Orascom Construction Industries (OCI)
Research Department
Brokerage
Orascom Construction Industries (OCI) 21 March 2006
Re-Initiation of Coverage Report Buy
Unleashing a Regional Genie
General Information
Summary
RIC Bloomberg code Market cap Net debt Enterprise value Shares outstanding Free float Weight in HCMI Weight in IFCG Weight in MSCI
OCIC.CA ORCI EY EGP44,596 mil EGP3,441 mil EGP64,490 mil 202.08 mil 37% 16% 28% 19%
OCI’s Cement Group capacity to reach 34.4 mtpa by 2008 OCI Cement Group capacity is forecast to increase from 14.4 million tons per annum as of the end of FY05 to 34.4 mtpa as of FY08. This capacity would be distributed as follows Egypt (29%), Algeria (16%), Iraq (15%), Turkey (14%), UAE (9%), Nigeria (7%), Pakistan (6%) and Spain (3%).
EGP280 EGP221 27% USD98 USD77
OCI ventures in the natural gas based fertilizer industry OCI has ventured in the natural gas based fertilizers field through a 30% investment in Egyptian Basic Industries Corporation (EBIC) in Egypt and a 51% investment in the Algerian Fertilizer Company (AFC).
OCI announces a rights issue with a size of EGP2.3 billion OCI announced that it will issue 11.5 million shares at a price of EGP201/share (EGP5/share of par value and EGP196/share to be added to reserves). Accordingly, OCI’s paid-in capital would reach EGP1,010.4 million, up from EGP952.9 million and EGP2,254.0 million will be added to reserves. Proceeds are to finance OCI’s expansions in emerging markets including Turkey and Algeria.
Valuation Target price Market price Upside potential GDR Target Price GDR Current Price
We recommend to “Buy” Orascom Construction Industries (OCI) We are re-initiating coverage on Orascom Construction Industries (OCI) with a “Buy” recommendation, based on our price target of EGP280/share. Our price target offers a 27% upside potential to EGP221/share. Based on our analysis, the stock trades at an estimated P/E of 28.0x for FY05 and 18.3x for FY06f compared to market average of 17.1x and 13.9x, respectively.
*1 GDR = 2 Local Shares
Share Price Information Absolute *Relative YTD ∆ 0.90% -1.30% 1M ∆ -6.00% -3.60% 3M ∆ 9.40% 3.50% 12M ∆ 66.89% 17.80% 52-Wk Range EGP113.89-303.30 12M Av. Daily Turnover EGP47.660 mil
Key Performance Indicators EGP
* Relative performance based on HCMI
365 OCI
315
HCM I
265 215 165
(unless stated otherwise)
03A
04A
05E
06F
07F
Revenues (Mil) Net Inc. before App. (Mil) EPS EPS Growth DPS Adjusted DPS Growth P/E (x) P/BV (x)
4,400 560 2.71 60.6% 0.47 110.0% 81.4x 20.7x
8,560 1,100 5.37 98.1% 0.71 50.0% 41.1x 14.6x
12,858 1,700 7.88 46.7% 2.10 196.2% 28.0x 10.6x
18,610 2,580 12.05 53.0% 4.49 114.2% 18.3x 5.5x
23,780 3,190 14.88 23.5% 7.92 76.4% 14.8x 4.7x
115 65 15 M
A
M
J
J
A
S
O
N
D
J
F
M
* Check back cover for definitions of investment ratings
Disclaimer Analyst
Nemat Allah Choucri / Walaa Hazem
Tel e-mail
+ 2 02 749 6008 (ext. 256) [email protected]
Sales Tel Fax
+ 2 02 749 6008 + 2 02 749 6051
Egypt – Building Materials & Construction
This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.
Also available at www.hc-si.com
Brokerage Outline
I.
Investment Summary Latest Developments
II.
OCI Overview A- Cement LOB B- Construction LOB
5 10 24
III.
Financial Review
31
IV.
Financial Forecasts & Valuation A- Cement LOB B- Construction LOB
35 35 39
V.
Financial Statements
46
VI.
OCI in Brief
47
Building Materials & Construction – OCI
3 4
2
Brokerage I. Investment Summary FY08 & FY09: breakthrough years for OCI We expect FY08f to be a breakthrough year for OCI with all of OCI’s announced cement capacity additions coming on line. In FY09f, the fertilizers LOB would become operational. We forecast OCI to record revenues of EGP29,169.1 million in FY08f, up 22.7% YoY and to record EGP33,380.0 million in FY09, up 14.4% YoY, implying a revenue CAGR of 31.3% from 2004a to 2009f. We forecast a net income of EGP4,407.3 million in FY08f, up 37.7% YoY and EGP4,735.1 million in FY09f, up 7.4% YoY. We forecast net earnings to grow at a CAGR of 33.9% from 2004a to 2009f. OCI trades at high multiples… partly justified by intra group-synergies OCI is trading at a P/E multiple of 28.0x for FY05e, higher than the market average of 17.1x and an EV/EBITDA multiple of 16.2x in FY05e. OCI is also trading at a P/E multiple of 18.3x for FY06f, higher than the market average of 13.9x and at an EV/EBITDA multiple of 9.6x. OCI EV/EBITDA in FY06f is higher than the combined weighted average of its cement and construction peer group of 8.5x. We believe OCI’s premium to the market is partly justified by intra-group synergies between the cement and construction businesses. Table 1: OCI Construction and Cement Peer Group Country
EV/EBITDA (FY06f)
Global Ranking
UK Thailand Turkey Canada Norway Norway USA
12.7 8.7 8.8 11.1 9.1 10.7 10.3 10.2 EV/EBITDA (FY06f)
109 136 128 125 82 79 77
Construction Companies Pterofac Ltd. Italian Thai Development, PCL Enka Insaat VE Sanayi AECON Group Inc. Veidekke ASA Aker Kvaerner ASA Perini Corp Average
Country
Cement Capacity
Cement Companies Holcim Phillipines Titan Cement Cementos Portalnd Valderrivas Lafarge Malayan Cement Dyckerhoff Average Weighted EV/EBITDA*
Phillipines Greece Spain Malaysia Germany
10 15 10 13 25
7.8 8.2 7.2 8.5 6.7 7.7 9.6
* A 34% weight was given to construction and a 66% weight to cement multiple in line with EBITDA contribution in 9M05. For the cement business, OCI is ranked # 139 globally and will have a capacity of 21.5 mtpa by end of FY06f. Source: Bloomberg, ENR, HC Brokerage
“Buy” OCI based on a weighted target price of EGP280/share We reinitiate coverage on OCI with a “Buy” recommendation based on a weighted target price of EGP280, offering a 27% upside potential. We arrived at our target price by allocating an 80% weight to DCF analysis and a 20% weight to comparable valuation (EV/EBITDA multiple). Table 2: Weighted Valuation Valuation method
Value/share % to target price
DCF
EGP302.1
80%
EV/EBITDA
EGP194.8
20%
Target price
Value component in the target price EGP241.3 EGP39.0 EGP280.3
Source: HC Brokerage
Building Materials & Construction – OCI
3
Brokerage Latest Developments OCI announces rights’ issue with a size of EGP2,311.5 million OCI has announced that it will increase its authorized capital from EGP2,000 million to EGP5,000 million and its paid-in capital from EGP952.9 million to EGP1,010.4 million. The increase in paid-in capital will be effected through issuing 11.5 million shares at EGP201/share (par value of EGP5 while EGP196 to be added to reserves) to shareholders as of record on February 16, 2005, bringing total number of shares to 202.1 million shares. Total proceeds of the capital increase will amount to EGP2,311.5 million. These proceeds will be used to finance OCI’s new expansions and investments in emerging markets including Turkey and Algeria. Subscription started on February 22, 2006 and will end on March 23, 2006. The Sawiris family, owning 63% of the company, has announced that it is committed to fully subscribe to its portion of the rights issue. OCI issues EGP1,450.0 million in bonds During 3Q05, OCI completed the issuance of its third nominal non-convertible bond issue of EGP1.45 billion. The issue was in three tranches, two EGP250.0 million tranches and the third USD150.0 million. The proceeds were used to refinance existing debt and new long-term investments. The Egyptian Pound tranches were oversubscribed 12.6x with subscription requests totalling EGP6,290 million. The dollar tranche was oversubscribed 2.85x with subscription requests totalling USD427.5 million. Table 3: OCI EGP1,450 million Bond Issue First Tranche
Value EGP250 Mil.
Coupon Semi-annual
Terms Fixed coupon at 11.75%
Second Tranche
EGP250 Mil.
Semi-annual
CBE discount rate + 150 bps
Third Tranche
USD150 Mil.
Semi-annual
6 Months LIBOR + 150 bps
Source: OCI, HC Brokerage
OCI launches USD300 million 5-year debut facility in the Euroloan Market OCI appointed Citigroup, BNP Paribas Le Caire, Calyon Bank Egypt, HSBC Bank Middle East Limited, NSGB and National Bank of Egypt (UK) Ltd as Lead Arrangers for a USD300 million 5-year revolver debut facility in the Euroloan market. OCI has established a wholly owned subsidiary in the British Virgin Islands to act as its borrowing arm. The new subsidiary, OCI Finance BVI, will act as the obligor for the proposed facility. The facility will benefit from an unconditional guarantee from OCI. The revolver carries a margin of 80 bps per annum to USD LIBOR. OCI establishes fertilizer projects in Egypt and Algeria OCI has announced that it will venture in the filed of natural gas based industries, mainly ammonia and urea fertilizers to capitalize on the competitive cost of energy in the Middle East and OCI’s technical competency in industrial plant construction. OCI’s fertilizer investments are in two companies: 1) Egyptian Basic Industries Corporation (EBIC) of which OCI owns 30% (USD57.0 million) of the equity of the project. The project has an investment cost of USD540.0 million; 65% of which will be financed through debt; and 2) Algerian Fertilizer Company, OCI has a 51% stake in the project to produce ammonia/urea fertilizer in Algeria. The project has an investment cost of USD746.0 million.
Building Materials & Construction – OCI
4
Brokerage II. Orascom Construction Industries Overview Brief background Orascom Construction Industries (OCI) is a leading cement producer and construction contractor active in emerging markets. The company is based in Cairo, Egypt, with activities in more than 20 countries and international revenues exceeding 70% of total revenues as of 9M05. OCI’s work force is currently around 40,000 employees. OCI is listed primarily on the Cairo & Alexandria Stock Exchange (CASE) since 1999, and is listed on London Stock Exchange (LSE) with a GDR ratio of 1 GDR to 2 shares. The company is 63% owned by the Sawiris Family and its chairman & founder is Mr. Onsi Sawiris, while the Chief Executive Officer is Mr. Nassef Sawiris. OCI is engaged in two lines of business that complement each other: Construction and Cement in addition to the company’s new expansions in the field of natural gas based industries. OCI’s historical landmarks OCI emerged rapidly from a company with five employees in 1976 and is forecast to be the number eight cement manufacturer globally by 2008 and ranks among the top 150 largest contractors globally. Table 4: OCI historical landmarks Year 1950
Landmark Foundation of a construction company by Mr. Onsi Sawiris in Upper Egypt
1961
Nationalization of the business; and change of name to El Nasr Civil Works. Onsi Sawiris left for Libya to continue his construction career.
1976
Mr. Onsi Sawiris returns to Cairo and establishes Orascom as a general contracting and trading company with five employees.
Early 1990’s Mr. Onsi Sawiris establishes Orascom as a leading private sector contractor. 1995
Mr. Onsi Sawiris transfers management control to Mr. Nassef Sawiris, who embarked upon an ambitious diversification strategy through investment in complementary businesses such as cement and building materials.
1999
OCI Initial Public Offering (IPO) on the CASE.
Source: OCI
OCI core enterprise-wide strategies The company’s main strategies are to i) establish strategic partnerships; ii) expand operations regionally; and iii) utilize the latest production technologies. The management team intends to deliver sustainable growth and above average returns by implementing these strategies. i)
ii)
iii)
Building Materials & Construction – OCI
Strategic Partnerships. The OCI Cement Group has partnered with Holcim in Egypt and Nigeria, with a prominent investor in Iraq, and with Dubai Holding in the UAE. The OCI Construction Group regularly partners with other multinational contractors to deliver superior fast track design-build solutions to its customers. Regional Expansion. OCI is currently active in more than 20 countries and international revenues accounted for around 70% of gross consolidated revenues (as of 9M05). Latest Technology. OCI has invested in the state-of-the-art cement production equipment and information systems.
5
Brokerage Chart 1: OCI Competitive Strengths
Sustainable Growth Drivers
Inter-company Synergies
Low Cost Structure
Reputation & Management
Source: OCI, HC Brokerage
Remarkable growth over a limited time span Since its IPO in 1999, OCI grew considerably locally and regionally, managing to achieve this growth while maintaining its target profit margins. OCI assets grew from EGP4.5 billion in 2000 to EGP16.3 billion as of 9M05 (a growth rate of 266.1%); while net worth grew from EGP1.0 billion in 2000 to EGP4.0 billion as of 9M05 (a growth rate of 292.1%). OCI’s EBITDA margin averaged 28.4% over this period (2000-2005), GPM averaged 28.2% and NPM averaged 13.3%.
Chart 2: OCI Evolution and Margins from (2000 to 2005) GPM NPM
14
Asset s
12
EGP Million
EBITDA M argin
35
16
Equit y
10
30 25
8 20
6 4
15
2 0
10
2000
2001
2002
2003
2004
A s s e t & E quit y E v o lut io n
9M 05
2000
2001
2002
2003
2004
9M05
O C I M a rgins
Source: HC Brokerage, OCI
Building Materials & Construction – OCI
6
Brokerage Contribution of cement and construction LOBs to top and bottom line Construction’s contribution to top line stood at 73.1% vs. 26.9% for cement in 9M05. However, because of tighter construction EBITDA margin of 10.6% vs. 55.1% for cement; construction contributed only 30.3% to bottom line while cement contributed the balance in 9M05. Starting in FY05, OCI has aggregated all other revenues under the construction LOB, revenues from OCI’s new fertilizers projects will be treated similarly. Table 5: Contribution by LOB 2000
2001
2002
2003
2004
9M05
Cement
28%
32%
31%
25%
25%
27%
Construction
72%
68%
69%
75%
75%
73%
Contribution to Sales*
Consolidated Sales** (EGP Mil.)
2,024.3 2,419.1 2,910.8 4,645.9 8,555.8 8,270.3
58.3% 18.1% 31.7%
56.5% 20.9% 33.1%
54.4% 10.1% 27.4%
Cement
50%
54%
46%
34%
51%
70%
Construction
50%
46%
54%
66%
49%
30%
279.1
303.8
363.9
Cement EBITDA Margin Construction EBITDA Margin Consolidated EBITDA Margin
42.5% 54.3% 18.1% 12.2% 26.0% 25.4%
55.1% 10.6% 24.5%
Contribution to Net Income*
Consolidated Net Income** (EGP Mil.)
558.3 1,101.3 1,274.5
* Before Eliminations ** After Eliminations. Source: OCI, HC Brokerage
Chart 3: Contribution to OCI Consolidated Sales and Net Earnings by LOB* (2000 - 9M05) Contribution by LOB to Sales
Contribution by LOB to Net Income
8,000
Cement
Construction Cement
800
EGP Million
6,000
EGP Million
1,000
Construction
7,000
5,000 4,000 3,000 2,000
600 400 200
1,000 0
0 2000
2001
2002
2003
2004
9M05
2000
2001
2002
2003
2004
9M05
*Before eliminations. Source: HC Brokerage, OCI
Building Materials & Construction – OCI
7
Brokerage
Chart 4: EBITDA Margin by LOB (2000 – 9M05) 70 60 50 Cement 40
Consolidated Construct ion
30 20 10 0 2000
2001
2002
2003
2004
9M 05
Source: HC Brokerage, OCI
International revenues contributed c.70% of gross revenues in 9M05 In 9M05 international revenues accounted for around 70% of OCI’s gross consolidated revenues at EGP6.1 billion, while local construction revenues registered EGP5.1 billion and local cement revenues constituted EGP1.0 billion. As such OCI’s revenue sources are diversified and OCI’s exposure to political risk in any one country is minimized. However, the company’s upcoming investments in Iraq are subject to a high degree of political risk. Table 6: Summary of OCI’s International Revenues (2003 – 9M05) EGP Mil.
Construction International Revenues
% of total Construction Revenues
FY03 1,800
FY04 5,200
9M05 5,100
57%
82%
78%
International Backlog
1,500
9,400
12,600
Total Backlog
2,400
10,900
14,150
63%
86%
89%
% of International Backlog/Total Backlog Cement International Revenues
% of total Cement Revenues Total International Revenues
% of consolidated Gross Revenues
332
1,200
1,000
32%
52%
43%
2,300
5,700
6,100
47%
61%
68%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
8
Brokerage OCI has 33 operational subsidiaries OCI’s has 33 operational subsidiaries falling under its two lines of business. The Cement LOB has 14 subsidiaries, while the Construction LOB has 19. Table 7: OCI Subsidiaries (as of 9M05) Operation Cement Group
Description
OCI Stake
Algerian Cement Co.
Cement manufacturer in Algeria
Egyptian Cement Co.
Cement manufacturer in Egypt
53.7%
United Cement Holding
Cement plant operator in Northern Iraq
51.0%
-Tasluja Cement Co.
Leased cement plant in Northern Iraq
100.0%
-
Pakistan Cement Co.
Cement manufacturer in Pakistan (Under Construction)
62.8%
United Cement Corp.
Cement manufacturer in Northern Iraq (under construction)
51.0%
Emirates Cement Co.
Cement manufacturer in the UAE (under construction)
50.0%
Ciments Blanc d’Algerie
White Cement manufacturer in Algeria (under construction)
Cimentos La Parilla
Cement Grinder in Spain
100% 51.1%
Van Cement
Cement manufacturer in Turkey
-
Baticim Cimento
Cement manufacturer in Turkey
20.0%
Sudacem
Cement Import Terminal & Distributor in Sudan
49.0%
Ready Mix Egypt
Ready-to-use-concrete
National Bag Co.
Cement, building materials and agriculture bags
75.0%
Mehsas National Bag Co.
Cement, building materials and foodstuff bags
50.0%
100%
Construction Group OCI Construction Activities
Regional Engineering, Procurement and Construction (EPC) services
Besix Group
International EPC services
100.0% 50.0%
Contrack International Inc.
Construction services for US government-financed projects
45.0%
OCI Algeria
EPC services in Algeria
Cementech Limited
Specialized EPC services on cement plants
Orascom Road Constr.
Asphalt and concrete paving
100% 100% 90.0%
National Steel Fabrication
Steel cutting, bending, welding and painting services
50.0%
Alico Egypt
Building façade, curtain walling and window systems
50.0%
Egyptian Basic Industries Corp.
Ammonia fertilizer manufacturer in Egypt
30.0%
Algerian Fertilizer Company
Ammonia/Urea Fertilizer manufacturer in Algeria
51.0%
Suez Industrial Development Co. Industrial Park Developer Egyptian Container Handling Co. Stevedoring services at Adabia port
-Sokhna Port Dev. Co.
60.5% 50.0%
Stevedoring services at Sokhna port
70.0%
Nile Valley Gas Company
Natural gas distribution in Upper Egypt
20.0%
National Pipe Company
Concrete pipe
40.0%
United Paints & Chemicals Co.
Pre-blended dry plaster, putty, and tile adhesives
50.0%
Gypsum manufacturer Construction chemicals Waterproofing contractor
50.0% 50.0% 50.1%
Paints and building chemicals
15.0%
- Egyptian Gypsum Co. - MBT Egypt - A-Build Egypt SCIB Chemical Source: OCI
Building Materials & Construction – OCI
9
Brokerage II.A. Cement Overview The OCI Cement Group is the largest cement producer in the Middle East and a leading regional cement exporter. In terms of international ranking, OCI Cement Group will rank as number eight upon completion of its expansion plans in 2008. OCI’s principal operating cement subsidiaries are the Egyptian Cement Company (ECC) and the Algerian Cement Company with an annual installed cement capacity of 13.5 million tons. ECC accounted for 71% of total FY04 cement revenues; while ACC accounted for 29%. The company is currently constructing integrated cement plants in Pakistan, Northern Iraq, Nigeria, and the UAE, which will increase OCI’s annual production capacity to more than 30.0 million tons by 2008. OCI exports cement primarily from Egypt to customers in more than 30 countries including most importantly the USA and Spain. In addition the company has recently acquired control of a grinding cement plant in Spain and a cement terminal in Sudan. OCI also produces and distributes ready mix concrete and cement bags in Egypt and Algeria.
Chart 5: OCI Cement Group International Ranking (2008f) 180 160
156
Capacity (Mill. tons)
Million Tons
140
114
120
97
100
70
80
48
60
43
41
40 20
34
28
23
17
O CI Vo lt or an ti m Si am Ce m G ra en si t m /U lt ra te ch
Ta ih ei Bu yo zz iD yc he rh of f
ex H ei de lb er g It al ce m en ti
Ce m
La fa rg e
H ol ci m
0
Source: HC Brokerage
Building Materials & Construction – OCI
10
Brokerage OCI Cement Group Evolution OCI’s total cement capacity grew considerably from 1.5 mtpa in 1999 to 14.4 mtpa in 2005. ECC and ACC currently constitute 59% and 35%, respectively. ECC will increase its capacity during 2006 from 8.5 mtpa to 10.0 mtpa, thereby accounting for 47% of a total expected capacity of 21.5 mtpa by end of 2006. Based on OCI’s announced cement expansions, we estimate a total regional cement capacity of 34.4 mtpa by 2008.
Chart 6: OCI Cement Group Capacity Evolution from 1999 to date 40 34.4
Capacity (M ill. to ns)
35 30
26.8
25
21.5
20 14.4
15 10
5.3
5
1.5
7.0
7.5
2002
2003
9.7
3.0
0 1999
2000
2001
2004
2005
2006
2007
2008
Source: HC Brokerage estimates based on OCI announced capacity expansions.
Cement demand peaks in summer Cement is a seasonal commodity where demand peaks in summer. OCI’s cement revenues clearly reflect this pattern, where second and third quarter revenues (from April to end of September) are higher than first and fourth quarter revenues (from November to end of March). In 2003, 4Q revenues were the highest during the year and that is due to the start of operations of the Algerian Cement Company (ACC), which boosted 4Q03 revenues.
Chart 7: Quarterly comparison of Cement Revenues (2003 – 9M05) 1,000 1Q
900
2Q
800
3Q
EGP Million
700
4Q
600 500 400 300 200 100 0 2003
2004
2005
Source: HC Brokerage
Cement Regional Expansions OCI Cement Group is expanding regionally targeting key emerging markets with large populations and growing economies. The majority of OCI’s new cement capacities would be completed by the end of 2007 and are expected to start contributing to OCI’s Cement Group revenues by 1Q08. OCI Cement Group is also focusing on countries facing cement shortages, with relatively Building Materials & Construction – OCI
11
Brokerage high selling prices of between USD100/ton to 130/ton. The highest profit margin in the cement group is expected to be generated in Iraq where the local selling price is USD120/ton and the cash cost is USD25/ton. Table 8: OCI Cement Operations Summary Cement Operation ECC
Country Capacity Pop. Consumption GDP/ mtpa Mil. Kg/capita Capita (USD) Egypt 8.50 72 389 1,093
Stake
Invest. Completion Cost Date USD/ton 53.7% 71-117 Operational
ACC
Algeria
5.00
33
455
2,611 100.0%
85-118
Operational
CIBA
Algeria
0.55
33
455
2,611 100.0%
332
August 2007
UNICEM
Nigeria
2.50
143
516
37.6%
132
June 2007
Cimentos La Parilla
Spain
0.60
41
1,166 25,000
51.1%
42
Operational
Emirates Cement
UAE
3.00
4
3,721 24,004
50.0%
123
Late 2007
United Cement Co.
