ksa retail sector€¦ · +966 2 6618275 [email protected] senior analyst syed taimure...

JULY2012

KSARetail Sector

Research DivisionCompany Reports

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Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

RESEARCHDIVISION

AGM - Head of ResearchAbdullah Alawi+966 2 [email protected]

Senior Analyst Syed Taimure Akhtar +966 2 6618271 [email protected]

AnalystSaleh Al-Quati+966 2 [email protected]

BROKERAGE AND INVESTMENT CENTERS

DIVISION

General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 [email protected]

AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 [email protected]

Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 [email protected]

Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 [email protected]

JULY2012

1

KSA - An emerging landscape for retailers• A major shift in retail market structure - SaudiArabia’sretailsectoristhelargestin

GCC, representing42%of thecouncil’smarketsize, followedby theUAE (29%)andQatar(11%).TheretailmarketinsideKSAhasevolvedovertheperiodoftimebuttheindustrywitnessedkeydevelopmentsinthepast10years;whichtransformedKingdom’slandscapefromsmallandunorganizedmarketstopalatialmallsandhypermarkets.

• Youth domination in population lead to support KSA retail sector - According toSAMA12011annualreport2,thepopulationinSaudiArabiawasrecordedat27.1mnin2010,wheresignificantportion(around47%3)oftotalpopulationagedbetween15and39.AccordingtoIMF4,thecountry’spopulationwillincreaseat2010-15CAGRof1.4%andreachat29.02mnin2015.Basedonourunderstanding,weexpecttheyouths(15-39ages)willcontinuetodominatethepopulationtill2015.

• Relatively low space/capita in the region - Despite of aggressive expansions inretail business across the Kingdom in past 5 years, it is worthy tomention that theretailspace/capitaisstilllowerthantheotherregionalmarkets.BasedonthestudyofLaSalle,retailspace/capitaincitieslikeRiyadh&Jeddahstoodat0.2m2ascomparedtospace/capitaof1.6m2ofmallinDubai,UAE.Furthermore,basedontheincreaseincustomerawarenessandeducation,weexpecttheretailcentersneedtobedesignedinmoreprofessionalmanner,whichshouldbewellequippedwith the latestavailabletechnologiesandfacilities.Hence,webelievesuchchangeswillleadto(i)theincreaseentrybarrierforsmallplayersand(ii)theenvironmentwherethesurvivalwillbebasedonuniquebusinessstrategy.

• Fragmented market dominated by private groups - The local sector is mainlydominatedbyfamilyownedbusinessgroups;whoarefocusingonacquiringexclusivityandfranchiseagreementswithwell-knowninternationalsuppliersandbrands.Inaddition,these private groups have well diversified business activities and good investmentsin real estateand land;which is also supporting toexpand retail activities inside theKingdom.Thetopfiveplayershold11.9%marketshare,whichislowerthandevelopedmarketsliketheUK,whereinthetopfiveplayershavea59%marketshare.Savola,AlOthaim,AlHokairandJarirMarketingarekeyplayersinKSA’sretailsector.

KSA Retail Sector 2012Sector | KSA | Retail Sector July 2012

2011 GRDI country attractiveness

Source: A.T Kearney 2011 GRDI

Retail space/capita-Key regional cities

Source: Jones Lang LaSalle

Brazil

Uraguay

Chile

India

Kuwait

China

SaudiArabia

Peru

UAE

Turkey

55.0

65.0

75.0

85.0

95.0

105.0

55.0 60.0 65.0 70.0 75.0

Co

untr

y ri

sk (e

cono

mic

& p

olit

ical

)0=

hig

h 10

0= lo

w

GDRI score (Market potential)

0.0

0.5

1.0

1.5

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dubai Riyadh Jeddah AbuDhabi

Doha Muscat Beriut Cairo

Sq meters (mn)-LHS Sq meter/capita-RHS

1. SaudiArabianMonetaryAgency2. 47thannualreport,TheLatestEconomicDevelopment20113. Jaririnvestors’presentationSep-20114. InternationalMonetaryFund

JULY2012

2

• Sector outlook - AccordingtoEIUestimates,theretailvolumetricsaleshasapotentialtoincreaseat2010-14CAGRof3.8%ascomparedtohistorical4-year2006-10CAGRof3.5%.Apartfromconventionalretail,onlineretailisgrowingexponentiallyinKSA,withincreasinginternetpenetrationallowingpeopletoshopaspertheirconvenience.ItisworthytonoticethattheexpectedgrowthinKSAretailerisnotguaranteeingtheconventionalretailertogetmuchbenefit;buttheactualbeneficiarywillbethosewhoevolvethemselveswiththechangingcompetitiveenvironment.Weinitiatethecoverageon‘Abdullah al-Othaim Markets Co.’and‘Fawaz Abdulaziz al-Hokair Co.’with‘Overweight’and‘Neutral’recommendations,respectively

PE & PBV 2011 (Local retailers)

Source: Tadawul, Companies report & Aljazira Capitalal-Othaim Mouwasat

Extra

SASCOAldrees

al Hokair

Alkhaleej

Jarir

0.0

2.0

4.0

6.0

8.0

10.0

12.0

6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

PBV

P/E

JULY2012

3

KSA retail sector - Volumetric growth

Source: EIU 2010; * where 2009 & 2010 are

based on EIU estimates

Segment-wise retail sales & growth trend in KSA

Source: Economist Intelligence Unit, February

2012

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2007 2008 2009* 2010* 2011e 2012e 2013e 2014e

0%

3%

6%

9%

12%

15%

18%

21%

-

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011e Non- Food Retail Sales (SAR bn) Food Retail Sales (SAR bn)

Non-food growth (%, RHS) Food growth (%, RHS)

Saudi Arabia’s retail sector

Growing significantlySaudiArabia’sretailsectoristhelargestinGCC,representing42%ofthecouncil’smarketsize,followedbytheUAE(29%)andQatar(11%).TheretailmarketinsideKSAhasevolvedovertheperiodoftimebuttheindustrywitnessedkeydevelopmentsinthepast10years;whichtransformedKingdom’slandscapefromsmallandunorganizedmarketstopalatialmallsandhypermarkets.Atpresent,SaudiArabiaisthelargestretailmarketintheGCCwiththeestimatedmarketsizeofUSD69.0bn-USD70.6bnin2011andexpectedtoreachatUSD76bn-USD78bnin2012,accordingtoEIU&JonesLangLaSalle.Moreover,accordingtoEIUestimates,theretailvolumetricsaleshasapotentialtoincreaseat2010-14CAGRof3.8%ascomparedtohistorical4-year2006-10CAGRof3.5%.Apartfromconventionalretail, online retail is growing exponentially in KSA,with increasing internet penetrationallowingpeople toshopasper theirconvenience.Thenumberof internetusers inKSAgrew46%in9M2011vis-à-vistheworldaverageof7%.

Moreover,accordingtoEIU,growth in theKingdom’sretailsectorwitnessed increase intotalvolumesataCAGRof6.3%during2007–11.Foodandnon-foodsegmentscontributealmostequallytoKSA’sretailsales.However,demandforbothsegmentsweakenedduringtheeconomicslowdownduring2009–10.Thefoodsegment’sannualsalesgrowthreducedfrom14.9%over2007–08to7.5%during2009–10,whilethatforthenon-foodsegmentfellfrom17.8%to8.9%overthesameperiod.Ascrudepricesrecoveredin2011,demandforboththesegmentsregainedmomentum.However,duetorisingpopularityofmodernretail,thefoodsegmentgrewhigher(16.9%)comparedtothenon-foodsegment(10.9%)in2011.

JULY2012

4

Growth trend in KSAs retail sales volume

Source: Economist Intelligence Unit, February

2012

11.7%

12.8%

5.0%

3.1%2.6%

8.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2006 2007 2008 2009 2010 2011e

GrowthinretailvolumesandsaleswasdrivenbysurgingdisposableincomeduetohighGDP growth (10.7% CAGR over 2001–11), favorable demographics (2.9% populationgrowthoverthelastdecade)andincreasingreligioustourism.GiventheKingdom’sculturalsetupandweather,increasingpurchasingpowerandpopulationgrowth,webelieveonlineretailcouldgrowataratehigherthanthatforotherdevelopingcountries.

According toA.TKearney’s2011GlobalRetailDevelopment Index (GRDI) 5 ,KSA retailmarket isrankedasthe7thmostattractiveretailmarketaroundtheglobeintermsof(i)offeringinvestmentopportunitiesatpresentand(ii)futuregrowthprospectus.

5. GRDIisanindexthatanalyzes30developingcountrieson25macroeconomicandretail-specificvariablestoidentifyinvestmentopportunityinemergingmarket.Moreover,thisindexalsohelpstoidentifytheprofitablemarketstodayaswellasthosewhichofferthemostpotentialinfuture.

