KSA Food & Retail Sector
KSA Food & Retail Sector Growing consumerism to drive high growth JANUARY 2011
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MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
2
Retail sales in KSA were USD 57.9 Bn in 2009 … … and are expected to grow at 9.8% CAGR during 2009-14
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STRUCTURE > FOOD, DRINKS AND TOBACCO (65% of total sales)
SEGMENT SALES (USD BN)
37.2
2009
KEY GROWTH DRIVERS > Increasing household expenditure (USD130 Bn in 2008 growing to
55.8
2014
USD243 Bn by 2012 at CAGR of 17%) driven by :
8.4%
Economic growth (4.5% real GDP growth between 2010 and 2015)
21.7
2005
APPAREL & FOOTWEAR (13% of total sales)
CAGR (2009-14)
and resultant rise in disposable income Favorable demographic profile with large and young population
13.3
2014
(60% of population is below 30 years old) 2005
13.0%
7.3
2009
Rapid urbanization (85% by 2015) and decreasing size of
3.0
household (5.2 in 2015 vs 5.7 in 2004) Pilgrimage tourism provides an additional driver to retail sales in KSA 6.3
2014
FURNITURE (6% of total sales)
2005
2009 2005
Source: BMI, EIU, Al Mal Capital analysis
Ample growth opportunities for large established players:
1.9
Highly fragmented market - share of top 5 players in retail sales at
less than 25% is much lower when compared to developed markets (UK : 59%)
16.4
2014
OTHER PRODUCTS (16% of total sales)
11.2%
3.7
2009
(7.7 Mn tourists in 2008, nearly 14 Mn by 2018)
Rising popularity of modern retail - BMI expects the share of
11.8%
9.3
organized (mass grocery) retail sales in total grocery sales to rise from 58% in 2008 to 75% in 2018
13.4
3
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Key Players Savola and Almarai are the largest players by revenue
FOOD, DRINKS & TOBACCO > • Second largest Food and Grocery retailer in Middle East in terms of sales
• Leading GCC dairy player with 28% market share in 2008
• Market leader in KSA with 8.5% share in 2009
• USD1.6 Bn sales in 2009
• Second-largest retail player by sales in KSA • USD837 Mn sales in 2009
AL RABIE SAUDI FOODS • Dairy products and juices
• USD4.8 Bn sales in 2009
SAVOLA
• Leading ME juice producer, USD350 Mn sales (2008)
• USD273 Mn sales in 2009
ALMARAI
AL OTHAIM
• Largest player in KSA in the mid-income branded clothing retail segment
• Leading retailer of IT products and office and school stationery in GCC
• More than 50% market
• Market share of 50% for
NON FOOD RETAIL >
share in KSA in 2008
laptop sales in KSA
• USD506 Mn sales in 2009
• USD672 Mn sales in 2009
AL HOKAIR
JARIR MARKETING 4
SADAFCO
Investment Summary (1/2) Almarai and Al Hokair still offer significant upside potential
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ALMARAI
Outperform
Double-digit revenue growth is expected to continue (CAGR of 12.8% during 2009-14E) on account of an
anticipated rise in dairy consumption and diversification into non-dairy (poultry, bakery and juice)
Fair Value (SAR)
125.5
Upside
12.6%
segments Vertically integrated business enables Almarai to keep costs low, and creates high barriers to entry thereby
lowering the threat from new entrants, and allowing it to record the highest EBIT margin in its peer group Upside bias as strong earnings growth potential and better operating performance than its peers outweigh
the relatively expensive valuation – current P/E multiple of 21.6x versus peer group average of 17.6x Almarai’s EBIT margin (21.3% TTM) and EPS growth (12.1% CAGR, 2010-12) are higher than its peer group
average of 9.5% and 11.2%, respectively
AL HOKAIR Fair Value (SAR) Upside
Outperform
We expect sales to grow at 13.0% CAGR during FY11-14, higher than the 12.5% during FY06-FY10, driven
by Al Hokair’s expansion initiatives targeting the CUR: Current Year | MKT CAP: Market Capitalization | TTM: Trailing Twelve Months | 1 YR AVG: 1 year average
7
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
8
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Growth Drivers Household spending to increase as economy grows KSA’s economy is subject to swings caused by volatile oil prices. Real GDP growth
KSA: REAL GDP (SAR BN)
forecasts are higher at 4.5% for the 2011-15 period (IMF estimates) versus 3.7% 1,100
900
KSA to witness much higher growth than that witnessed during 2004-08
CAGR 4.5%
growth during 2004-08 and 0.5% during 2009 • Increasing demand for oil (as global economy recovers) and price forecast of
CAGR 3.7%
USD100-120 per barrel over next few years • Government’s aggressive spending plans (USD 400 Bn of planned public
700
investment over 2009-13) • Government focus on diversification and encouraging private sector
500 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
KSA: HOUSEHOLD EXPENDITURE (USD BN)
KSA has witnessed rapid growth in income and household expenditure • Per capita income has grown from USD11,000 in 2000 to USD19,000 currently
250 CAGR 2008-12: 17.0%
200
and is forecast to reach USD23,000 by 2015 • Nearly 70% of households in KSA have annual income levels in excess of
150 100
participation in the petrochemical, power and telecom sectors
CAGR 2004-08: 14.2%
SAR55,000 (2009 estimates) compared to 63% in 2000 • Household expenditure is expected to grow from USD130 Bn in 2008 to
50
USD243 Bn by 2012 (CAGR of 17.0% vs 14.2% in 2004-08)
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Higher household expenditure should fuel growth in retail sales (37% of household expenditure was on retail sales in 2009)
Source: IMF, EIU, Euromonitor International, Al Mal Capital analysis
9
Growth Drivers Large and young population expected to drive retail demand
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A large and growing population has made KSA the largest consumer market in the
KSA: AGE-WISE DISTRIBUTION (2010)
GCC: 30-50 years 29%
• At 25.5 Mn, KSA accounts for 65% of GCC population
50-70 years 9%
• Expected population growth of 2.2% CAGR during 2009-15
>70 years 2%
KSA’s population is young, and this bodes well for growth in food and retail sales • 60% of the population in KSA is below 30 years of age
15-29 years 28%
• This is much higher when compared to other GCC economies: UAE (44%),
Oct-08
Jul-09
Apr-10
Jan-11
• We believe Almarai is better placed to take a hit on margins than its rivals, and hence, expect the company to keep its products competitively priced in order to expand its market share • Also, higher feed costs could see operating margin fall from 21.8% in 2009 to 20.4% in 2014
Source: Bloomberg
17
Almarai: Investment Summary (2/2) Higher margins justify higher trading multiples than peer group
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VALUATION APPROACH
FAIR VALUE
DCF approach
130.3
P/E approach
116.7
EV/EBIT approach
124.8
Weighted average fair price
125.5
MULTIPLES
FY09A
FY10E
FY11F
4.8
5.5
6.2
23.4
20.1
17.9
1,279
1,464
1,645
23.1
20.7
18.7
EPS (SAR)
P/E (x) EBIT (SAR Mn) EV/EBIT (x) KEY STATISTICS
STOCK VALUATION > Almarai is currently trading at a premium to its peers in terms of current and forward P/E and EV/EBIT multiples At current P/E of 21.6x and current EV/EBIT of 22.6x, Almarai trades at a premium of 22.5% and 47.5%, respectively, versus a peer group average of 17.6x current P/E and 15.3x current EV/EBIT In terms of forward multiples, Almarai trades on a 17.9x FY11E P/E and 18.7x FY11E EV/EBIT, a premium of 23.6% and 86.7%, respectively, versus a peer group average of 14.5x FY11E P/E and 10.0x FY11E EV/EBIT
We believe this premium is justified due to higher EBIT margin (21.3% TTM) and EPS growth (12.1% CAGR 2010-12) compared to peer average of 9.5% and 11.2%, respectively. Almarai’s strong earnings growth potential and better operating performance than its peers outweigh the relatively expensive valuation Our DCF, P/E and EV/EBIT based valuation returns a weighted average target price of SAR125.5 (12.6% upside at current level) FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Revenues (SAR Mn)
5,869
6,894
7,778
8,814
9,887
10,710
EBITDA (SAR Mn)
1,567
1,871
2,086
2,319
2,521
2,659
EBITDA margins
26.7%
27.1%
26.8%
26.3%
25.5%
24.8%
Net income (SAR Mn)
1,097
1,274
1,434
1,600
1,752
1,900
Net Debt/Equity
71.9%
75.8%
70.8%
64.4%
56.9%
44.7%
2.7%
2.1%
2.3%
2.6%
2.9%
3.1%
Dividend Yield Source: Bloomberg
18
Almarai: Overview Leading dairy company in GCC
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KEY STATISTICS
FY10E
Revenues (SAR Mn)
6,894
Operating Profit (SAR Mn)
1,464
Net Profit (SAR Mn)
1,274
EBITDA Margin (%)
27.1%
Net Margin (%)
18.5%
RoaE (%)
22.1%
PRODUCT REVENUES (9M 2010)
Juice 11%
Bakery Products 12%
Others 0.4%
Fresh Dairy 46%
BUSINESS OVERVIEW > Almarai, established in 1976, is the leading dairy company in the GCC. It had 28% share of the GCC Dairy market in 2008 (AC Nielsen). Famous brands are Almarai, BonSweet, Teeba, 7 Days, Al Riyadh Dairy, Alyoum and Sabouh. Almarai entered the poultry segment following the acquisition of Hail Agricultural Development Co. (HADCO) in 2009.
BUSINESS ACTIVITIES > • • •
Production of dairy products, processed cream, cheese and custard Production of juices, tomato paste, poultry and bakery products Ownership and operation of vegetable, grain, cattle and poultry farms
FACILITIES / CAPACITY > Almarai is a vertically integrated company covering all supply chain activities, including dairy farming, food processing, marketing, sales and distribution. It has a total production capacity 2.8 Mn liters of dairy products per day and also owns 7 farms in KSA.
MARKETS SERVED > Cheese and Butter 19%
The company has operations in KSA, UAE, Kuwait, Qatar, Oman and Bahrain. KSA accounted for Long Life Dairy, 9%
Source: Company, AC Nielsen
71.2% of revenues, while other GCC countries contributed 28.0% to its revenues in 9M 2010. 19
Investment Theme Core dairy business to benefit from rising consumption
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Almarai is the leading dairy player (28% market share in 2008) in GCC and has a
ALMARAI’S SHARE IN GCC DAIRY MARKET
strong brand presence 50%
42%
40%
• Almarai was ranked number four in Forbes’ Top 40 Arab Brands’ list released in
34%
30%
October 2008
25% 20%
It enjoys high and stable sales growth (CAGR of 28.6% during 2005-09) led by
20%
double-digit growth in all its business segments
10%
Strong sales growth likely to continue (12.8% CAGR during 2009-14)
0% Laban
Zabadi
Fresh milk
Other fresh dairy products
Dairy segment, Almarai’s main business line, is expected to expand at a CAGR of 8.0% during 2009-14 • Benefiting from growing population and household expenditure primarily
GROWTH IN DAIRY SEGMENT REVENUES Rise due to price hike Rise due to consumption
Rise due to market share gains All parameters constant
7.5
0.2
7.0
0.1
SAR Bn
6.5
0.1
6.0
0.1
5.5
4.0
0.1
0.3 0.1
0.3 4.5
4.5
2009
2010E
0.2
capita consumption of liquid milk in the GCC (20.6 liters in 2004) is much lower than the US (83.9 liters in 2006), EU-25 (92.6 liters in 2006)
0.1
• Anticipated increase in market share on account of rising trend of branded food products to ensure quality and SAR8 Bn capex planned for 2010-14 to
0.3 0.1
0.1
5.0 4.5
0.1
0.2
driven by increasing health consciousness and low consumption per capita. Per
6.2
6.7
5.7
expand production and distribution facilities • Growth, however, has normalized from that witnessed historically (22.9%
5.1
CAGR during 2005-09) 2011E
2012E
Source: AC Nielsen, Company filings, Al Mal Capital analysis
2013E
2014E
20
Investment Theme Entry into new business segments to provide additional growth
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EXPANSION AND NEW BUSINESS INITIATIVES
• 50:50 JV with Mead Johnson, a global leader in infant nutrition
• JV with Pepsico to expand presence in Asia and Africa
Dairy and Juice Bakery Infant milk Poultry and horticulture
Capitalizing on high growth opportunities in the infant formula market
• Strong partner support in gaining market share
• Doubling of capacity from 85,000 tons in 2H10
• Infant formula market was worth USD450 Mn in 2009 and is expected to grow
• 50:50 JV with Mead Johnson, a global leader in infant nutrition
• Currently the sector is dominated by global players such as Nestle, Wyeth and
• Fourfold capacity increase to 100 Mn birds per annum by 2012
• Almarai’s infant milk sales are expected to commence in 2011
at a CAGR of 8% during 2010-14
Abbot
Entry into the attractive KSA poultry segment through the acquisition of HADCO
CAGR (2010-14) BY SEGMENT
10 countries globally (world average of 11.5kg in 2008), according to FAO 44.9%
• Market size of USD450 Mn in 2009 • Almarai is well on track to capitalize on this attractive KSA poultry segment Poultry, Arable and Horticulture
Infant and others*
Source: Company filings, Mead Johnson, Al Mal Capital analysis
Bakery products
13.7%
12.8%
Fruit Juice
7.4% Cheese & Butter
7.3% Long Life Dairy
7.0%
Fresh Dairy
70% 60% 50% 40% 30% 20% 10% 0%
• With poultry consumption per capita of 37.0kg in 2008, KSA is amongst the top 61.8%
through a fourfold capacity increase from 25 Mn birds per annum in 2010 to 100 Mn by 2012
21
*CAGR for Infant segment is for the period 2011-14
Investment Theme Double-digit revenue growth expected to continue
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Strong revenue growth expected in juice (12.8% CAGR) and bakery products
GROWTH IN TOTAL REVENUES (SAR MN)
(13.7% CAGR) during 2010-14 12,000
8,000 6,000
10,710
CAGR (2009-14) 12.8%
10,000
6,894
9,887
• Bakery segment to benefit from increased capacity
8,814
• Doubling of capacity from 85,000 tons in 2H10
7,778
5,869
• Rise in juice consumption due to increasing health awareness
4,000
Savola’s (owns 30% stake in Almarai) presence in supermarkets should also help
2,000
Almarai to occupy premium shelf space
0 2009
2010E
2011E
2012E
2013E
2014E
Overall, we expect total revenues to continue to grow in double digits (CAGR of 12.8% during 2009-14)
REVENUE COMPOSITION BY SEGMENT Dairy products Bakery Products
100%
1% 7%
80%
Juice Poultry and Horticulture
10%
12% 11%
13% 11%
92%
73%
9M10
Infant and others
3%
60% 40%
• Almarai’s revenues grew 18.8% YoY from SAR4.3 Bn in 9M09 to SAR5.1 Bn in
Diversification into other business lines is expected to change the revenue mix 4%
• Dairy segment’s contribution is forecast to drop from 73% in 2010 to 62% in 2014
62%
20%
0% 2006
2010
2014
Source: Company filings, Al Mal Capital analysis *CAGR for Infant segment is for the period 2011-14
22
Investment Theme Operating margin much higher than peer group average
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EBIT MARGIN OF PEER GROUP (LAST 12 MONTHS)
Amongst the most profitable companies in the world in terms of operating margin
and net profit margin Almarai
• TTM EBIT margin of 21.3% versus peer group average of 9.5%
Bright Dairy & Food Co. Ojsc Dixy Group
Developing market players
China Mengniu Dairy Co.
Ability to reduce costs through vertical integration • Own dairy farms and has a herd size of more than 100,000 cows. ~95% of milk
Seventh Continent
requirement is supplied through own herd. In-house milk production helps to
Magnit Ojsc
ensure quality and serves as a barrier to new entrants
Savola Group
Wimm-Bill-Dann Foods
• Has grain production business through acquisition of HADCO
Emmi AG
Peer average 9.5%
Robert Wiseman Dairies
• Owns 97 sale depots and 2,000 delivery vans which transport Almarai’s products to 42,000 retail outlets
Dairy Crest Group Associated British Foods
• Almarai has invested heavily (SAR6.8 Bn in capex during 2006-09) to
Developed market players
Glanbia PLC
strengthen vertical integration and expand its business
Kraft Foods Inc
High yielding cow herd - annual yield of ~12,400 litres of milk per cattle is the
Nestle SA Kellogg Co.
highest in the world
General Mills Inc
Higher margins compared to peers and extensive distribution network should
Tiger Brand
further support market share expansion
Danone
0%
4%
8%
12%
16%
20%
24%
• Almarai is better positioned to lower its product prices compared to smaller players, and hence, gain market share
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
23
Investment Theme Margins likely to decline on higher feed imports
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Going forward, we expect margins to decline
GROSS MARGIN AND OPERATING MARGIN Gross Margin (LHS)
Gross margin is expected to drop from 40.3% in 2009 to 38.4% in 2014
Operating margin (RHS)
41%
22%
• Increase in alfalfa imports to conserve local water resources, in line with
40%
21%
government efforts, is expected to increase dairy feed cost as locally produced
39%
20%
38%
19%
alfalfa is ~40% cheaper than imports • Rise in commodity prices, e.g. milk powder, Alfalfa hay and fruit concentrates
37%
18%
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
• We expect Almarai to keep its products competitively priced and refrain from passing on the entire cost increases to consumers in order to gain market share In line with gross margin, operating margin is expected to decline from 21.8% in
NET INCOME (SAR MN)
2009 to 20.4% in 2014. In 9M10, operating margin declined 87 basis points YoY CAGR (2009-14) 11.6%
2,000 1,600
1,200
1,434 1,097
1,600
1,752
1,900
from 23.1% in 9M09 to 22.2% However, Almarai’s vertical integrated business (involving high capex) could be a
1,274
barrier for new entrants, thereby helping sustain margins
800
• If this happens, we could see margins surprising on the upside
400
Despite margin compression, we expect net income to grow at a CAGR of 11.6%
0
during 2009-14 2009
2010E
2011E
2012E
2013E
2014E
• Driven by robust top-line growth Source: Company filings, Al Mal Capital analysis
24
Valuation Valuation looks expensive; upside due to earnings growth
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HISTORICAL P/E MULTIPLE
STOCK PRICE (SAR) AND P/E BAND
22
140
134
130
21x
20
121
120
19x
110 100
17x
90
15x
Historical average 17.9
18
108
96
16
80
14
70
Dec-10
Jun-11
Dec-11
Q310
Q2 10
Q1 10
Q4 09
Q3 09
Q2 09
Fwd 12E
Jun-10
Fwd 11E
Dec-09
Fwd 10E
Jun-09
Current
Jan-09
Q1 09
Q3 08
50
Q4 08
12
60
During Jan 2009 - Sep 2010, Almarai had mostly traded in a P/E multiple range of 17x-19x
• Currently, the stock is trading at a P/E multiple of 21.6x on TTM basis, as it has moved up 10.9% since the company released its 3Q 2010 results on 05 October 2010 We believe the stock still holds upside potential
• Almarai offers the best exposure to the substantial opportunities in KSA’s retail sector on account of strong revenue growth in existing business lines and diversification into new business lines • Better placed to take a hit on margins compared to competitors, benefiting from its vertically integrated business lines. Ability to competitively price its products could further support market share expansion Source: Bloomberg, Company filings, Al Mal Capital analysis
25
Let the falcon guide you
Valuation Higher margins justify higher trading multiples than peer group Market Cap.
Company Almarai Danone Nestle SA Kellogg Company General Mills Inc Tiger Brands Limited Wimm-Bill-Dann Foods Kraft Foods Inc Ojsc Dixy Group Seventh Continent China Mengniu Dairy Co. Ltd. Associated British Foods PLC Dairy Crest Group PLC Glanbia PLC Robert Wiseman Dairies PLC Emmi AG Savola Group Peer group average Almarai premium (discount)%
P/E
EV/EBIT
Country KSA US Switzerland US US
(USD Mn) 6,946 38,924 191,321 18,749 22,927
Current 21.6 23.7 18.7 14.9 14.5
2010 20.1 17.2 17.1 14.8 14.6
Fwd 2011 17.9 15.5 16.5 14.0 13.4
Current 22.6 16.4 17.5 11.6 11.1
2010 21.0 13.8 13.2 11.4 11.3
Fwd 2011 18.7 10.2 10.3 9.2 8.9
South Africa Russia US Russia Russia China UK UK Ireland UK Switzerland KSA
5,076
14.9
15.1
14.0
10.8
11.2
9.7
5,495 54,656 1,127 610 4,400 14,055 837 1,495 396 1,189 4,293
44.4 19.8 NM 11.3 19.1 10.0 8.4 7.1 15.2 14.0 19.1 17.6 22.5%
37.8 15.6 NM 16.0 15.9 8.8 10.8 9.1 14.1 14.2 15.9 16.2 24.4%
29.0 13.5 20.7 8.6 14.4 8.5 9.7 10.1 12.8 13.6 14.4 14.5 23.6%
33.1 14.3 24.8 10.5 13.5 8.9 8.7 5.5 11.9 14.0 13.5 15.3 47.5%
30.0 12.2 16.7 9.8 10.8 8.5 10.9 6.7 11.5 17.6 10.8 13.0 61.0%
16.3 9.2 7.4 5.8 7.1 5.9 8.1 4.5 6.4 11.6 7.1 10.0 86.7%
Almarai is trading at a premium to its peers We believe this premium is justified as its operating margin (21.3% TTM) is more than double that of its peer average (9.5% TTM)
• Almarai’s 2010-12 EPS CAGR of 12.1% is higher than its peer group average of 11.2% Source: Thomson Reuters, Al Mal Capital analysis
26
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
NOPLAT
315
1,603
1,797
1,982
2,128
Depreciation and amortisation
102
441
476
488
476
75
(112)
(128)
(128)
(92)
(428)
(1,563)
(1,533)
(1,445)
(943)
65
369
611
896
1,569
1.00
0.95
0.88
0.81
0.75
64
352
538
727
1,173
Change in working capital Capex FCFF Discount factor
PV of FCFF 2,854
Sum of PV of FCFF Terminal value
29,294
PV of terminal value
21,891 9,876
Add: Investments Less: Net debt and minority interest
(4,659)
Total Equity Value
29,962
Fair value per share
130.3
VALUATION INPUTS Risk Free Rate Beta Risk Premium Cost of Equity WACC Terminal Growth Rate
2.7% 0.80 8.5% 9.5%
Cost of debt Effective tax rate Post tax cost of debt
3.2% 2.5% 3.1% 8.5% 3.0%
27
Valuation Comparative Valuation
Let the falcon guide you VALUATION METRICS
P/E Multiple
EV/EBIT
Premium / (Discount) to peer group
5.0%
Premium / (Discount) to peer group
5.0%
P/E Multiple
18.5x
EV/EBIT multiple
16.1x
FY 11 EPS
7.0
FY11 EBIT
1,644.8
Target EV
26,414.9
Add: Investments
9,876
Less: Net debt and minority interest
(4,659)
Target Market Cap.
