EUR 158.42 For Business Accounts Only

Saudi pharma retailers | Initiating coverage: Back to growth

Plays on wellness, maternity, and baby care. We foresee growth starting 2022 vs. a lacklustre 2021 for the two pharma retailers (sales/branch fell 6.7% and EPS -3.7%). Non-pharma sales wind up at ~85% of GP, as the two chains follow the Western format, uniquely positioning them as plays on two developing themes – Saudi’s rising health awareness and social reforms. Pharma retailers capture c86% of wellness, c55% of mom and baby, and c30% of cosmetics industry turnover. Chains grab the bulk of this, as standalone pharmacies continue to be displaced.

Nahdi: The sector’s value play. We initiate at OW, on 18% upside, implying a 2023e P/E of 25x, on par with global drug retail average. Nahdi is the largest chain (c30% total market share) and is highly streamlined, both operationally and financially, with a superior 2021 RoE of 44% vs. an industry average of 17% and an FCF margin of 12.8% vs. 3.9% thanks to efficient inventory management. With 1.1k branches nationwide, capex is limited to a few primer relocations. We see fewer bottom/up trajectories due to this, but it is a safe well-managed proxy with capacity to garner higher LFL sales. Online sales are also a higher 9% of top line vs. ‹2% for Al Dawaa.

Al Dawaa offers growth, but at a cost; Initiate at N. Saudi’s second largest, Al Dawaa, positions itself as a community chain. With an aggressive plan to add 18% more branches by 2025 in new areas, branch yields should improve. It has a case for margin expansion in 2022, as it saw aggressive hiring for new branches last year, which only opened in 4Q21, and higher low-margin COVID sales. We expect 2022 EPS growth of 36% vs. 6.2% for Nahdi, but our TP implies a lower 2023e P/E of 20x. This reflects the need to reduce inventory (180 days in 1Q22 vs. 80 days for Nahdi), raising leverage to 2.9x EBITDA at a time of rising interest rates.

Higher Saudisation a risk. Demand will remain resilient, in our view, given the nature of products sold with a 2018-20 ASP of SAR33 (Nahdi). With salaries averaging c18% of the two retailers’ sales, further increases in Saudisation rates for pharmacists is a key risk. Ageing receivables have in the past often marred the story for Saudi corporates, but this is not the case for pharma retail, where receivables average 24 days, despite Al Dawaa’s close government ties.