EFG Hermes research unit raised Oman-based Al Anwar Ceramic Tiles fair value by 9% to OMR0.655/share as it revise its estimates to include management’s plan to commercially operate its sixth production line starting 3Q2015, three quarters ahead of previous estimate.

The new FV offers 15% upside potential, hence EFG upgrade its rating to Buy. The stock trades at a 2015e P/E of 12.8x, well below its peers’ average of 15x. Significant delays to the capacity addition plan or weaker-than-estimated utilization rate are key risk factors to EFG'S estimates.

Management has confirmed that the sixth tile line with an annual production capacity of 4 million sqm will be operational by 3Q2015 versus 2Q2016 previously. Hence EFG raises its earnings estimate beyond 2014 by an average of 5.5% ,while lowers 2014 earnings estimate by just 2.2% to OMR8.9 million (+13% Y-o-Y) and expects EBITDA margin to improve by 60bps Y-o-Y to 41.5%. EFG expectS the dividend payout ratio to sustain at 65% in 2014 (OMR.023/share), equating to a yield of 4.1%.

The fifth tile production line with a capacity of 4 million sqm per annum started operation at end-2Q2014 and should have a positive impact on revenue starting in 3Q2014 ,said EFG.

EFG expect AACT to utilize 95% of its combined capacity during 3Q2014 and to report earnings of OMR2.36 million (+15% Y-o-Y and Q-o-Q) over revenue of OMR7.8 million (+20% Y-o-Y). Meanwhile, expects stable gross margin Y-o-Y at 56% but a 130bps decline Q-o-Q to reflect the incremental cost of the new production line. The margin should improve gradually in future quarters as utilization at the new line picks up, noted EFG.