Winning Formula
Abdullah Al Othaim Markets 2Q2016 Results Review 31 July 2016
Winning Formula
SAR 107
Buy
12-Month Target price
17% topline growth and gross margin expansion are noteworthy as Othaim demonstrated remarkable resilience to cautionary consumer spending. We expect discount retailer to continue benefiting from promotional pricing as premium retailers contend with shrinking basket size and customer attrition. Although SAR 1.12 EPS (-10% Y/Y) missed our SAR 1.21 estimate and consensus SAR 1.34, we see thin margins as greater risk. Headline 2Q results are encouraging as we await full financials to revisit our estimates and target price. For now maintain Buy and SAR 107 target price.
Recommendation
Stock Details Last Close Price
SAR
99.00
Upside to target
%
8.1
SAR mln
4,455
mln
45
Market Capitalization Shares Outstanding 52-Week High
SAR
110.75
Bucking the trend as sales maintain growth momentum
52-Week Low
SAR
62.25
Revenues jumped +17% Y/Y to SAR 2,019 mln beating our SAR 1,890 forecast by 7%. In an environment of cautionary spending, Othaim continues to benefit as a low cost retailer with limited customer attrition. In our view this bodes well as revenues maintained growth momentum in light of slowdown seen at other retailers (for example Farm +2% Y/Y). Substitution to lower priced alternatives could help Othaim win shoppers away from perceived higher priced retailers such as Danube or Tamimi.
Price Change (YTD)
%
10.3
Gross margins better than expected
Revenues (mln)
Despite promotional pricing gross margins improved to 16.7% from 14.4% in year ago period, and ahead of our estimate 15.8%. Although no specific reason was identified in management commentary for margin improvement, clearly Othaim’s business model is gaining favor in current spending environment.
Gross Margin
Earnings miss on higher opex
Price Multiples
Operating expenses increased during the quarter due to transportation, electricity and personnel costs to narrow the variance on operating profit to +4% from our forecast. We estimate +15% sequential increase in opex likely resulted from store additions. Higher financing costs contributed to earnings miss. We were looking for SAR 55 mln net income and consensus SAR 60 mln, while the actual came in at SAR 50 mln (-10% Y/Y). More critically, 2.5% operating and net margins place Othaim on weak footing for ongoing regulatory changes particularly with regards to workforce. The discount retailer’s ability to absorb wage inflation will be tested if job nationalization accelerates.
12-Mth ADTV
thd
59
SAR
5.20
4001.SE
AOTHAIM AB
EPS 2016E Reuters / Bloomberg
SFC Estimates
2016E
2017E
6,730
7,436
16.8%
16.5%
EBIT (mln)
219
257
Net Income (mln)
234
260
2015
2016E
2017E
P/E
19.3x
19.0x
17.1x
EV / EBITDA
14.1x
11.7x
9.5x
P/S
0.7x
0.7x
0.6x
P/B
3.8x
3.7x
3.2x
1-Year Share Performance
120
Shares outperforming peers Shares have outperformed the median for our Retail-Consumer coverage universe over the past 3 months gaining +5% versus -3%, and +21% versus +1% in the last 6 months. Clearly Othaim is doing something right – no frills offering in tighter spending environment could translate into market share gains.
100 80 60 40
Othaim (SAR mln)
2Q16
2Q16E
2Q15
Y/Y Chg
1Q16
Q/Q Chg
Revenues
2,019
1,890
1,726
17%
1,656
22%
7%
337
299
248
36%
295
14%
13%
16.7%
15.8%
14.4%
51
49
50
9%
4%
7%
-8%
Gross profit Gross margin Operating profit Operating margin
Variance Consensus 1,978
17.8% 3%
47
2.6%
2.9%
50
55
56
Net margin
2.5%
2.9%
3.2%
2.8%
3.0%
1.12
1.21
1.24
1.04
1.34
EPS
S O N D
J
F M A M
Othaim
TASI
J
J
SASERETL
Source: Bloomberg, Tadawul, SFC
2.5%
2.9% 47
A
57
Net income
-10%
J
2.9% 60
Asim Bukhtiar, CFA [email protected] +966 11 282 6844 Yazeed Al-Saikhan [email protected] +966 11 282 6608
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of company under coverage in this report are expected to perform inline with the sector or the broader market.