GRDIranking2011

Macro economic & industry specific variables weightage

Ranking Country RegionMarket

attractiveness (25%)

Country risk (25%)

Market saturation

(25%)

Time pressure

(25%)

GRDI score

1 Brazil LatinAmerica 100.0 79.4 42.9 63.9 71.62 Uraguay LatinAmerica 85.0 73.8 63.6 39.6 65.53 Chile LatinAmerica 84.3 100.0 30.3 44.3 64.74 India Aisa 28.9 59.9 63.1 100.0 63.05 Kuwait MENA 80.4 80.6 57.3 27.1 61.46 China Asia 49.5 76.5 31.0 87.7 61.2

7 SaudiArabia MENA 70.9 80.7 50.6 35.7 59.5

8 Peru LatinAmerica 39.8 61.5 72.0 59.5 58.29 UAE MENA 87.6 88.9 12.6 42.9 58.010 Turkey MENA 83.8 65.5 45.0 37.0 57.811 Lebonan MENA 56.3 43.0 57.5 53.8 52.712 Egypt MENA 22.1 49.5 85.5 52.7 52.513 Albania EasternEurope 19.9 48.3 79.6 60.5 52.114 Russia Aisa 76.2 49.1 30.9 51.0 51.815 Kazakhstan Asia 29.2 30.1 87.5 60.1 51.716 Indonesia Asia 38.2 53.0 54.5 58.8 51.117 Morocco MENA 22.6 72.9 52.8 54.8 50.818 Philippens Aisa 8.4 54.3 66.1 51.0 45.019 Tunisa MENA 37.5 75.2 63.0 21.3 49.320 Srilanka Asia 8.4 52.6 86.5 42.4 47.521 Malaysia Asia 53.9 64.0 18.0 52.7 47.222 Mexico LatinAmerica 74.6 67.5 16.3 23.8 45.623 Vietnam Aisa 8.4 35.0 48.8 85.1 44.324 Colombia LatinAmerica 45.7 54.0 35.8 36.9 43.125 Argentina LatinAmerica 60.4 26.6 44.2 38.4 42.426 SouthAfrica S.Africa 46.9 89.3 15.2 17.2 42.227 Panama LatinAmerica 44.3 47.3 44.5 27.6 40.9

28 DominicanRepublic LatinAmerica 39.5 0.0 74.2 49.0 40.7

29 Iran MENA 33.5 3.4 89.2 31.0 39.330 Bulgaria EasternEurope 45.1 56.2 4.9 50.2 39.1

Source:A.TKearney2011GRDI

JULY2012

5

KSA retail sector growth driversSurgeinpercapitaretailspending:

DomesticdemandhasbeenoneofthekeygrowthdriversofKSA’sretailsector.Inthelastfiveyears,percapitaretailsaleshaveexpanded9%annually,andareestimatedtohavereached SAR13,243 (USD3,532) in 2011. Although growth in per capita retail spendingis higher than that fordevelopedcountries suchas theUSA, JapanandGermany, it issignificantly lower than China’s 23.2% annual increase over 2006–11. Furthermore,KSA’sretailsalesinabsolutetermsaresignificantlylower(40–70%in2011)comparedtodevelopedcountriesliketheUS,JapanandGermany.Therefore,webelievethereisgreatscopeforgrowthinpercapitaretailsalesinKSA.

Growingpopulationandrisingdisposableincome:

Retail sales are highly correlated to the increase in disposable income and growth inpopulation. KSA’s GDP expanded 10.7% during 2001–11 led by higher crude prices.Consequently,accordingtoEIU,per-capita incomemorethandoubledfrom2000 levelstoSAR76,788 in2011,despiteahighpopulationannualgrowth rateof2.9%.Also, thepopulationhasdemonstratedhighpropensitytoconsume;whereaccordingtoSAMA2011annual report 6 , thepopulation inSaudiArabiawas recordedat27.1mn in2010withasignificantportion(around47%7)oftotalpopulationagedbetween15and39.AccordingtoIMF8 , thecountry’spopulationwill increaseat2010-15CAGRof1.4%andreachat29.02mnin2015.

Basedonourunderstanding,weexpecttheyouths(15-39ages)willcontinuetodominatethepopulationtill2015.Inaddition,aspertheIMF,KSA’srealGDPisexpectedtogrow6.0% in 2012, and 4.3% annually during 2013 and 2015, backed by steady growth indemandandcrudeprices,andinvestmentsininfrastructurebythegovernment.

6. 47thannualreport,TheLatestEconomicDevelopment20117. Jaririnvestors’presentationSep-20118. InternationalMonetaryFund

Country-wise per capita sales (USD)

Source: IMF, Economist Intelligence Unit, Feb

2012 & Aljazira capital

KSA real GDP growth vis-à-vis growth in household consumption

per head

Source: Economist Intelligence Unit, Feb 2012

731 2,076

5,134 6,049

11,360 10,771

9,086

13,078

8,563

13,243

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2006 2011

China Germany US Japan Saudi Arabia

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e

GDP growth (%) - LHS Growth in houeshold consumption per head (%, RHS)

JULY2012

6

Internet users & penetration in KSA

Source: Communication & information technology

commission

13%

20%

30%

36%38%

41%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2005 2006 2007 2008 2009 2010

Internet Users (mn) - LHS Internet penetration (% of population) -RHS

Oilandnon-oilsectorsarebothexpectedtodrivetheKingdom’seconomicgrowth.Whilehigherproduction(KSAproduced10mnbarrelsforalargepartof2012)wouldboosttheoil-basedsector,governmentspendingislikelytodrivethenon-oilsector.Thegovernmentis investing in infrastructure (plans to investSAR250bnover thenext10years)andhasincreasedsalariesofpublicsectoremployees.Consequently,percapitaGDPisexpectedto increase continuously; according to the IMF, itwould reachSAR85,958 by 2015 (up11.9%from2011levels).

Onlineretailtothriveonhigherinternetpenetration:

Onlineretailisgainingpopularityworldwideamongbothconsumersandretailers.Onlineretailnotonlyallowsconsumerstoshopattheirconvenience,bothintermsoftimeandplace, but also helps select fromawider rangeof products that are often available ondiscountsatshowroomprices.Higherinternetpenetrationhashelpedthistrend.InternetpenetrationinKSAincreasedfrom5%in2001to41%in2010,andisexpectedtoreach47.5%in2011.

Onlineretailhelpsretailersreducerentandstaffcostsignificantly,therebyimprovesmarginsandofferdiscounts toconsumers. Inaddition,online retail isgainingpopularityquicklyamongwomenandsinglemenduetotheKingdom’ssocialsetup.Giventheincreaseinpurchasingpoweronrisingincomelevels,womeninKSAhaveshownaninclinationtowardconstantlyimprovingtheirlifestyles.ThisisevidentfromthefactthatSaudiArabiaisoneofthebiggestmarketsforluxuriousgoods,cosmeticsandaccessoriesintheworld.

Population growth

Source: SAMA 2011 annual report, CIA fact book

& IMF data & forecast on trading economics

3.4% 3.4% 3.4%

1.8%

1.3%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

22.0

23.0

24.0

25.0

26.0

27.0

28.0

29.0

30.0

2007 2008 2009 2010 2015e*

Population (mn)-LHS Growth-RHSMedian age - 25.3 years (2011 est. CIA fact book)

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Widerreachoforganizedretailtofueldemand:

Highgrowthindiscretionaryspendinghasledtohugedemandfor internationalclothingandluxurybrands.Currently,KSAhasallmajorclothing,accessoriesandgrocerybrandsthat are further increasing their presence in theKingdom.AsperCBRE,KSAhas43%of the 294brands the entity tracks, significantly higher than leadingmarkets likeHongKongandRussia.Continuedgrowthindisposableincome,supportedbyincreasingsupplyofworld-classbrands, is likely to further boost discretionary spending.Growth in retaildemandisestimatedtobecomplementedbyanequallyaggressiveincreaseinsupplywiththeretailfloorspaceestimatedtoincreasefrom4.2mn2milesin2010to5.4mnm2by2015.

Mallsandhypermarketsasavenuesofentertainment:

KSAhas limitedmeansofentertainmentdue to itsculturalset-upandextremeclimaticconditions. While movie theatres are banned, its extreme weather conditions areunfavorable for outdoor sports/adventure activities. Therefore, fully air-conditionedshoppingmallsandhypermarketsthatnotonlyhaveshopsbutalsootheramusementandentertainment facilities like iceskating rings,waterparksand foodcourtshavebecomepopularentertainmentdestinations.

Religioustourism:

Afteroil,tourismisthelargestcontributortoSaudiArabia’sGDP.Tourism,mainlyreligioustourism, isestimated tohavecontributed16.8%to theGDP in2011.Around12milliontouristsvisitSaudiArabiainayearforreligiousreasons.Thenumberisexpectedtorisefurtherwith the government spending on infrastructure to supportmore pilgrims in theholycitiesofMeccaandMedina.Therefore,anumberofretailentitieshavesprungupintheregion.Today,MeccaandMedinatogetheraccountfor6%oftotalgrossleasablearea(GLA)inSaudiArabia.MeccaandMedinaareseenasthenextbiggestretailmarketafterRiyadhandJeddahwith thenumberof touristsexpected to increase to17mnby2025.Currently,0.24mn2milesareunderconstruction(or20%oftotalunderconstructionGLA)areinMeccaandMedina.

Emerging Trends

OrganizedretailwideningitsreachbeyondJeddahandRiyadh:

OrganizedretailinKSAismoreconcentratedcomparedtotheUAE,GCC’ssecondlargestretailmarket.JeddahandRiyadhaccountfor78%ofKSA’stotalgrossleasablearea(GLA).However,withrisingcompetitionandthesecitiesreachingasaturationpoint,developersarenowpenetratingdeeperandwideningtheirpresenceinmajortouristdestinationsandtierIIcitieslikeMecca,MedinaandAlKhobar.Ofthe1.2mn2milesofretailspaceunderconstruction(expectedtobecompletedby2015),45%isinsuchcities.Bythen,Mecca,MedinaandAlKhobarwouldhouse27%ofKSA’stotalGLA.

City-wise GLA distribution – 2010

Source: Economist Intelligence Unit

Mecca and Medina, 6%

Jeddah, 45%

Riyadh, 33%

Al Khobar, 16%

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Retailspaceishighlycompetitiveandheadedforconsolidation:

Over thepast few years, the landscapeofSaudiArabia’s retail sector has transformedfromaconventionalmarketplacecomprisingunorganizedindependentstoresandshopstoorganized large-scaleshoppingmallsandhypermarketsthathousethe largestglobalbrands.Currently,mostinternationalretailchainsaswellaslocalplayersoperateinKSA’sretailmarket.ThishasmadeSaudiArabia’sretailsectorhighlycompetitive.Thetopfiveplayers hold an 11.9% market share, lower vis-à-vis developed markets like the UK,wherein the topfiveplayershavea59%market share.Given the fragmentednatureofKSA’sretailsectorandrisingpopularityoforganizedretail,consolidationislikelywithlargerplayersgrowinginorganicallytocapturemarketshare.WehavealreadyseenkeyplayerslikeSavolaandAlHokairacquiringcompaniesrecently.

Foodsegmenttogrowmoreaggressively

Currently, the food and non-food segments have an equal share in KSA’s retail sales.Withthereducingsizeoffamilies(downfrom6.1in1992to5.7in2004,andexpectedtodeclineto5.2in2015),demandfornon-fooditemslikefurniture,homefurnishing,electricalappliancesandcomputersisexpectedtocontinuetogrow10.6%annuallyduring2012–15.However,demandforhigh-valuefoodslikemeat,sweets,convenienceandprocessedfood and restaurants is likely to grow at a higher pace. Therefore, growth in the foodsegment’ssalesisexpectedtobeintherangeof10–19%over2012–15.

