Lafarge Cement Jordan Equity Report - Awraq · PDF fileLafarge Cement Jordan Equity Report ......

Lafarge Cement Jordan Equity Report

December 13, 2010

Serene Zawaydeh

Head of Research

Research Division

Awraq Investments

[email protected]

Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110 Jordan

mailto:[email protected]

Lafarge Cement Jordan

Tel: 962-6-5503800 Fax: 962-6-4403801 P. O. Box 925102 Amman 11110

Jordan

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Table of Contents Executive Summary ............................................................................................................................................... 4

Ownership Structure ............................................................................................................................................. 4

Regional Presence of Lafarge Group ..................................................................................................................... 4

Competition in Jordan’s Cement Market .............................................................................................................. 5

Lafarge Cement Jordan’s Financial Highlights ...................................................................................................... 7

Stock Price ........................................................................................................................................................... 19

Valuation ............................................................................................................................................................. 21

Appendix ............................................................................................................................................................. 23

Disclaimer............................................................................................................................................................ 24

Table of Figures Figure 1: Ownership Structure (Dec 2010) ........................................................................................................... 4

Figure 2: Summary of Indicators ........................................................................................................................... 4

Figure 3: Cement Producers in Jordan .................................................................................................................. 5

Figure 4: Production, Cost and Prices ................................................................................................................... 7

Figure 5: Revenues, Net Profit, and Net Profit Margin ......................................................................................... 8

Figure 6: Revenues Growth Figure 7: Net Profit Growth% ............................................................................ 8

Figure 8: Quarterly Revenues and Net Profit ........................................................................................................ 9

Figure 9: Quarterly Profit as % of Annual Profit (2007-2009) ............................................................................... 9

Figure 10: Local and Export Sales ........................................................................................................................ 10

Figure 11: Cost of Sales ....................................................................................................................................... 10

Figure 12: Quarterly Revenues and Cost of Sales ............................................................................................... 11

Figure 13: Gross Profit ........................................................................................................................................ 11

Figure 14: Provision for Employees’ Termination Benefits Figure 15: Headcount ........................................ 12

Figure 16: Sales and Marketing Expenses ........................................................................................................... 12

Figure 17: Depreciation and Amortization.......................................................................................................... 13

Figure 18: Earnings per Share and P/E Ratio ...................................................................................................... 13

Figure 19: Assets, Liabilities and Shareholders’ Equity ....................................................................................... 14

Figure 20: Book Value per Share and Return on Equity ...................................................................................... 14

Figure 21: Liquidity Ratios ................................................................................................................................... 15

Figure 22: Working Capital and Working Capital Investments ........................................................................... 15

Figure 23: Inventory ............................................................................................................................................ 16

Figure 24: Cash and Short Term Deposits ........................................................................................................... 16

Figure 25: Interest Income .................................................................................................................................. 17

Figure 26: Cash Flow from Operating, Investing and Financing Activities .......................................................... 17

Figure 27: Quarterly Cash Flow from Operations ............................................................................................... 18

Figure 28: Capital Expenditure ............................................................................................................................ 18



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Figure 29: Dividends............................................................................................................................................ 19

Figure 30: JOCM versus Lafarge Group Stock Price Figure 31: JOCM Annual Low and High Stock Price ........ 19

Figure 32: Profit Margin for Cement Producers ................................................................................................. 20

Figure 33: Valuation Figure 34: Sensitivity to Beta and Growth Rates ............................................... 21

Figure 35: Sensitivity of Valuation to Applied Weights ...................................................................................... 21

Appendix Figure 36: Cement Producers’ Stock Prices (2002-2010) .................................................................. 23



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Figure 1: Ownership Structure (Dec 2010)

Source: Securities Depository Center

Figure 2: Summary of Indicators

Ticker JOCM JR

(Bloomberg) JOCM.AM (Reuters)

