Net profit: OMR0.1mn, -71% Y-o-Y, flat Q-o-Q, -46% EFGe
Revenues: OMR4.6mn, -5% Y-o-Y, flat Q-o-Q, in line with EFGe
Al Anwar Ceramics (AACT) reported another weak set of results for 3Q18, with weak net profit of OMR0.1mn (-71% Y-o-Y, flat Q-o-Q), missing our estimate of OMR0.18mn (-46%), despite revenue coming in line with our estimate of OMR4.6mn (-5% Y-o-Y, flat Q-o-Q). The company’s profit margin is still weak, due largely to competition pressure in its key markets, Oman and Saudi Arabia, and partly due to the seasonal impact, as Eid holidays fell in August. The company’s detailed operational figures will be available once the full financials are released.
Our view: AACT continues to disappoint with low profiabilty. Although we were expecting operational volatility due to the seasonal factors, and as the construction market is yet to recover from its trough, despite the recovery in oil prices, the sustainability and severity of margin erosion during the quarter (Y-o-Y) is a source of concern for us. We suspect that the combination of lower tile prices, higher inflationary pressure and competition is the cause of margin erosion.
We expect the share price to remain weak over the short term, on the back of weak performance. Our Buy rating for Al Anwar Ceramics is driven by: i) its debt-free, cash-rich balance sheet (cash and investments make up 38% of its market cap), which can withstand further competition pressure; ii) the company’s relatively strong free cash flow; and iii) its being a potential beneficiary of regional construction sector recovery over the medium to long terms, due to its multi-market operations. Moreover, our replacement cost analysis suggests that the share is trading at a deep discount to the company’s intrinsic book value. However, the persistent earnings misses raise our concern with regard to our investment thesis for the stock; hence, we will revisit our estimates once the detailed financials are released.
Al-Anwar Ceramics: OMR0.089 as of 9 Oct. 2018, Rating: Buy, TP: OMR0.160/share, MCap: USD69mn, AACT OM/AACT.OM
Sameer Kattiparambil, company