Almarai - Al Rajhi Capital
Almarai Company
Food-Diversified – Industrial ALMARAI AB: Saudi Arabia 24 July 2017
US$18.23bn Market cap
Target price Current price
36%
US$8.78mn
Free float
Avg. daily volume
61.0 84.0
-27.4% over current as at 20/7/2017
Senior Research Analyst Nivedan Reddy Patlolla, CFA Tel +966 11 211 9423, [email protected]
Existing rating
Underweight
Neutral
Overweight
Neutral
Performance Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
143
67.0
117
47.0
90
RSI10
170
87.0
70 30 -10 60
Vol mn
107.0
40 20
07/16
10/16
01/17
04/17
Source: Bloomberg
Earnings Period End (SAR) 12/15A 12/16A 12/17E 12/18E Revenue (mn) 13,795 14,699 14,143 14,748 Revenue growth 9.4% 6.6% -3.8% 4.3% EBITDA (mn) 3,850 4,337 4,320 4,503 EBITDA growth 11.5% 12.6% -0.4% 4.2% EPS 2.39 2.60 2.71 2.92 EPS growth 14.4% 8.6% 4.0% 7.9% Source: Company data, Al Rajhi Capital; Note: EPS for all years based on 800mn shares; revenue for FY15/16 is not IFRS based
Valuation Period End (SAR) 12/15A P/E (x) 35.1 P/B (x) 5.6 EV/EBITDA (x) 20.3 RoE (%) 15.9% Source: Al Rajhi Capital
12/16A 32.3 5.2 18.0 16.0%
12/17E 31.1 4.7 18.1 15.0%
12/18E 28.8 4.2 17.4 14.7%
Almarai Q2: Opex control masks weak revenue Almarai’s Q2 net profit at SAR674mn was in-line with our and consensus estimates of SAR661mn and SAR670mn respectively. However, revenue profile continues to be weak. After posting flat revenue in the last 3 quarters (0 - 2.5% y-o-y), Q2 top-line declined 4.2% y-o-y, led by 3.8% decline in KSA (~2/3rd of consol revenue) and 22.5% decline in other countries (EGP devaluation). The company mentioned that weak consumer sentiment was impacting KSA revenue, particularly the flagship Dairy and Juice segment which accounts for ~3/4th of consol revenue. We believe Almarai’s premium pricing in fresh dairy and juice segment, consumer down-trading, and likely decline in expat labour force may have impacted sales volume in last few quarters. Consensus 2017/ 2018 revenue estimates are likely to be cut by ~5-6% despite reinstatement of allowances for public sector employees in KSA, which should help alleviate some of the revenue pressure. On the other hand, earnings profile continues to be resilient led by: (a) margin expansion (Q2: gross margin +260 bps, operating margin +243 bps) on the back of benign commodity prices, and cost cutting/ productivity improvement program which took effect in end 2016 (SAR500mn cost savings targeted over next two years), (b) improving Poultry segment performance – net loss cut to SAR7mn vs. SAR76mn last year. Our target price remains unchanged at SAR61.0 per share. Lower revenue estimates are negated by better margin and lower capex assumptions. Our target price implies 27.4% downside from the current price and hence maintain Underweight rating. We do not see upside from higher FCFs (already part of our DCF) or significant improvement in earnings profile (benefits of cost control/ lower input prices negated by weak revenue growth and higher alfalfa costs). Additionally, commodity cycle bottoming out in the next few quarters remains a risk to margin assumptions.
Outlook: The company mentioned the H2 2017 outlook remains cautious due to market environment and unfavourable seasonality in Q3.
