• Stable petrol division, improved transport outlook; Buy We cut our FV by c10% to SAR44.5 (36% upside) as we lower our estimates to reflect the recent transport division weakness. We reiterate our Buy rating as we like the stable nature of the petrol station division and improved visibility at its transport segment post securing a major contract. Also, it has an attractive valuation (c11x 2017e P/E). A key risk is difficulty in securing and/or renewing transport contracts as well as raising rates on existing ones to pass on higher diesel costs. Another concern is receivables, up 45% YTD to over SAR300mn, but risk is low in our view as c80% is related to petrol stations (due to higher prices).
• cSAR600mn transport contract a game-changer Transport earnings stumbled in 9M16, down c60% (contribution fell to c23% from c41% in 2015) as Aldrees wasn’t able to fully pass on higher diesel prices to clients. Also, several contracts were not renewed (some temporarily renewed at lower rates), which explains its lower revenue (-12%). The recently-signed contract with Maaden Waad Al Shamal for truck transport of molten sulphur and phosphoric acid is a game-changer - the contract is effective from 1 Dec 2016 for four years with a max. total value of SAR597mn (cSAR150mn/annum) with estimated truck capex of cSAR150mn. The contract provides visibility on 40%+ of segment’s revenue for the next four years and the margins are good (c20-25% net margin vs. 9M16’s c9%) and secures 20%+ of earnings. The contract has a cost escalation clause allowing Aldrees to raise rates if diesel prices rise. Also, we believe the contract may be renewed beyond 2020.
• Petrol stations’ performance holds; upside risk from higher margins The petrol station division’s earnings were flattish despite a significant increase in at-the-pump petrol (+50-67%) and diesel (+80%) prices as volumes continued to grow and the government-set cash margin for station operators was unchanged. We expect a negligible increase in stations, as the emphasis is on renovations for the next three years (at cSAR100mn per year), which should bolster higher-margin rental income (c8% of station revenue). Plans to have in-station owned and operated mini-marts have been scrapped for now. There is a chance that the gov’t increases station operators’ cash margins: a SAR0.01 increase in petrol margins would translate into cSAR30mn increase in earnings (+25%).

Hatem Alaa, CFA
Nada Amin