RAKCEC report EFG Hermes

[sharewadi]

Oddly, this RAK Ceramics (RAKCEC) report from EFG Hermes gives current price as at 28 December 2006. It hasn't changed much though in the past 10 months. On 09 October 2007, RAKCEC closed at 5.97. It's up to 6.01 a couple of trading sessions later, on 16 October 2007.

EFG-Hermes 09 October 2007:

RAK Ceramics Expansions to Start Paying Off RAK Ceramics - Exploring New Initiatives to Offset Margin Decline - Company Note 09 October 2007 ST Rec. : Buy LT Rec. : Buy Current Price*: AED 5.72 LT Fair Value : AED 8.34 • Strong Revenue Growth as Utilization of New Capacity Accelerates: Revenue grew faster-than-estimated by 42% in 1H2007 to AED1.1 billion driven by 31% growth in tile sales volume and 9% in average prices. Capacity was 89% utilized; with the new UAE factories operating at almost full capacity and capacity utilization at start ups accelerating to 74% in China and 52% in Iran. • Higher Energy Costs Offset by Growth in Other Income: Energy costs increased to 13.5% of revenue from 12.5% in 2006 and 10% to 11% in previous years. There was a lack of reliable natural gas supply to replace more expensive liquid petroleum gas. EBITDA grew by 6.5% and the EBITDA margin tightened to 16.9% from 22.6% in 1H2006. However, earnings grew by 27% to AED93.8 million coming from the doubling of "Other income" from joint ventures (JVs) and others to AED51.3 million and FX gains of AED15 million on the back of a stronger Indian Rupee. • Capacity Upgrades in Bangladesh and Iran: RAKCEC is adding 5 million sq m of tile capacity in Iran (to become operational by January 2008) and 2.6 million sq meter of tile capacity (by January 2008) and 0.33 million pieces of sanitary ware (by mid-2008) in Bangladesh. We estimate total tile capacity will increase by 14% to 114 million sq m and sanitary ware by 36% to 4 million pieces by end-2008. • Strong Income Generation from JVs: RAKCEC has entered into JVs that require low initial investment and generate high return in: i) ceramic-related activities and ii) construction and real estate to develop residential and commercial units and Industrial warehouses. RAKCEC estimates these JVs will contribute AED76 million and AED109 million to earnings in 2007 and 2008. • Revising Forecasts: We upgrade revenue forecast by 8% in 2007 and 14% in 2008, reduce EBITDA by 14% in 2007 and 8% in 2008 but reduce earnings by only 5% in 2007 and increase them by 3% in 2008 as income from JVs will continue to compensate for the lower margins. We expect margins to gradually / mostly recover as RAKCEC expects to be able to depend on natural gas supplies in the UAE complex in 2008. We raise 2009 earnings forecast by 22%. • Upgrading LTFV Estimate by 13%: Our revised estimated FV stands at AED7.83 per share, implying 37% upside. We re-iterate our ST / LT Buy recommendation. Our forecasts are sensitive to the ability to: i) switch to cheaper energy, ii) generate sustainable income streams from JVs and iii) maintain margins in the event of a global slowdown that results in a supply-demand gap.

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