UAE INDUSTRIALS SECTOR 02 December 2012

UAE Contractors: Limited Valuation Appeal; Growth at the Expense of Increased Risks

Industry Update Industrials | UAE Jan Pawel Hasman +20 2 35356139 [email protected] Remain Neutral on Sector With Weak Underlying Fundamentals We upgrade our fair value (FV) for Arabtec Holding by 7% to Shaza El Kady +20 2 35356158 AED2.14/share on forecast revisions, Depa Limited stake acquisition and [email protected] expected positive catalysts starting 1Q2013, and we upgrade rating to

Neutral from Sell. We lower our FV for Drake and Scull International (DSI) by 10% to AED0.82/share and remain Neutral on the stock. However, we note that it currently offers the greatest upside potential when compared to its peers. We maintain our FV for Depa at USD0.3/share and remain Neutral on the stock despite sizable downside. Despite recent M&A news, Depa remains an illiquid stock whose value could be unlocked if management succeeded in listing it elsewhere than NASDAQ Dubai, in our view.

Multiples Remain Somewhat Expensive Given Earnings Quality COVERED COMPANIES Depa’s income statement multiples remain irrelevant, given the immediate Drake & Scull International income statement weakness caused by recent contract disputes - we Price (AED) 0.72 Fair Value (AED) 0.82 Rating Neutral forecast net income of USD2 million only for 2013. Meanwhile, we find 2011a 2012e 2013e DSI’s and Arabtec’s multiples relatively expensive, with 2013 P/E in excess of P/E (x) 8.5 19.5 14.1 P/BV (x) 0.6 0.6 0.6 14x compared to peer average of 12x. Div Yld 4.0 7.0 7.0

2013: A Year of Mega Projects, Potential Consolidation Arabtec We believe 2013 will be marked by execution and awards related to a Price (AED) 2.28 Fair Value (AED) 2.14 Rating Neutral number of sizable government projects, such as Arabtec’s Midfield 2011a 2012e 2013e Terminal, the Abu Dhabi Louvre Museum, KAPSARC in Saudi Arabia and P/E (x) 13.7 24.1 15.2 P/BV (x) 1.2 1.2 1.1 the New Doha Airport. Therefore, governments will become the chief Div Yld 2.2 2.2 2.2 clients of contractors under our coverage during the year. The nature of these clients, as well as the size of executed projects could put profitability DEPA and receivables collection to the test during 2013, which could explain why Price (USD) 0.36 Fair Value (USD) 0.30 Rating Neutral local contractors could be eyeing additional financing to strengthen their 2011a 2012e 2013e balance sheets, in our view. With USD120 million of new financing on DSI’s P/E (x) 15.0 balance sheet, we do not rule out small regional acquisitions as well. P/BV (x) 0.5 0.5 0.5 Div Yld 0.0 0.0 0.0

Increasingly More Optimistic About Arabtec, but Dilution Now a Risk Of the above-mentioned stocks, we are becoming increasingly optimistic about Arabtec, but do not see its valuation as compelling yet. We view the company’s balance sheet as stable and well-managed. We also positively view its newly acquired exposure to Depa, which could give it a bidding advantage over its competitors. However, the AED240 million price tag could have a toll on Arabtec’s cash levels, thus increasing likelihood of management reaching out for quasi-equity financing, most likely a convertible bond, posing dilution risks to minority shareholders.

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Industrials | UAE

TABLE OF CONTENTS

I. VALUATION OPPORTUNITIES REMAIN LIMITED; BUSINESS WITH GOVERNMENT ENTITIES COMES AT A PRICE 3 II. FINANCING AND DIVIDENDS – EXPECTING WEAK FCF IN 2013 7 III. BACKLOG COMPOSITION 9

COMPANIES COVERED IN THIS REPORT DRAKE & SCULL INTERNATIONAL (DSI) 14 ARABTEC HOLDING 18 DEPA LIMITED 22

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I. Valuation Opportunities Remain Limited; Business with Government Entities Comes at a Price

UAE contractors are gradually increasing their exposure to large government-sponsored projects, in our view, which will dominate their 2013 top-lines. While this exposure is capable of generating growth over the coming years, it comes at a price of increased working capital risks, especially in KSA and Abu Dhabi. Profitability of major government-sponsored ventures such as the Midfield Terminal remains blurred, obscuring visibility on medium-term earnings. Moreover, government-related entities with bottomless pockets have now more incentives to gain direct exposure to contracting businesses in order to gain control over the execution of their pipelines and/or lower their execution costs.

Government-sponsored Backlogs Call for More Financing and Increase Dilution Risks... During 2012 we witnessed this tendency in Abu Dhabi after the announcement of Sorouh/Aldar merger, acquisition of a sizable stake in Arabtec Holding (Arabtec) [ARTC.DU] by Aabar and, finally, acquisition of a 24% stake in Depa Limited (Depa) [DEPA.DI] by Arabtec. While 2013 should, in our view, be the year of execution of large government-sponsored projects of the GCC, it could also be a year of a gradually increasing dominance of government-related entities over the companies under our coverage which could (but does not have to) come at the expense of minority shareholders and their economic interests. We forecast weak FCF generation in 2013 for all covered companies. Undertaking projects with USD1 billion+ price tags could call for strengthening the balance sheets across the board and equity, not debt, could be the primary means. With the word ’convertible‘ already uttered by one management team, in the context of the ongoing M&A spree, we believe 2013 could bring about increased dilution risks for minority shareholders. We initially think that following the Depa stake purchase, Arabtec might be looking at AED300-500 million of new financing during 2013.

... And Valuations are Not That Compelling We are Neutral on all three UAE contractors under our coverage, with maintained preference for DSI. We upgrade our rating for Arabtec to Neutral from Sell. We believe Drake and Scull International (DSI) [DSI.DU] and Arabtec continue to trade on P/E and EV/EBITDA multiples that look pricey if compared to global average (please refer to Fig.2). Meanwhile, their 2013 earnings quality remains low, and the profitability of current backlogs is yet to be tested. While Depa trades at an attractive P/B discount of 50% (its medium-term income statement multiples are not indicative, in our view); it faces some uncertainties related to ownership and future listing, with no change to its weak stock turnover. We raise our FV for Arabtec by 7% to AED2.14/share following an improving outlook on its medium-term execution as new mega contracts should slowly start contributing to its quarterly top-line. Meanwhile, we downgrade our FV for DSI by 10% to AED0.82/share following: i) weaker-than-expected 9M2012 performance; and ii) an increase in valuation risk premiums commanded by the increased possibility of a regional shopping spree as USD120 million of freshly secured debt hits the balance sheet.

