Jarir Marketing Co

RETAIL | 16 August 2009 INITIATION OF COVERAGE Jarir Marketing Co. Overweight Much more than just a bookstore Price (SR) 131.80 The low computer penetration rate, rising disposable incomes and favorable demographics indicate a growing market for IT and school & office products in KSA. We 12-month target price (SR) 164.8 believe shareholders stand to gain as Jarir leverages its strong brand in the GCC region Potential upside (%) ↑ 25 and solid fundamentals to convert this opportunity into revenues, going forward. Stock details Financials 52-week range H/L (SR) 151/101 2008 2009E 2010E 2011ECAGR % Market cap ($mn) 1,407 Revenues SR mn2,520 2,656 2,972 3,394 10.4 Shares outstanding (mn) 40 EBITDA SR mn 363 400 438 491 10.5 Listed on exchanges TADAWUL EBITDA margin % 14.4 15.1 14.7 14.5 Price perform (%) 1M 3M 12M Net income SR mn 333 373 414 465 11.8 Absolute 0.0 (0.5) (9.5) Net margin % 13.2 14.1 13.9 13.7 Rel. to market (1.1) 0.1 20.5 Total retail stores # 23 27 30 33 Avg daily turnover (mn) SR US$ Total retail area Sq. Mt. 65,200 77,200 86,200 95,200 3M 8.5 2.3 ROE % 51.4 52.0 52.7 54.1 12M 9.5 2.5 ROA % 29.8 31.1 31.9 33.1 Reuters code 4190.SE Source: Company, NCBC Research estimates Bloomberg code JARIR AB • Strong business model and expansion plans to drive growth: Despite being called Website www.jarirbookstore.com “Jarir Bookstore”, over 60% of 2008 sales was IT based. The GCC IT market is Valuation multiples underpenetrated with spending in the region estimated to grow at over 9% CAGR over the 08 09E 10E next five years. Jarir, with its industry leading profitability, healthy balance sheet and P/E (x) 15.6 14.1 12.7 proactive management, is set to take market share through its ambitious store expansion P/B (x) 7.6 7.0 6.4 plans and leveraging its strong brand image. We expect the company to increase its retail EV/EBITDA (%) 11.2 13.7 12.6 Div yield (%) 5.2 5.9 6.5 store count to 37 by 2012 and 43 by 2015 from the 25 it reported at the end of 1H-09 Source: NCBC Research estimates • Regional presence likely to limit margin pressure: Our discussions with management Share price performance lead us to believe that the change in sales mix (63% of sales from IT in 2008 vs. 30% in 2002) is the key reason behind recent margin pressure (gross margins of 18% in 2008 vs. 160 14000 140 12000 26% in 2002), with this expected to stabilize in coming years. Jarir’s move to other GCC 120 10000 markets, which account for more than half of the region’s IT spend and enjoy higher 100 8000 80 margins, enhances the company’s growth potential and should provide further margin 6000 60 40 4000 support 20 2000 • Economic weakness to be mitigated by market growth: With more than 50% of GCC 0 0 Jan-07 Nov-07 Sep-08 Aug-09 nationals employed in the public sector, any economic softness is expected to have a less Jarir Tadawul (RHS) acute impact on sales than in more developed economies. Coupled with this, the % growth Source: Reuters of the market as a whole should help mitigate any softness in sales due to any negative macro factors Farouk Miah • Top/bottom-line growth seen ahead of competition: We expect Jarir’s top-line to [email protected] expand at a CAGR of 10.4% over the next three years. Although falling, Jarir’s net margin (13.2% in 2008) is well above that of most of its regional and global competitors. We expect net income to grow at 12% CAGR in 2008-2011 z Valuation: The Company trades at an attractive P/E of 14.1x earnings for 2009E, in line Please refer to the last page for important disclaimer with the TASI retail sector P/E. YTD, the stock is up 2% vs. the retail sector which is up 17% and the TASI which is up 22%. We initiate coverage with an Overweight rating and a target price of SR164.8, representing an upside potential of 25% Investment scenarios Store count and productivity are key drivers for growth Historical and expected price performance (three scenarios) 200 300 5.13 Scenario 15.14 8.05 3.39 Analysis 160 12.22 10.09 240 120 30.84 190.74 80 167.09 191 105.88 180 40 167 0 120 106 60 5% year DCF Bull case DCF year 20% DCF Bear case Bear DCF DCF Base Case Base DCF sq mtr sq 0 by 350 sq mtr Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 One One less KSA per store Higher WACC11.5% of Increase rev per per sq ft rev by Increase One One KSAmore per store Decrease rev per sq ft by rev per Decrease Reduce size of new store size of Reduce Historical Price Performance Price Scenario Size of by store higher 150 Investment view Investment scenarios • Brand leadership: A well-managed company with best-selling Price target: Weighting of DCF base case, surplus ROE model and products