Saudi Airlines Catering Co. (Catering) - Amazon Web...

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Saudi Airlines Catering Co. (Catering) December 2, 2015

Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 1

Maintain Buy after Meeting with Management

Management meeting provides us with comfort on Catering’s equity story

Last week, we met Saudi Catering’s management to seek clarity on five key issues which in our

view are key investor concerns: 1) Saudia’s fleet expansion plans, 2) potential of non “inflight

catering” business, 3) new catering contract with Saudia, 4) possibility of scrapping meals in

domestic flights and 5) dividends. After the meeting, on balance, we came out fairly positive

which provides us with comfort on Catering’s equity story. YTD, after sharp correction, (Catering -

35%, KSA peers -12%, global +23%), on a TTM P/E basis, Catering’s discount to KSA (-25%)

and global peers (-34%) stands close to historical high which seems unwarranted. While we have

cut 2016E-17E earnings by 17%, reward vs. risk now seems largely skewed to the upside and

we maintain Buy rating with a target price of SAR160/share (from SAR236/share).

Saudi Airlines’ fleet to expand by 20% between 2015-18E

Saudia has confirmed orders for 58 planes between 2016E-18E. However, while 18 new aircrafts

are set to join the fleet in 2016E, 18 planes may be retired meaning the net fleet addition is nil for

2016E. Between 2016-18E, while new aircraft additions could reach 58, 33 could be retired

implying a net addition of 25 aircrafts or 20% net addition to the 2015 year end fleet.

Aggressive focus on non “in-flight catering” business to continue

Management would continue to aggressively focus on other revenues sources such as Sky

Sales, Al Fursan Lounges, ground catering etc. We expect strong momentum in non “in-flight

catering” with a 2015E-17E Rev.CAGR of 19% (inflight catering 6%). Consequently, we expect

non “in-flight catering” revenues to account for a larger 33% share of total in 2017E (2015 27%).

That said, while airport-based businesses would continue to generate strong margins due to lack

of competition, competitive pressures imply non-airport business margins should be lower.

Earnings impact from volume discount in new Saudia contract seem manageable

Catering contract with Saudia has been renewed for 5 years. While the new one also works on a

cost + a fixed markup methodology, the only new feature is the volume discount. It starts at 1%

for SAR950m of in-flight catering sales to Saudia and linearly increases to 2.25% for SAR1.5bn of

sales. While we do not exactly know the current inflight catering sales to Saudia, 1%-2.25%

implies a discount of SAR10-34m or a manageable 1%-5% of 2016E-17E earnings.

Scrapping meals on domestic flights seems unlikely although adjustments possible

A key investor concern is the possibility of scrapping meals served in domestic flights (35%-40%

of total meals). However, we think that’s unlikely to be the case. Saudia is a full service national

career and removing meal from the flight package could negatively affect ticket pricing that could

defeat the very purpose of cost savings. Furthermore, cutting costs of a minor element (inflight

catering costs = 4% of revenues in 2010) is unlikely to generate material cost savings. That said,

meal structure adjustment is possible which should be largely manageable by the company.

Dividends should remain at elevated levels, thanks to debt free B/S and strong FCF

Dividends should remain at elevated levels due to debt free B/S, strong FCF from a low capex

consumptive model and high yield seeking anchor shareholders. Between 2016E-17E, while

Catering should generate SAR772m/year of operating cash flow, capex is estimated at SAR78m,

leading to a free cashflow of SAR694m. This should enable the company to maintain high payout

ratio of 89% leading to a SAR7.0 DPS (5.8% yield) in 2015E and SAR7.25 (6.0% yield) in 2016E.

Valuation discount vs. KSA/Global peers is close to historical highs after correction

YTD, Catering is the worst performer among KSA/global peers with a decline of 35% (KSA

consumer -12%, global peers +23%). On a TTM P/E basis, its discount to KSA (-25%) and global

peers (-34%) stands close to historical high which seems unwarranted. On our 2016 estimate, it

is trading at 14.9x P/E implying an 11%/17% discount to KSA (16.9x)/Global (18.1x) peers.

