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Initiating Coverage

Al Anwar Ceramic Tiles Company SAOG

Head of Research: Suresh Kumar.S

Analyst: Radhika Gadhia

Email: suresh@almahafinancial.com

Email: radhika@almahafinancial.com

Tel: (+968)24827137

Tel: (+968)24827138


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Content

Al Anwar Ceramic Tiles - A Snapshot…………………………………………………….. 4 Business Model……………………………………………………………………………… 5 Investment Rationale…………………………………………………………………….. 6 Risk and Concerns……………………………………………………………………. 10 Financial Highlights – FY 2010…………………………………………………………….. 11 Performance Overview………………………………………………………………11 Well Positioned among peers………………………………………………………… 13 Ceramic Industry – An Overview……………………………………………………… 16 Industry Structure: Ceramic Tiles - Porters Five Forces Model……………………. 17 Valuation…………………………………………………………………………………. 19 Financial Statements…………………………………………………………………. 23

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Page 2 of 28


Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Maha Research Target Price: RO: 0.306

Rating: Accumulate

MSM Ticker Stock Price (as on 24 Mar’11)

AACT 0.266

Face Value (RO)

0.100

52-wk High / Low (RO)

0.370 / 0.262

Equity Cap. (RO. mn)

19.47

Market Cap. (RO. mn)

51.78

Share Holding Pattern as on 31st Dec „10 Al Jazeira Services SAOG 37% Others 63%

Key Positives 

Low cost producer of ceramic tiles in the GCC region  Dominant leader in local market  Favourable demand supply dynamics , GCC markets remain a net importer of ceramic tiles  Long term growth prospects remain strong  Capacity expansion to fuel growth  Potential gainer from government spending  Beneficiary of the gradual revival in the Construction & Infrastructure space in the GCC region  Shielded by large Entry barriers  Healthy Balance sheet

Risks & Concerns  

Ratios

Adj. P/E

FY08 5.4

FY09 9.5

FY10 10.4

FY11E 10.3

1.4

2.5

2.3

1.8

Adj. P/BV Div Yield

0%

0%

1.5%

1.7%

RoAE

29%

31%

25%

19%

RoAA

23%

25%

21%

17%

Relative Performance (%)

1 Month 3 Month 6 Month 12 Month

MSM 30 -11% -6% -1% 6%

AACT -12% -5% 0.3% 19%

AACT over MSM -1% 1% 1.3% 13%

Movement of AACT vs. MSM 30 Index MSM

6000

1.00

5000

0.80

4000

0.60

3000

0.40

2000

0.20

1000

0.00 Mar 1, 2010

Outlook & Recommendation We hold a positive outlook on Al Anwar Ceramic Tiles SAOG for the long term based on its capability to demonstrate growth based on its track record and in view of the favourable demand supply scenario going forward. At current market price of RO 0.266, the stock trades at an EV/EBITDA of 6.1x and adjusted PE of 8.9x to FY 12E earnings. We have arrived at a target price of RO 0.306 based on our weighted average valuation matrix. We recommend “Accumulate” rating for the stock, implying an upside potential of 14.9% from the current price in 12 months.

Volume

1.20

0

Financials Figures in RO '000 except per share data

Thousands

AACT

High dependence on construction sector Delay in supply on natural gas from government can hamper the expansion plan Competition from Chinese imports & regional players

Revenue Cost of Sales Gross Profit Margin EBITDA Margin Net Profit Margin Adj. EPS Adj. BVPS

FY 2009 15,887 7,937 50% 42% 31% 0.025 0.095

FY 2010 17,055 8,333 51% 40% 31% 0.027 0.123

FY 2011E FY 2012E 17,170 20,024 8,709 10,100 49% 50% 40% 41% 29% 29% 0.026 0.030 0.144 0.169

May Aug Nov Feb 24, 2010 16, 2010 14, 2010 21, 2011

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Page 3 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Anwar Ceramic Tiles - A Snapshot Al Anwar Ceramic Tile Company (AACT), established in 1988, is the largest manufacturer and distributor of ceramic tiles in the Sultanate. The Company offers a wide range of products under AlShams brand, including glazed wall, floor, boarder and decorative tiles. The manufacturing facility of the Company is located at Nizwa, which makes use of the technical collaboration from leading Italian companies. AACT is the oldest manufacturer of ceramic tiles in Oman and continues to be a dominant player capturing 40% of the market pie. Rest of the market is shared by Al Maha Ceramics and a few foreign players. The Company also does exports to GCC countries. Geographic Segments

