.8% 50.1% 50.1% 49.1% 47.9%ATO 0.3 0.5 0.5 0.5 0.6 0.6WI/ Sales 0.4% 0.4% 0.5% 0.5% 0.5% 0.5%ALEV 1.3 1.3 1.3 1.3 1.3 1.3Liabilities/Net worth 0.1 0.2 0.1 0.2 0.2 0.2Current Ratio 2.1 2.7 3.3 3.8 4.0 4.2

Per Share Ratios 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PShare Price 70.78 70.78 70.78 70.78 70.78 70.78Actual No. Of Shares '000 40,000 40,000 40,000 40,000 40,000 40,000 New No. Of Shares '000 40,000 40,000 40,000 40,000 40,000 40,000 EPS 7.60 10.07 8.92 11.20 10.76 12.24Diluted EPS 7.60 10.07 8.92 11.20 10.76 12.24DPS 5.00 6.59 6.25 8.38 8.55 10.30Diluted DPS 5.00 6.59 6.25 8.38 8.55 10.30Revenues/Share 18.73 26.19 27.70 32.87 37.96 41.95BV/Share 40.4 43.4 45.6 47.8 49.5 50.7 Gross Cash Flow/Share 10.12 15.43 13.76 16.30 15.95 17.05FCFF/Share 3.58 12.77 11.21 13.36 12.82 14.63EBITDA/Share 11.93 14.36 13.87 16.46 18.64 20.11EV/Share 63.02 59.64 55.12 50.61 46.18 41.01

Multiples 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PP/E 9.3 7.0 7.9 6.3 6.6 5.8Diluted P/E 9.3 7.0 7.9 6.3 6.6 5.8Div Yield % 7.1% 9.3% 8.8% 11.8% 12.1% 14.5% P/Revenues 3.8 2.7 2.6 2.2 1.9 1.7EV/ Revenues 3.4 2.3 2.0 1.5 1.2 1.0 P/ COPAT 7.0 4.6 5.1 4.3 4.4 4.2EV/ COPAT 6.2 3.9 4.0 3.1 2.9 2.4P/ FCFF 19.8 5.5 6.3 5.3 5.5 4.8EV/ FCFF 17.6 4.7 4.9 3.8 3.6 2.8EV/ Ton 1680.4 954.3 734.9 674.8 615.7 546.8P/ EBITDA 5.9 4.9 5.1 4.3 3.8 3.5EV/ EBITDA 5.3 4.2 4.0 3.1 2.5 2.0P/ BV 1.8 1.6 1.6 1.5 1.4 1.4

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Misr Cement (Qena)

Unambitious local player facing tough times We have cut our estimates for the local cement market indicators (utilization rates, demand, and prices) given our negative sentiment for the instability following the January 25th uprising. As one of the existing local cement players, we have revised MCQE’s model by lowering its own KPIs. Moreover, we have factored in to our model the lower cash position to be achieved for the hefty dividends paid out. However, we have reduced our projection for MCQE’s capex expenditure to reflect MCQE’s usual trend. The net result of these revisions is such that we have decreased MCQE’s LTFV and TP by 15%, to EGP108/share, leaving 5% upside potential. Overall, we downgraded our BUY recommendation to an Underweight. Cutting estimates for MCQE’s KPIs: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices. We have thus revised MCQE’s model by lowering its own utilization rates, revenues and EBITDA margins during 2011-2015e by an average of 695bps, 11%, and 114bps, respectively. Decreased capex: We have reduced our projection for MCQE’s capex to reflect its considerably low repetitive historical trend for capital expenditure that stood at 1% of revenues during 2007-2010. Changing the accounting policy for UEBM: MCQE reported in 1Q11 an investment income of EGP3mn in 1Q11, compared to EGP1mn in 4Q10. This can be attributed to the change in accounting policy MCQE made for its 20%-stake in Upper Egypt for Bags Manufacturing (UEBM), changing it from being valued at cost to be valued via the equity method. Hence, this investment increased from EGP808k to EGP3.5mn, resulting in the above-mentioned investment income as a revaluation gain. Valuation and recommendation: We have decreased our LTFV and TP by 15%, to EGP108/share, leaving MCQE with 5% upside potential, and we thus downgraded our BUY recommendation to an Underweight.

Key Performance Indicators



UNDERWEIGHT (Downgraded) LT FAIR VALUE | EGP108 (Downgraded) TARGET PRICE | EGP108 (Downgraded)

COMPANY SYNOPSIS Misr Cement (Qena) [MCQE] was incorporated in May 1997 as a shareholding company to produce and sell cement and other related construction products. At the time it operated a cement plant with a single 1.5-mtpa capacity production line. In May 2000, MCQE had its shares listed on the Egyptian Exchange (EGX) - the company began public trading with an issued and paid-in capital of EGP300mn distributed over 30mn shares at a par value of EGP10/share. Currently, its paid-in capital stands at EGP298.8mn, distributed over 29.9mn shares at a par value of EGP10/share. In June 2009 MCQE provided FLSmidth the mechanical equipment, plant management and installation services necessary for its 1.4mn ton per annum production line. The plant had a total investment cost of EGP750mn, and began producing in April 2002. MCQE also provided technical management, maintenance and supervision for the quarries’ raw materials deliveries to Arab Swiss Engineering Company. In 2010, MCQE reached 4% local market share, selling 1,951k tons with no exports recorded.

SHAREHOLDER STRUCTURE

ASEC Cement Company 27.6%Misr Insurance 20.2%Egyptian Investment Projects 10.0%Egyptian Kuwaiti Investment 9.9%Al-Ahly Capital Holding Co. 7.5%Misr Financial Investments 7.5%Others 1.5%Free Float 15.7%

STOCK DATA

Reuters; Bloomberg MCQE.CA; MCQE EYRecent price as of 22-May-11 EGP103.39No. of listed shares 29.9mnMarket cap EGP3,089.1mn52-wk high / low EGP128.89/ EGP75.05Avg. daily volume / turnover 0mn / EGP0.17mn


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mnsharesEGP

Volume MCQE EGX 30 - rebased

Source: Bloomberg

EGP mn 2008 A 2009 A 2010 A 2011 F 2012 F

Revenues 773.34 844.60 888.40 755.62 655.96Growth rate 9.2% 5.2% -14.9% -13.2%

EBITDA 406.14 448.09 467.55 356.89 282.41Growth rate 10.3% 4.3% -23.7% -20.9%EBITDA margin 52.5% 53.1% 52.6% 47.2% 43.1%

Net income 302.95 352.26 428.32 346.10 257.00Growth rate 16.3% 21.6% -19.2% -25.7%Net margin 39.2% 41.7% 48.2% 45.8% 39.2%


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The Egyptian Uprising and MCQE As we detailed earlier, construction and real-estate are among the sectors that expected to be hardest hit by recent political events in Egypt. We believe these events will have a negative repercussion on our estimates for all the local cement market indicators (utilization, demand, and prices) that we believe to drive negatively our estimates for those indicators for all the cement companies. However, on a company basis, we believe the least affected player in our cement coverage will be MCQE.

