Herfy Foods
Herfy Food Services
Food/Dairy Products – Industrial HERFY AB: Saudi Arabia 31 October 2013
US$0.985bn Market cap
Target price Consensus price Current price
51%
US$1.785mn
Free float
Avg. daily volume
115.1 112.7 112.0
2.78% over current 0.62% over current as at 30/10/2013
Existing rating Underweight
Herfy Foods Overweight
Neutral
Neutral
Flash View is an analyst’s preliminary interpretation of a results announcement or the impact of a major event. Our investment rating and earnings estimates are not being changed in this report. Any formal changes to our investment rating or earnings estimates will be made in a subsequent report, which may differ from the preliminary views expressed here. Performance
Earnings vs. our forecast
Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
Above
In Line
Below
Earnings estimates
Up
No Change
Down
Dividend estimates
Up
No Change
Down
Recommendation
Upgrade
No Change
Downgrade
Long term view
Stronger
Confirmed
Weaker
Likely impact:
123
116
103
102
83 RSI10
Q3 Earnings: A big miss Herfy reported a disappointing set of results for Q3 2013, missing our as well as consensus estimates by a wide margin. The company’s adjusted net profit (excluding capital gain) came in at SAR38.1mn, down 10.1% y-o-y, compared to our SAR48.4mn estimate. The company recognized a one-time capital gain of SAR4.3mn, on sale of a factory, which took the net profit up to SAR42.4mn for the quarter. The stock has already reacted sharply to the results, falling 8.2% on Tuesday. We will revisit our estimates on the company after a discussion with the management. For now, we reiterate our Neutral rating on Herfy with a target price of SAR115.1.
Flash view
Vol th
Research Department ARC Research Team Tel +966 11 2119332, [email protected]
88
70 30 -10 400 300 200 100 10/12
02/13
05/13
Revenues: Herfy reported a net revenue of SAR198.5mn for Q3 2013, down 2.2% y-o-y, below our SAR214mn estimate. Total revenues stood at SAR226.5mn, mostly flat compared to SAR225.4mn in Q3 2012.
Gross and operating profits: The company’s gross profit came in at SAR60.3mn, down 1.7% y-o-y, missing our SAR67.4mn estimate. Gross profit margin improved slightly to 30.4% from 30.2% in Q3 2012. Operating profit fell 8% y-o-y to SAR38.6mn, missing our SAR47.7mn estimate, as operating margin contracted by about 120bps y-o-y to 19.5%, due to higher than expected increase in selling and general & administration expenses.
Net profit: Net profit stood at SAR42.4mn, which included a one-time capital gain of SAR4.3mn. However, after adjusting for this one-off gain, net profit fell 10.1% y-o-y to SAR38.1mn, much below our estimate of SAR48.4mn and consensus of SAR46.5mn.
Conclusion: It was a disappointing quarter for Herfy, as the company missed estimates by a wide margin. The company opened a total of seven stores in the nine months of 2013 (9M 2012: 7 stores), and two stores during Q3 2013 (Q3 2012: 1 store). We will revisit our estimates on the company after a discussion with management. For now, we reiterate our Neutral rating on Herfy with a target price of SAR115.1 per share.
08/13
Source: Bloomberg
Earnings Period End (SAR) Revenue (mn) Revenue Growth EBITDA (mn) EBITDA Growth EPS
12/12A
12/13E
12/14E
12/15E
842
973
1,095
1,243
18.8%
15.5%
12.6%
13.5%
227
265
299
338
20.4%
16.8%
12.8%
13.0%
6.04
6.96
EPS Growth 23.5% 15.2% Source: Company data, Al Rajhi Capital
7.81
8.80
12.2%
12.7%
Valuation
P/E (x) 20 18 16 14 12 10 8 6 4 2 0 01/10
Figure 1 Herfy: summary of Q3 2013 results (SAR mn)
01/11
01/12
Source: Company data, Al Rajhi Capital
01/13
Q3 2012
Q2 2013
Revenue
203.0
222.8
198.5
-2.2%
-10.9%
214
EBITDA
54.0
63.0
Not disclosed
n.a.
n.a.
60.1
EBITDA margin (%)
Q3 2013 % chg y-o-y % chg q-o-q
n.a.