100% 67%

55%

38%

47%

53%

80% 60%

62% 53%

40% 20%

45%

47%

33%

0% 2006

2007

2008 Oman

2009

2010

Export

Source: Company Reports & Al Maha Financial

Domestic market currently contributes about 50% of the revenues for the company. The Company continues to focus primarily on the Oman and other GCC markets and is also looking for potential markets like Iran, Iraq, Jordan, Yemen where the ceramic tile market size is about 40 to 50 million square meters. AACT has planned to increase its capacity from 10 million square meters to 16 million square meters in two phases as the medium and long term. With the completion of phase 1 of expansion plan in FY 2011, we expect exports of the Company to rise from FY 2012.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Business Model AACT currently has 3 production lines with a total capacity of 10 million square meters operating at 100% utilization level. The raw materials used in manufacturing of tiles include, clay silica, sand, shale, limestone. The company procures majority of the raw materials locally within 100 – 150 kms from the surrounding region of its manufacturing facility. The other raw material like fritz, glaze and pigments imported from leading manufacturers in Italy and Spain. The tiles are manufactured to international standards, with designs sourced from leading Italian firms. The quality standards of the company’s products are in compliance with the British Standard B.S. 6431/1984 and European Standard EN 87:1991. Cost of production - Break up by value

Salaries and staff costs 12%

Cost of raw materials and consumables 53%

Energy and Factory overheads 13%

Depreciation 12% Others 10%

Source: Company Reports & Al Maha Financial

Raw materials constitute 53% of the total cost of production for the Company. Ceramic tiles being an energy intensive business, overheads including power costs constitute 13% of the total cost of production.

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Page 5 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Investment Rationale ďƒ˜

Low cost producer of ceramic tiles in the GCC region AACT is the lowest cost producer of ceramic tiles in the region by maintaining a gross margin of 50%, which is highest among its peers. The company is able to maintain its position of lowest cost producer of ceramic tiles in the region due to accessibility of cheap raw materials within the proximity of 100-150 kms from the manufacturing facility. Investments in technologies and automation and employment of lean manufacturing systems have also helped the company to maintain its status as the low cost producer of ceramic tiles in the region. Improving efficiency and improving economies scale post expansion is expected to help the Company to retain the status. The company also enjoys the advantage of catering the GCC region due to lower freight cost and exemption of customs duty.

Gross Profit Margin, steady above 50%

60%

50%50%51%

50% 36% 30%33%

40%

37%37%36%

30%

33% 23%24%

20% 10% 0% Al Anwar Arab Ceramics Saudi Ceramics RAK Ceramics Ceramic Tiles 2008

2009

2010

Source: Zawya & Al Maha Financial

ďƒ˜ Dominant leader in Local Market The local Ceramic tiles market is catered mainly by Al Anwar Ceramic Tiles, along with Al Maha Ceramic Tiles and a few foreign players. AACT remains as a dominant leader enjoying 40% of the market on the back of strong dealer network, strengthening brand image, improving service efficiencies and through introduction of contemporary designs. During FY09, the local sales had contributed approximately 53% of the total sales of the company. The company is expected to maintain its dominance in the Oman market and expected to attain better penetration levels in export markets comprising other GCC countries.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

 Long term growth prospects remain strong, demand intact The long term growth prospects of the company continue to remain strong backed by favourable macro economic factors. As per statistics, the population of GCC countries which is presently at 30 million is expected to grow more than double by 2050. 70% of the region’s population is under 30 years of age. The favourable demographics will fuel the demand for new dwelling units, which is one of the major factors driving building construction. The company is also well poised to benefit from the significant investments in tourism sector. The overall size of the GCC ceramic tiles market is about 100 million sq meters. The region continues to remain as the net importer of ceramic tiles, as about 50% of the demand is met through imports. The supply gap leaves opportunity for the company to capitalize on. The company plans to expand its network in Saudi Arabia and UAE and also to enter new markets like Iran, Iraq, Jordan, Yemen to spread its presence.

