Depressed Prices + Rising Rates = Cash Crunch
Saudia Dairy & Foodstuff Co. (Sadafco) 3Q15 Earnings Review October 20, 2015
Earnings miss SFC and consensus; Maintain Hold Earnings miss SFC and consensus Sadafco reported headline net profit of SAR54m (+13% yoy, -7% qoq) which missed SFC estimate by 10% and consensus estimate by 17%. While revenue of SAR482m (+12% y/y, -7% qoq) was in-line with our estimate, EBIT of SAR58m (+12% y/y, -7% q/q) missed our estimate by 10% primarily due to margin miss (12.0% vs. SFC 13.5%). While EBIT margin of 12.0% is stable on a q/q and y/y basis, we highlight that this year Sadafco did not witness any uptick in EBIT margin as is typically visible (albeit on a much lower base) in Sadafco’s third quarter results (calendar year, Sadafco’s year ends in March). Detailed financials have not been disclosed yet which prevents us from dissecting the quarterly earnings performance, however, it seems the impact of downward revaluation of inventory (which until last quarter negatively impacted Sadafco’s earnings) seems to be over and EBIT margin is back to the normalized 12% mark.
Valuation not appealing for a more constructive view
Rating Summary Recommendation
Hold
12-Month Target price (SAR)
130
Upside/(Downside)
-8%
Stock Details Last Close Price Market Capitalization
SAR
142.3
SAR mln
4,625
Shares Outstanding
mln
33
52-Week High
SAR
148.7
52-Week Low
SAR
114.3
Price Change (YTD)
%
21.0
6-Mth ADTV
mln
6.2
EPS 2015E
SAR
6.21
2270.SE
SADAFCO AB
Reuters / Bloomberg
After an impressive 21% Ytd increase in stock price (Tadawul Food & Agri -11%), Sadafco trades Source: Tadawul at 2015E P/E of 24.8x (KSA Food & Agri 21.9x, EM peers 21.7x, DM peers 19.9x), which seems Key Shareholders (%) unattractive considering Sadafco’s narrow product suite. Post publication of preliminary results, Qurain Petrochemical Industries Co. we maintain Hold rating with an unchanged SAR130/share target price.
A leader in its respective categories but narrow product suite is the key issue
40
Al Sameh Trading Co.
12
Public
48
Sadafco is a KSA-focused (93% of revenues) player, primarily operating in the niche segments of Source: Tadawul long life milk (around 50% market share), tomato paste (around 40% share), and ice cream Price Multiples (around 20% share). Long life milk is the mainstay accounting for roughly 65% of net profit and 2015E tomato paste and ice cream accounts for around 10% and 15%, respectively. Overall, while we P/E 24.8x like Sadafco’s market positioning in respective categories and its debt-free balance sheet and EV / EBITDA 12.9x strong cash flows, we believe a narrow product suite coupled with a lack of meaningful presence Dividend Yield 2.8% in the broader GCC region are key hindrances to mid-term growth. Furthermore, with increasing local production of fresh milk and consumer affinity to “seemingly healthier” and cheaper fresh Source: SFC milk category, we believe largely mature long life milk category is likely to remain in slow growth 1-Year Share Performance mode leading to lower than sector average earnings growth for Sadafco in the long run.
