Key Stock Data Sector Real-Estate Reuters Code 4300.SE Bloomberg Code ALARKAN AB Equity Net Out. Shares (bn) 1.08 Market Cap (SAR bn) 17.226 Market Cap (USD bn) 4.591 Avg. 12m Vol. (‘000) 4,359.79 Volatility (30 day) 22.818 Volatility (180 day) 32.120

Executive Summary Dar Al-Arkan was established in 1994 and its business includes purchase and acquisition of real estate and land and construction of buildings. It specializes in the development of master-planned lifestyle residential communities offering developed land parcels, apartments and villas. It is also one of the leading providers of master-planned lifestyle communities from the private sector in the Saudi market. Revenues fell marginally by 2.3% in 1H09 During 1H09, the company’s revenues decreased 2.3% to SAR 2,720.08 million from SAR 2,784.52 million in 1H08, mainly due to higher sale of residential units in the corresponding period of last year as the company exited a completed project in Makkah city. CoS increased 9.7% during first half of 2009. Subsequently, as a percentage of revenues it rose to 54.9% in 1H09 from 48.9% in 1H08. Thereby, the gross profit fell 13.9% to SAR 1,225.66 million compared to SAR 1,422.73 million in 1H08. However, gross profit margin decreased to 45.1% in 1H09 compared to 51.1% during 1H08. Administrative and marketing expenses rose 2.5% to SAR 63.71 million during the first half of 2009. Operating profit decreased 14.2% to SAR 1,142.42 million from SAR 1,330.91 million in 1H08. Total finance amounted to SAR 78.61 million from SAR 202.06 million in 1H08. Subsequently, net profit declined 8.6% to SAR 1,042.78 million and margins stood at 38.3% compared to 41.0% in 1H08. Annualised EPS fell to SAR 1.93 per share from SAR 2.11 per share. Outlook Economies across the globe have been witnessing an ongoing economic slowdown, which has led to a liquidity constraint and has limited the economic activity and hampered high growth enjoyed earlier. Real GDP in the Saudi Arabia witnessed a high growth in the past but its real GDP is expected to decline 0.9% in 2009. The infrastructure and real estate sectors, which were the prime beneficiaries in a high growth environment have been the worst-hit due to dampened demand bringing the property prices to a more stable and realistic level. Amidst falling demand and deteriorating market conditions, real estate projects worth approximately USD 38.2 billion have been postponed or cancelled in the Saudi Arabia. Weak demand outlook and liquidity crunch might hold/cancel projects, thereby calling for a cautious approach in the medium-term. On the contrary, it has a strong presence in Saudi Arabia and its medium to long-term expansion plan makes it a definitive player in the region. Factors like wide reach within the country and well established business keeps the company’s long-term growth drivers intact. To determine the value of the company, we have used the DCF valuation method. Currently, Dar Al-Arkan stock is trading at a P/E multiple of 7.78x and 6.95x on 2009E and 2010E earnings, and at a P/B multiple of 1.23x and 1.16x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has gained 7.0% since the beginning of this year as against a rise of 19.9% by the Saudi’s Tadawul. Considering the above factors, we initiate our coverage with price target of SAR 16.58, which exhibits a potential upside of 3.9% from its closing price of SAR 15.95 (as on August 18, 2009). Therefore, we initiate our coverage on Dar Al-Arkan with a Neutral opinion. SAR Billion 2007A 2008A 2009E 2010E 2011E Total Revenue 4,926 5,611 5,889 6,657 7,321 EBITDA 2,313 2,694 2,641 2,992 3,268 EBITDA Margin (%) 46.9 48.0 44.8 44.9 44.6 Net Profit 2,009 2,356 2,213 2,480 2,692 Net Profit Margin (%) 40.8 42.0 37.6 37.2 36.8 Adjusted EPS (SAR) 1.86 2.18 2.05 2.30 2.49 Total Assets 18,374 20,164 24,108 27,481 29,611 RoAE (%) 18.6 20.7 17.2 17.2 17.5

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Dar Al-Arkan Real Estate Development Co. (4300.SE)

CMP SAR 15.95 Target SAR 16.58 Potential Upside 3.9%

MSCI GCC Index 408.46 Saudi Tadawul 5,759.58

Stock Performance (%) 52 week high / low (SAR) 26.13 / 11.90

1M 3M 12M Absolute (%) 2.9 6.8 -33.9 Relative (%) 3.2 10.9 -3.5

Shareholding Pattern (%) Khaled Bin Abdullah Shelash Al Shelash 9.10 Al Arkan for Construction Company 8.40 Manazel Construction Company 7.90 Youssef Bin Abdullah Shelash Al Shelash 7.70 Hethloul Bin Saleh Mohammed Al Hethloul 6.90 Kingdom Installment Trading Co. 5.70 Emaar Al Bayader for Development Co. 5.60 Majed Bin Abdulrahman Abdulaziz Al Qassem 5.30 Other Shareholders 32.39 Public 11.01

Dar Al-Arkan and Tadawul Movement

Dar Al-Arkan

Dar Al-Arkan Properties Company

Operates in development

and acquisition of commercial and residential

real estate

Dar Al-Arkan Projects Company

Operates in general

construction of residential and

commercial buildings

Dar Al-Arkan Investment Company

Operates in purchase and acquisition of real

estate investments

Operates in general construction of residential and commercial buildings Board of Directors • Chaired by Youssef Bin Abdullah Shelash Al Shelash

• Mr. Abdulaziz Bin Abdullah Shelash Al Shelash

• Mr. Hethloul Bin Saleh Mohammed Al Hethloul

• MrTarek Bin Mohammed Ali Al Jarallah

• Mr. Majed Bin Roumi Suleiman Al Roumi

• Mr. Ayman Abdullah Youssef Hamad Boudi

• Mr. Majed Bin Abdulrahman Abdulaziz Al Qassem

• Mr. Khaled Bin Abdullah Shelash Al Shelash

• Mr. Abdulkarim Bin Hamad Al Babtain

• Mr. Abdullatif Bin Abdullah Shelash Al Shelash

• Mr. Majed Bin Bader Al Rifai

Source: Zawya

Background Established in 1994, the Dar Al-Arkan operates in the field of purchase and acquisition of real estate and land and construction of buildings for the purpose of investing by leasing out or selling in favour of the company. The company operates in general construction of residential and commercial buildings (construction, maintenance, demolition and reconstruction). Dar Al-Arkan specializes in the development of master-planned lifestyle residential communities offering developed land parcels, apartments and villas. It is also one of the leading providers of master-planned lifestyle communities from the private sector in the Saudi market. Dar Al-Arkan converted to a joint stock company in 2005 and listed its shares on the Saudi Stock Exchange in December 2007.

While it is headquartered in Riyadh, Dar Al-Arkan has offices and branches across the country, including Mecca, Jeddah and Madinah. In total, the company has seven branches across Saudi Arabia. The company was rated as Best Sukuk Structure by a Private Corporate Issuer for the SAR 750 million Sukuk that closed in May 2009. The company was awarded the Best Residential Developer in Saudi Arabia at International Real Estate Finance (IREF) 2008 Awards of Excellence. Business Model

Strategic alliances with local entities for its growth and to expand its presence

DAR AL-

ARKAN

Dar Al-Arkan, a specialized residential real estate development company

Interest ranges across multi-sectors through its investment subsidiaries

Expanded its operations from construction to management, thereby diversifying the risk

IMF forecasts a 1.3% growth for the GCC countries in 2009 Construction sector logged in revenues worth SAR 71.03 billion in 2008 and accounted for 4.1% of GDP

Subsidiaries/Associates/Affiliates of Dar Al-Arkan Dar Al-Arkan has a number of subsidiaries, associates and investments.

