Fawaz Al Hokair Domestic performance holds key - Amazon Web ...
Fawaz Alhokair
Retail – Industrial ALHOKAIR AB: Saudi Arabia 03 August 2016
Rating
NEUTRAL
Target price
SAR46.0 (9.7% upside)
Current price
SAR41.9 as at 1/8/2016
Senior Research Analyst Nivedan Reddy Patlolla, CFA Tel +966 1 211 9423, [email protected] Key themes & implications Fawaz Al Hokair grew at a robust pace over FY1115 through organic and inorganic routes in both the domestic and international markets. However, revenue growth slowed sharply in FY16 due to a combination of slowdown in consumer spending in the domestic market and currency depreciation in international markets. Further, Blanco and US subsidiaries were in the midst of restructuring and were a significant drag on earnings. While sale of Blanco alleviates some of the pressure, we believe revenue growth kick-starting in the Kingdom is the key to re-rating of Al Hokair stock. Share information Market cap (SAR/US$)
8.80bn / 2.346bn
52-week range
37.31 - 90.85
Shares outstanding
210.0mn
Free float (est)
30%
Performance
1M
3M
12M
Absolute
-6.3%
8.2%
-55.8%
Relative to index
-3.8%
15.1%
-25.4%
Major Shareholder: Fas Company
49.0%
Abdulmajeed Abdulaziz Alhokair
7.0%
Valuation 03/14A
03/15A
03/16A
P/E (x)
11.4
11.0
14.3
03/17E 15.3
P/B (x)
3.6
3.7
3.4
2.7
EV/EBITDA (x)
9.7
9.3
11.0
9.6
Dividend Yield
2.7%
5.4%
0.0%
2.4%
Source: Company data, Al Rajhi Capital
Performance Price Close
Relative to TADAWUL FF (RHS) 110.0
91.0
102.9
81.0
95.7
71.0
88.6
61.0
81.4
51.0
74.3
41.0
67.1
31.0
60.0
RSI10
101.0
70 30 -10 08/15
11/15
02/16
Fawaz Al Hokair Domestic performance holds key Al Hokair had been struggling with international business (20% of revenue in FY16) over the past couple of years and more recently with domestic business. We believe the performance of domestic business (80% of revenue), which is highly profitable and the primary free-cash generating segment, holds the key for re-rating of the stock. Especially, margin trajectory of domestic business will be the major earnings driver over the short to medium term, given that revenue growth will be weighed down by lower consumer spending (already factored into our estimates via lower LFL growth). Investors will note that the impact from international business was more one-time in nature, dominated by restructuring of US & Blanco operations and currency depreciation-led forex losses in CIS/ Eastern Europe markets. We view sale of Blanco as earnings accretive for the company as this will avoid further losses/ restructuring costs, and increase consolidated profitability and return on capital (refer table 1 for proforma financials). We have Neutral rating on Al Hokair with target price of SAR46 per share. Higher than expected LFL growth/ gross margin in domestic business can offer further upside potential. Limited downside; await triggers before upgrading: Downside from current levels appear to be limited as (a) most negatives of international business are behind, (b) average RoE remaining at 20%+ even after assuming lower LFL growth/ subdued margins, and (c) operating leverage being built into the system due to declining consumer spending, can lead to sharp earnings uptick post stabilization. Evidence of LFL growth/ gross margin stabilization in domestic business for the next couple of quarters, and developments on proposed implementation of 9PM retail shop closure regulation will be the key triggers for re-rating of the stock. Valuation and financials: Despite a solid portfolio of well-known international brands and premium retailing locations, we cut our target multiple and lowered long term growth to factor in uncertainty surrounding proposed 9PM shop closure regulation. Based on our estimates, our equal weighted (DCF and P/E) target price stands at SAR46 per share. In case the regulation does not get implemented, our target price will increase to SAR54 per share and will imply an Overweight rating. Refer table 10 for earnings sensitivity to the proposed implementation of 9 PM rule. Note: Sale of Blanco, which was concluded in Q1FY17 (June 2016 quarter), has now been factored into our financials.
05/16
Source: Bloomberg, Company data, Al Rajhi Capital
Company summary Fawaz Al Hokair is a leading fashion retailer in Saudi Arabia, and also has international presence in the US, Europe, CIS countries and Balkans. Fawaz Al Hokair is a franchisee for more than 80 major international brands such as Zara, Gap, Marks & Spencer, Aldo etc.
Period End (SAR)
03/13A
03/14A
03/15A
03/16A
03/17E
Revenue (mn) Revenue Growth Gross profit margin
4,659 45.5% 24.3%
5,482 17.7% 25.5%
6,899 25.8% 25.9%
7,277 5.5% 23.8%
7,127 -2.1% 24.4%
EBITDA margin Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
16.3% 13.3% 2.95 38.4% 36.2% 20.0% 10.6%
17.3% 14.1% 3.67 24.5% 34.7% 23.9% 6.9%
16.4% 11.6% 3.80 3.4% 33.1% 18.5% 9.0%
13.8% 8.5% 2.93 -22.8% 24.6% 14.2% 9.4%
15.3% 8.1% 2.75 -6.4% 19.7% 14.1% 7.6%
Source: Company data, Al Rajhi Capital; Note: Revenue decline in FY17e due to sale of Blanco
Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
Fawaz Alhokair Retail – Industrial 03 August 2016
Investment thesis The underperformance of Al Hokair stock has mainly to do with the performance of domestic business, which contributed 80% of revenue in FY16. While International business (only 20% of revenue) also faced pressure due to sharp currency depreciation in CIS countries and Egypt, its negative impact was primarily from restructuring costs relating to US and Blanco subsidiaries. In this backdrop, we believe sale of Blanco will alleviate stress on earnings from international business, and increase consolidated return ratios. Nevertheless, this is a reversal from AlHokair’s earlier strategy of focusing on expansion in international markets also, apart from domestic market. It must be noted that the Blanco subsidiary is being sold to an investment firm based in Dubai, which is a related party by virtue of the company’s Chairman Mr Fawaz Abdulaziz Alhokair being one of the shareholders of the investment firm. The acquisition offer of SAR350mn for Blanco equals the total investment to date by Fawaz AlHokair including acquisition cost and investments. Since the payments are structured to be received in five equal yearly instalments, with the first payment starting one year from the completion of the deal, an additional SAR25mn payment will be received by AlHokair. However, the present value of the payment stream (including the additional payment) is lower than the stated offer price of SAR350mn. We do not have sufficient information on Blanco operations for an independent valuation estimate. Figure 1 Tangible improvement in pro-forma FY17e financials post the Blanco sale
Units
Current
Post Blanco Sale
Change
Comments
Business metrics Revenue
SAR mn
7,576
7,127
Gross margin
%
23.3%
24.4%
EBIT
SAR mn
662
713
EBIT margin
%
8.7%
10.0%
Adjusted net profit
SAR mn
520
576
EPS
SAR
2.47
2.75
RoCE
%
13.2%
14.1%
Net Debt/ Equity
(x)
1.08
0.79
Net Debt/ EBITDA
(x)
3.01
2.35
31.0%
29.6%
(132 bps)
150
137
-8.7%
Net working cap/ sales % Cash cycle Valuation
days
P/E
(x)
17.1
15.3
EV/E
(x)
10.6
9.6
EV/Sales
(x)
1.5
1.5
-5.9% 115 bps 7.7%
Sale of Blanco Domestic gross margin higher than Blanco No more one time restructuring/ shop closure related losses
127 bps 11.0%
Higher operating profits, lower financial charges
89 bps
Improvement in capital efficiency with higher operating margin Inflow of SAR350mn cash and decline in working cap loans
Blanco likely had higher inventory/ receivable days, as witnessed by jump in these metrics just after its acquisition in Q4 2014
Source: Al Rajhi Capital
Hence, while sale of Blanco does improve earnings visibility as one-time restructuring costs are eliminated and overall profitability improves, the key metric for the stock to get re-rated will be the performance of domestic business. Specifically, we will be watching for the gross margin, which will primarily determine the earnings trajectory going forward, in an environment of slowing consumer spending. Our focus on gross margin is to assess the level of markdowns required to achieve the revenue run rate, which can also be compared to the levels prevailing over the past few years.
Slowing domestic spending – the key issue We believe the impact of slowing consumer spending is the key issue which is plaguing the stock of Fawaz Al Hokair and other discretionary retailers in the Kingdom. This was especially visible in March 2016 quarter, when the gross margin slumped to 11.8% vs. an average of 25% over the last 12 quarters. Gross margin recovery in June 2016 quarter cannot Disclosures Please refer to the important disclosures at the back of this report.
