One of the risks that has a major impact on Avni Shahan’s business, which is seeking to raise debt on the Tel Aviv Stock Exchange, is the shutdown of sea and air ports, and especially restrictions on production in East Asian countries. It seems that the renewed outbreak of the corona virus in China is a significant risk factor for the company that owns the children’s clothing brands Kiwi and Honeyman Kids.
But this is not the problem with Avni Shoah’s prospectus, which was published before its intention to raise 60 million shekels in bonds, but mainly that the proceeds of the raising are intended for the distribution of a dividend of 15 million shekels after the issuance, which will be used to pay off part of the owner’s loan amounting to 22 million shekels; beyond that, the salary of the owner and the CEO “L, in Tselal Ben Shalom, will rise from about NIS 30,000 a month to NIS 200,000 a month.
Avni Shoham is a private company that was established in 2006. The controlling owner of the company is Bezalel Ben Shalom, who owns 100% of the company’s share capital. As of today, the company is engaged in one field of activity: the field of children’s clothing through the chain of KIWI and Honigman-Kids stores, as well as through the online trading arena of the brands.
The company operates based on an operating franchise model – the company’s stores are operated and managed by a manager who owns an independent business. The company is responsible for all the fixed expenses of the business, including the rent and store inventory, while the operator is responsible for all the variable expenses, including the personnel. The compensation for the operator is a fixed rate of 20% of the revenues. This model constitutes the bulk (about 70%) of the activity, while another model is based on the fact that the fixed and variable costs are charged to the operator in exchange for a higher rate of up to 40% of the revenues. In both models, the inventory in the stores belongs to a company that operates 168 branches in an area of 13,616 square meters.
The company is characterized by a high risk that is affected by the growth of the GDP, the amount of disposable income (which decreases as the interest rate in the economy increases), and increasing competition, among other things, against the online purchase sites.
The company’s revenues grew from NIS 200 million in 2019 to NIS 240 million in 2021. The average revenue per square meter increased from NIS 1,528 in 2019 to NIS 1,838,000 in 2021. In addition, the company recorded growth in same-store sales between 2019 and 2021 of 16.5%.
At Midrog, it is expected that the company will present an erosion in revenue per square meter in identical stores, since the company’s stores are narrow, and with an increase in their size and number, this may lead to cannibalization and damage to revenue per square meter. In addition to this, the weak macro conditions prevailing in the economy may take their toll. Midrog predicts that the revenue per MA will drop to a range of NIS 1,550-1,610 thousand in 2020 compared to NIS 1,896 thousand in 2021.
In the forecast for the years 2022-2023, Midrog anticipates an erosion in the revenue per square meter in the range of 15%-17% compared to the average revenue per meter in 2021, a decrease mainly due to a decrease in the average revenue per meter in the same stores as already manifested in the first nine months of 2022, an increase in the sales area and an expectation of the environment Economically challenging in the base scenario which will have a negative impact on the fashion retail industry. These will bring the company’s sales turnover to the range of NIS 260 – 300 million in 2022-2023, according to Midrog’s forecast.
Midrog states that the existence of significant transactions with related parties (loans and donations), the lack of an internal audit so far, and the tenure of family members of the controlling owner and the CEO in various positions in the company increase the company’s credit risk. In addition, dividend distributions are at a relatively high rate compared to the net profit , focusing on a single line of business and the lack of historical comparative information for the company’s activities in its current form, after the acquisition of Honeyman Kids, and minus the effects of the corona virus, have a negative effect on the company’s financial strength.
Midrog rated the bond at Baa1 level with a stable horizon.