RecentkeymergersandacquisitionsinKSA’sretailsector

Acquirer Target Company Year Deal value (USD mn)

SavolaGroupAlAziziaPandaUnitedLtd 2010 295.7GeantSupermarkets 2009 117.3

SaudiInternationalTradingCoLtd AlDawaaMedicalServicesCoLtd 2009 26.7

FawazAbdulazizAlHokair&CoRetailGroupJordan 2010 7.2

RetailGroupEgypt 2010 5.6

Source:Thompsondatabase,Zawya

City-wise GLA distribution – 2015

Source: Economist Intelligence Unit

Mecca and Medina, 9%

Jeddah, 43%Al Khobar,

18%

Riyadh, 29%

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Key challenges Highcompetition:

KSA’sretailmarketisveryfragmentedandcompetitiontomanagehighfootfallsisintense.Therefore,playerskeepinnovatingonstrategieslikeproductdifferentiation,price-relatedoffers alongwith placing themall distinctively in theminds of patrons through variousentertainmentpackageslikeamusementparksandfoodcourts.

Thetopfiveplayershold11.9%marketshare,whichislowerthandevelopedmarketsliketheUK,whereinthetopfiveplayershavea59%marketshare.Savola,AlOthaim,AlHokairandJarirMarketingarekeyplayersinKSA’sretailsector.

Thelocalsectorismainlydominatedbyfamilyownedbusinessgroups;whoarefocusingonacquiringexclusivityandfranchiseagreementswithwell-knowninternationalsuppliersand brands. In addition, these private groups have well diversified business activitiesandgood investments in realestateand land;which isalsosupporting toexpandretailactivitiesinsidetheKingdom.

• Savola Group: Thegroupoperatesviafourverticals:productionandprocessingoffooditems;manufactureofplasticpackagingproducts;retail(distributionofclothesandcosmeticsownershipandoperationofsupermarkets,hypermarketsanddepartmentstores);andrealestatepropertyinvestment,developmentandmanagement.Savola,throughAlAzizaPanda,isthebiggestplayerinKSA’sretailgrocerymarket.Thegroupcurrentlyhas90supermarketsand41hypermarkets.AstheshareoforganizedretailinKSA’sgrocerymarketislow(at43%),expandingnetworkisoneofthemostimportanttoolsfororganizedretailerstogainmarketshare.Inthatrespect,SavolaGroupisbetterplacedthanitspeers.Whilethegroupowns30–35%oflargeretailoutletsinKSA,itplanstofurtheradd50supermarketsand19hypermarketsby2015.

• Al Othaim: ThecompanyisthesecondlargestplayerinKSA’sretailgrocerymarket.However,ithaspositioneditselfasaretailerforlowerandmiddleclasses.Itsretailstoresaresmallerinsizeandcompetethroughprice-relatedoffers.

• Al Hokair: With5mn2milesofarea,AlHokairisthelargestretailspaceownerinKSAthathassignificantpresenceinclothingvertical.Thecompany’sclothingbrandscatertothemiddleincomegroupandcollectivelyrepresent8.4%marketshare,makingitasaleadingplayerinthesegment.Theclothingsegmentisexpectedtogrowata4yearCAGRof11%annuallytoSAR56bnin2015.Giventhefragmentednatureofthesegmentanditsdominantmarketposition,thereisamplescopeforAlHokairtogainmarketsharethroughorganicandinorganicroutes.

• Jarir: Jariristheleadingwholesalerandretailerofcomputerandcomputeraccessories,officeandschoolsupplies,booksandtoysinGCC.Thecompanyisthelargestretaileroflaptopsandlaptopaccessoriesintheregion,andholdsa50%marketshare.Withrisingpopularityoftheinternet,demandforlaptopsandsmartphonesiswitnessingstronggrowth.Thistrendisexpectedtocontinue,andJarir,withitsdominantmarketpositionandwideningnetwork,isexpectedtobeoneoftheleadingplayersinthemarket.Currently,Jaririsoperating35stores(5wholesalesand30retail),andplanstoopen8newstoresby2015(6insideKSAand2inKuwait).

TopfiveretailersinKSA,2011

Company # storesSales area

(m2)

Average sales area

(m2)

Grocery banner sales

(USD mn)

Market Share (%)

Panda 144 628,500 4,365 1,742 4.2

BinDawood 30 205,000 6,833 929 2.3

AlOthaim 108 162,440 1,504 879 2.0

Carrefour 17 107,000 6,294 683 1.7

Farm 43 115,850 2,694 327 0.8

Total 342 1,218,790 4,344 4,560 11.9

Source:EconomistIntelligenceUnit,Feb2012

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Humanresource:

Due to restricted labor regulations inside theKingdom,humanresourcemanagement isbecomingachallengeforthesector.ThroughSaudizationandothergovernmentpolicies,KSA’sgovernmenthasimposedrestrictionsonemploymentofexpats.Webelievethisleadtoapositiveimpactonlocalunemploymentrate;whilesimultaneouslyitwillalsoincreaselaborcostacrosstheKingdom.

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Abdullah al-Othaim Markets Co. (al-Othaim)Initiation | KSA | Retail Sector | July 2012

Key Information

Reuterscode: 4001.SE

Bloombergcode: ALOTHAIMAB

Country: SaudiArabia

Sector: Retail

PrimaryListing: TASI

M-Cap: SAR1,985.0mn

52WeeksH/L(SAR): 106.25/83

PriceChart

Source:Tadawul&Zawya

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

5,000.0

5,500.0

6,000.0

6,500.0

7,000.0

7,500.0

8,000.0

8,500.0

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Ap

r-12

Jun-

12

TASI - LHS al-Othaim (SAR) - RHS

Diversification in focus • An overview - Abdullahal-OthaimMarketsCompany(al-Othaim)started

itsoperationassmall foodtradingentityunderthenameofSalehal-OthaimTradingEst.in1956.However,lateron,thecompanystartedtoexpanditsoperationalfocusandopenedwholesaleandretailstoresin1981;whereal-Othaimwasregisteredasalimitedliabilitycompanyin1980(transformedintoJointStockCompanyin2007).Furthermore,thecompanytransformeditsfocusandstartedtobuildwholesale&retailsmallsandwarehousesinearly1990stocopewiththecity’s(i.e.Riyadh)economic & demographic developments. Since then the companyconsistentlymade expansions, which led the total number of stores(includingretail,wholesale,warehousesandcorners) toreacharound108stores (including76super&hypermarkets)across theKingdomby theendof1Q-2012. Itshouldbenoted that thecompanyhasnooperationalactivitiesoutsidetheKingdom.Thecompanyisranked51amongthetop100KSAcompanies.

• Strong foothold in local market & affiliated facilities - AccordingtoEIU9 , al-Othaim is ranked at 3rd in KSA food retail industrywith anestimatedmarketshareof2.5%-3%invaluetermandoccupied13.3%of the Kingdom sales area (m2) in 2011. Moreover, the company isranked2ndintermofthenumberofoutlets.Thecompany’swholesale& retail sales are mainly based on well recognized brands throughUnitedMarketingCenter(fullyownedsubsidiarybutnotconsolidated).Moreover, the company’s bakery segment is backed up by centralbakery;whereZodfactoryisthekeysupplieroffreshfoodproductstoal-Othaim.

• Stretching operational focus -Besideretailandwholesaletrading,thecompanyrecentlydecidedtoacquiretheremainingstakesinoneofitsassociatedcompanyi.e.OthaimRealEstateInvestment&DevelopmentCompany (Othaim malls). At present, the company holds 13.65%ownershipstakesinOthaimmalls.Accordingtothegiveninformation,thecompany is expected to [email protected]/shareto acquire remaining53.75mnshares inOthaimmall.Webelieve the100%acquisitionofOthaimmallwillexpandthecompany’soperationalactivities to real estate development and entertainment. Moreover,the addition of Othaimmall will also lead the company’s top-line tobederived fromdiversified sources.According toapress releaseonArgaam,thecompanywillrealizetheprofitabilityofOthaimmall(post-acquisition) from 2011; therefore the company’s EPS requires to berestatedatSAR7.82ascomparedtothereportedEPSofSAR6.67for2011.

• Estimated financial growth based on generic business - Sincethe company has not disclosed much information about the post-acquisition impactofOthaimmallonfinancialssowearemakingourestimationsbasedonthecompany’scurrentoperations.Hence,basedonourexpectations(withcurrentoperationalstructure),thecompany’ssalesrevenuewillincreaseataCAGRof4.2%,during2011-15;whereweassumethenumberofstoreswillremainsame(during2011-15)asrecordedin2011withanaverage2012-15grossmarginof8.1%.Ontheotherhand,thecompany’soperating&netprofitabilityareexpectedtoincreaseat2011-15CAGRof5.3%and6.5%,respectively.

SyedTaimureAkhtar(SeniorAnalyst)

[email protected]+966-2-6618271

Rating: ‘Overweight’

CurrentPrice: SAR87.0

12-monthpricetarget: SAR98.5

Upside/(Downside): 13.2%

9. EconomicIntelligenceUnit–IndustryReport,Consumergoods&retail-SaudiArabia;issuedinFeb2012.

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Investment risks• Customers’ visit becomes lower than our estimates - The expected increase in

customers’visitsisamonginthekeygrowthfactorsforthecompany.Thecustomers’visit isa revenuegeneration indicator foranyretailcompany.Hence,anydeviation incustomervisitscouldleadtomakeasubsequentadjustmentinthecompany’soutlook.

• Realization of Othaim mall acquisition -Asexplainedearlier,wehavenottakenanyfinancial impact of the 100% acquisition of Othaimmalls due to lack of disclosure.However,inlatersection,wehavediscussedthepotentialareastobeaffectedduetothisacquisition.Hence,ourvaluation ismuchsensitivewithpost-acquisitionera;andoncetheacquisitionwillmaterializewehavetorevisitourestimationswhichcouldleadustorevisethecompany’svaluationineitherdirection.