2
Fawaz Alhokair Retail – Industrial 03 August 2016
be extrapolated, as performance has likely been driven by majority of Ramadan falling in the June quarter vs. its impact being spread out in June and September quarters last year. Figure 2 Gross margin witnesses sharp slump in Q4FY16 (Mar' 2016 quarter) 2,500
35.0% 28.8%
28.9% 2,000
27.7%
27.0%
26.5%
25.3%
24.9%
26.8%
30.0% 26.0% 25.0%
25.3%
23.4% 20.8%
1,500
20.0% 15.0%
1,000 11.8%
10.0% 500 5.0%
Consol revenue
Domestic revenue
Q1FY17
Q4FY16
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
0.0%
Q1FY14
-
Gross margin - RHS
Source: Company data
The trend of slowing consumer spending has been developing due to multiple factors. The crude oil price slump has led to tightening of fiscal spending by government, which in the last few years had a multiplier effect on the liquidity in economy and also translated to higher consumer spending and job creation. Further, recent policies of revising energy/ utility prices resulted in lower disposable income, trends which have been reflected in slowing POS transactions and rising inflation. We believe these trends are set to persist in the coming few quarters unless the fiscal headroom of the government improves significantly backed by a sharp spurt in crude oil prices. Figure 3 POS transactions – declining growth
Figure 4 Significant rise in inflation
20.0 18.0
50%
5.0%
40%
4.5%
30%
4.0%
16.0 14.0 20%
12.0 10.0
10%
Title: Source: Please fill in the values above to have them entered in your report
3.5% 3.0% 2.5%
8.0
0% 2.0%
6.0 -10%
1.5% 1.0% 0.5% Apr-16
Jan-16
Feb-16 Mar-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
Apr-15
May-15
Jan-15
Feb-15 Mar-15
Dec-14
Oct-14
Nov-14
Sep-14
% YoY - RHS
Source: SAMA
Jul-14
0.0%
Aug-14
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
Mar-15 POS
May-15
Jan-15
Nov-14
Jul-14
Sep-14
-30%
May-14
-
Jun-14
-20%
2.0
May-14
4.0
Source: SAMA
International Operations: Worst is behind Over the past two years, Al Hokair has been impacted by the twin developments of (a) currency depreciation in its key international markets (which contribute 20% of consol revenue), and (b) acquisition of Blanco in Feb 2014, which was essentially a turnaround candidate and has been a source of regular one-off restructuring costs and write-offs. However, we believe the worst from international markets is behind, as majority of currency depreciation is already behind (refer to the details in the section below) and Blanco has been divested. Due to these developments, we believe the revenue/ earnings from international
Disclosures Please refer to the important disclosures at the back of this report.
3
Fawaz Alhokair Retail – Industrial 03 August 2016
business will become much more run-rate in nature without significant one-offs impacting the overall business. We detail the developments which impacted the international business:
Currency depreciation in international markets In majority of international countries where Al Hokair has operations, the currency depreciations ranged from 40% - 120% in the past couple of years. The currency depreciation was more of an EM (emerging markets) phenomena, led by multiple factors such as strengthening of USD as the Fed embarked on a path of monetary tightening, slump in crude oil prices, and general weakening of global economy which severely impacted the currencies of export dependent nations. Currency depreciation in international operations impacts Al Hokair as revenue from those regions gets reduced by the amount of currency depreciation (translation impact) and in cases where the depreciation is sharp – it results in spiraling inflation in an economy which impacts consumer demand for discretionary products. CIS countries (Kazakhstan and Armenia, cumulative revenue contribution of 3.5% in FY15) and Eastern Europe countries (Azerbaijan and Georgia, cumulative revenue contribution of 5.1% in FY15) have been victims of sharp currency depreciation (vs. USD) over the last couple of years. Figure 5 Egypt Pound vs. USD
Figure 6 Kazakhstan Tenge vs. USD
9
450
8.5
Title: Source:
400
8
Please fill in the values above to have them entered in your report 350
7.5 7
300
6.5
250
6 200 5.5 150
5
100
4.5
6/1/2016
3/1/2016
9/1/2015
12/1/2015
6/1/2015
3/1/2015
9/1/2014
12/1/2014
6/1/2014
3/1/2014
9/1/2013
12/1/2013
6/1/2013
3/1/2013
9/1/2012
12/1/2012
6/1/2012
3/1/2012
9/1/2011
12/1/2011
6/1/2011
3/1/2011
12/1/2010
4
50 0 12/2/2010
12/2/2011
12/2/2012
Source: Bloomberg
Source: Bloomberg
Figure 7 Azerbaijan Manat vs. USD
Figure 8 Georgia Lari vs. USD
1.8
3
1.6 2.5
1.4
12/2/2013
12/2/2014
12/2/2015
Title: Source: Please fill in the values above to have them entered in your report
1.2 2
1 0.8
1.5
0.6 1
0.4 0.2
0.5
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
12/1/2013
9/1/2013
6/1/2013
3/1/2013
12/1/2012
9/1/2012
6/1/2012
3/1/2012
12/1/2011
9/1/2011
6/1/2011
3/1/2011
12/1/2010
0
Source: Bloomberg
Disclosures Please refer to the important disclosures at the back of this report.
0 12/2/2010
12/2/2011
12/2/2012
12/2/2013
12/2/2014
12/2/2015
Source: Bloomberg
4
Fawaz Alhokair Retail – Industrial 03 August 2016
Blanco sale to alleviate stress on earnings The acquisition of the loss-making Blanco, Balkans acquisition, and expansion in US markets led to a dent in profitability. However, the company has been restructuring its various international operations and has outlined a strategy to turn around these operations. While our base case forecasts build for a moderate turnaround in the near term, faster than expected turnaround can result in significant upside to our net income estimates. Blanco operations in perspective: Blanco was the most important international subsidiary which needed to be restructured. For FY15, Blanco contributed 8.9% of consolidated revenue and reported SAR32mn loss, excluding which reported FY15 net profit (SAR798mn) would have been higher by 4%. For 9MFY16, Blanco reported a higher loss of SAR83mn, excluding which reported 9MFY16 net profit (SAR613mn) would have been higher by 14%. Hence, its divestiture is immediately earnings accretive, with higher returns on capital (refer table 1). Figure 9 Blanco a drag on earnings 1,000
800
830
798
696 613 600
400
200
-
(32) (83) (200) FY15 Consol net profit
9MFY16 Blanco profit (loss)
Consol net profit ex-Blanco
Source: Company data, Al Rajhi Capital
Implementation of 9 PM closing rule is the key risk Recently, media has been carrying articles relating to the likely implementation of a rule to close retail shops by 9 PM. We note that this is still under consideration by the government and there could be some exceptions to this rule, when it finally gets notified. Hence, before factoring in any impact from this rule, we would await clarity on the exact rules pertaining to this law. However, to give investors a sense of impact from the proposed law, we try to quantify the impact in various scenarios. We assume a certain range of revenue decline due to impact on volumes from reduced peak-time working hours (revenue of retailers is significant post 9 PM, as shoppers generally throng malls during the late night hours, due to heat during the day and late evenings). Apart from revenue decline, the margin decline would also be a function of fixed costs (typically a portion of SG&A costs). Together with revenue and margin-decline assumptions, we depict the impact on earnings from implementation of this rule. Note that these are not our assumptions of expected decline in volumes (which depends on the final set of rules governing this law which are yet to be released), but only a sensitivity analysis of earnings decline to that of a range of revenue and margin decline. Our analysis shows that with revenue decline in the range of 2.5%-20%, the earnings could decline by 3%-43% respectively, depending on the margin decline.
Disclosures Please refer to the important disclosures at the back of this report.
5
Fawaz Alhokair Retail – Industrial 03 August 2016
Figure 10 Al Hokair - earnings sensitivity to revenue/ margin decline from 9 pm regulation
Margin decline
Revenue decline 2.5%
5.0%
10.0%
15.0%
20.0%
0.0%
3%
5%
11%
16%
22%
0.5%
8%
11%
16%
21%
26%
1.0%
13%
16%
21%
25%
30%
1.8%
21%
23%
28%
32%
37%
2.5%
29%
31%
35%
39%
43%
Source: Company data, Al Rajhi Capital
No significant impact from full ownership in retail One of the major investor concerns in recent times was the government’s decision to allow 100% foreign ownership in the Saudi retail sector. One of the key concerns of investors was that exclusive brands (e.g. Inditex, which has own operations in majority markets) that Al Hokair retails in KSA, can now make a direct entry to the market which could potentially cannibalize the brand’s sales from Al Hokair managed outlets. However, we believe the probability of this risk playing out is not significant. Firstly, Al Hokair has a real estate portfolio comprising prime locations, thanks to its group company Arabian Centres, which is the largest builder, owner and operator of shopping malls in the Kingdom. Further, with 80 brands and more than 2,000 stores, Al Hokair has developed a sizeable logistics and distribution capability, which will be difficult for brands to operate on a standalone basis. The company also has strong operational knowledge of the region, which is one of the key factors that retailers require for efficient operations and low risk to business continuity. Finally, the Kingdom has already allowed 75% foreign ownership in the retail sector, and hence lifting the cap to 100% will not change the equation for most retailers as they already had an option for majority ownership before this rule was announced.
