At the risk of being overly repetitive, we continue to insist that the Gulf region is probably one of the most misunderstood regions by investors today and that is why it offers a deep discount for those who are willing to invest at current levels.We often speak about the Gulf’s competitive advantages on the global economic stage. The combinations of an impressive infrastructure, the privileged geographic location in the epicentre of high growth nations, surrounded by some of the world’s fastest growing economies and the benign tax systems can be regarded as a great platform from which companies can compete on a global scale.
Apart from all of the above, The Kingdom of Saudi Arabia has something additional to offer that is of interest, especially to people like us who are always trying to capture the opportunities that arise from high growth consumer dynamics. Saudi Arabia’s population counts around 27 million people, set to double within the next 20 years due to its juvenile population, a middle class is quickly installing itself, they are buying homes, cars, and all the other things that increasingly affluent consumers want.
This month we focus on yet another way for investors to capture this opportunity. It even has to do with oil, which for many is still the first thing that comes to mind when considering the Gulf region. Mohammed Bahaa, our MENA analyst, provides us with a perspective on Aldrees Petroleum and Transport Services, a Saudi Arabia-based company that operates in the wholesale and retail petroleum and commodity transportation sectors.
The petroleum services division focuses on the trade of retail petroleum products, including fuel, oil and lubricants through a network of over 357 petroleum filling stations across Saudi Arabia. The division also offers ancillary activities such as car wash, auto detailing services, coffee shops, bakeries and convenience stores at its filling stations.
The transport services division offers bulk commodities transportation services, including petroleum products, raw plastic products, chemical products, cement and agricultural products. The Company operates a fleet of 2,256 trucks and trailers, and has vehicle maintenance workshops in Riyadh, Jeddah and Dammam.
Aldrees operates the largest network of fuel pumping stations in a very fragmented market. As of end-2009, Aldrees operated 357 stations, representing a market share of 5.5%. The total market size is estimated at around 6,500 stations. The top 5 players comprise only 15% of the market share which means there are lots of opportunities that will arise from consolidation within the sector.
Since 2005, Aldrees has embarked on an aggressive growth strategy. It grew its network of gas stations by a CAGR of 28% during the period 2005-2009, outpacing the market and Tasheelat’s (its direct competitor) growth of 5% and 16%, respectively.
Aldrees’ fuel distribution business, with its lucrative margins and return on investment, combined with low capex requirements, operates in a sweet spot; the company is currently reaping the fruits of its earlier aggressive spending plans.
A little bit further ‘up-stream’, the commodity transportation business caters to petrochemical producers, cements plants and agricultural traders. SABIC, one Saudi’s main companies, has historically been the division’s key client thanks to 3-5 year variable-rate contracts to transport plastic products to GCC clients. Aldrees also transports heavy fuel oil to most of Saudi’s cement producers through 5-year fixed-rate contracts. The client mix transformed significantly in 2009 as Aldrees won new contracts to supply liquid fuels to cement producers. The commodity transportation in Saudi Arabia is vital since the railway network in Saudi Arabia is virtually inexistent. The hauling and delivery of goods locally and outside of Saudi Arabia, mainly GCC countries, is exclusively met by transportation trucks.
The combination of its high-margin capital-intensive commodity transportation fleet and its low-margin, cash-rich fuel distribution network allows Aldrees to maintain low gearing and high debt service ratios despite the capital intense character of the transportation business. Fuel distribution operations have enabled Aldrees’ aggressive expansion in the transportation business, which conversely has helped it overcome the effect of intense competition in the fuel distribution line on its operating margins and earnings growth.
Aldrees’ transportation and fuel divisions represent attractive acquisition targets for possible new entrants and/or financial investors. Aldrees enjoys a strong balance sheet that can finance inorganic expansion should the opportunities arise.
Aldrees has released its preliminary results for 3Q2010. Net profit came in at SAR 21 million, up 16% Y-o-Y and down by 21.3% Q-o-Q. On the operational level, EBIT came in at SAR 23.4 million, higher by 12.5% Y-o-Y and lower by 20% Q-o-Q. The drop in Q-o-Q earnings was expected due to the habitual seasonal effect of slower sales volumes during the summer.
Another example of the kind of investment opportunities that investors will find when investing in the region. Note that this is once again a company that has been able to assertively invest in its expansion without having to recur to external financing thanks to the kind of balance sheets investors dream of. Profit margins for the well managed business are very healthy in the Kingdom, global investors will eventually come to acknowledge that…
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