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 higher store 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. 16% in US) will help mitigate this impact as the variability of their incomes will be more limited. Furthermore, the GCC market for computers and peripherals will likely keep growing in spite of the global slowdown, albeit at a slower rate, due to the lower penetration rate, lack of basic IT infrastructure and government spending. Other business lines such as school supplies and books are far less cyclical and driven primarily by population growth and Government spending on education. These should also help counter any cyclical effect of the consumer IT business
• Operational efficiency key to smooth business flow: Another of Jarir’s strengths is its strong focus on achieving and maintaining operational efficiency to facilitate long-term business growth, even while continuing to expand store count. Jarir has taken several steps to automate its entire operations with this enabling Jarir to better manage its business – from product mix to price determination as well as current and fixed asset optimization. This factor has allowed the company to keep operational cost under check, improve efficiency and stay ahead of competition. The deployment of IT has also strengthened Jarir’s logistics and supply chain management capability. In addition, the company’s robust supply chain management allows it to procure raw materials at cheaper cost, leaving room for price cuts during times of fierce competition without compromising on quality
• Healthy cash flow and high dividend payout to boost shareholder value: Jarir has an impressive dividend track record—it pays all cash flows in excess of operating, financial and capital investment needs, as dividends to shareholders. Over the last few years, Jarir’s dividend payout ratio has remained high, ranging between 68.1% and 88.7% in 2002-2008.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 3 INVESTMENT VIEW
Moving ahead, we expect dividend per share to increase with rising profitability, keeping its payout ratio in 2009-2015 at the historical average of around 80%
• A prominent brand in the GCC: Founded in 1974 in Riyadh, Jarir is an exceptionally strong brand throughout Saudi Arabia and was the highest ranked retailer in the 2006 Forbes Arabia top 40 brand list. Jarir has taken great care in the building and design of each store, focusing on store location, size, stock-keeping units (SKU), new products launches and customer retention strategies. With expansions into Qatar, Kuwait and Abu Dhabi, it is now well on its way to establishing its brand across the GCC
• Market growth with expansion opportunities drives upside valuation: Our combined Discounted Cash Flow (50%), Dividend Discount Model (25%) and Surplus ROE (25%) valuations give a price target of SR164.8, indicating an upside of 25% to the current share price and giving our Overweight rating. On a P/E basis, Jarir trades at 14.1 2009 P/E, a 22% discount to its international peers. We believe this is compelling given its exposure to markets where growth is expected to be much higher than the growth rates in Western Europe/USA and thus a premium to peers would be expected. Investment risks
• Slower than expected store expansion: We believe the key driver for Jarir is the gains from a rollout of new stores which should take its total number of showrooms from 23 in 2008 to 43 in 2015. We believe this rate of expansion is possible due to the potential within the IT sector across the GCC and the current limited number of retailers on a similar scale to Jarir. However, if the rate of expansion is substantially slower than what we and the company expect, this will lower expected results in the outer years. If over our forecast period, Jarir opens one less store per year than we expect (i.e. 36 by 2015), this will reduce our DCF PT by 9% to SR153
• Growing competition to hurt margins: Jarir is engaged in a fragmented and competitive business and a GCC IT retail industry dominated by local players who provide a high level of competition. Separately, liberalization of the economy following KSA’s entry into the WTO has encouraged foreign companies to invest in the region’s burgeoning IT sector. The announcement in January 2009 of Office Depot, the US office supplier planning to launch across the GCC is a case in example. The competitive nature of the industry could lead to continued pricing and margin pressure
• FX risk factor due to high imports: Jarir sources a significant amount of its end products from Europe and the Far East, leading to foreign exchange risks as the Saudi real is pegged to the US dollar. The recent weakening in the US$ threatens to push the cost of Jarir’s imports from outside of the US higher, thereby increasing the company’s cost of sales and hurting margins. Although, to an extent, the impact of FX fluctuations can be minimized through hedges, this risk factor remains important for Jarir and the margins it will be able to generate
• Risks of obsolescence: Jarir imports IT products, stores them at warehouses and then dispatches them to the respective stores. These products are fast moving in nature and are prone to rapid technological obsolescence. Hence, efficient supply chain management is key, failing which, Jarir may be left with out of date products on which it will have to take a loss in order to sell. Efficiency of this ordering and distribution is key and any setbacks here or disagreements with suppliers could cause a bottleneck in Jarir’s attempts to have the latest products at its stores
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 4 INVESTMENT VIEW
• Global slowdown leading to increased sales of lower priced netbooks: The slowdown in the global economy has been met by a fall in the average price of laptops as well as a boom in the sale of netbooks which retail for under $400. Thus, although the number of transactions may not be affected greatly at Jarir, the average spend per customer in 2009 and 2010 is set to be lower due to these two factors. Thus, this will create pressure on Jarir’s top line with growth slower than in recent years
• Limited factors of differentiation: Due to the nature of products sold by Jarir, if competition was to increase significantly, bar changing the prices of its products, it is limited in differentiating itself from its competitors. As the products are mostly uniform in quality from retailer to retailer, price plays a large role in determining where the consumer will purchase the product. Thus, Jarir could face a pricing war with a “race to the bottom”. Jarir attempts to counter this with its post purchase sales service, financing options through its deal with SABB as well as its loyalty cards, all of which should enable it to justify charging a premium to its peers
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 5 Contents
VALUATION 7
Weighted average cost of capital (WACC) 7
Discounted cash flow model 7
Dividend discount model 8
Surplus ROE model 9
Liquidity 11
BUSINESS BACKGROUND 12
Company overview 12
Corporate history 12
Shareholding pattern 14
Corporate governance and investor-friendliness 14
KEY THEMES 16
Store expansion key growth driver 16
Changes in the computer industry 17
Sales evolution shows IT dominance 20
Impact of global downturn 21
Seasonality of sales 22
BUSINESS FOCUS 23
Company Operations 23
Retail/Wholesale 23
7 P’s of marketing 24
INDUSTRY AND BUSINESS DYNAMICS 27
Macro factors impacting Jarir 27
The regional IT market 29
The Saudi IT market 30
FINANCIALS PERFORMANCE 33
Model unraveled 33
NCBC vs. consensus 39
APPENDIX 40
FINANCIALS 41
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 6 Valuation
We use the following three methodologies to arrive at a fair price for Jarir:
• Discounted Cash Flow (DCF)
• Dividend Discount model (DDM)
• Surplus ROE model Weighted average cost of capital
We have based our valuation on the following assumptions:
1) Cost of Equity (COE) of 9.6% considering:
• Risk Free US 10-year Treasury yield of 3.67% (as of August 2009)
• Adjusted beta based on weekly returns (versus the new TASI index) of 0.67
• Equity risk premium of 8.79% (6.69% for the US and an additional 2..1% for Saudi Arabia)
2) Tax-adjusted cost of debt of 5.33% considering the company’s dues with banks and long- term funds acquired recently
Taking the above factors into consideration, we have computed weighted average cost of capital (WACC) for Jarir at 9.5%, assigning weights based on market capitalization and book value of total debt. Discounted cash flow model
First, we prepared a seven-year explicit Free Cash Flow (FCF) estimate for FY09 to FY15 for evaluating Jarir’s business.
We estimated the likely cash flows for the period beyond our forecast horizon using the continuing (or terminal) value principle assumed at 2.5% as this is the long term expected GDP growth rate for Saudi Arabia. We then discounted the cash flows using WACC.
Based on the results of these, we arrived at the estimated enterprise value (EV) of the company. Further, we adjusted this for debt and cash (including investments) to arrive at Jarir’s estimated market capitalization.
Exhibit 1: Jarir – Valuation (SR' 000, unless specified) Value % of total Sum of PV of FCFF – 7 years 2,202,153 32.9 PV of Terminal value 4,595,668 68.8 Enterprise Value 6,797,840 Add: Cash Available 24,962 0.4 Less: Total Debt 175,218 (2.6) Add: Financial Investments 36,006 0.5 Equity Value 6,683,590 No. of Shares Outstanding 40,000 Value per Share 167.1
Source: Company, NCBC Research
The target value of SR167.1 per share represents an upside of 27% to Jarir’s current share price. The table below indicates the impact of changes in WACC and the terminal growth rate on target value.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 7 VALUATION
Exhibit 2: Sensitivity of valuation to WACC and terminal growth WACC (%) 8.5 9.0 9.5 10.0 10.5 1.5 166.0 158.3 151.7 145.8 140.6 2.0 175.4 166.5 158.9 152.2 146.3
(%) 2.5 186.4 176.0 167.1 159.4 152.7 3.0 199.4 187.0 176.6 167.7 159.9
Terminal growthrate 3.5 215.0 200.1 187.7 177.2 168.2
Source: Bloomberg, NCBC Research
Dividend discount model
Jarir has been consistently paying cash dividends to shareholders (please see Page 15, Exhibit 15 on dividend policy). Thus, we have also used the dividend discount model for valuing the company.
Exhibit 3: Jarir—details of valuation (SR mn)
Dividend payment-7 yrs 2,990 Present value of dividends 2,167 Terminal value 7,555 Discounted terminal value 4,244 Total dividends to shareholders 6,411 Shares issued (mn) 40 Price per share (SR) 160.3 Upside/(downside) (%) 21.7
Source: NCBC Research
Considering dividend payment over the next eight years and terminal value of the dividends at end 2015, we arrived at a target price of SR160.3, representing a 21.7% upside.
Exhibit 4: Sensitivity of the valuation to COE and terminal growth
COE (%) 8.6 9.1 9.6 10.1 10.6 1.5 159.2 152.3 146.3 140.9 136.1 2.0 167.8 159.8 152.8 146.7 141.3 2.5 177.7 168.3 160.3 153.3 147.2 rate (%) 3.0 189.4 178.3 168.9 160.8 153.8
Terminal growth 3.5 203.4 190.0 178.9 169.4 161.3
Source: NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 8 VALUATION
Surplus ROE model
Given Jarir’s ability to generate ROE significantly higher than COE, we have used the surplus ROE valuation method to value the company. We generated an excess ROE model for the seven-year forecast period and assumed sustainable ROE of 47%, which is high compared to other retailers, but primarily due to its dividend payouts in excess of 80% which result in the net income figure increasing much faster than equity levels. The model forecasts the value of Jarir’s equity by discounting excess returns over and above COE (deducting imputed COE in Saudi Riyals from Jarir’s net income). We then find the present value of intermediate and terminal surplus generated, discounted at the cost of equity (9.6%). This is divided by the outstanding shares to arrive at a target price of SR164.8 (25% upside).
