Fawaz Abdulaziz al Hokair & Co. Results Update 1st Quarter 2012/13 SEPTEMBER Research Division Company Reports
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1 Fawaz Abdulaziz al Hokair & Co. Results Update 1st Quarter /13 Research Division Company Reports Please read Disclaimer on the back All rights reserved, AlJAZIRA CAPITAL
2 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati s.alquati@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager - Brokerage Division Ala a Al-Yousef a.yousef@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa Regional Manager - West and South Regions Abdullah Al-Misbahi a.almisbahi@aljaziracapital.com.sa Area Manager - Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No
3 Fawaz Abdulaziz al Hokair & Co. (Al-Hokair) Result Update 1Q12/13 KSA Retail September Impressive growth in profitability during 1Q-/13. Rating: Neutral Signed share purchase agreement (SPA) to acquire NESK group; expansion in focus. Maintain Neutral recommendation. Current Price: SAR month price target: SAR83.7 Upside/(Downside): -8.5% Financial overview 1Q-/13 Fawaz Abdulaziz al Hokair & Co. (Al-Hokair) posted net profit of SAR120.9mn (EPS; SAR1.73) in 1Q-/13. This indicates YoY and QoQ growth of 48.0% and 38.5%, respectively. The company s YoY growth in profitability is mainly associated with the additional revenue stream from the acquisition of Strasburg Jarvis Inc.; a US based fashion retailer. It should be noted that the acquisition of US based fashion retailer made an addition of 50 stores; where the acquisition was completed in July 2011 i.e. 2Q-2011/12. Financial performance 1Q-/13 All figures in SAR mn, unless otherwise stated 1Q- 2011/12 4Q- 2011/12 1Q- /13 YoY-Change (1Q--13 / 1Q ) QoQ-Change (1Q--13 / 4Q ) Sales revenue % 21.7% CGS (280) (435) (493) 76.2% 13.5% Gross profit % 34.6% Gross margins 61.4% 38.9% 43.0% Operating profit % 60.6% Operating margin 6.0% 9.2% 12.1% Net profit % 38.5% Net margin 11.3% 12.3% 14.0% EPS (SAR) Source: Quarterly & annual reports On the other hand, QoQ growth was mainly based on seasonal demand which is usually high during April-June due to holiday seasons. However, it should be noted that Ramadan is a peak season for the company. Price Chart 8, , , , , , , ,000.0 Jun-10 Aug-10 Oct-10 TASI - LHS Dec-10 Feb-11 Apr-11 Jun-11 Source: Zawya Key Information Reuters Code 4240.SE Bloomberg Code ALHOKAIR AB Country: Saudi Arabia Sector: Retail Primary Listing: TASI M-Cap: SAR6.4bn 52 Weeks H/L: SAR101.0 / Price performance alhokair (SAR) - RHS Aug-11 Oct month Dec-11 Feb-12 Apr month Jun month Absolute 4.6% 18.5% 63.7% Relative to TASI -0.9% 16.2% 44.3% Source: Zawya & Aljazira Capital Key Financials Intended to acquire NESK group To solidify brand portfolio According to a press release, the company has inked SPA to acquire NESK group for trading project LLC (Al-Jedaie) for SAR730.0mn (i.e. USD194.7mn). The deal is not finalized till now and the company is conducting legal and financial due diligence. Based on the given information, the acquisition of NESK group will stretch the company s existing brand portfolio (78 international brands) through the additions of new brands like Mango, Stradivarius, Okaidi, Jerry Weber, Woman secret and so on. It should be noted that the deal has not been materialized till now and the acquisition of NESK group will be based on the findings of legal & financial due diligence. Hence, at present, we are not incorporating the impact of this acquisition in our valuation. However, we believe the successful acquisition of NESK group will have the following potential impact on the company; Increase total number of stores by 120 outlets; as NESK group has 120 stores across the Kingdom. Addition of well recognized international brands (listed earlier). Positive impact on sales revenue with improved gross & operating margin; as the acquisition of NESK group will further strengthen the company s operational integration. As per the given information, the company will go for long-term loans to finance this deal; consequently, this will lead to a potential change in capital structure (with relatively high debt financing). Key Financials 2011/ 12 (a) Abdullah Alawi (AGM - Head of Research) a.alawi@aljaziracapital.com.sa Syed Taimure Akhtar (Senior Analyst) s.akhtar@aljaziracapital.com.sa / 13 (e) 2013/ 14 (e) Sales revenue (SAR mn) Revenue growth (YoY) 24.4% 9.0% 3.4% Gross profit (SAR mn) Gross margin 41.6% 42.0% 42.2% Operating profit Operating margin 13.3% 13.4% 14.3% Net profit (SAR mn) Net margin 14.0% 13.2% 13.4% Net profit growth (YoY) 42% 3.2% 5.0% EPS (SAR) Source: Quarterly & annual reports
4 Key financial updates Downward revision in operating margin is mainly associated with the upward revision in operating expense; in accordance with 1Q- /13 financial results. Key financial updates All figures in SAR mn, unless otherwise stated Earlier estimates New estimates Upward / (Downward) revision Sales revenue 3,442 3, % CGS (1,986) 2,027) 2.1% Gross profit 1,456 1, % Gross margins 42.3% 42.0% Operating profit % Operating margin 15.8% 13.4% Net profit % Net margin 14.3% 13.2% EPS (SAR) Source: Aljazira capital Key investment note Based on our calculation, the incorporation of NESK group (al- Jedaie) will lead the company s tentative 12-month price target (post acquisition) at SAR101.1/ share. Hence, this indicates the market, at present, has started to discount the impact of this under-process transaction. Investment consideration We have adjusted our valuation in accordance with 1Q-/13 financial results (Fiscal year for the company starts April 1 st of every year) and arrived at an updated consolidated 12-months price target of SAR83.5/share. This indicates, at current market price of SAR91.5/share (as of 29 th August ) the stock is trading at a premium of 8.5% to our updated 12-month price target with a prospective P/E & P/BV of 13.9x and 3.7x, respectively. We, therefore, maintain our Neutral recommendation for Al-Hokair.
