(RAKCEC:UH) Recommendation 24.5% Unique Competitive Upside - - PowerPoint PPT Presentation

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Ras Al Khaimah Ceramics (RAKCEC:UH)

SLIDE 2

Recommendation

24.5%

Upside

Unique Competitive Positioning Strong Industrial Positioning Recovering Financials

SLIDE 3

Company Overview

Sanitary Ware Tiles Tableware

Established in 1989 Serves 150 countries 15,000 employees 110 million square meters of tiles 5 million pieces of sanitary ware 24 million pieces of porcelain 600,000 faucets a year

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UNI UNIQUE COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Competitive Positioning

Prism Cement Saudi Ceramics Somany

Competitor Tiles Sanitary ware Table ware Prism Cement

✓ ✓ ✓

Somany

✓ ✓ ✘

Saudi Ceramics

✓ ✓ ✘

Cleopatra Ceramics

✓ ✓ ✘ Competitor Ma Market t Cap (in bi billions) UAE AE KSA Mi Middle Ea East Ind ndia Bangladesh Eur Europe Af Africa rica Re Remarks Somany 35.014 ✓ ✓ ✓ ✓ ✓ ✓ ✓ Only exports Sa Saudi Ceramics cs 1.325 ✓ ✓ ✓ ✓ ✓ ✓ ✓ Al Al Mah Maha Ceramics cs 0.40 ✓ ✓ ✓ ✓ ✘ ✘ ✓ Pr Prism Cement 67.727 ✓ ✘ ✘ ✘ ✓ ✘ ✓ Cleopatra Ceramics cs NA ✘ ✘ ✓ ✘ ✘ ✓ ✓ Private

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VA VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Porter’s Analysis

High barrier to entry, high cost per unit, large capital investment Plastic, aluminum, wood, marble Number of suppliers ⬇

Switching costs for retail customers ⬇ vs. construction companies and governments⬆

Many industry players with competitive advantages

Legend: 0 = No threat 1 = Very Low 2 = Low 3 = Moderate 4 = High 5 = Very High

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VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

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VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

The growth of Global Demand from 2016 to 2020 is expected to grow by 66%

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VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

UAE-EXPO2020: ⬆C, ⬆G, ⬆Real Estate & Tourism = ⬆Demand for Ceramics. Saudi Arabia: Oil Price growth India 2020: Contraction project (+20 mn housing units)

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VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

Global GDP is expected to grow from 2016 to 2022 by 37%

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VARIED COMPETITIVE POSITONING STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

Interest Rates ⬇, Investment⬆, Construction⬆ = Demand for ceramics ⬆

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VARIED COMPETITIVE POSITONING ST STRONG IND NDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RISKS

Industrial Positioning

Residential Supply Tiles Production Global GDP Infrastructure Transaction Lending Rates Government Expenditures Major Markets Development

Industry Growth

Government Expenditures ⬆: Infrastructure transaction ⬆ by 92% from 2013 to 2016 = Demand for ceramics ⬆

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECO RECOVERING FINA NANCIALS POSITIVE VALUATION INVESTMENT RISKS

Recovering Financials

500 1,000 1,500 2,000 2,500 3,000 3,500 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Revenue (AEDmn)

Q3 2017

REVENUE

9.2% YoY

NET INCOME 85.6% YtD

(50) 50 100 150 200 250 300 2012 2013 2014 2015 2016

Net Income (AEDmn)

CORE REVENUE

14.1% YoY

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECO RECOVERING FINA NANCIALS POSITIVE VALUATION INVESTMENT RISKS

Recovering Financials

75 95 115 135 155 175 195 215 235 '13 '14 '15 '16 '17e '18e '19e '20e '21e

Working Capital

Days in Accounts Receivables - Days in inventory - Days in Accounts Payable -

0% 5% 10% 15% 20% 25% 2012 2013 2014 2015 2016 Q3 17

EBITDA Margin

0% 5% 10% 15% 20% 25% 30% 35% '12 '13 '14 '15 '16 Q3 17

Gross Margin

❖ HIGHEST EBITDA MARGIN IN 5 YEARS ❖ WORKING CAPITAL POSITIVE TREND ❖ STABLE GROSS MARGIN

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VA VALUATION INVESTMENT RISKS

Positive Valuation

Bas ase e cas ase 3.54 3.54 50% 50% Bear earis ish 3.39 3.39 25% 25% Bull ullis ish 3.70 3.70 25% 25%

