Equity Analysis /
Saudi Arabia

Shaker: Losses continue, but Saudi operations improving

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    8 May 2019
    Published by

    Shaker reported a broadly in-line set of Q1 19 results, with net losses increasing to SAR27.4mn versus SAR20.6mn in Q1 18. This compares with our estimates of a loss of SAR31.5mn. The yoy increase in losses is mainly due to Shaker’s UAE subsidiary, which offset the improvement in domestic operations.

    Shaker reported a broadly in-line set of Q1 19 results, with net losses increasing to SAR27.4mn in Q1 19 versus SAR20.6mn in Q1 18. This is the tenth consecutive quarterly net loss and compares to the NCBC estimates of a loss of SAR31.5mn. We believe the weakness is due to a weak performance at Shaker’s UAE subsidiary – Energy Management Services Company. This offset the improvement in domestic operations. 

    Shaker reported a 8.2% yoy decline in sales to SAR197mn – the lowest Q1 level since 2009. However, this is higher than our estimates of SAR172mn, which we believe is due to the improvement in domestic sales. Saudi operations reported a 20% yoy reduction in losses supported by lower opex. Sales and gross profits of Saudi operations increased by 6.5% yoy and 3.6% yoy, respectively. We believe the improved domestic sales is a key positive. 

    Gross margins contracted by 782bps yoy to 16.7%. This is the lowest Q1 margin since 2009, and is broadly in line with our estimates of 17.0%. We believe the yoy contraction is mainly due to: 1) higher discounts offered to gain market share; and 2) shift in the product mix towards the low-margin AC segment. Moreover, we believe the gross margins were further impacted by the stock liquidation to comply with SASO regulations. Home appliances have gross margins of 32% versus LG AC products of 23%. 

    Opex declined 11.8% yoy to SAR53mn, in line with our estimates. Opex as a percentage of sales declined to 26.7% in Q1 19 from 27.8% in Q1 18. We believe this improvement came from lower staff costs (-23% yoy) and lower rent expenses (-28% yoy). Non-operating expenses declined 43.1% yoy to SAR7.8mn versus SAR13.7mn in Q1 18, due to LG Shaker reporting profits and lower financing charges. We believe LG Shaker reported a profit of cSAR0.1mn versus a loss of SAR0.3mn in Q1 18 and our estimates of a profit of SAR0.9mn. 

    We are Neutral on Shaker, with a PT of SAR9.0. Gross margins are expected to stabilise once Shaker’s stock liquidation is completed. However, a weak performance of the UAE subsidiary is a cause of concern.