While we have cut 2016E-17E earnings by 17%, after sharp correction, reward vs. risk

seems skewed to the upside and we maintain Buy with a TP of SAR160 (from SAR236).

Rating Summary

Recommendation Buy

12-Month Target price (SAR) 160

Upside/(Downside) 33%

Stock Details

Last Close Price* SAR 121.0

Market Capitalization SAR mln 9,922

Shares Outstanding mln 82

52-Week High SAR 197.9

52-Week Low SAR 112.7

Price Change (YTD) % -34.9%

6-Mth ADTV mln 35.8

EPS 2016E SAR 8.10

Reuters / Bloomberg 6004.SE CATERING

AB

Source: Tadawul, *as of 1 Dec

Key Shareholders (%)

SCCL. 25

Saudi Arabian Airlines 36

Public 39

Source: Tadawul

Price Multiples

2015E 2016E

P / E 15.4x 14.9x

EV / EBITDA 14.0x 13.4x

Dividend Yield 5.8% 6.0%

Source: SFC

1-Year Share Performance

Source: Bloomberg

Dipanjan Ray, CFA

[email protected]

+966 11 282 6861

AbdulAziz Jawdat

[email protected]

+966 11 282 6856

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S O N D J F M A M J J A S O N

Saudi Catering TASI Food & Agri

PUBLIC

Saudi Airlines Catering Co. (Catering)


Sources: Company, Saudi Fransi Capital

SAR mn, ending Dec 31-st

Income Statement 2013 2014 2015E 2016E 2017E 2013-15 2015-17 4Q15E 4Q14 Y/Y Chg 3Q15 Q/Q Chg

Revenues 1,867 2,136 2,269 2,454 2,751 10% 10% 565 535 6% 579 (2%)

Gross profit 692 775 803 839 922 8% 7% 207 183 13% 203 2%

EBITDA 561 649 684 717 793 10% 8% 182 167 9% 166 9%

EBIT 546 633 661 692 766 10% 8% 176 165 7% 160 10%

Net Income 524 608 645 665 739 11% 7% 170 164 3% 158 8%

Shares outstanding (mln) 82 82 82 82 82 82 82 82

EPS (SAR) 6.39 7.41 7.87 8.10 9.01 2.07 2.01 3% 1.92 8%

DPS (SAR) 5.50 6.75 7.00 7.25 8.00 1.75 1.75 0% 1.75 0%

SAR mn, ending Dec 31-st Growth (y/y) 2014 2015E 2016E 2017E

Balance Sheet 2013 2014 2015E 2016E 2017E 2013-15 2015-17 Sales 14% 6% 8% 12%

Cash and equivalents 893 677 432 581 611 EBITDA 16% 5% 5% 11%

Receivables 413 550 764 689 729 EBIT 16% 5% 5% 11%

Inventories 77 87 93 101 113 Net Income 16% 6% 3% 11%

Other current assets 68 154 134 100 100 DPS 23% 4% 4% 10%

Current assets 1,451 1,468 1,424 1,471 1,553 (1%) 4%

Margins 2014 2015E 2016E 2017E

PP&E 98 191 441 489 545 Gross Margin 36% 35% 34% 34%

Investments 140 150 50 50 50 EBIT Margin 30% 29% 28% 28%

Total assets 1,689 1,809 1,915 2,010 2,148 6% 6% EBITDA Margin 30% 30% 29% 29%

Net Margin 28% 28% 27% 27%

Accounts payable 146 175 199 214 239

Other current liabilities 3 197 36 45 56 Valuation Multiples 2014 2015E 2016E 2017E

Current liabilities 149 372 235 259 295 26% 12% P/E 23.4 15.5 15.1 13.5

EV/EBITDA 20.6 14.1 13.5 12.2

Employee benefits 112 117 117 117 117 P/Sales 6.6 4.4 4.1 3.6

Other non-current liabilities 0 7 7 7 7 P/BV 11.6 7.7 7.2 6.7

Total liabilities 112 124 124 124 124 5% 0% Dividend Yield 3.9% 5.7% 5.9% 6.6%

Total equity 1,159 1,226 1,307 1,387 1,501 6% 7% Ratios 2014 2015E 2016E 2017E

Net Debt/Equity (55%) (33%) (42%) (41%)

