AlJouf Agriculture: Disappointing 2Q2017 earnings due to SAR 7.4mn drop in sales, higher than expected COGS and non-recurring losses of SAR 2.5mn. Gross margin contracted on YoY basis to 33.1% Vs. 46.6% due to higher contribution rate of low-margin products, whereas OPEX was impacted by higher cost of crops delivery. Due to high sales and harvest season; 2H2017 earnings is expected to witness improved margins and higher sales. We revise our recommendation to “Neutral” with lower PT at SAR 29.20/share.

AlJouf Agriculture Company (AlJouf) result came below estimates, missing AJC and market censuses profits estimates of SAR 22.9mn and SAR 22.5mn respectively. The Company posted net income of SAR 7.71mn; indicating a fall of 66.4%YoY and 4.9%QoQ. The weak profitability is mainly attributed to i) SAR 7.4mn drop in sales ii) SAR 5.2mn higher cost of goods sold iii) SAR 2.5mn increase in capital losses. Although the company’s revenues came below our estimates; however, higher deviation in bottom line with our estimates was strongly impacted by higher than expected production cost, OPEX, other expenses and capital losses of SAR 2.5mn that led to gross margin contraction. We believe that the company’s higher production cost in 2Q2017 compared to same period last year was due to a decline in production of high margin products, such as wheat and green fodder, resulting in higher cost per ton . This is due to the company’s compliance with the government decision to reduce the cultivation of mentioned products. Thus, the impact of higher COGS is likely to continue in 2H2017.

AJC View: Based on the 1H-2017 performance, we expect the company to maintain recording YoY sales decline in 2H2017 due to the impact of low wheat cultivation & decline in green fodder production. However, the successful expansions in olive cultivation and other crops with high margins such as potatoes will help the company in maintaining a healthy margin. We believe that the tendency to sell a large part of the crops before harvest would mitigate the future input cost. Furthermore, in our view the company needs to set plans to increase efficiency; which could be a key factor in countering the upcoming risk of energy prices hikes. AlJouf Agriculture Co. is expected to post SAR 72.5mn in net income (2.42 EPS) for FY2017, recording a fall of 6.7%YoY due to sales decline and higher COGS. Thus, we revise our recommendation to ‘Neutral’ for the stock with lower TP at SAR 29.20/share; indicating a potential upside of 0.3% over current market price of SAR 28.97/share (as of 30th July 2017). The company is trading at a forward PE and PB of 11.98x and 1.01x respectively based on our FY2017 earnings forecast. We expect the company to maintain its dividend payment at SAR 1.0 DPS (3.4% D/Y) in FY2017.

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