Spinneys 1961 IPO: A high-margin, fast-growing UAE consumer play

A market leader in the UAE premium grocery segment, with industry-beating sales density and margins. Double-digit revenue growth is likely, with entry into the KSA grocery and UAE foodservice markets.

This report does not constitute investment advice. Please read the important information contained at the end of this document.

Overview

Spinneys 1961 Holding PLC operates 75 grocery retail stores under the Spinneys, Waitrose and Al Fair brands, with a total leasable area of 1.3mn sq ft (and total selling area of 742k sq ft). 70 of these stores are in the UAE and 5 in Oman; 85% are owned and managed, with the remainder operated by a third party.  Entry into Saudi Arabia is imminent.

The group’s target market is the premium grocery segment, servicing households with over AED20k monthly income. This is one of the fastest-growing areas within the broader grocery market. Its market share of this segment stands at 12% in the UAE, and 27% in Dubai (around three-quarters of sales are generated in Dubai). The group benefits from sales densities around twice the UAE grocery market average. Margins are also higher than industry peers.

85% of sales are food-related (and 15% are fresh food). 41% of sales are private label. The company has developed a sophisticated supply chain network to manage the timely delivery of over 55,000 stock-keeping units (SKUs). It has two production facilities to deliver fresh meat and baked goods to its customers; many larger stores also have in-house production facilities.

Over the next five years, the company plans to open 10-12 stores in Saudi Arabia, via a 50/50 joint venture with the Al Hokair family; the first four stores will open this year. In the UAE, 25 new stores are targeted over the next five years, with three scheduled to open this year. The company targets like-for-like growth of up to 5% for new stores, and 3% for mature stores. It also plans to add a third production facility in the UAE, slated to open in 2027.

A new growth driver is the group’s forthcoming entry into the UAE foodservice market, via The Kitchen by Spinneys. Two stores are scheduled to open this year, with 15 targeted by 2028. The UAE foodservice market is faster-growing than the grocery market, and the company has already trialled the concept at several locations.

We see double-digit top and bottom-line growth for the group over the next five years, based on this expansion plan, even after factoring in some margin compression.

Al Seer Group, the 100% shareholder, has announced that it will sell 25% of the company via an initial public offering of 900mn shares. The price range has been set at AED1.42-AED1.53 per share, with two cornerstone investors (Emirates International Investment Company and Franklin Templeton) committing an aggregate investment of AED275mn (ie approximately 20% of the offering). The space for other subscribers is therefore limited; this could lead to an initial demand-supply imbalance, but post-listing liquidity could also suffer if there is a limited effective free-float. The subscription period ends on 30 April (29 April for retail investors) with listing expected on 9 May.

Press reports indicate that the transaction was fully covered on the first day of the subscription period and will be priced at the top of the above range.

The price range is above where international industry peers trade on revenue and EBITDA-based multiples, but at a discount based on dividend yield. Relative to UAE listings, the price range is a premium to dividend yield, but a discount to revenue-based multiples. We think investors are likely to anchor their price expectations around earnings.

Key risks include the company’s high exposure to Dubai. While this currently provides a healthy tailwind, the emirate’s economy is sensitive to the global macroeconomic and geopolitical environment. Management’s efforts to break into two new markets (KSA grocery, UAE foodservice) could fail to meet expectations. The growing prevalence of express online delivery services could damage the group’s store-led customer offer. The limited free float of the shares could impact their liquidity and valuation.

We dig deeper into these issues below. This report does not constitute investment advice.

Outlook points to double-digit top and bottom-line growth for several years

We see Spinneys delivering an average of 13% pa revenue growth in the 2024-2028 period, driven by 8% pa growth in the store network, 3% like-for-like sales growth and the development of The Kitchen foodservice line. We project the number of grocery stores rising from 75 to 111 over this period (including 11 in Saudi Arabia), while the number of foodservice stores rises from zero to 15.