SUBSIDIARIES/ASSOCIATES/INVESTMENTS COUNTRY % SHARE Dar Al-Arkan Investment Company Saudi Arabia 100.00 Dar Al-Arkan Projects Company Saudi Arabia 100.00 Dar Al-Arkan Properties Company Saudi Arabia 100.00 Khozam Real Estate Development Company Saudi Arabia 51.00 INVESTMENTS Saudi Home Loans Company Saudi Arabia 15.00

Source: Zawya Industry Scenario At the beginning of the decade, the GCC states witnessed an economic boom, fuelled by high oil prices, increased effort for attracting private/foreign investments and expansionary fiscal policies by the governments. Therefore, with the high oil prices and subsequent economic development, the GCC region grew at 5.4% in 2007 and 6.4% in 2008. However, the global financial turmoil and subsequent weak oil prices, contraction of global demand and trade-related activity, liquidity crunch, lower tourism and remittances, the International Monetary Fund (IMF) forecasts the GCC countries to grow at a mere 1.3% in 2009, before recovering to 4.2% in 2010 on improving market dynamics. On the other hand, unlike the expected positive growth of the GCC region, Saudi Arabia’s real GDP is expected to contract 0.9% in 2009 before recovering to a growth rate of 2.9% in 2010. The real GDP grew at an average 4.4% over the period 2004-2008, on the back of high oil prices and subsequent economic development. Rapid credit growth and increased leverage witnessed during the booming economy in turn exposed the GCC banks to a global and domestic downturn. As per preliminary estimates, Saudi Arabia’s nominal GDP advanced 22.0% YoY to reach SAR 1,753.50 billion in 2008 from SAR 1,437.68 billion in 2007, driven by soaring oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel in 2008 from USD 67.6 per barrel in 2007. The mining & quarrying sector (up 37.2% to SAR 1,005.20 billion) was the largest contributor to the GDP at 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues worth SAR 71.03 billion during 2008 and accounted for 4.1%, and finance, insurance, real estate and business services contributed 6.6% of the total. However, in light of the current financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 22.3% decline in nominal GDP in 2009. However, a reversal in the trend is expected as the economic growth is likely to be 13.3% in 2010. The country is estimated to run a budget deficit of SAR 65 billion (USD 16 billion) in 2009. This is the first time in six years that the country would post a budgetary deficit. But, massive fiscal surpluses in 2008 and the previous five years have allowed Saudi Arabia to boost its foreign assets, which allowed it to fund higher spending and offset pressure from the global crisis.

Saudi Arabia's Nominal GDP

0

400

800

1,200

1,600

2,000

2004 2005 2006 2007 2008E0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Nominal GDP (SAR Billions) Nominal GDP Grow th (%)

Contribution to GDP (%)

0.0%

14.0%

28.0%

42.0%

56.0%

70.0%

2004 2005 2006 2007 2008E

Oil to GDP Non-oil to GDP

Source: SAMA, Central Department of Statistics & Information

Saudi ranks second in terms of infrastructure spending Saudi Arabia transforming into one of the most dynamic states within the GCC region

The GCC governments’ impetus to actively invest oil revenue windfalls in their domestic infrastructure to provide reliable basic services for their citizens, increased immigration leading to higher demand for modern and efficient infrastructure, rapid population growth, unprecedented expansion of the construction sector & industrial projects and huge investments in infrastructure by private players led to impressive growth in the real estate sector across the GCC. According to the Middle East Economic Digest (MEED), projects worth USD 2.15 trillion are either planned or underway in the region, which in turn implies attractive growth prospects for the real estate sector. Saudi Arabia and the UAE are the biggest project markets in the GCC with both of them making up 70.5% of total projects in the region. With investments to the tune of USD 598.05 billion, Saudi Arabia ranks second in terms of infrastructure spending, while UAE tops the list with USD 917.75 billion. However, the recent global credit crisis and cautious spending in the sector has slowed down the growth. The sector has been more prone to price correction and projects being delayed or postponed in the recent times. UAE, Saudi Arabia and Kuwait have projects worth USD 406.48 billion, USD 38.23 billion and USD 40.19 billion respectively, on hold as of August 4, 2009.

Value of Projects in GCC (in USD billion as of August 04, 2009)

-

200.00

400.00

600.00

800.00

1,000.00

Bahrain Oman Qatar Kuw ait Saudi Arabia UAE

Value of Projects On Hold in GCC (in USD billion as of August 04, 2009)

-

84.00

168.00

252.00

336.00

420.00

Bahrain Qatar Oman Kuw ait Saudi Arabia UAE

Source: MEED Saudi Arabia experienced an unprecedented construction boom during the past two decades, as the country’s infrastructure underwent rapid expansion. The creation of new airports, highways and even new cities attracted construction professionals from all over the world. In addition, a less open economy, restrictions on foreign ownership and a smaller expatriate population helped Saudi Arabia escape the real estate bubble that sent property prices plummeting in the UAE. However, transforming the business environment with the introduction of various reforms over the years, Saudi Arabia is now turning into one of the most dynamic states within the region. Further, as per the International Finance Corporation - World Bank 2009 Report on Ease of Doing Business, Saudi Arabia was ranked 16th among 181 countries globally, and number 1 in MENA region. Currently, the country’s property market is growing fast and at least a dozen real estate funds have got approval and have been established during the past six months. In addition, 75 applications for new funds are registered with the Capital Market Authority. Going forward, the Saudi government is expected to continue pumping capital in huge projects as the country’s 2009 budget, the largest in its history, allocated USD 60 billion to new projects. Moreover, the country has announced its aggressive spending plans for 2009 to take advantage of cheaper commodities such as steel, which has fallen by 70% since last summer. Further, it aims to spend USD 400 billion until 2013 to upgrade its infrastructure and has also launched a plan to build economic and industrial cities to create new jobs. While the residential sector makes up the biggest share of the market in terms of value, education and healthcare comprises of most projects. In addition, across sectors, projects in the study, planned, design and bidding phases make up a significant proportion of number of projects and budgets.

An estimated USD 6 billion is allocated for various residential projects in the country Affordable housing represents a big untapped market in Saudi Arabia for developers and investors

At least 10 major new city and real estate projects are currently underway in Saudi Arabia

Mega Projects of Saudi Arabia Projects Value (in USD Billions) King Abdullah Economic City 93 Prince Abdulaziz bin Mousaed Economic City 53 Jizan Economic City 30 Jeddah Project Mile High Tower 10 Shamieh Project 9.3 Madinah Knowledge Economic City 7 Al-Zahira City 4 Jabal Omar 3.3 Injaz 3 Riyadh Marriland Leisure Park 3 The country’s residential sector has been negatively impacted by reduced consumer confidence and limited credit availability. However, slight recovery of real estate market recently boosted investor confidence as Saudi Arabia was identified as the only country in the MENA where investors are optimistic of price rise in housing industry over the next 12 months. Saudi Arabia currently owns one of the world’s most comprehensive housing development programmes with an estimated USD 6 billion being allocated for various residential projects. At an initial cost of around USD 87.8 billion, the country is pursuing an ambitious ‘super project’ that aims to build six ‘Economic Cities’, which will be home to 2.5 million residents. According to the Saudi Arabian General Investment Authority (SAGIA), the new cities will contribute USD 150 billion to the country’s GDP by 2020. They are also expected to provide job opportunities to 1.3 million people and increase the per capita GDP to SAR 125,625 for those living in the cities. Demand for housing in Saudi Arabia is driven by the young and growing population seeking affordable homes instead of luxurious villas and penthouses. Nearly 60% of its people cannot afford own homes due to higher prices of property resulting in huge demand-supply gap. Therefore, affordable housing represents a big untapped market in Saudi Arabia for developers and investors as the demand for housing is likely to pickup. According to CB Richard Ellis (CBRE), in Saudi Arabia, many cities witnessed reverse migration as a large number of people departed from urbanized central areas owing to spiralling prices. It also projected that the country is currently facing a shortage of around two million homes due to pent up demand, easily available finance and a move towards smaller households. Additionally, the country will also need 1.4 million additional homes in the next decade to meet the rising demand from growing population. Earlier, the country plans to build 200,000 housing units every year under the development plan for 2004-2009, but the delivery rate has been very low at less than 50%. Hence, to prevent the shortfall getting bigger, Riyadh needs to build more than 12,000 new homes every year, yet only 5,000 units are currently under construction by major developers. Therefore, total new investment in housing is expected to be around USD 180 billion over the next seven years.

