Saudi Retail Sector: Optimistic outlook - Al Rajhi Capital

1 Saudi Retail sector Retail Industrial Saudi Arabia 05 January 2013 January 18, 2010 US$ bn 73% US$ Market cap Free float Avg. daily volume Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform Target mkt cap 23, over current Consensus mkt cap. 23, over current Current mkt cap. 21, as at 02/01/2013 Underweight Neutral Overweight Overweight Key themes Driven by rising population, improving education, and changing lifestyle, we expect the Retail sector in Saudi Arabia to continue growing. We expect big-box Retail formats and established players to flourish in the Kingdom, even as online sales gradually penetrate.

2 We believe the Retail market to spread beyond Riyadh and Jeddah and retailers will have to focus more on building relationships with its customers as competition intensifies. Implications We initiate coverage on Extra with an Overweight rating. We upgrade our target price for Jarir but maintain our Neutral rating. We also upgrade our target price for Alhokair after its impressive results in Q3 2012. On the other hand, we lower our target price for Alothaim. However we maintain an Overweight rating on both Alhokair and Alothaim. What do we think? Stock Rating Price Target Extra Overweight Alhokair Overweight Alothaim Overweight Jarir Neutral Why do we think it?

3 Stock 3 year EBITDA CAGR* 2013 EV/EBITDA Extra Alhokair Alothaim Jarir *2012-2015 Where are we versus consensus? 050100150200 ExtraAlhokairAlothaimJarirSARC urrentConsensusARC Source: Company data, Al Rajhi Capital Research Department Majed Al Solaim Tel +966 1211 9471, Saudi Retail sector : Optimistic outlook We extend our Saudi Retail sector coverage by adding United Electronic Company (Extra), a market leader in the home & electronic appliance segment in the Kingdom. We remain positive on the Saudi Retail sector driven by healthy population growth and higher consumer spending.

4 However, with intensifying competition and likely increase in costs, Saudi retailers will have to innovate rather than merely depending on store expansion. Retail market is promising: Favorable demographics coupled with higher income on the back of Saudi government s massive social spending will drive the Kingdom s Retail market in the medium-term. Big-box formats to remain popular: While large Retail formats are facing tough times across the globe, Saudi Arabia will remain an exception as they remain under-penetrated and are the only culturally accepted source of entertainment in the Kingdom. Different dynamics affecting grocery and non-grocery Retail : Although, large players dominate a fragmented grocery Retail market, we expect them to face higher costs (on account of Nitaqat) and intensifying competition, despite healthy growth prospects.

5 In non-grocery Retail , we expect two sub-categories: clothing & footwear as well as electronics & appliances to perform well in future. Valuation and conclusion. We initiate coverage on Extra with an Overweight rating as we like the company s approach at selling electronics (targeted campaigns & online sales). We arrive at a target price of per share. We have revised the target price of Alhokair to and have upgraded our rating to Overweight. The company recently acquired NESK Group, which added more than 120 stores with more than ten brands to its portfolio. We reiterate our Overweight rating on Alothaim but have revised down target price to as it needs to rein-in on its rising labor and marketing costs.

6 We remain Neutral on Jarir despite an upward revision of target price to SAR , as its electronic appliances segment has witnessed slower than expected growth in Retail sector Retail Industrial 05 January 2013 Disclosures Please refer to the important disclosures at the back of this report. 2 Retail is promising: growing despite challenges A strong economy moving away from oil The MENA region is expected to remain one of the few bright spots for global GDP growth in 2012, even as the global economic recovery remains uncertain with a deepening financial crisis in Europe and a slowdown in the US as well as emerging Asian markets like China and India.

7 According to the IMF s update in July 2012, GDP growth in the MENA region will be higher by 200bps y-o-y in 2012 at vs. decline of 20bps (advanced economies) to 340bps (Central and Eastern Europe), mainly due to higher oil production. As the global leader in oil exports, Saudi Arabia has been a beneficiary of the high crude prices witnessed in the first half of 2012. Although crude oil production from the Kingdom has moderated after it peaked in June 2012 at , it continues to be at elevated levels. Figure 1 Crude oil production are at elevated levels Figure 2 Smaller sectors are growing faster -20%0%20%40%Market Cap 1-year growthPerf ormance 1-year growth Source: OPEC, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital The Saudi economy, with real GDP at SAR942bn in 2011, (source: IMF with 1999 as base year) has been growing strong thanks to its rising oil exports even as countries in the developed world continue to struggle.

8 Although the IMF expects the Kingdom s real GDP growth to remain at moderate levels (6% in 2012 vs. 7% in 2011), it remains better than developed economies and comparable to the emerging economies of Asia. Even at the regional level, Saudi Arabia has remained relatively unscathed from the uprisings witnessed in other countries in the MENA region. This is mainly due to the massive social spending activities worth being carried out by the Saudi government over 2010-2014 as per the ninth five-year development plan. The Saudi government has allocated SAR250bn for building 500,000 new affordable housing units for low income Saudis. A new Saudization program (Nitaqat) aimed at increasing the employment of Saudi citizens in the private sector came into effect in late 2011, which has been supported by job placement and training schemes.

9 A decree was passed in 2011 to increase the minimum wages for all public sector employees to SAR3,000 per month. Further, in January 2012, an unemployment allowance (Hafiz) of SAR2,000 per month was introduced, which the Ministry of Labor has estimated to cost around per annum for the Saudi government. We believe this massive social spending will generate employment opportunities leading to higher disposable income levels for Saudi citizens, which will gradually trickle down to various sectors such as Retail . Apart from the social spending, the surpluses generated from oil exports are also being ploughed back to diversify the country s economy.

10 This has led to the development of new sectors such as agriculture, Retail , and real estate which are growing at a faster pace as compared to other bellwether sectors such as petrochemicals and banking. We view this as a positive development for the long-term economic growth of the Kingdom. Although this may indicate slower growth than in the past, it will pave the way for a much more vibrant and diversified economy. Saudi economy has benefited from high oil prices and exports for most of 2012 The Saudi government has been using its export surpluses for increased social spending Saudi Retail sector Retail Industrial 05 January 2013 Disclosures Please refer to the important disclosures at the back of this report.