Saudi Airlines Catering Co. - Aljazira Capital
Saudi Airlines Catering Co. March 2016 Investment Update Strong market share, healthy growth, non-existent competition, we maintain our “Overweight” recommendation. 4Q-2015 result remains healthy: The company in 4Q-2015 posted earnings of SAR 190.7mn, against SAR 172.8mn in 4Q-2014 translating into a jump of 10.37%YoY. A 3.9% rise in total revenues and a 6.8% fall in cost contributed to the growth in net income. On the revenue front, major growth of 50% YoY was seen in revenues from business lounge. Its share in revenue improved to 6.9% during 4Q-2015, as compared to 4.8% in 4Q-2014. In-flight revenues showed a growth of 0.6%YoY during 4Q-2015. Skysales revenue also improved by 19.0% YoY during 4Q-2015.
Please read Disclaimer on the back
Recommendation
Overweight
Current Price* (SAR)
101.75
Target Price (SAR)
141.1
Upside / (Downside)
38.7% *prices as of 3rd of March 2016
Total revenue, for 2015, increased by 5.8%YoY driven by 14.3%YoY increase in Sky sales revenues and 47.0% YoY increase in Business lounge revenue. Net income at SAR Key Financials 698.5mn showed an increase of 6.8%YoY for 2015. SARmn (unless specified) Strong Saudi Fleet Growth, supporting core operation: Saudi airlines is looking to add another 100 aircrafts1 to its fleet, taking the whole fleet size to 219 by the end of 2020. In 2015, Saudi airlines total fleet size stood at 125 planes, depicting a 6 year CAGR of 4.9%. With the massive expansion in the fleet size the company’s core revenues from in-flight catering is expected to show a 5 year CAGR of 12.6%. Airport Expansion: The Kingdom of Saudi Arabia is actively looking to expand its airports in order to support the growing numbers of passengers especially in Jeddah and Riyadh. Some of the major airport expansion projects in Saudi Arabia are
Revenues Growth % Net Income Growth % EPS
FY15E
FY16E
FY17E
2,261 6% 699 7% 8.52
2,446 8% 721 3% 8.79
2,703 10% 806 12% 9.83
Source: Company reports, Aljazira Capital, NM: Not Meaningful
Key Ratios SARmn (unless specified)
• Expansion of King Abdulaziz International Airport (Jeddah) to increase its capacity Gross Margin
FY15E
FY16E
36% 32% 31% 11.94 6.33 12.24 53% 38% 3.5% 7.50
35% 32% 29% 11.58 6.04 12.05 52% 35% 7.4% 7.50
FY17E
35% EBITDA Margin 32% Net Margin 30% • Expansion of King Khalid Airport (Riyadh) to increase its passenger handling capacity P/E 10.35 from 12mn to 35mn to a further 47.7mn. P/B 5.48 EV/EBITDA (x) 10.98 • Expansion of Prince Mohammad bin Abdulaziz Airport in Madina, whereby taking its ROE 53% total capacity to 12mn passengers2 . ROA 35% Dividend Yield 7.4% • In addition, a number of regional airports in Jizan, Abha, Arar, Qassim, Al-Jouf and Al- DPS 7.50 Source: Company reports, Aljazira Capital * Adjusted price Baha are expected to be completed in 2016 or 2017. from 13mn passenger to 80mn passengers.
