BinDawood Holding has faced operational challenges during 1H 2022, with its costs outpacing top-line growth. The majority revenue provider Danube stores, which accounted for over 70% of total revenue in FY21, faced muted performance during 1H 2022 with their sales inching up 0.2% YoY. However, the company’s Haramain stores, most of which fall under BinDawood, benefitted from Umrah pilgrims during Ramadan. Thus, these stores accounted for slightly over 5% revenue growth out of the total 6.6% revenue growth achieved during 1H 2022. Accordingly, we expect the recently concluded Hajj season would have further buoyed the performances of the Haramain stores. Yet, we lower our FY22 earnings expectations factoring in the recent cost pressures, which we expect to persist in the near future.
2Q 2022 earnings synopsis: BinDawood Holding’s revenue in 2Q 2022 edged higher by 8.7% YoY, matching our estimate (-2% variance). Revenue growth in the quarter was driven by an increase in the customer count by about 20% YoY to 12.5mn, as a return of pilgrims boosted BinDawood stores’ sales in the Ramadan season. However, sales of the more premium Danube stores slipped 0.5% YoY. The company witnessed a steep rise in its costs due to discounts offered to attract more customers, the addition of new stores, and the expenses related to a couple of acquisitions. Despite this, S&D and G&A expenses came in 3%-4% below our estimate, but with direct costs exceeding our estimate by ~5% and other operating income coming in c. 7% lower, operating profit of SAR 64.8mn missed our estimate by a wide margin (-48%). This gap further increased at the net income level resulting from sharply lower other income (SAR 6.7mn vs. our estimate of SAR 21.4mn). Consequently, net profit at SAR 42.3mn fell around 64% short (-55.4% YoY) of our estimate.
Valuation and risks:
We continue to value the company based on blended valuation methodologies – (i) Discounted Cash Flow (DCF) and (ii) Relative Valuation (using P/E and EV/EBITDA multiples) with equal weights assigned to each of them. The company opened two Express stores during 1H 2022 and hence we estimate its total stores to have reached 80 by June 2022-end, one less than our forecast. The company plans to add 8 more Danube stores. However, in the absence of any specific timeline given and considering that Danube stores are currently facing pressure on sales, we expect BinDawood to be relatively less aggressive in stores expansion and add only two more Danube stores this year and most of the remaining stores next year. Overall, we estimate the company’s store count to reach 84 by 2022-end (vs. 88 estimated earlier). Over the next couple of years, we forecast the company to add 5-6 stores per annum, including the BinDawood stores the company intends to open in Riyadh. Earlier, our Riyadh stores’ estimate was over and above the 5-6 stores the company intended to open each year till FY 2024. Hence, we estimate the total store count to reach 96 by FY24e, which is four less than the management target of 100 stores as well as our earlier estimate of 103 stores. We expect the company to register an improved performance in 3Q 2022, as the return of Hajj pilgrims is expected to further boost BinDawood stores’ sales, since over 50% of its stores are in the two holy cities
combined. On a separate note, we expect the company would continue to dole out discounts and run promotional campaigns going forward to continue attracting more footfalls in the backdrop of rising inflationary pressures. Accordingly, we anticipate the ramp-up of the new stores would be slow and hence we have lowered our margins expectations for FY22e (OPM: 5.8% vs. 7.6% earlier; NPM: 4.5% vs. 7.1% earlier). Our 5-year net profit CAGR till FY26e is also down to 13% from 18%, previously. However, we would like to highlight that despite the weak financial performance in 1H 2022 and the addition of new stores, the company stood debt free which is a positive in the current rising interest rate environment. Considering the points discussed above, we reduce our target price on BinDawood Holding to SAR 84.50 from SAR 108.00, previously. The stock price has corrected around 17% since our last report in August, and the current market price of SAR 73.00 gives an Accumulate rating. Currently, the stock trades at 29.8x P/E and 13.0x EV/EBITDA, based on our FY23 estimates. Downside risks to our valuation include less than expected addition of new stores, below-expected growth in average per store realization, and lower than estimated margins. Key upside risks to our valuation include more than expected addition of new stores, better than estimated average store revenue, and higher than forecasted profitability.