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Fig. 1. Comparative Analysis of Stocks Under Coverage DSI Arabtec Depa Upside (Downside) Potential 14% -6% -17% 2013/2014 Dividend Yield 7%/7% 2%/7% 0%/0% 2013/2014 FCF Yield -9%/9% 1%/3% -2%/1% 2013 Earnings Growth 38% 58% -6% 2013/2013 Earnings Quality (Visibility) Moderate Moderate Low Backlog Fragmentation (Avg. Value per Project) High (AED106 mn) Low (AED211 mn) Moderate (AED30 mn) Exposure to Government-sponsored Projects Low Moderate Low Prominent Client Disputes No Yes Yes Receivables / Total Assets 63% 57% 54% Cash / Total Assets 4% 7% 9% Current D/E Ratio 30% 16% 19% Source: Company Disclosures, EFG Hermes

Out of the three stocks under coverage, we continue to favour DSI. It is marginally cheaper than Arabtec on multiple basis (please refer to Fig.2), while our current FV for DSI offers a slight upside to current market price (14%). Warrants on c161 million shares with a strike price of AED1.16/share recently issued by DSI’s management to Goldman Sachs International could herald a treasury shares repurchase programme for hedging purposes, which adds an advantage for DSI’s shareholders. Moreover, the company does not have a track record of prominent client disputes; its backlog is more fragmented than that of its competitors (which implies more dispersed market and client risks) with a greater contribution from private sector clients. Additionally, unlike Arabtec, it enjoys larger ownership and control over its regional subsidiaries (lower minorities). Nonetheless, the above-mentioned factors are, in our view, insufficient for an outright Buy rating in light of the current share price. While we become more optimistic about Arabtec and its future growth prospects, we believe its minority shareholders are now at a risk of dilution that could occur as early as 2013 should management resort to quasi-equity financing.

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Fig. 2. A Snapshot of Peers Multiples Country Company EV/EBITDA (x) P/E (x) P/BV (x) 2012 2013 2014 2012 2013 2014 2012 2013 2014 Canada SNC-Lavalin Group 10.8 8.9 8.7 18.0 14.0 14.2 2.9 2.8 2.5 China China Communications and Construction 6.0 5.3 4.7 7.6 6.7 5.8 1.1 1.0 0.9 France Vinci SA 6.4 6.4 6.1 9.6 9.4 8.9 1.4 1.3 1.2 France Bouygues SA 4.4 4.3 4.2 7.7 6.6 6.0 0.7 0.6 0.6 France Eiffage SA 8.1 7.8 7.4 10.2 8.6 7.0 0.9 0.9 0.8 India Larsen & Toubro Ltd 16.0 13.9 12.2 21.3 19.2 17.1 3.7 3.0 2.7 India Nagarjuna Construction Co Ltd 11.6 7.9 7.1 22.4 12.6 9.0 0.5 0.4 0.4 Japan Mitsubishi Heavy Industries Ltd 8.5 8.2 7.4 47.5 23.0 17.4 1.0 1.0 0.9 Oman Galfar Engineering and Contracting Company 6.0 5.3 4.9 21.3 13.8 10.5 0.9 0.9 0.9 South Korea GS Engineering & Construction Corp 8.7 6.6 5.6 9.5 7.3 6.1 0.7 0.6 0.6 South Korea Samsung Engineering Co., Ltd 7.8 7.1 6.3 11.7 10.7 9.2 3.5 2.8 2.3 South Korea Hyundai Engineering & Construction Co Ltd 9.9 8.0 6.8 13.6 10.7 9.0 1.6 1.4 1.3 South Korea Hyundai Heavy Industries Co Ltd 7.2 7.1 6.4 8.9 8.5 7.3 0.9 0.8 0.7 Spain Acciona SA 7.7 7.6 7.2 19.3 14.4 0.5 0.5 0.5 Spain Fomento de Construcciones y Contratas SA (Fomento) 8.9 8.6 8.3 8.3 8.1 7.0 0.5 0.5 0.5 Sweden Skanska AB 9.5 8.5 7.8 14.2 12.5 11.3 2.2 2.1 2.0 Turkey Enka Insaat ve Sanayi A.S 8.4 8.0 7.7 12.8 12.4 11.4 1.5 1.3 1.2 UAE Arabtec 9.8 7.3 7.2 24.1 15.2 14.7 1.2 1.1 1.1 UAE DSI 12.8 9.3 9.2 19.5 14.1 15.1 0.6 0.6 0.6 UAE Depa N/M 25.7 8.3 N/M N/M 9.3 0.5 0.5 0.5 USA URS Corp 5.5 5.0 4.9 8.6 7.9 7.5 0.7 0.7 0.6 Average 8.7 8.4 7.1 15.6 12.0 10.4 1.3 1.2 1.1 The following companies in the table are covered by EFG Hermes: Galfar (OMR0.37, Neutral, FV: 0.40); Arabtec (AED2.28, Neutral, FV: AED2.14); DSI (AED0.72, Neutral, FV: AED0.82); Depa (USD0.36, Neutral, FV: USD0.30)

Source: Bloomberg, EFG Hermes estimates

Arabtec Buying a Stake in Depa – Positive, but Dilution Risks Increase Further We view Arabtec acquiring a 24% stake in Depa as positive. The stake was acquired at USD0.44/share. We note that our standalone valuation for Depa (before application of an arbitrary discount of 50% to account for the stock’s weak liquidity) now stands at USD0.60/share. Therefore, we think that the transaction is value-accretive and in favour of Arabtec. We believe the purchase makes sense from Arabtec’s strategic point of view. Depending on the level of control that Arabtec will gain over Depa, having a direct stake in an interior fit-out business could give Arabtec a bidding edge, going forward. We note that interior fit-out can contribute about 25% of any contract’s value. With civil, MEP, IWP and interior fit-out segments Arabtec would be able to provide a one-stop-shop solution to its future clients, in our view. Access to an interior fit-out arm is further justified by the pipeline of social infrastructure projects planned for Abu Dhabi, some of which Arabtec might be tempted to bid for (we note that, according to our knowledge, Arabtec would not be bidding for the Louvre for the time being).

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From Depa’s perspective, however, the newly established relationship could be tricky, in our view. On one hand, connection to Arabtec and its powerful Abu Dhabi shareholders (Aabar, IPIC) could conveniently source new contracts. On the other hand, depending on the amount of control that these shareholders could exercise over Depa’s management, the company could risk becoming a cost centre at the expense of fragmented minorities.

Will Arabtec or its Shareholders Continue to Increase their Stake in Depa? In light of the disclosures released to date, we do not think so, at least for the time being. We look at the acquisition mostly through the prism of its valuation, which we find very attractive. While the 24% stake does not guarantee control over Depa’s future strategy, we believe the investment would be later paired with some sort of strategic alliance between the two contractors, given the potential benefits of such an alliance for both firms.

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Industrials | UAE

II. Financing and Dividends – Expecting Weak FCF in 2013

We expect FCF generation for all three UAE contractors to be minimal in the following two years. We initially think that only Arabtec is currently capable of generating positive free cash flow in 2013, but this will largely depend on its collection abilities and good will of its powerful clients. On the other hand, we believe portions of Arabtec’s major KSA and UAE projects will be subcontracted, which could shield its net cash flow from downside pressures. We expect Arabtec and DSI to pay dividends out of their 2012 earnings. We think that Depa remains incapable of paying dividends now as it struggles with replenishing its backlog following the Doha contract cancellation and increasing pile of receivables yet to be collected. We forecast a dividend of AED0.05/share (yield of 7%) for DSI to be paid for 2012-14 and AED0.05/share (yield of 2%) for Arabtec for 2012-13 and AED0.15/share (yield of 7%) for 2014.

