Earnings Report /
Saudi Arabia

Dar Alarkan: Weak earnings on lower than expected revenues

  • Revenue grew 19.4% yoy (-58.1% qoq) to SAR678mn in Q2 22

  • Gross margins contracted by 38bps yoy to 36.2% in Q2 22

  • Opex in absolute terms increased 96.0% yoy (+38.1% qoq) to SAR88.0mn

SNB Capital
28 August 2022
Published bySNB Capital

Dar Al Arkan reported a weaker than expected set of Q2 22 results, with net income of SAR92.6mn (+313% yoy, -58.1% qoq). This is significantly lower than our estimates of SAR153mn and the consensus estimate of SAR141mn. We believe the negative variance was mainly due to 1) lower than expected revenue on lower property sales, 2) higher opex due to an increase in marketing expenses related to the new projects. However, this was partially offset by higher than expected gross margins and a decline in non-opex.

  • Revenue grew 19.4% yoy (-58.1% qoq) to SAR678mn in Q2 22, but came significantly lower than our estimates of SAR1.17bn. We believe the variance is mainly driven by lower than expected property sales and leasing revenue which was impacted by the renovation of their Azizia Towers in Makkah.

  • Gross margins contracted by 38bps yoy to 36.2% in Q2 22, but came higher than our estimates of 35.4%. We believe the variance is mainly due to increased proportion of higher margin developed properties in the sales mix. As a result, gross profit stood at SAR245mn (+18.2% yoy, -56.4% qoq), vs our estimates of SAR413mn.

  • Opex in absolute terms increased 96.0% yoy (+38.1% qoq) to SAR88.0mn. This compares to our estimate of SAR60.0mn and SAR44.9mn in Q2 21. We believe the yoy increase and variance is due to higher marketing expenses related to the new projects. Subsequently, Opex-to-sales stood at 13.0% in Q2 22, compared to our estimates of 5.1% and Q2 21 levels of 7.9%.

  • Net other expenses stood at SAR65.0mn (-53.7% yoy, -76.6% qoq) and was significantly lower than our estimates of SAR201mn. We believe the variance in non-opex was due to lower finance costs and higher income from deposits which offsets the decrease in the share of income from associates.

Outlook

Based on our last update, we are Neutral on Dar Al Arkan, with a PT of SAR11.8. We expect the company to continue recognizing sales from Shams Al Riyadh and begin realizing sales from its Dubai projects this year, which will be the key positives. We also expect the higher contribution from its development projects going forward to support margin expansions. The stock is trading at a 2022f P/B of 0.8x, in-line with its historical average.