FALCOM EQUITY RESEARCH REPORT · EQUITY RESEARCH REPORT Snehdeep Fulzele Head of Research +966 1 201 1280 [email protected] Company: Jarir Marketing Company Date: June

INTELLIGENTINVESTMENTIDEAS

FALCOMEQUITYRESEARCHREPORT

Snehdeep Fulzele Head of Research +966 1 201 [email protected]

Company: Jarir Marketing CompanyDate: June 19th 2007

FALCOM Ownership2.01% : 6,03,000 shares

Recommendation :

STRONG BUY

Market Price: SR 137Target Price: SR 209

PAGE 01JARIR MARKETING COMPANYFALCOM RESEARCH

52 week High 214.50 Low 127.00 PER (TTM) 16.6 PBV 7.7 Div. Yield 4.4% YTD 2007 -7.3% 1 Year Return -17.7% 3 Years Return 128.7% Beta 0.86 30 day Av. Volume 70,211

MARKET PERFORMANCE

Founder Shareholders 57.10% Gulf Investment Corporation 4.50% Olayan Group 4.13% FALCOM Financial Services 2.01% Shuaa Capital 0.29% Others 31.96%

SHAREHOLDING PATTERN

Stock Dividend (18-Dec-05) 1:4 Pre-Dividend Capital 240,000,000 Current Capital 300,000,000

CAPITAL ACTION

Sales 29.1%Net Profit 26.6%Fixed Assets 3.4%Shareholders’ Equity 20.0%

CAGR (2002-2006)

Tadawul Code: 4190 Market Price SR 137 Bloomberg Code: JARIR AB No. of Outstanding Shares 30,000,000 0.34% Market Capitalization 4,110,000,000 % to Total Market Cap 6.51% Enterprise Value 4,109,931,203 % to Services Sector

SYNOPSISJarir Marketing Company engaged in the retail business is generating heavy cash flows. Jarir clocked tremendous growth in last two years in view of high disposable income in the hands of consumers and appetite for technology intensive business machines. The brand enjoys solid reputation in the GCC region. The company's unique business model of de-risking the cyclical variation in demand is paying off. We have faith in the growth prospects of the company. High dividend payouts are an additional attraction. FALCOM Financial Services holds shares in the company.

OUR TAKE OUT:The company is poised for doubling sales by 2010. Based on our analysis, we have set a target price of SR 209. Our estimates are conservative. The current market price of SR 137 leaves room for appreciation of more than 50%. We recommend STRONG BUY on the stock.

PER 2007 15.2PER 2008 12.8PER 2009 10.4Div. Yield % 2007 4.61%Div. Yield % 2008 5.46%

VALUATION INDICATORS EST.*

PEG 0.57PEG (5 year Est.*) 0.85Book Value 17.76

CAGR (2006-2011) Est.*

Sales 21.1%Net Profit 19.5%Fixed Assets 6.4%Shareholders’ Equity 12.0%

(All amounts in SR) (* FALCOM Research Estimates)

SAUDI STOCK MARKET

(SR MILLION) 2005 2006 2007E 2008E 2009E 2010E 2011E

Sales 1209.7 1505.4 1681.8 2028.8 2537.9 3138.3 3923.9 PBDIT 178.7 243.8 275.1 326.5 404.4 493.6 609.9 Net Profit 176.2 243.3 270.5 320.8 395.7 482.1 593.8 EPS (SR) 5.9 8.1 9.0 10.7 13.2 16.1 19.8 Dividend Per Share (SR) 4.0 6.0 6.3 7.5 9.2 11.3 13.9 PER (X) 32.2 18.2 15.2 12.8 10.4 8.5 6.9 PBV (X) 11.1 7.0 5.7 4.8 4.0 3.3 2.8 Enterprise Value/ PBDIT (X) 31.9 17.9 14.5 12.1 9.6 7.7 6.0 Dividend Yield 2.1% 4.1% 4. 6% 5.5% 6.7% 8.2% 10.1% Dividend Payout Ratio 68.1% 74.0% 70.0% 70.0% 70.0% 70.0% 70.0% Return on Equity 34.6% 38.4% 37.4% 37.5% 38.6% 39.2% 39.9% Asset Turnover Ratio 1.6 1.8 1.8 1.8 1.9 1.9 2.1E – Estimate; Current Market price is used for estimates while price on last trading day of the year is used for previous years.

(Source: FALCOM Research)

Executive Summary 04Valuation 06Return to Shareholders 11Company Profile 13De-risking the business model 21Competitive Advantages 24Projections 27Financials 31

PAGE 03FALCOM RESEARCH

CONT

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JARIR MARKETING COMPANY

Early mover advantageJarir Marketing Company (Jarir) is operating in the retail as well as wholesale field of school supplies and office supplies for more than 30 years. It added computer supplies, software and office machines to product line along the way. It has created a niche in a field that is witnessing increasingly higher competition. We like the past track record of the company. Despite changing customer trends and pressure on margins, Jarir has emerged a winner.

Strong Financial positionIn the past four years, Jarir registered a compounded annual growth rate of more than 29% in top line and close to 27% growth in the bottom-line. Its Gross Profit Margin (GPM) touched a nadir at 18.6% in 2005 but recovered to 19.8% in 2006. In the first quarter GPM stood at slightly under 21%. Net profit margin touched 14.6% in 2004 and stayed there in the subsequent year before jumping to 16.2% in 2006. First quarter bottom-line margin was at 18.7%. At the end of 2006, Jarir carries shareholders’ equity of SR 633 million including share capital of SR 300 million.

Growth to continueDrop in year on year growth rates of various financial parameters in the first quarter have not escaped our scrutiny. Year on year sales grew 9.6% compared to a smart 43.3% growth in same period last year. Similarly, net profit in

the first quarter of 2007 at SR 80 million was higher 5.3% from SR 76 million for first quarter 2006. First three months of 2006 had seen a growth of 75% in year on year net profit.However, we are not concerned with short-term drop in rate of growth as previous two years registered a strong growth. More importantly, financials are still growing on a higher base. We believe the growth story of Jarir is not just intact but is going to gather pace in coming years.The company opened one new showroom in 2006, in Madinah and another one in Riyadh in the first week of 2007.

Jarir is expected to double the number of retail showrooms (Jarir Bookstores) in five years. Jarir would have added 3 showrooms by the end of 2007 (2 within KSA and one in Kuwait) and 4 more showrooms are scheduled to open in 2008. We will be seeing faster geographical expansion. Moreover, the new showrooms are likely to be bigger. From an average size of 2800 sqm now, in future the area of each Jarir Bookstore would be around 3500 sqm.Since the end of 2003, sales have shot up from SR 663 million to SR 1.5 billion at the end of 2006. FALCOM expects the sales to more than double over next five years raising the top line to SR 3.5 billion by 2011.

MIS drives efficiency through strict control on costsFor the high demand items like laptops, shortening of time from receiving the product

Despite changing customer trends and pressure on margins, Jarir has emerged a winner.

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EXECUTIVE SUMMARYPAGE 04 FALCOM RESEARCH

to dispatching it at the right retail showroom is crucial. It also reduces the risk of obsolescence. We are impressed by the strong logistics and supply chain management through the use of IT. In a fast moving world, Jarir has been at the forefront of using technology. The company equipped itself with the state of the art Management Information System as early as 1984. Management added JD Edwards program for resource planning in 1994. Almost half the sales in B2B segment are routed through connectivity with large customers.We believe supply chain management at Jarir gives it an edge over competitors. It is critical to source the inputs at competitive prices which in turn enable Jarir to maintain an image of provider of goods for value.

Healthy cash flows will continue to reward shareholdersJarir has rewarded its shareholders well. In 2006, dividend payout ratio is on the higher side at 74% on rising profits. Company has managed to consistently improve asset turnover ratio as well as return on equity by expanding through long-term lease arrangements. Management has confirmed that the lease agreements favor the company and are for a period of 15 to 20 years. The arrangement reduces the operational risk in the start up phase as company retains the right to exit in the first two years. We like the Jarir’s business model that has a potential to boost sales without straining the dividend payouts for the shareholders.

Professional ManagementThin line that usually separates the family involvement in routine affairs of the company initially bothered us. We were comforted by the pro-active steps of the management to ensure total non-interference from the family members in the running of the company. Al Agil family that holds the majority stake has taken concrete steps to shift the management in the professional hands.More than 80% of the key manpower is with the company for over 10 years. Employee satisfaction at Jarir is high.

Strong BuyJarir is quoting at a PER of 15.2 for estimated 2007 EPS of SR 9. The dividend yields on estimated dividends of SR 6.3 and SR 7 in 2007 and 2008 respectively are attractive at 4.6% and 5.5%. We have used a dividend discount model given the regularity of dividend payment, stability of earnings and high dividend payout. We arrived at a fair value per share of SR 209. The current price leaves a potential for 52% appreciation. We believe our assumptions for the next five years are conservative. FALCOM recommends STRONG BUY on the stock.

