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Equity Report on Herfy Foods
Public Limited Company Listed on TASI
This containsValuation Methodology Applicable / Not Applicable Status
Operating Model Applicable √Discounted Cash Flows Applicable √Trading Comparables Applicable √
Precedent Transaction Comparables
•Not Applicable since Herfy is a listed company √
RISK FACTORS AND MITIGATION
TECHNICAL ANALYSIS, PRICE PERFORMANCE
VALUATION
PROPOSED VALUATION AND RECOMMENDATION
Table of contents
FINANCIAL APPENDICESAll figures in Saudi Arabian Riyals, unless specifically mentioned
- Equity Method
- Technical Approach
RISK FACTORS AND MITIGATION
Decreased sales per restaurant
Revenue per restaurant declined from SR 3.4 mln per in 2012-13 to SR 3.0 mln in 2014-15.
Looking current inflationary pressure, the company should revise its products' prices or increase sales or introduce new products to coup with lost revenue per branch.
Expected number of branches
Herfy's success is based on number of restaurants in KSA. Slowing the opening of new restaurants can affect it drastically.
Herfy should continue opening new restaurants to keep its market leadership
Change in regulatory environment and working hours
Decrease in working hours to 40 hours per week can affect herfy's sales per restaurant
Herfy should have a contingency plan in place to address extra working hours requirements
Competition KSA is a fertile market for QSR, which attracts many international players to enter Saudi market.
Herfy needs to keep its market dominance by strong presence throughout the Kingdom.
Easing inflation in western countries
Easing inflation in western countries will advantage foreign QSR brands in KSA due to lower import bills.
Herfy will need to have long term contracts in place with its suppliers at competent prices.
Reliance on one brand name Herfy relies on only one brand name, therefore when it comes for westerns they visit western QSRs.
Herfy should also introduce a new different and unique brand name alongside with Herfy which can be more westernized with different look.
Under utilization of meat factory and bakeries
Meat factory and bakeries are under utilized which is a blow to overall performance
Un utilized capacity is a cost, Herfy should attract external clients to use its un-utilized capacity.
Increased energy prices Increased energy prices will have a downgrading affect on herfy's bottom line
Revision in sales prices or introducing new products like western chains can address this issue.
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Risk Detail Mitigation
RISK FACTORS AND MITIGATION
TECHNICAL ANALYSIS, PRICE PERFORMANCE
Herfy Agriculture Sector TASI
Per Share Data P/E 16.77 16.33 13.97Price/BV 4.62 2.79 1.45Price/CF 11.97 10.45 8.07Earning Yield (%) 5.96 6.12 7.16Dividends Dividend Yield (%) 4.21 3.46 5.02Payout Ratio (%) 69.59 53.91 59.4
Profitability Ratios (%)
Net Profit Margin 18.82 10.49 15.08Rate of Returns ROA 17.04 7.76 2.54ROE 27.56 17.08 10.33Financial Strength Current Ratio 1.24 1.16 1.33Quick Ratio 0.19 0.17 0.27Liquid Assets/Total Assets 10.08 12.04 11.29
Leverage 61.7 115.07 297.15
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P/E, P/B, Price/CF is higher than Agri sector and market, which makes stock a strong pick
Dividend yield is higher than sector and lower than market, but payout is higher than sector and market
Net Profit margin is quite higher than sector and marketROA & ROE is higher than sector and market
Financial strength is better than sector.
Comparative and technical analysis
365 days Bollinger band chart suggests that it is a buying time until price climbs SR 85 per share.
Period Price (SR)
52 weeks high 134
52-week low 65.25
365 days price performance
Herfy, agriculture sector, and market followed almost a
same upward and downward trend.
Herfy, agriculture sector and market, all lost approximately
minus 36% in one year.
365 days standard deviation suggests an upcoming surging upward price trend for near
future
Price Performance
Capital loss in 1 year
365 days standard deviation
VALUATION
-Based on technical analysis
Valuation Methodology Recommendation Justification
Technical Analysis NOT recommended
•Technical analysis (historical analysis and share charts) and EV suggest to invest in Herfy, but due to ongoing panic in overall stock market, most of the shares are under priced. It is forecasted that market may keep sliding down for short period. •Particularly in case of Herfy, investment decision should be postponed until 3rd Qtr 2016. Till then investor will see performance of company in opening new restaurants, furthermore stock market will generally surges after Ramadan.
