Updating its Q1report on theSaudi Food and Agriculture sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, gives the sector a positive outlook due to growth in demand supported by a young and growing population, and expansions into new segments.
Rating the two market leaders Almarai and Savola, Farouk Miah, Head of Equity Research at NCB Capital, said: “We remain Overweight on Savola with a PT of SR57.5 and remain Neutral on Almarai with a PT of SR68.6. However, volatility in global food prices, reliance on imports and a lack of pricing power are key concerns.
“At Savola, earnings outlook of the firm remains strong with growth coming from store expansion and margin increase at the Retail business (Panda), coupled with capacity increases at the Food business (edible oil and sugar). The stock price has doubled since our move to Overweight in 4Q11, hence the remaining upside is limited to 16%”.
“On the other hand, at Almarai, 2013E is expected to remain muted due to slower than expected revenue growth, delays in the Poultry business moving to profitability and costs from expansions pressuring margins. The long term potential remains with expansions in existing businesses and new ventures to support growth. Execution risk and limited pricing power remain the key concerns.”
The report states that this year to date there has been stability in global food prices which should in theory support margins for the Saudi food sector. However NCB Capital notes that much of these gains at Almarai are being negated by costs from its expansions. Longer term volatility and increases in global food prices remain a key risk for Saudi food companies given the majority of their raw materials are imported, coupled with limited pricing power which leads to margin pressure.
“For both Almarai and Savola, the earnings growth outlook remains strong off the back of aggressive expansion plans in existing/new businesses, as well as high single digit organic growth, added Mr. Miah. We believe both firms are well positioned to take advantage of the potential of growth for their respective sectors.”
“However, our Valuation on Savola remains favourable to Almarai. Savola is currently trading at 15.2x 2013E P/E against Almarai on 17.1x P/E. We believe the valuation on Savola remains attractive, although the multiple has expanded by around 17% in the past six months,” concluded Mr. Miah.
Strong growth outlook remains, although upside becoming limited
NCB Capital remains Overweight on Savola with a PT of SR57.5. “The earnings growth outlook remains strong with the Retail segment expected to benefit from continued double-digit revenue growth coupled with margin expansion. Capacity increases in the Food segment should support growth here. The recent rally in the stock has limited our upside, although enough remains for us to maintain our Overweight rating.” said Mr. Miah.
Proportion of group EBIT from Retail to almost double by 2018E
We remain Overweight although margin of safety becoming limited
NCB Capital remains Overweight on Savola due to its strong earnings outlook and attractive 2014E P/E of 13.6x. “However, we note that in the last six months the 12 month forward P/E multiple for Savola has expanded from 11.5x to 13.5x, reducing the discount vs. global peers from 25% to around 12% only,” explained Mr. Miah.
Returns expectations move to 2014E
NCB Capital remains Neutral on Almarai with PT decreasing slightly to SR68.6. “We believe 2013E will be another muted year with expectations of returns from its investments moving to 2014E,” said Mr. Miah. “The Poultry division is expected to remain loss making in 2013E (vs. previous expectation of break-even) which we believe will hurt sentiment re potential returns on upcoming investments. Additionally, 2013E is expected to record further margin contraction due to higher than expected costs from expansion.”