Record Low Earnings



Bawan Company (Bawan) reported 2Q2017 results with earnings miss; recording a bleak quarter as sector slowdown tightens but revenue came in-line with our estimate. EPS of SAR 0.15 was significantly lower to our SAR 0.32 estimate as margin contracted severely in this quarter. We re-iterate that the subdued revenue trends were the clear differentiator; as threshold volumes sales were not achieved due to dual impact of Ramadan and slowdown in construction activity. We revise our estimates for 2017-19 and our target price to SAR 20.00 from earlier SAR 22.00 as valuations appear to be unattractive. Bawan’s current earnings trends is a mismatch to its 2017E P/E of 13.4x, which is unjustified with its 5% discount to TASI’s 14.3x and when peers trades at lower valuations. We believe a 15-20% discount is ideal with its falling earnings trends. Maintain Neutral.

Revenue in-line with estimate
Revenue of SAR 476 million in 2Q2017 came in-line with our SAR 486 million estimate, down -13% Q/Q and -26% Y/Y. An initial view suggests, volume drop was seen across as Ramadan and lower construction activity has affected Bawan and the sector as a whole. With limited segment details; our view on segment performance suggest uneven decline across SBU’s. Starting with metals segment, we believe weak demand and pricing pressure has led to steel prices (local) witnessing a -9% Y/Y and -4% Q/Q decline to SAR 2,197/ton coupled with industry’s inventory pile-up. For woods and packaging, some softening is expected, as prices have not recovered fully since 2H2016. Wood prices of SAR 2,491/M3 in 2Q2017 fell by -1% Q/Q and -5% Y/Y and in similar range to 2016 levels. We believe these concerns from its core segments overshadowed in its group revenue. However, its electric segment is expected to have stayed at 1Q levels but some decline is set to be seen in ready-mix segment.

Margins contracts further; bleak earnings
Despite in-line revenue, gross profit declined by -56% Y/Y and -23% Q/Q to SAR 53.3 million, below our estimate of SAR 60.7 million as unit costs is expected to have spiraled up due to lack of breakeven volumes. We expected margins to stay at same levels in 1Q, but came-in weak with a contraction of 140 bps to 11.1% in 2Q2017. We attribute the lower operating leverage as the dampener as direct cost stands at SAR 423 million. The fall in revenue numbers below SAR 470-480 million would have resulted in adverse impact for Bawan as cost structure continues to be high amid lower volumes sales across most segments. The decline of -74% Y/Y and -44% Q/Q in operating profit to SAR 17.2 million, was unexpected and came below our SAR 25.7 million estimate. Margins also declined to 3.6% in in 2Q2017 contracting 200 bps sequentially, proved dearer in a thin margin business. Net income of SAR 8.9 million was one of the lowest since its listing. It declined by -83% Y/Y and -59% sequentially, missing our SAR 18.9 million estimate, while seeing 200 bps fall in net margins to 1.9%.

Stock underperforms; maintain Neutral
We believe the continued weakness in the sector has resulted in Bawan, underperforming TASI by -18%. DPS at SAR 1.00 for 2017E currently offers yields of 5.8%, but not enough to convince investors for a positive call. Maintain Neutral.


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