The outlook of the Saudi retail sector remains strong with macro as well as micro factors supporting growth, said NCB Capital in a new report issued yesterday. Volume expansion through opening stores, margin support from economies of scale, and consolidation of fragmented markets are key drivers of growth. On the other hand, wage inflation pressures, execution risk and competition are key concerns for the retail sector.
The recent amendments to the Saudization program Nitaqat will continue to lead to wage inflation and impact margins of the Kingdom’s retail sector.
The latest amendment in November 2012 increased the cost of foreign work permits to SR 200 per month (SR2,400 per year). “We believe the retail sector will be among the most affected by Saudization rulings given the relatively low percentage of Saudis working at these companies. However, we acknowledge that the effective minimum wage rule of SR 3,000 a month for Saudis working in the private sector and increased hiring of Saudis will support retail spending, particularly in the discretional sector,” said Farouk Miah, head of equity research at NCB Capital.
NCB Capital upgraded Fawaz Abdulaziz Al-Hokair Company to Overweight with a PT of SR 116.6. The increase in estimates is driven by increased visibility and comfort on expansion plans, continued growth in Saudi Arabia, and stability and possible expansion in margins. Growth into the value fashion segment is a potential catalyst. Execution risk, volatility in other income and corporate governance remain key concerns.
NCB Capital remains Overweight on United Electronics Company (eXtra) with a PT of SR 108 and Neutral on both Jarir Marketing Co. with a PT of SR 155 and Al-Othaim Market with a PT of SR 93.8. NCB Capital believes eXtra will benefit from the consolidation of a fragmented sector and potential margin expansion. “We believe Jarir is a high quality company although many positives are currently priced in. Al-Othaim is well positioned in a strong growing sector, although lack of store expansion has held back growth,” said Miah.
Extra, Jarir and Al-Othaim are well positioned to benefit from fragmented sectors, which are dominated by independent stores. NCB Capital believes this is the main driver enabling these companies to aggressively expand store count and revenues. For Al-Hokair, growth in the mid-level branded fashion segment should remain steady with significant potential in the value-segment and expansion abroad.
The sector trades at an attractive 2013E P/E of 12.6x given the growth outlook of the sector. Al-Othaim is at a discount given growth concerns with Al-Hokair at a discount given the risks present in its expansion.
Although NCB Capital believes the e-commerce potential is significant for Saudi Arabia, any meaningful growth is at least 5–10 years away. “The primary reasons for this include the poor postal system in Saudi Arabia, low credit card penetration, and the importance of shopping outings for many Saudi families,” Miah added.
Despite the obstacles, NCB Capital notes many retail companies are investing in their online presence. Extra has initiated sales of products through its website and Jarir is currently working toward this. Al-Othaim has also recently commenced an online order service, although on a small scale.