Residential Performance Indicators (as of 1Q 2009)

City Average Rent

(USD per sqmt) Sales Price

(USD per sqmt) Average Rental Yield Riyadh 60 600 10.0% Makkah 48 643 8.5% Madinah 38 670 8.5% Jeddah 62 1,530 10.0% Eastern Province 72 600 12.0% Source: Colliers International

In order to ease the housing problems the Saudi government is continuously taking steps. Riyadh’s metropolitan development strategy, known as Medstar, is an attempt to create new commercial centres on the outskirts of the city. Also, in March, the authorities banned the sale of off-plan properties without the approval of a committee that comprises the Commerce Ministry, the Saudi Arabian Monetary Agency (Sama), the central bank, and the General Commission for Housing. Finally, once the mortgage law that has been approved by the Majlis al-Shura (Consultative Council) comes into existence, mid-range homes will be available to about 50% of its households. Presently, only 25% of families own their homes, and banks remain reluctant to lend in the absence of the security that would come with mortgages guaranteed by law. Last year, bank credit to the private sector was equivalent to 40.7% of GDP, which is low compared with the UAE’s 78.4% and Bahrain’s 91.5%. Meanwhile, the office market in Riyadh is expected to see 1.1 million sqmt of office space being delivered during the period 2009-2014. The already high demand due to economic activity built up over the years of high oil prices, has been further boosted by the announcement that the central bank for the GCC Monetary Union will be set-up in the King Abdullah Financial District being built in Riyadh. Moreover, according to Colliers International (CI), total office space net leasable area (NLA) delivered along the city’s core business area reached 277,550 million sqmt between 1Q08 and 1Q09. Rental rates at Riyadh’s central business district (CBD), King Fahad Road reached an annual average of USD 400 per sqmt for primary grade office and USD 226 per sqmt for secondary grade office, while its average occupancy rates until 1Q09 stood at 91% across primary and secondary CBD’s. However, as a consequence of subdued market conditions along with a total NLA of over 550,000 sqmt expected to enter the market up to 2011, average rents are anticipated to fall slightly over the short to medium-term.

Office Performance Indicators (as of 1Q 2009)

City Average Rent

(USD per sqmt) Average Sales Price

(USD per sqmt) Average Rental Yield Riyadh 314 2,920 11% Makkah 76 - - Madinah 72 - - Jeddah 265 2,520 10.5% Eastern Province 120 1,090 11% Source: Colliers International

Cumulative Retail Supply (as of 1Q 2009)

City Grade A Malls – Rent

(USD per sqmt) Grade B Malls – Rent

(USD per sqmt) Leasable Area Riyadh 540 447 636,800 sqmt by 2012 Makkah 3711 2848 530,000 sqmt by 2012 Jeddah 1333 635 NA Eastern Province 661 403 400,000 sqmt by 2010 Source: Colliers International, GLA for Riyadh and Makkah; NLA for Eastern Province While religious visitors remain the backbone of the Saudi tourism industry, the country’s tourism drive is geared toward domestic tourism. The government is investing in an ambitious infrastructure building programme and allocated nearly SAR 385 million (USD 102 million) to the tourism sector in its 2009 budget. In March 2008, it had approved USD 38 billion tourism masterplan for the Red Sea coastline, under which 19 locations would be developed. In addition, a USD 10 billion Gulf coast development at Al-Auqair, south of Dammam was also approved and Supreme Commission for Tourism (SCT) received three bids in July 2008 for a 100-square-kilometre site at Al-Auqair and is now awaiting a decision from HH King Abdullah before launching talks with the bidders. As a result of diversification of the economy there has been a rise in the number of business visitors, which has inevitably led to the rise in demand and subsequent growth of the country’s hospitality sector. As per CI, corporate tourism represented approximately 35% of the total visitor base in the capital city, Riyadh last year, whereas travelling for shopping or other leisure related activities constituted 25%. With a total of 82 hotels and 8,000 rooms, Riyadh accounts for 7.7% of total supply in Saudi Arabia, translating into a moderately sized but highly profitable hospitality sector. Riyadh is considered second only to Abu Dhabi in reported Gross Operating Profit per Available Room (GOPPAR) revenue in the MENA region.

Local government undertakes various measures to ease housing problems Office market to get a boost with proposed establishment of the central bank for the GCC Monetary Union in Riyadh Efforts focused to strengthen the domestic tourism

An increase in religious tourism continues to drive Saudi Arabia’s real estate growth. According to official figures, last year nearly 1.73 million foreign pilgrims performed Hajj in addition to approximately 750,000 Saudi pilgrims. These pilgrims visiting the holy cities of Makkah and Medina to perform Umrah and Hajj are expected to reach 8 million by next year. With return on investment almost guaranteed, coupled with higher room rates at hotels which overlook the Haram Mosque and the Kaaba, massive developments surrounding the holy sites, the property market is now attracting timeshare and end users and professional investors. Apart from this, statistics reveal that last year 1.5 million pilgrims arrived by air, 131,000 by land, and nearly 23,000 by sea. Therefore, the demand for infrastructure (roads, airports, port upgrades as well as hospitals and clinics) is also immense and holds tremendous opportunities especially for public-private partnerships. Over the coming years, surroundings of the Grand Mosque in Makkah will witness one of the biggest property developments in the Gulf region including five-star hotels, 4,500 shops, a central transport station, prayer facilities for more than 200,000 worshippers and parking for 12,000 vehicles. Government’s focus on providing other basic amenities to the citizens is expected to further enhance the country’s infrastructural developments. Saudi Arabia’s transport sector is one of the key areas being revamped with plans to develop a national and regional rail network. In February 2009, the largest contract was awarded for the construction of the Haramain high-speed railway linking Makkah and Medina via Jeddah to Al-Rajhi Construction Group (RCG), France’s Alstom and China’s Railway Engineering (RE). It was announced in April that the freight line of the 1,200 km North-South Railway, which will link the northern mineral belt with Riyadh and Jubail, will be ready during 2010. Recently, the Transport Ministry announced inviting companies to bid for 100 new road contracts ranging between SAR 20 million and SAR 700 million. Meanwhile, major emphasis was laid on the continuing modernisation of education in the country in this year’s budget by allocating around SAR 122 billion for spending on education and manpower development. The education ministry currently undertaking a huge scheme to provide new schools for 1.7 million pupils, revealed plans to build around 3,500 schools of different sizes across the country at a total cost of SAR 20 billion. For this, it signed a SAR 2 billion (USD 533 million) contract with the the China Railway Construction Corp. (CRCC) to build 200 schools across the country. Riyadh-based Al-Rashid Trading & Contracting Co. was awarded a SAR 1.6 billion contract to build residences for academic staff at King Saud University in Riyadh in January this year and Saudi Bin-ladin Group was granted an SAR 8 billion contract for the construction of housing facilities at a new women’s college at the university. In addition to these awards, as part of Riyadh’s plans to build 1,500 schools and rehabilitate 2,000 existing educational facilities, a significant number of tenders were issued in January, focusing mainly on housing facilities for educational establishments throughout the country. As a result of global meltdown, several international banks have withdrawn from financing the multi-billion dollar projects. Though local banks are in better shape than their foreign counterparts, they do not have the capacity to fund multi-billion-dollar projects. Consequently, the government is playing an active role supporting the progress of the country’s developmental programme and ensuring work to continue uninterrupted on several mega development projects. So far, the government has extended financing worth more than SAR 11 billion to offset a marked decline in the volume of financing from the banking sector. The government financing is being extended mainly through the Public Investment Fund (PIF), which extended support to several vital projects in the power, petrochemical and transport sectors, especially the railways. The government’s intervention to save several mega projects reflects its determination and keenness to implement and complete these projects on schedule, thereby displaying its strength and potential to support the economy. Further, with a population of 25 million people growing at 2.5% annually, Saudi Arabia is set to double its population in 28 years. In addition, 40% of Saudi nationals are under the age of 20 and 70% under 30, and over 65% of families currently do not own a home. Such statistics reflects the country’s potential market for further expansion and huge demand in the coming years. Vast under-supply of housing, notably in the middle income sector will continue to drive demand in the local market, and Jeddah and Riyadh offer the most potential with the new economic cities starting to hit the market towards the end of the year.

