RIYADH – The Saudi retail sector would continue its strong earnings growth, NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, forecast Tuesday, but considers that much of this looks priced-in at current levels given the one year forward P/E for the sector has expanded by 24 percent YTD to 16.7 times. In its updated report on the Saudi retail sector, NCB Capital's Head of Equity Research Farouk Miah said “the sector has moved from a 30 percent discount to emerging market peers to a 10 percent premium.” “We downgrade Al Hokair to Neutral, remain Overweight on Extra and Shaker and remain Neutral on Jarir and Al Othaim.” “We remain Overweight on Extra with a PT of SR114.7 and Shaker with a PT of SR96. We believe Extra is well positioned to take advantage of the strong electronics sector outlook through opening new stores and organic growth. Shaker should continue to benefit from a strong demand outlook, as well as lower raw material prices. We have downgraded Al Hokair from Overweight to Neutral with a PT of SR173.7 based on its 36 percent P/E expansion year to date, leading to limited margin of safety given the risks present. We remain Neutral on Jarir with a PT of SR185.3 and Al Othaim with a PT of SR113.6,” he added. “However, we believe the execution risk of the planned expansions for the stocks under coverage is a key concern,” Miah noted. “All covered stocks in the past have missed their own expansion targets, thus supporting our cautious estimates. Reliance on external contractors, hiring limitations, bureaucracy and so on we believe could lead to delays across all retail firms. Furthermore, for Al Hokair/Extra/Jarir who have international expansion plans, we believe this adds an extra layer of risk.” The report considers that valuation is looking stretched for the sector, limiting margin of safety. The Saudi retail sector is up 27.4 percent YTD outperforming the TASI by 17.1 percent. The Saudi retail sector forward P/E is currently at 16.7x, a 10 percent premium to the MSCI Emerging Market Retail index, compared to an average 30 percent discount during the past three years. Although the growth outlook for the sector remains robust, NCB Capital believes the short-term upside from these levels are limited. Saudi retail growth outlook remains strong: “We expect the Saudi retail sector to continue to grow strongly supported by the young and growing population, high government spending and improved per capita income,” Miah further said. “The EIU estimate the retail market in KSA to rise at a CAGR of 9 percent to reach $137 billion by 2017E from $89 billion in 2012 with consumer electronics and clothing and footwear expected to record the fastest growth. From the five stocks under coverage, we expect revenue CAGR growth of 13 percent over the coming five years for the Saudi based operations.” – SG