Exhibit 5: Jarir - details of valuation (SR mn)
Net income-7 yrs 3,596 Equity cost 615 Excess equity return 2,981 Present value of excess returns 2,365 Terminal value 5,760 Discounted terminal value 3,539 Current book value 687 Value of equity 5,904 Shares outstanding (mn) 40 Value per share (SR) 164.8 Upside/(downside) (%) 25
Source: NCBC Research
We performed a sensitivity analysis to reflect the movement in fair price following changes in CoE and terminal growth rate.
Exhibit 6: Sensitivity of valuation to CoE and terminal growth Cost of equity 8.6 9.1 9.6 10.1 10.6 1.5 168.4 160.7 153.9 147.7 142.2 2.0 175.3 166.6 159.0 152.2 146.1
(%) 2.5 183.3 173.4 164.8 157.2 150.5 3.0 192.8 181.3 171.5 163.0 155.5
Terminal growthrate 3.5 204.1 190.6 179.3 169.6 161.2
Source: Bloomberg, NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 9 VALUATION
Peer group valuation
The GCC stock market does not have a listed stock involved in IT retail with also a lack of international retailers with a similar business mix to that of Jarir. In addition to this are the major differences in the economic structure and demographic profile of the individual countries. Hence, we have not considered peer group valuation for Jarir. Nevertheless, we present a table portraying Jarir’s position vis-à-vis its US and European competitors.
Exhibit 7: Valuation metrics P/E(x) RoE (%) RoA (%) Mkt Cap Company - country (USD mn) 09E 10E 09E 10E 09E 10E RadioShack Corp. – US 1,927.6 9.9 10.5 19.5 16.2 - - Staples Inc. – US 15,444.0 21.2 15.7 14.5 15.4 - - WH Smith PLC – London 1,128.2 11.3 10.9 33.6 30.1 12.3 12.3 OfficeMax Incorporated - US 587.4 35.8 26.0 8.8 10.4 - - Best Buy Co. – US 15,448.2 12.7 11.4 22.6 19.8 - - Jarir Marketing Co. - KSA 1,394.9 14.1 12.7 52.0 52.7 31.1 31.9 Overall Average 17.5 14.5 25.2 24.1 21.7 22.1 Average (excluding Jarir) 18.2 14.9 19.8 18.4 12.3 12.3 Premium / (discount) (%) (22.4) (14.5) 162.6 186.8 152.4 159.2
Source: Company, Reuters, NCBC Research estimates
The above table shows that Jarir trades at a discount to its closest international peer group of 22% and 15% for FY09 and FY10 P/E respectively. However, the company’s ROE and ROA are higher than the industry average, indicating strong fundamentals, compared with peers. Going forward, we expect the double-digit sales and earnings growth to continue in the medium term, strengthening the company’s comparison vis-à-vis peers. On a comparative basis, one would expect Jarir to trade at a premium to its peers given its closest higher growth prospects.
Blended valuation
Assigning 50% weight to DCF and 25% each to DDM and Surplus ROE, we arrived at a target price of SR164.8 per share for Jarir. This represents 25% upside from the current market price of SR131.8.
Exhibit 8: Jarir – Blended valuation Valuation approach Price Weight (%) DCF 167.1 50.0 DDM 160.3 25.0 Surplus ROE 164.8 25.0 Jarir share price (SR) 164.8
Source: NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 10 VALUATION
Historical valuation
We traced the historical movement of Jarir’s P/E multiple. Since 2005, Jarir has largely traded in the P/E band of 13–38x. Jarir currently trades at 13.9x TTM EPS, 15.6x 2008E EPS 14.1x 2009 EPS, slightly above the lower end of its P/E band. The sharp correction in Jarir’s share price in early 2006 and mid-September 2008 was in line with that in the broader Saudi market.
Exhibit 9: Jarir - P/E bands
350 36x
280
210 20x
140 13x
70
- Jan-05 Mar-06 Jun-07 Sep-08 Dec-09
Source: NCBC Research estimates
Liquidity
Jarir is less liquid on absolute terms when compared with volumes generated by other retail stocks and the rest of the TASI. The company’s average daily turnover stood at SR9.3 mn (USD2.5 mn) in the first seven months of FY09, equivalent to roughly 0.6% of its free float. This is compared to other retailers such as Al Othaim which averages around 4% of free float traded per day and Al Hokair on around 3%. However, Jarir accounts for 1% of the free float of the TASI, the largest contributor from the retail sector with Aldrees second with 0.2%.
Exhibit 10: Liquidity – Jarir 3 months YTD 2009 Jan 09 -Mar 09 Jan 09-Jul 09 FY 2008 Jarir Avg daily turnover (SR mn) 8.5 9.3 9.6 Avg daily turnover ($ mn) 2.3 2.5 2.6 Volumes (‘000) 64.0 73.5 74.4 As % of free float shares 0.47 0.61 0.62
Source: Tadawul, Bloomberg, NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 11 Business background
Company overview
Jarir Marketing Company (Jarir) is the largest retailer of IT products in the GCC with a market share of 50% for laptop sales in Saudi Arabia. Jarir is also one of the leading retailers and wholesalers of stationery, office and school supplies and books in the region. In FY08, Jarir generated sales of SR2.5bn and net income of SR332.8mn, indicating a 13.2% margin. Nearly 88% of its FY08 sales came from Saudi Arabia.
Jarir operates through two divisions: Retail and Wholesale. The Retail division is the largest contributor, accounting for (88.5% of FY08 revenue) with the Wholesale division accounting for the remaining 11.5%. Through its Retail division, Jarir also operates in three other GCC countries — Qatar, Abu Dhabi and Kuwait. These markets account for approximately 14% of Jarir’s retail revenue (and 12.3% of total revenue). Computer and IT products constitute the company’s largest product category, accounting for an estimated 63% of total 2008 sales, followed by office supplies with 14% and school supplies and books with 8% and 6% each. The “Other” category, which includes newspapers and magazines, forms 9% of total sales.
Jarir is also involved in the real estate business involving purchase and sale of residential and commercial buildings and land. Currently, the company owns a property in Egypt, which focuses on lease financing of real estate.
Exhibit 11: Revenue - Retail and Wholesale division (FY08 in SRmn) and product category
2500 Books Others 6% 9% School supplies 2000 8%
1500 Office supplies 14 % 1000
500
0 Computer & IT products Retail Wholesale 63% KSA Other GCC
Source: Company, NCBC Research
Corporate history
Jarir was established in Saudi Arabia in 1974 by the Al Agil family then comprising the late Abdulrahman Al Agil and his five sons. The company commenced business with just one store located on Jarir Street of Riyadh and was involved primarily in selling books. Perceiving an attractive opportunity in school and office supplies and computer and IT products, the company added these to its product line during the past two decades. Simultaneously, the company expanded its geographical reach in KSA, and now has a network of 21 stores in the Kingdom. Jarir also expanded into neighboring GCC countries by starting operations in Qatar in 2001, Abu Dhabi in 2002 and Kuwait in 2004.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 12 BUSINESS BACKGROUND
Exhibit 12: Jarir—organization structure
Jarir Marketing Co.
100% 100% 100% 100% 100%
United Company for Jarir Egypt Financing Office Supplies and Jarir Trading United Bookshop, Jarir Bookstore, Leasing Co. SAE, Stationeries WLL, Company LLC, Dubai Abu Dhabi Kuwait Egypt Qatar
Source: Company, NCBC Research
Until 2000, Jarir’s retail and wholesale divisions were managed under two different companies— Jarir Bookstore Co. and Jarir Marketing Co., respectively. In January 2000, these two entities were merged to form Jarir Marketing Company, resulting in product synergies. Three months after the merger, the founders offered 40% stake through private placement. In December 2003, the company made its initial public offering (IPO).
Following the restructuring in 2000, the retail and wholesale divisions share common infrastructure (warehouses, distribution networks etc). All purchases are stored at a 36,000 sq mt warehouse in Central Riyadh. To support expansion plans, in 2007, Jarir bought 57,000 sq mt of land next to its existing warehouse, taking its total warehouse space to 95,000 sq mt. The warehouse is linked to the central IT and Management Information System (MIS) to enable the company monitor sales and inventory. As of 31 December 2008, Jarir had an estimated 1,128 employees, compared with 594 as on 31 December 2002.
The company has performed strongly, leveraging the growing IT market in the GCC. Over the past five years, Jarir has enjoyed 29% revenue CAGR and 23% net income CAGR. This growth has largely been due to strategic store expansions in urban locations that have seen increased investment in education, transport facilities and infrastructure. This has equated to a net margin of around 16%.
Exhibit 13: Jarir’s top line and bottom line evolution over 2003-2013E (SRmn)
6,000 20%
4,800 16%
3,600 12%
2,400 8%
1,200 4%
0 0% 2003A 2004A 2005A 2006A 2007A 2008A 2009E 2010E 2011E 2012E 2013E Revenues (SRmn) Net income margin (%) (RHS)
Source: Company, NCBC Research estimates
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 13 BUSINESS BACKGROUND
Shareholding pattern
Until 1999, shares of Jarir were equally divided between the founder members (five brothers belonging to the Al Agil family). In 2000, the brothers diluted their stake through a private placement, selling a 40% stake to Gulf Investment Corporation and Jarir Investment Company. Following the dilution, the holding of the founder members decreased to 12% each.
In December 2003, Jarir went public. Currently, Jarir Investment Company holds a majority 12.6% stake in Jarir and the five brothers hold 9% each. Others, including shares held by the public, represent 42.4% of the total issued capital.
