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FERTILIZERS

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Please Read Last Page For Contact Details and Important Disclaimer

Planting Seeds of Growth Growing populations and rising global demand for food and bio-fuels make ‘Fertilizers’ a key industry. Environmentally-friendly legislation and increased restrictions on industrial activity in the developed world, particularly in Europe, have given rise to a number of opportunities in developing regions. Increasing phosphate rock exploration is likely to shift the focus to P-based fertilizers, especially given that N-based fertilizer companies are facing difficulties fixing natural gas prices. With an abundance of phosphate rock and natural gas at cheap prices and highly accessible ports, Egypt has a competitive fertilizer industry. China's recent 30% reduction in its global fertilizer trade further supports Egypt’s fertilizer potential. The expected rebound in the fertilizer market by 2010 reinforces our positive outlook for the sector. Within our coverage universe, Orascom Construction Industries (OCIC) is our top-pick. It has an expanding capacity, a varied product mix, and a widening regional footprint.

Optimism in 2010: Forecasts suggest the global economy will pick up in 2010. Should this happen, demand for commodities will regain momentum and global fertilizer markets will rebound, with prices trending upwards. P-fertilizers are expected to outperform the overall fertilizer market, growing with a 5-year CAGR of 9% over 2009-2013.

Short-term global supply disruption caused by China: With China’s resumption of the 110% export tax on September 15, 2009, N-fertilizer prices rose c.10% since August 2009. China’s fertilizer exports represent c.30% of the total fertilizer exports globally. Consequently, higher tariffs are expected to magnify the increase in prices by around 20%.

Egypt‘s cost advantage: Investors are able to obtain Egyptian raw materials at significantly lower cost than elsewhere in the international market. Natural gas prices in Egypt ranges from US$1.25 to 3/MMBtu. Current natural gas forwards for 4Q09 onwards, lie above US$5.8/MMBtu. Phosphate rock, at LE250-550/ton was equivalent to less than US$46-110/ton in 2Q09. This compares to an international price of c.US$150/ton. Both the lower gas and phosphate prices give Egypt an edge over other fertilizer markets.

OCIC is our top pick: OCI’s fertilizer operations were impacted by lower fertilizer prices of c. 50% YoY in 2Q09, resulting in a narrowing EBITDA margin. However, OCI owns a robust business model supported by several cost advantages. OCI’s EBITDA growth is dependent on higher EBITDA margins for its construction LoB and rising prices for fertilisers. N-Fertilizer prices increased by 40% YTD and we expect them to increase by a further 40% in 2010. We believe OCI’s 2010 fertilizer LoB EBITDA margins will be supported by a number of factors, including fertilizer price increases, the establishment of strategic alliances with global fertilizer distributors and production capacity growth. We also expect the construction LoB’s performance to continue to grow as several planned construction projects are implemented across the MENA region. We have increased OCI’s LTFV by 31% to LE 286.1/share and its TP by 30% to LE 268.4/share. The new TP implies a 12% upside potential and we have upgraded OCI to HOLD.

EFIC’s robust business model: The 50% decrease in global fertilizer prices has impacted EFIC’s top line. Though P-fertilizer prices may remain at current levels in 2009, this still mark’s a 20% YTD increase. We believe EFIC is well placed to capitalise from the expected pick-up in fertilizer demand in 2010. That said, EFIC has already exhibited encouraging margins in 1H09. This was a result of two factors. First, the management’s decision to blend 2008s expensive sulphur inventory with this year’s cheaper one and secondly, EFIC’s successful penetration of new, greenfield, markets. In light of these developments and the wider market outlook, we have increased our LTFV to LE 31.4/share vs. our old LTFV of LE 21.4/share. We have also raised our TP to LE 28.2/share vs. our old TP of LE 20.6/share. With a 9% upside potential, we have upgraded our recommendation from SELL to Underweight.

Muhammad El Ebrashi

[email protected]

DRIVERS • Inherent demand from increasing population

growth on both global& local levels. • Lack of fertilizer capacity till end of 2012 and

beginning of 2013. • European fertilizer companies face restrictions

as legislation to reduce carbon emission is enforced.

• Prime export location, due to Egypt's proximity to Europe, Africa and East Asia.

• Local cost advantage in natural gas prices. • Abundance of phosphate rock in Egypt at

competitive prices. RISKS • Lack of credit available to farmers. • Inventory over-hangs on a global level. • GoE must approve locking in forward natural

gas prices. • Sulphur has to be imported at international

prices. • Phosphate mines are government owned.

GoE announced that phosphate rock concession agreements are to be issued, yet no details are available.

CHANGES IN FORECASTS (2009E)

Note: EFIC’s figures are in LE mn, and OCI’s figures are in US$ mn, except per share data is in LE.

Source: CICR estimates

EFIC - Cons. Old New ChangeRevenues 884 770 -13%EBITDA 239 201 -16%Net Inc. 89 108 21%

LTFV 21.4 31.4 47%TP 20.6 28.2 37%Recom. SELL Underweight UP

OCI - Fert. LoB Old New ChangeRevenues 645,597 499,851 -23%EBITDA 457,267 340,232 -26%Net Inc. 304,686 193,409 -37%

LTFV 216.5 286.1 32%TP 207.9 268.4 29%Recom. Underweight HOLD UP

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Contents

2008 Global fertilizer market performance ......................................................... 4 Local fertilizer situation ....................................................................................... 8 Market dynamics .............................................................................................. 10

Global outlook .................................................................................................. 14 Domestic outlook .............................................................................................. 18 EFIC coverage ............................................................................................... 211 OCI coverage ................................................................................................. 332

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List of Acronyms ABUK Abu Kir Fertilizers CompanyAS Ammonium Sulphatebn BillionDAP Di-ammonium PhosphateDCF Discounted Cash FlowsDCP Di-Calciaum PhosphateEBIC Egyptian Basic Industries CompanyEFC Egyptian Fertilizers CompanyEFIC Egyptian Financial & Industrial Companyeq. EquivalentFoB Free on BoardGSSP Granulated Single Super PhosphateIFA International Fertilizers AssociationK PotashLE Egyptian PoundLoB Line-of-BusinessLTFV Long Term Fair ValueMALR Ministry of Land ReclamationMAP Mono-ammonium PhosphateMMBtu Million British Thermal Unitmn MillionN NitrogenNPK Mixed fertilizersOCI Orascom Construction IndustriesP PhosphatePBDAC Principal Bank of Agriculture & CreditPSSP Powdered Single Super PhosphateS SulphurSA Sulphuric AcidSCFP Suez Company for Fertilizer ProductionSSP Single Super PhosphateTP Target PriceTSP Tri-super PhosphateUAN Urea Ammonium NitrateUS$ United States DollarYTD Year-to-date

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2008 Global fertilizer market performance Fertilizer demand dropped in 2008 The global fertilizer consumption recorded 160 mn tons of nutrients in 2008, a decline of c. 4.8% from 168.1 mn nutrients in 2007. However, over a longer duration – 2000 to 2008 – demand grew at a CAGR of 2.4%. Nitrogenous (N) fertilizer consumption dominated the fertilizer market in 2008 with a 62% share of the total fertilizer consumption. Phosphate (P) and Potash (K) held a share of 23% and 15%, respectively. We attribute the 2008 decline in fertilizer consumption to four main factors.

Figure 1: Factors affecting fertilizer consumption

Source: CICR

1. The high fertilizer prices of mid-2008 encouraged some farmers to use greater amounts of organic nutrient sources, which could have long-term impacts on crop nutrition practices.

2. Farmers are waiting as long as possible to purchase fertilizers, anticipating further reductions in prices. This is particularly common where retailers hold large, high-priced inventories of phosphate, potash and compound fertilizer. It appears farmers are aiming to reduce their fertilizer P and K application rates where possible.

Figure 2: N fertilizer prices (YTD) Figure 3: P fertilizer prices (YTD)

Source: Bloomberg Source: Bloomberg & CICR estimates

3. Farmers, who are willing to use fertilizers, may be constrained in some countries by the lack of affordable credit.

4. Food inventories have increased yet reserves are insufficient. For example, the cereal stock-to-use ratio is c.23% in 2009 compared with c.32% in 2000.

High fertilizer prices in 2008

Farmers delaying purchase decisions

Lack of credit

High food inventory

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Figure 4: Global fertilizer consumption (2000 – 2008)

Source: IFA

N fertilizer supply offset that of non N fertilizer Fertilizer sales and imports collapsed in late 2008, driven by weakening financial and economic conditions and restricted credit access. The loss of fertilizer demand or purchase deferral in a large number of consuming countries was also a factor. However, N-based fertilizer supply increased, counter-balancing the decline in K & P fertilizers in 2008. Global urea production rose 1.7% compared to 2007, while the output of phosphate fertilizers and potash declined by 7.5% and 2.8% respectively. These movements were driven by a drop in exports and weak import demand. In order to preserve crop growth, farmers did not reduce their N-fertilizer applications.

Figure 5: Global fertilizer production (2000 – 2008)*

*Excluding ammonia, phosphate rock, and phosphoric acid

Source: IFA

Despite strong demand, the fertilizer markets were volatile in 2008. During 1H08 the industry was operating at close to maximum effective capacity. This helps explain the very tight market conditions that prevailed in the first half of 2008. However, fertilizer market conditions deteriorated rapidly in the fourth quarter.

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Figure 6: Global operating rates (2000 – 2008)

Source: IFA

Figure 7: Ammonia Supply/Demand (2006-2008)

Figure 8: Urea Supply/Demand (2006-2008)

Source: IFA & CICR estimates Source: IFA & CICR estimates

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Figure 9: Processed phosphate supply/demand (2006-2008)

Figure 10: Phosphoric acid supply/demand (2006-2008)

Source: IFA & CICR estimates Source: IFA & CICR estimates

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Local fertilizer situation Local market fundamentals There are 13 fertilizer producers in Egypt, 10 of which specialize in N-based fertilizers, whilst 3 are engaged with P-based fertilizers. The N-based fertilizer producers include 8 active companies – the other two are undergoing restructuring programs.

Egypt's total domestic fertilizer production experienced a CAGR of 15.9% between 2005/06 and 2008/09. Domestic production of 17.4 mn tons in 2008/09 yielded a 2.1x production/consumption coverage ratio. Strong coverage ratios were exhibited in both nitrogenous and phosphate fertilizer markets. The nitrogenous production/consumption coverage ratio equalled 2.1x, while the phosphate production/consumption coverage ratio was 1.6x in 2008/09. Total exports increased by a 5-year CAGR of 25.2% over the period 2005/06 – 2008/09. This growth followed increased production capacities, mainly in the N-fertilizer sub-segment. This has experienced a 26.2% CAGR (vs. 10.2% for the P-fertilizer sub-segment) over the same 5-year period. Total imports as a percentage of consumption declined to 3% in 2008/09 compared with 24% in 2005/06. Most of the decline came as a consequence of the continued export ban on N-fertilizer domestic producers (outside the ex-free zone area). Local production levels also increased with P-fertilizer production levels increasing to match local consumption.

Figure 11: Local fertilizer market deficit (2005/06 – 2008/09)

Figure 12: Fertilizer market dynamics (2003/04 – 2008/09)

Source: HCF, CICR estimates Source: HCF, CICR estimates

High coverage ratios

Increased exports activities without affecting local consumption

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N-based fertilizers

• 5 companies were established in the ex free-zone area. Of these five companies, only two had fully hedged its natural gas costs via secured feedstock supply contracts.

• Two companies are undergoing various rehabilitation programs:

1. KIMA was granted LE 3 bn to transform its operations from electricity to natural gas.

2. El Nasr Company was granted LE 180 mn to increase production capacities. These are expected to be finalized by end 2011.

• The Ministry of Agriculture and Land Reclamation (MALR) along with the Principal Bank of Agriculture Credit (PBDAC) announced that they will cease to interfere in either the distribution of N-fertilizers or their pricing mechanism in 2010. We believe that the price caps levied will be removed in 2010.

