EUR 25.64 For Business Accounts Only

SCH AB | Stalled recovery priced-in; Downgrade to Neutral

Prolonged turnaround warrants downgrade. We cut our 12M TP by 37.5% to SAR52.5/share, as SACO’s efforts to recover sales trends are taking a longer time to pay off. This comes due to delays in the rollout plan, along with weak demand on its products, amid the VAT hike and higher competition, as well as slower-than-expected pace of consolidation. That said, we lower 2020-23e EBITDA forecasts by 38% to reflect weaker store yields, and in turn, margins, while pushing the 2020 40-store target to 2022e. The more efficient strategy, driving better sales and margins, fuels a 2020-22e EPS CAGR of 12%, priced in, in our view, warranting the rating cut. On a 2021e P/E of c25x, SACO trades 18% above peers, in line with our implied P/E.

Sales density revival calls for active strategy. We see the pickup in store yields as a medium-term story, remaining pressured in 2021e, yet at a lower rate (-2.5% y-o-y vs. -9.3% in 2020e), as gradual consolidation and offering instalment sales (via two consumer finance companies in 1Q21) should partially mitigate pressures from slow demand and space additions (+c7% y-o-y). Reviving demand can be achieved via expanding the services offering, which should support home improvement tools’ sales, especially with rising mortgage activity. This should cement SACO’s position as a ‘one-stop-shop’, and help hasten the pace of market share gains, as having a wide distinguished offering is key to attract footfall, in our view.

Mortgages’ boom to stimulate demand, yet not immediately. Growth exhibited in mortgages should positively spill over to home improvement loans, and in turn, recover demand on SACO’s products, yet we believe with a lag of 1-2 years. A key watch factor is the pickup in home improvement loans activity, which appears to be bottoming out (-0.5% y-o-y in 3Q20 vs. -9% y-o-y in 2019), while new residential mortgage contracts soared 1.9x and 3.6x y-o-y in 9M20 and 2019, respectively, thanks to efforts to raise home ownership (+5pp to 53% in 2019 and 62% in 1Q20).

Challenged margins on track to recover. We expect EBITDA margin to reach 17.4% by 2022e (vs. 17.2% in 2020e and 15.3% in 2019), without assuming full recovery to pre-2018 levels, pending acceleration in sales trends. This should stem from: i) a +1% p.a. in 2020-25e sales/sqm (30% fixed costs), still substantially below historical levels, with a better sales mix and discount strategy, ii) reaping fruits of efficiency and cost cutting measures, and iii) unlocking value from Medscan (via securing logistic needs and launching Eastern Province DC in 2021e).