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Kuwait Food Co. - Americana

Source: CI Capital

Necessity Drives Value

Frenetic lifestyles, increasingly westernised habits and a large youth base are all helping to spur demand for both processed food and fast food outlets within the Middle East. The world-wide slowdown in economic growth and accompanying expatriate layoffs in GCC countries served to dampen the growth in demand for processed food yet, despite this, fast food restaurant turnover remained relatively unscathed. In this note we initiate coverage on Kuwait Food Company (KFC) [FOOD], one of the largest food conglomerates in the Middle East. The company operates 19 chains of restaurants with over 1000 restaurants in 79 cities, as well as running 21 industrial companies. KFC enjoys a strong market share in Egypt in the dairy and processed chicken segments whilst it has a similar influence in the GCC in regards to meat processing, frozen potatoes and canned beans. KFC is traded at 2010E EV/EBITDA of 6.5x vs. a composite peer average of 9.4x, and market average of 13.2x. We initiate coverage of the stock with an LTFV of KWD1.83/share and a target price of KWD1.64/share. Given the 18% upside potential vs. the target price we advocate a Hold rating.

Healthy business drivers: The food retail industry in the Middle East and North Africa (MENA) region enjoys strong growth potential mainly due to the high population growth and strong base of youth. Restaurants are a primary source of entertainment for families in the GCC market.

Robust business model: With 19 restaurant chains, KFC caters to a wide consumer base in the MENA region. The company has a strong portfolio of processed food ranging from meat and dairy to vegetables.

Valuation & Recommendation: KFC is valued using a sum-of-the-parts valuation method. We reached a fair value of KWD1.83/share and incorporated the book value of the available for sale investments into our valuation. KFC is traded at EV/EBITDA 2010E of 6.5x, a 31% discount vs. a composite peer average of 9.4x. Nevertheless, we are concerned with the negative technical view on the Kuwait Stock Exchange (KSE). Our target price is KWD1.64/share for KFC based on the estimated target EV/EBITDA of 7.5x. Given the 18% upside potential, we initiate coverage on the stock with a Hold rating.

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