Sector Report | January 18, 2013 MENA Consumer & Retail Evolving Consumer Preferences in MENA Identifying value and growth in a changing landscape
Sector Report | January 18, 2013
MENA Consumer & RetailEvolving Consumer Preferences in MENAIdentifying value and growth in a changing landscape
S e c t o r C o v e r a g e
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
MENA Consumer and Retail
The evolving MENA consumer Consumer preferences in MENA are changing, and retailers, food producers, and service providers are adapting to them. Rising disposable income and a persistent low interest rate environment in GCC states will cause an increase in consumer spending on (i) discretionary goods, including electronics and apparel, (ii) transportation and (iii) tourism. Changing dietary habits will play out in terms of a shift in preferences towards higher quality, healthier and fresher food options. Governments in MENA have and will increasingly adjudicate on matters of food and fuel subsidies with the consumer as priority beneficiary, rather than incumbent businesses and private sector commercial interests, in light of the civil unrest of the past 2 years across MENA.
Adapting to the new MENA consumer is key: Consumer and retail businesses in MENA that are successfully transforming their product offerings and delivery formats will be winners in the sector over the next 12 months. Key areas are 1-Vendor formats: organized retail, via hypermarkets and branded convenience stores will override the fragmented/unorganized retail format dominant in MENA over the next 5 years. The region’s improving logistics infrastructure and urbanization via new economic cities are highly supportive of organized retail in MENA. 2-Product mix: Businesses that are catering to changing consumer preferences are winners in the space- we highlight Shaker, GB Auto, Halwani, and Budget as prime examples. Secular consumer stocks in MENA have outperformed government spending-reliant stocks in terms of cash flow generation and equity returns, but valuation remains at a discount. We think this provides an extremely attractive entry point for several quality stocks under coverage in this report. We initiate coverage of 20 consumer and retail names in MENA. We select: Al Tayyar Travel Group (ALTAYYAR AB, SAR 120, 62%), Shaker (SHAKER AB, SAR 90, 34%), Budget (BUDGET AB, SAR 70, 30%), Halwani Brothers (HB AB, SAR 56, 28%), Al Meera Consumer Goods (MERS QD, QAR 205, 27%), Saudi Airlines Catering (CATERING AB, SAR 100, 26%), and Ghabbour Auto (AUTO EY, EGP 35, 25%), given upside potential from current prices. We like, but see fundamentals priced in at: Agthia Group (AGTHIA UH, AED 2.45, 16%), Al Hokair (ALHOKAIR AB, SAR 125, 18%), Al Othaim (AOTHAIM AB, SAR 95, 16%), United Electronics Company (EXTRA AB, SAR 105, -3%), Herfy (HERFY AB, SAR 120, 17%), Jarir Marketing (JARIR AB, SAR 180, 13%), Juhayna (JUFO EY, EGP 8.5, 10%), Mabanee (MABANEE KK, KWd 1,250, 4%), Saudi Dairy and Foodstuff Co. (SADAFCO AB, SAR 70, 6%), Saudi Paper Manufacturing (SPM AB, SAR 30, -1%), Savola (SAVOLA AB, SAR 45, 12%).
We advise against Al Marai (ALMARAI AB, SAR 52, -20%) and GASCO (NGIC AB, SAR 16, -16%), given weak top-down fundamentals. Risk: consumer lending, grain and commodity prices, FX risk, geopolitics given an unclear succession line in KSA and instability in Egypt and Syria.
Bloomberg code ALTAYYAR AB
Company name Al Tayyar Price target SAR 120
Rating 62% upside, Buy
Bloomberg code SHAKER AB Company name Shaker Price target SAR 90
Rating 34% upside, Buy
Bloomberg code BUDGET AB Company name BUDGET
Price target SAR 70
Rating 30% upside, Buy
Bloomberg code HB AB Company name Halwani Brothers
Price target SAR 56
Rating 28% upside, Buy
Bloomberg code MERS QD
Company name Al Meera Consumer Goods Price target QAR 205
Rating 27% upside, Buy
Bloomberg code CATERING AB
Company name Saudi Airlines Catering Price target SAR 100
Rating 26% upside, Buy
Bloomberg code AUTO EY Company name Ghabbour Auto
Price target EGP 35
Rating 25% upside, Buy
Bloomberg code ALMARAI AB Company name Almarai
Price target SAR 52
Rating -20% downside, Sell
Bloomberg code NGIC AB
Company name GASCO Price target SAR 16
Rating -16% downside, Sell
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Top picks
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2
Contents
MENA Consumer and Retail ................................................................................................................... 3
The evolving MENA consumer ............................................................................................................... 5
Key Industry drivers ................................................................................................................................ 8
Decomposing RoE: MENA consumer markets are competitive ........................................................... 14
Valuation: Secular themes currently trade at a discount to government spending stories ................ 15
MENA Consumer and Retail stocks in charts ....................................................................................... 20
Appendix 1: Comparative ratios and multiples .................................................................................... 25
Appendix 2: Our MENA diversified coverage universe ........................................................................ 31
Al Tayyar Travel Group ......................................................................................................................... 32
Shaker ................................................................................................................................................... 41
Budget Saudi ......................................................................................................................................... 50
Halwani Brothers .................................................................................................................................. 57
Al Meera Consumer Goods .................................................................................................................. 66
Saudi Airlines Catering .......................................................................................................................... 73
Ghabbour Auto ..................................................................................................................................... 81
Almarai Company ................................................................................................................................. 89
GASCO ................................................................................................................................................ 100
Agthia Group ...................................................................................................................................... 107
Fawaz Abdulaziz Alhokair & Co .......................................................................................................... 116
Abdullah Al Othaim Markets .............................................................................................................. 124
United Electronics Company (Extra) ................................................................................................... 131
Herfy Food Services Co. ...................................................................................................................... 138
Jarir Marketing Co .............................................................................................................................. 147
Juhayna Food Industries ..................................................................................................................... 155
Mabanee Co. ...................................................................................................................................... 163
Saudi Dairy and Foodstuff Co. ............................................................................................................ 170
Saudi Paper Manufacturing ................................................................................................................ 178
Savola ................................................................................................................................................. 186
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 3
MENA Consumer and Retail
Key stocks to own in the MENA consumer space
Exhibit 1: Our MENA consumers and retail coverage universe
Company Price target Rating Up (down) side ADTV, USDmn Index Free float
Al Tayyar Travel Group SAR 120 Buy 62% 5.5 SASEIDX 58.2%
Al-Hassan Shaker SAR 90 Buy 34% 1.4 SASEIDX 30.0%
United International Transportation SAR 70 Buy 30% 0.7 SASEIDX 41.1%
Halwani brothers SAR 56 Buy 28% 2.1 SASEIDX 31.8%
Al Meera QAR 205 Buy 27% 0.3 DSM 74.0%
Saudi Airlines Catering SAR 100 Buy 26% 6.5 SASEIDX 30.0%
Ghabbour Auto EGP 35 Buy 25% 0.1 EGX 100 29.4%
Fawaz Al Hokair SAR 125 Hold 18% 1.5 SASEIDX 30.0%
Herfy Food Services Co. SAR 120 Hold 17% 0.8 SASEIDX 32.1%
Abdullah Al Othaim SAR 95 Hold 16% 1.4 SASEIDX 48.6%
Agthia Group AED 2.45 Hold 16% 0.1 ADX 44.0%
Jarir Marketing SAR 150 Hold 13% 1.2 SASEIDX 54.2%
Savola SAR 45 Hold 12% 3.2 SASEIDX 59.9%
Juhayna Food Industries EGP 8.5 Hold 10% 0.6 EGX 30 49.3%
Saudi Dairy & Foodstuff Co. SAR 70 Hold 6% 0.9 SASEIDX 58.3%
Mabanee Co. KWd 1,250 Hold 4% 2.1 KWSEIDX 39.7%
Saudi Paper Manufacturing SAR 30 Hold -1% 1.3 SASEIDX 42.3%
United Electronics Company SAR 105 Hold -3% 1.2 SASEIDX 30.0%
National Gas & Industrialization SAR 16 Sell -16% 0.6 SASEIDX 71.1%
Almarai Co. SAR 52 Sell -20% 10.7 SASEIDX 36.5%
Company EV*, USDmn EV/EBITDA FY 13e P/E FY 13e P/B FY 13e RoE Div yield
Al Tayyar Travel Group 1,675.3 6.1x 6.6x 3.5x 53.4% 10.1%
Al-Hassan Shaker 755.1 8.7x 10.0x 3.1x 31.1% 5.0%
United Internatinal Transportation 451.8 4.5x 9.8x 2.0x 19.8% 4.2%
Halwani brothers 305.7 7.0x 12.2x 2.1x 17.0% 5.8%
Al Meera 493.9 10.8x 13.4x 1.3x 9.4% 5.4%
Saudi Airlines Catering 1,580.7 9.9x 11.4x 4.5x 39.2% 4.8%
Ghabbour Auto 1,340.4 6.8x 12.1x 1.4x 11.6% 4.1%
Fawaz Al Hokair 2,299.7 11.4x 12.1x 4.3x 35.5% 4.6%
Herfy Food Services Co. 823.6 12.5x 15.9x 4.9x 30.6% 2.9%
Abdullah Al Othaim 557.1 7.3x 10.8x 2.6x 24.1% 4.2%
Agthia Group 311.2 5.8x 8.8x 1.0x 11.8% 4.0%
Jarir Marketing 2,583.1 14.6x 15.0x 8.3x 55.5% 5.3%
Savola 7,182.6 12.0x 10.8x 1.8x 16.4% 3.7%
Juhayna Food Industries 896.9 8.2x 13.8x 2.4x 17.4% 2.5%
Saudi Dairy & Foodstuff Co. 532.9 8.2x 11.9x 2.3x 19.6% 5.0%
Mabanee Co. 3,028.6 14.5x 15.3x 3.3x 21.8% 0.0%
Saudi Paper Manufacturing 551.9 12.2x 10.5x 1.5x 14.4% 5.1%
United Electronics Company 666.0 10.9x 14.3x 4.4x 31.0% 2.6%
National Gas & Industrialization 370.0 8.8x 12.6x 1.4x 11.0% 7.1%
Almarai Co. 9,366.8 12.3x 15.4x 3.0x 19.5% 2.6%
Source: Company Data, Arqaam Capital Research* At recent market prices
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 4
Summary of recommendations
Exhibit 2: Our MENA consumer and retail summary of recommendations
Company Rating Outline
Halwani Brothers Buy Doubling of capacity at core business segments drive medium-term growth. Attractive entry level at 7.0x FY 13e EV/EBITDA
Al Meera Consumer Goods Buy High growth domestic retailer at similar fundamental qualities to KSA peers, but discounted valuation at 10.5x FY 13e EV/EBITDA
Al-Hassan Shaker Buy Most profitable supplier of cooling solutions in KSA: Average FY 08-11A operating margins + 600bps vs. domestic peers
Ghabbour Auto Buy New brand gamble (Geely) better suited for local demand than outgoing Hyundai models- CAPEX complete, EPS accretion to follow
United Int’l Transportation (budget) Buy Best fleet in town- 27M blended life cycle vs. 36M peers, Cheap current valuation in peer context: 8.9x FY 13e EPS 30% discount to peers
Saudi Airlines Catering Buy Buy unique exposure to Saudi Arabian airline industry via 40% RoE, 38%+ RoIC business at 12.6x FY 13e P/E
Al Tayyar Travel Group Buy Industry leader in corporate and government travel services; Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x EV/EBITDA).
Agthia Group Hold Deliberate shift in product mix focused on improving group margins, but exercise remains hit and miss
Saudi Dairy and Foodstuff Co. Hold Re-commissioning of idle plant diversifies product mix, but range remains narrow relative to peers
Juhayna Food Industries Hold Well-positioned vis-à-vis changing dietary preferences, resulting from rising urbanization in Egypt
SAVOLA Group Hold Leading KSA conglomerate offers broad exposure to food and retail sectors: growth a function of store roll-out and new product success
Abdullah Al Othaim Markets Hold Absence of catalysts and weakening margins produce uninspiring story at 10.8x FY 13e P/E
Fawaz Al Hokair Hold Largest KSA fashion retailer and high street brand franchisee. Superior margins and RoE priced in
Jarir Marketing Company Hold Solid business fully priced in at 15.0x FY 13e P/E, 14.6x EV/EBITDA
Mabanee Hold A pure play on the Kuwaiti retail rental market
Saudi Paper Manufacturing Hold Unexciting story in the absence of genuine growth catalysts
United Electronics Company Hold Industry deregulation a cause for concern, margins subpar vs. global peers, 20% on FY 13e EV/EBITDA discount warranted
Herfy Food Services Hold Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation
Almarai Co. Sell Main product line (dairy) facing market share loss due to rising competition and limited pricing power
National Gas & Industrialization Sell Unexciting story in the absence of genuine growth catalysts
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 5
The evolving MENA consumer
Consumer preferences in MENA are changing, and retailers, food producers, and service
providers are adapting to them. Rising disposable income and a persistent low interest rate
environment in GCC states will cause an increase in consumer spending on (i) discretionary
goods, including electronics and apparel, (ii) transportation and (iii) tourism. Changing dietary
habits will play out in terms of a shift in preferences towards higher quality, healthier and
fresher food options. Governments in MENA have and will increasingly adjudicate on matters
of food and fuel subsidies with the consumer as priority beneficiary, rather than incumbent
businesses and private sector commercial interests, in light of the civil unrest of the past 2
years across MENA.
Adapting to the new MENA consumer is key: Consumer and retail businesses in MENA that
are successfully transforming their product offerings and delivery formats will be winners in
the sector over the next 12 months. Key areas are 1-Vendor formats: organized retail formats,
via hypermarkets and branded convenience stores will override the fragmented/unorganized
retail format dominant in MENA over the next 5 years. The region’s improving logistics
infrastructure and urbanization via new economic cities are highly supportive of organized
retail in MENA. 2-Product mix: Businesses that are catering to changing consumer preferences
are winners in the space- we highlight Shaker, GB Auto, Halwani, and Budget as prime
examples.
Exhibit 3: Our MENA consumer and retail scorecard
Home market fundamentals
Consumer evolution MENA exposure
Code SSS* New POS** Margins Score Product mix Consumer preferences Disposable income Score New mkts M&A Score Overall
HB AB 4.5 3.5 3.0 3.80
MERS QD 4.0 4.0 4.5 4.10
SHAKER AB 4.5 4.5 3.0 4.20
AUTO EY 4.0 3.0 0.0 2.80
BUDGET AB 3.5 4.0 0.0 3.00
CATERING AB 4.0 3.0 3.0 3.40
ALTAYYAR AB 3.0 3.5 3.5 3.30
AGTHIA UH 4.0 2.5 3.0 3.20
SADAFCO AB 3.0 4.0 0.0 2.80
JUFO EY 4.5 2.0 3.0 3.20
SAVOLA AB 4.0 3.0 4.0 3.60
ALOTHAIM AB 3.0 2.0 0.0 2.00
ALHOKAIR AB 3.0 3.0 3.0 3.00
JARIR AB 3.5 3.0 0.0 2.60
MABANEE KK 4.0 2.5 2.5 3.10
SPM AB 2.5 1.0 3.0 2.00
Extra AB 3.0 3.0 3.0 3.00
HERFY AB 4.0 2.0 0.0 2.40
ALMARAI AB 3.0 4.0 3.0 3.00
NGIC AB 2.0 1.5 0.0 1.40
Source: Company Data, Arqaam Capital Research *SSS: Same store sales growth **New POS: new points of sale
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 6
We rate MENA consumer stocks on 3 key qualitative criteria: (i) their ability to capitalize on
domestic market fundamentals, (ii) their positioning vis-à-vis changing consumer preferences
and (iii) diversification and quality of exposure across broader MENA.
Exhibit 4: We rank MENA consumer and retail stocks on their positioning vs. MENA growth drivers
Source: Company Data, Arqaam Capital Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
SHAKER AB
MERS QD
HB AB
SAVOLA AB
CATERING AB
ALTAYYAR AB
JUFO EY
MABANEE KK
ALMARAI AB
BUDGET AB
ALHOKAIR AB
Extra AB
AUTO EY
AGTHIA UH
SADAFCO AB
JARIR AB
HERFY AB
ALOTHAIM AB
SPM AB
NGIC AB
Home market fundamentals
Home market fundamentals
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
SHAKER AB
MERS QD
HB AB
SAVOLA AB
CATERING AB
ALTAYYAR AB
JUFO EY
MABANEE KK
ALMARAI AB
BUDGET AB
ALHOKAIR AB
Extra AB
AUTO EY
AGTHIA UH
SADAFCO AB
JARIR AB
HERFY AB
ALOTHAIM AB
SPM AB
NGIC AB
Consumer evolution
Consumer evolution
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
SHAKER AB
MERS QD
HB AB
SAVOLA AB
CATERING AB
ALTAYYAR AB
JUFO EY
MABANEE KK
ALMARAI AB
BUDGET AB
ALHOKAIR AB
Extra AB
AUTO EY
AGTHIA UH
SADAFCO AB
JARIR AB
HERFY AB
ALOTHAIM AB
SPM AB
NGIC AB
MENA exposure
Inorganic growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
SHAKER AB
MERS QD
HB AB
SAVOLA AB
CATERING AB
ALTAYYAR AB
JUFO EY
MABANEE KK
ALMARAI AB
BUDGET AB
ALHOKAIR AB
Extra AB
AUTO EY
AGTHIA UH
SADAFCO AB
JARIR AB
HERFY AB
ALOTHAIM AB
SPM AB
NGIC AB
Overall score
Overall score
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 7
Home market fundamentals are a function of 3 core domestic growth criteria: (i) compelling
evidence of sales growth for existing stores/points of sale, (ii) opportunities for greater
domestic market penetration, via new points of sale/outlets, and (iii) where available,
expanding or stable margins.
Consumer evolution is our qualitative measure of a business’s positioning and adaptation avis-
à-vis changing consumer preferences (e.g. preference for organized retail formats, dietary
habits, discretionary spending on travel and tourism) that emanate from rising disposable
income, by way of changes to product mix. CAPEX deployment and operating leverage is
underscored here.
MENA exposure is a secondary criteria, that aims to capture the quality of a company’s
exposure to regional opportunities outside its home market. This has in some cases, resulted
in downside risk to EPS, as competition and domestic partnerships failed to pan out
successfully.
With the above rationale in mind we select the following picks as our favoured plays in the
MENA consumer and retail sector: Al Tayyar Travel Group (ALTAYYAR AB, SAR 120, 62%),
Shaker (SHAKER AB, SAR 90, 34%), Budget (BUDGET AB, SAR 70, 30%), Halwani Brothers (HB
AB, SAR 56, 28%), Al Meera Consumer Goods (MERS QD, QAR 205, 27%), Saudi Airlines
Catering (CATERING AB, SAR 100, 26%), and Ghabbour Auto (AUTO EY, EGP 35, 25%), given
upside potential from current prices.
We like, but see fundamentals priced in at: Agthia Group (AGTHIA UH, AED 2.45, 16%), Al
Hokair (ALHOKAIR AB, SAR 125, 18%), Al Othaim (AOTHAIM AB, SAR 95, 16%), United
Electronics Company (EXTRA AB, SAR 105, -3%), Herfy (HERFY AB, SAR 120, 17%), Jarir
Marketing (JARIR AB, SAR 180, 13%), Juhayna (JUFO EY, EGP 8.5, 10%), Mabanee (MABANEE
KK, KWd 1,250, 4%), Saudi Dairy and Foodstuff Co. (SADAFCO AB, SAR 70, 6%), Saudi Paper
Manufacturing (SPM AB, SAR 30, -1%), Savola (SAVOLA AB, SAR 45, 12%).
We advise against Al Marai (ALMARAI AB, SAR 52, -20%) and GASCO (NGIC AB, SAR 16, -16%),
given weak top-down fundamentals.
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 8
Key Industry drivers
1-Preferences
Vendor formats: and this is particularly important in KSA. The market is characterized by (i)
low retail GLA/capita (2.4 sqm/capita) in comparison to Qatar (5.9 sqm/capita) and the UAE
(14.6 sqm/capita), (ii) large city sprawl (Riyadh spreads across 1.55k km2, and houses 5.6mn
residents, (iii) high motorization rates (415 cars per 1000 residents, (iv) improving logistics
infrastructure and road network connectivity, and (v) the emergence of new, isolated urban
centres going forward (namely the 4 economic cities under construction by 2020). This is
further characterized by the fact that shop and mall visitation levels (i.e. footfall) are not only
utilitarian, but also a result of a recreational activity in a highly conservative social setting.
Exhibit 5: Organised retail penetration is particularly low in KSA, Egypt, and Kuwait …………………………………………………………………………………………………………………………………………………….. …………………………
Source: Company data, MEED, MECSC, Arqaam Capital Research
Exhibit 6: Organised retail lends itself well to highly motorised population centres. Interestingly, KSA has some of the highest mobility levels across MENA, but the lowest degree of organized retail penetration
Source: Arqaam Capital Research
The above factors lead to the following conclusions regarding the KSA retail sector:
1-Store penetration levels are low, and commute times are relatively long when compared
with other GCC markets
2-Vendors are typically fragmented and disorganized, and generally do not offer extensive
point of sale services such as maintenance, repair, or warranties
3-Access to retail outlets, whether by way of road networks or motorization rates, is high
4-Logistics infrastructure is supportive of large vendors
5-Footfall and per-visit customer spend is high in the context of a young, mobile population in
which exists a culture of mall and retail visitation for recreational purposes
The above factors lend themselves strongly in favour of large, organized retail formats, such as
hypermarkets, and well as convenience stores, rather than the existing range of small,
disorganized ‘neighborhood’ vendors. We therefore highlight large scale retailers in KSA
(Hokair, eXtra, Jarir) as key beneficiaries of evolving consumer preferences that are moving in
favour of larger retailing formats.
Dubai
Abu Dhabi
Riyadh
Cairo
Doha
JeddahKuwait
0%
10%
20%
30%
40%
50%
60%
70%
80%
0 100 200 300 400 500
Motorisation rate (per '000)
Organised retail (%)
7.7 7.5 10.6 8.5
4.3 5.6 5.3
23.1
11.3 2.7 0.9
4.3 3.0 2.3
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Dubai Abu Dhabi Riyadh Cairo Doha Jeddah Kuwait
MENA organised retail GLA(mn sqft)
Traditional retail Organised retail
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 9
Exhibit 7: Private sector logistics spend is inversely correlated with infrastructure quality and development levels
Source: UN, Arqaam Capital Research
Dietary preferences: From the perspective of food retailers, consumer preferences have, as a
function of rising income levels, education, and health awareness, resulted in increased
demand for higher quality food items, namely in (i) packaged dairy products in Egypt (please
refer to report on Juhayna), over traditional ‘loose’ products that enjoy limited shelf life, (ii)
fresh poultry and meat, over frozen produce (please refer to Almarai), and (iii) rising meat
consumption/capita (Halwani).
Exhibit 8: Food and dietary habits in KSA and Egypt: KSA consumes 4x Egypt’s per-capita intake of poultry, 2x dairy, but 50% its consumption of grain. KSA per-capita consumption of all food items has nevertheless grown since 2009
Kg/capita/annum Egypt Saudi Arabia
2009 2010 2011 2012 2013 Avg. Growth 2009 2010 2011 2012 2013 Avg. Growth
Grain
Wheat 215.8 220.7 207.7 207.9 208.1 (0.90%) 98.8 100.2 100.2 102.1 103.5 1.17%
Corn 139.2 147.9 136.7 135.0 137.8 (0.25%) 67.1 72.9 71.8 71.7 74.8 2.75%
Rice 53.6 48.6 43.0 43.5 45.8 (3.86%) 45.0 45.7 46.4 47.0 47.2 1.20%
Dairy
Liquid Milk 21.9 21.7 21.8 21.8 21.9 --% 41.7 41.7 42.0 42.5 43.1 0.83%
Butter 0.7 0.7 0.5 0.5 0.5 (8.07%) 1.7 1.7 1.6 1.7 1.7 --%
Cheese 5.8 5.8 5.7 5.6 5.6 (0.87%) 3.5 3.5 3.7 3.7 3.8 2.08%
Whole Milk 0.6 0.6 0.6 0.6 0.6 --% 1.3 1.3 1.3 1.3 1.4 1.87%
Live stock Poultry 10.0 9.9 9.9 10.0 10.2 0.50% 43.4 45.3 47.4 48.5 49.1 3.13%
Oil Palm Oil 9.9 11.2 12.7 13.0 13.3 7.66% 13.1 13.9 15.2 10.8 11.1 (4.06%)
Source: BMI, Arqaam Capital Research
The above data suggests that per capita consumption of most food items has risen in KSA
over the past 3 years. Conversely, grain consumption in Egypt has fallen, while non-milk dairy
has fallen more sharply, and this suggests a degree of substitution or potential preference
changes as urbanization rises. Note that grain consumption/capita in KSA is 50% of its
corresponding level in Egypt, while dairy is 2x the Egyptian level, and poultry upwards of 4x.
We believe that livestock consumption will continue to grow in Egypt as urbanization rises and
dietary habits change, and that grain and non-milk dairy consumption will continue to fall. We
see less growth potential in KSA livestock consumption, but upside to processed dairy demand.
13.6%
10.2%
7.4%
5.5%
3.6%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Egypt Qatar Kuwait KSA UAE
Logistics spend as % of GDP
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 10
Branded apparel, electronics, and auto: Disposable income growth across MENA suggests that
demand for (i) branded apparel (see Al Hokair), (ii) consumer electronics and white goods (see
Shaker, Extra, Jarir), and (iii) automotive solutions (GB Auto, Budget) is set to rise as consumers
continue to part with incremental income.
Afterthought: Where are the discount retailers in the GCC?
Discount retail formats are an integral part of the retailing landscape globally. The format
lends itself well to large population centres in urbanised areas that hold a substantial price
sensitive demographic. However, the penetration level of discount retailers in Saudi Arabia is
minimal, if not completely absent (Egypt conversely, has some degree of representation by
discounters). There are several reasons in our view that have precluded the appearance of
larger discounters in GCC markets, and these reasons are market specific:
KSA: by virtue of its climate and manufacturing capability (relative to demand), the country is a
net importer of food items. Discount retailers, which typically rely on unbranded/substitute
products, cannot generate the necessary scale economies to operate profitably in an
environment where inputs are imported (though production costs are arguably mitigated by
cheap and subsidised fuel costs). The range of non-food items typically sold in discount retail
formats is broad, and again in KSA, most non-food items are imported, rendering discount
pricing unfeasible. Finally, government regulation on land classification renders approvals for
large commercial land plots prohibitively expensive, which in part may explain the prevalence
of small retailers.
Egypt: In contrast, we believe that the Egyptian economic and demographic landscapes lend
themselves very well to discount retail formats: (i) the country is populous, with dense urban
centres, and disposable income levels are generally low (c.20% the KSA level, which in itself is
low, but improving). (ii) The food manufacturing industry in Egypt is highly developed with
substantial capability across product types. (iii) Production costs are low, and arguably among
the lowest in MENA, given natural resource abundance, climate, and cheap labour. (iv) local
labels and secondary brand penetration is high. All factors combined support a compelling
opportunity for discount retailing in Egypt. There exist several prominent discounters in the
Egyptian market as a result.
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 11
2-Population
MENA consumers are increasing in numbers, and increasingly able to part with disposable
income to improve living standards. The population of the broader MENA region is growing at
a rate of 3.1%/annum (CAGR FY 08-12e), introducing 5mn new consumers every year. The
core growth centres are Egypt (2.5% CAGR 08-12e), and KSA (4.0% CAGR 08-12e), accounting
for 23% and 14% of growth respectively. GDP/capita has also improved across MENA, namely
in Qatar and KSA rising 33% and 14% respectively since 2008. This has translated into a 17%
average growth in sales across our coverage universe of 20 MENA consumer names over the
past 5 years.
Exhibit 9: GDP/capita growth has generally outpaced population growth across MENA
Source: IMF
Exhibit 10: MENA consumer sector revenues have outpaced GDP growth
Source: IMF, Company data, Arqaam Capital Research
The market for consumer staples in MENA has seen the addition of 5mn new consumers
each year, which by our estimates will continue to necessitate imports of basic non-subsidised
food items. Household formation has also been on the rise, given (i) falling average household
sizes (in turn a function of urbanisation and rising expatriate residence, (ii) more affordable
housing solutions, in turn a function of improved access to consumer finance (penetration) and
its cost (affordability).
Exhibit 11: GCC markets (ex-KSA) typically reflect smaller household sizes
Source: World Bank, Arqaam Capital Research
Exhibit 12: On average, 60% of MENA population is within ‘prime consumer’ age range
Source: UNDP
Algeria
Bahrain
Jordan
Tunisia
Iraq
Egypt Kuwait LebanonLibya Morocco
Oman
Qatar
KSA
Sudan
Iran
UAE
(4%)
(2%)
--%
2%
4%
6%
8%
10%
12%
14%
(6%) (4%) (2%) --% 2% 4% 6% 8%
5-year population growth
5-year GDP/capita growth
100%
127%140%
164%
187%
100% 96% 100% 104% 110%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
FY 0
8A
FY 0
9A
FY 1
0A
FY 1
1A
FY 1
2e
FY 0
8A
FY 0
9A
FY 1
0A
FY 1
1A
FY 1
2e
Revenues GDP per capita
Indexed sector-revenues vs. indexed GDP/Capita (FY 08=100)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
0
10
20
30
40
50
60
70
80
90
Egyp
t
Iran
Alg
eri
a
Sud
an
Iraq
Mo
rocc
o
KSA
Syri
a
Tun
isia
UA
E
Lib
ya
Jord
an
Leb
ano
n
Om
an
Ku
wai
t
Qat
ar
Bah
rain
Total population (mn)
Population Average household size (RHS)
27% 20%31%
43%
23%36%
27% 24%31% 27% 27%
14%30%
40%23% 17%
59% 72% 52%
48%
62%52% 65%
55%55% 55%
64%81%
60%49%
56%81%
14% 8%17%
10% 16% 12% 8%21%
14% 17%9% 5% 10% 11%
21%
3%
0%
20%
40%
60%
80%
100%
Alg
eri
a
Bah
rain
Egyp
t
Iraq
Iran
Jord
an
Ku
wai
t
Leb
ano
n
Lib
ya
Mo
rocc
o
Om
an
Qat
ar
KSA
Sud
an
Tun
isia
UA
E
Population breakdown by age (FY 12)
< 15 years 15-60 years > 60 years
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 12
3-Penetration
Retail: Per-capita penetration levels for retail outlets in MENA are highest the UAE (14.6
sqft/capita), which place the market ahead of Qatar (5.9 sqft/capita) and KSA (2.4 sqft/capita).
The remainder of MENA, including GCC states, is substantially lower, averaging below 3.5
sqft/capita. Penetration levels for large, organised retail via convenience stores and
hypermarkets is very low across MENA markets.
Exhibit 13: Retail GLA/capita 2.6 sqft/capita in MENA (ex-UAE)
Source: JLL, Arqaam Capital Research
Exhibit 14: MENA internet penetration FY 09-11
Source: International Telecommunication Union, Arqaam Capital Research
Transportation and travel: MENA consumers are increasingly more mobile, which is reflected
in the rising penetration of land and air transport services across the GCC and Egypt. This is a
function of intra-regional travel growth, which is the result of the emergence of the GCC as a
regional employment hub, and growth in intra-regional tourism.
Exhibit 15: Egypt is extremely under-motorised vs. GCC states
Source: BMI
Exhibit 16: Airport traffic has grown at 8% CAGR across MENA
Source: GACA, World bank DGCA,
14.2 13.6
3.73.1
2.2 1.20.3
14.5 14.7
5.9
2.3 2.4 2.00.5
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Abu Dhabi Dubai Doha Jeddah Riyadh Kuwait Cairo
MENA GLA/capita (sqft)
FY 09A FY 12e
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
Qatar Kuwait Bahrain UAE Oman KSA Egypt
Internet penetration rates in GCC and Egypt %
0
100
200
300
400
500
Bah
rain
Ku
wai
t
KSA
Leb
ano
n
Qat
ar
UA
E
Om
an
Jord
an
Alg
eri
a
Tun
isia
Egyp
t
Passenger cars (per '000)
0
10
20
30
40
50
60
70
80
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
FY 0
9A
FY 1
0A
FY 1
1A
UAE Saudi Arabia Egypt Qatar Kuwait
Passenger traffic (mn)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 13
4-Prosperity
Disposable income levels are highly divergent in MENA, given clear wage disparities (average
GCC salary packages are c.5-6x corresponding levels elsewhere in MENA, after adjusting for
taxes, by our estimates). Disposable income growth is highest in KSA over the past 3 years,
according to EIU data. Discretionary spending, as a proportion of consumption, is highest in
the UAE (50%+), Qatar (45%), and KSA (40%).
Exhibit 17: KSA disposable income growth strongest in MENA
Source: EIU, Arqaam Capital Research
Exhibit 18: GCC discretionary spend/income highest in MENA
Source: UN, EIU, Arqaam Capital Research
Capital flows: Among the main drivers of MENA discretionary spending are (i) the nature of
the GCC as an exporter of capital and an importer of labour, (ii) the spillover of wealth from
the GCC into peripheral markets, via expatriate remittances and their subsequent domestic
reinvestment.
This has also resulted in rising demand for discretionary retail products, both within the GCC
(where expatriate Arabs reside and spend), and the periphery (where remittances are routed).
Exhibit 19: Remittances/GDP (by country)
Source: The World Bank. IMF
Exhibit 20: Inflation rates across MENA
Source: IMF
80
90
100
110
120
130
140
150
FY 09 FY 10 FY 11 FY 12 FY 13
Indexed annual disposable income (FY 09=100)
KSA UAE Egypt Iran Morocco Turkey
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Jord
an
Leb
ano
n
Mo
rocc
o
Sud
an
Tun
isia
Egyp
t
Alg
eri
a
Iran
Om
an
Remittances/GDP
FY 02A FY 12e
19.4%
16.9%
11.7%
6.9%5.8% 5.6% 5.4% 5.3% 5.1% 4.9%
4.2%3.3% 2.9%
2.3% 1.9% 1.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Iran
Sud
an
Egyp
t
Lib
ya
KSA
Leb
ano
n
Alg
eri
a
Ku
wai
t
Jord
an
Om
an
Tun
isia
Iraq
UA
E
Qat
ar
Mo
rocc
o
Bah
rain
5-year inflation CAGR
50%
45%
40%
16%13%
0%
10%
20%
30%
40%
50%
60%
UAE Qatar KSA Turkey Egypt
Discretionary spend / aggregate consumption, %
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 14
Decomposing RoE: MENA consumer markets are competitive
Equity returns largely a function of efficiency (asset turnover), rather than
profitability (margins). Consumer discretionary sector wins, while food
producers and retailers remain under pressure
Exhibit 21: DuPont: financial leverage and asset turnover overwhelmingly responsible for RoE generation*
FY 13e
FY 14e
Net margin (%) Asset turnover Leverage RoE (%)
Net margin (%) Asset turnover Leverage RoE (%)
JARIR AB 11 2.4 2.0 55 JARIR AB 11 2.5 2.0 57
ALTAYYAR AB 14 2.0 1.9 53 ALTAYYAR AB 14 2.0 1.8 52
CATERING AB 26 1.0 1.5 37 CATERING AB 25 1.0 1.4 36
SHAKER AB 12 1.4 1.9 31 SHAKER AB 13 1.4 1.7 31
EXTRA AB 5 3.0 2.0 31 ALHOKAIR AB 12 1.3 1.9 31
HERFY AB 20 1.2 1.3 31 HERFY AB 20 1.2 1.2 29
ALHOKAIR AB 12 1.3 1.8 29 EXTRA AB 5 2.9 2.0 29
AOTHAIM AB 3 2.4 3.0 24 AOTHAIM AB 3 2.4 2.9 23
MABANEE KK 60 0.2 1.8 22 ALMARAI AB 16 0.6 2.3 21
BUDGET AB 22 0.4 2.1 20 SADAFCO AB 11 1.4 1.4 21
SADAFCO AB 10 1.3 1.4 20 JUFO EY 12 1.0 1.7 21
ALMARAI AB 14 0.6 2.4 19 BUDGET AB 22 0.4 2.1 20
JUFO EY 11 0.9 1.7 17 SAVOLA AB 6 1.6 1.9 18
SAVOLA AB 6 1.5 2.0 17 HB AB 10 1.2 1.5 18
HB AB 10 1.1 1.5 17 MABANEE KK 60 0.2 1.6 18
SPM AB 13 0.5 2.3 14 AUTO EY 4 1.9 2.0 15
NGIC AB 7 1.2 1.5 12 SPM AB 13 0.5 2.3 14
AUTO EY 4 1.5 2.2 12 NGIC AB 7 1.3 1.5 12
AGTHIA UH 10 0.8 1.4 11 AGTHIA UH 10 0.8 1.4 12
MERS QD 5 1.1 1.6 9 MERS QD 6 1.3 1.6 11
Source: Company Data, Arqaam Capital Research * RoE drivers highlighted by company
Don’t look for margins plays: MENA consumer markets are competitive: fragmentation and
price competition are common denominators across most manufacturers of basic and
processed food items in MENA. This has rendered margins across the space susceptible to
pressure. We isolate food staples producers as the most likely to experience margin
maintenance challenges over the next 3 years, and prefer retailers (selectively), and
discretionary product and service providers (Al Tayyar, Budget, Catering), which are better
positioned for rising disposable income and discretionary spending in MENA.
Competition has resulted in high asset turnover profiles, particularly among lower-margin
retailers and service providers: we highlight Jarir Marketing (Hold, SAR 157), Extra (Hold, SAR,
105) and Al Tayyar (Buy, SAR 120) as prime examples of MENA consumer businesses that are
operationally efficient from an asset turnover perspective, generating RoEs in the 30-55%
range.
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 15
Valuation: Secular themes currently trade at a discount to
government spending stories
MENA consumer stocks are less correlated with direct government spending packages than
contractors, industrial manufacturers, property developers, logistics providers, or banks. They
are however positively exposed to the spillover effect of government efforts to improve living
standards, distribute welfare schemes, and raise wage levels. They generally do not have major
government shareholding interests, either.
Buying higher quality cash flow for less: Government spending-reliant sectors such as
construction, property development, industrial manufacturing, and building materials, have
proven sensitive to (i) politics and administrative bureaucracy, (ii) competing interests within
systems of state subsidies, and (iii) slow regulatory evolution, particularly in the GCC. This has
affected payment collections from government entities, thereby affecting balance sheets. The
net result has been cash flow profiles that are relatively unattractive, rendering the theme
better suited for selective bottom-up picks rather than top-down thematic calls.
Secular sectors, such as the discretionary consumer and retail space, have consistently
produced better cash flow margins overall during the last 3 years, despite being more
competitive. This is largely due to the fact that cash collection cycles are much shorter, and
that CAPEX burden is typically lower.
Exhibit 22: MENA consumer stocks have consistently proven more cash generative than stocks reliant on government spending
Source: Company Data, AC Research, Bloomberg *ex-KSA cement, MENA financials
Exhibit 23: While market valuation has been overly optimistic on government spending, rather than rewarding the MENA consumer sector for higher quality cash flows
Source: Company Data, AC Research, Bloomberg *ex-KSA cement, MENA financials
The market has however not fully rewarded MENA consumer stocks for EPS and cash flow
quality. The market has generally assigned far greater emphasis on government-spending-led
EPS growth over the past 4 quarters, rather than rewarding more secular consumer stocks for
earnings quality and cash generation as it had in FY 10-11A. This is evident when considering
comparing forward earnings multiples between the 2 groups. The net result suggests that
some MENA consumer and retail stocks currently trade at discounted valuation multiples,
despite far stronger earnings momentum and cash low quality going forward.
22%
17%
20%17%
15%
12%
0%
5%
10%
15%
20%
25%
FY 09A FY 10A FY 11A
Average OCF margin(%)
Consumer spending Government spending*
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
Jan 10
Mar 10
May 10
Jul 10
Sep 10
Nov 10
Jan 11
Mar 11
May 11
Jul 11
Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Government spending Consumer spending
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 16
Exhibit 24: P/B vs. RoE: MENA consumer stocks produce substantially better returns than other sectors
Source: Company Data, Arqaam Capital Research
Exhibit 25: The market has not fully rewarded select MENA consumer stocks for superior cash flow margins
Source: Company Data, Arqaam Capital Research
Almarai
HalwaniSADAFCO
Herfy
SavolaSPM
Juhayna
AgthiaAUTO
Budget
Tayyar
Catering
Shaker
Gasco
Othaim
Hokair
Jarir
ExtraMeera
Mabanee
AldarEmaar
Sorouh Arkan
SRECO Arabtec
DSIDepa
OCIC
KhodariREDSEA
ARCCO
YACCO
SACCO
QACCO
SOCCO
YNCCO
EACCO
JOUFAPCO
Amaintit
Zamil
0
1
2
3
4
5
6
7
8
9
10
-10% 0% 10% 20% 30% 40% 50% 60%
FY 11A ROE (%)
Current market cap / book value (x)
AlmaraiHalwani
SADAFCO
Herfy
Savola SPM
Juhayna
Agthia
AUTO
Budget
Tayyar
Catering
GascoOthaim
Hokair
Jarir
Extra
Meera
Aldar
Emaar
Sorouh
Arkan
SRECO
Arabtec
DSI
Depa
OCIC
Khodari
REDSEA
APCO
Amaintit
Zamil
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
-40% -20% 0% 20% 40% 60% 80%
FY 11A OCF margin (%)
Current market cap / FY 11A OCF (x)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 17
Exhibit 26: Snapshot of MENA consumer and retail coverage universe valuation and returns profiles
BBG Code Rating FVE 5yr Rev CAGR GPM % EBITDA % NPM% OCF % FCF % Div yld % SG&A/rev % D/E RoE % RoA % RoIC % PE
SADAFCO AB Hold SAR 70 8.8% 31.1 13.7 10.2 9.9 4.9 4.9 20.0 0.0 19.6 13.6 19.6 12.0
JUFO EY Hold EGP 8.5 21.0% 36.6 20.2 11.1 17.3 -1.2 2.5 16.4 59.0 17.4 10.0 18.2 14.2
HB AB Buy SAR 56 11.3% 30.5 15.9 9.8 8.9 -1.1 5.8 17.5 27.6 17.0 11.0 13.5 12.6
SAVOLA AB Hold SAR 45 13.7% 15.7 5.7 5.5 6.0 2.7 3.9 10.0 47.1 17.2 8.4 11.3 10.3
ALMARAI AB Sell SAR 52 12.8% 36.5 24.5 14.5 22.1 0.6 2.7 19.7 109.9 19.5 8.1 10.1 15.8
AOTHAIM AB Hold SAR 88 12.0% 9.4 5.7 3.4 6.4 0.9 4.2 3.7 63.9 24.1 8.1 19.4 11.0
ALHOKAIR AB Hold SAR 115 16.8% 45.0 14.9 12.2 13.5 7.5 3.7 30.1 60.7 29.5 14.1 17.7 15.0
MERS QD Buy QAR 205 20.2% 15.9 7.5 5.2 9.1 0.1 5.5 9.4 27.2 9.4 5.9 8.6 13.6
JARIR AB Hold SAR 150 16.8% 15.0 12.0 11.5 10.4 8.4 5.5 3.0 24.1 55.5 28.0 46.4 15.0
MABANEE KK Hold KWd 1,250 14.8% 79.6 74.3 60.3 54.4 24.2 0.0 5.9 54.5 21.8 12.1 15.9 15.1
SHAKER AB Buy SAR 90 11.2% 30.5 16.3 11.7 10.6 7.6 5.0 15.8 51.0 31.1 16.4 33.8 10.1
AUTO EY Buy EGP 35 17.3% 12.2 8.8 3.5 4.7 3.2 4.1 3.4 65.7 11.6 5.2 16.5 12.1
BUDGET AB Buy SAR 70 8.6% 15.3 60.2 21.5 61.4 -3.3 4.2 8.0 80.0 20.1 9.6 14.5 9.8
SPM AB Hold SAR 30 6.1% 27.6 20.4 12.5 19.6 12.4 5.1 13.0 125.3 13.9 5.9 11.9 10.9
CATERING AB Buy SAR 100 10.7% 38.0 29.4 25.5 28.0 7.3 4.4 8.6 0.0 36.7 25.3 36.7 12.4
ALTAYYAR AB Buy SAR 120 13.0% 22.3 16.0 14.0 11.4 8.7 10.8 7.3 45.7 53.4 28.3 38.8 6.6
EXTRA AB Hold SAR 105 14.7% 17.4 6.3 5.0 5.9 1.6 2.6 12.2 0.0 31.0 15.3 31.0 14.4
HERFY AB Hold SAR 120 11.4% 31.0 25.5 19.9 24.1 13.1 2.9 10.5 6.5 30.6 24.4 29.4 15.8
NGIC AB Sell SAR 16 3.7% 9.0 10.1 6.2 11.1 8.6 7.1 3.7 0.0 11.0 7.5 9.1 12.5
AGTHIA UH Hold AED 2.45 5.3% 25.7 14.3 10.3 12.1 4.1 4.0 16.5 18.4 11.8 8.7 11.8 8.7
Source: Company Data, Arqaam Capital Research
Exhibit 27: Valuation: Deep value plays exist in MENA consumer space: We like Al Tayyar (40% P/E discount), Halwani (5%), Al Meera and (7%), on discount valuation, and warrant premium multiples at Shaker, Saudi Catering, and GB Auto
Source: Company Data, Arqaam Capital Research
HB AB
SADAFCO AB
HERFY AB
SAVOLA AB
SPM AB
JUFO EY
AGTHIA UH
AUTO EY
BUDGET AB
ALTAYYAR AB
CATERING AB
SHAKER AB
NGIC AB
AOTHAIM AB
ALHOKAIR AB
JARIR AB
EXTRA AB
MERS QD
MABANEE KK
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
ALTAYYAR AB
AOTHAIM AB
AGTHIA UH
SAVOLA AB
SPM AB
MERS QD
HB AB
SADAFCO AB
EXTRA AB
BUDGET AB
MABANEE KK
JARIR AB
JUFO EY
ALHOKAIR AB
SHAKER AB
ALMARAI AB
AUTO EY
NGIC AB
HERFY AB
CATERING AB
P/E premium/discount % to sector (CMP/EPS 13e)
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
AGTHIA UH
AOTHAIM AB
HB AB
BUDGET AB
JUFO EY
SADAFCO AB
ALTAYYAR AB
MERS QD
EXTRA AB
AUTO EY
SPM AB
HERFY AB
ALMARAI AB
MABANEE KK
JARIR AB
ALHOKAIR AB
SAVOLA AB
NGIC AB
SHAKER AB
CATERING AB
EV/EBITDA premium/discount % to sector (EV current/EBITDA 13e)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 18
Risk: global grain prices, regional expansion challenges, and credit
availability are key risks to MENA consumer and retail businesses
Price controls in consumer staples, vs. rising global grain prices: Most basic food items in
MENA are capped by government price control. This renders basic food producers exposed to
input costs changes than cannot readily be passed on to end buyers. GCC governments
however sometimes employ a mix of subsidies and rebates designed to compensate producers
for exposure to commodity prices.
Saudi Succession: The absence of a clear line of succession in Saudi leadership may impact
investor sentiment of political and economic risk in the country.
Operational challenges to regional expansion drives: Execution risks, margin threats (in the
near term on higher SG&A and set up costs, but in the long term a function of market
competitiveness and strength of entrenched local competitors), relationships with local
partners, and regulation designed to protect local industries and producers may adversely
impact regional expansion ventures. KSA based retailers and food producers (Savola, Al Marai,
Al Hokair) have all either felt asset write-downs on, or opted to take full operational control of,
ailing international and regional ventures.
Credit availability: discretionary spending on auto and electronics in MENA is influenced by
the availability of consumer bank credit and credit card penetration levels. Egyptian auto
assemblers (GB Auto) may face significant challenges given the extremely low penetration rate
of retail banking services (>15% population) and low consumer loans penetration relative to
population base.
Exhibit 28: Consumer loans, MENA
Source: Central banks
Exhibit 29: Real interest rates, MENA
Source: BMI
-
20
40
60
80
100
120
140
Saudi Arabia
Kuwait Qatar UAE Egypt Oman Bahrain Lebanon
Consumer loans (USDmn)
2006 FY 12 YTD
-15.0
-10.0
-5.0
.0
5.0
10.0
Qat
ar
Bah
rain
Iraq
Jord
an
Om
an
KSA
Leb
ano
n
Egyp
t
Ku
wai
t
UA
E
Iran
Real interest rate (%)
FY 04A FY 12e
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 19
Grain prices: Global grain prices marked a new 3-yr high in Q3 12 (corn USDc 838/bu +60%,
soybeans USDc 1,712/bu +30%) on a global supply shortfall, following a drought in the
Northern area of US, which impacted crop production (corn –28% y/y, soybeans, -10% y/y).
With (i) 40-60% of MENA consumer staple producers’ COGS concentrated in poultry/feed, (ii)
limited use of effective commodity hedging policies, and (iii) minimal governmental subsidy
support, we expect margin profiles of consumer food companies to remain highly exposed to
grain price changes.
Exhibit 30: Grain prices hike in July 2012: +60% corn…
Source: Bloomberg
Exhibit 31: …+30% soybeans
Source: Bloomberg
Exhibit 32: Expected corn prices
Source: Bloomberg
Exhibit 33: Expected wheat prices
Source: Bloomberg
Exhibit 34: Expected soybeans prices
Source: Bloomberg
Exhibit 35: Expected sugar prices
Source: Bloomberg
0
100
200
300
400
500
600
700
800
900
Nov 10
Jan 11
Mar 11
May 11
Jul 11 Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12 Sep 12
Nov 12
Corn active contract (USDc/bu)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Nov 10
Jan 11
Mar 11
May 11
Jul 11 Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12 Sep 12
Nov 12
Soybeans active contract (USDc/bu)
0
100
200
300
400
500
600
700
800
Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e
Corn USDc/bu.
770
780
790
800
810
820
830
840
850
860
870
Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e
Wheat USDc/bu.
1,150
1,200
1,250
1,300
1,350
1,400
1,450
1,500
1,550
Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e
Soybeans USDc/bu.
