The recent announcement of the launch of our private equity fund that will focus on the African Food Industry received much attention in the past few days. This is an exciting new extension of Silk Invest’s business. Over the past year we have created a team that not only has the required experience in private equity in the region but also has a track record in the food industry. If you would like to discuss this strategy in more detail, please don hesitate to contact me.In this week’s letter, Hesham Saad and Mohammed Abdeen, our Cairo-based investment team covering the MENA, provide us with some perspective on the Jarir Marketing Company, a Saudi Arabia-based company that acts both as a wholesaler and retailer of office products. This company really couldn’t be in a better place at a better time…
A beautiful business
You won’t be surprised that Saudi Arabia is one of our favorite investment destinations if you consider all the things it has going for it. Apart from the obvious growth drivers derived from its natural resources, Saudi Arabia has a population of 26.5 million which is characterized by rapid growth and a large cohort of youths. The average age of a Saudi is 21.5 years old and just over 38% is younger than 14 years of age! Add to this the privileged financial situation of the Kingdom that is investing its resources to ensure a more affluent society takes hold and remains.
If you believe in the Kingdom’s internal growth story, The Jarir Marketing Company should be one of your favorites. It has tentacles running through the entire middle class opportunity. The company’s activities include retail and wholesale trading in office and school supplies, children toys, educational aids, office furniture, engineering equipment, computer and computer systems, sport and scout equipment, and paper. The company is also involved in the purchase and acquisition of residential, commercial buildings and land, in addition to computer maintenance. In other words, it is interestingly diversified.
Jarir also has regional ambitions and a strategy in place to execute them. Its subsidiaries comprise Jarir Trading Company in Abu Dhabi, United Arab Emirates, Jarir Bookstore in Kuwait, United Company for Office supplies and Stationeries in Qatar, Jarir Egypt Financial Leasing Co. in Egypt and United Bookstore in Abu Dhabi, United Arab Emirates.
The company has released its results for Q1 of 2010. Sales grew by 20.1% year-on-year to SAR 795 million, this growth can mostly be attributed to the increase in its outlets, up from 23 to 28 during Q1 2009. This expansion has resulted in higher sales of IT & electronics, as well as school and office supplies. The growth in year-on-year sales has increased the company’s EBIT by 11%. Net income also grew by 10% to SAR 118 million over the last 12 months.
The expansion strategy seems to be working. By just increasing its high street presence by around 20% (5 outlets), Jarir’s Q1 sales grew by the same proportion, boosting net Income by 10%. The company’s management plans to open another 3 stores later this year. This company is planting seeds in very fertile territory!
As always, we look at the Jarir Marketing Company from two perspectives; The Company and The Stock price. We have a positive view on both.
Jarir, the Company
Jarir has all what it takes to flourish in this untapped virgin economy thanks to its solid financial position. The total debt-to-Assets Ratio is very low at 15%. In addition, the company has a very strong bargaining position with its suppliers. This shows from the company’s current liabilities which are 3 times higher than its long term interest bearing liabilities, this essentially means that a major part of its working capital is financed by suppliers at no cost!
One of the main reasons why we think Jarir has a very sustainable business model lies in its solid cash flow generating abilities. The steadily growing positive trajectory of the income derived from its operations more than offsets the cost of financing its expansion.
Jarir has an prodigiously diversified all-weather product Mix which consists of books, school supplies, office supplies and IT & peripherals. Office supplies and IT & peripherals are the two largest revenue generators but they are typically regarded as also being more susceptible to economic downturns. However, in Saudi Arabia, they are relatively immune to slowdowns due to the disproportionate number of people working in the public sector where jobs are more secure and pay checks stable.
School supplies and books are defensives and growth will remain steady, even in a weak economy given they form a small portion of a consumer’s disposal income. If the economy booms, IT flourishes but even in more difficult times, the Saudi people will put their children’s education first (culture). Lets not forget that the positive demographics also do their share in supporting the demand for educational accessories.
Jarir the Stock
The Jarir stock, currently trading around SAR 150, is highly liquid and has further upside potential. The Falcons fund has already gained 15% on its current position and we looking for another 20% up to our target price of SAR 180. Furthermore, the stock habitually trades with low volatility and offers a dividend yield of around 5% at current price levels. The stock has an attractive PE level of 16x, below that of its peers and the Saudi Market which average around 20x and 19.1x respectively. Although we mention the word ‘peers’, in reality we see no listed alternative in the MENA space that even comes close to Jarir’s value proposition. Finally, good coverage from market analysts will ensure that this story doesn’t unfold in the dark and will provide the stock with ongoing momentum from both local and foreign investors.
In conclusion and in few words, the Jarir Marketing company is as good as it gets for investors who are looking for sustainable business models that can internally finance growth.
You may also have noticed that there are even great stories in Saudi Arabia in which you don’t even have to use the word ‘oil’… there’s more where this one came from.
If you would like to have a closer look at the fundamentals, we have attached the investment card for Jarir. We use these cards in our investment process to summarize the key parameters for each investment.
Our weekly updates provide more perspective and insight into the African and Middle Eastern markets and economies. We have a local presence in these markets which allows us to provide investors with a better understanding of what is really going on in this high growth environment. they can be downloaded via our website.
More information about our company is available on www.silkinvest.com
We look forward to keeping you updated
Kind regards from the Silk Invest team
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