More gains in store for 2H17; room for further rerating 
We upgrade our TPs for eXtra (+50% to SAR50) and Jarir (+21% to SAR184) on better-than-expected 1H17 trends and indications that consumer spending is on the mend, post the decision to reverse public sector pay-cuts. While share price rally has been strong since our upgrade in Feb 2017 (eXtra +56%, Jarir +15%), it still has legs, in our view, as electronics retailers will likely continue to outperform, at least through 2H17, bolstered by improving footfall and basket sizes, partly benefitting from residual effect of sector consolidation. We remain Buyers of both names, but continue to prefer eXtra over Jarir, as we see more room for margins to normalise (terminal EBITDA margin of 4.4% vs. historical of 4-6%) as it is on a turnaround trajectory and is cheaper on 2018e P/E (eXtra c12x vs. Jarir c15x). Jarir’s share price will likely remain supported by impending index flows as Saudi Arabia is upgraded to EM (MSCI and FTSE index weight of 0.04%, est. inflows USD150mn+). 
 
Pulling all the stops to get customers through the door…
Revenue growth momentum was strong in 1H17 for both names (+15% for eXtra, +14% for Jarir) on continued market share gains, mostly in the mobile segment. This was partly supported by increased footfall post closure of c3k small mobile retailers in Sep 2016 after the imposition of the 100% Saudisation requirement. eXtra’s market share gains to 11.2% from c8% were supported by its lowest price guarantee, growing online sales contribution and promotions (seven-day price crash in 2Q17, family entertainment coupon for every SAR1k spent, etc.) and improved sales mix. Meanwhile, Jarir’s gains came mostly on the back of mobile phone sales growth, with support from its stable high-margin supplies and books business. 

…but tactics for future growth differ somewhat  
The companies’ approaches to market share gains vary considerably; eXtra is looking to grow footfall at its existing network (47 in 23 cities), while Jarir is steadfast in its expansion plans (60 stores by 2020 from 47). Limited capex should lend to better FCF and DPO (net cash) for eXtra, particularly as it focuses on streamlining inventory. While Jarir’s capex bill is somewhat larger, the company’s strong balance sheet (also net cash) and superior returns (50%+ RoAE) can support expansions, in our view.  
 
MT outlook still relatively uncertain 
Key risk still lies in medium-term consumer spending uncertainty as subsidy reforms continue. Saudisation, expat levies and plans for early store closure are also risks; hence, our preference remains eXtra, given that it has ways to go for margin normalisation, which should support growth if revenue slows.

Hatem Alaa, CFA

Nada Amin