• Cut FV, but reiterate Buy mainly on attractive valuation We lower our FV by c27% to SAR38, mainly to reflect the recent weakness in the short-term rental segment. We maintain our Buy rating for Budget Saudi (28% upside), as we believe risks are mostly priced in at current levels, with the stock trading at c10x 2017e earnings, which is at a discount to peers (c13x). Key risks to our call include: i) a more severe weakness in KSA’s car rental and used car market; and ii) receivables risk (+c50% YTD), as payments from corporates slow down (cSAR5mn provisions in 9M16).
• Slowing down fleet additions; ‘Payless’ to start soon, albeit small Budget is slowing its fleet additions, in light of weaker market demand. We expect a flattish ST fleet, as this segment has been experiencing the largest slowdown. Budget Saudi will soon launch its ‘Payless’ representation, which will offer smaller, cheaper cars, enabling it to attract value-conscious customers. Additions could accelerate if ‘Payless’ proves successful (will add 250-300 cars initially at five locations; prices are 15-30% lower than Budget offering). We expect LT car fleet growth will slow to mid-single-digits from low-double-digits previously. Trucking subsidiary, Rahaal, will continue to grow the fastest, in our view (at least c10% fleet increase per annum vs. over 20% in 2016e). The main positive from slower fleet additions is tamer depreciation charges (largest cost item, c60% of total).
• Mix not in favour of margins; no signs of slowing used car market yet Margins have been on a downtrend lately, mainly on lower contribution from ST rentals, which is a trend we expect to continue. Lower rates as a result of a shift to cheaper cars, as well as some small discounts in the LT segment could also pressure margins. KSA’s used car market has reportedly not been strongly affected by market conditions, with the company still able to grow volumes sold; however, we expect prices to fall, limiting growth in the value of the gains (flattish over our forecast horizon; c75% of headline earnings).

Hatem Alaa, CFA
Nada Amin