HSBC says Saudi retailers under pressure; Jarir, Savola preferred

Saudi Arabia’s decision to allow 100 percent foreign ownership in retail and wholesale businesses, as part of a strategy to create more white-collar jobs for Saudis, is likely to put retail companies under pressure, especially the smaller and less efficient retailers, HSBC said in a research note on Monday.

“While the fine print will be important in terms of assessing the exact impact on individual companies/retail sub-sectors, it is clear that retail companies in all sectors should brace themselves for increased competition as and when this policy is ratified,” HSBC said.

The bank believes that larger companies like Jarir Marketing, Savola Group and Herfy would fare better than others in terms of resilience to the incoming competition.

Elsewhere SADAFCO is preferred among food producers.

“It is the closest dairy peer to Almarai in Saudi, liquidity is better… and has an immediate catalyst in terms of raw material tailwinds.”

On Jarir, HSBC maintained “buy” rating but cut target price to SAR 236 from SAR 248 on a lackluster revenue growth in Q2, and a reduced revenue growth forecast for the medium term.

Savola is maintained at “buy” with a target price of SAR 88 on continued weaker margins at its retail operations in Q2 in Panda and the sugar division. While the bank doesn’t see a recovery in the short term, the long-term outlook remains strong.

Herfy was upgraded to “buy” from “hold” and the target price cut to SAR 119 from SAR 130 on weaker margins for in the medium term, considering the year-to-date performance.

However, strong improvement in margins in 2016 is expected compared to the levels seen in 2015 as the stores mature.

Abdullah Al Othaim is retained at “hold” rating with a DCF-based target price to SAR 105 from SAR 116 as margins will remain under pressure in the near term from potential weakening in consumer confidence and increasing competition.

HSBC retained “hold” rating on Almarai with target price at SAR 87. The dairy and poultry producer continues to see strong margin gains as losses in poultry drop; however the stock trades at a significant premium to Saudi consumer peers limiting the upside potential, said the bank.

Fawaz Alhokair was maintained at “hold” with DCF valuation cut to SAR 83 from SAR 121. HSBC said Alhokair will be the most affected among Saudi consumers stocks from the possible introduction of 100 percent foreign ownership in retail.   

Saudi Airlines Catering retained a “buy” rating with target price cut to SAR 205 from SAR 223 on pressure on margins in the near term.

Saudi marketing Co. or Farm Superstores was maintained at “hold” but on a lower DCF-based target price of SAR 67 from SAR 88 share on more store additions, higher capex and a more subdued sales/square meter trajectory.

United Electronics Co. (eXtra) was retained at “hold” with target price cut to SAR 51 from SAR 79.17 on lowered revenue estimates following a weak Q2.

SADAFCO was reiterated “buy” with a 21 percent upside to target price at SAR 163 as the bank sees a strong earnings momentum for the company in the near term.