EUR 56.58 For Business Accounts Only

Maintain Neutral on feeble fleet growth, valuation

Cheap multiples justified by subpar growth. Given Budget Saudi’s aggressive fleet monetisation, we reduce 2018-22e FCFF by 9.3%, but our TP stands 16% higher at SAR29/share on: i) SAR202mn net debt reduction over 9M17, and ii) a lower RfR assumption of 4% vs. 4.7% before. The stock trades on a 2018e P/E of 11.3x, 23.4% below global peers, justified, in our view, by its below average EPS CAGR of 1.6% over 2018-20e vs. 10.7% for peers. Budget Saudi’s 2018e EV/dep. fleet assets of 1.9x stands in line with global peers, adjusted for profitability.

Optimism over women driving in Saudi overdone, in our view. In Sep-17, Saudi Arabia lifted a ban on women driving, effective June 2018. Since then, Budget Saudi’s share price rallied by c32%, despite its limited impact on the company’s operations, in our view. We expect women who drive to replace a large portion of ride-hailing apps and 1.4mn private chauffeurs/drivers. The company’s retail revenue is mainly driven by discretionary spending and demand for travel, and not by the size of the driving population. We believe the upside from the new decision comes mainly from reducing the risk of extended secondary car market weakness. Accordingly, we assume Budget Saudi’s average vehicle disposal price to grow at 6.2% CAGR over 2019-22e.

RoE to remain pressured by weak returns, suboptimal leverage. Budget Saudi has been trading down its fleet since Dec-15, focusing its services on low-income segments in Saudi Arabia leading its net fleet to drop by SAR198mn (13.2%) over 2015-17e, while directing its fleet sales proceeds mainly to deleveraging. The mix of falling profitability and leverage led the company’s RoE to drop to 15.6% in 2017e, from an average of 21% over 2009-14a. We expect Budget Saudi’s profitability to remain under pressure, mirroring the slow pace of Saudi’s economic recovery, as the lower-make fleet and strong competition hinder pricing growth. This, coupled with the suboptimal leverage, should maintain RoE in the vicinity of 15-16% over at least 2018-19.

Rising yields, thanks to deleveraging, are the main upside. We expect Budget Saudi’s dividend yield to rise to 4.4% in 2018 and 6.3% in 2019, from 3.4% in 2017. This comes on the back of deleveraging, which could continue to derive interest in the stock, we believe. For every 5% higher/lower rental/lease revenue/unit, fleet sale proceeds and fleet size p.a. than our assumptions, our TP increases/decreases by 33%, 7% and 2%, all else constant.