ARC est
26.6%
28.3%
Operating profit
42.0
50.6
38.6
-8.0%
-23.6%
28.1% 47.7
Net profit
42.4
51.2
42.4
0.0%
-17.2%
48.4
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
1
Herfy Food Services
Food/Dairy Products –Industrial 31 October 2013
Segmental performance: Herfy’s revenue from the restaurants segment grew by a marginal 1.6% y-o-y to SAR173.2mn, despite 13 new restaurants being added since Q3 2012. The Bakery segment (which includes Shaboura sales) was the most disappointing segment, with total revenue falling 12.4% y-o-y to SAR28.2mn. Net profit from the segment stood at SAR1.8mn in Q3 2013, up from SAR0.4mn in Q3 2012. We believe that the low profitability in Q3 2012 was due to the commencement of production at the new bakery factory which may have resulted in a sharp rise in costs. Figure 2 Segmental information Restaurants (SAR mn) Revenues
Q3 2013
Change (y-o-y) Our estimate Net income Change (y-o-y)
Q3 2013
Bakery
Q3 2012
Q3 2013
Total
Q3 2012
Q3 2013
Q3 2012
173.2
170.5
25.1
22.8
28.2
32.2
226.5
-
-
18.3
16.9
9.6
5.5
27.9
22.4
173.2
170.5
6.8
5.9
18.5
26.7
198.5
203.0
-
214.0
-
42.4
42.4
Less: Inter-segmental sales Net Revenues
Meat
Q3 2012
1.6%
16.0%
-30.5%
183.2
-
6.4
-
34.2
35.9
6.4
6.1
-4.8%
5.1%
24.4 1.8 353.1%
225.4
-2.2% 0.4
0.0%
Source: Company data, Al Rajhi Capital
Major developments Announced sale of factory Herfy agreed to sell its Shaboura & Mamoul factory to Saudi Master Baker Co. (Switz). The company has recognized a capital gain of SAR4.3mn on the sale during the quarter. The factory produced sliced bread and Shaboura & Mamoul. The sliced bread will now be produced at the company’s new factory, which has four times the production capacity of the one being sold. For Shaboura, an agreement has been endorsed with Switz to produce those products for Herfy. We believe the company’s decision to sell this factory may result in improved margins going forward, as bread production will be replaced by its new factory. Moreover, as Shaboura forms only 1% of the company’s total revenues, a hike in its costs would not affect Herfy’s overall margins.
Disclosures Please refer to the important disclosures at the back of this report.
2
Herfy Food Services
Food/Dairy Products –Industrial 31 October 2013
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Jithesh Gopi, CFA Head of Research Tel: +966 11 2119332 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
3
Food/Dairy Products – Industrial HERFY AB: Saudi Arabia 31 October 2013
US$0.985bn Market cap
Target price Consensus price Current price
51%
US$1.785mn
Free float
Avg. daily volume
115.1 112.7 112.0
2.78% over current 0.62% over current as at 30/10/2013
Existing rating Underweight
Herfy Foods Overweight
Neutral
Neutral
Flash View is an analyst’s preliminary interpretation of a results announcement or the impact of a major event. Our investment rating and earnings estimates are not being changed in this report. Any formal changes to our investment rating or earnings estimates will be made in a subsequent report, which may differ from the preliminary views expressed here. Performance
Earnings vs. our forecast
Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
Above
In Line
Below
Earnings estimates
Up
No Change
Down
Dividend estimates
Up
No Change
Down
Recommendation
Upgrade
No Change
Downgrade
Long term view
Stronger
Confirmed
Weaker
Likely impact:
123
116
103
102
83 RSI10
Q3 Earnings: A big miss Herfy reported a disappointing set of results for Q3 2013, missing our as well as consensus estimates by a wide margin. The company’s adjusted net profit (excluding capital gain) came in at SAR38.1mn, down 10.1% y-o-y, compared to our SAR48.4mn estimate. The company recognized a one-time capital gain of SAR4.3mn, on sale of a factory, which took the net profit up to SAR42.4mn for the quarter. The stock has already reacted sharply to the results, falling 8.2% on Tuesday. We will revisit our estimates on the company after a discussion with the management. For now, we reiterate our Neutral rating on Herfy with a target price of SAR115.1.
Flash view
Vol th
Research Department ARC Research Team Tel +966 11 2119332, [email protected]
88
70 30 -10 400 300 200 100 10/12
02/13
05/13
Revenues: Herfy reported a net revenue of SAR198.5mn for Q3 2013, down 2.2% y-o-y, below our SAR214mn estimate. Total revenues stood at SAR226.5mn, mostly flat compared to SAR225.4mn in Q3 2012.
Gross and operating profits: The company’s gross profit came in at SAR60.3mn, down 1.7% y-o-y, missing our SAR67.4mn estimate. Gross profit margin improved slightly to 30.4% from 30.2% in Q3 2012. Operating profit fell 8% y-o-y to SAR38.6mn, missing our SAR47.7mn estimate, as operating margin contracted by about 120bps y-o-y to 19.5%, due to higher than expected increase in selling and general & administration expenses.
