Al-Tayyar: Marginally higher than expected sales and net income for the quarter, posting YoY declines of 7.2% and 24% respectively. Results show tighter margins on a YoY basis. We remain “Overweight” on Al-Tayyar with an updated PT of SAR 44.5.

Al-Tayyar reported higher than expected sales and net income: Net income for the quarter stood at SAR 299.8mn, posting a 24.2% decline YoY and 54.7% growth QoQ mainly due to seasonality effects, standing 7.4% above our estimates and 12.7% above market consensus. The deviation was mainly due to lower than expected top line decline. Al-Tayyar posted a decline in sales of 7.2%YoY against our estimates of around 8.5%. Higher than expected sales were partially offset by tighter gross margins, which in turn reflects the increasingly competitive environment in the industry as the company reported selling at lower average prices in order to maintain market share. Gross margins declined 400bps YoY while operating margins posted a 292bps decline YoY for the quarter. Operating income declined 23.2%YoY due to declining revenues as well as a SAR44.5mn impairment loss recorded for the quarter, making a total of SAR75.3mn in impairment losses for H1-2016 compared to SAR20mn for the same period last year. Our estimates for the quarter included SAR24mn in impairment loss.

We maintain our “Overweight” recommendation for Al-Tayyar with an updated PT of SAR 44.5: The company currently trades at a TTM PE of 7.8x (as of 26th of July closing) and an estimated forward PE multiple of around 8.7x compared to a 3-year historical average daily PE of around 14.1x and a 1-year average PE of around 9.7x. We expect earnings to decline 26.1% by the end of FY2016 and 1.1% CAGR for FY2016- FY2019. The main downside risk to consider is the company’s ability to soften the setback from government and corporate related contracts on Al-Tayyar’s top line going forward. The company’s ability to leverage inbound tourism from Haj and Ummrah beyond estimates through integrating business lines within the company is the main upside risk to current valuation.

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