Valuation Al Hokair’s stock witnessed steep correction over the last one year. The correction was primarily due to impact of slowdown in consumer spending on earnings, especially in March 2016 quarter. Gross margin recovery in June 2016 quarter cannot be extrapolated, as performance has likely been driven by majority of Ramadan falling in the June quarter vs. its impact being spread out in June and September quarters last year. We believe investors were also concerned over the potential risk of 9PM closing rule being implemented, foreign brands entering the Saudi market directly after the government allowed 100% foreign ownership in retail and company’s exposure to developing market currencies which have witnessed high volatility and steep depreciation. We have addressed our views on these issues in previous sections.
Limited downside; domestic revenue/ gross margin trend will determine stock direction Downside from current levels appear to be limited as most negatives of international business are behind, average RoE remaining at 20%+ even after assuming lower LFL growth/ subdued margins, and finally operating leverage being built into the system due to declining consumer spending, can lead to sharp earnings uptick post stabilization. However, we would prefer to wait for evidence of LFL growth/ gross margin stabilization in domestic business for the next couple of quarters and developments on proposed implementation of 9PM retail shop closure law (refer table 10 for sensitivity analysis). Al Hokair share price declined 56% in the last one year and currently trades at 15.3x FY17e earnings, which is in-line with its 5-year average forward P/E. We value Al Hokair at an average of fair values derived from both DCF and relative valuation (P/E). We use equal weight for both the methods. Fair value based on both DCF and relative Disclosures Please refer to the important disclosures at the back of this report.
6
Fawaz Alhokair Retail – Industrial 03 August 2016
valuation (target P/E multiple) stands at SAR46 per share. We use a target multiple of 15.4x, which is in-line with the average forward P/E multiple of emerging market peers. While we applied 20% premium previously (to factor in Al Hokair’s exclusivity of leading int’l brands in the Kingdom), we refrain from using it now, due to risks pertaining to 9 PM closing rule. On the same lines, we cut our long term DCF growth forecast to 2.5% (3% previously). Using an equal weighted average of both methodologies, we arrive at a target price of SAR46, which implies 9.7% upside from CMP of SAR41.9. We are Neutral on Al Hokair. Figure 11 Equal weighted target price Method
Valuation
Weight
DCF
46.0
50%
Relative
46.0
50%
Value/ share 23.0 23.0
Target Price (SAR)
46.0
Source: Company data, Al Rajhi Capital
Figure 12 Sensitivity to DCF assumptions -0.5%
4.5%
5.9%
38.8
47.3
59.6
79.1
115.0
202.6
6.9% 7.9%
32.2
38.3
46.6
58.8
78.1
113.6
27.1
31.7
37.7
46.0
58.0
77.1
8.9%
23.1
26.7
31.2
37.1
45.3
57.2
9.9%
19.9
22.7
26.3
30.7
36.6
44.7
Source: Al Rajhi Capital
46.0
WACC (%)
WACC (%)
46.0
Figure 13 Sensitivity of equal weighted TP to DCF and Relative valn
Terminal Growth Rate (% ) 0.5% 1.5% 2.5% 3.5%
12.4
13.4
Target PE Multiple (x) 14.4 15.4
16.4
17.4
5.9%
58.5
60.1
61.6
63.1
64.6
66.2
6.9% 7.9%
48.1
49.6
51.1
52.7
54.2
55.7
41.5
43.0
44.5
46.0
47.5
49.0
8.9%
36.9
38.4
39.8
41.3
42.8
44.3
9.9%
33.5
34.9
36.4
37.8
39.3
40.8
Source: Al Rajhi Capital
Key upside risks: 9 PM rule not being implemented, better than expected LFL growth, faster than expected improvement in working capital, sustained uptick in crude oil prices which could kick start government spending. Key downside risks: 9 PM closing rule is the key risk. Other risks include negative impact on existing franchise partnerships arising from full ownership rules in retail, higher than expected impact on LFL growth from slowdown in consumer spending, delay in turnaround of US operations and further depreciation in CIS countries/ Baltics’ currencies.
Disclosures Please refer to the important disclosures at the back of this report.
7
Fawaz Alhokair Retail – Industrial 03 August 2016
Figure 14 International peer comparison M. Cap EV ($ mn)
RoE (%)
($ mn)
NPM (%)
P/E (x)
EV/E (x)
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
9.5
KSA JARIR MARKETING
KSA
2,832
2,562
52.6
52.1
54.4
12.8
13.0
13.3
12.7
11.6
10.0
12.1
11.0
UNITED ELECTRONI
KSA
267
231
11.6
13.0
15.5
1.7
1.9
2.3
15.4
13.2
10.3
8.4
7.6
6.2
Average
32.1
32.6
35.0
7.3
7.5
7.8
14.1
12.4
10.1
10.3
9.3
7.8
Median
32.1
32.6
35.0
7.3
7.5
7.8
14.1
12.4
10.1
10.3
9.3
7.8
7.2
Emerging Markets THE FOSCHINI GRO
SA
2,352
2,848
23.6
24.8
25.4
10.0
10.2
10.5
13.3
11.7
10.3
8.9
8.0
TRUWORTHS INTL
SA
2,800
2,940
36.0
36.1
34.0
17.7
16.6
16.5
13.2
11.8
10.8
9.7
8.5
7.7
MR PRICE GROUP
SA
4,436
4,353
45.1
44.4
46.3
13.7
14.1
14.7
21.8
19.1
16.5
15.4
13.3
11.3
TRINITY LTD
HK
137
201
(0.3)
1.2
3.8
(0.5)
2.2
6.9
na
26.2
15.7
9.3
6.2
5.5
APRANGA PVA
Lithuania
155
159
23.0
22.6
21.0
7.0
7.0
6.9
11.8
11.0
10.7
6.7
6.3
6.0
LOJAS RENNER SA
Brazil
5,387
5,794
25.3
27.0
29.3
9.6
10.4
11.5
27.0
21.6
17.3
13.8
11.5
9.4
RESTOQUE COM
Brazil
437
668
0.3
1.3
2.8
2.3
4.0
3.8
156.2
26.6
23.1
8.5
7.5
6.4
LPP
Poland
2,312
2,536
17.6
18.4
19.1
6.0
6.6
7.2
26.0
20.8
17.0
13.5
11.2
9.6
CCC SA
Poland
1,783
1,986
21.2
21.8
22.4
8.1
8.4
8.9
28.6
21.7
17.5
19.6
15.7
12.7
Average
24.0
21.9
22.7
9.3
8.8
9.7
37.2
18.9
15.4
11.7
9.8
8.4
Median
23.0
22.6
22.4
8.1
8.4
8.9
23.9
20.8
16.5
9.7
8.5
7.7
3.1
Developed Markets SPECIALTY FASHIO
Australia
80
79
8.8
13.0
15.8
0.7
1.0
1.2
23.2
9.9
6.4
3.9
3.5
IC GROUP A/S
Denmark
429
444
24.3
26.8
28.6
7.8
7.9
8.4
13.7
12.7
11.2
8.7
7.9
7.0
HENNES & MAURI-B
Sweden 50,015
49,598
33.1
34.9
35.0
10.0
10.2
10.3
21.5
19.1
17.4
12.7
11.2
10.0
INDITEX
Spain
107,683 101,981
26.2
26.7
27.1
13.9
14.2
14.4
30.4
26.8
23.9
17.6
15.4
13.5
GAP INC/THE
US
10,264
10,693
27.9
29.0
29.1
4.8
5.3
5.2
13.9
12.6
11.8
5.8
5.8
6.1
MACY'S INC
US
11,050
17,954
23.0
23.7
24.6
3.8
3.8
3.9
10.9
10.6
9.8
5.8
5.7
5.8
DEBENHAMS PLC
UK
912
1,220
10.5
9.8
9.0
3.4
3.3
3.0
7.5
7.6
7.8
4.0
3.9
3.8
MARKS & SPENCER
UK
6,871
9,436
14.1
14.1
13.4
4.6
4.4
4.4
10.6
10.9
10.7
5.7
5.7
5.6
NEXT PLC
UK
9,510
10,778
164.9
129.3
113.1
15.3
15.0
14.8
11.7
11.3
11.0
8.3
8.3
8.3
MYER HOLDINGS
Australia
804
809
7.0
6.9
7.5
2.1
2.3
2.4
14.2
14.0
12.7
6.0
5.7
5.4
ESPRIT HLDGS
Europe
1,559
1,018
(2.9)
(1.5)
2.7
(1.6)
(0.9)
1.9
(34.9)
(72.9)
36.4
(101.8)
15.1
5.7
TED BAKER PLC
UK
1,370
1,490
na
na
9.3
9.5
9.9
21.4
18.8
15.9
13.1
11.5
9.7
HUGO BOSS -ORD
Germany
4,210
4,308
8.9
9.3
9.7
15.1
14.1
13.0
8.1
7.7
7.2
MEN'S WEARHOUSE
US
#N/A N/A
2.4
2.1
2.7
na
na
na
na
na
na
URBAN OUTFITTER
US
3,502
na 3,271
26.1 na
26.9 na
na 26.9 na
19.2
19.5
20.5
6.3
6.5
6.4
15.4
13.9
12.6
6.5
6.2
5.9
Average
18.4
19.3
18.5
6.7
6.8
6.6
16.1
14.0
12.6
8.2
8.1
6.9
Median
23.0
23.7
24.6
4.8
5.3
5.2
14.0
12.6
12.2
6.3
6.9
6.0
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
8
Fawaz Alhokair Retail – Industrial 03 August 2016
Income Statement (SARmn) Revenue Cost of Goods Sold Gross Profit
03/13A
03/14A
03/15A
03/16A
4,659
5,482
6,899
7,277
7,127
(3,528)
(4,084)
(5,111)
(5,544)
(5,388)
1,130
1,398
1,787
1,733
1,739
Government Charges
(5)
(61) (1,002)
S.G. & A. Costs
(546)
(678)
(937)
Operating EBIT
584
720
846
Cash Operating Costs EBITDA
(3,901)
(4,536)
670
03/17E
(1,026) 713
(5,764)
(6,273)
(6,035)
1,135
1,004
1,092
758
946
(174)
(226)
(289)
(335)
Operating Profit
584
720
846
670
713
Net financing income/(costs)
(32)
(37)
(69)
(120)
(161)
Forex and Related Gains
-
-
-
-
Provisions
-
-
-
-
Depreciation and Amortisation
Other Income
(379)
-
97
131
50
56
332
Net Profit Before Taxes
649
814
827
605
594
Taxes
(31)
(42)
(20)
7
1
(0)
(9)
3
1
616
576
Other Expenses Our financials for FY17e are excluding Blanco, sale of which has been concluded in June 2016 quarter. Net profit for FY17e has been adjusted for one-time profit from sale of Blanco (reflected in other income) which is an exceptional item.