PAGE 05FALCOM RESEARCH JARIR MARKETING COMPANY

ValuationSelection of valuation modelWe have valued Jarir using the Dividend Discount Model (DDM) and Free Cash Flow to Equity (FCFE) Model.Dividend Discount Model is suitable given the regularity of dividend payment, stability of earnings and high dividend payout.

Dividend Discount Model1. Cost of equityCapital Asset Pricing Model is used for arriving at the cost of equity (Re).

a. Risk Free RateThe 10 year government bond yield was sought as the benchmark for the risk free rate of return. However, the bond market lacks liquidity and most of the bids are pointing to an inverted curve indicating market expectation of a fall in yields at the longer end of the maturity. We have assumed a risk free rate of 5% that is equivalent to current yield on government securities of 5 to 7 year period.

b. Return from the Saudi Stock MarketSince 1985, the market has returned compounded annual growth rate of 9.3%. For past five years this return stands at 23.1% and over last 10 years, Tadawul All Share Index has clocked compounded annual growth rate of 13.8%. For our analysis, we assumed market return of 11%. A higher expectation punishes the fair value while a lower expectation leads to sharp jump in the value.

c. Equity risk premium in line with the marketIn view of strong position of the company in the GCC region and growing consumer appetite

for technology intensive office machines, we believe the risk for Jarir is in line with the overall stock market and hence equity risk premium is taken same as the market risk premium.We get a cost of equity of 10.2%.

2. Perpetual growth rateThe average dividend payout from the company since 2002 has been 78%. We expect the dividend per share would rise to SR 14 per share in 2011 from SR 6 that the company paid recently. From 2007 to 2011, we have assumed 70% dividend payout. Beyond 2011, we expect the long-term perpetual growth rate in the dividends to settle around 5%.With these assumptions, we arrived at a per share fair value of Jarir at SR 209.

Sensitivity of valuationFair value is highly sensitive to the expected return from the market as well as perpetual growth rate of dividends for years beyond 2011.

Fair value calculation is not an exact science. It is subjective to the assumptions. A change in perpetual growth rate to 6% would boost the fair value to SR 253. Keeping other assumptions same, if we raise the cost of equity to 11%, the fair value drops to SR 177.5.

SENSITIVITY ANALYSIS

Fair Value 177.41 207.59 208.78 252.61 252.77

Beta 0.86 0.86 0.86 0.86 0.86

Risk Free rate 5.00% 5.00% 5.00% 5.00% 5.00%

Expected market return 12.00% 12.00% 11.00% 11.00% 10.00%

Perpetual growth rate 5.00% 6.00% 5.00% 6.00% 5.00%

Cost of equity 11.0% 11.0% 10.2% 10.2% 9.3%

Source: FALCOM Research estimates

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Free Cash Flow to Equity (FCFE) Model

Free Cash Flows are preferred over dividends in the following cases:1. Firms pay dividends that are not in line with earnings.Some firms preserve cash by not paying any dividends or pay minimal dividends which are insignificant when compared with net profits. Dividends then fail to represent the future prospects of the firm. In such cases, it is advisable to avoid dividend based valuation approach.

Jarir pays out substantial dividend in line with increasing net profit.

2. Often in cases of takeovers, another management targeting the company weighs the value in terms of free cash flows that are likely to be generated in future.

In the case of Jarir, Al Agil family holds the controlling stake of more than 57%. At the same time, some other shareholders are invested in the company for long-term. This reduces the floating stock of the company and adversely impacts takeover bid from any prospective investors.

Although both the conditions do not apply, we have worked on the valuation based on Free Cash Flows to offer another benchmark.

FREE CASH FLOW TO THE EQUITY CALCULATION (SR ‘000)

2007E 2008E 2009E 2010E 2011E PBDIT 275,134 326,538 404,361 493,651 609,921 Zakat (10,091) (12,173) (15,228) (18,830) (23,543) Working capital Investment (34,211) (62,241) (82,233) (89,743) (83,075) Capex (18,298) (19,112) (20,220) (32,400) (37,610) Free Cash Flow 212,534 233,012 286,680 352,678 465,693 Terminal Value 9,476,308 Cost of Debt 3.50% 3.50% 3.50% 3.50% 3.50% Cost of Equity 10.2% 10.2% 10.2% 10.2% 10.2% Portion of Debt 23,640 39,747 63,637 79,701 2,886 Portion of Equity 723,384 854,864 1,025,979 1,231,132 1,487,424 WACC 9.95% 9.86% 9.77% 9.76% 10.15% PV of FCF (2007E-2011E) 1,133,363 193,302 193,049 216,738 243,041 287,233 PV of FCF (2012 onwards) 5,844,855 Enterprise Value 6,978,218 Minus: Outstanding Debt 2,886 Plus: Cash 29,419 Equity Value 7,004,751 Number of Shares 30,000 Fair Value per share (SR) 233.5 *WACC – Weighted Average Cost of Capital (Source: FALCOM Research Estimates)


Keeping the key assumptions same, we arrived at a fair value of SR 233.5 per share. It is worth noting here that the company does not carry a long-term debt on its balance sheet. Any portion under ‘due to banks’ represents a short-term arrangement for cash flows management. As such, fluctuation in the debt portion reflects outstanding dues on given day and is only a measure of short-term liquidity or a lack of it. There is no significant variation in valuation on account of changes in debt.

Free cash flows react significantly to variation in assumptions of cost of equity and rate of future growth beyond five years.Thus, a one percentage drop in perpetual growth to 4% would result in a fair value for the share dropping to SR 200. Fair value moves in tandem with perpetual growth rate. On the other hand, fair value has an inverse relationship with cost of equity. A drop in cost of equity to 9% would push the fair value higher at SR 305 per share.

SENSITIVITY ANALYSIS

Cost of Equity Perpetual growth3% 4% 5% 6% 7%

9% 213.2 249.9 304.9 396.5 579.8 10% 180.7 206 241.3 294.4 382.7 10.2% 176.4 200.3 233.5 282.6 362.8 10.50% 167.8 189.1 218.3 260.4 326.5 11% 156.5 174.7 199.1 233.2 284.3

PAGE 08 FALCOM RESEARCHVALUATION

Relative ValuationNo other company in Saudi Stock Market is in the same business as Jarir. The listed companies in other markets that are operating in the same/ similar business segment can not be directly compared with Jarir for number of reasons such as• Growing trade surpluses of countries in GCC have kept the liquidity higher in areas where Jarir does its business• Higher liquidity and economic boom have boosted the consumer confidence higher in last few years and the huge correction in 2006 of the stock markets in the region have done little to dent consumer spending•Demographic profile of the GCC population favors strong growth in future for Jarir. Sources suggest, more than 38% of the population is below 14 years in Saudi Arabia – the largest country in the six nations GCC and home to Jarir•Companies within GCC pay lesser tax and face lesser competition.

Keeping the above points in perspective, we focused our attention on three companies that we believe operate in the retail segment with products similar to Jarir.

For the investors with an access to invest in any of these companies listed elsewhere as well as Jarir, a quick look at the relative value measures

would provide a good insight.As can be seen, Jarir enjoys lowest price earnings to growth ratio for the next five year projected financials. It has the highest net profit margin as well as dividend yield.This chart provides a quick comparison in terms

of size denominated in Saudi Riyal. It is relevant to point out the difference among the competing companies. Although, all of them target the retail consumer, they differ in the range of products, mix of products and marketing channels.

Best Buy Co.Best Buy completed 50 years of operation in 2006. Company operates in US, Canada and China. It offers range of products in consumer electronics, home-office products, entertainment software, appliances etc. Like Jarir, the company also provides office machines that comprise laptops and desktop computers, computer support services, networking, and accessories; the other similar line of products is in the entertainment software that includes DVD movies, video game hardware and software, CDs and computer software. It has established branded retail stores and commercial Web sites under the brand names - Best Buy, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, and Pacific Sales Kitchen and Bath Centers.

(TTM) PEG (5 YR. EST.) PER PBV DIV YIELD

MARKETCAP./ SALES

NET PROFIT

MARGIN

Jarir 0.85 16.62 7.71 4.4% 2.66 18.7%

Barnes & Noble * 1.61 18.90 2.29 1.5% 0.51 2.9%

Best Buy* 0.95 17.16 3.71 0.8% 0.64 3.8%

Staples* 1.00 18.98 3.59 1.2% 0.99 5.4%

TTM – Trailing Twelve Months

(Source: FALCOM Research Estimates and * YAHOO Finance)


Till March, the company operated around 822 Best Buy stores, 20 Magnolia Audio Video stores, 14 Pacific Sales stores, 121 Future Shop stores, and 135 Five Star stores. It was formerly known as Sound of Music, Inc. and changed its name to Best Buy Co., Inc. in 1983.

Staples Inc.The company, together with its subsidiaries, operates office products superstores worldwide. It offers business machines, computers and related products, as well as office furniture. In addition, it also provides a range of services in printing and faxing. The company has a strong network of 1,884 office superstores as well as 55 distribution and fulfillment centers. It markets its products and services through catalog mailings, direct mail advertising, and Internet. It is in the business since 1985.