Fig. 3. Arabtec FCF Generation Fig. 4. DSI FCF Generation Fig. 5. Depa FCF Generation FCF FCF Yield (RHS) FCF FCF Yield FCF FCF Yield (RHS) 45 20% 570 20% 450 20% 10% 250 25 370 0% 0% 0% 50 170 -10% 5 (150) -20% -20% -20% (30) (15) (350) -30% (230) -40% (550) -40% (35) -40% 2011a 2012e 2013e 2014e 2011a 2012e 2013e 2014e 2011a 2012e 2013e 2014e Source: Arabtec Holding, EFG Hermes Source: Drake & Scull International (DSI), Source: Depa Limited, EFG Hermes estimates estimates EFG Hermes estimates

Both Arabtec and DSI have recently indicated their need to strengthen balance sheets with additional financing. Arabtec’s management revived talks about issuance of convertible bonds, while DSI secured a major five-year loan worth USD120 million.

Fig. 6. Arabtec Balance Sheet Fig. 7. DSI Balance Sheet Fig. 8. Depa Balance Sheet Equity Debt Equity Debt Equity Debt Payables Receivables Payables Receivables Payables Receivables Other assets (net) Cash Other assets (net) Cash Other assets (net) Cash 1Q10a 2Q10a 3Q10a 4Q10a 1Q11a 2Q11a 3Q11a 4Q11a 1Q12a 2Q12a 3Q12a 1Q10a 2Q10a 3Q10a 4Q10a 1Q11a 2Q11a 3Q11a 4Q11a 1Q12a 2Q12a 3Q12a 1Q10a 2Q10a 3Q10a 4Q10a 1Q11a 2Q11a 3Q11a 4Q11a 1Q12a 2Q12a 3Q12e

Source: Arabtec Holding Source: Drake & Scull International (DSI) Source: Depa Limited, EFG Hermes

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Both companies experienced some shifts in their working capital composition, with receivables representing an increasing portion of their assets and payables a decreasing portion of their liabilities. Both companies begin to focus on a number of major projects with significantly concentrated client risks (Midfield Terminal and 5,000 villas in Saudi Arabia for Arabtec, KAPSARC for DSI) which could call for additional caution on receivables collection. We currently view Arabtec’s balance sheet as the most stable, with reasonably managed working capital and space for additional leverage. We become increasingly concerned about working capital management by DSI, with a noticeable increase in receivables as a portion of its total assets, not matched by the increase in its payables.

Fig. 9. Arabtec Fig. 10. DSI Fig. 11. Depa DSO DPO DSO DPO DSO DPO 480 480 480

380 380 380

280 280 280

180 180 180 1Q10a 2Q10a 3Q10a 4Q10a 1Q11a 2Q11a 3Q11a 4Q11a 1Q12a 2Q12a 3Q12a 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 1H10a 2H10a 1H11a 2H11a 1H12a Source: Arabtec Holding Source: Drake & Scull International (DSI) Source: Depa Limited

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III. Backlog Composition

Backlog Diversification We favour contractors with diversified backlogs in terms of geographies, business segments as well as projects. The more fragmented the backlog is, the lower the concentration of client risks. In terms of geographic diversification, Depa’s backlog is the most geographically diversified and comprises projects in at least 16 countries, with each jurisdiction accounting for less than 20% of total backlog. For DSI and Arabtec, at least half of their backlogs are concentrated across UAE and KSA.

Fig. 12. Current Backlog by Geography

UAE Saudi Arabia Qatar Egypt Kuwait Jordan Bahrain Syria India Russia Iraq Algeria Singapore Other 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ARABTEC Depa DSI

Source: Company Disclosures, EFG Hermes

After securing the Abu Dhabi Midfield terminal and another major project in Abu Dhabi, Arabtec’s UAE backlog now contributes AED8.7 billion to the company’s AED18.2 billion backlog, while KSA projects account for AED5.3 billion (88% of which is represented by the 5,000 villa project being constructed for the government). The largest portion of Depa’s backlog comes from Singapore, with total contracts worth AED417 million at end of 1H2012 (15% of backlog), where the company acquired Singapore based Design Studio in 2010. This is followed by KSA contracts, which account for at least AED417 million (14% of backlog) and then UAE with AED290 million (11% of backlog). DSI’s backlog is mostly dominated by KSA and UAE contracts (accounting for 28% and 19% of 3Q2012 backlog, respectively). The company has recently secured two projects in Iraq, which currently contribute for AED627 million or 8% of its backlog at end of 3Q2012.

Geographies to Fuel Backlog Growth The three contractors have eyed expansion of their KSA backlog over the previous two years, and we believe this trend is likely to continue as KSA project awards are expected to remain strong. We think that new opportunities are likely to be offered in new markets like Qatar, Iraq and Asia that will likely benefit all three contractors under coverage. Qatar has still to become a major jurisdiction for DSI and Arabtec, as contracts in the country accounted for less than 5% of both companies’ backlogs by end of 3Q2012. Meanwhile, Qatar

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contracts have accounted for more than 10% of Depa’s backlog at end of 1H2012, with several hotels in the final stages of the construction cycle.

DSI has recently entered Iraq with its first Oil and Gas project, while Arabtec is eyeing markets in Asia like Russia and India. We think that Depa’s future backlog growth will likely be concentrated in Asia, UAE and Qatar (assuming that the company’s dispute with the government over the NDIA contracts does not affect its further backlog expansion in the country).

Fig. 13. Arabtec’s Backlog Fig. 14. DSI’s Backlog Fig. 15. Depa’s Backlog UAE Qatar KSA Egypt KSA UAE Iraq Egypt 3.5 Kuwait India Russia Other Algeria Qatar Kuwait Other 3.0 20 10 2.5 15 2.0 1.5 10 5 1.0 5 0.5 0 0 0.0 2012e 2013e 2014e 2012e 2013e 2014e 2012e 2013e 2014e Source: EFG Hermes Source: EFG Hermes Source: EFG Hermes

Contracts Disputes According to industry sources and legal experts, many project disputes in the GCC result from the limited attention given to the legal aspect of project execution at its inception. Parties reaching agreements on large contracts are unlikely to make proper provisions for any conflict between them, especially when standardised contracts are being used. Disputes in the region have not been limited to private developers only, as we have seen more recent issues with governmental institutions, as in Depa’s case. However, according to other experts, conflict resolution in the GCC is statistically quicker than in Europe and the US. We like contractors with fragmented backlogs, as this lowers the company’s exposure to significant contract cancellations. We note that Depa’s backlog is more fragmented than DSI and Arabtec, after its mega New Doha International Airport (NDIA) contract was cancelled at end of 2Q2012. Arabtec has the least fragmented backlog, with the largest four contracts accounting for 57% of its backlog. We note that contractors within our coverage have had experience with legal disputes that have taken over two years in courts to resolve. Depa’s two major disputes were over Burj Khalifa in 2010 and more recently over the termination of its NDIA contract in 2Q2012 with the government of Qatar. Arabtec in 2009 began its dispute with Meydan LLC over the Nad Al- Sheba racecourse project, which has still not been resolved to date. We have outlined below the sizable projects in our coverage universe (with these being defined as any project that accounts for 5% or more of the company’s backlog).