Rapid developments in religious tourism throw tremendous opportunities Revamping transport sector, besides laying emphasis on modernizing of education system Government financing providing impetus to complete several mega projects amid prevailing economic turbulence Growing young population to drive growth of the sector over the coming years

Total income increased 14% in 2008 EPS rose to SAR 2.18 from SAR 1.86

Despite international markets reeling under financial crisis, development and investment in Saudi Arabia’s real estate sector is expected to remain strong. Recently, Jeddah released a 20-year vision as its official plan to guide the future expansion of the city including construction of new urban infrastructure, redevelopment and regeneration of older inner city neighbourhoods, upgrading the Corniche area to provide improved amenities and attract luxury residential development and gradual resettlement of almost 900,000 people from ‘unplanned settlements’ to affordable housing. On the other hand, Riyadh, the biggest city in the GCC, is witnessing development of more residential accommodation, besides increasing demand for hotels and commercial properties are on a rise in the city. Most of the projects in the country are scheduled to be completed by 2011. Finally, the country is embarking on much-needed reforms and is introducing new laws and formulating a regulatory framework to ensure that its real-estate sector growth is healthy and viable. Apart from the proposed mortgage law, certain important new set of laws will regulate developers of housing. The new rules require developers to be registered with the Ministry of Commerce and create escrow accounts for off-plan sales, based on a model of regulation similar to those developed during the past two years in Dubai. It is also expected to create more qualified real estate developers and require them to make available financial records in order to ensure they are of good financial standing. Financial Performance – FY 2008 Revenue Dar Al-Arkan total sales rose 13.9% to SAR 5,610.77 million compared to SAR 4,925.93 million in FY07. The increase is mainly due to a 28% increase in land revenue, partially offset by a reduction in revenues from the sale of residential properties. Revenues from the sale of residential properties stood at SAR 990.4 million in 2008, decrease of 25% from SAR 1,321.2 million in 2007, mainly due to the lower number of units sold in 2008, which stood at 1,101 units as against 1,220 units sold in 2007. In addition, with a shift in focus to lower middle income group, the company witnessed a decline in average unit price to SAR 823,500 in 2008 compared to SAR 1,082,900 in 2007. Revenues from the sale of land increased to SAR 4,620.4 million compared to SAR 3,604.8 million in 2007 as the company sold 7.6 million sqmts in 2008 as against 4.3 million sqmts in 2007. Expenses The company’s CoS rose 9.8% to SAR 2,765.59 million compared to SAR 2,517.93 million in 2007. However, as a percentage of revenue, it fell 182 bps to 49.3% compared to 51.1% in 2007, due to the higher profit margin generated by the sale of land in 2008. Marketing & distribution expenses soared 34.8% to SAR 52.68 million and general & administrative expenses increased 121.5% to SAR 96.96 million, attributable to increased promotion and advertising costs related to new projects, as well as higher payroll-related costs. Financing charges decreased to SAR 244.63 million from SAR 278.08 million, due to the company’s new policy to directly capitalise interest related to the construction of project-related expenses. Profitability The company’s gross profit increased 18.2% to SAR 2,845.18 million, due to higher sales. Gross margin expanded to 50.7% from 48.9% in 2007. Operating expenses increased 11.7%; however as percentage of revenue it fell to 52.9% from 53.9% in 2007. Further, the company’s profit from operations rose 16.5%. Net profit increased 17.3% to SAR 2,356.25 million from SAR 2,008.57 million in 2007, while net profit margin expanded 122 bps to 42.0% in 2008 from 40.8% a year ago. Adjusted EPS rose to SAR 2.18 from SAR 1.86 in 2007. Subsequently, RoAE increased from 18.6% to 20.7%; conversely RoAA fell from 13.4% to 12.2% on higher asset base.

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Revenues (SAR million)

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Net Profit (SAR million)

EBIT and EBIDTA Margin

30%

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56%

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2006 2007 2008 1H08 1H09

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18%

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2006 2007 2008 1H08 1H09

Return on Average Equity (RoAE)

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16%

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2006 2007 2008 1H08 1H09

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Shareholders' Equity (SAR million)

Chart Gallery

Size of the Company The salient features of the balance sheet are:

Dar Al-Arkan’s total assets increased 21.2% to SAR 22,097.94 million in 1H09 from SAR 18,229.08 million in 1H08, led by an increase in short-term properties, investment assets and investment in associates.

The share of current assets in the total assets base increased to 25.2% in 1H09 from 23.3% in the

previous year, led by a rise in short-term properties and accounts receivables. Short-term properties, which accounted for 11.7% of the total assets base (0.7% in 1H08) increased to SAR 2,576.95 million compared to SAR 120.60 million. Accounts receivables spiked 88.4% YoY to SAR 763.94 million in 1H09. On the other hand, properties under development decreased 52.9% to SAR 692.55 million from SAR 1,470.26 million in the period year ago. Cash and cash equivalents declined 54.5% to SAR 460.22 million taking its share in total assets to 2.1% (5.6% in 1H08). Prepayments and other receivables decreased 10.2% to SAR 1,034.36 million from 1,151.69 million in 1H08.

The share of non-current assets in the total assets decreased to 74.8% in 1H09 from 76.7% in

1H08. Projects under development increased 11.0% to SAR 7,834.59 million from SAR 7,058.92 million during the comparable period of last year. Investment properties under construction rose 26.4% to SAR 3,683.39 million, while its share in total assets was 16.7% in 1H09 (16.0% in 1H08). Investment assets rose to SAR 1,375.26 million from SAR 416.46 million in 1H08. However, property, plant & equipment (PPE) decreased 14.1% to SAR 111.07 million and properties (long-term) fell 29.2% to SAR 2,256.19 million a year ago.

