Saudi retail sector is poised for strong earnings growth mainly due to expansion through opening stores, margin support from economies of scale and consolidation of fragmented markets, all of which are key drivers of profit growth, said a report. However, wage inflation due to Saudisation, execution risk from store expansion and price-led competition are key concerns, said NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, in its latest report on the Saudi retail sector. “We remain overweight on extra with a PT of SR132 and Al Hokair with a PT of SR129, whilst remaining Neutral on both Jarir with a PT of SR164 and Al Othaim with a PT of SR92,” said Farouk Miah, the head of equity research at NCB Capital. “Extra and Al Hokair should continue to benefit from store expansion growth, as well as the possibility of higher margins. We believe Jarir is a high quality company although many positives are currently priced in,\" explained Miah. Al Othaim, he said, has a strong long-term outlook, although the coming 12 months will be difficult due to low organic sales growth, as well as pressure from Saudisation. NCB Capital considers that consolidation of fragmented sectors which are dominated by independent stores is a key theme for the Saudi retail market. “Extra, Jarir and Al Othaim are well positioned to benefit from this structural trend in their respective sectors, leading to 30-50 per cent expansion in their store count over the coming five years. Al Hokair has already consolidated the Saudi mid-market fashion segment, with potential growth coming from expansion in the value-segment and opening stores abroad,” remarked Miah. The NCB report pointed out that Saudisation will lead to long term pressure on retail margins. \"Since the middle of the fourth quarter of 2012, Saudi firms have incurred a SR2,400 ($639.8) charge per year on each foreign employee in excess of local staff. NCB Capital said this expense will lead to an average of 3-5 per cent Ebit pressure for the retail market.  From the stocks under coverage the EBIT impact ranges from 0.2 per cent for Jarir to more than 5 per cent for Al Othaim. Given the growth outlook, Miah said the Saudi retail sector trades at an attractive 2013E P/E of 13.6x and the variance in multiples between the stocks under coverage is due to their differing risk-reward scenarios. \"Al Othaim trades at a discount due to low organic growth and Al Hokair due to expansion risks; Extra trades at a premium due to its high growth outlook and Jarir due to its high dividend yield and returns,\" he added. TradeArabia News