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Dar Alarkan: Strong results on higher margins and lower opex

  • Sales declined 6.4% yoy to SAR555mn in Q1 21, but was slightly higher than our estimates of SAR522mn
  • Gross margins expanded significantly yoy to 36.9% vs 27.0% in Q1 20 and came in-line with our estimates of 35.5%
  • Non-operating expenses increased 36.9% yoy to SAR139mn and came higher than our estimates of SAR125mn

Dar Al Arkan reported a better than expected set of Q1 21 results, with a net income of SAR28.5mn (+130% yoy) and was higher than our estimates of SAR15.2mn. The positive yoy variance was mainly driven by improved margins and lower opex which offset the impact of lower lease revenue and higher financing costs. Sales declined 6.4% yoy to SAR555mn but came-in slightly higher than our expectations of SAR522mn (+11.8% qoq).

Sales declined 6.4% yoy to SAR555mn in Q1 21, but was slightly higher than our estimates of SAR522mn. The decline in sales was expected due to a decrease in the rental income coming from the renovation of their Azizia Towers project in Mecca. However, we believe the improved land and residential development sales partially offset the impact.

As per our latest discussion with the management of the company, Shams Al Riyadh land plots sales are strong and most buyers are building their own houses. Furthermore, Dar Al Arkan is expected to begin realizing sales from its Shams Al Riyadh and I Love Florence Tower (ILFT) projects in Riyadh and Dubai, respectively, which we believe will be a key revenue driver going forward.

Gross margins expanded significantly yoy to 36.9% vs 27.0% in Q1 20 and came in-line with our estimates of 35.5%. We believe the yoy improvement in margins is due to a higher proportion of developed unit sales in the sales mix. As a result, gross profit stood at SAR205mn (+27.8% yoy), vs our estimates of SAR186mn.

Further support to earnings came from the decline in operating expenses, which decreased 19.3% yoy to SAR37.4mn and came much lower than our estimates of SAR45.0mn. Subsequently, opex-to-sales stood at 6.7%, vs 7.8% in Q1 20 and our estimates of 8.6%.

Non-operating expenses increased 36.9% yoy to SAR139mn and came higher than our estimates of SAR125mn, which is mainly attributed to higher than expected financing costs.

We are Neutral on Dar Al Arkan, with a PT of SAR11.1. We believe the company will benefit from higher contribution from its development projects going forward, which is further supported by the value of its land. The stock is trading at a 2021f P/B of 0.6x, in-line with its historical average of 0.6x.


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