Securitization deal boosts eXtra’s profit, cash flows: Al Rajhi Capital

Al Rajhi Capital has said the recent securitization deal with United Electronics Co. (eXtra) has multiple positive implications for the company, such as upfront recognition of future profits and cash flows, increased capacity to expand in instalments sales as well as lowering debt.

United Electronics Company (eXtra) last month announced it successfully closed a Receivable Finance Murabaha Agreement (securitization) deal with Al Rajhi Bank worth SAR166 million, Argaam reported.

The transaction is considered the first for the company as well as the first non-asset backed securitization transaction in Saudi Arabia. 

The receivables were sold to Al-Rajhi Bank in exchange for a cash inflow of SAR 160 million. The securitized portion accounts for approximately 41 percent of their last outstanding balance of instalments sales. 

“We revise our topline growth estimate for 2019e to 14.3 percent year-on-year (YoY) from 9.7 percent previously and 9.4 percent for 2020e (from 7 percent). Post factoring this securitization deal, we have a 34 percent increase in EPS in 2019e. Thereby, we revise our target price to SAR 80/share implying a rating of “Overweight” with an upside potential of 15.4 percent,” Al Rajhi Capital said in a note.

eXtra managed to maintain a good credit quality for the instalments credit, maintaining an average delinquency rate below 10 percent and NPL ratio below 3 percent.

“We expect this securitization to improve its credit quality as it transfers most of the credit risk to a financial institution that is better equipped to deal with it,” the brokerage added.

Under the securitization deal, the company would recognize an additional profit of SAR 17 million in exchange for future interest payments expected to be collected in due course of time previously. 

The company is expected to use the proceeds of the deal to partially pay-off the current debt, which would decrease the leverage ratio to around 14 percent, resulting in a decrease of SAR 4 million in interest expenses as per estimates. 

Additionally, Tasheel program has a critical importance to the operations of eXtra, as it enables the company to extend its products to new clients through credit as well as increasing the purchasing power of the current clients.