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Saudi Ceramics Co.

Source: Al Rajhi Bank

steady growth maintained

Saudi Ceramics announced its Q2 results with strong top and bottom lines growth. Driven by strong tile sales, revenues grew by 15% y-o-y with explicit improvements in EBITDA margin. This fed through to a 13%increase in net profit. As for Q3, due to the seasonality nature of the business (the holy month of Ramadan in Q3), we believe Q3 results will be less interesting compared to the first half of this year. On the back of strong Q2 results, we’ve marginally revised our near-term forecasts. However, we maintain our target price of SAR161.6, implying 18.8% upside potential. We remain overweight.

Ceramic products driving sales: Saudi Ceramic’s revenues grew by 15.4% y-o-y reaching SAR320.6mn, higher than our estimate of 13.7%. Ceramics segment sales grew more than 18% y-o-y while water heaters sales grew by only 4%, below our forecast of 7%. Saudi Ceramics does not disclose detailed breakdown of its segments; however, we suspect that tiles sales was the chief driver of ceramics segment’s growth. As for the third quarter of this year, which coincides with the holy month of Ramadan, we expect sales to moderate. We estimate Q3 revenues to decline by 10.9% q-o-q but to grow by 12.1% y-o-y.

Valuation and conclusion: In our view, Saudi Ceramics is well positioned to continue growing steadily. We also think that the company will expand its business channel with the government to benefit from the huge government expenditure. Q2 results were strong and supported our view on the company. While we have lowered our forecasts for water heaters segment, we have raised our estimates for ceramics segment. Nevertheless, we remain Overweight and maintain our target price of SAR161.6 which implies 18.8% upside potential. The stock is now trading on a P/E multiple of 14.2x and EV/EBITDA of 11.1. We further note that we expect Saudi Ceramics Company to increase its dividends of this year to SAR4.0 per share (2010 dividends: SAR3.5 per share).

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