The blackout period: During the approximate week-long period of heightened political unrest, (Jan, 30th-to-Feb, 5th), we believe all cement players (including MCQE) temporarily halted all selling operations. However, operations resumed – albeit modestly – immediately after the blackout week. The limestone supply: cement plants procure limestone from quarries via blasting under military supervision. However, following the January 25th Egyptian uprising, the Army was unable to resume blasting operations for almost a month. Hence, this resulted in a shortage (or at least a fear from a shortage) of the cement major raw material (limestone) as we do not believe that cement plants possess large inventories of limestone. Cement producers therefore faced the challenge by then of reaching an agreement with the army so as not to hinder cement production in Egypt. Fortunately, MCQE has the advantage that its quarry is horizontal that does not require any blasting activities.

MCQE Recent Developments Valuating UEBM via the equity method instead of cost: MCQE’s 1Q11 net profits declined 11% year-on-year (YoY) to EGP102mn, compared to EGP115mn in 1Q10. MCQE’s revenue decreased 22% YoY to EGP196mn in 1Q11; driven by a 23% lower sales volume and a 1% higher average selling price. Such decline can be attributed to 1Q11 witnessing the Egyptian uprising (25th Jan revolution) and all of its economic repercussions on the construction and cement sectors. On a quarterly basis, MCQE reported 17% lower revenues in 1Q11, with 18% lower volume sold and 2% higher average selling price. MCQE delivered a 49% EBITDA margin in 1Q11, compared to 55% in 1Q10. MCQE started paying the EGP15/ton resource development fees in 3Q10. Hence, this YoY contraction was reported. For the below-EBITDA line items, MCQE reported an investment income of EGP3mn in 1Q11. This can be attributed to the change in accounting policy MCQE made for its 20%-stake in Upper Egypt for Bags Manufacturing (UEBM), changing it from being valued at cost to be valued via the equity method. Hence, this investment increased from EGP808k to EGP3.5mn, resulting in the above-mentioned investment income mostly as a revaluation gain.

MCQE to be the least affected

MCQE stopped operations during the blackout period

An advantage for having a horizontal limestone quarry

1Q11 income decreased YoY by 11%

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Income Statement Summary – MCQE (Actual Results vs. CI Capital Research estimates) Source: Company reports & CI Capital Research estimates Changes to our Forecasts since our Last Note Cutting local cement market estimates: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices between 2011-2015e by an average 1,192bps, 13% and 6%, respectively. We have thus revised MCQE’s model by lowering its own utilization rates, revenues and EBITDA margins during 2011-2015e, by an average of 695bps, 11% and 114bps, respectively.

Capex decreases, in line with MCQE’s usual trend: We have reduced our projection for MCQE’s capex by an average 82% over 2011-2015e to reflect its historical and repetitive trend for capital expenditure that stood at an average of 1% of revenues during 2007-2010. Valuation and Recommendation Long-Term Fair Value (LTFV) and Target Price (TP) cut by 15%. We valued MCQE using a discounted cash flow (DCF) model for free cash flow to the firm (FCFF) to derive its LTFV. We used a risk free rate of 11%, an equity market premium of 10%, a Beta of 0.17x, hence, a WACC of 12.67%, and a perpetual growth rate of 0%.

Given the above-mentioned negatively revised utilization rates, revenues, EBITDA margins and the reduced capex, in addition to the lower cash position expected to be achieved for the hefty dividends paid-out3, we have decreased MCQE’s LTFV and TP (set at this LTFV) by 15% to EGP108/share, implying 5% upside potential. Hence, we downgraded MCQE from Buy to Underweight.

3 By the end of 2010, MCQE used to accumulate cash for its dividends’ distribution and the company distributed in

2Q11 a DPS of EGP16 to share buyers till April 19th, 2011

MCQE’s indicators revised to match negatively revised cement market indicators

Reduced capex to an average of 1% of revenues

Lower LTFV on negatively revised utilization rates, revenues, EBITDA margins and decreased cash position

EGP mn 1Q10 A 1Q11 A % YoY 1Q10 E A/E 4Q10 A % QoQ

Revenues 252 196 -22% 193 2% 236 -17%Volumes sold (000 tons) 551 427 -23% 427 0% 522 -18%

Avg. selling price (EGP/ton) 457 459 1% 451 2% 451 2%

Opex (114) (100) -12% (101) -1% (122) -18%Opex/ton sold (EGP/ton) 206 234 13% 237 -1% 233 0%

Opex/Sales 45% 51% 566 bps 52% -161 bps 52% -89 bps

EBITDA 138 96 -30% 92 5% 114 -15%EBITDA margin 55% 49% -566 bps 48% 161 bps 48% 89 bps

Interest Income 9 10 9% 7 37% 9 16%Investment Income - 3 NM - NM 1 308%FX Gain/Loss 0.5 5 NM 3 59% 3 NM

EBT 117 104 -11% 90 15% 116 -11%EBT margin 47% 53% 633 bps 47% 593 bps 49% 362 bps

Net income 115 102 -11% 89 15% 114 -10%Net margin 46% 52% 639 bps 46% 600 bps 49% 372 bps

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May 23rd 2011

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Valuation – MCQE


Risks to our Recommendation

Construction activities improvement. Cement players to increase prices in the coming two years regardless of

improvements to construction activities.