Total liabilities & equity 1,689 1,809 1,915 2,010 2,148 6% 6% Net Debt/EBITDA -1.0 -0.6 -0.8 -0.8

RoE 50% 49% 48% 49%

RoA 34% 34% 33% 34%

SAR mn, ending Dec 31-st Operating FCF/EBITDA 58% 32% 102% 83%

Cash Flow Statement 2013 2014 2015E 2016E 2017E Payout Ratio 91% 89% 89% 89%

CF from operation+WC change 500 487 491 807 738 Working Capital/Sales 16% 23% 16% 15%

Capex -24 -112 -272 -74 -83

Operating FCF 477 375 219 733 655

FCF after investing 338 378 319 733 655

Dividends -424 -540 -564 -584 -625

Debt Repayment/New debt 0 0 0 0 0

Others -43 -44 0 0 0

Net Cash flow -129 -206 -245 149 30

CAGR

CAGR

Summary Financials

PUBLIC



Maintain Buy rating with a revised target price of SAR160/share

We used DCF to value Saudi Catering, but cross-checked our valuation with peer (KSA consumer, Global

catering and food service) P/E multiples. Our assumptions are:

We use our forecasts over 2016E–20E and use terminal growth rate of 3.5%. Overall, our cost of

equity and WACC is 10.0%.

Accordingly, we arrived at an equity value of SAR160/share. This implies a 32% cut from our earlier target

price of SAR236/share primarily due to 17% cut in earnings and increase in cost of capital assumption due

to an adverse change in the macroeconomic environment.

At CMP, the stock trades at a 2016E P/E of 14.9x, while our target price implies a 2016E P/E of 19.8x.

Fig. 1 : Calculation of equity value

SAR mn

Enterprise Value 12,832

Net cash 413

Other assets/liabilities (86)

Equity value 13,159

No. of shares outstanding (mn) 82

Value per share 160.0

Source: Saudi Fransi Capital

Key Risks

Key risks include: 1) Saudia fleet not expanding as estimated, 2) meal volume reduction on Saudia flights,

3) non-inflight catering business not ramping up, 4) margin compression from unforeseen adverse

changes in the catering contract with Saudia, 5) receivables (SAR9.5/share, 40% of B/S) write-down.

Valuation is sensitive to revenue growth/EBITDA margin and WACC and

terminal growth rate

Our valuation is sensitive to revenue growth and EBITDA margin. Between 2015E-2020E, we expect

revenue CAGR of 11% while our 2016E EBITDA margin estimate stands at 29.2%. All else equal, if

revenue CAGR were to be 100bps more/less than our current projection, our valuation would be impacted

by 4.2%. Similarly, all else equal, if EBITDA margin were to be 100bps higher/lower than our current

estimate (2016E 29.2%), our valuation would be impacted by 3.6%.

Fig. 2: Sensitivity Analysis – 2015E-20E Revenue CAGR/EBITDA margin and WACC/terminal growth rate

Sensitivity analysis – 2015E-20E

Revenue CAGR and EBITDA margin

Sensitivity analysis –

WACC and terminal growth rate

Sources: Saudi Fransi Capital Sources: Saudi Fransi Capital

27.2% 28.2% 29.2% 30.2% 31.2%

9% 137 142 147 153 158

10% 143 148 154 159 165

11% 149 155 160 166 172

12% 155 161 167 173 179

13% 162 168 174 181 187

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0E

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v C

AG

R 2016E EBITDA Margin

2.5% 3.0% 3.5% 4.0% 4.5%

8.0% 195 211 230 253 284

9.0% 165 176 188 203 221

10.0% 144 151 160 170 182

11.0% 127 133 139 146 154

12.0% 114 119 123 129 135

WA

CC

Terminal growth

Valuation

PUBLIC



YTD, Saudi Catering is the worst performer among KSA and global peers

YTD, Catering is the worst performer among KSA and global peers. While Catering’s stock price declined

35%, KSA consumer peers decreased 12% on average and global peers increased 23% on average.

