EUR 21.76 For Business Accounts Only

Fuel hikes hold benefits, but not a game changer

No short-run catalysts, reiterate Neutral. We update our forecasts to reflect higher fuel prices (+83% for 91 octane, +127% for 95 octane), as of 1 Jan, though station operators’ margins remained unchanged. We lower 2018-19e WC needs by 16%, as Aldrees’ CCC benefits from higher fuel prices, but the 5% VAT on diesel costs (23% of transport CoGS) should pressure transport margins (36% of SoTP EV). We cut our 12M TP by c6% to SAR29.5/share to reflect: i) higher leverage (3Q17 ND +32% q-o-q to SAR606mn), ii) better WC, and iii) lower transport margins. ND/EBITDA is expected to surge to 3.8x in 2018e on fuel segment reinvestments, especially as government receivables mount, given the delay in collection (should gradually improve starting 2019). On a 2018e P/E of 22.9x, Aldrees trades on par with peers.

Stations’ productivity a key watch factor. Aldrees is well-positioned to expand its volume-market share (currently 10%), as it gains traffic from unorganised players unable to sustain the higher i) fuel costs as they pay Aramco in advance, and ii) municipality licencing fees. Aldrees saw a pick-up in volumes sold post-closure of 250 stations with expired licences across Saudi. We assume a recovery in 2018 productivity (+1.7% y-o-y vs. +0.2% in 2017e), before picking up by 4.5% p.a. over 2019-22e. Waie should be available in all stations within cities by end-1Q18 (currently in 242 stations). The system, exclusive for Aldrees, provides solutions to control fuel consumption via installed chips (installed in >22k cars).

Fuel margins remain under pressure. Contrary to management’s expectation, station operators’ margins remained unchanged after the latest fuel prices hike, for the second consecutive time. We look for a drop in the segment’s EBITDA by 3% y-o-y, pressured by higher licencing and expat fees (effective 1 Jan). Aldrees aims to optimise the segment’s cost structure by renegotiating existing stations’ rent contracts (rent is 5% of costs). The company is still directing investments to revamp stations, and has no plans to scale down.

Potential hike in diesel prices to deter transport recovery. We expect transport EBITDA margin to recover in 2018 (+1.5ppt y-o-y to 34.7%), backed by the ramp-up of Ma’aden contract and unchanged diesel prices this year. The Saudi government aims to cut the diesel price subsidy to 10% by 2025, from our current estimate of 84%. This implies an average increase in diesel prices of 28% p.a. starting 2019, which would lower 2019-20e transport EBITDA by c7%, all else constant, since existing contracts (55% of 2019-20e revenue) do not have cost escalation clauses.