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Terminal ValueNOPAT 306,480 233,292 197,826 237,476 267,055Depreciation & Amortization 42,106 42,495 42,875 43,273 43,689Net Plant Expend. -5,099 -5,253 -5,411 -5,580 -5,762Change W.I. 959 1,107 -353 -3,575 -2,955Free Cash Flow to the Firm 344,446 271,641 234,937 271,593 302,028 2,383,018Perpetual Growth Rate 0%Discount Factor 0.93 0.83 0.73 0.65 0.58 0.58Discounted Free Cash Flow 320,395 224,325 172,191 176,666 174,421 1,376,191



Total Debt (Mar-11-EGP000) - Total Cash (Mar-11-EGP000) 422,332



LTFV (EGP) 108.1

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May 23rd 2011

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MCQE’s Historical & Forecast Financial Statements

Balance Sheet (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PAssets Cash & Cash Equivalent 810.7 665.4 595.0 574.2 635.4 670.5Net Receivables 5.1 4.3 3.7 3.9 4.6 5.1Total Inventory 47.1 44.7 42.1 42.9 50.8 57.3Advance Payments 0.8 0.8 0.7 0.7 0.9 1.0Other Trading Assets 0.0 0.0 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0Total Current Assets 863.6 715.2 641.6 621.7 691.7 733.9Net Plant 508.3 471.3 434.1 396.6 358.9 321.0Long-Term Investments 13.6 21.4 22.1 22.8 23.7 24.6Other Trading Non-Current Assets 0.4 0.5 0.6 0.7 0.8 0.9Other Non-current Assets 17.7 15.0 15.0 15.0 15.0 15.0Intangibles 0.0 0.0 0.0 0.0 0.0 0.0Total Assets 1,403.6 1,223.4 1,113.3 1,056.8 1,090.0 1,095.4

Liabilities & EquityShort-Tem Debt 0.0 0.0 0.0 0.0 0.0 0.0CP Of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Accounts Payable 25.6 24.3 22.9 23.3 27.6 31.1Accrued Expenses 0.2 0.1 0.1 0.1 0.2 0.2Down Payments 6.1 5.2 4.5 4.7 5.5 6.2Taxes Payable 14.9 12.7 11.0 11.4 13.5 15.1Dividends Payable 478.0 336.8 250.1 212.5 265.2 295.7Other Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Other Current Liabilities 26.3 30.1 40.0 50.0 60.0 70.0Total Current Liabilities 551.1 409.2 328.7 302.0 371.9 418.3Total Long Term Debts 0.0 0.0 0.0 0.0 0.0 0.0Other Non-Current Liabilities 55.9 48.5 41.4 30.0 16.5 1.5Long Term Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Total Liabilities 607.1 457.7 370.0 332.0 388.4 419.7Tax Provision 0.0 0.0 0.0 0.0 0.0 0.0Other Provisions 177.8 181.5 184.8 188.2 192.2 196.7Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Shareholders' Equity 618.8 584.2 558.5 536.7 509.4 479.0Total Liabilities & Equity 1,403.6 1,223.4 1,113.3 1,056.8 1,090.0 1,095.4

Income Statement (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PCapacity '000 Tons 1,500 1,500 1,500 1,500 1,500 1,500 Tons Sold '000 Tons 1,951 1,649 1,491 1,462 1,661 1,793 Revenues 888.4 755.6 656.0 677.9 799.9 894.6Cost of Goods Sold (391.6) (371.9) (350.2) (357.9) (423.7) (476.7)Gross Profits 496.8 383.7 305.7 320.0 376.2 417.9SG&A (29.2) (26.8) (23.3) (24.1) (28.4) (31.8)EBITDA 467.5 356.9 282.4 295.9 347.8 386.1Depreciation & Amortization (41.5) (42.1) (42.5) (42.9) (43.3) (43.7)EBIT 426.1 314.8 239.9 253.0 304.6 342.4Interest Expense (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)Provisions (37.0) (3.8) (3.3) (3.4) (4.0) (4.5)Interest Income 31.3 24.5 21.2 20.2 23.0 24.6Investment Income 0.7 6.3 3.1 3.2 17.2 17.4Other Non-Operating Income (Exp.) 0.0 0.1 0.1 0.1 0.1 0.1FX Gains (Losses) 11.4 9.7 0.0 (0.0) (0.0) (0.0)EBT 432.5 351.4 261.0 273.0 340.7 379.9Taxes (6.5) (5.3) (4.0) (54.6) (68.1) (76.0)NPAT 425.9 346.1 257.0 218.4 272.6 303.9Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Extraordinary Items 2.4 0.0 0.0 0.0 0.0 0.0Attributable Profits 428.3 346.1 257.0 218.4 272.6 303.9Dividends (478.0) (336.8) (250.1) (212.5) (265.2) (295.7)

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MCQE’s Historical & Forecast Financial Statements (Con’t) Source: Company reports & CI Capital Research estimates

Cash Flow (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PNOPAT 428.2 306.5 233.3 197.8 237.5 267.1Depreciation & Amortization 41.5 42.1 42.5 42.9 43.3 43.7Gross Cash Flow (COPAT) 469.7 348.6 275.8 240.7 280.7 310.7Working Investment Change 8.8 1.0 1.1 (0.4) (3.6) (3.0)Other Current Items (47.4) 3.8 9.9 9.9 9.9 9.9Cash After Current Operations 431.1 353.4 286.8 250.2 287.1 317.7Financing Payments (1.7) 0.1 0.2 0.5 0.5 0.8Cash Before Long-Term Use 429.5 353.5 287.0 250.7 287.6 318.5Net Plant Change (1.0) (5.1) (5.3) (5.4) (5.6) (5.8)FCFF 477.5 344.4 271.6 234.9 271.6 302.0Others (125.4) 172.1 86.6 32.7 (33.6) (7.9)Cash Before Financing 303.1 520.5 368.3 278.0 248.4 304.8Short-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Net Worth (0.2) 0.0 0.0 0.0 0.0 0.0Grey Area (4.2) 0.0 (0.0) 0.0 0.0 0.0Dividends (298.8) (522.0) (369.4) (277.8) (247.1) (303.8)Change in Cash (0.1) (1.5) (1.1) 0.2 1.4 1.1

Fact Sheet 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PROE 69.2% 59.2% 46.0% 40.7% 53.5% 63.4%ROS 48.2% 45.8% 39.2% 32.2% 34.1% 34.0%ROA 30.5% 28.3% 23.1% 20.7% 25.0% 27.7%ROIC 53.8% 40.0% 31.4% 27.3% 33.8% 39.5%Gross Profit Margin 55.9% 50.8% 46.6% 47.2% 47.0% 46.7%EBITDA Margin 52.6% 47.2% 43.1% 43.7% 43.5% 43.2%ATO 0.6 0.6 0.6 0.6 0.7 0.8WI/ Sales 2.4% 2.7% 3.0% 3.0% 3.0% 3.0%Net Profit Margin 48.2% 45.8% 39.2% 32.2% 34.1% 34.0%ALEV 2.3 2.1 2.0 2.0 2.1 2.3Liabilities/Net worth 98% 78% 66% 62% 76% 88%Current Ratio 1.6 1.7 2.0 2.1 1.9 1.8