P-based fertilizers • The Prime Minister approved the establishment of 14 new phosphate

companies with investment costs of LE 10 bn (eq. US$1.8 bn).

• Although Abu Tartur phosphate mine offers low-grade rock, we believe that P-fertilizer investors can benefit by either:

o Producing P-fertilizer products with low-grade phosphate and setting lower product prices. We feel such an approach could enable businesses to increase their sales.

o Manufacturing phosphoric acid and thus saving the freight costs associated with importing such acid.

Figure 13: N fertilizer market share 2008

Source: HCF, CICR estimates

ABUK68.39%

Delta23.14%

EFC0.47%

El Nasr Factory6.21%

El Suez0.23%

KIMA1.40%

AlexFert0.16%

Other8.47%

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Market dynamics

Source: CICR

Supply drivers

Growth in the nitrogenous fertilizer industry is heavily dependent on the availability of feedstock, namely natural gas. Egypt enjoys an increasing level of known natural gas reserves, recording 2,170 bn cubic meters in 2008.

Phosphate rock and sulphuric acid are the basic raw materials required in the production of phosphate fertilizer. In terms of volume, the former contributes 62-66% and the latter 34-38% of total inputs in Single Super Phosphate (SSP) production – the main phosphate fertilizer produced in Egypt. Phosphate rock is extracted from the Red Sea coast with the government-owned El-Nasr Mining Co. controlling 80% of the market and the Red Sea Co. and National Phosphate Co. producing 20% between them.

Sulphuric acid is a key ingredient in phosphate fertilizer production. Sulphur (the main raw material for its production) is imported for this purpose. Starting in 2004, industrial demand for sulphuric acid (such as water desalination projects, petrochemicals, glass, and pharmaceuticals) has increased. To achieve greater diversification and integration, and to meet the rising local needs, EFIC expanded its sulphuric acid production line in SCFP with an added annual capacity of 425k tons mid 2008.

In order to meet rising demand, the fertilizer industry has both expanded and developed a number of new plants. Helwan Fertilizers and Alexandria Fertilizers were both established in 2006/07, adding 2.4 mn/year of production, this increasing to 3.9 mn tons/year after Helwan's plant realised its full potential. EFIC increased its AS production capacity by 100% respectively, reaching 300k tons/year in 2H09.

Phosphate rock availability

Sulphuric acid expansion

Increasing local production capacities

Price cappingincrease

Deregulation of N fertilizers market

Distribution network (PBDAC)

Demand Drivers

Regulatory DriversCost-related Drivers

Supply Drivers

Key Inputs Cost Passing Ability

Population Growth Agricultural Land Demand Seasonality

Feedstock Availability

Added Capacity Restructuring

activities

Fertilizers Market

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Demand drivers

Rising fertilizer consumption is fuelled by population growth. This increased at an annual rate of 2% over FY05/06-08/09, creating a growing need for food. The strong link between fertilizer consumption and population growth is illustrated in the high correlation coefficient of 0.846 over the same time span.

To cope with the rising need for food, agricultural land has increased, reaching 8.9 mn feddans in FY08/09. With this expansion, demand for fertilizers rose by a 3-year CAGR of 7.3%. N-fertilizers grew by 16.2% over the same time span (FY06/07 – 08/09), higher than the industry average growth rate. P-fertilizers are essential in the preparation of soil in reclaimed areas, especially those plots located in the desert areas. The GoE's plan aims to reclaim 150k feddans p.a. Phosphate fertilizers are also utilized during the plant development phase as well as in plant cells division. Agricultural land and fertilizer demand exhibited a strong correlation coefficient of 0.63 over FY05/06-08/09.

Cost related drivers

N-fertilizer producers use natural gas as the main feedstock in the production of ammonia. This in turn is used in urea production. Natural gas represents about 71% of the cost of ammonia, which itself represents around 82% of the per-ton cost of urea. Thus, natural gas represents c. 58% of the per-ton cost of urea, and any cost increase in natural gas will negatively impact the profitability of nitrogen fertilizer producers. Although local N-fertilizer producers source natural gas at internationally competitive prices, some companies have better natural gas arrangements with the government of Egypt (GoE). Accordingly, local natural gas prices are supplied in the range of US$1.25-3/MMBtu.

Figure 14: Existing local N fertilizer companies’ environment

Source: CICR database

Phosphate rock and sulphuric acid are the basic raw materials in the production of SSP. Their cumulative share is 72 – 77%. Phosphate represents 34-38%, while sulfuric acid represents 62–66% of the total ingredients used. North African phosphate rock Free on Board (FOB) export prices averaged US$137.48/ton during 9M09, though they now hover around US$100/ton in the local market. Domestic producers are able to source phosphate rocks at much lower prices in order to manufacture lower grade SSP for consumption in the local market. These SSP grades were introduced by local producers to boost domestic sales, at affordable prices Phosphate is locally available and mainly extracted from the Red Sea coastal area – from El-Hamraweya to El-Seba'eya, including the Safaga, Al-Qoseir, Abu Tartur and El-Salam mines. Al-Nasr is the sole Egyptian phosphate producer and all of these mines are controlled by GoE. Sulphur, on the other hand, is imported.

Company Full Natural Gas Cost Hedge Price CapEgyptian Basic Industries (EBIC) Yes NoEgyptian Fertilizers Company (EFC) Yes NoHelwan Fertilizers No NoAlexfert No NoMisr Oil Processing Company (MOPCO) No NoEl Delta Fertilizers Company No YesAbu Qir Fertilizers & Chemical Industries (ABUK No Yes

El Nasr Coke and Chemicals Company No YesEgyptian Chemical Industries (Kima) No YesEl Nasr Fertilizer and Chemicals (SEMADCO) No Yes

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Regulatory drivers

Mr. Amin Abaza, Minister of Agriculture & Land Reclamation, recently announced that local N-fertilizer prices will be decreased by LE 100/ton. This follows the government’s decision to increase N-fertilizer prices by 100% in March 2008. The price of N-fertilizers will now range between LE 1,200-1500/ton. The government of Egypt (GoE) does not interfere in the P fertilizer pricing system.

Figure 15: Current N fertilizer prices mechanism (LE/ton)

Figure 16: N fertilizer local prices post 100% price hike

Source: CICR database Source: CICR database

The GoE is moving towards a deregulation of the N-fertilizer market. The MALR banned co-operatives from distributing fertilizers in mid 2007. However, this ban was lifted in 1H09, re-introducing co-operatives to the distribution cycle. Although the new distribution quotas for nitrogen fertilizer between the PBDAC, cooperatives, and private traders were not disclosed by the MALR, it is believed it will be 40%:40%:20%, respectively. Local co-operatives will now be added to the distribution lists for the phosphate fertilizer producers. The MALR is believed to be gradually reducing its role in the fertilizer market through the PBDAC, until full deregulation is achieved by the end of 2009.

Capping local N fertilizers, free P fertilizer market

Deregulation of N fertilizer market

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Regarding P-fertilizers, companies are free to set their own prices. Prices should reflect those in the international market. That said, to increase its 4Q08 domestic sales, EFIC introduced a new SSP grade fertiliser, with a lower phosphate grade and a subsequently lower price. Figure 17: P fertilizer prices

Source: EFIC

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Outlook • As crude oil prices increase, the demand for grain will revive. Demand for

fertilizers should follow suit starting 2010.

• According to the IFA, the nitrogen sector may see a tightening of conditions in 2010-11 regarding the supply of urea and ammonia. In the longer term, the expected increase of nitrogen capacity – due once announced projects turn operational – may lead to surpluses in 2012.

• Surpluses are mostly likely in the phosphate and potash sectors. A quicker-than-expected recovery in global or significant delays in new capacities would stifle this surplus threat however.

We believe that commissioning delays might allow the tight fertilizer market conditions to be extended until 2013.

Global outlook Many of the factors that caused the fertilizer bull market between 2003 and mid-2008 remain. Populations are still growing and diets continue to revolve around fruit, vegetables, and meats – all of which are fertilizer intensive. Global grain supplies will continue to be pressured, with farmers required to cultivate more from land and water resources that are actually shrinking on a per capita basis.

Fertilizer demand

During 2009 and early 2010, the International Fertilizer Association (IFA) suggested strong agricultural market fundamentals would support a revival in global fertilizer demand. The IFA projected an increase to 163.2 mn tons in 2009, a 2.1% increase on the 160 mn tons purchased in 2008. Most growth is expected to stem from P-based fertilizers (+3.1%), followed by K-based fertilizers (+2.7%). N-based fertilizers are expected to grow slower at a rate of 1.6%. The revival in fertilizer consumption is supported by the IFA’s expectations of an economic recovery in North America, East Asia and Western and Central Europe.

Over the period 2009-2013, the IFA expects global demand to rise c. 3% on average, to c. 185+ mn tons in 2013. P (4%) and K (5%) are forecast to grow at higher rates than that of N (2.1%). Asia is expected to account for more than 60% of the increase whilst Latin America also remains a key customer. Based on these expectations, the global N:P2O5:K2O ratio would improve to 1.00:0.40:0.28 compared with the current ratio of 1.00:0.36:0.24.

Figure 18: Global fertilizer consumption (2008 – 2013)

Source: IFA & CICR estimates

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Fertilizer Supply

According to the IFA, global ammonia capacity is projected to increase by 15%, from 154.9 mn tons in 2009 to 179.0 mn tons in 2013. One-third of this increase will stem from enhanced activities. The remaining two-thirds will be accounted for through the commissioning of new plants. Most of this additional capacity will occur in East Asia, West Asia, Latin America and Africa.

Figure 19: Global ammonia market dynamics (2008 – 2013)

Source: IFA

Between 2009 and 2013, the IFA estimates that about 55 new plants are planned to come on stream, of which about 20 are located in East Asia. At the same time, we expect the number of European fertilizer plants to decrease as eco-based legislation and green policies take effect during 2012. We believe that the closure or reduction in the number of facilities in Europe will lead to a direct increase in plants in East Asia.

Global urea capacity is forecasted to grow by a net 36.6 mn tons between 2009 and 2013, reaching 210.3 mn tons in 2013. However, large urea supply deficits will persist in most countries. Excluding China, the urea balance in the rest of the world shows significant though declining annual deficits in 2009 and 2010. After a transition year of near equilibrium in 2011, surpluses may materialise in 2012/13. Without China’s urea exports in 2009 and 2010, the rest of the world would experience shortages.

Figure 20: Global urea market dynamics (2009 – 2013)

Source: IFA

The IFA projects world phosphate rock capacity to reach 248 mn tons in 2013, a 30% growth on 2008. A number of projects for new mines or enlarged capacities have suffered delays. These are due to either rising costs or delays in the manufacture of downstream products.

Rock supply is projected to increase in East Asia, Africa, Latin America, West Asia and Oceania. According to the IFA, 15 mn tons of rock capacity will be

mn tns 2009 2010 2011 2012 2013Supply

Capacity 173.70 179.30 188.70 201.40 210.20 Supply 154.90 160.70 167.90 177.20 185.60

Utilization rate 89% 90% 89% 88% 88%

DemandFertilizers demand 135.30 140.20 144.50 149.10 153.30 Non-fertilizers demand 16.80 18.00 19.20 20.20 21.20 Distribution loss

Total demand 152.10 158.20 163.70 169.30 174.50

Potential balance 2.80 2.50 4.20 7.90 11.10 % Balance/supply 2% 2% 3% 4% 6%

mn tns 2009 2010 2011 2012 2013Supply

Capacity 173.70 179.30 188.70 201.40 210.20 Supply 154.90 160.70 167.90 177.20 185.60

Utilization rate 89% 90% 89% 88% 88%

DemandFertilizers demand 135.30 140.20 144.50 149.10 153.30 Non-fertilizers demand 16.80 18.00 19.20 20.20 21.20 Distribution loss

Total demand 152.10 158.20 163.70 169.30 174.50


New facilities are expected to be established in Asia to compensate the shut downs in Europe

Global capacities, less China, will be short of urea

Increasing phosphate capacities to meet P fertilizer supply

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earmarked for exports. If current projects proceed as scheduled, a surplus may well develop in the export market before 2011.

