Abstract
This case makes an attempt to carry out financial analysis of the performance of Kuwait Food Company with a view to understand if it would be worth investing in it. The case is developed from the perspective of Mohd Hussain, a small investor in Kuwait, who had already lost heavily in speculative investment. Being from a commerce background, he decided to apply his learning from a finance masters class. As he started to explore the company, he was puzzled with the financials of the company. Although Americana’s share prices had increased, the company’s finances were not so impressive. The sales of the company had been increasing in the last three quarters, but the net profit had gone down over the previous few years from KWD 54 million in the year 2011 to KWD 50 million in the year 2012. Even the margins were squeezed for the recent three quarters in 2013. With this information, Hussain knew that several answers were needed before making the investment choices. Was the growth of Americana’s share prices a speculative mania, or did it actually represent value? What were the issues with Americana’s profitability? How was the overall financial health of the business?
Introduction
Riding high on the tide of speculative investment in the stock market and then falling flat, Mohd Hussain, a small investor in Kuwait, lost half of his hard-earned money. 1 Hussain had been working in a private sector bank for the past 5 years. He had a Masters in Business Administration degree from a reputed university in Kuwait. From the very college days, Hussain was interested in stock market and had dreamt of making good money through the buying of shares. Perhaps the desire of making quick money was the main motivator that led him to the stock market investments. He never believed in keeping the money in the banks but his risk-taking nature and eagerness to multiply his savings made him invest all his savings in the stock market, but unfortunately he lost all his savings. Learning a painful lesson that buying shares is like buying a piece of the business and that one needs to understand the business before investing in it, he decided to quit speculation and make a careful investment decision the next time. On 15 November 2013, while reviewing the trend of rising share prices of Kuwait Food Company (Americana), which showed an increase of ~35.5 per cent over the previous year, from KWD (One Kuwaiti Dinar is equal to 3.54 US dollars as on 12 January 2014) 1,860 to KWD 2,520 by the end of 2013 (see Figure 1), he immediately thought the share price would rise further. The temptation to buy the shares started building up, but having already burnt his fingers in the stock market and having been severely bitten by the speculation, he dared not invest without looking into the company’s financial performance and its fundamentals. Hussain knew that it would not be so simple to dig deep down into Americana’s performance. Having gathered financial information, he decided to cut across the speculative beliefs and resort to the fundamentals that gravitate to the share prices.
About Kuwait Food Company (Americana)
Once he decided to get into the fundamentals of the company, Hussain started collecting the information about the company. Americana, one of the Middle East’s largest and most successful corporations, which had pioneered the fast-food franchise business in the Middle East and North Africa (MENA) region, had food processing as its core business although it had diversified its activities and entered the business of franchising in 1970. Incorporated in 1963, the company had been listed on the Kuwait Stock Exchange.
Continuing with rapid expansion, the company marked its second phase of growth and development in 1996 by acquiring the franchising business for TGI Friday’s, Pizza Hut in Bahrain, the Greenland Group in Egypt, etc. The company employed more than 55,000 employees in over 13 countries (Kuwait Food Company [Americana], 2011) (see Figure 2).
Americana’s Business Segments
Food Service Operating Segment
As a dedicated investor, Hussain looked into the business segments of the company. Americana opened its first outlet as a franchisee in 1970, in the State of Kuwait, while bringing along the experience of a ‘dine-in restaurant’ in the Middle East, marking the start of a chain of international restaurants in the region. By late 2012, the company operated 1,366 franchised outlets in the Middle East as well as in Kazakhstan in Central Asia (Kuwait Food Company [Americana] S.A.K., 2012).
Nearly 56 per cent of the total revenue of Americana was produced by the food segment. The total sales of food segments have increased at a cumulative average growth rate (CAGR) of 12 per cent over the past 5 years, from KWD 302 million in 2008 to KWD 452 million in 2012. On the profitability front, the food service segment contributed 67 per cent towards the total profits before tax in 2012. The detailed information about this segment’s revenues and assets is given in Exhibit 1.
