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All rights reserved, AlJAZIRA CAPITAL ©Research DivisionCompany Reports
MARCH2012
Please read Disclaimer on the back
JarirMarketingCompany Initiation
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37
RESEARCHDIVISION
Head of ResearchAbdullah Alawi+966 2 [email protected]
Senior Analyst Syed Taimure Akhtar +966 2 6618271 [email protected]
AnalystSaleh Al-Quati+966 2 [email protected]
BROKERAGE AND INVESTMENT CENTERS
DIVISION
General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 [email protected]
AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 [email protected]
Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 [email protected]
Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 [email protected]
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Jarir Marketing Company (Jarir)Initiation | KSA Retail Sector | March 2012
Rating: Neutral
12-month price target: SAR 153
Current Price: SAR 154
Upside/(down side) (0.6)%
Key Information
Reuters Code 4190.SE
Bloomberg Code JARIR AB
Country: Saudi Arabia
Sector: Retail
Primary Listing: TASI
M-Cap: SAR9420mn
52 Weeks H/L: SAR148.5/80.5
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TASI -LHS Jarir (SAR) -RHS
Price Chart
Jarir Marketing Company (Jarir)
Jarir marketing company (Jarir) started its
operation with a single retail store dates back
in 1974. The company, later on, expanded its
operational focus to wholesale market and
opened wholesale store in 1979.
The company started to make significant
growth, from 1980s onward, on the back of
(i) successful introduction of ROCOTM, Jarir
bookstore and Royal FalcomTM, (ii) effective
promotion and placement led to capture
market share from weak competitors and (iii)
upgrade its operational efficiency through
implementation of updated technology.
Syed Taimure Akhtar
(Senior Analyst)
+966-2-6618271
Expansion to counter rising competition
• A success story - The journey of Jarir marketing company (Jarir) started with the opening of a retail store dates back in 1974 and a wholesale store in 1979; where both stores were primarily dealing in the sale of stationeries and school supplies. The company, in the past, continued to grow through its unique business strategy and quick response to the change (in KSA socio & economic environment). Thus, these factors played vital role to evolve Jarir in KSA as among the market leaders in wholesale and retail industry of related products. Following the successful operation in the local market, the company started to expand its focus geographically in the GCC region, where the customers’ demography, preferences and needs are identical to the local market. Consequently, at present, a single store company has now transformed into a regional retailer & wholesaler of generic and verity of specialty products including electronics and others. According to the company’s investors’ presentation Dec-2011, Jarir is ranked among the top 100 companies in KSA and top 10 most recognized brand names in the Middle East in 2011.
• Operational details - The company’s operational structure is mainly based on two divisions i.e. wholesale and retail. Initially these two divisions were operating separately but later on these were merged and shared internal resources to form Jarir in 2000. The company’s retail & wholesale operation is based on 35 stores (5 wholesale & 30 retail) covering area of 1,036,000ft2 (Sep-2011 investor presentation), 4 corporate offices and 7 sales offices inside KSA & across the GCC region. In addition, these divisions are utilizing a central warehouse & distribution center (covering area of 330,000 ft2 and expandable to 750,000 ft2) located in Riyadh.
• Product offerings, alliances and customer base - Based on the given information, the company is offering a wide range of products including school & office stationeries/supplies, education aids & books, PCs & laptops, PCs & laptop accessories, digital electronics & video games and smart phones & PC tablet. According to the given information, the company has strong relationships with worldwide leading brands and companies particularly in PCs segment. Moreover, Jarir has a strong and well-diversified wholesale customer base, which includes oil companies, banks, government and health care.
• Emerging competitive environment in KSA retail sector - Saudi Arabia is the largest retail market in the GCC with the estimated market size of USD69.0bn-USD70.6bn in 2011 and expected to reach at USD76bn-USD78bn in 2012, according to EIU1 & Jones Lang LaSalle2. We believe the growth in local sector is heavily relied on the (i) high concentration of relatively young people (age ranging 15-39 years) in the total population, (ii) customers are generally categorized as the early adopters, (iii) low retail space/capita in Jeddah & Riyadh, (iv) rising brand and quality awareness among the customers, (v) limited entertainment facilities and (vi) strong spending power. Hence, we believe these factors will lead to increase entry barriers for small retailers and limit the survival to those players who will be able to remain pro-active to adopt changes and offer unique mix of services to the local customers.
• Potential evolution in books market - Recently, the world was introduced with e-books (like Amazon’s Kindle). Although the technology is not widely tested but we believe the introduction of such innovation in Saudi market will lead to a new era in books retail business.
• Competition for Jarir - Based on the wide-range of product offering and expected growth in the local retail sector, we believe the level of competition for the company will vary from segment to segment. Similarly,
1 Economic Intelligence Unit2 Saudi Arabian Retail Landscape - Dec 2011
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the entry of other renowned retailers in smart products (smart phones & PC tablets), laptops and other digital electronics will lead to a stiff competition. Since office/school supplies/stationary market inside KSA is much saturated so the level of competition in this segment could be of intermediate level. In addition, we believe the introduction of kindles (as discussed earlier) will be a big challenge for the company to maintain its local as well as regional dominance in the books segment.