Discounted cash flows (DCF) ValuationWe employed discounted cash flows (DCF) based valuation mythology to attain thecompany’s12-monthpricetarget.Thefollowingarekeybasicsteps&assumptionsweareusingtovalueal-OthaimonDCF:

• 4-yearsforecastedfreecashflows(FCF).

• TerminalvaluecalculationbasedontheGordonGrowthModel(GGM).

¾Expectingterminalgrowthof3%.

• Using Capital Asset PricingModel (CAPM) to calculate cost of equity. However, theCAPMcalculationisbasedonthefollowingvariables:

¾Riskfreerateof2.7%basedon10-yearsUSbondyieldof2%+countryriskpremiumofKSAof0.7%.

¾Equityriskpremiumtakenat11.2%.

¾Betaof0.67fromBloomberg.

• WeareusingWeightedAverageCostofCapital(WACC)fordiscountingthefutureFCFofthecompany,wherethecalculationofWACCisbasedonthefollowingvariables:

¾CostofequityequivalenttoCAPM

¾Costofdebttakenat3.5%

¾Contribution fromequity&debt in al-Othaim’scapital structure is takenat 90%&10%,respectively.

Usingtheaboveassumptions,wearrivedatDCFbasedvalueofSAR98.5/shareforthecompany.

Keyfinancialindicators

All figures in SARmn, unless specified 2011 2012e 2013e 2014e 2015e

Revenues 4,091 4,294 4,463 4,630 4,853

EBITDA 2,434 2,105 2,052 1,985 1,916

Netincome 150 158 167 179 193

EPS (SAR) 6.7 7.0 7.4 8.0 8.6

P/E 15.0 12.4 11.7 10.9 10.1

P/BV 4.2 3.2 2.8 2.4 2.1

EV/EBITDA 10.5 8.8 8.0 7.0 6.2

Source:AlJaziraCapital*WehavetakenrespectiveDecemberclosingpricesfor2010&2011,whileforyears2012&onwardsweusedclosingpriceof26thJune2012.

• Investment consideration – By employing discounted cash flow (DCF) valuationmethodologywearrivedataDCFbased12-monthtargetpriceofSAR98.5/shareforthecompany.Thisindicates,atpresent,thecompanyisofferingapotentialupsideof13.2%overthemarketpriceofSAR87.0/share(asof26thJune2012).We,therefore,initiateourcoverageonal-OthaimwithOverweightrecommendation.

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DCFBaseValuation

All figures in SAR Mn, unless specified

2011 2012e 2013e 2014e 2015e

Revenues 4,091 4,294 4,463 4,630 4,853EBITDA 232 238 257 282 307Margin(%) 5.7% 5.5% 5.8% 6.1% 6.3%EBIT 158 156 168 180 193Margin(%) 3.9% 3.6% 3.8% 3.9% 4.0%NetIncome 150 158 167 179 193Margin(%) 3.7% 3.7% 3.7% 3.9% 4.0%Cashfromoperations 305 257 300 329 358Totalassets 1,676 1,820 1,923 2,023 2,142Shareholders’equity 531 618 710 808 914Totalliabilities&equity 1,676 1,820 1,923 2,023 2,142FreeCashFlowAnalysis(FCF)NOPLAT 154 152 165 176 189Depriciation&amortization 74 82 88 103 114Changeinnetworkingcapital 77 22 47 51 55CAPEX (209) (123) (173) (185) (205)FCF 95 134 126 144 153DiscountFactor 0.96 0.87 0.80 0.73PVofFCF 128 110 115 111SumofPVofFCF 463Terminalvalue 2,389PVofTerminalvalue 1,734Netpresentvalue 2,197Add:Netdebts 19NetWorth 2,216Shares(mn) 22.5DCFbasedvalue(SAR/share) 98.5WACC 9.6%Terminalgrowth 3.0%

Source:AlJaziraCapital

Hence,atcurrentmarketpriceofSAR87.0share (asof26thJune2012) thecompany isofferingapotentialupsideof13.2%.We,therefore,initiateourcoverageonal-Othaimwith‘Overweight’recommendation.

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Valuation under different scenariosInordertofacilitate investorswehavefurthertestedourcorefundamentalassumptions under two possible scenarios: Bull Case and Bear Case.Thesescenarios illustratehowsensitiveourvaluation is tochanges inkeyfundamental variables. We chose the impact of the different (i) numberof customers’ visit (ii) growth in stores, (iii) sales/customer growth and (ii)grossmarginswhilekeepingtheother factorsconstantonthecompany’s valuation.

# of customers’ visit (YoY growth)

Base case; 2.5%YoYin2012&1.0%2013onwards

Best case 1; +2.5%YoYin2012&onward

Worst case 1; +2.0%YoYin2012&onward


Worst case 2; 1.5%YoYin2012&onward


Worst case 3; 1.0%YoYin2012&onward

# of new stores / year

Base case; Nonewstoresareexpectedduring3Q2012-FY2015

Best case 1; 2storesperyearduring3Q2012-FY2015

Worst case 1; Sameasbasecase

Best case 2; 4storesperyearduring3Q2012-FY2015

Worst case 2; Sameasbasecaseonward

Best case 3;8storesperyearduring3Q2012-FY2015

Worst case 3; Sameasbasecase

YoY sales / customer growth

Base case;2.5%YoYquarterlygrowthisexpectedduring2013-15

Best case 1;3.0%YoYquarterlygrowthduring2013-15

Worst case 1; 2.0%YoYquarterlygrowthduring2013-15


Worst case 2;1.5%YoYquarterlygrowthduring2013-15

Best case 3; 4.5%YoYquarterlygrowthduring2013-15

Worst case 3; 1%YoYquarterlygrowthduring2013-15

GP margin growth

Base case;2.5%YoYquarterlygrowthisexpectedduring2013-15

Best case 1; 3.0%YoYquarterlygrowthduring2013-15

Worst case 1; 2.0%YoYquarterlygrowthduring2013-15


Worst case 2;1.5%YoYquarterlygrowthduring2013-15


Worst case 3; 1%YoYquarterlygrowthduring2013-15

Company overviewAl-Othaim started its businesswith a small company known as Saleh al-OthaimTradingEst.witha limitedbusinessfocus i.e.deal in foodtrading.However, in 1981, the company’s management (comprised of sons offounder)startedtotransformtheoriginalsmallestablishmenttothepresentdaycompanyknowasAbdullahal-OthaimMarketsCompany.Thecompanyopened itswholesale and retail stores in 1981 but registered as a limitedliabilitycompanyin1980(transformedintoJointStockcompanyin2007).Thecompanyfurtherexpandeditsfocusandopenedseveralretailandwholesalemegamallsin1990s,inordertocopewiththeopportunitiesgeneratedasaresultoftherapideconomicanddemographicdevelopmentinRiyadh.

Later on, the company started to stretch its operating arms across theKingdomthroughopeningofnewoutlets,wheretheincreaseinnumberofoutletswasmainlybasedsupermarkets.Accordingtothegiveninformation,the company’s total numberof storeswas recordedat 108by the endof1Q-2012.Atpresent,thecompanyisdealinginthe(i)tradingofwiderangeof food supplies, consumablematerial, livestock, household equipment &burgermeatproductsand(ii)operationandmanagementofsupermarketsandmalls.

Al-Othaimkeyproductionline2011–Segmentwise

Meat section Condiments & peanut section

-Mincedmeatsproductionline. -Condimentmixing&grindingline.

-Bergermeatproductionline. -Peanutstoastingline.

-Mortadellameatsproductionline. -Coffeegrindingline.

-Condimentpackagingline.

-Condimentbaggingline.

-Legumebaggingline.

Vegetables & fruits packaging Jam and honey section-Vegetables&fruitsareassortedandstoredunderpropertemperature. -Sectionrelatedproduct

Source:al-Othaim

� According to EIU Saudi Arabian retail sector Feb 2012, the company owns 162,440 m2 sales areas in KSA— total sales area in KSA was recorded at 1,218,790 m2 in 2011.

The company at present is dealing in the following brands through its affiliates;

� Hali— food products. � Rax— Consumers’ products. � Safori— High quality food for children. � Prof.— Personal care products. � Victo— Food products. � Saeer— Non-food material. � Zad al Watan— Grocery food products. � Abo Fahad— Grocery food products.

Scenario analysis

Source: AlJazira Capital

125.8

113.0

107.1

98.5

97.6

92.3

87.2

- 20.0 40.0 60.0 80.0 100.0 120.0

Best case scenario - 3



Base case

Worst case scenario - 1



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Subsidiaries During2011,al-OthaimmadeaninvestmentofaroundSAR400mntoestablish4newwhollyownedsubsidiaries,whicharenotconsolidatedinthecompany’sfinancialstatement.

Al-Othaim-Subsidiaries

Name of subsidiaries Country Al-Othaim’s ownershipBaytal-WatanCompany KSA 100%HaleyHolding KSA 100%SevenServicesCompany KSA 100%UniversalMarketingCenterCompany KSA 100%`

Source:2011annualreport

Acquisition of Othaim mall – expanding operational sphere

Al-Othaimisinaprocesstoacquiretheremaining86.3%stakesinOthaimmall,whichwillleadaremarkablechange intheoverallstructureof thecompanyandnot limitedtothefinancials.Thoughtheacquisitioncouldopennewroomofopportunitiesforthecompanyand a potential step to attain diversity in top-line as this could enable the company todirectlydealinconstruction,managementandrentalofmallsandentertainmentareas.Butwebelieveitistooearlytoquantifytheimpactofthistransactiononthefuturegrowthofthecompanyas(i)thefinancialsofOthaimmallisnotavailableand(ii)thecompanyhasnotdisclosedenoughfinancial treatmentof thisdeal;hencewearenotconsideringanyquantitativefinancialimpactoftheacquisitioninourvaluation.However,wehighlightedthepotentialareastobeimpactedinthefollowingtable;

Shareholding patternThecompany’sexistingshareholdingstructureisgiveninthefollowinggraph

Ownership structure 2011

Source: Tadawul & Zawya

� The company is among the prominent success stories witnessed in KSA private sector.

� The company got listed on TASI in Jun 2008 through IPO.

� Since the listing at TASI the company has not given any bonus so the number of issued shares remained at 22.5mn in 2011.