Food Manufacturing Operating Segment
The company went in for backward integration by starting its first factory in the year 1973 for processing meat and hamburger products for its restaurants. In 1977, the company entered the poultry market by establishing the Cairo Poultry Company in Egypt. By the end of 2012, the company had 25 food-processing facilities across the MENA region, which included agricultural companies for supplying agricultural produce to the factories and land reclamation companies. The food-manufacturing segment contributed nearly 44 per cent out of the total revenue of Americana in 2012. The revenue from this segment also rose at a CAGR of 11 per cent, from KWD 275 million in 2008 to KWD 414 million in 2012. On the profitability front, this segment contributed 33 per cent to the total profits before tax of the company in 2012, as compared to 43 per cent in 2008 (see Exhibit 1).
Geographical Segments
The detailed information regarding the company’s geographic locations, its revenue split between the regions and the associated revenues is given in Exhibit 1. True to its business strategy, the company expanded its horizons to many Gulf Cooperation Council (GCC) countries, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and other MENA region countries. Americana’s products were distributed in more than 25 countries around the world, including 17 Arab countries as well as the USA, Canada and some European countries. Its products held more than 41 per cent of the KSA market share, while it was more than 48 per cent in the Kuwaiti market, 18 per cent in the Bahrain market and 15 per cent in the UAE market (Kuwait Food Company [Americana] S.A.K., 2012), (Figure 3).
Economy and Industry Overview
After understanding the company’s business, Hussain started on the information he had gathered on the economy and the food industry. He was pretty impressed with the growth of the food industry in the Middle East. Looking into the drivers of growth for the food industry, he realized that the regional growth had been driven by population growth in the MENA region and the increasing per capita income. According to the International Monetary Fund (IMF), the future outlook for the MENA region was quite positive. Recovering from slower growth in 2008–2009, the GDP growth picked up in 2012 and was expected to further improve in 2013. Growth was supported by the restoration of Libya’s oil production and strong expansion. Non-oil GDP growth was supported by a low global interest rate environment and by large increases in government spending amid high oil prices. The MENA region’s real GDP annual growth was expected to increase from 3.1 per cent in 2013 to 3.7 per cent in 2014, with inflation reducing from 10.3 per cent in 2013 to 9.0 per cent in 2014, as per the IMF estimates, given in Exhibit 2. However, Middle East unrest and the political instability remained a cause of concern for the growth of these countries, along with the volatility inherent in the oil prices (International Monetary Fund, 2013).
Outside the MENA region, the GCC had continued to be one of the most performing economies. The GCC had a steady 4 per cent growth in GDP, as per IMF estimates. Since 2009, the GCC’s combined GDP, or the total value of goods and services provided, had grown from $955 billion in 2009 to an estimated $1.6 trillion in 2013. That rapid growth was fuelled mainly by rising oil revenue, due to a sharp rise in oil prices from $62 per barrel in 2009 to around $105 per barrel in 2013. The positive outlook had been supported by the 2.6 per cent CAGR growth in the population of the GCC region. The total population is expected to reach 53.41 million, with the younger population (15–64 years) constituting 45 per cent of the total by 2020 (Kinninmont, 2009).
Due to population growth and the per capita income of the GCC, the food consumption was expected to hit 49.1 million metric tons (MTs) by 2017, growing at a CAGR of 3.1 per cent over 2012–2017 in the GCC, according to the Alpen Capital (2013). During 2004–2010, the GCC food consumption increased at a CAGR of 3.7 per cent to 38.8 million MT in 2010 (see Figure 4).
Changing lifestyle coupled with demand for food consumption and government focus on food security in Kuwait led to good prospects for the Kuwait food industry. Americana together with Almarai and Sovola contributes more than three-quarters of the total revenue of the listed food-processing companies. According to the Arab Organization for Agricultural Development, the per capita food consumption of the UAE is the highest, followed by that of Oman and Saudi Arabia (KSA). The Kuwait food consumption was 5.9 per cent, whereas Americana’s top business market, Saudi Arabia, had 62.0 per cent food consumption (Alpen Capital, 2013) (see Figure 5).