Exhibit 14: Shareholding structure (%)
Shareholders Post-PP Post-IPO Currently* Jarir Investment Company 12.6 14.2 12.6 Muhammed Al Agil 12.0 10.4 9.0 Abdullah Al Agil 12.0 10.4 9.0 Abdulkarim Al Agil 12.0 10.4 9.0 Nasser Al Agil 12.0 10.4 9.0 Abdulsalam Al Agil 12.0 10.4 9.0 Gulf Investment Company Bakery 10.0 10.0 - Olayan Group - 4.5 - Others 17.4 19.3 42.4 Total 100.0 100.0 100.0
Source: Company, Reuters, NCBC Research, * Shareholding pattern sourced from Tadawul as of Aug 2009
Governance and investor friendliness
Corporate governance assumes higher importance at Jarir, considering it is essentially a family- owned company. Over the years, Jarir has established a benchmark for family-owned businesses in the Kingdom by putting in place impressive corporate governance structures that make it one of the most transparent Tadawul-listed companies. Although Jarir is a family-owned business, it is managed by a team of professionals and the family does not interfere in the day- to-day management of the company. Of the twelve-member senior management, only two belong to the founding family. The company has a stock option plan in place. Moreover, employees are rewarded with bonuses on meeting targets. Approximately 30% employees are Saudi nationals.
Jarir maintains high standards of corporate governance across all its business practices. The company released a manual on ‘Corporate Governance Principles, Policies and Procedures’, which was approved by the General Assembly at a meeting on 10 March 2008. The 44-page note outlines the rules and norms for the directors and committees on shareholders rights, disclosure and transparency and corporate social responsibility. Non-management directors constitute a majority of Jarir’s board of directors, in line with international best practices. The company also maintains a high level of disclosure and releases a detailed review of its activities every quarter.
Dividend Policy: Jarir has a history of rewarding its shareholders with high dividends. The company’s aggregated dividend during 2003-2008 totaled SR1,012mn of the total net income of SR1,257.9mn; payout ratio averaged a high 80.4%. Except in FY05 and FY06, the company’s dividend payout ratio has stayed above 80%.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 14 BUSINESS BACKGROUND
Exhibit 15: Dividend paid (SRmn) and payout ratio (%)
500 100%
375 75%
250 50%
125 25%
0 0% 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E Dividend paid (SRmn) Payout ratio (%) (RHS)
Source: Company, NCBC Research estimates
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 15 Key themes
Store expansion key growth driver
Store expansion set to be key driver of growth: We believe that over the coming years, Jarir’s expansion throughout Saudi Arabia and the rest of the GCC holds will be the key to growth for the company. Jarir is increasingly transforming into an IT retailer. With margins in the IT retail segment continuously under pressure owing to price-based competition, we believe geographic expansion would engender higher volumes and drive sales and profits.
Existing management expansion targets perhaps too ambitious: Management has highlighted an ambitious four-year plan of increasing the number of stores from the 23 in FY08 to around 40-45 by FY12. We believe this is an ambitious number. In our discussions with the management, we learnt that the choice of location of the new stores is extremely important to the company. Thus, availability of prime spots could hold up store expansion. Given this and the general economic slowdown, we believe that store expansion will occur more cautiously, going forward. We estimate that by FY12, Jarir will have 37 stores throughout the GCC and will reach 43 by 2015.
Exhibit 16: New store openings 2005-2015E Year 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E # stores 19 20 20 23 27 30 33 37 39 41 KSA additions 1 0 3 3 2 2 2 1 1 1 Other GCC additions 0 0 0 1 1 1 2 1 1 1 # stores 20 20 23 27 30 33 37 39 41 43 Total selling space (sq mtr) 56,200 56,200 65,200 77,200 86,200 95,200 107,200 113,200 119,200 125,200 Avg. sales per sq mtr (SR 000’) 21.8 25.2 32.5 29.1 29.5 30.8 31.3 33.1 34.0 33.5
Source: Company, NCBC Research estimates
Variance in number of new stores plays important role in PT: If store expansion is in keeping with our estimate of 37 stores by 2012 instead of 40-45 stores targeted by the management, our DCF-based valuation of Jarir translates into a fair price target price of SR167.1.
If Jarir’s management is more successful than we envisage and is able to open one more store per year than that expected by us (i.e. 41 stores by 2012 and 50 by 2015), it will translate into a fair price target of around SR181. Conversely, if Jarir is unable to meet even our conservative store expansion numbers and opens roughly one less store per year than we estimate (i.e. 33 stores by 2012 and 36 by 2015) our fair price target would reduce to around SR153. Although this scenario analysis is theoretical and is dependant on many factors, we believe it illustrates well the importance of the number of stores Jarir is able to open to the valuation afforded to the company.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 16 KEY THEMES
Exhibit 17: Sensitivity analysis of number of store openings and corresponding PT (SR)
250 200 150
100 195.6 209.9 209.9 167.1 181.4 138.5 152.8 50 110.0 110.0 124.3 0 per yr DCF Bull case DCF per yr per yr per yr opened per yr opened DCF Bear Bear DCF case opened per yr opened opened per yr opened DCF Base Case Base DCF Two more stores Two more Three less stores less Three Three more stores Three more One less store opened One less store Two opened less stores opened One more store Four less stores opened Four less stores
Source: Company, NCBC Research estimates
Despite our conservative forecasts, the price target provides 27% upside: As explained above, Jarir’s valuation is sensitive to the number of stores openings in the coming years. We believe we have been fairly conservative in assuming 14 store openings by 2012 to take us to a total of 37 stores, vs. a management target of 40-45 stores. Despite our conservative estimate, our DCF-based fair price target is SR167.1, indicating a 27% upside to the current share price.
From our analysis, we find that each individual store equates to around SR2.0 per share in value to the firm, indicating the importance of how many new stores Jarir is actually able to open in the coming years. However, we highlight the importance of time value of money on our scenario analysis; that is to say that if in 2009, Jarir opened one less store than we expect, this would impact our PT by a higher degree than if it opened one less store than we expect in 2015.
Changes in the computer industry put pressure on retailers, but signs of optimism remain
Laptop sales have overtaken desktop sales, helping limit the impact of falling desktop prices: Laptops sales, which have been growing robustly over the past decade, took over desktop sales for the first time in 2Q-08. Laptops offer portability, which has been one of the main attractions for students and professional users. However, laptops also offer lower technical specification vs. the significantly more powerful desktop computers primarily used in offices and homes. Over the past few years, nevertheless, the absolute level of hard drive space, memory and various other performance indicators for laptops has increased significantly to an extent that lower technical specification is increasingly not an issue any more. Thus, with laptops coming on par with desktop computers in technical specifications, laptop sales have overtaken desktop sales.
From a retailer’s view, most have suffered with the average price of a desktop computer falling continuously. However, the laptop enjoyed up to a 25% premium over a desktop with the same specification. Thus the increase in % of sales from laptops, has, to some extent, mitigated the impact of fall in prices of the desktop enabling retailers to maintain high top line numbers.
Growing netbook sales bring falling average prices to the fore once again: The latest development of netbook sales driving overall computing sales, has once again put pressure on
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 17 KEY THEMES
the average sale price of computing items. Netbooks are essentially more basic versions of a traditional laptop and primarily used for the Internet and basic applications as opposed to serious gaming or photo/video editing. The average price of a netbook in 2008 was around $400 vs. $700 for a laptop. An increasing proportion of sales (circa. 20% as of Dec 2008 in the UK, and we would expect a similar figure for Saudi Arabia) are now coming from the netbook segment with this renewing top line pressure on IT retailers. Thus, the average value of the transaction is falling although the number of transactions maybe higher. We note however that the margins for netbooks are said to be the same as for laptops, so there should be no pressure on this front due to the increased popularity of netbooks.
Exhibit 18: Comparison of netbook vs. laptop Netbook Laptop Email, chat, IM 3 3 Social networking (blog, Facebook) 3 3 Surf the web on the go 3 3 Multitask 3 Stream audio/SD video 3 3 Create and edit videos, photos 3 Encode music 3 Watch HD movies 3 Play games Casual online games PC games Run complex office software 3 Related processor
Source: NCBC Research, Intel
Exhibit 19: Netbook growth as a percentage of the total laptop sub-category
100%
75%
50%
25%
0% Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Netbooks All other laptops
Source: Pricegrabber.com
Manufacturers have attempted to counter this trend by maintaining high-end laptops that cater to the tech conscious as well as the fashion-conscious. The release of the Dell Adamo is an example of this. Said to be the “thinnest laptop in the market” it has impressive technical specifications and is designed to make a fashion statement. Priced at around $2500, this is more than three times above the average laptop in the market.
Netbooks may be a complement to laptops, not a replacement: Some market data suggests that the netbook is not a replacement of laptops, rather, the netbook is emerging as a new sub-
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 18 KEY THEMES
category that complements the laptop. In a poll by Pricegrabber, a leading European price comparison website, 91% of consumers who owned a netbook also owned a laptop and 87% also owned a desktop. Most netbook owners seemed to have all three forms of computers with each serving a distinct purpose. This seems to indicate that a netbook is seen as a unit with its own distinct advantages (e.g. ultra portability) which are different from those of a laptop and thus owning both is not mutually exclusive ; a consumer may carry a netbook when travelling for Internet access since s/he would not be using complex software ; however, s/he may take a laptop to the university for using office-based tools such as Microsoft Excel whilst s/he may also own a desktop for serious gaming and storage of media files.
Top line pressure for Jarir: The impact of such trends on Jarir is that despite growing IT penetration in Saudi Arabia and the GCC and increasing IT spending, the average spend per customer in its stores seems to be falling. Thus, Jarir’s top line is under pressure. This is reflected in the company’ Q2-09 results where revenue fell by 7.2% YoY largely due increased sales of the cheaper netbooks as well lower prices for laptops. Although transaction numbers will have undoubtedly increased due to a higher number of stores, the average expenditure per customer will have been lower, putting pressure on overall sales numbers. However, the emergence of a segment of consumers purchasing netbooks in addition to their existing laptops should offer some respite. This should support sales since it essentially means a new sub- category of computing items in the form of the netbook.
Exhibit 20: Average laptop price (US $)
1800 1750 1640 1600
1450 1400 1330 1250 1200
1081 1000 990 940 864 800
658 600 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Wall Street Journal, Reuters, PriceRunner.com, NCBC Research ; * - 2009 as of Feb
Options exist in order to support the top line: Going forward, we believe industry pricing dynamics could emerge as a major concern for Jarir. High-end products will continue to be manufactured, however the target markets for these products are the fashion conscious and not the mass consumers. The price of a generic laptop/netbook will continue to be under pressure in the coming years, with pricing increasingly emerging as an important differentiating factor among manufacturers, especially in the current tough economic climate. The increase in competition from far-eastern manufacturers such as Asus and Acer has taken the pricing war in laptops to a new frontier and we see no indication of this trend reversing. Of course, there will be a limit to how low prices can go and manufacturers will be innovative in terms of adding extra functionalities to justify higher prices. For instance, manufacturers would emphasize looks and design vs. the actual technical functionalities. Such factors should provide a cushion to the continued pricing pressure. Retailers will also use other avenues to try and sustain the top line
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 19 KEY THEMES
such as offering bundled packages, warranties and post-purchase care. Nevertheless, pricing pressure would remain a major concern.