The company’s current liabilities spiked 144.0% to SAR 4,152.17 million with its share in total

assets rising from 9.3% in 1H08 to 18.8% in 1H09. This was led by fresh issuance of sukuks worth SAR 2,250 million over a short horizon and a 32.2% rise in accrued expenses to SAR 739.29 million compared to SAR 559.39 million in 1H08.

During 1H09, non-current liabilities decreased 14.0% to SAR 5,166.49 million with its share in

total assets falling to 23.4% from 33.0% in 1H08. While long-term loan declined 25.0% to SAR 4,500 million, Islamic Murabaha witnessed a fresh issuance at SAR 657.20 million in 1H09.

Shareholders’ equity increased 21.5% to SAR 12,779.28 million due to 33.3% increase in share

capital and 11.0% increase in legal reserves. Share capital stood at SAR 7,200 million, up from SAR 5,400 million in 1H08. Adjusted book value per share (BVPS) rose to SAR 10.87 compared to SAR 10.19 in 1H08. Further, shareholders’ equity to total asset ratio fell to 0.58 in 1H09 compared to 0.60 in the previous year.

Financial Performance Analysis – 1H 2009 For the six months ended June 2009, Dar Al-Arkan reported a 2.3% decrease in revenue to SAR 2,720.08 million as against SAR 2,784.52 million in the same period of the last year. More than reflection of a weak top-line performance in 1H09, this decline exhibits higher sale of residential units in the corresponding period of last year as the company exited a completed project in Makkah city. The company also witnessed a 9.7% increase in CoS during first half of 2009. Relative to revenue, CoS rose 603 bps to 54.9% in 1H09 compared to 48.9% in 1H08. Consequently, gross profit fell 13.9% to SAR 1,225.66 million compared to SAR 1,422.73 million in the same period of the last year. Gross profit margin also decreased to 45.1% in 1H09 compared to 51.1% in 1H08. Administrative & marketing expenses rose 2.5% to SAR 63.71 million during the first half of 2009. The company’s operating profit decreased to SAR 1,142.42 million, down 14.2% from SAR 1,330.91 million in 1H08. Total finance expenses amounted to SAR 78.61 million from SAR 202.06 million in 1H08. Subsequently, net profit declined 8.6% to SAR 1,042.78 million and margin stood at 38.3% compared to 41.0% in 1H08. Annualised EPS fell to SAR 1.93 per share from SAR 2.11 per share. However, RoAA fell from 12.5% to 9.9%, on lower profits, while RoAE dropped from 21.2% to 17.0%.

Total assets increased 21% to SAR 22,098 million Revenue decreased 2% in first half of 2009

Peer Comparison In order to do a peer comparison, we have taken comparable companies as Barwa Real Estate Company (BERC), Sorouh Real Estate Company (SREC), and Dar Al-Arkan (ALARKAN).

BREC SREC ALARKAN 2008 1H09 2008 1H09 2008 1H09 Ratios: Total Assets Turnover Ratio (x) 0.04 0.02* 0.31 0.38* 0.49 0.44* EBITDA Margin 42.4% -156.1% 44.9% 13.7% 48.0% 42.7% Net Profit Margin 34.9% 219.5% 49.9% 20.8% 42.0% 38.3% RoAE 6.8% 16.3%* 35.7% 12.8%* 20.7% 17.0%* RoAA 1.4% 2.9%* 15.4% 4.5%* 12.2% 9.9%* Market Indicators: Adj. EPS (USD) 0.32 0.78* 1.93 0.57* 0.58* 0.51* P/E (x) 27.68 11.46 4.66 15.80 7.31 8.26 Adj. BVPS (USD) 4.65 4.96 6.17 6.04 2.90 3.16 P/BV (x) 1.93 1.81 1.45 1.49 1.47 1.35 Current Market Capitalisation (USD Million) 2,356 2,356 1,932 1,932 4,591 4,591 (USD Millions) Sales 244 47 1,014 358 1495 725 % YoY change 77.6 -67.9 60.4 -22.4 13.8 -2.4 EBITDA 104 -73 455 49 718 310 % YoY change 19.5 NA 55.1 -78.8 16.4 -14.7 Net Profit 85 103 506 75 628 278 % YoY change -6.9 34.3 47.8 -73.9 17.2 -8.7 Total Assets 6,677 7,554 4,612 4,508 5374 5893 % YoY change 30.2 13.6 134.6 50.0 9.7 21.1 Shareholders' Equity 1,220 1,302 1,620 1,586 3128 3408 % YoY change -4.5 0.5 33.3 12.5 6.6 21.3

Source: Zawya, Dar Al-Arkan

Aggressive growth plans despite slowdown

New Projects and Strategies In order to tap the growing potential of the Saudi’s growing population and housing shortage, the company approved to double its capital to SAR 10.80 billion in two tranches issuing bonus shares to help fund expansion. The first issue closed in October 2008 and the other closed in July 2009. The capital hike was funded from reserves and retained profits. The government is spending huge amounts on infrastructure and the company wants to tap the growing opportunities in the region. Dar Al-Arkan is transforming the slum areas of Jeddah into high-rise buildings. The project, which includes 15 million sqmts of residential units, luxury hotels and shopping malls, will be completed over the next five years and is estimated to cost up to SAR 50 billion. SWOT Analysis

Risks and Concerns:

The dearth of liquidity may curtail/postpone the country’s infrastructure expansion plans. The slow economic growth has indeed negatively impacted the demand across the real estate and construction sectors. Going forward, if the economic growth remains weak, companies engaged in real estate activities might face restrained bottom-line growth.

Companies engaged in the tourism and aviation sector might also feel the heat of a prolonged economic downturn as lower disposable income leads to reduced level of activity in the sector.

Exposure to investment in securities and financial instruments in a weak financial market pose liquidity risks.

THREATS

Real estate projects might face delay or postponement following tight liquidity condition Investments might face increased losses and impairments if the negative trend in the financial markets continues

OPPORTUNITIES

Focus on diversifying towards a non-oil economy to provide opportunities of investments Government’s initiatives to inject liquidity in the economy to act as catalyst for growth

WEAKNESS

Declining sales may affect profitability Operations are restricted only to Saudi Arabia

STRENGTHS

Diversified revenue stream with presence across property management and building projects Huge brand recognition Well established player in the market

Valuation Methodology: We have used DCF valuation method to arrive at the fair value of Dar Al-Arkan, as discussed below: Assumptions:

(i) Risk free Rate (Rf) of 3.23%, equivalent to 12-months average yield on 10 year US T-bill.

(ii) Unlevered Beta of 1.02 (iii) A terminal growth rate of 2.0%

Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 10.46% and a WACC of 8.07%.

