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Raysut Cement 1Q16: Strong operations (21% above estimate), and below-EBIT items lead to 42% earnings beat

1Q2016 results highlights: Net income – OMR8.1mn, +34% Y-o-Y, +57% Q-o-Q, +42% EFGe; Operating profit – OMR8.38mn, +14% Y-o-Y, +22% Q-o-Q, +21% EFGe; Revenue – OMR25.3mn, +4% Y-o-Y, flat% Q-o-Q, +7% EFGe   Profit margins leads operational beat… Raysut Cement Company (RCC) announced limited 1Q2016 results. The company reported consolidated earnings of OMR8.1 million (+34% Y-o-Y, +57% Q-o-Q), coming in significantly above our OMR5.7 million estimate (+42%) supported by stronger-than-expected operational figures. RCC reported consolidated revenue of OMR25.3 million (+4% Y-o-Y, flat Q-o-Q, +7% EFGe) and an operating profit of OMR8.4 million (+14% Y-o-Y, +22% Q-o-Q) also topped our estimate by 21%. We believe better-than-estimated sales volume and/or cement prices along with cost control initiatives has lead to stronger than expected gross margin of 40.6% (+220bps Y-o-Y, +110bps Q-o-Q, 250bps above EFGe).   Investment gain, lower finance cost widens the earnings beat… Three below-EBIT items that positively impacted earnings are i) investment gain of OMR0.59 million during the quarter (versus investment loss of 0.26 million in 1Q2015), which we typically do not forecast; ii) finance cost significantly reduced to OMR0.1 million (74% lower Y-o-Y and Q-o-Q); and iii) effective tax rate of 8.8% versus our estimate of 14%.   Our View: Overall, RCC reported a strong set of financial results, despite the challenging economic scenario at its home and export markets, which supports our positive view on the company. The stronger-than-expected operating figures would challenge our conservative estimate for FY2016, where we estimates an 8% decline in operating profit Y-o-Y, as we suspect demand will take a breather with the potential drop in investment cycle across the region, and due to potential competition. Raysut cement remains our top pick as the shares are trading attractively at a 2016 P/E of 9.7x and dividend yield of 6.5% compared to Oman cement (Neutral rating, 2016e P/E of 11.7x, dividend yield of 6.4%). (company, Sameer Kattiparambil, Wafaa Baddour, CFA)  

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