• 1Q2016 earnings down 43% Y-o-Y on lower revenue Saudi ceramics posted 43% Y-o-Y drop in 1Q2016 earnings to SAR48 million, 22% ahead of our estimate, driven mainly by : i) 17% Y-o-Y drop in revenue (in line) due to weak demand conditions; ii) lower other income; and ii) hike in financing and zakat costs. The drop in revenue was entirely from the ceramics segment (-21% Y-o-Y) offsetting modest growth in water heaters (+2%). We were expecting significant drop in earnings to be driven by lower demand on construction slowdown and hike in energy cost that will be the main challenges for the company in the coming period. Main catalyst would be faster demand recovery. Saudi Ceramics AGM approved yesterday a cash dividend of SAR2.0 per share, implying 35% payout and c5% yield.
• Hike in energy cost softened by cost savings on WH; not sustainable Gross profit dropped 17% Y-o-Y on lower revenue, while GPM was almost flat at 44%, ahead of our forecast by 4.6pp, as the company was able to implement some cost-saving measures, mainly in the water heaters (WH) segment by getting discounts on buying large amounts of raw material that was used in 1Q2016, and as it has low weight of energy. Ceramics segment GPM contracted c6pp on hike in energy cost, but was largely offset by improved margins in WH (+9 pp). EBITDA was down 20%, and EBITDA margin inched down 100bps. EBIT further dropped 33% on increase in depreciation, leading to 3.6pp drop in EBIT margin. We believe margins contraction will be witnessed in the coming quarters due to pressure on WH prices, as the company has started losing market share in exporting markets.
• Latest development on upcoming expansions Saudi Ceramics has started commercial production at its water heater second plant with a capacity of 600k tonnes per annum and expects to reach full production capacity by end of 2Q2016. The company expects the project to contribute SAR92 million annually to the company’s revenues, assuming full capacity. The company has also started experimental operations at its second sanitary ware production plant (addition of 1.8 million pieces) that expects to continue until end of 2Q2016 and will later announce the commencement date of commercial production.

Tarek El-Shawarby
•