Al Tayyar Travel Group

We initiate Al Tayyar with an Overweight recommendation and a PT of SAR 1.6 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 4 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 215, majority of which (estimated at 6%) 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 215) 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 2 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-216 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 s.alkadi@aljaziracapital.com.sa 14 12 1 8 6 4 Recommendation Price Performance 7/6/15 6/6/15 5/6/15 4/6/15 8/6/15 TASI 3/6/15 2/6/15 1/6/15 12/6/14 11/6/14 1/6/14 9/6/14 8/6/14 Al Tayyar Group Overweight Current Price* (SAR) 74.3 New Target Price (SAR) 1.6 Upside / (Downside) 35.4% Key Sector Data Key Financials 14 12 1 8 6 4 Source: Bloomberg SARmn (unless specified) FY14 FY15E FY16E Revenues 7,711.4 9,22.8 1,443. Gross Income 1,62.9 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 Key Ratios *prices as of 1 st SARmn (unless specified) Market Cap(mn) 14,6 Number of Shares (mn) 2 YTD% -18.2% 52-week % change -26.1% 52 week (High) SAR 114. 52 week (Low) SAR 61.3 Source: Company reports, Aljazira Capital Source: Company reports, Aljazira Capital SARmn (unless specified) FY14 FY15E FY16E Gross Margin 21.% 2.9% 2.9% Net Margin 14.5% 14.% 13.8% P/E 12.x 11.6x 1.4x P/B 4.7 5.4 4.5 EV/EBITDA (x) 9.6x 12.x 9.3x Source: Company reports, Aljazira Capital 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 198. It debuted on the Tadawul stock exchange in May 212. 1

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 FY214 total revenues, revenues from Cargo accounted for around 2% of total revenues, the remaining 1.2% was from transportation and others. FY1H-215 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 FY214) which stands at around SAR 249mn of gross revenue for the first half of FY215; according to the company, the contract has been renewed to April 217. We should note that as of FY213, 69% of revenues were from the corporate and government segment, compared to 31% from retail. As of FY214, 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-215 saw large acquisitions by the company, most notably the acquisitions of Kenzy hotel in Makkah for a sum of SAR 1.5bn on Feb - 215. The deal is financed by a SAR 1.23bn 1 year loan with 2 semiannual payments, the rest is selffinanced from company reserves. The hotel includes 759 rooms and suites on 24 floors. Al Tayyar plans on spending SAR 1mn on refurbishment before operating the hotel on 2H-216. Al Tayyar is also a cofounder of the MOT (Ministry of Tourism) Saudi Heritage Hospitality Company, contributing SAR 5mn for a 2% 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 FY214, the company increased its stake in MREIC from 75% to 1%. We estimate that MREIC will add around 15 hotel rooms to Al Tayyar s hospitality portfolio by the end of FY216 and beginning of FY217, in addition to retail and office centers. We should note that MREIC contributed SAR 16mn to gross revenues during 1H-215, and currently represent more than 1% of consolidated assets. Al Tayyar recently announced (Aug 215) signing a conditional agreement for acquiring 25% of Thakher Investment and Real Estate Co. worth SAR 67mn 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-215. 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 16 14 12 1 8 6 4 2 Domestic Trips (mn) Estimated Visits to Makkah Million visitors 14 12 1 8 6 4 2 214 Domestic Inbound Arrivals Inbound Expediture (bn) (mn) Expenditure (bn) 214 215E 22E Source: SCTA, Aljazira Capital CAGR: 3.3% 215E 216E 217E Revenue Breakdown 1H-215 CAGR By Segment 212-216E 5% 4% 3% 2% 1% % Air Ticketing, Travel & Tours Cargo Transportation & Others 17.5% 218E 219E 22E Source: Colliers International, Aljazira Capital 1.9% Air Ticketing, Travel & Tours 3.3% 94.8 15.% Cargo 46.9% Transportation & Others 2

3 Robust 1H - 215 performance, notable growth on all income lines: Al Tayyar s revenue rose 2.4% YoY to SAR 4,539.4mn in 1H-215 while net profit grew 5.8% YoY at SAR 681.1mn in 1H-215 compared with SAR 643.6mn in 1H-214. 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-215, from SAR 27.1mn in 1H-214 to SAR 151.1mn in 1H-215. We believe that a little bit more than 1% of revenues from this segment are from hospitality activities relating to MREIC. Operating income for the period included an impairment loss of SAR 2mn, limiting growth from operating activities to 7.9% YoY for Q2-215 and 1% for 1H-215 YoY. Excluding impairment loss for the period puts growth from operating activities for the period at 13.16% and 13.12% YoY for Q2-215 and 1H-215 respectively. Net income for Q2-215 grew 8.7% YoY and 5.8% for 1H-215. Excluding impairment loss puts net income growth figures at 14.2% and 8.9% for Q2-215 and 1H-215 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.% in FY29 to 15.2% in FY214, signifying the company s operational strength. 1H-215 gross margins stood at 21.9%, a decline compared to 1H-214 gross margins. The same applies for operating and net income margins. We expect margins to gradually improve FY216 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 FY215 respectively following on FY214 s robust 23.2% growth in revenues and 14.5% in net income. Net income is estimated to grow 13.9% CAGR by FY217. We expect broadly stable DPS for FY215 and FY216, 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 1.6 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 FY216 PE of 1.4x. 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 1-year DCF methodology, a 2.7% terminal growth assumption and a 2 year weekly beta of 1.46. WACC is taken at 1.4%; we have arrived at a target price of SAR 1.6 per share indicating an upside potential of 35.4%. Double Digit Growth in Revenues and Net Income SAR (bn) 15 1 5 Al Tayyar Online Sales SAR (mn) 25 2 15 1 5 213 214 215E 216E Revenue Net Profit Net Profit Growth % 11 16 22.4 213 214 215E 4% 3% 2% 1% % Source: Aljazira Capital, company data Al Tayyar Recent Acquisitions Ownership Company/Entity Date % Value (SAR) Hanouf Travel & Tourism 214 7% 4.9mn Elegant Resort 214 1% 88mn CTM 214 1% 85nb MREIC 214 from 75% to 1% 28.3mn Careem 214 18.4% 16.9mn Kenzy Hotel 215 1% 15mn Thakher Investment & RE 215 25% 67mn MREIC Hotel Portfolio Hotel Source: company data, Aljazira capital Number of Rooms Muthmerah Umm Al Qurra 75 Masafi Hotel 196 Beer Balela 445 Sheab Quresh 51 New Jarwal 29 Total 1516

