Global Investment Update Fawaz Abdulaziz AlHokair & Co...

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

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2022242628303234363840

TASI (LHS) AlHokair (RHS) (SR)


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

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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)


2,700

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11.0%

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9.0%

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4.0%2009-10 (E) 2010-11 (E)

Revenue Forecast Growth

2011-12 (E) 2012-13 (E)

300

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2002009-10 (E) 2010-11 (E) 2010-12 (E) 2010-13 (E)

11.2%

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Net Profit Operating Margin%



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

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6002003-04 2004-05 2005-06 2006-07 2007-08 2008-09

40.0%

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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%



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

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2004-05 2005-06 2006-07 2007-08 2008-092.00

2.10

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No of stores (LHS) Sales Revenue per Store (RHS)



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)


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

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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

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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


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


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Gross Profit Gross Margin %

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20.0%

Net Profit Net Profit Margin %



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.



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.



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


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




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.



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


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.



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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



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



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



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.



The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report.

2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her

household) has a direct ownership position in securities issued by this company.6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for

this company, for which it received fees.8. Global Investment House has received compensation from this company for the provision of invest-

ment banking or financial advisory services within the past year.9. Global Investment House expects to receive or intends to seek compensation for investment bank-

ing services from this company in the next three month.10. Please see special footnote below for other relevant disclosures.

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.

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

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