19
20
20
20
20
20
20
20
20
20
20
Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e
Sugar#11 USDc/lb
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 20
MENA Consumer and Retail stocks in charts
Exhibit 36: 5-yr revenue CAGR (historic)
Source: Company Data, Arqaam Capital Research *when applicable
Exhibit 37: 5-yr revenue CAGR (fwd)
Source: Company Data, Arqaam Capital Research
Exhibit 38: 5-yr EPS CAGR (historic)
Source: Company Data, Arqaam Capital Research *when applicable
Exhibit 39: 5-yr EPS CAGR (fwd)
Source: Company Data, Arqaam Capital Research
Exhibit 40: Gross margins (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 41: EBIT margins (FY 13e)
Source: Company Data, Arqaam Capital Research
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Shak
er
Extr
a
Savo
la
Jari
r
Juh
ayn
a
Tayy
ar
Alm
arai
Ho
kair
Al M
ee
ra
Cat
eri
ng
Agt
hia
He
rfy
SPM
Oth
aim
AU
TO
SAD
AFC
O
Hal
wan
i
BU
DG
ET
Gas
co
Mab
ane
e
5-yr* Revenue CAGR (Historic)
0%
5%
10%
15%
20%
25%
Ho
kair
Juh
ayn
a
Al M
ee
ra
AU
TO
Jari
r
Mab
ane
e
Extr
a
Tayy
ar
Alm
arai
Oth
aim
He
rfy
Hal
wan
i
Shak
er
Savo
la
Cat
eri
ng
SAD
AFC
O
BU
DG
ET
SPM
Agt
hia
Gas
co
5-yr Revenue CAGR (Fwd)
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Extr
a
Juh
ayn
a
Tayy
ar
Oth
aim
SAD
AFC
O
He
rfy
Shak
er
Agt
hia
Ho
kair
Al M
ee
ra
Jari
r
Alm
arai
Cat
eri
ng
Hal
wan
i
BU
DG
ET
SPM
Savo
la
Mab
ane
e
Gas
co
AU
TO
5-yr* EPS CAGR (Historic)
0%
5%
10%
15%
20%
25%
30%
35%
40%
AU
TO
Juh
ayn
a
Ho
kair
Mab
ane
e
Shak
er
Alm
arai
Al M
ee
ra
Extr
a
Jari
r
Hal
wan
i
Tayy
ar
Savo
la
SAD
AFC
O
Cat
eri
ng
Oth
aim
He
rfy
Agt
hia
SPM
Gas
co
BU
DG
ET
5-yr EPS CAGR (Fwd)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Mab
ane
e
Ho
kair
Cat
eri
ng
Juh
ayn
a
Alm
arai
SAD
AFC
O
He
rfy
Hal
wan
i
Shak
er
SPM
Agt
hia
Tayy
ar
Extr
a
Savo
la
Al M
ee
ra
BU
DG
ET
Jari
r
AU
TO
Oth
aim
Gas
co
GPM % FY 13e
0%
10%
20%
30%
40%
50%
60%
70%
Mab
ane
e
Cat
eri
ng
He
rfy
Alm
arai
Tayy
ar
Juh
ayn
a
Shak
er
SPM
Hal
wan
i
Ho
kair
Jari
r
SAD
AFC
O
Agt
hia
BU
DG
ET
AU
TO
Savo
la
Al M
ee
ra
Gas
co
Extr
a
Oth
aim
EBIT margin % FY 13e
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 21
Exhibit 42: Net margins (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 43: CFO/Sales (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 44: D/E (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 45: Interest cover (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 46: Operating leverage % (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 47: Operating and financing leverage % (FY 13e)
Source: Company Data, Arqaam Capital Research
0%
10%
20%
30%
40%
50%
60%
70%
Mab
ane
e
Cat
eri
ng
BU
DG
ET
He
rfy
Alm
arai
Tayy
ar
SPM
Ho
kair
Shak
er
Jari
r
Juh
ayn
a
SAD
AFC
O
Hal
wan
i
Agt
hia
Gas
co
Savo
la
Al M
ee
ra
Extr
a
AU
TO
Oth
aim
NPM % FY 13e
0%
10%
20%
30%
40%
50%
60%
70%
Mab
ane
e
BU
DG
ET
Cat
eri
ng
He
rfy
Alm
arai
SPM
Juh
ayn
a
Ho
kair
Tayy
ar
Agt
hia
Shak
er
Jari
r
SAD
AFC
O
Gas
co
Al M
ee
ra
Hal
wan
i
Oth
aim
Savo
la
Extr
a
AU
TO
CFO/Sales % FY 13e
-3,000
-2,000
-1,000
-
1,000
2,000
3,000
4,000
SAD
AFC
O
Cat
eri
ng
Gas
co
Extr
a
He
rfy
Agt
hia
Jari
r
Al M
ee
ra
Hal
wan
i
Savo
la
Shak
er
Mab
ane
e
Tayy
ar
Juh
ayn
a
Ho
kair
Oth
aim
AU
TO
BU
DG
ET
Alm
arai
SPM
D/E (USDmn)
Equity Debt
-
10x
20x
30x
40x
50x
60x
He
rfy
Jari
r
Hal
wan
i
Tayy
ar
Mab
ane
e
Ho
kair
Agt
hia
Shak
er
Oth
aim
Alm
arai
Al M
ee
ra
SPM
Savo
la
BU
DG
ET
Juh
ayn
a
AU
TO
SAD
AFC
O
Cat
eri
ng
Gas
co
Interest cover (FY 13e)
0%
50%
100%
150%
200%
250%
300%
Ho
kair
Gas
co
Savo
la
SPM
Al M
ee
ra
Jari
r
Extr
a
He
rfy
Hal
wan
i
Oth
aim
Tayy
ar
Alm
arai
Mab
ane
e
Cat
eri
ng
Juh
ayn
a
Shak
er
Agt
hia
BU
DG
ET
SAD
AFC
O
AU
TO
Operating leverage % (FY 13e)
Hokair
GascoSPM Al MeeraJarir
ExtraHerfyHalwani Othaim
TayyarAlmarai
MabaneeCateringSavola
JuhaynaShaker
Agthia BUDGETSADAFCOAUTO
0%
50%
100%
150%
200%
250%
300%
0% 20% 40% 60% 80% 100% 120% 140%
Financing leverage % (FY 13e)
Operating leverage % (FY 13e)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 22
Exhibit 48: RoE % (average FY 13-15e)
Source: Company Data, Arqaam Capital Research
Exhibit 49: RoA % (average FY 13e-15e)
Source: Company Data, Arqaam Capital Research
Exhibit 50: RoIC % (average FY 13-15e)
Source: Company Data, Arqaam Capital Research
Exhibit 51: P/B (CMP/BVPS FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 52: P/S (current market cap / sales FY 13e)
Source: Company Data, Arqaam Capital Research
0%
10%
20%
30%
40%
50%
60%
Jari
r
Tayy
ar
Cat
eri
ng
Shak
er
Ho
kair
He
rfy
Extr
a
Oth
aim
Juh
ayn
a
Alm
arai
SAD
AFC
O
Mab
ane
e
BU
DG
ET
Hal
wan
i
Savo
la
AU
TO
SPM
Gas
co
Agt
hia
Al M
ee
ra
RoE (Avg FY 13-15e)
0%
5%
10%
15%
20%
25%
30%
35%
Tayy
ar
Jari
r
Cat
eri
ng
He
rfy
Shak
er
Ho
kair
Extr
a
SAD
AFC
O
Juh
ayn
a
Hal
wan
i
Mab
ane
e
Savo
la
Alm
arai
BU
DG
ET
Agt
hia
Gas
co
Oth
aim
AU
TO
Al M
ee
ra
SPM
RoA (Avg FY 13-15e)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Jari
r
Tayy
ar
Cat
eri
ng
Shak
er
Extr
a
He
rfy
Juh
ayn
a
SAD
AFC
O
Ho
kair
AU
TO
Oth
aim
Hal
wan
i
Mab
ane
e
SPM
Savo
la
Agt
hia
Alm
arai
Al M
ee
ra
Gas
co
BU
DG
ET
RoIC (Avg FY 13-15e)
--
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Agt
hia
Al M
ee
ra
Gas
co
AU
TO
SPM
Savo
la
BU
DG
ET
Hal
wan
i
SAD
AFC
O
Juh
ayn
a
Oth
aim
Alm
arai
Shak
er
Mab
ane
e
Tayy
ar
Ho
kair
Extr
a
Cat
eri
ng
He
rfy
Jari
r
P/B (CMP/ BVPS FY 13e)
--
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Oth
aim
AU
TO
Savo
la
Extr
a
Al M
ee
ra
Gas
co
Agt
hia
Tayy
ar
Shak
er
Hal
wan
i
SAD
AFC
O
SPM
Juh
ayn
a
Ho
kair
Jari
r
BU
DG
ET
Alm
arai
He
rfy
Cat
eri
ng
Mab
ane
e
P/S (Current market cap / Sales FY 13e)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 23
Exhibit 53: EV/EBITDA (current EV / EBITDA FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 54: P/E (CMP / EPS FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 55: PEG (CMP / EPS FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 56: Upside/Downside % from CMP
Source: Company Data, Arqaam Capital Research
Exhibit 57: YTD relative to index
Source: Bloomberg, Company Data, Arqaam Capital Research
Exhibit 58: Price performance
Source: Bloomberg, Company Data, Arqaam Capital Research
--
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
BU
DG
ET
Agt
hia
Tayy
ar
AU
TO
Hal
wan
i
Oth
aim
Gas
co
Juh
ayn
a
SAD
AFC
O
Shak
er
Cat
eri
ng
Al M
ee
ra
Extr
a
Ho
kair
Savo
la
SPM
Alm
arai
He
rfy
Mab
ane
e
Jari
r
EV/EBITDA (Current EV / EBITDA FY 13e)
--
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Tayy
ar
Agt
hia
Savo
la
BU
DG
ET
Shak
er
Oth
aim
SPM
Cat
eri
ng
SAD
AFC
O
Ho
kair
AU
TO
Hal
wan
i
Gas
co
Juh
ayn
a
Al M
ee
ra
Extr
a
Jari
r
Mab
ane
e
Alm
arai
He
rfy
P/E (CMP / EPS FY 13e)
--
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Alm
arai
Savo
la
SPM
SAD
AFC
O
He
rfy
Hal
wan
i
Agt
hia
AU
TO
BU
DG
ET
Tayy
ar
Cat
eri
ng
Shak
er
Gas
co
Oth
aim
Ho
kair
Al M
ee
ra
Juh
ayn
a
Extr
a
Jari
r
Mab
ane
e
PEG (CMP/ EPS FY 13e)
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Tayy
ar
Shak
er
BU
DG
ET
Hal
wan
i
Cat
eri
ng
AU
TO
Al M
ee
ra
Ho
kair
He
rfy
Oth
aim
Agt
hia
Jari
r
Savo
la
Juh
ayn
a
SAD
AFC
O
Mab
ane
e
SPM
Extr
a
Gas
co
Alm
arai
Upside/Downside % from CMP
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Tayy
ar
Hal
wan
i
Extr
a
Shak
er
Alm
arai
SAD
AFC
O
Gas
co
Ho
kair
BU
DG
ET
Jari
r
Cat
eri
ng
Oth
aim
SPM
Al M
ee
ra
Savo
la
AU
TO
Mab
ane
e
He
rfy
Juh
ayn
a
Agt
hia
YTD relative to index
-40%
-20%
0%
20%
40%
60%
80%
Juh
ayn
a
AU
TO
Cat
eri
ng
Ho
kair
Extr
a
BU
DG
ET
Tayy
ar
Mab
ane
e
SAD
AFC
O
He
rfy
Savo
la
Agt
hia
Jari
r
Hal
wan
i
Alm
arai
Shak
er
SPM
Oth
aim
Al M
ee
ra
Gas
co
Px performance (since May 2012)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 24
Exhibit 59: Buy portfolio alpha (YTD)
Source: Company Data, Arqaam Capital Research
Exhibit 60: Sell portfolio alpha (YTD)
Source: Company Data, Arqaam Capital Research
Exhibit 61: 5-yr revenue CAGR vs. CFO/sales
Source: Company Data, Arqaam Capital Research
Exhibit 62: Operating and financing leverage % (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 63: RoE vs. P/B (FY 13e)
Source: Company Data, Arqaam Capital Research
Exhibit 64: RoIC vs. P/E (FY 13e)
Source: Company Data, Arqaam Capital Research
100
101
101
102
102
103
103
104
104
105
105
1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 10 Jan
11 Jan
12 Jan
13 Jan
14 Jan
Buy portfolio alpha (YTD)
Buy portfolio Index
100
101
101
102
102
103
103
104
104
105
105
1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 10 Jan
11 Jan
12 Jan
13 Jan
14 Jan
Sell portfolio alpha (YTD)
Sell portfolio Index
Juhayna
AlmaraiSavola
SPM
SADAFCO
HerfyHalwani
Agthia
AUTO
BUDGET
Tayyar
CateringShaker
Gasco
Othaim
HokairAl Meera
Extra JarirMabanee
--%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%
0% 10% 20% 30% 40% 50% 60% 70%
CFO / Sales FY 13e
5-yr Revenue CAGR (FY 12-17e)
Hokair
GascoSPM Al MeeraJarir
ExtraHerfyHalwani Othaim
TayyarAlmarai
MabaneeCateringSavola
JuhaynaShaker
Agthia BUDGETSADAFCOAUTO
0%
50%
100%
150%
200%
250%
300%
0% 20% 40% 60% 80% 100% 120% 140%
Financing leverage % (FY 13e)
Operating leverage % (FY 13e)
Juhayna Almarai
Savola
SPM
SADAFCO
Herfy
HalwaniAgthia
AUTO
BUDGET
Tayyar
Catering
Shaker
Gasco
Othaim
Hokair
Al Meera
Extra
Jarir
Mabanee
0%
10%
20%
30%
40%
50%
60%
-- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
P/B (CMP / BVPS FY 13e)
RoE (FY 13e)
Juhayna
AlmaraiSavola
SPM
SADAFCO
Herfy
HalwaniAgthia AUTO
BUDGET
Tayyar Catering
Shaker
Gasco
Othaim
Hokair
Al Meera
Extra
Jarir
Mabanee
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
-- 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00
P/E (CMP / EPS FY 13e)
RoIC (FY 13e)
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 25
Appendix 1: Comparative ratios and multiples
Exhibit 65: P/E (CMP)
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 23.9x 29.3x 18.1x 13.8x 10.3x 7.6x
Almarai Co. ALMARAI AB 11.6x 13.1x 18.0x 15.4x 12.4x 11.0x
Savola SAVOLA AB 17.0x 11.4x 9.4x 9.0x 7.9x 7.0x
Saudi Paper Manufacturing SPM AB 9.2x 11.3x 11.2x 10.9x 10.3x 9.6x
Saudi Dairy & Foodstuff Co. SADAFCO AB 16.2x 14.1x 13.6x 11.9x 10.4x 9.6x
Herfy Food Services Co. HERFY AB 24.8x 21.0x 17.2x 15.9x 14.2x 12.8x
Halwani brothers HB AB 15.4x 15.4x 14.3x 12.2x 10.9x 9.5x
Agthia Group AGTHIA UH 10.9x 14.7x 9.4x 8.8x 8.0x 7.6x
Weighted harmonic mean 5.4x 14.9x 14.3x 12.9x 11.3x 10.0x
Consumer discretionary
Ghabbour Auto AUTO EY 12.7x 16.2x 18.4x 12.1x 8.5x 6.9x
United International Transportation BUDGET AB 13.9x 13.1x 10.9x 9.8x 9.2x 9.0x
Al Tayyar Travel Group ALTAYYAR AB 12.0x 9.7x 7.5x 6.6x 5.7x 5.2x
Saudi Airlines Catering CATERING AB 17.0x 17.1x 13.4x 11.4x 9.9x 9.0x
Al-Hassan Shaker SHAKER AB 16.1x 13.0x 11.9x 10.0x 8.3x 7.3x
National Gas & Industrialization NGIC AB 15.8x 13.4x 12.8x 12.6x 11.8x 11.3x
Weighted harmonic mean 6.7x 17.7x 14.5x 12.7x 11.1x 10.1x
Retailers
Abdullah Al Othaim AOTHAIM AB 11.4x 12.3x 12.1x 10.8x 9.7x 8.8x
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 32.0x 22.9x 16.5x 12.1x 9.9x 8.0x
Al Meera Consumer Goods MERS QD 24.6x 20.9x 17.3x 13.4x 11.1x 10.2x
United Electronics Company EXTRA AB 26.5x 19.6x 16.3x 14.3x 12.6x 11.0x
Jarir Marketing JARIR AB 23.9x 18.7x 16.8x 15.0x 13.1x 11.7x
Weighted harmonic mean 4.7x 18.8x 16.1x 13.4x 11.4x 10.1x
Mabanee Co. MABANEE KK 39.3x 35.3x 24.0x 15.3x 16.0x 15.1x
Source: Company Data, Arqaam Capital Research
Exhibit 66: P/B (CMP)
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 3.3x 3.0x 2.7x 2.4x 2.1x 1.8x
Almarai Co. ALMARAI AB 2.4x 2.2x 3.4x 3.0x 2.6x 2.3x
Savola SAVOLA AB 2.4x 2.2x 2.0x 1.8x 1.6x 1.4x
Saudi Paper Manufacturing SPM AB 1.9x 1.7x 1.6x 1.5x 1.4x 1.4x
Saudi Dairy & Foodstuff Co. SADAFCO AB 2.9x 2.7x 2.5x 2.3x 2.1x 2.0x
Herfy Food Services Co. HERFY AB 8.1x 7.0x 5.8x 4.9x 4.1x 3.6x
Halwani brothers HB AB 2.4x 2.3x 2.2x 2.1x 2.0x 1.8x
Agthia Group AGTHIA UH 1.3x 1.2x 1.1x 1.0x 1.0x 0.9x
Average 3.1x 2.8x 2.7x 2.4x 2.1x 1.9x
Consumer discretionary
Ghabbour Auto AUTO EY 1.6x 1.6x 1.5x 1.4x 1.3x 1.2x
United International Transportation BUDGET AB 2.9x 2.5x 2.2x 2.0x 1.7x 1.5x
Al Tayyar Travel Group ALTAYYAR AB 5.1x 5.0x 4.2x 3.5x 3.0x 2.5x
Saudi Airlines Catering CATERING AB 7.9x 6.6x 5.4x 4.5x 3.7x 3.1x
Al-Hassan Shaker SHAKER AB 4.8x 4.1x 3.7x 3.1x 2.6x 2.1x
National Gas & Industrialization NGIC AB 1.4x 1.4x 1.4x 1.4x 1.4x 1.4x
Average 4.0x 3.6x 3.1x 2.6x 2.3x 2.0x
Retailers
Abdullah Al Othaim AOTHAIM AB 4.1x 3.5x 3.0x 2.6x 2.3x 2.0x
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 6.7x 6.6x 5.2x 4.3x 3.5x 2.9x
Al Meera Consumer Goods MERS QD 6.7x 5.9x 5.5x 1.3x 1.3x 1.2x
United Electronics Company EXTRA AB 10.7x 6.9x 5.5x 4.4x 3.6x 3.0x
Jarir Marketing JARIR AB 12.0x 10.6x 9.4x 8.3x 7.4x 6.6x
Average 8.0x 6.7x 5.7x 4.2x 3.6x 3.1x
Mabanee Co. MABANEE KK 5.8x 5.0x 4.3x 3.3x 2.8x 2.4x
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 26
Exhibit 67: EV/EBITDA (Current EV)
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 13.4x 13.8x 10.6x 8.2x 6.3x 5.2x
Almarai Co. ALMARAI AB 16.8x 15.6x 14.0x 12.3x 10.5x 9.4x
Savola SAVOLA AB 21.2x 16.9x 12.9x 12.0x 10.9x 9.9x
Saudi Paper Manufacturing SPM AB 11.3x 13.6x 12.8x 12.2x 11.6x 11.0x
Saudi Dairy & Foodstuff Co. SADAFCO AB 12.1x 10.3x 9.4x 8.2x 7.2x 6.7x
Herfy Food Services Co. HERFY AB 19.6x 16.4x 13.7x 12.5x 11.2x 10.0x
Halwani brothers HB AB 9.9x 9.3x 8.0x 7.0x 6.3x 5.5x
Agthia Group AGTHIA UH 7.7x 8.8x 6.3x 5.8x 5.3x 5.0x
Average 14.0x 13.1x 11.0x 9.8x 8.7x 7.8x
Consumer discretionary
Ghabbour Auto AUTO EY 8.3x 7.7x 7.5x 6.8x 5.7x 5.1x
United International Transportation BUDGET AB 6.5x 5.7x 4.6x 4.5x 4.3x 4.1x
Al Tayyar Travel Group ALTAYYAR AB 11.1x 9.0x 7.0x 6.1x 5.3x 4.8x
Saudi Airlines Catering CATERING AB 13.8x 13.6x 11.6x 9.9x 8.6x 7.8x
Al-Hassan Shaker SHAKER AB 14.4x 11.9x 10.0x 8.7x 7.4x 6.5x
National Gas & Industrialization NGIC AB 10.1x 9.4x 7.6x 7.5x 7.8x 7.9x
Average 10.7x 9.6x 8.0x 7.3x 6.6x 6.1x
Retailers
Abdullah Al Othaim AOTHAIM AB 10.6x 9.0x 8.3x 7.3x 6.5x 5.8x
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 27.1x 23.7x 16.0x 11.4x 9.5x 7.9x
Al Meera Consumer Goods MERS QD 23.9x 18.1x 13.3x 10.5x 9.3x 8.8x
United Electronics Company EXTRA AB 21.1x 15.8x 13.0x 10.9x 9.6x 8.6x
Jarir Marketing JARIR AB 23.3x 18.4x 16.8x 14.6x 12.6x 11.2x
Average 21.2x 17.1x 13.5x 11.0x 9.5x 8.5x
Mabanee Co. MABANEE KK 34.5x 32.2x 21.9x 14.5x 14.9x 14.1x
Source: Company Data, Arqaam Capital Research
Exhibit 68: EV/Sales (Current EV)
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 3.2x 2.6x 2.1x 1.7x 1.3x 1.1x
Almarai Co. ALMARAI AB 5.1x 4.4x 3.5x 3.0x 2.6x 2.3x
Savola SAVOLA AB 1.3x 1.1x 1.0x 0.9x 0.8x 0.7x
Saudi Paper Manufacturing SPM AB 2.6x 2.5x 2.6x 2.5x 2.3x 2.2x
Saudi Dairy & Foodstuff Co. SADAFCO AB 1.8x 1.5x 1.3x 1.1x 1.0x 1.0x
Herfy Food Services Co. HERFY AB 5.3x 4.4x 3.6x 3.2x 2.8x 2.6x
Halwani brothers HB AB 1.6x 1.4x 1.3x 1.1x 1.0x 0.9x
Agthia Group AGTHIA UH 1.2x 1.0x 0.9x 0.8x 0.8x 0.7x
Average 2.7x 2.4x 2.0x 1.8x 1.6x 1.4x
Consumer discretionary
Ghabbour Auto AUTO EY 0.7x 0.7x 0.6x 0.6x 0.5x 0.4x
United International Transportation BUDGET AB 3.8x 3.3x 2.9x 2.7x 2.4x 2.2x
Al Tayyar Travel Group ALTAYYAR AB 1.6x 1.4x 1.1x 1.0x 0.8x 0.8x
Saudi Airlines Catering CATERING AB 5.0x 4.0x 3.4x 2.9x 2.5x 2.3x
Al-Hassan Shaker SHAKER AB 2.5x 1.8x 1.6x 1.4x 1.3x 1.1x
National Gas & Industrialization NGIC AB 0.9x 0.8x 0.8x 0.8x 0.7x 0.7x
Average 2.4x 2.0x 1.7x 1.6x 1.4x 1.3x
Retailers
Abdullah Al Othaim AOTHAIM AB 0.6x 0.5x 0.5x 0.4x 0.4x 0.3x
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 4.2x 3.3x 2.7x 2.0x 1.6x 1.4x
Al Meera Consumer Goods MERS QD 2.0x 1.5x 1.1x 0.9x 0.7x 0.6x
United Electronics Company EXTRA AB 1.4x 1.0x 0.8x 0.7x 0.6x 0.5x
Jarir Marketing JARIR AB 3.2x 2.3x 2.1x 1.7x 1.5x 1.3x
Average 2.3x 1.8x 1.4x 1.1x 1.0x 0.8x
Mabanee Co. MABANEE KK 24.0x 22.7x 16.4x 10.8x 11.2x 10.6x
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 27
Exhibit 69: RoA
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 8% 6% 9% 10% 12% 16%
Almarai Co. ALMARAI AB 10% 7% 8% 8% 9% 9%
Savola SAVOLA AB 6% 7% 8% 7% 8% 9%
Saudi Paper Manufacturing SPM AB 8% 6% 6% 6% 6% 6%
Saudi Dairy & Foodstuff Co. SADAFCO AB 12% 14% 13% 14% 14% 15%
Herfy Food Services Co. HERFY AB 25% 25% 26% 24% 24% 23%
Halwani brothers HB AB 12% 12% 10% 11% 12% 13%
Agthia Group AGTHIA UH 9% 6% 9% 9% 9% 9%
Average 11% 10% 11% 11% 12% 13%
Consumer discretionary
Ghabbour Auto AUTO EY 5% 4% 3% 5% 8% 9%
United International Transportation BUDGET AB 11% 10% 10% 9% 9% 8%
Al Tayyar Travel Group ALTAYYAR AB 23% 27% 29% 28% 28% 28%
Saudi Airlines Catering CATERING AB 32% 27% 28% 27% 26% 25%
Al-Hassan Shaker SHAKER AB 17% 15% 15% 16% 18% 19%
National Gas & Industrialization NGIC AB 6% 7% 7% 8% 8% 8%
Average 16% 15% 15% 16% 16% 16%
Retailers
Abdullah Al Othaim AOTHAIM AB 11% 9% 8% 8% 8% 8%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 12% 15% 17% 15% 16% 18%
Al Meera Consumer Goods MERS QD 15% 10% 11% 6% 7% 7%
United Electronics Company EXTRA AB 17% 17% 16% 15% 15% 14%
Jarir Marketing JARIR AB 28% 30% 29% 28% 28% 27%
Average 17% 16% 16% 14% 15% 15%
Mabanee Co. MABANEE KK 7% 7% 8% 12% 11% 11%
Source: Company Data, Arqaam Capital Research
Exhibit 70: RoE
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 14% 10% 15% 17% 21% 24%
Almarai Co. ALMARAI AB 21% 17% 19% 19% 21% 21%
Savola SAVOLA AB 12% 16% 17% 16% 17% 17%
Saudi Paper Manufacturing SPM AB 21% 15% 14% 14% 14% 14%
Saudi Dairy & Foodstuff Co. SADAFCO AB 18% 19% 19% 20% 21% 21%
Herfy Food Services Co. HERFY AB 33% 33% 34% 31% 29% 28%
Halwani brothers HB AB 16% 15% 15% 17% 18% 19%
Agthia Group AGTHIA UH 12% 8% 12% 12% 12% 12%
Average 18% 17% 18% 18% 19% 19%
Consumer discretionary
Ghabbour Auto AUTO EY 12% 10% 8% 12% 15% 17%
United International Transportation BUDGET AB 21% 19% 20% 20% 19% 17%
Al Tayyar Travel Group ALTAYYAR AB 43% 52% 56% 53% 52% 49%
Saudi Airlines Catering CATERING AB 46% 39% 41% 39% 38% 35%
Al-Hassan Shaker SHAKER AB 30% 32% 31% 31% 31% 29%
National Gas & Industrialization NGIC AB 9% 10% 11% 11% 12% 12%
Average 27% 27% 28% 27% 27% 26%
Retailers
Abdullah Al Othaim AOTHAIM AB 36% 28% 25% 24% 23% 23%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 21% 28% 31% 35% 36% 36%
Al Meera Consumer Goods MERS QD 26% 28% 32% 9% 11% 12%
United Electronics Company EXTRA AB 40% 35% 34% 31% 29% 27%
Jarir Marketing JARIR AB 50% 57% 56% 55% 57% 56%
Average 35% 35% 35% 31% 31% 31%
Mabanee Co. MABANEE KK 15% 14% 18% 22% 18% 16%
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 28
Exhibit 71: RoIC
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 14% 13% 15% 18% 21% 25%
Almarai Co. ALMARAI AB 12% 9% 10% 10% 11% 12%
Savola SAVOLA AB 8% 10% 11% 12% 12% 13%
Saudi Paper Manufacturing SPM AB 14% 11% 10% 12% 12% 12%
Saudi Dairy & Foodstuff Co. SADAFCO AB 18% 19% 19% 20% 21% 21%
Herfy Food Services Co. HERFY AB 31% 31% 32% 29% 28% 27%
Halwani brothers HB AB 16% 15% 12% 13% 15% 16%
Agthia Group AGTHIA UH 12% 8% 12% 12% 12% 12%
Average 16% 14% 15% 16% 17% 17%
Consumer discretionary
Ghabbour Auto AUTO EY 14% 15% 16% 16% 20% 21%
United International Transportation BUDGET AB 17% 16% 15% 14% 14% 13%
Al Tayyar Travel Group ALTAYYAR AB 39% 50% 41% 39% 38% 37%
Saudi Airlines Catering CATERING AB 46% 39% 41% 39% 38% 35%
Al-Hassan Shaker SHAKER AB 32% 33% 34% 34% 33% 31%
National Gas & Industrialization NGIC AB 8% 8% 9% 9% 10% 10%
Average 26% 27% 26% 25% 25% 24%
Retailers
Abdullah Al Othaim AOTHAIM AB 23% 22% 20% 19% 19% 18%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 16% 18% 22% 20% 22% 24%
Al Meera Consumer Goods MERS QD 26% 16% 19% 9% 10% 11%
United Electronics Company EXTRA AB 38% 35% 34% 31% 29% 27%
Jarir Marketing JARIR AB 43% 48% 46% 46% 47% 47%
Average 29% 28% 28% 25% 25% 26%
Mabanee Co. MABANEE KK 10% 9% 12% 16% 14% 14%
Source: Company Data, Arqaam Capital Research
Exhibit 72: Dividend yield
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 0% 0% 2% 2% 4% 5%
Almarai Co. ALMARAI AB 2% 2% 2% 3% 3% 4%
Savola SAVOLA AB 3% 2% 4% 4% 4% 5%
Saudi Paper Manufacturing SPM AB 3% 4% 4% 5% 6% 6%
Saudi Dairy & Foodstuff Co. SADAFCO AB 2% 5% 4% 5% 6% 6%
Herfy Food Services Co. HERFY AB 2% 3% 3% 3% 3% 4%
Halwani brothers HB AB 2% 3% 5% 6% 6% 7%
Agthia Group AGTHIA UH 2% 2% 4% 4% 4% 5%
Average 2% 3% 3% 4% 5% 5%
Consumer discretionary
Ghabbour Auto AUTO EY 5% 5% 3% 4% 6% 7%
United International Transportation BUDGET AB 3% 3% 4% 4% 5% 5%
Al Tayyar Travel Group ALTAYYAR AB 5% 8% 9% 11% 12% 14%
Saudi Airlines Catering CATERING AB 0% 3% 4% 5% 6% 6%
Al-Hassan Shaker SHAKER AB 4% 5% 5% 5% 5% 5%
National Gas & Industrialization NGIC AB 2% 3% 7% 7% 7% 7%
Average 3% 5% 5% 6% 7% 7%
Retailers
Abdullah Al Othaim AOTHAIM AB 3% 4% 4% 4% 5% 5%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 0% 4% 2% 5% 6% 7%
Al Meera Consumer Goods MERS QD 3% 3% 4% 6% 7% 7%
United Electronics Company EXTRA AB 0% 0% 2% 3% 3% 3%
Jarir Marketing JARIR AB 3% 4% 5% 5% 6% 7%
Average 2% 3% 3% 4% 5% 6%
Mabanee Co. MABANEE KK 1% 0% 1% 0% 1% 0%
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 29
Exhibit 73: CFO/Sales
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 16% 10% 17% 17% 18% 18%
Almarai Co. ALMARAI AB 28% 24% 22% 22% 23% 23%
Savola SAVOLA AB 7% 6% 5% 6% 7% 7%
Saudi Paper Manufacturing SPM AB 12% 11% 19% 20% 19% 20%
Saudi Dairy & Foodstuff Co. SADAFCO AB 7% 4% 9% 10% 11% 11%
Herfy Food Services Co. HERFY AB 27% 27% 25% 24% 24% 24%
Halwani brothers HB AB 10% 14% 9% 9% 10% 10%
Agthia Group AGTHIA UH 15% 8% 8% 12% 12% 13%
Average 15% 13% 14% 15% 15% 16%
Consumer discretionary
Ghabbour Auto AUTO EY 0% 5% 3% 5% 5% 4%
United International Transportation BUDGET AB 44% 71% 64% 61% 59% 57%
Al Tayyar Travel Group ALTAYYAR AB 22% 10% 11% 12% 13% 13%
Saudi Airlines Catering CATERING AB 57% 15% 29% 28% 27% 28%
Al-Hassan Shaker SHAKER AB 14% -3% 12% 11% 12% 12%
National Gas & Industrialization NGIC AB 10% 13% 11% 11% 10% 10%
Average 25% 19% 22% 22% 21% 21%
Retailers
Abdullah Al Othaim AOTHAIM AB 7% 7% 4% 6% 6% 6%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 14% 12% 12% 14% 14% 14%
Al Meera Consumer Goods MERS QD 9% 9% 8% 9% 8% 8%
United Electronics Company EXTRA AB -1% 5% 7% 6% 7% 6%
Jarir Marketing JARIR AB 12% 14% 11% 10% 10% 10%
Average 8% 10% 9% 9% 9% 9%
Mabanee Co. MABANEE KK 66% 66% 66% 66% 66% 66%
Source: Company Data, Arqaam Capital Research
Exhibit 74: FCF/Sales
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 1% -8% -8% -1% 7% 11%
Almarai Co. ALMARAI AB -4% -14% -10% 1% 4% 6%
Savola SAVOLA AB 5% 4% 1% 3% 3% 4%
Saudi Paper Manufacturing SPM AB -1% -3% 11% 12% 12% 14%
Saudi Dairy & Foodstuff Co. SADAFCO AB 1% -3% 3% 5% 7% 8%
Herfy Food Services Co. HERFY AB 13% 12% 10% 13% 14% 15%
Halwani brothers HB AB 0% 5% 3% -1% 3% 6%
Agthia Group AGTHIA UH 5% -4% 0% 4% 4% 6%
Average 2% -1% 1% 4% 7% 9%
Consumer discretionary
Ghabbour Auto AUTO EY -6% 2% -2% 3% 5% 4%
United International Transportation BUDGET AB 18% 5% -12% -4% 1% 4%
Al Tayyar Travel Group ALTAYYAR AB 20% 8% 9% 9% 9% 9%
Saudi Airlines Catering CATERING AB 29% 25% 25% 23% 23% 24%
Al-Hassan Shaker SHAKER AB 5% -7% 9% 8% 9% 9%
National Gas & Industrialization NGIC AB 5% 5% 9% 9% 8% 7%
Average 12% 7% 6% 8% 9% 9%
Retailers
Abdullah Al Othaim AOTHAIM AB 0% 2% 1% 1% 1% 1%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 7% 9% 4% 2% 10% 11%
Al Meera Consumer Goods MERS QD 6% 3% 1% 0% 1% 3%
United Electronics Company EXTRA AB -7% 2% 4% 2% 3% 3%
Jarir Marketing JARIR AB 11% 9% 9% 8% 8% 8%
Average 3% 5% 4% 3% 5% 5%
Mabanee Co. MABANEE KK -50% -50% -50% -50% -50% -50%
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 30
Exhibit 75: D/E
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 46% 50% 57% 59% 51% 35%
Almarai Co. ALMARAI AB 78% 102% 114% 110% 101% 92%
Savola SAVOLA AB 63% 69% 75% 69% 52% 38%
Saudi Paper Manufacturing SPM AB 139% 152% 147% 125% 119% 105%
Saudi Dairy & Foodstuff Co. SADAFCO AB 0% 0% 0% 0% 0% 0%
Herfy Food Services Co. HERFY AB 9% 9% 8% 7% 6% 5%
Halwani brothers HB AB 0% 2% 33% 28% 25% 21%
Agthia Group AGTHIA UH 15% 22% 20% 18% 17% 16%
Average 44% 51% 57% 52% 46% 39%
Consumer discretionary
Ghabbour Auto AUTO EY 81% 88% 91% 66% 50% 43%
United International Transportation BUDGET AB 59% 61% 75% 80% 80% 77%
Al Tayyar Travel Group ALTAYYAR AB 10% 9% 42% 46% 40% 37%
Saudi Airlines Catering CATERING AB 0% 0% 0% 0% 0% 0%
Al-Hassan Shaker SHAKER AB 37% 74% 63% 51% 37% 24%
National Gas & Industrialization NGIC AB 0% 0% 0% 0% 0% 0%
Average 31% 39% 44% 39% 33% 29%
Retailers
Abdullah Al Othaim AOTHAIM AB 78% 62% 65% 64% 63% 61%
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 33% 34% 38% 83% 69% 49%
Al Meera Consumer Goods MERS QD 0% 91% 99% 27% 24% 20%
United Electronics Company EXTRA AB 8% 0% 0% 0% 0% 0%
Jarir Marketing JARIR AB 19% 19% 23% 24% 26% 26%
Average 28% 41% 45% 40% 36% 31%
Mabanee Co. MABANEE KK 79% 78% 79% 55% 39% 25%
Source: Company Data, Arqaam Capital Research
Exhibit 76: Interest cover
Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Consumer staples
Juhayna Food Industries JUFO EY 3.5x 3.3x 3.8x 4.2x 5.1x 7.2x
Almarai Co. ALMARAI AB 12.1x 11.2x 9.4x 9.3x 10.6x 11.4x
Savola SAVOLA AB 3.9x 4.0x 4.2x 4.0x 4.8x 6.5x
Saudi Paper Manufacturing SPM AB 11.3x 7.4x 6.5x 6.5x 7.4x 7.9x
Saudi Dairy & Foodstuff Co. SADAFCO AB 152.0x 31.4x 92.5x - - -
Herfy Food Services Co. HERFY AB 267.5x 278.6x 341.3x 379.3x 424.5x 471.5x
Halwani brothers HB AB 60.7x 78.4x 36.0x 43.4x 51.9x 64.0x
Agthia Group AGTHIA UH 24.8x 12.5x 15.5x 16.7x 18.3x 19.2x
Average 67.0x 53.4x 63.7x 57.9x 65.3x 73.4x
Consumer discretionary
Ghabbour Auto AUTO EY 2.4x 2.1x 2.5x 3.3x 4.1x 5.4x
United International Transportation BUDGET AB 4.4x 3.8x 4.1x 4.5x 4.7x 4.7x
Al Tayyar Travel Group ALTAYYAR AB 17.2x 29.0x 27.4x 23.3x 22.5x 24.3x
Saudi Airlines Catering CATERING AB - - - - - -
Al-Hassan Shaker SHAKER AB 56.1x 18.7x 9.6x 12.6x 17.3x 25.1x
National Gas & Industrialization NGIC AB - - - - - -
Average 13.3x 8.9x 6.7x 7.3x 8.1x 9.9x
Retailers
Abdullah Al Othaim AOTHAIM AB 36.9x 12.6x 12.2x 12.0x 11.9x 11.7x
Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 18.8x 16.0x 24.0x 20.9x 20.2x 26.8x
Al Meera Consumer Goods MERS QD - 12.9x 7.6x 8.1x 9.3x 11.3x
United Electronics Company EXTRA AB 22.8x 205.5x 979.7x - - -
Jarir Marketing JARIR AB 34.7x 75.8x 80.8x 57.4x 55.6x 53.7x
Average 22.6x 64.5x 220.9x 19.7x 19.4x 20.7x
Mabanee Co. MABANEE KK 11.6x 12.0x 15.3x 22.9x 25.3x 33.0x
Source: Company Data, Arqaam Capital Research
MENA – Consumer and Retail
MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 31
Appendix 2: Our MENA diversified coverage universe
Exhibit 77: Our MENA coverage universe
Company BBG code EV*, USDmn EV/EBITDA FY 13e P/E FY 13e P/B FY 13e RoE Div yield
Real estate
Aldar Properties ALDAR UH 5,134.4 10.1x 5.7x 0.7x 12.2% 3.8%
Dar Al Arkan Real Estate Development ALARKAN AB 3,517.5 9.4x 8.1x 0.5x 6.5% 0.0%
Emaar Properties EMAAR UH 8,423.9 9.8x 10.3x 0.7x 6.9% 3.3%
Saudi Real Estate (Al Akaria) SRECO AB 991.6 16.8x 22.0x 1.1x 5.2% 3.7%
Sorouh Real Estate SOROUH UH 1,643.5 10.9x 7.9x 0.5x 6.8% 0.0%
Construction
Abdullah A.M. Al-Khodari Sons Co ALKHODAR AB 677.1 8.4x 11.3x 1.8x 15.9% 3.0%
Arabtec Holding ARTC UH 1,229.2 6.2x 9.9x 1.1x 10.9% 1.8%
Depa Limited DEPA DU 216.4 14.3x 8.2x 0.1x 1.5% 0.0%
Drake & Scull International DSI UH 649.2 11.8x 12.5x 0.6x 4.8% 0.0%
Orascom Construction Industries OCIC EY 11,203.6 7.1x 8.9x 2.4x 26.7% 5.8%
Red Sea Housing Services REDSEA AB 397.2 6.7x 10.7x 1.4x 13.5% 2.2%
Cement
Al Jouf Cement JOUF AB 656.6 9.6x 14.5x 1.4x 9.4% 2.3%
Arabian Cement ARCCO AB 1,293.3 7.8x 8.8x 1.3x 14.7% 6.1%
Eastern Cement EACCO AB 1,243.7 8.6x 11.8x 2.1x 17.7% 6.2%
Qassim Cement QACCO AB 1,733.9 9.7x 13.0x 3.6x 27.8% 7.4%
Saudi Cement SACCO AB 4,279.1 12.9x 15.3x 4.4x 28.5% 6.1%
Southern Cement SOCCO AB 3,822.3 12.0x 14.5x 5.2x 35.6% 6.3%
Yamama Cement YACCO AB 2,301.8 9.0x 13.0x 2.6x 19.7% 5.4%
Yanbu Cement YNCCO AB 2,469.6 8.8x 10.1x 2.8x 27.2% 8.9%
Industrial
Arabian Pipes APCO AB 526.6 32.4x 174.2x 1.7x 1.0% 0.0%
Saudi Arabian Amiantit SAAC AB 913.2 7.6x 11.1x 1.1x 9.5% 8.9%
Zamil Industrial Investment ZIIC AB 1,387.0 34.6x 20.4x 2.6x 12.6% 4.1%
Logistics and transport
Air Arabia AIRARABI UH 1,066.8 7.2x 11.8x 0.7x 6.3% 7.1%
Gulf Warehousing Company GWCS QD 627.5 12.1x 17.8x 2.3x 12.7% 4.3%
Consumers and retail
Abdullah Al Othaim AOTHAIM AB 557.1 7.3x 10.8x 2.6x 24.1% 4.2%
Agthia Group Agthia UH 317.9 5.8x 8.8x 1.0x 11.8% 4.0%
Al Meera Consumer Goods MERS QD 493.9 10.5x 13.4x 1.3x 9.4% 5.6%
Al Tayyar Travel Group ALTAYYAR AB 1,675.3 6.1x 6.6x 3.5x 53.4% 10.8%
Al-Hassan Shaker SHAKER AB 755.1 8.7x 10.0x 3.1x 31.1% 5.0%
Almarai Co. ALMARAI AB 9,366.8 12.3x 15.4x 3.0x 19.5% 2.6%
Fawaz Al Hokair ALHOKAIR AB 2,299.7 11.4x 12.1x 4.3x 35.5% 4.6%
Ghabbour Auto AUTO EY 768.6 6.8x 12.1x 1.4x 11.6% 4.1%
Halwani brothers HB AB 305.7 7.0x 12.2x 2.1x 17.0% 5.8%
Herfy Food Services Co. HERFY AB 823.6 12.5x 15.9x 4.9x 30.6% 2.9%
Jarir Marketing JARIR AB 2,583.1 14.6x 15.0x 8.3x 55.5% 5.5%
Juhayna Food Industries JUFO EY 908.8 8.3x 14.0x 2.4x 17.4% 2.5%
Mabanee Co. MABANEE KK 2,985.2 14.3x 15.1x 3.3x 21.8% 0.0%
National Gas & Industrialization NGIC AB 370.0 7.5x 12.6x 1.4x 11.0% 7.1%
Saudi Airlines Catering CATERING AB 1,580.7 9.9x 11.4x 4.5x 39.2% 4.8%
Saudi Dairy & Foodstuff Co. SADAFCO AB 532.9 8.2x 11.9x 2.3x 19.6% 5.0%
Saudi Paper Manufacturing SPM AB 551.9 12.2x 10.9x 1.5x 13.9% 5.1%
Savola SAVOLA AB 7,182.6 12.0x 10.8x 1.8x 16.4% 3.7%
United Electronics Company Extra AB 666.0 10.9x 14.3x 4.4x 31.0% 2.6%
United Internatinal Transportation BUDGET AB 259.1 4.5x 9.8x 2.0x 19.8% 4.2%
Source: Company Data, Arqaam Capital Research
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Rita Eid Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer discretionary
Al Tayyar Travel Group
BUY
Consumer discretionary / Saudi Arabia Bloomberg code ALTAYYAR AB
Market index SASEIDX
Price target (local) 120
Upside (%) 61.5
Market data 17/01/2013
Last closing price 74.3
52 Week range 56.0-77.0
Market cap (SAR mn) 5,940
Market cap (USD mn) 1,584
Average daily traded value (SAR mn) 21.6
Average daily traded value (USD mn) 5.8
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 4,607.4 5,503.9 6,462.3 7,451.7
EBITDA 694.5 903.3 1,037.0 1,187.5
Net income 612.0 788.9 905.0 1,039.2
EPS 7.65 9.86 11.31 12.99
P/E (current price) 9.7 7.5 6.6 5.7
BVPS 14.7 17.7 21.2 25.1
P/B (current price) 5.0 4.2 3.5 3.0
EV/EBITDA (current price) 9.0 7.0 6.1 5.3
Div. yield (%) 8.3 9.4 10.8 12.4
FCF margin (%) 11.4 7.3 7.9 8.3
Net debt/EBITDA (x) (0.4) 0.4 0.5 0.5
Net debt/Capital (%) (24.0) 18.9 20.8 21.5
Interest cover (x) (29.0) (28.1) (23.9) (23.0)
RoAA (%) 27.6 31.9 30.8 30.5
RoAE (%) 52.3 60.8 58.2 56.1
RoIC (%) 49.5 41.7 39.1 37.9
Industry leader in corporate and government travel services
Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x
EV/EBITDA); Initiate with Buy and SAR 120 fair value estimate
Al Tayyar Travel Group is the largest domestic travel agency operating in KSA, and holds a 27% market share of the industry in the Kingdom. The business is a clear leader in corporate ticketing services (35% market share), and a significant player in individual travel (14% share). Domestic flag carrier Saudi Airlines accounts for 40% of Al Tayyar’s ticketing revenues, while regional heavyweights Emirates Airlines, Qatar Airlines, Etihad Airways and Oman Air generate the bulk of the remaining 60%. The company is engaged in more than 3,000 contracts with governmental institutions and private corporations, which combined contributed 63% of revenues over the last 3 years. Revenue growth has averaged a 4-year CAGR of 20%, which going forward will be driven by medium-term contracts with government entities (namely a 5-year engagement signed in FY 10A with the Ministry of Education that has produced c.3% of revenues in FY 10-11A). We initiate coverage with a Buy recommendation and SAR 120 fair value estimate. The best way to think of Al Tayyar is in terms of the direction of travel flows; outbound travel, in the form of government and corporate ticketing, is ‘sticky’ and recurring in nature, and constitutes c.75% of ticketing revenues. Inbound travel, with pertains to religious tourism, is seasonal, highly competitive, unregulated, and consequently a relatively minor contributor to earnings. Relative to competitors (Fursan, Kanoo, Ace), the business has the most comprehensive geographic coverage of KSA. Threats to the industry, in the form of online booking services, are less potent than one would expect: internet literacy remains low, credit card ownership is similarly low, rendering online travel services an unlikely threat to the traditional travel agency model in KSA over the next 10 years. Similarly, corporate and government travel is typically more complex than individual travel, resulting in a need for agencies such as Al Tayyar to execute ancillary add-ons such as accommodation, transportation and cargo services. Industry trends: The business generates revenues as a General Sales Agent-GSA, receiving commissions (typically 7% of gross sales), in addition to performance incentives from the airlines it represents. Sub Sales Agents, who service GSAs such as Al Tayyar, are paid commissions for execution. Low cost carriers- LCCs, which may receive licensing to operate in KSA this year, receive volume-based incentives from parent airlines directly, and are a threat to the traditional GSA/SSA model. We conservatively model for a slowdown in revenues c.65% of their historical 3-yr CAGR, to account for competitive dynamics, but expect margins to remain intact as the composition of sales (government and corporate), is not likely to change, and nor is the space likely to see disruption via new entrants. Risk: Downside: Receivables. Upside: Real estate exposure (hospitality), capitalising on religious tourism in KSA.
SAR 120
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
86
96
106
116
126
136
146
Jun-12 Sep-12 Dec-12
ALTAYYAR AB SASEIDX
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 33
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-40%
-20%
0%
20%
-0.5
0.0
0.5
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Al Tayyar Travel Group
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 6.20 7.65 9.85 11.30 12.97 14.35
Diluted EPS 6.20 7.65 9.85 11.30 12.97 14.35
DPS 4.00 6.16 7.00 8.01 9.19 10.15
BVPS 14.54 14.72 17.72 21.16 25.10 29.45
Weighted average shares 80.00 80.00 80.00 80.00 80.00 80.00
Average market cap — — 5,051.11 5,051.11 5,051.11 5,051.11
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 12.0 9.7 7.5 6.6 5.7 5.2
P/E (x) (target price) 19.3 15.7 12.2 10.6 9.2 8.4
P/BV (x) (target price) 8.3 8.2 6.8 5.7 4.8 4.1
EV/EBITDA (x) (target price) 16.8 13.7 10.5 9.1 8.0 7.3
EV/FCF (x) 12.4 18.0 23.6 18.7 15.5 13.6
EV/Invested capital (x) 7.4 7.4 4.7 3.8 3.2 2.9
Dividend yield (%) 5.4 8.3 9.4 10.8 12.4 13.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 24.6 20.5 19.5 17.4 15.3 11.1
EBITDA 22.5 22.7 30.1 14.8 13.9 9.9
EBIT 19.1 25.5 31.2 15.3 14.8 10.1
Net income 25.4 23.3 28.8 14.7 14.8 10.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 14.8 15.1 16.4 16.0 15.8 15.7
EBIT 13.8 14.3 15.7 15.5 15.4 15.3
Net 13.0 13.3 14.3 14.0 13.9 13.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 24.0 27.6 31.8 30.6 30.3 29.8
RoAE 44.5 52.3 60.7 58.1 56.1 52.6
RoIC 38.9 49.5 41.4 38.8 37.6 36.8
FCF margin 20.1 11.4 7.3 7.9 8.2 8.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (20.5) (24.0) 18.8 20.7 21.6 22.6
Net debt/Equity (22.6) (26.0) 26.6 30.1 31.5 31.6
Interest cover (x) 17.2 29.0 27.4 23.3 22.5 24.3
Net debt/EBITDA (x) (0.5) (0.4) 0.4 0.5 0.5 0.6
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 34
Abacus Arqaam Capital Fundamental Data
Company profile
Al Tayyar Travel Group is a Saudi joint-stock
company listed in 2012. The company provides a
full suite of travel and tourism services in KSA,
including reservation, ticketing, hotel booking and
cargo services for all major domestic, regional and
international flights in the Kingdom. The business
operates more than 270 domestic and 20
international offices.
Ownership and management
Shareholders
Al Tayyar Investment and Real Estate Development Co. 23.30%
Dr. Nasser Akil Abdullah Al Tayyar 18.50%
Public 58.20%
Source: Zawya
Board of Directors
HH Prince Sultan Bin Mohammed Bin Saud Al Kabeer Chairman
Dr. Nasser Bin Akil Al Tayyar Vice Chairman
Ahmad Samer Hamdi Saadedine Al Zaeem Director
Ammar Bin Abdulwahid Faleh Al Khudairy Director
Nasser Mohammed Al Mutawea Director
Omar Bin Ali Obeid Balsharaf Director
Source: Zawya
Al Tayyar Travel Group
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 3,824.2 4,607.4 5,503.9 6,462.3 7,451.7 8,281.3
Gross profit 889.8 1,029.3 1,227.4 1,441.1 1,661.7 1,846.7
SG&A (363.4) (368.8) (360.8) (441.8) (514.0) (582.8)
EBITDA 566.2 694.5 903.3 1,037.0 1,180.9 1,297.8
Depreciation & Amortisation (39.8) (33.9) (36.7) (37.7) (33.1) (33.9)
EBIT 526.3 660.6 866.6 999.4 1,147.8 1,263.9
Net interest income(expense) (30.6) (22.8) (31.6) (42.9) (51.1) (52.0)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 31.2 7.3 1.4 1.4 1.4 1.4
Profit before tax 526.9 645.1 836.4 957.8 1,098.1 1,213.3
Income tax expense (27.6) (27.4) (36.4) (42.0) (48.2) (53.1)
Minorities (2.9) (5.7) (11.9) (11.9) (11.9) (11.9)
Other post-tax income/(expense) — — — — — —
Net profit 496.3 612.0 788.1 904.0 1,038.0 1,148.3
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 496.3 612.0 788.1 904.0 1,038.0 1,148.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 380.3 407.4 212.0 263.1 285.7 190.6
Receivables 940.7 980.4 1,201.4 1,434.7 1,615.6 1,748.6
Inventories — — — — — —
Tangible fixed assets 433.3 475.5 604.0 792.4 1,057.4 1,396.2
Other assets including goodwill 443.4 376.7 702.3 702.3 702.3 702.3
Total assets 2,197.7 2,240.0 2,719.7 3,192.6 3,661.1 4,037.7
Payables 142.1 185.5 181.0 194.8 204.2 215.5
Interest bearing debt 117.5 100.9 589.0 773.4 917.5 934.7
Other liabilities 774.9 775.8 531.9 531.9 531.9 531.9
Total liabilities 1,034.5 1,062.2 1,301.8 1,500.0 1,653.5 1,682.1
Shareholders equity 1,163.2 1,177.9 1,417.9 1,692.6 2,007.6 2,355.7
Minorities — — — — — —
Total liabilities & shareholders equity 2,197.7 2,240.0 2,719.7 3,192.6 3,661.1 4,037.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations 834.2 616.4 567.4 734.1 911.4 1,072.5
Net capex (66.9) (89.8) (165.1) (226.2) (298.1) (372.7)
Free cash flow 767.2 526.6 402.3 507.9 613.4 699.8
Equity raised/(bought back) — — — — — —
Dividends paid (321.5) (496.1) (560.0) (641.1) (734.9) (812.1)
Net inc/(dec) in borrowings — — — — — —
Other investing/financing cash flows (195.1) (3.4) (37.8) 184.4 144.1 17.2
Net cash flow 250.6 27.2 (195.5) 51.2 22.6 (95.1)
Change in working capital 154.4 (183.9) (257.3) (207.6) (159.7) (109.7)
Mohammad Kamal Rita Eid [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 35
Investment thesis
Industry leader in corporate and government travel services
Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x EV/EBITDA); initiate with Buy and SAR 120 fair value estimate
We initiate coverage on Al Tayyar Travel Group with a Buy rating and SAR 120 fair value
estimate. Al Tayyar Travel Group provides a full suite of travel and tourism services in KSA,
including reservation, ticketing, hotel booking and cargo services. The business holds a 27%
market share of the industry in the Kingdom and is a clear leader in corporate ticketing services
(35% market share), and a significant player in individual travel (14% share). We believe that
Al Tayyar is best positioned to capitalise on airline travel growth in KSA driven by (i) the
Kingdom’s large population base (c.29mn), of which 50% is below the age of 25 and eligible for
government-sponsored scholarship grants for education at foreign institutions, (the
government provides scholarships for c.55k students each year to commence their education
abroad through the Program of the Custodian of the Two Hold Mosques), (ii) rising disposable
income, which results in discretionary spending on private travel, (iii) economic growth, which
in turns stimulates corporate travel demand, (iv) regulatory reforms, which will serve to
develop and regulate religious tourism in the Kingdom, and (v) the expansion of the Kingdom’s
airports, which targets the capacity to accommodate 88mn visitors by 2020.
Exhibit 78: Travel and tourism contributed c.2.3% of KSA GDP in FY 11A
Source: World Travel & Tourism Councel, Arqaam Capital Research
Exhibit 79: 10% growth in capital investments within the industry is estimated in FY 12e
Source: World Travel & Tourism Councel, Arqaam Capital Research
Domestic flag carrier Saudi Airlines accounts for 40% of Al Tayyar’s ticketing revenues, while
regional heavyweights Emirates Airlines, Qatar Airlines, Etihad Airways and Oman Air generate
the bulk of the remaining 60%. The company is engaged in more than 3,000 contracts with
governmental institutions and private corporations, which combined contributed 63% of
revenues over the last 3 years. Revenue growth has averaged a 4-year CAGR of 20%, which
going forward will be driven by medium-term contracts with government entities (namely a 5-
year engagement signed in FY 10A with the Ministry of Education that has produced c.3% of
revenues in FY 10-11A).
43
46 47
48
50
38
40
42
44
46
48
50
52
FY 08A FY 09A FY 10A FY 11A FY 12e
SARmn
Direct contribution of travel & tourism to GDP
17
21 21 20 22
--
5
10
15
20
25
FY 08A FY 09A FY 10A FY 11A FY 12e
SARmn
Capital investment in travel & tourism
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 36
The KSA travel and tourism sector grew at 11% in 2012, vs. 5% in MENA despite the political
unrest across the region. Tourism in the Kingdom continues to be characterised by the large
annual influx of pilgrims to Mekkah and Madina, where number has grown at 10% CAGR over
the FY 09-12A period, according to official data. Al Tayyar management intends to capitalise on
the growth of religious tourism in KSA, but not via its core ticketing business (religious tourism
contributed a mere 4% to revenues and is a highly fragmented, competitive, unregulated
space). The business is targeting exposure to religious travel flows via Mothmera Real Estate
Investment Co. (a 36%-owned JV with Mothmera Holding), at a commitment of SAR 300mn,
funded via existing balance sheet cash and debt. The JV is in the process of constructing 7
properties in Mekkah (6 hotels totaling 2,165 rooms, which will add 6% to the total number of
hotel keys in Mekkah, and a further commercial property). Al Tayyar will operate the hotels
through its 51% owned subsidiary Mawasim Travel. The first hotel is expected to be completed
in Q3 13e with the remaining properties post FY 14e.
Exhibit 80: Al Tayyar Group business segments
Business segment Major clients 3-yr revenue
CAGR (%) Operational strategies
Travel Corporates and
government 17%
Signed number of contracts with 16 ministries, 20 universities and 53 other governmental institutions
Tourism Individuals 8% Provided internet based solutions to customers in addition to tourism offers
Shipping and transportation
Corporates 30% Targeted new industries (pharmaceuticals, construction materials,...)
Religious tourism Individuals 158% Established Mothmera Real Estate Company (a JV with Mothmera Holding) to construct
hotels in Mekkah
Accomodation and others
Individuals 72% Acquired 51% of Mawasim Travel in 2011 to develop its furnished apartments in Riyadh
and Taef
Source: Company Data, Arqaam Capital Research
Threats to the industry, in the form of online booking services, are less potent than one
would expect: Internet literacy remains low, credit card ownership is similarly low, rendering
online travel services an unlikely threat to the traditional travel agency model in KSA over the
next 10 years. Similarly, corporate and government travel is typically more complex than
individual travel, resulting in a need for agencies such as Al Tayyar to execute ancillary add-ons
such as accommodation, transportation and cargo services. According to industry sources,
consumers who booked tickets online in FY 06-09A were only 1-2% of the overall tally of tickets
issued, and a similar percentage applies to online hotel bookings.
Receivables are typically high, given government accounts: 47% of sales are government-
related, via various ministries, hospitals, and educational institutions. We estimate that 20-30%
of receivables are technically overdue, though collection certainty is usually high. The
company took SAR 46mn in provisions (7% receivables, 4% equity) against delinquent accounts
in FY 11A.
Valuation: We value Al Tayyar Travel Group on a 5-year DCF basis. Our price target implies
9.1x and 8.0x FY 13-14e EV/EBITDA, which after offering c.+62% in upside potential, remains at
22% discount to global peers. Al Tayyar currently trades at 6.6x FY 13e EPS and 6.1x FY 13e
EV/EBITDA. Risks: Competition, political uncertainty, and owner-based management.
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 37
Valuation: DCF-based FVE of SAR 120; initiate with Buy
We value Al Tayyar at SAR 120/share, implying 62% upside potential to CMP, via a DCF-
driven exercise (WACC 11.5%, 14.0% Re, Rd 4%). A terminal growth factor of 4% is applied. Our
price target implies 10.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA.
Exhibit 81: DCF valuation summary
Source: Company Data, Arqaam Capital Research
Risks
Competition: Domestic travel agencies hold 35% of the Saudi market share with the
remainder accounted for by international agencies. Al Tayyar holds a 27% share of the market
and is the sole travel agency listed in the Kingdom. Increased competition from local
competitors (Al Fursan Travel and Tourism, Kanoo Travel and Ace Travel) could threaten
margins and market share. Political uncertainty: Political uncertainty in the region may further
impede intra-regional tourism growth. Nevertheless, the business enjoyed a growth in internal
(domestic) travel, as typical holiday destinations in MENA (Egypt, Syria) were no longer viable
options in FY 11-12A.
Al Tayyar Travel Group
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT 999 1,148 1,264 1,395 1,542
38 33 34 33 31
EBITDA 1,037 1,181 1,298 1,428 1,573
(208) (160) (110) (92) (149)
829 1,021 1,188 1,336 1,424
(226) (298) (373) (458) (497)
Zakat (42) (48) (53) (59) (65)
561 675 762 819 862
0.99 0.89 0.80 0.72 0.64
501 540 547 527 497
11,923
2,611 Rf 4.2%
6,876 EMRP 10.0%
9,487 0.98
14.0%
315
(643) Cost of Debt 4.0%
Add: Investments in associates 456
Less: Non controlling interest (15)
9,600 D/E (market) 25.0%
NOSH 80 WACC 11.5%
120 4.0%
9.1 8.0 7.3 6.6 6.0
P/E 10.6 9.2 8.4 7.6 6.9
P/B 5.7 4.8 4.1 3.5 3.0
EV/EBITDA
PV of Visible FCFF
PV of Terminal Value
Enterprise Value Adjusted Beta
Cost of Equity
Add: Cash & Cash Equivalents
Less: Total Debt
Equity Value
Equity Value per Share Perpetual grow th
Implied multiples
WACC parameters
DCF summary
SAR mn unless otherwise stated
Depreciation & Amortization
Working capital changes
Operating Cash Flow
Purchase of PPE
Free Cash Flow to Firm
Discount Factor using WACC at 10.57%
PV of Visible FCFF
Terminal Value
Equity Valuation
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 38
Relative value
Exhibit 82: Peer multiples valuation suggests 22% FY 13e EV/EBITDA discount
Company Country Market Cap (USDmn) FY 13e EV/EBITDA FY 14e EV/EBITDA
Al Tayyar Travel Group KSA 1,585 6.1x 5.3x
Hogg Robinson Group UK 269 4.5x 4.3x
China Cyts Tours Holding China 1,128 9.5x 8.9x
China Travel International Investment Hong Kong 1,212 5.3x 4.7x
Auckland International Airport New Zealand 3,105 14.2x 13.3x
Kuoni Reisen Holding Switzerland 1,259 5.5x 4.5x
Celebi Hava Servisi Turkey 288 8.0x 7.0x
Source: Bloomberg, Company Data, Arqaam Capital Research
Operating drivers
Revenues
Revenues grew at c.20% CAGR in FY 08-11A driven mainly by government contracts, which
grew at a CAGR of 30% during the period. Revenues from corporate and individuals grew by
16% and 6% respectively during the period. We model for 13% CAGR in overall revenues over
the next 5 years, in-line with growth forecasts for the Kingdom’s tourism sector. The
company’s revenues are based on commissions and performance incentives paid by airlines.
Exhibit 83: Revenues by business segment
Source: Company Data, Arqaam Capital Research
Exhibit 84: Revenues by client
Source: Company Data, Arqaam Capital Research
2,475 2,740
3,368
3,973
225 262 293 449 71 68 163 186
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY 08A FY 09A FY 10A FY 11A
SARmn
Travel Tourism Transportation & others
987
1,361
1,822
2,164
494 452
695 780
1,291 1,257 1,307
1,663
--
500
1,000
1,500
2,000
2,500
FY 08A FY 09A FY 10A FY 11A
SARmn
Government agencies Companies Individuals &others
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 39
Margins
Exhibit 85: Margins by business segment
Margins FY 08A FY 09A FY 10A FY 11A
Travel 17% 21% 34% 34%
Tourism 13% 17% 13% 15%
Shipping & transportation 14% 17% 14% 8%
Tourism for religious purposes 9% 7% 6% 5%
Accomodation & others 29% 59% 58% 56%
Blended GPM 16.7% 21.1% 23.3% 22.3%
Source: Company Data, Arqaam Capital Research
Margins have historically grown through the diversification of the company’s client base.
Margins have been supported by the increase in number of contracts signed with corporate
and government clients, totaling 125 new contracts in 2011 (the current tally is more than
3,000) in the Kingdom.
Balance sheet
Working capital: Al Tayyar has hsitorically experienced no noteworthy widening in working
capital (from 24% to 25% of FY 08-11A revenues), given the stable composition of its
receivables book, and the nature of payment terms within the ticketing industry. However,
the 9M 12A period saw an increase in receivables (41%) vs. FY 11A, mostly on the back of
government contracts.
Balance sheet adequately funded: In FY 09A, the company paid down its long term
borrowings, allowing it to sell collateralised land assets under construction, and has not raised
any long term debt since. The company relies on raising short term loans to finance its
operations.
Exhibit 86: Historically WC/sales averaged 25%
Source: Company Data, Arqaam Capital Research
Exhibit 87: Maintain WC/sales trend
Source: Company Data, Arqaam Capital Research
24% 21%
28%
25%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
--
100
200
300
400
500
600
700
800
FY 08A FY 09A FY 10A FY 11A
Historical working capital (LHS, SAR mn) vs. WC/sales (RHS, %)
receivables payables WC/sales
25%
25%
24%
24%
22.5%
23.0%
23.5%
24.0%
24.5%
25.0%
25.5%
--
200
400
600
800
1,000
1,200
1,400
1,600
FY 12e FY 13e FY 14e FY 15e
Projected working capital (LHS, SAR mn) vs. WC/sales (RHS, %)
receivables payables WC/sales
January 18 2013
Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 40
Business trends
Exhibit 88: Margins likely to remain intact on recurring government/corporate business
Source: Company Data, Arqaam Capital Research
Exhibit 89: Revenue CAGR 20% FY 09A-13e
………………..………….……………
Source: Company Data, Arqaam Capital Research
Exhibit 90: Leverage most likely to rise to fund growth
Source: Company Data, Arqaam Capital Research
Exhibit 91: Cash generation to resume after FY 12e
Source: Company Data, Arqaam Capital Research
Exhibit 92: Asset turnover drives superior RoE
Source: Company Data, Arqaam Capital Research
Exhibit 93: 70% forecast div. payout FY 12e
Source: Company Data, Arqaam Capital Research
21%
23% 22% 22% 22%
15% 15% 15% 16% 16%
10%
13% 13% 13% 14%
--%
5%
10%
15%
20%
25%
FY 09A FY 10A FY 11A FY 12e FY 13e
Gross margin EBITDA margin Net margin
3,069
3,824
4,607
5,504
6,462
462 566 695 903 1,037
--
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY 09A FY 10A FY 11A FY 12e FY 13e
SAR mn
Revenues EBITDA
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
800
900
FY 09A FY 10A FY 11A FY 12e FY 13e
Leverage (LHS, SAR mn) vs. D/E(RHS, %)
Leverage D/E
1,933 2,198
2,240
2,720
3,193
517
834 616
567
734
--
500
1,000
1,500
2,000
2,500
3,000
3,500
FY 09A FY 10A FY 11A FY 12e FY 13e
SAR mn
Net debt CFO
20% 23%
27% 29% 28%
37%
43%
52% 56%
53%
--%
10%
20%
30%
40%
50%
60%
FY 09A FY 10A FY 11A FY 12e FY 13e
ROA ROE
--%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
FY 09A FY 10A FY 11A FY 12e FY 13e
EPS (LHS, SAR/share ) vs. payout ratio (RHS, %)
EPS Payout ratio
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Hammoud Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer discretionary Shaker
BUY
Consumer discretionary / Saudi Arabia Bloomberg code SHAKER AB
Market index SASEIDX
Price target (local) 90.0
Upside (%) 34.6
Market data 17/01/2013
Last closing price 67.0
52 Week range 58.3-80.3
Market cap (SAR mn) 2,345
Market cap (USD mn) 625
Average daily traded value (SAR mn) 5.3
Average daily traded value (USD mn) 1.4
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,566.2 1,795.3 2,003.6 2,209.4
EBITDA 238.5 283.2 327.1 382.9
Net income 180.2 197.9 233.9 282.7
EPS 5.15 5.65 6.68 8.08
P/E (current price) 13.6 12.4 10.5 8.7
BVPS 16.2 18.3 21.5 26.1
P/B (current price) 4.3 3.8 3.3 2.7
EV/EBITDA (current price) 12.1 10.2 8.8 7.5
Div. yield (%) 5.0 5.0 5.0 5.0
FCF yield (%) (7.3) 8.8 7.6 9.0
Net debt/EBITDA (x) 1.5 1.2 1.0 0.7
Net debt/Capital (%) 36.2 33.2 30.0 22.9
Interest cover (x) 18.7 9.6 12.6 17.3
RoAA (%) 17.3 15.7 17.1 18.9
RoAE (%) 34.3 32.8 33.6 34.0
RoIC (%) 32.7 34.0 33.8 33.0
Most profitable supplier of cooling solutions in KSA:
Average FY 08-11A operating margins + 600bps vs.
domestic peers: initiate with Buy
Shaker is a play on population growth-led cooling demand and improving
urban living standards in KSA: Through its partnership with LG, Shaker
dominates the air conditioning sector in its mid and high-end segments (in-
house production 80% FY11A LG sales, 66% aggregate sales), and has been
licensed to bid as a supplier of cooling solutions for government and
private sector projects since FY 10A. We initiate with a Buy rating and SAR
90 fair value estimate.
Current data estimates the Saudi Arabian window and split cooling
market at c.SAR 3.0bn in size: Market data suggests a c.SAR 1.0bn window
AC market and a c.SAR 2.0bn split AC market, of which Shaker commands
c.17% and 45%, market shares, respectively. Aside from Saudi Arabia, we
believe Shaker is an eventual region-wide distributor for the LG-brand.
We prefer Shaker over Zamil: Shaker has been successful in narrowing the
market share gap with Zamil (revenues -41% FY 08A vs. -7% FY 12e), in
terms of sales volume. From a margin perspective, Shaker has consistently
been able to secure at least a c.500bps lead at the operating level, mainly
driven by its better pricing capacity on imported products.
Among the strongest margin profiles within coverage space: We attribute
margin superiority to (i) high GPMs on imported LG products (40-45% FY
11A), (ii) efficient in-house production (freight cost avoidance) and (iii)
large distribution scale. Going forward, we believe the company will rely
more heavily on in-house production (72% FY 14e aggregate sales vs. 66%
FY 11A), while managing to improve GPM (+150bps FY 14e vs. FY 11A), by
way of scale economies.
Valuation: We value Shaker on a DCF basis. Our price target implies 20%
premium to peers on FY 13e EV/EBITDA. We warrant rich multiples on
superior equity returns (35% FY 12e ROE vs. 15% peers), a result of better
operating profitability (14% FY 13e vs. 10% peers).
Risks: Product concentration (LG >80%), rising raw material costs,
inventory management and a slowdown in Saudi construction awards.
SAR 90
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
88
97
106
115
124
133
Jan-12 Apr-12 Jul-12 Oct-12
SHAKER AB SASEIDX
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 42
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
20%
40%
60%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
0.0
1.0
2.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Al-Hassan G.I. Shaker Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 4.15 5.15 5.65 6.68 8.08 9.22
Diluted EPS 4.15 5.15 5.65 6.68 8.08 9.22
DPS 3.00 3.50 3.50 3.50 3.50 3.50
BVPS 13.85 16.16 18.32 21.50 26.08 31.79
Weighted average shares 35.00 35.00 35.00 35.00 35.00 35.00
Average market cap 1,226.10 1,017.12 1,017.12 1,017.12 1,017.12 1,017.12
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 16.9 13.6 12.4 10.5 8.7 7.6
P/E (x) (target price) 21.7 17.5 15.9 13.5 11.1 9.8
P/BV (x) (target price) 6.5 5.6 4.9 4.2 3.5 2.8
EV/EBITDA (x) 14.6 12.1 10.2 8.8 7.5 6.7
EV/FCF (x) 56.9 (31.3) 22.7 23.5 18.1 17.1
EV/Invested capital (x) 7.0 5.8 5.1 4.4 3.7 3.1
Dividend yield (%) 4.3 5.0 5.0 5.0 5.0 5.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 15.8 35.5 14.6 11.6 10.3 11.9
EBITDA 20.7 21.1 18.8 15.5 17.0 13.2
EBIT 18.3 19.0 19.5 15.3 17.1 12.6
Net income 9.6 24.1 9.8 18.2 20.9 14.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 17.0 15.2 15.8 16.3 17.3 17.5
EBIT 15.6 13.7 14.3 14.7 15.7 15.8
Net 12.6 11.5 11.0 11.7 12.8 13.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 19.0 17.3 15.7 17.1 18.9 19.6
RoAE 32.4 34.3 32.8 33.6 34.0 31.9
RoIC 32.3 32.7 34.0 33.8 33.0 30.8
FCF yield 5.5 (7.3) 8.8 7.6 9.0 8.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 19.2 36.2 33.2 30.0 22.9 15.4
Net debt/Equity 26.3 63.0 54.2 45.3 31.2 19.1
Interest cover (x) 56.1 18.7 9.6 12.6 17.3 25.1
Net debt/EBITDA (x) 0.6 1.5 1.2 1.0 0.7 0.5
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 43
Abacus Arqaam Capital Fundamental Data
Company profile
Established in 1950, Shaker is a market leader in the Saudi cooling industry. The company enjoys an exclusive dealership license with LG, allowing it to import LG products from Korea. Aside from imports, Shaker manufactures in-house cooling units via LG Shaker (51% JV with LG). Additionally, Shaker offers McQuay and Midea cooling products along with other home appliances made by international brands including Ariston, Maytag, Delonghi and Indesit. The company currently distributes 65% of its product range, whereas the other 35% is generated via government projects, after obtaining a license for public bidding in 2010.
Ownership and management
Shareholders
A K Al Muhaidib and Sons Group 12.2%
Ibrahim Abdullah Abunayyan and Bros 12.2%
Arabian Tawazon Company 10.0%
Limaa Holding 7.4%
Almutlaq Group 5.0%
Other investors 23.2%
Public 30.0%
Source: Zawya
Board of Directors
Abdulilah Bin Abdullah Abu Nayan Chairman
Abdulraouf Walid Abdulraouf Al Bitar Director
Al Hassan Ghazi Ibrahim Shaker Director
Musaab Suleiman Al Muhaidib Director
Jamal Abdulrazzak Al Muhaidib Director
Raed Abdulhamid Al Bouraikan Director
Ahmad Toufic Mohammed Moussa Director
Hussein Ghazy Ibrahim Shaker Director
Source: Company data
Al-Hassan G.I. Shaker Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 1,155.7 1,566.2 1,795.3 2,003.6 2,209.4 2,473.2
Gross profit 386.8 466.6 543.6 611.1 677.5 760.6
SG&A (206.5) (252.1) (287.3) (315.6) (331.4) (371.0)
EBITDA 197.0 238.5 283.2 327.1 382.9 433.3
Depreciation & Amortisation (16.6) (23.9) (26.9) (31.6) (36.8) (43.6)
EBIT 180.4 214.5 256.3 295.5 346.1 389.7
Net interest income(expense) (3.2) (11.5) (26.6) (23.4) (20.0) (15.5)
Associates/affiliates — — (1.0) — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 4.9 2.5 10.0 10.0 15.0 15.0
Profit before tax 182.0 205.6 238.7 282.1 341.0 389.1
Income tax expense (15.2) (13.1) (16.4) (19.3) (23.4) (26.7)
Minorities (21.5) (12.2) (24.5) (28.9) (34.9) (39.9)
Other post-tax income/(expense) — — — — — —
Net profit 145.2 180.2 197.9 233.9 282.7 322.6
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 145.2 180.2 197.9 233.9 282.7 322.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and other liquid assets 428.4 647.0 673.8 730.2 804.5 896.3
Receivables 197.4 268.9 308.2 344.0 379.3 424.6
Tangible fixed assets 242.3 290.4 317.3 345.8 375.3 405.8
Associates/investments — — — — — —
Other assets including goodwill 5.7 5.6 5.6 5.6 5.6 5.6
Total assets 873.9 1,211.9 1,305.0 1,425.5 1,564.7 1,732.3
Payables 209.3 228.3 259.9 289.1 318.0 355.5
Interest bearing debt 180.0 417.9 404.0 384.0 334.0 264.0
Other liabilities — — — — — —
Total liabilities 389.3 646.2 663.9 673.1 652.0 619.5
Shareholders equity 484.6 565.7 641.1 752.5 912.7 1,112.8
Minorities 61.5 84.9 97.2 101.6 107.6 112.6
Total liabilities & shareholders equity 873.9 1,211.9 1,305.0 1,425.5 1,564.7 1,732.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 159.1 (42.1) 212.0 212.9 264.4 284.9
Net capex (95.9) (72.9) (53.9) (60.1) (66.3) (74.2)
Free cash flow 63.1 (115.0) 158.1 152.8 198.2 210.7
Equity raised/(bought back) — — — — — —
Dividends paid (105.0) (122.5) (122.5) (122.5) (122.5) (122.5)
Net inc/(dec) in borrowings 56.8 232.7 (13.9) (20.0) (50.0) (70.0)
Other investing/financing cash flows 15.6 23.4 — — — —
Net cash flow 27.4 7.2 (4.9) (13.1) 5.6 2.6
Change in working capital (23.2) (262.1) (39.5) (76.0) (75.1) (96.9)
Mohammad Kamal Mohamad Hammoud [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 44
Investment thesis
Most profitable supplier of cooling solutions in KSA: Average FY 08-11A operating
margins + 600bps vs. domestic peer
Government project license allows business to bid on supplying cooling solutions for
SAR 650bn in residential, education and healthcare construction pipeline over the
next 5 years
Initiate with Buy and SAR 90/share fair value estimate
Shaker is a play on population growth-led cooling demand and improving urban living
standards in KSA: Through its partnership with LG, the business dominates the air conditioning
sector in its mid and high-end segments (in-house production 80% FY11A LG sales).
Furthermore, Shaker obtained a license to bid for government projects in FY 10A, which is
expected to further support revenues (30% FY 11A) and to moderate the impact of seasonal
factors on sales.
Current data estimates the Saudi Arabian window and split cooling market at c.SAR 3.0bn in
size: Market data suggests a c.SAR 1.0bn window AC market and a c.SAR 2.0bn split AC market,
of which Shaker commands c.17% and 45%, market shares, respectively.
Shaker has the potential to become a regional LG distributor in the split AC market: Aside
from domestic sales, the firm is eying regional expansion as it has generated 7% of FY 11A
revenues from exports (3.0x FY 10A) and is expected to emerge a leading LG distributor in the
MENA region. Shaker is also planning to penetrate the chiller market in FY 14e, but it remains
premature to assess valuation/revenue impact from this business line.
Revenue growth has been supported by a proliferation in construction awards in recent
years: Sales growth has been strong in the last 3 years (FY 08-11A CAGR 20%), on the back of
domestic capacity additions (Q2 11A: 1.5mupa vs. 0.50mupa Q2 10A) to meet strong cooling
demand (65% retail, 35% government projects, currently estimated at SAR 400-450mn). We
model for a 12% revenue CAGR over the next 5 years, driven by domestic production (15%
CAGR) and international sales (20%) due to (i) a strong construction pipeline (SAR 500bn by FY
15e), (ii) public sector supply contracts (education (c.SAR 170bn), healthcare (c.SAR 60bn) and
economic cities (c.SAR 250bn) (iii) population growth (5-yr CAGR 2%), younger and smaller
households (average household size: 5 individuals vs. 6 FY 02A) and (iv) rising income levels
(disposable income 3-yr CAGR 10%).
Competition not as threatening as one would think, given niche position: Despite the large
number of competitors (Samsung, Carrier, Zamil, Panasonic, etc.), Shaker has been able to
grow its aggregate market share across product categories from 32% to 37%, via a two-stage
capacity additions that begun in Q2 10-11A. In terms of market segmentation, the company
caters to higher-income households, via a highly-rated cooling brand (LG-Korea). At the other
end of the spectrum, Shaker added the Chinese-made ‘Midea’ brand to its roster so as to serve
the more price-sensitive segments of cooling demand in Saudi Arabia, rendering it the only
manufacturer that fully covers the different segments of the cooling market in the country.
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 45
Shaker vs. Zamil: Shaker has been successful in narrowing the market share gap with Zamil
(revenues -41% FY 08A vs. -7% FY 12e), in terms of sales value. From a margin perspective,
Shaker has consistently been able to secure at least a c.500bps lead at the operating level,
mainly by its better pricing capacity on imported products, along with superior SG&A control,
as the business managed to lower charges by c.150bps since FY 08A (vs. +250bps Zamil).
Exhibit 94: Shaker vs. Zamil: 5-yr revenue CAGR more than double (19% vs. 9%), narrowest operating margin spread >500bps
FY 08A FY 09A FY 10A FY 11A FY 12e Average 5-year
Revenues (SARbn)
CAGR
Zamil 1,552 1,577 1,636 1,843 1,924 8.9%
Shaker 918 998 1,156 1,566 1,795 19.1%
Δ (%) (40.9%) (36.7%) (29.4%) (15.0%) (6.7%) 113.4%
SG&A % revenues
Zamil 12.8% 13.9% 17.6% 16.9% 15.5% 15.3%
Shaker 17.4% 16.0% 17.9% 16.1% 16.0% 16.7%
Δ (bps) 461bps 217bps 25bps 6bps) 50bps 135bps
EBIT margin (%)
Zamil 6.2% 6.5% 9.1% 8.7% 8.6% 7.8%
Shaker 11.9% 15.3% 15.6% 13.7% 14.3% 14.2%
Δ (bps) 570bps 880bps 647bps 502bps 572bps 634bps
Source: Company Data, Arqaam Capital Research
Among the strongest margin profiles within coverage space: GPM: 31% 9M 12A vs. 22%
peers, EBITDA margins 15% vs. 10% peers. We attribute margin superiority to (i) high margins
on imported LG products (40-45% FY 11A), (ii) efficient in-house production (freight cost
avoidance) and (iii) large distribution scale (high market share: 45% split units, 17% window
units). Going forward, we believe the company will further rely on in-house production (72%
FY 14e aggregate sales vs. 66% FY11A) while managing to marginally improve GPM (+150bps FY
14e vs. FY 11A), by way of scale economies.
Valuation: We value Shaker on a DCF basis. Our price target implies 11.0x FY 13e EV/EBITDA,
entailing a 20% premium to peers. We warrant rich multiples relative to peers on the basis of
superior equity returns (35% FY 12e RoE vs. 15% for peers), primarily a result of higher
operating margins (14% FY 13e vs. 10% peers).
Risks: Product concentration (LG brand >80% FY 11A aggregate sales: 66% in-house
production, 17% imports), rising raw material costs, inventory management and a slowdown in
the Saudi Arabian construction spending bill.
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 46
Valuation: 35% upside to current market price; Initiate with Buy
and SAR 90/share fair value estimate
Substantial business growth driven by in-house capacity expansion
We value Shaker at SAR 90/share, implying 35% in upside potential to CMP, via a DCF driven
exercise (WACC 11.2%, 12.7% Re, 0.9 Beta, 5% Rd and 4% g). Our price target implies a 20%
premium to domestic peer group FY 13e EV/EBITDA, which we find appropriate given superior
margins (+ 600bps FY 08-11A avg. operating margins vs. peers).
Exhibit 95: Strong FCF momentum backed by resilient operations
Source: Company Data, Arqaam Capital Research *After-tax cash flows
Shaker
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 275 322 362 408 460
32 37 44 52 61
NOPLAT 306 358 406 460 521
(76) (75) (97) (100) (110)
230 283 309 360 411
(60) (66) (74) (82) (92)
170 217 235 277 319
Stub period FCF 164 217 235 277 319
0.90 0.81 0.73 0.66 0.59
PV of Visible FCFF (adj. for stub period) 148 176 171 182 189
4,621
866 Rf 4.2%
2,729 EMRP 10.0%
3,595 0.9
12.7%
57
(404) 2.5%
5.0%
3,151 20.0%
NOSH 35 WACC 11.2%
90 4.0%
11.0 9.4 8.3 7.3 6.5
P/E 13.5 11.1 9.8 8.6 8.0
P/B 4.2 3.5 2.8 2.3 1.9
PV of Visible FCFF
PV of Terminal Value
Enterprise Value
WACC parameters
DCF summary*
SARmn unless otherwise stated
Depreciation & Amortisation
Working Capital Changes
Operating Cash Flow
Purchase of PPE
Free Cash Flow to Firm
Discount factors using WACC at 11.19%
Terminal Value
Equity Valuation
Adjusted Beta
Cost of Equity
Implied multiples
EV/EBITDA
Less: Net (Debt) Funds Marginal tax rate
Cost of Debt
Equity Value D/C (market)
Equity Value per Share Perpetual grow th
Cash & Cash Equivalents
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 47
Relative value
Exhibit 96: Unwarranted 18% discount to peer group on FY 13e current P/E
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
Shaker 10.5 8.7 3.2 2.6 8.8 7.5
Average consumer discretionary 12.7 10.4 2.7 2.4 7.1 6.3
Premium / (discount) (18%) (17%) 19% 11% 24% 19%
Average consumer staples 11.1 9.3 1.9 1.7 11.6 10.0
Premium / (discount) (7%) (9%) 67% 55% (24%) (25%)
Average retailers 14.7 13.5 3.9 3.4 13.1 11.9
Premium / (discount) (30%) (37%) (19%) (24%) (33%) (37%)
Average coverage universe 12.4 10.7 2.7 2.4 11.1 9.7
Premium / (discount) (18%) (21%) 18% 10% (20%) (22%)
Source: Arqaam Capital Research
Operating sensitivity
We stress test in-house production against changes in blended market share, which we
currently estimate at 37% for the split and window AC segments. Despite our positivity on
Shaker, we see a significant EPS cut (20%) and FVE (18%) in the event that Shaker loses ground
by 7pps, highlighting the importance of market share preservation.
Exhibit 97: Gaining/preserving market share is a key business driver to Shaker
Market share Avg. FY 13-15e revs. Avg. FY 13-15e EPS Enterprise value Fair value estimate
30% 1,807 6.45 3,028 73.8
% Δ (18.9%) (19.3%) (15.8%) (18.0%)
35% 2,108 7.55 3,433 85.4
% Δ (5.4%) (5.5%) (4.5%) (5.1%)
37% 2,229 7.99 3,595 90.0
40% 2,409 8.65 3,837 96.9
% Δ 8.1% 8.3% 6.8% 7.7%
45% 2,564 9.22 4,046 102.9
% Δ 15.0% 15.3% 12.5% 14.3%
50% 2,849 10.26 4,429 113.8
% Δ 27.8% 28.4% 23.2% 26.5%
Source: Arqaam Capital Research, * Revenues and EV in SARmn, EPS and FVE in SAR
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 48
Valuation sensitivity
Exhibit 98: DCF sensitivity to valuation parameters
Source: Bloomberg, Arqaam Capital Research
Risks
Product concentration: Over 80% of Shaker’s sales are generated by LG products, rendering
Shaker highly dependent on its partnership with the Korean conglomerate.
Raw materials costs: We stress-test our valuation against fluctuations in raw material costs,
which impact equity value by 22% in the event of a 25% increase, assuming no cost hedges and
20% inflation pass-through.
Exhibit 99: Higher input prices materially impact EV and FVE in the absence of hedging
Raw material costs FY 13-15e GPM FY 13-15e EPS Enterprise value Fair value estimate
150 27.0% 6.09 2,289 51
50% (360bps) (23.8%) (36.3%) (43.4%)
125 28.8% 7.04 2,942 70
25% (180bps) (11.9%) (18.2%) (21.7%)
100 30.6% 7.99 3,595 90
75 32.4% 8.95 4,248 110
(25%) 180bps 11.9% 18.2% 21.7%
50 34.2% 9.90 4,902 129
(50%) 360bps 23.8% 36.3% 43.4%
Source: Arqaam Capital Research, Revenues and EV in SARmn, EPS and FVE in SAR
Slowdown in construction award momentum: 30% of Shaker’s revenue streams stem from
‘package projects’ leaving the business vulnerable to shocks in the domestic construction
industry.
Inventory management: Despite strong inventory management (shift towards the just-in time
approach), a slowdown in sales will lead to inventory build-up, which can eventually translate
into obsolete stock, leading to inventory write-downs.
