• Better Y-o-Y revenue growth vs. 1Q16 on Ramadan, base effects Aggregate revenue growth for the 13 names under coverage improved to 7% Y-o-Y on average from 3% in 1Q16, so have earnings growth for some names (select retail & food names). However, the sustainability of these trends is questionable as 2Q16 benefited from more Ramadan days this year. Also 1Q16 suffered from a high comparable base (especially for discretionary names) as 1Q15 was boosted by the two-month King-ordered bonus. SADAFCO remains our top-pick (strongest results yet again with earnings +47% Y-o-Y on commodity benefits and cost controls). We also continue to like Al Othaim (consistent positive LFL sales growth but recent opex jump concerning), Herfy (to benefit from aggressive expansions in the past two years) and Budget Saudi (cheapest stock).
• Key themes seen in 2Q16 Ramadan timing good for some, bad for others: More Ramadan days (c12) in 2Q this year helped most food producers (best revenue and margin month of year) and Hokair (last days of Ramadan a high-season for apparel sales). Herfy and Halwani were hit as Ramadan is seasonally weak for fast food and most of Halwani’s products. Dairy names the star performers but still of wary of fresh dairy: Dairy producers had an impressive 2Q overall aided by low commodity prices. SADAFCO continued to perform strongly with the largest earnings beat given low SMP prices. The real surprises were the very strong margin gains at fresh dairy producers Almarai and Nadec as raw material prices and efficiency measures offset higher utility and transport costs. However, their results are not indicative of future performance in our view as it appears they have not yet been hit by the impact of higher feed imports (100% by 2019e). Structural food demand growth continues to slow: With the exception of Almarai (+10% Y-o-Y but slower than 14% last quarter despite the Ramadan effect), food producers reported lower revenue Y-o-Y as competition intensified and consumers penny-pinched on some products. Discretionary retailers saw better performance: Electronics retailers Jarir and eXtra saw a flattish top-line in a declining market as promotional efforts intensified but earnings were still weak. Hokair was a big positive surprise reporting solid operational growth (revenue +17% Y-o-Y, EBITDA +34%) and flattish earnings after an exceptionally weak 4Q15/16 where it barely broke even. However, it is unclear how much of this was due to the Ramadan effect. pressures reign: Other than most food producers and Hokair, all names saw margin pressure on higher staff costs, subsidy reforms and increased promotional activity (particularly retailers). Budget was further hit by sales mix (ST rentals slowing), Catering by lower provision reversals and Aldrees by limited ability to adjust transport contract prices to reflect higher diesel costs. Currency devaluation: Several companies with exposure outside the GCC were affected by weaker currencies, particularly Savola and Halwani whose performances were hit by c13% EGP devaluation in March 2016.

Hatem Alaa, CFA
Nada Amin
Mirna Maher