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Fig. 16. Sizable Projects Contribution to Backlog In AED million, unless otherwise stated Percent of Project Name Country Backlog Backlog Completion Commentary ARABTEC Slowed down, likely back 5,000 Villas in Saudi Arabia KSA 4,665 26% 8% on track Abu Dhabi Airport UAE 3,602 20% 0% Execution to start in 2013 P 17 Tower on Sheikh Zayed Road UAE 1,100 6% 0% Kuwait University Kuwait 841 5% 10% DSI Slowed down but back King Abdullah Petroleum Studies and Research Center (KAPSARC) KSA 1,581 21% 36% on track Zubair Field Development EPC Pipelines Iraq 551 7% 0% Newly awarded Algeria Complex Algeria 422 6% 2% St. Regis Nile Corniche Project Egypt 367 5% 13% Presidential Palace UAE 356 5% 21% STEP Abu Dhabi UAE 353 5% 1% DEPA Slowed down but back King Abdullah Petroleum Studies and Research Center (KAPSARC) KSA 204 7% N/A on track Morocco Hospital Morocco 184 7% N/A King Saud University KSA 182 7% N/A Intercontinental Hotel Angola 176 6% N/A Source: Company Disclosures, EFG Hermes

While we like Arabtec’s aggressive backlog expansion over 9M2012, we remain wary that such aggressive backlog growth is likely to: i) create a capacity constraint for the company in terms of new project awards; and ii) make the company more exposed to significant contract cancellations, if its mega projects recently awarded were to go sour. Nonetheless, we believe the company’s backlog is of good quality and see these risks as minimal.

Saudi Arabia and Abu Dhabi to Fuel Top-Line Growth at the Expense of Collection Risks Saudi Arabia, UAE and to some extent Qatar have led project awards and execution over the past few years. Saudi Arabia has awarded USD32 billion worth of contracts between January and September 2012, followed by the UAE, with cUSD20 billion of project awards and Qatar at USD8 billion. Governments remain to be the chief spenders, with massive social infrastructure and transportation projects in the pipeline. Civil construction awards in 9M2012 surpassed USD20 billion, followed by awards in the transportation sectors. All of the companies under our coverage eye the Saudi Arabian market as the main source of growth for the coming years, with DSI and Arabtec having already accumulated at least 25% of their current backlogs there. However, top-line growth is likely to come at a price of: i) margin compression; ii) increased contract variations; iii) risks to receivables collection; and iv) overall regulatory risks stemming from employment regulations and visa processing, in our view. Moreover, project delays and construction-related bureaucracy pose additional risks, aside from the bidding and award process being slower than elsewhere and paired with low transparency.

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Fig. 17. Value of Project Awards in GCC Fig. 18. Awards by Sector In USD billion In USD billion

9M08 9M09 9M10 9M11 9M12 Bahrain Kuwait Oman Qatar UAE KSA 50 25 40 20 15 30 10 20 5 0 10 Oil 0 Gas Water Power Industrial Chemical KSA Transport UAE Qatar Oman Kuwait Bahrain Construction

Source: Meed Projects, EFG Hermes Source: Meed Projects, EFG Hermes

Fig. 19. Planned Projects Across GCC Countries Fig. 20. Planned Projects by Business Segment In USD billion In USD billion

KSA UAE Kuwait Qatar Oman Bahrain Chemical Construction Gas Industrial 100 Oil Power Transport Water 100 80

60

40 50

20

0 0 4Q12 1Q13 2Q13 3Q13 4Q12 1Q13 2Q13 3Q13

Source: Meed Projects, EFG Hermes Source: Meed Projects, EFG Hermes

Qatar: Focusing on Transportation Qatar is expected to offer projects worth USD49 billion over the next four quarters, according to Meed projects, with c78% of which planned in the transportation sectors. We think that the bulk of infrastructure works to be completed over the next few years is likely to focus on 2022 FIFA World Cup preparation. We believe companies with some track record in delivering transportation projects like Drake & Scull International (DSI) could benefit from these offerings over the medium term. We note that Qatar contracts currently contribute AED1.4 billion or 8% of Arabtec’s AED18.2 billion backlog. For DSI, only AED334 million come from Qatar contracts, accounting for 4% of the company’s AED7.5 billion backlog by end of 3Q2012. For Depa, after the termination of the New Doha International Airport, Qatar’s backlog stood at more than AED270 million or more than 10% of backlog at end of 1H2012.

UAE Recovering Faster Than Expected, but new Awards Still Limited We believe most halted projects in Abu Dhabi are likely to take some time before contractors are able to start bidding for them. To date, we believe the only major cultural project that has been offered to contractors was the Louvre Museum (worth USD1 billion, according to Meed Projects). We note that the Tourism Development and Investment Company (TDIC) started receiving bids on 11 November 2012, and DSI is currently bidding for the project. In the beginning of 2012, the Executive Council of Abu Dhabi announced that it has approved new construction, renovation and infrastructure projects in the Emirate. New developments

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were planned in Liwa, Ghayathi, Al Hayer, Al Shuaib, Bida Al Mutawaa, Mazyed, Um Ghafa, Nema, Al Salamat Umm Alashtan and Alybanah. New infrastructure projects were also planned to be implemented in the residential districts of Al Wathba, Al Falah, Mohamed bin Zayed and other areas predominantly inhabited by the local population. The Council has also approved the budget for the Zayed National Museum, Louvre Abu Dhabi and Guggenheim Abu Dhabi. Additionally, redesign and development of Al Ain National Museum and cultural Hilli site were approved. The Executive Council also gave its green light for the budget and development of infrastructure works at the Khalifa Port and the development of Khalifa Industrial Zone. Meanwhile, contractors under our coverage were able to secure a number of miscellaneous awards in Abu Dhabi, including the AED270 million oil and gas contracts for Arabtec-owned Target secured in October 2012 in Abu Dhabi and Qatar. Arabtec also secured a contract for the construction of villas for Abu Dhabi citizens worth AED423 million in October 2012. DSI has also been awarded two MEP contracts worth AED236 million in November 2012.

New Business Segments to Watch For - Rail and Oil & Gas As contractors shifted focus to KSA market, where growth opportunities come at the expense of profitability, they have more recently become interested in higher margin projects but also more specialised projects such as rail, as well as oil and gas. We note that both DSI and Arabtec have voiced their intentions to expand their oil and gas backlog. We think that Arabtec is better-positioned in this segment, with its 60%-owned subsidiary target already specialised in oil and gas projects. In 3Q2012, DSI secured its first major oil and gas contract in Iraq, which generated more than AED600 million to the company’s new awards. We think that transportation projects, such as rail are likely to fuel contract awards in the GCC over the next few years. Rail projects are expected to be located in the UAE, Qatar and across the GCC by 2017-20. DSI has already established a railway segment that is currently pre-qualifying for bids in GCC countries. We think that this subsidiary is likely to focus on projects in the UAE and Qatar. DSI has had previous experience in rail projects with the Jubilee line in the UK and Hong Kong Metro, and according to management, the company retains some talents with experience in these projects.

... But Spending Could Largely Depend on Regional Stability Over the next four quarters, GCC countries are expected to award USD195 billion worth of projects, with the majority to be focused on transport and construction, followed by the gas sector, according to Meed Projects. According to Meed Projects data, KSA is expected to offer USD60 billion of new projects over the next four quarters, while Qatar is expected to offer cUSD50 billion worth of projects. We think that the public sector is likely to lead new project offerings, as GCC governments focus on infrastructure works and new transportation systems, with rail increasingly coming into focus. Continuing geopolitical turmoil could have a toll on KSA spending, in our view. We think that focus is likely to shift towards the smaller GCC states, such as Qatar and the UAE, which are beginning to invest ambitiously in their service and transportation sectors in preparation for increased tourism arrivals.

