Saudi Ceramic Company

Transcription

1 Saudi Ceramics (2040) Saudi Ceramics leading producer of Ceramic and porcelain tiles Saudi Ceramic Company is the leading manufacturer of ceramic tiles in Saudi Arabia. The company tiles product portfolio includes ceramic tiles, floor tiles, porcelain tiles. In line with its product line the company also produces sanitary ware, and ceramic road markers. The company also manufactures and sells electric water heaters. Strong product demand from the local market - Demand for construction material in Saudi Arabia is mainly led by Government projects in different sectors, as estimated value of awarded projects in the first 9 months of 2013 reached USD 67bn. Growth in the sector is supported by demographic, economic, and regulatory factors. A rising population, changing family structure and current age demographics are the main demographic factors that may have an effect on demand. Economic factors include a potential rise in household income, cost of borrowing and liquidity, and relative low home ownership. Implementation of the mortgage law, and the new structure decided by the ministry of housing to provide developed land along with a loan to build housing units are the main regulatory factors that might have an effect on demand. Diversified revenue source - The company s major revenue source is its tiles business, whereas the road markers and sanitary ware business is an extension of its tiles production facilities. The company generates 78%-80% of its revenue from Sales of Ceramic & porcelain tiles and Sanitary ware business. The rest of its revenue is generated from the sales of Electric water heaters, which contributes around 20%-22% to the top line. New business lines to further dilute revenue - The company in 2012 announced that it is looking to enter the red brick business. For that matter the company in 2012 announced plans to establish a red brick factory with a capacity of 330,000tons per annum. The company is looking to enter plastics business, which will be first used internally and the rest will be sold to the market. This we believe will help the company in reducing its cost. Price Chart Recommendation 5-D ec Jan-13 T ASI Saud i C eram ic 5-F eb Mar-13 5-A pr-13 5-May-13 5-Jun-13 5-Jul-13 5-A ug Sep-13 Overweight 12-month price target; SAR Current Price: SAR Upside / (downside): 30.13% 5-O c t Nov-13 5-D ec Source: TASI & Zawya Key information Reuters code: 2040.SE Bloomberg code: SCERCO:AB Country: Saudi Arabia Sector: Building & Construction Primary Listing: KSA exchange M-Cap: SAR4,106mn 52 Weeks H/L (SAR): /72.25 Senior Analyst Talha Nazar Analyst Jassim Al-Jubran Key financial indicators Company Snapshot (in SAR,000) e 2014 e 2015 e 2016 e Net Sales 1,221 1,447 1,515 1,711 1,829 1,884 % Growth 13% 19% 5% 13% 7% 3% Net income % Growth 5% 7% 6% 37% 8% 4% EBITDA Margins 30% 27% 27% 32% 32% 33% EBIT Margins 20% 18% 18% 22% 22% 22% Net Margins 19% 17% 17% 21% 21% 21% ROE 20% 19% 18% 21% 19% 17% ROA 10% 10% 9% 11% 11% 10% Dividend Yield 4% 3% 2% 2% 2% 2% PE (x) PB (x) EPS (diluted) Valuation We initiate our coverage on Saudi Ceramics Company with an Overweight recommendation We have used DCF for the company s valuation, Our price target of SAR144.4 gives us a potential gain of 30.13% at current market price. Risk to our valuation h Chinese Dumping: Saudi Ceramics is also facing competition from the Chinese imports, as according to the company the selling price of Chinese products is even below the cost of production h Fuel Allocation: due to the on-going efforts by the government to curb fuel usage, the company is finding it hard to get allocation for its new factories. 1

