Equity Analysis /
Saudi Arabia

Extra: Solid growth and attractive investment case

  • Growing online sales to support retail revenue

  • Consumer finance; the key growth driver

  • Upgrade to Overweight with a revised PT of SAR139.9

SNB Capital
7 June 2022
Published by

We upgrade Extra to Overweight with a PT of SAR139.9. The stock is our preferred name in the consumer discretionary space given 1) growing consumer financing business (Tasheel), 2) market leadership in major product categories, 3) strong online offering and 4) earnings growth track-record. We project a strong 2021-24f earnings CAGR of 15.1%, translating into a strong FCF generation and steady growth in dividends. The stock is trading at 2022f P/E of 16.6x and offering an attractive dividend yield of 4.0%. This is lower than the peers group average of 20.2x.

  • Growing online sales to support retail revenue: Extra has grown to be one of the leading electronics retailers in Saudi, operating 52 stores by 2021. Its blended market share grew to 19.1% of Saudi consumer electronics market in 2021, from 8.8% in 2016. Extra’s retail strategy is to further grow its market share to c25% over the medium term, by prioritizing LFL growth and online sales over store/space expansion. For the retail segment, we project a revenue CAGR of 5.5% in 2021-2024f, driven by store sales (3.8% CAGR) and online (10.8% CAGR). These are based on assumptions of an average of 2 store openings annually, LFL in-line with inflation and higher online contribution (to c26% by 2024f from 22.4% in 2021).

  • Consumer finance; the key growth driver: Extra’s consumer finance’s loan book recorded a strong growth with a CAGR of 47.1% during 2018-21. In 2021, loan book stood at SAR1.27bn, of which 33% are product loans and 67% are personal loans. Given higher rates and margins, we believe the company will continue to focus on personal loans in the future to reach 75% by 2024f. We expect the loan book to grow at a CAGR of 15.0% in 2021-24f to reach SAR1.9bn, resulting in a financing income of SAR610mn in 2024f (c9% of revenues). We highlight that new entrants (such as Emkan – Rajhi Bank subsidiary) increased competition in NBFI space and hence, we reduced our growth assumption from our previous estimate of CAGR c21%. In the medium term, we remain positive on the business as consumer loan penetration remains relatively low in Saudi (see Exhibit 11).

  • High margin segments to drive profitability despite external challenges: We expect the increasing contribution from higher margin e-commerce and consumer finance business to support a gradual expansion in margins. However, the on-going supply-chain issues and inflationary pressure will keep margins growth at moderate levels. We project gross margin to reach 22.6% in 2024f, from 20.3% in 2021.

  • Upgrade to Overweight with a revised PT of SAR139.9: We upgrade Extra to Overweight with a revised PT of SAR139.9 (from SAR120.8). We expect the growth in online sales and consumer finance business to be the main earning drivers. The stock is trading at 2022f P/E and EV/EBITDA of 16.6x and 13.4x, vs peers group average of 20.2x and 11.2x, respectively.