52Wk Low 52 Wk H Close Target Price 4.63 JD 7.73 JD 4.61

JD 4.19 11/4/2010 4/13/2010 13/12/2010

2008 2009 2010 E

# of Shares (m) 60.44 60.44 60.44

Stock Price (JD) 6.45 7.1 4.56

Market Capitalization

JD 390 m JD 429 m JD 275 m

US$ 277 m US$ 305 m US$ 195m

Revenues (JD m) 321.1 284.8 170.9

Earnings (JD m) 49.29 45.71 19.99

EPS (JD) 0.82 0.76 0.33

P/E 9.48 5.65 14.00

Sh. Equity (JD m) 183.25 188.94 162.89

BV per share (JD) 3.03 3.13 2.69

P/BV 2.13 2.27 1.72

Dividends (JD m) 39.29 39.29 39.29

Div. per Share (JD) 0.65 0.65 0.65

Dividend Yield 10% 9% 14%

Source: Company’s Financials, Awraq Investments

Lafarge Group50.28%

Social Security21.85%

Mayloud Shoaibi 10.31%

Free Float

17.57%

Executive Summary Lafarge Cement Jordan (Ticker: JOCM) had a 50 year concession agreement. The company’s monopoly period ended in 2002, and merchants were given the right to import cement. Actual competition started when Saudi companies started producing, importing and selling cement in the local market. Lafarge Cement Jordan’s sales and net profit declined in the first 9 months of 2010 as Saudi competitors acquired part of its market share. The company’s stock price dropped and is back to 2003 levels. It closed at JD 4.61 on December 13, 2010, compared to JD 4.63 on May 13, 2003. Lafarge Cement Jordan’s stock price might drop further, with increased pressure from competition. Saudi cement producers have higher net profit margin than Lafarge Cement Jordan due to lower energy costs, which can enable them to reduce their prices to gain market share. Awraq Investments’ valuation of Lafarge Cement Jordan yielded JD 4.19 per share, 9% below the close price on December 13, 2010 of JD 4.61. Based on this valuation, our recommendation for Lafarge Cement Jordan is Hold.

Ownership Structure The government had established the cement factory in Fuhais in 1951. In 1982, the government established South Cement in Rashadiya for export purposes only. In 1984, the two companies were merged, following South Cement’s poor performance. Fuhais cement’s stock price was valued at JD 10 compared to JD 1 for South cement’s stock price. In 1998, the government sold 49% of its share in Jordan Cement to the French producer, Lafarge Group. Subsequently, Lafarge increased its stake to 50.275% controlling share and maintained voting rights. Lafarge Cement Jordan officially launched its new logo and identity in May 2009. Its trade name and logo became the same as that of Lafarge Group. Lafarge Cement Jordan currently has a paid up capital of JD 60.444 million. In addition to Lafarge Group, the Social Security owns 21.87% of the company; the Moroccan investor, Mayloud Shoaiby owns 10.31%, while free float is 17.57%.

Regional Presence of Lafarge Group Lafarge Group, established in 1833, is a global cement producer. It is ranked first in the Cement business, third in Aggregate and Concrete, third in Gypsum. The group’s workforce exceeded 90,000 employees in 79 countries in 2009. Lafarge expanded its presence in Arab countries through acquisitions. It acquired Orascom Cement in 2008, thereby expanding its presence in the region. In addition to its presence in Jordan, Lafarge currently operates in Egypt, Saudi Arabia, Syria, Iraq, UAE, Oman, Qatar, Turkey and Cyprus. It has 9 cement production sites in the Middle East, 9 aggregates quarries; 61 ready mix concrete plants; and 5 Gypsum production sites.

Target Price: JD 4.19 Recommendation: HOLD



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Competition in Jordan’s Cement Market The profitable operation of Lafarge Cement Jordan attracted competition into the market. The company’s net profit had reached JD 67 million in 2005, and stood at JD 45 million in 2009. Prolonged licensing procedures and a ban on cement exports in Saudi Arabia delayed competition in the market till the second half of 2009. Two Saudi companies had applied for licenses to produce cement in 2006 and 2007, but the licensing procedure took over two years. Furthermore, the Saudi government lifted a year-long ban on cement exports in May 2009. This allowed Saudi cement producers to export part of their surplus production provided they meet domestic demand; set a price of SAR200 (US$ 53) per ton in Saudi, and maintain a portion of production as inventory. The Saudi cement producers expanded outside their local market which is highly competitive. There are 12 cement producers including 8 publicly listed companies (1). Supply of cement in Saudi exceeds demand. In 2009, excess cement capacity stood at 11 million tons. Local cement sales in Saudi Arabia reached 22.1 million tons in the first six months of 2010 versus 18.9 million tons a year earlier, while exports surged 37.2% to 678,000 tons. With the introduction of the Saudi companies in Jordan, supply of Cement in Jordan exceeds demand. The production capacity is around 11 million tons in 2010 and 2011, while estimated demand in the market is 5-6 million tons. The construction of Aqaba’s US$ 10 billion Marsa Zayed project is expected to increase demand. Some Saudi cement producers operating in Jordan will be exporting their production to Iraq, where demand exceeds supply. According the Ministry of Industry and Trade, the production capacity for Cement in Iraq is around 7 million tons per year, while demand is around 14 million ton per year. The cement production process starts with mining, then producing clinker, which requires heating at very high temperatures, with high fuel consumption. In Saudi Arabia, the low cost of energy and using coal instead of fuel, reduces the production cost, and provides cement producers high profit margins. Cement Producers in Jordan Two Saudi cement producers started production in the second half of 2010, namely Northern Cement and Al Rajihi Cement. Competition will intensify further as the Ministry of Industry and Trade reports there are 6 licensed Saudi cement producers as indicated in the following figure. Saudi companies’ investment in Jordan’s cement market exceeds JD 1.04 billion. The biggest investment is JD 300 million, by Thab Investment for Building Materials, while the total investment for the two companies that had started production in 2009, amounts to JD 198.7 million. Figure 3: Cement Producers in Jordan