 Capacity expansion to fuel growth Al Anwar Ceramic Tiles is going ahead with the expansion plan which will entail the addition of two production lines each having a capacity of 3 million sq meters per annum. With the additional capacity becoming operational, the total capacity of the company would increase to 16 million sq meters per annum. AACT has already started the civil and steel works contracts for the construction of a factory structure as part of their capacity expansion plan. The first phase of the expansion is expected to be completed by October ’11. The expansion involves a capex of RO12 million which will be funded by internal accruals. The company is yet to receive an official confirmation for the allocation of gas from the government for the expansion. In absence of government’s approval, the company plans to convert LPG to natural gas which would increase the cost by RO 300 - 400 thousands. We expect the new production line of AACT to operate in its 100% capacity by FY13. This would augment the market penetration of the Company in Oman as well as in the GCC countries. As the demand side continues to be healthy, we expect the company to reap benefits from its capacity expansion.

 Potential gainer from government spending on infrastructure Government spending on infrastructure in the previous years has significantly increased the demand for tiles. The allocation for infrastructure projects was RO 937 million in the year 2010. This year also the budget continues to demonstrate thrust on infrastructure spending. The overall allocation towards various infrastructure development projects in roads, ports, housing, airports, health, and services sectors in the Eighth Five Year Plan has reached about RO 12 billion. The Government's planned and projected spending for the housing sector for the 8th five year plan has total to RO 448 million out of which RO 200 million is allocated for construction of replacement houses. Government’s focus on large projects and developing modern tourism infrastructure has

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Page 7 of 28


Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Maha Research

boosted the rate of construction, fostering the demand for tiles and thus benefiting Companies like AACT. Planned Spending for Eighth Five Year Plan (2011-2015)

Agriculture

16 25 38 43 44 52 54 73

Dams Marine fishing ports Vocational training Communications and IT

170 172 245 271

Education Housing

448 452 502

Seaports

1,233

Airports

1,653 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Source: Oman Observer & Al Maha Financial

ďƒ˜ Demand to boost up with revival in GCC construction sector Al Anwar Ceramic Tiles is highly dependent on the building and construction sector. The US subprime crisis, global recession and Dubai property slump have posed a challenge to tile manufacturers like AACT. However, the real estate markets of the GCC are now showing improvement with the stabilization of financial markets and the improving consumer and business confidence As the construction industry throughout the Gulf perks up, driven by new projects such as Qatar's win for the 2022 FIFA World Cup, new airports and touristic developments etc, the demand for ceramic tiles remains robust. According to a report released by Deloitte, GCC powers of construction 2010, Saudi Arabia, which has a 38% share of the total construction projects in the region, is expected to launch contracts worth $86bn in 2011. Currently the kingdom has $624bn worth of projects planned or underway. Qatar, with a smaller 15% of total construction projects, is estimated to see its construction industry grow by a CAGR of 12% over the same period. UAE has 36% of total construction projects, worth $958bn, and is expected to see the construction industry grow by a CAGR of 9.6% between 2010 and 2014. According to Cluttons 48,000 homes will be completed in the next two years, increasing current supply by 12 percent. Building costs have dropped by more than 40 percent from their peak in 2008.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

According to Ventures Middle East, the construction industry in Abu Dhabi witnessed fresh contracts awarded valued at 35.5 billion US dollars; 66 percent of the value of all contracts awarded in the United Arab Emirates (UAE) for 2010. The expected value of construction contracts to be awarded in 2011 will reach $39.8 billion, an increase of 12 per cent from 2010.

Project Pipeline by Country 100% Algeria, 10% 90% Kuwait, 10% 80% Egypt, 10% 70% Qatar, 10% 60% 50%

UAE, 26%

40% 30% 20% 10%

Saudi Arabia, 34%

0%

Source: MENA Construction Projects Tracker & Al Maha Financial

Across the main markets, the UAE, Saudi Arabia, Qatar, Kuwait, Egypt and Algeria there are almost US$498bn of projects in the pipeline. Saudi Arabia and UAE account for 34% and 26% respectively of the total projects in pipeline. The construction industry in Oman saw a 14.2 per cent year-on-year increase in 2009 to reach US$3.4bn according to the latest Oman Infrastructure Report Q4 2010. The report also stated that the industry would be valued at US$3.7bn in 2010. In the first half of 2010, Ministry of Finance approved eight new construction projects totaling to over RO 500 million. The government is projected to spend RO 3.86 billion on construction and infrastructure projects which are to be completed by 2015. In Oman, the sector is expected to show a growth rate of around 5.8% on average per year between 2010 and 2014, according to the projections by Business Monitor International. The increase in the number of construction projects will see demand for building materials increase rapidly with firms having to increase their output and boost capacity.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

 Shielded by large entry barriers Al Anwar Ceramic Tiles being a capital intensive business model, the overall cost of setting up the facility is high. The capacity has to be augmented in large volumes and requires updating of technologies. Hence, the company enjoys large entry barriers and thus the threat of new entrants is limited.

