• Cut FV, but still have Buy on solid market dynamics, LFLs & valuation We reduce our FV by c14% to SAR109 (25% upside) as we trim our estimates to reflect SG&A cost pressures. We reiterate our Buy call as Al Othaim is still one of our top KSA consumer picks as it is the only listed retailer posting positive LFL sales trends. We continue to see solid growth prospects in Saudi’s grocery retail sector (which should be fairly resilient despite the tough economic backdrop) as the market shifts to the organised format. It is also trading at a c15% discount to listed grocery retail peers on 2017e P/E.
• Still growing same-store-sales in a tough environment Al Othaim has almost consistently posted positive like-for-like (LFL) sales trends (+c4-5% in 2016 vs. +6-7% in 2015) and expects more growth in 2017 (+3-4%). This is in stark contrast to the largest grocery retailer Panda (owned by Savola), which is reporting negative LFLs (-5%) and is loss-making. The difference in our view is Al Othaim’s focus on “plain-and-simple” supermarkets, which are performing well, while Panda also has hypermarkets and convenience stores. Al Othaim’s emphasis on improved product availability and variety as well as its strong loyalty programme have helped its LFLs. It continues to expand its network (c15 KSA new stores annually, mostly supermarkets). It had initially planned to invest cSAR144mn over 2016-18e in Egypt, but has scaled down investments given FX issues (only opened 10 stores to date at SAR22mn capex).
• SG&A costs are the main risk The key risk to our numbers is negative margin surprises (core EBITDA margin -c20bps in 9M16) from high SG&A costs (+36%) mainly due to higher staff costs as well as some pressure from a higher electricity bill that have been erasing strong gross margin gains. 4Q16 margins could surprise as progressive rebates will likely be higher Y-o-Y given the company’s strong sales performance (+17%). Another risk is volatility from non-core investments: Al Othaim Malls (c14%-owned sister company) is performing well, but there could be pressure from newer businesses (fully consolidated) operating in areas such as recruitment services and food production.  

Hatem Alaa, CFA
Nada Amin