RIYADH – The Saudi food and agriculture sector will maintain positive outlook due to growth in demand supported by a strong macroeconomic environment that continues to support the Saudi Food sector outlook, with Savola and Almarai looking to strengthen their dominance though capacity increases, NCB Capital said in its fourth quarter equity research update on sector. “We continue to prefer Savola over Almarai given the stronger execution record on expansions, as well as growth outlook for the Retail business, although volatility in global soft commodity prices remains the key risk for the sector” said Farouk Miah, CFA, Head of Equity Research at NCB Capital. Rating the two market leaders Almarai and Savola, Miah said: “We remain Overweight on Savola with a PT of SR68.0. Capacity expansions in the food business in Saudi coupled with store and margin expansions in the Retail business remain key drivers for Savola. Additionally, continued gains from exiting non-core investments as well as relations between the global community and Iran improving should benefit Savola. Volatility in soft commodity prices and a slowdown in retail store expansions due to Saudisation are the main concerns for the company. We expect CAGR earnings growth of 14 percent between 2013 and 2018 for Savola” “We remain Neutral on Almarai with PT of SR50.2. In absolute terms financial performance in 2014 should improve at Almarai, due largely to the 50 percent increase in Poultry capacity, as well as partially due to the low base effect from 2013. However, we believe the outlook at Almarai remains muted with management uncertain if poultry will be profitable in 2014 and some segments such as cheese & butter facing limited growth. Almarai continues to trade at a high multiple (2014 P/E of 18.9x) with this at risk if there is any financial under-performance in 2014. A continued fall in soft commodity prices and better than expected performance at Poultry will be the main upside drivers for Almarai.” Savola “At Savola, the long term drivers of the business remain the capacity increases in Food and the expansion of stores and margins at Panda, which remains the key growth driver for Savola aiming to add around 10-14 percent sales area per year,” said Miah. “Short-term, Savola should continue to benefit from non-core disposals and improving relations between the global community and Iran. These factors combined should lead to CAGR income growth of 17 percent between 2013 and 2018, and increase its contribution to the Savola bottom-line from 20 percent to 26 percent.” Almarai Concluding his comments, Miah said “Almarai's financial performance should improve in 2014, although this is partially due to the weak performance in 2013. The pace of progress at the poultry plant remains the key catalyst, with management uncertain if 2014 will be profitable. Increased capacity in other segments should aid growth with stable/lower soft commodity prices a potential upside catalyst. Growth will be supported by fresh dairy and bakery which together constitutes 6 percent to the overall growth.” — SG