By 2028, we think Saudi Arabia will account for 10% of the top line, while The Kitchen will account for 7%. Our forecasts assume that the UAE (and notably Dubai) remains the key focus of the business.

We expect a slight margin squeeze over the coming years, driven by accelerated UAE grocery store openings and the push into Saudi Arabia and the UAE foodservice market. Accordingly, operating profit and EBITDA growth comes in slightly slower at 11% pa. Net profit growth is estimated at 10% pa, partly due to the forthcoming introduction of corporate taxes in the UAE.

Further details regarding our forecasts are presented below.

Valuation summary

We present below the implied valuation of the company (on a per share basis) based on the valuation multiples at which international industry peers and local UAE listings trade.

Valuation multiples for global industry peers

Peer companies are trading at a median of 0.8x EV/ trailing revenue. Given Spinneys 1961’s superior gross margin, the company might be expected to trade at a premium to the peer group in this measure. Industry peers are trading at a median of 9.3x EV/ EBITDA. Again, because of the company’s margin advantage, we think it can justifiably trade at a premium to this multiple. On a PE basis, peer companies are trading at a 23x trailing multiple, while on a dividend yield basis, they are trading at 1.9%.

Valuation multiples versus UAE-listed peers

We repeat the above exercise using locally listed non-financial sector companies with a US$1-5bn market capitalisation as the peer group. Summarised results are presented below.

Applying these median multiples to Spinneys 1961’s 2023 financial performance generates the following valuation ranges for the company.

Earnings multiples are likely to be the most appropriate valuation metric

Spinneys 1961 enjoys higher margins than both international industry peers and local UAE listings, meaning that estimates based on revenue and EBITDA-based multiples at which peers trade could understate the value-generation capacity of the business. The company has indicated that it is moving to a new dividend payout ratio regime (70%, versus an average 94% payout over the past three years), so investors may be reticent to use the dividend yield as a valuation yardstick.

Accordingly, investors will focus most closely on a PE-based valuation approach, in our view. Considering both international and local listed peers, a valuation range of AED1.1-AED1.6 per share appears most appropriate. However, investors may be willing to apply a premium to peers given the firm’s superior sales density, margins and profitability.

Risk factors

Most of the group’s revenues and profits are generated in Dubai. The emirate is sensitive to global macroeconomic and geopolitical events given its status as a tourism, trade, logistics and financial services hub.

The company’s suppliers are based in 44 countries. Unexpected disruptions to global trade could affect the company’s ability to service consumer demand.

Almost half of the company’s sales are for fresh produce. Any disruption to the cold supply chain could reduce the company’s ability to supply such goods to its customers.

20% of the company’s stores are Waitrose-branded. The licensing agreement with Waitrose is due to expire in 2031. If the company could not extend this agreement, it could disrupt its ability to service the premium grocery market in the UAE and Saudi Arabia.

Increased penetration of online grocery sales could limit the ability of the firm to charge premium prices for its goods.

Pressure on consumer purchasing power (for example, due to high food price inflation) could affect the company more than its peers since it is more focused on the premium grocery segment.

The company may find it more difficult to break into new markets than expected, such as the premium grocer segment in Saudi Arabia and the foodservice market in the UAE.

Regulatory pressure to increase the proportion of local citizens within the workforce could raise the company’s cost base and reduce its margins.

Since there is a high imported component to the goods it sells, the company could find its margins are squeezed if certain currencies (such as AUD, CHF, EUR or GBP) were to strengthen against US$.

The group makes significant of technology in its day-to-day operations. Any disruption of these systems could lead to increased wastage of goods and insufficient supplies arriving at stores.

Current efforts to build an in-house rapid delivery service (Spinneys Swift) could damage relationships with third-party aggregators who currently provide this service to end-users, ultimately hurting demand.

Investors in the IPO will not be able to exercise control over the business, which will be 75%-owned by Al Seer Group. They may, as a result, discount the valuation they attach to their shares.

