Saudi retail sector remains strong despite oil volatility

NCB Capital, a major wealth manager in the region and the largest asset manager in the Kingdom, has issued a report mentioning that the two-month bonus salary issued to Saudi government workers and a large number of Saudi private sector workers will support the retail sector. The sector performance remains strong despite the oil price volatility, providing its defensive nature.
Mohammed Tomalieh, equity research analyst at NCB Capital and author of the report, said: “We believe the two-month salary bonus will be a key growth driver for companies selling discretionary products such as Jarir, eXtra and Al-Hokair. This led us to revising organic growth estimates upward by 2-3 percent for covered stocks in this sector. Prices of covered stocks selling discretionary products outperformed the TASI by 4-16 percent in the week following the announcement, which we believe is due to the expected positive impact from these bonuses.”
NCB Capital’s quarterly report on the retail sector looks back at the impact of a similar issuance of two-month bonuses, in addition to a minimum wage for Saudi workers, in 2011. “PoS data reflects retail sales patterns and in 2011, values increased 38 percent YoY vs. average growth of 21 percent over the past five years,” stated Tomalieh.
According to Tomalieh, the retail sector currently trades at a 2015 P/E of 22x. “We believe that the premium over the TASI levels of 17x reflects the defensive nature and growth outlook for the sector. We also believe that the Retail sector is an ideal proxy for the increase in employment and income of Saudis. Accordingly, we believe it will be a key sector for FIIs.”
NCB Capital has downgraded eXtra to neutral while maintaining overweight ratings on Al Hokair, Jarir, Shaker and Al Othaim.
“The two-month bonus should have a positive effect on eXtra,” said Tomalieh, “but we believe the upside on the stock is limited and current valuations are fair, with the implied P/E in line with historical levels of 19x.”

He added: “Jarir is our top pick in the sector in light of its strength in both times of economic growth and uncertainty. We believe store expansion, both locally and internationally, remain the key top-line drover for Al-Hokair. Moreover, a potential turnaround in Blanco could be a key positive catalyst. Shakers outlook remains positive, provided the higher demand for higher-priced ACs and lower copper prices. And we believe Al-Othaim remains a top defensive pick. Strong organic growth and store expansions remain the key drivers for the company.”

Ratings update:

eXtra
NCB Capital downgrade eXtra from overweight to neutral with a PT of SR104.9. Despite the store shutdown incident during the retailer’s mega sale and having opened just one additional store in 2014, Tomalieh believes that eXtra will succeed in opening five new stores in 2015 — one in Oman and four in Saudi Arabia — and that the two-month salary bonus will allow the company to record higher organic growth levels in 2015. Nevertheless, Tomalieh believes that upward price movement in stock price will be limited as valuations are currently fair, with the implied P/E in-line with historical levels of 19x.

Jarir
Jarir’s fundamentals remain strong and NCB Capital remains overweight with a price target of SR246.6. In line with NCB Capital’s ranking system, Jarir is the top pick in the sector given its strength in times of both economic growth and uncertainty. Jarir management announced plans of doubling its store count to 60 in 2018. NCB Capital, however, took a conservative approach to Jarir’s expansion plans and expects the electronics giant to open an average of four stores a year for the next four years, bringing the total store count to 52 by 2018. Jarir offers primarily discretionary products and is expected to be a key beneficiary of the salary bonus decree while still maintaining top-line growth from organic growth and store expansions. Jarir is just one of three stocks trading above peak levels reached by the market in February 2006. It currently trades at a 201E P/E of 21.2x, justifying a 26.4 percent premium to peers.

Al-Hokair
NCB Capital remains overweight on Al-Hokair with a price target of SR128.6. “Al-Hokair has aggressive expansion plans in place, which are supported by strong organic growth. In FY 2015, Al Hokair opened 412 stores and is forecasting 340 new stores to be opened next year,” stated Tomalieh. NCB Capital believes that store expansions, both locally and internationally, remain the key top-line driver for Al-Hokair. Moreover, a potential turnaround in Blanco is a key positive catalyst. Moreover, Tomalieh believes Al-Hokair’s discretionary product offering should benefit significantly from the two-month bonus decree.

Al-Othaim
NCB Capital remains overweight on Al-Othaim with a price target of SR127.0. “Although the impact of the two-month bonus is expected to be significant for other covered companies, we believe it will be minimal on Al-Othaim due to the non-discretionary nature of its products. New store openings and high single-digit organic growth are key growth drivers for Al-Othaim” stated Tomalieh. NCB Capital believes Al-Othaim plans to open a mall in Hail by mid-2015, with it being rented out at higher than market rates of 8-10 percent.”