Saudi Research and Marketing Group

Transcription

(4210.SE)
Equity Research
May 14th, 2006
Sector Coverage Team
Marc Hammoud
+9714 3199 753
mhammoud@shuaacapital.com
Current Price:
SAR 46*
Fair value Target: SAR 60.2
Recommendation: BUY
Initial Coverage
Country:
Sector:
Exchange:
Saudi Arabia
Media
Saudi Stock Market (TADAWUL)
• 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.
• 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 multiplebased 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
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
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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 multiplebased 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
Equities research
Company overview
SRMG boasts 15 publications which
makes it the largest vertically integrated
publishing company in the region
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. 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 Pension 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
Fund
5.6%
Heirs of H.R.H.
Prince Ahmed Bin
Salman
33.5%
General
Organization for
Social Insurance
5.6%
H.R.H. Prince
Faisal Bin Salman
6.1 %
Mohammed
Hussein Al
Amoudi
9.4%
Hisham Ali Hafiz
11.6%
Mohammed
Ali Hafiz
11.6%
SRMG’s Ownership Structure Post-IPO
Other local
investors
11.6%
Pension Fund
3.9%
General Organization
for Social Insurance
3.9%
Free Float
30.0%
H.R.H. Prince Faisal
Bin Salman
4.3%
Mohammed Hussein
Al Amoudi
6.6%
Mohammed
Ali Hafiz
8.1%
Hisham Ali
Hafiz
8.1%
Heirs of H.R.H.
Prince Ahmed Bin
Salman
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.
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Drastic improvement in operational
performances and financial reporting
occured in 2004 and 2005
In 2004 and 2005, SRMG focused on improving its operational performance and financial
reporting with the aim of changing the previous family-business approach, and addressing
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 incorporates the group’s local and international publishing
works, research and marketing.
• Distribution, which comprises of local and international distribution of newspapers, magazines, phone cards and books, for the group and for third party customers.
• Media sales and advertising, which undertakes the sale of advertising spaces in
the group’s publications as well as in third party print media.
• Printing, which consists in printing works for the group but also for third party
customers.
SAUDI RESEARCH AND MARKETING GROUP
(SRMG)
90%
90%
10%
Scientific Works Holding Company
10%
Intellectual Holding Company for
Advertisement and Publicity
50%
Al-Khaleejiah
(KHA)
Saudi Distribution
Company
(SDC)
Kuwait Group for
Publishing & Distribution (50%) Kuwaiti
50%
Saudi Research and
Publishing Company
(SRPC)
Arab Media
Company Ltd.
(AMC)
IPM Ltd. (100%)
Guernsey
Asharq Al -Awsat
Ltd. (100%) UK
Moutamarat (49%)
UAE
Specialized Publishing
(under formation)
(100%)
KSA
Emirates Printing,
Publishing & Distr.
Co. (90%) UAE
Arab Net Technology
(100%) Guernsey
Media Investments
Ltd. (100%)
Guernsey
Specialized Publishing
(under formation)
(100%)
UAE
Al Madina Printing &
Publication Company
(MPPC)
Saudi Commercial
Company
(SCC)
Hala Printing
Press
(100%)
Sayidaty Products
Ltd. (100%)
Guernsey
H.H. Saudi Res earch
& Marketing (UK)
Ltd. (100%) UK
Satellite Graphics
Ltd. (100%)
UK
Al Majallah Magazine
Ltd. (Dormant)
(100%) UK
Sayidaty Ltd.
(Dormant) (100%)
UK
Moroccan Printing and
Publishing Co.
(100%) Morocco
History
The first company of the group, Al Madina Printing & Publication Company (MPPC), was
established in Jeddah in 1963. The latter originally only printed government material (educational).
In 1972, it moved into the publishing business and established the Saudi Research & Publishing Company (SRPC). SRPC launched the first English daily in the Kingdom, Arab News,
in 1975. It then launched more publications and acquired pan-Arab daily, Al Sharq Al Awsat,
in the 80’s.
The Saudi Distribution Company (SDC) was created in 1983 to distribute SRPC and third
party’s publications.
Then came Al-Khaleejiah in 1990, which was created to move into the media sales and
advertising business. Al-Khaleejiah originally acquired advertising exclusive rights of TV stations and SRPC’s publications.
May 14th, 2006
Equities research
The following chart traces the key dates of the group’s history:
Al Madina Printing
and Publishing Co.
(MPPC)
established in
Jeddah
SRPC
launches Arab
News, the
Kindgom’s
first English
daily
Creation of Al Khaleejiah
Advertising and
Public Relations
Company
SRMG pays
its first
dividend to
shareholders
SRMG becomes a
joint-stock company
1963
1972
1975 1978
Creation of
the Saudi
Research and
Publishing Co.
(SRPC)
Launch
of Al
Sharq Al
Awsat
1984
1989
Saudi Distribution
Company (SDC) is
established
2000
2004
New
shareholders are
introduced, while
founders’ share
is diminished
Main divisions
Saudi Research & Publishing Co. (SRPC)
SRPC is the group’s publication unit; its principal subsidiary. The company is headquartered
in Riyadh, with branch offices in all major Arab cities, such as Cairo, Beirut, and Dubai, as well
as London.
With 15 publications, SRPC claims 46.1%
of the Saudi newspapers and magazines
market and is the leader in each of the
main product segments: newspapers,
weekly and monthly magazines
Since the launch of its first paper in 1975, SRPC has launched products nearly every two
years. It now boasts 15 publications, consisting of dailies, weeklies and monthly newspapers
and magazines; printed in Arabic, English, Urdu and Malayalam. According to the company,
seven million people around the world read these publications, which are distributed
through 30,000 outlets and use 2.5 billion pages of paper annually.
SRPC is the largest single publisher in Saudi Arabia, with an aggregate market share of
46.1% in 2005. The company’s publications lead the market in each of the main product
segments: newspapers, weekly and monthly magazines, with 2005 market shares of 47.8%,
19.1%, and 36.7% respectively.
SRMG publications' share of sales and
subscriptions in Saudi Arabia
70.0%
60.0%
Market share
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2003
Daily New spapers
Monthly Magazines
Year
2004
2005
Weekly Magazines
Aggregate share of print media market
Source: SRMG, IPSOS Stat, SHUAA Capital
The drop in the aggregate market share from 57.2% in 2004 to 46.1% in 2005 was primarily due to the fact that the group was in the process of re-designing and re-launching a
number of major publications, which usually has a temporary impact on customer brand
recognition. Rationalisation of the group’s portfolio is now finalized, and the management
has put in place an aggressive corporate marketing campaign in an attempt to solidify
market share.
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SRPC is therefore well positioned vis-à-vis its peers on three fronts: size, scope, and reach.
Size: no other publisher in the Kingdom comes near in terms of size. The second largest
publishing house publishes only 3 newspapers and magazines. Scope: the diversity of SRPC’s products means that it should have a product in most hands. Reach: publications such
as Al Sharq Al Awsat are distributed and sold throughout the Arab world and beyond.
