Investors' eyes turn to Saudi retail

Saudi Arabia's retail sector is expected to grow fast, driven by a rising population and changing lifestyles. Reuters and Bloomberg News

As the earnings-reporting season gets under way, investors this week will turn their attention to quarterly results from Saudi Arabia's retail sector.

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Analysts are expecting to see decent fourth-quarter results, with year-on-year numbers driven by store openings across the sector. However, quarter-on-quarter comparisons are likely to disappoint as the third quarter included Ramadan, a peak time of the year for consumer spending in the kingdom.

Jarir Marketing, one of the country's largest stationery and electronic products retailers, last week reported a 21 per cent year-on-year increase in quarterly profit to 125 million riyals. The company posted a net profit of 152.9m in the third quarter.

"Jarir's results are very much indicative of what is expected to happen across the sector," said Farouk Miah, a retail analyst at NCB Capital. "The primary driver going forward for these companies are sales and expansion. "Whichever retail company you are looking at, they have been opening more and more stores."

The country's benchmark, the Tadawul All-Share Index, rose 0.1 per cent to 6,407.87 last week. The Tadawul fell 3.5 per cent last year as unrest in the Arab world and the deepening debt crisis in Europe dampened investor sentiment.

Despite the quarter-on-quarter slowdown, Mr Miah predicts consumer stocks will perform better this year than last.

Saudi Arabia's retail sector is expected to grow fast, driven by a rising population, improving education and changing lifestyles.

"The outlook for the global economy looks mixed at best, with demand for oil to slow down," Mr Miah said. "So where should investors place their money? Companies that are domestically focused, defensive, and less correlated to global demand. Retail would be perfect."

The economic slowdown could lower soft-commodity prices over the next year, which would ease cost burdens for the food retail companies, Mr Miah said.

Savola Al-Azizia United, one of the country's biggest food companies, should benefit the most. Savola, which recently entered the pasta business, also produces sugar and edible oils.

"It's a basic business," Mr Miah said. "Savola buys raw food, processes it and sells it."

Almarai, among the country's largest dairy producers, should also reap rewards, Mr Miah said.

Al Othaim, one of the country's largest supermarket chains, which may offer a "surprise" factor for investors, ought to see bigger margins this year on the back of store openings and softer food prices. Mr Miah expects Al Othaim to record revenue growth of 16 per cent year-on-year in the fourth quarter, with growth of 13 per cent this year.

"Store expansion is the key top-line driver," he said.

Al Othaim opened its 10th store in October, taking its total store count to 196. The company expects to open nine more stores this year.

"The key driver enabling this growth is the structural shift in the grocery retail market in Saudi Arabia, which is seeing organised retailers taking market share from corner stores," Mr Miah said. "With food retail prices traditionally sticky and not falling by the same level as costs, this may lead to enhanced margins for Al Othaim this year."

Egypt's stock market will probably be driven by political events, as run-offs for the third stage of parliamentary elections start on Tuesday. The results are expected to be published on Friday. Egypt's parliament is due to hold its first session January 23.

The country's benchmark EGX 30 Index fell 1.4 per cent last week to 3,627.80. The index declined 48 per cent last year after the revolution that ousted Hosni Mubarak from the presidency shook investor confidence.

UAE stock markets reported little trading activity last week as the earnings-reporting season begins in three weeks.

The Abu Dhabi Securities Exchange General Index ended last week little changed at 2,398.76, while the Dubai Financial Market General Index rose 0.5 per cent to 1,348.80.

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