2016E 21.3x 11.9x 3.2%
130 120 110
SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% qoq
3Q14
% yoy
2015E
2016E
Revenues
482
479
1%
490
-2%
521
-7%
431
12%
1,988
2,166
Gross Profit
166
170
-2%
Na
Na
180
-8%
130
28%
654
716
100 90
80 70 60 50 40 S
EBIT
EBIT Margin
Net Profit
58
65
12.0%
13.5%
54
60
-10%
Na
Na
Na
-10%
65
62
-7%
11.9%
-17%
58
52
12%
12.0%
-7%
48
13%
218
240
11.0%
11.1%
202
223
O
N
D
J Sadafco
F
M
A
M
J
J
A
S
TASI Food & Agri
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861
Source: Company, Saudi Fransi Capital, Bloomberg
AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the company under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this report should make themselves aware of, and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Earnings miss SFC and consensus; Maintain Hold Earnings miss SFC and consensus Sadafco reported headline net profit of SAR54m (+13% yoy, -7% qoq) which missed SFC estimate by 10% and consensus estimate by 17%. While revenue of SAR482m (+12% y/y, -7% qoq) was in-line with our estimate, EBIT of SAR58m (+12% y/y, -7% q/q) missed our estimate by 10% primarily due to margin miss (12.0% vs. SFC 13.5%). While EBIT margin of 12.0% is stable on a q/q and y/y basis, we highlight that this year Sadafco did not witness any uptick in EBIT margin as is typically visible (albeit on a much lower base) in Sadafco’s third quarter results (calendar year, Sadafco’s year ends in March). Detailed financials have not been disclosed yet which prevents us from dissecting the quarterly earnings performance, however, it seems the impact of downward revaluation of inventory (which until last quarter negatively impacted Sadafco’s earnings) seems to be over and EBIT margin is back to the normalized 12% mark.
Valuation not appealing for a more constructive view
Rating Summary Recommendation
Hold
12-Month Target price (SAR)
130
Upside/(Downside)
-8%
Stock Details Last Close Price Market Capitalization
SAR
142.3
SAR mln
4,625
Shares Outstanding
mln
33
52-Week High
SAR
148.7
52-Week Low
SAR
114.3
Price Change (YTD)
%
21.0
6-Mth ADTV
mln
6.2
EPS 2015E
SAR
6.21
2270.SE
SADAFCO AB
Reuters / Bloomberg
After an impressive 21% Ytd increase in stock price (Tadawul Food & Agri -11%), Sadafco trades Source: Tadawul at 2015E P/E of 24.8x (KSA Food & Agri 21.9x, EM peers 21.7x, DM peers 19.9x), which seems Key Shareholders (%) unattractive considering Sadafco’s narrow product suite. Post publication of preliminary results, Qurain Petrochemical Industries Co. we maintain Hold rating with an unchanged SAR130/share target price.
A leader in its respective categories but narrow product suite is the key issue
40
Al Sameh Trading Co.
12
Public
48
Sadafco is a KSA-focused (93% of revenues) player, primarily operating in the niche segments of Source: Tadawul long life milk (around 50% market share), tomato paste (around 40% share), and ice cream Price Multiples (around 20% share). Long life milk is the mainstay accounting for roughly 65% of net profit and 2015E tomato paste and ice cream accounts for around 10% and 15%, respectively. Overall, while we P/E 24.8x like Sadafco’s market positioning in respective categories and its debt-free balance sheet and EV / EBITDA 12.9x strong cash flows, we believe a narrow product suite coupled with a lack of meaningful presence Dividend Yield 2.8% in the broader GCC region are key hindrances to mid-term growth. Furthermore, with increasing local production of fresh milk and consumer affinity to “seemingly healthier” and cheaper fresh Source: SFC milk category, we believe largely mature long life milk category is likely to remain in slow growth 1-Year Share Performance mode leading to lower than sector average earnings growth for Sadafco in the long run.
2016E 21.3x 11.9x 3.2%
130 120 110
SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% qoq
3Q14
% yoy
2015E
2016E
Revenues
482
479
1%
490
-2%
521
-7%
431
12%
1,988
2,166
Gross Profit
166
170
-2%
Na
Na
180
-8%
130
28%
654
716
100 90
80 70 60 50 40 S
EBIT
EBIT Margin
Net Profit
58
65
12.0%
13.5%
54
60
-10%
Na
Na
Na
-10%
65
62
-7%
11.9%
-17%
58
52
12%
12.0%
-7%
48
13%
218
240
11.0%
11.1%
202
223
O
N
D
J Sadafco
F
M
A
M
J
J
A
S
TASI Food & Agri
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861
Source: Company, Saudi Fransi Capital, Bloomberg
AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the company under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this report should make themselves aware of, and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
