Tellimer

Extra: Consumer finance to support future growth

  • We believe consumer finance business will continue to be a key driver for future earnings and margin growth
  • Consolidation and online sale to support growth
  • We downgrade Extra to Neutral with a PT of SAR120.8

We downgrade Extra to Neutral with a PT of SAR120.8. We believe the company’s outlook remains positive given the 1) robust growth in the consumer finance business and 2) market share gains driven by consolidation and online sales. We expect a topline CAGR of 5.8% over 2020-2025f, while net income is expected to record a CAGR of 15.6%. However, we believe these positives are priced in with the stock trading at 2021f PE and EV/EBITDA of 21.1x and 16.0x vs peer group average of 23.3x and 20.4x, respectively. Higher NPL levels remain a key risk.

Consumer finance – The next growth driver: We believe the consumer finance business will continue to be a key driver for future earnings and margin growth. Extra recorded robust growth in its consumer book, up from SAR137mn in Q4 19 to SAR952mn in Q1 21. We expect the loan book to grow to SAR1.2bn by Q4 21 with a full transition to Tasheel’s books (which accounts for 91% of the total book). We expect the loan book to deliver a CAGR of 20.9% over 2020-2025f to reach SAR2.2bn, resulting in a financing income of cSAR402mn in 2025f (CAGR of +25.2%). However, higher NPL is a key risk. Our projections reflect an NPL ratio and a cost of risk of 8.5% and 2.0%, respectively.

Credit cards – Maintain customer base: In May 2021, Tasheel obtained a license from SAMA to provide credit card financing. As per SAMA data, total credit card loans stood at SAR17.6bn by end of Q1 21, accounting for c5% of total consumer loans. We believe the addition of the new business line will support Extra’s product diversification and customer loyalty. We expect the profit rate for the new business to be in line with the industry average of 24%-28%. However, we believe it will remain a small segment for the company given credit cards' relatively low penetration in Saudi.

Consolidation and online sale to support growth: Following a record sale in 2020, we believe future growth in the retail space to be driven by 1) sector consolidation and 2) a focus on online channels (representing 22.5% of Extra sales in Q1 21). Therefore, growth in the number of stores is expected to be limited. We expect Extra to increase the number of stores by one every year, taking the total store count to 55 by 2025f from 50 stores in 2020.

Downgrade to Neutral with a PT of SAR120.8: We downgrade Extra to Neutral with a PT of SAR120.8. Consumer financing and consolidation remain the key stock driver. However, at the current price, we believe all positives are priced in. The stock is trading at a 2021f P/E and EV/EBITDA of 21.1x and 16.0x vs peer group average of 23.3x and 20.4x, respectively.


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