• Losses continue for third consecutive quarter Lecico reported net loss of EGP41mn in 1Q16 vs. net profit of EGP2mn in 1Q15, which is broadly in line with our net loss forecast of EGP45mn. The loss was driven mainly by: i) shrinking margins on higher cost of sales/unit due to continued reduction in production; and ii) minor decrease in revenue. 2016 is a challenging year for Lecico due to lack of visibility on recovery in main markets, pressures on margin, as well as rising competition and overcapacity in the market. We will revisit our forecasts to reflect greater losses in 2016 vs. our previous forecast.
• Moderate decline in revenue despite growing domestic volume Revenue showed a mild decline of 3% Y-o-Y to EGP319mn, (+4% Q-o-Q, +7% vs. our forecast), which was driven by: i) lower sanitary ware revenue (-6% Y-o-Y) on a 9% Y-o-Y fall in volume, as a sharp drop in export volume (-26%) outweighed growth in domestic volume (+17%), and despite a mild improvement in average selling price of 4% as EGP devaluation in March resulted in higher EGP-denominated export prices; and ii) minor decrease in tiles revenue (-2% Y-o-Y); a decrease in avg. selling prices  (-8% Y-o-Y) on promotions and price reductions to face competition offset an increase in domestic tiles volume (+8% local, 0% export).
• Net operational loss for second quarter in a row on hike in unit production cost Gross profit fell 46% Y-o-Y (broadly in line), and gross margin contracted 13 pp Y-o-Y. EBITDA was further down 84% Y-o-Y to EGP8mn (-17% vs. our estimate) and EBITDA margin shrank to 2.5% vs. 15.1% in 1Q2015, broadly in line with our forecast of 3.2% due to higher cost per unit. The margin contraction led to a net operating loss of EGP11mn vs. net operating profit of EGP24mn in 1Q16.

Tarek El-Shawarby