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Tickers:4240.SE (Reuters)ALHOKAIR AB(Bloomberg)
Listing:Saudi Stock Exchange (Tadawul)
Fair Value:SR44.7
CMP:SR36.3 (as of Decmber 23, 2009)
December, 2009
BUY
Fawaz Abdulaziz AlHokair & Co.
Fawaz Abdulaziz Al-Hokair & Co. 1
Global Research - Saudi Arabia
Saud
i Ara
bia
Faisal Hasan, CFAHead of [email protected] No:(965) 22951270
Umar FaruquiFinancial [email protected] No:(965) 22951000
Mohammed Ali ShahFinancial [email protected] No:(966) 1 2199966 Ext. 951
Investment Update
Investment Summary
- Fawaz Abdulaziz AlHokair & Co., the market leader in fashion retailing in Saudi Arabia, managed to ride the recession well with its revenues increasing by 5.2% YoY to SR1.12bn in 6M 2009-10 (year end 31 March) while net profits witnessed a healthy growth of 10.6% YoY in 6M 2009-10 to SR499.4mn. The increase in revenue has been driven by increase in number of stores along with improvement in consumer sentiment. The company oper-ated 726 stores Kingdom-wide and represented over 50 International retail brands as of 31-March 2009.
- Gross profit margin increased to 44.6% in 6M 2009-10 from 42.5% in 6M 2008-09 while net profit margins increased to 14.7% in 6M 2009-10 from 13.7% in 6M 2008-09. Gross margins improved as the focus shifted on performing brands and stores after dumping of non-performing brands and stores in previous years.
- US$ Depreciation took its toll on gross margins in recent years as most of Fawaz-Al-Hokair imports were denominated in currencies which appreciated against the US$. In 2007 and 2008 Euro strengthened against the dollar by 9.1% and 7.3% respectively on average. The impact on gross margins was apparent with gross margins declining to 41.5% in 2008-09 from 47.1% in 2005-06.
- The introduction of big US-based brands like GAP and Banana republic has helped in propping up company’s performance and will continue to do so in coming years. The US based brands will also act as a hedge against US$ dollar devaluation, as it will dilute the impact of mainly Euro based imports in case of further US$ devaluation.
- We expect revenue to increase by 10.3%YoY in 2009-10 to SR2.09bn (year end 31-March 2010) driven by a surge in consumer confidence as depicted by the point of sales transac-tions which increased by 27.7% YoY in October. Taking a longer-term view, we expect revenue to grow at a 4-year (2009-12) CAGR of 7.2%. Our assumption is based on a conservative estimate of 50 per annum addition in number of stores and improvement in economic environment.
Global Research - Saudi Arabia Global Investment House
2 Fawaz Abdulaziz Al-Hokair & Co.
- Growth is likely to be aided by acquisition and buying of assets. Fawaz Alhokair and Co. reached an agreement to buy Wehbi Commercial Co. assets for SR175mn ($46.7 mn) in April 2009. Al-Hokair will get 20 exclusive merchandising rights in Saudi Arabia granted by international brand owners as part of the deal. According to the management as stated in the media reports, the acquisition is likely to boost net profit of the company by SR20-30mn next year (2010-11).
- The key success factors for the company include its ability to bring new brands into
Saudi Arabia and to open the stores in strategic locations such as upscale malls. Fawaz AL-Hokair shouldn’t be looked at in isolation as it is part of a larger group. Besides retail Al-Hokair has interests in real estate and other emerging lines of business thus allowing Fawaz-Al-Hokair to benefit from synergies.
- The Company continues to develop its infrastructure in terms of management, logistics and technology. With the growth strategies in place and keeping in view the macroeco-nomic factors and demographic characteristics, we expect company’s performance to im-prove in coming years.
- We have derived a value of SR44.7 per share using the weighted average of DCF and peer comparison methods. The stock at its current market price of SR36.3 (as on 23rd Decem-ber 2009) offers a potential upside of 23.1%. The stocks 2010-11 price earnings multiple of 10.2x is at a 20.9% discount to the peer average 2010-11 multiple of 12.9x. Thus we recommend a BUY on the stock
Table 01: Investment IndicatorsPrice (23rd Dec, 2009)
(SR)Shares in issue
(mn)Market Cap
(SR mn)52 - week price
range36.3 70.0 2,541 38.8 / 21.5
YearRevenues(SR mn)
Net Profit(SR mn)
EPS(SR)
BVPS(SR)
ROAE(%)
P/E(x)
P/BV(x)
2011 -12 E 2,452 266.9 3.81 15.44 25.8% 9.5 2.352010 -11 E 2,280 249.1 3.56 14.13 26.2% 10.2 2.572009 -10 E 2,095 227.1 3.24 13.07 25.6% 11.2 2.782008 - 09 A 1,899 202.4 2.89 12.33 22.9% 14.3 3.35
Source: Annual Reports, Zawya and Global Research Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 23rd December 2009
Chart 01 : Share Price Performance
Source: Zawya & Global Research
4,000
4,500
5,000
5,500
6,000
6,500
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Sep-
09
Oct
-09
Nov
-09
Dec
-09
2022242628303234363840
TASI (LHS) AlHokair (RHS) (SR)
Global Research - Saudi Arabia Global Investment House
3Fawaz Abdulaziz Al-Hokair & Co.
