Jarir Marketing Co

13 December 2009

Recommendation Neutral Upside 14.6%

Target Price SAR149.00 Current Price Jarir Marketing Co. (Jarir) – Initiation of Coverage SAR130.00* Retail Sector | Saudi Arabia

Mr. Al Agil’s Wonder Emporium

The leading retailer of office and school supplies, and computers in Saudi Arabia… Reuters Code Jarir is the leading retailer and wholesaler of office and school supplies, books, printed materials, 4190.SE computer and IT products in Saudi Arabia, with presence across the GCC region. The company Bloomberg Code JARIR AB operates 26 retail showrooms (22 in Saudi, 2 in Qatar, 1 in Kuwait, and 1 in Abu Dhabi) as well as 5 wholesale showrooms in Saudi Arabia. A major beneficiary of the attractive demographics and EPS FY09e SAR9.26 rising consumer spending in Saudi Arabia and the GCC, Jarir witnessed impressive growth over the Market Cap past six years, with its selling space growing at a CAGR of 11%, total sales at 29% and net SAR5.2 billion income at 20% from 2002 until 2008. Jarir reported sales of SAR2.5 billion and a net income of US$1.4 billion SAR333 million in 2008. We expect 2009 sales will be almost flat, however, as it has been a Enterprise Value challenging year, mainly due to a drop in the average selling prices of laptops, as we explain in SAR5.4 billion the report. Jarir reported sales of SAR1.8 billion and a net profit of SAR271 million in 9M2009. US$1.4 billion Number of Shares Outstanding … is eyeing further growth 40,000,000 Jarir aims to launch 19 new retail showrooms by 2013 to reach a total of 45 retail showrooms by Average Daily Turnover SAR8.1 million 2013, with a plan to launch 4 - 5 retail showrooms per year, 1 being regional, with the others being in Saudi Arabia. In our forecasts, we have assumed Jarir would operate 36 retail showrooms 52-week high/ low SAR137.75/112.25 in Saudi Arabia and 9 regional retail showrooms to reach a total of 45 showrooms by 2013. We expect Jarir’s selling space will grow by a CAGR of 12%, sales at 16% and net income at 15% Shareholders’ Structure over the next 5 years, until 2013. 45%|Al Agil Family Value Drivers 13%|Jarir Investment Company • Leading retailer and wholesaler in an attractive market with further growth potential 4% |Olayan Financial Limited • Solid business model led by a professional and focused management team 16%|Institutional investors • Expansion plan under way with 19 new retail showrooms to be launched by 2013 22%|Others • Strong financial position and free cash flow generation with 2009e FCF yield of 5.8% SAR Jarir TASI 195 • Expected attractive dividend yield of 5.3% for 2009 and an average payout ratio of around 80% 175 155 Major Concerns 135 • The business has relatively low tangible barriers to entry 115 95 • Higher exposure to trends in average selling prices of laptops and IT products in general 75

9 9 9 9 9 -08 -0 0 -0 -0 -0 -09 c g v c • Margins are sensitive to the different categories’ contribution to sales Jul-09 De Jan-09 Feb-09Mar Apr- May Jun-09 Au Sep-09 Oct-09No De We value Jarir at SAR149.00 per share

We value Jarir using an average of: a) DCF valuation; b) DDM valuation and c) Comparative-based *Closing as at December13th, 2009

valuation using 2009, 2010 and 2011 P/E multiples. The DCF valuation yielded a fair value of

SAR134.00, the DDM valuation yielded a fair value of SAR122.00, while the comparative valuation

yielded a fair value of SAR190.00. We arrive at a target price of SAR149.00 per share for Jarir,

which implies an upside of 14.6% over the current market price of SAR130.00. We assign Jarir a

‘Neutral’ recommendation.

Selected Indicators – Year end Dec. 2007a 2008a 2009e 2010f 2011f 2012f Ahmed Khalil

Revenues (SAR mil.) 1,741 2,520 2,500 3,092 3,777 4,546 Menatalla Sadek, CFA Revenues Growth (%) 15.7 44.7 -0.8 23.6 22.2 20.3

332 435 476 572 676 795 Gross Profit (SAR mil.)

19.1 17.3 19.1 18.5 17.9 17.5 Gross Profit Margin (%)

291 363 400 475 555 647 EBITDA (SAR mil.)

