Earnings Report /
Saudi Arabia

Extra: Weak Q3 earnings on margins contraction

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    8 October 2019
    Published by

    Extra reported a disappointing set of Q3 19 results, with net income declining 12.0% yoy to SAR27.2mn. Adjusting for the one-off gains of SAR4.5mn, net income declined 26.5% yoy to SAR22.7mn, lower than our estimates of SAR36.0mn. While sales (+15.7% yoy) were in line with our estimates, the deviation is primarily due to lower gross margins and higher opex.

    Extra reported a disappointing set of Q3 19 results, with net income declining 12.0% yoy to SAR27.2mn. Adjusting for one-off gains of SAR4.5mn, net income declined 26.5% yoy to SAR22.7mn. This compares to the NCBC and consensus estimates of SAR36.0mn and SAR37.5mn, respectively. While sales (+15.7% yoy) were in line with our estimates, deviation was primarily due to 1) lower gross margins (17.8% vs our estimates of 20.1%) and 2) higher opex impacted by the start-up of United Company For Financial Services (its fully owned subsidiary).

    Sales increased 15.7% yoy to SAR1,035mn, in line with our estimates of SAR1,041mn. This is the highest Q3 top-line on record, which we believe is supported by 1) the opening of six new stores (+14.3% yoy), taking the total store count to 48, 2) growth in e-commerce sales and 3) positive LFL growth of c1.5%. We believe the positive LFL is driven by sector consolidation due to 70% Saudisation on 12 retail subsectors, including electronics. 

    Gross margins contracted by 139bps yoy to 17.8%, lower than our estimates of 20.1%. Opex increased by +14.2% yoy mainly due to the start-up of Extra’s fully owned consumer finance subsidiary, United Company for Financial Services.  

    Extra recorded a one-off income of SAR4.5mn, from the settlement of insurance claim for fire in its Jeddah store, resulting in net non-operating income of SAR0.2mn, vs our estimates of non-operating expenses of SAR16.8mn. Moreover, the company recorded a one-off charge of SAR10.1mn related to the securitization of the loan.

    We are Neutral on Extra with a PT of SAR59.7. We believe the new consumer finance subsidiary will support earnings growth in 2020f; however, lower than expected gross margins in Q3 19 is a key concern. Extra trades at a 2019f PE of 20.6x vs PE of covered peers at 18.4x.