Research Department

Initiation of Coverage Report

20 September 2007 Arabtec Holding PJSC Buy Something To Build On

General Information Summary RIC ARTC.DU ƒ 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 ƒ 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% ƒ 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

ƒ 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. Arabtec Holding’s principal objective is to invest in the construction sector through the acquisition of contracting and related companies in the UAE and the MENA region. In August 2004, the company offered 55% of its shares to the public (220 million shares at a par value of AED1.0 per share). Arabtec Holding’s IPO was 74 times oversubscribed and the company listed its shares on the Dubai Financial Market (DFM) on January 4, 2005.

Arabtec is one of the key players in Dubai’s construction sector and was able to build a strong foundation in its home market. The company was involved with the UAE’s master developer Emaar Properties in most of its major development projects including its iconic development, Down Town Burj Dubai. The company is also involved in many of the UAE's major construction and infrastructure projects including The Jumeriah Beach Residence towers, expansion of the DIFC, Dubai Maritime City, and the expansion of Dubai International Airport.

Chart 1: Arabtec Holding’s Shareholders' Structure

Ot her s 11%

Sheikh Butti Bin Juma Al Maktoum 5% Free Float 55% Abraaj Capit al 10 %

Riad Burhan Kamal 19 %

Source: Arabtec Holding, HC Brokerage Arabtec Holding’s subsidiaries, joint ventures and regional expansions Arabtec Holding was able to well position itself in the UAE construction market through its involvement in the country’s key construction and infrastructure projects. Arabtec Holding currently holds effective interests in several subsidiaries in the fields of construction and its related works, such as manufacture and transportation of ready mix, sales and leasing of construction equipment, and in addition electrical mechanical and plumbing contractors. The company covers a wide spectrum of activities through its subsidiaries on both the local and international levels. Arabtec has recently acquired a 55.0% stake in Emirates Falcon Electromechanical Co. LLC on January 1, 2007, for a total cash consideration of AED18.3 million. Emirates Falcon Electromechanical contributed AED9.8 million to Arabtec’s consolidated profits in 1H07 of AED173.4 million.

Construction – Arabtec Holding P.J.S.C 5

Table 3: Arabtec Holding’s Subsidiaries and Associates as of 2Q07 Subsidiary Location % of Activity Own. Arabtec Construction LLC UAE 100.0% Civil Construction & related works Austrian Arabian Ready Mix Concrete 100.0% Manufacture & Transportation of UAE Co. LLC ready mix 33.3% Trading & leasing of construction House of Equipment Co. LLC UAE equipment Arabtec Construction LLC Qatar 49.0% Civil Construction & related works Arabtec Precast LLC UAE 100.0% Manufacture of pre-cast panels Nasir Bin Khalid Factory Ready Mix 49.0% Manufacture & Transportation of Qatar Concrete Co. LLC ready mix Emirates Falcon Electromechanical Co. 55.0% Electrical mechanical & plumbing UAE LLC contracts Arabtec Engineering LLC UAE 100.0% Infrastructure construction works Arabtec International Company Limited Mauritius 100.0% Civil Construction & related works Arabtec Pakistan Limited Pakistan 60.0% Civil Construction & related works

Source: Arabtec Holding, HC Brokerage

Regional expansions Arabtec Holding’s corporate strategy has shifted from domestic operations towards geographical diversification to minimize the risk of an overheating UAE real estate market. As Arabtec Holding enjoys a good relationship with massive property developers such as Emaar Propeties, it decided to follow Emaar’s regional and international expansions in order to secure contracts abroad. The company announced that it has set a target to generate around 40.0% of total revenues from international operations by 2010, in addition to its sustained growth in the local market.

Arabtec Holding was able to secure contracts in Qatar, Pakistan, and Mauritius through the establishment of new subsidiaries in the field of construction and related works as well as the manufacture and transportation of ready mix. Arabtec Holding 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. These companies are currently involved in the development of Al Waab City, a new residential and commercial complex. They will handle construction works and the supply of ready-mix. The estimated total value of the project is to the tune of AED4.0 billion (US$1.1 billion). In addition, Arabtec Holding has established a 60% joint venture in Pakistan, Arabtec Pakistan Limited, and was recently awarded an AED500 million (US$136.2 million) development project. The company is also planning to extend its operations in India as well as Jordan and Syria in the near future. Joint ventures Arabtec Holding was able to secure strong joint ventures with local and international contractors to achieve strong alliances, giving the company an edge against its competitors. The company has established six joint ventures by June 2007 which are already involved in the country’s major construction and infrastructure projects, such as the expansion of the Dubai World Central International Airport, Dubai Sports City, and the Abu Dhabi Investment Authority headquarters.