SRPC’s main publications are listed below:
Type
Dailies
Name
Monthlies
Quarterly
Target
Launch
Circulation
English
Social, political, Sports
English speakers in KSA/ Gulf
1975
56,000
Al Sharq Al Awsat
Arabic
Politics, economy, current events
Educated Arabs
1978
236,988
Arriyadiyah
Arabic
Sports and arts
Youths of KSA and Gulf
1987
116,124
Al Eqtisadiah
Arabic
Business, economy
Decision makers in KSA / Gulf
1992
81,000
Urdu
General
Urdu speakers in KSA / Gulf
1994
- Malayalem
General
Malayalam speakers in KSA / Gulf
1994
- Al Majalla
Arabic
Politics, economy, business
Saudis & Arabs in KSA/ Gulf
1980
88,950 Sayidati
Arabic
Arab Family affairs
All members of family
1981
137,215 Basim
Malayalem News
Bi-monthly
Topic
Arab News
Urdu News
Weeklies
Language
Arabic
Educational
Young generation
1987
- Urdu Magazine
Urdu
Artistic & General
Urdu speakers in KSA/ Gulf
1999
- Qadaiya Alamiya
Arabic
Politics
Educated Arabs
2004
-
Arrajol
Arabic
Cars, elegance, lifestyle
Elite men, life of the rich & famous
1992
- Hia
Arabic
Beauty & Fashion
Women throughout the Arab world
1992
43,424
Al Jameelah
Arabic
Beauty & Fashion
1994
- Azya’ Sayidati
Arabic
Beauty & Fashion
1996
-
Source: Middle East Media Guide 2006, ABC, SHUAA Capital
Al Sharq Al Awsat is SRPC main masthead
with a claimed circulation of 236,988
SRPC’s main masthead, Al Sharq Al Awsat, is based in London and is published by a fullyowned subsidiary. We have added a more detailed profile of this publication further down
in this report due to its flagship status in the group, and its substantial brand value in the
region.
The only competitor for Arab News is the Saudi Gazette. The Riyadh-based English daily
was founded in 1976 by the Okaz Organization for Press and Publication group specifically
to inform the increasing number of English-speaking readers in Saudi Arabia. The Saudi
Gazette boasts a circulation ranging from 14,400 to 60,000 depending on the source. As
explained in more details further down in this report, the significant difference in circulation
numbers released by independent sources and publishers highlights the difficulty of assessing the true circulation of most publications in the Arab world.
One year after the Gulf edition of Al-Eqtisadiah, SRPC launched in April 06 the Gulf edition
of Arab News by printing the paper in the UAE. The Gulf edition aims at helping the English
daily to establish its presence in Gulf markets in line with the group’s strategy to expand
to other markets in the region. The reason that prompted SRPC to publish the Gulf edition
from the UAE is because it wanted to establish strong contacts with large international
companies based in the country. According to the company, it should encourage Western publishers to print and publish their newspapers locally and consumer companies to
advertise in it in order to target Gulf markets and especially Saudi Arabia, the largest market
in the region.
Al Eqtisadiah (Business – Economy) and Arriyadiyah (Sport and Arts) are the only dailies
of their kinds in the Kingdom. SRPC plans to print Arriyadiah in Germany beginning June
1, 2006 to provide good coverage to the Saudi team’s participation in the World Cup. The
paper will be distributed in all German cities that host World Cup matches.
Al Majalla has no local competition, but competes directly with some well-known panArab weeklies such as Al Hawadeth (Lebanon), Al Majaless (Kuwait), Al Watan Al Arabi
(Egypt), Al Yaqza (Kuwait), and Sabah Al Khair (Egypt), all of which claim circulation above
100,000.
May 14th, 2006
Equities research
SRPC has also made inroads in targeting the Urdu and Malayalem communities in the Gulf.
Most of the labor in KSA and the Gulf originate from Pakistan or southern India, so this, in
our view, makes sense, particularly as it may open the door to targeted advertising from
these countries into the Gulf markets.
15 new specialised publications are
expected to be released in 2006
Al Sharq Al Awsat, which covers panArab affairs was launched in 1978
Going forward, further subsidiaries will be created such as Saudi Specialized Publishing
Company (SSPC), a ‘special publications’ division that will cater to specialized magazines.
SSPC, which is still under formation, plans to launch 15 new publications in 2006 across
most magazine-segments. This should develop further synergies within the group and
increase targeted advertising revenues from print media.
Al Sharq Al Awsat
This paper is the leading international Arabic daily. It is published in London and printed
simultaneously in 12 cities on four continents. Launched in 1978, it is one of four dailies that
offer comprehensive coverage of pan-Arab affairs (Al Hayat, Al Quds Al Arabi and Al Jazirah
being the other three). It is distinctive for its style and content, and its journalists are well
known and respected. In-depth analysis and exclusive interviews are a trademark of the paper. The target audience is executives and decision-makers, though the newspaper is very
popular among all income levels.
Al Sharq Al Awsat also owns the Arabic copyrights for The Washington Post and USA Today.
SRMG’s flagship newspaper compares favorably with its peers, outranking them in available
circulation figures and in clout. Al Sharq Al Awsat competes with mainly 6 Arabic dailies for
the Saudi market.
Newspaper
Date of
foundation
Owner
Based
Claimed
Circulation
Independent Source
Circulation
Al Sharq Al Awsat
1978
SRMG
London
236,988
235,000
Al Hayat
1946
Prince Khalid bin Sultan bin Abdul Aziz Al-Saud
London
-
166,650
Al Jazirah
1972
Al-Jazirah Press
110,000
2000
Assir Establishment for Press and Publishing
150,000
-
Okaz
1960
Okaz Organization for Press and Publication
Riyadh
Abha, western
Saudi Arabia
Jeddah
155,000
Al Watan
-
110,000
Al Riyadh
1964
Al-Yamama Press Establishment
Riyadh
-
150,000
Al Yaum
1965
Al-Yaum Organization for Printing and Publishing
Dammam
85,000
-
Source: Middle East Media Guide 2006, ABC, BBC News, SHUAA Capital
Al Sharq Al Awsat outranks
competition in terms of circulation
and carries a high “brand equity”
MPPC prints the group’s publications
and enjoys contracts with third parties
In addition to its higher circulation figures compared with its peers (last independent
audit was in Jan-June 2004), Al Sharq Al Awsat carries, in our opinion, a high ‘brand equity’.
Any valuation of this newspaper should reflect a goodwill value considerably superior to
its monetary value: influence is currency of its own, be it political, economic or social. For
example, the Financial Times, the Wall Street Journal, The Washington Post and the New
York Times have enormous influence on the opinions and decisions of their audiences, on
government and institutions. This influence cannot be quantified in monetary terms, but
is undeniable. The same is true for Al Sharq Al Awsat: this is a newspaper that influences its
readers and has the authority and clout to spur debate and change opinions.
Al Madina Printing & Publishing Co (MPPC)
MPPC is the oldest company of the group. It has now interests and operates six printing
presses in Riyadh (2), Jeddah, Dammam, Dhahban, and London. In addition to printing all
the group’s publications, MPPC enjoys lucrative government contracts to print schooling
and educational material.
MPPC has lately accelerated its growth pace as the group acquired interests in three printing presses, two in KSA and one in UAE. In June 2005, SRMG teamed up with Emirates Media
and the Arab Media and Press Foundation (AMPF), to establish United Printing Company in
the UAE. This new company is still under formation.
