GCC Q1 Earnings Update

Transcription

1. GCC Q1 Earnings Update Q1 Earnings Update We recently attended analyst calls hosted by GCC listed corporates to discuss earnings results for the first quarter of 2016 . Looking at the big picture, we feel that results have been better than anticipated considering the difficult operating environment in the GCC. This is the year that most corporate entities will begin to feel the pinch from the slowdown in government spending. This fiscal tightening is also expected to trickle down to consumer spending as well. However, on a closer look, we can observe that companies have been largely successful in trimming operating costs and prioritizing core operations, while shelving over-ambitious expansion plans. Disciplined spending has led to yearly profit growth for many such enterprises. S.No 1 2 3 4 5 6 7 8 9 10 11 12 Company Emirates NBD First Gulf Bank Tawuniya Almarai Agthia Group Mezzan Holding Dubai Parks Al Tayyar Aldar Properties Air Arabia Jazeera Airways Milaha Country UAE UAE KSA KSA UAE Kuwait UAE KSA UAE UAE Kuwait Qatar Sector Banking Banking Financial Services Consumer Staples Consumer Staples Consumer Staples Consumer Discretionary Consumer Discretionary Real Estate Transportation & Logistics Transportation & Logistics Transportation & Logistics CMP (LCL) 8.15 12.10 92.00 55.50 7.32 1.060 1.28 41.60 2.61 1.28 0.900 88.20 Q1 Sales Q1 Profit (LCL) Y/Y Q/Q (LCL) Y/Y Q/Q Outlook 3,905 1.6% -4.1% 1,808 7.6% -14.6% Positive 2,146 -5.0% -21.5% 1,332 -6.0% -22.5% Neutral 1,633 23.8% 0.5% 69 -21.8% -23.3% Positive 3,450 13.6% -3.7% 309 0.7% -36.2% Neutral 486 11.7% -0.9% 68 14.0% 29.3% Positive 55.7 5.3% 23.0% 5.2 -4.8% 57.6% Positive (38) (2) 0 Positive 1,968 -8.6% -9.9% 194 -32.1% -10.0% Negative 1,232 4.5% 9.5% 654 14.6% -12.8% Positive 946 6.7% -1.1% 114 34.0% 93.7% Positive 11.9 -7.8% 8.2% 4.0 33.3% 344.4% Neutral 771 -1.9% 11.8% 354 -3.0% 41.1% Positive In the following pages, we have elaborated on our key takeaways from management discussions and our brief outlook for the rest of the year.
2. GCC Q1 Earnings Update Emirates NBD : Dubai’s largest bank reported total income of AED 3.9 billion, up 2% y/y while sequentially, it declined 4% from AED 4.07 billion. Strong loan growth was the reason for the improvement in net interest income (3% up y/y). Net interest margin (NIM) contracted on account of higher EIBOR costs. However operating costs increased 16% y/y due to higher business volumes. In light of new economic environment, costs are being scaled down and this was visible in the q/q decline of 8% in operating expenses. Sustained improvement in overall credit quality has led to further declines in impairment provisions, which was down 24% y/y. Consequently, net income increased 8% y/y to AED 1.8 billion, but declined 15% q/q. ENBD continues to register strong deposit growth, which 12% y/y to reach AED 290 billion. Importantly, cheap CASA deposits account for 59% of the total and increased 8% y/y while government deposits are minimal. The bank’s loan book grew at a similar pace to AED 279.1 billion for a Loan deposit ratio of 96%. In Q1, AED 1.5 billion in debt that matured was replaced by AED 2 billion in private placements. ENBD has over AED 15 billion in debt maturing over the next 8 quarters; but management is confident of replacing this with new debt at reasonable rates. Operating costs increased 16% y/y but declined 8% q/q. This was partly due to the ramp up in sales teams in the second half of 2015 anticipating higher loan volumes. However, economic realities have forced ENBD to cut costs and we expect additional workforce trimming by the end of 2016. Cost to Income ratio stood at 32%, which is expected to come down c. 100 bps by year end. Credit quality metrics continue to improve with 6.9% Npl ratio compared to 7.8% in Q1’15. Coverage ratio remained healthy at 113.5%. SME provisioning increased in line with expectations and the bank is trimming its exposure in the segment. ENBD has also completely exited its legacy stake in Union Properties. Tier 1 and CAR ratios were stable at 17.6% and 20.3%, comfortably above UAE central bank and Basel III regulations. For the rest of the year, we expect NIM expansion to 2.8-2.9% range v/s current NIM of 2.6% as the bank will be able reprice assets and pass on higher EIBOR costs to customers. Loan growth in Dubai as a whole continues unabated as project awards ramp up in anticipation of Expo 2020. Although there’s been a slowdown in the real estate sector, unlike in 2009, Dubai’s seen a soft landing due to the many regulatory reforms implemented. Valuations are extremely attractive at FY16 P/E of 6.6x and P/B of 1.0x and dividend yield of 5.5%. ENBD remains ideal for investors seeking to capture the potential growth in Dubai. Emirates NBD Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (AED mn) Total Income 3,845 3,710 3,600 4,073 3,905 Operating Expenses (1,079) (1,157) (1,075) (1,357) (1,250) Operating Profit 2,766 2,553 2,474 2,716 2,655 Provisions (1,085) (901) (822) (599) (829) Net Income 1,671 1,646 1,673 2,134 1,808 Balance Sheet (AED bn) Total Assets 368 388 390 407 415 Loans 249 256 262 271 279 Deposits 260 274 269 287 291 Tier 1 Capital 39 41 42 44 44 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Cost Income Ratio 28.1% 31.2% 31.3% 33.3% 32.0% Net Interest Margin 2.9% 2.8% 2.8% 2.8% 2.6% NPL ratio 7.8% 7.4% 7.1% 7.1% 6.9% Coverage Ratio 103.2% 109.0% 114.5% 111.5% 113.5% Capital Adequacy 20.5% 21.0% 20.9% 20.7% 20.3% Advances Deposit Ratio 95.6% 93.3% 97.2% 94.2% 95.9%