6M 2009-10 Performance
Fawaz-Al-Hokair managed to ride the recession well with its revenues increasing by 5.2% YoY to SR1.12bn in 6MFY09 while net profits witnessed a healthy growth of 10.8% YoY in 6M 2009-10 to SR499.4mn. The increase in revenue has been driven by increase in number of stores along with improvement in consumer sentiment. The Company operated 726 stores Kingdom wide and represented over 50 International retail brands as of 31 March-2009.
Gross Profit margins witnessed an increase of 210 basis points as the non-performing stores and brands were dumped in previous years while the net profit margin increased by 70 basis points.
Table 02: 6M-FY09 Income StatementSR (000) 6M 2008-09 6M 2009-10 YoY ChangeRevenue 1,063,147 1,118,742 5.2%COGS (611,645) (619,294) 1.3%Gross Profit 451,502 499,448 10.6%Gross Profit Margin 42.5% 44.6% -Net Profit 145,330 161,010 10.8%Net Profit Margin 13.7% 14.4% -
Source: Tadawul & Global Research
We have taken point of sales figures provided by SAMA in its monthly annual report as the best indicator of retail sale of clothes. Retail sales declined heavily in June 2009 with a decline of 11.7% YoY followed by a 0.7% YoY decline in July 2009. Doubts over economic recovery subdued consumer sentiment during the summer. However, consumer sentiment rebounded from August 2009 with an increase in retail sales by 2.2% YoY followed by 7.0% YoY increase in September 2009. Strong rise of 27.7% YoY in retail sales in October 2009 bodes well for 2H 2009-10 sales of Al-Hokair which is likely to be the main beneficiary from this increase.
Chart 02: Point of Sales Transactions - YoY Growth
Source: SAMA & Global Research
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0
-15.0
Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09
Global Research - Saudi Arabia Global Investment House
4 Fawaz Abdulaziz Al-Hokair & Co.
Revenue and Net Profit Forecast
We expect revenue to increase by 10.3% YoY in 2009-10 to SR2.09bn driven by a surge in consumer confidence as depicted by the point of sales transactions which increased by 27.7% YoY in October. Taking a longer-term view, we expect revenue to grow at a 4-year 2009-2012 CAGR of 7.2%. Our assumption is based on a conservative estimate of 50 per annum addition in number of stores and improvement in economic environment. We expect department store segment and kids wear segment to contribute to the bulk of growth while the growth in womenswear segment to taper off to 1.0% in 2012-13.
Chart 03: Revenue Forecast (SR mn)
Source: Global Research
We expect net profit to grow at a 4-year 2009-12 CAGR of 7.4% as the impact of aggressive expansion in previous years start filtering in. With the growth strategies in place and keeping in view the macroeconomic factors and demographic characteristics, the company performance is likely to improve in coming years. We expect operating margins to improve to around 11.4% going forward from 8.8% in 2008-09 in view of the company’s effort to reduce its operating costs Growth is likely to be aided by acquisition and buying of assets. Fawaz Al Hokair and Co. reached an agreement to buy Wehbi Commercial Co. assets for SR175mn ($46.7 mn) in April 2009. Al-Hokair will get 20 exclusive merchandising rights in Saudi Arabia granted by international brand owners as part of the deal. According to the management as stated in the media reports, the acquisition is likely to boost net profit of the company by SR20-30mn next year.
Chart 04: Net Profit Forecast (SR mn)
Source: Global Research
2,700
2,600
2,500
2,400
2,300
2,200
2,100
2,000
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%2009-10 (E) 2010-11 (E)
Revenue Forecast Growth
2011-12 (E) 2012-13 (E)
300
280
260
240
220
2002009-10 (E) 2010-11 (E) 2010-12 (E) 2010-13 (E)
11.2%
11.8%
11.6%
11.4%
11.2%
11.0%
Net Profit Operating Margin%
Global Research - Saudi Arabia Global Investment House
5Fawaz Abdulaziz Al-Hokair & Co.
Financial Overview
RevenuesRevenues have grown at a 5-Year 2004-08 CAGR of 17.4% driven by Womenswear and Department store sales. Besides the year 2007-08 (year ending 31st March 2008) when revenues grew at 6.93% YoY, sales revenues have grown between 14-36% since 2004-05. The slow growth in 2007-08 is attributed to discontinuation of some of the brands, which were not performing up to the expectation.
During the year 2007-08, the company launched several new brands, including GAP, Ladybird and first-ever Banana Republic in Middle East. The impact of introduction of these brands was apparent on 2008-09 revenues which grew by 19.9% to SR1.89bn. These brands are expected to support growth in coming years.
Chart 05: Revenue (SR mn)
Source: Annual reports & Global Research
Womenswear is the largest component of Fawaz-Al-Hokair revenue contributing 39.0% to the overall revenue in 2008-09. Womenswear along with Department sale stores have contributed to bulk of the growth in revenue in recent years increasing at a 4-year (2005-08) CAGR of 10.4% and 23.2% respectively to SR740mn and SR673mn. Footwear and Kidswear are the other two major components of revenue contributing 11.5% and 10.1% in 2008-09 respectively.
