Maintain Neutral on meagre growth outlook
Raise TP by 20%, on lower cost of capital assumptions. We maintain our Neural rating on the stock, but raise our TP by 20% to account for: i) 1.5pp lower risk free rate assumption to 2.5%, as we reflect the global monetary easing dynamics, and ii) DCF rollover. Budget Saudi trades on a 2020e P/E of 12.9x, in line with global peers adjusted for growth, leaving limited upside from the current level.
Fleet, earnings growth to remain subdued in the short run, recover modestly in the medium to long run. Budget Saudi’s 9M19 earnings growth registered 5.5%. We expect the sluggish Saudi economic dynamics to continue pressuring its fleet and earnings growth potential in the short-term, before starting to gradually improve towards end-2020e, driven by rising per capital income and investment spending. We look for a fleet and EPS CAGR of 4.3% and 6.9%, respectively, over 2019-24e, compared to the double-digit growth that the company used to achieve before the 2015 oil crash. We expect muted impact from both the rising number of driving women in Saudi, and the Saudi government’s imposition of more stringent regulations within the sector.
Attractive dividend play. Budget Saudi’s limited capex needs, in light of its weak growth potential and healthy balance sheet, should enable it to sustain a dividend payout ratio of 60-65% over 2020-21e. This translates into an attractive dividend yield of 5.0% in 2020e and 5.4% in 2021e, compared to 2.5% and 3.1% for global peers and the Saudi market’s yield of 4.1% and 4.3%, respectively.
Risks. Better-than-expected economic dynamics would be positive for Budget Saudi’s fleet and earnings growth potential. Additionally, higher-than-anticipated use of the cheaper-cost debt funding in the company’s capital structure should reflect positively on Budget Saudi’s RoEs, dividend potential, and valuation. Otherwise, every 5% higher/lower-than-expected revenue per fleet unit and number of fleet units p.a. adds/deducts 25% and 5.5% to/from our TP, respectively, all else constant.
United International Transportation is engaged in the leasing and rental of vehicles. Co. operates under the brand name "Budget Rent a Car". Co. leases and rents passenger cars and trucks, commercial vehicles and specialized vehicles.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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