Technical Analysis support the investment
Stock Technical Analysis
InvestOverall
TASI Analysis
NOT Invest
Comparable Valuation
Gordon Growth Model: Price (SR) P 66.63Dividend per share (next dividend) SR D 3.95 Required rate of return of investor K 20%Growth rate in dividends G 26%Value of the company SR 3,078,442,496
Net Profit 2015 P/E Ratio of Agri Sector Value Actual Mkt Cap EV DCF
202,681,714 16.33 3,309,792,396 3,398,972,350 3,669,627,313 2,102,921,341
Net Profit 2015 P/E Ratio of Stock Market Value Actual Mkt Cap EV DCF
202,681,714 13.97 2,831,463,550 3,398,972,350 3,669,627,313 2,102,921,341
Book Value 2015 P/B of the Sector Value Actual Mkt Cap EV DCF735,453,982 2.79 2,051,916,610 3,398,972,350 3,669,627,313 2,102,921,341
Book Value 2015 P/B of the Market Value Actual Mkt Cap EV DCF
735,453,982 1.45 1,066,408,274 3,398,972,350 3,669,627,313 2,102,921,341
VALUATION
-Equity Approach
Corporate Valuation
VALUATION Numbers (SR)Agriculture
Sector Multiples
Valuation (SR) SAMA Weights Value (SR)
DCF 2,102,921,341 100% 2,102,921,341 70% 1,472,044,939 Net Income 2015 202,681,714 16.3 3,309,792,396 15% 496,468,859 Equity 2015 735,453,982 2.8x 2,051,916,610 15% 307,787,491
Total Enterprise Value 2,276,301,289
Note: While working on the buying side, it will be advisable to deduct outstanding loans and add cash to decrease EV so this can benefit the buyer.
Valuation Methodology Recommendation Justification
Fundamental Analysis Recommended
It is recommended to invest in Herfy, the company has potential to grow and provide capital gains to long term investors. Upcoming slides will identify the advantages of investment.
Transaction ApproachInvestment Approach Recommendation
LBO
NOT recommended:-Company is taking extensive loans for expansions. -Taking further loans to acquire the company while more loans for expansion will increase financial leverage & exposure.
Complete / Majority Buyout
NOT recommended in 2016. -Can be recommended in 2017 based on 2016 performance. -Majority shares buyout can raise minority interest related issues.-Since net profit in 2015, dollar terms remained same as 2014, so it is not recommended for complete majority buyout.
Partial Buyout Recommended - Details on next slide
INVESTMENT RATIONALE AND MARKET ANALYSIS
GROWTH OPPORTUNITIES
GCC foodservice (2014)
Total GCC Mkt Size $ 18.8 billion
Saudi Arabia $8.9 billion 47.1%UAE $5.3 billion 28.0%Kuwait $1.9 billion 10.1%Qatar $1.3 billion 6.9%Oman $1.1 billion 5.8%Bahrain $0.4 billion 2.1%
Market size is expected to increase to $24.5 billion by 2018; 47.1% of this will be accounted for Saudi Arabia, i.e. additional revenues of $ 2.6 billion
GROWTH OPPORTUNITIES
Favorable Macroeconomic
Indicators
Attractive Valuation
Leadership in the sector
Positive Sector Outlook
Impressive financial
performanceBUY
2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 F
Number of restaurants 257 300 345 390 432 474 516EBITDA (mln) 248.7 288.4 352.4 442.4 515.7 590.1 665.2 Net Income (mln) 205.8 202.7 253.7 326.2 382.1 437.5 496.4 Net Margin 22.6% 18.8% 20.0% 21.8% 22.1% 22.2% 22.2%
Herfy Sector TASI Current Ratio 1.2 1.2 1.3 Quick Ratio 0.2 0.2 0.3 Liquid Assets/Total Assets % 10.1 12.0 11.3 Leverage % 61.7 115.1 297.2 ROA 17.0 7.8 2.5 ROE 27.6 17.1 10.3
Investment RequirementsDue Diligence -Organizational structure-Major shareholders & their holdings-Minutes of board meetings-A/P, A/R, Inventories-Ownership of assets-Licenses
Legal due diligence -Articles of Association-Bylaws
Financial Modeling
Audited financial statements 2015
MACRO and Sector Analysis
Population and Tourism Sector Growth
-2.4% increase in KSA population per annum.-Increase in religious tourism.
-Euro monitor international forecasts fast food sales to increase @ CAGR of 7% for next 5 years. -Combo of better margins and healthy growth.-Healthy market attracting institutional players.- Recent acquisition of Kudu.- Existing players pursuing aggressive expansion.