in KSA and the ambition to become a well-known brand SR 164.81 Dividend discount model at 50%, 25% and 25%, across GCC respectively • Risk-reward weighted to the upside. The stock suggests 45% upside for our bull case, and 20% downside for our bear case DCF bull case Strong domestic market and increasing store count. We • Valuation is reasonable: The stock trades at a 2009E P/E of 14.1x, SR 190.74 assume higher Saudi spending power to translate into in line with the TASI retail sector increased revenue per sq mt. This combined with further expansion in retail stores to result in revenue • Visibility of medium-term revenues: Four new stores planned for CAGR of 14% between 2008-11E, and restrict margin 2009 (2 have opened in 1H-09) in addition to three opened in 2008 contraction, leading to EBIT margin of 14% in 2011E should boost revenues in 2009 and 2010 • Stores expansion in other GCC countries to ease margin DCF base case Per capita retail spending remains favorable over the pressure: Jarir has opened two new stores in Qatar in 2009, where SR 167.09 medium term, expansion continues. We assume 2008- margins are significantly higher than in KSA and should help the 11 revenue CAGR of 10% company limit margin downside DCF bear case Subdued spending power owing to decrease in per • Strong operational efficiency: Continued focus on improving SR 105.88 capita income in GCC. We assume 2008-2011 revenue operational efficiency and move to source stock from cheaper Asian CAGR of 6% and 2011 EBIT margin of 13.7%, markets will likely help Jarir maintain EBITDA margin in the range of reflecting lower revenue per sq mt. Assumes higher 14-15% in 2009-13 WACC of 11.5% • Regular dividends to boost shareholders’ confidence: We expect the company to maintain its high dividend payout ratio (c. 80%) in the coming years, thereby inspiring investor confidence in times of economic uncertainty Potential catalysts Investment risks • Higher store openings: Higher-than-targeted retail store openings • Margin pressure likely in medium term: Increasing competition in other GCC countries could boost overall margins as well as the could impact margins top line • Subdued consumer spending: The ongoing economic meltdown • Economic recovery: Faster-than-expected recovery in overall has forced consumers to curtail spending on discretionary items, economy will lift consumer sentiment in GCC, resulting in increased potentially hurting Jarir’s business demand for laptops • Slow store expansions: A prolonged downturn may slowdown the • Sector consolidation: Potential acquisitions in a highly competitive rate of expansion of new stores limiting Jarir’s growth retail sector could be a key growth driver 16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 2 Investment view Investment case • Boom in the GCC IT market to propel growth: Increasing disposable incomes, favorable demographics and higher spending in the non-oil sector are expected to stimulate demand for IT & peripherals, going forward. Jarir, with a 50% share of the laptop market and 63% of 2008 sales coming from IT and IT peripherals, looks set to be a key beneficiary of this growth. Liberalization of the telecom sector, rising broadband penetration and e- governance initiatives are key factors driving demand for IT products. Furthermore, increasing use of IT applications across all industry verticals is adding to the demand for computers & accessories. Business Monitor International (BMI) expects the Saudi IT market to be worth SR18bn in 2013, up from SR13bn in 2008. KSA, Jarir’s prime market, accounts for 43% of the GCC region’s total IT spend, while UAE, Qatar and Kuwait (markets where Jarir already has a presence) contribute an additional 50% • Store expansions throughout GCC set to be key to growth: We expect Jarir to capitalize on the growing potential of the IT sector by increasing the number of stores in Saudi Arabia to 32 by 2015, from 20 in 2008. Replication of its domestic success into the rest of the GCC will be an additional source of growth for Jarir in the coming years. We expect the number of GCC stores ex-KSA to increase from 3 in 2008 to 11 in 2015. With greater average IT spend per head in countries like Qatar and the UAE, combined with higher margins; we believe pan-GCC expansion will add significantly to the existing business model • High public sector employment should mitigate weak macroeconomic factors: Although the weak global economic growth will impact spending levels in Saudi Arabia and the GCC, we believe that the high % of people employed in the public sector (58% in the GCC vs.

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