We value Alothaim on a DCF basis using a WACC of 9% and TGR of 3%, producing a TP of SAR 9.1. The company trades at a warranted premium to peers on higher growth driven by expansion plans, market dynamics (55% of the grocery retail is dominated by the informal sector) and potential margin expansion on oeprating leverage. However, we beleive that the premium has widened and that consensus estimates are likely to be cut.  

Risks to our target price and investment thesis include:

Downside risks: (i) Expat exodus to weigh on volumes (c.50% of the loyalty program being expats), (ii) increased competition in the space, (iii) margin dilution on lower supplier rebates and store yield dilution, (iv) LFL weakness from lower consumer spending.

Upside: (i) Regulation of the grocery space triggering large closure of Baqalas (unorganized grocers), (ii)  stronger LFL sales driving store yields and operating leverage,  (iii) Milling company operational turnaround post completion of acquisition.