Focus on GCC, India and Bangladesh markets to boost RAK Ceramics share price

The Securities and Investment Company in Bahrain has a target price of Dh4.20 for RAK Ceramics shares, a 25 per cent premium on the stock’s closing price of Dh3.35 on Tuesday in Abu Dhabi.

RAK Ceramics’ change of strategy to focus on high-growth markets in the GCC, India and Bangladesh, and lifting its capacity to produce more high-margin products can result in boosting its share price, an analyst says.

The company, which produces sanitary ware and tiles, overhauled its business last year after Samena Capital, a private equity firm, acquired a 31.7 per cent stake from the ruling family of Ras Al Khaimah.

The Securities and Investment Company (Sico) in Bahrain has a target price of Dh4.20 for RAK Ceramics shares, a 25 per cent premium on the stock’s closing price of Dh3.35 yesterday in Abu Dhabi.

Anoop Fernandes, a Sico analyst, said RAK Ceramics was capable of achieving earnings growth of about 8 per cent a year over the next five years. He cited improvements to its product mix and falling energy and transport costs.

Fuel costs usually make up 4 to 5 per cent of RAK Ceramics’ product prices, but they fell to 2.2 per cent in the second quarter this year. RAK Ceramics’ daily production of sanitary ware is set to increase 32 per cent to 5.9 million items by the end of next year.

Mr Fernandes said he was expecting demand in the UAE to grow about 7 per cent a year because of more building completions in the retail, hospitality and residential sectors.

He was also expecting RAK Ceramics to achieve better results in Saudi Arabia, where it has lost sales volume over the past two years because labour issues have caused stoppages of projects.

The firm recently changed its distribution approach in the kingdom.

It has taken direct control of bids to supply government-related work, while instructing distributors to concentrate on sales to retailers.

As a result, it plans to increase business-to-business sales in the kingdom from 35 to 40 per cent currently to its peer average of 55 to 60 per cent.

“That’s not built into my estimate, because I’d rather wait for them to do that,” Mr Fernandes said.

In the first six months of the year, net profit for RAK Ceramics fell 2.4 per cent year-on-year to Dh146.4 million on flat revenue of Dh1.55 billion.

Mr Fernandes expects full-year revenue this year to dip 1 per cent to Dh3.1bn, but he forecasts a 10 per cent rise in net profit to Dh305m. RAK Ceramics has divested non-core businesses such as textiles and pharmaceuticals, as well as a loss-making business in ­Sudan.

The firm may also sell a shuttered Chinese business unit with a book value of Dh88m and a big piece of land on Ras Al Khaimah’s waterfront that it has valued at Dh900m.

Mr Fernandes said RAK Ceramics’ shares were likely to rise further if international sanctions on Iran were lifted soon. The shares are up 15 per cent this year.

The company has a ceramic tile factory in Iran that needs investment of about US$2m, but it is capable of producing much cheaper tiles because of the relatively lower cost of gas there.

“The problem is that they are not able to repatriate the cash,” said Mr Fernandes, adding that it could take some time for RAK Ceramics to compete in Iran’s domestic market because there were several established players there.

According to the market researcher Technavio, the market for ceramic tiles in the GCC is set to grow more than 11 per cent over the next five years, with the UAE, Saudi Arabia and Qatar viewed as the three key markets for expansion.

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