UAE cement companies are ripe for acquisition due to 'cheap valuations,' a new report says
Cement makers up for sale as prices decline
UAE cement manufacturers are likely acquisition targets as prices and demand continue to decline, a report says.
Net profit for UAE cement companies declined 86.6 per cent to US$10.9 million in the first nine months of the year, according to the report by Global Investment House, a Kuwaiti investment firm.
The slowdown in the property and construction sector continues to affect cement makers, driving down prices at a time when production capacity has increased throughout the region.
Gross margins for UAE cement companies are at an all-time low of 4.8 per cent, as production costs escalated 9 per cent, Global's research found.
"UAE seems to show that it hasn't reached the bottom yet as margins and profitability ratios continue to decline and continue to post new low levels," Global reported.
But the depressed market also makes the UAE attractive for potential mergers and acquisitions.
"Various regional companies have been acquiring companies in [the] UAE because they are the ones who have been affected the most and are available at quite cheap valuations," the report said.
Last year, Raysut Cement, based in Oman, acquired Pioneer Cement for $175m and the India-based UltraTech Cement paid $380m for a controlling stake in ETA Star Cement.
"We believe there are many such M&A [mergers and acquisitions] targets available in the region and expect these activities to continue in the coming years," Global said.
Omani companies are particularly interested in buying UAE cement manufacturers to benefit from the lower prices, it added.
"The infrastructure and construction activity is on a full swing in Oman and starting to set up a plant would take away 12 to 15 months of active demand period," the report said.
Overall revenue for cement companies in the GCC increased 10.9 per cent in the first nine months of the year, to $3.3bn from $3.05bn in the same period last year but net profit declined 3.5 per cent, from $1.15bn last year to $1.11bn.
Cost of sales jumped 13.9 per cent, slicing into the profit margins of companies, Global said.
Manufacturing capacity in the GCC more than doubled between 2004 and 2011.
But the slowdown in the property sector, which accounted for 65 to 70 per cent of the business, dampened the outlook for several companies.
"With the deferment and/or rescheduling of large construction projects, cement producers are revisiting their strategy boards and evaluating the opportunities and challenges very carefully," Global said.