Saudi Ceramic Continued success - Al Rajhi Capital

RSI10 

Vol 

Saudi Ceramic 

Construction and Materials –Industrial 

SCERCO AB: Saudi Arabia 

1 August 2010 

US$bn0.94bn 63.6% US$4.100mn 

Market cap Free float Avg. daily volume 

Target price 166.3 18.6% over current 

Consensus price n/a 

Current price 140.3 as at 31/7/2010 

Underweight Neutral Overweight 

Key themes 

We believe that the ceramics manufacturing industry 

will continue to grow. Saudi Ceramic has a very 

strong position in the Saudi ceramic market. It is 

currently the major local player. We believe that 

Saudi Ceramic’s strategy of increasing production 

capacity in the ceramic tiles and water heaters 

divisions will boost the company’s growth. 

Implications 

Saudi Ceramic is a quality company, which we rate 

as Overweight. It is performing well operationally 

and offers good growth in the near term at a 

reasonable valuation. We believe that growing 

dividends, coupled with high transparency will 

support the share price. 

Performance 

140 

130 

120 

110 

100 

70 

30 

600 10 

400 

200 

Earnings 

Period End (SAR) 12/09A 12/10E 12/11E 12/12E 

Revenue (SARmn) 958 1,129 1,356 1,551 

Revenue Growth 11.7% 17.9% 20.1% 14.3% 

EBITDA (SARmn) 282 344 415 488 

EBITDA Growth 8.9% 21.7% 20.7% 17.6% 

EPS 7.89 9.45 11.17 13.41 

EPS Growth 10.8% 19.9% 18.1% 20.1% 

Source: Company data, Al Rajhi Capital 

Valuation 

24 

22 

20 

18 

16 

14 

12 

10 

Price Close MAV10 MAV50 Relative to SASEIDX (RHS) 

08/09 10/09 01/10 05/10 07/10 

Source: Bloomberg 

P/E (x) 

01/07 01/08 01/09 


107 

103 

99 

95 

91 

88 

84 

80 

76 

72 


Continued success 

Research Department 

Hashem Al-Fawaz, Investment Analyst 

Tel 966 1 211 9269, alfawazhi@alrajhi-capital.com 

Saudi Ceramic is the only listed ceramics company in Saudi Arabia. It has 

shown good growth over the last couple of years. The increase in production 

capacity of the ceramic tiles and water heaters segments, and the continuation 

of exporting activities should drive the company’s growth over the next three 

years. The company has high and sustainable profit margins, and a likely 

increasing focus on ceramic tiles should push margins higher. Therefore, we 

are initiating coverage of Saudi Ceramic with an overweight rating and a 

target price of SAR166.3. This implies upside potential of 19%. 

Market: We believe that the booming construction market in the region will play 

an important role in stimulating the ceramics market. By our estimate, the Saudi 

ceramics market size is currently about SAR4bn. The market is expected to grow 

further driven by the boom in the building and construction industry, and the 

excellent quality of locally manufactured ceramics. Demand is exceeding supply, 

and we expect it to increase further. Nevertheless, the lack of innovative designs 

gives imported ceramics an advantage over local ones. 

Continuous and steady growth policy: Saudi Ceramic has projects under 

construction to increase the production capacity of all divisions’ sales. For the 

ceramic tiles division, it plans to open a fourth factory which has two stages that 

will increase output by 50% in 2012. A new water heaters factory has started 

production with 50% greater capacity than old one. Moreover, the company is 

working on upgrading and expanding bathroom products factory. The plan 

includes more automation by adding glazing robots. Therefore, taking aggressive 

expansion plans into account, we expect Saudi Ceramic to achieve revenue 

growth of 18% and 20% in 2010 and 2011 respectively. 

Gross and net margins are competitive and sustainable: Saudi Ceramic has 

a net margin of 20.6% compared to 30.9% and 6.3% for its GCC peers Al Anwar 

Ceramic Tiles and Rak Ceramics respectively. We expect the company to focus 

on the ceramic tiles segment since it has higher margins. The company has 

maintained the same gross and net margin levels over the last five years. This 

can be attributed to two facts: firstly, Saudi Ceramic has a concession from 

government to extract clay at minimal cost, and secondly, the high quality of 

products gives the company a competitive advantage. 

Respectable growth in recession period: Saudi Ceramic maintained good 

growth in 2009. Revenues and EBITDA grew in 2009 by 12% and 9% 

respectively. Moreover, net income increased by 11% in that year. These are 

uncommon results during a downturn for a company operating in a cyclical 

business like ceramics. We believe that improving economic conditions will 

drive further growth in revenues and EBITDA over the next two years. 

Saudi Ceramic still offers value: Using long-run discounted economic profit 

valuation, we estimate fair value per share for Saudi Ceramic at SAR166.3. Our 

target price for Saudi Ceramic of SAR166.3 is 100% driven by the long-run DEP 

method. Our target price implies 19% upside from the current level. Saudi 

Ceramic is trading on a 2010 EV/EBITDA multiple of 11.3x, a 2010 PE ratio of 

14.3x, and offering a dividend yield of 2.3%. Saudi Ceramic’s return on invested 

capital of 13.2% (our estimate for 2010) is 60% more than its WACC of 8.4%. 

Disclosures Please refer to the important disclosures at the back of this report. 