DCF sensitivity- leverage vs. cost of debt
Beta Growth D/(D+E) (at market) Cost of debt
90.0 3.00% 3.50% 4.00% 4.50% 5.00% 90.0 7.00% 6.00% 5.00% 4.00% 3.00%
0.95 71.1 74.9 79.2 84.1 89.7 15.0% 80.6 82.5 84.5 86.6 88.7
0.90 75.3 79.5 84.3 89.8 96.2 17.5% 82.5 84.8 87.2 89.8 92.4
0.85 79.9 84.6 90.0 96.3 103.5 20.0% 84.3 87.1 90.0 93.1 96.4
0.80 84.9 90.2 96.4 103.5 111.8 22.5% 86.3 89.6 93.0 96.7 100.6
0.75 90.5 96.5 103.5 111.7 121.4 25.0% 88.4 92.1 96.2 100.5 105.2
DCF sensitivity- Risk-free rate vs. terminal growth DCF sensitivity- leverage vs. cost of equity
Risk free rate Growth D/(D+E) (at market) Cost of equity
90.0 3.00% 3.50% 4.00% 4.50% 5.00% 90.0 14.74% 13.74% 12.74% 11.74% 10.74%
6.20% 63.8 67.0 70.4 74.3 78.7 15.0% 65.8 74.2 84.5 97.4 114.1
5.20% 71.1 74.9 79.2 84.1 89.7 17.5% 68.1 76.7 87.2 100.4 117.5
4.20% 79.9 84.6 90.0 96.3 103.5 20.0% 70.4 79.2 90.0 103.5 120.9
3.20% 90.5 96.5 103.5 111.7 121.4 22.5% 72.9 82.0 93.0 106.8 124.6
2.20% 103.7 111.6 120.9 132.1 145.7 25.0% 75.6 84.8 96.2 110.3 128.5
DCF sensitivity- Beta vs. terminal growth
January 18 2013
Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 49
Business trends
Exhibit 100: Split AC units to drive top-line growth going forward
Source: Company Data, Arqaam Capital Research
Exhibit 101: Sales grow 12% y/y on average
Source: Company Data, Arqaam Capital Research
Exhibit 102: Margin expansion led by higher operating scale
Source: Company Data, Arqaam Capital Research
Exhibit 103: Operating cash generation on the mend
Source: Company Data, Arqaam Capital Research
Exhibit 104: Leverage drawdown on better cash generation
Source: Company Data, Arqaam Capital Research
Exhibit 105: Superior profitability vs. Zamil (+20pps FY 12e)
Source: Company Data, Arqaam Capital Research
347 399 425 452 500
693 796
972 1,139
1,341 260 221
211 204
197
157 160
164 167
170
110 219
233 248
264
--
500
1,000
1,500
2,000
2,500
3,000
FY 11A FY 12e FY 13e FY 14e FY 15e
Revenue breakdown by type (SARmn)
Window Split Imported LG Home appliances Modern Vision (Jordan)
998 1,156
1,566 1,795
2,004
2,209
163 197 238 283 327 383
--
500
1,000
1,500
2,000
2,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue vs. EBITDA (SARmn)
Revenue EBITDA
31.3%33.5%
29.8% 30.3% 30.5% 30.7%
15% 16%14% 14% 15% 16%
14% 14%12% 12% 13% 14%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins: GPM, EBITM, NM (%)
GPM EBITM NM
98 128
356 347 341
285
192 159
(42)
212 213
264
(100)
(50)
--
50
100
150
200
250
300
350
400
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Net debt (cash) vs. CFO (SARmn)
Net debt CFO
658 8741,212 1,305 1,426 1,565247
389
646 664673
652
411
485
566641
752913
0.30
0.37
0.74
0.63
0.51 0.37
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
--
500
1,000
1,500
2,000
2,500
3,000
3,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Balance sheet, leverage (SARmn, x)
Total assets Total liabilities Equtiy D/E
21.6% 19.1%
15.9% 17.0% 18.4%
20.3%
32.3% 30.0%
31.9% 30.9% 31.1% 31.0%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
RoA vs. RoE (%)
RoA RaE
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Hammoud Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer discretionary Budget Saudi
BUY
Consumer discretionary / Saudi Arabia Bloomberg code BUDGET AB
Market index SASEIDX
Price target (local) 70.0
Upside (%) 29.7
Market data 17/01/2013
Last closing price 54.0
52 Week range 39.2-58.0
Market cap (SAR mn) 1,317
Market cap (USD mn) 351
Average daily traded value (SAR mn) 2.5
Average daily traded value (USD mn) 0.7
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 508.2 583.0 634.6 695.7
EBITDA 296.4 365.5 379.7 397.9
Net income 100.7 128.0 133.8 143.0
EPS 4.13 5.25 5.49 5.86
P/E (current price) 11.9 9.3 8.9 8.4
BVPS 21.2 24.6 28.0 31.6
P/B (current price) 2.3 2.0 1.7 1.5
EV/EBITDA (current price) 5.7 4.6 4.4 4.2
Div. yield (%) 3.4 3.8 4.2 4.6
FCF margin (%) 5.4 (12.2) (3.6) 0.8
Net debt/EBITDA (x) 1.0 1.2 1.3 1.4
Net debt/Capital (%) 34.8 40.4 41.5 41.5
Interest cover (x) 3.8 4.1 4.5 4.7
RoAA (%) 11.0 11.5 10.1 9.5
RoAE (%) 20.6 22.9 20.9 19.7
RoIC (%) 16.1 15.9 14.2 13.4
Best fleet in town- 27M blended life cycle vs. 36M peers
Cheap current valuation in peer context: 8.9x FY 13e EPS
30% discount to peers. Initiate with Buy, SAR 70 FVE
United International Transportation Company- Budget is a direct play on (i)
religious tourism/domestic vacationing in the Western region (60% of total car
rental income), (ii) business-related arrivals in the Central region and (iii)
industrial projects in the Eastern Province. Through its franchise, the company
operates the largest fleet in the Kingdom (c.22k cars) and generates its
revenue in equal measure from short-term rentals and long-term leases. The
business owns the ‘youngest’ car fleet in Saudi Arabia (18-month rental cycle,
36-month leasing cycle, substantially lower than blended 36M life cycle of
competitor offering), allowing for a premium pricing model. Initiate with Buy
and SAR 70 fair value estimate.
Long term leasing to drive growth: Current data sizes the KSA car
rental/leasing market at c.SAR 2.5bn, implying a market share of 20 and 25%
captured by Budget in the rental and leasing segments, respectively. We see a
5-yr CAGR of 5% in the rental division and 10% in the leasing business,
implying 8% growth in the entire business driven by (i) rising tourist inflows
(+6% CAGR), (ii) strong GDP growth (5% CAGR) and (iii) steady population
growth (2%+ CAGR). We also see 5% in FY 13e top-line additions generated by
Budget’s newly-formed trucking company (Juzoor Al Raskha, Fleet: 260 FY
12A, 1,000 FY 17e).
Margin compression on product mix is however inevitable: The business is
gradually shifting focus from short term rentals to long term leasing,
capitalising on (i) stronger growth prospects (10-12% industrial growth) along
with (ii) lower competitive pressure. Though we like Budget’s positioning
foresight, the weaker margin environment in the leasing business will lead to
GPM contraction of c.100bps over FY 13-15e (average 15.2%), compared to FY
10-12A (average 16.1%). All in, we view the strong positioning in the leasing
business as an overriding positive, irrespective of ST margin trajectory.
At 8.9x FY 13e P/E, we believe Budget is trading at an unwarranted 30%
discount to peers: Current market valuation implies a discount of 30%, which
is unwarranted, in our view, given superior earnings quality (22% FY 12e NPM
vs. 16% for peers). We value Budget at SAR 70/share using a 10-year DCF
exercise. Our FVE entails a 30%+ upside potential to CMP. Risks: Slowdown in
business activity/tourism, rising competition, client concentration risk.
SAR 70
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
89
101
113
125
137
149
Jan-12 Apr-12 Jul-12 Oct-12
BUDGET AB SASEIDX
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 51
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
50%
100%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
30%
35%
40%
45%
0.0
1.0
2.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
United International Transportation
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 3.89 4.13 5.25 5.49 5.86 6.00
Diluted EPS 3.89 4.13 5.25 5.49 5.86 6.00
DPS 1.50 1.69 1.88 2.06 2.25 2.44
BVPS 18.91 21.21 24.58 28.00 31.62 35.18
Weighted average shares 24.39 24.39 24.39 24.39 24.39 24.39
Average market cap 854.41 708.79 708.79 708.79 708.79 708.79
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 12.6 11.9 9.3 8.9 8.4 8.2
P/E (x) (target price) 18.0 17.0 13.3 12.8 11.9 11.7
P/BV (x) (target price) 3.7 3.3 2.8 2.5 2.2 2.0
EV/EBITDA (x) (target price) 6.5 5.7 4.6 4.4 4.2 4.0
EV/FCF (x) 25.9 77.0 (29.8) (91.9) 366.0 70.1
EV/Invested capital (x) 3.9 3.5 2.7 2.3 2.1 1.9
Dividend yield (%) 3.1 3.4 3.8 4.2 4.6 5.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 8.9 12.7 14.7 8.8 9.6 8.4
EBITDA (0.6) 14.0 23.3 3.9 4.8 4.7
EBIT 23.4 (17.4) 9.6 9.9 16.1 12.3
Net income 10.5 6.2 27.0 4.6 6.9 2.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 57.7 58.3 62.7 59.8 57.2 55.2
EBIT 9.8 7.2 6.9 6.9 7.3 7.6
Net 21.0 19.8 21.9 21.1 20.6 19.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 11.9 11.0 11.5 10.1 9.5 8.8
RoAE 21.9 20.6 22.9 20.9 19.7 18.0
RoIC 16.7 16.1 15.9 14.2 13.4 12.7
FCF margin 18.2 5.4 (12.2) (3.6) 0.8 4.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 35.8 34.8 40.4 41.5 41.5 41.1
Net debt/Equity 57.1 56.1 70.3 74.6 74.5 72.4
Interest cover (x) 4.4 3.8 4.1 4.5 4.7 4.7
Net debt/EBITDA (x) 1.0 1.0 1.2 1.3 1.4 1.5
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 52
Abacus Arqaam Capital Fundamental Data
Company profile
United International Transportation Company
(Budget) is the largest car rental firm in Saudi
Arabia. Based on a franchise agreement with
Budget International, the company offers a
diverse range of services including short term
rental, long term leasing, ‘Hajj’ and ‘Umrah’
services and pre-owned car sales. The
company covers the entire Kingdom with 80
rental outlets, of which more than 60% are
located in the Western region, and 20% in
each of the Central and Eastern regions. With
a fleet of 22k units, car rental services
contribute 53% to revenues, with the
remaining 47% being generated mainly from
long term leasing and other rentals.
Ownership and management
Shareholders
Zahid Group Holding Company 38.1%
Mohammed Abdullah Zahid 9.2%
Abdulilah Abdullah Zahid 6.7%
Abdullah Abdulilah Abdullah Zahid 0.8%
Abdulrahman Abdullah Zahid 0.8%
Farida Abdulilah Zahid 0.8%
Hasna Abdulilah Abdullah Zahid 0.8%
Louloua Abdulilah Abdullah Zahid 0.8%
Nawal Mohammed Saati Aita 0.8%
Public 41.1%
Source: Zawya
Board of Directors
Abdulilah Abdullah Mahmoud Zahid Chairman
Fahad Youssef Mahmoud Zahid Director
Abdulrahman Khaled Abdullah Al Dabal Director
Wafaa Hashem Youssef Zawawi Director
Oussama Saad Mohammed Al Haddad Director
Bassem Abdullah Alem Director
Walid Raafat Abdulsami Director
Source: Company data
United International Transportation
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 451.1 508.2 583.0 634.6 695.7 754.1
Gross profit* 80.2 77.0 86.6 94.7 106.7 117.6
SG&A (36.0) (40.5) (46.6) (50.8) (55.7) (60.3)
EBITDA 260.1 296.4 365.5 379.7 397.9 416.5
Depreciation & Amortisation (215.9) (259.9) (325.5) (335.7) (346.9) (359.3)
EBIT 44.2 36.5 40.0 43.9 51.0 57.3
Net interest income(expense) (10.1) (9.5) (9.7) (9.7) (10.8) (12.2)
Profits from car sales and others 59.5 74.9 100.8 99.4 98.0 96.5
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 4.2 1.8 1.5 5.0 10.0 10.0
Profit before tax 97.8 103.7 132.6 138.7 148.2 151.6
Income tax expense (2.9) (3.0) (4.0) (4.2) (4.4) (4.5)
Minorities (0.1) — (0.6) (0.7) (0.7) (0.7)
Other post-tax income/(expense) — — — — — —
Net profit 94.8 100.7 128.0 133.8 143.0 146.3
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 94.8 100.7 128.0 133.8 143.0 146.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and equivalents 10.7 26.7 22.2 34.3 39.2 32.5
Receivables 76.4 95.2 109.2 118.9 130.3 141.3
Inventories 2.8 4.1 4.7 5.1 5.6 6.1
Tangible fixed assets* 705.6 849.9 1,041.1 1,214.9 1,370.3 1,506.0
Other assets including goodwill 38.7 27.1 53.3 53.3 53.3 53.3
Total assets 834.2 1,003.0 1,230.6 1,426.6 1,598.8 1,739.2
Payables 49.4 123.4 142.0 154.5 168.6 182.1
Interest bearing debt 274.0 316.7 443.5 543.5 613.5 653.5
Other liabilities 49.8 45.6 45.6 45.6 45.6 45.6
Total liabilities 373.1 485.7 631.2 743.6 827.7 881.2
Shareholders equity 461.1 517.3 599.5 683.0 771.1 858.0
Minorities — 0.1 0.1 0.1 0.1 0.1
Total liabilities & shareholders equity 834.2 1,003.0 1,230.6 1,426.6 1,598.8 1,739.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 199.9 359.8 371.0 387.1 410.1 428.7
Net capex (213.1) (332.2) (442.3) (410.2) (404.3) (398.5)
Free cash flow 81.9 27.6 (71.2) (23.1) 5.8 30.3
Equity raised/(bought back) — — — — — —
Dividends paid (36.6) (41.2) (45.8) (50.3) (54.9) (59.5)
Net inc/(dec) in borrowings 46.4 42.5 126.8 100.0 70.0 40.0
Other investing/financing cash flows (13.4) (12.9) (14.3) (14.5) (16.0) (17.5)
Net cash flow 155.7 194.7 193.3 232.9 222.6 207.9
Change in working capital (38.6) 54.0 4.0 2.4 2.2 2.2
Mohammad Kamal Mohamad Hammoud [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 53
Investment Thesis
Supportive demographic and economic fundamentals, cheap in peer context: 8.9x
FY 13e EPS 30% discount to peers. Initiate with Buy, SAR 70 FVE
We initiate coverage of United International Transportation Company- Budget with a Buy
recommendation and SAR 70/share fair value estimate. Budget is a direct play on (i) religious
tourism and domestic vacationing in the Western region (60% of total rental income) (ii) strong
construction activity in Central and Western Provinces, which is highly supportive of long term
leases to contracting clients, (ii) business–related arrivals in the Central region and (iii)
industrial projects in the Eastern Province.
Long term leasing to drive top-line growth going forward: Current data sizes the car
rental/leasing market at c.SAR 2.5bn implying a market share of 20 and 25% captured by
Budget in the rental and leasing segments, respectively. We see a 5-yr CAGR of 5% in the rental
division and 10% in the leasing business, implying 8% growth in the entire business driven by (i)
rising tourist inflows (6% FY 12-17e CAGR), (ii) strong GDP growth (5% FY 12-17e CAGR) and (iii)
steady population growth (2%+ FY 12-17e CAGR). We also see 5% in FY 13e top-line additions
generated by Budget’s newly-formed trucking company (Juzoor Al Raskha, FY 12A fleet: 260
trucks, 1,000 FY 17e).
Exhibit 106: Exhibit 104: Lease fleet size rose from 47% in FY 08A to 52% of total in FY 12A
FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e
Short term rentals 8,582 8,658 8,914 9,522 10,500 11,200
Long term leasing 7,638 7,884 9,288 9,829 11,500 12,800
Total 16,220 16,542 18,202 19,351 22,000 24,000
LT leasing/total 47.1% 47.7% 51.0% 50.8% 52.3% 53.3%
Source: Company Data, Arqaam Capital Research
Key strengths include: (i) 25% market share of aggregate car leasing market in the Kingdom,
(ii) a similarly strong positioning (20% market share) in the car rental business and (iii) the
‘youngest’ car fleet in Saudi Arabia (18-month rental cycle, 36-month leasing cycle, -25% vs.
competitors).
Margin compression on product mix is however inevitable: The business is gradually shifting
from short term rentals to long term leasing, capitalising on (i) stronger growth prospects (10-
12% industrial growth) along with (ii) lower competitive pressure. Though we like Budget’s
positioning foresight, the weaker margin environment in the leasing business will lead to GPM
contraction of c.100bps over FY 13-15e (average c.15.2%), compared to FY 10-12A (average
16.1%). All in, we view the strong positioning in the leasing business as an overriding positive,
irrespective of short term margin trajectory. Vehicles are depreciated on a straight-line basis
(30 months, 35% salvage) and sold 18 months from purchase date, allowing the business to
book substantial gains on sales (15% margin).
At 8.9x FY 13e P/E, we believe Budget is trading at an unwarranted 30% discount to peers,
given its leading position in the Saudi car rental market. We value Budget at SAR 70/share on
a 10-year DCF basis in order to normalise for heavy CAPEX in the short run (reinvestment rate
2.5x FY 11A earnings).
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 54
Valuation
DCF-based fair value estimate of SAR 70, Initiate with Buy
Exhibit 107: Positive FCF generation in FY 15e, driven by robust operations (CFO/sales: 55%)
Source: Company Data, Arqaam Capital Research *Based on after-tax cash flows
Relative valuation
Exhibit 108: 30% and 38% discount to peers on FY 13e P/E and EV/EBITDA, respectively
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
Budget 8.9 8.4 1.9 1.7 4.4 4.2
Average consumer discretionary 12.7 10.4 2.7 2.4 7.1 6.3
Premium / (discount) (30%) (20%) (29%) (28%) (38%) (34%)
Average consumer staples 11.1 9.3 1.9 1.7 11.6 10.0
Premium / (discount) (11%) 1% 1% 1% (62%) (58%)
Average retailers 14.7 13.5 3.9 3.4 13.1 11.9
Premium / (discount) (33%) (30%) (51%) (50%) (66%) (65%)
Average coverage universe 12.4 10.7 2.7 2.4 11.1 9.7
Premium / (discount) (21%) (12%) (29%) (28%) (60%) (57%)
Source: Arqaam Capital Research
Budget Saudi
FY 13e FY 14e FY 15e FY 16e FY 17e FY 22e
EBIT (1-τ) 41 47 53 57 62 90
Depreciation & Amortisation 336 347 359 373 388 516
NOPLAT 377 394 413 430 450 606
Working Capital Changes 2 2 2 3 3 5
Others -- -- -- -- -- --
Operating Cash Flow 379 397 415 433 454 610
Net purchase of PPE & others (410) (404) (398) (393) (387) (358)
Free Cash Flow to Firm (31) (8) 16 40 67 253
Stub period FCF (30) (8) 16 40 67 253
Discount factors using WACC at 10.0% 0.91 0.83 0.75 0.69 0.62 0.39
PV of Visible FCFF (adj. for stub period) (27) (6) 12 28 42 98
4,387
WACC parameters
422 Rf 4.2%
1,701 EMRP 10.0%
2,124 Adjusted Beta 0.9
Cost of Equity 13.3%
22
(464) Marginal tax rate 10.0%
Cost of Debt 5.0%
1,708 D/C (market) 40.0%
NOSH 24 WACC 10.0%
70 Perpetual grow th 4.0%
5.8 5.6 5.3 5.1 4.9 4.7
P/E 12.8 11.9 11.7 11.5 11.2 9.6
P/B 2.5 2.2 2.0 1.8 1.7 1.2
PV of Visible FCFF
PV of Terminal Value
Enterprise Value
DCF summary*
Terminal Value
Equity Valuation
SAR mn unless otherwise stated
Cash & Cash Equivalents
Implied multiples
EV/EBITDA
Less: Net (Debt) Funds
Equity Value
Equity Value per Share
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 55
Operating sensitivity
We stress-test our valuation against leasing and rental margins. We estimate that a 250bps cut
to gross margins would be necessary to render current valuation levels unattractive. This
corresponds to a complete shift in the business towards long term leasing, a highly unlikely
scenario, in our view.
Exhibit 109: Despite strong growth prospects, GPM compression on higher contribution from the leasing business is inevitable
Leasing/total Average 3-yr fwd GPM Fair value estimate (SAR) Upside (%)
100.0% 12.5% 54 --%
80.0% 14.0% 60 11%
50.0% 15.0% 70 30%
30.0% 16.0% 75 40%
15.0% 17.0% 80 50%
Source: Company Data, Arqaam Capital Research
Valuation sensitivity
Exhibit 110: DCF sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
Risks
Macroeconomics dictate commercial demand for long term car leases: TA weakening in
industrial, construction and commercial activity in the Central and Western provinces would
impact business volumes and growth. This may also play out in terms of weaker private
demand for short term rentals, as leisure and domestic vacationing falls.
Client concentration risk: Budget heavily depends on its top 5 clients (Siemens, Kanoo, etc…)
which rent/lease c.5k+ vehicles, generating c.25% of aggregate revenues.
Intensifying competition: Despite Budget’s strategic positioning (especially in the leasing
segment), the car rental market is highly fragmented and unfavorable competitive
circumstances could significantly mitigate revenue growth and dilute margins on lower rental
rates or erosion of market share.
DCF sensitivity- leverage vs. cost of debt
Beta Growth D/(D+E) (at market) Cost of debt
70.0 3.00% 3.50% 4.00% 4.50% 5.00% 70.0 7.00% 6.00% 5.00% 4.00% 3.00%
1.01 51.2 55.1 59.6 64.9 71.1 35.0% 52.1 57.0 62.6 68.8 75.8
0.96 55.2 59.5 64.6 70.5 77.6 37.5% 54.3 59.9 66.2 73.3 81.5
0.91 59.5 64.4 70.1 76.8 84.9 40.0% 56.5 62.8 70.0 78.3 87.9
0.86 64.3 69.7 76.2 83.8 93.1 42.5% 58.9 66.0 74.2 83.7 94.9
0.81 69.5 75.6 83.0 91.8 102.6 45.0% 61.4 69.4 78.6 89.6 102.8
DCF sensitivity- Risk-free rate vs. terminal growth DCF sensitivity- leverage vs. cost of equity
Risk free rate Growth D/(D+E) (at market) Cost of equity
70.0 3.00% 3.50% 4.00% 4.50% 5.00% 70.0 15.31% 14.31% 13.31% 12.31% 11.31%
6.20% 44.2 47.4 51.0 55.2 60.0 35.0% 44.8 52.8 62.6 74.8 90.2
5.20% 51.2 55.1 59.6 64.8 71.0 37.5% 47.8 56.1 66.2 78.7 94.5
4.20% 59.5 64.3 70.0 76.7 84.8 40.0% 51.0 59.6 70.1 83.0 99.2
3.20% 69.4 75.6 82.9 91.7 102.5 42.5% 54.5 63.4 74.2 87.5 104.2
2.20% 81.6 89.5 99.1 111.0 126.0 45.0% 58.3 67.5 78.7 92.4 109.6
DCF sensitivity- Beta vs. terminal growth
January 18 2013
United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 56
Business trends
Exhibit 111: Western region sales by far the largest in KSA
Source: Company Data, Arqaam Capital Research
Exhibit 112: Long-term leases to drive growth going forward
Source: Company Data, Arqaam Capital Research
Exhibit 113: EBITDA growth trails revenue growth: lower margin leasing business takes strategic priority
Source: Company Data, Arqaam Capital Research
Exhibit 114: Gross margins to recalibrate down to pre-FY 10A levels going forward
Source: Company Data, Arqaam Capital Research
Exhibit 115: Strong CFO generation (70%* of FY 11A revs.)
Source: Company Data, Arqaam Capital Research, Adjusted for disposal gains
Exhibit 116: Slight RoE compression on segmental inclination
Source: Company Data, Arqaam Capital Research
209 221
248 269
285 305
92 107
135 148 161
177
103 107 126 139
152 168
--
50
100
150
200
250
300
350
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by location (SAR mn)
Western Central Eastern
228 243 268 286 298 313 330
177 192
241 269
300 337 369 9
16
28 37
46
--
100
200
300
400
500
600
700
800
FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by business segment (SAR mn)
Short term rental Long term leasing Other revenues
414 451 508
583 635
696
262 260 296
366 380 398
--
100
200
300
400
500
600
700
800
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue vs. EBITDA (SAR mn)
Revenue EBITDA
15.0%
17.8%
15.1% 14.9% 14.9% 15.3%
9%10%
7% 7% 7% 7%
20.7% 21.0%19.8%
22.1% 21.2% 20.7%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins: GPM, EBITM, NM (%)
GPM EBITM NM
199 263
290
421
509
574
269
200
360 371 387 410
--
100
200
300
400
500
600
700
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Net debt (cash) vs. CFO (SAR mn)
Net debt CFO
11.3% 11.4% 10.0% 10.5% 9.4% 9.0%
21.1% 20.6% 19.5%
21.3% 19.6%
18.5%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
RoA vs. RoE (%)
RoA RoE
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Haidar Arqaam Capital Research Offshore s.a.l.
Saudi Arabia – Consumer staples Halwani Brothers
BUY
Consumer staples / Saudi Arabia Bloomberg code HB AB
Market index SASEIDX
Price target (local) 56
Upside (%) 27.9
Market data 17/01/2013
Last closing price 43.4
52 Week range 34.1-58.0
Market cap (SAR mn) 1,240
Market cap (USD mn) 331
Average daily traded value (SAR mn) 7.7
Average daily traded value (USD mn) 2.1
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 813.6 896.0 1,037.4 1,158.7
EBITDA 123.7 143.3 164.5 183.1
Net income 80.5 87.0 101.5 113.6
EPS 2.82 3.05 3.55 3.98
P/E (current price) 15.4 14.3 12.2 10.9
BVPS 18.8 19.9 20.9 22.2
P/B (current price) 2.3 2.2 2.1 2.0
EV/EBITDA (current price) 9.3 8.0 7.0 6.3
Div. yield (%) 3.5 4.6 5.8 6.3
FCF margin (%) 4.5 3.3 (1.1) 2.8
Net debt/EBITDA (x) (0.9) (0.5) — 0.3
Net debt/Capital (%) (19.7) (10.3) 1.0 7.2
Interest cover (x) (78.4) 36.0 43.4 51.9
RoAA (%) 12.0 10.9 11.1 12.1
RoAE (%) 15.4 15.7 17.4 18.5
RoIC (%) 14.6 11.9 13.5 14.6
Doubling of capacity at core business segments drive medium-
term growth
Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with
Buy and SAR 56 fair value estimate
Halwani is a focused consumption play in Egypt and KSA, and is a
market share leader in (i) meat and poultry products in Egypt, and (ii)
flour-based confectionary (Halawa) and basic ingredients (Tahina) in
KSA. The business has launched a 2x capacity expansion at its meat
products facility in Egypt, and a new processing facility in Jeddah
which will consolidate and centralise all of Halwani’s manufacturing
facilities in KSA. We expect the capacity ramp up to deliver 13%
medium-term revenue growth and 14% EPS growth in the business.
At current valuation multiples, we believe the market is not fully
pricing in Halwani’s strong regional presence and margin stability, in
addition to overlooking the impact of capacity expansions. We initiate
coverage with a Buy recommendation and SAR 56 fair value
estimate.
Capacity expansions at core segments drive growth in the next 4
years: Revenues are largely driven by core business segments (meat,
Halawa, and Tahina) which together constitute 75% of the business,
and are expected to comprise an even larger share of revenues as the
ongoing capacity expansions are implemented. Halwani’s meat
business in Egypt is set to double capacity by FY 16e, while the
company’s sesame-based segments in KSA (Halawa/Tahina) are
expected to follow a similar trajectory upon their relocation to new
facilities in the Saudi Industrial City, Jeddah.
Current valuation attractive in context of c.30% EPS growth by FY
14e: We value Halwani at SAR 56/share using a DCF valuation exercise
and a 10.2% WACC. Our price target implies 15.6x FY 13e P/E, and 9.1x
FY 13e EV/EBITDA, a premium of 30% to regional peers, which we find
appropriate given Halwani’s operating leverage and growth outlook.
Risk: In the absence of commodity and FX hedges, global grain prices
fluctuations and EGP devaluation risks could materially impact margins
and cash flows.
SAR 56
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
48
63
78
93
108
123
Jan-12 Apr-12 Jul-12 Oct-12
HB AB SASEIDX
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 58
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
20%
40%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-40%
-20%
0%
20%
-1.0
-0.5
0.0
0.5
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Halwani Brothers
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 2.81 2.82 3.05 3.55 3.98 4.58
Diluted EPS 2.81 2.82 3.05 3.55 3.98 4.58
DPS 1.00 1.50 2.00 2.50 2.75 3.00
BVPS 17.76 18.82 19.87 20.92 22.15 23.73
Weighted average shares 28.57 28.57 28.57 28.57 28.57 28.57
Average market cap 914.24 1,145.66 1,239.94 1,239.94 1,239.94 1,239.94
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 15.4 15.4 14.3 12.2 10.9 9.5
P/E (x) (target price) 19.7 19.7 18.2 15.6 14.0 12.1
P/BV (x) (target price) 3.1 2.9 2.8 2.7 2.5 2.3
EV/EBITDA (x) (target price) 12.9 12.1 10.4 9.1 8.2 7.2
EV/FCF (x) 1,881.8 40.7 50.2 (135.6) 45.6 18.1
EV/Invested capital (x) 2.9 2.7 2.0 2.0 1.9 1.8
Dividend yield (%) 2.3 3.5 4.6 5.8 6.3 6.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 18.6 11.2 10.1 15.8 11.7 10.6
EBITDA 41.7 7.0 15.9 14.8 11.3 13.2
EBIT 56.6 6.9 13.8 13.4 11.7 14.8
Net income 88.6 0.2 8.0 16.7 11.9 15.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 15.8 15.2 16.0 15.9 15.8 16.2
EBIT 13.4 12.8 13.3 13.0 13.0 13.5
Net 11.0 9.9 9.7 9.8 9.8 10.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 13.2 12.0 10.9 11.1 12.1 13.4
RoAE 16.6 15.4 15.7 17.4 18.5 20.0
RoIC 15.8 14.6 11.9 13.5 14.6 16.1
FCF margin 0.1 4.5 3.3 (1.1) 2.8 6.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (23.0) (19.7) (10.3) 1.0 7.2 7.6
Net debt/Equity (23.0) (20.2) (13.7) 1.3 8.9 9.3
Interest cover (x) (60.7) (78.4) 36.0 43.4 51.9 64.0
Net debt/EBITDA (x) (1.0) (0.9) (0.5) — 0.3 0.3
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 59
Abacus Arqaam Capital Fundamental Data
Company profile
Established in 1952 in Jeddah, Halwani is a basic
supplier of meat and sesame-based products in
Saudi Arabia and Egypt. The company owns 15
manufacturing plants located in Saudi Arabia
(10) and Egypt (5), and holds leadership position
in the meat segment in Egypt (60%), and 50%
share in Tahina and Maamoul in Saudi Arabia.
The company is planning to double meat
capacity in its Egypt facilities and to relocate KSA
plants to the new facilities in the Saudi Industrial
City in Jeddah.
Ownership and management
Shareholders
Aseer Company 55.5%
Mohamed Abdulhameed Mahmoud Halw ani 7.0%
Halw ani International Company 3.5%
Faw az Mohammed Abdulhamid Halw ani 1.8%
Mohammed Faw az Mohammed Abdulhamid Halw ani 0.5%
Public 31.8%
Source: Zawya
Board of Directors
Mr Abdulrahman Ibrahim Alrw aiti Chairman
Mr Saleh Ahmed Hefni Director
Mr Mohieddine Saleh Kamel Director
Mr Mohamed Abdulhameed Mahmoud Halw ani Director
Mr Abdulaziz Mohamed Yamani Director
Mr Osama Zakarya Jamjoum Director
Mr Abdulelah Abdulrahim Sabahe Director
Mr Anas Ghaleb Khashoggi Director
Mr Ahmad Abdullah Kyhat Director
Source: Zawya
Halwani Brothers
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 732.0 813.6 896.0 1,037.4 1,158.7 1,281.4
Gross profit 238.0 243.5 276.2 316.4 353.4 397.2
SG&A (140.2) (139.0) (157.3) (181.5) (202.8) (224.3)
EBITDA 115.5 123.7 143.3 164.5 183.1 207.2
Depreciation & Amortisation (17.8) (19.2) (24.4) (29.6) (32.4) (34.2)
EBIT 97.8 104.5 118.9 134.9 150.6 173.0
Net interest income(expense) 1.6 1.3 (3.3) (3.1) (2.9) (2.7)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 1.3 3.2 0.9 — — —
Profit before tax 100.7 109.0 116.5 131.8 147.7 170.3
Income tax expense (20.3) (28.5) (29.5) (30.2) (34.1) (39.5)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 80.4 80.5 87.0 101.5 113.6 130.8
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 80.4 80.5 87.0 101.5 113.6 130.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and equivalents 116.9 121.1 266.0 157.3 98.6 82.5
Receivables 125.8 107.5 122.7 142.1 158.7 175.5
Inventories 180.8 176.8 203.8 237.0 264.8 290.7
Tangible fixed assets 209.0 266.0 295.3 369.4 418.1 435.1
Other assets including goodwill 20.5 17.4 17.4 17.4 17.4 17.4
Total assets 653.0 688.9 905.3 923.3 957.6 1,001.3
Payables 67.4 57.1 67.9 79.0 88.3 96.9
Interest bearing debt — 12.7 188.4 165.2 155.2 145.2
Other liabilities 78.1 81.3 81.3 81.3 81.3 81.3
Total liabilities 145.5 151.0 337.6 325.5 324.8 323.4
Shareholders equity 507.5 537.8 567.7 597.8 632.8 677.9
Minorities — — — — — —
Total liabilities & shareholders equity 653.0 688.9 905.3 923.3 957.6 1,001.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 74.3 114.5 83.5 92.7 113.9 133.5
Net capex (73.5) (77.9) (53.8) (103.7) (81.1) (51.3)
Free cash flow 0.8 36.6 29.7 (11.0) 32.8 82.3
Equity raised/(bought back) — — — — — —
Dividends paid (28.6) (42.9) (57.1) (71.4) (78.6) (85.7)
Net inc/(dec) in borrowings — 12.5 175.7 (23.2) (10.0) (10.0)
Other investing/financing cash flows 1.6 (1.0) — — — —
Net cash flow (26.2) 5.3 148.3 (105.6) (55.8) (13.4)
Change in working capital (38.9) 3.1 (31.3) (41.5) (35.1) (34.1)
Mohammad Kamal Mohamad Haidar [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 60
Initiate with a Buy recommendation and SAR 56 fair value
estimate
Doubling of capacity at core business segments drive medium-term growth
Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with a Buy and
SAR 56 fair value estimate
Halwani is a focused consumption play in Egypt and KSA, and is a market share leader in (i)
meat and poultry products in Egypt, and (ii) flour-based confectionary (Halawa) and basic
ingredients (Tahina) in KSA. The business has launched a 2x capacity expansion at its meat
products facility in Egypt (which since launch in Q1 12, has ramped up to 50% utilization), and a
new processing facility in Jeddah which will centralise all of Halwani’s manufacturing facilities
in KSA. We expect the capacity ramp up to deliver 13% medium-term revenue growth and 14%
EPS growth in the business. At current valuation multiples, we believe the market is not fully
pricing in Halwani’s strong regional presence and margin stability, in addition to overlooking
the impact of capacity expansions. We initiate coverage with a Buy recommendation and SAR
56 fair value estimate.
Exhibit 117: Core business sales constitute 75% of total revenues
Source: Company Data, Arqaam Capital Research
Exhibit 118: Sales equally split between KSA and Egypt
Source: Company Data, Arqaam Capital Research
Competitive industries have compelled the business to position itself as a premium brand
supplier: Halwani currently holds a leading position in the meat segment in Egypt (60%), and a
50% share of the Tahina and Maamoul markets in Saudi Arabia. Halwani operates in highly
competitive industries in which end buyers (rather than retailers) form the largest customer
base. Halwani’s clientele is equally split between wholesalers, grocers, and modern trade
markets, which it engages at different price points (and these are further categorized based on
location). Halwani is not a low-cost supplier, but rather focuses on positioning itself in the
premium quality bracket. Input cost movements are however often borne by the company,
and rarely passed on to end customers. This has preserved market share intact, at the expense
of margins.
Meat business, 38.5%
Halawa/Tahina, 38.8%
Other, 22.7%
Revenue breakdown by product type (FY 12e)
Saudi Arabia, 50%
Egypt, 45%
Other, 5%
Revenue breakdown by geography (FY 12e)
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 61
Capacity expansions at core segments drive growth in the next 4 years: Revenues are largely
driven by core business segments (meat, Halawa, and Tahina) which together constitute 75%
of the business, and are expected to comprise an even larger share of revenues as the ongoing
capacity expansions are implemented. Halwani’s meat business in Egypt is set to double
capacity by FY 16e, while the company’s sesame-based segments in KSA (Halawa/Tahina) are
expected to follow a similar trajectory upon their relocation to new facilities in the Saudi
Industrial City, Jeddah.
We expect revenues in both segments to double by FY 16e, as the relocation is completed
and new capacity is fully utilised. We expect the two segments to constitute c.80% of revenues
by then. Secondary product lines (packaging, Maamoul, jam, and cheese) are set for
expansions over two phases (of which phase 1 has already been launched, and covers the
packaging and Maamoul segments) and are expected to average 8% growth in the next 5
years, by our estimates.
Exhibit 119: Capacity expansions in core business segments drive 12% 5-yr revenue CAGR
Source: Company Data, Arqaam Capital Research
Margins to stabilise after expansion SG&A is brought under control: Halwani has successfully
lowered its SG&A bill by c.200bps (as % of revenues) in FY 11A. Margins are expected to
remain flat at the gross and EBIT levels in the next 3 years, assuming SG&A control and stable
commodity prices. Partial improvements in gross margins (50bps) are assumed in FY 15e, after
the business relocates to more efficient operating facilities in the Saudi Industrial City. Blended
gross margins are expected to arrive at 30.5% in FY 13-14e, in our view.
100% 70%
35%
--%
50%
100%
150%
200%
250%
Meat business
Halawa/Tahina
Other products
Meat business
Halawa/Tahina
Other products
Existing capacity Future capacity
Planned capacity expansions by business segment
Capacity additions
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 62
Exhibit 120: Core segments contribute to higher margins vs. newly introduced products
Source: Company Data, Arqaam Capital Research
Absence of commodity and FX hedges: Around 40% of Halwani’s business is sesame-based
and relies on global commodity prices. With no hedging strategies currently in effect, Halwani
exposes a large base of its input costs to grain price fluctuations, which creates margin
volatility, as well as EPS dilution risk. 50% of the Halwani business (Egyptian operations) on the
other hand is exposed to currency risk should any devaluation of the EGP materialise.
Exhibit 121: DCF sensitivity to cost assumptions
Source: Company Data, Arqaam Capital Research
Exhibit 122: Net margin sensitivity to cost assumptions
Source: Company Data, Arqaam Capital Research
Expansion plans: Halwani will continue its expansion plans at core business segments (+100%
meat, +70% Halawa/Tahina), and relocating facilities to Jeddah as construction works are
already complete. The total CAPEX bill of USD 100mn planned has been 25% expensed so far.
The remaining CAPEX will be incurred in the coming three years and will be 50% debt funded,
by a loan secured from SIDF at competitive rates (the function of government-subsidised debt
offerings in KSA). Apart from the SIDF loan, Halwani does not receive subsidies on input costs
in either Egypt or KSA, and relies on securing low-cost medium-to-long commodity agreements
in sourcing raw materials.
Valuation: We value Halwani at SAR 56/share using a DCF valuation exercise and a 10.2%
WACC. Our price target implies 15.6x FY 13e P/E, and 9.1x FY 13e EV/EBITDA, a premium of
30% to regional peers, which we find palatable given Halwani’s operating leverage and growth
outlook. We believe the market is not fully pricing in Halwani’s strong regional presence and
margin stability, in addition to overlooking capacity expansions at current multiples. We
initiate with a Buy recommendation and SAR 56 fair value estimate.
Risk: in the absence of commodity and FX hedges, we believe global grain prices fluctuation
and EGP devaluation could adversely impact margins and cash flows (a 10% increase in
commodity prices lower our FVE by 29% and our net margin by 210bps).
34%
20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Core business segments Other products
Gross margin by segment
COGS as a % of sales SG&A as a % of sales
56 18.50% 18.00% 17.50% 17.00% 16.50%
71.8% 35 37 40 42 44
70.4% 43 45 48 50 52
69.0% 51 53 56 58 60
67.6% 59 61 64 66 68
66.2% 67 69 72 74 76
DCF sensitivity- cost components
COGS as a % of sales SG&A as a % of sales
9.8% 18.50% 18.00% 17.50% 17.00% 16.50%
72.3% 6.9% 7.3% 7.7% 8.0% 8.4%
70.9% 8.0% 8.3% 8.7% 9.1% 9.5%
69.5% 9.0% 9.4% 9.8% 10.2% 10.6%
68.1% 10.1% 10.5% 10.9% 11.2% 11.6%
66.7% 11.1% 11.5% 11.9% 12.3% 12.7%
Net profit margin sensitivity- cost components
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 63
Valuation
c.40% discount to peer set offers upside potential, stock should re-rate on
strong fundamentals
Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with Buy and SAR
56 fair value estimate
Exhibit 123: DCF summary
Source: Arqaam Capital Research, Company Data
DCF summary
SARmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 104 116 133 146 158
Depreciation & Amortization 30 32 34 35 38
EBITDA 134 148 167 181 196
Working Capital Changes (41) (35) (34) (36) (36)
Operating Cash Flow 93 113 133 145 161
Purchase of PPE (104) (81) (51) (42) (38)
Free Cash Flow to Firm (11) 32 82 103 122
Discount Factor using WACC at 10.2% 0.91 0.82 0.75 0.68 0.62
PV of Visible FCFF (10) 26 61 70 75
Terminal Value 2,068
Equity Valuation WACC parameters
PV of Visible FCFF 223 Rf 4.2%
PV of Terminal Value 1,274 EMRP 10.0%
Enterprise Value 1,497 Adjusted Beta 0.80
Cost of Equity 12.2%
Cash & Cash Equivalents 130
Less: Net (Debt) Funds (36) Marginal tax rate 25.0%
Cost of Debt 4.0%
Equity Value 1,590 D/C (market) 25.0%
NOSH 29 WACC 10.2%
Equity Value per Share 56 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 9.1 8.2 7.2 6.7 6.1
P/E 15.6 14.0 12.1 11.0 10.1
P/B 2.7 2.5 2.3 2.2 2.0
* Based on after-tax operating profit
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 64
Exhibit 124: Halwani in peer context
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
Halwani 12.2 10.9 2.1 2.0 7.0 6.3
Average consumer staples 12.6 10.4 2.3 2.0 12.0 10.3
Premium / (discount) (3.2%) 4.5% (9.0%) (2.7%) (42.1%) (39.3%)
Average consumer discretionary 9.4 8.2 2.7 2.4 7.3 6.5
Premium / (discount) 29.7% 33.7% (24.4%) (18.9%) (4.0%) (3.8%)
Average retailers 13.8 12.4 3.9 3.4 12.4 11.1
Premium / (discount) (11.5%) (11.8%) (46.5%) (41.6%) (43.9%) (43.8%)
Average coverage universe 12.2 10.4 2.7 2.4 10.9 9.6
Premium / (discount) 0.2% 4.8% (22.7%) (17.1%) (36.1%) (34.5%)
Source: Company Data, Arqaam Capital Research
Discount to peer set offers upside potential, stock should re-rate on strong fundamentals:
Halwani currently trades at 7.0x FY 13e EV/EBITDA, a discount of 42% to the consumer staples
peer set average, suggesting that the market is not fully rewarding Halwani for its capacity
growth at current multiples. Adjusting for taxes on Egypt operations, Halwani trades at a 20-
25% discount to peers (predominantly operating in the GCC), at FY 13e 10.4x adjusted-EPS.
Exhibit 125: We value Halwani at a premium to consumer peers
Source: Company Data, Arqaam Capital Research
Exhibit 126: The business trades at a significant discount to peers at the EV/EBITDA level
Source: Company Data, Arqaam Capital Research
Risk: In the absence of commodity and FX hedges, we believe global grain prices fluctuation
and EGP devaluation could adversely impact margins and cash flows (a 10% increase in
commodity prices lower our FVE by 29% and our net margin by 210bps).
Almarai
Halwani
SADAFCO
Herfy
Savola
SPM
Juhayna
Aghtia
AUTO
Budget
Tayyar
Catering
Shaker
Gasco Othaim
Hokair
JarirExtra
Meera
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Target equity value/FY 13e book value
Target equity value/FY 13e net income
15.8x 15.7x
13.0x 12.5x 12.2x
8.8x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Almarai Herfy Juhayna Halwani SADAFCO Agthia
Current market cap / FY 13e net income
January 18 2013
Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 65
Business trends
Exhibit 127: Expansions drive revenue growth to >10% CAGR until FY 15e
Source: Company Data, Arqaam Capital Research
Exhibit 128: Meat business: 2x expansion ……………………………………….
Source: Company Data, Arqaam Capital Research
Exhibit 129: Margin stability expected after effective SG&A control in FY 11A
Source: Company Data, Arqaam Capital Research
Exhibit 130: SIDF loan to cover 50% of planned CAPEX
Source: Company Data, Arqaam Capital Research
Exhibit 131: Dividends grow as business expands and CAPEX requirements taper off
Source: Company Data, Arqaam Capital Research
Exhibit 132: LT debt impacts RoIC in FY 12e
Source: Company Data, Arqaam Capital Research
732 814
896
1,037 1,159
1,281
--%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
--
200
400
600
800
1,000
1,200
1,400
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues, SAR bn
Sales Sales growth (RHS)
38% 41% 42% 43% 43%
39% 38% 37% 37% 37%
23% 21% 20% 20% 20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 12e FY 13e FY 14e FY 15e FY 16e
Revenue breakdown by product
Meat business Halawa/Tahina Other
32.5%
29.9% 30.8% 30.5%
15.8% 15.2% 16.1% 15.9%
13.4% 12.8% 13.3% 13.0%
11.0% 9.9% 9.7% 9.8%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 10A FY 11A FY 12e FY 13e
Gross margin EBITDA margin EBIT margin Net margin
--%
5%
10%
15%
20%
25%
30%
35%
--
20
40
60
80
100
120
140
160
180
200
FY 11A FY 12e FY 13e FY 14e FY 15e
SARmn
Total borrowings D/E (RHS)
(200)
(150)
(100)
(50)
--
50
100
150
FY 10A FY 11A FY 12e FY 13e FY 14e
SAR mn
Dividends
CFO
Capex
15.8% 15.0% 15.3%
17.0% 18.0%
15.8%
14.6%
11.9%
13.5% 14.6%
12.3% 11.7%
9.6% 11.0%
11.9%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY 10A FY 11A FY 12e FY 13e FY 14e
RoE RoIC RoA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Sahar Srour Arqaam Capital Research Offshore s.a.l.
MENA – Retailers Al Meera Consumer Goods
BUY
Retailers / Qatar Bloomberg code MERS QD
Market index DSM
Price target (local) 205
Upside (%) 27.2
Market data 17/01/2013
Last closing price 161
52 Week range 140.0-198.0
Market cap (QAR mn) 1,612
Market cap (USD mn) 443
Average daily traded value (QAR mn) 1.3
Average daily traded value (USD mn) 0.3
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,166.3 1,597.2 2,294.0 2,635.2
EBITDA 99.3 134.8 171.2 199.4
Net income 77.3 93.3 120.0 145.0
EPS* 7.73 9.33 6.00 7.25
P/E (current price) 20.9 17.3 13.4 11.1
BVPS* 27.1 29.5 63.7 65.6
P/B (current price) 5.9 5.5 1.3 1.2
EV/EBITDA (current price) 18.1 13.3 10.5 9.0
Div. yield (%) 3.1 4.3 5.6 6.7
FCF margin (%) 3.5 1.1 0.1 1.4
Net debt/EBITDA (x) 1.3 1.5 (3.8) (2.8)
Net debt/Capital (%) 25.0 33.5 (40.1) (34.5)
Interest cover (x) 12.9 7.6 8.1 9.3
RoAA (%) 12.9 11.3 8.2 7.0
RoAE (%) 29.7 33.0 15.3 11.2
RoIC (%) 16.2 19.1 8.6 10.2
* FY 13-14e EPS and BVPS Adjusted for expected rights issue (1:1),
effective on 21 Jan 2013
Initiating coverage with BUY: high growth domestic retailer at
similar fundamental qualities to KSA peers, but discounted
valuation at 10.5x FY 13e EV/EBITDA
Three core value drivers for 20% aggregate revenue CAGR by FY 17e:
(i) Same-store sales growth: 7.4% CAGR by FY 17e, as customer conversion
(sales transactions/footfall) increases given high disposable income levels and
penetration levels rise.
(ii) Additional store space: 11.2% CAGR by FY 17e, as Al Meera broadens its
reach across Qatari and Omani locations, and
(iii) Reconfiguration to meet market preferences: converting old outlets into
modern formats designed to attract and retain a wide customer base.
Accordingly, we believe that Al Meera’s mix of organic and acquisition-led
expansion will translate into continued EPS momentum (+60% over the past
two years, followed by an expected 15% 5-year forward CAGR). Al Meera
trades at a 17% discount to KSA-based peer retailers, but holds equivalent, if
not better fundamentals. We initiate coverage of Al Meera Consumer Goods
with a Buy recommendation and QAR 205/share fair value.
Robust domestic fundamentals support growth outlook: The current retail
industry boom in Qatar is driven by a fast-growing population base
(4%+/annum), and rising GDP/capita (7%/annum). High disposable income and
rising consumer spending on discretionary goods should comfortably produce
top-line growth of 20% CAGR by FY 17e.
Margins to remain stable at best, given industry trends and strategic
direction: we see margins settling slightly below current levels due to (i)
competition (ii) strong bargaining clout on the part of suppliers, and (iii) lower
margins on international operations, which we expect to ramp up to 11-12%
of revenues.
The market has unduly assigned a discount to Al Meera vs. Saudi peers,
despite comparable credentials: At 13.4x FY 13e PE and 10.5x FY 13e
EV/EBITDA, Al Meera trades at discount to retailers in KSA. In terms of same-
store sales growth, new store openings, and penetration of remote (read:
captive) districts and provinces, Al Meera compares rather well with KSA
peers, but trades at a substantial discount.
Risks: Upside: Government support (26% shareholder), successful regional
footprint, additional branches via 15 land plots recently secured. Downside:
competition in the hyper/supermarket space, and delays in launch of new
branches.
QAR 205
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
82
92
102
112
122
132
Jan-12 Apr-12 Jul-12 Oct-12
MERS QD DSM
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 67
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
5%
10%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
50%
100%
150%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-50%
0%
50%
-6.0
-4.0
-2.0
0.0
2.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
30
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Al Meera Consumer Goods
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS* 6.55 7.73 9.33 6.00 7.25 7.91
Diluted EPS* 6.55 7.73 9.33 6.00 7.25 7.91
DPS* 4.50 5.00 7.00 9.00 10.88 11.87
BVPS* 24.92 27.15 29.48 127.48 131.11 135.06
Weighted average shares* 10.00 10.00 10.00 14.58 19.58 20.00
Average market cap* 621.06 1,513.66 1,576.51 1,253.62 1,683.43 1,719.25
*Adjusted for expected rights issue (1:1), effective on 21 Jan 2013
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 24.6 20.9 17.3 13.4 11.1 10.2
P/E (x) (target price) 31.3 26.5 22.0 17.1 14.1 13.0
P/BV (x) (target price) 8.2 7.6 7.0 1.6 1.6 1.5
EV/EBITDA (x) (target price) 27.4 21.5 15.8 12.4 10.7 10.1
EV/FCF (x) 40.9 52.7 119.8 739.7 58.2 27.3
EV/Invested capital (x) 8.5 4.1 3.8 1.3 1.3 1.3
Dividend yield (%) 2.8 3.1 4.3 5.6 6.7 7.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 5.9 27.5 37.0 43.6 14.9 14.2
EBITDA 38.6 27.7 35.8 27.0 16.5 6.0
EBIT 44.2 27.9 28.2 27.3 18.8 6.9
Net income 44.2 18.0 20.7 28.6 20.9 9.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 8.5 8.5 8.4 7.5 7.6 7.0
EBIT 7.2 7.2 6.7 6.0 6.2 5.8
Net 7.2 6.6 5.8 5.2 5.5 5.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 15.8 12.9 11.3 8.2 7.0 7.4
RoAE 27.9 29.7 33.0 15.3 11.2 11.9
RoIC 26.3 16.2 19.1 8.6 10.2 11.0
FCF margin 5.7 3.5 1.1 0.1 1.4 2.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (57.0) 25.0 33.5 (40.1) (34.5) (31.2)
Net debt/Equity (57.0) 47.8 66.5 (51.0) (42.7) (37.3)
Interest cover (x) — 12.9 7.6 8.1 9.3 11.3
Net debt/EBITDA (x) (1.8) 1.3 1.5 (3.8) (2.8) (2.4)
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 68
Abacus Arqaam Capital Fundamental Data
Company profile
Al Meera Consumer Goods Co. operates a chain of
cooperative stores throughout Qatar. Its main
activities involve the wholesale and retail trading of
different categories of consumer goods and
commodities, and the ownership and management of
consumer outlets.
Ownership and management
Shareholders
Government 26.0%
Public 74.0%
Source: Zawya
Board of Directors
Abdullah Khalid Naser Al Qahtani Chairman
Saif Said Saif Al Sowaidi Vice Chairman
Ahmed Abdullah Al Khulaifi Director
Saleh Mohamed Al-Nabit Director
Mohamed Ibrahim M B Al-Sulaiti Director
Mohamed Abdulla A A Al-Hashemi Director
Jassim Mohammed A O Al-Kubaisi Director
Source: Zawya
Al Meera Consumer Goods
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (QARmn)
Sales revenue 914.8 1,166.3 1,597.2 2,294.0 2,635.2 3,009.7
Gross profit 122.5 176.9 255.6 364.7 416.4 472.5
Shops rental income 26.7 31.0 36.2 42.6 50.4 59.9
SG&A (71.5) (108.6) (157.0) (236.2) (267.4) (321.2)
EBITDA 77.8 99.3 134.8 171.2 199.4 211.2
Depreciation & Amortisation (12.2) (15.5) (27.3) (34.4) (36.9) (37.6)
EBIT 65.5 83.8 107.5 136.8 162.5 173.6
Net interest income(expense) — (6.5) (14.2) (16.8) (17.4) (15.3)
Associates/affiliates — — — — — —
Other pre-tax income/(expense) — — — — — —
Profit before tax 65.5 77.3 93.3 120.0 145.0 158.3
Income tax expense — — — — — —
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 65.5 77.3 93.3 120.0 145.0 158.3
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 65.5 77.3 93.3 120.0 145.0 158.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (QARmn)
Cash and equivalents 142.2 116.8 95.1 996.5 876.0 770.3
Receivables 21.3 40.0 65.6 93.0 105.4 118.7
Inventories 52.2 87.7 121.3 174.4 194.5 222.4
Tangible fixed assets 109.7 172.6 257.0 429.1 576.7 689.5
Other assets including goodwill 109.1 348.6 348.6 348.6 348.6 348.6
Total assets 434.5 765.7 887.6 2,041.7 2,101.2 2,149.6
Payables 172.6 229.0 283.0 401.7 455.9 514.4
Interest bearing debt — 246.6 291.1 346.5 315.5 265.9
Other liabilities 12.7 18.7 18.7 18.7 18.7 18.7
Total liabilities 185.3 494.3 592.8 766.9 790.1 799.0
Shareholders equity 249.2 271.5 294.8 1,274.8 1,311.1 1,350.6
Minorities — — — — — —
Total liabilities & shareholders equity 434.5 765.7 887.6 2,041.7 2,101.2 2,149.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (QARmn)
Cashflow from operations 79.6 104.3 129.6 209.3 221.1 228.4
Net capex (27.5) (63.8) (111.8) (206.5) (184.5) (150.5)
Free cash flow 52.1 40.4 17.8 2.9 36.6 78.0
Equity raised/(bought back) — — — 950.0 — —
Dividends paid (41.3) (78.4) (70.0) (90.0) (108.8) (118.7)
Net inc/(dec) in borrowings — 246.6 44.6 55.4 (31.0) (49.6)
Other investing/financing cash flows 17.6 (221.1) 58.0 (16.8) (17.4) (15.3)
Net cash flow 28.5 (12.5) 50.4 901.5 (120.6) (105.7)
Change in working capital 17.2 24.2 (5.2) 38.2 21.7 17.2
Mohammad Kamal Sahar Srour [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 69
Valuation: discount to KSA peers despite comparable credentials
We value Al Meera Consumer Goods using DCF (10.0% WACC, 11.3% Ke, 6% Kd, and 25% D/C)
arriving at a fair value estimate of QAR 205/share. Our FVE suggests +26% upside to CMP,
which we warrant on (i) growth potential (15% EPS 5-year CAGR), (ii) high quality returns
(historical RoE c.30%), and (iii) ample CAPEX funds (cash/assets 50% in FY 13e following QAR
950mn rights issue).
Exhibit 133: Valuation breakdown
Source: Company Data, Arqaam Capital Research
The market has unduly assigned a discount to Al Meera vs. Saudi peers, despite comparable
credentials: At 13.5x FY 13e PE and 10.5x FY 13e EV/EBITDA, Al Meera trades at a 17%
discount to retailers in KSA. In terms of same-store sales growth, new store openings, and
penetration of remote (read: captive) districts and provinces, Al Meera compares rather well
with KSA peers, but trades at a substantial discount. Accordingly we initiate coverage of Al
Meera with a Buy recommendation and QAR 205/share fair value estimate.
Exhibit 134: Al Meera vs. peers; same-store sales and new store openings
Source: Company Data, Arqaam Capital Research
Exhibit 135: Unwarranted discount to peers
Source: Company Data, Arqaam Capital Research
Risks: Construction permits and store roll-out: 3 stores were delayed in FY 12A due to delays
in securing approvals for additional built-up area. Regional exposure: With no prior experience
in Oman or any other regional targeted market, we remain cautious on the company’s ability
to deliver growth without substantially compromising margins.
205
100
113 10
12
(30)
--
50
100
150
200
250
Old stores Additions Cash & equivalents
Investments Borrowings Price target
QAR/share
Extra
Al Othaim
Al Hokair
JarirAl Meera
1
10
100
1,000
--% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Aggregate new stores opening (FY 12-17e)
Same stores sales growth (FY 12 vs. 11A)
Al Meera
Al Othaim
Al Hokair
Extra
Jarir
--
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
-- 5.0 10.0 15.0 20.0
FY 13e PE (x)
FY 13e EV/EBITDA (x)
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 70
Summary of operations
Revenues: new store additions (1x current stores) and reconfigured store
formats to raise market share 25%
a) New stores: In FY 12, Al Meera aggressively expanded its domestic store network to
33 stores (+27% vs. FY 11A), after (i) inaugurating 2 new outlets (Abu Nakhla & Airport
Road Hypermarket), and (ii) securing 5 stores (15k sqm) via the acquisition of the
Qatar Market Company (QMC, under the Gaint Stores brand name) and Al Oumara
Bakery.
b) Raising footfall: Management targets to raise current footfall of 200k/month by (i)
refurbishing old stores into reconfigured, modern formats, (ii) signing deals with
international and regional suppliers to widen its product offerings, and (iii) developing
and operating its own logistics in-house logistics facilities, which should improve long-
term price competitiveness.
We believe the expansion measures above will at full swing contribute a 20% top-line CAGR
over the next 5 years, largely a result of doubling the number of outlets due for launch during
the period.
Ongoing international expansion to support locally-generated revenue growth, but
potentially at the expense of margins: In Dec. 12, Al Meera acquired Safeer Arabian
International, an Omani retail chain with 5 stores (32k sqm) at 0.5-0.8x P/sales. Following
renovations and a rebranding exercise, the Omani operations (70% Al Meera, 30% NIFCO) will
by our estimates generate 11-12% of revenues, starting FY 13e. Al Meera also inked strategic
deals to bolster presence abroad, in Tunisia, Libya, Egypt, Jordan, and Oman. We however
don’t model for any EPS impact at this stage, in the absence of any capital being committed
towards the ventures as of yet.
Exhibit 136: Robust store additions (15% FY 10-17e CAGR)…
Source: Company Data, Arqaam Capital Research
Exhibit 137: ..to produce retail sales CAGR of 23.5%
Source: Company Data, Arqaam Capital Research
58
22
26 5
5
-
10
20
30
40
50
60
70
Base units, FY 10A
Organic growth
Inorganic growth
International growth
Ending units, FY 17e
Store additions (units)
915 1,166
1,597
2,294
2,635
3,010
3,484
4,004
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Retail sales (QARmn)
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 71
Rental income as a supplement to retail sales: Rental income generated on smaller shop
formats rose 17.75% y/y in 9M 12A (nevertheless just over 2% of aggregate revenues). We
expect rental growth to average 20% in FY 17e as more outlets open, but given more
significant growth elsewhere, to remain below 3% of aggregate revenues over the next 5 years.
Margins: industry remains competitive- GPM expansion to prove short-lived
Margin expansion to stall on competition and regional growth: GPM stood at 16.3% in 9M
12A (+431bps vs. FY 09A); given (i) strategic partnerships with major suppliers, allowing for
preferential pricing, (ii) the development of a ‘direct-import program’, in which products
bypass a manufacturer’s authorized distributor and (iii) strengthening bargaining power and
market share, a result of the market’s shift from fragmented to organized retailing. Margins
are expected to reside slightly below current levels to 15.5% in FY 17e, due to (i) strong
competition (Lulu, 10% market share; and Carrefour, 9% market share), both of which are
adding capacity, (ii) strong bargaining power on the part of suppliers, and (iii) lower margins on
regional operations, as direct import programs are not available.
Compression more visible below EBIT line: We see 130bps NPM compression by FY 17e, due
to (i) expansion-linked SG&A growth, and (ii) finance costs on higher debt (+14.4% in 9M 12A,
largely due to a QAR 900mn debt facility secured in Q3 12A).
Exhibit 138: Margins to hold at best, given competition, regional debut, and higher finance charges
Source: Company Data, Arqaam Capital Research
CAPEX
Expansion capex adequately funded: In 9M 12A, the business drew on QAR 282mn in
borrowings (+14.4%; 1.04x equity) from a QAR 900mn financing facility from Barwa Bank
dedicated to (i) repay withdrawals from the QAR 2bn facility with Al Rayan Bank, and (ii)
finance future expansion and acquisitions. Al Meera will also raise equity via Rights in January,
doubling capital and issued shares (a QAR 950mn offering). We expect this to be sufficient
funding for the estimated QAR 1.2bn of capital expenditure earmarked for expansion over the
coming 5 years.
13.4%
15.2% 16.0% 15.9% 15.8% 15.7%
7.2% 7.2% 6.7% 6.0% 6.2% 5.8%
7.2% 6.6% 5.8% 5.2% 5.5% 5.3%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Margin breakdown (%)
Gross Profit Margin EBIT Margin Net Profit Margin
January 18 2013
Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 72
Exhibit 139: Summary of business milestones since Q2 11A
Expansion description Scope Update Growth Market footfall
Q2
11
A
Renovation of Nuaija Mall Construction cost of QAR 47mn Construction completed in Q4 12A but still awaiting power supply for commencement
Organic (retail space)
Domestic
Supply agreements & JV with French retailer Casino Group (24th largest worldwide food retailer)
Gaining exclusive rights to sell Casino-branded products in Qatar
Forming 'ALGE Retail Corporation' as Al Meera-Casino JV; 51% owned by Al Meera; to launch regional hypermarkets under Geant banner
Organic & Inorganic (retail space + product offering)
Domestic & International (Tunisia, Libya, Egypt, and Jordan)
Q3
11
A
Acquisition of Gaint Stores (Qatar Markets Co & Al Oumara Bakery)
Adding 5 new stores (15k sqm) as first breakthrough into hypermarket
4 gained stores undergoing rebranding into Al Meera supermarkets by Q4 12e
Inorganic (retail space + product offering)
Domestic
Q1
12
A
New Airport Road Hypermarket
Sub-leased from Dasman Group at total retail area of 5k sqm
Operations commenced Organic (retail space)
Domestic
50% JV with United Electronics Company (eXtra)
Forming a QAR 200k limited liability co. to operate 4k sqm of Electronics Mega-stores
Expected commencement in FY 15e
Inorganic (product offering)
Domestic
Abu Nakhla new branch Retail area of 3,082 sqm Construction completed Organic (retail space)
Domestic
Franchise deal with Thailand-based Index Living Mall Company (ILM)
Exclusive agreement to open furniture stores under the Thai brand
Granted the exclusive right for 3-yr period to develop and operate in Egypt, Jordan, and Oman
Organic (product offering)
Domestic & International (Egypt, Jordan, and Oman)
Q2
12
A
MOU with Business Trading Company (BTC)
Guarantee presence of Al Meera-branded outlets in BTC projects abroad
NA Organic (retail space)
International (Tunisia, Libya, Egypt, Jordan, and Oman)
Q3
12
A
Launch of 'Al Meera Bookstore'
100% owned subsidiary to operate under WH Smith Travel (UK franchise)
Bookstores to open in Ezdan Mall, Giant Hyatt Plaza, and Nuaija Mall
Organic (product offering)
Domestic
Securing 15 plots of land Leased from the government to build 5-25 store mini malls deliverable by FY 17e
Secured municipality clearance
Organic (retail space)
Domestic
Signing 3 lease agreements with Al Asmakh Real Estate
Opening 3 stores at Beverly Hills 10 Complex, Beverly Hills 3 Complex, and Beverly Hills Towers Complex
Delays in opening of the 3 stores; until Q1 13e
Organic (retail space)
Domestic
Q4
12
A
Reconstruction of Hazm Al Markhiya - Al Qutaifiya outlet
Signing construction contract on 3,125 sqm built up area
Delays in mall opening; initially expected in Q2 13e
Organic (retail space)
Domestic
New branch at a Barwa housing complex
Substituting ABC Mart supermarket after tenants complaints of the 1,000 apartment complex
Expected commencement in Q1 13e
Organic (retail space)
Domestic
Acquisition of Safeer Firm in Oman
Incorporating 2 subsidiaries; (70% owned by Al Meera, 30% by NIFCO) to operate 5 stores (32k sqm)
Rebranding the acquired stores to 'Al Meera' by Q1 13e
Inorganic (retail space)
International (Oman)
Signing MoU with each of Regency Group & Aramex International
Entering into partnerships/JVs to build & operate its own logistic facilities operations
Plans to build its own distribution centre on a 90k sqm plot in several phases, with the first stage involving a 10k sqm warehouse facility
Inorganic (product offering)
Domestic
Source: Company Data, Arqaam Capital Research
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Dahlia Sabaayon, CFA Arqaam Capital Research Offshore s.a.l
MENA – Consumer discretionary Saudi Airlines Catering
BUY
Consumer discretionary / KSA Bloomberg code CATERING AB
Market index Tadawul
Price target (local) 100.0
Upside (%) 26
Market data 17/01/2013
Last closing price 79.5
52 Week range 59.3-81.5
Market cap (SAR mn) 6,519
Market cap (USD mn) 1,738
Average Daily Traded Value (SAR mn) 22.8
Average Daily Traded Value (USD mn) 6.1
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,465.3 1,755.2 2,033.9 2,358.6
EBITDA 434.7 511.1 598.3 688.0
Net income 382.3 486.6 571.3 658.2
EPS 4.66 5.93 6.97 8.03
P/E (current price) 17.1 13.4 11.4 9.9
BVPS 12.0 14.6 17.8 21.4
P/B (current price) 6.6 5.4 4.5 3.7
EV/EBITDA (current price) 13.5 11.5 9.8 8.5
Div. yield (%) 3.5 4.1 4.8 5.6
FCF margin (%) 24.9 24.8 23.5 23.2
Net debt/EBITDA (x) (1.5) (1.7) (1.8) (2.0)
Net debt/Capital (%) (66.8) (73.0) (75.5) (77.3)
Interest cover (x) — — — —
RoAA (%) 29.0 30.6 29.6 28.7
RoAE (%) 42.4 44.6 43.0 41.0
RoIC (%) 38.8 40.5 39.2 37.5
Buy unique exposure to Saudi Arabian airline industry via 40%
RoE, 38%+ RoIC business at 11.4x FY 13e P/E; Initiate with Buy
and SAR 100 fair value estimate
Saudi Airlines Catering is the kingdom’s sole provider of catering and related
services for flag carrier Saudia (Saudi Arabian Airlines), as well as the majority
of airlines that fly in and out of the country’s airports. It further oversees retail
sales under the 'Sky Sales' brand on board flights operated by Saudia. The
company operates under exclusive agreements that expire in FY 15e, the
renewal of which remains highly likely. We initiate coverage on Saudi Airline
Catering with a Buy recommendation and SAR 100/share FVE, as the
company (i) offers unique exposure to the Saudi airline sector, (ii) enjoys
superior profitability (~30% EBITDA margins) and returns (40% RoE, 38%+
ROIC) , and (iii) ample cash generation (CFO/sales ~30% FY 13e).
The business offers unique exposure to the Saudi Arabian airline sector,
which we expect to post passenger traffic growth of 10% over the next 4 years
on average, and top 73mn passengers carried by FY 15e. We believe this is
driven by (i) improving disposable income levels, (ii) inbound business travel,
(iii) improvements to infrastructure and hotel facilities in Makkah and Medina,
in order to accommodate rising religious tourist flows into the Kingdom, (iv)
the deregulation of the aviation sector, and (v) the overwhelming impact of
population growth on the transportation sector in KSA in general.
Saudi Airlines Catering enjoys returns and profit margins superior to those
generated by domestic consumption plays, and regional/global catering
businesses: The company’s RoE of 39% is among the highest in our coverage
universe, and is well-ahead of global peer average of c. 17%. In addition,
operating margin of c.30% is substantially higher than the global benchmark.
