The GCC stock stars

Ben Roberts , July 4th, 2010

Construction Week has analysed the share performance of all construction and materials companies across the GCC’s stock markets from the beginning of this year to 22nd June

It set a benchmark of 5% for both the increase in stock market value and total return for the year to date.

Twelve companies beat this benchmark, with results showing that Kuwait and Saudi materials manufacturers have provided the best market value increase and total returns so far this year.

Kuwait Portland Cement Company has seen the biggest increase, up 54.49% on the benchmark (59.49% total rise so far this year on the Kuwait Stock Exchange), with a total return of KD70.57.

And Kuwait companies have surprisingly dominated the benchmark-beaters, with Combined Group Contracting, Kuwait Company for Process Plant Construction & Contracting Company and United Projects Group outperforming by 39.48%, 33.64% and 13.95% respectively. These companies produced total stock returns for the year of KD49.75, KD40.29 and KD30.52.

Saudi Arabia’s Saudi Vitrified Clay Pipes Company has also been a star performer, beating the CW benchmark by 50.95%, with total returns of SR63.01. Other companies from the Kingdom of note for the first half of this year include the ready mix giant Saudi Cement Company (10.57% up on the benchmark), Makkah Construction & Development Company (+6.90%) and Zamil Industrial Industries Company (+4.26%).

Stock price and total returns for the year do not tell the whole picture if you are an investor of course. Stock pickers will often look at the earnings per share (EPS) of a company and then the price/earnings (p/e) ratio (see box).

Based on these variables of dividend rates and outstanding shares, a company’s stock market value increase and its P/E ratio may be very different to each other when compared to peers.

This has played out in CW’s research. Kuwait Portland Cement Company may have outstripped the CW benchmark by almost 55%, but its P/E ratio sits at 6.32, a long way below the 23.3 of Makkah Construction & Development Company and the 22.32 of Saudi Vitrified.

Different investors will focus on a company’s dividends, p/e ratio or share value depending on their long-term intentions for the shares – indeed, the different figures may help determine those intentions.

A long term investor in a company – along with income funds – may study the dividends they will receive as stock holders, whereas those with a shorter term view may look at the capital gains to be pocketed from an increase in share price.

It also must be acknowledged how differently company finances are structured across the construction sector. If a contractor takes on a project that will take many years, it may subsequently take a few quarters for it to appear on its balance sheet – even if their share price may rise on the initial news.

Ziad Makhzoumi, CFO of Arabtec, recently highlighted this delay in an interview with CW. “In construction, you’re not taking on a four-week project, you’re taking on a three or four-year project, and there is usually a lag time between signing a contract and seeing the revenue on your balance sheet,” he said.

He pointed out that Arabtec’s net profits for the first quarter of 2010 were down 17% compared to the same period in 2009, but that the net margin had increased as a result of operating in new markets.

Materials manufacturers can see similar delays if they have expanded their capacity, though also the opening of a new plant or factory can boost share price and be factored into the forecasted revenues.

Gulf Cement Company, for example, will in the next three years see its 5,000-ton capacity cement plant come on line. Nishit Lakhotia, an analyst at Securities & Investment Company in Muscat, also earmarks an expected increase in capacity for Al Madinah, to add further to the competition for this commodity.

Of course, many of the companies in the region are private entities. But all things considered, CW has found some fascinating trends in the market. These trends highlight factors that have helped some companies to clear the 5% benchmark easily in the first half of the year. it may also point to those that have great expectations for the next six months.

2010’s 12 Outperformers
Material suppliers dominate the list of companies that have beaten CW’s 5% benchmark for share performance in the first half of 2010.

KUWAIT PORTLAND CEMENT COMPANY
Core business: The import, export, trade and distribution of cement and related products in bulk and in bags, along with the construction, operation, lease and rent of stores and silos needed for cement. Also produces ready mix cement and deformed steel bars.

Kuwait Portland’s success this year has been remarkable given its core business. Most analysts are certain that the cement market in Kuwait is saturated, with very few major projects of note to soak up the supply.

Nevertheless, its success has not been through obscure means, but merely being a major supplier for its market – where there is business, it tends to grab it. Its last financial statement showed why shareholders are rubbing their hands.

First quarter net profits reached KD6.35 million, up 211%, after a 100% cash dividend at 100 fils per share was announced for 2009. Its profitable streak saw it reverse a KD3.54 million loss incurred during the first nine months of 2008 into a KD14.08 for the first nine months of 2009.

Last year also saw a US$3 million profit from selling its 58.33% in United Gulf Cement Company. It has a diverse investment portfolio too.

CW benchmark outperformance: 54.49%
Market capitalization: KD105.7 million

SAUDI VITRIFIED CLAY PIPE COMPANY
Core business: The manufacture of vitrified clay pipes with an eye on being environmental friendly. Since 2001 the company has produced an annual capacity of 100,000 tonnes, and has been an ISO 9001 certified company since 1998.