13 / 30 pages SECTOR 02 December 2012 DRAKE & SCULL INTERNATIONAL (DSI)

Reduce FV After a Year of Muted Growth, Remain Neutral

HH Construction & Engineering | UAE 02 December 2012 Cut FV by 10% Following Weak Backlog Growth and FCF Generation We reduce our Fair Value (FV) for Drake & Scull International (DSI) to AED0.82 per share (down from AED0.91 per share previously) after weaker- than-expected 9M2012 backlog additions and FCF generation. We maintain Fair Value & Estimates Change our Neutral rating on the stock as our new FV offers 14% upside potential to the current share price. We note that a revival in execution of stalled projects and a stable receivables collection rate are key to our investment thesis and FV for the stock. DSI is currently trading at a slight premium to Stock Data international peers on a 2013 P/E basis at c14x versus peers at 12x. Rating Neutral Price (29 Nov 2012) AED0.72 New Financing for a Shopping Spree Fair Value AED0.82 Last Div. / Ex. Date AED0.03 on 03 May 2012 We attribute the recent weakness in the company’s cash levels (below Mkt. Cap / Shares (mn) AED1,640 / 2,287 AED300 million) to slow collection of receivables on KSA contracts. We had Av. Monthly Liquidity (mn) AED205.8 previously highlighted that we expect negative FCF for 2012, which we 52-Week High / Low AED1.0 / AED0.7 now think could continue into 2013 as the company focuses on execution Bloomberg / Reuters DSI UH / DSI.DU Est. Free Float 55.0% of its current backlog. We note that DSI has secured new financing worth AED440 million, likely to be fully drawn down over 2013 for new backlog Share Price Performance Relative expansions. We keep our dividend expectations unchanged and expect the To DFMGI company to continue paying dividends of AED0.05 per share over FY2012- 14, implying a dividend yield of c7%. Price (AED) DFMGI

Reduce FY2012-14 Estimates After Disappointing 9M2012 1.05 We now expect the company to close the year with total revenue of 1.00 0.95 cAED3.0 billion and earnings of AED84 million (down from AED3.3 billion 0.90 and AED156 million, respectively). We expect earnings to recover in 0.85 4Q2012 as execution of some major projects in Saudi Arabia and Algeria is 0.80 0.75 back on track. We have hiked up SG&A expenses forecast and expect these 0.70 to remain elevated in the medium term as the company pursues plans to

expand its backlog into new segments and jurisdictions. We think DSI is Jul 29 12 29 Jan 12 29 Sep29 12 29 Nov 29 12 29 Nov 29 11 29 Mar 12 likely to end 2012 with new awards of AED3.3 billion (down from AED4.4 29 May 12

billion previously), after having won projects worth cAED2.6 billion in 9M2012. Key Financial Highlights Dec Year End (AED mn) 2011a 2012e 2013e 2014e Revenue 3,110 2,991 3,492 3,580 EBITDA 273.6 178.0 246.1 247.7 Net Attributable Income 193.2 84.1 115.8 108.7 Jan Pawel Hasman EPS (AED) 0.08 0.04 0.05 0.05 +20 2 35356139 Price to Earnings (x) 8.5 19.5 14.1 15.1 [email protected] Dividend Yield (%) 4.0 7.0 7.0 7.0 Net Debt (Cash) 303.4 702.2 969.5 965.2 Shaza El Kady EV / EBITDA (x) 8.3 12.8 9.3 9.2 +20 2 35356158 ROAE (%) 7.3 3.1 4.2 3.9 [email protected] Source: Drake & Scull International (DSI), EFG Hermes estimates

14 / 30 pages DRAKE & SCULL INTERNATIONAL (DSI) 02 December 2012 Construction & Engineering | UAE

Changes to Estimates

Fig. 21. New Versus Old Estimates In AED million, unless otherwise stated New Old 2012e 2013e 2014e 2012e 2013e 2014e Total Revenue 2,991 3,492 3,580 3,308 3,749 4,314 Gross Profit 380 437 437 431 469 526 Gross Profit Margin 12.7% 12.5% 12.2% 13.0% 12.5% 12.2% SG&A (268) (271) (274) (272) (273) (275) EBTMI 115 155 137 181 215 269 Taxes (12) (16) (14) (7) (8) (10) EBMI 103 140 123 174 207 259 Minority Interests (19) (24) (15) (18) (29) (42) Net Income 84 116 109 156 178 217 Source: EFG Hermes estimates

15 / 30 pages DRAKE & SCULL INTERNATIONAL (DSI) 02 December 2012 Construction & Engineering | UAE

Financial Statements

Income Statement (Dec Year End) In AED million 2011a 2012e 2013e 2014e Total Revenue 3,110 2,991 3,492 3,580 COGS (2,673) (2,611) (3,056) (3,143) Gross Profit 437 380 437 437 Gross Profit Margin (%) 14.1 12.7 12.5 12.2 SG&A (255) (268) (271) (274) Other Operating Income (Expense) 91 66 81 85 EBITDA 274 178 246 248 EBITDA Margin (%) 8.8 6.0 7.0 6.9 Depreciation and Amortisation (73) (80) (86) (90) Net Operating Profit 201 98 161 158 Net Operating Profit Margin (%) 6.5 3.3 4.6 4.4 Net Interest Income (Expense) 19 20 (5) (21) Income before Taxes and Zakat 219 115 155 137 Taxes and Zakat (11) (12) (16) (14) Net Income before Minority Interest 208 103 140 123 Minority Interest (15) (19) (24) (15) Reported Net Income 193 84 116 109 Normal Reported EPS (AED) 0.08 0.04 0.05 0.05

Source: Drake & Scull International (DSI), EFG Hermes estimates

16 / 30 pages DRAKE & SCULL INTERNATIONAL (DSI) 02 December 2012 Construction & Engineering | UAE

Balance Sheet (Dec Year End) In AED million 2011a 2012e 2013e 2014e Cash and Cash Equivalents 525 232 223 277 Investments (Current) 216 7 7 7 Accounts Receivable (Current) 2,901 3,567 4,147 4,251 Inventory 26 20 24 25 Other Debit Balances (Current) 76 91 91 91 Total Current Assets 3,746 3,917 4,492 4,651 PP&E (Net) 423 510 562 579 Goodwill & Intangibles 1,174 1,142 1,103 1,065 Investments (Non-Current) 53 25 25 25 Accounts Receivable (Non-Current) 333 188 218 224 Other Debit Balances (Non-Current) 12 13 13 13 Total Non-Current Assets 1,995 1,877 1,922 1,906 Total Assets 5,741 5,795 6,414 6,557 Overdrafts 0 0 0 0 CPLTD 722 783 1,000 1,118 Accounts Payable (Current) 2,081 1,990 2,326 2,410 Other Credit Balances (Current) 43 30 30 30 Total Current Liabilities 2,846 2,803 3,355 3,558 Long Term Debt 106 151 193 124 Other Credit Balances (Non-Current) 70 83 83 83 Total Non-Current Liabilities 177 234 276 207 Total Net Worth 2,685 2,707 2,708 2,703 Minority Interest 32 51 75 90 Total Equity 2,718 2,758 2,783 2,793 Total Equity and Liabilities 5,741 5,795 6,414 6,557

