EUR 103.27 For Business Accounts Only

Saudi discretionary retailers | Selectivity is key; eXtra a continued outperformer

eXtra stands out, despite headwinds. Saudi appears on target to end its vaccination campaign by end-2021, so we see limited risk of restricting mall and store access to vaccinated people. Footfall should be strong, once retail activity resumes, as 2020 likely hastened the pace of market consolidation. As the fiscal deficit trends down, on oil price recovery, the government could be incentivised to cut the 15% VAT soon, and potentially introduce social benefits, to counter rising inflation. This should boost retail sentiment, posing upside. eXtra remains our pick (2022e P/E of c16x), as Tasheel should offset retail’s slower growth, despite ongoing spending pressures and 2020 high base. Jarir stands to benefit from resumption of schools on-ground, supporting margin recovery starting 3Q21e, but this is priced in. Trading on a 2022e P/E of 28.2x, we think the market overlooks SACO’s cost pressures, overshadowing the slow recovery in revenue trends, post rolling out instalment sales in 2H21e.

Consumer finance, new retail theme. eXtra always surpassed its peers, either through launching its online store (2011 vs. 2016 for Jarir and SACO) or offering consumer finance services (2015). To entice demand and spur traffic, amid ongoing spending pressures, Jarir and SACO followed eXtra’s footsteps, offering instalment sales via other companies, in 2019 and 2021, respectively. We see added benefit for eXtra, expanding its growth prospects, aiming to double 2020e EPS by 2023e (+28% over 2020-23e vs. +11% for Jarir and +6% for SACO).

Margins on path to recovery. Global shipping turbulences are sustaining, raising shipping costs and extending lead time, translating into product shortages. The impact is more pronounced on SACO, on partially absorbing the increased costs, along with facing shortages, delaying the recovery in 2021e top line (-1% y-o-y) and EBITDA margins (-c20bps y-o-y). Beyond 2021e, SACO’s EBITDA margin should slowly recover, partially pressured by higher Saudisation requirements. We see more concrete margin expansion, starting 2021e, for Jarir and eXtra, having fully passed on freight cost inflation and being Saudisation compliant, with a better mix.

Market share gains still key driver. Offering a unique shopping experience should garner eXtra further market share, particularly in the white goods segment, with less focus on expanding its network. Meanwhile, we see higher emphasis on store additions for Jarir and SACO to attract traffic, given the higher reliance on cross selling high-margin products. Cannibalisation risk is limited, as these expansions are focused on untapped areas in underserved and growing cities.