Few companies in CW’s stock stars list are more straightforward than Saudi Vitrified Clay Pipes Company. The company has claimed significant market share from producing clay pipes and its ancillary products and is an authority on joints and fittings.

In March 2009 it opened a second factory, which would have bolstered its earnings potential and then stock price, though its equity only really started to rise at the beginning of 2010.

The company is working on big projects in every major city of the Kingdom, which is not common among a lot of materials suppliers.

And the company itself is outstanding in its transparency, publishing on its website not only its full methods of production but also all the banks with which it deals financially.

CW benchmark outperformance: 50.95%
Market capitalisation: SR975 m

COMBINED GROUP CONTRACTING
Core business: A diversified contractor across both the construction, power and oil sectors across the Middle East and parts of Eastern Europe.

The publicity-shy contractor has seen the majority of its projects are for schools and roads, although its continued diversification includes a special projects section - the “proving grounds... where a new, related, business segment is explored and tested,” the company explains.

Its overall takings have seen only a small dip compared to peers. First quarter 2010 saw KD2.4 million in net profits, down from KD2.739.671 million in 2009.

CW benchmark outperformance: 39.48%
Market capitalization: KD152.8 million

UNITED PROJECTS GROUP
Core business: Aeroplane ground and cleaning services and catering, leasing out aeroplanes, tourism, travel, and cargo services as well as managing projects and investing surplus funds in portfolios managed by specialised companies.

United Projects Group has one of the more unusual suite of services, providing airport ground and cleaning along with leasing out planes and cargo services.

It also manages projects and has an investment portfolio on the side, and counts Kuwait United Construction Management and Sporting Real Estate among its past business partners.

Last year, as many services companies looked to break even, UPG posted a net profit of KD4.02 million, up 130% on the previous year, producing a 35% cash dividend (35 fils per share) for its investors.

First quarter results this year show more than a quarter of the 2009 net profits, at KD1.35 million, implying a continued ascent in its returns.

Further, it has completely outstripped a services index in Kuwait that has headed south for the last two months - all this from a company that will only be 10 years old in December and has 67 employees.

CW benchmark outperformance: 13.95%
Market capitalization: KD24.3 million

SAUDI CEMENT COMPANY
Core business: A 55-year-old producer of cement, cement-based products and investment in related fields.

The combination of Saudi Arabia and cement rarely produces anything but big numbers. The Kingdom’s growth and prospective projects ensure its major contractors will need every bag of the grey stuff it can get.

Saudi Cement Company is one such manufacturer to profit, selling into all the major cities helped by exclusive access to the railways – some analysts estimating the transport cost saving at 40%. It has two big plants in the Eastern Province, both between 120-130 km from Dammam port, where it has its own export terminal.

The first quarter saw a profit of SR174 million, up 16% on the 2009’s first quarter and an increase on the 10% rise in profits from the final quarter last year due to increased sales.

Investor faith is strong, and in May the company confirmed a 50% capital increase approved from SR1,020 million to SR1,530 million, through issue of 3-for-2 bonus shares.

CW benchmark outperformance: 10.57%
Market capitalization: SR6.7 billion

KUWAIT COMPANY FOR PROCESS PLANT CONSTRUCTION & CONTRACTING COMPANY
Core business: KCPC has a focus on civil engineering, building and infrastructure development with subsidiaries across the Gulf except Saudi Arabia with subsidiaries and strength in MEP.

KCPC has been an unshowy construction company that has experienced few hinderances in the global slowdown. The company is diverse across the public and private sectors and the projects it has worked on.

It caught the eye in the last week following its announced details of a KD200 million tender related to houses and buildings in the Jaber Al Ahmad Residential City and is looking for a replacement partner, following a breakdown with a UAE company based on a bank guarantee.

It is now in talks with firms around the world and the project is one of a flow of tenders for the firm, which also includes electrical and flooring mandates, hotels and shopping centres.

CW benchmark outperformance: 33.64%
Market capitalization: KD16.36 million

AL BABTAIN POWER & TELECOMMUNICATIONS
Core business: Manufacturer of transmission and distribution towers along with other industrial steel products.

Al Babtain Power & Telecommunication is embedded within the power market, particularly as a leading force in the production of transmission towers - which can deliver power up to 500 KV – along with distribution towers.

The majority of its business is in Saudi Arabia, and contractors such as National Contracting Company and Al Sharif have regularly returned to the company for further work.

But it has also strong lines of steel production for the oil and gas, petrochemicals and cement industries, particularly for plant upgrade work. 2009 saw sales of SR1.12 billion, up more than SR100 million on the previous year’s total despite a 14% increase in sales costs during that time.

First quarter net profits fell marginally, to SR24.2 million from SR25.3 for Q4 2009 after Zakat. Its stock price really started to climb after the first week of February.

On 9th of that month it was trading at SR34.6 – by 1st May it had reached a peak of SR42.9 and by 22nd June was coasting at SR38.8.