Per Share Ratios 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PShare Price 103.39 103.39 103.39 103.39 103.39 103.39Recent No. Of Shares '000 29,878 29,878 29,878 29,878 29,878 29,878 New No. Of Shares '000 29,878 29,878 29,878 29,878 29,878 29,878 EPS 14.34 11.58 8.60 7.31 9.12 10.17DPS 16.00 11.27 8.37 7.11 8.88 9.90Revenues/Share 29.73 25.29 21.95 22.69 26.77 29.94BV/Share 20.7 19.6 18.7 18.0 17.0 16.0 Gross Cash Flow/Share 15.72 11.67 9.23 8.06 9.40 10.40FCFF/Share 15.98 11.53 9.09 7.86 9.09 10.11EBITDA/Share 15.65 11.95 9.45 9.90 11.64 12.92EV/Share 76.26 81.12 83.48 84.17 82.12 80.95

Multiples 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PP/E 7.2 8.9 12.0 14.1 11.3 10.2Div Yield % 15.5% 10.9% 8.1% 6.9% 8.6% 9.6% P/Revenues 3.5 4.1 4.7 4.6 3.9 3.5EV/ Revenues 2.6 3.2 3.8 3.7 3.1 2.7 P/ COPAT 6.6 8.9 11.2 12.8 11.0 9.9EV/ COPAT 4.9 7.0 9.0 10.4 8.7 7.8P/ FCFF 6.5 9.0 11.4 13.1 11.4 10.2EV/ FCFF 4.8 7.0 9.2 10.7 9.0 8.0EV/ Ton 1519.0 1615.8 1662.7 1676.6 1635.8 1612.4P/ EBITDA 6.6 8.7 10.9 10.4 8.9 8.0EV/ EBITDA 4.9 6.8 8.8 8.5 7.1 6.3P/ BV 5.0 5.3 5.5 5.8 6.1 6.4

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May 23rd, 2011

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Sinai Cement

Problematic geographical place in tough times Given the political and economic repercussions of the Egyptian uprising, we have negatively revised our estimates for the local cement market indicators (utilization rates, demand, and prices). Being one of the existing local cement players, we have revised SCEM’s model by lowering its own KPIs. Additionally, SCEM’s plant was shut down for 11 working days for the attack of Bedouin activists in Sinai. What increased the risk of Sinai as a geographical location was the natural gas pipeline in Al-Arish that was bombed twice year-to-date and yet to be repaired and secured. This has forced SCEM to switch to costly mazut as a temporary replacement. Meanwhile, we have factored in to our model the lower cash position to be attained for the hefty dividends paid-out. We have therefore decreased SCEM’s LTFV and TP by 29%, to EGP53/share, leaving 17% upside potential. Overall, we downgraded our Strong Buy recommendation to a Hold. Cutting estimates for SCEM’s KPIs: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices. We have thus revised SCEM’s model by lowering its own revenues and EBITDA margins during 2011-2015e by an average of 5%, and 584bps, respectively. Al-Arish natural gas pipeline bombed twice: The natural gas pipeline in Al-Arish which provides SCEM with its natural gas needs has recently been hit by a second bombing. Consequently, SCEM had been forced to switch to the more expensive mazut for its first production line, incurring a higher cost.

Problems with the Bedouin: In early March, SCEM’s factory was attacked by Bedouin activists in Sinai, forcing the facility to shut down. However, the management resolved this problem and the factory resumed its full operation, but only after 11 working days of closure, which affected the company’s production and sales volumes in 1Q11. Distributors’ cash incentives and export activities: As we expect SCEM to continue its export activities in addition to the price squeeze brought on by lower expected local demand and increased competition, we believe SCEM will increase its marketing expenses for exports’ administrative fees and distributors’ cash incentives.

Valuation and recommendation: We have decreased our LTFV and TP by 29%, to EGP53/share, leaving SCEM with 17% upside potential, and thus we downgraded our Strong Buy recommendation to a Hold. Key Performance Indicators




HOLD (Downgraded) LT FAIR VALUE | EGP53 (Downgraded) TARGET PRICE | EGP53 (Downgraded)

COMPANY SYNOPSIS

Sinai Cement [SCEM] was incorporated in 1998 as a shareholding company to produce cement, packaging and all other cement products. In July 2000, SCEM had its shares listed on the Egyptian Exchange (EGX). SCEM was established with a paid-in capital of EGP250mn distributed over 25mn shares at a par value of EGP10/share. Currently, SCEM has a paid-in capital of EGP700mn distributed over 70mn shares at a par value of EGP10/share.

In August 2006, SCEM signed a contract with ASEC, ARASCO and FLSmidth to double its production capacity. It captured 8% local market share in 2010, selling 3,728k tons and 59% export market share, selling 31k tons.

SHAREHOLDER STRUCTURE

Vica Misr Cement Industries 39.6%Sama Cement 9.4%Social Insurance Fund 9.4%Al-Arabia Co. for Indust. Inv. 6.2%Others 7.0%Free Float 28.3% STOCK DATA

Reuters; Bloomberg SCEM.CA; SCEM EYPrice as of 22-May-11 EGP45.02No. of listed shares 70.0mnMarket cap EGP3,151.4mn52-wk high / low EGP63.2/ EGP38.3Avg. daily volume / turnover 0.07mn / EGP2.73mn


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mnsharesEGPVolume SCEM EGX 30 - rebased

Source: Bloomberg

EGP mn 2008 A 2009 A 2010 A 2011 F 2012 F

Revenues 906.32 1513.07 1627.59 1324.56 1244.64Growth rate 66.9% 7.6% -18.6% -6.0%

EBITDA 475.48 749.22 795.68 588.25 490.46Growth rate 57.6% 6.2% -26.1% -16.6%EBITDA margin 52.5% 49.5% 48.9% 44.4% 39.4%

Net income 414.13 677.55 904.07 522.21 345.95Growth rate 63.6% 33.4% -42.2% -33.8%Net margin 45.7% 44.8% 55.5% 39.4% 27.8%


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May 23rd, 2011

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The Egyptian Uprising and SCEM

As we detailed earlier, construction and real-estate are among the sectors expected to be hardest hit by recent political unrest in Egypt. We believe these events will have a negative repercussion on our estimates for all local cement market indicators (utilization, demand, and prices) which we believe to drive negatively our estimates for those indicators for all the cement companies. However, on a company basis, we believe the most affected player in our cement coverage will be SCEM.