31,631.9
Target price
128.6
Target price
137.5
Fair price
116.7
Fair price
124.8
Current price
111.5
Current price
111.5
Upside/Downside
4.6%
Upside/Downside
11.9%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
50%
130.3
65.1
Fair price using P/E multiple
25%
116.7
29.2
Fair price using EV/EBIT multiple
25%
124.8
31.2
Weighted average fair price
125.5
Current price
111.5
Change from current levels
12.6%
28
Let the falcon guide you
Valuation Assumptions
Dairy consumption per capita (excluding cheese and butter) is projected to grow from 35.5 litres in 2009 to 41.2 litres in 2014
Dairy segment
• Driven by increasing health consciousness and low consumption per capita compared to Western countries • Per capita consumption of liquid milk in GCC (20.6 liters in 2004) is much lower than US (83.9
liters in 2006), EU-25 (92.6 liters in 2006)
Market share is projected to increase from 29.5% in 2009 to 30.7% in 2014 • Expansion in production and distribution facilities
Prices are expected to rise 1.5% per annum during 2010-14 (lower than 3% inflation assumption) due to competition
Overall, dairy segment revenues are projected to grow at a CAGR of 8.0% during 2009-14
29
Let the falcon guide you
Valuation Assumptions
Non-dairy, new business lines
Infant formula segment
• Infant formula market is expected to grow at a CAGR of 8% during 2010-14 • Share in infant formula market is forecast to grow from 4% in 2011 to 17% in 2014
Poultry segment • Capacity expansion from 25 Mn birds per annum in 2010 to 100 Mn in 2013
Bakery segment • Benefiting from doubling of capacity from 85,000 tons in 2H10
Juice segment • Juice consumption is expected to rise from 12.4 liters in 2009 to 16.4 liters in 2014 • Almarai’s market share is projected to increase from 9.5% in 2009 to 11.9% in 2014
JV with PepsiCo likely to help Almarai expand its dairy and juice business in Asia and Africa • Outside GCC, sales is projected to increase from 1.1% of total revenues in 2009 to 1.5% in 2014
Combined contribution of non-dairy businesses to rise to 38% in 2014 from 23% in 2009
30
Let the falcon guide you
Valuation Assumptions
Gross margins are expected to decline, going forward • Alfalfa imports, as % of total alfalfa requirement, are expected to increase from 5% in 2008 to
Margins
50% in 2014 • Commodity prices of key raw materials (milk powder, Alfalfa hay and fruit concentrates) are forecasted to rise 3%, in line with inflation
• In comparison, Almarai’s product prices are forecasted to rise by 1.5% per annum, due to competition
Operating margin to decline in line with gross margin
Total SAR7.8 Bn capex (17% of total sales) during 2010-14E • Of the total capex, 84% is assumed to be spent on expansion, and the remaining 16% on
Capex
maintenance • Capex plan includes SAR2 Bn investment in capacity expansion at HADCO (from 25 Mn birds per annum in 2010 to 100 Mn by 2012) and SAR 650 Mn investment in the infant milk business
Capex of SAR2 Bn in 2010 and SAR1.7 Bn in 2011E
70% of the capex to be funded through debt
31
Valuation Sensitivity Analysis
Let the falcon guide you
200 141.4
SAR
150
100
91.8
96.4
91.8
98.0
155.5
157.7
162.6
162.6
125.5
109.5
50
0 Bea r Ca s e
Cos t of ra w ma teri a l ri s e by 1%
Growth i n product pri ces fa l l s by 1%
Ma rket s ha re Per ca pi ta fa l l s by 2% cons umption i s 10% l ower
Ba s e Ca s e
Per ca pi ta Ma rket s ha re Growth i n Cos t of ra w cons umption ri s e by 2% product ma teri a l fa l l s i s 10% hi gher pri ces ri s e by by 1% 1%
Bul l ca s e
Bear case:
Base case:
Bull case:
Per capita consumption of Juices and Dairy products is lower by 10%
Per capita consumption of Juices and Dairy products is higher by 10%
Almarai’s market share decreases by 2%
Per capita consumption of Dairy products grows by 1.8 liters for Dairy products and by 1 liter for the Juice segment
Price rise in Dairy, Juice segment is lower by 1%
Market share in Dairy segment to increase 25 bps in 2011
Price rise in Dairy, Juice segment is higher by 1%
COGS (as % of sales) is higher by 1%
Growth in product prices in line with inflation (1.5% YoY)
COGS (as % of sales) is lower by 1%
COGS (as % of sales) for Dairy products: stable for 2010, and then rise; stable for all other segments Source: Al Mal Capital analysis
32
Almarai’s market share increases by 2%
Almarai – Financial Statements Income Statement
Let the falcon guide you
Income statement (SAR Mn) Total Revenue
Gross Profit Margin (%)
FY09A 5,869 16.7% (3,503) 2,366 40.3%
FY10E 6,894 17.5% (4,174) 2,719 39.4%
FY11F 7,778 12.8% (4,726) 3,053 39.2%
FY12F 8,814 13.3% (5,385) 3,429 38.9%
FY13F 9,887 12.2% (6,071) 3,816 38.6%
FY14F 10,710 8.3% (6,601) 4,110 38.4%
Selling and Distribution Expenses General and Administration Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%)
(887) (200) 1,567 26.7% 1,279 21.8%
(1,031) (225) 1,871 27.1% 1,464 21.2%
(1,153) (255) 2,086 26.8% 1,645 21.1%
(1,298) (287) 2,319 26.3% 1,844 20.9%
(1,460) (322) 2,521 25.5% 2,034 20.6%
(1,581) (346) 2,659 24.8% 2,183 20.4%
Profit from associates Finance charges - net Net Income before tax
(2) (148) 1,129
(2) (134) 1,327
12 (163) 1,494
18 (195) 1,667
24 (234) 1,825
31 (235) 1,979
Tax Minority Interest Net Income after tax & MI
(29) (3) 1,097 18.7%
(34) (19) 1,274 18.5%
(38) (22) 1,434 18.4%
(42) (24) 1,600 18.2%
(46) (27) 1,752 17.7%
(50) (29) 1,900 17.7%
4.8 2.0
5.5 2.3
6.2 2.6
7.0 2.9
7.6 3.2
8.3 3.5
41.9%
41.9%
41.9%
41.9%
41.9%
41.9%
Growth (%) Cost of Revenue Gross Profit
Net Margin (%) Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
33
Let the falcon guide you
Almarai – Financial Statements Balance Sheet
Balance sheet (SAR Mn) Shareholders' Equity Minority Interest
FY09A 5,383 17
FY10E 6,149 52
FY11F 7,049 73
FY12F 8,048 96
FY13F 9,129 122
FY14F 10,294 149
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Short Term Loans Payables and Accruals Derivative Financial Instruments Total Liabilities and Equity
4,147 3,981 166 1,440 396 963 82 10,987
4,093 3,913 180 2,865 1,603 1,132 129 13,159
4,401 4,208 194 2,552 1,150 1,272 129 14,075
4,679 4,470 209 2,762 1,194 1,439 129 15,586
4,885 4,660 226 2,982 1,238 1,614 129 17,118
4,725 4,490 235 3,151 1,272 1,749 129 18,319
711
851
963
1,091
1,219
1,311
2,182 508 455 1,219 8,805 963 6,282 735 793 32 10,987
2,839 857 536 1,447 10,320 982 7,620 892 793 32 13,159
2,599 364 605 1,630 11,476 1,016 8,493 1,142 793 32 14,075
3,011 481 685 1,845 12,575 1,057 9,219 1,473 793 32 15,586
3,538 704 769 2,064 13,580 1,105 9,747 1,903 793 32 17,118
4,216 1,157 834 2,226 14,102 1,160 9,684 2,434 793 32 18,319
Working Capital
Current Assets Cash and cash equivalents Receivables and Prepayments Inventories Non Current Assets Investments and Financial Assets Property, Plant and Equipment Biological assets Intangible Assets - Goodwill Deferred charges Total Assets
34
Let the falcon guide you
Almarai - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Operating Activities Net Profit after tax & minority interest Depreciation & Amortization Bank charges Changes in operating assets & liabilities Other adjustments Cash Flows from Operating Activities
1,097 363 148 163 32 1,802
1,274 407 134 (139) 36 1,713
1,434 441 163 (112) 24 1,949
1,600 476 195 (128) 22 2,165
1,752 488 234 (128) 19 2,364
1,900 476 235 (92) 7 2,527
(1,335) 107 (458) (26) (1,711)
(1,903) 0 (21) 17 (1,908)
(1,563) 0 (22) 0 (1,585)
(1,533) 0 (23) 0 (1,556)
(1,445) 0 (23) 0 (1,469)
(943) 0 (24) 0 (967)
690 (380) (1) (148) 170
1,140 (460) (1) (134) 544
(158) (534) (1) (163) (857)
306 (601) (1) (195) (492)
234 (671) (1) (234) (672)
(136) (735) (1) (235) (1,107)
Net change in Cash and Cash Equivalents
261
349
(493)
117
223
453
Cash and Cash Equivalent at end of the year
508
857
364
481
704
1,157
Investing Activities Addition to property & equipment Proceeds from sale of property & equipment Acquisition of investments and financial assets Acquisition of subsidiaries, minority interest Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Distribution to minority interests Bank charges Cash Flows from Financing Activities
35
Let the falcon guide you Key ratios Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Almarai – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
40.3% 26.7% 18.7% 11.4% 24.4%
39.4% 27.1% 18.5% 10.6% 22.1%
39.2% 26.8% 18.4% 10.5% 21.7%
38.9% 26.3% 18.2% 10.8% 21.2%
38.6% 25.5% 17.7% 10.7% 20.4%
38.4% 24.8% 17.7% 10.7% 19.6%
127 80
127 80
126 80
125 79
124 79
123 78
71.9%
75.8%
70.8%
64.4%
56.9%
44.7%
23.4 4.4 18.8 2.7%
20.1 3.7 16.2 2.1%
17.9 3.3 14.7 2.3%
16.0 2.9 13.3 2.6%
14.6 2.6 12.2 2.9%
13.5 2.4 11.4 3.1%
18.7% 53.4% 2.04 20.4%
18.5% 52.4% 2.14 20.7%
18.4% 55.3% 2.00 20.3%
18.2% 56.6% 1.94 19.9%
17.7% 57.8% 1.88 19.2%
17.7% 58.5% 1.78 18.5%
36
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
37
Fawaz Al Hokair Capex to start yielding results JANUARY 2011
Let the falcon guide you
Al Hokair: Investment Summary (1/2) Capex to start yielding results
Let the falcon guide you
RATING
Outperform
Fair Value (SAR)
Promising outlook for clothing retail market in KSA
50.8
Upside
11.3%
Price (17 Jan 2011)
45.6
Market Cap. (SAR Bn)
3.2
Market Cap. (USD Mn)
851.2
Shares Outstanding
70 Mn
Price 52wk H/L
ALHOKAIR AB
Ticker (Reuters)
• Large young population base, higher income levels and the rising popularity of western clothing amongst the young are fuelling growth in KSA’s clothing retail market • Growing interest of mid and lower income segments in trendy, yet inexpensive, apparel is likely to boost growth in the street retailing format (retail activity in traditional shopping areas)
50.5/ 34.1
Ticker (Bloomberg)
INVESTMENT POSITIVES AND RISKS >
4240.SE
• EIU estimates the clothing and footwear market to rise at a CAGR of 13% from USD7.3 Bn in 2009 to USD13.3 Bn in 2014
AlHokair is well placed to capitalize on KSA’s young demographics and changing preferences • To capitalize on the growth opportunities, AlHokair has launched new initiatives and acquisitions to increase its presence across multiple age groups and income segments • Targeting the low income household segment through Street Retailing format
AlHokair
• Plans to open 70 Zippy stores in the next few years to expand into the children segment
TASI
120
• Wahba acquisition to improve AlHokair’s presence in the 16-25 age group
100
• Bolstered by these new initiatives, revenues are expected to grow at 13% CAGR during FY1114, higher than 12.5% during FY06-10
80 60
EBIT margin is expected to be between 11% and 12% in FY11-FY15, in line with FY10’s 11.6%
40
• Benefiting from restructuring measures and an anticipated decline in rental cost, partially negated by higher sales from the low margin Street retailing business
20 0 Apr-08
Dec-08
Source: Bloomberg
Aug-09
Apr-10
Jan-11
• Retail gross leasable area in KSA is expected to increase at a CAGR of 11.3% to reach 8.3 Mn sq. mt. during 2010-12. This should lower the rental rates for retail space in KSA 39
Al Hokair: Investment Summary (2/2) Al Hokair stock holds upside potential
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
DCF approach
51.0
P/E approach
51.1
P/Sales approach
50.0
Weighted average fair price
50.8
MULTIPLES
FY10A
FY11E
FY12E
3.3
4.9
4.5
P/E (x)
13.8
9.4
10.2
Sales per share (SAR)
29.6
35.1
39.1
1.5
1.3
1.2
EPS (SAR)
P/Sales (x) KEY STATISTICS Revenues (SAR Mn) EBITDA (SAR Mn) EBITDA margins Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
STOCK VALUATION > AlHokair is currently trading at a discount to its peers in terms of current and forward P/E and P/Sales multiples • At the current P/E of 10.8x and current P/Sales of 1.37x, AlHokair trades at a discount of 16.8% and 1.3%, respectively, versus a peer group average of 13.0x current P/E and 1.39x current P/Sales • In terms of forward multiples, Al Hokair trades on a 10.2x FY12E P/E and 1.16x FY12E P/Sales, a discount of 14.9% and 1.2%, respectively, versus a peer group average of 12.0x 2011E P/E and 1.18x 2011E P/Sales We believe the discount to its peer group average is justified, due to lower store productivity (Al Hokair’s 9M10 EBITDA margin of 14.1% is lower than the peer group average of 15.8%) However, we believe that the magnitude of discount should be lower considering that Al Hokair is well placed to capitalize on KSA’s young population base Our DCF, P/E, P/Sales based valuation returns a weighted average fair value of SAR50.8 (11.3% upside at current level) FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
1,899
2,074
2,456
2,740
3,060
3,385
232
318
385
429
475
518
12.2%
15.4%
15.7%
15.6%
15.5%
15.3%
202
232
341
313
344
371
40.1%
26.8%
24.5%
21.1%
16.5%
11.2%
5.1%
6.4%
6.5%
5.9%
6.5%
7.0%
40
Let the falcon guide you
Al Hokair: Overview Largest player in KSA in mid-income branded clothing retail
KEY STATISTICS
FY11E
Revenues (SAR Mn)
2,456
Operating Profit (SAR Mn)
289
Net Profit (SAR Mn)
341
EBITDA Margin (%)
15.7%
Net Margin (%)
13.9%
RoaE (%)
29.8%
Fawaz Abdul Aziz Al Hokair Company, established in 1990, is the largest player in KSA’s mid-income branded clothing retail segment, with more than 50% market share in 2008. The company owns and operates retail outlets, including clothes, footwear and accessories for men, women and children, and home furniture. As of March 2010, it had 864 clothing retail stores located in KSA with a total selling space of 191,530 sq. mt.
BRANDS > It primarily operates as a franchise of leading international brands. Famous brands include: Accessorize, Adams Kids, Banana Republic, Bershka, Charles and Keith, Gap, Marks and Spencer, Promod and Zara
SEGMENT REVENUES (2009) Women's Wear 39%
Department Stores (35%)
BUSINESS OVERVIEW >
BUSINESS MODEL > • •
Export 2%
Push model (e.g. Bershka) - where it acts primarily as the end retailer of the product, and hence, assumes lower risk Pull model (e.g. Marks and Spencer) - where it takes all operations-related decisions in KSA, and thus, assumes greater risk
MARKETS SERVED > Mens' Wear 3%
Source: Company
Shoes 11%
Children’s Wear 10%
Up until 2009, the company operated only in KSA. It opened its first international store outside KSA, in Kazakhstan, in February 2010 41
Investment Theme Rapid expansion in the past led to cannibalization
Let the falcon guide you
Al Hokair is the largest player in the KSA mid-income branded clothing retail
CAPEX (SAR MN)
segment with a market share of more than 50% in terms of sales 300
260
200
Increasing Capex in Expansionary phase CAGR FY05-10: 34.1%
150
129
250
It has invested heavily in expansion initiatives in the last few years 212
195 174
• ~SAR730 Mn in capex during FY07-FY10
167
• Store count grew from 200 in FY03 to 864 in FY10
105
100
• Number of brands rose from 25 in FY03 to >70 brands now
60
50
However, faster than required expansion led to cannibalization
0 FY05
FY06
FY07
FY08
FY09
FY10
FY11
• Sales per sq. mt. fell 12% from SAR11,157 in FY06 to SAR9,800 in FY07
FY12
• Al Hokair had to close 246 stores during FY08-FY09 to arrest the decline in
NUMBER OF STORES AND TOTAL SELLING SPACE No. of stores (LHS)
sales per sq. mt. at its stores
Selling area (RHS)
1,200
Saturation in its existing business also put pressure on the top-line
260
• Revenues grew at a CAGR of 11.9% during FY07-FY10 900
180 1018
600 717 550
680
737
1059
864
140
• Other Saudi retailers (Savola, Almarai and Jarir) observed much higher growth (24.4% on average) As a result, Al Hokair is targeting new segments, such as low income households, and niche segments, such as sports apparel, as well as overseas expansion for
300
100 FY06
('000 sq. mt.)
220
246 unprofitable stores were closed in FY08-09
FY07
FY08
FY09
Source: Company filings, Al Mal Capital analysis
FY10
FY11
FY12
growth 42
Investment Theme Foray into new business segments to boost top-line
Let the falcon guide you
Entering the low-income household segment through the Street Retailing format
• Large stores with higher sales per sq. mt. but lower gross margin, compared to Al Hokair’s existing stores
Overall, Al Hokair is well placed to take advantage of KSA’s young population base through its presence in various age groups and income segments
Expected to open 70 Zippy children's fashion stores over the next few years to expand into the children segment • >40% population in KSA is below 15 years of age Entering niche markets though its partnership with FIFA to capture the market for football lifestyle apparel and accessories in the soccer crazy MENA region Acquisition of Wahba (a retailer of apparel and shoes) in 2009 is expected to
REVENUE FROM VARIOUS SEGMENTS (SAR BN) Al Wahba acquisition
New Initiatives
4 0.3 3 2 1
0.3 0.1 0.0
0.2 0.2
0.4
0.6
• These stores have lower per sq. mt. sales, but higher gross margins, compared
Existing Business
0.3 0.8
improve Al Hokair’s presence in the 16-25 age group
0.3
1.0
to Al Hokair’s existing stores Expansion outside KSA, e.g. Egypt, Jordan and Kazakhstan • The company opened its first store outside KSA, in Kazakhstan, in February 2010
2.3
2.3
2.4
2.5
2.5
2.6
• It also acquired Retail Group Egypt (for SAR21.2 Mn) and Retail Group Jordan (for SAR27.1 Mn) from the parent (Al Hokair Group) in June 2010
0 FY11
FY12
FY13
Source: Company filings, Al Mal Capital analysis
FY14
FY15
FY16
43
Investment Theme Future sales growth likely to be better than FY06-FY10 performance
Let the falcon guide you
Overall, we expect Al Hokair’s revenues to grow at a CAGR of 13.0% during FY11-
REVENUE MIX Existing Business
100%
New Initiatives
FY14
Al Wahba acquisition
• Higher than 12.5% CAGR witnessed during FY06-FY10 6% 2%
9% 6%
80%
9% 13%
9%
8%
8%
19%
23%
26%
• AlHokair’s revenues grew 22.4% YoY from SAR1.1 Bn in 1H FY10 to SAR1.4 Bn in 1H FY11*
60% 40%
92%
85%
78%
Contribution of new initiatives to total revenues is projected to reach 34% in FY16 73%
69%
66%
from 8% in FY11
20%
Wahba acquisition is expected to contribute ~8-9% to revenues during FY12-FY16
0% FY11
FY12
FY13
FY14
FY15
However, integration of Wahba stores is likely to reduce sales per sq. mt. from
FY16
~SAR10,800 in FY10 to ~SAR10,500 in FY11
SALES PER STORE AND SALES PER SQ. MT. Sales per store (LHS)
3,000
stores Sales per sq. mt. are expected to start increasing from FY12 onwards, due to
12
2,600 10
2,400 8
2,200 2,000
SAR '000
SAR '000
14
Integration with Wahba stores
2,800
• These stores have lower per sq. mt. sales, compared to Al Hokair’s existing
Sales per sq. mt (RHS)
higher revenue contribution from Street retailing format stores • Management is targeting average revenue per sq. mt. of SAR 14,000 in the next 3-5 years
6
2009
2010
2011
2012
Source: Company filings, Al Mal Capital analysis
2013
2014
2015
2016
44
*Financial year end is March 2011
Investment Theme Margins had contracted significantly over the past few years
Let the falcon guide you
Gross margin declined from 47.1% in FY06 to 41.5% in FY09
MARGIN DEPENDENCY ON EXCHANGE RATES Gross Margin (LHS)
47.1%
48%
• Rapid expansion led to cannibalization and lower store utilization
USD-EUR Exchange Rate (RHS)
• Weak dollar against Euro. >40% of the merchandise is purchased in Euros
0.9
45.4% 44.1% 44%
42.6%
41.5%
EBIT margin contracted from 18.8% in FY06 to 8.8% in FY09
0.8
• On account of lower gross margin, coupled with increase in rental costs from
40%
10% of revenues in FY07 to 13% in FY09
0.7 36%
• Depreciation also increased from 2.8% of revenues in FY07 to 3.4% in FY09, 32%
0.6 FY06
FY07
FY08
FY09
due to high capex
FY10
However, since then, the EBIT margin improved to 11.6% in FY10 and further rose
PEERS’ EBITDA MARGIN (2008-9M10 AVERAGE) Developed market retailers
30% 25% 20% 15% 10% 5% 0%
to 13.4% in 1H FY11*. Gross margin also increased to 45.4% in FY10
Emerging market retailers
• Helped by restructuring measures and the dollar gaining against the euro in FY10 (average USD/EUR exchange rate of 0.74 in FY10 compared to 0.70 in
Peer average 16.7%
FY09)
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
Pantaloon Retail
Alhokair
Lojas Renner
Sprider Stores
Provogue (India)
Pumpkin Patch
Macy's Inc
Kohl's Corp.
Limited Brands
The Gap
Inditex SA
Benetton
Kappahl Holding
Aeropostale
Reitmans (Canada)
Next PLC
H &M
Despite this, AlHokair’s EBITDA margin (averaged 13.9% during 2008-9M10) is lower than the peer group average of 16.7% . In 9M10, AlHokair’s EBITDA margin stood at 14.1% compared to 15.8% for peer group • This can be attributed to lower productivity at Al Hokair’s stores (average revenue per sq. mt. of ~USD 3,000 in FY10) compared to ~USD 4,000 for peers 45
*Financial year end is March 2011
Investment Theme Restructuring likely to help stabilize margins
Let the falcon guide you
Going forward, the gross margin for the existing business is expected to improve,
SEGMENT-WISE GROSS MARGIN
albeit in a small way 60%
• Primarily driven by revenue contribution from Wahba stores, which have higher margins (~50 - 52%), and increased efficiency from new stores
55% 50% 50% 45%
• The dollar weakening against the euro, though, is likely to raise the cost of goods, thereby partially offsetting margin gains
45%
40%
37%
However, at the overall company level, gross margin is expected to marginally decline from 45.6% in FY11 to 45.1% in FY16 as higher sales from the low margin
30%
Existing business
Al Wahba
Zippy stores
FIFA
Street Retailing
GROSS MARGIN AND EBIT MARGIN 48%
Gross margin (LHS)
EBIT margin (RHS)
18% 16%
14% 12% 10% 42%
8% 40%
business. • Street retailing stores target low-income customers and hold more private
46%
44%
Street retailing business is likely to negate the margin expansion from the existing
6%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Company, Jiwar Real Estate Management & Marketing Co.. Al Mal Capital analysis
label branded clothes compared to existing Al Hokair stores EBIT margin to benefit from decline in rental cost as % of revenues • Rental rates are likely to fall due to the increase in retail space in KSA • Retail gross leasable area in KSA is expected to increase at a CAGR of 11.3% to reach 8.3 Mn sq. mt. during 2010-12, according to Jiwar Real Estate
Management & Marketing Co. We project EBIT margin to stay between 11%-12% in FY11-FY15, broadly in line with FY10 levels (11.6%) 46
Let the falcon guide you
Valuation Valuation at a deep discount to peer average Price/Sales per share
Market Cap.
Price/EPS
Company
Country
Al Hokair Aeropostale Inc Benetton The Gap Inc H & M Hennes & Mauritz AB Inditex SA Kappahl Holding AB Kohl's Corp.
KSA US Italy US Sweden Spain Sweden US
836 2,201 1,166 12,484 47,896 47,888 519 15,292
1.4 0.9 0.4 0.9 3.3 3.0 0.7 0.9
1.3 0.9 0.4 0.9 3.1 2.9 0.7 0.8
1.2 0.9 0.4 0.8 2.8 2.6 0.7 0.8
10.8 8.9 6.8 10.4 18.1 22.1 9.3 14.1
9.4 9.2 8.2 10.6 17.6 21.4 10.2 13.5
10.2 9.3 8.7 10.7 16.5 19.2 8.5 12.1
US
9,344
1.0
1.0
1.0
14.1
14.3
12.9
16.4 9.6 12.4 11.4 NM 9.6 NM 12.1 13.0 -16.8%
11.6 9.4 11.6 11.0 NM 9.4 15.3 22.8 13.1 -28.4%
10.3 9.1 10.2 10.4 17.2 7.9 11.8 17.0 12.0 -14.9%
Limited Brands Inc
(USD Mn)
Current
2010
Fwd 2011
Current
Macy's Inc US 9,842 0.4 0.4 0.4 Next PLC UK 5,902 1.1 1.1 1.1 Pumpkin Patch Limited NZ 225 0.8 0.7 0.7 Reitmans (Canada) Limited Canada 974 0.9 0.9 0.9 Sprider Stores SA Brazil 27 0.1 0.1 0.1 Lojas Renner SA Brazil 1,559 1.0 1.0 0.9 Pantaloon Retail (India) Ltd India 862 1.4 0.4 0.3 Provogue (India) Limited India 141 2.1 N/A 1.1 Peer group average 1.4 1.3 1.2 Al Hokair Al Hokair is trading at a steep discount to its peers in terms of current and forward P/E multiples premium (discount)% -1.3% 1.5%and P/Sales-1.2%
2010
Fwd 2011
We believe the discount to its peer group average is justified due to lower store productivity (Al Hokair’s 9M 2010 EBITDA margin of 14.1% is
lower than the peer group average of 15.8%) However, we believe that the magnitude of discount should be lower considering that Al Hokair is well placed to capitalize on KSA’s young
population base Source: Thomson Reuters, Bloomberg, Company filings, Al Mal Capital analysis
47
Valuation Al Hokair stock holds upside potential
Let the falcon guide you
STOCK PRICE (SAR) AND P/E BAND
HISTORICAL P/E MULTIPLE
75
20 13x
67.3
11x
58.3
65
18 16
55 45
9x
49.3
7x
40.4
14
35
12
25
10
15
8
Apr-08
Nov-08
Jul-09
Mar-10
Nov-10
Jul-11
Apr-08
Mar-12
2 year average P/E 12.1x
Nov-08
Jul-09
Mar-10
Nov-10
Jul-11
Mar-12
Current P/E multiple (10.8x) is significantly lower than historical 1-year P/E average of 13.1x and historical 2-year P/E average of 12.1x We believe the stock could trade at a multiple higher than its historical 2-year P/E average of 12.1x
• Primarily due to its substantial earnings potential on account of past capital investment • FY10-FY14 EPS CAGR of 12.5% compared to negative CAGR of 2.2% during FY07-10 Considering these factors, we believe that the stock offers 11.3% upside potential at the current level
Source: Bloomberg, Company filings, Al Mal Capital analysis
48
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
2HFY11*
FY12
FY13
FY14
FY15
FY16
100
304
335
362
391
405
Depreciation and amortisation
47
111
125
139
153
167
Change in working capital
(6)
(27)
(34)
(36)
(31)
(23)
Capex
(167)
(167)
(183)
(179)
(170)
(179)
FCFF
(26)
221
243
286
343
370
Discount factor
0.99
0.93
0.84
0.75
0.68
0.61
PV of FCFF
(26)
205
203
216
234
227
NOPLAT
Sum of PV of FCFF
1,059
Terminal value
4,285
PV of terminal value
2,634 234
Add: Investments Less: Net debt and minority interest
(358)
Total Equity Value
3,568
Fair value per share
51.0
VALUATION INPUTS Risk Free Rate
2.7%
Cost of debt
5.0%
Beta
1.03
Effective tax rate
4.3%
Risk Premium
8.5%
Post tax cost of debt
4.8%
Cost of Equity
11.5%
WACC
10.7%
Terminal Growth Rate
2.0%
49
* Financial year end is March
Let the falcon guide you
Valuation Comparative Valuation
VALUATION METRICS P/E Multiple P/E Multiple
P/Sales per share 13.1x
P/Sales per share multiple
1.5x
FY 12 EPS
4.47
FY12 Sales per share
39.1
Target price
58.6
Target price
57.2
Fair price
51.1
Fair price
50.0
Current price
45.6
Current price
45.6
Upside/Downside
9.6%
Upside/Downside
12.1%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
50.0%
51.0
25.5
Fair price using P/E multiple
25.0%
51.1
12.8
Fair price using P/Sales multiple
25.0%
50.0
12.5
Weighted average fair price
50.8
Current price
45.6 11.3%
Change from current levels
50
Let the falcon guide you
Valuation Assumptions
Street Retailing (retail activity in traditional shopping areas) • 12 Street Retailing format stores to be opened during FY11-FY16
New Business
• Assumed to be very large stores with store size of 4,000 sq. mt. (~225 sq. mt. for existing stores) • Higher sales per sq. mt of SAR 18,000
Zippy stores (children's fashion stores including clothes, footwear and accessories)
• 65 Zippy stores to be opened during FY11-FY16 • Sales per sq. mt of SAR 12,000, in line with sales per sq. mt in Al Hokair’s existing business • Average store size of 100 sq. mt.
FIFA stores • 12 large FIFA stores and 34 small FIFA stores to be opened during FY11-FY16 • Sales per sq. mt to be lower (SAR 8,000) due to its niche target segment • Average store size of 1,000 sq. mt.
51
Valuation Assumptions
Let the falcon guide you
Selling area to increase at a CAGR of 7.7% from ~191,000 sq. mt. in FY10 to ~300,000 sq. mt. in FY16
Existing Business
Sales per sq. mt. to grow 2% per annum • In line with per capita income growth
REVENUE MIX
• Average sales per sq. mt. for existing Al Hokair stores is SAR 12,000
Existing Business
100%
6% 2%
New Initiatives
9% 6%
80%
9% 13%
Al Wahba acquisition
9%
8%
8%
19%
23%
26%
Store expansion • 10-15 new stores (including domestic and international) to be opened each year under existing formats • Total number of stores to reach 1,018 in FY11 including 125 stores to be
60% 40%
92%
85%
78%
73%
69%
66%
FY13
FY14
FY15
FY16
acquired from the parent group (Al Hokair Group)
20%
0% FY11
FY12
Existing business’ contribution to total revenues is expected to decline to 66% in FY16 from 92% in FY11
52
Let the falcon guide you
Valuation Assumptions
Gross margins for existing store format expected to rise from 45.7% in FY11 to 46.7% in FY16 • Driven by revenue contribution from Wahba stores, which have higher margins (~50% - 52%), and
Margins
increased efficiency of new stores • However, any dollar depreciation with respect to the Euro could drive up cost of goods, thereby partially negating margin growth
Gross margins for new store formats are expected to be high for niche style stores (e.g. FIFA) and low for the Street retailing format • FIFA and smaller FIFA stores – 55% gross margin • Street retailing - ~37%-38% gross margin
• Zippy stores – 45% gross margin (In line with existing store formats)
Rental cost (per sq. mt.) projected to decline 2% in FY12 and remain stable in FY13, due to an oversupply in retail space. Thereafter, we expect rental to grow at 3% per annum, in line with inflation
Total capex of SAR1.1 Bn expected during FY11-16 • Of the total capex, 30% is assumed for expansion and the rest 70% for maintenance
Capex
We have assumed maintenance capex as percentage of sales to be 4%
Capex on opening of new stores is assumed at 2,800 SAR per sq. mt., growing at 5% per year
70% of the capex to be funded through debt 53
Valuation Sensitivity Analysis
Let the falcon guide you
70
SAR
60
55.0 45.1
50 44.0
44.0
45.4
46.7
56.4
56.7
57.8
57.8
50.8
40
30 Bea r Ca s e
Rental Gros s ma rgi n USD fa l l s by Sa l es growth growth i s 1% for new 5% a ga i ns t ra te per s tore hi gher bus i nes s i s Euro i s 1% l ower 5% l ower
Ba s e Ca s e
Sa l es growth USD Gros s ma rgi n Rental ra te per s tore a ppreci a tes for new growth i s 1% i s 1% hi gher by 5% a ga i ns t bus i nes s i s l ower Euro 5% hi gher
Bul l Ca s e
Bear case:
Base case:
Bull case:
Sales per store growth rate is lower by 1%
Sales per store growth rate is 1% in FY11 and 2%, beyond
Sales per store growth rate is higher by 1%
USD-EUR exchange rate stable at 0.77
USD-EUR exchange rate rises by 5%
Gross margin for new business initiatives is 45% for Zippy stores, 37% for Street retailing stores and 55% for FIFA stores
Gross margin for new business initiatives is higher by 5%
USD-EUR exchange rate falls by 5% Gross margin for new business initiatives is lower by 5% Growth in rental per sq. meter is higher by 1%
Rental rate per sq. mt. to fall by 2% in FY12, due to oversupply, and then grow between 2% and 3% per annum Source: Al Mal Capital analysis
54
Growth in rental per sq. meter is lower by 1%
Let the falcon guide you
Al Hokair - Financial Statements Income Statement
Income statement (SAR Mn) * Total Revenue Growth (%) Cost of Revenue Gross Profit Gross Profit Margin (%) Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%) Profit from associates Other income Finance charges - net Net Income before tax Tax Minority Interest Net Income after tax & MI Net Margin (%) Adjusted Net income Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%) * Year end is March
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
1,899 20% (1,111) 788 41.5% (65) (45) (511) 232 12.2% 168 8.8%
2,074 9% (1,132) 943 45.4% (78) (50) (574) 318 15.4% 241 11.6%
2,456 18% (1,336) 1,120 45.6% (96) (60) (675) 385 15.7% 289 11.8%
2,740 12% (1,486) 1,255 45.8% (111) (67) (760) 429 15.6% 317 11.6%
3,060 12% (1,663) 1,397 45.6% (125) (74) (848) 475 15.5% 350 11.4%
3,385 11% (1,849) 1,536 45.4% (139) (82) (936) 518 15.3% 378 11.2%
13 42 (12) 210 (7) 202 10.7% 172 2.89 1.75 60.5%
(30) 45 (13) 243 (11) (0) 232 11.2% 194 3.31 2.00 60.5%
24 67 (18) 361 (15) (5) 341 13.9%** 304 4.87 2.95 60.5%
26 11 (20) 334 (17) (5) 313 11.4% 313 4.47 2.70 60.5%
29 11 (22) 367 (18) (5) 344 11.2% 344 4.91 2.97 60.5%
31 11 (24) 397 (20) (5) 371 11.0% 371 5.31 3.21 60.5%
55
** Jump due to one off dividend of SAR37Mn from associates
Let the falcon guide you
Balance sheet (SAR Mn) * Shareholders' Equity Minority Interest
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Inventories, net Prepaid expenses and others Due from related parties Non Current Assets Plant, Property & Equipment Investment in companies equity Intangible Assets Other Non Current Assets Total Assets * Year end is March
Al Hokair - Financial Statements Balance Sheet FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
863 -
1,094 16
1,192 21
1,307 25
1,453 30
1,608 36
29 29 698 156 172 370 1,590
338 300 38 439 150 219 70 1,887
419 374 45 594 176 258 159 2,225
441 390 51 688 197 288 203 2,462
476 418 58 764 220 322 221 2,722
582 519 64 768 244 358 166 2,994
164
262
255
282
316
353
673 24 365 128 157 916 453 248 52 163 1,590
883 77 476 155 175 1,004 605 236 139 24 1,887
1,105 240 507 182 175 1,120 729 260 132 2,225
1,260 317 564 204 175 1,202 792 285 125 2,462
1,434 400 631 228 175 1,288 856 314 117 2,722
1,634 504 702 253 175 1,359 904 345 110 2,994
56
Let the falcon guide you
Al Hokair - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn) * Operating Activities Net Profit before tax & minority interest Depreciation & Amortization Changes in operating assets & liabilities Zakat paid Other adjustments Cash Flows from Operating Activities
Investing Activities Addition to property & equipment Other investments Consolidation/deconsolidation of a subsidiary Other cash outflows Cash Flows used in Investing Activities Financing Activities Equity capital raised Net change in debt Dividend paid Other financing cash flow Cash Flows from Financing Activities Net change in Cash and Cash Equivalents Cash acquired from subsidiary Cash and Cash Equivalent at end of the year * Year end is March
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
210 65 131
243 78 (43)
0 21 426
0 37 314
361 96 7 (15) (16) 433
334 111 (27) (17) (20) 381
367 125 (34) (18) (22) 418
397 139 (36) (20) (25) 455
(170) (214)
(148) (18)
0 4 (379)
(80) (2) (248)
(212) 24 0 0 (188)
(167) 0 0 0 (167)
(183) 0 0 0 (183)
(179) 0 0 0 (179)
0 268
0 0
0 162
0 60
0 46
0 46
(245) (74) (50)
(20) (20)
(243) (1) (81)
(198) 0 (137)
(199) 0 (152)
(216) 0 (171)
(3) 0 24
46 7 77
163 0 240
77 0 317
83 0 400
104 0 504
57
Let the falcon guide you
Al Hokair - Financial Statements Ratio Analysis
Key ratios *
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity
41.5% 12.2% 10.7% 14.3% 22.9%
45.4% 15.4% 11.2% 13.3% 23.7%
45.6% 15.7% 13.9% 16.6% 29.8%
45.8% 15.6% 11.4% 13.4% 25.0%
45.6% 15.5% 11.2% 13.3% 24.9%
45.4% 15.3% 11.0% 13.0% 24.3%
120 86
154 122
139 107
129 97
124 92
120 88
40.1%
26.8%
24.5%
21.1%
16.5%
11.2%
15.8 1.7 15.2 5.1%
13.8 1.5 10.9 6.4%
9.4 1.3 9.1 6.5%
10.2 1.2 8.1 5.9%
9.3 1.0 7.2 6.5%
8.6 0.9 6.5 7.0%
10.7% 119.5% 1.84 23.5%
11.2% 109.9% 1.72 21.2%
13.9%** 110.4% 1.87 28.6%
11.4% 111.3% 1.88 23.9%
11.2% 112.4% 1.87 23.7%
11.0% 113.1% 1.86 23.1%
Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/S x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE * Year end is March
58
** Jump due to one off dividend of SAR37Mn from associates
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
59
Savola Group Profitability missing in strategy JANUARY 2011
Let the falcon guide you
Savola: Investment Summary (1/2) Scale-cost leadership strategy impacting bottom-line growth
Let the falcon guide you
Market Perform
RATING Fair Value (SAR)
35.1
Upside
7.7%
Price (17 Jan 2011)
32.6
Market Cap. (SAR Bn)
16.3
Market Cap. (USD Bn)
4.3
Shares Outstanding
SAVOLA AB
Ticker (Reuters)
2050.SE
Savola
140
• EIU estimates the Food, Drinks & Tobacco market to rise at 8% CAGR from USD37.2 Bn in 2009 to USD55.8 Bn in 2014
38.3/28.8
Ticker (Bloomberg)
• Moreover, the rising popularity of modern retail, a highly fragmented market and rapid urbanization offer ample growth opportunities for large established players in the Kingdom Market share gains using scale-cost leadership strategy • Despite positive industry fundamentals and a strong position in the MENA food & retail sector, Savola’s top-line is expected to grow at a modest 7% CAGR during 2010-14 • Savola is expected to keep price hikes at a minimum to maintain price leadership. Manufacturing sales growth, hence, should be led by volume expansion and market share gains
TASI
• Retail revenue growth should be backed by store expansions and increase in sales per sq. mt. at newly added selling spaces
120
100 80
Strategic drawback in terms of lower margins compared to global peers
60
• Lack of vertical integration means reliance on costlier global raw material supplies and margin volatility. Inability to pass this cost to customers has dragged its margins below peers.