Minority Interests Net profit available to shareholders
(18)
620
771
798
(158)
(236)
(473)
03/13A
03/14A
03/15A
03/16A
03/17E
105.0
210.0
210.0
210.0
210.0
3.77
4.75
5.22
4.51
4.55
EPS (SAR)
2.951
3.673
3.798
2.932
2.745
DPS (SAR)
1.500
1.125
2.250
0.000
1.000
Dividends
-
(210)
Transfer to Capital Reserve
Adjusted Shares Out (mn) CFPS (SAR)
Growth
03/13A
03/14A
03/15A
03/16A
03/17E
Revenue Growth
45.5%
17.7%
25.8%
5.5%
-2.1%
Gross Profit Growth
43.1%
23.7%
27.8%
-3.0%
0.3%
EBITDA Growth
37.0%
24.9%
20.0%
-11.5%
8.8%
Operating Profit Growth
32.9%
23.3%
17.4%
-20.8%
6.4%
Net Profit Growth
38.4%
24.5%
3.4%
-22.8%
-6.4%
EPS Growth
38.4%
24.5%
3.4%
-22.8%
-6.4%
Margins
03/13A
03/14A
03/15A
03/16A
03/17E
Gross profit margin
24.3%
25.5%
25.9%
23.8%
24.4%
EBITDA margin
16.3%
17.3%
16.4%
13.8%
15.3%
Operating Margin
12.5%
13.1%
12.3%
9.2%
10.0%
Pretax profit margin
13.9%
14.8%
12.0%
8.3%
8.3%
Net profit margin
13.3%
14.1%
11.6%
8.5%
8.1%
Other Ratios
03/13A
03/14A
03/15A
03/16A
03/17E
ROCE
20.0%
23.9%
18.5%
14.2%
14.1%
ROIC
36.6%
22.9%
24.1%
13.5%
12.3%
ROE
36.2%
34.7%
33.1%
24.6%
19.7%
4.7%
5.2%
2.4%
-1.2%
3.0%
Capex/Sales
10.6%
6.9%
9.0%
9.4%
7.6%
Dividend Payout Ratio
25.4%
30.6%
59.2%
0.0%
36.4%
Valuation Measures
03/17E
Effective Tax Rate
03/13A
03/14A
03/15A
03/16A
P/E (x)
14.2
11.4
11.0
14.3
15.3
P/CF (x)
11.1
8.8
8.0
9.3
9.2
P/B (x)
2.2
3.6
3.7
3.4
2.7
EV/Sales (x)
2.2
1.7
1.5
1.5
1.5
EV/EBITDA (x)
13.5
9.7
9.3
11.0
9.6
EV/EBIT (x)
17.5
12.8
12.5
16.5
14.7
EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
1.7
2.7
2.1
2.0
1.9
3.6%
2.7%
5.4%
0.0%
2.4%
9
Fawaz Alhokair Retail – Industrial 03 August 2016
Balance Sheet (SARmn)
03/13A
03/14A
03/15A
03/16A
03/17E
Cash and Cash Equivalents
134
101
280
297
Current Receivables
-
-
-
-
-
1,103
1,534
2,016
2,246
2,050
Inventories Other current assets
429
665
877
1,164
1,312
1,214
Total Current Assets
1,903
2,512
3,460
3,854
3,694
Fixed Assets
1,350
1,616
2,047
2,328
2,488
Investments
239
260
318
318
318
Goodwill
479
479
799
805
805
99
149
145
166
166
-
-
-
-
-
Total Non-current Assets
2,168
2,504
3,309
3,617
3,777
Total Assets
4,070
5,016
6,770
7,471
7,471
438
773
1,029
1,525
1,194
-
-
-
-
-
Other Intangible Assets Total Other Assets
Short Term Debt Trade Payables Dividends Payable Other Current Liabilities Total Current Liabilities
1,090
1,927
2,111
2,675
2,345
Long-Term Debt
872
566
2,163
2,102
1,802
Other LT Payables
-
-
-
-
-
Provisions Total Non-current Liabilities Minority interests
66
70
79
89
81
938
636
2,242
2,191
1,884
21
27
17
700
1,050
2,100
Total Reserves
1,322
1,376
Total Shareholders' Equity
2,022
2,426
Total Equity
2,043
2,453
Total Liabilities & Shareholders' Equity
4,070
Paid-up share capital
Ratios Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn)
(3)
(3)
2,100
2,100
299
508
1,145
2,399
2,608
3,245
2,417
2,606
3,242
5,016
6,770
7,471
7,471
03/13A
03/14A
03/15A
03/16A
03/17E
1,176
1,238
2,912
3,331
2,566
1.55
1.31
2.57
3.32
57.6%
50.5%
120.5%
127.8%
2.35 79.1%
23.5
25.4
16.5
8.3
6.8
19.26
11.55
11.43
12.42
15.45
03/13A
03/14A
03/15A
03/16A
03/17E
Net Income before Tax & Minority Interest
649
814
827
605
594
Depreciation & Amortisation
174
226
289
335
379
Decrease in Working Capital
(441)
(171)
(798)
(247)
296
Other Operating Cashflow
(36)
(127)
(84)
(1)
Cashflow from Operations
346
742
233
692
Capital Expenditure
(494)
(376)
(621)
(683)
New Investments
(660)
(5)
(467)
(4)
(26)
(61)
-
(1,180)
(442)
(1,088)
Others Cashflow from investing activities Net Operating Cashflow Dividends paid to ordinary shareholders
(834) -
Proceeds from issue of shares
-
Increase in Loans
771
Effects of Exchange Rates on Cash
-
Other Financing Cashflow Cashflow from financing activities
300
(855)
(368)
(578)
-
-
29 -
(1) 770
-
(249) 6
1
(333)
1,028
(540) 291
(686) 6 (210) -
1,854
(25) 1,244
(249) 994 (210) -
435
(632)
(214)
(20)
-
-
11
(862)
Total cash generated
(64)
(33)
174
17
133
Cash at beginning of period
198
134
101
280
297
Implied cash at end of year
134
101
275
297
429
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
03/13A
03/14A
03/15A
03/16A
03/17E
10.6%
6.9%
9.0%
9.4%
7.6%
10
Fawaz Alhokair Retail – Industrial 03 August 2016
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11
Fawaz Alhokair Retail – Industrial 03 August 2016
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12
Retail – Industrial ALHOKAIR AB: Saudi Arabia 03 August 2016
Rating
NEUTRAL
Target price
SAR46.0 (9.7% upside)
Current price
SAR41.9 as at 1/8/2016
Senior Research Analyst Nivedan Reddy Patlolla, CFA Tel +966 1 211 9423, [email protected] Key themes & implications Fawaz Al Hokair grew at a robust pace over FY1115 through organic and inorganic routes in both the domestic and international markets. However, revenue growth slowed sharply in FY16 due to a combination of slowdown in consumer spending in the domestic market and currency depreciation in international markets. Further, Blanco and US subsidiaries were in the midst of restructuring and were a significant drag on earnings. While sale of Blanco alleviates some of the pressure, we believe revenue growth kick-starting in the Kingdom is the key to re-rating of Al Hokair stock. Share information Market cap (SAR/US$)
8.80bn / 2.346bn
52-week range
37.31 - 90.85
Shares outstanding
210.0mn
Free float (est)
30%
Performance
1M
3M
12M
Absolute
-6.3%
8.2%
-55.8%
Relative to index
-3.8%
15.1%
-25.4%
Major Shareholder: Fas Company
49.0%
Abdulmajeed Abdulaziz Alhokair
7.0%
Valuation 03/14A
03/15A
03/16A
P/E (x)
11.4
11.0
14.3
03/17E 15.3
P/B (x)
3.6
3.7
3.4
2.7
EV/EBITDA (x)
9.7
9.3
11.0
9.6
Dividend Yield
2.7%
5.4%
0.0%
2.4%
Source: Company data, Al Rajhi Capital
Performance Price Close
Relative to TADAWUL FF (RHS) 110.0
91.0
102.9
81.0
95.7
71.0
88.6
61.0
81.4
51.0
74.3
41.0
67.1
31.0
60.0
RSI10
101.0
70 30 -10 08/15
11/15
02/16
