EUR 22.12 For Business Accounts Only

Downgrade to Neutral on rising costs; Uber-Careem deal the main upside

Cut TP by c6% on rising costs. We cut our TP by c6% and downgrade our rating to Neutral as we account for the company’s rising service costs and SG&A expenses. Against this, we roll over our DCF and cut our discount rate assumption by 220bps to 2.5%, to reflect the global monetary easing dynamics. Seera’s share price rallied 29% y-o-y, and currently trades on a 2020e P/E of 19x, falling to 16.4x in 2021e, in line with global peers, adjusted for growth. This leaves limited upside, in our view.

Struggling to maintain market share after loss of government business. Seera has been struggling to defend its market share and prevent revenue deterioration since the loss of its key government contract in late 2018, given the tough competition from global companies (travel services represent 68-70% of Seera’s EBITDA and hospitality represents 30-32%). This was possible thanks to Seera aggressively growing its online booking platforms since 2017, offsetting the drop in government bookings. However, this came at a high cost, with the company’s cost of service and SG&A rising 43.3% and 17.1%, respectively, in 2019e. Accordingly, EBITDA margin dropped to c26% in 2019 from c38% in 2018, which we expect to be the new normal.

Successful completion of Uber-Careem deal could add SAR6.00/share to our TP. In Mar-19, Uber reached an agreement to acquire Careem Inc. for USD3.1bn, subject to regulatory approvals. Seera owns 15.3% of Careem, carried at only SAR13.5mn vs. an implied deal value of SAR1.8bn. We exclude Careem from our valuation, since: i) it has been loss-making since its start in 2012, with no clear visibility on when it should turn profitable, and ii) the Uber-Careem deal is likely to face stringent regulations, mainly in Egypt (the deal has already been approved in Saudi Arabia and the UAE, and rejected in Qatar), making its completion difficult. However, if the deal goes through at the announced price, it would alone raise our TP by 30% to SAR26.0/share

Other risks. Aside from the Uber-Careem deal, every 5% higher/lower-than-expected gross bookings would raise/lower our TP by 5%, all else constant. Additionally, every 5% higher/lower-than-expected service costs and SG&A expenses would reduce/raise our TP by 5% and 10%, all else constant.