3.54

LTM TM EV EV/ / Revenues EV EV/ / EBIT EBITDA EV EV/ / EBIT EBIT P/E /E Mu Mult ltip iple le Used ed 2.5x 15.1x 25.7x 22.5x Pric rice 3.9 5.0 1.9 2.3

3.27

Discounted Cash Flow Relative Valuation

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VA VALUATION INVESTMENT RISKS

Positive Valuation

3.54 3.27

80%

20%

Discounted Cash Flow Relative Valuation

3.48 AED 24.5% Upside from 2.8

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VA VALUATION INVESTMENT RISKS

Monte Carlo Simulation

3.27

20%

Relative Valuation

10000 20000 30000 40000 50000 60000 3.21 3.21 3.22 3.23 3.24 3.25 3.25 3.26 3.27 3.28 3.29 3.29 3.30 3.31 3.32 3.33 3.33 3.34 3.35 3.36 3.37 3.37 3.38 3.39 3.40 3.41 3.41 3.42 3.43 3.44 3.45 3.45 3.46 3.47 3.48 3.49 3.49 3.50 3.51 3.52 3.53 3.53 3.54 3.55 3.56 3.57 3.57 3.58 3.59 3.60 3.61 3.61 3.62 3.63 3.64 3.65 3.65 3.66 3.67 3.68 3.69 3.69 3.70 3.71 3.72 3.73 3.73 3.74 3.75 3.76 3.77 3.77 3.78 3.79 3.80 3.81 3.81 3.82 3.83 3.84 3.85

PR PRICE 3. 3.48 48

Factors:

Cost of Equity Terminal Growth

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VARIED COMPETITIVE POSITONING STRONG INDUSTRIAL POSITIONING RECOVERING FINANCIALS POSITIVE VALUATION INVESTMENT RI RISKS

Investment Risks

Market Operational Financial

Probability Severity Risk Matrix

20 40 60 80 100 120 140 160 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 WTI BRENT 0% 10% 20% 30% 40% 50% 60% 70% 80% 2012 2013 2014 2015 2016

Current Ratio Crude Oil Price

❖ LIQUIDITY / RECEIVABLES COLLECTION ❖ INTEREST RATE HIKES ❖ HIGH LEVERAGE ❖ POTENTIAL DROP IN OIL PRICES

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Recommendation

24.5%

Upside

Unique Competitive Positioning Strong Industrial Positioning Recovering Financials

3.48 12m TARGET 2.8 CLOSING

SLIDE 19

Appendix A Key Financial Ratios

AED mn

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Sales Growth

0% 11%

• 11%
• 1%
• 9%
• 1%

8% 7% 4% 4%

Gross Margin

27% 27% 26% 28% 28% 30% 30% 30% 30% 30%

Operating expenses Ratio

23% 19% 18% 18% 23% 22% 22% 22% 22% 22%

EBIT margin

6.2% 9.9% 10.2% 12.2% 4.7% 10.5% 9.6% 9.9% 10.1% 10.3%

EBITDA Margin

11% 14% 19% 19% 17% 16% 16% 16% 16% 16%

NI Growth

0% 27%

• 1%

1%

• 102%

5019%

• 21%

12% 9% 7%

Net Margin

7% 8% 9% 9% 0% 9% 6% 7% 7% 7%

ROAA

• 5%

5% 5% 0% 4% 3% 3% 4% 4%

ROAE

• 12%

10% 9% 0% 9% 7% 7% 8% 8%

Account Receivables Turnover

• 3.2

2.7 2.6 2.4 2.5 2.6 2.6 2.6 2.7

Days in Accounts Receivables

• 115

133 141 153 148 141 141 139 134

Inventory Turnover

• 2.4

2.1 1.9 1.7 1.8 2.1 2.2 2.2 2.3

Days in inventory

• 154

178 188 220 202 171 167 166 161

Accounts Payable Turnover

• 2.8

2.6 2.7 2.5 2.8 3.1 3.1 3.0 3.0

Days in Accounts Payable

• 128

141 136 147 128 117 118 120 121

Fixed Assets Turnover

3.0 3.0 2.6 2.9 2.4 2.5 2.6 2.8 2.9 3.0

Total Assets Turnover

0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Current Ratio

75% 54% 62% 51% 55% 52% 51% 50% 48% 46%

Quick Ratio

63% 79% 77% 95% 93% 115% 121% 116% 133% 141%

Debt to Equity

87% 69% 62% 67% 78% 78% 79% 70% 70% 70%

Net Debt to Equity

65% 50% 47% 55% 62% 47% 44% 43% 31% 26%

Interest Coverage

79% 34% 27% 23% 64% 25% 27% 25% 22% 22%

Debt to FA

1.9 1.6 1.6 1.9 1.8 1.9 2.0 1.8 1.9 2.0

Capex to FA

0.10 0.10 0.24 0.25 0.18 0.11 0.17 0.17 0.15 0.15

FCF to Revenue

8% 16% 13% 19% 24% 19% 19% 17% 25% 18%

FCF to EBITDA

78% 110% 70% 98% 140% 118% 120% 107% 162% 116%

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Appendix B Relative Valuation