Figure 21: Global phosphate rock capability (2009 – 2013)

Source: IFA

Companies within the global fertilizer industry continue to vertically integrate and consolidate through acquisitions or joint ventures. Most of the facilities involved in the production of P-fertilizers are located in phosphate-rich countries. In 2013, total global processed phosphate rock capacity is expected to reach 24 mn tons, increasing 9.1 mn tons on 2008. Close to 40 new MAP, DAP and TSP units will be constructed across ten countries, including 18 units in China alone. New facilities are planned in Africa, West Asia, East Asia and Latin America. The bulk of this expansion will relate to DAP capacity, forecast to increase 1.1 mn tons per year until 2013. Global demand for processed phosphates is projected to recover by 2010. The global supply/demand balance for DAP shows soft market conditions through 2013, with growing annual surpluses. Figure 22: Global processed phosphate production & surplus/deficit status (2009 – 2013)

Source: IFA & CICR estimates

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A slow recovery in demand and delays in the commissioning of oil and gas-related projects may result in annual surpluses in 2013, ranging between 3 and 4 mn tons of sulphur (S) per year. This equates to 5-8% of total sulphur supply. However, if future sulphur production grows at lower rates due to such project delays, the global sulphur market could balance in 2009-2010, raising the possibility of deficit thereafter, until 2013.

Figure 23: Global sulphur market dynamics (2009 – 2013)

Source: IFA

Prices

In light of the above, we have revised our expectations for N & P based fertilizers. We have reduced our forecast for N-based fertilizer prices by an average of 25% in 2009, reflecting the lower demand. We have also revised upwardly our projections for 2013 prices by an average of16%, reflecting the delay in plant commissioning. The same trends of urea and ammonia prices have been applied to ammonium sulphate.

For P-based fertilizers, we have increased PSSP and GSSP prices by an average of 70% from 2009 through to 2013. This increase incorporates the expected delays in production capacity. Our revised view for fertilizer prices does not fall below the US$100/ton, as was the case previously.

Figure 24: Urea price forecast (2009 – 2013) Figure 25: Ammonia price forecast (2009 – 2013)

Source: CICR estimates Source: CICR estimates

mn tns 2009 2010 2011 2012 2013Supply

Oil recovered 22.60 24.00 25.10 26.80 28.10 Gas recovered 24.40 27.00 27.90 29.00 30.70 Others 3.40 4.20 4.60 4.80 4.90

Total Supply 50.40 55.20 57.60 60.60 63.70

DemandSulphur for sulphuric acid 40.80 44.30 47.20 50.60 53.70 Non-sulphuric acid uses 6.30 6.50 6.60 6.80 6.90

Total demand 47.10 50.80 53.80 57.40 60.60


Sulphur potential deficits might arise as a result of projects delays

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Figure 26: AS price forecast (2009 – 2013) Figure 27: PSSP & GSSP price forecast (2009 –

2013)


Figure 28: TSP Price forecast (2009 – 2013) Figure 29: SA forecast (2009 – 2013)


Domestic outlook

Fertilizer demand

Fertilizer demand is likely to rise as a direct result of the Government of Egypt (GoE)’s plan to expand the agriculture land by c. 150k+ feddans/year. We believe domestic fertilizer consumption will increase by a CAGR 11.5% to 12.9 mn tons in FY13/14. We expect most of this demand to stem from P-based fertilizers (a 5 year CAGR of 24.9%), though N-based fertilizers will also contribute (a 5 year CAGR of 10.1%).

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Figure 30: Fertilizer consumption (FY09/10 – 13/14)


Fertilizer supply

Domestic production capacity is expected to climb to 30.1 mn tons in FY13/14, compared with 17.4 mn tons in FY08/09. This reflects the expected increase in production capacities – targeting overseas markets – starting FY10/11. We expect this additional capacity to result in a c.50% surge in P-fertilizer production, to 8 mn tons in FY13/14, compared with c. 1 mn in FY08/09. We also envisage N-fertilizer production rising by 6.3%, to 22.1 mn tons over the same period. N-fertilizer production in FY08/09 stood at 16.3 mn tons. These new production facilities have been approved by the Industrial Development Authority (IDA).

Figure 31: Fertilizer production FY08/09 – FY13/14


9,147 9,633 10,013 10,621 11,204

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Figure 32: Approved P fertilizer plants

Source: IDA

Prices

Due to the deregulation of the N-fertilizer market starting 2010, we believe the domestic price outlook should follow that of the international outlook detailed earlier.

SSP TSP NPK PA SA AS P DAP MAP SAP A U ANAgrifos - - - 396 - - - 880 880 1,090 - - - Aqua Farm - - - - - - 15 - - - - - - Aswan Fertilizers 660 - - - 500 - - - - - - - - Egyphos - 300 - 500 750 - - 540 - - 330 200 - Egypt Fertilizers 700 70 50 10 200 - - - - - - - - El Arabya Fertilizers 600 216 - - - - - - - - - - - El Doumy (Edfo) - - - 50 4 - - 105 - - 24 - - El Doumy (Qena) 240 - - - 86 - - - - - - - - El Masrya Chem 20 6 - - - - - - - - - - - El Sewedy 300 - - 600 1,000 300 - - - - 110 - - El Wady Holding 100 45 - 100 400 - - - - - - - - El Watanya Fertilizers 500 - 400 - 400 - - - - - - - - El Watanya Mining - 400 - - 15 - - - - - - - - KIMA 500 300 OCI - - - 500 1,500 - - 1,000 - - - - - Phosphoric United - - - - - - 50 - - - - - - Roage (New Valley) 70 - - - - - - - - - - - - Roage (Suez) 70 70 50 40 - - - 70 40 - - - - Sefora - - - 320 1,000 - - 700 - - 110 - - Segma - 315 - - - - - - - - - - - Sohag 600 600 - 300 800 - - - - - - - - Total 3,860 2,022 500 2,816 6,655 300 65 3,295 920 1,090 574 700 300

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Egyptian Financial & Industrial Company (EFIC) Is the worst behind us? The 50% decrease in global fertilizer prices has impacted EFIC’s top line. Though P-fertilizer prices may remain at current levels in 2009, this still mark’s a 20% YTD increase. We believe EFIC is well placed to capitalise from the expected pick-up in fertilizer demand in 2010. That said, EFIC has already exhibited encouraging margins in 1H09. This was a result of two factors. First, the management’s decision to blend 2008s expensive sulphur inventory with this year’s cheaper one and secondly, EFIC’s successful penetration of new, greenfield, markets. In light of these developments and the wider market outlook, we have increased our LTFV to LE 31.4/share vs. our old LTFV of LE 21.4/share. We have also raised our TP to LE 28.2/share vs. our old TP of LE 20.6/share. With a 9% upside potential, we have upgraded our recommendation from SELL to Underweight.

Fertilizers to pick-up in 2010: We expect fertilizer demand to increase in 2010 as a result of (1) global population growth, (2) increased national food reserves (2009 food reserves are still below those of 2000) and (3) the likely rise in farming activities after a spell of unfavourable weather. Penetrating new markets and strategic alliances: EFIC has penetrated several new markets, increasing its market share. Such new markets include KSA, UAE, & Sudan. In addition, EFIC’s management has engaged in a strategic alliance with OCI. We believe that such initiatives will boost EFIC’s AS sales. Global mining activities: We believe sulphur and phosphate rock prices may decrease as a result of increased mining activities. This would positively impact EFIC’s LTFV, which we estimate to have respective c.10% and c.8% sensitivities to US$10/ton change in sulphur and phosphate rock. Blending sulphur inventory: EFIC’s standalone margins declined following the decrease in P-fertilizer prices. Having purchased an expensive sulphur inventory in 2008, the management purchased cheap sulphur in 2009 at US$30/ton and lower, thus maintaining 30%+ gross margins. Valuation and recommendation: Relative to 4Q08 conditions, we believe the fertilizer market experienced positive changes, exhibited in a 20% price increase YTD. EFIC’s robust business model has enabled it to counter difficult market and specific conditions, particularly the sulphur inventory issue. With a cautiously positive outlook, we have increased our LTFV & TP to LE 31.4/share & LE 28.2/share, respectively. With 9% upside potential, we rate EFIC as Underweight from SELL.

Source: Company reports and CICR estimates

LE mn 2008 A 2009 F 2010 F 2011 F 2012 F

Revenues 931.3 770.1 993.6 1,022.6 1,080.9 Growth rate -17.3% 29.0% 2.9% 5.7%

EBITDA 296.3 201.3 320.8 326.3 334.2 Growth rate -32.1% 59.3% 1.7% 2.4%EBITDA margin 31.8% 26.1% 32.3% 31.9% 30.9%

Net income 226.0 108.1 200.2 240.6 243.0 Growth rate -52.2% 85.1% 20.2% 1.0%Net margin 24.3% 14.0% 20.1% 23.5% 22.5%

PER 7.9x 16.5x 8.9x 7.4x 7.3xP/BV 2.1x 2.1x 1.9x 1.8x 1.6xEV/EBITDA 8.7x 12.3x 8.1x 7.8x 7.3xNet debt/EBITDA 2.1x 2.9x 2.3x 2.3x 1.9xDividend yield 2.9% 1.9% 3.4% 4.1% 4.2%

Muhammad El Ebrashi

[email protected]

LTFV | LE 31.4 TARGET PRICE | LE 28.2

UNDERWEIGHT | MODERATE RISK SHARE DATA

COMPANY SYNOPSIS Egyptian Financial & Industrial Company (EFIC) is a joint-stock company founded in 1929. EFIC's main activities are producing and trading phosphate fertilizers and chemicals. It produces the following products:

1. Single super phosphate (SSP) in two forms powdered (PSSP) and granulated (GSSP)

2. Sulphuric acid 3. Ammonium Sulphate (AS) 4. Di-Calcium Phosphate (DCP) 5. Mixture fertilizers NPK

EFIC is the largest producer of phosphate fertilizers in Egypt, accounting for around 70% of SSP local market sales in 2007. Such a market share takes into account sales from Suez Co. for Fertilizers Production (SCFP), EFIC's 99.88%-owned subsidiary.

EFIC has an authorized capital of LE 700 mn and an issued capital of LE 693 mn, distributed over 69.3 mn shares at a par value of LE 10/share.

SHAREHOLDER STRUCTURE

Reuters; Bloomberg EFIC.CARecent price as of 13-Oct-09 LE 25.79No. of O/S shares 69.3 mnMarket cap LE 1,787.2 mn52-wk high / low LE 41.89/ LE 14.75Avg. daily volume / turnover 0.48 mn / LE 11.33 mn

Holding Company for Metallurgical Industries 25.3%Banks 12.8%Inusrance companies 0.90%Others 12.0%Free Float 49.0%Total 100.0%

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Company profile Egyptian Financial & Industrial Company (EFIC) is a joint stock company established in 1929. The company’s activities involve manufacturing and trading of phosphate based fertilizers. After several capital restructures and increases, EFIC’s paid in capital is LE 69.3 mn, distributed over 69.3 mn shares with par value of LE 10/share. Under the company’s present management, three plants are operated in (1) Kafr El Zayat, (2) Assuit, and (3) Suez Governorates. The latter, Suez Company for Fertilizer Production (SCFP), was established in 2002 and started operations in 2005. The three plants produce sulphuric acid, single super phosphate (SSP), granular super phosphate (GSSP), ammonium sulphate (AS), di-calcium phosphate (DCP), and mixed fertilizers (NPK).