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MPPC now operates 6 printing
presses after having acquired
interests in 3 new entities lately
In November of the same year, SRMG signed an agreement with the Madina Chamber of
Commerce to set up a new printing press in the city. The new venture will be majorityowned by SRMG (51%), who will also manage it. This company is also under formation.
Finally, SRMG announced in January of this year the acquisition of Hala printing press, one
of the largest and most advanced in Riyadh, for SAR 125 mn, for the purpose of production
of specialized publications.
On a strategic level, all these ventures and acquisitions will strengthen the group’s position
in printing, placing it well ahead of any potential competitors. SRMG’s strategy to increase
printing capability will allow the publishing unit to further diversify its product-base and
launch new publications without compromising quality and timing. It will also allow the
group to attract foreign partners seeking to print locally.
On an operational level, these acquisitions should enable greater synergies with other business units and economies of scale in the longer term.
Al-Khaleejiah is the exclusive media
and advertising agent for the group
but also for third party publications
Al-Khaleejiah (KHA)
In addition of being the group’s media sales and advertising arm, Al-Khaleejiah is also the
exclusive media agent for third party publications. Headquartered in Jeddah, with branches
in Riyadh, Dhahran, London, Paris, Dubai and Beirut, it has a global network of representatives in Japan, Pakistan and the USA.
Al-Khaleejiah discontinued its
contract with two major TV stations
in 2005 as part of its strategy to
focus on more lucrative business
Al-Khaleejiah’s scope of works has been revised recently as part of the group’s larger restructuring exercise. The rights of major TV stations acquired during the 90s have now been
divested. The company decided to focus on print media advertising as it has proven to be
more lucrative.
Al-Khaleejiah business model is to get exclusive advertising rights in both local and foreign
publications, which it then sells to third-parties (either corporate clients or other agencies).
As we expect the number of consumer magazines and hence the advertising business to
keep increasing, it should ensure the company steady revenue streams. This subsidiary is
likely to remain an important component of the group’s activity going forward, but will
most likely continue to derive most of its revenue from its association with SRPC.
It is worth mentioning that advertising revenues in Saudi Arabia are highly fragmented
between print media.
SRMG publications' share of advertising spending
on print media in Saudi Arabia
35.0%
30.0%
Market share
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2003
Daily Newspapers
Monthly Magazines
2004
Year
2005
Weekly Magazines
Average of total print media market
Source: SRMG, IPSOS Stat, SHUAA Capital
With 20.3% market share of
advertising spending on print media,
KHA is the largest single recipient in
KSA highly fragmented market
May 14th, 2006
In 2005, SRMG publications captured an average of 20.3% market share of advertising
spending on print media in the Kingdom (from 17.1% and 19.5% in 2003 and 2004 respectively). Given the highly fragmented competition, it positions SRMG as the largest single
recipient in the Kingdom in terms of advertising revenues. This dominant position is also
partly the result of being the largest publisher in Saudi and in the region.
Equities research
In more details, SRMG leads the market in both, newspapers and weekly magazines advertising, capturing 23.0% and 28.1% of the market in 2005 respectively. The growth was principally driven by Asharq Al Awsat and Al Eqtisadiah, which have been re-designed between
2003 and 2005.
The following table illustrates the market share of leading daily newspapers’ advertising
revenues in Saudi Arabia for the past three financial years:
Market Share
Newspaper
2003
2004
2005
SRMG newspapers
19%
22%
23%
Al Riyadh
23%
20%
17%
Okaz
18%
16%
15%
Al Jazirah
11%
10%
8%
Al Watan
8%
9%
7%
Al Yaum
7%
6%
6%
Al Madina
6%
5%
4%
Al Hayat
4%
4%
1%
Others (9 newspapers)
5%
9%
20%
100%
100%
100%
Total
Source: IPSOS Stat, SHUAA Capital
Unlike other newspapers in KSA, SRMG newspapers’ market share in the newspaper advertising business has grown from the second place with 19% in 2003 to the first position with
23% in 2005. SRMG’s continuous market share growth took place in an increasingly fragmented market with regular launch of new publications.
SDC distributes SRPC and third
party publications through its
distribution network in KSA and
subsidiaries in the UAE and Kuwait
Saudi Distribution Co. (SDC)
SDC is among the largest regional distribution companies, both in reach and capability, and
represents the fourth and final leg of SRMG’s business lines. With presently 700 vehicles (685
in 2005 and 590 in 2003) that cover 70,000 kms daily and 22 branches in the Kingdom, SDC
is responsible for distributing SRPC and third party’s publications. The company distributes
about 1.5 million copies and more than 800 titles in Saudi Arabia alone through 15,000
outlets in various parts of the country.
The company also has two subsidiaries, Emirates Printing Publishing and Distribution (EPPD)
and Kuwait Group for Publishing and Distribution (KGPD), which represent its distribution
arms in the UAE and Kuwait, respectively. Outside KSA, the UAE and Kuwait, the group subcontracts distribution to other agencies.
Local distribution is on a hand-to-hand and subscription basis. Leaflets and brochures targeting specific audiences are also handled by SDC.
SRMG’s strategy going forward
Third party business across the
printing, distribution and advertising
units should be the core driver
of growth going forward
The group’s strategy is to continue increasing synergies between its four main business
units as well as managing its costs and expenses efficiently.
The publishing unit will continue to represent the main business anchor of the group, while
opportunities to leverage its capabilities and established network will be perused further.
Third party business across the printing, distribution and advertising units will be the core
driver of growth going forward. The company will also most likely emerge as the largest
regional consolidator in the printing and publishing services arena. This will have a positive
impact on the company’s margins and profitability due to the inherent economies of scale
in such business lines, as well as stronger placement power and portfolio variety in advertising. The risk lies in publishers’ possible reluctance to give up control over these services, and
the possible perception of conflicts of interest.
The strategy can be summarized as following:
• Continuing the cost-control and in-house vitalization of operations.
• Introduction of new drivers to leverage existing infrastructure.
• Focus on third-party business for printing, direct advertising and distribution.
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Sector Overview
Political, economical and social positive
trends make the Middle East in general
and KSA in particular an attractive
market for publishers and advertisers
While European and American publishers are in retrenchment mode, things are just beginning to get interesting in the Middle East. Freer access to information through satellite TV
and Internet has accustomed audiences to diversified sources and opinions. Economic
liberalization has created an upward social mobility that has benefited a generally better
educated population base. Newspapers are not only more daring than they once were, they
are also more numerous, and represent more diverse opinions.