One of the top challenges faced by the food industry was the food price stability, as the food industries in the MENA region were heavily dependent on imported food. Any changes in the imported food price directly influenced the food prices in the region. In addition, the inability of the food companies to just raise the prices in spite of the raw material price changes due to the government restrictions acted as a big challenge for the food companies.
Financial Information about Americana
To make a good investment decision, Hussain examined the company’s current profits as well as the profits generated over the previous years. To evaluate the financial position of the company, Hussain started with the most important aspect of the health of the company, that is, sales growth. The total sales of the company grew from KWD 557 million in 2008 to KWD 809 million in 2012, reporting a CAGR of 9.7 per cent (Kuwait Food Company [Americana] S.A.K., 2009). Profitability was another key aspect that he was concerned about. During 2008–2012, the gross profit gradually increased from KWD 120 million to KWD 143 million, whereas the net profit rose from KWD 41 million to KWD 50 million in 2012 (see Exhibit 3). The increase in gross profit had been slower, at a CAGR of 4.4 per cent, than that of the net profit at 5.1 per cent (see Figure 6a).
Reading the annual reports of Americana, Hussain found out that the company had made a significant effort to expand its franchise business during the period from 2008 to 2012 by bringing the big brands, such as Krispy Kreme Doughnuts, Taco Bell, Signor Sassi and Maestro, under its umbrella. The size of total assets increased from KWD 555 million in 2008 to KWD 603 million in 2012 at a CAGR of 2.1 per cent (see Exhibit 4). The retained earnings of the company grew at a CAGR of 8.5 per cent during the period from 2008 to 2012. They formed a considerable proportion of total equity, which had been on a rising trend since 2010 (see Figures 6c and 6d).
The cash flow from operations had consistently generated cash for the company. It rose from KWD 63 million in 2008 to KWD 110 million in 2012 (see Exhibit 5). On the other hand, the cash flows from investing and financing activities had remained negative due to investments in fixed assets and repayment of debt (see Figures 6f and 6g).
Although the top-line and operating profits increased in absolute numbers, Hussain was wondering about the margins, which had reduced over the years. During the year 2012, the company focused on expanding the customer base by adding new production lines, opening new-concept restaurant chains and entering into new markets. As a result, the company achieved record-high sales of KWD 809.6 million when compared to KWD 720.8 million achieved in the year 2011 with a growth rate of 12 per cent. However, the company’s net profit declined by 8 per cent to KWD 50 million when compared to KWD 54 million achieved during the previous year. The gross profit margin fell from 22 per cent in 2008 to 18 per cent in 2012, whereas the net profit margin initially increased from 7 per cent in 2008 to 8 per cent in 2010, after which it fell to 6 per cent in 2012 (see Figures 6b and 6e).
In the year 2013, the company reported KWD 210 million of total sales in the first quarter, which increased to KWD 225 million in the second quarter and marginally declined to KWD 208 million in the third quarter. Gross profit fell from KWD 40 million in the first quarter to KWD 31 million in the third quarter (see Exhibit 6), while gross profit margin fell from 19 per cent to 15 per cent during the same period (Kuwait Food Company [Americana] S.A.K., 2013a). On the other hand, the net profit margin saw a steep decline from KWD 16 million in the first quarter to KWD 8 million in the third quarter, reporting a net profit margin fall from 7.8 per cent to 3.9 per cent (Kuwait Food Company [Americana] S.A.K. 2013b) (see Figure 7).
Competitors of Americana
Savola Group (Savola), Halwani Bros and Saudi Dairy & Foodstuff Company (Sadafco) are the strongest competitors of Americana in foodstuff manufacturing and distribution in the GCC.
Having gathered the relevant data and being equipped with the financial analysis tools and techniques, Hussain knew that it would be a long journey before conclusions could be drawn based on the fundamentals. Counting on the stack of data, while getting puzzled with contradictions, would Hussain be able to make a decision about investment in Americana?
Business Segments Information (KWD’000)
Selected Economic Indicators—MENA Oil-exporting Countries
Balance Sheet for Kuwait Food Company (Americana) (KWD’000)
Cash Flow Statement of Kuwait Food Company (Americana)
Summary for Trailing Four Quarters of Kuwait Food Company
