ALHOKAIR reported a net profit decline of 45.5% y-o-y to SR27mn, beating our estimate of SR18mn loss. Revenue declined 8.6% y-o-y, likely due to muted consumer spending and closure of non-profitable stores. Given the challenging market dynamics, the company continues to follow a prudent strategy of closing non-profitable stores while improving its cost efficiency in order to boost profit margins.

In the near term, Al Rajhi Capital expects Alhokair’s top-line to remain under pressure, largely due to weak consumer demand, driven by changing consumption basket and declining customer base. Further, its gross margin to remain under pressure, mainly due to higher discounts offered to support top-line.

However, a likely improvement in the international sales and higher demand of value products, coupled with recent traction in newly launched products should partially offset the decline in LFL sales in the medium term.

For the longer-term, Al Rajhi Capital remains optimistic on the top-line growth that is likely to be boosted by pick-up in consumer sentiments following a broader based economic recovery amid higher government spending, as announced in the budget 2019. Al Rajhi Capital remains Neutral on the stock, while we revise our target price upwards to SR20.0 per share (earlier: SR19 per share) largely due to beat in top line and better than expected gross margin. — SG