Aljazira Cap lowers Al Othaim rating to 'Underweight', retains TP at SAR 107.7/share

Aljazira Capital lowered its recommendation to “Underweight” on Abdullah Al Othaim Markets Co. and retained the target price (TP) at SAR 107.7 per share.

The company posted a net profit of SAR 60.7 million, missing Aljazira Capital’s and consensus estimates of SAR 97.8 million and SAR 95.3 million, respectively.

Higher operating expenses, a hike in value-added tax (VAT), adoption of distance learning, in addition to the impact of COVID-19 pandemic on the real estate business led to the decline in profit, the brokerage firm said in a report.

Aljazira believes the adverse impact of the aforementioned factors is not entirely reflected in the share price at current levels, expecting the net profit to be under pressure in the near term due to these factors.

“Al Othaim stands to benefit from increased retail demand, which would boost its growth in the long term,” the firm said, adding that the company’s strategy of continued expansion bodes well, enabling it to increase market share and capitalize on growth opportunities.

“Margin expansion supports increase in revenue, which in turn drives growth in net profit,” Aljazira added.

The brokerage firm expects Al Othaim to post a 19% increase in net profit to SAR 413.7 million in fiscal year 2020, and a 5.7% decline in net profit to SAR 391.2 million on FY2021.

According to Aljazira Capital, the “Underweight” recommendation rating implies that the stock is currently trading at a premium to its 12 months price target, and would typically decline by over 10% from the current price levels over next 12 months.