Iraq (Bazian)
2.90
29
51.0%
127
4Q07
United Cement Hldg
Iraq (Tasluja)
2.30
29
51.0%
120
Mid 2006
Pakistan Cement
Pakistan
2.20
156
90
632
62.8%
90
August 2006
Sudacem
Sudan
-
40
-
570
49.0%
Van Cement
Turkey
0.60
73
426
4,199
100%
Baticim Cimento*
Turkey
4.2
73
426
4,199
20.0%
70
276
907
276
907
-
69
Operational Operational
* The company’s capacity in terms of clinker is 2.2 mtpa and owns 75% of Batisoke that has a cement capacity of 1.2 mpta. Source: OCI, HC Brokerage, World Bank
Chart 8: OCI Cement Operations by Country - Key Indicators Price/ton 140
90%
Cash cost/ton* Profit Margin (%)
120
80%
Iraq UAE
100
USD/ton
Nigeria
70% 80 60
60%
Algeria Egypt
Invest. Cost/ ton*
Pakistan
40 50% 20 0
40% Egypt
Algeria Nigeria
UAE
Iraq
Turkey 0
10
20
30 40
50 60
Pakistan Turkey
70
80 90 100 110 120 130 140
USD/ t on
* Cash cost/ton includes energy cost, labor, packaging, maintenance and other expenses and excludes SG&A and depreciation. Source: HC Brokerage
Building Materials & Construction – OCI
12
Brokerage 1) Egyptian Cement Company (ECC) ECC is located in the Suez area and operates four dry process production lines, each with a design capacity of 2 mtpa while actual production for all four lines stands at 8.5 mtpa. ECC is one of the most cost efficient cement producers in the world with a current cash cost/ton of USD12/ton. ECC is the largest contributor to OCI Cement Group revenues. ECC’s contribution to FY04 and 9M05 cement revenues came in at 70.1% and 62.6%, respectively. In terms of bottom line ECC contributed 77.3% of FY04 cement group net earnings of EGP875.1 million and 68.3% of 9M05 net earnings of EGP1,077.5 million. OCI has announced that it will increase ECC’s capacity from 8.5 million tons to 10.0 million tons through a new by-pass treatment mechanism. The investment cost of this project is EUR28.2 million. The new technology targets lowering overall by-pass dust emissions by up to 60% and reducing the energy and electricity consumption per ton of cement produced. Completion of the by-pass treatment production line is scheduled for May 2006. Table 9: ECC Information Summary General Information Operation
Egyptian Cement Company (ECC). ECC produces OPC.
Location
Egypt
Date of Establishment
1996
Ownership
53.7% owned by OCI and 44% owned by Holcim
Type of Energy used
Natural gas
Current Capacity
8.5 mtpa
Total Investment Cost
USD836 Mil.
Investment Cost/ton
USD71-117/ton
Planned Capacity Upgrade
1.5 mtpa
Capex Bill
EUR28.2 Mil.
Completion date
Mid 2006
Current Selling price/ton
USD53/ton
Current cash cost/ton
USD12/ton
Market share
18.33% (as of FY05)
Source: OCI, HC Brokerage
Chart 9: ECC Capacity Evolution
2007f 2006f 2005e Capacity
2004 2003 0
2
4
6
8
10
Mil. tons Source: HC Brokerage, OCI
Building Materials & Construction – OCI
13
Brokerage The Egyptian cement market overview in FY05 Local cement demand in Egypt came in at 28.2 million tons in 2005, up 19.8% from 23.5 million tons in 2004. ECC accounted for 18.3% of this volume (5.2 million tons). The increase in local demand was at the expense of exports, which fell by 22.5% to 9.5 million tons, down from 12.3 million tons in 2004. ECC accounted for 26.5% of these exports (2.5 million tons). ECC came second in terms of local sales and exports after Italcementi subsidiaries in Egypt that comprise Suez, ASEC and Torah, which collectively accounted for 30% of local and export sales, respectively in FY05. The majority of ECC exports are to the United States (34%) and the Middle East (34%).
Chart 10: ECC’s share of Egypt’s local sales and Exports Ameryah 9%
National 8% Beni Suef & Alex 9%
Sinai 4% Qena 3%
Sinai Cement 8%
A ssiut 7%
Misr Beni Suef 3%
Suez 31%
Sinai White 3%
M isr B eni Suef 8%
ECC 18%
Qena 3% A meryah 2%
Natio nal 12%
Assiut 15% Local Sales
Suez 30%
ECC 26% E xpo rt s
A lex & B eni Suef 1%
Source: Cement Producers Council, ECC, HC Brokerage
Table 10: ECC’s Key Financial Indicators 2003
2004
9M05
1,151.6
1,607.9
1,508.9
91.9%
70.1%
62.6%
Key Financial Indicators Sales % of OCI Cement Sales Net Profit
306.4*
676.2
736.0
% of OCI Cement Net Earnings
100.5%
77.3%
68.3%
26.6%
42.1%
48.8%
NPM * Before Eliminations. Source: OCI, HC Brokerage
Chart 11: ECC Export Destinations as of 9M05
Middle East
Afria
34%
27%
Europe USA
5%
34%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
14
Brokerage 2) Algerian Cement Company (ACC) ACC is the largest cement producer in Algeria with two production lines and a capacity of 5.0 mtpa. The first line started operations in January 2004, and the second line started operations in mid 2005. ACC is expected to export cement regionally starting 2006. Table 11: ACC Information Summary General Information Operation
Algerian Cement Company (ACC). Cement manufacturer
Location
Algeria
Date of Establishment
2001
Ownership
100% owned by OCI
Type of Energy
Natural gas
Current Capacity
5.0 mtpa
Total Investment Cost
USD507.5 Mil.
Investment Cost/ton
USD85-118/ton
Current Selling price/ton
USD67/ton
Current cash cost/ton
USD15/ton
Market share
21% (as of 3Q05)
Source: OCI, HC Brokerage
Chart 12: ACC Capacity Evolution
2007f
2006f
2005e
Capacity
2004 0
2
4
6
Mil. tons Source: HC Brokerage, OCI
Table 12: ACC’s Key Financial Indicators 2004
9M05
Key Financial Indicators Sales
660.0
659.8
% of OCI Cement Sales
29.1%
27.4%
Net Profit
164.0
321.9
% of OCI Cement Net Earnings
18.7%
29.9%
NPM
24.8%
48.8%
* Before Eliminations. Source: OCI, HC Brokerage
3) Ciments Blancs d’Algerie (CIBA) In August 2005, OCI contract with a value construct a Greenfield demand, estimated at Building Materials & Construction – OCI
announced that its newly established CIBA has signed an EPC of USD138 million with an F.L.Smidth/OCI Algeria consortium to capacity of 0.55 mtpa. CIBA will cater for Algerian white cement 0.3 mtpa during 2004. CIBA’s location near three major Algerian 15
Brokerage ports and the national railway networks provide potential for exports in the near future. The total investment cost of CIBA is USD182.4 million to be financed by a 55% to 45% debt to equity structure. Table 13: CIBA Information Summary General Information Operation
CIBA is currently under construction and will produce white cement(Greenfield)
Location
Algeria
Date of Establishment
August 2005
Ownership
100% owned by OCI
Type of Energy
Natural gas
Current Capacity
0.55 mtpa
Total Investment Cost
USD182.4 Mill.
Investment Cost/ton
USD332/ton
Completion Date
August 2007.
Source: OCI, HC Brokerage
Algerian Cement Market Overview Algeria consumed 15.0 million tons of cement in 2004, implying a per capita cement consumption of 455 kgs/person, based on a population estimate of 33.0 million. To satisfy local demand, Algeria imported 1.34 million tons for USD75.0 million1 in 2004 at USD56/ton. Algeria imports cement from Tunisia, France, Germany and Spain. There are four state owned cement players, other than ACC, in the market with a combined cement capacity of 13.5 million tons. These players are Groupe Industrielle des Ciments et Dérivés Centre (ERCC) (3.4 mpta), Groupe Industrielle des Ciments et Dérivés d’Ech-Cheleff (2.0 mtpa) (ECDE), Groupe Industrielle des Ciments et Dérivés Est (4.4 mtpa) (ERCE) and Groupe Industrielle des Ciments et Dérivés Ouest (2.7 mtpa) (ERCO). Algeria’s cement capacity rose to 17.0 million tons after ACC increased its production capacity to around 5.0 mtpa during 2005. 4) Pakistan Cement Company (PCC) In March 2005, OCI acquired a controlling 51% stake in Pakistan Cement Company (PCC), formerly known as Chakwal Cement Company. In July 2005, OCI increased its stake in PCC to 60.6% through the conversion of USD19.2 million of debt it had purchased earlier into equity. To complete the construction of PCC’s new cement plant, PCC has signed agreements with a syndicate of 11 Pakistani banks and the Eksport Kredit-Fonden (EKF), the Denmarkbased international export credit agency, for the financing of the equivalent of USD130.0 million in limited recourse project finance debt which will be provided in Pakistani Rupees. The syndication of the Pakistani banks will provide USD80.0 million in debt finance to be repaid over a period of seven years with a grace period of two years. EKF will guarantee USD50.0 million in debt finance, which will also be provided by three Pakistani banks to finance additional importation of equipment. The EKF guaranteed a portion of the loan will be repaid over a period of eight years with a similar grace period of two years. PCC is scheduled to start operation in mid 2006. Pakistan cement exports are mainly to Afghanistan.
1
Algerian Customs Authority.
Building Materials & Construction – OCI
16
Brokerage
Table 14: PCC Information Summary General Information Operation
Pakistan Cement Company (PCC). Cement manufacturer (under construction).
Location
Pakistan
Date of Acquisition
March 2005
Ownership
62.75% owned by OCI
Type of Energy
Coal, Fuel
Current Capacity
2.2 mtpa
Total Investment Cost
USD198 Mill.
Investment Cost/ton
USD90/ton
Completion Date
August 2006.
Current Selling price/ton USD84/ton Current cash cost/ton
USD29/ton
Source: OCI, HC Brokerage
Pakistan Cement Market Overview There are around 22 operating cement plants in Pakistan with an installed capacity of 18.0 mtpa, expected to reach 28.0 mtpa by 2008. Demand registered 14.0 million tons in 2004 and is expected to reach 22.0 mtpa by 2008. Pakistan exports around 3.0 mtpa of cement to Afghanistan, with Iran being its major competitor in this market. Pakistan uses coal as a main source of energy for manufacturing cement. The price/ton of coal is around USD70. 5) United Cement Holding (Tasluja, Kurdistan, Iraq) In November 2004, the Kurdistan Regional Government awarded an OCI consortium a 12year lease contract for the Tasluja cement plant. Under the terms of the lease contract, OCI will be responsible for the rehabilitation, operation and maintenance of the Tasluja cement plant and will have the first right of refusal after the end of the lease agreement to bid for the plant should other bidders express interest in acquiring it. Handover of the plant to OCI was completed in February 2005. The plant is the largest cement plant in Northern Iraq with a capacity of 2.3 mtpa. The rehabilitation of line I, which currently produces less than 300,000 mtpa, was completed in mid 2005. The rehabilitation of line II, which is currently idle, is expected to be completed by mid 2006. Table 15: Tasluja Information Summary General Information Operation
12-year leased cement plant in Northern Iraq
Location
Iraq
Date of Lease Contract
November 2004
Ownership
51% owned by OCI
Type of Energy
Natural gas
Current Capacity
2.3 mtpa
Total Investment Cost
USD276 Mill.
Investment Cost/ton
USD120/ton
Completion Date
Mid 2006.
Current Selling price/ton USD120/ton Current cash cost/ton
USD25/ton
Source: OCI, HC Brokerage
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Brokerage 6) United Cement Corporation (Bazian, Northern Iraq) United Cement Corporation is also located in Northern Iraq. The company (51% owned by OCI) is planned to have a production capacity of 2.9 mtpa with an investment cost of USD368.0 million. The plant is expected to be completed in late 2007. Table 16: United Cement Corporation (Bazian) Information Summary General Information Operation
Cement manufacturer in Northern Iraq (under Construction)
Location
Iraq
Ownership
51% owned by OCI
Type of Energy
Natural gas
Current Capacity
2.9 mtpa
Total Investment Cost
USD368 Mill.
Investment Cost/ton
USD127/ton
Completion Date
4Q07.
Current Selling price/ton USD120/ton Current cash cost/ton
USD25/ton
Source: OCI, HC Brokerage
Iraqi Market Overview In 2004, Iraqi total cement production reached 0.5 mtpa down from 7.2 mtpa in 2002 before the war. The country has currently an annual design capacity of 19.3 mtpa but its operating capacity is of 2.6 mtpa only. Domestic consumption in Iraq in 2004 reached 8.0 million tons. 7) Emirates Cement Company In September 2005, OCI announced that it will establish the Emirates Cement Company in partnership with the Dubai Investment Group (DIG), a member of Dubai Holding LLC, and the government of the Emirate of Fujairah (UAE). The plant and the raw material quarry will be located in Fujairah. OCI will be responsible for managing and operating the new plant. Table 17: Emirates Cement Company Information Summary General Information Operation
Cement manufacturer in the UAE (under Construction) (Greenfield)
Location
UAE
Date of Establishment
September 2005
Ownership
50% owned by OCI and 50% owned DIG
Type of Energy
Natural gas
Current Capacity
3.0 mtpa
Total Investment Cost
USD370 Mill.
Investment Cost/ton
USD123/ton
Completion Date
End of FY07
Current Selling price/ton USD71/ton Current cash cost/ton
USD33/ton
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
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Brokerage UAE Cement Market Overview There are seven companies operating in the UAE cement market. Total cement capacity as of FY05 reached 11.0 million tons. Local consumption reached 16.0 million tons in 2004, thus the market had a shortage of 5.0 million tons in 2004. The United Arab Emirates (UAE) is currently importing cement but starting 2006, when additional capacities come on line, cement imports are expected to gradually drop. Capacity is expected to reach around 20.0 mtpa. In an attempt to combat the shortage of cement in the UAE, the UAE government reduced tariffs on cement imports2. 8) United Cement Company of Nigeria Ltd. (UNICEM) Egyptian Cement Company (ECC) entered into a partnership with the Flour Mills of Nigeria Ltd. to construct a new Greenfield 2.5 mpta cement factory. ECC’s share in the project is 70% and since ECC is 53.7% owned by OCI and 44% owned by Holcim, the shareholding structure of UNICEM is as follows: 37.6% OCI, 30.8% Holcim, and 30% owned by the Flour Mills of Nigeria Ltd. In August 2005, the European Investment Bank signed loan facilities totalling USD150.0 million with Obanja Cement PLC to finance the construction and operation of a new cement Greenfield plant with a capacity of 4.4 mtpa . Table 18: UNICEM Information Summary Operation
Cement manufacturer in Nigeria (under Construction) (Greenfield)
Location
Nigeria
Date of Establishment
February 2005
Ownership
70% owned by ECC and 30% owned by Flour Mills of Nigeria Ltd.
Type of Energy
A combination of natural gas and fuel
Current Capacity
2.5 mtpa
Total Investment Cost
USD330 Mill.
Investment Cost/ton
USD132/ton
Completion Date
End of FY07
Current Selling price/ton
USD130/ton
Current cash cost/ton
USD40/ton
Source: OCI, HC Brokerage
Nigerian Cement Market Overview Nigeria is the world’s second largest importer of cement and it has a low cement per capita consumption of around 70 kgs. The new project is expected to help bridge the cement demand gap of around 7.0 mtpa as Nigeria’s annual cement needs are in the range of 10.0 mpta and the existing capacities and the existing capacities are only of around 3.0 mtpa (only one international player in the market).
2
Construction World-Gulf Edition.
Building Materials & Construction – OCI
19
Brokerage 9) Cementos La Parilla In September 2005, OCI has acquired a 51.1% stake in Cementos La Parilla through an indirect participation for a total sum of EUR20.7 million. Cementos la Parilla is a grinding station with a capacity of 0.6 million tons per year. OCI will supply Cementos La Parilla with clinker initially from its Egyptian subsidiary ECC and possibly in future from ACC as well. In January 2006, OCI started the doubling of the capacity of Cementos La Parilla station to reach 1.1 mtpa. The acquisition is part of the OCI Cement Group long-term strategy to strengthen its presence in the Mediterranean region. Table 19: Cementos La Parilla Information Summary General Information Operation
Cement Grinder in Spain
Location
Spain
Date of Establishment
September 2005
Ownership
51.1% owned by OCI
Current Capacity
0.6 mtpa
Total Investment Cost
EUR20.7 million
Investment Cost/ton
EUR35/ton
Current Selling price/ton USD84/ton Source: OCI, HC Brokerage
Spanish Cement Market Overview Spain is the largest consumer and the largest cement importer in Europe. Cement consumption reached 47.8 million tons in 2004, of which 8.2 million tons were imported. Cement demand is expected to grow by 3.7% in 2006. We believe that OCI’s new capacity will easily be absorbed. 10) Turkey Investments in Van Cement & Baticim Cimento OCI has made two acquisitions in Turkey, Van Cement and Baticim Cimento earmarking a total of USD250 million for its investments in both regions (equivalent to USD69/ton). OCI sees the Turkish acquisitions as a natural extension to their core geographic markets around the Mediterranean rim.
A) Van Cement: OCI acquired Van Cement in Eastern Turkey for a total consideration of USD54.0 million at an acquisition cost per ton of USD97. The plant has a capacity of 0.6 mtpa of cement and 0.2 mtpa of clinker with large potential for upgrade as OCI intends to increase its capacity in the Eastern region of Turkey to around 3.0 mtpa through a local partnership that will be subject to regulatory approvals. Van Cement sold 192,000 tons of cement in 2004. OCI’s investment in East Turkey complements its presence in Northern Iraq (the 2.3 mpta leased capacity Tasluja and the 3.0 mtpa capacity in Bazian scheduled to commence operations in 2007) in addition to creating potential for exports to Iraq and Syria. Syria’s current cement capacity stands at around 6.0 mtpa, while its demand is in the range of 8.0 mtpa.
Building Materials & Construction – OCI
20
Brokerage Table 20: Van Cement Information Summary General Information Operation
Cement Manufacturer in Turkey
Location
East Turkey
Date of Acquisition
January 2006
Ownership
OCI
Type of Energy
Fuel
Current Capacity
0.6 mtpa and 0.2 mtpa of clinker
Total Acquisition Cost
USD54 million
Acquisition Cost/ton
USD97/ton
Current Selling price/ton USD70/ton Current cash cost/ton
USD28/ton
Source: OCI, HC Brokerage
B) Baticim Cimento: OCI made another acquisition in Western Turkey through acquiring 20% of Baticim Cimento, which has an annual cement capacity of 3.0 mtpa and clinker capacity of 2.2 mtpa, for a total value of USD54.7 million at an EV/ton of USD82. Baticim Cimento is the majority shareholder (75%) of Batisoke Cimento, which has annual clinker and cement capacities of 0.8 mtpa and 1.2 mtpa, respectively. On a consolidated basis, Baticim Cimento is the fourth largest cement exporter in Turkey with proximity to ports and holds close to 50% market share of the Aegean region. Baticim generates 30%-40% of its revenues from exports to the Mediterranean region. Baticim has cash piled in excess of USD50.0 million. Table 21: Baticim Cimento and Batisoke Cimento FY05 Key Financial Indicators USD Mil.
FY04
Sales FY05
FY04
Net Income FY05
FY04
NPM FY05
Baticim
195.3
197.9
10.2
31.2
5.3%
15.8%
Batisoke
51.2
61.5
4.4
15.1
8.6%
24.6%
Source: Bloomberg
Table 22: Baticim Cimento Information Summary General Information Operation
Cement Manufacturer in Turkey
Location
Turkey
Date of Establishment
12 August 2005-19 December 2005
Ownership
51.1% owned by OCI
Type of Energy
Fuel
Current Capacity
3.0 mtpa of cement and 2.2 mtpa of clinker.
Total Acquisition Cost
USD54.7 million
Acquisition Cost/ton
USD18/ton
Current Selling price/ton USD70/ton Current cash cost/ton
USD28/ton
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
21
Brokerage Turkish Cement Market Overview Turkey is one of the largest cement producers and exporters in the Mediterranean region experiencing double-digit growth in consumption. Domestic consumption grew by 14% from January 2005 to October 2005. The prospect of Turkey’s EU accession will provide a further boost for economic activity in Turkey. Turkey has a grinding capacity of 65.9 mn tons and clinker capacity of 40 mn tons. Turkish cement exports reached 8.2 million tons in 2004. From January 2005 till October 2005 Turkey exported 6.4 million tons, 10% lower than in the same period of 2004 due to the rise in local demand. Turkey consumed 31.0 million tons in 2004 implying a cement per capita consumption of 426 kgs. Domestic consumption is expected to increase to 33.2 million tons in 2005 and 35.6 million tons in 2006. Cement exports are estimated to remain at around 8.0 million tons in 2005. Turkey is expected to increase its production capacity to 43.0 million tons of clinker (an increase of 3.0 million tons). Turkey is exporting cement to Iraq using land routes.
11) OCI other cement related investments
a) Sudacem Sudacem is a 49% owned subsidiary of OCI. It is a cement importer terminal and distributor in Sudan as OCI sees good potential in the Sudanese market.
b) Ready Mix Egypt Ready Mix Egypt (RME) is a 100% owned subsidiary by OCI and produces ready to use concrete. The company was established in 1999 and is one of the largest ready-mix companies in Egypt with a capacity of 1.2 million m³ annually of concrete. RME contributed 3.5% (EGP85.6 million) of OCI Cement Group 9M05 revenues of EGP2,412.3 million.
c) National Bag Company National Bag Company (NBC), a 75% owned subsidiary by OCI established in 1997. NBC produces bags for cement, building materials, fast food, and agricultural products with an annual capacity of 160.0 million cement bags annually. NBC is the largest bag producer in Egypt located in the 6th of October City and produces cement bags for its sister company ECC, Ameryah Cement Company (Cimpor) and Alexandria Cement Company (Lafarge) as well as fast food bags for McDonalds and Hardees. NBC contributed 4.9% (EGP118.2 million) of OCI Cement Group 9M05 revenues of EGP2,412.3 million.
d) Mehsas National Bag Company Mehsas National Bag Company (MNBC), 50% owned by OCI, was established in 1998 in Algeria to manufacture and sell packaging products for the cement, building materials, agriculture and chemical industries. MNBC has a capacity of 80.0 million bags annually, and it produces cement bags for the Algerian Cement Company (ACC).
e) Egypt Sack In January 2006, OCI announced that it has completed the acquisition of Egypt Sack for a total value of EGP43 million. Egypt Sack owns and operates a cement bags manufacturing plant in the industrial zone of 6th of October City with an annual production capacity of 60.0 million cement bags. Post this acquisition, OCI consolidated cement bags manufacturing capacity reached 300 million bags per year including NBC and MNBC. Egypt Sack posted revenues of EGP38.6 million and a net income of EGP6.7 million during 2004. Management estimates net income of EGP9.0 million for 2005.
