• Cut FV as volume and margin pressure add up We cut our FV for Al Anwar Ceramics by 12% to OMR0.250 as we lower our earnings estimates by 10% on average for our forecast horizon post weaker-than-expected 1Q16 results on rising competition in its main export market, Saudi Arabia, which we believe will sustain in the near term. The shares are trading at a premium to regional peers (2016e P/E of 15.1x) and 5% above our FV. Hence, we maintain our Neutral rating. Stronger-than-expected sales to new export markets is a key upside risk in the short term.
• Expect 2016 earnings to drop 21% Y-o-Y We forecast earnings to drop 21% Y-o-Y (-16% vs our previous estimate) to OMR5.2 mn driven by: i) a 4% decrease in revenue as we assume the ASP for tiles will remain weak due to competitive pressure in major export markets; and ii) a 13% drop in EBITDA with EBITDA margin retreating 300bps Y-o-Y to 29.2%. The company still has a strong balance sheet with a net cash position of OMR4.1 mn in 1Q16, which is supportive of its expansion plans. We estimate a more sustainable dividend pay-out level of 70% over the medium term (versus a 90% pay-out in FY2015), which implies a 2016 dividend of OMR0.012/share and a 4.6% yield.
• Export revenue to diversify, but competition stress remains Management recently cited that it will further diversify its export markets by entering Africa, Jordan, and Yemen in order to compensate for the weak performance in Saudi Arabia. Even though we believe this to be positive, as it should boost volume growth over the medium term, it will not necessarily lead to margin improvement due to the costs associated with transportation, currency movements, and competition, in our view. Moreover, the new markets will be challenging given internal political issues, especially in Yemen and African countries, in our view. We also maintain our estimate of flat product demand in the local market in 2016 as we expect competition to remain firm.

Sameer Kattiparambil
Tarek El-Shawarby