Saudi Ceramics Company
Saudi Ceramics Company 3Q2015 – First Look
Buy
12-Month Target Price SAR 105
3Q Off-Radar
October 20, 2015 Expected Total Return Price as of Oct 19, 2015
SAR 62.50
Upside to Target Price
68.0%
Expected Dividend Yield
4.0%
Expected Total Return
72.0%
Market Data SAR 105.44/56.90
52-Week H/L Market Capitalization
SAR 3,125 mln
Enterprise Value
SAR 3,880 mln
Shares Outstanding
50.0 mln
Free Float
72.0%
12-Month ADTV (000’s)
283.8
TASI Weight
0.81%
Reuters Code
2040.SE
Bloomberg Symbol
SCERCO AB
1-Year Price Performance 120 110 100
Saudi Ceramics Company (SCC) reported preliminary 3Q2015 results on Oct-19 with an EPS of SAR 1.25 (-21% Y/Y and -23% Q/Q) missing our estimate of SAR 1.44 and consensus of SAR 23.1. Earnings missed our expectations by -12% as the impact of a weak demand and down cycle in building material prices affected growth. We await more clarity and will take a closer look once we receive the filings. Despite the short term issues, SCC continues to be a consistent growth story with its command of 20% market share in KSA tiles industry supported by a lucrative domestic housing market. Though government spending concerns are in place, prioritized spending on social sectors is prevalent aiding long term demand. The stock currently trades at 2016E P/E of 9.3x cheaper to nearest comparable, Al Anwar Ceramic’s (Oman) P/E of 11.5x and lower to TASI P/E of 15.0x. We continue to recommend Buy and maintain our target price of SAR 105 offering an upside of +68%. Topline pressure on weak demand Revenues are yet to be reported but the preliminary announcement indicates revenues were lower than SAR 386 million in 3Q2014. We believe lower volume sales due to impact of Ramadan and pressure on ceramic realization, could result in a lower revenue growth. Additionally, the impact of Yuan devaluation and stiff competition from European producers would have led to higher price competition. However, a clearer view should emerge in the coming quarters. Seasonal 3Q impact on profitability Gross profit of SAR 105 million missed our estimate of SAR 134 million, declining by -5% Y/Y and -23% sequentially. However, the trend reversed in operating profit which grew by +19% Y/Y but declined by -22% Q/Q to SAR 67 million. Net income came in weak at SAR 63 million in 3Q2015 versus SAR 78 million during 3Q2014; it includes one-off investment gain of SAR 26 million. Net income declined by -21% Y/Y and -23% sequentially but adjusting one-off income, earnings have witnessed growth of +20% Y/Y.
90
Capex, DPS and valuation upside drives Buy rating SCC’s planned expansion projects including sanitary ware, water heater and red bricks are due for completion by end of 4Q2015. However, there appears a concern on fuel allocation especially with red bricks projects though not largely. We believe stock prices have not witnessed any large revival since the market meltdown and believe bearish valuation trends persist. We believe this to be irrational for a stable business model, hence expect market rerating on the stock gradually. Maintain Buy due to large upside of +68% and yields 4.0%.
80 70 60 50
O
N
D
J
F
M
SCC
A
M
J
J
TASI
A
S
TBMCI
Source: Bloomberg
Oct-19-2015
SCC
TASI
62.50
9,765
TBMCI 2,738
Total Change
Key Financials FY December 31 (SAR mln)
2014A
2015E
2016E
2017E 1,825
Revenue
1,621
1,701
1,775
6-months
(28.5)%
(19.0)%
(27.5)%
EBITDA
441
465
485
501
1-Year
(40.8)%
(21.4)%
(36.3)%
Net Profit
310
316
335
350
2-Year
(29.0)%
(2.7)%
(21.0)%
EPS (SAR)
6.20
6.32
6.70
7.00
DPS (SAR)
2.00
2.50
3.00
3.00
BVPS (SAR) 3Q2015
30.43
34.32
39.60
44.81
ROAA
11%
10%
10%
10%
ROAE
19%
17%
16%
15%
(SAR mln)
Actual
RC Forecast
Gross Profit
105
134
P/E
10.1x
9.9x
9.3x
8.9x
Operating Income
67
87
P/B
2.1x
1.8x
1.6x
1.4x
P/S
1.9x
1.8x
1.8x
1.7x
EV/ EBITDA
8.8x
8.3x
8.0x
7.7x
EV/ Sales
2.4x
2.3x
2.2x
2.1x
Net Income
63
72
EPS (SAR)
1.25
1.44
Santhosh Balakrishnan
Ahmed Al Fozan
[email protected] +966-11-203-6809
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Market 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 105