Fawaz Al Hokair Domestic performance holds key Al Hokair had been struggling with international business (20% of revenue in FY16) over the past couple of years and more recently with domestic business. We believe the performance of domestic business (80% of revenue), which is highly profitable and the primary free-cash generating segment, holds the key for re-rating of the stock. Especially, margin trajectory of domestic business will be the major earnings driver over the short to medium term, given that revenue growth will be weighed down by lower consumer spending (already factored into our estimates via lower LFL growth). Investors will note that the impact from international business was more one-time in nature, dominated by restructuring of US & Blanco operations and currency depreciation-led forex losses in CIS/ Eastern Europe markets. We view sale of Blanco as earnings accretive for the company as this will avoid further losses/ restructuring costs, and increase consolidated profitability and return on capital (refer table 1 for proforma financials). We have Neutral rating on Al Hokair with target price of SAR46 per share. Higher than expected LFL growth/ gross margin in domestic business can offer further upside potential. Limited downside; await triggers before upgrading: Downside from current levels appear to be limited as (a) most negatives of international business are behind, (b) average RoE remaining at 20%+ even after assuming lower LFL growth/ subdued margins, and (c) operating leverage being built into the system due to declining consumer spending, can lead to sharp earnings uptick post stabilization. Evidence of LFL growth/ gross margin stabilization in domestic business for the next couple of quarters, and developments on proposed implementation of 9PM retail shop closure regulation will be the key triggers for re-rating of the stock. Valuation and financials: Despite a solid portfolio of well-known international brands and premium retailing locations, we cut our target multiple and lowered long term growth to factor in uncertainty surrounding proposed 9PM shop closure regulation. Based on our estimates, our equal weighted (DCF and P/E) target price stands at SAR46 per share. In case the regulation does not get implemented, our target price will increase to SAR54 per share and will imply an Overweight rating. Refer table 10 for earnings sensitivity to the proposed implementation of 9 PM rule. Note: Sale of Blanco, which was concluded in Q1FY17 (June 2016 quarter), has now been factored into our financials.
05/16
Source: Bloomberg, Company data, Al Rajhi Capital
Company summary Fawaz Al Hokair is a leading fashion retailer in Saudi Arabia, and also has international presence in the US, Europe, CIS countries and Balkans. Fawaz Al Hokair is a franchisee for more than 80 major international brands such as Zara, Gap, Marks & Spencer, Aldo etc.
Period End (SAR)
03/13A
03/14A
03/15A
03/16A
03/17E
Revenue (mn) Revenue Growth Gross profit margin
4,659 45.5% 24.3%
5,482 17.7% 25.5%
6,899 25.8% 25.9%
7,277 5.5% 23.8%
7,127 -2.1% 24.4%
EBITDA margin Net profit margin EPS EPS Growth ROE ROCE Capex/Sales
16.3% 13.3% 2.95 38.4% 36.2% 20.0% 10.6%
17.3% 14.1% 3.67 24.5% 34.7% 23.9% 6.9%
16.4% 11.6% 3.80 3.4% 33.1% 18.5% 9.0%
13.8% 8.5% 2.93 -22.8% 24.6% 14.2% 9.4%
15.3% 8.1% 2.75 -6.4% 19.7% 14.1% 7.6%
Source: Company data, Al Rajhi Capital; Note: Revenue decline in FY17e due to sale of Blanco
Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
Fawaz Alhokair Retail – Industrial 03 August 2016
Investment thesis The underperformance of Al Hokair stock has mainly to do with the performance of domestic business, which contributed 80% of revenue in FY16. While International business (only 20% of revenue) also faced pressure due to sharp currency depreciation in CIS countries and Egypt, its negative impact was primarily from restructuring costs relating to US and Blanco subsidiaries. In this backdrop, we believe sale of Blanco will alleviate stress on earnings from international business, and increase consolidated return ratios. Nevertheless, this is a reversal from AlHokair’s earlier strategy of focusing on expansion in international markets also, apart from domestic market. It must be noted that the Blanco subsidiary is being sold to an investment firm based in Dubai, which is a related party by virtue of the company’s Chairman Mr Fawaz Abdulaziz Alhokair being one of the shareholders of the investment firm. The acquisition offer of SAR350mn for Blanco equals the total investment to date by Fawaz AlHokair including acquisition cost and investments. Since the payments are structured to be received in five equal yearly instalments, with the first payment starting one year from the completion of the deal, an additional SAR25mn payment will be received by AlHokair. However, the present value of the payment stream (including the additional payment) is lower than the stated offer price of SAR350mn. We do not have sufficient information on Blanco operations for an independent valuation estimate. Figure 1 Tangible improvement in pro-forma FY17e financials post the Blanco sale
Units
Current
Post Blanco Sale
Change
Comments
Business metrics Revenue
SAR mn
7,576
7,127
Gross margin
%
23.3%
24.4%
EBIT
SAR mn
662
713
EBIT margin
%
8.7%
10.0%
Adjusted net profit
SAR mn
520
576
EPS
SAR
2.47
2.75
RoCE
%
13.2%
14.1%
Net Debt/ Equity
(x)
1.08
0.79
Net Debt/ EBITDA
(x)
3.01
2.35
31.0%
29.6%
(132 bps)
150
137
-8.7%
Net working cap/ sales % Cash cycle Valuation
days
P/E
(x)
17.1
15.3
EV/E
(x)
10.6
9.6
EV/Sales
(x)
1.5
1.5
-5.9% 115 bps 7.7%
Sale of Blanco Domestic gross margin higher than Blanco No more one time restructuring/ shop closure related losses
127 bps 11.0%
Higher operating profits, lower financial charges
89 bps
Improvement in capital efficiency with higher operating margin Inflow of SAR350mn cash and decline in working cap loans
Blanco likely had higher inventory/ receivable days, as witnessed by jump in these metrics just after its acquisition in Q4 2014
Source: Al Rajhi Capital
Hence, while sale of Blanco does improve earnings visibility as one-time restructuring costs are eliminated and overall profitability improves, the key metric for the stock to get re-rated will be the performance of domestic business. Specifically, we will be watching for the gross margin, which will primarily determine the earnings trajectory going forward, in an environment of slowing consumer spending. Our focus on gross margin is to assess the level of markdowns required to achieve the revenue run rate, which can also be compared to the levels prevailing over the past few years.
Slowing domestic spending – the key issue We believe the impact of slowing consumer spending is the key issue which is plaguing the stock of Fawaz Al Hokair and other discretionary retailers in the Kingdom. This was especially visible in March 2016 quarter, when the gross margin slumped to 11.8% vs. an average of 25% over the last 12 quarters. Gross margin recovery in June 2016 quarter cannot Disclosures Please refer to the important disclosures at the back of this report.