Sales evolution shows IT dominance
Still a bookstore, but increasingly less so: Although Jarir’s stores are called “Jarir Bookstore” and its tagline associated with this is “not just a bookstore”, the reality is that, its book sales are shrinking as a percentage of overall group sales. In 2008 only 6% sales came from books, a number, which we believe, has reduced by 11% in the past six years and will continue to be under pressure in the coming years. The percentage of sales coming from the IT and IT peripherals stood at 63% in 2008, up from 22% in 2000. The decision taken by management to increasingly focus on the IT sector given its massive potential, we believe indicates the quality of management and its ability to anticipate trends in consumer buying. This is even more impressive given the tendency for family-run businesses to often be bureaucratic and slow in responding to change in the face of changing sector dynamics. We believe Jarir will continue with its focus on IT and IT peripherals.
Exhibit 21: Revenue break-up of product category
120%
100%
80%
60%
40%
20%
0% 2000 2008 Books School supplies Office supplies IT & peripherals Others
Source: Company, NCBC Research
Move away from books makes sense, but the segment will remain: The books business is a difficult market. Although margins are usually higher than those for electronics (30-50% vs. <10%), sales growth is often muted at 2-3% per annum.
Although the books business has the advantage of being a defensive sector, or arguably, a counter cyclical sector, it is unlikely to see high sales growth numbers, although an increased emphasis on education and increasing literacy rates should aid the books business. In its 2009 budget, the Saudi Arabian government announced a 16.3% rise in the amount to be spent on education. Literacy rates in Saudi Arabia, at 79%, are also relatively low compared with neighboring countries, offering room for growth. These factors should help generate growth for Jarir’s book business. Nevertheless, we do not believe this product line will be a source of high growth.
Disproportionate amount of floor space given to books – rent saving possible: From our visits to Jarir stores across Saudi Arabia, an interesting observation is the disproportionate floor space dedicated to books despite this sector accounting for only 6% of total sales. In many stores, it is not unusual to see 50% of the store floor space dedicated to books. Although rent could be saved in minimizing the amount of floor space dedicated to books, we believe Jarir will continue to
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 20 KEY THEMES
emphasize this business as this is its “trophy asset” and the company is known to have the widest selection of books available in the Kingdom, a reputation it would not want to tarnish.
Impact of global downturn mitigated by employment dynamics
High public sector employment should soften impact of global slowdown: Electronic goods such as laptops and cameras are discretionary items because they are often bought on a “want” basis vs. a “need” basis. Thus, in times of economic uncertainty, sales of these items usually fall significantly as their demand elasticity is very high. If a consumer faces uncertainty over his/her job or income, s/he will more likely halt the purchase of these discretionary items vs. staple items.
The scenario in Saudi Arabia, however, is different because a significantly higher % of the Saudi working population is employed in the public sector. Thus, in times of economic uncertainty, there is a more limited impact in terms of increased unemployment or reduced disposable incomes due to a majority of people being secure in their jobs. This results in a much softer impact on the sales of discretionary goods vs. countries where a larger percentage of the population is employed in the private sector.
The impact of the above on Jarir is that we believe the 2009 and 2010 sales numbers will not be hit as badly as would be the case for global retailers of similar consumer items. Although we have seen top line weakness in Q2-09, this has primarily been to lower average price of items vs. fewer consumers buying items.
We believe the disproportionate number of people working in the public sector is not specific to Saudi Arabia alone but the trend prevails throughout the GCC. Thus Jarir’s sales from its non- Saudi locations should also see a repetition of the Saudi trend.
Unlike any other country or region, the GCC public sector employment as a percentage of total employment is estimated to have stood at 58% in 2007. In the GCC countries, the number stands at above 80% in Qatar, the UAE and Kuwait and is around 50% in Saudi Arabia. It is the lowest in Bahrain, at 34%. These number are significantly higher than the corresponding figure in the US (16.1%) the EU (30%) and the UK (20%)
Exhibit 22: % of national workforce (excluding expats) in public sector employment
EU
UK
US
GCC
Oman
Bahrain
UAE
Qatar
Kuwait
KSA
0% 20% 40% 60% 80% 100%
Source: World Bank, NCBC Research, Government websites, ILO
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 21 KEY THEMES
Overall, from the portfolio of products sold by Jarir, we believe its electronic range will be most susceptible to impact from the downturn in the economy given its “discretionary” status; sales of books are expected to be the least impacted by the slowdown as these constitute a very small percentage of a consumer’s disposable income and so will be defensive.
Seasonality of sales
Sales and margins for Jarir are highly seasonal and primarily impacted by the start of the school year. This is when there is an increase in the number of school related items as well as IT/IT peripherals purchased leading to higher overall sales and margins due to the type of products purchased. There is also some link to the calendar year start when companies may order new items to replenish their IT and stationary needs.
Typically, the Saudi academic year starts in Q3. However, this year, Ramadan is from August 20 to September 20, thus the opening of schools will be delayed to Q4. This may lead to some of the increase in sales for school related items spilling over into 4Q-09 vs. 3Q-09.
As we can see from the chart below, over the past few years, when Ramadan and the start of the academic year have not overlapped, 3Q has usually been Jarir’s strongest sales quarter.
Exhibit 23: Seasonality of sales and income (SRmn)
750
600
450
(SR mn) 300
150
0 Q1 06 Q1 07 Q1 08 Q1 09 Q2 06 Q2 07 Q2 08 Q2 09 Q3 06 Q3 07 Q3 08 Q3 09 Q4 06 Q4 07 Q4 08 Q4 09
Sales Net income
Source: Company, NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 22 Business focus
Company Operations
Jarir has a diversified product portfolio including office and school supplies, stationary products, children’s toys, books, computer systems and software. The office supplies business is largely linked to overall economic growth, while the IT and peripherals business is mostly consumer oriented and is indirectly related to hydrocarbon-related business cycles. The school supplies business, though resilient to an economic downturn, is prone to annual cycles. Overall, demographics and high disposable incomes are key growth drivers for Jarir’s business. Our industry discussion is based broadly on IT and peripherals, the market for which represents around 65% of the combined value of all the five businesses in which Jarir operates. Lack of sufficient industry data/information limits our ability to analyze the books, school and office supplies business.
Jarir has the largest retail network of 21 stores in Saudi Arabia today. The company has also diversified its geographic presence into the fast-growing markets of Qatar (two stores) and Abu Dhabi and Kuwait with one store each.
The restructuring of Jarir in 2000 by merging the Retail and Wholesale divisions has unlocked value by synergizing benefits of products in both segments that were largely common. Until 2000, Jarir Bookstore Company looked after the retail business while Jarir Marketing Company managed the wholesale business.
Below we discuss the operational aspects of the two divisions:
Retail
The retail division caters primarily to consumer end-users. Its network consists of 21 bookstores in KSA, two in Doha and one each in Abu Dhabi and Kuwait that serve walk-in customers. The company’s retail showroom (widely known as Jarir Bookstore) has an average selling space of around 2,800 sq mt (30,000 sq ft), displaying about 90,000 SKUs covering the entire range of products sold by Jarir. The division also includes five corporate sales offices for big clients/corporate companies. Government organizations, Aramco, hospitals and banks are key customers on this side of the business.
Based on new stores opening at regular intervals, Jarir’s total selling space increased from 19,148 sq mt in 1998 to 36,786 sq mt in 2002 and to an estimated 65,200 sq mt in 2008. This implies approximately 10% CAGR in FY02-FY08. Consequently, the division’s revenue grew at a CAGR of 32% in FY02-FY08 to reach SR2,231mn in 2008. During the same period, contribution of the Retail segment to total revenues also went up from 76.3% in FY02 to 88.5% in FY08. Going forward, we expect the division to register 10% CAGR in revenue to SR4, 359mn in FY15 (91.7% of total revenue), as store expansion plans yields results.
Wholesale
The Wholesale division primarily sells school and office supplies to resellers and retailers, who, in turn, sell it end-users. Under this division established in 1979, Jarir operates six showrooms and seven wholesale offices. The division offers more than 1,600 products under its ROCO and Royal Falcon labels. While ROCO covers high-end products, Royal Falcon targets the lower
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 23 BUSINESS FOCUS
end. The company proactively monitors customer preferences across its stores and changes its products to incorporate their needs.
As the total number of wholesale showrooms has remained unchanged over the past five years, the division’s contribution to total revenue has dropped from 23.7% in FY02 to 11.5% in FY08. The number stood at 40.4% in FY97. Given that this business operates on a reseller model, margins at the Wholesale division are traditionally lower than those in the Retail division. Furthermore, the company has not indicated plans to expand the Wholesale division. As a result, we expect the division’s contribution to total revenues to decrease to 8.3% by FY15. We forecast the Wholesale division to record 5% revenue CAGR to SR394.4mn by FY15. 7 P’s help Jarir stay a step ahead of competition
The company adheres to the 7 P’s of marketing aimed at delivering the best products and services to customers. In the following section, we analyze each of the seven elements of the marketing mix (or 7 P’s of marketing) from Jarir’s point of view.
Product – in step with the times
Jarir has a reputation of continuously monitoring user trends and aligning its products to meet customer needs. Although, some of Jarir’s products are dynamic, entailing the risk of rapid obsolescence, the company’s proactive initiatives have resulted in its preeminence. The company has successfully identified and capitalized on business opportunities ahead of others. For instance, from a small shop selling only books, today Jarir has a sizeable presence in office supplies, school supplies, IT and peripherals and others (include stationeries, arts and gifts). Exhibit 24 below illustrates how quickly and efficiently Jarir responds to the changing needs of consumers. In addition, Jarir’s after sales services, a rarity among GCC companies in this space, is considered the best in the region.
