Fawaz Abdulaziz Al Hokair & Partners -Equity Report -13-08-2012

Impressive but limited upside

Alhokair delivered robust Q1 (April-June 2012) results, posting impressive year-over-year sales growth of 19.4%, driven by strong like-for-like sales and new stores. Further, the company was able to improve its gross margin level to 47% and achieved 12.8% growth in operating profit. The company recently announced its decision to acquire NESK Group, which will add 120 stores with more than ten brands to its portfolio. Thus, we believe Alhokair’s international operations coupled with acquisition of local brands, will spur the company’s near term growth. We have revised our forecasts on the back of strong Q1 results to arrive at a new target price of SAR91.4 (old: SAR62.5). However, our new target offers limited upside potential. Therefore, we downgrade our rating to Neutral.

Valuation & Conclusion: We have revised our forecasts for Alhokair and set a new target price of SAR91.4 (old target: SAR62.5). Given the YTD rise in Alhokair’s share price, we believe the stock is overpriced (current price: SAR95.25) and offers limited upside potential. Thus, we downgrade our rating from Overweight to Neutral. Alhokair trades at an EV/EBITDA multiple of 9.6x and a forward PE ratio of 12.4x, offering a dividend yield of 3.1%.