• Along with that a lot of effort is being directed towards converting a number of domestic airports to international airports. We believe given the rising number of passengers, the number of inbound/outbound flights are expected to increase, which will result in higher passenger influx. The government is allocating significant funds to improve its airports in-order to support infrastructure development. Along with the expansion of Holy mosque, an ever increasing domestic travel, and strong expatriate population, we believe the higher passenger traffic will invariably end in higher revenue opportunities for Saudi airline catering. Non-airlines business, improving revenue share: Saudi catering prime revenue source is its in flight catering service which in 2015 contributed 72.3% to the total revenues, as compared to average 77.8% contribution during 2010-2015.The non-airlines revenue contribution in 2015 stood at 9.1%, as compared to an average of 5.1% from 2010-2014. Non-airlines revenue has grown at a 6 year CAGR of 65.2%. The company has diversified its business by providing catering services to corporate clients like STC, Maaden, Saudi Railways Organization, SABB .. etc. The company has also entered into the laundry business with an investment of SAR 64mn. High ROE despite debt Free balance sheet: The company’s balance sheet on the back of strong performance has grown from SAR 814mn in 2009 to SAR1.92bn in 2015, out of which 27.6% is cash. Given the minimum capital expenditure requirement for expansion, the company’s requirement for debt financing is low, which has resulted in zero debt for the company. The company has also maintained a healthy ROE of 49%3 despite of zero debt on the balance sheet. Given that the capex requirement for the company is extremely low, we believe that future debt requirements will be small. We expect the company to maintain a ROE of 52%4 , primarily due the strong growth in earnings.
http://www.arabnews.com/news/732666 http://www.arabnews.com/madinah-airport-expansion-deals-signed 2010-2015 Average ROE 4 2016-2020 Average ROE
Valuation: Saudi Catering is expected to benefit from the increase in Saudi Airlines fleet, which by 2020 is expected to double. The company has a debt free balance sheet , due to the low capex requirement, and a high percentage of cash. For 2016 we expect Catering to post earnings of SAR 739 mn, depicting a rise of 6%YoY. Revenues in the same time period is expected to stand at SAR 2,446mn (8% YoY). Catering is currently trading at a trailing 12 months PE of 15.4x, against our 2016 forward PE of 11.29x,given the current state of oil prices we believe a slowdown in economic activity is imminent, which can potentially impact Saudi airlines decision to increase its fleet size. Due to which we have considered our “Base” scenario. We believe at current market price, Catering is trading at a discount of 38.7% against our revised 12-month price target of SAR 141.1 we update our recommendation to “Overweight”. Risks to our Valuation: Fleet Expansion: We have based our forecast on an increase in the number of planes by Saudi airlines, which is susceptible to change; any change in plan by Saudi airlines will impact our forecast and price target. Current market Condition: The 12-month price target is based on pure fundamentals of the stock, and does not consider the current market sentiment. We believe the target price based fundamentals is the appropriate reflection of the company.
1 2 3
1
© All rights reserved
Acting Head of Research
Talha Nazar +966 11 2256115 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
Please read Disclaimer on the back
Recommendation
Overweight
Current Price* (SAR)
101.75
Target Price (SAR)
141.1
Upside / (Downside)
38.7% *prices as of 3rd of March 2016
Total revenue, for 2015, increased by 5.8%YoY driven by 14.3%YoY increase in Sky sales revenues and 47.0% YoY increase in Business lounge revenue. Net income at SAR Key Financials 698.5mn showed an increase of 6.8%YoY for 2015. SARmn (unless specified) Strong Saudi Fleet Growth, supporting core operation: Saudi airlines is looking to add another 100 aircrafts1 to its fleet, taking the whole fleet size to 219 by the end of 2020. In 2015, Saudi airlines total fleet size stood at 125 planes, depicting a 6 year CAGR of 4.9%. With the massive expansion in the fleet size the company’s core revenues from in-flight catering is expected to show a 5 year CAGR of 12.6%. Airport Expansion: The Kingdom of Saudi Arabia is actively looking to expand its airports in order to support the growing numbers of passengers especially in Jeddah and Riyadh. Some of the major airport expansion projects in Saudi Arabia are
Revenues Growth % Net Income Growth % EPS
FY15E
FY16E
FY17E
2,261 6% 699 7% 8.52
2,446 8% 721 3% 8.79
2,703 10% 806 12% 9.83
Source: Company reports, Aljazira Capital, NM: Not Meaningful
Key Ratios SARmn (unless specified)
• Expansion of King Abdulaziz International Airport (Jeddah) to increase its capacity Gross Margin
FY15E
FY16E
36% 32% 31% 11.94 6.33 12.24 53% 38% 3.5% 7.50
35% 32% 29% 11.58 6.04 12.05 52% 35% 7.4% 7.50
FY17E
35% EBITDA Margin 32% Net Margin 30% • Expansion of King Khalid Airport (Riyadh) to increase its passenger handling capacity P/E 10.35 from 12mn to 35mn to a further 47.7mn. P/B 5.48 EV/EBITDA (x) 10.98 • Expansion of Prince Mohammad bin Abdulaziz Airport in Madina, whereby taking its ROE 53% total capacity to 12mn passengers2 . ROA 35% Dividend Yield 7.4% • In addition, a number of regional airports in Jizan, Abha, Arar, Qassim, Al-Jouf and Al- DPS 7.50 Source: Company reports, Aljazira Capital * Adjusted price Baha are expected to be completed in 2016 or 2017. from 13mn passenger to 80mn passengers.