EBITDA Margin (%) 16.7 14.4 16.0 15.4 14.7 14.2 Please see the important disclosures 276 333 370 442 517 604 contained on the last page of the Net Income (SAR mil.) report. EPS Pre-Appropriations (SAR) 6.91 8.32 9.26 11.05 12.94 15.10

18.8 15.6 14.0 11.8 10.0 8.6 P/E (x)

8.5 7.6 6.6 5.9 5.3 4.7 P/B (x)

56.0 28.1 31.0 33.9 34.7 36.0 EBITDA Interest Coverage (x)

0.3 0.3 0.2 0.2 0.2 0.2 Total Debt/Equity (x)

18.5 14.8 13.4 11.3 9.7 8.4 EV/EBITDA (x)

6.0 6.8 6.9 8.8 10.3 12.1 DPS (SAR)

4.6 5.2 5.3 6.8 8.0 9.3 Dividend yield (%)

Source: Jarir consolidated figures, BMG estimates

Jarir

Table of Contents

The Story...... 2

Our View...... 3

Assumptions and Projections ...... 4

Valuation ...... 7

9M2009 Review ...... 9

Case study: 2009... The Year of the Netbook ...... 10

Appendix I: Financial Statements Summary...... 11

1 Jarir

The Story

The leading retailer of office and school supplies, computers and IT products in Saudi Arabia Jarir Marketing Company (Jarir) is the leading retailer and wholesaler of office and school supplies, books, A leading retailer of printed materials, computer and IT products in Saudi Arabia, with presence across the GCC region. The office and school company was founded by the late Abdulrahman Al Agil in 1974 when he opened his first bookstore on supplies, computers Jarir Street in Riyadh. The late 1970s saw the expansion of the company’s retail operations with the and IT products in development of a corporate division to cater for the needs of corporate clients, then a wholesale division Saudi Arabia for the distribution of office and school supplies to resellers in Saudi Arabia. In 2001, Jarir extended its Jarir operates 26 operations beyond Saudi Arabia, opening its first regional showroom in Qatar. Today, Jarir operates a retail showrooms network of 26 retail showrooms (22 in Saudi and 4 in the GCC) as well as 5 wholesale showrooms in and plans to launch Saudi Arabia. Jarir plans to launch 19 new retail showrooms over the coming 4 years to reach a total of 19 new showrooms 45 retail showrooms by 2013. The plan is to launch 4 - 5 retail showrooms per year, 1 being regional, over the coming 4 with the others being in Saudi Arabia. years Jarir’s operations are categorised into two different divisions:

a) Jarir Bookstore (Retail division – 89% of sales in 2008): Jarir’s retail division operates 26 showrooms (22 in Saudi, 2 in Qatar, 1 in Kuwait and 1 in Abu Dhabi) catering for walk-in customers and 4 corporate sales offices (3 in Saudi and 1 in Qatar) catering for corporate

clients. The retail showrooms are located in prime locations, and have an average area of 30,000 square feet per store (approx. 2,800 sqm.). The showrooms carry more than 200,000 stock keeping units (SKUs) including office and school supplies, computers and IT products,

books and printed materials. Jarir is also dynamic and responsive to changes in consumer preferences, especially with regard to the IT products and electronics it offers. A recent example of this was the introduction of the recently popular netbooks, as well as smart phones.

Jarir’s operations are supported by a 330,000 square ft. (expandable to 750,000 square ft.) state-of-the art central warehouse and distribution centre, which is located in Riyadh. The Retail sales grew at corporate sales offices, on the other hand, sell mostly office supplies, computers and IT a CAGR of 32% products. Only 6 retail showrooms (23%) out of the 26 are owned, as Jarir’s strategy is to only from 2002 until buy properties in prime locations, with a potential for a significant price appreciation. The 2008 remaining 20 showrooms (77%) are leased over periods ranging between 10 - 20 years. Retail Jarir is the top sales grew at an impressive CAGR of 32% from 2002 until 2008, generating SAR2.2 billion in laptops retailer in 2008 and representing 89% of the business. Laptop sales as well as computer and IT products Saudi Arabia with a have been the major contributor to the growth in the retail division over the past few years. 50% market share With more than 320,000 laptops sold in 2008, representing 50% of the market, Jarir is the top

laptop retailer in Saudi Arabia. Laptops represented 50% of Jarir’s total sales in 2008

b) Jarir Marketing (Wholesale division – 11% of sales in 2008): Jarir’s wholesale division The wholesale operates 5 wholesale showrooms and 7 wholesales offices, all of which are located in Saudi division grew at a Arabia. The division sells office and school supplies to both retailers and wholesalers. Private CAGR of 15% from labels constitute a major part of sales. The wholesale business grew at a CAGR of 15% from 2002 until 2008 2002 until 2008, generating SAR289 million in 2008 and representing 11% of the business