Building Materials & Construction – OCI
22
Brokerage OCI Current Cement Operations
Table 23: Cement Summary by Region Company ECC
Country Egypt
Capacity 8.5
ACC
Algeria
5.0
CIBA
Algeria
0.0
PCC
Pakistan
0.0
Tasluja
Iraq
0.3
Bazian
Iraq
0.0
Emirates Cement
UAE
0.0
Nigeria
0.0
Spain
0.6
Van Cement
Turkey
0.6
Baticim Cimento
Turkey
3.4
UNICEM Cementos La Parilla
Total
18.4
% of OCI Capacity Capacity in 08’ % of Capacity in 08’ 46.2% 10.0 29.1%
27.2% 0.0% 0.0% 1.6% 0.0% 0.0% 0.0% 3.3% 3.3% 18.5% 100%
5.0 0.6 2.2 2.3 2.9 3.0 2.5 1.1 0.6 4.2 34.4
14.5% 1.7% 6.4% 6.7% 8.4% 8.7% 7.3% 3.2% 1.7% 12.2% 100%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
23
Brokerage II.B. Construction LOB Overview The OCI Construction Group ranks among the top 150 largest contractors in the world. OCI provides Engineering, Procurement and Construction (EPC) services on large, complex, and demanding projects for public and private customers primarily in the Middle East, North Africa, and Central Asia. OCI itself has undertaken numerous landmark infrastructure, industrial, and commercial projects in Egypt and Algeria. Examples include the Nile City in Egypt, the European Parliament in Brussels, Weill Cornell University in Qatar and Algerian Cement Company in Algeria. OCI’s main operating construction businesses are the BESIX Group, based in Belgium, with extensive experience on large building, infrastructure and marine projects, and Contrack International, based in the USA with extensive experience on institutional and infrastructure projects. OCI, BESIX and Contrack target projects primarily in the Middle East, North Africa and Central Asia. OCI other construction activities include partnerships with industry leaders, manufacturing fabricated steel products as well as architectural curtain walling and window systems. OCI also has investments in infrastructure concessions including a port operator, industrial park developer and natural gas distributor. Additionally, OCI is currently venturing in the field of urea/ammonia fertilizers projects, whose operations will be included under the construction LOB. Table 24: ENR Ranking* Top 225 Global Contractors
Top 225 International Contractors 2004 2005
Top 400 US Contractors
2004
2005
OCI
144
139
68
63
-
-
BESIX
109
95
51
51
-
-
-
-
148
-
175
148
Contrack
2004
2005
Source: OCI, ENR, HC Brokerage
* Engineering News Record (ENR) companies are ranked on the Top Global Contactors list by their total construction contracting both at home and abroad. This differs from the top international contractors ranking, which ranks firms based only on revenue from projects outside of their home countries. OCI ranking includes Contrack for the category of Global and International Contractors.
Construction Group Strategy OCI is selective in choosing the projects it bids for. The company targets large, complex and demanding projects in which it has competitive advantages either through a specific technical competency, a strong geographical presence or a successful track record with the client.
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Brokerage Construction work backlog evolution from 2000 to date OCI construction work backlog grew considerably from EGP1.8 billion in 2000 to EGP14.1 billion as of 9M05. 89% (EGP12.6 billion) of the backlog figure as of 9M05 represents projects outside Egypt, indicating that OCI is not dependent on Egypt for its Construction Group revenues. Usually Backlog takes 18 to 24 months to translate into revenues.
Chart 13: Construction Work Backlog Evolution 16
Backlog in EGP billion*
14 12
10.9
50% Consolidation of BESIX
EGP Bilion
10 8
11.4
14.1 12.1
8.9 7.1
EGP Devaluation
6
3.8
4 1.8
2.1
2.3
2000
2001
2002
2
2.7
0 2003
Mar. 04
Jun. 04
Sep. 04
Dec. 04
Mar. 05
Jun. 05
Sep. 05
Source: OCI, HC Brokerage
* The jump from 2003 to March 2004 in the backlog was due to the EGP devaluation and from March 2004 to June 2004 due to the first time 50% proportionate consolidation of BESIX. EGP12.6 billion of the EGP14.1 billion of Backlog as of 9M05 represents the backlog of work outside Egypt.
Construction Revenue Evolution from 2001 to date OCI’s construction revenues grew from EGP1.4 billion in 2001 to EGP6.4 billion in 2004, and EGP6.2 billion as of 9M05. New work booked hovered around EGP9.5 billion as of 9M05, up from EGP1.3 billion in 2001, a 630.8% growth rate over a period of around 4 years.
Chart 14: Construction revenue and new work booked (2001 – 9M05) 7.0
6.4 Const ruction Revenues
6.0
6.2
10.0
9.5
9.0 New Work Booked
8.0 5.0
6.0
4.0
3.2
5.0
3.0 2.0
7.5
7.0
4.0 1.4
1.7
3.3
3.0 2.0
1.0
2.0 1.3
1.0 0.0
0.0 2001
2002
2003
2004
9M 05
2001
2002
2003
2004
9M 05
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
25
Brokerage Regional Developments OCI’s regional construction work is executed by OCI Construction, BESIX and Contrack International. Table 25: OCI Regional Construction Projects Entity
Project
Contract Value Completion Mil. USD189 May 07
OCI/BESIX
Sea Water Desalination plant in Algeria
OCI/BESIX
Fairmont Hotel in Egypt
EUR16.6
May 07
OCI/BESIX
New Talkha Power Station
USD45.0
July 07
OCI/F.L. Smidth
Two Green Field cement plants in Algeria
USD447.0
-
F.L. Smidth/ OCI
Construction of a GF cement plant in UAE
USD309.0
-
BESIX
Burj Dubai tower in the UAE
USD875.0
-
BESIX
Multifunctional Complex in Rotterdam
USD42.2
November 07
BESIX
IBM training center in La Hulpe Brussels
EUR21.0
January 07
BESIX
Quay Walls for the Arabian bay project in Dubai
EUR27.3
-
BESIX
Emirates Cement Plant in Fujairah
EUR21.5
-
BESIX
Quay Wall in the port of Limbe in Cameroon
EUR12.3
-
BESIX
Quay Wall in Hartelhaven-Netherlands
EUR9.3
-
EBSIX
Bridge over the Mungo River in Cameroon
EUR5.8
-
Contrack International
Design Build Work in Afghanistan
USD171.0
-
F.L. Smidth/OCI Algeria
EPC Contract for Ciments Blanc d’Algerie
USD138.0
-
Contrack Int’l/Darwish
Science & Technology Park in Doha
USD355.0
-
BESIX/Moroccan Somagec
Build a port in Tangiers
BESIX
Wastewater Treatment BOT Contract in UAE
EUR91.0
August 06
EUR429.0
2008
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
26
Brokerage 1) OCI Construction OCI Construction is 100% owned by OCI and is based in Egypt and provides Engineering, Procurement and Construction (EPC) services on industrial, commercial and infrastructure projects for public and private customers. 2) BESIX Group BESIX Group was founded in 1909 and since then has undergone impressive growth. The Group is 50% owned by OCI and is based in Belgium and provides EPC services on large commercial infrastructure and marine projects for public and private customers worldwide. The BESIX Group has undertaken numerous landmark projects in the Middle East including: the Sheikh Zayed Bin Sultan Al Nahyan Mosque in Abu Dhabi, the Emirates Palace Hotel in Abu Dhabi, Al Khalifa Sports Stadium in Qatar and is currently constructing the Burj Dubai Tower which will be the world’s tallest building standing more than 700 meters high. BESIX realized an EBITDA margin of 8% in FY04. Table 26: BESIX Key Consolidated Indicators (Euro Mil.) Sales
2000 942
2001 962
2002 812
2003 776
2004 877
EBIT
22.2
34.5
19.6
29.0
38.0
Net Result
15.5
25.9
6.2
14.3
28.4
820
750
825
850
1,364
Order Book at year end Source: BESIX, HC Brokerage
3) Contrack International Contrack International was established in 1985 and is headquartered in Washington D.C. In 1998, OCI acquired 45% of the company. Contrack International provides EPC services on institutional and infrastructure projects financed by the US Government in the Middle East and Central Asia. Contrack International is currently undertaking numerous humanitarian construction projects in Afghanistan and is the largest international contractor operating in the country. Contrack International has completed several prestigious construction projects in Qatar including the Weill Cornell Medical College and Al Jazeera Children’s Satellite Channel building. 4) National Steel Fabrication National Steel Fabrication Company (NSF) was established in 1995 and operates a single plant in the 6th of October City which provides a complete range of steel fabrication services. NSF is a joint venture between OCI (50%) and Consolidated Contractors (CCC) (50%). NSF has provided steel fabricated products to numerous customers including Vinci, Bouygues Construction, Skanska, Bechtel, Kajima, KBR, Fluor, Bifinger & Berge, Technip and Foster Wheeler. NSF exports nearly half of its products to project sites throughout the Middle East and North Africa. 5) Alico Egypt Alico Egypt was established in 1999 and operates a single plant in Ain Sokhna, which manufactures aluminum and glass architectural products including building facades, curtain walls, windows, and doors. Alico Egypt is a joint venture between OCI (50%) and Alico UAE (50%), a leading architectural products manufacturer. Alico Egypt exports a quarter of its products to project sites throughout the Middle East and North Africa.
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27
Brokerage 6) OCI investments in natural gas based industries Although natural gas fertilizer projects is a new line of business, it will continue to be classified by OCI as part of the construction group. The rationale behind venturing in this LOB is that OCI believes attractive returns for shareholders could be realized by capitalizing on the competitive cost of energy in the Middle East, and OCI’s technical competency in industrial plant construction. OCI management believes that 60% to 70% of the equity invested in fertilizer projects would be recovered through construction revenues before the sale of fertilizers commences. Natural gas is cheaply priced in North Africa at USD0.551.25/mbtu compared to international prices.
Chart 15: International Natural Gas Price Comparison 14 Price in USD/MBTU
12
USD
10 8 6 4 2 0 North Africa
Russia
Malaysia
Ukraine
Eastern Europe
Europe
Continental Europe
US-Henry Hub
UK
Source: OCI, HC Brokerage
A) Egyptian Basic Industries Corporation (EBIC) In October 2005, OCI announced that it invested in a fertilizer project through a 50% stake in the Middle East Petrochemical Company (MEPCO) that in turn owns 60% of Egyptian Basic Industries Corporation (EBIC); which makes OCI’s effective share in EBIC 30%. EBIC will have a capacity of 2,000 tons per day of ammonia, 750,000 mtpa. The plant is a Greenfield project located in Al Ain Al Sokhna with a total investment cost of USD540.0 million. OCI’s share in the equity of the project is USD57.0 million of the project’s USD190.0 million of equity, which makes it the largest single shareholder. The EBIC plant is scheduled for start-up during early 2009. The plant will use natural gas as its primary fuel source and has already signed a 25-year Gas Supply Agreement with stateowned EGPC at a fixed price of USD1.25 per million BTU. A 17-year take-or-pay agreement for 100% of the new plant’s output has been secured with New-York based Transammonia, a leading specialized international trader. EBIC signed agreements for a USD350.0 million loan in long-term project finance debt with an interest rate ranging between 150 to 200 bps over LIBOR, on a non-recourse basis. USD225.0 million of the financing package will be an export-credit facility guaranteed by the Export-Import Bank of the United States (EXIM bank). The international Loan facilities were signed with 5 mandated lead arrangers including BNP Paribas, HSBC, Natexis Banques Populaires, SG and WestLB in a club deal transaction structure. 100% of the project’s output is to be exported with freight cost comprising 5-10% of product cost. Breakeven selling price is around USD100/ton for ammonia.
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28
Brokerage Table 27: EBIC capital Structure Source of Capital
USD Million
Debt
350.0
Equity
190.0
Total
540.0
Source: OCI, HC Brokerage
2) Algerian Fertilizer Company (AFC) OCI signed an initial agreement in February 2006 with the Algerian state owned oil & gas, Sonatrach to establish a 1.0 mtpa Greenfield granular urea plant in Algeria for an investment cost of USD746.0 million. The company will also produce ammonia but as a raw material. OCI will act as the lead project developer. According to the terms of the agreement, OCI will have a 51% stake in the new venture while Sonatrach’s stake will be 49%. Furthermore, Sonatrach has agreed to a 20-year gas supply agreement with AFC at a price of USD0.55 per million BTU subject to a 5% annual increase. OCI already received several expressions of interest from international fertilizer traders to enter into long-term off-take agreements for the plant’s output. OCI intends to obtain the required long-term project finance debt in a limited recourse structure from a combination of local Algerian and international banks. The project is expected to be operational by 2009. 10% to 15% of output is to be sold locally and the balance is to be exported to the US, European markets and North Africa. The project’s breakeven-even urea price is USD110/ton in peak debt years.
Brief Overview of the Global fertilizer market with an emphasis on Nitrogen fertilizers Global fertilizer consumption in FY05 was 154.1 million tons, 4.6% higher than FY04. Fertilizer consumption was estimated to be 89.7 million tons for nitrogen fertilizers, 37.0 million tons for potash fertilizers and 27.4 million tons for phosphate fertilizers. Nitrogen fertilizer producers announced new expansions especially in low cost natural gas regions. Table 28: Nitrogen, Potash and Phosphate Fertilizer Consumption Consumption Nitrogen Potash Phosphate Total
04/05e
05/06f
Change
09f/10f
89.65 37.04 27.43 154.12
91.05 37.14 27.37 155.56
+1.6% +0.3% -0.2% +0.9%
96.07 40.69 30.32 167.08
Source: International Fertilizer Industry Association, HC Brokerage
According to the International Fertilizer Industry Association, consumption growth in FY06 is expected to slow down to 0.9%, with nitrogen fertilizer consumption expected to rise by 1.6% and consumption of other fertilizers to drop. In the long run, nitrogen fertilizers consumption is expected to rise by 1.4% to reach 96.07 million tons in FY10. Ammonia prices are volatile Ammonia global prices increased from US$185/ton in 2003, to US$241/ton in 2004 and US$252/ton as of October 2005. Fluctuations in Ammonia prices are driven by supply constraints, with consumption steadily growing in line with the growth in cropped land.
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29
Brokerage Chart 16: Historical Average Global Ammonia Prices (Nov. 02’ to Oct. 05) 350 300 250 200 150 Average Global Ammonia Prices 100 50 0
Source: FADINAP, HC Brokerage
Building Materials & Construction – OCI
30
Brokerage III. Financial Review Construction contributes 73% of 9M05 Consolidated Revenues… 9M05 construction revenues contributed 73.1% of sales (before eliminations) coming in at EGP6,546.7 million, up from EGP4,525.4 million in 9M04. The cement LOB contribution to consolidated sales was 26.9% (before eliminations) recording a value of EGP2,412.3 million, up from EGP1,753.1 million in 9M04. 9M05 total consolidated revenues came in at EGP8,270.3 million, up 34.0% from EGP6,172.0 million in 9M04.
Chart 17: Contribution to Consolidated 9M05 Sales by LOB
Construction 73%
Cement 27%
Source: HC Brokerage, OCI
A) Cement LOB We attribute the 37.6% YoY growth in cement revenues to the 19.8% YoY growth in local cement demand in Egypt reaching 28.2 million tons, of which ECC captured an 18.3% market share, in addition to the start of operation of ACC’s second production line during June 2005. Cement prices increased on average by 33% in Egypt and 9% in Algeria. ECC contributed 62.6% (EGP1,508.9 million) of OCI Cement Group revenues while ACC contributed 27.4% (EGP659.8 million) of OCI Cement Group revenues. The OCI Cement Group recorded third quarter revenues of EGP965.2 million, up 56.3% from EGP617.5 million in 3Q04. Chart 18: Cement EBITDA and EBITDA Margin as of 9M05 60
1400 1200
50
Cement EBITDA Cement EBITDA M gn.
1000
40
Consolidat ed EBITDA M gn. 800
30 600 20
400
10
200 0
0 9M 04
9M 05
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
31
Brokerage B) Construction LOB Construction revenues increased by 44.7% in 9M05 YoY. This growth was a result of the 50% consolidation of BESIX occurring during the second quarter of 2004, thereby contributing to one out of the three quarters presented in 9M04 financials. 9M05 results, however, fully reflect the consolidation of BESIX for the entire period. Third quarter Construction Group revenues reached EGP2,177.1 million, up 18.7% from EGP1,834.5 million in 3Q04. Construction Group backlog reached EGP14.1 billion, 89% of this figure represents work outside Egypt. Additions to backlog during the 3Q05 amounted to EGP3.2 billion. 38% of the order book is from commercial projects, followed by Industrial projects representing 33% of the current order book. The private sector is the Construction Group’s biggest client accounting for 53% of the order book, followed by the public sector accounting for 23% as of 9M05. The distribution of the order book by region shows that, the majority of the Construction Group LOB Order Book is in the Middle East (38%), followed by Africa (23%) and Europe (15%).
Chart 19: Order Book Structure by Type of Project and Region (as of 9M05) Europe 15%
Industrial 33%
Inf rastructure 16%
Central Asia 12%
Africa 23%
Egypt 11% Government 13%
Commercial 38%
Other 1%
M iddle East 38%
O r der Book by Region
C ur r ent Sr uctur e of O r der Book Source: HC Brokerage, OCI
New contract awards during 3Q05 During 3Q05, the BEISX Group was awarded new contracts with a net total value of EUR145.0 million, Contrack International was awarded USD171.0 million. As a whole, the OCI Construction Group added around EGP3,200 million to its construction backlog. Table 29: New contract awards during 3Q05 Company BESIX
Contract Value in Mil. 145.0
Currency EUR
Exchange Rate 7.44
Value in EGP Mil. 1,079
Contrack
171.0
USD
5.84
999
OCI
192.0
USD
5.84
1,123 3,200
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
32
Brokerage Consolidated EBITDA margin stood at 24.5% OCI reported a consolidated EBITDA of EGP2,027.7 million (a margin of 24.5%), up 27.4% from EGP1,592.0 million (a margin of 25.8%) in 9M04. The cement LOB recorded an EBITDA of EGP1,328.0 million (a margin of 55.1%), up 44.1% from EGP921.8 million in 9M04. The construction LOB, despite recording higher sales than cement, due to its lower margins, recorded an EBITDA figure of EGP694.1 million (a margin of 10.6%), up 24.0% from EGP559.8 million (a margin of 12.4%) in 9M04.
Chart 20: Construction EBITDA and EBITDA Margin as of 9M05
EGP Million
600 400
Construction EBITDA
50
Construction
40
Consolidated
30
%
60
800
20
200
10
0
0 9M04
9M05
Source: OCI, HC Brokerage
Negative Goodwill Amortization jumps to EGP267.8 million… The negative goodwill amortization figure is the result of BESIX and Pakistani Cement Company (PCC) acquisitions.
BESIX: following the BESIX acquisition, independent auditors conducted a fair valuation of the company's assets arriving at a fair value of EUR195.3 million while the acquisition valuation was EUR136.8 million for 100% of BESIX, resulting in a negative goodwill of EUR58.5 million. EUR29.3 million represents OCI’s share of this negative goodwill corresponding to its 50% share in BESIX. OCI’s FY04 income statement carried a negative goodwill amortization figure of EGP70.4 million (EUR9.5 million). 9M05 consolidated income statement included a negative goodwill amortization figure of EGP108.3 million (EUR14.6 million), while the total for the year is forecast to reach EGP142 million by the closing of FY05.
Pakistan Cement Company (PCC): Following PCC’s acquisition, independent auditors conducted a fair valuation of the company's assets arriving at a fair value of USD121.9 million while the acquisition tag for 100% of the company was USD78.1 million, resulting in a negative goodwill of USD43.8 million. Corresponding to OCI’s 62.752% share in PCC, OCI’s recognized USD27.5 million on this transaction. 9M05 consolidated income statement included EGP159.5 million representing the full negative goodwill amortization of the PCC acquisition. Table 30: OCI Negative Goodwill Breakdown Mil.
Acquisition Value Fair Value
BESIX PCC
EUR136.8
EUR195.3.
USD78.1
USD121.9.
Total
Negative Goodwill OCI stake in co. OCI Neg. Goodwill as of 9M05 EUR58.5 50% EGP108.3 USD43.8
62.75%
EGP159.5 EGP267.8
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
33
Brokerage …and helps to boost 9M05 bottom Line… OCI recorded consolidated bottom line of EGP1,274.5 million, up 54.3% from EGP825.8 million in 9M04. The growth in net income was backed by the 34% YoY growth in sales while maintaining almost the same margins as in 9M04; coupled with the above mentioned negative goodwill amortization of EGP267.8 million (21.0% of consolidated net income), up from only EGP70.6 million in 9M04 (8.5% of consolidated net income). SG&A to sales increased to 6.4%, up from 4.7% in 9M04 due to the consolidation of BESIX taking place in the 2nd quarter of 2004 and PCC consolidation-taking place during the 3Q05. OCI income from investment of EGP68.5 million included EGP47.7 million of profits on sale of investments. OCI currently pays taxes on its construction LOB only and not on the cement LOB as ECC has a tax exemption ending in 2009 and ACC’s tax exemption ends in 2012. OCI will start paying a tax rate of 30% on its Pakistan cement earnings after it starts operations by 2H06. Tax rates charged to its construction LOB in Egypt are 20%, Algeria 15% and around 35% for BESIX projects. Table 31: 9M05 Income Statement EGP Mil.
Const.
Cement
-
Cons. 9M05 8,270.3
Cons. 9M04 6,172.0
External Revenue
6,163.1
2,107.2
383.6
305.1
(688.7)
-
-
6,546.7
-
2,412.3
(688.7)
8,270.3
6,172.0
▲ 34.0%
5,423.8
977.9
(688.1)
5,713.6
4,291.9
▲ 33.1%
159.6
184.9
(17.6)
326.8
210.4
▲ 55.1%
5,583.4
1,162.8
(705.7)
6,040.5
4,502.3
▲ 34.2%
Gross Profit
963.3
1,249.5
17.0
2,229.8
1,669.6
▲ 33.6%
GPM
14.7%
51.8%
27.0%
27.1%
Inter-group Revenues Total Revenues COGS Depr. & amort. COGS
Elimin.
% Chg. ▲ 34.0%
428.8
105.8
5.7
528.9
288.1
▲ 83.6%
534.5
1,143.7
22.7
1,700.9
1,381.6
▲ 23.1%
EBITDA
694.1
1,328.6
-
2,027.7
1,592.0
▲27.4%
EBITDA Margin
10.6%
55.1%
24.5%
25.8%
SG &A Operating Profit
54.0
6.7
7.8
68.5
13.9
▲392.8%
(88.6)
14.6
-
(74.0)
(9.0)
-
Interest Income
25.3
12.2
-
37.5
Interest Expense
114.3
136.4
-
250.7
248.8
▲ 0.8%
24.7
36.6
(42.7)
18.7
15.0
▲ 24.7%
-
-
(33.6)
(33.6)
(49.5)
Negative Goodwill amortiz.
108.3
-
159.5
267.8
Pre-tax Income
544.0
1,077.5
113.7
1,735.1
Income from Invest. FX Gain (Loss)
Other Income Profit on Intra-Group Constr.
Provision on Income tax Minority Interest Net Income
NPM
7.7 ▲ 387.0%
-
55.6
-
-
55.6
70.6
▲279.3%
1,181.5
▲ 46.9%
58.3
▼ 4.6%
18.9
-
(386.1)
405.0
297.4
▲ 36.2%
469.5
1,077.5
(272.4)
1,274.5
825.8
▲ 54.3%
7.2%
44.7%
15.4%
13.4%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
34
Brokerage IV. Financial Forecasts and Valuation A. Cement LOB OCI plans to increase its production capacity to around 34.4 million tons by the end of 2008. Production capacity planned expansions comprise a new production line in Algeria, and the construction of new cement plants in Iraq, Pakistan, Nigeria, UAE, and Turkey. In addition, OCI acquired an operational cement company in Spain in 2005. OCI expects to be the 8th largest cement producer globally after the completion of these plans in 2008. OCI is increasing its production capacity locally and regionally to cater for the expected increase in demand for cement in the next few years on the back of a number of reasons: •
The improvement in macroeconomic indicators along with the activation of the mortgage law and the expected launch of mortgage financing mechanism boosted domestic consumption in Egypt by 20% during 2005; this is expected to continue in the medium term.
•
The hike in oil prices and the current economic boom in the GCC region, resulted in major growth in the construction sector and related businesses. This trend is forecast to continue and cement consumption is expected to grow by an annual average of 6% – 8% in the next 3 – 5 years.
•
The forecast rise in global demand for cement along with the increase in energy costs coupled with strict environmental regulations, will limit production capacity increases in Europe and the USA.
