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
RESEARCH DIVISION AGM - Head of Research Abdullah Alawi +966 2 6618275 a.alawi@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar +966 2 6618271 s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati +966 2 6618253 s.alquati@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager - Brokerage Division Ala a Al-Yousef +966 1 2256000 a.yousef@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa +966 1 2256277 lalmutawa@aljaziracapital.com.sa Regional Manager - West and South Regions Abdullah Al-Misbahi +966 2 6618404 a.almisbahi@aljaziracapital.com.sa Area Manager - Qassim & Eastern Province Abdullah Al-Rahit +966 6 3617547 aalrahit@aljaziracapital.com.sa Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37
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: SAR91.25 12-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-2011-12) QoQ-Change (1Q--13 / 4Q-2011-12) Sales revenue 725 711 865 19.4% 21.7% CGS (280) (435) (493) 76.2% 13.5% Gross profit 445 276 372-16.3% 34.6% Gross margins 61.4% 38.9% 43.0% Operating profit 44 65 105 140.0% 60.6% Operating margin 6.0% 9.2% 12.1% Net profit 82 87 121 48.0% 38.5% Net margin 11.3% 12.3% 14.0% EPS (SAR) 1.2 1.2 1.7 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 8,500.0 8,000.0 7,500.0 7,000.0 6,500.0 6,000.0 5,500.0 5,000.0 Jun-10 Aug-10 Oct-10 TASI - LHS Dec-10 Feb-11 Apr-11 Jun-11 Source: Zawya 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - 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 / 51.75 Price performance alhokair (SAR) - RHS Aug-11 Oct-11 1 - month Dec-11 Feb-12 Apr-12 3 - month Jun-12 12 - 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 +966-2-6618275 Syed Taimure Akhtar (Senior Analyst) s.akhtar@aljaziracapital.com.sa +966-2-6618271 / 13 (e) 2013/ 14 (e) Sales revenue (SAR mn) 3202.7 3492.2 3609.2 Revenue growth (YoY) 24.4% 9.0% 3.4% Gross profit (SAR mn) 1334 1465 1521 Gross margin 41.6% 42.0% 42.2% Operating profit 426 468 516 Operating margin 13.3% 13.4% 14.3% Net profit (SAR mn) 447 462 485 Net margin 14.0% 13.2% 13.4% Net profit growth (YoY) 42% 3.2% 5.0% EPS (SAR) 6.39 6.60 6.93 Source: Quarterly & annual reports
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 3,492 1.4% CGS (1,986) 2,027) 2.1% Gross profit 1,456 1,465 0.6% Gross margins 42.3% 42.0% Operating profit 544 468-14.0% Operating margin 15.8% 13.4% Net profit 491 462-6.0% Net margin 14.3% 13.2% EPS (SAR) 7.0 6.6 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.
Updated Financial Statements Amount in SARmn, unless otherwise specified 2010/ 11 2011/ 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 262 426 468 516 575 642 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) 107 77 52 31 32 34 Profit before zakat & minority interest 335 484 502 529 589 657 Minority interest (4) (1) (5) (5) (6) (7) Zakat (15) (36) (35) (38) (43) (48) Net profit 315 447 462 485 540 601 YoY growth 36% 42% 3.2% 5.0% 11.3% 11.4% Balance sheet Assets Cash and bank balance 107 198 218 254 300 331 Other current assets 1,029 1,203 1,338 1,431 1,533 1,642 Property plant & equipment 613 790 880 875 864 850 Other non-current assets 420 384 469 576 713 888 Total assets 2,169 2,575 2,904 3,137 3,409 3,711 Liabilities & owners' equity Total current liabilities 777 789 822 809 808 816 Long-term loans 225 313 281 211 158 119 Total non-current liabilities 42 49 52 53 54 56 Minority interests Paid -up capital 700 700 700 700 700 700 Statutory reserves 144 189 235 284 338 398 Retained earnings 250 513 790 1,057 1,327 1,597 Provision for minority interest 31 23 24 24 25 25 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 304 400 474 562 612 661 Investing activities (42) (313) (266) (222) (246) (275) Financing activities (236) 4 (189) (303) (320) (354) Cash & bank balance from acquired subsidiaries 3 - - - - - Change in cash 31 91 20 37 45 32 Ending cash balance 107 198 218 254 300 331 Key fundamental ratios Liquidity ratios Current ratio (x) 1.5 1.8 1.9 2.1 2.3 2.4 Cash ratio (x) 0.1 0.3 0.3 0.3 0.4 0.4 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) 15.97 24.02 25.16 27.46 30.30 33.47 Debt / equity (x) 0.28 0.31 0.24 0.15 0.09 0.06 Market/valuation ratios EV/sales (x) 1.29 1.75 1.92 1.82 1.71 1.63 EV/EBITDA (x) 9.09 10.37 10.95 9.84 8.84 8.03 EPS (SAR) 4.51 6.39 6.60 6.93 7.71 8.59 BVPS (SAR) 16.08 20.36 24.99 29.50 34.13 38.86 Market price (SAR)* 43.30 75.00 91.50 91.50 91.50 91.50 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) 9.61 11.73 13.87 13.21 11.87 10.65 P/BV ratio (x) 2.69 3.68 3.66 3.10 2.68 2.35 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.
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 800 116 9999.
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