• Raise FV and remain Buyers; valuation still attractive We increase our FV 17% to SAR127 (30% upside), as we increase earnings c18% on average to reflect strong same-store-sales growth and Egypt expansions. We remain Buyers as we believe the market will continue to reward the stock for its strong LFL sales trends while expanding its network (targeting c15 supermarkets in KSA per annum) in challenging conditions. In contrast, KSA’s largest grocery retailer Panda (owned by Savola Group) is also growing aggressively (retail space +13% over 2015-1Q16 vs. +11% for Al Othaim), but at the expense of margins, with Al Othaim’s 2015 earnings c60% higher than Panda despite its smaller scale. While recent share price performance has been strong (+c10% YTD vs. -c5% for TASI), the stock is still trading at a 20%+ discount to grocery retail peers on 2016e P/E.
• Impressive same-store-sales and margin trends Al Othaim was the only listed KSA retailer to post strong positive like-for-like (LFL) trends in 1Q16 (+c7% Y-o-Y in line with 2015 trends), driven by improved product availability and variety, as well as a focus on private labels and geographic diversification within Saudi Arabia. The company was also able to improve margins slightly in the quarter (+c20bps) despite higher utility and transport costs, likely on better rebates, in our view. A risk to earnings is volatility from non-core investments: Al Othaim Malls (c14%-owned sister company) is performing well, but the company recently delved into new businesses that are fully consolidated operating in areas such as recruitment services and food production.
• Venturing aggressively into Egypt’s grocery retail market Al Othaim is looking to invest cSAR144mn over 2016-18e to build a network in Egypt, with around three stores (area per store is nearly half that of KSA supermarkets at c900-1k sqm) already opened and plans to open c30 stores per annum (we assume 20). We are positive on the venture, given very low-organised grocery retail penetration in Egypt (c15-20%). Also, we like the company’s strategy in the new market, where stores will be mostly located in high-density middle-income residential areas in main and secondary cities.

Hatem Alaa, CFA
Nada Amin