Factory Investment (JD million)

Production Capacity (million Tons) Sales Notes

Lafarge Jordan Cement

4.9 Local Northern Cement 48.7 1 Local Started production in 2009

Al Rajihi Cement 150 2 Export Started production in 2009

Qatrana Cement 240.5 2 Export Started production in Oct 2010

Modern Jordanian for Cement and Mining 161 1.2 Test production, end 2010

Saudi Jordanian Co. for Building and Construction Materials 140 NA Building factory, 2010

Thab Investment for Building Materials 300 3 NA

Total Capacity 1040.2 14.1

Source: Ministry of Industry and Trade (1) http://www.zawya.com/Story.cfm/sidZW20100725000089/Competition,%20Export%20Ban%20To%20Take%20Toll%20On%20Saudi%20Cement%20Firms/



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Northern Cement (Shamaliya) is the primary competitor for Lafarge Cement Jordan in the local market. It started production in the second half of 2009, and its production capacity is 1 million ton per year. The company imports bulk Clinker from Saudi Arabia, creating unfair competition, as stated by Lafarge Cement Jordan. It uses coal, and not fuel oil when producing clinker in Saudi Arabia. Its production cost per ton is estimated at around JD 25 per ton, compared to around JD 500 per ton for Lafarge Cement Jordan. The company is also exempted from taxes for 10 years, as per the investment promotion incentives. Northern Cement produces dark Pozzolana cement, which is darker than the cement produced by Lafarge Cement Jordan, which is due to the nature of desert mountains in Saudi Arabia. This might attract contractors who might prefer darker cement. It is noteworthy that in October 2010, Saudi-based Rajihi Cement Company signed a US$30 million accord with Shamaliya Cement company to provide it with 60% of its needs of clinker. Al Rajihi Cement Company has a total investment of JD 150 million. It started production by end of 2009 with a production capacity 2 million ton per year. Its production is mainly for export purposes. Reportedly, the company faced challenges and had failing test, due to the high concentration of materials that negatively affect the strength of cement, in lands acquired for mining. Qatrana Cement is a subsidiary of Saudi’s publicly listed cement producer, Arabian Cement Company. Its investment amounts to JD 240.5 million and is the second highest investment following Thab. It has a daily production capacity of around 5000 tons, and an annual production capacity of 2 million tons. It will be exporting its production outside Jordan. Arab Company for White Cement Industry The Arab Company for White Cement Industry was established in 1982 with paid up capital JD 10 million. The Syrian Jordanian public shareholding company started production of white Portland cement in 1985. Its shareholders include the following:

Syrian Jordanian Company for Industry (Jordan) Syrian National Cement Corporation (Syria) Jordan Investment Corporation (Jordan) Social Security Corporation (Jordan)

The company’s production capacity is 120,000 ton per year, and its sales range between 10,000 and 80,000 tons annually. The company exports its products to Syria, Saudi Arabia, Yemen and Iraq. It is the only producer of White Cement in Jordan. It faces competition from Egypt, but not Saudi producers and Lafarge Cement Jordan, which produce black cement.



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Lafarge Cement Jordan’s Financial Highlights Production, Cost and Prices Lafarge Cement Jordan has two plants in Fuhais and Rashadiyeh and an export terminal in Aqaba. The location of the plant in Fuhais creates an advantage compared to other producers. The company starts the production process with mining, then producing clinker which requires high temperatures. Cost of sales is primarily cost of fuel, which is bought from Jordan Petroleum Refinery Company. 2008 had the highest cost of sales, due to the increase in oil prices. The company seeks alternative sources for energy to reduce cost. The business cycle for the cement producers is short. It is around 45 days from mining to sales. The company sells all its production without leaving quantities in stock. The company has a production capacity of 4.9 million tons. Production covered local demand between 2001 and 2005. It was increased from 4.05 million in 2005 to reach the highest production level of 4.28 million tons in 2008, along with a boom in the real estate market. The company adjusts its production based on demand. Along with a decline in real estate activity in 2009, and competition in the market, it reduced its production to 3.83 million tons in 2009. Figure 4: Production, Cost and Prices

