Fawaz Alhokair’s Q2 misses estimate: Al Rajhi Cap

Fawaz Abdulaziz Alhokair Co.’s Q2 2017 net profit of SAR 6.8 million fell short of Al Rajhi Capital’s estimate of SAR 41 million, the brokerage firm said in an earnings review on Wednesday.

“Despite healthy operating performance, net profit was mainly impacted by higher selling, general, and administrative expenses at SAR 134 million (our estimate SAR 114 million), SAR 18 million one-off provision for foreign subsidiaries after an external audit, and SAR 26 million forex loss (our estimate SAR 5 million loss) due to appreciation of euro and pound sterling,” Al Rajhi Capital added.

The retailer’s operating performance, however, was broadly in line with forecast.

Revenue stood at SAR 1.5 billion, beating expectations of SAR 1.4 billion, while gross profit at SAR 300 million was marginally higher than Al Rajhi Capital’s estimate of SAR 294 million.

Alhokair’s gross margins rose 100 basis points year-on-year (YoY) despite lower consumer spending and double-digit revenue declines.

The gross margin expansion came as the management has focused on better merchandizing and value brands, amid lower rents, and low inventory provisions.

Looking ahead, Alhokair’s revenue and profit margins will likely be impacted in the near term by Saudization at malls and the gradual lifting of energy and utility subsidies, which is negative for discretionary consumption.

“However, the company’s efforts at better sourcing, closing unprofitable stores, adjusting premium/ value brand portfolio mix to reflect current environment and turning around international operations will drive better long term profitability,” the report said.

Alhokair’s net debt-to-equity is projected to improve to 0.7x by fiscal year 2019 from 1.0x in fiscal year 2017, with sustained free cash flows going forward.

Al Rajhi Capital upgraded the stock to “overweight” with a target price of SAR 42.8.