40 20 0 Jan-08
Outlook for the food & retail sector in KSA is promising
• Robust economic growth, a large population base and the resultant rise in household expenditure are fuelling growth in KSA’s food & retail sector. Pilgrimage tourism provides an additional driver to retail sales in KSA (7.7 Mn tourists in 2008, nearly 14 Mn by 2018E)
500 Mn
Price 52wk H/L
INVESTMENT THEME AND RISKS >
Oct-08
Jul-09
Apr-10
Jan-11
Margins likely to improve on higher utilization • Operating margin is likely to expand from 3.7% in 2010 to 5.1% in 2014, driven by maturity of startup businesses and new stores
Source: Bloomberg
61
Savola: Investment Summary (2/2) Future earnings growth offers limited upside potential
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
STOCK VALUATION > At the current level, the stock looks fairly valued. The stock has gained 9.0% in 2010, as against a gain of 4.0% posted by the Tadawul All Share Index
DCF approach
34.6
SOTP approach
35.6
P/E approach
35.2
Forward P/E multiple of 13.3x is at a premium of 5.1% to its peer group average of 12.6x on the basis of FY11 EPS
Weighted average fair price
35.1
We believe this premium is unjustified on account of lower FY10-FY12E EPS CAGR of 10.0% compared to the peer group average of 13.7% FY10-FY12E EPS CAGR Also, Savola’s financial performance in the last few quarters could negatively impact investor sentiment. Over the last 3 quarters, Savola has missed analysts’ consensus net income estimate by 13%-16%
MULTIPLES
FY09A
FY10E
FY11E
1.9
2.3
2.5
Adj. P/E (x)*
17.6
14.3
13.3
EBIT (SAR Mn)
945
759
887
EV/EBIT (x)
21.4
27.2
23.3
Adj. EPS (SAR)*
Our DCF, SOTP and P/E based valuation methodologies return a weighted average fair value of SAR35.1 (7.7% upside at current level) Potential catalyst: Savola holds investments worth SAR6.1 Bn (at book value). We have not forecasted any gains from sale of the investment portfolio. Any related cash inflow could allow for upside
KEY STATISTICS
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Revenues (SAR Mn)
17,917
20,536
21,945
23,638
25,398
26,918
EBITDA (SAR Mn)
1,641
1,490
1,681
1,900
2,135
2,326
EBITDA margins
9.2%
7.3%
7.7%
8.0%
8.4%
8.6%
952
1,085
993
1,106
1,273
1,379
56.4%
58.4%
55.0%
51.2%
42.5%
33.8%
4.3%
3.3%
3.0%
3.4%
3.9%
4.2%
Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
62
*Adjusted for income from the sale of investments
Savola: Overview Largest Food and Grocery retailer by sales in the KSA
Let the falcon guide you
KEY STATISTICS
FY10E
Revenues (SAR Mn)
20,536
Operating Profit (SAR Mn)
759
Net Profit (SAR Mn)
1,085
EBITDA Margin (%)
7.3%
Net Margin (%)
5.3%
RoaE (%)
15.0%
PRODUCT REVENUES (2009) Real Estate 1%
Edible Oil 32%
Retail 43%
BUSINESS OVERVIEW > Savola Group, established in 1979, is a conglomerate with subsidiaries operating in edible oils, sugar, retail, dairy products, real estate and plastics. It is the second largest Food and Grocery retailer by sales in the Middle East and market leader in KSA with 8.5% share in 2009. Famous
brands are Afia, Arabi, Ladan, Yudum in the edible oil segment; Al Osra, Ziadah and Safa in the sugar business; Panda and Hyper-Panda in retailing.
BUSINESS ACTIVITIES > • • • •
Production of edible oils, sugar, juices, tomato pastes, dairy and bakery products Manufacturing of plastic packaging products Operating super/hypermarkets, department stores, fast food and restaurants Real estate investment and development (residential and commercial)
STRATEGIC INVESTMENTS > Savola holds strategic investment in Almarai (29.9% stake), Herfy Foods (47.6% stake), Knowledge Economic City (6.4% stake), which are listed on the Saudi stock exchange.
MARKETS SERVED >
Plastics 4% Source: Company
Sugar, 20%
KSA, other GCC countries, Egypt, Iran, Turkey, Morocco and Algeria are the key end markets. KSA, Egypt and Iran accounted for 66.0%, 11.7% and 10.2%, respectively, of Savola’s revenues in 2009. 63
Investment Theme Long-term strategy based on scale-cost leadership
Let the falcon guide you
Leadership position in most of its key markets - strong brand image
MARKET SHARE FOR EDIBLE OIL
• Second largest Food and Grocery retailer in terms of revenue in the Middle
75%
East and market leader in KSA (8.5% market share in 2009)
60%
50%
42%
• More than 60% market share in KSA in terms of value in Sugar and Edible Oil
40%
segments
27% 20%
25%
20%
15%
15%
using scale-cost leadership Morocco
Sudan
Kazakhstan
Turkey
Algeria
Iran
Egypt
KSA
0%
30
Sugar Sales
Savola is better placed to command volume-based rebates from suppliers Edible Oils Sales
Co., Delta Sugar and AJWA group)
20 4.1
4.0
3.6
15 2.5
10
0
• Benefiting from its large size relative to regional peers (e.g. Al Khaleej Sugar
Retail Sales
25
5
• The company is strengthening its network both organically and through acquisitions (e.g. Giant stores) to expand market share
REVENUE BY PRODUCTS
SAR Bn
Long-term strategy to win market share from weaker rivals in fragmented markets
1.9 3.7
1.9 3.9
7.4
5.7
7.9
4.2 8.4
4.5 8.7
4.7 9.0
• Raw material cost, as % of revenues, is ~70% for retail companies • Economies of scale in other cost areas as well, such as manufacturing, marketing and distribution
4.6
3.2
4.2
6.1
7.9
2006
2007
2008
2009
8.4
9.2
10.2
11.2
12.3
Well diversified revenues on product basis
2010E 2011E 2012E 2013E 2014E
Source: Company filings, Al Mal Capital analysis
64
Investment Theme Retail segment growth driven by organic expansion
Let the falcon guide you
Retail revenue is forecasted to grow at 9.9% CAGR during 2009-14
RETAIL SEGMENT REVENUES
Mainly driven by expansions in the number of stores
14
CAGR: 9.9%
12
11.2
SAR Bn
10 8
CAGR: 35.6%
7.9
9.2
10.2
• Expected to increase store count from 114 in 2009 to 160 by 2012. Selling area is project to grow at 10.6% CAGR from 405,000 sq. mt. in 2009 to 550,000 sq. mt. in 2012
6.1
6 4
8.4
12.3
3.2
Focusing on opening Hypermarkets as compared to supermarkets
4.2
• In the long run, hypermarkets have higher sales per sq. mt. as they sell higher
2
value products (e.g. electronics and furniture)
0 2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
• Although gains take longer to accrue (~24 months compared to ~12 months for a supermarket) Increase in utilization (sales per sq. mt.) of newly added selling space should also lead to retail revenue growth in 2011 • 102,000 sq. mt. selling area added in 2009 (~34% over 2008)
Source: Company filings, Al Mal Capital analysis
65
Investment Theme Modest top-line growth expected, despite market share gains
Let the falcon guide you
Manufacturing revenue is forecast to grow at 4.8% CAGR during 2010-14
MANUFACTURING SEGMENT REVENUES CAGR: 4.8%
16
14 12
12.3
CAGR: 18.9%
SAR Bn
10
13.7
14.8
6.0
• Primarily driven by volume expansion on account of market share gains in existing markets by passing on cost benefits from economies of scale to consumer
10.1
• Improved capacity utilization from start up businesses (e.g. Algeria)
7.8
8
6
12.9
14.3
6.3
• Savola is expected to keep price hikes at a minimum to achieve market share
4
gains. Selling price in the sugar segment likely to decline in 2011 on global
2
oversupply concerns
0
2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
Overall, we expect Savola’s revenues to grow at 8.5% CAGR during 2009-14 • The company’s revenues grew 16.4% YoY from SAR13.1 Bn in 9M09 to SAR15.2
TOTAL REVENUES
Bn in 9M10 30
CAGR: 8.5%
25
SAR Bn
20
CAGR: 25.4%
21.9
26.9
25.4
17.9
13.8
15
10
20.5
23.6
9.1
10.4
2006
2007
5 0 2008
2009
2010E 2011E 2012E 2013E 2014E
Source: Company filings, Al Mal Capital analysis
66
Investment Theme Margins are lower compared to global peers
Let the falcon guide you
Despite economies of scale and lower tax rates, Savola’s net margin is lower than
EBIT MARGINS OF GLOBAL PEERS
global peers and was 200bps lower than Al Othaim in 1H10
Archer Daniels Midland
EBIT Margin-Edible Oil
China Agri-Industries
Low margins are due to a variety of reasons including:-
Corn Products Intl. Savola - Edible Oil
Average: 15.0%
9.0%
Thai Vegetable Oil
Savola’s strategy to pass on cost benefits from economies of scale to end customers to gain market share
K.S.Oil Sampoerna Agro Tbk
Reliance on global supplies of raw oil and cane raw sugar, the prices of which have
United Plantation Berhad
risen 15-30% YoY, as the business is not vertically integrated
IJM Plantations
0%
10%
Khon Kaen Sugar
20% 30% 40% EBIT Margins - Sugar
• Edible oil – buys raw oil and refines it into finished product • Sugar –imports raw sugar and refines it into white sugar
Maryborough Savola - Sugar
Average: 13.2%
9.5%
However, Savola could not pass the entire rise in raw material cost to end
Delta Sugar Illovo Sugar
customers as price leadership is essential for a mass grocery retailer
Savola - Retail 1% 0% 10% Dixy Group Cia. Brasileira de Dist. Sultan Center X5 Retail Group Comercial Mexicana Organizacion Soriana Seventh Continent Cencosud SA Magnit Wal-Mart de Mexico 0%
10%
Margin -40% Retail 20% EBIT30%
• Consumers in two main end-markets - Saudi and Egypt, are extremely price conscious, due to modest income levels compared to their GCC peers, such as UAE and Qatar
Average: 6.6%
High operating and integration costs due to business expansion
• EBIT margin of 4.6% for start-ups compared to 10.4% for mature businesses in the manufacturing segment in 2009 20%
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
30%
40%
67
Investment Theme Margins to expand, but remain below those of 2009
Let the falcon guide you
Going forward, EBIT margin is likely to improve from 3.7% in 2010 to 5.1% in 2014
EXPANSION IN GROSS AND EBIT MARGIN
primarily driven by maturity of startup businesses Gross Margin (LHS)
EBIT Margin (RHS)
20%
6%
• EBIT margin in sugar is expected to rise from 5.9% in 2010 to 7.5% in 2014. The
16%
5%
new plant in Egypt will use cheaper local beet sugar as raw material from 2012
4%
• Increasing number of new stores focused on the hypermarket format which
12%
3% 8%
2%
4%
1%
0%
0%
2006
2007
2008
2009 2010E 2011E 2012E 2013E 2014E
GROSS MARGIN AND KEY RAW MATERIAL PRICES Gross margin (RHS)
sugar
oil
350
20%
300 (Rebased)
However, EBIT margin is expected to remain lower than the level witnessed in 2009 (5.3% in 2009) • Margins in 2009 were supported by a YoY decline in average raw material prices, not fully passed on to end customers. Since then, raw oil and cane sugar prices have risen 15-30%
• This, along with Savola’s inability to pass the entire rise in input cost to consumers, should keep margins below that in 2009
16%
250 200
12%
150
8%
100 50 0
Dec-06
take up to two years to reach peak sales volume
Sep-07
Jun-08
Mar-09
Source: Bloomberg, Company filings, Al Mal Capital analysis
Dec-09
Overall, we forecast EBIT margin of 3.7% in 2010 and 4.0% in 2011 • In 9M10, EBIT margin stood at 3.5% compared to 5.3% in 9M09
4%
Moreover, reliance on global commodity prices might lead to volatility in margins,
0%
as had happened in 4Q08, when gross margin fell to 6.9% due to high inventory
Sep-10
provisions led by a steep fall in raw oil prices 68
Investment Theme Historically, net income has benefited notably from sale of investments
Let the falcon guide you
Historically, Savola has generated significant income from the sale of investments.
ADJUSTED PBT AND CONTRIBUTION OF GAIN FROM INVESTMENTS TO PBT Adjusted PBT
• During 2006-09, the company generated a SAR2.0 Bn profit on sale of
1,600
(PBT) during this period)
70% 60%
1,200
SAR Mn
investments (contributed 46.4% to profit before zakat and minority interest
Contribution of gain from investments to PBT
• In January 2010, Savola floated 30% of its stake in fast food chain, Herfy,
50%
recording SAR196 Mn as capital gain
40%
800
30% 20%
400
Adjusting for investment capital gains, PBT grew at a CAGR of 10.1% during 200609
10% 0
0% 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Savola still holds investments worth SAR6.1 Bn (at book value) • This includes SAR2.7 Bn investment in Almarai, SAR223 Mn in Herfy Foods, SAR196 Mn in Emaar the Economic City and other investments in certain real estate companies (for e.g. Kinan International for Real Estate Development) • Assuming no income from sale of these investments, adjusted PBT is expected to grow at a CAGR of 13.3% during 2009-14, led by margin expansion and revenue growth • We expect any capital gain from sale of investments to boost Savola’s earnings
Source: Company filings, Al Mal Capital analysis
69
Valuation Future earnings growth offers limited upside potential
Let the falcon guide you
PEER GROUP MULTIPLE
STOCK PRICE (SAR) AND P/E BAND 50
49.1
20x
39.2
16x
34.3
14x
30
20
10
0 Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Country
44.2
18x
40
Company
Jul-11
Dec-11
Savola K.S.Oil IJM Plantations Corn Products Intl. Delta Sugar Illovo Sugar Ltd Sultan Center Seventh Continent Cia. Brasileira Dist Peer average Savola premium (discount) %
KSA India Malaysia U.S. Egypt South Africa Kuwait Russia Brazil
Mkt Cap (USD Mn) 4,267 414 811 3,530 496 1,862 373 610 6,417
PE Current
2010
Fwd 2011
14.8 13.7 26.7 18.6 17.9 21.3 NM 11.3 20.5 19.3
14.3 7.8 22.2 16.8 8.7 17.9 10.4 16.0 19.4 15.5
13.3 7.8 20.2 15.5 9.7 15.0 11.5 8.6 12.4 12.6
-23.7%
-7.4%
5.1%
At the current level, the stock looks fairly valued. The stock has gained 9.0% in 2010 as against a gain of 4.0% posted by the Tadawul All Share
Index • Forward P/E multiple of 13.3x at a premium of 5.1% to its peer group average of 12.6x on the basis of FY11 EPS • However, current P/E multiple of 14.8x is much below the historical 1 year P/E average of 16.8x Also, Savola’s financial performance in the last few quarters could negatively impact investor sentiment. During the last 3 quarters, Savola has
missed analysts’ consensus net income estimate by 13%-16% Potential catalyst: We have not forecasted any gains from sale of the investment portfolio. Any related cash inflow could allow for upside Source: Thomson Reuters, Bloomberg, Al Mal Capital analysis
70
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
NOPLAT
204
824
970
1,140
1,276
Depreciation and amortization
288
794
857
910
953
Change in working capital
(217)
(167)
(199)
(155)
(130)
Capex
(458)
(809)
(856)
(563)
(592)
FCFF
(183)
643
772
1,331
1,508
1.00
0.95
0.86
0.78
0.71
(183)
612
666
1,039
1,066
Discount factor PV of FCFF 3,200
Sum of PV of FCFF Terminal value
18,231
PV of terminal value
12,887 7,168
Add: Investments Less: Net debt and minority interest
(5,942)
Total Equity Value
17,313
Fair value per share
34.6
VALUATION INPUTS Risk Free Rate Beta Risk Premium
2.7% 1.1 8.5%
Cost of Equity
12.1%
Cost of debt Effective tax rate Post tax cost of debt
5.0% 7.0% 4.7%
WACC Terminal Growth Rate
10.4% 2.0%
71
Let the falcon guide you
Valuation SOTP Method
Segment
Valuation Method
Edible Oil
EBIT Multiple
473
13.0
6,137
Sugar
EBIT Multiple
243
12.1
2,932
Plastics
EBIT Multiple
66
19.2
1,264
Retail
EBIT Multiple
109
19.0
2,074
Franchising
EBIT Multiple
1
19.0
27
(33)
19.2
(642)
Corporate expenditure
Multiple
EBIT (FY10E) (SAR Mn)
DCF
EV (SAR Mn)
Investment in associates Herfy (49% stake)
Market Value
1,005
1.0
1,005
Almarai (29.9% stake)
Market Value
7,702
1.0
7,702
Book Value
1,555
1.0
1,555
AFS Investments
Book Value
835
1.0
835
Other investments (mainly land bank)
Book Value
847
1.0
847
Others
Total EV (SAR Mn)
23,738
Less: Net Debt
(4,378)
Less: Minority Interest
(1,536)
Fair Market cap. (SAR Mn)
17,824
Shares in issue (Mn)
500
SOTP fair price (SAR)
35.6 72
Valuation Comparative Valuation
Let the falcon guide you
VALUATION METRICS P/E Multiple Premium / (Discount) to peer group
-20%
P/E Multiple
15.5
TTM EPS
2.3
Fair price
35.2
Current price
32.6
Upside/Downside
7.9%
WEIGHTED AVERAGE PRICE (SAR)
Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
40.0%
34.6
13.8
Fair price using SOTP
40.0%
35.6
14.3
Fair price using P/E multiple
20.0%
35.2
7.0
Weighted average fair price
35.1
Current price
32.6
Change from current levels
7.7%
73
Let the falcon guide you
Valuation Assumptions Sales volume
Manufacturing segment
180,000 MT additional sugar production capacity is expected in 2012, due to the commencement of operations at Alexandria Sugar Co. • Production of white sugar from domestically grown sugar beet
Utilization rates should gradually improve, particularly in start-up businesses (e.g. Algeria)
• Market share gains are expected in existing markets by passing on the cost benefit from economies of scale to consumers Selling price
Double-digit growth in selling price is expected in 2010 • Raw oil prices were up 17% YoY in 2010 and raw sugar prices were up 30% YoY
Lower growth in sugar prices in Egypt compared to the global trend • The Egyptian government provide subsidies on sugar, due to which Savola is forced to sell sugar at competitive prices
Beyond 2010, selling price in the edible oil segment is expected to move in line with inflation (average 4% growth in 2011-14)
Sugar prices are expected to decline 2% in 2011 as a result of:• Global oversupply due to additional production coming on-stream in India and Australia 74
Let the falcon guide you
Valuation Assumptions New stores
Retail segment
30 new stores are expected to be opened during 2011-14, taking the total store count to 194 in 2014
Total selling area is projected to grow at 7.9% CAGR from 405,000 sq. mt. to 600,000 sq. mt. during 2009-14
Sales per store
We assume new stores take an average 3 years to generate similar sales as that of existing stores • 50% store efficiency in the first year, gradually increasing to 100% by the fourth year • This is because hypermarkets take ~24 months compared to supermarkets (~12 months) to generate similar per sq. mt. sales as that of existing store
Existing stores
Sales per store
12% growth in sales per store in 2010 • Boosted by a full year of revenues from the 11 Geant stores acquired in Oct 2009. Geant stores acquisition added 82,000 sq. mt. (27% addition over Savola’s selling space in 2008) • Overall, Giant and Geant stores constituted 37% of Savola’s total retail selling space as of 2009
5% per annum growth in sales per store during 2011-14 • Assuming 3% per annum growth in household expenditure and growing share of hypermarkets and supermarkets in overall retail industry 75
Let the falcon guide you
Valuation Assumptions
Operating margin expected to decline in 2010 Due to reliance on global supplies of raw oil and cane raw sugar, the prices of which have risen 15-30%
Margins
YoY However, Savola might not pass the entire rise in cost to end customers to gain market share
Margins are expected to pick up in 2011 driven by improved capacity utilization and maturity of start-up
businesses Margins in sugar likely to improve as the new plant in Egypt will use cheaper local beet sugar as raw material from 2012 Increased efficiency of the newly added selling space and focus on the hypermarket format which takes up to 2 years to generate similar per sq. mt. sales as that of existing stores
Overall, we forecast total capex of SAR3.7 Bn (3% of total sales) over 2010-2014 Of the total capex, 73% is assumed to be spent on expansion
Capex
We expect Savola to focus more on consolidating its existing businesses rather than on expansion 30 new stores to be opened in 2011-14 (20% expansion to over 152 stores at the end of 2009) Capex per sq. mt. for new store – SAR 14,000 in 2011, i.e., a total of SAR621 Mn in 2011
70% of the capex is to be funded through debt 76
Valuation Sensitivity Analysis
Let the falcon guide you
45
SAR
40
41.1
41.1
37.7 32.5
35
30
40.5
39.6 35.1
30.7 29.2
29.2
29.8
25 Bea r Ca s e
Inventory EBIT ma rgi n EBIT ma rgi n EBIT ma rgi n da ys of Suga r of Edi bl e Oi l of Retai l i ncrea s es by di vi s i on i s di vi s i on i s di vi s i on i s 5 da ys 1% l ower 1% l ower 1% l ower
Ba s e Ca s e
EBIT ma rgi n EBIT ma rgi n of Retai l of Edi bl e Oi l di vi s i on i s di vi s i on i s 1% hi gher 1% hi gher
EBIT ma rgi n Inventory of Suga r da ys di vi s i on i s decrea s es by 1% hi gher 5 da ys
Bul l Ca s e
Bear case:
Base case:
Bull case:
EBIT Margins of retail, edible oil and sugar division to be lower by 1%
EBIT Margin of retail division to rise by 40 bps to 1.7% in 2011, and then increasing steadily to 3.7% by 2014
EBIT Margins of retail, edible oil and sugar division to be higher by 1%
Inventory days increases by 5 days
EBIT Margin of the Edible Oil division to decline by 250 bps to 6.4% in 2010, and then expand to 6.8% in 2011, and to 7.8% by 2014 EBIT Margin of the Sugar division to decline 360 bps to 5.9% in 2010, and then increase to 6.5% in 2011, and to 7.5% by 2014
Source: Al Mal Capital analysis
Inventory days to reduce by 5 days to 52 days in 2010, on better inventory management 77
Inventory days decreases by 5 days
Let the falcon guide you
Savola – Financial Statements Income Statement
Income statement (SAR Mn) Total Revenue Growth (%) Cost of Revenue Gross Profit Gross Profit Margin (%) Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%) Profit from associates Other income Finance charges - net Net Income before tax & MI Tax Minority Interest Net Income after tax & MI Net Margin (%) Adjusted Net income before tax & MI Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
FY09A 17,917 29.6% (14,810) 3,107 17.3% (696) (629) (1,534) 1,641 9.2% 945 5.3%
FY10E 20,536 14.6% (17,381) 3,154 15.4% (731) (672) (1,723) 1,490 7.3% 759 3.7%
FY11F 21,945 6.9% (18,490) 3,454 15.7% (794) (729) (1,839) 1,681 7.7% 887 4.0%
FY12F 23,638 7.7% (19,828) 3,810 16.1% (857) (800) (1,967) 1,900 8.0% 1,043 4.4%
FY13F 25,398 7.4% (21,225) 4,174 16.4% (910) (878) (2,071) 2,135 8.4% 1,225 4.8%
FY14F 26,918 6.0% (22,411) 4,507 16.7% (953) (951) (2,183) 2,326 8.6% 1,372 5.1%
353 176 (227) 1,247 (63) (232) 952 5.3% 929 1.90 1.00 52.5%
405 361 (193) 1,331 (99) (148) 1,085 5.3% 1,136 2.17 1.08 50.0%
453 109 (223) 1,226 (98) (135) 993 4.5% 1,226 1.99 0.99 50.0%
466 109 (244) 1,374 (117) (151) 1,106 4.7% 1,374 2.21 1.11 50.0%
517 109 (261) 1,590 (143) (174) 1,273 5.0% 1,590 2.55 1.27 50.0%
521 109 (272) 1,731 (164) (188) 1,379 5.1% 1,731 2.76 1.38 50.0%
78
Let the falcon guide you
Savola – Financial Statements Balance Sheet
Balance sheet (SAR Mn) Shareholders' Equity Minority Interest
FY09A 6,961 1,567
FY10E 7,501 1,536
FY11F 7,995 1,671
FY12F 8,546 1,822
FY13F 9,180 1,996
FY14F 9,867 2,184
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit
2,415 1,996 419 6,313 1,830 1,461 3,022
2,674 2,217 457 7,402 2,187 1,543 3,673
2,856 2,384 471 8,217 2,386 1,643 4,188
3,113 2,622 492 8,612 2,622 1,762 4,228
3,324 2,811 512 8,810 2,805 1,885 4,119
3,590 3,060 530 9,029 2,965 1,993 4,071
17,257
19,113
20,739
22,094
23,310
24,670
1,251
1,661
1,825
2,022
2,175
2,302
5,634 1,091 1,417 2,297 829 11,623 5,056 1,030 5,537 17,257
6,902 1,512 1,688 2,476 1,226 12,211 5,495 969 5,747 19,113
8,026 2,172 1,864 2,685 1,306 12,713 5,983 908 5,822 20,739
8,881 2,474 2,072 2,933 1,401 13,213 6,483 847 5,883 22,094
9,891 3,026 2,227 3,140 1,499 13,419 7,036 786 5,597 23,310
11,055 3,796 2,360 3,316 1,584 13,615 7,594 725 5,296 24,670
Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Accounts receivables, net Inventories, net Prepaid expenses and others Non Current Assets Investments Intangible assets Property, Plant and Equipment Total Assets
79
Let the falcon guide you
Savola – Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn) Operating Activities Net Profit after tax & minority interest Depreciation & Amortization Gain on sale of assets Changes in operating assets & liabilities Other adjustments Cash Flows from Operating Activities Investing Activities Addition to property & equipment Acquisition of investments and financial assets Other investments Consolidation/deconsolidation of a subsidiary Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Bank charges Other cash outflows Cash Flows from Financing Activities Net change in Cash and Cash Equivalents
Cash and Cash Equivalent at end of the year
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
952 696 (325) 534 485 2,342
1,085 731 0
993 794 0
1,106 857 0
1,273 910 0
1,379 953 0
(391) (45) 1,379
(167) (81) 1,539
(199) (50) 1,714
(155) (61) 1,967
(130) (44) 2,158
(880) (34) 0 0 (914)
(809) (34) 0 0 (843)
(856) (35) 0 0 (891)
(563) (36) 0 0 (599)
(592) (36) 0 0 (628)
(513) (227) 351 (444)
871 (544) (193) (123) 11
683 (496) (223) 0 (36)
277 (553) (244) 0 (520)
81 (637) (261) 0 (817)
201 (689) (272) 0 (760)
397
477
660
303
552
770
1,001
1,478
2,138
2,440
2,992
3,762
(945) (158) (560) 163 (1,500)
(55)
80
Let the falcon guide you
Key ratios Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%)
Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Savola – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
17.3% 9.2% 5.3% 6.0% 14.3%
15.4% 7.3% 5.3% 6.0% 15.0%
15.7% 7.7% 4.5% 5.0% 12.8%
16.1% 8.0% 4.7% 5.2% 13.4%
16.4% 8.4% 5.0% 5.6% 14.4%
16.7% 8.6% 5.1% 5.7% 14.5%
57 46
52 42
53 43
54 44
54 44
54 44
56.4%
58.4%
55.0%
51.2%
42.5%
33.8%
17.1 0.91 12.3 4.3%
15.0 0.79 13.9 3.3%
16.4 0.74 12.3 3.0%
14.7 0.69 10.9 3.4%
12.8 0.64 9.5 3.9%
11.8 0.61 8.4 4.2%
5.3% 103.8% 2.48 13.7%
5.3% 107.4% 2.55 14.5%
4.5% 105.8% 2.59 12.4%
4.7% 107.0% 2.59 12.9%
5.0% 109.0% 2.54 13.9%
5.1% 109.1% 2.50 14.0%
81
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
82
Jarir Marketing Company Not just a bookstore, lower margins to the fore JANUARY 2011
Let the falcon guide you
Jarir: Investment Summary (1/2) Competition and shift in sales mix to impact bottom-line growth
Let the falcon guide you
Market Perform
RATING Fair Value (SAR)
161.0
Upside
4.7%
Price (12 Jan 2011)
153.8
Market Cap. (SAR Bn)
6.2
Market Cap. (USD Bn)
1.6
Shares Outstanding Price 52wk H/L
• The young population is likely to be more tech-savvy compared to the current working population, and hence, buy more electronic products • With economic recovery, discretionary spending is likely to rise. This, coupled with the anticipated decline in average household size, is a positive sign for increased purchases of discretionary goods such as electronic goods, smart phones and gaming consoles
166.75/ 128.75
Ticker (Bloomberg)
JARIR AB
Ticker (Reuters)
4190.SE TASI
Robust revenue growth expected • Benefiting from positive industry fundamentals and its leadership position, we expect Jarir’s sales growth to remain strong (CAGR of 12.4% during 2009-14) • Organic expansion (selling space projected to grow 55% during 2009-14) and increase in sales per sq. ft. at newly added selling spaces should further boost revenue growth • New business lines, e.g. smart phones, are expected to show good progress
180 160 140 120 100 80 60 40 20 0 Jan-08
Large young population base is likely to ensure high demand for books and laptops in KSA
• KSA’s young demographic profile and the government’s increased emphasis on education are likely to create strong demand for school supplies and laptops
40 Mn
Jarir
INVESTMENT THEME AND RISKS >
• The pressure on laptop sales from lower priced net books is likely to ease Competition and shift in sales mix to hit margins • Margins are expected to decline for the next 3 years and stabilize by 2014 • Sales mix is moving towards low gross margin products - ~15% for laptops & smart phones, versus ~25% for school supplies, computer accessories Aug-08 Mar-09 Oct-09
Source: Bloomberg
Jun-10
Jan-11
• Growing competition from global and local players, as well as hypermarkets, could trigger a price war between retailers, thereby eroding profitability 84
Jarir: Investment Summary (2/2) Valuation looks expensive
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
DCF approach
161.5
P/E approach
159.9
Weighted average fair price
161.0
STOCK VALUATION > At the current level, the stock looks expensive. Jarir trades on a 14.3x FY11E P/E, a premium of 24.1%, versus a peer group average of 11.6x FY11E P/E We believe the premium to peer group average on forward multiple basis is unjustified as our estimated 2010-12E EPS CAGR of 9.2% is much lower compared to the estimated peer group average of 12.3% Considering these factors, we believe future earnings growth offers limited upside potential from these levels
MULTIPLES
FY09A
FY10E
FY11E
9.4
9.7
10.7
P/E (x)
16.4
15.8
14.3
EBIT (SAR Mn)
384
387
429
EV/EBIT (x)
16.2
16.2
14.7
EPS (SAR)
KEY STATISTICS Revenues (SAR Mn) EBITDA (SAR Mn) EBITDA margins Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
Our DCF and P/E based valuation returns a weighted average target price of SAR161.0 (4.7% upside at current level)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
2,555
2,972
3,388
3,797
4,216
4,577
403
408
453
494
540
589
15.8%
13.7%
13.4%
13.0%
12.8%
12.9%
374
390
429
464
502
543
13.5%
17.8%
17.1%
18.6%
15.6%
11.9%
6.2%
4.8%
5.2%
5.7%
6.1%
6.6%
85
Let the falcon guide you
Jarir: Overview Leading retailer of IT products and stationery in the GCC
KEY STATISTICS
FY10E
Revenues (SAR Mn)
2,972
Operating Profit (SAR Mn)
387
Net Profit (SAR Mn)
390
EBITDA Margin (%)
13.7%
Net Margin (%)
13.1%
RoaE (%)
50.6%
BUSINESS OVERVIEW > Jarir, established in 1980, is a retailer and wholesaler of office products, school supplies, children’s toys, books, computers and computer accessories. It is the leading retailer of IT products and stationery in the GCC and has 50% market share of laptop sales in KSA. The company’s product portfolio covers defensive school and office supplies and high growth computer goods and consumer electronics.