Powered by Enhanced Datasystems’ EFA Platform 1


Construction & Materials –Industrial 

1 August 2010 

Page 

3 Saudi ceramics market: dominated by imports 

3 Opportunities foster optimism, few threats 

Ceramic products are essential parts of modern buildings. This explains the high 

correlation between demand for ceramics and construction markets. The demand for 

ceramic products is huge, and we expect it to grow further driven by the booming 

construction. Saudi ceramics are considered high quality but they have to develop 

innovative designs to compete with imported ceramics. 

5 Saudi Ceramic: in expansion mode 

5 

Continuous and steady growth policy 

Saudi Ceramic’s business contains two divisions: ceramic tiles and bathroom products, 

and water heaters. All divisions have grown strongly recently. We expect further 

growth since the company is increasing production capacity. Desert Mines supplies 

Saudi Ceramic and sells clay to local ceramic companies. Saudi Ceramic sells its 

products through four main channels: showrooms, dealers, institutions and exports. 

6 

Ceramic tiles and bathroom goods segment: gradual and 

sustainable expansion strategy 

Saudi Ceramic is expanding production capacity of ceramic tiles. It currently has total 

production capacity of 34mn m 2 of ceramic tiles, and we expect this to reach 43mn and 

52mn m 2 by the end of 2010 and 2011 respectively. 

7 

Water heaters segment: remarkable growth 

Saudi Ceramic currently has total production capacity of 1.5mn heaters per year. Water 

heater segment sales grew by 33% and 21% in 2008 and 2009 respectively. More than 

50% of this segment’s production is exported. 

8 Profitable business: fine record, returns set to last 

8 

Gross and net margins are competitive and sustainable 

Saudi Ceramic has a net margin of 20.8% compared to 30.9% and 6.3% for its regional 

peers Al Anwar Ceramic Tiles and Rak Ceramics respectively. We expect the company 

to focus on the ceramic tiles segment since it has a higher margin. 

8 

Respectable growth in recession period 

Revenues and EBITDA grew in 2009 by 12% and 9% respectively. Moreover, net 

income increased by 11% in that year. We expect that improving economic conditions 

will drive further growth in revenues and EBTIDA over the next two years. 

10 Valuation: offers good long-term value 

10 High economic profit; growth in dividend payout ratio 

Saudi Ceramic achieves a return on invested capital (ROIC) of 12.5-12.6%. We expect 

the company to maintain and improve its high returns, and so two-thirds of our 

estimated fair enterprise value for Saudi Ceramic comes from future economic profits. 

We estimate fair value per share at SAR166.3, and set this as our target price. 

Currently, Saudi Ceramic offers a dividend yield of 2.3%. The company increased the 

paid dividend to 30% of paid-up capital in 2009; however, we expect it to maintain the 

same dividend for at least three years. Our rating on Saudi Ceramic is Overweight. 

13 Appendix: investments 

14 Financial data 

Disclosures Please refer to the important disclosures at the back of this report. 2



1 August 2010 

Corporate summary Share information Valuation 

Saudi Ceramic Company is one of the 

Market cap (SAR/US$) 3.502bn / 0.935bn 

oldest and leading ceramics producers 

52-week range 109.5 - 140.8 

in the Middle East. Saudi Ceramic Daily avg volume (US$) 

3.700mn 

manufactures and markets ceramic Shares outstanding 

25.00mn 

products. The company has two major Free float (est) 63.6% 

segments: ceramic tiles and bathroom 

products, which contribute 77% of Performance: 1M 3M 12M 

revenues, and water heaters which Absolute 7.8% -4.5% 2.1% 

contributes the remaining 23%. 

Relative to index 13.2% 5.1% -4% 

Incorporated in 1977 in Riyadh by a 

group of prominent businessmen. 

Major Shareholder: 

General Social Insurance 15.9% 

Saleh Abdulaziz Al Rajhi 14.3% 

Source: Bloomberg, Al Rajhi Capital 

Saudi ceramics market 

dominated by imports 

Period End 12/09A 12/10E 12/11E 12/12E 

Revenue (SARmn) 958 1,103 1,230 1,368 

EBITDA (SARmn) 282 343 391 447 

Net Profit (SARmn) 197 230 252 295 

EPS (SAR) 7.89 9.20 10.09 11.78 

DPS (SAR) 3.00 3.00 3.00 3.00 

EPS Growth 10.8% 16.7% 9.6% 16.8% 

EV/EBITDA (x) 13.3 11.3 10.3 9.0 

P/E (x) 16.7 14.3 13.1 11.2 

P/B (x) 3.8 3.3 2.8 2.3 

Dividend Yield 2.3% 2.3% 2.3% 2.3% 


The Saudi ceramic market size 

is about SAR4bn 

70% of the market sales are 

imports 

With a size of about SAR4bn, the Saudi ceramics market is one of the biggest in the MENA 

region. We expect the market to grow further, driven by the current boom in the building and 

construction industry. The ceramic products include ceramic wall and floor tiles, bathroom 

goods and water heaters. The main material used in manufacturing ceramics is clay. The tiles 

include many kinds such as porcelain and ceramic tiles. Ceramics are made mainly of clay, 

which is extracted locally, and heated in gas kilns and mixed with other exported chemicals. 

The porcelain is made of white clay which is imported from Ukraine and Turkey. 

The ceramic tiles market is dominated by imports which represent around 70% of the market. 

