EUR 26.30 For Business Accounts Only

BUDGET AB | Cut TP 27% post COVID-19; Maintain Neutral

26% y-t-d share price drop justified. Our TP cut reflects: i) heavy pressures over 2020-21e, on falling rental and used car sales activity, amid the Saudi lockdown, and waning economic activity, ii) c14% lower number of fleet units, as we reflect a lower fleet base in 2020e, and iii) 1PP higher equity risk premium to 8%. Budget Saudi’s share price shed 26% y-t-d, fairly reflecting the impact of the ongoing dynamics on the stock, on our valuation. The stock trades on a 2021e P/E of 32.6x, falling to a sustainable P/E of 9.6x over 2022-25e, in line with historical industry average levels. We expect the company to completely halt dividend payments over 2020-21e, and only resume them starting 2022e.

Heavy losses in 2020e; Gradual recovery beyond. We expect Budget Saudi to incur SAR328mn in losses in 2020e, mostly non-cash losses that should not impact FCFF generation, and gradually recover beyond 2020e. We assume an average revenue of SAR10,7k/unit, only 40% of its 2019 levels, and a reduction in the company’s net fleet by 6.8% in 2020. Beyond 2020e, we assume a gradual recovery in average revenue and net fleet to pre-COVID-19 levels of cSAR27k/unit, and 30k units. Our assumptions imply that the company will only partially recover in 2021e and normalise fully in 2024e.

Negatively skewed risk profile. As a play on Saudi macro dynamics, Budget Saudi’s risk profile is skewed downwards. The risk of fiscal austerity measures in Saudi or sustained oil price weakness into 2021e can sharply undermine our TP. Otherwise, every 5% lower/higher revenue/unit p.a. deducts/adds 22.2% to our TP, all else constant. Meanwhile, every 5% lower/higher-than-expected number of fleet units p.a. reduces/increases our TP by 3.7%, all else constant.