Fig. 3: YTD stock performance – Saudi Catering vs. KSA peers and global peers

YTD stock performance - Catering vs. KSA peers

YTD stock performance - Catering vs. global peers

Sources: Bloomberg, Saudi Fransi Capital Sources: Bloomberg, Saudi Fransi Capital

After sharp correction, Catering’s TTM P/E discount to KSA and global

peers is close to historical high which seems unwarranted

After a sharp correction YTD, on a TTM P/E basis, Catering trades at a steep discount to KSA and global

peers. While Catering’s discount to KSA consumer average stands at around 25%, its discount to global

peers stand at around 34%. This also implies Catering’s TTM P/E discount to KSA and global peers stand

close to historical high (since Saudi Catering IPO) which seems unwarranted.

Fig. 4: TTM P/E - Catering vs. KSA peers and Global peers

Saudi Catering vs. KSA Consumer Avg. TTM P/E

Saudi Catering vs. global peers median TTM P/E


Fig. 5: TTM P/E discount - Catering vs. KSA peers and Global peers

Saudi Catering’s TTM P/E discount to KSA peers

Saudi Catering’s TTM P/E discount to global peers

-35%

-12%

-33%-29% -29%

-22% -21%

-15% -14%

4% 5% 6%

17%

-40%

-30%

-20%

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KSA Consumer Avg. Catering KSA Cons. 5 Yr Avg.

10.0

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Global Peers Median P/E Catering Global Peers 5 Yr. Avg. Median

-40%

-30%

-20%

-10%

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TTM P/E discount to KSA Peers 3 Yr. Avg. TTM P/E discount

-50%

-40%

-30%

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TTM P/E discount to Global Peers 3 Yr. Avg. TTM P/E discount

PUBLIC




At 14.9x 2016E P/E, Catering is trading at an undemanding valuation and

at a discount to KSA and Global peers

On our 2016 estimates, Catering is trading at an undemanding 14.9x P/E implying an 11% discount to

KSA peers and 17% discount to global peers. Due to lack of exact comparables, while we have chosen

KSA consumer sector as the comparable group in KSA, we have chosen catering & food service

companies outside KSA as its global peer group.

