Al Tayyar Travel Group

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© All rights reserved 40 60 80 100 120 140 4000 6000 8000 10000 12000 14000 8/6/14 9/6/14 10/6/14 11/6/14 12/6/14 1/6/15 2/6/15 3/6/15 4/6/15 5/6/15 6/6/15 7/6/15 8/6/15

TASI Al Tayyar Group

Source: Bloomberg

Price Performance

Recommendation Overweight

Current Price* (SAR) 74.3

New Target Price (SAR) 100.6 Upside / (Downside) 35.4%

Al Tayyar Travel Group Holding Company (Al Tayyar) offers travel and tourism services in Saudi Arabia, the UK, Egypt, Malaysia, Lebanon, Sudan, and the UAE. It provides air ticketing, travel & tours, cargo movement, and transportation services, among others. Headquartered in Riyadh, the company was established in 1980. It debuted on the Tadawul stock exchange in May 2012.

SARmn (unless specified) FY14 FY15E FY16E

Revenues 7,711.4 9,220.8 10,443.0 Gross Income 1,620.9 1,928.9 2,182.4 EBIT 1,146.9 1,351.2 1,529.6 Net Income 1,118.9 1,287.1 1,436.9 EPS 5.59 6.42 7.16

Source: Company reports, Aljazira Capital

SARmn (unless specified) FY14 FY15E FY16E

Gross Margin 21.0% 20.9% 20.9% Net Margin 14.5% 14.0% 13.8% P/E 12.0x 11.6x 10.4x

P/B 4.7 5.4 4.5

EV/EBITDA (x) 9.6x 12.0x 9.3x

Key Financials

Key Ratios

*prices as of 01st_{September 2015}

SARmn (unless specified)

Market Cap(mn) 14,600 Number of Shares (mn) 200

YTD% -18.2%

52-week % change -26.1% 52 week (High) SAR 114.0 52 week (Low) SAR 61.3

Key Sector Data

We initiate Al Tayyar with an “

Overweight

” recommendation and

a PT of SAR 100.6 reflecting our positive outlook for the company

and the sector. We view Al Tayyar as one of our favorite picks in

the market for capitalizing on the rising potential of religious

tourism in the kingdom

Government initiatives to boost tourism: Al Tayyar operates in KSA with over 400 offices and has offices overseas. The Saudi Arabian government has outlined vast expansion plans to boost the country’s tourism industry. Saudi Arabia’s travel & tourism sector is witnessing rapid growth due to expansion in tourism infrastructure, rise in per capita income, growth in young population, and increase in business travel. Additionally, ongoing expansion of the holy mosques at Makkah and Madinah is supporting growth in inbound tourism. Saudi travel and tourism market is estimated to stand at USD45.3bn by the end of 2015, majority of which (estimated at 60%) is from religious and domestic tourism. According to the Saudi Commission for Tourism and Antiquities (SCTA), inbound tourism arrivals and expenditure are estimated to grow 5.4% and 12.1% respectively, while domestic tourism trips and expenditure are estimated to grow 6.7% and 12.5% respectively. Development of King Abdulaziz International Airport, the expansion of the holy mosques at Makkah and Madinah, and the likely increase in the number of haj and umrah visas are expected to support further growth in the above figures.

Al Tayyar equipped to leverage on inbound tourism in the kingdom: Al Tayyar is equipped to integrate current and upcoming business lines within the company. Current and ongoing expansion in hospitality, most notably the recent acquisition of Kenzy Hotel in Makkah (759 rooms & suites), will enable Al Tayyar to have an integrated service offering for domestic and religious tourism. We view Al Tayyar as one of our favorite picks in the market for capitalizing on the rising potential of haj and umrah tourism in the kingdom as well as on the growth in Makkah. There were recent moves by the company to increase its footprint in haj and umrah tourism including agreements with international entities to organize haj and umrah trips. Al Tayyar recently announced (May 2015) the cancellation of an agreement with Naseel holdings for the rental of towers for religious tourism housing. Even though this might slow expansion efforts, it shows the direction taken by management towards expanding haj and umrah exposure.

Growth in hospitality portfolio to be the focal catalyst in unlocking growth potential and diversifying revenue streams: We believe the high contribution of travel and tourism as a percentage of revenue will gradually decline as the company grows inorganically through acquisitions. In addition to growth through acquisitions, smaller segments (Cargo, transportation, and other) are estimated to grow at a relatively faster pace than the company’s core business. Contribution from hospitality is expected to be the main catalyst in gradually changing total revenue mix. We expect a total of around 2000 rooms to be operational within the next two years, effectively integrating business lines through bundled service offerings and gradually decreasing dependence on corporate and government contracts in the travel and tourism segment. We expect the company to add a hospitality segment to revenue breakdown in the near future following the acquisition of Muthmerah real estate Investment Corporation (MREIC). FY-2016 earnings would start reflecting a clearer image of how hospitality will contribute to the company’s top line mix and margins as more hotels start operations.

