EUR 44.47 For Business Accounts Only

Story intact, despite short term headwinds

Remain buyers as competitive pressures ease. Liquidation activity from smaller, unorganised players, ahead of the Saudisation deadlines, has taken its toll on SACO’s store yields (-14% y-o-y in 1H18), coupled with the more cautious consumer behaviour. We see room for yields recovery (+2.5% p.a. over 2019-23e), as market share gains accelerate within targeted sectors and new additions mature. The current share price ignores upside potential from faster displacement and operational recovery. We cut our 12-month target price by 27% to SAR102/share, to reflect c16% lower sales/sqm, on average, over 2018-22e and, in turn, margins (-2.6ppt). SACO trades on a 2019e P/E of 15.4x, 8% below peers, despite its higher growth (2018-20e EPS CAGR of 26% vs. peers’ 13%). Any weakness in the stock post 2H18 results (-23% y-o-y) would present an attractive entry point.

Displacement story remains intact. Operating in a fragmented market, with spending on home improvement underpenetrated, provides room for growth. This is feasible, in our view, as SACO taps new areas in Saudi, introduces unique products, and provides innovative solutions, driving 2018-20e revenue growth of 11% p.a. We look for accelerated consolidation post enforcing 70% Saudisation in stores selling furniture and kitchenware (Sep-18), electrical appliances (Nov-18), and building materials (Jan-19).

Sales ramp-up, efficiency efforts fuel margin recovery. Operating leverage (28% fixed costs) as store yields improve, along with SACO’s cost cutting initiatives post 1Q18, should drive EBITDA margin recovery from the all-time low of 10.1% in 2018e, reaching 12% by 2020e. Labour costs are also contained, thanks to lower staff density, with no plans to hire more Saudi salesforce (50-60% Saudisation), but relocate to targeted departments.

Growing efficiently. SACO continues to improve its operational efficiency by testing out different projects in one of its Riyadh stores, ‘Store of the Future’. These include: i) targeting to reduce store headcount by 25% (-7% y-t-d), so we assume lower staff density of 12.5 employees/1k sqm over 2019-23e vs. 14.5 in 2017, and ii) launching a services section, offering new installation and maintenance services. We assume c3% p.a. growth in services revenue, in line with average, until the company rolls this section out to all stores.