Life Style changes Market
- Fast food remains a popular and affordable food option for native Arabs and expatriate consumers of all income groups, with the acceleration in growth recorded in the category in 2014 driven largely by increasingly busy lifestyles, the rising population and government measures aimed at boosting consumer disposable income levels.
-KSA QSR market penetration is 34% while in US and Canada 52% and 58% respectively, which shows cushion for growth. -The opportunity in sector attracting international investments in form of Cheesecake factory, Shake Shack etc.-Total sales in fast food sector stood $ 8.9 bln in 2014.
INVESTMENT RATIONALE
Unique Business Model
-Upward business integration-Less reliance on other suppliers for running chain of restaurants.
Brand Synergy and goodwill
-Strong brand name.-Strong presence throughout the Kingdom
Capitalizing on parent company
-Savola being major shareholder with 34% holdings. -Ahmad Saeed’s presence in business since establishment.
Excellent historical financial
performance
-Net profit growth @ CAGR of 8.4% for 2011-15.-Sales growth @ CAGR of 11% over five years.
INVESTMENT RATIONALE
New Restaurants driving growth
-Herfy’s growth is dominated by new restaurants. - Herfy ‘s focus is to increase QSRs
Better borrowing power
-Strong financial position gives better borrowing power to Herfy. -Banks are ready to invest in foods and agriculture sector. 2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 F
-
100
200
300
400
500
600
0%
5%
10%
15%
20%
25%
Net Income & Net Income Margin
Net Income Net Margin
mln
SR
86%
3% 12%
Revenue Breakdown 2015
Restaurants Meat factory Bakeries
86%
2% 11%
Revenue Breakdown 2016
Restaurants Meat factory Bakeries
87%
2% 11%
Revenue Breakdown 2017
Restaurants Meat factory Bakeries
Herfy Vs Agri. Sector Market Leaders
Herfy Agri. Sector TASI Savola Wafrah Sadafco Almarai
Per Share Data P/E 16.77 16.33 13.97 11.07 18.5 21.59Price/BV 4.62 2.79 1.45 2.02 2.23 4.11 3.43Price/CF 11.97 10.45 8.07 8.26 65.42 15.79 11.8Earning Yield (%) 5.96 6.12 7.16 9.03 5.4 4.63Dividends Dividend Yield (%) 4.21 3.46 5.02 5.69 2.93 1.67Payout Ratio (%) 69.59 53.91 59.4 57.98 80.7 36.02Profitability Ratios (%) Net Profit Margin 18.82 10.49 15.08 7.21 8.96 13.89Rate of Returns ROA 17.04 7.76 2.54 7.03 13.9 7ROE 27.56 17.08 10.33 18.25 18.12 15.89Financial Strength Current Ratio 1.24 1.16 1.33 0.92 2.84 3.35 1.28Quick Ratio 0.19 0.17 0.27 0.12 0.47 0.5 0.18
Liquid Assets/Total Assets % 10.08 12.04 11.29 13.6 5.53 15.37 7.46Leverage % 61.7 115.07 297.15 149.79 35.44 30.29 122.34Borrowing % 16.58 17.02 11.23 34.14Equity/Assets % 61.84 38.54 73.83 76.69 44.06Debit/Equity% 26.81 44.16 15.21 77.48
APPENDICES
Valuation Methods Value of the company – SR
Price per Share – SR
Simple DCF Method 2,102,921,341 45.7Corporate Value 1,840,544,028 40.0Enterprise Value 3,669,627,313 79.4 Book Value 735,453,982 15.9
Corporate Value Using Comparables (Equity approach) 2,276,301,289 49.4
Recommended Valuation - buy side 1,840,544,028 40.0Gordon Growth Model 3,078,422,496 66.6
CAPM
Rf 3%Beta (sector) 1.17Rm 13%Ra= Rf + B (Rm - Rf) 15%
WACCSource SR Weights Rate WACC
Equity 735,453,982 78.9% 15% 11.6%Loans 197,164,886 21.1% 1.30% 1.9%Total 932,618,868 100.0% 16.0% 13.5%
2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 F -
100
200
300
400
500
600
0%
5%
10%
15%
20%
25%
Net Income & Net Income Margin
Net Income Net Margin
mln
SR
2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 F0.0
100.0200.0300.0400.0500.0600.0700.0
25.0%
