Fawaz Abdulaziz AlHokair & Co – Investment Update

Global Investment House – Fawaz Abdulaziz AlHokair – Investment Update - 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 operated 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.

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

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 transactions 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.

    Revenue Forecast (SR mn)

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Source: Global Research

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).

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.

Outlook

AlHokair is the market leader in fashion retailing in Saudi Arabia. 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. 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.

  Investment Indicators

Source: Annual Reports, Zawya and Global Research