The Board and senior management team have limited public listed company experience and may therefore struggle with challenges particular to this corporate structure.

The company’s operations in Oman may be considered sub-scale. The company has made losses in the country for several years. Revamping/ restructuring efforts to address this situation could put short-term pressure on margins and may prove unsuccessful over the long term.

The shares may suffer from poor post-listing liquidity, eg due to the prevalence of long-term investors on the share register. This could limit shareholders’ ability to crystallise their investment and they may consequently discount the valuation they are willing to attach to the shares.

The investment case for Spinneys 1961

We highlight below some differentiating characteristics of the Spinneys 1961 investment story.

The macroenvironment in the UAE and Saudi Arabia appears favourable

UAE growth drivers

UAE real GDP was US$442bn in 2022. Economic growth is forecast to rise by 3.4% pa from 2022 to 2028. Average disposable income per capita (US$20,700 in 2022) is forecast to rise by 2.3% pa over the same period. The UAE’s population (9.4mn in 2022) is expected to grow by 0.7% pa from 2022-2028, with the affluent population (3.0mn, with annual income >US$30k) forecast to rise by 4.3% pa over the same period.

The UAE grocery market (AED66bn in 2022) is projected to grow by 3.9% pa over this period. The premium grocery retail market (AED27bn in 2022) is forecast to grow at 4.4% pa 2022-2028. UAE whitespace is projected to grow from 38mn sq ft in 2022 to 46mn sq ft in 2033 ie 1.7% pa.

The company plans to open 25 new stores in the UAE over the coming five years, with 3 scheduled to open before year-end. In Dubai, the company’s capacity growth will be via both Spinneys and Waitrose brands; with 3 Spinneys outlets planned in 2024 (Al Khawaneej 35,873 aq ft, Sobha 3,148 sq ft and Arabian Ranches 3 23,191 sq ft), which together will grow the firm’s footprint by 5%. In Abu Dhabi growth will be spearheaded by the Waitrose brand.

The UAE foodservice market is projected to grow by 6.8% pa from 2022-2028, from AED29bn to AED43bn. The company plans to enter this market via its The Kitchen by Spinneys concept. Two confirmed sites for The Kitchen by Spinneys have been identified: Dubai Mall will open in Q2 24 while Creek Harbour will open in H2 24. A third site is still under discussion. The company expects to have 15 stores operating in 2028.

KSA growth drivers

The Saudi Arabian economy is the largest in the GCC, with the biggest population. Unsurprisingly, it is also the largest grocery market in the region.

The Saudi economy had real GDP of US$793bn in 2022. Economic growth is forecast to rise by 3.2% pa from 2022 to 2028. The population was 36.4mn in 2022 and is expected to grow by 1.4% pa from 2022 to 2028. 27% of the population is located in Riyadh and 25% in Jeddah, the two locations where the company intends to focus its expansion in the country.

Disposable income in 2022 averaged US$13,341 per capita in Riyadh and US$12,252 in Jeddah, versus US$9,500 for the whole country. The affluent population (3.1mn in 2022) is expected to grow by 6.4% pa over the same period. Expatriates are likely to be a key driver of this growth, given the country’s long-term goal is to raise their weight to 50% of the population (from around one-third currently).

The Saudi grocery market (AED125bn in 2022) is expected to grow by 4.8% pa from 2022-2028. The premium grocery retail market is forecast to grow at 6.7% CAGR from 2022-2028.

KSA whitespace is projected to grow from 67mn sq ft in 2022 to 86mn sq ft by 2033, ie 2.3% CAGR. The company intends to open 10-12 stores in the Kingdom over the next five years. One store will open in H1 24 (43,465 sq ft store in La Strada, Riyadh) with a further 3 stores planned for H2 24 (11,636 sq ft in KAFD, 20,000 sq ft in U-Walk Jeddah and 26,000 sq ft in U-Walk Riyadh). Together, these stores would grow the group’s overall footprint by around 8% (versus end-2023).

