Herfy expected to make SAR 55.7 mln profit in Q4, says SICO

Herfy Food Services Co. (Herfy Foods) is expected to post a SAR 55.7 million in earnings in the fourth quarter of 2017, maintaining the same level as Q4 2016 despite a 2 percent year-on-year (YoY) increase in revenue at SAR 285.7 million, SICO Investment Bank said in a report.

This is due to the rise in cost of sales translating to a lower gross margin at 30.9 percent versus 32.7 percent YoY, the report said.

SICO also forecast a 13 percent decline in like-for-like sales in Herfy stores in fiscal year 2017.

“We have assumed Herfy to have 353 stores by year-end (addition of three stores in Q4 2017); however, expect pressure on like-for-like sales to continue in the quarter,” the investment bank added.

SICO said it expects Herfy’s stores to increase to 423 by 2020, with more focus on smaller cities where margins are expected to be higher, likely due to lower operating costs.

SICO maintained a ‘neutral’ rating on the stock, and cut its target price to SAR 55.

Pressure from higher expat levy and the 5 percent value-added tax represent valuation risks, the bank said.

“Going forward, expat levy will increase each year, from 2018 to 2020, by SAR 200/month per expat employee. We expect Herfy’s bottom line to be incrementally impacted by SAR 9.5- 10mn each year due to higher levy. However, management expects cost efficiency initiatives in 2018 will offset some of the levy impact,” SICO said.

The firm also faces the risk of cannibalization for existing stores from continuous expansion and increase in competitive threat from the other multi-national and regional competitors, the report said, while noting that Jeddah-based Al Baik is planning to open seven new outlets in Herfy’s key market Riyadh.