Remain Overweight on solid expansions, strategy
Aggressive expansions to continue. SACO announced its 2019-20 expansionary plan in Jan-18, targeting 7 new stores in the GCC, ahead of our previous expectation of 3 stores. We raise our 12M TP by 25% to SAR140/share to reflect new higher retail space guidance and better EBITDA margins (+70bps vs. previously). SACO continues to be a play on displacement, benefiting from the shift towards modern retail on a step-up in costs, and its unique product offering, limiting competition. Its strategy continues to focus on raising efficiencies, adding new categories, and expanding product offerings and services. SACO trades on a 2018e P/E of 17.5x, 20% below peers, despite its higher growth (2017-19e CAGR of 13% vs. peers’ 6.8%)
Unique product offering attracts footfall. Our 2017-19 revenue CAGR of c12% is driven by SACO’s sustainable market share gains, as it extends its foothold in new areas in Saudi, displacing unorganised players. SACO’s strategy to introduce unique products and provide innovative solutions boosts traffic (+21% y-o-y to 3.6mn in 9M17), driving the positive like-for-like sales growth (+3.8%), despite the basket size drop (-4.7% y-o-y SAR246) due to introducing low-priced items. The fact that >80 of customers are Saudis should continue to protect SACO from consumption shocks, as government measures favour Saudis, alleviating pressures on their incomes.
Efficiency measures yield positive margin outlook. We look for an average expansion of c30bps p.a. in EBITDA margins, reaching 14.2% by 2020 (vs. 13.4% in 2017e). Margin improvement stems from: i) ongoing cost-cutting measures, ii) maturity of new additions, iii) growing contribution of SACO’s private label, and iv) Medscan Terminal synergies. This should offset the pressure from increased utility prices and labour costs, driven by higher Saudisation requirements (currently standing at 36%, targeting 38% to remain in the mid-green zone) and expat fees.
Services offer upside. SACO aims to be a full-fledged one-stop shop for home improvement solutions, by expanding the services segment (c1% of sales). SACO currently offers free delivery and installation for large items, and charges a small fee for others. This should pose an upside for margins, in addition to SACO’ plans to grow Medscan’s client base at a later stage (average EBIT margin of 41% in 9M17).
Saudi Company for Hardware SJSC (SACO) is a Saudi Arabia-based company engaged in the hardware retail and wholesale business. Its household improvement products fall under different departments, such as lightings, automotive, bed and bath, electrical appliances, lawn and garden, toys, storage and organization, building materials, sports equipment, plumping supplies, pain and sundries, outdoor living, indoor furniture, house wares and hardware. It offers a group of home solutions, such as paints, floor and wall, bathroom accessories, power, keep your garden beautiful, electrical device holder, washing and ironing, cars travel, storage, dust, water and moving. The Company operates more than 20 stores in different cities and offers over 45,000 products. Furthermore it has warehouses in Central and Western region, as well as maintenance centers in Central, Eastern, and Western regions. Its subsidiary, Medscan Terminal Co, is a provider of long-distance freight trucking services.
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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