Key financial & valuation data
All figures in SARmn, unless specified 2011 2012e 2013e 2014e 2015e
Revenues 4,147 4,763 5,438 5,895 6,197
EBITDA 527 606 706 776 827
Net income 513 582 676 741 788
EPS (SAR) 8.5 9.7 11.3 12.3 13.1
P/E 16.3 15.9 13.7 12.5 11.7
P/BV 9.2 8.5 7.4 6.4 5.7
EV/EBITDA 15.94 15.33 13.15 11.96 11.21
Source: AlJazira Capital
• Diversified expansion in operational coverage will lead to enhance customer visit - At present, the company has already been contracted for the opening of 8 new stores (6 in KSA & 2 in Kuwait) till 2013-14 to enhance its coverage in new areas and strengthen its presence in existing location. We believe the given expansion plan will help the company to (i) attract more customers at new locations inside the Kingdom and (ii) make convenient for customers to visit the store. Hence, customers’ annual visit is expected to reach at 28mn in 2015 with a CAGR of 6.2%, during 2010-15. In addition, besides these stores Jarir is still under-negotiation to open 8 new stores, which are not included in our valuation since the company has not finalized these proposed expansions.
• Financial growth - Based on the company’s given expansion plans (discussed earlier) and strong presence in smart products market, we expect sales revenue to increase at a CAGR of 10.6%, during 2011-15 and gross profit margin reach at 16.1% in 2015. On other the hand, the company’s net profit is expected to increase at a CAGR of 11.3%, during 2011-15; where net profit margin is expected to reach at 12.7% in 2015.
• Investment consideration – By employing discounted cash flow (DCF) valuation methodology we arrived at a DCF based 12-month target price of SAR153/share for the company. This indicates the company is trading at a premium of 0.6% to the market price of SAR154/share (as of 19th March 2012) with a prospective 2012 P/E & P/BV of 15.9x and 8.5x, respectively. We, therefore, initiate our coverage on Jarir with Neutral recommendation.
Keynote to the valuation
We are not using relative valuation, at present, because of the following reasons:
i. Jarir is more domestic and regional play rather than international.
ii. International players are suffering from recession; while Jarir is expanding mainly in local market to untapped the opportunities
iii. The local and regional retail market dynamics i.e. mainly demographic factors and spending habits are much different from Western countries
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• Failure to respond appropriately - The retail industry around the globe has emerged as one of the most dynamic industries, where the pace of change is similar to the change in pace of technology. This is mainly due to the rapid increase in customers’ awareness. Hence, this indicates the big challenge for the retailers, unlike in the past, is to maintain the loyalty of customers, which could change with better technology. We believe KSA retail industry growth is in an advanced phase, where the customers’ spending power is high (so the pace of change in preferences/need is high) and success is relied on the unique offerings and quick response to any major shift. Hence, based on our understanding, any failure or even late response to adopt new technology could lead to massive dent on Jarir’ future growth.
• Lower than expected conversion rate - Conversion rate is one of the most crucial indicators to judge the performance of retail business, which is the number of sales transaction to the number of visiting customers. It is worthy to mention that maintaining or improving conversion rate is one of the major challenges for any retailer in dynamic & competitive environment. Similarly, it will be a main challenge for Jarir to maintain the conversion rate without compromising much on profitability margin to continue its growth in a highly competitive environment. Hence, any major deviation in conversion rate from our estimated levels could raise alarm on the company’s valuation and future growth.
• Intensive price war - We believe the entry of big retail names in the company’s related markets, especially in PCs & smart product markets, could lead to an intensive price war. Though we have already incorporated this factor in our valuation but we cannot rule out the possibility of more than expected intensive price war. This could lead to the subsequent downward revision in the average basket price from our current expectations, while the impact will further translate into lower than expected profitability margins. Thus, this will make negative impact on the company’s valuation and expected growth.
Investment risks
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Discounted cash flows (DCF) Valuation
The following are key basic steps & assumptions we are using to value Jarir on DCF:
� 4-years forecasted free cash flows (FCF).
� Terminal value calculation based on the Gordon Growth Model (GGM).
¾ Expecting terminal growth of 3%.
� Using Capital Asset Pricing Model (CAPM) to calculate cost of equity. However, the CAPM calculation is based on the following variables:
¾ Risk free rate of 2.7% based on 10-years US bond yield of 2% + country risk premium of KSA of 0.7%.
¾ Equity risk premium taken at 11.2%.
¾ Beta of 0.57.
� We are using respective Weighted Average Cost of Capital (WACC) for discounting the future FCF of the company for each year, where the calculation of WACC for each year is based on the following variables:
¾ Cost of equity equivalent to CAPM
¾ Cost of debt taken at 3.5%
¾ Contribution from equity & debt in Jarir’s capital structure is taken at 91% & 9%, respectively.
Using the above assumptions, we arrived at DCF based value of SAR153/share for the company.
DCF Base Valuation
All figures in SAR Mn, unless specified 2011 2012e 2013e 2014e 2015e
Revenues 4,147 4,763 5,438 5,895 6,197 EBITDA 527 606 706 776 827 Margin (%) 12.7% 12.7% 13.0% 13.2% 13.4%EBIT 507 579 676 743 792 Margin (%) 12.2% 12.2% 12.4% 12.6% 12.8%Net Income 513 582 676 741 788 Margin (%) 12.4% 12.2% 12.4% 12.6% 12.7%Cash from operations 594 461 584 627 657 Total assets 1,720 1,971 2,174 2,396 2,631 Shareholders' equity 907 1,081 1,250 1,435 1,632 Total liabilities & equity 1,720 1,971 2,174 2,396 2,631 Free Cash Flow Analysis (FCF)NOPLAT 474 554 648 712 759 Depriciation & amortization 20 28 30 33 36 Change in net working capital 68 (121) (94) (118) (137)CAPEX (208) (88) (101) (101) (93)FCF 355 373 483 526 564 Discount Factor 0.94 0.87 0.80 0.73 PV of FCF 351 418 419 414 Sum of PV of FCF 1,601 Terminal value 10,365 PV of Terminal value 7,605 Enterprise value 9,207 Add: Net debts (24)Net Worth 9,183 Shares (mn) 60.0 DCF based value (SAR/share) 153.0 WACC 8.6%Terminal growth 3.0%
Source: AlJazira Capital
Valuation summary
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MARCH2012
Hence, at current market price of SAR154/share (as of 18th March 2012) the company is trading at a premium of 0.6% and with a prospective 2012 P/E & P/BV of 15.9x and 8.5x, respectively. We, therefore, initiate our coverage on Jarir with ‘Neutral’ recommendation.