Fig. 6: Catering vs. KSA and Global peers

Sources: Saudi Fransi Capital, Bloomberg

KSA 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E

Othaim 17.2 14.9 10.4 9.2 3.7 3.2 2.2% 2.5% 6% 6% 21% 21%

Jarir 17.3 15.1 17.2 14.9 9.2 7.9 4.5% 5.0% 13% 13% 53% 52%

Extra 25.1 20.5 13.5 12.1 2.9 2.7 2.0% 2.2% 3% 4% 11% 13%

Al Hokair 20.1 16.6 14.7 14.9 5.9 5.1 3.9% 4.5% 16% 17% 30% 32%

Savola 18.7 16.0 15.8 14.4 2.9 2.7 3.9% 4.4% 7% 7% 15% 17%

Al Marai 25.0 21.7 16.6 14.4 4.6 4.1 1.5% 1.7% 24% 25% 18% 19%

Sadafco 21.7 18.6 12.5 11.5 3.9 3.6 3.2% 3.6% 15% 15% 19% 20%

Nadec 20.4 17.4 9.5 8.7 1.9 1.8 1.9% 2.2% 17% 17% 9% 10%

Herfy 21.2 18.8 16.9 15.0 6.4 5.7 3.4% 3.7% 27% 27% 30% 30%

Al Tayyar 9.6 8.3 7.9 6.8 3.6 3.0 5.6% 7.0% 16% 16% 38% 36%

Farm 18.8 16.6 15.0 13.4 3.9 3.4 2.4% 2.4% 8% 8% 21% 21%

KSA Average 19.6 16.8 13.6 12.3 4.4 3.9 3.1% 3.6% 14% 14% 24% 25%

Global

Gate Group Nm 15.2 10.4 7.4 4.6 3.8 1.0% 1.9% 4% 6% Nm 25%

SATS 19.5 18.1 14.4 13.7 2.9 2.7 3.9% 4.1% 17% 17% 15% 15%

Auto Grill 39.2 28.2 7.4 6.8 4.2 3.7 0.4% 0.8% 9% 9% 11% 13%

DO & CO AG 25.5 20.7 10.5 9.1 3.9 3.5 1.1% 1.3% 11% 11% 15% 16%

Compass Group 20.5 18.7 12.8 11.9 8.4 7.4 2.7% 2.9% 9% 9% 43% 40%

SODEXO 20.7 19.0 10.4 9.7 3.7 3.4 2.5% 2.7% 7% 8% 19% 19%

Catering International 18.3 16.7 6.5 5.6 NA NA 0.9% 1.0% 6% 6% 11% 11%

Global Avg. 20.9 18.1 10.3 9.2 4.6 4.1 2.0% 2.3% 9% 10% 20% 21%

Catering 15.4 14.9 14.0 13.4 7.6 7.2 5.8% 6.0% 30% 29% 49% 48%

EBITDA Margin RoEP/E EV/EBITDA Dividend YieldP/BV

PUBLIC



Saudi Airlines’ fleet to expand by 20% between 2015-18E

Saudia has confirmed orders for 58 planes between 2016E-18E. However, out of 18 new aircrafts that are

set to join the fleet in 2016E, 15 Embraer planes (72 seaters) and 3 Boeing 747s may be retired meaning

the net fleet addition is nil for 2016E. Between 2016-18E, while new aircraft addition to the fleet could

reach 58, according to our fleet retirement estimates (15 Embraer Planes in 2016, and retiring other

aircrafts after 20 years in service), 33 aircrafts could be retired meaning a net addition of 25 aircrafts (148

aircrafts in total in 2018 end vs. 123 in 2015 end), or 20% net addition to the 2015 year end fleet.

Fig. 7: Saudia net fleet addition

Saudi fleet evolution (no. of aircrafts)

Split of Saudia aircrafts by type

Sources: Saudi Catering, Saudi Fransi Capital Sources: Saudi Airlines, Saudi Fransi Capital

Fig. 8: Saudia fleet evolution

Sources: Saudi Catering, Saudi Fransi Capital

Fig. 9: Saudia fleet by year of inception

Sources: Saudi Airlines, Airfleets.net

113

118

123 123

141

148

80

90

100

110

120

130

140

150

160

2013 2014 2015E 2016E 2017E 2018E

A32029%

A32113%

A33010%

B7473%

B77733%

Embraer12%

2015E 2016E 2017E 2018E

Year - Beginning 118 123 123 141

Aircrafts - Addition 5 18 22 18

Aircrafts - Retirement 0 -18 -4 -11

Year - End 123 123 141 148

% YoY 4% 0% 15% 5%

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1997-2000 2001-2005 2006-2010 2010-2015

Key takeaways from meeting with management

PUBLIC



Aggressive focus on non “in-flight catering” business to continue

While Saudi Catering will continue to benefit from Saudia’s fleet increase coupled with an increase in the

number of Hajj/Umrah travelers, we understood that management continues to aggressively focus on

other sources of revenues such as Sky Sales, Al Fursan Lounges, ground catering and laundry etc.

Sky Sales – Addition of retail spaces in domestic and international terminals

Al Fursan Lounges - Construction of new airport lounges and possibility of opening lounges to

all passengers in lieu of payment of a flat fee and replicating the concept of lounges across

broader user segments such as hospitals, head offices of companies etc.

Overall, we expect strong revenue growth momentum in non “in-flight catering” segment to continue with a

revenue CAGR of 19% between 2015-17E (2013-15E CAGR 20%) vs. inflight catering revenue CAGR of

6% for 2015-17E (2013-15E 7%). Consequently, we expect non “in-flight catering” revenues to account for

a larger 33% share of total revenues (27% in 2015E) while in-flight catering should account for 67% share

of total revenues in 2017E (73% in 2015E).

