EUR 21.76 For Business Accounts Only

Solid expansions, brand loyalty drive displacement

On an expansion spree. Operating in a fragmented market (57% unorganised), coupled with Saudi’s unchanged spending outlook, supports Al-Othaim’s strategy to further extend its aggressive store roll-out, targeting 25 stores p.a., and expand its market share. We remain buyers of Al-Othaim, as it continues to be a play on displacement, despite overlooked cost pressures from expat fees, leaving 2018 clean EPS flat y-o-y (vs. 6% y-o-y for consensus). We raise our 12M TP by c31% to SAR196/share to reflect, over 2018-22: i) 30bps, on average, better EBITDA margins, thanks to Al-Othaim’s higher bargaining power in negotiating suppliers’ margins as it gains more market share, and ii) higher store openings (18 p.a. vs. 9 previously), despite factoring 65% higher capex, mainly pertaining to the new logistics project, Al-Othaim city. Al-Othaim trades on a 2018e P/E of 21.2x, 7% above peers.

Market outperformer. Al-Othaim stands out in the market, evident by its 2017 flat like-for-like sales growth (vs. a double-digit drop for Panda and Farm Superstores), benefiting from trading down and limited exposure to discretionary items (5% of top line). Management expects this to sustain in 2018, as higher pre-Ramadan sales should compensate for the y-t-d drop in LFL sales (10% y-o-y). We expect the aggressive expansions to continue pressuring Saudi’s 2018 store yields by 4.4% vs. c5% in 2017. In our view, maturity of new additions (74 stores over 2016-18e), along with the focus on attracting Saudi customers (55% of sales) to mitigate impact from expat departures, should drive recovery in yields over 2019-22e of c3% p.a.

Consolidation of Riyadh warehouses (66% of revenue). Al-Othaim plans to heavily invest in a comprehensive logistics project in Riyadh (SAR600mn over 3 years), expanding its HQ, fleet, and warehousing capacity to support the growing store network. We expect consolidating Riyadh warehouses to save costs, as current total annual warehouse rent is SAR11.8mn, rising further, given the aggressive store expansions. This provides scope for EBITDA margin recovery by 2021e (+20bps y-o-y to 5.5%), from ongoing pressure stemming from increasing expat fees (-30bps p.a.), as Al-Othaim refrains from raising prices to maintain its dominant position.