Exhibit 24: Product break-up of sales (%), 2000 and 2008
120%
100%
80%
60%
40%
20%
0% 2000 2008 Books School supplies Office supplies IT & peripherals Others
Source: Company, NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 24 BUSINESS FOCUS
Price – on par with other retailers
Jarir’s products are competitively priced, as the company focuses on cost rationalization strategies while maintaining quality. For instance, the company has outsourced the manufacturing of own brands (Royal Falcon and ROCO) to companies in Asia. In product categories such as electronics, Jarir does not have fixed agreements with suppliers, but purchases these items from local sellers in bulk at discounts. Jarir’s huge warehouse and distribution centre also allows the company to accept large export orders.
Overall, we find that Jarir is competitively priced in comparison to its peers. Finding products which are exactly the same in terms of quality and specification at Jarir and all of its competitors has been difficult; however in Exhibit 25 we display some products which are available in Jarir and its main competitor in the IT sector, Extra. For example on the various laptops which we observe, Jarir charges only SR9 more than Extra. This we do not think is to do with pricing policy rather the psychology of pricing with Jarir preferring all prices to finish on a 9 vs. Extra who finishes on a 0. Even though the price of good may be broadly same, we feel the adding on of extras may give Jarir the lead with consumers. Jarir seems to include more add-ons like free bags, computing accessories etc than its rivals, making its proposition more alluring to consumers who feel they have received something for free.
Exhibit 25: Price comparison between Jarir and competitors (SR)
Average price between Jarir Item Extras? Price in Jarir Price in Extra and competitors Western Digital 500GB external hard 339 239 100 drive
SanDisk 8GB USB drive 79 85 (6) Sony DSC-W220 Camera Jarir also includes free bag 999 999 0 Panasonic DMC-FX180 Camera Jarir also includes free 2GB memory card and bag 1,599 1,599 0 Xbox Elite with free game Jarir also includes rechargeable battery 1,549 1,799 (250) and controller
Toshiba L300-257 laptop Jarir also includes free bag, table and 1 yr extended 2,799 2,790 9 guarantee Toshiba U400-20V laptop Jarir also includes free bag, 3.5 GB USB and 1 yr 3,599 3,590 9 extended guarantee Sony VGN-CS36MJ laptop Jarir includes free bag 4,499 4,490 9 Average difference (16)
Source: From visits to relevant stores, NCBC Research
Jarir is also able to provide financing options through its tie-up with SABB. A SABB representative is present at Jarir stores and can offer on-the-spot financing deals for significant purchases. Extra is also currently providing financing options on purchases above SR2000 through SAMBA.
Place – preferring to stand alone
Jarir adopts the strategy of setting up standalone stores rather than opening outlets in malls. This is because the company believes a showroom in a mall could help post robust turnover in the initial phase due to high customer traffic, but as time progresses footfalls will drop as customers turn to new malls. Hence, the company believes that a standalone store works more effectively in establishing brand identity and recall.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 25 BUSINESS FOCUS
Promotion – banking on loyalty credits
With pricing broadly the same across competitors, Jarir is turning to other avenues to make the retail experience at its stores more rewarding. The company carries out several promotional campaigns and customer loyalty schemes for both corporate and retail shoppers. Jarir also tracks repeat customers online and offers them cash discounts. Today, approximately 40% of the company’s customers hold the Jarir loyalty card. In addition, Jarir effectively uses various advertising methods, such as billboards and newspapers, to promote its brand and products.
People – ability to hire, groom, retain
Jarir boasts of a well-educated, highly motivated and experienced team. Of its total employee base, approximately 50% have been with the company for more than 10 years. Jarir provides in- house training to its bookstore employees, as they represent the company and its brand, given that they deal directly with customers. In its training programs, Jarir focuses on the importance of assuming responsibility, having the right attitude, self-motivation and product knowledge. The company also offers incentives such stock options, a share in profits and special bonuses to employees who meet or beat sales targets.
Process – the art of building loyalty
Process is an amalgamation of the points already outlined as it covers attracting a customer to the shop, impressing him with the product and ensuring through efficient and effective after- sales service that s/he returns. We believe Jarir scores high on all these parameters, as reflected in its strong brand image in GCC.
Physical evidence – designed to impress
Location, look and feel are of paramount importance for any store and Jarir has understood this fact well, as reflected in the company’s bookstores being landmarks in the GCC region. In the 2006 Forbes Arabia brand survey, Jarir was said to be the 9th strongest brand throughout the middle-east and number one for any form of retail store. According to management, the showroom is built by incorporating the positive aspects of many successful stores in the US. Despite SKUs as high as 90,000, the layout of a Jarir bookstore ensures that customers do not feel cluttered. Added to this, the company’s comprehensive product mix means that there is something for everyone in the family. This strategy has helped drive more traffic and sales at Jarir’s stores, thereby increasing revenue earned per sq mt of selling space. The presence of Starbucks coffee shops at showrooms adds to the shopping experience.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 26 Industry & business dynamics
Macro factors impacting Jarir
Reliance of the Saudi economy to oil price remains high: In 2008, oil prices reached an all time high of $147 per barrel following the trend of increased prices since 2002 when a barrel cost $23. This inflow of money helped per capita income of Saudis to increase to SR79, 570 in 2008, from SR39,750 in 2002. This increased the propensity of the Saudis to spend more and stimulated an investment boom in the consumer-oriented sector. However, oil prices fell sharply from the peak in July 2008 to under $40 in Dec 2008, although a recovery occurred with recent prices at around $70. This variability in and over-reliance on the oil price, coupled with unequal distribution of income (we believe current median incomes in Saudi are at least 25% lower than the GDP Per Capita figure of SR79,570 stated above), are likely to result in lower-than- expected growth in spending going forward.
Fundamentals of Saudi economy are better than most global economies: The Kingdom has low debt levels (13.5% of GDP vs. more than 100% in 1999) and ample reserves, which has added to the fiscal surplus over the past few years (estimated at SR1,665bn). This leads us to believe that KSA will fare relatively better than most countries in the face of the global economic slowdown. Moreover, the increased emphasis on diversifying the economy away from oil-based sectors (resulting in a steady 4.3% - 5.2% growth in non-oil GDP over the past four years) should impart stability to the economy. According to the IMF, Saudi Arabia’s expected GDP growth of (0.9%) and 3.9% in 2009 and 2010, respectively, will outperform world GDP growth estimates of (1.4%) and 2.5% for those years.
Favorable demographics to spur demand: More than half of the population in the Middle East is below 25 years. The median age in Western Europe is 40.5 years, whereas that in North America is 36.3.
Exhibit 26: GCC population dynamics - median age in years
45
40
35
30
25
20
15
10 1975 2000 2025 2050
Saudi Arabia Qatar Bahrain UAE Oman Kuwait
Source: Company, NCBC Research estimates
The population across the GCC countries is expected to grow at 2–3% CAGR in the next 30 years, according to estimates by the United Nations Population Division. This demographic fact means that a higher proportion of the population relative to the developed world will be currently in, or expected to go through formal education in the coming decade or so with around 250,000 new families being currently formed per year in Saudi Arabia. This generation will develop a higher dependency and use of tech-based items vs. the current working class population. These
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 27 INDUSTRY AND BUSINESS DYNAMICS
two trends suggest a positive outlook for Jarir: for demand from school supplies and laptops for students and increased demand for computing from the workplace as well as general consumer electronics.
Education sector a key focus in the GCC: The Education sector is proving to be the key beneficiary of the large oil windfall enjoyed by the GCC during 2002-2008. For instance, Saudi Arabia’s FY09 budget, approved on 22 December 2008, increased education spending by SAR17bn to SAR122.1bn. This represents a remarkable 26% of total government expenditure and constitutes the largest single category. The government made provisions for the construction of 1,500 new schools in addition to another 3,240 schools which are currently being built with 2,000 schools are to be renovated. On 26 July, the Ministry of Education in Saudi Arabia signed a SR2bn ($533m) contract with the China Railway Construction Corporation (CRCC) to build 200 schools across the country. The largest venture in the area of higher education was the completion of a SAR12bn campus at the King Khaled University. The budget further provided for the establishment of a Princess Norah University for women as well as a Medical City at Riyadh’s King Saud University.
Innovation in education has been particularly notable in Bahrain, Qatar and the UAE and considerable strides are being made across the GCC. With spending on education as a % of GDP set to remain ahead of many other developing as well as developed countries, long term prospects look positive for Jarir. (For further information on the Education sector in the GCC, please refer to our report dated February 1 2009 titled “Education in the GCC – Shaping the Future” by our Chief Economist Dr Jarmo Kotilaine)
Exhibit 27: Average public expenditure in education as a percentage of GDP Literacy rate 1965-74 1975-84 1985-94 1995-2003 2007 (latest in %) Country Bahrain - 3.3 4.1 3.6 3.3 86.5 Kuwait - 4.1 7.1 6.3 3.6 93.3 Oman - 2.1 3.6 3.9 4.0 81.4 Qatar - 3.6 4.0 3.3 3.3 89.0 Saudi Arabia 3.6 6.7 7.2 6.3 6.8 78.8 UAE - 1.3 2.0 1.7 1.4 77.9 International comparison China 1.0 2.4 2.3 2.3 2.1 92.0 Indonesia 2.6 2.1 1.1 1.2 3.5 90.4 Malaysia 4.1 6.1 5.5 6.2 4.6 89.0 Philippines - 1.8 2.4 3.4 2.5 93.0 Egypt 4.7 5.4 4.8 5.6 3.8 71.4 USA 7.0 6.7 5.2 5.4 5.7 99.0 United Kingdom 5.0 6.3 5.0 5.0 5.5 99.0 Ireland 5.0 6.0 5.2 4.3 7.7 99.0
Source: UNESCO, UNDP
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 28 INDUSTRY AND BUSINESS DYNAMICS
The regional IT market
Strong growth from a low base expected: Although the IT market in the Middle East has taken great strides in the past decade, it lags other developing countries and is significantly behind developed countries. As of 2008, BMI estimates the regional IT market to be currently worth SR32bn and will reach SR50bn by 2013. In 2008, the average Internet penetration rate in the region was around 25%, with the UAE leading with a penetration rate of above 50%. Saudi Arabia reported a penetration rate of 24%. As against this, penetration rate was 72% in the US and 69% in Europe, while India reported an Internet penetration rate of 22%.