But you usually can’t buy Saudi stocks without buying into a receivables
scare, however: The company’s total receivables day count has climbed from
93 days in FY 10A, to a current level of 140 days, an increase of 50%. This is an
endemic issue common to all KSA commercial interests that address the
Government as a client.
Valuation: We derive a 12M price target of SAR 100, suggesting 25% in upside
potential from the stock’s recent market price. We adopt a WACC of 11.9%,
driven by 13.8% Re, 0.96 Beta, and terminal growth factor of 4%. Risks:
Disclosure levels remain low, but are improving. Client concentration: 70% of
the company’s revenues stem from Saudia, via a 5-year agreement that
expires in Jan 2015, and 85% are concentrated within 4 clients including
Saudia. Passenger traffic is the primary determinant of DCF sensitivity. Though
we assign a high probability to the exclusivity contract being renewed, a
surprise move to allocate the Saudia contract to a competitor in FY 15e
would be highly detrimental to the business.
SAR 100
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
86
96
106
116
126
136
Jul-12 Oct-12 Jan-13
CATERING AB Tadawul
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 74
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
24%
26%
28%
30%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-90%
-80%
-70%
-60%
-3.0
-2.0
-1.0
0.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Saudi Airlines Catering
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 4.66 4.66 5.93 6.97 8.03 8.86
Diluted EPS 4.66 4.66 5.93 6.97 8.03 8.86
DPS — 2.74 3.26 3.83 4.41 4.87
BVPS 10.04 11.96 14.63 17.77 21.38 25.37
Weighted average shares 82.00 82.00 82.00 82.00 82.00 82.00
Average market cap — — 6,387.80 6,387.80 6,387.80 6,387.80
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 17.0 17.1 13.4 11.4 9.9 9.0
P/E (x) (target price) 21.4 21.4 16.9 14.4 12.5 11.3
P/BV (x) (target price) 10.0 8.4 6.8 5.6 4.7 3.9
EV/EBITDA (x) 17.5 17.3 14.7 12.6 10.9 9.9
EV/FCF (x) 21.5 20.6 17.2 15.7 13.7 12.1
EV/Invested capital (x) 9.1 7.7 6.3 5.2 4.3 3.6
Dividend yield (%) — 3.5 4.1 4.8 5.6 6.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 15.6 22.8 19.8 15.9 16.0 10.0
EBITDA 25.2 1.0 17.6 17.1 15.0 10.1
EBIT 27.4 1.1 16.2 17.4 15.2 10.3
Net income 27.7 — 27.3 17.4 15.2 10.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 36.1 29.7 29.1 29.4 29.2 29.2
EBIT 34.7 28.6 27.7 28.1 27.9 28.0
Net 32.1 26.1 27.7 28.1 27.9 28.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 37.8 29.0 30.6 29.6 28.7 27.0
RoAE 60.5 42.4 44.6 43.0 41.0 37.9
RoIC 46.1 38.8 40.5 39.2 37.5 34.9
FCF margin 29.3 24.9 24.8 23.5 23.2 24.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (92.4) (66.8) (73.0) (75.5) (77.3) (79.6)
Net debt/Equity (92.4) (66.8) (73.0) (75.5) (77.3) (79.6)
Interest cover (x) — — — — — —
Net debt/EBITDA (x) (1.8) (1.5) (1.7) (1.8) (2.0) (2.2)
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 75
Abacus Arqaam Capital Fundamental Data
Company profile
The Saudi Airlines Catering Company provides
catering services to Saudi Arabian Airlines and
other foreign airlines operating in the airports
of Jeddah, King Khalid International Airport,
Riyadh, (KKIA), King Fahd International
Airport, Dammam (KFIA), Makkah and Prince
Mohammed International Airport, Madinah
(PMIA), and to Saudia’s flights operating from
Cairo International Airport. It was established
in 1981 and transformed into a Saudi limited
liability company in 2008. During 2011, and
after obtaining the approval of the Minister of
Commerce and Industry, the business was
converted into a joint stock company. The
business also operates on-board retail
services (Sky Sales), and manages free zones
in Saudi Arabian airports.
Ownership and management
ShareholdersGeneral Organization for Arabian Airlines 35.7%
Strategis Catering Company 34.3%
Public 30.0%
Source: Zawya
Board of Directors
Mr. Khalid Abdullah Bin Abdullah Al Molhem Chairman
Mr. Fahd Abdulmohsen Al Rasheed Director
Mr. Jonathan Stent Torriami Director
Mr. Yousef Adbul Sattar El Maimani Director
Mr. Sami Abdul Mohsen Al Hokair Director
Mr. Shawgi Mohammed Mushtag Director
Mr. Basel Mohammed AL gadhib Director
Mr. Hasan Shakib Al Jabri Director
Mr. Abdul Aziz Saif Al Saif Director
Source: Zawya
Saudi Airlines Catering
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 1,193.2 1,465.3 1,755.2 2,033.9 2,358.6 2,594.0
Gross profit 545.4 558.5 667.0 772.9 896.3 985.7
SG&A (114.8) (123.7) (155.9) (174.6) (208.3) (228.2)
EBITDA 430.6 434.7 511.1 598.3 688.0 757.5
Depreciation & Amortisation (16.6) (16.1) (24.5) (27.0) (29.8) (31.3)
EBIT 414.0 418.6 486.6 571.3 658.2 726.2
Net interest income(expense) — — — — — —
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 3.1 1.9 — — — —
Profit before tax 417.1 420.6 486.6 571.3 658.2 726.2
Income tax expense (34.7) (38.2) — — — —
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 382.4 382.3 486.6 571.3 658.2 726.2
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit — — — — — —
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and other liquid assets 813.3 720.6 954.4 1,191.1 1,461.3 1,772.8
Receivables 74.5 82.3 85.9 94.8 105.1 112.5
Inventories 52.5 65.5 78.7 91.1 105.7 116.2
Tangible fixed assets 67.3 109.8 104.7 100.2 96.5 93.9
Other assets including goodwill — — — — — —
Total assets 1,208.1 1,424.5 1,758.1 2,096.5 2,486.8 2,885.4
Payables 299.6 348.8 455.2 527.5 611.7 672.7
Interest bearing debt — — — — — —
Other liabilities 84.9 94.6 103.0 112.0 121.9 132.6
Total liabilities 384.5 443.5 558.2 639.5 733.6 805.3
Shareholders equity 823.7 981.0 1,200.0 1,457.1 1,753.2 2,080.0
Minorities — — — — — —
Total liabilities & shareholders equity 1,208.1 1,424.5 1,758.1 2,096.5 2,486.8 2,885.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 682.3 214.3 507.7 570.0 643.8 729.1
Net capex (13.2) (58.8) (19.4) (22.5) (26.1) (28.7)
Free cash flow 349.2 364.2 435.8 477.5 548.0 623.6
Equity raised/(bought back) — — — — — —
Dividends paid — (225.0) (267.6) (314.2) (362.0) (399.4)
Net inc/(dec) in borrowings — — — — — —
Other investing/financing cash flows (23.9) (36.2) — — — —
Net cash flow 645.2 (105.8) 220.7 233.3 255.7 300.9
Change in working capital (38.1) 3.6 89.6 50.9 59.3 43.0
Mohammad Kamal Dahlia Sabaayon, CFA [email protected] Arqaam Capital Research Offshore s.a.l
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 76
Buy unique exposure to Saudi Arabian airline industry via 40%
RoE, 38%+ ROIC business at 11.4x FY 13e P/E
Initiate with Buy and SAR 100 fair value estimate
Saudi Airlines Catering is the kingdom’s sole provider of catering and related services for flag
carrier Saudia (Saudi Arabian Airlines), as well as the majority of airlines that fly in and out of
the country’s airports. It further oversees retail sales under the 'Sky Sales' brand on board
flights operated by Saudia. The company operates under exclusive agreements that expire in
FY 15e, the renewal of which remains highly likely. Catering and on-board services generated
>90% of FY 12e revenues, with the remainder produced by sales at the various business
lounges as well as the laundry services it provides. Though we remain highly confident of the
probability of contract renewals, we also see value in the business’s non-airline catering
services, targeted at large corporations and educational institutions that operate in remote
areas of the Kingdom. We initiate coverage on Saudi Airline Catering with a Buy
recommendation and SAR 100/share fair value estimate, as the company (i) offers unique
exposure to the Saudi airline sector via its strong relationship with Saudia, (ii) enjoys superior
profitability (~30% EBITDA margins) and returns (40% RoE, 38%+ ROIC) , and (iii) ample cash
generation (CFO/sales ~30% FY 13e).
The business offers unique exposure to the Saudi Arabian airline sector, which we expect to
post passenger traffic growth of 10% over the next 4 years on average, and top 73mn
passengers carried by FY 15e. We believe this is driven by (i) improving disposable income
levels, promoting outbound tourist flows within and outside MENA, (ii) inbound business
travel, as GDP growth is expected to average 4.5% over the next 3 years by the IMF, (iii)
improvements to infrastructure and hotel facilities in Makkah and Medina, in order to
accommodate rising religious tourist flows into the Kingdom (which over the past 3 years has
registered a 13% CAGR), (iv) the deregulation of the aviation sector, as a third domestic
aviation license is expect to be granted to a foreign Low Cost Carrier- LCC in FY 13e, and new
landing rights for both local and international airlines are added, and (v) the overwhelming
impact of population growth on the transportation sector in KSA in general. FY 11A witnessed
strong growth in passengers (+19%), flights numbers (+7%), and cargo shipments (+5%), and
we expect the trajectory to remain intact over the coming 3 years.
The business plans to introduce new non-airline business lines including laundry and cleaning
services in the Kingdom, in addition to other services for pilgrims/religious tourists. The
integration exercise into ancillary services appears sensible on the surface, but we remain
cautious on forays into what appear to be highly fragmented, disorganized, and opaque
industries.
Saudi Airlines Catering enjoys returns and profit margins superior to those generated by
domestic consumption plays, and regional/global catering businesses: The company’s RoE of
39% is among the highest in our coverage universe, and is well-ahead of global peer average of
c. 17%. In addition, operating margin of c.30% are substantially higher than the global
benchmark of 6%. Having its production units located within Saudi Arabia’s international
airports cuts logistics and procurement costs substantially in our view, and allows for
advantages in inventory management. The company’s exclusivity agreement with Saudia,
however, remains the main driver behind margins, in our view.
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 77
Exhibit 140: Superior profitability when compared to global peers
Company Country Mkt Cap (USD mn) ROE ROA Operating margin
Sodexo France 13,300 18.9% 4.3% 5.4%
Catering InternationaL Services France 280 20.6% 8.9% 7.6%
DO & CO AG Austria 436 14.5% 6.7% 7.0%
Compass Group PLC UK 21,450 18.0% 6.5% 6.8%
Sligro Food Netherlands 1,250 14.0% 7.8% 4.3%
Average
17.2% 6.8% 6.2%
Saudi Airlines Catering KSA 1,700 39.0% 27.0% 30.0%
Source: Arqaam Capital Research, Company Data, Bloomberg
But you usually can’t buy Saudi stocks without buying into a receivables scare, however: The
company’s total receivables day count has climbed from 93 days in FY 10A, to a current level of
140 days, an increase of 50%. This is an endemic issue common to all KSA commercial interests
that address the Government as a client. Payment default risk is near-zero in our view, and
collection delays are more a matter of bureaucracy, rather than any risk counterparty liquidity.
The downside is typically in the financing that is required to meet supplier payments, as
receivables remain uncollected. Saudi Arabian Catering however sits on a highly liquid balance
sheet (cash/assets 42% FY 12e), rendering receivables impact on margins (on the back of
finance costs) and cash flow generation (on elevated working capital needs) manageable.
We conservatively model for a 3-year revenue CAGR of 14% driven chiefly by in-flight catering
revenues which we expect to remain at c.80% of total sales by FY 15e. Our growth forecasts
are in-line with average passenger traffic growth in Saudi Arabian airports (and revenues/PAX),
over the past 3 years. We regard ancillary services (laundry, cleaning) as potential areas of
upside risk, but do not model for any aggressive expansion in operations at this stage. We
assume stable gross margins of 38% throughout our forecast period, given that (i) 85% of
revenues are based on cost-plus contracts where cost movements are passed on the Saudia,
and (ii) the fact that the business meets and currently exceeds local hiring quotas
(‘Saudisation’), mitigating the risk of SG&A costs posting surprises going forward.
Valuation: We derive a 12M price target of SAR 100, suggesting 25% in upside potential from
the stock’s recent market price. We adopt a WACC of 11.9%, driven by 13.8% Re, 0.96 Beta,
and terminal growth factor of 4%. Risks: Disclosure levels remain low, but are improving.
Client concentration: 70% of the company’s revenues stem from Saudia, via a 5-year
agreement that expires in Jan 2015, and 85% are concentrated within 4 clients including
Saudia. Passenger traffic is the primary determinant of DCF sensitivity; our fair value estimate
sheds 6% for every 1% drop in passenger traffic growth. Though we assign a high probability to
the exclusivity contract being renewed, a surprise move to allocate the Saudia contract to a
competitor in FY 15e would be highly detrimental to the business.
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 78
Initiating coverage with SAR 100 price target and Buy
recommendation
We derive a 12M price target of SAR 100, suggesting 25% in upside potential over the stock’s
recent market price. We adopt a WACC of 11.9%, driven by 13.8% Re, 0.96 Beta, and terminal
growth factor of 4%.
Operating assumptions: we expect catering revenues to grow at a 3-year CAGR of 14%, in-line
with the average growth of passenger traffic in Saudi Arabian airports and revenues per
passenger over the past 3 years. We see operating margin at 28% throughout our forecast
period, given that 85% of revenues are based on cost-plus contracts where the company is
capable of passing on cost movements to end clients.
Exhibit 141: DCF valuation summary
Source: Company Data, Arqaam Capital Research
Risks
Client concentration: 70% of the company’s revenues are stem from Saudia, via a 5-year
agreement that expires in Jan 2015, and 85% are concentrated within 4 clients including
Saudia. Passenger traffic is the primary determinant of DCF sensitivity; our fair value estimate
sheds 6% for every 1% drop in passenger traffic growth. Disclosure and corporate access
levels remain low, but are improving.
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT 571 658 726 769 816
27 30 31 32 32
EBITDA 598 688 758 801 848
(46) (54) (39) (26) (28)
552 634 718 775 821
(22) (26) (29) (30) (32)
Cash Tax Paid on Operations (52) (60) (66) (70) (74)
477 548 624 674 714
Discount Factor using WACC at 11.9% 0.89 0.80 0.71 0.64 0.57
PV of Visible FCFF (adj. For stub period) 425 436 444 429 406
Terminal Value 9,462
Equity Valuation WACC parameters
PV of Visible FCFF 2,139 Rf 4.2%
PV of Terminal Value 5,380 EMRP 10.0%
Enterprise Value 7,520 Adjusted Beta 0.96
Cost of Equity 13.8%
Cash & Cash Equivalents 655 Marginal tax rate
Cost of Debt
Equity Value 8,175 D/C (market)
NOSH 82 WACC 11.9%
Equity Value per Share 100 Perpetual grow th 4.0%
Free Cash Flow to Firm
DCF summary
SAR mn unless otherwise stated
Depreciation & Amortization
Working Capital Changes
Adj. Operating Cash Flow
Purchase of PPE
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 79
Relative value
Discount to global peers: We cross check our valuation against global peers which trade at an
average FY 13e EPS of 15.6x, implying a discount of 22%. We find this largely unwarranted
given superior profitability (39% RoE vs. 17% global peers) and robust EPS growth.
Exhibit 142: Peer multiples suggest Saudi Catering is trading at 27% discount to global averages
Company Country Mkt Cap (USD mn) PE 13e ROE
Sodexo France 13,300 16.2 19%
Catering International Services France 280 20.5 21%
DO & CO AG Austria 436 14.8 14%
Compass Group PLC UK 21,450 14.2 18%
Sligro Food Netherlands 1,250 12.5 14%
Average
15.6 17%
Saudi Airlines Catering KSA 1,700 11.4 39%
Source: Company Data, Arqaam Capital Research, Bloomberg
Sensitivity tests: passenger traffic remains main DCF determinant
Our fair value estimate is highly sensitive to passenger traffic in Saudi Arabia. For every 100bps
increase in passenger traffic growth, our fair value estimate moves by 5%. For every 100bps
change in gross margin, our fair value estimate moves by 3%.
Exhibit 143: Price sensitivity to gross margin and passenger traffic
Source: Arqaam Capital Research
Exhibit 144: Price sensitivity to terminal growth rate and Beta ………….
Source: Arqaam Capital Research
Gross margin Passenger traffic growth
100 7% 8% 9% 10% 11% 12% 13%
35% 77 81 85 90 95 100 105
36% 80 84 89 93 98 104 109
37% 83 87 92 97 102 107 113
38% 86 90 95 100 105 111 117
39% 88 93 98 103 109 115 121
40% 91 96 101 107 113 119 125
41% 94 99 104 110 116 123 129
Sensitivity table on Catering's DCF price
Growth Beta
100 0.93 0.94 0.95 0.96 1.06 1.16 1.26
1% 82 82 81 80 76 71 67
2% 88 87 86 86 80 75 71
3% 94 94 93 92 85 79 74
4% 103 102 101 100 92 85 79
5% 114 113 112 110 100 92 85
6% 129 127 126 124 111 100 92
7% 151 148 146 144 126 112 100
Sensitivity table on Catering's DCF price
January 18 2013
Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 80
Business trends
Exhibit 145: Revenues grow in parallel with passengers traffic ……..
Source: Company Data, Arqaam Capital Research
Exhibit 146: In-flight catering revenues constitute 80% of total sales, on average
Source: Company Data, Arqaam Capital Research
Exhibit 147: Net margin well ahead of global peer 10% average
Source: Company Data, Arqaam Capital Research
Exhibit 148: RoE among the highest in our coverage universe
Source: Company Data, Arqaam Capital Research
Exhibit 149: Revenues vs.EBIT …………………………………………………………..
Source: Company Data, Arqaam Capital Research
Exhibit 150: Exceptional FY 10A was the result of 0.5bn cash inflow from Saudia Airlines
Source: Company Data, Arqaam Capital Research
--
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
--
500
1,000
1,500
2,000
2,500
3,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Airline revenues vs. passengers
Airline revenues Passengers
--
500
1,000
1,500
2,000
2,500
3,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues breakdown
In-flight catering Sky sales revenues
Business lounge revenues Non-airline revenues
Other revenues
44% 46%
38% 38% 38% 38% 38%
29% 32%
26% 25% 26% 25% 25%
--%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Gross margin vs. net margin
Gross Profit Margin Net Profit Margin
68%
60%
42% 41% 40% 39% 36% 37% 38%
29% 28% 27% 27% 25%
--%
10%
20%
30%
40%
50%
60%
70%
80%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
ROAE vs. ROAA
ROAE ROAA
1,032 1,193
1,465
1,755
2,034
2,359
2,594
325 414 419 487 571 658 726
--
500
1,000
1,500
2,000
2,500
3,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues vs. EBIT
Revenues EBIT
20%
57%
15%
29% 28% 28% 28%
--%
10%
20%
30%
40%
50%
60%
70%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
CFO/sales
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Dahlia Sabaayon, CFA Arqaam Capital Research Offshore s.a.l
MENA – Consumer discretionary Ghabbour Auto
BUY
Consumer discretionary / Egypt Bloomberg code AUTO EY
Market index EGX
Price target (local) 35.0
Upside (%) 25.0
Market data 17/01/2013
Last closing price 28.0
52 Week range 18.5-32.3
Market cap (EGP mn) 3,612
Market cap (USD mn) 547
Average daily traded value (EGP mn) 0.9
Average daily traded value (USD mn) 0.1
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 7,415.3 7,860.2 8,445.7 10,371.7
EBITDA 653.9 672.2 744.5 883.0
Net income 223.0 195.8 298.2 427.1
EPS 1.73 1.52 2.31 3.31
P/E (current price) 16.2 18.4 12.1 8.5
BVPS 18.0 18.8 20.0 21.6
P/B (current price) 1.6 1.5 1.4 1.3
EV/EBITDA (current price) 5.4 5.3 4.8 4.0
Div. yield (%) 5.1 2.7 4.1 5.9
FCF margin (%) 1.7 (2.2) 3.2 4.5
Net debt/EBITDA (x) 1.6 2.0 1.6 1.1
Net debt/Capital (%) 23.8 28.4 28.0 22.5
Interest cover (x) 2.1 2.5 3.3 4.1
RoAA (%) 4.0 3.3 5.0 7.5
RoAE (%) 9.6 8.2 11.9 15.9
RoIC (%) 14.6 15.8 16.5 19.7
New brand gamble (Geely) better suited for local demand than
outgoing Hyundai models- CAPEX complete, EPS accretion to
follow . We initiate with Buy and EGP 35 12M FVE
GB Auto is a play on car ownership penetration in Egypt’s urban centres,
which we expect to rise as a result of (i) shorter car replacement cycles, which
currently are very long, and (ii) absence of viable alternative vehicles when
looking for a balance of quality and cost. We expect the business to defend
market share at best, as new entrants and substitutes enter their core Cairo
market. The key determinant remains the affordability of car ownership in
Egypt, which we expect to be on a long term upward trend as
macroeconomics gradually recuperate, and consumer level finance improves
in its availability and cost.
Egypt is under-motorised (33 cars/1000 people vs. 102/1000 in Jordan, and
the average age of a vehicle is 35 years+). The working population of Cairo is
roughly 2x the size of its resident population, suggesting that over 20mn
workers commute daily to the city from outside the Central Business Districts.
It all boils down to income levels and bank lending: income levels dictate
discretionary spending, which affects first-time purchases, as well as car
replacement frequency for existing owners. We see wage growth of 30% in
the next 5 years as economic stabilization and austerity is followed by rising
productivity, inflation, and wages. This in turn is a function of financial
services penetration in Egypt.
GB Auto maintains a market-leading 33% share of passenger car sales in
Egypt, and is one of the large distributors of passenger cars in Iraq, a
recovering market with growth potential. The company has recently
inaugurated the Prima Assembly Plant to produce the first locally assembled
Geely Emgrand7 models, as a replacement for the Hyundai Verna (18% of PC
revenues in FY 11A). We believe this will prove successful as consumer needs
(affordability, fuel economy) are closely met.
Operating leverage: cash flow accretion is immediate as CAPEX program is
complete: spending on additional showrooms, distribution network
expansion, a financing arm, after-sales services, and regional subsidiaries is
complete. What lies ahead is c. 30% in operating cash flow expansion, and
ROIC enhancement to 19.7%, in our view.
Valuation: We believe the market will begin to reward the business primarily
for its high degree of operating leverage, which should translate into EPS and
cash flow accretion ahead of peers. We assign a fair value of EGP 35/share on
a DCF basis, implying 25% premium to the current share price and initiate
coverage with a Buy recommendation. Risks: Upside: affordability macro
recovery and higher auto financing penetration. Downside: currency
devaluation, and unfavorable regulation.
EGP 35
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
80
95
110
125
140
155
170
Jan-12 Apr-12 Jul-12 Oct-12
AUTO EY EGX
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 82
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
5%
10%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
-20%
0%
20%
40%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
10%
20%
30%
0.0
1.0
2.0
3.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Ghabbour Auto
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 2.20 1.73 1.52 2.31 3.31 4.05
Diluted EPS 2.20 1.73 1.52 2.31 3.31 4.05
DPS 1.37 1.43 0.76 1.16 1.66 2.03
BVPS 17.82 18.05 18.80 19.96 21.62 23.64
Weighted average shares 129.00 129.00 129.00 129.00 129.00 129.00
Average market cap 5,598.60 2,709.00 3,586.20 3,586.20 3,586.20 3,586.20
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 12.7 16.2 18.4 12.1 8.5 6.9
P/E (x) (target price) 15.9 20.2 23.1 15.1 10.6 8.6
P/BV (x) (target price) 2.0 1.9 1.9 1.8 1.6 1.5
EV/EBITDA (x) 7.5 7.0 6.8 6.1 5.2 4.7
EV/FCF (x) (11.6) 36.6 (26.7) 17.1 9.7 9.0
EV/Invested capital (x) 1.4 1.5 1.6 1.5 1.5 1.4
Dividend yield (%) 4.9 5.1 2.7 4.1 5.9 7.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 61.4 7.9 6.0 7.4 22.8 23.5
EBITDA 39.3 7.8 2.8 10.8 18.6 10.8
EBIT 38.6 (1.6) (0.8) 15.1 22.8 13.4
Net income 39.6 (21.5) (12.2) 52.3 43.2 22.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 8.8 8.8 8.6 8.8 8.5 7.6
EBIT 7.7 7.0 6.6 7.0 7.0 6.4
Net 4.1 3.0 2.5 3.5 4.1 4.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 6.1 4.0 3.3 5.0 7.5 9.3
RoAE 13.2 9.6 8.2 11.9 15.9 17.9
RoIC 13.7 14.6 15.8 16.5 19.7 20.6
FCF margin (5.7) 1.7 (2.2) 3.2 4.5 3.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 24.8 23.8 28.4 28.0 22.5 16.0
Net debt/Equity 44.8 44.8 54.1 46.4 33.7 22.8
Interest cover (x) 2.4 2.1 2.5 3.3 4.1 5.4
Net debt/EBITDA (x) 1.7 1.6 2.0 1.6 1.1 0.7
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 83
Abacus Arqaam Capital Fundamental Data
Company profile
Ghabbour Auto is a leading automotive distributor and assembler in MENA, headquartered in Giza, within the Greater Cairo Area. The company’s operations span multiple market segments, including passenger cars, commercial vehicles, construction equipment, and motorcycles and three-wheelers, in addition to a large network of service and automotive spare parts sales-points. In Egypt, the company has the exclusivity to assemble, import and distribute passenger cars under the Hyundai and Geely brands. Under the Volvo and Mitsubishi brands, it also assembles imports and exclusively distributes commercial vehicles (buses and trucks) in Egypt, where it also manufactures trailers and superstructures. Via GB Polo, the company manufactures and assembles bus bodies for local and export markets. In Iraq, it is the sole importer and distributor of Hyundai vehicles through a joint venture, GK Auto. In addition, it exclusively distributes products in Egypt including two and three-wheelers under the Bajaj brand, tires under the Lassa and Yokohama brands, and construction equipment under the Volvo brand.
Ownership and management
ShareholdersGhabbour family 70.6%
Public 29.4%
Source: Company data
Board of DirectorsDr. Raouf Ghabbour Chairman
Mr. Aladdin Hassouna Saba Director
Dr. Walid Sulaiman Abanumay Director
Mr. Hassan Abdalla Director
Mr. Yasser Hashem Director
Mr. Nader Ghabbour COO
Mr. Ali Pandir Director
Source: Company data
Ghabbour Auto
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (EGP mn)
Sales revenue 6,873.8 7,415.3 7,860.2 8,445.7 10,371.7 12,810.0
Gross profit 885.4 883.3 931.4 1,030.9 1,265.8 1,474.3
SG&A (278.6) (229.4) (259.2) (286.4) (382.8) (495.5)
EBITDA 606.8 653.9 672.2 744.5 883.0 978.8
Depreciation & Amortisation (79.1) (134.7) (157.2) (152.0) (155.6) (153.7)
EBIT 527.7 519.2 515.0 592.5 727.5 825.1
Net interest income(expense) (171.0) (219.2) (253.9) (194.9) (158.0) (128.0)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) — — — — — —
Profit before tax 356.7 300.0 261.1 397.6 569.5 697.1
Income tax expense (72.8) (77.0) (65.3) (99.4) (142.4) (174.3)
Minorities 26.1 32.4 43.7 59.0 79.6 107.5
Other post-tax income/(expense) — — — — — —
Net profit 284.0 223.0 195.8 298.2 427.1 522.8
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit — — — — — —
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (EGPmn)
Cash and other liquid assets 828.5 1,010.1 887.4 498.2 445.3 612.3
Receivables 1,183.7 1,308.5 1,415.7 1,435.4 1,512.5 1,540.3
Inventories 1,661.1 1,259.8 1,518.6 1,584.5 1,496.9 1,521.8
Tangible fixed assets 1,688.1 1,802.7 2,038.5 2,013.1 1,909.4 1,806.9
Other assets including goodwill 220.9 224.1 224.1 224.1 224.1 224.1
Total assets 5,583.7 5,608.7 6,087.8 5,758.8 5,591.6 5,708.8
Payables 1,214.2 1,056.1 1,290.9 1,320.4 1,247.4 1,180.2
Interest bearing debt 1,859.0 2,053.6 2,200.0 1,692.3 1,384.6 1,307.7
Other liabilities 211.9 171.1 171.1 171.1 171.1 171.1
Total liabilities 3,285.1 3,280.8 3,662.0 3,183.9 2,803.1 2,659.0
Shareholders equity 2,298.6 2,327.9 2,425.8 2,574.9 2,788.5 3,049.9
Minorities 303.8 343.9 387.6 446.6 526.2 633.7
Total liabilities & shareholders equity 5,583.7 5,608.7 6,087.8 5,758.8 5,591.6 5,708.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (EGPmn)
Cashflow from operations 7.9 364.8 221.8 394.2 520.2 556.6
Net capex (400.4) (240.1) (393.0) (126.7) (51.9) (51.2)
Free cash flow (392.5) 124.6 (171.2) 267.5 468.3 505.3
Equity raised/(bought back) — (9.5) — — — —
Dividends paid (176.9) (184.4) (97.9) (149.1) (213.5) (261.4)
Net inc/(dec) in borrowings 1,073.1 192.0 146.4 (507.7) (307.7) (76.9)
Other investing/financing cash flows 177.4 53.0 — — — —
Net cash flow 681.1 175.7 (122.7) (389.2) (52.9) 167.0
Change in working capital (295.5) 98.5 (131.2) (56.0) (62.5) (120.0)
Mohammad Kamal Dahlia Sabaayon, CFA [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 84
New brand gamble (Geely) better suited for local demand than
outgoing Hyundai models- CAPEX complete, EPS accretion to
follow
We initiate with Buy and EGP 35 12M FVE
GB Auto is a play on car ownership penetration in Egypt’s urban centres, which we expect to
rise as a result of (i) shorter car replacement cycles, which currently are very long, and (ii)
absence of viable alternative vehicle options when looking for a balance of quality and cost.
We expect the business to defend market share at best, as new entrants and substitutes enter
their core Cairo market. The key determinant remains the affordability of car ownership in
Egypt, which we expect to be on a long term upward trend as macroeconomics gradually
improve, and consumer level finance improves in its availability and cost. We initiate coverage
of GB Auto with a Buy recommendation and EGP 35 price target, as we believe the market
will reward the business for growth.
Egypt is under-motorised (33 cars/1000 people vs. 102/1000 in Jordan, and the average age of
a vehicle is 35 years+). The working population of Cairo is roughly twice the size of its resident
population, suggesting that over 20mn workers commute daily to the city from far outside the
Central Business Districts. Alternative transportation modes are largely absent, rendering
private motorized travel the sole viable option for many. Equally important however is the fact
that median wages currently place car ownership out of reach.
It all boils down to income levels and bank lending: income levels dictate discretionary
spending, which affects first-time purchases, as well as car replacement frequency for existing
owners. We see wage growth of 30% in the next 5 years as economic stabilization and
austerity is followed by rising productivity, inflation, and wages. This in turn is a function of
financial services penetration in Egypt, where less than 10% of the population own bank
accounts.
GB Auto maintains a market-leading 33% share of passenger car sales in Egypt, and it’s one of
the large distributors of passenger cars in Iraq, a recovering market with growth potential. The
company has recently inaugurated the Prima Automotive Assembly Plant to produce the first
locally assembled Geely Emgrand7 models, as a replacement for the currently manufactured
Hyundai Verna (18% of PC revenues in FY 11A). GB Auto also has exclusive distribution rights
for three-wheelers from Bajaj in India, in addition to commercial vehicles under the Volvo and
Mitsubishi brands. Core competitors are Chevrolet (Mansoor) and Toyota (Futtaim), who
currently do not have comparable service and distribution capabilities to GB Auto’s. We expect
growth across all of GB Auto's divisions, but believe the the passenger cars business should
continue to drive earnings, at an average of 63% of 2012-16e gross profit. The business is also
launching an in-house vehicle finance arm, to facilitate credit in an otherwise ~100% cash
purchase market today.
Operating leverage: cash flow accretion is immediate as CAPEX program is complete:
spending on additional showrooms, distribution network expansions, a financing arm, after-
sales services, and regional subsidiaries is complete. What lies ahead is c. 30% in operating
cash flow expansion, and ROIC enhancement to 19.7%, in our view.
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 85
Exhibit 151: Passenger car sales concentrated in Egypt and Iraq
Source: Company Data, Arqaam Capital Research
Valuation: GB Auto stock is down 15% since the beginning of November, driven by the ongoing
civil unrest in Egypt. We see limited downside from these levels as we believe downside risks
are already factored in, via an index-wide discount, and our cost of capital assumptions. We
believe the market will begin to reward the business primarily for its high degree of operating
leverage, which should translate into EPS and cash flow accretion ahead of peers. We assign a
fair value of EGP 35/share on a DCF basis, implying 25% premium to the current share price
and initiate coverage with a Buy recommendation. Our valuation is based on a WACC of
19.1% (15.0% Rf, 22.5% Rd, 0.75 Beta, 11.3% Re) and a terminal growth rate of 4%.
Risks: Upside: affordability, macro recovery and higher auto financing penetration. Downside:
currency devaluation, loss of distributorship rights (Hyundai is an example) and unfavorable
regulation.
Passenger cars, 77%
Motorcycles and Three Wheelers,
14%
Commercial Vehicules and Constrcution
Equipment, 5%
Other, 4%
GB Auto revenue breakdown by segment
Passenger cars sales in Egypt,
61%
Passenger cars sales in Iraq,
39%
GB Auto passenger cars sales by country
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 86
Valuation
Substantial growth potential yet to be rewarded by market. We initiate
with Buy and 12M price target of EGP 35
Operating leverage not priced in: GB Auto stock is down 15% since the beginning of
November, driven by the ongoing civil unrest in Egypt. We see limited downside from these
levels as we believe downside risks are already factored in, via an index-wide discount, and our
cost of capital assumptions. We believe the market will begin to reward the business primarily
for its high degree of operating leverage, which should translate into EPS and cash flow
accretion ahead of peers. We assign a fair value of EGP 35/share on a DCF basis, implying 25%
premium to the current share price and initiate coverage with a Buy recommendation. Our
valuation is based on a WACC of 19.1% (15.0% Rf, 22.5% Rd, 0.75 Beta, 11.3% Re) and a
terminal growth rate of 4%.
Exhibit 152: DCF valuation suggests an EGP 35/share fair value estimate
Source: Company Data, Arqaam Capital Research
Our DCF forecast is based on a (i) relatively stable passenger car market share in Egypt of 33%,
(ii) growing car penetration rates of 44 per 1,000 population vs. a current rate of 33 per 1000,
translating into a 40% CAGR in passengers car sales revenues over the FY 13-17e period, (iii)
stable gross profit of 9% for completely- built-up (CBU) units, 15% for completely-knocked-
down (CKD) units, and 7% gross profit margin in Iraq. We see debt levels falling to EGP 1.3 bn
by FY 15e vs. EGP 1.9bn Q3 12A, as expansion GB Auto’s CAPEX program is complete.
FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT 515 593 727 825 983 1,237
157 152 156 154 155 157
EBITDA 672 745 883 979 1,138 1,394
(131) (56) (62) (120) (135) (155)
541 689 821 859 1,003 1,240
(393) (127) (52) (51) (44) (35)
Cash Tax Paid on Operations (65) (99) (142) (174) (214) (283)
83 462 626 633 744 921
Discount Factor using WACC at 19.1% 0.99 0.84 0.70 0.59 0.49 0.41
PV of Visible FCFF (adj. For stub period) 2 386 439 373 368 382
Terminal Value 6,335
Equity Valuation WACC parameters
PV of Visible FCFF 1,950 Rf 15.0%
PV of Terminal Value 2,627 EMRP 10.0%
Enterprise Value 4,577 Adjusted Beta 0.75
Cost of Equity 22.5%
Cash & Cash Equivalents 887
Investment in associates 180 Marginal tax rate 25.0%
Less: Net (Debt) Funds (1,087) Cost of Debt 11.3%
NCI (82)
Equity Value 4,475 D/C (market) 30.0%
NOSH 129 WACC 19.1%
Equity Value per Share 35 Perpetual grow th 4.0%
Free Cash Flow to Firm
DCF summary
EGP mn unless otherwise stated
Depreciation & Amortization
Working Capital Changes
Adj. Operating Cash Flow
Purchase of PPE
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 87
Peer multiples valuation suggests unwarranted FY 13-14e EV/EBITDA
discount
Based on our estimates, GB Auto currently trades at FY 13e/14e EV/EBITDA of 6.3x/5.3,
implying a c.13-22% discount to the global peer average FY 13e/14e EV/EBITDA of 7.3x/6.8x.
Looking beyond the near-term political and economic uncertainties in Egypt, we think this is
unwarranted given the Egyptian automotive industry’s low penetration levels, and long term
structural improvements to affordability and credit availability.
Exhibit 153: We believe discount to global peers is unwarranted given the growth potential of the automotive industry in Egypt
Source: Bloomberg, Arqaam Capital Research
Sensitivity
We stress test penetration rates against changes in market share, which we currently estimate
at 33%. We also gauge the change of passenger car-PC sales margins on our target price, which
remains more sensitive to changes in CBU margins than CKD.
A 60bps change in passenger car penetration rates would move our target price by
12%.
A 2bps decline in CBU margins would result in a 9% cut to our target price; whereas a
2bps cut to CKD margins would result in a 3% move in our FVE.
Exhibit 154: Price target sensitivity to changes in market dynamics
Source: Company Data, Arqaam Capital Research
Exhibit 155: Price target more sensitive to changes in CBU margin than CKD
Source: Company Data, Arqaam Capital Research
Company Market Currency Mkt Cap (USDmn)
FY 13e FY 14e
Daimler AG Germany EUR 50,917 9.2 8.8
BMW Germany EUR 52,302 7.6 7.6
Volkswagen Germany EUR 89,282 7.6 6.6
Toyota Japan JPY 136,356 10.2 8.8
Nissan Japan JPY 39,742 6.2 5.6
Hyundai Motor Korea KRW 43,326 3.3 3.1
Dogus Otomotiv Turkey TRY 799 6.6 7.3
Average 7.3 6.8
GB Auto Egypt 662 6.3 5.3
Premium/(discount) -13% -22%
EV/EBITDA
Market share Penetration rate
35 27 29 31 33 35 37 39
27.00% 30 31 32 33 34 35 36
29.00% 30 31 32 33 35 36 37
31.00% 30 32 33 34 35 37 38
33.00% 31 32 34 35 36 37 39
35.00% 31 33 34 35 37 38 40
37.00% 32 33 35 36 38 39 41
39.00% 32 34 35 37 38 40 41
Sensitivity table on GB Auto's DCF price
CKD margin CBU margin
35 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00%
11.50% 29 31 32 34 35 37 38
12.50% 30 31 33 34 35 37 38
13.50% 30 32 33 34 36 37 39
14.50% 31 32 33 35 36 38 39
15.50% 31 32 34 35 37 38 39
16.50% 31 33 34 36 37 38 40
17.50% 32 33 35 36 37 39 40
Sensitivity table on GB Auto's DCF price
January 18 2013
Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 88
Business Trends
Exhibit 156: PC sales to remain the main contributor of total revenues
Source: Company Data, Arqaam Capital Research
Exhibit 157: Net margins to improve on decreasing debt …………….
Source: Company Data, Arqaam Capital Research
Exhibit 158: GB Auto market share to remain stable
Source: Company Data, Arqaam Capital Research
Exhibit 159: 40%+ earnings growth in FY 13-14e
Source: Company Data, Arqaam Capital Research
Exhibit 160: D/E to peak in FY 12e
Source: Company Data, Arqaam Capital Research
Exhibit 161: Material improvement in CFO starting FY 14e
Source: Company Data, Arqaam Capital Research
68%
78% 77% 77% 79%79%
--
2,000
4,000
6,000
8,000
10,000
12,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenues by segment (EGPmn)
Passenger cars Motorcycles and Three Wheelers Commercial vehicles Other
--
2
4
6
8
10
12
14
16
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins (%)
Gross margin Net margin
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
--
50,000
100,000
150,000
200,000
250,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e
PC sales in Egypt
Annual PC sales in Egypt GB annual PC sales GB Market share
436
607 654
794
919
1,133 1,097
1,204
205 258
191 152 239
347 415
498
--
200
400
600
800
1,000
1,200
1,400
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e
Earnings (EGPmn)
EBITDA Net income
--%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
--
500
1,000
1,500
2,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e
Total debt (EGPmn) vs. D/E (%)
Debt Debt/equity
--%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
--
100
200
300
400
500
600
700
800
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
CFO/sales
cash_from_operations CFO/sales
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Haidar Arqaam Capital Research Offshore s.a.l.
Saudi Arabia – Consumer staples Almarai Company
SELL
Consumer staples / Saudi Arabia Bloomberg code ALMARAI AB
Market index SASEIDX
Price target (local) 52
Upside (%) -20.2
Market data 17/01/2013
Last closing price 65.0
52 Week range 56.4-74.8
Market cap (SAR mn) 25,998
Market cap (USD mn) 6,932
Average daily volume (SAR mn) 40.2
Average daily volume (USD mn) 10.7
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 7,951.0 9,994.3 11,641.7 13,356.9
EBITDA 2,250.3 2,509.6 2,848.7 3,339.1
Net income 1,139.5 1,444.4 1,684.3 2,088.7
EPS 4.95 3.61 4.21 5.22
P/E (current price) 13.1 18.0 15.4 12.4
BVPS 29.5 19.1 21.6 24.7
P/B (current price) 2.2 3.4 3.0 2.6
EV/EBITDA (current price) 15.6 14.0 12.3 10.5
Div. yield (%) 2.0 2.2 2.6 3.2
FCF margin (%) (14.0) (10.4) 0.6 4.2
Net debt/EBITDA (x) 3.0 3.4 3.3 2.9
Net debt/Capital (%) 48.6 51.9 51.2 49.2
Interest cover (x) 11.2 9.4 9.3 10.6
RoAA (%) 8.1 8.4 8.5 9.6
RoAE (%) 17.6 20.0 20.7 22.5
RoIC (%) 9.1 9.7 10.1 11.4
Main product line (dairy) facing market share loss due to rising
competition and limited pricing power
Smallest revenue contributor (poultry) to post highest growth
(100%+ by FY 13e) on new production capability and consumer
conversion towards fresh product
Unwarranted 15.4x FY 13e P/E, 12.3x EV/EBITDA multiples at
40% premium to peers. Initiate with Sell and SAR 52 fair value
estimate
Almarai is a leading regional brand in dairy, juice, bakery, and
poultry products in the GCC with a dominant presence in Saudi Arabia
(68% revenues domestic: 32% GCC). The company is planning SAR
15bn in CAPEX in the next 5 years, earmarked for its poultry and
bakery divisions. We expect the units to deliver the bulk of revenue
growth in the next 5 years. Conversely, Almarai’s dairy segments
(50%+ of total business) are expected to experience a slowdown in
growth going forward as a result of rising competition and market
share loss. Despite medium-term visibility on non-dairy sales growth,
we remain skeptical on the full execution of the FY 13-17e CAPEX plan
in the presence of a heavily leveraged balance sheet, and believe the
market is overly positive on the impact of capacity additions in
secondary business lines on growth. We initiate with a Sell
recommendation and SAR 52 FVE.
Valuation: We value Almarai at SAR 52/share using DCF (9.9% WACC
and 4% TGR). Our price target implies FY 13e P/E and EV/EBITDA of
12.4x and 10.5x, respectively, at a mild 10% discount to domestic
peers, which we find reasonable given limited growth prospects in the
dairy segment, in addition to an uncertain short-term outlook on the
implications of the IDJ (International Dairy & Juice) consolidation. We
believe the market has consistently favored Almarai for its dominant
market position and size relative to peers, and is rewarding the
business with an unwarranted 40% premium multiples to peers at
current valuation.
Risk: Delays in deploying new capacities and continued unrest in
Egypt. Further increases in global grain prices would directly impact
margins.
SAR 52
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
89
98
107
116
125
134
Jan-12 Apr-12 Jul-12 Oct-12
ALMARAI AB SASEIDX
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 90
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
40%
45%
50%
55%
0.0
2.0
4.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Almarai Company
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 5.59 4.95 3.61 4.21 5.22 5.94
Diluted EPS 5.59 4.95 3.61 4.21 5.22 5.94
DPS 1.98 2.24 1.44 1.68 2.09 2.37
BVPS 26.89 29.47 19.09 21.61 24.74 28.31
Weighted average shares 172.50 230.00 315.00 400.00 400.00 400.00
Average market cap 10,844.50 14,747.60 26,000.00 26,000.00 26,000.00 26,000.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 11.6 13.1 18.0 15.4 12.4 11.0
P/E (x) (target price) 9.3 10.5 14.4 12.3 9.9 8.7
P/BV (x) (target price) 1.9 1.8 2.7 2.4 2.1 1.8
EV/EBITDA (x) (target price) 14.2 13.3 11.9 10.5 8.9 8.0
EV/FCF (x) (112.4) (26.8) (28.8) 435.3 53.7 32.1
EV/Invested capital (x) 2.8 2.4 2.0 1.8 1.6 1.5
Dividend yield (%) 1.7 2.0 2.2 2.6 3.2 3.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 18.1 14.7 25.7 16.5 14.7 13.3
EBITDA 17.5 7.4 11.5 13.5 17.2 11.4
EBIT 14.2 3.9 11.3 15.8 21.6 12.6
Net income 17.2 (11.4) 26.8 16.6 24.0 13.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 30.2 28.3 25.1 24.5 25.0 24.6
EBIT 21.1 19.1 16.9 16.8 17.8 17.7
Net 18.5 14.3 14.5 14.5 15.6 15.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 10.9 8.1 8.4 8.5 9.6 9.9
RoAE 22.2 17.6 20.0 20.7 22.5 22.4
RoIC 12.3 9.1 9.7 10.1 11.4 11.7
FCF margin (3.8) (14.0) (10.4) 0.6 4.2 6.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 41.8 48.6 51.9 51.2 49.2 46.2
Net debt/Equity 74.5 98.2 110.9 107.4 98.9 88.7
Interest cover (x) 12.1 11.2 9.4 9.3 10.6 11.4
Net debt/EBITDA (x) 2.2 3.0 3.4 3.3 2.9 2.7
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 91
Abacus Arqaam Capital Fundamental Data
Company profile
Almarai is one of the leading regional brands
in dairy, juice, bakery, and poultry products,
with a market leading share of the fresh milk
industry (52%), laban (milk based beverage)
(56%), zabadi (yoghurt) (45%), cheese (42%),
fresh juices (41%), and baked goods (27% in
KSA). Its distribution network connects to
over 50,000 retail outlets around the GCC
through 90 sales depots. The company is
undergoing substantial expansions at its
poultry and bakery divisions, and is planning
to spend SAR 15bn in CAPEX in the coming 5
years. Almarai recently expanded its presence
to Egypt after the consolidation of IDJ in Q1
12A.
Ownership and management
Shareholders
Savola Group Company 36.5%
HH Prince Sultan Bin Mohammed Bin Saud Al Kabir 28.6%
Omran Mohammed Omran and Partners Company 5.7%
Public 29.2%
Source: Zawya
Board of DirectorsHHPrince Sultan Bin Mohammed Bin Saud Al Kabir Chairman
Mr Abdulrahman Abdulaziz Al Muhanna Director
Mr Moussa Omran Mohammed Al Omran Director
Mr Nasser Mohammed Al Mutaw w a Director
Mr Ibrahim Mohammed Al Issa Director
Dr Abdulraouf Mohammed Manaa Director
Mr Ibrahim Bin Hassan Al Madhoun Director
Mr Suleiman Bin Abdulkader Al Muhaidab Director
Source: Zawya
Almarai Company
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARm)
Sales revenue 6,930.9 7,951.0 9,994.3 11,641.7 13,356.9 15,128.3
Gross profit 2,735.9 2,996.5 3,647.9 4,249.2 4,942.1 5,597.5
SG&A (1,275.2) (1,478.9) (1,958.9) (2,293.4) (2,564.5) (2,919.8)
EBITDA 2,096.0 2,250.3 2,509.6 2,848.7 3,339.1 3,719.4
Depreciation & Amortisation (635.3) (732.7) (820.5) (892.9) (961.5) (1,041.7)
EBIT 1,460.7 1,517.6 1,689.0 1,955.8 2,377.5 2,677.7
Net interest income(expense) (120.6) (135.0) (179.7) (209.3) (224.3) (234.6)
Associates/affiliates (5.9) (42.3) (28.2) (14.1) — 8.3
Exceptionals/extraordinaries — (160.2) — — — —
Other pre-tax income/(expense) — — — — — —
Profit before tax 1,334.2 1,180.1 1,481.2 1,732.4 2,153.3 2,451.4
Income tax expense (27.2) (33.2) (44.4) (52.0) (64.6) (73.5)
Minorities (21.6) (7.4) 7.7 3.8 — (3.8)
Other post-tax income/(expense) — — — — — —
Net profit 1,285.4 1,139.5 1,444.4 1,684.3 2,088.7 2,374.1
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 1,285.4 1,139.5 1,444.4 1,684.3 2,088.7 2,374.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARm)
Cash and equivalents 240.8 272.0 229.3 214.8 210.6 354.4
Receivables 613.8 617.4 821.5 956.9 1,097.8 1,243.4
Inventories 1,299.3 1,696.8 2,086.5 2,430.4 2,766.5 3,133.4
Tangible fixed assets 7,866.6 10,508.1 12,887.6 14,494.7 16,033.2 17,491.5
Other assets including goodwill 2,550.7 2,559.5 2,662.2 2,712.2 2,762.2 2,812.2
Total assets 12,571.2 15,653.8 18,687.1 20,809.0 22,870.4 25,035.0
Payables 1,253.4 1,513.2 1,912.6 2,227.9 2,536.0 2,872.3
Interest bearing debt 4,847.2 6,925.2 8,700.0 9,500.0 10,000.0 10,400.0
Other liabilities 285.2 437.8 437.8 437.8 437.8 437.8
Total liabilities 6,385.8 8,876.2 11,050.4 12,165.7 12,973.8 13,710.2
Shareholders equity 6,185.4 6,777.7 7,636.6 8,643.3 9,896.5 11,324.8
Minorities — — — — — —
Total liabilities & shareholders equity 12,571.2 15,653.8 18,687.1 20,809.0 22,870.4 25,035.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARm)
Cashflow from operations 1,965.0 1,924.0 2,162.6 2,568.5 3,055.5 3,428.0
Net capex (2,230.3) (3,035.3) (3,200.0) (2,500.0) (2,500.0) (2,500.0)
Free cash flow (265.3) (1,111.3) (1,037.4) 68.5 555.5 928.0
Equity raised/(bought back) — — — — — —
Dividends paid (454.9) (515.6) (577.8) (673.7) (835.5) (949.6)
Net inc/(dec) in borrowings 470.5 2,077.5 1,774.8 800.0 500.0 400.0
Other investing/financing cash flows (17.2) (419.3) (202.4) (209.3) (224.3) (234.6)
Net cash flow (266.9) 31.2 (42.7) (14.5) (4.2) 143.8
Change in working capital 6.3 (171.6) (194.3) (164.1) (169.0) (176.2)
Mohammad Kamal Mohamad Haidar [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 92
Initiate with a Sell recommendation and SAR 52 price target
Main product line (dairy) facing market share loss due to rising competition and
little pricing power
Smallest revenue contributor (poultry) to post highest growth (100%+ by FY 13e)
on new production capability and consumer conversion towards fresh product
Unwarranted 15.4x FY 13e P/E, 12.3x EV/EBITDA multiples at 40% premium to
peers. Initiate with a Sell and SAR 52 fair value estimate
Almarai is a leading regional brand in dairy, juice, bakery, and poultry products in the GCC
with a dominant presence in Saudi Arabia (68% domestic, 32% regional). The company enjoys a
leading market position in GCC in fresh milk market (52%), laban (milk based beverage) (56%),
zabadi (yoghurt) (45%), cheese (42%), fresh juices (41%), and baked goods (27% in KSA). The
business is planning SAR 15bn in CAPEX in the next 5 years, earmarked for its poultry and
bakery divisions. We expect the units to deliver the bulk of revenue growth in the next 5 years.
Conversely, Almarai’s dairy segments (50%+ of total business) are expected to experience a
slowdown in growth going forward as a result of rising competition and market share loss.
Almarai recently raised its stake in IDJ (International Dairy & Juice, a food producer in Egypt) to
broaden its operations in Egypt. The move should drive strong (25%) top-line growth in the
next 3 years, but to concurrently produce dilution to margins due to a less efficient
management of SG&A costs versus Almarai’s existing operations. Despite medium-term
growth visibility on non-dairy products, we remain skeptical on the full execution of FY 13-17e
CAPEX plan in the presence of a heavily leveraged balance sheet, and believe the market is
overly positive on the impact of capacity additions in secondary business lines on growth. We
initiate with a Sell and SAR 52 FVE.
Unwarranted premium at current multiples: We value Almarai at SAR 52/share using DCF
(9.9% WACC, 4% TGR). Almarai trades at FY 13e 15.4x EPS and FY 14e 12.4x EPS, a significant
premium of 40% versus peers in the consumer’s staples industry.
Risk: Delays in deploying new capacity in the poultry division, and continued unrest in Egypt,
affecting sales growth at IDJ.
Exhibit 162: 9M 12A revenue breakdown by geography
Source: Company Data, Arqaam Capital Research
Exhibit 163: Market position in GCC, by product line
Source: Company Data, Arqaam Capital Research *KSA only
Saudi Arabia 67.5%
Other GCC countries
26.1%
Other countries
6.4%
Revenue breakdown by geography (9M 12A)
52.5% 56.1%
45.1% 41.9% 40.8%
27.1%
--%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Fresh milk Laban Zabadi Jar cheese Fresh juices Baked goods*
Market share by product in GCC
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 93
Valuation
Unwarranted 40% premium to peers at 15.4x FY 13e P/E, 12.3x EV/EBITDA.
Initiate with a Sell and SAR 52 fair value estimate
Unwarranted premium at current multiples: We value Almarai at SAR 52/share using DCF
(9.9% WACC, 4% TGR). Our price target implies FY 13e P/E and EV/EBITDA of 12.4x and 10.5x,
respectively, a discount of 10% to domestic peers, which we find reasonable given limited
growth prospects in the dairy segment and huge CAPEX commitments in an already highly-
levered business, in addition to uncertainty on the implications of the IDJ consolidation in the
near term. We believe the market has consistently favored Almarai for its dominant position
and size relative to peers, and is overreacting to the EPS accretion potential of capacity
expansions in its secondary business lines. We initiate with a Sell and SAR 52 FVE.
Exhibit 164: DCF summary
Source: Arqaam Capital Research, Company Data
Almarai
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 1,897 2,306 2,597 2,843 3,104
741 843 912 992 1,086
EBITDA 2,638 3,149 3,509 3,835 4,190
(164) (169) (176) (152) (162)
2,474 2,980 3,333 3,683 4,028
(2,500) (2,500) (2,500) (2,500) (1,800)
(26) 480 833 1,183 2,228
0.91 0.83 0.75 0.69 0.62
69 454 688 877 1,485
Terminal Value 42,263
Equity Valuation WACC parameters
PV of Visible FCFF 3,562 Rf 4.2%
PV of Terminal Value 26,395 EMRP 10.0%
Enterprise Value 29,956 Adjusted Beta 0.76
Cost of Equity 11.8%
Cash & Cash Equivalents 202
Less: Net (Debt) Funds (8,901) Marginal tax rate 2.5%
Less: NCI 707
Add: JV and associates 319
Cost of Debt 4.0%
Equity Value 20,869 D/C (market) 25.0%
NOSH 400 WACC 9.9%
Equity Value per Share 52 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 10.5 9.0 8.1 7.4 6.7
P/E 12.4 10.0 8.8 8.0 7.2
P/B 2.4 2.1 1.8 1.6 1.4
* Based on after-tax operating profit
Free Cash Flow to Firm
Discount Factor using WACC at 8.88%
PV of Visible FCFF
DCF summary
SARmn unless otherwise stated
Depreciation & Amortization
Working Capital Changes
Operating Cash Flow
Purchase of PPE
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 94
Exhibit 165: Almarai in peer context
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
Almarai 15.4 12.4 3.0 2.6 12.3 10.5
Average consumer staples 11.0 9.3 1.9 1.7 11.5 10.0
Premium / (discount) 40.6% 34.6% 58.6% 55.3% 6.9% 5.6%
Average consumer discretionary 9.4 8.2 2.7 2.4 7.3 6.5
Premium / (discount) 63.9% 52.4% 9.7% 8.7% 69.8% 61.6%
Average retailers 13.8 12.4 3.9 3.4 12.4 11.1
Premium / (discount) 11.8% 0.6% (22.4%) (21.7%) (0.7%) (5.5%)
Average coverage universe 12.2 10.4 2.7 2.4 10.9 9.6
Premium / (discount) 26.6% 19.5% 12.0% 11.1% 13.1% 10.0%
Source: Company Data, Arqaam Capital Research
Almarai trades at FY 13e 15.4x EPS and FY 14e 12.4x EPS, a significant premium of 40% versus
peers in the consumer’s staples industry.
Exhibit 166: Implied FY 13e P/E multiples at target price
Source: Company Data, Arqaam Capital Research
Exhibit 167: Highest P/E multiples in our coverage universe: 40% premium to peers
Source: Company Data, Arqaam Capital Research
Exhibit 168: The market has consistently rewarded Almarai for its market share leadership…
Source: Factset
Exhibit 169: …but is fully pricing in the business at current multiples
Source: Factset
18.7x
15.7x
14.2x
12.6x 12.4x
10.2x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Herfy Halwani Juhayna SADAFCO Almarai Agthia
Target equity value / FY 13e net income
Almarai
Halwani
SADAFCO
Herfy
SavolaSPM
Juhayna
Aghtia
AUTO
Budget
Tayyar
Catering
Shaker
Gasco
Othaim
Hokair
JarirExtra
Meera
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Current market cap/FY 13e book value
Current market cap/FY 13e net income
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Mar
10
May
10
Jul 1
0
Sep
10
No
v 1
0
Jan
11
Mar
11
May
11
Jul 1
1
Sep
11
No
v 1
1
Jan
12
Mar
12
May
12
Jul 1
2
Sep
12
No
v 1
2
Historic P/E
Almarai Savola Sadafco JADCO Halwani
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
No
v 0
9
Jan
10
Mar
10
May
10
Jul 1
0
Sep
10
No
v 1
0
Jan
11
Mar
11
May
11
Jul 1
1
Sep
11
No
v 1
1
Jan
12
Mar
12
May
12
Jul 1
2
Sep
12
Historic P/B
Almarai Savola Sadafco JADCO Halwani
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 95
Risk: Delays in deploying new capacity in the poultry division, and continued unrest in Egypt,
affecting sales growth at IDJ. Further increases in global grain prices would result in margin
compression at the gross level; for every 5% move in grain prices, we estimate a 79bps
compression in GPM.
Valuation sensitivity
Exhibit 170: A 200bps growth in input costs lowers our FVE by 20%...
Source: Company Data, Arqaam Capital Research
Exhibit 171: …and creates 13% EPS downside in FY 13e
Source: Company Data, Arqaam Capital Research
Exhibit 172: FVE sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
Exhibit 173: EV sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
COGS as a % of sales SG&A as a % of sales
52 16.50% 16.00% 15.50% 15.00% 14.50%
65.0% 36 39 42 44 47
64.0% 42 44 47 49 52
63.0% 47 50 52 55 57
62.0% 52 55 58 60 63
61.0% 58 60 63 65 68
DCF sensitivity- cost components
COGS as a % of sales SG&A as a % of sales
4.21 17.00% 16.50% 16.00% 15.50% 15.00%
65.5% 3.36 3.50 3.65 3.79 3.93
64.5% 3.65 3.79 3.93 4.07 4.21
63.5% 3.93 4.07 4.21 4.35 4.49
62.5% 4.21 4.35 4.49 4.63 4.78
61.5% 4.49 4.63 4.78 4.92 5.06
EPS sensitivity- cost components
Rf Growth
52 3.40% 3.70% 4.00% 4.30% 4.60%
4.80% 41 43 46 49 53
4.50% 43 46 49 52 56
4.20% 46 49 52 56 60
3.90% 49 52 56 60 64
3.60% 52 55 59 64 69
DCF sensitivity- Risk-free rate vs. Terminal growth
Cost of debt D/(D+E) (at market)
29,967 15.00% 20.00% 25.00% 30.00% 35.00%
5.00% 23,274 25,683 28,566 32,078 36,444
4.50% 23,750 26,250 29,252 32,922 37,509
4.00% 24,244 26,839 29,967 33,807 38,631
3.50% 24,756 27,452 30,713 34,736 39,815
3.00% 25,288 28,090 31,494 35,711 41,067
DCF sensitivity- leverage vs. cost of debt
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 96
Business Overview
Revenues
Exhibit 174: Segment revenues and growth assumptions
Revenue (SARmn) FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Fresh dairy 3,169 3,476 3,789 4,092 4,378 4,641 4,873 5,068
10% 9% 8% 7% 6% 5% 4%
Long life dairy 659 761 830 896 959 1,016 1,067 1,110
16% 9% 8% 7% 6% 5% 4%
Fruit juice 745 888 1,226 1,409 1,621 1,864 2,144 2,465
19% 38% 15% 15% 15% 15% 15%
Cheese and butter 1,282 1,447 1,606 1,766 1,943 2,137 2,351 2,586
13% 11% 10% 10% 10% 10% 10%
Poultry 176 319 511 1,070 1,629 2,189 2,408 2,627
81% 60% 110% 52% 34% 10% 9%
Arable and horticulture 48 73 156 172 189 208 229 251
52% 115% 10% 10% 10% 10% 10%
Other 31 21 53 58 64 71 78 85
(31%) 150% 10% 10% 10% 10% 10%
IDJ 530 689 861 1,034 1,240 1,488
30% 25% 20% 20% 20%
Total 6,931 7,951 9,994 11,642 13,357 15,128 16,653 18,285
15% 26% 16% 15% 13% 10% 10%
Source: Company Data, Arqaam Capital Research
We expect Almarai to continue reporting strong revenue growth, in FY 12e: (+25%) largely
due to the IDJ consolidation exercise, which adds c.7% to FY 11A revenues. The poultry and
bakery segments will deliver the strongest elements of top-line growth in the next 5 years,
following capacity expansions. Conversely, Almarai’s dairy segments (50%+ of total business)
are expected to experience declining growth in FY 13e onwards, given limited future capacity
expansions in the segment. Margins on the gross level should stabilise at current levels
following the IDJ consolidation, but are expected to experience pressure at the EBIT level.
Advanced logistics capabilities allow for strong domestic penetration and market share:
Almarai is a leading regional brand in dairy, juice, bakery, and poultry products in the GCC with
dominant presence in Saudi Arabia (68:32 KSA:GCC). Its distribution network connects to over
50,000 retail outlets around the GCC through 90 sales depots, which allows the company to
operate a 6-day order placement cycle, and easy access to modern trade markets. Almarai
currently enjoys a leading market position in the GCC in the fresh milk market (52%), laban
(56%), zabadi (45%), cheese (42%), fresh juices (41%), and baked goods (27% in KSA).
Competition compromises market share and drives down growth in the group’s largest
segment: Long-life and fresh dairy (50%+ of total sales) products are not expected to
experience meaningful growth in the next 5 years, due to market share loss on intensified
competition. In the absence of further capacity expansions, we believe Almarai will maintain
its leading position in the GCC milk market as new players join, but expect it to grow in line
with the industry average (5%) by FY 15e, down from current levels of 9%.
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 97
Significant expansions at the poultry division drive massive growth in the segment; increased
demand on fresh poultry shifts focus away from frozen products: Almarai is planning to
expand capacity at its poultry division to 150mn birds (+300%) by FY 15e, up from 35mn birds
currently in coops, on the back of large assigned CAPEX (SAR 4bn) of which SAR 1.3bn is
already incurred. Poultry sales are expected to grow 55% in FY 12e and 110% in FY 13e, after
which the segment should contribute c.15% of total revenues in FY 15e. We however see little
support for EPS on the back of the segment’s expansion, and do not expect EPS accretion
before FY 15e, when CAPEX is fully deployed. Almarai first introduced the business in FY 09
with 17mn birds.
Margins
Lower subsidies on exported products threaten international margins: The KSA government
regulates milk pricing in the Kingdom via price ceilings on dairy products, and provides
subsidies on input costs to domestic producers in the form of offsets to the costs of irrigation
water and feedstock. Subsidies on exported sales however are capped at 20% of local sales
subsidies, resulting in lower margins (vs. domestic sales), but nevertheless a premium to un-
subsidised countries (excluding the UAE), which contribute to c.30% of total sales. Total
government subsidies on input costs in FY 12 totaled SAR 150mn (7% of poultry/feed COGS) vs.
SAR 80mn in FY 11 (5%). We expect blended gross margins to remain flat at current levels
(c.36.5%) in FY 12e-13e, in our view.
Exhibit 175: Superior margins relative to peers at Almarai as a result of government subsidies and comprehensive hedges against input costs
Source: Company Data, Arqaam Capital Research *Q2 12A numbers
Higher Saudisation costs to drive down EBIT margins in the coming years: Almarai will likely
exercise a degree of SG&A control, following the consolidation of IDJ which added c.100bps to
its SG&A bill (as a % of revenues). The full integration of IDJ into Almarai in the near term
should stabilise SG&A costs at current levels (19.7% of revenues), in contrast to saudisation
costs which are expected to adversely impact EBIT margin in the coming years.
36.5%
31.1% 30.4% 31.2%
16.4%
24.2%
13.4% 15.8%
21.1%
10.1%
14.8%
9.8% 9.2%
21.3%
4.8%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Almarai SADAFCO* Halwani Herfy Savola
Margins (9M 12A)
Gross margin EBITDA margin Net margin
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 98
GCC markets to constitute the bulk of offshore activities; growth and margin performance
remain a function of KSA operations: International operations currently account for 32.5% of
sales, and are largely GCC-based. Sales from growing segments (poultry, bakery), which are (i)
largely domestic, (ii) highly profitable (60-70% GPM), will likely drive up margins on aggregate.
Sales in Egypt are also likely to rise (from 3% of revenues) after the inclusion of IDJ, which is
modeled to grow at 3-year CAGR of 25%.
25% hedge on grain prices leaves room for margin pressures in the poultry and dairy
segments: Input costs are equally split between concentrates, packaging, and feedstock.
Feedstock costs are highly sensitive to global grain prices. This is partially offset by hedges on
grain prices (25% of total) and long-term feedstock agreements which cover 12 months of
poultry/dairy operations. We model for stable commodity prices, but highlight that a 5% move
in grain costs would produce a 79bps change in margins, (post hedge).
CAPEX
FY 12-17e CAPEX is aggressive: Almarai launched its 5-year SAR 15bn CAPEX programme to (i)
add production capacity (poultry, bakery), (ii) expand distribution networks (i.e. purchase
trucks), (iii) build a new UHT factory, and (iv) cover maintenance works. CAPEX expenses in Q3
12 totaled SAR 2.3bn (SAR 1.3bn on the poultry segment alone), and are expected to reach SAR
3.3bn by year end, by our estimates. We expect operating cash flows to be sufficient to cover
annual capital expenditures (SAR 2.5bn) in FY 13-16e, and to partially reduce leverage (SAR
10.4bn in FY 15e, 92% D/E). OCF margins, in our view, will remain in the 20%+ range level post-
FY 12e, vs. 15% on average across the sector.
IDJ consolidation to produce margin dilution; demand recovery in Egypt key: Almarai raised
its stake in IDJ (dairy producer that mainly operates in Egypt and Jordan) in Q1 12A to broaden
its regional exposure. IDJ currently operates at 3-4% EBIT margins (vs. 19.1% at Almarai), due
to less efficient SG&A cost control, which is expected to dilute margins at the overall business.
IDJ margins however are expected to climb to 10% in the coming two years as full integration
into Almarai completes, adding c.50bps to blended EBIT margins in FY 14e. We expect IDJ to
grow at a 3-year CAGR of 25% conditional on a macro recovery in Egypt, lifting IDJ into positive
EPS contribution.
Exhibit 176: Medium term CAPEX covered by borrowings…
Source: Company Data, Arqaam Capital Research
Exhibit 177: …which pushes up D/E to 110% in FY 13e
Source: Company Data, Arqaam Capital Research
20.0%
20.5%
21.0%
21.5%
22.0%
22.5%
23.0%
23.5%
24.0%
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
SARmn
CAPEX OCF OCF margin (RHS)
--%
20%
40%
60%
80%
100%
120%
--
2,000
4,000
6,000
8,000
10,000
12,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Total borrowings (SARmn)
Total borrowings D/E (RHS)
January 18 2013
Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 99
Business trends
Exhibit 178: IDJ consolidation in FY 12e impacts revenue growth ….
Source: Company Data, Arqaam Capital Research
Exhibit 179: Almarai’s product mix to gradually diversify away from dairy
Source: Company Data, Arqaam Capital Research
Exhibit 180: IDJ consolidation causes 220bps compression in EBIT margins in FY 12e
Source: Arqaam Capital Research, Company Data
Exhibit 181: Poultry segment expected to remain in the red until FY 15e, when expansion CAPEX is fully deployed
Source: Arqaam Capital Research, Company Data *KSA only
Exhibit 182: Dividends at 40% payout despite heavy CAPEX ………..