2 Valuation Discounted Cash Flow We have used the Discounted Cash Flow valuation to attain company s 12 month value. Following are the key basic steps & assumptions we have assumed to value Saudi Ceramics. 10-year forecasted cash flow, Terminal value calculation based on Gordon Growth model h Expected Terminal growth of 3% Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables h Risk free rate of 3.33% based on 10 years US bond Yield of 2.63% + country risk premium of Saudi Arabia of 0.7% h Equity Risk Premium of 9.85% h Beta of We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables h Cost of equity based on CAPM h Cost of Debt is taken as 4.08% h Contribution from equity and debt in Saudi Ceramics Capital structure is taken at 59% & 41%, respectively Using the above assumption, we arrived at DCF based value of SAR 144.4/share for the company. Valuation Table DCF Valuation table FCF Terminal Value 8,308.2 Discount Factor Present Value of FCF Present Value of Terminal Value 4,537.4 Sum of FCF 6,220.8 Net Debt (804.0) FCFE 5,416.7 Fair Value 144 Source: AlJazira Research Sensitivity of DCF WACC Growth 4.8% 5.8% 6.8% 7.8% 8.8% 2.0% % % % % Source: AlJazira Research We Initiate our coverage on Saudi Ceramics Company with a Price target of SAR 144.4/share, with an Overweight stance. 2

3 Saudi Arabia- Construction Demand Demand for construction material in Saudi Arabia is mainly led by government projects in different sectors, as estimated value of awarded projects in the first 9 months of 2013 reached USD 67bn 1. The Saudi Government s 2013 budget is currently funding construction-intensive, multibillion-riyal projects ranging from ports and roads to rail networks and communications facilities. This large influx of construction project is bound to raise demand for construction material and sustain growth in the short to medium term. The residential building sector, is expected to expand at a CAGR of 8 10% in the long term. The development in the residential housing sector is primarily led by the projects awarded by the Saudi Ministry of Housing (MOH). Contracts worth SAR 4 Billion were approved in 2013 by the Ministry of Housing providing 60,000 units of housing across different provinces, these contracts are part of the ministry s long term plan to provide 500,000 units in the long term 2. Real estate service company Jones Lang LaSalle estimates annual demand for housing to be between 150,000 and 200,000 units per year. Growth in the sector is supported by demographic, economic, and regulatory factors. A rising population, changing family structure and current age demographics are the main demographic factors that may have an effect on demand. Economic factors include a potential rise in household income, cost of borrowing and liquidity, and relative low home ownership. Implementation of the mortgage law, and the new structure decided by the ministry of housing to provide developed land along with a loan to build housing units are the main regulatory factors that might have an effect on demand. Demand is expected to remain healthy in the long term. Long term support by the government fueling direct and indirect demand for construction material is bound to keep demand at high levels at least till the end of Population of Saudi Arabia M n T o tal Po p ulatio n Saud i Po p ulatio n G ro w th R ate ( Saud i) 2. 3% 2. 3% 2. 2% 2. 2% 2. 1% 2. 1% 2. 0% 2. 0% 1. 9 % 1. 9 % 1. 8% 1. 8% Source: CDSI Estimated Construction Growth-KSA U S$ b n % o f G D P e 2013f 2014f 2015f 2016f C o nstructio n ind ustry value, U SD b n C o nstructio n ind ustry, % o f G D P Source: Delliote, Business Monitor; Note: e : estimate; f : forecast 3 1 Zawya 2 Colliers International

4 Saudi Ceramics Saudi Ceramic Company is the leading manufacturer of ceramic tiles in Saudi Arabia. The company tiles product portfolio includes ceramic tiles, floor tiles, porcelain tiles. In line line with its product line the company also produces sanitary ware, and ceramic road markers. The company also manufactures and sells electric water heaters. Product Portfolio Product Classification Variety Capacity Ceramics and Porcelain Tiles The company produces ceramic tiles according to international standards wall tiles, floor tiles and decoration tiles, featuring innovative textures and varnishes, decoration tiles, skirting tiles and tile accessories of different sizes and designs. 52 mn sqm per year of ceramics and porcelain tiles,including 12mn sqm of floor tiles per year Sanitary Ware The company produces bathroom and toilet Sanitary. It sell complete sets and single pieces like wash basins, water closets, etc. 2.5mn sanitary ware per year Electric Water Heaters The Company manufactures Electrical water heaters in different shapes and sizes. The heater comes with different water storage capacity. Vertical, horizontal, slim, square, central. 1.5mn electric water heaters per year Ceramic Road Markers The company produces high visibility ceramic road markers The makers come in two colors white and yellow 1.8mn ceramic road makers per year Bathroom Accessories The company also produces a wide variety of bathroom accessories mirrors, mixers, bathtubs, toilet seat covers, flushing systems, as well as grout and tile adhesive materials and other various materials for the fixing of tiles. 6 million bathroom tile accessories per year Source: Saudi Ceramics, Zawya The company offers its producrs through an existing 32 showrooms across the Kingdom, as well as through a local network of distributors and international markets. The company operates through 11 factories in Saudi Arabia, distributing more than 68mn pieces of different types of products. Revenue mix The company s major revenue source is its tiles business, whereas the road markers and sanitary ware business is an extension of its tiles production facilities. The company generates 78%-80% of its revenue from sales of ceramic & porcelain tiles and sanitary ware business. The rest of its revenue is generated from the sales of electric water heaters, which contributes around 20%-22% to the top line. The company also stated that more than 50% of its sales goes towards the distributors,10% is exported and the rest of sales in generated through direct sales to projects and sales from the company s 32 showrooms. Sales Channels Revenue Distribution D istrib uto rs 5 5 % E x p o rts 10% O th ers ( Pro j ect & D irect Sales 3 5 % C eram ic T iles and Sanitary W are 7 8% W ater H eaters 2 2 % Source: Saudi Ceramics Source: Saudi Ceramics 4