Figure 1| Jarir’s operations

Planned expansion falls under the retail

divisions’ showrooms

Source: Jarir

2 Jarir

Our View

A major beneficiary of the region’s demographics and rising consumer spending Jarir has been a major beneficiary of the attractive demographics and rising spending patterns of Jarir is a major consumers in Saudi Arabia and the GCC region over the past three decades, with further opportunities for beneficiary of the growth. Built on a solid business model, strong financials and a professional management team, the attractive company has expanded its operations successfully by venturing into other product categories, including demographics and computers and electronics, as well as growing its store network geographically, both locally in Saudi rising consumer Arabia and regionally in the neighbouring GCC countries. Today, Jarir represents a one-stop shop, with a spending in Saudi recognized brand name, which caters to the needs of both walk-in customers through its retail Arabia and the GCC showrooms, as well as other businesses through its corporate sales offices and wholesale showrooms. region While we acknowledge that the tangible barriers to entry for the business are relatively low, we believe that achieving the size and depth of Jarir’s operations involves significant financial and non-financial

investments, which can only be achieved over time.

Increased exposure to average selling prices of laptops and IT products is our major concern

Although Jarir witnessed impressive growth in its laptops business over the past 5 years, with a CAGR of We are concerned 54%, from 2003 until 2008, we believe that the increased contribution of laptop sales (50% of total sales about the high in 2008), exposes Jarir to trends in their average selling prices, posing a volatility risk to Jarir’s sales and exposure to laptop margins. This explains the expected flat sales for 2009, albeit with expected stronger margins (GPM of sales and its effect 19.0%) versus a 45% sales growth in 2008, with a weaker GPM of 17.3%, due to the severe drop in on sales and average selling prices of laptops so far in 2009 (SAR1,500 versus SAR3,200 in 2008 according to margins volatility management), as manufacturers reduced their prices to entice consumer demand, in addition to the considerable popularity of the much cheaper netbooks in the marketplace. This also applies to other IT products and electronic goods (collectively comprising 20% of Jarir’s sales in 2008), which are highly dependable on industry innovations and changing consumer preferences, such as the increasing popularity of smart phones. Generally, the pricing trends for these products, in the long run, is expected

to head downwards, as technology becomes cheaper; it remains difficult to determine the short-term

average prices, which is also affected by new product launches, although a slight recovery is likely to be

seen in 2010. Therefore, we believe that Jarir’s profitability will depend, ultimately, on the overall

product mix being offered, which is influenced by the technology-related products that Jarir is currently

selling or plans to sell in the future. (Please refer to Appendix I: The Year of the Netbook)

We like the Jarir story All in all, we are positive about Jarir, and we believe that the company is capable of capitalising on its We like the Jarir expertise and strong financial position to achieve its growth plans over the coming years with limited story downside risks, while maintaining its strong operating cash flows and attractive dividend payout ratio of at least 80%.

Figure 2| Jarir’s existing retail showrooms and expansion plan*

Source: Jarir *Includes expansion beyond our forecast period 3 Jarir

Assumptions and Projections

1) Retail division

Showrooms

Jarir plans to open 19 new showrooms by 2013 in Saudi Arabia and the GCC region. This will bring Jarir’s Jarir plans to open total number of showrooms to 45 up from 26 currently. Based on management guidance, we have 19 new showrooms assumed Jarir will add 1 more showroom in 2009 (Jarir already opened 3 new showrooms so far in 2009), by 2013... we have 4 showrooms in 2010, 5 showrooms in each of 2011 and 2012 and 4 showrooms in 2013. We have assumed 4 - 5 new assumed that 14 of the 19 new showrooms will be opened in Saudi Arabia, while the remaining 5 showrooms per year showrooms will be opened abroad by 2013. According to management, 4 out of the 14 new Saudi showrooms will be owned (1 in each year), while the others will be leased. Based on an average showroom area of 30,000 sq ft., we have assumed that the total selling space will grow by a CAGR of 12% to reach 1.35 million sq. ft. up from 0.8 million sq. ft. currently.