Cost of Equity: 10.46% WACC: 8.07%

DCF Calculations DCF Valuation (FCFF Model)

(in SAR ’000) 2009E 2010E 2011E 2012E 2013E Operating Profit (EBIT) 1,446,262 2,936,245 3,209,316 3,459,090 3,762,492 Income Tax 36,160 73,414 80,241 86,486 94,072 Effective Tax Rate 2.5% 2.5% 2.5% 2.5% 2.5% NOPAT 1,410,102 2,862,832 3,129,074 3,372,604 3,668,420 Add: Depreciation and Amortisation 51,933 55,780 59,157 62,080 65,497 Less: Capex 862,213 2,411,261 1,649,234 1,573,508 1,803,014 Less: Change in Net Working Capital -341,918 255,087 124,004 133,339 152,522 Operating Free Cash Flows to Firm (OFCFF) 941,740 252,264 1,414,994 1,727,838 1,778,380 Non-Operating Income 2,810 9,394 12,527 15,969 19,996 Tax on Non-Operating Income 70 235 313 399 500 Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 2,740 9,159 12,214 15,570 19,496 Free Cash Flow to Firm (FCFF) 944,480 261,423 1,427,208 1,743,408 1,797,876 WACC (Ko) 8.07% 8.07% 8.07% 8.07% 8.07% Present Value / Discount Factor @ 0.9619 0.8901 0.8236 0.7621 0.7052 Long-Term Growth Rate (g) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] 16.80 Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 30,204,799 Present Value of Free Cash Flows 908,526 232,690 1,175,469 1,328,655 1,267,834

Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 4,913,174 Terminal Value: Residual Cash Flow (FCFF of 2013E) 1,797,876 WACC 8.07% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 6.07% Equals Nominal Terminal Value 30,204,799 Implied Multiple of 2013E EBITDA 7.89 Times PV/Discount Factor 0.71 Present Value of Terminal/Residual Value 21,299,957 Enterprise Value 26,213,131 Implied Multiple of 2013E EBITDA 6.85 Less: Market Value of Long-term Debts 8,307,195 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 17,905,936 Net shares outstanding (’000) 1,080,000 Fair Value Per Share (SAR) 16.58

* figures in SAR ’000 unless specified Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes.

Sensitivity Analysis of Nominal Terminal Value (SAR ’000)

Discount Factor

Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00%

6.07% 35,806,273 39,919,316 45,042,603 51,600,451 60,293,481 7.07% 29,908,674 32,754,184 36,160,791 40,312,609 45,484,198 8.07% 25,679,106 27,769,777 30,204,799 33,076,885 36,515,308 9.07% 22,497,585 24,102,023 25,933,354 28,043,371 30,500,925

10.07% 20,017,509 21,290,088 21,290,088 24,339,481 26,187,603

Sensitivity Analysis of Discounted Terminal Value (SAR ’000) Discount

Factor Long-Term Growth Rate

1.00% 1.50% 2.00% 2.50% 3.00% 6.07% 27,464,270 30,619,072 34,548,756 39,578,783 46,246,545 7.07% 21,992,154 24,084,486 26,589,400 29,642,274 33,444,996 8.07% 18,108,507 19,582,816 21,299,957 23,325,307 25,750,030 9.07% 15,220,824 16,306,312 17,545,306 18,972,845 20,635,513

10.07% 12,997,986 13,824,311 14,753,013 15,804,376 17,004,418

Sensitivity Analysis of Enterprise Value (SAR ’000) Discount

Factor Long-Term Growth Rate

1.00% 1.50% 2.00% 2.50% 3.00% 6.07% 32,649,725 35,804,527 39,734,211 44,764,238 51,432,000 7.07% 27,038,570 29,130,903 31,635,816 34,688,690 38,491,412 8.07% 23,021,682 24,495,991 26,213,131 28,238,481 30,663,204 9.07% 20,006,249 21,091,738 22,330,732 23,758,271 25,420,938

10.07% 17,660,873 18,487,197 19,415,900 20,467,263 21,667,305 Investment Opinion The world economies are witnessing an economic slowdown. However, the MENA region is likely to be relatively less affected by the financial crisis by timely government support to the public sector. The regional real estate sector witnessed an unprecedented expansion over the past years on healthy economic growth, higher disposable incomes, rising share of affluent population. Among the GCC countries, Saudi Arabia with a population of 25 million people growing at 2.5% annually, the population is set to double in 28 years. In addition, 40% of Saudi nationals are under the age of 20 and 70% under 30, and over 65% of families currently do not own a home, thereby reflecting market potential for further expansion and huge demand in the coming years. It is projected that the country is currently facing a shortage of around two million homes due to increase in demand, easily available finance and a move towards smaller households. Additionally, the country will also need 1.4 million additional homes over the next decade to meet rising demand from growing population. Earlier, the country planned to build 200,000 housing units every year under the development plan for 2004-2009, but the delivery rate has been very low at less than 50% till now, thereby putting pressure on rentals. The country’s residential sector has been negatively impacted by reduced consumer confidence and limited credit availability. Nearly 60% of its people cannot afford their own homes due to higher prices of property resulting in huge demand-supply gap. Real estate developers are facing major challenges like lack of financing schemes that equip majority of the public with the capacity to purchase their own housing units, stringent rules on foreign ownership and the government’s current ban on real estate developers pre-selling their units prior to delivery. Amid this Dar Al-Arkan’s revenues are highly concentrated in Saudi Arabia alone, thereby increasing the country’s systematic risk. Despite the economic downturn, the company’s revenues fell a slightly by 2.3% YoY in 1H09. The company has taken various steps as it announced to capture opportunities in the market. Currently, Dar Al-Arkan stock is trading at a P/E multiple of 7.78x and 6.95x on 2009E and 2010E earnings, and at a P/B multiple of 1.23x and 1.16x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has gained 7.0% since the beginning of this year as against a rise of 19.9% by the Saudi’s Tadawul. Considering the above factors, we initiate our coverage with a price target of SAR 16.58, which exhibits a potential upside of 3.9% from its closing price of SAR 15.95 (as on August 18, 2009). Therefore, we initiate our coverage on Dar Al-Arkan with a Neutral opinion.

Fair Value: SAR 16.58 Investment Opinion: NEUTRAL

Financial Statements

Consolidated Balance Sheet (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash & Cash Equivalents 3,346,865 716,475 1,012,010 460,215 333,309 464,138 454,254 Account Receivable and Pre Paid Expenses 483,561 948,647 405,536 763,936 1,027,899 1,125,618 1,177,706 Short Term Investment 6,645 0 0 0 0 0 0 Prepayment & Other Receivables 1,382,092 1,736,635 1,151,693 1,034,362 1,787,055 2,105,748 2,283,743 Due from related parties 3,576 57,042 88,208 31,500 73,022 88,734 101,532 Project Under Development (Short Term) 2,132,092 1,148,200 1,470,263 692,549 945,549 1,106,019 1,231,316 Properties (Short Term) 551,387 120,600 120,600 2,576,945 2,576,945 2,837,576 2,944,332 Total Current Assets 7,906,219 4,727,599 4,248,310 5,559,507 6,743,781 7,727,833 8,192,884 Non-Current Assets Project Under Development (Long Term) 6,347,696 6,772,765 7,058,924 7,834,593 7,678,664 8,712,372 9,298,105 Investment in Properties Under Construction 1,295,090 3,727,480 2,915,066 3,683,391 3,984,756 4,533,399 5,067,198 Properties (Long Term) 2,234,452 2,978,237 3,185,243 2,256,192 2,718,163 3,120,431 3,410,608 Investment assets 241,690 591,238 416,464 1,375,260 1,379,843 1,567,372 1,674,033 Investment in Associates 75,000 1,120,000 177,500 1,152,400 1,363,204 1,581,383 1,733,546 Property, Plant, and Equipment 160,596 119,790 129,361 111,072 101,023 84,343 68,765 Net Deferred Expenses 113,585 126,871 98,213 125,528 139,043 153,868 165,553 Total Non-Current Assets 10,468,109 15,436,382 13,980,771 16,538,436 17,364,696 19,753,167 21,417,808 Total Assets 18,374,327 20,163,980 18,229,081 22,097,943 24,108,477 27,481,001 29,610,692 LIABILITIES AND EQUITY Liabilities Current Liabilities Islamic Sukuks - Short Term 0 0 0 2,250,000 2,250,000 2,916,566 3,447,122 Islamic Murabaha - Short Term 400,000 1,635,000 1,000,000 900,000 900,000 950,000 1,000,000 Account Payables 107,719 171,207 142,480 262,877 357,973 412,620 465,970 Accrued Expenses and others 861,882 613,387 559,388 739,293 914,191 1,036,581 1,102,108 Due to related parties 0 0 0 0 0 0 0 Total Current Liabilities 1,369,602 2,419,594 1,701,868 4,152,170 4,422,165 5,315,767 6,015,200 Non-Current Liabilities Islamic Murabaha - Long Term 0 0 0 657,195 474,908 1,340,992 947,068 Islamic Sukuks - Long Term 6,000,000 6,000,000 6,000,000 4,500,000 5,250,000 6,000,000 6,750,000 End Of Service Indemnities 4,475 7,889 6,672 9,297 11,843 14,874 17,507 Total Non-Current Liabilities 6,004,475 6,007,889 6,006,672 5,166,492 5,736,751 7,355,865 7,714,575 Total Liabilities 7,374,077 8,427,483 7,708,540 9,318,662 10,158,916 12,671,633 13,729,775 Equity Share Capital 5,400,000 7,200,000 5,400,000 7,200,000 10,800,000 10,800,000 10,800,000 Legal Reserve 3,242,254 3,600,000 3,242,254 3,600,000 586,007 962,513 1,371,168 Retained Earning 2,357,996 936,497 1,878,287 1,979,281 2,563,554 3,046,855 3,709,750 Equity attributable to equity holders 11,000,250 11,736,497 10,520,541 12,779,281 13,949,561 14,809,368 15,880,917 Total Liabilities and Equity 18,374,327 20,163,980 18,229,081 22,097,943 24,108,477 27,481,001 29,610,692

