Al Rajhi Capital remains “Neutral” on the Saudi consumer sector as it is expected to shrink due to reduced purchasing power of the people as a result of increased value-added tax (VAT) and removal of cost-of-living allowance.
The brokerage firm advised in a research note to take a long-term bet on the KSA consumer sector although there are significant headwinds in the near-term.
“In fact, we are in the middle of the industry consolidation which will eventually play out in the next two years in our view,” it added.
Al Rajhi also expects the overall Saudi consumer spending to decline significantly in 2020 and moderately in 2021 before gradually recovering 2022 onwards.
Therefore, for the Saudi consumer sector, the brokerage firm cut near-term revenue growth but in medium to longer-term, it expects large players to become larger due to consolidation arising in the aftermath of COVID 19.
“Our top picks in the consumer space are Al Othaim due to its high revenue growth and profits, eXtra for its strong relations with suppliers, and robust balance sheet for SADAFCO,” Al Rajhi said.
Meanwhile, SADAFCO in the past adopted very well when consumer spending was impacted due to VAT by introducing smaller packet items of its products, which was the consumer buying behavior at time, Al Rajhi stated.
“We expect that the dairy and ice-cream segment will continue to do well in the near term and a strong balance sheet gives room for future expansion plans,” it noted.
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Summary of Al Rajhi’s coverage for Saudi consumer companies |
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|
Company |
Recommendation |
Target price |
Expected 2020 profit (SAR mln) |
Expected 2021 profit (SAR mln) |
|
Jarir |
Underweight |
110.00 |
762 |
828 |
|
eXtra |
Overweight |
51.00 |
142 |
184 |
|
Al Othaim |
Neutral |
116.00 |
399 |
397 |
|
Fawaz Al Hokair |
Underweight |
13.00 |
492 |
247 |
|
Almarai |
Neutral |
51.00 |
1,967 |
1,942 |
|
Savola |
Neutral |
41.00 |
1,254 |
1,406 |
|
Herfy |
Neutral |
39.00 |
145 |
193 |
|
SADAFCO |
Neutral |
169.00 |
308 |
359 |
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