Al Anwar Ceramics (AACT) reported a weak set of 2Q18 headline numbers – with a thin net profit of OMR0.1mn (-79% Y-o-Y, -73% Q-o-Q), well below our estimate of OMR0.3mn (-67%), partly due to weaker-than-estimated revenues of OMR4.6mn (-9% Y-o-Y, -16% Q-o-Q, -7% EFGe), which we suspect was due to the seasonal impact, as the quarter saw Ramadan and Eid. Moreover, the competition intensity in the company’s key markets has added further pressure on its profit margins. Detailed operational figures will only be available once full financials are out.

Our view: Overall, a disappointing set of numbers. Although we were expecting operational volatility due to the seasonal factors and as the construction market is yet to recover from its trough despite a recovery in oil prices, the severity of margin erosion during the quarter (Y-o-Y) was surprising. We suspect that the combination of low sales volumes, higher inflationary pressure and competition scenario all lead to a margin erosion. 

Our Buy rating on Al Anwar Ceramics is driven by: i) its strong debt-free, cash-rich balance sheet, which can resist any further competition pressure; ii) the company’s relatively strong free cash flow, which should provide a sustainable dividend yield; and iii) a potential beneficiary of a regional construction sector recovery over the medium to long term, due to its multi-market operations. Moreover, our replacement cost analysis suggests share trades at a deep discount to the company’s intrinsic book value. However, the consistent earnings misses are of a great concern on our investment theme; hence, we will revisit our estimates once the detailed financials are released.

 Al-Anwar Ceramics: OMR0.105 as of 5 Jul. 2018, Rating: Buy, TP: OMR0.160/share, MCap: USD82mn, AACT OM/AACT.OM

Sameer Kattiparambil