Figure 3| Jarir’s retail showrooms and selling space

50 Showrooms Selling space (000s sq. ft.) 1,400,000 45

1,200,000

35 1,000,000

80 0,0 00

60 0,0 00 20

40 0,0 00

20 0,0 00

0 0

2 008 a 2009e 2010 f 20 11f 201 2f 2013 f 2008a 2009e 2010f 2011f 2012f 2013f Saudi Arabia Non-Saudi Arabia Total Sa udi Arabia Non-Saudi Arabia Total Source: Jarir and BMG estimates

In our forecasts, we have approached new and old showrooms, inside and outside of Saudi Arabia

separately. As a general rule, we have assumed a two-year maturity cycle for new showrooms as follows: We have assumed a a) In the first year of operation: Sales per sq. ft. to be 50% of that of old showrooms two-year maturity b) In the second year of operation: Sales per sq. ft. to be 75% of that of old showrooms cycle for the new showrooms

c) In the third year of operation: Sales per sq. ft. to be equal that of old showrooms

The following represents our assumptions for the showrooms:

• Saudi showrooms: Jarir currently operates 22 showrooms in Saudi Arabia, 2 of which were launched We have assumed in 1Q2009 and 3Q2009. We have assumed that Jarir will add 14 new showrooms in Saudi Arabia (1 of Jarir will add 14 which will open before year-end) to reach a total of 36 local showrooms by 2013. For old Saudi new showrooms in

showrooms (including new showrooms that mature in their third year of operation), we have assumed Saudi Arabia...

that the sales per sq. ft. will grow by 5.0% to reach SAR3,655 by 2013 versus SAR3,479 in 2008 (but a 25.1% growth over FY2009e sales per sq. ft. of SAR2,921). This is a function of the increase in the average age of the stores, in addition to higher spending on computers, IT products and electronics • Regional showrooms: Jarir currently operates 4 regional showrooms; 2 in Qatar (1 showrooms was ...and 5 regional showrooms opened in Qatar in 2Q2009), 1 in Kuwait and 1 in Abu Dhabi. Jarir plans to open more regional

showrooms, namely, in Qatar, Kuwait, Bahrain and Oman. We have assumed Jarir will add 5 new

regional showrooms to reach a total of 9 regional showrooms by 2013. For old regional showrooms

(including new showrooms that mature in their third year of operation), we have assumed a slightly

higher growth in sales per sq. ft. owing to the higher GDP per capita (Qatar at 3.4x, UAE at 2.5x,

Kuwait at 2.6x, although Oman is at 0.8x Saudi Arabia’s GDP per capita) and lower competition in these markets. We have assumed that sales per sq. ft. will grow by 2.0% to reach SAR3,647 by 2013 versus SAR3,575 in 2008 (but a 28.6% growth over FY2009e sales per sq. ft. of SAR2,835)

4 Jarir

Figure 4| Jarir’s average sales per square ft.

4,000

3,500 3,000

2,500 2,000 1,500 1,000

50 0

2007a 2008a 2009e 2 010 f 201 1f 20 12f 20 13f Saudi Arabian showrooms Non-Saudi Arabian showrooms Total Source: Jarir and BMG estimates

Figure 5| Jarir’s like-for-like average sales per square ft.

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 50 0 0 2007a 2008a 2009e 2 010 f 201 1f 20 12f 20 13f Saudi Arabian showrooms No n S aud i Arabian sho wro oms To tal Source: Jarir and BMG estimates

Corporate sales

Jarir currently operates 3 corporate sales offices in Saudi Arabia and 1 in Qatar. Corporate sales have We have assumed a been growing at a CAGR of 12% from 2003 to reach SAR127 million in 2008, and represented 5% of total CAGR growth of sales in 2008. We have assumed corporate sales will grow by a CAGR of 10% to reach SAR201 million 10%

and 4% of total sales in 2013.

2) Wholesale division

Jarir currently operates 5 wholesale showrooms and 7 wholesale offices, all of which are located in Saudi We have assumed a Arabia. Jarir’s wholesale revenues have been growing at a CAGR of 15% from 2003 to reach SAR289 CAGR growth of million, and represented 11% of total sales in 2008. We have assumed wholesale revenues will grow by a 10% CAGR of 10% to reach SAR457 million and 9% of total sales in 2013.

3) Margins

Jarir’s margins are sensitive to the different categories’ contribution to sales. Books have the highest Jarir’s margins are margins, followed by school and office supplies, computer supplies, IT products and electronics, while sensitive to the laptops have the lowest margins. This explains why margins have been softening over the past few years different categories’ (save for 2009) with the rising contribution of laptop sales to total sales as figures 6 and 7 illustrate. The contribution to gross profit margin for laptops is roughly 0.20x - 0.5x the gross profit margins for the other products. sales

Going forward, we expect the contribution of laptop sales to total sales will decline, as we expect faster

growth in the other product categories, namely computer supplies, IT products and electronics. Moreover, We forecast an we believe it will be difficult for Jarir to maintain its 50% market share in laptops as competitors will be average GPM of lured to tap into the lucrative Saudi Arabian market. As such, we forecast margins to continue easing 18.1% and an gradually, albeit at a slower pace, also due to higher competition in the other product categories. We average EBITDA forecast an average gross profit margin of 18.1% throughout our forecast period until 2013 (versus an margin of 14.9%