The blackout period: During the approximate week-long period of heightened political unrest, (Jan, 30th-to-Feb, 5th), SCEM had to close one of its furnaces. Fortunately, SCEM resumed operations at this furnace shortly after that period. Moreover, the closure of this furnace coincided with the scheduled maintenance period, so SCEM is unlikely to incur extra-ordinary costs for this shutdown.

Al-Arish natural gas pipeline: The natural gas pipeline in Al-Arish which provides SCEM with its natural gas needs was first bombed in February 2011. Hence, the company was forced to replace natural gas with costly mazut. By that time the challenge that faced SCEM was not just replacing a cheap fuel for an expensive one, yet, there was a shortage in mazut by that time and transporting it was not safe for the lack of national security. Fortunately, it took the authorities just a month to be able to fix this pipe line and to resume its operation on March 16. However, by the end of April, another explosion rocked this gas pipeline, which to date remains inoperative. This time SCEM is unlikely to suffer a shortage in mazut supplies, however, the resource’s higher cost detriments still apply.

Bedouin tribe’s problems: On March 8, 2011, SCEM’s factory was attacked by Bedouin activists in Sinai forcing the factory shutdown. Fortunately, the management was able to resolve this problem and the factory resumed its full operation, but only after 11 working days of closure, which affected the company’s production and sales volumes in .1Q11

Stock market closure for over seven weeks: During the political unrest and resulting instability in the financial system, the Egyptian Stock Exchange (EGX) was kept closed for more than seven weeks. In early March 2011, SCEM revealed its 2010 financial results and its BoD proposal of an EGP9.5-DPS, carrying a dividend yield of 21% (based on the stock price on January 27, 2011). This decision further supported the defensive nature of SCEM's stock when trading resumed. When the market resumed its operations, SCEM offered the highest dividend yield in the whole CI Capital Research coverage universe, if not in the whole market. SCEM was one of the companies better-suited to weathering the market fall in the beginning, thanks to its high proposed dividend yield.

The market opened on March 23 after a closure lasting more than seven weeks, and most of the traded stocks fell on the first day of trading by the 10% limit. SCEM was one of few stocks that closed on a positive note. The market fell on the first day by 8.9%, which drove SCEM to fall to EGP41.04 at the opening of trading, before witnessing a quick rebound to close surpassing the top gainer of the day with the 10% limit up. SCEM’s stock was not just defensive over the opening trading sessions; the stock was positively aggressive, trading way above its 52wk average volume and recording an average of 239k in trading volume and reaching a high of EGP63/share on April 6, 2011.

SCEM to be the most affected

One furnace closed during the blackout period

SCEM’s natural gas line was bombed twice

Bedouin forcing SCEM to shut down the factory

Hefty DPS pushing SCEM’s stock to a high of EGP63/share following the market opening

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SCEM Recent Developments

4Q10 income increased YoY by 101%: SCEM's stand-alone 2010 net profits grew 33% year-on-year (YoY) to EGP904mn, compared to EGP678mn in 2009. Meanwhile, 99.96%-owned subsidiary Sinai Cement for Services (SCS) inked EGP1.7mn in 2010 net profits vs. a net loss of EGP7.2mn a year ago. All in all, SCEM's consolidated net profits reached EGP906mn, up 35% vs. 2009. SCEM’s revenues increased 5% YoY to EGP423mn in 4Q10, driven by 8% YoY increases in volume sold and 2% decrease in average selling price. We attribute this increase in sales volume to the installation of SCEM’s fourth grinder in April 2010. On QoQ level, SCEM reported 10% higher revenues in 4Q10 due to 10% higher volume sold as 3Q10 witnessed the seasonal slowdown for Ramadan. However, 4Q10 opex/ton came in 4% and 1% higher than 3Q10 and 4Q09, respectively. We attribute this to (i) SCEM booking higher-than-expected marketing expenses related to exports (25k tons in 2010), (ii) an 8% annual electricity increase, and (iii) a 50% increase in electricity costs during peak times (effective July 2010). Hence, 4Q10 EBITDA margin narrowed to 48% vs. 49% in 4Q09.

In a surprise development, SCEM reported a one-time refund of EGP176mn related to a settlement with the GoE over resource development fees. SCEM used to pay a resource development fee of EGP35/cement ton starting May 2008. In May 2010, the GoE had decided to decrease the fee from EGP35/ton to EGP15/ton effective July 2010. More recently, the GoE decided in January 2011 to compensate SCEM for the period from May 2008-July 2010, equivalent to a total amount of EGP176mn:

EGP135mn of which was recorded as a one-time income in 2010 related to the period from May 2008-December 2009.

EGP41mn of which has been accounted for as part of cost of goods sold (COGS) in the period from January 2010-July 2010.

For the sake of comparison, we reclassified the EGP41mn from COGS to one- time income, totalling EGP176mn. Income Statement Summary – SCEM (Actual Results vs. CI Capital Research estimates)

* Cost of Goods Sold excluding EGP41mn reclassified as extra-ordinary items for the resource development fees compensation for the period of 1H10 Source: Company reports & CI Capital Research estimates

One-time refund of EGP176mn

EGP mn 2009 A 2010 A* % YoY 2010 E A/E 4Q09 A 4Q10 A * % YoY 4Q10 E A/E 3Q10 A % QoQ

Revenues 1,513 1,628 8% 1,618 1% 403 423 5% 414 2% 387 10%

Volumes sold (000 tons) 3,495 3,753 7% 3,719 1% 926 997 8% 964 3% 907 10%

Avg. selling price (EGP/ton) 433 434 0% 435 0% 435 425 -2% 429 -1% 426 0%

Cost of Goods Sold (670) (707) 5% (706) 0% (174) (183) 5% (183) 0% (168) 9%Cost/ton sold (EGP/ton) 192 188 -2% 190 -1% 188 184 -2% 190 -3% 185 -1%

