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ALDREES AB | On path to recovery; Valuation rich, cut to Neutral

On an expansion spree. Aldrees is aggressively expanding its fuel station network, targeting 100 new stations in 2021 (+73 in 2020), with a 2025 target of 1k stations (vs. our forecast of 805 and 544 in 2020). Management is encouraged by the hike in qualified operators’ margins, providing ample room for market share gains (88% are fragmented, unqualified individual players). We roll over our DCF, yet maintain our 12M TP, reflecting an average 1.1pp cut in 2021-24e EBITDA margins for both segments, with 23% higher capex for new stations and transport contracts. We downgrade our rating to Neutral, as we see valuation stretched on a 2021e P/E of 31x (vs. peers’ c20x), pricing 2020-22e EPS recovery of 30% p.a. (+41% clean).

Room for stations’ ramp-up (80% of SoTP). Consolidation is a continuing theme, although it was overshadowed by the lower traffic (mobility restrictions and e-learning), amid the pandemic. While we do not see recovery to pre-pandemic levels in 2021e, we look for a 4% pickup in volumes/station and 2% beyond, supported by: i) ramping up new stations, ii) Waie programme (c24% of volumes, with an upside, amid plans to waive the SAR150 tag fee in 2021), and iii) garnering market share, at the expense of unorganised players. The muted medium-term growth is hindered by the lower fuel consumption, post launching Riyadh Metro in 2021, in our view.

Revamps to unlock higher margins. Contrary to guidance and our expectations, the higher margins were not applicable to all stations in 2020 (410 stations, 80% of total), pending revamps and fulfilling Aramco’s required documentation, for the remaining ones. Aside from COVID-19 implications and the higher opex, this weighed on the segment’s 2020 profitability, which we see on path to recover, as Aldrees completes revamps of existing stations. We see EBIT margin recovering to 4.1% by 2022e from 3.5% in 2021e, pressured by c17% higher octane prices vs. 3.7% in 2020.

Transport to bottom out. Although renewal of Ma’aden’s contract (expiring in Jul-21) remains uncertain, management is confident of its ability to win the tender (bid at a 15% discount), on having the required tanks. Yet, we assign less emphasis on this contract, factoring its partial renewal with c74% discount, and see growth fuelled by new ones secured end-2020 (SAR200mn over three years), and warehousing operations. This should imply flattish 2021e revenue, with solid EBIT margin recovery at 11.4% (vs. 2020 low of 5.5%), yet remaining below 19.2%, as of 2019, on lower Ma’aden contribution (23% vs. 49%) with a NPM cut (15% vs. 20-25% previously).