5 Jarir

average of 18.7% from 2006 to 2008), and an average EBITDA margin of 14.9% (versus an average of 16.0% from 2006 to 2008). The rise in margins in 2009 has been the result of the lower contribution of laptop sales to total sales, despite the higher number of laptops sold due to: a) Price reductions by manufacturers to entice demand, and b) The popularity of netbooks, which have very low specs, and thus lower average prices. Figure 6| Jarir’s product mix 2003 2008 Others, 9% Others, 10% Books, 6% Laptops, 22% Office Books, 13% su pplies, Lapt ops, Laptops comprised Computer 14% 50% 50% of sales in su pplies and Sch ool 2008 IT, 11% supplies, 8% Office

supplies , School Comp uter sup plies, 23% supplies and 21% IT, 13%

Source: Jarir

Figure 7| Jarir’s revenues and margin forecasts

6,000 ,00 0 25.0%

5,000 ,00 0

20.0%

4,000 ,00 0

15.0%

3,000 ,00 0

10.0%

2,000 ,00 0

In SAR(000s) 5.0%

1,000 ,00 0

0 0.0%

2 006 a 2 007a 2 008a 2 00 9e 2 010f 2 011f 201 2f 201 3f

Re tai l s al es Wholesales GPM EBITDA margin

Source: Jarir and BMG estimates 4) Capex and dividends:

th Jarir’s assets more than doubled from 2002 to reach SAR1.2 billion in September 30 , 2009. The company has financed its growth mostly through retained earnings, with its borrowings mostly restricted to finance its working capital needs. In 2008, however, the company took a long-term loan of SAR150 million to finance its expansion plans, as well as working capital requirements. Nevertheless, Jarir remains under-leveraged, with a net debt to equity ratio of 0.28x as at September 30th, 2009, while its EBITDA interest coverage ratio currently stood at 29.0x for the nine months ending September 30th, 2009. We believe that Jarir’s balance sheet is healthy, and should continue to support its expansion plans, as well as maintain its high dividend payout ratio. Jarir has maintained a high dividend payout ratio, historically, averaging 80% since 2000 which, we expect, will continue over our forecast period. We We expect Jarir will expect Jarir’s capex will average 11% of its operating cash flows throughout our forecast period (versus maintain its an average of 27% in the past 5 years) as Jarir had already purchased the plots of land, which will house dividend payout the owned showrooms. It is worth mentioning that launching an owned showroom costs around SAR30 ratio at 80% million, while launching a leased showroom costs SAR4 - 5 million. Figure 8| Jarir’s FCF, CFO, CAPEX and FCF yield 70 0,000 12 .0% 60 0,000 10 .0% 50 0,000 8.0% 40 0,000 6.0% 30 0,000 20 0,000 4.0%

In SAR (000s) In SAR 10 0,000 2.0% 0 0.0% 200 7a 2008a 200 9e 2010 f 2 011 f 2 012f 2013 f

FCF CFO Capex FCF yield

Source: Jarir and BMG estimates 6 Jarir

Valuation

We value Jarir using an average of: a) DCF valuation; b) DDM valuation and c) Comparative-based We value Jarir using valuation using 2009, 2010 and 2011 P/E multiples as follows: an average of: a) DCF valuation; DDM a) DCF-Valuation with a value of SAR134.00 per share valuation and c) We used the following assumptions: Comparative-based valuation • Forecast period: Projected earnings over an explicit period of five years ending 2013.

• Perpetual growth rate: 2%

• Perpetual weighted average cost of capital (WACC): 11.50%

Figure 9| Jarir’s free cash flow Figures in (SAR 000s) 2009e 2010f 2011f 2012f 2013f Cash operating profit after tax 388,579 461,936 540,134 628,989 707,505 Change in working capital (42,047) (78,342) (99,436) (117,970) (96,475) The DCF valuation Capital expenditure (45,091) (45,013) (50,398) (50,161) (45,455) yielded a fair value Free cash flow 301,441 338,581 390,300 460,858 565,576 of SAR134.00 per Terminal value 6,080,722 share

PV of free cash flow and terminal value 299,847 302,477 313,265 332,179 4,277,818