5 Plant expansion to strengthen the prime business In order to further expand its footing in the Saudi market, and to take advantage of the current construction boom in Saudi Arabia, the company expanded its capacity by replacing its double-firing tile production lines in 2nd factory with a single firing-firing system, increasing its capacity in the process by 8mn sqm. The company was also looking to start a new tile production line with a capacity of 4mn sqm in 2013, however due to some unforeseen reasons the project is expected to commission in 1Q The company is also looking to expand its sanitary ware business, as it looks to double its capacity from 2.5mn unit to 5mn units in two phases. The 1st phase will add around 18,000 tons of capacity which roughly stand at 1.0mn units. The plant is expected to be operational towards the end of 3Q The company expects to add SAR 75mn 3 to the top line from the 1st phase of the factory. The company is also looking to expand its ceramic markers business however no details have been provided. Revenue to see dilution as new business lines become operational The company s direction in expanding its business is quite clear as it is looking to expand its offering within the building and construction sector. In 2012, the company announced that it is looking to enter the red brick business. For that matter, in 2012, the company announced its plans to establish a red brick factory with a capacity of 330,000tons per annum. The plant is expected to be operational in 2H Management also highlighted that it is further looking to diversify its product mix within the confines of the building and construction sector. The company is looking to enter plastics business, which will be first used internally and the rest will be sold to the market. This we believe will help the company in reducing its cost. On the back of expanding capacity and new product lines, we expect the company to show strong growth in its profitability from we expect the company to post CAGR of 7.9%. Net Sales C AG R 10. 8% C AG R 14. 8% C AG R 7. 9 % I n 000 SAR Easy access to financing...supporting growth prospects The company historically has partly financed its projects through debt financing. The company has maintained a debt to equity ratio of 38% 4 on average during We believe going forward the status quo will remain as the company will look to finance its future project through debt and self financing. This we believe is due to the soft lending terms at competitive rates that the company enjoys from Saudi Industrial development fund(sidf). Going forward we believe the D/E ratio will go down, primarily due to the increase in the size of the share holder equity. Debt/Equity Ratio Source; Saudi Ceramics, Aljazira Research 3 8% D eb t D eb t/ E q uity Average D / E ( ) Average D / E ( ) 3 5 % 43% 41% 39 % 37% 35% 33% 31% 29 % 27% 25% Source; Saudi Ceramics, Aljazira Research 5 3 Tadawul website average

6 Chinese Dumping a threat Ceramic tiles from China has been treated as a threat from multiple countries as they are selling below the manufacturing cost. Countries like Brazil, Argentina, India and countries from the European Union has put an anti-dumping duty, on Chinese ceramic products in order to control irrational pricing. Saudi Ceramics is also facing competition from the Chinese imports, as according to the company the selling price of Chinese products is even below the cost of production, the company is pushing hard for an anti-dumping duty on Chinese products in-order to level the playing field. Electric Water Heater margins- a function of steel price The company water heater business margins are inversely related to steel prices, due to which the profitability of the division swings with the change in steel prices. Going forward we believe without the absence of any hedging the margins will fluctuate with the changes in the steel prices. Chinese Hot Roll Steel Prices Jan - 12 Mar - 12 May - 12 Jul - 12 Sep - 12 Nov - 12 Jan - 13 Mar - 13 May - 13 Jul - 13 Sep - 13 Nov - 13 Steel Price Annual Average Prices Source: Bloomberg Fuel Allocation to new plants The company receives fuel at a subsidized rates. All the company s factories are run on subsidized fuel. However due to the on-going efforts by the government to curb fuel usage, the company is finding it hard to get allocation for its new factories. We believe, in-line with the governments initiative to provide affordable housing for the masses, it will be a conflict of interest for the government to stop fuel allocation for the building and construction sector. 6

