Equity Analysis /
Saudi Arabia

Dar Alarkan: Higher land sales support profitability

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    30 July 2019
    Published by

    Dar Al Arkan reported a stronger than expected set of Q2 19 results, though net income declining -31.0% yoy to SAR75.0mn. This compares to NCBC estimates of SAR32.0mn. We believe the variance is mainly due to higher land sales at improved margins. Dar Al Arkan trades at a 2019f PB of 0.6x, which is in-line with the company’s 5-year average.

    NCBC view on the results:

    Dar Al Arkan reported better-than-expected set of Q2 19 results. Net income declined -31.0% yoy to SAR75.0mn. However, this is higher than the NCBC estimates of SAR32.0mn. We believe the variance is mainly due to higher than expected land sales and gross margin expansion on land sales.

    Sales decreased 48.0% yoy to SAR928mn, coming higher than our estimates of SAR857mn and SAR824mn in Q1 19. We believe land sales accounted for c93% of total sales, with the remaining coming from rental income and sale of units. Historically land sales made-up 90-95% of total sales. According to our calculations, land sales came-in at SAR867mn vs our estimates of SAR800mn and SAR764mn in Q1 19. The Ministry of Justice index shows the real estate transaction values in Saudi declined c15% yoy in 1439H (2018), following a decline of 27% yoy in 1438H (2017).

    Gross margins stood at 21.7% in Q2 19 vs 14.9% in Q2 18 and our estimates of 19.0%. We believe the yoy gross margin expansion suggests that Dar Al Arkan sold less undeveloped land. We believe the majority of land sales occurred in Jeddah, where c+60% of the total land bank of Dar Al Arkan is located. According to our estimates, the land bank of Dar Al Arkan declined to c21mn sqm in Q2 19 vs c24mn sqm in Q2 18. 

    Dar Al Arkan has received a waiver on white land fees for the majority of its holding to date. According to management feedback, the white land fee on Dar Al Arkan’s land bank will be cSAR22mn per annum. We believe not receiving a waiver for the 2019 payment may impact earnings significantly.

    We are Neutral on the company, with a PT of SAR13.1. Dar Al Arkan’s strategy and ability to liquidate undeveloped land despite the white land fees is a key positive. The company currently trades at a 2019f P/B of 0.6x, which is in-line with its 5-year historical average.