Barnes & NobleBarnes & Noble is known as a bookstore operator. The company operates as a bookseller primarily in the United States through a chain of bookstores. It also sells its books through its Web site, Barnes & Noble.com. The company, through its subsidiaries, publishes a range of nonfiction and illustrated books in wide range of areas, such as crafts, food, home design, puzzles and games and children’s books etc. The company runs around 793 bookstores. Barnes & Noble, Inc. was founded in 1986 and is based in New York, United States.

Within Saudi ArabiaSaudi Stock Market is currently trading at a PER multiple of 14.34. Tadawul All Share Index is at 7075 after briefly dipping under 7000 towards the end of January. Similarly, Services sector to which Jarir belongs witnessed its index closing below 1800 for a short period around the same

time. Jarir marked its 52 week low of SR 127 on 27th January. A brief snapshot of relative valuation in the Saudi Stock Market is provided in the following table.

Due to the vast differences among listed companies in general and Services sector in particular, this comparison is not very useful. Because of the substantial drop in stock prices since March 2006, dividend yield for the market looks attractive. We believe Jarir stands out among the increasing listed companies on the Saudi Stock Market because of its track record. We would not take guidance from average valuation measures of indices in the table as such a simplistic analysis would be misleading.

PER PBV DIV. YIELD

Tadawul All Share Index 14.34 3.01 3.59% TASI Services 31.43 2.01 1.81% Jarir 16.62 7.71 4.38% Source : FALCOM Research

PAGE 10 FALCOM RESEARCHVALUATION

Jarir stock price has grown steadily as compared to Tadawul All Share Index and TASI Service index. It lagged behind the two indices when the bullish trend was strong. During a bearish trend that commenced from February last year, the

stock has outperformed the two indices.Strength of the Jarir stock is evident over long term. It has provided higher returns as compared to both the Tadawul All Share Index and TASI Services Sector Index. Comparatively low volatility and steady growth make this stock a must for a long-term portfolio.

Dividend PolicyJarir is generating net profit at a compounded annual growth rate of 26.6% over past four years whereas it has built up assets at a CAGR of 10.8% while shareholders’ equity has grown at 20% CAGR. Every year, Jarir is paying high dividends without affecting growth in sales that have grown at a CAGR of 29.1%. Since 2002, the company has made a cumulative profit of SR 744 million out of which it distributed a sum of SR 583 million as dividends – an average dividend payout ratio of more than 78%.

We expect the heavy dividend payout to continue. We have assumed a constant dividend payout of 70% for future projections.

2003 61.35

2004 73.59 4.0 26.5%

2005 189.20 4.4 163.1%

2006 147.75 4.0 -19.8%

2007 YTD 137.00 6.0 -3.2%

Source : Tadawul

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From February last year, the stock has outperformed the two indices.

Source : FALCOM Research

Source : FALCOM Research

YEAR MARKET PRICEAS ON 31ST DEC

DIVIDENDRECEIVED (SR)

TOTALRETURNS

Year on Year Returns including dividends


SHAREHOLDING PATTERN % SHARES (NUMBER OF SHARES) % SHARES

As on 12-May-07 12-May-07 31-Dec-06 Post IPO adj.* Post IPO Post Pvt.Placement

Founding Shareholders

Jarir Investment Company 12.10% 3,631,000 3,647,000 4,250,000 680,000 12.6% -

Muhammed Al Agil 9.00% 2,700,000 2,700,000 3,125,000 500,000 12.0% 20.0%

Abdullah Al Agil 9.00% 2,700,000 2,700,000 3,125,000 500,000 12.0% 20.0%

Abdulkarim Al Agil 9.00% 2,700,000 2,700,000 3,125,000 500,000 12.0% 20.0%

Nasser Al Agil 9.00% 2,700,000 2,700,000 3,125,000 500,000 12.0% 20.0%

Abdulsalam Al Agil 9.00% 2,700,000 2,700,000 3,125,000 500,000 12.0% 20.0%

Gulf Investment Corporation 4.50% 1,351,000 1,351,000 3,000,000 480,000 10.0% -

Olayan Group 4.13% 1,238,000 1,238,000 1,350,000 216,000 - -

FALCOM Financial Services 2.01% 603,000 - - - - -

Shuaa Capital 0.29% 88,000 - - - - -

Others 31.97% 9,589,000 10,264,000 5,775,000 924,000 17.4% -

Total 100.00% 30,000,000 30,000,000 30,000,000 4,800,000 100% 100.0%

* Shares are adjusted for the change in face value from SR 50 to SR 10 as well as stock dividend after the initial public offering.

Source : Jarir Marketing Company

RETURN TO SHAREHOLDERSPAGE 12 FALCOM RESEARCH

PreambleToday a renowned name in the Middle East, Jarir Marketing Company (Jarir) was started in 1974 on the Jarir Street of Riyadh. A one store firm that primarily sold books slowly graduated into school supplies, then to office supplies and finally computer hardware and software. Success of Jarir happened over 30 long years.

Jarir operates in School supplies, Office Supplies, Computer Supplies, Books (both English and Arabic), Information Technology (IT) and business machines (laptops, desktops) segments. From the beginning, management is conscious of developing Jarir as one stop shop for all family members.

The company segregated the operations between Retail division that focuses on end users and Wholesale division that caters to resellers (retailers - small shops, malls etc. as well as wholesalers). Until January 2000, two divisions were separate companies – Jarir Bookstore Company looked after retail business and Jarir Marketing Company handled wholesale business. Since the products were common, Jarir Bookstore Company was merged into Jarir Marketing Company to take advantage of the synergy. This move was a pre-cursor to a larger plan of widening the shareholder base. In April 2000, founders privately placed 40% shares with Gulf Investment Corporation (10%) and others.

Till 2000, Jarir had 11 showrooms that fetched 27,300 square meters (sqm) of selling space. By the end of 2006, the network had grown to 20 showrooms with 56,200 sqm area. Over the same period, sales zoomed up from SR 402 million to SR 1.5 billion. Year 2001 witnessed the foray of company

in the GCC region through opening of showroom in Qatar. More recently in 2006, the company stepped in Egypt with the acquisition of land. Today, the company owns three trademarks – Jarir BookstoreTM, ROCOTM and Royal FalconTM. Jarir Bookstores are the company’s retail showrooms. Carefully located, Jarir Bookstores are prominent landmarks of their areas. They are professionally designed and products are organized for ease in shopping. ‘ROCO’ targets the premium range of products while ‘Royal Falcon’ caters to the lower end.

Jarir is majority owned by the founding family of Al Agil. Conscious efforts by the promoting family have resulted in building up of a professional team for running the company. Only two members out of twelve in the senior management belong to the family.

The company operates in a vibrant environment that is impacted by changing customer tastes, technological progress, increasing competition and advances in productivity. Challenges are many.

Taking the best practices from the industry all over the world, Jarir developed its unique business model. Management has de-risked the business substantially to remove blips in growth so that the company does not see a short period of rapid growth followed by stretched period of inactivity.

Jarir has been successful in occupying a niche position through savvy combination of sourcing of materials, logistics management, systematic inventory control and marketing. One common thread running through its operations over three decades is spontaneous adjustment to customer requirement.

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Taking the best practices from the industry all over the world, Jarir developed its unique business model.


OperationsIn January 2000, after the merger of the two companies, Jarir Bookstore Company and Jarir Marketing Company, operations of the combined company were separated into two divisions – retail and wholesale. Type of user defines the involvement of a division. A direct user is tapped by the retail division. On the other hand, resellers come under the wholesale division.

Two divisions work separately on product planning, sales and marketing. However, human resources, systems and sourcing are handled at the corporate level. Retail showrooms provide the early indicators on changing consumption

patterns. Accordingly, wholesale division cherry picks fast moving items for its customers.

A single warehouse of the company located in Sulai area of Riyadh serves all the outlets of the company whether inside or outside Saudi Arabia. Logistical arrangement at Jarir is efficient and keeps close tab on inventory management. Almost 50% products account

for cross-stocking, in other words, half the products arriving in the warehouse immediately move out to the desired showrooms.

Company has recently acquired land of 57,000

COMPANY PROFILEPAGE 14 FALCOM RESEARCH

sqm next to the existing warehouse taking the total warehouse space to over 95,000 sqm. Jarir stocks more than 50K items of office equipment, 5K art and engineering products and a wide range of gift items. In addition, Jarir Publication has more than 20K Arabic and English book titles.

Due to more time required for transporting goods from Riyadh warehouse and the cost involved, Jarir has decided to keep its venture in Egypt on hold till the situation becomes

favorable. In the meanwhile, the real estate in Egypt is going up in value.

The warehousing facility is integrated with bookstores and sales offices through central IT and Management Information System. It enables almost real time monitoring of sales and inventory. As a result, management can quickly act to adjust the product mix following a change in customer preferences. The whole set up significantly contributes in keeping the control on costs through

• on time availability of fast moving products at all the showrooms• excellent product sourcing. Jarir is leveraging its might in Retail to get attractive deals from t the suppliers and• competitive pricing.