Saudi Ceramic has a 25% share, and the remaining 5% is divided between small private Saudi 

companies such as Alfanar, Future Ceramic in Dammam and Al-Jawdah Ceramic. Many of 

the local companies are suffering because of the lack of innovative designs that are an 

important feature of modern buildings. Imports, especially from Europe and US, are 

characterised by innovative designs, making them more attractive to people despite their 

high prices. 

Figure 1. Saudi ceramics market : market share of ceramic tiles 

5% 

25% 

70% 


Imports Saudi ceramics others 

Excess demand in bathroom 

products market 

The bathroom products market is very dominated by imports, with a share of around 90%. 

Saudi Ceramic company has more than 7% of the bathroom products market, and the other 

local companies represent 3 % of the market. This market is characterised by excess demand, 

which provides an opportunity for local companies to expand their capacity. Regarding the 

water heaters markets, Saudi Ceramic has a share of about 50%. The other local companies 

have less than 5% market share, and imports represent the remaining 45% of the market. 




1 August 2010 

Opportunities foster optimism, few threats 

Huge government projects will 

boost the demand for ceramics 

products 

Imports have a competitive 

advantage in innovative 

designs 

Demand is expected to be more 

than 200mn m 2 by 2013 

Booming construction market 

Ceramic products including tiles, bathroom products and water heaters are essential parts of 

modern buildings. This explains the high correlation between demand for ceramics and 

construction markets. The Saudi government is constructing huge projects called economic 

cities. There are also other big construction projects for the twelve newly created government 

universities, and expansion projects for the existing universities. These projects are expected 

to increase the demand for ceramic products and support the revenue growth. 

Excellent quality, but lack of innovative designs 

Saudi ceramics are considered high quality since their raw materials, mainly red clay, are 

among the best in the world. However, the imported ceramics, especially the European, are 

preferred by customers because of the variety of design that fits different people’s needs. 

Some of the local companies are trying to overcome this obstacle by producing customised 

orders where the customer selects his preferred design. Saudi ceramics are cheaper than the 

European so they are attractive for low and middle class people. 

Demand is exceeding supply 

We expect demand for ceramic tiles to be more than 200mn m 2 by 2013 while the current 

supply level is about 136mn m 2 . The demand for bathroom products is already exceeding the 

quantity supplied. However, supply of water heaters exceeds demand which increases the 

export percentage of locally manufactured heaters. Overall, the sales growth potential of 

Saudi ceramic companies seems very clear. 




1 August 2010 


in expansion mode 

Ceramic tiles and bathroom 

products division is the biggest 

in Saudi Ceramic 

Continuous and steady growth policy 

Saudi Ceramic’s business contains two divisions: ceramic tiles and bathroom products (this is 

named by the company as sanitary wares), and water heaters. The company combines 

ceramic tiles and bathroom products in one division since they have almost the same 

business line and raw materials. 40% of ceramic tiles production is customised. i.e. produced 

according to customers’ preferences. In Q2 2010, ceramic tiles contributed 79% of total 

revenues whereas water heaters contributed 21%. All divisions have grown strongly recently; 

the water heaters segment showed the greatest year-on-year growth in Q2 2010 since it grew 

by 15.3%. The ceramic tiles and bathroom products segment grew by 15% in Q2 2010. The 

company’s three year compound annual growth rate (CAGR) in revenues is 24 %. 

Figure 2. Saudi Ceramic: revenues breakdown in Q2 2010 

21% 

79% 

ceramic tiles and bathroom products 

water heaters 


Saudi Ceramic sells clay to 

local ceramic companies 

Increase in production capacity 

of all segments 

Desert Mines has a concession to extract clay 

Desert Mines was a department of Saudi Ceramic Company, and it is in the process of 

becoming a separate entity 100% owned by Saudi Ceramic. Desert Mines has a concession 

from the Saudi government to extract clay and it is renewed periodically. Desert Mines 

supplies Saudi Ceramic and sells clay to local ceramic companies and other companies that 

use clay in their manufacturing process such as ceramic pipes companies. The high quality of 

local clay gives the company an opportunity to export its products abroad. 

Production capacity is increasing 

Saudi Ceramic’s factories are located in the Second Industrial City in Riyadh. Saudi Ceramics 

has three ceramic tiles factories, and a fourth is under construction. The fourth tiles factory 

project will increase production capacity by 50%. The first stage of the fourth factory is 

expected to start commercial production by the end of 2010. The second stage is expected to 

run by the end of 2011. The company had already expanded the capacity of the only bathroom 

products factory in Q1 2010. The company has two water heater factories. The second factory 

started commercial production in Q4 2009 and it has half of the capacity of the first one. 

Taking these expansion plans into account and assuming the prices will increase or stay 

constant, we expect Saudi Ceramic to achieve impressive revenue growth of 18% and 20% in 

2010 and 2011 respectively. 




1 August 2010 

Figure 3. Saudi Ceramic: production capacity for each segment 

2007 2008 2009 2010E 2011E 

Ceramic tiles(mn m2) 21 32 34 43 52 

Sanitary wares (tons) 19,200 24,000 27,600 34,500 41,000 

Water heaters (heater) 600,000 850,000 1,200,000 1,500,000 1,600,000 


55% of revenues come from 

local dealers 

Sales by distribution channels 

The company’s sales can be divided based on the distribution channels. The company has 25 

showrooms around Saudi Arabia that derive 20% of its sales. The exports represent 13% of 

sales. The sales of the Dubai office increased by 25% in 2009. The third channel is direct sales 

to institutional projects, which make up a 7% share. Most of the sales are driven by company 

dealers, which represent 55% of sales. 