Analyst Sultan Al Kadi +966 11 2256374

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Roughly 95% of Al Tayyar’s top line is generated from travel and tourism sales, 25% of gross revenues for the period are from a contract with the Ministry of Education: Air ticketing and travel and tours account for over 96% of Al Tayyar’s FY2014 total revenues, revenues from Cargo accounted for around 2% of total revenues, the remaining 1.2% was from transportation and others. FY1H-2015 recorded a similar breakdown of company revenues, where revenues from air ticketing travel & tours made 94.8% of total revenue while revenues from cargo contributed 1.8% and transportation and other accounted for 3.3% of Al Tayyar’s top line. Air ticketing and travel comprises a bit less than 95% of total gross revenues. The company disclosed that 25% of its gross revenue is generated from a contract with the Ministry of Education (down from 28% in FY2014) which stands at around SAR 249mn of gross revenue for the first half of FY2015; according to the company, the contract has been renewed to April 2017. We should note that as of FY2013, 69% of revenues were from the corporate and government segment, compared to 31% from retail. As of FY2014, Al Tayyar holds a 45% market share in the corporate and government segment of the market. Al Tayyar’s growth trend points to an eventual move towards a more diversified revenue mix, hospitality being the main driver for the move.

Inorganic expansion and acquisition strategy outcomes are significant variables in Al Tayyar’s long term growth path: Al Tayyar continues to expand through acquisitions, it currently has 38 consolidated subsidiaries. The company raised capital twice in less than two years, from SAR 1.2bn to SAR 2bn, an indication of continuous expansion efforts. So far, FY-2015 saw large acquisitions by the company, most notably the acquisitions of Kenzy hotel in Makkah for a sum of SAR 1.5bn on Feb - 2015. The deal is financed by a SAR 1.23bn 10 year loan with 20 semiannual payments, the rest is self-financed from company reserves. The hotel includes 759 rooms and suites on 24 floors. Al Tayyar plans on spending SAR 100mn on refurbishment before operating the hotel on 2H-2016. Al Tayyar is also a cofounder of the MOT (Ministry of Tourism) Saudi Heritage Hospitality Company, contributing SAR 50mn for a 20% stake in the hospitality company through a fully owned subsidiary. Another noteworthy effort was the investment in Careem (Tech transportation startup) where Al Tayyar paid SAR 16.9mn for 18.4% in equity. Short and long term bets on Makkah’s real estate and hospitality market through fully acquiring MREIC and the recent deal for 25% of Thakher Investment and Real Estate: By the end of FY2014, the company increased its stake in MREIC from 75% to 100%. We estimate that MREIC will add around 1500 hotel rooms to Al Tayyar’s hospitality portfolio by the end of FY2016 and beginning of FY2017, in addition to retail and office centers. We should note that MREIC contributed SAR 16mn to gross revenues during 1H-2015, and currently represent more than 10% of consolidated assets. Al Tayyar recently announced (Aug 2015) signing a conditional agreement for acquiring 25% of Thakher Investment and Real Estate Co. worth SAR 670mn through issuing 6.5 million new Al Tayyar shares in a share swap transaction. The agreement is conditional on restructuring land titles and regulatory as well as BOD approvals. Thakher has a large real estate project in Makkah, 322.8k sqm in size; the project hosts 95 hotels and hotel apartments, 8 residential building, and retail centers. According to management, phase-1 is expected to be operation in two to three years from FY-2015. Al Tayyar has effectively increased its strategic presence in Makkah’s real estate and hospitality market in a short period of time as well as securing a sizable long term investment through Thakher investments. We should note that Al Tayyar will have board representation for their newly acquired stake in the company. We have yet to incorporate al Tayar’s recent investment in Thakher in our estimates given the current tentative state of the deal. However, we view the deal as a positive long term wager on Makkah’s real estate and hospitality market.

Tourism Indicators Growth Outlook

Estimated Visits to Makkah 0 20 40 60 80 100 120 140 160 Domestic Trips

(mn) Expediture (bn) Domestic Inbound Arrivals (mn) Expenditure (bn) Inbound

2014 2015E 2020E 0 2 4 6 8 10 12 14

2014 2015E 2016E 2017E 2018E 2019E 2020E

Million visitors

CAGR: 3.3%

Source: SCTA, Aljazira Capital

Source: Colliers International, Aljazira Capital

Revenue Breakdown 1H-2015

CAGR By Segment 2012-2016E

94.8

1.9% 3.3%

Air Ticketing, Travel & Tours Cargo Transportation & Others 17.5% _15.0% 46.9% 0% 10% 20% 30% 40% 50%