The company adjusts cement prices along with changes in fuel oil prices, regardless of the direction, in line with the agreement with the Ministry of Industry and Trade. The company has a leading market share, and other cement producers follow similar prices. Lafarge Cement Jordan’s average price increased from JD 64 per ton in 2007 to JD 75 per ton in 2008, and remained at JD 74 per ton in 2009. Increased competition and supply could ignite a price war, driving prices down, and reducing revenues. However, due to fixed costs, the average cost per ton would remain high even as production declines. Revenues and Net Profit Lafarge Cement Jordan’s revenues increased at a Compound Annual Growth Rate (CAGR) of 18% between 2003 and 2008, but dropped by 11% in 2009. Revenues had increased from JD 139.7 million in 2003 and peaked in 2008 reaching JD 321 million, then slipped by 11% in 2009 to reach JD 284.8 million in 2009 along with competition in the market. In the first 9 months of 2010, revenues amounted to JD 133 million, representing 42% decline over revenues in first 9 months of 2009 which stood at JD 230 million. The company had double digit revenues growth rates between 2004 and 2008, with 2007 being the only year with 8% growth rate.

21 24 28 36 41 54 5140 43 51 59 64 75 74

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Note: Prices per ton are excluding tax Source: Lafarge Cement Jordan



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Net profit was highest in 2005 as it reached JD 67 million. Although Lafarge Group acquired the company in 1998, it was not producing at full capacity prior to 2005. The company increased production in 2005, and this was accompanied with an increase in revenues and net profit. However, with increasing energy cost, net profit declined by 31% between 2005 and 2009 to reach JD 46 million. The competition had a bigger effect on net profit in 2010, as it slipped by 75% in the first 9 months of 2010 to reach JD 13 million, compared to JD 54 million in the first 9 months of 2009. Figure 5: Revenues, Net Profit, and Net Profit Margin

Source: Lafarge Cement Jordan

Figure 6: Revenues Growth Figure 7: Net Profit Growth%


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Revenues Net Profit Net Profit Margin

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An overview of the quarterly results for Lafarge Cement Jordan between 2007 and 2010 indicate the importance of the second quarter. Revenues were highest in Q2 2008, having reached JD 96 million. Net profit was highest in Q2 2009, as it reached JD 25.7 million, with a net profit margin of 28%. In Q2 2010, net profit amounted to JD 52 million, with a net profit margin of 14%. The second and third quarters generate the majority of the company’s annual profit. In 2007, Q2 and Q3 generated 70% of total profit for the year; compared to 62% in 2008; while Q2 and Q3 generated 98% of 2009 profit. The combined profit for Q2 and Q3 2010 amounted to JD 11 million compared to JD 44.8 million in 2009. The net profit for the first three quarters of 2010 amounted to JD 13.24 million, 75% lower than the net profit for the first three quarters of 2009, which stood at JD 53.7 million. The fourth quarter of 2009 recorded a net loss of JD 8 million versus net profit of JD 7.7 million in 2008. Figure 8: Quarterly Revenues and Net Profit

Figure 9: Quarterly Profit as % of Annual Profit (2007-2009)

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Local and Export Sales Local sales generated 98% of total sales in 2009. The company used to export to Iraq, Sudan and Eritria. However, Lafarge Group’s presence in Egypt enables it to export to Sudan from Egypt’s operation. The group is also present in Iraq. Therefore, Lafarge Cement Jordan will not be exporting production, and export revenues will be eliminated. Figure 10: Local and Export Sales


Cost of Sales In 2006, the government liberalized the prices of petroleum products. This was accompanied by an increase in cost of fuel for Lafarge Cement Jordan. Cost of sales was highest in 2008, as it reached JD 231 million, along with the increase in fuel prices and accounted for 72% of total revenues. In the first 9 months of 2010, revenues declined, while fixed cost remained high, increasing cost of sales to 80% of revenues. In the first two quarters of 2010, the cost of sales accounted for 82% of revenues, compared to 56% back in 2005. Figure 11: Cost of Sales


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Figure 12: Quarterly Revenues and Cost of Sales


Gross Profit The company’s gross profit was on average JD 90.8 million between 2005 and 2009. The gross profit margin declined from 44% in 2005 to 32% in 2009. In the first 9 months of 2010, the gross profit declined to JD 27 million, with a profit margin of 20%. The gross profit for the year 2010 is therefore expected below the average for the past 5 years. Figure 13: Gross Profit

Restructuring Fees When Lafarge Group acquired the company in 1998, the company had 2800 employees. The company had started the first phase of restructuring the company in 2001. The second phase started in 2007. On September 24, 2006, Lafarge Cement Jordan signed an agreement with the Union of Construction Workers, to compensate employees for voluntary termination of service. The agreement was extended to another year in November 2009. The company estimates the cost of termination of services at around JD 65,000 per employee.