Over the coming five years, steady progress across the region should take average penetration rates to around 40%, with Saudi Arabia touching 30% and Qatar and the UAE 80%. This progress indicates that the broader market for Jarir will be increasing and the size of the IT market, as a whole, will be significantly larger.
Exhibit 28: Internet penetration rate (per capita)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% Egypt Kuwait Qatar Saudi UAE
2008 2013
Source: Company, NCBC Research estimates, Business Monitor International
Broadband penetration levels set be key: Although the broader Internet penetration rate is an important indicator of the size of the IT market in any given country, due to increased use of the Internet for gaming and downloading films, music etc, the broadband penetration rate is increasingly being used as a closer proxy to the size of an IT industry in any given country. With increased broadband penetration rates, Internet users are able to download and browse sites faster, leading to increased usage and benefits gained from using the Internet.
We find that although current broadband rates are low compared with global standards, these are expected to increase three fold in the coming five years. The current broadband penetration rate in the GCC is estimated at 8% and is expected to increase to 30% by 2013. Saudi Arabia is currently at 6% and is expected to increase to 30% by 2013.
We believe that in some ways, the development of broadband infrastructure is more important than the more generic increase in Internet penetration. This is because with broadband, Internet users can fully benefit from the potential of the Internet. We see the increased emphasis on investing in the national IT infrastructure as a positive sign for Jarir as this will encourage consumers to invest more in IT-based products.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 29 INDUSTRY AND BUSINESS DYNAMICS
Exhibit 29: Broadband penetration rate
35%
30%
25%
20%
15%
10%
5%
0% Egypt Kuwait Qatar Saudi UAE
2008 2013
Source: Company, NCBC Research estimates, Business Monitor International
The Saudi IT market
Saudi the biggest piece in a growing pie: According to the 3Q-09 BMI IT report, Saudi Arabia has the biggest IT market in the region, valued at SR13.5bn in 2008 and is expected to rise to SR18.4bn by 2013, a CAGR of 8%. This roughly equates to 40% of the total regional IT market. As mentioned, internet penetration in Saudi Arabia is expected to reach nearly 30% by 2013 vs. 23% in 2008. Access to broadband, a key determinant of overall increase of computer usage, is expected to grow significantly from 6.4% in 2008 to 31% by 2013.
Exhibit 30: 2008 IT market size
Egypt
Kuwait
Qatar
Saudi
UA E
0 2000 4000 6000 8000 10000 12000 14000 (SR mn)
Source: Company, NCBC Research estimates, Business Monitor International
Sales of computers (PCs, laptops, notebooks) in Saudi Arabia are expected to reach SR6bn in 2009 and are expected to grow at 8% CAGR between FY08 and FY13. As mentioned earlier, we believe the number of units sold so far in 2009 has enjoyed good growth, despite the wider economic slowdown; however, the average value of the items being sold is falling, leading to top line pressure for Jarir. In 2008, total computer sales in Saudi remained strong with a sale of 0.5m units (60% of which were laptops/notebooks) taking the stock of installed computers to 4m. Cheaper notebooks have been the main growth driver in the IT sector, with their sales increasing 50% to 312,000 units in the GCC in FY08.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 30 INDUSTRY AND BUSINESS DYNAMICS
Government initiatives should help drive sector growth: The Saudi government has implemented several initiatives recently which should foster growth of the IT sector. In June 2008, Saudi’s governing Shura Council approved a draft national strategy for the IT industry with the aim to increase its contribution to GDP to 20% by 2010. Several economic and smart cities are being planned throughout the Kingdom; these should help train the new generation in the latest technologies and make the IT sector more integral to the running of the economy. The most technologically focused project, Knowledge Economic City (KEC), is being constructed in Madinah at a cost of $6bn and aims to be a technology hub for the Kingdom. Through the “Yusr” project, the government has highlighted its aim to bring all governmental departments online with $800mn being set aside in 2007 for this project. As previously mentioned, the increased focus on the education sector will also help drive growth in the Saudi IT sector.
All sub-markets should enjoy strong growth: The IT market is sub-categorized into hardware, software and services. Hardware comprises computer sales, largely PCs, notebooks and accessories. The market, which roughly accounts for half of the total Saudi IT market, is estimated to have been worth SR5.6bn in 2008 and is expected to grow at 8% CAGR during FY09-FY13. IT Services, the second-largest category in terms of market size, is estimated to have been worth SR3.7bn in 2008 and growing at 9% CAGR. Lastly, the software market is estimated to have been worth SR2.3bn in 2008 and is growing at 10% CAGR.
Exhibit 31: Saudi IT sub-market size
9
8
7
6
5
4 SR (bn)
3
2
1
0 Hardware IT services Software
2008 2013
Source: Company, NCBC Research estimates, Business Monitor International
Developments in the telecom industry should benefit the IT sector: Liberalization of the telecom sector has led to the issuance of new licenses for fixed, mobile and fixed-wireless broadband services, which is expected to drive Internet usage in the region. Increased competition following the entry of new players will result in price declines, boosting Internet penetration rates. In Saudi Arabia, new entrants such as Atheeb’s Go and Mobily are challenging the historic monopoly of STC and providing alternatives regarding internet service providers.
Some time lag on large projects to be expected, but low percentage being cancelled: The collapse of the oil price from $147 a year ago and the poor economic conditions coupled with tight access to credit has put a dent to the ambitious programmes the Saudi government had planned for the coming years. Delays in various large-scale projects have already started happening due to paucity of finance. However, the actual % being delayed or cancelled is relatively low (according to Proleads Group, only 80 projects worth $20bn out of 720 projects
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 31 INDUSTRY AND BUSINESS DYNAMICS
worth $430bn), and far less when compared to the other countries in the GCC (e.g. 300 projects cancelled or on hold in the UAE worth $300bn). Also, considering the low computer penetration rates in KSA, we believe the impact of project delays and spending cuts on the IT industry will be marginal.
Fragmented and competitive landscape: The various businesses in which Jarir operates in Saudi Arabia are fragmented and mainly comprise small local players. In the IT and IT peripherals business line Jarir’s main competitors number around half a dozen, in addition to many smaller independent stores in this market. Another recent trend has been of the traditional grocery retailers expanding into electronics through their hypermarket stores. HyperPanda (the hypermarket brand of the Panda supermarket chain, owned by Savola) and Carrefour now sell electronics. Although they do not offer as extensive a range of products like the specialist electronics stores, they are known for their aggressive pricing policy to draw customers. This means that the Saudi consumer electronics market is bracing itself for an intensely competitive scenario where aggressive pricing, efficient processing and an extensive range of products are key determinants in order to increase market share. We highlight the key competitors to Jarir in Appendix 1.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 32 Financial performance
Model unraveled
Before we highlight the financial performance of Jarir and our forecasts, we believe it is important to briefly highlight our modeling methodology on how we came to the numbers below.
In our model, we have used sales per sq. mt, the size of stores and the number of stores as the key drivers of the top line. We have also attempted to demarcate between same store sales and sales from new stores into our model. Thus, by forecasting the number of stores, the average sales per store and the size of the average store, we can compute the sales number.
Based on interactions with the Jarir management and our own estimates, we believe it takes around a year for a new store to break even and 2-3 years before it is running at 100% efficiency. The down cycle of the economy, which Jarir currently faces, is another factor that could delay the progress of a store picking up 100% efficiency.
We have incorporated both these factors into our model; for the inefficiency aspect, we have taken only 60% of “normal” sales in year one for a new store and 80% in year two. This has been done to incorporate into our model the inefficiencies one will find in new stores. Further, to factor in the weak economic cycle into our model, we have subtracted another 50% of “normal” sales from year one from new stores. For example, if a store was expected to make SR100mn in its first year, we have multiplied this by 50% to incorporate the economic cyclical impact (SR100mn x 50% = SR50mn) and then by 60% to incorporate the inefficiency effect of a new store (SR50mn x 60% = SR30mn). In year two, the sales number has only been multiplied by 80% to incorporate the inefficiency of the new store, which we think will still be present – no cyclical factor is multiplied here
Exhibit 32: Modeling method of new stores Year 1 Year 2 Year 3 Factors (%) a) Cyclical factor 50 100 100 b) Efficiency factor 60 80 100 New store 1) "Normal" revenue 100 110 120 2) Multiplied by cyclical factor (1) x (a) = 50 (1) x (a) = 110 (1) x (a) = 120 3) Multiplied by efficiency factor (2) x (b) = 30 (2) x (b) = 88 (2) x (b) = 120 4) Reported revenue 30 88 120
Source: Company, NCBC Research estimates
Working down the P&L, we have used a range of methods to estimate costs but primarily have focused on the percentage of sales a particular cost line is recording, keeping in mind the broader strategy of the company (e.g. number of new stores to be opened). This has allowed us to tweak specific costs and estimate how these should grow as a % of sales.
Revenue
Geographic and sector expansion has led to strong top line growth to date: Jarir reported a healthy 29% CAGR in revenue in FY02-FY08, largely on the back of 32% CAGR in the retail segment. This growth is attributable to Jarir’s store expansion in KSA and other GCC countries which was supported by increased demand for IT and peripherals. Jarir opened nine new stores in KSA in 2002-2008, taking its total store count to 20; total selling space increased from 36,786 sq
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 33 FINANCIAL PERFORMANCE
mt in 2002 to an estimated 65,200 sq mt during the same period. Encouraged by the success of its first non-KSA venture in Qatar in 2001, Jarir opened one more in Abu Dhabi and Kuwait in 2002 and 2004, respectively, with a further store opened in Qatar in 1H-09. Consequently, Jarir’s revenue from non-KSA operations registered a CAGR of 43% in FY02-FY08. However, the company’s wholesale division reported a relatively subdued CAGR of 14% in FY02-FY08.
Weaker economy to slow growth, but still double-digit growth: The current economic scenario hints at a slowdown in consumer spending. However, the Saudi market for IT products remains relatively untapped, as reflected by low computer penetration rates. Given this scenario, we believe Jarir’s expansion plans will enable it to record 9% CAGR in revenue over our forecast period up to FY15. We expect FY09 sales to grow 5% to SR2.7bn with FY10 sales increasing 12% to SR3.0bn. A majority of this growth is set to come from the retail division, which we expect will grow 5.8% in FY09 and 13% in FY10.