3. GCC Q1 Earnings Update First Gulf Bank : For the first quarter of 2016, FGB reported operating income of AED 2.15 billion, down 5% y/y, mainly on account of declining noninterest income. This filtered down to the bottom line which contracted 6% y/y to AED 1.33 billion from AED 1.42 billion in Q1’15. Similar to its peers in UAE, FGB was also impacted by NIM compression with Q1’16 NIM of 3.1% compared to 3.4% last year (30 bps decline). Provisions showed marginal increase of 1%, which is excellent considering FGB’s Abu Dhabi based banking peers have reported much higher provision expenses. Loans and advances increased 7% y/y and 2% q/q to AED 152.5 billion at the end of Q1’16. However, there was a 2% y/y decline in overall deposits, particularly government and corporate deposits. On a positive note, international deposits, especially from Asia Pacific improved 41% q/q and now account for 6% of the total. This inflow of deposits is mainly from institutions and asset managers seeking to take advantage of FGB’s high credit ratings. CASA deposits increased their share of total deposits to 24% due to addition of AED 4 billion in current accounts. Advances to deposits increased to 90.3% from 85.5% in Q1’15. Funding mix is healthy and the bank is seeking to refinance upto USD 700 million of debt maturities later this year. Non-interest income, which includes fees & commission income declined on account of fewer deals and slower business activity overall. However, FGB maintained its position as the most cost-efficient bank in UAE with cost-income ratio of 20.3%, down 10 bps y/y. The bank has trimmed staff expenses and the ratio remains well below management guidance of below 23%. NPL’s increased 11% y/y to AED 4.1 billion (NPL ratio of 2.6%) due to the broader economic slowdown in Abu Dhabi in 2015. On the other hand, q/q, NPL’s declined 6% due to write-offs in Consumer banking. Provisions declined to AED 4.5 billion, implying a provision coverage ratio of 110%, which is healthy, although much less than Q1’15, when coverage ratio was 126%. The outlook for FGB is neutral. We expect high single digit loan growth for the full year. Asset repricing over the next few quarters is expected to drive top line growth. Valuations are attractive at 9.5x Fy16 P/E and 1.6x P/B. Moreover, the stock provides a projected dividend yield of 7.7%. First Gulf Bank Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (AED mn) Total Income 2,259 2,312 2,281 2,733 2,146 Operating Expenses (462) (593) (544) (500) (436) Operating Profit 1,797 1,719 1,737 2,233 1,710 Provisions (372) (258) (317) (507) (376) Net Income 1,417 1,452 1,419 1,718 1,332 Balance Sheet (AED bn) Total Assets 214 219 229 228 227 Loans 143 149 154 150 153 Deposits 143 140 142 143 141 Total Equity 32 33 34 36 33 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Cost Income Ratio 20.4% 21.9% 21.6% 20.6% 20.3% Net Interest Margin 3.4% 3.4% 3.3% 3.3% 3.1% NPL ratio 2.5% 2.6% 2.7% 2.8% 2.6% Coverage Ratio 126.1% 116.6% 109.5% 102.9% 109.8% Capital Adequacy 18.0% 18.7% 18.6% 17.5% 18.2% Advances Deposit Ratio 85.5% 87.5% 90.1% 87.2% 90.3%
4. GCC Q1 Earnings Update Tawuniya Insurance : Our key takeaway from the call is that the insurance sector remains an excellent bet in the Saudi equity space. While at first look, Q1 results may look lackluster, the reality is that the impairment in investments was the reason for the decline in net profit. This was mainly due to a change in accounting methods whereby investment impairments are booked quarterly instead of annually like in previous periods. Tawuniya’s revenues increased 23.8% y/y indicating the success it has had in gaining market share. Higher regulatory oversight has enabled quality players like Tawuniya to gain customers in a fragmented market. Furthermore, the overall industry remained healthy with 17% growth in written premiums. The regulator is cracking down on insurance providers with capital violations and smaller players are also being forced to reprice contracts on an actuarial basis. In such a situation where price competition will be reduced, the larger players like Tawuniya and Bupa stand to benefit the most. In Tawuniya’s case, the umbrella of Motor, Property & Casualty and Medical gives it an advantage of all insurance solutions in one house. The macro developments with the increased focus on privatization means the insurance industry stands to gain a lot. Motor insurance penetration is currently only 38-40% and Saudi citizens in public sector are not yet mandated to have compulsory medical insurance. Regulatory changes are expected in this regard. We feel this will be a great sector to invest in considering the upside. Tawuniya remains one of the best investment options considering its scale, quality of operations and presence in all segments of the insurance market. Tawuniya Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (SAR mn) Gross written premium 1,506 1,802 1,473 2,764 1,701 Net Premium earned 1,285 1,351 1,438 1,590 1,623 Investment Income 27 49 1 (6) (26) Net Claim Incurred (984) (1,059) (996) (1,134) (1,268) Expenses (1,258) (1,303) (1,269) (1,513) (1,564) Net Income 88 205 217 89 69 Balance Sheet (SAR mn) Total Assets 10,896 10,897 11,098 11,569 11,052 Investments & cash 4,310 4,180 4,454 4,294 4,358 Technical Reserves 6,023 6,936 6,629 7,160 6,910 Total Equity 2,309 2,165 2,255 2,309 2,248 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Net margin 6.8% 15.1% 15.1% 5.6% 4.2% Loss ratio 76.6% 78.4% 69.2% 71.3% 78.1%