Recent developments • The board of directors has appointed Ms. Suzi El-Nahas as the contact person for

all EFIC investor relations and communication and to represent the company with all parties of the Egyptian Capital Market starting July 1, 2009. We view this initiative to provide EFIC’s investors with consistent and reliable information as a positive development.

• EFIC signed a toll-manufacturing agreement with Orascom Construction Industries (OCI) [OCIC.CA] for the production of AS using ammonia sourced from OCI. OCI will provide up to 78k tons of ammonia annually. EFIC will process the sourced ammonia to produce up to 300k tons of AS per year. This will then be distributed and sold exclusively by the OCI Fertilizer Group.

• SCFP had increased it’s AS production capacity from 150k tons per annum to 300k tons per annum by 1H09 end. The newly inaugurated capacity will start production effectively from 2H09 in order to accommodate the OCI deal.

• DCP operations, with 20k annual capacity, will be launched in 2H09.

Operational & financial analysis

2Q09

Revenues: Consolidated YoY revenues decreased by 58.5% to LE 124 mn in 2Q09, (30% lower than the CICRe of LE 177 mn) from LE 290 mn a year ago. This decline is the result of a reduced quantity being sold at lower prices. 56% less produce was sold following the low demand for P-fertilizers in 2Q09 vs. 2Q08. Similarly, there was a 35% decrease in prices YoY.

Higher Consolidated EBITDA margin: EFIC exhibited an increase of 4% YoY in EBITDA margin, reaching 42% in 2Q09 vs. 38% a year ago. This wider margin is mainly due to a 5% improvement in COGS/sales in 2Q09, to 50% vs. 56% a year ago. We believe this improvement in COGS/sales followed EFIC’s management decision to increase SCFP selling activity to capitalise on (1) lower sulphur inventory costs and (2) a tax exemption till the end of 2015.

Interest expense: This exhibited a two-fold YoY increase to LE 21 mn in 2Q09 (+14% vs. CICR e of LE 18.4 mn) vs. LE 10.4 mn in 2Q08. We believe this is the result of short-term loans used to purchase sulphur inventory at a lower cost of c.US$30/ton.

Net earnings: Consolidated net income decreased by 73% YoY to LE 27 mn in 2Q09 (+131% vs. CICRe) vs. LE 102 mn a year ago. This comes on the back of falling revenues and higher finance costs.

Fertilizer LoB re-organization deal OCI-EFIC deal

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Figure 33: Consolidated quarterly earnings

Source: EFIC’s consolidated financial statements & CICR estimates

Consolidated Financials (LE '000) 1Q08 A 2Q08 A 1H08 A 1Q09 A 2Q09 A 2Q09 E Variance 1H09 A 1H09 E VarianceMar-08 Jun-08 Jun-08 Mar-09 Jun-09 Jun-09 A vs. E Jun-09 Jun-09 A vs. E

Revenue 230,418 298,925 529,343 132,174 124,110 176,920 -29.8% 256,284 309,094 -17.1%YoY growth 168.1% -42.6% -58.5% -40.8% -1767 bps 93.9% -41.6% 13551 bpsQoQ growth -6.1% 33.9%

Gross Profit 120,241 132,014 252,255 44,873 61,554 46,609 32.1% 106,427 91,482 16.3%Gross Margin 52.2% 44.2% 47.7% 33.9% 49.6% 26.3% 2325 bps 41.5% 29.6% 1193 bpsYoY growth 34.2% -62.7% -53.4% -64.7% 22.3% -63.7%QoQ growth 37.2% 3.9%

EBITDA 103,470 113,976 217,446 37,669 52,309 41,228 26.9% 89,978 78,897 14.0%EBITDA Margin 44.9% 38.1% 41.1% 28.5% 42.1% 23.3% 1884 bps 35.1% 25.5% 958 bpsYoY growth 35.8% -63.6% -54.1% -63.8% 23.2% -63.7%QoQ growth 38.9% 9.4%

EBIT 99,072 109,458 208,530 33,879 47,045 27,666 70.0% 80,924 61,545 31.5%EBIT Margin 43.0% 36.6% 39.4% 25.6% 37.9% 15.6% 2227 bps 31.6% 19.9% 1166 bpsYoY growth -65.8% -57.0% -74.7% -70.5%QoQ growth 38.9% -18.3%

Net Profit 96,499 101,663 198,162 15,828.0 27,272 11,832 130.5% 43,100 27,660 55.8%Net margin 41.9% 34.0% 37.4% 12.0% 22.0% 6.7% 1529 bps 16.8% 8.9% 787 bpsYoY growth -83.6% -73.2% -88.4% -86.0%QoQ growth -25.2%

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Projection assumptions • EFIC’s product mix includes SA, PSSP, GSSP, NPK, AS, and DCP. EFIC’s

production capacities are 805k for SA, 1,200k for PSSP, 750k for GSSP, 50k for NPK, 300k for AS (150k were added in 2H09), and 20K for DCP (expected to be launched in 2H09). EFIC’s production capacities per plant are as follows:

Figure 34: EFIC’s consolidated production capacities as at July 2009

Source: EFIC

• We have increased EFIC’s average utilization rate from c. 70% to 75% during 2009 – 2013. We believe this increase will help the management achieve their strategy goals of penetrating greenfield markets. Thus far, such markets have been established in the KSA, UAE, and Sudan. This expansion is in line with the company’s aim to increase its market share and to meet the demand from an expected revival in global fertilizer markets in 2010.

Figure 35: EFIC’s consolidated sales values Figure 36: EFIC’s consolidated sales

volumes

Note: 2005 – 2008 values include intercompany

Source: EFIC & CICR Source: EFIC & CICR

"000 tons SA PSSP GSSP NPK AS DCPKafr El Zayat Plant 170 450 300 - - - Assiut Plant 210 450 300 - - - Suez 425 300 150 50 300 20 Total 805 1,200 750 50 300 20

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• We have assumed that EFIC’s sulphur inventory at the end of 2008 will be blended with low-cost sulphur cost available at US$30/ton, in line with the company’s management advice. We believe that this practice will enhance EFIC’s standalone margins for 2009 from 15% (our old estimate) to c.31% (our new estimate).

Figure 37: EFIC’s standalone margins old vs. new (2009 – 2013)

Source: EFIC & CICR

• EFCI’s management has re-iterated that capitalization of interest on SCFP’s assets will cease in 2H09. SCFP’s construction in progress will be stopped as new production lines – such as the second line of ammonium sulphate – become operative during 2H09.

• Upon EFCI’s disclosure of guidance relating to depreciation expenses, we have decreased the depreciation rate for SCFP to the rate of 8-9% annually (applied on gross fixed assets) vs. our old estimate of 15% (applied on gross fixed assets). In addition, we have decreased EFIC’s standalone depreciation expense to 12% (applied on gross fixed assets) down from 15% (applied on gross fixed assets). Consolidated depreciation represented 9.5% on the average from gross fixed assets starting 2010.

Figure 38: EFIC’s consolidated depreciation expense old vs. new (2009 – 2013)


• We have increased the consolidated interest expense for the years 2010 – 2013. This reflects EFIC’s dependency on short-term borrowing to finance its working capital requirements, mainly sulphur and phosphate rocks. This increase comes despite the fact that SCFP’s loans are being repaid as per EFIC’s management new repayment schedule. We assumed that EFIC might use debt finance to pay for its 15% equity stake in Egyphos.

Figure 39: EFIC’s consolidated interest expense old vs. new (2009 – 2013)


• We have incorporated EFIC’s 15% equity stake in Egyphos (1st phase only). This first phase has a total investment cost of US$680 mn (US$300 mn equity and US$380 mn debt) and is due to start in 2010.

• We have decreased the perpetual growth rate for both EFIC standalone and SCFP from 4% to 3%. This 25% decrease reflects our cautious view for EFIC’s perpetual growth rates starting 2016. As announced by the International Fertilizer Industry Association (IFA), 40 P-fertilizer plants in ten countries across Africa, East & West Asia and Latin America are due to be established from 2013 onwards. Out of these 40 plants, 18 are planned to be established in China.

2009E 2010E 2011E 2012E 2013EGross profit margin - New 30.4% 30.1% 30.6% 34.8% 35.8%Gross Profit - Old 15.0% 34.5% 37.5% 37.7% 37.6%Change in Gross Profit Margin 1542 bps -439 bps -690 bps -296 bps -185 bps

EBITDA margin - New 23.0% 25.1% 25.5% 29.9% 30.9%EBITDA margin - Old 10.0% 29.5% 32.4% 32.6% 32.5%Change in EBITDA Margin 1304 bps -439 bps -692 bps -267 bps -161 bps

2009E 2010E 2011E 2012E 2013EDep. Expense - New 36,755 80,882 85,544 86,686 87,846

Dep. Expense - Old 82,949 128,094 134,061 135,598 137,152 Change in Dep. Expense -56% -37% -36% -36% -36%

2009E 2010E 2011E 2012E 2013EInterest expense - New 65,824 64,431 65,328 67,498 70,651

Interest expense - Old 72,872 28,413 23,844 - - Change in Int. Expense -10% 127% 174% NM NM

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Valuation and recommendation DCF Following the increase in fertilizer prices by an average of 20% since the start of 2009, we believe the impacts of the 4Q08 market downturn are coming to an end. Indeed, EFIC’s management is gearing its business model towards an expected upswing in the market in 2010. Should this upswing fully materialise, we would expect fertilizer prices to increase.

EFIC (standalone) has an expensive sulphur inventory, relative to current prices, of US$30/ton. This is due to the fact that it was purchased during 2008. To avoid further price hikes in 2009, EFIC’s management purchased new sulphur inventory, maintaining its 1H09 standalone gross margins close to 30%. This compares to a gross margin of 20% for the full year 2008.

We believe that standalone gross margins of 30+% will be maintained in 2009. In addition, consolidated gross margins should escalate to c.36% in 2010 as the new AS & DCP production lines become fully operative in 1Q10. EFIC should also benefit from increasing its global market share. Management has made the penetration of new markets – such as Saudi Arabia, Sudan, Oman, and the United Arab Emirates – an integral part of its strategy.

EFIC’s debt to equity (where debt equals total liabilities excluding provisions and minority interest) in 2009 is expected to be 1.0x compared with 1.32x in 2008. This is due to the company’s increased short term borrowing – itself a product of the need to finance its sulphur-dominated working capital requirements. Excluding the Egyphos deal, we believe leverage ratios for 2010 would be enhanced. Consolidated interest expense should decrease gradually starting 2010 compared with that of 2009e.

In our sum-of-the-parts (SOTP) model, we have updated our outlook for EFIC, upgraded our forecasts for fertilizer prices and incorporated the impact of the merged sulphur inventories. We have also included the effects of EFIC’s purchased stake in Egyphos. This was not considered in our previous valuation. The result is a 47% higher LTFV of LE 31.4/share.

Figure 40: EFIC’s consolidated LTFV


Subsidiary Method

Corporate Value (LE

mn)

Equity share

EFIC's Consolidated

share (LE mn)EFIC DCF 1,665.8 100.0% 1,665.8SUEZ DCF 1,261.5 99.9% 1,260.0EGYPHOS (1st phase) Cost 1,696.7 15% 254.5

Total Corporate Value 3,180.3

Total Debt in 1H09 (1,044.8)

Total Cash 1H09 42.1

Shareholders' value 2,177.5

No. of Shares 69.3

LTFV 31.4

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Peer Multiple We have used the EV/EBITDA multiples instead of the PE multiple. We believe that this change enables a fairer and more accurate comparison between domestic fertiliser companies. This is due to this ratio being immune to the impacts of leveraging.

* We have incorporated EFIC’s 15% equity stake in Egyphos (1st phase only) at its investment cost.

