JEDDAH: Saudi retail sector will continue to grow at a solid pace in 2011, Al Rajhi Capital said in its report entitled "Hop on the Train" released Tuesday. It is expected that all categories, broken down by grocery and non-grocery segments, of the retail sector will continue to grow at a solid pace, the report added. The report cited that stronger growth will, however, be seen in electronics and apparel, which will benefit companies like Jarir and Alhokair, while Alothaim can profit from the highly fragmented grocery market. All segments will also, however, face challenges, which include booming real estate prices and intensifying competition, both of which serve to suppress margins. The report initiates coverage of Jarir with an Overweigh rating citing a target price of SR189.4, which implies 26 percent upside. Alhokair is also rated as Overweight with a target price of SR49.9, implying 19 percent upside, and Alhothaim as Neutral with a target price of SR86.4, implying upside potential of 11-12 percent. Fragmented markets, nevertheless, offer major growth potential and significant new store openings are expected to be a key driver of growth, although certain retailers are also expanding by acquisition, the report noted. Looking across each sub-sector, in the grocery segment supermarkets and hypermarkets are leading growth, with local retailers having become more active in expanding their operations through opening new stores and acquiring smaller retailers. As a result, the report forecast that supermarkets and hypermarkets will grow by CAGRs of 4.4 percent and 7.2 percent and reach SR24.2 billion and SR18.7 billion respectively by 2014, outperforming small groceries' CAGR of roughly 3.2 percent. However, challenges will come from increased competition, the entrance of international players and the ability for grocery retailers to differentiate themselves in order to grow and gain market share. With regards to the non-grocery retail segments, more latent growth is projected, however, most segments continue to steadily advance. The electronics and appliances markets including smartphones and tablets are leading growth. Electronics and appliances make up 18.5 percent of the non-grocery retailing industry. This area has grown strongly during the last five years and ARC expects it to achieve a CAGR of 5.2 percent over the next five years, the report said. The market size is currently SR27 billion and the report expects it to reach SR35 billion by 2014, with a selling space of roughly 821,000 square meters. Similarly, the clothing and footwear market is advancing steadily due to changing lifestyles especially amongst the younger generation including both Saudi men and women. Growth is also being driven in large part by the entrance of numerous international brands and large retailers' aggressive expansion. ARC expects this segment to continue to grow strongly with a CAGR of 5.3 percent over the next four years. Leisure and personal goods specialists, while diverse, have performed less favorably with growth declining by 5 percent in 2009. While certain categories such as books showed growth in 2009, the overall decline in this sub-sector's sales can be attributed to a drop of about 10 percent in sales of luxury goods and precious metals, which make up the biggest proportion of this segment. Commenting on the findings of the report, Dr. Saleh Al Suhaibani, head of Research at Al Rajhi Capital, said: "Overall, we see strong prospects for continued growth across the sector and all segments within it. We have also looked at the performance of some of the sector's key players and found that while Jarir is the most efficient of the three stocks analyzed and yields the highest returns, with a remarkable economic profit spread of 39 percent, all three companies are performing well operationally and have healthy financial positions." "Jarir is the preferred stock, however, as it still has strong prospects and a professional and open management team, which should support the ongoing strength of the stock. While both Alhokair and Alothaim have performed well already, both groups have ambitious expansions plans and their PE and EV/EBITDA ratios offer better value also making them strong picks," he added.
