Selling our position in Al Hokair Group and initiating a position in Aldrees Petroleum


We are selling our entire position in Al Hokair Group (c1.5% of the portfolio). The recent news that a member of the Al Hokair family has been detained in Saudi Arabia’s corruption crackdown might negatively impact the entire family’s standing in the kingdom. This will in turn negatively impact the performance of the business which is dependent on consumer confidence and sentiment.

In addition, the group’s 3Q17 results were disappointing with a drop in revenues worse than expected, as well as a sharp drop in margins. It is not clear whether the drop in margins is due to a structural change in the company’s cost base or a transitory issue. If this drop is due to a structural change, then the company’s shares are overvalued at current levels according to our estimates (12-month target price of SAR18.9, or a downside of 20% from current levels). We will err on the side of caution and sell the entire position given the change in the overall investment case based on the above.

We are also initiating a position in Aldrees Petroleum and Transport Services Co (ALDREES:AB) of 4% of the portfolio. Aldrees operates petrol stations across Saudi Arabia and is well positioned to benefit from the expected increase in the number of cars in the kingdom now that women will be permitted to drive. The company also operates a transport business representing c21% of its net profit in 2016, with the balance from the petroleum business. Aldrees owns and operates over 1,200 truck heads and over 2,000 trailers.

The investment case is supported by a strong balance sheet (1.5x net debt to EBITDA at the end of 2016) and a solid dividend yield of c4% for 2017 on our estimates and at current share price levels. Capital expenditure (capex) requirements are undemanding at c2.5% of revenues, especially that the company is highly cash generative, with EBITDA more than adequate to cover both dividends and capex over the medium term.