Exhibit 33: Revenues from different segments
Retail driver Revenues break-up (SR mn)
45 2,950 5,000
36 2,880 4,000
27 2,810 3,000
18 2,740 2,000
9 2,670 1,000
0 2,600 0 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2008E 2009E 2010E 2011E 2012E 2013E
Total store count Avg selling space (RHS - Sq Mt) Retail Wholesale Total
Source: Company, NCBC Research
Margins
Margin contraction seen in recent years: Jarir’s gross margins have contracted from 26.5% in FY02 to 17.8% in FY08. From our conversations with management, we believe the key reason for this is the changing sales mix at the company. As exhibit 24 indicated, over the last six years there has been a shift from traditional media (higher margins) to new media (low margins). In 2000 the books business line, where gross margins are around 40%, made up 18% of sales. In 2008, this was only 6%. Conversely sales from IT, where gross margins are less than 10%, made up only 22% of group sales in 2000 vs. 63% in 2008. The high cost of merchandise (approximately 90% if its imports are from US, Europe and the Far East) coupled with declining selling prices owing to rising competition has also contributed to margin pressure.
Expected margin stabilization going forward: Going forward, we believe there will be more limited pressure on margins as the sales mix will remain relatively steady. Jarir has also indicated it plans to purchase more merchandise from the Far East, which is relatively cheaper compared with the US and Europe. We expect margins to remain subdued but decline at lower rates, supported by decreased product costs. For 2009, we expect an increase in gross margins to 18.8% as increased buying from the far-east starts to flow through, with a margin of 18.1% in FY15.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 34 FINANCIAL PERFORMANCE
Control on SG&A has help helped bolster operating figures: SG&A expenses, as a percentage of revenue, fell from a high of 8.2% in FY02 to 4.0% in FY08 because: a) Jarir’s turnover increased following the launch of new stores in KSA and other GCC countries; and b) the company kept selling expenses under check. 56% of SG&A expenses are employee expenses, with 15% from advertisements expenses and the remaining 29% classified as other overheads. Going forward, we anticipate SG&A expenses to remain at 4.3-4.8%. Accordingly, we forecast operating margins to decrease little to 13.3% by FY15 from 13.9% in FY08.
Compared with global peers, Jarir’s EBITDA and net margins estimated for FY09 look higher at 15.1% and 14.1% respectively. We believe this is due to lower variable costs such as salaries and rents for the stores etc vs. international peers who, for example, are often paying premium rents to be located in key malls. Due to the strength of the Jarir brand, it does not need to compete with others, and pay a premium, to be located in the latest mall, but rather can choose a location which it feels will best suit its own needs.
Exhibit 34: Margin estimate (2009); Jarir vs. peers
16%
12%
8%
4%
0%
-4% RadioShack Staples WH Smith OfficeMax Best Buy Jarir Marketing
EBITDA margin Net margin
Source: Company, NCBC Research estimates
Taxation
Companies in KSA are subject to Zakat payment. Zakat an “Islamic” wealth tax levied on Saudi and GCC nationals, Saudi or GCC-owned entities; and shareholders in limited liability companies. Jarir has provided for Zakat between 2.6-4.0% over the past seven years. We assume a marginal tax rate of 3.6% over the forecast period.
Growth in net profit
Over the past five years, Jarir’s net profit has grown at 23% CAGR from SR94.7mn in FY02 to SR332.8mn in FY08. However, we expect net profit to expand at 10% CAGR over our forecast period as fierce competition will put pressure on margins. We expect net margins to contract to 13.3% in FY15 from 13.2% in FY08 and the 14.1% we expect in FY-09. The rise in margin expected in 2009 is primarily due to lower merchandize costs and Jarir’s strategy to purchase more from Asian countries where costs are relatively lower as compared to Europe. The impact of this is clearly reflected in 1H-09 COGS as a % of sales (80.8%) coming in lower than 1H-08 (81.9%). We expect this trend to continue in 2H 09, resulting in margin gains for FY-09.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 35 FINANCIAL PERFORMANCE
Fixed asset and capex plans
Of Jarir’s 25 stores across the GCC, six are company-owned and the remaining leased. Jarir has changed its investment strategy in the past few years, relying mostly on long-term lease contracts (10-20 years) for new store plans rather than outright purchases. Jarir purchased land in Egypt to expand its retail business in overseas markets. But due to the economic uncertainty in the country and operational issues, Jarir has kept its plans on hold. In FY06, Jarir ventured into lease financing of real estate in Egypt through Jarir-Egypt Financial Leasing Company. In FY07, the company acquired six plots of land for SR170mn; the land is currently valued at SR260mn. As a result, Jarir’s total assets grew 26.8% YoY in FY07, with land bank contributing approximately 45% of its total asset base.
From our conversations with management, we expect one of the six plots of land to be used for the building of a new warehouse with the remaining five plots used for new showrooms. Beyond this, we have assumed all further stores will be leased. In its real estate business, Jarir plans to initiate several other real estate projects by acquiring residential and commercial property and land. We expect the company to resort to short-term and long-term funding in addition to internal accruals to fund its capex plans.
Historically, Jarir’s capital spending has varied significantly from nothing in FY02 to as high as SR179mn in FY07. Jarir’s capex as percentage of sales has varied from 0.9% in FY05 to 10.3% in FY07.
We believe built stores cost around SR25-30mn in capex with leased stores costing around SR5mn. In addition, the new warehouse, the construction of which should commence in 2010, is expected to cost SR20mn. Additionally we expect around SR0.5mn to be spent per store on refurbishments with around 1/5th of stores being refurbished each year (i.e. each store will be refurbished every 5-7 years). We have estimated other capex expenditures such as ongoing developments of facilities, transport etc as 0.2% of sales. With these estimates, we forecast group capex to be SR50mn in 2009, equivalent to 1.9% of group sales. By 2015, we expect capex of SR47.5mn, or 1.0% of group sales.
Exhibit 35: Capex (SR mn) and as % of sales 2005-2015
300 12%
240 10%
180 7%
120 5%
60 2%
0 0% 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Capex as % of sales
Source: Company, NCBC Research estimates
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 36 FINANCIAL PERFORMANCE
Working capital management
Jarir’s strong working capital management helped generate robust operating cash flows, which increased to SR310.9mn in FY08 from SR97.1mn FY02. The company has a good inventory turnover ratio, which increased steadily from 2.7x in FY03 to 5.4x in FY08. The company’s average inventory conversion period also declined to 68 days in FY08 from 136 days in FY03, reflecting improved inventory management.
Jarir also seems to be managing its debtors well. Receivables outstanding for the company declined to 24 days in FY08 from 60 days in FY02. Payables outstanding also declined from a high of 58 days in FY02 to 33 days in FY08. Overall, the company’s operating cycle fell to 81 days in FY08 from 180 days in FY02.
Cash and investments
Jarir usually maintains a small portion of cash on its balance sheet. The company uses liquid funds to execute capex plans and returns the remaining to shareholders as dividends. This clearly reflects in Jarir’s cash and cash equivalents, which have remained at SR6-33mn during FY02-FY08. As of 31 December 2008, the number stood at SR24mn. Investment property (SR8mn in FY08) represents company-owned property held to earn rentals. Jarir’s equity investment of SR28mn in FY08 represents its stake in a private company. The company does not have any other investments, apart from property, plant and equipment.
Balance sheet - Leverage
Historically, Jarir has never relied heavily on debt. The company had SR90mn in short-term loans in FY02; the number declined to negligible levels by end-FY06. However, the company’s short-term loans increased to SR190mn in FY07, as Jarir entered the real estate sector. The company paid off most of the debt by end-FY07. As of 2008, the company’s short-term debt stood at SR42 million, of which SR40 million was in securitization loans from Banque Saudi Fransi. In 3Q-08, the company for the first time in several years, took a long-term loan of SR150mn, which it intends to pay off in equal quarterly installments of SR25 million by FY12.
Jarir’s short-term loans consist of floating rate revolving bank facilities, mainly used for funding its operational, financial and investment activities. Going forward, we expect the company to continue using the revolving facility to meet its short term funding needs. We expect debt levels of SR172mn in 2009 and SR32mn in 2015, equating to 28% and (2%) on a net debt/Ebitda basis.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 37 FINANCIAL PERFORMANCE
Profitability ratios
Jarir’s return on equity (ROE) has increased from 27.2% in FY03 to 51.4% in FY08, despite the decline in net margins. A similar trend was observed in the company’s return on assets (ROA), which also grew steadily from 19% to 30% during the same period. The table below provides a DuPont analysis, highlighting the reasons for the increase.
Exhibit 36: DuPont breakdown of ROE Particulars 2006 20072008 Asset turnover (times) 1.89 1.82 2.26 Net profit margin (%) 16.2 15.9 13.2 Equity multiplier (times) 1.39 1.54 1.72 Return on equity (%) 42.6 44.5 51.4 Return on assets (%) 30.3 28.9 29.8
Source: Company, NCBC Research
Jarir’s asset turnover ratio rose to 2.26 in FY08 from 1.16 in FY03 reflecting the company’s efficiency at using its assets in generating revenues and in line with general trend seen in the retailing industry. However, Jarir’s net profit margin declined to 13.2% in FY08 from 16.4% in FY03. Historically, the company has not relied a great deal on debt. In FY07, however, Jarir made significant use of the bank revolving facility. The company recently raised SR150mn in long-term debt for development of new stores and a warehouse. Consequently the company’s leverage ratio increased to 1.72x in FY08, from a low of 1.39x in 2006 and 1.43x in 2003.
This indicates that a healthy rise in asset turnover ratio more than offset lower net profit margins, leading to sharp rise in ROE and ROA. As Jarir pays out in excess of 80% of its net income in dividends, this has led to the net income figure over the past few years to grow at a quicker rate than the equity figure afforded to Jarir.
Going forward, we expect Jarir to further leverage its asset base to generate sales. As such we expect asset turnover ratio to continue to climb in outer years. Although margin is expected to improve in 2009, pressure will likely remain owing to cutthroat and competitive pricing leading to margin contraction. Additionally, as Jarir clear off its debt, equity multiplier will likely trend lower. Net to net, we expect higher asset turnover ratio to more than offset declining margin and leverage, resulting in expansion of ROE and ROA over our forecasted period.
