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Initiation of Coverage Report Research Department Initiation of Coverage Report 20 September 2007 Arabtec Holding PJSC Buy Something To Build On General Information Summary RIC ARTC.DU Strong local presence and a healthy backlog Bloomberg code ARTC UH Arabtec Holding, formerly Arab Technical Construction Company, was established in Dubai Market cap AED3,588 mil in 2004 with the principal objective of investing in the construction sector through the Shares outstanding 598 mil acquisition of contracting and related companies in the UAE and the MENA region. In Enterprise value AED3,661 mil August 2004, the company offered 55.0% of its shares in an IPO that was oversubscribed Net debt AED73.3 mil 74 times. The company listed its shares on the Dubai Financial Market (DFM) on January Free float 55.0% 4, 2005. Arabtec’s local outstanding backlog stood at around AED16.2 billion by the end of July 2007, including all local and international activities. Valuation Geographical expansion on the rise Target price AED7.60 Arabtec Holding is undertaking an aggressive regional expansion plan, mainly targeting Market price AED6.00 Asian and Middle Eastern markets. Arabtec Holding was able to secure contracts in Qatar, Upside potential 26.67% Pakistan, and Mauritius through the establishment of new subsidiaries and joint ventures in the field of construction and related works as well as the manufacture and Share Price Information transportation of ready mix. Arabtec’s share in regional joint venture projects reached a Absolute *Relative value of AED2.3 billion as of 1H07, with more expected project awards in the pipeline. YTD ∆ 30.9% 28.6% 1H07: Robust growth 1M ∆ 3.8% 1.4% Arabtec Holding released 1H07 results posting a net income of AED173.4 million, up 3M ∆ 0.3% 6.5% 52.7% from AED113.6 million in 1H06, due to a 25.1% YoY increase in revenues on the 12M ∆ 39.9% 52.9% back of recording more construction contracts as well as the acquisition of new Av. Daily Turnover AED21.319 mil subsidiaries. * Relative performance based on DFMGI We recommend a "Buy" for Arabtec Holding We initiate coverage on Arabtec Holding with a "Buy" recommendation, based on our DCF valuation of AED7.60/share, which offers a 26.67% upside potential to the current market price. The stock trades at a PER of 10.8x in FY07e vs. an average of 13.5x for the DFM. Key Performance Indicators AED (unless stated 05A 06A 07E 08F 09F otherwise) Revenues 2,565.5 2,809.6 3,604.4 4,517.9 5,674.4 Operating Profit ARTC DFMGI 143.7 207.3 352.6 426.6 542.0 7 OPM (%) 5.6% 7.4% 9.8% 9.4% 9.6% EBITDA 205.7 299.1 469.9 576.9 733.7 5 EBITDA Margin (%) 8.0% 10.6% 13.0% 12.8% 12.9% Net Income 165.9 216.9 332.5 398.3 504.2 EPS 0.36 0.36 0.56 0.67 0.84 3 EPS Growth - 30.8% 53.3% 19.8% 26.6% P/E (x) 14.5 14.4 10.8 9.0 7.1 1 P/BV (x) 4.2 4.0 3.7 3.7 3.1 SONDJ FMAMJ J AS * Check back cover for definitions of investment ratings Disclaimer Analyst Ahmed Badr 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 Tel +971 4 20 66 858 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 e-mail [email protected] 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 Sales information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies Tel +971 4 20 66 888 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. Fax +971 4 20 66 866 UAE – Construction Table of Contents I. Investment Summary 3 II. Arabtec Holding Overview 5 III. The UAE Construction Sector Overview 8 IV. Financial Review 11 V. Forecasts & Valuation 15 VI. Financial Statements 18 VII. Arabtec Holding in Brief 19 Construction – Arabtec Holding P.J.S.C 2 I. Investment Summary An aggressive expansion plan Arabtec has an aggressive regional expansion plan in Asia and the Middle East with a strategy that is focused on diversifying the revenue mix to reduce the geographical risk of only operating in the UAE. Qatar Arabtec has recently set up two