Net income after minority: AED45mn, -56% Y-o-Y, -20% Q-o-Q, -22% vs. EFGe
Clean earnings (barring one-off’s) : AED48mn, -31% Y-o-Y, +78% Q-o-Q, -17% EFGe
Revenues: AED719mn, flat Y-o-Y, +9% Q-o-Q, +1% vs.EFGe
Gross profit: AED275mn, +1% Y-o-Y, +15% Q-o-Q, +2% vs. EFGe
Net operating profit: AED72mn, -12% Y-o-Y, +61% Q-o-Q, -8% EFGe
 
RAK Ceramics (RAKCER) announced its 2Q18 results, with net profit after minority of AED45mn (-56% Y-o-Y, -20% Q-o-Q) and coming in 22% below our estimate of AED58mn, despite revenue coming in line with our estimates. Higher-than-expected S,G&A expenses and interest cost negated the company’s stable operations during the quarter. The company reported 2Q18 revenues of AED719mn (flat Y-o-Y, +9% Q-o-Q) and came in line with our estimates. Although the company reported slightly weaker-than-expected sales revenue during the quarter from India and Bangladesh, this was compensated for by a pick-up in its sales revenue from Europe and Saudi Arabia.  
 
Operating profit, of AED72mn (-12% Y-o-Y, 61% Q-o-Q), came broadly in line with our estimate of AED78mn (-8%). The company had incurred slightly higher S,G&A during the quarter (AED168mn; +10% Y-o-Y, +6% Q-o-Q, +11% EFGe), which we assume could be due to additional cost from the expansion strategy, affecting the EBIT margin, which came in at 10.0%, vs our estimate of 10.9%. Moreover, higher-than-expected interest cost during the quarter, of AED32mn (+83% Y-o-Y, +71% Q-o-Q, +81% EFGe), affected the bottom-line significantly. 
 
Our view: Although earnings came in weaker than our estimate, operational indicators during the quarter are not discomforting. We believe the stability in oil price would help pent-up demand the company’s core Middle East markets, along with its growing emerging markets presence. However, the balance sheet is still stretched, with working capital cycle standing at an elevated level of 289 days (vs. 286 days in 2Q17, 281 days in 1Q18), and is still a source of concern. We have a Buy rating on RAKCER, as we believe the valuation still provides lots of comfort (FY18e P/E of 9.0x) and is a strong dividend play (yield above 7% for FY18e).

Sameer Kattiparambil, Dina Hicham

  
RAK Ceramics (AD): AED2.44 as of 1 Aug. 2018, Rating: Buy, TP: AED3.13/share, MCap: USD599mn, RAKCEC UH/RKCE.AD