Saudi Ceramics Company
Saudi Ceramics Company 1Q2016 – First Look
Buy
12-Month Target Price SAR 50.00
Ceramic Products Sales Depresses Topline
May 18, 2016 Expected Total Return Price as of May 17 , 2016
39.60 SAR
Upside to Target Price
26%
Expected Dividend Yield
5%
Expected Total Return
31%
Market Data 52 Week H/L
SAR 88.0/32.3
Market Capitalization
SAR 1,980 mln
Shares Outstanding
50.00mln
Free Float
72.00%
12-Month ADTV (222’s)
468.8
TASI Weight
0.23%
Reuters Code
2040.SE
Bloomberg Symbol
SCERCO AB
1-Year Price Performance
Saudi Ceramics Company announced its 1Q2016 results with an EPS of SAR 0.96 (-13% Q/Q and -43% Y/Y), below our estimate and consensus of SAR 1.47 and SAR 1.48 respectively. Depressed bottom line was a result of a number of factors, majorly lower topline (-8% Q/Q and -22% Y/Y) and lower ceramic products margins, which declined from 38% in 1Q2015 to 32% in 1Q2016. We believe that the company is facing difficult times due to lower demand and higher competition. The company is believed to be facing lower realization and pricing levels in the ceramic products segment. It is expected to face a lull phase in the short term following the slowdown in the construction sector with subsidy cuts impacting margins. With such expectations, we have revised our target price to SAR 50 from SAR 54. Despite earnings revision, Saudi Ceramics still offers a potential to recover due to expansions in the heater’s plant, which is fully utilized at present and expansions have kicked-off early in 2Q2016. The share trades at an attractive forward P/E of 10.4x versus the sector’s 13.6x, in addition to dividend yield of 5%. Hence, we maintain our Buy recommendation. Lower gross margins Through 2015, ceramic products average contribution to total revenue stood at 80%, while water heater contributed almost 20%. In 1Q2016, ceramic products contribution declined reaching 76% while water heaters contributed almost 22%. Unlike 2014 and 2015 when ceramic products margins averaged 38%, 1Q2016 witnessed a shift where ceramic products gross margins also declined reaching 32%. On the other hand, water heaters margins jumped reaching its all-time high at 34%. Declining operating margins Y/Y The company posted 15% operating margins in 1Q2016 compared to 12% and 18% Q/Q and Y/Y respectively. We believe the tighter economic conditions started to impact the company’s margins while tough competition from imported product persisted. However, we believe that as the economic conditions pick-up, the company will be able to recover, especially with 5 expansions under way.
Source: Bloomberg SCC May-11-2016
39.60
TASI
TBMCI
6,142
2,120
Total Change 6-months (25.3%) (54.7%) 1-Year (54.3%) 2-Year
(3.1%)
(13.3%)
(31.7%)
(44.9%)
(31.7%)
(52.3%)
Recommend Buy despite turbulence Although the construction sector is witnessing a slowdown, we believe that the company will be able to recover following massive expansions in existing and new segments. Stock price has fallen to its 5-year low reaching SAR 33.00 early in 1Q2016 and remained near it. Year to date, the share price has lost -13% whereas the sector lost -8% and the market lost -4%. We believe the market has priced-in most negatives. 2016E P/E for Saudi Ceramics is at 10.4x and the sector is at 13.6x (TASI at 13.8x) with an expected dividend yield of 5%, which makes the opportunity attractive. We maintain our Buy recommendation on Saudi Ceramics.