Source: Drake & Scull International (DSI), EFG Hermes estimates

Cash Flow Statement (Dec Year End) In AED million 2011a 2012e 2013e 2014e Cash Operating Profit after Taxes 298 223 230 234 Change in Working Capital (483) (623) (278) (26) Cash Flow after Change in Working Capital (185) (400) (48) 208 CAPEX and Investments (124) (143) (100) (68) Free Cash Flow (310) (543) (148) 139 Non-Operating Cash Flow (97) 0 0 Cash Flow before Financing (310) (640) (148) 139 Net Financing 213 346 139 (85) Change in Cash (97) (294) (9) 54

Source: Drake & Scull International (DSI), EFG Hermes estimates

17 / 30 pages NATIONAL (DSI) 02 December 2012 ARABTEC HOLDING ering | UAE Cautiously Optimistic after 2012 Awards, Upgrade to Neutral

HH Construction & Engineering | UAE 02 December 2012

Raise FV by 7%, Upgrade to Neutral After Recent Sell-Off We raise our Fair Value (FV) for Arabtec Holding (Arabtec) to AED2.14 per Fair Value & Estimates Change share, up from AED2.00 per share previously. We upgrade our rating to Neutral, as our new FV suggests only 6% downside potential. We think 2013 is likely to be dominated by execution of the Midfield Terminal (AED3.6 billion) and the 5,000 villa project in Saudi Arabia (AED4.7 billion). However, Arabtec is still trading at a premium to international peers at a Stock Data 2013e P/E of c15x versus 12x for peers. Rating Neutral Price (29 Nov 2012) AED2.28 Fair Value AED2.14 Depa Stake Acquisition Positive, but Dilution Now More Probable Last Div. / Ex. Date AED0.05 on 07 May 2012 We think the 24% stake purchase in Depa Limited (Depa) is likely to help Mkt. Cap / Shares (mn) AED3,579 / 1,570 enhance Arabtec’s future bidding capabilities as it could give the company Av. Monthly Liquidity (mn) AED580.9 52-Week High / Low AED3.5 / AED1.4 an edge in bidding for more integrated contracts, depending on how much Bloomberg / Reuters ARTC UH / ARTC.DU control Arabtec exercises over Depa going forward. We value this stake at Est. Free Float 55.0% AED0.06 per share (based on our USD0.6 per share valuation of Depa). However, we believe that in light of some of management’s historical Share Price Performance Relative statements, the probability of Arabtec resorting to additional financing To DFMGI through issuance of a convertible bond has now increased, posing additional dilution risks for minority shareholders. Price (AED) DFMGI

Midfield Terminal to Limit Capacity in 2013 4.0 We think that after Arabtec secured projects worth cAED8 billion in 3.5 3.0 9M2012, the company is likely to be less aggressive in bidding for new 2.5 contracts in 2013 as it focuses on execution of major projects. We forecast 2.0 new contract additions worth AED8.5 billion in 2012 and only AED2.6 1.5 billion in 2013. For 2012, we reduce our earnings estimate to account for 1.0 higher-than-expected SG&A expenses and lower margins in 9M2012. We 29 Jul Jul 29 12 29 Jan 12 now expect revenue of AED5.50 billion and earnings of AED150 million Sep29 12 29 Nov 29 12 29 Nov 29 11 29 Mar 12 29 May 12 (down from AED5.56 billion and AED307 million, respectively).

Key Financial Highlights Dec Year End (AED mn) 2011a 2012e 2013e 2014e Revenue 5,003 5,501 6,083 6,435 EBITDA 590.6 405.8 540.9 552.1 Net Attributable Income 260.5 148.8 235.5 242.8 Jan Pawel Hasman EPS (AED) 0.17 0.09 0.15 0.15 +20 2 35356139 Price to Earnings (x) 13.7 24.1 15.2 14.7 [email protected] Dividend Yield (%) 2.2 2.2 2.2 6.6 Net Debt (Cash) (159.9) 195.0 259.6 275.3 Shaza El Kady EV / EBITDA (x) 6.7 9.8 7.3 7.2 +20 2 35356158 ROAE (%) 8.6 4.4 6.6 6.5 [email protected] Source: Arabtec Holding, EFG Hermes estimates

18 / 30 pages ARABTEC HOLDING 02 December 2012 Construction & Engineering | UAE

Forecast Changes

Fig. 22. New versus Old Estimates In AED million, unless otherwise stated New Old 2012e 2013e 2014e 2012e 2013e 2014e Total Revenue 5,501 6,083 6,435 5,567 6,937 8,672 COGS (4,837) (5,341) (5,663) (4,814) (6,064) (7,643) Gross Profit 665 742 772 753 872 1,029 Gross Margin 12.1% 12.2% 12.0% 13.5% 12.6% 11.9% SG&A Expenses (532) (490) (514) (435) (439) (448) Finance Income (Expense) (16) (16.4) (14) (10) (4) (2) Other Income (Expense) 83 44 46 72 64 23 EBT 198 280 289 378 491 602 Taxes (1) (3) (3) (3) (7) (9) EBMI 197 277 286 375 484 592 Minority Interest (48) (42) (43) (68) (208) (291) Net Income 149 235 243 307 275 302 Source: EFG Hermes estimates

19 / 30 pages ARABTEC HOLDING 02 December 2012 Construction & Engineering | UAE

Financial Statements

Income Statement (Dec Year End) In AED million 2011a 2012e 2013e 2014e Total Revenue 5,003 5,501 6,083 6,435 COGS (4,374) (4,837) (5,341) (5,663) Gross Profit 629 665 742 772 Gross Profit Margin (%) 12.6 12.1 12.2 12.0 SG&A (348) (533) (490) (515) Other Operating Income (Expense) 37 7 7 7 EBITDA 591 406 541 552 EBITDA Margin (%) 11.8 7.4 8.9 8.6 Depreciation and Amortisation (272) (267) (282) (287) Net Operating Profit 318 138 259 265 Net Operating Profit Margin (%) 6.4 2.5 4.3 4.1 Net Interest Income (Expense) (33) (34) (35) (35) Other Non-Operating Income (Expense) 95 128 93 97 Income before Taxes and Zakat 380 233 317 327 Taxes and Zakat (2) (1) (3) (3) Net Income before Minority Interest 378 232 314 324 Minority Interest (80) (48) (42) (43) Reported Net Income 261 149 235 243 Normal Reported EPS (AED) 0.17 0.09 0.15 0.15

Source: Arabtec Holding, EFG Hermes estimates

20 / 30 pages ARABTEC HOLDING 02 December 2012 Construction & Engineering | UAE

Balance Sheet (Dec Year End) In AED million 2011a 2012e 2013e 2014e Cash and Cash Equivalents 684 350 385 439 Investments (Current) 151 0 0 0 Accounts Receivable (Current) 3,907 4,261 4,741 5,030 Inventory 319 222 247 262 Other Debit Balances (Current) 1,196 1,195 1,195 1,195 Total Current Assets 6,257 6,028 6,567 6,926 PP&E (Net) 1,181 1,181 1,321 1,478 Goodwill & Intangibles 343 293 244 195 Investments (Non-Current) 207 458 458 458 Accounts Receivable (Non-Current) 798 782 869 923 Other Debit Balances (Non-Current) 10 9 9 9 Total Non-Current Assets 2,539 2,722 2,902 3,062 Total Assets 8,796 8,750 9,469 9,988 CPLTD 468 512 516 572 Accounts Payable (Current) 3,832 3,574 4,015 4,288 Other Credit Balances (Current) 823 877 877 877 Total Current Liabilities 5,123 4,963 5,408 5,737 Long Term Debt 56 33 129 143 Other Credit Balances (Non-Current) 250 285 302 310 Total Non-Current Liabilities 305 318 431 453 Total Net Worth 2,953 3,067 3,224 3,388 Minority Interest 415 402 406 411 Total Equity 3,368 3,469 3,630 3,799 Total Equity and Liabilities 8,796 8,750 9,469 9,988