Most of OCI’s capacity additions are in high growth emerging markets that are under served. OCI aims to partially replace imports in these countries while maintaining a high profitability margin. However due to cement capacity expansions in the Gulf which will materialize by late 2007/2008, in the case of demand slowing down, overcapacities are a threat to OCI resulting in strong competition and tighter margins. We believe that due to OCI’s strong operational base and efficient processes it would be able to withstand this competition in the event it materializes. OCI cement group is expanding its operations into six new countries to operate in a total of eight countries, serving a population of 550 million. In addition, OCI plans to capitalize on ECC’s location in Al Ain Al Sokhna on the Red Sea to benefit from high growth in demand in other countries on the borders of the Red Sea. 1. Egypt Egypt is the company’s major source of cement revenues representing around 71% of FY05 estimated revenue, falling to around 31.4% of total cement revenue following the completion of the group’s expansion plans. Egypt has a current population of around 72.4 million with a GDP per Capita of USD1,100, forecast to grow by 4% – 6% in the next 3 – 5 years.
Building Materials & Construction – OCI
35
Brokerage Table 32: Egyptian Cement Sales Breakdown ECC (54% owned subsidiary) Production Capacity (000s) Utilization Rate Local Sales Volume (000s) Selling Price (USD) Export Sales Volume (000s) Selling Price (USD) Total Revenue (EGP Mil.)
FY05e
FY06f
FY07f
FY08f
8,500
9,250
10,000
10,000
90%
100%
100%
100%
5,170
5,970
6,370
6,610
46.5
56.0
57.7
59.4
2,520
3,280
3,630
3,390
54.0
63.0
64.9
66.8
2,170
3,080
3,440
3,530
Source: OCI, HC Brokerage
2. Algeria Algeria is the company’s second most important source of revenue representing around 29% of FY05 estimated revenues, falling to only 18.4% of revenues following the completion of the group’s expansion plans. Algeria is an attractive market with a current population of 33 million and a GDP per Capita of USD2,600, that is forecast to grow by 5% – 7% in the next 3 – 5 years. Table 33: Algerian Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f
1. ACC (100% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s)
4,700
5,000
5,000
5,000
52.6%
80.0%
85.0%
90.0% 4,500
2,470
4,000
4,250
Selling Price (USD)
63.0
67.0
69.0
71.1
Total Revenue (EGP MIL.)
900
1,530
1,670
1,820
2. Ciments Blanc d’Algerie (100% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
180
550
0%
0%
50%
50%
0
0
90
275
0.0
0.0
68.0
70.0
0
0
35
110
Source: OCI, HC Brokerage
3. Iraq Iraq is an attractive market for OCI with a current population of 28.8 million and a GDP per Capita of USD900, expected to grow significantly following the stability of political conditions in the country. The company’s two subsidiaries in Iraq are forecast to account for 16.6% of the cement group revenue by the end of 2009. Table 34: Iraqi Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f 2,300
1. Tasluja Cement Company (51% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
1,920
2,300
0%
75%
80%
85%
0
1,440
1,840
1,960
0.0
85.0
70.0
72.1
0
700
730
800
2,900
2. Bazian Cement Company (51% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
0
0%
0%
0%
80%
0
0
0
2,320
0.0
0.0
0.0
72.1
0
0
0
950
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
36
Brokerage 4. U.A.E U.A.E is a lucrative market for OCI following the hike in oil prices and the current boom in the economy and the construction sector. The U.A.E has a current population of 4.3 million and a GDP per Capita of USD24,000. The company’s subsidiary in the U.A.E is expected to account for 9.5% of the cement group revenue by the end of 2009. Table 35: U.A.E. Sales Breakdown Emirates Cement Company (50% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY05e
FY06f
FY07f
FY08f
0
0
0
3,000
0%
0%
0%
80%
0
0
0
2,400
0.0
0.0
0.0
73.1
0
0
0
1,000
Source: OCI, HC Brokerage
5. Nigeria Nigeria is a promising market for OCI with a current population of 143.2 million and a GDP per Capita of USD520. However, the recent hike in oil prices is expected to result in a 5% – 7% annual growth in the economy in the next 3 – 5 years. The company’s subsidiary in Nigeria is expected to account for 11.8% of the cement group revenue by the end of 2009. Table 36: Nigeria Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f 2,500
1. United Cement Company (38% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
1,250
0%
0%
80%
85%
0
0
1,000
2,125
0.0
0.0
100.0
103.0
0
0
570
1,250
Source: OCI, HC Brokerage
6. Pakistan Pakistan is an attractive market for OCI with a current population of 156 million and a GDP per Capita of USD630. The company’s subsidiary in Pakistan is expected to account for 5.8% of the cement group revenue by the end of 2009. Table 37: Pakistan Cement LOB Sales Breakdown Pakistan Cement Company (63% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY05e
FY06f
FY07f
FY08f
0
730
2,200
2,200
0%
75%
75%
76%
0
540
1,650
1,670
0.0
75.0
65.00
67.0
0
230
610
640
Source: OCI, HC Brokerage
7. Spain Spain is an appealing market for OCI by being the largest cement consumer and importer in Europe. Spain can act as an export destination to OCI plants in North Africa. Spain has a current population of 41 million and a GDP per Capita of USD25,000. The company’s subsidiary in Spain is expected to account for 5.1% of the cement group revenue by the end of 2009.
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37
Brokerage Table 38: Spanish Cement Sales Breakdown Cementos La Parilla (51% owned subsidiary)
FY05e
FY06f
FY07f
0
600
1,100
1,100
0%
100%
100%
100%
Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY08f
0
600
1,100
1,100
0.0
86.5
89.1
91.8
0
300
560
580
Source: OCI, HC Brokerage
8. Turkey Turkey is an alluring market for OCI with a current population of 72.7 million and a GDP per Capita of USD4,200. The company’s subsidiary in Turkey is expected to account for 1.4% of the cement group revenue by the end of 2009. Table 39: Turkish Cement Sales Breakdown Van Cement Company (100% owned subsidiary)
FY05e
FY06f
FY07f
0
600
600
600
0%
60%
60%
60%
Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD)
FY08f
0
360
360
360
0.0
70.0
72.1
74.3
0
140
150
150
Total Revenue (EGP MIL.) Source: OCI, HC Brokerage
Cement contribution to top line forecast to rise.. As a result of the forecast growth in the cement group, its contribution will increase from EGP3.4 billion representing 24% of OCI expected gross revenue in 2005 to EGP11.9 billion representing 33% of OCI gross revenue in 2009.
Chart 21: OCI Cement Sales Volume Breakdown (FY05e-FY09f) Iraq 16%
Egypt 76%
Algeria 24%
Algeria 19%
Nigeria 8% U.A.E 9% Pakistan 6% Spain 4%
FY05e
Egypt 37%
Turkey 1%
FY09f
Source: HC Brokerage
While country diversification will ensure less revenue concentration.. ECC’s contribution to cement sales is estimated at 64% in 2005, by 2009, it is forecast to fall to 31% with another seven countries contributing to cement LOB top line.
Building Materials & Construction – OCI
38
Brokerage Chart 22: OCI Cement Sales Value Breakdown (FY05e-FY09f) Nigeria 12%
Iraq 17%
Algeria 29%
Egypt 71%
U.A.E 10%
Algeria 18%
Egypt 31%
FY05e
Pakistan 6% Spain 5% Turkey 1%
FY09f
Source: HC Brokerage
B. Construction LOB The construction group provides around 74% of the company’s top line figures and will remain OCI’s main LOB. However, its share of total revenue is expected to diminish to around 66% by the end of 2009 as a result of the expected massive expansion in the cement group and the addition of a new fertilizers line of business. Table 40: Construction Sales Breakdown Figures in EGP MiL. Construction Group Work Backlog % Growth Construction Group Sales % Growth
FY05e 14,600
FY06f 18,830
FY07f 23,350
FY08f 27,790
34%
29%
24%
19%
10,470
13,700
17,470
20,180
49%
31%
27%
16%
Source: OCI, HC Brokerage
OCI ‘s construction revenues growth is forecast on the heels of: •
Government budget surpluses in the GCC region on the back of higher energy export prices stimulating demand for oil and gas construction services;
•
Expected growth in the economy in Egypt and North Africa following several structural reforms;
•
Secured Contracts from the US Army for the reconstruction of Iraq and Afghanistan following the war;
•
High population growth rates in OCI’s countries of presence resulting in a demand for housing units and infrastructure and for industries to support job creation; and
•
Inter-company synergies as the OCI Construction Group provides services to OCI Cement as the OCI Construction Group is currently working on five Greenfield cement plants in five countries for the Cement Group.
Building Materials & Construction – OCI
39
Brokerage Chart 23: Construction Group Backlog (FY05e-FY08f) 30,000 June
EGP Million
25,000
December
20,000 15,000 10,000 5,000 0 2005
2006
2007
2008
Source: OCI, HC Brokerage
We expect that within the next 5 years OCI will shift its operations from Europe and Africa towards GCC countries and the Middle East. This is mainly due to two main reasons: •
The expected global boom in the construction industry is located in the GCC and the Middle East; and
•
The company’s construction group can earn a slightly higher margin in these regions rather than in saturated Europe or in African countries with limited resources.
Chart 24: OCI Work Backlog Regional Breakdown (FY05e-FY09f) Africa 23%
Europe 12% Europe 15%
Central Asia 12%
Middle East* 50%
FY05e
Central Asia 16%
Middle East* 62%
Africa 10%
FY09f
* Middle East includes Egypt, GCC and North Africa. Source: OCI, HC Brokerage
C. Fertilizers LOB We expect that the fertilizers LOB will not have significant impact on FY09 results; however, this LOB will start representing a portion of 2% – 5% of total sales from 2012. In case of further acquisitions in the fertilizers LOB, which is a highly possible scenario, and depending on the value and volume of acquisitions this LOB contribution to top line could increase.
Building Materials & Construction – OCI
40
Brokerage Table 41: Fertilizers LOB Sales Breakdown 2009f
2010f
2011f
1. EBIC (30% owned subsidiary) Production Capacity (000s) Utilization Rate
750
750
750
40%
80%
90% 675
Sales Volume (000s)
300
600
Selling Price (USD)
150
165
180
Total Revenue (EGP MIL.)
257
564
693
1,000
1,000
1,000
40%
80%
90%
Sales Volume (000s)
400
800
900
Selling Price (USD)
166
190
214
Total Revenue (EGP Mil.)
378
866
1,098
2. AFC (51% owned subsidiary) Production Capacity (000s) Utilization Rate
Source: OCI, HC Brokerage
The rationale for this investment is as follows: •
The primary raw material required for the manufacturing process is natural gas comprising 60% – 80% of fertilizer cash cost of production. Egypt has abundant natural gas which is competitively priced.
•
Expanding in the fertilizers industry will generate large industrial contracts for the construction group.
•
The fertilizers industry is expected to provide the company with steady cash flows and high returns.
•
Expected growth of 14% in global ammonia capacity from 159.6 million tons in 2004 to 182.1 million tons in 2009.
•
Global urea capacity is currently 143 million with expected growth in urea demand by around 3.9 million tons per year during the next five years.
Table 42: Fertilizers Sales Breakdown 2004 68.9
2009f 78.6
2014f 81.7
Europe
46.1
46.6
46.0
North and Central America
25.4
24.7
25.7
Middle East
9.0
17.4
18.5
Africa
4.6
7.4
8.5
Oceania
1.3
2.7
3.3
159.6
182.1
190.1
South and East Asia
Total Source: OCI, HC Brokerage
FY05 top line growth trickles down into healthy net earnings growth We expect OCI to post consolidated sales of EGP12.9 billion in FY05e up 50.3% from EGP8.6 billion in FY04. We estimate the company’s FY06f top line at EGP18.6 billion, up 44.7% YoY.
Building Materials & Construction – OCI
41
Brokerage Table 43: Sales Breakdown by LOB Figures in EGP Mil. Construction Sales
2005e 10,470
2007f 17,470
2009f 23,730
2011f 27,170
3,350
8,100
11,890
13,260
0
0
270
770
970
1,790
2,510
2,880
12,860
23,780
33,380
38,320
Construction Cost
9,230
15,390
20,850
23,780
Cement Cost
1,540
3,670
5,270
5,860
0
0
180
410
1,240
2,190
3,040
3,480
Total COGS
9,580
16,870
23,260
26,570
Construction Gross Margin
11.9%
11.9%
12.2%
12.5%
Cement Gross Margin
54.0%
54.7%
55.7%
55.8%
0.0%
0.0%
31.7%
46.0%
25.5%
29.1%
30.3%
30.7%
Cement Sales Fertilizers Sales Elimination of Intra Group Revenue Total Sales
Fertilizers Costs Elimination of Intra Group Costs
Fertilizers Gross Margin Total Gross Margin Source: HC Brokerage
We have assumed a slight rise in the construction group gross margin from 11.9% to 12.5%. This is mainly due to shifting a larger part of the backlog to GCC countries at a slightly higher profit margin. The cement group gross margin is also expected to increase from 54% to 55.8% due to increasing production capacity in new markets at slightly higher profit margins. Therefore, the growth in gross margins of cement and construction, along with the addition of fertilizer line of business and the increasing relative contribution of the cement group to top line sales, is forecast to result in significant growth in gross margins from 26% in FY05e to 31% in FY09f.
Chart 25: OCI Sales Value Breakdown by LOB (FY05e-FY11f) Fertilizers 2% Cement 24% Cement 29%
FY05e
Construction 76%
FY11f Construction 69%
Source: HC Brokerage
We expect OCI to realize a GPM of 25.5%, down from 27.5% in FY04. Gross margin is expected to decline due to an increase in the share of BESIX in the Construction Group at a slightly lower profit margin than OCI Construction and CONTRACK. We expect OCI to post an EBITDA margin of 23.5% in FY05e, down from an EBITDA margin of 25.8% in FY04. EBITDA in absolute terms is estimated to rise to EGP3.0 billion in FY05, up from EGP2.2 billion in FY04.
Building Materials & Construction – OCI
42
Brokerage Table 45: Key Indicators (FY04a : FY07f) Figures in EGP Mil. Sales
FY04a 8,560
FY05e 12,860
FY06f 18,610
FY07f 23,780
Growth in Sales
94.3%
50.3%
44.7%
27.8%
Gross Profit Gross Profit Margin EBITDA
2,355
3,280
5,340
6,910
27.5%
25.5%
28.7%
29.1%
2,210
3,020
4,960
6,360
EBITDA Margin
25.8%
23.5%
26.7%
26.7%
Total Assets
12,750
19,030
26,620
30,640
Growth in Total Assets
57.2%
49.3%
39.8%
15.2%
Source: OCI, HC Brokerage
We are optimistic about consolidated net earnings’ growth in FY05e, which we have estimated at 53.8% - net earnings of EGP1.7 billion (EPS of EGP7.9), up from EGP1.1 billion (EPS of EGP5.4). We believe that the company is set to post a net income of EGP2.6 billion (EPS of EGP12.0) in FY06f, up 51.6% YoY.
Chart 26: OCI Top line and Bottom line Performance (FY04a:FY07f) 3,500
Top Line GPM
70.00%
3,000
60.00%
2,500
50.00% 40.00%
10,000
5,000
0 FY 04a
FY 05e
FY06f
FY07f
Bottom Line
70.00%
NPM
60.00% 50.00%
EGP Mil.
15,000
Growth Rate
EGP Mil.
20,000
2,000
40.00%
1,500
30.00%
1,000
20.00%
500
10.00%
0
30.00%
Growth Rate
25,000
20.00% 10.00% 0.00% FY 04a
FY 05e
FY06f
FY07f
Source: HC Brokerage
FY05e CAPEX bill estimated at EGP2.6 billion OCI CAPEX planning is demand driven, thus the company is expected to spend around EGP2.6 billion in CAPEX in FY05, representing 20% of OCI’s total sales, mainly invested to increase cement capacities. The continuous growth in cement capacities during 2006 is expected to increase the company’s CAPEX to EGP2.8 billion representing 15% of total sales. This high level of CAPEX will secure financing of OCI’s expansion plans and allow the company to maintain its position as one of the top contractors and cement producers in the Middle East. The CAPEX bill is estimated at EGP2.4 billion in FY07f. The bulk of the company’s expansion plans will be financed during the next two years. Therefore, CAPEX / Sales is expected to decline as a % of sales to around 5% starting 2008.
Building Materials & Construction – OCI
43
Brokerage
Chart 27: CAPEX/Sales (FY05e:FY09f) 35,000
CAPEX Sales
30,000
EGP Million
25,000 20,000 15,000 10,000 5,000 0 FY 05
FY 06
FY 07
FY 08
Source: OCI, HC Brokerage
Leverage OCI has a high leverage with a debt / equity ratio of 1.5x in FY04 increasing to 1.6x in 9M05. OCI is currently in an expansion plan, therefore we expect its debt / equity ratio will stabilize in the range of 0.9x by the end of 2006, then gradually decline.
Chart 26: Leverage (FY04a:FY07f) 80%
Total Liabilities / Total Assets
70%
Bank Debt / Total Assets
EGP Million
60% 50% 40% 30% 20% 10% 0% FY 04a
FY 05e
FY 06f
FY 07f
Source: OCI, HC Brokerage
Our DCF Valuation Implies a value of EGP302 Our DCF valuation yielded a fair value per share of EGP302, which offers a 36.7% upside potential to EGP221, the company’s current market price. We have applied in our DCF valuation a single WACC of 16.3%, and a cost of equity of 17%. We have assumed a 5% perpetual growth rate beyond the projection horizon. Table 46: Value per Share (EGP) Sensitivity to WACC Perpetual Growth Rate 3%
14.3% 344
15.3% 309
WACC 16.3% 280
17.3% 255
18.3% 233
4%
361
322
290
263
240
5%
381
338
302
272
247
6%
407
357
317
284
256
7%
439
381
334
297
266
Source: HC Brokerage
Building Materials & Construction – OCI
44
Brokerage Our multiple valuation implies a value of EGP194.8/share Our multiple valuation is based on the EV/EBITDA multiple for FY06f for a construction/cement peer group suggests a value per share of EGP194.8, offering an 11.7% downside to the current market price.
Our weighted target price is EGP280/share Accordingly, we recommend to “Buy” OCI based on a weighted target price of EGP280, offering a 27% upside potential to the market price. We arrived at our target price using a weighted average of DCF (80%) and comparable valuation (20%) (EV/EBITDA multiple). Table 47: Weighted Valuation Valuation method
Value/share % to target price
DCF
EGP302.1
80%
EV/EBITDA
EGP194.81
20%
Target price
Value component in the target price EGP241.3 EGP39.0 EGP280.3
Source: HC Brokerage
Sensitivity Analysis Case 1: Lower Cement Prices – In case we assume that cement prices will be 10% less than our base case assumptions, we downgrade our DCF valuation to EGP281 per share. Case 2: Higher COGS – In case we assume that COGS will increase by 5% above our base case assumptions, thus squeezing the company’s profit margins, we downgrade our DCF valuation to EGP259 per share. Case 3: Increase in Cement Contribution to Top Line – In case we assume that total sales of the base case will remain the same; however, with a 10% – 15% increase in the contribution of cement to the top line at the expense of construction revenue, we upgrade our DCF valuation to EGP320 per share. Case 4: Increase in Construction Contribution to Top Line – In case we assume that total sales of the base case will remain the same; however, with a 10% – 15% increase in the contribution of construction to top line at the expense of cement contribution, we downgrade our DCF valuation to EGP211 per share.
Building Materials & Construction – OCI
45
Brokerage V. Financial Statements EGP
03A
(unless stated otherwise)
04A
05E
06F
07F
08F
09F
Income Statement Revenues
4,403
COGS Gross Profit
8,556 12,858 18,609 23,783 29,170 33,380
3,193
6,201
9,581
13,268
16,870
20,095
1,210
2,355
3,277
5,341
6,913
9,075 10,122
23,259
SG & A Expenses
226
489
677
979
1,251
1,535
Other Operating Income, Net
(39)
(36)
(54)
(78)
(100)
(123)
(140)
Operating Income
945
1,832
2,547
4,284
5,562
7,417
8,225
Interest Expense
263
330
487
606
573
444
318
Interest Income
10
15
58
98
173
125
104
Investment Income
1,756
11
20
23
61
69
76
85
Other Non-Operating Income (Expense)
150
44
262
0
(194)
(238)
(272)
Pre-Tax Income
853
1,583
2,401
3,837
5,037
6,938
7,823
29
77
96
192
353
486
782
824
1,504
2,305
3,645
4,684
6,452
7,041
Income Tax After Tax Income Minority Interest
266
403
612
1,054
1,485
2,045
2,306
Net Inc. before Appropriations
558
1,101
1,694
2,591
3,200
4,407
4,735
Appropriations Net Income
11
16
102
155
192
264
284
548
1,085
1,592
2,435
3,008
4,143
4,451
Balance Sheet Assets Cash & Marketable Securities
925
1,634
3,153
5,630
5,168
5,181
4,560
1,226
2,735
4,194
5,789
7,670
9,420
11,338
662
1,035
1,810
3,022
3,843
4,577
5,298
68
253
377
494
629
727
855
2,881
5,667
4,989
6,696
8,793
10,907
12,488
13,354
13,738
87
121
440
511
591
682
786
154
267
267
267
268
269
267
Net Receivables Inventory Other Current Assets Total Current Assets Net Fixed Assets Investments Other Non-Current Assets Total Assets
9,535 14,935 17,310 19,905 22,051
8,111 12,750 19,035 26,619 30,656 34,208 36,841
Liabilities Short-Term Debt
714
983
2,288
2,248
1,848
1,448
Accounts Payable
1,171
3,138
4,867
6,036
7,675
7,799
7,608
0
0
525
1,062
1,792
3,129
4,072
604
771
890
1,047
Distributions Payable Other Current liabilities Total Current Liabilities
221
309
462
2,107
4,431
8,142
2,563
3,493
4,127
4,879
3,831
2,783
138
295
401
452
410
383
347
0
0
54
134
234
355
495
4,637
6,682
8,987
Long-Term Debt Other Non-Current Liabilities Provisions Minority Interest Shareholders’ Equity
1,148
9,950 12,085 13,266 13,874
1,146
1,487
2,099
3,153
2,158
3,044
4,213
8,053
1,736
9,461 10,739 11,402
Free Cash Flow Statement NOPLAT
903
1,727
2,343
3,914
4,980
6,633
Non-Cash Items
237
375
474
678
797
884
951
Gross Cash Flow
1,139
2,101
2,817
4,592
5,777
7,518
8,069
Gross Investments
(868)
(1,463)
(2,265)
144
181
1,966
3,484
271
638
552
4,737
5,958
Operating Free Cash Flow Non-Operating Cash Flow
(76)
42
329
151
45
Free Cash Flow to Investors
195
680
881
4,887
6,003
Building Materials & Construction – OCI
7,118
9,484 11,553 (34)
(75)
9.450 11,478
46
Brokerage VI. OCI in brief OCI Overview Orascom Construction Industries (OCI) is the largest Construction and Building Materials Company locally and regionally. OCI operations are divided into the Cement Group LOB and Construction Group LOB with the cement Group-ranking number nine internationally based on announced cement capacities and the construction group ranking among the top 150 largest contractors in the world. The company has operations in more than 20 countries and is currently expanding in the filed of natural gas based fertilizers. OCI targeted ROE in any project it ventures in is 30%.
Key attractions Inter-group synergies. OCI’s investment in the highly profitable natural gas based fertilizers industry. ECC tax exemption till 2009 and ACC’s tax exempted till 2012. Strategic Alliances with topnotch international players in the construction and cement fields.
Key concerns Having investments in countries with high political risk like Iraq. Threat of overcapacities of cement coming from the Gulf by the end of 2007. Increase in energy prices.