Source: Bloomberg & CICR estimates

** EFIC’s peer multiples are as follows:

EBITDA (LE mn) 2010

Peers' EV/EBITDA

(2010)**

EV (LE mn) Ownership % Prop. Ent Value (LE mn)

EFIC 106.6 6.8 723.3 100.0% 723.3

SCFP 214.2 6.8 1,453.6 99.9% 1,451.9

Egyphos* 254.5

2,429.7

Debt (1,044.8)

Cash 42.1

Equity Value 1,426.9

Shares 69.3

Relative Value 20.6

Total prop EV.

Company EV/EBITDA 2010FAcron 4.2xAgrium 5.9xCF Industries 4.9xSABIC 8.8xIsrael Chemicals 7.3xMosaic 7.1xArab Potash 6.9xYara International 7.0xSAFCO 9.0x

Average 6.8x

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New target price & Investment rationale Starting July 09, EFIC’s stock hovered in the range of LE19.97-24.8/share reaching our old TP of LE 20.6/share. We have continued to use a sum-of-the-parts (SOTP) valuation, resulting in EFIC having a LTFV of LE 31.4/share. This revised LTFV reflects our backing of EFIC’s management and the company’s overall performance over the last eighteen months. EFIC’s handling of the 2008 inventory issue, its efforts to increase its market share and penetrate new markets, strategic alliances with other firms and the positive macro outlook for the fertilizer market in 2010 are all reflected in this new figure.

We have, as a result, upgraded EFIC’s TP to LE 28.2/share. To calculate the TP, we have assigned 70% to LTFV and 30% to relative value, ensuring consistency in stock valuation in the local market. The increase in TP implies an upside potential of 9% and leads us to rate EFIC as a Underweight, one category above our previous SELL recommendation.

Figure 41: EFIC’s TP


Investment rationale • Solid strategy to increase market share over 2009-2013, through:

1. Penetration of untapped markets, i.e. Indonesia, KSA, Sudan, Oman, and UAE.

2. Securing the sale of production capacities, i.e. OCI deal.

3. Revenues growth at 5-year CAGR of 6.5% to 2013.

• We believe the steps taken by EFIC’s management to resolve its 2008’s sulphur inventory will result in increasing EFIC’s margins.

• Increasing production capacities and product mix.

• Recovery for the fertilizer industry in 2010.

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Risks to recommendation

Upside risks

• Lower interest rate reduces finance costs, especially from the sulphur purchases.

• Global phosphate and sulphur mining capacities are expected to increase by 30% and 7%, respectively, until 2013. As new capacity is added, phosphate rocks and sulphur prices could decrease. In such a scenario, EFIC’s LTFV would be positively affected.

• Delayed operating of P-fertilizer production capacities may prolong sustainable margins.

• The Egyphos project is expected to be launched in 2010. EFIC has a 15% equity stake. This is expected to increase EFIC’s investment income and, ultimately, its net earnings.

Figure 42: EFIC’s LTFV sensitivity to changes in feedstock prices


Downside risk

• Additional capacities, either local or regional, could increase competition and jeopardise EFIC’s current market share.

• Escalating cost of raw materials, especially sulphur, could reduce the effectiveness of EFIC’s blending strategy. Under our new assumptions, EFIC’s LTFV will change by a respective 10% and 8% for every US$10/ton change in sulphur and phosphate rock.

-$10 $0 $10

-$10 EGP 36.3 EGP 33.7 EGP 31.1 -$10

$0 EGP 34.0 EGP 31.4 EGP 28.8 $0

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Summary Financials

Source: EFIC’s consolidated financials and CICR estimates

Balance Sheet (LE mn) Dec-08A Dec-09F Dec-10F Dec-11F Dec-12F Dec-13FAssets Cash & Cash Equivalent 56 116 129 137 129 122Total Current Assets 875 649 716 861 921 992Net Plant 1,136 1,157 1,086 1,011 936 860Total Assets 2,012 1,806 2,056 2,127 2,112 2,106

Liabilities & Shareholders' Equity Short-Term Debt 607 630 824 860 757 643Current Portion Of LTD 66 62 58 33 8 8Total Current Liabilities 938 795 1,035 1,056 942 809Total Liabilities 1,125 903 1,084 1,072 950 809Shareholders' Equity 851 866 935 1,018 1,126 1,260Total Liabilities & Net worth 2,012 1,806 2,056 2,127 2,112 2,106

Income Statement (LE mn) Dec-08A Dec-09F Dec-10F Dec-11F Dec-12F Dec-13FRevenues 931 770 994 1,023 1,081 990COGS (603) (535) (637) (661) (708) (647)Gross Profits 329 235 356 362 373 343SG&A (32) (33) (36) (35) (39) (37)EBITDA 296 201 321 326 334 307Dep. & Amort. (18) (37) (81) (86) (87) (88)EBIT 278 165 240 241 248 219Interest Expense (50) (66) (64) (65) (67) (71)EBT 240 116 215 259 261 226

Taxes (14) (8) (15) (18) (18) (16)NPAT 226 108 200 241 243 210Minority Interest (0) (0) (0) (0) (0) (0)Extraordinary Items 0 0 0 0 0 0Attributable Profits 226 108 200 241 243 210

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Source: EFIC’s consolidated financials and CICR estimates

Summary Financials Cash Flow Dec-08A Dec-09F Dec-10F Dec-11F Dec-12F Dec-13FNOPAT 265 156 225 223 229 203Dep. & Amor. 18 37 81 86 87 88COPAT 283 193 306 308 316 291WI Change (422) 81 (32) (89) 5 (76)Other Current Items (85) 82 0 (50) (60) (10)CF After Current Oper. (225) 355 274 169 261 204Financing Payments (111) (132) (127) (124) (101) (79)Cash Before LT. Use (335) 224 147 45 160 126Net Plant Change (231) (57) (10) (11) (11) (12)FCFF (370) 216 264 208 309 203Others 13 18 (215) 83 81 77CF Before Financing (553) 184 (77) 117 230 191Short-Term Debt 311 23 194 36 (103) (114)Long-Term Debt 66 (16) (0) (0) 0 0Net-worth (20) (60) (70) (84) (61) (10)Grey Area 0 0 0 0 0 0Dividends 3 (72) (33) (61) (74) (74)Change in Cash (192) 60 13 8 (8) (8)

Fact Sheet Dec-08A Dec-09F Dec-10F Dec-11F Dec-12F Dec-13FROE 26.6% 12.5% 21.4% 23.7% 21.6% 16.6%ROS 24.3% 14.1% 20.2% 23.5% 22.5% 21.2%ROA 11.2% 6.0% 9.7% 11.3% 11.5% 10.0%ROIC 15.1% 9.2% 11.8% 11.3% 11.8% 10.4%Gross margin 35.3% 30.5% 35.9% 35.4% 34.5% 34.7%EBITDA Margin 31.8% 26.1% 32.3% 31.9% 30.9% 31.0%EPS 3.26 1.56 2.89 3.47 3.51 3.03DPS 0.75 0.48 0.89 1.06 1.08 0.93P/E 7.9x 16.5x 8.9x 7.4x 7.3x 8.5xDividend Yield 2.9% 1.9% 3.4% 4.1% 4.2% 3.6%P/ Revenue 1.9 2.3 1.8 1.7 1.7 1.8EV/ Revenues 2.8 3.2 2.6 2.5 2.2 2.3P/ COPAT 6.3 9.3 5.8 5.8 5.7 6.1EV/ COPAT 9.2 12.8 8.5 8.3 7.7 8.0P/ FCFF -4.8 8.3 6.8 8.6 5.8 8.8EV/ FCFF -7.0 11.4 9.8 12.3 7.9 11.4P/ EBITDA 6.0 8.9 5.6 5.5 5.3 5.8EV/ EBITDA 8.7 12.3 8.1 7.8 7.3 7.5P/ BV 2.1 2.1 1.9 1.8 1.6 1.4

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Orascom Construction Industries (OCI) A fertile product mix OCI’s fertilizer operations were impacted by lower fertilizer prices of c. 50% YoY in 2Q09, resulting in a narrowing EBITDA margin. However, OCI owns a robust business model supported by several cost advantages. OCI’s EBITDA growth is dependent on higher EBITDA margins for its construction LoB and rising prices for fertilisers. N-Fertilizer prices increased by 40% YTD and we expect them to increase by a further 40% in 2010. We believe OCI’s 2010 fertilizer LoB EBITDA margins will be supported by a number of factors, including fertilizer price increases, the establishment of strategic alliances with global fertilizer distributors and production capacity growth. We also expect the construction LoB’s performance to continue to grow as several planned construction projects are implemented across the MENA region. We have increased OCI’s LTFV by 31% to LE 286.1/share and its TP by 30% to LE 268.4/share. The new TP implies a 12% upside potential and we have upgraded OCI to HOLD.

Strategic alliances and a sound distribution network: OCI is expanding its global distribution network through strategic alliances. Partners include Gavilon and FITCO. Fertilizers are sold through both retail and wholesale channels and are backed by long-term take-or-pay agreements with no price discounts. Low cost materials: OCI has low feedstock agreements in Egypt and Algeria. This results in lower costs per ton of urea (c.US$80/ton) and ammonia (c.US$70/ton) compared to current international prices of US$249/ton and US$231/ton, respectively. In addition, current natural gas forwards for 4Q09 onwards lie above the US$5.8/MMBtu, leading us to believe that OCI’s fixed natural gas costs could provide a competitive advantage in its fertilizer LoB in the near future. Sensitivity to fertilizer price volatility: Each US$10 change in fertilizer prices will have a 4% change in OCI’s LTFV vs. our old estimate of 1.5% change in OCI’s LTFV. Hence, LTFV is now more sensitive to changes in fertilizer price. This is a result of OCI’s capacity expansion plans coupled with new offered products. MENA governments’ disproportionate spending on infrastructure: OCI’s US$7.2 bn backlog is weighted towards infrastructure and industrial investments, 60% & 13% respectively. We expect LoB’s revenues growth to benefit from MENA governments’ stimulus packages, of which the GCC’s planned projects amount to US$2.6 tn in August (+7% YoY). Valuation and recommendation: We increased our LTFV 31%, to LE 286.1/share from LE 216.5/share. We also raised our TP by 30%, to LE 268.4/share up from LE 207.9/share. Owing to the 12% upside potential to our target price, we upgraded OCI’s recommendation from Underweight to HOLD.

Source: Company reports and CICR estimates

US$ mn 2008 A 2009 F 2010 F 2011 F 2012 F

Revenues 3,720.3 4,048.0 4,725.3 5,334.9 5,532.1 Growth rate 8.8% 16.7% 12.9% 3.7%

EBITDA 878.1 821.1 1,110.8 1,370.3 1,322.2 Growth rate -6.5% 35.3% 23.4% -3.5%EBITDA margin 23.6% 20.3% 23.5% 25.7% 23.9%

Net income 985.0 427.8 668.9 825.1 806.5 Growth rate -56.6% 56.4% 23.3% -2.3%Net margin 26.5% 10.6% 14.2% 15.5% 14.6%

PER 12.7x 19.3x 11.8x 9.4x 9.7xP/BV 2.9x 2.5x 2.6x 2.5x 2.5xEV/EBITDA 11.1x 16.7x 17.1x 13.9x 14.4xNet debt/EBITDA 0.5x 5.8x 9.1x 7.4x 7.7xDividend yield 2.3% 2.4% 3.7% 4.6% 4.5%

Muhammad El Ebrashi

[email protected]

LTFV | LE 286.1 TARGET PRICE | LE 268.4 HOLD | MODERATE RISK

SHARE DATA

COMPANY SYNOPSIS Orascom Construction Industries was incorporated under Law no. 159/1981 in April 1998 as a shareholding company, to undertake contracting activities and other related activities. OCI's operations encompass construction, fertilizers (nitrogen), and previously cement.

In 1999, OCI joined in the cement business and had its shares listed on the Egyptian Exchange (EGX). Afterwards, it owned and operated a cement group. In January 2008, OCI divested the cement LoB to Lafarge S.A., which paid EUR8.8 bn (US$12.9 bn) and assumed US$2 bn in debt; the deal was executed on the EGX.

