By Beatrice Thomas
Saudisation will lead to a short-term slowdown in the retail sector as lower demand and higher wages squeeze profit margins
Saudisation will lead to a short-term slowdown in the retail sector as lower demand and higher wages squeeze profit margins, according to a NCB Capital report.
However, NCB said in its Q4 update report on the Saudi retail sector that it viewed this period “as an opportunity to enter stocks for the long-term”, the Saudi Gazette reported.
“Macroeconomic drivers in Saudi Arabia remain strong with consolidation of fragmented sectors supporting the long-term growth outlook for stocks under our coverage,” Farouk Miah, head of equity research at NCB Capital, said.
Miah said NCB had upgraded retail and real estate firm Al Hokair to “overweight” with a Price Target (PT) of SR146.7 ($39.11) as it should be amongst the least impacted by Saudisation with multiple sources of growth supporting its outlook.
However, he said it had downgraded electronics and appliances company Extra to Neutral with a PT of SR109.9 ($29.30) “as we believe it will be amongst the most impacted from Saudisation in the short-term”.
“Although the long-term drivers remain in-tact for Extra, we believe it lacks short-term positive catalysts,” he said.
In other analysis, NCB Capital remained neutral on bookstore chain Jarir and markets group Al Othaim and overweight on wholesale air conditioning and appliance company Shaker.
“As seen in 3Q13, we believe a slowdown in growth will continue to be recorded in the next few quarters due to the negative short-term impact of Saudisation,” Miah said.
“These include one million fewer expatriates, the negative sentiment from remaining expatriates, slowdown in new store openings and higher staff costs for companies, leading to pressure on margins. From the companies under coverage, we believe Shaker and Extra will be negatively impacted the most.”
However, NCB said it believed in the long-run Saudisation would be a positive for the retail sector.
“Increased employment and disposable incomes for locals, particularly for women, should lead to higher sales for retail companies,” he said. “Additionally, the longer term drivers for the sector such as consolidation of a fragmented sector, young and growing population and economies of scale aiding margins all remain.”