2
Fawaz Alhokair Retail – Industrial 03 August 2016
be extrapolated, as performance has likely been driven by majority of Ramadan falling in the June quarter vs. its impact being spread out in June and September quarters last year. Figure 2 Gross margin witnesses sharp slump in Q4FY16 (Mar' 2016 quarter) 2,500
35.0% 28.8%
28.9% 2,000
27.7%
27.0%
26.5%
25.3%
24.9%
26.8%
30.0% 26.0% 25.0%
25.3%
23.4% 20.8%
1,500
20.0% 15.0%
1,000 11.8%
10.0% 500 5.0%
Consol revenue
Domestic revenue
Q1FY17
Q4FY16
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
0.0%
Q1FY14
-
Gross margin - RHS
Source: Company data
The trend of slowing consumer spending has been developing due to multiple factors. The crude oil price slump has led to tightening of fiscal spending by government, which in the last few years had a multiplier effect on the liquidity in economy and also translated to higher consumer spending and job creation. Further, recent policies of revising energy/ utility prices resulted in lower disposable income, trends which have been reflected in slowing POS transactions and rising inflation. We believe these trends are set to persist in the coming few quarters unless the fiscal headroom of the government improves significantly backed by a sharp spurt in crude oil prices. Figure 3 POS transactions – declining growth
Figure 4 Significant rise in inflation
20.0 18.0
50%
5.0%
40%
4.5%
30%
4.0%
16.0 14.0 20%
12.0 10.0
10%
Title: Source: Please fill in the values above to have them entered in your report
3.5% 3.0% 2.5%
8.0
0% 2.0%
6.0 -10%
1.5% 1.0% 0.5% Apr-16
Jan-16
Feb-16 Mar-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
Apr-15
May-15
Jan-15
Feb-15 Mar-15
Dec-14
Oct-14
Nov-14
Sep-14
% YoY - RHS
Source: SAMA
Jul-14
0.0%
Aug-14
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
Mar-15 POS
May-15
Jan-15
Nov-14
Jul-14
Sep-14
-30%
May-14
-
Jun-14
-20%
2.0
May-14
4.0
Source: SAMA
International Operations: Worst is behind Over the past two years, Al Hokair has been impacted by the twin developments of (a) currency depreciation in its key international markets (which contribute 20% of consol revenue), and (b) acquisition of Blanco in Feb 2014, which was essentially a turnaround candidate and has been a source of regular one-off restructuring costs and write-offs. However, we believe the worst from international markets is behind, as majority of currency depreciation is already behind (refer to the details in the section below) and Blanco has been divested. Due to these developments, we believe the revenue/ earnings from international
Disclosures Please refer to the important disclosures at the back of this report.
3
Fawaz Alhokair Retail – Industrial 03 August 2016
business will become much more run-rate in nature without significant one-offs impacting the overall business. We detail the developments which impacted the international business:
Currency depreciation in international markets In majority of international countries where Al Hokair has operations, the currency depreciations ranged from 40% - 120% in the past couple of years. The currency depreciation was more of an EM (emerging markets) phenomena, led by multiple factors such as strengthening of USD as the Fed embarked on a path of monetary tightening, slump in crude oil prices, and general weakening of global economy which severely impacted the currencies of export dependent nations. Currency depreciation in international operations impacts Al Hokair as revenue from those regions gets reduced by the amount of currency depreciation (translation impact) and in cases where the depreciation is sharp – it results in spiraling inflation in an economy which impacts consumer demand for discretionary products. CIS countries (Kazakhstan and Armenia, cumulative revenue contribution of 3.5% in FY15) and Eastern Europe countries (Azerbaijan and Georgia, cumulative revenue contribution of 5.1% in FY15) have been victims of sharp currency depreciation (vs. USD) over the last couple of years. Figure 5 Egypt Pound vs. USD
Figure 6 Kazakhstan Tenge vs. USD
9
450
8.5
Title: Source:
400
8
Please fill in the values above to have them entered in your report 350
7.5 7
300
6.5
250
6 200 5.5 150
5
100
4.5
6/1/2016
3/1/2016
9/1/2015
12/1/2015
6/1/2015
3/1/2015
9/1/2014
12/1/2014
6/1/2014
3/1/2014
9/1/2013
12/1/2013
6/1/2013
3/1/2013
9/1/2012
12/1/2012
6/1/2012
3/1/2012
9/1/2011
12/1/2011
6/1/2011
3/1/2011
12/1/2010
4
50 0 12/2/2010
12/2/2011
12/2/2012
Source: Bloomberg
Source: Bloomberg
Figure 7 Azerbaijan Manat vs. USD
Figure 8 Georgia Lari vs. USD
1.8
3
1.6 2.5
1.4
12/2/2013
12/2/2014
12/2/2015
Title: Source: Please fill in the values above to have them entered in your report
1.2 2
1 0.8
1.5
0.6 1
0.4 0.2
0.5
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
12/1/2013
9/1/2013
6/1/2013
3/1/2013
12/1/2012
9/1/2012
6/1/2012
3/1/2012
12/1/2011
9/1/2011
6/1/2011
3/1/2011
12/1/2010
0
Source: Bloomberg
Disclosures Please refer to the important disclosures at the back of this report.
0 12/2/2010
12/2/2011
12/2/2012
12/2/2013
12/2/2014
12/2/2015
Source: Bloomberg
4
Fawaz Alhokair Retail – Industrial 03 August 2016
Blanco sale to alleviate stress on earnings The acquisition of the loss-making Blanco, Balkans acquisition, and expansion in US markets led to a dent in profitability. However, the company has been restructuring its various international operations and has outlined a strategy to turn around these operations. While our base case forecasts build for a moderate turnaround in the near term, faster than expected turnaround can result in significant upside to our net income estimates. Blanco operations in perspective: Blanco was the most important international subsidiary which needed to be restructured. For FY15, Blanco contributed 8.9% of consolidated revenue and reported SAR32mn loss, excluding which reported FY15 net profit (SAR798mn) would have been higher by 4%. For 9MFY16, Blanco reported a higher loss of SAR83mn, excluding which reported 9MFY16 net profit (SAR613mn) would have been higher by 14%. Hence, its divestiture is immediately earnings accretive, with higher returns on capital (refer table 1). Figure 9 Blanco a drag on earnings 1,000
800
830
798
696 613 600
400
200
-
(32) (83) (200) FY15 Consol net profit
9MFY16 Blanco profit (loss)
Consol net profit ex-Blanco
Source: Company data, Al Rajhi Capital
Implementation of 9 PM closing rule is the key risk Recently, media has been carrying articles relating to the likely implementation of a rule to close retail shops by 9 PM. We note that this is still under consideration by the government and there could be some exceptions to this rule, when it finally gets notified. Hence, before factoring in any impact from this rule, we would await clarity on the exact rules pertaining to this law. However, to give investors a sense of impact from the proposed law, we try to quantify the impact in various scenarios. We assume a certain range of revenue decline due to impact on volumes from reduced peak-time working hours (revenue of retailers is significant post 9 PM, as shoppers generally throng malls during the late night hours, due to heat during the day and late evenings). Apart from revenue decline, the margin decline would also be a function of fixed costs (typically a portion of SG&A costs). Together with revenue and margin-decline assumptions, we depict the impact on earnings from implementation of this rule. Note that these are not our assumptions of expected decline in volumes (which depends on the final set of rules governing this law which are yet to be released), but only a sensitivity analysis of earnings decline to that of a range of revenue and margin decline. Our analysis shows that with revenue decline in the range of 2.5%-20%, the earnings could decline by 3%-43% respectively, depending on the margin decline.
Disclosures Please refer to the important disclosures at the back of this report.
5
Fawaz Alhokair Retail – Industrial 03 August 2016
Figure 10 Al Hokair - earnings sensitivity to revenue/ margin decline from 9 pm regulation
Margin decline
Revenue decline 2.5%
5.0%
10.0%
15.0%
20.0%
0.0%
3%
5%
11%
16%
22%
0.5%
8%
11%
16%
21%
26%
1.0%
13%
16%
21%
25%
30%
1.8%
21%
23%
28%
32%
37%
2.5%
29%
31%
35%
39%
43%
Source: Company data, Al Rajhi Capital
No significant impact from full ownership in retail One of the major investor concerns in recent times was the government’s decision to allow 100% foreign ownership in the Saudi retail sector. One of the key concerns of investors was that exclusive brands (e.g. Inditex, which has own operations in majority markets) that Al Hokair retails in KSA, can now make a direct entry to the market which could potentially cannibalize the brand’s sales from Al Hokair managed outlets. However, we believe the probability of this risk playing out is not significant. Firstly, Al Hokair has a real estate portfolio comprising prime locations, thanks to its group company Arabian Centres, which is the largest builder, owner and operator of shopping malls in the Kingdom. Further, with 80 brands and more than 2,000 stores, Al Hokair has developed a sizeable logistics and distribution capability, which will be difficult for brands to operate on a standalone basis. The company also has strong operational knowledge of the region, which is one of the key factors that retailers require for efficient operations and low risk to business continuity. Finally, the Kingdom has already allowed 75% foreign ownership in the retail sector, and hence lifting the cap to 100% will not change the equation for most retailers as they already had an option for majority ownership before this rule was announced.