Shareholders structure Foregin Institutions 29%
Sawiris Family Foreign Institutions Middle Eastern Institutions Private Investors
63.0% 29.0% 6.0% 2.0%
Middle Eastern Institutions 6% Private Investors 2%
Sawiris Family 63%
Investment Ratings Stock Liquidity
Upside Potential
High Mid Low
>35% >40% NA
35%-25% 40%-30% 50%-30%
25%-15% 30%-20% 30%-20%
15%-10% 20%-10% 20%-10%
Brokerage
Orascom Construction Industries (OCI) 21 March 2006
Re-Initiation of Coverage Report Buy
Unleashing a Regional Genie
General Information
Summary
RIC Bloomberg code Market cap Net debt Enterprise value Shares outstanding Free float Weight in HCMI Weight in IFCG Weight in MSCI
OCIC.CA ORCI EY EGP44,596 mil EGP3,441 mil EGP64,490 mil 202.08 mil 37% 16% 28% 19%
OCI’s Cement Group capacity to reach 34.4 mtpa by 2008 OCI Cement Group capacity is forecast to increase from 14.4 million tons per annum as of the end of FY05 to 34.4 mtpa as of FY08. This capacity would be distributed as follows Egypt (29%), Algeria (16%), Iraq (15%), Turkey (14%), UAE (9%), Nigeria (7%), Pakistan (6%) and Spain (3%).
EGP280 EGP221 27% USD98 USD77
OCI ventures in the natural gas based fertilizer industry OCI has ventured in the natural gas based fertilizers field through a 30% investment in Egyptian Basic Industries Corporation (EBIC) in Egypt and a 51% investment in the Algerian Fertilizer Company (AFC).
OCI announces a rights issue with a size of EGP2.3 billion OCI announced that it will issue 11.5 million shares at a price of EGP201/share (EGP5/share of par value and EGP196/share to be added to reserves). Accordingly, OCI’s paid-in capital would reach EGP1,010.4 million, up from EGP952.9 million and EGP2,254.0 million will be added to reserves. Proceeds are to finance OCI’s expansions in emerging markets including Turkey and Algeria.
Valuation Target price Market price Upside potential GDR Target Price GDR Current Price
We recommend to “Buy” Orascom Construction Industries (OCI) We are re-initiating coverage on Orascom Construction Industries (OCI) with a “Buy” recommendation, based on our price target of EGP280/share. Our price target offers a 27% upside potential to EGP221/share. Based on our analysis, the stock trades at an estimated P/E of 28.0x for FY05 and 18.3x for FY06f compared to market average of 17.1x and 13.9x, respectively.
*1 GDR = 2 Local Shares
Share Price Information Absolute *Relative YTD ∆ 0.90% -1.30% 1M ∆ -6.00% -3.60% 3M ∆ 9.40% 3.50% 12M ∆ 66.89% 17.80% 52-Wk Range EGP113.89-303.30 12M Av. Daily Turnover EGP47.660 mil
Key Performance Indicators EGP
* Relative performance based on HCMI
365 OCI
315
HCM I
265 215 165
(unless stated otherwise)
03A
04A
05E
06F
07F
Revenues (Mil) Net Inc. before App. (Mil) EPS EPS Growth DPS Adjusted DPS Growth P/E (x) P/BV (x)
4,400 560 2.71 60.6% 0.47 110.0% 81.4x 20.7x
8,560 1,100 5.37 98.1% 0.71 50.0% 41.1x 14.6x
12,858 1,700 7.88 46.7% 2.10 196.2% 28.0x 10.6x
18,610 2,580 12.05 53.0% 4.49 114.2% 18.3x 5.5x
23,780 3,190 14.88 23.5% 7.92 76.4% 14.8x 4.7x
115 65 15 M
A
M
J
J
A
S
O
N
D
J
F
M
* Check back cover for definitions of investment ratings
Disclaimer Analyst
Nemat Allah Choucri / Walaa Hazem
Tel e-mail
+ 2 02 749 6008 (ext. 256) [email protected]
Sales Tel Fax
+ 2 02 749 6008 + 2 02 749 6051
Egypt – Building Materials & Construction
This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.
Also available at www.hc-si.com
Brokerage Outline
I.
Investment Summary Latest Developments
II.
OCI Overview A- Cement LOB B- Construction LOB
5 10 24
III.
Financial Review
31
IV.
Financial Forecasts & Valuation A- Cement LOB B- Construction LOB
35 35 39
V.
Financial Statements
46
VI.
OCI in Brief
47
Building Materials & Construction – OCI
3 4
2
Brokerage I. Investment Summary FY08 & FY09: breakthrough years for OCI We expect FY08f to be a breakthrough year for OCI with all of OCI’s announced cement capacity additions coming on line. In FY09f, the fertilizers LOB would become operational. We forecast OCI to record revenues of EGP29,169.1 million in FY08f, up 22.7% YoY and to record EGP33,380.0 million in FY09, up 14.4% YoY, implying a revenue CAGR of 31.3% from 2004a to 2009f. We forecast a net income of EGP4,407.3 million in FY08f, up 37.7% YoY and EGP4,735.1 million in FY09f, up 7.4% YoY. We forecast net earnings to grow at a CAGR of 33.9% from 2004a to 2009f. OCI trades at high multiples… partly justified by intra group-synergies OCI is trading at a P/E multiple of 28.0x for FY05e, higher than the market average of 17.1x and an EV/EBITDA multiple of 16.2x in FY05e. OCI is also trading at a P/E multiple of 18.3x for FY06f, higher than the market average of 13.9x and at an EV/EBITDA multiple of 9.6x. OCI EV/EBITDA in FY06f is higher than the combined weighted average of its cement and construction peer group of 8.5x. We believe OCI’s premium to the market is partly justified by intra-group synergies between the cement and construction businesses. Table 1: OCI Construction and Cement Peer Group Country
EV/EBITDA (FY06f)
Global Ranking
UK Thailand Turkey Canada Norway Norway USA
12.7 8.7 8.8 11.1 9.1 10.7 10.3 10.2 EV/EBITDA (FY06f)
109 136 128 125 82 79 77
Construction Companies Pterofac Ltd. Italian Thai Development, PCL Enka Insaat VE Sanayi AECON Group Inc. Veidekke ASA Aker Kvaerner ASA Perini Corp Average
Country
Cement Capacity
Cement Companies Holcim Phillipines Titan Cement Cementos Portalnd Valderrivas Lafarge Malayan Cement Dyckerhoff Average Weighted EV/EBITDA*
Phillipines Greece Spain Malaysia Germany
10 15 10 13 25
7.8 8.2 7.2 8.5 6.7 7.7 9.6
* A 34% weight was given to construction and a 66% weight to cement multiple in line with EBITDA contribution in 9M05. For the cement business, OCI is ranked # 139 globally and will have a capacity of 21.5 mtpa by end of FY06f. Source: Bloomberg, ENR, HC Brokerage
“Buy” OCI based on a weighted target price of EGP280/share We reinitiate coverage on OCI with a “Buy” recommendation based on a weighted target price of EGP280, offering a 27% upside potential. We arrived at our target price by allocating an 80% weight to DCF analysis and a 20% weight to comparable valuation (EV/EBITDA multiple). Table 2: Weighted Valuation Valuation method
Value/share % to target price
DCF
EGP302.1
80%
EV/EBITDA
EGP194.8
20%
Target price
Value component in the target price EGP241.3 EGP39.0 EGP280.3
Source: HC Brokerage
Building Materials & Construction – OCI
3
Brokerage Latest Developments OCI announces rights’ issue with a size of EGP2,311.5 million OCI has announced that it will increase its authorized capital from EGP2,000 million to EGP5,000 million and its paid-in capital from EGP952.9 million to EGP1,010.4 million. The increase in paid-in capital will be effected through issuing 11.5 million shares at EGP201/share (par value of EGP5 while EGP196 to be added to reserves) to shareholders as of record on February 16, 2005, bringing total number of shares to 202.1 million shares. Total proceeds of the capital increase will amount to EGP2,311.5 million. These proceeds will be used to finance OCI’s new expansions and investments in emerging markets including Turkey and Algeria. Subscription started on February 22, 2006 and will end on March 23, 2006. The Sawiris family, owning 63% of the company, has announced that it is committed to fully subscribe to its portion of the rights issue. OCI issues EGP1,450.0 million in bonds During 3Q05, OCI completed the issuance of its third nominal non-convertible bond issue of EGP1.45 billion. The issue was in three tranches, two EGP250.0 million tranches and the third USD150.0 million. The proceeds were used to refinance existing debt and new long-term investments. The Egyptian Pound tranches were oversubscribed 12.6x with subscription requests totalling EGP6,290 million. The dollar tranche was oversubscribed 2.85x with subscription requests totalling USD427.5 million. Table 3: OCI EGP1,450 million Bond Issue First Tranche
Value EGP250 Mil.
Coupon Semi-annual
Terms Fixed coupon at 11.75%
Second Tranche
EGP250 Mil.
Semi-annual
CBE discount rate + 150 bps
Third Tranche
USD150 Mil.
Semi-annual
6 Months LIBOR + 150 bps
Source: OCI, HC Brokerage
OCI launches USD300 million 5-year debut facility in the Euroloan Market OCI appointed Citigroup, BNP Paribas Le Caire, Calyon Bank Egypt, HSBC Bank Middle East Limited, NSGB and National Bank of Egypt (UK) Ltd as Lead Arrangers for a USD300 million 5-year revolver debut facility in the Euroloan market. OCI has established a wholly owned subsidiary in the British Virgin Islands to act as its borrowing arm. The new subsidiary, OCI Finance BVI, will act as the obligor for the proposed facility. The facility will benefit from an unconditional guarantee from OCI. The revolver carries a margin of 80 bps per annum to USD LIBOR. OCI establishes fertilizer projects in Egypt and Algeria OCI has announced that it will venture in the filed of natural gas based industries, mainly ammonia and urea fertilizers to capitalize on the competitive cost of energy in the Middle East and OCI’s technical competency in industrial plant construction. OCI’s fertilizer investments are in two companies: 1) Egyptian Basic Industries Corporation (EBIC) of which OCI owns 30% (USD57.0 million) of the equity of the project. The project has an investment cost of USD540.0 million; 65% of which will be financed through debt; and 2) Algerian Fertilizer Company, OCI has a 51% stake in the project to produce ammonia/urea fertilizer in Algeria. The project has an investment cost of USD746.0 million.
Building Materials & Construction – OCI
4
Brokerage II. Orascom Construction Industries Overview Brief background Orascom Construction Industries (OCI) is a leading cement producer and construction contractor active in emerging markets. The company is based in Cairo, Egypt, with activities in more than 20 countries and international revenues exceeding 70% of total revenues as of 9M05. OCI’s work force is currently around 40,000 employees. OCI is listed primarily on the Cairo & Alexandria Stock Exchange (CASE) since 1999, and is listed on London Stock Exchange (LSE) with a GDR ratio of 1 GDR to 2 shares. The company is 63% owned by the Sawiris Family and its chairman & founder is Mr. Onsi Sawiris, while the Chief Executive Officer is Mr. Nassef Sawiris. OCI is engaged in two lines of business that complement each other: Construction and Cement in addition to the company’s new expansions in the field of natural gas based industries. OCI’s historical landmarks OCI emerged rapidly from a company with five employees in 1976 and is forecast to be the number eight cement manufacturer globally by 2008 and ranks among the top 150 largest contractors globally. Table 4: OCI historical landmarks Year 1950
Landmark Foundation of a construction company by Mr. Onsi Sawiris in Upper Egypt
1961
Nationalization of the business; and change of name to El Nasr Civil Works. Onsi Sawiris left for Libya to continue his construction career.
1976
Mr. Onsi Sawiris returns to Cairo and establishes Orascom as a general contracting and trading company with five employees.
Early 1990’s Mr. Onsi Sawiris establishes Orascom as a leading private sector contractor. 1995
Mr. Onsi Sawiris transfers management control to Mr. Nassef Sawiris, who embarked upon an ambitious diversification strategy through investment in complementary businesses such as cement and building materials.
1999
OCI Initial Public Offering (IPO) on the CASE.
Source: OCI
OCI core enterprise-wide strategies The company’s main strategies are to i) establish strategic partnerships; ii) expand operations regionally; and iii) utilize the latest production technologies. The management team intends to deliver sustainable growth and above average returns by implementing these strategies. i)
ii)
iii)
Building Materials & Construction – OCI
Strategic Partnerships. The OCI Cement Group has partnered with Holcim in Egypt and Nigeria, with a prominent investor in Iraq, and with Dubai Holding in the UAE. The OCI Construction Group regularly partners with other multinational contractors to deliver superior fast track design-build solutions to its customers. Regional Expansion. OCI is currently active in more than 20 countries and international revenues accounted for around 70% of gross consolidated revenues (as of 9M05). Latest Technology. OCI has invested in the state-of-the-art cement production equipment and information systems.
5
Brokerage Chart 1: OCI Competitive Strengths
Sustainable Growth Drivers
Inter-company Synergies
Low Cost Structure
Reputation & Management
Source: OCI, HC Brokerage
Remarkable growth over a limited time span Since its IPO in 1999, OCI grew considerably locally and regionally, managing to achieve this growth while maintaining its target profit margins. OCI assets grew from EGP4.5 billion in 2000 to EGP16.3 billion as of 9M05 (a growth rate of 266.1%); while net worth grew from EGP1.0 billion in 2000 to EGP4.0 billion as of 9M05 (a growth rate of 292.1%). OCI’s EBITDA margin averaged 28.4% over this period (2000-2005), GPM averaged 28.2% and NPM averaged 13.3%.
Chart 2: OCI Evolution and Margins from (2000 to 2005) GPM NPM
14
Asset s
12
EGP Million
EBITDA M argin
35
16
Equit y
10
30 25
8 20
6 4
15
2 0
10
2000
2001
2002
2003
2004
A s s e t & E quit y E v o lut io n
9M 05
2000
2001
2002
2003
2004
9M05
O C I M a rgins
Source: HC Brokerage, OCI
Building Materials & Construction – OCI
6
Brokerage Contribution of cement and construction LOBs to top and bottom line Construction’s contribution to top line stood at 73.1% vs. 26.9% for cement in 9M05. However, because of tighter construction EBITDA margin of 10.6% vs. 55.1% for cement; construction contributed only 30.3% to bottom line while cement contributed the balance in 9M05. Starting in FY05, OCI has aggregated all other revenues under the construction LOB, revenues from OCI’s new fertilizers projects will be treated similarly. Table 5: Contribution by LOB 2000
2001
2002
2003
2004
9M05
Cement
28%
32%
31%
25%
25%
27%
Construction
72%
68%
69%
75%
75%
73%
Contribution to Sales*
Consolidated Sales** (EGP Mil.)
2,024.3 2,419.1 2,910.8 4,645.9 8,555.8 8,270.3
58.3% 18.1% 31.7%
56.5% 20.9% 33.1%
54.4% 10.1% 27.4%
Cement
50%
54%
46%
34%
51%
70%
Construction
50%
46%
54%
66%
49%
30%
279.1
303.8
363.9
Cement EBITDA Margin Construction EBITDA Margin Consolidated EBITDA Margin
42.5% 54.3% 18.1% 12.2% 26.0% 25.4%
55.1% 10.6% 24.5%
Contribution to Net Income*
Consolidated Net Income** (EGP Mil.)
558.3 1,101.3 1,274.5
* Before Eliminations ** After Eliminations. Source: OCI, HC Brokerage
Chart 3: Contribution to OCI Consolidated Sales and Net Earnings by LOB* (2000 - 9M05) Contribution by LOB to Sales
Contribution by LOB to Net Income
8,000
Cement
Construction Cement
800
EGP Million
6,000
EGP Million
1,000
Construction
7,000
5,000 4,000 3,000 2,000
600 400 200
1,000 0
0 2000
2001
2002
2003
2004
9M05
2000
2001
2002
2003
2004
9M05
*Before eliminations. Source: HC Brokerage, OCI
Building Materials & Construction – OCI
7
Brokerage
Chart 4: EBITDA Margin by LOB (2000 – 9M05) 70 60 50 Cement 40
Consolidated Construct ion
30 20 10 0 2000
2001
2002
2003
2004
9M 05
Source: HC Brokerage, OCI
International revenues contributed c.70% of gross revenues in 9M05 In 9M05 international revenues accounted for around 70% of OCI’s gross consolidated revenues at EGP6.1 billion, while local construction revenues registered EGP5.1 billion and local cement revenues constituted EGP1.0 billion. As such OCI’s revenue sources are diversified and OCI’s exposure to political risk in any one country is minimized. However, the company’s upcoming investments in Iraq are subject to a high degree of political risk. Table 6: Summary of OCI’s International Revenues (2003 – 9M05) EGP Mil.
Construction International Revenues
% of total Construction Revenues
FY03 1,800
FY04 5,200
9M05 5,100
57%
82%
78%
International Backlog
1,500
9,400
12,600
Total Backlog
2,400
10,900
14,150
63%
86%
89%
% of International Backlog/Total Backlog Cement International Revenues
% of total Cement Revenues Total International Revenues
% of consolidated Gross Revenues
332
1,200
1,000
32%
52%
43%
2,300
5,700
6,100
47%
61%
68%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
8
Brokerage OCI has 33 operational subsidiaries OCI’s has 33 operational subsidiaries falling under its two lines of business. The Cement LOB has 14 subsidiaries, while the Construction LOB has 19. Table 7: OCI Subsidiaries (as of 9M05) Operation Cement Group
Description
OCI Stake
Algerian Cement Co.
Cement manufacturer in Algeria
Egyptian Cement Co.
Cement manufacturer in Egypt
53.7%
United Cement Holding
Cement plant operator in Northern Iraq
51.0%
-Tasluja Cement Co.
Leased cement plant in Northern Iraq
100.0%
-
Pakistan Cement Co.
Cement manufacturer in Pakistan (Under Construction)
62.8%
United Cement Corp.
Cement manufacturer in Northern Iraq (under construction)
51.0%
Emirates Cement Co.
Cement manufacturer in the UAE (under construction)
50.0%
Ciments Blanc d’Algerie
White Cement manufacturer in Algeria (under construction)
Cimentos La Parilla
Cement Grinder in Spain
100% 51.1%
Van Cement
Cement manufacturer in Turkey
-
Baticim Cimento
Cement manufacturer in Turkey
20.0%
Sudacem
Cement Import Terminal & Distributor in Sudan
49.0%
Ready Mix Egypt
Ready-to-use-concrete
National Bag Co.
Cement, building materials and agriculture bags
75.0%
Mehsas National Bag Co.
Cement, building materials and foodstuff bags
50.0%
100%
Construction Group OCI Construction Activities
Regional Engineering, Procurement and Construction (EPC) services
Besix Group
International EPC services
100.0% 50.0%
Contrack International Inc.
Construction services for US government-financed projects
45.0%
OCI Algeria
EPC services in Algeria
Cementech Limited
Specialized EPC services on cement plants
Orascom Road Constr.
Asphalt and concrete paving
100% 100% 90.0%
National Steel Fabrication
Steel cutting, bending, welding and painting services
50.0%
Alico Egypt
Building façade, curtain walling and window systems
50.0%
Egyptian Basic Industries Corp.
Ammonia fertilizer manufacturer in Egypt
30.0%
Algerian Fertilizer Company
Ammonia/Urea Fertilizer manufacturer in Algeria
51.0%
Suez Industrial Development Co. Industrial Park Developer Egyptian Container Handling Co. Stevedoring services at Adabia port
-Sokhna Port Dev. Co.
60.5% 50.0%
Stevedoring services at Sokhna port
70.0%
Nile Valley Gas Company
Natural gas distribution in Upper Egypt
20.0%
National Pipe Company
Concrete pipe
40.0%
United Paints & Chemicals Co.
Pre-blended dry plaster, putty, and tile adhesives
50.0%
Gypsum manufacturer Construction chemicals Waterproofing contractor
50.0% 50.0% 50.1%
Paints and building chemicals
15.0%
- Egyptian Gypsum Co. - MBT Egypt - A-Build Egypt SCIB Chemical Source: OCI
Building Materials & Construction – OCI
9
Brokerage II.A. Cement Overview The OCI Cement Group is the largest cement producer in the Middle East and a leading regional cement exporter. In terms of international ranking, OCI Cement Group will rank as number eight upon completion of its expansion plans in 2008. OCI’s principal operating cement subsidiaries are the Egyptian Cement Company (ECC) and the Algerian Cement Company with an annual installed cement capacity of 13.5 million tons. ECC accounted for 71% of total FY04 cement revenues; while ACC accounted for 29%. The company is currently constructing integrated cement plants in Pakistan, Northern Iraq, Nigeria, and the UAE, which will increase OCI’s annual production capacity to more than 30.0 million tons by 2008. OCI exports cement primarily from Egypt to customers in more than 30 countries including most importantly the USA and Spain. In addition the company has recently acquired control of a grinding cement plant in Spain and a cement terminal in Sudan. OCI also produces and distributes ready mix concrete and cement bags in Egypt and Algeria.
Chart 5: OCI Cement Group International Ranking (2008f) 180 160
156
Capacity (Mill. tons)
Million Tons
140
114
120
97
100
70
80
48
60
43
41
40 20
34
28
23
17
O CI Vo lt or an ti m Si am Ce m G ra en si t m /U lt ra te ch
Ta ih ei Bu yo zz iD yc he rh of f
ex H ei de lb er g It al ce m en ti
Ce m
La fa rg e
H ol ci m
0
Source: HC Brokerage
Building Materials & Construction – OCI
10
Brokerage OCI Cement Group Evolution OCI’s total cement capacity grew considerably from 1.5 mtpa in 1999 to 14.4 mtpa in 2005. ECC and ACC currently constitute 59% and 35%, respectively. ECC will increase its capacity during 2006 from 8.5 mtpa to 10.0 mtpa, thereby accounting for 47% of a total expected capacity of 21.5 mtpa by end of 2006. Based on OCI’s announced cement expansions, we estimate a total regional cement capacity of 34.4 mtpa by 2008.
Chart 6: OCI Cement Group Capacity Evolution from 1999 to date 40 34.4
Capacity (M ill. to ns)
35 30
26.8
25
21.5
20 14.4
15 10
5.3
5
1.5
7.0
7.5
2002
2003
9.7
3.0
0 1999
2000
2001
2004
2005
2006
2007
2008
Source: HC Brokerage estimates based on OCI announced capacity expansions.
Cement demand peaks in summer Cement is a seasonal commodity where demand peaks in summer. OCI’s cement revenues clearly reflect this pattern, where second and third quarter revenues (from April to end of September) are higher than first and fourth quarter revenues (from November to end of March). In 2003, 4Q revenues were the highest during the year and that is due to the start of operations of the Algerian Cement Company (ACC), which boosted 4Q03 revenues.
Chart 7: Quarterly comparison of Cement Revenues (2003 – 9M05) 1,000 1Q
900
2Q
800
3Q
EGP Million
700
4Q
600 500 400 300 200 100 0 2003
2004
2005
Source: HC Brokerage
Cement Regional Expansions OCI Cement Group is expanding regionally targeting key emerging markets with large populations and growing economies. The majority of OCI’s new cement capacities would be completed by the end of 2007 and are expected to start contributing to OCI’s Cement Group revenues by 1Q08. OCI Cement Group is also focusing on countries facing cement shortages, with relatively Building Materials & Construction – OCI
11
Brokerage high selling prices of between USD100/ton to 130/ton. The highest profit margin in the cement group is expected to be generated in Iraq where the local selling price is USD120/ton and the cash cost is USD25/ton. Table 8: OCI Cement Operations Summary Cement Operation ECC
Country Capacity Pop. Consumption GDP/ mtpa Mil. Kg/capita Capita (USD) Egypt 8.50 72 389 1,093
Stake
Invest. Completion Cost Date USD/ton 53.7% 71-117 Operational
ACC
Algeria
5.00
33
455
2,611 100.0%
85-118
Operational
CIBA
Algeria
0.55
33
455
2,611 100.0%
332
August 2007
UNICEM
Nigeria
2.50
143
516
37.6%
132
June 2007
Cimentos La Parilla
Spain
0.60
41
1,166 25,000
51.1%
42
Operational
Emirates Cement
UAE
3.00
4
3,721 24,004
50.0%
123
Late 2007
United Cement Co.
