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Kuwait Food Company (Americana) Was Established in Growth and Accompanying Expatriate Layoffs in GCC Countries Served to 1963 in Kuwait

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Kuwait Food Company (Americana) Was Established in Growth and Accompanying Expatriate Layoffs in GCC Countries Served to 1963 in Kuwait REGIONAL FOOD | KFC June 21, 2010 jam Kuwait Food Company (Americana) Necessity Drives Value Please Read Last Page For Contact Details and Important Disclaimer REGIONAL FOOD | KFC June 21, 2010 Kuwait Food Co. (Americana) HOLD LT FAIR VALUE | KWD1.83 Necessity Drives Value TARGET PRICE | KWD1.64 Frenetic lifestyles, increasingly westernised habits and a large youth base COMPANY SYNOPSIS are all helping to spur demand for both processed food and fast food outlets within the Middle East. The world-wide slowdown in economic Kuwait food Company (Americana) was established in growth and accompanying expatriate layoffs in GCC countries served to 1963 in Kuwait. KFC is one of the Middle East's largest group of companies operating in the following dampen the growth in demand for processed food yet, despite this, fast segments: food restaurant turnover remained relatively unscathed. In this note we (i) Restaurants sector: KFC runs 19 chains of initiate coverage on Kuwait Food Company (KFC) [FOOD], one of the restaurants, in the fields of Fast Food, Casual largest food conglomerates in the Middle East. The company operates 19 Dining, cafés and Pastries. chains of restaurants with over 1000 restaurants in 79 cities, as well as (ii) Industries Sector: KFC manufactures frozen and running 21 industrial companies. KFC enjoys a strong market share in processed meat, canned and frozen vegetables, Egypt in the dairy and processed chicken segments whilst it has a similar tuna and canned fruits, confectionary items and cakes. Also, the company operates in the field of influence in the GCC in regards to meat processing, frozen potatoes and dairy products and runs one of the Middle East’s canned beans. KFC is traded at 2010E EV/EBITDA of 6.5x vs. a composite largest Poultry companies, Cairo Poultry. peer average of 9.4x, and market average of 13.2x. We initiate coverage of (iii) Commercial and retail segment which runs the stock with an LTFV of KWD1.83/share and a target price of agencies for distribution in Kuwait of Heinz for KWD1.64/share. Given the 18% upside potential vs. the target price we processed tomato and Ketchup, Cadbury chocolates, and others. advocate a Hold rating. Healthy business drivers: The food retail industry in the Middle East and Also, KFC invests surplus funds in investment portfolios. These investments exceed KWD177mn. North Africa (MENA) region enjoys strong growth potential mainly due to the high population growth and strong base of youth. Restaurants are a primary SHAREHOLDER STRUCTURE source of entertainment for families in the GCC market. Al-Kharafi National Co. for Stocks & Real Estate 66.8% Robust business model: With 19 restaurant chains, KFC caters to a wide Kuwait food Company 2.70% Public 30.5% consumer base in the MENA region. The company has a strong portfolio of processed food ranging from meat and dairy to vegetables. STOCK DATA Valuation & Recommendation: KFC is valued using a sum-of-the-parts Reuters; Bloomberg FOOD.KK valuation method. We reached a fair value of KWD1.83/share and incorporated Recent price as of 20-Jun-10 KWD1.38 No. of outstanding shares 391 mn the book value of the available for sale investments into our valuation. KFC is Market cap KWD540 mn traded at EV/EBITDA 2010E of 6.5x, a 31% discount vs. a composite peer 52-wk high / low KWD1.94 KWD1.18 average of 9.4x. Nevertheless, we are concerned with the negative technical Avg. daily volume / turnover 0.14 mn / KWD229.5 mn view on the Kuwait Stock Exchange (KSE). Our target price is KWD1.64/share for KFC based on the estimated target EV/EBITDA of 7.5x. STOCK PERFORMANCE | 52 WEEKS Given the 18% upside potential, we initiate coverage on the stock with a Hold rating. Volume FOOD KWSE-rebased 2.00 2.5 KWD mn 2008 A 2009 A 2010 F 2011 F 2012 F KW D mn shares 1.80 1.60 2.0 Revenues 557.45 616.43 691.21 754.83 824.94 1.40 1.20 1.5 Growth rate 28.2% 10.6% 12.1% 9.2% 9.3% 1.00 0.80 1.0 INITIATION OF COVERAGE EBITDA 103.82 86.78 101.61 114.70 124.15 0.60 Growth rate 69.6% -16.4% 17.1% 12.9% 8.2% 0.40 0.5 EBITDA margin 18.6% 14.1% 14.7% 15.2% 15.0% 0.20 0.00 - Jun-09 Sep-09 Jan-10 May-10 Net income 35.22 36.28 39.61 46.69 50.28 Growth rate -35.9% 3.0% 9.2% 17.9% 7.7% Source: Bloomberg Net margin 6.3% 5.9% 5.7% 6.2% 6.1% PER 15.3x 14.9x 13.6x 11.6x 10.7x INGY EL-DIWANY P/BV 2.2x 1.9x 1.8x 1.8x 1.7x [email protected] EV/EBITDA 6.6x 7.3x 6.5x 5.7x 5.2x Net debt/EBITDA 1.4x 1.1x 1.2x 1.0x 0.8x Dividend yield 5.6% 4.3% 5.6% 6.6% 7.1% Source: Company reports & CICR analysis Please Read Last Page for Contact Details and Important Disclaimer 2 REGIONAL FOOD | KFC June 21, 2010 Table of Contents Executive Summary _______________________________________________________________ 4 I. Investment Case ________________________________________________________________ 5 II. Valuation ______________________________________________________________________ 