Saudi Research and Marketing Group (4210.SE) Equity Research Initial Coverage May 14th, 2006 Current Price: SAR 46* Country: Saudi Arabia Fair value Target: SAR 60.2 Sector: Media Recommendation: BUY Exchange: Saudi Stock Market (TADAWUL) Sector Coverage Team • Saudi Research and Marketing Group (SRMG) is the holding company of the largest vertically integrated publishing business in the Middle East and Gulf region whose Marc Hammoud publications are read by an estimated 180 million readers worldwide. The group is involved +9714 3199 753 in four main business segments (publishing, distribution, printing and media sales & [email protected] advertising) and its primary market is Saudi Arabia (KSA). • Saudi Research and Publishing Company (SRPC), the group’s publishing subsidiary, boasts 15 publications in total, comprising of dailies, weeklies and monthlies in Arabic, English, Urdu and Malayalem. Al Sharq Al Awsat, the seminal pan-Arab daily based in London, is the group’s flagship masthead. SRPC is the largest single publisher in Saudi Arabia, with an aggregate market share of 46.1% in 2005. • The group’s strategy is to continue increasing synergies between its four main business units as well as managing costs and expenses efficiently. Third party business across the printing, distribution and advertising units will be the core driver of growth going forward. Of course, the group will also look at non-organic growth especially in the printing and distribution businesses. • We have conducted two valuation exercises on SRMG, a DCF valuation and multiple- based valuation to reach a target price of SAR 60.2, implying a 31% upside potential on the issuing price. At SAR 46 the stock trades at a price to 2006E earnings of 14.6x. *Issuing price Saudi Research and Marketing Group Equities research Contents HIGHLIGHTS ............................................................................3 COMPANY OVerVieW ................................................................4 HIstOry ........................................................................................................................................... 5 MAIN DIVISIONS ............................................................................................................................. 6 SRMG’S stratEgy GOING FOrward.........................................................................................10 SecTOR OVerVieW .................................................................11 ANALYSIS AND FOrecASTS .......................................................16 ADVErtISING REVENUES .............................................................................................................16 SalES AND subsCRIPTIONS REVENUES ...................................................................................17 PrINTING REVENUES ...................................................................................................................17 PrOFItabILIty .............................................................................................................................18 Q1 2006 ..........................................................................................................................................18 FORECasts ....................................................................................................................................18 VALUATION ............................................................................20 FINANciALS ...........................................................................22 February 3 May 14th, 2006 2 rd, 2005 Saudi Research and Marketing Group Equities research Highlights • Saudi Research and Marketing Group (SRMG) is the holding company of the largest vertically integrated publishing business in the Middle East and Gulf region whose publications are read by an estimated 180 million readers worldwide. The group is involved in four main business segments (publishing, distribution, printing and media sales & advertising) and its primary market is Saudi Arabia (KSA). • Saudi Research and Publishing Company (SRPC), the group’s publishing subsidiary, boasts 15 publications in total, comprising of dailies, weeklies and monthlies in Arabic, English, Urdu and Malayalem. Al Sharq Al Awsat, the seminal pan-Arab daily based in London, is the group’s flagship masthead. SRPC is the largest single publisher in Saudi Arabia, with an aggregate market share of 46.1% in 2005. • In 2004 and 2005, SRMG was completely restructured, cost control measures were implemented and habitual inefficiencies were addressed resulting in a drastic improvement in operational performances and financial reporting. SRMG’s consolidated revenues grew by 12.0% YoY to SAR 1,063 mn while gross profit