5. GCC Q1 Earnings Update Almarai Foods : Almarai reported a mixed set of numbers for the first quarter of the year. The highlight of the period was the strong performance seen in both Dairy & Juice and Bakery segments. However, Poultry segment performance has taken a turn for the worse and its outlook remains muted at best. The company posted sales of SAR 3.45 billion, registering top line growth of 13.6% y/y. The revenue hasn’t trickled down to the bottom line as energy cost inflation, forex losses and worsening losses from poultry segment have impacted margins. Operating expenses have also increase with the 10% y/y growth in employee workforce. Net income for the quarter was SAR 309 million v/s 306 million last year (0.7% y/y growth). Sales reached SAR 2.64 billion (+12.2% y/y) with fresh dairy products accounting for SAR 1.35 billion, which is 39% of the overall company revenues. The top line growth was volume driven which was due to improvements in its distribution network. Management expects a normalized run rate of closer to 10% y/y by the end of the year. Net income has stayed flat at SAR 386 million (-0.4% y/y) due to energy cost inflation and higher depreciation. This has weighed on the net margin which declined 190 bps to 14.6%. A catalyst with immediate impact would be the removal of price caps of dairy products set by the government. The company has requested the government to potentially allow upward revision of price cap in light of tougher operating environment for dairy producers. Where possible, Almarai has increased prices, for example, premium juices. Almarai bakery products sales grew 28% y/y to hit SAR 455 million. Net income grew 184% to SAR 56 million from SAR 20 million in Q1 last year. Key reason for the huge y/y increase is that 2 factories were lost - due to fire towards the end of 2014, which depressed Q1 15 sales numbers. The company has regained the lost capacity except for cupcake production capacity which will roll out in Q2 this year. Healthy growth was registered in volumes and the company also selectively increased prices for certain products. Commodity prices, yeast in particular remain low and as such, the segment should continue to be a bright spot in Almarai’s stable of products. Poultry sales grew 6.8% y/y to SAR 330 million while net loss widened to SAR 104 million. The poultry segment faced both expected and unexpected headwinds this year, which have combined to depress its outlook for the rest of the year. What was expected was the higher energy costs and lack of subsidy payments by the government (the company received SAR 31 million in subsidy payments in Q1 15). The unexpected factor and the real reason for underperformance has been the flood of cheap imports from Brazil. With the Brazilian real weakening significantly against the dollar in 2015, import competition has undercut the pricing structure in the Kingdom. The company has had to compete on price by running promotions and this has worsened losses. Even with the promotions, the company has lost market share to its import competition. In previous calls, management’s projection for the segment was breakeven by 2016. However, in light of new dynamics, it is clear that this won’t happen for at least the next 4 quarters. We expect the poultry segment to continue operating in a challenging environment. While initially budgeted at SAR 5 billion for the year, market conditions have warranted a closer look at capex plans. Management is currently revising estimates and expects cost optimization programs to eventually reduce 2016 capex to c. SAR 4.5 billion. Capex spend for Q1 was SAR 1.3 billion with the bulk of it going towards farming and manufacturing capex. Logistics expansion and Poultry segment were also allocated funds to facilitate expansion. The capex will be funded through a mix of debt and internal cash flow generation. Almarai is currently renewing mid to long term bank debt to refinance its sukuk and fund capex. The company has traditionally operated with high debt due to its capital intensive business model. Net debt/Equity stood at 82% at the end of Q1, marginally above the 5 year average of 80.2%. Net Debt is now over SAR 10 billion while cash on hand is SAR 1.07 billion, sufficient to manage its operations. We feel that Dairy, Juice and Bakery products will continue to post growth rates in the low double digits for the rest of the year. However, the outlook for poultry division remains muted for now and it remains to be seen how quickly the company can stem the losses. Since hitting its low price in January, the stock has appreciated 39% in the past 2 months and is currently trading at rich valuations compared to other food industry peers. The Fy16 P/E is 24.2x, P/B is 3.7x and projected 12m dividend yield is 1.5%. We have a neutral position on the stock considering its strong rally in recent months and rich valuations.
