Al Rajhi Capital, the investment banking subsidiary of Saudi Arabia’s Al Rajhi Bank, said it has initiated coverage of Herfy, the only listed fast food company on the Tadawul, with an Overweight rating.

Al Rajhi Capital issued an in depth research report on Herfy entitled 'It’s Getting Better', which highlights Herfy’s strong performance, future prospects and potential for share price appreciation.

The report also set a target price of SR89.6 for the stock, implying upside potential of 21.9 per cent from current levels. Herfy is trading on a 2010 EV/Ebitda multiple of 11.9x, a 2010 PE ratio of 15.2x, and offering a dividend yield of 4.4 per cent.

While no longer cheap, Herfy’s valuation is in line with that of international peers such as McDonalds and Burger King.

Al Rajhi Capital valued the stock using a combination of long-run discounted economic profit and comparative multiples analysis and its favourable view is based largely on factors which include: the company’s strong operational performance, good dividends, sound levels of transparency as well as future growth levels which are expected to be robust.

According to the report, Herfy should achieve top-line growth of 13 per cent and 14 per cent in 2010 and 2011, respectively. Growth is to be supported by a number of factors including the ongoing expansion of the fast food market.

Al Rajhi Capital’s research indicates that the young and rapidly growing population (50 per cent below 20) in Saudi Arabia is playing a vital role in stimulating the fast food market, which it estimates is currently worth SR6.3 billion.

Herfy is already the second largest player in the Saudi market, just behind McDonalds, and its growth strategy, which includes opening an additional 20 to 25 restaurants each year and planned production increases in its bakery and meats divisions, will ensure it holds its position as a market heavyweight. Moreover, the company is considering expanding its international business in the GCC and Mena regions through franchises. It now has 15 stores in Kuwait, Bahrain, the UAE and Egypt.

In addition to strong expected top line growth, the report also emphasises Herfy’s profitability. The company has a net margin of 22.2 per cent compared to 20.0 per cent and 7.9 per cent for McDonalds and Burger King respectively.

“Our report provides an in depth view into one of our preferred stocks in the agriculture and food sector. Herfy is performing well operationally and offers growth in the near term at a reasonable valuation. We believe Herfy’s handsome dividends coupled with strong levels of transparency will continue to support its share price going forward,” said Dr Saleh Al Suhaibani, head of Research at Al Rajhi Capital.-TradeArabia News Service