EUR 31.35 For Business Accounts Only

All eyes on fuel segment; Upgrade to Overweight

Long-awaited margin revision to triple 2020e EPS. Aramco adjusted fuel operators’ margins upwards by a sizable c67% for octane to 15 halalas and 43% for diesel to 5 halalas, for the first time since 2007 (+24% in 2007), without setting a date. We raise our 2020-23e EPS estimates by 2.4x, on average, to reflect the higher margins as of 2020e, mitigating pressures stemming from the sector’s rising costs. We, thereby, upgrade our rating to Overweight from Neutral, and raise our 12M TP 2.2x to SAR66.0/share. Any delay in applying the upward adjustment would be an overhang on the stock, given the weakness in performance (-18% y-o-y in 9M19 clean EPS). Aldrees offers superior growth (EPS +81% over 2019-21e), with room for higher DPS (yield of 3.7%), trading 18% below peers on a 2020e P/E of 14.1x.

Fuel retailing, next growth story (78% of SoTP EV). We see greater focus by the government to develop the fuel retailing market to uplift the service level via: i) limiting the higher margins to qualified station operators (18 companies), ii) obliging stations to install PoS terminals (14 July), iii) relaunching Massar (MoMRA’s stations revamp programme), and likely extending it to the whole market, and iii) launching self-service stations. We see this as conducive for market consolidation, allowing Aldrees (5% of market) to displace smaller unorganised players (88% of market), lowering risks from the entry/expansions of other players.

Margin revision a breather. We assume a 4.3% improvement in stations’ productivity over 2018-21e, driven by: i) faster displacement of unorganised players, ii) the Waie programme (359 stations, c15% of volumes), and iii) the completion of station revamp in 2020e (148 remaining, 33% of stations). The margin revision should lift the segment’s profitability (+3.2x y-o-y in 2020e EBIT) and absorb rising opex, despite limiting the higher margin to station volumes (c95% of volumes) and assuming higher costs to account for higher municipality and environmental fees.

Transport to lose steam beyond 2019e. We look for an average drop of c11% in 2020-21e transport revenue, following Ma’aden’s stellar performance in 2019e, which we see as a peak (SAR144mn, 4% discount to contract value). We account for the renewal of this 4-year contract (due to expire Jul-21), albeit at a 67% discount, assuming higher reliance on the lower-priced rail (currently 75%). With no other sizable contracts secured, rising demand for logistics, warehousing, and other chemical contracts is not sufficient to fully mitigate Ma’aden’s lower revenue.