SNAPSHOT OF RETAIL AND WHOLESALE DIVISIONS

Divisions Retail Wholesale

Customer profile End users - Walk in / Corporate Resellers – wholesalers / retailers

Stores/offices

Operates 20 book stores including one each in Doha, Abu Dhabi and Kuwait

and 5 corporate offices.Had 16 bookstores and 3 corporate offices till December 2003.

Expected to double the number of showrooms over next five years.

It has 6 wholesale showrooms and7 wholesale offices.

No addition is foreseenfor coming five years.

Products School Supplies, office supplies, Computers and IT, Books & Magazines, Office Machines

Fast moving items in schooland office supplies


• Jarir has state of the art system that ensures quick response to market determined product mix.

• Egypt venture is on hold following unfavorable logistics.

• Jarir acquired additional land in the first quarter for warehouse.

Retail DivisionRetail division is split into showrooms (widely known as Jarir Bookstores) and Corporate Sales offices. Walk in customers are serviced through the showrooms while big clients with repetitive orders such as government, quasi-government departments, companies are attended to by the

Corporate Sales offices. Over the years, retail division has grown in prominence. From the contribution of 71% in sales in 2000, the retail division has grown to a share of 88% in total sales in 2006.

Bookstores need to carry entire range of products because of different profiles of walk in customers. Often, Jarir management gets its first feel of changing trends here. An average size of a bookstore is currently 2,800 square meter (sqm). The company runs 20 bookstores out of which 17 are inside the Kingdom and one each in

Qatar, Abu Dhabi and Kuwait. Given the higher spending power of consumers in Kuwait, Qatar and UAE, Jarir enjoys better margins outside Saudi Arabia.

Source: FALCOM Research



Corporate sales differ from book store sales in two major ways – size of order and credit period. Client companies also provide repetitive business for Jarir. This clientele lifts large quantities of office stationeries and software products that generate better margins. Jarir has established five offices for looking after this segment of retail one each in Riyadh, Al Khobar, Jeddah in Saudi Arabia as well as in Qatar and Abu Dhabi. Key customers of Corporate sales are Aramco, Government organizations, hospitals and banks.Jarir has a program for loyal retail customers whether corporate or walk in individuals. The company can track the repeat customers and at the same time appreciate the loyalty of its customers by providing favorable treatment such as discount. Over 225,000 customers use Jarir Bookstore’s loyalty card program.

Wholesale DivisionJarir established the wholesale section in 1979 after it tapped an opportunity in the distribution of school and office supplies. This division was responsible for developing two special trademarks viz. ROCOTM and Royal FalconTM. The

company maintains more than 1,600 products from these two trademarks.

Remote locations and other retailers including competitors are served by a wholesale division. Usually because of the reselling nature of the business, client is more aware of the current trends in products and prices. The margin chart outlines the trend in net profit margin of the two divisions. As can be seen, we have assumed lower margins for projections.

The division operates through its showrooms and sales offices. It has six showrooms and seven sales offices. Showrooms entertain the walk in customers while sales offices cater to customers with large orders. Over last few years, Jarir did not feel a need to increase the network for this division and does not have any presence outside Saudi Arabia.

Wholesale division closely co-ordinates with retail showrooms. Often, a fast moving item on the floor of the retail showroom is picked by the wholesale.


Product Categories1. School SuppliesAs can be expected, this is the most seasonal product line at the company. School kits such as educational books, writing instruments, bags, notebooks, educational aids, writing material etc. constitute school supplies. At the beginning of the two school terms in September (impacts third quarter result) and January (impacts first quarter result), company sees major sale of school supplies.

Faber Castell, a strong brand in this product group, has witnessed heavy supply of duplicate cheaper imports in the market. Jarir has taken steps to curtail substandard supply from unauthorized persons.

School supplies are low value items. Over the years, Jarir has seen a drop in percentage contribution in total sales from this category. The group sales have maintained a steady growth, a sign of matured segment unlike fast moving office machines. From 2001-2006, the category has clocked high single digit growth. In 2007, school supplies product group is expected to contribute only 10% to the total sales of the company. Ten years back, school supplies accounted for 30% of the total sales.Jarir competes with many hypermarkets in this segment.

2. Office SuppliesStationery – diaries, calendars, writing paper, pens & pencils; table top items – pins, desk top mats, in and out boxes, staplers, letter opener, files etc.; and miscellaneous items like hand

bags etc. are part of office supplies. In view of faster growth of IT products, this segment is also seeing a drop in percentage contribution to overall sales of the company.

Computer supplies such as printing material like paper, ink cartridges; Compact Disks, DVDs etc. are also part of the Office Supplies. Jarir competes with hypermarkets and electronic stores in computer supplies.

Corporate clients account for lion’s share of the office supplies. The segment has better margins as compared to the Office Machines. Jarir faces competition from small retail outlets as well as major players such as Maktaba and Obeikan in office supplies.

3. IT Products and business machinesMultimedia and software products, desktops, laptops, scanners, printers, fax machines, networking products such as routers and photo copiers are part of the category. Jarir sources products from reputed world manufacturers – IBM, Hewlett Packard, Dell etc. but enjoys a special understanding with Toshiba.

Laptops and notebooks are among the best sellers at Jarir. This is the fastest growing and technologically intensive area. Recent developments in the field of office machines (laptops) and telecom have generated a strong demand. Due to quick technological obsolescence and fast launching of new products, the turnover in this product group is extremely high. A substantial growth at Jarir is a result of sudden and sharp jump in this category.


In 2005, feel good factor in the GCC due to buoyant stock markets of the region gave a tremendous boost to business.

Sustenance of high growth rates of the segment is debatable. Oil prices have seen increased volatility at higher levels and regional stock markets shrunk in 2006. Impact of wealth effect from the collapse of the stock prices may have been delayed by the region’s younger population and easy monetary policy.

Due to dramatic growth of the IT products and especially office machines, this product segment has attracted attention of big players. Jarir is a leader in the product category with substantial lead over second placed competitor.

We expect the segment to register the maximum growth among all products. However, we have toned down the rate of growth in our projections and also taken into account probable negative impact on the margins.

4. BooksFor decades, Jarir is known for its stock of books. Even today, Jarir bookstores offer more than 50,000 titles in Arabic and English.

Looking at the potential of Arabic books, the company established Jarir Publishing Company (JPC) more than a decade back in 1996. JPC obtains rights from publishers, in the United States and Europe, of the original English version of the books for translation and publication in Arabic. At present JPC holds rights on over 1,000 titles from various areas such as management,

health, information technology, personality development, life style, sports, travel, cooking etc. JPC undertakes complete range of activities that include selection of book titles, approval of local authorities and assigning both translation and printing to specialized entities. Sale of JPC is high among Arab readers. Some of the titles are selected for college education. JPC exports to Egypt, United Arab Emirates, Syria, Jordan, Kuwait, Oman and Lebanon.

5. Newspaper & MagazinesThis serves to keep the family together in Jarir Bookstores. Despite insignificant sales, news papers and magazines are essential to maintain traffic to the retail showrooms.

Own brandsOver more than 20 years, Jarir has established two of its brands – Royal FalconTM and ROCOTM. The company sells office stationery and school supplies under these brands that includes pens, drawing tools and notebooks. Royal Falcon targets the lower end while ROCO is a premium brand. In school and office supplies, Jarir’s own brands help raise the margin. Jarir is not involved on the manufacturing of these brands. Production is entirely outsourced. Given the ease in duplication and risk of losing heavy business to sub-standard products, Jarir has registered both the trademarks in number of markets including Middle East, India and China.


Jarir is in a business of retailing with no significant barriers to entry. It has a model that is easy to replicate. Against the conventional wisdom, Jarir has chosen to go for stand alone stores instead of taking space at the malls where traffic of walk in customers is always high. Except Toshiba that has a preferential arrangement with the company, Jarir has no exclusive arrangements with leading suppliers in the segments it operates in. Secret of business model at Jarir lies in the thoughtful actions that go into reducing the risks at every stage – sourcing, warehousing, sales and marketing. Management at Jarir runs a highly efficient structure that starts with human resources. Absence of adequately experienced and qualified manpower in the local market as well as limitations on outsourcing of manpower by the Government has been mainly responsible for controlled growth in the past.

Company has taken several measures to limit risks while continuing its focus on growth.

1. Cost and efficiency drive expansionDespite tremendous growth in population and spurt in consumerism within GCC, company has seen a checkered expansion of Jarir Bookstores. One reason could be that growth of past two years has been phenomenal and caught most in the market off-guard. At the same time, company believes that a rapid fire expansion may yield faster growth in the short duration but reduce its control on cost and efficiency that

is evident in high turnover and return on equity ratios. Moreover, it might increase the risk of overselling if for any reason market fails to absorb the volumes. Management is therefore cautious in creating right amount of space that is neither restrictive for free movement of customers nor so huge that empty floor starts to bite the efficiency.

Take Riyadh, for example, the fastest growing capital in the world. Population of Riyadh has supposedly shot up to six million people. However, company has only five retail showrooms which mean each showroom is serving 1.2 million people and that is clearly inadequate. Problems in getting the right people on board, training them as also right location at the right price limits growth.