� The company is in a process to increase its issued shares by 7.3mn (representing 32.4% of existing issued shares) at SAR97.75/share to acquire remaining stakes in Othaim mall i.e. 53.8mn shares. Upon the completion of acquisition the company’s number of issued shares will increase subsequently.

Abdulaziz Saleh Ali al

Othaim, 17.7%Abdullah Saleh Ali al -Othaim, 6.0%

General public, 42.5%

al-Othaim Holding

Company, 27.6%

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Improvement in customers’ visit – justifying expansions

Accordingtothegiveninformation,thecompany’soverallcustomers’visit(inallcategoriesof stores) was recorded at 39.0mn in 2011 as compared to 33.0mn recorded in 2010.We believe the growth in annual customers’ visitwasmainly associatedwith the rapidexpansions in retail business— the company opened 9 new stores in 2011 across theKingdom. Itshouldbenotedthat thecustomers’visitperstore inadayalsowitnessedimprovement(asindicatedinfollowinggraph),whichindicatestheexpansioncreatedvalueforthecompany.

Potentialimpactonal-Othaim(non-quantitative)

Potential areas Nature of impact Description

Revenues(otherthanretailoperations)

Positive

• Increaseinrevenues;additiontotherevenuesofgenericbusiness.

• Diversifiedsourcesofrevenueleadtochangeinoverallrevenuecomposition.

OperatingprofitBasedonoperatingperformanceofacquiringentity

• Basedontheacquiredcompany’soperatingcashflows.

Profitfromassociatedcompanies

Negative• PostacquisitionwillforcethecompanytoconsiderOthaimmallasapartofoperationalactivities.

Netincome Positive

• Theimpactofadditionalsalesrevenueswilleventuallytranslateintobetternetincome.

• Atpresent,al-OthaimisrecognizingprofitfromOthaimmallonpro-ratabasis.However,theacquisitionwillenablethecompanytorecognizefullprofitabilityfromOthaimmall.

Assets Positive• Thecompany’sassetswillincreaseduetoinjectionofadditionalassetsfromOthaimmallincludingcashandothers.

Totaldebt&liabilities Positive

• Similartoincreaseassets,thecompany’salsoconsolidatetheliabilityofOthaimmallinitsbalancesheet.

Totalsharecapital Positive • Issuanceofnewsharetocompletethedeal.

Totalequity Positive

• Consolidationeffectsimilartoassets&liabilities,asmentionedearlier.

• IssuanceofnewshareatapremiumofSAR87.7/sharewillleadtocreatesharepremiumaccount.

Shareholdingpattern Change

• DilutioninexistingshareholdersexcepttheonewhohasstakesinOthaimmall.

Source:AljaziraCapital

Customers’ visit

Source: al-Othaim & Aljazira Capital0.95

1.00 1.01

1.02 1.03

1.04

0.90

0.92

0.94

0.96

0.98

1.00

1.02

1.04

1.06

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2010 2011 2012 2013 2014 2015

Customer visit (mn) - LHS Customer visit / store/day (000) - RHS

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Sincethecompanyhasnotdiscloseditsfutureexpansionplan(inretailbusiness)sowekeepthetotalnumberofstoresat108 (2newstoresopened in1Q-2012) forour futureprojections.However,webelievethecustomers’visitwillcontinueitsnorth-bondmovementwithgradualpaceandexpectedtoreach41.2mnin2015;wheretheanticipatedincreaseincustomers’influxisprimarilybasedonthecountry’sstrongeconomicanddemographicfactors.

� Ramadan and Eid seasons celebrated in 3Q in last four consecutive years i.e. 2008-2011. Consequently, the company’s sales revenue witnessed notable growth in similar quarters, during 2008-2011 (as witnessed in the graph).

� However, the decline in sales revenue in 4Q is mainly due to post-Ramadan slow retailing activities.

Operational activities highly sensitive to seasonal changesThough the nature of the company’s business, at present, (especially food trading) isrelatedtodaytodayshopping;buttheinfluxofcustomersismuchaffectedwithseasonalchangesi.e.RamadanandEidholidays(apeakseasonforKSAretailsector).

We believe the company’s operational activities (with current operational structure) willcontinuetoremainmuchsensitivewithupsanddownsinseasonalarrivalsofcustomers.Since Ramadan season is based on Hijri (Islamic) calendar— based on lunar— so thecompany’speakseasonwillaccordinglyshiftfrom3Qto2Q.Furthermore,basedonourcalculations,thementionedchangeinpeakseasonisexpectedtostartfrom2015onwardsandthecompany’ssalesrevenueisexpectedtoincreaseataCAGRof4.2%in2011-15.

Moderate growth in profitability Basedonourexpectations, thecompany isexpectedtopostnetprofitofSAR157.7mn(EPS;SAR7.0)in2012ascomparedtothenetincomeofSAR150.1mn(EPS;SAR6.7)in2011.ItisworthytomentionthatwearenotconsideringthefinancialimpactofOthaimmallacquisition,asmentionedearlier.

QoQ sales revenue

Source: al-Othaim & Aljazira Capital

Sales revenue growth


Net profitability, ROAA & ROAE


7.4% 1.4%

18.6%

-14.0%

4.5% 5.4%

14.6%

-6.5%

6.2%5.7%

11.0%

-15.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Quarterly retail sales revenue (SARmn)-LHS QoQ growth - RHS

12.1%

15.2%

4.9% 3.5%

3.5%4.7%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2010 2011 2012e 2013e 2014e 2015e

Total sales revenue (SARmn) - LHS YoY growth - RHS

11.9%9.5% 9.0% 8.9% 9.1%

9.3%

40.9%

30.6%

27.4%25.1%

23.6%22.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

-

50.0

100.0

150.0

200.0

250.0

2010 2011 2012e 2013e 2014e 2015e

Net profitability (SARmn) - LHS ROAA - RHS ROAE - RHS

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Hence, theexpected increase innetprofitabilityataCAGRof6.5%,during2011-15 ismainly based on the company’s current operational structure i.e. dominated by retailsegment;wheretheforecastedgrowthinretailbusinessismainlybasedon(i)increaseincustomervisitat2011-15CAGRof1.4%and(ii)nominalincreaseinrevenuespercustomerat2011-15CGARof2.7%.

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Financial statements

Abdullahal-OthaimMarketsCompany-IncomeStatement(FY11-15e)

Amounts are SAR in ‘000’ unless specified

2010 2011 2012e 2013e 2014e 2015e

Sales 3,422,445 3,942,797 4,137,194 4,283,021 4,433,997 4,642,867

Rent 96,315 148,115 157,064 179,552 195,757 210,586

Totalrevenues 3,518,760 4,090,913 4,294,258 4,462,572 4,629,754 4,853,453Costofsales-exdepreciation&amortization (3,191,287) (3,693,791) (3,878,570) (4,016,756) (4,146,405) (4,330,091)

Depreciation&Amortization (49,199) (73,977) (82,283) (88,203) (102,568) (113,850)

Grossprofit 278,274 323,145 333,404 357,613 380,781 409,512

Selling&distributionexpenses (88,446) (115,021) (114,737) (122,213) (129,962) (139,550)

General&administrativeexpenses (43,237) (50,503) (62,839) (66,928) (71,170) (76,593)

Provisionforimpairmentofproperty&equipment (1,500) - - - - -

Operatingincome 145,092 157,622 155,828 168,471 179,649 193,368

Netprofitfromassociatedcompanies 14,459 12,656 16,589 12,214 8,993 6,622

Financialcharges (3,977) (12,516) (11,795) (10,329) (5,321) (2,741)

Otherincome/(expenses) 10,473 (4,178) 651 - - -

Incomebeforezakat 166,047 153,583 161,273 170,356 183,321 197,249

Zakat (4,119) (3,500) (3,525) (3,726) (4,006) (4,386)

Netincome 161,929 150,083 157,747 166,630 179,315 192,863

P&LappropriationA/C

Openingbalance-Retainedearnings 79,607 169,093 236,667 323,429 415,075 513,698

Netincome 161,929 150,083 157,747 166,630 179,315 192,863

Transfertostatutoryreserves (16,193) (15,008) - - - -

Transfertovoluntaryreserves - - - - - -

Dividends (56,250) (67,500) (70,986) (74,983) (80,692) (86,788)

Closing-Retainedearnings 169,093 236,667 323,429 415,075 513,698 619,773

Source:Abdullahal-OthaimMarketsCompanyfinancialreports&AljaziraCapital

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Abdullahal-OthaimMarketsCompany-BalanceSheet(FY11-15e)


2010 2011 2012e 2013e 2014e 2015e

Current assets

Cashandbankbalance 45,236 43,619 67,165 70,039 71,517 82,096

Inventories 285,276 311,353 342,489 351,051 359,827 368,823

Prepayments&A/Creceivables 88,744 105,465 106,520 109,183 111,912 114,710

Total current assets 419,256 460,437 516,173 530,272 543,257 565,629

Non current assets

Investmentinassociatedcompany 105,191 118,945 166,523 170,686 174,954 179,327

Property&equipment 908,287 1,024,7571,103,3241,188,4011,270,6401,361,925

Projectunderconstruction 39,443 58,261 20,391 20,595 20,801 21,009

Intangibleassets-net 14,554 13,215 13,347 13,481 13,616 13,752

Total non current assets 1,067,474 1,215,178 1,303,586 1,393,163 1,480,010 1,576,013

Total Assets 1,486,731 1,675,615 1,819,760 1,923,435 2,023,267 2,141,642

Liabilities & owner's shareholders' equity

Current liabilities

Short-termloans&murabaha 70,998 61,433 39,931 37,935 36,038 34,236CurrentportionofL.Tloans&murabaha 100,728 103,346 118,848 121,819 124,865 127,986

Tradepayable 584,531 694,779 746,888 802,904 863,122 927,856

Otherpayables&accruals 73,949 83,062 85,139 87,268 89,449 91,685

Total current liabilities 830,207 942,621 990,806 1,049,926 1,113,474 1,181,764

Non-current liabilities

Endofserviceindemnities 28,884 35,461 36,348 37,257 38,188 39,143

Long-termloans&murabaha 179,120 166,231 174,542 126,543 63,272 6,327

Totalnon-currentliabilities 208,004 201,692 210,890 163,800 101,460 45,470

Total liabilities 1,038,211 1,144,313 1,201,696 1,213,726 1,214,934 1,227,234

Shareholders' equity

Sharecapital 225,000 225,000 225,000 225,000 225,000 225,000

Statutoryreserves 41,974 56,982 56,982 56,982 56,982 56,982

Voluntaryreserves 12,453 12,453 12,453 12,453 12,453 12,453

Retainedearnings 169,093 236,667 323,429 415,075 513,698 619,773UnrealizedgainsfrominvestmentsinAFSsecurities - 199 199 199 199 199