Valuation under different scenarios
In order to facilitate investors we have further tested our core fundamental assumptions under two possible scenarios: Bull Case and Bear Case. These scenarios illustrate how sensitive our valuation is to changes in key fundamental variables. We chose the impact of the different (i) conversion rate (ii) average basket prices, (iii) customer visit and (ii) cost of sales while keeping the other factors constant on the company’s valuation.
Scenario analysis
Bul
l cas
e -
4
Bul
l cas
e -
3
Bul
l cas
e -
2
Bul
l cas
e -
1
Bas
ed c
ase
Bea
r ca
se -
1
Bea
r ca
se -
2
Bea
r ca
se -
3
Bea
r ca
se -
4
EPS 2012e (SAR) EPS 2013e (SAR) 12-month weighted average price target
201.4
191.3181.5
168.8
153 .0
138.1127.0 119.3 111.4
100.0
120.0
140.0
160.0
180.0
200.0
220.0
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Source: AlJazira Capital
Sce
nario
ass
ump
tions
Conversion rate Average basket
Bull case 1; +0.25% to base caseBull case 2; +0.5% to base caseBull case 3; +0.75% to base caseBull case 4; +1% to base case
Bear case 1; -0.25% to base caseBear case 2; -0.5% to base caseBear case 3; -0.75% to base caseBear case 4; -1% to base case
Bull case 1; +0.75% to base caseBull case 2; +1.25% to base caseBull case 3; +1.5% to base caseBull case 4; +1.75% to base case
Bear case 1; -0.75% to base caseBear case 2; -1.25% to base caseBear case 3; -1.5% to base caseBear case 4; -1.75% to base case
Customers’ visit Cost of sales / revenues
Bull case 1; +1% to base caseBull case 2; +1.5% to base caseBull case 3; +1.75% to base caseBull case 4; +2% to base case
Bear case 1; 1-% to base caseBear case 2; -1.5% to base caseBear case 3; -1.75% to base caseBear case 4; -2% to base case
Bull case 1; -0.25% to base caseBull case 2; -0.5% to base caseBull case 3; -0.75% to base caseBull case 4; -1% to base case
Bear case 1;+0.25% to base caseBear case 2; +0.5% to base caseBear case 3; +0.75% to base caseBear case 4; +1% to base case
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The retail market inside KSA has evolved over the period of time but the industry witnessed key developments in the past 10 years. At present, Saudi Arabia is the largest retail market in the GCC with the estimated market size of USD69.0bn-USD70.6bn in 2011 and expected to reach at USD76bn-USD78bn in 2012, according to EIU & Jones Lang LaSalle. Moreover, according to EIU estimates, the retail volumetric sales has a potential to increase at 2010-14 CAGR of 3.8% as compared to historical 4-year 2006-10 CAGR of 3.5%.
KSA retail sector - Volumetric growth
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2007 2008 2009* 2010* 2011 e 2012 e 2013 e 2014 e
Source: EIU 2010; * where 2009 & 2010 are based on EIU estimates
According to A.T Kearney’s 2011 Global Retail Development Index (GRDI)3,KSA retail market is ranked as the 7th most attractive retail market around the globe in terms of (i) offering investment opportunities at present and (ii) future growth prospectus.
GRDI ranking 2011
Macro economic & industry specific variables weightage
Ranking Country Region Attractiveness (25%)
CountryRisk (25%)
Saturation (25%)
Time pressure (25%) GRDI score
1 Brazil Latin America 100.0 79.4 42.9 63.9 71.62 Uruguay Latin America 85.0 73.8 63.6 39.6 65.53 Chile Latin America 84.3 100.0 30.3 44.3 64.74 India Asia 28.9 59.9 63.1 100.0 63.05 Kuwait MENA 80.4 80.6 57.3 27.1 61.46 China Asia 49.5 76.5 31.0 87.7 61.27 Saudi Arabia MENA 70.9 80.7 50.6 35.7 59.58 Peru Latin America 39.8 61.5 72.0 59.5 58.29 U.A.E. MENA 87.6 88.9 12.6 42.9 58.010 Turkey MENA 83.8 65.5 45.0 37.0 57.811 Lebanon MENA 56.3 43.0 57.5 53.8 52.712 Egypt MENA 22.1 49.5 85.5 52.7 52.513 Albania Eastern Europe 19.9 48.3 79.6 60.5 52.114 Russia Asia 76.2 49.1 30.9 51.0 51.815 Kazakhstan Asia 29.2 30.1 87.5 60.1 51.716 Indonesia Asia 38.2 53.0 54.5 58.8 51.117 Morocco MENA 22.6 72.9 52.8 54.8 50.818 Philippines Asia 8.4 54.3 66.1 51.0 45.019 Tunisia MENA 37.5 75.2 63.0 21.3 49.320 Sri Lanka Asia 8.4 52.6 86.5 42.4 47.521 Malaysia Asia 53.9 64.0 18.0 52.7 47.222 Mexico Latin America 74.6 67.5 16.3 23.8 45.623 Vietnam Asia 8.4 35.0 48.8 85.1 44.324 Colombia Latin America 45.7 54.0 35.8 36.9 43.125 Argentina Latin America 60.4 26.6 44.2 38.4 42.426 South Africa S. Africa 46.9 89.3 15.2 17.2 42.227 Panama Latin America 44.3 47.3 44.5 27.6 40.928 Dominican Republic Latin America 39.5 0.0 74.2 49.0 40.729 Iran MENA 33.5 3.4 89.2 31.0 39.330 Bulgaria Eastern Europe 45.1 56.2 4.9 50.2 39.1
Source: A.T Kearney 2011 GRDI
KSA retail Sector - Volumetric Growth
Source: EIU 2010; * where 2009 & 2010 are based on EIU estimates
KSA retail market
3 GRDI is an index that analyzes 30 developing countries on 25 macroeconomic and retail-specific variables to identify investment opportunity in emerging market. Moreover, this index also helps to identify the profitable markets today as well as those which offer the most potential in future.