Starting 2008, OCI ventured in the fertilizers business by merging Egyptian Fertilizers Company (EFC). The deal amounted to US$1.59 bn (cash and shares), also OCI assumed EFC's US$1.1 bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilizers, a Nigerian company. In addition, OCI owns 60% in Egyptian Basic Industries Company (EBIC), another fertilizer plant in Egypt. A third fertilizers plant, Sorfert, is underway in Algeria, to be launched in 2H10. Also, OCI acquired 20% stake in Gavilon, a US fertilizer distribution company. Furthermore, OCI schemed a DAP/MAP project – phosphate fertilizers – in Algeria or Morocco.

SHAREHOLDER STRUCTURE

Reuters; Bloomberg OCIC.CARecent price as of 13-Oct-09 LE 239.28No. of O/S shares 206.9 mnMarket cap LE 49,511.4 mn52-wk high / low LE 270.7/ LE 93.15Avg. daily volume / turnover 0.4 mn / LE 65.58 mn

Sawiris Family 54.0%Free Float 46.0%Total 100.0%

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Company profile Orascom Construction Industries (OCI) has two separate segments under its management. One line of businesses (LoB) involves construction, the other fertilizers. OCI entered the fertilizer sector in January 2008, merging with Egyptian Fertilizers Company (EFC), a subsidiary of ABRAAJ Capital (Abraaj) – a UAE based company. The deal amounted to US$1.59 bn (cash and shares). OCI also assumed EFC's US$1.1 bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilizers, a Nigerian company.

OCI has a 60% equity stake in Egyptian Basic Industries Company (EBIC), another fertilizer plant in Egypt, launched in 2H09. A third fertilizer plant, Sorfert, is underway in Algeria, due to be launched in 2H10. OCI also acquired a 20% stake in Gavilon, a US fertilizer distribution company and, in a separate venture, schemed a DAP/MAP project – for phosphate fertilizers – in Algeria or Morocco.

Of the domestic N-based fertilizer companies, OCI is one of the most ambitious. Unlike many local N-based companies, OCI locked-in its natural gas costs that lie within the lower quartile of Egypt’s range for natural gas costs (US$1.25-3/MMBtu). In addition, its Algerian operations are supported with even lower cost of feedstock, at less than US$1/MMBtu.

Currently, OCI has annual production capacities of 1.37 mn tons of urea, and 750 mn tons of ammonia. These capacities are to be increased by 0.35 mn tons of urea ammonium nitrate (UAN), starting 2010. The urea and ammonia will be increased by further 1.8 mn tons and 1.2 mn tons, respectively in 2010.

Recent developments • Interim cash dividend of US$0.80 per share to be paid out at the end of September

2009.

• OCI established Orascom for Fertilizers Plants Maintenance (OFPM), a 99.99%-owned subsidiary. The latter has submitted a tender offer to acquire Egyptian Fertilizers Company (EFC), OCI’s 99.99% subsidiary. The tender offer was executed at US$10.84/share on 29-Jun-09.

• OCI signed a toll-manufacturing agreement with the Egyptian Financial and Industrial Company [EFIC.CA] for the production of AS using ammonia sourced from, and exclusively marketed by, OCI in the international export market. OCI will supply up to 78k tons of ammonia annually. This will be processed to produce up to 300k tons of AS per year, with both distribution and sales conducted exclusively by the OCI Fertilizer Group.

• Orascom Construction Industries entered into a strategic alliance with FITCO Tradecom do Brazil Ltda (part of the Brazilian-based company Group Fertipar). This agreement requires the supplying of granular urea fertilizers to Brazil. FITCO is a fertilizer trading company with considerable experience in the Brazilian market. This agreement aims to enhance domestic demand and develop further marketing and sales opportunities for OCI's fertilizer products. FITCO International also has a growing presence in a number of other Latin American countries.

This strategic supply agreement is initially focused on nitrogen-based fertilizers, specifically for granular urea, during 2009. A shipment of 30k tons of granular urea from OCI's fertilizer production facilities in Egypt to Brazil is already underway. The agreement encompasses a mutual exclusivity arrangement on a “right of first refusal” basis for the supply and import of granular urea fertilizer into the Brazilian market.

• The construction LoB has won three new awards amounting to US$780 mn. The new awards are (1) US$140 mn for the work to be done in the phase two of the third Cairo Metro Line, (2) US$168 mn for the infrastructure and utilities works in a number of governorates in Egypt and (3) US$ 472 mn for work to be done in the New Cairo wastewater project.

Fertilizer LoB reorganizing deal

OCI-EFIC agreement

OCI-FITCO distribution agreement

Successive construction biding deals


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Operational & financial analysis

2Q09

OCI’s 2Q09 consolidated net income of c. US$103 mn is in line with the CICRe figure of US$108 mn. Consolidated revenues recorded US$1,091 mn vs. CICRe of US$1,026 mn (+6% vs. CICRe; +9% vs. consensus estimates). Following a c. 50% decrease in fertilizer prices, net income from continued operations decreased by 54.6% to US$208.2 mn vs. US$458.6 mn in 1H08. With an identical utilization rate to that of last year (100%), we believe revenue deviation is due to higher than expected revenues in both the construction and fertilizer segments. Core operations reported an EBITDA margin of 17.1% vs. CICRe of 17%, as construction LoB’s EBITDA margin of 13% vs. CICRe of 11% more than offset the fertilizer LoB’s margin of c.60% vs. CICRe of 70%. Revenues are higher than CICRe by 6.3% across the board: Consolidated revenues recorded US$1,091 mn vs. CICRe of US$1,026 mn (+6.3%). The positive performance came on the back of higher fertilizer and construction revenue performances:

• 2Q09 fertilizer revenues recorded US$96 mn (9% of consolidated revenues) vs. CICRe of US$90.5 mn. This result was 6.3% higher than the CICRe figure. Deviation from the CICRe came as a result of differences in both quantity and price. OCI’s urea and ammonia quantities sold 655k tons and 70.1k tons vs. CICRe of 635k tons & 68k tons, respectively, in 1H09.

• Construction recorded US$995 mn (91% of consolidated sales) vs. CICRe of US$933.7 mn (+6.3%). We attribute this better-than-expected result to increased deliveries during 2Q09. The construction LoB was successful in securing US$2.1 bn in new project awards for 1H09. This segment recorded a backlog for 2Q09 of US$7.2 bn.

EBITDA | Higher construction margin offset that of fertilizer: Consolidated EBITDA recorded US$186.9 mn vs. US$174.7 mn (+7%). The difference stems from the lower EBITDA margin for fertilizer of c. 60% vs. CICRe of 70%+ and a higher EBITDA margin for construction of 13% vs. CICRe of 11%.

Net Financing Cost lower than CICRe estimate: OCI’s actual net financing cost was US$14.6 mn compared to a CICRe of US$26 mn in 2Q09. The net financing cost in 2Q08 was US$27 mn. This reduction in the comparative net financing cost is due to the recognition of FX gains of US$37.3 mn in 2Q08 compared to FX gains of US$7.5 mn in 2Q09.

Net income: Net income recorded US$102.4 mn, 5% less than the CICRe figure of US$107.9 mn.

54% lower earnings YoY followed the decrease in fertilizer prices


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Figure 43: OCI’s quarterly performance

Source: OCI and CICR estimates

Figure 44: OCI’s quarterly performance

*Actual fertilizer revenues are based on an average price of US$265/ton and a quantity of 655k tons of urea sold. 70k tons of ammonia was sold at an average price of US$201/ton.

**Actual construction revenues are the residual of consolidated revenues less that of fertilizers.

Source: OCI and CICR estimates

2Q09 A 2Q09 E VarianceJun-09 Jun-09 A vs. E

RevenuesUrea (US$ mn) 82.1 75.1 9.2% Quantity (mn tons) 308.7 317.5 -2.8% Price (US$/ton) 265.8 236.7 12.3%

Ammonia (US$ mn) 14.1 15.3 -7.9% Quantity (mn tons) 70.1 67.6 3.7% Price (US$/ton) 201.2 226.5 -11.2%

Fertilizers LoB * 96.2 90.5 6.3%Construction LoB ** 995.1 933.7 6.6%

Total Revenues 1,091.3 1,024.2 6.5%

EBITDAFertilizers LoB 69.7 68.7 1.5%Margin 73% 76%Construction LoB 117.3 105.1 11.6%Margin 12% 11%

Total EBITDA 187.0 173.8 7.6%

Consolidated Financials (US$ mn) 2Q08 A 1Q09 A 2Q09 A 2Q09 E Variance 1H09 A 1H09 E VarianceJun-08 Mar-09 Jun-09 Jun-09 A vs. E Jun-09 Jun-09 A vs. E

Total Revenues 974.4 827.8 1,091.0 1,024.2 6.5% 1,918.8 1,852.0 3.6%YoY growth 51.0% 12.9% 12.0% 5.1% 686 bps 12.4% 8.4%QoQ growth 32.9% -18.7% 31.8% 23.7% 807 bps

Gross Profit 319.8 215.7 260.5 270.0 -3.5% 476.2 485.7 -2.0%Gross Margin 32.8% 26.1% 23.9% 26.4% -248 bps 24.8% 26.2% -141 bpsYoY growth 119.2% -4.1% -18.5% -15.6% -297 bps -12.6% -10.8%QoQ growth 42.1% 2.1% 20.8% 25.2% -440 bps

EBITDA 258.7 175.8 187.0 173.8 7.6% 362.8 349.6 3.8%EBITDA Margin 26.5% 21.2% 17.1% 17.0% 17 bps 18.9% 18.9% 3 bpsYoY growth 145.6% 6.9% -27.7% -32.8% 510 bps -14.3% -17.4%QoQ growth 57.3% 19.3% 6.4% -1.1% 751 bps

EBIT 225.1 136.9 143.4 149.5 -4.1% 280.3 286.4 -2.1%EBIT Margin 23.1% 16.5% 13.1% 14.6% -145 bps 14.6% 15.5% -86 bpsYoY growth 159.6% 0.6% -36.3% -33.6% -271 bps -22.4% -20.7%QoQ growth 65.4% 25.7% 4.7% 9.2%

Net inc. from contin. operations 245.0 105.7 102.4 108.0 -5.2% 208.1 213.7 -2.7%Net margin from (continued operations) 25.1% 12.8% 9.4% 10.5% -116 bps 10.8% 11.5% -69 bpsYoY growth 226.7% -50.5% -58.2% -55.9% -229 bps -54.6% -53.4%QoQ growth 14.7% 41.9% -3.1% 2.2% -530 bps

Inc. from discont. operations (net of tax) - 0 0 0 - 0.0 0%Net inc. incl. dicount. operations 245.0 105.7 102.4 108.0 -5.2% 208.1 213.7 -2.6%Gain on sale of discont. operations - 0.0Net income 245.0 105.7 102.4 108.0 -5.2% 208.1 213.7 -2.6%YoY growth 47% -77.7% -58.2% -55.9% -71.1% -70%QoQ growth -48% 40% -3% 2%


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Management guidance Fertilizer LoB:

OCI’s management allocated US$200 mn to accommodate its fertilizer LoB’s growth. This capex is to be disbursed over 2009, 2010, and 2011 at US$20 mn, US$105 mn, and US$75 mn, respectively.

• EBIC:

1. Fully consolidated (100%).

2. As at 1H09, OCI has consolidated US$314 mn of EBIC’s debt, which is not cash spent but taken on the balance sheet as a result of consolidation.