Table 4: Arabtec Holding’s Joint Ventures as of 1H07 Joint Venture % Owned The Abu Dhabi Investment Authority Head Quarter Project 40.0% The Six Construct/Arabtec Joint Venture Projects 50.0% The Samsung/ Six Construct/Arabtec Joint Venture Projects 30.0% The Arabtec/Max Bogl Joint Venture Projects 50.0% Arabtec Engineering/WCT Engineering Berhad Joint Venture Project 50.0% Arabtec/Emirates Sunderland Group Joint Venture Project 50.0%

Source: Arabtec Holding, HC Brokerage

Construction – Arabtec Holding P.J.S.C 6

Current backlog and recent contract awards Arabtec’s local outstanding backlog stood at AED10.0 billion by the end of March 2007, including all local joint ventures’ projects. In addition, the company has an outstanding share of both Qatar and Pakistan’s backlog of AED2.3 billion. Additionally, the company was awarded several new projects which reached a value of AED3.9 billion by the end of July 2007. Hence, Arabtec’s total local and international backlog is currently to the tune of AED16.2 billion.

Table 5: Recently Awarded Development Projects Project Developer Value (AED Completion Period Arabtec’s Share Mil.) 1047 Villas at Dubai Silicon Dubai Silicon Oasis 1,200.0 32 Months100.0% Oasis Authority 212 Villas in Arabian Ranches Emaar Properties 163.0 22 Months 100.0% Arabtec/Dubai Hotel On Shiekh Zayed Road 1,076.0 N/A N/A Contracting Co. Ocean Heights Tower I Damac properties 645.0 36 Months100.0% Phase-2 at The National ADNEC 778.0 18 Months 100.0% Exhibition Centre

Source: Arabtec Holding, HC Brokerage

Construction – Arabtec Holding P.J.S.C 7

III. The UAE Construction Sector Overview A robust growth for the UAE construction sector… Investments in the UAE construction sector have been intensifying for the past decade at an extremely rapid pace. The construction industry contributed strongly to the UAE’s GDP, reaching 7.1% of total GDP in 2006 with a value to the tune of AED40.8 billion (USD11.1 billion). There has been a consistent increase in private and public sectors’ construction activity in the UAE with a major focus on the construction of tourist facilities, hotels, commercial, and leisure developments, residential, and trade tours. The current construction boom is a direct result of the Dubai government allowing foreign residents to acquire real estate in Dubai. The UAE is embarking on a multi-billion dollar tourism drive with a target to increase the number of tourists from the current figure of 6 million to 16 million by 2016. …with the main focus on infrastructure The UAE government plans to spend around AED110.0 billion (USD30.0 billion) in the next five years for the construction of new infrastructure projects and government, commercial and residential buildings. Major projects are being carried out in areas related to airport development, roads, railways, and ports. Some of the major undergoing projects are the metro rail system in Dubai, Emaar’s iconic structure, down town Burj Dubai, Al-Raha beach in Abu Dhabi, and the Palm Island in Jumeirah.

Table 6: Construction Sector Contribution to the UAE’s total GDP (2005a-2011f) AED Bil. 2005 2006e 2007f 2008f 2009f 2010f 2011f Construction Industry Value 34.3 40.8 47.1 53.6 60.0 66.0 72.5 Real Growth, % YoY 7.9% 8.0% 8.5% 7.4% 6.6% 5.7% 5.7% % of Total GDP 7.1% 7.1% 7.1% 7.1% 7.3% 7.4% 7.4%

Source: BMI, Central Bank of UAE, HC Brokerage

The construction sector contributing an average of 10.8% of Dubai’s GDP from 2000 till 2006 Dubai, which continues to be the centre of construction activities in the UAE, has experienced an increase in real estate investment from USD3.0 billion in 2000 to USD45.0 billion in 2006, according to data published by the USA Department of Commerce. The construction sector in Dubai is considered one of the key sources of employment, income, and growth for Dubai. The construction sector’s estimated contribution to Dubai’s total GDP is around 12.9% in 2006, and averaged 10.8% during the period from 2000 to 2006. The construction sector GDP increased by 324.5% during the period 2000-2006 and has grown with an annual average growth rate of 25.5% during the same period, reflecting the construction boom being witnessed in the Emirate. The construction sector’s GDP reached a value of AED21.5 billion (USD5.9 billion) in 2006, according to the latest data published by the Dubai Chamber of Commerce and Industry.

