• Global values AlHokair stock at SR52.92 and initiates coverage with a ‘BUY’
Global Investment House – Kuwait - Fawaz Abdulaziz AlHokair & Co. (AlHokair) is the market leader in fashion retailing in Saudi Arabia. The Company is focused on mid market brands, where it has and continues to introduce new franchises into the Kingdom. Its portfolio of brands covers major sectors of the branded apparel market, which include Womenswear, Childrenswear, Menswear, Footwear and Department stores. As of 31 March 2008, the Company operated 682 stores Kingdom wide and represented over 50 international retail brands.
The value of AlHokair’s shares derived from the weighted average of the DCF and peer comparison methods is SR52.92 per share. The stock currently trades at SR41.25 (as on 14th July 2008), which implies that the weighted average value of AlHokair’s shares is 28.3% higher than the share’s current market price. At the current price, AlHokair’s shares have forward P/E multiples of 12.1x and 9.7x the estimated 2008-09 and 2009-10 earnings respectively. We, therefore, initiate our coverage of the AlHokair stock with a ‘BUY’ recommendation, at its prevailing price levels.
Financial Performance
For the year 2007-08 (ending Mar 31st, 2008), the total revenue of AlHokair was SR1,584.0mn, up 6.9% from the previous year. This came on the back of 14.5% growth achieved in 2006-07. Though the Company has been growing at a healthy rate over the past few years, the growth slowed down in 2007-08.
Chart: Revenue (SR mn)
Source: AlHokair Annual Reports
Looking at the composition of revenue of AlHokair, Womenswear segment is the largest contributor to the total revenue. For the year 2007-08, Womenswear segment contributed 44.4% of total revenue i.e. SR704mn. Department stores segment contributed 27.9% total revenues in 2007-08 with sales of SR443mn. These two segments were followed by Footwear and Childrenswear segment, which contributed 12.6% and 9.7% of revenues respectively during 2007-08. Other contributors in 2007-08 were Menswear (2.5%), Export, Wholesale and Others (2.9%).
The segments, which registered highest growth in 2007-08, include Menswear, Womenswear and Footwear. Menswear segment registered a growth of 54.2% during 2007-08. However, in absolute terms, performance of Menswear was not a significant growth driver for the company. The real growth driver for the company in 2007-08 was Womenswear, which grew by almost SR100mn during the year. Footwear segment registered growth of 14.6% during 2007-08 to reach SR199mn. Similarly segments like Department stores and Export, Wholesale and Others grew by 2.2% and 9.2% respectively during the year. The only segment that registered a decline in sales in 2007-08 was Department Store. Sales of this segment declined by 24.4% during the year 2007-08.
For the year 2007, the gross profit of AlHokair was SR675.0mn in 2007-08, up 3.3% from SR653.7mn in 2006-07. This translates to a gross profit margin of 42.6% in 2007-08, down from 44.1% in the previous year. The gross margin of the company has come down in the past few years. In the past couple of years, the gross margin has also been impacted due to decline in US Dollar (to which Saudi Riyal is pegged) against major currencies. With the weakening of US Dollar against major currencies in recent years, the profit margin of the company has been impacted. This is due to the fact that AlHokair sources a significant amount of merchandise from the countries whose currencies have gained against US Dollar.
Operating profit of AlHokair was down 15.3% during the year 2007-08 to reach SR207.6mn, from SR245.1mn in the previous period. The operating margin for the year 2007-08 was 13.1%, down from 16.5% in the previous year. The decline in operating margin was due to factors like increase in selling and marketing expenses and also reflected the decline in gross margin. This is attributed to the increased investment in new brand partners and infrastructure. During the year, the company invested in development of its infrastructure in terms of management, logistics and technology, which it believes will build a platform for future growth
Net profit of AlHokair declined by 18.5% during the year 2007-08 to reach SR201.4mn, from SR247.3mn in the previous year. The net profit margin for the year 2007-08 was 12.7%, down from 16.7% in the previous year. The decline in operating margin was reflected in the decline in net margin. The return on average equity (RoAE) was 24.0% for 2007-08 as compared to 38.0% in the previous year. Similarly, the return on average assets (RoAA) was 18.3% for 2007-08 as compared to 28.7% in the previous year.
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 mall. However the company’s performance has not been impressive in the past two 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, we expect company’s performance to improve in coming years.