Source: BMG estimates

b) DDM valuation with a SAR122.00 per share

Jarir has maintained a stable dividend policy with an average payout ratio of 80% since 2000. We The DDM valuation expect Jarir will maintain this payout ratio, especially since the company’s policy is to lease yielded a fair value showrooms rather than own them, meaning its expansion plans should not drain its cash flows. We of SAR122.00 per arrived at a target price of SAR122.00 per share based on the following assumptions: share

Figure 10| Jarir’s DDM valuation 2009e 2010f 2011f 2012f 2013f Dividends per share (SAR) 6.95 8.84 10.35 12.08 13.66 Terminal value (SAR) 117.31 Cost of equity 12.5% 12.5% 12.5% 12.5% 12.5%

Present value of dividends (SAR) 6.90 7.81 8.13 90.32 8.48 Jarir’s value per share (SAR) 122.00 Source: BMG estimates

c) Comparative-based valuation with a value of SAR190.00 per share

Due to the lack of similar listed companies in the region, we compare Jarir to the following companies, despite the obvious differences in size and geographical focus:

• Staples: is the world’s largest office products company. The company sells office supplies (47% of sales), business machines and related products (28%), computers and related products (18%) and office furniture (7%), and operates 2,218 stores in 27 countries throughout North and South

America, Europe, Asia and Australia

• Office Depot: is a global supplier of office products and services. The company sells office supplies (61% of sales), technology and related products (25%) and office furniture (14%) and operates 1,429 retail stores in 49 countries throughout North and Central America, Europe and Asia

• BestBuy: is a specialty retailer selling consumer electronics (36% of sales), home office products (34%), entertainment software (17%), appliances (6%) and other products and services (7%) The company operates 3,942 retail stores throughout North America, Europe and Asia

• Barnes & Noble: is the world’s largest bookseller. The company sells books, magazines, CDs and DVDs and operates 779 retail stores throughout the United States

7 Jarir

Figure 11| Comparable companies’ key data

EBITDA Net EBITDA int. Company Total Sales ROE ROA margin Debt/Equity coverage

BestBuy US$45.0 billion 6.2% 22.0% 6.3% 28.2% 30.0x Staples US$23.1 billion 9.1% 14.3% 6.2% 50.0% 14.0x Office Depot US$14.5 billion 1.4% -66.5% -28.1% 53.0% 3.0x Barnes & Noble US$5.1 billion 6.2% 7.6% 2.5% -30.5% 135.4x Jarir US$0.7 billion 14.4% 48.4% 28.6% 24.4% 28.1x Source: Companies’ latest annual financials and Bloomberg

Figure 12| Comparative valuation*

Company Country P/E 2009 2010 2011 The comparative- Staples US 17.70 20.91 17.26 based valuation BestBuy US 14.58 13.46 12.20 yielded a fair value Barnes & Noble US 26.01 17.12 17.04 of SAR190.00 per Average 19.43 17.16 15.50 share Jarir 14.04 11.76 10.05

Source: Bloomberg consensus estimates Closing prices as of December 9th, 2009

*We have excluded Office Depot because the negative P/E distorted the valuation

We value Jarir at SAR149.00 per share

Using an average of the previous three valuation methods, we arrive at a target price of SAR149.00 per We value Jarir at share for Jarir, which implies an upside of 14.6% over the current market price of SAR130.00. SAR149.00 per Accordingly, we assign Jarir a ‘Neutral’ recommendation. share

Figure 13| Valuation

DCF valuation 1/3 SAR 134.00

DDM Valuation 1/3 Fair Value SAR 122.00 SAR 149.00

Current price SAR 130.00 Undervalued by 14.6%

Comparative valuation SAR 190.00 1/3

Source: BMG estimates

8 Jarir

9M2009 Review

Weak sales...

2009 has been a challenging year in terms of sales, as Jarir reported revenues of SAR1,831 million in 2009 has been a 9M2009 versus SAR1,851 million in 9M2008, representing a decline of 1.1%. Besides the obvious reasons challenging year for for a tighter market in 2009, which was the case with most companies worldwide, Jarir’s sales were sales, mainly due to affected because of the following: lower laptop sales a) The lower value of laptop sales, despite the higher volumes sold, due to lower average laptop selling prices as manufacturers reduced their prices to entice consumer demand, in addition to the popularity of netbooks, which have very low specs b) The successive delays in the new school year, which usually starts early September due to swine flu concerns. This was relevant specifically to 3Q2009, which witnessed a decline of 6.4% in sales

While we expect 4Q2009 revenues will be stronger than both 4Q2008 and 3Q2009, due to an improving We expect FY2009 consumer sentiment, in addition to the start of the new school year in October, we believe that FY2009 will be almost flat revenues will be almost flat relative to FY2008 revenues, despite the contribution of the new showrooms relative to FY2008

