Retail Sector Report - Al Rajhi Capital

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Abdullah Al Othaim Markets Retail 05 January 2013 Balance Sheet (SARmn) 12/10A 12/11A 12/12A 12/13E 12/14E Cash and Cash Equivalents 45 44 121 156 306 Current Receivables - - - - - Inventories 283 311 348 380 417 Other current assets 82 97 90 90 90 Total Current Assets 410 452 559 626 814 Fixed Assets 948 1,083 1,137 1,229 1,327 Investments 105 119 168 168 168 Goodwill 15 13 12 12 12 Other Intangible Assets - - - - - Total Other Assets - - - - - Total Non-current Assets 1,067 1,215 1,318 1,409 1,507 Total Assets 1,478 1,667 1,877 2,036 2,321 Short Term Debt 172 165 191 191 191 Accounts Payable 552 686 652 718 789 Accrued Expenses - - - - - Dividends Payable - - - - - Other Current Liabilities 98 83 111 111 111 Total Current Liabilities 821 934 954 1,020 1,091 Long-Term Debt 179 166 200 200 300 Other LT Payables - - - - - Provisions 29 35 39 39 39 Total Non-current Liabilities 208 202 239 239 339 Minority interests - - - - - Paid-up share capital 225 225 225 225 225 Total Reserves 224 306 458 551 665 Total Shareholders' Equity 449 531 683 776 890 Total Equity 449 531 683 776 890 Total Liabilities & Shareholders' Equity 1,478 1,667 1,877 2,036 2,321 We expect net debt to gradually decline over the forecast period Ratios 12/10A 12/11A 12/12A 12/13E 12/14E Net Debt (SARmn) 306 287 270 236 185 Net Debt/EBITDA (x) 1.61 1.23 1.16 0.80 0.57 Net Debt to Equity 68.1% 54.1% 39.5% 30.4% 20.8% EBITDA Interest Cover (x) (14.8) (1,670.3) (27.9) 507.9 (59.5) BVPS (SAR) 19.93 23.61 30.38 34.49 39.57 Cashflow Statement (SARmn) 12/10A 12/11A 12/12A 12/13E 12/14E Net Income before Tax & Minority Interest 166 154 156 176 201 Depreciation & Amortisation 50 75 88 119 131 Decrease in Working Capital 55 73 (39) 34 34 Other Operating Cashflow (7) (7) (14) (4) (5) Cashflow from Operations 263 295 190 324 360 Capital Expenditure (277) (209) (143) (210) (229) New Investments - (1) (43) - - Others (7) - 13 - - Cashflow from investing activities (283) (209) (173) (210) (229) Net Operating Cashflow (20) 86 17 113 131 Dividends paid to ordinary shareholders (56) (68) - (79) (81) Proceeds from issue of shares - - - - - Effects of Exchange Rates on Cash - - - - - Other Financing Cashflow - - - - - Cashflow from financing activities (42) (87) 60 (79) 19 Total cash generated (62) (2) 78 35 150 Cash at beginning of period 107 45 44 121 156 Implied cash at end of year 45 44 121 156 306 Ratios 12/10A 12/11A 12/12A 12/13E 12/14E Capex/Sales 7.9% 5.1% 3.3% 4.6% 4.5% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 30
RSI10 Vol th Jarir Marketing Company Retail –Industrial JARIR AB: Saudi Arabia 05 January 2013 US$2.5bn 100% US$1.13mn Market cap Free float Avg. daily volume Target price 168.60 6.2% over current Consensus price 157.1 -0.4 below current Current price 158.75 as at 02/01/2013 Research Department Majed Al Solaim, +966 1211 9471, alsolaimm@alrajhi-capital.com Neutral Underweight Neutral Overweight Key themes Driven by rising population, improving education, and changing lifestyle, we expect the retail sector in Saudi Arabia to continue growing. Jarir has a very strong position in books, office & school supplies, and electronics markets. Jarir should continue to grow by opening new stores and benefiting from new electronics segment growth. Implications Jarir is one of our preferred stocks in the retail sector. It has a unique business model with strong position in electronics and school supplies markets. However, its share price has performed well and, in our view, most of its positives have been priced in. Performance Earnings Period End (SAR) 12/11A 12/12E 12/13E 12/14E Revenue (mn) 4,147 4,681 5,383 6,029 Revenue Growth 37.6% 12.9% 15.0% 12.0% EBITDA (mn) 527 610 644 736 EBITDA Growth 26.9% 15.7% 5.6% 14.3% EPS 10.26 9.90 10.34 11.54 EPS Growth 2.4% -3.5% 4.5% 11.6% Source: Company data, Al Rajhi Capital Valuation 18 16 14 12 10 8 6 4 2 170 160 150 140 130 70 30 600 -10 400 200 Price Close P/E (x) MAV10 12/11 04/12 07/12 10/12 Source: Bloomberg 0 01/09 01/10 01/11 01/12 Source: Company data, Al Rajhi Capital 114 110 107 103 99 95 92 88 84 Jarir Limited upside potential Despite a slight decline in Q3 revenue (1.6% y-o-y), Jarir reported a top-line and bottom-line growth of 10.5% and 11.3% y-o-y respectively for the nine months ended September 2012. According to our estimates, same-store sales growth was low due to pressure in electronic margins and a delay in the launch of iPhone 5 this year, especially for Q3. Jarir was able to maintain gross margin levels of 15% for the first nine months of 2012, mainly due to the growth of non-electronic segment. We expect the company to report a sales growth of 19.9% y-o-y in Q4 driven by sales of tablets, iPhone 5 (and other smart phones) and sale of non-electronic items. Further, Jarir plans to open more than four stores every year. Given the 9M results, we have revised our forecasts and set a new target price of SAR168.6. However, as the share price currently offers an upside potential of only 6.2%, we remain Neutral. Still growing overall: Jarir reported y-o-y sales growth of 10.5% in the first 9 months of 2012. We believe this sales growth was driven by all segments (especially school supplies and books), except smart phones. Jarir has only 10% market share in the smartphone market, which indicates that there is still potential for further growth. Additionally, the tablet market is developingrapidly and hence offers much more room for growth. Some concerns in margins: The slow growth in smart phones and tablet sales is affecting Jarir’s gross margin, but sales of non-electronic items such as school supplies and books, which deliver high profit margins, has enabled the company to maintain 15% gross margin for the first nine months of 2012. However, it’s worth noting that Jarir has been able to slightly reduce its SGA expenses as a proportion of sales. We expect the margin pressure to continue, but not in Q4 considering the robust seasonal sales of school supplies. iPhone 5 likely to support same-store sales growth: Jarir continued to expand organically, adding two stores in Riyadh and Yanbu to take the store count to 32. The management believes the increase in the number of stores is one of the reasons for its bottom-line growth. The launch of the new iPhone is likely to support smartphone sales in Q4 and H1 2013. Further, tablets have created a new sub-market and the launch of new brands is expanding this market. Thus, we believe Jarir will report double-digit same-store sales growth for at least another 6 months. Generous dividends: Jarir distributed cash dividends of SAR5.9 per share for the first nine months of 2012. We expect a dividend of SAR1.8 for Q4, resulting in a full year dividend of SAR7.7, which implies a dividend yield of 5%. Conclusion: We have raised our target price to SAR168.6, given that we have marginally increased our earnings forecasts. Our new target price implies an upside potential of 6.2%. Therefore, we maintain our Neutral rating. Jarir currently trades at a 2013 EV/EBITDA multiple of 14.7x and a PE ratio of 15.4x. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 31
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Retail Sector Report - Al Rajhi Capital

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