Saudi Company for Hardware (SACO) CMP: SAR 72, Target Price: SAR 62

Transcription

1 Saudi Company for Hardware (SACO) CMP: SAR 72, Target Price: SAR 62 Raneem Seroor (extn ) rseroor@sicobank.com GCC Equities Consumer Goods Company Update 20 December 2018 Time to book profits LT Rating downgraded to Sell, Target Price of SAR 62/sh (vs. previous TP of SAR 59/sh), offering a downside of 14% over current price 4Q18 earnings to be 12% lower YoY, while up by 47% QoQ on seasonality and promotions Post 3Q18 earnings, stock rallied by 38% - Time to book profit Recap - SACO reported SAR 24.4mn net income in 3Q18, 7% higher YoY/QoQ, while beating SICO by 7%. The beat to estimate came on the back of the higher than expected sales of SAR 340mn, +5% YoY, accordingly gross margins improved to 18.9% (from 16% in 2Q18). Since 3Q18 earnings, stock has rallied 38%, accordingly we change our rating on SACO from BUY to SELL. Also, as we incorporate 3Q beat, we adjust our TP marginally (from SAR 59/sh to SAR 62/sh) and increase our FY18 estimates by 8%. However, our FY19 and FY20 estimates remain broadly unchanged from last published note. Post the deep sell-off in SACO in September, and since our last company note published on September 25 th, where we had a BUY rating SACO s current price exceeded our (previous TP of SAR 59/sh) by 23%. The stock outperformed Tadawul index by 31% to date. Exhibit 1. SACO relative price performance Ratings Short-term Long-term Risk Profile Market Data Sector Market Cap Primary Market Other Reuters Bloomberg Neutral Sell High Consumer Goods USD 0.69bn Saudi Arabia 4008.SE SCH AB Equity Free Float 38% Relative Price Performance Tadawul SACO Oct-17 Dec-17 Jan-18 Feb-18 Apr-18 May-18 Jun-18 Aug-18 Sep-18 Restated to 100 Relative Price Performance (%) 1m 3m 12m Absolute (2.5) Relative (11.7) Valuation Ratio 2018E 2019E P/E x P/BV x EV/EBITDA x Div Yld% /24/ /26/ /28/ /30/ /1/ /3/ /5/ /7/ /9/ /11/ /13/ /15/ /17/ /19/ /21/ /23/ /25/ /27/ /29/ /1/ /3/ /5/ /7/ /9/ /11/ /13/ /15/ /17/ /19/2018 Tadawul SACO Source: Bloomberg Trading Data Daily Vol (6M Avg) 0.2 Daily T/o (6M Avg USD) 2.8 Issued Shares wk High/Low 96.27/44.00 Source: SICO Research, Bloomberg Please refer to the disclaimer at the end of the report

2 GCC Equities December Q18 outlook - Forecaste earnings to decline 12% YoY Saudi retailers usually perform well on 4Qs, led by end of year purchases and push through mega sales. Recall, SACO had a major mega sale in 4Q17, a first since the company s IPO. In 4Q18 as well, SACO has end of year promotions on some selected items. In 4Q18, we expect SACO sales to reach SAR 400mn, up 18% QoQ, while down by 7% YoY. We conservatively forecast Gross margins to marginally decline to 19.5% from 19.7% YoY in 4Q, despite stores maturity, given a tough macro environment. We expect SACO s 4Q earnings to be SAR 36mn, +47% QoQ, while down 12% YoY - given that 4Q17 was unusually strong led by both mega sale and pre VAT sales boost. Exhibit 2. 4Q sales trend 500, , , , , , , , ,000 50, % 34% 33% 50% 40% 30% 20% 18% 10% 0% -10% -20% -30% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Sales G% QoQ Source: Company Announcement, SICO research Stores update SACO is behind its target of adding 4 stores in 2018 (equivalent to 10% growth on retail space). The retailer opened two new stores in 2018, in Al Jouf city (SACO store) and Riyadh City (SACO World store). Due to contactors delays, SACO is opening only one more store by 4Q18. Exhibit 3. Customer footfall and basket size Exhibit 4. Quarterly LFL trend Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Costumer visit basket size % 5% 0% -5% -10% -15% 8% 4% 4% 3% 2% -1% -13% 4Q16 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company Announcement Source: Company Announcement

