• 4Q2015: still a margin story as revenue growth slows… Our 13 Saudi consumer and retail covered names delivered 7% Y-o-Y revenue growth on average in 4Q15, remaining range-bound versus 3Q15, but slowing compared to 1H15’s low double digit Y-o-Y growth. Food players showed signs of slowing structural demand whilst retailers’ LFL sales trends largely contracted. Earnings growth of 21% (distorted by strong growth at SADAFCO and Nadec; median +11%), outpaced top-line growth as food names continued to benefit from low raw material prices.
• …but all eyes on 1Q2016 given recent subsidy reforms The growth outlook is likely to be considerably different over the coming quarters as companies will be hit by higher petrol/diesel and utility costs that could also slightly impact household spending. The outlook is particularly contentious for fresh dairy producers (Almarai & Nadec) who will face a double whammy due to a higher raw material cost bill as the kingdom moves to ban local fodder cultivation entirely by 2019. Also, some retailers’ growth will likely be dampened in 1Q16 as 1Q15 was boosted by one-off bonuses ordered by King Salman. In this environment, we prefer names with limited direct subsidy exposure and pricing flexibility, namely Aldrees, Budget Saudi, Al Hokair and SADAFCO.
• Food buoyed by low input costs; SADAFCO the best performer Food names’ revenue growth slowed to only 3% Y-o-Y with tough competition still brewing (especially in long-life milk and cheese and butter). SADAFCO posted the strongest top-line growth of 11% Y-o-Y on continued market share gains. A supportive raw material cost environment was the saving grace for food players with exceptional bottom line growth reported by SADAFCO (+126% Y-o-Y), Nadec (+71%) and Halwani (+45%). Meanwhile, all food companies’ revenues outside KSA were flattish to lower Y-o-Y on political turmoil and/or weaker EGP (Almarai, Halwani & Savola).
• Retailers yields on downtrend, margins flat; Al Othaim an exception Retailers posted stronger revenue growth of c9% on average mostly on new openings as like-for-like trends weakened for most names, signalling a demand lull, particularly for electronics’ retailers (eXtra & Jarir). However, margins were flattish on expenses for new locations and Saudisation efforts. Al Othaim (earnings +20% Y-o-Y) was the standout across retailers posting strong LFL sales growth and improved margins on higher rebates.
• Shift of Hajj season entirely to 3Q affects some names The Hajj season shifted entirely into 3Q in 2015 versus being split between 3Q and 4Q in 2014. This affected revenue growth of some names such as Catering (+4% Y-o-Y) and Al Hokair (KSA revenue +7% with LFL of -3%; sees 5-6x its average daily sales during the peak shopping period).

Hatem Alaa, CFA
Nada Amin