Country
Population
(mn)
Median Age
Literacy rate
1990 (%)
Literacy rate
2003 (%)
Algeria
32.5
24.6
52.9
70.0
Bahrain
0.7
29.1
82.1
89.1
Egypt
77.6
23.6
47.1
57.7
Iraq
26.1
19.4
-
40.4
Jordan
5.8
22.6
81.5
91.3
Kuwait
2.3
25.8
76.7
83.5
Lebanon
3.8
27.3
80.3
87.4
Libya
5.8
22.6
68.1
82.6
Morocco
32.7
23.6
38.7
51.7
Palestine
3.7
-
-
-
Oman
2.9
19.1
54.7
75.8
Qatar
0.6
31.5
77.0
89.0
Saudi Arabia
25.7
21.2
66.2
78.8
Syria
18.4
20.3
64.8
78.0
Tunisia
10.1
27.2
59.1
74.3
2.6
27.9
71.0
77.9
20.7
16.5
32.7
50.2
UAE
Yemen
Source: UNDP, UNICEF, CIA World Factbook, SHUAA Capital
The three main challenges for the
industry in the region are freedom of the
press, accurate independent circulation
figures and competition from Internet
Political factors are inextricably linked to the industry. Freedom of the press has increased
notably throughout the region, and calls for reform have spurred a debate that has benefited the press. This has also been the case in other parts of the world. South Korea, for
example, witnessed a huge surge in magazines and newspapers in the late 80’s following
political liberalization.
The Middle East has been more or less at the center of the world attention since 2001. Arabs
are increasingly participating in global debates, and after decades of silence, are eager to
do so. These factors have contributed to the creation of pan-Arab networks of information
that have changed the publishing industry by placing new demands on it, and by raising
standards. This has also created new opportunities for publishers, who have accessed the
market of the Arab Diaspora.
Although in principle there is no legal restriction on freedom of expression in Saudi Arabia,
self-censorship is common. However, newspapers have recently reported on previously
taboo subjects such as political, economic and educational reform, women’s rights, corruption, and religion.
Change has also been a matter of economics: on the back of rising oil prices, the region has
boomed economically, translating into more business on local, regional and international
levels. As a result, publishers re-addressed layouts to suit more choosy audiences and capture a share of the increased advertising activity.
Another big challenge facing the industry today is accurate data-collection. Publishers are
currently under no obligation to submit to independent audits. Circulation figures are thus
hard to verify.
May 14th, 2006
11
Equities research
Furthermore, companies wishing to advertise cannot accurately plan media spending, as
they have only limited information about their target audiences. To remedy the situation,
the GCC Advertisers Association and the UAE Chapter of the International Advertising
Association have established the Circulation Audit Steering Organization (CASTOR). Audits
have been, until recently (April 2006), carried out by foreign bodies such as the Audit
Bureau of Circulation (ABC) of UK. However, the London-based company has announced
that it will no longer offer direct auditing services to the regional publishing industry citing inadequate resources.
ABC UK has been strategically reviewing it presence in the Middle East for a number of
months. It had a total of 13 titles in membership. With the call from advertisers for all
titles to be audited, ABC had to invest significantly more funds in the Middle East in order
to satisfy this growing demand and help educate the market. This would have meant
establishing a local office and the provision of locally based, experienced audit staff. As a
not-for-profit organization, it decided to cease offering print audit services.
Moreover, the CASTOR has set its own auditing standards after having sent them to ABC
with an application for certification. Hence, BPA Worldwide is now the only international
auditor operating in the region.
It is worth mentioning that SRMG has decided to discontinue its use of independent
circulation auditors for the time being.
As SRMG’s mains markets are KSA, UAE and Kuwait, we have decided to focus on these.
Saudi Arabia
Key factors pertaining to the publishing and advertising industry display positive trends in
the Kingdom. Demographic and economic aspects in particular combine to create good
market conditions for regional and foreign advertisers: the average disposable income
has increased by 2.1% for 04/05, and is set to gain momentum in 05/06 as exhibited in the
table below; population is also expected to grow fast to reach nearly 30 million by 2009.
Crucially, the percentage of under 15’s is expected to remain around the 40% mark. This is
significant for the advertising industry in particular, as young populations allow for greater
marketing innovation and brand-loyalty potential down the line. We therefore expect
advertising to become increasingly present in the lives of young Saudis in the future, with
print media grabbing a substantial share of this market.
2004
2005
2006
2007
2008
2009
Population (mn)
24.9
25.7
26.5
27.3
28.1
28.9
GDP (USD bn at PPP)
279
303
322
339
357
375
GDP per head (USD at PPP)
11,200
11,780
12,166
12,446
12,714
12,983
Personal disposable income (USD mn)
86,728
88,544
90,903
92,201
94,603
97,369
75
79
83
86
89
93
3,020
3,080
3,140
3,150
3,180
3,220
Household consumption (USD bn)
Household consumption per head (USD)
Source: EIU, SHUAA Capital
The past few years have also witnessed a notable change in the conditions of women in
the Kingdom. And the authorities have let on that more will follow. Women are already
key end-recipients of targeted advertising, and women’s magazines have done extremely
well in terms of circulation (the highest circulation of the entire MENA region belongs to a
women’s magazine). In part, this is due to the prevailing social conditions. Since these are
gradually evolving, however, we would expect publishers and advertisers to diversify their
products to reflect this trend. As women already account for more than half of all university graduates in the Kingdom, we also expect that they will amount for an ever-increasing
share of print-consumption.
Though local publishers have been so
far limited, the Saudi market is overall
shared by around 130 publications
rd, 2005
The Kingdom has eight publishers, five of which publish only one or two mastheads.
There are eight Arabic dailies, one Arabic business daily, two Arabic sports dailies, and two
English dailies. Overall, the Saudi media scene supports around 130 publications.
All newspapers are privately owned. As newspapers have to be established by royal decree, the Ministry of Information is responsible for the approval - or dismissal - of editors.
12
Equities research
Saudis prefer to get their newspapers from the local newsstands every day, whereas companies tend to buy subscriptions. Latest surveys suggest however that there may have
been a drop in readership figures for Saudi papers in general.
At the same time the number of Internet users in Saudi Arabia has surged, thus enabling
increased online access.
Saudi Arabia was granted full WTO membership in October 2005; a watershed event for
the country. For businesses both inside and outside of the Kingdom, this is very good
news: compliance to WTO rules has had an impact on the legal framework, translating to greater access to the Saudi market for foreign companies and greater access to
foreign markets for Saudi companies. Coupled with the oil-fuelled boom and favorable
demographic (as mentioned above), we believe that a lot more advertising / marketing,
especially from the private sector, should target the Saudi market.
Breakdown of Advertising Expenditures in KSA by Sector as at September 2005 (USD mn)
Sector
2004
2005
Share %
Change 05/04 %
Government
52.8
153.5
22.7
190.9
Insurance & Real Estate
45.4
76.7
11.4
69.0
Professional Services
40.2
52.6
7.8
30.7
Shopping Malls & Retail Stores
38.9
46.2
6.8
18.7
Vehicles, Accessories & Supply
38.0
45.4
6.7
19.3
Financial Services
28.7
40.8
6.0
42.5
Food Beverages And Tobacco
39.3
39.2
5.8
-.2
Publishing Media
27.9
34.3
5.1
23.0
Communications & Public Utilities
15.1
34.2
5.1
127.3
Toiletries Hygiene / House Care Products
31.4
30.6
4.5
-2.6
Hotel, Travel & Tourism
28.4
26.3
3.9
-7.3
Business / Construction Equip. & Supply
19.0
25.9
3.8
36.6
Clothing, Jewelry & Personal Accessories
22.0
20.8
3.1
-5.4
Other Services
18.0
19.4
2.9
7.9
Entertainment
14.8
16.7
2.5
12.6
Household Appliances
13.2
12.9
1.9
-2.2
Total
473
676
100
43
Source: Pan Arab Research Center, SHUAA Capital
The biggest share of advertising
expenditures in KSA comes from the
government and overall advertising
expenditures are channeled for
78% through newspapers ads
As evidenced in the above table, the Saudi government and other governmental bodies
represented by far the biggest share of advertising expenditure as at September 2005.
