NCB Capital, a leading wealth manager in the region and the largest asset manager in the Kingdom, confirmed that the defensive nature of the retail sector allowed it to remain strong during the recent correction in the Saudi financial market. Additionally, the company believes that the sector will not be directly affected by fluctuations in oil prices.

Mohammed Tomalieh, equity research analyst at NCB Capital, pointed out that the positive outlook toward the sector is driven by favorable demographics and increasing disposable income per capita. Upon ranking covered companies on defensive metrics, Tomalieh believes Jarir and Al Othaim are the best defensive names in the sector.

NCB Capital upgraded Alhokair to overweight with a PT of SR 112.7. Additionally, they upgraded eXtra and Jarir to overweight with a PT of SR105.8 and SR212.7, respectively.

“We remain overweight on Al Othaim and Shaker. We believe Al Othaim is a strong defensive name, unaffected by economic cycles or any potential budget cuts. We maintain our overweight rating on Shaker on an improved outlook as demand for higher priced +3 ACs picks-up. We believe LG Shaker, AC manufacturing associate company, will benefit from declining copper prices,” Tomalieh added.

“Although oil prices declined significantly, the fundamentals of these companies remain relatively unchanged, with attractive valuations at the current levels. We reduced our estimates for eXtra due to the recent Megasale incident, while our estimates for Jarir increased on higher store expansion, better margin expectations and strong organic growth.”

Tomalieh added: “The recent correction in the retail sector is unjustified, provided that the fundamentals of covered names remain relatively unchanged. Covered names are trading at a 2015E P/E ranging between 14.2-21.2x, which we believe is attractive provided the positive outlook on expansions, margins and organic growth.”