Winning Formula

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Abdullah Al Othaim Markets 2Q2016 Results Review 31 July 2016

Winning Formula

SAR 107

Buy

12-Month Target price

17% topline growth and gross margin expansion are noteworthy as Othaim demonstrated remarkable resilience to cautionary consumer spending. We expect discount retailer to continue benefiting from promotional pricing as premium retailers contend with shrinking basket size and customer attrition. Although SAR 1.12 EPS (-10% Y/Y) missed our SAR 1.21 estimate and consensus SAR 1.34, we see thin margins as greater risk. Headline 2Q results are encouraging as we await full financials to revisit our estimates and target price. For now maintain Buy and SAR 107 target price.

Recommendation

Stock Details Last Close Price

SAR

99.00

Upside to target

%

8.1

SAR mln

4,455

mln

45

Market Capitalization Shares Outstanding 52-Week High

SAR

110.75

Bucking the trend as sales maintain growth momentum

52-Week Low

SAR

62.25

Revenues jumped +17% Y/Y to SAR 2,019 mln beating our SAR 1,890 forecast by 7%. In an environment of cautionary spending, Othaim continues to benefit as a low cost retailer with limited customer attrition. In our view this bodes well as revenues maintained growth momentum in light of slowdown seen at other retailers (for example Farm +2% Y/Y). Substitution to lower priced alternatives could help Othaim win shoppers away from perceived higher priced retailers such as Danube or Tamimi.

Price Change (YTD)

%

10.3

Gross margins better than expected

Revenues (mln)

Despite promotional pricing gross margins improved to 16.7% from 14.4% in year ago period, and ahead of our estimate 15.8%. Although no specific reason was identified in management commentary for margin improvement, clearly Othaim’s business model is gaining favor in current spending environment.

Gross Margin

Earnings miss on higher opex

Price Multiples

Operating expenses increased during the quarter due to transportation, electricity and personnel costs to narrow the variance on operating profit to +4% from our forecast. We estimate +15% sequential increase in opex likely resulted from store additions. Higher financing costs contributed to earnings miss. We were looking for SAR 55 mln net income and consensus SAR 60 mln, while the actual came in at SAR 50 mln (-10% Y/Y). More critically, 2.5% operating and net margins place Othaim on weak footing for ongoing regulatory changes particularly with regards to workforce. The discount retailer’s ability to absorb wage inflation will be tested if job nationalization accelerates.

12-Mth ADTV

thd

59

SAR

5.20

4001.SE

AOTHAIM AB

EPS 2016E Reuters / Bloomberg

SFC Estimates

2016E

2017E

6,730

7,436

16.8%

16.5%

EBIT (mln)

219

257

Net Income (mln)

234

260

2015

2016E

2017E

P/E

19.3x

19.0x

17.1x

EV / EBITDA

14.1x

11.7x

9.5x

P/S

0.7x

0.7x

0.6x

P/B

3.8x

3.7x

3.2x

1-Year Share Performance

120

Shares outperforming peers Shares have outperformed the median for our Retail-Consumer coverage universe over the past 3 months gaining +5% versus -3%, and +21% versus +1% in the last 6 months. Clearly Othaim is doing something right – no frills offering in tighter spending environment could translate into market share gains.

100 80 60 40

Othaim (SAR mln)

2Q16

2Q16E

2Q15

Y/Y Chg

1Q16

Q/Q Chg

Revenues

2,019

1,890

1,726

17%

1,656

22%

7%

337

299

248

36%

295

14%

13%

16.7%

15.8%

14.4%

51

49

50

9%

4%

7%

-8%

Gross profit Gross margin Operating profit Operating margin

Variance Consensus 1,978

17.8% 3%

47

2.6%

2.9%

50

55

56

Net margin

2.5%

2.9%

3.2%

2.8%

3.0%

1.12

1.21

1.24

1.04

1.34

EPS

S O N D

J

F M A M

Othaim

TASI

J

J

SASERETL

Source: Bloomberg, Tadawul, SFC

2.5%

2.9% 47

A

57

Net income

-10%

J

2.9% 60

Asim Bukhtiar, CFA [email protected] +966 11 282 6844 Yazeed Al-Saikhan [email protected] +966 11 282 6608

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Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)

Research and Advisory Department Rating Framework

BUY Shares of company under coverage in this report are expected to outperform relative to the sector or the broader market.

HOLD Shares of company under coverage in this report are expected to perform inline with the sector or the broader market.

SELL Shares of company under coverage in this report are expected to underperform relative to the sector or the broader market.

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