Reflecting the large volume of travel between Saudi Arabia and the UAE (Dubai-Riyadh international flight route was one of the busiest in the world in 2023 with 4.0mn passengers), Spinneys and Waitrose brands already have high levels of recognition in the Kingdom.

The company is exposed to the most attractive market segments

Spinneys 1961 is exposed to growing and increasingly affluent populations in both the UAE and Saudi Arabia. In addition, it is exposed to the fastest-growing segment of the retail grocery market (the affluent segment), where it is a market leader.

The group is targeting a large addressable market

The company’s focus is serving households earning over AED20k per month (ie US$5.4k/ month). This amounts to an AED24bn addressable premium grocery market in the UAE and AED8bn in the Riyadh/ Jeddah regions of Saudi Arabia (ie AED32bn in total, US$8.4bn).

Relative to its peers in the UAE, the company is more exposed to more affluent customers with higher spending levels. Its customer base is skewed towards Western expatriates. In Saudi Arabia the affluent expatriate population is expected to experience above-average growth.

Currently, the company is capturing just 12% of this addressable market in the UAE (27% in Dubai) and 0% in Saudi Arabia.

In addition, the company is entering the UAE foodservice market via its ‘The Kitchen by Spinneys’ concept. This AED29bn market is expected to grow by 6.8% pa to 2028, when the company expects to have 15 stores operational.

Already, 13.5% of the group’s top line is generated from in-store bakery, prepared meals and café sales. The company has also already tested the concept at several store locations. A site in Dubai Mall will open in Q2 24 with another site in Creek Harbour expected to open in H2 24.

Superior sales density

Average retail revenue per GSA was AED3.5k per sq ft for the company, versus AED1.6k for the whole UAE market.

Like for like sales growth at the company averaged 3.8% pa from 2019 to 2023, while net new store additions added a further 4.4% points of growth. Spinneys’ GSA has grown at 7.5% pa from 2019 to 2023.

Spinneys 1961 is more profitable than its global industry peers

The company’s gross margin in 2023 was 42%, and has averaged 41% over the past few years. In contrast, global industry peers have a median gross margin of 23%.

The group’s EBITDA margin in 2023 was 16.9%, again significantly better than its peer group’s median margin of 8.4%.

Spinney’s return on assets in 2023 was 15.2%, versus 4.8% for the peer group.

This superior profitability reflects a combination of factors, including the focus on more affluent customers, high sales density, strong branding and a high proportion of fresh food sales (59% for the company, versus 45% for the overall UAE grocery market).

Attractive dividend policy

The company expects to maintain a dividend payout of 70% of earnings. In 2023, the company paid out 77% of its net profit, in 2022 the payout ratio was 102% and in 2021 the payout ratio was 103%. Versus the recent past, the 70% target ratio therefore appears to provide a cushion for the company’s expansion plans, notably the premium grocery market in Saudi Arabia and the UAE foodservice market (via The Kitchen by Spinneys) but also accelerated openings in the core UAE premium grocery space.

The revenue mix is heavily skewed towards fresh food.

85% of 2023 revenue was food-related, largely split between fresh convenience, fresh produce and non-fresh groceries. 29,151 of the company’s 55,828 SKUs were food-related in 2023 (52%). Fresh food items are dependent on sophisticated supply chain infrastructure and hence are less exposed to competition than non-food items.

Growing private label contribution

7,200 SKUs (ie 13% of the total) were under the company’s private labels stable (including SpinneysFOOD, SpinneysHOME, SpinneysWELLNESS and Fine Food, plus Waitrose products (for which the company has exclusive rights in the UAE and KSA). Private label sales contributed 41% to group revenue in 2023, up from 38% in 2022.