BUSINESS ACTIVITIES > •
Ownership and management of bookstores and computer electronics retail outlets
•
Distribution of computers and peripherals, office and school supplies, toys, sports equipments and stationary
•
Real estate investment and leasing
SEGMENT REVENUES (2009) Office supplies, 13%
School Supplies 8%
Books 6% Computer & IT products 65% Source: Company
Others 8%
SELLING SPACE > As of 2009, Jarir owned 27 retail stores in Saudi Arabia, Kuwait, UAE, and Qatar, and 5 wholesale showrooms. Total selling space stood at 905,000 sq. ft. as of 2009.
MARKETS SERVED > Jarir has a presence in KSA, other GCC countries and Egypt. KSA accounted for 88.3% of revenues in 2009; Other GCC countries and Egypt accounted for the remaining 11.7%.
86
Investment Theme Diversified portfolio mix helped weather the downturn
Let the falcon guide you
Resilient and diversified product portfolio
REVENUE MIX Computer & IT products
100%
9% 8% 10%
80%
15%
60%
Office supplies
School Supplies
9% 6% 8% 14%
8% 6% 8% 13%
63%
65%
Books
Others
11% 6% 8% 12%
• Benefiting from the defensive nature of school and office supplies, Jarir’s revenues grew 1% in 2009, despite the downturn • By contrast, sales of discretionary goods retailers - Fitaihi Holding and Bahrain Duty Free - declined 21.1% and 7.8%, respectively, in 2009 Historical sales expanded at 19.3% CAGR during 2006-09
40% 58%
62%
20%
• Organic expansion - Number of stores increased from 20 in 2007 to 27 in 2009.
0%
Total selling space grew 35% from 0.6 Mn sq. ft. in 2007 to 0.8 Mn sq. ft. in 2007
2008
2009
2010E
• Sales at both existing and new stores were strong with little signs of
SALES PER SQ. FT. 3,500
CAGR: 27%
3,264
3,000
SAR
2,000
Impact of pressure on laptop sales 2,838
2,891
2,358
2,500
2009
cannibalization as sales per sq. ft. rose from SAR2,358 in 2007 to SAR2,838 in 2009 • New business lines e.g. games consoles and smart phones showed good progress
2,021
Sales per sq. ft. fell 13% in 2009 due to pressure on laptop sales
1,500
1,000
• Decline in prices (USD650 in Dec-09 from USD800 in Dec-08) as lower priced
500
net books (USD400) took preference over laptops
0
2006
2007
Source: Company filings, Al Mal Capital analysis
2008
2009
2010E
87
Investment Theme Organic expansion and discretionary spending to fuel sales growth
Let the falcon guide you
The pressure on laptop sales is likely to ease
GROWTH IN STORE COUNT AND SELLING SPACE Total selling space (LHS)
• Only 14% of users see netbooks as a replacement of laptops
Retail stores (RHS)
1,400
50
1,200
40
'000 sq. ft.
1,000 800
30
600
20
400 10
200
0 2009
2010E
2011E
2012E
2013E
We expect sales growth to remain strong (12.4% CAGR in 2009-14) • Revenues grew 20.3% YoY from SAR1.8 Bn in 9M09 to SAR2.2 Bn in 9M10 KSA’s young demographics ensures strong demand for school supplies and laptops • The young population are likely to be more tech-savvy compared to the
0 2008
• Trend moving towards owning >1 computing device
current working population. Computer hardware sales projected to grow at 7%
2014E
CAGR to USD2.4 Bn during 2010-14
REVENUE GROWTH AND SALES PER SQ. FT. Revenues (LHS)
Organic expansion
Sales per sq. ft. (RHS)
5,000
• Projected to open 3-4 new stores every year in the next 5 years adding an
3,500
average of 90,000 sq. ft. per year
3,000
4,000
• Larger size stores (size of the new store opened in Feb 2010 is 4,800 sq. mt.
3,000
2,000
2,000
1,500 1,000
1,000
500
0
0 2006 2007 2008 2009 2010E2011E2012E2013E2014E
Source: Pricegrabber, Research and Markets, Company filings, Al Mal Capital analysis
SAR
SAR Mn
2,500
against an average of 3,000 sq. mt) With economic recovery, discretionary spending is likely to rise. Smart phones and
gaming consoles should show good growth • Handset sales and consumer electronics devices market expected to grow at 7% CAGR and 6% CAGR, respectively, in KSA during 2010-14 88
Investment Theme Shift in sales mix putting pressure on margins
Let the falcon guide you
CONTRIBUTION OF LOW MARGIN PRODUCTS & GROSS MARGIN Gross margin
19.1%
• Smart phones and games consoles have generated gross margins of ~12-15%
19.0% 17.3%
16.8%
11.2% 9.1%
8.8%
16.4% 16.1%
15.9% 16.0%
11.5% 11.7%
11.9% 12.1%
• On the other hand, school supplies and computer accessories have gross margins of ~25-30% Increasing competition from other large retailers such as Obeikan, Extra and PC
7.8%
Net 2007
2008
2009
2010E
2011E
2012E
2013E
Laptop
1,000
925
800
• Those with limited usage needs opted for netbooks over laptops
808
• Downturn also led to increased promotional spending by retailers by way of
600 400
Cannibalization of laptop sales from relatively lower-priced smart phones and
Cautious buying from customers during the economic downturn
Cellphones
774
2014E
netbooks
LAPTOP AND CELLPHONE PRICES
USD
16.7% in 9M10 Sales mix has moved towards lower margin products
Others (incl. smartphones, game consoles) as % of sales
20% 18% 16% 14% 12% 10% 8% 6%
Gross margin have contracted from 19.8% in 2006 to 19.0% in 2009 and further to
discounts/offers to generate sales. Advertising expenses, as % of revenues, 349
265
236
rose from 0.4% in 2006 to 0.9% in 2009
200 0 2008
2009
Source: Pricegrabber, Company filings, Al Mal Capital analysis
2010
89
Investment Theme Margins to remain under stress due to competition
Let the falcon guide you
Going forward, we expect margin pressure to ease a little
GROSS MARGIN AND EBIT MARGIN Gross margin
22% 19.8%
19.1%
19% 16%
• Given the anticipated stabilization of laptop and netbook sales
EBIT margin
• Economic recovery is likely to drive discretionary spending towards higher
19.0%
value goods, in turn, increasing sales per store, and thereby, store efficiency
17.3%
16.8% 16.4% 16.1% 15.9% 16.0%
16.1% 15.9% 15.0%
13.9% 13.0% 13%
12.7% 12.3%
and discounts 12.1% 12.2%
However, increasing competitive pressure at the retail level is likely to continue eroding profitability
10% 2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
Peer average WH Smith
Jarir Officemax
Staples Inc Best Buy Co.
Radioshack
• This could trigger a price war between retailers which would also increase promotional expenditure
* Size of the bubble represents Asset turnover
50%
Overall, operating margin is expected to decline for 3 years from 13.0% in 2010 to
40%
12.1% in 2013, and stabilize thereafter
30%
Benchmarked to its global peers, Jarir fares well in terms of margins and asset
20% 10%
turnover (2.0x in 2009), but lags on 2011E EPS growth
0%
0.0%
• Competition from foreign players such as USA’s Office Depot, and domestic players such as Obeikan or Xtra and hypermarkets
OPERATIONAL PARAMETERS
2011 EPS growth
• Competition between suppliers may force them to offer retailers better terms
3.0%
6.0% 9.0% EBIT margin
12.0%
Source: Thomson Reuters, Bloomberg,, Company filings, Al Mal Capital analysis
15.0%
• Jarir 2011E EPS growth of 10.0% is much lower than the expected peer group average of 17.4% 90
Valuation Valuation looks expensive
Let the falcon guide you
PEER GROUP MULTIPLE
STOCK PRICE (SAR) AND P/E BAND 210
192.9 190
Country
Market Cap. (USD Mn)
PE Current
2010
Fwd 2011
20x 171.4
170
18x 150.0
150
16x
130
128.6
14x
110
90 Jan-09
Company
Aug-09
Mar-10
Oct-10
May-11
Dec-11
At the current level, the stock looks fairly valued
Jarir Marketing Sears Holdings Staples Inc Radioshack Corp. WH Smith PLC Officemax Incorp. Best Buy Co. Inc Peer group average Jarir premium (discount) %
KSA US US US UK US US
1,627 8,254 16,547 1,960 1,135 1,463 14,069
15.8 29.5 20.1 9.1 11.6 37.6 10.6
15.8 NM 17.6 8.5 10.5 23.5 9.8
14.3 NM 14.5 7.8 9.9 16.7 8.9
19.8
14.0
11.6
-19.8%
12.9%
24.1%
• Forward P/E at a premium to peer group average on the basis of FY11 EPS • Moreover, current P/E multiple (15.8x) is higher than the historical 2 year P/E average of 14.4x We believe the premium to peer group average on forward multiple basis is unjustified
• While Jarir's net margin of 13.9% (TTM) is higher than the peer group average (2.8% TTM), the forward EPS growth is much lower • 2010-12E EPS CAGR of 9.2% for Jarir compared to the estimated peer group average of 12.3% Considering these factors, we believe future earnings growth offers limited upside potential from these levels * We have considered only developed market peers as there are no listed comparable peers for Jarir in GCC and emerging markets. Source: Thomson Reuters, Bloomberg, Company filings, Al Mal Capital analysis
91
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
90
419
456
498
543
6
23
26
29
32
Change in working capital
(15)
(59)
(67)
(72)
(66)
Capex
(61)
(101)
(128)
(88)
(92)
20
282
287
367
417
1.00
0.96
0.89
0.82
0.75
20
271
254
300
314
NOPLAT Depreciation and amortisation
FCFF Discount factor PV of FCFF Sum of PV of FCFF
1,158
Terminal value
7,132
PV of terminal value
5,364 36
Add: Investments
(96)
Less: Net debt and minority interest
6,461
Total Equity Value
Fair value per share
161.5
VALUATION INPUTS Risk Free Rate
2.7%
Cost of debt
6.6%
Beta
0.68
Effective tax rate
2.5%
Risk Premium
8.5%
Post tax cost of debt
6.4%
Cost of Equity
8.5%
WACC
8.5%
Terminal Growth Rate
2.5%
92
Let the falcon guide you
Valuation Comparative Valuation
VALUATION METRICS P/E Multiple Premium / (Discount) to peer group
0.0%
P/E Multiple
16.2x
FY 11 EPS
10.7
Target price
173.5
Fair price
159.9
Current price
153.8
Upside/Downside
4.0%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
70.0%
161.5
113.1
Fair price using P/E multiple
30.0%
159.9
48.0
Weighted average fair price
161.0
Current price
153.8
Change from current levels
4.7%
There are no listed comparable peers (those involved in IT retail and school & office supplies) for Jarir in the GCC and emerging markets. There are companies with similar business in developed markets (US and Europe), but there is a difference in the economic growth and demographic profile of the countries these companies operate in when compared to KSA. Hence, we have given low weight to peer group valuation for Jarir. 93
Valuation Assumptions
Let the falcon guide you
Organic expansion
Revenues
Retail store count projected to rise from 27 in 2009 to 41 in 2014 (52% growth) • Open 2-4 new stores every year in the coming five years (in line with management’s estimate of 40-45 by 2013)
REVENUE MIX Others
100%
• New stores to be 5% larger in size than the current stores (~3,000 sq. mt.)
Computer & IT products
Books, school & office supplies
7.8%
11.2%
11.4%
11.6%
11.8%
12.0%
64.9%
62.3%
62.4%
62.5%
62.6%
62.7%
27.3%
26.6%
26.3%
26.0%
25.7%
25.4%
2009
2010E
2011E
2012E
2013E
2014E
Like-for-like sales (same store sales) per sq. ft.
80% 60%
Assumed to be lower for IT products (1.5%) than for school and office supplies (2.0%) in 2011 due to cannibalization of laptop sales by lower priced netbooks and smart phones • Like-for-like sales (same store sales) per sq. ft. is assumed to increase from 2012 as laptop and netbook sales begin to stabilize
40%
20%
Selling space forecasted to grow 55% from 0.8Mn sq. ft. in 2009 to 1.3Mn sq. ft. in 2014
Higher growth expected in consumer electronics, smart phones and gaming consoles • Consumer electronics devices market in KSA forecasted to grow at a CAGR of 6% during 2010-14
0%
• Handset sales to be dominated by smart phones, and 3G handsets
Overall, we assume 3.2% CAGR in sales per sq. ft. during 2010-14 • With economic recovery, discretionary spend should grow • New stores take an average of 2-3 years to generate similar sales per sq. ft. as that of existing stores 94
Let the falcon guide you
Valuation Assumptions
We have assumed lower gross margin for laptops, smart phones and games consoles • 12-15% for laptops, smart phones and games consoles
Margins
• 25-30% for school supplies and computer accessories
We expect margins to decline in the next 3 years, but then stabilize • Increasing competitive pressure at the retail level from foreign (e.g. USA’s Office Depot) and local players (e.g. Obeikan, XTra) and growing trend of hypermarkets (e.g. Geant, Carrefour) at the retail level • Sales mix moving towards lower gross margin products
Competitive pressure is expected to be marginally offset by • Stabilization between laptop and netbook sales in the next two years
• Increase in discretionary spending towards higher value goods, driven by economic recovery • Supplier discounts/offers
Overall, we assume SAR0.5 Bn capex during 2010-14 (SAR97 Mn in 2010) • Of the total capex, 83% is assumed to be spent on expansion while the remaining 17% on maintenance
Capex
Capex per sq. ft. for new store (owned) – SAR 1,300 in 2010 and new store (leased) – SAR 650 in 2010
95
Let the falcon guide you
Valuation Sensitivity Analysis
180
171.7
173.7
175.9
175.9
166.3
SAR
160
151.1 148.1
148.1
161.0
155.8
149.6
140
120 Bea r Ca s e
Inventory Li ke-for-l i ke Li ke-for-l i ke 4 New retai l da ys s a l es growth s a l es growth s howrooms i ncrea s ed by for s chool for opened i n 5 da ys s uppl i es computers next two decrea s es by decrea s es by yea rs -5.0% -2.0%
Ba s e Ca s e
8 New retai l s howrooms opened i n next two yea rs
Li ke-for-l i ke Li ke-for-l i ke Inventory s a l es growth s a l es growth da ys for for s chool decrea s ed by computers s uppl i es -5 da ys i ncrea s es by i ncrea s es by 2.0% 5.0%
Bul l Ca s e
Bear case:
Base case:
Bull case:
Only 4 new retail showrooms opened during 2010-11
6 new retail showrooms opened during 2010-11
8 new retail showrooms opened during 2010-11
Growth in like-for-like sales per sq. ft. for computer and IT products to be lower by 2%
Like-for-like sales per sq. ft. for computer and IT products increases by 1.5% in 2011
Growth in like-for-like sales per sq. ft. for school supplies to be lower by 2%
Like-for-like sales per sq. ft. for school supplies rises by 2% in 2011
Growth in like-for-like sales per sq. ft. for computer and IT products to be higher by 2%
Inventory days increases by 5 days
Inventory days remains stable at 85 days in 2011
Source: Al Mal Capital analysis
96
Growth in like-for-like sales per sq. ft. for school supplies to be higher by 2% Inventory days decrease by 5 days
Jarir – Financial Statements Income Statement
Let the falcon guide you
Income statement (SAR Mn) Total Revenue
Gross Profit Margin (%)
FY09A 2,555 1.4% (2,069) 486 19.0%
FY10E 2,972 16.3% (2,474) 498 16.8%
FY11F 3,388 14.0% (2,833) 555 16.4%
FY12F 3,797 12.1% (3,186) 611 16.1%
FY13F 4,216 11.0% (3,546) 670 15.9%
FY14F 4,577 8.6% (3,846) 730 16.0%
Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%)
(19) (52) (50) 403 15.8% 384 15.0%
(20) (58) (53) 408 13.7% 387 13.0%
(23) (66) (60) 453 13.4% 429 12.7%
(26) (75) (68) 494 13.0% 467 12.3%
(29) (83) (76) 540 12.8% 511 12.1%
(32) (91) (82) 589 12.9% 557 12.2%
Rental income Other income Finance charges – net Net Income before tax Tax Net Income after tax
14 (13) 385 (11) 374 14.6% 9.35 7.38 78.9%
26 0 (12) 402 (12) 390 13.1% 9.74 7.30 75.0%
28 0 (15) 442 (14) 429 12.6% 10.71 8.04 75.0%
29 0 (17) 479 (15) 464 12.2% 11.61 8.71 75.0%
30 0 (24) 517 (16) 502 11.9% 12.54 9.41 75.0%
32 0 (29) 560 (17) 543 11.9% 13.57 10.18 75.0%
Growth (%) Cost of Revenue Gross Profit
Net Margin (%) Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
97
Let the falcon guide you
Balance sheet (SAR Mn) Shareholders' Equity Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Accounts receivables, net Inventories, net Prepaid expenses and others Non Current Assets Investment property, net Equity investments Property, Plant and Equipment Total Assets
Jarir – Financial Statements Balance Sheet FY09A 723
FY10E 816
FY11F 932
FY12F 1,056
FY13F 1,190
FY14F 1,335
145 100 45 382 277 68 37
54 7 47 620 330 74 216
111 58 53 572 378 83 110
182 122 60 635 416 92 125
234 166 68 698 453 101 140
288 212 76 748 480 108 154
1,250
1,490
1,615
1,873
2,121
2,371
294
360
419
486
558
625
679 40 181 421 37 571 8 28 535 1,250
842 78 212 508 44 647 8 28 612 1,490
890 10 243 586 50 725 7 28 690 1,615
1,047 53 274 664 57 826 7 28 791 1,873
1,236 125 306 743 63 885 7 28 850 2,121
1,426 213 334 811 68 945 6 28 910 2,371
98
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Jarir - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
385 19 32 (8) 13 440
402 20 (53) (25) 1 345
442 23 (59) (14) 7 400
479 26 (67) (15) 7 431
517 29 (72) (16) 8 467
560 32 (66) (17) 8 517
(32) 0 (32)
(97) 0 (97)
(101) 0 (101)
(128) 0 (128)
(88) 0 (88)
(92) 0 (92)
(55) (338) 0 (393)
86 (296) 0 (210)
(54) (313) 0 (366)
80 (340) 0 (260)
61 (368) 0 (307)
61 (398) 0 (337)
Net change in Cash and Cash Equivalents
15
38
(68)
43
72
88
Cash and Cash Equivalent at end of the year
40
78
10
53
125
213
Operating Activities Net Profit before tax Depreciation & Amortization Changes in operating assets & liabilities Zakat paid Other adjustments Cash Flows from Operating Activities Investing Activities Addition to property & equipment Other cash outflows Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Other cash outflows Cash Flows from Financing Activities
99
Let the falcon guide you
KEY RATIOS Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle
Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Jarir – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
19.0% 15.8% 14.6% 31.0% 53.1%
16.8% 13.7% 13.1% 28.4% 50.6%
16.4% 13.4% 12.7% 27.6% 49.0%
16.1% 13.0% 12.2% 26.6% 46.7%
15.9% 12.8% 11.9% 25.1% 44.7%
16.0% 12.9% 11.9% 24.2% 43.0%
85 69
85 69
85 69
85 70
85 71
85 72
13.5%
17.8%
17.1%
18.6%
15.6%
11.9%
16.4 2.41 15.5 6.2%
15.79 2.07 15.4 4.8%
14.3 1.82 13.9 5.2%
13.25 1.62 12.8 5.7%
12.26 1.46 11.7 6.1%
11.33 1.34 10.7 6.6%
14.6% 204.4% 1.73 51.7%
13.1% 199.5% 1.83 47.7%
12.6% 209.8% 1.73 46.0%
12.2% 202.7% 1.77 44.0%
11.9% 198.7% 1.78 42.2%
11.9% 193.0% 1.78 40.7%
100
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Institutional Sales Jalal Faruki
+971 4 360 1103
Akram Annous
+971 4 360 1113
Research Irfan Ellam
+971 4 360 1153
Disclaimer: This report is not an offer to buy or sell nor a solicitation to buy or sell any of the securities mentioned within. The information and recommendations contained in this report were prepared using information available to the public and sources Al Mal Capital believes to be reliable. Al Mal Capital PSC does not guarantee the accuracy of the information contained within this report and accepts no responsibility or liability for losses or damages incurred as a result of investment decisions taken based on information provided or referred to in this report. Any analysis of historical facts and data is for information purposes only and past performance of any company or security is no guarantee or indication of future results. Al Mal Capital PSC, or its “related group companies” (which may include any of its branches, affiliates and subsidiaries) or any director(s) or employee(s) of the said companies, individually or collectively, may from time to time take positions or effect transactions related to companies mentioned in this report. Al Mal Capital PSC and its related group companies may have performed or seek to perform investment banking or any other financial or advisory services for the companies mentioned in this report. 101
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Office 302, Downtown Dubai ,Emaar Square 4 Sheikh Zayed Road, P.O. Box 119930, Dubai, UAE Tel: +971 4 360 11 11, Fax: +971 4 360 11 22 www.almalcapital.com
Let the falcon guide you
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
2
Retail sales in KSA were USD 57.9 Bn in 2009 … … and are expected to grow at 9.8% CAGR during 2009-14
Let the falcon guide you
STRUCTURE > FOOD, DRINKS AND TOBACCO (65% of total sales)
SEGMENT SALES (USD BN)
37.2
2009
KEY GROWTH DRIVERS > Increasing household expenditure (USD130 Bn in 2008 growing to
55.8
2014
USD243 Bn by 2012 at CAGR of 17%) driven by :
8.4%
Economic growth (4.5% real GDP growth between 2010 and 2015)
21.7
2005
APPAREL & FOOTWEAR (13% of total sales)
CAGR (2009-14)
and resultant rise in disposable income Favorable demographic profile with large and young population
13.3
2014
(60% of population is below 30 years old) 2005
13.0%
7.3
2009
Rapid urbanization (85% by 2015) and decreasing size of
3.0
household (5.2 in 2015 vs 5.7 in 2004) Pilgrimage tourism provides an additional driver to retail sales in KSA 6.3
2014
FURNITURE (6% of total sales)
2005
2009 2005
Source: BMI, EIU, Al Mal Capital analysis
Ample growth opportunities for large established players:
1.9
Highly fragmented market - share of top 5 players in retail sales at
less than 25% is much lower when compared to developed markets (UK : 59%)
16.4
2014
OTHER PRODUCTS (16% of total sales)
11.2%
3.7
2009
(7.7 Mn tourists in 2008, nearly 14 Mn by 2018)
Rising popularity of modern retail - BMI expects the share of
11.8%
9.3
organized (mass grocery) retail sales in total grocery sales to rise from 58% in 2008 to 75% in 2018
13.4
3
Let the falcon guide you
Key Players Savola and Almarai are the largest players by revenue
FOOD, DRINKS & TOBACCO > • Second largest Food and Grocery retailer in Middle East in terms of sales
• Leading GCC dairy player with 28% market share in 2008
• Market leader in KSA with 8.5% share in 2009
• USD1.6 Bn sales in 2009
• Second-largest retail player by sales in KSA • USD837 Mn sales in 2009
AL RABIE SAUDI FOODS • Dairy products and juices
• USD4.8 Bn sales in 2009
SAVOLA
• Leading ME juice producer, USD350 Mn sales (2008)
• USD273 Mn sales in 2009
ALMARAI
AL OTHAIM
• Largest player in KSA in the mid-income branded clothing retail segment
• Leading retailer of IT products and office and school stationery in GCC
• More than 50% market
• Market share of 50% for
NON FOOD RETAIL >
share in KSA in 2008
laptop sales in KSA
• USD506 Mn sales in 2009
• USD672 Mn sales in 2009
AL HOKAIR
JARIR MARKETING 4
SADAFCO
Investment Summary (1/2) Almarai and Al Hokair still offer significant upside potential
Let the falcon guide you
ALMARAI
Outperform
Double-digit revenue growth is expected to continue (CAGR of 12.8% during 2009-14E) on account of an
anticipated rise in dairy consumption and diversification into non-dairy (poultry, bakery and juice)
Fair Value (SAR)
125.5
Upside
12.6%
segments Vertically integrated business enables Almarai to keep costs low, and creates high barriers to entry thereby
lowering the threat from new entrants, and allowing it to record the highest EBIT margin in its peer group Upside bias as strong earnings growth potential and better operating performance than its peers outweigh
the relatively expensive valuation – current P/E multiple of 21.6x versus peer group average of 17.6x Almarai’s EBIT margin (21.3% TTM) and EPS growth (12.1% CAGR, 2010-12) are higher than its peer group
average of 9.5% and 11.2%, respectively
AL HOKAIR Fair Value (SAR) Upside
Outperform
We expect sales to grow at 13.0% CAGR during FY11-14, higher than the 12.5% during FY06-FY10, driven
by Al Hokair’s expansion initiatives targeting the CUR: Current Year | MKT CAP: Market Capitalization | TTM: Trailing Twelve Months | 1 YR AVG: 1 year average
7
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
8
Let the falcon guide you
Growth Drivers Household spending to increase as economy grows KSA’s economy is subject to swings caused by volatile oil prices. Real GDP growth
KSA: REAL GDP (SAR BN)
forecasts are higher at 4.5% for the 2011-15 period (IMF estimates) versus 3.7% 1,100
900
KSA to witness much higher growth than that witnessed during 2004-08
CAGR 4.5%
growth during 2004-08 and 0.5% during 2009 • Increasing demand for oil (as global economy recovers) and price forecast of
CAGR 3.7%
USD100-120 per barrel over next few years • Government’s aggressive spending plans (USD 400 Bn of planned public
700
investment over 2009-13) • Government focus on diversification and encouraging private sector
500 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
KSA: HOUSEHOLD EXPENDITURE (USD BN)
KSA has witnessed rapid growth in income and household expenditure • Per capita income has grown from USD11,000 in 2000 to USD19,000 currently
250 CAGR 2008-12: 17.0%
200
and is forecast to reach USD23,000 by 2015 • Nearly 70% of households in KSA have annual income levels in excess of
150 100
participation in the petrochemical, power and telecom sectors
CAGR 2004-08: 14.2%
SAR55,000 (2009 estimates) compared to 63% in 2000 • Household expenditure is expected to grow from USD130 Bn in 2008 to
50
USD243 Bn by 2012 (CAGR of 17.0% vs 14.2% in 2004-08)
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Higher household expenditure should fuel growth in retail sales (37% of household expenditure was on retail sales in 2009)
Source: IMF, EIU, Euromonitor International, Al Mal Capital analysis
9
Growth Drivers Large and young population expected to drive retail demand
Let the falcon guide you
A large and growing population has made KSA the largest consumer market in the
KSA: AGE-WISE DISTRIBUTION (2010)
GCC: 30-50 years 29%
• At 25.5 Mn, KSA accounts for 65% of GCC population
50-70 years 9%
• Expected population growth of 2.2% CAGR during 2009-15
>70 years 2%
KSA’s population is young, and this bodes well for growth in food and retail sales • 60% of the population in KSA is below 30 years of age
15-29 years 28%
• This is much higher when compared to other GCC economies: UAE (44%),
Oct-08
Jul-09
Apr-10
Jan-11
• We believe Almarai is better placed to take a hit on margins than its rivals, and hence, expect the company to keep its products competitively priced in order to expand its market share • Also, higher feed costs could see operating margin fall from 21.8% in 2009 to 20.4% in 2014
Source: Bloomberg
17
Almarai: Investment Summary (2/2) Higher margins justify higher trading multiples than peer group
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
DCF approach
130.3
P/E approach
116.7
EV/EBIT approach
124.8
Weighted average fair price
125.5
MULTIPLES
FY09A
FY10E
FY11F
4.8
5.5
6.2
23.4
20.1
17.9
1,279
1,464
1,645
23.1
20.7
18.7
EPS (SAR)
P/E (x) EBIT (SAR Mn) EV/EBIT (x) KEY STATISTICS
STOCK VALUATION > Almarai is currently trading at a premium to its peers in terms of current and forward P/E and EV/EBIT multiples At current P/E of 21.6x and current EV/EBIT of 22.6x, Almarai trades at a premium of 22.5% and 47.5%, respectively, versus a peer group average of 17.6x current P/E and 15.3x current EV/EBIT In terms of forward multiples, Almarai trades on a 17.9x FY11E P/E and 18.7x FY11E EV/EBIT, a premium of 23.6% and 86.7%, respectively, versus a peer group average of 14.5x FY11E P/E and 10.0x FY11E EV/EBIT
We believe this premium is justified due to higher EBIT margin (21.3% TTM) and EPS growth (12.1% CAGR 2010-12) compared to peer average of 9.5% and 11.2%, respectively. Almarai’s strong earnings growth potential and better operating performance than its peers outweigh the relatively expensive valuation Our DCF, P/E and EV/EBIT based valuation returns a weighted average target price of SAR125.5 (12.6% upside at current level) FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Revenues (SAR Mn)
5,869
6,894
7,778
8,814
9,887
10,710
EBITDA (SAR Mn)
1,567
1,871
2,086
2,319
2,521
2,659
EBITDA margins
26.7%
27.1%
26.8%
26.3%
25.5%
24.8%
Net income (SAR Mn)
1,097
1,274
1,434
1,600
1,752
1,900
Net Debt/Equity
71.9%
75.8%
70.8%
64.4%
56.9%
44.7%
2.7%
2.1%
2.3%
2.6%
2.9%
3.1%
Dividend Yield Source: Bloomberg
18
Almarai: Overview Leading dairy company in GCC
Let the falcon guide you
KEY STATISTICS
FY10E
Revenues (SAR Mn)
6,894
Operating Profit (SAR Mn)
1,464
Net Profit (SAR Mn)
1,274
EBITDA Margin (%)
27.1%
Net Margin (%)
18.5%
RoaE (%)
22.1%
PRODUCT REVENUES (9M 2010)
Juice 11%
Bakery Products 12%
Others 0.4%
Fresh Dairy 46%
BUSINESS OVERVIEW > Almarai, established in 1976, is the leading dairy company in the GCC. It had 28% share of the GCC Dairy market in 2008 (AC Nielsen). Famous brands are Almarai, BonSweet, Teeba, 7 Days, Al Riyadh Dairy, Alyoum and Sabouh. Almarai entered the poultry segment following the acquisition of Hail Agricultural Development Co. (HADCO) in 2009.
