NCB Capital: strong performance of KSA retail stocks continues unabated

In its updatedreport on the Saudi retail sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, states that the strong performance of Saudi Retail stocks continues unabated with the sector up more than 40% 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%. We remain Overweight on Extra and Shaker and Neutral on Al Hokair, 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,” commented Mr. Miah. “Despite expecting some weakness in 2H13 for Shaker, we believe the longer term demand outlook remains strong with Shaker well positioned to capture this.”

Continuing, Mr. Miah said: “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%. However the 2013E P/E multiples have expanded by an average of 39% 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, Mr. Miah went on to say: “Although Saudi Retail sector sales are expected to grow at a CAGR of 9% over the coming five years, the covered stocks are expected to grow earnings at an average of 13% 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 Mr. 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.“

Growth outlook remains strong with organic growth remaining high:

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 US$90bn of sales per year in 2012 with this growing by a CAGR of 9.1% for the next five years to US$139bn in 2017E.

“We believe the revenue growth outlook of covered stocks will be even higher due to the increasing market shares taken by organised chains,” said Mr. 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% organic growth in 2Q13.