3 GCC Equities December Financials Income Statement (Consolidated) Year ending 31 Dec (SAR mn) 2017A 2018E 2019E 2020E Revenue 1,456 1,405 1,452 1,639 Cost of Goods Sold 1,171 1,154 1,195 1,340 Gross Profit Selling, General and Admin. Expenses EBITDA Operating Profit Other Income Net Interest Income Tax Minority Interest Net Profit Balance Sheet (Consolidated) Year ending 31 Dec (SAR mn) 2017A 2018E 2019E 2020E Cash & Short Term Deposits Other Current Assets Investments Net Fixed Assets Net Intangible Assets Total Non-Current Assets Total Assets 1,004 1,139 1,143 1,200 Current Liabilities Total Debt Other Liabilities Total Liabilities Minority Interest Share Capital Reserves & Surplus Shareholders Funds Total Equity & Liabilities 1,004 1,139 1,143 1,200

4 GCC Equities December Cash Flow Statement (Consolidated) Year ending 31 Dec (SAR mn) 2017A 2018E 2019E 2020E Net profit before minority Depreciation Other Adjustments Working Capital Changes (131) 7 4 (20) Cashflow from Operations Capital Expenditure (83) (60) (72) (74) Other Investing Activities Cashflow from Investing (83) (60) (72) (74) Debt Raised/Repaid 57 (12) (8) 2 Dividend (42) 48 (90) (115) Other Financing Activities Cashflow from Financing (93) (106) Net Chg in Cash (27) Key Ratios (Consolidated) Year ending 31 Dec (SAR) 2017A 2018E 2019E 2020E EPS EPS Growth (%) 4.6 (29.3) Gross Margin (%) EBITDA Margin (%) EBITDA Growth (%) 4.6 (26.9) Net Margin (%) ROAE (%) ROAA (%) Debt/Equity (%) Valuation Ratios PER (x) PBV (x) Dividend Yield (%) EV/EBITDA (x) Source: SICO Research, Company Data

5 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 GCC Equities December Price, Target Price and Rating Change History Chart of (SCH AB) Date Closing Price Target Price Rating Initiation 10-Jul B X 15-Aug N 17-Sep B 20-Dec S B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R= Under Review B B N S 0.0 Closing Price Target Price Rating Initiation B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R = Under Review Analyst Stock Rating Definitions *Note:- Under old methodology, up until 20th Feb 2016, we had 5 categories of LT rating. Sell (<-25%), Reduce (-10 to -25%), Neutral (-10% to +10%), Add (+10% to +25%), Buy (>+25%). The LT rating was independent of Risk Profile.

6 GCC Equities December Time Horizon Short term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the short-term performance of the stock during the immediate six months after issuing a rating. This might be due to both quantitative and qualitative factors which the analyst think can affect the stock price. Long term SICO Research s Long-term rating is based on the Target Price calculated by the analyst. The Target Price is arrived at using both fundamental and/or comparative valuation methods based on the detailed financial models developed by analysts incorporating current expectations and analyst s assumptions. Target price for a stock is calculated one year forward from the valuation date Recommendation (Short term) Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%) Neutral Analyst does not expect any short term triggers/events (+/- 10%) Negative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%) Recommendation (Long term) Buy Neutral If Risk profile is High Target price estimate offers 20%+ return from the current share price. If Risk profile is Normal Target price estimate offers 15%+ return from the current share price. If Risk profile is High Target Price estimate offers 0% to 20% return from the current share price. If Risk profile is Normal Target Price estimate offers 5% to 15% return from the current share price Sell If Risk profile is High Target price estimate offers less than 0% return from the current share price. If Risk profile is Normal Target price estimate offers less than 5% return from the current share price. Risk High Normal Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility

7 GCC Equities December Contact Details P.O Box 1331, BMB Centre, 1 st Floor Diplomatic Area Manama, Kingdom of Bahrain Investment Research research@sicobank.com Head of Research Nishit Lakhotia, CFA, CAIA T: (Direct) Brokerage Mariam Isa Tel: (Direct): Chief Capital Markets Officer Fadhel Makhlooq Tel: (Direct): Visit us at sicobank.com Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related Investments. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA), Al Baraka Banking Group, Bank ABC, Eskan REIT and GFH. Copyright Notice Securities and Investment Company This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part.