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Population growth
Source: SAMA 2011 annual report, CIA fact book & IMF data & forecast on trading economics
2011 GRDI country attractiveness
Brazil
Uraguay
Chile
India
Kuwait
China
Saudi Arabia
Peru
UAE
Turkey
55.0
65.0
75.0
85.0
95.0
105.0
55.0 60.0 65.0 70.0 75.0
Cou
ntry
ris
k (e
cono
mic
& p
oliti
cal)
0= h
igh
100
= lo
w
GDRI score (Market potential)
Source: A.T Kearney 2011 GRDI
Youth domination & high literacy rate leads to make local industry more dynamic
According to SAMA4 2011 annual report5, the population in Saudi Arabia was recorded at 27.1mn in 2010, where significant portion (around 47%6) of total population aged between 15 and 39. According to IMF7, the country’s population will increase at 2010-15 CAGR of 1.4% and reach at 29.02mn in 2015. Based on our understanding, we expect the youths (15-39 ages) will continue to dominate the population till 2015. On the other hand, according to World Bank report 2010 the adult and youth literacy rate in KSA was recorded at 86% and 97% in 2009, respectively.
3.4% 3.4% 3.4%
1.8%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
22.0
23.0
24.0
25.0
26.0
27.0
28.0
29.0
30.0
2007 2008 2009 2010 2015e*
Population (mn) LHS Growth RHS-
1.3%
We, therefore, believe the youth dominance in the overall population and high literacy rate with better education standard will ease the public to adapt new technologies. On the other hand, we expect the improvement in awareness among customer on the back of high literacy rates with better educational standards leading the local market to become more dynamic in responding to quick changes in the customer preferences/needs.
4 Saudi Arabian Monetary Agency.5 47th annual report, The Latest Economic Development 2011.6 Jarir investors’ presentation Sep-20117 International Monetary Fund
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Relatively low space/capita will unfold opportunities to make expansion
Despite of aggressive expansions in retail business across the Kingdom in past 5 years, it is worthy to mention that the retail space/capita is still lower than the other regional markets. Based on the study of LaSalle, retail space/capita in cities like Riyadh & Jeddah stood at 0.2m2 as compared to space/capita of 1.6m2 of mall in Dubai, UAE.
Furthermore, based on the increase in customer awareness and education, we expect the retail centers need to be designed in more professional manner, which should be well equipped with the latest available technologies and facilities. Hence, we believe such changes will lead to (i) the increase entry barrier for small players and (ii) the environment where the survival will be based on unique business strategy.
Potential evolution in books market
In the past few years the world was introduced with the concept of e-books. Although the technology is not widely tested but we believe the introduction of such innovation in Saudi market will lead to a new era in books retail business. According to the article on business week, Amazon has initiated to transform its traditional book business to e-book business. In addition, based on the independent study, the potential hit through the introduction of e-books will be on the big publishers around the world, while the e-publishing company (i.e. Amazon) and authors will be the major beneficiary.
Smart phone heading towards two - players market & mix trend in PCs & PC tablet markets
The smart phone is heading to become the two-player markets i.e. Apple & Google until the Windows Phone 7 will not help MS to recapture some initiative. Recently, the failure of big name like Nokia in smart phone market and shift of Finnish phone maker from its own Symbian system has further paved the way for Apple & Google to continue their domination in the near future. According to the study done by EIU, the open privilege of software will get the preference over the propriety software in the smart phone market. This suggests that the free access to Android will lead Google to get an edge over Apple. Hence, this indicates that the local market will continue to be dominated with the smart phones of these two players in 2012. On the other hand, the study done by EIU indicates that the increase in demand of PC tablets will continue to eat up the market share of PCs. In addition, EIU study also suggests PC tablets and handheld devices are suitable till now for the application commonly used at work place so PCs are expected to continue its domination at work place.
Retail space/capita – Key regional cities
Source: Jones Lang LaSalle
0.0
0.5
1.0
1.5
2.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Dubai Riyadh Jeddah Abu Dhabi Doha Muscat Beriut Cairo
Sq meters (mn) LHS Sq meter/capita RHS
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MARCH2012
Jarir marketing company (Jarir) started its operation with a single retail store dates back in 1974. The company, later on, expanded its operational focus to wholesale market and opened wholesale store in 1979. The company started to make significant growth, from 1980s onward, on the back of (i) successful introduction of ROCOTM, Jarir bookstore and Royal FalcomTM, (ii) effective promotion and placement led to capture market share from weak competitors and (iii) upgrade its operational efficiency through implementation of updated technology.
The company, over the period of time, expanded its key business focus from the wholesaling and retailing of office/school stationeries & supplies to educational books and electronic items. At present, the company is dealing in the wide range of products including PCs, laptops and smart products i.e. smart phones and PC tablets. It is worthy to mention that Jarir has evolved as the leading market player in non-food retail industry, where historic success was mainly associated with the unique business strategy (i.e. relied mainly on innovative product mix) and quick response to change in local market.