companies in Qatar with Nasser Bin Khaled Al Thani & Sons Holding Company, with Arabtec holding a 49.0% stake in both companies. The Qatari subsidiaries were awarded the development project of Al Waab City, a new residential and commercial complex, in terms of construction works and supply of ready-mix for an estimated total value of AED4.0 billion (US$1.1 billion). Pakistan Arabtec has also established a 60/40 joint venture in Pakistan, Arabtec Pakistan Limited, and was recently awarded an AED500 million (US$136.2 million) development project. Mauritius Arabtec established a 100% owned subsidiary in Mauritius, “Arabtec International Company Limited” which operates in civil construction and related works. Recent contract awards brings backlog to AED16.2 billion Recently, the group was awarded new local projects to the tune of AED3.9 billion. These projects came in as an addition to the company’s existing local backlog worth AED10.0 billion as of March 2007, thus securing Arabtec’s future growth till FY11. In addition, Arabtec has an outstanding share of both Qatar and Pakistan’s backlog of AED2.3 billion, which leads to a total backlog of around AED16.2 billion. We believe that Arabtec will be able to secure more contracts in FY07, given its strong reputation in the UAE as well as good relationships with master local developers such as Emaar Properties. Sustained top line growth on the back of a huge construction backlog Arabtec’s existing backlog as well as their potential to win future projects provides a healthy growth in revenues along our forecast period. We believe that Arabtec will be able to record revenues amounting to AED3.6 billion in FY07e, up 28.3% from AED2.8 million in FY06. We then forecast Arabtec’s revenues to grow at a CAGR of 20.9% from FY07e till FY11f. … at higher profitability levels Arabtec recorded a GPM and EBITDA margin of 15.0% and 13.6%, respectively, in 1H07 reflecting its efficiency and stronger operations. We believe that this trend will be sustained going forward. We forecast Arabtec’s GPM and EBITDA margin to reach 15.0% and 13.0% in FY07e, up from 12.7% and 10.6% in FY06, respectively. Double digit bottom line growth going forward We forecast bottom line to grow at a CAGR of 21.4% from FY07 till FY11. We expect Arabtec to record net income of AED332.5 million and AED398.3 million in FY07 and FY08, respectively. Table 1: Arabtec Holding’s Key Performance Indicators (FY06a-FY11f) AED Mil. FY06a FY07e FY08f FY09f FY10f FY11f Revenues 2,809.6 3,604.4 4,517.9 5,674.4 6,593.6 7,692.3 Growth in Revenues 9.5% 28.3% 25.3% 25.6% 16.2% 16.7% Gross Profit 357.0 539.1 678.3 854.9 1,016.1 1,194.0 GPM 12.7% 15.0% 15.0% 15.1% 15.4% 15.5% EBITDA Margin 10.6% 13.0% 12.8% 12.9% 13.6% 13.9% Net Income 216.9 332.5 398.3 504.2 610.9 721.1 Total Assets 2,335.1 2,879.3 3,582.2 4,328.0 4,989.1 5,716.1 Growth in Total Assets 23.6% 23.3% 24.4% 20.8% 15.3% 14.6% ROAA 18.7% 15.2% 14.8% 15.5% 15.8% 16.0% ROAE 55.8% 46.9% 45.1% 47.5% 47.0% 44.8% Debt/Equity (x) 0.20 0.06 0.11 0.07 0.07 0.04 Source: Arabtec Holding, HC Brokerage Construction – Arabtec Holding P.J.S.C 3 Our target price of AED7.60 dictates a “Buy" recommendation We are initiating coverage on Arabtec Holding with a "Buy" recommendation based on a target price of AED7.60, which provides an upside potential of 26.67% to the current market price of AED6.00. We arrived at our target price using a 100% DCF valuation. Table 2: Value per Share (AED) Sensitivity to WACC Perpetual Growth Rate WACC 10.26% 11.26% 12.26% Multiple WACC’s 2% 8.24 7.15 6.29 7.07 3% 8.99 7.70 6.69 7.60 4% 9.99 8.39 7.20 8.28 5% 11.37 9.31 7.84 9.16 Source: HC Brokerage Construction – Arabtec Holding P.J.S.C 4 II. Arabtec Holding Overview Background and operations Arabtec Holding, formerly Arab Technical Construction Company, was established in Dubai in 2004, in accordance with the UAE Federal Law.
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