2. Leasing against owningIn the past, management has been cautious in not locking its investments in low yielding assets including real estate. Expansion in last six years has entirely come from leased showrooms. Against five of its own showrooms, company runs fifteen showrooms on leased premises.

Leasing agreements favor Jarir. Lessor enters into long-term arrangement that usually runs for not less than fifteen years and Jarir gets to pay rentals at a substantial discount to the market rates. Jarir also retains the right to exit for the first two years that are crucial to the success of the venture. If the showroom is successful

DE-

RISK

ING

THE

BUSI

NESS

MO

DEL

Jarir has taken several measures to limit risk while containing its focuson growth.


in the first two years then it is set to become a cash cow or else management can walk away with minimal loss to its shareholders. Lessor agrees to favor Jarir because Jarir Bookstore soon becomes a major landmark in the area attracting customers. As a result, Lessor is able to charge better rentals to other tenants.

Past two years have seen a sudden jump in real estate. In last three months, the company has executed two transactions, both in Riyadh. First, it expanded the warehouse by investing SR 27 million and then it invested SR 60 million for a plot of land. We believe this strategy would benefit company in two ways – Riyadh is growing very fast and there is every possibility that property at a prime location would facilitate own showroom in future. On the other hand, if the property is developed as a mall then it would yield higher rentals not to mention a ride on bullish real estate.

We tend to agree with the management on unlocking the cash and distributing to shareholders as long as it does not compromise the steady growth potential of the company

or lose opportunities that would make more returns than shareholders could hope to make elsewhere.

3. Stand alone family StoresBased on past experience, management realized that store within a mall may steer growth in initial years but would cap the revenues when the consumer focus shifts to another commercial centre. On the other hand, the concept of stand alone stores maintains the brand identity; continues to offer consistent and expected experience to walk in customers and most importantly maintains the overall trend in growth.

Lessors of premises offer attractive terms to Jarir as it generates traffic to the location. A new Jarir store invariably pulls customers because of shopping value to entire family. Jarir has something to offer for every member

of the family. It is pertinent to mention here that despite low volume and low profit, Jarir needs to offer items such as Newspapers and Magazines to maintain stream of customers.

DE-RISKING THE BUSINESS MODELPAGE 22 FALCOM RESEARCH

4. Sub-letting to complementary businessJarir operates in technologically intensive products such as laptops and mobiles. These products move fast but also carry low life due to quick technological obsolescence. To reduce the risk of obsolete mobiles, company tied up with a company that had desired expertise – Axiom Telecom. The association kept its earlier margins from mobiles intact but took away the risk of variation in sales as well as obsolescence out of its model. Recently, it added Starbucks to its showrooms to enhance the consumer experience.

5. Strong Management Information SystemJarir equipped itself with the state of the art system as early as 1984. Monitoring current trend of consumption is important for the management to increase turnover on the warehouse floor. Management Information System (MIS) at Jarir has always been strong. Since the technological advances are fast and consumerism drives the demand to latest products especially in Business Machines category, company has to reduce the shelf life (time spend by the product in the warehouse) of its key products significantly which is done with the help of MIS. In the B2B category, Jarir has managed to connect online with some customers. Management has key data at its fingertips with a maximum lag of a day. This is a major advantage in a competitive industry.

6. Market IntelligenceMarket intelligence is an integral part of strategy to increase revenues, expand geographically and control costs. Jarir maintains good relations in the fields of real estate and hypermarket to scan the consumer patterns. Separate consumer surveys, industry exhibitions and economic data are also tracked regularly to get a feel of the market.

There have been ample instances of Jarir delaying its decision to enter a market when data was contradictory. A case in point is its showroom in Madina where basic analysis of emerging data suggested low disposable income amid rising population. Discussion with its associates in the real estate and hypermarket segments, however, confirmed the arrival of its consumer and management promptly latched on to the opportunity.


Buoyancy in oil prices and resulting consumer boom has attracted the attention of the world to the Middle East. International competition is coming home - knocking on the region’s door which has hitherto been the only domain of the company – and it will test the dynamism of the management. For the last five years, consumer has raised its spending by 10% year on year. The retail market in the Middle East is largely fragmented with top five retailers accounting for less than 15% of the total retail sales. Retailers from United States and Europe may find the biggest markets with the most growth in consumer spending in Sharjah, Abu Dhabi and Dubai in the UAE followed by Kuwait, Qatar and Saudi Arabia. For the new entrants various options are available – franchising, licensing or distribution partnerships if their appetite for risk is low and are not looking at heavy capital expenditure.

Jarir works in a competitive market. It does not have exclusive arrangements with any suppliers and barriers to entry are almost non-existent. Hypermarkets and supermarkets are opening at a frantic pace to keep pace with the growing consumerism.

The company faces competition from many players in each product groups. Amidst toughening competition, we believe that Jarir has following competitive advantages:

1.Dedicated ManpowerCompany has an experienced team in place that values strategic vision. Management lays extra emphasis on transparency and responsibility. About 80% of the executive managers are with the company for more than 10 years. Founding family follows hands off approach but controls key positions. Employee satisfaction at Jarir is very high.

2. Innovation and leadershipJarir entrusts responsibility and at the same time rewards employees financially. It formulated a unique system called ‘Employee Stocks’ that distributes a share of profit to deserving

employees. This program is not linked to the stock price of Jarir and is internally developed. ‘Employee Stocks’ has inculcated a culture of ownership within the company.

It is easy to expand selling space by taking space in the hypermarkets. However, Jarir has followed a longer route of expansion by selectively choosing important locations and setting up stand alone showrooms.

COM

PETI

TIVE

AD

VANT

AGES

Jarir works in a competitive market but strategically in-built advantages should give the company an edge over its rivals.

FOUNDINGMEMBER KEY POSITION

Muhammed Al Agil Chairman

Abdullah Al Agil Head of Wholesale Operations(Jarir Marketing)

Abdulkarim Al Agil Head of Retail Operations(Jarir Bookstores)

Nasser Al Agil Head of Engineering and Real Estate

Abdulsalam Al Agil Chairman of Audit Committee

Source : Jarir Marketing Company

COMPETITIVE ADVANTAGESPAGE 24 FALCOM RESEARCH

We believe innovation and ability to go alone are key ingredients in the success of top companies. These attributes constantly enable leadership position and competitors find them most difficult to imitate.

3. Smart locations and designRetail is driving the volumes at Jarir not the wholesale. Management has always been conscious of location that is single most important factor in making or breaking a retail business in any product. Jarir Bookstores, branded retail showrooms of Jarir, are famous

as landmarks in their areas. Moreover, each showroom is designed to offer uncluttered shopping experience that stands out among competitors. Recently, it also added Starbucks coffee to few showrooms which further enhances the feel of the place.

4. Diversity of ProductsUnlike competitors who focus on different

product groups, Jarir concentrates on offering a single umbrella option for the whole family. The range of products at Jarir is unmatched which keeps the number of walk in customers high, broadens motives of purchase and thereby raises return per square meter of space. Exposure to wide variety of customers facilitates quicker adaptation to trends and provides stability to income.

5. Response to customers Management foresight is noticeable in the fast pace at which Jarir adjusts to the changing

trends in customer preference. Experience in excess of three decades is simply irreplaceable. Ten years back, School Supplies accounted for one third sales but today they are down to one tenth. Whereas, IT products and business machines that clocked 11% of the sales in 1997 and 22% in 2000 now generate 60% of the top line.

40%

31%

15% 16%


6. Management Information SystemInformation technology and administrative information systems form the base of all operations at Jarir. Points of sale at showrooms are integrated with administrative information systems. JD Edwards system for resource planning provides effective control over the daily operations. It covers entire gamut of essential

activities – inventory, distribution, creditors and debtors’ management, administrative and financial reports, ledger book, equipments, fixed assets, email, budget system management etc. Company has received a certificate of appreciation from JD Edwards for effective implementation of resources planning system.

PAGE 26 FALCOM RESEARCHCOMPETITIVE ADVANTAGES

Jarir Bookstore is a misnomer for today’s Jarir Marketing Company. Out of four major lines of products, books are no more the growth drivers. Higher turnover on comparatively lower margins in office machines is powering the company to new heights.

Business model of Jarir puts the onus of growth on choosing the right products that would move fast off the shelves. As long as Jarir is able to read the customer’s mind, demand pull and right product mix will maintain the buoyancy in efficiency parameters such as turnover ratios.It is obvious that the retail is the key to company’s success. Speedier expansion in number of showrooms coupled with double digit growth in sales at existing showrooms will keep the cash cow that Jarir is, healthy.

For future projections, we have relied upon recent performance of the company in the same store sales. We also scanned the past data of the company on new store sales. Jarir showrooms become the main feature in the locality soon after their opening but it takes about three years for the new outlet to reach its full potential. From the fourth year onwards, the sales tend to follow a normalized growth pattern. In terms of profitability, new showrooms usually break even

within one year.Before the expansion, Jarir undertakes a thorough study of the location that includes but does not limit to

•Demographic profile such as population, distribution of age group etc.•Number of schools, offices, food and beverage joints, hypermarkets etc.•GDP per capita•Trend in real estate prices besides construction activities

Retailing is substantially location driven. If the location is wrong, retailers can suffer cash drainage over number of years in which case immediate closure in the initial years is better.