Source: Arabtec Holding, EFG Hermes estimates

Cash Flow Statement (Dec Year End) In AED million 2011a 2012e 2013e 2014e Cash Operating Profit after Taxes 588 404 538 549 Change in Working Capital 37 (403) (134) (77) Cash Flow after Change in Working Capital 626 2 404 472 CAPEX and Investments (125) (218) (356) (376) Free Cash Flow 500 (216) 48 96 Non-Operating Cash Flow (78) (70) 20 20 Cash Flow before Financing 423 (286) 68 116 Net Financing (305) (39) (32) (62) Change in Cash 118 (325) 35 54

Source: Arabtec Holding, EFG Hermes estimates

21 / 30 pages 02 December 2012 DEPA LIMITED ering | UAE

Awaiting Clarity, Remain Neutral

HH Construction & Engineering | UAE 02 December 2012

Maintain Neutral Rating Despite Downside Potential We maintain our Neutral rating on Depa Limited (Depa) as we await more clarity on the company’s business strategy and final ownership structure Results Preview following Arabtec Holding’s (Arabtec) 24% stake buyout. While the share price offers significant downside potential to our unchanged fair value (FV) of USD0.30 per share, we note that we apply a 50% liquidity discount to our DCF-based valuation for Depa to account for the stock’s poor liquidity. Stock Data We believe that the company’s liquidity situation has not improved and Rating Neutral await clarity on management’s future listing plans. Price (29 Nov 2012) USD0.36 Fair Value USD0.30 What Could Arabtec’s Stake Now Mean for Depa? Last Div. / Ex. Date USD0.04 on 27 Apr 2010 Mkt. Cap / Shares (mn) USD221.3 / 614.7 We see some potential benefits for Depa from Arabtec's stake buyout, as it Av. Monthly Liquidity (mn) USD7.0 could lead to an expansion of both companies’ backlogs. Depa could be 52-Week High / Low USD0.5 / USD0.2 hired for interior fit-out contracts that Arabtec is currently undertaking in Bloomberg / Reuters DEPA DU / DEPA.DI the UAE, such as the Midfield Terminal Contract as well as some Emaar Est. Free Float 37.7%

Properties-linked projects. The profitability of any such project awards continues to be uncertain for Depa, and this remains our main concern Share Price Performance Relative related to Arabtec’s increased involvement. To DFMGI

3Q2012: Seasonally Weak, As Expected Price (USD) DFMGI Depa reported earnings of USD0.9 million in 3Q2012 (versus our USD4.7 0.60 net loss estimate), but USD9 million of losses were absorbed by minorities. 0.55 Total revenue of USD114 million was exactly in line with our forecast, but 0.50 0.45 the gross margin of 10.5% was slightly weaker. The company’s balance 0.40 0.35 sheet showed some signs of weakening, with a sharp increase in leverage 0.30 to USD83 million and a slowdown in receivables collection. Backlog stood 0.25 0.20 at USD700 million (versus our USD740 million forecast) after the company secured new projects worth USD70 million over the quarter. 29 Jul Jul 29 12 29 Jan 12 29 Sep29 12 29 Nov 29 12 29 Nov 29 11 29 Mar 12 29 May 12

Key Financial Highlights Dec Year End (USD mn) 2011a 2012e 2013e 2014e Revenue 472.4 519.9 545.9 603.0 EBITDA 44.0 (27.2) 9.1 28.3 Net Attributable Income 14.8 (29.7) 1.8 23.8 Jan Pawel Hasman EPS (USD) 0.02 (0.05) 0.00 0.04 +20 2 35356139 Price to Earnings (x) 15.0 N/M 121.2 9.3 [email protected] Dividend Yield (%) 0.0 0.0 0.0 0.0 Net Debt (Cash) (19.1) 12.0 15.7 9.4 Shaza El Kady EV / EBITDA (x) 5.3 N/M 25.7 8.3 +20 2 35356158 ROAE (%) 3.1 (6.4) 0.4 5.1 [email protected] Source: DEPA Limited, EFG Hermes estimates

22 / 30 pages DEPA LIMITED 02 December 2012 Construction & Engineering | UAE

Results Review

Fig. 23. Income Statement Highlights In USD million, unless otherwise stated 1Q12a 2Q12a 3Q12a 3Q12e Q-o-Q Variance Revenue 103 122 114 114 -6% 0% COGS (92) (124) (102) (102) Gross Profit 11 (2) 12 13 -664% -5% GPM 11% -2% 10% 11% 12% -1% SG&A (15) (32) (22) (18) -31% 23% Other Income 1 0 4 1 Share of Profits from Associates 0 0 2 0 Finance Income (Expense) (0) (1) (1) (1) EBTMI (3) (35) (6) (5) Tax 0 (2) (2) (1) EBMI (2) (37) (8) (6) Minority Interests 1 8 9 1 Net Profit (2) (29) 1 (5) -103% -120% Source: DEPA Limited, EFG Hermes estimates

23 / 30 pages DEPA LIMITED 02 December 2012 Construction & Engineering | UAE

Financial Statements

Income Statement (Dec Year End) In USD million 2011a 2012e 2013e 2014e Total Revenue 472 520 546 603 COGS (394) (475) (473) (522) Gross Profit 79 45 73 81 Gross Profit Margin (%) 16.6 8.6 13.3 13.5 SG&A (35) (80) (64) (53) EBITDA 44 (27) 9 28 EBITDA Margin (%) 9.3 (5.2) 1.7 4.7 Depreciation and Amortisation (23) (1) (7) (7) Net Operating Profit 21 (28) 2 21 Net Operating Profit Margin (%) 4.4 (5.4) 0.3 3.5 Share of Results from Associates (1) 0 0 5 Net Interest Income (Expense) (4) (3) (2) (1) Other Non-Operating Income (Expense) 4 (6) 2 5 Income before Taxes and Zakat 20 (37) 2 29 Taxes and Zakat (4) (1) 0 (3) Net Income before Minority Interest 16 (38) 2 26 Minority Interest (1) 8 0 (3) Reported Net Income 15 (30) 2 24 Normal Reported EPS (USD) 0.02 (0.05) 0.00 0.04