Air Ticketing, Travel &

Tours Cargo

Transportation & Others Source: company data, Aljazira Capital

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Double Digit Growth in Revenues and Net Income

Al Tayyar Online Sales

0% 10% 20% 30% 40% 0 5000 10000 15000 2013 2014 2015E 2016E SAR (bn)

Revenue Net Proﬁt Net Proﬁt Growth %

11 16 22.4 0 5 10 15 20 25 2013 2014 2015E SAR (mn)

Source: Aljazira Capital, company data

Source: company data, Aljazira Capital

Robust 1H - 2015 performance, notable growth on all income lines: Al Tayyar’s revenue rose 20.4% YoY to SAR 4,539.4mn in 1H-2015 while net profit grew 5.8% YoY at SAR 681.1mn in 1H-2015 compared with SAR 643.6mn in 1H-2014. Revenues from air ticketing, travel and tours grew 17.3% YoY contributing the majority of top line growth figures. Revenues from cargo grew 12.2% YoY. The largest growing segment is transportation and other, registering a 557% growth YoY in 1H-2015, from SAR 27.1mn in 1H-2014 to SAR 151.1mn in 1H-2015. We believe that a little bit more than 10% of revenues from this segment are from hospitality activities relating to MREIC. Operating income for the period included an impairment loss of SAR 20mn, limiting growth from operating activities to 7.9% YoY for Q2-2015 and 10% for 1H-2015 YoY. Excluding impairment loss for the period puts growth from operating activities for the period at 13.16% and 13.12% YoY for Q2-2015 and 1H-2015 respectively. Net income for Q2-2015 grew 8.7% YoY and 5.8% for 1H-2015. Excluding impairment loss puts net income growth figures at 14.2% and 8.9% for Q2-2015 and 1H-2015 respectively.

Expanding margins imply operational advantage, the addition of hospitality will adjust margins on all income lines in the medium to long term: Al Tayyar’s operating margins rose from 14.0% in FY2009 to 15.2% in FY2014, signifying the company’s operational strength. 1H-2015 gross margins stood at 21.9%, a decline compared to 1H-2014 gross margins. The same applies for operating and net income margins. We expect margins to gradually improve FY2016 onwards. Travel and tourism margins are estimated to slightly decline in the long run given the increased competition in the retail segment of travel and tourism as well as the stronger online presence of global competitors. The company has a relatively weak but growing online contribution; we believe Al Tayyar should attempt to push more retail sales through its online portal in order to be able to compete in the long run for a more tech savvy retail consumer base. The company should be able to post significant growth in online income due mostly to a low base effect. On the other hand, Al Tayyar appears keen to hold on to and add corporate and government clients given the higher margins and long term commitments in the segment. The addition of hospitality will adjust margins on all income lines in the long term as hospitality starts to contribute a larger portion of the company’s top line.

Positive earnings outlook on the assumption of continuous growth of current trends: We estimate revenues and net income to grow 19.6% and 15% for FY2015 respectively following on FY2014’s robust 23.2% growth in revenues and 14.5% in net income. Net income is estimated to grow 13.9% CAGR by FY2017. We expect broadly stable DPS for FY2015 and FY2016, a solid cash position as well as healthy cash flows will place the Al Tayyar as a stable long term dividend paying investment.

We initiate Al Tayyar with an “Overweight” recommendation and a PT of SAR 100.6 per share reflecting our positive outlook for the company and the sector: Al Tayyar trades at a FY15E P/E of 11.6x and a forward FY2016 PE of 10.4x. We believe Al Tayyar is currently trading at a discount compared to sector and market multiples, average PE of the sector stands at around 21x. Al Tayyar’s attractive valuation is supported by low forward multiples, growth potential relative to its size as well as healthy cash flows and dividends outlook. Our valuation is based on a 10-year DCF methodology, a 2.7% terminal growth assumption and a 2 year weekly beta of 1.46. WACC is taken at 10.4%; we have arrived at a target price of SAR 100.6 per share indicating an upside potential of 35.4%.

Company/Entity Date Ownership _% Value _(SAR)

Hanouf Travel & Tourism 2014 70% 40.9mn Elegant Resort 2014 100% 88mn CTM 2014 100% 85nb MREIC 2014 from 75% _{to 100% 208.3mn} Careem 2014 18.40% 16.9mn Kenzy Hotel 2015 100% 1500mn Thakher Investment & RE 2015 25% 670mn

Source: company data, Aljazira capital

Hotel Number of Rooms

Muthmerah Umm Al Qurra 75 Masafi Hotel 196 Beer Balela 445 Sheab Quresh 510 New Jarwal 290

Total 1516

Source: company data, Aljazira Capital

Al Tayyar Recent Acquisitions

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Downside and Upside risks to valuation and assumptions: A main concern with Al Tayyar is its reliance on a single government contract that effectively contributes 25% of the company’s gross revenues. As a result, a key downside risk facing the company is the inability to renew or replace the current contract upon expiration mid-2017. Our current valuation assumes the company’s ability to either renew or replace the contract upon expiration. Tighter margins would potentially come to effect over time due to an increasingly globalized and competitive market as foreign online players establish a stronger footprint in the region and Al Tayyar starts to lose ground in the online part of the market. Al Tayyar’s ability to leverage its growth in hospitality at a greater pace and integration than expected as well as better than estimated hospitality performance are the key upside risks to our valuation.

