Equity Analysis /
Saudi Arabia

Al Othaim: Q2 19: Sales growth offset by higher other expenses

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    5 August 2019
    Published by

    Al Othaim reported a lower than expected set of Q2 19 results, with net income declining -20.8% yoy to SAR58.7mn. This compares to the NCBC and consensus estimates of SAR66.5mn and SAR76.8mn, respectively. We believe the lower than expected results were mainly due to higher financing expenses, as sales and all other profit lines were in-line with our estimates. Al Othaim currently trades at a 2019f PE of 18.1x vs covered retail peers average of 19.0x.

    NCBC view on the results:

    Al Othaim reported a lower than expected set of Q2 19 results, with net income declining -20.8% yoy to SAR58.7mn. This compares to the NCBC and consensus estimates of SAR66.5mn and SAR76.8mn, respectively. We believe the lower than expected results were mainly due to higher financing expenses, as sales and all other profit lines were in-line with our estimates. The yoy growth in sales is mainly due to new store expansions, which offset the impact of negative LFL.

    Al Othaim’s sales increased +7.4% yoy to SAR2,172mn in Q2 19, coming in-line with our estimates. We believe the yoy growth is mainly attributed to new store openings, which offset the negative LFL of c.-2.0%. Since Q2 18, Al Othaim opened 15 supermarkets and 5 minimarkets in Saudi. It increased the number of minimarkets in Egypt from 3 stores to 8 stores. This increased the total store count to 245 stores (199 in Saudi Arabia and 46 in Egypt).

    Gross margins contracted marginally by -38bp yoy to 18.2% in Q2 19 vs our estimates of 18.8%, which we believe is due to higher discounts offered during the Ramadan season. Opex increased +5.5% yoy to SAR325mn, in-line our estimates. We believe the yoy increase in opex is due to expenses associated with the new store openings. 

    Other expenses stood at SAR11mn in Q2 19 vs our estimates of an expense of SAR5.5mn. This compares to an other income of SAR6.9mn in Q2 18. This drove the yoy weakness and the deviation from our estimates. The increase in other expenses was driven by higher financing expenses.

    We are Overweight on Al Othaim with a PT of SAR80.9. We believe aggressive store expansions, with a focus on Saudi, will be a key growth catalyst going forward. Al Othaim currently trades at a 2019f PE of 18.1x vs covered retail peers average of 19.0x.