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Fawaz Abdulaziz Al Hokair & Partners

Source: NCB Capital

Growth phase post restructuring

Post an aggressive period of expansion, Al Hokair has undertaken a restructuring of its business to drive efficiency and profitability. We believe the benefits are now coming through and it is well positioned to grow. We initiate on Al Hokair with an Overweight rating and PT of SR42.

Coming out of restructuring: Between FY04 and FY07, Al Hokair went through a rapid phase of expansion with the number of stores increasing from 361 to 717. In this period, Al Hokair struggled to manage the business, leading to restructuring and the closure of 246 stores in FY08-FY09. With EBIT margins up 190bps YoY in the nine months ending 31 Dec. 2009, we believe the benefits are starting to come through. Going forward, we believe it has set the foundations for good growth from increased efficiencies and expansion.

Geographic expansions key to top-line growth: Although Al Hokair has rationalized its number of stores in KSA, it still views store expansions, particularly outside of KSA, as the key top-line growth driver. With its target to have 1,100-1,200 stores by FY16, Al Hokair looks set to capitalize on the growth of fashion retail in the region. However, we forecast cautious expansion and assume total store count reaches 1,088 by FY16e, leading to 8% revenue CAGR during FY10-16e.

Room for growth in store productivity: The increased pace of store expansion in the past few years led to store efficiencies suffering with higher operating expenses and lower average revenue per sq. mtr. (SR9,654 in FY07 from SR11,273 in FY04). Although this figure has improved due to its restructuring measures, it remains low compared to peers. Management is seeking further gains here and is targeting average revenue per sq. mtr. Of SR14,000 in the coming three to five years.

Valuation: Al Hokair currently trades on a FY11e P/E of 10.3x vs. a global peer average of 14.5x. Given the high levels of competition in KSA and the lower productivity of Al Hokair stores vs. its peers, we retain a discount factor while valuing the stock. We initiate coverage on Al Hokair with an Overweight rating and share price target of SR42, indicating 18% upside to current levels.

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