Jarir, like other Saudi retail players under our coverage, is also witnessing challenging business conditions, despite the relatively improved economic conditions viz-a-viz last year with the removal of COVID-related restrictions, the opening of schools, and an increase in foreign travelers. The company’s average store sales have declined back-to-back by 18.1% YoY and 4.8% YoY in 1Q and 2Q 2022, respectively. The company’s stores count on a net basis decreased to 67 as of 2Q 2022-end from 68 at FY21-end (our estimate: 69 stores), according to our analysis. Though we expect the company to post slightly better numbers in 2H22, rising inflation and credit costs are likely to weigh on earnings growth.
2Q 2022 earnings synopsis: Jarir Marketing’s 2Q 2022 revenue stood flat YoY at SAR 2.0bn. In contrast, we had forecasted revenue to grow by 8% YoY in 2Q 2022 on the premise of improved operating conditions with the reopening of schools and the return of pilgrims. The company faced a faster rise in its costs as it had to offer more discounts on products and increase ad spending to boost sales. Consequently, the company’s gross and operating margin contracted by over 60 bps YoY to 12.4% and 9.5%, missing our estimate of 13.7% and 11.8%, respectively. Net margin, though, fell at a marginally lesser pace to 8.8% (-58 bps YoY; our estimate: 11%), partly supported by the SAR 10mn gain booked from the sale of a property in Khobar.
Valuation and risks:
We continue to value Jarir based on blended valuation methodologies – (i) Discounted Cash Flow (DCF) and (ii) Relative Valuation (using P/E and EV/EBITDA multiples) with equal weights assigned to each of them. We have lowered our stores count forecast slightly to 72 from 70, previously, as we expect Jarir to go slow on new stores addition, given the pressure on retail sales. Among the product categories, sales of IT and digital products have remained weak, which we attribute to a resumption of work from the office which likely has led to a decrease in the demand for these products. Rising interest rates might also adversely impact consumer discretionary items like smartphones and other accessories. Consequently, we forecast average store sales in FY22 to fall ~5% YoY vs. our earlier expectation of it to remain flat. As a result, our FY22 EPS estimate is now down to SAR 8.27, the same as in FY21 and lower than our prior estimate of SAR 9.00. Yet, we remain optimistic about the company’s prospects over the medium-term, given its market-leading position with good geographical presence, and expect its store count to gradually rise, meeting the company’s target of having about 80 stores by FY25. However, we contend most of the near-term positives have
already been priced in, considering around 18% appreciation in Jarir’s stock price since our last report in July, and hence we assign a Hold rating on it with a target
price of SAR 187.00. Currently, the stock trades at 20.6x P/E and 17.1x EV/EBITDA, based on our FY22 estimates. Downside risks to our valuation include less than expected addition of new stores, below-estimated average realization per store, and lower than estimated margins. Key upside risks to our valuation include more than expected addition of new stores, better than estimated average store revenue, and higher than forecasted profitability.