Gulf Cement outlook remains bouyant

Ras Al-Khaimah, UAE, was incorporated as a public shareholding company in 1977. It has a current clinker capacity of 1.3Mt and cement capacity of 2.5Mt. The company mainly produces and markets three different types of cement - ordinary Portland cement (OPC), sulphate resistant portland cement (SRC) and a mix of the two. A small quantity of slag too is produced, which is sold off to slag cement-makers.
The company is currently listed in the Abu Dhabi Securities Market (ADSM) and Kuwait Stock Exchange (KSE). The GCC stock closed at KD0.410/AED5.21 at the end of trading on October 2, 2006. 

The stock, thus, is currently trading at 6.4x its 2005 earnings and 18.3x 2006 (E) earnings. The stock saw high turnover of about 148 per cent at the ADSM in 2005. The year 2006 so far has seen relatively more sedate turnover of the stock (about 53 per cent), primarily on account of the number of paid-up shares of the company shooting up, thanks to the 70 per cent bonus declared by the company in 2005.

UAE Cement Sector

The total production of clinker and cement in UAE in 2005 is estimated at 8.25mt and 12.38mt respectively. The seven listed companies had an estimated total production of clinker and cement of 7.44Mt (90.1 per cent share of total) and 10.33mt (83.4 per cent share) respectively, the rest belonging to the four private companies.

The total sale of cement in UAE in 2005 is estimated at 14.42mt. The seven listed companies collectively sold an estimated 11.57mt (80.2 per cent share of total), the rest coming from the four private companies. In value terms, the combined revenues of the seven listed companies were AED2.86bn in 2005, up 33.9 per cent over 2004, with net profits of AED2.05bn, up 131.7 per cent over 2004. Net profits in the case of most of the companies shot up on the back of realised/unrealised gains and dividend income from their investment portfolios.

Outlook
The strong upward trend in construction activity witnessed in UAE in 2004 and 2005 is expected to continue in the near-term due to expectations of sustained high oil prices and abundant liquidity. This liquidity is expected to continue to be directed to development of massive real estate and infrastructure  projects. In addition, UAE’s strong population growth requires massive real estate and infrastructure investments.

The construction projects in UAE are a good mix of residential, commercial, retail, multi-use and hospitality projects in Dubai, Abu Dhabi, and in other emirates. Projects worth an estimated $312bn are said to be at various stages of development at present.

However, a general slowdown in real estate activity due to an anticipated correction in the Dubai property market could adversely impact new projects, going forward, including the possible delay or scrapping altogether of some of the proposed projects. But, the construction sector is at different stages of maturity in the different emirates at present. While the Dubai market could be approaching its peak, the Abu Dhabi and Ras Al-Khaimah markets have just about started picking up. Thus, the pipeline of projects lined-up in UAE should indeed see continued buzz in the construction market and, thereby, in the cement market, in the near-medium-term.

First Half of 2006
The company had revenue of AED347.4mn in the first six months of 2006, up 17.1 per cent y-o-y, on the back of higher volumes as well as realisations. The total cost of operations of AED211.6mn was up 2.2 per cent y-o-y. The company benefited from using coal as the main fuel, leading to a steep lowering of its cost of production during the period. Primarily on the back of this, gross profit for the period swelled up by 51.7 per cent y-o-y to AED135.8mn, with a gross profit margin of 39.1 per cent, vis-a-vis 30.2 per cent in 1H 2005. General and administrative expenses, including staff costs, during the period of AED3.8mn were lower by 31.2 per cent y-o-y, while the selling expenses of AED0.5mn were less than half that in the corresponding period of the previous year. This caused the operating profit to grow by 57.3 per cent y-o-y to AED132.3mn, with an operating profit margin of 38.1 per cent, vis-à-vis 28.3 per cent in 1H 2005.

There was a substantial decrease in the realised/unrealised gains from investments during the period, with the total loss net of dividend and interest income under this head of AED119.2mn being 176.5 per cent lower than the total gain of AED155.9mn during the 1H of 2005. Finance charges of AED3.5mn were up 61.6 per cent y-o-y on the back of higher outstanding debt at the end of the period. The company’s net profit during the period of AED21.5mn was down 90.7 y-o-y, with a net profit margin of 6.2 per cent, vis-a-vis 77.9 per cent in 1H 2005, mainly on account of losses from the investments portfolio.

The total assets of the company of AED1.59bn at the end of June 2006 were up 3.1 per cent from the end of 2005. Trade & other receivables rose by 13.7 per cent during the period. Investments held for trading were higher by 4.7 per cent, while those available for sale were down 36.3 per cent during the period. Net fixed assets reached AED567.2mn at the end of the period, up 42.0 per cent, primarily on the back of work-in-progress on the company’s new clinker line. On the liabilities side, bank loans (current & non-current) were AED205.2mn, up by 85.0 per cent at the end of the period. Trade & other payables of AED63.1mn were down 36.3 per cent during the period. The period also saw the share capital of the company rising to AED620.9mn, with the addition of 70% stock bonus declared in the previous year.