Global values Savola stock at SR29.4 and recommends a HOLD on the stock

Published October 13th, 2009 - 02:22 GMT

Global Investment House – Saudi Arabia – Savola – Initial Research Report- Savola Group Company (avola) has a key benefit of having a well diversified business which ranges from production of edible oil and sugar to retail and real estate. We expect company’s future growth will be driven by (i) upcoming capacity expansions in sugar production facilities in Egypt (ii) aggressive development and acquisition in its retail business, which is likely to prop up company’s top line at a 2008-12 CAGR of 15.2% to SR24.3bn in 2012. However, the company’s profitability is expected to witness a strong 2008-12 CAGR of 83.1% to SR2.3bn in 2012 partly due to the low base in 2008 and based on the expected (i) improvement in gross margins on account of cost dilution (ii) lower impairment and write-off costs in future.

 

We initiate our coverage on Savola with a ‘HOLD’ recommendation. We have used Sum of the Parts (SOTP) DCF valuation technique, which is the combination of the value of each business segment of the company. By employing SOTP valuation technique, we have arrived at a fair value of SR29.4, which shows that the stock is offering a potential upside of 1.3% at the market price of SR29.0 (as on 10th October 2009).

 

The company’s expansion plan of overall sugar production capacity is based on the completion of 2nd phase of expansion at United Sugar Company (USC), Egypt in 2010, which will lead the sugar production capacity to increase at a CAGR of 10.1% during 2008-12 to reach 2.2mn tons in 2012. Moreover, the expansion in the company’s retail segment is based on two types of strategies (i) acquisition of other retail chains for e.g. Giant and Geant stores (ii) adding new hyper and super panda stores. This is expected to increase company’s overall retail stores to 110-116 in 2012, out of which 15-20 will be hypermarkets and remainder will be supermarkets.

 

According to Food & Agriculture Policy Research Institute (FAPRI) and our expectations, edible oil and sugar consumption in the MENA region is expected to increase at a 2008-12 CAGR of 1.6% and 1.5% to 6.8mn tons and 13.6mn tons in 2012 respectively. The expected growth in both commodities is based on the growth in population which is forecasted to grow at a 2008-12 CAGR of 1.6%.

 

We have used FAPRI future price projections in our financial model, which has shown aremarkable decline of 33.8% in the average prices of edible during 2008, while average price of sugar has registered an improvement of 3.5% in 2008. Going forward, based on the projections given by FAPRI, the average prices of edible oil and sugar are expected to show an upward trend. The average prices per ton of soybean oil , rapeseed oil, sunflower oil, palm oil and peanut oil are expected to remain in the range of US$850-1,100, US$920-1,200, US$975-1,200, US$630-775 and US$1,325-1650, during 2008-12, respectively. The average prices of sugar per ton are expected to remain in the range of US$450-500, during 2008-12.

 

Based on the given future plans and expected lower prices in 2009 onwards compared to 2008, we expect the company’s sale revenues to slow down to 2008-12 CAGR of 15.2% to 24.3bn in 2012.  On the other hand, the revenue growth from other business segments is based on the expected increase in prices in 2009 and onwards. In short, the expected increase in sale revenue from these other segments is based on (i) improvement in average prices in 2010 vis-à-vis 2009 (ii) expansion in retail and food segment.

 

By the end of 2008, the company’s retail segment was the major revenue generator, accounting for 43.8% of the total company’s revenue followed by edible oil and sugar segments with a share of 32.6% and 17.6% respectively. However, the consolidated share of food segment during 2008 was recorded at 50.0%.  Based on the expansion plans, the retail segment is likely to be a major source of revenue for the company in 2012E followed by the entire the food segment.

 

Savola is expected to register a gross profit of SR3.0bn in 2009 as compared to gross profit of SR1.8bn in 2008. Hence, the gross profit margin is expected to reach 17.6% in 2009 from 13.0% in 2008. The reasons for lower GP margins in 2008 were (i) rapid fall in prices of products during 4Q2008 and (ii) rising cost on account of the expansion in company’s operation, which dented the company's profitability in 2008. However, based on the commencement of new projects in retail and food (sugar) segment, we expect the company will be able to maintain its GP margin at previous levels of 17.0%-19.0% during 2009-12.

 

The company is expected to register, after tax profit of SR1,005.3mn (translating into EPS of SR2.0) in 2009 as compared to SR202.4mn in 2008. The robust growth in the company’s bottom line is mainly due to an expected (i) improvement in gross profit margins to 17.6% in 2009 from 13.0% in 2008 (ii) reduction in impairment of assets & project cost write off to SR129.9mn in 2009 from SR437.2mn in 2008.

 


 Profitability (SR mn) & ROAA

Profitability (SR mn) & ROAE

<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" />

Source: Company Reports, Global Research

Source: Company Reports, Global Research

The company’s profitability is expected to witness a strong 2008-12 CAGR of 83.1% to SR2.3bn in 2012 partly due to the low base in 2008 and based on the expected (i) improvement in gross margins on account of cost dilution (ii) lower impairment and write-off costs in future.

 

Investment Indicators

Price as on 10th October 2009 (SR)

Shares in issue (mn)

Market Capitalization (SR mn)

52-Week Price (High / Low)

29.0

500

14,500

29.7/16.8

 

Revenues

Net Profit

EPS

BVPS

ROAE

P/E

P/BV

(SR Mn)

(SR Mn)

(SR)

(SR)

(%)

(x)

(x)

2010E

20,341

1,351

2.7

18.5

15.6%

10.7

1.6

2009E

17,443

1,005

2.0

16.1

13.2%

14.4

1.8

2008A

13,795

202

0.4

14.3

2.7%

59.8

1.7

2007A

10,410

1,230

3.3

20.7

16.8%

10.9

1.7

 

Source: Annual Reports and Global Research


© 2000 - 2019 Al Bawaba (www.albawaba.com)

You may also like