Iraq (Bazian)
2.90
29
51.0%
127
4Q07
United Cement Hldg
Iraq (Tasluja)
2.30
29
51.0%
120
Mid 2006
Pakistan Cement
Pakistan
2.20
156
90
632
62.8%
90
August 2006
Sudacem
Sudan
-
40
-
570
49.0%
Van Cement
Turkey
0.60
73
426
4,199
100%
Baticim Cimento*
Turkey
4.2
73
426
4,199
20.0%
70
276
907
276
907
-
69
Operational Operational
* The company’s capacity in terms of clinker is 2.2 mtpa and owns 75% of Batisoke that has a cement capacity of 1.2 mpta. Source: OCI, HC Brokerage, World Bank
Chart 8: OCI Cement Operations by Country - Key Indicators Price/ton 140
90%
Cash cost/ton* Profit Margin (%)
120
80%
Iraq UAE
100
USD/ton
Nigeria
70% 80 60
60%
Algeria Egypt
Invest. Cost/ ton*
Pakistan
40 50% 20 0
40% Egypt
Algeria Nigeria
UAE
Iraq
Turkey 0
10
20
30 40
50 60
Pakistan Turkey
70
80 90 100 110 120 130 140
USD/ t on
* Cash cost/ton includes energy cost, labor, packaging, maintenance and other expenses and excludes SG&A and depreciation. Source: HC Brokerage
Building Materials & Construction – OCI
12
Brokerage 1) Egyptian Cement Company (ECC) ECC is located in the Suez area and operates four dry process production lines, each with a design capacity of 2 mtpa while actual production for all four lines stands at 8.5 mtpa. ECC is one of the most cost efficient cement producers in the world with a current cash cost/ton of USD12/ton. ECC is the largest contributor to OCI Cement Group revenues. ECC’s contribution to FY04 and 9M05 cement revenues came in at 70.1% and 62.6%, respectively. In terms of bottom line ECC contributed 77.3% of FY04 cement group net earnings of EGP875.1 million and 68.3% of 9M05 net earnings of EGP1,077.5 million. OCI has announced that it will increase ECC’s capacity from 8.5 million tons to 10.0 million tons through a new by-pass treatment mechanism. The investment cost of this project is EUR28.2 million. The new technology targets lowering overall by-pass dust emissions by up to 60% and reducing the energy and electricity consumption per ton of cement produced. Completion of the by-pass treatment production line is scheduled for May 2006. Table 9: ECC Information Summary General Information Operation
Egyptian Cement Company (ECC). ECC produces OPC.
Location
Egypt
Date of Establishment
1996
Ownership
53.7% owned by OCI and 44% owned by Holcim
Type of Energy used
Natural gas
Current Capacity
8.5 mtpa
Total Investment Cost
USD836 Mil.
Investment Cost/ton
USD71-117/ton
Planned Capacity Upgrade
1.5 mtpa
Capex Bill
EUR28.2 Mil.
Completion date
Mid 2006
Current Selling price/ton
USD53/ton
Current cash cost/ton
USD12/ton
Market share
18.33% (as of FY05)
Source: OCI, HC Brokerage
Chart 9: ECC Capacity Evolution
2007f 2006f 2005e Capacity
2004 2003 0
2
4
6
8
10
Mil. tons Source: HC Brokerage, OCI
Building Materials & Construction – OCI
13
Brokerage The Egyptian cement market overview in FY05 Local cement demand in Egypt came in at 28.2 million tons in 2005, up 19.8% from 23.5 million tons in 2004. ECC accounted for 18.3% of this volume (5.2 million tons). The increase in local demand was at the expense of exports, which fell by 22.5% to 9.5 million tons, down from 12.3 million tons in 2004. ECC accounted for 26.5% of these exports (2.5 million tons). ECC came second in terms of local sales and exports after Italcementi subsidiaries in Egypt that comprise Suez, ASEC and Torah, which collectively accounted for 30% of local and export sales, respectively in FY05. The majority of ECC exports are to the United States (34%) and the Middle East (34%).
Chart 10: ECC’s share of Egypt’s local sales and Exports Ameryah 9%
National 8% Beni Suef & Alex 9%
Sinai 4% Qena 3%
Sinai Cement 8%
A ssiut 7%
Misr Beni Suef 3%
Suez 31%
Sinai White 3%
M isr B eni Suef 8%
ECC 18%
Qena 3% A meryah 2%
Natio nal 12%
Assiut 15% Local Sales
Suez 30%
ECC 26% E xpo rt s
A lex & B eni Suef 1%
Source: Cement Producers Council, ECC, HC Brokerage
Table 10: ECC’s Key Financial Indicators 2003
2004
9M05
1,151.6
1,607.9
1,508.9
91.9%
70.1%
62.6%
Key Financial Indicators Sales % of OCI Cement Sales Net Profit
306.4*
676.2
736.0
% of OCI Cement Net Earnings
100.5%
77.3%
68.3%
26.6%
42.1%
48.8%
NPM * Before Eliminations. Source: OCI, HC Brokerage
Chart 11: ECC Export Destinations as of 9M05
Middle East
Afria
34%
27%
Europe USA
5%
34%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
14
Brokerage 2) Algerian Cement Company (ACC) ACC is the largest cement producer in Algeria with two production lines and a capacity of 5.0 mtpa. The first line started operations in January 2004, and the second line started operations in mid 2005. ACC is expected to export cement regionally starting 2006. Table 11: ACC Information Summary General Information Operation
Algerian Cement Company (ACC). Cement manufacturer
Location
Algeria
Date of Establishment
2001
Ownership
100% owned by OCI
Type of Energy
Natural gas
Current Capacity
5.0 mtpa
Total Investment Cost
USD507.5 Mil.
Investment Cost/ton
USD85-118/ton
Current Selling price/ton
USD67/ton
Current cash cost/ton
USD15/ton
Market share
21% (as of 3Q05)
Source: OCI, HC Brokerage
Chart 12: ACC Capacity Evolution
2007f
2006f
2005e
Capacity
2004 0
2
4
6
Mil. tons Source: HC Brokerage, OCI
Table 12: ACC’s Key Financial Indicators 2004
9M05
Key Financial Indicators Sales
660.0
659.8
% of OCI Cement Sales
29.1%
27.4%
Net Profit
164.0
321.9
% of OCI Cement Net Earnings
18.7%
29.9%
NPM
24.8%
48.8%
* Before Eliminations. Source: OCI, HC Brokerage
3) Ciments Blancs d’Algerie (CIBA) In August 2005, OCI contract with a value construct a Greenfield demand, estimated at Building Materials & Construction – OCI
announced that its newly established CIBA has signed an EPC of USD138 million with an F.L.Smidth/OCI Algeria consortium to capacity of 0.55 mtpa. CIBA will cater for Algerian white cement 0.3 mtpa during 2004. CIBA’s location near three major Algerian 15
Brokerage ports and the national railway networks provide potential for exports in the near future. The total investment cost of CIBA is USD182.4 million to be financed by a 55% to 45% debt to equity structure. Table 13: CIBA Information Summary General Information Operation
CIBA is currently under construction and will produce white cement(Greenfield)
Location
Algeria
Date of Establishment
August 2005
Ownership
100% owned by OCI
Type of Energy
Natural gas
Current Capacity
0.55 mtpa
Total Investment Cost
USD182.4 Mill.
Investment Cost/ton
USD332/ton
Completion Date
August 2007.
Source: OCI, HC Brokerage
Algerian Cement Market Overview Algeria consumed 15.0 million tons of cement in 2004, implying a per capita cement consumption of 455 kgs/person, based on a population estimate of 33.0 million. To satisfy local demand, Algeria imported 1.34 million tons for USD75.0 million1 in 2004 at USD56/ton. Algeria imports cement from Tunisia, France, Germany and Spain. There are four state owned cement players, other than ACC, in the market with a combined cement capacity of 13.5 million tons. These players are Groupe Industrielle des Ciments et Dérivés Centre (ERCC) (3.4 mpta), Groupe Industrielle des Ciments et Dérivés d’Ech-Cheleff (2.0 mtpa) (ECDE), Groupe Industrielle des Ciments et Dérivés Est (4.4 mtpa) (ERCE) and Groupe Industrielle des Ciments et Dérivés Ouest (2.7 mtpa) (ERCO). Algeria’s cement capacity rose to 17.0 million tons after ACC increased its production capacity to around 5.0 mtpa during 2005. 4) Pakistan Cement Company (PCC) In March 2005, OCI acquired a controlling 51% stake in Pakistan Cement Company (PCC), formerly known as Chakwal Cement Company. In July 2005, OCI increased its stake in PCC to 60.6% through the conversion of USD19.2 million of debt it had purchased earlier into equity. To complete the construction of PCC’s new cement plant, PCC has signed agreements with a syndicate of 11 Pakistani banks and the Eksport Kredit-Fonden (EKF), the Denmarkbased international export credit agency, for the financing of the equivalent of USD130.0 million in limited recourse project finance debt which will be provided in Pakistani Rupees. The syndication of the Pakistani banks will provide USD80.0 million in debt finance to be repaid over a period of seven years with a grace period of two years. EKF will guarantee USD50.0 million in debt finance, which will also be provided by three Pakistani banks to finance additional importation of equipment. The EKF guaranteed a portion of the loan will be repaid over a period of eight years with a similar grace period of two years. PCC is scheduled to start operation in mid 2006. Pakistan cement exports are mainly to Afghanistan.
1
Algerian Customs Authority.
Building Materials & Construction – OCI
16
Brokerage
Table 14: PCC Information Summary General Information Operation
Pakistan Cement Company (PCC). Cement manufacturer (under construction).
Location
Pakistan
Date of Acquisition
March 2005
Ownership
62.75% owned by OCI
Type of Energy
Coal, Fuel
Current Capacity
2.2 mtpa
Total Investment Cost
USD198 Mill.
Investment Cost/ton
USD90/ton
Completion Date
August 2006.
Current Selling price/ton USD84/ton Current cash cost/ton
USD29/ton
Source: OCI, HC Brokerage
Pakistan Cement Market Overview There are around 22 operating cement plants in Pakistan with an installed capacity of 18.0 mtpa, expected to reach 28.0 mtpa by 2008. Demand registered 14.0 million tons in 2004 and is expected to reach 22.0 mtpa by 2008. Pakistan exports around 3.0 mtpa of cement to Afghanistan, with Iran being its major competitor in this market. Pakistan uses coal as a main source of energy for manufacturing cement. The price/ton of coal is around USD70. 5) United Cement Holding (Tasluja, Kurdistan, Iraq) In November 2004, the Kurdistan Regional Government awarded an OCI consortium a 12year lease contract for the Tasluja cement plant. Under the terms of the lease contract, OCI will be responsible for the rehabilitation, operation and maintenance of the Tasluja cement plant and will have the first right of refusal after the end of the lease agreement to bid for the plant should other bidders express interest in acquiring it. Handover of the plant to OCI was completed in February 2005. The plant is the largest cement plant in Northern Iraq with a capacity of 2.3 mtpa. The rehabilitation of line I, which currently produces less than 300,000 mtpa, was completed in mid 2005. The rehabilitation of line II, which is currently idle, is expected to be completed by mid 2006. Table 15: Tasluja Information Summary General Information Operation
12-year leased cement plant in Northern Iraq
Location
Iraq
Date of Lease Contract
November 2004
Ownership
51% owned by OCI
Type of Energy
Natural gas
Current Capacity
2.3 mtpa
Total Investment Cost
USD276 Mill.
Investment Cost/ton
USD120/ton
Completion Date
Mid 2006.
Current Selling price/ton USD120/ton Current cash cost/ton
USD25/ton
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
17
Brokerage 6) United Cement Corporation (Bazian, Northern Iraq) United Cement Corporation is also located in Northern Iraq. The company (51% owned by OCI) is planned to have a production capacity of 2.9 mtpa with an investment cost of USD368.0 million. The plant is expected to be completed in late 2007. Table 16: United Cement Corporation (Bazian) Information Summary General Information Operation
Cement manufacturer in Northern Iraq (under Construction)
Location
Iraq
Ownership
51% owned by OCI
Type of Energy
Natural gas
Current Capacity
2.9 mtpa
Total Investment Cost
USD368 Mill.
Investment Cost/ton
USD127/ton
Completion Date
4Q07.
Current Selling price/ton USD120/ton Current cash cost/ton
USD25/ton
Source: OCI, HC Brokerage
Iraqi Market Overview In 2004, Iraqi total cement production reached 0.5 mtpa down from 7.2 mtpa in 2002 before the war. The country has currently an annual design capacity of 19.3 mtpa but its operating capacity is of 2.6 mtpa only. Domestic consumption in Iraq in 2004 reached 8.0 million tons. 7) Emirates Cement Company In September 2005, OCI announced that it will establish the Emirates Cement Company in partnership with the Dubai Investment Group (DIG), a member of Dubai Holding LLC, and the government of the Emirate of Fujairah (UAE). The plant and the raw material quarry will be located in Fujairah. OCI will be responsible for managing and operating the new plant. Table 17: Emirates Cement Company Information Summary General Information Operation
Cement manufacturer in the UAE (under Construction) (Greenfield)
Location
UAE
Date of Establishment
September 2005
Ownership
50% owned by OCI and 50% owned DIG
Type of Energy
Natural gas
Current Capacity
3.0 mtpa
Total Investment Cost
USD370 Mill.
Investment Cost/ton
USD123/ton
Completion Date
End of FY07
Current Selling price/ton USD71/ton Current cash cost/ton
USD33/ton
Source: OCI, HC Brokerage
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Brokerage UAE Cement Market Overview There are seven companies operating in the UAE cement market. Total cement capacity as of FY05 reached 11.0 million tons. Local consumption reached 16.0 million tons in 2004, thus the market had a shortage of 5.0 million tons in 2004. The United Arab Emirates (UAE) is currently importing cement but starting 2006, when additional capacities come on line, cement imports are expected to gradually drop. Capacity is expected to reach around 20.0 mtpa. In an attempt to combat the shortage of cement in the UAE, the UAE government reduced tariffs on cement imports2. 8) United Cement Company of Nigeria Ltd. (UNICEM) Egyptian Cement Company (ECC) entered into a partnership with the Flour Mills of Nigeria Ltd. to construct a new Greenfield 2.5 mpta cement factory. ECC’s share in the project is 70% and since ECC is 53.7% owned by OCI and 44% owned by Holcim, the shareholding structure of UNICEM is as follows: 37.6% OCI, 30.8% Holcim, and 30% owned by the Flour Mills of Nigeria Ltd. In August 2005, the European Investment Bank signed loan facilities totalling USD150.0 million with Obanja Cement PLC to finance the construction and operation of a new cement Greenfield plant with a capacity of 4.4 mtpa . Table 18: UNICEM Information Summary Operation
Cement manufacturer in Nigeria (under Construction) (Greenfield)
Location
Nigeria
Date of Establishment
February 2005
Ownership
70% owned by ECC and 30% owned by Flour Mills of Nigeria Ltd.
Type of Energy
A combination of natural gas and fuel
Current Capacity
2.5 mtpa
Total Investment Cost
USD330 Mill.
Investment Cost/ton
USD132/ton
Completion Date
End of FY07
Current Selling price/ton
USD130/ton
Current cash cost/ton
USD40/ton
Source: OCI, HC Brokerage
Nigerian Cement Market Overview Nigeria is the world’s second largest importer of cement and it has a low cement per capita consumption of around 70 kgs. The new project is expected to help bridge the cement demand gap of around 7.0 mtpa as Nigeria’s annual cement needs are in the range of 10.0 mpta and the existing capacities and the existing capacities are only of around 3.0 mtpa (only one international player in the market).
2
Construction World-Gulf Edition.
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Brokerage 9) Cementos La Parilla In September 2005, OCI has acquired a 51.1% stake in Cementos La Parilla through an indirect participation for a total sum of EUR20.7 million. Cementos la Parilla is a grinding station with a capacity of 0.6 million tons per year. OCI will supply Cementos La Parilla with clinker initially from its Egyptian subsidiary ECC and possibly in future from ACC as well. In January 2006, OCI started the doubling of the capacity of Cementos La Parilla station to reach 1.1 mtpa. The acquisition is part of the OCI Cement Group long-term strategy to strengthen its presence in the Mediterranean region. Table 19: Cementos La Parilla Information Summary General Information Operation
Cement Grinder in Spain
Location
Spain
Date of Establishment
September 2005
Ownership
51.1% owned by OCI
Current Capacity
0.6 mtpa
Total Investment Cost
EUR20.7 million
Investment Cost/ton
EUR35/ton
Current Selling price/ton USD84/ton Source: OCI, HC Brokerage
Spanish Cement Market Overview Spain is the largest consumer and the largest cement importer in Europe. Cement consumption reached 47.8 million tons in 2004, of which 8.2 million tons were imported. Cement demand is expected to grow by 3.7% in 2006. We believe that OCI’s new capacity will easily be absorbed. 10) Turkey Investments in Van Cement & Baticim Cimento OCI has made two acquisitions in Turkey, Van Cement and Baticim Cimento earmarking a total of USD250 million for its investments in both regions (equivalent to USD69/ton). OCI sees the Turkish acquisitions as a natural extension to their core geographic markets around the Mediterranean rim.
A) Van Cement: OCI acquired Van Cement in Eastern Turkey for a total consideration of USD54.0 million at an acquisition cost per ton of USD97. The plant has a capacity of 0.6 mtpa of cement and 0.2 mtpa of clinker with large potential for upgrade as OCI intends to increase its capacity in the Eastern region of Turkey to around 3.0 mtpa through a local partnership that will be subject to regulatory approvals. Van Cement sold 192,000 tons of cement in 2004. OCI’s investment in East Turkey complements its presence in Northern Iraq (the 2.3 mpta leased capacity Tasluja and the 3.0 mtpa capacity in Bazian scheduled to commence operations in 2007) in addition to creating potential for exports to Iraq and Syria. Syria’s current cement capacity stands at around 6.0 mtpa, while its demand is in the range of 8.0 mtpa.
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Brokerage Table 20: Van Cement Information Summary General Information Operation
Cement Manufacturer in Turkey
Location
East Turkey
Date of Acquisition
January 2006
Ownership
OCI
Type of Energy
Fuel
Current Capacity
0.6 mtpa and 0.2 mtpa of clinker
Total Acquisition Cost
USD54 million
Acquisition Cost/ton
USD97/ton
Current Selling price/ton USD70/ton Current cash cost/ton
USD28/ton
Source: OCI, HC Brokerage
B) Baticim Cimento: OCI made another acquisition in Western Turkey through acquiring 20% of Baticim Cimento, which has an annual cement capacity of 3.0 mtpa and clinker capacity of 2.2 mtpa, for a total value of USD54.7 million at an EV/ton of USD82. Baticim Cimento is the majority shareholder (75%) of Batisoke Cimento, which has annual clinker and cement capacities of 0.8 mtpa and 1.2 mtpa, respectively. On a consolidated basis, Baticim Cimento is the fourth largest cement exporter in Turkey with proximity to ports and holds close to 50% market share of the Aegean region. Baticim generates 30%-40% of its revenues from exports to the Mediterranean region. Baticim has cash piled in excess of USD50.0 million. Table 21: Baticim Cimento and Batisoke Cimento FY05 Key Financial Indicators USD Mil.
FY04
Sales FY05
FY04
Net Income FY05
FY04
NPM FY05
Baticim
195.3
197.9
10.2
31.2
5.3%
15.8%
Batisoke
51.2
61.5
4.4
15.1
8.6%
24.6%
Source: Bloomberg
Table 22: Baticim Cimento Information Summary General Information Operation
Cement Manufacturer in Turkey
Location
Turkey
Date of Establishment
12 August 2005-19 December 2005
Ownership
51.1% owned by OCI
Type of Energy
Fuel
Current Capacity
3.0 mtpa of cement and 2.2 mtpa of clinker.
Total Acquisition Cost
USD54.7 million
Acquisition Cost/ton
USD18/ton
Current Selling price/ton USD70/ton Current cash cost/ton
USD28/ton
Source: OCI, HC Brokerage
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Brokerage Turkish Cement Market Overview Turkey is one of the largest cement producers and exporters in the Mediterranean region experiencing double-digit growth in consumption. Domestic consumption grew by 14% from January 2005 to October 2005. The prospect of Turkey’s EU accession will provide a further boost for economic activity in Turkey. Turkey has a grinding capacity of 65.9 mn tons and clinker capacity of 40 mn tons. Turkish cement exports reached 8.2 million tons in 2004. From January 2005 till October 2005 Turkey exported 6.4 million tons, 10% lower than in the same period of 2004 due to the rise in local demand. Turkey consumed 31.0 million tons in 2004 implying a cement per capita consumption of 426 kgs. Domestic consumption is expected to increase to 33.2 million tons in 2005 and 35.6 million tons in 2006. Cement exports are estimated to remain at around 8.0 million tons in 2005. Turkey is expected to increase its production capacity to 43.0 million tons of clinker (an increase of 3.0 million tons). Turkey is exporting cement to Iraq using land routes.
11) OCI other cement related investments
a) Sudacem Sudacem is a 49% owned subsidiary of OCI. It is a cement importer terminal and distributor in Sudan as OCI sees good potential in the Sudanese market.
b) Ready Mix Egypt Ready Mix Egypt (RME) is a 100% owned subsidiary by OCI and produces ready to use concrete. The company was established in 1999 and is one of the largest ready-mix companies in Egypt with a capacity of 1.2 million m³ annually of concrete. RME contributed 3.5% (EGP85.6 million) of OCI Cement Group 9M05 revenues of EGP2,412.3 million.
c) National Bag Company National Bag Company (NBC), a 75% owned subsidiary by OCI established in 1997. NBC produces bags for cement, building materials, fast food, and agricultural products with an annual capacity of 160.0 million cement bags annually. NBC is the largest bag producer in Egypt located in the 6th of October City and produces cement bags for its sister company ECC, Ameryah Cement Company (Cimpor) and Alexandria Cement Company (Lafarge) as well as fast food bags for McDonalds and Hardees. NBC contributed 4.9% (EGP118.2 million) of OCI Cement Group 9M05 revenues of EGP2,412.3 million.
d) Mehsas National Bag Company Mehsas National Bag Company (MNBC), 50% owned by OCI, was established in 1998 in Algeria to manufacture and sell packaging products for the cement, building materials, agriculture and chemical industries. MNBC has a capacity of 80.0 million bags annually, and it produces cement bags for the Algerian Cement Company (ACC).
e) Egypt Sack In January 2006, OCI announced that it has completed the acquisition of Egypt Sack for a total value of EGP43 million. Egypt Sack owns and operates a cement bags manufacturing plant in the industrial zone of 6th of October City with an annual production capacity of 60.0 million cement bags. Post this acquisition, OCI consolidated cement bags manufacturing capacity reached 300 million bags per year including NBC and MNBC. Egypt Sack posted revenues of EGP38.6 million and a net income of EGP6.7 million during 2004. Management estimates net income of EGP9.0 million for 2005.