We should note that Al Tayyar’s board of directors has accepted Nasser al Tayyar’s resignation as managing director and vice chairman. We do not expect the recent event to have any negative effects on overall company performance.

Valuation Metrics:

Our DCF based valuation methodology is based on 10-year explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions;

• Terminal growth rate is taken at 2.7%.

• 2-year weekly raw beta of 1.46 (Bloomberg).

• Risk free rate is taken at 3.3%.

• KSA total market risk premium is taken at 13.8% from Bloomberg. Hence, the equity risk premium is calculated at 10.5%.

• Capital Assets Pricing Model (CAPM) is used to calculate cost of equity at 18.7%.

• Cost of debt is taken at 3.4%.

• Weighted average cost of capital (WACC) is calculated at 10.4%.

Based on our DCF valuation, our 12month price target for Al-Tayyar Group stands at SAR 100.6/share, against current market price of SAR 74.3/share, we initiate our coverage on the company with an “Overweight” recommendation

Sensitivity Analysis

WACC G ro wth 8.4% 9.4% 10.4% 11.4% 12.4% 1.0% 102 95 90 87 83 2.0% 111 102 96 91 87 2.7% 119 108 100 95 90 3.0% 123 111 102 97 91 4.0% 141 123 112 104 97

Source: Aljazira capital

DPS & Dividend Yield Estimates

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

2013 2014E 2015E 2016E 2017E

DPS Div Yield %

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Balance Sheet (in SAR mn) 2012 2013 2014 2015F 2016F

Cash & Cash Equivalents 746.8 2,117.1 1,958.6 3,737.9 2,970.0

Accounts Receivable 974.1 583.2 855.4 1,099.5 1,338.7

Net Plant, Property & Equipment 578.2 757.3 1,318.3 1,699.9 3,064.0

Net intangible assets 146.6 139.4 300.2 302.0 304.7

Total Assets 3,249.6 5,474.3 6,201.1 8,557.7 9,878.9

Long Term Debt - - - 1,154.2 1,073.4

Accounts Payable 393.4 772.1 1,040.9 1,266.3 1,542.1

Total Liabilities 1,512.2 2,987.0 3,336.1 5,095.9 5,766.5

Total Stockholder's Equity and Non-controlling Interests 1,737.4 2,487.2 2,865.0 3,461.8 4,112.4

Income Statement (in SAR mn)

Revenue 5,389.9 6,260.3 7,711.4 9,220.8 10,443.0

EBITDA 836.1 1,064.9 1,234.4 1,428.5 1,646.9

Depreciation & Amortization (40.0) (44.8) (60.9) (87.0) (146.0)

Operating income 822.3 988.3 1,146.9 1,351.2 1,529.6

Net income before zakat and income tax 796.1 1,020.0 1,173.5 1,341.5 1,500.9

Net profit 755.4 977.2 1,118.9 1,287.1 1,436.1

EPS (SAR per share) 3.78 4.9 5.59 6.42 7.16

Cash Flow Statement (in SAR mn)

Net Income 755.4 977.2 1,118.9 1,287.1 1,436.1

Change in WC 251.2 1,116.8 (17.5) 62.2 279.5

Cash Flow from Operating Activities 1,214.7 2,157.1 1,163.1 1,428.8 1,871.1

Capex (164.7) (143.8) (376.3) (461.0) (1761.1)

Cash Flow from Investing Activities (472.5) (369.8) (734.6) (258.4) (2189.8)

Dividends (310.6) (443.0) (544.9) (700.0) (800.0)

Cash Flow from Financing Activiites (402.8) (417.1) (587.0) 608.9 (775.5)

Key Financial Ratios

Gross margin 21.3% 21.4% 21.0% 20.9% 20.9% EBITDA margin 15.5% 17.0% 16.0% 15.5% 15.8% EBIT margin 14.8% 16.3% 15.2% 14.5% 14.4% NP margin 14.0% 15.6% 14.5% 14.0% 13.8% ROE 51.5% 49.3% 41.5% 43.1% 37.4% ROA 27.5% 22.4% 19.2% 17.4% 15.6%

Source: Company Reports, Aljaizra Research

Financial Statements

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1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months.

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