Jarir Marketing Company - Product mix 2011
Source: Jarir investors; presentation Dec 2011
Office supplies include all the office stationeries and related items including paper, files & folder and other supplies.
School supplies cover all the necessary items required for a student.
Books (Arabic & English) section is dealing in wide-range of best-selling books including religious and educational books. In Arabic section, the company is additionally selling the Arabic translation (done in-house) of quality non-Arabic books.
Arts & engineering all necessary items i.e. artist boards, sheet & pads, mat & foam boards, art portfolio/binder/tubes, compasses and surveying instruments.
PCs & laptop section deals in top branded PCs, laptops & PC tablets (from sales to service). Moreover, the company has also a wide range of related accessories.
Electronics section is mainly dealing in digital cameras, cell phones and other personal electronic stuffs.
Video games collection is based on the latest available games included the related software and other stuff.
Smart phones section is dealing with the latest model of top brands in the industry.
According to the investors’ presentation Sep 2011, the company is having over 200,000 items as compared to 98,000 items in 2003.
Company overview
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MARCH2012
Operational structure
The company’s operational structure is mainly based on two divisions wholesale and retail. It is worth mentioning that the company is utilizing common resources to strengthen its operational integration. However, the company has separate marketing and sales team for both divisions to strengthen its market intelligence necessary to cater opportunities in these markets.
Operational structure
Board Of Directors
Internal Audit
Executive Chairman
RETAIAL DIVISION JARIR MARKETING
Ceo Ceo
Marketing
CorporateSales
Meichandising& Purchasing
Merchandising& Purchasing
Functions Shared WithWholesale Division
Sales
Marketing
DistributionCentre
InformationTechnology / MIS
HumanResources
Finance& Accounting
Finance& Accounting
InternationalExpansion
ShowroomSales
(Jarir Bookstore) (Wholesale Division)
Source: Jarir IPO prospectus
By the end of 2011, the company’s total number of subsidiaries was recorded at 5, where all are incorporated outside the Kingdom. Hence, this indicates that the company’ regional operation is mainly based on these subsidiaries.
Jarir Marketing Company - Subsidiaries
Subsidiary name Country of incorporation Ownership
United Company for Office Suppies & Stationeries WLL Qatar 100%
Jarir Trading Co. LLC Abu Dhabi 100%
The United Bookstore Abu Dhabi 100%
Jarir Book Store Kuwait 100%
Jarir Egypt Financial Leasing Co. SAE Egypt 100%
Source: 2011 annual report
Number of stores
By the end of 2011, the company’s retail & wholesale operation is based on 35 stores (5 wholesale & 30 retail) covering area of 1,036,000ft2, 4 corporate offices and 7 sales offices inside KSA & across the GCC region. In addition, these divisions are utilizing a central warehouse & distribution center (covering area of 330,000 ft2 and expandable to 750,000 ft2) located in Riyadh.
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Number of operational stores
TotalTotal
Total 5
430 7Total
JMC
Jarir Bookstore
SHOWROOMS SHOWROOMSCORPORATE SALES SALES OFFICE
Jarir MarketingWholesale DivisionRetail Division
KSA
GCC
26
4
Riyadh
Khobar
Jeddah
Qatar
1
1
1
1
Riyadh
Qassim
Dammam
Jeddah
Khamis Mushate
Riyadh
Qassim
Dammam
Hofuf
Jeddah
Khamis Mushate
1
1
1
1
1
1
1
1
1
1
1
Source: Investors’ presentation Dec-2011
At present, out of 30 retail showrooms. Jarir owns 7 showrooms (covering 28% of total floor area), while the remaining are on lease term of 10-20 years with an exit option. Moreover, the company’s all owned showrooms are located inside the Kingdom.
Shareholding pattern
The company’s existing shareholding structure is given in the following graph:
Ownership structure
Source: Tadawul
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MARCH2012
The company’s total number of retail outlets was increased at a CAGR of 15%, during 2008-11, and recorded at 35 in 2011. It is worthy to mention that the company’s recorded expansion was mainly focusing to enhance its retail activities in order to remain intact with the past developments in KSAs retail sector. Furthermore, we believe the company will continue to focus on retail segment in order to cater the expected opportunities in KSAs retail sector.
Jarir is expected to open 8 new stores till 2013-14 of which 6 are scheduled to open within the Kingdom and the remaining 2 will be located in Kuwait. Hence, this indicates the number of stores will continue to increase at 2011-15CAGR of 5.9%, while the prime focus will be on KSA and Kuwait markets. Moreover, we believe, the expansion in stores will lead the company\s total cover area to reach at 1.37mn ft2 in 2015 (2011-15CAGR of 7.3%). We believe the company’s expansion strategy is in line with the outcomes of 2011 GRDI score (as discussed earlier in KSA retail section), which indicates Kuwait and KSA as the most attractive markets across the region. On the other hand, the regional space/capita matrix also indicates KSA as more attractive place for expansion than saturated markets of UAE i.e. Abu Dhabi and Dubai
Growth in number of stores
TabukHail
Uniza
Madina
Makkah
Khamis Mushayt
TaitJeddah
Yanbu
Buraidah
Saudi Arabia
Riyadh
Al-Khobar / Dammam
Jubail
Kuwait
DahranQatar/Doha
Oman
Musqt
AbuDhabiUAE
Existing ShowroomsNew(contracted)New(Under negotation / Proposed)
Source: Investors’ presentation Dec-2011
Expansion in stores to strengthen presence
Growth in number of stores & area covered
Source: Investors’ presentation Dec-2011 905
955
1,036
1,149
1,3001,375
1,375
900.0
1500.0
1400.0
1300.0
1200.0
1100.0
1000.0
800.00.05.0
10.015.020.025.030.035.040.045.050.0
Retail stores -LHS Wholesale stores - LHS Area covered ( 000 Sqft) - RHS20092008 2010 2011 2012e 2013e 2014e 2015e
At present, Jarir is under negotiation for the opening of 8 more stores. The company has not announced timeline for theses stores so we have not incorporated the impact of these proposed stores in our valuation.