Total shareholders' equity 448,520 531,302 618,063 709,710 808,333 914,408

Total liabilities & shareholders' equity 1,486,731 1,675,615 1,819,760 1,923,435 2,023,267 2,141,642


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Abdullahal-OthaimMarketsCompany-CashFlowStatement(FY11-15e)


2010 2011 2012e 2013e 2014e 2015e

OperatingActivitiesIncomebeforezakat 166,047 153,583 161,273 170,356 183,321 197,249Depreciation&amortization 49,199 73,977 82,283 88,203 102,568 113,850Otheroperationalcashflows (8,609) (9,201) (8,970) (5,611) (7,678) (8,266)ChangesinNWC 56,785 76,776 21,995 46,920 50,894 55,177Netcashfromoperatingactivities 263,423 295,136 256,581 299,868 329,104 358,010InvestingActivitiesPlant,property&equipment (277,924) (209,667) (122,982) (173,484) (185,012) (205,343)Otherinvestmentactivities (5,247) 252 (30,471) 7,918 4,591 2,112Netcashfrominvestmentactivities (283,170) (209,415) (153,452) (165,566) (180,421) (203,232)FinancingactivitiesLoans&murabahas 13,972 (19,837) 2,312 (47,024) (62,123) (55,625)Dividendpaid (56,250) (67,500) (70,986) (74,983) (80,692) (86,788)Otherfinancingactivities - - (10,908) (9,421) (4,390) (1,786)

Netcashfromfinancingactivities (42,278) (87,337) (79,583) (131,428) (147,204) (144,200)

Netchangeincash (62,025) (1,617) 23,546 2,873 1,479 10,579

Endingcashbalance 45,236 43,619 67,165 70,039 71,517 82,096


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Abdullahal-OthaimMarketsCompany–KeyFinancialRatios(FY11-15e)

2010 2011 2012e 2013e 2014e 2015e

Liquidity RatiosCurrentRatio(x) 0.5 0.5 0.5 0.5 0.5 0.5CashRatio(x) 0.1 0.0 0.1 0.1 0.1 0.1Profitability RatiosGrossMargin 7.9% 7.9% 7.8% 8.0% 8.2% 8.4%EBITDAMargin 5.5% 5.7% 5.5% 5.8% 6.1% 6.3%EBITMargin 4.1% 3.9% 3.6% 3.8% 3.9% 4.0%NetProfitMargin 4.6% 3.7% 3.7% 3.7% 3.9% 4.0%ROAA 11.9% 9.5% 9.0% 8.9% 9.1% 9.3%ROAE 40.9% 30.6% 27.4% 25.1% 23.6% 22.4%Leverage RatiosDebttoEquity(x) 0.78 0.62 0.54 0.40 0.28 0.18DebttoAsset 23.6% 19.8% 18.3% 14.9% 11.1% 7.9%Liabilities/TotalAssets(x) 0.70 0.68 0.66 0.63 0.60 0.57Growth RatesRevenueGrowthRate 12.1% 16.3% 5.0% 3.9% 3.7% 4.8%NetIncomeGrowthRate 108.9% -7.3% 5.1% 5.6% 7.6% 7.6%EquityGrowthRate 30.8% 18.5% 16.3% 14.8% 13.9% 13.1%TotalAssetGrowthRate 20.1% 12.7% 8.6% 5.7% 5.2% 5.9%Ratios Use for ValuationNumberofShares(mn) 22.5 22.5 22.5 22.5 22.5 22.5Parvaluepershare(SAR) 10.0 10.0 10.0 10.0 10.0 10.0BVpershare(SAR) 19.9 23.6 27.5 31.5 35.9 40.6EPS(SAR) 7.2 6.7 7.0 7.4 8.0 8.6MarketPrice(SAR)* 78.0 100.0 87.0 87.0 87.0 87.0MarketCapin(SARMn) 1,755 2,250 1,958 1,958 1,958 1,958EV(SARMn) 1,960 2,434 2,105 2,052 1,985 1,916EV/EBITDA 10.1 10.5 8.8 8.0 7.0 6.2P/ERatio 10.8 15.0 12.4 11.7 10.9 10.1P/BVRatio 3.9 4.2 3.2 2.8 2.4 2.1InterestCoverageRatio 36.5 12.6 13.2 16.3 33.8 70.5DividenYeild 3.2% 3.0% 3.6% 3.8% 4.1% 4.4%

Source:Abdullahal-OthaimMarketsCompanyfinancialreports&AljaziraCapital*WehavetakenrespectiveDecemberclosingpricesfor2010&2011,whileforyears2012&onwardsweusedclosingpriceof26thJune2012.

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Fawaz Abdulaziz al-Hokair Co. (al-Hokair)Initiation | KSA | Retail Sector | July 2012

Key Information

Reuterscode: 4240.SE

Bloombergcode: ALHOKAIRAB

Country: SaudiArabia

Sector: Retail

PrimaryListing: TASI

M-Cap: SAR5,547.5

52WeeksH/L(SAR): 89.75/45.0

PriceChart

Source:Tadawul&Zawya

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TASI - LHS alHokair (SAR) - RHS

A leading fashion retailer • Readymade clothing to brand franchiser - FawazAbdulazizal

Hokair&Co.(al-Hokair)starteditsoperationin1990asaretailerandwholesalerofready-madetextiles&clothes,shoesandperfumes.Lateron,thecompanyexpandeditsfocustotheintroductionofmoreforeignbrandsinthelocalretailmarketthroughfranchisingandotherpossibleways.Consequently,thecompany’sstrategy(alongwithlocaleconomicgrowth)ledthecompanytoestablishitselfasaleadingfashionretailerinKSA.

• Diversified brands & wide geographical presence - The company’sexpansion strategy since 1997 was mainly relied on (i) geographicalexpansion; inside and outside the Kingdom and (ii) stretching brands’portfolio; through acquiring new franchises. Consequently, by March2012 (company’s fiscal year ended April-Mar), the company’s totalnumberofstoreswasrecordedat1,176ofwhich995storesarelocatedinsidetheKingdom;whiletotalnumberofcommercialbrandsstoodat78—offeringwiderangeofbrandedfashionproductsincludingapparels,cosmetics,footwearandsoon.Itisworthytomentionthatthecompany,duringFY2011-12,stretcheditsoperationalarmsinUSAwith51storesandAzerbaijanwith2newstores.

• Low competition in local market- Based on the company’s widecoverage and operational focus, we believe al-Hokair, at present, isoperating in relatively low competition environment. Moreover, basedonourunderstanding,theamplerecognitionininternationalmarketwillcontinuetosupportthecompany’simageasagatewaytoenterinSaudifashionretailmarket.Consequently,webelievethecompanywillcontinuetodominatethelocalfashionretailindustryandapotentialfranchiserforanynewmid-highendbrand.

• Expansions to keep the growth intact - Webelievethecompanywillcontinue its expansion strategy to sustain its growth and increase itstotalnumberofstoresataCAGRof3.2%duringFY2011/12-FY2015/16.Furthermore,theanticipatedacquisitionoffranchisefornewbrandwilllead to make an additional positive impact of around 1.1% on salesrevenue.Hence,thecompany’ssalerevenueisexpectedtoincreaseataCAGRof4.9%,duringFY2011/12-FY2015/16.Moreover,thecompany’sgrossmarginisexpectedtomaintainattheaveragelevelof42.3%duringFY2012/13-FY2015/16ascomparedtothehistoricalaverage4-yeargrossmarginof40.1%.Ontheotherhand,weexpecttheoperatingmarginwillcontinuetoshowimprovementandleadthecompanynetprofitabilitytoincreaseataCAGRof9.2%,duringFY2011/12-FY2015/16.

Keyfinancialindicators

All figures in SARmn, unless specified

2011/12 2012/13e 2013/14e 2014/15e 2015/16e

Revenues 2,575 3,203 3,442 3,586 3,731EBITDA 539 664 721 778 835Netincome 315 447 491 537 587EPS (SAR) 4.5 6.4 7.0 7.7 8.4P/E 9.6 12.4 11.3 10.3 9.5P/BV 2.7 3.9 3.2 2.7 3.3EV/EBITDA 9.1 8.8 8.0 7.3 6.5

Source:AlJaziraCapital*WehavetakenrespectiveMarchendpricesfor2010&2011,whileforyears2012&onwardsweusedclosingpriceof26thJune2012

SyedTaimureAkhtar(SeniorAnalyst)

[email protected]+966-2-6618271

Rating: ‘Neutral’

CurrentPrice: SAR79.25

12-monthpricetarget: SAR80.2

Upside/(Downside): 1.2%

• Investment consideration –Weuseddiscountedcashflow(DCF)valuationmethodologytovaluethecompanyandarrivedata12-monthtargetpriceofSAR80.2/share.Thisindicates,atpresent,thecompanyisofferingapotentialupsideof6.2%overthemarketpriceofSAR79.25share(asof26thJune2012).We,therefore,initiateourcoverageonal-HokairwithNeutralrecommendation.

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24

Investment risks• Deviation in growth drivers -Theexpectedincreaseinnumberofstoresi.e.40stores

perannumandpotentialinductionofnewbrandlinearetheleadinggrowthfactorsforthecompany.Hence,anydeviationinthesefactorswillleadustomakesubsequentadjustmentsinourestimations;ineitherdirection.

• Unstable political environment -ItshouldbenotedthatwehavenotincorporatedanyimpactofpoliticaldisturbanceinEgypt,wherethecompanyownsmorethan70storesi.e.representingmorethan35%ofal-HokairstoresoutsidetheKingdom.Hence,anyunprecedentedeventcouldleadusrequiredadjustmentsinvaluationandestimations.

