Three cement firms weather local storm

What's up Kuwaiti investment bank gives trio concrete backing.

DUBAI // With projects worth close to US$500 billion (Dh1.83 trillion) on hold in the country, it would be natural to assume that shares of cement firms here will continue to crumble. But three Abu Dhabi-listed makers are weathering the storm well, according to a Kuwait-based investment bank that placed buy ratings on the stocks this week.

Global Investment House believes shares of RAK Cement have upside potential of close to 50 per cent, while both Gulf Cement and Fujairah Cement Industries could jump as much as 30 per cent. This is despite cement prices dropping 11.4 per cent last year. The investment bank said in a report that it expected a 19 per cent capacity increase by 2011. RAK Cement benefits from being 20 per cent owned by Abu Dhabi's Hydra Properties, which has many continuing projects that should help keep demand constant.

Gulf Cement and Fujairah Cement feature effective internal cost controls and little exposure to poorly performing outside investments, the bank noted. The recommended price target for RAK Cement is Dh1.55, while Gulf Cement and Fujairah Cement are priced at Dh2.19 and Dh2.86 respectively. The bank is less bullish on Arkan Building Materials in Abu Dhabi, as it is expected to post a 24.1 per cent drop in its gross margins for last year. Global Investment House predicts the stock could drop as much as 33 per cent.

"Arkan ventured into the steel segment in the last two years and received a severe burn because of depreciation in commodity prices," said Hettish Karmani, a senior financial analyst at Global Investment House. "It also wrote down inventories worth Dh430m." The new price target for Arkan is Dh1.68, down from its January 11 close of Dh2.53. The entire sector is under intense pressure as demand for cement has abruptly reversed.

In the boom years of rapid expansion in the region there was typically a demand-supply gap of between 3 million and 5 million tonnes a year. Last year there was a surplus of more than 3 million tonnes, Mr Karmani said. Economic uncertainty and lack of project financing in the country has forced developers to either cancel or put on hold 49 per cent of the $924bn worth of developments in the country, Global Investment House's report said.

In order to diversify and boost profits, most cement makers invested heavily in property and equity markets in the boom years. The value of these investments has declined dramatically, increasing pressure on baseline income for most cement firms, according to Mr Karmani. @Email:[e-mail]