6. GCC Q1 Earnings Update Almarai Q1 '15 P&L (SAR mn) Total Income 3,037 Operating Expenses (732) Operating Profit 378 Ebitda 746 Net Income 306 Balance Sheet (SAR mn) Cash 732 Net PPE 16,726 Total Assets 24,739 Total Debt 9,531 Total Equity 11,764 Free Cash Flow 8 Ratios Q1'15 Gross Margin 36.6% Ebitda Margin 27.0% Net Margin 10.1% Debt/Equity 81.0% Net Debt/Ebitda 2.48 Q2'15 Q3'15 Q4'15 Q1'16 3,650 (749) 639 1,020 530 3,524 (774) 673 1,071 595 3,584 (766) 573 1,013 484 3,450 (821) 403 821 309 527 17,346 25,269 10,186 11,907 (151) Q2'15 38.0% 27.3% 14.5% 85.5% 2.66 2,088 17,669 26,420 11,362 12,271 498 Q3'15 41.1% 27.6% 16.9% 92.6% 2.44 2,039 18,696 27,371 11,382 12,618 98 Q4'15 37.3% 27.9% 13.5% 90.2% 2.40 1,069 19,576 27,972 11,565 12,799 (1,010) Q1'16 35.5% 27.6% 8.9% 90.4% 2.65
7. GCC Q1 Earnings Update Agthia Group : The company posted sales growth of 12% y/y to AED 486 million, with net profit amounting to AED 68 million, up 14% y/y from Q1 15. Gross margin increased to 35.4% from 31.5%, primarily due to the Al Bayan acquisition and lower input costs. SG&A also had a comparable increase to 22% from 18.2%, on account of higher marketing efforts and higher opex from Al Bayan. Net margin improved marginally by 30 bps to 13.9%. The company generates excellent cash flow and balance sheet is healthy with AED 619 million in cash with only AED 446 million in total debt. Agthia is actually under-leveraged and has significant headroom to scale up through acquisitions or organic investments. Looking at its business segments, water and flour were the best performers. Its feed business was hurt by competitive pressures; however, the company was able to maintain its margins because of lower input costs in the feed business and 2% sales volume growth. Revenues in dairy and non-core segment grew at high rates, but they are yet to break even at the operating level due to front loaded expenses as it’s ramped up. Agthia has begun its much awaited entry into the Saudi market with its distributorship deal with Olayan Group to export flour into the kingdom. The company plans to ship 250-300K tonnes per year. It has also appointed a distributor in Pakistan and is exploring options to enter the market. The other major news is the bottled water JV in Kuwait. This is part of the regional expansion plan of the Al Ain brand in the GCC. Agthia is investing in Kuwait with a view to export to other markets in the MENA region. The initial capacity is slated to be 27K bottles per hour and the land and bottling licenses have already been acquired. The project is expected to come online in 2017 with annual capacity of 12 million cases. Capex requirements are unchanged from the initial guidance of 200-250 million per year and Agthia is also planning at least 1 acquisition. The company is evaluating Dairy and Juice companies in UAE or bottled water companies operating ex-UAE as potential acquisition targets. In addition to that, the 40% expansion of Al Ain’s bottling capacity is set to commence full operations in Q2, which is expected to provide a boost to the bottom line. Overall, in a challenging market, Agthia has managed to maintain growth in sales and profits inspite of intense competition. Expect Agthia to be able to post stable numbers in the quarters ahead. Any news of a potential acquisition would be earnings accretive. The main concern is the relative illiquidity of the stock and its valuations of 15.6x Fy16 PE are roughly on par with the sector. Agthia Group Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (AED mn) Total Income 435 476 465 490 486 Operating Expenses (79) (88) (83) (120) (107) Operating Profit 58 69 53 55 66 Ebitda 77 89 74 77 88 Net Income 59 66 54 52 68 Balance Sheet (AED mn) Cash 521 652 636 571 619 Net PPE 842 859 871 933 951 Total Assets 2,064 2,311 2,302 2,375 2,534 Total Debt 281 506 427 458 446 Total Equity 1,435 1,440 1,492 1,544 1,535 Free Cash Flow 73 (72) 95 66 59 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Gross Margin 31.5% 33.0% 29.3% 34.1% 35.4% Ebitda Margin 15.5% 16.5% 16.7% 17.0% 17.1% Net Margin 13.6% 13.8% 11.7% 10.6% 13.9% Debt/Equity 19.6% 35.1% 28.6% 29.7% 29.1% Net Debt/Ebitda -0.91 -0.51 -0.70 -0.36 -0.53