13
MARCH2012
Increase in customer visit
According to the company’s Dec 2011 investors’ presentation, customers’ visit was recorded at 22mn in 2011 as compared to 19mn in 2010, as recorded in investors’ presentation Sep-2011. We believe the estimated growth in 2011 customers’ visit was mainly associated with the opening of new stores in existing and new locations, where the growth potential is relatively high.
Based on our expectations, the customers’ visit will increase at a CAGR of 6.2%, during 2010-15 to reach at 28mn in 2015. The expected growth in customers’ visit is mainly associated with the opening of new stores in existing & new locations, where the growth potential is relatively high. It is noteworthy that the daily customer visits per store is expected to show a declining trend, which is mainly based on the increase in number of stores in prime city i.e. Riyadh. At present, we are not expecting any serious threat from such decline in daily visits per store since the annual customers’ per visit is estimated to continue in an upward trend.
Customers’ visit
Source: Investors’ presentation Dec-2011 & Aljazira capital
* Estimated figures
-2009 2010 2011 2012e 2013e 2014e 2015e
30.0 2.3
2.2
2.1
2.0
1.9
1.8
1.7
25.0
20.0
15.0
10.0
5.0
2.2
2.12.1
2.12.1 2.0 2.0
Per day customer visit / store (000)-RHSCustomer visit (mn) -LHS
14
MARCH2012
Improvement in customers’ conversion rate 8
Jarir customers’ conversion rate in 2011 was recorded at 32.7% as compared to 33.3% recorded in 2010. We believe the decline in conversion rate was mainly associated with increase of 15.8% in customers’ visit in 2010 against YoY growth of 14% in value transaction; where the increase in customers’ visit was mainly associated with the openings of 2 new stores in new locations in 2011. Furthermore, in 2012, we believe the company’s expansions in new areas, estimated inflow of 24mn customers and steady average basket price will lead average conversion rate to show improvement and reach at 33.3% in 2012.
We believe the company’s proactive strategy to attract customers along with moderate expansion (8 stores in 3-4 years) will remain a key factor to further strengthen conversion rate. Moreover, we believe the expansions in new areas and strengthening of position in the existing locations will also play a major role to enhance the company’s conversion rate. Hence, we expect the company’s conversion rate to reach at 35.0% in 2015 as compared to the conversion rate recorded in 2011.
Competitive average basket price 9
Based on our calculations, the company’s overall average basket price in 2011 was recorded at SAR524 as compared to SAR425 calculated in 2010. We believe the growth in average basket price was mainly based on the (i) increase in average prices of office/school stationery and (ii) moderate price increase in new laptops and PC tablets and (iii) new versions of smart phones, which are obviously expensive than the earlier ones.
In the wake of upcoming competition and rapid evolution in technology, we believe the company has to offer its products at competitive pricing in order to maintain its growth trajectory. Consequently, this will lead the company’s average basket price to increase at a CAGR of 3% during 2011-15. Furthermore, despite of expected limited increase in average basket price, we believe the company will perform well in stiff competitive environment
350.
400.
450.
500.
550.
600.
2009* 2010* 2011* 2012e 2013e 2014e 2015e
Growth in average basket price (SAR)
Source: Investors’ presentation Dep-2011 & Aljazira capital
*Calculated figures (including wholesale prices)
Dynamic strategy - Key to continue growth
32.5%
33.5%
34.5%
35.5%
36.5%
37.5%
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
2009 2010 2011 2012e 2013e 2014e 2015e
Value transactions (mn) -LHS Conversion rate (%) - RHS
Conversion rate
Source: Investors’ presentation Dec-2011 & Aljazira capital
8 Revenue generating customers / total visiting customers.5 47th annual report, The Latest Economic Development 2011.9 Average price per transaction or revenues/number of transaction
15
MARCH2012
on the back of (i) well-organized market intelligence, (ii) quick response to changes, (iii) associations & marketing agreements with renowned brands of technology providers 10 and (iv) well-qualified management.
New e-books technology & its potential impact on Jarir
Since the customers in KSA are relatively young and quick to adapt changes so we cannot rule-out the growth potential of e-book, which could lead to a shift in the local book market from traditional paper books, in longer run. Moreover, we believe the major benefit will be associated with the one who will first bring this new technology & related tools in the local market. Despite of tough competition expected in the local market, we expect Jarir as a potential candidate to introduce such technology in the local market. Our expectation is mainly based on;
(i) Wide range of electronic product including the e-book tools i.e. smart phones, IPad and others.
(ii) One of the prominent book sellers inside the Kingdom.
(iii) Renowned brand name in local & regional markets with international recognition.
Potential impact of e-book technology on Jarir
Segments Impact Description
Traditional books NegativeIntroduction of e-book will possibly obsolete traditional books (paper-books). This could lead to the sale of traditional books at low prices.
Smart products PositiveThese products are used as a tool to operate e-book technology.
Source: Aljazira capital
Based on our understanding, e-book will eventually lead to the physical closure/reduction in a large section of books, which will enable Jarir to (i) expand its electronics coverage and (ii) product cost / ft2. Moreover, we cannot rule out the impact on overall customers’ visit with introduction of e-book in the local market. On the other hand, we believe the introduction of e-book by other competitor will hit the company’s book segment severely. However, we are not anticipating any major impact on the smart products’ section since Jarir is among the leading retailer of smart products inside the Kingdom.
