Cersanit: 4Q05 preview

Cersanit is due to report its 4Q05 results on February 28. We expect the company to post very good results, with sales growing 30% y/y to PLN 172.4m and EBIT growing 25% y/y to PLN 36.3m. At the same time, we expect net profit to come in at PLN 28.4m, implying 92% y/y growth due, to significant financial costs booked in 4Q04, resulting mainly from FX losses on Cersanit’s long USD position. Cersanit’s 4Q05 results were positively influenced by a spur in consumer demand, before the expiry of a tax allowance for construction materials at the end of 2005. Due to its top-line diversification combined with excellent management skills, Cersanit was best positioned, among its industry peer group, to take advantage of this phenomenon and we believe it again gained domestic market share. We expect all of the company’s business lines to do equally well in 4Q05. For the full-year 2005, we expect Cersanit’s sales to come in at PLN 646.7m (10.9% y/y growth) and net profit to mount to PLN 123.7m, implying almost 19% y/y growth.

We believe that although the market has been discounting good 4Q05 results for Cersanit for some time already, as the stock appreciated 16% year-to-date, we could still expect further positive impact, as the company usually exceeds market estimates. We believe that at a 2006F P/E of 16.2x, Cersanit is now fairly valued in comparison to other tiles producers, as well as to construction and construction materials stocks. Before the Ukrainian factory boosts growth in 2007, we expect single digit growth across the P&L lines in 2006. We reiterate our Hold rating for Cersanit, with a fair value estimate of PLN 15.0 per share.