Distributing Almarai stake to affect Savola profitability, exit easier option: Analysts

Savola headquarters

Savola Group's decision to increase its capital via SAR 6 billion rights issue and distribute all Almarai shares to its shareholders is a first-of-its-kind step in the Saudi market. The move could lead Savola's investments to drop significantly, which will affect its profitability, analysts told Argaam.

The analysts expected the move to lower Savola's profit by 34%, which is the percentage of profits it was receiving from Almarai.

They added that Savola's shares may witness fierce speculations in the coming period, until the decisions to raise and cut the capital as well as Almarai shares distribution are approved.

Indirect exit

Chairman of TeamOne Consulting Abdullah Baeshen said that it would have been easier for Savola to exit Almarai directly. However, the sale of Savola’s stake in Almarai, which is considered a core investment, might shake the market, which would not tolerate a sale of this size.

Abdullah Baeshen, Chairman of TeamOne Consulting

He added that Savola's announcement delivered different and disparate messages to market participants, thinking that there may have been prior consultations for those procedures. Baeshen considered that Savola indirectly got rid of its stake in Almarai.

Financial Analyst Khalid Al-Zaidi explained that the decision will lead to a significant decrease in Savola's investments, which will affect its assets and solvency. He noted that there might have been pressure by some influential partners in Savola that contributed to this decision.

Khalid Al-Zaidi, Financial Analyst

Al-Zaidi pointed out that the decision has not yet been implemented awaiting the approvals of regulators and the shareholders. The move will affect Almarai’s dividend distribution, as Savola will lose 34% of its annual profits.

Fund infusion and share distribution

Baeshen stated that Savola used a composite financial model instead of using the common models. The composite model involves infusions of funds and distributions of its share in Almarai to its shareholders, thus, the board of directors submitted the recommendation to its general assembly and the official authorities until it obtains approvals.

What Savola is trying to do is to increase and then reduce capital as measures to change the structure of the company's assets, offset some losses and raise financial leverage to support its future expansions, the analyst added.

Savola’s stock

Meanwhile, Al-Zaidi explained that benefits from Savola's decision may be temporary, stressing the need to know the company's plans, particularly with regard to Panda's IPO, as Savola owns 98.87% of Panda's shares.

He expects Savola's share to witness fierce speculations in the coming periods, until the distribution of Almarai’s shares, the capital increase and the public offering of Panda are approved, expecting a slowdown in the stock movement after the implementation.

On the other hand, Baeshen considers Savola’s move as marketing of the stock to traders. The company's announcement caused confusion for dealers at the beginning and led to the fluctuation of the stock in the first trading session, he pointed out. However, later, there will be certain qualified investors who will deem that this process gives an asset in exchange for inflating another asset in the financial statements.

He indicated that the returns obtained by Savola during the period of its long-term investment in Almarai were good, pointing to the high capital value of this investment.