outlook remains positive

This report follows our flash view of 19th April. Saudi Ceramics’ Q1 results were below our expectation in terms of both revenues and profits. We believe the change in product mix–concentrating on cheaper products that carry lower margins–affected revenues and ultimately profits. Gross margin was affected mainly by water heaters margin which fell by around 1.5% year on year. For the next two years, we do not expect segments’ gross margins to improve noticeably. However, the expansion in tiles segment, which bears higher margins, should support the company’s aggregate gross margin. On the back of Q1 results, we have trimmed our forecasts and consequently cut our target price by around 7 % to SAR161.6. Our new target price still implies 18 % upside potential. Therefore, we remain overweight.

Conclusion: Saudi Ceramic has a solid business model with a strong position in the local market. We continue to believe that the fourth ceramic tile plant will be the key growth driver for 2011 and 2012. However, Q1 results were below expectations and certainly not so encouraging. Therefore, we have trimmed our near term forecasts and consequently lowered our target price to SAR161.6. Our new target price implies 18% upside potential. We remain overweight.

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