 Healthy Balance Sheet The company has a strong balance sheet with cash & cash equivalents and very low levels of debt. The capacity expansion is completely funded on internal accruals making AACT relatively less risky.

Risk and Concerns  Competition from Chinese players AACT is facing competition from low quality Chinese imports. The cheap Chinese imports could affect the total sales volume of the company. However, the company expects the competition to ease off due to increasing freight and manufacturing cost in China.

 Delay in supply of natural gas from government to be a hindrance to the expansion plan Delay in supply of natural gas from the government would be a hindrance to the expansion plan. Another option available to the company is to convert the LPG into natural gas. The conversion would the company’s cost by RO 300 – 400 thousands. However, the company is optimistic on getting written approval from the government.

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Page 10 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Financial Highlights – FY 2010 Al Anwar Ceramic Tiles continues to be the market leader in Oman for FY 2010. During the year, the Company manufactured 10.38 million square meters of ceramic tiles registering a 5% growth in production compared to the previous year and the capacity utilization was 104% for the year. FY 2009 9,870

Volume ('000 Sqm) % change Avg realizations per tonne % change Revenue (RO '000s) Gross Profit (RO '000s) Net Profit (RO '000s)

1.61 15,887 7,950 4941

FY 2010 10,380 5% 1.64 2% 17,055 8,722 5331

Q1 2010 2,500 1.83 4,576 2,400 1431

Q2 2010 2,620 5% 1.71 -7% 4,482 2,298 1381

Q3 2010 Q4 2010 2,690 2,570 3% -4% 1.59 1.45 -7% -9% 4,282 3,716 2,146 1,878 1340 1040

Gross revenues for the year showed an increase of 7% to reach RO 17 million from RO 15.8 million last year. In 2010 export sales accounted for more than half ( i.e. 52%) of the gross revenue. The average realizations have shown an increase 2% on Y-o-Y basis and decreased 9% on Q-o-Q basis. We expect the realizations to be stable for the year 2011 and thereafter improve gradually. The margins and returns are expected to be under pressure in 2012 owing to higher expenses.

Performance Overview ďƒ˜ Stable top line and bottom line 18,000 16,000

50%

51%

40%

42%

40%

60%

46%

45%

14,000 12,000

50%

50% 40%

34%

32%

10,000

30%

8,000 6,000 4,000

30%

31%

31%

26%

20%

22%

10%

2,000 -

0% 2006

2007

2008

Sales

Net Profit

EBITDA Margin

Net Profit Margin

Al Maha Financial Services LLC

2009

2010

Gross Profit Margin

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Page 11 of 28


Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Maha Research

The top line of AACT grew at a CAGR of 20.6% over the last four years ending 2010 and margins remained steady in these years. During the year 2010, the company’s total income stood at RO 17.398 million. Revenues of the Company is expected to grow from RO 17 million in FY 2010 to reach RO 23 million in FY 2015, an increase of 35%. The realizations are expected to be stable in FY 2011 and inch up thereafter. We expect the margins to be under pressure post expansion due to capacity expansion.  Low Debt to Equity- Almost Zero leverage 0.20

0.16

0.15

0.12 0.10 0.08 0.06 0.04 0.03 0.01 0.00 2005

2006

2007

2008

2009

2010

2011

Al Anwar Ceramic Tiles is less leveraged with the debt equity ratio of 0.01 in FY 2010. We expect the debt to remain low as the capex is internally funded.  Solvency levels intact 6.0 4.9

