Global Investment House – Equity Research Report on Sultan Center Food Products Company - Company Background- The Sultan Center Food Products Co. KSC (better known as The Sultan Center, or TSC) is Kuwait’s largest independent retailer. It was incorporated as a holding company on September 29, 1980. The Sultan Center of today has its origins in PSC Supply, a unit of the Petroleum Services Company, which was a major provider of hardware, tools, and supplies to the oil industry. From these beginnings, TSC has expanded to become a premier retailer and leading supplier of supermarket items, perishables, and general merchandise in the Middle East. In 1981, with the launch of Kuwait’s first self-service store in Shuwaikh specializing in the supply of household hardware and do-it-yourself products, The Sultan Center, the retail brand, was born.
The company today has presence, among others, in retail, restaurants, trade, fashion and telecom segments. It has a market share of 15-17% in the retail segment in Kuwait. The company is also credited with introducing the ‘one-stop shop’ format in the Middle East. Besides “The Sultan Center” – the retail brand, the company today manages some of the popular restaurant franchises in Kuwait, such as Jeans Grill, Café Sultan, Chi-Chi’s and Tumbleweed. In addition, some of the well-known fashion brands, such as Union Bay, Quicksilver, NafNaf, Bandolera, BEDO, Tom Tailor, ZOOMP, Claire, etc.; and prominent fast-moving consumer and durable brands, such as Black & Decker, LEGO, etc., are identified with the company.
TSC was listed in the Kuwait Stock Exchange on April 9, 1997, under the ticker ‘SULTAN’. The company's shares have enjoyed healthy liquidity in the past. The average daily volume traded of the stock was 2.2 million shares, with a stock turnover of 119%, during 2005. The stock closed at KD0.700 on June 10, 2006, with a 52-week high/low of KD1.635/KD0.609. The stock price has run down by about 31.8% so far since the beginning of 2006.
Shareholding
As for shareholding pattern of the company, various members of the Sultan family have sizeable holdings in the company. The Board of Directors of the company consists of Sultan family members.
Dividend History
The company has been consistently paying dividends to its shareholders. In 2002, 2003, 2004 and 2005 the company paid cash dividends of 5%, 10%, 15% and 25% respectively. Besides, it has also rewarded its shareholders with bonuses continuously since 2002, announcing stock dividends of 5%, 10%, 20% and 15% in 2002, 2003, 2004 and 2005 respectively.
Main Business Segments
Retail
The Sultan Center is the premier retailer and leading supplier of supermarket items, perishables, and general merchandise in the Middle East. Among the business segments, the retail segment is the company’s main line of business. It is a price-sensitive and low margin business. Food contributes a major component of the retail segment revenues. The company has a strong presence in this segment in Kuwait, with presence in Oman and Jordan too. The company has 27 outlets in its retail business line in Kuwait, Oman and Jordan.
Restaurants
The Sultan Center Restaurants Division is responsible for the operation of food outlets, including internationally recognized franchise operations, both inside and outside Kuwait. There are four restaurants in Kuwait and one in Oman at present. All these outlets are well-located. The restaurants business of TSC is a growing business, with high margins.
Fashion
The company has a presence in the fashion business though a separate company called “The Style Company”. The business spans 13 outlets in Kuwait and nine in UAE.The Style Company represents many renowned brands from around the globe, including those from Europe, Canada, USA and the Asia-Pacific. These brands range from the sophisticated and luxurious to the latest trends for adults, teens, and kids. Some of the brands offered by The Style Company are Union Bay, Quicksilver, NafNaf, Bandolera, Mavi, BEDO, Brubaker, Claire and Claire Kids.
Trade
The trading business of TSC is done through two separate companies. The companies trade in food (including perishables) and FMCG goods. A major part of the trade segment is supply services. This segment is the second largest contributor to TSC’s overall revenues after retail, and enjoys margins higher than for retails business.
Besides the above, the company also has presence in telecommunications and security systems and services segments.
The company plans to expand aggressively in its retail, restaurants and fashion businesses in the near-term. With its aggressive expansion plans, the company is consolidating its position as a retail giant in the region.
