EUR 21.76 For Business Accounts Only

Accelerated consolidation behind us; Cut to N

Fairly priced post 2018 rally. Stringent Saudisation requirements in the mobile market triggered faster displacement of unorganised players in 2017, expanding Jarir’s market share to 20% from 15%. However, the pace of displacement softened during 2H17 (organised players’ market share was 47% in Dec-17 vs. 24% in Jan-16), with Saudi store yields falling by 1% y-o-y in 2H17 vs. +6% y-o-y in 1H17. We maintain our 12M TP of SAR180/share and downgrade our rating to Neutral on valuation grounds. Jarir trades on a 2018e P/E of 17.4x, 27% above peers, justified given its high dividend yield of 5.2% vs. peers’ 2.4%. eXtra trades on par with Jarir, with a stronger growth outlook (2017-19e EPS CAGR of 29% vs. c7% for Jarir), as it stands to benefit from enforcing full Saudisation in electrical appliances stores as of Nov-18. Potential upgrade of MSCI Saudi to EM status (due in Jun-18) and Jarir’s inclusion in FTSE (effective 2019), could lend some support to the stock.

Expansions fuel market share gains. Further rise in Jarir’s market share should be driven by the ongoing expansionary plan, especially as Jarir targets untapped areas in Saudi. Jarir is approaching its 2019e 60-store target (50 stores as of 2017), with plans to open 5 stores p.a. over 2018-19e (+10% p.a. in retail space). This should pressure store yields by 1.5% in the short-run, as benefits from market share gains wane, coupled with unchanged spending pressures (PoS value/transaction down to all-time low in Feb-18). Beyond 2019e, we assume a gradual recovery in yields (2% p.a.), as expansions ease and new additions mature (21 stores over 2016-19e).

Margins to normalise. Enhancing product margins and higher supplier rebates in 2017 mitigated the pressure from the higher opex of new stores and shift in Jarir’s sales mix towards lower-margin products. Contribution of electronic products reached 68% in 2017 vs. 66% in 2016, post-mobile market consolidation. We expect 2018 EBITDA margin to normalise at 12.5% (-20bps y-o-y), assuming lower rebates in line with 2018e modest top line growth (7.5% vs. 13.4% in 2017), and as Jarir targets raising its Saudisation rate to >60% vs. the current 55%.