Key Financials FY December 31 (SAR mln)
1Q2016
2015A
2016E
2017E
2018E
Revenue
1,658
1,442
1,825
1,997
EBITDA
453
363
459
516
Net Profit
284
190
287
333
Actual
RC Forecast
Revenue
373
466
EPS (SAR)
5.68
3.79
5.74
6.66
Gross profit
121
161
DPS (SAR)
0022
2.00
2.00
2.25
Operating proft
55
74
BVPS (SAR)
38
39
43
48
Net profit
48
74
ROAE
15%
10%
13%
14%
0.96
1.47
P/E
6.9x
10.4x
6.9x
5.9x
P/B
1.0x
1.0x
.9x
.8x
EV/ EBITDA
6.2x
7.7x
6.1x
5.4x
(SAR mln)
EPS
Abdulaziz A. Bin Zaraah [email protected] +966-11-203-6816
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Buy
12-Month Target Price SAR 50.00
Ceramic Products Sales Depresses Topline
May 18, 2016 Expected Total Return Price as of May 17 , 2016
39.60 SAR
Upside to Target Price
26%
Expected Dividend Yield
5%
Expected Total Return
31%
Market Data 52 Week H/L
SAR 88.0/32.3
Market Capitalization
SAR 1,980 mln
Shares Outstanding
50.00mln
Free Float
72.00%
12-Month ADTV (222’s)
468.8
TASI Weight
0.23%
Reuters Code
2040.SE
Bloomberg Symbol
SCERCO AB
1-Year Price Performance
Saudi Ceramics Company announced its 1Q2016 results with an EPS of SAR 0.96 (-13% Q/Q and -43% Y/Y), below our estimate and consensus of SAR 1.47 and SAR 1.48 respectively. Depressed bottom line was a result of a number of factors, majorly lower topline (-8% Q/Q and -22% Y/Y) and lower ceramic products margins, which declined from 38% in 1Q2015 to 32% in 1Q2016. We believe that the company is facing difficult times due to lower demand and higher competition. The company is believed to be facing lower realization and pricing levels in the ceramic products segment. It is expected to face a lull phase in the short term following the slowdown in the construction sector with subsidy cuts impacting margins. With such expectations, we have revised our target price to SAR 50 from SAR 54. Despite earnings revision, Saudi Ceramics still offers a potential to recover due to expansions in the heater’s plant, which is fully utilized at present and expansions have kicked-off early in 2Q2016. The share trades at an attractive forward P/E of 10.4x versus the sector’s 13.6x, in addition to dividend yield of 5%. Hence, we maintain our Buy recommendation. Lower gross margins Through 2015, ceramic products average contribution to total revenue stood at 80%, while water heater contributed almost 20%. In 1Q2016, ceramic products contribution declined reaching 76% while water heaters contributed almost 22%. Unlike 2014 and 2015 when ceramic products margins averaged 38%, 1Q2016 witnessed a shift where ceramic products gross margins also declined reaching 32%. On the other hand, water heaters margins jumped reaching its all-time high at 34%. Declining operating margins Y/Y The company posted 15% operating margins in 1Q2016 compared to 12% and 18% Q/Q and Y/Y respectively. We believe the tighter economic conditions started to impact the company’s margins while tough competition from imported product persisted. However, we believe that as the economic conditions pick-up, the company will be able to recover, especially with 5 expansions under way.
Source: Bloomberg SCC May-11-2016
39.60
TASI
TBMCI
6,142
2,120
Total Change 6-months (25.3%) (54.7%) 1-Year (54.3%) 2-Year
(3.1%)
(13.3%)
(31.7%)
(44.9%)
(31.7%)
(52.3%)
Recommend Buy despite turbulence Although the construction sector is witnessing a slowdown, we believe that the company will be able to recover following massive expansions in existing and new segments. Stock price has fallen to its 5-year low reaching SAR 33.00 early in 1Q2016 and remained near it. Year to date, the share price has lost -13% whereas the sector lost -8% and the market lost -4%. We believe the market has priced-in most negatives. 2016E P/E for Saudi Ceramics is at 10.4x and the sector is at 13.6x (TASI at 13.8x) with an expected dividend yield of 5%, which makes the opportunity attractive. We maintain our Buy recommendation on Saudi Ceramics.
Key Financials FY December 31 (SAR mln)
1Q2016
2015A
2016E
2017E
2018E
Revenue
1,658
1,442
1,825
1,997
EBITDA
453
363
459
516
Net Profit
284
190
287
333
Actual
RC Forecast
Revenue
373
466
EPS (SAR)
5.68
3.79
5.74
6.66
Gross profit
121
161
DPS (SAR)
0022
2.00
2.00
2.25
Operating proft
55
74
BVPS (SAR)
38
39
43
48
Net profit
48
74
ROAE
15%
10%
13%
14%
0.96
1.47
P/E
6.9x
10.4x
6.9x
5.9x
P/B
1.0x
1.0x
.9x
.8x
EV/ EBITDA
6.2x
7.7x
6.1x
5.4x
(SAR mln)
EPS
Abdulaziz A. Bin Zaraah [email protected] +966-11-203-6816
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