8. GCC Q1 Earnings Update Mezzan Holding : Mezzan grew its revenues 5.3% y/y to KWD 55.7 million driven by broad based growth across most product lines. The company has 2 distinct business segments; Food and Non-Food business line. Food business, which accounts for 67% of sales, had growth in manufacturing and service segments, while the catering division contracted due to expiration of some long term contracts in Kuwait. Non-Food business including FMCG and Pharma grew 11.0% y/y due to strong performance in Kuwait. Home market of Kuwait remains its core revenue generator, accounting for 70.3% of sales followed by UAE and Qatar with 14% and 8.5% respectively. The company also has operations in Jordan, Afghanistan and Iraq collectively responsible for 6.9% of sales. Except for catering, all operations posted growth in Kuwait while in UAE, macro-economic headwinds led to 8.3% y/y sales decline. Mezzan had strong growth in Qatar in both its water and catering businesses. Driven by the top line growth, gross profit advanced 6.5% y/y to KWD 14.3 million with gross margin of 25.7%, up 40 bps from 25.3% in Q1’15. However, forex issues, higher marketing expenses and finance & tax expenses weighed on net profit which declined 4.8% y/y to KWD 5.2 million. Management guidance for the rest of the year is unchanged from the start of the year. Yearly profits are expected to growth c. 911% as marketing expenses booked upfront in Q1 normalize. Capex is budgeted at c. 5% of revenues and the outlay in Q1 is as per projections. 80% of the company’s portfolio is comprised of defensive staple items, which hold up better in challenging macroeconomic conditions. The stock - is trading at 16x Fy16 P/E which is on par with its peers in the S&P GCC Consumer Staple Index. Adding in the dividend yield of 3%, Mezzan is a solid defensive bet in volatile markets. Mezzan Holding Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (KD mn) Total Income 52.9 51.6 46.3 45.3 55.7 Operating Expenses (8.1) (8.5) (9.5) (7.6) (8.3) Operating Profit 5.3 8.5 4.0 4.7 5.9 Ebitda 6.5 9.6 5.2 4.1 6.8 Net Income 5.5 7.0 3.7 3.3 5.2 Balance Sheet (KD mn) Cash 8.4 6.8 8.0 7.7 11.8 Net PPE 66.3 66.1 61.7 61.3 62.5 Total Assets 175.0 178.1 181.6 180.3 195.5 Total Debt 38.5 40.7 40.1 39.1 41.5 Total Equity 85.6 92.9 96.6 100.0 105.3 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Gross Margin 25.4% 26.0% 26.8% 25.8% 25.7% Ebitda Margin 11.2% 12.6% 12.3% 9.0% 12.3% Net Margin 10.3% 13.6% 7.9% 7.2% 9.3% Debt/Equity 44.9% 43.8% 41.5% 39.1% 39.4%
9. GCC Q1 Earnings Update Dubai Parks & Resorts: Dubai Parks & Resorts (DPR) continues its progress to opening as scheduled in October 2016. 85% of overall infrastructure, 76% of ride systems, 65% of total facilities and 41% of show systems have been completed as of the end of Q1. The company reporte d a net loss of AED 38 million. DPR has not yet commenced revenue generating activities. It has drawn down AED 2.3 billion of its AED 4.6 billion debt facility and this will likely be fully drawn down out by opening date as operations are ramped up. In Q1, DPR signed 39 lease proposals for Riverland with 65% of total space signed over. A mix of favorable lease rates and higher proportion of high value parcels being leased out has resulted in the company already exceeding over 100% of projected revenues from such leases. These leases are structured similar to mall lease agreements with a base rent and a turnover rent provision if sales exceed contractual targets. Furthermore, DPR announced its detailed ticket pricing which stayed more or less in line with IPO projections. Bollywood parks ticket prices were increased 16% due to greater than anticipated interest from Indian travel operators. Annual passes were also announced which are priced at c. 3x daily ticket price, which is comparable to international theme park benchmarks. This is targeted at residents living in Dubai and sales from annual passes will be capped at around 10% of overall revenues. The revenue recognition mechanism for annual passes will be split over the 12 month period from first entry, which will smoothen annual revenues. DPR is targeting a visitor mix of 70% international tourists and 30% local residents. DPR is seeking to raise a total of AED 2.6 billion of which AED 993 million is through debt, secured from a syndicate of banks and a further AED 1.68 billion through a rights issue, or 25% of additional equity capital. The company wishes to keep the capital split at 60% Equity and 40% debt and that is the reasoning for raising additional equity after an IPO just 15 months back. The subscription period for the rights issue is until 25th May, while rights are tradeable until the 18th and it is priced at AED 1. Committed investors have committed AED 1 billion, or 60% of equity funding required. As we enter the final phase of construction, we expect losses to widen since operations will be scaled up. The soft launch is expected to be about a month before the Grand opening in October. Revenue recognition is only expected in Q4. The subscription th period for the rights issue to raise funds for the Six Flags theme park commenced on May 12 . The hype involved in marketing Dubai’s newest major attraction can be a catalyst for the stock in the 6 month period ahead. Overall, the company continues to deliver on targets and by Q2 results call, we should have a firm idea of opening dates and completion progress. We remain bullish on the stock as a long term bet on Dubai as the premier tourist destination in the region.
