Abdullah Al Othaim Markets Co.’s third-quarter net profit of SAR 50.5 million came close to Al Rajhi Capital’s estimate of SAR 47.6 million, adjusted for a SAR 100.1 million gain from the sale of Hail Mall, the brokerage said in an earnings review.
“We believe the new stores productivity is maturing faster than our expectation, and if this sustains going forward, it is an upside risk to our ~12 percent CAGR revenue growth estimate over FY17-20,” Al Rajhi Capital said.
Al Othaim’s gross and operating margins increased by 50 basis points year-on-year (YoY) each, in-line with the brokerage’s estimates and broadly in-line with the trend witnessed in the previous few quarters.
Such operating leverage could negate the impact of headwinds such as higher Saudization, expat levy and likely electricity/ utility price hikes, Al Rajhi Capital said.
Looking ahead, the retailer is expected to be debt-free on the sale of Hail Mall in Q3 2017, the report said.
Higher free cash flows and progressively higher dividend are likely, in light of stable to lower capex requirements going forward.
“We reiterate our stand that Al Othaim remains one of the strongest consumer franchises in Saudi Arabia with a strong operating profile and importantly, high revenue visibility in the current environment,” the report added.
Al Rajhi Capital upgraded the stock to “overweight”, raising its target price to SAR 131.5 from SAR 121.6.
Long term investors can play Al Othaim for secular compounding gains in the next few years, “despite limited short term upside,” the brokerage concluded.
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