Advertising expenditures are channeled through different media support with newspapers being the preferred support. As at September 2005, daily newspapers have attracted
78% of total advertising expenditures (vs. 72% as at 31 December 2004).
Media split %
TV
NP
MG
RD
Government
Sector
6
92
1
1
OD
1
Insurance & Real Estate
2
93
1
1
3
1
Professional Services
2
92
5
1
Shopping Malls & Retail Stores
1
82
6
3
8
Vehicles, Accessories & Supply
9
75
8
2
6
Financial Services
12
79
5
2
3
Food Beverages And Tobacco
34
26
6
4
30
Publishing Media
1
83
10
4
2
Communications & Public Utilities
9
72
4
2
13
25
23
33
1
17
Hotel, Travel & Tourism
Toiletries Hygiene / House Care Products
3
71
9
3
15
Business / Construction Equip. & Supply
2
85
6
-
7
Clothing, Jewelry & Personal Accessories
-
60
27
4
10
Other Services
0
91
5
2
2
Entertainment
19
67
4
6
4
Household Appliances
6
79
9
4
2
Total
8
78
6
2
6
TV: Television, NP: Newspaper, MG: Magazine, RD: Radio, OD: Outdoor advertising
Source: Pan Arab Research Center, SHUAA Capital
May 14th, 2006
13
Equities research
As mentioned earlier in this report, SRMG leads the daily newspapers market with 47.8%
market share in 2005 and as a result should benefit from its dominant position to continue
to capture the largest share of newspapers advertising.
In addition to supportive demographic, economic and social trends, Saudi Arabia was in
2004 at the low end of the range in terms of ‘per capita advertising expenditures’ compared to other markets.
Country
KSA
2004 Population
(mn)
2004 Total Advertising
Expenditures (USD)
2004 Per Capita Advertising
Expenditures (USD)
24.9
473,000,000
19.0
7.8
201,214,587
25.8
Poland
38.19
1,306,735,000
34.2
Greece
11.04
1,001,707,000
90.7
France
59.9
15,412,510,000
257.3
Bulgaria
Source: European Association of Communications Agencies, SHUAA Capital
Additionally, the Saudi market is still quite open for Arabic translations of foreign publications. The number of translated international magazines is therefore sure to increase, and
foreign publishers will be courting local publishers for partnerships. Integrated companies
with printing and distribution facilities such as SRMG are likely to benefit.
Overall, the Saudi market is relatively fragmented, which could lead to a possible consolidation in the medium term.
The UAE emerged to be a regional
hub for the publishing, printing
and advertising industries
UAE
With the full weight of the government’s considerable financial resources, the UAE has
emerged as the regional hub for the publishing, printing, and advertising industries. The
government owns several satellites, publishers, radio stations, and is known to be business-savvy.
The creation of Dubai Media City (DMC) in 2001 was a master stroke, attracting all major
international media companies. The number of partners in DMC rose 20% from 880 in
2004 to approximately 1,077 in 2005 and still many companies are on the waiting list
to enter or to expand. There are currently eight media segments in the DMC, of which
marketing, broadcasting and publishing enjoyed the greatest growth. That has created a
flurry of opportunities for third-party business, and has pulled in considerable advertising
revenues. Dubai also hosts a number of international trade shows, such as the Middle East
Publishing Conference or the International Advertising Association World Congress which
reflects the growing importance of the sector in the country.
Advertising spending in the UAE
in 2005 reached almost USD 1 bn
according to industry sources.
65% were channeled through
print media and 15% through
newspapers and magazines
According to the Chairman of the International Federation of the Periodical Press (FIPP),
almost USD 1 bn was spent on advertising in the UAE in 2005, in comparison to just under
USD 700 mn in 2004. The automotive, banking, telecommunications and real estate sectors benefited the most from this significant growth.
More precisely, advertising spending in the UAE’s print media rose by 70.4% to reach
USD 588 mn in 2005, compared to USD 345 mn the previous year, according to Pan Arab
Research Centre. This is about 65% of the total advertisement spending. Newspapers and
print magazines received USD 136 mn or 15% of the total advertisement spending closely
followed by the electronic media.
Among the top advertisers, Dubai-based companies dominate the advertisement spending, while other emirates lag behind. Mobile handset maker Nokia and real estate major
Emaar Properties jointly top the list with nearly USD 8 mn in annual advertisement spending, followed by Dubai’s retail promotions Dubai Shopping Festival (DSF) and Damas
Group which spend about USD 6.7 mn and USD 5.8 mn annually respectively.
The UAE has about 400 advertising agencies, but 90% of the business is controlled by top
20 companies that include the world’s leading names.
rd, 2005
14
Equities research
There are already about 500 printers in the UAE. Recent studies estimate that the printing
industry in the UAE is worth anywhere between AED 8 bn and AED 10 bn annually and is
growing by 15-20% a year, prompting many printers to plan expansion. This is due to new
local and foreign publications being printed locally and in Arabic. It is estimated that about
USD 1.7 trillion worth of business will be generated in the printing and publishing sector in
the Middle East by 2008.
Kuwait presents more freedom of
press but the market potential for
the publishing industry is limited
Kuwait
Kuwait’s press is one of the freest in the region, receiving high marks in international standards. The government drafted a bill in 2004 to remove censorship and prevent summary
closures of publications; a step that other GCC countries would do well to emulate.
The country has 7 Arabic dailies that enjoy wide readership and support. The country is
certainly wealthy enough to support its local publishing industry, but scale is an issue. There
are currently 5 publishers in Kuwait, most of which are family-owned businesses publishing
only one masthead.
MENA region
The wider MENA market has enormous potential for the publishing industry. A Middle East
Publishing Award was launched last year, and a Middle East Media Guide the year before.
According to the 2006 edition of the same guide, more than 70 newspapers, 14 television
channels, 9 radio stations and several newspapers, were launched in the Middle East in 2005
alone.
The current population of the MENA region is about 300 million. But with one of the fastest
population growth rates in the world, forecasters estimate that the population is set to
double by 2050.
Also to be considered are the low median age and increasing literacy rates throughout
the region: a young and increasingly sophisticated audience, better educated than their
parents, can only increase the density of print media in the region.
In potentially large markets such as Egypt and Algeria, the government is in near complete
control of the publishing industry, but these markets can be accessed through distribution
partnerships. This is already happening to some extent, but the exact numbers and circulation are hard to come by.
On the advertising market front, advertising expenditures in the Gulf grew by 15% in 2005
to exceed USD 4.5 bn and are expected to keep increasing at the same pace in 2006 to
reach USD 5 bn. The lion’s share of these expenditures went to the print media and satellite
television channels which dominate the markets in the Gulf.
We believe that the region could present good prospect in the longer term.
May 14th, 2006
15
Equities research
Analysis and Forecasts
We have decided to conduct our financial analysis on the consolidated financial statements as SRMG represents an integrated business with a significant component (historically around 43%) of revenues being generated through inter-companies sales.