3Q Off-Radar
October 20, 2015 Expected Total Return Price as of Oct 19, 2015
SAR 62.50
Upside to Target Price
68.0%
Expected Dividend Yield
4.0%
Expected Total Return
72.0%
Market Data SAR 105.44/56.90
52-Week H/L Market Capitalization
SAR 3,125 mln
Enterprise Value
SAR 3,880 mln
Shares Outstanding
50.0 mln
Free Float
72.0%
12-Month ADTV (000’s)
283.8
TASI Weight
0.81%
Reuters Code
2040.SE
Bloomberg Symbol
SCERCO AB
1-Year Price Performance 120 110 100
Saudi Ceramics Company (SCC) reported preliminary 3Q2015 results on Oct-19 with an EPS of SAR 1.25 (-21% Y/Y and -23% Q/Q) missing our estimate of SAR 1.44 and consensus of SAR 23.1. Earnings missed our expectations by -12% as the impact of a weak demand and down cycle in building material prices affected growth. We await more clarity and will take a closer look once we receive the filings. Despite the short term issues, SCC continues to be a consistent growth story with its command of 20% market share in KSA tiles industry supported by a lucrative domestic housing market. Though government spending concerns are in place, prioritized spending on social sectors is prevalent aiding long term demand. The stock currently trades at 2016E P/E of 9.3x cheaper to nearest comparable, Al Anwar Ceramic’s (Oman) P/E of 11.5x and lower to TASI P/E of 15.0x. We continue to recommend Buy and maintain our target price of SAR 105 offering an upside of +68%. Topline pressure on weak demand Revenues are yet to be reported but the preliminary announcement indicates revenues were lower than SAR 386 million in 3Q2014. We believe lower volume sales due to impact of Ramadan and pressure on ceramic realization, could result in a lower revenue growth. Additionally, the impact of Yuan devaluation and stiff competition from European producers would have led to higher price competition. However, a clearer view should emerge in the coming quarters. Seasonal 3Q impact on profitability Gross profit of SAR 105 million missed our estimate of SAR 134 million, declining by -5% Y/Y and -23% sequentially. However, the trend reversed in operating profit which grew by +19% Y/Y but declined by -22% Q/Q to SAR 67 million. Net income came in weak at SAR 63 million in 3Q2015 versus SAR 78 million during 3Q2014; it includes one-off investment gain of SAR 26 million. Net income declined by -21% Y/Y and -23% sequentially but adjusting one-off income, earnings have witnessed growth of +20% Y/Y.
90
Capex, DPS and valuation upside drives Buy rating SCC’s planned expansion projects including sanitary ware, water heater and red bricks are due for completion by end of 4Q2015. However, there appears a concern on fuel allocation especially with red bricks projects though not largely. We believe stock prices have not witnessed any large revival since the market meltdown and believe bearish valuation trends persist. We believe this to be irrational for a stable business model, hence expect market rerating on the stock gradually. Maintain Buy due to large upside of +68% and yields 4.0%.
80 70 60 50
O
N
D
J
F
M
SCC
A
M
J
J
TASI
A
S
TBMCI
Source: Bloomberg
Oct-19-2015
SCC
TASI
62.50
9,765
TBMCI 2,738
Total Change
Key Financials FY December 31 (SAR mln)
2014A
2015E
2016E
2017E 1,825
Revenue
1,621
1,701
1,775
6-months
(28.5)%
(19.0)%
(27.5)%
EBITDA
441
465
485
501
1-Year
(40.8)%
(21.4)%
(36.3)%
Net Profit
310
316
335
350
2-Year
(29.0)%
(2.7)%
(21.0)%
EPS (SAR)
6.20
6.32
6.70
7.00
DPS (SAR)
2.00
2.50
3.00
3.00
BVPS (SAR) 3Q2015
30.43
34.32
39.60
44.81
ROAA
11%
10%
10%
10%
ROAE
19%
17%
16%
15%
(SAR mln)
Actual
RC Forecast
Gross Profit
105
134
P/E
10.1x
9.9x
9.3x
8.9x
Operating Income
67
87
P/B
2.1x
1.8x
1.6x
1.4x
P/S
1.9x
1.8x
1.8x
1.7x
EV/ EBITDA
8.8x
8.3x
8.0x
7.7x
EV/ Sales
2.4x
2.3x
2.2x
2.1x
Net Income
63
72
EPS (SAR)
1.25
1.44
Santhosh Balakrishnan
Ahmed Al Fozan
[email protected] +966-11-203-6809
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Market 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