4.9

5.0

4.0

3.8

3.8

3.0

2.1

2.0 1.0 0.0 2006

2007

2008 Current Ratio

2009

2010

The Company maintains very high levels of solvency with the current ratio consistently above 2.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Well Positioned among peers Al Anwar Ceramic tiles, when compared to peers in the region like RAK Ceramics, Saudi Ceramics and Arab Ceramics, maintains better operational efficiency and high margins owing to low cost of production and better realizations, based on the financial performance in FY2010. The company also maintains sound solvency levels as compared with regional peers. EBITDA Margin

Ras Al Khaimah Ceramic Company

20

Saudi Ceramics Company

31

Arab Ceramic Company

39

Al Anwar Ceramic Tiles Company

34 0

10

20

30

40

50

Source: Zawya & Al Maha Financial

EBITDA margin of Al Anwar Ceramic tiles stays next to Arab Ceramics in the group. Economies of scale and standardization of the product has helped the company to lower the cost, in turn increasing the operational profitability.

Net Margin

Ras Al Khaimah Ceramic Company

7

Saudi Ceramics Company

20

Arab Ceramic Company

32

Al Anwar Ceramic Tiles Company

31 0

10

20

30

40

Source: Zawya & Al Maha Financial

Al Anwar Ceramic Tiles has higher net margin ratio as compared peer set average of 22.6%

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Return on Assets

Ras Al Khaimah Ceramic Company

4

Saudi Ceramics Company

11

Arab Ceramic Company

33

Al Anwar Ceramic Tiles Company

19 0

10

20

30

40

Source: Zawya & Al Maha Financial

In terms of Return on assets, AACT is placed next to Arab Ceramic Company.

Return on Equity

Ras Al Khaimah Ceramic Company

11

Saudi Ceramics Company

21

Arab Ceramic Company

42

Al Anwar Ceramic Tiles Company

22 0

10

20

30

40

50

Source: Zawya & Al Maha Financial

The Return on equity of the company stands next to Arab Ceramic Company.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Current Ratio

Ras Al Khaimah Ceramic Company

1.66

Saudi Ceramics Company

1.37

Arab Ceramic Company

3.54

Al Anwar Ceramic Tiles Company

5.87 0

2

4

6

8

Source: Zawya & Al Maha Financial

Al Anwar Ceramic Tiles has the highest current ratio among the group,which is way above the peer average.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Ceramic Tiles Industry – An Overview The ceramic tile market in the GCC is estimated at approx 100 million square meters per annum. The industry grew from 85 million square meters in 2006 to 100 million square meters in 2010, registering a growth of 17.6% in last four years. The ceramic tile players in the GCC region cater to about 50% of the demand and the rest is met by imports. RAK Ceramics, UAE has the largest capacity in the GCC region. GCC remains net importer of tiles and this provides an opportunity to local manufacturers. Production Capacity of Major Tile Manufacturers in GCC Company

Country

Production (Mn Sq Mtrs)

RAK Ceramics

UAE

82

Saudi Ceramic

Saudi Arabia

42

Al Jawdah Ceramic

Saudi Arabia

10

Al Anwar Ceramic

Oman

10

Al Khaleej Ceramic

UAE

6

Al Maha Ceramic

Oman

5

Fujairah Ceramic

UAE

3.6

Source: Company Reports & Al Maha Financial

The production capacity of GCC countries has remained unchanged as compared to last year, except for Saudi Arabia. In the year 2010, Saudi Ceramics added a capacity of 9-10 million square meters. Oman Market

Local Manufacturers 70%

Chinese imports 20%

Italian & Spanish Players 10%

Source: Company Reports & Al Maha Financial

In the Oman market, Al Anwar Ceramic Tiles caters to the retail mid-segment which constitutes around 70% of the market. The other major player in this segment is Al Maha Ceramics with capacity of 5 million sq meters. The premium segment which forms around 10% of the overall market is catered by Italian and Spanish players. The rest 20% of the market is catered by low quality Chinese imports.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Industry Structure: Ceramic Tiles - Porters Five Forces Model

Threat of New Entrants Barriers to entry Capital Intensive High Fixed cost Capacity augmented in large volumes Technology Brand Equity

Bargaining Power of Buyers

Bargaining Power of Suppliers  

Limited Possible in case of glaze which is imported from Europe Supplier switching cost is low

Industrial Rivalry Oligopoly market Competition from Chinese players

  

