Better margins boosted profits

Saudi Ceramics announced Q3 results with robust bottom line growth of 17% y-o-y but weak sales growth of 5.9%. We attribute this to weaker Ramadan and
summer season than we had expected. On the other hand, the company
announced it would double its capacity of sanitary ware plant in 2013. In our
view, this announcement coupled with ongoing expansions is encouraging and
should ensure continuous growth for the company in the medium to long term.
Finally, it is worth noting that the share price has fallen by 8% year to date
(TASI down 6% year to date) and now trades at a PE ratio of 12.2x and
EV/EBITDA of 9.6x. We remain overweight with a target price of SAR161.5.

Revenues below expectation: Q3 revenues grew by 5.9% y-o-y, below our
estimate of 14.5%. We believe that we had underestimated the impact of
Ramadan and summer holiday season. That said, we believe sales will pick up in
Q4 to grow by almost 14 % y-o-y supported by higher volumes. Although SCC
announced commencement of trial production from the second phase of the
fourth ceramic tile plant in September (Q3), we don’t expect a material impact
till Q1 2012 as it normally takes 3-4 months to start commercial production for
tile plants.

Conclusion: We think the expansion in sanitary ware is encouraging and
should ensure continuous growth for the company. Looking ahead, we expect
SCC to sustain its double digit revenue growth streak and report a 2011 revenue
growth of 12.5%. Despite the weak growth in sales, Q3 results were overall
satisfactory considering the spectacular improvements in margins; we have
accordingly revised our forecasts. We maintain our Overweight rating and target
price of SAR161.5, implying 18% upside. SCC stock trades at 2012 EV/EBITDA
multiple of 9.6x and offers a dividend yield of 3.3%.

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