Equity Analysis /
Saudi Arabia

Al Othaim: Downgrade to Neutral on fair valuation concerns

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

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    SNB Capital
    27 January 2020
    Published bySNB Capital

    We downgrade Al Othaim to Neutral on fair valuation concerns, with a revised PT of SAR83.0. We expect top-line CAGR of 5.7% for Al Othaim between 2018-2024f, supported mainly by aggressive store expansions in Saudi. Despite the growth prospects, we believe 1) the revival of Panda and 2) emergence of e-commerce food retailing platforms may pose risks to Al Othaim’s market share going forward. We believe the stock currently prices in all the positives, trading at a 2020f PE of 23.0x vs covered peers at 18.7x.

    Aggressive expansions to support sales growth: During 2019, Al Othaim opened 28 new stores in Saudi (22 supermarket and 5 convenience stores) and one in Egypt, taking the total store count to 262 stores. We expect the company to continue with its aggressive store expansion in 2020f and open 13 supermarkets and 5 convenience stores, taking its total store count to 280 stores. We expect the company to open an average of 9 stores/annum thereafter till 2024f, taking its total store count to 334 stores.

    Sector consolidation trends visible, however LFL growth to remain limited due to competition: We expect the market share of supermarkets to be supported by the ongoing sector consolidation trends in Saudi. However, we believe any improvement in Al Othaim’s market share will be limited due to the recovery at Panda and emergence of e-commerce platforms. Accordingly, we expect LFL rates to improve from c-9% in 2018 but remain negative at c4% in 2019f and c-3% in 2020f. We expect LFL to turn marginally positive from 2021f onwards at an average growth of 1.4%, supported by population growth, inflation and consolidation trends.

    HR services business supporting top-line of Al Othaim: Al Othaim’s HR services business, Mueen HR Company, supported Al Othaim’s top-line growth since 2017. Revenues of Mueen grew from SAR59mn in 2017 to SAR246mn in 2019f. We believe Mueen’s business is driven by Al Othaim’s branches. Accordingly, we forecast revenues of Mueen to grow in-line with Al Othaim going forward.

    Downgrade to Neutral on fair valuation concerns: We downgrade Al Othaim to Neutral on fair valuation concerns, with a revised PT of SAR83.0. Al Othaim trades at 2020f PE of 23.0x vs covered peers at 18.7x. We believe the current valuation prices in all the positives. We believe the downside risk to our valuations going forward is the revival of competitor Panda.