Capacity expansions ‘to back Saudi food sector’
Riyadh, September 17, 2013
The long-term outlook of the Saudi food and agriculture sector remains strong with capacity expansions at major food companies Savola and Almarai aiming to capture this growth, a report said.
“We remain Overweight on Savola with a PT of SR57.8 ($15.41) and remain Neutral on Almarai with a PT of SR48.3 ($12.87),” said Farouk Miah, head of Equity Research at NCB Capital, leading wealth manager and Saudi Arabia’s largest asset manager. NCB Capital recently released its latest update on the Saudi Food Sector.
“Both stocks have performed strongly in 2013, partly due to expansions in their P/E multiples which could unwind if financial performance does not meet expectations. FX volatility and execution risks on the expansions are short-term concerns.”
Regarding Savola, the update considers that the long-term growth story remains intact, with volume and margin expansion the main driver in the retail business and higher capacity in the food business.
However, NCB Capital expects the second half of 2013 to only record profit growth of 10 per cent vs. average of 17 per cent in the past three years. This is due to FX pressures in Egypt and Iran, as well as some disruption in operations from the sugar warehouse fire in Saudi Arabia.
While noting a price target of SR48.3, NCB Capital remains Neutral on Almarai in expectation of 2013 earnings growth of only 5.9 per cent.
“The focus of investors is on 2014 where we expect YoY net income growth of 21 per cent,” said Miah.
“The poultry segment becoming profitable will be a major reason behind the increase in growth rate with any further delays a major disappointment.
“Despite the muted financial performance over the past 12-18 months, the stock is up 27 per cent YTD based on the high P/E multiple expanding further. We believe another disappointing financial performance in 2014E could lead to significant downside on the stock,” he added.
NCB Capital believes that success of expansions is the key determinant of medium-term growth. Both Savola and Almarai are planning on significant capacity expansions either at existing businesses or into new segments.
This includes a 45 per cent expansion in selling space at Panda for Savola and a five-fold increase in poultry capacity at Almarai. The level of success with these expansions will play a significant role in the growth outlook at both firms.
NCB Capital expect CAGR earnings growth of 15 per cent and 14 per cent for Savola and Almarai over 2012-2017.
On the other hand, the update considers that there is a short-term risk due to non-Saudi exposure.
“Both Savola and Almarai are increasingly expanding outside of Saudi Arabia,” said Miah.
“Although this makes strategic sense, recent events in the region and the subsequent impact on operations and FX are damaging the profitability of the non-Saudi exposure. We believe around 40 per cent of Savola revenues and 10 per cent of Almarai are non-US$ based, adding an element of volatility to earnings,” he added. – TradeArabia News Service
More Miscellaneous Stories
- Death penalty sought for Bahrain terrorists
- Girl, 9, dies after fall from 8th floor in Abu Dhabi
- Lebanese café brand opens Dubai outlet
- Bahrain poultry firm told to step up safety
- Customer dies in Bahrain cafe brawl
- Bahraini boys hurt while planting bombs
- Philips, Ericsson launch LED street lighting
- DuBiotech to set up first Halal safety lab
- Jotun to supply coatings for Makkah Station
- Raytheon wins $655m Kuwait Patriot deal
- Alwaleed Foundation lights up 3 Saudi villages
- Poultry farms strike may trigger shortages in Bahrain
- Oman seals Victoria food security pact
- Saudi woman, 80, donates $133m to charity
- New Saudi clamp on energy drinks
- Outrage follows Bahrain killer bomb
- Improvised explosive device used in Bahrain attack
- 3 policemen killed in Bahrain blast
- Dammam-Al Ahsa train service starts
- Egypt wheat supplies enough to last until June
- Expat killed at Saudi workers' holding facility
- 80 global speakers for Doha summit on family
- Restaurant runs up $47,555 phone bill in 4 days
- NZ minister to visit Gulf states
- Public-private tie-ups ‘vital for agri growth’
- China firm wins solar power project in Amman
- 15,000 attend Bahrain garden show
- Omani firms shine at top food expo
- Bahrain to set up national food company
- Dozens hurt in gas leak at plant near Doha