7 III. Industry Overview _____________________________________________________________ 14 A. Global Food Business _________________________________________________________ 14 B. Food Industry in the MENA Region _______________________________________________ 15 1. Main Characteristics ______________________________________________________________ 15 2. Dynamics of the Food Industry ______________________________________________________ 16 3. Key Regional Food Markets _________________________________________________________ 18 4. Future Outlook ___________________________________________________________________ 21 IV. Company Profile ______________________________________________________________ 23 A. Company Synopsis ___________________________________________________________ 23 B. Business segments ___________________________________________________________ 24 C. Recent Developments _________________________________________________________ 27 V. Operational and Financial Analysis _______________________________________________ 28 A. Operational Analysis __________________________________________________________ 28 B. Financial Analysis ____________________________________________________________ 29 i. Dec 2005–Dec 2009 _________________________________________________________ 29 ii. Interim Financial Summary (1Q10 vs. 1Q09) ______________________________________ 31 VI. Projection Assumptions ________________________________________________________ 32 INITIATION OF COVERAGE Please Read Last Page for Contact Details and Important Disclaimer 3 REGIONAL FOOD | KFC June 21, 2010 Executive Summary A shift in consumption patterns towards ready-to-eat food and out-of-home Global food sales consumption is driving growth in the food market. Global food sales, estimated estimated at USD6.7tn to be in the vicinity of USD6.7tn in 2009, consist of the retail food (fresh and in 2009 processed food) and the food service establishment (restaurants and hotels) segments. Kuwait Food Company (KFC) [FOOD] is one of the largest food players in the MENA region. And it really is a regional entity, operating in the GCC, Egypt and Africa, as well as the Levant. The food market in the MENA region is sizable, with Egypt accounting for 51% Egypt accounted for 51% of of food sales with a total food retail value of USD44.8bn in 2009. In Egypt, the the sizeable food market in the food industrial market is relatively underpenetrated as the vast majority of population lies within the mid-to-low income segments that prefer traditional MENA region fresh food products. The food service market is concentrated, with a few fast food outlets dominating the market. Saudi Arabia is one of the most attractive consumer markets in the region in Saudi Arabia is an attractive light of its large population base, a large tranche of foreign labour and the consumer market increasing average income in recent years. On top of this, demand from pilgrims for convenience foods such as pre-packed and ready-to-eat meals makes a major contribution to food retail sales and fast food chains. Kuwait too provides a healthy potential for the food industry, driven in large by Healthy potential in the Kuwaiti (i) a high GDP/Capita, and (ii) a young expat population (86% of the foreign market population is between 15 and 64 years old). KFC is a consumer-driven company and operates three business segments: a restaurants segment (51% of total revenues in 2009), industries segment (46% of revenues in 2009) and a commercial and retail segment (3% of revenues in 2009). Through its restaurants and industries segments, KFC caters to a raft of KFC operates in the food different consumption patterns across the MENA region. Indeed, KFC operated service and the food retail international franchises across 79 cities in the MENA region through 1,157 sectors restaurants under 19 restaurant chains at the end of 2009. Through its industries segment, KFC offers packaged food and enjoys a strong position in the manufacturing of meat, dairy products, and canned and frozen vegetables in its markets. The company’s packaged food business targets middle and high- end income classes who prefer buying ready-to-eat foods. The commercial & retail sector handles the distribution of Heinz ketchup and California Garden for canned foods in Kuwait. KFC adopts a backward integration strategy by sourcing some of its basic Part of KFC’s needs are requirements for chicken for its meat plants and restaurants from its subsidiary, supplied within the group Cairo Poultry Company [POUL]. Furthermore, KFC cultivates a number of crops used for production at its factories, including potatoes and vegetables for its subsidiaries Farm Frites and Egyptian Canning Company. Though the prospects for KFC are promising, we believe rising food prices will Rising food prices remain the INITIATION OF COVERAGE remain the company’s main concern with prices expected to increase in light of company’s main concern the anticipated rebound in the global economy. To negotiate this, KFC is seeking to minimize its costs by diversifying purchase sources and rationalize its expenses along the value chain.
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