COGS/Sales 44% 43% -87 bps 44% -23 bps 43% 43% 2 bps 44% -89 bps 43% -13 bps

SG&A (94) (125) 34% (115) 9% (29) (39) 33% (29) 36% (27) 46%

SG&A/ton sold (EGP/ton) 27 33 24% 31 8% 32 39 23% 30 31% 29 33%

SG&A/Sales 6% 8% 150 bps 7% 59 bps 7% 9% 191 bps 7% 228 bps 7% 228 bps

Opex (764) (832) 9% (821) 1% (204) (222) 9% (212) 5% (195) 14%Opex/ton sold (EGP/ton) 219 222 1% 221 0% 220 223 1% 219 2% 214 4%

Opex/Sales 50% 51% 63 bps 51% 36 bps 51% 52% 193 bps 51% 138 bps 50% 216 bps

EBITDA 749 796 6% 797 0% 199 201 1% 202 -1% 192 5%EBITDA margin 50% 49% -63 bps 49% -36 bps 49% 48% -193 bps 49% -138 bps 50% -216 bps

XO Items (1) 177 NM 1 NM (0) 176 NM - NM - NM

Net income 678 904 33% 728 24% 180 363 101% 187 94% 175 108%Net margin 45% 56% 1077 bps 45% 1058 bps 45% 86% 4101 bps 45.1% 4065 bps 45% 4055 bps

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May 23rd, 2011

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Changes to our Forecasts since our Last Note

Cutting local cement market estimates: Due to the recent political unrest and economic instability, we have amended our expectations for the local cement market indicators by decreasing its utilization rates, demand and local prices between 2011-2015e by an average 1,192bps, 13% and 6%, respectively. We have thus revised SCEM’s model by lowering its own revenues and EBITDA margins during 2011-2015e, by an average of 5% and 584bps, respectively.

Production halt in 2011 for the blackout period and the Bedouin problems: The January 25th Egyptian uprising was followed by a blackout week, while March witnessed SCEM’s plant shutdown for 11 working days till the management resolved the Bedouin problem. Hence, we expect SCEM to report 7% YoY lower revenues to reach EGP345mn (sales volume: -4% to 806k; average prices: -3% to EGP428//ton) in 1Q11. Along with our negatively revised local cement market utilization rates and the above-mentioned specific incidences drove us to lower our estimates for 2011 sales volumes by 6% to 3.1mn tons.

Higher costs in 2011 for the natural gas problem: SCEM comprises two production lines. The second production line that was introduced in December 2008 is originally fueled by mazut, and remains so until SCEM finalizes contracts with the authorities for the supply of natural gas. However, the first line is fueled by natural gas, supplied by the pipeline at Al-Arish. Since, its second bombing in April however, the pipeline remains inoperative. Consequently, we expect SCEM to report a QoQ EBITDA margin contraction of 176-bps to 46% in 1Q11. Assuming that SCEM will continue using mazut for the two lines for two consecutive quarters (2Q11 and 3Q11), we expect SCEM to incur higher-than-previously expected COGS/ton in 2011 by EGP2.

Higher marketing expenses for distributors’ cash incentives and export activities: Due to the exports activity SCEM is expected to continue, in addition to the price squeeze brought on by lower expected local demand and increased competition, we believe SCEM will increase its marketing expenses for exports’ administrative fees and distributors’ cash incentives. Hence, we increased our estimate for SCEM’s marketing expense/ton during 2011-2015e by an average of 11%.

Operational basis forecasts changes – SCEM

* Old update dated January 19, 2011 Source: CI Capital Research estimates

SCEM’s indicators revised to match negatively revised cement market indicators

Estimates for SCEM’s 2011-sales volume decreased by 6%

Estimates for SCEM’s 2011-COGS/ton increased by EGP2

Estimates for SCEM’s marketing expense/ton increased by 11% during 2011-2015

EGP mn 2011 P 2012 P 2013 P 2014 P 2015 P Av. (2011-15)

RevenuesOld 1,455 1,394 1,479 1,627 NANew 1,325 1,245 1,472 1,655 1,850

Change in Revenues -9% -11% 0% 2% NA -5%

EBITDAOld 710 649 671 737 NANew 588 490 582 650 718

Change in EBITDA -17% -24% -13% -12% NA -17%

EBITDA marginOld 49% 47% 45% 45% NANew 44% 39% 40% 39% 39%

Change in EBITDA Margin -439 bps -716 bps -581 bps -601 bps NA -584 bps

Net IncomeOld 641 462 479 534 NANew 522 346 417 467 517

Change in Net Income -19% -25% -13% -13% NA -17%

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May 23rd, 2011

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Valuation and Recommendation

Long-Term Fair Value (LTFV) and Target Price (TP) decreased 29%. We valued SCEM using a discounted cash flow (DCF) model for free cash flow to the firm (FCFF) to derive its LTFV. We used a risk free rate of 11%, an equity risk premium of 10%, a Beta of 0.62x, hence, WACC of 17.2%, and a perpetual growth rate of 0%.

Given the above mentioned negatively revised revenues, EBITDA margins and the lower cash position to be achieved for the hefty dividends paid-out (by the end of 2010, SCEM used to accumulate cash for its dividends’ distribution and the company distributed in 2Q11 a DPS of EGP9.5), we have decreased SCEM’s LTFV and TP (set at this LTFV) by 29% to EGP53/share, implying 17% upside potential. Hence, we downgraded SCEM from Strong Buy to Hold.

Valuation – SCEM

Source: CI Capital Research estimates SOTP valuation: SCEM holds 99.96% and 25.4% stakes in Sinai Cement for Services (SCS) and Sinai for White Cement (SWC), respectively. Using cost method, we included the stakes for both SWC and SCE in our LTFV at its cost value. Hence, our sum-of-the-parts (SOTP) valuation yielded a LTFV of EGP53/share with respective contributions of 2.8% and 0.8% from SWC and SCS.

Long Term Fair Value Sum of the Parts calculation


Decreased LTFV and TP on negatively revised revenues, EBITDA margins, and decreased cash position

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Terminal ValueNOPAT 634,126 323,658 394,543 446,358 497,833Depreciation & Amortization 81,734 85,313 88,712 92,261 95,959Net Plant Expend. -67,027 -72,112 -75,299 -78,328 -81,491Change W.I. 14,016 -2,846 -15,311 -12,651 -14,229Free Cash Flow to the Firm 662,849 334,014 392,646 447,640 498,072 2,895,155Perpetual Growth Rate 0%Discount Factor 0.91 0.77 0.66 0.56 0.48 0.48Discounted Free Cash Flow to the Firm 601,844 258,644 259,417 252,340 239,556 1,392,475



Total Debt (Dec-10-EGP000) - Total Cash (Dec-10-EGP000) 29,149Sinai White cement (SWC) 88,889Sinai Cement for Services (SCS) 24,990



LTFV (EGP) 52.7

CompanyValuation

method Stake

No. of shares owned(mn)

Par value

Total invest.