Chart 06: Revenue Composition FY08
Source: Annual Reports & Global Research
2,000
1,800
1,600
1,400
1,200
1,000
800
6002003-04 2004-05 2005-06 2006-07 2007-08 2008-09
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Net Profit Operating Margin%
Womenswear 39.0%
Department Stores 35.4%
Kids Wear 10.1%
Footwear 11.5%
Menswear2.5% Wholesale1.5%
Global Research - Saudi Arabia Global Investment House
6 Fawaz Abdulaziz Al-Hokair & Co.
SeasonalityLike many retailers Al-Hokair is also exposed to the seasonal impact of retail sales. As can be seen in the graph below retail sales suddenly peak in the 2Q (Jun-Sep) and stay high in 3Q (Oct-Dec) before coming down to pre-peak levels in 4Q (Jan-Mar). Peak season sales (2Q and 3Q currently) account for approximately 58-62% of the total sales and 70-73% of the total net profit for the year. The main reason for the peak in sales has been the Ramadan and Eid season which have fallen in the 2Q in the past few years. People tend to spend more in Ramadan particularly before Eid to prepare for the Holy Festival. Wearing new clothes is an integral part of the Eid festival. The sales have also remained high in 3Q, though lower than 2Q, due to the Pilgrimage season. People from all across the world come for the Pilgrimage with many of them shopping on the way back to their own countries.
However it is important to note that the Islamic calendar is a lunar based calendar. Every year Islamic calendar falls back 10-12 days compared to the internationally accepted civil calendar. Thus the Ramadan season will start falling in the 1Q (Jun-Sep) for sometime in the future. Chart 07: Quarterly Revenue (SR mn)
Source: Tadawul, Zawya and Global Research
Number of stores The number of stores has increased from 451 stores in 2004-05 to 726 in 2008-09. Revenue per store has seen a V-shaped trend. The sales revenue per store declined in 2005-06 and 2006-07 as the company embarked on aggressive expansion plans. However, filtering out of non-performing stores has increased the revenue per store to SR2.6mn in 2008-09 from 2.3mn in 2007-08.
Chart 08: No of Stores & Revenue Per Store (SR mn)
Source: Annual reports & Global Research
200
300
400
500
600
700
800
1Q F
Y07
2Q F
Y07
3Q F
Y07
4Q F
Y07
1Q F
Y08
2Q F
Y08
3Q F
Y08
4Q F
Y08
1Q F
Y09
2Q F
Y09
400
450
500
550
600
650
700
750
2004-05 2005-06 2006-07 2007-08 2008-092.00
2.10
2.20
2.30
2.40
2.50
2.60
2.70
No of stores (LHS) Sales Revenue per Store (RHS)
Global Research - Saudi Arabia Global Investment House
7Fawaz Abdulaziz Al-Hokair & Co.
Cost Structure Cost of sales comprised of 64.2% of the total operating costs in 2008-09. The contribution hovered around 65-67% in the past three years as the Euro strengthened against the US$ which increased the costs for Al-Hokair imports.
Sales and administration expenses are the other major components of cost. There contribution to total cost has increased from 26.5% in 2004-05 to 29.5% in 2008-09. The increase in costs can be attributed to increased marketing and sales activity in the face of intense competition and high inflation in recent years.
Chart 09: Total Cost Breakdown (SR mn)
Source: Annual Reports & Global Research
US$ Depreciation took its toll on gross margins in recent years as most of Fawaz-Al-Hokair imports were denominated in currencies which appreciated against the US$. In 2007 and 2008 Euro strengthened against the dollar by 9.1% and 7.3% respectively on average while recovering by 5.6% in 2008. The impact on gross margins was apparent with gross margins declining to 41.5% in 2008-09 from 47.1% in 2005-06.
Chart 10: USD-Euro Exchange Rate
Source: Bloomberg & Global Research
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2004-05 2005-06 2006-07 2007-08 2008-09
Cost of Sales S & M G & A D & A
1.101.151.201.251.301.351.401.451.501.551.60
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Global Research - Saudi Arabia Global Investment House
8 Fawaz Abdulaziz Al-Hokair & Co.
Margins and ProfitabilityGross Profits have increased at a steady 5-year 2004-08 CAGR of 17.4%. However, gross margins have seen a downward trend during these years due to multiple factors. Depreciation of US$ against Euro has hit the margins hard as the Saudi currency is pegged to the US$. In addition, the company was in a constant process of refining its portfolio by dropping the non-performing brands and store locations.
Chart 11: Gross profit (SR mn) and Gross Margin
Source: Annual Reports & Global Research
Aggressive expansion policy depicted by an increase in number of stores from 451 stores in 2004-05 to 726 stores in 2008-09 has subdued net profit growth at a 5-year (2004-08) CAGR of 3.8% pulling down net margins from 17.5% in 2004-05 to 10.7% in 2008-09. Aggressive expansion can lead to adding up of non-performing brands and stores which have an adverse affect on net margins. Cannibalization of sales also becomes a threat with the brands and stores competing among themselves.
In addition, intense competition and high inflation led to an increase in sales and marketing costs at a 5-year (2004-2008) CAGR of 23.7% which kept pressure on net margins.
Chart 12: Net profit (SR mn) and Net Margin
Source: Annual Reports & Global Research
400
450
500
550
600
650
700
750
800
850
2004-05 2005-06 2006-07 2007-08 2008-0938.0%
39.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
48.0%
Gross Profit Gross Margin %
150
170
190
210
230
250
270
2004-05 2005-06 2006-07 2007-08 2008-098.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Net Profit Net Profit Margin %
Global Research - Saudi Arabia Global Investment House
9Fawaz Abdulaziz Al-Hokair & Co.