Construction – Arabtec Holding P.J.S.C 8

Chart 2: GDP of Dubai’s Construction Sector and its contribution to Dubai’s GDP at Current Prices (2000-2006)

25,000 80 GDP of Construction Sector Share of Total GDP Growth of Construction Sector GDP 20,000 65 50 15,000 35 10,000

AED Mil. 20 Growth Rate 5,000 5

0 -10 2000 2001 2002 2003 2004 2005 2006

Source: Dubai Chamber of Commerce & Industry, HC Brokerage

An estimated total construction projects awards value of AED120.2 billion in 2007 The value of construction projects awards in the UAE has been massive in the last two years, still with more project awards yet to come in the period between 2007 and 2011. The estimated value of total construction contracts awarded reached AED58.8 billion (USD16.0 billion) in 2005. The figure then is expected to have reached AED114.1 billion (USD31.1 billion) in 2006 and is estimated to reach a value of AED120.2 billion (USD32.8 billion) by the end of 2007. The difference between the value of construction contracts awards and the value of existing construction projects clearly shows the growth potential for the UAE construction sector for the short and medium terms.

Chart 3: Estimated Construction Contracts Awards’ Value by Emirate (2005-2007)

80,000 2005 70,000 2006 60,000 2007 50,000

40,000

AED Mil. 30,000

20,000

10,000

0 Abu Dhabi Dubai Sharjah Other Emirates

Source: Ventures Middle East LLC, HC Brokerage

UAE Construction sector growth drivers The UAE economy being significantly buoyant was the main factor that led to the rapid growth of the construction sector as a whole. The UAE economy, especially Dubai, has been embarking on maximizing the construction sector’s contribution to the overall economic growth in the past decade with several economic and legal structures that allowed this growth. The following are the factors that triggered the overall construction boom in the UAE; 1) Sustained economic growth; 2) the political choice to turn Dubai into the region’s main trade center; 3) the significant rise in oil prices, which in turn generated liquidity in the market (oil prices increased from around USD20 per barrel in 2002 to around USD76 per barrel currently; 4) an economy with relatively low interest rates, providing cheap mortgages; 5) freehold ownership rights granted to both GCC and non-GCC nationals; 6) the rapid rise in population in the Emirates (at an average annual growth rate of 6%), especially in Dubai due to the increasing number of expatriates; 7) and the establishment of commercial free zones such as Dubai Internet City, Dubai Media City and Knowledge village.

Construction – Arabtec Holding P.J.S.C 9

UAE construction sector outlook and concerns The main question that arises is for how long the UAE construction sector would sustain these high growth levels. Despite the positive outlook for the UAE construction sector, the following are the key difficulties we expect to affect the industry; i) The rapid hike in the cost of construction materials with both cement and steel on top of the list as well as wood products for the past 2-3 years have left many contractors struggling. As a result, the majority of contractors and developers tend to enter into long-term agreements with suppliers to insure cost efficiency and continuity of supply. ii) Another concern is the huge amount of competition in the market which leads some contractors to submit relatively low bids in order to acquire market share, thus squeezing their overall profitability. iii) The dependence on exported workforce, which may result in a shortage of labor going forward. Despite these risks, the UAE still maintains a positive outlook for its construction sector, especially in Abu Dhabi which is currently on the verge of a boom. Forecasts imply that total construction industry value would reach around AED72.5 billion (USD19.7 billion) by 2011, representing a 7.4% of the total GDP for the UAE.

Construction – Arabtec Holding P.J.S.C 10

IV. Financial Review

Top line up by 9.5% YoY reaching AED2.8 billion in FY06 Arabtec's historical operations experienced a steady growth on the back of the construction market boom in Dubai, which was triggered in 2002. Arabtec was able to benefit from the growth of Dubai’s construction sector being one of the pioneer local construction companies in addition to its relationship with prime local private and public developers such as Emaar Properties and Dubai Properties as well as government entities. Arabtec recorded revenues of AED2.8 billion in FY06, up 9.5% from AED2.6 billion in FY05 on the back of a healthy flow of local construction project awards as well as a hike in revenues from other construction related operations. Contract revenues reached AED2.7 billion in FY06, up 6.4% from AED2.5 billion in FY05, representing 94.7% of total revenues in FY06 vs. 97.4% of total revenues in FY05. The drop of representation of contract revenues to total revenues is the result of a hike of 124.6% in other revenues reaching AED149.8 million in FY06, contributing 5.3% of total revenues vs. 2.6% in FY05.