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The total amount of provisions for employees’ termination benefits reached JD 54 million between 2006 and 2009. Headcount dropped from 1453 employees in 2006 to 1028 in 2009. It is planned to decline by another 200 in 2010 to reach 828 employees. Figure 14: Provision for Employees’ Termination Benefits Figure 15: Headcount

Source: Lafarge Cement Jordan Source: Lafarge Cement Jordan

Sales and Marketing Expenses Sales and marketing expenses declined from JD 13.7 million in 2003 to JD 4.2 million, due to reclassification of expenses. The cost of cement bags was changed from Sales and Marketing expenses, into Cost of Sales. Figure 16: Sales and Marketing Expenses


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Fuhais PlantRashadya Plant - TafilaHeadcount



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Depreciation and Amortization In 2005, the company revalued its assets, and changed the depreciation method to be in line with Lafarge Group. Depreciation for machines that was previously used was over 30 years, while Lafarge Group used depreciation over 12 years. Depreciation and amortization amounted to JD 10.3 million in 2005, and declined to JD 8.3 million in 2006. Figure 17: Depreciation and Amortization


Earnings per Share Earnings per share were highest in 2005, having reached JD 1.11. The P/E ratio was below 15 between 2003 and 2009, and stood at 7.9 in 2008. The decline in profit in the first 9 months of 2010 led to a decline in earnings per share, and the P/E ratio retreated to 52.7 based on the trailing 12 months till September 2010, with JD 0.09 Earnings per Share. Figure 18: Earnings per Share and P/E Ratio

Source: Lafarge Cement Jordan, Bloomberg

9.2 10.0 10.3 8.3 8.1 11.0 13.6 10.2

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Balance Sheet Highlights Lafarge Cement Jordan’s total assets amounted to JD 235 million at the end of September 2010, down from JD 296 million at the end of September 2009. Shareholders’ equity accounted for 69% of total assets at the end of Q3 2010, and stood at JD 163 million, down from 189 million at the end of 2009. Total liabilities accounted for 31% of assets at the end of September 2010 and stood at JD 72 million. Liabilities are mainly accounts payable due to suppliers, including Jordan Petroleum Refinery Company and National Electric Power Company. Long term and short term loans were only JD 2.7 million at the end of September 2010. The company’s mining lands in Fuhais were bought from the government in the fifties. They are valued at historical cost, and therefore are undervalued. Figure 19: Assets, Liabilities and Shareholders’ Equity


Book Value and Return on Equity Book value per share was JD 2.7 at the end of Q3 2010, down from JD 3.1 at the end of 2009. The company’s return on equity was above 20% between 2003 and 2009. However, ROE dropped to 3% based on the T12M profit for the period ended September 2010.

Figure 20: Book Value per Share and Return on Equity

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P a g e | 1 5

Liquidity Ratios The company maintained a current ratio above 1. Current assets were 1.4 times current liabilities at the end of September 2010. The quick ratio, however, dropped to 0.49 at the end of September 2010 versus 0.94 at the end o 2009. Figure 21: Liquidity Ratios


Working Capital The company has positive working capital, as current assets exceed current liabilities. However, excluding cash from current assets, results in negative working capital investments. This is due to inventory and spare parts. 70% of Inventory consists of imported expensive spare parts needed for machinery. For example, the cost of each gear box is around JD 600,000. The company has high accounts payable which increases the current liabilities. It was able to negotiate better terms with suppliers, and increased days payable from 30 days in 2008 to 60 days in 2009. Figure 22: Working Capital and Working Capital Investments

1.84

3.26 3.05

1.69

1.31 1.34 1.47 1.40

1.06

2.28 2.23

0.97 0.74 0.62

0.94

0.49 -

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2003 2004 2005 2006 2007 2008 2009 Sep-10

Current Ratio Quick Ratio


25

70 90

42 25 25

37 19

3 8 2

(10)(26)

(7)(23)

12

(50)

-

50

100

2003 2004 2005 2006 2007 2008 2009 Sept 2010

JD m

illio

n

Current Assets - Current Liabilities

(Current Assets - Cash) -(Current Liabilities - Interest bearing Debt)



Jordan

P a g e | 1 6

Figure 23: Inventory

Cash and Short Term Deposits The company’s cash and short term deposits had reached JD 88 million at the end of 2005. Cash and short term deposits dropped from JD 61 million at the end of 2009, to JD 8 million at the end of September 2010. The deposits accounted for 12% of current assets at the end of Q3 2010 versus 47% at the end of Q3 2009, and had accounted for 53% of current assets at the end of 2009. Figure 24: Cash and Short Term Deposits


Finance revenues amounted to JD 1.42 million at the end of 2009, compared to JD 2.47 million in 2006. This decline accompanied a decline in interest rates. The company is not allowed to have cash deposits for longer than 1 month, and all cash deposits are in Jordanian Dinar.