BUSINESS ACTIVITIES > • • •
Production of dairy products, processed cream, cheese and custard Production of juices, tomato paste, poultry and bakery products Ownership and operation of vegetable, grain, cattle and poultry farms
FACILITIES / CAPACITY > Almarai is a vertically integrated company covering all supply chain activities, including dairy farming, food processing, marketing, sales and distribution. It has a total production capacity 2.8 Mn liters of dairy products per day and also owns 7 farms in KSA.
MARKETS SERVED > Cheese and Butter 19%
The company has operations in KSA, UAE, Kuwait, Qatar, Oman and Bahrain. KSA accounted for Long Life Dairy, 9%
Source: Company, AC Nielsen
71.2% of revenues, while other GCC countries contributed 28.0% to its revenues in 9M 2010. 19
Investment Theme Core dairy business to benefit from rising consumption
Let the falcon guide you
Almarai is the leading dairy player (28% market share in 2008) in GCC and has a
ALMARAI’S SHARE IN GCC DAIRY MARKET
strong brand presence 50%
42%
40%
• Almarai was ranked number four in Forbes’ Top 40 Arab Brands’ list released in
34%
30%
October 2008
25% 20%
It enjoys high and stable sales growth (CAGR of 28.6% during 2005-09) led by
20%
double-digit growth in all its business segments
10%
Strong sales growth likely to continue (12.8% CAGR during 2009-14)
0% Laban
Zabadi
Fresh milk
Other fresh dairy products
Dairy segment, Almarai’s main business line, is expected to expand at a CAGR of 8.0% during 2009-14 • Benefiting from growing population and household expenditure primarily
GROWTH IN DAIRY SEGMENT REVENUES Rise due to price hike Rise due to consumption
Rise due to market share gains All parameters constant
7.5
0.2
7.0
0.1
SAR Bn
6.5
0.1
6.0
0.1
5.5
4.0
0.1
0.3 0.1
0.3 4.5
4.5
2009
2010E
0.2
capita consumption of liquid milk in the GCC (20.6 liters in 2004) is much lower than the US (83.9 liters in 2006), EU-25 (92.6 liters in 2006)
0.1
• Anticipated increase in market share on account of rising trend of branded food products to ensure quality and SAR8 Bn capex planned for 2010-14 to
0.3 0.1
0.1
5.0 4.5
0.1
0.2
driven by increasing health consciousness and low consumption per capita. Per
6.2
6.7
5.7
expand production and distribution facilities • Growth, however, has normalized from that witnessed historically (22.9%
5.1
CAGR during 2005-09) 2011E
2012E
Source: AC Nielsen, Company filings, Al Mal Capital analysis
2013E
2014E
20
Investment Theme Entry into new business segments to provide additional growth
Let the falcon guide you
EXPANSION AND NEW BUSINESS INITIATIVES
• 50:50 JV with Mead Johnson, a global leader in infant nutrition
• JV with Pepsico to expand presence in Asia and Africa
Dairy and Juice Bakery Infant milk Poultry and horticulture
Capitalizing on high growth opportunities in the infant formula market
• Strong partner support in gaining market share
• Doubling of capacity from 85,000 tons in 2H10
• Infant formula market was worth USD450 Mn in 2009 and is expected to grow
• 50:50 JV with Mead Johnson, a global leader in infant nutrition
• Currently the sector is dominated by global players such as Nestle, Wyeth and
• Fourfold capacity increase to 100 Mn birds per annum by 2012
• Almarai’s infant milk sales are expected to commence in 2011
at a CAGR of 8% during 2010-14
Abbot
Entry into the attractive KSA poultry segment through the acquisition of HADCO
CAGR (2010-14) BY SEGMENT
10 countries globally (world average of 11.5kg in 2008), according to FAO 44.9%
• Market size of USD450 Mn in 2009 • Almarai is well on track to capitalize on this attractive KSA poultry segment Poultry, Arable and Horticulture
Infant and others*
Source: Company filings, Mead Johnson, Al Mal Capital analysis
Bakery products
13.7%
12.8%
Fruit Juice
7.4% Cheese & Butter
7.3% Long Life Dairy
7.0%
Fresh Dairy
70% 60% 50% 40% 30% 20% 10% 0%
• With poultry consumption per capita of 37.0kg in 2008, KSA is amongst the top 61.8%
through a fourfold capacity increase from 25 Mn birds per annum in 2010 to 100 Mn by 2012
21
*CAGR for Infant segment is for the period 2011-14
Investment Theme Double-digit revenue growth expected to continue
Let the falcon guide you
Strong revenue growth expected in juice (12.8% CAGR) and bakery products
GROWTH IN TOTAL REVENUES (SAR MN)
(13.7% CAGR) during 2010-14 12,000
8,000 6,000
10,710
CAGR (2009-14) 12.8%
10,000
6,894
9,887
• Bakery segment to benefit from increased capacity
8,814
• Doubling of capacity from 85,000 tons in 2H10
7,778
5,869
• Rise in juice consumption due to increasing health awareness
4,000
Savola’s (owns 30% stake in Almarai) presence in supermarkets should also help
2,000
Almarai to occupy premium shelf space
0 2009
2010E
2011E
2012E
2013E
2014E
Overall, we expect total revenues to continue to grow in double digits (CAGR of 12.8% during 2009-14)
REVENUE COMPOSITION BY SEGMENT Dairy products Bakery Products
100%
1% 7%
80%
Juice Poultry and Horticulture
10%
12% 11%
13% 11%
92%
73%
9M10
Infant and others
3%
60% 40%
• Almarai’s revenues grew 18.8% YoY from SAR4.3 Bn in 9M09 to SAR5.1 Bn in
Diversification into other business lines is expected to change the revenue mix 4%
• Dairy segment’s contribution is forecast to drop from 73% in 2010 to 62% in 2014
62%
20%
0% 2006
2010
2014
Source: Company filings, Al Mal Capital analysis *CAGR for Infant segment is for the period 2011-14
22
Investment Theme Operating margin much higher than peer group average
Let the falcon guide you
EBIT MARGIN OF PEER GROUP (LAST 12 MONTHS)
Amongst the most profitable companies in the world in terms of operating margin
and net profit margin Almarai
• TTM EBIT margin of 21.3% versus peer group average of 9.5%
Bright Dairy & Food Co. Ojsc Dixy Group
Developing market players
China Mengniu Dairy Co.
Ability to reduce costs through vertical integration • Own dairy farms and has a herd size of more than 100,000 cows. ~95% of milk
Seventh Continent
requirement is supplied through own herd. In-house milk production helps to
Magnit Ojsc
ensure quality and serves as a barrier to new entrants
Savola Group
Wimm-Bill-Dann Foods
• Has grain production business through acquisition of HADCO
Emmi AG
Peer average 9.5%
Robert Wiseman Dairies
• Owns 97 sale depots and 2,000 delivery vans which transport Almarai’s products to 42,000 retail outlets
Dairy Crest Group Associated British Foods
• Almarai has invested heavily (SAR6.8 Bn in capex during 2006-09) to
Developed market players
Glanbia PLC
strengthen vertical integration and expand its business
Kraft Foods Inc
High yielding cow herd - annual yield of ~12,400 litres of milk per cattle is the
Nestle SA Kellogg Co.
highest in the world
General Mills Inc
Higher margins compared to peers and extensive distribution network should
Tiger Brand
further support market share expansion
Danone
0%
4%
8%
12%
16%
20%
24%
• Almarai is better positioned to lower its product prices compared to smaller players, and hence, gain market share
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
23
Investment Theme Margins likely to decline on higher feed imports
Let the falcon guide you
Going forward, we expect margins to decline
GROSS MARGIN AND OPERATING MARGIN Gross Margin (LHS)
Gross margin is expected to drop from 40.3% in 2009 to 38.4% in 2014
Operating margin (RHS)
41%
22%
• Increase in alfalfa imports to conserve local water resources, in line with
40%
21%
government efforts, is expected to increase dairy feed cost as locally produced
39%
20%
38%
19%
alfalfa is ~40% cheaper than imports • Rise in commodity prices, e.g. milk powder, Alfalfa hay and fruit concentrates
37%
18%
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
• We expect Almarai to keep its products competitively priced and refrain from passing on the entire cost increases to consumers in order to gain market share In line with gross margin, operating margin is expected to decline from 21.8% in
NET INCOME (SAR MN)
2009 to 20.4% in 2014. In 9M10, operating margin declined 87 basis points YoY CAGR (2009-14) 11.6%
2,000 1,600
1,200
1,434 1,097
1,600
1,752
1,900
from 23.1% in 9M09 to 22.2% However, Almarai’s vertical integrated business (involving high capex) could be a
1,274
barrier for new entrants, thereby helping sustain margins
800
• If this happens, we could see margins surprising on the upside
400
Despite margin compression, we expect net income to grow at a CAGR of 11.6%
0
during 2009-14 2009
2010E
2011E
2012E
2013E
2014E
• Driven by robust top-line growth Source: Company filings, Al Mal Capital analysis
24
Valuation Valuation looks expensive; upside due to earnings growth
Let the falcon guide you
HISTORICAL P/E MULTIPLE
STOCK PRICE (SAR) AND P/E BAND
22
140
134
130
21x
20
121
120
19x
110 100
17x
90
15x
Historical average 17.9
18
108
96
16
80
14
70
Dec-10
Jun-11
Dec-11
Q310
Q2 10
Q1 10
Q4 09
Q3 09
Q2 09
Fwd 12E
Jun-10
Fwd 11E
Dec-09
Fwd 10E
Jun-09
Current
Jan-09
Q1 09
Q3 08
50
Q4 08
12
60
During Jan 2009 - Sep 2010, Almarai had mostly traded in a P/E multiple range of 17x-19x
• Currently, the stock is trading at a P/E multiple of 21.6x on TTM basis, as it has moved up 10.9% since the company released its 3Q 2010 results on 05 October 2010 We believe the stock still holds upside potential
• Almarai offers the best exposure to the substantial opportunities in KSA’s retail sector on account of strong revenue growth in existing business lines and diversification into new business lines • Better placed to take a hit on margins compared to competitors, benefiting from its vertically integrated business lines. Ability to competitively price its products could further support market share expansion Source: Bloomberg, Company filings, Al Mal Capital analysis
25
Let the falcon guide you
Valuation Higher margins justify higher trading multiples than peer group Market Cap.
Company Almarai Danone Nestle SA Kellogg Company General Mills Inc Tiger Brands Limited Wimm-Bill-Dann Foods Kraft Foods Inc Ojsc Dixy Group Seventh Continent China Mengniu Dairy Co. Ltd. Associated British Foods PLC Dairy Crest Group PLC Glanbia PLC Robert Wiseman Dairies PLC Emmi AG Savola Group Peer group average Almarai premium (discount)%
P/E
EV/EBIT
Country KSA US Switzerland US US
(USD Mn) 6,946 38,924 191,321 18,749 22,927
Current 21.6 23.7 18.7 14.9 14.5
2010 20.1 17.2 17.1 14.8 14.6
Fwd 2011 17.9 15.5 16.5 14.0 13.4
Current 22.6 16.4 17.5 11.6 11.1
2010 21.0 13.8 13.2 11.4 11.3
Fwd 2011 18.7 10.2 10.3 9.2 8.9
South Africa Russia US Russia Russia China UK UK Ireland UK Switzerland KSA
5,076
14.9
15.1
14.0
10.8
11.2
9.7
5,495 54,656 1,127 610 4,400 14,055 837 1,495 396 1,189 4,293
44.4 19.8 NM 11.3 19.1 10.0 8.4 7.1 15.2 14.0 19.1 17.6 22.5%
37.8 15.6 NM 16.0 15.9 8.8 10.8 9.1 14.1 14.2 15.9 16.2 24.4%
29.0 13.5 20.7 8.6 14.4 8.5 9.7 10.1 12.8 13.6 14.4 14.5 23.6%
33.1 14.3 24.8 10.5 13.5 8.9 8.7 5.5 11.9 14.0 13.5 15.3 47.5%
30.0 12.2 16.7 9.8 10.8 8.5 10.9 6.7 11.5 17.6 10.8 13.0 61.0%
16.3 9.2 7.4 5.8 7.1 5.9 8.1 4.5 6.4 11.6 7.1 10.0 86.7%
Almarai is trading at a premium to its peers We believe this premium is justified as its operating margin (21.3% TTM) is more than double that of its peer average (9.5% TTM)
• Almarai’s 2010-12 EPS CAGR of 12.1% is higher than its peer group average of 11.2% Source: Thomson Reuters, Al Mal Capital analysis
26
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
NOPLAT
315
1,603
1,797
1,982
2,128
Depreciation and amortisation
102
441
476
488
476
75
(112)
(128)
(128)
(92)
(428)
(1,563)
(1,533)
(1,445)
(943)
65
369
611
896
1,569
1.00
0.95
0.88
0.81
0.75
64
352
538
727
1,173
Change in working capital Capex FCFF Discount factor
PV of FCFF 2,854
Sum of PV of FCFF Terminal value
29,294
PV of terminal value
21,891 9,876
Add: Investments Less: Net debt and minority interest
(4,659)
Total Equity Value
29,962
Fair value per share
130.3
VALUATION INPUTS Risk Free Rate Beta Risk Premium Cost of Equity WACC Terminal Growth Rate
2.7% 0.80 8.5% 9.5%
Cost of debt Effective tax rate Post tax cost of debt
3.2% 2.5% 3.1% 8.5% 3.0%
27
Valuation Comparative Valuation
Let the falcon guide you VALUATION METRICS
P/E Multiple
EV/EBIT
Premium / (Discount) to peer group
5.0%
Premium / (Discount) to peer group
5.0%
P/E Multiple
18.5x
EV/EBIT multiple
16.1x
FY 11 EPS
7.0
FY11 EBIT
1,644.8
Target EV
26,414.9
Add: Investments
9,876
Less: Net debt and minority interest
(4,659)
Target Market Cap.
31,631.9
Target price
128.6
Target price
137.5
Fair price
116.7
Fair price
124.8
Current price
111.5
Current price
111.5
Upside/Downside
4.6%
Upside/Downside
11.9%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
50%
130.3
65.1
Fair price using P/E multiple
25%
116.7
29.2
Fair price using EV/EBIT multiple
25%
124.8
31.2
Weighted average fair price
125.5
Current price
111.5
Change from current levels
12.6%
28
Let the falcon guide you
Valuation Assumptions
Dairy consumption per capita (excluding cheese and butter) is projected to grow from 35.5 litres in 2009 to 41.2 litres in 2014
Dairy segment
• Driven by increasing health consciousness and low consumption per capita compared to Western countries • Per capita consumption of liquid milk in GCC (20.6 liters in 2004) is much lower than US (83.9
liters in 2006), EU-25 (92.6 liters in 2006)
Market share is projected to increase from 29.5% in 2009 to 30.7% in 2014 • Expansion in production and distribution facilities
Prices are expected to rise 1.5% per annum during 2010-14 (lower than 3% inflation assumption) due to competition
Overall, dairy segment revenues are projected to grow at a CAGR of 8.0% during 2009-14
29
Let the falcon guide you
Valuation Assumptions
Non-dairy, new business lines
Infant formula segment
• Infant formula market is expected to grow at a CAGR of 8% during 2010-14 • Share in infant formula market is forecast to grow from 4% in 2011 to 17% in 2014
Poultry segment • Capacity expansion from 25 Mn birds per annum in 2010 to 100 Mn in 2013
Bakery segment • Benefiting from doubling of capacity from 85,000 tons in 2H10
Juice segment • Juice consumption is expected to rise from 12.4 liters in 2009 to 16.4 liters in 2014 • Almarai’s market share is projected to increase from 9.5% in 2009 to 11.9% in 2014
JV with PepsiCo likely to help Almarai expand its dairy and juice business in Asia and Africa • Outside GCC, sales is projected to increase from 1.1% of total revenues in 2009 to 1.5% in 2014
Combined contribution of non-dairy businesses to rise to 38% in 2014 from 23% in 2009
30
Let the falcon guide you
Valuation Assumptions
Gross margins are expected to decline, going forward • Alfalfa imports, as % of total alfalfa requirement, are expected to increase from 5% in 2008 to
Margins
50% in 2014 • Commodity prices of key raw materials (milk powder, Alfalfa hay and fruit concentrates) are forecasted to rise 3%, in line with inflation
• In comparison, Almarai’s product prices are forecasted to rise by 1.5% per annum, due to competition
Operating margin to decline in line with gross margin
Total SAR7.8 Bn capex (17% of total sales) during 2010-14E • Of the total capex, 84% is assumed to be spent on expansion, and the remaining 16% on
Capex
maintenance • Capex plan includes SAR2 Bn investment in capacity expansion at HADCO (from 25 Mn birds per annum in 2010 to 100 Mn by 2012) and SAR 650 Mn investment in the infant milk business
Capex of SAR2 Bn in 2010 and SAR1.7 Bn in 2011E
70% of the capex to be funded through debt
31
Valuation Sensitivity Analysis
Let the falcon guide you
200 141.4
SAR
150
100
91.8
96.4
91.8
98.0
155.5
157.7
162.6
162.6
125.5
109.5
50
0 Bea r Ca s e
Cos t of ra w ma teri a l ri s e by 1%
Growth i n product pri ces fa l l s by 1%
Ma rket s ha re Per ca pi ta fa l l s by 2% cons umption i s 10% l ower
Ba s e Ca s e
Per ca pi ta Ma rket s ha re Growth i n Cos t of ra w cons umption ri s e by 2% product ma teri a l fa l l s i s 10% hi gher pri ces ri s e by by 1% 1%
Bul l ca s e
Bear case:
Base case:
Bull case:
Per capita consumption of Juices and Dairy products is lower by 10%
Per capita consumption of Juices and Dairy products is higher by 10%
Almarai’s market share decreases by 2%
Per capita consumption of Dairy products grows by 1.8 liters for Dairy products and by 1 liter for the Juice segment
Price rise in Dairy, Juice segment is lower by 1%
Market share in Dairy segment to increase 25 bps in 2011
Price rise in Dairy, Juice segment is higher by 1%
COGS (as % of sales) is higher by 1%
Growth in product prices in line with inflation (1.5% YoY)
COGS (as % of sales) is lower by 1%
COGS (as % of sales) for Dairy products: stable for 2010, and then rise; stable for all other segments Source: Al Mal Capital analysis
32
Almarai’s market share increases by 2%
Almarai – Financial Statements Income Statement
Let the falcon guide you
Income statement (SAR Mn) Total Revenue
Gross Profit Margin (%)
FY09A 5,869 16.7% (3,503) 2,366 40.3%
FY10E 6,894 17.5% (4,174) 2,719 39.4%
FY11F 7,778 12.8% (4,726) 3,053 39.2%
FY12F 8,814 13.3% (5,385) 3,429 38.9%
FY13F 9,887 12.2% (6,071) 3,816 38.6%
FY14F 10,710 8.3% (6,601) 4,110 38.4%
Selling and Distribution Expenses General and Administration Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%)
(887) (200) 1,567 26.7% 1,279 21.8%
(1,031) (225) 1,871 27.1% 1,464 21.2%
(1,153) (255) 2,086 26.8% 1,645 21.1%
(1,298) (287) 2,319 26.3% 1,844 20.9%
(1,460) (322) 2,521 25.5% 2,034 20.6%
(1,581) (346) 2,659 24.8% 2,183 20.4%
Profit from associates Finance charges - net Net Income before tax
(2) (148) 1,129
(2) (134) 1,327
12 (163) 1,494
18 (195) 1,667
24 (234) 1,825
31 (235) 1,979
Tax Minority Interest Net Income after tax & MI
(29) (3) 1,097 18.7%
(34) (19) 1,274 18.5%
(38) (22) 1,434 18.4%
(42) (24) 1,600 18.2%
(46) (27) 1,752 17.7%
(50) (29) 1,900 17.7%
4.8 2.0
5.5 2.3
6.2 2.6
7.0 2.9
7.6 3.2
8.3 3.5
41.9%
41.9%
41.9%
41.9%
41.9%
41.9%
Growth (%) Cost of Revenue Gross Profit
Net Margin (%) Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
33
Let the falcon guide you
Almarai – Financial Statements Balance Sheet
Balance sheet (SAR Mn) Shareholders' Equity Minority Interest
FY09A 5,383 17
FY10E 6,149 52
FY11F 7,049 73
FY12F 8,048 96
FY13F 9,129 122
FY14F 10,294 149
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Short Term Loans Payables and Accruals Derivative Financial Instruments Total Liabilities and Equity
4,147 3,981 166 1,440 396 963 82 10,987
4,093 3,913 180 2,865 1,603 1,132 129 13,159
4,401 4,208 194 2,552 1,150 1,272 129 14,075
4,679 4,470 209 2,762 1,194 1,439 129 15,586
4,885 4,660 226 2,982 1,238 1,614 129 17,118
4,725 4,490 235 3,151 1,272 1,749 129 18,319
711
851
963
1,091
1,219
1,311
2,182 508 455 1,219 8,805 963 6,282 735 793 32 10,987
2,839 857 536 1,447 10,320 982 7,620 892 793 32 13,159
2,599 364 605 1,630 11,476 1,016 8,493 1,142 793 32 14,075
3,011 481 685 1,845 12,575 1,057 9,219 1,473 793 32 15,586
3,538 704 769 2,064 13,580 1,105 9,747 1,903 793 32 17,118
4,216 1,157 834 2,226 14,102 1,160 9,684 2,434 793 32 18,319
Working Capital
Current Assets Cash and cash equivalents Receivables and Prepayments Inventories Non Current Assets Investments and Financial Assets Property, Plant and Equipment Biological assets Intangible Assets - Goodwill Deferred charges Total Assets
34
Let the falcon guide you
Almarai - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Operating Activities Net Profit after tax & minority interest Depreciation & Amortization Bank charges Changes in operating assets & liabilities Other adjustments Cash Flows from Operating Activities
1,097 363 148 163 32 1,802
1,274 407 134 (139) 36 1,713
1,434 441 163 (112) 24 1,949
1,600 476 195 (128) 22 2,165
1,752 488 234 (128) 19 2,364
1,900 476 235 (92) 7 2,527
(1,335) 107 (458) (26) (1,711)
(1,903) 0 (21) 17 (1,908)
(1,563) 0 (22) 0 (1,585)
(1,533) 0 (23) 0 (1,556)
(1,445) 0 (23) 0 (1,469)
(943) 0 (24) 0 (967)
690 (380) (1) (148) 170
1,140 (460) (1) (134) 544
(158) (534) (1) (163) (857)
306 (601) (1) (195) (492)
234 (671) (1) (234) (672)
(136) (735) (1) (235) (1,107)
Net change in Cash and Cash Equivalents
261
349
(493)
117
223
453
Cash and Cash Equivalent at end of the year
508
857
364
481
704
1,157
Investing Activities Addition to property & equipment Proceeds from sale of property & equipment Acquisition of investments and financial assets Acquisition of subsidiaries, minority interest Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Distribution to minority interests Bank charges Cash Flows from Financing Activities
35
Let the falcon guide you Key ratios Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Almarai – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
40.3% 26.7% 18.7% 11.4% 24.4%
39.4% 27.1% 18.5% 10.6% 22.1%
39.2% 26.8% 18.4% 10.5% 21.7%
38.9% 26.3% 18.2% 10.8% 21.2%
38.6% 25.5% 17.7% 10.7% 20.4%
38.4% 24.8% 17.7% 10.7% 19.6%
127 80
127 80
126 80
125 79
124 79
123 78
71.9%
75.8%
70.8%
64.4%
56.9%
44.7%
23.4 4.4 18.8 2.7%
20.1 3.7 16.2 2.1%
17.9 3.3 14.7 2.3%
16.0 2.9 13.3 2.6%
14.6 2.6 12.2 2.9%
13.5 2.4 11.4 3.1%
18.7% 53.4% 2.04 20.4%
18.5% 52.4% 2.14 20.7%
18.4% 55.3% 2.00 20.3%
18.2% 56.6% 1.94 19.9%
17.7% 57.8% 1.88 19.2%
17.7% 58.5% 1.78 18.5%
36
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
37
Fawaz Al Hokair Capex to start yielding results JANUARY 2011
Let the falcon guide you
Al Hokair: Investment Summary (1/2) Capex to start yielding results
Let the falcon guide you
RATING
Outperform
Fair Value (SAR)
Promising outlook for clothing retail market in KSA
50.8
Upside
11.3%
Price (17 Jan 2011)
45.6
Market Cap. (SAR Bn)
3.2
Market Cap. (USD Mn)
851.2
Shares Outstanding
70 Mn
Price 52wk H/L
ALHOKAIR AB
Ticker (Reuters)
• Large young population base, higher income levels and the rising popularity of western clothing amongst the young are fuelling growth in KSA’s clothing retail market • Growing interest of mid and lower income segments in trendy, yet inexpensive, apparel is likely to boost growth in the street retailing format (retail activity in traditional shopping areas)
50.5/ 34.1
Ticker (Bloomberg)
INVESTMENT POSITIVES AND RISKS >
4240.SE
• EIU estimates the clothing and footwear market to rise at a CAGR of 13% from USD7.3 Bn in 2009 to USD13.3 Bn in 2014
AlHokair is well placed to capitalize on KSA’s young demographics and changing preferences • To capitalize on the growth opportunities, AlHokair has launched new initiatives and acquisitions to increase its presence across multiple age groups and income segments • Targeting the low income household segment through Street Retailing format
AlHokair
• Plans to open 70 Zippy stores in the next few years to expand into the children segment
TASI
120
• Wahba acquisition to improve AlHokair’s presence in the 16-25 age group
100
• Bolstered by these new initiatives, revenues are expected to grow at 13% CAGR during FY1114, higher than 12.5% during FY06-10
80 60
EBIT margin is expected to be between 11% and 12% in FY11-FY15, in line with FY10’s 11.6%
40
• Benefiting from restructuring measures and an anticipated decline in rental cost, partially negated by higher sales from the low margin Street retailing business
20 0 Apr-08
Dec-08
Source: Bloomberg
Aug-09
Apr-10
Jan-11
• Retail gross leasable area in KSA is expected to increase at a CAGR of 11.3% to reach 8.3 Mn sq. mt. during 2010-12. This should lower the rental rates for retail space in KSA 39
Al Hokair: Investment Summary (2/2) Al Hokair stock holds upside potential
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
DCF approach
51.0
P/E approach
51.1
P/Sales approach
50.0
Weighted average fair price
50.8
MULTIPLES
FY10A
FY11E
FY12E
3.3
4.9
4.5
P/E (x)
13.8
9.4
10.2
Sales per share (SAR)
29.6
35.1
39.1
1.5
1.3
1.2
EPS (SAR)
P/Sales (x) KEY STATISTICS Revenues (SAR Mn) EBITDA (SAR Mn) EBITDA margins Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
STOCK VALUATION > AlHokair is currently trading at a discount to its peers in terms of current and forward P/E and P/Sales multiples • At the current P/E of 10.8x and current P/Sales of 1.37x, AlHokair trades at a discount of 16.8% and 1.3%, respectively, versus a peer group average of 13.0x current P/E and 1.39x current P/Sales • In terms of forward multiples, Al Hokair trades on a 10.2x FY12E P/E and 1.16x FY12E P/Sales, a discount of 14.9% and 1.2%, respectively, versus a peer group average of 12.0x 2011E P/E and 1.18x 2011E P/Sales We believe the discount to its peer group average is justified, due to lower store productivity (Al Hokair’s 9M10 EBITDA margin of 14.1% is lower than the peer group average of 15.8%) However, we believe that the magnitude of discount should be lower considering that Al Hokair is well placed to capitalize on KSA’s young population base Our DCF, P/E, P/Sales based valuation returns a weighted average fair value of SAR50.8 (11.3% upside at current level) FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
1,899
2,074
2,456
2,740
3,060
3,385
232
318
385
429
475
518
12.2%
15.4%
15.7%
15.6%
15.5%
15.3%
202
232
341
313
344
371
40.1%
26.8%
24.5%
21.1%
16.5%
11.2%
5.1%
6.4%
6.5%
5.9%
6.5%
7.0%
40
Let the falcon guide you
Al Hokair: Overview Largest player in KSA in mid-income branded clothing retail
KEY STATISTICS
FY11E
Revenues (SAR Mn)
2,456
Operating Profit (SAR Mn)
289
Net Profit (SAR Mn)
341
EBITDA Margin (%)
15.7%
Net Margin (%)
13.9%
RoaE (%)
29.8%
Fawaz Abdul Aziz Al Hokair Company, established in 1990, is the largest player in KSA’s mid-income branded clothing retail segment, with more than 50% market share in 2008. The company owns and operates retail outlets, including clothes, footwear and accessories for men, women and children, and home furniture. As of March 2010, it had 864 clothing retail stores located in KSA with a total selling space of 191,530 sq. mt.
