Net income after minority: AED43mn, +8% Y-o-Y, +13% Q-o-Q, +17% vs. EFGe
Revenues: AED726mn, -3% Y-o-Y, +8% Q-o-Q, +2% vs. EFGe
Gross profit: AED267mn, -4% Y-o-Y, +6% Q-o-Q, +5% vs. EFGe
Net operating profit: AED67mn, -16% Y-o-Y, +25% Q-o-Q, +13% EFGe
 
RAK Ceramics (RAKCER) announced its 4Q18 results, with net profit after minority of AED43mn (+8% Y-o-Y, +13% Q-o-Q) and came in 17% above our estimate of AED37mn, partly supported by a better-than-estimated top-line. The company reported 4Q18 revenues of AED726mn (-3% Y-o-Y, +8% Q-o-Q), 2% above our estimate. Moreover, lower-than-expected SG&A expenses during the quarter also supported the operating margin.
 
Thus, operating profit, of AED67mn (-16% Y-o-Y, +25% Q-o-Q) was 13% above our estimate. The company’s SG&A expenses stabilised during the quarter at AED147mn (-9% Y-o-Y, -10% Q-o-Q, -10% vs. EFGe) and supported the EBIT margin, which came in at 9.3% vs. our estimate of 8.4%. Moreover, the company’s EBITDA margin was the strongest in the past eight quarters, which came in at 16.6% vs. 15.7% in 4Q17, 13.0% in 3Q18 and 13.1% vs. EFGe. Interest expense remained flat Q-o-Q at AED20mn.
 
BoD proposes cash DPS of AED0.15, 5% bonus shares for FY18: RAKCER’s Board of Directors (BoD) proposed to distribute a cash DPS of AED0.15 for FY18 (-37% Y-o-Y; in line with EFGe) and 5% bonus shares (5 shares for every 100 held). The proposed cash dividend implies AED135mn in total cash dividends, 8% dividend yield and 74% payout (vs. 79% payout in FY17; in line with EFGe of 75%).
 
Plan to set up production unit in Saudi Arabia: The company has announced its intention to set up a ceramic-manufacturing facility in Saudi Arabia, with a first phase plan of 10mn sqm/annum production capacity. The company highlighted that its optimistic view about growth in Saudi Arabia and the attractive cost advantages as key forces behind the plan.
 
Our view: Overall, a good set of numbers in a weak market. Although the business breakdown is not yet available, we assume better-than-expected operations could be a function of: i) stronger-than-expected construction activities in its core markets; ii) stable operating cost in its key expanding markets after it peaked over the past two quarters; and iii) lower fuel prices. Although the balance sheet has started to show some improvement, as its working capital cycle was reduced to 280 days from an elevated level of 297 days last quarter, it still continues to be a source of concern, in our view. Although we believe oil prices stabilising would help pent-up demand in the company's core Middle Eastern markets, along with its growing emerging markets presence, short-term challenges from the inflationary impact and the overall construction weakness in its key market of UAE would be an overhang. We have a Buy rating on RAKCER, as we like its multi-national operations, and we believe the valuation provides comfort (FY19e P/E of 7.5x) and is a strong dividend play (yield of c8% for FY19). (Sameer Kattiparambil, Dina Hicham, company)
 
RAK Ceramics (AD): AED1.89 as of 12 Feb. 2019, Rating: Buy, TP: AED2.89/share, MCap: USD464mn, RAKCEC UH/RKCE.AD