Growth Strategy and Drivers
Relationships with retail brands Over the years, one of the key success factors of AlHokair has been its ability to tie-up with prominent international retail brands, such as Massimo Dutti, Banana Republic, La Senza Girl etc., and introducing them to the Saudi market. The Company has established strong relationships with international retail brands and has also benefited from their expertise and experience. These strategic alliances with some of the successful mid-market retail brands has helped AlHokair to occupy a position of strength in Saudi market. Going forward, we believe this will also be one of the most important factors determining success of AlHokair.
Portfolio of brandsAlHokair targets a wide range of segments with its presence in Womenswear, Childrenswear, Menswear, Department stores and Footwear. The current portfolio of AlHokair includes more than 50 brands which are primarily targeted to the mid-market segment allowing AlHokair to tap into a large population base. This diversified brand portfolio of AlHokair keeps it immune from non-performance of some brands. The company screens the market on a regular basis in order to ensure that it can always meet its customers’ needs and expectations. Keeping in view the market requirements, AlHokair continues to churn its portfolio of brands. The new brands which were launched in 2007-08 included GAP, Ladybird and first-ever Banana Republic in Middle East.
Strategic locationsOne of the most important factors in fashion retail business is location of the stores. In Saudi Arabia, there is a high demand for quality retail spaces. AlHokair has been able to position its stores in prime retail locations on premier commercial streets, and in upscale shopping centres / malls. This has been helped by the fact that the sister concerns of AlHokair are engaged in the business of shopping mall development and management. Therefore, AlHokair has been able to secure a good number of strategic locations in upscale malls has been able to negotiate competitive lease rentals rates, as opposed to high market rates, from its sister concerns. The management continues to identify a large number of new locations in Saudi Arabia where the company is not currently represented and where they believe there is potential to open profitable stores.
Preferred partnerOn account of its established track record, AlHokair considered one of the most preferred partners for recognized international brands in Saudi Arabia. This is an important competitive advantage for AlHokair in comparison to other competitors who will find difficult to match this.
Economies of scaleDue to its large scale of operations, AlHokair is able to lower costs through economies of scale for lease rentals, bulk purchasing, and logistics. The company negotiates directly with suppliers around the world, taking advantage of a number of long standing supplier relationship. AlHokair is also able to obtain favorable lease rental terms from shopping mallowners since it books large retail spaces for its wide range of brands.
Global Research - Saudi Arabia Global Investment House
10 Fawaz Abdulaziz Al-Hokair & Co.
Risk Factors
Changing nature of fashionOne of the key features in the fashion retail business is its constantly changing nature. The designs, which are widely accepted in one season, might be outdated in the next season. This entails close understanding of the fashion sense of people. Due to this changing nature, one of the biggest challenges faced by the fashion retailers is to sell its products. Redundant stock at planned levels ties up capital and affects the potential growth of the business. The management of AlHokair has indicated that they remain committed over the years to sell itsmerchandise within the season it is purchased.
Poor performance of brandsThe company invests significantly in bringing mid market brands available from around the world into the Saudi market. The launch of a new concept/product generally is characterized by relatively high start-up costs. The success of new products introduced depends on the ability to anticipate the tastes and habits of consumers and to offer brands that appeal to their preferences. However, there are possibilities that some brands may not perform up to the expectations or sales may decline over a number of years, due to competitive activity or lack of partner support. This poses a significant risk for the company given the fact that they have invested in the brand.
Unprofitable Stores and CannibalizationMost of the capital expenditure of the company is invested in setting up retail stores.However, depending on various external factors including change in market conditions, geographic concentration, customer behavior or fashion trends, some stores may not perform as was initially expected. In such cases, the company may choose to shut down or modify these stores to meet the company’s overall objectives. Additionally aggressive expansion in terms of brands and stores can lead to revenue cannibalization with brands and stores competing with each other.
Exchange Rate RiskThe company’s principal area of operations is Saudi Arabia whose currency is pegged to US$. The weakening of US$ against major currencies in recent years has had a negative impact on the profit margin of the company. This is due to the fact that AlHokair sources a significant amount of merchandise from the countries whose currencies have appreciated against US$.
Outlook
AlHokair is the market leader in fashion retailing in Saudi Arabia. The key success factors for the company includes its ability to bring new brands into Saudi Arabia and to open the stores in strategic locations such as upscale malls. The company’s performance in terms of net profit growth has not been impressive in the past three years. However, the management has taken steps to improve the performance. This includes launching of some big brands like GAP and Banana Republic which will be reflected in company’s performance in coming years. The company also continues to develop its infrastructure in terms of management, logistics and technology. With the growth strategies in place and keeping in view the macro-economic factors and demographic characteristics, we expect company’s performance to improve in coming years.
Global Research - Saudi Arabia Global Investment House
11Fawaz Abdulaziz Al-Hokair & Co.
Valuation & Recommendation
For arriving at the fair value of AlHokair, we have used a combination of valuation methods: the cash flow approach represented by the Discounted Cash Flow (DCF) method and the market approach represented by Peer Group valuation.
