Marka Holding: Facing a Storm

[UPDATE 20th May 2017] We were right in thinking Marka Holding’s stock was over-inflated. Since our this post was written, the company has announced a rights issue with the intent to double its paid up capital. The founders lockup has since expired and the stock has collapsed more than 50% since its all recent highs as seen below.

Time for an update on the UAE’s (only) pure-play retail stock, Marka Holding. We’ve previously written about the company and its somewhat ambitious growth targets. In this post we’re going to look at recent performance now that 2016 financials are available, starting with their top line…

Significant acquisitions in 2015 meant that revenue targets for the year were comfortably beaten by 97% . In 2016 however, we’re seeing the opposite, with top-line 17% below targets that were set in their IPO prospectus. To reach the AED 600mn revenue target for 2017, Marka will have to go on a massive acquisition spree or see a remarkable bump in organic sales. They need to grow top-line by 100% this year, no small feat.

Both of the group’s core segments, Retail and F&B, are weak. As previously discussed, the Retail focus was largely on the turnaround of Retailcorp, their main asset whose primary product line is sportswear. The single (and profitable) cash-cow of the entire group is Reem Al Bawadi, the Lebanese restaurant chain with ambitions to evolve into a regional franchise.

With revenues down across both Retail and F&B it’s no surprise that gross profits have suffered too, currently 21% below target.

Weaker than expected gross profits are being further exacerbated by a trend lower in gross margins. The move in Retail has been particularly drastic, form 45% to below 30%.

Marka lost money in every quarter in 2016, and across all segments. The only significantly profitable contribution in was in Q3, attributed to a one time sale of a controlling stake in their Cheeky Monkey birthday party venue business to a related party (independently valued of course). All of Marka’s business lines have been loss-making.

The liquidity profile seems to be worsening too. Cash levels had fallen around 57% over 2016. If we assume Marka continues to lose an average of AED 35mn per quarter over 2017 – as it has done since Q4 2015 –  the company may find itself in a very difficult situation by Q4 of this year.

Given the above, it’s rather remarkable that the stock still trades at a 20% premium to its greenfield IPO valuation.

Leverage & Goodwill

Dig a little deeper into the balance sheet and we note a massive 61% of its assets are Intangible, 83% of which are Goodwill from acquisitions that we’ve previously detailed. Marka’s Goodwill assets are now facing impairment. Page 28 of the 2016 full year financial statements sees Retailcorp receiving a AED 52.4mn Goodwill write-down as a result of entering into an agreement in March 2017 to sell the asset. Retailcorp was a business that Marka bought in December 2014 for around AED 213mn, of which AED 182mn was Goodwill. Just two years later Marka is selling it for at least 25% less than the price they paid, somewhere around the AED 150mn mark, if they’re lucky.

If Retailcorp gets sold then a lot of the bleeding from operations might stop.

The problem with asset impairments and write downs gets more acute when a company is leveraged. Marka has around AED 680mn of debt on its balance sheet. It’s Debt to Equity ratio today is over 200%. If we strip out the Goodwill from the asset side of Marka’s balance sheet, the company has significant negative equity. Principal payments are kicking in and financing costs are now ticking up, reaching AED 33mn and AED 27mn respectively for 2016. Many of Marka’s various shariah compliant debt facilities had 1 to 3 year moratoriums related to principal repayments and borrower covenants. These are all snapping into effect now, with AED 92mn becoming due over 2017 alone. If the Retailcorp sale goes through, we estimate that Marka is left with around AED 100mn of liquidity at the end of 2017.

It’s probably no surprise then, that the CEO of barely a couple of years, Nick Peel departed the firm in December 2016. Whether he left or was asked to has not been disclosed.

Corporate Governance

Just to top it off, there are questions around corporate governance and compliance. The partial sale of its stake in Cheeky Monkey’s to a related party was carried out in contravention of Securities & Commodities Authority regulations. Marka has until June 2017 to get shareholder approval for this sale, as the value of the transaction was more than 5% of the company’s issued capital and did not receive the pre-approval required. Who has time for corporate governance when the ship is sinking.

It’s incredible at this juncture to recall that this company was 36 times over-subscribed at IPO. For now, Marka’s future hinges on the sale of Retailcorp. We eagerly await Q1 2017 financial statements to see if interim CEO and Founder Khaled Al Muhairi can turn this ship around.