Equity Analysis /
Saudi Arabia

Al Othaim: Sales growth offset by higher expenses

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    12 May 2019
    Published by

    Al Othaim reported an in-line set of Q1 19 results, with a net income of SAR68.3mn (+1.6% yoy). This is in-line with the NCBC estimates of SAR68mn. The impact of the strong top-line growth of 9.0% yoy, driven by store expansions, was diluted by higher operating and non-operating expenses.

    NCBC view on the results 

    Al Othaim reported an in-line set of Q1 19 results, with net income coming broadly flat yoy at SAR68.3mn (+1.6% yoy). This is in-line with NCBC and consensus estimates of SAR68.0mn and SAR69.5mn, respectively. We believe the strong revenue growth, led by new store openings, was offset by higher opex and non-operating losses vs. non-operating profits in Q1 18.

    Al Othaim’s sales increased 9.0% yoy to SAR1.96bn, coming in-line with our estimates of SAR1.91bn. We believe the yoy increase in sales is mainly driven by the aggressive store openings in Saudi. Al Othaim opened 29 new stores (22 in Saudi and 7 in Egypt) in Q1 19, taking the total store count to 239 stores (193 in Saudi and 46 in Egypt). We believe the stores in Saudi were a mix of supermarkets and large minimarket formats, whereas in Egypt it was minimarkets. We estimate LFL at c-1.0% in Q1 19. 

    Gross margins expanded by 55bps to 19.5%, in-line with our estimates of 19.3%. We believe this is a positive and came as a result of higher rebates from suppliers. However, opex-to-sales increased to 15.7% vs our estimates of 15.9% and 15.4% in Q1 18. We believe the increase in opex is due to the expat levy, Saudisation measures along with aggressive store openings. To highlight, the company focused during 2018 was on large minimarket format stores rather than supermarkets.

    The company reported non-operating expense of SAR6.9mn vs a profit of SAR3.1mn in Q1 18 and our expectations of a profit of SAR2.2mn, leading to the flat profits yoy. We believe the losses are possibly due to higher than expected Zakat and financing expenses.

    We are Overweight on Al Othaim with a price target of SAR80.9. We expect aggressive expansions to continue supporting top-line growth. A turnaround in LFL towards growth will be a key catalyst going forward. Al Othaim trades at a 2019f PE of 16.9x vs covered peers PE of 17.6x.