16-May-2017
Saudi Consumer and Retail - 1Q17 results recap: Discretionary names stage a strong earnings recovery
Weaker consumer demand continued in 1Q17 with all but three of 14 KSA consumer names under our coverage posting flat to declining revenue. Five names recorded earnings growth. Select discretionary retailers outperformed partly due to a low comparable base (1Q16 saw the onset of austerity measures).
Weak performance by food producers with all names under coverage seeing flat to declining revenue partly on increased promotional activity to spur demand especially in UHT milk. Usually resilient dairy & juice was the most affected as seen in Almarai, Nadec and SADAFCO’s numbers. EGP devaluation was an additional source of pressure for Almarai, Halwani and Savola. Almarai had the best results set posting flat revenue and 14% earnings growth driven by its bakery and poultry segments (the latter saw losses contract over 70% Y-o-Y).
Tailwinds for electronics retailers: eXtra (+8%) and Jarir (+20%) posted solid top-line growth on positive LFLs despite a c25% contraction in KSA’s electronics market (Jan-Feb 2017); both names benefited from market consolidation from the closure of c3k mobile retailers, who were unable to meet 100% Saudisation.
Turnaround materialising for eXtra and Al Hokair, but not yet for Savola and Shaker: eXtra saw a big recovery from 1Q16 losses (partly on inventory liquidation) and is the best performing KSA consumer stock (+50% YTD); Hokair’s revenue was still down Y-o-Y, but margins recovered strongly from a year ago (impaired by aggressive promotions in KSA and Blanco that is now sold); Savola’s numbers confirm that 4Q16’s kitchen-sinking was not enough with recurring losses widening for grocery retailer Panda; Shaker reported losses for the second quarter in a row.
Othaim continues to impress with sustained positive LFLs (revenue +17%), which is in stark contrast to Panda (-17%) and Farm (+2%) with a surprise from lower-than-expected SG&A costs that drove rare margin gains and an earnings beat. Fast food retailer Herfy failed to impress posting a flattish quarter on a sharp drop in restaurant LFLs, but we believe 1Q17 is a bottom for same-store-sales
Aldrees, Budget & Catering still weak: Aldrees’s transport division remained pressured on fewer contracts (revenue from Waad Al Shamal yet to be booked); Budget earnings continued to fall on slower ST rentals & gains on used vehicle sales; Catering’s in-flight revenue and overall margins stayed on downtrend.
Stick to select retailers into 2Q17 earnings season: Reversal of public sector pay cuts, promotional activity, less cost pressures and a peak demand season (Ramadan & Eid) point to another strong quarter for eXtra, Hokair, Jarir & Othaim (all Buy rated).
Hatem Alaa, CFA
Nada Amin
Mirna Maher
Weak performance by food producers with all names under coverage seeing flat to declining revenue partly on increased promotional activity to spur demand especially in UHT milk. Usually resilient dairy & juice was the most affected as seen in Almarai, Nadec and SADAFCO’s numbers. EGP devaluation was an additional source of pressure for Almarai, Halwani and Savola. Almarai had the best results set posting flat revenue and 14% earnings growth driven by its bakery and poultry segments (the latter saw losses contract over 70% Y-o-Y).
Tailwinds for electronics retailers: eXtra (+8%) and Jarir (+20%) posted solid top-line growth on positive LFLs despite a c25% contraction in KSA’s electronics market (Jan-Feb 2017); both names benefited from market consolidation from the closure of c3k mobile retailers, who were unable to meet 100% Saudisation.
Turnaround materialising for eXtra and Al Hokair, but not yet for Savola and Shaker: eXtra saw a big recovery from 1Q16 losses (partly on inventory liquidation) and is the best performing KSA consumer stock (+50% YTD); Hokair’s revenue was still down Y-o-Y, but margins recovered strongly from a year ago (impaired by aggressive promotions in KSA and Blanco that is now sold); Savola’s numbers confirm that 4Q16’s kitchen-sinking was not enough with recurring losses widening for grocery retailer Panda; Shaker reported losses for the second quarter in a row.
Othaim continues to impress with sustained positive LFLs (revenue +17%), which is in stark contrast to Panda (-17%) and Farm (+2%) with a surprise from lower-than-expected SG&A costs that drove rare margin gains and an earnings beat. Fast food retailer Herfy failed to impress posting a flattish quarter on a sharp drop in restaurant LFLs, but we believe 1Q17 is a bottom for same-store-sales
Aldrees, Budget & Catering still weak: Aldrees’s transport division remained pressured on fewer contracts (revenue from Waad Al Shamal yet to be booked); Budget earnings continued to fall on slower ST rentals & gains on used vehicle sales; Catering’s in-flight revenue and overall margins stayed on downtrend.
Stick to select retailers into 2Q17 earnings season: Reversal of public sector pay cuts, promotional activity, less cost pressures and a peak demand season (Ramadan & Eid) point to another strong quarter for eXtra, Hokair, Jarir & Othaim (all Buy rated).
Hatem Alaa, CFA
Nada Amin
Mirna Maher