Discounted cash flows (DCF) ValuationWeuseddiscountedcashflows(DCF)basedvaluationmythologytoattainthecompany’s12-monthpricetarget.Thefollowingarekeybasicsteps&assumptionsweareusingtovalueal-HokaironDCF:

• 4-yearsforecastedfreecashflows(FCF).

• TerminalvaluecalculationbasedontheGordonGrowthModel(GGM).

¾Expectingterminalgrowthof3%.

• UsingCapitalAssetPricingModel(CAPM)tocalculatecostofequity.However,theCAPMcalculationisbasedonthefollowingvariables:

¾Riskfreerateof2.7%basedon10-yearsUSbondyieldof2%+countryriskpremiumofKSAof0.7%.

¾Equityriskpremiumtakenat11.2%.

¾Betaof0.81fromBloomberg.

• WeareusingWeightedAverageCostofCapital(WACC)fordiscountingthefutureFCFofthecompany,wherethecalculationofWACCisbasedonthefollowingvariables:

¾CostofequityequivalenttoCAPM

¾Costofdebttakenat3.5%

¾Contributionfromequity&debtinal-Hokair’scapitalstructureistakenat85%&15%,respectively.

Using theaboveassumptions,wearrivedatDCFbasedvalueofSAR80.2/share for thecompany.

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DCFBaseValuation

All figures in SAR Mn, unless specified

2011-12 2012-13e 2013-14e 2014-15e 2015-16e

Revenues 3,203 3,442 3,586 3,731 3,877EBITDA 539 664 721 778 835Margin(%) 16.8% 19.3% 20.1% 20.8% 21.5%EBIT 426 544 595 650 703Margin(%) 13.3% 15.8% 16.6% 17.4% 18.1%NetIncome 447 491 537 587 635Margin(%) 14.0% 14.3% 15.0% 15.7% 16.4%Cash from operationsTotalassets 2,575 2,869 3,170 3,506 3,843Shareholders'equity 1,425 1,745 2,068 2,420 2,770Totalliabilities&equity 2,575 2,869 3,170 3,506 3,843Free Cash Flow Analysis (FCF)NOPLAT 381 498 544 594 642Depriciation&amortization 114 120 126 128 133Changeinnetworkingcapital (194) (150) (135) (156) (120)CAPEX (288) (219) (211) (192) (162)FCF 13 249 324 374 492DiscountFactor 0.95 0.86 0.78 0.70PVofFCF 237 279 291 347SumofPVofFCF 1,154Terminalvalue 6,741PVofTerminalvalue 4,749Net present value 5,903Add:Netdebts (290)Net Worth 5,613Shares(mn) 70.0DCF based value (SAR/share) 80.2WACC 10.5%Terminalgrowth 3.0%

Source:AlJaziraCapital

JULY2012

26

Company overviewAl-Hokair started its business in 1990s as a domestic retailer andwholesaler of ready-made clothing items, footwear and perfumes.However,upon the realizationofopportunities raisedon thebackofsocio-economic development in local market, the company startedtostretch itself inthe localmarketwhichwas latersupportedbythemanagement’seffectivestrategy.

Atpresent,bytheendofMarch2012(al-HokairfiscalyearApril-Mar),the company is operated with 1,176 stores; where the company isofferingownedaround78 international fashionbrands. It isworthy tomentionthatthecompanyhasenteredinUSAthroughtheacquisitionofStrasburgJarvisInc10.forUSD2.2mninJuly2011(2Q2011-12forthe

10. StrasburgJarvisInc.isaspecialtychildren’sclothierwhohasbeendesigning,manufacturingandretailingheirloom-qualityspecialoccasionandseasonalapparel.

Establishment phase

� Started its operation.

� Aligned its strategy in line with socio-economic growth.

� Seeking-out to make alliance with potential international players.

� Acquired retail skills from international players

Repositioning & strategic focus phase

� Indentify new places within the Kingdom to enhance profitability.

� Reorganize management structure to grow more efficiently

� IPO in 2006.

� Continue expanding geographical presence & acquiring new franchises.

� Focusing to enhance economies of scale and revisit loss making stores.

Expansion & growth phase

� Introduced local market with international fashion brand.

� Acquired new franchises to add brands.

� Established itself as a well-diversified franchise holder with interest in various most niches of the fashion market.

Source:al-HokairIPOprospectus

1990-1996 1997-2004 2005-till now

AtcurrentmarketpriceofSAR79.25/share(asof26thJune2012)thecompanyisofferingapotentialupsideof1.2%.We,therefore,initiateourcoverageonal-Hokairwith‘Neutral’recommendation.

Valuation under different scenariosInordertofacilitate investorswehavefurthertestedourcorefundamentalassumptionsundertwopossiblescenarios:BullCaseandBearCase.Thesescenariosillustratehowsensitiveourvaluationistochangesinkeyfundamentalvariables.Wechosetheimpactof thedifferent (i)numberofnewstores/quarterand (ii)additionalgrowth frompotentialinduction of new brands while keeping the other factors constant on the company’svaluation.

Scenario analysis

Source: AlJazira Capital

137.8

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Base case

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Scenario assumptions# new stores/quarter

Base case; 10 stores

Best case 1;+15stores

Worst case 1; +5stores


Worst case 2;0stores


Worst case 3;0stores

Additional growth from the induction of new brand

Base case; average1.1%/year

Best case 1;10%higherthanbasecase

Worst case 1; 10% lower than base case


Worst case 2;20%lowerthanbasecase


Worst case 3;30%lowerthanbasecase

JULY2012

27

company).Moreover,theacquisitionofStrasburgmadetheadditionofchildrenclothinginthecompany’sexistingoffering.Besidethisacquisition,al-HokairalsomarkeditspresenceinKazakhstanwith the opening of 2 new stores.During FY2011-12, the company alsostrengtheneditspresenceinJordanandEgyptianareasthroughacquisitionofretailgroupJordanandretailgroupEgypt,respectively.

Subsidiaries Thecompany’supdatedsubsidiariesarelistedinthefollowingtable.

Shareholding patternThecompany’sexistingshareholdingstructureisgiveninthefollowinggraph:

Expansion - a key to successSincethecompany’scorebusinessactivityistheretailingofinternational(mid-highend)fashionbrandssowebelievethesuccessisprimarilybasedontwofactors(i)strengthenitsexistingpresencethroughacquiringnewfranchisesofrenownedfashionbrandsand(ii)increaseitspresencethroughopeningofnewstoresacrosstheoperationalareas,local&worldwide.Hence,consideringtheimportanceofthesefactors,thoughthecompanyhasnotdisclosedanyinformationaboutexpansioninstoresandbrandportfolio;weassumethecompany’stotalnumberofstoreswillincreaseataCAGRof3.2%,duringFY2011/12–FY2015/16;where thepossiblebrand inductionwillmakeadditionalpositive impactofaround1.1%perannumduringtheforecastedtimeperiod.

� The company is the leading fashion retailer in KSA and 70% owned by founder’s family.

� The company started its operation in 1990 with an initial capital of SAR300,000 (as a general partnership). The company’s capital was further increased to SAR1.5mn in 1991 and reached at SAR400mn by 2005.

� The company’s legal status was converted to ‘Limited Liability Company’ in 2005. The company share capital was further increased to SAR700mn in FY2007-08.

� The company got listed on TASI in Dec 2006.

Al-Hokair-Subsidiaries

Name of subsidiaries Country Al-Hokair ownership

Al-WaheedaEquipmentCo.Ltd KSA 100%HaifaB.al-Kalam&PartnersInternationalCo.fortrading KSA 100%

SaudiRetailCo. KSA 100%WahbaTradingCompanyLtd KSA 100%Kazakhstangroup RepublicofKazakhstan 85%Al-FaridaTradingAgenciesCo. KSA 70%RetailGroupEgypt ArabRepublicofEgypt 98%RetailGroupJordan HashemiteKingdomofJordan 95%RetailGroupofAmerica USA 100%RetailGroupofAzerbaijan RepublicofAzerbaijan 90%

Source:2011-12annualreport

Geographical disbursement of stores 2011-12

Source: al-Hokair IPO prospectus

Ownership structure 2011-12

Source: Tadawul & Zawya

Dr. Abdulmajeed al -Hokair, 7.0%

Dr. Salman al-

Hokair, 7.0%

Dr. Fawaz alHokair, 7.0%

FAS Saudiholding company 49.0%

30.0%General public

Saudi Arabia, 84.6%

USA, 4.3%

Kazakhstan, 2.4%Egypt, 6.3% Jordan, 2.0%

Others, 0.3%

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Consequently,thecompany’ssalesrevenueisexpectedto increaseataCAGRof4.9%during FY2011/12-FY2015/16; where the gross margins are expected to remain at anaveragelevelof42.3%duringourforecastedperiod.

Furthermore, the company’s sales revenue is much sensitive with ups and downs inseasonal demand. According to the given information, Eid-season will remain a peakseasonforthecompanyi.e.2Q(July-Sep)foreachfiscalyear.Basedonourcalculation,EidwillcontinuetobecelebratedinJuly-Sepduringourforecastedtimeperiod;therefore,thementionedquarterwillcontinuetoremainpeakseasonforthecompany.

Largest fashion retailer in KSA & diversified product range - key supplements for al-HokairThecompany isenjoyingthebenefitofhavinguniquebusinessstructure i.e. franchisinginternational fashion brands as compared to other retailers with conventional strategy.Moreover,webelievethestrongimagein internationalmarketwillcontinuetoaddvalueto the company andmaintain its image as a ‘gateway toSaudi fashion retailmarket’.Hence,thesefactorswillhelpthecompanytosustainitscurrentpositioninlocalmarketparticularly;andprovidecushiontocontinueitsgrowthtrajectory.

Ontheotherhand,thecompany’swiderangeofoffering—includingclothing, footwear,eyewear,perfumesandsoon—couldbeanadditionalfactorforthecompanytosustainitscurrentpositioninlocalmarkets.Hence,weassumethecompanywillcontinuetofaceminimallevelofcompetitioninlocalfashionretailindustry.

Profitability growthThe company is expected to post net profitability of SAR490.9mn (EPS; SAR7.0) inFY2012/13,whichindicatesYoYgrowthof9.7%—theexpectedslowdowningrowthascomparedtopreviousfiscalyeargrowthismainlyassociatedwithlowerotherincome.