Consolidated Income Statement (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Sales 4,925,933 5,610,768 2,784,523 2,720,084 5,888,663 6,657,464 7,321,450 Cost of Goods Sold -2,517,925 -2,765,587 -1,361,794 -1,494,426 -3,067,446 -3,454,605 -3,813,794 Gross Sales 2,408,008 2,845,181 1,422,729 1,225,658 2,821,217 3,202,859 3,507,655 Marketing & Distribution Expenses -39,086 -52,675 -62,149 -63,710 -64,117 -75,817 -87,039 General & Administration Expenses -43,769 -96,957 0 0 -116,481 -135,016 -152,143 Other parties share in profits from investments -12,591 -1,221 0 0 0 0 0 Depreciation -18,441 -22,252 -11,432 -9,752 -21,607 -22,221 -23,049 Amortisation of deferred charges -24,027 -27,671 -18,235 -9,772 -30,326 -33,559 -36,108 Net Operating Profit 2,270,095 2,644,404 1,330,913 1,142,424 2,588,686 2,936,245 3,209,316 Net Islamic Murabaha Expense -6,156 -48,241 -23,564 -33,173 -78,163 -101,474 -107,114 Islamic Sukuk Expense -271,923 -196,387 -178,494 -45,433 -245,484 -300,767 -354,159 Other Income 45,149 16,894 11,436 1,966 4,776 9,394 12,527 Net Profit before Zakat/Minority interests 2,037,165 2,416,670 1,140,291 1,065,784 2,269,815 2,543,399 2,760,571 Zakat -28,591 -60,423 0 -23,000 -56,751 -63,592 -69,021 Net Profit 2,008,574 2,356,247 1,140,291 1,042,784 2,213,063 2,479,807 2,691,549

Consolidated Cash Flow Statement (in SAR ’000) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E OPERATING ACTIVITIES Net income before Zakat 2,037,165 2,416,670 1,140,291 1,065,784 2,269,815 2,543,399 2,760,571 Depreciation 18,441 22,252 11,432 9,752 21,607 22,221 23,049 Amortization for Deferred Expenses 24,027 27,671 18,235 9,772 30,326 33,559 36,108 Provisions for Doubtful Debts 378 0 0 0 0 0 0 End-of-service provision 1,524 3,581 2,295 2,063 4,777 4,148 3,887 Company's Share of profit in sister companies 0 0 0 -400 -400 0 0 (Increase) Decrease in operating assets and liabilities: Account Receivables -3,280 -465,086 84,671 184,711 -79,252 -97,719 -52,088 Pre-Paid Expenses -1,087,897 -354,543 230,399 702,273 -50,420 -318,693 -177,994 Development of lands (Short Term) 1,979,396 430,787 430,787 -250,004 -2,222,525 -349,181 -172,991 Project Under Process (Short Term) 5,803,775 983,892 683,834 455,651 202,651 -249,020 -191,532 Account Payable and other liabilities 28,010 63,488 34,761 91,669 186,766 54,646 53,351 Dealings with related parties -1,982 -53,466 0 0 0 0 0 Accrued Expenses 261,194 -284,642 -302,494 102,906 300,805 122,390 65,526 Paid End Of Service Indemnities -202 -167 -99 -654 -823 -1,117 -1,254 Zakat Paid 0 -24,277 0 0 -60,423 -56,751 -63,592 Due from related parties 0 0 -84,633 25,542 -15,980 -15,711 -12,799 Cash from operations 9,060,551 2,766,161 2,249,479 2,399,065 586,923 1,692,170 2,270,243 Investing Activities Development of Lands (Long Term) -2,234,452 -743,786 -950,792 -1,484,295 260,075 -402,268 -290,177 Project Under Process (Long Term) -6,426,369 -425,069 -711,228 -1,061,828 -905,899 -1,210,808 -718,203 Purchase of Property and Equipment -13,472 -3,472 -2,201 -1,034 -2,840 -5,541 -7,471 Investments -1,453,915 -3,798,267 -102,500 -32,000 -243,204 -218,179 -152,163 Investments in Lands under process 0 0 -1,619,976 44,088 -257,276 -637,193 -600,034 Investment properties 0 0 -174,774 -784,022 -788,605 -187,529 -106,661 Net cash used in investing activities -10,128,208 -4,970,594 -3,561,471 -3,319,091 -2,197,823 -2,259,251 -1,584,532 Financial Activities Islamic Murabaha -14,024 1,235,000 600,000 -77,805 -260,092 916,084 -343,924 Islamic Sukuk 6,000,000 0 0 750,000 1,500,000 1,416,566 1,280,556 Dividend Paid -1,620,000 -1,620,000 -1,620,000 0 0 -1,620,000 -1,620,000 Deferred Expense -135,099 -40,957 -2,863 -8,429 -12,172 -14,824 -11,685 Net cash (used in) from financing activities 4,230,877 -425,957 -1,022,863 663,766 1,227,735 697,826 -695,053 Increase/Decrease in Cash and Cash Equivalents 3,163,220 -2,630,390 -2,334,855 -256,260 -383,165 130,745 -9,343 Cash and cash equivalents beginning of the period 183645 3,346,865 3,346,865 716,475 716,475 333,309 464,055 Cash and cash equivalents end of period 3,346,865 716,475 1,012,010 460,215 333,309 464,055 454,712