1-Risk free rate (RFR) of 5.5%2-Equity risk premium of 5.75%3-Beta of 1.14-A terminal growth rate of 3.0%5-Cost of debt of 7.0%
Table 03: DCF Calculations(SR mn) 2009-10 (E) 2010-11 (E) 2011-12 (E) 2012-13 (E)
FCF 110.2 203.1 229.0 271.7 Discounted Cash Flow 107.5 179.0 182.4 195.5 Terminal Value 3,653.2 Primary Value (discounted) 664.3 Terminal Value (discounted) 2,628.3 Total Enterprise Value 3,292.6 Debt 370.0 Sep-09Investments and Cash equivalents 185.9 Sep-09Total Equity Value 3,108.5 Shares Outstanding (mn) 70.0 Fair Value per Share (SR) 44.4
Source: Global Research
Based on assumptions given above, we have derived the cost of equity of 11.9% and WACC of 10.7% using the CAPM method. Using the WACC and the Gordon Growth Model (GGM) for terminal value, we have arrived at a DCF value of SR44.4 per share.
Sensitivity AnalysisWe have carried out a sensitivity analysis to show the impact of change in terminal growth rate and WACC on the company’s DCF fair value.
Table 04: Sensitivity Analysis Terminal Growth Rate
2.0% 2.5% 3.0% 3.5% 4.0%
Cost of Equity
8.7% 52.6 56.5 61.1 66.6 73.3 9.7% 45.3 48.2 51.5 55.3 59.9
10.7% 39.8 41.9 44.4 47.2 50.5 11.7% 35.3 37.0 39.0 41.1 43.5 12.7% 31.7 33.1 34.6 36.3 38.2
Source: Global Research
Global Research - Saudi Arabia Global Investment House
12 Fawaz Abdulaziz Al-Hokair & Co.
Peer Comparison MethodTo arrive at the peer-set P/E multiple, we have computed the average P/E of companies world-wide due to lack of comparables in the regional market. The companies selected are in the same line of business. Based on their current market prices and projected earnings, the average estimated P/E for these companies is 16.19x in 2009-10E and 12.90 in 2010-11E.
Table 05: Peer Group Average P/ERelative Valuation 2009-10 (E) 2010-11 (E)J Crew Group 25.1 20.9Gap 13.9 12.7Limited Brands 17.1 14.3Reitman 17.5 14.1Pumpkin Patch 6.6 5.7Abercombie and Fitch 34.4 18.9La Chateau 10.9 10.1Marisa SA 17.7 15.6Noni B Limited 11.6 8.3Kapahl Holding 11.6 10.1Next Plc 11.8 11.3Average 16.2 12.9AL-Hokair 11.2 10.2
Al-Hokair Fair Value 52.5 45.9 Source: Bloomberg & Global Research
We have used the 2010-11E average peer multiple of 12.90x to come up with the relative fair value of Al-Hokair of SR45.90 per share based on the forecasted 2010-11E earnings.
We have not used other listed Saudi retail companies for relative valuation purposes since they are involved in completely different lines of business. For e.g. Al-Othaim Market is involved in food retail while Jarir Marketing Company is primarily involved in book selling business. However, we take a look at these companies to give a broader view of the Saudi retail sector. Though the list of companies given below is not exhaustive, we believe they represent the retail sector as a whole in terms of market capitalization and diversity of their operations.
Table 06: Saudi Retail Average P/EValuation Method 2009-10 (E) 2010-11 (E)Al-Othaim 15.4 13.5 Jarir Marketing 14.2 12.4 Al-Hokair 11.0 9.7Saudi Retail average 13.5 11.9
Source: Bloomberg & Global Research
Al-Hokair with 2010-11E price earnings multiple of 10.2x is also attractive with comparison to the Saudi Retail sector trading at a discount of 14.3% to the Saudi retail average 2010-11E estimated price earnings multiple of 11.9x.
Global Research - Saudi Arabia Global Investment House
13Fawaz Abdulaziz Al-Hokair & Co.
Weighted Average Share ValueAs the price-earnings multiple varies with time and other qualitative factors, we have provided a lower weightage of 20.0% to the peer valuation method and 80.0% weightage to the value arrived at using the DCF method.
Table 07: Weighted Average ValueValuation Method Weightage ValueDCF 80.0% 44.4
Relative P/E valuation 20.0% 45.9 Weighted Average Value (SR) 44.7
Source: Global Research
We have derived a value of SR44.7 per share using the weighted average of DCF and peer comparison methods. The stock at its current market price of SR36.3 (as on 23rd December 2009) offers a potential upside of 23.1%. The stocks 2010-11 price earnings multiple of 10.2x is at a 20.9% discount to the peer average 2010-11 multiple of 12.9x. Thus we recommend a BUY on the stock.
Global Research - Saudi Arabia Global Investment House
14 Fawaz Abdulaziz Al-Hokair & Co.
BA
LA
NC
E S
HE
ET
Faw
az A
bdul
aziz
AlH
okai
r &
Co.
