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Yamamah Saudi Cement

Source: NCB Capital

Well positioned for 2010

We believe Yamama is well located to take advantage of the increased momentum of the construction sector in 2010, particularly in the Central region. With average prices 4% below the sector in 2009, we believe its strategy is to generate profitability through high sales volumes. With a strong outlook for 2010, we upgrade our rating on the stock to Overweight.

• Demand in central region gaining momentum: We believe there is increasing momentum with some of the key projects in the Central region in 2010, compared to the slow pace seen elsewhere in Saudi Arabia. Due to its location just outside of Riyadh, Yamama is ideally located to meet this demand and will incur minimal logistical costs in the process. This, combined with its integrated plant, below average costs and in-house power generation capabilities will help support growth in 2010, we believe.

• Price discount to the sector expected to continue: We believe Yamama will continue to focus on maintaining its market share through prices which are at a discount to the average of the listed companies. We believe its strategy is to deliver financial growth through driving sales volumes. In, what is essentially a commodity product sector, we believe Yamama will be able to increase profits through the higher volumes, despite the lower prices.

• Margin pressure to remain, but cost advantage to minimize impact: Due to the ongoing trends in the cement sector, alongside its peers, we believe Yamama will continue to face margin pressure. We expect gross and net margins to fall by 100bps and 20bps respectively in 2010e. However, due to the aforementioned cost advantages, we believe its overall cost per ton of cement advantage above the sector will remain in 2010, helping minimize margin falls.

• Valuation at a discount: Yamama currently trades at 11.1x for 2010e P/E, below the industry average of 11.8x. However, we believe its advantageous location and ability to meet new demand will enable it to trade at par with the industry average, going forward.

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