Table 7: Arabtec Holding’s Revenues’ Breakdown (FY05-FY06) AED Mil. FY06 FY05 Change Revenues Contract Revenue 2,659.8 2,498.8 6.4% % of Total Revenues 94.7% 97.4%

Other Revenues Sales of Ready Mix Concrete 14.5 7.4 95.9% Sale and Hire of Equipment 19.8 - Plant Division 11.1 2.7 311.1% Electrical Division 3.2 1.1 190.9% Scaffolding 0.5 0.2 150.0% Drainage 78.7 50.2 56.8% Model Division 22.0 5.0 340.0% Total 149.8 66.7 124.6% % of Total Revenues 5.3% 2.6%

Total Revenues 2,809.6 2,565.5 9.5%

Source: Arabtec Holding, HC Brokerage

Profitability on the rise… Arabtec has improved its profitability margins by effective cost management through increasing the number of subsidiaries operating in construction related fields, thus owning the whole construction loop and gaining more control of costs’ structure. Arabtec’s GPM and EBITDA margin reached 12.7% and 10.6% in FY06, up from 9.0% and 8.0% in FY05, respectively.

Chart 4: Arabtec’s Historical Profitability Margins (FY05-FY06)

21 GPM-Contracting GPM-Other 18 GPM

15 EBITDA Margin NPM 12 % 9

6

3

0 FY05 FY06

Source: Arabtec Holding, HC Brokerage

Construction – Arabtec Holding P.J.S.C 11

…thus recording a 30.7% YoY growth in bottom line Net profit increased 30.7% YoY reaching AED216.9 million in FY06, compared to AED165.9 million in FY05. The 30.7% increase in net income is mainly attributable to i) A 9.5% YoY increase in revenues reaching AED2.8 billion, up from AED2.6 billion in FY05. FY05 is a 15 months period, if we adjust FY05 to represent 12 moths only and compare to FY06 sales, the company would have recorded a 36.9% YoY growth in sales; ii) higher margins; iii) an increase in other operating income and iv) a decrease in interest expense, reaching AED1.2 million in FY06 from AED5.8 million in FY05.

Table 8: Arabtec Holding’s Key Performance Indicators (FY05-FY06) AED Mil. FY06 FY05 ▲% Income Statement Revenues 2,809.6 2,565.5 9.5% COGS 2,452.6 2,333.3 5.1% Gross Profit 357.0 232.2 53.7% GPM 12.7% 9.0% S.G. & A 164.7 89.9 83.2% Other Operating Income, Net 15.0 1.4 971.4% Operating Income 207.3 143.7 44.3% EBITDA 299.1 205.7 45.4% EBITDA % 10.6% 8.0% Interest Expense 1.2 5.8 -79.3% Interest Income 4.9 5.9 -16.9% Other Non-Operating Income 7.8 22.1 -64.7% Minority Interest 1.9 - Net Income 216.9 165.9 30.7% NPM 7.7% 6.5% EPS* 0.42 0.32 31.3%

*Adjusted for 120 million bonus shares approved on May 29, 2006.

Source: Arabtec Holding, HC Brokerage

1H07 Results A 25.1% YoY growth in revenues on the back of operational expansion…

Arabtec’s consolidated revenues surged 25.1% in 1H07, reaching AED1.8 billion, up from AED1.4 billion in 1H06. The hike in revenues came at the back of the completion of several phases of outstanding construction contracts in addition to the growing contribution of other operations such as sales of ready-mix, equipment, and other construction related operations. Arabtec was able to secure several contracts in 1H07 through its local and regional subsidiaries which in turn increased its backlog. …coupled with a turnaround in 1H07 profitability margins…

1H07 results experienced a significant improvement in Arabtec’s overall profit margins as a result of the acquisition of subsidiaries that assisted in minimizing total costs of the whole construction process. GPM came in at 15.0% in 1H07, up from 12.3% in 1H06 due to the improvement of contract margins as well as the increase in contribution of revenues from other operations to total revenues, which yields higher margins and in turn improves overall GPM. EBITDA margin reached 13.6% in 1H07, up from 11.0% in 1H06 despite the increase in SG&A/revenues, reaching 6.5%, up from 5.8% in 1H06.

Construction – Arabtec Holding P.J.S.C 12

Chart 5: Arabtec’s YoY Profitability Margins (1H06-1H07)

GPM 21 EBITDA Margin 19 NPM 17

15

% 13

11

9

7

5 1H06 1H07

Source: Arabtec Holding, HC Brokerage

…Leads to a 52.6% YoY hike in bottom line Net income reached AED173.4 million in 1H07, up 52.6% from AED113.6 million in 1H06, due to: i) the 25.1% YoY increase in revenues, ii) higher margins and iii) a 96.7% YoY increase in other operating income which represents manpower and other charges to joint ventures. These increases are in line with the group’s growing joint venture operations. Total Assets up 23.7% YoY

