According to Pawel Oskard, the CFO of Cersanit quoted by PAP, in an answer to many analysts’ questions, stated that behind very high administration expenses were costs of expansion in Romania, Ukraine and also Russia that coincidently cumulated in the quarter. Should these one-off costs be excluded 1Q07 net profit would be higher than in 1Q06 and the margins would be on the comparable levels. Pawel Oskard did not comment what specific costs were incurred only indicating market research and advisory, costs that could not have been capitalized. In 1Q07 after deconsolidation of Opoczno administration costs came in at PLN 24m and grew 110% y/y and 47% q/q. The same way derived sales costs came in at PLN 42.4m, up 45% y/y and 28% y/y. The CFO hopes that Cersanit is going to benefit from the boom in the construction however recently the prices of tiles decreased due to the price competition. At the same time, Artur Kloczko, head of supervisory board of Cersanit commented in the Puls Biznesu that the there was nothing unusual in those results and everything in under control.
Our view: Due to the low transparency of Cersanit we must stick to the explanation of the company. We believe that the company is doing very well on the market and further improves its position as indicated by sales growth and a very high gross profit margin of 49.2% vs 46.5% in 4Q06 (both include Romanceram, and not include Opoczno). On the other hand, in our opinion we should expect EBIT to be negatively influenced by those “expansion costs” also in the next quarters though not to such an extent. Although the results came materially below expectations on both EBIT and net profit the stock was supported yesterday, in our view, by (i) very good gross profit on sales results (ii) confidence in the management explanation regarding one-off expansion costs (iii) management’s first time official mentioning Russia as expansion direction that could happen soon. We believe that two options, greenfield or acquisition are equally probable on the Russian market and the speculations regarding the proximity of this happening may further positively influence the stock.