We use a 4-year DCF with WACC 9.6% and TGR at 3% producing a TP at AED 1.8. The company trades at a discount to peers which we find unwarranted given scale, improving return and profitability.

We rate Lulu High Risk due to the lack of trading history. 

(i) Macro slowdown: the GCC region remains highly exposed to oil price which drives the bulk of government revenues. A decline in oil prices could trigger a slowdown in government spending and result in an overall economic slowdown which in the GCC impacts expat residents’ numbers. A decline in overall population could result in a decline in sales densities and reverse operating leverage benefits weighing down on margins and net income.
(ii) Competition: LuLu operates in 6 different markets where they compete with local peers. New entrants into the value segment could erode market share and sales. 
(iii) Lease term changes: upon renewal of leases of key locations, landlords could opt to significantly increase lease rates or refuse to renew.
(iv) Introduction of new taxes in the GCC could impact consumer spending ability or directly impact the company.