7 Key financial data Amount in SARmn, unless otherwise specified e 2014 e 2015 e 2016 e 7 Income Statement Net Sales 1,221 1,447 1,515 1,711 1,829 1,884 % Growth 13% 19% 5% 13% 7% 3% Cost of Sales (775) (973) (1,019) (1,086) (1,160) (1,195) Gross Income Selling and marketing expenses (137) (157) (161) (180) (187) (188) General and Administrative expenses (65) (60) (62) (71) (75) (78) Income from main operations % Growth 10% 6% 6% 37% 9% 4% Financing cost (17) (16) (17) (20) (24) (24) Other revenues and expenses, net Net income before Zakat Zakat provision (7) (9) (9) (12) (13) (14) Net income % Growth 5% 7% 6% 37% 8% 4% Balance Sheet Assets Current Assets Cash and equivalent Account Receivable, net Inventories,net Prepayments and other assets Total current assets ,113 1,437 1,713 Non-current assets Investments and financial assets Project under construction Property, Plant and Equipment,net 1,138 1,288 1,439 1,682 1,812 1,957 Loan to associate company Total non-current assets 1,476 1,653 1,803 2,047 2,177 2,322 TOTAL ASSETS 2,269 2,546 2,784 3,160 3,614 4,035 Liabilities and Shareholders Equity Current Liabilities Short term loans Accounts payable Notes payables due within a year Accruals and other liability Current Portion of Short term loans Total current liabilities Non-current liabilities Notes payables Long term loans Employees end of service benefits Total non-current liabilities Total Liabilities 1,122 1,240 1,305 1,410 1,563 1,669 Shareholders Equity Share capital Statutory reserve Retained earnings ,223 1,523 1,839 Unrealized gain from avaliable-for-sale securities Total Shareholders' Equity 1,147 1,306 1,479 1,750 2,051 2,366 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY 2,269 2,546 2,784 3,160 3,614 4,035 Cash Flow Cash Flow from: Operating Activities Investing Activities (285) (310) (293) (410) (314) (346) Financing Activities (40) 6 (55) Changes in Cash 25 (7) Cash Opening Balance Cash Ending Balance Source: Aljazira Research

8 Key ratios Ratios e 2014 e 2015 e 2016 e Liquidity Ratio Current Ratio(x) Quick Ratio (x) Efficiency Ratios Receivables Days Turnover Inventory Days Turnover Payables Days Turnover Profitability ROE 20% 19% 18% 21% 19% 17% ROIC 12% 11% 11% 13% 12% 11% ROA 10% 10% 9% 11% 11% 10% Margins Gross Margins 37% 33% 33% 36% 37% 37% EBITDA Margins 30% 27% 27% 32% 32% 33% EBIT Margins 20% 18% 18% 22% 22% 22% Net Margins 19% 17% 17% 21% 21% 21% Valuations Dividend Yield 3.5% 3.1% 2.1% 2.1% 2.1% 2.1% Book Value Per Share (BVPS) Market Capitalization(in SAR Mn) 2,475 2,822 4,163 4,163 4,163 4,163 Enterprise value (in SAR Mn) 1,731 1,976 3,250 3,184 3,290 3,427 PE (x) PB (x) EV/EBITDA (x) EPS (diluted) Source: Aljazira Research 8

9 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati s.alquati@aljaziracapital.com.sa Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager - Brokerage Division Ala a Al-Yousef a.yousef@aljaziracapital.com.sa Sales And Investment Centers Central Region Manger Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa Area Manager - Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa Regional Manager - West and South Regions Abdullah Al-Misbahi a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. 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