Expansion in retail stores

Source: al-Hokair & Aljazira Capital

Quarter sales revenue trend

Source: al-Hokair & Aljazira Capital

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Itisworthytomentionthatourforecastedotherincomeismainlybasedonincomefromrentals;hence,overallotherincomeduringFY2012/13-FY2015/16isexpectedtoremainlowerthanFY2011/12.Hence,thiswillleadthecompany’snetprofitabilitytoincreaseataCAGRof9.1%,duringFY2012/13-FY2015/16.

Profitability, ROAE & ROAA

Source: al-Hokair & Aljazira Capital15.6%

18.9%18.0% 17.8% 17.6%

17.3%

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35.1%

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FawazAbdulazizal-HokairCompany-IncomeStatement(FY2011/12–FY2015/16e)

‘Amount in SAR‘000’, unless specified

al-Hokair

2010-11 2011-12 2012-13e 2013-14e 2014-15e 2015-16e

Sales 2,574,608 3,202,667 3,442,291 3,585,943 3,730,756 3,876,702Costofsales (1,435,476) (1,755,304) (1,866,371) (1,944,246) (2,022,749) (2,101,867)Depreciation&amortization (102,186) (113,776) (119,618) (125,599) (128,290) (132,608)Gross profit 1,036,946 1,333,586 1,456,302 1,516,099 1,579,716 1,642,227 Operatingexpense (775,012) (907,938) (911,872) (920,991) (930,201) (939,503)Operating profit 261,934 425,649 544,429 595,108 649,516 702,724

Profit/(loss)fromassociatedcompanies (17,442) (745) - - - -

Financialcosts (16,405) (17,723) (17,901) (18,080) (18,260) (18,443)Otherincome 106,681 76,940 10,935 11,379 11,841 12,322Income before zakat 334,769 484,121 537,464 588,407 643,096 696,603 Zakat (15,089) (35,858) (39,731) (43,859) (48,309) (52,654)Net income before minority interest 319,680 448,263 497,733 544,548 594,788 643,949

Minorityinterest (4,209) (882) (6,813) (7,493) (8,225) (8,940)Net income for the year 315,472 447,381 490,921 537,055 586,563 635,009

P&L appropriation a/c

Openingbalance 281,459 250,383 513,026 783,033 1,051,560 1,344,842Profitfortheyear 315,472 447,381 490,921 537,055 586,563 635,009Transfertostatutoryreserves (31,547) (44,738) (49,092) (53,706) (58,656) (63,501)Dividendpaid (315,000) (140,000) (171,822) (214,822) (234,625) (285,754)

Retained earning - Ending balance 250,383 513,026 783,033 1,051,560 1,344,842 1,630,595

Source:FawazAbdulazizal-HokairCompanyfinancialreports&AljaziraCapital

Financial statements

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FawazAbdulazizal-HokairCompany–Balancesheet(FY2011/12–FY2015/16e)

Amount in SAR‘000’, unless specified

2010-11 2011-12 2012-13e 2013-14e 2014-15e 2015-16e

Current assetsCash&equivalent 107,325 198,047 207,995 252,808 331,371 479,990Inventories 598,552 745,960 895,152 1,029,425 1,183,839 1,302,223Prepayments 297,774 290,629 305,161 320,419 336,440 353,262Loanstorelatedparties 132,328 166,461 174,784 183,523 192,699 202,334Total current assets 1,135,979 1,401,097 1,583,092 1,786,175 2,044,349 2,337,809 Non-current assetsInvestmentinassociates 219,007 244,691 256,926 269,772 283,261 297,424Plant,property&equipment 613,197 790,049 878,462 952,227 1,003,363 1,018,783Intengibleassets 61,438 61,438 64,510 67,735 71,122 74,678Goodwill 81,140 78,141 85,955 94,550 104,005 114,406Loanstorelatedparties 58,591 - - - - -Total non-current assets 1,033,373 1,174,319 1,285,852 1,384,284 1,461,751 1,505,290 Total assets 2,169,352 2,575,416 2,868,944 3,170,459 3,506,100 3,843,099 Liabilities & owner's equityCurrent laibilitiesBankP/A 85,903 126,684 114,015 102,614 92,352 83,117TradeP/A 285,309 242,728 248,796 255,016 261,392 267,926Accruedexpenses 330,502 310,291 318,048 325,999 334,149 342,503Duestosistercompanies - 8,847 9,068 9,294 9,527 9,765Currentportionoflong-termloan 75,000 100,000 102,500 105,063 107,689 110,381

Total current laibilities 776,714 788,549 792,427 797,986 805,109 813,693 Non-current laibilitiesLong-termloans 225,000 312,518 281,266 253,140 227,826 205,043Employessbenefits 41,810 49,152 50,381 51,640 52,931 54,254Totalnon-currentlaibilities 266,810 361,670 331,647 304,780 280,757 259,298Total laibilities 1,043,524 1,150,219 1,124,074 1,102,766 1,085,866 1,072,990 Onwer's equitySharecapital 700,000 700,000 700,000 700,000 700,000 700,000Statutoryreserves 144,436 189,174 238,266 291,971 350,628 414,128Retainedearnings 250,383 513,026 783,033 1,051,560 1,344,842 1,630,595Owner'sequity 1,094,819 1,402,200 1,721,298 2,043,532 2,395,469 2,744,724Provisionforminority 31,008 22,997 23,572 24,161 24,765 25,384Total owner's equity 1,125,827 1,425,197 1,744,870 2,067,693 2,420,234 2,770,108 Total liabilities & owner's equity 2,169,352 2,575,416 2,868,944 3,170,459 3,506,100 3,843,099


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FawazAbdulazizal-HokairCompany–Cashflowstatement(FY2011/12–FY2015/16e)

Amount in SAR‘000’, unless specified

2010-11 2011-122012-13 e

2013-14 e

2014-15 e

2015-16 e

Operating Activities

Incomebeforezakat&incometax&minorityinterests 334,769 484,121 537,464 588,407 643,096 696,603

Depriciation&amortization 102,186 113,776 119,618 125,599 128,290 132,608

Otheroperationalcashflows 5,305 (17,398) (39,003) (44,062) (49,511) (54,855)

ChangesinNWC (138,060) (180,707) (149,677) (135,133) (155,677) (120,079)

Net cash from operating activities 304,200 399,792 468,402 534,811 566,199 654,277

Investing ActivitiesPlant,property&equipment (63,704) (298,197) (218,917) (211,184) (192,269) (161,984)Otherinvestmentactivities 22,174 (15,278) (1,299) (1,467) (1,647) (1,841)Net cash from investment activities (41,530) (313,476) (220,216) (212,651) (193,916) (163,825)

Financing activitiesProceedsfrommurabahafinancing&loans 15,903 153,299 (49,743) (45,705) (42,125) (38,961)

Dividendpaids (260,529) (140,000) (171,822) (214,822) (234,625) (285,754)Otherfinancingactivities 9,071 (8,894) (16,672) (16,820) (16,969) (17,120)

Net cash from financing activities (235,555) 4,406 (238,237) (277,347) (293,719) (341,834)

Netchangeincash 27,115 90,722 9,948 44,813 78,564 148,618

Cash-Openingbalance 76,796 107,325 198,047 207,995 252,808 331,371

Cash&bankbalancefromacquiredsubsidiaries 3,415 - - - - -

Ending cash balance 107,325 198,047 207,995 252,808 331,371 479,990


JULY2012

33

FawazAbdulazizal-HokairCompany–Cashflowstatement(FY2011/12–FY2015/16e)

2009/10 2011/12 2012/13e 2013/14e 2014/15e 2015/16e

Liquidity RatiosCurrentRatio(x) 1.5 1.8 2.0 2.2 2.5 2.9CashRatio(x) 0.1 0.3 0.3 0.3 0.4 0.6Profitability RatiosGrossMargin 40.3% 41.6% 42.3% 42.3% 42.3% 42.4%EBITDAMargin 14.1% 16.8% 19.3% 20.1% 20.8% 21.5%EBITMargin 10.2% 13.3% 15.8% 16.6% 17.4% 18.1%NetProfitMargin 12.3% 14.0% 14.3% 15.0% 15.7% 16.4%ROAA 15.6% 18.9% 18.0% 17.8% 17.6% 17.3%ROAE 28.2% 35.1% 31.0% 28.2% 26.1% 24.5%Leverage RatiosDebttoEquity(x) 0.28 0.31 0.23 0.17 0.13 0.10DebttoAsset 14.3% 17.1% 13.8% 11.2% 9.1% 7.5%Liabilities/TotalAssets(x) 0.48 0.45 0.39 0.35 0.31 0.28Growth RatesRevenueGrowthRate 24.1% 24.4% 7.5% 4.2% 4.0% 3.9%NetIncomeGrowthRate 36.3% 41.8% 9.7% 9.4% 9.2% 8.3%EquityGrowthRate 101.4% 126.6% 122.4% 118.5% 117.0% 114.5%TotalAssetGrowthRate 14.9% 18.7% 11.4% 10.5% 10.6% 9.6%Ratios Use for ValuationNumberofShares(mn) 70.0 70.0 70.0 70.0 70.0 70.0Parvaluepershare(SAR) 10.0 10.0 10.0 10.0 10.0 10.0BVpershare(SAR) 16.1 20.4 24.9 29.5 34.6 39.6EPS(SAR) 4.5 6.4 7.0 7.7 8.4 9.1MarketPrice(SAR)* 43.3 75.0 79.3 79.3 79.3 79.3MarketCapin(SARMn) 3,031 5,250 5,548 5,548 5,548 5,548EV(SARMn) 3,310 5,591 5,837 5,756 5,644 5,466EV/EBITDA 9.1 10.4 8.8 8.0 7.3 6.5P/ERatio 9.6 11.7 11.3 10.3 9.5 8.7P/BVRatio 2.7 3.7 3.2 2.7 2.3 2.0InterestCoverageRatio 16.0 24.0 30.4 32.9 35.6 38.1DividenYeild 10.4% 2.7% 3.1% 3.9% 4.2% 5.2%


*WehavetakenrespectiveMarchendpricesfor2010&2011,whileforyears2012&onwardsweusedclosingpriceof26thJune2012.

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