Total assets increased by 23.7% in 1H07 to AED2.9 billion, up from AED2.3 billion in FY06, mainly due to: i) A 405.3% YoY increase in cash balance reaching AED651.8 million as result of healthy cash flows from operations. ii) A 19.6% increase in net fixed assets from AED415.9 million to AED497.6 million, mainly a result of a purchase of equipment. iii) A 59.3% increase in goodwill and intangibles reaching AED190.7 million, up from AED119.7 million as a result of the acquisition of Emirates Falcon Electromechanical Co. LLC. iv) A 45.8% YoY increase in other current assets, reaching AED101.5 million in 1H07. Acquisition of Emirates Falcon Electromechanical Co. for an all cash deal amounting to AED18.3 million Arabtec acquired 55.0% of Emirates Falcon Electromechanical Co. LLC on January 1, 2007, for a total cash consideration of AED18.3 million. A goodwill arising from acquisition amounted to AED9.1 million. Another AED9.0 million was recorded as other intangible assets, which represent technological expertise and trade mark. Emirates Falcon Electromechanical contributed AED9.8 million to Arabtec’s consolidated profits in 1H07.

Table 9: Net Assets Acquired on the Acquisition of Emirates Falcon Electromechanical AED Mil. Net Assets Acquired at Fair Value Property, Plant and Equipment 0.1 Inventories 0.2 Trade and Other Receivables 36.1 Bank and Cash Balances 3.1 Provisions (1.9) Accounts Receivable (12.8) Due to Related Parties (24.0) Due From Related Parties 0.5 Bank Overdrafts (0.8) Net Assets 0.5 Less: Minority Interest (0.2) Goodwill 9.1 Other Intangible Assets 9.0 Total Cash Consideration 18.3 Net Cash Outflow Cash Paid (18.3) Cash and Cash Equivalents Acquired 3.6 Net Cash Outflow (14.8)

Source: Arabtec Holding, HC Brokerage

Construction – Arabtec Holding P.J.S.C 13

Plenty of room for borrowing

Arabtec’s total debt decreased to AED61.5 million (AED11.4 million LTD and AED50.0 million STD) in 1H07, down from AED157.6 million in FY06, implying a debt/equity ratio of 0.07x, down from 0.20x in FY06. This low debt/equity ratio implies that Arabtec has plenty of borrowing capacity. Arabtec plans to keep its debt levels low and rely only on self and equity financing.

Table 10: Arabtec Holding’s 1H07 Results AED Mil. 1H07 1H06 YoY Income Statement Revenues 1,767.8 1,413.5 25.1% Cost of Services 1,502.2 1,239.4 21.2% Gross Profit 265.6 174.2 52.5% GPM 15.0% 12.3% S.G. & Administrative Expenses 114.0 81.6 39.7% Other Operating Income, Net 35.4 18.0 96.7% Operating Income 186.9 110.6 69.0% EBITDA 240.0 154.8 55.0% EBITDA % 13.6% 11.0% Interest Expense 2.5 0.0 Other Non-Oper. Income (2.2) 2.9 Minority Interest (8.8) 0.1 Net Income 173.4 113.6 52.6% NPM 9.8% 8.0% EPS* 0.29 0.19 52.6%

Balance Sheet Cash & Excess Marketable Securities 651.8 129.0 405.3% Net Receivables 1,150.1 1,197.5 -4.0% Inventory 179.5 215.1 -16.6% Other Current Assets 101.5 69.6 45.8% Current Assets 2,082.8 1,611.2 29.3% Net Fixed Assets 497.6 415.9 19.6% Intangibles & Goodwill 190.7 119.7 59.3% Other Non-Current Assets 116.4 188.2 -38.2% Total Assets 2,887.6 2,335.1 23.7% Short-Term Debt 50.0 156.8 -68.1% Accounts Payable 1,750.0 1,226.4 42.7% Other Current Liabilities 59.6 8.0 645.0% Current Liabilities 1,859.6 1,391.3 33.7% Long-Term Debt 11.4 0.8 1325.0% Other Non-Current Liabilities 22.1 85.2 -74.1% Provisions 58.4 47.8 22.2% Minority Interest 50.3 26.4 90.5% Shareholders' Equity 885.7 783.7 13.0%

*Adjusted for 78 million bonus shares approved on April 9, 2007.

Source: Arabtec Holding, HC Brokerage

Construction – Arabtec Holding P.J.S.C 14

V. Forecasts and Valuation

FY07e: Regional expansion, higher profitability and sustained top line growth

Top line is expected to record a 28.3% YoY growth in FY07f We believe that Arabtec is set to record AED3.6 billion in FY07e revenues, up 28.3% YoY. We forecast top line to grow in FY08f by 25.3% YoY, reaching AED4.5 billion. We then forecast Arabtec’s revenues to grow at a CAGR of 20.9% from FY07e until FY11f. Continuous growth in revenues is on the back of a strong local backlog with more construction projects’ awards in the pipeline in addition to the company’s operations in Qatar and Pakistan and other regional expansions to come. Contracting revenues is expected to remain the main contributor to Arabtec’s revenues going forward, reaching 94.0% of total revenues in FY11f, compared to 94.7% in FY06.