Common – Size Statements

Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Current Assets Cash & Cash Equivalents 18.2% 3.6% 5.6% 2.1% 1.4% 1.7% 1.5% Account Receivable and Pre Paid Expenses 2.6% 4.7% 2.2% 3.5% 4.3% 4.1% 4.0% Short Term Investment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Expenses, Prepayment & Other Receivables 7.5% 8.6% 6.3% 4.7% 7.4% 7.7% 7.7% Due from related parties 0.0% 0.3% 0.5% 0.1% 0.3% 0.3% 0.3% Project Under Development (Short Term) 11.6% 5.7% 8.1% 3.1% 3.9% 4.0% 4.2% Properties (Short Term) 3.0% 0.6% 0.7% 11.7% 10.7% 10.3% 9.9% Total Current Assets 43.0% 23.4% 23.3% 25.2% 28.0% 28.1% 27.7% Non-Current Assets Project Under Development (Long Term) 34.5% 33.6% 38.7% 35.5% 31.9% 31.7% 31.4% Investment in Properties Under Construction 7.0% 18.5% 16.0% 16.7% 16.5% 16.5% 17.1% Properties (Long Term) 12.2% 14.8% 17.5% 10.2% 11.3% 11.4% 11.5% Investment assets 1.3% 2.9% 2.3% 6.2% 5.7% 5.7% 5.7% Investment in Associates 0.4% 5.6% 1.0% 5.2% 5.7% 5.8% 5.9% Property, Plant, and Equipment 0.9% 0.6% 0.7% 0.5% 0.4% 0.3% 0.2% Net Deffered Expenses 0.6% 0.6% 0.5% 0.6% 0.6% 0.6% 0.6% Total Non-Current Assets 57.0% 76.6% 76.7% 74.8% 72.0% 71.9% 72.3% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Islamic Sukuks - Short Term 0.0% 0.0% 0.0% 10.2% 9.3% 10.6% 11.6% Islamic Murabaha - Short Term 2.2% 8.1% 5.5% 4.1% 3.7% 3.5% 3.4% Account Payables 0.6% 0.8% 0.8% 1.2% 1.5% 1.5% 1.6% Accrued Expenses and others 4.7% 3.0% 3.1% 3.3% 3.8% 3.8% 3.7% Due to related parties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Current Liabilities 7.5% 12.0% 9.3% 18.8% 18.3% 19.3% 20.3% Non-Current Liabilities Islamic Murabaha - Long Term 0.0% 0.0% 0.0% 3.0% 2.0% 4.9% 3.2% Islamic Sukuks - Long Term 32.7% 29.8% 32.9% 20.4% 21.8% 21.8% 22.8% End Of Service Indemnities 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% Total Non-Current Liabilities 32.7% 29.8% 33.0% 23.4% 23.8% 26.8% 26.1% Total Liabilities 40.1% 41.8% 42.3% 42.2% 42.1% 46.1% 46.4% Equity Share Capital 29.4% 35.7% 29.6% 32.6% 44.8% 39.3% 36.5% Legal Reserve 17.6% 17.9% 17.8% 16.3% 2.4% 3.5% 4.6% Retained Earnings 12.8% 4.6% 10.3% 9.0% 10.6% 11.1% 12.5% Equity attributable to equity holders 59.9% 58.2% 57.7% 57.8% 57.9% 53.9% 53.6% Total Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Common-Size Consolidated Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold -51.1% -49.3% -48.9% -54.9% -52.1% -51.9% -52.1% Gross Sales 48.9% 50.7% 51.1% 45.1% 47.9% 48.1% 47.9% Marketing & Distribution Expenses -0.8% -0.9% -2.2% -2.3% -1.1% -1.1% -1.2% General & Administration Expenses -0.9% -1.7% 0.0% 0.0% -2.0% -2.0% -2.1% Other parties share in profits from investments -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Depreciation -0.4% -0.4% -0.4% -0.4% -0.4% -0.3% -0.3% Amortisation of deferred charges -0.5% -0.5% -0.7% -0.4% -0.5% -0.5% -0.5% Net Operating Profit 46.1% 47.1% 47.8% 42.0% 44.0% 44.1% 43.8% Net Islamic Murabaha Expense -0.1% -0.9% -0.8% -1.2% -1.3% -1.5% -1.5% Islamic Sukuk Expense -5.5% -3.5% -6.4% -1.7% -4.2% -4.5% -4.8% Other Income 0.9% 0.3% 0.4% 0.1% 0.1% 0.1% 0.2% Net Profit before Zakat/Minority interests 41.4% 43.1% 41.0% 39.2% 38.5% 38.2% 37.7% Zakat -0.6% -1.1% 0.0% -0.8% -1.0% -1.0% -0.9% Net Profit 40.8% 42.0% 41.0% 38.3% 37.6% 37.2% 36.8%

Financial Ratios

2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Liquidity Ratios: Current Ratio (x) 5.77 1.95 2.50 1.34 1.52 1.45 1.36 Quick Ratio (x) 5.77 1.95 2.50 1.34 1.52 1.45 1.36 Average Collection Period (Days) 36 47 29 57 61 59 57 Length of Operating Cycle (Days) 36 47 29 57 61 59 57 Average Payment Period (Days) 14 18 17 27 31 41 42 Length of Cash Cycle (Days) 22 28 12 31 30 18 15 Activity Ratios: Debtors Turnover Ratio (x) 10.22 7.84 12.53* 6.35* 5.96 6.18 6.36 Creditors' Turnover Ratio (x) 26.87 19.83 21.77* 13.77* 11.59 8.97 8.68 Total Assets Turnover Ratio (x) 0.33 0.29 0.30* 0.26* 0.27 0.26 0.26 Equity Turnover Ratio (x) 0.46 0.49 0.52* 0.44* 0.46 0.46 0.48 Profitability Ratios: Gross Profit Margin (GPM) 48.9% 50.7% 51.1% 45.1% 47.9% 48.1% 47.9% EBITDA Margin 46.9% 48.0% 48.9% 42.7% 44.8% 44.9% 44.6% Operating Profit Margin (OPM) 46.1% 47.1% 47.8% 42.0% 44.0% 44.1% 43.8% Net Profit Margin (NPM) 40.8% 42.0% 41.0% 38.3% 37.6% 37.2% 36.8% Return on Average Equity (RoAE) 18.6% 20.7% 21.2%* 17.0%* 17.2% 17.2% 17.5% Return on Average Assets (RoAA) 13.4% 12.2% 12.5%* 9.9%* 10.0% 9.6% 9.4% Leverage Ratios: Debt to Equity (D/E) Ratio (x) 0.58 0.65 0.67 0.65 0.64 0.76 0.76 Shareholders' Equity to Total Assets Ratio (x) 0.60 0.58 0.58 0.58 0.58 0.54 0.54 Total Liabilities to Total Assets Ratio (x) 0.40 0.42 0.42 0.42 0.42 0.46 0.46 Current Liabilities to Equity Ratio (x) 0.12 0.21 0.16 0.32 0.32 0.36 0.38 Growth Rates: % YoY Growth in Revenue 13.2 13.9 NA -2.3 5.0 13.1 10.0 % YoY Growth in Operating Profit 10.7 16.5 NA -14.2 -2.1 13.4 9.3 % YoY Growth in EBITDA 11.8 16.5 NA -14.6 -2.0 13.3 9.2 % YoY Growth in Net Profit 10.7 17.3 NA -8.6 -6.1 12.1 8.5 % YoY Growth in Total Assets 57.3 9.7 NA 21.2 19.6 14.0 7.7 % YoY Growth in Shareholders' Equity 3.7 6.7 NA 21.5 18.9 6.2 7.2 Ratios used for Valuation: Adj. EPS (SAR) 1.86 2.18 2.11* 1.93* 2.05 2.30 2.49 Adj. BVPS (SAR) 10.19 10.87 9.74 11.83 12.92 13.71 14.70 P/E Ratio (x) 8.58 7.31 7.55 8.26 7.78 6.95 6.40 P/BV Ratio (x) 1.57 1.47 1.64 1.35 1.23 1.16 1.08 Current Market Price (SAR) 15.95 15.95 15.95 15.95 15.95 15.95 15.95

* Annualised

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