Saudi Arabias first securitization deal

The receivables were sold to Al-Rajhi Bank in exchange for a cash inflow of SR160mn. The securitized portion accounts for approx. 41% of their last outstanding balance of installments sales.

Al Rajhi Capital Research said the deal has multiple positive implications for the company such as upfront recognition of future profits and cash flows, increased capacity to expand in installments sales as well as lowering debt. We revise our topline growth estimate for 2019e to 14.3% y-o-y (from 9.7% previously) and 9.4% for 2020e (from 7%).

Post factoring this securitization deal, Al Rajhi Capital then have a 34% increase in EPS in 2019. “Thereby, we revise our target price to SR80/sh. implying a rating of “Overweight” with an upside potential of 15.4%.”

Al Rahji Capital believes that Extra has managed to maintain a good credit quality for the installments credit, maintaining an average delinquency rate below 10% and NPL ratio below 3%. “We expect this securitization to improve its credit quality as it transfers most of the credit risk to a financial institution that is better equipped to deal with it. Given that Al Rajhi has taken the receivables with just a discount of 4% highlights the good credit quality.”

The credit portion of sales of Extra has been growing rapidly during the last three years - as it reached approx. 7.5% in the last reporting period (up from 3% in FY17 and 7% in FY18 as per our estimates). Given this securitization of 41% of their credit sales books, with more credit capacity available, we expect this proportion to increase to 9%-10% in FY19E and stimulate Extra sales positively.

Under the securitization deal, the company would recognize an additional profit of SAR17mn ( 8% of FY19e net income) in exchange for future interest payments expected to be collected in due course of time previously.

The company’s debt/assets stood at 19%, with a healthy cash balance of SR223mn.