Table 11: Arabtec Holding’s Revenue Composition (FY07e-FY11f) AED Mil. FY07e FY08f FY09f FY10f FY11f Contract Revenues 3,406.6 4,263.9 5,346.7 6,204.0 7,227.7 % of Total Revenues 94.51% 94.38% 94.23% 94.09% 93.96%

Other Revenues 197.82 254.07 327.69 389.54 453.81 % of Total Revenues 5.49% 5.62% 5.77% 5.91% 6.04% Total Revenues 3,604.4 4,517.9 5,674.4 6,593.6 7,692.3

Source: HC Brokerage

A turnaround in profitability margins in FY07e We believe that Arabtec’s profitability margins are expected to rise significantly in FY07e on the back of better cost efficiency. However, we believe that there would be slight fluctuations going forward as a result of penetrating new markets through the establishment of new subsidiaries and joint ventures which would affect operating and net profit margins. We expect Arabtec to record an overall GPM of 15.0% in FY07e, up from 12.7% in FY06, and maintain this level along our forecast period. EBITDA margin is expected to reach 13.0% in FY07e, up from 10.6% in FY06 due to the hike in GPM, coupled with an expected increase of 106.4% YoY in other operating income resulting from joint ventures’ operations.

Chart 6: Arabtec Holding’s Profitability Margins (FY06a-FY11f)

20.00% GPM EBITDA M argin NPM

15 .0 0%

10 .0 0%

5.00% FY06a FY07f FY08f FY09f FY10f FY11f

Source: HC Brokerage

Construction – Arabtec Holding P.J.S.C 15

Net income growth comes in at higher levels We expect Arabtec to post a net income of AED332.5 million (Adjusted EPS of AED0.56) in FY07e, a whooping 53.3% YoY increase from AED216.9 million (Adjusted EPS of AED0.36) in FY06. As a result, the net margin is expected to increase from 7.7% to 9.2%. This increase in the net margin is mainly due to the following: (i) The significant hike in revenues in FY07e on the back of a growing construction projects’ backlog; and (ii) increase in other operating income due to the company’s involvement in several joint ventures operating in significant projects. We forecast Arabtec to record a 19.8% YoY increase in FY08f net income to reach AED398.3 million (Adjusted EPS of AED0.67). Net margin is expected to slightly decrease reaching 8.8% in FY08f on the back of increasing minority interest reaching AED39.4 million. We believe that Arabtec will incur Capex of around AED252.3 million in FY07e; representing 7.0% of total revenues, up from 5.9% of total revenues in FY06a on the back of a rising need for purchasing equipment and other fixed assets to meet the demands of its growing construction projects' portfolio.

Table 12: 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

Our DCF valuation Implies a value of AED7.60/share Our DCF target price of AED7.60/share, representing a 26.67% upside potential from the current market price, which implies a “Buy” recommendation. We have used in our DCF valuation multiple WACCs ranging between 11.26% for FY07e and 11.19% for FY10f, a perpetual growth rate of 3% and a beta of 0.88.

Table 13: 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

Arabtec is traded at a P/E (07e) of 10.8x compared to a peer group average of 13.6x and a market average of 13.5x.

Construction – Arabtec Holding P.J.S.C 16

Table 14: Comparable Multiples

Company Country PE (07e) Clough Limited Australia 9.7x Tolent PLC UK 8.6x Gammon India LTD India 29.6x Santo Co LTD Japan 11.0x Protasco BHD Malaysia 9.8x Sunil Hitech Engineers India 13.0x Average 13.6x

Source: Bloomberg, HC Brokerage

Construction – Arabtec Holding P.J.S.C 17

VI. Financial Statements

AED Mil. (unless stated otherwise) 05A 06A 07E 08F 09F

Income Statement Revenues 2,565.5 2,809.6 3,604.4 4,517.9 5,674.4 Direct Costs 2,333.3 2,452.6 3,065.3 3,839.7 4,819.5 Gross Profit 232.2 357.0 539.1 678.3 854.9 S.G. & Administrative Expenses 89.9 164.7 228.4 284.6 357.5 Other Operating Income, Net 1.4 15.0 41.9 33.0 44.6 Operating Income 143.7 207.3 352.6 426.6 542.0 Interest Expense 5.8 1.2 6.8 6.1 7.5 Interest Income 5.9 4.9 4.4 4.6 9.9 Investment Income Other Non-Oper. Income 22.1 7.8 11.3 12.7 15.9 Pre-Tax Income 165.9 218.8 361.4 437.7 560.2 Minority Interest - 1.9 28.9 39.4 56.0 Net Income 165.9 216.9 332.5 398.3 504.2