...but stronger margins, leading to a growth in the bottom line

The weak sales, however, were compensated for by stronger margins, again due to the lower But margins were contribution of laptop sales to total sales, as laptops have the lowest margins relative to the other stronger leading to product categories at 0.2x - 0.5x. Jarir reported a gross profit margin of 19.1% and EBITDA margin of a 7.1% increase in 16.0% in 9M2009 versus a gross profit margin of 17.4% and an EBITDA margin of 14.7% in 9M2008. the net profit This resulted in a 7.1% increase in the net profit to reach SAR271 million in 9M2009 versus SAR253 million in 9M2008.

Launching 3 new retail showrooms, bringing the total retail showrooms to 26

Jarir has launched 3 new showrooms in 2009 as follows: Jarir launched 3 Q1: 1 showroom in Riyadh, Saudi Arabia new retail showrooms bringing Q2: 1 showroom in Doha, Qatar the total to 26 retail showrooms

Q3: 1 showroom in Riyadh, Saudi Arabia

One more retail showrooms is expected to be launched before year-end in Riyadh, which will bring the 1 more showroom total number of retails showrooms to 27, of which 23 are in Saudi, while 4 are abroad. will be launched in 4Q2009

Dividends

So far in 2009, Jarir has paid total cash dividends of SAR203 million or SAR5.075 per share (adjusted for Jarir paid total cash the capital increase), implying a payout ratio of 75%. We expect Jarir will maintain a payout ratio of at dividends of least 80% throughout our forecast period. SAR5.075 per share so far in 2009 Figure 14| 9M2009 results summary

9M2008 9M2009 Revenues (SAR millions) 1,851 1,831 % change -1.1% Gross profit (SAR millions) 321 350 Gross profit margin 17.4% 19.1% EBITDA (SAR millions) 273 293 EBITDA margin 14.7% 16.0% Net income (SAR millions) 253 271 % change 7.1% Source: Jarir

9 Jarir

Case study: 2009... The Year of the Netbook

Netbooks versus Laptops

Netbooks witnessed outstanding global popularity in 2009 due to their low average selling prices (under US$500) relative to laptops, as consumers focused more on price in 2009. This has led to a significant drop in average selling prices of laptops, which affected different hardware manufacturers, as well as technology retailers, such as Jarir, which saw its average selling prices of laptops drop by 53% to reach SAR1,500 (US$400) so far in 2009, versus SAR3,200 (US$850) in 2008. This severe drop is not expected to recover, at least in 2010, as average selling prices of laptops are expected to grow by only 2.6% in 2010, according to technology research firm Gartner. Moreover, with shipments of netbooks expected to grow by approximately 41% to reach 41 million shipments in 2010 versus 29 million shipments in 2009, Gartner predicts that netbooks will remain popular in 2010 and grab a sustained market share, going forward. Nevertheless, an opposing view argues that netbooks are not replacements for laptops but are complimentary, and this is evident in the limited technical specifications and storage capacities of netbooks, as opposed to laptops, as well as the fact that most netbook owners already own laptops, according to several market studies.

Therefore, while we expect a slight recovery in the average selling prices of laptops in 2010, as consumers become more willing to spend with the improvement in economic conditions, we believe that the real effect on retailers’ profitability, such as Jarir will, ultimately, depend on their overall product mix, as well as their ability to monitor and take full advantage of changes in consumer preferences. Jarir’s venture into the smart phones business provides another useful example of this issue.

10 Jarir

Appendix I: Financial Statements Summary*

Income Statement All figures in SAR 000s 2007a 2008a 2009e 2010f 2011f 2012f 2013f Revenues 1,741,231 2,519,917 2,500,300 3,091,576 3,776,970 4,545,576 5,195,241 COGS -1,409,229 -2,084,930 -2,023,993 -2,519,634 -3,100,893 -3,750,100 -4,296,464 Gross profit 332,002 434,987 476,307 571,941 676,078 795,476 898,777 General & administrative expenses -30,563 -50,734 -49,598 -61,326 -74,922 -90,169 -103,056 Marketing & selling expenses -24,554 -35,034 -47,506 -58,740 -71,762 -86,366 -98,710 EBITDA 290,653 363,445 400,430 475,239 555,375 647,412 728,009 Depreciation -13,768 -14,226 -21,227 -23,364 -25,983 -28,471 -30,998 EBIT 276,885 349,219 379,204 451,875 529,393 618,941 697,011 Net interest expense -5,193 -12,950 -10,200 -13,400 -10,050 -10,050 -6,700 Other income 13,397 5,246 16,000 17,600 19,360 21,296 23,426 Profit before zakat 285,089 341,515 382,297 455,445 532,730 622,245 703,573 Zakat -8,840 -8,750 -11,851 -13,303 -15,242 -18,423 -20,504 Net income 276,249 332,765 370,446 442,142 517,489 603,823 683,069 Source: Jarir, BMG estimates

