We upgrade Al Hokair to Overweight from Neutral with a revised PT of SAR21.8. We expect the company’s topline and earnings to show strong growth in FY23 and beyond driven by 1) recovery in fashion retail sales post Covid-19, 2) increasing footprint in F&B and online sales and 3) return to net store expansion. We factor an average of 37 total net store additions per year, which we believe translates into higher sales. However, the prevailing higher inflationary environment is expected to put pressure on discretionary spending, which may keep the company’s margin under-pressure. The stock is trading at FY23f P/E and EV/EBITDA of 15.9x and 7.8x vs peer group average of 13.1x and 7.5x, respectively.
Recovery in fashion retail sales post Covid-19
Al-Hokair’s fashion retail sales have recovered strongly from the effects of Covid-19, with 39% yoy growth in FY22. Despite a subdued performance in Saudi, its international retail operations are showing a strong growth momentum in FY23f, driven by sustained performance in the CIS countries and Jordan, which is expected to continue. We believe the increasing focus on fast fashion, beauty, and sports brands to improve its retail revenue growth. However, we believe that inflationary concerns will have a short-term negative impact on consumer discretionary spending. We project fashion retail revenue to grow by 1.8% in FY23f, followed by 5.6% and 4.5% in FY24f and FY25f, respectively.
F&B segment and online sales to support growth
Al-Hokair’s F&B division (which represents 8.4% of the FY22 topline) is showing a strong growth in store count and transactions. We believe the acquisition of Subway master franchise rights and franchise rights for Secrets will increase its store count and revenue growth going forward. Therefore, we project F&B revenues to grow at a CAGR of 8.9% during FY22-FY25f. The company is also focusing on improving its online sales through several launches of monobrand platforms. We expect online sales contribution to increase from 4.0% in FY22 to 7.8% in FY25f. We also expect the company's margins to improve as it is gaining traction in higher margin F&B and online revenues.
Store optimisation as a key strategy
We expect the company to continue its store network optimisation strategy and return to net store opening cycle during FY23f. We project an average of 37 net store additions per year until FY25f to take the total store count to 1,778 from the current level of 1,659. Further, we believe the normalisation of inventory cycle from 21.7 weeks in Q4 FY22 to 18.9 weeks in Q2 FY23 (target at 15-17weeks) and debt optimisation through capital restructuring plans will strengthen the company’s financial position.
Upgrade to Overweight with a revised PT of SAR21.8
We upgrade our rating on Al-Hokair to Overweight from Neutral with a revised PT of SAR21.8 (from a capital reduction adjusted target price of SAR44.0). We believe the recovery in retail sales, increasing footprint in F&B domain, enhancing online presence to support the future earnings. The stock currently trades at FY23f P/E and EV/EBITDA of 15.9x and 7.8x, compared to the global peer group average of 13.1x and 7.5x respectively.