10. GCC Q1 Earnings Update Al Tayyar Travel : Results for the first quarter were muted, more or less in line with market expectations. Revenues for the quarter clocked in at SAR 1.97 billion with gross profit of SAR 377 million (-14.5% y/y and -10.5% q/q). Gross margins have contracted 135 bps from 20.5% in Q1’15 to 19.15% this past quarter. Al Tayyar reported net income of SAR 194 million (-32.2% y/y and -9.8% q/q). Net margin for the quarter was 9.85% v/s 13.5% in the same period last year, due to impairments booked and increase in operational expenses. The performance in the quarter was impacted by the 29% drop in corporate and 8% drop in retail ticketing. The slowdown in the economy has prompted corporates to trim expenses and this is trickling down to Al Tayyar’s earnings. Excluding the Ministry of Higher Education (MOHE) contract, ticketing revenue from GRE’s dropped 50% y/y. More importantly, the MOHE contract is up for renewal in February 2017 and in all likelihood, the government will renegotiate the contract at lower rates or retender it to the market. Both scenarios will most likely depress Al Tayyar’s ticketing margins. With ticketing still accounting for c. 80% of revenues, the segment remains the company’s bread and butter. Facing such headwinds in its core ticketing business, Al Tayyar has embarked on a new strategy to drive growth. We came away from the call with the understanding that the company will be in a transition phase while implementing this strategy over the next 35 years. The company is making a concentrated push into the hospitality segment with its hotel pipeline, Equinox JV and 30% stake in Thaker. 3 new hotels in Makkah and 1 in Jeddah will begin operations this year which is estimated to achieve maturation by 2018. Altayyar’s JV agreement with Equinox involves bringing 8,000 rooms into UAE and Saudi Arabia by 2021. However, its most ambitious plan is the Thaker investment which is projected to add 36,000 hotel rooms to the Makkah hotel sector. The project involves an investment of USD 3-4 billion over a period of 10 years with a phased out launch plan. Altayyar is also investing heavily into its online ticketing system, upto $100 million over the next 5 years with a target of $1 billion in sales over the same timeframe. While this is great for sales growth, the margins in online ticket booking are much thinner compared to what the company currently generates. AlTayyar’s concentration risk of relying on GRE’s for the bulk of its revenues, clouds its near term future. Its key risk is the nonrenewal of the MOHE contract which only runs for another 10 months. Other risks include currency risks and delays in payments from GREs. The stock has rallied from its low of SAR 33.1to now trade in the low 40’s. For investors with a high risk appetite, AlTayyar may provide rich rewards. However, we remain cautious and expect muted results in the coming quarters as it gears into the transition phase. Al Tayyar Travel Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (SAR mn) Total Income 2,153 2,387 1,907 2,185 1,968 Operating Expenses (157) (171) (176) (204) (163) Operating Profit 284 426 282 271 240 Ebitda 304 445 306 299 263 Net Income 286 396 265 215 194 Balance Sheet (SAR mn) Cash 1,135 1,680 1,948 2,009 1,749 Net PPE 3,890 3,921 3,993 4,550 4,213 Total Assets 6,945 7,555 7,966 8,421 9,083 Total Debt 1,269 1,622 1,598 1,459 1,619 Total Equity 3,126 3,531 3,792 4,006 4,984 Free Cash Flow (70) 231 371 776 (370) Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Gross Margin 20.5% 23.2% 20.9% 19.2% 19.2% Ebitda Margin 15.7% 15.6% 15.7% 15.7% 15.6% Net Margin 13.3% 16.6% 13.9% 9.9% 9.8% Debt/Equity 40.6% 45.9% 42.1% 36.4% 32.5% Net Debt/Ebitda 0.11 -0.05 -0.26 -0.41 -0.10
11. GCC Q1 Earnings Update Aldar Properties : Revenues increased 4% y/y to AED 1.23 billion in Q1’16 while gross profit clocked in at AED 527 million v/s AED 598 million l ast year (with GP margin of 43% v/s 51% in Q1’15). The drop was on account of high margin land sales done in the same period last year. Net Income increased 14.5% y/y to AED 654 million. Collection of government receivables and partial impairment reversals for sales of certain villas in 2010-11 were the reason for this boost in net income. Finance expense also decreased due to the deleveraging exercise the past few years. Balance sheet remains healthy with AED 6.5 billion of cash v/s a debt load of AED 6 billion, effectively implying that the company has negative net debt. D/E ratio is 0.3x and if the company so wishes, it has ample headroom to take on debt. Capex expenditures of AED 5.2 billion are planned for the year, out of which AED 2.5 billion is allocated to new developments through off-plan sales, AED 2.2 billion for existing developments and AED 0.5 billion for continued re-investment in its core investment properties. The Investment Properties segment posted top-line growth of 13% y/y and also increased GP margin to 77.3% form 75.1% last year. This was largely due to the gradual maturation of Yas Mall, which currently has 98% trading occupancy. Turnover rents are also trickling in through some of the core fashion brands, F&B outlets and certain anchor tenants. However, its Hotel business was impacted by the slowdown in the economy, which has affected both retail and corporate spending. Occupancy rate stood at 81% v/s 86% in Q1’15 and ADRs have also declined. Aldar’s other segments continued to post both revenue and bottom line growth. In Q1, Aldar announced the launch of Yas Acres, a 6 billion development with 1,315 units. This is located in an investment zone, meaning both nationals