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MENAFN - Arab News - 30/12/2013
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(MENAFN - Arab News) Saudization will lead to a short-term slowdown in the retail sector due to lower demand and higher wages pressuring margins, NCB Capital says in its Q4 update report on the sector.
"However, we view this period as an opportunity to enter stocks for the long-term," said Farouk Miah, CFA, head of equity research at NCB Capital.
"Macroeconomic drivers in Saudi Arabia remain strong with consolidation of fragmented sectors supporting the long-term growth outlook for stocks under our coverage," he said.
"We upgrade Al-Hokair to Overweight with a PT of SR146.7 as it should be amongst the least impacted by Saudization with multiple sources of growth supporting its outlook," he said.
"We downgrade Extra to Neutral with a PT of SR109.9 as we believe it will be amongst the most impacted from Saudization in the short-term. Although the long-term drivers remain in-tact for Extra, we believe it lacks short-term positive catalysts," he added.
NCB Capital remains Neutral on Jarir and Al-Othaim and Overweight on Shaker.
"We believe Jarir is a 'must own' as part of portfolio given the double-digit organic growth, dividend track record and strong balance sheet. However, we remain Neutral given the high 19.2x 2014E P/E," commented Miah.
"Despite the poor recent results at Shaker, we remain Overweight as 2014E should record a significant YoY improvement given the implementation of the new energy regulations. We remain Neutral on Al Othaim; although the earnings outlook is strong, execution risks on new stores and margin vulnerability are key risks."
Commenting further, Miah said: "As seen in 3Q13, we believe a slowdown in growth will continue to be recorded in the next few quarters due to the negative short-term mpact of Saudization. These include one million fewer expatriates, the negative sentiment from remaining expatriates, slowdown in new store openings and higher staff costs for companies, leading to pressure on margins. From the companies under coverage, we believe Shaker and Extra will be negatively impacted the most."

Miah added: "We believe over the long-run Saudization will be a positive for the retail sector. Increased employment and disposable incomes for locals, particularly for women, should lead to higher sales for retail companies. Additionally, the longer term drivers for the sector such as consolidation of a fragmented sector, young and growing population and economies of scale aiding margins all remain."

NCB Capital upgrades Al-Hokair to Overweight given its strong growth outlook and expectations it will be amongst the least impacted by Saudization. Growth is multi-faceted, coming from new store expansion in Saudi and abroad, entry into new segments such as cosmetics and value fashion, as well targeting further acquisitions to enhance growth. Short-term margin pressure from international expansions and volatility in Other Income remain key risks.

"We downgrade Extra to Neutral with our price target falling by 19% to SR109.9," stated Miah. "We believe the short-term outlook remains under pressure due to lower demand from expatriates due to Saudization, as well as the construction sector slowdown. The stock is down 23 percent post weak 3Q13 results, however, the valuation remains relatively expensive at 16.0x 2014E P/E. Although there is reasonable upside of 13 percent to our PT, we believe the coming few quarters lack sufficient catalysts to support significant upside from the current level."


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