(SR
000)
2006
-07
A20
07-0
8 A
2008
-09
A20
09-1
0 (E
)20
10-1
1(E
)20
11-1
2 (E
)20
12-1
3 (E
)A
sset
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ash
& c
ash
equi
vale
nts
95,8
53
27,5
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58,6
62
24,8
33
20,8
49
72,7
10
Trad
e re
ceiv
able
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,195
4,
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- 5,
741
6,24
5 6,
717
7,07
2 D
ue fr
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late
d pa
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99,9
35
83,1
55
156,
666
172,
333
189,
566
208,
523
229,
375
Inve
ntor
ies
281,
973
353,
259
364,
843
449,
253
488,
768
525,
076
551,
862
Prep
aym
ent a
nd o
ther
ass
ets
100,
471
176,
623
127,
721
200,
918
187,
363
201,
498
212,
157
Tot
al C
urre
nt A
sset
s59
0,42
7 64
4,60
3 67
3,44
6 88
6,90
7 89
6,77
6 96
2,66
1 1,
073,
176
Adv
ance
s aga
inst
inve
stm
ent
- 2
4,47
3 1
38,5
41
- -
- -
Inve
stm
ents
in a
ssoc
iate
s and
oth
ers
76,
000
135,
007
147
,914
1
55,3
09
186
,371
2
14,3
27
235
,760
In
vest
men
t pro
perti
es 2
6,30
3 25
,455
12
4,60
6 14
9,52
7 17
9,43
3 21
5,31
9 23
6,85
1 D
efer
red
char
ges
13,
177
24,
526
16,
305
18,
751
21,
564
24,
798
27,
278
Net
fixe
d as
sets
256,
655
379,
287
489,
043
553,
486
576,
184
592,
136
596,
699
Tot
al F
ixed
Ass
ets
372,
136
588,
748
916,
409
877,
073
963,
551
1,04
6,58
1 1,
096,
588
Tot
al A
sset
s 9
62,5
63
1,2
33,3
50
1,5
89,8
55
1,7
63,9
80
1,8
60,3
27
2,0
09,2
42
2,1
69,7
64
Lia
bilit
ies:
Due
to B
anks
- 1
01,6
12
370
,000
3
81,1
00
400
,155
4
28,1
66
449
,574
Tr
ade
paya
bles
68,4
89
99,8
85
162,
541
224,
627
237,
402
243,
785
256,
222
Acc
rued
exp
ense
s and
oth
er li
abili
ties
99,6
46
103,
844
165,
552
208,
582
192,
016
206,
280
216,
803
Due
to re
late
d pa
rties
3,0
52
- -
- -
- -
Tot
al C
urre
nt L
iabi
litie
s 1
71,1
87
305
,342
6
98,0
93
814
,308
8
29,5
73
878
,231
9
22,5
99
End
-of-
serv
ice
inde
mni
ties
17,2
89
22,5
20
28,9
15
34,6
98
41,6
38
49,9
65
59,9
59
Ow
ners
’ Equ
ity :
Shar
e ca
pita
l40
0,00
0 70
0,00
0 70
0,00
0 70
0,00
0 70
0,00
0 70
0,00
0 70
0,00
0 St
atut
ory
rese
rve
49,3
62
69,5
03
89,7
38
112,
451
137,
365
164,
058
192,
174
Ret
aine
d ea
rnin
gs32
4,72
4 13
5,98
6 73
,109
10
2,52
2 15
1,75
1 21
6,98
8 29
5,03
2 T
otal
Sha
reho
lder
’s E
quity
774
,086
9
05,4
89
862
,847
9
14,9
73
989
,116
1
,081
,046
1
,187
,207
T
otal
Lia
bilit
ies &
Ow
ners
’ Equ
ity 9
62,5
63
1,2
33,3
50
1,5
89,8
55
1,7
63,9
80
1,8
60,3
27
2,0
09,2
42
2,1
69,7
64So
urce
: Ann
ual A
ccou
nts a
nd G
loba
l Res
earc
h
Global Research - Saudi Arabia Global Investment House
15Fawaz Abdulaziz Al-Hokair & Co.
INC
OM
E S
TA
TE
ME
NT
Faw
az A
bdul
aziz
AlH
okai
r &
Co.
(SR
000)
2006
-07
A20
07-0
8 A
2008
-09
A20
09-1
0 (E
)20
10-1
1(E
)20
11-1
2 (E
)20
12-1
3 (E
)R
etai
l Sal
es 1
,481
,305
1
,583
,957
1
,899
,112
2
,095
,290
2
,279
,586
2
,451
,554
2
,581
,240
C
ost o
f sal
es (8
27,6
24)
(908
,970
) (1
,111
,379
) (1
,171
,267
) (1
,274
,288
) (1
,368
,948
) (1
,438
,783
)G
ross
Pro
fit 6
53,6
81
674
,987
7
87,7
33
924
,023
1
,005
,297
1
,082
,606
1
,142
,457
Se
lling
& m
arke
ting
expe
nses
(331
,005
) (3
78,3
00)
(510
,710
) (5
65,7
28)
(615
,488
) (6
61,9
19)
(696
,935
)G
ener
al a
nd a
dmin
istra
tive
expe
nses
(36,
084)
