We remain Neutral on Jarir, with a revised PT of SAR162.0 (previously SAR157.8). We believe all positives are priced-in at current valuations. The company trades at a 2020f PE of 18.2x vs covered peers average at 18.7x. Jarir’s top-line is expected to increase at a CAGR 7.9% between 2018-2024f, supported by 1) store expansions, 2) consolidation trends and 3) increased discretionary spending. Moreover, we expect margin expansion, as a result of cost efficiencies and a change in the product mix towards stationery products.
Store expansion and consolidation trends to drive growth: Jarir opened two new stores in 2019 (excl. Jeddah airport branch), taking its total store count to 58. We expect Jarir to continue at this pace of expansion, with an average opening of two stores per annum until 2024f. We forecast a total store count of 70 stores by 2024f. Moreover, we expect consolidation trends in the electronics retail market following the Saudization drive to continue in 2020f. This will support the expansion of Jarir’s market share. Jarir is currently the market leader in the smartphones and laptop/tablet segments, with estimated market shares of 21% and 30%, respectively.
Discretionary spending to support top-line growth: We expect discretionary spending on electronics to improve, supported by 1) lower unemployment rates in Saudi which stand at a 3-year low of 12.0% in Q3 19, 2) extended cost of living allowances and 3) capital gains from the Saudi Aramco IPO. Moreover, we expect Jarir’s increased focus on e-commerce to support overall sales, specifically e-books, and customer retention programs e.g. loyalty cards and co-branded credit cards, to also support the top-line. As of 2018, 918,000 loyalty cards were active and contributed to 19% of total revenues. We expect overall revenues to grow at a CAGR of 7.9% to SAR11.6bn between 2018-2024f.
Margins to improve on favourable product mix: We believe a change in the product mix towards the high margin stationery products and e-books will support gross margin expansion. This will offset the impact of increased costs from expat levies. We forecast gross margins to increase at an average rate of 10bps per annum, increasing from 15.1% in 2018 to 15.8% in 2024f.
Remain Neutral; Revised PT of SAR162.0: We remain Neutral on Jarir, with a revised PT of SAR162.0. We believe current valuations price in the growth expectations from store expansion and consolidation trends. Jarir trades at a 2020f PE of 18.2x vs covered peers average at 18.7x.