Limited Low switching cost Availability of cheap Chinese imports

Limited Product differentiation Premium segment – granite, marble, mosaic etc

Threat of Substitutes

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Threat of New Entrants: Ceramic Tile industry is a capital intensive industry involving large fixed cost. This acts as an entry barrier limiting the threat of new entrants. Also the capacities have to be augmented in large volumes. Other entry barriers include huge investment in technology, need of automation. Threat of Substitutes: Threat of substitutes is limited in the ceramic tiles industry. Differentiated products like mosaic tiles, marble tiles, granite tiles, chip floor can act as substitutes. However the high price of the differentiated products limits the threat of substitutes. Bargaining Power of Buyers: The bargaining power of the buyers is limited to the extent of cheaper Chinese products available in the market. Also the switching cost of the buyer is low which leaves some scope for bargaining. Bargaining Power of Suppliers: The bargaining power of the suppliers remains low as most of the raw materials are cheap and readily available. Therefore, it limits the bargaining power of the supplier to the extent raw materials like frits, glazes and pigments that are imported from Italy and Spain. Industry Rivalry: Industry rivalry is low as the ceramic tile industry is an oligopoly market with a few players. The competition mainly comes from the cheap Chinese imports.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Valuation We have used the following valuation methodologies to arrive at the fair value of Al Anwar Ceramic Tiles.    

Discounted Cash Flow Enterprise Value to EBITDA multiple Price to Book Value Multiple Price to Earnings Multiple

Discounted Cash Flow (DCF) Analysis The following base data have been used in our valuation exercise. Beta (2 Year) Risk Free Rate Risk Premium Cost of Equity Cost of debt WACC Perpetual Growth Rate

1.13 4.50% 6.75% 12.13% 2.90% 12.06% 2% Figures in RO ‘000 except per share data

Net Operating Profit After Tax Add: Depreciation and Amortization Less: Change in working capital Less: Capex

2008 3,466 774 455 5,893

Present Value of Free Cash Flow Terminal Value Present Value of Terminal Value Enterprise Value Less :Net Debt Equity Value No of shares Equity Value Per Share

2009 4,859 1,115 1,167 569

2010 5,006 1,157 163 620

2011E 4,742 1,497 1,097 3,500 1,465 77,063 43,611 61,004 (1,057) 59,947 194,692 0.308

2012E 5,726 1,743 1,035 3,500

2013E 6,506 1,826 1,046 1,000

2014E 6,600 1,879 77 799

2015E 6,628 1,924 283 668

2,337

4,468

4,822

4,301

We have estimated the Equity value of Al Anwar Ceramic Tiles at RO 59.95 Million, which implies to a per share value of RO 0.308.

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Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Relative Valuation We have carried out a comparative analysis of the peer companies across the geographies to ascertain the benchmark multiples for arriving at the fair value of Al Anwar Ceramic Tiles. Our Relative valuation matrix includes Enterprise Value to EBITDA Multiple, Relative Price to Book and Relative Price to Earnings Valuation Matric EV/EBITDA Price/Book P/E (TTM)

Al Anwar Ceramic Oman 8.77 2.17 9.71

Arab Ceramic Egypt 3.61 2.29 5.42

Saudi Ceramic KSA 12.21 3.32 15.12

R A K Ceramic UAE 4.84 0.72 6.27

Peer Average 7.36 2.13 9.13

Benchmark multiples for relative valuation are arrived at by assigning equal weights to  

Five year historic median of adjusted one year forward multiples of AACT & The peer group average Figures in RO ‘000 except per share data

Enterprise Value to EBITDA 1 year Forward EV/EBITDA 5 Year Median Peer Group Average Benchmark Multiple EBITDA( 2012E) Enterprise Value Less: Net Debt Equity Value Number of Shares Equity Value Per share Relative Price to Book Adjusted Price to Book (1 year fwd.) Historic Median(5 Years) Peer Group Average Benchmark Multiple Book Value per Share (2012E ) Equity Value Per share Relative Price to Earnings Adjusted Price to Earnings( 1 Yr. Fwd.)) Historic Median(5 Years) Peer Group Average Benchmark Multiple Earningse per Share (2012E ) Equity Value Per share

