• Global values ACICO at KD0.940/share and recommends a BUY on the stock
Global Investment House – Kuwait – ACICO Industries Company – Investment Update -Company’s operating income for the year 2007 declined by 22% to KD42.6mn as against KD54.4mn in 2006. The drop was a direct result of 97% decline in the housing development income and an increase of 57% in the adjustments of inter-company transactions. During the year the company’s aerated concrete business remained flat and was able to earn KD13.2mn. Net profit of the company for the period ending 2007 recorded an increase of KD22.1mn from KD13.3mn in 2006. This translated into an earning per share of 114Fils as against 69Fils in 2006. With higher contribution from the other income portion, company’s net margins also increased from 23.2% to 51.7%.
The company has re-modeled its business structure and it has resulted in following segments: ACICO Industrial, ACICO Real Estate, ACICO Hotels, ACICO Cement, ACICO Construction and GAK ACICO.
The value of ACICO’s shares derived from the weighted average of the DCF and relative valuation methods is KD0.940 per share. The stock closed at KD0.770 on the Kuwait Stock Exchange at the end of trading on 6th July, 2008. The value of the stock has a potential upside of 22.0% from its current price level. At current price, ACICO’s shares are trading at a P/E multiple of 5.0x and 4.3x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the stock.
Financial Performance
Company’s operating income for the year 2007 declined by 22% to KD42.6mn as against KD54.4mn in 2006. The drop was a direct result of 97% decline in the housing development income and an increase of 57% in the adjustments of inter-company transactions. During the year the company’s aerated concrete business remained flat and was able to earn KD13.2mn. Going forward, company has changed its paradigm from housing development to more of a contracting business, which would be complemented by new businesses such as: ACICO Hotels, ACICO Real Estate, ACICO Investments and ACICO contracting business in Dubai.
Operating cost of the company also declined in unison to the revenue and ended down by 19% at KD35.5mn in 2007, last year being KD43.7mn. 97% decline in the housing development and 47% increase in the adjustment of intercompany transaction reduced the cost.
Company’s gross margins for the year declined by 3% to 16.8%, while same in the last year stood at 19.7%. Decline in the margins resulted because of decline in the margins of the contracting business from 13% to 10% in 2007. Contracting business was the major revenue earner for the company in the year 2007.
General and administrative expenses of the company for the year rose by 107% to KD4.7mn as against KD2.2mn in the same period last year. Increase in the expenses was a result of increase in the staff cost from KD0.7mn to KD1.3mn along with KD1.2mn for the pre-opening of hotel expenses. On the other hand selling expenses which only account for the business of aerated concrete, rose by 28% to KD0.8mn from KD0.6mn in the previous year. Increase in selling expenses can be attributed to ever rising fuel costs.
Group share of results from associates also contributed more than KD1mn to the profits. That profit was result of contribution from the company associates in Saudi Arabia, Qatar and Kuwait. Aerated concrete industries company in Saudi Arabia witnessed a loss of KD0.10mn while the Aerated Concrete industries company in Qatar witnessed a gain of KD0.05mn. The major contributor was the Al-Masaken International for Real Estate Development was KD1.09mn.
The total assets of the company increased by 72% to KD187.5mn at the end of 2007. Current assets rose by 88% at the end of the year to KD55.9mn. The major reason for the increase in current asset can be attributed to increase in cash balances and receivables of the company. Inventories of the company increased by 40% to KD3.5mn. Net fixed assets on the other hand rose by 35% to KD19.5mn. Increase in plant and equipment can be attributed to the up-gradation of the block and cement factory of the company in 2007.
Net profit of the company for the period ending 2007 recorded an increase of KD22.1mn from KD13.3mn in 2006. This translated into an earning per share of 108Fils as against 65Fils in 2006. With higher contribution from the non-core income portion, company’s net margins also increased from 23.2% to 51.7%.