22

62

88

51 51

34

61 53

8

40%

61%65%

50% 49%

34%

53%47%

12%

0%

10%

20%

30%

40%

50%

60%

70%

-

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 Sept-09Sept-10

JD m

illio

n

Cash and Short Term Deposits Cash & Short Term Deposits / Current Assets


23 30 36 44 46 54 42 43

42%

30%27%

43% 44%

54%

36%

65%

20%

30%

40%

50%

60%

70%

-

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 Sept 2010

JD m

illio

n

Inventory and Spare Parts Inventory and Spare Parts/ Current Assets



Jordan

P a g e | 1 7

Figure 25: Interest Income


Cash Flow The company had positive cash flow from operations between 2003 and 2009. In the first 9 months of 2010, it recorded negative cash flow from operations of JD 12 million, compared to positive cash flow from operations amounting to JD 63 million in the first 9 months of 2009. Cash flow from financing activities had reached JD 91 million in 2006 and stood at JD 41 at the end of 2009. Figure 26: Cash Flow from Operating, Investing and Financing Activities


The following figure provides the quarterly cash flow from operations between 2007 and 2010. Lafarge Cement Jordan was able to maintain positive cash flow from operations throughout 2009, with the second quarter of the year recording JD 51.5 million operating cash flow. In 2010, the company had negative cash flow from operations in the first quarter and the third quarter, having reached negative JD 18 million and JD 7.3 million respectively.

1.02 1.73 2.47 1.96 1.14 1.42

1.7%2.0%

4.8%

3.8%3.3%

2.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-

1

1

2

2

3

3

2004 2005 2006 2007 2008 2009

JD m

illio

nInterest Income Interest Income / Cash and Short Term Deposits

54 59

79 71 76

45

76 63

(12)

(7) (7

)

(15

)

(16

)

(38

) (23

) (8)

(4)

(0.7

)

(32

) (12

)

(38

)

(91

)

(39

)

(38

)

(41

)

(40

)

(40

)

(100)

(50)

-

50

100

2003 2004 2005 2006 2007 2008 2009 Sep-09 Sep-10

JD m

illio

n

Operating Investing Financing



Jordan

P a g e | 1 8

Figure 27: Quarterly Cash Flow from Operations


Capex In 2007, Lafarge Cement Jordan increased its produciton capacity to 4.9 million tons, compared to 4.2 million tons in 2005. This required added Capital Expenditure which reached JD 37.6 million in 2007. Capex accounted for 15% of revenues in 2007, compared to 7% in 2006. It declined from JD 15 million in 2008 to JD 9.5 million in 2009, and stood at JD 1.5 million in the first 9 months of 2010 versus JD 5.5 million in the first 9 months of 2009. On July 31, 2008, Lafarge Cement Jordan acquired 51% of Al Aloul Group, which consists of four limited liabiliy companies specialized in producing ready mix concrete. This added JD 64 thousand in profit the same year. A two year project entitled “Treasury project” was launched in 2009 with the objective of cutting costs and increasing liquidity. The company is working on improving operational efficiency, reducing maintenance costs, using alternative resources, in addition to reducing headcount. Capex might increase by JD 11 million in 2011, to be accompanied with JD 5 million reduction in cost. Figure 28: Capital Expenditure


12.9

27.4 25.3

10.1 12.7 14.6

(3.1)

20.7

8.6

51.5

3.3 12.3

(18.0)

13.1

(7.3)

(30)

(20)

(10)

-

10

20

30

40

50

60


JD m

illio

nCash Flow from Operations

8.7 7.1 15.5 16.5 37.6 15.0 9.5 1.5

6%4%

8% 7%

15%

5% 3%1%

0%2%4%6%8%10%12%14%16%

-5

10 15 20 25 30 35 40

2003 2004 2005 2006 2007 2008 2009 Sept 2010

JD m

illio

n

CAPEX CAPEX/ Revenues



Jordan

P a g e | 1 9

Dividends Lafarge Cement Jordan maintained a dividend distribution policy, and distributed JD 0.65 per share between 2006 and 2009, which amounted to JD 39.3 million annually. The company distributed JD 1.5 per share based on 2005 profit, amounting to JD 90.7 million, thereby increasing the dividend yield to 12.6%. The company might distribute lower dividends in 2011 due to lower profit. Retained earnings declined from JD 89 million at the end of 2009, to JD 63 million at the end of September 2010. Figure 29: Dividends


