JEDDAH — The defensive nature of the retail sector in Saudi Arabia allowed it to remain strong during the recent correction in the Saudi financial market, NCB Capital, the leading wealth manager in the region and the largest asset manager in the Kingdom, said Tuesday. Additionally, the company believes that the sector will not be directly affected by fluctuations in oil prices. Mohammed Tomalieh, equity research analyst at NCB Capital, pointed out that the positive outlook toward the sector is driven by favorable demographics and increasing disposable income per capita. Upon ranking covered companies on defensive metrics, Tomalieh believes Jarir and Al Othaim are the best defensive names in the sector. NCB Capital upgraded Al Hokair to Overweight with a PT of SR112.7. Additionally, they upgraded Extra and Jarir to overweight with a PT of SR105.8 and SR212.7, respectively. “We remain Overweight on Al Othaim and Shaker. We believe Al Othaim is a strong defensive name, unaffected by economic cycles or any potential budget cuts. We maintain our Overweight rating on Shaker on an improved outlook as demand for higher priced +3* ACs picks-up. We believe LG Shaker, AC manufacturing associate company, will benefit from declining copper prices,” he added. “Although oil prices declined significantly, the fundamentals of these companies remain relatively unchanged, with attractive valuations at the current levels. We reduced our estimates for Extra due to the recent Megasale incident, while our estimates for Jarir increased on higher store expansion, better margin expectations and strong organic growth,” he further said. Tomalieh also pointed out that “the recent correction in the retail sector is unjustified, provided that the fundamentals of covered names remain relatively unchanged. Covered names are trading at a 2015 P/E estimates ranging between 14.2-21.2x, which we believe is attractive provided the positive outlook on expansions, margins and organic growth.” Jarir rosy Jarir to overweight with its PT increasing to SR212.7. Tomalieh believes aggressive store expansion plans and strong organic growth outlook are key drivers for the stock, with margin expansion supporting it. He expects Jarir revenues to grow at a CAGR 13 percent between 2015-2019E, supported by a 29 percent increase in store count. Additionally, he conservatively expects the company to open 15 stores by 2018E, while management expects 25 stores. Jarir trades at a 2015E P/E of 19.3x vs. sector at 22.7x. Extra overweight NCB Capital upgraded Extra to overweight with a revised PT of SR105.8, believing that the recent shutdown of stores will have a minimal impact on the financials. Although the demand outlook remains strong, NCB Capital conservatively revised store expansions from 9 to 6 stores over the next three years. The company is trading at an attractive 2015E P/E of 14.2x vs. the sector average of 22.7x. Al Hokair expansion drive NCB Capital upgraded Al Hokair to Overweight, with a revised PT of SR112.7. Growth at Al Hokair is expected to come from expansions, as well as new acquisitions. Expanding abroad remains a key growth driver that Al Hokair is capitalizing on, although it increases FX risks and places margin pressures. Tomalieh expects sales to grow at a CAGR of 15 percent until 2019E, with higher other income leading to a CAGR growth of 20 percent at the bottom-line. The company is trading at a forward P/E of 21.2x, which is attractive considering a higher earnings growth rate of 20 percent CAGR till 2019E vs. 4-14 percent for other covered stocks. Al Othaim remains attractive NCB Capital remains Overweight on Al Othaim, with a PT of SR125.3. Al Othaim is relatively unaffected by the market weakness due to the defensive nature of its business. NCB Capital believes store expansions will be a key driver of top-line growth, with execution being a key risk. Volume-driven growth will lead to higher rebates and support margins. The company trades at a forward P/E of 20.1x, lower than the sector which trades at 22.7x. Shaker sees stronger sales Finally, NCB Capital remains Overweight on Shaker, with a PT of SR92.0. The demand for air conditioners (ACs) is expected to be strong assuming sustained government spending. An increase in sales of higher-priced 3*ACs is a key top-line driver for Shaker, with higher income from associates supporting earnings. The company is trading at an attractive valuation of 14.8x 2015E P/E, with an attractive dividend yield of 4.7 percent. — SG
