• Drop in net income despite growth in the top line
• Presence in Abu Dhabi and Al Ain to act as a savior
• New businesses i.e. Lime & Dry Mortar to support the income
• Start of new cement plant to bolster volumes & cushion the margins

Increase in cost restricts bottom line growth
Arkan Building Materials Company declared its 1Q11 results. Company recorded net income of AED9.3mn in 1Q11, lower by 51.5% Y-o-Y and 39.5% Q-o-Q. Major reason for the tumult in profit was 5.7% decline in the cement prices along with over 25% decline in prices of blocks. Along with that jittery capital markets dropped the value of investments in equities, resulting in a loss of AED2.6mn.

Valuation update
ARKAN has always traded on a higher multiple as compared to other cement manufacturers, reason being its extra high outstanding shares of 1.75bn. With such high number of shares, the price on a relative basis turns out to be lower which drops our weighted average value. We have upgraded our fair value by to AED1.26/share as compared to AED0.95/share earlier. Increase in the fair value resulted because of commissioning of new cement capacity and also because of addition of lime and dry mortar plant. Despite increase in our target price we recommend a HOLD on the stock as our fair value is 4.9% lower than current market price of AED1.32/share.

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