(42,
414)
(44,
557)
(52,
382)
(56,
990)
(62,
760)
(66,
080)
Dep
reci
atio
n &
am
ortiz
atio
n (4
1,52
9) (4
6,70
3) (6
4,70
4) (6
5,55
7) (7
2,30
2) (7
9,04
7) (8
5,43
7)O
pera
ting
Profi
t 2
45,0
63
207
,571
1
67,7
61
240
,355
2
60,5
17
278
,880
2
94,0
05
Fina
nce
char
ges
(1,2
60)
(7,1
96)
(12,
458)
(18,
778)
(19,
531)
(20,
708)
(21,
943)
Net
oth
er in
com
e 1
4,81
0 1
2,89
8 5
4,51
4 2
0,95
3 2
5,07
5 2
6,96
7 2
8,39
4 Pr
ofit b
efor
e Z
akat
258
,613
2
13,2
73
209
,817
2
42,5
31
266
,061
2
85,1
39
300
,455
Za
kat
(11,
341)
(11,
870)
(7,4
59)
(15,
404)
(16,
918)
(18,
209)
(19,
295)
Net
Pro
fit
247
,271
2
01,4
03
202
,358
2
27,1
26
249
,143
2
66,9
29
281
,161
P&L
App
ropr
iatio
n A
ccou
nt:
Ope
ning
Bal
ance
of R
etai
ned
Earn
ings
102
,180
3
24,7
24
135
,986
7
3,10
9 1
02,5
22
151
,751
2
16,9
88
Net
Pro
fit fo
r the
yea
r 2
47,2
71
201
,403
2
02,3
58
227
,126
2
49,1
43
266
,929
2
81,1
61
Tran
sfer
to S
tatu
tory
Res
erve
(24,
727)
(20,
140)
(20,
236)
(22,
713)
(24,
914)
(26,
693)
(28,
116)
Incr
ease
in sh
are
capi
tal
- (3
00,0
00)
- -
- -
- D
ivid
ends
- (7
0,00
0) (2
45,0
00)
(175
,000
) (1
75,0
00)
(175
,000
) (1
75,0
00)
Clo
sing
Bal
ance
of R
etai
ned
Ear
ning
s 3
24,7
24
135
,986
7
3,10
9 1
02,5
22
151
,751
2
16,9
88
295
,032
Sour
ce: A
nnua
l Acc
ount
s and
Glo
bal R
esea
rch
Global Research - Saudi Arabia Global Investment House
16 Fawaz Abdulaziz Al-Hokair & Co.
CA
SH F
LO
W S
TA
TE
ME
NT
Faw
az A
bdul
aziz
AlH
okai
r &
Co.
(SR
000)
2006
-07
A20
07-0
8 A
2008
-09
A20
09-1
0 (E
)20
10-1
1(E
)20
11-1
2 (E
)20
12-1
3 (E
)O
pera
ting
Act
iviti
es
Profi
t bef
ore
Zaka
t 2
58,6
13
213
,273
2
09,8
17
242
,531
2
66,0
61
285
,139
3
00,4
55
Dep
reci
atio
n an
d am
ortiz
atio
n 4
1,52
9 4
6,70
3 6
4,70
4 6
5,55
7 7
2,30
2 7
9,04
7 8
5,43
7 G
ain
on sa
le o
f ava
ilabl
e fo
r sal
e se
curit
ies
(2,4
89)
- -
- -
- -
Prov
isio
n fo
r inv
ento
ry -
- 2
7,65
4 -
- -
- In
com
e of
ass
ocia
te -
- (1
2,90
6) -
- -
- Pr
ovis
ion
for e
nd-o
f-se
rvic
e in
dem
nitie
s 4
,266
8
,077
7
,496
5
,783
6
,940
8
,328
9
,993
Wor
king
Cap
ital C
hang
esD
ec/(i
nc.)
in tr
ade
rece
ivab
les
(12,
195)
8,1
95
4,0
00
(5,7
41)
(505
) (4
71)
(355
)D
ec /
(inc)
in in
vent
orie
s (3
7,43
7) (4
5,73
4) (3
9,23
9) (8
4,41
0) (3
9,51
5) (3
6,30
8) (2
6,78
6)D
ec /
(inc)
in p
repa
ymen
ts a
nd o
ther
cur
rent
ass
ets
(30,
673)
(100
,625
) 4
8,90
2 (7
3,19
7) 1
3,55
5 (1
4,13
4) (1
0,65
9)In
c/(d
ec) i
n tra
de p
ayab
le (5
9,74
3) 3
1,39
6 6
2,65
5 6
2,08
6 1
2,77
5 6
,384
1
2,43
6 In
c/(d
ec) i
n ac
crue
d ex
pens
es a
nd o
ther
liab
ilitie
s 1
6,90
3 6
,164
5
4,24
9 4
3,03
0 (1
6,56
6) 1
4,26
4 1
0,52
3 C
ash
from
ope
ratio
ns 1
78,7
74
167
,450
4
27,3
33
255
,639
3
15,0
48
342
,248
3
81,0
44
Zaka
t pai
d (1
1,22
4) (1
3,83
6) -
(15,
404)
(16,
918)
(18,
209)
(19,
295)
End-
of-s
ervi
ces i
ndem
nitie
s pai
d (1
,638
) (2
,847
) (1
,101
) -
- -
- T
otal
Ope
ratin
g C
ashfl
ow 1
65,9
12
150
,767
4
26,2
32
240
,234
2
98,1
29
324
,038
3
61,7
50
Inve
stin
gC
apex
(1
04,8
42)
(191
,524
) (2
69,6
08)
(130
,000
) (9
5,00
0) (9
5,00
0) (9
0,00
0)Pr
ocee
ds fr
om a
vaila
ble
for s
ale
secu
ritie
s 3
9,48
9 -
- -
- -
- In
vest
men
ts in
equ
ities
- (5
9,00
7) -
(7,3
96)
(31,
062)
(27,
956)
(21,
433)
Def
erre
d ch
arge
s (3
,611
) (1
3,86
3) 4
,218
(2
,446
) (2
,813
) (3