Source: Arqaam Capital Research, Company Data
Exhibit 183: Weak asset and capital returns given high leverage
Source: Arqaam Capital Research, Company Data
--%
5%
10%
15%
20%
25%
30%
--
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues (SARmn)
Total Revenues Revenue growth (RHS)
84% 83% 75%
70% 67% 64%
12% 12% 13%
13% 13% 13%
3% 4% 5% 9% 12% 14%
--%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenue breakdown by segment
Dairy products Bakery Poultry Arable and horticulture Other IDJ
39.5% 37.7% 36.5% 36.5% 37.0%
27.2% 25.6%
24.3% 24.0% 24.6% 21.1%
19.1% 16.9% 16.8% 17.8% 18.5%
14.3% 14.5% 14.5% 15.6%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
FY 10A FY 11A FY 12e FY 13e FY 14e
Gross margin EBITDA margin EBIT margin Net margin
17.1% 15.2%
12.0%
(18.7%)
(25.0%)
(20.0%)
(15.0%)
(10.0%)
(5.0%)
--%
5.0%
10.0%
15.0%
20.0%
Dairy and juices Arable and horticulture
Bakery Poultry
Net margin by business segment (9M 12A)
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
--
1,000
2,000
3,000
4,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Dividends
CAPEX
CFO
20.8%
16.8%
18.9% 19.5% 21.1% 21.0%
12.3%
9.1% 9.7% 10.1% 11.4% 11.7%
10.2%
7.3% 7.7% 8.1% 9.1% 9.5%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
RoE RoIC RoA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Hammoud Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer discretionary GASCO
SELL
Consumer discretionary / Saudi Arabia Bloomberg code NGIC AB
Market index SASEIDX
Price target (local) 16.0
Upside (%) -15.8
Market data 17/01/2013
Last closing price 19.0
52 Week range 17.6-26.5
Market cap (SAR mn) 1,425
Market cap (USD mn) 380
Average daily traded value (SAR mn) 2.3
Average daily traded value (USD mn) 0.6
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,671.5 1,756.6 1,828.0 1,911.3
EBITDA 147.6 157.4 156.9 162.4
Net income 106.3 111.2 113.3 120.5
EPS 1.42 1.48 1.51 1.61
P/E (current price) 14.8 14.2 13.9 13.1
BVPS 13.7 13.7 13.7 13.8
P/B (current price) 1.5 1.5 1.5 1.5
EV/EBITDA (current price) 8.2 7.7 7.7 7.4
Div. yield (%) 3.3 7.1 7.1 7.1
FCF margin (%) 5.3 7.5 7.1 7.0
Net debt/EBITDA (x) (0.3) (0.6) (0.7) (0.7)
Net debt/Capital (%) (4.1) (9.3) (10.2) (11.2)
Interest cover (x) — — — —
RoAA (%) 7.3 7.5 7.6 8.0
RoAE (%) 10.5 10.8 11.0 11.7
RoIC (%) 7.6 8.9 9.1 9.7
Industry deregulation a cause for concern, margins subpar vs. global
peers, 20% on FY 13e EV/EBITDA discount warranted
National Gas and Industrialisation Co. (GASCO) is a specialised liquefied
petroleum gas (LPG) distributor in Saudi Arabia, enjoying a monopoly in the
distribution of LPG products across the Kingdom. GASCO generates > 90% of
sales via its gas distribution business.
Potential industry deregulation to introduce competitive pressures on
margins: The Council for Competition Protection (CCP) has approved a verdict
to withhold the renewal of contract with GASCO, which is set to expire in FY
14e. This step appears to be a precursor to the deregulation of the LPG
industry in Saudi Arabia, as early as H2 14e. We believe that the authorities will
prioritise consumer interests above all else going forward, in the aftermath of
regional social unrest and the expansion of welfare, social benefits, subsidies,
and public sector wage increases in the Kingdom. This will likely translate into
allowing competition in the LPG sector to play out in favour of consumers, at
the expense of commercial entities such as GASCO. We consequently initiate
with Sell and an SAR 16 fair value estimate.
Population and GDP growth to drive modest top-line expansion: LPG demand
in KSA is either industrial in nature, or focused on domestic cooking needs
(cooling and heating are delivered via other energy source). We expect
household demand rise in line with (i) the rate of household formation in
major cities, which we model at 2.0%- a standard function of population
growth and (ii) urbanisation outside of dense districts, which we expect to
grow at 3%. We currently see cumulative residential supply at 5.6mn units,
which we forecast to grow to 5.7mn in FY 13e, outpacing population growth
(2.0% 5-yr CAGR) as average household sizes shrink.
Margins are structurally thin: GPMs have consistently been in single-digit
territory (avg. 9% FY 09-11A vs. 14% peers). We however model for one-time
50bps expansion in FY 13e on the back of more efficient cylinders and tanks
production (+200bps vs. FY 11A), on larger scale.
We perform a sensitivity exercise to measure the effect of deregulation on our
valuation. This suggests that a 25% market share loss could lead to EV and FVE
dilution of 24% and 22%, respectively.
Valuation: Our PT of SAR 16 implies a 10.6x FY 13e EPS; a 15% discount to
global peers. We largely warrant the discount on deregulation risk. We
perform a sensitivity exercise to measure the effect of deregulation on our
valuation. This suggests that a 25% market share loss could lead to EPS and EV
dilution of 20% and 22%, respectively.
SAR 16
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
81
93
105
117
129
141
Jan-12 Apr-12 Jul-12 Oct-12
NGIC AB SASEIDX
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 101
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
5%
10%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
2%
4%
6%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-15%
-10%
-5%
0%
-1.0
-0.5
0.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
National Gas & Industrialisation Company
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 1.20 1.42 1.48 1.51 1.61 1.69
Diluted EPS 1.20 1.42 1.48 1.51 1.61 1.69
DPS 0.50 0.70 1.50 1.50 1.50 1.50
BVPS 13.36 13.72 13.70 13.71 13.82 14.00
Weighted average shares 75.00 75.00 75.00 75.00 75.00 75.00
Average market cap 1,875.00 1,650.00 1,500.00 1,500.00 1,500.00 1,500.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 17.5 14.8 14.2 13.9 13.1 12.5
P/E (x) (target price) 13.3 11.3 10.8 10.6 10.0 9.5
P/BV (x) (target price) 1.2 1.2 1.2 1.2 1.2 1.1
EV/EBITDA (x) (target price) 9.9 9.2 8.7 8.7 8.4 8.2
EV/FCF (x) 15.9 13.5 9.1 9.3 9.1 8.9
EV/Invested capital (x) 1.2 1.2 1.2 1.2 1.2 1.1
Dividend yield (%) 2.4 3.3 7.1 7.1 7.1 7.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 2.3 5.7 5.1 4.1 4.6 3.6
EBITDA 6.1 7.0 6.7 (0.3) 3.5 2.6
EBIT 2.5 (6.0) 15.5 2.2 7.6 6.0
Net income (252.7) 17.9 4.6 1.8 6.3 5.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 8.7 8.8 9.0 8.6 8.5 8.4
EBIT 5.5 4.9 5.4 5.3 5.5 5.6
Net 5.7 6.4 6.3 6.2 6.3 6.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 6.5 7.3 7.5 7.6 8.0 8.3
RoAE 9.0 10.5 10.8 11.0 11.7 12.1
RoIC 7.9 7.6 8.9 9.1 9.7 10.1
FCF margin 4.8 5.3 7.5 7.1 7.0 6.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (1.1) (4.1) (9.3) (10.2) (11.2) (12.4)
Net debt/Equity (1.1) (4.1) (9.3) (10.2) (11.2) (12.4)
Interest cover (x) — — — — — —
Net debt/EBITDA (x) (0.1) (0.3) (0.6) (0.7) (0.7) (0.8)
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 102
Abacus Arqaam Capital Fundamental Data
Company profile
National Gas & Industrialization Company (GASCO) distributes and retails liquefied petroleum gas (LPG) in KSA, consisting mainly of propane and butane gas-based products. The company holds a monopoly on LPG in Saudi Arabia and owns several land plots, filling stations, and a distribution fleet. Furthermore, GASCO sells cylinders, tanks, and their related spare parts, and transports chemicals, glass, and auto parts across the Kingdom.
Ownership and management
Shareholders
Said Ali Ghodran Al Ghamdi 11.9%
Public Investment Fund 10.9%
General Organization for Social Insurance -KSA 6.1%
Public 71.1%
Source: Zawya
Board of Directors
Saed Bin Hamdan Al Hamdan Chairman
Ibrahim Al Ali Al Khudair Director
Sattam Bin Amer Al Harbi Director
Tarek Ibrahim Al Mounif Director
Mohammed Bin Ibrahim Al Shabnan Director
Ghodran Said Ali Ghodran Director
Salman Mohammed Hasan Al Jashi Director
Ali Mohammed Al Souflan Director
Source: Company data
National Gas & Industrialisation Company
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 1,581.3 1,671.5 1,756.6 1,828.0 1,911.3 1,979.5
Gross profit* 146.5 144.1 159.9 164.7 175.2 183.9
SG&A (59.3) (62.1) (65.2) (67.9) (71.0) (73.5)
EBITDA 137.9 147.6 157.4 156.9 162.4 166.7
Depreciation & Amortisation (50.8) (65.6) (62.7) (60.1) (58.3) (56.2)
EBIT 87.2 82.0 94.7 96.8 104.2 110.4
Net interest income(expense) — — — — — —
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 11.3 28.0 20.0 20.0 20.0 20.0
Profit before tax 98.5 109.9 114.7 116.8 124.2 130.4
Income tax expense (8.3) (3.6) (3.4) (3.5) (3.7) (3.9)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 90.2 106.3 111.2 113.3 120.5 126.5
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 90.2 106.3 111.2 113.3 120.5 126.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and equivalents 10.7 42.6 95.7 104.8 115.9 130.6
Receivables 15.8 17.9 18.8 19.6 20.5 21.2
Inventories 140.8 169.0 176.7 184.0 192.1 198.7
Tangible fixed assets* 395.3 460.3 441.5 427.0 416.6 409.8
Other assets including goodwill 862.1 798.9 757.3 765.4 774.9 782.7
Total assets 1,424.8 1,488.7 1,490.0 1,500.9 1,519.9 1,543.0
Payables 203.8 234.1 244.7 254.9 266.1 275.2
Interest bearing debt — — — — — —
Other liabilities 219.1 225.7 217.7 217.7 217.7 217.7
Total liabilities 422.9 459.7 462.4 472.6 483.7 492.9
Shareholders equity 1,001.8 1,029.0 1,027.6 1,028.3 1,036.2 1,050.1
Minorities — — — — — —
Total liabilities & shareholders equity 1,424.8 1,488.7 1,490.0 1,500.9 1,519.9 1,543.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 162.9 217.7 176.0 175.5 180.9 184.5
Net capex (86.9) (128.4) (43.9) (45.7) (47.8) (49.5)
Free cash flow 76.0 89.3 132.1 129.8 133.1 135.1
Equity raised/(bought back) — — — — — —
Dividends paid (37.5) (52.5) (112.6) (112.6) (112.6) (112.6)
Net inc/(dec) in borrowings — — — — — —
Other investing/financing cash flows (31.4) (5.0) 33.7 (8.1) (9.5) (7.8)
Net cash flow 7.1 31.8 53.2 9.1 11.1 14.7
Change in working capital (1.6) 28.9 2.0 2.1 2.2 1.8
Mohammad Kamal Mohamad Hammoud [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 103
Material deregulation risk warrants negative outlook
Initiate with Sell and SAR 16.0/share fair value estimate
We value GASCO using a 5-yr DCF model (12.1% WACC: 0.9 Beta, 12.9% ke, 4% g). Our price
target of SAR 16 implies a 20% discount to global peers, which we warrant given (i) weaker
profitability (avg. 5% FY 13-15e EBIT margins vs. 10% peers) and (ii) deregulation risk, which
may materially impact profitability and cash generation.
Exhibit 184: FCFF has no room for growth going forward
Source: Arqaam Capital Research
Relative valuation
We cross check our DCF generated price target of SAR 16 against global peers. We calculate
average sector FY 13e EV/EBITDA at 9.2x (vs. 7.4x GASCO). We find this plausible given (i) weak
margin outlook (-470bps vs. FY 13e operating margin) and (ii) deregulation risk which is
irrelevant for global peers given that U.S and Japan are free markets.
GASCO
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 94 102 108 113 119
60 58 56 54 53
NOPLAT 154 160 164 168 171
2 2 2 2 2
Other changes -- -- -- -- --
157 162 166 169 173
(54) (57) (57) (58) (60)
103 105 108 111 113
Stub period FCF 98 105 108 111 113
0.90 0.80 0.71 0.64 0.57
PV of Visible FCFF (adj. for stub period) 88 84 77 71 64
1,448
384 Rf 4.2%
821 EMRP 10.0%
1,205 0.9
12.9%
96
(200) 2.5%
5.0%
1,200 10.0%
NOSH 75 WACC 12.1%
16 4.0%
7.7 7.4 7.2 7.1 6.9
P/E 10.6 10.0 9.5 9.1 8.7
P/B 1.2 1.2 1.1 1.1 1.1
Cost of Equity
Implied multiples
EV/EBITDA
Less: Net (Debt) Funds ** Marginal tax rate
Cost of Debt
Equity Value D/C (market)
Equity Value per Share Perpetual grow th
Cash & Cash Equivalents
PV of Visible FCFF
PV of Terminal Value
Enterprise Value
WACC parameters
DCF summary*
SAR mn unless otherwise stated
Depreciation & Amortisation
Working Capital Changes
Operating Cash Flow
Adjusted Beta
Purchase of PPE and others
Free Cash Flow to Firm
Discount factors using WACC at 12.1%
Terminal Value
Equity Valuation
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 104
Exhibit 185: FY 13e: 20% discount EV/EBITDA, warranted on sub-par operating margins (-4.7%)
Company Country Mkt Cap (USD mn) EV/EBITDA Operating margin (%)
Hiroshima Gas Japan 198 12.1 2.0
Hokkaido Gas Japan 192 8.5 5.9
Gasco SA Chile 1,326 7.7 11.6
Southwest Gas United States 1,937 6.9 13.3
Piedmont Natural Gas United States 2,225 11.0 17.4
National Gas and Industrialization Saudi Arabia 369 7.7 5.3
Average global peers
9.6 10.0
NGIC vs. peers
(19.8%) (4.7)
Source: Arqaam Capital Research
Valuation sensitivity
Exhibit 186: DCF sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
Risks
Deregulation: We believe that the authorities will prioritise consumer interests above all else
going forward, in the aftermath of regional social unrest. We perform a sensitivity exercise to
measure the effect of deregulation on our valuation. This suggests that a 25% market share
loss could lead to EV and FVE dilution of 24% and 22%, respectively.
Exhibit 187: New entrants could place significant shareholder value at risk
Market share Avg FY 13-15e revs. Avg FY 13-15e EPS EV FVE
100% 1,929 1.71 1,205 16.0
75% 1,446 1.37 915 12.5
% Δ (25.0%) (19.7%) (24.0%) (21.7%)
50% 964 1 655 9.1
% Δ (50.0%) (39.4%) (45.7%) (43.4%)
25% 482 1 394 5.6
% Δ (75.0%) (59.1%) (67.3%) (65.1%)
Source: Arqaam Capital Research Revenues and EV in SARmn, EPS and PT in SAR
Slowdown in industrial and hotel demand: 13% of sales are generated in the manufacturing
and hotel sectors, where unsupportive demand conditions could affect GASCO.
P&L surprises: FY 09A earnings were affected by an SAR 155mn loss (1.5x EPS) on financial
securities. We flag GASCO’s available for sale (AFS) investments (SAR 482mn), as a 10% loss
puts 5% of equity at risk. GASCO’s overall AFS book equates to 46% of equity.
16.0 3.00% 3.50% 4.00% 4.50% 5.00% 16.0 7.00% 6.00% 5.00% 4.00% 3.00%
0.97 13.8 14.2 14.6 15.1 15.7 5.0% 15.1 15.2 15.3 15.4 15.4
0.92 14.3 14.8 15.3 15.8 16.5 7.5% 15.4 15.5 15.6 15.8 15.9
0.87 14.9 15.4 16.0 16.6 17.3 10.0% 15.7 15.8 16.0 16.2 16.3
0.82 15.6 16.2 16.8 17.5 18.3 12.5% 16.0 16.2 16.4 16.6 16.8
0.77 16.3 17.0 17.7 18.5 19.4 15.0% 16.3 16.5 16.8 17.1 17.4
DCF sensitivity- Risk-free rate vs. terminal growth DCF sensitivity- leverage vs. cost of equity
Risk free rate Growth D/(D+E) (at market) Cost of equity
16.0 3.00% 3.50% 4.00% 4.50% 5.00% 16.0 14.93% 13.93% 12.93% 11.93% 10.93%
6.20% 12.8 13.1 13.5 13.9 14.4 5.0% 12.9 14.0 15.3 16.9 18.9
5.20% 13.8 14.2 14.6 15.1 15.7 7.5% 13.2 14.3 15.6 17.3 19.3
4.20% 14.9 15.4 16.0 16.6 17.3 10.0% 13.5 14.6 16.0 17.7 19.7
3.20% 16.3 17.0 17.7 18.5 19.4 12.5% 13.8 15.0 16.4 18.1 20.2
2.20% 18.0 18.8 19.7 20.8 22.0 15.0% 14.2 15.4 16.8 18.5 20.7
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 105
Business overview
Customer segments: GASCO caters to households, agricultural activity, manufacturing
industries, hotel facilities, commercial and others.
Exhibit 188: High customer segment concentration at 80% of total revenues
Customer segmentation Share Avg. FY 13-15e growth
Civil (households) 80.0% 2.1%
Industrial manufacturing 8.0% 10.7%
Agricultural activity 7.0% 6.0%
Hospitality and commercial 5.0% 4.6%
Source: Arqaam Capital Research
Product mix: GASCO offers a diversified range of products including gas, cylinders, tanks and
spare parts, with high concentration in Gas sales (90% FY 12e revenues).
Exhibit 189: Cylinders and tanks to double their top-line contribution in 3 years
Source: Company Data, Arqaam Capital Research
Exhibit 190: Gas deliveries to households will remain the backbone of the business
Source: Company Data, Arqaam Capital Research
Revenue seasonality: Top-line generation has been slightly tilted towards the winter season
((Q4-Q1) +7% vs. (Q2-Q3)), with Hajj coinciding in Q4 for the last 7 years. We attribute this to
along with hotel consumption spike during Hajj.
COGS: Aramco fixes prices and supplies GASCO’s depots in Riyadh, Jeddah, Yanbu and Kharj.
Cost per unit currently stands at 45 halala/litre (vs. sales 66-72 halala/litre for bulk and retail,
respectively). GASCO bears transport cost which account for c.30bps of total costs.
CAPEX: The company possesses a fleet of 400 trucks and 100 for filling tankers, and will add
130 new trucks over the coming period, of which 80 are for replacement purposes. We
estimate capex at c.SAR 170mn in the coming 3 years.
Dividends: FY 12e payout reached SAR 113mn (+2.0x y/y), implying an attractive dividend yield
of 8%. This is however unlikely to remain sustainable given that the BoD may withhold from
paying dividends if the industry is de-regulated.
1,441 1,482 1,543 1,564 1,615 1,672
96 87 116 181 201 227 10 1111
11 12 12
--
500
1,000
1,500
2,000
2,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by business segment (SAR mn)
Gas deliveries Cylinders & tanks Spare parts and others
1,237 1,265 1,336 1,405 1,462 1,529
124 127 134 141 146 153 108 111 117 123 128 134 77 79 83 88 91 96
--
500
1,000
1,500
2,000
2,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by customer segment (SAR mn)
Civil Industrial Agricultural Hospitality, commercial & other
January 18 2013
National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important
Notice. 106
Business trends
Exhibit 191: Cylinders and tanks to double their top-line contribution
Source: Company Data, Arqaam Capital Research
Exhibit 192: Modest revs CAGR (5%) and weak EBITDA margins (<10%)
Source: Company Data, Arqaam Capital Research
Exhibit 193: GPM to stabilise at 9% going forward
Source: Company Data, Arqaam Capital Research
Exhibit 194: Stable CFO generation but at a low level (10% sales)
Source: Company Data, Arqaam Capital Research
Exhibit 195: CFO covers dividends in the absence of Capex/debt
Source: Company Data, Arqaam Capital Research
Exhibit 196: Slight RoE expansion, but overall level remains low
Source: Company Data, Arqaam Capital Research
1,441 1,482 1,543 1,564 1,615 1,672
96 87 116 181 201 227 10 1111
11 12 12
--
500
1,000
1,500
2,000
2,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by business segment (SAR mn)
Gas deliveries Cylinders & tanks Spare parts and others
1,546 1,581 1,671 1,757 1,828 1,911
130 138 148 157 157 162
--
500
1,000
1,500
2,000
2,500
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue vs. EBITDA (SAR mn)
Revenue EBITDA
8.2%9.3%
8.6%9.1% 9.0% 9.2%
6% 6%5%
5% 5% 5%
(3.8%)
6%6% 6% 6% 6%
(6.0%)
(4.0%)
(2.0%)
--%
2.0%
4.0%
6.0%
8.0%
10.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins: GPM, EBITM, NM (%)
GPM EBITM NM
11.1%
10.3%
13.0%
10.0% 9.6% 9.5%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
CFO/Sales (%)
CFO/Sales
129
7
32
53
9 11 --
20
40
60
80
100
120
140
(250)
(200)
(150)
(100)
(50)
--
50
100
150
200
250
300
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Cash flow changes by activity (SAR mn)
CFO CFI CFF Change in cash
Change in cash (SAR mn)
(4.4%)
6.3% 7.1% 7.5% 7.5% 7.9%
(6.0%)
9.0% 10.3% 10.8% 11.0% 11.6%
(8.0%)
(6.0%)
(4.0%)
(2.0%)
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
RoA vs. RoE (%)
RoA RoE
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Heba Khalil Arqaam Capital Research Offshore s.a.l.
UAE – Consumer staples Agthia Group
HOLD
Consumer staples / UAE Bloomberg code AGTHIA UH
Market index ADX
Price target (local) 2.45
Upside (%) 16.1
Market data 17/01/2013
Last closing price 2.1
52 Week range 1.7-2.3
Market cap (AED mn) 1,266
Market cap (USD mn) 345
Average Daily Traded Value (AED mn) 0.4
Average Daily Traded Value (USD mn) 0.1
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,144.3 1,317.5 1,399.9 1,513.0
EBITDA 132.2 186.0 200.0 218.5
Net income 86.3 134.3 144.1 158.4
EPS 0.14 0.22 0.24 0.26
P/E (current price) 14.7 9.4 8.8 8.0
BVPS 1.7 1.9 2.0 2.2
P/B (current price) 1.4 1.3 1.2 1.1
EV/EBITDA (current price) 8.8 6.3 5.8 5.3
Div. yield (%) 2.4 3.7 4.0 4.4
FCF margin (%) (4.3) (0.4) 4.1 3.8
Net debt/EBITDA (x) (0.3) — — —
Net debt/Capital (%) (3.6) 0.7 0.4 0.5
Interest cover (x) 12.5 15.5 16.7 18.3
RoAA (%) 6.2 9.0 8.9 9.2
RoAE (%) 8.5 12.4 12.3 12.5
RoIC (%) 8.3 11.9 11.8 11.9
Core business (agribusiness) capitalising on market share gains
via capacity adds. Deliberate shift in product mix focused on
improving group margins, but exercise remains ‘hit and miss’
Initiate with Hold and AED 2.45 FVE
Agthia is a leading Abu Dhabi-based food and beverage group, with
dominant positions in the flour (41%) and animal feed (48%) markets
in the UAE. The company operates along two major business lines: an
agribusiness division that generates 67% of revenues (vs. 83% FY 08A),
and a consumer segment which sells water, beverages, and food
products in the GCC (33%). The company generates >90% of its
revenues in the UAE, of which flour and feed sales constitute 62%. (vs.
72% FY 08A).
Agthia is planning to introduce c.15% additional capacity in flour and
animal feed by FY 13e to (i) eliminate raw material outsourcing, (ii)
meet rising demand, and (iii) support the growing frozen baked
business. We believe the expansion to result in c.10% annual top-line
growth in the coming 3 years, but see no margin improvement given
low GPMs associated with the Agribusiness (20% vs. 30% consumer
division). The agribusiness division is expected to remain a major
contributor to revenues, and to constitute c.70% of our EV estimate.
New product launches in consumer division to remain ‘hit and miss’:
New high-margin product launches (dairy and frozen baked products),
and regional acquisitions (Pelit Su, WOW, Chiquita) put substantial
CAPEX at risk (AED 340mn, c.50% PPE), as product success remains
sensitive to intra-regional distribution issues. Sale volumes remain
relatively weak given strong domestic competition. We expect a slight
ramp up in Pelit Su sales in the coming 2 years following rebranding
into ‘Alpin’ (to target UAE market), and expect minimal contribution
from dairy products (1% market share) in the presence of larger
competitors (Almarai, Nestle).
Valuation: We value Agthia at AED 2.45/share using a DCF approach
(10.2% WACC, 3% g). Our price target implies 10.2x FY 13e P/E, and
6.9x FY 13e EV/EBITDA, a 25% discount to regional peers. We believe
the market has fairly rewarded Agthia on product diversity and margin
enhancement at current multiples.
Risk: continued unrest in Egypt and Turkey, removal of subsidies on
flour prices in UAE, and FX risk in Egypt.
AED 2.45
© Copyright 2013 , Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
90
99
108
117
126
135
Jan-12 Apr-12 Jul-12 Oct-12
AGTHIA UH ADX
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 108
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-4%
-2%
0%
2%
-0.4
-0.2
0.0
0.2
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Agthia Group
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 0.19 0.14 0.22 0.24 0.26 0.28
Diluted EPS 0.19 0.14 0.22 0.24 0.26 0.28
DPS 0.05 0.05 0.08 0.08 0.09 0.11
BVPS 1.64 1.73 1.87 2.03 2.20 2.36
Weighted average shares 600.00 600.00 600.00 600.00 600.00 600.00
Average market cap 1,290.00 1,020.00 1,266.00 1,266.00 1,266.00 1,266.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 10.9 14.7 9.4 8.8 8.0 7.6
P/E (x) (target price) 12.7 17.0 10.9 10.2 9.3 8.9
P/BV (x) (target price) 1.5 1.4 1.3 1.2 1.1 1.0
EV/EBITDA (x) (target price) 9.0 10.4 7.4 6.9 6.3 5.8
EV/FCF (x) 26.2 (27.6) (275.3) 24.1 23.9 13.8
EV/Invested capital (x) 1.4 1.3 1.2 1.1 1.0 1.0
Dividend yield (%) 2.4 2.4 3.7 4.0 4.4 5.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 9.2 13.7 15.1 6.3 8.1 3.7
EBITDA 6.2 (13.0) 40.7 7.5 9.3 7.9
EBIT 3.6 (22.3) 58.4 8.0 9.7 4.6
Net income 9.4 (25.4) 55.5 7.3 9.9 4.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 15.1 11.6 14.1 14.3 14.4 15.0
EBIT 11.1 7.6 10.5 10.6 10.8 10.9
Net 11.5 7.5 10.2 10.3 10.5 10.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 9.2 6.2 9.0 8.9 9.2 9.0
RoAE 12.3 8.5 12.4 12.3 12.5 12.1
RoIC 11.6 8.3 11.9 11.8 11.9 11.6
FCF margin 5.2 (4.3) (0.4) 4.1 3.8 6.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (11.2) (3.6) 0.7 0.4 0.5 (1.3)
Net debt/Equity (12.8) (4.4) 0.8 0.5 0.6 (1.5)
Interest cover (x) 24.8 12.5 15.5 16.7 18.3 19.2
Net debt/EBITDA (x) (0.8) (0.3) — — — (0.1)
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 109
Abacus Arqaam Capital Fundamental Data
Company profile
Agthia Group is a leading Abu Dhabi based
food and beverage company. The business
was founded in 2004, and is listed on the Abu
Dhabi Securities Exchange since May 2005.
Agthia operates in the UAE, Egypt and Turkey
and has an international presence in 17
countries.
Agthia runs two main business divisions:
agribusiness and consumer products. As a
major supplier in the agribusiness market in
the UAE, Agthia has a leadership position in
flour (41%) and in animal feed (48%). The
company has grown its consumers business
via acquisitions and expansions over the past
3 years. In 2009, Agthia entered the Egyptian
market via establishing production factories
for tomato and chili paste, and frozen
vegetables. It also introduced fresh dairy
products in the UAE in 2011 and acquired
Pelit Su, a natural spring water company in
Turkey, in 2012. The introduction of frozen
baked products is planned for 2013.
Ownership and management
Shareholders
General Holding Corporation 51.0%
Abu Dhabi Retirement P&B Fund 5.0%
Public 44.0%
Source: Zawya
Board of Directors
H.E. Rashed Mubarak Al Hajeri Chairman
H.E. Majed Salem Al Romaithi V. Chariman
H.E. Abu Bakr Siddiq Khouri Director
H.E. Juma Al Khaili Director
H.E. Mohammed Thani Al Rumaithi Director
H.E. Tareq Al Masaood Director
H.E. Suhail M. Al Ameri Director
Source: Zawya
Agthia Group
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (AEDmn)
Sales revenue 1,006.1 1,144.3 1,317.5 1,399.9 1,513.0 1,569.2
Gross profit 252.3 236.8 335.4 360.1 393.1 410.0
SG&A (154.4) (161.0) (217.4) (231.0) (249.7) (258.9)
EBITDA 151.9 132.2 186.0 200.0 218.5 235.7
Depreciation & Amortisation (39.8) (45.1) (47.9) (50.9) (55.0) (64.6)
EBIT 112.1 87.1 138.1 149.1 163.5 171.1
Net interest income(expense) (4.5) (7.0) (8.9) (8.9) (8.9) (8.9)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 7.7 6.2 6.5 5.4 5.4 5.4
Profit before tax 115.3 86.4 135.6 145.5 160.0 167.5
Income tax expense 0.3 (0.1) (1.4) (1.5) (1.6) (1.7)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 115.7 86.3 134.3 144.1 158.4 165.9
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 115.7 86.3 134.3 144.1 158.4 165.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (AEDmn)
Cash and equivalents 269.0 268.7 214.2 217.2 215.7 245.2
Receivables 249.9 216.0 256.4 277.3 303.7 322.6
Inventories 214.2 253.9 336.3 356.1 383.5 397.0
Tangible fixed assets 479.9 598.1 655.6 716.7 782.7 828.0
Other assets including goodwill 118.4 95.2 95.2 95.2 95.2 95.2
Total assets 1,331.3 1,431.8 1,557.8 1,662.5 1,780.8 1,887.9
Payables 179.8 149.7 188.3 199.4 214.8 222.3
Interest bearing debt 142.8 223.2 223.2 223.2 223.2 223.2
Other liabilities 24.5 23.5 23.5 23.5 23.5 23.5
Total liabilities 347.1 396.4 435.0 446.1 461.5 469.0
Shareholders equity 984.2 1,035.5 1,122.7 1,216.4 1,319.3 1,418.9
Minorities — — — — — —
Total liabilities & shareholders equity 1,331.3 1,431.8 1,557.8 1,662.5 1,780.8 1,887.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (AEDmn)
Cashflow from operations 146.4 94.7 100.4 169.0 178.5 209.2
Net capex (94.0) (144.3) (105.4) (112.0) (121.0) (109.8)
Free cash flow 52.4 (49.6) (5.0) 57.0 57.4 99.3
Equity raised/(bought back) — — — — — —
Dividends paid (30.0) (30.0) (47.0) (50.4) (55.4) (66.3)
Net inc/(dec) in borrowings — — — — — —
Other investing/financing cash flows 51.4 80.4 (2.4) (3.6) (3.5) (3.5)
Net cash flow 73.8 0.8 (54.4) 3.0 (1.5) 29.5
Change in working capital (11.9) (38.8) (84.2) (29.6) (38.4) (24.8)
Mohammad Kamal Heba Khalil [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 110
Initiate with Hold and AED 2.45 FVE
Core business (agribusiness) capitalising on market share gains via capacity
adds. Deliberate shift in product mix focused on improving group margins,
but exercise remains ‘hit and miss’
Agthia is a leading Abu Dhabi-based food and beverage group, with dominant positions in the
flour (40%+) and animal feed (48%) markets in UAE. The company operates along two major
business lines: an agribusiness division that generates 65% of revenues, and a consumer
segment which sells water, beverages, and food products in the GCC (35%). Agthia completed
a series of acquisitions over the past 3 years (Capri-Sun, Ice Crystal, Chiquita, Pelit Su) to
diversify its portfolio away from low-margin flour and animal feed products, which are the core
product lines that the business has specialised in over the past 5 years. The company will
introduce c.15% in additional capacity in the flour and animal feed segments by FY 13e, to
meet market demand, but more importantly, to attempt to preserve market share in a
competitive space. Agthia’s consumer segment (water, fruits and vegetables, dairy) is expected
to deliver 6% revenue CAGR FY 12-15e, as new products launch. We think Agthia has
successfully curtailed concentration risk over the past 2 years by the introduction of new
products, but believe that the market has rewarded Agthia on diversification and margin
improvements achieved over the past 3 quarters at current multiples. We initiate with Hold
and AED 2.45 fair value estimate.
Exhibit 197: Flour and feed generated 65% revenues vs. 80% in FY 08A
Source: Company Data, Arqaam Capital Research
Exhibit 198: Agthia’s market standings in the UAE ……………………………
Source: Company Data, Arqaam Capital Research
Agribusiness
Capacity additions: Agthia is a major supplier of flour and poultry feed in the UAE with a 40%+
market share. The segment currently contributes to 65% of total revenues (vs. 83% in FY 08A),
which we expect to hold into FY 15e. Agthia is upgrading its facilities in the segment and
introducing additional capacity in its poultry feed (+12% in Q4 12e) and flour (+19% in Q4 13e)
plants at a total CAPEX consideration of AED 33mn. The upgrade is expected to add 7% and 8%
to the segment’s sales in FY 13e and FY 14e, respectively. We believe Agthia will maintain its
market share in both segments going forward, and deliver total top-line growth of 6% and 8%
in FY 13e and FY 14e, respectively as a result of capacity additions.
Flour and Feed, 65%
Water and Beverages, 30%
Food, 5%
Revenue breakdown by product (9M 12A)
Flour and Feed Water and Beverages Food
48% 41%
26% 19%
12% 6% 5% 3% 1%
0%
10%
20%
30%
40%
50%
60%
Gra
nd
Mill
s Fe
ed
Gra
nd
Mill
s Fl
ou
r
Al A
in
(Bo
ttle
d W
ate
r)
Tom
ato
Pas
te
Cap
ri S
un
Fro
zen
V
ege
tab
les
Al A
in &
Ice
C
ryst
al (
HO
D)
Pu
re N
atu
ral
Yop
lait
Market Share in the UAE
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 111
Exhibit 199: Expansions in flour and feed to take effect in FY 13e-14e
Source: Company Data, Arqaam Capital Research
Consumer segment
1- Sales volumes of new water products remain disappointing: Agthia produces ‘al Ain’ water,
which captures 26% of the UAE bottled water market. It launched WOW (in FY 11A) in the UAE,
and acquired Pelit Su in Turkey (H1 12A). We expect Pelit Su to contribute to higher sales
volumes in FY 13e as the product is rebranded to ‘Alpin’ to target the GCC market. Despite
weak sales volumes in H1 12A, due to political instability in the region (output volumes and
distribution were affected by unrest in Syria), we expect a steady annual pick-up in sales of 5%
in FY 13e onwards as distribution capability is eventually restored and volumes recover.
2- Fresh fruit segment to secure B2B deals and diversify client’s base: Agthia expanded into
the processed fresh fruit and vegetable segment (after launching phase 1 in Q4 11A) to target
the hospitality and catering industry in the UAE. We expect the segment to achieve 7% growth
in FY 13e and to maintain its market share at 10% going forward, pending further guidance
regarding phase 2. This initiative is aligned with Agthia’s strategy to (i) expand its business into
higher margin segments (24-28%) and (ii) diversify its portfolio away from agribusiness
products.
Exhibit 200: Acquisitions drive 20% growth in FY 11-12
Source: Company Data, Arqaam Capital Research
Exhibit 201: Pelit Su to add 25% capacity to water segment
Source: Company Data, Arqaam Capital Research
100% 100% 100% 100%
19%
12%
90%
95%
100%
105%
110%
115%
120%
125%
Flour Feed Flour Feed
Pre-expansion Post-expansion
Capacity expansions in the agribusiness division
Capacity additions
--%
5%
10%
15%
20%
25%
--
50
100
150
200
250
300
350
400
450
500
FY 11A FY 12e FY 13e FY 14e FY 15e
Water and beverages revenues (AEDmn)
Bottled water and beverages Revenue growth (RHS)
31
10 8
3 1.1
--
5
10
15
20
25
30
35
al ain Pelit Su Ice Crystal Capri-Sun WOW
Water and beverages production capacities (unit mn)
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 112
3- New product lines are promising, but will not materially impact P&L: The introduction of
frozen baked products in H2 13e is expected to expose Agthia to a fast growing and profitable
segment (45-50% margin business). Phase 1 of the project is expected to launch with 8k tons at
AED 57mn CAPEX, and is likely to add 1% to revenues in FY 14e. We expect the segment to
grow at a 5-year CAGR of 10%, and consequently to contribute a minor share of revenues
going forward.
4- Minimal contribution expected from newly introduced dairy ‘Yoplait’ and tomato paste
products: Agthia entered the fresh dairy market after introducing ‘Yoplait’ products in Q4 11A.
We expect minimal contribution from the dairy segment (0.4% of total sales FY 12e) despite
high segment margins (40-50%), largely due to the competitive presence of Almarai in the GCC
(35% market share). Similarly, we expect little revenue additions from tomato paste products
(Egypt plant-based) as negative gross margins are currently felt in the segment (c.-10%) due to
the economic impact of political unrest in Egypt (coupled with raw material shortage, and
difficulties in reaching export markets). Given continuing losses, we believe that a scenario in
which Agthia shuts down its tomato paste operations is likely. The business would in our view
eventually re-align its focus on remaining Egyptian operations (frozen vegetables), in which we
expect a pick-up in sales (+9%) and gross margin improvements (1-5%) to come through in FY
13e.
Segment margin recovery improvement likely on product mix rationalisation: Group margins
advanced by 5pps in FY 12e, mainly due to the introduction of new high-margin product lines
(fresh fruits and frozen baked products). We also expect margins to improve slightly in FY 13e
onwards, as (i) more profitable products launch, (ii) new production technology is introduced,
and (iii) loss-making product lines in Egypt are terminated. We consequently expect blended
gross margins to arrive at 25.5% and 25.7% in FY 12e and FY 13e, respectively.
Exhibit 202: Gross margin by segment
Source: Company Data, Arqaam Capital Research
Exhibit 203: Net margin by segment
Source: Company Data, Arqaam Capital Research
CAPEX bill is a substantial bet on new product lines: Agthia is committed to a total of AED
340mn (c.50% existing PPE) CAPEX in the next 3 years, enough to cover flour/poultry segment
expansions (USD 9mn), frozen bakery capacity (USD 15.5mn), new product launches, and PPE
maintenance. We expect the business to continue to experience challenges in launching new
product segments successfully, and consequently see RoE and RoIC subdued in the near-term.
39.8%
20.6%
(8.6%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
Water and Beverages Flour and Feed Food
Gross margin by segment
16.0% 15.6%
(43.8%)(50%)
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
Water and Beverages Flour and Feed Food
Net margin by segment
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 113
Valuation: Subpar RoE (11.6% FY 13e) in peer context. Initiate
with Hold and AED 2.45 FVE
We value Agthia at AED 2.45/share using a DCF approach (10.2% WACC, 3% g). Our price target
implies 10.2x FY 13e P/E, and 6.9x FY 13e EV/EBITDA, a 25% discount with regional peers. We
believe the market has already rewarded Agthia on product diversification and margin
enhancement achieved since FY 09A. We initiate with Hold recommendation and AED 2.45
fair value estimate.
Exhibit 204: DCF summary
Source: Company Data, Arqaam Capital Research
Agthia
DCF summary
AEDmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 128 142 150 159 170
Depreciation & Amortization 51 55 65 70 71
EBITDA 179 197 214 229 241
Working Capital Changes (30) (38) (25) (28) (30)
Operating Cash Flow 149 159 189 201 211
Purchase of PPE (112) (121) (110) (98) (85)
Free Cash Flow to Firm 37 38 80 103 126
Discount Factor using WACC at 10.5% 0.90 0.82 0.74 0.68 0.61
PV of Visible FCFF 34 31 59 70 77
Terminal Value 1,800
Equity Valuation WACC parameters
PV of Visible FCFF 270 Rf 4.0%
PV of Terminal Value 1,104 EMRP 10.0%
Enterprise Value 1,373 Adjusted Beta 0.75
Cost of Equity 11.5%
Cash & Cash Equivalents 518
Less: Net (Debt) Funds (429) Marginal tax rate 10.0%
Cost of Debt 5.0%
Equity Value 1,471 D/C (market) 20.0%
NOSH 600 WACC 10.2%
Equity Value per Share 2.45 Perpetual grow th 3.0%
Implied multiples
EV/EBITDA 6.9 6.3 5.8 5.5 5.2
P/E 10.2 9.3 8.9 8.3 7.8
P/B 1.2 1.1 1.0 1.0 0.9
* Based on after-tax operating profit
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 114
Exhibit 205: 8.8x FY 13e P/E: 30% discount to peer set
Source: Company Data, Arqaam Capital Research
Exhibit 206: 35% discount to peers on EV/EBITDA
Source: Company Data, Arqaam Capital Research
DCF sensitivity
Exhibit 207: 5% increase in grain prices lowers our PT by 30%
Source: Company Data, Arqaam Capital Research
Exhibit 208: EV sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
Risk
Grain and feed price exposure: With 70% of Agthia COGS in flour/poultry feed, we expect
global grain prices to remain an operational risk factor. A 5% change in wheat and feedstock
prices would impact our PT and EV estimates by 30% each.
Political unrest in the MENA region: Decline in exports sales driven by (i) unrest in key export
markets (Libya) (ii) higher logistics costs, and (iii) production issues due to persistent instability
in Egypt.
Removal of subsidies on flour prices could result in loss of market share as input costs and
selling prices increase.
FX risk: EGP devaluation could further compress margins.
15.9x 15.4x
13.2x12.2x 11.9x
8.8x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Herfy Almarai Juhayna Halwani SADAFCO Agthia
Current market cap / FY 13e net income
12.5x 12.3x
8.3x 8.2x
7.0x
5.8x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Herfy Almarai Juhayna SADAFCO Halwani Agthia
Current EV / FY 13e EBITDA
COGS as a % of sales SG&A as a % of sales
2.45 17.50% 17.00% 16.50% 16.00% 15.50%
75.9% 1.43 1.56 1.69 1.82 1.95
74.7% 1.81 1.94 2.07 2.20 2.33
73.4% 2.19 2.32 2.45 2.58 2.71
72.2% 2.57 2.70 2.83 2.96 3.09
70.9% 2.95 3.08 3.21 3.34 3.47
DCF sensitivity- cost components
Rf Growth
1,372 2.00% 2.50% 3.00% 3.50% 4.00%
5.00% 1,105 1,159 1,219 1,288 1,367
4.50% 1,164 1,224 1,292 1,369 1,459
4.00% 1,228 1,295 1,372 1,460 1,562
3.50% 1,299 1,375 1,462 1,563 1,681
3.00% 1,379 1,464 1,563 1,679 1,816
DCF sensitivity- Risk-free rate vs. Terminal growth
January 18 2013
Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 115
Business trends
Exhibit 209: Resumption of organic growth expected post FY 12e
Source: Company Data, Arqaam Capital Research
Exhibit 210: Agribusiness division to remain the largest contributor to revenues
Source: Company Data, Arqaam Capital Research
Exhibit 211: Margins slightly improve as consumer segment expands
Source: Company Data, Arqaam Capital Research
Exhibit 212: Higher margins expected from new products versus existing ones
Source: Company Data, Arqaam Capital Research
Exhibit 213: Dividends sustainable at 35%+ payout
Source: Company Data, Arqaam Capital Research
Exhibit 214: Inferior profitability (11.6% RoE in FY 13e vs. 18% peers) on poor contribution from subsidiaries
Source: Company Data, Arqaam Capital Research
--%
2%
4%
6%
8%
10%
12%
14%
16%
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues (AEDmn)
Revenue Revenue growth (RHS)
68% 67% 66% 67% 67% 66%
26% 28% 29% 29% 28% 28%
--%
20%
40%
60%
80%
100%
120%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenue breakdown by product
Flour and feed Water and beverages Food
25.1%
20.7%
25.5% 25.7% 26.0% 26.1%
15.1%
11.6%
14.1% 14.3% 14.4% 15.0%
11.5%
7.5%
10.2% 10.3% 10.5% 10.6%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Gross margin EBITDA margin EBIT margin Net margin
45.0% 45.0%
40.0%
26.4%
20.0%
2.0%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Baked products
Dairy Bottled water and beverages
Fresh fruits Flour and animal feed
Frozen vegetables
Expected gross margin by product in FY 15e
-200
-150
-100
-50
-
50
100
150
200
250
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
AEDmn
Dividends
CAPEX
CFO
12.3%
8.5%
12.4% 12.3% 12.5% 12.1%
11.6%
8.3%
11.9% 11.8% 11.9% 11.6%
9.2%
6.2%
9.0% 8.9% 9.2% 9.0%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
RoE RoIC RoAA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Ziad Itani Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Retailers Fawaz Abdulaziz Alhokair & Co
HOLD
Retailers / Saudi Arabia Bloomberg code ALHOKAIR AB
Market index SASEIDX
Price target (local) 125
Upside (%) 18.1
Market data 17/01/2013
Last closing price 106
52 Week range 60.0-111.0
Market cap (SAR mn) 7,420
Market cap (USD mn) 1,979
Average daily volume (SAR mn) 5.4
Average daily volume (USD mn) 1.5
Year-end (local mn) 2011 2012* 2013e 2014e
Revenues 2,574.6 3,202.7 4,355.2 5,227.4
EBITDA 364.1 539.4 757.8 909.6
Net income 319.7 448.3 614.7 751.3
EPS 4.63 6.42 8.78 10.73
P/E (current price) 23.2 16.6 12.1 9.9
BVPS 16.1 20.4 24.8 30.1
P/B (current price) 6.6 5.2 4.3 3.5
EV/EBITDA (current price) 23.7 16.0 11.4 9.5
Div. yield (%) 3.5 1.9 4.1 5.1
FCF margin (%) 9.3 3.9 2.0 9.8
Net debt/EBITDA (x) 0.8 0.6 1.6 1.2
Net debt/Capital (%) 18.4 17.4 38.6 30.5
Interest cover (x) 16.0 24.0 20.9 20.2
RoAA (%) 15.8 18.9 18.6 17.4
RoAE (%) 28.6 35.1 38.9 39.1
RoIC (%) 18.3 22.4 19.6 21.5
*Fiscal year ended March 2012
Largest KSA fashion retailer and high street brand
franchisee. Superior margins and RoE priced in; initiate
with Hold and SAR 125 FVE
Fawaz Abdulaziz Alhokair is the largest fashion retailer in Saudi Arabia.
The business focuses on wholesale and retail trade in the western apparel
and fashion industry. Alhokair operates more than 1,176 stores, 995 of
which in Saudi Arabia and the remaining 181 spread across Egypt, Jordan,
Kazakhstan, Azerbaijan and the USA. The retailer benefits from 78 licensed
brands in its portfolio, with women’s clothing and department stores
generating more than 80% of revenues. In Q4 12A, Alhokair acquired NESK
Group, adding c.120 stores and 10+ brands. Saudi Arabia remains by far
Hokair’s largest market, contributing 92% of sales. During the past five
years, top line growth has record a CAGR of c.15%, supported by
geographic expansion and the addition of several new trademarks to the
retailer’s portfolio, including the licensing of 10 international brands.
Improvement in standards of livings and brand awareness drive growth:
We believe the Saudi Arabian apparel sector is supported by rising
discretionary spending on the back of public sector salary increases, and
consumer preferences that are increasingly moving in favour of brand
name apparel.
NESK acquisition EPS accretive, brand dilutive: In Q4 12A, the business
bought NESK Group (Al Jedaie) for SAR 730mn. We estimate the
transaction was performed at c.2.5x price/sales, which we find relatively
expensive. The deal remains accretive to EPS given (i) the expansion of the
Hokair’s brand offering (though arguably dilutive in terms of positioning),
(ii) the broadening of exposure to new consumer segments, and (iii) an
expansion of store footprint.
Market valuation prices in margins and attractive RoE: Market valuation
implies a 9% discount to domestic peer group P/E (12.1x FY 13e) and 3.5%
premium EV/ EBITDA (11.4x FY 13e), which we find modestly attractive
given above-average margins across the board (+24.8% GPM; +6.3% NPM
in FY 13e). Despite compelling growth and margins, we believe the
business holds little upside risk from current valuation levels. We initiate
with Hold and SAR 125 FVE.
Risks: Counterfeit products, international roll-out, and FX risk.
SAR 125
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
88
105
122
139
156
173
190
Jan-12 Apr-12 Jul-12 Oct-12
ALHOKAIR AB SASEIDX
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 117
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
50%
100%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
60%
0.0
1.0
2.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
30
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Fawaz Abdulaziz Alhokair & Co
Year-end 2010 2011 2012* 2013e 2014e 2015e
Financial summary
Reported EPS 3.31 4.63 6.42 8.78 10.73 13.27
Diluted EPS 3.31 4.57 6.40 8.78 10.73 13.27
DPS — 3.72 2.00 4.39 5.37 6.64
BVPS 15.86 16.08 20.36 24.75 30.12 36.75
Weighted average shares 70.00 70.00 70.00 70.00 70.00 70.00
Average market cap 7,420.00 7,420.00 7,420.00 7,420.00 7,420.00 7,420.00
Year-end 2010 2011 2012* 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 32.1 23.2 16.6 12.1 9.9 8.0
P/E (x) (target price) 37.8 27.1 19.5 14.3 11.7 9.4
P/BV (x) (target price) 7.9 7.8 6.1 5.1 4.2 3.4
EV/EBITDA (x) (target price) 27.1 23.7 16.0 11.4 9.5 7.9
EV/FCF (x) 58.4 35.9 69.8 97.1 16.9 12.8
EV/Invested capital (x) 6.9 7.2 5.6 3.5 3.1 2.8
Dividend yield (%) — 3.5 1.9 4.1 5.1 6.3
Year-end 2010 2011 2012* 2013e 2014e 2015e
Growth (%)
Revenues 9.2 24.1 24.4 36.0 20.0 19.8
EBITDA 37.0 14.3 48.1 40.5 20.0 19.8
EBIT 43.6 8.7 62.5 41.2 22.8 22.7
Net income 14.4 38.1 40.2 37.1 22.2 23.7
Year-end 2010 2011 2012* 2013e 2014e 2015e
Margins (%)
EBITDA 15.4 14.1 16.8 17.4 17.4 17.4
EBIT 11.6 10.2 13.3 13.8 14.1 14.5
Net 11.2 12.4 14.0 14.1 14.4 14.8
Year-end 2010 2011 2012* 2013e 2014e 2015e
Returns (%)
RoAA 13.3 15.8 18.9 18.6 17.4 19.3
RoAE 23.5 28.6 35.1 38.9 39.1 39.7
RoIC 16.3 18.3 22.4 19.6 21.5 24.1
FCF margin 7.1 9.3 3.9 2.0 9.8 10.7
Year-end 2010 2011 2012* 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 19.8 18.4 17.4 38.6 30.5 23.0
Net debt/Equity 26.4 24.7 23.9 70.7 51.7 34.3
Interest cover (x) 18.8 16.0 24.0 20.9 20.2 26.8
Net debt/EBITDA (x) 0.9 0.8 0.6 1.6 1.2 0.8
*Fiscal year ended March 2012
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 118
Abacus Arqaam Capital Fundamental Data
Company profile
Fawaz Abdulaziz Alhokair & Co was founded in 1990 and is currently the biggest fashion retailer in Saudi Arabia. The main activity of the business revolves around wholesale and retail trade in the apparel and fashion industry, with women’s clothing and department stores generating c.82% of FY 11A revenues. Alhokair operates more than 1,176 stores, 995 of which in Saudi Arabia and the remaining 181 spread across Egypt, Jordan, Kazakhstan, Azerbaijan and the USA. Alhokair benefits from 78 licensed brands in its portfolio. In Q4 12A, Alhokair acquired NESK Group, further growing its chain by c.120 stores.
Ownership and management
Shareholders
FAS Saudi Holding Company 49.00%
Dr Fawaz Abdulaziz Fahed Alhokair 7.00%
Dr Salman Abdulaziz Fahed Alhokair 7.00%
Dr Abdulmajeed Abdulaziz Fahed Alhokair 7.00%
Public 30.00%
Source: Zawya
Board of Directors
Dr Fawaz Abdulaziz Fahed Alhokair Chairman
Mr Salman Abdulaziz Fahed Alhokair Vice Chairman
Mr Abdulmajeed Abdulaziz Fahed Alhokair Director
Mr Abdulrahman Bin Mawlay Director
Mr Fares Abdullah Abalkhayl Director
Mr Ajlan Abdulrahman Al Ajlan Director
Mr Mansoor Saad Al Ajlan Director
Source: Company data
Fawaz Abdulaziz Alhokair & Co
Year-end 2010 2011 2012* 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 2,074.4 2,574.6 3,202.7 4,355.2 5,227.4 6,265.0
Gross profit 942.6 1,139.1 1,447.4 1,977.2 2,373.2 2,844.3
SG&A (624.1) (775.0) (907.9) (1,219.4) (1,463.7) (1,754.2)
EBITDA 318.5 364.1 539.4 757.8 909.6 1,090.1
Depreciation & Amortisation (77.5) (102.2) (113.8) (156.7) (171.3) (184.5)
EBIT 240.9 261.9 425.6 601.1 738.3 905.6
Net interest income(expense) (12.8) (16.4) (17.7) (28.7) (36.6) (33.8)
Associates/affiliates (30.0) (17.4) (0.7) — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 44.7 106.7 76.9 91.5 109.8 131.6
Profit before tax 242.9 334.8 484.1 663.8 811.4 1,003.4
Income tax expense (11.4) (15.1) (35.9) (49.2) (60.1) (74.3)
Minorities — (4.2) (0.9) — — —
Other post-tax income/(expense) — — — — — —
Net profit 231.5 319.7 448.3 614.7 751.3 929.1
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 231.5 319.7 448.3 614.7 751.3 929.1
Year-end 2010 2011 2012* 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 76.8 107.3 198.0 212.3 373.6 371.4
Receivables 154.6 297.8 290.6 487.5 580.7 691.5
Inventories 476.1 598.6 746.0 1,043.1 1,236.2 1,465.9
Tangible fixed assets 605.3 613.2 790.0 1,340.9 1,445.4 1,539.4
Other assets including goodwill 574.4 552.5 550.7 965.4 965.4 965.4
Total assets 1,887.3 2,169.4 2,575.4 4,049.1 4,601.3 5,033.7
Payables 368.5 615.8 553.0 814.9 965.0 1,143.5
Interest bearing debt 370.0 385.9 539.2 1,437.2 1,463.7 1,253.0
Other liabilities 38.6 41.8 58.0 64.4 64.4 64.4
Total liabilities 777.1 1,043.5 1,150.2 2,316.6 2,493.1 2,460.9
Shareholders equity 1,110.2 1,125.8 1,425.2 1,732.5 2,108.2 2,572.7
Minorities 15.9 31.0 23.0 33.5 — —
Total liabilities & shareholders equity 1,887.3 2,169.4 2,575.4 4,049.1 4,601.3 5,033.7
Year-end 2010 2011 2012* 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations 296.1 304.2 399.8 611.5 719.6 860.9
Net capex (148.4) (63.7) (276.2) (522.6) (209.1) (187.9)
Free cash flow 147.6 240.5 123.6 88.8 510.5 673.0
Equity raised/(bought back) — — — — — —
Dividends paid — (260.5) (140.0) (307.3) (375.7) (464.5)
Net inc/(dec) in borrowings — 15.9 153.3 898.0 26.5 (210.7)
Other investing/financing cash flows (101.6) 31.2 (46.2) (730.0) — —
Net cash flow 46.0 27.1 90.7 (50.5) 161.3 (2.2)
Change in working capital (43.1) (122.0) (214.0) (196.8) (136.3) (162.1)
*Fiscal year ended March 2012
Mohammad Kamal Ziad Itani [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 119
Largest KSA fashion retailer and high street brand franchisee
Superior margins and RoE priced in; initiate with Hold and SAR 125 FVE
Fawaz Abdulaziz Alhokair is the largest fashion retailer in Saudi Arabia. The business focuses
on wholesale and retail trade in the western apparel and fashion industry. Alhokair operates
more than 1,176 stores, 995 of which in Saudi Arabia and the remaining 181 spread across
Egypt, Jordan, Kazakhstan, Azerbaijan and the USA. The retailer benefits from 78 licensed
brands in its portfolio, with women’s clothing and department stores generating more than
80% of revenues. In Q4 12A, Alhokair acquired NESK Group, adding c.120 stores and 10+
brands. Saudi Arabia remains by far Hokair’s largest market, contributing 92% of sales.
Improvement in standards of livings and brand awareness drive growth: During the past five
years, top line growth recorded a CAGR of c.15%, supported by geographic expansion and the
addition of several new trademarks to the retailer’s portfolio, including the licensing of 10
international brands. We believe the Saudi Arabian apparel sector is supported by rising
discretionary spending on the back of public sector salary increases, and consumer preferences
that are increasingly moving in favour of brand name apparel. The EIU sees an 11% growth in
the KSA retail industry per year for the next five years. We believe Alhokair to be well
positioned to benefit from the step up in social welfare as the business targets the upper-mid
income segments of the population. Saudi Arabia has set a record state budget for 2013 (SAR
820bn; +19% in y/y) of which a sizable portion is dedicated to welfare and salaries.
Attractive margins: Gross margins have posted growth from 41.5% in FY 09A to 45.2% in FY
12A, largely a result of an increase in market share and bargaining power. Alhokair adopts
close partnerships with franchisors via a ‘push model’ (taking the product directly to the
customer via trade show promotions and point of sale displays). NPM stood at 14.0% (+172bps
y/y), surpassing local peers by 583bps.
Market valuation captures fundamentals, leaves little upside risk: Using a DCF model and a
WACC of 11.8% we arrive at a fair value of SAR 125. Market valuation implies a 9% discount to
a domestic peer group P/E (15.5x FY 13e), and 22% premium EV/ EBITDA (14.1x FY 13e), which
we find warranted given above-average margins across the board (+24.5% GPM; +5.6% NPM in
FY 13e). Despite compelling growth and margins, we believe the business holds little upside
risk from current valuation levels. We initiate with Hold and SAR 125 FVE.
Risks: We see some risk in counterfeit products displacing the lower end of consumer
demand, and smaller scale retailers expanding their presence sufficiently to contest Alhokair’s
market share. Despite some FX hedges currently employed at Alhokair, we note that currency
risks will persist as Alhokair imports the majority of its products in Euros and sells in Saudi
Riyals, a currency pegged to the USD. Saudi leadership succession remains unclear, suggesting
risk of political/economic uncertainty.
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 120
Key operating drivers
Organic growth driven by highly supportive demographics and rising purchasing power: We
believe Alhokair will continue to benefit from strong demand through a fast growing
population and an improvement in standards of living in KSA. As per SAMA, the Saudi
population currently amounts to 28mn and has grown at 3% annually, whereas GDP has risen
by an average of 23% in 2009-2011. This all serves to support discretionary spending across a
multitude of segments, particularly mid-range apparel.
Store openings drive growth: Alhokair operates 995 stores within the kingdom (+8% y/y),
claiming a c.50% market share in the branded western apparel industry. International store
launches have been aggressive, rising 66% y/y from 109 in FY 11A to 181 in FY 12A. The retailer
benefits from 78 licensed brands in its portfolio with international names including high street
brands Zara, Marks & Spencer, Bershka and Massimo Dutti.
NESK acquisition EPS accretive, brand dilutive: In Q4 12A, the business bought NESK Group (Al
Jedaie) for SAR 730mn. NESK operates c.120 stores across the Kingdom and benefits from
more than 10 brands in its portfolio such as Mango, Stradivarius, Okaidi, Jerry Weber and
Woman Secret. As per official disclosure, the NESK Group’s FV of assets amounts to SAR
391mn vs. liabilities of SAR 72.2mn. The acquisition charge of SAR 730mn consequently
generates SAR 411.2mn in Goodwill. We estimate the transaction was performed at c.2.5x
price/sales, which we find relatively expensive. The deal remains accretive to EPS given (i) the
expansion of the Hokair’s brand offering (though arguably dilutive in terms of positioning), (ii)
exposure to new consumer segments, and (iii) an expansion of store footprint.
We expect Alhokair to raise its international store count to 261 by FY 13e (+44% y/y) vs.
1,145 locally (+15% y/y driven by the NESK consolidation). Consequently, we see FY 13e
revenues rising 27% y/y with Alhokair’s international presence contributing 10% of top line
(+185bps y/y). In FY 14e onwards we expect annual growth to hover in the 10%-15% region, in
tandem with (i) rising population (iii) increasing disposable income and (iii) store launches. As
such we expect revenues of SAR 4.1bn and SAR 4.6bn in FY 13-14e, up 27% and 45%
respectively vs. FY 12A revenues of SAR 3.2bn.
Exhibit 215: Revenues remain locally driven…
Source: Company Data, Arqaam Capital Research
Exhibit 216: …but international expansion has ramped up faster
Source: Company Data, Arqaam Capital Research
1.9 2.1 2.32.9
3.94.6
5.46.2
0.20.3
0.4
0.6
0.9
1.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e
Sales (SAR bn)
Saudi Arabia International
726 884
919 995
1,195 1,285
1,375 1,465
109
181
271
361
451 541
--
100
200
300
400
500
600
--
200
400
600
800
1,000
1,200
1,400
1,600
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e
International store countLocal store count
Local International
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 121
Leverage and liquidity: In light of the SAR 730mn NESK acquisition deal, Alhokair raised SAR
717m as a long term syndicated Murabaha loan. Consequently, total debt currently stands at
c.SAR 1.4bn (D/E 71%, well above domestic peer average of c.40%). We see little risk Hokair’s
high leverage levels as high operating margins vs. peers (+500bbs) allow for healthy interest
cover (20.9x FY 13e).
Exhibit 217: Working capital vs. P&L remains stable
Source: Company Data, Arqaam Capital Research
Exhibit 218: We see leverage at c.80% by FY 13e
Source: Company Data, Arqaam Capital Research
CAPEX: We believe Alhokair will require c.SAR 730mn in capital expenditures for the launch of
c.350 stores by FY 14e. We expect Hokair to generate c.SAR 1.3bn in OCF during the period,
which should prove sufficient to cover CAPEX needs.
Exhibit 219: Cash flow quality to remain high
Source: Company Data, Arqaam Capital Research
Exhibit 220: We do not expect the NESK acquisition to impact dividend payout
Source: Company Data, Arqaam Capital Research
25 27 42
33 41
108
119 157 115 125
120
154
152
155 160
9%
13%11%
15%16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
--
20
40
60
80
100
120
140
160
180
FY 09A FY 10A FY 11A FY 12A FY 13e
WC/Rev (%)Days
Receivable days Payable days Inventory days WC/Rev.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 500 1000 1500 2000
D/E
Debt (SAR mn)
Othaim
Hokair
Jarir
Extra
Al Meera
353
296 304 400
611
720
19%
14%
12% 12%
14% 14%
--%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
--
100
200
300
400
500
600
700
800
FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e
CFO (SAR mn) CFO/ Revenues
261
140
307 376
83%
31%
50% 50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
--
50
100
150
200
250
300
350
400
FY 11A FY 12A FY 13e FY 14e
Dividends (SAR mn) Payout ratio
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 122
Valuation
Industry positioning and margin profile largely priced in at 12.1x PE and 11.4x
EV EBITDA FY 13e. Initiate with Hold
We value Alhokair at SAR 125/share (+18% vs. CMP), using a DCF model and a WACC of 11.8%
(Re 12.8%, Rd 7.7%, Beta 0.84). We apply a conservative terminal growth rate of 4.0%, 50 bps
above expected inflation. Market valuation implies a 9% discount to domestic peer group P/E
(12.1x FY 13e) and 3.5% premium EV/ EBITDA (11.4x FY 13e), which we find modestly
attractive given above-average margins across the board (+24.8% GPM; +6.3% NPM in FY 13e).
We believe the business’s core strength stems from strategic retail locations, market expertise
and supportive domestic demographics which appear sustainable in the long run. Despite
attractive growth potential and margins, we see little in the way of upside risk to current
market price. Initiate with Hold SAR 125 FVE.
Exhibit 221: Alhokair valuation summary
Source: Company Data, Arqaam Capital Research
Exhibit 222: We see minor upside risk to current multiples
Source: Company Data, Arqaam Capital Research
Risks
Competition from smaller scale retailers with exclusive licenses could threaten sales volume.
Geographic expansion to foreign countries (Kazakhstan, Azerbaijan and the USA) where local
retailers are more competitive could prove challenging. We see downside risks resulting from
margin compressions and higher currency exchange risk. Counterfeit products which are in
wide circulation in MENA, could siphon-off price-sensitive demand. Saudi leadership
succession remains unclear, suggesting risk of political/economic uncertainty.
25
115
20
3 0 125 106
0
20
40
60
80
100
120
140
160
PV
of
visi
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FC
FF
PV
of
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inal
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Ban
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Cas
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NC
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Alhokair DCF summary (SAR/share)
0x
2x
4x
6x
8x
10x
12x
14x
16x
0x 5x 10x 15x 20x
FY 13e EV/EBITDA
FY 13e P/E
Othaim
Hokair
Jarir
Extra
Al Meera
January 18 2013
Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 123
Business trends
Exhibit 223: Women clothing segment contributes c.35% to FY 11A revenues…
Source: Company Data, Arqaam Capital Research
Exhibit 224: …which remain locally driven (92% of sales)
Source: Company Data, Arqaam Capital Research
Exhibit 225: GPM of 44.2% and NPM of 12.4% as of FY 11A…
Source: Company Data, Arqaam Capital Research
Exhibit 226: CAPEX funds cover store expansion targets
Source: Company Data, Arqaam Capital Research
Exhibit 227: We see leverage tapering down to c.50% by FY 15e
Source: Company Data, Arqaam Capital Research
Exhibit 228: ROA of 17% and ROE of 31% are attractive
Source: Company Data, Arqaam Capital Research
47%
35%
8%
5%5%
FY 11A sales distribution
Retail centres Women clothing Shoes Children clothing others
1.9 2.1 2.32.9
3.94.6
5.46.2
0.20.3
0.4
0.6
0.9
1.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e
Sales (SAR bn)
Saudi Arabia International
41.5%
45.4% 44.2% 45.2% 45.4% 45.4%
8.8%11.6% 10.2%
13.3% 13.8% 14.1%
10.7% 11.2% 12.4% 14.0% 14.1% 14.4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e
GPM EBIT margin NPM (Group)
293 279 341
1,225
1,090
882
296 304 400
611
720
861
--
200
400
600
800
1,000
1,200
1,400
FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
Net debt (SAR mn) CFO (SAR mn)
370
386
539
1,437 1,464
1,253 33%
34% 38%
83% 69%
49%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
--
200
400
600
800
1,000
1,200
1,400
1,600
FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
Total debt (SAR mn) D/E (%)
21%
28% 31%
35% 36% 36%
12% 15% 17% 15% 16%
18%
--%
5%
10%
15%
20%
25%
30%
35%
40%
FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
ROE ROA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Ziad Itani Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Retailers Abdullah Al Othaim Markets
HOLD
Retailers / Saudi Arabia Bloomberg code AOTHAIM AB
Market index SASEIDX
Price target (local) 95
Upside (%) 16.2
Market data 17/01/2013
Last closing price 82.0
52 Week range 80.3-102.0
Market cap (SAR mn) 1,845
Market cap (USD mn) 492
Average daily volume (SAR mn) 5.4
Average daily volume (USD mn) 1.4
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 4,090.9 4,440.4 5,033.0 5,666.2
EBITDA 232.9 253.1 286.9 323.0
Net income 150.1 152.4 170.8 189.8
EPS 6.67 6.77 7.59 8.43
P/E (current price) 12.3 12.1 10.8 9.7
BVPS 23.6 27.3 31.5 36.2
P/B (current price) 3.5 3.0 2.6 2.3
EV/EBITDA (current price) 9.0 8.3 7.3 6.5
Div. yield (%) 3.7 3.7 4.2 4.6
FCF margin (%) 2.1 1.4 0.9 0.8
Net debt/EBITDA (x) 1.2 1.2 1.1 1.1
Net debt/Capital (%) 33.3 28.9 28.1 27.8
Interest cover (x) 12.6 12.2 12.0 11.9
RoAA (%) 9.5 8.6 8.6 8.4
RoAE (%) 30.6 26.6 25.8 24.9
RoIC (%) 22.1 19.9 19.4 18.9
Absence of catalysts and weakening margins produce uninspiring
story at 10.8x FY 13e P/E
Initiate with Hold and SAR 95 fair value estimate
Abdullah Al Othaim Markets is the second largest retailer in Saudi Arabia
with 2.5% market share of the SAR 77bn retail industry. The company’s retail
segment forms 80% of sales whereas wholesale contributes the remaining
20%. As of 2010, the company began generating additional revenues by
leasing retail space (4% FY 12e revenues). The business operates a network of
105 retail outlets, including 6 hypermarkets, 70 supermarkets, 9 wholesale
outlets and 20 corner shops. Al Othaim plans to launch 13-15 stores next year
(+12% y/y), which should bring about 25% in revenue growth within the next
24 months. The business remains a lower margin player in its industry (NPM
442bps below peers) on a high finance costs resulting from its store roll-out
commitments. The market has fully digested growth and margin trajectory
over the past 4 quarters, and as such we see little in the way of viable upside
catalysts going forward. We initiate coverage with Hold and SAR 95 FVE.
Saudi retail sales growth driven by demographics and consumer preferences:
KSA retailers are beneficiaries of the market’s young and growing population
base: as per SAMA, the Saudi population currently amounts to 28mn, with
80% of its residents below the age of 40. New household formation and rising
income levels should remain supportive of discretionary consumer spending in
the medium term. Al Othaim revenues are generated locally, with the majority
from the central region, specifically Riyadh.