and expats can invest in the property. The company has already booked 70% of sales in the first cluste r of 267 units. The buyer profile is broadly split among Nationals, Arab expats and Western expats. Its existing developments launched since 2014 are now 79% sold. These properties are slated for completion in 2018. We can expect consistent revenue recognition going forward now that the most of these projects enter the high capex stage. A near term catalyst is the completion of land plot in Raha beach to the government for a sale price of AED 908 million. This is accounted using the point-in-time method and management expects this to done in either late Q2 or Q3. Aldar has now been recognized by the Abu Dhabi municipality as the first master developer in the Emirate. With the new rules and regulations regarding property investments, management believes that Aldar’s size and scale enable it benefit the most. Aldar continues to deliver stable results. With the launch of Yas Acres, the company has development plans slated for the next 4-5 year period and its investment properties, particularly Yas Mall, are on their path to stabilization. The stock is trading at FY16 PE of 9.6x and P/B of 0.97x. Positive earnings surprise in Q2/Q3, one-time cash inflow in Q2 and recovery in sentiments could boost the stock price in the near term. Aldar Properties Q1'15 P&L (AED mn) Total Income 1,179 Operating Expenses (24) Operating Profit 399 Ebitda 450 Net Income 569 Balance Sheet (AED mn) Cash 5,225 Net PPE 14,615 Total Assets 37,553 Total Debt 8,161 Total Equity 18,288 Free Cash Flow 1,644 Ratios Q1'15 Ebitda Margin 20.8% Net Margin 48.2% Debt/Equity 44.6% Net Debt/Ebitda 2.27 Q2'15 Q3'15 Q4'15 Q1'16 1,106 (24) 314 365 599 1,176 (17) 356 407 634 1,125 (25) 79 166 735 1,232 (19) 370 418 649 5,250 17,804 35,903 7,098 18,897 804 Q2'15 24.6% 54.2% 37.6% 1.49 6,946 17,756 37,018 7,093 19,543 1,740 Q3'15 28.8% 53.9% 36.3% 0.11 6,260 15,570 36,141 5,947 20,288 323 Q4'15 30.3% 65.3% 29.3% -0.23 6,579 15,477 36,497 5,977 20,135 315 Q1'16 29.3% 52.7% 29.7% -0.44
12. GCC Q1 Earnings Update Air Arabia : The airline provided a positive surprise with excellent set of numbers in Q1’16. Revenue increased 7% y/y to AED 946 million. This was achieved in spite of facing headwinds in yield, which declined c. 9% y/y. The main catalyst for top line growth was the 17% increase in passenger numbers, which was much more than our expectations of 10-12%. The low oil prices implied a 13% drop in fuel expenses and enabled GPM expansion of c. 550 bps to 20.8%. Non-fuel expenses were also contained registering a 3% decline y/y. Consequently, Air Arabia posted net income of AED 114.3 million, 34% up y/y. This profit growth was achieved despite registering AED 33 million in hedging losses for the quarter. We believe the gradual maturation of many of the new routes launched in H2’15 led to the increase in passengers carried. Seat factor clocked in at 81%, which is an improvement from the latter part of 2015, where the company was below 80%. Management is confident of maintaining seat factors in the 81-83% range for the rest of the year. Additionally, we think the economic slowdown in the region has resulted in many corporate and retail travelers opting for Low cost carrier options as a means of cutting costs. On the capex side, the airline is in the final leg of receiving aircraft it had ordered in 2011. Air Arabia will collect 4 more aircraft in 2016, out of which 2 will be allocated to Sharjah and 2 to its other operating hubs in Jordan/Morocco. The fleet size is expected to be 46 aircraft by year end. After accepting its final aircraft in 2017, the company expects to lease aircraft to maintain capacity growth in lieu of the favourable lease rates prevailing in the market right now. Air Arabia’s balance sheet remains healthy with AED 1.6 billion of cash and the company has the cash flow generation to maintain its dividend payouts in the future. For the past 7 quarters, we had touted Jazeera Airways as our pick in the airline sector. However, we now reverse position and believe Air Arabia is the better bet among airline operators. The company has been able to maintain passenger growth in an over-supplied market. At the same, the gradual wind down of legacy fuel hedges will reduce nonoperating losses. Valuations are attractive at current prices at FY16 P/E of 10x compared to 13x for Jazeera Airways. Air Arabia Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (AED mn) Total Income 886 860 1,123 956 946 Operating Expenses (62) (61) (46) (70) (68) Operating Profit 83 118 244 111 129 Ebitda 173 214 345 215 233 Net Income 78 146 231 56 111 Balance Sheet (AED mn) Cash 1,581 1,242 1,455 1,599 1,584 Net PPE 6,084 6,184 6,442 6,354 6,476 Total Assets 11,164 10,960 11,293 11,399 11,571 Total Debt 3,576 3,472 3,581 3,496 3,532 Total Equity 4,709 4,986 5,032 4,998 4,678 Free Cash Flow 144 219 328 248 196 Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Gross Margin 16.3% 20.7% 25.8% 18.9% 20.8% Ebitda Margin 22.0% 24.0% 22.8% 24.7% 25.9% Net Margin 8.8% 17.0% 20.6% 5.8% 11.7% Debt/Equity 75.9% 69.6% 71.2% 70.0% 75.5% Net Debt/Ebitda 1.26 1.49 2.25 1.65 1.60
