RAK Ceramics could be an interesting investor play once projects return
UAE building materials company picked up pace quite well in second-half 2020
During the week ended February 11, the Abu Dhabi index gained a marginal 0.05 per cent, while DFM closed lower 1.40 per cent.
A 5.32 per cent decline for du, which has a 10.72 per cent weightage in the index, pulled Dubai index lower this week. du reported a profit that was 17 per cent lower and cut dividends also. This week's top-performing stocks are Dubai Insurance Company (up 51.76 per cent), Emirates Refreshment Co. (21.07 per cent), Ras Al Khaimah Poultry (15 per cent), Dubai National Insurance & Reinsurance (14.88 per cent) and Abu Dhabi National Takaful (11 per cent).
An exciting company for investor play is RAK Ceramics, which can benefit from the reopening and economic recovery in the GCC. The company reported revenues of Dh2.35 billion in 2020 and a loss of Dh128 million.
Its production lines were running smoothly throughout the year, and it also benefitted from demand in Saudi Arabia, Europe, the UK and Australia despite intermittent supply chain issues. Its India and Bangladesh's operations had to be shut down in the last week of March 2020, but resumed by the first week of June.
The pandemic triggered a revenue decline, but the losses were due to an impairment of Dh213 million related to investment properties. RAK Ceramics still reported a profit of around Dh153 million on an operational level, which points to its strong manufacturing efficiency.
Handle on expenses
Of the reported sales of Dh2.35 billion, the Middle East accounted for Dh1.25 billion, Asia generated Dh590 million, Europe contributed Dh387 million, while others added about Dh121 million. RAK Ceramics took further measures to boost operational efficiency, reducing admin and general expenses to Dh199 million from Dh210 million. On expenses, staff salaries and other associated costs were reduced from Dh143 million to Dh120 million.
The company's overall business scenario is likely to get materially better, with revenue anticipated to grow to Dh2.54 billion. The same could be the case for profits.
But shipping costs spike
Last year, freight and transportation costs jumped by a third to Dh178 million from Dh133 million. This rise was primarily due to a surge in shipping costs as well as supply chain bottlenecks.
The abnormal scenario is likely to get resolved during the year. With a market capitalisation of Dh1.68 billion, RAK Ceramics trades at almost 10 times next year's earnings and the shares yield 8.4 per cent. Indeed an attractive proposition for the value investor.
- Vijay Valecha is Chief Investment Officer at Century Financial.