Saudi retail stocks continue to thrive

In its new report on the Saudi retail sector, NCB Capital states that the strong performance of Saudi retail stocks continues unabated with the sector up more than 40 percent YTD in 2013.
“We believe rather than expectations of upward revisions in earnings estimates, the strong performance is due to multiple expansion. This is due to the strong outlook of the sector,” said Farouk Miah, CFA, head of equity research at NCB Capital. “For stocks under our coverage, we expect average three-year earnings CAGR of 17 percent. We remain overweight on eXtra and Shaker and neutral on Alhokair, Al-Othaim and Jarir.”
NCB Capital remains overweight on eXtra with a PT of SR135.4 and Shaker with a PT of SR92.7. “We believe the outlook of eXtra remains strong with new store openings ahead of schedule, although this comes at the price of short-term margin pressure,” said Miah. “Despite expecting some weakness in 2H 2013 for Shaker, we believe the longer term demand outlook remains strong with Shaker well positioned to capture this.”
Miah added: “We remain neutral on Jarir, Al Othaim and Al Hokair. For all three stocks, we believe the earnings growth outlook remains strong with an average three-year CAGR at 18 percent. However the 2013 P/E multiples have expanded by an average of 39 percent YTD to 18x and all three stocks trade at par or at a premium to the MSCI Retail Index. We believe there is limited room for significant earnings upside revision, thus any continued upside will be led by further multiple expansions, which we believe would be unjustified.”
Stating that continued government spending coupled with increasing disposable incomes remain the key drivers of the Saudi retail sector, Miah added: “Although Saudi retail sector sales are expected to grow at a CAGR of 9 percent over the coming five years, the covered stocks are expected to grow earnings at an average of 13 percent as they are well positioned to take market share.”
“However, a key short-term risk remains margin pressure off the back of aggressive expansion from opening new stores,” noted Miah. “This is due to the time taken for stores to mature, as well as pre-operating costs holding back the break-even level. However, over the long-term, the potential for margin expansion remains off the back of the benefits of economies of scale, namely better discounts from suppliers coming through.”
NCB Capital considers that the growth outlook of the Saudi retail sector remains strong, through a combination of high organic growth at existing firms, as well as through expansions which are consolidating fragmented sectors.
EIU estimates the Saudi retail sector to be worth $90 billion of sales per year in 2012 with this growing by a CAGR of 9.1 percent for the next five years to $139 billion in 2017.
“We believe the revenue growth outlook of covered stocks will be even higher due to the increasing market shares taken by organized chains,” said Miah. “YTD, we believe the covered stocks (except Shaker) have all recorded flat or higher organic growth YoY with Jarir the most impressive at around 12 percent organic growth in Q2 2013.