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PUBLIC
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
+966 11 282 6861
AbdulAziz Jawdat
+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)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 2
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
Saudi Airlines Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 3
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
20
15
E-2
0E
Re
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
Saudi Airlines Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 4
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
Sources: Bloomberg, Saudi Fransi Capital Sources: Bloomberg, Saudi Fransi Capital
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%
-10%
0%
10%
20%
Ca
teri
ng
KS
A C
on
s.
Avg
.
Extr
a
Sa
vo
la
Al T
ayya
r
Fa
rm
Alh
okair
Jari
r
Oth
aim
Al M
ara
i
Sa
da
fco
He
rfy
Na
dec
-35%
23%
-16%
7%
17%
32%36%
42% 43%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Ca
teri
ng
Glo
ba
l P
ee
r A
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.
Ca
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Au
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O
Ga
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10.0
13.0
16.0
19.0
22.0
25.0
28.0
1-D
ec-1
0
1-M
ar-
11
1-J
un
-11
1-S
ep
-11
1-D
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1
1-M
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1-J
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-12
1-S
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-12
1-D
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2
1-M
ar-
13
1-J
un
-13
1-S
ep
-13
1-D
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3
1-M
ar-
14
1-J
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-14
1-S
ep
-14
1-D
ec-1
4
1-M
ar-
15
1-J
un
-15
1-S
ep
-15
KSA Consumer Avg. Catering KSA Cons. 5 Yr Avg.
10.0
13.0
16.0
19.0
22.0
25.0
28.0
31.0
34.0
2-D
ec-1
0
2-M
ar-
11
2-J
un
-11
2-S
ep
-11
2-D
ec-1
1
2-M
ar-
12
2-J
un
-12
2-S
ep-1
2
2-D
ec-1
2
2-M
ar-
13
2-J
un
-13
2-S
ep
-13
2-D
ec-1
3
2-M
ar-
14
2-J
un
-14
2-S
ep-1
4
2-D
ec-1
4
2-M
ar-
15
2-J
un
-15
2-S
ep
-15
Global Peers Median P/E Catering Global Peers 5 Yr. Avg. Median
-40%
-30%
-20%
-10%
0%
10%
20%
Dec-1
2
Fe
b-1
3
Apr-
13
Jun
-13
Au
g-1
3
Oct-
13
Dec-1
3
Fe
b-1
4
Ap
r-14
Jun
-14
Au
g-1
4
Oct-
14
Dec-1
4
Fe
b-1
5
Ap
r-15
Jun
-15
Au
g-1
5
Oct-
15
TTM P/E discount to KSA Peers 3 Yr. Avg. TTM P/E discount
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
De
c-1
2
Fe
b-1
3
Ap
r-13
Jun
-13
Au
g-1
3
Oct-
13
De
c-1
3
Fe
b-1
4
Ap
r-14
Jun
-14
Au
g-1
4
Oct-
14
De
c-1
4
Fe
b-1
5
Ap
r-15
Jun
-15
Au
g-1
5
Oct-
15
TTM P/E discount to Global Peers 3 Yr. Avg. TTM P/E discount
PUBLIC
Saudi Airlines Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 5
Sources: Bloomberg, Saudi Fransi Capital Sources: Bloomberg, Saudi Fransi Capital
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 Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 6
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%
23
3
51
71
0
10
20
30
40
50
60
70
80
1997-2000 2001-2005 2006-2010 2010-2015
Key takeaways from meeting with management
PUBLIC
Saudi Airlines Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 7
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%
40%
50%
60%
70%
80%
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
Saudi Airlines Catering Co. (Catering)
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) Page 8
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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Saudi Airlines Catering Co. (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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Saudi Airlines Catering Co. (Catering)
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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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Saudi Airlines Catering Co. (Catering)
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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)
Sources: Saudi Fransi Capital
Consequently, we are 13% lower than Bloomberg consensus.
Fig. 17: SFC estimates vs. Bloomberg consensus (SARm)
Sources: Saudi Fransi Capital
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
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Research and Advisory
P.O. Box 23454
Riyadh 11426
Saudi Arabia
Head Office | Riyadh
research&[email protected]
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Research and Advisory Department
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
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C.R. 1010231217
P.O Box 23454
Riyadh 11426
Saudi Arabia
Head Office | Riyadh