Figure 4. Saudi Ceramic: revenues breakdown by distribution channels 


We expect an increase in 

capacity of ceramic tiles of 50% 

in 2012 

Increased utilisation of 

bathroom products factory 

We expect revenues to grow by 

18% and 22% in 2010 and 

2011 respectively 

Ceramic tiles and bathroom products segment: gradual 

and sustainable expansion strategy 

Saudi Ceramic plans to continue expanding its production of ceramic tiles. The company has 

replaced the old tiles line in the first tiles factory whose capacity totalled 600,000 m 2 by a 

new line whose annual capacity is 2mn m 2 . This project has been completed and production 

started on March 2009. The company also lunched a new production line at the first tile 

factory with an annual capacity of 1.3mn m 2 , which started production on May 2010. 

Moreover, work is progressing on implementation of the first stage of the fourth tile factory 

project with annual production capacity of 9mn m 2 . This stage is expected to be in operation 

by the end of 2010. The second stage of the fourth tiles factory has a capacity of 9mn m 2 , and 

the company expects to launch production by the end of 2011. The company currently has a 

total production capacity of 34mn m 2 of ceramic tiles, and we expect it to reach 43mn and 

52mn m 2 by the end of 2010 and 2011 respectively. 

The company has one factory that handles bathroom products production. The current 

capacity of 30,000 tons per year equals more than 2mn pieces. The company is planning to 

expand its capacity further since demand is huge. The company is working on upgrading and 

expanding the bathroom products factory. The plan includes more automation by adding 

glazing robots for spraying, high and low pressure casting lines, tunnel and shuttle kilns and 

tunnel dryers. Upgrading and expanding will result in an increase of capacity of 50% up to 

3mn pieces annually within tow years. 

The ceramic tiles and the bathroom products segment sales grew by 41% and 9% in 2008 and 

2009 respectively. From the fact that the company’s policy is to produce at full capacity, and 

based on the aggressive expansion, we expect that the company’s revenues will grow by 18% 

and 22% in 2010 and 2011 respectively. 




1 August 2010 

Figure 5. Saudi Ceramic: ceramic tiles and bathroom products segment sales forecasts 

1,400 

1,320 

1,200 

1,061 

1,189 

1,000 

867 

800 

672 

734 

600 

475 

400 

200 

0 

FY 07 FY08 FY09 FY10E FY11E FY12E FY13E 

sales(mn SAR) 


50% of water heaters are 

exported 

We expect revenues to grow by 

17.5% and 12% in 2010 and 

2011 respectively 

Water heaters segment: remarkable growth 

Saudi Ceramic produces porcelain-coated water heaters, which are stainless and safer than 

galvanised water heaters. The company sells water heaters under different brand names 

based on quality and durability, such as the Saudi Ceramic brand which is distributed mainly 

in the local and GCC market, and “Super Aqua Hot” which is exported to Europe. The 

company exports more than 50% of its commercial production of this segment. 

Saudi Ceramic has two water heater factories. The second factory started commercial 

production in the last quarter of 2009 with an annual production capacity of 500,000 water 

heaters (50% of the first factory capacity). The company currently has a total production 

capacity of 1.5mn heaters per year. Water heater segment sales grew by 33% and 21% in 2008 

and 2009 respectively. This was driven mainly by huge demand from local customers and 

foreign countries. We expect that this demand will continue further. Therefore, we expect the 

water heater segment to grow by 18% and 12% in 2010 and 2011 respectively. 

Figure 6. Saudi Ceramic: water heaters segment sales forecasts 

400 

350 

330 

366 

300 

250 

224 

263 

295 

200 

185 

150 

140 

100 

50 

0 

FY 07 FY08 FY09 FY10E FY11E FY12E FY13E 

sales(mn SAR ) 





1 August 2010 

Profitable business 

good record and sustainable returns 

Saudi Ceramic barely suffered 

during the downturn of 2009 

Respectable growth in recession period 

Saudi Ceramic maintained good growth in the recessionary year of 2009. Revenues and 

EBITDA grew in 2009 by 12% and 9% respectively. Moreover, net income increased also by 

11% in that year. These are uncommon results during an economic downturn for a company 

operating in a cyclical business like ceramics. We are convinced that the company will 

perform better in economic recovery stage. We expect that the improving economic 

conditions and the current expansion projects will drive further growth in revenues and 

EBTIDA over the next two years. 

Figure 7. Saudi Ceramic: revenues and EBITDA growth 

50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

FY08 FY09 FY10E FY11E FY12E 

revenues 

EBITDA 


As the figure above shows, we expect revenue growth of 18% in 2010 to be followed by growth 

of 20% in 2011 and 14% in 2012. Regarding EBITDA, we expect growth of of 22% in 2010 to 

be followed by growth of 21% in 2011 and 18% in 2012. We expect the EBITDA margin to 

expand from 30% in 2009 to 32% by 2012. 

