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ALDREES AB | Growth priced in; Remain N, on rising concerns

Recovery surprises, yet with risks ahead. The recovery in stations’ productivity was impressive in 2021e (+c14% y-o-y), surpassing pre-pandemic levels, ahead of our previous expectations by 2024e. But EBITDA margins remain behind, with further cost pressures ahead, as Aldrees hikes its Saudisation to comply with the new Nitaqat. We raise our 12M TP by c35% to SAR71.0/share, as we rollover our DCF with c13% higher volume/station, on average, more than offsetting the higher labour costs. On a 2022e P/E of 23.3x, 2021-23e EPS growth of 35% p.a. is priced in, in line with our implied valuation, warranting a Neutral call, with limited visibility on potential operational disruptions, on failure to secure Saudi calibres, particularly for the transport segment.

Stations key driver (85% of SoTP), with room for more. Aldrees remains committed to almost doubling its stations to 1k by 2025 (vs. 821 in our model), aggressively expanding its network ahead of the market. Displacing unorganised players via ongoing expansions (+50 stations p.a.) drove the pickup in volume/station, as Aldrees captured a higher market share, especially with its differentiated offering via the Waie programme (25% of 1H21 volumes). We expect this to sustain, looking for a 4% y-o-y hike in 2022e volumes/station (+2% p.a. beyond), as Saudi moves past the pandemic, potentially easing caps on religious tourism, and resuming physical schooling.

Stringent Saudisation a hiccup, deterring recovery. The new Nitaqat programme, launched in May-21, entails hiking Saudisation rates by c8% for stations and c16% for transport, over the next three years. While the company is still lobbying against this, we believe it will pressure 2022e EBITDA margin to 7.4%, before rebounding to 2021e level of 7.7% by 2025e. Pressures should be more magnified on transport, as recovery stalls, with no sizeable high-margin contracts secured like Ma’aden. Meanwhile, we see room for improvement in stations, as Aldrees unlocks higher fuel margins via revamps (c80% of stations are eligible), with an upside from relying on self-service stations (launched the first in 2019; yet could prove unfeasible, like the UAE).

Transport still a laggard. Ma’aden contract was renewed for one year, as of 1 September, with a c25% rate cut and a minimum monthly revenue of SAR2.37mn (c80% discount to old contract). That said, we continue to assign lower emphasis on this contract and see growth driven by the three secured end-2020 (SAR200mn over 3 years), albeit at a subdued rate (+c5% p.a.). EBIT margins should recover to 10.2% by 2023e, yet standing below 2019 level of 19.2%, on lower contribution of Ma’aden (49% vs. 11%), with a NPM cut (10-15% vs. 25% previously), and the Saudisation hike.