Top management of Jarir spends considerable time and effort into the feasibility study. Jarir has unblemished record of site selection. The company has never closed its showroom except in one case where it shifted its existing showroom to a bigger location in the same area. We have a strong faith in the management of the company to lead the industry in innovation. Increasing competition will undoubtedly drive the company to explore new ways of doing the things.

PRO

JECT

IONS

Cash rich nature of business would lead to drop in financial charges.


At Jarir, a plan of expansion is implemented in three phases viz.

• identification and finalization of site including signing of purchasing agreement or leasing contract• prepayment of expenses for getting the showroom ready and• marketing and eventual opening of a new showroom

We have assumed a following schedule of expansion over the next five years:

Although ambitious, we believe this schedule is achievable. In the past, management should have been more expansive but the sudden and sharp growth in last two years was not anticipated. We do not mind seeing a short-term drop in efficiency ratios in lieu of faster growth in revenues that would not only increase the market share of Jarir but also forestall the competition in its track.Jarir brand has a distinct advantage as the name evokes a complete family experience in cozy and professional surroundings. New entrants may replicate the design and product offerings but to provide the similar feel is a formidable challenge.We have assumed a steady growth of 10% in same showroom sales for stores that have celebrated their third anniversary. For new showrooms, we assumed sales at half that of established showrooms in the first year, three quarter sale in the second year and old showroom status in the third year.

We expect the trend of increasing sale of office machines and software to continue. Profit margin on office machines is low but is high on the software. Higher churning of fast moving products reflects in higher turnover ratios. Rising sales on steady asset base leads to dilution of fixed cost and to some extent compensates for lower margins on fast moving items.

PAGE 28

• Expansion is crucial to maintaining growth.• Jarir will double the number of showrooms in next five years.• Unlike in last six years when Jarir added new showrooms through leasing arrangement, coming five years will see Jarir adding at least four new showrooms of its own.• Company acquired real estate in Egypt in 2006 and since the beginning of the year additional land worth SR 87 million has been added.• Hike in rentals and building of own showrooms would see steady rise in other income over the period of projections.

FALCOM RESEARCHPROJECTIONS

EXPANSION PLAN

2007 Q1 Q2 Q3 Q4 Total KSA 2 2 GCC 1 1 2008 Q1 Q2 Q3 Q4 KSA 1 1 1 3 GCC 1 1 2009 Q1 Q2 Q3 Q4 KSA 2 1 3 GCC 1 1 2 2010 Q1 Q2 Q3 Q4 KSA 1 1 2 4 GCC 1 1 2011 Q1 Q2 Q3 Q4 KSA 1 1 2 GCC 1 1

Total 20

Corporate sales division is part of retail because of absence of intermediary. This comprised 8% of the retail sales in 2006. We have assumed little growth in this segment. At 5% year on year rise, corporate sales are expected to cross SR 122 million by 2011.

Historical data points towards diminishing contribution of wholesale division. As against CAGR of more than 36% in Retail sales over 4

years from end of 2002 to 2006, wholesale registered a CAGR of 10%. In the past two years, wholesale grew at more than 13% which may not be sustained. Year on year growth of 7% is assumed in the sales of wholesale division.

Because of bottom-up approach in retail sales, growth there is more uneven. As expected, top line of retail division grows faster from 2009 onwards because of sale at

JARIR MARKETING COMPANY PAGE 29FALCOM RESEARCH

new showrooms peaking to its potential three years from opening.

Over last few years, cost of goods sold and occupancy have ranged between 78-81.5% of sales; we have assumed the same to be between 80-82% for the next five years. General and administrative expenses will fall as % sales as they are more related to inflation than the top line. Logistics management is

expected to see further improvement due to higher volumes on the same asset base. Fixed cost expenses will spread over larger business turnover and that would reflect in fall of selling & distribution cost as a % of sales. Cash rich nature of business would lead to drop in financial charges. Our assumptions result in gradual fall of net profit margin from 16.2% as of 2006 to 15.1% for the year 2011.

Our assumptions are conservative. We have preferred to err on the side of caution. Potential higher returns could accrue from number of factors such as – favorable product mix that would eventually reflect in higher profit margins and higher sales, faster implementation of expansion, higher rental income etc.

Key Assumptions• Growth of 10% in same showroom sales from 3rd year onwards• Consumer preference for fast moving office machines and software shall continue• Corporate sales is expected to grow at 5% year on year• Wholesale division is assumed to grow at 7% per annum• Gross profit margin to fall from 19.8% at the end of 2006 to 18% for 2011• Operating efficiency to improve from higher turnover• Net profit margin to decrease from 16.2% in 2006 to 15.1% in 2011.

PAGE 30 FALCOM RESEARCHPROJECTIONS

1. RevenuesRetail division is quintessential for the growth of the company. Within retail, share of corporate sales is less than the showrooms. Management is therefore according its undivided attention to the growth of retail outlets. Over a period from

2002 to 2006, retail sales jumped at a CAGR of 33.7% while sales at the wholesale division recorded more sedate CAGR of 9.9%.

The average per annum growth for retail over four years is 34.1%. In 2005, wide-spread participation of individual investors in the stock markets and precipitous rise in stock prices took the consumer confidence to unprecedented level which reflects in extraordinary retail growth for Jarir in that year at 54%. Without 2005, retail grew at an average of 27.6% - a more than six percentage point drop.

Total retail sales at the showrooms (without corporate sales) shot up from SR 300.5 million in 2002 to SR 1.2 billion in 2006 whereas per showroom sale went up from SR 23.5 million to SR 61 million over the same period. We anticipate the growth to continue further.

The growth in sales at the Jarir Bookstores (retail showrooms) is because of both higher selling space through the addition of new showrooms as well as increasing per square meter sale.

Based on assumptions in the previous

FINA

NCIA

LS

Over a period from 2002 to 2006, retail sales jumped at a CAGR of 33.7% while sales at the wholesale division recorded more sedate CAGR of 9.9%.


section, retail shall grow at a CAGR of slightly under 23% over next five years whereas Wholesale shall clock a CAGR of 7%. By 2011, we expect retail to

account for 93% of total sales as compared to 88% now. Over the same period, share of wholesale division is expected to fall to 7% from 12% now.

PAGE 32 FALCOM RESEARCHFINANCIALS

2002

2003

2004

2005

2006

2007

E20

08 E

2009

E20

10 E

2011

E

Tota

l Ass

ets

49

6,15

6

566,

867

68

0,66

6

765,

004

93

0,00

0

1,15

0,00

0

1,40

0,00

0

1,60

0,00

0

Sale

s

412,

933

52

2,88

3

680,

010

1,

045,

091

1,

318,

244

1,

481,

582

1,

814,

509

2,

308,

678

2,

893,

044

3,

661,

406

YoY

Grow

th26

.6%

30.1

%53

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26.1

%12

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22.5

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25.3

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Net I

ncom

e

76,9

00

94

,535

104,

359

15

2,55

9

215,

816

24

1,49

8

290,

322

36

3,61

7

448,

422

55

8,36

4

NPM

%18

.6%

18.1

%15

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14.6

%16

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16.3

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15.8

%15

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15.2

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RETA

IL D

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WHO

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There is a noticeable growth in the sales at the new bookstores in the initial two years. Invariably, new showrooms are observed to catch up with the old without affecting its geographically closest showroom. Management ensures avoidance of cannibalization at the time of choosing the new locations. From the third year onwards, new showrooms follow the

normalized growth patterns. The contribution from the new showrooms seems to be on the lower side in the chart because after a year new showroom moves to old showroom category.

Jarir classifies its sales broadly under Retail and Wholesale and within retail, sales are segregated into

Sour

ce: F

ALCO

M R

esea

rch

2002

2003

2004

2005

2006

2007

E20

08 E

2009

E20

10 E

2011

E

Tota

l Ass

ets

13

5,51

4

178,

887

16

2,68

6

174,

074

18

6,25

9

199,

297

21

3,24

8

228,

176

Sale

s

128,

202

14

0,48

3

145,

708

16

4,64

0

187,

141

20

0,24

1

214,

258

22

9,25

6

245,

304

26

2,47

5

YoY

Grow

th9.

6%3.

7%13

.0%

13.7

%7.

0%7.

0%7.

0%7.

0%7.