Valuation Al Hokair’s stock witnessed steep correction over the last one year. The correction was primarily due to impact of slowdown in consumer spending on earnings, especially in March 2016 quarter. Gross margin recovery in June 2016 quarter cannot be extrapolated, as performance has likely been driven by majority of Ramadan falling in the June quarter vs. its impact being spread out in June and September quarters last year. We believe investors were also concerned over the potential risk of 9PM closing rule being implemented, foreign brands entering the Saudi market directly after the government allowed 100% foreign ownership in retail and company’s exposure to developing market currencies which have witnessed high volatility and steep depreciation. We have addressed our views on these issues in previous sections.
Limited downside; domestic revenue/ gross margin trend will determine stock direction Downside from current levels appear to be limited as most negatives of international business are behind, average RoE remaining at 20%+ even after assuming lower LFL growth/ subdued margins, and finally operating leverage being built into the system due to declining consumer spending, can lead to sharp earnings uptick post stabilization. However, we would prefer to wait for evidence of LFL growth/ gross margin stabilization in domestic business for the next couple of quarters and developments on proposed implementation of 9PM retail shop closure law (refer table 10 for sensitivity analysis). Al Hokair share price declined 56% in the last one year and currently trades at 15.3x FY17e earnings, which is in-line with its 5-year average forward P/E. We value Al Hokair at an average of fair values derived from both DCF and relative valuation (P/E). We use equal weight for both the methods. Fair value based on both DCF and relative Disclosures Please refer to the important disclosures at the back of this report.
6
Fawaz Alhokair Retail – Industrial 03 August 2016
valuation (target P/E multiple) stands at SAR46 per share. We use a target multiple of 15.4x, which is in-line with the average forward P/E multiple of emerging market peers. While we applied 20% premium previously (to factor in Al Hokair’s exclusivity of leading int’l brands in the Kingdom), we refrain from using it now, due to risks pertaining to 9 PM closing rule. On the same lines, we cut our long term DCF growth forecast to 2.5% (3% previously). Using an equal weighted average of both methodologies, we arrive at a target price of SAR46, which implies 9.7% upside from CMP of SAR41.9. We are Neutral on Al Hokair. Figure 11 Equal weighted target price Method
Valuation
Weight
DCF
46.0
50%
Relative
46.0
50%
Value/ share 23.0 23.0
Target Price (SAR)
46.0
Source: Company data, Al Rajhi Capital
Figure 12 Sensitivity to DCF assumptions -0.5%
4.5%
5.9%
38.8
47.3
59.6
79.1
115.0
202.6
6.9% 7.9%
32.2
38.3
46.6
58.8
78.1
113.6
27.1
31.7
37.7
46.0
58.0
77.1
8.9%
23.1
26.7
31.2
37.1
45.3
57.2
9.9%
19.9
22.7
26.3
30.7
36.6
44.7
Source: Al Rajhi Capital
46.0
WACC (%)
WACC (%)
46.0
Figure 13 Sensitivity of equal weighted TP to DCF and Relative valn
Terminal Growth Rate (% ) 0.5% 1.5% 2.5% 3.5%
12.4
13.4
Target PE Multiple (x) 14.4 15.4
16.4
17.4
5.9%
58.5
60.1
61.6
63.1
64.6
66.2
6.9% 7.9%
48.1
49.6
51.1
52.7
54.2
55.7
41.5
43.0
44.5
46.0
47.5
49.0
8.9%
36.9
38.4
39.8
41.3
42.8
44.3
9.9%
33.5
34.9
36.4
37.8
39.3
40.8
Source: Al Rajhi Capital
Key upside risks: 9 PM rule not being implemented, better than expected LFL growth, faster than expected improvement in working capital, sustained uptick in crude oil prices which could kick start government spending. Key downside risks: 9 PM closing rule is the key risk. Other risks include negative impact on existing franchise partnerships arising from full ownership rules in retail, higher than expected impact on LFL growth from slowdown in consumer spending, delay in turnaround of US operations and further depreciation in CIS countries/ Baltics’ currencies.
Disclosures Please refer to the important disclosures at the back of this report.
7
Fawaz Alhokair Retail – Industrial 03 August 2016
Figure 14 International peer comparison M. Cap EV ($ mn)
RoE (%)
($ mn)
NPM (%)
P/E (x)
EV/E (x)
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
CY16E
CY17E
CY18E
9.5
KSA JARIR MARKETING
KSA
2,832
2,562
52.6
52.1
54.4
12.8
13.0
13.3
12.7
11.6
10.0
12.1
11.0
UNITED ELECTRONI
KSA
267
231
11.6
13.0
15.5
1.7
1.9
2.3
15.4
13.2
10.3
8.4
7.6
6.2
Average
32.1
32.6
35.0
7.3
7.5
7.8
14.1
12.4
10.1
10.3
9.3
7.8
Median
32.1
32.6
35.0
7.3
7.5
7.8
14.1
12.4
10.1
10.3
9.3
7.8
7.2
Emerging Markets THE FOSCHINI GRO
SA
2,352
2,848
23.6
24.8
25.4
10.0
10.2
10.5
13.3
11.7
10.3
8.9
8.0
TRUWORTHS INTL
SA
2,800
2,940
36.0
36.1
34.0
17.7
16.6
16.5
13.2
11.8
10.8
9.7
8.5
7.7
MR PRICE GROUP
SA
4,436
4,353
45.1
44.4
46.3
13.7
14.1
14.7
21.8
19.1
16.5
15.4
13.3
11.3
TRINITY LTD
HK
137
201
(0.3)
1.2
3.8
(0.5)
2.2
6.9
na
26.2
15.7
9.3
6.2
5.5
APRANGA PVA
Lithuania
155
159
23.0
22.6
21.0
7.0
7.0
6.9
11.8
11.0
10.7
6.7
6.3
6.0
LOJAS RENNER SA
Brazil
5,387
5,794
25.3
27.0
29.3
9.6
10.4
11.5
27.0
21.6
17.3
13.8
11.5
9.4
RESTOQUE COM
Brazil
437
668
0.3
1.3
2.8
2.3
4.0
3.8
156.2
26.6
23.1
8.5
7.5
6.4
LPP
Poland
2,312
2,536
17.6
18.4
19.1
6.0
6.6
7.2
26.0
20.8
17.0
13.5
11.2
9.6
CCC SA
Poland
1,783
1,986
21.2
21.8
22.4
8.1
8.4
8.9
28.6
21.7
17.5
19.6
15.7
12.7
Average
24.0
21.9
22.7
9.3
8.8
9.7
37.2
18.9
15.4
11.7
9.8
8.4
Median
23.0
22.6
22.4
8.1
8.4
8.9
23.9
20.8
16.5
9.7
8.5
7.7
3.1
Developed Markets SPECIALTY FASHIO
Australia
80
79
8.8
13.0
15.8
0.7
1.0
1.2
23.2
9.9
6.4
3.9
3.5
IC GROUP A/S
Denmark
429
444
24.3
26.8
28.6
7.8
7.9
8.4
13.7
12.7
11.2
8.7
7.9
7.0
HENNES & MAURI-B
Sweden 50,015
49,598
33.1
34.9
35.0
10.0
10.2
10.3
21.5
19.1
17.4
12.7
11.2
10.0
INDITEX
Spain
107,683 101,981
26.2
26.7
27.1
13.9
14.2
14.4
30.4
26.8
23.9
17.6
15.4
13.5
GAP INC/THE
US
10,264
10,693
27.9
29.0
29.1
4.8
5.3
5.2
13.9
12.6
11.8
5.8
5.8
6.1
MACY'S INC
US
11,050
17,954
23.0
23.7
24.6
3.8
3.8
3.9
10.9
10.6
9.8
5.8
5.7
5.8
DEBENHAMS PLC
UK
912
1,220
10.5
9.8
9.0
3.4
3.3
3.0
7.5
7.6
7.8
4.0
3.9
3.8
MARKS & SPENCER
UK
6,871
9,436
14.1
14.1
13.4
4.6
4.4
4.4
10.6
10.9
10.7
5.7
5.7
5.6
NEXT PLC
UK
9,510
10,778
164.9
129.3
113.1
15.3
15.0
14.8
11.7
11.3
11.0
8.3
8.3
8.3
MYER HOLDINGS
Australia
804
809
7.0
6.9
7.5
2.1
2.3
2.4
14.2
14.0
12.7
6.0
5.7
5.4
ESPRIT HLDGS
Europe
1,559
1,018
(2.9)
(1.5)
2.7
(1.6)
(0.9)
1.9
(34.9)
(72.9)
36.4
(101.8)
15.1
5.7
TED BAKER PLC
UK
1,370
1,490
na
na
9.3
9.5
9.9
21.4
18.8
15.9
13.1
11.5
9.7
HUGO BOSS -ORD
Germany
4,210
4,308
8.9
9.3
9.7
15.1
14.1
13.0
8.1
7.7
7.2
MEN'S WEARHOUSE
US
#N/A N/A
2.4
2.1
2.7
na
na
na
na
na
na
URBAN OUTFITTER
US
3,502
na 3,271
26.1 na
26.9 na
na 26.9 na
19.2
19.5
20.5
6.3
6.5
6.4
15.4
13.9
12.6
6.5
6.2
5.9
Average
18.4
19.3
18.5
6.7
6.8
6.6
16.1
14.0
12.6
8.2
8.1
6.9
Median
23.0
23.7
24.6
4.8
5.3
5.2
14.0
12.6
12.2
6.3
6.9
6.0
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
8
Fawaz Alhokair Retail – Industrial 03 August 2016
Income Statement (SARmn) Revenue Cost of Goods Sold Gross Profit
03/13A
03/14A
03/15A
03/16A
4,659
5,482
6,899
7,277
7,127
(3,528)
(4,084)
(5,111)
(5,544)
(5,388)
1,130
1,398
1,787
1,733
1,739
Government Charges
(5)
(61) (1,002)
S.G. & A. Costs
(546)
(678)
(937)
Operating EBIT
584
720
846
Cash Operating Costs EBITDA
(3,901)
(4,536)
670
03/17E
(1,026) 713
(5,764)
(6,273)
(6,035)
1,135
1,004
1,092
758
946
(174)
(226)
(289)
(335)
Operating Profit
584
720
846
670
713
Net financing income/(costs)
(32)
(37)
(69)
(120)
(161)
Forex and Related Gains
-
-
-
-
Provisions
-
-
-
-
Depreciation and Amortisation
Other Income
(379)
-
97
131
50
56
332
Net Profit Before Taxes
649
814
827
605
594
Taxes
(31)
(42)
(20)
7
1
(0)
(9)
3
1
616
576
Other Expenses Our financials for FY17e are excluding Blanco, sale of which has been concluded in June 2016 quarter. Net profit for FY17e has been adjusted for one-time profit from sale of Blanco (reflected in other income) which is an exceptional item.