Balance Sheet All figures in SAR 000s 2007a 2008a 2009e 2010f 2011f 2012f 2013f Cash and cash equivalents 18,324 24,263 24,936 31,042 38,203 46,202 52,933 Net receivables 82,189 96,918 99,679 123,251 150,575 181,217 207,117 Net inventory 377,093 390,832 459,515 551,498 660,526 820,138 933,773 Other current assets 71,241 92,829 110,199 135,951 157,679 197,841 224,706 Total current assets 548,847 604,842 694,328 841,742 1,006,984 1,245,397 1,418,529 Net plant & equipment 484,329 521,931 545,795 567,444 591,859 613,549 628,006 Other long-term assets 36,006 36,144 36,080 38,003 40,231 42,730 44,842 Total assets 1,069,182 1,162,917 1,276,204 1,447,189 1,639,074 1,901,676 2,091,377 Bank overdrafts 190,000 42,028 39,808 9,399 89,142 118,534 151,696 Current portion of long-term debt 0 0 25,000 100,000 50,000 50,000 50,000 Accounts payable 199,987 182,829 243,138 293,731 335,305 431,057 486,437 Accrued expenses 24,052 40,778 39,372 47,099 59,644 71,727 81,710 Other current liabilities 21,141 27,189 15,053 19,698 24,223 28,834 33,395 Total current liabilities 435,180 292,824 362,370 469,927 558,314 700,152 803,239 Long term debt 0 150,000 125,000 100,000 100,000 100,000 50,000 Long term liabilities 24,902 33,227 0 0 0 0 0 Shareholders' equity 609,100 686,866 788,833 877,262 980,760 1,101,524 1,238,138 Total liab. and equity 1,069,182 1,162,917 1,276,204 1,447,189 1,639,074 1,901,676 2,091,377 Source: Jarir, BMG estimates *Year end December

11 Jarir

Cash Flow Summary* All figures in SAR 000s - Year end Dec. 2007a 2008a 2009e 2010f 2011f 2012f 2013f Cash flow from operations 260,043 310,255 346,532 383,594 440,698 511,019 611,030 Cash flow from investment -179,385 -51,828 -45,091 -45,013 -50,398 -50,161 -45,455 Cash flow from financing 196,114 10,353 64,553 44,591 129,743 79,393 33,161 Source: Jarir, BMG estimates *Year end December

Financial Ratios 2007a 2008a 2009e 2010f 2011f 2012f 2013f Profitability Gross profit margin (%) 19.1 17.3 19.1 18.5 17.9 17.5 17.3 EBITDA margin (%) 16.7 14.4 16.0 15.4 14.7 14.2 14.0 Net profit margin (%) 15.9 13.2 14.8 14.3 13.7 13.3 13.1 ROA (%) 25.8 28.6 29.0 30.6 31.6 31.8 32.7 ROE (%) 45.4 48.4 47.0 50.4 52.8 54.8 55.2

Coverage EBITDA interest coverage (x) 56.0 28.1 31.0 33.9 34.7 36.0 43.2 FFO interest coverage (x) 49.1 23.0 25.8 26.3 26.5 27.4 35.2

Leverage Total debt/EBITDA (x) 0.7 0.5 0.5 0.4 0.4 0.4 0.3 Total debt/Equity (x) 0.3 0.3 0.2 0.2 0.2 0.2 0.2

Source: Jarir, BMG estimates

BMG Financial Group BMG Building, King Abdullah Road PO Box 67729, Riyadh 11517, KSA Tel: +966 1 453 7722 Fax: +966 1 454 7544 Website: www.bmg.com.sa

BMG – Jeddah Office Al Mukhmal Plaza Palestine Street, Al Hamra District P.O. Box 52972 Jeddah, KSA Tel: +966 2 668 1777 Fax: +966 2 668 1888 Email: [email protected]

Egypt Affiliate:

Beltone Financial Isis Bldg., Osiris St., 8th & 9th floors Garden City, Cairo, Egypt 11451 Tel: +20 (0)2 792 6610 Fax: +20 (0)2 792 6620 E-mail: [email protected] Website: www.beltonefinancial.com

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