margin, EBITDA margin and net profit margin jumped from 28.1%, 13.1% and 4.6% in 2004 to 37.5%, 22.1% and 17.1% in 2005 respectively. • The group’s strategy is to continue increasing synergies between its four main business units as well as managing costs and expenses efficiently. Third party business across the printing, distribution and advertising units will be the core driver of growth going forward. Of course, the group will also look at non-organic growth especially in the printing and distribution businesses. • The publishing industry in KSA and in the region is expected to benefit from supportive demographic, economic and social trends which should ensure a healthy and sustainable growth in the years to come. On the other hand, the print media scene in the region faces a certain number of challenges. Indeed, lack of freedom of expression and accurate data-collection (circulation figures) are affecting the newspaper and magazine markets, which if politically liberalized and independently verified could flourish even further. Moreover, the rise of Internet and allied developments are providing new challenges such as managing the impact of online competition. • We have conducted two valuation exercises on SRMG, a DCF valuation and multiple- based valuation to reach a target price of SAR 60.2, implying a 31% upside potential on the issuing price. At SAR 46 the stock trades at a price to 2006E earnings of 14.6x. May 14th, 2006 Saudi Research and Marketing Group Equities research Company overview SRMG boasts 15 publications which SRMG is the holding company of the largest vertically integrated publishing business in the makes it the largest vertically integrated Middle East and Gulf region whose publications are read by an estimated 180 million read- publishing company in the region ers worldwide. Al Sharq Al Awsat, the seminal pan-Arab daily based in London, is the group’s flagship masthead. The group has 15 publications in total, comprising of dailies, weeklies and monthlies in Arabic, English, Urdu and Malayalem. The company’s primary market is Saudi Arabia (KSA), though it created a number of regional partnerships in order to exploit the significant growth potential in the region. Most of the group’s assets are in Saudi Arabia, where it employed 2,779 people by end of 2005 (vs. 2,684 by end of 2004). In 2000, a major restructuring occurred, which resulted in the introduction of a number of new shareholders to the group. After the 2005 capital increases (in two phases) from SAR 600 mn to SAR 800 mn, SRMG offered 24 million shares or 30% of its total shares for public subscription in an Initial Public Offering (IPO) that started on 8 April 2006 and closed on 17 April 2006. The price issue of SAR 46/share included a premium of SAR 36 as the Capital Market Authority (CMA) recently decided to split the nominal share value of all companies listed on TADAWUL (Saudi Stock Market) from SAR 50 to SAR 10/share. It is also worth mentioning that the General Organization for Social Insurance and the Pen- sion Fund purchased National Commercial Bank’s (NCB) 11.2% stake just before the IPO. SRMG’s Ownership Structure Pre-IPO Other local investors 16.6% Pension Heirs of H.R.H. Fund Prince Ahmed Bin 5.6% Salman General 33.5% Organization for Social Insurance 5.6% H.R.H. Prince Faisal Bin Salman 6.1 % Mohammed Hisham Ali Haz Hussein Al 11.6% Amoudi 9.4% Mohammed Ali Haz 11.6% SRMG’s Ownership Structure Post-IPO Other local investors 11.6% Pension Fund 3.9% Free Float 30.0% General Organization for Social Insurance 3.9% H.R.H. Prince Faisal Bin Salman 4.3% Mohammed Hussein Al Amoudi 6.6% Mohammed Ali Haz 8.1% Heirs of H.R.H. Hisham Ali Prince Ahmed Bin Haz Salman 8.1% 23.5% Source: SRMG, SHUAA Capital The IPO was oversubscribed nearly four times, which was a much lower participation than in previous IPOs as the subscription mode was different. A single investor could purchase a maximum of 25,000 shares for SAR 1.15 mn. February 3 May 14th, 2006 rd, 2005 Saudi Research and Marketing Group Equities research Drastic improvement in operational In 2004 and 2005, SRMG focused on improving its operational performance and financial performances and financial reporting reporting with the aim of changing the previous family-business approach, and addressing occured in 2004 and 2005 habitual inefficiencies. Non-core business units were liquidated, the overall structure was simplified and a new management team was put in place. Moreover, cost control measures were implemented, and much of the non-editorial publishing and advertising staff were relocated from high-cost locations such as London to cheaper locations such as Beirut and Dubai. The group is now effectively organized into the following main business segments: • Publishing, which