Al Maha Financial Services LLC

2007 6.46

2008 2.82

2009 6.77

2010 6.60

2007 2.21

2008 1.04

2009 1.97

2010 1.98

2007 8.38

2008 3.88

2009 8.82

2010 11.08

www.almahafinancial.com

2011 5.10 6.46 7.36 6.91 8,251 56,987 (1,057) 58,044 194,692 0.298 2011E 1.57 1.97 2.13 2.05 0.169 0.346 2011E 8.87 8.82 9.13 8.97 0.030 0.269

Page 20 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Enterprise Value to EBITDA, one year forward 9.0 7.5 6.0 4.5 3.0 1.5 2007

2008

2009

2010

2011

Median

Price to Book Value, one year forward 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 2007

2008

2009

2010

2011

Median

Price to Earnings, one year forward 12 10 8 6 4 2 2007

Al Maha Financial Services LLC

2008

2009 Median

2010

2011

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Page 21 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Weighted Average Valuation Matrix Ceramic Tiles being a capital intensive business, we have assigned relatively higher weight to DCF which is an operating cash flow related valuation, to arrive at the intrinsic value of the stock

Valuation Matric Discounted Cash Flow Enterprise Value to EBITDA multiple Price to Book Value Multiple Price to Earnings Multiple Weighted Average Fair Value Current Market Price Up side

Weights Fair Value 40% 0.308 20% 0.298 20% 0.346 20% 0.269 100% 0.306 0.266 14.9%

Recommendation We hold a positive outlook on the growth story of Al Anwar Ceramic Tiles SAOG in the long term and have arrived at a target price of RO 0.306 based on our weighted average valuation matrix. We are bullish on the stock and assign “Accumulate� rating with an upside potential of 14.9% from the current price of RO 0.266 in 9 to 12 months.

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Page 22 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Financial Statements Income Statement Figures in RO ‘000 except per share data FY 2008 FY 2009 Turnover

FY 2010 FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E

11,870

15,887

17,055

17,170

20,024

22,766

22,895

23,082

Cost of Sales

5,934

7,937

8,333

8,709

10,100

11,491

11,369

11,491

Gross profit

5,936

7,950

8,722

8,461

9,925

11,275

11,526

11,591

Other income

80

110

368

296

139

95

89

89

Director's remumeration

26

27

31

34

36

37

39

41

1,135

1,291

1,554

1,578

1,832

2,076

2,088

2,105

848

1,112

1,462

1,471

1,564

1,778

1,903

1,919

24

18

15

10

-

-

-

-

3,982

5,612

6,028

5,663

6,631

7,477

7,584

7,615

414

671

697

655

796

897

910

914

3,568

4,941

5,331

5,008

5,835

6,580

6,674

6,701

Administrative and general expenses Selling and Distribution expenses Net finance costs Profit for the year before income tax Taxation Net profit for the period

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Page 23 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Balance Sheet

Figures in RO ‘000 except per share data FY 2008

FY 2009

FY 2010

11,341 23 11,364

10,793 34 10,827

10,256 37 3,650 13,942

12,374 35 3,321 15,730

14,264 35 321 14,620

13,590 35 13,625

12,662 35 12,697

11,560 35 11,595

108 2,164 2,767 1,278 6,318

4,571 2,198 3,668 1,212 11,648

2,671 3,711 2,227 3,672 1,365 13,647

3,711 2,576 4,121 5,114 15,521

2,711 3,004 5,006 10,838 21,559

2,032 3,642 5,691 17,012 28,378

2,032 3,663 5,724 23,241 34,660

2,032 3,924 5,771 29,442 41,169

17,682

22,475

27,589

31,251

36,179

42,002

47,357

52,764

-

-

-

-

Non Current Assets Property, plant and equipment Financial assets available - for - sale Non-current portion of held-to-maturity investments Total Non Current Assets Current assets Available for sale investment Financial assets held - to - maturity Inventories: Trade receivables Cash and bank balances Total Current Assets Total Assets

FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E

Current liabilities Current maturities of Government soft loans Bank Borrowing Trade and other payables Taxation Total Current liabilities

308

308

308

308

2,405 342 3,055

2,172 617 3,097

2,042 735 3,085

1,742 501 2,551

2,020 584 2,603

2,298 658 2,956

2,274 667 2,941

2,298 670 2,968

Non-current liabilities Non -current maturities of Government soft loans Deferred Government grant Staff terminal benefits Deferred tax liability Total Non Current liabilities