Saudi Ceramic’s regional peers 

are Al Anwar Ceramic Tiles and 

Rak Ceramics 

We expect the company to 

focus on the ceramic tiles 

segment since it has higher 

margin 

Gross and net margins are competitive and sustainable 

Saudi Ceramic’s regional peers are Al Anwar Ceramic Tiles and Ras Al Khaimah (Rak) 

Ceramics. Al Anwar Ceramic Tiles is listed on the Muscat Securities Market (MSM), and Rak 

Ceramics is listed on the Abu Dhabi Securities Market (ADSM). Al Anwar Ceramic Tiles 

enjoys higher gross and net margins than Saudi Ceramic. This is due mainly to the fact that 

Al Anwar Ceramic Tiles produces only ceramic tiles, which enjoy higher margins than other 

ceramic products such as bathroom products and water heaters. However, Rak Ceramics is 

below Saudi Ceramic in terms of the gross and net margin. Rak Ceramics is suffering because 

it implemented huge expansion projects in a short period. It has plants in six different 

countries around the world, which increased its capex and logistic costs. Moreover, Rak 

Ceramics has a high financing cost that reduces its net margin. 

Saudi Ceramic has a net margin of 20.6% compared to 30.9% and 6.3% for Al Anwar Ceramic 

Tiles and Rak Ceramics respectively. We expect the company to focus on the ceramic tiles 

segment since it has higher margins. We believe that Saudi Ceramic’s margins are good. This 

can be attributed to two facts; firstly, Saudi Ceramic has a concession from Saudi government 

to extract clay in a minimal cost; and secondly, the high quality of products gives the 

company a competitive advantage and good appearance abroad. 




1 August 2010 

Figure 8. Saudi Ceramic versus Al Anwar Ceramic Tiles and Rak Ceramics (gross & net 

margins) 

60.0% 

50.0% 

50.0% 

40.0% 

36.8% 

30.0% 

20.0% 

24.2% 

30.9% 

20.6% 

10.0% 

6.3% 

0.0% 

Gross Margin 

Net Margin 


Al Anwar Ceramic Tiles Rak Ceramics Saudi Ceramic 

Saudi Ceramic maintained the 

same gross and net margin 

levels over the last five years 

Saudi Ceramic’s gross and net margins look respectable. The company has maintained almost 

the same gross and net margin over the last five years. We believe it will be able to improve 

its margins or at least maintain the current margins levels, given that the demand is 

increasing. However, market risks resulting from local competitors and dumping practices by 

some foreign importers, which sell at low prices, may affect the margins. 




1 August 2010 

Valuation 

offers good long-term value 

High economic profit of 12.5- 

12.6% 

High economic profit; growth in dividend payout ratio 

By our estimates, over the period 2008-2009 Saudi Ceramic achieved a return on invested 

capital (ROIC) of 12.5-12.6%. This is 60% more than our estimate of the company’s weighted 

average cost of capital (WACC) of 8.4%, implying that the company achieved an economic 

profit spread (ROIC – WACC) of 4.2-4.3%. We expect Saudi Ceramic’s economic profit 

spread to increase from this year onwards driven by the expected increase in demand. 

Figure 9. Saudi Ceramic: economic profit spread (ROIC-WACC) 

7.0% 

6.0% 

5.5% 

6.1% 

6.0% 

5.0% 

4.3% 

4.2% 

4.9% 

4.0% 

3.0% 

2.0% 

1.0% 

0.0% 

2008 2009 2010 2011 2012 2013 

economic profit 


Saudi Ceramic currently offers 

a dividend yield of around 2.3% 

Our key long-run method of 

forecasting is discounted 

economic profit (DEP) 

The company has increased its annual paid dividends from 20% t0 25%of paid-up capital in 

2006. Then, it increased the paid dividend to 30% in 2009. However, we expect the company 

to maintain the same paid dividend for at least three years given that the company has high 

capex. Saudi Ceramic currently offers a dividend yield of 2.3%. The payout ratio is low in 

comparison to the high net margin. However, we expect the company to increase its paid 

dividends after 2013 assuming a reduction in capex. 

Valuation: summary of our approach and conclusions 

Our key method of valuation for Saudi Ceramic is long-run discounted economic profit 

(DEP), sometimes also called discounted long-run EVA (“economic value added”). This is a 

simple variation on discounted cash flow, and is mathematically equivalent. In our models, 

we make explicit forecasts for income statement, balance sheet and cash flow out to 2021. We 

then assume a steady fading of return on invested capital, i.e. excess return, down to the cost 

of capital over a period of up to 40 years from end of our period of explicit forecasting. This 

approach avoids a common problem in long-run modelling: namely, that the analyst stops 

forecasting at some arbitrary point when the company in question is still generating high 

returns. In terms of financial theory this is implausible, and excess returns will eventually 

disappear through competition, regulation or some other means. 

Our DEP valuations are sensitive to many factors, including assumed revenue growth, 

EBITDA margin and capex/sales ratio in 2021, i.e. the last year of explicit forecasting. 

Another important variable is the assumed duration of the period of competitive advantage, 

i.e. the period during which the company generates returns above weighted average cost of 

capital (WACC). Deciding on the length of the period of the competitive advantage is 

naturally a subjective exercise. We have assumed 30 years for Saudi Ceramic on the grounds 

that it is one of the leaders in its market and that it would take several years for rivals to 

challenge it effectively. 

We estimate Saudi Ceramic’s 

WACC at 8.4% 

However, as with any DCF-based approach, the factor to which the DEP valuation is most 

sensitive is WACC; we have assumed a WACC of 8.4% for Saudi Ceramic. Saudi Ceramic has 

an adjusted Beta of around 0.9 according to Bloomberg. Moreover, Saudi Ceramic has a low 

interest rate on debt which stems from the fact that a significant portion of its loans comes 




1 August 2010 

from the Saudi Industrial Development Fund (SIDF); these loans carry a very low or zero 

interest rate. 