Private label products are targeted to be at least 10% cheaper than branded alternatives, allowing the business to appeal to a wider demographic and providing some protection to the business model if customers’ purchasing power were to come under pressure (eg due to high food price inflation).

Improving branded margin

The proportion of revenues generated by branded product sales has steadily declined in recent years (to 59% of the total in 2023). In contrast, the branded margin has improved, to 27%.

In 2023, the company had relationships with 3,948 brands, via 871 suppliers in 44 countries. Of the top 100 brand relationships, 78% were with international brands (eg Cadbury), 8% were with regional brands (eg Almarai)  and 16% were with local brands (eg Al Ain).

The company can execute limited-period exclusivity agreements with some of its brands. Such arrangements generated AED95mn revenue in 2023 (ie 3% of the top line) and enjoyed a trade profit margin of almost 40%.

A varied store footprint is shifting towards large-format

Of the 75 stores in the group’s umbrella, 56 are Spinneys-branded, 15 are Waitrose and 4 are Al Fair.

In 2023, 46 stores were located in Dubai, 18 in Abu Dhabi (of which 11 are managed by a third party), 6 were in the Northern Emirates and 5 in Oman.

27 stores were Market Stores (<10,750 sq ft), 26 were medium supermarkets (10,750 – 21,500 sq ft) and 22 were Large Supermarkets (>21,500 sq ft).

Of the group’s 64 owned stores, 57 are leased from third parties, 5 from Al Seer Group (the majority shareholder) and 2 are owned outright by the company.

Of the 62 leased stores, 26% have a remaining lease term >5 years, 51% have lease term of 1-5 years and 23% have less than one year remaining on the lease. 

38 of the 62 leases stores have rental clauses with a variable turnover-based clause while the remaining 24 stores do not.

The group is gradually shifting towards larger format stores; 11 of the 14 stores closed since end-2019 have been Market Stores. In the modern grocery segment, hypermarkets generate over two-thirds of sales volume in both the UAE and Saudi Arabia.

Above-average online sales penetration

In 2023, the online sales penetration rate was 13%. This compares to a 5% rate for the overall UAE grocery market. 87% of these online sales were via third-party aggregators such as InstaShop, Talabat, Now Now and Deliveroo, with the focus of such operators being hyperlocal deliveries within 60 minutes. To capture some of this business, the company is developing its own hyperlocal e-commerce capacity through ‘Spinneys Swift’, which is due for launch in H1 2024.

Diversified supplier relationships

The company serves 871 suppliers from 44 countries. 65% of product purchase value was sourced from UAE-based suppliers, with the remaining 35% from 43 other countries. Where possible, the group operate a dual-sourcing model, to mitigate supply risk. 79% of the group’s products are supplied via air freight and 21% via sea freight.

The top 5,10, 20 and 30 suppliers (as identified by the company across multiple criteria) supplied 8.4%, 13.4%, 21.5% and 28.0% of purchases in 2023, which points to a highly diversified sourcing model.

Strong warehousing and supply-chain management capabilities

By sharing weekly demand forecast information with its suppliers, the company has been able to reduce unit logistics costs and to keep wastage rates at around 5% (4.3% in 2021, 4.7% in 2022, 5.4% in 2023), while on-shelf availability averages close to 90% across the product range.

The company has one warehouse and distribution centre in Kezad, Abu Dhabi, with 437k sq ft. It is operated by 560 staff and picks approximately 40k deliveries daily. 99% of deliveries were on time in 2023.

The group owns a fleet of 118 commercial vehicles that service its warehouse and production facilities, local suppliers and stores. E-commerce deliveries are conducted from 3 Spinneys stores (all in Dubai) and 2 Waitrose stores (one in Dubai, one in Abu Dhabi). Deliveries from third-party aggregators (such as InstaShop, Deliveroo and Talabat) account for 87% of online traffic currently.

