EUR 24.26 For Business Accounts Only

BUDGET AB | Trading at demanding valuation; Downgrade to UW

Wide valuation gap to global peers unjustified. We raise our TP by 11.1%, on: i) DCF rollover, and ii) 50bps lower WACC amid global monetary easing dynamics, while reducing our average FCFF forecasts by 10% over our forecast horizon, on higher expected capex needs. We downgrade our rating to Underweight from Neutral, following the 42% share price rally, since Mar-20, in line with the Saudi market. Budget Saudi’s current valuation ignores the negative impact of the adverse macro dynamics on the company’s operations. Budget Saudi trades on a 2021e P/E of c24x vs. peers’ c12x, which we find unjustified. Our assumption of a gradual earnings recovery puts Budget Saudi’s 2023e P/E at 15.8x, 17% above the industry’s historical average.

Strong margins on fleet sales support 2020e performance, but should recede as of 2021e. Budget Saudi’s performance in 9M20 was shielded by robust sales of used fleet (SAR246mn in 2020e, -5.7% y-o-y, on our numbers). Most of the company’s sold fleet in 9M20 is highly depreciated, in our view, with the company generating a gross margin of c74% on fleet sales vs. the historical average of 46% over 2016-19. Such strong fleet sales in 9M20, which boosted profitability and cash flow, reflects the unfavourable growth dynamics in Saudi Arabia, and the company’s inability to fully utilise its fleet amid the falling demand on car rental activity (net rental revenue in 2020e estimated at SAR676mn, -13.7% y-o-y). We expect margins on fleet sales to drop 52% in 2021e, then normalise at the historical levels. This should lower net income by c33% in 2021e before recovering gradually to pre-COVID levels over 2022-25e, as macro dynamics and travel activity improve. Additionally, such recovery will come at the cost of rising capex, to replace the sold fleet.

Feeble dividend yield over 2020-21e. We see weak profitability in 2020-21e to lead Budget Saudi to distribute a DPS of SAR0.75 in 2020e and 2021e, yielding 2.2%, vs. SAR1.50 pre COVID-19, which could disappoint the market. We expect dividends to improve along with income beyond 2021e, returning to pre-COVID levels in 2022.

Valuation most sensitive to rental rates, used car prices. Alone, every 5% higher/lower-than-expected rental revenue p.a. would add/reduce 27% to/from our TP, all else constant. Every 5% higher/lower-than-forecasted used car prices and number of fleet units would raise/reduce our TP by 6.7% and 3.3%, respectively, all else constant.