Company Name TEV/Total Revenues LTM - Latest TEV/EBITDA LTM - Latest TEV/EBIT LTM - Latest P/Diluted EPS Before Extra LTM - Latest Geberit AG (SWX:GEBN)

5.8x 22.4x 28x 32x

The Siam Cement Public Company Limited (SET:SCC)

1.8x 8.3x 10.9x 10.9x

Prism Cement Limited (BSE:500338)

1.8x 25.6x 55x NM

Grupo Lamosa, S.A.B. de C.V. (BMV:LAMOSA *)

1.4x 7.4x 9.2x 13x

Saudi Ceramic Company (SASE:2040)

1.9x 12x NM NM

Summary Statistics TEV/Total Revenues TEV/ EBITDA TEV/ EBIT P/Diluted EPS Before Extra High

7.5x 35x 55x 43x

Low

1.4x 7.4x 9.2x 10x

Mean

3.4x 18x 28x 24x

Median

1.8x 12x 19x 13x

AED TEV/Total Revenues TEV/ EBITDA TEV/ EBIT P/E Factor

2763 495 169 0.18

Median Multiple

1.8x 12x 19.45x 13x

TEV

4973 5943 3291

• Cash

424 424 424 424

Debt

2084 2084 2084 2084

Shares Restated

858 858 858 858

Price

3.9 5.0 1.9 2.3

Average Price

3.27

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Appendix C Discounted Cash Flow

WEIGHTED AVERAGE COST OF CAPITAL (WACC) Risk Free Rate 4.17% Beta 0.75 Market Premium 6.26% Country Premium 8.83% Cost of Equity 17% Cost of Debt 2.80% Tax Rate 6.70% WACC 12% Ceramic Products 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e Rev from UAE 522.8 575 620 628 641 667 707 714 728 Change in Revenue 10.0% 7.8% 1.4% 2.0% 4.0% 6.0% 1.0% 2.0% Rev from Bangladesh 222 237 237 262 275 288 303 318 334 Change in Revenue 6.8%

• 0.4%

10.6% 5.0% 5.0% 5.0% 5.0% 5.0% Rev from KSA 462 359 400 236 247 272 305 335 362 Change in Revenue

• 22.4%

11.5%

• 41.0%

5.0% 10.0% 12.0% 10.0% 8.0% Rev from India 467 466 391 291 320 368 412 425 438 Change in Revenue

• 0.1%
• 16.0%
• 25.6%

10.0% 15.0% 12.0% 3.0% 3.0% Rev from Europe 191 200 320 401 341 363 381 401 421 Change in Revenue 4.8% 59.8% 25.4%

• 15.0%

6.5% 5.0% 5.0% 5.0% Other 995 935 474 437 439 443 450 456 463 Change in Revenue

• 6.1%
• 49.3%
• 7.9%

0.5% 1.0% 1.5% 1.5% 1.5% Total Revenue 2,860 2,628 2,441 2,254 2,263 2,402 2,558 2,649 2,745 Change in Revenue

• 8.1%
• 7.1%
• 7.6%

0.4% 6.1% 6.5% 3.6% 3.6%

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Appendix C Discounted Cash Flow

Valuation Method Weight Value Per Share DCF 80% 2.83 Relative Valuation 20% 0.65 12 Months Target Price 100% 3.49 AED mn 2017e 2018e 2019e 2020e 2021 EBITDA 453 473 505 522 540 Capex 125 194 192 166 172 WC used 169

• 57
• 113

88

• 57

Tax

• 20
• 16
• 17
• 19
• 20

FCFF 594 567 757 635 PV 561 505 636 476 Terminal PV 2522 WACC 12.3% Terminal Growth 2.0% Net Debt 1660 FCFE 3040 Shares mn 858.4 Fair Value 3.54

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Appendix C Forecasting Schedules