WACC is in turn highly sensitive to assumed terminal capital structure. Estimating terminal 

capital structure is again a rather subjective exercise. We have assumed a terminal debt/(debt 

plus equity) ratio of 35% for Saudi Ceramic, compared to about 45% at present. We expect 

the company to redeem some of the debt as more cash is generated and so we expect gearing 

to decrease over the long run. 

Figure 10. Saudi Ceramic: weighted average cost of capital (WACC) 

Risk-free Rate 3.0% 

Expected Mkt Return - Risk-free Rate 8.4% 

Adjusted Beta 0.9 

Cost of Equity 10.6% 

Pre-tax Cost of Debt 4.5% 

Effective Tax rate 2.6% 

After-tax Cost of Debt 4.4% 

Target D/(D+E) 35.0% 

WACC 8.4% 


Two-thirds of our estimated fair 

enterprise value for Saudi 

Ceramic comes from future 

economic returns 

We estimate fair value per 

share at SAR166.3 

One of the advantages of discounted economic profit forecasting is that it splits the analyst’s 

appraised fair enterprise value for a company between discounted economic profit, i.e. the 

present value of the company’s future returns in excess of the cost of capital, and invested 

capital, i.e. (in simple terms) the debt and equity funding already invested in the business. 

With regard to Saudi Ceramic, as the table below shows, we calculate discounted economic 

profit at SAR3,238mn, i.e. roughly twice the opening invested capital of SAR1,554mn. In 

other words, two-thirds of our estimated fair enterprise value for Saudi Ceramic comes from 

discounted economic profit. This means that a large part of the company’s value lies in the 

high economic returns that we expect it to continue to generate in the future. 

As noted, appraised fair enterprise value is the sum of discounted economic profit and 

invested capital. From appraised fair enterprise value we subtract net debt to estimate the 

fair value of equity. We divided the fair value of equity by the number of shares to arrive at 

the intrinsic fair value per share. Based on long-run DEP analysis, and using our core 

assumption of a period of competitive advantage of 30 years, we thus estimate fair value per 

share for Saudi Ceramic at SAR166.3. 

Figure 11. Saudi Ceramic: discounted economic profit valuation 

(SAR '000) 

Discounted economic profit 3,283,376 

Opening Invested capital 1,553,867 

Appraised value of the enterprise 4,837,243 

Value of debt (739,985) 

Appraised value of the equity 4,157,269 

Number of shares 25,000 

Appraised share price 166.3 


We have considered 

comparative multiples analysis 

too 

We have selected two GCC 

ceramic companies as 

benchmark for Saudi Ceramic 

In addition to long-run DEP, we have considered comparative multiples analysis to value 

Saudi Ceramic in relation to other players in the GCC region. Under this approach we 

estimate fair value using comparisons of valuation measures – notably, EV/EBITDA and PE 

multiples– with other listed GCC ceramic companies since Saudi Ceramic is the only listed 

ceramic company in Saudi Arabia. However, we have taken 100% weight on the long-run 

DEP method because it is theoretically more defensible. 

Regarding the comparative multiples analysis, we have selected two GCC ceramic companies 

as benchmarks. Those two companies are Al Anwar Ceramic Tiles and Ras Al Khaimah (Rak) 

Ceramics. We believe that they provide excellent comparables considering that they are 

operating in the same region, and face almost the same macroeconomic factors. However, the 

relatively low liquidity in the non-Saudi GCC markets is a major concern that probably 




1 August 2010 

reduces the ratios for these companies. In addition, the other non-Saudi GCC markets have 

been more affected by global economic events over the past couple of years. This has 

decreased investors’ confidence in the non-Saudi GCC markets and contributed to relatively 

cheap stock prices. The table below shows the major valuation ratios for Al Anwar Ceramic 

Tiles and Rak Ceramics compared to Saudi Ceramic’s. 

Figure 12. Saudi Ceramic: comparative multiples analysis 

Coompany Market Sector MKT Cap P/E EV/EBITDA 

Bloomberg 

Code 

Al Anwar Ceramic Tiles MSM Construction & Materials $ 130 9.9 6.5 AACT OM 

Rak Ceramics ADSM Real Estate $ 285 4.3 4.4 RAKCEC DH 

Saudi Ceramic KSA-Tadawul Building & construction $ 903 14.3 11.5 SCERCO AB 


Saudi Ceramic still offers value 

despite its high PE and 

EV/EBITDA ratios 

We believe that Saudi Ceramic still offers value despite its high PE and EV/EBITDA ratios 

compared to Al Anwar Ceramic Tiles in Oman. Al Anwar produces only ceramic tiles, which 

as mentioned earlier enjoy higher margins than other ceramic products such as bathroom 

products and water heaters. While this fact probably supports a high valuation, Saudi 

Ceramic operates in a larger market, with greater growth potential in a larger number of 

businesses; moreover, Saudi Ceramic is engaged in aggressive expansion that should drive its 

growth further. Saudi Ceramic is well above Rak Ceramics in terms of PE and EV/EBITDA 

ratios. Rak Ceramics has almost the same business lines except that it does not manufacture 

water heaters, which have low margins. Rak Ceramics is suffering because of apparently 

unsuccessful expansion projects in different countries, and high financing costs that reduce 

its net margin. 

