Q1: solid results

Herfy released Q1 results with robust year-on-year sales growth of 17% and remarkable net profit growth of 16%. Sales in two divisions, restaurants and meats, showed very strong growth of 19% and 56% respectively; with around 6% same store sales growth in the core restaurants division. The bakery and rusk divisions showed modest growth of 4% and 1% after struggling in the last two quarters of 2010. The gross margin decreased in Q1 as a result of increasing foods commodities prices, but was offset by declining SG&A costs. Despite the declining gross margin, the overall results were solid and above our expectation. In our view, the acceleration in same store sales and the recovery in bakery segment are extremely positive news. Therefore, we upgrade our rating to Overweight and set a new target price of SAR91.7.

Valuation and conclusion: Herfy reported strong sales and profit growth for Q1 2011. Although we are concerned about declining gross margin, the overall results were solid and above our expectation. In our view, the acceleration in same store sales and the recovery in bakery segment are extremely positive news. We have made slight changes to our forecasts. Therefore, we have set a new target price of SAR91.7 (old target price was SAR89.4). This implies 16% upside as the share price has recently fallen and so we rate the stock Overweight. Herfy stock is currently trading on a 2011 PE of 15.3x and an EV/EBITDA ratio of 11.9x.


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