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Saudi Ceramics Co.

Source: Al Rajhi Bank

Continued success

Saudi Ceramic is the only listed ceramics company in Saudi Arabia. It has shown good growth over the last couple of years. The increase in production capacity of the ceramic tiles and water heaters segments, and the continuation of exporting activities should drive the company’s growth over the next three years. The company has high and sustainable profit margins, and a likely increasing focus on ceramic tiles should push margins higher. Therefore, we are initiating coverage of Saudi Ceramic with an overweight rating and a target price of SAR166.3. This implies upside potential of 19%.

Continuous and steady growth policy: Saudi Ceramic has projects under construction to increase the production capacity of all divisions’ sales. For the ceramic tiles division, it plans to open a fourth factory which has two stages that will increase output by 50% in 2012. A new water heaters factory has started production with 50% greater capacity than old one. Moreover, the company is working on upgrading and expanding bathroom products factory. The plan includes more automation by adding glazing robots. Therefore, taking aggressive expansion plans into account, we expect Saudi Ceramic to achieve revenue growth of 18% and 20% in 2010 and 2011 respectively.

Saudi Ceramic still offers value: Using long-run discounted economic profit valuation, we estimate fair value per share for Saudi Ceramic at SAR166.3. Our target price for Saudi Ceramic of SAR166.3 is 100% driven by the long-run DEP method. Our target price implies 19% upside from the current level. Saudi Ceramic is trading on a 2010 EV/EBITDA multiple of 11.3x, a 2010 PE ratio of 14.3x, and offering a dividend yield of 2.3%. Saudi Ceramic’s return on invested capital of 13.2% (our estimate for 2010) is 60% more than its WACC of 8.4%.

Valuation: offers good long-term value
High economic profit; growth in dividend payout ratio
Saudi Ceramic achieves a return on invested capital (ROIC) of 12.5-12.6%. We expect the company to maintain and improve its high returns, and so two-thirds of our estimated fair enterprise value for Saudi Ceramic comes from future economic profits. We estimate fair value per share at SAR166.3, and set this as our target price. Currently, Saudi Ceramic offers a dividend yield of 2.3%. The company increased the paid dividend to 30% of paid-up capital in 2009; however, we expect it to maintain the same dividend for at least three years. Our rating on Saudi Ceramic is Overweight.

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