,235
) (2
,480
)O
ther
s -
- (1
14,0
68)
113
,620
(2
9,90
5) (3
5,88
7) (2
1,53
2)T
otal
Inve
stin
g C
ashfl
ow (6
8,96
4) (2
64,3
94)
(379
,459
) (2
6,22
2) (1
58,7
80)
(162
,077
) (1
35,4
44)
Fina
ncin
gD
ivid
end
paid
- (7
0,00
0) (2
45,0
00)
(175
,000
) (1
75,0
00)
(175
,000
) (1
75,0
00)
Due
from
rela
ted
parti
es (7
,082
) 1
3,72
8 (7
3,51
2) (1
5,66
7) (1
7,23
3) (1
8,95
7) (2
0,85
2)B
ank
borr
owin
gs (6
,667
) 1
01,6
12
268
,388
1
1,10
0 1
9,05
5 2
8,01
1 2
1,40
8 T
otal
Fin
anci
ng C
ashfl
ow (1
3,74
9) 4
5,34
0 (5
0,12
4) (1
79,5
67)
(173
,178
) (1
65,9
46)
(174
,444
)
Net
Cha
nge
in C
ash
& C
ash
Equi
vale
nts
83,
199
(68,
287)
(3,3
50)
34,
446
(33,
829)
(3,9
84)
51,
861
Cas
h &
Cas
h Eq
uiva
lent
s at b
egin
ning
12,
654
95,
853
27,
566
24,
216
58,
662
24,
833
20,
849
Cas
h &
Cas
h E
quiv
alen
ts a
t end
95,
853
27,
566
24,
216
58,
662
24,
833
20,
849
72,
710
Sour
ce: A
nnua
l Acc
ount
s and
Glo
bal R
esea
rch
Global Research - Saudi Arabia Global Investment House
17Fawaz Abdulaziz Al-Hokair & Co.
FACT SHEETFawaz Abdulaziz AlHokair & Co.
2006-07 A 2007-08 A 2008-09 A 2009-10 (E) 2010-11(E) 2011-12 (E) 2012-13 (E)Liquidity Ratios
Current Ratio (x) 3.45 2.11 0.96 1.09 1.08 1.10 1.16Quick Ratio (x) 1.80 0.95 0.44 0.54 0.49 0.50 0.57
Profitability RatiosGross Profit Margin 44.1% 42.6% 41.5% 44.1% 44.1% 44.2% 44.3%Operating Margin 16.5% 13.1% 8.8% 11.5% 11.4% 11.4% 11.4%Net Profit Margin 16.7% 12.7% 10.7% 10.8% 10.9% 10.9% 10.9%ROAA 28.7% 18.3% 14.3% 13.5% 13.7% 13.8% 13.5%ROAE 38.0% 24.0% 22.9% 25.6% 26.2% 25.8% 24.8%Total Asset Turnover (x) 1.72 1.44 1.35 1.25 1.26 1.27 1.24
Leverage RatiosDebt to Equity 0.0% 11.2% 42.9% 41.7% 40.5% 39.6% 37.9%Total Liabilities to Total Assets 19.6% 26.6% 45.7% 48.1% 46.8% 46.2% 45.3%
Growth RatesRevenue Growth Rate 14.5% 6.9% 19.9% 10.3% 8.8% 7.5% 5.3%Net Income Growth Rate 0.4% -19% 0.5% 12.2% 9.7% 7.1% 5.3%Equity Growth Rate 46.9% 17.0% -4.7% 6.0% 8.1% 9.3% 9.8%Total Asset Growth Rate 26.8% 28.1% 28.9% 11.0% 5.5% 8.0% 8.0%
Ratios Used For ValuationNumber of shares (mn) 40.0 70.0 70.0 70.0 70.0 70.0 70.0BV per Share (SR) 11.06 12.94 12.33 13.07 14.13 15.44 16.96 EPS (SR) 3.53 2.88 2.89 3.24 3.56 3.81 4.02 Market Price (SR) 57.14 54.25 41.25 36.30 36.30 36.30 36.30 Market Cap (SR mn) 2,286 3,798 2,888 2,541 2,541 2,541 2,541 EV (SR mn) 2,190 3,872 3,233 2,863 2,916 2,948 2,918 EV/EBITDA 7.64 15.23 13.91 9.36 8.76 8.24 7.69P/E Ratio 16.2 18.9 14.3 11.2 10.2 9.5 9.0 P/BV Ratio 5.17 4.19 3.35 2.78 2.57 2.35 2.14
Source: Annual Accounts and Global ResearchHistorical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 23rd December 2009.
Global Research - Saudi Arabia Global Investment House
18 Fawaz Abdulaziz Al-Hokair & Co.
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Disclosure Checklist
Fawaz Abdulaziz AlHokair & Co.
Company Recommendation
Buy
Ticker4240.SE (Reuters)ALHOKAIR AB (Bloomberg)
Price Disclosure
1, 10SR36.3
Global Research: Equity Ratings Definitions
BuyHoldReduceSell
Global Rating Definition
Fair value of the stock is >10% from the current market priceFair value of the stock is between +10% and -10% from the current market priceFair value of the stock is between -10% and -20% from the current market priceFair value of the stock is < -20% from the current market price