NCB Capital, the Kingdom’s largest asset manager and leading wealth management company, initiated coverage on Extra with an Overweight rating and price target of SR106.2 (upside of 26%) and on Shaker with an Overweight rating and price target of SR82.5 (upside of 19%). In its new report issued today, NCB Capital believes the market leading position of both firms will enable them to take advantage of the strong outlook for each of their respective sectors. Growth through higher volumes and sales outside of Saudi Arabia are further catalysts.
“We start coverage on Extra with an Overweight rating and PT of SR106.2, indicating an upside potential of 26%. Key positives for the stock include its market leading position in electronics retail, its wide array of products it sells leading to limited volatility in sales and its strong balance sheet enabling it to quickly take advantage of the market opportunities,” said Farouk Miah, Head of Equity Research at NCB Capital. “Key concerns on the stock include potential margin pressure from price based competition, ability to successfully execute its aggressive expansion plans and any slowdown in consumer spending which will potentially hurt demand for electronics.”
NCB Capital also initiated coverage on Shaker with an Overweight rating and price target of SR82.5, indicating an upside potential of 19%. “Key positives for the stock include its market leading position in the air conditioning sector, its domestic manufacturing facility which recently doubled capacity enabling it to meet incremental demand, as well as the scope to expand sales to the government and exports. Key concerns are its exposure to raw material inflation which can pressure margins, ability to compete with cheap Chinese players and any slowdown in government projects,” highlighted Mr. Miah.
NCB Capital initiated on these two stocks together given their relationship in the product chain; Shaker is primarily a manufacturer of AC units, as well as a distributor of these and other home appliance items. Extra is a retailer of electronics in general, including AC units and home appliances. “We believe the organised electronics retail sector has good potential to continue growing in the coming years due to increased market share gains from independent stores and positive macro factors such as a growing young population, high household creation and strong government spending which should help support growth in the sector,” explained Mr. Miah.
NCB Capital’s main concerns focus on margin pressure due to price based competition, threat of large foreign entrants coming into the market and raw material inflation. For Extra specifically, pressure on margins may come in the form of product pricing pressure. For Shaker, the pressure on margins may come in the form of raw material inflation.
Significant progress on the 500,000 new housing units specifically, and other infrastructure projects in general, are the key catalysts for both Shaker and Extra. This and other government led initiatives should support growth for household appliances and AC units. Continued growth in disposable income will support growth for discretional consumer electronics. Increased sales outside of Saudi (through opening of stores for Extra and exports for Shaker) are an additional catalyst for both stocks.