13. GCC Q1 Earnings Update Jazeera Airways : Jazeera Airways announced 1Q16 results. The airline posted a net profit of KD 4 million in 1Q16 VS RO 3.3 million, last year, up by 33.3% YoY. This was mainly attributed due a one off gain of KD 2.4 million from the sale of its subsidiary Sahaab Leasing. Jazeera’s revenue declined by 7.8% YoY to RO 11.86 million from RO 12.86 million in 1Q15 on the back of lower yield play which dropped 11% YOY. Due to excess capacity and low fuel prices, yield decline is prevalent in the airline industry as a whole. However, its effect on Jazeera has been more than expected. Load factor improved to 72.6% from 69.6% as the airways increased its additional capacity by 2.6%YoY. Saving from lower fuel prices (fell by 17%YoY) was offset by higher operating charges such as rerouting its flight away from political unrest region. Usually airline industry has seasonal earnings where Q3 to be highest. Plans to add new routes in such as Taif, Saudi Arabia (4 flights/week), June 7 and Isfahan, Iran (2 flights/week) July 3 this year is expected to drive revenue growth. From the last 2 quarters, it’s evident that yield declines have affected Jazeera more than we expected. Although the balance sheet is healthy with no debt and cash holdings above KD 30 million, valuations are rich at the moment at 13x Fy16 P/E. We maintain a neutral outlook on the stock. We await Q2 results to evaluate whether Q1 was a blip in performance or rather, a sustained where lower yields weigh down profits. Jazeera Airways Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 P&L (KD mn) Total Income 12.9 13.8 21.0 11.0 11.9 Operating Expenses (1.1) (1.0) (1.2) (0.8) (1.1) Operating Profit 2.3 2.1 8.2 0.3 1.5 Ebitda 2.5 2.3 8.4 0.5 1.6 Net Income 3.0 3.2 8.3 0.9 4.0 Balance Sheet (KD mn) Cash 67.0 65.2 54.0 30.9 30.5 Net PPE 1.9 1.8 1.7 5.1 5.0 Total Assets 233.9 167.1 105.0 49.5 49.5 Total Debt 114.9 70.5 17.9 Total Equity 71.7 55.1 63.3 31.6 33.2 Free Cash Flow 4.7 3.0 3.8 (0.6) (0.1) Ratios Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Gross Margin 26.4% 23.2% 45.1% 10.6% 22.0% Ebitda Margin 31.1% 26.7% 23.1% 23.1% 22.1% Net Margin 23.4% 23.3% 39.3% 8.3% 33.8% Debt/Equity 160.4% 128.0% 28.3% 0.0% 0.0% Net Debt/Ebitda 2.51 0.33 -2.71 -2.28 -2.40
14. GCC Q1 Earnings Update Qatar Navigation : Qatar Navigation (Milaha) reported net income of QAR 352 million for Q1 16 compared to QAR 365 mn last year (-3.6% y/y, +259% q/q). The exceptional growth compared to last quarter is mainly due to the impairments booked in Q4 last year. Overall, the numbers are as we expected. While the Gas & petrochem division continued its stellar run (+22.6% y/y growth in profit), there was weakness in the Offshore division (-10.5% sales contraction and -46% drop in profit to QAR 11.7 million) as management had indicated in its conference call with us. The Offshore segment was affected by lower utilization and charter rates for its vessels. Furthermore, the late mobilization of Halul diving vessel also impacted top line. In the global market, almost 18% of total fleet is on standby with utilization at about 50% and day rates seeing declines of 20-40% from last year. Responding to the market reality, Milaha has successfully slashed costs to maintain profitability in the division. Surprisingly, there was a marginal contraction in the Maritime & logistics segment revenues (-2% y/y). Additionally, there was 6% growth in wages and operating expenses in the division. This impacted segment profitability which dropped to QAR 39.5 million from QAR 50.5 million last year. The decline was due to a large decrease in bulk shipping chartering out activities. Milaha Capital had a net profit of QAR 159 million (v/s QAR 168 million last year, -5.5% y/y). Q1 is seasonally, a strong one for the segment due to dividend payments from its sizeable equity investments. Its quarry segment continues to perform well and rental incomes increased marginally. The best performer remains the Gas & Petrochem segment, which continues to have its safety net of stable long term contracts. The product tankers and crude carries trade in the spot market and rates are expected to soften here. We believe this drop should be moderate with management aiming for maximum utilization. We feel that Milaha is well positioned to handle the recent downturn in the economy. In spite of the challenging conditions, the Offshore segment remains profitable and the Gas & Petrochem segment is a stellar performer with the comfort of stable long term contracts. . At current valuations and considering the solid balance sheet we feel there is limited downside to Milaha. The potential award of the Hamad Port concession in coming months can lead to stock price rally. Milaha Q1'15 P&L (QAR mn) Total Income 786 Operating Expenses (273) Operating Profit 279 Ebitda 352 Net Income 365 Balance Sheet (QAR mn) Cash 4,204 Net PPE 3,985 Total Assets 19,343 Total Debt 5,627 Total Equity 12,966 Free Cash Flow 517 Ratios Q1'15 Gross Margin 70.3% Ebitda Margin 35.1% Net Margin 46.4% Debt/Equity 43.4% Net Debt/Ebitda -3.34 Q2'15 721 (325) 163 234 286 Q3'15 797 (284) 253 333 308 Q4'15 690 (277) 170 254 136 Q1'16 771 (279) 259 339 352 5,055 5,395 5,586 5,463 4,024 5,137 5,039 5,009 20,870 22,055 22,132 21,499 6,435 7,593 7,578 7,487 13,651 13,624 13,751 13,139 (15) 299 62 599 Q2'15 Q3'15 Q4'15 Q1'16 67.6% 67.3% 64.9% 69.8% 37.2% 38.3% 39.2% 38.9% 39.7% 38.6% 19.7% 45.6% 47.1% 55.7% 55.1% 57.0% -3.16 -2.09 -1.99 -1.85
15. GCC Q1 Earnings Update Disclaimer Data sourced from Bloomberg and company reports . CMP (Current Market Prices) are as of close on 18th May, 2015. This report has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all care has been taken to ensure that the facts stated herein are accurate and the estimates, opinions and expectations contained herein are fair and reasonable, neither United Securities LLC, nor any of its employees shall be, in any way, responsible for the contents. This shall not be construed as an offer to buy or sell the investments referred to in this report.