Stock Price Lafarge Cement Jordan’s stock price was highest in 2006 having reached JD 14.67. Although the company recorded the highest sales and net profit in 2008, the stock lost 58% of its value, dropping from JD 12.67 on March 16, 2008 to JD 5.32 on November 24, 2008, which accompanied the drop in Amman Stock Exchange Index following the global financial downturn. The stock had started sliding in July 2008, along with the increase in oil prices and costs. Despite competition in the second half of 2009, the stock price ranged between JD 6.12 and JD 7.65 in 2009. In 2010, the stock price peaked at JD 7.73 on April 11, 2010, prior to dividend distribution, but dropped by 45% to reach JD 4.27 on September 23, 2010. Lafarge Cement Jordan’s stock price is highly correlated to Lafarge Group’s price, with a correlation coefficient of 91% between January 2008 and December 13, 2010.

Figure 30: JOCM versus Lafarge Group Stock Price Figure 31: JOCM Annual Low and High Stock Price

0.6

5

1.5

0.6

5

0.6

5

0.6

5

0.6

5

75

%

13

5%

71

%

82

%

80

%

86

%

5.0%

12.6%

5.3% 5.8%

10.4% 10.5%

0.0%

5.0%

10.0%

15.0%

0

0.5

1

1.5

2

2004 2005 2006 2007 2008 2009

JD

Dividend per ShareDividends/ Net ProfitDividend per Share / Stock Price

0

20

40

60

80

100

120

02468

101214

1/1

/20

08

4/1

/20

08

7/1

/20

08

10

/1/2

00

8

1/1

/20

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00

9

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10

10

/1/2

01

0

Euro

JD

Lafarge Cement Jordan Lafarge SA

3.13

5.49

10.6 11.0210.21

5.326.12

4.27

5.6

12.34

14.39 14.6713.98

12.67

7.65 7.73

0

2

4

6

8

10

12

14

16

2003 2004 2005 2006 2007 2008 2009 Till Dec 13, 2010

JD

JOCM Annual Low and High Stock Price

Source: Bloomberg

Source: Bloomberg



Jordan

P a g e | 2 0

Cement Producers’ Profit Margin In addition to Lafarge Group, we selected 8 publicly listed Saudi cement producers for the peer valuation, namely: Arabian Cement, Eastern Cement, Tabuk Cement, Saudi Cement, Yamamah Saudi Cement, Southern Province Cement, and Qassim Cement. The net profit margin for Saudi producers is significantly higher than Lafarge Cement Jordan and Lafarge Group, which accompanies lower costs. Lafarge Cement Jordan had a profit margin of 2.8% for the trailing 12 months till September 2010, although it stood at 13.6% in Q2 2010 and 9.9% in Q3 2010. Lafarge Group’s profit margin was 4.6% for the trailing 12 months till September 2010, while Saudi producers’ profit margin ranged between 21.3% and 58.8%. The Saudi producers are able to compete, while maintaining high profit margins, which increases threat of price competition for Lafarge Cement Jordan. Figure 32: Profit Margin for Cement Producers

Company Ticker

(Bloomberg) Profit Margin

T12M till Sept 2010 Q3 2010 Q2 2010

Lafarge Cement Jordan JOCM JR Equity 2.8% 9.9% 13.6%

Lafarge Group LG FP Equity 4.6% 8.3% 7.4%

Arabian Cement ARCCO AB Equity 21.3% 49.7% 41.8%

Eastern Cement EACCO AB Equity 38.5% 37.1% 45.0%

Yanbu Cement YNCCO AB Equity 47.0% 49.2% 45.0%

Tabuk Cement TACCO AB Equity 45.2% 39.9% 54.1%

Saudi Cement SACCO AB Equity 43.9% 42.9% 45.3%

Yamamah Saudi Cement YACCO AB Equity 50.6% 51.6% 57.0%

Southern Province Cement SOCCO AB Equity 52.1% 42.9% 51.6%

Qassim Cement QACCO AB Equity 58.8% 53.8% 53.1% Source: Bloomberg



Jordan

P a g e | 2 1

Valuation In this valuation, we applied equal weights to the Discounted Cash Flow model, Dividend Discount Model, and P/E and P/BV valuation models. For the peer analysis, we used the previously mentioned 8 publicly listed cement producers in Saudi Arabia, in addition to Lafarge Group. Figure 33: Valuation Figure 34: Sensitivity to Beta and Growth Rates