Net profit: Net profit stood at SAR42.4mn, which included a one-time capital gain of SAR4.3mn. However, after adjusting for this one-off gain, net profit fell 10.1% y-o-y to SAR38.1mn, much below our estimate of SAR48.4mn and consensus of SAR46.5mn.
Conclusion: It was a disappointing quarter for Herfy, as the company missed estimates by a wide margin. The company opened a total of seven stores in the nine months of 2013 (9M 2012: 7 stores), and two stores during Q3 2013 (Q3 2012: 1 store). We will revisit our estimates on the company after a discussion with management. For now, we reiterate our Neutral rating on Herfy with a target price of SAR115.1 per share.
08/13
Source: Bloomberg
Earnings Period End (SAR) Revenue (mn) Revenue Growth EBITDA (mn) EBITDA Growth EPS
12/12A
12/13E
12/14E
12/15E
842
973
1,095
1,243
18.8%
15.5%
12.6%
13.5%
227
265
299
338
20.4%
16.8%
12.8%
13.0%
6.04
6.96
EPS Growth 23.5% 15.2% Source: Company data, Al Rajhi Capital
7.81
8.80
12.2%
12.7%
Valuation
P/E (x) 20 18 16 14 12 10 8 6 4 2 0 01/10
Figure 1 Herfy: summary of Q3 2013 results (SAR mn)
01/11
01/12
Source: Company data, Al Rajhi Capital
01/13
Q3 2012
Q2 2013
Revenue
203.0
222.8
198.5
-2.2%
-10.9%
214
EBITDA
54.0
63.0
Not disclosed
n.a.
n.a.
60.1
EBITDA margin (%)
Q3 2013 % chg y-o-y % chg q-o-q
n.a.
ARC est
26.6%
28.3%
Operating profit
42.0
50.6
38.6
-8.0%
-23.6%
28.1% 47.7
Net profit
42.4
51.2
42.4
0.0%
-17.2%
48.4
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. Powered by EFA Platform
1
Herfy Food Services
Food/Dairy Products –Industrial 31 October 2013
Segmental performance: Herfy’s revenue from the restaurants segment grew by a marginal 1.6% y-o-y to SAR173.2mn, despite 13 new restaurants being added since Q3 2012. The Bakery segment (which includes Shaboura sales) was the most disappointing segment, with total revenue falling 12.4% y-o-y to SAR28.2mn. Net profit from the segment stood at SAR1.8mn in Q3 2013, up from SAR0.4mn in Q3 2012. We believe that the low profitability in Q3 2012 was due to the commencement of production at the new bakery factory which may have resulted in a sharp rise in costs. Figure 2 Segmental information Restaurants (SAR mn) Revenues
Q3 2013
Change (y-o-y) Our estimate Net income Change (y-o-y)
Q3 2013
Bakery
Q3 2012
Q3 2013
Total
Q3 2012
Q3 2013
Q3 2012
173.2
170.5
25.1
22.8
28.2
32.2
226.5
-
-
18.3
16.9
9.6
5.5
27.9
22.4
173.2
170.5
6.8
5.9
18.5
26.7
198.5
203.0
-
214.0
-
42.4
42.4
Less: Inter-segmental sales Net Revenues
Meat
Q3 2012
1.6%
16.0%
-30.5%
183.2
-
6.4
-
34.2
35.9
6.4
6.1
-4.8%
5.1%
24.4 1.8 353.1%
225.4
-2.2% 0.4
0.0%
Source: Company data, Al Rajhi Capital
Major developments Announced sale of factory Herfy agreed to sell its Shaboura & Mamoul factory to Saudi Master Baker Co. (Switz). The company has recognized a capital gain of SAR4.3mn on the sale during the quarter. The factory produced sliced bread and Shaboura & Mamoul. The sliced bread will now be produced at the company’s new factory, which has four times the production capacity of the one being sold. For Shaboura, an agreement has been endorsed with Switz to produce those products for Herfy. We believe the company’s decision to sell this factory may result in improved margins going forward, as bread production will be replaced by its new factory. Moreover, as Shaboura forms only 1% of the company’s total revenues, a hike in its costs would not affect Herfy’s overall margins.
Disclosures Please refer to the important disclosures at the back of this report.
2
Herfy Food Services
Food/Dairy Products –Industrial 31 October 2013
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Jithesh Gopi, CFA Head of Research Tel: +966 11 2119332 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
3