Slower growth in 2005 revenues
due to increased competition in
print media and rise of internet
SRMG’s consolidated revenues grew 12.0% in 2005, increasing from SAR 949.4 mn to SAR
1,063 mn. The company’s revenues are generated from four main activities: sales and subscriptions of publications, advertising and media sales, printing, and distribution.
The slower growth in total consolidated revenues can be attributed to increased competition in print media (resulting in a lower growth in circulation numbers and advertising
revenues). It can also partly be attributed to the rise of Internet, which is changing the way
people are provided with information.
The table below provides with a breakdown of the consolidated revenues by activity for
the past three financial years.
SAR mn
2003
2004
2005
Advertising (net of discounts)
363.6
480.4
517.9
-
32.1%
7.8%
% of Total
46.6%
50.6%
48.7%
Sales & Subscriptions
390.5
421.9
440.0
-
8.0%
4.3%
50.1%
44.4%
41.4%
Growth
Growth
% of Total
Third Party Printing
14.0
33.4
90.6
-
138.6%
171.3%
% of Total
1.8%
3.5%
8.5%
Others
11.9
13.7
14.5
Growth
-
15.1%
5.8%
Growth
% of Total
Total
Growth
1.5%
1.4%
1.4%
780.0
949.4
1,063.0
-
21.7%
12.0%
Third party printing revenues’ contribution in the consolidated revenues rose from 3.5%
in 2004 to 8.5% in 2005 on the back of higher revenues from commercial and schoolbook
printing.
Advertising revenues
Advertising revenues from print media
gained momentum in 2005 as SRMG
managed to grab a biggest market
share of advertising spending on daily
newspapers and monthly magazines
Advertising revenues are primarily derived from the sale of advertising spaces in the
group and in third party publications. It is worth mentioning that exclusivity rights in nonprint media were discontinued end of 2004.
The table below provides with a breakdown of advertising revenues for the past three
financial years.
SAR mn
2003
Print Media (net of discounts)
269.2
365.1
517.0
-
35.6%
41.6%
% of Total
74.0%
76.0%
99.8%
TV Media
93.8
115.2
0
-
22.8%
-100.0%
25.8%
24.0%
0.0%
Growth
Growth
% of Total
Other Advertising Services
Total
Growth
2004
2005
0.6
0.1
0.9
363.6
480.4
517.9
-
32.1%
7.8%
rd, 2005
16
Equities research
Total advertising revenues rose 7.8% in 2005 to reach SAR 517.9 mn mainly on the back
of strong growth (+41.6%) in advertising revenues from print media. The latter increased
substantially for two major reasons: First, advertising spending on print media in Saudi
Arabia is on the upward trend, and second, SRMG publications’ market share of adverting
spending on print media continued to increase in 2005.
The surge in advertising revenues from print media more than counterbalanced SRMG’s
decision to discontinue its media sales contracts with two TV stations which generated
revenues of SAR 115.2 mn in 2004. We believe that this strategic decision is legitimate as a
recent report released by the Arab Advisors Group reveals that TV advertising rates in the
Arab region have dropped considerably since 2004.
We believe that much of the future activity will remain centered around the core markets
of KSA and the Gulf, but Al-Khaleejiah could be the group’s most significant asset to penetrate neighboring markets such as Iran, Pakistan and India.
Sales and subscriptions revenues
As the number of publications
continued to increase in 2005, sales
and subscriptions of SRPC publications
exhibited a negative performance which
was more than offset by the growing
third party distribution business
Sales and subscriptions revenues include revenues derived from the sales and subscriptions of SRPC print publications but also third party distribution revenues generated by
SDC.
The table below provides with a breakdown of sales and subscriptions revenues for the
past three financial years.
S AR mn
2003
SRPC Publications
237.0
233.1
219.5
-
-1.6%
-5.8%
% of Total
60.7%
55.3%
49.9%
Third Party Distribution
153.5
188.8
220.5
Growth
Growth
2004
2005
-
23.0%
16.8%
% of Total
39.3%
44.7%
50.1%
Total
390.5
421.9
440.0
-
8.0%
4.3%
Growth
The 5.8% decline in SRPC publications revenues can be attributed to its 11.1% loss of market share in Saudi Arabia (please refer to the section where we present SRPC activity).
On the other hand, third party distribution services have been developed through SDC
(50.1% of total revenues in 2005, up from 39.3% in 2003) as part of the company’s strategy
to grab more third party business. All things considered, total revenues increased by 4.3%
to SAR 440 mn.
Printing Revenues
The table below provides with a breakdown of printing revenues for the past three financial years.
SAR mn
Third Party Printing
Growth
Total
2003
2004
14.0
33.4
2005
90.6
-
138.6%
171.3%
14.0
33.4
90.6
Printing revenues growth accelerated
in 2005 as a result of the booming
publishing industry in the region
May 14th, 2006
Printing revenues are mainly generated from printing services to third party customers, including the Ministry of Education (printing of schoolbooks) and key commercial customers (printing of brochures, flyers, magazines, and others).
17
Equities research
Profitability
2005 profitability improved
drastically as a result of the
restructuring undertaken by the
group over the past 2 years
In 2005, we could finally see the results of the restructuring undertaken by the company
over the past two years. The non profitable businesses were closed and the exceptional
expenses incurred by the group’s restructuring dropped drastically. Hence, SRMG’s profitability improved considerably with a leap in the gross profit margin from 28.1% in 2004 to
37.5% in 2005, in EBITDA margin from 13.1% to 22.1% and in net profit margin from 4.6%
to 17.1%.
Q1 2006
First press releases reported that SRMG’s Q1 06 net profit grew by 120% to reach SAR 61.1
mn while revenues increased by 15%.
Forecasts
We expect sales and subscriptions revenues to continue growing but at a slower pace as
we believe that SRMG’s publications circulation (newspapers and magazines) should level
off due to increased competition and overall downward trend in newspapers readership.
SRMG should, for instance, face competition from new media support like Internet as penetration rates in the Gulf are expected to grow drastically in the coming years on the back
of higher PC penetration and substantial investments by telecom operators in broadband
network (ADSL).
We believe that specialized magazines - where targeted advertising is easier to push – and
distribution of third party products will increasingly drive sales and subscriptions revenues. Indeed, as explained earlier in this report, the number of publications (newspapers
and magazines) should continue rising and as SRMG possesses one of the largest regional
distribution networks, other publishers should use it to disseminate their products.
Though we expect a higher number of publications (newspapers and magazines) and
hence increased competition going forward, we believe that advertising revenues growth
should gain momentum in the short to medium term for two major reasons. First, we expect the 15 new specialized publications that should be released this year to impact positively the company’s advertising revenues from 2007 onwards. Second, liberalization of
the fast growing GCC economies - implying greater financial openness to the rest of the
world and acceleration in privatization - should be translated into a significant increase
in the advertising business in the short to medium term. As SRMG is the largest publisher
in the region (around 50% market share in KSA, the largest economy in the region) the
company’s revenues generated through advertising should follow suit.
