The Saudi Arabian retail sector continues to be fuelled by favourable demographics, improving education and changing lifestyles, which will see the market reach SR276 billion ($74 billion) by 2014 from SR226 billion in 2009, said a report.

This represents four per cent compound annual growth rate (CAGR), according to a report issued by the research department of Al Rajhi Capital (ARC), the investment banking subsidiary of Saudi Arabia’s Al Rajhi Bank.

The 47-page report, entitled “Hop on the Train”, also provides in-depth analysis of the performance and prospects of three key stocks within the industry: Jarir, the largest company in the sector by market value, which has made its name in books and the consumer electronics market, Alothaim, one of the largest players within the grocery market, and Alhokair, a leading apparel retailer.

The report initiates coverage of Jarir with an overweigh rating citing a target price of SR189.4, which implies 26 per cent upside. Alhokair is also rated as overweight with a target price of SR49.9, implying 19 per cent upside, and Alhothaim as neutral with a target price of SR86.4, implying upside potential of 11-12 per cent.

According to the report it is expected that all categories, broken down by grocery and non-grocery segments, of the retail sector will continue to grow at a solid pace. ARC cites that stronger growth will, however, be seen in electronics and apparel, which will benefit companies like Jarir and Alhokair, while Alothaim can profit from the highly fragmented grocery market.

All segments will also, however, face challenges, which include booming real estate prices and intensifying competition, both of which serve to suppress margins.

Fragmented markets, nevertheless, offer major growth potential and significant new store openings are expected to be a key driver of growth, although certain retailers are also expanding by acquisition, said the report.

Looking across each subsector, in the grocery segment supermarkets and hypermarkets are leading growth, with local retailers having become more active in expanding their operations through opening new stores and acquiring smaller retailers.

As a result, the report expects supermarkets and hypermarkets to grow by CAGRs of 4.4 per cent and 7.2 per cent and reach SR24.2 billion and SR18.7 billion respectively by 2014, outperforming small groceries’ CAGR of roughly 3.2 per cent.

However, challenges will come from increased competition, the entrance of international players and the ability for grocery retailers to differentiate themselves in order to grow and gain market share, the report said.

With regards to the non-grocery retail segments, more latent growth is projected, however, most segments continue to steadily advance. The electronics and appliances markets including smartphones and tablets are leading growth. Electronics and appliances make up 18.5 per cent of the non-grocery retailing industry.

This area has grown strongly during the last five years and ARC expects it to achieve a CAGR of 5.2 per cent over the next five years. The market size is currently SR27 billion and the report expects it to reach SR35 billion by 2014, with a selling space of roughly 821,000 sq m.

Similarly, the clothing and footwear market is advancing steadily due to changing lifestyles especially amongst the younger generation including both Saudi men and women. Growth is also being driven in large part by the entrance of numerous international brands and large retailers’ aggressive expansion. ARC expects this segment to continue to grow strongly with a CAGR of 5.3 per cent over the next four years.

Leisure and personal goods specialists, while diverse, have performed less favourably with growth declining by 5 per cent in 2009. While certain categories such as books showed growth in 2009, the overall decline in this subsector’s sales can be attributed to a drop of about 10 per cent in sales of luxury goods and precious metals, which make up the biggest proportion of this segment.

“Overall we see strong prospects for continued growth across the sector and all segments within it,” said Dr Saleh Al Suhaibani, head of research at Al Rajhi Capital.

“We have also looked at the performance of some of the sector’s key players and found that while Jarir is the most efficient of the three stocks analysed and yields the highest returns, with a remarkable economic profit spread of 39 per cent, all three companies are performing well operationally and have healthy financial positions.”

“Jarir is the preferred stock, however, as it still has strong prospects and a professional and open management team, which should support the ongoing strength of the stock. While both Alhokair and Alothaim have performed well already, both groups have ambitious expansions plans and their PE and EV/EBITDA ratios offer better value also making them strong picks,” he concluded. – TradeArabia News Service