BRANDS > It primarily operates as a franchise of leading international brands. Famous brands include: Accessorize, Adams Kids, Banana Republic, Bershka, Charles and Keith, Gap, Marks and Spencer, Promod and Zara
SEGMENT REVENUES (2009) Women's Wear 39%
Department Stores (35%)
BUSINESS OVERVIEW >
BUSINESS MODEL > • •
Export 2%
Push model (e.g. Bershka) - where it acts primarily as the end retailer of the product, and hence, assumes lower risk Pull model (e.g. Marks and Spencer) - where it takes all operations-related decisions in KSA, and thus, assumes greater risk
MARKETS SERVED > Mens' Wear 3%
Source: Company
Shoes 11%
Children’s Wear 10%
Up until 2009, the company operated only in KSA. It opened its first international store outside KSA, in Kazakhstan, in February 2010 41
Investment Theme Rapid expansion in the past led to cannibalization
Let the falcon guide you
Al Hokair is the largest player in the KSA mid-income branded clothing retail
CAPEX (SAR MN)
segment with a market share of more than 50% in terms of sales 300
260
200
Increasing Capex in Expansionary phase CAGR FY05-10: 34.1%
150
129
250
It has invested heavily in expansion initiatives in the last few years 212
195 174
• ~SAR730 Mn in capex during FY07-FY10
167
• Store count grew from 200 in FY03 to 864 in FY10
105
100
• Number of brands rose from 25 in FY03 to >70 brands now
60
50
However, faster than required expansion led to cannibalization
0 FY05
FY06
FY07
FY08
FY09
FY10
FY11
• Sales per sq. mt. fell 12% from SAR11,157 in FY06 to SAR9,800 in FY07
FY12
• Al Hokair had to close 246 stores during FY08-FY09 to arrest the decline in
NUMBER OF STORES AND TOTAL SELLING SPACE No. of stores (LHS)
sales per sq. mt. at its stores
Selling area (RHS)
1,200
Saturation in its existing business also put pressure on the top-line
260
• Revenues grew at a CAGR of 11.9% during FY07-FY10 900
180 1018
600 717 550
680
737
1059
864
140
• Other Saudi retailers (Savola, Almarai and Jarir) observed much higher growth (24.4% on average) As a result, Al Hokair is targeting new segments, such as low income households, and niche segments, such as sports apparel, as well as overseas expansion for
300
100 FY06
('000 sq. mt.)
220
246 unprofitable stores were closed in FY08-09
FY07
FY08
FY09
Source: Company filings, Al Mal Capital analysis
FY10
FY11
FY12
growth 42
Investment Theme Foray into new business segments to boost top-line
Let the falcon guide you
Entering the low-income household segment through the Street Retailing format
• Large stores with higher sales per sq. mt. but lower gross margin, compared to Al Hokair’s existing stores
Overall, Al Hokair is well placed to take advantage of KSA’s young population base through its presence in various age groups and income segments
Expected to open 70 Zippy children's fashion stores over the next few years to expand into the children segment • >40% population in KSA is below 15 years of age Entering niche markets though its partnership with FIFA to capture the market for football lifestyle apparel and accessories in the soccer crazy MENA region Acquisition of Wahba (a retailer of apparel and shoes) in 2009 is expected to
REVENUE FROM VARIOUS SEGMENTS (SAR BN) Al Wahba acquisition
New Initiatives
4 0.3 3 2 1
0.3 0.1 0.0
0.2 0.2
0.4
0.6
• These stores have lower per sq. mt. sales, but higher gross margins, compared
Existing Business
0.3 0.8
improve Al Hokair’s presence in the 16-25 age group
0.3
1.0
to Al Hokair’s existing stores Expansion outside KSA, e.g. Egypt, Jordan and Kazakhstan • The company opened its first store outside KSA, in Kazakhstan, in February 2010
2.3
2.3
2.4
2.5
2.5
2.6
• It also acquired Retail Group Egypt (for SAR21.2 Mn) and Retail Group Jordan (for SAR27.1 Mn) from the parent (Al Hokair Group) in June 2010
0 FY11
FY12
FY13
Source: Company filings, Al Mal Capital analysis
FY14
FY15
FY16
43
Investment Theme Future sales growth likely to be better than FY06-FY10 performance
Let the falcon guide you
Overall, we expect Al Hokair’s revenues to grow at a CAGR of 13.0% during FY11-
REVENUE MIX Existing Business
100%
New Initiatives
FY14
Al Wahba acquisition
• Higher than 12.5% CAGR witnessed during FY06-FY10 6% 2%
9% 6%
80%
9% 13%
9%
8%
8%
19%
23%
26%
• AlHokair’s revenues grew 22.4% YoY from SAR1.1 Bn in 1H FY10 to SAR1.4 Bn in 1H FY11*
60% 40%
92%
85%
78%
Contribution of new initiatives to total revenues is projected to reach 34% in FY16 73%
69%
66%
from 8% in FY11
20%
Wahba acquisition is expected to contribute ~8-9% to revenues during FY12-FY16
0% FY11
FY12
FY13
FY14
FY15
However, integration of Wahba stores is likely to reduce sales per sq. mt. from
FY16
~SAR10,800 in FY10 to ~SAR10,500 in FY11
SALES PER STORE AND SALES PER SQ. MT. Sales per store (LHS)
3,000
stores Sales per sq. mt. are expected to start increasing from FY12 onwards, due to
12
2,600 10
2,400 8
2,200 2,000
SAR '000
SAR '000
14
Integration with Wahba stores
2,800
• These stores have lower per sq. mt. sales, compared to Al Hokair’s existing
Sales per sq. mt (RHS)
higher revenue contribution from Street retailing format stores • Management is targeting average revenue per sq. mt. of SAR 14,000 in the next 3-5 years
6
2009
2010
2011
2012
Source: Company filings, Al Mal Capital analysis
2013
2014
2015
2016
44
*Financial year end is March 2011
Investment Theme Margins had contracted significantly over the past few years
Let the falcon guide you
Gross margin declined from 47.1% in FY06 to 41.5% in FY09
MARGIN DEPENDENCY ON EXCHANGE RATES Gross Margin (LHS)
47.1%
48%
• Rapid expansion led to cannibalization and lower store utilization
USD-EUR Exchange Rate (RHS)
• Weak dollar against Euro. >40% of the merchandise is purchased in Euros
0.9
45.4% 44.1% 44%
42.6%
41.5%
EBIT margin contracted from 18.8% in FY06 to 8.8% in FY09
0.8
• On account of lower gross margin, coupled with increase in rental costs from
40%
10% of revenues in FY07 to 13% in FY09
0.7 36%
• Depreciation also increased from 2.8% of revenues in FY07 to 3.4% in FY09, 32%
0.6 FY06
FY07
FY08
FY09
due to high capex
FY10
However, since then, the EBIT margin improved to 11.6% in FY10 and further rose
PEERS’ EBITDA MARGIN (2008-9M10 AVERAGE) Developed market retailers
30% 25% 20% 15% 10% 5% 0%
to 13.4% in 1H FY11*. Gross margin also increased to 45.4% in FY10
Emerging market retailers
• Helped by restructuring measures and the dollar gaining against the euro in FY10 (average USD/EUR exchange rate of 0.74 in FY10 compared to 0.70 in
Peer average 16.7%
FY09)
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
Pantaloon Retail
Alhokair
Lojas Renner
Sprider Stores
Provogue (India)
Pumpkin Patch
Macy's Inc
Kohl's Corp.
Limited Brands
The Gap
Inditex SA
Benetton
Kappahl Holding
Aeropostale
Reitmans (Canada)
Next PLC
H &M
Despite this, AlHokair’s EBITDA margin (averaged 13.9% during 2008-9M10) is lower than the peer group average of 16.7% . In 9M10, AlHokair’s EBITDA margin stood at 14.1% compared to 15.8% for peer group • This can be attributed to lower productivity at Al Hokair’s stores (average revenue per sq. mt. of ~USD 3,000 in FY10) compared to ~USD 4,000 for peers 45
*Financial year end is March 2011
Investment Theme Restructuring likely to help stabilize margins
Let the falcon guide you
Going forward, the gross margin for the existing business is expected to improve,
SEGMENT-WISE GROSS MARGIN
albeit in a small way 60%
• Primarily driven by revenue contribution from Wahba stores, which have higher margins (~50 - 52%), and increased efficiency from new stores
55% 50% 50% 45%
• The dollar weakening against the euro, though, is likely to raise the cost of goods, thereby partially offsetting margin gains
45%
40%
37%
However, at the overall company level, gross margin is expected to marginally decline from 45.6% in FY11 to 45.1% in FY16 as higher sales from the low margin
30%
Existing business
Al Wahba
Zippy stores
FIFA
Street Retailing
GROSS MARGIN AND EBIT MARGIN 48%
Gross margin (LHS)
EBIT margin (RHS)
18% 16%
14% 12% 10% 42%
8% 40%
business. • Street retailing stores target low-income customers and hold more private
46%
44%
Street retailing business is likely to negate the margin expansion from the existing
6%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Company, Jiwar Real Estate Management & Marketing Co.. Al Mal Capital analysis
label branded clothes compared to existing Al Hokair stores EBIT margin to benefit from decline in rental cost as % of revenues • Rental rates are likely to fall due to the increase in retail space in KSA • Retail gross leasable area in KSA is expected to increase at a CAGR of 11.3% to reach 8.3 Mn sq. mt. during 2010-12, according to Jiwar Real Estate
Management & Marketing Co. We project EBIT margin to stay between 11%-12% in FY11-FY15, broadly in line with FY10 levels (11.6%) 46
Let the falcon guide you
Valuation Valuation at a deep discount to peer average Price/Sales per share
Market Cap.
Price/EPS
Company
Country
Al Hokair Aeropostale Inc Benetton The Gap Inc H & M Hennes & Mauritz AB Inditex SA Kappahl Holding AB Kohl's Corp.
KSA US Italy US Sweden Spain Sweden US
836 2,201 1,166 12,484 47,896 47,888 519 15,292
1.4 0.9 0.4 0.9 3.3 3.0 0.7 0.9
1.3 0.9 0.4 0.9 3.1 2.9 0.7 0.8
1.2 0.9 0.4 0.8 2.8 2.6 0.7 0.8
10.8 8.9 6.8 10.4 18.1 22.1 9.3 14.1
9.4 9.2 8.2 10.6 17.6 21.4 10.2 13.5
10.2 9.3 8.7 10.7 16.5 19.2 8.5 12.1
US
9,344
1.0
1.0
1.0
14.1
14.3
12.9
16.4 9.6 12.4 11.4 NM 9.6 NM 12.1 13.0 -16.8%
11.6 9.4 11.6 11.0 NM 9.4 15.3 22.8 13.1 -28.4%
10.3 9.1 10.2 10.4 17.2 7.9 11.8 17.0 12.0 -14.9%
Limited Brands Inc
(USD Mn)
Current
2010
Fwd 2011
Current
Macy's Inc US 9,842 0.4 0.4 0.4 Next PLC UK 5,902 1.1 1.1 1.1 Pumpkin Patch Limited NZ 225 0.8 0.7 0.7 Reitmans (Canada) Limited Canada 974 0.9 0.9 0.9 Sprider Stores SA Brazil 27 0.1 0.1 0.1 Lojas Renner SA Brazil 1,559 1.0 1.0 0.9 Pantaloon Retail (India) Ltd India 862 1.4 0.4 0.3 Provogue (India) Limited India 141 2.1 N/A 1.1 Peer group average 1.4 1.3 1.2 Al Hokair Al Hokair is trading at a steep discount to its peers in terms of current and forward P/E multiples premium (discount)% -1.3% 1.5%and P/Sales-1.2%
2010
Fwd 2011
We believe the discount to its peer group average is justified due to lower store productivity (Al Hokair’s 9M 2010 EBITDA margin of 14.1% is
lower than the peer group average of 15.8%) However, we believe that the magnitude of discount should be lower considering that Al Hokair is well placed to capitalize on KSA’s young
population base Source: Thomson Reuters, Bloomberg, Company filings, Al Mal Capital analysis
47
Valuation Al Hokair stock holds upside potential
Let the falcon guide you
STOCK PRICE (SAR) AND P/E BAND
HISTORICAL P/E MULTIPLE
75
20 13x
67.3
11x
58.3
65
18 16
55 45
9x
49.3
7x
40.4
14
35
12
25
10
15
8
Apr-08
Nov-08
Jul-09
Mar-10
Nov-10
Jul-11
Apr-08
Mar-12
2 year average P/E 12.1x
Nov-08
Jul-09
Mar-10
Nov-10
Jul-11
Mar-12
Current P/E multiple (10.8x) is significantly lower than historical 1-year P/E average of 13.1x and historical 2-year P/E average of 12.1x We believe the stock could trade at a multiple higher than its historical 2-year P/E average of 12.1x
• Primarily due to its substantial earnings potential on account of past capital investment • FY10-FY14 EPS CAGR of 12.5% compared to negative CAGR of 2.2% during FY07-10 Considering these factors, we believe that the stock offers 11.3% upside potential at the current level
Source: Bloomberg, Company filings, Al Mal Capital analysis
48
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
2HFY11*
FY12
FY13
FY14
FY15
FY16
100
304
335
362
391
405
Depreciation and amortisation
47
111
125
139
153
167
Change in working capital
(6)
(27)
(34)
(36)
(31)
(23)
Capex
(167)
(167)
(183)
(179)
(170)
(179)
FCFF
(26)
221
243
286
343
370
Discount factor
0.99
0.93
0.84
0.75
0.68
0.61
PV of FCFF
(26)
205
203
216
234
227
NOPLAT
Sum of PV of FCFF
1,059
Terminal value
4,285
PV of terminal value
2,634 234
Add: Investments Less: Net debt and minority interest
(358)
Total Equity Value
3,568
Fair value per share
51.0
VALUATION INPUTS Risk Free Rate
2.7%
Cost of debt
5.0%
Beta
1.03
Effective tax rate
4.3%
Risk Premium
8.5%
Post tax cost of debt
4.8%
Cost of Equity
11.5%
WACC
10.7%
Terminal Growth Rate
2.0%
49
* Financial year end is March
Let the falcon guide you
Valuation Comparative Valuation
VALUATION METRICS P/E Multiple P/E Multiple
P/Sales per share 13.1x
P/Sales per share multiple
1.5x
FY 12 EPS
4.47
FY12 Sales per share
39.1
Target price
58.6
Target price
57.2
Fair price
51.1
Fair price
50.0
Current price
45.6
Current price
45.6
Upside/Downside
9.6%
Upside/Downside
12.1%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
50.0%
51.0
25.5
Fair price using P/E multiple
25.0%
51.1
12.8
Fair price using P/Sales multiple
25.0%
50.0
12.5
Weighted average fair price
50.8
Current price
45.6 11.3%
Change from current levels
50
Let the falcon guide you
Valuation Assumptions
Street Retailing (retail activity in traditional shopping areas) • 12 Street Retailing format stores to be opened during FY11-FY16
New Business
• Assumed to be very large stores with store size of 4,000 sq. mt. (~225 sq. mt. for existing stores) • Higher sales per sq. mt of SAR 18,000
Zippy stores (children's fashion stores including clothes, footwear and accessories)
• 65 Zippy stores to be opened during FY11-FY16 • Sales per sq. mt of SAR 12,000, in line with sales per sq. mt in Al Hokair’s existing business • Average store size of 100 sq. mt.
FIFA stores • 12 large FIFA stores and 34 small FIFA stores to be opened during FY11-FY16 • Sales per sq. mt to be lower (SAR 8,000) due to its niche target segment • Average store size of 1,000 sq. mt.
51
Valuation Assumptions
Let the falcon guide you
Selling area to increase at a CAGR of 7.7% from ~191,000 sq. mt. in FY10 to ~300,000 sq. mt. in FY16
Existing Business
Sales per sq. mt. to grow 2% per annum • In line with per capita income growth
REVENUE MIX
• Average sales per sq. mt. for existing Al Hokair stores is SAR 12,000
Existing Business
100%
6% 2%
New Initiatives
9% 6%
80%
9% 13%
Al Wahba acquisition
9%
8%
8%
19%
23%
26%
Store expansion • 10-15 new stores (including domestic and international) to be opened each year under existing formats • Total number of stores to reach 1,018 in FY11 including 125 stores to be
60% 40%
92%
85%
78%
73%
69%
66%
FY13
FY14
FY15
FY16
acquired from the parent group (Al Hokair Group)
20%
0% FY11
FY12
Existing business’ contribution to total revenues is expected to decline to 66% in FY16 from 92% in FY11
52
Let the falcon guide you
Valuation Assumptions
Gross margins for existing store format expected to rise from 45.7% in FY11 to 46.7% in FY16 • Driven by revenue contribution from Wahba stores, which have higher margins (~50% - 52%), and
Margins
increased efficiency of new stores • However, any dollar depreciation with respect to the Euro could drive up cost of goods, thereby partially negating margin growth
Gross margins for new store formats are expected to be high for niche style stores (e.g. FIFA) and low for the Street retailing format • FIFA and smaller FIFA stores – 55% gross margin • Street retailing - ~37%-38% gross margin
• Zippy stores – 45% gross margin (In line with existing store formats)
Rental cost (per sq. mt.) projected to decline 2% in FY12 and remain stable in FY13, due to an oversupply in retail space. Thereafter, we expect rental to grow at 3% per annum, in line with inflation
Total capex of SAR1.1 Bn expected during FY11-16 • Of the total capex, 30% is assumed for expansion and the rest 70% for maintenance
Capex
We have assumed maintenance capex as percentage of sales to be 4%
Capex on opening of new stores is assumed at 2,800 SAR per sq. mt., growing at 5% per year
70% of the capex to be funded through debt 53
Valuation Sensitivity Analysis
Let the falcon guide you
70
SAR
60
55.0 45.1
50 44.0
44.0
45.4
46.7
56.4
56.7
57.8
57.8
50.8
40
30 Bea r Ca s e
Rental Gros s ma rgi n USD fa l l s by Sa l es growth growth i s 1% for new 5% a ga i ns t ra te per s tore hi gher bus i nes s i s Euro i s 1% l ower 5% l ower
Ba s e Ca s e
Sa l es growth USD Gros s ma rgi n Rental ra te per s tore a ppreci a tes for new growth i s 1% i s 1% hi gher by 5% a ga i ns t bus i nes s i s l ower Euro 5% hi gher
Bul l Ca s e
Bear case:
Base case:
Bull case:
Sales per store growth rate is lower by 1%
Sales per store growth rate is 1% in FY11 and 2%, beyond
Sales per store growth rate is higher by 1%
USD-EUR exchange rate stable at 0.77
USD-EUR exchange rate rises by 5%
Gross margin for new business initiatives is 45% for Zippy stores, 37% for Street retailing stores and 55% for FIFA stores
Gross margin for new business initiatives is higher by 5%
USD-EUR exchange rate falls by 5% Gross margin for new business initiatives is lower by 5% Growth in rental per sq. meter is higher by 1%
Rental rate per sq. mt. to fall by 2% in FY12, due to oversupply, and then grow between 2% and 3% per annum Source: Al Mal Capital analysis
54
Growth in rental per sq. meter is lower by 1%
Let the falcon guide you
Al Hokair - Financial Statements Income Statement
Income statement (SAR Mn) * Total Revenue Growth (%) Cost of Revenue Gross Profit Gross Profit Margin (%) Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%) Profit from associates Other income Finance charges - net Net Income before tax Tax Minority Interest Net Income after tax & MI Net Margin (%) Adjusted Net income Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%) * Year end is March
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
1,899 20% (1,111) 788 41.5% (65) (45) (511) 232 12.2% 168 8.8%
2,074 9% (1,132) 943 45.4% (78) (50) (574) 318 15.4% 241 11.6%
2,456 18% (1,336) 1,120 45.6% (96) (60) (675) 385 15.7% 289 11.8%
2,740 12% (1,486) 1,255 45.8% (111) (67) (760) 429 15.6% 317 11.6%
3,060 12% (1,663) 1,397 45.6% (125) (74) (848) 475 15.5% 350 11.4%
3,385 11% (1,849) 1,536 45.4% (139) (82) (936) 518 15.3% 378 11.2%
13 42 (12) 210 (7) 202 10.7% 172 2.89 1.75 60.5%
(30) 45 (13) 243 (11) (0) 232 11.2% 194 3.31 2.00 60.5%
24 67 (18) 361 (15) (5) 341 13.9%** 304 4.87 2.95 60.5%
26 11 (20) 334 (17) (5) 313 11.4% 313 4.47 2.70 60.5%
29 11 (22) 367 (18) (5) 344 11.2% 344 4.91 2.97 60.5%
31 11 (24) 397 (20) (5) 371 11.0% 371 5.31 3.21 60.5%
55
** Jump due to one off dividend of SAR37Mn from associates
Let the falcon guide you
Balance sheet (SAR Mn) * Shareholders' Equity Minority Interest
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Inventories, net Prepaid expenses and others Due from related parties Non Current Assets Plant, Property & Equipment Investment in companies equity Intangible Assets Other Non Current Assets Total Assets * Year end is March
Al Hokair - Financial Statements Balance Sheet FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
863 -
1,094 16
1,192 21
1,307 25
1,453 30
1,608 36
29 29 698 156 172 370 1,590
338 300 38 439 150 219 70 1,887
419 374 45 594 176 258 159 2,225
441 390 51 688 197 288 203 2,462
476 418 58 764 220 322 221 2,722
582 519 64 768 244 358 166 2,994
164
262
255
282
316
353
673 24 365 128 157 916 453 248 52 163 1,590
883 77 476 155 175 1,004 605 236 139 24 1,887
1,105 240 507 182 175 1,120 729 260 132 2,225
1,260 317 564 204 175 1,202 792 285 125 2,462
1,434 400 631 228 175 1,288 856 314 117 2,722
1,634 504 702 253 175 1,359 904 345 110 2,994
56
Let the falcon guide you
Al Hokair - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn) * Operating Activities Net Profit before tax & minority interest Depreciation & Amortization Changes in operating assets & liabilities Zakat paid Other adjustments Cash Flows from Operating Activities
Investing Activities Addition to property & equipment Other investments Consolidation/deconsolidation of a subsidiary Other cash outflows Cash Flows used in Investing Activities Financing Activities Equity capital raised Net change in debt Dividend paid Other financing cash flow Cash Flows from Financing Activities Net change in Cash and Cash Equivalents Cash acquired from subsidiary Cash and Cash Equivalent at end of the year * Year end is March
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
210 65 131
243 78 (43)
0 21 426
0 37 314
361 96 7 (15) (16) 433
334 111 (27) (17) (20) 381
367 125 (34) (18) (22) 418
397 139 (36) (20) (25) 455
(170) (214)
(148) (18)
0 4 (379)
(80) (2) (248)
(212) 24 0 0 (188)
(167) 0 0 0 (167)
(183) 0 0 0 (183)
(179) 0 0 0 (179)
0 268
0 0
0 162
0 60
0 46
0 46
(245) (74) (50)
(20) (20)
(243) (1) (81)
(198) 0 (137)
(199) 0 (152)
(216) 0 (171)
(3) 0 24
46 7 77
163 0 240
77 0 317
83 0 400
104 0 504
57
Let the falcon guide you
Al Hokair - Financial Statements Ratio Analysis
Key ratios *
FY09A
FY10A
FY11F
FY12F
FY13F
FY14F
Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity
41.5% 12.2% 10.7% 14.3% 22.9%
45.4% 15.4% 11.2% 13.3% 23.7%
45.6% 15.7% 13.9% 16.6% 29.8%
45.8% 15.6% 11.4% 13.4% 25.0%
45.6% 15.5% 11.2% 13.3% 24.9%
45.4% 15.3% 11.0% 13.0% 24.3%
120 86
154 122
139 107
129 97
124 92
120 88
40.1%
26.8%
24.5%
21.1%
16.5%
11.2%
15.8 1.7 15.2 5.1%
13.8 1.5 10.9 6.4%
9.4 1.3 9.1 6.5%
10.2 1.2 8.1 5.9%
9.3 1.0 7.2 6.5%
8.6 0.9 6.5 7.0%
10.7% 119.5% 1.84 23.5%
11.2% 109.9% 1.72 21.2%
13.9%** 110.4% 1.87 28.6%
11.4% 111.3% 1.88 23.9%
11.2% 112.4% 1.87 23.7%
11.0% 113.1% 1.86 23.1%
Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/S x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE * Year end is March
58
** Jump due to one off dividend of SAR37Mn from associates
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
59
Savola Group Profitability missing in strategy JANUARY 2011
Let the falcon guide you
Savola: Investment Summary (1/2) Scale-cost leadership strategy impacting bottom-line growth
Let the falcon guide you
Market Perform
RATING Fair Value (SAR)
35.1
Upside
7.7%
Price (17 Jan 2011)
32.6
Market Cap. (SAR Bn)
16.3
Market Cap. (USD Bn)
4.3
Shares Outstanding
SAVOLA AB
Ticker (Reuters)
2050.SE
Savola
140
• EIU estimates the Food, Drinks & Tobacco market to rise at 8% CAGR from USD37.2 Bn in 2009 to USD55.8 Bn in 2014
38.3/28.8
Ticker (Bloomberg)
• Moreover, the rising popularity of modern retail, a highly fragmented market and rapid urbanization offer ample growth opportunities for large established players in the Kingdom Market share gains using scale-cost leadership strategy • Despite positive industry fundamentals and a strong position in the MENA food & retail sector, Savola’s top-line is expected to grow at a modest 7% CAGR during 2010-14 • Savola is expected to keep price hikes at a minimum to maintain price leadership. Manufacturing sales growth, hence, should be led by volume expansion and market share gains
TASI
• Retail revenue growth should be backed by store expansions and increase in sales per sq. mt. at newly added selling spaces
120
100 80
Strategic drawback in terms of lower margins compared to global peers
60
• Lack of vertical integration means reliance on costlier global raw material supplies and margin volatility. Inability to pass this cost to customers has dragged its margins below peers.