5 Updated Financial Statements Amount in SARmn, unless otherwise specified 2010/ / 12 / 13E 2013/ 14E 2014/ 15E 2015/ 16E Income statement Revenues 2,575 3,203 3,492 3,609 3,755 3,902 YoY growth 24.1% 24.4% 9.0% 3.4% 4.0% 3.9% Cost of sales (1,538) (1,869) (2,027) (2,086) (2,163) (2,233) Gross profit 1,037 1,334 1,465 1,523 1,592 1,669 Operating expenses (775) (908) (997) (1,007) (1,017) (1,027) Operating profit YoY growth 8.7% 62.5% 10.0% 10.2% 11.4% 11.6% Profit/(loss) from associated companies (17) (1) Financial costs (16) (18) (19) (19) (19) (19) Other income/(expenses) Profit before zakat & minority interest Minority interest (4) (1) (5) (5) (6) (7) Zakat (15) (36) (35) (38) (43) (48) Net profit YoY growth 36% 42% 3.2% 5.0% 11.3% 11.4% Balance sheet Assets Cash and bank balance Other current assets 1,029 1,203 1,338 1,431 1,533 1,642 Property plant & equipment Other non-current assets Total assets 2,169 2,575 2,904 3,137 3,409 3,711 Liabilities & owners' equity Total current liabilities Long-term loans Total non-current liabilities Minority interests Paid -up capital Statutory reserves Retained earnings ,057 1,327 1,597 Provision for minority interest Total owners' equity 1,126 1,425 1,749 2,065 2,389 2,720 Total equity & liabilities 2,169 2,575 2,904 3,137 3,409 3,711 Cash flow statement Operating activities Investing activities (42) (313) (266) (222) (246) (275) Financing activities (236) 4 (189) (303) (320) (354) Cash & bank balance from acquired subsidiaries Change in cash Ending cash balance Key fundamental ratios Liquidity ratios Current ratio (x) Cash ratio (x) Profitability ratios Gross profit margin 40.3% 41.6% 42.0% 42.2% 42.4% 42.8% Operating margin 10.2% 13.3% 13.4% 14.3% 15.3% 16.5% EBITDA margin 14.1% 16.8% 17.5% 18.5% 19.4% 20.3% Net profit margin 12.3% 14.0% 13.2% 13.4% 14.4% 15.4% Return on assets 15.6% 18.9% 16.9% 16.1% 16.5% 16.9% Return on equity 28.2% 35.1% 29.1% 25.4% 24.2% 23.5% Leverage ratio Interest coverage (x) Debt / equity (x) Market/valuation ratios EV/sales (x) EV/EBITDA (x) EPS (SAR) BVPS (SAR) Market price (SAR)* Market-Cap (SAR mn) 3,031 5,250 6,405 6,405 6,405 6,405 Dividend yield 10.4% 2.7% 2.2% 2.6% 3.4% 4.2% P/E ratio (x) P/BV ratio (x) Source: Company annual reports & Aljazira capital * We have taken respective March closing prices for 2010 & 2011, while for years & onwards we used closing price of 29 August.
6 COMPANY PROFILE RATING TERMINOLOGY AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated Underweight would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated Neutral is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company. For further queries about our special services, contact us at the toll free number
7 Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/ legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by AlJazira Capital from sources believed to be reliable, but AlJazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. AlJazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in AlJazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report. This report has been produced independently and separately and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report. It should be also noted that the Research Division of AlJazira Capital had no information at the time of issuing this report regarding any conflict of interest between the company/companies mentioned in this report and any members of the board / executives / employees of AlJazira Capital or any of Bank AlJazira Group companies. No part of this document may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of AlJazira Capital. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations. Asset Management Brokerage Corporate Finance Custody Advisory Head Office: Madinah Road, Mosadia P.O. Box: 6277, Jeddah 21442, Saudi Arabia Tel: Fax:
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