Downside and Upside risks to valuation and assumptions: A main DPS & Dividend Yield Estimates concern with Al Tayyar is its reliance on a single government contract that 4.5 effectively contributes 25% of the company s gross revenues. As a result, a 4 key downside risk facing the company is the inability to renew or replace 3.5 3 the current contract upon expiration mid-217. Our current valuation 2.5 assumes the company s ability to either renew or replace the contract upon 2 expiration. Tighter margins would potentially come to effect over time due to 1.5 1 an increasingly globalized and competitive market as foreign online players.5 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 1-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 1.5%. 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 1.4%. 213 214E 215E 216E 217E DPS Div Yield % Based on our DCF valuation, our 12month price target for Al-Tayyar Group stands at SAR 1.6/share, against current market price of SAR 74.3/share, we initiate our coverage on the company with an Overweight recommendation 6.% 5.% 4.% 3.% 2.% 1.%.% Sensitivity Analysis Growth WACC 8.4% 9.4% 1.4% 11.4% 12.4% 1.% 12 95 9 87 83 2.% 111 12 96 91 87 2.7% 119 18 1 95 9 3.% 123 111 12 97 91 4.% 141 123 112 14 97 Source: Aljazira capital 4

Financial Statements Balance Sheet (in SAR mn) 212 213 214 215F 216F Cash & Cash Equivalents 746.8 2,117.1 1,958.6 3,737.9 2,97. Accounts Receivable 974.1 583.2 855.4 1,99.5 1,338.7 Net Plant, Property & Equipment 578.2 757.3 1,318.3 1,699.9 3,64. Net intangible assets 146.6 139.4 3.2 32. 34.7 Total Assets 3,249.6 5,474.3 6,21.1 8,557.7 9,878.9 Long Term Debt - - - 1,154.2 1,73.4 Accounts Payable 393.4 772.1 1,4.9 1,266.3 1,542.1 Total Liabilities 1,512.2 2,987. 3,336.1 5,95.9 5,766.5 Total Stockholder's Equity and Non-controlling Interests 1,737.4 2,487.2 2,865. 3,461.8 4,112.4 Income Statement (in SAR mn) Revenue 5,389.9 6,26.3 7,711.4 9,22.8 1,443. EBITDA 836.1 1,64.9 1,234.4 1,428.5 1,646.9 Depreciation & Amortization (4.) (44.8) (6.9) (87.) (146.) Operating income 822.3 988.3 1,146.9 1,351.2 1,529.6 Net income before zakat and income tax 796.1 1,2. 1,173.5 1,341.5 1,5.9 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.) (1761.1) Cash Flow from Investing Activities (472.5) (369.8) (734.6) (258.4) (2189.8) Dividends (31.6) (443.) (544.9) (7.) (8.) Cash Flow from Financing Activiites (42.8) (417.1) (587.) 68.9 (775.5) Key Financial Ratios Gross margin 21.3% 21.4% 21.% 2.9% 2.9% EBITDA margin 15.5% 17.% 16.% 15.5% 15.8% EBIT margin 14.8% 16.3% 15.2% 14.5% 14.4% NP margin 14.% 15.6% 14.5% 14.% 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 5

RESEARCH DIVISION AGM - Head of Research Abdullah Alawi +966 11 225625 a.alawi@aljaziracapital.com.sa Analyst Jassim Al-Jubran +966 11 2256248 j.aljabran@aljaziracapital.com.sa Senior Analyst Talha Nazar +966 11 2256115 t.nazar@aljaziracapital.com.sa Analyst Sultan Al Kadi +966 11 2256374 s.alkadi@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef +966 11 2256 a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa +966 11 2256364 s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa +966 11 2256277 lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit +966 16 3617547 aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. Al-Misbani +966 12 66184 a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni +966 1 225 6352 s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 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 1% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated Underweight would typically decline by over 1% from the current price levels over next twelve months. 3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated Neutral is expected to stagnate within +/- 1% range from the current price levels over next twelve months. 4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company. 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