a Saudi Cement Company

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January 2012 Forecasts & Assumptions Revenue KMEFIC Research Equity Analysis Report We broke down the company’s annual historical revenue into average cement price per ton (for the year) and sales volume (in million tons per annum). This allowed us to isolate the effects on revenue caused by price fluctuations and sales growth. We expect sales volume to grow at an average annual rate of 4% over the next 2 years, in line with BMI’s (Business Monitor International) forecast for real construction industry growth in the Kingdom (the main driver of cement demand). However, we expect sales volume to level off after 2013 due to Yamama Cement reaching its maximum production capacity of 6.3 mtpa. We anticipate a small decline in Yamama’s average cement price per ton in 2012 due to new cement firms entering the market but expect average prices to increase moderately afterwards due to growing cement demand. Lastly, Yamama’s new planned production line (that will replace five of its older production lines) is not scheduled to be completed until 2015 and thus will have no effect on revenues over the forecast period. Based on the these assumptions and other relevant factors, we forecast revenues to grow during the 2010 – 2015 period at a compounded annual growth rate (CAGR) of 5.57% to reach SAR 1,668 million in 2015. Capital Expenditures On the 19 th of October 2011, Yamama announced that they will proceed with their intended cement plant restoration. The project aims to replace five of Yamama’s oldest production lines (that have a production capacity of 5,600 tons of clinker per day) with a standalone production line (that will have a production capacity of 10,000 tons of clinker per day). We have incorporated the planned project into our forecasts and valuation by taking the following assumptions: • The new production line will cost approximately SAR 1.5 billion. • Yamama will not pay a cash dividend for the 2 nd half of 2011 but will alternatively issue 1-to- 2 bonus shares (which has already been submitted to the general assembly for approval by the board of directors). The cash will instead be utilized to help finance the production line. • Also to help the company finance the production line, Yamama will borrow part of the project’s cost. Share Capital We have assumed that the proposed 1-to-2 bonus shares will be approved by the general assembly and will take place in 2012, raising Yamama’s number of shares outstanding to 202.5 million and its share capital to SAR 2,025 million. Net Income We forecast net income to grow at a compounded annual growth rate (CAGR) of 4.65% over the 2010 – 2015 period to reach SAR 824.5 million in 2015. Yamama Saudi Cement Co. P a g e | 14
January 2012 Valuation KMEFIC Research Equity Analysis Report We valued Yamama Cement using two main approaches: Discounted Cash Flow Analysis and Relative Valuation. Discounted Cash Flow Analysis Discounted Cash Flow Analysis was used to discount the company’s forecasted Free Cash Flows to Firm. We applied a top down approach by firstly taking into account all relevant factors to estimate the company’s primary sources of income. These estimates were then coupled with forecasts of expenses in order to work out the company’s operating profits and net profits over the forecast horizon. Capital expenditures and variations in working capital requirements were taken into account when computing Enterprise Value. Adjustments for debt, investments in associates, and cash & cash equivalents were made to compute the company’s equity value. We used a WACC of 9.3% in our DCF Analysis (the CAPM was used to compute the cost of equity) and the terminal growth rate was set to 1.5%. Our DCF model yielded an estimated fair value of SAR 60.57 per share, representing a 28.9% upside to Yamama’s closing share price (adjusted for the 50% capital increase) on the 1 st of January, 2012. Relative Valuation In our relative valuation model, we used the industry’s trailing P/E ratio and P/BV ratio. Based on Yamama’s forecasted EPS in 2011 and the trailing P/E for the industry, we reached a fair value of SAR 52.64 per share, representing an upside of 12.0%. Similarly, based on the forecasted BVPS in 2011 and the trailing P/BV for the industry, we obtained a fair value of SAR 55.62 per share, representing an upside of 18.3%. Conclusion In order to compute the fair value per share for Yamama Cement, we used a weighted average of the previously mentioned valuation approaches. We allocated a 40% weight to the discounted cash flow method and equal weights of 30% to the P/E multiple and P/BV multiple valuation methods. We reached a final fair value of SAR 56.71 for the company’s share, representing a 20.6% upside from the current price level (as of the 1 st of January, 2012 and adjusted for the 50% capital increase). Accordingly, we issue an “ACCUMULATE” recommendation for Yamama Cement. Table 6 - Yamama Cement Fair Value per Share Method Value Weight Weighted Value DCF - FCF to firm 60.57 40% 24.23 Relatives - P/E 52.64 30% 15.79 Relatives - P/B 55.62 30% 16.69 Fair value per share 56.71 Current market price* (as of 1/1/2012) 47.00 Potential upside / (downside) 20.6% *Adjusted for the 50% capital increase Yamama Saudi Cement Co. P a g e | 15
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a Saudi Cement Company

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