0%

Net I

ncom

e

17,8

05

14

,272

16,2

34

23

,661

27,4

67

29

,035

30,5

32

32

,096

33,7

29

35

,434

NPM

%10

.2%

11.1

%14

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14.7

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14.2

5%14

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13.7

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Tota

l Sal

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541,

135

66

3,36

6

825,

718

1,

209,

731

1,

505,

385

1,

681,

823

2,

028,

767

2,

537,

934

3,

138,

347

3,

923,

881

Tota

l Net

Pro

fit

94,7

05

10

8,80

7

120,

593

17

6,22

0

243,

283

27

0,53

3

320,

853

39

5,71

3

482,

151

59

3,79

8

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Bookstore (showroom) and corporate. The combined sales at Jarir in 2006 stood at SR 1.5 billion out of which Bookstores contributed SR 1,222.7 million, corporate sales chipped in with a sale of SR 95.5 million and balance SR 187.1 million came in from Wholesale division. By 2011, total sales are expected to be SR 3,923.9 million out of which a lion’s contribution of SR 3,661.4 million is anticipated from retail (showrooms: SR 3,539.5 million and corporate: SR 121.9 million) and rest SR 262.5 million from wholesale.

2. ExpensesCost of goods sold and occupancy is fairly steady – moving in tandem with the sales. Jarir has done well to keep leasing expenses lower than the market rentals. In coming years, real estate rentals shall climb up. However, leasing agreements favor Jarir and the company should see less grow in cash out flow on account of occupancy than the overall market. Administrative expenses going forward will keep pace with the inflation. Turnover is expected to grow more than the fixed assets and variable expenses especially distribution will show gradual decline as a percentage of sales.

3. Other IncomePrior to 2000, management was in favor of owning the bookstore. Jarir used to acquire land, build a building

and allocate a large portion for its retail showroom. The remaining portion is rented. By and large, the other income is accruing from rentals. In the absence of usage of any financial structures, 2007 is likely to see income from rentals settling around SR 12 million and next four years should see gradual improvement in line with inflation and opening of own showrooms.

4. ProfitabilityCompetition in laptops is fierce all over the world but manufacturing cost has remained steady leading to pressure on margins. However, consumer demand has kept the industry growing. Company is playing the same game – pushing the products at frantic pace on low margins.Product mix at Jarir has changed dramatically and every few years, shift is discernible towards IT products and office machines. Gross profit margin has picked up in 2006 after a steady fall over previous three years. For the next five years, margins are seen steadily declining.

Seasonal influence on account of school supplies is noticed in the first and third quarter every year. In terms of sales, third quarter logs in the highest followed by first and then fourth and second quarter in that order. Fourth quarter of 2005 was solitary exception as the momentum of the third quarter carried on to the last quarter to record more sales than the first quarter.


for p

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0015

,000

15,0

0025

,000

Tota

l cur

rent

Ass

ets

454,

463

488,

399

476,

136

561,

308

686,

347

835,

298

950,

225

Inve

stm

ent P

rope

rty,

net

8,29

010

0,00

017

5,00

026

5,00

035

0,00

041

5,00

0Eq

uity

Inve

stm

ent

27,9

5127

,951

27,9

5127

,951

27,9

5127

,951

Prop

erty

& E

quip

men

t, ne

t29

1,29

131

8,71

233

5,00

035

2,00

037

0,00

040

0,00

043

5,00

0TO

TAL

ASSE

TS74

5,75

484

3,35

293

9,07

81,

116,

259

1,34

9,29

71,

613,

248

1,82

8,17

6Li

abilit

ies &

Sha

reho

lder

s’ Eq

uity

CURR

ENT

LIAB

ILIT

IES

Due

to B

anks

62,0

5255

723

,640

39,7

4763

,637

79,7

012,

886

Acco

unts

pay

able

133,

032

160,

210

140,

862

167,

439

202,

395

241,

987

274,

226

Accr

ued

expe

nses

and

oth

er20

,823

28,4

8428

,984

30,9

8432

,984

34,9

8436

,984

defe

rred

reve

nues

5,26

65,

269

5,26

95,

269

5,26

95,

269

5,26

9To

tal C

urre

nt L

iabi

litie

s22

1,17

319

4,52

019

8,75

524

3,43

930

4,28

436

1,94

131

9,36

5Pr

ovisi

on fo

r end

of s

ervi

ce

Inde

mni

ties

15,0

1215

,981

16,9

4017

,956

19,0

3420

,176

21,3

86

Tota

l Lia

bilit

ies

236,

185

210,

501

215,

695

261,

395

323,

318

382,

117

340,

751

SHAR

EHO

LDER

S’ E

QUI

TYSh

are

Capi

tal

300,

000

300,

000

300,

000

300,

000

300,

000

300,

000

300,

000

Stat

utor

y re

serv

e5,

414

29,7

4256

,795

88,8

8112

8,45

217

6,66

723

6,04

7Sp

ecia

l res

erve

for e

xpan

sion

13,0

8613

,085

--

--

-Re

serv

e fo

r em

ploy

ees

8,00

013

,000

13,0

0013

,000

13,0

0013

,000

13,0

00Re

tain

ed e

arni

ngs

183,

069

277,

024

353,

589

452,

983

584,

528

741,

465

938,

378

Tota

l Sha

reho

lder

s’ Eq

uity

509,

569

632,

851

723,

384

854,

864

1,02

5,97

91,

231,

132

1,48

7,42

4TO

TAL

LIAB

ILIT

IES

AND

SH

AREH

OLD

ERS’

EQ

UITY

745,

754

843,

352

939,

078

1,11

6,25

91,

349,

297

1,61

3,24

81,

828,

176

E -

Estim

ates

Sour

ce: F

ALCO

M R

esea

rch

and

Jarir

A

NNUA

L BA

LANC

E SH

EET

(SR’

000)


(SR’

00)

2005

2006

2007

E20

08E

2009

E20

10E

2011

ESa

les

1

,209

,731

1,5

05,3

85

1

,681

,823

2,0

28,7

67

2

,537

,934

3,1

38,3

47

3

,923

,881

Co

st o

f Sale

s & o

ccup

ancy

(984

,810

)

(1,2

07,2

02)

(1

,348

,988

)

(1,6

37,7

01)

(2

,059

,705

)

(2,5

60,1

01)

(3

,215

,795

)Gr

oss P

rofit

224

,921

2

98,1

83

332

,835

3

91,0

66

478

,228

5

78,2

46

708

,085

Ge

n. &

Adm

in. E

xpen

ses

(25

,185

)

(

32,8

42)

(34

,484

)

(

36,2

08)

(38

,019

)

(

39,9

20)

(41

,916

)Se

lling

& Di

strib

utio

n Ex

pens

es

(

22,9

39)

(23

,210

)

(

25,2

27)

(30

,432

)

(

38,0

69)

(47

,075

)

(

58,8

58)

Ope

ratin

g In

com

e

1

76,7

97

242

,131

2

73,1

24

324

,426

4

02,1

41

491

,251

6

07,3

11

Oth

er in

com

e

10,8

61

14

,516

12,0

00

12

,600

12,6

00

13

,230

13,2

30

Finan

cing

Char

ges

(4

,888

)

(4,7

88)

(4

,500

)

(4,0

00)

(3

,800

)

(3,5

00)

(3

,200

)In

com

e be

fore

Zak

at

1

82,7

70

251

,859

2

80,6

24

333

,026

4

10,9

41

500

,981

6

17,3

41

Prov

ision

for Z

akat

(6

,550

)

(8,5

76)

(10

,091

)

(

12,1

73)

(15

,228

)

(

18,8

30)

(23

,543

)Ne

t Inc

ome

176

,220

2

43,2

83

270

,533

3

20,8

53

395

,713

4

82,1

51

593

,798

E

- Es

timat

esSo

urce

: FAL

COM

Res

earc

h, Ja

rir

STAT

EMEN

T O

F IN

COM

E


(SR

‘000

)20

0520

0620

07Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Sa

les

272,

806

261,

913

360,

809

314,

202

390,

821

319,

652

446,

762

348,

150

428,

489

Sale

s Cos

t21

9,47

222

2,31

328

4,78

425

8,24

030

7,26

826

5,12

234

8,54

228

6,27

033

9,54

4To

tal In

com

e53

,334

39,6

0076

,025

55,9

6283

,553

54,5

3098

,220

61,8

8088

,945

Oth

er R

even

ues

2,41

93,

397

1,68

53,

360

6,05

13,

873

2,02

82,

564

3,26

8To

tal R

even

ues

55,7

5342

,997

77,7

1059

,322

89,6

0458

,403

100,

248

64,4

4492

,213

Adm

in a

nd M

arke

ting

Expe

nses

9,64

410

,835

11,9

9013

,748

10,6

2710

,324

14,0

5519

,387

9,26

5De

prec

iatio

n74

839

733

642

541

540

940

942

652

5O

ther

Exp

ense

s46

31,

216

1,99

51,

215

609

2,12

21,

977

8041

Tota

l Exp

ense

s10

,855

12,4

4814

,321

15,3

8811

,651

12,8

5516

,441

19,8

939,

831

Net I

ncom

e Be

fore

Zak

at44

,898

30,5

4963

,389

43,9

3477

,953

45,5

4883

,807

44,5

5182

,382

Zaka

t1,

350

1,20

02,

400

1,60

01,

875

1,65

13,

050

2,00

02,

290

Net I

ncom

e43

,548

29,3

4960

,989

42,3

3476

,078

43,8

9780

,757

42,5

5180

,092

Shar

e Ca

pita

l24

0,00

024

0,00

030

0,00

0

3

00,0

00

300,

000

300,

000

300,

000

300,

000

300,

000

# nu

mbe

r of s

hare

s Adj

. (00

0)24

,000

24,0

0030

,000

30

,000

30

,000

30,

000

30,

000

30,0

0030

,000

EPS

(SR)

1.8

1.2

2.0

1.4

2.5

1.5

2.7

1.4

2.7

BV (S

R)15

.716

.915

.617

.015

.517

.019

.721

.117

.8

Gr

oss P

rofit

Mar

gin

19.6

%15

.1%

21.1

%17

.8%

21.4

%17

.1%

22.0

%17

.8%

20.8

%Ne

t Pro

fit M

argi

n16

.0%

11.2

%16

.9%

13.5

%19

.5%

13.7

%18

.1%

12.2

%18

.7%

ROE

11.6

%7.