Balance Sheet Assets Cash & Excess Marketable Securities 121.7 129.0 137.9 284.4 388.9 Net Receivables 936.2 1,197.5 1,531.9 1,819.7 2,127.9 Inventory 95.4 215.1 264.0 330.6 415.0 Other Current Assets 61.6 69.6 81.1 95.1 112.0 Current Assets 1,214.9 1,611.2 2,014.8 2,529.9 3,043.9 Net Fixed Assets 331.5 415.9 563.1 754.8 989.5 Intangibles & Goodwill 140.3 119.7 104.5 109.7 115.2 Other Non-Current Assets 203.1 188.2 196.9 187.8 179.5 Total Assets 1,889.8 2,335.1 2,879.3 3,582.2 4,328.0

Short-Term Debt - 156.8 52.9 85.5 20.0 Accounts Payable 919.4 921.5 1,106.9 1,333.2 1,606.5 Distributions - - 149.5 209.3 269.1 Other Current Liabilities 307.3 312.9 460.9 577.7 725.6 Current Liabilities 1,226.7 1,391.3 1,770.2 2,205.7 2,621.2 Long-Term Debt - 0.8 8.4 43.4 78.4 Other Non-Current Liabilities 57.1 85.2 30.0 33.0 36.3 Provisions 32.0 47.8 48.7 49.7 50.7 Minority Interest - 26.4 55.3 94.7 150.7 Shareholders' Equity 574.0 783.7 966.7 1,155.7 1,390.8

Free Cash Flow Statement NOPLAT 143.7 207.3 352.6 426.6 542.0 Non-Cash Items 94.0 107.5 118.3 151.3 192.7 Gross Cash Flow 237.8 314.8 470.9 577.9 734.7 Gross Investments (415.6) (357.7) (314.8) (254.7) (375.9) Operating Free Cash Flow (177.9) (42.9) 156.1 323.2 358.8 Non-Operating Cash Flow 27.9 12.7 (13.3) (22.2) (30.2) F. C. F. Available to Investors (149.9) (30.2) 142.8 301.0 328.5

Construction – Arabtec Holding P.J.S.C 18

VII. Arabtec Holding in Brief

Arabtec Holding Overview Arabtec Holding was established in 2004 in accordance with UAE Federal Law. The company is primarily engaged in investing in the construction sector through the acquisition of construction contracting companies and related companies. In 2004, the company offered 55.0% of its shares to the public (220 million shares at a par value of AED1.0 per share). Arabtec Holding’s IPO was 74 times oversubscribed and the company listed its shares on the Dubai Financial Market (DFM) on January 4, 2005. The company enjoys a close relationship with the UAE’s master developer Emaar Properties and has carried out a significant portion of Emaar’s development projects in Dubai. Arabtec’s target is to benefit from its relationship with Emaar by expanding into regional markets where Emaar has already established a foundation in order to carry out development projects for Emaar and its subsidiaries outside the home market.

Key Attractions ƒ One of the key players in its home market with strong relationships with prime local developers. ƒ Strong local presence, in addition to regional expansion in Asia and the Middle East, starting with Qatar and Pakistan. ƒ A strong local backlog in addition to regional project awards which secures Arabtec’s future growth on both the short and medium terms. ƒ Owning subsidiaries operating in all construction related works thus giving the company control over the whole construction process in terms of supply of equipment and material. ƒ Low debt/equity levels and plenty of room for borrowing.

Key Concerns ƒ Rising costs of raw and construction materials. ƒ Arabtec inability to operate outside its home market at the same efficiency. ƒ A slowdown in the region’s construction market.

Shareholders’ Structure

Riad B urhan Kamal Free Float 55.0% 19 % Riad Burhan Kamal 19.0% Others 11.0% A braaj Capital Abraj Capital 10.0% 10 % Sheikh Buti Bin Juma Al Maktoum 5.0%

Free Float Sheikh 55% Butti Bin Juma Al Maktoum

Other s 5% 11%

Investment Ratings

Stock Liquidity Upside Potential High >30% 30% to 20% 20% to 10% 10% to 0% 0% to -25% Less than -25% Mid >35% 35% to 25% 25% to 15% 15% to 5% 5% to -20% Less than -20% Low >40% 40% to 30% 30% to 20% 20% to 10% 10% to -20% Less than -20% Recommendation Strong Buy Buy Accumulate Hold Reduce Sell

