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Micro Cap8,498 -0.25

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GFH 0.5 1,361,733
BKSB 0.14 70,617
DANA 0.62 13,288,208
DAMAC 3.85 372,716
DSI 0.39 34,049,322
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SABIC 98.09 2,208,800

Saudi Ceramics Co.

Source: Al Rajhi Bank

Simple investment case

Saudi Ceramics is one of the leading ceramic producers in the region. The company has shown double-digit revenue growth over the past few years, 2010 included. We expect substantially higher output of ceramic tiles and sanitary ware to boost revenues this year; in addition, we expect expansion in ceramic tiles to drive margins higher. We have raised our near-term forecasts and now expect sales growth of 16.5% this year. We are also positive about the long-run plan for diversification into red bricks. Our new target price of SAR174.2 implies 19% upside. We remain Overweight.

Conclusion: We see Saudi Ceramic as a high-quality company that should maintain steady growth in the future. As noted, we predict revenue growth of 16.5% in 2011 and of 12.8% in 2012. Furthermore, we expect margins to improve due to the expansion in the tiles business which has the highest margins. Consequently, we have raised our profit forecasts. While we have also raised our WACC to reflect our view that investors in the MENA region may demand a greater risk premium, our new target price of SAR174.2 (5% above our old target of SAR166.3x) still implies 19% upside. The PE ratio of 13.7x is not excessive and we expect the dividend yield to rise steadily. We remain Overweight.

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