40 20 0 Jan-08
Outlook for the food & retail sector in KSA is promising
• Robust economic growth, a large population base and the resultant rise in household expenditure are fuelling growth in KSA’s food & retail sector. Pilgrimage tourism provides an additional driver to retail sales in KSA (7.7 Mn tourists in 2008, nearly 14 Mn by 2018E)
500 Mn
Price 52wk H/L
INVESTMENT THEME AND RISKS >
Oct-08
Jul-09
Apr-10
Jan-11
Margins likely to improve on higher utilization • Operating margin is likely to expand from 3.7% in 2010 to 5.1% in 2014, driven by maturity of startup businesses and new stores
Source: Bloomberg
61
Savola: Investment Summary (2/2) Future earnings growth offers limited upside potential
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
STOCK VALUATION > At the current level, the stock looks fairly valued. The stock has gained 9.0% in 2010, as against a gain of 4.0% posted by the Tadawul All Share Index
DCF approach
34.6
SOTP approach
35.6
P/E approach
35.2
Forward P/E multiple of 13.3x is at a premium of 5.1% to its peer group average of 12.6x on the basis of FY11 EPS
Weighted average fair price
35.1
We believe this premium is unjustified on account of lower FY10-FY12E EPS CAGR of 10.0% compared to the peer group average of 13.7% FY10-FY12E EPS CAGR Also, Savola’s financial performance in the last few quarters could negatively impact investor sentiment. Over the last 3 quarters, Savola has missed analysts’ consensus net income estimate by 13%-16%
MULTIPLES
FY09A
FY10E
FY11E
1.9
2.3
2.5
Adj. P/E (x)*
17.6
14.3
13.3
EBIT (SAR Mn)
945
759
887
EV/EBIT (x)
21.4
27.2
23.3
Adj. EPS (SAR)*
Our DCF, SOTP and P/E based valuation methodologies return a weighted average fair value of SAR35.1 (7.7% upside at current level) Potential catalyst: Savola holds investments worth SAR6.1 Bn (at book value). We have not forecasted any gains from sale of the investment portfolio. Any related cash inflow could allow for upside
KEY STATISTICS
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
Revenues (SAR Mn)
17,917
20,536
21,945
23,638
25,398
26,918
EBITDA (SAR Mn)
1,641
1,490
1,681
1,900
2,135
2,326
EBITDA margins
9.2%
7.3%
7.7%
8.0%
8.4%
8.6%
952
1,085
993
1,106
1,273
1,379
56.4%
58.4%
55.0%
51.2%
42.5%
33.8%
4.3%
3.3%
3.0%
3.4%
3.9%
4.2%
Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
62
*Adjusted for income from the sale of investments
Savola: Overview Largest Food and Grocery retailer by sales in the KSA
Let the falcon guide you
KEY STATISTICS
FY10E
Revenues (SAR Mn)
20,536
Operating Profit (SAR Mn)
759
Net Profit (SAR Mn)
1,085
EBITDA Margin (%)
7.3%
Net Margin (%)
5.3%
RoaE (%)
15.0%
PRODUCT REVENUES (2009) Real Estate 1%
Edible Oil 32%
Retail 43%
BUSINESS OVERVIEW > Savola Group, established in 1979, is a conglomerate with subsidiaries operating in edible oils, sugar, retail, dairy products, real estate and plastics. It is the second largest Food and Grocery retailer by sales in the Middle East and market leader in KSA with 8.5% share in 2009. Famous
brands are Afia, Arabi, Ladan, Yudum in the edible oil segment; Al Osra, Ziadah and Safa in the sugar business; Panda and Hyper-Panda in retailing.
BUSINESS ACTIVITIES > • • • •
Production of edible oils, sugar, juices, tomato pastes, dairy and bakery products Manufacturing of plastic packaging products Operating super/hypermarkets, department stores, fast food and restaurants Real estate investment and development (residential and commercial)
STRATEGIC INVESTMENTS > Savola holds strategic investment in Almarai (29.9% stake), Herfy Foods (47.6% stake), Knowledge Economic City (6.4% stake), which are listed on the Saudi stock exchange.
MARKETS SERVED >
Plastics 4% Source: Company
Sugar, 20%
KSA, other GCC countries, Egypt, Iran, Turkey, Morocco and Algeria are the key end markets. KSA, Egypt and Iran accounted for 66.0%, 11.7% and 10.2%, respectively, of Savola’s revenues in 2009. 63
Investment Theme Long-term strategy based on scale-cost leadership
Let the falcon guide you
Leadership position in most of its key markets - strong brand image
MARKET SHARE FOR EDIBLE OIL
• Second largest Food and Grocery retailer in terms of revenue in the Middle
75%
East and market leader in KSA (8.5% market share in 2009)
60%
50%
42%
• More than 60% market share in KSA in terms of value in Sugar and Edible Oil
40%
segments
27% 20%
25%
20%
15%
15%
using scale-cost leadership Morocco
Sudan
Kazakhstan
Turkey
Algeria
Iran
Egypt
KSA
0%
30
Sugar Sales
Savola is better placed to command volume-based rebates from suppliers Edible Oils Sales
Co., Delta Sugar and AJWA group)
20 4.1
4.0
3.6
15 2.5
10
0
• Benefiting from its large size relative to regional peers (e.g. Al Khaleej Sugar
Retail Sales
25
5
• The company is strengthening its network both organically and through acquisitions (e.g. Giant stores) to expand market share
REVENUE BY PRODUCTS
SAR Bn
Long-term strategy to win market share from weaker rivals in fragmented markets
1.9 3.7
1.9 3.9
7.4
5.7
7.9
4.2 8.4
4.5 8.7
4.7 9.0
• Raw material cost, as % of revenues, is ~70% for retail companies • Economies of scale in other cost areas as well, such as manufacturing, marketing and distribution
4.6
3.2
4.2
6.1
7.9
2006
2007
2008
2009
8.4
9.2
10.2
11.2
12.3
Well diversified revenues on product basis
2010E 2011E 2012E 2013E 2014E
Source: Company filings, Al Mal Capital analysis
64
Investment Theme Retail segment growth driven by organic expansion
Let the falcon guide you
Retail revenue is forecasted to grow at 9.9% CAGR during 2009-14
RETAIL SEGMENT REVENUES
Mainly driven by expansions in the number of stores
14
CAGR: 9.9%
12
11.2
SAR Bn
10 8
CAGR: 35.6%
7.9
9.2
10.2
• Expected to increase store count from 114 in 2009 to 160 by 2012. Selling area is project to grow at 10.6% CAGR from 405,000 sq. mt. in 2009 to 550,000 sq. mt. in 2012
6.1
6 4
8.4
12.3
3.2
Focusing on opening Hypermarkets as compared to supermarkets
4.2
• In the long run, hypermarkets have higher sales per sq. mt. as they sell higher
2
value products (e.g. electronics and furniture)
0 2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
• Although gains take longer to accrue (~24 months compared to ~12 months for a supermarket) Increase in utilization (sales per sq. mt.) of newly added selling space should also lead to retail revenue growth in 2011 • 102,000 sq. mt. selling area added in 2009 (~34% over 2008)
Source: Company filings, Al Mal Capital analysis
65
Investment Theme Modest top-line growth expected, despite market share gains
Let the falcon guide you
Manufacturing revenue is forecast to grow at 4.8% CAGR during 2010-14
MANUFACTURING SEGMENT REVENUES CAGR: 4.8%
16
14 12
12.3
CAGR: 18.9%
SAR Bn
10
13.7
14.8
6.0
• Primarily driven by volume expansion on account of market share gains in existing markets by passing on cost benefits from economies of scale to consumer
10.1
• Improved capacity utilization from start up businesses (e.g. Algeria)
7.8
8
6
12.9
14.3
6.3
• Savola is expected to keep price hikes at a minimum to achieve market share
4
gains. Selling price in the sugar segment likely to decline in 2011 on global
2
oversupply concerns
0
2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
Overall, we expect Savola’s revenues to grow at 8.5% CAGR during 2009-14 • The company’s revenues grew 16.4% YoY from SAR13.1 Bn in 9M09 to SAR15.2
TOTAL REVENUES
Bn in 9M10 30
CAGR: 8.5%
25
SAR Bn
20
CAGR: 25.4%
21.9
26.9
25.4
17.9
13.8
15
10
20.5
23.6
9.1
10.4
2006
2007
5 0 2008
2009
2010E 2011E 2012E 2013E 2014E
Source: Company filings, Al Mal Capital analysis
66
Investment Theme Margins are lower compared to global peers
Let the falcon guide you
Despite economies of scale and lower tax rates, Savola’s net margin is lower than
EBIT MARGINS OF GLOBAL PEERS
global peers and was 200bps lower than Al Othaim in 1H10
Archer Daniels Midland
EBIT Margin-Edible Oil
China Agri-Industries
Low margins are due to a variety of reasons including:-
Corn Products Intl. Savola - Edible Oil
Average: 15.0%
9.0%
Thai Vegetable Oil
Savola’s strategy to pass on cost benefits from economies of scale to end customers to gain market share
K.S.Oil Sampoerna Agro Tbk
Reliance on global supplies of raw oil and cane raw sugar, the prices of which have
United Plantation Berhad
risen 15-30% YoY, as the business is not vertically integrated
IJM Plantations
0%
10%
Khon Kaen Sugar
20% 30% 40% EBIT Margins - Sugar
• Edible oil – buys raw oil and refines it into finished product • Sugar –imports raw sugar and refines it into white sugar
Maryborough Savola - Sugar
Average: 13.2%
9.5%
However, Savola could not pass the entire rise in raw material cost to end
Delta Sugar Illovo Sugar
customers as price leadership is essential for a mass grocery retailer
Savola - Retail 1% 0% 10% Dixy Group Cia. Brasileira de Dist. Sultan Center X5 Retail Group Comercial Mexicana Organizacion Soriana Seventh Continent Cencosud SA Magnit Wal-Mart de Mexico 0%
10%
Margin -40% Retail 20% EBIT30%
• Consumers in two main end-markets - Saudi and Egypt, are extremely price conscious, due to modest income levels compared to their GCC peers, such as UAE and Qatar
Average: 6.6%
High operating and integration costs due to business expansion
• EBIT margin of 4.6% for start-ups compared to 10.4% for mature businesses in the manufacturing segment in 2009 20%
Source: Thomson Reuters, Company filings, Al Mal Capital analysis
30%
40%
67
Investment Theme Margins to expand, but remain below those of 2009
Let the falcon guide you
Going forward, EBIT margin is likely to improve from 3.7% in 2010 to 5.1% in 2014
EXPANSION IN GROSS AND EBIT MARGIN
primarily driven by maturity of startup businesses Gross Margin (LHS)
EBIT Margin (RHS)
20%
6%
• EBIT margin in sugar is expected to rise from 5.9% in 2010 to 7.5% in 2014. The
16%
5%
new plant in Egypt will use cheaper local beet sugar as raw material from 2012
4%
• Increasing number of new stores focused on the hypermarket format which
12%
3% 8%
2%
4%
1%
0%
0%
2006
2007
2008
2009 2010E 2011E 2012E 2013E 2014E
GROSS MARGIN AND KEY RAW MATERIAL PRICES Gross margin (RHS)
sugar
oil
350
20%
300 (Rebased)
However, EBIT margin is expected to remain lower than the level witnessed in 2009 (5.3% in 2009) • Margins in 2009 were supported by a YoY decline in average raw material prices, not fully passed on to end customers. Since then, raw oil and cane sugar prices have risen 15-30%
• This, along with Savola’s inability to pass the entire rise in input cost to consumers, should keep margins below that in 2009
16%
250 200
12%
150
8%
100 50 0
Dec-06
take up to two years to reach peak sales volume
Sep-07
Jun-08
Mar-09
Source: Bloomberg, Company filings, Al Mal Capital analysis
Dec-09
Overall, we forecast EBIT margin of 3.7% in 2010 and 4.0% in 2011 • In 9M10, EBIT margin stood at 3.5% compared to 5.3% in 9M09
4%
Moreover, reliance on global commodity prices might lead to volatility in margins,
0%
as had happened in 4Q08, when gross margin fell to 6.9% due to high inventory
Sep-10
provisions led by a steep fall in raw oil prices 68
Investment Theme Historically, net income has benefited notably from sale of investments
Let the falcon guide you
Historically, Savola has generated significant income from the sale of investments.
ADJUSTED PBT AND CONTRIBUTION OF GAIN FROM INVESTMENTS TO PBT Adjusted PBT
• During 2006-09, the company generated a SAR2.0 Bn profit on sale of
1,600
(PBT) during this period)
70% 60%
1,200
SAR Mn
investments (contributed 46.4% to profit before zakat and minority interest
Contribution of gain from investments to PBT
• In January 2010, Savola floated 30% of its stake in fast food chain, Herfy,
50%
recording SAR196 Mn as capital gain
40%
800
30% 20%
400
Adjusting for investment capital gains, PBT grew at a CAGR of 10.1% during 200609
10% 0
0% 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Savola still holds investments worth SAR6.1 Bn (at book value) • This includes SAR2.7 Bn investment in Almarai, SAR223 Mn in Herfy Foods, SAR196 Mn in Emaar the Economic City and other investments in certain real estate companies (for e.g. Kinan International for Real Estate Development) • Assuming no income from sale of these investments, adjusted PBT is expected to grow at a CAGR of 13.3% during 2009-14, led by margin expansion and revenue growth • We expect any capital gain from sale of investments to boost Savola’s earnings
Source: Company filings, Al Mal Capital analysis
69
Valuation Future earnings growth offers limited upside potential
Let the falcon guide you
PEER GROUP MULTIPLE
STOCK PRICE (SAR) AND P/E BAND 50
49.1
20x
39.2
16x
34.3
14x
30
20
10
0 Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Country
44.2
18x
40
Company
Jul-11
Dec-11
Savola K.S.Oil IJM Plantations Corn Products Intl. Delta Sugar Illovo Sugar Ltd Sultan Center Seventh Continent Cia. Brasileira Dist Peer average Savola premium (discount) %
KSA India Malaysia U.S. Egypt South Africa Kuwait Russia Brazil
Mkt Cap (USD Mn) 4,267 414 811 3,530 496 1,862 373 610 6,417
PE Current
2010
Fwd 2011
14.8 13.7 26.7 18.6 17.9 21.3 NM 11.3 20.5 19.3
14.3 7.8 22.2 16.8 8.7 17.9 10.4 16.0 19.4 15.5
13.3 7.8 20.2 15.5 9.7 15.0 11.5 8.6 12.4 12.6
-23.7%
-7.4%
5.1%
At the current level, the stock looks fairly valued. The stock has gained 9.0% in 2010 as against a gain of 4.0% posted by the Tadawul All Share
Index • Forward P/E multiple of 13.3x at a premium of 5.1% to its peer group average of 12.6x on the basis of FY11 EPS • However, current P/E multiple of 14.8x is much below the historical 1 year P/E average of 16.8x Also, Savola’s financial performance in the last few quarters could negatively impact investor sentiment. During the last 3 quarters, Savola has
missed analysts’ consensus net income estimate by 13%-16% Potential catalyst: We have not forecasted any gains from sale of the investment portfolio. Any related cash inflow could allow for upside Source: Thomson Reuters, Bloomberg, Al Mal Capital analysis
70
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
NOPLAT
204
824
970
1,140
1,276
Depreciation and amortization
288
794
857
910
953
Change in working capital
(217)
(167)
(199)
(155)
(130)
Capex
(458)
(809)
(856)
(563)
(592)
FCFF
(183)
643
772
1,331
1,508
1.00
0.95
0.86
0.78
0.71
(183)
612
666
1,039
1,066
Discount factor PV of FCFF 3,200
Sum of PV of FCFF Terminal value
18,231
PV of terminal value
12,887 7,168
Add: Investments Less: Net debt and minority interest
(5,942)
Total Equity Value
17,313
Fair value per share
34.6
VALUATION INPUTS Risk Free Rate Beta Risk Premium
2.7% 1.1 8.5%
Cost of Equity
12.1%
Cost of debt Effective tax rate Post tax cost of debt
5.0% 7.0% 4.7%
WACC Terminal Growth Rate
10.4% 2.0%
71
Let the falcon guide you
Valuation SOTP Method
Segment
Valuation Method
Edible Oil
EBIT Multiple
473
13.0
6,137
Sugar
EBIT Multiple
243
12.1
2,932
Plastics
EBIT Multiple
66
19.2
1,264
Retail
EBIT Multiple
109
19.0
2,074
Franchising
EBIT Multiple
1
19.0
27
(33)
19.2
(642)
Corporate expenditure
Multiple
EBIT (FY10E) (SAR Mn)
DCF
EV (SAR Mn)
Investment in associates Herfy (49% stake)
Market Value
1,005
1.0
1,005
Almarai (29.9% stake)
Market Value
7,702
1.0
7,702
Book Value
1,555
1.0
1,555
AFS Investments
Book Value
835
1.0
835
Other investments (mainly land bank)
Book Value
847
1.0
847
Others
Total EV (SAR Mn)
23,738
Less: Net Debt
(4,378)
Less: Minority Interest
(1,536)
Fair Market cap. (SAR Mn)
17,824
Shares in issue (Mn)
500
SOTP fair price (SAR)
35.6 72
Valuation Comparative Valuation
Let the falcon guide you
VALUATION METRICS P/E Multiple Premium / (Discount) to peer group
-20%
P/E Multiple
15.5
TTM EPS
2.3
Fair price
35.2
Current price
32.6
Upside/Downside
7.9%
WEIGHTED AVERAGE PRICE (SAR)
Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
40.0%
34.6
13.8
Fair price using SOTP
40.0%
35.6
14.3
Fair price using P/E multiple
20.0%
35.2
7.0
Weighted average fair price
35.1
Current price
32.6
Change from current levels
7.7%
73
Let the falcon guide you
Valuation Assumptions Sales volume
Manufacturing segment
180,000 MT additional sugar production capacity is expected in 2012, due to the commencement of operations at Alexandria Sugar Co. • Production of white sugar from domestically grown sugar beet
Utilization rates should gradually improve, particularly in start-up businesses (e.g. Algeria)
• Market share gains are expected in existing markets by passing on the cost benefit from economies of scale to consumers Selling price
Double-digit growth in selling price is expected in 2010 • Raw oil prices were up 17% YoY in 2010 and raw sugar prices were up 30% YoY
Lower growth in sugar prices in Egypt compared to the global trend • The Egyptian government provide subsidies on sugar, due to which Savola is forced to sell sugar at competitive prices
Beyond 2010, selling price in the edible oil segment is expected to move in line with inflation (average 4% growth in 2011-14)
Sugar prices are expected to decline 2% in 2011 as a result of:• Global oversupply due to additional production coming on-stream in India and Australia 74
Let the falcon guide you
Valuation Assumptions New stores
Retail segment
30 new stores are expected to be opened during 2011-14, taking the total store count to 194 in 2014
Total selling area is projected to grow at 7.9% CAGR from 405,000 sq. mt. to 600,000 sq. mt. during 2009-14
Sales per store
We assume new stores take an average 3 years to generate similar sales as that of existing stores • 50% store efficiency in the first year, gradually increasing to 100% by the fourth year • This is because hypermarkets take ~24 months compared to supermarkets (~12 months) to generate similar per sq. mt. sales as that of existing store
Existing stores
Sales per store
12% growth in sales per store in 2010 • Boosted by a full year of revenues from the 11 Geant stores acquired in Oct 2009. Geant stores acquisition added 82,000 sq. mt. (27% addition over Savola’s selling space in 2008) • Overall, Giant and Geant stores constituted 37% of Savola’s total retail selling space as of 2009
5% per annum growth in sales per store during 2011-14 • Assuming 3% per annum growth in household expenditure and growing share of hypermarkets and supermarkets in overall retail industry 75
Let the falcon guide you
Valuation Assumptions
Operating margin expected to decline in 2010 Due to reliance on global supplies of raw oil and cane raw sugar, the prices of which have risen 15-30%
Margins
YoY However, Savola might not pass the entire rise in cost to end customers to gain market share
Margins are expected to pick up in 2011 driven by improved capacity utilization and maturity of start-up
businesses Margins in sugar likely to improve as the new plant in Egypt will use cheaper local beet sugar as raw material from 2012 Increased efficiency of the newly added selling space and focus on the hypermarket format which takes up to 2 years to generate similar per sq. mt. sales as that of existing stores
Overall, we forecast total capex of SAR3.7 Bn (3% of total sales) over 2010-2014 Of the total capex, 73% is assumed to be spent on expansion
Capex
We expect Savola to focus more on consolidating its existing businesses rather than on expansion 30 new stores to be opened in 2011-14 (20% expansion to over 152 stores at the end of 2009) Capex per sq. mt. for new store – SAR 14,000 in 2011, i.e., a total of SAR621 Mn in 2011
70% of the capex is to be funded through debt 76
Valuation Sensitivity Analysis
Let the falcon guide you
45
SAR
40
41.1
41.1
37.7 32.5
35
30
40.5
39.6 35.1
30.7 29.2
29.2
29.8
25 Bea r Ca s e
Inventory EBIT ma rgi n EBIT ma rgi n EBIT ma rgi n da ys of Suga r of Edi bl e Oi l of Retai l i ncrea s es by di vi s i on i s di vi s i on i s di vi s i on i s 5 da ys 1% l ower 1% l ower 1% l ower
Ba s e Ca s e
EBIT ma rgi n EBIT ma rgi n of Retai l of Edi bl e Oi l di vi s i on i s di vi s i on i s 1% hi gher 1% hi gher
EBIT ma rgi n Inventory of Suga r da ys di vi s i on i s decrea s es by 1% hi gher 5 da ys
Bul l Ca s e
Bear case:
Base case:
Bull case:
EBIT Margins of retail, edible oil and sugar division to be lower by 1%
EBIT Margin of retail division to rise by 40 bps to 1.7% in 2011, and then increasing steadily to 3.7% by 2014
EBIT Margins of retail, edible oil and sugar division to be higher by 1%
Inventory days increases by 5 days
EBIT Margin of the Edible Oil division to decline by 250 bps to 6.4% in 2010, and then expand to 6.8% in 2011, and to 7.8% by 2014 EBIT Margin of the Sugar division to decline 360 bps to 5.9% in 2010, and then increase to 6.5% in 2011, and to 7.5% by 2014
Source: Al Mal Capital analysis
Inventory days to reduce by 5 days to 52 days in 2010, on better inventory management 77
Inventory days decreases by 5 days
Let the falcon guide you
Savola – Financial Statements Income Statement
Income statement (SAR Mn) Total Revenue Growth (%) Cost of Revenue Gross Profit Gross Profit Margin (%) Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%) Profit from associates Other income Finance charges - net Net Income before tax & MI Tax Minority Interest Net Income after tax & MI Net Margin (%) Adjusted Net income before tax & MI Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
FY09A 17,917 29.6% (14,810) 3,107 17.3% (696) (629) (1,534) 1,641 9.2% 945 5.3%
FY10E 20,536 14.6% (17,381) 3,154 15.4% (731) (672) (1,723) 1,490 7.3% 759 3.7%
FY11F 21,945 6.9% (18,490) 3,454 15.7% (794) (729) (1,839) 1,681 7.7% 887 4.0%
FY12F 23,638 7.7% (19,828) 3,810 16.1% (857) (800) (1,967) 1,900 8.0% 1,043 4.4%
FY13F 25,398 7.4% (21,225) 4,174 16.4% (910) (878) (2,071) 2,135 8.4% 1,225 4.8%
FY14F 26,918 6.0% (22,411) 4,507 16.7% (953) (951) (2,183) 2,326 8.6% 1,372 5.1%
353 176 (227) 1,247 (63) (232) 952 5.3% 929 1.90 1.00 52.5%
405 361 (193) 1,331 (99) (148) 1,085 5.3% 1,136 2.17 1.08 50.0%
453 109 (223) 1,226 (98) (135) 993 4.5% 1,226 1.99 0.99 50.0%
466 109 (244) 1,374 (117) (151) 1,106 4.7% 1,374 2.21 1.11 50.0%
517 109 (261) 1,590 (143) (174) 1,273 5.0% 1,590 2.55 1.27 50.0%
521 109 (272) 1,731 (164) (188) 1,379 5.1% 1,731 2.76 1.38 50.0%
78
Let the falcon guide you
Savola – Financial Statements Balance Sheet
Balance sheet (SAR Mn) Shareholders' Equity Minority Interest
FY09A 6,961 1,567
FY10E 7,501 1,536
FY11F 7,995 1,671
FY12F 8,546 1,822
FY13F 9,180 1,996
FY14F 9,867 2,184
Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit
2,415 1,996 419 6,313 1,830 1,461 3,022
2,674 2,217 457 7,402 2,187 1,543 3,673
2,856 2,384 471 8,217 2,386 1,643 4,188
3,113 2,622 492 8,612 2,622 1,762 4,228
3,324 2,811 512 8,810 2,805 1,885 4,119
3,590 3,060 530 9,029 2,965 1,993 4,071
17,257
19,113
20,739
22,094
23,310
24,670
1,251
1,661
1,825
2,022
2,175
2,302
5,634 1,091 1,417 2,297 829 11,623 5,056 1,030 5,537 17,257
6,902 1,512 1,688 2,476 1,226 12,211 5,495 969 5,747 19,113
8,026 2,172 1,864 2,685 1,306 12,713 5,983 908 5,822 20,739
8,881 2,474 2,072 2,933 1,401 13,213 6,483 847 5,883 22,094
9,891 3,026 2,227 3,140 1,499 13,419 7,036 786 5,597 23,310
11,055 3,796 2,360 3,316 1,584 13,615 7,594 725 5,296 24,670
Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Accounts receivables, net Inventories, net Prepaid expenses and others Non Current Assets Investments Intangible assets Property, Plant and Equipment Total Assets
79
Let the falcon guide you
Savola – Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn) Operating Activities Net Profit after tax & minority interest Depreciation & Amortization Gain on sale of assets Changes in operating assets & liabilities Other adjustments Cash Flows from Operating Activities Investing Activities Addition to property & equipment Acquisition of investments and financial assets Other investments Consolidation/deconsolidation of a subsidiary Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Bank charges Other cash outflows Cash Flows from Financing Activities Net change in Cash and Cash Equivalents
Cash and Cash Equivalent at end of the year
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
952 696 (325) 534 485 2,342
1,085 731 0
993 794 0
1,106 857 0
1,273 910 0
1,379 953 0
(391) (45) 1,379
(167) (81) 1,539
(199) (50) 1,714
(155) (61) 1,967
(130) (44) 2,158
(880) (34) 0 0 (914)
(809) (34) 0 0 (843)
(856) (35) 0 0 (891)
(563) (36) 0 0 (599)
(592) (36) 0 0 (628)
(513) (227) 351 (444)
871 (544) (193) (123) 11
683 (496) (223) 0 (36)
277 (553) (244) 0 (520)
81 (637) (261) 0 (817)
201 (689) (272) 0 (760)
397
477
660
303
552
770
1,001
1,478
2,138
2,440
2,992
3,762
(945) (158) (560) 163 (1,500)
(55)
80
Let the falcon guide you
Key ratios Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle Leverage ratios Net Debt/Equity (%)
Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Savola – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
17.3% 9.2% 5.3% 6.0% 14.3%
15.4% 7.3% 5.3% 6.0% 15.0%
15.7% 7.7% 4.5% 5.0% 12.8%
16.1% 8.0% 4.7% 5.2% 13.4%
16.4% 8.4% 5.0% 5.6% 14.4%
16.7% 8.6% 5.1% 5.7% 14.5%
57 46
52 42
53 43
54 44
54 44
54 44
56.4%
58.4%
55.0%
51.2%
42.5%
33.8%
17.1 0.91 12.3 4.3%
15.0 0.79 13.9 3.3%
16.4 0.74 12.3 3.0%
14.7 0.69 10.9 3.4%
12.8 0.64 9.5 3.9%
11.8 0.61 8.4 4.2%
5.3% 103.8% 2.48 13.7%
5.3% 107.4% 2.55 14.5%
4.5% 105.8% 2.59 12.4%
4.7% 107.0% 2.59 12.9%
5.0% 109.0% 2.54 13.9%
5.1% 109.1% 2.50 14.0%
81
Let the falcon guide you
MARKET OVERVIEW
3
FOOD & RETAIL SECTOR: TRENDS & OUTLOOK
9
ALMARAI: GROWING STEADILY
16
AL HOKAIR: CAPEX TO START YIELDING RESULTS
38
SAVOLA: PROFITABILITY MISSING IN STRATEGY
60
JARIR MARKETING: NOT JUST A BOOKSTORE, LOWER MARGINS TO THE FORE
83
82
Jarir Marketing Company Not just a bookstore, lower margins to the fore JANUARY 2011
Let the falcon guide you
Jarir: Investment Summary (1/2) Competition and shift in sales mix to impact bottom-line growth
Let the falcon guide you
Market Perform
RATING Fair Value (SAR)
161.0
Upside
4.7%
Price (12 Jan 2011)
153.8
Market Cap. (SAR Bn)
6.2
Market Cap. (USD Bn)
1.6
Shares Outstanding Price 52wk H/L
• The young population is likely to be more tech-savvy compared to the current working population, and hence, buy more electronic products • With economic recovery, discretionary spending is likely to rise. This, coupled with the anticipated decline in average household size, is a positive sign for increased purchases of discretionary goods such as electronic goods, smart phones and gaming consoles
166.75/ 128.75
Ticker (Bloomberg)
JARIR AB
Ticker (Reuters)
4190.SE TASI
Robust revenue growth expected • Benefiting from positive industry fundamentals and its leadership position, we expect Jarir’s sales growth to remain strong (CAGR of 12.4% during 2009-14) • Organic expansion (selling space projected to grow 55% during 2009-14) and increase in sales per sq. ft. at newly added selling spaces should further boost revenue growth • New business lines, e.g. smart phones, are expected to show good progress
180 160 140 120 100 80 60 40 20 0 Jan-08
Large young population base is likely to ensure high demand for books and laptops in KSA
• KSA’s young demographic profile and the government’s increased emphasis on education are likely to create strong demand for school supplies and laptops
40 Mn
Jarir
INVESTMENT THEME AND RISKS >
• The pressure on laptop sales from lower priced net books is likely to ease Competition and shift in sales mix to hit margins • Margins are expected to decline for the next 3 years and stabilize by 2014 • Sales mix is moving towards low gross margin products - ~15% for laptops & smart phones, versus ~25% for school supplies, computer accessories Aug-08 Mar-09 Oct-09
Source: Bloomberg
Jun-10
Jan-11
• Growing competition from global and local players, as well as hypermarkets, could trigger a price war between retailers, thereby eroding profitability 84
Jarir: Investment Summary (2/2) Valuation looks expensive
Let the falcon guide you
VALUATION APPROACH
FAIR VALUE
DCF approach
161.5
P/E approach
159.9
Weighted average fair price
161.0
STOCK VALUATION > At the current level, the stock looks expensive. Jarir trades on a 14.3x FY11E P/E, a premium of 24.1%, versus a peer group average of 11.6x FY11E P/E We believe the premium to peer group average on forward multiple basis is unjustified as our estimated 2010-12E EPS CAGR of 9.2% is much lower compared to the estimated peer group average of 12.3% Considering these factors, we believe future earnings growth offers limited upside potential from these levels
MULTIPLES
FY09A
FY10E
FY11E
9.4
9.7
10.7
P/E (x)
16.4
15.8
14.3
EBIT (SAR Mn)
384
387
429
EV/EBIT (x)
16.2
16.2
14.7
EPS (SAR)
KEY STATISTICS Revenues (SAR Mn) EBITDA (SAR Mn) EBITDA margins Net income (SAR Mn) Net Debt/Equity Dividend Yield Source: Bloomberg
Our DCF and P/E based valuation returns a weighted average target price of SAR161.0 (4.7% upside at current level)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
2,555
2,972
3,388
3,797
4,216
4,577
403
408
453
494
540
589
15.8%
13.7%
13.4%
13.0%
12.8%
12.9%
374
390
429
464
502
543
13.5%
17.8%
17.1%
18.6%
15.6%
11.9%
6.2%
4.8%
5.2%
5.7%
6.1%
6.6%
85
Let the falcon guide you
Jarir: Overview Leading retailer of IT products and stationery in the GCC
KEY STATISTICS
FY10E
Revenues (SAR Mn)
2,972
Operating Profit (SAR Mn)
387
Net Profit (SAR Mn)
390
EBITDA Margin (%)
13.7%
Net Margin (%)
13.1%
RoaE (%)
50.6%
BUSINESS OVERVIEW > Jarir, established in 1980, is a retailer and wholesaler of office products, school supplies, children’s toys, books, computers and computer accessories. It is the leading retailer of IT products and stationery in the GCC and has 50% market share of laptop sales in KSA. The company’s product portfolio covers defensive school and office supplies and high growth computer goods and consumer electronics.