SELL Shares of company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. 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. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. 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.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Winning Formula
SAR 107
Buy
12-Month Target price
17% topline growth and gross margin expansion are noteworthy as Othaim demonstrated remarkable resilience to cautionary consumer spending. We expect discount retailer to continue benefiting from promotional pricing as premium retailers contend with shrinking basket size and customer attrition. Although SAR 1.12 EPS (-10% Y/Y) missed our SAR 1.21 estimate and consensus SAR 1.34, we see thin margins as greater risk. Headline 2Q results are encouraging as we await full financials to revisit our estimates and target price. For now maintain Buy and SAR 107 target price.
Recommendation
Stock Details Last Close Price
SAR
99.00
Upside to target
%
8.1
SAR mln
4,455
mln
45
Market Capitalization Shares Outstanding 52-Week High
SAR
110.75
Bucking the trend as sales maintain growth momentum
52-Week Low
SAR
62.25
Revenues jumped +17% Y/Y to SAR 2,019 mln beating our SAR 1,890 forecast by 7%. In an environment of cautionary spending, Othaim continues to benefit as a low cost retailer with limited customer attrition. In our view this bodes well as revenues maintained growth momentum in light of slowdown seen at other retailers (for example Farm +2% Y/Y). Substitution to lower priced alternatives could help Othaim win shoppers away from perceived higher priced retailers such as Danube or Tamimi.
Price Change (YTD)
%
10.3
Gross margins better than expected
Revenues (mln)
Despite promotional pricing gross margins improved to 16.7% from 14.4% in year ago period, and ahead of our estimate 15.8%. Although no specific reason was identified in management commentary for margin improvement, clearly Othaim’s business model is gaining favor in current spending environment.
Gross Margin
Earnings miss on higher opex
Price Multiples
Operating expenses increased during the quarter due to transportation, electricity and personnel costs to narrow the variance on operating profit to +4% from our forecast. We estimate +15% sequential increase in opex likely resulted from store additions. Higher financing costs contributed to earnings miss. We were looking for SAR 55 mln net income and consensus SAR 60 mln, while the actual came in at SAR 50 mln (-10% Y/Y). More critically, 2.5% operating and net margins place Othaim on weak footing for ongoing regulatory changes particularly with regards to workforce. The discount retailer’s ability to absorb wage inflation will be tested if job nationalization accelerates.
12-Mth ADTV
thd
59
SAR
5.20
4001.SE
AOTHAIM AB
EPS 2016E Reuters / Bloomberg
SFC Estimates
2016E
2017E
6,730
7,436
16.8%
16.5%
EBIT (mln)
219
257
Net Income (mln)
234
260
2015
2016E
2017E
P/E
19.3x
19.0x
17.1x
EV / EBITDA
14.1x
11.7x
9.5x
P/S
0.7x
0.7x
0.6x
P/B
3.8x
3.7x
3.2x
1-Year Share Performance
120
Shares outperforming peers Shares have outperformed the median for our Retail-Consumer coverage universe over the past 3 months gaining +5% versus -3%, and +21% versus +1% in the last 6 months. Clearly Othaim is doing something right – no frills offering in tighter spending environment could translate into market share gains.
100 80 60 40
Othaim (SAR mln)
2Q16
2Q16E
2Q15
Y/Y Chg
1Q16
Q/Q Chg
Revenues
2,019
1,890
1,726
17%
1,656
22%
7%
337
299
248
36%
295
14%
13%
16.7%
15.8%
14.4%
51
49
50
9%
4%
7%
-8%
Gross profit Gross margin Operating profit Operating margin
Variance Consensus 1,978
17.8% 3%
47
2.6%
2.9%
50
55
56
Net margin
2.5%
2.9%
3.2%
2.8%
3.0%
1.12
1.21
1.24
1.04
1.34
EPS
S O N D
J
F M A M
Othaim
TASI
J
J
SASERETL
Source: Bloomberg, Tadawul, SFC
2.5%
2.9% 47
A
57
Net income
-10%
J
2.9% 60
Asim Bukhtiar, CFA [email protected] +966 11 282 6844 Yazeed Al-Saikhan [email protected] +966 11 282 6608
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of company under coverage in this report are expected to perform inline with the sector or the broader market.
SELL Shares of company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. 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. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. 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.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