We expect Saudi Ceramic to concentrate more on ceramic tiles since its return is higher. 

Moreover, we expect the company to record an impressive increase in its earnings when its 

new expansion projects start commercial production. 

Risks associated with our assumptions 

It is important to mention that our valuation relies heavily on forecasts which are subject to 

errors. We have come up with several assumptions including growth, cost of capital, and 

market trend to predict future performance. We have tried to arrive at the most accurate 

assumptions; however, reality may deviate from our forecasts depending on new 

microeconomic or macroeconomic factors. Competition is another factor that can influence 

our assumptions. New entrants or/and transformation of current rivals’ business models 

might cause a change in the whole market, and hence in our overall assumptions and 

forecasts. 




1 August 2010 

Appendix: 

Saudi Ceramic’s investments 

SAR44.4mn investment in 

associate companies 

15.87% share in Natural Gas 

Distribution 

50% share in CPC 

CPC and Saudi Ceramic has 

the same input, i.e. clay 

Saudi Ceramic has some investments that are intended to increase the value of the operating 

business. Saudi Ceramic has a total of SAR44.4mn of investment in two associate companies, 

which are Natural Gas Distribution Company and Ceramic Pipes Company (CPC). The 

company does not have a controlling interest in either company. The company also has 

investments in available-for-sale securities of SAR9mn. 

Natural Gas Distribution Company 

Natural Gas Distribution Company is a limited liability company established in 2002 with 

paid up capital of SAR15mn. Saudi Ceramic has 15.87% of the share capital. The main 

activities of the associate are to purchase and distribute gas to factories in the Second 

Industrial City in Riyadh. Gas is an important material that is used to run kilns where clay is 

processed to produce ceramics. The investment is accounted for using the equity method 

because the company has significant influence over the investee by major representation in 

the board of directors. 

Ceramic Pipes Company 

Ceramic Pipes Company (CPC) is a closed joint stock company established in February 2007. 

Saudi Ceramic Company holds 50% of the share capital. The authorised and fully subscribed 

share capital is SAR100mn in which SAR80mn is paid up. The company has paid its share by 

contributing SAR25mn in cash and SAR15mn in kind, representing the value of a plot of land. 

The investment is accounted for using the equity method. 

The main activity of the company is manufacturing of clay pipes, which are used in 

connecting sewage systems. The sole customer of the company is the government. Clay pipes 

are expected to experience high demand because of the construction of government’s huge 

economic cities. However, there are other local competitors in the market such as Saudi 

Vitrified Clay Pipe Company (SVCP), which is listed in Saudi stock market. CPC is purchasing 

clay from Desert Mines Company, which is a division of Saudi Ceramic. The company’s 

production capacity is 100,000 tons per year. We expect the company to start commercial 

production by the end of 2010. However, we expect the contribution of CPC to net income to 

be minor in 2010 and 2011. 




1 August 2010 

We expect revenues to reach 

SAR1,103mn this year 

Income Statement (SARmn) 12/08A 12/09A 12/10E 12/11E 12/12E 

Revenue 857 958 1,129 1,356 1,551 

Cost of Goods Sold (537) (605) (708) (841) (946) 

Gross Profit 321 352 421 515 605 

Government Charges 

S.G. & A. Costs (138) (156) (177) (217) (248) 

Operating EBIT 183 197 245 298 357 

Cash Operating Costs (598) (675) (786) (941) (1,062) 

EBITDA 259 282 344 415 488 

Depreciation and Amortisation (77) (86) (99) (117) (131) 

Operating Profit 183 197 245 298 357 

Net financing income/(costs) 2 4 (2) (12) (13) 

Forex and Related Gains 

Provisions - - - - - 

Other Income 

Other Expenses 

Net Profit Before Taxes 185 200 243 286 344 

Taxes (7) (3) (6) (7) (9) 

Minority Interests 

Net profit available to shareholders 178 197 236 279 335 

Dividends (63) (75) (75) (75) (75) 