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Brokerage OCI Current Cement Operations
Table 23: Cement Summary by Region Company ECC
Country Egypt
Capacity 8.5
ACC
Algeria
5.0
CIBA
Algeria
0.0
PCC
Pakistan
0.0
Tasluja
Iraq
0.3
Bazian
Iraq
0.0
Emirates Cement
UAE
0.0
Nigeria
0.0
Spain
0.6
Van Cement
Turkey
0.6
Baticim Cimento
Turkey
3.4
UNICEM Cementos La Parilla
Total
18.4
% of OCI Capacity Capacity in 08’ % of Capacity in 08’ 46.2% 10.0 29.1%
27.2% 0.0% 0.0% 1.6% 0.0% 0.0% 0.0% 3.3% 3.3% 18.5% 100%
5.0 0.6 2.2 2.3 2.9 3.0 2.5 1.1 0.6 4.2 34.4
14.5% 1.7% 6.4% 6.7% 8.4% 8.7% 7.3% 3.2% 1.7% 12.2% 100%
Source: OCI, HC Brokerage
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Brokerage II.B. Construction LOB Overview The OCI Construction Group ranks among the top 150 largest contractors in the world. OCI provides Engineering, Procurement and Construction (EPC) services on large, complex, and demanding projects for public and private customers primarily in the Middle East, North Africa, and Central Asia. OCI itself has undertaken numerous landmark infrastructure, industrial, and commercial projects in Egypt and Algeria. Examples include the Nile City in Egypt, the European Parliament in Brussels, Weill Cornell University in Qatar and Algerian Cement Company in Algeria. OCI’s main operating construction businesses are the BESIX Group, based in Belgium, with extensive experience on large building, infrastructure and marine projects, and Contrack International, based in the USA with extensive experience on institutional and infrastructure projects. OCI, BESIX and Contrack target projects primarily in the Middle East, North Africa and Central Asia. OCI other construction activities include partnerships with industry leaders, manufacturing fabricated steel products as well as architectural curtain walling and window systems. OCI also has investments in infrastructure concessions including a port operator, industrial park developer and natural gas distributor. Additionally, OCI is currently venturing in the field of urea/ammonia fertilizers projects, whose operations will be included under the construction LOB. Table 24: ENR Ranking* Top 225 Global Contractors
Top 225 International Contractors 2004 2005
Top 400 US Contractors
2004
2005
OCI
144
139
68
63
-
-
BESIX
109
95
51
51
-
-
-
-
148
-
175
148
Contrack
2004
2005
Source: OCI, ENR, HC Brokerage
* Engineering News Record (ENR) companies are ranked on the Top Global Contactors list by their total construction contracting both at home and abroad. This differs from the top international contractors ranking, which ranks firms based only on revenue from projects outside of their home countries. OCI ranking includes Contrack for the category of Global and International Contractors.
Construction Group Strategy OCI is selective in choosing the projects it bids for. The company targets large, complex and demanding projects in which it has competitive advantages either through a specific technical competency, a strong geographical presence or a successful track record with the client.
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24
Brokerage Construction work backlog evolution from 2000 to date OCI construction work backlog grew considerably from EGP1.8 billion in 2000 to EGP14.1 billion as of 9M05. 89% (EGP12.6 billion) of the backlog figure as of 9M05 represents projects outside Egypt, indicating that OCI is not dependent on Egypt for its Construction Group revenues. Usually Backlog takes 18 to 24 months to translate into revenues.
Chart 13: Construction Work Backlog Evolution 16
Backlog in EGP billion*
14 12
10.9
50% Consolidation of BESIX
EGP Bilion
10 8
11.4
14.1 12.1
8.9 7.1
EGP Devaluation
6
3.8
4 1.8
2.1
2.3
2000
2001
2002
2
2.7
0 2003
Mar. 04
Jun. 04
Sep. 04
Dec. 04
Mar. 05
Jun. 05
Sep. 05
Source: OCI, HC Brokerage
* The jump from 2003 to March 2004 in the backlog was due to the EGP devaluation and from March 2004 to June 2004 due to the first time 50% proportionate consolidation of BESIX. EGP12.6 billion of the EGP14.1 billion of Backlog as of 9M05 represents the backlog of work outside Egypt.
Construction Revenue Evolution from 2001 to date OCI’s construction revenues grew from EGP1.4 billion in 2001 to EGP6.4 billion in 2004, and EGP6.2 billion as of 9M05. New work booked hovered around EGP9.5 billion as of 9M05, up from EGP1.3 billion in 2001, a 630.8% growth rate over a period of around 4 years.
Chart 14: Construction revenue and new work booked (2001 – 9M05) 7.0
6.4 Const ruction Revenues
6.0
6.2
10.0
9.5
9.0 New Work Booked
8.0 5.0
6.0
4.0
3.2
5.0
3.0 2.0
7.5
7.0
4.0 1.4
1.7
3.3
3.0 2.0
1.0
2.0 1.3
1.0 0.0
0.0 2001
2002
2003
2004
9M 05
2001
2002
2003
2004
9M 05
Source: OCI, HC Brokerage
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25
Brokerage Regional Developments OCI’s regional construction work is executed by OCI Construction, BESIX and Contrack International. Table 25: OCI Regional Construction Projects Entity
Project
Contract Value Completion Mil. USD189 May 07
OCI/BESIX
Sea Water Desalination plant in Algeria
OCI/BESIX
Fairmont Hotel in Egypt
EUR16.6
May 07
OCI/BESIX
New Talkha Power Station
USD45.0
July 07
OCI/F.L. Smidth
Two Green Field cement plants in Algeria
USD447.0
-
F.L. Smidth/ OCI
Construction of a GF cement plant in UAE
USD309.0
-
BESIX
Burj Dubai tower in the UAE
USD875.0
-
BESIX
Multifunctional Complex in Rotterdam
USD42.2
November 07
BESIX
IBM training center in La Hulpe Brussels
EUR21.0
January 07
BESIX
Quay Walls for the Arabian bay project in Dubai
EUR27.3
-
BESIX
Emirates Cement Plant in Fujairah
EUR21.5
-
BESIX
Quay Wall in the port of Limbe in Cameroon
EUR12.3
-
BESIX
Quay Wall in Hartelhaven-Netherlands
EUR9.3
-
EBSIX
Bridge over the Mungo River in Cameroon
EUR5.8
-
Contrack International
Design Build Work in Afghanistan
USD171.0
-
F.L. Smidth/OCI Algeria
EPC Contract for Ciments Blanc d’Algerie
USD138.0
-
Contrack Int’l/Darwish
Science & Technology Park in Doha
USD355.0
-
BESIX/Moroccan Somagec
Build a port in Tangiers
BESIX
Wastewater Treatment BOT Contract in UAE
EUR91.0
August 06
EUR429.0
2008
Source: OCI, HC Brokerage
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Brokerage 1) OCI Construction OCI Construction is 100% owned by OCI and is based in Egypt and provides Engineering, Procurement and Construction (EPC) services on industrial, commercial and infrastructure projects for public and private customers. 2) BESIX Group BESIX Group was founded in 1909 and since then has undergone impressive growth. The Group is 50% owned by OCI and is based in Belgium and provides EPC services on large commercial infrastructure and marine projects for public and private customers worldwide. The BESIX Group has undertaken numerous landmark projects in the Middle East including: the Sheikh Zayed Bin Sultan Al Nahyan Mosque in Abu Dhabi, the Emirates Palace Hotel in Abu Dhabi, Al Khalifa Sports Stadium in Qatar and is currently constructing the Burj Dubai Tower which will be the world’s tallest building standing more than 700 meters high. BESIX realized an EBITDA margin of 8% in FY04. Table 26: BESIX Key Consolidated Indicators (Euro Mil.) Sales
2000 942
2001 962
2002 812
2003 776
2004 877
EBIT
22.2
34.5
19.6
29.0
38.0
Net Result
15.5
25.9
6.2
14.3
28.4
820
750
825
850
1,364
Order Book at year end Source: BESIX, HC Brokerage
3) Contrack International Contrack International was established in 1985 and is headquartered in Washington D.C. In 1998, OCI acquired 45% of the company. Contrack International provides EPC services on institutional and infrastructure projects financed by the US Government in the Middle East and Central Asia. Contrack International is currently undertaking numerous humanitarian construction projects in Afghanistan and is the largest international contractor operating in the country. Contrack International has completed several prestigious construction projects in Qatar including the Weill Cornell Medical College and Al Jazeera Children’s Satellite Channel building. 4) National Steel Fabrication National Steel Fabrication Company (NSF) was established in 1995 and operates a single plant in the 6th of October City which provides a complete range of steel fabrication services. NSF is a joint venture between OCI (50%) and Consolidated Contractors (CCC) (50%). NSF has provided steel fabricated products to numerous customers including Vinci, Bouygues Construction, Skanska, Bechtel, Kajima, KBR, Fluor, Bifinger & Berge, Technip and Foster Wheeler. NSF exports nearly half of its products to project sites throughout the Middle East and North Africa. 5) Alico Egypt Alico Egypt was established in 1999 and operates a single plant in Ain Sokhna, which manufactures aluminum and glass architectural products including building facades, curtain walls, windows, and doors. Alico Egypt is a joint venture between OCI (50%) and Alico UAE (50%), a leading architectural products manufacturer. Alico Egypt exports a quarter of its products to project sites throughout the Middle East and North Africa.
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Brokerage 6) OCI investments in natural gas based industries Although natural gas fertilizer projects is a new line of business, it will continue to be classified by OCI as part of the construction group. The rationale behind venturing in this LOB is that OCI believes attractive returns for shareholders could be realized by capitalizing on the competitive cost of energy in the Middle East, and OCI’s technical competency in industrial plant construction. OCI management believes that 60% to 70% of the equity invested in fertilizer projects would be recovered through construction revenues before the sale of fertilizers commences. Natural gas is cheaply priced in North Africa at USD0.551.25/mbtu compared to international prices.
Chart 15: International Natural Gas Price Comparison 14 Price in USD/MBTU
12
USD
10 8 6 4 2 0 North Africa
Russia
Malaysia
Ukraine
Eastern Europe
Europe
Continental Europe
US-Henry Hub
UK
Source: OCI, HC Brokerage
A) Egyptian Basic Industries Corporation (EBIC) In October 2005, OCI announced that it invested in a fertilizer project through a 50% stake in the Middle East Petrochemical Company (MEPCO) that in turn owns 60% of Egyptian Basic Industries Corporation (EBIC); which makes OCI’s effective share in EBIC 30%. EBIC will have a capacity of 2,000 tons per day of ammonia, 750,000 mtpa. The plant is a Greenfield project located in Al Ain Al Sokhna with a total investment cost of USD540.0 million. OCI’s share in the equity of the project is USD57.0 million of the project’s USD190.0 million of equity, which makes it the largest single shareholder. The EBIC plant is scheduled for start-up during early 2009. The plant will use natural gas as its primary fuel source and has already signed a 25-year Gas Supply Agreement with stateowned EGPC at a fixed price of USD1.25 per million BTU. A 17-year take-or-pay agreement for 100% of the new plant’s output has been secured with New-York based Transammonia, a leading specialized international trader. EBIC signed agreements for a USD350.0 million loan in long-term project finance debt with an interest rate ranging between 150 to 200 bps over LIBOR, on a non-recourse basis. USD225.0 million of the financing package will be an export-credit facility guaranteed by the Export-Import Bank of the United States (EXIM bank). The international Loan facilities were signed with 5 mandated lead arrangers including BNP Paribas, HSBC, Natexis Banques Populaires, SG and WestLB in a club deal transaction structure. 100% of the project’s output is to be exported with freight cost comprising 5-10% of product cost. Breakeven selling price is around USD100/ton for ammonia.
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Brokerage Table 27: EBIC capital Structure Source of Capital
USD Million
Debt
350.0
Equity
190.0
Total
540.0
Source: OCI, HC Brokerage
2) Algerian Fertilizer Company (AFC) OCI signed an initial agreement in February 2006 with the Algerian state owned oil & gas, Sonatrach to establish a 1.0 mtpa Greenfield granular urea plant in Algeria for an investment cost of USD746.0 million. The company will also produce ammonia but as a raw material. OCI will act as the lead project developer. According to the terms of the agreement, OCI will have a 51% stake in the new venture while Sonatrach’s stake will be 49%. Furthermore, Sonatrach has agreed to a 20-year gas supply agreement with AFC at a price of USD0.55 per million BTU subject to a 5% annual increase. OCI already received several expressions of interest from international fertilizer traders to enter into long-term off-take agreements for the plant’s output. OCI intends to obtain the required long-term project finance debt in a limited recourse structure from a combination of local Algerian and international banks. The project is expected to be operational by 2009. 10% to 15% of output is to be sold locally and the balance is to be exported to the US, European markets and North Africa. The project’s breakeven-even urea price is USD110/ton in peak debt years.
Brief Overview of the Global fertilizer market with an emphasis on Nitrogen fertilizers Global fertilizer consumption in FY05 was 154.1 million tons, 4.6% higher than FY04. Fertilizer consumption was estimated to be 89.7 million tons for nitrogen fertilizers, 37.0 million tons for potash fertilizers and 27.4 million tons for phosphate fertilizers. Nitrogen fertilizer producers announced new expansions especially in low cost natural gas regions. Table 28: Nitrogen, Potash and Phosphate Fertilizer Consumption Consumption Nitrogen Potash Phosphate Total
04/05e
05/06f
Change
09f/10f
89.65 37.04 27.43 154.12
91.05 37.14 27.37 155.56
+1.6% +0.3% -0.2% +0.9%
96.07 40.69 30.32 167.08
Source: International Fertilizer Industry Association, HC Brokerage
According to the International Fertilizer Industry Association, consumption growth in FY06 is expected to slow down to 0.9%, with nitrogen fertilizer consumption expected to rise by 1.6% and consumption of other fertilizers to drop. In the long run, nitrogen fertilizers consumption is expected to rise by 1.4% to reach 96.07 million tons in FY10. Ammonia prices are volatile Ammonia global prices increased from US$185/ton in 2003, to US$241/ton in 2004 and US$252/ton as of October 2005. Fluctuations in Ammonia prices are driven by supply constraints, with consumption steadily growing in line with the growth in cropped land.
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Brokerage Chart 16: Historical Average Global Ammonia Prices (Nov. 02’ to Oct. 05) 350 300 250 200 150 Average Global Ammonia Prices 100 50 0
Source: FADINAP, HC Brokerage
Building Materials & Construction – OCI
30
Brokerage III. Financial Review Construction contributes 73% of 9M05 Consolidated Revenues… 9M05 construction revenues contributed 73.1% of sales (before eliminations) coming in at EGP6,546.7 million, up from EGP4,525.4 million in 9M04. The cement LOB contribution to consolidated sales was 26.9% (before eliminations) recording a value of EGP2,412.3 million, up from EGP1,753.1 million in 9M04. 9M05 total consolidated revenues came in at EGP8,270.3 million, up 34.0% from EGP6,172.0 million in 9M04.
Chart 17: Contribution to Consolidated 9M05 Sales by LOB
Construction 73%
Cement 27%
Source: HC Brokerage, OCI
A) Cement LOB We attribute the 37.6% YoY growth in cement revenues to the 19.8% YoY growth in local cement demand in Egypt reaching 28.2 million tons, of which ECC captured an 18.3% market share, in addition to the start of operation of ACC’s second production line during June 2005. Cement prices increased on average by 33% in Egypt and 9% in Algeria. ECC contributed 62.6% (EGP1,508.9 million) of OCI Cement Group revenues while ACC contributed 27.4% (EGP659.8 million) of OCI Cement Group revenues. The OCI Cement Group recorded third quarter revenues of EGP965.2 million, up 56.3% from EGP617.5 million in 3Q04. Chart 18: Cement EBITDA and EBITDA Margin as of 9M05 60
1400 1200
50
Cement EBITDA Cement EBITDA M gn.
1000
40
Consolidat ed EBITDA M gn. 800
30 600 20
400
10
200 0
0 9M 04
9M 05
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
31
Brokerage B) Construction LOB Construction revenues increased by 44.7% in 9M05 YoY. This growth was a result of the 50% consolidation of BESIX occurring during the second quarter of 2004, thereby contributing to one out of the three quarters presented in 9M04 financials. 9M05 results, however, fully reflect the consolidation of BESIX for the entire period. Third quarter Construction Group revenues reached EGP2,177.1 million, up 18.7% from EGP1,834.5 million in 3Q04. Construction Group backlog reached EGP14.1 billion, 89% of this figure represents work outside Egypt. Additions to backlog during the 3Q05 amounted to EGP3.2 billion. 38% of the order book is from commercial projects, followed by Industrial projects representing 33% of the current order book. The private sector is the Construction Group’s biggest client accounting for 53% of the order book, followed by the public sector accounting for 23% as of 9M05. The distribution of the order book by region shows that, the majority of the Construction Group LOB Order Book is in the Middle East (38%), followed by Africa (23%) and Europe (15%).
Chart 19: Order Book Structure by Type of Project and Region (as of 9M05) Europe 15%
Industrial 33%
Inf rastructure 16%
Central Asia 12%
Africa 23%
Egypt 11% Government 13%
Commercial 38%
Other 1%
M iddle East 38%
O r der Book by Region
C ur r ent Sr uctur e of O r der Book Source: HC Brokerage, OCI
New contract awards during 3Q05 During 3Q05, the BEISX Group was awarded new contracts with a net total value of EUR145.0 million, Contrack International was awarded USD171.0 million. As a whole, the OCI Construction Group added around EGP3,200 million to its construction backlog. Table 29: New contract awards during 3Q05 Company BESIX
Contract Value in Mil. 145.0
Currency EUR
Exchange Rate 7.44
Value in EGP Mil. 1,079
Contrack
171.0
USD
5.84
999
OCI
192.0
USD
5.84
1,123 3,200
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
32
Brokerage Consolidated EBITDA margin stood at 24.5% OCI reported a consolidated EBITDA of EGP2,027.7 million (a margin of 24.5%), up 27.4% from EGP1,592.0 million (a margin of 25.8%) in 9M04. The cement LOB recorded an EBITDA of EGP1,328.0 million (a margin of 55.1%), up 44.1% from EGP921.8 million in 9M04. The construction LOB, despite recording higher sales than cement, due to its lower margins, recorded an EBITDA figure of EGP694.1 million (a margin of 10.6%), up 24.0% from EGP559.8 million (a margin of 12.4%) in 9M04.
Chart 20: Construction EBITDA and EBITDA Margin as of 9M05
EGP Million
600 400
Construction EBITDA
50
Construction
40
Consolidated
30
%
60
800
20
200
10
0
0 9M04
9M05
Source: OCI, HC Brokerage
Negative Goodwill Amortization jumps to EGP267.8 million… The negative goodwill amortization figure is the result of BESIX and Pakistani Cement Company (PCC) acquisitions.
BESIX: following the BESIX acquisition, independent auditors conducted a fair valuation of the company's assets arriving at a fair value of EUR195.3 million while the acquisition valuation was EUR136.8 million for 100% of BESIX, resulting in a negative goodwill of EUR58.5 million. EUR29.3 million represents OCI’s share of this negative goodwill corresponding to its 50% share in BESIX. OCI’s FY04 income statement carried a negative goodwill amortization figure of EGP70.4 million (EUR9.5 million). 9M05 consolidated income statement included a negative goodwill amortization figure of EGP108.3 million (EUR14.6 million), while the total for the year is forecast to reach EGP142 million by the closing of FY05.
Pakistan Cement Company (PCC): Following PCC’s acquisition, independent auditors conducted a fair valuation of the company's assets arriving at a fair value of USD121.9 million while the acquisition tag for 100% of the company was USD78.1 million, resulting in a negative goodwill of USD43.8 million. Corresponding to OCI’s 62.752% share in PCC, OCI’s recognized USD27.5 million on this transaction. 9M05 consolidated income statement included EGP159.5 million representing the full negative goodwill amortization of the PCC acquisition. Table 30: OCI Negative Goodwill Breakdown Mil.
Acquisition Value Fair Value
BESIX PCC
EUR136.8
EUR195.3.
USD78.1
USD121.9.
Total
Negative Goodwill OCI stake in co. OCI Neg. Goodwill as of 9M05 EUR58.5 50% EGP108.3 USD43.8
62.75%
EGP159.5 EGP267.8
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
33
Brokerage …and helps to boost 9M05 bottom Line… OCI recorded consolidated bottom line of EGP1,274.5 million, up 54.3% from EGP825.8 million in 9M04. The growth in net income was backed by the 34% YoY growth in sales while maintaining almost the same margins as in 9M04; coupled with the above mentioned negative goodwill amortization of EGP267.8 million (21.0% of consolidated net income), up from only EGP70.6 million in 9M04 (8.5% of consolidated net income). SG&A to sales increased to 6.4%, up from 4.7% in 9M04 due to the consolidation of BESIX taking place in the 2nd quarter of 2004 and PCC consolidation-taking place during the 3Q05. OCI income from investment of EGP68.5 million included EGP47.7 million of profits on sale of investments. OCI currently pays taxes on its construction LOB only and not on the cement LOB as ECC has a tax exemption ending in 2009 and ACC’s tax exemption ends in 2012. OCI will start paying a tax rate of 30% on its Pakistan cement earnings after it starts operations by 2H06. Tax rates charged to its construction LOB in Egypt are 20%, Algeria 15% and around 35% for BESIX projects. Table 31: 9M05 Income Statement EGP Mil.
Const.
Cement
-
Cons. 9M05 8,270.3
Cons. 9M04 6,172.0
External Revenue
6,163.1
2,107.2
383.6
305.1
(688.7)
-
-
6,546.7
-
2,412.3
(688.7)
8,270.3
6,172.0
▲ 34.0%
5,423.8
977.9
(688.1)
5,713.6
4,291.9
▲ 33.1%
159.6
184.9
(17.6)
326.8
210.4
▲ 55.1%
5,583.4
1,162.8
(705.7)
6,040.5
4,502.3
▲ 34.2%
Gross Profit
963.3
1,249.5
17.0
2,229.8
1,669.6
▲ 33.6%
GPM
14.7%
51.8%
27.0%
27.1%
Inter-group Revenues Total Revenues COGS Depr. & amort. COGS
Elimin.
% Chg. ▲ 34.0%
428.8
105.8
5.7
528.9
288.1
▲ 83.6%
534.5
1,143.7
22.7
1,700.9
1,381.6
▲ 23.1%
EBITDA
694.1
1,328.6
-
2,027.7
1,592.0
▲27.4%
EBITDA Margin
10.6%
55.1%
24.5%
25.8%
SG &A Operating Profit
54.0
6.7
7.8
68.5
13.9
▲392.8%
(88.6)
14.6
-
(74.0)
(9.0)
-
Interest Income
25.3
12.2
-
37.5
Interest Expense
114.3
136.4
-
250.7
248.8
▲ 0.8%
24.7
36.6
(42.7)
18.7
15.0
▲ 24.7%
-
-
(33.6)
(33.6)
(49.5)
Negative Goodwill amortiz.
108.3
-
159.5
267.8
Pre-tax Income
544.0
1,077.5
113.7
1,735.1
Income from Invest. FX Gain (Loss)
Other Income Profit on Intra-Group Constr.
Provision on Income tax Minority Interest Net Income
NPM
7.7 ▲ 387.0%
-
55.6
-
-
55.6
70.6
▲279.3%
1,181.5
▲ 46.9%
58.3
▼ 4.6%
18.9
-
(386.1)
405.0
297.4
▲ 36.2%
469.5
1,077.5
(272.4)
1,274.5
825.8
▲ 54.3%
7.2%
44.7%
15.4%
13.4%
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
34
Brokerage IV. Financial Forecasts and Valuation A. Cement LOB OCI plans to increase its production capacity to around 34.4 million tons by the end of 2008. Production capacity planned expansions comprise a new production line in Algeria, and the construction of new cement plants in Iraq, Pakistan, Nigeria, UAE, and Turkey. In addition, OCI acquired an operational cement company in Spain in 2005. OCI expects to be the 8th largest cement producer globally after the completion of these plans in 2008. OCI is increasing its production capacity locally and regionally to cater for the expected increase in demand for cement in the next few years on the back of a number of reasons: •
The improvement in macroeconomic indicators along with the activation of the mortgage law and the expected launch of mortgage financing mechanism boosted domestic consumption in Egypt by 20% during 2005; this is expected to continue in the medium term.
•
The hike in oil prices and the current economic boom in the GCC region, resulted in major growth in the construction sector and related businesses. This trend is forecast to continue and cement consumption is expected to grow by an annual average of 6% – 8% in the next 3 – 5 years.
•
The forecast rise in global demand for cement along with the increase in energy costs coupled with strict environmental regulations, will limit production capacity increases in Europe and the USA.
Most of OCI’s capacity additions are in high growth emerging markets that are under served. OCI aims to partially replace imports in these countries while maintaining a high profitability margin. However due to cement capacity expansions in the Gulf which will materialize by late 2007/2008, in the case of demand slowing down, overcapacities are a threat to OCI resulting in strong competition and tighter margins. We believe that due to OCI’s strong operational base and efficient processes it would be able to withstand this competition in the event it materializes. OCI cement group is expanding its operations into six new countries to operate in a total of eight countries, serving a population of 550 million. In addition, OCI plans to capitalize on ECC’s location in Al Ain Al Sokhna on the Red Sea to benefit from high growth in demand in other countries on the borders of the Red Sea. 1. Egypt Egypt is the company’s major source of cement revenues representing around 71% of FY05 estimated revenue, falling to around 31.4% of total cement revenue following the completion of the group’s expansion plans. Egypt has a current population of around 72.4 million with a GDP per Capita of USD1,100, forecast to grow by 4% – 6% in the next 3 – 5 years.
