• Reduce FV to OMR0.286; trades above peers We cut our FV for Al Anwar ceramics (AACT) by 15% to OMR0.286 as we: i) reduce our earnings estimates by an average of 10% for our forecast horizon due to our lower sales volume estimates and higher standard tax rate of 15% (up from 12%); and ii) raise our risk free rate estimate by 50bps to 4.5%. We reiterate our Neutral rating as it is trading close to our FV and at a pricey multiple (2016e P/E of 13.4x) versus regional peers’ average (8.1x). AACT’s higher valuation versus peers is partly justified by our strong EBITDA margin estimate of 31% for 2016 (versus 20.5% regional average) and ROE of c15% (versus 11.3%).
• 2016 volume growth limited by competition and sector backdrop AACT management aims to improve volumes through increased sales in existing markets and penetrating new ones; however, we believe growth will be limited in the short term, as rising competition in AACT’s main export market (Saudi Arabia) is expected to continue and construction activity slows down regionally. We expect its capacity utilisation rate to inch up to 88% in 2016 (from 86% in 2015) and the average selling price to descend marginally (-2%), owing to competition pressure. We expect 2016 earnings to drop 6% Y-O-Y driven by weak margins and flattish revenue. We forecast the EBITDA margin to contract by 100 bps to 31.3%.
• Healthy balance sheet supports strong dividend pay-out AACT maintains a strong balance sheet with a net cash position of cOMR13 million (including investments) as of Dec 2015, which we believe can easily cover the planned 22% expansion (expecting cOMR10 million capex). Hence, we believe management will be able to sustain its strong dividend pay-out over the medium term. We estimate a more sustainable pay-out level of 80% in 2016 (versus 90% in 2015) and 75% over rest of our forecast horizon. The 2016 DPS implies a dividend yield of 6.0% and would be supportive on its share price, in our view.

Sameer Kattiparambil
Tarek El-Shawarby