(EGP mn) % PaidValue

(EGP mn)Value

Contribution

SCEM value per

shareSinai Cement (SCEM) DCF 100% 70.00 10 NM NA 3,033 96.4% 50.8Sinai for White Cement (SWC) Cost 25.40% 0.89 100 89 100% 89 2.8% 1.5Sinai Cement for Services (SCS) Cost 99.96% 2.50 10 25 100% 25 0.8% 0.4Sum of the parts 3,147 100% 52.7

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May 23rd, 2011

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Risks to our Recommendation

The following could lead to an upgrade in our recommendation:

The natural gas pipeline to be repaired and to resume providing SCEM with its natural gas needs

SCEM’s management becoming able to finalize the needed contracts with the authorities for the natural gas supply for its second production line

Construction activities improvement. Cement players to increase prices in the coming two years regardless of

improvements to construction activities. The following could trigger a downgrade in our recommendation:

A higher-than-expected downward trend in construction activities. Failure by SCEM to achieve the expected local market shares following the

introduction of the neighbouring competitors to their production. SCEM to continue using mazut instead of natural gas beyond 3Q11. A shortage in mazut resulting in increasing its price.

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May 23rd, 2011

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SCEM’s Historical & Forecast Standalone Financial Statements

Balance Sheet (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PAssets Cash & Cash Equivalent 694.1 875.8 891.7 899.9 914.4 931.1Net Receivables 25.1 20.5 19.2 22.7 25.6 28.6Total Inventory 147.7 123.0 124.4 148.9 168.9 191.1Advance Payment to Suppliers 7.6 6.3 6.4 7.6 8.6 9.8Other Trading Assets 0.0 0.0 0.0 0.0 0.0 0.0Other Current Assets 4.7 7.0 6.0 5.0 4.0 3.0Total Current Assets 879.2 1,032.5 1,047.7 1,084.1 1,121.4 1,163.5Net Plant 1,481.5 1,466.8 1,453.6 1,440.2 1,426.3 1,411.8Long-Term Investments 125.6 125.6 125.6 125.6 125.6 125.6Other Trading Non-Current Assets 0.5 0.9 1.1 1.3 1.5 1.7Other Non-current Assets 217.5 80.0 85.0 90.0 95.0 100.0Intangibles 0.0 0.0 0.0 0.0 0.0 0.0Total Assets 2,704.3 2,705.9 2,713.1 2,741.2 2,769.8 2,802.6

Liabilities & EquityShort-Tem Debt 0.0 0.0 0.0 0.0 0.0 0.0CP Of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Accounts Payable 27.8 23.2 23.5 28.0 31.7 35.8Accrued Expenses 7.2 6.0 6.1 7.3 8.2 9.3Down Payments 58.1 47.3 44.3 52.5 59.0 66.0Taxes Payable 0.0 0.0 0.0 0.0 0.0 0.0Dividends Payable 0.0 0.0 0.0 0.0 0.0 0.0Other Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Other Current Liabilities 32.5 29.7 27.7 25.7 23.7 21.7Total Current Liabilities 125.6 106.2 101.6 113.5 122.7 132.8Total Long Term Debts 0.0 0.0 0.0 0.0 0.0 0.0Other Non-Current Liabilities 86.8 76.7 66.6 56.5 46.4 36.2Long Term Spontaneous Finance 0.0 0.0 0.0 0.0 0.0 0.0Total Liabilities 212.4 182.9 168.2 170.0 169.0 169.1Tax Provision 0.0 0.0 0.0 0.0 0.0 0.0Other Provisions 37.5 42.4 47.1 52.6 58.7 65.7Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Shareholders' Equity 2,454.4 2,480.6 2,497.9 2,518.7 2,542.0 2,567.9Total Liabilities & Equity 2,704.3 2,705.9 2,713.1 2,741.2 2,769.8 2,802.6

Income Statement (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PCapacity '000 Tons 3,200 3,200 3,200 3,200 3,200 3,200 Tons Sold '000 Tons 3,759 3,108 3,042 3,455 3,739 4,036 Revenues 1,627.6 1,324.6 1,244.6 1,472.1 1,655.0 1,850.4Cost of Goods Sold (706.5) (590.6) (598.9) (712.3) (806.4) (911.1)Gross Profits 921.0 734.0 645.7 759.9 848.6 939.3SG&A (125.4) (145.7) (155.3) (177.4) (198.2) (221.3)EBITDA 795.7 588.3 490.5 582.5 650.4 718.0Depreciation & Amortization (78.0) (81.7) (85.3) (88.7) (92.3) (96.0)EBIT 717.7 506.5 405.1 493.7 558.1 622.1Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0Provisions (12.9) (14.0) (9.9) (9.0) (10.4) (11.6)Interest Income 27.3 35.8 36.6 36.6 36.8 37.2Investment Income 0.0 0.0 0.0 0.0 0.0 0.0Other Non-Operating Income/Expense 0.7 1.1 0.6 (0.3) (0.9) (1.5)EBT 732.8 529.4 432.4 521.0 583.7 646.2Taxes (5.5) (7.2) (86.5) (104.2) (116.7) (129.2)NPAT 727.4 522.2 346.0 416.8 467.0 517.0Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Extraordinary Items 176.7 0.0 0.0 0.0 0.0 0.0Attributable Profits 904.1 522.2 346.0 416.8 467.0 517.0Dividends (665.0) (468.8) (310.6) (374.2) (419.2) (464.1)

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May 23rd, 2011

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SCEM’s Historical & Forecast Standalone Financial Statements (Con’t)

Note: Due to the lack of detailed information regarding Sinai Cement for Services (SCS) - the company incorporated in SCEM’s consolidated statements - we have limited our detailed estimates to SCEM’s stand-alone results. Source: Company reports & CI Capital Research estimates