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
EBITDA & EBITDA Margin
EBITDA EBITDA Margin
mln
SR
Income Statement (SAR mln) 2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 FNumber of restaurants 257 300 345 390 432 474 516Total revenues 910.1 1,077.0 1,267.2 1,494.4 1,732.2 1,975.0 2,236.9 COS (618.7) (756.2) (880.7) (1,016.2) (1,177.9) (1,343.0) (1,521.1)SM & GA (97.8) (112.7) (127.4) (144.0) (162.7) (183.9) (207.9) EBITDA 248.7 288.4 352.4 442.4 515.7 590.1 665.2 EBITDA Margin 27.3% 26.8% 27.8% 29.6% 29.8% 29.9% 29.7%Depreciation and Amoartization (55.1) (80.3) (93.2) (108.1) (124.2) (142.0) (157.3)EBIT 193.6 208.1 259.1 334.3 391.6 448.1 507.9 EBIT Margin 21.3% 19.3% 20.4% 22.4% 22.6% 22.7% 22.7% Other Income 17.7 2.4 6.4 6.4 6.4 6.4 6.4 Pre tax income 211.3 210.5 265.5 340.7 398.0 454.5 514.3 Zakat & Interest (5.5) (7.8) (11.8) (14.4) (15.9) (17.0) (18.0)Net Income 205.8 202.7 253.7 326.2 382.1 437.5 496.4 Net Margin 22.6% 18.8% 20.0% 21.8% 22.1% 22.2% 22.2%
Balance Sheet (SAR mln) 2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 FCash and Marketable securities 28.8 21.9 38.8 34.1 41.9 47.6 54.1 Accounts Receivables 20.0 23.2 28.5 33.6 38.0 43.3 49.0 Inventory 91.1 108.9 125.5 147.6 164.6 191.3 220.9 Others 90.7 98.0 105.8 114.3 123.5 133.3 144.0 Total Current Assets 230.7 252.1 298.6 329.6 367.9 415.6 468.0 Net Fixed Assets 745.3 937.2 1,078.9 1,205.8 1,300.9 1,378.3 1,440.3 Others - - - - - - - Total Long term Assets 745.3 937.2 1,078.9 1,205.8 1,300.9 1,378.3 1,440.3 Total Assets 976.0 1,189.2 1,377.5 1,535.3 1,668.8 1,793.8 1,908.3 Short term debt & current long term 43.0 87.1 117.0 132.8 133.5 127.4 114.7 Accounts Payable 48.1 68.7 86.9 100.2 122.6 143.5 158.4 Others 43.2 47.7 47.7 47.7 47.7 47.7 47.7 Total Current Liabilities 134.2 203.6 251.6 280.7 303.8 318.6 320.8 Total Long Term Debt 116.7 197.2 264.8 300.5 302.2 288.3 259.7 Other non current liabilities 47.2 53.1 54.6 56.3 58.0 59.7 61.5 Equity 677.8 735.5 806.5 897.8 1,004.8 1,127.3 1,266.3 Total Liabilities and Equity 976.0 1,189.2 1,377.5 1,535.3 1,668.8 1,793.8 1,908.3
Statement of Cash Flows (SAR mln) 2014 A 2015 A 2016 F 2017 F 2018 F 2019 F 2020 F
CF from Operations 225.8 291.1 337.0 413.7 499.8 560.1 624.3
CF from Investing activities (216.6) (272.6) (235.0) (235.0) (219.3) (219.3) (219.3)
CF from Financing activities (37.7) (25.4) (85.1) (183.4) (272.7) (335.1) (398.6)
Change in cash and cash equivalents (28.5) (6.9) 16.9 (4.7) 7.8 5.7 6.5
Opening Cash balance 57.3 28.8 21.9 38.8 34.1 41.9 47.6
Ending Cash Balance 28.8 21.9 38.8 34.1 41.9 47.6 54.1
DISCLAIMER
Utmost efforts are exercised to ensure that the information included in this report is accurate and correct. However, creator/presenter of this presentation/report bears no liability whether explicitly or implicitly for the content of the presentation/report and no legal responsibility, whether directly or indirectly, for any results based on it. This presentation/report should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from creator/presenter of this report. This report doesn’t constitute a recommendation to buy or sell the shares of the company (herfy foods) or investment decisions. Any investment act taken by an investor based fully or partially on this report is the complete responsibility of the investor. This report is not meant to be used or seen as advice or an option or any other measure to be taken in the future. It is recommended to consult a qualified investment advisor before investing in these investment tools.