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Abu Dhabi, UAETuesday 19 June 2018

Adnoc Distribution eyes ambitious growth strategy amid IPO plans

Service station and convenience store operator to list shares on ADX next month

Subscription to Adnoc Distribution's IPO will begin in late November. Courtesy Adnoc
Subscription to Adnoc Distribution's IPO will begin in late November. Courtesy Adnoc

Adnoc Distribution, which intends to complete an IPO on the Abu Dhabi stock market next month, plans to leverage the size and strength of its network of service stations and retail shops through an ambitious revenue growth strategy that includes the introduction of digital services and a loyalty programme, as well as agreeing strategic partnerships with convenience store operators.

Its parent group, the Abu Dhabi National Oil Company (Adnoc), will sell as much as 20 per cent of the fuel retailer and distributor to local and international investors in an initial public offering, which will open next week.

Adnoc Distribution currently operates 360 service stations and 235 Oasis convenience stores across the UAE except for Dubai, and has a monopoly in Sharjah and Abu Dhabi. Maximising what is the country’s largest retail network is central to the company’s future plans.

“We are engaged in discussions with branded convenience store operators about the possibility of operating our convenience stores on a joint venture basis,” the company said in its prospectus for the IPO.

According to a source close to the transaction, “retail is the most exciting part of this company”.

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It is understood that by maximising the proximity of Adnoc’s service stations to most neighbourhoods, the company could turn its convenience stores into the grocery top-up destination of choice.

“We believe that through a combination of improved product category management, a comprehensive pricing strategy, and promotional activity designed to increase the number of our retail fuel customers who shop at our convenience stores, we can significantly grow our convenience store revenue and profitability,” the prospectus said.

The subsequent increase in customer basket sizes and average prices could generate about US$30 million to $60m of incremental earnings on an annual basis, the company estimates.

In the first nine months of this year, fuel retail operations accounted for 70.7 per cent of total revenue of Dh14.2 billion, and 66 per cent of total gross profit of Dh3.1bn. Of fuel retail revenue, 4.9 per cent was generated from the convenience stores.

Adnoc Distribution also plans to introduce digital services including booking and paying via smartphone app for fuel to be delivered direct to your vehicle while at home or at work. The creation of a loyalty programme and offering deliveries of LPG cylinders to retail customers will also incrementally boost sales and improve the customer experience.

Read more: Adnoc opens up for more partnerships in new era

These initiatives are part of a strategy - outlined to investors ahead of the IPO - that support a reported equity valuation of between US$10 billion and US$14bn. Adnoc Distribution’s management is keen to demonstrate the ability to execute this strategy which will also show investors that the IPO valuation is actually representative of a discount to the company’s estimated enterprise value of over $15bn, the source said.

In its prospectus, the company concedes that there is a risk that its ambitions may not be fully met, especially given the highly competitive nature of the fuel distribution and convenience store industries.

“To remain competitive, we must constantly analyse consumer preferences and competitors’ offerings and prices to ensure that we offer a selection of convenience products and services at competitive prices to meet consumer demand,” it said.

However, bringing in new shareholders – both local and international – via the IPO and with them, the extra scrutiny on management, including the expectation of maintaining performance quarter on quarter and not just year on year, should ensure the company focuses on remaining competitive as well as operating as efficiently as possible, the source said.