Retail Sector Report - Al Rajhi Capital

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Saudi Retail Sector Retail –Industrial 05 January 2013 The UAE-based Axiom Telecom has a strong presence across the GCC countries, UK and India with more than 500 outlets. The company retails all leading brands of mobile handsets, tablets and mobile accessories. Further, the company has a strategic partnership with telecom players du in the UAE and Mobily in Saudi Arabia. The Saudi electronics retail market is heating up with regional companies increasing their presence. Al Bandar’s “Emax” stores, Majid Al Futtaim’s “Best E-City” stores (which it acquired from Alhokair in 2009), and Egypt-based Itsalat International’s “i2” are retailers from the MENA region, which are viewed as potential competitors in the segment. However, they have very low market share as compared to Extra. Investment in education remains a priority for the government Emphasis on a knowledge economy to boost book sales The Saudi government has placed high emphasis on education for its nationals. The Kingdom’s goal of creating a knowledge-based society has led the Ministry of Economy and Planning to allocate SAR732bn toward human resources in the ninth five-year development plan, which includes education and training. Although the percentage of allocation has reduced from 56% in the eighth five-year development plan to the current 51%, it still remains a major area of focus. The ninth five-year development plan envisages increasing the number of students enrolled at each academic stage – elementary, intermediate, technical and vocational, graduate, and post-graduate levels. A number of new educational facilities (25 technology colleges, 28 technical institutes, and 50 industrial training institutes) will be built. The plan also targets to monitor the implementation of projects under the first five-year plan of the National Policy for Science, Technology and Innovation, and will provide SAR900mn in grants for research projects each year. Further, initiatives include the launch of 10 research centers, 15 technological innovation centers affiliated to King Abdullah City for Science and Technology (KACST), and at least 8 technology incubators at KACST and other universities. We believe this emphasis on education will provide a boost for book sales and stationeries benefitting retailers like Jarir — which has diversified to selling electronics (laptops, smart phones, and gaming equipment) and even has the motto “Not just a bookstore”. Figure 19 Education and heath are of prime importance SAR bn 1600 Figure 20 Spending is high on basic and college education SAR bn 800 1200 Municipal & Housing Services Transport & Communications 600 Institute of Public Administration Science, Tech. & Innovation 800 Economic Resources Health 400 Technical & Vocational Higher Education 400 Human Resources (Education) 200 General Education 0 Eighth Plan (2005-09) Ninth Plan (2010-14) 0 Eighth Plan (2005-09) Ninth Plan (2010-14) Source: Ministry of Economy and Planning, Al Rajhi Capital Source: Ministry of Economy and Planning, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 12
RSI10 Vol mn United Electronics Company Retail EXTRA AB: Saudi Arabia 05 January 2013 US$0.7bn 40% US$1.14mn Market cap Free float Avg. daily volume Target price 123.5 19% over current Consensus price 123.4 19% over current Current price 103.75 as at 02/01/2013 Underweight Neutral Overweight Overweight Key themes We expect rising population, improving education, and changing lifestyle to continue to drive the retail sector in Saudi Arabia. We believe the electronic retail segment, to which Extra caters, has immense potential not only in the Saudi Arabia but also in the GCC, thanks to the latent demand electronic gadgets and home appliances. Implications Extra is our preferred stock in the retail sector. Extra has become a leader in a very short time thanks to its aggressive expansion plans backed by an attention to all aspects of setting up an efficient business. We expect the stock to perform well in future, benefitting from the young demography and higher disposable income levels. Performance 103 Earnings Period End (SAR) 12/11A 12/12E 12/13E 12/14E Revenue (mn) 2,462 2,850 3,302 3,830 Revenue Growth 38.4% 15.8% 15.8% 16.0% EBITDA (mn) 158 180 199 218 EBITDA Growth 33.6% 13.8% 10.9% 9.3% EPS 5.51 6.17 6.81 7.31 EPS Growth -4.2% 12.0% 10.3% 7.4% Source: Company data, Al Rajhi Capital Valuation 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 93 83 73 70 30 -104 3 2 1 Price Close P/E (x) MAV10 12/11 04/12 07/12 10/12 Source: Bloomberg 0.0 01/09 01/10 01/11 01/12 Source: Company data, Al Rajhi Capital 136 129 122 115 107 100 93 86 Research Department Majed Alsolaim, Tel +966 1211 9471, alsolaimm@alrajhi-capital.com Extra Ushering in the digital age Extra is the market leader in the home & electronic appliance segment in the Kingdom and has maintained solid revenue growth over the past few years on account of Saudi Arabia’s strong demographics. We expect the company to post healthy revenue growth over the next few years due to new store openings. Although, the company’s margins are lower as compared to its peers, we attribute it to the selling and distribution costs. We believe that high SGA expenses are justified, given that the company is in a rapid expansion mode. We initiate Extra with an Overweight rating and a target price of SAR123.5, implying an upside potential of 19%. Favorable market conditions: We believe that Saudi Arabia’s retail sector will benefit immensely in the coming years on account of a young (80% below 40) and rapidly growing population. Apart from the Kingdom, neighboring GCC countries also have a similar demographic profile. While improving income levels, low internet penetration levels and an attraction to modern lifestyle will lead to a surge in demand for electronic devices, an increase in housing units will ensure steady demand for home appliances. Extra, being a market leader in the Kingdom, is positioned to reap rich dividends from this trend. Growth to come from rapid store expansion: Extra is planning to set up 42 stores in the country by 2015 from 29 stores currently. Given the fact that Extra has been expanding rapidly over the past couple of years, we believe that it is capable of adding 4-5 stores every year for the next couple of years, implying double-digit revenue growth over the near-term. Aggressive sales pitch: Extra has been conducting huge sales events like the “Women Festival” and the recently concluded “Mega Sale” to capture the attention of Saudi consumers. The financials also point to the fact that Extra’s selling and distribution expenses are very high as compared to its peer Jarir and thus have impacted profit margins. However, we believe this is mainly due to Extra’s rapid expansion plans. Financials are supportive for growth: Although inventory value has grown considerably (+86% y-o-y) at the end of Q3 2012 and represents a chunk of the balance sheet (around 55%), we believe the company can easily tide over any working capital issues. Our belief stems from the fact that Extra has zero debt on its balance sheet and hence can raise debt if required. Valuation: We like Extra’s business for its growth potential and its approach at selling electronic products (targeted sales campaigns and online sales) in the Kingdom. We feel the company will ride on the retail wave in the Kingdom as well as the GCC region at large and expect it to witness high revenue and profit growth in future. We have conservatively kept selling expenses at the same level in the forecast period, but we understand that this could reduce substantially in future, boosting margins. We initiate coverage on the stock with and Overweight rating and arrive at a target price of SAR123.5 per share using a blend of long run discounted economic profit (DEP) method (70% weight) along with comparable P/E and EV/EBITDA multiples of Extra’s peers (30%). Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 13
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Retail Sector Report - Al Rajhi Capital

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