Minority Interests Net profit available to shareholders
(18)
620
771
798
(158)
(236)
(473)
03/13A
03/14A
03/15A
03/16A
03/17E
105.0
210.0
210.0
210.0
210.0
3.77
4.75
5.22
4.51
4.55
EPS (SAR)
2.951
3.673
3.798
2.932
2.745
DPS (SAR)
1.500
1.125
2.250
0.000
1.000
Dividends
-
(210)
Transfer to Capital Reserve
Adjusted Shares Out (mn) CFPS (SAR)
Growth
03/13A
03/14A
03/15A
03/16A
03/17E
Revenue Growth
45.5%
17.7%
25.8%
5.5%
-2.1%
Gross Profit Growth
43.1%
23.7%
27.8%
-3.0%
0.3%
EBITDA Growth
37.0%
24.9%
20.0%
-11.5%
8.8%
Operating Profit Growth
32.9%
23.3%
17.4%
-20.8%
6.4%
Net Profit Growth
38.4%
24.5%
3.4%
-22.8%
-6.4%
EPS Growth
38.4%
24.5%
3.4%
-22.8%
-6.4%
Margins
03/13A
03/14A
03/15A
03/16A
03/17E
Gross profit margin
24.3%
25.5%
25.9%
23.8%
24.4%
EBITDA margin
16.3%
17.3%
16.4%
13.8%
15.3%
Operating Margin
12.5%
13.1%
12.3%
9.2%
10.0%
Pretax profit margin
13.9%
14.8%
12.0%
8.3%
8.3%
Net profit margin
13.3%
14.1%
11.6%
8.5%
8.1%
Other Ratios
03/13A
03/14A
03/15A
03/16A
03/17E
ROCE
20.0%
23.9%
18.5%
14.2%
14.1%
ROIC
36.6%
22.9%
24.1%
13.5%
12.3%
ROE
36.2%
34.7%
33.1%
24.6%
19.7%
4.7%
5.2%
2.4%
-1.2%
3.0%
Capex/Sales
10.6%
6.9%
9.0%
9.4%
7.6%
Dividend Payout Ratio
25.4%
30.6%
59.2%
0.0%
36.4%
Valuation Measures
03/17E
Effective Tax Rate
03/13A
03/14A
03/15A
03/16A
P/E (x)
14.2
11.4
11.0
14.3
15.3
P/CF (x)
11.1
8.8
8.0
9.3
9.2
P/B (x)
2.2
3.6
3.7
3.4
2.7
EV/Sales (x)
2.2
1.7
1.5
1.5
1.5
EV/EBITDA (x)
13.5
9.7
9.3
11.0
9.6
EV/EBIT (x)
17.5
12.8
12.5
16.5
14.7
EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
1.7
2.7
2.1
2.0
1.9
3.6%
2.7%
5.4%
0.0%
2.4%
9
Fawaz Alhokair Retail – Industrial 03 August 2016
Balance Sheet (SARmn)
03/13A
03/14A
03/15A
03/16A
03/17E
Cash and Cash Equivalents
134
101
280
297
Current Receivables
-
-
-
-
-
1,103
1,534
2,016
2,246
2,050
Inventories Other current assets
429
665
877
1,164
1,312
1,214
Total Current Assets
1,903
2,512
3,460
3,854
3,694
Fixed Assets
1,350
1,616
2,047
2,328
2,488
Investments
239
260
318
318
318
Goodwill
479
479
799
805
805
99
149
145
166
166
-
-
-
-
-
Total Non-current Assets
2,168
2,504
3,309
3,617
3,777
Total Assets
4,070
5,016
6,770
7,471
7,471
438
773
1,029
1,525
1,194
-
-
-
-
-
Other Intangible Assets Total Other Assets
Short Term Debt Trade Payables Dividends Payable Other Current Liabilities Total Current Liabilities
1,090
1,927
2,111
2,675
2,345
Long-Term Debt
872
566
2,163
2,102
1,802
Other LT Payables
-
-
-
-
-
Provisions Total Non-current Liabilities Minority interests
66
70
79
89
81
938
636
2,242
2,191
1,884
21
27
17
700
1,050
2,100
Total Reserves
1,322
1,376
Total Shareholders' Equity
2,022
2,426
Total Equity
2,043
2,453
Total Liabilities & Shareholders' Equity
4,070
Paid-up share capital
Ratios Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x) BVPS (SAR)
Cashflow Statement (SARmn)
(3)
(3)
2,100
2,100
299
508
1,145
2,399
2,608
3,245
2,417
2,606
3,242
5,016
6,770
7,471
7,471
03/13A
03/14A
03/15A
03/16A
03/17E
1,176
1,238
2,912
3,331
2,566
1.55
1.31
2.57
3.32
57.6%
50.5%
120.5%
127.8%
2.35 79.1%
23.5
25.4
16.5
8.3
6.8
19.26
11.55
11.43
12.42
15.45
03/13A
03/14A
03/15A
03/16A
03/17E
Net Income before Tax & Minority Interest
649
814
827
605
594
Depreciation & Amortisation
174
226
289
335
379
Decrease in Working Capital
(441)
(171)
(798)
(247)
296
Other Operating Cashflow
(36)
(127)
(84)
(1)
Cashflow from Operations
346
742
233
692
Capital Expenditure
(494)
(376)
(621)
(683)
New Investments
(660)
(5)
(467)
(4)
(26)
(61)
-
(1,180)
(442)
(1,088)
Others Cashflow from investing activities Net Operating Cashflow Dividends paid to ordinary shareholders
(834) -
Proceeds from issue of shares
-
Increase in Loans
771
Effects of Exchange Rates on Cash
-
Other Financing Cashflow Cashflow from financing activities
300
(855)
(368)
(578)
-
-
29 -
(1) 770
-
(249) 6
1
(333)
1,028
(540) 291
(686) 6 (210) -
1,854
(25) 1,244
(249) 994 (210) -
435
(632)
(214)
(20)
-
-
11
(862)
Total cash generated
(64)
(33)
174
17
133
Cash at beginning of period
198
134
101
280
297
Implied cash at end of year
134
101
275
297
429
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
03/13A
03/14A
03/15A
03/16A
03/17E
10.6%
6.9%
9.0%
9.4%
7.6%
10
Fawaz Alhokair Retail – Industrial 03 August 2016
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11
Fawaz Alhokair Retail – Industrial 03 August 2016
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12
