Net loss: SAR46.5mn, vs. net loss of SAR5mn in 2Q17, net loss of SAR49.9mn in 1Q18  and EFGe of SAR29mn net loss
Gross profit: SAR79mn, -32% Y-o-Y, +11% Q-o-Q, +3% vs. EFGe
Revenues: SAR242mn, -12% Y-o-Y, -6% Q-o-Q, +4% vs. EFGe 
 
Saudi Ceramics Company has just released its 2Q18 financial highlights, showing a net loss of SAR46.5mn vs. a net loss of SAR5mn in 2Q17, a net loss of SAR49.9mn in 1Q18 and missing our net loss estimate of SAR29mn despite the company reporting slightly better revenues than our estimate. The miss was primarily due to higher-than-expected S,G&A expenses reported during the quarter at SAR63mn (+1% Y-o-Y,+5% Q-o-Q, +18% vs. EFGe), and on below-EBIT items, likely on elevated finance cost. Revenue came in slightly higher than our estimates at SAR242mn (-12% Y-o-Y, -6% Q-o-Q, +4% EFGe) and reported ‎gross profit of SAR79.5mn (-10pp Y-o-Y, +5pp Q-o-Q) and exactly in line with EFGe. 
The company has attributed the losses to the prevailent weak ceramic prices in the market due to severe competition from the imported tiles. 
 
Our view: Although the company has continued to show a weak bottom-line, marginally better revenue and gross margin during the quarter, despite the seasonality, is commendable. However, we still believe the company will go through volatile operational conditions in the short term until the recovery phase begins in early 2019 when the construction sector in Saudi Arabia starts to pick up as contract awards regain momentum. Moreover, the elevated cost structure will continue to pressure earnings in the short term. Our Buy rating on Saudi Ceramics is based on our replacement cost valuation, which suggests limited downside,‎ and as we see growth potential to emerge in the medium term, once the construction phase picks up.

Sameer Kattiparambil, Dina Hicham,
 
Saudi Ceramics: SAR18.04 as of 2 Aug. 2018, Rating: Buy, TP: SAR24.30/share, MCap: USD289mn, SCERCO AB/2040.SE