Building Materials & Construction – OCI
35
Brokerage Table 32: Egyptian Cement Sales Breakdown ECC (54% owned subsidiary) Production Capacity (000s) Utilization Rate Local Sales Volume (000s) Selling Price (USD) Export Sales Volume (000s) Selling Price (USD) Total Revenue (EGP Mil.)
FY05e
FY06f
FY07f
FY08f
8,500
9,250
10,000
10,000
90%
100%
100%
100%
5,170
5,970
6,370
6,610
46.5
56.0
57.7
59.4
2,520
3,280
3,630
3,390
54.0
63.0
64.9
66.8
2,170
3,080
3,440
3,530
Source: OCI, HC Brokerage
2. Algeria Algeria is the company’s second most important source of revenue representing around 29% of FY05 estimated revenues, falling to only 18.4% of revenues following the completion of the group’s expansion plans. Algeria is an attractive market with a current population of 33 million and a GDP per Capita of USD2,600, that is forecast to grow by 5% – 7% in the next 3 – 5 years. Table 33: Algerian Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f
1. ACC (100% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s)
4,700
5,000
5,000
5,000
52.6%
80.0%
85.0%
90.0% 4,500
2,470
4,000
4,250
Selling Price (USD)
63.0
67.0
69.0
71.1
Total Revenue (EGP MIL.)
900
1,530
1,670
1,820
2. Ciments Blanc d’Algerie (100% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
180
550
0%
0%
50%
50%
0
0
90
275
0.0
0.0
68.0
70.0
0
0
35
110
Source: OCI, HC Brokerage
3. Iraq Iraq is an attractive market for OCI with a current population of 28.8 million and a GDP per Capita of USD900, expected to grow significantly following the stability of political conditions in the country. The company’s two subsidiaries in Iraq are forecast to account for 16.6% of the cement group revenue by the end of 2009. Table 34: Iraqi Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f 2,300
1. Tasluja Cement Company (51% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
1,920
2,300
0%
75%
80%
85%
0
1,440
1,840
1,960
0.0
85.0
70.0
72.1
0
700
730
800
2,900
2. Bazian Cement Company (51% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
0
0%
0%
0%
80%
0
0
0
2,320
0.0
0.0
0.0
72.1
0
0
0
950
Source: OCI, HC Brokerage
Building Materials & Construction – OCI
36
Brokerage 4. U.A.E U.A.E is a lucrative market for OCI following the hike in oil prices and the current boom in the economy and the construction sector. The U.A.E has a current population of 4.3 million and a GDP per Capita of USD24,000. The company’s subsidiary in the U.A.E is expected to account for 9.5% of the cement group revenue by the end of 2009. Table 35: U.A.E. Sales Breakdown Emirates Cement Company (50% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY05e
FY06f
FY07f
FY08f
0
0
0
3,000
0%
0%
0%
80%
0
0
0
2,400
0.0
0.0
0.0
73.1
0
0
0
1,000
Source: OCI, HC Brokerage
5. Nigeria Nigeria is a promising market for OCI with a current population of 143.2 million and a GDP per Capita of USD520. However, the recent hike in oil prices is expected to result in a 5% – 7% annual growth in the economy in the next 3 – 5 years. The company’s subsidiary in Nigeria is expected to account for 11.8% of the cement group revenue by the end of 2009. Table 36: Nigeria Cement Sales Breakdown FY05e
FY06f
FY07f
FY08f 2,500
1. United Cement Company (38% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
0
0
1,250
0%
0%
80%
85%
0
0
1,000
2,125
0.0
0.0
100.0
103.0
0
0
570
1,250
Source: OCI, HC Brokerage
6. Pakistan Pakistan is an attractive market for OCI with a current population of 156 million and a GDP per Capita of USD630. The company’s subsidiary in Pakistan is expected to account for 5.8% of the cement group revenue by the end of 2009. Table 37: Pakistan Cement LOB Sales Breakdown Pakistan Cement Company (63% owned subsidiary) Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY05e
FY06f
FY07f
FY08f
0
730
2,200
2,200
0%
75%
75%
76%
0
540
1,650
1,670
0.0
75.0
65.00
67.0
0
230
610
640
Source: OCI, HC Brokerage
7. Spain Spain is an appealing market for OCI by being the largest cement consumer and importer in Europe. Spain can act as an export destination to OCI plants in North Africa. Spain has a current population of 41 million and a GDP per Capita of USD25,000. The company’s subsidiary in Spain is expected to account for 5.1% of the cement group revenue by the end of 2009.
Building Materials & Construction – OCI
37
Brokerage Table 38: Spanish Cement Sales Breakdown Cementos La Parilla (51% owned subsidiary)
FY05e
FY06f
FY07f
0
600
1,100
1,100
0%
100%
100%
100%
Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD) Total Revenue (EGP MIL.)
FY08f
0
600
1,100
1,100
0.0
86.5
89.1
91.8
0
300
560
580
Source: OCI, HC Brokerage
8. Turkey Turkey is an alluring market for OCI with a current population of 72.7 million and a GDP per Capita of USD4,200. The company’s subsidiary in Turkey is expected to account for 1.4% of the cement group revenue by the end of 2009. Table 39: Turkish Cement Sales Breakdown Van Cement Company (100% owned subsidiary)
FY05e
FY06f
FY07f
0
600
600
600
0%
60%
60%
60%
Production Capacity (000s) Utilization Rate Sales Volume (000s) Selling Price (USD)
FY08f
0
360
360
360
0.0
70.0
72.1
74.3
0
140
150
150
Total Revenue (EGP MIL.) Source: OCI, HC Brokerage
Cement contribution to top line forecast to rise.. As a result of the forecast growth in the cement group, its contribution will increase from EGP3.4 billion representing 24% of OCI expected gross revenue in 2005 to EGP11.9 billion representing 33% of OCI gross revenue in 2009.
Chart 21: OCI Cement Sales Volume Breakdown (FY05e-FY09f) Iraq 16%
Egypt 76%
Algeria 24%
Algeria 19%
Nigeria 8% U.A.E 9% Pakistan 6% Spain 4%
FY05e
Egypt 37%
Turkey 1%
FY09f
Source: HC Brokerage
While country diversification will ensure less revenue concentration.. ECC’s contribution to cement sales is estimated at 64% in 2005, by 2009, it is forecast to fall to 31% with another seven countries contributing to cement LOB top line.
Building Materials & Construction – OCI
38
Brokerage Chart 22: OCI Cement Sales Value Breakdown (FY05e-FY09f) Nigeria 12%
Iraq 17%
Algeria 29%
Egypt 71%
U.A.E 10%
Algeria 18%
Egypt 31%
FY05e
Pakistan 6% Spain 5% Turkey 1%
FY09f
Source: HC Brokerage
B. Construction LOB The construction group provides around 74% of the company’s top line figures and will remain OCI’s main LOB. However, its share of total revenue is expected to diminish to around 66% by the end of 2009 as a result of the expected massive expansion in the cement group and the addition of a new fertilizers line of business. Table 40: Construction Sales Breakdown Figures in EGP MiL. Construction Group Work Backlog % Growth Construction Group Sales % Growth
FY05e 14,600
FY06f 18,830
FY07f 23,350
FY08f 27,790
34%
29%
24%
19%
10,470
13,700
17,470
20,180
49%
31%
27%
16%
Source: OCI, HC Brokerage
OCI ‘s construction revenues growth is forecast on the heels of: •
Government budget surpluses in the GCC region on the back of higher energy export prices stimulating demand for oil and gas construction services;
•
Expected growth in the economy in Egypt and North Africa following several structural reforms;
•
Secured Contracts from the US Army for the reconstruction of Iraq and Afghanistan following the war;
•
High population growth rates in OCI’s countries of presence resulting in a demand for housing units and infrastructure and for industries to support job creation; and
•
Inter-company synergies as the OCI Construction Group provides services to OCI Cement as the OCI Construction Group is currently working on five Greenfield cement plants in five countries for the Cement Group.
Building Materials & Construction – OCI
39
Brokerage Chart 23: Construction Group Backlog (FY05e-FY08f) 30,000 June
EGP Million
25,000
December
20,000 15,000 10,000 5,000 0 2005
2006
2007
2008
Source: OCI, HC Brokerage
We expect that within the next 5 years OCI will shift its operations from Europe and Africa towards GCC countries and the Middle East. This is mainly due to two main reasons: •
The expected global boom in the construction industry is located in the GCC and the Middle East; and
•
The company’s construction group can earn a slightly higher margin in these regions rather than in saturated Europe or in African countries with limited resources.
Chart 24: OCI Work Backlog Regional Breakdown (FY05e-FY09f) Africa 23%
Europe 12% Europe 15%
Central Asia 12%
Middle East* 50%
FY05e
Central Asia 16%
Middle East* 62%
Africa 10%
FY09f
* Middle East includes Egypt, GCC and North Africa. Source: OCI, HC Brokerage
C. Fertilizers LOB We expect that the fertilizers LOB will not have significant impact on FY09 results; however, this LOB will start representing a portion of 2% – 5% of total sales from 2012. In case of further acquisitions in the fertilizers LOB, which is a highly possible scenario, and depending on the value and volume of acquisitions this LOB contribution to top line could increase.
Building Materials & Construction – OCI
40
Brokerage Table 41: Fertilizers LOB Sales Breakdown 2009f
2010f
2011f
1. EBIC (30% owned subsidiary) Production Capacity (000s) Utilization Rate
750
750
750
40%
80%
90% 675
Sales Volume (000s)
300
600
Selling Price (USD)
150
165
180
Total Revenue (EGP MIL.)
257
564
693
1,000
1,000
1,000
40%
80%
90%
Sales Volume (000s)
400
800
900
Selling Price (USD)
166
190
214
Total Revenue (EGP Mil.)
378
866
1,098
2. AFC (51% owned subsidiary) Production Capacity (000s) Utilization Rate
Source: OCI, HC Brokerage
The rationale for this investment is as follows: •
The primary raw material required for the manufacturing process is natural gas comprising 60% – 80% of fertilizer cash cost of production. Egypt has abundant natural gas which is competitively priced.
•
Expanding in the fertilizers industry will generate large industrial contracts for the construction group.
•
The fertilizers industry is expected to provide the company with steady cash flows and high returns.
•
Expected growth of 14% in global ammonia capacity from 159.6 million tons in 2004 to 182.1 million tons in 2009.
•
Global urea capacity is currently 143 million with expected growth in urea demand by around 3.9 million tons per year during the next five years.
Table 42: Fertilizers Sales Breakdown 2004 68.9
2009f 78.6
2014f 81.7
Europe
46.1
46.6
46.0
North and Central America
25.4
24.7
25.7
Middle East
9.0
17.4
18.5
Africa
4.6
7.4
8.5
Oceania
1.3
2.7
3.3
159.6
182.1
190.1
South and East Asia
Total Source: OCI, HC Brokerage
FY05 top line growth trickles down into healthy net earnings growth We expect OCI to post consolidated sales of EGP12.9 billion in FY05e up 50.3% from EGP8.6 billion in FY04. We estimate the company’s FY06f top line at EGP18.6 billion, up 44.7% YoY.
Building Materials & Construction – OCI
41
Brokerage Table 43: Sales Breakdown by LOB Figures in EGP Mil. Construction Sales
2005e 10,470
2007f 17,470
2009f 23,730
2011f 27,170
3,350
8,100
11,890
13,260
0
0
270
770
970
1,790
2,510
2,880
12,860
23,780
33,380
38,320
Construction Cost
9,230
15,390
20,850
23,780
Cement Cost
1,540
3,670
5,270
5,860
0
0
180
410
1,240
2,190
3,040
3,480
Total COGS
9,580
16,870
23,260
26,570
Construction Gross Margin
11.9%
11.9%
12.2%
12.5%
Cement Gross Margin
54.0%
54.7%
55.7%
55.8%
0.0%
0.0%
31.7%
46.0%
25.5%
29.1%
30.3%
30.7%
Cement Sales Fertilizers Sales Elimination of Intra Group Revenue Total Sales
Fertilizers Costs Elimination of Intra Group Costs
Fertilizers Gross Margin Total Gross Margin Source: HC Brokerage
We have assumed a slight rise in the construction group gross margin from 11.9% to 12.5%. This is mainly due to shifting a larger part of the backlog to GCC countries at a slightly higher profit margin. The cement group gross margin is also expected to increase from 54% to 55.8% due to increasing production capacity in new markets at slightly higher profit margins. Therefore, the growth in gross margins of cement and construction, along with the addition of fertilizer line of business and the increasing relative contribution of the cement group to top line sales, is forecast to result in significant growth in gross margins from 26% in FY05e to 31% in FY09f.
Chart 25: OCI Sales Value Breakdown by LOB (FY05e-FY11f) Fertilizers 2% Cement 24% Cement 29%
FY05e
Construction 76%
FY11f Construction 69%
Source: HC Brokerage
We expect OCI to realize a GPM of 25.5%, down from 27.5% in FY04. Gross margin is expected to decline due to an increase in the share of BESIX in the Construction Group at a slightly lower profit margin than OCI Construction and CONTRACK. We expect OCI to post an EBITDA margin of 23.5% in FY05e, down from an EBITDA margin of 25.8% in FY04. EBITDA in absolute terms is estimated to rise to EGP3.0 billion in FY05, up from EGP2.2 billion in FY04.
Building Materials & Construction – OCI
42
Brokerage Table 45: Key Indicators (FY04a : FY07f) Figures in EGP Mil. Sales
FY04a 8,560
FY05e 12,860
FY06f 18,610
FY07f 23,780
Growth in Sales
94.3%
50.3%
44.7%
27.8%
Gross Profit Gross Profit Margin EBITDA
2,355
3,280
5,340
6,910
27.5%
25.5%
28.7%
29.1%
2,210
3,020
4,960
6,360
EBITDA Margin
25.8%
23.5%
26.7%
26.7%
Total Assets
12,750
19,030
26,620
30,640
Growth in Total Assets
57.2%
49.3%
39.8%
15.2%
Source: OCI, HC Brokerage
We are optimistic about consolidated net earnings’ growth in FY05e, which we have estimated at 53.8% - net earnings of EGP1.7 billion (EPS of EGP7.9), up from EGP1.1 billion (EPS of EGP5.4). We believe that the company is set to post a net income of EGP2.6 billion (EPS of EGP12.0) in FY06f, up 51.6% YoY.
Chart 26: OCI Top line and Bottom line Performance (FY04a:FY07f) 3,500
Top Line GPM
70.00%
3,000
60.00%
2,500
50.00% 40.00%
10,000
5,000
0 FY 04a
FY 05e
FY06f
FY07f
Bottom Line
70.00%
NPM
60.00% 50.00%
EGP Mil.
15,000
Growth Rate
EGP Mil.
20,000
2,000
40.00%
1,500
30.00%
1,000
20.00%
500
10.00%
0
30.00%
Growth Rate
25,000
20.00% 10.00% 0.00% FY 04a
FY 05e
FY06f
FY07f
Source: HC Brokerage
FY05e CAPEX bill estimated at EGP2.6 billion OCI CAPEX planning is demand driven, thus the company is expected to spend around EGP2.6 billion in CAPEX in FY05, representing 20% of OCI’s total sales, mainly invested to increase cement capacities. The continuous growth in cement capacities during 2006 is expected to increase the company’s CAPEX to EGP2.8 billion representing 15% of total sales. This high level of CAPEX will secure financing of OCI’s expansion plans and allow the company to maintain its position as one of the top contractors and cement producers in the Middle East. The CAPEX bill is estimated at EGP2.4 billion in FY07f. The bulk of the company’s expansion plans will be financed during the next two years. Therefore, CAPEX / Sales is expected to decline as a % of sales to around 5% starting 2008.
Building Materials & Construction – OCI
43
Brokerage
Chart 27: CAPEX/Sales (FY05e:FY09f) 35,000
CAPEX Sales
30,000
EGP Million
25,000 20,000 15,000 10,000 5,000 0 FY 05
FY 06
FY 07
FY 08
Source: OCI, HC Brokerage
Leverage OCI has a high leverage with a debt / equity ratio of 1.5x in FY04 increasing to 1.6x in 9M05. OCI is currently in an expansion plan, therefore we expect its debt / equity ratio will stabilize in the range of 0.9x by the end of 2006, then gradually decline.
Chart 26: Leverage (FY04a:FY07f) 80%
Total Liabilities / Total Assets
70%
Bank Debt / Total Assets
EGP Million
60% 50% 40% 30% 20% 10% 0% FY 04a
FY 05e
FY 06f
FY 07f
Source: OCI, HC Brokerage
Our DCF Valuation Implies a value of EGP302 Our DCF valuation yielded a fair value per share of EGP302, which offers a 36.7% upside potential to EGP221, the company’s current market price. We have applied in our DCF valuation a single WACC of 16.3%, and a cost of equity of 17%. We have assumed a 5% perpetual growth rate beyond the projection horizon. Table 46: Value per Share (EGP) Sensitivity to WACC Perpetual Growth Rate 3%
14.3% 344
15.3% 309
WACC 16.3% 280
17.3% 255
18.3% 233
4%
361
322
290
263
240
5%
381
338
302
272
247
6%
407
357
317
284
256
7%
439
381
334
297
266
Source: HC Brokerage
Building Materials & Construction – OCI
44
Brokerage Our multiple valuation implies a value of EGP194.8/share Our multiple valuation is based on the EV/EBITDA multiple for FY06f for a construction/cement peer group suggests a value per share of EGP194.8, offering an 11.7% downside to the current market price.
Our weighted target price is EGP280/share Accordingly, we recommend to “Buy” OCI based on a weighted target price of EGP280, offering a 27% upside potential to the market price. We arrived at our target price using a weighted average of DCF (80%) and comparable valuation (20%) (EV/EBITDA multiple). Table 47: Weighted Valuation Valuation method
Value/share % to target price
DCF
EGP302.1
80%
EV/EBITDA
EGP194.81
20%
Target price
Value component in the target price EGP241.3 EGP39.0 EGP280.3
Source: HC Brokerage
Sensitivity Analysis Case 1: Lower Cement Prices – In case we assume that cement prices will be 10% less than our base case assumptions, we downgrade our DCF valuation to EGP281 per share. Case 2: Higher COGS – In case we assume that COGS will increase by 5% above our base case assumptions, thus squeezing the company’s profit margins, we downgrade our DCF valuation to EGP259 per share. Case 3: Increase in Cement Contribution to Top Line – In case we assume that total sales of the base case will remain the same; however, with a 10% – 15% increase in the contribution of cement to the top line at the expense of construction revenue, we upgrade our DCF valuation to EGP320 per share. Case 4: Increase in Construction Contribution to Top Line – In case we assume that total sales of the base case will remain the same; however, with a 10% – 15% increase in the contribution of construction to top line at the expense of cement contribution, we downgrade our DCF valuation to EGP211 per share.
Building Materials & Construction – OCI
45
Brokerage V. Financial Statements EGP
03A
(unless stated otherwise)
04A
05E
06F
07F
08F
09F
Income Statement Revenues
4,403
COGS Gross Profit
8,556 12,858 18,609 23,783 29,170 33,380
3,193
6,201
9,581
13,268
16,870
20,095
1,210
2,355
3,277
5,341
6,913
9,075 10,122
23,259
SG & A Expenses
226
489
677
979
1,251
1,535
Other Operating Income, Net
(39)
(36)
(54)
(78)
(100)
(123)
(140)
Operating Income
945
1,832
2,547
4,284
5,562
7,417
8,225
Interest Expense
263
330
487
606
573
444
318
Interest Income
10
15
58
98
173
125
104
Investment Income
1,756
11
20
23
61
69
76
85
Other Non-Operating Income (Expense)
150
44
262
0
(194)
(238)
(272)
Pre-Tax Income
853
1,583
2,401
3,837
5,037
6,938
7,823
29
77
96
192
353
486
782
824
1,504
2,305
3,645
4,684
6,452
7,041
Income Tax After Tax Income Minority Interest
266
403
612
1,054
1,485
2,045
2,306
Net Inc. before Appropriations
558
1,101
1,694
2,591
3,200
4,407
4,735
Appropriations Net Income
11
16
102
155
192
264
284
548
1,085
1,592
2,435
3,008
4,143
4,451
Balance Sheet Assets Cash & Marketable Securities
925
1,634
3,153
5,630
5,168
5,181
4,560
1,226
2,735
4,194
5,789
7,670
9,420
11,338
662
1,035
1,810
3,022
3,843
4,577
5,298
68
253
377
494
629
727
855
2,881
5,667
4,989
6,696
8,793
10,907
12,488
13,354
13,738
87
121
440
511
591
682
786
154
267
267
267
268
269
267
Net Receivables Inventory Other Current Assets Total Current Assets Net Fixed Assets Investments Other Non-Current Assets Total Assets
9,535 14,935 17,310 19,905 22,051
8,111 12,750 19,035 26,619 30,656 34,208 36,841
Liabilities Short-Term Debt
714
983
2,288
2,248
1,848
1,448
Accounts Payable
1,171
3,138
4,867
6,036
7,675
7,799
7,608
0
0
525
1,062
1,792
3,129
4,072
604
771
890
1,047
Distributions Payable Other Current liabilities Total Current Liabilities
221
309
462
2,107
4,431
8,142
2,563
3,493
4,127
4,879
3,831
2,783
138
295
401
452
410
383
347
0
0
54
134
234
355
495
4,637
6,682
8,987
Long-Term Debt Other Non-Current Liabilities Provisions Minority Interest Shareholders’ Equity
1,148
9,950 12,085 13,266 13,874
1,146
1,487
2,099
3,153
2,158
3,044
4,213
8,053
1,736
9,461 10,739 11,402
Free Cash Flow Statement NOPLAT
903
1,727
2,343
3,914
4,980
6,633
Non-Cash Items
237
375
474
678
797
884
951
Gross Cash Flow
1,139
2,101
2,817
4,592
5,777
7,518
8,069
Gross Investments
(868)
(1,463)
(2,265)
144
181
1,966
3,484
271
638
552
4,737
5,958
Operating Free Cash Flow Non-Operating Cash Flow
(76)
42
329
151
45
Free Cash Flow to Investors
195
680
881
4,887
6,003
Building Materials & Construction – OCI
7,118
9,484 11,553 (34)
(75)
9.450 11,478
46
Brokerage VI. OCI in brief OCI Overview Orascom Construction Industries (OCI) is the largest Construction and Building Materials Company locally and regionally. OCI operations are divided into the Cement Group LOB and Construction Group LOB with the cement Group-ranking number nine internationally based on announced cement capacities and the construction group ranking among the top 150 largest contractors in the world. The company has operations in more than 20 countries and is currently expanding in the filed of natural gas based fertilizers. OCI targeted ROE in any project it ventures in is 30%.
Key attractions Inter-group synergies. OCI’s investment in the highly profitable natural gas based fertilizers industry. ECC tax exemption till 2009 and ACC’s tax exempted till 2012. Strategic Alliances with topnotch international players in the construction and cement fields.
Key concerns Having investments in countries with high political risk like Iraq. Threat of overcapacities of cement coming from the Gulf by the end of 2007. Increase in energy prices.
Shareholders structure Foregin Institutions 29%
Sawiris Family Foreign Institutions Middle Eastern Institutions Private Investors
63.0% 29.0% 6.0% 2.0%
Middle Eastern Institutions 6% Private Investors 2%
Sawiris Family 63%
Investment Ratings Stock Liquidity
Upside Potential
High Mid Low
>35% >40% NA
35%-25% 40%-30% 50%-30%
25%-15% 30%-20% 30%-20%
15%-10% 20%-10% 20%-10%