Source: Awraq Investments

The Discounted Cash Flow model yielded JD 4.63 with estimated Earnings per share of JD 0.331 for 2010 and JD 0.34 for 2016. We assumed revenues will decline by 40% in 2010 to reach JD 170 million, and would be around JD 161 million in 2016. The company’s future earnings and cash flows depend on market share dynamics, and the company’s future plans to face competition. Total capital expenditure between 2010 and 2016 is estimated at around JD 61 million. The total liabilities are taken into consideration in the WACC calculation, and not only the company’s debt. The weight of equity in the WACC calculation is 64%, while weight of debt is 36% of total assets. The dividend discount model yielded JD 4.9 per share, based on the assumption that the company will distribute JD 0.5 per share in 2011, as a result of lower profit in 2010. The results of the first 9 months of 2010 were used in the peer analysis and reduced the target price. The P/E valuation yielded JD 1.33 due to a drop in earnings for the trailing 12 months till September 2010. The P/BV valuation yielded JD 3.05 per share. The sensitivity analysis in Figure 34 provides the weighted valuation results after changing Beta, and the corresponding changes in Cost of Equity and Weighted Average Cost of Capital, in addition to changes in the terminal growth rate. We used values of Beta ranging between 1.2 and 0.8, while the terminal growth rate was changed between 1% and 2%. The resulting weighted valuation lies between JD 3.83 and JD 5.12. The DCF model is weighted at 60%, DDM is weighted at 20%, while P/E and P/BV valuation models are weighted at 10% each. The weighted valuation is sensitive to the weight applied to each valuation method as indicated in the following figure. The average value obtained for the different schemes is JD 4.06. Figure 35: Sensitivity of Valuation to Applied Weights

Valuation Method Sensitivity to Weights Applied to Valuation Methods

DCF 25% 40% 60% 70% 40% 10%

DDM 25% 30% 20% 10% 40% 70%

P/E 25% 15% 10% 10% 10% 10%

P/BV 25% 15% 10% 10% 10% 10%

Weighted Valuation (JD) 3.47 3.97 4.19 4.17 4.25 4.33

Average (JD) 4.06

Valuation vs Market Price % -24.7% -13.9% -9.1% -9.5% -7.8% -6.1%



Model Valuation

(JD) Weight

Weighted Valuation (JD)

Average (FCFE, FCFF) 4.63 60% 2.78

DDM 4.90 20% 0.98

P/E Valuation 1.32 10% 0.13

P/BV Valuation 3.03 10% 0.30

Target Price 100% 4.19

Stock Price ( 13-12-2010) 4.61

Valuation vs Market Price % -9.0%

Weighted Valuation: DCF 60%; DDM 20%; P/E 10%

P/BV 10%

Beta 1.20 1.08 0.80

Ke 12.4% 11.7% 10.0%

WACC 9.7% 9.3% 8.2%

JD

Terminal Growth Rate (G)

1.0% 3.83 4.01 4.57

1.5% 4.00 4.19 4.82

2.0% 4.18 4.40 5.11



Jordan

P a g e | 2 2

Our fair value is based on Beta of 1.08, Cost of Equity of 11.7%, WACC of 9.3%, and terminal growth rate of 1.5%, with applied weight of 60% to DCF, 20% to DDM and 10% to P/E and P/BV valuation. Our target price is JD 4.19, which is 9% lower than the stock price on December 13, 2010 which closed at JD 4.61. Our recommendation for Lafarge Cement Jordan is HOLD. The limited free float for the share which is 17.6% can limit the share’s volatility and keep it above JD 4, despite fierce competition.



Jordan

P a g e | 2 3

Appendix Figure 36: Cement Producers’ Stock Prices (2002-2010)

0

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SAR

Arabian Cement

020406080

100120140160180

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Eastern Cement

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Saudi Cement

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Southern Province Cement

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Lafarge Group

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Qassim Cement

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/1/2

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Yanbu Cement

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Yamamah Saudi Cement

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1/2

010

SAR

Tabouk Cement

Source: Bloomberg



Jordan

P a g e | 2 4

Disclaimer

Awraq Investments and its affiliates obtain information from sources they believe to be reliable, but do not

warrant its accuracy or fitness for a particular purpose, and disclaim for themselves and their information

providers all liability arising from the use.

The Information in this publication is provided in good faith for informational purposes only. The information

provided is not offered as tax, legal, or investment advice, or an offer to buy or sell securities or otherwise.

The information provided in this publication may be displayed and printed for your personal, non-commercial

use only. You may not reproduce, re-transmit, distribute, disseminate, sell, publish, broadcast, or circulate

the information in any form or media to anyone, without the expressed written consent of Awraq

Investments.

Awraq Investments is not liable for any loss resulting from any action taken or reliance made by any person

on any information or material posted by it. You should make your own inquiries and seek independent

advice from relevant industry professionals before acting or relying on any information or material made

available to you in this publication. You rely on this information at your own risk.

Awraq Investments, its subsidiaries, parent, and/or any connected parties, may act or trade and/or enter into

any transaction that maybe inconsistent or disregard any information contained herein.

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