RCL can sustain higher multiples

John Keells Stock Brokers said that Royal Ceramic share can sustain higher multiples.

This assessment is carried in JKSB’s first quarter earnings update on Royal Ceramics, highlights of which are as follows

Lower GP margins were compensated for by tight cost controls in RCL’s first quarter, with earnings flat mostly due to the reduction in comparative other operating income. The company also made some significant investments during the quarter.

Stripping out other operating income from EBIT shows an improvement of 29.0% in this quarter. However, GP margins (as measured against net revenues) fell to 43.32% from 44.79% last year. Distribution and Admin expenses were essentially flat when looked at cumulatively.

Finance expenses rose marginally by 7.0%. Net debt increased sharply both YoY and QoQ by 168.7% and 46.9% respectively to reach Rs.1.37 billion for this period.

The segmental breakdown showed tiles having revenue growth of 11.6%. GP and net margins for the segment showed some erosion, with net margins for tiles declining from 36.9% last year to 31.7%. Revenue from sanitary ware sales were increased by 60.6%, to Rs.163m with an earning of Rs.18.7m. The new paints acquisition had revenues of Rs.31.1m for the quarter with earnings of Rs.1m.

The company spent Rs.500m in FY11 to expand their Horana plant which makes ceramic tiles. Production was boosted from 7,500 square meters a day to between 10,500 and 11,000 square meters per day. Porcelain tiles are made in Eheliyagoda which has a capacity of 4,000 square meters per day. RCL’s distribution network currently includes 41 showrooms and a network of 320 direct and sub-dealers. The company plans to open 10 new showrooms and add 25 more dealers this year.

RCL acquired 20.03% stake of Lewis Brown & Company Limited at a cost of Rs.621.2m on 16th of June 2011. Lewis Brown is the holding company of the 160 year old Delmege Forsyth which is involved in retail distribution, travel and insurance broking and reportedly made Rs.250m in earnings last year. RCL also acquired Ever Paint and Chemical Industries (which retails paint under the brand name “Colorbrite”) in April 2011 at a cost of Rs.70.35m

We maintain our FY12 EPS estimate of Rs.15.68 per share and feel that the stock which is still trading at a forward earnings multiple of 9.5x FY12 earnings can sustain higher multiples.