Saudi Arabia: Al Tayyar Group – Refreshing the investment case

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In this note, we provide more colour on Al Tayyar’s investment case with: 1) an overview of the online travel market’s potential in Saudi Arabia, showing that Saudis are already among the biggest online spenders on travel globally; 2) an overview of the group’s asset portfolio in Makkah; and 3) our assumptions regarding the Ministry of Higher Education (MOHE) contract. The long-term investment case remains intact, we believe, but we expect short-term weakness to affect the bottom line. We lower our FY17 profit estimate by 17% and cut our TP to SAR47.8 (from SAR52.0), maintaining our BUY rating. The stock trades on 8.8x 2018E P/E vs a global peer average of 19.5x.

A promising online business opportunity

We look at the online travel market in Saudi Arabia and compare it to global and emerging market (EM] peers. According to Euromonitor, lodging and transport online bookings in Saudi Arabia rose 18% YoY to $3.5bn in 2016, more than doubling since 2013. Data from Euromonitor show the average lodging transaction in Saudi generated $917 in sales in 2016, more than three times the UK average. However, the number of transactions is considerably lower, standing at three transactions per 100 inhabitants vs 73 in the UK and an average of seven in EM/ Frontier Market (FM) countries. We think total transaction volumes could triple in the next five years, with Al Tayyar’s online platforms positioned to be key beneficiaries of this growth. Management targets annual sales of $1bn by 2020, having achieved $153mn in 2016, comfortably outperforming its own target of $30mn. We forecast SAR1bn ($270mn) in 2017 on a gross revenue basis, below the 1H17 run rate.

Makkah in focus – REIT IPO a potential catalyst

The group announced in early July that it had signed an MoU to launch its own REIT via an IPO in the next six months. It plans to transfer to the REIT four hotel properties with c.1,230 hotel rooms and 110 serviced apartments, all located in Makkah. On our estimates, this could translate into a possible IPO range of SAR1.6-4.9bn ($433mn-1.3bn), serving as a potential catalyst for the stock, with the proceeds likely to go towards increasing the company’s dividend or expanding its footprint in the Makkah real estate market, which we believe is attractive. Owing to its strategic exposure to religious tourism, we believe Al Tayyar should also benefit from a likely increase in the number of visas granted for Makkah, as all construction and infrastructure work is near completion. We expect the number of Hajj pilgrims to steadily grow from just 1.8mn in 2016 to 2.6mn in 2017, reaching pre-2012 levels of 3.4mn by 2019.

Downside risks overly discounted – maintain BUY

At what we believe is an attractive valuation for the stock, trading on 8.8x 2018E P/E and 6x 2018E EV/EBITDA, we see more potential upside than downside risk. We lower our FY17 net profit forecast and slightly reduce our TP to SAR47.8, on the following assumptions: 1) a 21% YoY decline in the government’s contribution to ticketing revenue in 2017, based on lower revenue from the MOHE contract; and 2) an improvement in retail ticketing revenue following the king’s decision to reinstate all bonuses and allowances for the public sector (this means lower profitability as retail ticketing is a lower-margin business). We believe the stock is currently pricing in an outright contraction in the government revenue line, which is unjustified in our view. We maintain our BUY rating.