PPE 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e Net 1,039 1,169 1,181 1,066 1,160 1,130 1,145 1,157 1,144 1,139 Depreciation 133 146 195 191 182 154 179 181 179 178 Gross 1,172 1,315 1,376 1,256 1,342 1,284 1,324 1,337 1,323 1,317 Depreciation Rate 11.34% 11.09% 14.18% 15.19% 13.56% 12% 14% 14% 14% 14% Capex 109 113 282 267 213 125 194 192 166 172 Capex/ Revenue 3% 3% 9% 9% 8% 5% 7% 6% 5% 5% Capex/ PPE 10% 10% 24% 25% 18% 11% 17% 17% 15% 15%

Ratios

2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

COGS/Revenue

• 69.6%
• 69.1%
• 69.3%
• 66.5%
• 63.0%
• 65.0%
• 65.0%
• 65.0%
• 65.0%
• 65.0%

Admin & General Expense/Revenue

• 9.8%
• 7.5%
• 6.8%
• 6.2%
• 7.8%
• 7.8%
• 7.8%
• 7.8%
• 7.8%
• 7.8%

Selling and Distirbution Expense

• 11.8%
• 11.0%
• 10.5%
• 10.7%
• 13.6%
• 13.0%
• 13.0%
• 13.0%
• 13.0%
• 13.0%

Tax Expense/Profit before Tax

• 9.0%
• 6.6%
• 6.7%
• 6.7%
• 33.9%
• 6.7%
• 6.7%
• 6.7%
• 6.7%
• 6.7%

Finance Expense/Average Loans

• 6.3%
• 4.7%
• 4.4%
• 4.2%
• 3.5%
• 3.5%
• 3.5%
• 3.5%
• 3.5%

Finance Income/ Cash at the Bank 4.8% 6.3% 3.8% 1.7% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0%

DEBT 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e Short Term Borrowing 1,531 909 1,099 663 776 874 915 848 883 920 Long Term Borrowing 437 915 770 1,310 1,308 1,311 1,372 1,272 1,324 1,380 Total Loans 1,968 1,824 1,870 1,973 2,084 2,185 2,286 2,119 2,207 2,300 Change in Debt

• 7%

2% 6% 6% 5% 5%

• 7%

4% 4% LT/ Total 22% 50% 41% 66% 63% 60% 60% 60% 60% 60% ST/ Total 78% 50% 59% 34% 37% 40% 40% 40% 40% 40% Debt/Equity 87% 69% 62% 67% 78% 78% 79% 70% 70% 70% Investment Properties 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e Net 231 222 1114 1159 1169 1161 1152 1144 1135 1127 Depreciation 7 7 7 10 9 9 8 8 8 8 Gross 238 229 1,121 1,169 1,178 1,169 1,161 1,152 1,144 1,135 Depreciation Rate 3.02% 3.17% 0.65% 0.82% 0.76% 0.73% 0.73% 0.73% 0.73% 0.73% Addition to Investment Properties 0.0 0.0 0.1 0.0 0.5

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Appendix E Cost Efficiency

Ratio 2012 2013 2014 2015 2016 COGS/Revenue 70% 69% 69% 66% 63% Admin & General Expense/Revenue 10% 7% 7% 6% 8% Selling and Distirbution Expense 12% 11% 10% 11% 14%

58.00% 60.00% 62.00% 64.00% 66.00% 68.00% 70.00% 72.00% 2012 2013 2014 2015 2016

COGS/Revenue

SLIDE 25

Appendix F Governance

19.1% 6.4% 6.1% 5.7% 62.7% Samena Limestone Co Limestone SAE Fab Investments General Pensions and Social Security Authority

Name Position

Abdallah Massaad Chief Executive Officer

Pramod Kumar Chand

CFO & Interim Head of Investor Relations

Sarat Chandak

Chief Executive Officer of India

Imtiaz Hussain

Chief Executive Officer of Rak Ceramics Bangladesh

Stefan Schmied

President of Tiles & Sanitaryware

SLIDE 26

Appendix G Share Price Target

10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5

01/2017 02/2017 02/2017 02/2017 02/2017 03/2017 03/2017 03/2017 03/2017 04/2017 04/2017 04/2017 04/2017 04/2017 05/2017 05/2017 05/2017 05/2017 06/2017 06/2017 06/2017 06/2017 07/2017 07/2017 07/2017 07/2017 07/2017 08/2017 08/2017 08/2017 08/2017 09/2017 09/2017 09/2017 09/2017 10/2017 10/2017 10/2017 10/2017 10/2017 11/2017 11/2017 11/2017 11/2017 12/2017 12/2017 12/2017 12/2017 12/2017 01/2018 01/2018 01/2018 01/2018 02/2018 02/2018 02/2018 02/2018 03/2018 03/2018 03/2018 03/2018 04/2018 04/2018 04/2018

Volume Share Price

3.48

... 1 YEAR TARGET