Margins en route to recovery, but remain less attractive than peer set
average: Scale economies, on the back of expansion, have resulted in
operating margin improvements since FY 09A. However, at an NPM of 3.7% in
FY 11A, (-90bps y/y, pressured by rising finance costs due to store roll-out) the
business is 442bps below industry peers.
CAPEX: c.SAR 588mn will be used to deliver 22 additional stores by FY 14e, by
our estimates. We expect the business to generate c.SAR 677mn in OCF during
the period, rendering additional borrowings to cover CAPEX minimal. Dividend
policy (45% payout) would however necessitate additional leverage (to c.65%
by FY 13e).
We value Al Othaim using DCF. Current market valuation implies an 18%
discount to domestic peer group P/E (10.8x FY 13e), and 34% discount EV/
EBITDA (7.3x FY 13e), which we find warranted. Risks: Supplier concentration
(20 suppliers provide c.80% of shelf products), elevated payables (SAR 778mn:
11x cash at hand, 7.1x receivables and 2.5 x inventories).
SAR 95
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
72
83
94
105
116
127
Jan-12 Apr-12 Jul-12 Oct-12
AOTHAIM AB SASEIDX
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 125
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
2%
4%
6%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
1.0
1.1
1.2
1.3
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Abdullah Al Othaim Markets
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 7.20 6.67 6.77 7.59 8.43 9.30
Diluted EPS 7.20 6.67 6.77 7.59 8.43 9.30
DPS 2.50 3.00 3.05 3.42 3.80 4.18
BVPS 19.93 23.61 27.34 31.51 36.15 41.27
Weighted average shares 22.50 22.50 22.50 22.50 22.50 22.50
Average market cap 1,845.00 1,845.00 1,845.00 1,845.00 1,845.00 1,845.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 11.4 12.3 12.1 10.8 9.7 8.8
P/E (x) (target price) 13.2 14.3 14.1 12.5 11.3 10.2
P/BV (x) (target price) 4.8 4.0 3.5 3.0 2.6 2.3
EV/EBITDA (x) (target price) 10.6 9.0 8.3 7.3 6.5 5.8
EV/FCF (x) (144.1) 24.4 33.3 47.5 47.3 48.0
EV/Invested capital (x) 2.8 2.6 2.3 2.0 1.8 1.6
Dividend yield (%) 3.0 3.7 3.7 4.2 4.6 5.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 12.1 16.3 8.5 13.3 12.6 11.9
EBITDA 42.7 18.7 8.7 13.3 12.6 11.9
EBIT 57.5 7.5 7.8 12.2 11.2 10.4
Net income 108.9 (7.3) 1.6 12.1 11.1 10.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 5.6 5.7 5.7 5.7 5.7 5.7
EBIT 4.2 3.9 3.8 3.8 3.7 3.7
Net 4.6 3.7 3.4 3.4 3.3 3.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 11.9 9.5 8.6 8.6 8.4 8.2
RoAE 40.9 30.6 26.6 25.8 24.9 24.0
RoIC 22.7 22.1 19.9 19.4 18.9 18.4
FCF margin (0.4) 2.1 1.4 0.9 0.8 0.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 38.2 33.3 28.9 28.1 27.8 27.9
Net debt/Equity 68.1 54.1 47.7 46.0 45.2 45.0
Interest cover (x) 36.9 12.6 12.2 12.0 11.9 11.7
Net debt/EBITDA (x) 1.6 1.2 1.2 1.1 1.1 1.2
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 126
Abacus Arqaam Capital Fundamental Data
Company profile
Abdullah Al Othaim Markets was established
in 1956 and is currently the second largest
retailer in Saudi Arabia. The main activity of
the company is the wholesale and retail trade
of food and consumer materials. As of FY 10A,
the company began generating revenues from
retail leasing activities. The company’s
operations are limited to Saudi Arabia with
c.74% of its FY 11A revenues from the central
region of the Kingdom. As of Q3 12A, the
company operates a network of 105 retail
outlets, including six hypermarkets, seventy
supermarkets, nine wholesale outlets and
twenty corner shops.
Ownership and management
Shareholders
Al Othaim Holding Company 27.60%
Mr Abdullah Saleh Ali Al Othaim 6.00%
Public 66.40%
Source: Zawya
Board of Directors
Mr Abdullah Saleh Ali Al Othaim Chairman
Mr Fahed Abdullah Saleh Ali Al Othaim Director
Mr Youssef Bin Mohammed Nasser Al Qafary Director
Mr Abdallah Ali Abdallah Al Dabakhi Director
Mr Abdulaziz Saleh Abdallah Al Rabdi Director
Mr Abdulsalam Saleh Abdulaziz Al Rajehi Director
Mr Sabah Mohammed Motlak Al Motlak Director
Mr Saleh Mohammed Saleh Al Othaim Director
Source: Company data
Abdullah Al Othaim Markets
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 3,518.8 4,090.9 4,440.4 5,033.0 5,666.2 6,340.7
Gross profit 311.6 384.1 417.4 473.1 532.6 596.0
SG&A (115.3) (151.2) (164.3) (186.2) (209.6) (234.6)
EBITDA 196.2 232.9 253.1 286.9 323.0 361.4
Depreciation & Amortisation (49.6) (75.3) (83.1) (96.2) (110.9) (127.4)
EBIT 146.6 157.6 170.0 190.7 212.0 234.0
Net interest income(expense) (4.0) (12.5) (14.0) (15.9) (17.8) (20.0)
Associates/affiliates 14.5 12.7 — — — —
Exceptionals/extraordinaries (1.5) — — — — —
Other pre-tax income/(expense) 10.5 (4.2) — — — —
Profit before tax 166.0 153.6 156.0 174.8 194.2 214.0
Income tax expense (4.1) (3.5) (3.6) (4.0) (4.4) (4.9)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 161.9 150.1 152.4 170.8 189.8 209.2
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 161.9 150.1 152.4 170.8 189.8 209.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 45.2 43.6 106.3 126.8 142.5 152.7
Receivables 88.7 105.5 114.4 129.6 145.9 163.3
Inventories 285.3 311.4 346.1 392.3 441.6 494.2
Tangible fixed assets 908.3 1,024.8 1,108.6 1,282.9 1,479.1 1,698.7
Other assets including goodwill 159.2 190.4 190.4 190.4 190.4 190.4
Total assets 1,486.7 1,675.6 1,865.8 2,122.0 2,399.7 2,699.3
Payables 658.5 777.8 815.6 924.5 1,040.8 1,164.7
Interest bearing debt 350.8 331.0 399.6 453.0 510.0 570.7
Other liabilities 28.9 35.5 35.5 35.5 35.5 35.5
Total liabilities 1,038.2 1,144.3 1,250.7 1,412.9 1,586.2 1,770.8
Shareholders equity 448.5 531.3 615.1 709.1 813.5 928.5
Minorities — — — — — —
Total liabilities & shareholders equity 1,486.7 1,675.6 1,865.8 2,122.0 2,399.7 2,699.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations 263.4 295.1 195.9 320.8 355.8 392.3
Net capex (277.9) (209.7) (133.2) (276.8) (311.6) (348.7)
Free cash flow (14.5) 85.5 62.7 43.9 44.2 43.5
Equity raised/(bought back) — — — — — —
Dividends paid (56.3) (67.5) (68.6) (76.9) (85.4) (94.1)
Net inc/(dec) in borrowings 14.0 (19.8) 68.6 53.3 57.0 60.7
Other investing/financing cash flows (5.2) 0.3 — — — —
Net cash flow (62.0) (1.6) 62.7 20.4 15.8 10.1
Change in working capital 56.8 76.8 (5.8) 47.4 50.6 54.0
Mohammad Kamal Ziad Itani [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 127
Valuation
Market-implied discount to peers warranted on subpar margins and returns
We value Al Othaim at SAR 95/share (+16% vs. CMP), using a DCF model and a WACC of
11.1% (Re 11.7%, Rd 7.7%, Beta 0.73). We apply a conservative terminal growth rate of 4.0%,
50 bps above inflation.
Market valuation implies a 18% discount to domestic peer group P/E (10.8x FY 13e), and 34%
discount EV/ EBITDA (7.3x FY 13e), which we find warranted given lower than average NPM (-
442bps) and RoA (c.-6%) vs. peers. We believe the business’s core strength stems from
strategic retail locations, market expertise and it’s mid to low income target consumer base
(80%+ of the population). Despite growth, the business’s relatively low margins and highly
levered balance sheet offer little appeal in comparison to better-positioned peers. Initiate with
Hold and PT SAR 95.
Exhibit 229: Al Othaim valuation summary
Source: Bloomberg, Company Data, Arqaam Capital Research
Exhibit 230: Discount to peers is warranted, leaves little upside risk (+16%)
Source: Bloomberg, Company Data, Arqaam Capital Research
Exhibit 231: Markdown to peer multiples is justified given lower returns and higher debt burden (FY 13e)
5 -yr Revenue CAGR GPM NPM CFO/Sales D/E RoA RoIC P/E EV/EBITDA
Abdullah Al Othaim 12% 9.4% 3.7% 6.4% 64% 8% 19% 10.8x 7.3x
Fawaz Al Hokair 22% 45.4% 12.4% 14.0% 83% 15% 20% 12.1x 11.4x
Al Meera 20% 15.9% 6.6% 9.1% 27% 6% 9% 13.9x 10.8x
United Electronics Company 15% 17.4% 5.4% 5.9% 0% 15% 31% 14.3x 10.9x
Jarir Marketing 17% 15.0% 12.4% 10.4% 24% 28% 46% 15.0x 14.6x
Average 17% 20.6% 8.1% 9.2% 40% 14% 25% 13.2x 11.0x
Source: Bloomberg, Company Data, Arqaam Capital Research
31
88 32
3 5 95 82
0
20
40
60
80
100
120
140
PV
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FC
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Othaim DCF summary (SAR/share)
0x
2x
4x
6x
8x
10x
12x
14x
16x
0x 5x 10x 15x 20x
FY 13e EV/EBITDA
FY 13e P/E
Othaim
Hokair
Jarir
Extra
Al Meera
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 128
Risks
Competition: particularly from hypermarket operator Panda, who leads the market with >3x
Othaim’s market share. Supplier concentration: 20 suppliers provide for c.80% of shelf
products. A decline in market share could further pressure margins via compromised
bargaining power. Geographic concentration: Operations are largely focused on the Saudi
Arabian market with 95% of products bought locally. Change in target consumer: As per
management guidance, Al Othaim’s main clients are mid-low income residents in KSA. Rising
income levels and improved welfare and public sector wage packages could see consumer
migration towards higher-end retailing formats. Payables: SAR 778mn: 11x cash at hand, 7.1x
receivables and 2.5 x inventories weight heavily on working capital and balance sheet.
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 129
Key operating drivers
Shareholder rejection of proposed merger: In Q4 12A, shareholders rejected a proposed
merger with affiliate entity OREIDCO (Othaim Real Estate Investment Development Co), in
which Al Othaim would effectively acquire Mall assets from OREIDCO. The Othaim family,
which is a shareholder in both companies, did not participate in the vote. The CEO of Al
Othaim had sold down his 18% holding in the firm to 5%, prior to the meeting. In the
aftermath of the shareholder rejection of the proposed merger, Al Othaim stock rebounded by
c.10%. The deal would in our view resulted in value accretion to shareholders (revenue
synergies of c.15%), but would have resulted in substantial control being transferred away
from minorities in favour of majority shareholders.
Exhibit 232: Revenues remain driven by core retail operations and produce 12% CAGR by FY 15e… ……
Source: Company Data, Arqaam Capital Research
Exhibit 233: …As a result of an increase in store count and retail area
Source: Company Data, Arqaam Capital Research
Store pipeline to drive top line growth: Othaim’s retail segment forms 80% of total retail sales
(71.1% of revenues) whereas wholesale contributes the remainder 20% (19.3% of revenues).
Iktisab, Othaim’s customer loyalty program with 400k+ members, contributes 45% of total
sales. Combined sales across retail and wholesale activities rose by c.15% y/y.
As per guidance, the company plans to inaugurate 13 to 15 new stores in FY 13e, composed
of 5 corner shops and 8-10 supermarkets. Given prior delays in store openings* (5 out of 12
planned in 2012 were delayed), we conservatively model for 11 store openings in FY 13e. This
brings the business’s total retail units to c.115 in FY 13e (+10% y/y). Given substantial customer
loyalty and continuous reconfiguration of the retailer’s product offering, we expect per-store
revenues to grow by c.3.5% y/y (vs. 11.6% in FY 11A). Consequently, we see FY 13e revenues
rising 12% y/y, with rental income contributing 4.4%. We expect annual growth to hover in the
10%-13% region, in tandem with (i) rising population (iii) increasing disposable income (iii)
store openings. As such, we expect revenues of SAR 5.0bn and SAR 5.7bn in FY 13-14e, up 13%
and 39% respectively vs. FY 12e revenues of SAR 4.4bn.
*Management guidance attributes delays to store opening schedules to: (i) slow construction progress on the
part of contractors (ii) long bureaucratic processes regarding municipal approvals (iii) power grid connectivity
issues and (iv) delays in securing and acquiring strategic locations.
2.32.8 3.1
3.43.9
4.44.9
5.56.1
0.0
0.10.1
0.1
0.1
0.2
0.2
0.3
0.3
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues (SAR bn)
Retail and wholesale revenues Rental revenues
77 80
86
96
108 113
124
135
146
216
270 292
327
380 398
436
475 514
100
150
200
250
300
350
400
450
500
550
60
70
80
90
100
110
120
130
140
150
160
FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Number of stores Retail area (000's sqm)
January 18 2013
Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 130
Business trends
Exhibit 234: The central region generates 74% of top line...
Source: Company Data, Arqaam Capital Research
Exhibit 235: Supermarkets form 2/3 of retail shops
Source: Company Data, Arqaam Capital Research
Exhibit 236: We believe margins will not materially improve
Source: Company Data, Arqaam Capital Research
Exhibit 237: CFO margin 6.4% in FY 13e
Source: Company Data, Arqaam Capital Research
Exhibit 238: Cash generation is sufficient to fund expansion and concurrently pay down debt
Source: Company Data, Arqaam Capital Research
Exhibit 239: We find ROA of 9% subpar vis-à-vis domestic peers, a function of the business’s high leverage
Source: Company Data, Arqaam Capital Research
5%
12%
7%
74%
2%Geographical sales distribution
Southern region Eastern region Northern region
Central region Western region
6
70
9
20
Store count by type
Hypermarkets Supermarkets Outlets Corner shops
8.9% 9.4% 9.4% 9.4% 9.4% 9.4%
4.6%
3.7% 3.4% 3.4% 3.3% 3.3%
--%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
GPM NPM (Group)
306 287 293
326
367
418
263 295
196
321
356 392
--
50
100
150
200
250
300
350
400
450
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Net debt (SAR mn) CFO (SAR mn)
351 331
400 453 510
571
78%
62% 65% 64%
63%
61%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
--
100
200
300
400
500
600
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Total debt (SAR mn) D/E (%)
36%
28%
25% 24% 23% 23%
11%
9% 8% 8% 8% 8%
--%
5%
10%
15%
20%
25%
30%
35%
40%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
ROE ROA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Rita Eid Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Retailers United Electronics Company (Extra)
HOLD
Retailers / Saudi Arabia Bloomberg code EXTRA AB
Market index SASEIDX
Price target (local) 105
Upside (%) -3.1
Market data 17/01/2013
Last closing price 108.0
52 Week range 77.5-115.5
Market cap (SAR mn) 2,592
Market cap (USD mn) 691
Average daily traded value (SAR mn) 3.9
Average daily traded value (USD mn) 0.0
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 2,461.5 3,015.4 3,608.7 4,104.9
EBITDA 158.0 192.7 228.5 260.1
Net income 132.1 158.9 181.5 206.4
EPS 5.50 6.62 7.56 8.60
P/E (current price) 19.6 16.3 14.3 12.6
BVPS 15.6 19.7 24.4 29.8
P/B (current price) 6.9 5.5 4.4 3.6
EV/EBITDA (current price) 17.0 13.9 11.8 10.3
Div. yield (%) — 2.3 2.6 3.0
FCF margin (%) 2.3 3.8 1.6 3.1
Net debt/EBITDA (x) (0.4) (0.6) (0.5) (0.6)
Net debt/Capital (%) (17.2) (25.6) (18.7) (22.5)
Interest cover (x) 205.5 979.7 — —
RoAA (%) 19.3 18.0 16.6 15.9
RoAE (%) 42.7 37.5 34.3 31.7
RoIC (%) 35.3 33.6 31.0 28.9
Digital products demand growth priced in, Initiate with
Hold and SAR 105 fair value estimate
Market leader in audiovisuals: Extra’s product portfolio includes (i) audio
visual (60% of revenues) and (ii) home appliances (white goods that
provide the highest gross margin across its product offering, and are
present in Riyadh, Jeddah and Khobar) and (iii) digitals, with home
appliances and digitals being equally distributed in their contribution to
revenues. Extra sells a number of its private label brands, (‘Class’-
assembled in China and sold in KSA) and other brands on an exclusive
basis such as Optima, Princess and La Germania. Extra holds a market
share of 4-5% in home appliances, 20% in electronics and 8% in
communication solutions. The Saudi retail market is highly fragmented,
with retailers that individually hold market shares <1% controlling 77% of
the market in 2011, and hypermarkets servicing <5% of the industry.
Changing consumer preferences in favour of organized retailers are driven
by rising income levels, through which consumers are increasingly opting
to pay for access to point of sale services (warranties, repair, and
servicing) that are largely absent elsewhere. We initiate with a Hold
recommendation and fair value estimate of SAR 105.
Growth largely on new store launches: We expect eXtra to register
revenue CAGR of c.15% over the next 3 years via (i) capturing market
share in the digital products segment, albeit at the expense of margins
(estimated at 8-10%), (ii) 16 new store openings by 2016 (producing 13%
of revenues growth by 2016), (iii) capitalizing on rising store traffic and (iv)
international expansion. Extra has begun expanding outside KSA with 2
stores in Oman and Bahrain (recently launched) in early 2013.
Extra’s own private label brands generate the highest gross margins out
of its product portfolio, followed by home appliances (18-20%), audio
visual products (11-13%) and computers and digital products (8-10%). We
model for a slight degree of net margin compression (25bps) in FY 13e
driven by (i) international expansion setup costs and (ii) efforts to capture
market share in digitals at the expense of margins.
Market valuation leaves little on the table: We believe current market
valuation adequately prices in Extra’s growth strategy and regional
expansion. We initiate coverage with a Hold recommendation and SAR
105/share fair value estimate.
Risks: (i) same-store sales cannibalization, and (ii) competition.
SAR 105
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
90
101
112
123
134
145
156
Jan-12 Apr-12 Jul-12 Oct-12
EXTRA AB SASEIDX
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 132
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
5%
10%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
20%
40%
60%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-30%
-20%
-10%
0%
-1.0
-0.5
0.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
30
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
United Electronics Company (Extra)
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 4.07 5.50 6.62 7.56 8.60 9.86
Diluted EPS 4.07 5.50 6.62 7.56 8.60 9.86
DPS — — (2.50) (2.86) (3.25) (3.72)
BVPS 10.14 15.64 19.70 24.41 29.76 35.90
Weighted average shares 24.00 24.00 24.00 24.00 24.00 24.00
Average market cap — 1,871.27 2,498.74 2,498.74 2,498.74 2,498.74
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 26.5 19.6 16.3 14.3 12.6 11.0
P/E (x) (target price) 25.7 19.0 15.8 13.8 12.2 10.6
P/BV (x) (target price) 10.3 6.7 5.3 4.3 3.5 2.9
EV/EBITDA (x) (target price) 22.0 16.5 13.5 11.4 10.0 9.0
EV/FCF (x) (20.0) 46.3 22.6 46.0 20.2 18.1
EV/Invested capital (x) 10.0 6.9 5.5 4.4 3.6 3.0
Dividend yield (%) — — 2.3 2.6 3.0 3.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 23.5 38.4 22.5 19.7 13.8 14.7
EBITDA 94.5 33.6 22.0 18.6 13.8 11.7
EBIT 143.1 36.7 20.3 14.2 13.8 14.7
Net income 138.1 35.1 20.3 14.2 13.7 14.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 6.6 6.4 6.4 6.3 6.3 6.2
EBIT 5.6 5.5 5.4 5.2 5.2 5.2
Net 5.5 5.4 5.3 5.0 5.0 5.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 16.0 19.3 18.0 16.6 15.9 15.5
RoAE 50.3 42.7 37.5 34.3 31.7 30.0
RoIC 38.0 35.3 33.6 31.0 28.9 27.5
FCF margin (7.3) 2.3 3.8 1.6 3.1 3.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (4.5) (17.2) (25.6) (18.7) (22.5) (25.0)
Net debt/Equity (4.8) (17.2) (25.6) (18.7) (22.5) (25.0)
Interest cover (x) 22.8 205.5 979.7 — — —
Net debt/EBITDA (x) (0.1) (0.4) (0.6) (0.5) (0.6) (0.7)
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 133
Abacus Arqaam Capital Fundamental Data
Company profile
Extra (United Electronics Company) is a leading big-box retailer in Saudi Arabia with 29 stores in the Kingdom. Extra started its operations in 2003 and was listed on Saudi market in December 2011. The company’s core activities include retail of consumer electronics, appliances and communication solutions. Extra plans to have 40 stores in the Kingdom by 2015 and 4 stores in Oman and Bahrain by 2016. Extra aims to become the leading retailer in the GCC in 2020.
Ownership and management
Shareholders
Al Fozan Holding Company 45.43%
Public 30.00%
Abdulaziz Alsaghyir Commercial Investment Co. 14.94%
Itlalah Arabia Trading Co. 3.50%
Abdullatif and Mohammad Al Fozan Co. 2.10%
Rokn Al Elham Development Co. 2.03%
Ma'aly Al Khaleej Trading Co. 2.00%
Source: Zawya
Board of Directors
Mr. Abdulah Abdullatif Al Fozan Chairman
Mr. Hisham Abdulaziz Alsaghyir Director
Mr. Ahmed Youssef Ahmed Alsager Director
Mr. Abdulmohsen Abdullatif Alissa Director
Mr. Mohamed Galal Ali Fahmy Director
Mr. Basil Mohammad Al Gadhib Director
Mr. Fozan Mohammad Al Fozan Director
Mr. Waleed Abdulaziz Alsaghyir Director
Mr. Khalid Abdullatif Al Fozan Director
Source: Company data
United Electronics Company (Extra)
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 1,778.4 2,461.5 3,015.4 3,608.7 4,104.9 4,707.1
Gross profit 322.1 435.3 530.7 626.1 712.2 816.7
SG&A (222.7) (299.4) (367.3) (439.5) (500.0) (573.3)
EBITDA 118.3 158.0 192.7 228.5 260.1 290.4
Depreciation & Amortisation (18.8) (22.0) (29.3) (41.9) (47.9) (47.1)
EBIT 99.4 135.9 163.4 186.6 212.2 243.4
Net interest income(expense)* (0.2) (0.6) (0.2) — — —
Associates/affiliates 0.5 — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 0.3 0.1 0.2 0.2 0.1 —
Profit before tax 100.1 135.5 163.5 186.7 212.3 243.4
Income tax expense (2.3) (3.4) (4.6) (5.2) (5.9) (6.8)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 97.7 132.1 158.9 181.5 206.4 236.5
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 97.7 132.1 158.9 181.5 206.4 236.5
*As reported
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 30.2 64.6 121.2 109.4 160.4 215.0
Receivables 7.5 5.3 9.6 11.5 13.1 15.0
Inventories 256.6 340.8 427.9 513.6 584.2 670.0
Tangible fixed assets 267.0 317.1 390.3 503.5 599.3 693.5
Other assets including goodwill 30.5 47.2 46.7 46.7 46.7 46.7
Total assets 591.7 775.1 995.8 1,184.8 1,403.8 1,640.2
Payables 309.1 369.7 490.4 566.5 657.0 746.1
Interest bearing debt 18.5 — — — — —
Other liabilities 20.8 30.0 32.5 32.5 32.5 32.5
Total liabilities 348.5 399.7 522.9 598.9 689.5 778.6
Shareholders equity 243.3 375.3 472.9 585.9 714.4 861.6
Minorities — — — — — —
Total liabilities & shareholders equity 591.7 775.1 995.8 1,184.8 1,403.8 1,640.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations (14.8) 128.5 217.6 211.9 272.6 285.1
Net capex (115.4) (72.2) (102.5) (155.2) (143.7) (141.2)
Free cash flow (130.2) 56.3 115.1 56.7 129.0 143.9
Equity raised/(bought back) — — — — — —
Dividends paid — — (58.9) (68.5) (77.9) (89.3)
Net inc/(dec) in borrowings (52.3) (18.5) — — — —
Other investing/financing cash flows 198.0 (3.5) 0.5 — — —
Net cash flow 15.5 34.4 56.6 (11.8) 51.0 54.6
Change in working capital (132.9) (32.7) 29.4 (11.6) 18.3 1.5
Mohammad Kamal Rita Eid [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 134
Digital products demand growth priced in, Initiate with Hold and
SAR 105 fair value estimate (SAR 84 adj. for 1:4 stock dividend)
Extra affords exposure to Saudi discretionary consumer spending that results from (i) growth
in per-capita income, (ii) rising population, household formation, and urbanisation rates, (iii)
supportive demographics, and (iv) evolving consumer preferences. We think KSA residents will
(i) spend more on electronic equipment as income levels rise, (ii) furnish more households as
(iii) its youthful population begins to form family units, and (iv) prefer the point of sale benefits
(servicing, repair, and guarantees) that are available at organised retailers, rather than the
limited ancillary services available at fragmented smaller retailers today. We however believe
that the market has fully priced in eXtra’s positioning in the Saudi retail market. We find
current valuation levels fair 14.3x FY 13e P/E, placing it on par with direct peer Jarir Marketing
(Hold, SAR 180). We initiate with a Hold recommendation and SAR 105 fair value estimate.
Market leader in audiovisuals: Extra’s product portfolio includes (i) audio visual (60% of
revenues) and (ii) home appliances (white goods that provide the highest gross margin across
its product offering, and are present in Riyadh, Jeddah and Khobar) and (iii) digitals, with home
appliances and digitals being equally distributed in their contribution to revenues. Extra sells a
number of its private label brands, (‘Class’- assembled in China and sold in KSA), and certain
brands on an exclusive basis such as Optima, Princess and La Germania. Extra holds a market
share of 4-5% in home appliances, 20% in electronics and 8% in communication solutions. The
Saudi retail market is highly fragmented, with retailers that individually hold market shares
<1% controlling 77% of the market in 2011, and hypermarkets servicing <5% of the industry.
Changing consumer preferences in favour of organized retailers are driven by rising income
levels, through which consumers are increasingly opting to pay for access to point of sale
services (warranties, repair, and servicing) that are largely absent elsewhere.
Exhibit 240: Extra’s market share in KSA consumer electronics reached 13.6% in FY 12A
Retailer Name 2008 2009 2010
eXtra 6.7% 8.0% 9.3%
Jarir Bookstore 3.3% 4.0% 4.7%
Axiom 2.3% 2.5% 2.6%
Hyper Panda 2.2% 2.2% 2.3%
E-max 1.5% 1.8% 2.0%
Electro 1.2% 1.3% 1.3%
Carrefour 1.6% 1.3% 1.1%
Best E-City 0.4% 0.4% 0.3%
Others 80.7% 78.5% 76.3%
Source: Euromonitor, Arqaam Capital Research
Extra’s main competitors in the home appliances and consumer electronics segment are
Electro (4 stores) and Emax (6 stores). In the mobile segment, Axiom Telecom – a leading
distributor and retailer of mobile phones - is broadly considered a market leader. Extra’s
largest competitor in the laptops and computers segment is Jarir Marketing (Hold, SAR 180),
who commands a 50% share of the domestic market. Extra’s mega sale event held in October
has been successful and attracted 1.9mn visitors (58% growth y/y). The event has depleted
stocks by 50% according to management.
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 135
Growth: We expect eXtra to register revenue CAGR of c.15% over the next 3 years via (i)
increasing market share in the digital products segment, albeit at the expense of margins
(estimated at 8-10%), (ii) 16 new store openings by 2016 (producing 13% of revenues growth
by 2016), (iii) capitalizing on rising store traffic and (iv) regional expansion. Regional exposure
has begun with a single store in Bahrain, which has started operations in early FY 13e. We
estimate a CAPEX bill/new store of SAR 5-16mn, depending on size and location. We expect
eXtra to have spent 3.5% of sales this year on store expansions, and for this to rise to 4.5% in
FY 13e, as the business expands in Bahrain and Oman.
Other regional ventures of note: In Q1 12A, eXtra signed a strategic alliance with Qatar’s Al
Meera Holding (Buy, QAR 205) to set up a 50/50 JV in Doha, aimed at selling eXtra’s brands in
the country. The JV would allow eXtra to establish a footprint in a growth market alongside a
26% Qatari government-owned partner, whose presence in Qatar is established. As per
management guidance, we do model for the JV contributing c. 5% of revenues starting FY 15e.
Exhibit 241: Extra’s total store network to reach 39 in FY 14e, with 2 outlets outside KSA
Source: Company Data, Arqaam Capital Research
E-commerce: eXtra launched an integrated e-commerce capability during 2011 at a cost of SAR
4.7mn, which management estimates covers 90% of the Kingdom. The company has
established the infrastructure needed to retail electronically, however revenues from e-
commerce remain relatively minor (c.1% of revenues). The fact that shopping in the Kingdom is
a social recreational activity mitigates the threat of e-commerce from competitors significantly
encroaching on market share.
Saudisation: As of June 2011, the company successfully reached the requisite Saudisation
quota (c.24%) to meet the Ministry of Labour’s requirements for local hires.
Valuation: We believe current market valuation adequately prices in Extra’s growth strategy
and expansion plans. We initiate coverage with a Hold recommendation and SAR 105/share
fair value estimate. Risks: (i) same-store sales cannibalization, and (ii) competition.
2 4
7 5
7 5
13
17
24
29
36 39
--
5
10
15
20
25
30
35
40
45
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e
Store openings Total stores
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 136
Valuation: Initiating coverage with a Hold recommendation and
SAR 105/share fair value estimate
Fundamentals fully priced in at 14.3x and 12.6x FY 13/14e P/E and 11.8x and 10.3x FY 13/14e
EV/EBITDA: Our DCF-based fair value estimate of SAR 105 (3% downside to CMP) implies 13.8x
FY 13e P/E and 11.4x EV/EBITDA. Extra currently trades at 14.3x and 12.9x FY 13-14e P/E, in
line with direct domestic peer Jarir Marketing (Hold, SAR 180). We believe current market
valuation adequately prices in Extra’s growth strategy and expansion plans. We initiate
coverage with a Hold recommendation and SAR 105/share FVE.
Exhibit 242: DCF valuation summary
Source: Company Data, Arqaam Capital Research
Risks: Sales cannibalization: Extra plans to reach 40 stores in KSA by 2016. As a result, the
potential for same-store sales to decline as new stores are rolled out is high. Competitors are
highly capable of engaging eXtra in on price and product range (Electro, Emax, Axiom Telecom,
Jarir).
United Electronics Company (eXtra)
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT 187 212 243 274 309
42 48 47 44 40
EBITDA 229 260 290 318 349
(12) 18 2 12 (4)
217 278 292 330 345
(155) (144) (141) (133) (120)
Zakat (5) (6) (7) (8) (9)
57 129 144 190 217
0.90 0.81 0.74 0.67 0.60
51 105 106 127 131
3,458
520 Rf 4.2%
2,087 EMRP 10.0%
2,606 0.80
12.2%
95
(95) Cost of Debt 4.0%
Add: Investments in associates 0.3
Less: Non controlling interest --
2,512 D/E (market) 20.0%
NOSH 24 WACC 10.5%
105 4.0%
11.4x 10.0x 9.0x 8.2x 7.5x
P/E 13.8x 12.2x 10.6x 9.4x 8.4x
P/B 4.3x 3.5x 2.9x 2.4x 2.1x
Adjusted Beta
Cost of Equity
WACC parameters
Implied multiples
EV/EBITDA
PV of Visible FCFF
PV of Terminal Value
Enterprise Value
Add: Cash & Cash Equivalents
Less: Total Debt
Equity Value
Equity Value per Share
Purchase of PPE
DCF summary
SAR mn unless otherwise stated
Depreciation & Amortization
Working capital changes
Operating Cash Flow
Free Cash Flow to Firm
Discount Factor using WACC at 10.7%
PV of Visible FCFF
Terminal Value
Equity Valuation
Perpetual grow th
January 18 2013
United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 137
Operating drivers
Revenues: We see revenue CAGR of 15% over the next 3 years via (i) market share gains in
the digital products segment, via aggressive pricing (at expense of margins -estimated at 8-
10%), (ii) 16 new store openings by 2016 (producing 13% rev growth by FY 16e), (iii) an
increase in store traffic driven by rising discretionary spending and household numbers,
and (iv) regional expansion.
Extra plans to expand outside KSA with 5 stores planned in Oman, Bahrain and Qatar by
2016. However, we conservatively model for 2 store openings in Bahrain and Oman in FY
13e, which we expect to contribute 4% of revenues in FY 13e and a further store in Qatar
as a result of the JV with Al Meera (5% revenues FY 15e).
Exhibit 243: Revenue 3yr CAGR of 25% FY 08-11A
Source: Company Data, Arqaam Capital Research
Exhibit 244: 15% 3yr CAGR going forward
Source: Company Data, Arqaam Capital Research
Margins: Extra’s own brands generate the highest gross margins, followed by home
appliances (18-20%), audio visual products (11-13%) and computers and digital products
(8-10%). We model for a slight net margin compression (25bps) in FY 13e driven by (i)
regional roll-out and setup costs and (ii) efforts to increase market share in digitals at the
expense of margins.
Exhibit 245: Market share gains in digitals at expense of margins…
Source: Company Data, Arqaam Capital Research
Exhibit 246: …forecast slight margin compression driven by setup costs and efforts to increase share in digitals
Source: Company Data, Arqaam Capital Research
1,262 1,440
1,778
2,462
--
500
1,000
1,500
2,000
2,500
3,000
FY 08A FY 09A FY 10A FY 11A
Revenues (SAR mn)
3,015
3,609
4,105
4,707
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY 12e FY 13e FY 14e FY 15e
Revenues (SAR mn)
18.1% 17.7% 17.6%
6.6% 6.4% 6.4% 5.5% 5.4% 5.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
FY 10A FY 11A FY 12A
Gross margin EBITDA margin Net margin
17.4% 17.4% 17.4%
6.3% 6.3% 6.2% 5.0% 5.0% 5.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
FY 13e FY 14e FY 15e
Gross margin EBITDA margin Net margin
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Haidar Arqaam Capital Research Offshore s.a.l.
Saudi Arabia – Consumer staples Herfy Food Services Co.
HOLD
Consumer staples / Saudi Arabia Bloomberg code HERFY AB
Market index SASEIDX
Price target (local) 120
Upside (%) 16.7
Market data 17/01/2013
Last closing price 102.8
52 Week range 84.0-114.0
Market cap (SARmn) 3,083
Market cap (USDmn) 822
Average Daily Traded Value (SARmn) 2.8
Average Daily Traded Value (USDmn) 0.8
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 708.6 847.8 969.7 1,085.5
EBITDA 188.2 225.1 247.3 276.8
Net income 146.6 178.8 193.3 216.4
EPS 4.89 5.96 6.44 7.21
P/E (current price) 21.0 17.2 15.9 14.2
BVPS 14.7 17.6 21.1 24.8
P/B (current price) 7.0 5.8 4.9 4.1
EV/EBITDA (current price) 16.4 13.7 12.5 11.2
Div. yield (%) 2.8 2.9 2.9 3.4
FCF margin (%) 12.1 10.4 13.1 14.2
Net debt/EBITDA (x) (0.1) (0.1) (0.2) (0.4)
Net debt/Capital (%) (3.4) (2.5) (7.5) (12.7)
Interest cover (x) 278.6 341.3 379.3 424.5
RoAA (%) 27.0 28.2 26.2 25.4
RoAE (%) 35.8 37.0 33.3 31.5
RoIC (%) 31.5 32.2 29.4 28.1
Leading KSA fast food brand: growth via (i) 10% outlet additions and (ii) rising store yields, given growing franchise popularity and discount menu pricing strategy (iii) operating leverage, as expansion CAPEX is complete Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation, initiate with Hold Herfy is a leading fast food brand in KSA currently running 198 ‘Herfy’
outlets across the Kingdom (21 owned, 177 leased) with 20 additional
restaurants in the pipeline by FY 13e (+10%). The company completed
a comprehensive revamp of its restaurant segment in 2011 and added
capacity at its in-house bakery division in 2012. We expect new stores
to drive growth in the medium term, and bakery sales to 3rd
parties
support revenue growth at 15% CAGR over the next 5 years. We
believe the market is fairy pricing Herfy’s strong franchise at current
multiples. We initiate with a Hold and SAR 120 fair value estimate.
Medium term growth CAPEX complete- look for ~25% EPS and ~30%
OCF accretion by FY 14e: Herfy fully expensed CAPEX on the new
bakery line (SAR 100mn) in H1 12A and has little further obligations
due in the medium term. The outcome is above average OCF margins
(27%), FCF yields (14%) by FY 14e, but more importantly, vastly
superior RoE of 33%- among the best within the sdelection of
companies under coverage in this report.
Value lies in local franchise and brand exportability in MENA: We
value Herfy at SAR 120/share on DCF (WACC 9.3% and TGR 4%). Our
price target implies a 18.6x FY 13e P/E, and 14.6x EV/EBITDA, a
premium of 50% to regional peers. We believe the market has
adequately acknowledged the franchise value inherent in the
business, and its successful menu pricing strategy and industry
positioning as a value-for-money local brand. We wait for EPS
accretion to play out and multiples to begin to offer better value vs.
peers.
Risk: Fewer-than-expected store openings and grain prices volatility
could largely impact our EV and equity value estimates.
SAR 120
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
82
91
100
109
118
127
136
Jan-12 Apr-12 Jul-12 Oct-12
HERFY AB SASEIDX
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 139
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-20%
-10%
0%
-0.6
-0.4
-0.2
0.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Herfy Food Services Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 4.14 4.89 5.96 6.44 7.21 8.01
Diluted EPS 4.14 4.89 5.96 6.44 7.21 8.01
DPS 2.03 2.91 3.00 3.00 3.50 4.00
BVPS 12.67 14.65 17.61 21.06 24.77 28.79
Weighted average shares 30.00 30.00 30.00 30.00 30.00 30.00
Average market cap 960.00 2,200.50 3,082.50 3,082.50 3,082.50 3,082.50
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 24.8 21.0 17.2 15.9 14.2 12.8
P/E (x) (target price) 29.0 24.5 20.1 18.6 16.6 15.0
P/BV (x) (target price) 9.5 8.2 6.8 5.7 4.8 4.2
EV/EBITDA (x) (target price) 22.9 19.2 16.0 14.6 13.0 11.7
EV/FCF (x) 48.4 42.1 40.8 28.4 23.3 19.6
EV/Invested capital (x) 9.0 7.7 6.5 5.5 4.7 4.1
Dividend yield (%) 2.0 2.8 2.9 2.9 3.4 3.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 12.0 22.2 19.7 14.4 11.9 11.1
EBITDA 11.5 19.6 19.6 9.8 11.9 11.1
EBIT 9.1 19.8 20.7 11.1 11.9 11.1
Net income 8.4 18.0 22.0 8.1 12.0 11.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 27.1 26.6 26.6 25.5 25.5 25.5
EBIT 21.3 20.9 21.1 20.5 20.5 20.5
Net 21.4 20.7 21.1 19.9 19.9 19.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 27.3 27.0 28.2 26.2 25.4 24.7
RoAE 35.7 35.8 37.0 33.3 31.5 29.9
RoIC 31.0 31.5 32.2 29.4 28.1 27.0
FCF margin 12.9 12.1 10.4 13.1 14.2 15.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (3.9) (3.4) (2.5) (7.5) (12.7) (18.0)
Net debt/Equity (4.2) (3.7) (2.7) (8.0) (13.4) (18.9)
Interest cover (x) 267.5 278.6 341.3 379.3 424.5 471.5
Net debt/EBITDA (x) (0.1) (0.1) (0.1) (0.2) (0.4) (0.5)
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 140
Abacus Arqaam Capital Fundamental Data
Company profile
Herfy is a leading fast food chain in Saudi Arabia,
established in 1981. Herfy currently runs 198
outlets across the Kingdom. The company holds
a 25% share of the fast food market in KSA, with
operations concentrated in the Central region.
Herfy runs a bakery facility which recently
commenced a new line, after building a 4-line
plant in Riyadh. The company currently has a
small presence in the GCC through franchised
restaurants in Kuwait, Bahrain, and UAE.
Ownership and management
Shareholders
Savola Group Company 47.6%
Ahmad Hamad Mohammed Al Saeed 20.3%
Public 32.1%
Source: Zawya
Board of DirectorsMr Abdulaziz Bin Khaled Bin Ali Al Ghufaili Chairman
Dr Abdul Raouf Mohammed Manna Director
Mr Khaled Ahmad Hamad Mohammed Al Saeed Director
Mr Abdulsalam Bin Abdulrahman Al Akil Director
Mr Ahmad Hamad Mohammed Al Saeed Director
Mr Ibrahim Bin Hasan Al Madhun Director
Mr Abdullah Bin Abdullatif Al Sayf Director
Mr Ahmad Abdullatif Al Shubaiki Director
Source: Zawya
Herfy Food Services Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 579.9 708.6 847.8 969.7 1,085.5 1,205.5
Gross profit 192.9 226.2 264.5 300.6 336.5 373.7
SG&A (69.2) (78.0) (85.6) (101.8) (114.0) (126.6)
EBITDA 157.3 188.2 225.1 247.3 276.8 307.4
Depreciation & Amortisation (33.6) (39.9) (46.2) (48.5) (54.3) (60.3)
EBIT 123.7 148.3 178.9 198.8 222.5 247.1
Net interest income(expense) (0.5) (0.5) (0.5) (0.5) (0.5) (0.5)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 4.4 2.5 5.1 — — —
Profit before tax 127.7 150.2 183.4 198.3 222.0 246.6
Income tax expense (3.5) (3.6) (4.6) (5.0) (5.5) (6.2)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 124.3 146.6 178.8 193.3 216.4 240.4
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 124.3 146.6 178.8 193.3 216.4 240.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and equivalents 50.0 57.7 55.4 91.8 140.7 204.4
Receivables 24.1 20.4 24.4 27.9 31.3 34.7
Inventories 48.2 65.2 78.8 90.4 101.2 112.4
Tangible fixed assets 321.1 381.8 462.8 521.0 575.2 623.4
Other assets including goodwill 55.5 61.8 61.8 61.8 61.8 61.8
Total assets 498.8 586.9 683.2 792.9 910.2 1,036.8
Payables 25.4 35.6 43.1 49.4 55.3 61.4
Interest bearing debt 33.9 41.3 41.3 41.3 41.3 41.3
Other liabilities 59.4 70.5 70.5 70.5 70.5 70.5
Total liabilities 118.6 147.3 154.8 161.1 167.0 173.1
Shareholders equity 380.2 439.6 528.4 631.8 743.2 863.6
Minorities — — — — — —
Total liabilities & shareholders equity 498.8 586.9 683.2 792.9 910.2 1,036.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 157.2 188.2 215.4 233.6 263.0 292.7
Net capex (82.7) (102.7) (127.2) (106.7) (108.5) (108.5)
Free cash flow 74.5 85.5 88.2 126.9 154.5 184.2
Equity raised/(bought back) — — — — — —
Dividends paid (60.8) (87.3) (90.0) (90.0) (105.0) (120.0)
Net inc/(dec) in borrowings 15.7 7.4 — — — —
Other investing/financing cash flows 0.4 2.1 — — — —
Net cash flow 29.9 7.7 (1.8) 36.9 49.5 64.2
Change in working capital (0.6) 0.4 (10.2) (8.8) (8.2) (8.5)
Mohammad Kamal Mohamad Haidar [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 141
Initiate with a Hold recommendation and SAR 120 price target
Leading KSA fast food brand: growth via (i) 10% outlet additions and (ii) rising store yields, given growing franchise popularity and discount menu pricing strategy (iii) operating leverage, as expansion CAPEX is complete Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation, initiate with Hold Herfy is a leading fast food brand in KSA currently running 198 ‘Herfy’ stores across the
Kingdom (21 owned, 177 leased) with 20 additional restaurants in the pipeline by FY 13e (10%+
of total outlets), of which 4 will be fully owned, and the remaining land-leased. The company
underwent a mass renovation of its restaurant premises in 2011, and launched a capacity
expansion at its bakery division in 2012. We expect store additions to continue to drive growth
momentum in the medium term, and the bakery expansions to support 20% revenue growth in
FY 12e and FY 13e. We believe the market is fairy pricing in Herfy’s strong domestic franchise
and operating leverage at current multiples. We initiate with a Hold and SAR 120 fair value
estimate.
Outlet additions and rising footfall drive growth at the company’s largest business segment:
Herfy is on track to launch 20 additional branches in 2013 after adding 11 stores in 2012
(below an initial target of 20, due to renovation works) to meet rising demand for fast food
meals as KSA’s youth population continues to grow in absolute numbers (3% y/y) and
disposable income levels improve (12% y/y). The new stores will result in enhanced
profitability in FY 13e, due to their larger size (land-leased outlets attract higher footfall than
average store-front restaurants). We expect Herfy to add a minimum of 20 stores annually in
the coming 5 years and expect revenues from this segment to grow at a 5 year CAGR of 15%.
Exhibit 247: Higher footfall drives yield/store up; grain prices mitigate the gain at the EBIT level
Source: Arqaam Capital Research, Company Data
18.5%
19.0%
19.5%
20.0%
20.5%
21.0%
21.5%
22.0%
22.5%
--
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A Q1 12A Q2 12A Q3 12A
Yield/store (SAR) EBIT margin (RHS)
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 142
Menu re-pricing is a last resort response to rising grain prices: Herfy has employed a
competitive pricing strategy vis-a-vis local rivals (McDonald’s, Hardees, Burger King,
Fuddruckers, etc.) which offers customers lower than average menu prices (prices over the
past 2.5 years have not changed), and rather competing on lowering their costs through
vertical integration and cost-effective supplier agreements. This leaves room for the business
to raise menu prices in the future, should global grain prices rise further. We currently assume
that grain prices will fixed throughout our forecast period, but note that a 10% move in grain
cost would impact our EV and FVE by 23% each.
Exhibit 248: A 10% increase in grain prices lower our EV estimate by 23%...
Source: Company Data, Arqaam Capital Research
Exhibit 249: …and lower our fair value estimate by a similar amount
Source: Company Data, Arqaam Capital Research
Exhibit 250: Above-average EBITDA margins despite discounted menu prices relative to peers
Source: Company Data, Arqaam Capital Research *Q2 12A numbers
Bakery facility allows for ancillary revenues from sales to 3rd
parties: Herfy launched
operations in line 1 of its new bakery plant in Riyadh after completely deploying CAPEX in H1
12A (SAR 100mn). Three lines remain idle at the new factory of which we expect a second line
to commence operations in the coming 6-9 months, against total CAPEX obligations of SAR
150mn. We expect revenues from the bakery segment to grow at a 5-year CAGR of 13%, unlike
operations at the Chaboura plant (Maamoul) which we expect to witness minimal growth in
the coming years due to rising competition and the lack of expansion opportunities.
COGS as a % of sales SG&A as a % of sales
3,612 11.50% 11.00% 10.50% 10.00% 9.50%
73.1% 2,590 2,685 2,779 2,874 2,968
71.1% 3,006 3,101 3,196 3,290 3,385
69.0% 3,423 3,518 3,612 3,707 3,802
66.9% 3,839 3,934 4,029 4,123 4,218
64.9% 4,256 4,351 4,445 4,540 4,635
EV sensitivity- cost components
COGS as a % of sales SG&A as a % of sales
120 11.50% 11.00% 10.50% 10.00% 9.50%
73.1% 86 89 92 96 99
71.1% 100 103 106 109 113
69.0% 114 117 120 123 127
66.9% 128 131 134 137 140
64.9% 142 145 148 151 154
PT sensitivity- cost components
36.5%
31.2% 31.1% 30.4%
16.4%
24.2% 21.1%
13.4% 15.8%
10.1%
14.8%
21.3%
9.8% 9.2%
4.8%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Almarai Herfy SADAFCO* Halwani Savola
Margins (9M 12A)
Gross margin EBITDA margin Net margin
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 143
Internal sourcing of raw material supports long-term margin stability: Herfy fully sources
ingredients for its restaurants from its meat processing and bakery plants. Its meat plant also
supplies hypermarkets in KSA, and has done so since it raised capacity in 2010. Herfy recently
expanded its meat processing factory to fully meet the rising raw material need in its
restaurants segment where it supplies 100% of meat/poultry used in production, leaving 30%
of the plant’s output to be distributed to local hypermarkets, which should secure the segment
a 5-year revenue CAGR of 9%. Herfy imports raw material necessary for its meat plant from
different suppliers (Brazil and Australia, among others) through long-term agreements. This
allows the company to better manage its cost base (60% in meat/poultry) in the absence of
hedging strategies against global grain prices. We expect SG&A costs to settle at 10-10.5% of
total revenues going forward, and gross margins to arrive at 31.2% and 31% in FY 12e and
FY13e, respectively.
Exhibit 251: 10% increase in poultry/feed costs lower our terminal-year NPM by 410bps…
Source: Company Data, Arqaam Capital Research
Exhibit 252: …and creates a 20% dilution on EPS in FY 17e
Source: Company Data, Arqaam Capital Research
Medium term growth CAPEX complete- look for ~25% EPS and ~30% OCF accretion by FY 14e:
Herfy fully expensed CAPEX on the new bakery line (SAR 100mn) in H1 12A and has little
further obligations due in the medium term. The outcome is above average OCF margins
(25%), FCF margins (14%) by FY 14e, but more importantly, vastly superior RoE of 33%- the
best among companies covered in this report. In the longer-term picture, we expect Herfy to
incur a total of SAR 585mn in CAPEX over the coming 5 years which includes the
commissioning of a new bakery line and covers maintenance works. This is against total OCF of
SAR 1.5bn, allowing for an 50% dividend payout and distributions of SAR 4/share in FY 15e, in
our view.
Valuation: We value Herfy at SAR 120/share on DCF (WACC 9.3% and TGR 4%). Our price
target implies a 18.7x FY 13e P/E, and 14.6x EV/EBITDA, a premium of 50% to regional peers.
We currently believe the market has adequately acknowledged the franchise value inherent in
the business, and its successful menu pricing strategy and industry positioning as a value-for-
money local brand. We wait for EPS accretion to play out and multiples to begin to offer
better value vs. peers. Risk: Fewer-than-expected store openings and delays in launching line 2
at Herfy’s bakery facility. With 60% of Herfy’s input costs contained in poultry/feed costs, grain
price changes could largely impact our EV and equity value estimates as well as margins at the
gross and net levels.
COGS as a % of sales SG&A as a % of sales
20.0% 11.50% 11.00% 10.50% 10.00% 9.50%
73.1% 14.9% 15.4% 15.9% 16.4% 16.9%
71.1% 17.0% 17.4% 17.9% 18.4% 18.9%
69.0% 19.0% 19.5% 20.0% 20.4% 20.9%
66.9% 21.0% 21.5% 22.0% 22.5% 22.9%
64.9% 23.0% 23.5% 24.0% 24.5% 25.0%
Net profit margin sensitivity- cost components
COGS as a % of sales SG&A as a % of sales
9.7 11.50% 11.00% 10.50% 10.00% 9.50%
73.1% 7.2 7.5 7.7 7.9 8.2
71.1% 8.2 8.5 8.7 8.9 9.2
69.0% 9.2 9.4 9.7 9.9 10.1
66.9% 10.2 10.4 10.6 10.9 11.1
64.9% 11.2 11.4 11.6 11.9 12.1
EPS sensitivity- cost components
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 144
Valuation
>30% RoE, RoIC business warrants premium multiples to peer set
But at ~14x P/E FY 14e, market fully prices in franchise value and operating
leverage; initiate with a Hold recommendation and SAR 120 FVE
We value Herfy at SAR 120/share using a DCF valuation exercise (WACC 9.3% and TGR of 4%).
Our price target implies 18.6x FY 12e P/E, and 14.6x EV/EBITDA, a premium of 50% to regional
peers. We believe market is fairy pricing Herfy’s strong market position and expansion strategy
at current multiples. We believe the market has adequately acknowledged the franchise value
inherent in the business, and its successful menu pricing strategy and industry positioning as a
value-for-money local brand. We wait for EPS accretion to play out and multiples to begin to
offer better value vs. peers, and initiate with a Hold recommendation and SAR 120 fair value
estimate.
Exhibit 253: DCF summary
Source: Arqaam Capital Research, Company Data
Herfy Food Services Co.
DCF summary
SARmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 194 217 241 265 291
Depreciation & Amortization 48 54 60 66 73
EBITDA 242 271 301 332 363
Working Capital Changes (9) (8) (9) (9) (9)
Operating Cash Flow 234 263 293 323 354
Purchase of PPE (107) (109) (108) (120) (124)
Free Cash Flow to Firm 127 154 184 204 231
Discount Factor using WACC at 9.3% 0.91 0.83 0.76 0.70 0.64
PV of Visible FCFF 116 129 141 142 148
Terminal Value 4,571
Equity Valuation WACC parameters
PV of Visible FCFF 679 Rf 4.2%
PV of Terminal Value 2,926 EMRP 10.0%
Enterprise Value 3,605 Adjusted Beta 0.68
Cost of Equity 11.0%
Cash & Cash Equivalents 38
Less: Net (Debt) Funds (45) Marginal tax rate 2.5%
Cost of Debt 4.0%
Equity Value 3,599 D/C (market) 25.0%
NOSH 30 WACC 9.3%
Equity Value per Share 120 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 14.6 13.0 11.7 10.6 9.7
P/E 18.6 16.6 15.0 13.6 12.4
P/B 5.7 4.8 4.2 3.6 3.1
* Based on after-tax operating profit
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 145
Exhibit 254: Herfy in peer context
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
Herfy 15.9 14.2 4.9 4.1 12.5 11.2
Average consumer staples 12.5 10.3 2.2 2.0 11.9 10.2
Premium / (discount) 27.9% 38.2% 121.0% 112.0% 5.2% 9.6%
Average consumer discretionary 9.4 8.2 2.7 2.4 7.3 6.5
Premium / (discount) 69.4% 74.4% 77.9% 71.7% 72.0% 71.4%
Average retailers 13.8 12.4 3.9 3.4 12.4 11.1
Premium / (discount) 15.5% 15.1% 25.8% 23.6% 0.6% 0.2%
Average coverage universe 12.2 10.4 2.7 2.4 10.9 9.6
Premium / (discount) 30.8% 36.7% 81.7% 75.5% 14.5% 16.7%
Source: Company Data, Arqaam Capital Research
We believe the market is pricing Herfy fairly at 12.4x FY 13e EV/EBITDA, on par with the
regional consumer staples sector average. Herfy currently trades at 15.9x FY 13e P/E, a
premium of 28% to peers, which we find reasonable given that it enjoys some of the highest
profitability ratios in its industry and is successfully positioning itself as a value-for-money local
brand.
Exhibit 255: PT signals premium multiples to peers… We wait for EPS accretion to play out
Source: Company Data, Arqaam Capital Research
Exhibit 256: Current multiples suggest full market valuation
Source: Company Data, Arqaam Capital Research
Risk: Fewer-than-expected store openings and delays in launching line 2 at Herfy’s bakery
facility. With 60% of Herfy’s input costs contained in poultry/feed costs, grain price changes
could largely impact our EV and equity value estimates as well as margins at the gross and net
levels.
Almarai
Halwani
SADAFCO
Herfy
Savola
SPM
Juhayna
Aghtia
AUTO
Budget
Tayyar
Catering
Shaker
Gasco Othaim
Hokair
JarirExtra
Meera
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Target equity value/FY 13e book value
Target equity value/FY 13e net income
Almarai
Halwani
SADAFCO
Herfy
SavolaSPM
Juhayna
Aghtia
AUTO
Budget
Tayyar
Catering
Shaker
Gasco
Othaim
Hokair
JarirExtra
Meera
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Current market cap/FY 13e book value
Current market cap/FY 13e net income
January 18 2013
Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 146
Business trends
Exhibit 257: Store additions are key to securing 10%+ top-line growth in the coming 3 years
Source: Company Data, Arqaam Capital Research
Exhibit 258: Stable sales composition expected as company expands all segments
Source: Company Data, Arqaam Capital Research
Exhibit 259: SG&A optimised at current level of 10.5% (of total sales)
Source: Company Data, Arqaam Capital Research
Exhibit 260: Restaurants are the largest contributors to bottom-line profitability
Source: Company Data, Arqaam Capital Research
Exhibit 261: Little cash outflow constraints favors larger dividend distributions
Source: Company Data, Arqaam Capital Research
Exhibit 262: Superior profitability measures to peers (34% RoE in FY 12e vs. 18% average peers)
Source: Company Data, Arqaam Capital Research
580
709
848
1,015
1,164
1,279
--%
5.0%
10.0%
15.0%
20.0%
25.0%
--
200
400
600
800
1,000
1,200
1,400
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Revenues, SAR bn
Sales Sales growth (RHS)
79.5% 80.8% 81.1% 80.4% 80.8%
17.3% 15.7% 15.8% 16.5% 16.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by segment
Restaurants Meat business Bakery
33.3% 31.9% 31.2% 31.0%
27.1% 26.6% 26.6% 25.5%
21.3% 20.9% 21.1% 20.5% 21.4% 20.7% 21.1% 19.9%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 10A FY 11A FY 12e FY 13e
Gross margin EBITDA margin EBIT margin Net margin
76.4%
13.7% 10.0% 0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Restaurants Meat business Bakery and other
Net margin by business segment
(300)
(200)
(100)
--
100
200
300
400
FY 10A FY 11A FY 12e FY 13e FY 14e
SAR mn
Dividends
CFO
Capex
32.7% 33.4% 33.8% 31.6%
29.8% 31.0% 31.5% 32.2% 30.3%
28.9%
24.9% 25.0% 26.2% 25.2% 24.4%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FY 10A FY 11A FY 12e FY 13e FY 14e
RoE RoIC RoA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Ziad Itani Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Retailers Jarir Marketing Co
HOLD
Retailers / Saudi Arabia Bloomberg code JARIR AB
Market index SASEIDX
Price target (local) 180
Upside (%) 12.9
Market data 17/01/2013
Last closing price 159.5
52 Week range 135.3-168.5
Market cap (SAR mn) 9,570
Market cap (USD mn) 2,552
Average daily volume (SAR mn) 4.5
Average daily volume (USD mn) 1.2
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 4,147.3 4,634.2 5,540.1 6,625.3
EBITDA 526.7 578.2 664.8 768.5
Net income 513.0 569.2 636.8 732.6
EPS 8.55 9.49 10.61 12.21
P/E (current price) 18.7 16.8 15.0 13.1
BVPS 15.1 17.0 19.1 21.6
P/B (current price) 10.6 9.4 8.3 7.4
EV/EBITDA (current price) 18.4 16.8 14.6 12.6
Div. yield (%) 4.2 4.8 5.3 6.1
FCF margin (%) 9.3 8.6 8.4 8.3
Net debt/EBITDA (x) 0.2 0.3 0.3 0.3
Net debt/Capital (%) 10.7 13.6 15.0 15.3
Interest cover (x) 75.8 80.8 57.4 55.6
RoAA (%) 32.5 30.8 30.0 29.9
RoAE (%) 60.2 59.1 58.7 60.0
RoIC (%) 48.3 46.5 46.4 47.3
Solid business fully priced in at 15.0x FY 13e P/E, 14.6x
EV/EBITDA; initiate with Hold and SAR 180 FVE
Saudi Arabia is the largest retail market within the GCC at an industry size of
c.USD 70bn as of FY 11A, as per EIU data, which also suggests growth of 10%
in each of FY 12e and 13e. Industry growth is a function of (i) low GLA/capita
(2.4 sqm/capita, vs. 14.6 sqm/capita UAE, 5.9 sqm/capita Qatar), particularly
in the organised retail space, (ii) a young population base (60% residents
within ‘prime consumer age band of 15-65 years of age, and (iii) rising
disposable income (+12%y/y). As per SAMA data, consumer spending reached
a high of SAR 177bn in Q2 12A. The Government’s emphasis on propping up
the educational sector has led to the announcement of c.200+ additional
schools and higher education facilities over the next 4 years. This has directly
impacted sales at the Kigdom’s largest seller of office and school supplies,
electronics (laptops and PCs), and Smartphones. Jarir has been contracted for
the launch of 10 new stores in FY 13-14e with a further 17 on the agenda. We
consequently see 15%+ revenue CAGR in the next 4 years. We initiate
coverage of Jarir Marketing with a Hold recommendation and SAR 180 FVE.
Computer and electronics drive sales growth: As per data from IDC, Jarir is
the top laptop retailer in Saudi Arabia with a c.50% share. Jarir currently holds
a c.9% market share of the Smartphone segment as well. As of FY 11A, 66% of
Jarir’s revenues were generated by its computers and electronics segment,
which sold more than 600k PC units during the period, or c.1650 units/day.
Core products remain a significant portion of the business, but product mix
has been deliberately reconfigured towards the electronics segment: Jarir
has thus far published on more than 1.9k titles and exports to the GCC and the
Levant region. Jarir’s core business formed 32% of sales in FY 11A, in steady
decline over a 6-year period (FY 04A 60%). We expect office and school
supplies and books to remain a significant portion of the business, but see a
decline to c.30% of revenues, in the next two years. We see limited potential
for the uptake of e-books in KSA, as Arabic content remains limited.
Product mix shift pressured margins as consumer electronics are low margin
in nature. We believe this is an unavoidable step in adapting to changing
consumer preferences in KSA.
Valuation: Jarir trades at a 14% premium to domestic peer group P/E (15.0x FY
13e), and 32% premium EV/ EBITDA (14.6x FY 13e), which we feel fully capture
business value. Risks: Downside: barriers to entry are relatively low. Upside:
improved adoption of eBook content in KSA, rising broadband, tablet and
Smartphone penetration.
SAR 180
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
90
98
106
114
122
130
Jan-12 Apr-12 Jul-12 Oct-12
JARIR AB SASEIDX
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 148
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
8%
10%
12%
14%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
20%
40%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
10%
20%
0.0
0.2
0.4
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Jarir Marketing Co
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 6.68 8.55 9.49 10.61 12.21 13.62
Diluted EPS 6.68 8.55 9.49 10.61 12.21 13.62
DPS 5.43 6.73 7.59 8.49 9.77 10.90
BVPS 13.29 15.11 17.01 19.13 21.57 24.30
Weighted average shares 60.00 60.00 60.00 60.00 60.00 60.00
Average market cap 9,570.00 9,570.00 9,570.00 9,570.00 9,570.00 9,570.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 23.9 18.7 16.8 15.0 13.1 11.7
P/E (x) (target price) 27.0 21.1 19.0 17.0 14.7 13.2
P/BV (x) (target price) 13.5 11.9 10.6 9.4 8.3 7.4
EV/EBITDA (x) (target price) 23.3 18.4 16.8 14.6 12.6 11.2
EV/FCF (x) 33.2 28.0 27.0 23.2 19.6 17.4
EV/Invested capital (x) 12.1 10.6 9.1 7.9 7.0 6.2
Dividend yield (%) 3.4 4.2 4.8 5.3 6.1 6.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 18.0 37.6 11.7 19.5 19.6 16.1
EBITDA 3.0 26.9 9.8 15.0 15.6 12.1
EBIT 2.9 28.0 10.9 13.2 15.9 12.1
Net income 7.2 28.0 10.9 11.9 15.0 11.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 13.8 12.7 12.5 12.0 11.6 11.2
EBIT 13.1 12.2 12.1 11.5 11.1 10.7
Net 13.3 12.4 12.3 11.5 11.1 10.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 29.9 32.5 30.8 30.0 29.9 29.2
RoAE 52.7 60.2 59.1 58.7 60.0 59.4
RoIC 42.7 48.3 46.5 46.4 47.3 46.9
FCF margin 10.8 9.3 8.6 8.4 8.3 8.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 10.3 10.7 13.6 15.0 15.3 15.3
Net debt/Equity 12.3 12.7 16.7 18.6 19.3 19.4
Interest cover (x) 34.7 75.8 80.8 57.4 55.6 53.7
Net debt/EBITDA (x) 0.2 0.2 0.3 0.3 0.3 0.3
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 149
Abacus Arqaam Capital Fundamental Data
Company profile
Jarir Marketing Co was founded in 1974 and primarily engages in the retailing and wholesaling of IT and office products in Saudi Arabia and the GCC region. Its inventory includes school supplies, children’s toys, books, office furniture, engineering tools, sports and equipment, computer systems and related software. Jarir operates 32 retail showrooms spread across c.105k sqm, along with 5 wholesale showrooms and 7 sales offices. Saudi Arabia contributes 93% of aggregate sales. In addition, Jarir benefits from property investments in Egypt. Forbes places Jarir as one of the top 10 most recognized brand names in the Middle East.
Ownership and management
Shareholders
Jarir Company for Commercial Investments 9.50%
Mr Mohammed Abdulrahman Nasser Al Agil 9.00%
Abdulkarim Abdulrahman Nasser Al Agil 9.00%
Mr Nasser Abdulrahman Nasser Al Agil 9.00%
Mr Abdullah Abdulrahman Nasser Al Agil 9.00%
Abdulsalam Abdulrahman Nasser Al Agil 9.00%
Public 45.50%
Source: Zawya
Board of Directors
Mr Mohammed Abdulrahman Nasser Al Agil Chairman
Mr Nasser Abdulrahman Nasser Al Agil Director
Mr Abdullah Abdulrahman Nasser Al Agil Director
Mr Abdulkarim Abdulrahman Nasser Al Agil Director
Mr Nasser Abdulaziz Al Agil Director
Mr Nasser Abdullah Al Badah Director
Mr Thamer M Al Khawashki Director
Mr Abdulilah Saeed Aldrees Director
Source: Company data
Jarir Marketing Co
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 3,014.6 4,147.3 4,634.2 5,540.1 6,625.3 7,688.9
Gross profit 519.2 651.8 694.1 831.0 980.5 1,130.3
SG&A (104.1) (125.1) (115.9) (166.2) (212.0) (269.1)
EBITDA 415.1 526.7 578.2 664.8 768.5 861.2
Depreciation & Amortisation (19.4) (20.2) (16.5) (29.2) (31.8) (34.9)
EBIT 395.7 506.5 561.7 635.7 736.8 826.3
Net interest income(expense) (11.4) (6.7) (7.0) (11.1) (13.3) (15.4)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 28.9 29.9 33.0 33.0 33.0 33.0
Profit before tax 413.2 529.8 587.8 657.6 756.5 843.9
Income tax expense (12.4) (16.8) (18.6) (20.8) (24.0) (26.7)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 400.7 513.0 569.2 636.8 732.6 817.2
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 400.7 513.0 569.2 636.8 732.6 817.2
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 52.3 59.8 61.3 63.5 81.8 101.7
Receivables 247.5 282.4 355.5 425.0 508.2 589.8
Inventories 543.0 600.9 701.7 838.6 1,005.2 1,168.0
Tangible fixed assets 555.0 742.1 824.8 911.0 992.3 1,089.9
Other assets including goodwill 35.6 34.6 34.6 34.6 34.6 34.6
Total assets 1,433.5 1,719.7 1,977.9 2,272.7 2,622.2 2,984.0
Payables 405.8 538.4 626.1 748.3 897.0 1,042.2
Interest bearing debt 150.1 175.2 231.7 277.0 331.3 384.4
Other liabilities 80.0 99.6 99.6 99.6 99.6 99.6
Total liabilities 635.9 813.1 957.5 1,124.9 1,327.9 1,526.3
Shareholders equity 797.6 906.6 1,020.4 1,147.8 1,294.3 1,457.7
Minorities — — — — — —
Total liabilities & shareholders equity 1,433.5 1,719.7 1,977.9 2,272.7 2,622.2 2,984.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations 364.5 593.6 516.1 577.1 649.5 735.8
Net capex (38.9) (207.2) (115.9) (110.8) (99.4) (115.3)
Free cash flow 325.6 386.4 400.3 466.3 550.1 620.5
Equity raised/(bought back) — — — — — —
Dividends paid (326.0) (404.0) (455.3) (509.4) (586.1) (653.7)
Net inc/(dec) in borrowings 13.1 25.0 56.6 45.3 54.3 53.2
Other investing/financing cash flows — — — — — —
Net cash flow 12.6 7.5 1.5 2.2 18.3 19.9
Change in working capital (63.2) (13.5) (86.1) (84.2) (101.2) (99.1)
Mohammad Kamal Ziad Itani [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 150
Valuation- business expansion largely priced into current valuations,
DCF-based fair value estimate of SAR 180/share, initiate with Hold
Exhibit 263: Highly profitable vs. international peers, generating SAR 3.1k of sales/sqft …
Source: Company Data, Arqaam Capital Research
Exhibit 264: …backed by high customer turnover (22mn in FY 11A, +15% y/y)
Source: Company Data, Arqaam Capital Research
We see Jarir fairly priced at SAR 180/share using a DCF model and a WACC of 10.3% (Re
11.3%, Rd 7.7%, Beta 0.69). We apply a conservative terminal growth rate of 4.0%, 50 bps
above LT inflation. Current valuation implies a 14% premium to domestic peer group P/E (15.0x
FY 13e), and 32% premium EV/ EBITDA (14.6x FY 13e), which we find justified given superior
NPM (+364 bps) and ROE (c.+25%). We believe the business’s core strength stems from its
strategic showroom locations, market dominance, and highly profitable store GLA (USD
sales/sq ft on par with US-based Best Buy, and sales/employee ahead of global industry
heavyweights).
Exhibit 265: Valuation summary
Source: Company Data, Arqaam Capital Research
Exhibit 266: Jarir already trades at premium to peer retailers
Source: Company Data, Arqaam Capital Research
Risks: Downside: barriers to entry are relatively low. Upside: improved adoption of eBook
content in KSA, rising broadband, tablet and Smartphone penetration.