• Along with that a lot of effort is being directed towards converting a number of domestic airports to international airports. We believe given the rising number of passengers, the number of inbound/outbound flights are expected to increase, which will result in higher passenger influx. The government is allocating significant funds to improve its airports in-order to support infrastructure development. Along with the expansion of Holy mosque, an ever increasing domestic travel, and strong expatriate population, we believe the higher passenger traffic will invariably end in higher revenue opportunities for Saudi airline catering. Non-airlines business, improving revenue share: Saudi catering prime revenue source is its in flight catering service which in 2015 contributed 72.3% to the total revenues, as compared to average 77.8% contribution during 2010-2015.The non-airlines revenue contribution in 2015 stood at 9.1%, as compared to an average of 5.1% from 2010-2014. Non-airlines revenue has grown at a 6 year CAGR of 65.2%. The company has diversified its business by providing catering services to corporate clients like STC, Maaden, Saudi Railways Organization, SABB .. etc. The company has also entered into the laundry business with an investment of SAR 64mn. High ROE despite debt Free balance sheet: The company’s balance sheet on the back of strong performance has grown from SAR 814mn in 2009 to SAR1.92bn in 2015, out of which 27.6% is cash. Given the minimum capital expenditure requirement for expansion, the company’s requirement for debt financing is low, which has resulted in zero debt for the company. The company has also maintained a healthy ROE of 49%3 despite of zero debt on the balance sheet. Given that the capex requirement for the company is extremely low, we believe that future debt requirements will be small. We expect the company to maintain a ROE of 52%4 , primarily due the strong growth in earnings.
http://www.arabnews.com/news/732666 http://www.arabnews.com/madinah-airport-expansion-deals-signed 2010-2015 Average ROE 4 2016-2020 Average ROE
Valuation: Saudi Catering is expected to benefit from the increase in Saudi Airlines fleet, which by 2020 is expected to double. The company has a debt free balance sheet , due to the low capex requirement, and a high percentage of cash. For 2016 we expect Catering to post earnings of SAR 739 mn, depicting a rise of 6%YoY. Revenues in the same time period is expected to stand at SAR 2,446mn (8% YoY). Catering is currently trading at a trailing 12 months PE of 15.4x, against our 2016 forward PE of 11.29x,given the current state of oil prices we believe a slowdown in economic activity is imminent, which can potentially impact Saudi airlines decision to increase its fleet size. Due to which we have considered our “Base” scenario. We believe at current market price, Catering is trading at a discount of 38.7% against our revised 12-month price target of SAR 141.1 we update our recommendation to “Overweight”. Risks to our Valuation: Fleet Expansion: We have based our forecast on an increase in the number of planes by Saudi airlines, which is susceptible to change; any change in plan by Saudi airlines will impact our forecast and price target. Current market Condition: The 12-month price target is based on pure fundamentals of the stock, and does not consider the current market sentiment. We believe the target price based fundamentals is the appropriate reflection of the company.
1 2 3
1
© All rights reserved
Acting Head of Research
Talha Nazar +966 11 2256115 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