Having said that, while the company would continue to register strong margins in segments which are

based in airports due to absence of competitors, non-airport business margins are likely to be lower (SFC

est. around 15% EBITDA margin) due to strong competition. Overall, while Catering’s EBITDA margin has

largely remained stable (30%-31% in the 5 year period of 2011-15E), we expect consolidated EBITDA

margin to compress by 190 bps between 2015E-18E.

Fig. 10: Revenue mix evolution

Evolution of In-flight catering and other revenues

Revenue growth CAGR

Sources: Saudi Catering, Saudi Fransi Capital Sources: Saudi Catering, Saudi Fransi Capital

Fig. 11: EBITDA margin evolution

Sources: Saudi Catering, Saudi Fransi Capital

77% 75% 73% 69% 67%

23% 25% 27% 31% 33%

0%

10%

20%

30%

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50%

60%

70%

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90%

100%

2013 2014 2015E 2015 2016

Inflight Catering (% of total) Other revenues (% of total)

7%

20%

10%

6%

19%

10%

0%

5%

10%

15%

20%

25%

InflightCatering

Others Consolidated InflightCatering

Others Consolidated

2013-2015E Revenue CAGR 2015E-2017E Revenue CAGR

31.0%

30.1% 30.4% 30.1%

29.2%28.8%

28.2%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

2012 2013 2014 2015E 2016E 2017E 2018E

PUBLIC



Volume discount in the renewed catering contract increases from 1%-

2.25% between SAR950m-SAR1.5bn of inflight catering sales to Saudia

The catering contract with Saudia has been renewed in 2014 for 5 years. Similar to the last contract, while

the new one also incorporates cost plus a fixed markup methodology implying largely fixed margins, the

only new feature in the current contract is the volume discount. Between SAR950m and SAR1.5bn of

Saudia’s in-flight catering sales, the company will provide a discount of 1%-2.25%. While the discount

starts at 1% for SAR950m of sales, it linearly increases to 2.25% for SAR1.5bn of sales. While we do not

exactly know the step-up discount formula and the current inflight catering sales to Saudia, 1%-2.25%

implies a discount of SAR10-34m or a manageable 1%-5% of 2016E-17E earnings.

Scrapping meals on domestic flights seems unlikely although some

adjustments could be made

A key concern for investors on Saudi Catering’s stock is the possibility of scrapping/significant reduction of

meals served in domestic flights which in turn would negatively affect Catering’s earnings as domestic

flights accounted for a significant 37% of the total meals served in 2011 (although the data is old, we don’t

believe the business mix has materially changed). However, after meeting the management, we think

that’s unlikely to be the case for the following reasons.

Saudia is a full service national career and removing meal from the flight package could

negatively affect ticket pricing which could defeat the very purpose of cost savings

Cost of inflight catering accounted for a minor 4% of Saudi Airlines’ revenues in 2010 (although

the data is old, we don’t think the ratio has materially changed) and cutting costs of a minor

element of the broader cost base is unlikely to generate material cost savings for Saudia

It could negatively impact brand perception for a full service national carrier such as Saudia

especially when improvement of customer service is one of the key focus areas

Having said that, we believe some adjustment in the meal structure is possible which should be largely

manageable by the company.

Fig. 12: Mix of meals served by end use

% of meals served by customer category

Saudia revenues vs. cost of inflight catering (2010, SAR ’000)

Sources: Saudi Catering IPO prospectus, Saudi Fransi Capital Sources: Centre for Asia Pacific Aviation, Saudi Catering prospectus

Dividends should remain at elevated levels, thanks to debt free balance

sheet, strong FCF and high yield seeking shareholders

Considering the high yield seeking investors (Saudi Airlines 36% shareholding, Strategic Catering

Company 25%), dividends are likely to remain at elevated levels. Between 2012-2014, while the payout

ratio averaged 87%, we expect payout ratio to average 89% between 2015E-17E, thanks to a low capex

consumptive business model and a debt free balance sheet. While we expect the company to pay a DPS

of SAR7.0 (89% payout ratio, 5.8% yield), 2016E DPS is estimated at SAR7.25 (89% payout, 6.0% yield).