2%13

.1%

8.3%

16.3

%8.

6%13

.7%

6.7%

15.0

%RO

A7.

2%4.

1%8.

0%5.

7%8.

2%5.

2%9.

6%5.

0%9.

5%As

set T

urno

ver R

atio

0.4

0.4

0.5

0.4

0.4

0.4

0.5

0.4

0.5

* Sa

les G

row

th (Q

oQ c

hang

e)42

.6%

-4.0

%37

.8%

-12.

9%24

.4%

-18.

2%39

.8%

-22.

1%23

.1%

* NP

Gro

wth

(QoQ

cha

nge)

105.

3%-3

2.6%

107.

8%-3

0.6%

79.7

%-4

2.3%

84.0

%-4

7.3%

88.2

%Ye

ar o

n Ye

ar C

hang

eSa

les

34.5

%55

.6%

37.1

%64

.3%

43.3

%22

.0%

23.8

%10

.8%

9.6%

Sale

s Cos

t37

.1%

57.0

%39

.1%

64.1

%40

.0%

19.3

%22

.4%

10.9

%10

.5%

Tota

l Rev

enue

s22

.9%

43.2

%28

.0%

65.2

%60

.7%

35.8

%29

.0%

8.6%

2.9%

Adm

in a

nd M

arke

ting

Expe

nses

-2.5

%28

.1%

8.0%

7.4%

10.2

%-4

.7%

17.2

%41

.0%

-12.

8%To

tal E

xpen

ses

0.9%

31.2

%15

.6%

11.9

%7.

3%3.

3%14

.8%

29.3

%-1

5.6%

Zaka

t17

.4%

14.3

%26

.3%

68.8

%38

.9%

37.6

%27

.1%

25.0

%22

.1%

Net I

ncom

e30

.1%

50.7

%31

.3%

99.6

%74

.7%

49.6

%32

.4%

0.5%

5.3%

# Nu

mbe

r of s

hare

s are

adj

uste

d fo

r the

cha

nge

in fa

ce v

alue.

* Q

oQ –

Qua

rter

on

Qua

rter

Sour

ce: F

ALCO

M R

esea

rch

and

Qua

rter

ly R

esul

ts o

f the

Jarir

QUA

RTER

LY IN

COM

E ST

ATEM

ENT


2005 2006 2007E 2008E 2009E 2010E 2011E

Net Income 176,220 243,283 270,533 320,853 395,713 482,151 593,798

Net Cash Flow from Operating Activities 164,965 258,832 237,790 261,619 316,557 395,550 513,933

Net Cash Flow from Investing Activities (32,553) (75,919) (107,998) (92,000) (108,000) (115,000) (100,000)

Net Cash Flow from Financing Activities

(115,030)

(181,495) (156,917)

(173,266) (200,708) (260,935) (414,321)

Net Change in cash and cash equivalents 17,382 1,418 (27,125) (3,647) 7,850 19,615 (387)

Cash and Cash Equivalents

Beginning of Year 14,313 31,695 33,113 5,988 2,341 10,191 29,806

End of Year 31,695 33,113 5,988 2,341 10,191 29,806 29,419

E - Estimates Source: FALCOM Research

CASH FLOW STATEMENT

2005 2006 2007E 2008E 2009E 2010E 2011E

Profitability Ratios

EPS (SR)

5.9

8.1

9.0

10.7

13.2

16.1

19.8

Gross Profit Margin 18.6% 19.8% 19.8% 19.3% 18.8% 18.4% 18.0%

PBDIT Margin 14.8% 16.2% 16.4% 16.1% 15.9% 15.7% 15.5%

Operating Profit Margin 14.6% 16.1% 16.2% 16.0% 15.8% 15.7% 15.5%

Net Profit Margin 14.6% 16.2% 16.1% 15.8% 15.6% 15.4% 15.1%

Return on Equity 34.6% 38.4% 37.4% 37.5% 38.6% 39.2% 39.9%

Return on Assets 23.6% 28.8% 28.8% 28.7% 29.3% 29.9% 32.5%

Turnover Ratios

Total Asset Turnover Ratio

1.62

1.79

1.79

1.82

1.88

1.95

2.15

Fixed Asset Turnover Ratio

4.15

4.60

3.87

3.85

4.00

4.18

4.62

Leverage Ratios

Equity/ Assets 68.3% 75.0% 77.0% 76.6% 76.0% 76.3% 81.4%

Debt/ Equity 12.2% 0.1% 3.3% 4.6% 6.2% 6.5% 0.2%

Other Ratios

Current Ratio 2.1 2.5 2.4 2.3 2.3 2.3 3.0

Book Value per share (SR)

17.0

21.1

24.1

28.5

34.2

41.0

49.6

DPS (SR)

4.0

6.0

6.3

7.5

9.2

11.3

13.9

Dividend Payout Ratio 68.1% 74.0% 70.0% 70.0% 70.0% 70.0% 70.0%

Year on Year Growth

Sales 46.5% 24.4% 11.7% 20.6% 25.1% 23.7% 25.0%

Net Profit 46.1% 38.1% 11.2% 18.6% 23.3% 21.8% 23.2%


FINANCIAL RATIOS


Rating Rationale• FALCOM Research assigns ratings based on the calculated fair value of a stock. Recommendation assumes, unless specifically mentioned, the holding period of 2 years for a stock to get closer to its fair price.

We assign• Strong Buy if Fair Value > 20% of the Current Market Price• Buy if Fair Value > 10% of the Current Market Price• Hold if Fair Value is between +10% and -10% of the Current Market Price• Sell if Fair Value < 10% of the Current Market Price • Strong Sell if Fair Value < 20% of the Current Market Price

User’s GuideEarnings per Share: The amount of profit to which each share is entitled.IPO: Short for Initial Public Offering. An IPO is when a company sells stock in itself for the first time.Market Cap: The amount of money you would have to pay if you bought every share of stock in a company. (To calculate market cap, multiply the number of shares by the price per share.) Short for Market Capitalization.Return on Equity (ROE): This ratio measures the percentage return earned by the company for its shareholders. It is calculated by dividing net profit by the Shareholders’ Equity.Return on Assets (ROA): Calculated by dividing net profit with total assets, the ratio measures the return on total capital deployed in the business.Asset Turnover Ratio: The ratio measures efficiency of assets in terms of sales realized. Higher the sales on the given asset base, better the efficiency.Dividend Payout Ratio: Dividend is paid out of the profits or sometimes through reserves. It is calculated as the dividend as a percentage of net profit. The ratio indicates distribution of net profits to the shareholders. Equity shareholders receive their returns through dividends and appreciation of share price.

••

•

•

•

•

•


Disclosures

Corporate• FALCOM Financial Services did not receive any compensation for the preparation of this report.• FALCOM Financial Services was not involved in the management of public issue of the company in last 3 years.• FALCOM Financial Services holds equity shares of the researched company.• Neither associate nor employee of FALCOM Financial Services serves on the Board of Directors of the company. Analyst• The analyst involved in the preparation of this report does not hold equity shares of the Jarir Marketing Company.• The analyst responsible for this report has never worked for the Jarir Marketing Company.• The views expressed in this report accurately reflect personal views of the analyst about companies mentioned in the report.• No part of the analyst’s compensation was, is or will be directly or indirectly linked to the specific recommendations or views expressed in this report.


Disclaimer:

All rights reserved. This research document is prepared for the use of clients of FALCOM Financial Services and may not be

redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of

FALCOM Financial Services. Receipt and review of this research report constitutes your agreement not to redistribute,

retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any

investment recommendations, estimates or price targets) prior to public disclosure of such information by FALCOM Financial

Services. The information herein was obtained from various sources believed to be reliable but we do not guarantee its accuracy.

FALCOM Financial Services makes no representations or warranties whatsoever as to the data and information provided and

FALCOM Financial Services does not represent that the information content of this document is complete or free from any

errors.

This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer

or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or

investments. It is not intended to provide personal investment advice and it does not take into account the specific investment

objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek

financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed

or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors

should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities

and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Any investment action

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Documents

FALCOM EQUITY RESEARCH REPORT · EQUITY RESEARCH REPORT Snehdeep Fulzele Head of Research +966 1 201 1280 [email protected] Company: Jarir Marketing Company Date: June