486 131 202 289 1,107

240 69 254 344 906

319 316 634

328 300 628

362 300 662

411 300 711

413 300 713

417 300 717

Shareholders' funds Share capital Legal reserve Retained earnings Fair Value Reserve Total shareholders's funds

8,607 1,357 3,564 (9) 13,519

11,189 1,851 5,429 3 18,472

16,224 2,384 5,192 69 23,869

19,469 2,885 5,643 76 28,073

19,469 3,468 9,893 83 32,914

19,469 4,126 14,648 92 38,335

19,469 4,794 19,339 101 43,702

19,469 5,464 24,035 111 49,079

Total shareholders's funds and liabilities

17,682

22,475

27,589

31,252

36,179

42,002

47,357

52,764

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Page 24 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Ratios FY 2008

FY 2009

0.018 0.022 0.069 0.0%

0.025 0.031 0.095 0.0%

0.027 0.033 0.123 1.5%

0.026 0.033 0.144 1.9%

0.030 0.039 0.169 2.3%

0.034 0.043 0.197 2.5%

0.034 0.044 0.224 2.6%

0.034 0.044 0.252 2.6%

5.4 1.4 1.6 4.0

9.5 2.5 3.0 1.7

10.4 2.3 3.3 8.0

10.3 1.8 3.0 7.4

8.9 1.6 2.6 6.1

7.9 1.4 2.3 5.5

7.8 1.2 2.3 5.4

7.7 1.1 2.2 5.4

50.0% 39.7% 30.1% 29.0% 24.2% 22.5% 44.6%

50.0% 41.8% 31.1% 30.9% 25.5% 24.6% 44.3%

51.1% 40.1% 31.3% 25.2% 20.7% 21.3% 39.4%

49.3% 40.1% 29.2% 19.3% 16.7% 17.0% 28.1%

49.6% 41.2% 29.1% 19.1% 17.4% 17.3% 30.0%

49.5% 40.5% 28.9% 18.5% 17.0% 16.8% 33.8%

50.3% 41.0% 29.2% 16.3% 15.1% 14.9% 34.3%

50.2% 41.0% 29.0% 14.4% 13.5% 13.4% 34.4%

Liquidity and Solvency Current ratio Total Debt /Equity Interest Coverage

2.1 0.06 166

3.8 0.03 311

4.4 0.01 374

6.1 0.01 532

8.3

9.6

11.8

13.8

-

-

-

-

Velocity Creditors Inventory Debtors Cash Conversion Cycle

56 203 71 218

50 193 84 227

45 182 79 215

40 196 83 239

34 196 83 244

35 205 86 256

36 224 91 279

36 231 91 285

Per Share Adjusted Earning per Share Adj. Cash Earnings per Share Adjusted BVPS Dividend Yield Valuation Adjusted P/E Adjusted PBV Price/ Sales EV/EBIDTA Profitability Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Equity Return on Capital Employed Return on Average Assets Return on Average Sharecapital

Al Maha Financial Services LLC

FY 2010 FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E

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Page 25 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Maha Rating System Al Maha uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage. "Buy": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 9-12 month time horizon. "Accumulate": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 9-12 month time horizon. "Neutral": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 9-12 month time horizon. Definitions: "Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.

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Page 26 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

Al Maha Financial Services LLC PO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: 00 968 2482 7171, Fax: 00968 24827121

Contacts Research: Suresh Kumar Radhika Gadhia Khushboo Badlani

Telephone

e-mail

24827137 24827138 24827140

suresh@almahafinancial.com radhika@almahafinancial.com khushboo@almahafinancial.com

24827181 24827129

kedar@almahafinancial.com steven@almahafinancial.com

Institutional Sales: A. S. Kedarnath Steven Noronha

Brokerage: Abdullah Al Hinai 24827188 Mahmoud Al Hamsaidi 24827144

Al Maha Financial Services LLC

abdullah@almahafinancial.com mahmoud@almahafinancial.com

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Page 27 of 28


Al Maha Research

Initiating Coverage on Al Anwar Ceramic Tiles Company SAOG 27 March 2011

DISCLAIMER: The research report has been prepared by Al Maha Financial Services LLC for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. Al Maha Financial Services LLC will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. Al Maha Financial Services LLC and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. Al Maha Financial Services LLC and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the sources believed to be reliable ad in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of Al Maha Financial Services LLC.

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Page 28 of 28


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