37% 36% 37%

35% 34% 35%

15% 15% 13%

13% 15% 16%

0%

20%

40%

60%

80%

100%

2009 2010 2011

Saudia Domestic Saudia International

Saudia Hajj and others Other Airlines

4% of Saudia Revenues

-

5,000

10,000

15,000

20,000

25,000

Saudia Revenues Cost of inflight catering

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Between 2016E and 2017E, while we estimate Catering to generate SAR772m/year of operating cash

flows, capex is estimated at SAR78m/year, leading to a free cashflow/year of SAR694m vs. an estimated

dividend outflow of SAR605m/year.

Fig. 13: DPS, payout ratio and dividend yield

DPS and payout ratio

Dividend yield

Sources: Saudi Catering, Saudi Fransi Capital Sources: Saudi Catering, Saudi Fransi Capital

Fig. 14: Cash flow analysis 2015E-17E

Sources: Saudi Fransi Capital

Working capital improvement likely as payment terms are worked out

Currently Saudia pays a flat SAR100m/month to Catering. However, working capital has significantly

increased in 2015 YTD (from SAR334m in end 2014 to SAR546m in 3Q15). While part of the working

capital buildup this year could be attributed to construction of lounges for Saudia which has not been paid

yet, the remainder could be attributed to increase in receivables from normal course of business. Overall,

receivables from related party (mostly Saudia) increased from SAR465m in end 2014 to SAR683m in

3Q15. While we do not believe a material write-off is likely, we understood the management is working

with its anchor client Saudia to improve payment terms. Although no further details or specific targets are

disclosed, management expects an improvement in working capital situation from hereon.

No exposure to Bin Laden sukuk

As of end 3Q15, the company had a SAR100m sukuk (5% of balance sheet) investment in Bin Laden. This

has been redeemed in full in early October and Catering’s exposure to Bin Laden stands at nil.

5.50

6.75 7.00 7.25

8.00

86%91% 89% 89% 89%

0%

20%

40%

60%

80%

100%

0.00

2.00

4.00

6.00

8.00

10.00

2013 2014 2015E 2016E 2017E

DPS (LHS) Payout ratio (RHS)

4.9%

3.9%

5.8%6.0%

6.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013 2014 2015E* 2016E* 2017E*

2015E 2016E 2017E 2016E-17E Avg.

EBITDA 684 717 793 755

Other operating cash flows (193) 90 (56) 17

Capex (272) (74) (83) (78)

Operating FCF 219 733 655 694

Other investing cash flows 100 0 0 0

Cash flow after investing 319 733 655 694

Dividend (564) (584) (625) (605)

Net Cash Flow (245) 149 30 89

Opening Cash+Securities 677 432 581

Closing Cash+Securities 432 581 611

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Disclosure levels could be improved

We understood that the company is looking to increase transparency and is likely to improve disclosure

levels to analysts and investors. This could include increased participation in investor conferences, hosting

conference calls and publishing data on KPIs.

Selling pressure from a key shareholder seems to have largely subsided

YTD, Saudi Catering has significantly underperformed the broader Tadawul index. Catering has lost

around 35% while TASI lost around 13%. In our view, while macro uncertainty (threat of lower oil price

affecting economic activity and hence domestic/international air travel) and stock specific concerns

(uncertainty on meals on domestic flights and new catering contract with Saudia) were reasons for the

stock’s underperformance, another key factor was selling of shares by Strategic Catering Company

Limited (SCCL), a key shareholder. According to data published in Tadawul and Bloomberg, while SCCL’s

shareholding in the company was 34% in end 4Q14 (28.1m shares), its shareholding stood at only 25%

(20.7m shares) as of end Nov 2015 implying an offloading of around 9% stake. Having said that, it seems

selling pressure has largely subsided (SCCL’s shareholding remained broadly stable in the previous two

months) which could be positive for stock price performance in the coming days.