BUSINESS ACTIVITIES > •
Ownership and management of bookstores and computer electronics retail outlets
•
Distribution of computers and peripherals, office and school supplies, toys, sports equipments and stationary
•
Real estate investment and leasing
SEGMENT REVENUES (2009) Office supplies, 13%
School Supplies 8%
Books 6% Computer & IT products 65% Source: Company
Others 8%
SELLING SPACE > As of 2009, Jarir owned 27 retail stores in Saudi Arabia, Kuwait, UAE, and Qatar, and 5 wholesale showrooms. Total selling space stood at 905,000 sq. ft. as of 2009.
MARKETS SERVED > Jarir has a presence in KSA, other GCC countries and Egypt. KSA accounted for 88.3% of revenues in 2009; Other GCC countries and Egypt accounted for the remaining 11.7%.
86
Investment Theme Diversified portfolio mix helped weather the downturn
Let the falcon guide you
Resilient and diversified product portfolio
REVENUE MIX Computer & IT products
100%
9% 8% 10%
80%
15%
60%
Office supplies
School Supplies
9% 6% 8% 14%
8% 6% 8% 13%
63%
65%
Books
Others
11% 6% 8% 12%
• Benefiting from the defensive nature of school and office supplies, Jarir’s revenues grew 1% in 2009, despite the downturn • By contrast, sales of discretionary goods retailers - Fitaihi Holding and Bahrain Duty Free - declined 21.1% and 7.8%, respectively, in 2009 Historical sales expanded at 19.3% CAGR during 2006-09
40% 58%
62%
20%
• Organic expansion - Number of stores increased from 20 in 2007 to 27 in 2009.
0%
Total selling space grew 35% from 0.6 Mn sq. ft. in 2007 to 0.8 Mn sq. ft. in 2007
2008
2009
2010E
• Sales at both existing and new stores were strong with little signs of
SALES PER SQ. FT. 3,500
CAGR: 27%
3,264
3,000
SAR
2,000
Impact of pressure on laptop sales 2,838
2,891
2,358
2,500
2009
cannibalization as sales per sq. ft. rose from SAR2,358 in 2007 to SAR2,838 in 2009 • New business lines e.g. games consoles and smart phones showed good progress
2,021
Sales per sq. ft. fell 13% in 2009 due to pressure on laptop sales
1,500
1,000
• Decline in prices (USD650 in Dec-09 from USD800 in Dec-08) as lower priced
500
net books (USD400) took preference over laptops
0
2006
2007
Source: Company filings, Al Mal Capital analysis
2008
2009
2010E
87
Investment Theme Organic expansion and discretionary spending to fuel sales growth
Let the falcon guide you
The pressure on laptop sales is likely to ease
GROWTH IN STORE COUNT AND SELLING SPACE Total selling space (LHS)
• Only 14% of users see netbooks as a replacement of laptops
Retail stores (RHS)
1,400
50
1,200
40
'000 sq. ft.
1,000 800
30
600
20
400 10
200
0 2009
2010E
2011E
2012E
2013E
We expect sales growth to remain strong (12.4% CAGR in 2009-14) • Revenues grew 20.3% YoY from SAR1.8 Bn in 9M09 to SAR2.2 Bn in 9M10 KSA’s young demographics ensures strong demand for school supplies and laptops • The young population are likely to be more tech-savvy compared to the
0 2008
• Trend moving towards owning >1 computing device
current working population. Computer hardware sales projected to grow at 7%
2014E
CAGR to USD2.4 Bn during 2010-14
REVENUE GROWTH AND SALES PER SQ. FT. Revenues (LHS)
Organic expansion
Sales per sq. ft. (RHS)
5,000
• Projected to open 3-4 new stores every year in the next 5 years adding an
3,500
average of 90,000 sq. ft. per year
3,000
4,000
• Larger size stores (size of the new store opened in Feb 2010 is 4,800 sq. mt.
3,000
2,000
2,000
1,500 1,000
1,000
500
0
0 2006 2007 2008 2009 2010E2011E2012E2013E2014E
Source: Pricegrabber, Research and Markets, Company filings, Al Mal Capital analysis
SAR
SAR Mn
2,500
against an average of 3,000 sq. mt) With economic recovery, discretionary spending is likely to rise. Smart phones and
gaming consoles should show good growth • Handset sales and consumer electronics devices market expected to grow at 7% CAGR and 6% CAGR, respectively, in KSA during 2010-14 88
Investment Theme Shift in sales mix putting pressure on margins
Let the falcon guide you
CONTRIBUTION OF LOW MARGIN PRODUCTS & GROSS MARGIN Gross margin
19.1%
• Smart phones and games consoles have generated gross margins of ~12-15%
19.0% 17.3%
16.8%
11.2% 9.1%
8.8%
16.4% 16.1%
15.9% 16.0%
11.5% 11.7%
11.9% 12.1%
• On the other hand, school supplies and computer accessories have gross margins of ~25-30% Increasing competition from other large retailers such as Obeikan, Extra and PC
7.8%
Net 2007
2008
2009
2010E
2011E
2012E
2013E
Laptop
1,000
925
800
• Those with limited usage needs opted for netbooks over laptops
808
• Downturn also led to increased promotional spending by retailers by way of
600 400
Cannibalization of laptop sales from relatively lower-priced smart phones and
Cautious buying from customers during the economic downturn
Cellphones
774
2014E
netbooks
LAPTOP AND CELLPHONE PRICES
USD
16.7% in 9M10 Sales mix has moved towards lower margin products
Others (incl. smartphones, game consoles) as % of sales
20% 18% 16% 14% 12% 10% 8% 6%
Gross margin have contracted from 19.8% in 2006 to 19.0% in 2009 and further to
discounts/offers to generate sales. Advertising expenses, as % of revenues, 349
265
236
rose from 0.4% in 2006 to 0.9% in 2009
200 0 2008
2009
Source: Pricegrabber, Company filings, Al Mal Capital analysis
2010
89
Investment Theme Margins to remain under stress due to competition
Let the falcon guide you
Going forward, we expect margin pressure to ease a little
GROSS MARGIN AND EBIT MARGIN Gross margin
22% 19.8%
19.1%
19% 16%
• Given the anticipated stabilization of laptop and netbook sales
EBIT margin
• Economic recovery is likely to drive discretionary spending towards higher
19.0%
value goods, in turn, increasing sales per store, and thereby, store efficiency
17.3%
16.8% 16.4% 16.1% 15.9% 16.0%
16.1% 15.9% 15.0%
13.9% 13.0% 13%
12.7% 12.3%
and discounts 12.1% 12.2%
However, increasing competitive pressure at the retail level is likely to continue eroding profitability
10% 2006
2007
2008
2009
2010E 2011E 2012E 2013E 2014E
Peer average WH Smith
Jarir Officemax
Staples Inc Best Buy Co.
Radioshack
• This could trigger a price war between retailers which would also increase promotional expenditure
* Size of the bubble represents Asset turnover
50%
Overall, operating margin is expected to decline for 3 years from 13.0% in 2010 to
40%
12.1% in 2013, and stabilize thereafter
30%
Benchmarked to its global peers, Jarir fares well in terms of margins and asset
20% 10%
turnover (2.0x in 2009), but lags on 2011E EPS growth
0%
0.0%
• Competition from foreign players such as USA’s Office Depot, and domestic players such as Obeikan or Xtra and hypermarkets
OPERATIONAL PARAMETERS
2011 EPS growth
• Competition between suppliers may force them to offer retailers better terms
3.0%
6.0% 9.0% EBIT margin
12.0%
Source: Thomson Reuters, Bloomberg,, Company filings, Al Mal Capital analysis
15.0%
• Jarir 2011E EPS growth of 10.0% is much lower than the expected peer group average of 17.4% 90
Valuation Valuation looks expensive
Let the falcon guide you
PEER GROUP MULTIPLE
STOCK PRICE (SAR) AND P/E BAND 210
192.9 190
Country
Market Cap. (USD Mn)
PE Current
2010
Fwd 2011
20x 171.4
170
18x 150.0
150
16x
130
128.6
14x
110
90 Jan-09
Company
Aug-09
Mar-10
Oct-10
May-11
Dec-11
At the current level, the stock looks fairly valued
Jarir Marketing Sears Holdings Staples Inc Radioshack Corp. WH Smith PLC Officemax Incorp. Best Buy Co. Inc Peer group average Jarir premium (discount) %
KSA US US US UK US US
1,627 8,254 16,547 1,960 1,135 1,463 14,069
15.8 29.5 20.1 9.1 11.6 37.6 10.6
15.8 NM 17.6 8.5 10.5 23.5 9.8
14.3 NM 14.5 7.8 9.9 16.7 8.9
19.8
14.0
11.6
-19.8%
12.9%
24.1%
• Forward P/E at a premium to peer group average on the basis of FY11 EPS • Moreover, current P/E multiple (15.8x) is higher than the historical 2 year P/E average of 14.4x We believe the premium to peer group average on forward multiple basis is unjustified
• While Jarir's net margin of 13.9% (TTM) is higher than the peer group average (2.8% TTM), the forward EPS growth is much lower • 2010-12E EPS CAGR of 9.2% for Jarir compared to the estimated peer group average of 12.3% Considering these factors, we believe future earnings growth offers limited upside potential from these levels * We have considered only developed market peers as there are no listed comparable peers for Jarir in GCC and emerging markets. Source: Thomson Reuters, Bloomberg, Company filings, Al Mal Capital analysis
91
Let the falcon guide you
Valuation DCF Method
FCF ANALYSIS (SAR Mn)
4QFY10
FY11
FY12
FY13
FY14
90
419
456
498
543
6
23
26
29
32
Change in working capital
(15)
(59)
(67)
(72)
(66)
Capex
(61)
(101)
(128)
(88)
(92)
20
282
287
367
417
1.00
0.96
0.89
0.82
0.75
20
271
254
300
314
NOPLAT Depreciation and amortisation
FCFF Discount factor PV of FCFF Sum of PV of FCFF
1,158
Terminal value
7,132
PV of terminal value
5,364 36
Add: Investments
(96)
Less: Net debt and minority interest
6,461
Total Equity Value
Fair value per share
161.5
VALUATION INPUTS Risk Free Rate
2.7%
Cost of debt
6.6%
Beta
0.68
Effective tax rate
2.5%
Risk Premium
8.5%
Post tax cost of debt
6.4%
Cost of Equity
8.5%
WACC
8.5%
Terminal Growth Rate
2.5%
92
Let the falcon guide you
Valuation Comparative Valuation
VALUATION METRICS P/E Multiple Premium / (Discount) to peer group
0.0%
P/E Multiple
16.2x
FY 11 EPS
10.7
Target price
173.5
Fair price
159.9
Current price
153.8
Upside/Downside
4.0%
WEIGHTED AVERAGE PRICE (SAR) Methodologies
Weight assigned
Fair Price
Weighted average price
Fair price using DCF approach
70.0%
161.5
113.1
Fair price using P/E multiple
30.0%
159.9
48.0
Weighted average fair price
161.0
Current price
153.8
Change from current levels
4.7%
There are no listed comparable peers (those involved in IT retail and school & office supplies) for Jarir in the GCC and emerging markets. There are companies with similar business in developed markets (US and Europe), but there is a difference in the economic growth and demographic profile of the countries these companies operate in when compared to KSA. Hence, we have given low weight to peer group valuation for Jarir. 93
Valuation Assumptions
Let the falcon guide you
Organic expansion
Revenues
Retail store count projected to rise from 27 in 2009 to 41 in 2014 (52% growth) • Open 2-4 new stores every year in the coming five years (in line with management’s estimate of 40-45 by 2013)
REVENUE MIX Others
100%
• New stores to be 5% larger in size than the current stores (~3,000 sq. mt.)
Computer & IT products
Books, school & office supplies
7.8%
11.2%
11.4%
11.6%
11.8%
12.0%
64.9%
62.3%
62.4%
62.5%
62.6%
62.7%
27.3%
26.6%
26.3%
26.0%
25.7%
25.4%
2009
2010E
2011E
2012E
2013E
2014E
Like-for-like sales (same store sales) per sq. ft.
80% 60%
Assumed to be lower for IT products (1.5%) than for school and office supplies (2.0%) in 2011 due to cannibalization of laptop sales by lower priced netbooks and smart phones • Like-for-like sales (same store sales) per sq. ft. is assumed to increase from 2012 as laptop and netbook sales begin to stabilize
40%
20%
Selling space forecasted to grow 55% from 0.8Mn sq. ft. in 2009 to 1.3Mn sq. ft. in 2014
Higher growth expected in consumer electronics, smart phones and gaming consoles • Consumer electronics devices market in KSA forecasted to grow at a CAGR of 6% during 2010-14
0%
• Handset sales to be dominated by smart phones, and 3G handsets
Overall, we assume 3.2% CAGR in sales per sq. ft. during 2010-14 • With economic recovery, discretionary spend should grow • New stores take an average of 2-3 years to generate similar sales per sq. ft. as that of existing stores 94
Let the falcon guide you
Valuation Assumptions
We have assumed lower gross margin for laptops, smart phones and games consoles • 12-15% for laptops, smart phones and games consoles
Margins
• 25-30% for school supplies and computer accessories
We expect margins to decline in the next 3 years, but then stabilize • Increasing competitive pressure at the retail level from foreign (e.g. USA’s Office Depot) and local players (e.g. Obeikan, XTra) and growing trend of hypermarkets (e.g. Geant, Carrefour) at the retail level • Sales mix moving towards lower gross margin products
Competitive pressure is expected to be marginally offset by • Stabilization between laptop and netbook sales in the next two years
• Increase in discretionary spending towards higher value goods, driven by economic recovery • Supplier discounts/offers
Overall, we assume SAR0.5 Bn capex during 2010-14 (SAR97 Mn in 2010) • Of the total capex, 83% is assumed to be spent on expansion while the remaining 17% on maintenance
Capex
Capex per sq. ft. for new store (owned) – SAR 1,300 in 2010 and new store (leased) – SAR 650 in 2010
95
Let the falcon guide you
Valuation Sensitivity Analysis
180
171.7
173.7
175.9
175.9
166.3
SAR
160
151.1 148.1
148.1
161.0
155.8
149.6
140
120 Bea r Ca s e
Inventory Li ke-for-l i ke Li ke-for-l i ke 4 New retai l da ys s a l es growth s a l es growth s howrooms i ncrea s ed by for s chool for opened i n 5 da ys s uppl i es computers next two decrea s es by decrea s es by yea rs -5.0% -2.0%
Ba s e Ca s e
8 New retai l s howrooms opened i n next two yea rs
Li ke-for-l i ke Li ke-for-l i ke Inventory s a l es growth s a l es growth da ys for for s chool decrea s ed by computers s uppl i es -5 da ys i ncrea s es by i ncrea s es by 2.0% 5.0%
Bul l Ca s e
Bear case:
Base case:
Bull case:
Only 4 new retail showrooms opened during 2010-11
6 new retail showrooms opened during 2010-11
8 new retail showrooms opened during 2010-11
Growth in like-for-like sales per sq. ft. for computer and IT products to be lower by 2%
Like-for-like sales per sq. ft. for computer and IT products increases by 1.5% in 2011
Growth in like-for-like sales per sq. ft. for school supplies to be lower by 2%
Like-for-like sales per sq. ft. for school supplies rises by 2% in 2011
Growth in like-for-like sales per sq. ft. for computer and IT products to be higher by 2%
Inventory days increases by 5 days
Inventory days remains stable at 85 days in 2011
Source: Al Mal Capital analysis
96
Growth in like-for-like sales per sq. ft. for school supplies to be higher by 2% Inventory days decrease by 5 days
Jarir – Financial Statements Income Statement
Let the falcon guide you
Income statement (SAR Mn) Total Revenue
Gross Profit Margin (%)
FY09A 2,555 1.4% (2,069) 486 19.0%
FY10E 2,972 16.3% (2,474) 498 16.8%
FY11F 3,388 14.0% (2,833) 555 16.4%
FY12F 3,797 12.1% (3,186) 611 16.1%
FY13F 4,216 11.0% (3,546) 670 15.9%
FY14F 4,577 8.6% (3,846) 730 16.0%
Depreciation and Amortization General and Administration Expenses Selling and Marketing Expenses EBITDA EBITDA Margin (%) Operating profit Operating Margin (%)
(19) (52) (50) 403 15.8% 384 15.0%
(20) (58) (53) 408 13.7% 387 13.0%
(23) (66) (60) 453 13.4% 429 12.7%
(26) (75) (68) 494 13.0% 467 12.3%
(29) (83) (76) 540 12.8% 511 12.1%
(32) (91) (82) 589 12.9% 557 12.2%
Rental income Other income Finance charges – net Net Income before tax Tax Net Income after tax
14 (13) 385 (11) 374 14.6% 9.35 7.38 78.9%
26 0 (12) 402 (12) 390 13.1% 9.74 7.30 75.0%
28 0 (15) 442 (14) 429 12.6% 10.71 8.04 75.0%
29 0 (17) 479 (15) 464 12.2% 11.61 8.71 75.0%
30 0 (24) 517 (16) 502 11.9% 12.54 9.41 75.0%
32 0 (29) 560 (17) 543 11.9% 13.57 10.18 75.0%
Growth (%) Cost of Revenue Gross Profit
Net Margin (%) Earnings per share (SAR) Dividend per share (SAR) Payout Ratio (%)
97
Let the falcon guide you
Balance sheet (SAR Mn) Shareholders' Equity Long Term Liability Long term loans Other long Term Liabilities Current Liabilities Account Payable Accrued Expenses and other liabilities Bank credit Total Liabilities and Equity Working Capital Current Assets Cash and cash equivalents Accounts receivables, net Inventories, net Prepaid expenses and others Non Current Assets Investment property, net Equity investments Property, Plant and Equipment Total Assets
Jarir – Financial Statements Balance Sheet FY09A 723
FY10E 816
FY11F 932
FY12F 1,056
FY13F 1,190
FY14F 1,335
145 100 45 382 277 68 37
54 7 47 620 330 74 216
111 58 53 572 378 83 110
182 122 60 635 416 92 125
234 166 68 698 453 101 140
288 212 76 748 480 108 154
1,250
1,490
1,615
1,873
2,121
2,371
294
360
419
486
558
625
679 40 181 421 37 571 8 28 535 1,250
842 78 212 508 44 647 8 28 612 1,490
890 10 243 586 50 725 7 28 690 1,615
1,047 53 274 664 57 826 7 28 791 1,873
1,236 125 306 743 63 885 7 28 850 2,121
1,426 213 334 811 68 945 6 28 910 2,371
98
Let the falcon guide you
Jarir - Financial Statements Cash Flow Statement
Cash flow statement (SAR Mn)
FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
385 19 32 (8) 13 440
402 20 (53) (25) 1 345
442 23 (59) (14) 7 400
479 26 (67) (15) 7 431
517 29 (72) (16) 8 467
560 32 (66) (17) 8 517
(32) 0 (32)
(97) 0 (97)
(101) 0 (101)
(128) 0 (128)
(88) 0 (88)
(92) 0 (92)
(55) (338) 0 (393)
86 (296) 0 (210)
(54) (313) 0 (366)
80 (340) 0 (260)
61 (368) 0 (307)
61 (398) 0 (337)
Net change in Cash and Cash Equivalents
15
38
(68)
43
72
88
Cash and Cash Equivalent at end of the year
40
78
10
53
125
213
Operating Activities Net Profit before tax Depreciation & Amortization Changes in operating assets & liabilities Zakat paid Other adjustments Cash Flows from Operating Activities Investing Activities Addition to property & equipment Other cash outflows Cash Flows used in Investing Activities Financing Activities Net change in debt Dividend paid Other cash outflows Cash Flows from Financing Activities
99
Let the falcon guide you
KEY RATIOS Profitability ratios Gross Profit Margin EBITDA Margin Net Profit Margin Return on Average Assets Return on Average Equity Liquidity ratios Inventory days Cash conversion cycle
Leverage ratios Net Debt/Equity (%) Valuation ratios P/E x P/Sales x EV/EBITDA x Dividend Yield Du Pont Analysis Net margin Asset Turnover Financial leverage RoE
Jarir – Financial Statements Ratio Analysis FY09A
FY10E
FY11F
FY12F
FY13F
FY14F
19.0% 15.8% 14.6% 31.0% 53.1%
16.8% 13.7% 13.1% 28.4% 50.6%
16.4% 13.4% 12.7% 27.6% 49.0%
16.1% 13.0% 12.2% 26.6% 46.7%
15.9% 12.8% 11.9% 25.1% 44.7%
16.0% 12.9% 11.9% 24.2% 43.0%
85 69
85 69
85 69
85 70
85 71
85 72
13.5%
17.8%
17.1%
18.6%
15.6%
11.9%
16.4 2.41 15.5 6.2%
15.79 2.07 15.4 4.8%
14.3 1.82 13.9 5.2%
13.25 1.62 12.8 5.7%
12.26 1.46 11.7 6.1%
11.33 1.34 10.7 6.6%
14.6% 204.4% 1.73 51.7%
13.1% 199.5% 1.83 47.7%
12.6% 209.8% 1.73 46.0%
12.2% 202.7% 1.77 44.0%
11.9% 198.7% 1.78 42.2%
11.9% 193.0% 1.78 40.7%
100
Let the falcon guide you
Institutional Sales Jalal Faruki
+971 4 360 1103
Akram Annous
+971 4 360 1113
Research Irfan Ellam
+971 4 360 1153
Disclaimer: This report is not an offer to buy or sell nor a solicitation to buy or sell any of the securities mentioned within. The information and recommendations contained in this report were prepared using information available to the public and sources Al Mal Capital believes to be reliable. Al Mal Capital PSC does not guarantee the accuracy of the information contained within this report and accepts no responsibility or liability for losses or damages incurred as a result of investment decisions taken based on information provided or referred to in this report. Any analysis of historical facts and data is for information purposes only and past performance of any company or security is no guarantee or indication of future results. Al Mal Capital PSC, or its “related group companies” (which may include any of its branches, affiliates and subsidiaries) or any director(s) or employee(s) of the said companies, individually or collectively, may from time to time take positions or effect transactions related to companies mentioned in this report. Al Mal Capital PSC and its related group companies may have performed or seek to perform investment banking or any other financial or advisory services for the companies mentioned in this report. 101
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Office 302, Downtown Dubai ,Emaar Square 4 Sheikh Zayed Road, P.O. Box 119930, Dubai, UAE Tel: +971 4 360 11 11, Fax: +971 4 360 11 22 www.almalcapital.com
