Retail Sector Report - Al Rajhi Capital

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Fawaz Abdulaziz Alhokair Retail –Industrial 05 January 2013 Balance Sheet (SARmn) 03/10A 03/11A 03/12A 03/13E 03/14E Cash and Cash Equivalents 76 107 198 269 328 Current Receivables - - - - - Inventories 476 599 746 1,017 1,179 Other current assets 362 494 476 626 626 Total Current Assets 914 1,199 1,420 1,912 2,132 Fixed Assets 584 613 790 1,193 1,286 Investments 260 219 245 245 245 Goodwill 61 61 61 473 473 Other Intangible Assets 78 81 78 93 93 Total Other Assets - - - - - Total Non-current Assets 983 975 1,174 2,003 2,096 Total Assets 1,897 2,174 2,594 3,915 4,229 Short Term Debt 70 161 227 279 279 Accounts Payable 149 285 249 429 374 Accrued Expenses - - - - - Dividends Payable - - - - - Other Current Liabilities 224 335 332 563 563 Total Current Liabilities 444 782 807 1,270 1,216 Long-Term Debt 300 225 313 763 763 Other LT Payables - - - - - Provisions 39 42 49 64 64 Total Non-current Liabilities 339 267 362 827 827 Minority interests 20 31 23 23 25 Paid-up share capital 700 700 700 700 700 Total Reserves 394 395 702 1,094 1,461 Total Shareholders' Equity 1,094 1,095 1,402 1,794 2,161 Total Equity 1,114 1,126 1,425 1,817 2,186 Total Liabilities & Shareholders' Equity 1,897 2,174 2,594 3,915 4,229 Ratios 03/10A 03/11A 03/12A 03/13E 03/14E Net Debt (SARmn) 294 279 341 773 715 Net Debt/EBITDA (x) 0.93 0.91 0.63 1.05 0.86 Net Debt to Equity 26.4% 24.7% 23.9% 42.5% 32.7% EBITDA Interest Cover (x) 7.4 9.6 30.7 23.8 30.2 BVPS (SAR) 15.63 15.64 20.03 25.64 30.87 Cashflow Statement (SARmn) 03/10A 03/11A 03/12A 03/13E 03/14E Net Income before Tax & Minority Interest 241 335 484 634 719 Depreciation & Amortisation 78 45 119 153 162 Decrease in Working Capital (88) (119) (181) (162) (217) Other Operating Cashflow 44 15 (23) (22) (36) Cashflow from Operations 276 276 400 604 628 Capital Expenditure (124) (63) (276) (332) (255) New Investments (98) 30 (31) (479) - Others (6) 23 (6) (15) - Cashflow from investing activities (228) (9) (313) (826) (255) Net Operating Cashflow 48 267 86 (223) 373 Dividends paid to ordinary shareholders - (261) (140) (210) (315) Proceeds from issue of shares - - - - - Effects of Exchange Rates on Cash - - - - - Other Financing Cashflow 3 9 (9) 1 - Cashflow from financing activities 3 (236) 5 294 (315) Total cash generated 52 31 91 71 58 Cash at beginning of period 24 76 107 198 269 Implied cash at end of year 76 107 198 269 328 Ratios 03/10A 03/11A 03/12A 03/13E 03/14E Capex/Sales 6.0% 2.5% 8.6% 7.7% 4.9% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 26
RSI10 Vol mn Abdullah Al Othaim Markets Retail AOTHAIM AB: Saudi Arabia 05 January 2013 US$0.5bn 72% US$0.65mn Market cap Free float Avg. daily volume Target price 96.7 19% over current Consensus price 101.7 25% Current price 81.25 as at 02/01/2013 Research Department Majed Alsolaim +966 1211 9471, alsolaimm@alrajhi-capital.com Underweight Neutral Overweight Overweight Key themes We expect the retail sector in Saudi Arabia to continue on its growth path on the back of everincreasing population, improving education, and changing lifestyle. Alothaim enjoys a strong presence in the grocery market. We expect the company to continue its growth journey by opening new stores as well as benefiting from the changing lifestyle in the Kingdom. Implications Alothaim is well managed, both operationally and financially, which makes it attractive. In our view, the stock has potential for further upside, given the yearto-date dip in Alothaim’s share price. Performance 108 103 98 93 88 83 78 70 