We believe the launch of new smart devices compatible with 4G technology will open a new room of growth for Saudi telecom operators and also electronic device retailers i.e. Jarir. The global smart device market witnessed the launch of new IPAD3 in Mar 2012 (one of the few devices compatible with 4G technology).
It is worthy to mention that iPad3 has not been launched in KSA till now; however, we are expecting the penetration of the new IPAD version, Jarir is a potential distributor, in local market towards the end of 2012. Consequently, we are expecting iPad3 could give a boost in the company’s growth (Note: We have not taken any impact of iPad3 on our valuation since it is premature to make estimated growth from iPad3, at present).
10 Dell, HP, Apple, Acer, Sony, Fujitsu Siemens and others.
16
MARCH2012
Financial performance in 2011
Jarir Marketing Company’s sales revenue was recorded at SAR4.1bn in 2011, which indicates YoY massive growth of 37.6% over the revenues recorded in 2010. We believe the growth in the company’s 2011 sales revenue was mainly associated with YoY increase of (i) 23.3% in average basket price, (ii) 14% in value transactions. Consequently, the company’s net profitability registered YoY growth of 28% in 2011 and recorded at SAR513mn (EPS: SAR8.55), indicating a net profit margin of 12.4%.
Computers & electronics will continue to dominate Jarir’s revenues
Over the period of time, the company has transformed from the retailer & wholesaler of office/school supplies/stationeries to computers & electronics, which was mainly, associated with the induction of smart phones and PC tablets in the electronic segment. Consequently, the increased focus in electronic segment i.e. smart phones and PC tablets led to the domination of computer & electronics segment in the overall product mix.
According to the company’s investors’ presentation Dec-2011, currently the company has secured 7%-8% market of smart phones; where the estimated size of the market is hard to determine due to lack of official market size. This indicates the electronics & computer section will continue to dominate the company’s overall revenues. Based on our expectations, the company’s sales revenue will increase at 2011-15 CAGR of 10.6% and reach at SAR6.3bn in 2015. However, the company’s revenue/ft2 to increase at a CAGR of 3.1%, during 2011-15, which is mainly due to increase in ft2 area covered at 2011-15 CAGR of 7.3%.
Sales revenue & revenue/ft2)
Source: Investors’ presentation Dec-2011 & Aljazira capital
4.3
4.2
4.1
4.0
3.9
3.8
3.7
3.6
3.5-
7,000.0
6,000.0
5,000.0
4,000.0
3,000.0
2,000.0
1,000.0
2011 2012e 2013e 2014e 2015eRevenues - Core business (SARmn) - LHS Revenues - Computer & electronics (SARmn) - LHS
Revenues - Others (SARmn) - LHS Revenues/sqft (000 SAR) - RHS
Product mix 2004 Product mix 2011
Core business (books & stationary) 32.0%
Computer& electronics 66.0%
Others2.0%
Core business (books & stationary)59.9%
Computer& electronics 35.5%
Others4.6%
Source: Jarir Investors’ Presentation Dec-2011
Financial overview & outlook
17
MARCH2012
Operational efficiency will lead profitability growth
Based on our expectations, the company’s profitability is expected to post after tax profit of SAR582mn (EPS: SAR9.7) in 2012, which indicates YoY growth of 13.4%. Moreover, on account of increase in competition, we believe the company will take cost control measure to maintain its profitability margin. Hence, this will translate into increase in net profitability at a CAGR of 11.3%, during 2011-15.
Profitability growth & margins
Source: Company annual reports & Aljazira capital
19.0%
16.6%15.3%
15.3%
15.6%
15.8% 16.1%
14.6%
13.3%12.4% 12.2% 12.4% 12.6% %12.7
11. 0%
12. 0%
13. 0%
14. 0%
15. 0%
16. 0%
17. 0%
18. 0%
19. 0%
20. 0%
-
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
2009 2010 2011 2012e 2013 e 2014e 2015e
Net profit (SARmn) - LHS Gross margin (%) - RHS Net margin (%) - RHS
18
MARCH2012
Jarir Marketing Company - Income Statement (FY11-15e)
All figure in SAR Mn, unless specified 2011 2012e 2013e 2014e 2015e
Sales 4,147 4,763 5,438 5,895 6,197
Cost of sales (3,514) (4,036) (4,591) (4,961) (5,200)
Gross profit 634 727 848 934 997
General & administration expenses (68) (78) (90) (98) (103)
Selling & distribution expenses (59) (70) (82) (93) (103)
Operating profit 507 579 676 743 792
Other income (Expense) 31 31 31 31 31
Financial charges (7) (3) (3) (2) (2)
Profit before zakat 531 606 704 772 821
Zakat (18) (24) (28) (31) (33)
Profit after zakat 513 582 676 741 788
P&L Appropriation A/C
Opening balance 320 255 372 473 584
Net income 513 582 676 741 788
Transfer to statutory reserves (51) (58) (68) (74) -
Dividend paid (404) (407) (507) (556) (591)
Transferred to capital (123) - - - -
Ending retained earnings 255 372 473 584 781
Source: Jarir marketing company financial reports & Aljazira Capital
Financial statements
19
MARCH2012
Jarir Marketing Company - Balance Sheet (FY11-15e)
All figure in SAR Mn, unless specified 2011 2012e 2013e 2014e 2015e
Current Assets