Fig. 15: Catering’s share Px. trend vs. TASI and SCCL shareholding

Sources: Bloomberg, Saudi Fransi Capital

28.1 28.1 28.1 28.1 28.1

24.0

21.0 20.7

50

60

70

80

90

100

110

120

130

10

14

18

22

26

30

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Nov-15

SCCL shareholding (mn shares, LHS) Catering* (RHS) TASI * (RHS)

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We cut 2016E-17E earnings by 17%; we are 13% below consensus

Keeping in mind recent trends and our outlook for 2016E and 2017E (growth slowdown in 2016E from an

uncertain economic environment and a stronger 2017E), we have cut Catering’s 2016E-17E revenues,

EBITDA and net profit by 12%, 16% and 17%, respectively. While we expect 2016E net profit to grow by

3% yoy, we expect a stronger 2017 with 11% yoy increase in net profit.

Fig. 16: Earnings estimate revision (SARm)


Consequently, we are 13% lower than Bloomberg consensus.

Fig. 17: SFC estimates vs. Bloomberg consensus (SARm)


Fig. 18: Revenue and net profit evolution (SARm)

Revenues

Net Profit

Sources: Company data, Saudi Fransi Capital Sources: Company data, Saudi Fransi Capital

2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2016E-17E

Revenue 2,269 2,454 2,751 2,447 2,781 3,149 -7% -12% -13% -12%

EBITDA 684 717 793 744 846 960 -8% -15% -17% -16%

EBITDA Margin 30.1% 29.2% 28.8% 30.4% 30.4% 30.5%

EBIT 661 692 766 728 828 941 -9% -16% -19% -18%

EBIT Margin 29.1% 28.2% 27.9% 29.7% 29.8% 29.9%

Net Profit 645 665 739 696 793 905 -7% -16% -18% -17%

ChangeNew Old

2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2016E-17E

Revenue 2,269 2,454 2,751 2,359 2,720 3,227 -4% -10% -15% -12%

EBITDA 684 717 793 690 790 917 -1% -9% -13% -12%

EBITDA Margin 30.1% 29.2% 28.8% 30.4% 30.4% 30.5%

EBIT 661 692 766 679 770 910 -3% -10% -16% -13%

EBIT Margin 29.1% 28.2% 27.9% 29.7% 29.8% 29.9%

Net Profit 645 665 739 667 744 865 -3% -11% -15% -13%

SFC estimates Bberg consensus Change

11%

14%

6%

8%

12%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015E 2016E 2017E

Revenues (SARm) % YoY growth

20%

16%

6%

3%

11%

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

600

700

800

2013 2014 2015E 2016E 2017E

Net Profit (SARm) % YoY growth

Estimate changes

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PUBLIC

Research and Advisory Department

Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37

Rating Framework

BUY

Shares of the companies under coverage in this report are expected to outperform relative to the sector or the broader market.

HOLD

Shares of the companies under coverage in this report are expected to perform in line with the sector or the broader market.

SELL

Shares of the companies under coverage in this report are expected to underperform relative to the sector or the broader market.

Saudi Fransi Capital

Call Center | 800 125 9999

www.sfc.sa

Commercial Registration | 1010231217

Research and Advisory

P.O. Box 23454

Riyadh 11426

Saudi Arabia

Head Office | Riyadh

research&[email protected]

http://www.sfc.sa/

mailto:research&[email protected]

PUBLIC

PUBLIC

Research and Advisory Department

Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37

This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset

management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with

the company that is subject of this report and/ or own its security.

This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it

should not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should

be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report.

This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This

report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take

into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment

objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every

potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security

is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected

return.

To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of

this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements

regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute

SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any

investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities,

can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on

investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part

of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in

any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this report

should make themselves aware of, and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by

the foregoing limitations.

Saudi Fransi Capital LLC

C.R. 1010231217

P.O Box 23454

Riyadh 11426

Saudi Arabia

Head Office | Riyadh

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