HERFY AB | Expensive in light of distant recovery; Cut to UW
Long way to full recovery. Suspending dine-in services for 11 weeks and closing 68 mall branches since 15 March weighed on 9M20 earnings (-78% y-o-y). While we look for a c2.3x y-o-y rebound in 2021e EPS, we only expect recovery to pre-crisis levels by 2023e, pressured by the step-up in costs. Spending rationalisation also positions Herfy in a tight spot, forcing it to offer more promotions, especially with the narrowing price gap compared to peers (vs. the cheapest previously). That said, we downgrade our rating to Underweight from Neutral, and cut our 12M TP by 7% to SAR45.5/share. Valuation is stretched, as Herfy trades on a 2021e P/E of 22.6x, well above its historical forward multiple of c14x, while our valuation implies 19.9x.
Nationwide delivery range comes at a cost. Delivery sales (c10% of 2019 top line) were gaining momentum before the COVID-19 pandemic, supported by Herfy’s nationwide presence, serving it well during the crisis. The company is focusing on growing delivery sales (in-house managed or aggregator platforms), while slowing its branch expansion (we assume eight p.a. over 2021-25e vs. 2020 target of 12-15), targeting untapped areas via smaller formats. Growing these services should sustain yield recovery, but come at the expense of margins (drivers and call centre costs for own or double-digit commissions for aggregators, eating up 14% of EBITDA). Launching a “dark kitchen” concept should be more positive, in our view.
New launches support yield recovery, albeit below average. Expanding meal offerings, particularly via introducing a breakfast menu (planned in 2021e), as well as growing delivery reach (+2x mobile app-linked branches to 200 in 2020), should support the 23% y-o-y recovery in 2021e yields from 2020e disrupted operations (-25% y-o-y). However, yields should remain below historical average, on sustained promotions and/or tapping low-yielding cities (and smaller formats) vs. Riyadh (and standalones) previously. Launch of Doka Bakery House (three branches, over 2018-19) should revive bakery segment (6.5% p.a.), along new capacity additions.
Weak margin trajectory. EBTIDA margin should normalise at a new lower level of c28% over 2021-25e (vs. 31.3% in 2019 and 2020e low of 25.4%). We attribute this to the step up in restaurants’ costs (recent hike in custom duties and expat fees), as well as rising contribution of low-margin delivery, especially as Herfy does not enjoy sufficient cost passing ability. Upsides can stem from a better sales mix, cost savings, commission negotiations on higher order volumes, and menu price hikes.
Herfy Food Services Co SJSC (HFS) is a Saudi Arabia-based public shareholding company that is engaged in the food industry. The Company owns and operates a chain of fast-food restaurants, sweets and chocolate shops, bakery outlets, three bakery factories, and a meat processing plant. The Company's operations are structured into four business segments: the operation of restaurants and provision of supply services; production and sale of meat products; production and sale of Shaboura products, and production and sale of bread. HFS, through its restaurants and outlets, provides varied foods menus under the brand name Herfy, including 19 combo meals as well as 30 individual items such as hamburgers, chicken, seafood, soft drinks and different side orders. Furthermore, the Company sells various products produced by its factories to the local and regional consumers under the brand name Herfy Foods, including maamoul breads and cooked frozen chicken tenders, among others.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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