Management of Ceramika Nowa Gala has announced a consolidated forecast for 2007, which is broadly in line with our expectations and below consensus estimates. Net earnings are expected to reach PLN 13.3m for 2007 and grow 26.7% versus management net earnings forecast for 2006 of PLN 10.5m. This is 2.1% above our estimates of PLN 13.3m but 12% below consensus estimate of PLN 15.1m. Sales should come in at PLN 125m (+19% y/y vs 2006 management forecast) for 2007, which is 10% above our forecast of PLN 113.7m and 3.7% above consensus estimate of PLN 120.5m. Management expects EBIT to reach PLN 17.8m (+10.6% vs 2006 management forecast) in 2007, which is 1.5% below our forecast of PLN 18.1m and 12% below consensus estimate of PLN 20.2m. At the same time the management stated that is negotiating with other market players regarding consolidation. Any results of mergers/acquisitions are not included in the management forecast.
Our view: We believe that the management forecast should disappoint the market, which clearly expected more. It is around 20% below the most bullish forecasts on both EBIT and net profit. However, we expect this negative trading impact to be offset by the management statements regarding potential acquisitions. In our view the management being forced to downgrade its forecasts in the previous two years has come up with realistic numbers. At the same we are negatively surprised by the forecast of high sales growth and low EBIT improvement implying material deterioration of operating profitability. The implied EBIT margin for 2007 of 14.2% compares with 15.5% adjusted EBIT margin that management forecasts for 2006.
This could mean that the management does not expect any improvement in product mix and that the sales could grow at the expense of extensive marketing outlays. In our view, this confirms the substantial problems that the company is having with its strategy of concentration on up-market niche. The bigger dynamics in net profit versus EBIT growth in the management forecast should imply that the management expects tax benefits from the new factory located in the special economic zone. Management forecast puts the company on 2007 P/E of 15x, implying some 12% discount to the Polish industrial peer group. In our opinion even higher discount would be warranted taking into account two consecutive years of earnings disappointments and management forecast downgrades.