Arbah Capital: Saudi Agriculture and Food Sector Detailed Coverage | 2017

In a report on the Saudi agriculture and food sector, Arbah Capital said it expects food and beverages companies in Saudi Arabia to record SAR 53.9 billion in revenue by 2018, growing at a CAGR of 5.4 percent. However, there will be limited improvement in gross profit margin reaching 27.5 percent from the 2015 level of 27.1 percent.

“The Saudi agriculture and food sector has been weathering out the economic heat, further we expect more or less current level performance of the sector to continue going forward based on the favorable growth drivers and importantly defensive nature of the sector”, the brokerage said.

Arbah Capital has recommended “neutral” ratings on Almarai Co., National Agriculture and Development Co. (NADEC) and Herfy Food Services Co. and assigned “overweight” ratings for Savola Group and Saudi Airlines Catering Co.

With regard to Savola Group, expected recovery in commodity prices and discount offers will likely pose a positive impact on the company’s top-line growth. Meanwhile, devaluation of the Egyptian pound will likely have a negative impact on Savola’s wholly-owned subsidiary in Egypt, amounting to SAR 171 million in Q4 2016. Arbah expects gradual recovery in the retail segment due to ongoing restructuring and reduction in OPEX of Pandati stores.

Almarai’s bakery segment showed strong growth aided by low commodity costs. However, the importation of the feed will put additional burden on the cost structure of the company, may be more than SAR 200 million earlier announced by the company. Also, Arbah expects devaluation of the Egyptian pound to have adverse impact of 1 - 1.5 percent on the company’s sales.

Going forward, NADEC is expected to benefit from the expansion of its arable farming plan in Sudan. However, the cessation of wheat cultivation in the kingdom by 2019 will impact revenue of the company.

Herfy’s meat and bakery segments continued to show strong results with high profit margins. Nevertheless, the company is forecast to maintain net profit margin within the range of 18-21 percent in the coming years.

Saudi Catering is reducing its reliance on inflight catering. As per its long term strategy, by 2019 it expects to record a revenue mix of 59 percent inflight catering (currently 70 percent) and 41 percent for other sources (currently 30 percent). Also, business lounges will continue to generate strong result going forward, Arbah said.