GCC Retail Industry
The GCC retail market today is estimated to be of the size of $50 billion. Adding in other prominent countries in the region, such as Jordan, Lebanon, Egypt, Syria, Iran and Iraq, the pan-Middle East retail market could be estimated to exceed $100 billion in size at the end of 2005. In terms of size of retail floor space, from around one million square metres of space in GCC shopping malls in the 1990’s, completed malls in the GCC around the middle of 2004 were estimated to have a total gross floor space of 3.8 million square metres, which is projected to further grow to over 9.4 million square metres by 2010. The reasons for this growth lie with the basic demographic profile of the region. The high GDP too has translated into high per capita incomes and, thereby, into high purchasing power in the hands of the people.
Outlook
The total retail gross floor space across GCC is expected to grow to over 9.4 million square metres by 2010 from 3.8 million square metres in the middle of 2004, at a CAGR of 13%. This boom in retail space is driven by a mushrooming of malls all across the GCC countries, foremost among them being UAE and Saudi Arabia, at an estimated total investment of close to $10bn. The Retail International forecasts that up to one quarter of gross domestic product (GDP) could be spent in the UAE malls by the end of this decade.
We have attempted to arrive at the size of the retail industry in the GCC in 2010. Assuming an annual growth in the nominal GDP of the region of 10%, and assumed expenditure in the retail market of 10%, 15% and 20% of the GDP under three scenarios, we have arrived at total retail market sizes of $93bn, $139bn and $185bn respectively. This implies CAGRs of 13.1%, 22.7% and 29.9% during 2005-’10 in the size of the retail market in GCC under the three scenarios.
Financial Performance of TSC in the First Quarter of 2006
The company had revenues of KD45.2mn in the first quarter of 2006, down 10.4% year-on-year (yoy). The decline in revenues during the quarter was caused by declines both in telecom and trade revenues. The contract revenues were down 20.3% yoy. The total cost of sales of KD34.5mn were down 16.7% yoy. The sharper decline in the cost of sales caused a growth in the gross profit, which was KD10.7mn, up 18.6% yoy. Operating profit of KD5.9mn too was up a hefty 106.5% yoy. There was a net investment loss of KD2.6mn during the quarter, down 119.3% yoy, on the back of a 142.7% decline in unrealized losses on changes in fair value of investments. While the share of the company in the profits of its associates rose 60.7% to KD5.5mn, the company’s net profit during the period of KD7.9mn was down 57.9% yoy.
The total assets of the company of KD228.7mn were up 15.0% from the end of 2005. Investments in associates was up 23.0% to KD90.8mn, thanks to the acquisition of an additional stake in NREC, as well as acquisition of stake in a new company. Investments available for sale shot up to KD9.4mn at the end of the quarter from KD0.04mn at the end of 2005. On the liabilities side, current bank borrowings almost doubled to KD49.3mn, while the long-term bank borrowings declined by 24.8% to KD10.2mn at the end of the quarter.
Valuation & Recommendation
SoP Valuation
We have carried out a Sum of Parts (SoP) valuation of TSC. The SoP valuation enables the assumption of different terminal growth rates, different risk levels, different working capital and capital expenditures for each business segments, in keeping with the dynamics of the particular segment, rather than taking common figures for the entire company. The share value of the company based on the SoP method with the above assumptions is KD0.914.
Peer Comparison Method
To arrive at the peer-set P/E multiple, we have computed the weighted average P/E of the listed retail companies in the Middle East. The weighted P/E for these companies is 8.3, based on the current market prices and 2005 earnings. On the basis of this weighted average Sector P/E and TSC's projected 2006 earnings, the company’s stock valuation comes to KD0.759 per share.
Weighted Average Share Value
The value of TSC’s shares derived from the weighted average of the SoP and peer comparison methods is KD0.883 per share. The stock closed at KD0.700 on the KSE at the end of trading on June 10, 2006, which implies that the intrinsic value of TSC’s shares is at a premium of 26.1% to the share’s current market price. We, therefore, recommend a 'BUY' on the TSC stock at its prevailing price levels with a medium-term perspective.