Printing revenues should continue to grow steadily as we expect third party printing
to swell with the regular launch of new newspapers and magazines. Moreover, SRMG’s
acquisition of interests in three printing presses - two in Saudi Arabia and one in the UAE
- added substantially on MPPC printing capacity and thus should boost revenues going
forward.
rd, 2005
18
Equities research
SAR mn
2004
2005
2006E
2007E
2008E
2009E
Advertising (net of discounts)
480.4
517.9
539.7
578.5
621.9
666.0
Growth
32.1%
7.8%
4.2%
7.2%
7.5%
7.1%
% of Total
50.6%
48.7%
43.2%
39.5%
36.9%
34.9%
Sales & Subscriptions
421.9
440.0
454.52
468.6
482.7
497.1
8.0%
4.3%
3.3%
3.1%
3.0%
3.0%
% of Total
44.4%
41.4%
36.4%
32.0%
28.6%
26.0%
Printing
33.4
90.6
239.5
400.8
561.6
726.7
138.6%
171.3%
164.3%
67.4%
40.1%
29.4%
3.5%
8.5%
19.2%
27.4%
33.3%
38.0%
Growth
Growth
% of Total
Others
13.7
14.5
15.6
17.0
18.6
20.2
Growth
15.1%
5.8%
7.5%
9.0%
9.5%
8.5%
% of Total
1.4%
1.4%
1.2%
1.2%
1.1%
1.1%
Total
949.4
1063.0
1249.2
1465.0
1684.8
1910.1
Growth
21.7%
12.0%
17.5%
17.3%
15.0%
13.4%
Source: SHUAA Capital
In terms of profitability, we believe that the current management will continue to manage
costs aggressively resulting in better margins at all levels. Moreover, we expect stronger
synergies between the group’s business segments, which should also have a positive
impact on margins.
May 14th, 2006
19
Equities research
Valuation
As pointed out in our analysis and forecasts section, we consider SRMG as an integrated
business and therefore we have performed both the DCF and the comparative valuation on
the entire group.
DCF Valuation
We arrived at an estimated equity value for SRMG group of SAR 5.19 bn or SAR 64.9/share
based on a Discounted Cash Flow (DCF) exercise.
Key assumptions used in our DCF valuation:
• Risk free rate: we assumed a risk free rate of 5.42% derived from the yield on Saudi
Treasury bonds maturing in 2013.
• Market risk premium: we assumed a market risk premium of 5% which we apply
across the board on all MENA equity markets.
• We assumed an industry beta of 0.71.
• Based on the above assumptions a cost of equity of 9.0% was arrived at.
• The group’s cost of debt stands at 6.0% as per the group latest debt.
• A Weighted Average Cost of Capital (WACC) of 8.8% was calculated based on a
debt to equity weight of 6.4%.
• A terminal growth rate of 3% taking into account the eventual slowdown of the
growth pace in the publishing industry.
Our DCF valuation is based on a 4-year consolidated cash flow forecast (2006 - 2009) as
we estimate it is a reasonable forecast period considering the numerous changes that the
media sector in the region is going through.
Multiple-based valuation
Our comparative valuation is based on a compilation of price-to-earnings ratios (P/E) of
global peer companies which focus on the same core business lines than SRMG; publishing,
printing, media sales & advertising and distribution. We have estimated that SRMG does not
have comparable companies in the region. We have selected the P/E ratio as we believe it
best captures the value generated by publishers such as SRMG serving the region.
Firm
Hurriyet - Turkey
Pearson - UK
Daily Mail & General Trust - UK
SCMP group - Hong Kong
Edipresse - Switzerland
Average
Market cap (USD ‘000) as at 14MAY06
P/E 06
1,504,000
17.2
11,408,630
19.0
5,021,600
15.8
599,020
16.9
544,450
15.7
3,815,540
16.9
By applying the forward P/E average of 16.9x, we arrived at an estimated equity value of
SAR 4.25 bn or SAR 53.1/share.
rd, 2005
20
Equities research
SAR bn
Valuation Range
6.00
5.00
4.00
3.00
2.00
1.00
0.00
5.19
4.25
DCF Valuation
Comparative Valuation
Because the multiple-based valuation does not capture the growth potential of SRMG,
which is certainly higher than its global peers, we chose to apply a 60% weighting to our
DCF valuation and 40% to our comparative valuation, which resulted in a price target of
SAR 60.2, implying a 31% upside potential.
At SAR 46 the stock trades at a price to 2006E earnings of 14.6x, which is the lowest ratio
compared to the peers group.
May 14th, 2006
21
Equities research
Financials
Consolidated Balance Sheet (SAR ‘000)
Year to December
2004
2005
2006E
2007E
2008E
2009E
Cash and cash equivalents
155,308
117,273
87,852
174,092
279,480
424,614
Accounts receivable and prepayments
293,001
333,091
388,495
455,588
523,944
594,018
53,840
119,184
105,455
123,667
142,222
161,244
502,149
569,548
581,802
753,347
945,646
1,179,875
Assets
Inventories
Total Current Assets
Investments in unconsolidated subsidiary
1,713
-
-
-
-
-
Investments in available for sale securities
3,338
4,104
4,720
5,428
6,242
7,178
Property, plant and equipment
433,500
466,773
601,517
604,362
598,101
585,539
Intangible assets
359,524
357,143
381,096
360,049
339,002
317,955
Total Non-Current Assets
798,075
828,020
987,332
969,839
943,344
910,672
1,300,224
1,397,568
1,569,134
1,723,186
1,888,991
2,090,548
Short term loans and bank overdrafts
130,955
51,560
80,000
85,000
85,000
85,000
Accounts payable and accruals
Total Assets
Liabilities
186,752
197,809
239,100
280,393
322,463
365,589
Deferred revenue
11,833
13,403
16,240
19,044
21,902
24,831
Current portions of term loans
45,679
11,758
-
-
-
-
Dividends payable
Other liabilities
Deferred profit
Total Current Liabilities
5,000
-
-
-
-
-
-
18,800
17,666
8,411
-
-
-
22,091
22,091
9,560
-
-
380,219
315,421
375,097
402,408
429,364
475,420
Term Loans
27,826
-
-
-
-
-
Customers’ deposits
24,050
25,167
26,174
27,090
27,902
28,740
Long term payables
3,517
3,959
4,997
5,860
6,739
7,640
77,847
63,804
70,184
77,203
84,923
93,415
Other liabilities
-
28,200
8,411
-
-
-
Deferred profit
-
31,651
9,560
-
-
-
Total Non-Current Liabilities
133,240
152,781
119,326
110,152
119,565
129,795
Total Liabilities
513,459
468,202
494,423
512,561
548,929
605,216
-5,233
3,837
3,717
3,867
4,367
5,267
600,000
800,000
800,000
800,000
800,000
800,000
80,777
86,827
111,965
143,058
177,697
216,362
Employees’ terminal benefits
Minority interest
Share capital
Statutory reserve
Contractual reserve
7,126
9,072
21,641
37,188
54,507
73,839
General reserve
90,780
-
-
-
-
-
Unrealised gains
1,195
2,448
3,500
4,300
4500
4700
Foreign currency translation adjustments
5,266
-1,891
-
-
-
-
Retained earnings
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
6,854
29,073
133,888
222,212
298,990
385,165
791,998
925,529
1,070,995
1,206,758
1,335,695
1,480,066
1,300,224
1,397,568
1,569,134
1,723,186
1,888,991
2,090,548
rd, 2005
22
Equities research
Consolidated Income Statement (SAR ‘000)
Year to December
Revenue
2004
2005
2006E
2007E
2008E
2009E
949,382
1,062,969
1,249,215
1,464,956
1,684,757
1,910,080
Direct costs
679,592
663,910
772,015
900,948
1,037,810
1,182,340
Gross Profit
269,790
399,059
477,200
564,008
646,947
727,741
Share in results of an un-consolidated subsidiary co.