842 865
278
180
380
--
100
200
300
400
500
600
700
800
900
1,000
Jarir Best Buy Staples Office Depot Barnes & Nobles
USD sales per sqft
565
465 460 485
333
--
100
200
300
400
500
600
Jarir Best Buy Staples Office Depot Barnes & Nobles
Sales/store employee (USD 000's)
41
144 7 1 180 160
-10
40
90
140
190
240
290
340
PV
of
visi
ble
FC
FF
PV
of
term
inal
val
ue
Ban
k b
orr
ow
ings
Cas
h &
eq
uiv
ale
nts
Fair
val
ue
pe
r sh
are
Cu
rre
nt m
arke
t p
rice
Jarir DCF summary (SAR/share)
0x
2x
4x
6x
8x
10x
12x
14x
16x
0x 5x 10x 15x 20x
FY 13e EV/EBITDA
FY 13e P/E
Othaim
Hokair
Jarir
Extra
Al Meera
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 151
Key operating drivers
We see double digit growth in revenues (15%+) in the next four years, on new store launches
and rising Smartphone penetration in Egypt: As per guidance, the company has already been
contracted for the opening of 10 new stores in FY 13-14e with 17 others on the agenda. This
brings total showrooms to 42 in FY 14e (+31% vs. FY 12A) with plans to increase the number of
current stores by more than 70% in the next 5 years. The business is also considering an entry
into the Egyptian Smartphone market; Jarir management sees a 20%+ y/y sales growth in FY
13e Smartphone penetration rises. As such we expect revenues of SAR 5.5bn and SAR 10.1bn
in FY 13-17e, up c.20% and 120% respectively vs. FY 12A revenues of SAR 4.6bn, in line with
management expectations of more than doubling sales volumes in the next five years.
Exhibit 267: Revenues +12% y/y in FY 12A…
Source: Company Data, Arqaam Capital Research
Exhibit 268: …driven by store count and footfall
Source: Company Data, Arqaam Capital Research
Strong sales momentum driven by the computers and electronics segment: revenues rose
54% in the last two years following the addition of the smart phone segment in Q2 09A, in
which Jarir currently holds a c.7-10% market share. Recent evolution in notebook GPU’s
(Nvidia and AMD) has allowed for the development of mobile desk stations delivering desktop-
level performance. Increasingly, mobile notebooks are replacing desktops for intensive gaming,
graphic design and multimedia/office usage, while the pricing premium vs. desktops in decline.
We see this as one of the main drivers behind the rise in electronic sales and complementary
products (Software and peripherals). As per figures published International Data Corporation
(IDC), Jarir is the top laptop retailer in Saudi Arabia with a c.50% market share. In FY 11A, Jarir
sold more than 600k PCs or c.1650 PC/day. We note that as per a 2009 survey by the Pan Arab
Research Study (PARC), Jarir electronics was visited by 70% (vs. 52% in 2007) of respondents,
on par with Extra (58% vs. 2007).
And Smartphone demand on short product life cycles: The rapid evolution of Smartphones
has helped produce a 6-yr CAGR of 37% in the segment’s sales by FY 11A. We believe the
decline in Smartphone prices, coupled with KSA’s young population, should support
Smartphone penetration rates in the country. The short life span of electronics (PCs and
Smartphones are usually replaced within 2-4 years) allows for substantial replacement
demand.
2.5 2.63.0
4.14.6
5.5
6.6
7.7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
Revenues (SAR bn)
2327
2830
32
36
4044
110
102 110
143 149 163
174 183
--
50
100
150
200
0
10
20
30
40
50
FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
Revenue / showroom (SAR mn)Number of showrooms
Number of showrooms Revenue per showroom
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 152
Core products remain a significant portion of the business: Office and school supplies and
books achieved a 6-yr CAGR of 17% in sales in the run up to FY 11A. Jarir has thus far published
on more than 1.9k titles and exports to the GCC and the Levant region. Jarir’s private label
(ROCCO, 3k+ stock-keeping units) is the key contributor to wholesales (c.65% of total). Jarir’s
core business formed 32% of sales in FY 11A, in steady decline over a 6-year period (FY 04A
60%). We expect office and school supplies and books to remain a significant portion of the
business, but see a decline to c.30% of revenues, in the next two years. We see limited
potential for the uptake of e-books in KSA, as Arabic content remains limited.
Exhibit 270: 1.1mn sqft of retail space, of which 26% is owned
Source: Company Data, Arqaam Capital Research
Exhibit 271: 32 showrooms with 7 as investment assets (22%)
Source: Company Data, Arqaam Capital Research
Margins under pressure as product mix evolves: GPM fell 400bps over a 2 year period, from
19.7% in FY 09A to 15.7% in FY 11A. The downtrend has been the result Jarir’s rising reliance
on lower-margin electronics and PC sales. To put this in perspective, its core office/school
supplies business (32% of revenues) produced margins in excess of 36%, whereas its
computers and electronics segment (66% of revenues) exhibited GPMs of 11.7% in FY 11A. The
trade-off of sacrificing margins in order to better adapt to changing consumer preferences, is a
commercial reality that the business has had to accept. We expect FY 13e to reflect a degree of
margin compression, in line with the continuing change in product mix.
257 326 392 423 423 504
656 706 741 838
198 198
198 198 198
249
249 249
298
298
--
200
400
600
800
1,000
1,200
FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A 9M 12A
Area (sqft 000's)
Leased Owned
10 12 14 15 15 17 21 22 23 25 5
5 5 5 5
6
6 6 7
7
--
5
10
15
20
25
30
35
FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A 9M 12A
Number of showrooms
Leased Owned
Exhibit 269: Five subsidiaries in GCC and Egypt
Subsidiary name Country of incorporation Ownership
United Company for Office Suppies and Stationeries WLL Qatar 100%
Jarir Trading Co. LLC Abu Dhabi 100%
The United Bookstore Abu Dhabi 100%
Jarir Book Store Kuwait 100%
Jarir Egypt Financial Leasing Co. SAE Egypt 100%
Source: Company Data, Arqaam Capital Research
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 153
Exhibit 272: In FY 04A, 60% of revenues came through Jarir’s core business line at a GPM of 37.1%...
Source: Company Data, Arqaam Capital Research
Exhibit 273: … Jarir’s product offering has since shifted in favour of electronics at a far lower GPM of 11.7%
Source: Company Data, Arqaam Capital Research
Exhibit 274: …pressuring blended margins
Source: Company Data, Arqaam Capital Research
36%
60%
5%
FY 04A
Computers & Electronics Core business Others
GPM 11.7%
GPM 29.3%
GPM 37.1%
66%
32%
2%
FY 11A
Computers & Electronics Core business Others
GPM 11.7%
GPM 21.4%
GPM 36.0%
19.7%
17.2% 15.7% 15.0% 15.0% 14.8% 14.7%
15.8%
13.8% 12.7% 12.5%
12.0% 11.6% 11.2%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
GPM EBITDA Margin
January 18 2013
Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 154
Business trends
Exhibit 275: Computer and electronics sales dominate revenue mix (66% as of FY 11A)
Source: Company Data, Arqaam Capital Research
Exhibit 276: We expect sales CAGR of 18% over the next 3 years ……….
Source: Company Data, Arqaam Capital Research
Exhibit 277: Margins in decline on shift in product mix
Source: Company Data, Arqaam Capital Research
Exhibit 278: Cash flow quality remains modest (11%+ OCF/sales)
Source: Company Data, Arqaam Capital Research
Exhibit 279: Substantial borrowing headroom
Source: Company Data, Arqaam Capital Research
Exhibit 280: DuPont: 57% ROE profile on high asset turnover
Source: Company Data, Arqaam Capital Research
66%
32%
2%
FY 11A
Computers & Electronics Core business Others
3,015
4,147 4,634
5,540
6,625
7,689
415 527 578 665 769 861
--
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Sales (SAR mn) EBITDA (SAR mn)
17.2% 15.7%
15.0% 15.0% 14.8% 14.7%
13.3% 12.4% 12.3%
11.5% 11.1% 10.6%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e
GPM NPM (Group)
98 115 170
214 249 283
364
594
516 577
649
736
--
100
200
300
400
500
600
700
800
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Net debt (SAR mn) CFO (SAR mn)
150
175
232 277
331
384 19% 19%
23%24%
26%26%
0%
5%
10%
15%
20%
25%
30%
--
50
100
150
200
250
300
350
400
450
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Total debt (SAR mn) D/E (%)
50% 57% 56% 55% 57% 56%
28% 30% 29% 28%
28% 27%
--%
10%
20%
30%
40%
50%
60%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
ROE ROA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected]
+9714 507 1743
Sahar Srour Arqaam Capital Research Offshore s.a.l.
MENA – Consumer staples
Juhayna Food Industries
HOLD
Consumer staples / Egypt Bloomberg code JUFO EY
Market index EGX
Price target (local) 8.50
Upside (%) 10.1
Market data 17/01/2013
Last closing price 7.72
52 Week range 3.7-8.2
Market cap (EGP mn) 5,451
Market cap (USD mn) 825
Average daily traded value (EGP mn) 4.1
Average daily traded value (USD mn) 0.6
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 2,243.6 2,826.3 3,546.5 4,379.5
EBITDA 424.0 551.8 716.0 928.8
Net income 185.9 300.5 394.8 531.5
EPS 0.26 0.43 0.56 0.75
P/E (current price) 29.3 18.1 13.8 10.3
BVPS 2.6 2.8 3.2 3.7
P/B (current price) 3.0 2.7 2.4 2.1
EV/EBITDA (current price) 13.8 10.6 8.2 6.3
Div. yield (%) — 1.9 2.5 3.9
FCF margin (%) (8.0) (7.6) (1.2) 7.2
Net debt/EBITDA (x) 0.5 1.1 1.2 1.0
Net debt/Capital (%) 7.8 19.0 24.4 22.8
Interest cover (x) 3.3 3.8 4.2 5.1
RoAA (%) 6.5 9.4 10.7 12.8
RoAE (%) 10.8 15.7 18.5 21.9
RoIC (%) 12.7 15.3 18.2 21.4
Well-positioned vis-à-vis changing dietary preferences,
resulting from rising urbanization in Egypt
Initiate with Hold on 97% FY 12A share price rally
We initiate coverage on Juhayna Food Industries with a Hold
recommendation and EGP 8.50 fair value estimate. We view Juhayna as a
key beneficiary of unique domestic dynamics: (i) large domestic
population base (83mn) with attractive demographics (youth presenting
of 41% total), (ii) low consumption per capita across 3 segments with
substantial growth potential, particularly in the dairy and yogurt
segments, and (iii) changing consumer preferences, which have resulted in
a visible shift in demand from loose to packaged milk products. Current
valuation, however, suggests that the market has adequately rewarded
growth potential (15% FY 08-11A revenue CAGR) as reflected in the 97%
share price rally in FY 12A.
Robust consumption growth across dairy, yogurt, and juice segments in
Egypt: at an annual 9% blended demand growth rate over the next 5-6
years. Demand for packaged milk and yogurt (vs. loose products-
unprocessed and unpacked) will in our view continue to displace demand
for loose products, and to constitute 25% and 92% of respective totals by
FY 15e (vs. current 13% and 80%).
Margin trend to reverse course as vertical integration bears fruit: Margin
compression in the past 2 years (-422bps) resulted from increases in grain
prices (corn +29%, soybean +19%). We forecast a reversal in this trend
going forward, and model for margin enhancement over our forecast
horizon as the company (i) locked in input costs at below market prices,
for the next 6 quarters, and (ii) invested in a comprehensive vertical
integration strategy to become virtually self-sufficient vis-a-vis inputs,
thereby curtailing exposure to global grain price volatility.
Valuation multiples currently rich: We value Juhayna Food Industries at
EGP 8.50/share (+8.6% vs. CMP) on a DCF-basis (WACC of 16% (Re 21%, Rd
6%, 35% D/C, TGR 4%)). Current valuation, which reflects rich multiples
(>14x P/E) suggests that strong underlying fundamentals and growth (21%
FY 12-17e revenue CAGR) are largely captured in the stock price, in the
context of the recent rally (+97% during 2012) and 46.4% outperformance
of the EGX index.
Risks: (i) slower-than-expected conversion to packaged products, (ii) rising
input costs, (iii) FX exposure risk, and (iv) political unrest.
EGP 8.50
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
85
108
131
154
177
200
Jan-12 Apr-12 Jul-12 Oct-12
JUFO EY EGX
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 156
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
10%
20%
30%
0.0
0.5
1.0
1.5
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
20
40
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Juhayna Food Industries
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 0.32 0.26 0.43 0.56 0.75 1.02
Diluted EPS 0.31 0.26 0.43 0.56 0.75 1.02
DPS 0.04 — 0.15 0.20 0.30 0.41
BVPS 2.33 2.57 2.84 3.20 3.66 4.27
Weighted average shares 726.42 726.42 716.23 706.05 706.05 706.05
Average market cap 4,419.44 2,832.08 5,507.92 5,598.16 5,598.16 5,598.16
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 23.9 29.3 18.1 13.8 10.3 7.6
P/E (x) (target price) 26.3 32.3 20.0 15.2 11.3 8.4
P/BV (x) (target price) 3.7 3.3 3.0 2.7 2.3 2.0
EV/EBITDA (x) (target price) 14.4 14.9 11.4 8.8 6.8 5.6
EV/FCF (x) 336.1 (35.1) (29.5) (143.0) 20.1 10.9
EV/Invested capital (x) 3.1 3.1 2.6 2.3 2.1 1.9
Dividend yield (%) 0.4 — 1.8 2.3 3.5 4.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 18.0 20.5 26.0 25.5 23.5 21.4
EBITDA 12.8 (3.2) 30.1 29.8 29.7 21.1
EBIT 7.1 (8.5) 41.4 33.5 30.8 27.4
Net income 23.3 (18.4) 61.6 31.4 34.6 35.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 23.5 18.9 19.5 20.2 21.2 21.2
EBIT 16.8 12.7 14.3 15.2 16.1 16.9
Net 12.2 8.3 10.6 11.1 12.1 13.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 9.9 6.5 9.4 10.7 12.8 16.0
RoAE 20.5 10.8 15.7 18.5 21.9 25.7
RoIC 14.0 12.7 15.3 18.2 21.4 25.0
FCF margin 1.0 (8.0) (7.6) (1.2) 7.2 10.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 1.6 7.8 19.0 24.4 22.8 17.2
Net debt/Equity 2.3 11.6 29.8 38.9 34.5 23.2
Interest cover (x) 3.5 3.3 3.8 4.2 5.1 7.2
Net debt/EBITDA (x) 0.1 0.5 1.1 1.2 1.0 0.6
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 157
Abacus Arqaam Capital Fundamental Data
Company profile
Established in 1983, Juhayna Food Industries is a leading Egyptian food manufacturer specialized in the production, processing and packaging of milk, yogurt, juice and juice concentrate. The company has 209 different products processed at 6 separate facilities with a designed industrial capacity that yields 3,500 tons per day.
Ownership and management
Shareholders
Pharon Investment 50.75%
Public 49.25%
Source: Zawya
Board of Directors
Safwan Ahmad Thabet Chairman
Mohammed Al Deghaim Director
Yasser Suleiman Al Mallawini Director
Hiba Thabet Director
Mariam Safwan Ahmad Thabet Director
Ayman Ismail Ahmad Suleiman Director
Ahmad Amin Mahmoud Al Abin Director
Seifeddine Safwan Ahmad Thabet Director
Akil Hamed Bashir Director
Source: Zawya
Juhayna Food Industries
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (EGPmn)
Sales revenue 1,861.5 2,243.6 2,826.3 3,546.5 4,379.5 5,316.3
Gross profit* 709.1 773.5 1,014.3 1,297.3 1,649.8 2,005.8
SG&A (270.9) (349.6) (462.6) (581.3) (721.0) (880.7)
EBITDA 438.2 424.0 551.8 716.0 928.8 1,125.1
Depreciation & Amortisation (126.3) (138.6) (148.1) (177.3) (224.1) (226.9)
EBIT 311.8 285.4 403.6 538.6 704.8 898.2
Net interest income(expense) (59.3) (38.6) (71.8) (101.9) (116.2) (102.8)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 2.9 (38.0) 2.0 2.0 2.0 2.0
Profit before tax 255.4 208.8 333.8 438.7 590.6 797.4
Income tax expense (27.6) (22.9) (33.4) (43.9) (59.1) (79.7)
Minorities — — 0.1 0.1 0.1 0.1
Other post-tax income/(expense) — — — — — —
Net profit 227.8 185.9 300.5 394.8 531.5 717.7
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 227.8 185.9 300.5 394.8 531.5 717.7
*Gross profit excluding depreciation
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (EGPmn)
Cash and equivalents 723.9 688.4 539.7 455.3 437.7 361.9
Receivables 298.8 188.0 193.6 242.9 288.0 349.6
Inventories 279.6 397.2 429.6 531.8 647.4 775.3
Tangible fixed assets* 1,288.5 1,543.0 2,101.5 2,580.3 2,837.9 2,983.2
Other assets including goodwill 137.3 144.7 141.7 141.7 141.7 141.7
Total assets 2,728.2 2,961.3 3,406.1 3,952.0 4,352.7 4,611.6
Payables 216.6 148.6 161.1 252.6 339.9 436.1
Interest bearing debt 761.4 899.1 1,136.9 1,334.6 1,329.2 1,061.2
Other liabilities 106.4 101.5 101.5 101.5 101.5 101.5
Total liabilities 1,084.5 1,149.1 1,399.4 1,688.7 1,770.5 1,598.8
Shareholders equity 1,643.4 1,811.8 2,006.2 2,262.7 2,581.6 3,012.1
Minorities 0.3 0.4 0.5 0.6 0.7 0.8
Total liabilities & shareholders equity 2,728.2 2,961.3 3,406.1 3,952.0 4,352.7 4,611.6
*Tangible fixed assets includes PPE, projects under construction, and plant wealth
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (EGPmn)
Cashflow from operations 306.5 224.8 492.8 612.0 796.4 952.0
Net capex (287.8) (404.3) (706.6) (656.1) (481.7) (372.1)
Free cash flow 18.8 (179.6) (213.8) (44.1) 314.6 579.9
Equity raised/(bought back) 960.9 — — — — —
Dividends paid (26.4) — (106.0) (138.2) (212.6) (287.1)
Net inc/(dec) in borrowings (277.2) 83.9 237.8 197.7 (5.4) (267.9)
Other investing/financing cash flows (23.7) 6.4 (66.7) (99.8) (114.1) (100.7)
Net cash flow 652.4 (89.3) (148.7) (84.4) (17.5) (75.9)
Change in working capital (78.7) (164.4) (25.5) (60.0) (73.3) (93.3)
Mohammad Kamal Sahar Srour [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 158
Well-positioned vis-à-vis changing dietary preferences, resulting
from rising urbanization
Initiate with Hold on 97% share price rally in FY 12A
We initiate coverage on Juhayna Food Industries with a Hold recommendation and EGP 8.50
fair value estimate. Juhayna is a leading food producer of a range of dairy products (milk,
cheese, and cream), yogurt, juice, and juice concentrates in Egypt. We view Juhayna as a key
beneficiary of unique domestic dynamics: (i) large domestic population base (83mn) with
attractive demographics (youth (>19 yrs) represent of 40%+ of the total), (ii) low consumption
per capita across 3 segments with substantial growth potential, particularly in the dairy and
yogurt segments, and (iii) changing consumer preferences, which have resulted in a visible shift
in demand from loose to packaged milk products. Current valuation, however, suggests that
the market has adequately rewarded growth potential (15% FY 08-11A revenue CAGR) as
reflected in the 97% share price rally in FY 12A.
Rising consumption/capita: Egypt has one of the lowest per capita consumption levels in each
of the dairy (22kg/capita vs. average 54kg/capita in 4 Arab countries), yogurt (2kg/capita vs.
average 9kg/capita), and juice (3L/capita vs. average 15L/capita) product categories. There is
substantial headroom for per-capita consumption growth, largely a result of changing
consumer preferences towards packaged products. The conversion is expected to continue as
a function of rising urbanisation and health awareness.
Exhibit 281: Market leader across all product segments
Source: Company Data, Arqaam Capital Research
Exhibit 282: Lowest MENA per-capita consumption* in Egypt
Source: Company Data, Arqaam Capital Research *Consumption of dairy, yogurt, and juice
products
Robust consumption growth across dairy, yogurt, and juice segments in Egypt: We model for
an annual 9% blended demand growth rate over the next 5-6 years. Demand for packaged milk
and yogurt will in our view continue to displace demand for traditional loose products (which
are unprocessed and unpacked), and to constitute 25% and 92% of respective totals by FY 15e
(vs. current 13% and 80%). The conversion is expected to continue as a function of rising
urbanisation (43.2% of total population is located in cities) and health awareness. Assuming an
aggregate 37% market share across all 3 product segments, coupled with upside potential to
realized selling prices, translates into a 21% 5-year revenue CAGR outlook.
72% 67%
34%
51%
22%
15%
32%
13% 24%
6%
20%
8% 6%
12%
13%
--%
20%
40%
60%
80%
100%
Plain milk Flavored milk Spoonable yogurt
Drinkable yogurt
Juice blended products
Market share among key players, by segment (%)
Juhayna Danone Lactel Faragallo Al Marai Beyti Belhana
Enjoy Nestle Labanita Cappy Best Rani Other
22
2 3
30 38
12
69
5
26
78
2 11 10
3 7
17 23
19 18
--
20
40
60
80
100
Dairy (kg/capita) Yogurt (kg/capita) Juice (litre/capita)
Consumption/capita in Egypt, by segment
Egypt UAE Morocco KSA Jordan Tunisia
Algeria Oman Libya Bahrain Kuwait Qatar
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 159
Exhibit 283: 9% blended demand CAGR across all segments… …
Source: FAPRI, BMI, Company Data, Arqaam Capital Research
Exhibit 284: ..supported by a shift in consumer preferences
Source: FAPRI, BMI, Company Data, Arqaam Capital Research
Margin trend to reverse course as vertical integration bears fruit: Margin compression in the
past 2 years (-422bps) resulted from increases in grain prices (corn +29%, soybean +19%). We
forecast a reversal in this trend going forward, and model for margin enhancement over our
forecast horizon as the company (i) locked in input costs at below market prices, for the next 6
quarters, and (ii) invested in a comprehensive vertical integration strategy to become virtually
self-sufficient vis-a-vis inputs, thereby curtailing exposure to global grain price volatility.
Production inputs, (powdered milk, juice concentrates, and packaging materials) are all
imported and USD-denominated, but are not hedged against.
Exhibit 285: Margins on the mend
Margins (%) FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Dairy 31.1% 30.6% 25.8% 29.3% 30.1% 31.0%
Yogurt 38.1% 36.8% 34.6% 36.0% 36.4% 36.8%
Juice 33.7% 32.2% 27.0% 29.5% 30.6% 31.7%
Concentrates (18.9%) (16.3%) 14.6% 22.5% 24.0% 25.5%
Agriculture na na 34.6% (5.0%) (2.0%) 7.0%
Blended GPM 32.5% 31.3% 28.3% 30.6% 31.6% 32.6%
EBIT Margin 18.5% 16.8% 12.7% 14.3% 15.2% 16.1%
NPM 11.7% 12.2% 8.3% 10.6% 11.1% 12.1%
Source: Company Data, Arqaam Capital Research
Operating leverage evident as fresh capacity comes on-line: We believe Juhayna will continue
to retain spare capacity via (i) the construction of a new yogurt plant (700ton/day capacity-
+75%) in Q3/Q4 13e, (and largely paid up CAPEX via an EGP 300mn loan), and (ii) capacity
expansion in the dairy segment (+25%) in Q2 13e (to be financed with an EGP 140.2mn loan).
Cash flow and EPS accretion should automatically be visible by FY 13e as a result.
1,763 1,869 1,909 1,951 1,995
99 129 183 247 327 294
351 428
522 637
--
500
1,000
1,500
2,000
2,500
3,000
3,500
FY 10A FY 11A FY 12e FY 13e FY 14e
Total consumption in Egypt, by segment ('000 ton)
Dairy Yogurt Juice
195 241 279 341
419 72
103 159
219 295
294 351
428
522
637
--
200
400
600
800
1,000
1,200
1,400
1,600
FY 10A FY 11A FY 12e FY 13e FY 14e
Demand for packaged products in Egypt, by segment ('000 ton)
Dairy Yogurt Juice
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 160
DCF-based price target of EGP 8.50; initiate with Hold
P/E premium warranted on 23% revenue CAGR vs. 12% peers
We value Juhayna Food Industries at EGP 8.50/share (+10% vs. CMP) on a DCF-basis (WACC of
16% (Re 21%, Rd 6%, 35% D/C, TGR 4%). Current valuation, which reflects rich multiples (c.14x
P/E) suggests that strong underlying fundamentals and growth (23.4% FY 12-15e revenue
CAGR) are largely captured in the stock price, in the context of a recent rally (+97% during FY
12A) and 46%+ outperformance of the EGX index.
Exhibit 286: Peer context: current trading multiples capture growth and margins vs. peer set
Company Revenue FY 08-11A CAGR (%) Revenue FY 12-15e CAGR (%) EBIT margin* (%) CFO margin* (%) RoE* (%)
Juhayna 15.3% 23.4% 15.2% 17.3% 17.4%
Almarai 16.5% 14.8% 16.8% 22.1% 19.5%
Savola 22.2% 10.5% 6.0% 6.0% 16.4%
SADAFCO 13.1% 9.6% 11.1% 9.9% 19.6%
Halwani 7.0% 12.7% 13.0% 8.9% 17.0%
Agthia 10.2% 6.0% 10.6% 12.1% 11.8%
Average- peers 13.8% 10.9% 11.5% 11.8% 16.9%
Company Well-positioned vs. changing preferences Current PE* (x) Current PB* (x) Current EV/EBITDA* (x) Dividend yield* (%)
Juhayna Yes 13.8x 2.4x 8.2x 2.5%
Almarai Yes 15.4x 3.0x 12.3x 2.6%
Savola Yes 9.0x 1.8x 12.0x 3.7%
SADAFCO Yes 11.9x 2.3x 8.2x 5.0%
Halwani Yes 12.2x 2.1x 7.0x 5.8%
Agthia Yes 8.8x 1.0x 5.8x 4.0%
Average- peers
11.5x 2.0x 9.1x 4.2%
Source: Company Data, Arqaam Capital Research *FY 13e
Risks
Upside risks: (i) product uptake (packaged dairy), (ii) market share gains, (iii) realized selling
prices, and (iv) rising retail penetration in Egypt (USD 1.5bn in additional retail GLA, as per
MEED Projects). Downside risks: (i) slower-than-expected conversion to packaged products, (ii)
raw material costs, (iii) FX risk, as most inputs are USD-denominated and not hedged, and (iv)
subdued demand growth due to political unrest.
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 161
Business trends
Exhibit 287: Domestic sales (95-96%) constitute bulk of revenues
Source: Company Data, Arqaam Capital Research
Exhibit 288: ..and are mainly driven by dairy sales
Source: Company Data, Arqaam Capital Research
Exhibit 289: GPM to expand by 191bps during FY 12e-14e…
Source: Company Data, Arqaam Capital Research
Exhibit 290: ..flowing through to EBIT and net margins (+181bps and +151bps, respectively)
Source: Company Data, Arqaam Capital Research
Exhibit 291: Operating cash flow margins >17%
Source: Company Data, Arqaam Capital Research
Exhibit 292: CAPEX vs. leverage
Source: Company Data, Arqaam Capital Research
1,717 2,151
2,684 3,391
4,211 145 93
142
155
169
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY 10A FY 11A FY 12e FY 13e FY 14e
Revenues (EGP mn)
Local sales Exports
1,037 1,135 1,414 1,740
2,096 402
614 800
1,067
1,393
384 421
528
639
773
39
45
49
54
60
37
46
57
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY 10A FY 11A FY 12e FY 13e FY 14e
Revenues by segment (EGP mn)
Dairy Yogurt Juice Concentrates Agriculture
318 293 414 524
649 148 212
288
389
513
124 114
156
196
245
(6)
7
11
13
15
10
(2) (1)
4
31.3%
28.3% 30.6% 31.6% 32.6%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
(50)
100
250
400
550
700
850
1,000
1,150
1,300
1,450
1,600
1,750
FY 10A FY 11A FY 12e FY 13e FY 14e
Gross profit by segment (EGP mn)
Dairy Yogurt Juice
Concentrates Agriculture Aggregate GPM (%)
32.5% 31.3% 28.3%
30.6% 31.6% 32.6%
18.5% 16.8%
12.7% 14.3% 15.2% 16.1%
11.7% 12.2%
8.3% 10.6% 11.1% 12.1%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margin breakdown (%)
Gross Profit Margin EBIT Margin Net Profit Margin
307 225
493 612
796
16%
10%
17% 17%
18%
--%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
--
100
200
300
400
500
600
700
800
900
FY 10A FY 11A FY 12e FY 13e FY 14e
CFO (LHS, EGP mn); CFO margin (RSH, %)
Capex CFO margin
288 404
707 656
482
(277)
84
238 198
(5)
(400)
(200)
--
200
400
600
800
FY 10A FY 11A FY 12e FY 13e FY 14e
Capex vs. change in debt (EGP mn)
Capex ∆ Loans
January 18 2013
Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 162
Appendix 1: Business strategy
Manufacturing operations –economies of scale, product offering diversification, and brand
equity
Economies of scale: as the company is among the largest dairy producer in Egypt that enjoys
negotiation clout and pricing power.
Brand equity: The company’s products enjoy brand recognition, while its diversified product
portfolio (209 SKUs) allows the business to position itself across the majority of price points
and quality brackets.
Commercial and distribution network – in-house capability a competitive advantage
Comprehensive distribution channel: Juhayna has successfully launched its own distribution
channel, currently operating through 24 centers across Egypt. In 9M 12A alone, Juhayna
inaugurated 5 new distribution centers, doubling its fleet size to 883 vans and trucks. Product
that is shifted to retailers is expected to continue growing (+33%, to 60k outlets), albeit at
higher SG&A costs. This however will result in a comprehensive distribution network with
substantial competitive advantages that will be difficult for competitors to replicate, in our
view. Better inventory management, particularly in the context of perishable products, will
likely be the main benefit to the business.
Export markets: Juhayna may utilise excess capacity to expand exports to MENA markets,
particularly the GCC, which currently stands at 5.3% of 9M 12A sales (+36% y/y), after sales to
Libya were restored (80% of exports).
Vertical integration via fully-owned dairy and agricultural farms
In FY 08A, Juhayna locked in 10% of its raw milk supply via a JV with Milkes Dairy Co. that
owned and operated a farm facility (40% owned; with a 3.5k herd size). By FY 11A, 4.5k
feddans of land were reclaimed and cultivated to produce 42k tons of agricultural crops.
Another 18k acres were recently bought for 2 newly established firms: (i) Al Enmaa Agriculture
Development and Reclamation, to plant cattle feed & fruit trees, and (ii) Al Enmaa Livestock, to
establish a dairy farm that will launch production in Q1 13e at a herd size of 14k arriving in 4
phases (3,600 milking cows in each phase with the 1st
arriving by the end of FY 13e). Juhayna is
expected to internally secure 40-50% of its input needs by FY 15e. We expect margin
enhancement in FY 13e as the company’s backward integration starts materializing, in-line
with management guidance for the strategy to bear fruit within 12 months.
Horizontal expansion with potential new product lines under consideration
Juhayna also announced its plans to expand into other food categories (e.g. confectionary,
biscuits) either via acquisition or by establishing a new entity, in order to leverage its
production and distribution channels. We currently do not model for any new product
offerings, pending guidance from management.
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Sahar Srour Arqaam Capital Research Offshore s.a.l.
MENA – Real Estate Mabanee Co.
HOLD
Real Estate / Kuwait Bloomberg code MABANEE KK
Market index KSE
Price target (local) 1,250
Upside (%) 4.2
Market data 17/01/2013
Last closing price 1,200
52 Week range 763.6-1,280
Market cap (KWD mn) 733
Market cap (USD mn) 2,604
Average daily traded value (KWD mn) 607.5
Average daily traded value (USD mn) 2.2
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 37.7 52.2 79.3 76.3
EBITDA 26.5 39.0 58.9 57.4
EPS 0.0 0.1 0.1 0.1
P/E (current price) 35.3 24.0 15.3 16.0
Net debt 105.0 129.9 110.7 93.5
BVPS 0.2 0.3 0.4 0.4
P/B (current price) 5.0 4.3 3.3 2.8
EV/EBITDA (current price) 32.2 21.9 14.5 14.9
Div. yield (%) — 0.8 — 0.9
FCF margin (%) (15.1) (32.7) 27.1 34.1
Net debt/EBITDA (x) 4.0 3.3 1.9 1.6
Net debt/Capital (%) 40.2 42.3 32.6 26.1
Interest cover (x) 12.0 15.3 22.9 25.3
RoAA (%) 7.4 9.0 12.5 11.3
RoAE (%) 15.2 19.2 24.4 19.1
RoIC (%) 9.5 12.0 15.9 13.9
A pure play on the Kuwaiti retail rental market
Initiate with Hold, KWd 1,250 fair value estimate
Mabanee is a pure play on the retail property sector in Kuwait with
its operations being solely concentrated in the Avenues Mall (98%),
the largest in Kuwait. We believe the business will benefit from the
country’s supportive macroeconomics, given 3% real GDP/capita FY
12-17e CAGR and rising private consumption/capita (+7% FY 12-17e
CAGR). Mabanee is the market’s first mover in the megamall space,
and has secured strategic anchor tenant relationships, particularly
with Al Shaya Group (major retail franchisee in the MENA region,
35.8% stake in Mabanee). We believe the stock’s 49% outperformance
of KSE index in FY 12A has resulted in fairly-priced implied cap rates on
rental assets, and as such initiate coverage with a Hold rating and
KWd 1,250 fair value estimate.
Rental revenues to double in FY 13e upon launch of Phase III. Phases
I & II (GLA 166k) have been fully operational as of Q4 08A, at 95%
occupancy. The construction of phase III (GLA 95k) is also completed
and inauguration is scheduled for Q1 13e (at 95% pre-leased
occupancy). We expect an aggregate of 261k sqm of retail space to
generate KWD 66mn in recurring rental income in FY 13e, at an
implied blended rate of KWD 268/sqm (supported by higher margin
rentals on luxury shops in Phase III of the Megamall). We forecast an
average growth in rentals of 7% in FY 12-13e (Phases I & II), as we
expect lease renewals to incorporate higher rents. We model for a 4%
growth for all 3 Phases beyond FY 14e, in-line with long-term inflation
estimates.
We model for a weakening in rental yields subsequent to the launch
of Phase IV: Mabanee received government approval for phase IV,
which is expected to provide 60k sqm of additional GLA at a KWD
50mn cost. The new phase will be launched in by Q4 16e, adding KWD
9mn (c. 11%) to rental income in FY 17e. We expect some degree of
saturation in the domestic retail market and hence model for 50%
occupancy in Phase IV. Applying a 70% EBITDA margin, phase IV will
result in average yields of 13.2%, which are less accretive than the 3
phases combined (15.1% return). We exclude phase V from our
valuation due to pending regulatory approvals.
KWd 1,250
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
87
103
119
135
151
167
Jan-12 Apr-12 Jul-12 Oct-12
MABANEE KK KSE
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 164
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
50%
100%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
-50%
0%
50%
100%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
60%
0.0
2.0
4.0
6.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
20
40
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Mabanee Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 0.03 0.03 0.05 0.08 0.07 0.08
Diluted EPS 0.03 0.03 0.05 0.08 0.07 0.08
DPS 0.01 — 0.01 — 0.01 —
BVPS 0.21 0.24 0.28 0.36 0.42 0.50
Weighted average shares 609.16 607.60 609.44 611.19 611.19 611.19
Average market cap 403.84 473.49 719.14 721.20 721.20 721.20
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 39.3 35.3 24.0 15.3 16.0 15.1
P/E (x) (target price) 40.9 36.8 25.0 16.0 16.7 15.7
P/BV (x) (target price) 6.0 5.2 4.4 3.5 3.0 2.5
EV/EBITDA (x) 34.9 32.5 22.1 14.7 15.0 14.3
EV/FCF (x) (48.4) (151.6) (50.5) 40.2 33.1 32.4
EV/Invested capital (x) 4.0 3.7 3.2 2.7 2.5 2.3
Dividend yield (%) 0.6 — 0.7 — 0.9 —
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 3.2 5.8 38.7 51.7 (3.7) 5.3
EBITDA 6.2 7.2 46.9 51.1 (2.4) 5.3
EBIT 6.3 8.1 47.9 52.8 (4.7) 5.0
Net income 21.9 11.3 47.1 56.3 (4.2) 6.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 69.5 70.4 74.6 74.3 75.3 75.3
EBIT 60.1 61.4 65.5 66.0 65.3 65.1
Net 52.4 55.2 58.5 60.3 60.0 60.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 7.8 7.4 9.0 12.5 11.3 11.3
RoAE 15.7 15.2 19.2 24.4 19.1 17.2
RoIC 9.7 9.5 12.0 15.9 13.9 13.6
FCF margin (50.1) (15.1) (32.7) 27.1 34.1 33.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 41.8 40.2 42.3 32.6 26.1 17.9
Net debt/Equity 74.7 71.6 75.6 50.4 36.2 22.3
Interest cover (x) 11.6 12.0 15.3 22.9 25.3 33.0
Net debt/EBITDA (x) 3.8 4.0 3.3 1.9 1.6 1.1
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 165
Abacus Arqaam Capital Fundamental Data
Company profile
Mabanee is the largest listed real estate developer in Kuwait by market capitalisation. The company was founded in 1964, after which it underwent an Initial Public Offering in 1999. Mabanee adopts a pure retail rental business model revolving around a single project in Kuwait, The Avenues Mall. After successfully completing Phases I & II of the Mall, Mabanee is in the process of inaugurating phase III while adding 57% to its GLA. Approvals for phase IV were recently granted.
Ownership and management
Shareholders
Alshaya Group 35.8%
National Industries Group 19.2%
Orient Investment Company 5.4%
Public 39.7%
Source: Zawya
Board of Directors
Mohammed Abdulaziz Alshaya Chairman & MD
Mohammed A. Latif Alshaya Vice Chairman
Abdullah A. Latif Alshaya Director
Ayman A. Latif Alshaya Director
Azzam A. Al Fulaij Director
Mohammad Rashed Al Mutairi Director
Ahmed Wassim Al Arabi Director
Source: Zawya
Mabanee Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (KWDmn)
Sales revenue 35.6 37.7 52.2 79.3 76.3 80.4
Gross profit* 28.2 30.5 39.4 63.1 61.0 64.3
SG&A (3.4) (4.0) (0.5) (4.2) (3.6) (3.8)
EBITDA 24.7 26.5 39.0 58.9 57.4 60.5
Depreciation & Amortisation (3.3) (3.4) (4.7) (6.6) (7.6) (8.1)
EBIT 21.4 23.1 34.2 52.3 49.8 52.3
Net interest income(expense) (1.8) (1.9) (2.2) (2.3) (2.0) (1.6)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) — 0.5 — — — —
Profit before tax 19.5 21.7 32.0 50.0 47.9 50.8
Income tax expense (0.9) (1.0) (1.4) (2.2) (2.1) (2.2)
Minorities — — — — — —
Other post-tax income/(expense) — — — — — —
Net profit 18.7 20.8 30.6 47.8 45.8 48.5
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 18.7 20.8 30.6 47.8 45.8 48.5
*Gross Profit excluding depreciation of investment properties
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (KWDmn)
Cash and equivalents 5.1 9.7 5.4 9.0 6.8 8.2
Receivables 6.7 3.9 7.2 10.9 10.5 11.0
Tangible fixed assets 1.0 0.9 0.9 0.8 0.7 0.6
Investment properties 211.3 262.2 325.2 342.7 367.5 393.6
Other assets including goodwill 32.3 30.3 30.3 30.3 30.3 30.3
Total assets 256.4 307.2 369.0 393.6 415.8 443.6
Payables 29.1 45.1 61.4 53.8 56.5 59.4
Interest bearing debt 100.0 114.8 135.3 119.7 100.3 76.6
Other liabilities 0.4 0.6 0.6 0.6 0.6 0.6
Total liabilities 129.4 160.5 197.2 174.1 157.3 136.6
Shareholders equity 127.0 146.7 171.8 219.6 258.5 307.0
Minorities — — — — — —
Total liabilities & shareholders equity 256.4 307.2 369.0 393.6 415.8 443.6
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (KWDmn)
Cashflow from operations 23.7 45.0 48.3 43.1 56.4 59.1
Net capex (41.5) (50.7) (67.6) (23.9) (32.4) (34.1)
Free cash flow (17.8) (5.7) (19.3) 19.2 24.1 25.0
Equity raised/(bought back) — — — — — —
Dividends paid (4.5) — (5.5) — (6.9) —
Net inc/(dec) in borrowings 23.1 14.8 20.5 (15.6) (19.4) (23.6)
Other investing/financing cash flows (0.8) (4.5) — — — —
Net cash flow — 4.6 (4.3) 3.6 (2.2) 1.4
Change in working capital (1.0) 16.4 13.0 (11.3) 3.1 2.4
Mohammad Kamal Sahar Srour [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 166
A pure play on the Kuwaiti retail rental market
Initiate with Hold, KWd 1,250 fair value estimate
Mabanee is a pure play on the retail property sector in Kuwait with its operations being solely
concentrated in the Avenues Mall (98%), the largest in Kuwait. We believe the business will
benefit from the country’s supportive macroeconomics, given 3% real GDP/capita FY 12-17e
CAGR and rising private consumption/capita (+7% FY 12-17e CAGR). Mabanee is the market’s
first mover in the megamall space, and has secured strategic anchor tenant relationships,
particularly with Al Shaya Group (major retail franchisee in the MENA region, 35.8% stake in
Mabanee). We believe the stock’s 49% outperformance of KSE index in FY 12A has resulted in
fairly-priced implied cap rates on rental assets, and as such initiate coverage with a Hold
rating and KWd 1,250 fair value estimate.
Rental revenues to double in FY 13e upon launch of Phase III. Phases I & II (GLA 166k) have
been fully operational as of Q4 08A, at 95% occupancy. The construction of phase III (GLA 95k)
is also completed and inauguration is scheduled for Q1 13e (at 95% pre-leased occupancy). We
expect an aggregate of 261k sqm of retail space to generate KWD 66mn in recurring rental
income in FY 13e, at an implied blended rate of KWD 268/sqm (supported by higher margin
rentals on luxury shops in Phase III of the Megamall). We forecast an average growth in rentals
of 7% in FY 12-13e (Phases I & II), as we expect lease renewals to incorporate higher rents. We
model for a 4% growth for all 3 Phases beyond FY 14e, in-line with long-term inflation
estimates.
Exhibit 293: GLA (Avenues Mall) to increase by 57% in FY 12e, following launch of Phase III…
Source: Company Data, Arqaam Capital Research
Exhibit 294: …. driving up blended rental rates to KWD 268/sqm in FY 13e (+8% y/y), on high-end tenants
Source: Company Data, Arqaam Capital Research
We model for a weakening in rental yields subsequent to the launch of Phase IV: Mabanee
received government approval for phase IV, which is expected to provide 60k sqm of additional
GLA at a KWD 50mn cost. The new phase will be launched in by Q4 16e, adding KWD 9mn (c.
11%) to rental income in FY 17e. We expect some degree of saturation in the domestic retail
market and hence model for 50% occupancy in Phase IV. Applying a 70% EBITDA margin, phase
IV will result in average yields of 13.2%, which are less accretive than the 3 phases combined
(15.1% return). We exclude phase V from our valuation due to pending regulatory approvals.
166 166 166
261 261 261
--
50
100
150
200
250
300
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Avenues Mall GLA ('000 sqm)
203 204 211 228 268 278
90%
95% 95% 62%
95% 95%
--%
20%
40%
60%
80%
100%
--
50
100
150
200
250
300
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Avenues Mall rental rate (KWD/sqm, RSH)OR (%, LHS)
Rent (KWD/sqm) Occupancy rate (%)
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 167
Valuation: Implied rental cap rates in-line with current market
valuation following 50% FY 12A share price rally, initiate with Hold
We value Mabanee at KWd 1,250/share by applying a DCF valuation on its rental portfolio,
which accounts for the bulk of our EV estimate (96%), and adding the FV of the Salmiya land
(covering 9,516sqm area of which 7,678sqm investment plot is currently set for auction; at an
auction initial price of KWD 4k/sqm). We however withhold from valuing the remaining land
bank in the AlRai area (187k sqm), which is dedicated for future expansion phases through
long-term leases from the government.
Our valuation suggests limited upside potential to CMP (+4.2%) as we believe the stock’s 49%
outperformance of KSE index in FY 12A has resulted in fairly-priced implied cap rates on rental
assets. Current valuation implies that the market is pricing in a 9.4% cap rate on FY 17e NOI,
which is largely in-line with the 9.1% cap rate that our DCF model implies (as the expansion
into phases III & IV converts into visible cash flows).
Exhibit 295: DCF Valuation breakdown
Source: Company Data, Arqaam Capital Research
Exhibit 296: Cap rate calculation- inclusive of Phase III
KWd/share Current market implied At FVE*
Price/share 1,200 1,250
Less: Investments (38) (38)
Plus: NCI 1 1
Add: Net debt 198 198
Implied NPV 1,361 1,411
FY 17e NOI 128 128
Implied cap rate (%) 9.4% 9.1%
Source: Company Data, Arqaam Capital Research *Fair value estimate
Risks
Upside: (i) Al Shaya Group is a major shareholder in Mabanee (35.8% stake), which suggests
the mitigation of long-term occupancy risks, (ii) retail sales growth: BMI expects average
annual growth of 10% in Kuwaiti retail sales in FY 12-17e, which will allow Mabanee to extract
additional rental revenues from its Megamall, (iii) further expansion into phases V and VI of the
Avenues Mall, and (iv) higher than expected rental rates for phase III, as we conservatively
assume KWD 25/sqm/month average rate (c. 29% below recent management guidance of
35/sqm/month). Downside: (i) delays in phase IV delivery, (ii) higher than expected CAPEX
requirements for phase IV, as we assume an estimated cost of USD 150mn, (iii) political risks,
and (iv) concentration risk with >98% of Mabanee’s revenues are dependent on a single
project – The Avenues mall, suggesting downside risks in the event that retail market
fundamentals in Kuwait begin to deteriorate.
(206)
1,250
681 6
62
424
238 8
(1)
38
--
200
400
600
800
1,000
1,200
1,400
1,600
Ph
ase
s I
& II
Leas
ed
off
ice
Salm
iya
plo
t
Ph
ase
III
Ph
ase
IV
Cas
h
De
bt
NC
I
Inve
stm
en
ts
Pri
ce ta
rge
t
KWd/share
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 168
Key operating drivers
Mabanee’s investment properties portfolio: includes (i) 9,156sqm land in Salmiya area, of
which 7,678sqm relate to an investment plot that will be offered for auction(1)
at an initial bid
of KWD 4k/sqm (c. KWD 32mn), (ii) operating assets including phases I & II of the Avenues mall
and a leasable office building in Salhiya Kuwait City, and (iii) properties under development,
which includes Phase III (at CAPEX amounting to KWD 161mn in 9M 12A). We estimate the fair
value of investment property assets at >2x carrying value (KWD 262mn in FY 11A), in-line with
the assessment of independent appraisers commissioned by the company. The most recent
independent appraisal of Mabanee’s IP portfolio implies KWD 0.89/share as of FY 11A, which
coincides with our aggregate fair value estimate of (i) The Avenues Phases I & II, (ii) 70% of
Phase III, matching the proportion of overall CAPEX incurred in FY 11A, (iii) the Salmiya land
plot, and (iv) office space currently being leased out.
Exhibit 297: Estimated fair value of IP portfolio 2x book value
Source: Company Data, Arqaam Capital Research
Acquisition of Al Rai Logistica EPS accretive: In May 2012, Mabanee increased its capital by
4.7% (28.5mn shares) to acquire 91% of its associate Al Rai Logistica (49.9% owned) via a share
swap deal (1:5.075 shares). The acquired land bank (30k sqm), located adjacent to the Avenues
Mall, can generate EPS accretion on further extensions of Mabanee’s flagship shopping
complex. We estimate that the consolidation of the acquired business will contribute 7.5% of
aggregate revenues in FY 12e.
Exhibit 298: Mabanee’s Avenues mall vs. Emaar’s Dubai mall
Current GLA (sqm) Expected GLA (sqm) Rental rate (USD/sqm) Occupancy rate (%)
Dubai Mall 325,000 357,500 1,400 95%
The Avenues 261,000 321,000 950 95%
Source: Company Data, Arqaam Capital Research
Note (1) The fully-owned subsidiary (Fifth Ring Road Co.) has filed a lawsuit to end the common ownership of the 7,678sqm plot in Salmiya area. The
court ruled to auction off the plot at an initial auction price of c. KWD 32mn. The auction however has been postponed twice, most recently to Jan 2013.
157 170 211
262 343 323
503 543
118%
90%
138%
107%
--%
20%
40%
60%
80%
100%
120%
140%
160%
--
100
200
300
400
500
600
FY 08A FY 09A FY 10A FY 11A
IP BV vs. FV (KWDmn, LHS);% upside (RHS)
Book value Fair value % upside
January 18 2013
Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 169
Business Trends
Exhibit 299: Historical IP* revenue (19% FY 07-11A CAGR)
Source: Company Data, Arqaam Capital Research *Investment properties
Exhibit 300: Forecast IP* revenues: 21% FY 11-15e CAGR
Source: Company Data, Arqaam Capital Research *Investment properties
Exhibit 301: Aggregate revenues
Source: Company Data, Arqaam Capital Research
Exhibit 302: Margin trends
Source: Company Data, Arqaam Capital Research
Exhibit 303: Capex vs. debt
Source: Company Data, Arqaam Capital Research
Exhibit 304: CFO/sales
Source: Company Data, Arqaam Capital Research
24 31 33 34
11 2
1 2 3 3
--
10
20
30
40
50
60
70
80
90
FY 08A FY 09A FY 10A FY 11A
IP revenue breakdown, KWD mn
Rental revenue Arrangement fees Other revenues
38
67 69 72 6
6
5
6
7 8
--
10
20
30
40
50
60
70
80
90
FY 12e FY 13e FY 14e FY 15e
IP revenue breakdown, KWD mn
Rental revenue Arrangement fees Other revenues
36 34 36 38 48
79 76 80 -- -- -- --
4
0.5 --
--
--
10
20
30
40
50
60
70
80
90
FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Aggregate revenues (KWDmn)
IP revenues Logistics
71.0% 70.2%72.6%
66.9%
71.8% 70.6%
58.4% 60.1%
61.4%
65.5% 66.0% 65.3%
44.4%
52.4% 55.2%
58.5% 60.3% 60.0%
40%
45%
50%
55%
60%
65%
70%
75%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins (%)
GPM (incl. Depn) EBIT Margin NPM
82 100
115 135
120 100
15 41 51
68
24 32
--
20
40
60
80
100
120
140
160
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Capex vs. debt (KWDmn)
Debt Capex
79.8%
66.4%
119.5%
92.5%
54.4%
73.9%
--%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
CFO/sales (%)
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Haidar Arqaam Capital Research Offshore s.a.l.
Saudi Arabia – Consumer staples Saudi Dairy and Foodstuff Co.
HOLD
Consumer staples / Saudi Arabia Bloomberg code SADAFCO AB
Market index SASEIDX
Price target (local) 70
Upside (%) 5.6
Market data 17/01/2013
Last closing price 66.0
52 Week range 49.0-70.3
Market cap (SARmn) 2,145
Market cap (USDmn) 572
Average daily volume (SARmn) 3.3
Average daily volume (USDmn) 0.9
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 1,335.7 1,593.5 1,766.5 1,935.6
EBITDA 194.7 213.0 242.5 276.0
Net income 152.5 158.1 180.3 206.5
EPS 4.69 4.86 5.55 6.35
P/E (current price) 14.1 13.6 11.9 10.4
BVPS 24.1 26.1 28.3 30.8
P/B (current price) 2.7 2.5 2.3 2.1
EV/EBITDA (current price) 10.3 9.4 8.2 7.2
Div. yield (%) 4.5 4.4 5.0 5.8
FCF margin (%) (3.0) 2.7 4.9 6.7
Net debt/EBITDA (x) (0.3) (0.4) (0.2) (0.2)
Net debt/Capital (%) (6.6) (8.8) (5.7) (5.9)
Interest cover (x) (31.4) (92.5) — —
RoAA (%) 14.1 13.6 14.1 15.0
RoAE (%) 20.1 19.4 20.4 21.5
RoIC (%) 19.4 18.6 19.6 20.6
Dairy segment to drive 10% revenue growth
Re-commissioning of idle plant diversifies product mix,
but range remains narrow relative to peers
Initiate with Hold and SAR 70 fair value estimate
Saudi Dairy & Foodstuff Company (SADAFCO) is a leading food
manufacturer in Saudi Arabia with market-leading positions in the
production of UHT-milk, tomato paste, and ice cream. In response to
rising demand, the company re-commissioned its Dammam facility in Q3
12A, in order to raise its production capacity of tomato paste, snacks, and
cheese products. We expect the company’s largest segment (milk and
dairy) to drive revenue growth going forward, as a result of rising per-
capita dairy consumption in KSA. Given a relatively narrow product mix
compared to peers, as well as minimal future capacity expansions, we
believe revenue growth will remain >10% CAGR over the next 5 years. We
believe the market is fairly valuing SADAFCO at current multiples (11.9x FY
13e P/E, 8.2x EV/EBITDA). We initiate with a Hold recommendation and
SAR 70 fair value estimate.
Re-commissioning of Dammam plant introduces additional capacity in
non-dairy business units: SADAFCO relocated the manufacture of some of
its products to a previously de-commissioned plant in Dammam, after
launching operations at the facility in Q3 12A. We expect the production
of tomato paste, snacks, and cheese products to rise 25% in FY 13e as an
estimated 20% additional capacity is made available at the new plant. We
see the overall non-dairy business segment producing 5-year CAGR of 13%
going forward. The relocation to the Dammam plant however will vacate
sizable capacity for milk and milk product output at the company’s Jeddah
facilities, leading to an optionality on future capacity increases, or the
introduction of new product lines.
Valuation: We value SADAFCO at SAR 70/share using DCF (WACC 10.9%,
TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e
EV/EBITDA, at par with the MENA peer average. We believe market has
fully credited SADAFCO for its expansion strategy which is nearing
completion, and is fairly valuing the business at current multiples.
Risk: Input costs, and a highly competitive domestic industry (dairy).
SAR 70
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
89
100
111
122
133
144
Jan-12 Apr-12 Jul-12 Oct-12
SADAFCO AB SASEIDX
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 171
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
-10%
-5%
0%
-0.4
-0.2
0.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Saudi Dairy and Foodstuff Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 4.07 4.69 4.86 5.55 6.35 6.89
Diluted EPS 4.07 4.69 4.86 5.55 6.35 6.89
DPS 1.50 3.00 2.92 3.33 3.81 4.14
BVPS 22.49 24.14 26.09 28.30 30.85 33.60
Weighted average shares 32.50 32.50 32.50 32.50 32.50 32.50
Average market cap 1,365.00 1,374.75 2,145.00 2,145.00 2,145.00 2,145.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 16.2 14.1 13.6 11.9 10.4 9.6
P/E (x) (target price) 17.1 14.9 14.3 12.6 11.0 10.1
P/BV (x) (target price) 3.1 2.9 2.7 2.5 2.3 2.1
EV/EBITDA (x) (target price) 13.3 11.3 10.3 9.0 7.9 7.4
EV/FCF (x) 302.1 (55.3) 51.4 25.4 16.9 13.4
EV/Invested capital (x) 3.0 2.8 2.6 2.4 2.2 2.0
Dividend yield (%) 2.3 4.5 4.4 5.0 5.8 6.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 10.9 17.7 19.3 10.9 9.6 8.5
EBITDA 1.4 17.8 9.4 13.8 13.8 7.3
EBIT (0.9) 22.4 9.7 16.1 14.5 8.5
Net income (35.8) 15.2 3.6 14.1 14.5 8.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 14.6 14.6 13.4 13.7 14.3 14.1
EBIT 11.1 11.5 10.6 11.1 11.6 11.6
Net 11.7 11.4 9.9 10.2 10.7 10.7
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 13.0 14.1 13.6 14.1 15.0 15.1
RoAE 18.9 20.1 19.4 20.4 21.5 21.4
RoIC 18.1 19.4 18.6 19.6 20.6 20.5
FCF margin 0.6 (3.0) 2.7 4.9 6.7 7.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital (46.2) (6.6) (8.8) (5.7) (5.9) (8.1)
Net debt/Equity (46.2) (6.6) (8.8) (5.7) (5.9) (8.1)
Interest cover (x) 152.0 (31.4) (92.5) — — —
Net debt/EBITDA (x) (2.0) (0.3) (0.4) (0.2) (0.2) (0.3)
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 172
Abacus Arqaam Capital Fundamental Data
Company profile
Saudi Dairy & Foodstuff Company (SADAFCO),
established in 1976 in Jeddah, is a leading food
manufacturer and major producer of UHT (long
life) milk in Saudi Arabia. SADAFCO enjoys a
leading position in the consumer goods space
via its Saudia brand, which covers UHT-milk,
tomato paste, and ice cream products. The
company owns two production facilities in
Jeddah, and recently re-commissioned its
Dammam plant, which will primarily host the
production of tomato paste, snacks, and cheese
products.
Ownership and management
Shareholders
United Industries Company 30.1%
Al Sameh Trading Company 11.6%
Public 58.3%
Source: Zawya
Board of Directors
HH Sheikh Hamad Sabah Al Ahmed Al Jaber Sabah Chairman
Mr Faick Hussen Mohamed Al Saleh Vice Chariman
Mr Tarik Mohamed Abdul Salam Director
Mr Faisal Hamad Mubarak Al Ayyar Director
Mr Abdullah Yacoub Bichara Director
Mr Sulaiman Saud Jarallah Al Jarallah Director
Mr Mussad Abdullah Abdulaziz Al Nassar Director
Source: Zawya
Saudi Dairy and Foodstuff Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 1,134.4 1,335.7 1,593.5 1,766.5 1,935.6 2,100.6
Gross profit 368.1 415.3 495.5 549.3 601.9 653.2
SG&A (242.4) (261.5) (326.7) (353.3) (377.4) (409.6)
EBITDA 165.3 194.7 213.0 242.5 276.0 296.1
Depreciation & Amortisation (39.5) (40.9) (44.2) (46.5) (51.6) (52.5)
EBIT 125.7 153.8 168.8 196.0 224.4 243.6
Net interest income(expense) (0.8) 4.9 1.8 — — —
Associates/affiliates 16.1 — — — — —
Exceptionals/extraordinaries (2.5) (0.2) — — — —
Other pre-tax income/(expense) 5.2 5.5 1.2 — — —
Profit before tax 146.2 164.2 171.8 196.0 224.4 243.6
Income tax expense (13.8) (11.8) (13.7) (15.7) (18.0) (19.5)
Minorities (0.4) (0.4) — — — —
Other post-tax income/(expense) — — — — — —
Net profit 132.4 152.5 158.1 180.3 206.5 224.1
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 132.4 152.5 158.1 180.3 206.5 224.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and equivalents 337.9 51.7 74.6 52.9 58.8 88.4
Receivables 252.1 308.8 346.6 382.2 417.1 451.1
Inventories 208.0 253.1 345.9 383.5 420.2 456.0
Tangible fixed assets 267.7 322.7 382.1 423.9 449.7 460.2
Other assets including goodwill 8.6 159.6 84.6 84.6 84.6 84.6
Total assets 1,074.3 1,095.8 1,233.7 1,327.1 1,430.4 1,540.3
Payables 127.7 120.8 195.5 216.8 237.5 257.8
Interest bearing debt — — — — — —
Other liabilities 215.6 190.4 190.4 190.4 190.4 190.4
Total liabilities 343.3 311.3 386.0 407.2 428.0 448.2
Shareholders equity 731.0 784.5 847.8 919.9 1,002.5 1,092.1
Minorities 0.9 1.2 1.2 1.2 1.2 1.2
Total liabilities & shareholders equity 1,074.3 1,095.8 1,233.7 1,327.1 1,430.4 1,540.3
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 75.5 56.2 146.3 174.8 207.3 227.0
Net capex (68.2) (95.9) (103.6) (88.3) (77.4) (63.0)
Free cash flow 7.3 (39.7) 42.7 86.5 129.9 164.0
Equity raised/(bought back) — — — — — —
Dividends paid (48.8) (97.5) (94.8) (108.2) (123.9) (134.4)
Net inc/(dec) in borrowings — — — — — —
Other investing/financing cash flows 58.9 (149.0) 75.0 — — —
Net cash flow 17.4 (286.2) 22.9 (21.7) 6.0 29.6
Change in working capital (89.4) (145.3) (76.9) (75.2) (76.3) (77.2)
Mohammad Kamal Mohamad Haidar [email protected] Arqaam Capital Research Offshore s.a.l.
+9714 507 1743
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 173
Initiate with Hold and SAR 70 fair value estimate
Dairy segment to drive 10% revenue growth
Re-commissioning of idle plant diversifies product mix, but range remains
narrow relative to peers
Saudi Dairy & Foodstuff Company (SADAFCO) is a leading food manufacturer in Saudi Arabia
with market-leading positions in the production of UHT-milk, tomato paste, and ice cream, via
its Saudia brand. In response to rising demand, the company re-commissioned its Dammam
facility in Q3 12A, in order to raise its production capacity of tomato paste, snacks, and cheese
products. We expect the company’s largest segment (milk and dairy) to drive revenue growth
going forward, as a result of rising per-capita dairy consumption in KSA. Given a relatively
narrow product mix compared to peers, as well as minimal future capacity expansions, we
believe revenue growth will remain >10% CAGR over the next 5 years. We believe the market
is fairly valuing SADAFCO at current multiples (11.9x FY 13e P/E, 8.2x EV/EBITDA), at a 34%
discount to peers, which we find sensible given that SADAFCO holds a narrower product mix
than peers, and has little growth prospects beyond relocation to Dammam facilities. We
initiate with a Hold recommendation and SAR 70 fair value estimate.
Rising milk and dairy consumption in Saudi Arabia drives growth, leadership position in UHT-
milk to remain intact: SADAFCO is a market leader in UHT-milk production in Saudi Arabia
(56% market share). We expect the business to retain its market position as dairy consumption
in KSA rises in tandem with population growth. Milk sales currently account for 65% of total
sales, having grown 14% y/y. Beyond population-led consumption growth in KSA, we see few
growth drivers in the milk/dairy division, barring potential future capacity additions. We expect
the segment to register a 5-year revenue CAGR of 10%, vs. 13% for SADAFCO’s non-dairy
product range. We therefore forecast aggregate revenue growth of 19% and 11% in FY 12e and
FY 13e respectively, largely driven by ex-milk products. Geographic expansion remains a viable
medium-term growth driver, though we do not explicitly model for any non-domestic sales
expansions at this stage, pending further management guidance on strategy, timing and
CAPEX.
Exhibit 305: GCC dairy market: 2.01bn litres consumed in 2012
Source: Almarai, Arqaam Capital Research
Exhibit 306: GCC milk market: 1.27bn litres consumed in 2012
Source: Almarai, Arqaam Capital Research
Laban, 26%
Fresh milk, 23% Long life milk,
21%
Milk powder, 19%
Zabadi, 11%
GCC dairy market by type
Fresh milk, 37%
Long life milk, 33%
Milk powder, 30%
GCC milk market by type
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 174
The re-commissioning of SADAFCO’s Dammam plant introduces fresh capacity at ex-milk
business units: SADAFCO relocated the production of some of its products to a previously de-
commissioned plant in Dammam, launching operations at the facility in Q3 12A. The plant will
primarily host the production of tomato paste, snacks, and cheese products previously handled
at SADAFCO’s Jeddah facilities. We therefore expect production to rise 25% as an estimated
c.20% in incremental capacity is made available at the new plant, securing the segment a 5-
year CAGR of 13%. The relocation to the Dammam plant will however vacate sizable capacity
for milk and milk product production at the Jeddah facilities, leading to an optionality on future
capacity increases, or the introduction of new product lines.
Retail expansion in KSA to support growth in ice cream products segment: SADAFCO’s ice
cream segment currently accounts for 10% of total sales, growing from c.5% in FY 09A. The
segment leads the Saudi Arabian ice cream industry with a 43% share of the market. We
expect the segment to continue delivering solid growth in FY 12-13e as retail outlets across the
Kingdom expand, securing the segment a 5-year CAGR of 13%.
Long-term raw material supply contracts suggests margin stability: SADAFCO does not own
farms, and fully imports skimmed milk powder necessary for the production of UHT milk from
international suppliers, through long-term agreements (12-18 months). This allows some
degree of cost management, in the absence of effective hedging policies. We therefore expect
little in the way of margin variability at the gross level, and forecast gross margins to arrive flat
at 31.1% in FY 12-13e. SADAFCO is expected to marginally lower its SG&A bill to 19% of total
revenues due to increased efficiency at the Dammam plant, leading to margin improvements
at the EBIT and net levels. The business already meets ‘Saudisation’ (local staffing
requirements) limits at its facilities.
Little CAPEX in the pipeline suggest higher dividend distributions going forward: SADAFCO
commenced operations at its Dammam plant after completing construction works and
incurring the majority of CAPEX in FY 11A/H1 12A. We expect SADAFCO to comfortably
accommodate 60%+ dividend payouts in FY 13e onwards, barring potential future acquisition
or expansion CAPEX.
Discount to peers at current multiples: We value SADAFCO at SAR 70/share using DCF (WACC
10.9%, TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA, at par
with regional peer averages. We believe the market has fully credited SADAFCO for its
expansion strategy which is nearing completion, and is fairly valuing the business at current
multiples (30% discount to peer EV/EBITDA average). We initiate with a Hold and fair value
estimate of SAR 70.
Risk: Potential downside risk to margins as a result of raw material/input costs, against which
the business does not actively hedge. The KSA dairy industry remains highly competitive in the
presence of larger competitors such as Almarai, Al Safi, and Nestle. Lower-than-expected
capacity utilisation at SADAFCO’s Dammam plant could leave our growth expectations in the
tomato paste and snacks segments unmet.
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 175
Valuation
Price performance (+48% 1-yr% vs. +10% SASEIDX) suggests market has fully
priced in growth and business fundamentals. Initiate with Hold and SAR
70/share fair value estimate
Discount to peers at current multiples: We value SADAFCO at SAR 70/share using DCF (WACC
10.9%, TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA, at par
with regional peer averages. We believe the market has fully credited SADAFCO for its
expansion strategy which is nearing completion, and is fairly valuing the business at current
multiples. We initiate with a Hold and fair value estimate of SAR 70.
Exhibit 307: DCF summary
Source: Company Data, Arqaam Capital Research
SADAFCO
DCF summary
SARmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 180 206 224 242 271
Depreciation & Amortization 46 52 53 57 56
EBITDA 227 258 277 298 327
Working Capital Changes (75) (76) (77) (80) (77)
Operating Cash Flow 152 182 199 219 249
Purchase of PPE (88) (77) (63) (57) (56)
Free Cash Flow to Firm 63 104 136 162 193
Discount Factor using WACC at 10.5% 0.90 0.81 0.73 0.66 0.60
PV of Visible FCFF 57 85 100 107 115
Terminal Value 2,916
Equity Valuation WACC parameters
PV of Visible FCFF 464 Rf 4.2%
PV of Terminal Value 1,736 EMRP 10.0%
Enterprise Value 2,200 Adjusted Beta 0.90
Cost of Equity 13.2%
Cash & Cash Equivalents 73
Less: Net (Debt) Funds -- Marginal tax rate 10.0%
Cost of Debt 4.0%
Equity Value 2,272 D/C (market) 25.0%
NOSH 33 WACC 10.9%
Equity Value per Share 70 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 9.1 8.0 7.4 6.9 6.3
P/E 12.6 11.0 10.1 9.4 8.4
P/B 2.5 2.3 2.1 1.9 1.8
* Based on after-tax operating profit
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 176
Exhibit 308: SADAFCO in peer context
P/E
P/B
EV/EBITDA
At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e
SADAFCO 11.9 10.4 2.3 2.1 8.2 7.2
Average consumer staples 12.6 10.5 2.3 2.0 12.0 10.3
Premium / (discount) (5.9%) (0.7%) 2.6% 6.5% (31.5%) (29.9%)
Average consumer discretionary 9.4 8.2 2.7 2.4 7.3 6.5
Premium / (discount) 26.3% 27.2% (15.0%) (11.4%) 13.5% 11.2%
Average retailers 13.8 12.4 3.9 3.4 12.4 11.1
Premium / (discount) (13.8%) (16.0%) (39.9%) (36.2%) (33.6%) (35.0%)
Average coverage universe 12.2 10.4 2.7 2.4 10.9 9.6
Premium / (discount) (2.4%) (0.2%) (13.2%) (9.5%) (24.4%) (24.3%)
Source: Company Data, Arqaam Capital Research
SADAFCO currently sit at a 30% discount to peers at the EV/EBITDA level (8.2x vs. 12.0x
consumer staples peers average in FY 13e). We warrant the discount on the relatively narrow
product mix SADAFCO holds versus peers, and the little remaining growth prospects beyond
relocation to Dammam facilities. The market however currently values SADAFCO at par with
peer averages in FY 13e and FY 14e at 11.9x and 10.4x P/E, respectively.
Exhibit 309: Valuation sees SADAFCO at par with peers on P/E
Source: Company Data, Arqaam Capital Research
Exhibit 310: Current multiples near peer average P/E, P/B
Source: Company Data, Arqaam Capital Research
Risk: Potential downside risk to margins as a result of raw material/input costs, against which
the business does not actively hedge. The KSA dairy industry remains highly competitive in the
presence of larger competitors such as Almarai, Al Safi, and Nestle. Lower-than-expected
capacity utilisation at SADAFCO’s Dammam plant could leave our growth expectations in the
tomato paste and snacks segments unmet.
