EUR 40.22 For Business Accounts Only

ALHOKAIR AB | Value to unfold, but not imminently; Maintain N

Turnaround sluggishly plays out, yet priced in. Alhokair is well-positioned to capitalise on the rapid social changes in Saudi Arabia, especially as it takes firm footings to reposition itself as a lifestyle retailer. Moreover, better recovery in mall traffic should pave the way to reap fruits of the optimisation plan and aggressive kitchen-sinking over FY20-21. While we expect the profitability turnaround of 1HFY22 to resume, we would turn more positive should the pace of recovery accelerate. Although we believe the stock bottomed out, having lost c30% in value over past 6M (c20% of which we attribute to rights issue dilution), we stay Neutral on the view that the market would like to see that Alhokair’s altered strategy is a credible one.

Uplifting sales densities, with selective expansions. Efforts to develop a high-yielding and margin portfolio with a leaner network should raise blended yields (3.4% p.a. over FY23-26e). As the clean-up is now behind us, we expect a reversal in space trend end-FY23e (+2.7% p.a. vs. -4.5% over FY19-21), on expanding: i) existing top performing brands, ii) new underserved propositions, as sports and athleisure, and iii) other segments, as electronics, beauty, and F&B. The launch of the loyalty programme and instalment sales, as part of FAS Lab (50:50 JV with Arabian Centres), should be a traffic puller, enhancing customer retention and cross-selling.

Unlocking value from turnaround strategy. With finalising the bulk of balance sheet clean up (cSAR1.3bn provisions and write-offs in FY20-21), impairments related to divesture of the US (signed LoI to sell 66.7%) and Balkans by end-FY22, should have a minimal impact (US 1HFY22 losses of SAR12mn, SAR21mn BV). We, thereby, project EBITDA margin to reach 8.4% in FY22e (vs. -9.2% in FY21), 11.7% by FY25e reaping fruits of optimisation strategy, with better inventory management (provisions 2% of sales). Also, cost-cutting and launching the shared service centre (3QFY22) should streamline headcount, mitigating F&B’s higher Saudisation costs.

Capital restructuring to ease debt burden. Alhokair BoD proposed a c46% capital reduction in Nov-21 to write-off accumulated losses of cSAR969mn (via cancelling 96.9mn shares). This will be followed by a capital hike to SAR2,131mn via a SAR1bn rights issue (100mn shares). Proceeds will be used to partially settle debt (SAR2.9bn, as of 2QFY22) and fund growth plans. This should raise our 12M TP by 25% to SAR23.8/share, however, we do not account for this in our forecasts, pending securing EGM and regulatory approvals (timeline yet to be announced).