Source: DEPA Limited, EFG Hermes estimates

24 / 30 pages DEPA LIMITED 02 December 2012 Construction & Engineering | UAE

Balance Sheet (Dec Year End) In USD million 2011a 2012e 2013e 2014e Cash and Cash Equivalents 90 40 33 35 Accounts Receivable (Current) 383 440 455 503 Inventory 22 30 30 33 Other Debit Balances (Current) 1 1 1 1 Total Current Assets 497 511 519 572 PP&E (Net) 104 100 99 98 Goodwill & Intangibles 145 143 143 143 Investments (Non-Current) 39 39 39 39 Accounts Receivable (Non-Current) 40 44 45 50 Other Debit Balances (Non-Current) 0 1 1 1 Total Non-Current Assets 328 327 327 331 Total Assets 825 838 846 903 CPLTD 53 44 41 37 Accounts Payable (Current) 261 317 326 361 Other Credit Balances (Current) 0 0 0 0 Total Current Liabilities 314 361 367 397 Long Term Debt 18 8 8 8 Other Credit Balances (Non-Current) 18 20 20 20 Total Non-Current Liabilities 36 28 28 28 Total Net Worth 453 435 437 461 Minority Interest 22 14 14 17 Total Equity 475 449 451 478 Total Equity and Liabilities 825 838 846 903

Source: DEPA Limited, EFG Hermes estimates

Cash Flow Statement (Dec Year End) In USD million 2011a 2012e 2013e 2014e Cash Operating Profit after Taxes 45 4 8 33 Change in Working Capital (35) (28) (7) (24) Cash Flow after Change in Working Capital 10 (23) 1 10 CAPEX and Investments (14) (10) (5) (6) Free Cash Flow (4) (33) (4) 4 Net Financing (19) (19) (3) (2) Change in Cash (23) (52) (7) 2

Source: DEPA Limited, EFG Hermes estimates

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RATING AND FAIR VALUE CHART

ARABTEC(ARTC.DU) DEPA(DEPA.DI) AED 2.28 (29-Nov-2012) USD 0.36 (29-Nov-2012)

PRICE () 30-Nov-2011 to 29-Nov-2012 PRICE () 30-Nov-2011 to 29-Nov-2012

4.0 0.50

3.5 0.45

3.0 0.40

2.5 0.35

2.0 0.30

1.5 0.25

1.0 0.20 12/2011 07/2012 12/2011 07/2012

Closing Price Fair Value Postive Chg Closing Price Fair Value Postive Chg Fair Value Negative Chg Recommendation Chg Fair Value Negative Chg Recommendation Chg

Date From To Price Date From To Price 09-Apr-2012 Fair Value AED1.46 Fair Value AED1.84 AED3.19 02-Oct-2012 Fair Value USD0.98 Fair Value USD0.30 USD0.29 09-Apr-2012 Neutral Sell AED3.19 02-Oct-2012 Buy Neutral USD0.29 06-May-2012 Fair Value AED1.84 Fair Value AED1.76 AED3.33 24-Oct-2012 Neutral Buy USD0.22 24-May-2012 Fair Value AED1.76 Fair Value AED1.86 AED2.89 22-Nov-2012 BuyNeutral USD0.38 28-Jun-2012 Fair Value AED1.86 Fair Value AED2.00 AED2.82

DRAKE & SCULL INTERNATIONAL(DSI.DU) AED 0.72 (29-Nov-2012)

PRICE () 30-Nov-2011 to 29-Nov-2012

1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 12/2011 07/2012

Closing Price Fair Value Postive Chg Fair Value Negative Chg Recommendation Chg

Date From To Price 24-Apr-2012 Fair Value AED1.21 Fair Value AED1.04 AED0.92 24-Apr-2012 Buy Neutral AED0.92 20-May-2012Fair Value AED1.04 Fair Value AED0.91 AED0.80

RATING DISTRIBUTION

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Rating Coverage Universe %

Buy 43% Neutral 47% Sell 9% N/R U/R 1%

ANALYST CERTIFICATION

We, Jan Pawel Hasman and Shaza El Kady, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we or our spouse[s] or dependants (if relevant) hold a beneficial interest in the securities that are subject of this report. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

IMPORTANT DISCLOSURES

EFG Hermes Holding, or any of its subsidiaries or officers (other than the authors of this report) may have a financial interest in one or any of the securities that are the subject of this report. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, “EFG Hermes”) for third parties may own the securities that are the subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The author(s) of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which the author(s) has/have no discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee-earning mandates for companies that are either the subject of this report or are mentioned in this report. Research reports issued by EFG Hermes are prepared and issued in accordance with the requirements of the local exchange conduct of business rules, where the stock is primarily listed.

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INVESTMENT DISCLAIMERS

This research report is prepared for general circulation and has been sent to you as a client of one of the entities in the EFG Hermes Group and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security.

It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. This research report must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on fundamental analysis of the company’s future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendation(s) and fair value estimate(s) for the company or companies mentioned in this report. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.

Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith.

The decision to subscribe to or purchase securities in any offering should not be based on this report and must be based only on public information on such security and/or information made available in the prospectus or any other document prepared and issued in connection with the offering.

Investment in equities or other securities are subject to various risks, including, among others, market risk, currency risk, default risk and liquidity risk. Income from such securities, and their value or price may therefore fluctuate. Basis and levels of taxation may change which would impact the expected return from such securities. Foreign currency rates of exchange may affect the value or income of any security mentioned in this report. Investors should therefore note that by purchasing such securities, including GDRs, they effectively assume currency risk.

This report may contain a short- or medium-term recommendation or trading idea, which underscores a near-term event that would have a short-term price impact on the equity securities of the company or companies’ subject of this report. Short-term trading ideas and recommendations are different from our fundamental equity rating, which reflects, among other things, both a longer-term total return expectation and relative valuation of equity securities relative to other stocks within their wider peer group. Short-term trading recommendations may therefore differ from the longer-term stock’s fundamental rating.

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EFG Hermes, or any of its subsidiaries does and seeks to do business with companies mentioned in its research reports. As a result, investors should be aware that the firm or any of its subsidiaries may have a material conflict of interest that could affect the objectivity of this report.

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GUIDE TO ANALYSIS

EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment.

In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value.

For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:

Rating Potential Upside (Downside) % Buy Above 15% Neutral (10%) and 15% Sell Below (10%)

EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst’s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating.

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No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available.

CONTACTS AND STATEMENTS

Report prepared by EFG Hermes Holding SAE (main office), Building No. B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, Egypt 12577, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP 2,391,473,750.

Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it.

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EGYPT SALES TEAM UAE SALES TEAM KSA SALES TEAM RESEARCH MANAGEMENT

Local Call Center Call Center Call Center 16900 +971 4 306 9333 Int’l Call Center: +966 (0)1 1111292 Cairo General + 20 2 35 35 6140 [email protected] [email protected] [email protected] UAE General + 971 4 363 4000 [email protected] [email protected] Western Institutional Sales Western Institutional Sales Mohamed Aly Julian Bruce Director of Client Relationship Head of Research +20 2 35 35 6052 +971 4 363 4092 Riyadh: Wael Ziada [email protected] [email protected] Mazen Matraji +20 2 35 35 6154 +9661 279 8640 [email protected] GCC Institutional & HNW Sales [email protected] Chahir Hosni Head of Products +971 4 363 4090 Director of Client Relationship Ahmad Gad [email protected] Jeddah: +971 4 363 1904 Abdulelah Akbar [email protected] UAE Retail Sales +966 2 2612332 Reham Tawfik [email protected] Head of Publ. and Distribution +971 4 306 9418 Rasha Samir [email protected] +20 2 35 35 6142 [email protected]

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