Municipal fee: Major step, minimal impact

The municipal fee for commercial outlets has been finalised in the range of SAR0.06 – SAR6 per square meter (source: Ministry of Municipal and Rural Affairs), depending on the location of the outlet (cities divided into 5 zones) and the size of the outlet (divided into 5 tiers). Refer to figure 1 for more details, and
figure 3 for a list of additional services on which the municipal fee will be applicable. The level of municipal fee is much less than what has been suggested by media reports previously i.e. the municipal fee could be in the range of SAR50-SAR300 per sq mtr. Our back of the envelope calculations suggest that the impact of municipal fee is insignificant for the listed retailers under our coverage, with very minor margin impact and net profit impact of less than 1%. Overall, the final quantum of municipal fee is a non-event for commercial establishments and it will ease one of the major concerns that investors have on the retail sector. At a broader level, we believe instituting a municipal fee will aid the government efforts to broaden the revenue base and also drive higher efficiency in space utilization by commercial establishments.

Benign level of municipal fee: Contrary to previous reports, the municipal fee has been finalised at a much lower level. Even though the municipal fee can be increased in the future, fixing the fee at a lower level gives us comfort that it would not be a major overhang on retailers’ profitability going forward.

Prefer to stay cautious on the retail sector: We believe that the municipal fee impact had not been factored into the stock prices, hence, we do not expect an extended relief rally on this news. We still prefer to stay cautious on the retail sector as the major concern is still the demand side, especially after the recent austerity measures taken by the government. In the current environment, we prefer stocks with higher revenue visibility. Hence, Almarai and Al Othaim top our pecking order as relatively safer stocks, which have high/ near complete exposure to non-discretionary products.

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