-1,366
-679
-
-
-
-
Marketing and selling expenses
11,108
20,826
27,483
27,834
32,010
38,202
105,928
116,065
133,666
153,820
175,215
196,738
15,931
16,342
18,738
21,974
25,271
28,651
General and administration expenses
Head office expenses
Professional and consulting fees
EBITDA
Depreciation
Amortisation of intangible assets
11,007
14,916
11,000
11,000
11,000
11,000
124,450
230,231
286,313
349,379
403,450
453,150
24,613
20,685
36,172
39,565
42,461
45,061
2,381
2,381
2,381
2,381
2,381
0
Operating Profit (EBIT)
97,456
207,165
247,760
307,433
358,608
408,088
Financial charges
11,665
11,587
6,091
7,013
7,225
7,225
-
466
-
-
-
-
Other income
13,771
12,516
34,583
36,741
26,408
19,101
Other expenses
4,483
5,343
6,500
7,500
8,000
8,500
Income from investments in available for sale securities
Non recurring expenses
29,228
3,793
4,997
4,395
5,054
5,730
Pre-tax profit
65,851
199,424
264,755
325,266
364,736
405,734
Loss from discontinued operations, net
11,782
6,708
0
0
0
0
Minority Interests
-1,982
-634
600
2,100
3,800
5,100
Zakat & Income Tax
5,513
10,647
12,492
13,185
16,848
17,191
46,574
181,435
252,863
314,181
351,689
393,643
Net income for the year
Consolidated Free Cash Flow (SAR ‘000)
Year to December
EBITDA
Taxes
Change in working capital
Capex
2006E
2007E
2008E
2009E
286,313
349,379
403,450
453,150
-12,492
-13,185
-16,848
-17,191
-384
-44,013
-44,841
-45,968
-171,016
-42,411
-36,200
-32,500
Minority Interests
-880
-1,150
-1,500
-1,900
Free Cash Flow
101,541
248,621
304,062
355,591
May 14th, 2006
23
Equities research
Key ratios
Year to December
2004
2005
2006E
2007E
2008E
2009E
CAGR
Revenues
21.7%
12.0%
17.5%
17.3%
15.0%
13.4%
15.0%
EBITDA
80.5%
85.0%
24.4%
22.0%
15.5%
12.3%
29.5%
332.8%
289.6%
38.6%
23.7%
11.4%
11.6%
52.7%
Equity
-
16.9%
15.7%
12.7%
10.7%
10.8%
13.3%
Assets
-
7.5%
12.3%
9.8%
9.6%
10.7%
10.0%
10.7
19.9
47.0
49.8
55.8
62.7
Debt / Equity (x)
0.3
0.1
0.1
0.1
0.1
0.1
Debt / Market Cap (x)
0.1
0.0
0.0
0.0
0.0
0.0
Gross margin
28.4%
37.5%
38.2%
38.5%
38.4%
38.1%
EBITDA margin
13.1%
21.7%
22.9%
23.8%
23.9%
23.7%
Profit margin
4.9%
17.1%
20.1%
21.2%
20.6%
20.2%
-
21.1%
25.2%
27.3%
27.2%
27.5%
13.5%
16.9%
18.9%
19.2%
19.4%
80,000
80,000
80,000
80,000
80,000
80,000
EPS (SAR)
0.6
2.3
3.1
3.9
4.3
4.8
DPS (SAR)
0.4
0.5
1.4
2.2
2.7
3.0
Growth
Net profit
Leverage
Interest coverage (x)
Margins & profitability
RoAE
RoAA
-
Valuation
Number of shares (‘000)
BVPS (SAR)
9.9
11.6
13.4
15.1
16.7
18.5
Share Price (SAR)
46.0
46.0
46.0
46.0
46.0
46.0
P/E
79.0
20.3
14.6
11.8
10.6
9.5
4.6
4.0
3.4
3.0
2.8
2.5
EV / EBITDA
30.3
16.0
12.9
10.6
9.2
8.2
Dividend yield
0.8%
1.1%
3.0%
4.8%
5.9%
6.6%
P/BV (x)
rd, 2005
24
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Equities research
Research
Head of Research
Heavy Industries and Utilities
Walid Shihabi
+9714 3199750
Mohamed El Nabarawy, CFA
+9714 3199756
Strategy and Economics
Munir Shahin
+9714 3199754
wshihabi@shuaacapital.com
Walid Shihabi
+9714 3199750
wshihabi@shuaacapital.com
Ranya Afifi
+9714 3199752
rafifi@shuaacapital.com
Ryan Ayache
+9714 3199751
rayache@shuaacapital.com
Commercial Banks and other
Financial Services
Mohamed El Nabarawy, CFA
+9714 3199756
melnabarawy@shuaacapital.com
Munir Shahin
+9714 3199754
mshahin@shuaacapital.com
Real Estate, Construction and
Construction Materials
Mohammad Kamal
+9714 3199745
mkamal@shuaacapital.com
Ahmad Shahin
+9714 3199742
melnabarawy@shuaacapital.com
mshahin@shuaacapital.com
Telecommunications, Media and
Technology
Marc Hammoud
+9714 3199753
mhammoud@shuaacapital.com
Transportation and Logistics
Kareem Murad
+9714 3199757
kmurad@shuaacapital.com
Pharmaceuticals, Retail and
Consumer Products
Mohamad Hawa
+9714 3199762
mhawa@shuaacapital.com
Data
Ahmad Shahin
+9714 3199742
ashahin@shuaacapital.com
Layout & Design
ashahin@shuaacapital.com
Jovan Ruseski
+9714 3199759
Regional Sales
Portfolio Advisory Services
Khalaf Al Khalaf
+9714 3199775
Oubada Duwaji
+9714 3199700
Mohamad Bleik
+9714 3199773
Prime Brokerage
kalkhalaf@shuaacapital.com
jruseski@shuaacapital.com
oduwaji@shuaacapital.com
mbleik@shuaacapital.com
Fozan Al Mofleh
Phiras Soubra
+9714 3199728
falmofleh@shuaacapital.com
+9714 3199747
psoubra@shuaacapital.com
May 14th, 2006
27
This document has been issued by SHUAA Capital for informational purposes only. This document is not and should not be
construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment or subscribe to any investment
management or advisory service. This document is not intended as investment advice as to the value of any securities or as to the
advisability of investing in, purchasing, or selling any security. SHUAA Capital has based this document on information obtained
from sources it believes to be reliable. It makes no guarantee, representation or warranty as to its accuracy or completeness and
accepts no responsibility or liability in respect thereof or for any reliance placed by any person on such information. All opinions
expressed herein are subject to change without notice. This document may not be reproduced or circulated without the prior written consent of SHUAA Capital psc.

Saudi Research and Marketing Group

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