Cash & equivalents 60 55 60 61 65
A/C receivable 243 317 332 357 384
Inventories 601 721 829 954 1,097
Prepaid expenses & other 39 41 43 45 47
Total current assets 943 1,133 1,264 1,417 1,593
Fixed & Non-Current Assets
Investment property 7 7 7 7 7
Equity investment/Investment available for sale 28 29 29 30 31
Property, plant & equipment 742 803 873 942 999
Total fixed & non-current assets 777 838 910 979 1,037
Total Assets 1,720 1,971 2,174 2,396 2,631
Liabilities & Shareholders' Equity
Current liabilities
Due to banks 67 68 70 72 74
A/C Payable 464 533 560 588 617
Accrued expenses & others 94 99 104 109 115
Employees' incentive program - current portion 29 29 29 29 29
Deferred revenues 10 10 10 10 11
Total current liabilities 664 740 774 809 846
Non-current liabilities
Long-term loans 108 107 105 104 103
Employees' incentive plan 1 1 1 1 1
Provision for employees' EOSB indemnities 40 42 44 46 49
Total non-current liabilities 149 150 150 151 153
Total Liabilities 813 890 924 960 998
Shareholders' Equity
Share capital 600 600 600 600 600
Statutory reserve 51 109 177 251 251
Retain earnings 255 372 473 584 781
Total Shareholders' Equity 907 1,081 1,250 1,435 1,632
Total Liabilities & Shareholders' Equity 1,720 1,971 2,174 2,396 2,631
Source: Jarir Market Company financial reports & Aljazira Capital
20
MARCH2012
Jarir - Cash Flow Statement (FY11-15e)
All figure in SAR Mn, unless specified 2011 2012E 2013E 2014E 2015E
Operating cash flow
Net Income from operation 513 582 676 741 788
Depreciation & amortization 20 28 30 33 36
Other cash flows from operations 13 (28) (28) (29) (29)
Change in Working Capital 47 (121) (94) (118) (137)
Net Cash from operating activities 594 461 584 627 657
Investing Cash flow
Addition to property. Plat & equipment (207) (88) (101) (101) (93)
Other investment activities 0 (1) (1) (1) (1)
Cash Flows from Investing Activities (207) (89) (102) (102) (94)
Financing Cash flow
Dividend paid (404) (407) (507) (556) (591)
Dues to banks 25 0.587 (0.433) 0.704 0.759
Other financing cash flows 30 30 31 32
Cash Flows from Financing Activities (379) (377) (477) (524) (559)
Increase/Decrease in Cash 7 (4.8) 4.8 1.1 4.6
Cash Beginning Balance 52 59.8 55.0 59.7 60.8
Cash Ending Balance 60 55 60 61 65
Source: Jarir Marketing Company financial reports & Aljazira Capital
21
MARCH2012
Appendix
Key operational indicators
All figure in SAR Mn, unless specified 2011 2012E 2013E 2014E 2015E
Total area (sqft) 991,083 1,094,667 1,226,500 1,339,500 1,358,333
Sales/sqft (SAR) 4,185 4,340 4,401 4,401 4,563
Cost/sqft (SAR)-excluding Dep. 3,525 3,635 3,714 3,679 3,802
FCF/sqft (SAR) 358.5 399.3 392.6 392.5 415.4
Customer visit (mn) 22.0 23.9 26.4 27.7 28.0
Number of Stores 35 38 42 44 44
Customer visit /Store (per day) 2,089 2,074 2,069 1,997 1,996
Transaction (mn) 7.2 8.0 8.9 9.5 9.8
Conversion ratio 32.7% 33.3% 33.7% 34.2% 34.9%
Cost of sales / sales revenue - exl Dep 84.2% 83.9% 83.6% 83.4% 83.1%
Source: Aljazira Capital
Market position
Jarir
Extra
Best
Obeikan
Electro
Copu Me
Jarir
Obeikan
maktaba
tihama
mirza
70%84%
81%
65%
53%
29%
29%
18%
31%
8%
19%
2009
2007
2009
2007
52%
70%
58%
40%
23%
38%
36%
17%
14%
7%
6%
Bookstore Ever Visited Electronic Megastores Ever Visited
Source: Jarir Marketing Company Dec 2011 Investors’ presentation
*The above graphs are the result of marketing survey conducted to determine the customer visit to different retail stores across the Kingdom. Interestingly, Jarir was ranked at the top retailer which was visited by most of the people, which indicate the company’s strong presence in the local market.
Store’s facts
Source: Jarir Marketing Company Dec 2011 Investors’ presentation
* Number of showrooms are representing only retail showrooms
2003 2004 2005 2006 2007 2003 2009 2010 2011
Leased
Owned
Up toDecember2011
5 5 5 5 5 66 6 7
10 12 14 15 15 17 21 22 23
2003
455 524 490 621 621753
905 955 1036
2004 2005 2006 2007 2003 2009 2010 2011
Leased
Owned
257
198
326
198
392
198
423
198
423
198
504
249
656
249
706
249
741
295
Number Of Showrooms
Showrooms Area Is SQF `000
Average Sales Per Store Employee In US$ `000
333
485460465565
Jarir Best Buy Staples Office Depot Barnes & Nobles• Store employee in best buy, B&N and Office Depot are assumed to be 60% of total emp. for calculating the Sales per store emp.
• # North American Retail Division (the Sales per Sqf for Staples & Office Depot pertains to North American Retail Sales/Division).
• For Staples the total sqf for North American Retail Sales has been calculated based on the no. of stores & avg store size.
Note
22
MARCH2012
Key global competitors
office supliers
school supplies
PC & peripherals
portable devices
gaming
books
art supplies
(pdas, ipods, digital cams, mobile)STAPLES
STAPLES
STAPLES
STAPLES
Source: Jarir Marketing Company Dec 2011 Investors’ presentation
Local competitors
Laptops & electronics eXtra & Electro
Bookstores Obeikan
Office supplies Almaktaba
Source: Jarir Marketing Company Dec 2011 Investors’ presentation
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