3. EBIC maintenance is US$5 mn in 2010 and US$7 mn in 2011.

• EFC:

1. Fully consolidated (100%).

2. Production capacity will increase from 1.3 mn ton per annum in 2010 to 1.6 mn ton per annum in 2011.

3. Utilization rates will remain 100%+ in 2009 and 2010 and will vary in 2011 depending on sales agreements.

4. EFC maintenance is US$10 mn in 2009 and US$15 mn in 2010 and 2011.

5. EFC engages in fertilizer trading. EFC trading activities resulted in 139K tons of fertilizer transactions.

• Sorfert Algeria:

1. Proportionately consolidated at 50.99%.

2. OCI’s share in Sorfert debt is US$770 mn, of which US$203 mn was drawn down in 1H09.

• Notore Chemical Industries:

1. A US$18 mn investment.

2. Accounted for using the cost method.

3. OCI’s management is not expecting any dividends from Notore in 2009 and 2010.

• Gavilon:

1. OCI has a c.20% equity stake in Gavilon.

2. OCI received US$18 mn in investment income during 1Q09 and no income in 2Q09. For the remainder of 2009, OCI expects to receive between US$6-20 mn in additional investment income.

Construction LoB: OCI has assigned US$100 mn and US$50 mn in 2010 and 2011 respectively for the LoB growth and maintenance.


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Valuation We continue to use our DCF model to determine OCI’s LTFV. We have used comparative multiples for both construction and fertilizer peers to value OCI based on relative value. We have blended the LTFV based on DCF and peer multiple to reach a target price for OCI. In calculating OCI’s TP, we have used a 70%:30% weighting for LTFV and peer multiples, respectively. A summary of our findings is disclosed below:

DCF method: LTFV of LE 286.1/share.

Multiples method: value of LE 226.9/share

TP value: LE 268.4/share

DCF

Figure 45: OCI’s new vs. old valuation (‘000)


Projection assumptions

• Fertilizer LoB: we have assumed the following:

1. An increase in production capacities in accordance with management guidance.

2. An increase in cost reductions from operational synergies.

3. Ammonium nitrate (AN), which will be outsourced, is a basic input for UAN.

4. The local sales price to be equal to that of the international price.

(This differs from our old assumption that Egypt’s local capped price of LE 750/ton (eq. US$138/ton) is applied. We believe that private companies in Egypt are free to price their products as opposed to companies that have large governmental stakes. The latter have price caps set by the Government of Egypt).

5. EBIC will have fewer operating days given it started operations later than expected.

6. Capex and maintenance programs for the LoB over 2010 and 2011 were included within the data provided by management. In addition, we allocated OCI’s US$200 mn capex plan to EFC.

Subsidiary Equity ValueEquity share OCI's share

% of total

value Subsidiary Equity ValueEquity share OCI's share

% of totalvalue

EBIC $1,354,659 60% $812,795 7.6% EBIC $1,212,150 60% $727,290 9.0%EFC $3,757,796 100% $3,757,796 35.2% EFC $2,766,166 100% $2,766,166 34.3%Sorfert $3,213,718 51% $1,638,675 15.4% Sorfert $2,817,425 51% $1,436,605 17.8%Gavilon $1,700,000 20% $340,000 3.2% Gavilon $1,700,000 20% $340,000 4.2%Total Fertilizers $10,026,173 $6,549,266 61.4% Total Fertilizers $8,495,741 $5,270,061 65.4%Construction $4,090,952 100% $4,090,952 38.3% Construction $2,757,033 100% $2,757,033 34.2%Other Investments $30,520 $30,520 0.3% Other Investments $30,520 $30,520 0.4%

Sum $14,147,644 $10,670,737 100% Sum $11,283,294 $8,057,614 100%

Shareholders' value $10,670,737 Shareholders' value $8,057,614

No. of shares (outstanding) 206,918 No. of shares (outstanding) 206,918

Fair value/GDR $51.6 Fair value/GDR $38.9LE/US$$ 5.5 LE/US$$ 5.6Fair value/local share 286.1 Fair value/local share 216.5

New Valuation OLD Valuation


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• Construction LoB: we have incorporated a two-period growth rate for OCI’s new construction contracts (bookings). This is supported by the growth in the MENA governments’ construction activities starting late 2010. Accordingly, we have increased the LoB’s perpetual growth rate to 1% vs. nil in our old estimate.

1. 2009 – 2010: Increased the average growth rate in related new bookings to average 4% vs. our old estimate of 3% over the same period. We believe OCI should benefit from MENA stimulus packages during the same period. For example, the GCC’s planned projects amount to US$2.6 tn in August (+7% YoY).

2. 2011 – 2013: Raise the average growth rate for the new bookings to 6% vs. our old estimate of 3% over the same period. We believe that this increase is in line with the positive outlook for the construction industry starting late 2010 and early 2011.

Projection highlights

We have increased our estimate for OCI shareholders’ value from US$8,057 mn to US$10,671 mn. The drivers of this increased estimate are:

• EBIC: we increased OCI’s shareholders value in EBIC by US$86 mn (net). This increase resulted from synergies though it was muted by fewer operational days during 2009.

• EFC: we increased OCI’s shareholder value in EFC by US$992 mn (net). This increase is derived from (1) increasing production capacities from c.1.3 mn tons of urea to c. c.1.6 mn tons of urea starting 2011, (2) increasing synergy effects and (3) the introduction of AS – a tradable product – into OCI’s product mix starting 2H09.

(Note: after revaluing EFC, we have increased its value to US$11.74/share vs. our old estimate of US$8.64/share. The execution price for restructuring the fertilizer LoB, by which EFC’s shares was transferred to OFPM, was US$10.84/share on June 30, 2009).

• Sorfert – we have increased OCI’s shareholders value in Sorfert by US$202 mn.

• Construction – we have increased OCI’s shareholders value in the construction LoB by US$1,334 mn as a result of the positive outlook for the construction activity starting late 2010 and early 2011.

Figure 46: Change in LTFV highlights (new vs. old)


727 813

2,766 3,758

1,437

1,639 340

340 2,757

4,091 31

31

0

2,000

4,000

6,000

8,000

10,000

12,000

Old Valuation New Valuation

US$ mnEBIC EFC Sorfert Gavilon Construction Other Investments

12%

48%

36%

14%


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Peer Multiple

Figure 47: A comparison of peer multiples


EBITDA (US$ mn)

Year MI adj Adj EBITDA (US$ mn)

Peers' EV/EBITDA

EV (US$ mn)

Debt (US$ mn)

Cash (US$ mn)

Equity Value(US$ mn)

Construction 469.9 > 2010 - 469.9 9.6x 4,518.2 (2,613.8) 1,752.4 3,656.7

EBIC 223.3 > 2010 (89.3) 134.0 6.8x 909.4 (188.4) 5.1 726.1

EFC 415.9 > 2010 - 415.9 6.8x 2,822.0 - 21.7 2,843.7

Sorfert 539.4 > 2011 (264.4) 275.0 4.0x 1,100.1 (203.0) - 897.1

Total (353.7) 1,294.8 9,349.6 (3,005.2) 1,779.2 8,123.6

Gavilon 340.0

8,463.6

206.9

226.9 Fair value/local share (LE)

Equity Value

No. of shares (outstanding)


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New Target Price (TP) & Investment rational We are confident in OCI’s business model, specifically in its fertilizer LoB. This is despite the current low fertilizer prices. Regarding the fixing of their natural gas costs, we believe OCI will be able to withstand fluctuating fertilizer prices.

We expect prices to rebound in 2010 – we estimate they will experience an average 44% YoY increase, to US$362/ton & US$367/ton vs. US$238/ton & US$273/ton for ammonia and urea, respectively in 2010e and 2009e. The fertilizer LoB is expected to revive, with growing EBITDA margins of 70% during 2010e compared to margins of 68% 2009e, - justifying our upgrade for OCI’s LTFV to 286.1/share.

Starting July 09, OCI’s stock rallied 18%, reaching our LTFV and exceeding our TP of LE 207.9/share by 15.0%. We expect the Chinese restoration of fertilizer export taxes from 10% to 110% , starting September 15, to lead to an increase in fertilizer prices once more. This should also act as a short term catalyst for OCI’s fertilizer LoB (60%+ of OCI’s LTFV). Consequently, we have set a higher TP of LE 286.4/share, a noticeable increase compared to the previous TP of LE 207.9/share. In calculating OCI’s TP, we have continued to use a 70%:30% weighting for LTFV and peer multiples, respectively. With a 12% upside potential from the recent market price, we have upgraded OCI’s rating from Underweight to HOLD.

Figure 48: OCI’s TP


226.9232.8

238.8

244.7

250.6

256.5

262.4

268.4

274.3

280.2

286.1

150.0

170.0

190.0

210.0

230.0

250.0

270.0

290.0

310.0

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

OC

I's T

arge

t pric

e LE

= Multiple Weight

= LTFV Weight


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Investment rationale and risks to recommendation

Investment rationale

• Expanding fertilizer model, through:

1. Strategic alliances, extending its trading activities to include EFC, Gavilon (in which OCI has 20% equity stake) and FITCO (Brazil’s FERTIPAR subsidiary). The Gavilon investment is believed to open up the US distribution market whilst the FITCO agreement allows penetration of the Brazilian market. This latter agreement also creates the potential for expansion elsewhere in South America.

2. Widening its product mix, such as UAN and AS. 3. Increasing production capacities in Egypt and Algeria.

• Continuing to seek cost reduction opportunities, especially via synergies. • Recovery in the fertilizer demand and prices in 2010 will increase fertilizer LoB’s

margins. • Continued winning of contracts in a weak economic environment. • Construction activity in 2010 onwards is expected to grow.

Risks to recommendation

Upside risks

• OCI’s LTFV cumulative sensitivity increased by 2.7-folds to 4% vs. our old estimate of 1.5% to US$10/ton change in urea, ammonia, UAN, and AS.

Figure 49: OCI’s LTFV sensitivity


• The number of natural gas supply licences issued has been reduced. As natural gas prices increase (current forwards is 5.8+/MMBtu) we expect OCI’s natural gas forwards contracts to rise in value. OCI’s fertilizer LoB margins would be expected to increase.

• Although not immediately quantifiable, we believe OCI’s decision to include P-fertilizers in its fertilizer business model will increase its margins.

• Delayed commissioning for N-fertilizer production capacities may prolong sustainable margins for OCI’s fertilizer LoB.

• An earlier than expected recovery in the construction sector would lead to improved margins.

Downside risks

• An increase in the number of fertilizer players could increase supply and pressure prices, leading in turn to narrowing margins.

• Could follow global trends and suffer delays in the opening of OCI’s new fertilizer plants.

• The fertilizer and construction LoB’s are highly correlated. Fluctuations in fertilizer selling prices move in line with fluctuations in GCC’s construction activity (in which OCI has some 40% of its backlog). Construction activity is partially linked to the performance of oil. OCI’s margins could be negatively impacted should fertilizer prices in 2010 challenge our estimates, or should oil prices start to decrease.

• A number of countries, such as India, are attempting to fix their feedstock prices. Their margins are expected to improve and could, as a result, initiate price competition.

LE % LE % LE % LE % LE %(6.16) -2.2% (2.97) -1.0% (1.02) -0.4% (0.91) -0.3% (11.11) -3.9%

- - - - - - - - - - 6.16 2.2% 2.97 1.0% 1.02 0.4% 0.91 0.3% 11.11 3.9%

Urea effect on LTFV Ammonia effect on LTFV UAN effect on LTFV AS effect on LTFV Cummulative effect


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OCI’s LoB forecasted financial performance

Fertilizers note: starting 2011 fertilizer top line decreased as consequence of proportionately consolidating Sorfert vs. our estimate for our old full consolidation.