18.7x
15.7x
14.2x
12.6x 12.4x
10.2x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Herfy Halwani Juhayna SADAFCO Almarai Agthia
Target equity value / FY 13e net income
Almarai
Halwani
SADAFCO
Herfy
SavolaSPM
Juhayna
Aghtia
AUTO
Budget
Tayyar
Catering
Shaker
Gasco
Othaim
Hokair
JarirExtra
Meera
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Current market cap/FY 13e book value
Current market cap/FY 13e net income
January 18 2013
Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 177
Business trends
Exhibit 311: Ex-milk products (Dammam facility) to drive growth in FY 12-13e
Source: Company Data, Arqaam Capital Research
Exhibit 312: Revenue mix to remain unchanged
Source: Company Data, Arqaam Capital Research
Exhibit 313: Significantly lower EBITDA margins vs. peers (13.7% in FY 13e vs. 22% peers)- given higher SG&A costs
Source: Company Data, Arqaam Capital Research
Exhibit 314: UHT-milk segment enjoys the highest margins within the SADAFCO product range
Source: Company Data, Arqaam Capital Research
Exhibit 315: Dividends at 60% payout going forward
Source: Company Data, Arqaam Capital Research
Exhibit 316: DuPont: weaker margins generate lower RoE vs. peers, signaling inefficient utilisation of resources
Source: Company Data, Arqaam Capital Research
1,134 1,336
1,593 1,767
1,936
--%
5.0%
10.0%
15.0%
20.0%
25.0%
--
500
1,000
1,500
2,000
2,500
FY 10A FY 11A FY 12e FY 13e FY 14e
SAR bn
Sales Sales growth
65% 64% 63% 63% 63%
8% 8% 9% 9% 9%
9% 9% 9% 9% 10%
--%
20%
40%
60%
80%
100%
120%
FY 11A FY 12e FY 13e FY 14e FY 15e
Revenue breakdown by product
Milk Tomato paste Ice cream Powdered milk Cheese Others
32.5% 31.1% 31.1% 31.1% 31.1%
14.6% 14.6% 13.4% 13.7% 14.3%
11.1% 11.5% 10.6% 11.1% 11.6% 11.5% 11.4% 9.9% 10.2% 10.7%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 10A FY 11A FY 12e FY 13e FY 14e
Gross margin EBITDA margin EBIT margin Net margin
13.9%
11.4% 11.4%
2.3%
3.8%
1.6%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Milk Tomato paste
Ice cream Powdered milk
Cheese Others
Net margin by product
(250)
(200)
(150)
(100)
(50)
--
50
100
150
200
250
FY 10A FY 11A FY 12e FY 13e FY 14e
SAR mn
Dividends
CFO
Capex
18.1% 19.4%
18.6% 19.6%
20.6%
18.1% 19.4%
18.6% 19.6%
20.6%
12.3% 13.9% 12.8% 13.6%
14.4%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 10A FY 11A FY 12e FY 13e FY 14e
RoE RoIC RoA
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Mohamad Hammoud Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer staples Saudi Paper Manufacturing Busin
HOLD
Consumer staples / Saudi Arabia Bloomberg code SPIMACO AB
Market index SASEIDX
Price target (local) 30.0
Upside (%) -0.7
Market data 17/01/2013
Last closing price 30.2
52 Week range 27.4-40.2
Market cap (SAR mn) 1,133
Market cap (USD mn) 302
Average daily traded value (SAR mn) 4.8
Average daily traded value (USD mn) 1.3
Year-end (local mn) 2011 2012e 2013e 2014e
Revenues 835.7 781.4 831.9 887.6
EBITDA 151.8 164.3 169.8 177.9
Net income 100.4 100.9 107.8 114.1
EPS 2.68 2.69 2.88 3.04
P/E (current price) 11.7 11.6 10.8 10.3
BVPS 17.5 18.8 20.0 21.3
P/B (current price) 1.8 1.7 1.6 1.5
EV/EBITDA (current price) 13.5 12.5 12.1 11.5
Div. yield (%) 3.8 4.5 5.1 5.8
FCF yield (%) (3.1) 34.8 12.4 12.4
Net debt/EBITDA (x) 6.1 4.4 3.1 2.8
Net debt/Capital (%) 56.2 47.0 35.4 34.7
Interest cover (x) 7.4 6.5 8.1 9.5
RoAA (%) 6.2 6.0 6.7 7.3
RoAE (%) 16.1 14.9 14.8 14.7
RoIC (%) 10.7 11.4 11.7 12.0
SAR 30
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
77
87
97
107
117
127
137
Jan-12 Apr-12 Jul-12 Oct-12
SPM AB SASEIDX
Unexciting story in the absence of genuine growth
catalysts, initiate with Hold and SAR 30 FVE
Saudi Paper Manufacturing (SPM) is a diversified paper producer
specialised in paper recycling, manufacturing and converting. SPM
dominates the KSA paper products market with a market share of
c.70%, while catering to other MENAT countries including Algeria,
Bahrain, Kuwait, Jordan, and UAE, which combined accounted for 13%
of total FY 11A sales.
We see no genuine catalyst in FY 13e: We believe SPM’s business is
heavily dependent on per-capita paper use, which is relatively stable.
Although the indicator is 50% lower in the MENAT region vs. developed
markets, we find little in the way of a meaningful catalyst for the gap
to close. Accordingly, we believe that demand for paper will be solely
driven by (i) population growth for domestic use and (ii) GDP growth
for commercial use. Market data suggests GDP and population 5-yr
CAGR of 5.7% and 2.1% for Saudi Arabia and 6.0% and 1.4% for MENAT
ex-KSA, respectively. This will lead to modest revenue growth going
forward (5-yr CAGR 6%), in the absence of any capacity additions.
Margins reached a trough in FY 11A (25%): Fluctuating pulp costs
along with issues with the main mill’s power generators have led to
500bps in overall margin compression since FY 08A. We however
anticipate a GPM recovery in FY 12e (+300bps) given (i) the handling of
power outages, and (ii) the decline in pulp prices by 14% in 9M 12A.
We nevertheless anticipate competitive pressures to materialise in
FY13-14e, which should draw GPMs down to 27% (-100bps vs. FY 12e).
Valuation: We value SPM on a DCF basis. Our price target implies 10.4x
FY 13e P/E, reflecting a discount of 22% to domestic peers, which we
find appropriate given better growth prospects and margins elsewhere
(FY 13e EBITDA margin 20.4% vs. 24.6% peers). We initiate coverage
with a Hold rating and SAR 30 fair value estimate.
Risks: Long term margins compression, imports, competition, and high
financial leverage.
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 179
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
-10%
0%
10%
20%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
60%
0.0
5.0
10.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Saudi Paper Manufacturing Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 3.27 2.68 2.69 2.88 3.04 3.28
Diluted EPS 3.27 2.68 2.69 2.88 3.04 3.28
DPS 1.00 1.20 1.40 1.60 1.80 2.00
BVPS 15.86 17.47 18.76 20.04 21.28 22.56
Weighted average shares 37.50 37.50 37.50 37.50 37.50 37.50
Average market cap 1,313.67 1,089.77 1,089.77 1,089.77 1,089.77 1,089.77
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 9.5 11.7 11.6 10.8 10.3 9.5
P/E (x) (target price) 9.2 11.2 11.1 10.4 9.9 9.1
P/BV (x) (target price) 1.9 1.7 1.6 1.5 1.4 1.3
EV/EBITDA (x) 11.2 13.5 12.5 12.1 11.5 10.9
EV/FCF (x) (154.3) (69.9) 6.7 17.5 16.4 14.3
EV/Invested capital (x) 1.9 1.8 1.8 1.8 1.8 1.8
Dividend yield (%) 3.2 3.8 4.5 5.1 5.8 6.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 44.1 4.0 (6.5) 6.5 6.7 5.9
EBITDA 24.5 (17.5) 8.2 3.3 4.8 6.1
EBIT 26.5 (16.7) 4.6 3.6 3.8 5.9
Net income 30.4 (18.1) 0.5 6.9 5.8 7.9
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 22.9 18.2 21.0 20.4 20.0 20.1
EBIT 16.7 13.4 15.0 14.6 14.2 14.2
Net 15.3 12.0 12.9 13.0 12.9 13.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 8.5 6.2 6.0 6.7 7.3 8.1
RoAE 22.2 16.1 14.9 14.8 14.7 15.0
RoIC 13.9 10.7 11.4 11.7 12.0 12.6
FCF yield (1.5) (3.1) 34.8 12.4 12.4 13.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 55.6 56.2 47.0 35.4 34.7 33.1
Net debt/Equity 133.0 141.4 103.0 70.2 62.4 54.0
Interest cover (x) 11.3 7.4 6.5 8.1 9.5 11.8
Net debt/EBITDA (x) 4.3 6.1 4.4 3.1 2.8 2.4
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 180
Abacus Arqaam Capital Fundamental Data
Company profile
Saudi Paper Manufacturing (SPM) is a leading
vertically integrated manufacturer of tissue
paper products. The company operates three
different business lines including paper
recycling, paper manufacturing and paper
converting. The paper recycling and
manufacturing divisions accommodate 100kt
and 125kt in capacities exclusively earmarked
for the Saudi Arabian market. Paper conversion
(66kt) serves regional markets including the
UAE, Kuwait, Morocco and Turkey, in addition to
the local market (40kt). Finished products
include Jumbo rolls, toilet rolls, facial tissues,
and kitchen towels. SPM also owns registered
brands including Excellence, Mouchoir, Zaman,
City, Weekend, and Pure.
Ownership and management
Shareholders
HH Prince Abdullah Bin Musaed Al Saud 50.0%
FALCOM Financial Services 7.7%
Public 42.3%
Source: Zawya
Board of Directors
HH Prince Abdullah Bin Musaed Al Saud Chairman
James David Pheebs Director
Azzam Bin Abdullah Bin Mansour Abalkhail Director
Adeeb Bin Abdulrahman Sowailim Director
Moussa Bin Abdulkarim Al Robaian Director
Abdulaziz Bin Saleh Bin Mansour Al Jarbou Director
Mohammed Bin Abdullah Al Khorayf Director
Source: Company data
Saudi Paper Manufacturing Co.
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SARmn)
Sales revenue 803.6 835.7 781.4 831.9 887.6 939.9
Gross profit 231.9 210.7 218.8 229.6 241.4 255.6
SG&A (97.3) (98.7) (101.6) (108.1) (115.4) (122.2)
EBITDA 183.9 151.8 164.3 169.8 177.9 188.8
Depreciation & Amortisation (49.4) (39.7) (47.1) (48.3) (51.9) (55.4)
EBIT 134.5 112.0 117.2 121.5 126.0 133.5
Net interest income(expense) (11.9) (15.1) (18.0) (15.1) (13.2) (11.3)
Associates/affiliates — — — — — —
Exceptionals/extraordinaries — — — — — —
Other pre-tax income/(expense) 2.8 6.7 5.0 5.0 5.0 5.0
Profit before tax 125.4 103.6 104.2 111.4 117.8 127.1
Income tax expense (2.8) (2.6) (2.6) (2.8) (3.0) (3.2)
Minorities — (0.7) (0.7) (0.7) (0.7) (0.8)
Other post-tax income/(expense) — — — — — —
Net profit 122.6 100.4 100.9 107.8 114.1 123.1
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 122.6 100.4 100.9 107.8 114.1 123.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SARmn)
Cash and other liquid assets 294.5 353.6 397.7 504.6 444.4 391.3
Receivables 256.2 272.9 289.0 296.3 304.0 309.0
Tangible fixed assets 635.3 656.7 670.2 512.8 522.1 528.8
Associates/investments 22.1 35.1 44.0 44.0 44.0 44.0
Other assets including goodwill 236.1 325.5 133.2 133.2 133.2 133.2
Total assets 1,507.3 1,731.9 1,622.3 1,579.1 1,535.9 1,494.4
Payables 54.3 50.8 48.4 58.0 68.8 79.8
Interest bearing debt 827.1 992.8 837.2 736.6 636.0 535.4
Other liabilities 31.1 33.1 33.1 33.1 33.1 33.1
Total liabilities 912.4 1,076.8 918.8 827.7 738.0 648.4
Shareholders equity 594.9 655.1 703.5 751.3 797.9 846.0
Minorities — 4.2 4.2 4.2 4.2 4.2
Total liabilities & shareholders equity 1,507.3 1,731.9 1,622.3 1,579.1 1,535.9 1,494.4
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SARmn)
Cashflow from operations 96.1 89.2 330.6 163.3 171.4 189.0
Net capex (107.8) (115.1) (58.6) (59.9) (61.2) (62.0)
Free cash flow (11.7) (25.9) 272.0 103.4 110.2 127.0
Equity raised/(bought back) — — — — — —
Dividends paid (37.5) (45.0) (52.5) (60.0) (67.5) (75.0)
Net inc/(dec) in borrowings 61.7 165.1 (155.6) (100.6) (100.6) (100.6)
Other investing/financing cash flows (1.8) (48.6) — 169.0 — —
Net cash flow (1.3) 30.6 45.9 96.7 (71.1) (59.9)
Change in working capital (72.6) (45.4) (16.8) (8.0) (7.8) (0.8)
Mohammad Kamal Mohamad Hammoud [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 181
Initiate with Hold and SAR 30/share fair value estimate
Limited growth potential in the absence of genuine catalysts
Current valuation implies a 22% discount to peers on FY 13e EPS given lower EBITDA margins (-4.2pps)
Saudi Paper Manufacturing (SPM) is a diversified paper producer specialised in paper
recycling, manufacturing, and converting: SPM dominates the KSA paper market with a
market share of c.70% in paper manufacturing through (i) operating a paper mill capacity on a
single large site, (ii) optimising efficiency in logistics, and (iii) executing a low-cost strategy
supported by a captive diesel generator/water recycling unit. SPM also caters to other MENAT
countries including Algeria, Bahrain, Kuwait, Jordan and UAE, which together accounted for
13% of total FY 11A sales.
Exhibit 317: Business lines
Business segment Activity/product Capacity Market
Paper recycling Collection, de-inking 100ktpy Saudi Arabia
Paper manufacturing Regular / Jumbo rolls 125ktpy Saudi Arabia
Paper converting Facial tissues, kitchen towels, toilet rolls 66ktpy MENAT
Source: Company Data, Arqaam Capital Research
We see no genuine catalyst in FY 13e: We believe SPM’s business is heavily dependent on per-
capita paper use, which is relatively stable. Although the indicator is 50% lower in the MENAT
region vs. developed markets, we find little in the way of a meaningful catalyst for the gap to
close. Accordingly, we believe that demand for paper will be solely driven by (i) population
growth for domestic use and (ii) GDP growth, for commercial use. Market data suggests GDP
and population 5-yr CAGR of 5.7% and 2.1% for Saudi Arabia and 6.0% and 1.4% for MENAT ex-
KSA, respectively. This will lead to modest revenue growth going forward (5-yr CAGR 6%), in
the absence of any capacity additions.
Revenue growth has been a function of market share wins over the past 3 years (FY 08-11A
CAGR 18%), but we believe market penetration has peaked. A highly competitive paper
products industry in MENA is serviced by more than 10 prominent brands, which together
account for 70% of the market, by our estimates. We expect growth to level off, and model for
a 6% revenue 5-yr CAGR, driven by regional GDP and population growth. Going forward, we
see 12% in top-line support emanating from regional sales.
Margins reached a trough in FY 11A (25%): Fluctuating pulp costs along with technical issues
with the company’s power generators have led to 500bps in overall margin compression since
FY 08A. Failures in the company’s power generators from Q2 11-Q1 12A led to a shutdown of a
production line for a period of 3 weeks, forcing the business to install temporary generators.
All in, margins have declined by 500bps since FY 08A. We however anticipate a GPM recovery
in FY 12e (+300bps) given (i) the complete handling of the power generation issue along with
(ii) an observed decline in pulp prices by 14% in FY 12e. We nevertheless anticipate
competitive pressures to materialise in FY 13-14e, which should draw GPMs down to 27% (-
100bps vs. FY 12e).
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 182
Valuation: better growth at 12.1x and 11.5x FY 13-14e EV/EBITDA found elsewhere
We value SPM using DCF (10.2% WACC: Rf 4.2%, 1.1 Beta, 10.0% EMRP, 5% Rd). Our valuation
exercise sees SPM at 24% and 22% discounts to peers on FY 13e EV/EBITDA and P/E,
respectively. We warrant the discounts given stronger margin outlook for peers in a domestic
context (FY 12e EBITDA margins -420bps vs. peers).
Exhibit 318: Implied valuation reflects discounts to domestic peers of 24% and 22% for FY 13e EV/EBITDA and P/E, respectively
Source: Arqaam Capital Research *Based on after-tax cash flows
Saudi Paper
FY 13e FY 14e FY 15e FY 16e FY 17e
EBIT (1-τ) 119 123 130 138 146
48 52 55 59 63
NOPLAT 167 175 186 197 209
(8) (8) (1) (7) (14)
159 167 185 190 195
(60) (61) (62) (63) (63)
99 106 123 128 132
Stub period FCF 94 106 123 128 132
0.91 0.83 0.75 0.68 0.62
PV of Visible FCFF (adj. for stub period) 86 88 92 87 82
2,223
435 Rf 4.2%
1,375 EMRP 10.0%
1,810 1.1
15.4%
308
(1,032) 10.0%
5.0%
1,125 50.0%
NOSH 38 WACC 10.2%
30 4.0%
10.7 10.2 9.6 9.1 8.5
P/E 10.8 10.2 9.6 8.9 8.4
P/B 1.5 1.4 1.3 1.3 1.2
Cost of Equity
Implied multiples
EV/EBITDA
Less: Net (Debt) Funds Marginal tax rate
Cost of Debt
Equity Value D/C (market)
Equity Value per Share Perpetual grow th
Cash & Cash Equivalents
DCF summary*
SAR mn unless otherwise stated
Depreciation & Amortisation
Working Capital Changes
Operating Cash Flow
PV of Visible FCFF
PV of Terminal Value
Enterprise Value
WACC parameters
Adjusted Beta
Purchase of PPE
Free Cash Flow to Firm
Discount factors using WACC at 10.2%
Terminal Value
Equity Valuation
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 183
Relative valuation
We perform a peer-multiple valuation to cross check our DCF-driven fair value estimate of SAR
30. We warrant a discount of 22% to the peer-implied multiple valuation of SAR 36/share,
given better capacity-driven revenue growth elsewhere in the KSA manufacturing space.
Operating sensitivity
We stress-test our model against changes in EBITDA margins. Our DCF valuation exercise is
most sensitive to EBITDA margin assumptions. Pressuring our EBITDA margins downwards (by
1pp) implies significant equity value impact (-14%).
Exhibit 320: A 100bps FY 13-17e EBITDAM compression entails a downgrade to Sell
Avg. FY 13-17e EBITDAM Avg. FY 13-17e EBITDA Avg. FY 13-17e EPS Enterprise value Price target
18.0% 167 2.68 1,550 20.2
% Δ (10.1%) (15.4%) (14.6%) (27.7%)
19.0% 177 2.93 1,700 24.1
% Δ (5.1%) (7.7%) (6.6%) (13.9%)
20.0% 186 3.17 1,810 30.0
21% 196 3.41 1,930 32.9
% Δ 5.0% 7.6% 6.6% 13.9%
22.0% 205 3.66 2,055 35.1
% Δ 10.1% 15.3% 13.5% 25.3%
Source: Arqaam Capital Research * EBITDA and EV in SAR mn, EPS and PT in SAR
Valuation sensitivity
Exhibit 321: DCF sensitivity to valuation parameters
Source: Company Data, Arqaam Capital Research
DCF sensitivity- leverage vs. cost of debt
Beta Growth D/(D+E) (at market) Cost of debt
30.0 3.00% 3.50% 4.00% 4.50% 5.00% 30.0 7.00% 6.00% 5.00% 4.00% 3.00%
1.22 21.8 23.9 26.4 29.2 32.6 40.0% 18.8 20.8 23.0 25.4 28.2
1.17 23.1 25.4 28.1 31.2 34.9 45.0% 20.9 23.4 26.2 29.5 33.2
1.12 24.6 27.1 30.0 33.4 37.5 50.0% 23.2 26.4 30.0 34.3 39.4
1.07 26.2 28.9 32.1 35.8 40.3 55.0% 25.8 29.8 34.5 40.2 47.3
1.02 27.9 30.8 34.3 38.4 43.5 60.0% 28.7 33.7 39.8 47.6 57.7
DCF sensitivity- Risk-free rate vs. terminal growth DCF sensitivity- leverage vs. cost of equity
Risk free rate Growth D/(D+E) (at market) Cost of equity
30.0 3.00% 3.50% 4.00% 4.50% 5.00% 30.0 17.37% 16.37% 15.37% 14.37% 13.37%
6.20% 19.3 21.1 23.2 25.6 28.4 40.0% 17.0 19.8 23.0 26.8 31.3
5.20% 21.8 23.9 26.4 29.2 32.6 45.0% 19.9 22.8 26.2 30.3 35.1
4.20% 24.6 27.1 30.0 33.4 37.5 50.0% 23.2 26.4 30.0 34.3 39.4
3.20% 27.9 30.8 34.3 38.4 43.5 55.0% 27.2 30.5 34.5 39.1 44.5
2.20% 31.6 35.2 39.4 44.5 50.9 60.0% 31.9 35.6 39.8 44.8 50.6
DCF sensitivity- Beta vs. terminal growth
Exhibit 319: 22% discount to domestic peer group FY 13e P/E on lower EBITDAM (-4.2pps)
Company Mkt Cap (SAR mn) Leading P/E EBITDAM
Alabdullatif Industrial Investment 2,600 10.0 24.0
Takween Advanced Industries 1,353 12.9 19.4
Filling & Packing Materials Manufacturing 534 15.0 15.8
National Co for Glass Manufacturing 780 13.9 39.1
Saudi Paper Manufacturing Co 1,121 10.1 20.4
Average peers
12.9 24.6
Δ vs. peers
-22% -4.2pps
Source: Bloomberg, Arqaam Capital Research
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 184
Risks
Imports: Though we find domestic competition rather inert, we believe imports from large
low-cost producers (such as China, Taiwan and Indonesia) could pressure sales margins on
domestic paper products. Financial leverage: Gearing currently stands at 1.5x, leading to
substantial interest charges (18% FY 12e EPS).
Exhibit 322: SWOT: industry structure lends itself in favour of substantial competitive threats and substitution by imports
Source: Arqaam Capital Research
Strengths
• Low cost producer: 70% market share in papermanufacturing
• Vertically-integrated firm: Paper recycling,manufacturing and converting
• Strong brand reputation in the Saudi market: Manadeel,Excellence, Mouchoir, Pure, etc...
Opportunities
• Potential long-term growth: Paper consumption/capita= 5kg/capita pa (vs. 14kg U.K. and 22kg U.S)
• Expansion plan: A 5th paper manufacturing is currently being under study (previously posptoned)
• Declining pulp prices: 10% decline in pulp prices trend y/y
Threats
• Imports: China, Taiwan and Indonesia
• Domestic competion: New entrants
• ==> Both could disturb market share and margins byaffecting SPM's competitive position
Weaknesses
• Recurring power problems
• Stagnant sales growth (0% last 2 years)
• Declining margin/ profitability trends (25% FY 11A GPMvs. 33% FY 09A), ROIC halved over the last 4 years (7% FY11A vs. 14% FY 07A)
• High gearging ratio (c. 1.5x FY 11A Net debt/equity)
January 18 2013
Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 185
Business trends
Exhibit 323: Domestic sales >85% revenues
Source: Company Data, Arqaam Capital Research
Exhibit 324: Revenue growth to slow on peak mkt penetration
Source: Company Data, Arqaam Capital Research
Exhibit 325: Margin expansion in FY 12A unlikely to persist …………
Source: Company Data, Arqaam Capital Research
Exhibit 326: 19% operating cash flow margins in FY 13e …………………
Source: Company Data, Arqaam Capital Research
Exhibit 327: Gearing remains high (FY 12e 1.5x) despite drawdown ……
Source: Company Data, Arqaam Capital Research
Exhibit 328: RoE driven by leverage, rather than asset turnover or margins
Source: Company Data, Arqaam Capital Research
333
576 725 678 724 773
224
228
110 103
108 114
--
100
200
300
400
500
600
700
800
900
1,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue breakdown by location (SAR mn)
Saudi Arabia MENAT ex-KSA
558
804 836 781
832 888
148 184 152 162 170 178
--
100
200
300
400
500
600
700
800
900
1,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Revenue vs. EBITDA (SAR mn)
Revenue EBITDA
33.4%
28.9%
25.2%28.0% 27.6% 27.2%
19%17%
13%15% 15% 14%17% 15%
12% 13% 13% 13%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Margins: GPM, EBITM, NM (%)
GPM EBITM NM
727 791
926 908 883 857
46 96 89
147 163 172
--
100
200
300
400
500
600
700
800
900
1,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Net debt (cash) vs. CFO (SAR mn)
Net debt CFO
1,374 1,507 1,732 1,817 1,776 1,830
864912
1,077 1,114 1,028 1,039511
595
655703 748 791
1.5
1.4
1.5 1.5
1.31.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
Balance sheet, leverage (SARmn, x)
Total assets Total liabilities Equtiy D/E
6.8% 8.1%
5.8% 5.6% 5.9% 6.1%
18.4%
20.6%
15.3% 14.3% 13.9% 14.0%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e
RoA vs. RoE (%)
RoA RoE
I n i t i a t i o n R e p o r t
J a n u a r y 1 8 2 0 1 3
Mohammad Kamal [email protected] +9714 507 1743
Ziad Itani Arqaam Capital Research Offshore s.a.l
Saudi Arabia – Consumer discretionary/Retailers Savola
HOLD
Consumer discretionary/Retailers / Saudi Arabia Bloomberg code SAVOLA AB
Market index SASEIDX
Price target (local) 45
Upside (%) 12.4
Market data 17/01/2013
Last closing price 39.7
52 Week range 28.0-42.2
Market cap (SAR mn) 19,850
Market cap (USD mn) 5,293
Average daily volume (SAR mn) 12.1
Average daily volume (USD mn) 3.2
Year-end (SAR mn) 2011 2012e 2013e 2014e
Revenues 25,195.7 27,374.7 31,091.3 34,390.6
EBITDA 1,593.1 2,095.6 2,238.6 2,476.1
Net income 1,468.7 1,752.9 1,832.4 2,124.8
EPS 3.47 4.21 4.39 4.99
P/E (current price) 11.4 9.4 9.0 7.9
BVPS 18.1 20.1 22.3 25.1
P/B (current price) 2.2 2.0 1.8 1.6
EV/EBITDA (current price) 16.9 12.9 12.0 10.9
Div. yield (%) 2.5 3.6 3.7 4.3
FCF margin (%) 3.9 1.4 2.7 3.4
Net debt/EBITDA (x) 3.2 3.4 2.9 2.3
Net debt/Capital (%) 32.8 40.3 34.8 30.4
Interest cover (x) 4.0 4.2 4.0 4.8
RoAA (%) 7.8 8.2 7.8 8.5
RoAE (%) 17.0 18.3 17.3 17.9
RoIC (%) 9.5 11.4 11.6 12.4
Leading KSA conglomerate offers broad exposure to food and
retail sectors: growth a function of store roll-out and new
product success. Initiate with Hold and FVE of SAR 45 (+12.5%
vs. CMP)
Savola owns the largest and most successful retail hypermarket
chain in KSA-Panda (74% owned) and is the number one grocery
retailer in KSA with a c.10% market share. Savola also operates in the
food (edible oils, sugar, pasta), retail, plastic, and real estate
industries. Core activities focus on edible oils, retail and sugar
products We believe there is ample room for market consolidation via
acquisition opportunities, as well as room for market share wins as
organized retailing formats become an industry standard, at the
expense of existing smaller formats. We believe Savola will generate
top line CAGR of c.11% in the next four years on the back of an
increase in supermarket outlets (+50 outlets, +55%), and Panda-
branded Hypermarkets (+20 outlets, +50%), by FY 15e. Retail margins
appear to be set for growth as scale economies play out.
Almarai stake increase to strengthen foothold in the dairy market
and support margins: The acquisition of a further stake in Almarai
(+6.5% to 36.5% overall) as a step intended to gain further exposure to
the producer’s strength in the packaged food industry. Though we
find Al Marai expensive at current valuation, we remain positive on
the fundamentals of the business, as see EPS and margin accretion for
Savola on the back of the stake increase (Almarai FY 11A NPM 14.3%
vs. 5.8% Savola). We also see scale economies and distribution
synergies working in favour of the two businesses. Savola’s food
product margins (edible oils, sugar, dairy and pasta) benefit from
vertical integration through a fully-owned packaging/plastics division
and a prominent distribution channel (Panda).
Conglomerate P/E discount adequate: We believe the business’s core
strength stems from its broad product mix and significant market
share in the food retail segment via Panda. However, RoE is diluted by
the range of non-core ventures that are not particularly EPS accretive
at current. Risks: commodity prices, FX risk, Saudi succession
ambiguity.
SAR 45
© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
90
103
116
129
142
155
Jan-12 Apr-12 Jul-12 Oct-12
SAVOLA AB SASEIDX
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 187
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
5%
10%
2011 2012e 2013e 2014e 2015e
EBITDA Margin Net Margin
0%
10%
20%
30%
2011 2012e 2013e 2014e 2015e
Revenues Assets
0%
20%
40%
60%
0.0
2.0
4.0
2011 2012e 2013e 2014e 2015e
Net Debt/Capital Net Debt/EBITDA
0
10
20
2011 2012e 2013e 2014e 2015e
P/E P/E Sector
Savola
Year-end 2010 2011 2012e 2013e 2014e 2015e
Financial summary
Reported EPS 2.33 3.47 4.21 4.39 4.99 5.70
Diluted EPS 2.05 2.94 3.51 3.66 4.25 4.93
DPS 1.25 1.00 1.44 1.47 1.70 1.97
BVPS 16.43 18.14 20.08 22.31 25.09 28.55
Weighted average shares 500.00 500.00 500.00 500.00 500.00 500.00
Average market cap 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00
Year-end 2010 2011 2012e 2013e 2014e 2015e
Valuation metrics
P/E (x) (current price) 17.0 11.4 9.4 9.0 7.9 7.0
P/E (x) (target price) 19.2 12.9 10.6 10.2 8.9 7.8
P/BV (x) (target price) 2.7 2.5 2.2 2.0 1.8 1.6
EV/EBITDA (x) (target price) 21.2 16.9 12.9 12.0 10.9 9.9
EV/FCF (x) 25.2 27.1 70.0 31.6 23.3 18.8
EV/Invested capital (x) 1.9 1.7 1.4 1.4 1.3 1.3
Dividend yield (%) 3.2 2.5 3.6 3.7 4.3 5.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Growth (%)
Revenues 17.4 19.8 8.6 13.6 10.6 10.4
EBITDA 5.7 25.6 31.5 6.8 10.6 10.4
EBIT (0.3) 34.1 37.2 7.5 12.0 11.6
Net income (13.3) 43.2 19.3 4.5 16.0 16.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Margins (%)
EBITDA 6.0 6.3 7.7 7.2 7.2 7.2
EBIT 4.5 5.0 6.3 6.0 6.1 6.1
Net 4.9 5.8 6.4 5.9 6.2 6.5
Year-end 2010 2011 2012e 2013e 2014e 2015e
Returns (%)
RoAA 5.9 7.8 8.2 7.8 8.5 9.5
RoAE 12.3 17.0 18.3 17.3 17.9 18.4
RoIC 7.6 9.5 11.4 11.6 12.4 12.6
FCF margin 5.1 3.9 1.4 2.7 3.4 3.8
Year-end 2010 2011 2012e 2013e 2014e 2015e
Gearing (%)
Net debt/Capital 34.3 32.8 40.3 34.8 30.4 23.8
Net debt/Equity 55.9 55.3 70.4 58.9 46.1 32.9
Interest cover (x) 3.9 4.0 4.2 4.0 4.8 6.5
Net debt/EBITDA (x) 3.6 3.2 3.4 2.9 2.3 1.7
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 188
Abacus Arqaam Capital Fundamental Data
Company profile
Established in 1979, Savola is a major Saudi conglomerate with operations in the food (edible oils, sugar, and pasta), retail, plastic, and real estate sectors. The core activities of the business focus on edible oils, retail and sugar products. Combined, the three segments form 97% of FY 11A revenues (c.SAR 24.3bn). The conglomerate holds significant stakes in regional businesses including (among others) Herfy Foods Services Co (48%), Almarai Dairy Co (36.5%) and Kinan International Real Estate Development (30%). Savola operates in the Middle East, North Africa and the Central Asian region (MENACA). The GCC remains the centre of operations, generating c.64% of FY 11A revenues.
Ownership and management
Shareholders
MASC Holding 12.00%
General Organization for Social Insurance - Saudi Arabia 10.93%
Abdullah Mohammed Abdullah Al Rabiah 8.75%
A K Al Muhaidib and Sons Group 8.52%
Public 59.80%
Source: Zawya
Board of Directors
Mr Sulaiman Abdulkader Abdulmohsin Al Muhaidib Chairman
Mr Abdullah Mohammed Nour Rehaimi Vice Chairman
Mr Ibrahim Bin Mohammed Al Issa Director
Mr Bader Mohammed Bin Abdullah Al Issa Director
Dr Sami Mohsen Baroum Director
Mr Abdulaziz Bin Khaled Bin Ali Al Ghufaily Director
Dr Abdulraouf Mohammed Mannaa Director
Mr Ammar Abdulwahed Faleh Al Khudairi Director
Dr Ghassan Ahmed Abdullah Al Sulaiman Director
Mr Mohammad Abdulqadir Mohammed Al Fadl Director
Mr Mosa Omran Al Omran Director
Source: Company data
Savola
Year-end 2010 2011 2012e 2013e 2014e 2015e
Income statement (SAR mn)
Sales revenue 21,029.5 25,195.7 27,374.7 31,091.3 34,390.6 37,964.2
Gross profit 3,415.2 3,970.7 4,762.4 5,285.5 5,846.4 6,453.9
SG&A (2,146.6) (2,377.6) (2,666.7) (3,047.0) (3,370.3) (3,720.5)
EBITDA 1,268.6 1,593.1 2,095.6 2,238.6 2,476.1 2,733.4
Depreciation & Amortisation (326.7) (329.7) (361.7) (375.1) (389.8) (406.1)
EBIT 941.9 1,263.4 1,733.9 1,863.5 2,086.3 2,327.3
Net interest income(expense) (244.3) (317.5) (408.2) (468.5) (430.4) (360.7)
Associates/affiliates 556.9 537.4 686.0 715.1 791.0 873.2
Exceptionals/extraordinaries (88.7) 117.4 6.0 — — —
Other pre-tax income/(expense) — — — — — —
Profit before tax 1,165.9 1,600.8 2,017.7 2,110.1 2,446.9 2,839.8
Income tax expense (140.1) (132.0) (264.8) (277.8) (322.1) (373.8)
Minorities (139.0) (266.4) (350.7) (361.2) (372.0) (383.2)
Other post-tax income/(expense) — — — — — —
Net profit 1,025.7 1,468.7 1,752.9 1,832.4 2,124.8 2,466.0
Arqaam adjustments (including dilution) — — — — — —
Arqaam Net profit 1,025.7 1,468.7 1,752.9 1,832.4 2,124.8 2,466.0
Year-end 2010 2011 2012e 2013e 2014e 2015e
Balance sheet (SAR mn)
Cash and equivalents 577.4 1,214.1 445.7 1,138.6 688.6 764.4
Receivables 2,614.3 3,239.9 3,825.0 4,344.3 4,805.3 5,304.6
Inventories 2,527.1 3,152.4 3,717.1 4,242.1 4,692.2 5,179.8
Tangible fixed assets 4,739.2 5,384.4 5,565.1 5,770.3 5,997.3 6,247.8
Other assets including goodwill 7,323.9 7,110.5 9,110.5 9,110.5 9,110.5 9,110.5
Total assets 17,781.9 20,101.4 22,663.4 24,605.7 25,293.9 26,607.1
Payables 3,745.0 4,147.4 4,460.5 5,090.5 5,630.6 6,215.7
Interest bearing debt 5,173.6 6,233.0 7,513.0 7,711.4 6,468.1 5,464.9
Other liabilities 648.5 650.1 650.1 650.1 650.1 650.1
Total liabilities 9,567.1 11,030.6 12,623.6 13,451.9 12,748.8 12,330.7
Shareholders equity 8,214.9 9,070.8 10,039.9 11,153.8 12,545.1 14,276.4
Minorities 1,194.8 1,348.4 1,699.0 2,060.2 2,432.2 2,815.4
Total liabilities & shareholders equity 17,781.9 20,101.4 22,663.4 24,605.7 25,293.9 26,607.1
Year-end 2010 2011 2012e 2013e 2014e 2015e
Cash flow (SAR mn)
Cashflow from operations 1,404.8 1,573.5 1,288.3 1,877.7 2,289.8 2,683.3
Net capex (335.7) (579.2) (903.4) (1,026.0) (1,134.9) (1,252.8)
Free cash flow 1,069.1 994.2 384.9 851.7 1,154.9 1,430.5
Equity raised/(bought back) — — — — — —
Dividends paid (625.6) (497.7) (722.2) (733.0) (849.9) (986.4)
Net inc/(dec) in borrowings 137.3 759.5 1,280.0 198.4 (1,243.3) (1,003.2)
Other investing/financing cash flows (1,004.6) (619.4) (1,711.0) 375.7 488.4 634.9
Net cash flow (423.8) 636.7 (768.3) 692.8 (449.9) 75.8
Change in working capital (85.2) (218.4) (836.7) (414.3) (371.0) (401.8)
Mohammad Kamal Ziad Itani [email protected] Arqaam Capital Research Offshore s.a.l
+9714 507 1743
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 189
Leading KSA conglomerate offers broad exposure to food and
retail sectors: growth a function of store roll-out and new product
success
Initiate with Hold and FVE of SAR 45 (+12.5% vs. CMP)
Savola owns the largest and most successful retail hypermarket chain in KSA-Panda (74%
owned) and is the number one grocery retailer in KSA with a c.10% market share. The largest
five grocers in the Kingdom hold a combined market share of c.17%, which underscores the
fragmentation of the market when compared to the UK (60%) and Brazi (35%). This suggests
ample room for market consolidation via acquisition opportunities, as well as room for market
share wins as organized retailing formats become an industry standard, at the expense of
existing smaller formats. We believe Savola will generate top line CAGR of c.11% in the next
four years on the back of an increase in supermarket outlets (+50 outlets, +55%), and Panda-
branded Hypermarkets (+20 outlets, +50%), by FY 15e. Retail margins appear to be set for
growth as scale economies play out.
Savola also operates in the food (edible oils, sugar, pasta), retail, plastic, and real estate
industries. Core activities focus on edible oils, retail and sugar products; combined they form
97% of FY 11A revenues (c.SAR 24.3bn). The conglomerate holds significant stakes in regional
businesses Herfy (48% owned, Hold, SAR 120), Almarai Dairy Co (36.5%, Sell, SAR 52) and Kinan
International Real Estate Development Co (30%, not listed). Savola’s operations are focused on
the Middle East, North Africa and the Central Asian region (MENACA).
Almarai stake increase to strengthen foothold in the dairy market and support margins: The
acquisition of a further stake in Almarai (+6.5% to 36.5% overall) as a step intended to gain
further exposure to the producer’s strength in the packaged food industry. Though we find Al
Marai expensive at current valuation, we remain positive on the fundamentals of the business,
as see EPS and margin accretion for Savola on the back of the stake increase (Almarai FY 11A
NPM 14.3% vs. 5.8% Savola). We also see scale economies and distribution synergies working
in favour of the two businesses. Savola’s food product margins (edible oils, sugar, dairy and
pasta) benefit from vertical integration through a fully-owned packaging/plastics division and a
prominent distribution channel (Panda).
Conglomerate P/E discount adequate: current market valuation implies a 28% discount to
domestic peer group P/E (9.0x FY 13e), and 27% premium EV/ EBITDA (12.0x FY 13e).
Associate contributions to net income below the EBIT line are largely behind the divergence in
the two approaches. We believe the business’s core strength stems from its broad product mix
and significant market share in the food retail segment via Panda. However, RoE is diluted by
the range of non-core ventures that are not particularly EPS accretive at current.
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 190
Valuation: 30% conglomerate discount adequate; initiate with
Hold and FVE of SAR 45
We apply an SOPT valuation on the various business units in Savola. We value core
businesses using DCF (WACC of 10.9%: Re 13.7%, Rd 8.2%, Beta 0.93) and adjust for the value
of associates by marking them to market valuation (Al Marai and Herfy), using our fair value
estimates derived via detailed DCF exercises outlined under their respective sections in this
report. We apply a conservative terminal growth rate of 4.0%, 50 bps above our estimate of LT
domestic inflation in calculating terminal value components. Our DCF model implies an SAR
45/share fair value estimate, suggesting no more than 12.5% in upside potential from current
market price. We consequently initiate coverage with a Hold recommendation.
Exhibit 329: SOTP valuation summary
SOTP valuation
NPV-visible FCFF core business 12
NPV-terminal FCFF from core business 36
Fair value of associates 20
NCI (3)
Net Debt (21)
Fair value per share 45
Current market price 40
Upside/(downside) 12.5%
Source: Company Data, Arqaam Capital Research
Conglomerate P/E discount adequate: current market valuation implies a 28% discount to
domestic peer group P/E (9.0x FY 13e), and 27% premium EV/ EBITDA (12.0x FY 13e).
Associate contributions to net income below the EBIT line are largely behind the divergence in
the two approaches. We believe the business’s core strength stems from its broad product mix
and significant market share in the food retail segment via Panda. However, RoE is diluted by
the range of non-core ventures that are not particularly EPS accretive.
Exhibit 330: 30% conglomerate discount applied by market ……….…
Source: Company Data, Arqaam Capital Research
Exhibit 331: We see the business at a discount to peers on lower-than-average cash flow margins
Source: Company Data, Arqaam Capital Research
Risks
0x
2x
4x
6x
8x
10x
12x
14x
0x 5x 10x 15x 20x
FY 13e EV/EBITDA
FY 13e P/E
Juhayna
SADAFCO
SPM AlmaraiSavola Herfy
Halwani
Agthia
0%
5%
10%
15%
20%
25%
30%
0x 5x 10x 15x 20x
FY 13e OCF/Revenues
TP/OCF FY 13e
Juhayna
SADAFCO
SPM
Almarai
Savola
Herfy
HalwaniAgthia
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 191
Abrupt changes in commodity prices (sugar and edible oils): Raw materials for oil and sugar
products are imported, and consequently expose the company to a significant degree of
commodity risk. In FY 08A, Savola adjusted its inventory net realizable value by c.SAR 77mn,
pressuring net margin by 56bps.
Geographic expansion: ventures into uncharted territory where local competitors are
entrenched could prove costly. In FY 07A, Savola shut down the manufacturing facilities
belonging to AFIA Jordan, and an impairment loss of SAR 110mn was booked.
Foreign exchange: Savola operates in the MENA region and Central Asia. In addition it imports
several of its inputs, as noted above. 70% of oil product inputs are in procured in USD, and all
remaining oil (Palm, Corn, Soya, and Sunflower Oil) COGS are also denominated in USD. This
exposes the edible oils segment (c.37% FY 11A revenues) to considerable FX risk as sales are
denominated in a mix of MENA currencies (including Iranian Rials, 13.2% of revenues) while
earnings are reported in SAR.
Domestic economic stability: Unclear leadership succession in KSA could impact market
sentiment and risk perception.
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 192
Business structure
Savola operates in the food (edible oils, sugar, pasta), retail, plastic, real estate industries.
Core activities focus on edible oils, retail and sugar products. Combined, this forms 97% of FY
11A revenues (c.SAR 24.3bn). Operations are geographically focused on the Middle East, North
Africa and the Central Asian region (MENACA).
1-Edible oils and sugar: Over the past 3 years, revenue growth (60%) was driven by a 63% rise
in sales in each of the core edible oils and sugar segments. The rise was driven by store
expansions, a broadening of product offering, and higher per-capita consumption. In FY 11A,
73% of revenue was generated by edible oil and retail sales.
Exhibit 332: Savola Group summary sales forecast by business line (FY 11A)
Source: Company Data, Arqaam Capital Research
2-Secondary food products: Management guidance indicates plans to roll out convenience
stores in the retail segment, and to focus on higher margin products (e.g. specialty fats for
pastry and sweetener products) in the foods segment (sugar, flour). Geographically, Savola
seeks to target Egypt, KSA, Iran and Turkey as core food markets. The conglomerate also plans
to increase its B2B exposure (selling sugar products to soft drink and beverage manufacturers,
for example).
Exhibit 333: Edible oils: We expect Iran to remain the largest market for edible oil sales
Source: Company Data, Arqaam Capital Research
Exhibit 334: Edible oils: We see significant growth potential in Turkey …..
Source: Company Data, Arqaam Capital Research
7 9 10 12 13 15 16 18 8
9 10 11
12 14
15 16
5 6
6 7
8 9
10 10
1
1 1
1 1
1 2
2
--
5
10
15
20
25
30
35
40
45
50
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Gross sales (SAR bn)
Edible oils Panda retail Sugars Plastics Pasta
2.6 3.4 3.7 4.1 4.5 4.9 5.4 6.01.8
2.52.8
3.13.5
3.84.3
4.7
0.8
1.01.2
1.41.6
1.82.0
2.2
0
2
4
6
8
10
12
14
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Edible oils primary market sales (SAR bn)
Iran KSA, Gulf &Yemen Egypt
0.6 0.8 0.9 1.1 1.2 1.4 1.6 1.80.40.6 0.7 0.8
0.91.0
1.11.3
0.40.5
0.60.7
0.91.0
1.11.2
0.3
0.30.3
0.40.4
0.40.4
0.5
0.2
0.20.2
0.20.3
0.30.3
0.3
0
1
2
3
4
5
6
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Edible oils secondary market sales (SARbn)
Turkey Sudan Algeria Morocco Kazakhstan
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 193
Exhibit 335: Sugar product sales: GCC markets remain core ………………
Source: Company Data, Arqaam Capital Research
Exhibit 336: Sugar products: We expect sales to grow by a 5-year CAGR of 10% by FY 17e
Source: Company Data, Arqaam Capital Research
Exhibit 337: Retail: Sales generated c.35% of FY 11A revenues (93% domestic)
Source: Company Data, Arqaam Capital Research
Exhibit 338: Plastics: Sales remain a minor contributor to top line at 4% of FY 11A revenues
Source: Company Data, Arqaam Capital Research
3-Retail- Azizia Panda United- APU is a 74% owned closed joint stock company operating 166
supermarkets and hypermarkets, of which 131 are in Saudi Arabia, 34 in Lebanon and 1 in
Dubai, as of FY 11A. In 2012, Panda maintained its market leadership in KSA retail sales, with a
c.10% share. Growth revolves around (i) new store launches, (ii) consolidation and (iii) exports.
Store launches will focus on rolling out operations in secondary cities in KSA, while also raising
penetration in primary ones (Riyadh, Jeddah, Dammam and Khobar). Older outlets in
secondary cities (made 5-6 years ago) are paying off as stores have matured, and urbanization
is on the rise. As of Q4 12A, Savola’s KSA store count reached 144, and 40 new sites are
currently under evaluation for new store openings. APU (Panda) produced 12% y/y sales
growth and 3x net income growth. Panda raised its operating selling area to 497k sqm (+4.6%
y/y). The increase is the result of 11 store openings in Saudi Arabia: 4 hypermarkets and 7
supermarkets, which contributed in expanding its customer base by 1.3% y/y to reach 87mn
customer-shopping transactions, in FY 11A. Gross retail area touched 500k sqm in Q3 12A,
while management plans to add 50k sqm (+10%) in FY 13e.
4,082, 70%
1,779, 30%
FY 11A sugar sales (SAR mn)
KSA, Gulf &Yemen Egypt
3.5 4.1 4.5 4.9 5.4 6.0 6.6 7.21.5
1.82.0
2.22.4
2.72.9
3.2
0
2
4
6
8
10
12
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Sugar geographical sales split (SAR bn)
KSA, Gulf &Yemen Egypt
7.68.6
9.510.6
11.612.8
14.115.5
0.30.3
0.3
0.4
0.4
0.4
0.4
0.4
0.3
0.30.3
0.3
0.3
0.3
0.3
0.4
5
7
9
11
13
15
17
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Panda retail sales (SAR bn)
KSA UAE Lebanon
0.8 0.9 1.0 1.1 1.2 1.3 1.41.60.1
0.10.1
0.20.2
0.20.2
0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Plastics sales (SAR bn)
KSA Egypt
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 194
Economies of scale begin to bear fruit as hypermarkets mature (i.e. sales and footfall
growth begin normalizing). A hypermarket typically requires 3 years to mature and a
further 4 years to reach optimum scale. Panda operates the largest distribution centre
in KSA (Riyadh) and is planning to build a new distribution centre in KAEC/Rabigh at a
CAPEX consideration of SAR 850mn. Once complete, the new centre will likely be sold
to investors and then leased back. Since all of Savola distribution centres are leased,
they remain off-balance sheet. Consequently, any gain on sale from the new
distribution centre will be amortised over the life of the lease period.
Organised convenience retail (i.e. 7-eleven model) is an area of focus: Traditional
retail (locally known as ‘baqqala’) formats form 50% of the market in KSA. Savola’s
rollout of organized convenience stores generates substantial cost benefits:
Convenience stores enjoy distribution and supply chain advantages, which generate
back-end margins (savings from suppliers), typically by rebates on large product
orders.
Exhibit 339: Panda exhibits the lowest margins as a food retailer, in line with local peers…
Source: Company Data, Arqaam Capital Research
Exhibit 340: … pressuring blended NPM as the retail segments contributes 36% to top line figure
Source: Company Data, Arqaam Capital Research
2.2%
4.4%
5.8%
9.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
FY 11A
NPM (%)
Panda Sugar Edible oils Plastics
37%
36%
23%
4%
FY 11A gross sales (SAR bn)
Edible oils Panda retail Sugars Plastics
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 195
4-Important non-managed investments:
Almarai Dairy Co (Sell, SAR 52): Savola holds a strategic investment in Almarai (36.5%) after
raising its stake by 6.5% in Q4 12A. We find strategic benefits in the stake, particularly via
Savola’s access to Marai’s packaged foods business (ready-to-eat products), and potential
distribution and retailing synergies.
Herfy Foods Co (Hold, SAR 120): 48%-owned by Savola (via direct and indirect positions). Herfy
is a domestic fast food chain that is well-known within KSA, and is currently expanding within
the broader GCC region.
Kinan International Real Estate Development: is 30% owned by the Savola Group. The
developer is currently delivering 3 projects (over an area of c.5mn sqm in total), rendering the
business one of the largest private residential developers in Saudi Arabia. Shoppers at Kinan’s
commercial centres reached SAR 56mn in FY 11A (+14.3% y/y). The business enjoys occupancy
rates of 90-100% across its portfolio of commercial centres.
CAPEX
We believe Savola will require c.SAR 2.5+bn in capital expenditures by FY 14e to fund capacity
additions, strategic acquisitions and store count increases. As per management guidance,
CAPEX can be broken down into: beet sugar production capacity addition: SAR 800mn, of
which 70% is already paid, and 30% due in FY 13e. Foods: CAPEX on all other categories will
likely touch SAR 850mn+. Retail: CAPEX over the next 1-2 years is budgeted at c.SAR 1.3-1.4bn
for the development of (i) a new distribution centre, (ii) 20 new stores and (iii) expanding the
current fleet of cars and distribution trucks. We expect Savola to generate c.SAR 4.7bn in CFO
during the period, which should prove more than sufficient to cover CAPEX needs, though
management indicates that debt will likely be raised to fund growth.
January 18 2013
Saudi Arabia – Food & Staples Retailing
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 196
Exhibit 341: Summary of operations and management guidance
Subsidiary by sector Ownership Description, comments and management guidance Country of operations Revenues (SARmn)
Revs (% of Total)
3-yr CAGR
Edible Oils 9,312 36.5% 28%
Afia International Company (Afia) 95% Edible oils mother company KSA, Iran, Egypt, Turkey
and Kazakhstan 1,325 5.2%
Afia Arabia 95% Market share leadership: 60% in KSA, 26% in the Gulf and 30% in the Levant.
KSA, Yemen, Gulf and Levant
2,500 9.8%
Savola Behshahr Company (SBC) 80% Economic sanctions in addition to difficulty in importing raw materials and the decline in Iranian currency against the dollar are key risks facing Behshahr. Management plans to partially hedge local inflation by increasing product sales prices.
Iran 3,360 13.2%
Afia International (Egypt) 100% Flat earnings caused by political instability, affecting the entire delivery chain. Market share however remains intact.
Egypt
Yudum Edible Oil Company 100%
Yudum (12.6% market share) and Sirma (1.8% market share) booked a net loss due to (i) an unexpected devaluation in the Turkish Lira and (ii) decline in premium pricing. The company is working on a turnaround plan via vertical integration and cost optimization, including the distribution model.
Turkey 814 3.2%
Savola Kazakhstan 100% c.25% market share via its number one brand Leto. Russian imports and the competitive advantage of local integrated players remain credible threats to business.
Kazakhstan 211 0.8%
Savola Foods Emerging Markets Company (SFEM) - Morocco
100% c.15% market share. The recent decline in sales is attributed to regional geopolitics whereas operational losses were compounded by FX risk.
Morocco 280 1.1%
Savola Foods Emerging Markets Company (SFEM) - Sudan
100%
The Sabah brand is a market leader in Sudan with over 80% of the market in the branded foods segment (+60% in PET). Management believes that securing competitively priced crude sunflower oil will remain a major challenge for business growth. New investments in a PET packing line are planned in order implement the conversion from bulk to packaged products.
Sudan 280 1.1%
Afia International Company (SFEM) - Algeria 100% Ranks as no.2 in Algeria with a market share of 33%+. Top line growth drivers: (i) increased distribution coverage and (ii) the launch of a second brand (Oleor). Price controls set by the Government helped the company back to profitability.
Algeria 542 2.1%
Sugar Products Sugar in Saudi Arabia is undersupplied by 6mn tons/annum, (imports, mainly from Brazil, cover the gap). We see Savola selling all of its products in FY 13e onwards.
5,850 22.9% 27%
United Sugar Company (USC) - KSA 74% USC operates the third largest sugar refinery in the world, at an annual production capacity of c.1.3mn tons. Sugar is 100% hedged against physical inventory and Savola holds a 75% market share in KSA.
KSA 4,000 15.7%
United Sugar Company of Egypt (USCE) 62% Management attributes low profitability to international raw sugar prices changes, cost optimization and macroeconomic conditions.
Egypt 1,800 7.1%
Alexandria Sugar Company (ASC) 19% As per management guidance, ASC plans to begin operating the new factory during the 2013 beet season. We note that additional capacity takes 12-18months to come online, and reaches full utilisation (c.10k tons/day) in further 12months.
Egypt
January 18 2013
Saudi Arabia – Food & Staples Retailing
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 197
Subsidiary by sector Ownership Description, comments and management guidance Country of operations Revenues (SARmn)
Revs (% of Total)
3-yr CAGR
Pasta Products
50 0.2% N/A
Al Maleka and Al-Farasha Food Industries 100% The Group’s largest FMCG acquisition was made in Q4 11A, through the purchase of sister companies El Maleka and Al Farasha, claiming 35% share of the Egyptian pasta market. The Pasta segment experienced a 30% y/y growth in 9M 12A.
Egypt
Retail Business
9,182 36.0% 8%
Azizia Panda United 74%
Operates 166 supermarkets and hypermarkets, of which 131 are in KSA, 34 in Lebanon and 1 in the UAE (Dubai) over a total selling area of 500k sqm. Management plans to add 50k sqm (+10%) by FY 13e. Operates the largest distribution centre in KSA (Riyadh) and is planning to build a new distribution centre in KAEC/Rabigh for SAR 850mn. Panda ranks no 1 in KSA with a c.10% market share.
KSA, Lebanon and Dubai
Plastic
1,001 3.9% 16%
Savola Plastics (LLC) 100%
A regional producer of rigid and flexible plastic packaging and owner of both Al Sharq Co. (Riyadh, KSA) and New Marina Plastics (Alexandria, Egypt). The company manages and operates seven facilities, and supplies pre-forms, containers, closures and films for water and soft drinks containers, edible oil, health and personal care products, cleaning materials, and lubricants.
Other investments activities Real Estate and franchising KSA 76 0.3% -27%
Total revenues, pre- consolidation 25,500 100.0% 19%
Consolidation - Inter-company sales -300
Total revenues 25,200
19%
Source: Company Data, Arqaam Capital Research * Revenue figures are based on FY 11A and estimates
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 198
Business trends
Exhibit 342: Revenue breakdown
Source: Company Data, Arqaam Capital Research
Exhibit 343: Stable blended margin outlook
Source: Company Data, Arqaam Capital Research
Exhibit 344: We expect working capital to rise marginally in FY 12e
Source: Company Data, Arqaam Capital Research
Exhibit 345: Current leverage is in place to meet substantial CAPEX bill
Source: Company Data, Arqaam Capital Research
Exhibit 346: We expect a drop in leverage levels as current cash generation remains strong
Source: Company Data, Arqaam Capital Research
Exhibit 347: Asset and equity returns remain below peer averages
Source: Company Data, Arqaam Capital Research
7 9 10 12 13 15 16 18 8
9 10 11
12 14
15 16
5 6
6 7
8 9
10 10
1
1 1
1 1
1 2
2
--
5
10
15
20
25
30
35
40
45
50
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e
Gross sales (SAR bn)
Edible oils Panda retail Sugars Plastics Pasta
16.2% 15.8% 17.4% 17.0% 17.0% 17.0%
4.9% 5.8% 6.4% 5.9% 6.2% 6.5%
--%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
GPM NPM (Group)
46 45 51 55
83 79
72
73
57 52
54 60
7% 7%
9%
11%
0%
2%
4%
6%
8%
10%
12%
--
10
20
30
40
50
60
70
80
90
FY 09A FY 10A FY 11A FY 12e
WC/Rev (%)Days
Receivable days Payable days Inventory days WC/Rev.
4,596 5,019
7,067 6,573
5,779
4,700
1,405 1,573 1,288 1,878
2,290 2,683
--
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Net debt (SAR mn) CFO (SAR mn)
5,174
6,233
7,513 7,711
6,468 5,465
63%
69%
75% 69%
52%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
--
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
Total debt (SAR mn) D/E (%)
12%
16% 17%
16% 17% 17%
6% 7% 8% 7% 8% 9%
--%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e
ROE ROA
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 199
Appendix 1: Subsidiaries and investments
Exhibit 348: Subsidiaries and associates
Company name Country Holding
Afia Trading International Virgin Islands (British)
100.0%
Kugu Gida Yatum ve Ticaret [via Afia international Company] Turkey 100.0%
Savola Edible Oils - Sudan [via Savola Foods Emerging Markets] Sudan 100.0%
Aalinah Al Kawniah Saudi Arabia 100.0%
Abtkar Al Kawniah Saudi Arabia 100.0%
Al Azizia Panda United Company Saudi Arabia 100.0%
Alwaqat Al Kawniah Saudi Arabia 100.0%
Asda'a International Real Estate Investment Saudi Arabia 100.0%
Kafazat Al Kawniah for Real Estate Saudi Arabia 100.0%
Marasina International Real Estate Investment Saudi Arabia 100.0%
Masa'ay International Real Estate Investment Saudi Arabia 100.0%
Saraya International Real Estate Investment Saudi Arabia 100.0%
Savola Packaging Systems Saudi Arabia 100.0%
Utur Packaging Materials Company Saudi Arabia 100.0%
Malintra Holdings [via Afia International Company] Luxembourg 100.0%
Madarek Investment Company Jordan 100.0%
Al Farasha for Food Industries [via Savola Foods Company] Egypt 100.0%
El Maleka for Food Industries Company [via Savola Foods Company] Egypt 100.0%
Afia International Company - Algeria [via Savola Foods Emerging Markets] Algeria 100.0%
Savola Foods Emerging Markets Company [via Savola Foods Company] Virgin Islands (British)
95.4%
Afia International Company [via Savola Foods Company] Saudi Arabia 95.2%
Savola Foods for Sugar Company [via Savola Foods Company] Cayman Islands
95.0%
Inveskz [via Afia International Company] Virgin Islands (British)
90.0%
Savola Foods Company [SFC] Saudi Arabia 90.0%
Savola Industrial Investments Company [4.5% directly and 85.5% indirectly] Saudi Arabia 90.0%
Adeem Arabia Company [AAC] Saudi Arabia 80.0%
Al Matoun International for Real Estate Investment Holding Company Saudi Arabia 80.0%
Giant Stores Trading Company [8%directly and 66.96% indirectly] Saudi Arabia 75.0%
United Company for Central Markets [8% directly and 66.96 indirectly] Lebanon 75.0%
United Sugar Company [via Savola Industrial Investments Company] Saudi Arabia 74.5%
United Sugar Company of Egypt Egypt 56.9%
Herfy Food Services Company Saudi Arabia 47.6%
Almarai Company Saudi Arabia 36.5%
Kinan International for Real Estate Development Company Limited Saudi Arabia 30.0%
Source: Zawya, Company Data, Arqaam Capital Research
Exhibit 349: Investments
Company name Country Holding
Alexandria Sugar Company [via Savola Foods Company] Egypt 19.0%
Knowledge Economic City Company Saudi Arabia 6.4%
Aliat Almadinah Mall Saudi Arabia -
Swicorp Joussour Company Saudi Arabia -
Intaj Capital I MENA -
Source: Zawya, Company Data, Arqaam Capital Research
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 200
Appendix 2: Term loans and overdrafts
Exhibit 350: Operational loans by business segment
Short term loans ( SARmn) Banks/Others FY 11A FY 10A
The Savola Group
Al Rajhi, SAAB, SIB, SAMBA and Bank Al Jazirah
911 236
Afia International
SAAB, NCB, SAMBA and European, Egyptian, Iranian & Turkish banks
947 990
Savola Food Emerging Markets Co Sudanese, Algerian & European banks
106 125
El Maleka & Al Farasha Co. Pasta HSBC-Egypt, National Bank, National Egyptian Bank, Société Générale
33 0
Azizia Panda United
NCB
-- 35
Matoun Co.
SAMBA
70 0
Savola Packaging Systems (SPS) SABB and SAMBA
244 149
United Sugar Company (USC)
SAAB, NCB and SAMBA and Int’l Commercial Bank Egypt
445 503
Al-Batool International Co. (Franchising)
SABB
-- 31
Short term debt 2,755 2,070
Source: Company Data, Arqaam Capital Research
Exhibit 351: Long term funding scheme
Long term loans (SARmn) Banks/Others FY 11A FY 10A
Savola Packaging Systems Co. Saudi Industrial Development Fund (SIDF):
24 27
The Savola Group
SAMBA, Saudi Fransi Bank and Saudi Investment Bank, Jazirah Bank
1,831 1,756
Al Azizia Panda United Co.
NCB, SABB
370 450
Afia International Co.
NCB, SAMBA, HSBC in Turkish and European Banks
337 419
Savola Foods Emerging Markets Co.
Société Générale/ Algeria, French Bank
31 44
United Sugar Co.
SABB, SAMBA, Commercial Intl. Bank of Egypt, Standard Chartered Bank
814 367
El Maleka & Al Farasha Co. Pasta
HSBC, National Bank, Société Générale, NBSG
11 0
Savola Packaging Systems Co. SABB, SAMBA
60 41
Gross long term debt 3,478 3,104
Less current portion :
SIDF
-4 -3
Commercial banks
-652 -706
Net long term debt 2,821 2,395
Source: Company Data, Arqaam Capital Research
Exhibit 352: Long term loans repayment schedule
Relevant segment (SARmn) FY13e FY14e FY15e FY16 -19e Total
Savola group
797 417 348 -- 1,563
Afia Int'l
101 57 10 36 204
APU
151 111 -- -- 262
Savola Packaging Systems Co
42 23 6 3 75
United Sugar Co
201 208 98 182 688
Savola Food Emerging Markets
12 4 2 -- 18
Pasta
11 -- -- -- 11
Total 1,315 820 465 222 2,821
Source: Company Data, Arqaam Capital Research
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 201
Important Notice
1. Author, regulator and responsibility Arqaam Capital Limited (“Arqaam”) is incorporated in the Dubai International Financial Centre (“DIFC”) and is authorised and regulated by the Dubai Financial Services Authority ("DFSA") to carry on financial services in
and from the DIFC. Arqaam publishes and distributes (i.e. issues) all research.
Arqaam Capital Research Offshore s.a.l. is a specialist research centre in Beirut, Lebanon, which assists in the production of research issued by Arqaam.
2. Purpose This document is provided for informational purposes only. Nothing contained in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when considering or making
investment decisions. In preparing this document, Arqaam did not take into account the investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on this
document, investors should independently evaluate the investments and strategies referred to herein and make their own determination of whether it is appropriate in light of their own financial circumstances and
objectives.
3. Rating system
Arqaam investment research is based on the analysis of regional and country economics, industries and company fundamentals. Arqaam company research reflects a long-term (12-month) fair value target for a
company or stock. The ratings bands are:
Ratings
Buy Total return > 20%
Hold -10% < Total return < 20%
Sell Total return < -10%
In certain circumstances, ratings may differ from those implied by a fair value target using the criteria above. Arqaam policy is to maintain up-to-date fair value targets on the companies under its coverage, reflecting
any material changes to the analyst’s outlook on a company. Share price volatility may cause a stock to move outside the rating range implied by Arqaam’s fair value target. Analysts may not necessarily change their
ratings ifn this happens, but are expected to disclose the rationale behind their view to Arqaam clients.
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6. Risk warnings 6.1 Any prices, valuations or forecasts are indicative and are not intended to predict actual results, which may differ substantially from those reflected.
6.2 The value of an investment may go up as well as down. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including, without
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6.4 Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
6.5 This document does not propose to identify or to suggest all of the risks (direct or indirect) which may be associated with the investments and strategies referred to herein.
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January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 202
Disclosure
Exhibit 353: Agthia Group (AGTHIA UH) as of 18/01/2013
Source: Bloomberg
Exhibit 354: Saudi Airlines Catering (CATERING AB) as of 18/01/2013
Source: Bloomberg
Exhibit 355: Al Tayyar Travel Group (ALTAYYAR AB) as of 18/01/2013
Source: Bloomberg
Exhibit 356: Savola Group (SAVOLA AB) as of 18/01/2013
Source: Bloomberg
Date Recommendation Target Price
18/01/2013 Hold AED 2.4
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
Date Recommendation Target Price
18/01/2013 Buy SAR 100.0
50.00
55.00
60.00
65.00
70.00
75.00
80.00
85.00
90.00
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
Date Recommendation Target Price
18/01/2013 Buy SAR 119.9
50.00
55.00
60.00
65.00
70.00
75.00
80.00
85.00
90.00
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
Date Recommendation Target Price
18/01/2013 Hold SAR 44.6
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 203
Exhibit 357: Saudi Dairy & Foodstuff Co. (SADAFCO AB) as of 18/01/2013
Source: Bloomberg
Exhibit 358: Fawaz Abdulaziz Al Hokair (ALHOKAIR AB) as of 18/01/2013
Source: Bloomberg
Exhibit 359: Abdullah Al Othaim Markets (AOTHAIM AB) as of 18/01/2013
Source: Bloomberg
Exhibit 360: Jarir Marketing (JARIR AB) as of 18/01/2013
Source: Bloomberg
Exhibit 361: Almarai Co. (ALMARAI AB) as of 18/01/2013
Source: Bloomberg
Exhibit 362: Halwani Brothers (HB AB) as of 18/01/2013
Source: Bloomberg
Date Recommendation Target Price
18/01/2013 Hold SAR 69.7
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Hold SAR 125.2
10.00
30.00
50.00
70.00
90.00
110.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Hold SAR 95.3
10.00
30.00
50.00
70.00
90.00
110.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Hold SAR 180.1
70.00
90.00
110.00
130.00
150.00
170.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Sell SAR 51.9
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Buy SAR 55.5
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 204
Exhibit 363: Al-Hassan Shaker (SHAKER AB) as of 18/01/2013
Source: Bloomberg
Exhibit 364: National Gas & Industrialisation (NGIC AB) as of 18/01/2013
Source: Bloomberg
Exhibit 365: United International Transportation (BUDGET AB) as of 18/01/2013
Source: Bloomberg
Exhibit 366: Saudi Paper Manufacturing (SPM AB) as of 18/01/2013
Source: Bloomberg
Exhibit 367: United Electronics Company (EXTRA AB) as of 18/01/2013
Source: Bloomberg
Exhibit 368: Herfy Food Services Co. (HERFY AB) as of 18/01/2013
Source: Bloomberg
Date Recommendation Target Price
18/01/2013 Buy SAR 90.0
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
May
-10
Au
g-1
0
No
v-1
0
Feb
-11
May
-11
Au
g-1
1
No
v-1
1
Feb
-12
May
-12
Au
g-1
2
No
v-1
2
Date Recommendation Target Price
18/01/2013 Sell SAR 16.0
10.00
12.00
14.00
16.00
18.00
20.00
22.00
24.00
26.00
28.00
30.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Buy SAR 70.0
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 HOLD SAR 30.0
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00O
ct-0
9
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Date Recommendation Target Price
18/01/2013 Hold SAR 104.7
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
Date Recommendation Target Price
18/01/2013 Hold SAR 119.9
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
January 18 2013
Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 205
Exhibit 369: Al Meera Consumer Goods (MERS QD) as of 18/01/2013
Source: Bloomberg
Exhibit 370: Mabanee Co. (MABANEE KK) as of 18/01/2013
Source: Bloomberg
Exhibit 371: Ghabbour Auto (AUTO EY) as of 18/01/2013
Source: Bloomberg
Exhibit 372: Juhayna Food Industries (JUFO EY) as of 18/01/2013
Source: Bloomberg
Date Recommendation Target Price
18/01/2013 Buy QAR 205.0
0.00
50.00
100.00
150.00
200.00
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2Date Recommendation Target Price
18/01/2013 HOLD KWD 1.3
0.30
0.50
0.70
0.90
1.10
1.30
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
Date Recommendation Target Price
18/01/2013 Buy EGP 35.0
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
Date Recommendation Target Price
18/01/2013 Hold EGP 8.5
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct
-11
De
c-1
1
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2