Construction – Arabtec Holding P.J.S.C 19

HC Brokerage – Cairo, Egypt HC Brokerage Senior Management HC Brokerage, among Egypt’s top Hussein El Sherbiny Chairman & Managing Director [email protected] Ext. 200/201 ranking securities brokerages, [email protected] +202 3749 6008 offers services primarily for the Research Egyptian market to institutions and Nemat Allah Choucri Co-Head of Regional Research [email protected] Ext. 356 high net worth individuals Walaa Hazem Co-Head of Regional Research [email protected] Ext. 353 Abdelaziz Abdel Nabi Analyst- Chemicals & Fertilizers [email protected] Ext. 359 HC Brokerage’s product offerings Ahmed Badr Senior Analyst [email protected] +971 4 20 66 850 include equities listed on the Cairo Christina Hedra Analyst – Utilities, Logistics & [email protected] +971 4 20 66 858 and Alexandria Stock Exchange Transportation (CASE), global depositary receipts Jonathan Bertman Editor [email protected] Ext. 367 (GDRs) for Egyptian companies Engy El Dishish Analyst – Local Textiles [email protected] Ext. 362 listed on the London Stock Germaine Benyamin Analyst –Tourism, Financial Serv. [email protected] Ext. 355 Exchange, domestic fixed income Haitham El Shaarawy Analyst – Cement [email protected] Ext. 364 products, Eurobond issues, for both Hatem Alaa Analyst – Banking [email protected] Ext. 352 Egypt and other countries, Reem Mansour Economist [email protected] Ext. 368 intermediation services for May Khamis Financial Analyst [email protected] Ext. 357 transactions involving unlisted Mennatallah El Hefnawy Financial Analyst [email protected] Ext. 363 securities in the over-the-counter Sara Serour Analyst – Food & Beverage, [email protected] Ext. 359 (OTC) market, and listing services Tobacco, Mills for the CASE. Mohamed El Saiid, MFTA Vice President/Head of TA Desk [email protected] Ext. 175 Wael Atta Technical Analyst [email protected] +971 4 20 66 851 Sales [email protected] +202 3749 6008 Shawkat El-Maraghy Head of Sales [email protected] Ext. 210 Amro Mohamed Foreign Sales Desk [email protected] +202 3749 6082 Yasser Seif Local and Gulf Sales [email protected] Ext. 319 Hossam Wahid Local and Gulf Sales [email protected] Ext. 206 Yasser Mansour Local Sales [email protected] Ext. 217 Abeer Younes Local Sales [email protected] Ext. 208 Amr El Hemely GDR Trader [email protected] Ext. 222 Mostafa Saad Chief Equities Trader [email protected] Ext. 213 Ahmed Nabil Local Bonds Trader [email protected] Ext. 218 HC Securities & Investment – Cairo, Egypt HC Securities & Senior Management Investment Hussein Choucri Chairman and Managing Director [email protected] Ext. 122 HC Securities & Investment, the holding company for HC group, Investment Banking +202 3749 0380/4 owns HC Brokerage and Hussein Tarek Allouba Managing Director [email protected] Ext. 101 Choucri Financial Advisors. Wael El-Hatow Vice President [email protected] Ext. 112 Investment banking is engaged in Ahmed Sallam Assistant Vice President [email protected] Ext. 115 raising capital and providing advice Baher Abdelmalek Assistant Vice President [email protected] Ext. 116 in the areas of corporate finance, Mahmoud Selim Assistant Vice President [email protected] Ext. 118 mergers and acquisitions, Rana Durra Assistant Vice President [email protected] Ext. 110 restructuring, divestitures and spin- Sherif Ahmed Assistant Vice President [email protected] Ext. 113 offs, capital market services, Yasmine Mowafy Assistant Vice President [email protected] Ext. 117 project finance and real estate. Asset management offers portfolio Asset Management +202 3749 0380/4 and mutual fund services. Nabil Moussa Executive Director [email protected] Ext. 125 Adel Kamel Vice President [email protected] Ext. 127 Wael Wagih Vice President, [email protected] Ext. 220 Head of Fixed Income Omar Radwan, CFA Vice President [email protected] Ext. 129 Hassem Kortam, MSc Assistant Vice President [email protected] Ext. 124 Seif Meguid Financial Analyst [email protected] Ext. 128 Al-Futtaim HC Securities – Dubai, UAE +971 4 20 66 888 Al-Futtaim HC Securities Senior Management Al-Futtaim HC Securities is a full- Hassan Aly Choucri General Manager [email protected] +971 4 20 66 855 service securities brokerage Sales offering trading solutions for the Karim Moustafa Business Development [email protected] +971 4 20 66 862 UAE markets. Sherif Abdelkhalek Dealing Room Manager [email protected] +971 4 20 66 861 Nizar Sawaf Sales Trader [email protected] +971 4 20 66 868 Oubada Jawad Sales Trader [email protected] +971 4 20 66 860

20 September 2007 Also available at www.hc-si.com 20