CW benchmark outperformance: 7.46%
Market capitalization: SR1.5 billion

MAKKAH CONSTRUCTION & DEVELOPMENT COMPANY
Core business: Construction projects for all new developments and upgrade work in the vicinity of the Grand Mosque in Makkah.

MC&DC has delighted shareholders in the last two weeks by maintaining its cash dividend at SR247 million for its June-to-June cycle.

Other figures from the statement look strong too, with net income beating that of 2008 by 17% despite a slip from the AED213 million posted between July 2008 and June 2009.

First quarter profits this year were SR52 million, up from SR43 million of last year’s first quarter. The company is well-placed as a developer for the area around the Grand Mosque based on a recent incline in pilgrim numbers, with the Hilton Makkah a stand-out project for the company project.

Its share price has been substantial, from SR27 at the start of the year to SR30.1 on the 22nd June, though not without its volatility.

CW benchmark outperformance: 6.9%
Market capitalisation: SR43 billion

SAUDI CERAMIC COMPANY
Core business: The manufacture and selling of ceramic products for both wholesale and retail markets. Bathroom fixtures, wall and floor tiles, electric water heaters, and ceramic road markers are among its key enterprises.

The third entry from Saudi Arabia’s extraordinary materials market, Saudi Ceramic Company typifies the opinion that the global financial crisis never made it to the Kingdom.

The company’s sales and net income have both grown year-on-year, with last year’s annual sales up by SR100 million and after-tax earnings up 9.7% to SR197 million. Its exporting network sells into 45 countries, and it has 26 showrooms around the Kingdom.

Cash dividends have been maintained in the last two years, and the company has been proven credit worthy: in May it borrowed SR71 million from the Saudi Industrial Development Fund to help finance a plant expansion.

Once the increased production emerges, sales should follow, and with it further gains on the stock market.

Raj Sinha at HSBC Saudi Arabia advised to be ‘overweight’.

CW benchmark outperformance: 4.58%
Market capitalization: SR3.075 billion

AL ANWAR CERAMIC TILES COMPANY
Core business: An Omani manufacturer of kitchen, floor and bathroom tiles that distributes around the region.

A significantly smaller company than its Saudi peers, Al Anwar Ceramic Tiles Company’s moniker as the ‘first and only tile manufacturer in the Sultanate of Oman’ goes some way to explain its ability to sell well in the last two years.

The combination of local raw materials and finishing materials and designs from Europe give it a degree of uniqueness, but it is the recent balance sheet that has been most pleasing to the eye.

Net profits for the first quarter rose 11% from OR1.26 million to OR1.43 million compared to the first three months of 2009, with sales rising from OR4.096 million to OR4.575 million during that period due to a 7% increase in production.

“Based on our cost position and the very satisfactory acceptance of 'Al Shams' across the GCC markets, we remain optimistic about our prospects for the year 2010,” said chairman Hussain Ali Habib Sajwani in April.

CW benchmark outperformance: 0.3%
Market capitalization: OR49.16 million

ZAMIL INDUSTRIAL INVESTMENT COMPANY
Core business: A manufacturing giant of glass, steel, mirrors and air conditioners. Subsidiaries include Zamil Steel.

The only materials supplier with big-scale multiple specialisms, Zamil has been competitive on all fronts in the last year: steel, glass, mirrors, transmission towers and air conditioners.

Its rise on the stock market had an outstanding start to the year with Q4 2009 results that more than tripled after reducing costs and securing investments in India and Egypt.

In an interview with a newswire, Abdulla Al-Zamil, chief executive officer, emphasized the reduction in inventories and receivables to reduce its debts to banks.

It has meant that it could cut steel costs in its home markets where some rivals could not. New ventures with Indian firm Heurtey Petrochem’s Petro-Chem Development and New Delhi Tele-Towers last year and a steel factory in India at the end of 2008 look to be adding to its firepower.

But despite its gain against the CW benchmark, it fell below the SR41.73 in which it started the year and has lost around SR9 since its peak in 14th April.

CW benchmark outperformance: 4.26%
Market capitalization: SR2.736 billion

Conclusion:
As four of the top five, Kuwait companies have been surprisingly successful. Cement is still vital, and Kuwait Portland Cement Company has enjoyed the market juggle of supply and demand. Two contractors – Combined Group Contracting and KCPC – have produced a big outperformance with effective diversification.

However, some have flourished with a single product area, such as Saudi Vitrified Clay Pipes Company. There is a link between strong first quarter results and a good rise for the half-year.

Top ten fallers
(below the 5% CW benchmark)

Arkan Building Materials: -46.88%
National Ranges: -40.90%
Construction Materials: -40.45%
Salbookh Trading: -40.23%
Ras Al Khaimah Cement Company: -34.41%
Arabtec Holdings: -33.36%
Mushrif Trading: -31.74%
Mohammed Al Mojil Group: -25.83%
Galfar Engineering: -25.69%
Union Cement Company: -25.24%