Moreover, net profit was boosted by other unsustainable income (SR21 million) to reach SR202 million, well above estimates as well as consensus, the report said.
Further, Alhokair announced the acquisition of Strasburg-Jarvis Inc., a clothing company; this is in line with the company's strategy to expand its overseas business. "We have thus raised our forecasts and set a new target price of SR62.5. Our new target offers respectable upside of 16 percent; we upgrade our rating on the company to Overweight," Al-Rajhi Capital said.
Alhokair shares closed 0.43 percent lower at SR57.25 last week.
Alhokair's total selling space reached roughly 240,000 square meters (excluding the recent acquisition in the US). On that basis, Al-Rajhi Capital estimates organic growth of close to 12 percent in Q2. "Benefiting from fast-growing apparel market in the Kingdom, we expect Alhokair to achieve SSS growth above 10 percent this year," Al-Rajhi Capital said in its report.
Alhokair announced recently the acquisition of Strasburg-Jarvis Inc., a wholesaler and retailer of clothing, for $2.2 million. The chain has 52 stores with a selling space of roughly 7,000 square meters. Further, Alhokair continues to open new stores in other countries, mainly in Kazakhstan. Overseas selling space reached 30,000 sqm while its sales comprise 11 percent of total revenues. "Looking ahead, we expect revenues from overseas to reach 25 percent by 2013. It is worth noting that Alhokair's international business carries higher gross margin (US: 71 percent, Kazakhstan 48 percent) compared to 46 percent in the Kingdom.
Alhokair's gross margin improved considerably from 42.7 percent in Q2 last year to 45 percent in Q2 this year, but declined q-o-q by 120bps due to the seasonality difference. Also, the company was able to contain its SG&A costs at a low level of 25.9 percent of sales despite overseas expansions; Al-Rajhi Capital had expected costs to be higher due to provisions associated with international start-up businesses. This coupled with the gross margin improvement resulted in a strong operating and net profits. "Looking ahead, we expect gross margin to slightly improve due to international expansion which, according to the company, offers higher margins," the report quoted Al-Rajhi Capital as saying.
Alhokair distributed SR2.5 per share in dividends for the year 2010. On the back of strong performance, Al-Rajhi Capital expects the company to increase its dividends to SR3.0 per share for this year. By its estimates, this implies a payout ratio of 54 percent and a dividend yield of 5.1 percent. Moreover, considering the company's strong ROE of 29 percent and expansion plans, Alhokair might declare stock dividends in the near future.
Al-Rajhi Capital has increased its revenue and profit forecasts, which if all other factors had been equal would have pushed our target price substantially. Al-Rajhi Capital said: "Considering the growing international business, we set a new target price of SR62.5 (old target: SR50.4) and hence upgrade our rating to Overweight."
Alhokair trades on an attractive PE ratio of 9.8x.