Cash Flow (EGPmn) 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PNOPAT 748.9 634.1 323.7 394.5 446.4 497.8Depreciation & Amortization 78.0 81.7 85.3 88.7 92.3 96.0Gross Cash Flow (COPAT) 826.9 715.9 409.0 483.3 538.6 593.8Working Investment Change (21.3) 14.0 (2.8) (15.3) (12.7) (14.2)Other Current Items 4.6 (5.5) (1.2) (1.2) (1.2) (1.2)Cash After Current Operations 810.2 724.4 404.9 466.7 524.8 578.4Financing Payments (12.3) 3.4 5.6 1.7 (1.0) (3.9)Cash Before Long-Term Use 797.9 727.8 410.5 468.5 523.7 574.4Net Plant Change (173.4) (67.0) (72.1) (75.3) (78.3) (81.5)FCFF 632.1 662.8 334.0 392.6 447.6 498.1Others (271.5) (167.1) (7.6) 14.8 9.3 10.3Cash Before Financing 352.9 493.7 330.8 408.0 454.7 503.2Short-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0Net Worth 360.2 0.0 0.0 0.0 0.0 0.0Grey Area 2.8 (9.0) (5.2) (3.5) (4.2) (4.7)Dividends (665.0) (496.1) (328.7) (396.0) (443.6) (491.1)Change in Cash 50.9 (11.5) (3.0) 8.6 6.9 7.4

Fact Sheet 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PROE 36.8% 21.1% 13.9% 16.5% 18.4% 20.1%ROS 55.5% 39.4% 27.8% 28.3% 28.2% 27.9%ROA 33.4% 19.3% 12.8% 15.2% 16.9% 18.4%ROIC 30.1% 25.1% 12.7% 15.3% 17.2% 18.9%Gross Margin 56.6% 55.4% 51.9% 51.6% 51.3% 50.8%EBITDA Margin 48.9% 44.4% 39.4% 39.6% 39.3% 38.8%ATO 0.6 0.5 0.5 0.5 0.6 0.7WI/ Sales 5.4% 5.6% 6.2% 6.3% 6.4% 6.5%ALEV 1.1 1.1 1.1 1.1 1.1 1.1Liabilities/Net worth 0.1 0.1 0.1 0.1 0.1 0.1Current Ratio 7.0 9.7 10.3 9.6 9.1 8.8

Per Share Ratios 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PShare Price 45.02 45.02 45.02 45.02 45.02 45.02Recent No. Of Shares '000 70,000 70,000 70,000 70,000 70,000 70,000 EPS 12.92 7.46 4.94 5.95 6.67 7.39DPS 9.50 6.70 4.44 5.35 5.99 6.63Revenues/Share 23.25 18.92 17.78 21.03 23.64 26.43BV/Share 35.1 35.4 35.7 36.0 36.3 36.7 Gross Cash Flow/Share 11.81 10.23 5.84 6.90 7.69 8.48FCFF/Share 9.03 9.47 4.77 5.61 6.39 7.12EBITDA/Share 11.37 8.40 7.01 8.32 9.29 10.26EV/Share 35.10 32.51 32.28 32.16 31.96 31.72

Multiples 2010 A 2011 P 2012 P 2013 P 2014 P 2015 PP/E 3.5 6.0 9.1 7.6 6.7 6.1Div Yield % 21.1% 14.9% 9.9% 11.9% 13.3% 14.7% P/Revenues 1.9 2.4 2.5 2.1 1.9 1.7EV/ Revenues 1.5 1.7 1.8 1.5 1.4 1.2 P/ COPAT 3.8 4.4 7.7 6.5 5.9 5.3EV/ COPAT 3.0 3.2 5.5 4.7 4.2 3.7P/ FCFF 5.0 4.8 9.4 8.0 7.0 6.3EV/ FCFF 3.9 3.4 6.8 5.7 5.0 4.5EV/ Ton 767.9 711.1 706.1 703.6 699.1 693.9P/ EBITDA 4.0 5.4 6.4 5.4 4.8 4.4EV/ EBITDA 3.1 3.9 4.6 3.9 3.4 3.1P/ BV 1.3 1.3 1.3 1.3 1.2 1.2

Contacts and Disclaimer:

CI CAPITAL RESEARCH

Mark Rorison | Group Director, Head of Research Mark.R [email protected]

Amr Hussein Elalfy, CFA | Co-Head of Research [email protected]

Mona Mansour | Co-Head of Research [email protected]

CI CAPITAL SECURITIES BROKERAGE

(EGYPT & UAE)

Khaled Abd El Rahman | MD & Global Head of Securities Brokerage [email protected]

DYNAMIC SECURITIES

Ahmed Roushdy | Managing Director

[email protected]

DISCLAIMER

The inform ation used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accu-rate. This information has not been independently veri fied and may be condensed or inc omplet e. CICR does not make any guarantee, representa-tion or warranty and accepts no res ponsibility or liability to the accuracy and completeness of such inform ation. Expression of opinion contained herein is based on certain assum ptions and with the use of speci fic financial techniques that reflec t the personal opinion of the authors of the com-mentary and is subject to change without notice. It is acknowledged that different assumptions can always be made and that there is a wide choice of techniques that can be adopted each of which can lead to a di fferent conclusion. Therefore, all that is stated herein is of an indicative and infor-mati ve nature as forward-looking statem ents, projections, and fair values quoted may not be realized. Accordingly, CICR does not take any re-sponsibility for decisions made on the basis on the content of this commentary. This commentary is made for the sole use of CICR’s customers and no part or excerpt of its content may be redistributed, reproduced or conveyed in any form, written or oral, to any third party without the prior written cons ent of CICR. This commentary does not constitute a solicitation or an offer to buy or sell securities.

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RATING SYSTEM In February 2009, CI Capital Research (CICR) launched a new rating system to gi ve analysts more freedom to be mark et responsi ve. This is to make one element of our research m ore dynamic, nam ely the advertising of target prices and recomm endations. W hat we did not change is our assessment of the Long Term Fair Value (LTFV), nor have we stopped our detailed industry and company research. W hat we did is changing the target price to trade in the balance of where a share should trade and where we think it will trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The target price, which is not necessarily the LTFV, is where the analyst, given all (qualitati ve as well as financial) i nform ation avail-able, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts, and perceptions. Recommendations: Our new rating system falls out from t he total return relating t o the share price performance to the target price, and including any distributions as may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable gi ven prevailing interest rates and risks. (Please see table below.) Recommendation structure: Change to Target Price

Strong BUY > 30% Strong Conviction BUY > 20% < 30% Hold > 10% < 20%

Underweight > 0% < 10% SELL < 0%

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