Equity Analysis /
Saudi Arabia

Alhokair: Losses on lower sales and provisions

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    30 June 2019
    Published by

    Alhokair reported a disappointing set of CY Q1 19 earnings, with a net loss of SAR141mn vs our estimates of a profit of SAR26.8mn. While sales were in-line with our estimates, we believe the disappointing earnings were a result of provisions on inventory, despite the opex efficiencies. Adjusting for an early payment of sukuk, adjusted net loss stood at SAR103mn in CYQ1 19.

    NCBC view on the results

    Alhokair announced a disappointing set of CYQ1 19 (FYQ4 19) results, with a net loss of SAR141mn. This is the second consecutive CYQ1 loss recorded by the company and is significantly lower than the NCBC and consensus estimates of a profit of SAR26.8mn and SAR25.2mn, respectively. The disappointing earnings came as a result of weak gross margins, despite, which we believe is mainly due to provisions on inventory similar to CYQ1 18. Opex stood at SAR87mn vs our estimates of SAR173mn and SAR186mn in CYQ1 18, which is a positive. Adjusting for the early payment of sukuk, adjusted net loss stood at SAR103mn.

    Alhokair’s revenue declined -10.1% yoy to SAR1.07bn in CYQ1 19 vs SAR1.19bn in CYQ1 18, coming in-line with our estimates. This is the eighth consecutive quarter with yoy decline in sales, mainly due to ongoing closing down of underperforming stores and negative LFL. There was a net closure of 166 stores during the first three quarters of FY 19, taking the total stores to 1,756 stores by December 2018 vs a target of 1,582 stores by March 2019.

    Gross margins contracted -58bps yoy to 3.2% in CYQ1 19 vs our estimates of 23.0%. We believe the decline in gross margins is mainly due higher provisions of slow moving inventory in the last quarter of its financial year, similar to the one in same quarter last year. This offset the impact of the company implementing the discount control methods. 

    Opex declined -53.0% yoy to SAR87mn vs our estimates of SAR173mn. We believe the decline in opex comes as a result of the cost optimization measures. This reduction in opex helped limit the operating loss to SAR52.9mn in CYQ1 19 vs the operating loss of SAR140.7mn in CYQ1 18. 

    We are currently Neutral on Alhokair, with at PT of SAR25.0. We believe the surprise net loss due to continued inventory provisions is a key concern. The stock trades at a 2020E P/E of 17.1x, broadly in-line vs sector P/E of 16.6x.