Figures US '000 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

New Gross Fertilizers LoB * 499,851 1,000,579 1,280,722 1,178,880 1,096,949 Growth rate -22.4% 100.2% 28.0% -8.0% -6.9%

Old Gross Fertilizers LoB 645,597 985,129 1,472,642 1,338,983 1,097,311 Growth rate 0.2% 52.6% 49.5% -9.1% -18.0%

% Chg. Gross Fertilizers LoB -22.6% 1.6% -13.0% -12.0% 0.0%

New Gross Construction LoB 3,593,522 3,932,513 4,140,516 4,353,230 4,619,396 Growth rate 16.8% 9.4% 5.3% 5.1% 6.1%

Old Gross Construction LoB 3,704,435 3,883,311 4,033,681 4,171,627 4,305,244 Growth rate 20.4% 4.8% 3.9% 3.4% 3.2%

% Chg. Construction LoB -3.0% 1.3% 2.6% 4.4% 7.3%

New Consolidated 4,048,034 4,725,257 5,334,946 5,532,110 5,716,345 Old Consolidated 4,243,032 4,820,795 5,396,553 5,510,610 5,402,555 % Chg. Consolidated -4.6% -2.0% -1.1% 0.4% 5.8%

New Fertilizers LoB 340,232 704,554 906,396 808,798 726,954 Growth rate 107.1% 28.6% -10.8% -10.1%EBITDA Margin - Fertilizers LoB 68.1% 70.4% 70.8% 68.6% 66.3%

Old Fertilizers LoB 457,267 691,979 1,049,196 905,396 664,988 Growth rate 51.3% 51.6% -13.7% -26.6%EBITDA Margin - Fertilizers LoB 70.8% 70.2% 71.2% 67.6% 60.6%

% Chg. Fertilizers LoB -25.6% 1.8% -13.6% -10.7% 9.3%

New Construction LoB 480,896 406,284 463,918 513,357 548,224 Growth rate -15.5% 14.2% 10.7% 6.8%EBITDA Margin - Construction LoB 13.4% 10.3% 11.2% 11.8% 11.9%

Old Construction LoB 481,577 504,830 524,379 542,312 559,682 Growth rate 4.8% 3.9% 3.4% 3.2%EBITDA Margin - Construction LoB 13.0% 13.0% 13.0% 13.0% 13.0%

% Chg. Construction LoB -0.1% -19.5% -11.5% -5.3% -2.0%

New Consolidated 821,128 1,110,838 1,370,314 1,322,154 1,275,178Old Consolidated 912,093 1,184,899 1,546,132 1,447,707 1,224,670% Chg. Consolidated -10.0% -6.3% -11.4% -8.7% 4.1%

New Fertilizers LoB 193,409 494,982 639,252 565,087 498,811Growth rate -52.3% 155.9% 29.1% -11.6% -11.7%Net Margin - Construction LoB 38.7% 49.5% 49.9% 47.9% 45.5%

Old Fertilizers LoB 304,686 479,953 732,574 624,250 403,896 Growth rate -24.9% 57.5% 52.6% -14.8% -35.3%Net Margin - Construction LoB 47.2% 48.7% 49.7% 46.6% 36.8%

% Chg. Fertilizers LoB -36.5% 3.1% -12.7% -9.5% 23.5%

New Construction LoB 271,471 265,666 316,362 358,465 384,753Growth rate -17.3% -2.1% 19.1% 13.3% 7.3%Net Margin - Construction LoB 7.6% 6.8% 7.6% 8.2% 8.3%

Old Construction LoB 256,721 273,070 282,602 290,310 359,529 Growth rate -21.8% 6.4% 3.5% 2.7% 23.8%Net Margin - Construction LoB 6.9% 7.0% 7.0% 7.0% 8.4%

% Chg. Construction LoB 5.7% -2.7% 11.9% 23.5% 7.0%

NewConsolidated before minority interest

463,232 760,648 955,614 923,551 883,564

Growth rate -36.9% 64.2% 25.6% -3.4% -4.3%Old Consolidated before minority

interest534,657 741,112 987,733 914,560 763,424

Growth rate -27.2% 38.6% 33.3% -7.4% -16.5%

% Chg.Consolidated before minority interest -13.4% 2.6% -3.3% 1.0% 15.7%

Earn

ings

Sale

sEB

ITD

A


14 October 2009


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Source: OCI’s analyst presentations & CICR estimates

Summary Financials Balance Sheet (in US$ mn) Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13Assets Cash & Cash Equivalent 1,658.4 511.3 741.0 832.2 778.6 802.6Total Current Assets 3,749.0 7,141.7 12,360.4 12,739.2 12,818.6 12,871.7Net Plant 1,798.3 2,915.3 3,379.7 3,367.5 3,237.3 3,168.1Total Assets 7,840.0 10,955.3 16,692.6 17,111.8 17,113.6 17,150.9

Liabilities & Shareholders' Equity Current Portion of LT Debt 0.0 29.7 83.3 136.9 136.9 1,086.9Total Current Liabilities 2,464.9 4,225.9 9,634.5 10,170.0 10,263.6 11,383.4Total Long-Term Debt 1,595.2 2,431.6 2,617.1 2,470.8 2,351.9 1,264.1Total Liabilities 4,085.9 6,657.5 12,251.6 12,640.8 12,615.5 12,647.5Shareholders' Equity 3,257.0 3,539.8 3,499.2 3,529.6 3,551.1 3,551.1Total Liab. & Equity 7,840.0 10,955.3 16,692.6 17,111.8 17,113.6 17,150.9

Income Statement (in US$ mn) Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13Revenues 3,720.3 4,048.0 4,725.3 5,334.9 5,532.1 5,716.3COGS (2,640.6) (2,880.3) (3,189.1) (3,505.4) (3,738.1) (3,951.4)Gross Profits 1,079.8 1,167.8 1,536.2 1,829.5 1,794.0 1,765.0SG&A (201.8) (306.4) (374.9) (406.3) (419.5) (437.9)Other Operating Income 0.1 15.2 6.6 4.2 4.7 5.2Provisions 0.0 (55.4) (57.1) (57.1) (57.1) (57.1)EBITDA 878.1 821.1 1,110.8 1,370.3 1,322.2 1,275.2Depreciation & Amortization (134.0) (149.9) (125.2) (163.9) (175.0) (183.3)EBIT 744.1 671.2 985.7 1,206.4 1,147.2 1,091.8Interest Expense (122.1) (151.5) (106.5) (122.4) (111.5) (104.5)Interest Income 124.4 23.8 9.5 11.7 11.9 11.6Investment Income 0.5 29.8 34.8 50.3 49.4 46.2Other Non-Operating Expenses 90.8 4.1 5.8 6.1 6.5 6.9EBT 837.8 577.3 929.3 1,152.1 1,103.5 1,051.9Taxes (103.8) (114.1) (168.7) (196.5) (180.0) (168.4)NPAT 733.9 463.2 760.6 955.6 923.6 883.6Minority Interest (14.1) (35.4) (91.7) (130.5) (117.1) (110.4)Extraordinary Items 265.2 0.0 0.0 0.0 0.0 0.0Attributable Profits 985.0 427.8 668.9 825.1 806.5 773.2


14 October 2009


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Source: OCI’s analyst presentations & CICR estimates

Summary Financials

Cash Flow (in US$ mn) Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13NOPAT 626.6 558.1 775.0 931.9 902.1 864.5Depreciation & Amortization 134.0 149.9 125.2 163.9 175.0 183.3Gross Cash Flow (COPAT) 760.6 708.0 900.2 1,095.8 1,077.1 1,047.8WI Change 123.3 (519.3) (172.4) 47.1 (38.9) (52.8)Other Current Items 13,443.3 (4,638.3) (4,753.8) (101.3) (41.7) 66.6Cash After Current Operations 14,327.2 (4,449.5) (4,026.0) 1,041.7 996.5 1,061.6Financing Payments (122.1) (151.5) (136.2) (205.7) (248.4) (241.4)Cash Before Long-Term Use 14,205.1 (4,601.1) (4,162.2) 836.0 748.2 820.2Net Plant Change (1,055.2) (1,266.9) (589.6) (151.7) (44.8) (114.2)FCFF (171.3) (1,078.2) 138.2 991.3 993.4 880.8Others (1,465.2) 1,448.7 3.3 20.1 20.3 17.0Cash Before Financing 11,684.8 (4,419.3) (4,748.6) 704.3 723.7 723.0Change in Cash 950.7 (1,147.0) 229.7 91.1 (53.6) 24.0

Fact Sheet Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13ROE 22.5% 12.1% 19.1% 23.4% 22.7% 21.8%ROS 19.7% 10.6% 14.2% 15.5% 14.6% 13.5%ROA 9.4% 3.9% 4.0% 4.8% 4.7% 4.5%ROIC 10.7% 5.8% 5.1% 6.0% 5.9% 5.6%Gross Profit Margin 29.0% 28.8% 32.5% 34.3% 32.4% 30.9%EBITDA Margin 23.6% 20.3% 23.5% 25.7% 23.9% 22.3%EPS 3.42 2.24 3.68 4.62 4.46 4.27Diluted EPS 3.42 2.16 3.54 4.45 4.30 4.11DPS 1.00 1.04 1.62 1.99 1.95 1.87P/E 12.7 19.3 11.8 9.4 9.7 10.1Dividend Yield 2.3% 2.4% 3.7% 4.6% 4.5% 4.3%P/ Revenue 2.5 2.2 1.9 1.7 1.6 1.6EV/ Revenues 2.6 3.4 4.0 3.6 3.4 3.3P/ COPAT 12.2 12.6 9.9 8.2 8.3 8.5EV/ COPAT 12.8 19.4 21.2 17.4 17.7 18.2P/ FCFF -54.2 -8.3 64.7 9.0 9.0 10.2EV/ FCFF -56.7 -12.7 137.8 19.3 19.2 21.6P/ EBITDA 10.6 10.9 8.1 6.5 6.8 7.0EV/ EBITDA 11.1 16.7 17.1 13.9 14.4 14.9P/ BV 2.9 2.5 2.6 2.5 2.5 2.5

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Contacts and Disclaimer:

CI CAPITAL RESEARCH

Mark Rorison | Group Director, Head of Research [email protected]

Amr Hussein Elalfy, CFA | Director

[email protected] Mona Mansour | Director

[email protected]

■■

CIBC

Amr Mostafa | Managing Director

[email protected]

DYNAMIC SECURITIES

Ahmed Roushdy | Managing Director [email protected]

DISCLAIMER

The information used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accu-rate. This information has not been independently verif ied and may be condensed or incomplete. CICR does not make any guarantee, representa-tion or warranty and accepts no responsibility or liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and w ith the use of specif ic f inancial techniques that reflect the personal opinion of the authors of the com-mentary and is subject to change without notice. It is acknowledged that different assumptions can always be made and that there is a wide choice of techniques that can be adopted each of which can lead to a different conclusion. Therefore, all that is stated herein is of an indicative and infor-mative nature as forward-looking statements, projections, and fair values quoted may not be realized. Accordingly, CICR does not take any re-sponsibility for decisions made on the basis on the content of this commentary. This commentary is made for the sole use of CICR’s customers and no part or excerpt of its content may be redistributed, reproduced or conveyed in any form, w ritten or oral, to any third party without the prior written consent of CICR. This commentary does not constitute a solicitation or an offer to buy or sell securities.

CI CAPITAL HOLDING

8, Nadi El-Seid Street, Third Floor Dokki, Giza

Egypt

Reuters pages: COIW, COIX, COIY, and COIZ

Bloomberg page: COIB <GO>

For more information, please contact CI Capital Research on +2

(02) 33 38 62 59, send e-mail to [email protected] or visit our website at www.cich.com.eg

RATING SYSTEM In February 2009, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This is to make one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV), nor have we stopped our detailed industry and company research. What we did is changing the target price to trade in the balance of where a share should trade and where we think it w ill trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The target price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as f inancial) information avail-able, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts, and perceptions. Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions as may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given prevailing interest rates and risks. (Please see table below.) Recommendation structure: Change to Target Price

Strong BUY > 30% Strong Conviction BUY > 20% < 30%

Hold > 10% < 20% Underw eight > 0% < 10% SELL < 0%

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