20-Feb-2017
Budget Saudi - Turn Neutral as down-trading weighs on ST rentals; other segments are not without risks
Rating: Neutral
Target Price: SAR32.5
Closing Price: SAR29.4
Lower TP on ST yield pressures, receivable risk and likely lower used car gains
We reduce our TP for Budget KSA 14% to SAR32.5 (11% upside) and downgrade to Neutral from Buy, mainly to reflect vehicle yield pressures on tighter consumer spending (reflected in a preference for cheaper cars) and a longer working capital cycle on a lengthening in receivable collection (61 days in 2016 vs. an avg. of 46 over the prior three years) due to counterparty payment delays (mostly government-related exposure). Valuation (c12x 2017e P/E) is broadly in line with peers, with earnings to likely remain under pressure in 2017e (-13% Y-o-Y), as mix skews away from higher-margin ST rentals and used-car gains are lower (market now mainly under pressure for cars over five years of age, but this is likely to change, in our view). Gains on sale of used vehicles were flat in 2016 despite an increase in vehicles sold due to disposing of some ST cars ahead of their typical sales cycle (c18 months); thus, booking slight to no gains on them.
Expect further pressure on ST segment despite 2016 fleet optimisation
Weaker spending and cost-cutting trends drove customers to choose cheaper vehicles in the ST segment (c37% of 2016 revenue; yields -15%; revenue -16%) and lowered fleet utilisation. Accordingly, the company reduced its ST fleet c7% in 2016 (sold some cars ahead of their typical optimal selling point) to better manage slower demand and cost rationalisation trends. We expect a flattish fleet over our forecast horizon despite plans to soon roll out value brand ‘Payless’ (c200-300 cars initially at five offices) and expect further yield pressure in 2017e (-8%).
LT leasing and trucking segments are resilient, but could see pressure as contracts are renewed
The LT leasing segment (c47% of revenue) has been relatively more stable (revenue +7% in 2016, fleet +2%, flattish yields), given strong ties with clients (100% corporates), its contractual nature, and as the company was able to take some market share from struggling competitors. In 2017e, we expect some yield pressure (-4%), as some contracts may be renewed at lower rates, in our view. The fastest growing segment will continue to be trucking (c16% of revenue vs. c8% two years ago; +22% in 2016), where the company is planning to grow its fleet c15% in 2017e to c4,200 trucks. While we expect weaker yields there as well, revenue should continue to grow north of 20%.
Nada Amin
Hatem Alaa, CFA
Target Price: SAR32.5
Closing Price: SAR29.4
Lower TP on ST yield pressures, receivable risk and likely lower used car gains
We reduce our TP for Budget KSA 14% to SAR32.5 (11% upside) and downgrade to Neutral from Buy, mainly to reflect vehicle yield pressures on tighter consumer spending (reflected in a preference for cheaper cars) and a longer working capital cycle on a lengthening in receivable collection (61 days in 2016 vs. an avg. of 46 over the prior three years) due to counterparty payment delays (mostly government-related exposure). Valuation (c12x 2017e P/E) is broadly in line with peers, with earnings to likely remain under pressure in 2017e (-13% Y-o-Y), as mix skews away from higher-margin ST rentals and used-car gains are lower (market now mainly under pressure for cars over five years of age, but this is likely to change, in our view). Gains on sale of used vehicles were flat in 2016 despite an increase in vehicles sold due to disposing of some ST cars ahead of their typical sales cycle (c18 months); thus, booking slight to no gains on them.
Expect further pressure on ST segment despite 2016 fleet optimisation
Weaker spending and cost-cutting trends drove customers to choose cheaper vehicles in the ST segment (c37% of 2016 revenue; yields -15%; revenue -16%) and lowered fleet utilisation. Accordingly, the company reduced its ST fleet c7% in 2016 (sold some cars ahead of their typical optimal selling point) to better manage slower demand and cost rationalisation trends. We expect a flattish fleet over our forecast horizon despite plans to soon roll out value brand ‘Payless’ (c200-300 cars initially at five offices) and expect further yield pressure in 2017e (-8%).
LT leasing and trucking segments are resilient, but could see pressure as contracts are renewed
The LT leasing segment (c47% of revenue) has been relatively more stable (revenue +7% in 2016, fleet +2%, flattish yields), given strong ties with clients (100% corporates), its contractual nature, and as the company was able to take some market share from struggling competitors. In 2017e, we expect some yield pressure (-4%), as some contracts may be renewed at lower rates, in our view. The fastest growing segment will continue to be trucking (c16% of revenue vs. c8% two years ago; +22% in 2016), where the company is planning to grow its fleet c15% in 2017e to c4,200 trucks. While we expect weaker yields there as well, revenue should continue to grow north of 20%.
Nada Amin
Hatem Alaa, CFA