Herfy Food’s Q2 net profit misses estimates, says Al Rajhi Cap

Herfy Food Services Co.’s net profit of SAR 43.4 million for the second quarter this year missed Al Rajhi Capital and the market consensus estimates of SAR 49 million and SAR 51 million, respectively, the brokerage said in an earnings review.

Q2 net profit was down 12.3 percent year-on-year (YoY).

Revenue dropped 2 percent YoY, missing the expectations of a 0.9 percent YoY growth, mainly due to a higher than expected decline in like-for-like (LFL) sales.

“We had already factored in weakness associated with the holy month of Ramadan completely falling in Q2 this year vs. 20 days last year via lower LFL assumption. Hence, we attribute the revenue miss to weak consumption environment that has impacted the top-line of most consumer companies in Q2 this year,” the brokerage said.

The gross margins of 27.7 percent in Q2 also missed Al Rajhi Capital’s estimates of 29 percent; however, it was partially offset by the better selling, general and administrative expenses’ control.

Going forward, the LFL decline is expected to stop due to reinstatement of allowances for public sector employees – which will have a complete impact in H2 – and as Q3 is seasonally a strong quarter for Herfy, the review said.

The brokerage has reduced the 2017-18 revenue estimates by 5.7 percent and 6.8 percent, respectively, due to lower LFL growth assumptions.

“We expect better EBIT margin, hence we retain 2017 net income estimate but cut 2018 estimate by 5.5 percent,” the firm said.

Al Rajhi Capital has maintained its “Neutral” rating on the stock, but revised the target price to SAR 57 per share from the firm’s previous SAR 60.6 per share.

The revised target price beats the current market price by 6.6 percent.

“Turnaround in LFL sales is the key as better store capacity utilization will drive operating leverage, leading to higher net income growth rates and stock re-rating,” the report said.