NCB Capital believes strong organic growth supports outlook for the Saudi retail sector

Press release
Published September 29th, 2014 - 05:33 GMT

In its latest update report, NCB Capital believesthatthe Saudi Retail sector outlook remains positive, led by strong earnings growth from store expansions, strong organic growth, margin stability and Saudisation pressures easing. 

 “EIU expects a CAGR 7.8% growth for the sector till 2018E,” stated Mohamed Tomalieh, Equity Research Analyst at NCB Capital. “We expect organic growth to stand between 8-10% for companies such as Al Hokair and Al Othaim. Moreover, covered companies are expanding by adding new stores locally and internationally, which will be a catalyst that drives growth for the sector.” 

“We upgrade Al Othaim to Overweight, downgrade Al Hokair to Neutral, while maintaining other ratings,” continued Mr. Tomalieh. .“We upgrade Al Othaim to Overweight (PT SR127.1) on new store openings, margin stability, strong organic growth outlook and overcoming the negative effects of Saudisation. Al Othaim trades at a 2015E P/E of 19.0x vs. sector at 24.5x which is relatively attractive provided the strong fundamentals. We downgrade Al Hokair to Neutral (PT SR123.5) on fair valuation and the relatively unchanged outlook. Al Hokair trades at a 2015E P/E of 30.4x.” 

NCB Capital remains Neutral on Jarir and Extra while Overweight on Shaker. Although Jarir has a strong balance sheet, dividend track record and prudent management, NCB Capital believes the valuation is fair at the current levels. The Overweight rating on Shaker is maintained given the improved outlook for the company, as the AC market stabilizes.  

Concluding NCB Capital’s 3Q14 update, Mr. Tomalieh said: “The opening of the TASI to international investors has led to the sector expanding YTD gains to 50%. We expect a significant inflow of foreign capital to the market and .believe the retail sector will be a beneficiary due to the strong macro-economic outlook, rising disposable income and growing population. We expect this move to reduce the risk premium assumed, resulting in re-rating and multiple expansion.” 

Ratings Update  

Al Othaim

“We upgrade Al Othaim to Overweight, with PT rising to SR127.1, primarily driven by strong top-line growth from new store openings and high single-digit organic growth,” stated Mr. Tomalieh. “Sustainability of this growth will be a key catalyst. Additionally, we believe that higher volumes will lead to better terms from suppliers, thereby supporting margin outlook. Execution of new store openings remains a key risk for the company provided the relative difficulties faced by contractors. Al Othaim plans to open 15 new stores in 2014 after opening 13 in 2013; we estimate 9 stores (7 super markets and 2 corner stores) for 2014. We estimate revenues to grow 16.4% YoY in 2014E, with approximately half of this driven by Al Othaim’s strong organic growth.” 

Al Hokair

NCB Capital downgrades Al Hokair to Neutral with the PT up by 21.4% to SR123.5. The earnings outlook remains strong driven by aggressive store expansions and improved margins, with the international segment being the major driver. However, execution risk on new stores and volatility in other income remain the key concerns. In September 2014, Al Hokair announced the acquisition of 42 woman apparel stores from Al Danah Trading Group for SR383mn. The strong outlook for the fashion retail market in the region and Al Hokair’s strong market presence should support the company’s growth outlook.   


“We remain Neutral on Extra with our PT up 17% to SR134.5,” said Mr. Tomalieh. “Results of 2Q14 show a continued trend of improvement, after the short-term pressures seen in 2013. We believe that earnings outlook remains strong with store openings, organic growth and margin expansions being the main drivers. Execution risk and price-led competition remain key concerns. However, we believe the outlook for Extra will be strong, given its high market share and the expected revival in demand for consumer electronics. With construction activities increasing, we believe that demand for white goods will rise. We expect Extra’s earnings to increase at a CAGR of 11.4% during 2013–2018E. 


NCB Capital remains Neutral on Jarir with the PT increasing to SR196.5. Despite the opening of three new stores, the top-line growth was weak at 4% YoY in 1H14. This was primarily due to lower segmental demand from the consumer electronics segment (64% to total revenues). However, NCB Capital believes margin expansion remains the key catalyst for the company. “The outlook remains strong, but we believe that Jarir is currently trading at fair valuations,” added Mr. Tomalieh. “The 2015E P/E stands at 20.8x, representing a 49% premium over peers.” 


“We remain Overweight on Shaker with a PT of SR103.0, said Mr. Tomalieh. “We believe that demand for ACs and other household appliances will increase, driven by the relative pick-up in the construction sector. We expect margins to improve supported by lower commodity prices and economies of scale. These factors, coupled with higher income from associates will improve Shaker’s profitability. The company is trading at an attractive 2015E P/E of 13.5x. The earnings growth outlook for Shaker remains strong and we estimate a CAGR of 2.8% over 2013–18E.”

Background Information

NCB Capital Company

NCB Capital was founded in 2007 as the investment banking and asset management arm of the National Commercial Bank (over 90% ownership), providing clients with premier solutions of integrated investment services. Today, NCB Capital is the largest Asset Manager in the Kingdom of Saudi Arabia and the largest Sharia compliant Asset Manager globally with over SAR140 billion of assets under management.

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