Extensive in-house production facilities

The company operates two centralised production facilities that together deliver 1,498 SKUs to its stores (ie 3% of the total). The Spinneys Meat Production Unit, located in Jebel Ali, covers 50k sq ft, employs 138 staff and produces 703 fresh-product SKUs. The Spinneys Central Bakery Unit in Dubai Investment Park covers 46k sq ft, employs 170 staff and produces 795 fresh-product SKUs. Together, these facilities generated AED259mn revenue in 2023 (ie 9% of the total).

In addition, the group operates in-store production facilities at the majority of its stores, which typically account for c20% of SKUs.

Exclusive Waitrose licence

The group has been granted a 10-year licence by the UK’s Waitrose group, commencing in 2021 and terminating in 2031. Negotiations to extend this arrangement will likely take place in 2027.

Historical growth rate is comparable to global industry peers

The company has delivered 8% top-line growth over the past three years. This compares to the peer group average of 11% over the same period. On a consistent currency basis, however, we think the growth rates are likely to be more comparable (The US$, to which AED is pegged, has appreciated by c3% pa over this period, on a trade-weighted basis).

Large and committed workforce

The company employs 4,216 staff. Almost 11% of the UAE workforce are Emirati nationals; this figure should rise to c13% by 2024 as per UAE quotas. Around 51% of the Omani workforce are Oman nationals (versus a minimum quota of 50%).

The company benefits from a loyal workforce: 22% of the group’s full-time employees have been with the company for over a decade.

Corporate governance

Below, we briefly consider the company’s mission and values, the Board structure and the senior management team.

Company purpose, mission and values

Spinney’s 1961 Holding’s vision is to be the best retailer in its key markets. Its mission is to nourish and inspire its communities to live better lives, day by day.

Its corporate values are illustrated below:

Reflecting the development of a high-quality corporate culture, the company is well-respected by customers, employees and other key stakeholders.

Board of Directors

The Board of Directors has nine members, of whom three are considered independent. Two are female while five are Emirati. Eight of the nine board members are non-executives. Seven directors were appointed this year, with the remaining two appointed last year. The average age of the Board is 50 years (with a range of 39 – 69). Chairman Ali Al Bwardy is the founding shareholder and highly respected in the UAE retail industry. In total, four Al Bwardy family members sit on the Board.

Executive management team

The senior management team has an average of 23 years of experience. CEO Sunil Kumar has worked at Spinneys for 30 years and began his career at the front line. The deputy CEO has 38 years of professional experience while the CFO has 23 years of professional experience.

IPO transaction information

The company has indicated that the selling shareholder (Al Seer Group) is offering 900mn shares (a quarter of the total), priced at AED1.42-AED1.53 per share, giving a total transaction value of AED1.28bn-1.38bn (cUS$350-375mn). The IPO subscription period ends on 29 April for retail investors and on 30 April for institutional investors. Press reports indicate that the books were fully covered on the first day of the subscription period and that the transaction will be priced at the top of the above pricing range.

Two cornerstone investors have been identified, Emirates International Investment Company and Franklin Templeton, each of whom has committed to invest AED137.7mn in the transaction, (ie AED275.4mn in aggregate), which will give each a c2.5% stake in the company.

Accordingly, the volume of shares available to other investors will likely be limited to 20% of the company. Given this limited supply, and the buoyant IPO subscription demand we have recently observed, investors may once again find this issue to be oversubscribed. Post-listing liquidity could prove limited, depending on how the shares are allocated to subscribers.

Important information

Disclaimer: This document is for information purposes only and does not constitute investment research. This document does not constitute investment advice nor does it give any recommendation to buy, hold, sell or trade any asset or security. inam has produced this document in good faith but does not provide any guarantees regarding the accuracy of information contained therein. inam does not bear any liability for any damages or losses in connection with the use of this document. The content is not intended for distribution or use by any person in any jurisdiction in any country where such distribution or use would be contrary to law or regulation.