RIYADH – The Saudi retail sector's strong earnings growth will 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, NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, said Monday in its latest report on the Kingdom's retail sector. However, wage inflation due to Saudization, 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, while 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 Saudization.” 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 percent 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,” Miah said. Noting that Saudization 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 percent EBIT pressure for the retail market. From the stocks under coverage the EBIT impact ranges from 0.2 percent for Jarir to more than 5 percent for Al Othaim. “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,” Miah pointed out. – SG
