Ras Al Khaimah Cement Company (RAKCC), Ras Al Khaimah, UAE, was incorporated as a public shareholding company in 1995. It started commercial production on <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />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 (ADSM), under the ticker ‘RKCC.AD’. The RAKCC stock closed at AED2.34 on September 26, 2006, thus, currently trading at 9.5x its 2005 earnings and 8.9x 2006 (E) earnings. The stock saw high turnover of about 172 per cent at the ADSM in 2005. The year 2006 so far has seen a relatively more sedate turnover of about 76 per cent, primarily on the back of dull sentiments prevailing in the stock markets.
UAE Cement Sector Overview
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 realized/unrealized 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 US$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.
Financial Performance in the First Half of 2006
The company had revenue of AED167.6mn in the first six months of 2006, up 16.8 per cent y-o-y, on the back of higher volumes as well as realizations. The total cost of operations of AED93.3mn was up 13.6 per cent y-o-y. Gross profit for the period was AED74.3mn, up 21.1 per cent y-o-y, with a gross profit margin of 44.3 per cent, vis-à-vis 42.8 per cent in 1H 2005. General and administrative expenses, including staff costs, during the period of AED5.8mn were higher by 45.8 per cent y-o-y, while the selling expenses of AED0.5mn were higher by 3.3 per cent y-o-y. This caused the operating profit to grow by 20.9 per cent y-o-y to AED69.1mn, with an operating profit margin of 41.2 per cent, vis-à-vis 39.8 per cent in 1H 2005. Finance charges of AED0.09mn were down 94.1 per cent y-o-y on the back of lower outstanding debt at the end of the period. The company’s net profit during the period of AED69.0mn was up 27.0 per cent y-o-y, with a net profit margin of 41.2 per cent, vis-à-vis 37.9 per cent in 1H 2005.
The total assets of the company of AED736.4mn at the end of June 2006 were up 12.3 per cent from the end of 2005. Trade & other receivables rose by 19.8 per cent during the period. Inventories were higher by 22.4 per cent. Net fixed assets reached AED475.6mn at the end of the period, down 1.8 per cent. On the liabilities side, short-term borrowings at the end of the period were AED10.4mn, up by 188.9 per cent from the end of 2005. Trade & other payables of AED38.6mn were up 17.0 per cent during the period. The period also saw the share capital of the company rising to AED484mn, with the addition of 10% stock bonus declared for the previous year.
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Valuation & Recommendation
DCF Valuation
We have carried out a Discounted Cash Flow (DCF) valuation of RAKCC. Based on our future earnings projections, the DCF value of RAKCC is AED3.29 per share.
Relative Valuation
The weighted average forward P/E for the peer set is 10.8x. On the basis of this and RAKCC’s projected 2006 earnings, the company’s stock valuation comes to AED2.85 per share.
Weighted Average Share Value
The value of RAKCC’s shares derived from the weighted average of the DCF and relative valuation methods is AED3.20 per share. The stock closed at AED2.34 on the ADSM at the end of trading on September 26, 2006, which implies that the weighted average value of RAKCC’s shares has an upside of 36.7 per cent from the share’s current market price. At their current price, RAKCC’s shares are trading at a P/E multiple of 9.5x the 2005 earnings, and forward multiples of 8.9x and 8.6x the projected 2006 and 2007 earnings respectively. We, therefore, recommend a ‘Buy’ on the RAKCC stock, upgrading it from our earlier 'Hold' recommendation, with a medium-term perspective.
The upgrade at a lower intrinsic value (AED3.20 now vs. AED3.83 in our December 2005 Update) is primarily due to the run-down in the stock price of about 35 per cent since that Update.
