• Transport contracts rates mostly upped; reiterate Buy We cut our FV by 17% to SAR49.5 (37% upside) from SAR60.0 as we raise WACC c1pp and lower earnings estimates by c17% mainly to reflect slower contract additions at the transport division and fewer station openings in the near term. We remain Buyers as we like the stable nature of the petrol stations division with upside from the revamp strategy detailed below. Also, the stock’s valuation is attractive at a 2016e P/E of 11.2x. Aldrees announced a negative cost impact of cSAR27mn from subsidy reforms that mostly relates to higher diesel costs for the transport division. However, it managed to raise contract prices (c10%) for most clients to offset the higher costs. A key risk in our view is difficulty in securing and/or renewing transport contracts, which we expect to be the case in 2016. However, the company is looking to invest cSAR200mn in 2016-17 to expand its fleet in preparation for some big pending awards.
• Petrol stations performance to hold up despite higher prices The petrol station division should remain fairly resilient despite a significant increase in at-the-pump petrol (+50-67%) and diesel (+80%) prices as volumes continue to grow and the government-set cash margin for station operators is unchanged. While working capital management could improve as a result of higher prices (Aldrees pays Aramco with a one-month lag and c70% of sales in cash), impact on funding costs will not be felt in the short term (c45% of debt is ST) due to higher interest rates and increased capex.
• Upside to petrol stations margins from revamp, in-station mini marts The station count will likely be flattish in 2016 as Aldrees will close c30 stations and focus on renovations (for 3-4 years) with SAR100mn earmarked this year. Most stations will see minor retrofits (64 out of 74 in 2016), which have a lower investment cost and cause less disruptions (a couple of weeks’ closure versus 8-12 months for a complete rebuild). Newer stations should help attract more tenants boosting rental income (c8% of stations revenue) Additionally, Aldrees earmarked cSAR94mn to reach 200 in-station owned & operated convenience stores (branded ‘AD mart’) by 2019 from only four in 2015 that have the potential to contribute c6% to earnings in four years.

Hatem Alaa, CFA
Nada Amin