30 -102 1 1 Earnings Period End (SAR) 12/11A 12/12E 12/13E 12/14E Revenue (mn) 4,091 4,326 4,592 5,090 Revenue Growth 16.2% 5.7% 6.2% 10.9% EBITDA (mn) 233 234 294 325 EBITDA Growth 22.4% 0.3% 25.7% 10.6% EPS 6.67 6.77 7.61 8.69 EPS Growth -7.3% 1.5% 12.4% 14.2% Source: Company data, Al Rajhi Capital Valuation Source: Bloomberg Price Close P/E (x) 20 18 16 14 12 10 8 6 4 2 0 01/09 01/10 01/11 01/12 Source: Company data, Al Rajhi Capital MAV10 12/11 04/12 07/12 10/12 107 100 92 85 77 70 62 Alothaim Recovered in Q3 Alothaim remains one of the attractive stocks in the Saudi retail industry. After a disappointing performance in the first half of 2012 (9% y-o-y decline in net profit), the company delivered a decent performance in Q3, reporting a growth of 13% y-o-y, reaching SAR40.7mn. One of Alothaim’s main challenges is to reduce high labor and marketing costs, which are pressurizing its profit margin. We believe the launch of new stores and improving same-store sales will enable the company to report decent results going forward. We remain Overweight on Alothaim, but due to its underperformance, especially in the first half of 2012, we have reduced our target price from SAR109.4 to SAR96.7. Slight growth in top-line Alothaim reported revenue growth of 3.5% y-o-y for the nine months ended September 2012, reaching SAR3,239mn, on the back of high volumes from same-store-sales (SSS) and leasing income. At the end of 2012, we expect the company’s revenue to reach SAR4,325mn, reflecting a 5.7% y-o-y increase backed by healthy same-store sales growth and leasing income. We expect SSS to continue to grow by 3.5% y-o-y. Further, the leasing income from other retailers will contribute substantially to Alothaim’s Q4 revenue. Consequently, we believe the company will continue to maintain its 3.8% market share and position itself as the second-largest grocery retailer in Saudi Arabia. Significant labor cost effect: Alothaim has incurred high labor costs mainly due to the fact it has been incorporating the minimum wage of SAR3,000 since 2011 coupled with high attrition. In addition, the labor cost has risen by SAR12- 15mn as a result of the Ministry of Labor’s recent decision to hike work permit fees from SAR100 to SAR2,400 annually for private companies, who employ more foreigners than Saudis. We believe these higher costs will squeeze Alothaim’s profit margin. New stores expansion likely to gain pace: The company has ambitious plans to increase its selling area by focusing more on supermarkets and hypermarkets. Alothaim’s management plans to open around 10-15 stores in Saudi Arabia each year. However, Alothaim is very selective about choosing its store locations while looking out for the best prices. As a result, we believe the company will roll out 7-9 outlets every year to reach 130 stores by 2014, with a total selling space of around 290,000 square meters. Valuation: We believe Alothaim will continue to report decent results based on its same-store sales growth, expansion plans, and rising population. Given the year-to-date dip in Alothaim’s share price (around 20%), we believe the company is attractive (current price SAR81.25). Thus, we reiterate our Overweight rating on the stock but have revised our target price downward from SAR109.4 to SAR96.7, implying an upside potential of 19%. Alothaim trades at a 2013 EV/EBITDA multiple of 5.7x and a PE ratio of 10.7x. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 27
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Retail Sector Report - Al Rajhi Capital

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