NCB Capital expects continued strong earnings growth for Saudi retail sector

Delivering its latest report on the Saudi retail sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, expects strong earnings growth to continue due to expansion through opening stores, margin support from economies of scale and consolidation of fragmented markets, all of which are key drivers of profit growth. However, wage inflation due to Saudisation, execution risk from store expansion and price-led competition are key concerns..

“We remain Overweight on Extra with a PT of SR132 and Al Hokair with a PT of SR129, whilst remaining Neutral on both Jarir with a PT of SR164 and Al Othaim with a PT of SR92,” said Farouk Miah, Head of Equity Research at NCB Capital. “Extra and Al Hokair should continue to benefit from store expansion growth, as well as the possibility of higher margins. We believe Jarir is a high quality company although many positives are currently priced in. Al Othaim has a strong long-term outlook, although the coming 12 months will be difficult due to low organic sales growth, as well as pressure from Saudisation.” 

NCB Capital considers that consolidation of fragmented sectors which are dominated by independent stores is a key theme for the Saudi retail market. “Extra, Jarir and Al Othaim are well positioned to benefit from this structural trend in their respective sectors, leading to 30-50% expansion in their store count over the coming five years. Al Hokair has already consolidated the Saudi mid-market fashion segment, with potential growth coming from expansion in the value-segment and opening stores abroad,” commented Mr. Miah. 

Stating that Saudisation is a longer term pressure on margins, the report notes that since the middle of 4Q12 Saudi firms have incurred a SR2,400 charge per year on each foreign employee in excess of local staff. NCB Capital considers that this expense will lead to an average of 3-5% EBIT pressure for the retail market.  From the stocks under coverage the EBIT impact ranges from 0.2% for Jarir to more than 5% for Al Othaim.  

Concluding his comments, Mr. Miah stated: “Given the growth outlook, the Saudi retail sector trades at an attractive 2013E P/E of 13.6x. The variance in multiples between the stocks under coverage is due to their differing risk-reward scenarios. Al Othaim trades at a discount due to low organic growth and Al Hokair due to expansion risks; Extra trades at a premium due to its high growth outlook and Jarir due to its high dividend yield and returns.”