Margins Drag Down Profitability
August 08, 2016 Rating 12- Month Target Price
Buy SAR 140.00
JARIR MARKETING COMPANY (JARIR) 2Q2016 First Look
Margins Drag Down Profitability
Expected Total Return Price as on Aug-07, 2016
SAR 107.76
Upside to Target Price
29.9%
Expected Dividend Yield
6.4%
Expected Total Return
36.3%
Market Data SAR 222.0/99.0
52 Week H/L
SAR 9,698 mln
Market Capitalization Shares Outstanding
90 mln
Free Float
96.00%
12-Month ADTV
118,940
Revenues dropped -1% Y/Y and -2% Q/Q to SAR 1.4 billion, in line with our expectations, as Jarir reported 2Q results. Slowdown in consumer discretionary spending has been expected to hurt the Company, which has dragged stock price down substantially, underperforming the TASI by –22% year to date. Gross margins narrowing to 11.7% as compared to 13.6% last year and 15.1% in the preceding quarter hurt profitability top to down. We believe the stock price decline has been overdone and recommend a Buy with a target price of SAR 140.00. Dividend yield in excess of 6% is an added charm.
Revenues decline -1% Y/Y Quarterly revenues slipped -1% Y/Y to SAR 1.4 billion, marginally better than our estimates as the Company experienced a drop in revenues from the KSA market by -2% Y/Y while revenues from GCC countries grew +8% Y/Y despite the fact that local stores increased by 3 while GCC stores went up by 1 for the same period. Sales of computers & supplies as well as office supplies have been hit. Consumer spending, particularly in retail, is expected to be anemic this year tracking economic growth.
Gross margins at lows
1-Year Price Performance
We had anticipated a decline in gross margins but the actual tightening negatively surprised. Gross margins at 11.7% for 2Q are the lowest quarterly margins to date versus 13.6% in 2Q2015. Unfavorable sales mix coupled with price promotions and discounts have been damaging to margins. Gross profit for 2Q fell -15% Y/Y to SAR 163 million. Although operating expenses are up +18% Y/Y on the back of higher marketing expenditure to boost sales, they are notably down -8% Q/Q. Net income is -17% lower Y/Y while net margins have narrowed to 9.2% for the quarter.
110
100 90 80 70 60 50 40
Two new stores so far
30 A
S
O
N
D
Jarir
J
F
M
A
M
TASI
J
Only two new stores have opened in first half of this year, one each towards the end of each quarter. Full year target of 6-7 new stores may prove challenging for the Company particularly in this environment of dropping sales and thinning margins.
J
TRETL
Source: Bloomberg
Good entry opportunity 6M
1Y
A total DPS of SAR 3.00 has been announced for 1H 2016. The stock offers 2016 dividend yield in excess of 6% (full year DPS estimate of SAR 6.90), which is appealing. P/E of 12.7x 2016E earnings has moderated substantially. Despite pressure on sales and margins currently, we like the business model and expect a robust recovery from 2017 as economic growth improves. Depressed stock prices are a good entry opportunity. We recommend a Buy with a SAR 140.00 target price.