Exhibit 37: DuPont breakdown of ROE Particulars 2009 20102011 Asset turnover (times) 2.21 2.29 2.42 Net profit margin (%) 14.1 13.9 13.7 Equity multiplier (times) 1.67 1.65 1.64 Return on equity (%) 52.0 52.7 54.1 Return on assets (%) 31.1 31.9 33.1
Source: Company, NCBC Research
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 38 FINANCIAL PERFORMANCE
NCBC vs. Consensus
The key problem in comparing our numbers vs. consensus is the lack of up to date data available from other brokers. In only using data from brokers who have updated on the stock in the past six months, we find that our top line numbers are around 5% lower than consensus, with this difference gradually shrinking as we move down the P&L. On a net profit basis, our ’09 and ’10 figures are broadly in line with consensus. Our PT of SR165 is 6% higher than the consensus of SR155.5. We believe the difference on the top line is due to our conservative estimates on how many new stores can be opened. On the bottom line, the difference is from our assumption that Jarir will be better able to control its costs.
Exhibit 38: NCBC vs. consensus estimate Figures (SR mn), unless specified 2009 2010 2011 Revenue Consensus 2,780 3,219 3,805 NCBC 2,656 2,972 3,394 Var % (4.5) (7.7) (10.8) EBITDA Consensus 399 452 520 NCBC 400 438 491 Var % 0.3 (3.1) (5.6) Net Profit Consensus 369 419 480 NCBC 373 414 465 Var % 1.2 (1.3) (3.2) PT Consensus 155.5 NCBC 164.8 Var % 6.0
Source: Reuters, NCBC estimates
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 39 Appendix
Key competitors
Obeikwan: This business is essentially a smaller-scale version of Jarir in that it has a similar range of products — laptops, IT peripherals, books, stationary etc; however, the ranges available within each of these product lines are more limited than Jarir’s. It competes with Jarir mainly on price.
Extra: This is an electronics retailer that focuses on all household goods such as microwaves, fridge freezers and washing machines. It also offers an impressive range of IT and IT peripherals, combined with various other consumer electronics such as cameras, PDA’s, game stations. It currently has 11 number of stores in the Kingdom and plans to expand on this in the coming few years. Its unique selling point is its extensive array of electronic items, which makes it a “one stop shop” for all electronics for the modern home. However, if the consumer is specifically looking for a laptop, s/he may prefer a specialist store such as Jarir. We believe this is one of the strongest competitors to Jarir in the IT business.
Tihama Bookstores: This is a specialist bookstore which has a good range of books on offer, although these are largely Arabic. Tihama Bookstores is part of the larger publically listed Tihama group (Market cap approx SR500mn) which is also involved in advertising and market research. It currently has 25 stores in Saudi Arabia.
CompuMe: CompuMe Saudi Arabia, a subsidiary of National technology Group (NTG), is a multi-national conglomerate group with over 20 specialized IT businesses. CompuMe is one of the largest Digital Technology Retailer in Saudi Arabia established in 1999, operating through four stores in the Kingdom. It is an IT specialist store so does not stock other electronics and is much smaller than Jarir in terms of availability of different models.
Hyper Panda: This is the supermarket arm of Savola and the largest organized food retailer in Saudi Arabia by market share. The hypermarket format, which includes up to 40% non-food items, has started selling electronics, including laptops and accessories. Although this is a small percentage of its current business, an aggressive move into this area would intensify competition for Jarir.
Carrefour: This is one of the leading international organized grocery retailers to have a presence in the Middle East. Carrefour currently has 9 stores in Saudi Arabia with a total of 31 stores in the region (11 in UAE, 3 in Qatar, 2 in Oman, 1 in Kuwait with 4 in Egypt and 1 in Jordan). Similar to HyperPanda, it has an increasing % of items dedicated to non-food and is involved in laptops and accessories. Currently this is a small percentage of its business; nevertheless, any aggressive intention to promote this business could intensify competition and create pricing pressure for Jarir.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 40 Financials
Key financials
(SR mn) 2008 2009E 2010E 2011E 2012E 2013E Income statement Net sales 2,520 2,656 2,972 3,394 3,852 4,269 % change 44.7 5.4 11.9 14.2 13.5 10.8 Operating expenses 2,171 2,271 2,551 2,921 3,324 3,684 Operating profit 349 384 421 472 528 585 Other income 15 15 16 17 18 18 EBITDA 363 400 438 491 547 606 % change 25.0 10.2 9.4 12.0 11.5 10.7 Dep. & Amortization 14 16 17 18 20 21 EBIT 349 384421 472 528585 Interest Income, net (13) (12) (8) (8) (6) (4) Pre-tax profit 342 387 429 482 539 599 Tax (Zakat) 9 14 15 17 19 21 Net income^ 333 373 414 465 520 578 % change 20.5 12.2 10.8 12.3 11.9 11.1 Balance sheet Current assets 605 649 700 760 811 889 Investments 8 88 8 88 Net fixed assets 522 556 618 659 702 733 Other assets 28 28 28 28 28 28 Total assets 1,163 1,241 1,354 1,454 1,549 1,657 Current liabilities 293 301 339 403 452 505 Total debt 192 172 182 152 112 72 Other liabilities 33 40 46 53 61 70 Total liabilities 476 491 535 557 563 574 Share capital 300 400 400 400 400 400 Reserves & surplus 387 350 420 498 586 683 Shareholders' funds 687 750 820 898 986 1,083 Total equity & liab 1,163 1,241 1,354 1,454 1,549 1,657 Cash flow statement Cash flow from op. (a) 311 415 407 457 501 574 Cash flow from inv.(b) (52) (50) (79) (59) (62) (51) NOPLAT 340 371406 456 509564 WC (44) 20 (30) (33) (47) (33) CAPEX (52) (50) (79) (59) (62) (51) Depreciation 14 1617 18 2021 Free cash flow 258 356 313 382 419 500 Cash flow from fin.(c) (253) (330) (334) (416) (472) (521) Debt 2 (20) 10 (30) (40) (40) Net chg. in cash (a+b+c) 6 35 (6) (18) (34) 2 Cash at start of the year 18 24 59 53 35 1 Cash at end of the year 24 59 53 35 1 3
Source: Company, NCBC Research estimates, ^ excluding minority interests
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 41 FINANCIALS
Key financials - contd.
Key ratios 2008 2009E 2010E 2011E 2012E 2013E Per share ratios (SR) EPS 8.3 9.3 10.3 11.6 13.0 14.4 Cash EPS 8.7 9.7 10.8 12.1 13.5 15.0 Div per share 6.8 7.8 8.6 9.7 10.8 12.0 Book value per share 17.2 18.7 20.5 22.4 24.6 27.1 Valuation ratios (x) P/E 15.6 14.1 12.7 11.3 10.1 9.1 P/Cash EPS 15.0 13.5 12.2 10.9 9.8 8.8 P/BV 7.6 7.0 6.4 5.9 5.3 4.9 EV/sales 1.6 2.1 1.8 1.6 1.5 1.3 EV/EBITDA 11.2 13.7 12.5 11.3 10.3 9.3 Div yield (%) 5.2 5.9 6.5 7.3 8.2 9.1 Profitability ratios (%) Gross margins 17.8 18.8 18.5 18.3 18.1 18.1 Operating margin 13.9 14.5 14.2 13.9 13.7 13.7 EBITDA margins 14.4 15.1 14.7 14.5 14.2 14.2 Net profit margins 13.2 14.1 13.9 13.7 13.5 13.5 ROE 51.4 52.0 52.7 54.1 55.2 55.9 ROA 29.8 31.1 31.9 33.1 34.6 36.1 Liquidity ratios Current ratio 2.1 2.2 2.1 1.9 1.8 1.8 Quick Ratio 0.7 0.9 0.9 0.8 0.7 0.7 Operating ratios (days) Inventory 57 52 51 49 48 47 Receivables outstanding 24 23 23 24 24 25 Payables outstanding 33 38 37 36 35 34 Operating cycle 80 75 74 73 72 72 Cash cycle 47 37 37 37 37 38
Source: Company, NCBC Research estimates
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE 42
Kindly send all mailing list requests to [email protected]
Brokerage sales Roger Yeoman +966 2646 5724 [email protected] +966 565 076302 (mobile)
Brokerage website www.alahlitadawul.com / www.alahlibrokerage.com
Corporate website www.ncbc.com
NCBC INVESTMENT RATINGS
Overweight: Target price represents expected returns in excess of 15% in the next 12 months Neutral: Target price represents expected returns between -10% and +15% in the next 12 months Underweight: Target price represents a fall in share price exceeding 10% in the next 12 months Price Target: Analysts set share price targets for individual companies based on a 12 month horizon. These share price targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon
OTHER DEFINITIONS
NR: Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations CS: Coverage Suspended. NCBC has suspended coverage of this company NC: Not Covered. NCBC does not cover this company
IMPORTANT INFORMATION The authors of this document hereby certify that the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this document. The authors also certify that neither they nor their respective spouses or dependants (if relevant) hold a beneficial interest in the securities that are the subject of this document. Funds managed by NCB Capital and its subsidiaries for third parties may own the securities that are the subject of this document. NCB Capital or its subsidiaries may own securities in one or more of the aforementioned companies, or funds or in funds managed by third parties The authors of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. The Investment Banking division of NCB Capital may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this document or are mentioned in this document.
This document is issued to the person to whom NCB Capital has issued it. This document is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. This document is not intended to take into account any investment suitability needs of the recipient. In particular, this document is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this document. NCB Capital strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this document take into account both risk and expected return. Information and opinions contained in this document have been compiled or arrived at by NCB Capital from sources believed to be reliable, but NCB Capital has not independently verified the contents of this document and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. To the maximum extent permitted by applicable law and regulation, NCB Capital shall not be liable for any loss that may arise from the use of this document or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. All opinions and estimates included in this document constitute NCB Capital’s judgment as of the date of production of this document, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this document may be reproduced without the written permission of NCB Capital. Neither this document nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations.
NCB Capital is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia to carry out dealing, as principal and agent, and underwriting, managing, arranging, advising and custody, with respect to securities under licence number 37-06046. NCB Capital’s registered office is at 25th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 22216, Riyadh 11495, Kingdom of Saudi Arabia.
16 August 2009 JARIR MARKETING COMPANY - INITIATING COVERAGE