Valuation: We continue to value Almarai based on equal weights for DCF and P/E based relative valuation. Our DCF based target price is SAR63.5 per share, assuming 7.9% WACC (35% debt in capital structure, 0.9 adjusted beta). Our P/E based target price stands at SAR58.4 per share based on 20x FY18 earnings. We assign this premium valuation to Almarai, despite
Food-Diversified – Industrial ALMARAI AB: Saudi Arabia 24 July 2017
US$18.23bn Market cap
Target price Current price
36%
US$8.78mn
Free float
Avg. daily volume
61.0 84.0
-27.4% over current as at 20/7/2017
Senior Research Analyst Nivedan Reddy Patlolla, CFA Tel +966 11 211 9423, [email protected]
Existing rating
Underweight
Neutral
Overweight
Neutral
Performance Price Close
MAV10
MAV50
Relative to TADAWUL FF (RHS)
143
67.0
117
47.0
90
RSI10
170
87.0
70 30 -10 60
Vol mn
107.0
40 20
07/16
10/16
01/17
04/17
Source: Bloomberg
Earnings Period End (SAR) 12/15A 12/16A 12/17E 12/18E Revenue (mn) 13,795 14,699 14,143 14,748 Revenue growth 9.4% 6.6% -3.8% 4.3% EBITDA (mn) 3,850 4,337 4,320 4,503 EBITDA growth 11.5% 12.6% -0.4% 4.2% EPS 2.39 2.60 2.71 2.92 EPS growth 14.4% 8.6% 4.0% 7.9% Source: Company data, Al Rajhi Capital; Note: EPS for all years based on 800mn shares; revenue for FY15/16 is not IFRS based
Valuation Period End (SAR) 12/15A P/E (x) 35.1 P/B (x) 5.6 EV/EBITDA (x) 20.3 RoE (%) 15.9% Source: Al Rajhi Capital
12/16A 32.3 5.2 18.0 16.0%
12/17E 31.1 4.7 18.1 15.0%
12/18E 28.8 4.2 17.4 14.7%
Almarai Q2: Opex control masks weak revenue Almarai’s Q2 net profit at SAR674mn was in-line with our and consensus estimates of SAR661mn and SAR670mn respectively. However, revenue profile continues to be weak. After posting flat revenue in the last 3 quarters (0 - 2.5% y-o-y), Q2 top-line declined 4.2% y-o-y, led by 3.8% decline in KSA (~2/3rd of consol revenue) and 22.5% decline in other countries (EGP devaluation). The company mentioned that weak consumer sentiment was impacting KSA revenue, particularly the flagship Dairy and Juice segment which accounts for ~3/4th of consol revenue. We believe Almarai’s premium pricing in fresh dairy and juice segment, consumer down-trading, and likely decline in expat labour force may have impacted sales volume in last few quarters. Consensus 2017/ 2018 revenue estimates are likely to be cut by ~5-6% despite reinstatement of allowances for public sector employees in KSA, which should help alleviate some of the revenue pressure. On the other hand, earnings profile continues to be resilient led by: (a) margin expansion (Q2: gross margin +260 bps, operating margin +243 bps) on the back of benign commodity prices, and cost cutting/ productivity improvement program which took effect in end 2016 (SAR500mn cost savings targeted over next two years), (b) improving Poultry segment performance – net loss cut to SAR7mn vs. SAR76mn last year. Our target price remains unchanged at SAR61.0 per share. Lower revenue estimates are negated by better margin and lower capex assumptions. Our target price implies 27.4% downside from the current price and hence maintain Underweight rating. We do not see upside from higher FCFs (already part of our DCF) or significant improvement in earnings profile (benefits of cost control/ lower input prices negated by weak revenue growth and higher alfalfa costs). Additionally, commodity cycle bottoming out in the next few quarters remains a risk to margin assumptions.
Outlook: The company mentioned the H2 2017 outlook remains cautious due to market environment and unfavourable seasonality in Q3.
Valuation: We continue to value Almarai based on equal weights for DCF and P/E based relative valuation. Our DCF based target price is SAR63.5 per share, assuming 7.9% WACC (35% debt in capital structure, 0.9 adjusted beta). Our P/E based target price stands at SAR58.4 per share based on 20x FY18 earnings. We assign this premium valuation to Almarai, despite
