Positive outlook on the UAE cement sector. However, we recommend a “HOLD” on RAK Cement stock
Company Background
Global Investment House – Ras Al-Khaimah Cement Company - Equity Update research – Ras Al Khaimah Cement Company (RAKCC), Ras Al Khaimah, UAE, was incorporated as a public shareholding company in 1995. It started commercial production on April 1, 2000. It has a clinker capacity of 1.2mt and cement capacity of 1.1mt. The company’s plant is on the outskirts of Ras Al Khaimah city. It also enjoys excellent locational advantages, being close to the Mina Al Saqr port, which gives it cost advantages in case of both imports and exports. The company produces and markets two broad types of cement – ordinary Portland cement (OPC) and sulphate resistant Portland cement (SRC).
The company is currently listed in the Abu Dhabi Securities Market. The stock turnover of the company on the ADSM has been robust at 151% in the year to December 2005. The high/low prices of the stock over the last one year have been AED5.22/3.06 on the ADSM.
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Analysis of 3rd Quarter 2005 Results
Sales for RAKCC increased marginally by 0.4% y-o-y during the quarter to AED76.3mn, taking the total for the first three quarters up by 19.6% y-o-y to AED219.8mn. The cost of sales of AED44.5mn, on the other hand, increased by 20.6% y-o-y during 3Q2005, with the total for the first three quarters going up by 20.9% y-o-y to AED126.6mn. On the operating expenses side, the administrative expenses increased by 8.7% y-o-y during 3Q2005, with the total for the first three quarters going up by 6.5%. Similarly, the marketing expenses decreased by 5.0% y-o-y during 3Q2005, with the total for the first three quarters declining by 35.7%. This was due to lower sales commissions paid during the two periods. The finance costs too declined by 66.8% y-o-y in 3Q, and by 49.2% y-o-y during the first three quarters of the year. This was on account of the company re-paying a large part of the loan that it had taken from one of its parents – Union Cement Company – to re-pay an earlier medium-term loan taken from RAK Bank. The net profit of the company of AED29.5mn decreased by 18.5% y-o-y during 3Q2005, with the total for the first three quarters of AED83.9mn being higher by 21.0% y-o-y. The EPS of the company rose by 18.8% to AED0.19 in the first nine months of 2005, from AED0.16 in the first nine months of 2004.
The total assets of the company of AED639.0mn at the end of September 2005 were up 1.8% during year-to-date. While there was an increase of 17.4% in the trade accounts receivable & others (134 average receivable-days at the end of September 2005, up from 113 days at the end of December 2004), inventories increased by 25.1% (64 average inventory-days at the end of September 2005, down from 94 average inventory-days at the end of December 2004) during year-to-date. On the liabilities side, there was a rise in the trade payables & others of 11.1% year-to-date at the end of September 2005 (75 average payable-days at the end of September 2005, almost half of 145 average payable-days at the end of December 2004), and a year-to-date decline of 76.1% in the loans & borrowings to AED23.9mn at the end of September 2005. The paid-up share capital increased to AED440.0mn, thanks to a 10% bonus issue during YTD.
UAE Cement Sector Outlook
According to MEED Projects, projects currently under execution in the GCC, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Iran and Iraq are in excess of $697bn. Out of these, UAE is believed to account for about 32%, or $224bn worth of projects. Out of an amount of $294bn proposed to be invested in construction projects all across the GCC (over the next 3-4 years), UAE is believed to account for about 60%, or about $177bn. Assuming that all the investment projects valued at $177bn announced in UAE so far are implemented, we project a cement demand growth at a CAGR of over 25% in volume-terms during 2005-’09.
On the supply side, announcements have been made by various incumbent as well as new cement companies for expansion of existing capacities and/or setting up new capacities. New clinker capacities of about 10.9mt and cement capacities of about 16.9mt are believed to be coming up in the UAE in the coming 2-3 years – by way of expansions as well as greenfield projects.
Valuation & Recommendation
In our previous Research Report on RAKCC in October 2004, with which we had initiated coverage of the stock, we had arrived at a weighted average share value of AED3.21 per share, and had recommended a 'Buy' on the stock at the then prevailing price of AED2.60. The stock has since then had a good run at the stock markets, touching a high/low of AED5.22/AED2.65 over the 14 months since our Report was released, thereby, justifying our 'Buy' recommendation.
The positive news flows favorably impacting the UAE cement sector, as well as the excellent YTD performance of GCC have prompted us to revisit our earlier projections. We have accordingly revised our projections for sales, gross profit, operating profit and net profit for 2005 to AED293.1mn, AED145.2mn, AED115.0mn and AED111.7mn respectively, to better reflect the company's first 9 months results this year.
Besides the changes in the projections, we have also made a change in the risk-free rate and cost of debt from that assumed in our earlier Report. The combination of the revised financial projections and WACC has led to an upward revision in the DCF value of RAKCC to AED3.91 now, from AED3.40 in the October 2004 Report. Based on the Sector P/E multiple of 13.9x (up from 10.7x at the time of the earlier Report), the peer valuation too has increased now to AED3.53 from AED2.43 earlier. The combined effect of these two has led to an upward revision in the weighted average share value of RAKCC, which is now AED3.83, as against AED3.21 in our October 2004 Report.
At the current market price of AED4.08 on the ADSM, the share is quoting at a premium of 6.4% to its intrinsic value. The scrip has already gained 50.9% since the release of our October 2004 Report and 27.0% over the last one year on the ADSM. We, therefore, downgrade the RAKCC stock to 'Hold'.
