Equity Analysis /
Saudi Arabia

Dar Alarkan: Lower land sales impact profitability

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    9 May 2019
    Published by

    Dar Al Arkan reported a stronger-than-expected set of Q1 19 results, despite net income declining -92.3% yoy to SAR25.5mn. This compares with NCBC estimates of SAR20.0mn. We believe the variance is mainly due to higher margin expansion. Dar Al Arkan trades at a 2019f PB of 0.6x, which is in line with the company’s five-year average.

    Dar Al Arkan reported better than expected set of Q1 19 results, despite net income declining -92.3% yoy to SAR25.5mn. This is higher than the NCBC estimates of SAR20.0mn. We believe the variance is mainly due to higher gross margins, which came 235bps higher than our estimates at 19.3%.

    Sales decreased 70.5% yoy to SAR824mn, coming in-line with our estimates of SAR842mn and SAR1.02bn in Q4 18. We believe land sales accounted for c95% 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 SAR782mn vs our estimates of SAR800mn and SAR984mn in Q4 18. The Ministry of Justice index shows the real estate transaction values in Saudi declined c15% yoy in 1439H, following a decline of 27% yoy in the prior year (1438H).

    Gross margins stood at 19.3% in Q1 19 vs 17.0% in Q1 18 and our estimates of 16.4%. 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 c22mn sqm in Q1 19 vs c26mn sqm in Q1 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.