This week our team in the Middle East, Hasham Saad and Mohammed Bahaa, take us to the Kingdom of Saudi Arabia and its strong growth potential. We focus on how a growing consumer society is helping this economy to diversify itself away from its dependence on oil.
The Kingdom of Prosperity
Saudi Arabia owes its vast amount of reserves to its abundant hydro-carbon reserves. It is a top-down managed economy with strong government controls over its major economic activities. The kingdom possesses more than 20% of proven petroleum reserves and thus ranks as the world’s largest oil exporter. The oil sector accounts for roughly 75% of budget revenues, 45% of GDP, and 90% of export earnings. Nevertheless, approximately 40% of Saudi’s GDP comes from the private sector.
The tremendously cash-rich government has already been executing a strategy to further encourage growth in the private sector, especially in the areas of power generation, telecommunications, natural gas exploration, and petrochemicals. The goal is to reduce the kingdom’s dependence on oil exports and to increase employment opportunities for the swelling Saudi population which has grown up to 25.4 million people in 2009.
What makes Saudi Arabia especially interesting as an economy is not only the fact that it is affluent, but also because it has a very young population; 51% of its citizens are below the age of 25. These demographics obviously herald a significant increase in the workforce and number of new families, which will propel demand for food, clothing, electronics and other consumer goods.
Saudi Arabia forecasts its real GDP growth to reach 3.3% in 2010, up from 0.6% in 2009 when oil production contracted. Going forward, much of this growth will increasingly be driven by non-oil related activity. There is already clear evidence that a notable strengthening in domestic activity is in the works. The authorities are confidently rolling out a master plan aimed at installing the foundations that will ensure sustainable growth for private consumption
According to Business Monitor International, Saudi Arabia’s mass grocery retail sales are anticipated to grow by nearly 34% by 2013. Today, up to approximately 40% of the retail sales still take place in small and somewhat informal outlets. This clearly leaves further potential for more organized & larger scale players to penetrate the sector. Let us not forget that in Europe, over the past 20 years we have witnessed how successful groups with the benefits of economies of scale and marketing capabilities were in conquering the retail markets, we anticipate a similar trend in the desert kingdom.
Although Saudi Arabia currently has inferior consumer spending power than some of its neighbors in the Gulf, the larger size of the Saudi population can realistically provide retailers with a realistic and sustainable long-term volume growth potential.
As an investor, how do you position for this trend? We believe one of the ways the equity investors can capture this opportunity is via the Abdullah Al Othaim Markets Company. It is probably positioned to one of the big beneficiaries of the shift towards Saudi consumerism as it has long tentacles into the structure of this growing part of the economy.
The Abdullah Al Othaim Markets Co, a subsidiary of Al Othaim Holding, a Saudi Arabia-based company that is engaged in the wholesale of consumer products. It is primarily active in food products through its chain of supermarkets and convenience stores. It also has divisions that focus on wholesale trading activities of automobiles and spare parts, agricultural crops, livestock, household equipment, catering services. In addition, the Company owns and operates several bakeries in different cities of the Saudi Kingdom as well as food processing and manufacturing facilities. Furthermore, Abdullah Al Othaim Markets Company is also involved in the construction, managing, operating and maintaining of supermarkets, malls, storage facilities and cooling warehouses.
Al Othaim is Saudi Arabia’s second largest retailer with a 4% market share. The company operates through a network of 89 outlets across the Kingdom. Most stores (56) are located in Riyadh, and the majority of outlets exist in the format of supermarkets.
As the only listed pure food retailer in the region, the stock represents an excellent way to gain exposure to the sector. Al-Othaim’s aggressive store expansion, multi-format operations and pricing power position it strongly within the Saudi Arabian food retailing space. Its defensive product portfolio with staples constituting 85% of turnover makes the business model quite resilient should help the company outperform even during economic downturns. The group is committed to driving it’s expansion further by adding an average of 10 new stores every year over the next five years.
Al-Othaim has reported strong 2Q10 preliminary results with net income increasing by 61% YoY to USD 8.3 million. During the Q2 period, Sales increased by 13.5% YoY to USD 227 million. During the same period, despite investments in new outlets, net margins rose by 1.08%. Management highlighted that this was due to an improved bargaining positioning vis-à-vis their suppliers as a result of its rising market share. Needless to say that Al-Othaim is a core holding in our Arab Falcons fund!
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