2Y
10% 0%
-10% -20% -30% -40% -50% -60% Jarir
TASI
TRETL
Key Financial Ratios
Key Financial Figures Fig in SAR mln MlnMMln Sales
Gross Profit
RC Est. Estimates 1,364
Actuals
191
163
1,391
Net Income
150
129
EPS (SAR)
1.67
1.43
FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR)
2015A 6,375 844 829 9.21 7.21
2016E 5,848 781 771 8.56 6.90
Muhammad Faisal Potrik
Faisal Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 6,316 856 841 9.34 7.50
FY Dec31 BVPS (SAR) ROAE ROAA EV/EBITDA P/E
2015A 16.71 58.0% 34.0% 11.5x 11.8x
2016E 18.37 48.8% 30.3% 12.5x 12.7x
2017E 20.22 48.4% 30.1% 11.4x 11.7x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
JARIR MARKETING COMPANY (JARIR) 2Q2016 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
Buy SAR 140.00
JARIR MARKETING COMPANY (JARIR) 2Q2016 First Look
Margins Drag Down Profitability
Expected Total Return Price as on Aug-07, 2016
SAR 107.76
Upside to Target Price
29.9%
Expected Dividend Yield
6.4%
Expected Total Return
36.3%
Market Data SAR 222.0/99.0
52 Week H/L
SAR 9,698 mln
Market Capitalization Shares Outstanding
90 mln
Free Float
96.00%
12-Month ADTV
118,940
Revenues dropped -1% Y/Y and -2% Q/Q to SAR 1.4 billion, in line with our expectations, as Jarir reported 2Q results. Slowdown in consumer discretionary spending has been expected to hurt the Company, which has dragged stock price down substantially, underperforming the TASI by –22% year to date. Gross margins narrowing to 11.7% as compared to 13.6% last year and 15.1% in the preceding quarter hurt profitability top to down. We believe the stock price decline has been overdone and recommend a Buy with a target price of SAR 140.00. Dividend yield in excess of 6% is an added charm.
Revenues decline -1% Y/Y Quarterly revenues slipped -1% Y/Y to SAR 1.4 billion, marginally better than our estimates as the Company experienced a drop in revenues from the KSA market by -2% Y/Y while revenues from GCC countries grew +8% Y/Y despite the fact that local stores increased by 3 while GCC stores went up by 1 for the same period. Sales of computers & supplies as well as office supplies have been hit. Consumer spending, particularly in retail, is expected to be anemic this year tracking economic growth.
Gross margins at lows
1-Year Price Performance
We had anticipated a decline in gross margins but the actual tightening negatively surprised. Gross margins at 11.7% for 2Q are the lowest quarterly margins to date versus 13.6% in 2Q2015. Unfavorable sales mix coupled with price promotions and discounts have been damaging to margins. Gross profit for 2Q fell -15% Y/Y to SAR 163 million. Although operating expenses are up +18% Y/Y on the back of higher marketing expenditure to boost sales, they are notably down -8% Q/Q. Net income is -17% lower Y/Y while net margins have narrowed to 9.2% for the quarter.
110
100 90 80 70 60 50 40
Two new stores so far
30 A
S
O
N
D
Jarir
J
F
M
A
M
TASI
J
Only two new stores have opened in first half of this year, one each towards the end of each quarter. Full year target of 6-7 new stores may prove challenging for the Company particularly in this environment of dropping sales and thinning margins.
J
TRETL
Source: Bloomberg
Good entry opportunity 6M
1Y
A total DPS of SAR 3.00 has been announced for 1H 2016. The stock offers 2016 dividend yield in excess of 6% (full year DPS estimate of SAR 6.90), which is appealing. P/E of 12.7x 2016E earnings has moderated substantially. Despite pressure on sales and margins currently, we like the business model and expect a robust recovery from 2017 as economic growth improves. Depressed stock prices are a good entry opportunity. We recommend a Buy with a SAR 140.00 target price.
2Y
10% 0%
-10% -20% -30% -40% -50% -60% Jarir
TASI
TRETL
Key Financial Ratios
Key Financial Figures Fig in SAR mln MlnMMln Sales
Gross Profit
RC Est. Estimates 1,364
Actuals
191
163
1,391
Net Income
150
129
EPS (SAR)
1.67
1.43
FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR)
2015A 6,375 844 829 9.21 7.21
2016E 5,848 781 771 8.56 6.90
Muhammad Faisal Potrik
Faisal Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 6,316 856 841 9.34 7.50
FY Dec31 BVPS (SAR) ROAE ROAA EV/EBITDA P/E
2015A 16.71 58.0% 34.0% 11.5x 11.8x
2016E 18.37 48.8% 30.3% 12.5x 12.7x
2017E 20.22 48.4% 30.1% 11.4x 11.7x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
JARIR MARKETING COMPANY (JARIR) 2Q2016 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