Transfer to Capital Reserve 

We expect steady dividends for 

the next three years 

We expect Saudi Ceramic to 

maintain its strong sales growth 

over the next three years 

Consistent margins and strong 

margins 

12/08A 12/09A 12/10E 12/11E 12/12E 

Adjusted Shares Out (mn) 25.00 25.00 25.00 25.00 25.00 

CFPS (SAR) 10.18 11.32 13.41 15.83 18.67 

EPS (SAR) 7.12 7.89 9.45 11.17 13.41 

DPS (SAR) 2.500 3.000 3.000 3.000 3.000 

Growth 12/08A 12/09A 12/10E 12/11E 12/12E 

Revenue Growth 39.4% 11.7% 17.9% 20.1% 14.3% 

Gross Profit Growth 42.2% 10.0% 19.5% 22.3% 17.4% 

EBITDA Growth 47.0% 8.9% 21.7% 20.7% 17.6% 

Operating Profit Growth 55.2% 7.6% 24.4% 21.9% 19.5% 

Net Profit Growth 39.5% 10.8% 19.9% 18.1% 20.1% 

EPS Growth 39.5% 10.8% 19.9% 18.1% 20.1% 

Margins 12/08A 12/09A 12/10E 12/11E 12/12E 

Gross profit margin 37.4% 36.8% 37.3% 38.0% 39.0% 

EBITDA margin 30.3% 29.5% 30.4% 30.6% 31.5% 

Operating Margin 21.3% 20.5% 21.7% 22.0% 23.0% 

Pretax profit margin 21.6% 20.9% 21.5% 21.1% 22.2% 

Net profit margin 20.8% 20.6% 20.9% 20.6% 21.6% 

Other Ratios 12/08A 12/09A 12/10E 12/11E 12/12E 

ROCE 16.4% 15.5% 16.1% 16.3% 16.8% 

ROIC 15.9% 13.9% 15.3% 15.4% 15.8% 

ROE 26.6% 24.9% 25.2% 24.9% 24.8% 

Effective Tax Rate 3.8% 1.5% 2.6% 2.5% 2.5% 

Capex/Sales 28.7% 28.0% 24.9% 26.0% 23.0% 

Dividend Payout Ratio 35.1% 38.0% 31.7% 26.9% 22.4% 

We expect EV/EBITDA & 

EV/sales to decline 

Valuation Measures 12/08A 12/09A 12/10E 12/11E 12/12E 

P/E (x) 19.7 17.8 14.8 12.6 10.5 

P/CF (x) 13.8 12.4 10.5 8.9 7.5 

P/B (x) 4.8 4.1 3.4 2.9 2.4 

EV/Sales (x) 4.6 4.1 3.6 3.1 2.8 

EV/EBITDA (x) 15.1 13.9 11.8 10.2 8.8 

EV/EBIT (x) 21.5 19.9 16.6 14.2 12.0 

EV/IC (x) 2.8 2.5 2.2 1.9 1.7 

Dividend Yield 1.8% 2.1% 2.1% 2.1% 2.1% 





1 August 2010 

Expanding balance sheet due 

to expansion in operations 

Debt/equity is quite high but 

financing cost is relatively low 

Saudi Ceramic’s cash flow 

position is strong 

We estimate capex/sales at 

around 23-28% over the next 

three years 

Balance Sheet (SARmn) 12/08A 12/09A 12/10E 12/11E 12/12E 

Cash and Cash Equivalents 25 36 124 90 100 

Current Receivables 108 109 120 170 202 

Inventories 351 357 421 509 558 

Other current assets 28 28 35 35 35 

Total Current Assets 512 530 701 804 895 

Fixed Assets 1,004 1,176 1,358 1,594 1,819 

Investments 47 60 52 52 52 

Goodwill 

Other Intangible Assets - - - - - 

Total Other Assets 2 2 2 2 2 

Total Non-current Assets 1,053 1,237 1,412 1,648 1,873 

Total Assets 1,565 1,767 2,113 2,452 2,768 

Short Term Debt 281 289 364 364 364 

Trade Payables 

Dividends Payable - - - - - 

Other Current Liabilities 

Total Current Liabilities 423 469 558 582 605 

Long-Term Debt 392 406 500 611 643 

Other LT Payables 1 0 1 1 1 

Provisions 25 33 36 36 36 

Total Non-current Liabilities 418 439 537 647 679 

Minority interests 

Paid-up share capital 250 250 250 250 250 

Total Reserves 474 609 769 973 1,234 

Total Shareholders' Equity 724 859 1,019 1,223 1,484 

Total Equity 724 859 1,019 1,223 1,484 

Total Liabilities & Shareholders' Equity 1,565 1,767 2,113 2,452 2,768 

Ratios 12/08A 12/09A 12/10E 12/11E 12/12E 

Net Debt (SARmn) 647 659 740 885 907 

Net Debt/EBITDA (x) 2.49 2.33 2.15 2.13 1.86 

Net Debt to Equity 89.3% 76.8% 72.6% 72.3% 61.1% 

EBITDA Interest Cover (x) (120.2) (80.7) 161.4 34.7 38.5 

BVPS (SAR) 28.97 34.35 40.76 48.93 59.35 

Cashflow Statement (SARmn) 12/08A 12/09A 12/10E 12/11E 12/12E 

Net Income before Tax & Minority Interest 184.9 200.2 242.6 286.4 344.0 

Depreciation & Amortisation 76.7 85.8 99.0 116.7 131.5 

Decrease in Working Capital (90.4) 15.2 (64.6) (113.4) (57.2) 

Other Operating Cashflow (3.4) 2.7 (4.5) (7.2) (8.6) 

Cashflow from Operations 167.8 303.8 272.5 282.5 409.6 

Capital Expenditure (246.3) (268.1) (281.7) (352.6) (356.6) 

New Investments (23.8) 1.5 11.2 0.0 0.0 

Others 

Cashflow from investing activities (270.1) (266.5) (270.5) (352.6) (356.6) 

Net Operating Cashflow (102.3) 37.3 2.0 (70.0) 53.0 

Dividends paid to ordinary shareholders (62.1) (64.5) (75.9) (75.0) (75.0) 

Proceeds from issue of shares 

Effects of Exchange Rates on Cash 

Other Financing Cashflow (1.8) 0.0 0.0 0.0 0.0 

Cashflow from financing activities 106.7 (26.9) 86.7 35.5 (43.0) 

Total cash generated 4.5 10.4 88.8 (34.5) 10.0 

Cash at beginning of period 20.9 25.3 35.7 124.5 90.0 

Implied cash at end of year 25.3 35.7 124.5 90.0 100.0 

Ratios 12/08A 12/09A 12/10E 12/11E 12/12E 

Capex/Sales 28.7% 28.0% 24.9% 26.0% 23.0% 





1 August 2010 

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Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except 

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Saudi Ceramic Continued success - Al Rajhi Capital

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